My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author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: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” – Warren Buffet
This week sees the end of the Chapter about growth which I hope has briefly explained why economic growth will not return until the system changes dramatically. This article explains how energy sources and the financial world are linked and rounds out this Chapter. “Today, the world economy depends on global supply chains and the electric grid. The financial system is also very important. It is hard to believe that the overall system can stay together for many years, but perhaps, in parts of the world, it can. We just don’t know.”
https://ourfiniteworld.com/2019/08/22/debunking-lower-oil-supply-will-raise-prices/
Here is the link to last week: Issue 66
Now that Brexit will not be coming to a final conclusion yet, I will continue to provide weekly updates as events progress:
Brexit Update – 30th August 2019
The Brexit deadline remains 31st October 2019 and stays in place unless Boris can get Parliament to agree a new exit plan.
Boris Johnson has been busy trying to convince the EU that a deal is possible. The saga continues and there will be no resolution until more water passes under the bridge. “Britain could “easily cope” with a no-deal Brexit, which would be the fault of EU leaders’ “obduracy”, Boris Johnson claimed at the summit of G7 countries in France, as he continued to resist mounting pressure to spell out his own plans for breaking the deadlock.”
Brexit Hot Press – Parliament suspended
This short article makes the point that this is no big deal but the press are having a field day:
https://off-guardian.org/2019/08/28/discuss-johnson-prorogues-parliament/
And this is the current status of parliament: “The act of proroguing parliament brings to an end the current parliamentary “session”. This leads to a short break before a new session begins.” Read on for an explanation and what it means for Brexit:
https://fullfact.org/law/proroguing-parliament/
And here’s the ‘nuts & bolts’ of the present situation from ‘Mish’:
Parliament will be in recess now until 3rd 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
Aging populations consume less and are no longer supported by enough workers
As populations age support and dependency ratios become unbalanced. These support systems were designed many years ago and are not geared to work with so few people paying into the programmes.
Not all countries are affected in the same way. The potential support ratio (PSR) is the number of people aged 15–64 per one older person aged 65 or older. This ratio describes the burden placed on the working population (unemployment and children are not considered in this measure) by the non-working elderly population.
When populations on average get older, the Potential Support Ratio (PSR) tends to fall. Between 1950 and 2009, this ratio declined from 12 to 9 potential workers per person aged 65 or over. By 2050, the potential support ratio is projected to drop further to reach 4 potential worker per older person.
The reduction of PSR has important implications for social security schemes, particularly for pay-as-you-go pension systems under which taxes on a current worker pay the pensions of retirees. In 2015, Japan had the lowest PSR in the world, at 2.1
Clearly growth is all that matters in our current system and the consumer base responsible for this growing consumption will be shrinking in the future because growth among these nations peaked nearly fifty years ago. All the decades of interest rate cuts and resultant debt since 1981 were only a substitute to artificially boost consumption of the waning annual growth of the consuming population. Central banks will continue to print money in a vain attempt to maintain a false paradigm which is one that assumes “normal” growth is just around the corner.
The misconception is that “normal” demand will return and allow central banks to cease printing money and purchasing assets and allow these quasi banks to sell these assets back to the market. In our lifetimes there will be no period of similar growth in consumer demand than we saw over the past half century.
The declining quantity and quality of the combined populace of the OECD, China, Brazil, & Russia will be negative when offsetting the meagre consumption growth from the rest of the world. Therefore we can determine that the days of consumption-driven economic growth are at an end and asset appreciation is now entirely a collusion of federal governments and central banks which will never again allow a free and unfettered market to determine asset prices.
American population growth is ending and will soon go negative
The USA is the main driver of global economic performance because it produces over 25% of world GDP. Therefore what is happening in USA is a key indicator of the likely course of events for the rest of the world.
The American core population (people aged: 15-64) make up 65% of the total US population and represent 95% of US employment. When considering economic growth as measured by the annual growth in GDP, changes in population growth should be included in economists’ projections and budgets but seem to be accorded little attention.
It is growth in this crucial sector of the population that drives the need for new housing, new infrastructure, and generally adds millions of new consumers and thus demand in an expanding economy.
The core US population growth has been slowing since the turn of the century and now in 2019 growth has ended. The trend indicates that it will go negative in the coming years demonstrating that we cannot expect any population growth to contribute to economic expansion in the coming years.
A variety of factors are driving this fall in core growth which includes decades of negative birth rates; retirement of the boomer generation into the 65+ age group; and minimal net immigration since 2008. This trend is expected to persist for many years because net US population growth is now confined among the 65+ age group living many years longer than previous generations.
The next Chapter deals with the after-effects of the next expected financial crisis and what we all hope will be a return to sanity in the pursuit of economic stability and a general improvement in living standards for everyone in our closely connected world. Before we move on, another important aspect of the disappearance of growth is that of the financial industry in its entirety
Financialisation as an indicator of false growth and dysfunctional markets
One of the common side effects of debt-fuelled speculation is financialisation, and one should immediately look to the growth and prominence of the financial industry since the 1980s with alarm, hesitation and concern; how and why is it that an industry that produces no physical product has grown to its current size? After all, the financial industry exists as a non-production utility and its very purpose is to properly allocate capital and resources to desirable, in-demand industries.
It is an industry whose very existence relies on the success of other industries. If the financial industry is able to properly allocate capital and resources to productive industries it is rewarded and is able to grow along with those other fundamental industries. If a misallocation occurs capital and resources are allocated to, and used up by failing industries, those which then shrink along with the finance industry and economic growth in general.
The concern is that of a general “hollowing out” of production which occurs in any country and something that is rarely disputed when addressing industry in America. This effect would typically result in a smaller financial industry, not a larger one; yet the explosion of growth in the finance industry since the 1980s has been quite to the contrary.
This is because debt-fuelled investment speculation and debt-based spending has exploded since the 1980s. Debt-supported investment speculation can be seen in the three instances in the 21st century when long-term returns for stocks have been reduced, each peak fuelled by different forms of speculation, that ensure low future returns.
The dilemma is that debt temporarily inflates the price of desirable assets until the point in time where that debt needs to be paid back and if a majority of the economy has debt that needs to be paid back economic growth is constrained.
At some point those individuals are paying back loans instead of boosting economic growth through spending. If the majority of the economy has unproductive debt i.e. debt that has not created an income stream to repay the principal amount borrowed and interest on the debt, then defaults, write-downs and write-offs have a punishing effect on the economy and the financial system in general.
Tradable securities far outpace economic growth:
For many, the punishing effect of defaulted debt is the destruction of investments which are not the same as true wealth. These investors’ “assets” evaporate and prices plunge but the reason that assets vanish in a market crisis is because debt is always considered an asset by the issuer, yet in reality debt is not always a true asset for the issuer.
There are always improper claims on assets that don’t exist, for example: loans that will not be paid back. In effect, there are claims on assets and securities issued on those “assets” that outnumber the actual underlying real assets. This is defined by the term “financialisation” and exists due to debt (leverage/speculation) and adding to layers of complexities which lead to a weakening of the market structure.
The book by Charles Kindleberger: “Manias, Panics, and Crashes” shows how this process has unfolded over and again throughout history. Speculative manias gather speed through expansion of money and credit. There are many more economic expansions than there are manias. But every mania has been associated with the expansion of credit. In the last hundred years the expansion of credit has been almost exclusively through the banks and the financial system.
In a boom time, relaxation in regulation and supervision builds up danger areas that become visible only when the boom turns to bust. The prominence of the finance industry and the growing dominance of obscure types of investments, many of which are simply more expensive packages of existing investments, become obvious.
Ever since the 1980s financialisation has grown owing to temporary debt-based investment speculation and debt-based spending. Although financialisation is temporary, because debt constraints eventually cause a readjustment, the real danger is that the temporary misallocation of wealth rewards the financial industry in a boom and bust cycle.
Wealth and capital, that would have been used in other demand industries had productive debt been pursued, is instead concentrated and consumed in the financial industry; which when coupled with the ability to influence politics creates a temporary reward or misallocation of assets which can cause a further entrenchment of an undeserving industry allowing a further misallocation of productive resources.
We have already discussed the Austrian business cycle in Chapter 11 about macroeconomics and the foregoing is an example of how misallocation of financial resources can cause a sudden malfunction in an economy and leave economists at a loss to explain exactly what has happened.
In any event, the financial world represented by Wall Street in the USA, has not brought us true economic growth but rather has conspired, albeit unconsciously, to minimise growth leaving future generations to suffer the effects of a final collapse. It is this situation that the next Chapter addresses.
To be continued next Saturday
The waste of printed currency by TPTB is evident in the huge numbers of resorts, cruise ships, golf courses, busy airports, big hotels & motels, restaurants, theaters, sports stadiums, Black colleges, empty mansions/condos clogging the coasts, and the many TV/radio stations with programs/ads that people ignore. When almost all the fuel has been wasted and there is not enough for farm tractors and essential transport, what use are the idle rich and their luxuries?
I’ve noticed that the radio stations in the shithole midwestern state I live in rarely have commercials advertising an actual business. 95% of the “ads” are nothing but PSAs by the Ad Council practically begging people to become a foster parent (you know it’s for a niglet) or to
“look beyond the resume” to hire some kid who never graduated any kind of school. (once again, a pavement ape). Or it’s an ad to remind you to take advantage of some gov’t agency or program.
Indeed Robert, thank you, and the next Chapter will address this very pertinent question.