The stock market’s were relatively calm this summer, with the primary bourses attempting to regain lost ground after the “Brexit” victory in Britain, confirming that when corrections are sudden and caused exclusively by political factors, the recovery in stock prices is just as fast. With the beginning of September, however, the markets have returned to discount the reality of a situation of total stalemate with regard to the possible solutions proposed to exit the structural deflation in varying measures afflicting most developed economies. In fact, in spite of the intellectual efforts of many reputable economists, which led to the creation of a new definition of the phenomenon; now known as secular stagnation, it is nothing but a classic structural deflation. A recent example is found in the economy of Japan, grappling with this problem since the ’90s, while at our latitude the last deflation on record dates back to the late’ 50s. But this time history has not been heeded, so the political class of the governments of the major developed countries and their central banks did not understand the problem until it was too late. Only the former governor of the Federal Reserve, Mr. Greenspan, at a conference at the end of the 90s, once said that his worst nightmare was the Japanese syndrome, but this authoritative warning went unheeded.
The main element that has brought forth the serious recessive crisis of 2008, consisting of the abnormal size of the world’s financial debt, which continues to exceed global GDP, has not been minimally reduced, to the contrary, perhaps it has even increased. In part the leverage that weighed on the same has been reduced, through the absorption also by the central banks, of a share of the derivatives and structured products accumulated on the market up until 2008. Structural deflation is a function of this mass of debt in the sense that in a global context of excess capacity, abundance of raw materials and cheap labor, the debt burden which weighs on different economic factors, states, businesses and consumers, prevents any new spending or investment. Therefore, to unlock the impasse, which otherwise is likely to continue for several more years, the only action possible is to consolidate the respective existing debt. The first country that could implement the solution to make their public debt irredeemable is Japan, given that over the years the Central Bank, the BOJ, has already substantially increased its balance sheet by printing yen and buying Japanese government debt on the open market. The surprising decision announced last week by Governor Kuroda, of the desire to control the yield of ten-year government bond by keeping it at 0%, might be a preliminary step toward debt consolidation. In fact, it is difficult to understand the sense of zero yield on ten-year that would cause a switch to purchases of 20 and 30 year maturities, while adjusting the return to zero could be the necessary step to then declare that debt irredeemable, allowing the Japanese government, freed from the same, to start a new phase of massive public investment financed with new debt, which eventually would drive the Japanese economy away from decades of deflationary stagnation. In this respect, it also appears legitimate to ask what Governor Draghi is actually referring to when he stated that the ECB is prepared to undertake “unconventional” intervention measures. In the meantime, the Fed did not change key interest rates, probably also due to the upcoming elections, but definitely because the US economy is not excelling, maintaining the benefit of the doubt on the dollar’s real potential and re-proposing gold, back from a brief consolidation at the $1300 support level, as an attractive alternative. As for the bourses, October could coincide with a traditional correction of 5% from current values, in the expectation that as of November, there will be other elements to be discounted imparted by the new US administration.
Nicola Bravetti Fonte dati: Bloomberg