It’s going to end badly, and here’s a blow-by-blow from Charles Hugh Smith at oftwominds.com:
The over-indebted, overcapacity global economy an only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.
For those seeking a summary, here is the global financial endgame in fourteen points:
1. In the initial “boost phase” of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.
2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.
Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.
3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.
In other words, financialization is untethered from the real economy of producing goods and services.
Low interest rates make the problems they purport to cure worse. From Wolf Richter at wolfstreet.com:
Interest rates don’t have to be negative to make a mess in the era of low demand.
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
Now the plot thickens: I’ve got a former Secretary of the Treasury backing me up. We’ve already seen, including in my last podcast, how negative interest rates screw up the economy. Negative interest rates are so absurd that just thinking about them gives me a headache.
In the era of negative interest rates, owning financial assets such as government bonds, or savings in the bank, or corporate bonds, and increasingly European junk bonds, no longer produces income but a financial burden – because you have to pay the negative interest in one form or another. And so these quote unquote “assets” are not only a financial burden on you that you would want to get rid of normally, but by extension, they’re burden on the economy as a whole.
Look how economies and stocks have fared in countries with negative interest rates – such as Japan and the countries of the Eurozone: Their stocks have gotten crushed. Their bank stocks have gotten annihilated. Japanese bank stocks are down 92% from the peak 30 years ago, and European bank stocks are down 76% from 12 years ago. European bank stocks are now back where they’d first been in 1993.
The European and Japanese economies have been mired in microscopic growth interspersed with declines. In Japan, this has been going on for over two decades. In Europe it’s been a dozen years.