Economic Crisis

A snapshot of the state of the World (in charts)

It’s easy to get distracted by immediate developments and daily news flow. But it pays to keep an eye on the big, long-term trends in the world. They’re relevant to investing as much as any other area of life. Today I’ll take a snapshot of the state of the world, with the aid of a lot of charts.

I’ve been wading through various recent reports from the International Monetary Fund (IMF), and have picked out some highlights that I hope you find interesting. The tomes in question are the latest Global Financial Stability Report (150 pages), the World Economic Outlook (302 pages) and the Fiscal Monitor (156 pages).

Some of the stuff in these reports is practically coma-inducing. Theoretical econometrics feature heavily, and undoubtedly keep academics and government policy units busy. But they seem of dubious practical use in the real world. So I won’t be attempting to explain things like the following (even assuming I had the willpower or ability to decipher it):

Apparently, that’s a formula for “instantaneous quasi correlation”, in the matter of the international synchronisation of house prices. These reports are full of such “gems”.

So let’s quickly get back to useful stuff that we can understand.

I’ll start with rapidly slowing population growth, and rapidly increasing population ageing. I’m sure these topics won’t be new to you, but it’s worth a reminder from time to time.

In short, population growth is plunging across the world as a whole, both in developed and developing countries.

At the same time, the ratio of older people to working-age people is rising fast. In fact, it’s just about to rocket in the developed countries (right-hand side of the left-hand chart below).

This is a major challenge for developed countries. Most of them already run big government budget deficits and have huge and growing public debts. Politicians’ vote-seeking behaviour means they have to keep handing out free sweets, or else the plebs get uppity.

With public healthcare and pension costs about to rocket, and structurally tepid economic growth, there will be major financial crises sooner or later. It’s just a question of when.

The global financial crisis (2007-2010) and aftermath was merely a dry run for the real thing. It’s one thing for banks to go bust. They were bailed out with government cash, while economies and securities markets were propped up with ultra-low interest rates and money printing (QE).

This chart illustrates just how much money – about ten trillion dollars’ worth – was printed by the central banks in the US, eurozone, Japan and UK since 2007. It already looks pretty desperate.

But what happens when the governments of big developed countries themselves have a solvency crisis? Who provides the backstop? Martians? One day, possibly not too far into the future, we’ll find out.

In the meantime, there’s still a hell of a lot of bonds trading with a negative yield. Just in case anyone has forgotten, this is highly abnormal.

Paying someone for the privilege of lending to them would have been thought absurd just a few years ago. In this surreal world we live in, it’s now accepted practice. Go figure.

Despite all the money printing and negative rates (real or nominal), consumer price inflation is still subdued across the developed world. If a decade of printing trillions of dollars of new cash, and having negative real interest rates, won’t light a fire under consumer prices then you know there are some big structural issues.

As I’ve pointed out before, credit growth is hampered by strict new capital regulations at banks. With QE reversal just starting – known as quantitative tightening (QT) – it’s possible that deflationary pressures are building, and not inflationary ones (see here for more).

Only time will tell, and it pays to be alert to developments. However, if deflation actually becomes a serious threat, expect central banks to quickly slip out of the QT reverse gear and slam “forwards” into QE once more.

Eventually, they may even give up the smoke-and-mirrors of funnelling the money though bond markets, and just hand it straight to the government. It’s effectively what happens anyway with QE as we know it, just in a way that’s acceptable in polite company.

But, if and when we get to direct deficit funding, markets will finally smell a rat. Currencies will fall, rates will rocket, and it’s Argentina / Zimbabwe / Venezuela here we come. (Okay, I’m already physically in the former. Inflation was about 45% a year two years ago, and it’s still in the mid-20s.)

Perhaps it’s this fear of fiat currencies that got people so excited about bitcoin and other cryptocurrencies last year, as an escape route. Cryptos may yet go mainstream.

In the meantime, the IMF provides some useful charts on the most recent bubble and bust in the crypto world. The first one I’ve picked looks at the total value of the crypto market in recent times. (I’d ignore the comparison to G4 central bank balance sheets – the black line – pumped up as they are with the QE trillions.)

The next chart compares the bitcoin bubble with previous bubbly episodes. It was not only massive, it was also faster, both on the way up and the way down.

I don’t pretend to know what will happen with cryptos in the short run. Anyone who claims to know should be treated with extreme scepticism. But, given the big picture state of developed country economic trends and government finances, I can see why cryptocurrencies may rocket again one day.

People may need an escape route from fiat currency chaos. That’s as developed country finances buckle under the strain of insane debts and money printing. But that could still be many years away. (Gold will work too, if you can get hold of it by then. Best to buy some now, if you haven’t already…)

Of course, one of the things about cryptos is that you need internet access to use them. Most people I know don’t realise more than half the world still doesn’t have internet.

Internet penetration will continue to spread over time. As it does, it will open up all sorts of new business opportunities and other benefits for people that are currently cut off.

Changing tack, we often hear about how progressively fewer people, of working age, actually have jobs in the US. The measure is known as the participation rate, and has been falling for years.

It turns out that this trend isn’t unique to the US. The next chart shows the change in participation rates between 2008 and 2016 for various countries:


The US is one of the countries where the down trend is strongest. But Portugal, Denmark, Canada and the Netherlands have also seen meaningful falls in the percentage of working age people with a job.

British workers are sitting on the fence, and the participation rate has barely changed over this period. On the other hand, more people than ever are going to work in places like Germany and the Czech Republic.

Falling participation rates are connected with stagnant wages in developed countries in recent decades. The main culprits for this are most likely globalisation and automation.

Globalisation involves jobs being moved to or created in cheaper places, as trade and communication links have opened up. Factories moved to, or were set up in, places like China or Vietnam. Communications technology allowed service jobs in big corporations – call centres, human resources, accounting and so on – to move to places like India or Poland.

Workers in emerging markets got better jobs and pay. Consumers in developed countries got cheaper goods and services. But many developed country workers saw jobs evaporate, contributing to oversupply of labour and downwards pressure on wages.

On top of that, there’s automation to contend with. It’s been around for a long time, but it appears a new wave is only just getting started. A great many manual jobs went ages ago, starting with agriculture, and then manufacturing. Now it’s spreading everywhere – in financial services, retail checkouts, driving and the professions (accounting, law, medicine), to name just a few areas.

There are even computers that write investment analysis (gulp), albeit dull, unengaging and often inaccurate (phew).  Computers accumulate and process data, but they don’t appear to check it (yet).

On top of globalisation and automation, I think there’s another, overlooked factor that’s probably suppressed wages in developed countries. And if you’re in the PC-brigade, or are easily offended, here is your “trigger warning”:

You probably won’t like what I’m about to say. Now’s your chance to stop reading.

(Hence, please don’t contact me if it upsets you in any way. On the other hand, feel free to tell me if you disagree, but please supply reasoning.)

This additional factor, instead of working to reduce labour demand in developed countries, has acted to increase supply. Put simply: more and more women have joined men in the workforce.

Now, before anyone gets upset, let me explain. It’s clear that more women than ever are working in developed countries, and that they’re increasingly working in well-paid, professional jobs. (Great news, since they live longer than men, and need to put aside considerably more for retirement – see here.)

This has increased the labour supply, in terms of the number of people that are ready, willing and able to go to work. The next chart shows the changes to participation rates again, but this time broken out between men and women.

Most of the countries listed have experienced falling participation rates for men, whereas just as big a proportion has seen rising participation rates for women. Only a few of those listed – Canada, USA, Portugal, Denmark – have seen rates fall for both men and women.

What happens when you increase the supply of anything without a matching increase in demand? Prices fall, obviously. Hence, the increased labour supply, as more women have gone to work, is likely to have added further downward pressure on average pay rates (on top of the other factors).

I remember reading something last year, from the BBC, about how average pay for British men, across all jobs, has been falling. This is at the same time as average pay for British women has been rising. Men and women are competing for jobs more than ever before. I’d be surprised if that hasn’t put pressure on average pay across the whole working population, even if women have been gaining ground as men lose it.

But now, time to move on…

Next, a quick chart that I think neatly illustrates the rapid shift of economic power in the world. It’s nothing to do with GDP or anything like that. Instead, it shows certain countries’ rankings, since 1995, for the number of patents they have registered, in total.

Of course, intellectual property rights, such as patents, are only one factor in what determines economic success. But the way that South Korea and China have charged up the rankings in the past couple of decades is noteworthy. The trend is likely to continue.

Finally, whatever else may be going on, global debts keep piling up relative to GDP.

How long the world can keep adding debt faster than it grows the economy – especially in debt-saturated developed countries – is anyone’s guess. One day, perhaps soon, we’ll find out.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.