Most,
intuitively, sense this to be a correct assessment but few can either prove
it or articulate it to the less sophisticated. Let me arm you to be the
"Nostradamus" amongst your friends and colleagues in explaining the
problem and what the future therefore foretells.
However, let me
make it very clear, this will not make you popular. Smart maybe, but highly
likely to make you unwanted at the social gatherings of the genteel.
The first thing
you will need in your role of 'all seeing' is the back of an envelope, or a
somewhat clean napkin at your next luncheon. You will need only a few simple
facts to go along with your prop.
THE FACTS MAME,
JUST THE FACTS!
First, if you
could total the world's balance sheets you would find that it would
approximate $200 Trillion. In putting together this total you would discover
that 75% of all financial assets are debt assets worth $150 Trillion. To most
of us, debt is the epitome of a liability. To banks, however, it is not. It
is considered an asset and recorded as such a banks ledger. Your liability is
their asset.
The historical
debt payment over a long period of time is 6% per annum. The Federal
Reserve's dividend payment to its holders of capital was originally
established in 1913 at precisely this 6% and is still accrued accordingly. Remember
also, in a fractional reserve, fiat based banking system money can only be
loaned into existence.
Today we have
approximately $9 Trillion (6% of $150T) in annual debt payments that must be absorbed
annually by increased productivity of the working classes.
Consider that
the US Economy at approximately $15 Trillion is 25% of the global economy.
Therefore the global economy approximates $60 Trillion ($62T officially, but
we will use round numbers so we don't lose anyone in the arithmetic).
The working
class therefore has to increase productivity by $9T divided by $60T or 15%
annually to absorb the current global usury charges.
In the last few
years of explosive debt growth we have passed the point of the global economy
being able to grow and improve productivity at a fast enough rate, not to be
literally consumed by this existing debt burden.
Unfortunately,
it gets worse.
One of the
problems in using GDP as a measure of growth is that it includes government
spending. In the case of the US, it is approaching 25% of the output of the
country. Within that, approximately $3.7 Trillion is $490B in interest
payments or 13% of US expenditures. This actually
means
that there is an additional 3% that must be added to the 15% or nearly 18%.
This is called
Debt Saturation.
DIMINSHING
MARGINAL PRODUCTIVITY.
A very
unpopular chart to deficit spending hawks is the chart showing the change in
GDP as a ratio to the change in debt. The easiest way to understand this
chart is to consider how much the economy will grow for every dollar of
increased debt. As you can see, the effect of increased debt has been
steadily losing its ability to increase economic growth and since the
financial crisis has decidedly turned negative.
Increased debt
is now counterproductive to the growth of the economy because the economy
simply does not have sufficient productive investments to absorb it. We may
have plenty of investments but they are mal-investments. They are investments
that simply cannot pay the debt financing utilized.
The Korean
Times recently illustrated
that despite a booming Asian environment, technology firms are now
struggling to cover interest payments. One in three firms on the Kosdaq failed to earn sufficient money to cover interest
payments in 2010. The interest coverage ratio, otherwise dubbed times
interest earned (TIE), refers to the measure of a firm’s ability to
honor its debt payments. 280 out of 876 Kosdaq-listed
outfits, or 32 percent, could not reach the benchmark reading of one in the
interest coverage ratio.
TELLTALES OF DEBT SATURATION:
1- Non Performing Loans
The
mal-investment is just too large to contain and is showing up in
ever-increasing levels of non-performing loans. This is despite rolling over
loans at false asset values.
 
Non-performing
bank assets are increasing globally! The above chart from Reggie Middleton's BoomBustBlog graphically depicts this indisputable trend.
What is this signaling three years after the financial crisis?
The rise in the
above US non-performing assets is alarming. It reflects a 9.5% change since
2005. Everything is not at all well in the US banking sector.
Equally
concerning is what is happening in Central and Eastern Europe where the
change is 7%. I personally consider Central and Eastern Europe to be the
unaddressed 'sub-prime' problem of Europe. I suspect it will eventually
replace the PIIGS in financial media news coverage.
2- Chronic Unemployment
The money
lenders look at unemployment in a different fashion than the average person
and would have us easily confused by its adjustments, birth-death models and
other deceiving statistics. To them it is not about how many of our fellow
citizens are unemployed, but rather simply how many net new jobs are being
created to pay for the annual usury assessment fee of the $9 Trillion we
previously discussed. Herein lies their problem.
The internet
has had a profound impact on the increase in productivity. Schumpeter's
creative destruction is an engine running at full throttle. Vast swaths of
jobs are being made obsolete through the adoption of new technology. The
'clerical' industry has almost disappeared in the span of 15 years through
operational innovations such as supply chains. This has been tremendous for
corporate profits allowing them to maintain highly leveraged balance sheets.
The problem is that it has been solely at the expense of real job growth. No
matter what a corporation does to make money, it eventually comes down to a
consumer having the money to pay for the goods or services it produces.
We have reached
the saturation point where we have insufficient real income growth to
maintain the leveraged balance sheets of corporations. Government social nets
are becoming burdened with making up the difference in either transfer
payments (i.e.45 Million on food stamps in the US) or subsidies ( North
Africa paying 28% of country budgets toward food subsidies for the unemployed
population to survive). There are examples everywhere if you care to look. I
have written extensively on this in my series on Innovation and
in articles such as "Fearing the Gearing".
3- Money
Velocity Doesn't Increase with Money Printing
Debt Saturation
occurs when aggregate income no longer supports debt burdens. When
governments print money, eventually Money Velocity increases as people
incorporate inflation expectations into their buying behavior. When we
examine the Federal Reserve's Money Velocity statistics we see that something
is very different this time.
Despite
increases in MZM, M1 and M2 money velocity maintains its downward slope with
little suggestion of wanting to reverse trend.
We presently
have inflation in what people NEED along with shrinking real disposable
incomes. Since people must pay for their NEEDS with short term money (cash,
check or credit card), there is little ability for them to adjust to
inflation when they are living from paycheck to paycheck. If their disposable
incomes were higher they would stockpile and turn their money over faster.
Additionally, money as a multiplier would flow through our society. Instead,
today the money does not move through multiple hands but is returned almost
immediately to the banks as debt payment, since most intermediaries are also
burdened with debt.
WHAT YOU MUST BE AWARE OF
First, You must understand
the impact of mal-investments and the brake that debt is now applying to the
Global Economy.
World Real GDP, adjusted for inflation on a
year-over-year basis has plummeted. According to the World Bank this growth
indicator has gone negative with the world's real GDP actually shrinking
Y-o-Y.
The global growth engine has not only stalled but
has clearly hit an unexpected brick wall.
Secondly, You must
understand the significance of the stalled and possibly fatally ill
"Shadow Banking" Credit
Engine.
Similar to
moving about on an airplane or train it is hard to determine the speed you
are traveling, because you have a limited
frame of
reference. In a casual conversation with your fellow travelers it is easily
forgotten or unnoticed that you are moving at a rapid speed. This is the
situation we find ourselves in as the Shadow Banking System fails to rebound
and the debt it once created is not being replaced. The liabilities of the
Shadow Banking System are shrinking. These leveraged liabilities are now
shrinking the global money supply despite every effort of central banks to
combat it. The Central Banks are losing the battle. Like glacial tectonic
shifts they are undermining the abilities of financial institutions to
continue to carry and roll-over non performing debt.
Finally, You Must be Aware of: "Money Illusion"
The overlay below of the
Nominal and Real (ShadowStats inflation-adjusted)
Dow illustrates the concept of Money Illusion, the tendency of people to think of currency in
nominal, rather than real, terms. Below the Dow series is the Consumer Price
Index (CPI) from 1913 and with estimates for the earlier years.
The above chart reflects what is actually going on in the
financial markets. The secular bear market that began in 2000 is still
underway. Since the 2009 lows we are experiencing a Cyclical Bull Market
counter rally that is to be fully expected as part of a Secular Bear Market.
The chart to the right is adjusted for inflation based on
published CPI numbers. If ShadowStats inflation numbers are used, as is the
case in the above chart, then the chart to the right would more clearly
resemble longer term secular bear markets already experienced.
CONCLUSION
There is nothing magic in any of this and it has all
been well documented, unfortunately by the Russians when they studied the
capitalist system to identify its fundamental weaknesses. The Kondratieff
long wave shows that the capitalist system suffers the build up and purging
of debt on a generational basis on the frequency approaching 55 year cycles.
We have extended this natural cycle by means of un-natural acts which I have
written about in my extensive "Extend & Pretend" series of
articles. Even in the days of old the king resorted to "jubilee" to
cleanse the system. Of course we are much too sophisticated for such a simple
solution today.
We have papered over the realities of "Too Big
to Fail" by not allowing the proven tenets of capitalism to work. We
have Anti-trust laws under the Sherman act to address 'too big', Control
Fraud Laws to address questionable ethical behavior for the sake of profit
(like mortgage fraud, liars loans etc) and Bankruptcy laws to liquidate
failed enterprises to force debt holders to take haircuts and swap debt for
equity. Instead we allow the prevalent game of Regulatory Arbitrage to run
without restriction or detection. Existing laws are not being exercised in an
attempt to protect what amounts to the emergence of a crony capitalist
system. Benito Mussolini had a somewhat different world for the merging of
corporate and government interests that I will leave for readers to recollect
who have a historical penchant. It is not a word easily digested in the
polite 'cocktail chatter' of today's genteel upper middle class.
Welcome to Kondratieff's Long Wave Cycle
FORETELLING THE FUTURE
In your new role as 'Nostradamus' to your friends
you can safely predict a decade ahead to be a secular bear market in
financial assets, in real terms. Nominal values may not show this clearly but
it will be very evident in the reduced standard of living most Americans will
experience.
You are going to have to work harder and harder, for
less and less to survive at a lower and lower standard of living.
This will all be required to support the annual $9T
debt bondage we have assumed as our politicos add additional 'stimulus' to a
suffocating and debt saturated global economy.
Listen to FREE Global Insights audio, 3 times a
week at
www.GordonTLong.com
Global Macro
Issues for non-mainstream listeners looking
for the truth.
Gordon T. Long
Tipping
Points
Mr. Long is a former senior group
executive with IBM & Motorola, a principle in a high tech public start-up
and founder of a private venture capital fund. He is presently involved in
private equity placements internationally along with proprietary trading
involving the development & application of Chaos Theory and Mandelbrot
Generator algorithms.
Gordon T Long is not a
registered advisor and does not give investment advice. His comments are an
expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
you are encouraged to confirm the facts on your own before making important
investment commitments.
© Copyright 2010 Gordon T Long. The information herein was
obtained from sources which Mr. Long believes reliable, but he does not
guarantee its accuracy. None of the information, advertisements, website
links, or any opinions expressed constitutes a solicitation of the purchase
or sale of any securities or commodities. Please note that Mr. Long may already
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before investing in any security based upon statements and information
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