After five years of
aggressive Federal Reserve and government intervention in our monetary and
financial systems, it's time to ask: Where are we?
The "plan," such
as it has been, is to let future growth sweep everything under the rug.
To print some money, close their eyes, cross their fingers, and hope for
the best.
On that, I give them an
"A" for wishful thinking – and an "F" for actual
results.
For the big banks, the
plan has involved giving them free money so that they can be
"healthy." This has been conducted via direct (TARP, etc.) and
semi-direct bailouts (such as offering them money at zero percent and then
paying them 0.25% for stashing that same money back at the Fed), and
indirectly via telegraphing future market interventions so that the big banks
could 'front run' those moves to make virtually risk-free money.
This has been fabulously
lucrative for the big banks that are in the inner circle. As we've noted
somewhat monotonously, the big banks enjoy "win ratios" on their
trading activities that are, well, implausible at best.
Here's a chart of J.P.
Morgan's trading revenues for the first three quarters of 2013, showing how
many days the bank made or lost money:
(Source)
Do you see the number of
days the bank lost money? No? Oh, that's right. There weren't any.
Now, for you or me,
trading involves losses, or risk. Sometimes you win, and sometimes you lose.
There appears to be zero risk at all to JP Morgan's trading activities. They
won virtually all of the time over this 9-month period.
That's like living at a
casino poker table for months and never losing.
Of course, Bank of
America/Merrill Lynch, Goldman Sachs, and a few other U.S.-based banks were
able to turn in roughly similar results. Pretty sweet deal being a bank these
days, huh?
So one might think, Well,
that's just how banks are now. Bernanke's flood of liquidity is allowing
them to simply 'win' at trading. If true (which it appears to be), we
can't call this trading. The act of "trading" implies risk. And
it's clear that what the big banks are doing carries no risk; otherwise they
would be posting at least some degree of losses. We should call it
sanctioned theft, corporate welfare, cronyism – the list goes on. And
it is most grossly unfair, as well as corrosive to the long-term health of
our markets.
Therefore, sadly, I have
to give Bernanke an A++ on his objective of handing the banks a truly massive
amount of risk-free money. He's done fabulously well there.
But will this be
sufficient to carry the day? Will this be enough to set us back on the path
of high growth?
And even if we do
magically return to the sort of high-octane growth that we used to enjoy back
in the day, will that really solve anything?
Endless Growth Is Plan A Through Plan Z
The problem I see with
the current rescue plans is that they are piling on massive amounts of new
debts.
These debts represent
obligations taken on today that will have to be repaid in the future. And the
only way repayment can possibly happen is if the future consists of a LOT of
uninterrupted growth upwards from here.
It's always easiest to
make a case when you go to silly extremes, so let's examine Japan. It's no
secret that Japan is piling on sovereign debt and just going nuts in an
attempt to get its economy working again. At least that's the publicly stated
reason. The real reason is to keep its banking system from imploding.
After all, exponential
debt-based financial systems function especially poorly in reverse. So Japan
keeps piling on the debt in rather stunning amounts:
(Source)
That's up nearly 40% in
three years (!).
It's the people of Japan
who are on the hook for all that borrowing, now standing well over 200% of
GDP. So here's the kicker: In 2010, Japan had a population of 128 million. In
2100, the 'best case' projected outcome for Japan is that its population will
stand at 65 million. The worst case? 38 million.
So...who, exactly, is
going to be paying all of that debt back?
The answer: Japan's
steadily shrinking pool of citizens.
This is simple math, and
the trends are very, very clear. Japan has a swiftly rising debt load and a
falling population. Whoever it is that is buying 30-year Japanese debt at
1.69% today either cannot perform simple math, or, more likely, is merely
playing along for the moment but plans on getting out ahead of everybody
else.
But the fact remains that
Japan's long-term economic prospects are pretty terrible. And they will
remain so as long as the Japanese government, slave to the concept of
debt-based money, cannot think of any other response to the current economic
condition besides trying to shock the patient back to vigorous life by
borrowing and spending like crazy.
If, instead, Japan had
used its glory days of manufacturing export surpluses to build up real stores
of actual wealth that would persist into the future, then the prognosis could
be entirely different. But it didn't.
The U.S. Is No Different
Except for some timing
differences, the U.S. is largely in the same place as Japan twenty years ago
and following a nearly identical trajectory. Currently, it's an
economic powerhouse, folks are generally optimistic on the domestic economic
front (relatively speaking), and its politicians are making exceptionally
short-sighted decisions. But the long-term math is the same.
There's too much debt
representing too many promises. The only possible way those can be met is if
rapid and persistent economic growth returns.
However, even under the
very best of circumstances, where the economy rises from here without a hitch
– say, at historically usual rates of around 3.5% in real terms (6% or
more, nominally) – we know that various pension and entitlement
programs will still be in big trouble.
Worse, we know that the
environment is screaming for attention based on our poor stewardship.
Addressing issues such as over-farming, water wastage, and oceanic fishery
depletion – to say nothing of carbon levels in the atmosphere
- will be hugely expensive.
Likewise, a complete
focus on consumer borrowing and spending at the exclusion of everything else
(except bailing out big banks, of course), along with a dab of excessive
state security spending, has left the U.S. with an enormous infrastructure
bill that also must be paid, one way or the other. That is, short-term decisions
have left us with long-term challenges.
But what happens if that
expected (required?) high rate of growth does not appear?
What if there are hitches
and glitches along the way in the form of recessions, as is certain to be the
case? There always have been moments of economic retreat, despite the
Fed's heroic recent attempts to end them. Then what happens?
Well, that's when an
already implausible story of 'recovery' becomes ludicrous.
If we take a closer look
at the projections, the idea that we're going to grow – even remotely –
into a gigantic future that will consume all entitlement shortfalls
within its cornucopian maw becomes all but laughable.
Of course, the purpose of
this exercise is not to make fun of anyone, nor to mock any particular
beliefs, but to create an actionable understanding of the true nature of
where we really are and what you should be doing about it.
In Part II: Why
Your Own Plan Better Be Different, we examine more deeply the unsustainability
of our current economic system and why it is folly to assume "things
will get better from here."
Given the unforgiving
math at the macro altitudes, the need for adopting a saner, more prudent plan
at the individual level is the best option available to us now.
Click here
to access Part II
of this report (free executive summary; enrollment required for full access).
