Submitted by Taps Coogan on the 8th of October 2018 to The Sounding Line.
Daniel Lacalle, Chief Economist at Tressis Gestión, recently gave an interview in which he dispels the idea that the world has, until recently, been enjoying synchronized global growth.
“At the end of the day, it all comes down to the fallacy of synchronized growth. We have been hearing from international bodies, from central banks, that we were living in a synchronized growth territory, that we were seeing developed markets grow faster than what was typical of developed markets while emerging markets were also growing in tandem, and that the economies were much healthier, that everything was much better, and that 2018 was a year in which we would see the confirmation of that synchronized growth trend and the relfation trade. Well guess what? It wasn’t the case… What we were being told was synchronized growth was synchronized debt growth, and that massive increase in debt, that led to the highest level of global debt-to-GDP in history last year, was creating massive… internal problems in many economies that were getting used to cheap and easy money, and a very small reduction, completely minuscule and completely moderate reduction in the balance sheet of the Federal Reserve of less than $260 billion, has created this reckoning that the reality that we were seeing globally was not a reality of high growth, better productivity, and more positive surprises, but the reality that it was just a debt led bump up of a much clearer trend of secular stagnation. So what happens is we will likely see solutions, that instead of cleaning the system, there will not be a massive crisis, will be solutions that will basically lead to more secular stagnation. Why? Because what most central banks, what most governments will be doing will be to try to avoid the pain… of improving the economy… They will likely perpetuate the problem. Therefore, the constant bailout… of China and the constant bailout that we’re seeing for example in the less productive economies in the Eurozone, is actually more likely to be the solution and the exit. And what that leads to is higher debt… low interest rates…, central banks being way behind the curve, and at the same time, that potential growth is being eroded.”
With central bank accommodation of the markets likely receding only temporarily, as we previously noted: “while bad news may finally be bad news again, very bad news may very well be the best news of all for markets.” If things really do get dicey, central banks will dust of the printing presses once again.
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