But Wait, We Were Told There Wasn’t a Downside!

Great White Shark

I love it when the sharks start eating each other…. it must be a lack of other suitable food, yes?

“Financial markets are euphoric, in the grip of an aggressive search for yield…and yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain,” said Claudio Borio, the head of the BIS’s monetary and economic department.


There is no macroeconomic outlook that’s positive, and geopolitical aspects simply add to instability (they never subtract from it; at best it’s neutral.)


But Mr. Borio said the effectiveness of policies aiming to boost domestic demand—and therefore growth—has been stunted by large overhangs of debt.

And how do you “reduce” said overhang?

You must pay down the debt — that is, you must run a budget surplus, whether you are a company, an individual household or a nation.

None of them have.

There is an often-repeated lie that corporations have “de-levered.”  This is false.  The Fed Z1 shows exactly the opposite; no material contraction of corporate debt ever happened during the crash; indeed, it simply stopped growing for a short while and then started accelerating again.

With the exception of mortgages the same is generally true of households.

The composition of that debt has changed; for example, among households the fastest-growing segment shifted to college student debt.  There are those who will argue that this is really “investment” but that’s a lie when the debt is growing faster than the increase in output that it enables.

“Growth” on a permanent basis is impossible.  It is impossible because this planet is finite, both in size and resource.  Therefore the premise of “infinite economic expansion” is a false one; that we have busily worked toward filling in the open space and consuming the resource on an unbalanced basis, effectively draining the batteries that took millions of years to charge, means that we are in effect participating in a giant ponzi scheme.


Returning to normal monetary policy too slowly could also be dangerous for government finances, the BIS warned. “Keeping interest rates unusually low for an unusually long period can lull governments into a false sense of security that delays the needed consolidation,” it said, as the glut of cash encourages cheap government borrowing.

It’s more-basic than that.

I recently had an interesting conversation with a good friend that pointed out how crazy people are, generally, when it comes to this matter.  People simply don’t think about it and thus don’t get it.

Reality is this: All deficit spending simply dilutes your purchasing power, and as such when looked at from a perspective of  everyone in the economy it is a net wash at best, not a positive.

In other words if you deficit spend to provide someone with health care the cost of that health care comes out of everyone’s hide through depreciation of buying power — including the person you allegedly “help”!

So let’s say I need some expensive medical procedure and have no money.  You “give” me that procedure as the government and do so by running a deficit.  I “get” the procedure but everyone pays for it immediately and on a forward basis in the form of permanently damaged buying power, including me!

In other words by permanently increasing the amount of circulating money and credit to fund that procedure while the percentage of the bill that I see immediately is small (since there are a lot of people in the country) eventually I will almost-certainly get rooked out of more, on balance, than if I didn’t get the “benefit”.

The other side of the coin is also true, but rarely discussed or admitted to: If you run a budget surplus and pay down debt you add buying power to everyone in the nation.

That’s cumulative — that is, compounded — as well.

But wait — you say — what about all those programs?  Well, I already went over that.  We could eliminate them all, get rid of the medical monopoly crap, and guarantee everyone a decent family income sufficient to immediately and permanently eliminate poverty among US citizens.  At the same time we could run a $400 billion a year surplus, which would result in a gain in purchasing power of a bit under 1% (if measured against private and public debt) or about 2.4% if measured against public debt.

Drill that into your head folks — if you had zero gain in salary or wage but we took this step over a 10 year period you would gain 27% in purchasing power — that is, your real standard of living would go up 27 percent!

Over a 40 year working life the increase with no raise in salary or hourly wage would be an astounding 158%.

And that, by the way, is not corrected for the declining outstanding debt balance, which means this (simple) calculation understates the benefit.

What BIS is saying here is what I’ve been saying since I started writing on this in 2007 — deficit spending is in fact worse than a tax in that the damage it does is recurring every single year, where with a tax you can simply stop collecting it any time you’d like.

Wake up folks — the markets are grossly over-valued compared against the actual economic situation.

The Market Ticker

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