The year 2023 was, like the previous years of this century, an upheaval and a revolution in many ways. History continues to accelerate at a speed never seen before. Geopolitical conflicts mingled with innovations of all kinds. It was a year of dangers (continuing war in Ukraine, invasion of Nagorno-Karabakh, Israeli-Palestinian conflict, coups d'états in Africa, persistent tensions in Taiwan, cyber-attacks, etc.) but also of significant advances, the most striking of which remains the accelerated development of generative AI. In the face of all these challenges, the main threat remains the rise of authoritarianism, which, let's not forget, goes hand in hand with the end of the financial cycle we are currently in. With many political elections due to take place in 2024, the economic and financial outlook is likely to tip the balance for better or worse.
In an article published in January 2023, we outlined four main hypotheses for the year ahead:
- Liquidity problems will arise on the markets, creating financial instability.
- Growth will slow abruptly and Western countries will enter recession
- Inflation will remain above the sacrosanct 2% target
- Gold price will take advantage of this situation and the multiple challenges to finish significantly higher.
All these predictions have been confirmed by the facts: in both the USA and Europe, several banks failed during the spring (it was the worst year for the banking sector since 2008, with the collapse of the giant Crédit Suisse), the eurozone went into recession (the USA escaped thanks to massive and effective support from the Treasury and the Fed), inflation exceeded 2% in the overwhelming majority of Western countries, and gold reached an all-time high.
If central banks haven't yet lowered their interest rates, it's only a matter of weeks, as recent statements attest. But above all, we need to take a close look at the evolution of the money supply in circulation. Thanks to the Fed's support program following last March's banking crisis, the wave of borrowing by US banks has offset the reduction in the central bank's balance sheet. As a result, the country's money supply has remained unchanged for almost ten months.
The year ended with a paradox more visible than ever: the disconnect between financial markets and the real economy. The markets took advantage of the slowdown in inflation and the ambiguity of central banks to end the year at record levels. This scenario is, however, only temporary. More on this later.
On the other hand, more and more companies are seeing their cash reserves depleted and are threatened with bankruptcy in the face of rising borrowing costs and slowing economic activity. The most vulnerable are, of course, those who have taken advantage of the health crisis and low interest rates to take on unreasonable debt, as well as those companies already classified as "zombies" (whose revenues are insufficient to cover the interest on their debt).
These fragilities can be observed in all advanced economies (United States, Denmark, France, Sweden, Germany, etc.), and in all sectors (textiles, housing, transport, real estate, etc.) and types of companies. In the United States, the number of bankruptcies has risen by 30% compared with 2022, and in the European Union as a whole, by 13%. In some countries, bankruptcy rates have exceeded the levels recorded during the 2007-2008 financial crisis.
Given this situation, what developments can we expect in 2024?
To forecast and anticipate, we need to look at the long term. Let's not forget that the current period comes at the end of a financial cycle, due to the multiplicity of risks around the world, the level of debt of the major powers in relation to the wealth they produce, and the increase in their military budgets.
Since 2008, financialized capitalism as it has prevailed for half a century - i.e., disconnected from the real world by its monetary system - has been in terminal phase. Its downfall is being delayed by ever-increasing debt and, for the past two years, by inflation. Let's not forget the speech made by French Finance Minister Joseph Caillaux in 1932, referring to the 1929 crisis: "The advent of the turmoil was delayed by monetary inflations (...) which had more or less the same effects as the shot of morphine that the doctor inflicts on his patient, which puts the evil to sleep but allows it to creep along dully, and which allows it to erupt all the more violently because it has been artificially delayed." Is history repeating itself?
There's every reason to believe that in 2024:
- The economic situation will be even worse (business failures will worsen, unemployment will rise sharply - especially in Europe - and many countries will once again enter recession, particularly those where interest rates are now higher than growth rates).
- A major financial crisis will ensue. Contrary to popular belief, as the Fed and ECB in particular prepare to lower rates (over the spring and summer), further bank failures will occur gradually, then suddenly, as markets lose confidence in the credibility of central banks. Central banks remain trapped in a Manichean choice between inflation and financial crisis. With real interest rates having been positive for several months, they are choosing to fight rising prices. The interest rate revolution has thus begun. A great economic and financial penitence threatens.
- Gold will set new records. Demand will continue to be strongly driven by purchases by central banks (particularly in the "Global South"), attracted by an asset that is not subject to any authority and acts as insurance against future uncertainty.
At the same time, elections of major importance will be taking place all over the world. Almost 60% of the world's GDP is involved. The most important of these are the presidential elections in Taiwan and the USA on January 13 and November 5, 2024, and the parliamentary elections in Europe and India on June 9 and April 1, 2024.
Their respective outcomes depend on the world's economic, financial and geopolitical developments, in particular the position of the Biden administration at the head of a country that remains the world's leading power -despite its fragilities.
As the country enters an election year, it is unlikely that public spending will be cut or taxes raised in the United States. What's more, if the Fed's support program ends in March 2024, there's nothing to prevent the creation of a new, similar one. On the other hand, economic and financial instability will have serious consequences both in the United States and worldwide. All the more so as price rises will persist, as they will probably be kept above 2% to keep the cost of debt as low as possible...
The future may be darkening, but history is never doomed. This coming year, more than ever, will require a major turnaround to avoid the worst. From an economic point of view, we need to rethink our monetary policy in order to put an end to the pro-cyclical effect of money-debt, encourage the most productive companies and activities for the real economy (through incentives such as subsidies, differentiated interest rates, etc.), and finally implement major decentralization programs to slow down banking concentration and the resulting inequalities. From a social point of view, we need to put aside anything that tends towards individualism in order to create trust between individuals, while considering that change is first and foremost personal... Finally, from a political point of view, we need to introduce ever more democracy.
May 2024 bring balance to a world sorely lacking in it.
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