October 2014 – GLOBAL ECONOMY – The world’s three economic superpowers – the U.S., China and Europe – are heading for a major collapse in asset values because their economic models favor consumption instead of productivity, one economist has warned. “We’re still not wise enough to realize that our current model is a ‘Ponzi scheme’ rushing toward its inevitable ‘Minsky moment,” Steen Jakobsen, a chief economist at Danish investment bank Saxo Bank, said in a research note on Friday. The term “Minsky moment” refers to a phrase coined for the Asian debt crisis of the late 1990s by Pimco’s Paul McCulley. Unsustainable debt will be the cause of the crash, according to Jakobsen, and will occur when the cash returns on assets become insufficient to service the debt taken on to acquire those assets in the first place. He gives no timeframe for his thesis but says that the problem of huge debts has been swept under the carpet by central bankers and policymakers and will come back as low inflation or even deflation.
“We’re still working with the same dog-eared script we were introduced to all of five years ago,” he said. “Maintain sufficiently low interest rates to service the debt burden, pretend to have credible plan, but never address the structural problem and simply buy more time. But while we were able to get away with this theme for an awfully long time, the dynamic is now changing.” Central banks across the world launched bond-buying programs following the economic crash of 2008. Aside from injecting fresh funds into the economy, some economists have argued that bond-buying could also have deliberately helped to stoke inflation, which then erases sovereign debt – as debt loads lose their value when consumer price growth is strong. High-profile economists including former U.S. Treasury Secretary Larry Summers have warned on the potential for “secular stagnation,” when a lack of investment in a developed economy leads to falling incomes and stagnant demand.
Jakobsen calls debt the “elephant in the room” and uses a simple equation on the U.S. economy to put across his point. He argues that U.S. productivity growth is low when if you consider that any shortfall in growth is being made up by increased debt. “The move onto the internet has ironically made us bigger consumers and less productive. Had we remained at pre-1970s productivity, the U.S. GDP (gross domestic product) would have been 55 percent higher and the outstanding debt to GDP would be easily fundable,” he claims in his note. “No serious policymaker or central banker is talking about the truth told by simple maths and hoping that things turn out well. Hope is not good policy and it belongs in church, not in the real economy.” –CNBC