Monday, August 24, 2015
Go To Original
Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?
These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying.
It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.
Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.
What is going on here?
The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits.
Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand.
As time passed, this rationale for a central bank was made redundant by government deposit insurance for bank depositors, and central banks found additional functions for their existence. The Federal Reserve, for example, under the Humphrey-Hawkins Act, is responsible for maintaining full employment and low inflation. By the time this legislation was passed, the worsening “Phillips Curve tradeoffs” between inflation and employment had made the goals inconsistent. The result was the introduction by the Reagan administration of the supply-side economic policy that cured the simultaneously rising inflation and unemployment.
Neither the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that the Federal Reserve is supposed to stabilize the stock market by purchasing stocks. The Federal Reserve is supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.
If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market.
The problem with central banks is that humans are fallible, including the chairman of the Federal Reserve Board and all the board members and staff. Nobel prize-winner Milton Friedman and Anna Schwartz established that the Great Depression was the consequence of the failure of the Federal Reserve to expand monetary policy sufficiently to offset the restriction of the money supply due to bank failure. When a bank failed in the pre-deposit insurance era, the money supply would shrink by the amount of the bank’s deposits. During the Great Depression, thousands of banks failed, wiping out the purchasing power of millions of Americans and the credit creating power of thousands of banks.
The Fed is prohibited from buying equities by the Federal Reserve Act. But an amendment in 2010 – Section 13(3) – was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole which enables the Fed to lend money to entities that can use the funds to buy stocks. Thus, the Swiss central bank could be operating as an agent of the Federal Reserve.
If central banks cannot properly conduct monetary policy, how can they conduct an equity policy? Some astute observers believe that the Swiss National Bank is acting as an agent for the Federal Reserve and purchases large blocs of US equities at critical times to arrest stock market declines that would puncture the propagandized belief that all is fine here in the US economy.
We know that the US government has a “plunge protection team” consisting of the US Treasury and Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes.
Is the stock market decline of August 20-21 welcome or unwelcome?
At this point we do not know. In order to keep the dollar up, the basis of US power, the Federal Reserve has promised to raise interest rates, but always in the future. The latest future is next month. The belief that a hike in interest rates is in the cards keeps the US dollar from losing exchange value in relation to other currencies, thus preventing a flight from the dollar that would reduce the Uni-power to Third World status.
The Federal Reserve can say that the stock market decline indicates that the recovery is in doubt and requires more stimulus. The prospect of more liquidity could drive the stock market back up. As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again.
On the other hand, the stock market decline last Thursday and Friday could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, flight sets in.
If flight turns out to be the case, it will be interesting to see if central bank liquidity and purchases of stocks can stop the rout.
Go To Original
Asian stock markets opened Monday with another sharp selloff. As of this writing, China’s Shanghai Composite index had dropped by over 8 percent and Japan’s Nikkei, Hong Kong’s Hang Seng and Australia’s All Ordinaries were all down by more than 3 percent. China’s central bank was preparing another round of cash infusions into the country’s financial markets.
The global panic, which has wiped out over a trillion dollars in stock values in the US alone, has shattered the claim that the US and world economies are in the midst of an economic recovery.
Prompted by decelerating economic growth in China, a collapse of financial markets and currencies in the so-called emerging market countries, and a continuing fall in the price of oil and other commodities, the plunge in stock prices is an expression not simply of passing conditions, but rather the inability of governments and central banks to address the fundamental contradictions of the capitalist system that led to the Wall Street crash and recession of 2008–2009.
What appears to be coming to an end is the period when massive infusions of cash by central banks into the financial markets, combined with a ruthless assault on the living standards of the international working class, could paper over the systemic character of the crisis and produce a boom in stock prices, corporate profits and the wealth of the financial aristocracy—even as the real economy continued to stagnate.
An article published Sunday in the New York Times (“Investors Race To Escape Risk In Global Bonds”) sheds light on a significant factor behind the crisis atmosphere on global markets. The Times explains that some of the biggest bond mutual funds based in the US, including BlackRock, Franklin Templeton and Pimco, are massively invested in emerging market government bonds whose values are now collapsing.
The article raises the very real possibility that one or more of these firms could be bankrupted by demands from investors for the return of their cash, under conditions where the firms cannot offload their emerging market bonds and meet these demands. Such an event would be comparable to, if not worse than, the collapse of Lehman Brothers in 2008.
The large-scale investments by bond mutual funds in these highly risky bonds underscores the rotten foundations not only of the so-called economic recovery, but of the global capitalist system itself. It demonstrates that the response of the capitalist class to the economic breakdown of 2008–2009 was a continuation and escalation of the parasitism and speculation that triggered the crash in the first place.
It exemplifies the modus operandi of world capitalism in its dotage and decay. What was historically considered the normal paradigm—investing capital to build factories and mines and carry out research and development, hire workers, and generate profit from the surplus value extracted through their exploitation—has become almost incidental to a ceaseless, feverish scramble for ever-higher yields from various forms of financial manipulation and outright fraud.
In the older imperialist centers, particularly the United States, the industrial infrastructure has been largely dismantled, decimating the jobs and living standards of the working class, in order to seek higher profits from the creation of financial bubbles. Following the 2008 Wall Street crash, the American ruling class led the way in using unlimited supplies of virtually free credit provided by central banks to push stock prices to record highs and generate an emerging market bubble, while laying siege to the jobs, wages and conditions of workers through mass unemployment and austerity policies.
The resulting “recovery” had the character of a gigantic Ponzi scheme, resting on a stagnant real economy and ever-increasing social inequality. This financial house of cards is being undermined by the growth of deflationary tendencies in the world economy, reflected most starkly in collapsing commodity prices and the slowdown in China, but also in anemic growth or outright recession in Japan, Europe and the US.
In January 2008, the World Socialist Web Site wrote that the crisis, then in its early stages, was “not merely a conjunctural downturn, but rather a profound systemic disorder” of the capitalist system.
On September 16, 2008, the day after the collapse of Lehman Brothers, the WSWS declared: “A sea change is unfolding in the US and world economy that portends a catastrophe of dimensions not seen since the Great Depression of the 1930s.”
The article continued: “These events are signposts in the historic failure of American and world capitalism. For the working class, they mean a rapid growth of unemployment, poverty, homelessness and social misery. The government, Wall Street and both political parties will seek to place the burden for the consequences of their own greed and incompetence squarely on the backs of working people.”
This analysis has been entirely confirmed. Seven years later, the labor force participation rate in the United States is at the lowest level in nearly four decades, while economic output in the euro area remains below its level in 2008.
The crisis has been compounded by the policies pursued over the past seven years. The world’s major central banks have taken on enormous levels of debt, limiting their ability to respond to a new panic. The balance sheet of the US Federal Reserve has ballooned from under a trillion dollars in 2008 to over $4 trillion today, and the Fed’s benchmark interest rate has been held essentially to zero, giving the central bank significantly less “ammo,” in the words of the Wall Street Journal, to respond to a renewed financial crisis.
“The world economy is like an ocean liner without lifeboats,” Stephen King, chief economist at HSBC, wrote in a recent research note.
All of the institutions of capitalist rule, most notably the European Union itself, have been dramatically weakened in the period since 2008. The signs of disarray and instability in Beijing, amidst a growing wave of strikes and protests by Chinese workers, have stoked fears in ruling classes around the world that the regime upon which they have relied to provide a cheap-labor manufacturing base and stimulate global growth may be unraveling.
The perplexity and bankruptcy of governments and policymakers in the face of the renewed downturn was summed up in a column published in the Financial Times over the weekend by former Treasury Secretary Lawrence Summers, who called on the Federal Reserve to keep interest rates at zero indefinitely.
Summers wrote: “Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises. This is why long-term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade.”
The intensification of the economic crisis sets the stage for immense social struggles. The working class will not accept a return to conditions of mass poverty and industrial slavery.
Go To Original
We witnessed something truly historic happen on Friday. The Dow Jones Industrial Average plummeted 530 points, and that followed a 358 point crash on Thursday. When you add those two days together, the total two day stock market crash that we just witnessed comes to a grand total of 888 points, which is larger than any one day stock market crash in U.S. history. It is also interesting to note that this 888 point crash comes in the 8th month of our calendar. Perhaps that is just a coincidence, and perhaps it is not. It just struck me as being noteworthy. This is the first time that the Dow has dropped by more than 300 points on two consecutive days since November 2008, and we all remember what was happening back then. Overall, this was the worst week for the Dow in four years, and there have only been five other months throughout history when the Dow has fallen by more than a thousand points (the most recent being October 2008). Of course we still have six more trading days left in August, so there is plenty of time remaining for even more carnage.
By itself, the 530 point plunge on Friday was the ninth worst stock market crash in all of U.S. history. The following list of the top eight comes from Wikipedia…
#1 2008-09-29 −777.68
#2 2008-10-15 −733.08
#3 2001-09-17 −684.81
#4 2008-12-01 −679.95
#5 2008-10-09 −678.91
#6 2011-08-08 −634.76
#7 2000-04-14 −617.77
#8 1997-10-27 −554.26
Another very interesting thing to note is that the largest stock market crash in U.S. history took place on the very last day of the Shemitah year of 2008, and now we are less than a month away from the end of this current Shemitah year.
It is funny how these strange “coincidences” keep happening.
The financial carnage that we witnessed on Friday was truly global in scope. On a percentage basis, Chinese stocks crashed even more than U.S. stocks did. Japanese stocks also crashed, so did stock markets all over Europe, and emerging market currencies all over the planet got absolutely destroyed.
The following is how Zero Hedge summarized what went down…
- China’s worst week since July – closes at 5 month lows
- Global Stocks’ worst week since May 2012
- US Stocks’ worst week in 4 years
- VIX’s biggest weekly rise ever
- Crude’s longest losing streak in 29 years
- Gold’s best week since January
- 5Y TSY Yield’s biggest absolute drop in 2 years
Even though I specifically warned that this would happen, and have been explaining why it would happen on my website in excruciating detail for months, the truth is that I didn’t expect stocks to start crashing this quickly or this ferociously.
Normally, August is a fairly slow month in the financial world. As I have discussed previously, most of the really noteworthy stock market crashes throughout history have taken place during the months of September and October. So I thought that things wouldn’t start getting really crazy for another few weeks at least.
Financial markets tend to fall much faster than they go up, and I believe that we are moving into a time of extraordinary volatility. There will be huge down days, and there will also be huge up days. In fact, the three largest single day rallies in Dow history happened right in the middle of the financial crisis of 2008. So don’t let what happens on any one particular day fool you.
An absolutely gigantic global financial bubble is beginning to burst, and stocks could potentially fall a very, very long way. For instance, just consider what MarketWatch columnist Brett Arends has just written…
I don’t mean to be alarmist or to induce panic, but someone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70% until the Dow Jones Industrial Average falls to about 5,000.
It is important to keep in mind that Arends is not a “bear” at all. He is a very level-headed analyst that tries to objectively look at all sides of things.
I sincerely hope that global financial markets will stabilize for at least a couple of weeks. But there is absolutely no guarantee that will happen.
So many of the things that I have been warning about on this website and on End of the American Dream are starting to unfold right in front of our eyes. If I am right, this is just the beginning. I believe that we are moving into a time of unprecedented chaos, and our nation is about to be shaken to the core.
Hopefully you have been preparing for the storm that is coming for quite a while and you will not be surprised by what is about to happen.
Unfortunately, the same cannot be said for the vast majority of Americans. Most of them are totally unprepared for what is coming, and they are going to be completely blindsided by the events that will unfold in the months ahead.
The relative calm of the past few years has lulled millions into a false sense of complacency.
If you are one of those that have dozed off, I have a word of warning for you…
Wake up and get ready.
Go To Original
What has been happening on Wall Street the past few days has been nothing short of stunning. On Thursday, the Dow Jones Industrial Average plummeted 358 points. It was the largest single day decline in a year and a half, and investors are starting to panic. Overall, the Dow is now down more than 1300 points from the peak of the market. Just yesterday, I wrote about all of the experts that are warning about a stock market crash in 2015, and after today I am sure that a lot more people will start jumping on the bandwagon. In particular, tech stocks are getting absolutely hammered lately. The Nasdaq has fallen close to 3.5% over the past two days alone, and it has dropped below its 200-day moving average. The Russell 2000 (a small-cap stock market index) is also now trading below its 200-day moving average. What all of this means is that the stock market crash of 2015 has already begun. The only question left to answer at this point is how bad it will ultimately turn out to be.
When stocks were booming, tech stocks were leading the way up.
But now that the market has turned, tech stocks are starting to lead the way down…
The Dow and the S&P 500 are negative for the year. The so-called “FANG” stocks – Facebook, Apple, Netflix, and Google – were some of the biggest losers, and helped send the Nasdaq more than 2% lower. Biotechs also suffered big losses; the iShares Nasdaq Biotechnology ETF fell 4% to a three-month low. The Vix, which gauges market expectations for near-term shifts in the S&P 500, surged more than 21%.
And Twitter is absolutely imploding. It has fallen below its IPO price, and at this point it is now down 65 percent from the peak.
Of course it was inevitable that Twitter and these tech stocks would start falling eventually. I specifically warned my readers about Twitter’s stock price nearly two years ago. I hope people listened to what I was saying and got out in time.
This current market crash is happening in the context of a full-blown global financial meltdown. Stock markets all over the planet are collapsing, and currencies are being devalued left and right. The following comes from a recent piece by Wolf Richter…
Hot money is already fleeing emerging markets. Higher rates in the US will drain more capital out of countries that need it the most. It will pressure emerging market currencies and further increase the likelihood of a debt crisis in countries whose governments, banks, and corporations borrow in a currency other than their own.This scenario would be bad enough for the emerging economies. But now China has devalued the yuan to stimulate its exports and thus its economy at the expense of others. And one thing has become clear on Wednesday: these struggling economies that compete with China are going to protect their exports against Chinese encroachment.Hence a currency war.
Two more major shots in the currency war were fired on Thursday by Kazakhstan and Vietnam…
Hit by sharp declines in crude prices, the oil-producing nation of Kazakhstan introduced a freely floating exchange rate for the tenge, which subsequently lost more than a quarter of its value.The State Bank of Vietnam (SBV) devalued the dong (VND) by 1 percent against the dollar on Wednesday—its third adjustment so far this year—and simultaneously widened the trading band to 3 percent from 2 percent previously, the second increase in six days.
A quarter of its value?
Now that is a devaluation.
In the coming days, we are likely to see even more emerging markets devalue their currencies in a global “race to the bottom”. But this “race to the bottom” presents a great danger to financial markets. As I have written about previously, there are 74 trillion dollars in derivatives globally that are tied to the value of currencies. As foreign exchange rates start flying around all over the place, there are going to be financial institutions out there that are going to be losing obscene amounts of money.
I cannot say the “d word” enough. Derivatives are going to play a starring role during this financial collapse, and so that is a word that you will want to be listening for very carefully in the weeks and months to come.
The meltdown that has already been affecting much of the rest of the planet is now starting to affect us. And it was inevitable that it would. I like how Clive P. Maund put it recently…
Many lesser markets around the world are toppling, but somehow the big Western markets of Europe, Japan and the US are staying aloft. If you have ever made a sand castle on the beach and watched what happened when the tide comes in, you will recall that it is the weaker outer ramparts and smaller turrets that collapse first, and the big central towers that hold out the longest. The weaker outer ramparts and smaller turrets are the Emerging Markets which are already crumbling, and it won’t be long until the big central towers – the big Western Markets, go the same way – everything is pointing to it.
The funny thing is that even though all of the signs are pointing to a nightmarish global financial crisis, the mainstream media continues to insist that everything is going to be just fine.
In fact, CNBC says that the recent dip in stock prices is a “bull indicator” and they are encouraging everyone to pour lots more money into stocks.
But of course the truth is that what financial conditions are really telling us is that stocks have much, much farther to fall.
For instance, high yield credit is starting to crash just like it did prior to the stock market crash of 2008. Stocks and high yield credit usually tend to track one another quite closely, and so when there is a divergence that is a huge red flag. And as this chart from Zero Hedge demonstrates, a very large divergence has developed in recent months…
Sadly, the 358 point plunge for the Dow on Thursday was just the beginning.
Yes, there will be up days and down days, but we are now officially entering the “danger zone” as we roll into the months of September and October.
So will 2015 soon be mentioned along with the famous market crashes of 1929, 1987, 2001 and 2008?
Go To Original
The Japanese government announced Monday that the country’s economic output declined by 0.4 percent in the second quarter, or 1.6 percent on an annualized basis. Private consumption, business investment and net exports all fell, primarily as a result of the rapid deceleration of the Chinese economy and continued stagnation in Europe and the United States.
The contraction in the world’s third largest economy not only dealt a blow to the anti-deflationary program of Prime Minister Shinzo Abe, dubbed “Abenomics,” it exposed the failure of the major capitalist governments to engineer a genuine recovery from the financial collapse and recession of 2008 and added to mounting signs of a deeper slump.
Private consumption, which accounts for about 60 percent of Japan’s gross domestic product, fell 0.8 percent over the three-month period and exports plunged by 4.4 percent.
The dismal data showed that the Japanese economy remains stagnant, at best, despite a massive asset-buying program carried out by the Bank of Japan for the past two years that is pumping trillions of yen into the financial markets. Last October, the central bank accelerated the pace of asset-buying—in effect, money-printing—to 80 trillion yen per year.
As in the US and Europe, where the central banks have carried out similar monetary stimulus programs, Abe’s infusion of cash into the financial system has pushed up stock prices, subsidized financial speculation and increased the wealth of the corporate elite, but has done virtually nothing to revive the real economy.
The growth of financial parasitism was reflected in the response of the Japanese stock market to the negative economic news. In what has become a global pattern, where big investors respond to signs of continued slump in the real economy by driving share values higher in anticipation of more cash from central bankers, the Nikkei stock index rose 0.5 percent on Monday.
The Japanese report followed a wave of negative data pointing to sharply slower growth in China and last week’s surprise devaluation of the renminbi (also known as the yuan). China, the world’s second largest economy and the main “engine of growth” for the global economy after the 2008 crash, is Japan’s biggest trading partner.
The global implications of a further decline in China are indicated by the fact that over the past decade, China has accounted for a third of the expansion in the global economy, almost double that provided by the US.
The devaluation has increased fears in governments and markets around the world that China may be on the verge of a major crisis. It followed official reports that Chinese exports fell 8.3 percent in July and the country’s producer prices fell for the 40th consecutive month, with the decline accelerating in July.
Chinese exports to Japan are down 10 percent from levels a year ago. (They are down 12 percent to Europe).
Following the initial devaluation, Beijing reported that factory output in July was barely above a four-year low reached last March. Business investment grew at its slowest pace since 2000 in the first seven months of 2015, led by a collapse in real estate investment.
Chinese imports fell 8.1 percent in July from a year earlier after a decline of 6.1 percent in June, reflecting a slowdown in demand from Chinese industries for raw materials.
Tao Wang, chief China economist at UBS, said: “Clearly, the overwhelming problem for China remains one of rising deflationary pressures.”
The slowdown in China has had a particularly brutal impact on the Japanese economy. But Japanese exports have also been battered by slumping demand from Europe and the US.
Last Friday, European officials reported that GDP in the 19-nation eurozone grew by a mere 0.3 percent in the second quarter. France did not grow at all. Germany expanded by only 0.4 percent. Italy grew 0.2 percent compared to 0.3 percent in the first quarter, and the Dutch economy managed only 0.1 percent growth. The region’s economy remains smaller than it was in the second quarter of 2008.
And in the US, the Federal Reserve Bank of New York on Monday released its monthly manufacturing survey, showing a sharp drop in activity thus far in August. The business conditions index plunged from plus 3.9 in July to minus 14.9, its lowest point since the height of the crisis in April 2009.
The continuing decline in the prices of basic commodities is a direct expression of global deflationary pressures. The decline in oil prices that began last year deepened on Monday, with West Texas intermediate crude oil falling another 1.1 percent, after declining 3 percent last week, to close at $42.05 a barrel, a six-year low. Copper prices fell another 1 percent in London. A Bloomberg index of commodities dropped to its lowest level since early 2002.
The general slowdown is having a particularly severe impact on the so-called “emerging market” economies of Eastern Europe, Latin America, Asia and Africa. Stocks, bonds and currencies of these countries have generally plunged since China announced its devaluation.
The Turkish lira, Mexican peso and South African rand all hit new record lows versus the dollar on Monday, while the currencies of Malaysia and Indonesia slumped to their lowest levels since the Asian crisis of 1997-98. Other currencies that have fallen sharply include the Malaysian ringgit, the Thai baht and the Indonesian rupiah. JPMorgan’s Emerging Market Currency Index has declined 2.4 percent this month to its lowest reading since it was first calculated in 2000.
Any one of these countries or others dependent on capital inflows from the major economies and expanding export markets could tip over into insolvency and trigger another world financial crisis.
In a column published Monday by the Financial Times, Jay Pelosky, head of J2Z Advisory, wrote: “Since 2010, the emerging economies have been the world’s growth engine, suggesting the current woes of the Bric [Brazil, Russia, India, China] economies are worth noting: yes, India is growing, but Brazil and Russia are in deep recession while China is slowing rapidly… Unlike 2010, China will not rescue the global economy. Odds of a global recession would seem to be in the 35-40 percent range and climbing.”
The global economy is more closely interconnected and complex than ever before in history. But its division into rival nation states, the basic political framework of capitalist private ownership of the means of production, makes any rational and progressive resolution of the crisis within the framework of capitalism impossible.
Instead, what predominates is an uninterrupted growth of parasitism and criminality. At the heart of the slump is a sharp decline in productive investment. Last April, the International Monetary Fund admitted that there was no prospect for a return to “normal” growth rates such as those that predated the 2008 financial collapse. It attributed this above all to a marked decline in productive investment in the advanced economies of Europe and North America.
American corporations are sitting of a cash hoard of $1.4 trillion. But infrastructure investment in the first quarter in the US fell by 2.8 percent. The corporate-financial elite is starving the economy of productive investment, and instead engaging in financial manipulations and swindles that increase its own personal wealth at the expense of society. The result is mass unemployment, wage cutting and growing poverty and social misery for the working class.
Mergers and acquisitions, which generate billions for the banks and big investors while destroying jobs, are at record levels, not only in the US, but internationally. So are stock buybacks, in which corporate profits are used not to expand production or carry out research and development, but to buy the company’s own shares, pushing up the stock price and increasing executive bonuses and investor windfalls.
Since 2004, US companies have spent nearly $7 trillion purchasing their own stock. According to University of Massachusetts Professor William Lazonick, that amounts to about 54 percent of all the profits made by Standard & Poor’s 500 companies between 2003 and 2012.
China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations
Go To Original
Go To Original
When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.
Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.
The FTSE 100 has now erased its gains for the year, but there are signs things could get a whole lot worse.
1 - China slowdown
China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.
The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.
The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.
Data for exports showed an 8.9pc slump in July from the same period a year before. Analysts expected exports to fall only 0.3pc, so this was a huge miss.
The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.
2 - Commodity collapse
The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.
The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe.
Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.
Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom.
The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.
3 - Resource sector credit crisis
Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.
With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.
Nowhere has this been felt more acutely than shale oil and gas drilling in the US. Tumbling oil prices have squeezed the finances of US drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.
As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.
4 - Dominoes begin to fall
The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.
The central banks are rapidly losing control. The Chinese stock market has already crashed and disaster was only averted by the government buying billions of shares. Stock markets in Greece are in turmoil as the economy grinds to a halt and the country flirts with ejection from the eurozone.
Earlier this year, investors flocked to the safe-haven currency of the Swiss franc but as a €1.1 trillion quantitative easing programme devalued the euro, the Swiss central bank was forced to abandon its four-year peg to the euro.
5 - Credit markets roll over
As central banks run out of silver bullets then, credit markets are desperately seeking to reprice risk. The London Interbank Offered Rate (Libor), a guide to how worried UK banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.
Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).
6 - Interest rate shock
Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.
7 - Bull market third longest on record
The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.
UK markets have been a beneficiary of the huge balance-sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.
8 - Overvalued US market
In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.