Debt-driven recoveries will lead to greater crises

Global recoveries have been slower and weaker since 1975 and it's taking longer for economies to recover, according to the Organization for Economic Cooperation and Development (OECD).

Crises have been more frequent than before, and the only good thing is that they have been less aggressive, the organization says.

The OECD also found that after 1975, almost all economies emerged from recessions with more debt than before, which also means the solution to these crises was through an increase of debt.

This is no secret, but when crises are more frequent with less time for a recovery, will the method of increasing debt to solve a crisis still have the desired effect?

Thus, when a major crisis comes along, quantitative easing by central banks will be unable to bring fresh impetus to the economy.

So what does the future hold for the global economy?

Global debt has risen to record levels - more than three times of global gross domestic product. But even as debt levels continue to rise, they do not seem to be resolving the real economic problems.

Economist Daniel Lacalle believes this is because that governments and central banks for decades have always believed that a lack of demand was causing problems for the economy, even if it was not the case.

They never considered that a glut could also be an important problem.

Product quality and technology failing to keep pace with market demand could all be reasons that discourage consumers from buying, which in turn reduces demand and takes the momentum out of the economy.

Have the governments and central bankers been ignoring Lacalle's ideas? Let's review what happened in 2008, after US investment bank Lehman Brothers collapsed.

The US Federal Reserve led central banks around the world in launching a quantitative easing blitz. Their rationale was to prevent another major financial institution from collapsing, and the phrase "too big to fail" became an important buzzword in economic and financial markets.

Thus, we know that governments and central banks were already aware that core economic issues may not lie in demand, but in supply problems.

But there are enterprises that have grown to a huge size, yet can't guarantee continuous effective operations. And should they fail, the global economy could be plunged into another 2008-style crisis.

This is why, since 2008, QE has become the instant elixir to solve economic and financial crises.

For example, when Covid-19 hit the world last year, the global economy ground to a halt. But due to the QE launched by central banks, the global economy and financial markets witnessed only a temporary crisis, which did not trigger a systemic risk problem as in 2008.

Of course, savvy investors and economists will see this as a pallid solution, but when finance chiefs around the world only look at the numbers to explain their achievements, why would they take the time to solve the underlying problems when the numbers are good enough to shut most people up?

Therefore, the current global economic woes are indeed caused by supply chain problems rather than declines in consumer and investment demand.

I believe that over the next five to ten years, governments and central banks will continue to use QE and increase debt to solve their economic and financial crises, until the effectiveness of these relevant methods is totally lost.

Andrew Wong is chairman and CEO of Anli Securities