The economist at the Royal Bank of Scotland said the other day: “Sell everything.” A “cataclysmic” crash is coming in 2016, we’re told, and RBS is advising investors to get rid of their shares, buy bonds and basically run for the hills.
I suppose if you were the bank at the centre of the 2008-12 financial crisis, when RBS had to be nationalised at vast public expense, you might well be excused for being jumpy, though this sounded a little like panic.
Yes, the growth figures have been disappointing. Scotland’s GDP rose by only 0.1 per cent in the third quarter of last year and the oil industry is flat-lining. But construction has been booming, there were record car sales last year and Christmas was as big a consumer event as ever as families borrowed away the winter blues.
But the Chancellor, George Osborne, has also been issuing storm warnings. His new year message was that Britain faces a “cocktail of threats” to growth and stability. He had somehow failed to notice these less than two months ago in his November statement when he hailed the recovery.
So why the sudden air of crisis? Whenever stock markets fall – as they have recently – there is often an air of panic because that’s where rich people put their money: in pensions and share portfolios. The squeeze on earnings of recent years has hit more people than a stock market rout but they are little people who don’t count. Money never sleeps easy.
I suspect the Chancellor’s intervention may also have had something to do with the forthcoming European referendum and the new version of Project Fear. As with the Scottish referendum, businesses are being lined up to warn that “it’s a dangerous world out there” and Britain can’t risk losing the European Union’s 500 million consumers.
But it’s not just politics and panic. Fairly level-headed analysts, such as the Bank of England’s chief economist, Andy Haldane, have been warning of a “third stage” financial crisis based on the debts of “emerging” economies like China. The first stage was the banking crisis of 2008 and the second was the Eurozone sovereign debt crisis of 2012. Now comes the third instalment.
Oil is the canary in the mine.The Saudis had been trying to undermine the US shale oil and gas industry by flooding the world market with lots of cheap oil to lower the price, rather too well. Yesterday, the price of a barrel of oil dipped below $30; a sobering figure, not only for the Scottish Government. Oil and Gas UK says the UK has already lost 65,000 jobs, directly and indirectly, in the offshore industry since 2012.
The timing of the Saudi’s oil price war couldn’t have been worse because it collided with the latest China crisis. This communist country is discovering that capitalism isn’t so easy after all and that issuing decrees doesn’t stop the stock market from falling when investors lose confidence. Growth is slowing, debt growing.
The world’s second largest economy is undergoing the transition from a pure exporting country to a consumer economy. It is becoming like the rest of us. But maturity means that China’s double-digit growth figures of the past 25 years, based on dirt-cheap labour and an undervalued currency, cannot be continued.
But again, since China represents only about 17 per cent of world output and since its consumer transformation is creating lucrative markets for British firms, why the panic? Like us China has built its recent economic grown on a mountain of unsustainable debt. This is what is spooking the banks.
The dirty secret of the recovery from the 2008-12 recession is that it was achieved by a one-off splurge of cheap money that turbo-charged stock markets and property prices, making wealthy people very rich and leaving poor people pretty much where they were.
A lot of the cheap money went abroad into the recently developed nations, often referred to as the Brics (Brazil, Russia, India, China, South Africa) but also Turkey, Venezuela and Indonesia. Investors were hypnotised by something called “the commodities super-cycle”, a theory that commodities such as oil and minerals were no-lose investments because they are non-renewable and global economic growth can only increase demand for them; until it didn’t.
The commodities-based Brics are in serious trouble and there is widespread talk of countries like Brazil and Turkey defaulting on their debts. If this happens we could see a blow-back to the British economy and a repeat of the banking collapses of 2008.
According to the 16th Geneva Report on the world economy, global debt has reached $158.8 trillion. It has grown by more than £57trn since the financial crisis ended in 2012. That’s not far short of the value of all the world’s stock markets combined. If that’s the third wave, it’s looking very big.
If there is another financial crash, caused by a mass default in the emerging markets, there is very little the central banks and governments can do about it. They can’t cut interest rates, as they did in 2009. UK base rates are at their lowest level since the late 17th century.
Bail outs? The British Government alone mounted a £1.2trn rescue of the bankrupt British banks in 2008-9 but it would be hard pushed to do so again. Britain has also continued to borrow its way to recovery. In 2010 George Osborne said that government borrowing would reach zero by 2015; it is £68 billion.
The “march of the makers” didn’t happen either. The Chancellor’s manufacturing renaissance did not materialise essentially because of endemic inequality. According to the Office of National Statistics, household wealth in Britain increased by nearly one fifth between 2012 and 2014 to £11.3trn. But most went to the top 20 per cent who saw wealth rise by 21 per cent.
The bottom 50 per cent (most of us) had to do with seven per cent. Wealthy people tend not to spend their money but to invest it, mostly abroad. Stagnant wages and lack of investment have meant that British manufacturing productively has lagged behind our competitors.
Putting all of this together, there’s clearly a serious risk of another Lehman Brothers collapse: the investment bank that folded in 2008 and sent shock waves across the banking world. But this is not inevitable. The banks are no longer holding huge quantities of dodgy collateralised debt obligations based on sub-prime mortgages. That’s what mainly caused the 2008 crash.
We might find that the banks and corporations have lent unwisely to sub-prime countries. There is a growing climate of tension in international relations in the Middle East, North Africa, Eastern Europe and so on which is also making investors uneasy. But looking back through the 20th century, with two world wars, the Cold War and de-colonisation, it surely isn’t any worse.
No; the biggest danger to investor confidence is the one Keynes noted: confidence itself. We could be talking ourselves into an economic crisis because, well, we can’t think of anything else to do. That would be rather foolish.
From Herald 14/1/16