Central bankers’ experiment with zero interest rates is falling short on the supply side of their economies.
Productivity and labor-force growth are failing to accelerate despite policies Bank of England Governor Mark Carney said should deliver the economic growth needed to generate “supply-side improvement.”
That’s because what’s been put forward as the “mechanism of action” by various central banks, along with other “Big banking interests” has been a lie for 30 years.
This is what central banks have orchestrated and has been responsible for essentially all of the so-called “growth” — and why they cannot get any more from this particular rock.
Now look at the trend in borrowing over the same time:
Contemplate this —
I borrow $1 million @ 15% interest (1980). It costs me $150,000 a year in interest to use this $1 million. Note that under our current system, despite the claims otherwise, the bank did not actually have to take in a million in deposits to make this loan; it instead created the million out of thin air.
This is fraud, as I’ve repeatedly pointed out, just as it is when the government does it, because it is exactly identical in effect to counterfeiting — but under our current system it is a legalized fraud.
Now a few years later the interest rate is machined lower to 10%. I now can refinance the $1 million and pay $100,000 a year in interest. That would be nice, but what’s even “nicer” is that I can borrow another $500,000 (50% more!) to spend and pay the same $150,000. Guess what actually happened (again, look at that second chart.)
Again, the additional $500,000 never existed from past production; the bank (and/or government) simply pushed a button on a computer and created it out of thin air!
Now in 2000, a few short years later, the rate has fallen to 5%. I can refinance my $1.5 million and pay $75,000 a year in interest. Or, I can borrow another $1.5 million and the bank will create it out of thin air, effectively counterfeiting another million and a half, and pay the same in interest!
Guess what the chart above says people did — and they then immediately spent that (faux) “money”!
So now it’s 2010, and the rate of interest has fallen to 2.5%. I could, once again, refinance my $3 million and pay $75,000 in interest. OR, I could “borrow” and spend another $3 million for a total of $6 million, six times what I originally borrowed and exactly none of it reflects actual past production that was actually borrowed from a real person or business.
There are those who claim that the borrowed funds were used to invest (e.g. in machinery, equipment and job-creating things) and thus grow the economy. They’re lying and this chart proves it:
Were they telling the truth the gold line would be above zero; that is, economic expansion (red line) would exceed growth in debt (blue line.) It has not since 1980 ever; the only time that line was positive was during the immediate aftermath of the crash in 2008 but at the time “growth” had been negative and debt was defaulting even faster. The nasty part of that “deleveraging”, however, was that it was essentially all in “financial products” (e.g. structured credit derivatives, etc) and not in corporate borrowing. Corporate and government borrowing never decreased.
Remember this folks — we invented out of whole cloth six times as much economic activity as actually existed. We pretended that it existed by creating credit out of thin air without anything behind it. That credit got spent on consumption exactly as if it was wealth created from past production and had exactly the same effect on stimulating demand as if the funds came from that past production.
That looks like a free lunch, doesn’t it?
It isn’t — because the $150,000 in interest is real and has to be generated somewhere. While you can do this refinance-and-wash game to obtain the annual interest payments for a while, and we have, what happens when rates stop going down?
Two bad things:
1. You must now make that interest payment out of actual production because you can’t simply borrow more and use that to pay the interest. In other words you better have a positive actual return on all that borrowed money, but you don’t if you spent it all on consumption — it’s gone!
2. Worse, when your loan comes to term you can’t borrow more to refinance it at lower rates. If you’re lucky rates simply flat-line and you can roll it at the same rate, but then you have no new (counterfeited) “money” to spend and “grow” the economy! If rates go up, however, you probably can’t make the higher interest payments nor can you pay down the principal since you spent it and as a result you will likely default.
Utterly nobody in media or government wants to deal with this. When I raised this very issue several years ago with Congressional offices (including but not limited to Cathy McMorris-Rodgers staff), particularly during the debt limit mess a few years ago, it was dismissed with complaints that we “can’t” deal with that because it would mean massive spending cuts that are politically impossible.
So what — arithmetic doesn’t care about your political problems and the refusal to deal with it just means that the magnitude of the problem gets worse!
How much longer do we continue to pretend that we’re growing profits and the economy when what has really been happening is the pyramiding of leverage upon leverage for consumption — the very definition of a Ponzi Scheme?
I have no idea — but what I do know is that arithmetic is not political and the longer you continue to lie to yourself and others the worse the eventual snapback to reality will be.
The check is on the table folks.