You may have read that the Federal Reserve will reduce its monthly money printing by $10Bn. This distracts attention away from the fact that they will still create 3.5Bn new dollars every business day.
The salient point is that they are continuing to expand the money supply. Equally talk of austerity in Ireland or anywhere else is nonsense. All ‘Euro land’ governments from Germany to Ireland, Britain, USA and Japan continue to spend more money than they take in. Per capita debt, public and private in Euro land, USA, Britain and Japan is higher than it was in 2008. This can only be sustained with miniscule interest rates, longer durations on debt and yet more money printing (debt creation).
Why do we have perpetual debt creation – Money Printing?
Western economies are largely welfare driven. Our modern democracies have long since reached a point whereby more people are net beneficiaries of government spending than net contributors. In other words, the majority of voters get more from government than they pay in.
There are about 3.2m people entitled to vote in Ireland. About 1.2m potential voters receive direct payments from the government every month.1 This includes civil servants, semi state workers, the unemployed and pensioners. If we include those on government sponsored training schemes this number is even higher. It is reasonable to estimate that almost 40% of our potential voters are on the government payroll.
There are many more voters dependent on various government subsidies and spending programs. 4.7% of our potential voters are in adult crèches receiving a third level education paid for by government To this number we can add a plethora of independent private sector companies that provide services to the government. Additionally we have many indirect beneficiaries of government spending who receive more benefit in kind than they pay for with tax. For example, low wage earners with large families receive more health care, education and other services than would otherwise be provided if they had to pay for it themselves.
Ireland is one of the better and more efficiently run democracies in the world. We are by no means an outlier. In my view a combination of democracy, an international human rights culture and fiat currency systems have rendered our national economic systems inoperable.
Our democratic systems produce populist political parties that all have a similar message. They offer a suite of solutions to the electorate involving more government spending on matters such as health, defence, education, regulation and policing, more help for mortgage holders, more support for the banks and on and on. The key word is more. The electorate wants to vote for those that promise more benefits and less tax. Politicians cannot get elected offering more taxes and less spending. This dynamic between politicians and voters is unlikely to change in our present democratic systems.
Can we grow our way of this problem?
Arithmetically it is very challenging. As discussed above, politically it is impossible.
When economists appear on our television and radio shows to talk about GDP growth they often talk nonsense. There are two reasons for this.
Firstly, GDP is measured in Dollars, Euros and fiat currency generally. We measure length in metres, volume in litres and temperature in degrees. We measure goods and services in fiat currency which by design loses some of it purchasing power against those very goods and services every month. GDP is economic activity measured in fiat currency. If the sole business of an economy was coal production and production in year one was 1m tons measured at €10 per ton we would say that GDP is €10m. If coal production remained static the following year and coal cost €11 per ton we would measure GDP at €11m. Therefore we would say that GDP has grown by 10%. If we measured GDP in weight we would say that GDP remained static at 1m tons. Clearly, in our economic system GDP is largely a loose measure of inflation.
The second problem with GDP growth is that GDP is a government produced statistic. The Americans in 2013 changed the way in which they calculate GDP which of course resulted in a higher number. (http://blog.bea.gov/2013/07/23/gdp_changes/)
Where does this all end?
The debt problem will definitely be resolved. When those who borrowed can’t repay, those that lent take the loss. In our complex global system of finance savings are lent out in the form of fiat currency. If the borrowers don’t repay savers lose.
Governments have acted to save the financial system by pumping more fiat currency into the system. They are deliberately and without shame devaluing the purchasing power of people who earn and save in fiat currency. They talk about CPI targets of 2%. They are trying to make savers and earners 2% poorer every year. However this is not enough. Clearly the debts are not being paid down. Therefore, we will need greater and greater inflation and interest rates at zero for longer and longer.
This is the road we are on. It is a road to hyperinflation.
The mechanics of engineering inflation
Around the globe government agencies lend newly created fiat currency to private banks. These private banks in turn lend much of the borrowed money to another branch of government at a higher rate of interest. For example, the Federal Reserve lends money to Goldman Sachs which Goldman lends on to the US Treasury Department - for a profit naturally. In Europe, the ECB has, since the onset of the financial crisis, lent money to banks in Ireland and the other Euro members by way of the LTRO and other bank lending programs. The recipient banks in turn bought, amongst other assets, Irish bonds and other periphery country bonds. It is simple for banks. The government department that lends money to the bank will accept government bonds as collateral. This would be a sweet deal for us if we could get it. But you and I can’t borrow from the central bank and lend on to the government. We are not listed among the ‘eligible’ counterparties.
This transaction whereby one department of government creates and lends money to the overall government via the banking cartel is the foundation stone of our financial system.
I believe this system is fundamentally flawed. Furthermore I am convinced it is breaking down. Thus it remains my contention that now is not a good time to invest. The investment waters are muddied by our pseudo capitalist system. It is harder to tell good investments from bad when all prices are being juiced up by central banks. Remember it is their stated policy to make property, bond and stock prices higher. When the Ponzi scheme collapses fortunes will be lost. Insolvent equities will cease to exist and overhyped overpriced stocks will come back down to realistic values. This will be the time to invest in stock markets.