South China Morning Post
In June 2006, I observed that interest rate increases by the US Federal Reserve would sooner or later effect heavily indebted American households. In November 2006, I argued that the developed world might end up in the same mess as Japan since the 1990s, fending off deflation with monetary and fiscal expedients and stagnating.
Two months later, I found it “perfectly possible to imagine a liquidity crisis too big for the monetary authorities to handle alone … Governments would need to step in.” By autumn 2007, I argued that we confronted “a more toxic cocktail than many investors still want to believe”, and the crisis would be global.
In December 2007, I predicted a “great dying” of financial institutions as a “man-made disaster – the subprime mortgage crisis – works its way through the global financial system”. On August 7, 2008, I anticipated a “global tempest” that would swiftly make the term “credit crunch” an absurd understatement.
There is a lot about the present reminiscent of pre-crisis days. In all but a handful of housing markets, inflation-adjusted home prices are above where they were on the eve of the crisis. US home prices plunged a quarter between 2006 and 2012. They have recovered and added some on top. New York condos are 19 per cent above their pre-crisis high. And real estate isn’t the best performer of 2017.
On January 1, you would have done even better to invest in emerging market equities. Another winner for the year was the “Fang” tech companies: Facebook, Amazon, Netflix and Google shares are up between 30 per cent and 60 per cent. The best trade of all? Bitcoin, up by a factor of seven since the year began.
Now consider the reasons to be nervous. First, the monetary policy party is closing. The Fed and the Bank of England are raising rates. The combined assets of the big four central banks – the Fed, European Central Bank, Bank of Japan and Bank of England – peak in December 2018, but the expansion rate has already started to slow. Global credit growth in aggregate is slowing.
Second, we are at a demographic inflection point. Between now and 2100, China’s working-age population is projected to shrink from 1 billion to below 600 million. Many labour markets look tight, with unemployment rates and other measures of slack leading economists to expect a surge in wages and inflation. Countries that think immigration will help matters will be disappointed as many newcomers lack the skills to easily absorb into a modern workforce. The rising dependency ratio as populations age doesn’t translate into higher saving but higher consumption, especially on health care.
The end of the 35-year bond bull market is nigh. Bonds will sell off; long-term rates will rise. The question is whether inflation will increase as much or more. If not, then real interest rates will rise, with serious implications for highly indebted entities. The Bank for International Settlements has published “early-warning indicators for stress in domestic banking systems”. Two big economies with flashing red lights are China and Canada.
Point three: a networked world – whose biggest companies are dedicated to reducing the cost of everything from shopping to searching to social networking – is a structurally deflationary world.
According to the World Bank, a range of occupations – from food processors to finance professionals – have a 50 per cent or higher probability of being “computerised”, with technology entirely or largely replacing human workers. Already, Waymo’s driverless cars are on the streets of Phoenix, Arizona.
Oh, and if you debtors pin your hopes for an inflation surprise on a new Middle Eastern crisis, according to the International Energy Agency, America is halfway through the biggest expansion in oil output by any country in history thanks to shale oil drillers. Even without electric cars, we would avoid a serious oil shock if Iran and Saudi Arabia went to war tomorrow.
No two financial crises are the same. But there will be a next one and, as the monetary medication begins to be withdrawn, it draws nearer.
Niall Ferguson’s new book is The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power