Saturday, June 2, 2012

Fantasy World of Debt and More Liquidity

The entitlement societies that have developed over the last several decades were created on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Our current entitlement societies were built on the assumption that those advantages would continue in both Europe and US, and that ever greater prosperity and promises would be sustained through debt financed consumption growth. In that eerie fantasy world, debt was to be used as a tool fueling consumption and be the catalyst to bring about ever more growth.

Now reality has raised its ugly head and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have become overwhelming. While the populations of Europe and America were led to believe the good times would never end, their core advantages in technology, capital, and productivity started to erode, and  to lag behind the emerging countries. Manufacturing jobs have steadily gone elsewhere, replaced by low skilled service jobs, this has removed the supports from our debt fueled prosperity showing it to be unsustainable.

We were told that we were moving up the value chain, while in reality the opposite was true. The debt fueled prosperity and consumption growth led many to believe that their future would be secure if they moved towards "higher value adding activities" than the emerging and developing countries. The economies we built on those false assumptions are now crashing down. Merely addressing the symptoms of our malaise as "financial problems", a tactic being tried by  leaders, central banks, and the IMF, will only raise false hope, it will not avert the economic and political catastrophe. If governments are allowed to default on their debts only the foolish and insane will choose to loan them money.  

Central banks have tried to address the situation by printing money and adding liquidity. Driving down the interest on government debt has been a key component in kicking the can down the road. This is their equivalent of a band-aid, and they have been putting one band-aid on top of another, but our wounds are not healing. In the modern border-less world we have created, bankers are finding it impossible to control where money flows, the result is akin to pouring water into a leaky bucket. Money flows into the hands of speculators, manipulators, and a over valued stock market, meanwhile the poor and many people have little prospects to earn money, their only or chief source of income is that given to them by governments running massive deficits.

For years those in charge have busied themselves looking for "green shoots", they touted that we only need "confidence", and that consumers should go out and spend. All the time they caution that austerity is not the answer and will only make things worse, the bonds and coupons of the strongest countries are yielding 0% with inflation leaving the buyer locked into a losing hand. The reward for saving and doing the "right thing" is gone. Our government centered economy  does not work, the emperor has no clothes!  Prepare for our Government and others across the world to break promises and rewrite the rules. The bottom line is that you cannot spend your way out of debt, the fat lady is about to sing!


  1. Bruce, apparently, you read very widely. I do too. I read Walter Burien and he sounds convincing. I've done my own research on the subject of the CAFR, It holds up to examination from what I've seen. If you place the CAFR money on one side and our unfunded liabilities on the other, all you end up with is a giant question mark.