Central Bankers Banking on a Free Lunch

Reports this week by the International Monetary Fund suggest central bank efforts to revive the global economy have stalled,  and we may be facing a debt crisis if world leaders fail to respond. This comes on the heels of our April Global Income Edge issue, released yesterday, in which we outlined the fragile state of the global economy and recommended our most secure investments to collect high dividends while the world economies shake out.

Bottom line: we could be headed for an extended period of lower growth, more market volatility, and a protracted, painful, global downturn. Investors should exercise caution, despite recent gains in the market. 

In one report, the International Monetary Fund finds the global debt situation is getting worse. In an interview with the IMF’s top fiscal watchdog, Bloomberg reported that the IMF is warning that global policy makers need to guard against a “spiral” of weakening growth and rising debt, or risk economies slipping into stagnation. And the IMF has found most countries are on a higher debt path than last year.  

The IMF – which again has yet again downgraded global growth projections, this time from 3.4% to 3.2% – says that if the debt spiral takes hold, the responses of individual countries won’t be enough.  “Major economies will have to quickly act together to combat the ‘stagnation forces’ through measures to spur both demand and supply, the IMF said, according to Bloomberg.

If you read between the lines, “measures to spur supply and demand” means fiscal and monetary policy that so far has had limited success for various reasons. Political gridlock around the world has made fiscal policies practically impossible to implement.  And central banks have already started running out of ammo as they’ve reached the limits of what their monetary stimulus programs can achieve. It’s clear that every new round of stimulus has had diminishing returns.

In fact, many economists think that central banks may not be able to come to the rescue if another global financial crisis occurs soon.  

Longtime readers will know that we have planned for deflationary and low growth scenarios since we started Global Income Edge in 2014. Our most conservative portfolios were designed as anti-deflationary – where they will keep paying income in more dire economic environments. They include companies such as utilities, healthcare and telecom, which have pricing power or competitive advantages in their markets.

I have less faith than the IMF in the world’s ability to deal with these problems given lessons of history, but I hope that our leaders can resolve this debt problem before it gets worse.    

My biggest worry is that when it comes to stimulus, much of the business and political world can’t seem to grasp the concept that, “There is no such thing as a free lunch.”  Trillions in easy money shoved into economies ultimately hollows out the real productive economy, and builds only asset bubbles.

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