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MarkGB 

"Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world" - Henry Kissinger

and yet...

"Sooner or later everyone sits down to a banquet of consequences" – Robert Louis Stevenson

Debt based growth no longer works

In response to an FT article by Claire Jones on 18th August 2016, entitled ‘ECB hints at taking further monetary policy action in September’

http://www.ft.com/cms/s/0/a441bdee-6548-11e6-a08a-c7ac04ef00aa.html#ixzz4HjCFUe5A

‘The European Central Bank has hinted at taking further action next month should economic conditions in the eurozone fail to improve, with its top policymakers saying the impact of the latest wave of uncertainty to hit the global economy needed “very close monitoring”…

…The latest edition of the central bank’s monetary policy deliberations — for the meeting on July 21 when it decided to keep rates on hold — indicated the governing council may well act according to analysts’ expectations and keep its ultra-loose monetary policy in place for longer when it next meets on September 8…

…The tone of the remarks will raise hopes of an extension of the central bank’s €80bn-a-month quantitative easing programme beyond the current spring of 2017 deadline…

…In September, ECB’s staff will publish a fresh set of forecasts for the eurozone… …Inflation would be just 0.2 per cent this year, but would rise to 1.3 per cent in 2017 and hit 1.6 per cent the following year’ 

Capital is now global not local or even regional - this is not the 1930s, the 1970s, or the 1990s…even China is now on the board. What this means is that the focus on regional measures and ‘data dependence’ are a chimera. Of course, the central banks realise this, which is why they have been ‘passing the baton’ to each other for the past five years.

QE1 and QE2 did not ‘work’, so $40 billion per month in QE3 was rolled out. That did not work either, so it was doubled up to $80 billion per month. We now have circa $180 billion per month being issued globally, $13 trillion of sovereign bonds with negative yields, and still every year they reduce the growth forecasts for the current year and predict things to improve in years 2 and 3. They haven’t, and they won’t.

The debt growth model is kaput. After a certain point, which we passed some time ago, QE and particularly negative interest rates, are deflationary:

1.     Savers and retirees look at their shrinking pots and save more

2.     SMEs will not hire that extra person until they have no other choice - they will cope with what they’ve got

3.     Corporates will not embark on capital investment in an environment that looks like it could collapse at any moment. Share buy backs look like a much ‘safer’ option

Debt based growth requires inflation, population growth, and increased productivity. These policies will not create inflation, there is nothing they can do about population growth, and productivity will not increase in the environment described at 1 to 3.

This situation is complicated by three ‘political’ factors:

a)    The siphoning of wealth off the top is becoming increasingly difficult for the banks – many of us would say ‘boo hoo’ to that…however

b)   Populations are increasingly noticing that things are not going to according to the so-called 'solutions'' that their leaders claim to have – confidence is eroding rapidly…and

c)    This generation of political leadership has been weaned and raised in a world where capital is cheap; and protected from taking responsibility for their largesse by central bankers who have provided the ‘get-out-of-jail’ card every time they screw up

Unless policy makers stop the pretence that this is ‘working’, and address the root causes of massive unsustainable debt, both on and off balance sheet, this will end with the market ‘cleaning house’ of its own accord – which will make 2008 look like a walk in the park. Debt based growth no longer works.

Jackson is not the guy in the hole

Settle down children and Aunty Janet will tell you a fedtime story.