More than six years after the global financial meltdown erupted in September 2008, the world economy is increasingly coming to resemble a minefield with any number of potential flashpoints that could set off another crisis.
The central cause of instability is the lack of any return to growth patterns once considered to be the norm and the consequent growth of financial parasitism, Nick Beams commented in an article for WSWS Wednesday.
Summarizing the overall situation, the latest report of the Organization for Economic Cooperation and Development (OECD), released earlier this month, noted that “a return to the pre-crisis growth path remains elusive for the majority of OECD countries. In most advanced economies, potential growth has been revised down and, in some cases, there are growing concerns that persistently weak demand is pulling down potential growth further, resulting in a protracted period of stagnation.”
It warned of the development of a vicious cycle “whereby weak demand undermines potential growth, the prospects of which in turn further depress demand, as both investors and consumers become risk averse and prefer to save.”
The crisis had increased social stress, hitting low-income households hard, with young people “suffering the most severe income losses and facing increasing poverty risk.”
Financial Parasitism
In the midst of ongoing stagnation, the other main feature of the global economy is what can only be described as an explosion of financial parasitism.
Profits are increasingly being accumulated not through investment and increased production, but by various forms of speculation fuelled by ultra-cheap money supplied by the world’s central banks via various forms of quantitative easing. The three-fold increase in the US S&P 500 index over the past six years since its low point in 2009 is only one indication of this trend.
In an overview of the situation, the consultancy firm McKinsey &Co recently reported that the world is now awash with more debt than before the global financial crisis.
Global Debt, Instability
Global debt has increased by $57 trillion since 2007 to almost $200 trillion, far outpacing real economic growth, with the share of debt rising from 270 percent to 286 percent of global gross domestic product. “Overall debt relative to gross domestic product is now higher in most nations than it was before the crisis” with higher levels of debt posing “questions about financial stability,” the report noted.
One of the most significant expressions of the increasing instability in financial markets is the emergence of the phenomenon of negative yields on both government and now corporate bonds.
Demand for bonds is so high in a world awash with cash that the yield is pushed down so low — the price of a bond and its yield bear an inverse relationship to each other — that the holder would suffer an overall loss by retaining the bond to the time of redemption when its face value is paid out.
The explanation for this seeming insanity lies in the fact that the bond purchaser calculates that before that time arrives the continued flood of cash will push the purchase price even higher and hence there is a profit to be made by selling the bond before the date of redemption.
In a comment published Tuesday on Australia’s Business Spectator web site, columnist Alan Kohler noted: “Investing in negative-yield bonds is based on a tried and tested ‘bigger fool’ formula that became so prevalent in the stock market during the 1990s internet bubble. That is, you might be a fool for buying a bond at minus 0.5 percent yield … but a bigger fool will buy it off you for minus 0.6 percent.”
The whole system is able to function because central banks are prepared to intervene and buy bonds at any price. The sums of money involved are huge.
