Boiling frog syndrome – true or alternative fact?

AS every banker and policy maker converge into Bali this weekend for the World BankIMF annual meetings, everyone is asking how should we all respond to the daily changes that the world seems to be going through at all levels?

Three authoritative reports suggest that things seem to look OK, but there is little room for complacency. On the two-three year horizon, more and more people are worried about a perfect storm in the financial markets, whilst the scientists are now saying that we have less than a decade to deal with global climate change.

The IMF’s World Economic Report suggests that growth is now slightly down for 2018, whilst risks rise for 2019. Global growth will remain steady over 2018–2019 at last year’s rate of 3.7%, better than growth achieved in the years between 2012 and 2016. As a number of important economies are nearing full employment, there are now growing concerns over the return of inflation, with higher interest rates on the cards. The IMF urges policymakers to “build resilience and implement growth-enhancing reforms”.

Its companion Global Financial Stability Report suggests that the global financial system remains vulnerable if real interest rates were to rise. “In economies with globally systemically important financial sectors, debt owed by governments, companies, and households has risen from around 200% of GDP a decade ago to almost 250% today.”

With US$11.4 trillion debt outstanding outside the US, emerging market economies will face higher borrowing costs and risks of debt crises.

“Asset valuations remain stretched across several sectors and regions, and underwriting standards are deteriorating ”. Indeed, the IMF team suggests that “there is a 5% probability that emerging market economies will experience portfolio debt outflows of US$100bil or more”, broadly similar to size of outflows experienced during the last global crisis. Argentina and Turkey are already facing these outflow issues.

The other report that deserves serious attention is the Intergovernmental Panel on Climate Change (IPCC) study, which warned this week that the world has only one more decade to deal with rising temperatures. If, as the climate change models suggest, global warming rises by 1.5°C or more, there will be big variations in mean temperature in most land and ocean regions, hot extremes in most inhabited regions, heavy rain and snow in several regions, and big drought and precipitation risks in some regions.

Why are there more earthquakes and tsunamis? It is not difficult to understand that if ice caps melt, ocean levels rise and the heavier weight may be causing continental shelves to shift. Of 105,000 species studied, 9.6% of insects, 8% of plants and 4% of vertebrates are projected to lose over half of their climatically determined geographic range for global warming of 1.5°C. In plain language, there will be accelerating biodiversity loss, including losses from forest fires, coral loss and the spread of invasive species.

Are we surprised that it feels like the last days of Rome, when the Emperor was fid- dling whilst Rome burned?

During the Japanese lost decade, analysts came up with the image of a frog, sitting in a pot of water that is slowly reaching boiling point. Because the temperature rises very slowly, the frog sits comfortably and ignores the fact that it is slowly being boiled, until it is too late.

The boiling frog, or the transfixed deer dazzled by oncoming cars on the highway, are good analogies of the current global situation, with everyone saying that basically everything is OK, but be warned of the future. So when things go wrong, the Cassandras can claim that they did do the warning, but no one listened. Another way of describing this is “shuffling decks on the Titanic”, as the world plunges to disaster.

First, why is no one listening? Because the poor can do little about it; the rich thinks that they can always migrate to somewhere else, and the middle class is squabbling about who should be blamed.

Second, even you as an individual actually can predict the future, would the leader listen to you? If there is one lesson about the deliverer of bad news, it is that bosses do not like to hear bad news and is more likely than not to shoot the messenger. Few will speak truth to power.

Third, for every truth, there will be deniers and disbelievers, who think that there are alternative facts. So in the world of fake news, believe more in lies than the truth.

Fourth, in a situation of uncertainty, human beings tend to wait rather than act. Doing nothing is so much easier than doing something that could be wrong.

Better still, vote in someone like Trump, who will make so much changes until someone cries stop. If you make a mess of things, making bigger messes covers up everything else. Bankers and borrowers learnt this very well in the last 30 years – if you owe US$2,000 you are bankrupt. But if you owe US$2bil, someone will bail you out – the Too Big to Fail strategy.

In short, in the world of quantum money, there appear to be no consequences in doing what is totally weird.

During the last global crisis, central banks (to the delight of politicians) discovered that the marginal cost of printing money is zero. So, it costs central banks nothing to print more money to bail out bad behaviour. It is like shoving dirt under the carpet until the carpet reaches the ceiling. That’s what happens when we dump so much plastic into our oceans so that there is more plastic in the seas than fish.

The world is truly facing its boiling frog dilemma. To jump or stay still and be boiled, either in another climate disaster or financial crash. Very happy alternatives.

Stop the world, I want to get off, but let me enjoy the Bali Conference first.