Thursday, January 15, 2015

A Bridge Over Troubled Waters, How Safe Is This Bridge?

Is Getting Across Based On Hope And Prayer?
I would be a lot more excited about what has been recently herald as good economic news if I felt it was built on a solid and stable foundation. Using the analogy of a bridge, if you are unable to get to the other side you often have a problem. A plank breaking under your feet may spell a problem and the collapse of the total structure a real disaster. Planning to cross a bridge and getting to the other side is not the same thing. If obstacles develop in the process it is possible the goal may never be accomplished.

The rate and ease at which traffic flows across a bridge can change dramatically if faith in the structure is lost or becomes an issue. Much of how society reacts is based on faith in its institutions. A very serious concern should be that many economist have lost or discounted the strong connection between savings and the important role it plays in society. This has skewed and undercut the core beliefs of many hard working people responsible for driving the economy. It is becoming apparent that higher interest rates produce a higher quality of growth. Low interest rates coupled with easy money policies increase risk and encourage a misallocation of funds by investors searching for higher yields.

How people tend to view the economy is based on the performance of prior years. This benchmark has become ingrained in us, and we always expect economic improvement. If last year was good but this year is no better the momentum is gone. Remember the quality of this growth is just as important as the quantity or the fact will come back to haunt us. We must not be distracted into thinking the long-term ramifications of an unsustainable economy built on debt and government deficit spending has much of a future. With a large number of people unemployed and living on government payouts the burden on society will become to heavy and much like the bridge it will eventually fail.

In recent years what have been considered economic norms have been altered and rules have been changed to shore up the crumbling financial foundations of countries across the world. In the past the cost of government normally included a reasonable market rate or carrying cost. This was also known as interest on the debt. As of late savers have been thrown under the bus. The free market has had less influence in determining the rates nations pay on their bonds and central banks have taken the lead. If this is not contained it leaches over into the real economy poisoning both growth and stability, and that is happening today.

Over past decades government's increased role in the economy almost guarantees that deflation will not become a major issue. I consider most of the major countries of the world to now have government centered economies and if you consider what a government employee receives as a salary as a "benchmark" wage it becomes difficult to envision a major drop in compensation to other workers. This would not be tolerated by society as non-government workers would simply stop working or seek more support from government and institutions to level the playing field. This seriously reduces the possibility of deflation, just yesterday the White House announced plans for another "stealth wage increase" in the form of a new law granting workers paid sick time.

It is important to remind ourselves it hasn't always been this way, but this can be difficult because when we look back at history the vision we see is always distorted by who tells the story. Currently, the media controlling and spreading information about the economy is linked at the hip and intertwined with the government. As we cross this bridge over troubled waters we should have no illusions that the path is sound or safe. After years of extraordinary intervention by both central banks and governments we have an unstable structure built in haste and untested. A structure built for their short term benefit and not for the people.

Today the economy of both America and the world is being forced to undergo a major transformation as mankind begins to mature. Over the last two hundred years we have filled the world with our ever growing population and shortened the distance between lands that were once far apart. These factors of change have stimulated economic growth in a positive way, but at some point devising an economic system that is sustainable long term has a great deal of merit. This would be much easier if governments stopped squandering and wasting the low hanging fruit. Optimism of this occurring should be contained to avoid major disappointment.

 Footnote; Please feel free to explore the blog archives and as always comments are encouraged. This article ties together several post I have made over the last few months. More in the article below concerning how currency markets are beginning to show concern about the future.


  1. "Today the economy of both America and the world is being forced to undergo a major transformation as mankind begins to mature. Over the last two hundred years we have filled the world with our ever growing population and shortened the distance between lands that were once far apart."

    The thing that's really irritating to me is that we could have financially worked our way through the obvious trend of the West having a declining birth rate - namely, by paying down our national debts. Ie. Whether a country has ten million citizens or twenty million citizens, its debt level stays the same - so, if the population drops by 50% over a generation or two, our debts need to be downscaled as well so as not to overwhelm the remaining population with an unsustainable debt.

    For years, things have always grown because our populations always grew - we could always grow out of it because our tax base was increasing with the population.

    If they - who ever they are - want to stop over-populating the world, okay, fine... but you cannot exponentially expand the debt while at the same time staring square in the face of a declining population. You have to reduce the tax-burden to reflect the smaller population.

    I am no conspiracy bug, but I tell you, in the face of what we have witnessed in the past 6 or 7 years, you kinda have to believe that our betters fully understand the long term implications, and know that this vast increase in debt in the face of declining populations means certain bankruptcy for most countries around the globe in the coming decades... and the only way out will be to have a global reset and a new financial system.

  2. Jeb, thank you for your comment, I agree we have missed many opportunities to correct the problem of growing debt. I also fear we are working to a reset, and that it will be fostered upon us in a way many people find very unfair and damaging.

  3. I also think a reset is coming in the form of the IMF SDR.

  4. You guys know double entry accounting, right? Those govt liabilities are someone else's asset, to the penny. Thus, an aging and/or contracting population might require MORE govt liabilities, not less. And as long as they are denominated in the debtor's currency, solvency is essentially a non-issue. The constraint is inflation, which is nowhere in sight, despite what look like "high" levels of debt.

    Also, have you ever heard of a corporate bond analyst comparing a company's debt level to its income? Normally, you compare debt levels to assets, and debt service to income. We should do the same when looking at govt debt. And by that measure, the U.S. is mighty far away from problematic debt levels, unfunded liabilities and all.

  5. I seriously beg to differ, especially when you go into including "unfunded liabilities and all." You may believe what you want, but I caution you if you have any thoughts that the government or central bankers are anything resembling transparent. Both have been superbly entrepreneurial when it comes to Ponzi schemes or the art of pseudo-economics hocus-pocus that has allowed the current situation to develop.

  6. Please note; To those of you have found my article interesting I have just published an article that focuses on exploring why the value of things you own and control are even more important than whether we encounter inflation or deflation. The article was inspired by the comment Art made, you will find it below or as the latest article listed on the right side of the page.

  7. Definitely one way of squaring off your debt is to account for your assets. However, in the current economic scenario, by raking up trillons of dollars of debt, what quantifiable - verifiable - tangible assets have we created in the process? In fact, QE turned out to be nothing but buying someone else's DUD assets by throwing your real - hard - asset, CASH!!! So, SPEAKING SANELY, your debt should result in corresponding asset. At least that is what financial prudence would like you to do! Which, we did not.

    Any by the way, this real - hard - asset, CASH, that we used to bail out sunken banks, should have been morally used by these banks in lending for building/creating real assets - like, manufacturing, creating jobs, producing goods, offering services.

    But thats for ideal world. What happened instead was upon being bailed out, these banks partied - started investing in commodities, raking up their prices, causing inflation in rest of the world, making putting up plants ever more costly, etc. The result was that WALL/MONEY STREET made windfall profits, while, MAIN STREET - worldover, bore the brunt of inflation eating away their savings, if any!!!

    In nutshell, DEBT was NOT put in to any ASSET CREATION that should have generated a steady INCOME which would have, in turn, serviced our debt! In stead, DEBT was used to generate SPECULATIVE INCOME!!! Thats where the chain lay broken.

    As far as currency part is concerned, since USD is the world's reserve currency, FED printing unabashedly $$$ & giving it away @ 0%, further fuelled this speculation in commodities & incentivised such activities. In fact, FED did not take adequate steps to prevent such a thing is surprising, to say the least.

  8. Deflation is not going to happen because government employee wages are a bulwark? What nonsense is that? Servicing debt is deflationary, and debt is beyond the pale. Demand decreases when money goes to pay debt. Yes, savings are wiped out by government policies but no deflation? Wrong - what are you seeing now in commodities - it is not just falling demand it is money going to service debt. You can kiss those government jobs goodbye when the S hits the fan - as it is now well underway...

    1. While I hear your argument I beg to differ. It is possible that many debts will never be repaid, rules will be changed, and we will move on. If this is done as money flows into tangible property and out of paper and promises all bets are off.