My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “An investment in knowledge pays the best interest.” Benjamin Franklin
As we continue to examine the way growth as we have known it is failing, this article by Chris Martenson, explains a lot about how and why it is happening now and will get worse as we approach the next crisis:
https://www.peakprosperity.com/the-hard-truth/
Here is the link to last week: Issue 64
Now that Brexit will not be coming to a final conclusion yet, I will continue to provide weekly updates as events progress:
Brexit Update – 16th August 2019
The Brexit deadline remains 31st October 2019 and stays in place unless Boris can get Parliament to agree a new exit plan. ‘Mish’ has a good article explaining the options that Boris has going forward:
Blain’s Brexit Watch
Even as the global economy trips and tumbles, back here in UK, its same-as, same-as. Sterling gets a bit of a respite from the fact the rest of the world now looks as daft as the UK! But it won’t last long. Jeremy Corbyn is vaguely suggesting a no-confidence vote in September. Gosh! How original? With Boris holding a majority of one, how long did Jeremey take to come up with that not-so-cunning plan? Boris’ chief strategist and headsman Dominic Cummings is quite clear in his strategy – doesn’t matter if Boris loses a no-confidence vote, it will be too late to avoid the Oct 31st deadline.
Facing out a confidence vote is Boris’ apparent strategy, but we’d prefer something a little more positive. The longer Boris can hang on without the distractions of a hostile parliament, the longer it gives him to reach a new agreement with Europe. But there aren’t many signs or signals of any meaningful discussions with Brussels (which is exactly why I suspect they might be happening?).
I suspect the odds of No-Deal on Oct 31st are shortening. Even if Boris does get Europe to agree an acceptable solution to the BackStop, his wafer-thin majority means he has a slim chance of getting it approved pre-Oct 31 in Parliament. Boris is betting he can win an election, but only after Brexit. If the plan is to deliver, as he promises, it’s difficult to see any alternative to No-Deal. So stay short of sterling and… that’s the best I can suggest.
Parliament will be in recess now until September. Details of Parliament’s deliberations can be found here:
CHAPTER 12
The End of Growth
“It has been more profitable for us to bind together in the wrong direction than to be alone in the right one.” Nassim Nicholas Taleb: ‘The Black Swan: The Impact of the Highly Improbable’
“It’s tough to make predictions, especially about the future.” – Yogi Berra
Increasing debt issuance is not initiating growth
Global economic growth continues to be elusive for the controlling elites this century because the debt-driven ‘growth’ model is not working. Not only is monetary expansion not working, it is actually aggravating the situation; printing money simply has diluted the stock of general purchasing power through the creation of additional new ‘virtual’ money being stuck in the financial sector and resulting in increases in all kinds of asset values from government bonds to stock market shares and extreme artworks.
Governments, especially America, relied heavily on an increasing amount of debt issuance for several decades but consumers eventually reached a point at which they could no longer support taking on more debt, whether in the form of mortgages, vehicle loans and leases, student debt or credit cards.
The problem for the U.S. financial system is that there will be widespread defaults on the consumer debt that has already been issued. The average U.S. household has finally reached a limit on the amount of debt it can absorb. This is why restaurant, vehicle and retail sales are falling and why house sales have rolled over in many states.
As time rolls on into 2020 the situation is bound to get worse as all the fundamental economic indicators are predicting. Furthermore, corporate debt is even more stretched and it appears that the stock markets have reached a final maximum and will only begin to fall because adding more debt is just not working.
The big risk is a fall in interest rates in the near future, as hinted at by the Fed, which will accelerate the rate of defaults and coincident collapse in asset values. The problem, however, is that rising asset prices and surging debt levels, despite rumours to the contrary, do not translate into stronger economic growth. The transition to leverage starting in the early 1980’s was the turning point for the growth rate of the economy.
To put this in economic terms, it currently requires almost $4.00 of debt to create $1.00 of economic growth. This is a problem when 70% of the economy is driven by consumption and there is a finite limit to the amount of debt that can ultimately be taken on by households.
As we have explored in the foregoing Chapters, it is not possible to accurately predict when another global financial crisis might occur whether in America, China or elsewhere. The common measure of debt/GDP ratio has no identifiable tipping point to indicate that a crisis is likely or imminent but we do know that the larger a government’s debt load the greater the risk of a debt crisis occurring.
The Keynesians refer to the ‘wealth effect’ of high asset prices as they trickle down into a higher cost of living through the required higher return on capital for the majority of the population which has not seen an increase in their real incomes since 2000.
They have however witnessed higher rents, higher transport costs, higher education costs and higher medical costs; in short, higher prices for everything that has a capital overhead component. QE has eaten into the peoples’ discretionary income by inflating asset balloons and has in fact depressed growth not increased it.
Zero/negative interest rates have kept the huge overhang of debt from collapsing thus far, but at the cost of destroying savings income and eventually will do the same to pensions both defined benefit and contributory as is evident in pension fund reports through 2019.
The effect of energy costs on extraction is limiting growth
Growth in the second half of the 20th century was fuelled mainly by oil extraction. The last giant oil fields with greater than 30:1, ‘energy-return’ on ‘energy-invested’ (EROEI) came on line in the 1980s.
Alaska’s North Slope, Britain and Norway’s North Sea fields and Siberia. Those events allowed the USA and the West generally to extend their growth another twenty years. From 2001, in the wake of the dot.com ‘bust’, government and other debts began to soar in a sharply upward direction with only a slight downward adjustment in 2008/9 and have continued their trajectory ever upward.
Debt increases as EROEI falls and you will notice two important trends. When the U.S. EROEI ratio was higher than 30:1, prior to 1970, U.S. public debt did not increase all that much. However, this changed after 1970, as the EROEI continued to decline, public debt increased in an exponential fashion.
The question raised by the Hill’s Group research analysis is whether the reason for the explosion of government debt since 1970 is that central bankers unwittingly were trying to compensate for the lack of GDP stimulus deriving from the earlier net energy surplus. In effect, they switched from flagging ‘energy-driven’ growth model, to the new ‘debt-driven’ growth model.
From a peak net surplus around 1973, by 2012, oil companies were beginning to consume more energy per barrel in their own processes (from oil exploration to transport fuel deliveries at the petrol stations), than that which the barrel would deliver net to the globalized industrial world in aggregate.
It is controversial in attributing much of the era of earlier western material prosperity to the big discoveries of ‘cheap’ oil, and the subsequent elusiveness of growth, to the decline in net energy per barrel available for GDP growth.
This surplus energy at an EROEI ratio of now less than 10:1 derives from the oil that we have been using (after the energy-costs expended in retrieving it) is now at a point that it can barely support our energy-driven, western economic lifestyle.
Implicit in this analysis, is that our era of plentiful oil was a one time, one off event. This also implies that global demand for oil will decline and the price will fall. There are other factors affecting the use of oil which we will continue to explore. Suffice to say that so far as growth of our economies is concerned the restraints placed on it by the changing nature of our main energy source seem to indicate that no stimulus will come from this quarter.
It is also interesting to note that the expansion of debt took effect directly after the dollar was removed from the gold standard in 1971 and the petro-dollar came into existence and this arrangement has remained unchanged ever since.
There are rumblings in the world of global finance that the era of ‘king dollar’ is set change and we will touch on the implications of this major alteration for the stability of the western economic and financial system as a whole.
Debt of necessity does not impact the economy alone; there is a price to be paid for debt and it is called ‘interest’. Historically, interest rates have been set by the financial markets without interference from politicians and central bankers. But as we have seen this is far from the case in our present financial system. Interest rates have been set artificially by central bankers and this has distorted the markets and caused debt pricing (valuations) to become detached from reality. We will explore interest rates next.
To be continued next Saturday
A lot of precious irreplaceable fuel is blown out the asses of jumbo jets carrying the rich from NYC and Chicago to/from their many posh resorts. The Elite will not suffer when it’s nearly all been wasted and the price of tractor fuel and food skyrockets; but the Deplorables definitely will. Wonder what the Peasants will do when they can’t afford enough food and the Elite say “Let them take a vacation flight to where caviar and cake is plentiful”.
Quite so Robert, thank you. History tells us that the peasants will only stand so much raping until a breaking point is reached, then all hell breaks loose and I see it as no different this time.