Sunday, 7 September 2014

More On Less Money

This post is a steal from The Automatic Earth rather than a link.  At 1560 words it is an interesting take about the changed world and radically altered money systems.

Last week's Money and Markets had an extended article by Martin Weiss on Black Swan event major worries.  He says that a number of nesting Black Swans are ready to fly.


Looking around us today, it would – or at least could – seem obvious that we live in a new world. Which we don’t recognize – as being new – because we don’t want that world. We instead want more of what we used to know, with icing and a cherry on top.

 We want to go back, not forward, though we don’t phrase or see it that way. The underlying issue is that the ‘forward’ we do want is not available, and we have no problem fooling ourselves into believing we can still achieve it.

We want a world controlled by America, with Europe as a sort of hunchbacked sibling obediently limping in its footsteps. That is familiar, and that feels safe. Like it was in days gone by, went things seemed to go well for us. We want what we had back then, we just want more of it. We want growing economies, and better lives for our kids than we had, just like our parents did.

When there’s a crisis, we want it solved, so we can return to what we had, and add to it.  Because we so obviously and one-dimensionally want this and only this, it’s very easy for those who try, to make us do whatever it is they like, as long as they hold forth the promise of delivering our ideal world of more of the same and then some.

There’s no-one who promises a world of less, or a world that is genuinely new, not just in name, who stands a chance of being taken serious, much less of being voted into office.

There’s not an economist who doesn’t promise a return to growth, or to prosperity, if only some model (s)he believes in is followed. More stimulus, less stimulus, the ideas and theories and models seem to run the gamut, but actually they’re all the same.

They’re goal-seeked. Economics as a whole, as a field, is. There are no theories that seek not to return us to growth. As if eternal growth is a natural law or a god given right.

We are already paying a huge price for having these contorted and convoluted images presented and sold to us as real, and for us to buy into them. In Japan, Shinzo Abe is busy unleashing an economic Fukushima upon his people, just so their country can return to growth.

In China, the amounts of credit with which markets are flooded just so the illusion of growth can be maintained are stupendous.
Europe can’t wait for its crisis to be finally over, so more of the same, plus a bunch of added gadgets, is there for everyone to grab onto. In the US, the media-induced consensus is that the return to growth has already been realized.

Hail the central bankers. More of the same, in various stages of ‘development’, can be seen in many other countries across the globe. All geared towards additional growth, towards hopes and dreams.

But everywhere, save perhaps in a few very poor places, the illusion of growth can only be bought with debt. And debt, how ironic, is the opposite of growth once there is too much of it. So they just have us believe there’s no such thing as too much.

A report from two St. Louis Fed economists this week blames low inflation levels in the US on ‘consumers’ hoarding money. With 40+ million Americans on food stamps, they could think of nothing else than a local version of Ben Bernanke’s insane notion of ‘excessive savings’ in China holding back the world economy.

Without even considering the option that people simply don’t have money to hoard. That they instead are buried in debt. That the money pumped into the system only reaches the top part of it, and gets stuck there. If people don’t spend, it must be because they have tons of cash sitting in their mattresses, not that they don’t have it.

A sadder picture of the state of economics could not be painted. What even more sad is that these are the kind of yokels who determine economic policy.

We don’t stand a chance. At first, I liked to see them address velocity of money in their inflation ideas, but then found they had no idea what it was or meant. US velocity of – base- money is at a record low.

 People are not spending. The same goes for Japan and Europe. But that’s not because people are wallowing in endless piles of cash. It’s because they’re at the end of the line.

A somewhat related piece has PIMCO bond manager Bill Gross explain how it all works according to the book he talks:

Two variables figure in the monetary straitjacket Gross describes: credit creation and credit velocity. The former must constantly expand at a high enough rate to pay interest on previously issued liabilities so as not to trigger the need for the sale of existing assets. If the current rate on outstanding debt in the U.S. is 4.5%, the Fed should target credit expansion of at least 4.5% per year.

Nevertheless, credit expansion has averaged just 2% for the past 5 years and only 3.5% in the past year. U.S. underachievement in credit creation is to blame for today’s economic stagnation, where the economy struggles to reach 2% real GDP growth.

A second variable of monetary policy is the velocity of money. Gross says no central banker knows how fast money should be changing hands in the economy and must therefore only dial the level up or down cautiously in order to avert a credit collapse.

But as a general rule, he writes, “the projected return on financial assets (relative to their risk) must be sufficiently higher than the return on today’s or forward curve levels of cash (overnight repo), otherwise holders of assets sell longer-term maturities and hold dollar bills in a mattress — lowering velocity and creating a recession/debt delevering.”

Now you know: The US doesn’t create enough additional debt. That’s why the economy is doing so poorly. Where is other times the economy was founded and built on production, on people working and producing things, it’s now debt that makes it tick.

And since people don’t have money, contrary to what the St. Louis Fed guys claim, they will need to borrow, says Gross. But they don’t. Not even at historically low rates. And if people don’t have money, and don’t borrow, they don’t spend, and you’re not going to get either growth or inflation.

By the way, why inflation at certain levels has achieved such a mantra-like status is beyond me, certainly in the way it’s supposed to be manipulated by central bankers. I always thought a central bank’s main task was to make sure just enough ‘money’ was in circulation in an economy to let it function. Not to set a goal for inflation levels.

Which undoubtedly is why they predictably always fail to achieve whatever goal it is they set. Of course, as per Bill Gross just now, central bankers must tamper in a similar way with the velocity of money (consumer spending) and ‘dial the level up or down cautiously’.

As if Bernanke can make Americans spend more, or less, as and when he sees fit. How crazy do ideas get? Is that mere wishful thinking, is it goal seeking, or is it an elementary lack of intelligence?

It’ll take us forever and a day to pay down our debts and achieve some, any, kind of growth again. But that should not be the end of the world, it’s merely a transition to a new world, which has already dawned (just not on us).

We’re in a new world, one without – economic -growth, but we see it through old eyes, and it’s ruled through old politics. If we don’t recognize the dangers of that discrepancy in time, we’re going to enter an era – we may already have – of many more botched western interventions like the ones in Ukraine and Iraq.

Where our leaders, who always were power hungry to begin with, turn out to be blood thirsty as well, when it comes to re-establishing the power structures of old, which belong in times gone by, and which will never come back.

The task of – central – governments, central bankers, and certainly alliances like NATO, should be to make sure as few people get hurt in this transition as possible. They should be the keepers of the peace, and the protectors of the weak as well as the natural environment in their part of the world. So far, they’re 180º off in every single respect.

As long as we insist on seeing the world through our old eyes, focused on growth and on more of whatever we feel we need even more of, we will continue to pick the leaders who promise us that. That may have been sort of fine 50 years ago, but in today’s world it can only lead to destruction, bloodshed, poverty and misery.

We’ve seen our world change, and we’ve failed to keep to up with the changes. We don’t want to be content with less, no matter how much we already have.

What we possess has become our self-image, and the one we portray upon the world. But be careful: it we don’t change that, fast, it’ll lead us to places we don’t want to go.


Just a rider, GDP statistics should be filed under fiction.

1 comment:

  1. A problem in seeing the world through new eyes is whose eyesight we should trust apart from our own.