Global wake up call to prepare, rethink what value really means to us, and not just re-set the current financial system, but create a new one.
Big earthquakes are usually preceded by small quakes, or tremors, and followed by aftershocks. However, tremors may fade without the big one coming, so seismologists have a dilemma: when does increased shaking signify that a big fault is ready to bust loose.
Earthquakes are not a bad analogy to financial system collapses. Pressure builds along a system’s fault zone. Monitoring the tremors may forewarn collapse – or not. A shaky system may wobble along for a long time.
So what’s shaking financially? Quarterly reports from the Bank of International Settlements (BIS) offer macroeconomic clues. BIS is the world’s central bank for national central banks; the U.S. Federal Reserve is a member. Conspiracy theories regularly have the BIS trying to rule the world through the global banking system, but the latest BIS quarterly report looks more like the Gnomes of Zurich are into strange maneuvers trying to control the tremors.
Volatility in financial markets is increasing, partly from uncertainty as with oil prices, and partly from electronic trading. The average quote lifetime for U.S. Treasuries is down to 1.5 seconds.
Five central banks now have negative discount rates: European Central Bank, Sweden, Denmark, Switzerland, and Japan, and Canada is considering going negative. That means that depositors have to pay these banks to hold their money. Only the Federal Reserve of the U.S. has raised rates in the past few years, and it’s questionable whether that was good for growth of the U.S. economy. GNP growth without “overheating” is the core goal of all central banks. (Only central banks have negative interest. No commercial bank is yet known to have gone below zero in rates given depositors.)
International banks still struggling with cross-border lending are shedding assets, so we’re not back to easy money. Old-fashioned banks depending more on conventional deposits seem more stable, less prone to depend on cross-banking credit. The stock values of big banks deep into international trading positions (like derivatives) are declining. That is, they remain interlocked to a degree that makes them too big to fail because of a domino effect, as in 2008, and stockholders are wary.
In this situation, what happens when such a bank “fails?” Since it has to keep operating, BIS proposed restructuring its capital. That might include a “bail-in,” which G20 national leaders approved at their November 2015 meeting. Depositors with funds above a guaranteed amount ($250,000 FDIC insurance in the U.S.) get a haircut. A fraction of other deposits is confiscated, reclassified as bank capital. This happened to the banks of Cyprus in 2013. The Cypriot banks endure, and so does the Cypriot economy, but it is scarred. Could this happen elsewhere? Don’t rule it out.
How shaky is the banking system? Enough that the Gnomes are into tools never used before in order to keep the system propped up.
The March 2016 BIS quarterly report also dug into increasing wealth inequality, which is related to income inequality, but not the same thing. Wealth is assets minus liabilities. Income inequality is rising in most of the world, not just in the United States, where it has become a political issue. However, wealth inequality is even more extreme.
Although not as extreme as in 1910, extensive statistics on wealth inequality suggest that now, American households in the lowest 20% are deep in the hole – negative – while the top 20% has over a million in net assets, and billionaires are a fraction of the tippy-top 1%. For example, the mean net worth of American households in the bottom 20% is – $32,000, while for the top 20% it is $1.4 million.
The release of the “Panama Papers” is shining a light on tax havens hiding trillions of dollars, invested or not, in who knows what. (Panama City is booming into the financial center of Latin America.) The total amount in sheltered hidey-holes is estimated from $7-8 trillion to as high at $32 trillion, amounts big enough to compare with central bank funds. Economists see these as distorting the global economy – along with dark money investing, and closed private investing markets that do not disclose anything.
The shadiest dark markets trading illegal contraband in shark-infested markets appear to be fading. They are small; hedge funds supervise $3 trillion in more or less private placements are feeling a little more regulatory pressure to treat their investors better. That is, the central banks and financial regulators are riding a tiger system that is hard to tame. And yes, that tiger could still break loose and eat everyone.
More interesting statistics show the effects of “the system” on people. For example, the best investment wealthier people can make in their children is to “buy a neighborhood” having better schools, where their kids take on the aspirations of other kids trundled in the same direction. The U.S. has slowly become more segregated in housing – segregated by wealth, which correlates with race. Studies show that moving children to a “better neighborhood” improves their health, happiness, and future income.
To keep our social edge, many of us live close to a financial edge, a condition best explained by personal stories. One is by Neal Gabler, a writer with an upper middle class income, who revealed in The Atlantic that he was one of the 47% of people surveyed that said that they could not pay a $400 emergency expense without selling something. Gabler is a high-income freelance “precariat” living from project to project. Sometimes he has to wait for a check before paying bills. Where he lives is not cheap; it’s a good neighborhood for the children on Long Island.
Like many other households, the Gablers have little money left after paying “to keep up appearances:” mortgage, vehicle payments, health premiums, other insurance, taxes, groceries, school expenses, other child-developing activity fees – and if they are disciplined, maybe a don’t touch savings plan. As they see it, their disposable income is anything left after spending whatever seems necessary to function in a modern world.
In this milieu, commercial enticements keep beckoning. These include well-intentioned spending, as for a child’s discretionary orthodontics; give the kid a little edge with a near-perfect smile. People in the lowest income 20% often live on a sharper edge.
For example, suppose inability to pay even $100 in cash means that you can’t pay a traffic fine, or hire a lawyer, or keep up with your alimony. If this goes on, you are apt to wind up in jail, which is now sometimes referred to as de facto debtor’s prison. This situation is emerging as a social issue with “the system.”
But a few global statistics hint that a debt-fueled economic system is more than an American problem. At 114%, Americans are in the mid-pack of advanced economies on a rarely shown metric: household debt as a percentage of disposable income. Danes actually have 305%. An assumption of debt is that the future will somehow pay for it. Supposed it can’t; then what?
Some form of global financial implosion; that’s what. We had a taste of implosion in 2008-2009, when people paying at the bottom could not support the rickety financial superstructure piled on them. Risk testing of financial institutions might or might not detect the tremors portending a bigger bust next time.
Then we might have to deeply rethink what value really means to us, and not just re-set the current system, but create a new one.