Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. Have these actions really worked or merely masked over major flaws and problems? And just for fun, consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future. In what most of us view as a fast moving world many people have come to think if a financial crisis doesn't occur today or in the next few weeks it is simply not going to happen at all.
Several months ago I penned an article saying that America
had been lulled with the rest of the world into complacency as we
have kicked the can down the road. I continued that as a nation we
have yet to feel
much pain from the sequester. Not dealing with what we were told was a
massive problem has only reinforced the idea that far too much has been
made as to the ramifications of an out of control budget. Remember the horror stories surrounding sequestration
and the financial cliff? I recall one Sunday morning talk-show host
referring to them as draconian and predicting dire consequences. Sidestepping financial responsibility has been rather painless and reinforces the idea that we can continue down this path.
Thinking that we will be able to grow out of our problems is a bit
simplistic and a much overused strategy. The theory of growing your way forward is loved and often viewed
as a painless easy solution to problems because growth can mask over hard to address deeper rooted structural flaws that undermine our economic system. We often forget how interesting the times we are living through really
are and tend to think after some type of setback the worst is largely behind us. As optimism returns a feeling that we have rounded the
corner and the promise of better days ahead can easily overtake us.
Modern Monetary Theory often referred to as MMT to its many believers removes much of the
risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that
details the procedures and consequences of using government-issued
tokens and our current units of fiat money. Newly acquired tools like derivatives and currency swaps allow us to print and manipulate away problems. While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter except in the manipulated land of MMT.
This cure to past woes adds a whole new exciting dimension to economics
that eliminates any potential of failure and concern that the sun will
not come up tomorrow. However there is a major flaw in the concept of MMT that not only wounds the theory but it is its Achilles heel. What do you do when it becomes apparent the economic efficiency of credit
is beginning to collapse? This means that as more money is poured into the system and lower rates are no longer effective in driving the economy forward options evaporate. As the extra GDP growth generated by each batch of loans drops and momentum ends this become the equivalent of pushing on a string and is a sign of exhaustion.
What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. Companies have already ushered saving from interest paid on debt into the earning column and a major reason inflation remains low is they are sitting on a hoard of cash, this has lowered the velocity of money. We must remember the artificially low FED controlled interest rates are a massive one-off or onetime tailwind that is mainly behind us. When rates stop going lower or reverse the positive effect will ebb and become a major headwind. With massive government debt in many countries and the economy still weak this headwind has the potential to become devastating. The collision of MMT, social unrest over inequality, and other destabilizing factors have the potential to create the perfect storm.
Footnote; Your comments are welcome and encouraged. If you have time
check out the archives for other post that may be of interest. Below is
an article that list the 10 most crucial problems facing the world, if
you have time please take a look.