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BOE ! Will there be another Financial Crisis ?

October 12, 2016


The question was asked by Bank of England (BOE) Knowledge Bank. Here is my write-up………..

As a student of economics I do not see any reason for global economic revival. Crash of financial market is unavoidable and will happen more frequently.

It is looming because no genuine effort is made to overcome the economic crisis. Measures taken after 2008-9 global financial crises are not permanent, they are mostly stop gap arrangements and hence problems will persist and will pop up more often at shorter intervals. Because of constant compromise it has weakened the global financial system.

Let’s take European crisis of 2008-9 and Greece as example. The Troika in their talk pretended to be extremely tough, but had to negotiate and compromise by agreeing to offer two massive bailout packages, totaling 240 billion Euros.

The key in this deal is long dated maturities. A tactic to delay rollover knowingly that Greece economy could never generate such large size income and can never pay back the loan amount.

Total size of Global Bank’s Balance Sheet that has surged to alarmingly high level in last 8-years from USD 7 Trillion to over USD 23 Trillion is another valuable indicator to judge Central Banks restrain and major cause of economic slowdown for being unable to provide funding to corporate sector, as large part of money was meant for Bank Capitalization.

What needs to be answered is that if all went well and is so far going well then despite tripling of balance sheets during this period, why are the global economies struggling for growth and has never recovered in true sense ?

The answer is simple. It is because the purpose of lending is not to stimulate economies. It is meant to protect the shareholders interest by injecting funds for Bank Capitalization or to avoid collapse. Unfortunately good part of beneficiaries are legislators and law makers or they have some sort of indirect link. Thus the intention in this situation is obvious.

The real owners of cash and poor depositor are the sufferers and they get nothing in return. Instead negative interest rate environment is created intentionally, as large size cash/commodity holders cannot store their assets at home due to many risks involved.

Decades old low “Interest Rate” environment, “Quantitative Easing” and recent talks of High Inflation” is Central Banks bully in the name of economic growth to support their loose monetary policy stance that has nothing to do with growth, prosperity or improvement of job market condition.

The whole purpose behind the ultra easing monetary policy is to reduce and slowdown the pace of monstrous “Rising Debt” to provide cheap funding to finance its debt.

Can anyone explain how would US, Japanese or European economy benefit from ongoing high inflation theory ? How will it stimulate economy and for how long ?

Economist/Analyst should not fool nations with their misguided theories that inflation is the growth recipe for advance economies.

Despite collapse of commodities and oil prices globally since last many years, there is no respite for the consumers. Common essentials items of daily use are already skyrocketing and are at exorbitantly high price.

Did airlines and transportation fares fell at same proportion ? What about Housing/Rental ? What about the cars prices after there is steel glut ? Is food not costlier than before despite falling trend in the agriculture/food sector since last 7 years?

And mother of all queries. Why there is no inflation despite printing of money, as amount may have exceeded USD 16 trillion is last eight years ?

Earlier, crash was delayed because of Chinese growth that was pulling the global economic engine for nearly 2-decades as the economy was growing at nearly 10 pct on an average. The real problem occurred when China’s growth started to deflate. Its Fx Reserves have melted down by more than a Trillion Dollars to USD 3.17 trillion.

In comparison to China, I consider India a peanut, it a very highly overrated economy. It’s economy is totally dependent on Foreign Funding and Remittances. Recently its banking industry has received further blow as it is suffering from over USD 150 Billion stressed loan.  India has nothing exceptional to offer expect its population, which is exploding sharply that has reached 1.3 billion and is now competing with China.

Brazil is in a total fix and in 2nd quarter of this year South Africa survived as scary period by not being thrown into Junk grade by the rating Agencies. BRICS has turned in to BRICKS !

Except for the Central Banks, did anyone ever give a thought that why the world has entered in negative interest rate era? And for how long are we going to stay in negative interest rate environment ? Or how soon can FED, ECB, BoE or BOJ hikes its rate by 1-2 pct. Not in two decades, because then there is no other funding source to finance its debt/deficit, which should be pure income.

Couple of weeks ago BOE Deputy Governor Shafik in her media appearance has expressed her uneasiness about UK interest rate and said she sees lower rates for longer period of time.

I have never heard Central Banks taking publicly or showing concern about the biggest global hit taken by the global economy due to oil price crash. In last 2-years the world lost nearly USD 2-Trillion in hard cash.

Probably because they are aware that there is no stopping to printing of money. They can print any amount at will without being questioned/challenged. They can change Accounting Rules for Window Dressing purpose. Global Central Banks Balance Sheets has inflated to abnormal size, which is against all economic theories/calculations, because they know they will never be questioned for extreme violation. They are aware that survival of Rating Agencies is based on their fees, so they will not act against their wishes like it happened in recent past. What about immoral and unethical practices?

And lastly Economist/Analyst associated with financial institutions and business houses will never talk of Bearish market condition because they are paid to provide tailor made economic theories/analysis to misguide the market with one sided Bullish sentiment/stories. Hence, they are compelled to always provide positive sentiment and avoid discussing much of negative talk. The will always give excuse that market is correcting.

The key to understand is the source of genuine income that Economies all over the globe can generate Cash Money, which can come from only four resources. Revenue collection is the major source of government earnings/income, but politicians/leaders all over the world are selfish and will always talk of lowering taxes for political reasons/gains and will never talk of tax rate hike to reduce the gap to meet its funding shortfall.

For any economy, Exports are another major source and backbone of economy to generate income. Exports are is suffering globally due to exorbitantly higher pricing factor.

Underdeveloped economies are heavily dependent on Remittances inflow, which is a major source of their income, which is the major cause of future economic crisis.

However, when economies are unable to generate income from their own resources they are faced with cash crunch and to manage their Balance of Payment (BOP) positions they are left with no option but to borrow from external recourses to meet BOP or have print money at home to meet its Domestic requirements.

Current global economic imbalance is result of over pricing and excessive overvaluation of everything that has pushed the market towards unimaginable heights.

Hence, it has reached such a high point that the crisis is here to stay forever, unless the size of global economy is deflated or reduced to half of its size, which is unthinkable and hence impossible because of protectionist approach by the global managers to protect the interest of their shareholders. Hence, market crash and crisis is here to stay forever.


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