The world has experienced several crises over the past decades: the so-called Black Monday in 1987 and the Asian crisis in 1997; a year later, we had a difficult time dealing with a default of our own economy. The impending global crisis rhetoric is ongoing. But, if we look carefully at the situation, we’ll have to admit that the global economy has been in a latent crisis since 2008. The realities we live in include a persistent economic downturn, and this trend is here to stay.
None of the attempts to contain the economic downturn by regulation have succeeded yet. At the end of the 20th century, the IMF tried to apply deflationary monetary policies – a typical practice for all national economies, but the Asian and Russian crises hit anyway, confirming its low efficiency. Later the IMF changed its approach, focusing on the credit and banking sector and the floating exchange rate. An upgraded version of this policy was applied to the Russian market, but it did not work as it should. The course of action was adjusted again: monetary policies were replaced with fiscal and tax ones, monitoring and risk management.
But the situation is still tense. The next round of the crisis is likely to begin in the investment segment of the financial sector as usual, and the global hierarchy of economic influence will change. Obviously, regulators have already exhausted their incentive instruments; their anti-crisis modes have become the new normal.
Intuition suggests we are to expect a change in the global economic model, obviously, via the crisis of the current model. In the United States, an irreversible process is underway that is splitting the consensus of the elites and complicating the consolidation of a single line of influence in foreign markets. The Americans have stopped raising the nominal interest rate. The zero rate policy keeps it down to 0-0.25%; it was originally needed for an economic recovery, but now it looks like a dead end.
Investors are redistributing assets to less vulnerable markets. At the same time, with the general economic volatility, which is being controlled by a set of manipulative policies (military threats, sanctions, and information pressure), all they can hope for is a milder impact on their portfolios. The bond market is chaotic. There is discrepancy between the real economic importance of countries and their influence and position within the global system. The QE (quantitative easing) policy gave trillions to various corporations, governments and banks at a ridiculously low interest rate. At the same time, there is a risk of stock bubbles in national markets. Inflation is out of control, and the US-China economic confrontation poses a risk of a global chain reaction, which can affect any economy.
We have to admit that all national economies have shown zero growth in recent years; the middle class is shrinking; unemployment is growing, while the number of the wealthiest people (1% of the total population) has soared 50% and continues to increase. Speaking of forecasts, we have to prepare for what we never prepared for before – just like we failed to prepare in 1998; a momentary sharp strengthening of the dollar against soft currencies is possible, and so is artificial speculation with exchange rates, a redistribution and reduction of the employment market. All this is already happening, albeit in a sluggish mode.
By Alexey Buyanov, Director at Bengala Investments SA, investment company