By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute
Can runaway booms descend into busts absent monetary tightening by the world’s central banks? I pose this question in the wake of an extraordinary exchange on January 22 at Davos between Bloomberg editor-at-large Tom Keene and Bob Prince, co-CIO of Bridgewater Associates, in which the latter posited the notion that “we’ve probably seen the end of the boom-bust cycle.”
It is striking that one of today’s titans of finance has given us what appears to be another version of “this time it’s different,” which the famous investor Sir John Templeton once described as “the four most expensive words in investing.” My own basic take has been that the U.S. economy over the past three years has been weaker than the underlying quantitative data suggests and that there is ample historical precedent to suggest that credit cycles can end, even in the context of a low interest rate environment, notably via a deterioration in the quality of credit itself, as the great economist Hyman Minsky once explained in his financial instability hypothesis. The truth is that for decades, the U.S.—indeed the entire global economy—has been characterized by an economically unsustainable model in which larger and larger portions of GDP gains have been going to a smaller number of people at the top (who also have a higher propensity to save than people with lower incomes, which means the “trickle-down” effect is minimal to nonexistent). Wage gains also appear to be leveling off, which could have ominous implications for sustainable future growth. Yet many investors like Prince seem to accept today’s buoyant asset bubbles as a given in the absence of a concerted effort by the central banks to “take away the punch bowl just when the party gets going” (in the famous words of former Fed Chairman William McChesney Martin), via higher interest rates.
In the words of Bob Prince (quoted in Doug Noland’s Credit Bubble Bulletin):
Bob Prince…: “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn—wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom-bust cycle.”
Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guesstimates of what central banks will do?”
Prince: “That won’t play much of a role nearly as it has. You remember the ’80s when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [BPS Fed rate increase], 25 minus. We’re not even going to get 25 plus or minus and we got negative yields. That idea of the boom-bust cycle—and that history that we’ve been in for decades—is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease—nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”
Prince goes on to acknowledge that “cycles in growth are caused by the boom and bust in credit: Credit expansion, credit contraction,” but makes the assumption that “those expansions and contractions of credit are largely driven by changes in monetary policy.”
That may have been the case for much of the post-World War II period, but if we look back further, there is evidence to suggest that Prince’s hypothesis is another variant of the dangerous “this time it’s different” truism.
Why have so many people gotten this wrong?
The misconception probably stems from a famous statement made in 1997by the MIT economist Rudi Dornbusch: “None of the U.S. expansions of the past 40 years died in bed of old age; every one was murdered by the Federal Reserve,” and this was more or less true of the U.S. economy from 1946 until the 2000s.
But then economic dynamics changed. Yes, the Federal Reserve raised the Fed funds rate by 400 basis points in the mid-2000s, but it reversed almost all of that move and began opening the floodgates of bailout financing by early May 2008. Nevertheless, the U.S. and global economy fell off a cliff in the second half of that year as global financial fragility erupted into a full-blown global systemic crisis to a degree unseen since the 1930s.
Why was it different that time? The reason is that there had emerged myriad asset bubbles and a related unprecedented rise in private indebtedness in the U.S. and other economies. These supports to cyclical demand expansion were unstable and unsustainable. In other words, these were conditions very similar to those that prevail today.
Hyman Minsky and Irving Fisher described how once the debt “disease” goes metastatic there will come a “Minsky moment” when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, the Fed is powerless, no matter how much they want to bring the punchbowl back.
The U.S. and much of the global economy still have quasi-bubbleized assets and very high levels of private (and quasi-private) indebtedness. Bob Prince and many of his investment cohorts appear to remain oblivious to the threat of a Minsky/Fisher debt deflation dynamic, which the Fed and the central banking fraternity can do little to stop, if one is to judge from today’s current buoyant stock markets.
There is yet another way in which global economic growth can slow or even falter this time around, which I have discussed before (in the context of China’s economy): This thesis dates from “a very old idea from business cycle theory prior to the Second World War that private sector over-investment can become so unsustainably high that even without a fiscal/monetary shock, there could be a fall in autonomous investment. Once that begins,” a weakening edifice of highly suspect and marginal lending activity “can lead to a cumulative economic contraction even if interest rates plummet and monetary conditions ease.”
This old idea from the history of economics has largely been forgotten due to changes in the fads and fashions in academic economics. But there are grounds for thinking it is an idea whose time has come once again.
Globally, we have a glut of consumer goods, much of it emanating from China, but given increasingly weakening demand from an economy that is growing more and more skewed to the top 1 percent, we have fewer consumers able to buy it. Moreover, in China itself, modest fiscal stimulus measures undertaken at the end of last year could well be overridden by the onset of the coronavirus, which risks undermining the impact of these recent upticks in infrastructure investment, along with the potential benefits accrued from the cessation of the trade war with the U.S. government.
It follows that the world has a condition of over-investment that is unsustainable. This means there will be less investment to produce additional goods. Much like a rickety building on shaky foundations, therefore, a decline in global autonomous investment threatens to plunge us into a global economic slowdown, independent of actions by the global or national monetary authorities.
Are there any signs of this? Over the past year, global growth “recorded its weakest pace since the global financial crisis a decade ago,” according to the International Monetary Fund. This, despite buoyant risk asset markets, credit and money growth in key economies well in excess of nominal GDP, super-easy monetary policy everywhere, and an end of the fiscal restriction of recent years. Therefore, we cannot attribute this surprising softening to a “murderous Fed” (to paraphrase Dornbusch) or its cohorts in the global central banking fraternity. It is, however, possible to posit that we may be seeing a cresting of excessive global fixed investment, which eventually could cause a global recession. There is no question that our central banks and governments will try to do “whatever it takes” to postpone such a decline.
The point is that, relative to the post-war business cycle patterns in most people’s minds, the end of this global expansion does not need a “murderous Fed.” Excessive risk asset valuations and high indebtedness, even in a world of low prevailing interest rates and unprecedented central bank intervention, can nonetheless lead to negative financial and economic dynamics. And given excessive global capital spending in a world where the warranted rate of growth has now downshifted, an autonomous decline in excessive investment can do the same. Add to this the increasing risks brought about by the spread of the coronavirus, and you’ve got the ingredients for an incipient global economic calamity.
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Here is a novel idea. The Fed has blown a bubble in the top 1 percent. They have deflated and attacked Mainstreet.
Why not give Mainstreet the cheap money and charge Wallstreet what Mainstreet pays?
I like that. A permanent inverted yield curve. ;-)
not even facetious – it could be the only thing that will work.
But that’s the problem: it will work. And the party on the upper deck will stop.
So logically you need the Bern then?
Cant have that, then you might actually find God and no longer be distracted by the devil.
And do it as a gift, not a “loan”, and you have the UBI.
Better, since all fiat creation should be for the general welfare ONLY then let’s REQUIRE that all fiat creation beyond that created by deficit spending for the general welfare shall be in the form of an equal Citizen’s Dividend.
So let’s assert a RIGHT as citizens and not depend on gifts, as if equal protection under the law were optional.
People who don’t have money don’t spend money. It’s not really a difficult concept. Still, economists want to reinvent the wheel every so often, just to justify their existence, I suppose.
People have spending habits and lifestyle aspirations. So do companies and governments and non-profit institutions. If they don’t have enough money, they can borrow.
Historically low interest rates make this behaviour all the more attractive. The crunch comes when borrowers reach their limits, or when lenders ask for repayment, or when borrowers can no longer make interest payments despite low rates.
The author is spot on. Surely many economists would agree. If Mr Prince truly believed in the end of cycles he would be deeply in debt and fully invested in illiquid assets. Is he???
yes, let’s all invest in liquid assets despite the fact that we are drowning in them.
> People have spending habits and lifestyle aspirations.
Try being unemployed/precariously employed for a while. You’ll never spend money again.
Well, sometimes it is the opposite really. When the entire family never, ever has enough to pay for the necessities, it is so hard to save because one never has had the experience of of saving for anything. Got some extra change at the month’s end and their are not cut off notices? OMG! Let’s just get that sofa. Quick, before something happens! And why not?
The lectures about personal responsibility especially financial, by the well-off can be a bit jarring. This is not to say that people do not have destructive habits, but when their often chaotic financial reality extends, at best, to a few months demanding long term, multi year, even just months, planning and consistent efforts for those hopeful benefits can be unrealistic, even unreasonable.
Here, the awful part is that all the liquidity, the financial resources, are all being parasitically consumed or just sequestered by the already overly wealthy. These resources are often acquired with little, or no effort, and for doing nothing constructive; denying the economic resources or fuel to those who have nothing means that they cannot create anything of economic worth.
Financial hoarding means resource destruction, which many of the “job creators” and “Lords of the Universe” do with great skill and gusto. It is a game really to them.
The opportunities to get, create, or even maintain the services and products, even the ability to not only get an education, but also have a stable enough existence in shelter, food, clothing and other needs so that they can be productive, be it in finger painting, coding, preaching, or in biotechnology. Or just sitting at the bar drinking and bull*******. All are denied in hunting the next crappy meal or panicking over next week’s rent.
I agree with this: when you are in financial fire straits it is difficult to plan ahead. Your expectations whittle down to what many in calmer waters would not even give second thought, but that feel like important victories or losses.
By all accounts consumption is destroying the biosphere.
How do you get consumption to decline without affecting the privileged lifestyles of the elite?
Well all you have to do is separate the economy in two.
1 – The real, physical consumer economy (deflation for the 99%)
2 – The financial economy (free money for the 1%)
The two cancel eachother out for a perfect balanced economy. Yea!
Do you understand that words are abstractions that firstly describe material things and actions? Words are not themselves things or substantial actions.
In the same way, money is not a thing. Money, like words, represents things or the actions its holder can command/buy. Money is an abstraction of things and actions but not the thing itself.
When money is made from money as in investment, banking, insurance and real estate [The FIRE Sector] no more things are created for that money to represent. Therefore only the money [balloon] is inflated by those profits. They don’t represent real growth of the economy. Financial gains are losses to the real economy of exchange of material goods and services.
Ultimately, FIRE Sector profits must lead to economic collapse, if not reversed, by taxation and redistribution for instance. Someday we won’t recover from one of the busts at the end of the booms that preview the Wall St Ragnorak!
Yes, “Wall St Ragnorak” is a metaphor, an abstraction, and not the thing itself. I say this to clarify it for economists and other fools.
I learn so much here every day!
In Norse mythology, Ragnarök is a series of events, including a great battle, foretold to lead to the death of a number of great figures (including the Gods Odin, Thor, Týr, Freyr, Heimdallr and Loki), natural disasters and the submersion of the world in water.
submersion of the world of water. Sounds positively coastal…
Indeed, well said.
I think another possibility is that the ‘economy’ of money is being decoupled from the economy of the actual production of useful goods and services. Money is ultimately a fiction – although a powerful and potentially useful one if it is used a medium of exchange for real things, and to steer investments to productive enterprises and to punish failure – but ultimately the government can simply force the financial economy to boom no matter what happens in the real world, because finance is just ink on paper/bits in a computer. Of course, what happens in the real world as this occurs might not be to everyone’s taste…
“But,” asked Clinton-Grant, “why can’t we just buy some more ships? How much does an interstellar transport cost? A trillion dollars? I have sextillions in my accounts alone. I could buy a hundred ships, surely.”
“No,” said Cheney. “We don’t have the capacity. All the money in the world won’t buy you a single ship.”
“It’s like this,” said Draghi. “Suppose there are two apples, and you have a dollar, and I have a dollar. We each get an apple. But suppose that I print a million dollars. Now I can outbid you, and I get both apples. But I can’t get a million apples because they don’t exist. Our finances give us control, but they can’t make real things out of nothing. If Cheney says that we don’t have the physical ability to construct new ships in time, then we don’t. Period.”
– From “Splendid Apocalypse,” Timothy J. Gawne, Ballacourage Books, 2015.
This is exactly Stephanie Kelton’s point with her “everyone gets a pony” hypothetical.
https://www.latimes.com/opinion/op-ed/la-oe-kelton-pony-for-all-20170929-story.html?_amp=true&__twitter_impression=true
Do the Davos, or insert name here, crowd have unlimited appetites for personal and family accumulation? After the nth house, car or whatever, what pleasure do they derive from the boodle or personalized Bezzle? Or is pleasure the wrong emotion? They stash away plenty to allow dynastic continuity, but can there ever be enough for Jackpot insurance? Some clever agents are working on more services to sell for exfiltration and ground control for that flight capital.
Uruguay, you say. Hmm. Wonder how much the bunkers are there? Or was that Paraguay? New Zealand has been erecting non-price barriers so now less attractive. Do they have good wi-fi?
Personal and family accumulation is secondary once the greed-driven obtain enough to meet their needs. Power is the driver here. As was said during the Nixon days (might have been said before many times but that is when I first heard the concept):
“Power corrupts, and absolute power corrupts absolutely.” The emotional needs of the corrupt are power, power and more power. They see themselves as defining what is right in the world, which “coincidentally” happens to align with their interests – very dangerous.
Empathy is for suckers.
It’s power, but the amount money is also a way of keeping score. These people are competitive.
It’s power, but the amount money is also a way of keeping score. These people are empty
just a thought
Power is addicting. It is an addiction. The root of all addictions are founded in spiritual issues — issues of pride and dishonesty. Issues of personal fulfillment, and self esteem, and having “enough”. Issues of gratitude for the blessings of life which all humans share. I could write volumes on the subject, in my volunteer work as a counsellor. I have even had some of the upper class tell me this, that it is a sickness they cannot escape from.
Quoting Nietzsche: “Just see these superfluous ones! Wealth they acquire and become poorer thereby. Power they seek for, and above all, the lever of power, much money—these impotent ones!
See them clamber, these nimble apes! They clamber over one another, and thus scuffle into the mud and the abyss.
Towards the throne they all strive; it is their madness—as if happiness sat on the throne! Ofttimes sitteth filth on the throne—and ofttimes also the throne on filth. “ (Also Sprach Zarathustra, The New Idol)
“These impotent ones” Is that hitting a nail on the head? Perhaps some of what is being discussed here is about the substitution of rising wealth to replace falling testosterone.
Well, Pfizer came up with a less socially corrosive remedy for that – little blue pills.
More generally speaking this is a really insightful and thought provoking article. Thankyou.
And maybe this “this time it is different” BS is more a case of the one percent saying “nothing to see here” so as to avoid panicking the markets long enough to cash out their often ill gotten gains and quietly head for the exits.
I think its more about having power over oneself, and in order to do that, one must know oneself. Ever notice how the elites seem to be totally out of control in their personal lives, in some way? Epstein comes to mind… they desire power over others because they have none over themselves.
Sounds a lot like Fukuyama’s Hegelian ideas working their way into the world view of some oligarchs. It is not surprising that such entitled people would adopt End Times outlooks which naturally place themselves as the cherry on the sundae of what amounts to a mapping of Christian eschatology onto finance.
I remember my disappointment when reading Stephen Hawking taking that view on astrophysics; possibly his ALS would explain wanting the End Times of physics to be nigh, pitching the trendy GUT back then.
Getting back to Davos, I guess it is just a reminder that the rentier class is the Problem, in spite of them calling themselves the Solution, and every time we have a gathering of the foxes to seek a better security system to guard the henhouse, we should not be surprised by the brainstorming outcomes.
There could be a similarity to Battered Wife Syndrome, but that is probably a metaphor jump. Somehow we are addicted to relying on our abusers to lead us economic good times.
The Davos’ attitude is disconcerting because they actually think (I assume) that they have trained the Fed to finance them. Feed me Seymour. Nothing to change the way we operate financially comes out of their conference – just maneuverings to maintain their financial position. They are in deep denial unless they can come up with a new plan; a plan to spend credit for a good purpose. Yes they are looking at the GND seriously (they pretend) – but only as a means to their old worn out ends. That, in fact, will be self defeating. If the Billionaires think they can profit from a devastated environment they’ll just wind up eating cake. We need a cause, an honest cause; and a dedication to a goal. Billionaires making big profits from taxpayers, aka central banksters, is not a good cause. There can be no “anticipated growth” in cleaning up our mess unless we intend to make more mess perpetually. That does in fact sound very Davos, doesn’t it? Faux GND.
And the never-ending question: How is it justified that someone/institution makes a profit on interest charged for credit? That hard-core “capitalist” idea sits at the very center of the whirlpool. Whether the credit is offered for decidedly frivolous purposes is beside the point – in fact the only way this scam works is to promote frivolous purposes. Exponentiating our dilemma. So here’s another question, what does a frantic billionaire do in a state-run command economy?
Bribe those in power. Or be quietly “disappeared”.
“No more boom and bust”
Gordon Brown used to say that a lot in the UK before 2008.
The Conservatives managed to pin the GFC on Gordon Brown after 2008.
Quite how he caused a global financial crisis, I have never been able to fathom, but it seemed to work.
New Labour were out, and the Conservatives were in.
This makes complete sense, yet seems incredibly hard to grasp for many people. We have the supply siders controlling the mainstream discussion (includes also Merkel and german ordoliberals with their ‘it’s the only way’ intellectual absolutism), because this quote justifies different policy only if you agree with the role of demand in economy.
Funnily enough European Central Bank is trying increase inflation and economic activity by forcing in money to the supply side and continuosly failing. I wonder if they have realized there how the popular quiz about insanity goes:
“Insanity is doing the same thing over and over again and expecting different results.”
I was thinking of using that insanity quote myself. Spot on.
Allow me to modify it a little: “Sanity is doing the same thing over and over again when it earns you millions or billions regardless of the results.“
But, what if the Fed continues to inject hundreds of billions into the overnight repo markets, or “Not quantitative easing” as Powell put it? There is no democratic or government oversight into this (I understand pre-2009/ Dodd-Frank there was some government involvement). The fed can at will release billions into the banks to “maintain liquidity”. How long can this (paired with perpetually low interest rates) prevent the bust cycle for?
For all the bears out there, the Fed can keep the market “irrational”, longer than you can stay solvent.
I hope you’re wrong. By inflating the repo market the Fed is building a house of cards. Isn’t the idea that the Fed can keep the market “irrational,” longer than you can stay solvent,” another variation of “this time it’s different”?
I t would seem like at some point that money has to enter the real economy, and when it does, inflation…
I wish it would enter the real economy, but nay the neofeudalist, debt peonage architecture sucks up the lower class dollars faster than they can trickle down. Hence why we see pervasive asset inflation (stocks and yachts) but a loaf of bread hasn’t inflated much. I concede that much inflation is hidden in crapificafion (smaller carton of ice cream, planned obsolescence, etc.)
What, like inflation didn’t already happen?
Post ww2, including 2008, real shortage of workers, e.g. building homes, caused wages to rise, or wage inflation dreaded by fed, which then raised rates, causing unemployment (especially home builders), recession, and falling wages.
But this time no shortage of workers, no wage growth, little gdp growth, low rates for decade, resulting in housing shortage, homelessness, and wealth transfer from workers to. 1% rhru low wages/ high asset prices. Ideal for the rich.
But low wages means low spending and profits. Many loss making companies propped up by low rates. But even so many oil patch corps already going under, some for second time, so banks and others less willing to loan more, more bankruptcies.
Investors and banks stop reaching for yield when near term risk of bk gets too high.
Once leverage gets high a modest triggering event might initiate a contraction that cannot be stopped by more liquidity bc confidence is lost. Leverage has never been higher, world growth already low, and Coronavirus is not a modest trigger, its an out of control sledgehammer. Certainly in China, and likely has already spread to countries without the capacity to contain it. Thailand has already said they can’t.
Bear in mind that China was the engine that single handedly pulled the world out of recession in 2009 thru massive infra investment… not this time. Granted us is long overdue to fix our aging infra, but we are not likely to act, and even if we did it would not begin this year. Certainly Eu, gripped by bankers fondness for austerity even more there than here in us, will not do anything useful.
And the us banks most exposed are not big Wall Street but second, third tier, meaning fed won’t save them, FDIC will take them over, sack mgmt, shareholders get nothing, and give them to solvent banks. So this lot is much faster to shut off credit lines than in 2008.
Apple shutting down China op, will have big profit hit both bc no China sales and loss of supply chain. In recession, who needs a new phone?
We’ve had over 11 years of a rising primary trend in the prices of the stock market indexes and over 30 years in the bond market, a period that has coincided with the rise of extreme economic inequality. The mechanics of the monetary feeding tubes into the financial markets that have been used to maintain and raise financial asset prices and concentrate wealth in ever fewer hands would be useful for voters to know. Among other questions that arise is whether the Primary Dealers are being required to use proceeds from the Federal Reserve Bank of New York’s open market operations to buy stock index futures or other financial instruments? Further, what roles do computer algorithms and exchanges now play in driving up financial asset prices? What are the present forms of communications between the Fed and the Primary Dealers? Why do the Primary Dealers have seats on the board of governors of the Federal Reserve Bank of New York? What is the legislative basis for the Fed broadening its dual mandate to encompass preventing financial distress among large shadow bank financial intermediaries? Why has the Federal Reserve been granted bank regulatory powers? Should the Glass-Steagall Act be reinstated? Why isn’t price discovery in markets being allowed in a system that ostensibly uses markets to drive policy?
I have also been impressed by the sheer magnitude of and lack of public attention to the increase in the account balance in the U.S. Treasury’s General Account at the Federal Reserve. What are the reasons for running a TGA account balance at a current level of ~$450 billion when we need infrastructure upgrades, funding of public education, improved public healthcare, programs to address climate change and homelessness, etc.?
Based on the dramatic decline in the velocity of money, the supposed “Wealth Effect” from rising financial asset prices appears in reality to be virtually nonexistent. But it also appears to me that the system is reliant on rising financial asset prices to fund many public and corporate pension plans and individual retirement plans, so it’s important to be careful IMO. Further, to what extent are global reserve currency considerations, specifically global liquidity, driving monetary and markets policy, and are they compatible with domestic needs?
Lotsa good questions.
Need a treasury sec to appoint a not dependent on wall st or private cap as fed chair for starters. Redirect fed research towards Keene, Minsk etc. then when congress balks at raising ceiling to fund congress mandated programs, deposit twenty 1T platinum coins with treasury, now both fed and treasury books are balanced. Then borrow or pay down debt as needed to adjust liquidity.
Or maybe get marginal rates back to where they were in Reagan years to reduce inequality, ‘pay for’ m4a, infra etc first to reduce inequality.
I have been trying to figure out a way to communicate what you put so well.
Its like fighting the mafia. Doesn’t matter what I do they keep throwing Uber money.
This is a huge conundrum. How to insulate people’s assets while making the necessary changes to the system. Perhaps something like the FDIC? I don’t know how that would work, given it’s much more complex than simple bank deposits. But anything is doable. I’d love to hear more on this.
Interesting proposal, Dan. Thanks. Perhaps with an expanded legal mandate and source of funding comparable to that being discussed here, the Pension Benefit Guaranty Corporation could serve this purpose. Just a thought.
My scenario is: Bernie gets elected, infrastructure spending and Green new deal ensues, incomes go up, the real economy recovers, equities stabilize due to improved fundamentals, and pension plans 1) are fully funded and 2) payouts depend on real yields again.
Then we’ll look back and wonder: why didn’t economists and policy makers do this sooner? What were we afraid of?
yeah that will happen (sarcasm off). My prediction, if Bernie gets elected (a big if) what you see happening to Trump gets taken to a level you could never imagine. Russia Russia Russia will be childs play for whats coming. And thats if he actually tries to do some of the things he says he’s doing. What people here and on other sites fail to understand is that the people that rule us, don’t like you. They know best, they’ve done best, and you will appreciate them and the crumbs they give you. These people will not change until someone punches them in the mouth.
The bankers fill your economy up with their debt products and it crashes in a Minsky Moment.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
How is the US economy booming in the 1920s?
It’s booming on borrowed money, where bankers are loading the economy up with their debt products leading to a crash, the Minsky Moment
.
How is the Japanese economy booming in the 1980s?
It’s booming on borrowed money, where bankers are loading the economy up with their debt products leading to a crash, the Minsky Moment.
How are the US, UK and euro-zone economies booming before 2008?
They are booming on borrowed money, where bankers are loading the economy up with their debt products leading to a crash, the Minsky Moment.
How is the Chinese economy booming after 2008?
It’s booming on borrowed money, where bankers are loading the economy up with their debt products leading to a crash, the Minsky Moment.
The PBoC saw the Minsky Moment coming unlike the BoJ, ECB, BoE and the FED.
How did they do that?
Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
https://www.youtube.com/watch?v=1WOs6S0VrlA
The black swan flies in under our policymakers’ radar.
They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
How can bankers shift their debt products without crashing your economy?
Bank credit effectively moves future prosperity into today.
You spend the loan today and pay it back in the future.
Banks are not financial intermediaries as most policymakers think.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
The idea is that you use bank credit to increase the productive capacity of the economy and grow GDP.
Business and industry can use bank credit to expand today, and then pay that money back in the future. It enables the economy to grow much faster as business leaders don’t have to wait until they have the money to expand.
The repayments won’t be a problem when GDP grows with the debt.
The UK:
https://www.housepricecrash.co.uk/forum/uploads/monthly_2018_02/Screen-Shot-2017-04-21-at-13_53_09.png.e32e8fee4ffd68b566ed5235dc1266c2.png
Before 1980 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)
Debt grows with GDP
After 1980 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)
Debt rises much faster than GDP
2008 – Minsky Moment
After 2008 – Balance sheet recession and the economy struggles as debt repayments to banks destroy money. We are making the repayments on the debt we built up from 1980 – 2008.
The idea is that you use bank credit to increase the productive capacity of the economy and grow GDP. SoS
The current banking model is an obsolete relic of the corrupt Gold Standard now that fiat is (as it should be) inexpensive (think Tally Sticks).
So there’s really no excuse for government privileges for depository institutions since we might easily have the actual lending of fiat itself between EVERYONE (with the banks as loan brokers, if desired) in the private sector and not just between banks.
I took Chuck Prince to mean something a little different. The Fed’s room for maneuver is gone. So the idea of a Fed induced cycle is gone. It might well be the case that the Fed is terrified given its lack of “ammo” that this cycle cannot be allowed to end. Whatever it takes to prevent a cyclical top until the fiscal policy cavalry arrives.
Sadly, as is already noted above, not all cycles can be kept alive indefinitely. Maybe this one just died on Friday.
I dunno — from where I sit, they’re looking at the wrong thing altogether.
The era of monetary policy’s supremacy is over. From now on, fiscal policy is where it’s at …
From now on, fiscal policy is where it’s at … eg
Except government privileges for private depository institutions greatly enhance their ability to compete with fiscal spending for real resources – but not for the general welfare but for the private welfare of the banks themselves and for the rich, the most so-called “credit worthy”.
You can follow the structural changes since mid-century. With wages flat and no longer linked to rising productivity, consumers had to make up the gap by increasing employment and/or increasing borrowing. Spending in the 1980s was fueled by women entering the workforce. The daycare center child abuse panic was an obvious symptom. Spending in the 1990s was fueled by rising stock prices that loosened the venture capital spigots and encouraged retail investors. This meant more pay until the IPOs collapsed. It also led many to early, and often short lived, retirements. Spending in the 2000s was fueled by rising house prices which provided collateral for borrowing. We know how well that worked out.
In the 2010s, we saw one of the weakest recoveries ever. Yes, the venture capitalists were spending, but they were terrified to go all the way to an IPO lest an accountant see their numbers. They are selling to other large investors, not the retail investment market which no longer exists. (It’s so bad that brokers aren’t charging for retail trades.) Interest rates may be low, but credit is no longer available. Consolidation means that there are no local merchant bankers – its all centrally planned, – and the big institutions only deal in large sums and well known brand names. If you want a loan for less than $10M, good luck with that. The government could borrow to make up the shortfall, but wouldn’t for religious reasons.
There really wasn’t all that much to drive a consumer society in the 2010s.
If the BLS is to be believed, roughly 50% of American households spend more than they earn. This is like one of those black market jokes set in Eastern Europe under communism, except it is in an official US government publication. Maybe some economist can explain how this works and what it means for the long term.
When I see statements like Prince’s “we’ve probably seen the end of the boom-bust cycle”, I start looking at assumptions. I think he would be correct if everything is as it has typically been since the 1945, but I don’t believe that is the case.
1. Inequality. We are currently in a period of inequality (e.g. Gini coefficient) that has only been achieved in the late 1920s and during the Gilded Age is the 1870s before monopoly-busting kicked in. So to posit that today is like, say the 1950s, is assuming that inequality doesn’t matter economically or financially.
2. Financial Regulation. The first few decades after the Industrial Revolution had economic and financial measures that looked like an oscilloscope. Those oscillations continued until the regulation of the New Deal got put in place in the late 1930s. Then they became more dampened and less frequent. However, the big push to deregulate in the late 1990s quickly restarted big oscillations.
3. The Fed. The Fed got put into place in 1913. Big oscillations continued to occur until after the New Deal financial regulation was put in place. It was pretty quiescent overall until inflation got out of hand and Volcker squished it. Then it was largely quiet again until the 2008 financial crisis. LTCM almost blew a lot of things up, but that got stopped. Even the dot.com crash didn’t do too much beyond off-the-wall tech stocks. However, complacency allowed the 2008 crisis to nearly turn into 1932. Sharp recoveries from troughs like that generally occur for several years, so we are really using the relative quiescence of the past 3-5 years as proof that we have killed the boom-and-bust system. That appears to be a pretty big conclusion from a small data set.
4. The Fed and policy makers also appear to equate the “markets” with the “economy”. Going back to Assumption 1 – Inequality, I think the very high inequality is making this a less and less relevant comparison. So, reacting to when the DJIA takes a header is not the same as reacting to when a bunch of good, long-term jobs are shuttered in the Mid-West. I think many of the financial and economic policy-makers are becoming less connected to the real economy and real people.
So I am still looking for real evidence that inequality and loosening regulation won’t actually restart the boom-and-bust cycle.