From Daniel Stelter’s point of view, the high level of debt is one of the reasons for the stock market turbulence. The economist fears an erosion of prosperity in the euro zone – and says how Germany could become an economic driving force again.
After the wave of selling on the stock market at the beginning of August, market activity has calmed down again.
Michael Nagle / BloomberSTILL BEING VOTED4
Recently, there was a sudden sense of alarm on the stock markets, but then fears of a crash calmed down again. How do you explain this development?
Due to investors’ euphoria about artificial intelligence, the valuations of many companies have risen sharply. However, hopes about the productivity effects of AI were probably exaggerated. The trigger for the turbulence appears to have been the small interest rate hike by the Japanese central bank. Investors borrowed yen and used it to invest in technology stocks – now they have had to close their positions. This shows that many financial market players are still working with a lot of borrowed capital and loans.
Haven’t loans become more expensive due to interest rate increases by central banks in recent years?
Despite the interest rate hikes by central banks, there was and still is a lot of liquidity in the market. The positive development of share prices, especially technology stocks, has obscured the fact that there are fundamental structural problems. In many industrialized countries, states and private households are heavily indebted. This makes the system vulnerable to crises. The private sector will not be able to cope with higher interest rates in the long term. At the same time, states are unlikely to be able to get debt growth under control.
Which countries do you mean?
This applies to Europe, but also to the USA. The American economy is booming and there is full employment, but the American budget deficit is still 6 percent or more – so the government is taking on new debt instead of reducing it. But one could also argue the other way around, that the USA has to have such budget deficits for the economy to run so well.
Daniel Stelter
Despite these risks, the financial markets quickly calmed down again. Wasn’t it simply a false alarm?
I would describe this as a warning shot. Historically, overvaluations on the stock market are followed by corrections and crashes. However, central banks have often prevented such adjustments in recent decades by lowering interest rates or calming the markets in other ways. Some market observers compare the current situation with the crisis surrounding Russia and the hedge fund LTCM in 1998. After that, prices continued to rise and stock market euphoria continued until the New Economy bubble burst in 2000.
So you expect a recovery on the stock market before the crash occurs?
Nobody knows. I just look at the situation as it is. The financial system is already having problems with the current interest rate level, as can be seen in the state finances. The French Finance Minister Bruno Le Maire, for example, has said that the French state’s interest payments are largely to blame for the increasing budget deficit. And with every month that interest rates remain higher, the problem becomes bigger because old bonds expire and new debts cost more. In addition, productivity growth in the economy is unsatisfactory.
In Europe or the USA?
Across the Western world. However, in the USA there has at least been hope over the past two years that productivity is increasing. However, I think it is premature to speak of a turnaround. The huge programs to support the economy during the Corona crisis are likely to have played an important role here.
What is the situation in Europe?
There is definitely no such trend reversal in Europe. Then there is the demographic development. Europe is shrinking, in the USA the aging population is not quite as bad. Nevertheless, both regions have the problem that they have not made provisions for this aging society. That is not a good scenario.
So, in your view, lean years are now looming?
We have had some great decades behind us, with the fall of the Berlin Wall and the entry of Eastern Europe and China into the global economy. Borders opened, liberalization took place, and countries removed trade barriers. That is now changing. The conflict between China and the USA will continue to be reflected in higher tariffs and technology bans, and will slow down the economy. No matter who wins the presidential election in the USA, this policy will continue, and it will also affect Europe. The American Inflation Reduction Act is a very good example: it is nothing other than a protectionist and debt-financed reindustrialization program for the USA, which is at the expense of Europe. At the same time, it is becoming more difficult for Europe to do business with China.
And China is also a very serious competitor.
China has such cost advantages that tariffs of 20 percent play practically no role. Now Europe can isolate itself from this. But that means less growth in the world and higher inflation rates. Added to this is climate policy, which is also causing higher inflation rates.
So you expect inflation rates to remain higher in the long term?
We live in a world where the only way to pay back the debt in nominal terms is to devalue it through inflation. Higher inflation does not even require an escalation in the Middle East or an oil price of $200 – if that happens, the problem is much bigger. The current level of stock prices and real estate prices is also only justified if one assumes that interest rates will fall.
Isn’t there also a risk of national bankruptcies due to the high level of debt?
The answer is quite clear: the states will not go bankrupt because the central banks are financing them. And that will also happen in the Eurozone. In a currency union where no one wants to save, savers are the ones who get screwed. The Euro only has a chance of surviving with structurally higher inflation. The assets of savers in the Euro will therefore gradually depreciate.
You say that interest rates cannot rise because of the high level of debt. So why were the central banks able to increase key interest rates significantly in recent years without the system falling apart?
One reason why there have been few accidents so far, apart from the collapse of some regional banks in the USA following the interest rate hikes, is the continued high level of liquidity in the system. This is shown, for example, by the Financial Conditions Index of the Chicago branch of the US Federal Reserve. The second reason is that many players acted cleverly in times of low and negative interest rates and took on long-term, cheap debt. Many companies in the USA literally soaked themselves up with liquidity at the time.
And what about private households?
In the US, this is reflected in the real estate market. A lot of financing is done with 30-year fixed-rate mortgages. At the moment, you can see that very few property owners are selling their homes. If they were to buy a new property, they would have to take out a new mortgage, and they cannot afford that because of the increased interest rates. Therefore, there are far fewer transactions in the market and property prices continue to rise, even though interest rates are higher.
Isn’t there a chance that the economy can grow out of its debt crisis?
Believe me, I personally would like nothing more than that. But to solve the debt problem, growth would have to be very, very high. It cannot be solved with higher taxes either. In the euro zone, this will probably end up being inflation.
Conversely, this means that the euro is increasingly becoming a soft currency.
The euro has long since taken this path. In Europe, the creation and maintenance of prosperity is not on the political agenda, neither in Germany nor in other EU countries. This will have bitter consequences. The further the EU moves away from its promise to nurture people’s prosperity, the greater the risk of political tensions.
What does this mean for Switzerland?
Switzerland has the franc. But the sad thing is that it is located in the middle of Europe. The negative development in Europe is of course dragging Switzerland down with it. The country does benefit when companies move from the euro zone to Switzerland. But the Swiss export economy will suffer from the further devaluation of the euro.
Will the euro survive in the long term?
I said in 2011 and 2012 that the euro would probably not survive – and now, twelve years later, it is still here. So it can last for a few more decades. In another twelve years, debt in the euro zone may be at today’s Japanese level. There is much to suggest that there will be no economic crash, but rather another gentle decline.
What does this mean for the population?
The price of preserving the euro is an erosion of prosperity that we barely notice on a daily basis. It is a bit like the frog sitting in a pot of cold water that is slowly being brought to the boil. Many of the baby boomers in Germany are coming to terms with the situation and are trying to settle in – according to the motto “It will be enough for me”. My concern is that this is a mistake.
Can’t German politics counteract this? After all, Germany is still the anchor of stability in the Eurozone.
As I said before: anyone who saves in the euro is the fool. The problem is that if the Germans do the same as the French and Italians and don’t save any more, then trust in the euro will erode more quickly. That’s a dilemma. Nevertheless, I think it would make sense to make Germany economically fit – that would also help the euro zone. To do this, more should be invested in the country, for example in infrastructure and digitalization. Today, a large part of the state’s money is simply not used productively. The state does not have a shortage of money, it is just being spent incorrectly.
It is not easy for savers and private investors to build and secure wealth these days. What advice do you have for them?
The best solution is to invest part of your assets in stocks and equity products in a cost-effective and globally diversified manner. I also think it makes sense to have a certain amount of gold in your portfolio. I would advise against real estate in the Eurozone; demographic developments and politics speak against it.
Bestselling author and economist
feb. · Daniel Stelter is a macroeconomist, strategy consultant and founder of the forum “Beyond the Obvious”, which specializes in strategy and macroeconomics. As an expert on economic and financial crises, he has written several economic books, some of which have become bestsellers. The 60-year-old Stelter is ranked among Germany’s leading economists. After studying economics at the University of St. Gallen, he earned his doctorate on the subject of “Deflationary Depression: Consequences for Management”.
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