It was a party that started out of necessity, when the world economy was on the verge of a Depression–in the US and in the EU–, but now the market has became increasingly addicted to the cheap money, like someone who ends up hooked in painkillers after a surgical operation.
Adjusting the world economy after that massive injection of liquidity (equivalent to almost 50% of world GDP) is going to be anything but easy. There is no fine-tuning, but just a bumping ride ahead of us. The emerging markets’s slowdown is already a fact. In this third quarter, according to data compiled by The Wall Street Journal, the emerging markets are going to add less growth to the world economy than the industrialized economies. It is the first that this happens since, exactly, 2007.
The problem, however, is not just for the emerging economies, or for the commodities, stock and bond markets, as it is often said. It also poses a real difficulty for the CFOs of big Western companies that so far have enjoyed ultra-low interest rates and booming financial markets. Now, when the central banks start slowly to push the brakes of the quantitative easing, those firms are facing a new scenario–more expensive (or less cheap) money, and less investment opportunities.
What can they do? Nobody knows. So far, the recovery is lacking investment. According to the (ex-Deutsche Bank) economist Ed Yardeni, American companies should be investing, at this point in the economic cycle, between 8% and 25% more than what they are doing. In plain English, that means from $150.000 to $500.000 million per year.
Where is that money going? Part of it, to shareholders via dividends and stock repurchases. The biggest chunk, however, is safely stacked in tax heavens or in cash or ultra-liquid assets. Companies can borrow at 3 percent rates (until recently, even at lower rates) and then buyback shares. Now, this is coming to an end. There is going to be less money to borrow, and less money to spend to keep shareholders happy. Maybe is this the time to invest in plants and increase production? Don’t bet on it–the income of the average American family is still 4 percent lower than in 2007.
Living without $33 trillion is going to be interesting, to say the least.