UN’s Warning on Globalisation – 3rd Leg of GFC

‘Globalisation’, once the great go forward phase (or phrase…) of world prosperity is becoming decidedly ‘on the nose’ as the human side of it starts taking it’s toll and the economic dangers, whilst not new, start getting mainstream attention.

Last week the Unitied Nations’ annual report on the UN Conference on Trade Development (UNCTAD) did not mince words on where this is heading, saying it is leading us to the third phase of the financial crisis:

"There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market,"

The underlying issue is the sheer amount of debt (often US denominated) taken on by emerging economies on the back of all the money printing through QE.  The stats are nothing less than breathtaking.  Corporate debt in these emerging markets has nearly doubled from 57% to 104% of GDP since the end of 2008 to the staggering amount of $25 trillion.  For context the GFC was triggered by ‘just’ $2 trillion in sub prime loans. From the report:

"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system,"

Part of the core issue too is that companies are not reinvesting in their businesses, something we have highlighted time and again.  They are instead buying their own shares and other short term measures to prop up their price using cheap debt.

The UN is inherently left wing but their solution is in stark contrast to the ‘globalisation’ script and some would argue even radical.  They are calling for a shift from private to public policy, leaving behind the neo liberal approach and looking to protectionism, prescriptive or tax incentivised reinvestment controls, capital controls, and government stimulus.  These ideas have been getting traction of late with central banks even looking to more fiscal than monetary expansion.  Today’s AFR even runs a story where IFM Investors chief economist advocates helicopter money for Australia with that printed money going purely into infrastructure spending.  Where does this stop?

It’s a scary prospect and as the UN says:

"If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone,"