Geopolitical Update : Excessive liquidity weakened the Economy’s immune system

By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 3 Mar 2020 (public release delayed & adjusted)

Policy makers around the world are responding to the implosion in Chinese manufacturing activity with promises to intervene and inject more liquidity to avert a global recession. This was helping stock markets yesterday.

Investors feel FED made a historic failure

Today the FED weighed it – It didn’t wait for the next official meeting, it made an emergency cut of 0.5%. A very rare move. Something it did after 9/11 and 2008. The FED said the US fundamentals are strong, but markets heard “this is as bad as the Great Financial Crisis”. Worse even, the FED has now less dry powder. At the very least it showed how distressed central bankers are with the brutal contraction China. Investors think mainly of their money.

The FED is responding to the Chinese contraction and it may be feeling the West is not as prepared as it says for the Covid19 virus. A contraction that most Western experts are still downplaying. They concede China may have contracted 2% or 4% in Q1 2020. But the FED saw probably what I did this week: the Chinese economy may have contracted by 10% YTD. Sadly, central banks are doing more of the same – adding yet more liquidity.

But there are many issues that more liquidity simply won’t solve, because it is exactly excess liquidity that has made the world economy so vulnerable and weak. The hyperinflation in risk assets is weakening the real economy and exacerbating deflationary pressures.

All major multinational institutions are cutting their estimates for economic growth in 2020. Experts acknowledge now what they denied for 5 weeks: the world economy is risking a recession.

Excessive liquidity weakened the Immune System of the World Economy

Many stock and real estate investors were excited yesterday about renewed central bank interventions, but any trained macro economist would explain that central banks are near the end-game. How much lower can rates get? Interest rates are already negative in many developed economies and even in the USA the 10 Year Bond Yield stands at a mere 1.0%.

The closer the USA gets to negative rates, the closer the world edges to a Currency Reform and potential Debt Restructuring of large proportions. Debt and wealth destruction are likely to come hand in hand. More liquidity draws the Great Normalisation near – the bloated credit and wealth has to be shrunk back to normality.

Just as most governments can’t repay their spiralling debt, much of the wealth private investors have built up is inflated debased paper money. Yes, the spectacular wealth creation of the past two decades was fed by the printing of excess paper-money by central banks – in gigantic amounts. But this should not lead us to lay all the blame squarely on central bankers.

The renewed liquidity injection may soothe investors in the short term, but in the absence of structural measures it will only accelerate the decline of developed nations – the West. Yes, mature democracies are in a trap. Voters want only economic expansions and expect policy makers to avoid the down-swings at any cost. Ageing voters ..

Vulnerable US? Lack of broad Health Coverage

While the USA has been quietly preparing for a potential outbreak and saying it is well prepared, I believe the USA may have an Achilles heel and a big disadvantage compared to to other advanced nations such as Germany, Switzerland, South Korea and the United Kingdom.

These nations have different forms of a broad health care coverage, but they all have found that the macroeconomic benefits outweigh the costs.

My point is this: millions of Americans have no health care coverage and millions of Americans often go to work “sick”, because they have no paid “sick leave”. A sick worker in Germany or Switzerland can stay home for a few days until he or she feels well. The person gets paid and it is not likely to lose the job. But many a sick person in the USA may go to work an pass the corona virus to his co-workers.

Many in the United States believe that a universal health coverage is something that only Socialist States have, but capitalistic nations like Switzerland have it and they still allow for lots of competition in the health care sector. Much of the political discussion in the USA is based on two extreme views. I believe there are many compromises mid-way that are neither Socialistic nor Wild West capitalistic, they are simply pragmatic and they pay off.

Some concerns have been raised among experts regarding the state of preparedness of the USA to handle the unfolding Corona Virus outbreak. While Washington announced that it had just shipped 15’000 lab tests to health centres, South Korea had already tested over 67’000 persons. The USA says it has few infections, but that might be just because less then 500 persons have been tested.

Most Western nations are allowing only a few people to be tested …

If you want to read the full report, kindly write to c.takushi@bluewin.ch

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 3 Mar 2020

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

A distinct broad approach to geopolitical research

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) He only writes when his analysis deviates from Consensus