Understanding the Global Recession of 2019

Understanding the Global Recession of 2019, by Charles Hugh Smith.

2019 is shaping up to be the year in which all the policies that worked in the past will no longer work.

As we all know, the Global Financial Meltdown / recession of 2008-09 was halted by the coordinated policies of the major central banks, which lowered interest rates to near-zero, bought trillions of dollars of bonds and iffy assets such as mortgage-backed securities, and issued unlimited lines of credit to insolvent banks, i.e. unlimited liquidity.

Central governments which could do so went on a borrowing / spending binge to boost demand in their economies, and pursued other policies designed to bring demand forward, i.e. incentivize households to buy today what they’d planned to buy in the future.
This vast flood of low-cost credit and liquidity encouraged corporations to borrow money and use it to buy back their stocks, boosting per-share earnings and sending stocks higher for a decade.

Interest rates have been at emergency lows for a decade now. Can they be normalized without popping the “everything bubble”? Probably not.

Demand has been brought forward for a decade, effectively draining the pool of future demand. Unprecedented asset purchases, low rates of interest and unlimited liquidity have inflated gargantuan credit / asset bubbles around the world, the so-called everything bubble as most asset classes are now correlated to central bank policies rather than to the fundamentals of the real-world economy. …

As soon as authorities attempt to limit their support / stimulus, markets wobble into instability. The entire economic structure of “wealth” is now dependent on asset bubbles never popping, for any serious decline in asset valuations will bankrupt pension funds, insurers, local governments, zombie companies and overleveraged households–every entity which is only solvent as long as asset bubbles expand or maintain current valuations.

So how do central banks normalize their unprecedented policies without popping the asset bubbles they’ve created? The short answer is: they can’t. Rising interest rates are a boon to savers and Kryptonite to borrowers — especially over-leveraged borrowers who must roll over short-term debt and borrow more just to maintain the illusion of solvency. …

This leaves the central bank with a stark and sobering choice: either let the asset bubble collapse and accept the immense destruction of “wealth,” or buy the whole darn market. This is the unintended consequence of employing unprecedented policies for a decade: like using antibiotics every day for years, eventually resistance develops and the “fix” no longer works. …

We are already seeing this in action as Chinese governmental agencies have started quietly buying empty flats in ghost buildings to prop up the housing market. The idea here is to restore confidence with a relatively modest burst of quiet buying. But when markets turn and confidence is lost, sentiment can’t be restored so easily: sensing their last chance is at hand, sellers dump assets at a quickening pace, overwhelming the modest central bank buying.

Central banks can create infinite money. Maybe they will end up buying all the world’s assets? Don’t laugh — they already own a pretty significant percentage, so when the next recession rolls around — as it inevitably must — the fun begins.