Economic Imbalances Connected to Central Bankers’ Policies

In 2008 the worldwide economy seemed at a precipice.  Politicians and economists demanded action that resulted in significant governmental interventions.  It is not possible in hindsight to argue with the policies given the fears at that time.  It is also impossible to determine if we would we would have gone off the economic cliff without the by central banker actions.

We have been taught there is no such thing as a free lunch.  It seems this lesson has been lost in recent decades, especially when it comes to policy and economic decisions.  The interventions made by central banks including the Federal Reserve since 2008 are historic.  Banks have purchased their countries’ debt, in essence printing money.  While so far the negative economic consequences have not been catastrophic, there will indeed be consequences.

There are two general problems typically arising from excess money supply.  The first is inflation.  Inflation has historically been across the board with increased prices for many categories of goods and services during these periods.  This type of inflation has yet to occur.

Another issue arising from an oversupply of money is bubble creation in certain asset categories. This is basically a different type of inflation and it is a growing problem.  Initially the asset bubbles occurred in commodities with prices of oil, gold, and other metals significantly increasing.  These bubbles have already burst with negative consequences affecting exporting countries.  This includes oil-producing countries such as Venezuela, Saudi Arabia and Iraq.  It is also damaged Canada and Australia who initially benefited from the overvalued commodities being purchased by China.

More recently, Chinese and other countries have significantly cut back on commodity purchases as their economies’ have slowed.  Ups and downs are a normal part of business cycles.  However, the uptick since 2008 has not been normal, but instead has been artificially created by various countries’ cheap money policies and deficit spending.

The popping of the commodity bubbles has brought consternation to equity markets that have shown increased volatility.  This is of significant concern because these equity valuations are one of the few remaining mega bubbles.  When this equity bubble pops, the consequences will be ugly.

China has been at the epicenter of bubble creation.  Immediately following 2008 when the meltdown occurred, China’s exports dropped significantly as many countries went into recession.  Out of concern for the negative effects this would have on its own social order, the Chinese government avoided recession by using debt irresponsibly to build an oversupply of goods and services, including entirely new but unoccupied cities.  The chickens are coming home to roost with China’s economy showing strains from an economic slowdown.

The Chinese economy is a bubble built on the inappropriate use of debt and governmental interventions. Michael Pettis published an article, Global Imbalances and the Chinese Economy, which reviews the economic challenges facing China.  Given the importance China plays in the world economy, the repercussions will be felt worldwide.  While capitalism and industrialists will likely be the scapegoats, the real culprits are inept governments that continue to believe they can manipulate supply and demand better than the free market.  One will they ever learn!