Posts Tagged ‘debt’

As to the “flation” debate

March 4, 2011

The “flation” debate is alive and well and in some quarters it borders on violent confrontation. So I’d like to get another crack at it.

Armchair inflationists observe the flare-up in commodity  prices and claim hyperinflation is around the corner. The more technical inflationists observe the flare-up in money aggregates which rightly result in flaring commodity prices and claim hyper inflation is around the corner.

Western economies are service based consumer economies.  In the USA for example, consumers till very recently accounted for 70% of GDP of $14Trillion.

Thus, in the USA if the consumer should for some reason be unable to carry on spending as it did till recently, it follows that US GDP would suffer significantly.

But empirically, since the crash of 2007, official data seems to indicate that US GDP has not really suffered that much. This leads observers to opine variously that either we are out of the crisis or at least coming out of it. Certainly, the rise in unemployment seems to have stalled if not reversed so that if people are no longer losing their jobs the explosion in the monetary base will translate in inflation and hyperinflation is around the corner… because we are a consumer based economy… so that if the consumer is doing well then GDP will explode nominally thus giving us inflation…

But I with my $800 computer am not convinced that inflation looms on the horizon. Hyperinflation is a different animal alltogether and I’ll touch on it later on. But I cannot countenance inflation … yet.

Here are a few spanners in the inflationist argument.

If the rise in unemployment has stalled and, according to the most recent data, has reversed, then why has food stamp usage not even abated?

But more importantly, if the rise in unemployment has already stalled and has now reversed, why is the participation rate plumbing new depths?

FRED Graph
FRED Graph

But then, if indeed the official employment statistics are fudged as these official graphs suggest, then how come GDP hasn’t really suffered that much since the crisis began?

One reason is the extraordinary, galactic, gargantuan and thoroughly unprecedented fashion in which our governments are attempting to substitute for the consumer by injecting money into the economy in ways that have never been attempted in the history of man. Subsidies, TARP, Quantitative Easing and good old fashioned fraud perpetrated at the highest levels of government have helped keep up appearances of normality.

And here is the conundrum. You may or may not agree that the rise in unemployment has not yet stalled but, say you, even if it has not, then obviously government has been successful in compensating the loss of  consumer expenditure because it is plain to see that commodity prices are flaring. So somebody is buying these commodities which in turn means that somewhere there is demand. And if there is demand then we will have inflation… right?

Graph: Personal Saving Rate

Graph: Household Sector: Liabilites: Household Credit Market Debt Outstanding

Clearly, from 1980 till 2000 consumers egged on by state mandated reductions in interest rates, gradually depleted their savings whilst at the same time gorged on debt thus contributing to turning the US economy in a raging consumer based economy (declining interest rates discourage saving and encourage debt thus goosing inflation).

But since 2007 consumer trends have clearly reversed thus undermining the consumer based economy. In the recent past, consumers have been saving more and have been taking out less debt. The trend is similar in Europe. Ergo, in the West today consumers are taking a break if not outright retrenching… and for good reason… unemployment is rampant in the UK, in France, in Spain in Greece in Italy, in Portugal and in the good ol’ USofA.

If that is the case, then I don’t see how in a consumer based economy inflation can once again be revived in the absence of the consumer. I see how the government is for now compensating for the lack of consumer. But Keynesian monetary injections are not going towards expanding the productive economy. If monetary injections were successful then the participation rate would be turning up signifying that business was hiring again. Instead, money injected by the authorities is going directly to line the pockets of bankers and selected entities whom in turn go on to protect the purchasing power of their monetary gift by investing and speculating in commodities because they are fully aware of the deleterious nature of state directed policy.

Investment and speculation in commodities by privileged parties of course results in severe dislocations in the energy and food markets with consequences that are as much economic and political as they are social on the global stage.

Notice the trend of government debt (the debt that has to be serviced and eventually paid back through taxation) since 1980

Graph: Federal Government Debt: Total Public Debt

Now check out GDP progression since 1980

Graph: Real Gross Domestic Product
Notice how since 1980 Federal debt progresses from $1Trillion to about $14Trillion but GDP barely doubles from $6Trillion to barely $15Trillion. The entirety of US GDP today is made up of debt.
There are other significant charts that buttress the above contention and that you can see under “My Charts” in the right hand side column. Chart 135 on page 1 is particularly significant and should strike fear in the hearts of any citizen that is about to retire as well as the hearts of sovereigns and investment funds the world over as well as, yes, your (the person reading this blog) insurance and pension fund.
To wrap it up.
The final arbiter of whether the authorities have been successful in inducing inflation is tax revenue. For as long as tax revenue stalls or declines, there is no inflation in sight. That’s because in a consumer based economy, for as long as consumers do not spend money in the general economy, business cannot pay taxes. And since unemployment is still rising, the wider economy is not working thus taxes cannot be paid thus there cannot be inflation. Moreover, flaring commodity prices due to aberrant monetary policy act as a further tax on consumer as the extra money that has to be spent on gasoline, electricity or food cannot be spent in other aspects of the economy.
The important thing in understanding what the outcome will be is not mere idle speculation. Understanding which flation will befall us is vital to surviving this crisis. One of the more immediate concerns for example is that if indeed we should be in deflation as I contend, economic actors that are struggling with heavy debt loads would be better off selling whatever assets they have now, in an attempt at lightening or extinguish the debt load now, because in deflation assets will only lose more value. Alternatively, in the absence of assets owned outright, economic actors could contemplate walking away from debt i.e declare bankruptcy now before things get worse.
On the other hand, if inflation should befall us then economic actors struggling under heavy debts would do well to hold on to the debt and, eventually, even increase the load (as governments are doing). In this event, even people that own nothing would be well advised to take out a loan and buy assets.
In the immortal words of Inspector Harry Callaghan: “Well? Do you feel lucky punk!?”
Just a few words about hyperinflation.
Hyperinflation is a political event more than a monetary or economic event. Hyperinflation is only partly related to inflation but does not result from it. Hyperinflation results from the loss of confidence in a government. That is; when in a floating exchange rate monetary system as we have today in the West economic actors lose faith in a sovereign, said sovereign can no longer obtain funding. Being unable to sell sovereign debt to fund its own activity the sovereign must resort to printing money without corresponding creation of financial instruments held by third parties. Thus the national currency is thoroughly and aggressively debased resulting in hyperinflation. Argentina and Zimbabwe are but two of the more recent examples of hyperinflation.

Curtailing public expenditure as catalyst for revolution

September 20, 2010

This is not a new theme in these pages. In this March 2009 post you can follow links and read comments to other blog entries on the logical progression brought about by the inability of government to induce expansion in the credit markets.

Today we have this report chronicling the lengths some towns, counties, municipalities and states are going to in order to fend off bankruptcy.

Sales of existing homes are at their lowest level in 15 years, and new home sales plummeted this summer to the lowest levels on record. Property and sales tax revenues have shrunk. And nowhere is this more apparent than at the local government level, where officials are being forced to roll back the everyday hallmarks of modern civilization.

Cincinnati, Ohio, is cutting back on trash collection and snow removal and filling fewer potholes.

The city of Dallas is not picking up litter in public parks. Flint, Mich., laid off 23 of 88 firefighters and closed two fire stations. In some places it’s almost literally the dark ages: the city of Shelton in Washington state decided to follow the example of numerous other localities and last week turned off 114 of its 860 street lights. Others have axed bus service and cut back on library hours. Class sizes are being increased and teachers are being laid off. School districts around the country are cutting the school day or the school week or the school year—effectively furloughing students. The National Association of Counties estimates that local governments will eliminate roughly half a million employees in the next fiscal year, with public safety, public works, public health, social services, and parks and recreation hardest hit by the cutbacks. A July survey by the association of counties, the National League of Cities, and the U.S. Conference of Mayors of 270 local governments found that 63 per cent of localities are cutting back on public safety and 60 per cent are cutting public works. […] America is moving “from the Jetsons to the Flintstones,” [Mrs. Huffington] argues. “The American dream was already based on the idea you could work hard and do well and your children will do better. Now we are confronted with downward mobility across the board. You have the phenomenon of unprecedented numbers of college grads who can’t get jobs.” The current public sector cutbacks in education and infrastructure will only make things worse, Huffington says. “You are both hurting people in the present, and basically undercutting your economic growth and prosperity in the future.”

And here is where most people are unable to reconcile what has been happening till 2006 and what is happening now. Pay attention.

But the problem isn’t simply a product of the current recession or the 2008 financial crisis. It is now well understood that for years Americans lived beyond their means on borrowed money.

Technically true. Americans like everyone else in the West too.

But that is not the problem. The problem is what caused people to live beyond their means. Has anyone asked the question and looked into the dynamics? People will say that capitalism, selfishness, greed or vanity are the causes of people living beyond their means. Though all true contributing factors, these are but the proximate causes.

I say it is the inevitability of the political process aided and abetted by the monetary system.

Politics is inherently and by necessity manipulative thus it can only result in expedient self serving policy. This is the one single reason why a restricted circle of banks were able to impose a fiat monetary system on the politicians in 1913. Fiat money guarantees profits to the banks whilst allowing politicians to manipulate social/economic reality. Predicated on inflation, the inflationary dynamic brought about by fiat money induces a rise in trade and asset values. At the outset of the dynamic, the difference in the rate of increase in nominal or intrinsic value is negligible. But as the dynamic progresses, the rate of increase in nominal value decouples from intrinsic value till the former runs away from the latter. Nominal value is associated with credit expansion.

Credit expansion is not a bad thing in and of itself. But credit expanding at rates that far outstrip the rate of expansion of GDP is not a good thing. So that in an environment where the progression of GDP is anemic if not stagnant the only way to induce a rise in nominal asset values is by manipulating interest rates ever lower. Eventually, when interest rate manipulation loses traction, financial gimmickry must take-up the slack (derivatives, off balance sheet investments, CDOs, CDSs, MBSs… ). When even derivatives hit the proverbial wall, government must step in with creative measures. Initially, preferential accounting treatment for select entities, then progressively outright interventions and preferential legal treatment for said favorite entities.

… have to run now… will finish later…

The keen observer will notice that a fiat monetary system is inherently and mathematically limited. That’s because despite what Monetarists and Keynesians may wish, inflation conforms to the law of diminishing returns so that at at some point, more inflation no longer has any effect on the expansion of GDP. Official data buttresses this.

The above is not conjecture. It is fact that cannot be disputed.

If politicians for whatever reason have opted for a fiat monetary system, what is also evident is that the success of the choice hinges on never allowing the public to debate the choice let alone ratify it. It follows that the success of imposing fiat money upon society rests on government successfully avoiding any study or debate of the system in academia or in economic discourse.

If the above is achieved successfully, economists, pundits and professionals will argue and debate any number of issues at any given time but few, if any, will ever question the choice of monetary system itself. In fact, things are even better.  Ignorance of the monetary system and of the laws that govern fiat money also insures that scholars in other human sciences fail to understand the basic dynamics that, for example, lead to over-consumption, the depletion of resources and the devastation of the environment – ramifications that are due in large part to the choice of monetary system.  Empirically then, it is clear that the debate must (should) center on the monetary system as the dynamic that is upstream of any and all human dynamics.

A fiat monetary system is necessarily predicated on high monetary velocity which means low savings and expanding credit. This is a mathematical truism that cannot be disputed.

Thus, if the authorities willingly discourage study and discussion of the system and, at the same time, lower interest rates and expand credit markets (as required by the logic of fiat money), the inescapable conclusion is that individuals must perforce go progressively from living a decent life on one salary, to needing two salaries, to depleting their savings, to going into debt initially for a little extra to splurge on some luxury until, finally, going into debt even for daily necessities.

So, absolutely, Americans and Europeans have lived beyond their means. But this was forced upon them by aberrant government policies that make it inevitable that people behave the way they did.

But where does that leave people like the good citizens of Ashtabula County, Ohio? How can they be safe from criminals without a fully staffed local police force, TV station WKYC asked a local judge in April. “Arm yourselves,” came the reply from Ashtabula County Common Pleas Judge Alfred Mackey. “Be very careful, be vigilant, get in touch with your neighbors, because we’re going to have to look after each other.”

And so they did. In July, a group of farmers removed the safeties from their shotgun triggers and surrounded a trailer in which a suspected house robber was hiding while they waited for the county’s last, lone squad car to arrive

Middle class running as fast as it can – Commentary: Another day older and deeper in debt

Reality vs academic research… sometimes they match

August 14, 2010

Eric Sprott digging out scientific papers that show the inherent diminishing return of debt i.e. showing the mathematical limit of excessive spending.

With thanks to Zero Hedge.


If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the “Keynesian endpoint”, where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???

End excerpt –

Eggspurt (expert) research is of course always welcome but the ability to notice empirical evidence can save you a whole bunch of time and headache. Deficit spending has an inherent diminishing-return quality about it. How else could you explain that since 1980 government debt has progressed from US$2Trillion to US$12Trillion and yet GDP only progressed from US$6Trillion to US$14Trillion? This is simple arithmetic that even modest merchants use to judge the viability of their shops. But above all, for anyone that wants to see it, this is an economy that has been aggressively stimulated for many, many years and yet the main stream political/economic elite is calling for more stimulus (much more if your name is Krugman, somewhere in the realm of blue-yonder more). Recall here the definition of insanity.

As I outline in the post below, other than a lag in time there is no difference between government and private debt. Eventually both the interest and principle must be paid through taxes. Pay today or pay tomorrow but pay we must because government has no money of its own. Government’s only income comes from you and me. So that in a situation where both government and individuals are taking on increasing amounts of debt, you must perforce reach a mathematical limit beyond which underlying economic activity no longer suffices to service the debt (notice in this regard the various nations, states and municipalities that are circling the fiscal drain as we speak). At this point, taking on further debt in an attempt to stimulate economic expansion is sheer madness.

But of course. Though mad it might be, deficit spending is populist and politically expedient. So deficit it is for as long as we can maintain some degree of social expenditure. But gradually as the social promises our leaders handed out over the past half century must necessarily be curtailed, social unrest will follow till revolution enters the realm of the probable. At that point our “leaders” will plunge us in a world war.

Curtailing public spending a precursor to war…

July 30, 2010

Today Greece, tomorrow a nation near you.

As governments tax revenue dwindles and as their ability to borrow is progressively hindered by a slowing economy and rising unemployment, the social promises of the past thirty years cannot be met.

As a result public anger will rise and though initially it may be viewed as a localised phenomenon, eventually as more countries succumb to the same dynamic, social unrest will spread across borders and will ortanize too.

If tax revenue continues to collapse, revolution becomes a distinct possibility.

But it would be most unbecoming to allow revolution to happen anywhere in the West. Revolution is something that happens to banan republics but certainly not in the “civilised” West that purports to be a beacon of morality.

But when simple arithmetics tells you that Greece is only the prologue of what is to come, then what do you do?

Typically, at this juncture with nowhere to turn in order to increase tax revenues, the West engineers large scale conflicts.

Government issues emergency order as fuel shortages strand tourists and disrupt food and medical supplies… […] But hopes of a return to normal were quickly dashed when riot police fired tear gas at thousands of truckers gathered outside the transport ministry this morning.

Debt and demobilization… (Adrian Ash)

July 4, 2010

If you follow this blog you know that, so far, I expect global conflict by 2015 latest.

Here’s an interesting piece by Adrian Ash. The reason I find this note interesting is not so much for what it forecasts. It doesn’t forecast anything. The note merely observes a dynamic that is intimately related to the life cycle of inflation and sovereign debt.

In one of my previous posts, someone asked how I think a war could be financed at this point in time. Obviously, when you observe the graph at the link above, it is clear that financing isn’t the problem. If the people go along with the scam, a government can create the financing; and wars against foreign evils have a way of rallying people around the flag… regardless of the overwhelming evidence that a country’s own politicians have plundered and pillaged society to the tune of billions of Dollars.

The cost of government

June 13, 2010

The mainstream media must eventually come around to highlighting some of the glaring absurdities inherent in our socio/economic construct, albeit in piecemeal fashion.

What the mainstream media cannot do or does not want to do is to place the how and why in its appropriate context. That’s why you have people like me to do it for you.

This is a recurrent theme in the pages of this blog.

Once a government makes the deliberate choice to adopt a fiat monetary system, the path is dialed in.

In choosing a fiat monetary system, the inherent implication is that government reserves the right to expand the monetary base faster than underlying economic activity would justify.

Fiat money precludes any reference to intrinsic value thus there are no capital or temporal restraints to the expansion of the monetary base. Thus politicians of all stripes perceive fiat money to have no intrinsic cost. Hence government spending will always and everywhere increase year on year regardless of economic trends or conditions.

By implication, as the trend of government spending always follows a positive slope, GDP progression gradually and inevitably becomes ever more dependent on more government spending.

But as it is arithmetically impossible to increase spending ad infinitum, in order to maintain spending on a positive trajectory, government must perforce progressively become the largest actor in the economy so as to spend as much money as possible itself.

Hence the reason of government inherent inefficiency – inefficiency that is in large part due to the necessity to circulate money no matter for what reason and regardless of efficiency, return on investment or productivity.

Hence the reason that as the fiat monetary logic progresses, government becomes the largest and most inefficient actor in the economy.

As a side note here, I would like to also draw your attention to unions.

Although at the outset unions served a truly social and economic purpose, like all entities  as union clout progresses then it follows that at some point the main focus of the union becomes its own survival and perpetuation regardless of the greater good of its members or society.

Also note that in the past thirty years unions have moved from the private sphere of business into the public sphere of government. This is of course a logical progression for a union because government offers a more secure and more coddled work environment. However, as government can only be financed by the individual citizen, expanding government means an increase in taxes and/or an increase in borrowing. But even if government opts to finance itself via borrowing, government still needs to pay interest on the debt which means that at some point this money must still be extracted from society.

Thus as unions expand into government, government finds itself locked in the death grip of runaway national debt and runaway debt service costs. This is all fine for as long as the expansion of the monetary base brings about at least nominal GDP expansion.

However, as the expansion of the monetary base  explodes but GDP progression stalls or, Ye Gods!, turns negative, the monetary system is broken; thus government is broke and broken too.

Some interesting articles this morning…

January 28, 2010

… but not necessarily for what they appear to be about.

Let’s start with Bloomberg and Stiglitz:

This is an ambiguous article that deals with the economics of happiness. Stiglitz sets off with this comment: “Bankers created “negative value” with innovations such as mortgages that homeowners couldn’t afford, said Nobel laureate Joseph E. Stiglitz, who is speaking today at the World Economic Forum in Davos, Switzerland, on the economics of happiness.

Setting aside for the moment that the article is about the economics of happiness in an attempt at finding a better way of gauging the wealth and well being of a country, what strikes me as typical is the fact that even Stiglitz, Nobel Laureate that he is, perpetuates the perception that the problem that has befallen us was due to bad mortgages. Glaringly absent in Stiglitz’s comments now or in the past, is any indication as to why the banks should have been allowed and even encouraged to do what they did; and, by the way, banks are still now aggressively encouraged to do more of the same. My peeve with the whole charade is the unwillingness to have a proper discussion on the utility and desirability of a fiat monetary system. Because if banks did what they did, it is only because the presumed guardians of the system allowed them to do so despite the various laws that, if applied, would have clearly and immediately put a stop to such aberrant (criminal?) practices.

But then, Stiglitz goes on and at least partly redeems himself when he says:

Stiglitz, who advocates a broader measure of gross domestic product that takes social well-being into account, studied the issue last year for French President Nicolas Sarkozy, who has said that relying on GDP to gauge the state of an economy helped trigger the financial crisis.

Right there, Stiglitz actually hits the nail on the head. As I have already written in previous posts, the GDP figure is at the heart of most social, economic and financial metrics. But GDP is a flawed figure and, by itself, says nothing of the direction or the quality of development. As a flawed figure, GDP becomes the proverbial end that justifies the means. Specifically, since GDP is the begin all and end all of politics and economics, the natural tendency of government officials is to boost GDP by any means possible. Hence the appeal of a fiat monetary system which allows government to push credit and money creation in excess of GDP progression. The rationale for doing that is that by stimulating credit and money creation government can induce inflation, thus a rise in prices thus a rise in GDP.

That right there is the elephant in the room that few can intellectually countenance and, of those that can, fewer still are willing or ready to discuss. Because I assure you there are some officials that understand that.

Moving on from Stiglitz, Mr. Sarkozy of France too has a beef and it happens to be globalization.

Once again, Mr. Sarkozy’s peeve is justified but fails to address the reasons why globalization came about. Anyone that in talking about globalization does not mention that it is the logical ramification of the use of fiat money, is wide of the mark.

Fiat money has a logic. Fiat money is predicated on the expansion of credit and money supply. If that were not the case, then we could make do with either a fixed amount of money or with a value based monetary system. It is as simple as that. No need for arcane mathematical formulas. The choice of a monetary system is deliberate even if it is unilateral thus not submitted to the people for ratification. As a deliberate choice, fiat money implies two things: first, fiat money must not contemplate intrinsic value – second, fiat money can only exist in an inflationary environment.

The above being so, then it is clear that globalization is an inherent and inevitable consequence of a fiat monetary system. Few will remember for example that in the 1960s, the United States were exactly in the same jam we find ourselves in today globally. That’s right. In the 60s, the USA were confronting bankruptcy brought about by profligate spending that pushed credit and money creation far in excess of GDP since 1913. (Just a related observation here to note that the causes of the first inflationary crisis of 1929 were never really tackled. What happened instead is that as a consequence of WWII nobody anywhere had any industrial capacity left standing so that the USA were finally able to utilize their excess capacity to supply the rest of the world). Curiously enough,  in the late 1960s events were precipitated by none other than France who, smelling smoke in the wind, asked to redeem their US$ currency reserves for the gold they thought they were entitled to.

Surprise!! The gold wasn’t there. At least not enough of it because if the USA acquiesced to redeemed France’s foreign currency reserves, then everyone else would have wanted to redeem their reserves too and at that point, obviously, there wasn’t enough gold anywhere in the world to satisfy sovereign demand.


Abrogate Bretton Woods.

The USA gathered the leaders of the then developed world and essentially made them an offer they could not refuse. I mean; heck! The gold wasn’t there anyway so they had nothing to lose by at least listening to what the USA had to say.

The deal the USA put to the Europeans was to adopt a new monetary system based on the US$ as reserve currency.

To the question: “Why should we do that?”

The answer was twofold. The first part of the answer is what counted and what ultimately would have clinched the deal anyway; that is, the USA told the Europeans that by adopting the US$ as reserve currency they could themselves go on a fiat monetary system, hence they could print as much money as they pleased. The shrewd politicians that the European heads of states were, they needed no other reason to go along with the scam. The second part of the answer and which was then and still is today a moot point is that if the Europeans did not go along with the scam, the USA would have annihilated them (WWII was still rather fresh in Europeans’ minds and the Russian bogey man was looming large). A hard sell it was not.

And so it was that the US$ got a new lease on life. Essentially, inflation had saturated the US market hence the looming bankruptcy. By assimilating new markets, US$ inflation could now be pushed into a whole bunch of new currencies.

Incidentally, the introduction of the Euro served the same purpose. In one fell swoop, European currencies were devalued by anywhere between 20 and 50% thus boosting inflation.

Globalization is just more of the same. New markets to expand inflation into. Hence the US$ is today the official reserve currency of all countries and, thanks to the magic of “floating exchange rates”, inflation is guaranteed.

The problem of course is that inflation is a dynamic that is exponential in character and conforms to the law of diminishing returns. It could not be otherwise. If that were not the case, then there would be a direct correlation between the amount of credit and money creation and GDP progression. But as shown here, that is clearly not the case.

Moving on.

Here is an interesting blog post that puts forth an interesting observation. Essentially, our nations have surrendered sovereignty to the financial elite.

Fact is, the United States of America had no one in power to stop the Fed. The Fed did what it wanted to do. No one was a there to protect the taxpayer. America abdicated sovereignty. The country was actually too weak to fight the banks.

Though astute the observation is, once again the author cannot or does not want to make the connection with fiat money.

Fiat money has a logic. Fiat money must follow a cycle. Inherent in fiat monetary logic are a number of ramifications and outcomes. Chief amongst the ramifications of fiat money is that each additional unit of currency created has a diminishing effect on the overall economy thus a diminishing effect on GDP. The diminishing effect of fiat money is illustrated by what is known as the “Money Multiplier”. This is what the multiplier looks like:

Graph: M1 Money Multiplier

Now, here is the interesting part of this graph. Let’s zoom in on the period of time going from 2000 to present day:

FRED Graph
Now look at this:
FRED Graph
Since hockey stick shaped graphs seem to be the topic du jour albeit in different discussions, how’s that for a hockey stick?
The hockey stick shape representing the acceleration of debt at government level (not included in this graph is corporate and household debt which must be added for full effect) is matched by a multiplier that literally sank like a lead balloon.
That, dear reader, in my opinion represents the limit of the “beneficial” effect of a fiat monetary system. That, in my opinion, is the end of the inflationary cycle and the end of what can be done to keep GDP on an expansionary trajectory. That, in my opinion, is the end of this iteration of this monetary system. As a by the by, there have been so far 3 iterations to this monetary system: 1913 – 1929, 1929 – 1970, 1970 – today. The first iteration was saved by WWII, the second iteration was saved by bringing in new markets and currencies in on the US$ fiat monetary system. How will we solve this iteration of the monetary system…??? (For those of you that are mumbling that a new reserve currency will solve our problems you get a goose egg. A new currency will buy us some time; think Euro. Ultimately, the problem remains excess debt, excess industrial capacity, overbearing government and insufficient revenue to service debt.)
But more importantly, if any of my contentions as outlined above are true, that is the reason our “leaders” are about to throw us into a conflict of global proportions.
But let me be clear about something here. Most of you reading this post have been indoctrinated by the facile cliche that wars are profitable. As a matter of fact, wars are profitable. Not only are wars profitable, but they also keep research and development alive and a large number of military applications then make their way into civilian life too. So limited back water wars are inevitable if for no other reason that when you build weapons you cannot stock them unused forever.
But this next war is not going to be an inventory management war. This next war has a well defined economic and social focus. This next war serves to reset the fiat monetary system and create the conditions that allow us to re-start inflation. This next war will be a world war complete with civilians called up and packed off to the front and energy and food rationing at home. This next war must deal with one of the inevitable outcomes of fiat money; this next war needs to address industrial and infrastructure overcapacity.
Since I can virtually guarantee that no main stream politician today could contemplate any other monetary system than fiat, then the present system must be reset. Thus a world war is inevitable.
Got bullion?
PS – The war is inevitable and must involve civilians packed-off to the front for the simple reason that currency seems to have lost its multiplier role. If that is true, it means that unemployment will increase significantly. The trouble is that if the currency no longer has a multiplier effect on the overall economy, then revenues will necessarily dwindle at individual and corporate level thus at government level. As revenues dwindle, government must curtail public spending. And that’s the flash point. Rising unemployment must now confront lower social expenditure if not discontinuation of certain social services. Thus, unless someone somewhere can find a way to restore to the currency its multiplying powers as contemplated by Keynesian economics (the prevalent economic model of the past century), then we are looking at horrendous levels of unemployment (by taking the broadest measure in the US, unemployment is already well in the 20% according to labor statistics measure U6 as opposed to U3 which is the figure government uses for its official calculations). Thus it looks to me that the next war not only has to address infrastructure and industrial overcapacity but also a pernicious problem of unemployment because the unemployed poor have a nasty but historic tradition of rising up against the power elites and hang them.

Have we avoided catastrophe?

January 15, 2010

Everywhere I go, people come to me and sort of taunt me. My views are black on white so I can be taken to task anytime now or in the future and you guys do. I am considered a doomer with an incorrigible penchant for the dramatic without any apparent just cause.

So it is on this sunny Friday morning that as I bop to the groove of The New Mastersounds playing “Make me proud“, I thought I should. So here it goes.

Has government action, legal or not, avoided catastrophe?

To answer this question, lets go back to the charts that are thoughtfully produced by our trusty Federal Reserve of St Louis

Once again, from 1980 till today, government spending looks like this:

FRED Graph
So, government debt went from about US$1Trillion to about US$12Trillion
And what did we get for all this munificence?
FRED Graph
There you have it. Whilst GDP progressed by about 100% since 1980, government debt progressed by about 1200%. Of course, these figures do not take into account neither consumer nor corporate debt. If I did, the picture would look even more dramatic than it already does. Essentially, in order to expand GDP by a meager 100% in thirty years of ostensible social and economic development, we have embarked on a binge of debt of galactic proportions that has no precedent in the history of man ever.
So the question is; have Western governments today avoided catastrophe by bravely carrying on doing what they have done for the past thirty years only on a grander and more daring scale?
If so, at what cost?
Everyone that taunts me points at the gains in the stock market and exclaims: “See!? You were wrong. We have recovered and all is well again.”
I am not so sure of course. If we have avoided catastrophe now, it won’t be for long. It can’t be for long.
Essentially, if we have avoided catastrophe, this truly would be a most undesirable case of the end justifying the means. The inescapable conclusion would be that deficits and debt don’t matter. In that case, why not have government borrow unlimited amounts of money and pay a salary to every single citizen for ever?
Just in the past thirty years, private, corporate and government debt has expanded by well in excess of 1000% (somewhere in the region of 1500% to be exact) and yet, GDP only really pottered about in the neighborhood of 100%
If you think this crisis was only a near miss with doom but all is now well once again, I can guarantee that the next crisis will whack us all upside the head hard. And considering the amount of debt that has been piled up just in the past 12 months with unorthodox (and untested) forms of debt that don’t show up in the above charts, I can guarantee that the next dip will be a doozie.
Our governments truly have made a Faustian pact with the monetary authorities.
Bullion still looking awfully good from where I’m standing.

Walk away from your mortgage (New York Times)

January 9, 2010

Is this more anecdotal evidence of media awakening?

As stated here, there is absolutely no moral obligation not to. A mortgage is a financial transaction.

Where this essay in the New York Times fails, is in correctly identifying the reasons government attempts to persuade you that walking away is immoral. The NYTimes article says: “There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. […] The other reason is that default (supposedly) debases the character of the borrower.

Actually, the NYT only partially got it wrong. The reason government does not want you to walk away is because doing so would immediately cause a revaluation of the property to the downside. This would require a re-marking of the outstanding debt thus triggering a reduction in total outstanding debt.

Of course, if you follow this blog, you know that in an unchecked fiat monetary system inflation is the conditio sine qua non of the existence of government. Thus, the survival of government is predicated on the continued expansion of inflation thus on the continual expansion of debt.

A reduction of outstanding debt is contrary and lethal to the logic of government.

Deflation brings about a reduction of outstanding debt. Deflation is the enemy of debtors and nobody is deeper in debt than government issuer of the reserve currency.

Ho, ho, ho…. global currency talk is once again filling the air waves…

December 28, 2009

As outlined in several prior posts, one way to get a modicum of inflation going again would be to introduce a new currency so as to devalue the currency it replaces. This is one of the oldest tricks in the book and one that has been used often in the recent past (think Argentina, Zimbabwe…) and again very recently with the introduction of the Euro for example. At this stage of the game however, nothing short of somehow altering or even replacing the global reserve currency is going to help.

In recent months rumors have filled the airwaves at regular intervals regarding potential strategies that could be implemented: the Amero, adoption of the UN’ Special Drawing Rights (SDRs) and even rumors of a two tier devaluation of the US Dollar differentiating between US$ held overseas (to be devalued more) and US$ held within US borders.

What is clear is that governments are running out of options to restart the inflationary cycle and this would be a desperate last ditch attempt that would buy us some time. But that’s all it would do. Buy us some time because as per the latest BIS report, outstanding global financial obligations are still running at US$600Trillion whereas global GDP is running in the ball park of US$50Trillion and is dropping fast. The elephant in the room therefore is still the debt mountain we have built in 100 years of aggressive, pervasive and persistent inflation pumping in the US$ monetary system (the US$ being the world reserve currency of course).

Here is Jesse’s Cafe Americain with his comments and an article written by Martin Wolf in, of all places, some Persian Gulf daily:

Here is the UN’s own Trade and Development Report 2009 – true to form of course, always late to the penny-dropping party and always misguided in the final conclusion. But at least they’ve brought the issue up finally.

In the needlessly wordy, overly pompous lump of platitudes and redundant ideology that passes for a “report” at the UN, what you want to read is chapter IV: “Reform of the international monetary and financial system”. You will find the link at the bottom of the page under “quick links”. It is a PDF file and I seem unable to attach a link for you but I will post below their own highlights.

To be sure the report is actually reasonable in its initial chapters despite a glaring piece of ignorant pablum right at the start of the report when the luminaries that are the UN researchers state that:

The crisis proves that free financial markets do not lead to optimal social and macroeconomic outcomes.”

Of course, the UN conveniently disregards the fact that in economies where, for example, the choice of monetary system is not submitted to the people for ratification, where interest rates are manipulated arbitrarily by political decree, where in order to pander to special interest groups companies are not allowed to fail, where governments arbitrarily decree that corporate and commercial law must be suspended in order to save the system and where governments arbitrarily appropriate public funds, where industries are protected and subsidized even though they are not economically viable, how free can the market really be?

But, in all honestly, the report does get better as you go along… to a point:

“… because speculative investments do not generate increases in real income. […] Financial globalization implies a de facto loss of national policy autonomy […] The current international reserve system does not provide for any disciplines on surplus countries and on deficit countries that issue reserve currencies. (Ed. you don’t say!) […] In the absence of symmetric interventions in currency markets, the system has a deflationary bias… […] Any reform of the inter- national monetary and financial system has to address the issue of SDR allocation (Ed. this is the allusion to a new reserve currency).

This is the point at which after having identified many of the shortcoming of the present monetary system, the bright crayons that are the experts in the UN box, go on to offer solutions that are nothing but variations on the floating exchange fiat theme… ergo… more of the same…

I expected no less from the UN so, here it goes:

Unconditional countercycli- cal access to IMF resources would help prevent excessive currency depreciations. […] Achieving a stable pattern of exchange rates stands a bet- ter chance within a multilat- erally agreed framework for exchange-rate management. (Ed. of course the UN says it is desirable but does not say how to achieve that concretely. Also, the UN completely disregards the fact that government continuously intervene in the currency markets; what else is Quantitative Easing? Why set up Euro/Dollar swap lines of credit with foreign governments?… what a bunch of crock!!) […] An exchange rate system based on the principle of constant real exchange rates would tackle the problem of destabilizing capital flows at its source (Ed. these nitwits propose floating exchange rates by any other name i.e. more of the same)

So, after a reasonably good start even if peppered with pablum, the UN report goes on to propose more of what we already have but maybe with a new currency or a revalued global reserve currency and then, disregarding all the crap they have dished out in what is essentially a piece of trashy literature that aims to justify the grossly ludicrous salaries and benefits paid to an over staffed, under employed, unjustifiably proud, over arrogant, group of vain and ineffective “professionals” that couldn’t hack it in the real world, they conclude with one pearl of wisdom:

A further accumulation of external debt obligations by the United States would make the world economy even more fragile.

Of course, if you follow this blog, you will know that I contend that like Climate Change, the UN is nothing but a tool of inflation. I don’t mean to detract from the group of true idealists that are employed here and there within the organization and that are genuinely unaware of the ultimate purpose of the UN. But all the UN is, is a tool meant to create circulation of great amounts of money in an attempt to maintain a positive multiplier effect of the currency. That is the reason the UN must spend money regardless of the political/economic/social conditions it encounters in the areas where it operates. Have you ever heard the UN not to disburse on a project because the local government had been found out to be corrupt? Of course not. The UN must disburse because failure to deploy those sums would mean a reduced budget for the following year. And I can assure you that no UN department is going to stand for that. The UN will always outspend itself in an effort to acquire ever more resources year in year out. That is par for the course in a monetary/political system predicated on inflation.

But inflation is teetering on the brink of the deflationary cliff these days….

How far can a global war be?

2013/2015 is my prediction in the absence of radical political economic change in direction.

Take me to task then.