Is the Strange Resilience of the Global Economy Just a Great Illusion That Future Generations Will Have to Pay for?
The question is worth asking, given that the world has withstood major shocks in recent years at the cost of unorthodox public policies.
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Since the COVID-19 pandemic took hold of the world in early 2020, it's an understatement to say that the planet hasn't been spared any major shocks. When you read this, you inevitably think of the war in Ukraine started by Vladimir Putin's Russia in early 2022.
All these shocks were bound to produce disasters for the global economy, if economists worldwide were to be believed. And yet, at the start of 2024, I have the impression that all these predicted disasters have not happened!
If the latest figures from the International Labour Office are believed, the global unemployment rate is at an all-time low of 5.1%. In what follows, therefore, I think it would be interesting to look back not only at these major shocks but also at the reasons behind the astonishing resilience of the global economy.
Sudden supply disruptions
Since the start of the war in Ukraine, the world has had to absorb a major energy shock. Yet, unlike what people had to endure in the 1970s, we didn't have to suffer a recession as a result of this energy shock. After oil prices quadrupled in 1973, all the advanced countries sank into recession.
As in the 70s, however, the levy was massive, with a transfer of income of the order of several GDP points from energy-consuming to energy-producing countries.
Energy-consuming countries have had to cope with severe supply disruptions. It was these disruptions that led to the only recession observed. Germany was the victim. Germany's powerful industry had to do without Russian gas. However, the recession that hit Germany was more than limited, with a fall in activity of just 0.3% in 2023.
Energy autonomy becomes essential
It's no coincidence, of course, that the advanced economies proved so resilient. America, by far the world's leading superpower, was virtually unaffected by the price surge in 2022. You know why, as I do. America now produces almost as much energy as it consumes.
In so doing, America is reaping the rewards of the government's constantly asserted desire to achieve a form of energy autonomy. Whatever the cost in terms of pollution.
Unlike the oil shocks, governments took care to cushion this energy shock by spending hundreds of billions of dollars. As is often the case, the loss of revenue was simply postponed, via massive public borrowing.
As a reminder, American debt now exceeds $34T:
The rest of the world is following the same trend of massive indebtedness. World debt exceeds $307T by the end of Q3 2023!
Public authorities have resorted to unorthodox methods
In early 2023, a financial crisis begins in America. Major American regional banks defaulted, followed by the collapse of Credit Suisse in Europe. However, these bankruptcies did not provoke anything remotely resembling the financial panic that followed the collapse of Lehman Bank in 2008, the most impressive in almost a century!
The economy's resilience may have come as a surprise to some, but it is no accident. This resilience can be explained above all by the resolute action taken by public authorities to limit the impact of bankruptcies, and to avoid contagion at all costs.
The public authorities were prepared to use unorthodox methods to achieve this.
In America, the regulator guaranteed uninsured deposits. In Europe, the Swiss authorities organized a crash takeover of Credit Suisse by the bank UBS, cutting off a category of investors that should have been protected.
No massive repatriation of capital this time
Then, like me, you witnessed a sharp rise in interest rates without a crash in emerging countries. Of course, there were flashpoints all over the world: in Egypt, Bolivia, Sri Lanka, Zambia, Panama, Ethiopia, and, as always, Argentina.
Nevertheless, the world has seen nothing like what happened in the 1980s, when America experienced a lost decade. Back then, under the leadership of Paul Volcker, the Fed raised interest rates to 20% in 1981. This rate hike triggered a massive repatriation of capital to America.
The situation is different now. The IMF is keeping a watchful eye on the situation, with a financing capacity far superior to that of the time. The IMF seems to have learned the lessons of the Asian crisis of the 90s. In addition, many emerging countries have built up reserves to protect themselves. Finally, others have tried to limit their dollar borrowing to minimize currency risks.
The fragmentation of the world to come will not be without cracks
No one can predict the future. So nothing can be ruled out for the years to come. More accidents are bound to happen. The rapid and brutal rise in interest rates is far from having had all its negative effects on the global economy. Financial markets remain very nervous. Real estate will continue to be badly shaken. If the planet continues to advance in its energy transition, mountains of capital will have to be shifted into new activities at the expense of old ones.
This fragmentation of the world will not take place without cracks everywhere.
In the meantime, we can simply acknowledge that the world has shown unexpected resilience to date and that this resilience is largely due to the policies pursued by individual states.
The big question we need to ask ourselves is: won't the policies being pursued by governments make it too much for future generations to bear?
All these unorthodox public policies are likely to be a wall against opportunities for future generations
Just asking such a question gives you a clue to my answer. Public debt has risen like never before in peacetime. It remains to be seen whether governments will be able to meet these commitments in the years to come. All the more so more resources will have to be found to finance the transition and strengthen defense, a form of productive sovereignty, and social protection shaken by the aging of the world's population.
Who is likely to be the first to pay for these excesses? The savers who have bought government bonds through investment vehicles such as life insurance policies.
Unfortunately, it is also quite possible that protection against risk will become a wall against opportunity for future generations. As diesel begins to disappear from cars, the global economy will run more and more like a diesel engine: stronger, but also less flexible and slower.
Correction: The general fund of life insurance companies have only a sliver of government debt, 1-2%. Majority is corporate debt, 60-80%. That’s its own problem but corporations at least create value vs destroy it.
Also, whole life insurance contracts (the only kind with guarantees on cash value and endowment) transfer risk of non-performance from individuals to the carrier. It’s not like owning bonds directly in a portfolio as an investor. Policyholders have downside protection against bond losses while receiving the economic benefits (guaranteed liquidity and death benefit protection) of the policy. If anything, the right life insurance policy structure replaces the bond portion of an investor portfolio providing less volatility and additional wealth transfer benefits.
I could add more... but people have even less interest in understanding life insurance than understanding money.
Bottomline, savers are always going to be punished in a fiat world, except those that choose the Bitcoin escape hatch.
Hey Sylvain, interesting wording: Major American regional banks :)
It was just temporary panic selling when a regional bank collapsed. People still remember 2008 and panic at the slightest resemblance to those events. All is fine with the US baking system. If I could, I'd abolish news feeds like CNBC. They do more harm than good.