#16. Tapers and frightened tapirs

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.     

15 thoughts on “#16. Tapers and frightened tapirs

  1. Tim,
    It seems a bottle of brandy is in order to read your bog and Gail Tverberg [our infinite world ] to avoid becoming too melancholic. Seriously what is to be done?? Politicians seem unable to grasp the nettle ; their sole aim being to get re-elected ie to keep their jobs .

    • Politicians hardly ever get the big picture unless or until they have to – e.g. the dithering and appewasement of the inter-war years.

      In the US and the UK, nothing will happen until it’s forced on politicians. What’s happening now is borrrowed growth – the economy grows but debt grows much more quickly. Eventually, interest rates rise sharply, something which neither country can afford given the scale of their debts.

      Some have spoken of an impending “third leg” of the financial crisis. I think Robert Peston has called it “the third horseman”. We haven’t solved the problems revealed in ’08, just knocked them into the long grass (or, in US-speak, “kicked the can down the road”).

      So the financial crisis will be back – it’s never really gone away – and “a problem deferred is a problem worsened”

  2. Tim
    “Eventually, interest rates rise sharply something which neither country can afford given the scale of their debts.”
    As I understand it, they can control interest rates with money printing. i.e. stepping up QE. Do you think we are heading for an inflationary currency collapse? Are there any other ways this is likely to pan-out?
    I’m pretty sure that if there’s much more market turmoil, Yellen will announce an increase in QE.
    Cheers, Joe

    • Joe;
      An inflationary currency collapse is the logical conclusion of printing more money than real economic output can justify – so yes.

      The way it pans out, I suspect, it that people lose faith in money. Fiat money is backed only by “the full faith and credit” of the issuing government. How far “full faith and credit” have already been eroded, and how this will progress, are questions of timing, but not of direction.

  3. Another good one there Tim, thanks. I’ve been offline lately, preoccupied with work (has to be done!). Picking up on Peter Marcham’s point (to which you replied), increasingly these days I’m thinking harder and harder about how to prepare myself and my family for the mother of all systemic economic collapses within the coming, say, 5 years (if we last that long). The degree of denial within the politico-economic Establishment (if denial it really is) is beyond surreal, beyond breathtaking. We’re not living in the proverbial “interesting times”. We’re living in an alter-universe. My next Moraymint post will be on the theme of answering Peter Marcham’s question: “Seriously, what is to be done?”

    • Store up some cash outside a bank and where you can always get hold of it. With deflation, there is a contraction of currency and credit so, by this means, you’ll always be able to buy what you need when others will be stuck.
      When they decide to get out of the deflationary depression globally, they’ll all print money like crazy, so store up some silver coins outside a bank and where you can always get hold of them,
      because, with hyperinflation, currency, which will be in abundance, will be more and more valueless and unacceptable to farmer and grocer.

    • I’m really going to have to answer (or try to answer) two questions.

      1. How does this end? is the easier of the two. I think you know my answer to that.

      2. What can we do about it? Harder. Let’s remember that some places will fare a lot better than others. Middle East oil producers, and Norway, are at one extreme. Countries that are over-populated, have squandered (or never possessed) energy resources, and whose economies depend on debt-fuelled consumption, are the other extreme. But there are gradations across that range.

      I’ve just visited a place with a warm climate (to quote Patrick O’Brian, “it’s easier to be poor in a warm country”) with low population density, potential for self-sufficiency in both energy and food, AND no addiction to consumerism.

      Now, that’s an answer for someone who is young (or young-ish), few commitments, marketable (or adaptable) skills and flexibility of mind. That isn’t everyone. Personally, I wouldn’t want to live in, say, Abu Dhabi, Canada or Norway. But my model shows Denmark and Switzerland looking pretty good, too.

      Basically, how adaptable is the place where you live? How adaptable can it become? Is it burdened with negative preconceptions (such as consumerism, a class system, lack of democratic accountability, obsession with non-pragmatic ideologies such as state control and/or privatisation, income inequality)? If it is that way, can we change it?

      Some countries are probably in clover as energy costs soar. Others (for reasons given above) are probably already past the point of rescue. But that still leaves a lot of scope……(this is becoming a future blog, methinks….)

  4. What needs to be done? That question can not be really answered in a meaningful way. First, a more basic question needs to be discussed: All fossil fuels are finite. Does this mean that we should not use them? And if we decide to use them, should we use them in such small quantities in order to stretch their usage far into the distant future? Or should we simply use them as quickly as possible maximizing the joy of life here and now?

    Should I, knowing that I will be dead soon, really care for future generations? My mother told me roughly 40 years ago: “Don’t be stupid. If you do not drive a car, other people will. It does not make any difference.” I think that argument represents a powerful reality.

    Personally, I believe the correct answer is: Invest in renewable energy. Wind, solar etc. The argument that this energy is too expensive is in my opinion not valid since not all costs are properly accounted for with conventional fossil fuels. When burning fossil fuels, the cost of pollution and the cost of replacing a non-renewable resource is not accounted for. An electrical car running on a battery can not be compared to a car powered by an internal combustion engine as the cost of oxygen consumed during the combustion process and the cost of dumping the exhaust fume into the atmosphere is not accounted for either. In comparison, a car powered by a battery does not produce exhaust fumes and does not need oxygen to run. An electrical engine achieves efficiencies in excess of 80% while a typical combustion engine runs at 20% efficiency. The problem is that the best batteries available can store only a small fraction of the energy a tank of gas contains.

    The second thing which can and should be done, is to minimize energy waste. The amount of energy wasted is just mind boggling. We know how to build houses which do not require heating, yet roughly one third of all energy consumed goes into keeping our houses comfortable in the summer as well as in the winter. What a waste! Trains need a fraction of the energy trucks need to transport goods. Yet, most of the goods are transported by trucks. The list of wasteful energy usage is a very long one. I suspect that we could decrease our energy usage by 50% without even sacrificing the quality of life.

    Thanks for a very good article!

  5. First visit here. Good summary of the worsening debt crisis. A small point: surely you have double counting when you add the Fed’s $900 bn to the US Govt’s deficit because the latter is nearly entirely funded by the Fed’s printing (aka “debt monetisation”)

    Moraymint, look forward to reading you promised piece too. What is your blog address please ?

    • MorayMint (“the too good to Hurry Mint” ?),

      I read the finance pages of the DT regularly and spot you from there.
      Do you happen to know who is that “dr. jonathan wilson” is ? The one who always has pithy and pertinent economic comments and criticism of jeremy warner and AEP ?

    • Yes, that’s me popping up from time to time over at the DT. I don’t know who Dr JW is in reality, so to speak, but I consider him to be a like-minded soul!

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