Andrew McCombe:
Hey guys, Andrew McCombe here from LeadWell Global. I’m back with Suren Pather, he’s the Head of Wealth at LeadWell Global. In the first video we discussed the, what’s the shock you, you give it a fancy name Suren.
Suren Pather:
Exogenous shock.
Andrew McCombe:
An exogenous shock, that is the Coronavirus that is causing the financial markets to be unsettled at the moment. However we discussed in the first video, it’s not actually necessarily about that. So this video series Suren’s going to discuss the cause of what’s going on. Surenit’s all yours.
Suren Pather:
Thank you Andrew. Look, I’d like to take everyone back to 2007 when all would have heard about the financial crisis.
People have forgotten that now it’s been more than 12 years.
But what actually happened at the very beginning of the financial crisis was there was a good intention starting from the U S where the intention was for everyone to be able to afford to buy their home.
And I guess at that level of government they allowed easy credit, easy access to funding, right? So everyone was able to borrow funds to buy their own home.
But what happened was, you know, as with everything in life, you start with a good intention and desires, you know, add to more desires and desires are insatiable to the point where people went far beyond what the initial intention was to acquire their own home, but it was to buy the second and third homes.
So that continued and regulators should have policed the system to ensure that credit wasn’t that easy, that people who could not afford to take on more credit should not have taken on more credit.
But when you’ve got many components to the system and you’ve got banks who’s interest it is, is to actually create more credit.
When things went unchecked, credit blew up. People are buying the second and third homes. They couldn’t even afford to buy their second and third homes.
People who had no jobs, were unemployed, no income, were able to borrow money. And so eventually this system of debt binging led to such an extent that these dates were all consolidated and sold off to other countries beyond the U S in the form of securities. And these bundled securities eventually became toxic because the underlying borrowers couldn’t pay their bills. And when it finally blew up, we had this financial crisis where there’ was a huge amount of debt in the system created by banks themselves.
So governments tried to step into rescue banks, and most governments then reached a point where they did not have the financial capacity to do so because you either had to raise taxes, right? Or deficit quite heavily to fund a lot of these banks. So what tend to happen was that they went to the next level of, rescue, which was central banks and central banks only have one policy too, that is to reduce interest rates or to expand money supply. And what happened then was that central banks, made credit, even easier to allow the system to gain more, I guess more certainty, for people to know that it was easy to get credit to fix up their problems.
So, if you look at what actually happened in 2007, 2009, it was a debt crisis starting off with a good intention. And if you now turn the pages to today, that problem of debt was never resolved because the way they saved the world was through more debt. In fact, total debt has increased by more than $2 quad trillion. And that’s a phenomenal number.
Andrew McCombe:
$2 quadtrillion?
Suren Pather:
$2 quad trillion! And what does it mean to solve the problem of debt? They’ve increased debt and everyone thinks the world is fine, but is it really fine? If you ask central bank governors, they will say they saved the world. Because what’s the problem? If you normally increase money supply, reduce interest rates, you cause inflation and their response is, there is no inflation. And normally if you have no inflation you tend to get the economies overheating and then eventually unemployment will increase. That’s the, I guess the pressure valve. But in this case they would argue that there’s full employment. So you’ve got an amazing world, full employment, no inflation and it’s been solved through more debt. But now comes the Coronavirus, what I call an exogenous shock or an external shock. And that external shock may start as just in terms of the physical economy. But my concerns are when it feeds into the financial economy, how much more ammunition is left with central banks? And therein in lies my biggest fear because the end of the day, the way to resolve this now is what? We are talking about zero interest rates. And when you got zero interest rates, it means the time value of money is nothing. And when you have zero interest rates, you need to understand how the mechanism works in terms of, how money is fed through the system. So central banks reduce rates to zero. Funds are channeled through banks, and the banks are meant to lend it out to people, make credit easy. But, if you think about what really happens in the world, who do banks lend to?
Andrew McCombe:
Other banks?
Suren Pather:
Other banks, or also they lend to people who don’t really need it? I call them the rich, because banks are fearful of lending to the wrong people and having defaults causing their problems. And what do the rich do? The rich take the funds that they don’t need and buy assets with it. And it’s no magic formula to see why stock markets have gone up so incredibly high since 2009 right?. Because by the share weight of money, prices have increased because of all the spending on it. In fact, just to sidetrack for a moment, you know a lot of the easy money flowing to banks or companies, right, are basically spent on rebuying their own stocks or in fact even borrowing to pay their own dividends and making these companies look attractive to the mere mortals. That pushes prices up even further. So stock markets have gone up incredibly but incomes have not increased.
Andrew McCombe:
So Suren, it’s also an interesting one for the banks though, isn’t it, because their bonuses are being affected and/or, obviously they are using it to increase bonuses, but it’s also affected at the moment.
Suren Pather:
Well look, now it works in reverse and the very thing that pushed up the bonuses, now it’s come back to bite them because if your share prices fall as we’ve seen right now, it’s certainly going to effect their bonuses.
Andrew McCombe:
So what’s the solution for the everyday investor that’s out there, the general mum and dad, that sort of thing. What are we going to do?
Suren Pather:
My personal belief is that the pain should have been taken at the very beginning in 2009.
Andrew McCombe:
Okay, great. Well, what we’ll do Suren, is we’re going to talk about that, the solution and feeling the pain I guess, in the video three, which will be available in the description below or in the link above. So, Suren thanks for coming on and we’ll see you in the next video.
Suren Pather:
Thank you, Andrew.
