The Global Economy
An unfair critic of an ultra-cautious admiral once said that he looked like “a frightened tapir”.
Change one letter and you’ve got today’s capital markets – most seem to resemble a “frightened taper”.
But does anyone really understand what’s happening?
My aim here is to spell out just some aspects of the economy that seldom, if ever, receive coverage. This may be because they’re just too simple. Or it might be because they’re just too frightening.
Let’s start with “growth” in the US economy. For a start, what growth? America seems to be growing at an “impressive” rate of around 3%. That adds getting on for $500bn to recorded GDP. But the Fed is printing an annualised $900bn at the moment, equivalent to about 5.5% of GDP, and underlying government borrowing is about 6%. So QE, plus the deficit, are injecting about 11.5% of GDP into one end of the sausage machine, and what’s coming out of the other end is barely 3%. And that’s supposed to be “growth”?
Then there’s GDP itself, supposedly about $16 trillion. Investors and commentators tend to accord this figure the validity of Holy Writ, ignoring the fact that it contains about $2 trillion of “imputations”. These arise from assigning rents to houses that no one is renting, putting a price on services provided by banks to their customers free of charge, and adding the cost of healthcare and other employee benefits which employers provide for free.
In short, about 16% of US GDP consists of these non-existent dollars – dollars, that is, that nobody receives, nobody can spend and nobody can tax. You won’t need me to tell you that the inflation calculations used to measure “real” growth (and “real” incomes) look, shall we say, a tad low, or to remind you that the US unemployment rate would be well into double figures if the numbers didn’t exclude categories such as “discouraged workers” (who, by the way, might be discouraged, but they certainly aren’t working). Then there’s the Federal debt, which tends to rise even more quickly than Congress can agree to raise the ceiling. Meanwhile, experts reckon that about $3.6 trillion (and rising) needs to be spent on putting America’s roads, bridges, water supply systems, levees and so on into good nick.
And this is one of the world’s “strongest” economies? If that’s what a “strong” economy looks like, I wouldn’t want to see a “weak” one (so I’ll ignore Japan, where the plan to improve trade by undermining the yen has just created a record deficit….)
It’s not just the US or Japan, of course. Pending fuller data, UK growth may exceed increases in personal and public debt, but I doubt it. Eurozone growth is negligible, despite bail-outs, on-going deficits and cash injections. I would be amazed if China isn’t sitting on a mountain of debt, especially property-related debt at the provincial level.
Then there’s “the taper”. This doesn’t mean that the Fed is reversing QE. It doesn’t even mean that the Fed has stopped printing liquidity into the system. It just means that the rate of printing is slowing.
Even that has been enough to make capital markets wobble, and to shake economies as different as those of Turkey and India, forcing a wave of interest rate rises as central bankers fear capital flight.
A great recovery, huh?
I don’t want to push the surplus energy thesis of economics at you on each and every occasion, but I’ll just remind you of two things.
First, the price of oil is a lot higher now than its average in 2007, before the biggest output slump in living memory. Why hasn’t it cratered, as it did after much smaller recessions in the not-too-distant past?
Second, modelling using SEEDS (the surplus energy economics data system) indicates that the system is awash with more than US$60 trillion of claims that the real economy cannot meet.
Far from tackling the value destruction that has to happen, we’re adding to it all the time, by creating money and creating credit.
This looks like nothing more or less than macro-scale denial. Some might call it the last chance saloon. To me it feels more like the Galactic Hitchhiker’s restaurant at the end of the universe.