Even The ‘Experts’ Are Worried…

The world’s top 20 financial ministers met over the weekend and many economists waited with baited breath to see if a coordinated global stimulus push would result.  The IMF was certainly pushing for it, saying “They should go bold, they should go broad and they should go together”.  But it seems sanity, for now, prevailed with some dire warnings amongst discussions. 

From German Finance Minister, Wolfgang Schäuble:

“Fiscal as well as monetary policies have reached their limits.  If you want the real economy to grow there are no shortcuts which avoid reforms.”  He added that whilst it prevented the GFC from spiralling out of control “they may have laid the foundation for the next crisis.”

What does that mean?  Well William White, chairman of the Economic and Development Review Committee at the OECD and former chief economist at the Bank for International Settlements (BIS), had this to say:

“If you think about a crisis period as a period of deleveraging, in fact this has not happened and we’ve gone in the very opposite direction. Now, on the household side, clearly there have been some improvements made but on the corporate side in the US, things have gotten significantly worse—the debt ratios for corporations have gone up very substantially as has government debt…

More importantly—again, when I say the situation is worse today than it was in 2007—in 2007 this debt problem was essentially confined to the advanced market economies. Since then, the debt ratios—the private debt ratios in particular—have exploded in the emerging market countries and so we now have in a sense a global problem whereas in 2007 you might say we had a regional problem with the advanced market economies. But now it’s basically everywhere so, yes, I do think that the situation is worse than it was then…”

(If you recall we wrote last week that Australian household debt is the worst in the world!)

So by not agreeing to further stimulus they are seemingly accepting they have gone as far as they can, added even (and substantially) more debt to e debt problem, and may have to let the market be the market (for now…).  That could prove to be very messy as many believe the financial market falls (and gold’s gains) this year are a sign of the market having lost faith they have it under control.

This all prompted Europe’s biggest bank, Deutsche Bank to write to investors:

“There are rising stresses in the global financial system; in particular the rising risk of a U.S. corporate default cycle and the risk of a sharp one-off renminbi devaluation due to the sharp increase in China’s capital outflows,”….”Buying some gold as ‘insurance’ is warranted.”