“The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest — but the myth — persistent, persuasive, and unrealistic.” – JFK
According to one of my financial heroes, Bill Bonner, money is not wealth. It simply measureswealth like a clock measures time. Wealth is what has been produced, is made available and that which you can buy with money.
When banks print money out of thin air it is like adding an extra hour to a clock. It doesn’t make time any bigger, it simply distorts it and disorients the observer. What counts with money is that it is honestly made available to purchase goods and services. Honest money cannot be separated from the real economy where those goods and services are produced.
Say’s Law offers the wisdom that “You buy products with products . . . not pieces of paper.”
QE in the US, Europe and Japan is following Zimbabwe in separating money from the real economy. Trillions of dollars have been printed that mislead everyone into thinking they are wealthy, until they see the need for a wheelbarrow full of this pseudo wealth to buy real wealth – a carton of milk. We aren’t there yet but that is where we are headed!
Similarly, profit is not wealth but merely a measurement of overall business efficiency. When you combine these two illusions you arrive at the curse of the 21st century . . . debt. Debt offers the most efficient means of producing profit, by producing unreal money with few overheads.
With all of this in mind let me give you my perspective on what is going on and remember I’m no economist, but even to my simple mind we are now heading to an almighty financial catastrophe. I will use the car industry to make my point but the principles can be applied across today’s financial world.
A car manufacturer happily makes cars and sells them, growing the business in the process. Then market saturation of what is for sale, together with competition from various areas, begin to challenge sales and profits. Overheads must be cut and with the capable assistance of modern technology workers are replaced with machines and former workers are not replaced.
The competition is merciless and sales continue to stagnate or even decline. However, the government and banks are pushing very cheap money and so, what the banks didn’t grab to boost balance sheets overflowing with bad debts, businesses are borrowing in huge amounts.
They haven’t used this cheap money to invest in stock and machinery, to grow the business organically and create jobs, as government had hoped but gone for the easier option; to buy out their competition and buy back their own shares to boost the share price. HSBC is a perfect example of this in practice.
This is an unreal economy, where share prices are pushed ever higher by companies whose sales performance is declining. In addition, competition is reduced by takeovers, with the number of publicly listed companies in the US plummeting from 7,300 to just 3,700 in the last 20 years. This has a twofold detrimental effect, in breeding price controlling monopolies and suppressing the necessary growth of new companies.
With sales stagnating/declining it becomes increasingly more difficult to service all that debt. In the US most corporations have little cash and too much debt. The bottom 99% of corporate borrowers have just $900 billion in cash and $6 trillion in debt.
Debt is such a serious issue now that analysts think the coming crisis will dwarf the 1929-1946 Great Depression. 2009 saw the worst recession in the US, with corporate bond or loans defaults at 180 and now in the first half of 2016 they are already at 100, without seeming let up.
Added to this banks are no longer following their core raison-d’etre of supporting new/young businesses, the life blood of the corporate world and a serious wealth creator. There is simply no profit with interest rates so low.
Instead they have created the biggest casino in known history, with a $700 trillion derivatives market that is gambling without a roulette wheel or playing cards and adds nothing to wealth creation, except for the few.
If we move on from the corporate scenario and address why sales are stagnating/declining and why all of government money stimulation, including negative interest rates isn’t working, it all comes down to confidence. Confidence, or its lack, is what kills everything from politicians to cash to corporations and share prices.
Bankers have been fuelling the economy with debt over the last 50 years by conditioning people to believe they can “live today and pay tomorrow”. For half of this time people, like myself, bought into this hogwash, resulting in the credit boom of the ‘90’s, where people were holding and using up to 30 or more credit cards.
Eventually the bubble burst and a lot of people got badly burned, consigning them either to bankruptcy, or very reduced circumstances, as they struggled to repay the debt they had accumulated. And so the credit promise of personal wealth dissolved into a nightmare.
Confidence in credit has disappeared and this lost confidence has been further fuelled by a reduction in job security. New technology is now stealing jobs at an ever increasing pace, helping corporations to cut back on their most expensive overhead. In addition, the odious practices of outsourcing abroad, ‘zero hours’ and short term employment contracts, has led to a complete evaporation of any personal security in the future.
In the UK, the real value of wages has plummeted by 13.6% over the last 7 years, (higher in the South East and London), making the imbalance in people’s financial situations increasingly untenable and yet another contribution to dwindling confidence.
Much as the government wants to re-stimulate the economy with shed loads of money, it is proving quite useless with a growing lack of confidence in a corporate sponsored government’s ‘financialisation of life’ through extreme Neoliberal policies.
This situation is reflected by unrelenting price increases that now place the cost of an average first time buyer home at £176,773 in 2016 in the UK. With home ownership at its lowest level in 30 years, 95% of young people currently renting are unable to raise the required deposit of £35,354.2002, making it impossible to take that important first step to home security.
Even the cost of the family car has escalated way beyond wage increases and now stands at £28,973, a phenomenal amount of money for young people, many of whom are already struggling with even greater amounts of student debt!
Profit driven unregulated Capitalism only ever seeks a short term view of the future, in which profits reign supreme. To achieve these profits, corporations need people to spend and consume, something encouraged by debt in recent decades.
Now, as a glaring example of just how desperate Capitalism has become to force us to spend, banks are actively looking to turn money completely digital by getting rid of cash, thus providing them with absolute control over our finances.
Negative interest rates previously stimulated the economy with cheap debt and bankers are baffled at why this tried and tested method does not seem to be working now. Indeed, rather than stimulating the economy it is destroying it, with already shaky banks unable to earn from lending, pension funds becoming as shaky as the banks and people taking their money out of banks and stuffing it under the mattress.
What they cannot acknowledge is that people are no longer so gullible. They see their wealth being taken from them and passed to the already rich and powerful in bank bailouts, plus credit that has them paying into the future for something they want to enjoy now.
This is causing a lowering in their living standards and a reduction in the contribution they make to how their lives are run, from the erosion of democracy by a corrupt political system. According to Oxfam, in 2013 there were 50 million Europeans who could not afford to heat their homes, on a continent with 342 billionaires.
Brexit and the revolt in the EU, plus support for Donald Trump in the US, signal the beginnings of a middle class rebellion against the status quo and their being herded into poverty through privatisation that they can only be paid for with debt.
With the exception of the few, unregulated Capitalism is destroying all areas of Society, from the corporate to the personal and is no longer sustainable . . . if it ever was.
Until the next time
Thinking from his Book: Global Magna Carta. Returning Power to the 99% . . . If They Want It! By J T Coombes