Synchronized global slowdown

Posted By Darren Winters on Oct 28, 2019

Synchronized global slowdown

The global economy is experiencing a “synchronized global slowdown,” those were the precise words used by IMF Chief Economist Gita Gopinath in a recent report released by the IMF.

The global growth outlook is its weakest since the Great Recession of 2008, according to the IMF report. Here is the bit which suggests that there may be trouble ahead. The IMF estimates that 90% of the world sees slower growth, which is a considerable change to the global economy from two years ago when growth was accelerating across three-quarters of the globe in a synchronized upswing.

The IMF is not renowned for crying wolf, bearing in mind that IMF economists tend to see the world through a pink champagne glass. Put simply, The IMF’s track record of forecasting is overly bullish.

Over the last 28 years, the IMF predicted that an average of five economies would contract. But in reality, 26 economies contracted.

In short, the IMF has a poor track record of predicting recessions, because they have been too optimistic.

When the ardently bullish IMF starts to turn bearish by putting out a warning of a synchronized global slowdown it would be prudent to take note

Synchronized global slowdown

If fact, the IMF, who tends not to be alarmist, has been waving the red flag of a synchronized global slowdown since the beginning of 2019.

Indeed, the IMF made a fifth-straight cut to its 2019 global growth forecast last week, citing a broad deceleration across the world’s largest economies as trade tensions undermine the expansion.

“With a synchronized slowdown and uncertain recovery, the global outlook remains precarious” IMF Chief Economist Gita Gopinath warned in her report.

“There is no room for policy mistakes and there is an urgent need for policymakers to cooperatively de-escalate trade and geopolitical tensions,” she added.

UN Secretary-General António Guterre echoed the IMF’s synchronized global slowdown view as he warned almost simultaneously that the global economy was facing serious challenges

“The global economic outlook is facing severe headwinds, and the international community must quickly act to do everything possible to prevent the world from fracturing, mostly due to the US and China trade war,” said UN Secretary-General António Guterre.

Do we need the IMF or the UN to warn us of a synchronized global slowdown as it is fairly obvious that we are on the cusp of another systemic crisis? Economic crisis and civil unrest walk lockstep.

There is a street burning near you as the global economy melts down

In Europe, Frances’s Yellow Vest movement continues, despite mainstream media blackout on the story. Catalan Separatists have been fighting a five day running battle with police in Spain. In the UK an estimated one million protesters have marched through London demanding a second Brexit referendum. In South America, Mexican cartels now rule city after gun-battle with the police. In Argentina, the President resigns after food riots left 22 dead. Venezuela’s is a mad max scenario and in Asia, Honk Kong has endured the 29th weekend of rioting.

Perhaps the IMF’s “synchronized global slowdown” view is yet again too upbeat

It is beginning to look more like a Soviet Union’s 90s meltdown. “During tense and testing times I fears the possibility of a Great Fracture with the two largest economies splitting the globe in two each with its dominant currency, trade and financial rules, its internet and artificial intelligence capacities and its own zero-sum geopolitical and military strategies,” said UN Secretary-General António Guterre at the World Bank Group and IMF Annual Meetings in Washington.

On an upbeat note, Guterre told the group of bankers “that it is not too late to avoid this fracturing of the world” and he added that “we must do everything possible to avert this…and maintain a universal economy with universal respect for international law; a multipolar world with strong multilateral institutions, such as the World Bank and IMF”.

What exactly can policymakers do to halt this synchronized global slowdown?

Monetary policy is spent and has reached the laws of diminishing returns.

“Money supply growth is unresponsive.” according to Eric Basmajian, of EPB Macro. So the central bank’s monetary easing is unlikely to have any positive impact on the real economy. The velocity of money in the economy has not increased despite the central bank’s greatest monetary easing experiment in the history of finance. The velocity of money refers to the rate at which money changes hands in an economy. The chart here illustrates the velocity of M1 money stock is in a long term downtrend, which started since the Great Recession.

The same chart also illustrates how the effectiveness of monetary policy across the world is dying

Put simply monetary policymakers are pushing on a string as further easing is unlikely to have any positive impact on the real economy, according to the data. 

UN Secretary-General António Guterre’s advice to his audience of bankers and government officials is that they must conduct fiscal policies to halt this synchronized global slowdown

I did envisage that unimaginable fiscal spending would come next. 

But with the great middle class that used to bankroll the state now almost non-existant and public debts spiraling out of control just how does Guterre propose this ramping up of Fiscal spending will be financed? 

Guterre recommends that governments should modernize their tax systems that are “smarter, greener, and more aligned behind the sustainable development and climate action agendas,” he said. Second, he said global financial markets must incentivize long term investing in programs that address poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. And third, he said, “it is time to break the cycle of excessive debt build-up followed by painful debt crises”.

How do governments deleverage and simultaneously increase fiscal spending, there is an obvious contradiction here? 

But maybe I have missed the point, perhaps Guterre is suggesting that the next stop is Socialism, universal basic income financed with soak the rich policies.

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