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Our policymakers in Washington, D.C. have indeed sown the seeds of economic destruction. I think the threats all boil down to the liberalization of U.S. and global monetary policy.
The idea of thriving in harsh conditions made me think of an article I read in Wired.co.uk last year:
“Study: neuroscientists develop equation for predicting future disasters”
The article summarizes what neuroscientists are working on that could explain, and even help anticipate, what would generate a coming collapse in risk appetite and financial markets. My emphasis:
“The dynamics of complex systems – like the brain and the economy – depend on how their elements causally influence each other; in other words, how information flows between them,” said lead author Lionel Barnett.” …
“The team suggests it’s possible to measure when a system reaches that tipping point, when it moves from a healthy system to one that is overwhelmingly indicating a change. It occurs when an overwhelming number of nodes have caused an integrated change too big to remain stable.”
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| Consumer debt is on the rise: As of Dec. 31, 2013, it was up by 2.1 percent from its level in the third quarter of 2013. |
Any ideas of what’s become too big to remain stable?
Your immediate response may be to say the flows of information have generated a stock market bubble. But I think we have to look deeper than that.
That is to ask: What are these “nodes” that are causing “an integrated change too big to remain stable?”
I believe the easiest answer is extraordinary monetary policy.
The intervention by global central banks, spearheaded by the Federal Reserve, has been aimed at one thing: stability.
Their primary goal has been to create stability in the financial system, despite their stated goal of stimulating the economy. But their devotion to financial market stability comes with consequences. This is where the seeds of destruction have been sown.
The omnipresence of central banks has indeed brought financial market stability. And it has also corresponded with what many consider a recovery in economic growth. But it’s really not as clear-cut as it seems.
The omnipresence of central banks has implanted policies that discourage real, sustainable growth. Extraordinary monetary policy, instead, encourages mal-investment and prolongs necessary deleveraging because it simply props up the type of growth that cannot stand on its own.
Look at how debt now dominates the world still today, five years removed from the global financial crisis:
- The U.S. requires perpetual debt-ceiling hikes just to keep government “open”
- The euro zone remains exposed to a banking system that’s drowning in its own sovereign debt
- Japan is doing everything in its power to maintain internal financing of its mountainous debt
- China can no longer grow sufficiently without risking a complete implosion of their debt-driven economy
That’s just the big four. And we’ve seen recently how these threats can manifest themselves in emerging market turmoil.
Basically, the sustainability of the world’s most important economies rests entirely on a perceived stability in the financial system, i.e. their ability to take on and manage debt.
I caught a headline last week discussing a recent report released by the New York Fed. It was their U.S. household debt and credit report. Here’s the biggest takeaway sitting right in the first paragraph of that report:
Aggregate consumer debt increased in the fourth quarter by $241 billion, the largest quarter-to-quarter increase seen since the third quarter of 2007. As of Dec. 31, 2013, total consumer indebtedness was $11.52 trillion, up by 2.1 percent from its level in the third quarter of 2013. The four quarters ending on Dec. 31, 2013, were the first since late 2008 to register an increase ($180 billion or 1.6 percent) in total debt outstanding. Nonetheless, overall consumer debt remains 9.1 percent below its 2008Q3 peak of $12.68 trillion.
I don’t like the parallels. But what does it really mean?
It could mean consumers are confident enough to reignite borrowing to a meaningful degree. But that in and of itself doesn’t indicate a healthy economy. It could merely indicate how information flows are influencing consumers.
Again, I suggest these information flows are merely the nodes of extraordinary monetary policy aimed at creating a perceived stability.
The New York Fed’s report could also indicate desperation. Remember what I said earlier: “The omnipresence of central banks has implanted policies that discourage real, sustainable growth.” If the positive side-effects are wearing off, the consumer may be seeking debt out of desperation rather than rediscovered optimism due to a real and sustainable economic recovery.
Regardless of the reason for the growth in consumer debt, I find it concerning. I wonder if it is, with all the other evidence, “overwhelmingly indicating a change.” I wonder if we’re not very near a tipping point …
The global financial system remains tightly coupled. Even a relatively isolated implosion in one part of the world could trigger a chain reaction throughout the globe. When a system is so dependent on debt, there is little that can be done to support it when the dominos begin to fall.
Needless to say, much of the global wealth cushion was wiped out after the credit crunch of 2008. The central banks stepped in. And they kept the situation from getting worse.
But did they do anything to keep it from happening again?
I don’t think so.
And in fact, I say that they’ve likely sown the seeds of economic destruction. They’ve fostered a system of debt and easy money that’s too big to remain stable.
Best,
JR
{ 1 comment }
Debt is our problem. Even our boom times were based on debt spending, i.e. home equity loans, leveraged buy outs, housing boom, leveraged everything, all resulting from the Fed's easy money policies. We no longer save, only borrow and speculate, no longer produce, only consume, and the Fed has put themselves into our prosperity management. The Fed is our economic politburo, and central planner.