UN fears third leg of the global financial crisis, with epic debt defaults

UN fears third leg of the global financial crisis, with epic debt defaults, by Ambrose Pritchard-Evans. When this thing blows, it will be huge. This author is one of the world’s handful of most preeminent financial journalists. See the commentary on the next post too.

The third leg of the world’s intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history.

It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity.

“Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” said the annual report of the UN Conference on Trade and Development (UNCTAD). …

We are left with a world in a state of leaderless policy inertia, unable to escape slow suffocation. Trade is stagnant. Deflation is still knocking at the door a full seven-and-a-half years into the economic cycle, even with the monetary pedal pushed to the floor. The next downturn will test this regime to destruction.

The UN have this entirely backwards of course:

The UN’s diagnosis is that “shareholder primacy” and the entire edifice of liberal market finance are among the key culprits, all made worse by stringent fiscal austerity that has starved the global economy of sufficient demand.

No, the problem is state bureaucrats overriding markets and setting prices — even in our so-called capitalist West. Ever noticed that bureaucrats dictate overnight interest rates? This is the most important price in our economy — the price of money/debt. This has led to the ridiculous extremes of zero and even negative interest rates, which no market would ever have countenanced. Before central banks and fractional reserve banking in the West, interest rates were stable at around 6% for century after century, but no one remembers that now.

Its prescription is radical. The world must jettison neo-liberal ideology, and launch a “global new deal” with a blitz of investment on strategic sectors. It wants a return of the “developmental state”, commanding a potent industrial policy, and backed by severe controls on capital flows. “If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone,” it said. …

What is clear is that world will soon need a massive and coordinated spending push by governments to create demand and bring the broken global system back into equilibrium.

No no no no no. This is the worst possible idea — a fully Soviet economy, globally. Markets always do better than bureaucrats. Yet the global elite may be about to use the failure of bureaucrats with interest rates and monetary policy over the last few decades as an excuse to take over the world as their own taxpayer funded dictatorship. This would set back human progress by centuries, perhaps millennia, with a new post-Enlightenment dark ages. Very bad.

The world has too much debt, brought on by stupidly low interest rates set by bureaucrats. That damage is done, baked in the cake. So clear it off and start afresh. Yet more bureaucratic control of the economy is just compounding the problem with more of the same stupidity.

hat-tip Stephen Neil