The Economic Doomsday Clock Is Closer To Midnight – 10.15.15

  • Prisoner’s Dilemma describes when two purely rational entities may not cooperate even if it is in their best interests to do so, thereby replacing known risks for unknown risks. In an arms race when two superpowers possess the ability to destroy each other, the optimal solution is disarmament and peace. If the superpowers do not trust one another completely, the natural course of action is proliferation of conflict through nuclear armament despite great peril to all.This non-cooperation, selfishness, and conflict, ironically results in an equilibrium of peace, but with massive risk.
  • Global central banks are engaged in an arms race of devaluation resulting in suboptimal outcomes for all parties and greater systemic risk.  In this year alone 49 central banks have cut rates or devalued their currencies to gain a competitive edge and since 2008 there have been over 600 rate cuts worldwide. Globally we have printed over 14 trillion dollars since the end of the financial crisis.  The global economy did not de-leverage from the 2008 crash but instead doubled down as global debt has increased a staggering 40% since 2007. The pace of global growth is slowing with the World Bank lowering GDP projections from 3% to 2.5%, and emerging economies from China to Brazil are struggling. Global currency reserves outside the US have declined over $1 trillion USD from their peak in August 2014 as foreign central banks have sold dollars to offset the ill effects of capital flight and commodity declines.
  • The last time the world economy experienced declines in reserves of this magnitude was right before the crash of 2008. Cross-asset volatility is rising from the lowest levels in three decades yet markets remain complacent with the expectation that central banks will always support asset prices.

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