Another financial crisis looms with central banks inflating unsustainable asset bubbles as a potentially harmful side effect of policies that are intended to stimulate economic growth, according to the head investment strategist at Société Générale.
The Federal Reserve hasn’t begun a rate-hiking cycle since 2004, and responded to the 2008 financial crisis by cutting interest rates to record lows to spur business activity. That easy-money policy leaves the central bank in a quandary as stock markets hit record highs while “there is much that looks recessionary about the U.S. economy,” said Albert Edwards, global strategist at French bank Société Générale.
The Fed may need to raise rates “not to rein in the economy, but to restrain financial market excess,” he said in a March 19 report
obtained by Newsmax Finance. “In that respect it is probably too late already. We believe the die is now cast, the cake is baked and coming out of the oven, and the financially fattened goose is well and truly cooked.”
Edwards established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation, as seen in Japan after its economic bubble burst in the early 1990s.
After cutting interest rates to record lows, the Fed began a stimulus program known as quantitative easing, or buying bonds in an attempt to push down borrowing costs. That policy hasn’t worked among consumers who got buried in debt during the housing bubble, according to SocGen.
“One of the reasons why QE has been ineffective, despite inflating household net wealth to a record $83 trillion in the fourth quarter last year, is that the rich tend to own the assets but have a low marginal propensity to consume,” Edwards said. “The poor with a much higher propensity to consume tend to own the debt.”
Stock markets globally have gained in the past year with deluge of central bank easing, including the European Central Bank's quantitative easing program that is intended to pump about $63 billion a month into the region's economy until September 2016. In the past 12 months, the S&P 500 has gained 13 percent after hitting record highs, Germany's DAX index has jumped 27 percent and Japan's Nikkei index has surged 39 percent.
Edwards faults the Fed under Chairman Alan Greenspan for policies that led to the dot-com bubble that collapsed in 2000 and the housing bubble that collapsed in 2006. Consumers responded to the financial instability by holding their cash rather than spending it, which helped to trigger recessions.
“The problem with using asset bubbles to drive an economy is that when the bubble bursts, private sector borrowers realize they have been taken for a mug and correct their savings behavior aggressively, causing recession,” Edwards said. “That same barbarically naïve policy remains in place today.”
A drop in private sector savings in relation to gross domestic product, driven by corporate borrowing to finance stock buybacks and mergers and acquisitions, may point the way to recession, he said.
“The decline from a 9 percent surplus at the end of 2009 to 3 percent of GDP now is precipitous and almost entirely driven by another corporate sector borrowing binge to finance activities in the financial markets,” Edwards said. “Another spontaneous recessionary retrenchment awaits.”
Meanwhile, New York Post columnist John Crudele
said the economy is too weak to justify a rate increase.
"The Fed has been itching to raise interest rates for the last two years, but the weak economy has stymied it," he said.
The Atlanta Fed's estimate of first-quarter GDP growth stood at only 0.3 percent as of Tuesday. The economy expanded 2.2 percent in the fourth quarter.
"Bottom line: despite what Yellen says, the economy is barely moving. It’s dead in the water,” Crudele said. “And despite what the Fed says, this has to be of enormous concern."
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