Their short-term gain is long-term pain for us


By George Kerevan
FORGET introvert Britain: what’s in store for the rest of the globe in 2013? Start with the world economy. It’s going to be rough.
Everywhere except in the Calvinist eurozone, countries are pumping up the money supply (aka central banks printing electronic cash) in order to restore a semblance of growth.

This, allied to holding interest rates at rock bottom, is forcing down the value of currencies in a “beggar-your-neighbour” attempt to promote exports – just like the 1930s.

The Japanese are leading the pack, with the new prime minister, Shinzo Abe strong-arming his country’s supposedly independent central bank into printing oodles of new yen in a bid to deflate the currency and out-export China.

The US Federal Reserve is not far behind and has promised to print as many dollars as are needed to bring American unemployment below 6.5 per cent.

The new Chinese leadership has countered by turning on its own monetary taps, flooding China’s inefficient state firms with endless subsidy.

In the short term, this monetary bonanza is going to send stock ­markets soaring in early 2013 and make us all feel good.

The main US stock market index, the S&P 500, might even beat its all-time record high of 1565 – as long as Congress ­continues to avoid the famous fiscal cliff with a few more fudges.

However, the good news won’t last. For a start, all that new cash has to go somewhere. Much of it has ended up invested in corporate bonds because this is a safe option for fund managers, even though it doesn’t earn very much. Returns on US corporate bonds are at their lowest yet.

Unfortunately, this “corporate bond bubble” is yet another financial crisis in the making. Even moderate economic growth in the US and China in 2013 could cause a rise in ­interest rates to curb incipient inflation. That, in turn, would trigger a flight of investors’ money out of low-yield corporate bonds into equities, crashing the value of bond holdings overnight. So much for your pension fund.

The major international credit ­ratings agencies are already sounding the alarm on the state of the corporate bond market. However, my guess is that we probably won’t see a ­meltdown in the bond market in 2013 – but only because I think ­global economic growth will stall despite the monetary printing presses ­working overtime. Here’s why.

So far, since the credit crunch of 2008, we’ve been stuck in a financial crisis caused by banks borrowing too much from each other.

However, in 2013, we will enter a new phase of the ­economic crisis caused by something else – excess manufacturing capacity exacerbated by cut-throat currency devaluations.

Since 2008, the world has stopped borrowing and started saving. During the boom times of the first decade of the century, the world saved on average 21.7 per cent of global income (mostly thanks to thrifty Asians).

However, in 2013, global savings will rise to an historical high of 24.6 per cent, according to the IMF. In other words, we are saving more than we can ­productively invest. Result: a dearth of consumption and an excess of productive capacity.

Instead of reducing manufacturing capacity – which usually happens in a recession – individual nations are protecting their own factory jobs while devaluing their currencies, in the vain hope of selling more abroad.

Of course, if everyone tries to do this simultaneously, the only result is a flood of under-priced goods on to the world market – which is precisely what is happening as we enter 2013. Result: semi-permanent slump.

The odd man out in the global economy is the eurozone, where Germany has enforced hair-shirt austerity on the – admittedly profligate – Mediterranean members, rather than seek growth.

This has resulted in 1930s-style unemployment and poverty in southern Europe. This must surely result in a definitive political rupture, giving rise to anti-euro regimes of either the left or populist right. Or else see Europe sink into economic and political ­impotence.

Spanish unemployment is at 26 per cent and rising, and the old Francoist establishment can be heard rumbling in the wings. In Italy, a resurgent Silvio Berlusconi is campaigning for a ­return to the lira – Italian elections are next month. In France, the right-wing National Front is recruiting 600 members per day. In Portugal, president Cavaco Silva has asked the country’s constitutional court to rule on the legality of parliamentary moves to dismantle the welfare state – imagine Nick Clegg taking George Osborne to court and you’ll get the point.

Because the German chancellor, Angela Merkel, has to fight a tight election this September, Germany has allowed a temporary fix in the ongoing euro crisis.

The European Central Bank (ECB) is buying Spanish and Greek sovereign bonds and lending money to otherwise insolvent European banks, in order to calm the markets until the German elections are over.

However, this is a very temporary measure that could fall apart at any moment.

The ECB is actually banned from acting as a proper central bank should by guaranteeing the credit of members of the monetary union – the real cause of the euro crisis.

Prediction: if Merkel wins ­re-election, the euro crisis will return with a vengeance.

If she loses, an alliance of French and German Social Democrats will turn on the European monetary spigot and devalue the euro. Of course, the markets will respond by dumping sovereign euro bonds, likely forcing a string of bank collapses.

And that folks, is the best of the international news for 2013.

Even worse: the proxy war between Saudi Arabia and Iran now being fought in Syria could bring the latest victory in the “Sunni spring”.

An Israel surrounded by Sunni fundamentalist regimes might attempt a show of force against Iran, before the latter gets nuclear weapons. None of that bodes well for oil prices and economic growth.

Thankfully, the world shows a surprising ability to muddle through. The worst has usually not occurred.

So let’s pray that 2013 truly is a happy new year.

Courtesy of George Kerevan and the Scotsman newspaper