20150902-NATIXIS-The__permanent_financial_crisis__12页_1mb

Summary of FLASH ECONOMICS: "The 'permanent financial crisis'"

Core Content

The document discusses the current global economic situation, highlighting a quasi-recession that is primarily driven by real economy issues, not by monetary policy. It argues that the continued implementation of expansionary monetary policies in response to this real economy slowdown has led to an excess of global liquidity, which in turn has created a "permanent financial crisis" due to frequent and substantial capital flows between asset classes.

Main Points

1. Global Quasi-Recession

• The global economy is experiencing a quasi-recession, with growth rates below potential.
• This is not due to monetary policy but to real economic factors in various regions.

2. Real Economy Causes

• Emerging countries (excluding China): Suffer from production bottlenecks, including:
  • Rapid wage growth
  • Limited electricity production
  • Inadequate transport infrastructure
• China: Faces a loss of competitiveness and excess production capacity due to:
  • Sharp increase in labor costs
  • Past over-investment leading to price declines in industry
• Japan: Experiences low growth due to:
  • Unfavorable income distribution favoring capital over wage-earners
  • Continuous decline in real wages
• Euro Zone: Experiences underinvestment due to:
  • High uncertainty from past crises
  • Excessive public and private debt
• United States: Suffers from an oil sector crisis and industrial production decline
• Commodity-exporting countries: Are impacted by falling commodity prices due to weak global growth

3. Monetary Policy Response

• Despite the real economy problems, monetary policies remain very expansionary:
  • Very low interest rates in OECD countries
  • Quantitative easing in the Euro Zone and Japan
  • Low interest rates and reserve requirement reductions in China and other emerging markets
• This leads to a global liquidity glut, which is ineffective in solving real economic issues.

4. Financial Crisis Dynamics

• The excess liquidity results in massive capital flows between asset classes.
• When risk aversion increases, investors shift from risky assets (e.g., emerging market assets, equities) to risk-free assets (e.g., government bonds), causing financial crises.
• The document notes that this pattern is becoming permanent, hence the term "permanent financial crisis".

5. Recent Capital Flows and Market Reactions

• Large capital outflows from emerging countries have led to currency depreciation.
• Concerns over global growth in 2015 triggered capital flows out of equities and into government bonds, resulting in:
  • Sharp decline in share prices
  • Drop in long-term interest rates on government bonds

Key Information

• The document emphasizes that monetary policy cannot address real economic issues.
• China's "true" growth is significantly lower than its "official" growth, suggesting a more accurate global growth rate of 2%.
• Capital flows are a direct result of global liquidity and increased risk aversion.
• The "currency war" is highlighted as a global phenomenon, with countries like Japan, the Euro Zone, and China attempting to weaken their currencies.

Conclusion

• The world is in a quasi-recession due to real economy problems.
• The monetary policy response has created excessive liquidity, leading to frequent and severe financial crises.
• Investors must be prepared for ongoing financial instability due to the interaction between real economic slowdown and monetary policy.
• The document warns that this situation is paradoxical and inevitable unless real economy issues are addressed.

Disclaimer

• This document is strictly confidential and intended exclusively for qualified professionals and investors.
• It is not a financial analysis and not subject to legal independence requirements.
• It is not a personalized investment recommendation and not an offer or solicitation.
• Natixis and its affiliates disclaim liability for any actions based on this document.
• The information is based on public data and not guaranteed.
• The views expressed are those of the author(s) and not of Natixis.
• The document is regulated in various jurisdictions, including France, the UK, Germany, Spain, Italy, and Dubai, with restrictions on distribution.