Excellent reading today

Some outstanding essays from Gary Shilling via John Mauldin and from Dave Rosenberg via Mike Shedlock.

First Gary Shilling (GS):


It is a long read packed with insightful information and graphs that are really worth your time. Not withstanding his conclusion and the dynamics that lead him to it, that I tend to wholeheartedly agree with, in my opinion GS too fails to explain the how and why of the dynamics.

For exmaple, in the opening paragraph, GS correctly identifies the problem when he says: “Beyond the current recession, the worst since the 1930s, lies years of slow growth…” . However, GS does not explain how and why we’ve had slow growth for many years. Because to be correct, we’ve had slow “real” growth. But other than real growth, GDP has been chugging along at an average of 4% yoy at a nominal rate. Hence the question I ask in many of my essays. That is, in a service economy that is composed of 70% consumption, how much real wealth is created in a 4% yoy progression? The answer of course is to be found in the quantity of inflation that is induced into the system. Considering that inflation as measured by the growth of credit and money supply has been progressing at an average 10% yoy (with peaks at 20%), it is immediately evident that there has been little “real” wealth generated. However, even identifying the cause of weak “real” growth does not explain why that should have been so. And the answer to this question, of course, is to be found in the choice of monetary system. A choice, I might add, that is arbitrary and unilateral and has never been submitted to the people for ratification. So, by completely disregarding the monetary system, GS still falls for many popular myths on which more later.

Also, although he identifies increased government regulation as a drag on the economy, in reading the paragraph I cannot help but get the feeling that GS may agree with some of the proposed regulation. However, other than forcing derivatives on an exchange, I strongly disagree that any increased regulation might help preventing anything. We do have strong regulation but enshrined in the Fiat monetary logic is the necessity to disregard practices that are initially border line legal but that, as the inflationary dynamic develops, become down right illegal and criminal – (SIVs, off balance sheet entities, mark to model accounting … ). Once again; the fiat monetary logic conforms to the law of diminishing returns. Therefore you always need greater degrees of inflation in order to bring about the same GDP expansion. Once the inflationary logic goes beyond its half way point, fraud is virtually guaranteed by necessity and aided and abetted by government.

Somewhere in the essay GS also believes in the “savings glut” claptrap. There is no such thing of course. What there is instead, is a fiat monetary system that is predicated on inflation and is inherently exponential in nature. Thus inducing ever greater quantities of inflation in the system results in the logical transition from a manufacturing economy to a service economy which, by necessity, becomes an economy based on imports and consumption. That being the case, inflation (as measured by money supply and credit) is exchanged for goods and services overseas. So, the savings glut would not exist if it weren’t for excessive inflation of the global reserve currency: i.e. the US Dollar.

Somewhere in the essay, GS also says that “bankers fear inflation”. To which I can only say: right! Inflation is the conditio-sine-qua-non of the fiat monetary system. Bankers’ only way to make money is to generate inflation. In the absence of inflation, banks would have to create far less credit and money thereby limiting profits. In a fiat monetary system the authority that is charged with creating money does so and charges interest. In the particular case of the USA, the Federal Reserve creates the money and gives it to the Treasury and charges interest in the process. Thus, every Dollar bill that leaves the Fed is devalued by that much. The less intuitive ramification of this monetary system is that debt can never be repaid. That’s because if you rustled up all the coins and $ bills in circulation and gave them back to the Fed, you would still owe them interest on the last bill that was created and delivered. Thus, a fiat monetary system can only survive in an inflationary environment. Absent inflation, the fiat monetary system implodes and with it so do governments.

Also, in chart 9, GS seems to think of inflation in terms of prices. Prices of course are a function of inflation; they are the manifestation of inflation but are not the cause.

Towards the end of the essay, GS states that he sees local government and state spending increasing at 5% and says that as tax revenue dwindles at state level, the money will have to come from Washington. Of course, if you’ve read any of my essays, you will know that there is very little difference between individuals, corporations, local government, state government or, indeed, the Federal Government. That is, when bankruptcy overwhelms individuals and corporations, it will progressively overwhelm local, state and Federal Governments too. So, we may want increased spending from our governments but in a situation of global bankruptcy and rising interest rates, governments will have a hard time borrowing even more than what they already have. Not only that, but how much more production capacity can we really absorb world wide? I mean, considering that industrial capacity utilization has been steadily declining over the years thereby progressively eroding pricing power, why should we create even more of it now?

I have to run now and will polish and add to my comments at a later date. For the time being do read the two essays from Gary Shilling and Dave Rosenberg because they are really worth it.

Dave Rosenberg essay via Mike Shedlock



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