I recommend following the link to read this article in full. There are a number of charts and related information that are well worth studying, to properly understand the whole argument.
From Zero Hedge (bold and italics in original, red font mine):
In a moment of surprising clarity, Deutsche Bank’s Jim Reid pointed out what is largely taboo in the financial industry – the truth. “Looking back, real GDP growth in the US through the latter half of the 2000s and the 2010s has been at the lowest levels since the cyclically scarred decades of the Great Depression and the First World War.”
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What is amusing, is the constant state of shock of supposedly serious people who are stunned that despite the Fed being constantly in the markets, and buying up trillions in securities, the US economy has not responded in a favorable manner. Of course, nobody has pointed out that if all it took to generate growth out of thin air without consequences was for the Fed to print, i.e., monetize debt, this would have started 100 years ago in 1913, and by now the US economy would be so advanced it would be colonizing Uranus. Logic, however, is not a Keynesian economist’s best friend.
That said, the reasons surrounding the lack of US growth are secondary for the time being. A bigger question is what happens from here, now that even respected banks, and even ivory tower economists have admitted that QE has been a complete failure for the broader economy, and the common American, benefiting only the uber-wealthy. Which leads us to a different topic. Syria.
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In an uncanny historical analogue of the current economic predicament, we have to go back only 70 years or so back, to the time of the first Great Depression: that was the first and ostensibly last time, when the US economy was performing in a comparably subpar fashion to trendline.
Click to enlarge
So in an extreme (if logically forthcoming) scenario when the Fed’s final proposed fallback strategy of “forward guidance” which is destined to replace QE now that tapering is on the table, were to fail, as many already suggest it will (just look at the BOE), the final solution for the US central bank is one – Nominal GDP Targetting, which stripped of its fancy title is really a euphemism for “print until you drop”, or rather monetize securities and inject money without regard for inflation (paradropping bundles cash may well be allowed as Ben Bernanke would be happy to admit), with the only intention of promoting growth at any cost.
…
But will “Nominal GDP Targetting” work?
After quite a detailed analysis, including multiple charts, we get to the answer, and the crux of the article:
In other words, targeting GDP for the sake of GDP, concerns about inflation aside, when soaring inflation would also lead to surging interest rates, has become impossible.
So what is the only possible way out left for a country in which monetary policy has failed on all fronts except to inflate asset prices to stratospheric levels, and yet the economy still refuses to budge? For the answer we go to Deutsche Bank one last time:
During the US Great Depression the huge declines in consumer and businesses confidence in the face of mass unemployment can be seen in the extremely and persistently low level of velocity…. As it turned out, the US economy managed to grow at an average of 13.5% a year over the next 10 years and was back on ‘target’ by 1944…. Velocity also moved during the recovery from the Great Depression as the US war machine swung into action in the early 1940s.
In other words, at a time when the US was in almost an identical predicament and GDP catch up would have been impossible by any other means, what happened? World War. Luckily, for the US it generated unprecedented growth and cemented its status as the world’s super power, and the USD as the reserve currency. Others were not so lucky.
Are we the only ones who suggest that the only outcome is a military one? No. Recall from Kyle Bass:
Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.
“Inevitable”
Which also means preconceived from the start. So despite a recent sense of detente in Syria, pay close attention: never since the cold war has the world been so close to the edge of a full-blown global military conflict. Whether or not the Syria “trigger” has been produced as the catalyst that will spark growth, or is merely a precursor to such an event is still unclear. However with every passing day, the US economy lags ever more behind its “trendline” and the common man gets left ever further behind the superclass of financial asset oligarchs, a state which the president opined recently was unacceptable. The question is whether millions of war casualties for the sake of yet another economic “golden age” aren’t.
To those who know, hedge fund manager J. Kyle Bass needs no introduction.
In the following “must watch” keynote lecture delivered in October 2012, in his usual calm, matter-of-fact, pragmatic and incisive style he shared his thoughts on a number of key issues facing the world over the next few years. These include the inevitability of a major war, escalation of social unrest and food riots, and why our governments will never tell us the truth about the nation’s financial situation:
Highlights (with comments from your humble blogger)
4:00 – Largest peacetime accumulation of debt in world history … ends through war
“Something that I think is really important to pay attention to; in the last ten years, debts around the world… has grown from $80 Trillion to just over $200 Trillion. So debts have grown, at almost an 11% compound annual growth rate, over the last ten years. We sit today at the largest peacetime accumulation of debt in world history.
One of the things we talked about in the back after the last panel – and very few people are willing to go out there and say this – you know how this ends, right? This ends through war…
We don’t have a playbook for the enormity of debt at 340% of global GDP, and that’s why we have such a hard time thinking about how this plays out. But I can tell you that – again, I don’t know who’s going to fight who – but I’m fairly certain that in the next few years you will see wars erupt and not just small ones.”
8:00 – Deficit spending going into a war
“If you think about what’s happened in the past; if you study history, you see that when sovereign nations get to 250% total credit market debt to GDP, they’re both deficit spending going into a war. And at the conclusion to the victor go the spoils and to the loser go defeat and default. That’s the playbook that we’re actually familiar with.”
9:00 – Central banks have created $10 Trillion out of thin air
“Central bank balance sheet expansions are really important. We talk about money printing; today… the four largest central banks in the world have $13 Trillion on balance sheet. From the beginning of the [GFC] crisis to today, they’ve expanded by $10 Trillion. Ten trillion dollars has been created out of thin air. How are we supposed to think about that? Well I know we are all worried about it… You are starting to see the first signs of what happens when you expand central bank balance sheets limitlessly.”
13:00 – More worried about the sovereign balance sheet
“I went and met with (Kenneth) Rogoff in February of 2009 and delivered our work here to him, and I said to him: “I’m looking at this and it’s really, really worrying me” – and if you remember, in February 2009 we (financiers, traders) were mostly focused on which bank is going under, and who was going to bail this bank out and that bank out and how the financial system is going to stay together, but I was more worried about what was going on on the sovereign balance sheet – when your banking system gets to ten times your GDP, and you lose 3% of your banking system, you’re finished. And that’s what’s happened; Iceland, it’s what happened to Ireland, it’s really what happened in a number of different nations…
So at the top of what’s going wrong with the world, no one was paying attention to how large these systems were getting. You know, in February of 2009 when Rogoff looked at this he said to me: ‘I can hardly believe it’s this bad,’ and I was thinking: ‘Oh shit, who’s paying attention to the size of those countries’ banking systems, because if you, the father of sovereign balance sheet analysis isn’t, then I know who isn’t’.”
This observation serves as solid justification for the concerns that Senator Barnaby Joyce has, for some years now, been expressing (to much derision by “experts”) about ever rising sovereign debt – the “trajectory”, as he calls it – in the USA, Europe, and in turn, here in Australia.
Moreover, Bass’ observations about the dangers of an expanding financial sector ring out like the tolling of funeral bells when one considers the size of ours. In late August 2012, the Bank of International Settlements (BIS) issued a warning about the size of Australia’s banking sector:
Finance has grown too big around the world and cross-border lending too large, according to BIS chief economist Stephen Cecchetti.
In Australia, the finance sector accounts for 11.5 per cent of all industry value added, having doubled its share of the economy since the mid-1980s.
This compares with the 2008 peak of 7.7 per cent in the US and 10.4 per cent in Ireland…
The extraordinary dimensions of Australia’s banking sector were highlighted by Bank of America Merrill Lynch research last week showing that Australia has the second-largest banking system in the world by market capitalisation, surpassing those of the eurozone, Japan, Britain and China.
It is absurd for a nation of 22 million to have a banking sector that represents more than 8 per cent of the world banking industry by market value. Banking now represents just under half Australia’s listed market.
Back to Kyle Bass:
12:00 – GDP is a homogenizing denominator, we use government tax revenue as a better denominator
“When we think about private sector leverage becoming a public sector problem, back in 2008 when we were trying to understand this transference of risk from the private balance sheets to the public balance sheets, very few people – in fact, I couldn’t find it when I went out looking for it – had done the work to try to understand On Balance Sheet debts, and then the acuity of the banking system problem. So when I was thinking about how to get my arms around how this is going to go forward, we were saying, ok let’s forget about contingent liabilities, let’s forget about social welfare, let’s forget about promises that had been made to various people in various nations; let’s just look at On Balance Sheet obligations. Let’s just look at how big banking sectors are in relation to GDP – and actually, GDP is a pretty good homogenizing denominator; we tend to use central government tax revenue as a better denominator, because certain countries are much more productive than others, in our opinion…”
There are two important observations here that I wish to highlight.
The first is Bass’ concern over private sector (ie, banking system) “leveraging” (ie, mega-debt) being transferred on to the public (taxpayer) sector, in a banking system crisis. This is the #1 reason why, even though it is true that private debt is much worse than public debt, I believe that Barnaby Is Right in constantly expressing concern over the rapidly rising trajectory of public debt in Australia. Because, regardless of whether or not you agree that our public debt is “low compared to other OECD countries,” the undeniable fact remains that our rapidly rising government debt does represent a weakening of the government’s balance sheet… even before any banking crisis arrives! Foreseeing that our banking system was, just like the rest of the West, our key vulnerability, and that weakening the government balance sheet unnecessarily would only make our future problems far more calamitous, was one of the main reasons why I launched this blog in early 2010. When you hear some distinguished-looking, eminent economic “expert” – or politician – reassuring us that Australia’s public debt is “low”, just keep one word at the front of your mind. Ireland. And remember what happens to the public debt level, when a government with previously “low” public debt suddenly finds itself borrowing to the stratosphere – often from the IMF – in trying to bail out an over-leveraged banking system.
The second important observation – on GDP as a “homogenizing denominator” – is one that thrilled your humble blogger, and made him feel a lot smarter than he actually is. How so?
For years I have argued that using “GDP” as a measuring stick is bogus, and deliberately misleading, because:
(a) “Gross Domestic Product” (GDP) is really just a blunt measure of total volume x notional “value” of transactions in the economy… irrespective of whether those transactions were actually a result of “productive” activities or not; as such
(b) it only serves the purpose of helping politicians and bureaucrats to obscure the truth about the economy, and the government’s financial management; and so
(c) governments should be required to report key budget figures like government spending, and public debt, as a percentage of government tax revenue instead.
Bass is both subtle and brilliant, in describing GDP as a “pretty good homogenizing denominator”. One definition of that word is: “to form by blending unlike elements”.
That’s exactly what the GDP figure does – it blends unlike elements. It is a meaningless quantitative measurement, that simplistically blends together every transaction in the economy in one huge number (all the better for making things like government spending or debt “as a percentage of GDP” sound like a small number). In so doing, it obscures any qualitative measurement of activity in the economy. That is, unlike “GDP”, a qualitative measurement would distinguish between the volume x value of transactions resulting from real, productive activities, versus that which resulted only from (eg) non-productive money-shuffling between financial institutions. In theory, an economy could boast a China-like level of annual GDP “growth”, while actually producing nothing. All it takes to achieve that, is a sufficient increase in the volume x notional “value” of electronic digits that are transacted each year. “GDP” as a measurement is utterly ridiculous, once you see it for what it is.
This blogger can greatly appreciate the wisdom of Kyle Bass and his hedge fund team, in choosing to assess economies based on a recognition that “certain countries are much more productive than others”, and that GDP as a measurement does not help to identify which countries have quality (ie, productive) activity, and which do not.
15:00 – We think inflation causes default 90% of the time
“When your debts get to be 20, 25 times your central government tax revenue, a non-linearity develops between your revenues and your expenses. So if you try to inflate your way out of this problem which – again, the academics, the central bankers of the world believe that when you get to this proverbial fork in the road, that fork is either inflate or default, and those two roads are mutually exclusive of one another – we tend to think that 90% of the time one causes the other. And when you develop this non-linearity… when your debts are 20 times your revenues and you try to inflate your way out of this through revenue, it moves your swaps curves or your debt costs, ok? Your expenses grow exponentially while your revenues grow in a linear fashion … it just makes sense, this is logic.
So when you think about Japan, they’ve got 24 times their central government tax revenue in debt. If Japan ever moves to an inflationary bias, they’re finished.”
Oh dear. Remember, this talk was given in October last year. As of March this year, the government of Japan has moved to an inflation bias, after 15 years of deflation. They have set the central Bank of Japan a 2% target for inflation, to be achieved within two years.
19:00 – More social unrest
“You’re going to see more social unrest. You saw huge riots in Greece and you’re seeing huge riots in other parts of the world over food, and lack of food, and those are actually tertiary and secondary derivatives of the financial problems, in my opinion, that we’re exporting inflation to some other nations. So going forward it’s going to be a problem.”
24:00 – They’re not going to tell you when this happens… Their job is to promote confidence, it’s not to tell you the truth
“They’re not going to tell you when this happens, you’re going to have to see it for yourself. How many of you remember Mexico in ’94 when we had the ‘Tequila Crisis’? The government gave affirmative determinations that they would not devalue, they would not default, almost daily. And the day after they said we won’t devalue, they devalued 60%. The government’s never going to tell you that it’s going to happen. (Greece’s) Yunker, when asked in 2010 if there was a secret meeting to discuss restructuring Greece, he said: ‘Oh no, there’s no meeting’. And then they talked to two other Finance ministers the next day, and they said: ‘Oh yes, we had a meeting and Yunker was in there’. And so the press went back to him and said: ‘You told us there wasn’t a meeting’, and he said: ‘Look, when it becomes serious, you have to lie’.
You have to realise that these guys are never going to tell you the truth, because they can’t tell you the truth. Their job is to promote confidence, it’s not to tell you the truth.”
26:00 – There is no chance the Japanese can ever repay their debts
“We all know Japan’s On Balance Sheet situation is now 240% debt to GDP, 25 times central government tax revenue; they have over a quadrillion Yen of debt, On Balance Sheet. That’s a one with fifteen zeros after it. If you were to try to count to a quadrillion, and if every number only took you one second to get there, how long do you think it would take you to get to a quadrillion? Thirty-one million years. There is no chance the Japanese can ever repay their debts. Plain and simple. And they will have a crisis. They will have a bond crisis in the next two or three years, in our opinion. It will be a big one.”
Japan is our second largest trading partner, last time I looked.
42:00 – Global sovereign restructurings … people are going to lose a lot of money
“What this means, is that the globe is about to enter into a period of sovereign restructurings. And what does that mean to you? Well, to me it means people are going to lose a lot of money.”
54:00 – Gold is not the panacea that people think… Currency system should be linked to population growth
“It (gold) is not the panacea that people think… Having our entire currency system tethered to something that’s either convertible into a fixed asset or – I think something that’s better, maybe, tied to population growth – makes a little bit more sense. But limitless credit creation is probably a bad idea.”
This too, impressed me. And made me feel smarter than I am. How so?
Fundamental to my own alternate currency system idea, is the view that gold (or any other ‘commodity’ whose stocks, supply, or public reporting of reserves can be manipulated) should not be used as the basis for a future currency system. And – per Kyle Bass – my idea ties currency issuance directly to population size.
An independent carbon bank, similar to the Reserve Bank, should be set up to oversee a carbon price and investment in clean technology, the peak renewable energy lobby says.
The Clean Energy Council will today release a discussion paper proposing the carbon bank, which it says could be allowed to borrow money to invest in renewable energy projects against the future revenue of Labor’s proposed carbon tax and emissions trading scheme.
Hmmmmm.
An “independent” carbon bank.
Trading in … what you breathe out.
Borrowing … and “investing” … against the future government tax revenue.
In other words, the government … meaning taxpayers … the guarantor for any losses on those “investments”.
And derivatives, well, they’re safe-as-houses too.
After all, the mortgage-backed derivatives market that blew up America is only a tiddling little market.
So there’s clearly no cause for concern about yet another bankster-driven scheme, to blow up a global, air-backed derivatives bubble:
To give an idea of the vast disconnect between our banks’ “Assets” (66% of which are loans), and their exposure to OTC derivatives, the following chart shows their total Assets – blue line – versus a red line of total Off-Balance Sheet “business” (click to enlarge):
$2.66 Trillion in "Assets" versus $15 Trillion in Off-Balance Sheet "Business"
They say that the main gimmick used to promote Hubba Bubba is that it is less sticky than other brands of bubble gum, and so burst bubbles are easier to peel from your skin.
No worries then.
Sure, we are going to get squeezed dry.
But there’ll be no needing to go shave our heads or rend our clothes when the biggest bubble ever goes POP!
One of the most basic necessities of life, the greatest reflection of our standard of living, is the price of power.
I remember that a very salient time for me was having a discussion with my mother-in-law, and talking about the carbon price, and her quietly sitting back and in sort of a disdainful way, which I think reflects the disgust held by so many in the community.
She said look, you know, in winter, in the New England, when she’s working on Meals and Wheels, it’s at times it’s very easy to find out where the pensioner is, because you will find them in bed because that is the only place they can afford to stay warm.
So they’re not there because they’re sick, they’re there because they’re cold, and I find that disgusting that would be happening in my nation now. We’re the nation that supplies coal to the world, yet we can’t afford to look after our own.
So. We merrily sell our coal to the world, for them to use in their coal-fired power stations. But we introduce a big new tax on our own coal-fired power stations. So that our already-overpriced electricity, will become even more overpriced … by (minority) government decree.
(Oh yes, and we refuse to consider nuclear. The only viable, base-load power alternative to coal. But, we merrily keep selling our uranium to the world, for their nuclear power stations).
Media Release – Senator Barnaby Joyce, 27 April 2011:
Today’s consumer price index figures from the Australian Bureau of Statistics show that utility price increases are accelerating not slowing down under Labor, Senator Barnaby Joyce said today.
“Last week public buildings were burning down in the centre of Sydney while homeless people merely miles away slept on the street. This week we find that good honest hard working people are struggling with the fundamentals of life because the Labor party’s management is incompetent.
“The elixir of the quality of life is the price of power.
“Labor can raise its bat today. Under this Labor government electricity prices have gone up by over 50% in not much more than 3 years. That is a bigger total increase than under the 11 years of the previous Coalition government.
“It doesn’t stop there. Ill-considered investments in desalination have caused water prices to go up by 46% and gas prices have gone up by 30%.
“Last winter my mother-in-law told me that on her meals-on-wheels runs she often finds pensioners in bed, not because they are sick, but because it is the warmest part of the house when they can’t afford the heating.
“Under Labor things aren’t getting any easier and they are not going to with a carbon tax that will push up electricity bills by another $200 per year at least.
“Australians don’t need more excuses to save on power; they have plenty of reasons already.
“But it’s not just household bills that will get hit. Combined with a high Australian dollar, these price increases are hurting Australian manufacturing. Do we want to make life even tougher for them and risk having no manufacturing industry in this country at all?
“All for a plan to cool the planet from a room in Canberra.”
(click to enlarge)
Even after adjusting for inflation:
· Electricity prices have been going up 10% per year under Labor, compared to 1% under previous Coalition government
· Water prices have gone up by 9% per year under Labor, compared to 1% under previous Coalition government
· Gas prices have gone up by 5% per year under Labor, compared to 1% under previous Coalition government
Australians now owe financial institutions more than $1 trillion in housing mortgages, almost 15 times as much as 20 years ago, new Reserve Bank figures show.
The Reserve revealed that people paying off their own homes now owe banks and other lenders $763 billion – almost 12 times more than the $65 billion owed in January 1990, when figures were first compiled.
Rental investors have increased their mortgage debt even more spectacularly. In January 1990, landlords owed banks $10.5 billion, but by January this year, the figure had swollen more than 30 times over, to $324 billion.
Household disposable income also rose in that period, but it only trebled. In January 1990, home mortgages ate up just 28 per cent of our disposable income. By January 2000, that had ballooned to 66 per cent, and by January this year, it doubled again to 134 per cent.
Even in the past year, despite the global financial crisis, the debt we owe on home mortgages climbed relentlessly, up $83.5 billion to $1087 billion.
Households’ willingness to take on greater debt powered much of Australia’s economic growth from 1990-2010 but with our households now as indebted as any in the Western world, economists say that will not be repeated.
By creating ever more money (as debt, or ‘credit’ loaned to home buyers and consumers), the prices for everything are silently, relentlessly pushed ever higher.
But our wages never rise enough to match. So, we are driven ever more deeply into debt.
Now that Rudd Labor has so rapidly indebted the Federal government as well, we are in huge financial danger. There is simply no ‘capacity’ for households, or the government, to keep on spending and support the economy when another crisis strikes.
Thanks to too much debt, the only way forward is… even more debt. And we all know what happens when you reach a point where your debt is so great that you cannot pay it back.
Ever wonder why things cost so much more today, than they did when you were a child?
Here’s a simple little exercise that shows how the Reserve Bank of Australia has robbed all of us by stealth. And continues to do so.
Take a look at the RBA’s Inflation Calculator. Try it out for yourself. And be prepared for quite a shock.
Australia changed from the old imperial currency (pounds, shillings, pence) to decimal currency (dollars and cents) in 1966. So let’s take a look at how RBA-managed inflation has robbed us blind since 1966.
According to the RBA’s own calculator, an item costing $10 in 1966 would have cost you $106.81 in 2009.
Helpfully, their calculator also tells us that equals 968% inflation. In 43 years. At an average rate of 5.7% per year.
Why is this so important to know? Because – as you can easily see – inflation robs the national currency of its “buying power”. Simply and bluntly, inflation robs you and I, the “working families” of Australia.
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Barnaby Is Right 
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