Ambrose Evans-Pritchard: Do our rulers know enough to avoid a 1930s replay?
[Ambrose Evans-Pritchard is International Business Editor at the Telegraph.]
The commodity and emerging market booms are breaking in unison, leaving no more bubbles left to burst. Almost every corner of the world is now being drawn into the vortex of debt deflation.
The freight rates for Capesize vessels used to ship grains, coal, and iron ore have fallen 95pc to $11,600 since May, hence the bankruptcy of Odessa’s Industrial Carriers last week with a fleet of 52 vessels. Cargo deliveries dropped 15.2pc at the US Port of Long Beach last month, but that is a lagging indicator.
From what I have been able to find out, shipping is slowing as fast as it did in the grim months of late 1931. “The crisis is now in full swing across the entire world,” said Giulio Tremonti, Italy’s finance minister. “It is hitting the real economy, the productive forces of industry. It’s global, it’s total, and it’s everywhere,” he said.
Italy’s industrial output has fallen 11pc in the last year. Foreign orders have dropped 13pc. But we are all in much the same boat. Europe’s car sales fell 9pc in September (32pc in Spain). US housing starts fell to a 45-year low in September.
Last week, the International Monetary Fund had to rescue Hungary and Ukraine as contagion swept Eastern Europe. It would not surprise me if Russia itself were to tip into a downward spiral towards bankruptcy (again) and fascism (again).
Russia’s foreign reserves have fallen by $67bn since August. Ural crude prices fell to $65 a barrel last week, below the budget solvency threshold of the now extravagant Russian state.
The new capitalists have to repay $47bn in foreign loans over the next two months. In Russia, oligarch fiefdoms built on leverage - Mikhail Fridman (Alfa), Oleg Deripaska (Basic Element), and Vladimir Lisin (Novolipetsk) - are lining up for state bail-outs from a $50bn rescue fund.
Brazil is free-fall as well. Sao Paolo’s Bovespa index is down a third in dollar terms in a month. Hopes that the BRIC quartet (Brazil, Russia, India, and China) would take over as the engine of world growth have proved yet another bubble delusion.
China says 53pc of the country’s 3,600 toy factories have gone bust this year. Economist Andy Xie says China is at imminent risk of its own crisis after allowing over-investment to run rampant, like Japan in the 1980s. “The end is near. They’ve been keeping this house of cards going for a long time with bank support,” he said.
Lord (Adair) Turner, the head of Britain’s Financial Services Authority, offers soothing words. “There is no chance of a 1929-33 depression. We know how to stop it happening again,” he said.
I hope Lord Turner is right, but his Olympian certainty bothers me. It assumes that the economic elites a) understand what happened in the 1930s – on that score I suspect that few, other than the Fed’s Ben Bernanke, have delved into the scholarship (sorry, Galbraith’s pot-boiler The Great Crash does not count);
b) that central banks will now jettison the dogma of inflation-targeting that got us into this mess by lulling them into a false sense of security as credit growth and housing booms went mad. Will they now commit the reverse error as credit collapses?
c) understand that non-US banks – especially Europeans – have used the shadow banking system to leverage a $12 trillion (£7 trillion) spree around the world, and that this must be unwound as core bank capital shrivels away;
Yes, the Fed made frightening errors in the early 1930s by raising rates into the crisis, but they were constrained by the norms of the age: the fixed exchange system (Gold Standard), and fear of the bond markets. Are today’s central banks are doing much better? The Europeans fell into the trap of equating this year’s oil and food spike with the events of the early 1970s...
Read entire article at Telegraph (UK)
The commodity and emerging market booms are breaking in unison, leaving no more bubbles left to burst. Almost every corner of the world is now being drawn into the vortex of debt deflation.
The freight rates for Capesize vessels used to ship grains, coal, and iron ore have fallen 95pc to $11,600 since May, hence the bankruptcy of Odessa’s Industrial Carriers last week with a fleet of 52 vessels. Cargo deliveries dropped 15.2pc at the US Port of Long Beach last month, but that is a lagging indicator.
From what I have been able to find out, shipping is slowing as fast as it did in the grim months of late 1931. “The crisis is now in full swing across the entire world,” said Giulio Tremonti, Italy’s finance minister. “It is hitting the real economy, the productive forces of industry. It’s global, it’s total, and it’s everywhere,” he said.
Italy’s industrial output has fallen 11pc in the last year. Foreign orders have dropped 13pc. But we are all in much the same boat. Europe’s car sales fell 9pc in September (32pc in Spain). US housing starts fell to a 45-year low in September.
Last week, the International Monetary Fund had to rescue Hungary and Ukraine as contagion swept Eastern Europe. It would not surprise me if Russia itself were to tip into a downward spiral towards bankruptcy (again) and fascism (again).
Russia’s foreign reserves have fallen by $67bn since August. Ural crude prices fell to $65 a barrel last week, below the budget solvency threshold of the now extravagant Russian state.
The new capitalists have to repay $47bn in foreign loans over the next two months. In Russia, oligarch fiefdoms built on leverage - Mikhail Fridman (Alfa), Oleg Deripaska (Basic Element), and Vladimir Lisin (Novolipetsk) - are lining up for state bail-outs from a $50bn rescue fund.
Brazil is free-fall as well. Sao Paolo’s Bovespa index is down a third in dollar terms in a month. Hopes that the BRIC quartet (Brazil, Russia, India, and China) would take over as the engine of world growth have proved yet another bubble delusion.
China says 53pc of the country’s 3,600 toy factories have gone bust this year. Economist Andy Xie says China is at imminent risk of its own crisis after allowing over-investment to run rampant, like Japan in the 1980s. “The end is near. They’ve been keeping this house of cards going for a long time with bank support,” he said.
Lord (Adair) Turner, the head of Britain’s Financial Services Authority, offers soothing words. “There is no chance of a 1929-33 depression. We know how to stop it happening again,” he said.
I hope Lord Turner is right, but his Olympian certainty bothers me. It assumes that the economic elites a) understand what happened in the 1930s – on that score I suspect that few, other than the Fed’s Ben Bernanke, have delved into the scholarship (sorry, Galbraith’s pot-boiler The Great Crash does not count);
b) that central banks will now jettison the dogma of inflation-targeting that got us into this mess by lulling them into a false sense of security as credit growth and housing booms went mad. Will they now commit the reverse error as credit collapses?
c) understand that non-US banks – especially Europeans – have used the shadow banking system to leverage a $12 trillion (£7 trillion) spree around the world, and that this must be unwound as core bank capital shrivels away;
Yes, the Fed made frightening errors in the early 1930s by raising rates into the crisis, but they were constrained by the norms of the age: the fixed exchange system (Gold Standard), and fear of the bond markets. Are today’s central banks are doing much better? The Europeans fell into the trap of equating this year’s oil and food spike with the events of the early 1970s...