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Photo: Bloomberg – |
After almost two years of solid profits in the stock markets, will we return to the horror train? The answer is that, due to higher debt levels, declining liquidity support for central bank markets and the rise of index funds, Michael Howell, managing director of Crossborder Capital and author of Capital Wars: Growth in Global Liquidity, told the Financial Times ”.
Only two things really matter for investment: how much money is in the system and how it is distributed. Rising stock prices have once again confirmed that both are highly resilient concepts.
Some may argue that this has always been the case. Okay, but we have to ask ourselves if we have not reached the point where this resilience is becoming a far bigger and more institutionalized problem. I think we are there.
We estimate that global liquidity – the volume of cash and loans circulating on global financial markets – is testing the level of 172 trillion. dollars. This figure is the source of all types of liquidity, including central banks, traditional commercial banks and so-called shadow banks, which supply short-term debt and foreign exchange derivatives.
This reflects the words of Henry Kaufman, a former economist at Salomon Brothers: “Money matters, but credit matters.”
After the financial crisis, the United States and China were the two dominant providers of liquidity, but because China’s international financial footprint is small, America’s actions are much more important for global markets, especially during crises.
See the importance of global dollar funding and the expansion of foreign exchange support lines between central banks to provide access to mechanisms guaranteed by the US currency during the covid emergency. According to our estimates, these actions, together with the almost 60% jump in the size of central bank balance sheets (up to over $ 30 trillion), have fueled the 30% increase in global liquidity since the beginning of 2020.
Yet these numbers are overshadowed by the huge pile of debt that we now estimate exceeds $ 300 trillion. dollars (three times global GDP) and weighs on the world economy.
The problem is that the debt must eventually be repaid or, more likely, refinanced. Assuming an average debt maturity of five years, the annual refinancing problem is $ 60 trillion, which requires balance capacity or, in other words, liquidity.
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