How to avert Global financial system collapse in the era of De-Globalisation and protectionism?

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The business cycle has four phases: Expansion, peak, contraction and Trough. The recent figures by

ECRI state:

  • “Continued Global Growth slowdown, no upturn in U.S Growth and inflation, Powell Pivot, no Second Half Recovery” April 2019 Vol.

The global economy is struggling to come to terms with slow growth, political and social unrest unseen since the Great Depression of 1929. Many economists, financial institutions are preparing and warning of a looming recession eclipsing 2008 financial crisis in its impact and Severity. The options available to central banks around the globe are limited and challenged since globalisation falsely I might add has become synonymous with job losses giving rise to populist nationalistic parties (Trump mania, Italy’s Salvini, Bolsonaro, Brexit leave party Johnson/Farage). The market volatility, contraction of global economy growth and fear of recession is effectively damping investment opportunities, companies are tightening shoring up stocks preparing for a shock wave of financial sector collapse. Financial experts in media forums are either arguing for steps to be taken collectively to implement serious financial restructuring of the entire financial system (2nd Bretton Wood Marshall Plan) by resetting, reforming, overhauling/replacing long held capitalist principles driven by orthodox-classic perceptions purported by (Maynard, Keynes, Milton Friedman) pioneers on free market economy. Alternatively, ideally some would argue for governments to stop bailing out failed enterprises and allow the market to determine or adjust itself without interference from external force a Laissez-Fair Adam smiths “invisible hand” approach.

History of recessions determines response and it seems revival of Alvin Hansen’s book 1938. “Full Recovery OR Stagnation” aptly is relevant to current decisions adopted by Feds and ECB to deal with economic slowdown. Hanson believed inflation could be regulated by” Timely Changes” in interest rate and tax rates with controls extending to prices and wages. Hanson advocated before congress 1930s that a large-scale economic stimulus would ward off “secular stagnation” and in 2013 Larry Summers former US treasury secretary in support of Hansen’s argument proposed to IMF that global economy entered long -term economic slump. Given the recent rate cut by Feds and ECB coupled with ageing demographics, low manufacturing yield, protectionist manoeuvres stifling innovation and development under the guise of national interest Hanson’s theory criticised for pessimistic overtures correlates with current monetary policy and Summers predictions.

The ECB and Federal Reserve to avoid civil unrest are pumping more QE into the economy to kickstart growth while investors are cautiously hedging their bets such as Bridgewater Associates largest hedge fund outdone others by increasing market share last year gaining 15% when it invested simultaneously in China despite Trumps trade sanctions. Culpable confusion for investment indicated in August 20th article by FT headline “investors pull $2.6bn from funds in China” in direct conflict to 28th Aug “U.S investment in China rises despite trade war”.

The shareholders and stakeholder’s priority and concerns are about increasing its profit margins and avoiding unnecessary risks by diversifying in emerging economies. Given current sentiments to De-globalise world economy, Financial institutions/companies interconnected via SWIFT etc have responsibility and their conduct has a cause and effect on government decisions, this exponentially increases risks to another level prime example being Huawei, European Union Mercosur Free trade, Anglo Dutch war and opium war.

The announcement of the European Central Bank 12/09/2019 to cut interest rate further from -0.4 to -0.5 indicate apprehension, panic and loss of confidence in the monetised financial system to recover robustly naturally. This is due to several factors both historical and recent: the global economic down turn, inverted yield curve, pension debt crisis, civil unrest such as the “yellow Vest “protestors, Tariff war and currency/trade war and escalating tensions by Brexit are symptoms of a wider fiscal problems long overlooked and unresolved by successive governments.

The ECB expects central banks to productively use another QE stimulus package to rebuild confidence in a waning consumer market society saturated with overconsumption, debt and fear of job losses pushing the system to overload with contradictions. The German manufacturing economy is contracting and with 18,000 job losses at Deutsche Bank July 2019 this is sending shock waves across Europe as it could ignite liquidity problem previously noted with Lehman Brothers in 2008 only this time with far reaching global banking contagious effect. Currently Deutsche bank holds $45 trillion derivatives trades with other institutions will the European bank bail out with negative interest rate already having cumulative effect on savers and unpredictable bond/equity market be the straw that broke the camel’s back heralding end of the Fiat system?

The ECB decision to cut rates was hailed by Donald Trump as a positive move the Federal Reserve could emulate given the strong Dollar effecting USA exports, subsequently on 18/09/2019 rates were cut by another quarter its second since July of 2019. This race to cut interest rates to zero or negative is similar move adopted by FDR April 5th, 1933 suspending gold standard prohibiting the Treasury exporting Gold part of an expansionary monetary policy to stimulate domestic economy following Great Recession, deflation/unemployment. This move was also responding to Britain abandoning gold standard devaluing the pound subsequently forcing Roosevelt to take such drastic actions to prevent Americans depreciating dollar further by exchanging it for gold.

Currency manipulation is against Free trade standards, since the 2nd WW the World Trade Organisation and IMF prohibits government direct intervention to bolster its exports devaluing its currency, the trade war between China and USA is undermining competitiveness as a shift towards protectionism is upsetting market equilibrium.

For decades under the guise of de regulations, liberating economies via trade the global economy growth became interconnected and reliant on states playing smaller role allowing multinational corporations to set the pace and agenda. As of August 2019 approximately 30 central banks around the world cut interest rates (hence FT reporting on China trade investment) to boost exports but the global demand for goods and services is all time low in Europe and elsewhere, this is a clear sign of recession alert touted by ECRI data long-overdue some might add especially with geopolitics and international relations in dire straits. In the 1950s and 60s low level of debts following WW2, Marshall plan, IMF and WB radically increased demand for goods, services and productivity, current economic woes stem from debt crisis (government, corporations and personal) a rebalancing of expenditure, fiscal regulations and higher taxation on corporate entities to reduce income inequality and redistribution of wealth might go a long way. In reality, the last bailout benefited the banking sector, global debt is $ 246.5 trillion increased by $3 trillion in the first quarter of 2019, in trying to solve debt problems with more debt Institute of international finance which released the study warns of impending crisis spearheaded by out of control cooperate debt bubble. In 2007 CDOs (collateralised debt obligations) subprime mortgages caused financial meltdown, today ETFs (exchange traded fund) corporate Bond market pose a risk investor can no longer ignore in the USA alone

  • $1.3 trillion in leverage loans

  • $1.2 trillion in junk bonds

  • $3 trillion of investment grade corporate debt just one notch above junk.

Source: Barron’s

The data and figures (inverted yield curve) point to unsustainable debt level a crisis significantly worsen due to the current fragmented political order and leadership power vacuum who previously handled 2008 crisis.

The sanctions against Iran, Russia, China and Venezuela is not functioning as expected by Washington foreign policy makers and advisers, China is moving toward multilateralism with long term economic ties spending prodigiously on BIR initiatives while USA adopted a unilateral standpoint devaluing its status as world leader. In geopolitical hegemonic terms a shift towards the East and emerging markets perilously pits nations against other nations, with an ongoing Tariff/ trade war barrier instigated by Trump for re-election 2020 weaponizing the dollar through sanctions is having little effect on Russia and China: both are hoarding/stocking up on Gold reserve in preparation for financial system collapse, historically protectionist policies invariably led to the last major conflict. An anarchic international system is de-stabilising global economy, what must or should be paramount for the current world leaders is formulating coherent political plan, to restore a balance of order as economic fiscal policies targeting growth is interwoven with rule of law, democratic values and principles this is paramount in an effort to prevent escalation to military engagement.

By Fatheya Yallas MSc international Conflict& Resolution


The views expressed in this article are the author’s own and do not necessarily reflect Horndiplomat editorial policy.

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