A new global financial crisis develops fast; who denies it?

Xi Jinping, President of the People's Republic of China, visited the European Commission. Jinping, in the foreground, on the left photographed here with Li Zhanshu, Member of the Political Bureau of the Central Committee of the Communist Party of China (CCCPC); Member of the Secretariat of the CCCPC; Head of the General Office of the CCCPC, on the right. (EC Audiovisual Services, Date: 31/03/2014 Location: Brussels - EC/Berlaymont).

Xi Jinping, President of the People’s Republic of China, visited the European Commission. Jinping, in the foreground, on the left photographed here with Li Zhanshu, Member of the Political Bureau of the Central Committee of the Communist Party of China (CCCPC); Member of the Secretariat of the CCCPC; Head of the General Office of the CCCPC, on the right. (EC Audiovisual Services, Date: 31/03/2014 Location: Brussels – EC/Berlaymont).

During the last two weeks the world’s largest stock markets had a wild time not seen since Lehman Brothers went bust on 15 September 2008. The New York stock exchange in Wall Street lost more than 8% of its capitalization in a few days and then recovered some of the losses to close last Friday 28 August 4% down from 19 August. On “Black Monday”, 24 August the Shanghai Composite index, China’s benchmark stock index lost 8.5% of its value in a few hours. Those daily losses came in excess of the unbelievable cost the Chinese share holders paid during the weeks after the Friday 12 June fall down. By now the Chinese stocks have shed around 35% off their early June value. The rest of the major world capital markets in Europe and Asia have lost smaller chunks of their capitalization. If this is not a new bubble bursting before our eyes then we have lost the meaning of percentages.

According to most analysts the reasons behind the present precariousness in international financial markets, after four to five years of steady gains, are related mainly to two factors. Firstly it’s the fatigue of the Chinese economy which has been the locomotive of global growth during the past twenty years. The second cause of incertitude stems from the prospect of an increase of dollar interest rates by the US central bank, the Fed. Mainstream economists though stop their ‘insightful’ analysis at this point not bothering to mention why the global financial system would stutter if the Fed raises its interest rates by some decimal points or if the Chinese economy stops growing by outsized rates.

Addicted to money for free

The answer is to be found in the fact that the global financial system is addicted to abundant and free of charge money which all the major central banks have injected into the banking systems. The banks cannot any more tolerate to pay anything for the money they usurp. Needles to say that the international financial system is in the hands of a handful of US and EU banks, while the health of the emerging markets, China included, is tightly related to borrowed money at negative real interest rates. On this account the Fed is the largest benefactor of the banks having injected to the US lenders $4.5 trillion during the last five years at zero nominal interest rates.

However, given that from 2010 to 2014 the US inflation was in the positive part of the graph, the American banks had been ‘paying’ negative real interest rates. Those extra gains have to be added on top of the huge profits made by the US banks which have being lending out at interest rates ranging from 6% to 20% the money they got for free. All the $4.5tn they got from the Fed they have spread to the mainstream and mainly to the gray financial markets. Most of that money has ended up in the stock, bond and derivatives markets having created the new bubbles, which have now started to deflate and might burst at any time.

It’s the same disease

The same is true for the Chinese financial markets. According to the latest available data, the internal debt in China quadrupled in a few years to (Renminbi or Yuan) RMB 28.5tn now from 7tn in 2007. The base to build this paper tower comes (also at negative real interest rates) from the central bank of the country, the People’s Bank of China. By the end of June 2015 it has injected RMB 8.90 trillion to the country’s banks. The banks in their turn have lent and re-lent that money and today the overall internal indebtedness in this huge country is even more gigantic and has reached almost the triple of its GDP.

One can imagine what can go off if a critical mass of Chinese private borrowers, local governments and state enterprises start falling in arrears with their loans. Such a dreadful scenario may be triggered if the real overall growth rate of the Chinese economy falls below 7%. This figure, amongst other things, is considered as the lowest development tempo in order for the country’s borrowers to be able to continue servicing their debts. This benchmark development rate for China is also the lowest tolerable rate if the country’s trading partners want to keep their own economies in the positive side, albeit at much lower growth rates.

Beijing doing more

The Chinese authorities have predicted that by the end of this year the overall growth rate will end up at this level. The problem is that many western investors do not believe it and question the credibility of the Chinese statistics. That’s why the Chinese authorities are doing much more to support growth. During the past weeks the Chinese decision makers in order to counter the sell-off in the country’s stock exchange and strengthen the real economy, have being further inflating the already incredibly high unconventional liquidity advancements from the People’s Bank of China to borrowers.

China learns a lesson

Up to now those new monetary expansionist measures have proved incapable of arresting the sell offs. It seems that China has just discovered an unpleasant surprise for its leadership that its own communist kind of capitalism suffers from the same diseases and ups and downs as the democratic one. More than twenty years of continuous double digit growth had created the false impression that China can beat the rules of gravity and direct its markets the way it wanted; always upwards. The sacrosanct of all markets, the stock exchange, finally set things right by showing that all markets are the same whatever the adjective before it. President Xi Jinping and the new leadership of China come to terms with that.

Coming back to the developed world and more specifically to Eurozone, all along these last wild weeks the euro, despite its internal problems with Greece, has emerged as a rather safer placement. Even though the European stock exchanges have paid a dear price to the new uncertainties, the euro gained some grounds with the dollar. This doesn’t mean that Eurozone is immune to the global financial turbulences. However it indicates a rather stronger resistance to possible new financial swings.

Some paid the early costs

In any case the truth remains that if the global markets continue stuttering badly, no country in the world would avoid paying a dear price to the new financial Armageddon. Some medium sized key countries like Brazil, Turkey and South Africa have already felt the shock and have entered a path of economic and political shakiness. Understandably the financial community led by the banks, does not see a major crisis developing and keep asking for more free money, pressing the American Fed to keep postponing the increase of its zero interest rates. The bankers don’t run any danger as the 2007-2008 crisis proved, it will be the real economy to pay the price this time.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

Τhe EU Refugee Crisis: a day in the life of a Refugee in Greece

Much more than a ‘lifeline’ for millions of households, remittances can spur global growth, says UN agency

Why Eurozone urgently needs the ECB to print and distribute at least €500 billion

A Sting Exclusive: “The Chinese economy is steady and moving in the right direction”, Ambassador Yang of the Chinese Mission to EU underscores from Brussels

FEATURE: Niger’s girls find sanctuary in fistula treatment centres

Brexit talks: 2nd round fails to bring the EU and the UK closer on key issues

Why Commissioner Rehn wants us all to work more for less

Scotland in United Kingdom: It’s either the end or the beginning of the end

ECB money bonanza not enough to revive euro area, Germany longs to rule with stagnation

EU and Amazon cut deal to end antitrust investigation over e-books deals

We’ll succeed together

Is “Sustainable Development” a concept that integrates Health Literacy and Health Policy as a global health action?

EU and China discuss economic and trade relations at the 7th High-level Economic and Trade Dialogue

The ECB proposes a swift solution for SMEs’ financing

The Next Web 2014, the biggest European conference on Internet so far and the Absence of Brussels from Amsterdam

Assault on key Yemeni port would endanger 300,000 children and ‘choke off’ aid for millions more: UNICEF chief

Managing and resolving conflicts in a politically inclined group of team members

How much time has the ‘European Union of last chance’ left?

AIESEC @ European Business Summit 2014: The Digital Era: A New Business Frontier

Opening – Parliament expresses support for victims of Fuego volcano in Guatemala

UN chief welcomes resolution to 27-year-old disagreement over renaming the former Yugoslav Republic of Macedonia

The European Sting writes down the history LIVE from G20 Leaders’ Summit in Turkey

The representatives of the regions and the cities know better what the EU needs on migration, trade, poverty and taxation

EU Trade Ministers come together in a desperate attempt to save TTIP

EU Leaders’ meeting in Sofia: Completing a trusted Digital Single Market for the benefit of all

MWC 2016 LIVE: The top 5 themes of this year’s Mobile World Congress

UK: Crawley group wins European Citizens’ Prize

ECB to people: Not responsible if you lose money on Bitcoin, your governments are

Following the World Cup? Then you’re watching high-performing migrants at work

The vehicles of our future

Cyber attacks are shutting down countries, cities and companies. Here’s how to stop them

Here are three ways blockchain can change refugees’ lives

UNICEF delivers medical supplies to Gaza in wake of deadly protests

Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

“Who do I call if I want to call Europe?” Finally a name and a number to answer Henry Kissinger’s question

Trump’s trade war splits the EU; Germany upset with Juncker’s “we can be stupid too”

ITU Telecom World 2017: exploring smart digital transformation

Google once more under EU crossfire from a possible record fine and new Right to be forgotten case

Commission to decide on bank resolution issues

These charts show where the world’s refugees came from in 2017 – and where they’re heading

France v Croatia: How the World Cup finalists stack up off the pitch

Venezuela: Parliament calls for urgent EU help for people fleeing the country

I’m not feeling lucky: The “Right to Be Forgotten” ruling puts Google inside a box

G20 LIVE: G20 Leaders’ Communiqué Antalya Summit, 15-16 November 2015

Germany not famous for easy way outs from political stalemates

Draghi tells the EU Parliament his relaxed policies are here to stay

These countries are all building brand-new cities

Lithuania finds the ways to maintain its energy security

The EU Parliament and the ECB unknowingly or unwillingly fail to protect our financial assets

How blockchain can manage the future electricity grid

EU’s tougher privacy rules: WhatsApp and Facebook set to be soon aligned with telcos

ECB to support only banks not Peoples

Containers at the port of Tokyo. (Copyright: European Union, 2016. Source: EC - Audiovisual Service. Photo: Haruyoshi Yamaguchi)

EU cuts fast-track free trade deals with Japan and Singapore and leads the trade scene

Latin America’s cities are ready to take off. But their infrastructure is failing them

Brexit uncertainty keeps shaking the world’s financial markets

AI has huge potential – but it won’t solve all our problems

The EU to bear the cost of eventual sanctions against Russia

MWC 2016 LIVE: Ericsson/Cisco partnership on track, insist execs

UK’s PM Theresa May asks for a two-year Brexit transition plan as negotiations round kicks off

Eurozone cannot endure any longer youth marginalisation

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s