SEPTEMBER 2016 / NO. 2
TAGS: FINANCE, SYSTEM, GOVERNMENTS, POLITICIANS, CENTRAL BANKS, FED, ECB, JORIS LUYENDIJK

The financial world is a mess

“The financial system is like a shared partnership where you and your partner promise to stop smoking in 2030, stop drinking in 2040, and to be loyal for half of the time in 2050. That is the current uncontrollable and unmanageable situation between governments, politicians and central bankers.”
The above statement illustrates the dramatic situation in the financial markets where no one, no one at all, has any control. This is what we face daily in our strategic intelligence practices. We provide some insight as to why we cannot rely on the financial system, or on presidents, prime ministers, politicians or central bankers.
  • Demand for money lags behind supply. Some of the causes are aging populations, income inequality, consumer savings and structural tax increases on the middle class
  • The surplus of an increase in the money supply, and collapse in demand, has led to a savings surplus or ‘savings glut’
  • Savings are hit because interest rates are so extremely low, and the ‘price of money’ is expected to fall further
  • In 2008, the bubble burst causing a worldwide deep recession. This slump was overcome when governments began to expand their debt
  • The FED and ECB started with quantitative easing (QE) or ‘printing money’ by buying government bonds: in 2016, this reached US$ 11,000 billion worldwide, and was even more during 2017-2018
  • Investment and spending by governments could solve the problems, as the current interest rates are so low
  • ‘Negative interest rates’: how long are they going to last? This has no economic logic!
  • The easing of loans keeps non-viable businesses alive, an effect called ‘evergreening’. This impacts competition, and limits productivity and thus economic growth. Banks have many of these kinds of ‘bad loans’ on their balance sheets
  • These ‘bad loans’ give banks insufficient space to finance promising new initiatives
  • In Italy banks have around € 360 billion of ‘bad loans’ on their balance sheets. Will an Italian banking crisis lead to the next financial crisis?
  • Finally, if companies pay low interest during structural under-performance, we can speak about ‘creative destruction’
It is obvious that the financial system can’t be controlled by any one: no president, no prime minister from whatever country, no FED, no ECB, no Central Bank. Joris Luyendijk, who conducted research for 2 years in the City, expressed this well. In 2015, he wrote, regarding who is in control in the financial world the following great statement:
“Imagine you are sitting in an airplane, relaxing with a glass of wine, and when looking out of the window you see that the engine is on fire. There is no cabin crew. In the chaos you make your way to the front of the plane and open the door of the cockpit only to find that there are no pilots”
Banks try to improve their ratios by shifting risks. However, these risks remain within the financial system: the systemic risks have not been reduced since 2008, and have actually increased. On 10th July, 2016, Chief Economist Folkerts of Deutsche Bank stated that Europe must support the banks in Southern Europe with € 150 billion to prevent a new economic crisis.
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