This interconnected world.

There is no question that we are living in interesting times!

Back in the old country there was a popular saying: “There are liars, damn liars, and politicians.” I am insufficiently aware of politics in both my new home country, the US of A, and my new home state, Oregon, to know if that saying is equally pertinent to life in America as it was in Great Britain – I suspect that it is.

So what’s getting ‘my knickers in a twist’ today? Namely the state of the world economy.

There seems to be so much spin and counter-spin that getting to the truth of what is going on, economically speaking, is not straightforward.

Which is why a recent article posted by over on The Automatic Earth jumped out at me. To my eyes, it really did cover the truth of what’s going on. And to double-check my analysis I shared it with Dan Gomez, no stranger to global finances, and he found it useful. Indeed, this was Dan’s reply: “That’s pretty much it. This should be the top of the world news every week until governments become accountable. All the other big issues of the day pale compare to the backlash from this sclerotic thinking. Good luck to all of us.”

Raúl has very kindly given me his permission to republish this. It’s not an easy read but that doesn’t detract from the value of the essay.

ooOOoo

 Why This Slump Has Legs

 January 18, 2016  Posted by Raúl Ilargi Meijer
Berenice Abbott Columbus Circle, Manhattan 1936
Berenice Abbott Columbus Circle, Manhattan 1936

We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth’”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever.

How do we know a ‘recovery’ is so far off it’s really no use to even talk about it? As I said, it’s easy. Let me lead this in with a graph I saw just today, which deals with a topic the Automatic Earth has covered a lot: marginal debt, or more precisely, the productivity/growth gained from each additional dollar of debt.

Please note, this particular graph deals with private non-financial debt only, we’ll get to other kinds of added debt, but that restriction is actually quite illuminating.

MarginalDebtNow of course, you have to wonder about the parameters the St. Louis Fed uses for its data and graphs, and whether ‘growth’ was all that solid in the run up to 2008. There’s plenty of very valid arguments that would say growth in the 1960’s was a whole lot more solid than that in the naughties, after the Glass-Steagall repeal, and after the dot.com blubber.

However, that’s not what I want to take away from this, I use this to show what has happened since 2008, more than before, when it comes to “passing debt off as ‘growth’”.

But it’s another thing that has happened since 2008, or rather not happened, that points out to us why this slump will have legs. That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.

Instead, all that has been done since 2008, QE, ZIRP, the works, has been aimed at keeping a facade ‘alive’, and aimed at protecting the interests of the bankers and other rich parties. That facade, expressed most of all in rising stock markets, has allowed for societies to be gutted while people were busy watching the S&P rise to 2,100 and the Kardashians bare 2,100 body parts.

It was all paid for, apart from western QE, with $28 trillion and change of newfangled Chinese debt. The problem with this is that if you find yourself in a bubble and you don’t go through the inevitable deleveraging process that follows said bubble in a proper fashion, you’re not only going to kill economies, you’ll destroy entire societies.

And that is not just morally repugnant, it also works as much against the rich as it does against the poor. It’s just that that is a step too far for most people to understand. That even the rich need a functioning society, and that inequality as we see it today is a real threat to everyone.

Recognizing this simple fact, and the consequences that follow from it, is nothing new. It’s why in days of old, there were debt jubilees. It’s also why we still quote the following from Marriner Eccles, chairman of the Federal Reserve under FDR and Truman from 1934-1948, in his testimony to the Senate Committee on the Investigation of Economic Problems in 1933, which prompted FDR to make him chairman in the first place.

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Everything would all be so much simpler if only more people understood this, that you need a – fleeting, ever-changing equilibrium- to prosper.

Instead, we’re falling into that same trap again. Or, more precisely, we already have. We have been fighting debt with more debt and built the facade put up by the Fed, the BoJ and the ECB, central banks that all face the same problems and all take the same approach: save the rich at the cost of the poor. Something Eccles said way back when could not possibly work.

Anyway, so here are the graphs that prove to us why the slump has legs. There’s been no deleveraging, the no. 1 requirement after a bubble bursts. There’s only been more leveraging, more debt has been issued, and while households have perhaps deleveraged a little bit, though that is likely strongly influenced by losses on homes etc. plus the fact that people were simply maxed out.

First, global debt and the opposite of deleveraging:

LeverageGlobalAnd global debt from a longer, 65 year, more historical perspective:

LeverageGlobal2-500It’s a global debt graph, but it’s perhaps striking to note that big ‘growth’ spurts happened in the days when Reagan, Clinton and Obama were the respective US presidents. Not so much in the Bush era.

Next, China. What we’re looking at is what allowed the post 2008 global economic facade to have -fake- credibility, an insane rise in debt, largely spent on non-productive overinvestment, overcapacity highways to nowhere and many millions of empty apartments, in what could have been a cool story had not Beijing gone all-out on performance enhancing financial narcotics.

LeverageChina500Today, the China Ponzi is on its last legs, and so is the global one, because China was the last ‘not-yet-conquered’ market large enough to provide the facade with -fleeting- credibility. Unless Elon Musk gets us to Mars very soon, there are no more such markets.

So US debt will have to come down too, belatedly, with China, and it will have to do that now. because there are no continents to conquer and hide the debt behind. We’re all going to regret engaging in the debt game, and not letting the bubble deflate in an orderly fashion when we still could, but all those thoughts are too late now.

LeverageUS500What the facade has wrought is not just the idea that deleveraging was not needed (though it always is, after every single bubble), but that net US household worth rose by 55% in the 6-7 years since the bottom of the crisis, an artificial bottom fabricated with…more debt, with QE, and ZIRP.

USTaxesHoneyPot2Meanwhile, in today’s world, as stock markets go down at a rapid clip, China, having lost control of a market system it never had the control over that Politburos are ever willing to acknowledge they don’t have, plays a game of Ponzi whack-a-mole, with erratic ‘policies’ such as circuit breakers and CIA-style renditions of fund managers and the like.

And all the west can do is watch them fumble the ball, and another one, and another. And this whole thing is nowhere near the end.

China bad loans have now become a theme, but the theme doesn’t mean a thing without including the shadow banking system, which in China has been given the opportunity to grow like a tumor, on which Beijing’s grip is limited, and which has huge claims on local party officials forced by the Politburo to show overblown growth numbers. If you want to address bad loans, that’s where they are.

Chinese credit/debt graphs paint only a part of the picture if and when they don’t include shadow banks, but keeping their role hidden is one of Xi’s main goals, lest the people find out how bad things really are and start revolting. But they will anyway. That makes China a very unpredictable entity. And unpredictable means volatile, and that means even more money flowing out of, and being lost in, markets.

The ‘least worst’ place to be for what money will be left is US dollars, US treasuries and perhaps metals. But there’ll be a whole lot less left than just about anyone thinks. That’s the price of deleveraging.

The price of not deleveraging, on the other hand, is what we see in the markets today. And there is no cure. It must be done. The price for keeping up the facade rises sharply with each passing day, and the effort will in the end be futile. All bubbles have limited lifespans.

I’ll close this with a few recent words from Tim Morgan, who puts it so well I don’t feel the need to try and do it better.

The Ponzi Economy, Part 1

In order to set the Ponzi economy into some context, let’s put some figures on it. In the United States, total “real economy” debt (which excludes inter-bank borrowing) increased by $19.4 trillion – in real, inflation-adjusted terms – between 2000 and 2014, whilst real GDP expanded by only $3.7 trillion. Britain, meanwhile, added £1.9 trillion of new debt for less than £400bn on “growth” over the same period. I spent part of the holiday period unearthing quite how much debt countries added for each dollar of “growth” over a period starting at the end of 2000 and ending in mid-2015.

Unsurprisingly, the league is topped by Portugal ($5.65 for each $1 of growth), Ireland ($5.42) and Greece ($5.39). Britain’s ratio ($3.46) is somewhat flattering, in that the UK has used asset sales as well as borrowing to sustain its consumption. The average for the Eurozone ($3.54) covers ratios as diverse as Germany (just $1.87) and France ($4.22).

China’s $2.56 looks unexceptional until you note that the more recent (post-2007) number is much worse. Economies which seem to have been growing without too much borrowing (such as Brazil and Russia) are now experiencing dramatic worsening in their ratios, generally in the wake of tumbling commodity prices.

In the proverbial nutshell, then, the world has become addicted to borrowing money, spending it, and passing this off as “growth”. This is a copybook example of a pyramid scheme, which in turn means that the world’s most influential economic mentor is neither Keynes nor Hayek, but Charles Ponzi.

[..] How, in the absence of growth, can inflated capital values be sustained? The answer, of course, is that they can’t. Like all Ponzi schemes, this ends with a bang, not a whimper. This is why I find forecasts of a ‘big fall’ or ‘sharp correction’ in markets hard to swallow. Ponzi schemes don’t end gradually, any more than someone can fall off a cliff gradually, or be “slightly pregnant”.

The Ponzi economy simply continues for as long as irrationality prevails, and then implodes. Capital markets, though, are the symptom, not the cause. The fundamental problem is an inability to escape from an addictive practice of manufacturing supposed “growth” on the basis of borrowed money.

There may be shallow lulls in the asset markets, nothing ever only falls down in a straight line in the real world, but that debt I’ve described here will and must come down and be deleveraged.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

ooOOoo

If you found your mind wandering somewhat as you tried to stay focussed on the essay, just go back and read the closing two paragraphs.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

As I said at the start: we are living in interesting times!

28 thoughts on “This interconnected world.

  1. Raúl Ilargi Meijer writes: “That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.”

    Of course but the bubble could be seen earlier, and so this I wrote in a letter to FT in August 23, 2006, while FT still published my letters… (Now I am basically censored… just like am in Venezuela)

    Long-term benefits of a hard landing

    Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.

    Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

    This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.

    http://teawithft.blogspot.ca/2006/08/long-term-benefits-of-hard-landing.html

    1. Dear Per,

      I’m flattered that you are still following my humble scribblings but so glad you are. For your letter to the FT indicates that even a decade ago the scale of the upcoming crisis was seen by some, including your goodself.

      Did you get to see the film The Big Short? And, if so, how did you find it?

      1. We thoroughly enjoyed the film, albeit it brought to the surface again my anger at how the banks were bailed out, and the almost total absence of criminal charges. Having read your article I can understand your opinion about the film. One wonders if the backers of the film still had some obligations to others behind the scenes?

  2. The slump and downfall of the stock market is way beyond my own mortal head dear Paul.. But as I see it, things can not keep on going as they are, something has to give. and many have predicted such failures in our economic structures.. For they are propped up with nothing.. just a load of zero’s on a computer mainly.. And the whim of many..
    Things have to change.. and that means by things no longer remaining the same.. The world as a whole is seeing Mass Movement.. so too will our economy systems..
    The old ways of being are in decline and for the new to take hold the old has to come to an end.. Change is Constant.. Such is Energy in motion..

    Lovely to catch up with you Paul and and all be it briefly as I take a short blogging break..
    Enjoy your weekend both of you and have a good week.. 🙂
    Blessings Sue 🙂

  3. It does make me think “Do we really want growth?” What will it bring us? More greed, more spending, more encouragement to buy material goods .. at the expense of many peoples and the planet itself.
    As Sue says, its time for something different … but it seems that the change we need will be certainly be a painful one!

    1. My thoughts precisely Val – the neurotic obsession with growth by Neoliberalist means seems bound to fail in at least the majority of the world’s economic regions, for how can most secure an advantage – meaning real-terms wage growth for the labour force and a positive balance of payments for the nation – over our trading neighbours? There has to be winners and losers, and who shall care for the latter?

      1. … don’t let anyone else know this … but I want to ban competitive sports too. As long as we think in terms of winners and losers we will create them.

      2. Your secret is safe with me Val. My own view is that money needs largely to be removed from competitive sports, as it seems only to bring corruption in its wake, and we end-up with doped athletes and rigged competition – neither of which constitute sport, but merely a black market at play.

    2. Val, I know it sounds almost too simple, but the change we require is integrity. That coupled with awareness for those that are less capable of coping. In these present times, that sounds like some fanciful dream!

      1. Integrity is often in the eye of beholder Paul. We need a shift in awareness – away from self preservation and absorption into an understanding that we are in fact comnected. That it matters how we impact others and our world.

  4. I would like to put that of neo-liberalism into some perspective.

    In Venezuela it meant that public services were privatized by selling the concessions to whoever offered the government the most moneys for it, saddling us consumers with the need of paying a lot for those services.
    Real neoliberalism would have allotted those public services not to whoever offered the government the most for it, but to those who offered the consumers the lowest tariffs.

    And there they are still complaining about neo-liberalism, though in reality it was all based on government bureaucrats getting more resources upfront in their hands… and après nous le deluge.

    And also, in 1989, the term Washington Consensus that symbolizes neo-liberalism was coined… but no one said a word that in 1988 the Basel Accord, for the purpose of setting the capital requirements for banks assigned a risk weight of zero percent to the government and a 100 percent to the private sector… real pure unabridged statism.

  5. Loved revisiting this post Paul and reading all the conversations.. I have to agree Sport has been corrupted through Money.. And those within it are hugely over paid.. Though healthy competition drives one to succeed and we should always try to do our best in all we do. 🙂

      1. From what I see of your presidential election race on my rare glimpses of your elections on British TV.. It makes our politics and politicians seem quite sane!.. and that is saying something LOL 🙂

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