The yearlong decline in global equities that started with a selloff in energy became a full-blown bear market Thursday as a rout in bank shares extended losses in the broadest worldwide gauge past 20 percent.
The MSCI All-Country World Index slipped 1.3 percent, pushing its decline since May to 20 percent and marking the biggest retreat from risk since Europe’s sovereign debt crisis in 2011. Every industry has fallen since last year’s record high with decreases exceeding 25 percent in financial stocks and 30 percent in energy and commodities.
www.bloomberg.com/…
Here’s what’s going on. The push for austerity has turned consumers in many developed nations into poor credit risks. Let me give you an example. A couple of years ago the Republicans made hay about people staying on unemployment benefits. Unfortunately, things like unemployment benefits mean that your bills get paid when you’re out of work. If congress cuts unemployment benefits, then that means that American consumers become worse credit risks. Lack of credit restricts consumer spending.
Many developed countries already have negative interest rates on government debt. What this means is that businesses and consumers in their economy have become such bad credit risks that it makes more sense to pay the government to hold your money than to lend it out. In order to get money moving again, a number of central banks have set their interest rates negative (meaning it costs money to park excess funds with the central bank). This has unbalanced several European banks who are rumored to be in dangerous shape.
The entire situation has been made worse by the collapse of a massive commodities bubble. Lenders, like most of the financial universe, became fixated in inflation. This meant that risky loans to commodities producers seemed safe. When the chickens came home to roost, the interest rates for risky corporate borrowers shot through the roof.
The way forward is for government to intervene to move risk away from consumers. The way to do so would be an expansion of government employment to create more consumers with good jobs, health care expansions to further reduce the aggregate risk posed by medical bankruptcies, bankruptcy reform to rehabilitate consumers by shedding zombie debt (debt that will never get repaid but continues to impugn consumer credit), student loan reform for the same reason and tax reform to, if necessary, directly take money from corporate money hordes and put it into the hands of consumers.
These may seems impossible given current political realities. Here’s the thing, if this crash isn’t stopped this thing is going to accelerate and metastasize. That could get really bad, really fast.