Anthony Rowley

TOKYO: Seen through the eyes of many financial commentators, 2021 will be the year when the world puts the Covid 19 crisis behind it, when the global economy gets back onto a recovery track and when stock investors get back to the serious business of making money. But they are living in a fool’s paradise.

Outside the gates of this fragile paradise lurk demons waiting to drag its inhabitants down if not into a fiery inferno then certainly into a state of cold and painful reality. It will be the end of what former US Federal Reserve chairman Alan Greenspan called a state of ‘irrational exuberance.”

The name of one of these demons is Debt (with a capital D) who has grown to huge and hideous proportions while policymakers looked the other way and as governments, business corporations and households indulged in an orgy of borrowing, into which stock investors have also plunged eagerly.

As the Institute of International Finance notes, “the world economy enters 2021 with record amounts of debt that will weigh on recovery prospects. The surge in global debt has been unprecedented since the onset of the pandemic, increasing by over $17 trillion to $275 trillion last year.”

Another demon – a temptress – has meanwhile lured inhabitants of the fool’s paradise into a false sense of security and an orgy of self-indulgence. She is called the Queen of Ease or QE (which also stands for the Quantitative Easing tactics used by central banks to flood the world with easy money).

A third demon also uses subtle and sophisticated tactics to conceal the destructive aims of forces intent upon creating another global financial crisis. This one is called MMT or Modern Monetary Theory which many fail to recognize could equally be called Mythical Money Theory.

But there is yet another demon whose presence has not been noticed, or at least acknowledged, by legions of commentators (many of whom should know better) who argue that money can continue flowing like milk and honey from central banks without fear of retribution.

The name of this sinister spirit is Nemesis, after the goddess of divine retribution and revenge in Greek mythology, more prosaically, nemesis is defined to mean a “downfall caused by an inescapable agent.” But either way the term implies punishment for arrogance or careless actions.

What does all this have to do with financial markets – stock markets especially?  Stock markets in most so-called advanced economies have been able to enjoy a long and wild party (orgy) only by ignoring many of the socio-economic problems of the real world – the “fool’s paradise” syndrome.

This year will be one when this grim fact is brought home. It will be the year when markets are forced to grow up or “get real” by a dawning awareness that saving the planet and its inhabitants from floods, fires, droughts and diseases caused by climate change is going to cost money.

How much money, and who is going to have to pay, will come as a big shock to financial markets. Trillions of dollars are going to have to be invested from here on in carbon-reducing new projects and in writing off old assets, preventing new pandemics and in myriad other socio-economic areas.

It does not require much thought to appreciate the awful financial challenges facing the post-pandemic world. Production and employment are being ravaged, millions are sliding back into poverty, inequality is rising while private and public capital investment continues to decline.

Even before Covid 19 struck with all the viciousness of avenging “furies” (female deities of vengeance in ancient Greek mythology) the more intelligent among economists and development specialists were warning of the dangers of growing inequality and of potential social unrest.

Yet stock markets, even in some emerging economies, rode blissfully above such warnings, intoxicated by the monetary easing that was supposed to support economic activity among rich and poor alike but instead worked principally to the advantage of capital rather than labor.

The consequences of such disregard for economic inequality and for spending to reduce or end it threaten to come home to roost now as the pandemic adds to already massive needs for spending on socio-economic projects like disease control, basic infrastructure, health and education to name but some.

These are problems for governments, investors argue. But it is not so. There are no exact calculations of how much it will cost to save the planet and humanity from such myriad problems but the UN Sustainable Development Goals (SDGs) project the cost at $5 trillion a year between now and 2030.

The UN also said in 2015 when the goals were published that governments could not be expected to pay for more than one half of the needed spending — which meant the private sector would need to find the other half, or around $2.5 trillion annually over the coming decade.

This can only mean calls upon existing and new company shareholders for money, not only to finance climate-friendly new investment but also write off so-called “stranded assets ” ranging from coal mines to power stations (a cost the Bank of England has estimated at as much as $20 trillion).

Shareholders will therefore need to forego dividends in favor of capital spending by companies, a prospect that will be nowhere near as attractive for them as riding a “tech boom” as they have been doing for several years sustained by injections of central bank liquidity

Led by the US Federal Reserve, these banks have been “blowing out their balance sheets” to a stunning extent since the Global Financial Crisis of 2008 in order to keep markets afloat and to avoid financial system distress. The tactic worked but at the cost of extreme asset inflation

The Fed and the European Central Bank alone have boosted the size of their balance sheets by some six times since 2010. But only at risk, as some experts acknowledge, of creating inflation, financial instability, distortions in financial markets and problems with government debt management.

Governments are now deeply, deeply in debt. As the IIF says, this has been driven largely by a sharp buildup in government borrowing that has brought the global government debt-to-GDP ratio to nearly 105 percent in 2020 up from 90 percent in 2019.”

Market investors in stocks and bonds will need to pick up more of the burden of financing economic recovery and a sustainable future. The sooner they face up to this fact and substitute an appreciation of long-term investment needs for short term-gain hunger the happier the future will be.