Tuesday, June 9, 2015

Disconnecting An Economy In Our Intertwined World

We Are All In The Same Boat!
In a recent post titled "Silly Or Delusional" I cautioned those that thought a bad jobs report or other bad news flowing out of America should bolster other currencies and weaken the dollar. Again, I put forth the idea the dollar remains the best house in a bad neighborhood or the cleanest dirty shirt in the closet, this means it is still the least worse option or currency to place your wealth. Have no doubt without the continued flow of goods from their shores such export-based economies such as Japan and China are "toast" and will further slow. As the world's reserve currency and the most liquid of all currencies the dollar has gained as faith in other currencies has diminished and central banks across the world continue to print more and more money. This is not to say I hold any illusion as to the "true value" of paper money, it is no more than a glorified IOU.

High on our mind should be the question as to whether it is possible to decouple or disconnect an economy in our world where finances are so intertwined. While the pain is not always equally shared most economists seem to take the attitude that it is not really possible to escape unscathed and avoid being pulled downward from the forces of your neighbors falling production. This becomes particularly difficult if you are dependent on them because they are a customer or supplier. It seems central banks policies have had more effect in supporting and propping up derivatives than generating real growth. The low-interest rates that propel investors into high-risk assets in search of a positive return and all the money being pumped into the system when coupled with cross-border money flows have turned the world's financial system into a global Ponzi scheme.

As the world economy has become more sophisticated the old formula of a nation creating wealth on the backs of cheap labor alone has begun to erode. Today a mix of natural resources, brains, and capital are taking the lead. Simply put, I beg anyone to show me a major country that is forging ahead and achieving growth on their own by having created the proper mix. I guarantee if it becomes apparent someone has perfected such a formula it will rapidly be copied across the planet. In recent years central banks have tried to take the lead and reinvigorate the economic landscape, this has morphed into where it has become the main driver of economic data but has generated little real growth outside the financial sector.

In many ways, the reality that we have been left to twist and spin in the wind without direction is becoming obvious. One thing is clear government has totally failed to step up to the plate and devise a strategic economic that addresses both the necessary structural changes we must make and develop long-term sustainable growth. We must question the numbers that are being presented and spewed forth from both government and other groups as well as just how relevant they are. Recent GDP numbers show a marked deceleration in growth and most likely a decline when you factor in the even more surprising rise in America's trade deficit. Today it would seem fair to say America is no longer the world's economic locomotive able to move us forward, or using another metaphor you might say that we are now all in the same boat.

To confuse issues more we must consider that the numbers and economic formulas we rely so heavily upon are flawed. This means we are moving forward on a journey armed with a faulty compass and a map that is not drawn to scale. It is important to remember the economist Simon Kuznets who created the way to determine our national GDP in 1934 told the US Congress the formula was problematic. In 1962 Kuznets again emphasized that we must keep in mind the difference between quantity and the quality of growth. He made clear a distinction exist between cost and returns, and between the long and the short run. Kuznets went further to specify we needed goals concerning both growth "of what, and for what." Other economists have agreed that GDP is an empty abstraction with a very weak link to the real economy.

 The myth that poor quality growth can be sustained or generate escape velocity and free us from our economic woes is again proving false. No matter how hard we try to forget, it is becoming more apparent that America's last big economic surge just before the 2014 elections was driven by a 10% jump in federal spending, mostly on Pentagon hardware. This "pre-election" spending was the biggest increase in spending by the federal government since 2009 when the Obama administration put in place its huge economic stimulus package. Free trade is often not fair trade, once herald as a huge job creator and as a win-win formula for growth has also proved to benefit very few at the expense of many. Also, underwhelming has been my experience with government projects such as infrastructure schemes to create jobs and carry us forward. Often these result in the public paying dearly for poorly designed bridges to nowhere. Adding insult to injury the jobs created are temporary and short lived.

Several things have become clear as the markets have disconnected and lost the ability to reflect honest price discovery. This should be crystal clear when we see the Dow Jones Industrial Average leap over 265 points and hover near all-time highs on bad news. It is little wonder many people are beginning to realize there is no safe place to hid. This does indeed leave us in a pickle, a tight spot, under a bit of duress, or simply at a point where we are forced to face the truth. Unfortunately, not taking the proper steps often causes more problems down the road. This brings to mind the words of Winston Churchill who said, "The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close. In its place, we are entering a period of consequences".  My point is, we too are entering the place where we must pay the piper.

1 comment:

  1. Banks do not print money, they lend it into existence as debt. No debts = no money