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AB 2000 studies

Alain Boublil Blog

 

Toward a reduction of the risks

For almost two years, most of the economic reflections and comments are about the increase of risks, the imminent coming of a recession and even of a new major financial crisis. No economist did forecast the 2007-2008 one and no political leader did propose measures to cope with that risk. That incites them today to announce the worst to then pretend that “they were right in saying that”. It is indisputable that the world is going through a period propitious to accidents and even to breakdowns. Trade tensions created by the American administration have generated retorts from targeted countries. Ups and downs connected to the Brexit are hurting the planet first economic zone. The point that a ten year period without recession may look abnormally long is favoring the analysis according to which it will be necessary that it turns around. The interest rate curb inversion is comforting the reasoning because in the past it has been frequently the announcing signal of a recession. Tensions inside the ECB, on the point of the coming into function if its new chairman, Christine Lagarde could hurt the institution which is an essential element of the economic stability in Europe. To that it is necessary to add the rise, everywhere in the world of indebtedness, whatever it is public or private. What could happen if rates increase, are saying some ones? And it will be necessary at the end to reimburse, are saying some others.

Yet, despite of these tensions and of a weak growth in developed countries and a slowing in the emerging ones, financial markets are at their top and companies financial results, set apart punctual disappointments, show a still comfortable profit level. The reduction of financial charges, whose States and businesses are enjoying, is by large offsetting uncertainties created by the international environment. A new volatility appeared in trade exchanges due to inventories fluctuations as a reaction to the threat of new custom duties or physical constraints affecting these exchanges.

The progress appeared in the conclusion of a trade agreement between China and the U.S. must not be undervalued. Above the announced measures, what is new is the change of the method by the White House which went from the “tweet culture” to the adoption of elements of language prepared by professionals. They show the will to reach a trade peace through a pragmatic and progressive method. To talk about “phase one” means that a tangible result has been achieved and that it an “after” and “phases two, three and others” will occur if necessary. It is understandable because the American president is coming into the campaign for his reelection and he cannot accept the idea of a Wall Street fall or of a recession which would highly probably result from a trade war with China.

The Brexit crisis has in common with the trade tensions that both are going to be solved through procrastination. The Irish border issue is impossible to solve. A territory cannot be inside and outside the European Union. The absence of a frontier means that Northern Ireland stays at least in the Custom Union. The reestablishment of a physical border would create a comeback to serious troubles that nobody wants. The solution is the delay, maybe indefinite of a final agreement regarding Northern ireland and the creation of other delays which could be extended to put in practice the technical clauses of the withdrawal from the European Union. It is likely that it is where we go in the coming weeks, if we believe the House of Commons votes turning down the possibility of a Brexit without agreement and the last discussions between British and Irish political leaders. So, a major crisis could be avoided.

The arguments according to which the growth cycle is abnormally long and the rate curb inversion would announce a recession have a weak point: they are based on historical precedents and are ignoring the changes in the world economy. The most important, it is that in developed economies, growth weakened and has even sometimes disappeared. In France, the average annual growth rate for the last ten years is inferior to 1% and in Germany it is hardly superior to that. Japan is stagnating for a long time. In these countries, growth has lost its cyclical characteristic. Only the U.S. has had an annual growth rate significantly above sto 1% but it has been along with a double indebtedness with the increases of the budget and the current account deficits. We could say that as in 2007, growth is there but the expenditures which contribute to it have not been paid. But the comparison stops there because debtors are not anymore the same and the dubious debts have not been securitized and sold all around the world. Mainly, they are Treasury Bonds largely subscribed by German, Japanese and until a recent period Chinese, savers.

The rate curb inversion is not more an advanced indicator of a recession. During the past, it was the consequence of the short-term rates increase provoked by central banks to curb demand and to fight against inflation. That policy and it was its purpose provoked a growth slowing and even a recession. Today, it is the opposite which is occurring because the fall of long-term interest rates which sent them below or at the same level than short-term rates is coming from the surplus of the world saving at a time when central banks, to support demand, are reducing short-term rates and are massively buying on the market long term bonds to finance indirectly budgets deficits.

Worries in Europe are, at last, on the growing divergences between countries carrying a surplus, like Germany and Nederland, and the other members of the Euro-zone at a time when the ECB appoints a new chairman. Mario Draghi policy is under acrimonious critics from former central bankers, which is without precedent in this very muffled world. So Christine Lagarde inherits a tough situation and the issue which is raised is to know if she will succeed in keeping this accommodating policy without increasing the current tensions which could, in the opposite case, lead to a new crisis of the euro.

At the end, the world economy has two weak points. Its banking system is severely tested by the evolution of the interest rates. Its margins usually were created by the spread between the cost of their resources and the rates they offer to their clients. With such a low spread due to the rates curb flatness or even its inversion, their financial strength is put into question. It is what is happening to the German banking system. To the opposite, the infatuation for the American technological stocks has reached such a level that an industrial or marketing failure of one of these companies would have a contagion impact on the others. Due to the level of the market capitalization they reached and the worldwide dispersion of their shareholders, a crisis could have systemic consequences much more serious than the burning out of the Internet bubble at the beginning of the century.

Imagination is without limits to forecast the worst or to fill itself with an excessive enthusiasm. It could be much wisely employed if it was used to conceive economic policies adapted to the “new world” and to prevent the punctual risks affecting some activities.

        

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