It has been said that central banks can change how things look or appear by fiddling around with interest rates and printing new currency units to purchase assets. But they cannot change how things actually are.
The system of creating new currency units and lending them into the economy appears to be holding together. Stock markets have continued to rally. Bonds markets, with some exceptions, are mostly firm to bid. Property and Art prices are equally untroubled. Our financial markers, GDP, unemployment, stock prices et al tell us that everything appears to be okay. As you know I take a highly skeptical view of the economic data presented to us. I think it is mostly nonsense. Voting patterns in much of the western world in 2016 confirm that many in the electorate are equally skeptical of government data.
The election told us a lot about our sources of information. I believed that Trump could not win. I followed the election closer than most and yet I was clueless. All of the information that I had was worthless. Every ‘respectable’ media source told us that Trump had very little chance of winning. He never led Clinton in the polls and he needed to win all 7 swing states. The media failed to observe and then report how close the race was. The day before the election, the New York Times told us that according to a series of pre-election polls, Trump had a 15% chance of winning. The next day Trump won 306 electoral votes to Clintons 232. He got 32% more electoral votes than Clinton. It is too easy to forget how stunningly unexpected this decisive victory was. The popular vote is irrelevant. Saying Clinton won the popular vote is a different answer to a different question. For me, one of the most important lessons from this election was that our sources of news and fact are worthless.
Votes in elections often serve as proxy votes on the economy. America has been producing great economic statistics. Under Barack Obama the US added more than 9 million jobs taking official unemployment from over 10% to under 5%. Real wages are up 3.4%. Clinton should have been a shoe in. But the public did not buy the feel good story being told by government and retold by media. You will know from my writings that I regard the USA as just another bankrupt country. Labour force participation peaked at 67.3% in January 2000. Now it is 62.7%. Real wages are lower not higher. The data that I am quoting comes from the same government sources.
This rejection of government propaganda can be seen in many parts of the world including Europe. But perhaps just as importantly it is a timely reminder to us of how difficult it is for us to know what is really going on in the world around us. Journalist and media outlets don’t research facts and present them to us. They snatch at whatever half-baked facts that are made available to them and weave a plausible story around them. What you get is an opinion based on personally held biases, informed by nothing more than a press release.
Trump has stated numerous times that he wants to increase spending and that he wants to reduce taxes. In other words he wants to borrow more money. He also says that he wants higher interest rates. It appears that at least in the short term he is getting higher rates. The Federal Reserve increased its benchmark rate to .75%. In addition to this, the yield on US 10 year treasuries has increased from 1.6% to 2.5%.
Obama took in about $3.2tn in taxes in 2016 and spent $3.8tn, for a federal deficit of $600Bn. Trump wants to increase the deficit and jack up interest rates. Not even the Japanese would try that!
Trump could try some kind of bankruptcy or bond holder haircut. Whatever he does it will be fun to watch.
According to Reuters, Japan’s government will be spending about €793Bn this year. About one quarter of this outlay will be spent servicing existing debts. They will be borrowing another €280B in 2017. This is the Ponzi scheme that gives all other Ponzi schemes hope of eternal life.
The political machinations of Europe make no particular difference to our positions. It doesn’t really matter too much who is in power when the Ponzi system breaks down. However the impending bank bailouts are more interesting. Especially considering that the ECB continues to lend €60Bn of new money into existence every month.
The bailout of Italy’s Monte dei Paschi is actually quite important for two reasons. First it will, in theory at least, involve ‘bailing in’ some private investors. Secondly, and perhaps more importantly, it will have serious consequences for a potential bailout of the German behemoth – Deutsche Bank.
In our July 2015 report I wrote:
Much of China’s economy has been based on a state sanctioned infrastructure build out. This looks to have petered out. A slumping Chinese economy and the state inability to rescue it will have real reverberations beyond its borders.
While I can say that the USA, Japan and most of Europe is functionally bust, China remains a mystery. In the third quarter last year the Bank for International Settlements reported that China’s "credit to GDP gap" has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia's speculative boom in 1997 or in the US subprime bubble before the Lehman crisis. The IMF has issued similar warnings.
French investment bank Natixis SA estimates that China lost over $900bn in net capital outflows in 2016. Various data and anecdotal evidence point to a rush to the exits out of China. However, as stated above, China remains a mystery. The government has more power than its counterparts to arrest any economic turbulence.
On November 8, in a shock move, Prime Minister Modi interrupted Indian TV programming to announce that all 1,000 (€14) and 500 (€7) rupee notes would be scrapped immediately. These bills account for 86% of the country’s cash in circulation. 90% of transactions in India are in cash. The population would need to convert their old currency into new 500 and 2000 rupee notes at a bank. More than half of Indians didn’t have a bank account and an estimated 300m have no identification. People without ID could convert up to 2000 rupee (€28) without opening a bank account. Otherwise they need to open a bank account.
As you can imagine this has created chaos in a country containing almost one fifth of the world’s population. The government still has not enough new currency to replace the old. People have been forming lines outside banks every day. A quarter of the population is illiterate. This makes opening a bank account or transacting online very difficult. Two thirds of the population has no internet access. Even electricity is a luxury. Mobile phones are difficult to charge in many areas!
Nevertheless, mainstream media are not reporting chaos. The headline from Forbes magazine sums it up – “Not Perfect but Heading in the Right Direction”. Should we believe them? Other non-main stream sources that I have read describe India as a country on the brink of disintegration. In the course of the last two months I have read and watched more than 50 reports on this crisis. I have to say that I am none the wiser.
I don’t think that anybody considers India to be an important economy globally. But it has a huge population. Gold is changing hands at a $200 premium to world prices in Mumbai.
The private sector continues to be a very exciting source of innovation and wealth creation. We really are in the middle of a technological revolution. However the private sector is dwarfed by the debts and future obligations of governments in most developed nations.
There is an unwritten bond of trust between the governing and the governed. This trust is often stored in state institutions and instruments such as the judiciary, security forces and the currency etc. Every Euro, Dollar, Yen, Pound and Franc issued, is a debt instrument, with a compounding interest rate attached. Overtime the amount of interest and capital owed inevitably exceeds the original amount of currency issued. The shortage of money to pay back debts is met by yet a further issuance of debt backed currency. This is what has been happening since 2008.
History dictates that the Ponzi scheme will collapse, credit will contract, asset prices will crash and those few left holding real money will possess extraordinary buying power.