Growth payback

Crude oil price (WTI) dipped below 40 on August 24. It closed at around 47 on Aug. 31 – 25% jump in a week. But, that is to be expected. Extreme movements and extreme reactions – more noise and less substance. Short-term noise is all that financial markets of today generate. Long-term trend seems down. Simple reason: global economies gorged on credit and fast forwarded growth. Nothing left in the tank now. Period.  All other arguments are circular and endogenous. For example, this one:

One of the main dynamics behind the downdraught is world trade. [Link]

The authors quickly clarify:

At least part of the reason behind the waning trade performance is a vicious circle of cause and effect. [Link – could be behind firewall]

An India Market Strategy report by Credit Suisse has an interesting fact:

Oil exporters with burgeoning surpluses ended up creating SWFs, which allocated funds by formula, and several were also heavy users of ETFs. As almost all now run high deficits, they are forced to sell their holdings to fund their government, and also to maintain the USD peg.

This is showing up in capital flows not just slowing but possibly reversing, as the combined current accounts of oil producers may go from a surplus of US$407 bn in CY14 to a deficit of $106 bn if US$45/bbl sustains.

My guess is that it would sustain and even dip. The world, by and large, remains in denial about the growth payback consequence of fast-forwarding of future growth through leverage, in the new millennium.

The FT article linked above has good charts. It ends with the usual homilies about reforms that are needed in emerging economies. Might as well be said in the context of developed nations too. But, the recognition and acceptance of low growth as a consequence of past debt excesses is yet to be formally recognised.

Coming out of addiction to recovery is not straight. The intermediary step – de-addiction – is often the most painful. But, there is no skipping it. Attempt to ignore, sidestep and worse tackle it with more liquor (debt) is worse. There is no recovery at all, then.


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