Monday, January 18, 2016
Free falling oil prices are wreaking havoc in the “oil patch.” Oil simply costs too much to recover at current prices, making drilling (much less exploration) a losing battle.
In North Dakota, the active rig count has fallen from 200 to 49 over the past four years. In Texas, the oil rig count is 271, down from 697 at the same point last year.
Layoffs in the energy sector are mounting, which will lead to home foreclosures and personal bankruptcies.
Employers in the oil and gas extraction sector have cut 17,000 jobs since the October 2014 peak, according to the U.S. Bureau of Labor Statistics.
Many energy companies are already failing, and the number will surely increase throughout the course of 2016 and beyond. The fallout will be widespread.
We can expect significant bank failures to accompany the failing energy companies they loaned to when oil was over $100 per barrel.
With oil now at roughly $30 per barrel, there will be carnage in both the energy and banking sectors. Bank failures will soon be on the rise, which will remind Americans of the fallout from the housing crisis in 2009 and 2010.
Here’s a look at this history of bank failures, going back to the year 2000:
Year - Number of Failures
2000 - 2
2001 - 4
2002 - 11
2003 - 3
2004 - 4
2005 - 0
2006 - 0
2007 - 3
2008 - 25
2009 - 140
2010 - 157
2011 - 92
2012 - 51
2013 - 24
2014 - 18
2015 - 8
As you can see, from 2000-2007, just 32 US banks failed. Then, starting in 2009, there was an explosion of bank failures due to the housing crisis.
From the FDIC’s creation in 1933 through 2008, there were just 10 years in which 100 banks failed in a single year. But that regrettable milestone was reached in consecutive years — 2009 and 2010.
My sense is that we are once again on the precipice of significant bank failures. Lending institutions in oil producing states, and beyond, are on the hook for the huge losses now being experienced by frackers and other high-cost energy producers.
Shale oil is expensive to extract by historical standards, and is only viable at much higher prices. Shale oil costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa.
At the current price of roughly $30 per barrel, many producers will not be able to survive. The cost to extract shale oil simply exceeds the returns.
This year, we will witness an avalanche of bankruptcies in the oil patch, running from North Dakota to Texas, and on to Pennsylvania. There will be continued job losses, home foreclosures and lots more failing banks.
More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection due to collapsing oil prices.
One-third of U.S. oil companies could face bankruptcy by mid-2017, according to Wolfe Research.
The current downturn in oil is now deeper and longer than each of the five oil price crashes since 1970, according to Morgan Stanley. Yet, Morgan -- as well as Goldman Sachs and Citigroup -- expects the price of oil to plunge into $20 territory.
Wall St. is bracing for a wave of defaults in the oil sector. Standard & Poor's Ratings Service recently warned that a whopping 50% of energy junk bonds are "distressed," meaning they are at risk of default.
Corporate defaults topped 100 last year, the first time that's happened since 2009. Almost one-third of the defaults in 2015 were by oil, gas or energy companies.
The world currently produces a surplus of 2-3 million barrels per day. That surplus isn’t going away anytime soon. And as the global economy flirts with recession, demand will not rebound anytime soon either. This means low oil prices are here to stay for the foreseeable future, and the collapse of energy companies will continue.
Unfortunately, yet quite predictably, a significant number of banks are doomed to collapse right along with those energy companies.
This is a story to follow closely throughout 2016.
Friday, December 11, 2015
Rising government debts are becoming worrisome all over the world. Over the past eight years, governments have added $60 trillion in new debt to the already enormous piles of existing debt.
As a point of reference, the entire output of the global economy in 2014 was estimated at $77.6 trillion by the International Monetary Fund (IMF).
The US has been an active player in this global debt binge.
According to the US Treasury, the national debt now stands at $18.775 trillion.
Without context, numbers can be meaningless, and even misleading. So, let me attempt to provide some context.
The IMF recommends that a developed nation’s debt not exceed 60 percent of its gross domestic product (GDP), or the entire output of its economy. A nation’s debt is the cumulative byproduct of accruing annual budget deficits.
In essence, a deficit results from a government spending more money in any given year than it collects in taxes and other revenues. The deficit adds to a nation’s debt.
The concern is that high debt-to-GDP ratios cause economic instability and hinder economic growth.
Again, the national debt is $18.775 trillion, which is bigger than our projected $18.125 trillion economy in 2015.
In other words, our debt is more than 100 percent of our economic output. That’s a whole lot bigger than the IMF’s 60 percent recommendation.
Yet, it's important to remember that the government doesn't pay its expenditures with the entire US economy; it pays for them with its revenues, which are procured through corporate and personal taxes.
The 2016 federal budget shows $3.525 trillion in revenues, which is about 20 percent of the national debt. That's a more accurate and useful reflection of the government's true debt ratio than is debt-to-GDP. It's also more worrisome.
In essence, if the government dedicated every dollar it collected this year to the national debt, it could only pay down roughly 20 percent, and there would be no money for anything else.
The trouble is that each annual deficit leads to even more debt.
For example, the federal government will run a $474 billion deficit in fiscal 2016, which amounts to 2.5 percent of GDP (by the way, the fiscal year is supposed to begin on October 1, but, due to Congressional dysfunction, the budget wasn’t handed to the president to be signed into law until November 2).
Economists have long recommended that a nation’s deficit should not exceed its annual economic growth. For example, if a country’s economy grows by 3 percent, it can sustain a deficit of 3 percent.
While the US economy used to grow by 3 percent annually, it hasn’t cracked that number since 2005. We’re now stuck with roughly 2 percent annual economic growth, which means our deficits should be smaller as well.
However, it should be noted that if the US were to follow the above deficit formula it would be perpetually indebted. A country needs to have economic growth exceeding its deficit in order to begin paying down its existing debt, rather than adding to it each year.
The current federal deficit of 2.5 percent is certainly better than it had been in recent years.
After the 2008 financial and economic crash, deficits soared as the federal government sought to fill the void left by crippled US companies and households, as can be seem below.
Deficits by Year, as a Percentage of GDP (source: Federal Reserve)
2009 - 9.8 percent
2010 - 8.6 percent
2011 - 8.4 percent
2012 - 6.7 percent
2013 - 4.1 percent
2014 - 2.8 percent
Clearly, the deficits have been moving in the right direction. But this doesn’t diminish the fact that deficits are the norm in the US, and they have been for many decades. There is never an honest attempt by Congress to balance the budget by either spending less or collecting more to avoid continual deficits.
Kiplinger’s and the Conference Board both project US economic growth of 2.5 percent this year. If that proves to be accurate, the 2.5 percent deficit would be a wash.
But here’s the concern:
As the national debt has grown continually larger, deficits that once seemed reasonable (say, 3 percent) result in rather huge dollar amounts. For example, this year's 2.5 percent deficit amounts to a whopping $474 billion.
In fiscal 2015, the US spent more on debt service (interest payments) than on housing & community, transportation, education, and food & agriculture. Debt service buys you nothing.
The debt will reach $20 trillion by 2017. By that time, a deficit of 2.5 percent would equal $500 billion — half-a-trillion dollars!
Deficits of that size were once unimaginable; they are now a matter of fact, and they will continue to be at least that large from this point forward. It's just math.
There’s no reason that the deficit will necessarily be restricted to 2.5 percent annually, but even if it is, the result would be $1 trillion in added debt every two years. Yet, as the debt continues to rise, deficits of 'just' 2.5 percent will result in ever larger dollar amounts.
It’s easy to see how this whole thing spirals out of control and eventually cripples the United States.
It’s not some far out notion. The numbers are rather clear.
Debt service crowds out other spending. It robs from critical national needs, such as science, research & development, infrastructure, education, healthcare, etc.
Our debt is on track to become so cumbersome that it will prevent the government from tending to needs that most Americans take for granted.
The national debt isn’t going away. It will continue growing dangerously larger each and every year, well into the foreseeable future.
Tuesday, November 17, 2015
The economic expansion that followed World War II — known as the post-war expansion — was unparalleled in the 20th Century.
Much of Europe, which had been destroyed by years of warfare, needed to be rebuilt. The Marshall Plan — the American initiative to aid in the rebuilding Western Europe after the war — cost approximately $130 billion in today's dollars.
The rebuilding effort put millions of men to work and utilized huge amounts of resources. Roads, bridges, dams, train stations, railways and buildings all needed to be rebuilt or constructed.
The US, absent any competition from Europe or Japan, became the world’s dominant economic superpower in the latter half of the 20th Century.
Once the rebuilding of Europe and Japan was completed, however, a huge source of economic growth came to an end. But Europe and Japan were then able to redirect their energy and resources from the war effort toward other, more useful economic pursuits.
In the process, Europe and Japan became huge sources of industrial output, manufacturing, engineering, research, development and invention. The US suddenly had some competition.
But all developed economies eventually experience a slowing of their growth rates. At some point, most of the potential growth has been ultimately realized and there is less juice to be squeezed from the fruit, so to speak.
Inevitably, the economies of the US, Japan and Europe have all slowed from the from their postwar glory years.
Enter China to pick up the slack.
China’s expansion over the past 30 years — especially the last 20 — rivals the postwar expansion in Europe, Japan and the US.
The Asian giant became the dominant consumer of many — if not most — of the world’s industrial commodities (copper, zinc, iron ore, coal, etc.), creating an economic boom that spread to other countries that are commodities exporters (Brazil, Chile, Australia, New Zealand, Indonesia, etc.).
Between 2000 and 2011, broad indices of commodity prices tripled, easily outpacing global growth, notes The Economist. That was clearly unsustainable, and we are now seeing the fallout.
China’s economy has begun to slow, and like the US, Japan and Europe, it too is overburdened by debt.
From the New York Times:
The so-called supercycle driven by China’s once insatiable appetite for raw materials has been extraordinary by any standard. Edward L. Morse, Citigroup’s global head of commodities research, likens China’s boom to the three decades after World War II when Europe was rebuilt, or the Gilded Age industrialization of the United States in the half-century after the Civil War.
“The last 20 years have been mind-boggling,” Mr. Morse said. “Between 1993 and 2013, China built 200 cities of a million people or more. This was incredibly intensive in terms of steel and copper and other commodities.”
Consider that for a moment. The US, the third most populous country in the world, has just 10 cities with a population of 1 million or more. But China built 200 of them in just 20 years. That is absolutely stunning!
The Chinese boom is tantamount to the massive buildout that occurred in Europe and Japan after WWII. In fact, it was even bigger.
Yet, that massive infrastructure buildout has finally come to an end, and with it so has the commodities super-cycle. Hence, the global crash we are now witnessing.
Commodity prices have fallen to their lowest level since the financial crisis and — by at least one measure — to the lowest this century.
The Bloomberg Commodity Index, which tracks a basket of 22 commodities, has fallen to its lowest level since 1999.
Copper is a key component in manufacturing everything from electronics to cars and other industrial goods. But copper prices are near their worst levels since 2009. Copper has sunk by about 22% so far this year.
China represents 40% of global demand, says financial blogger Wolf Richter. But China and the rest of the global economy are slowing. Absent demand, supplies have grown, so prices have fallen.
Shanghai steel futures have fallen to a record low, largely due to shrinking demand from its top consumer, China.
China is the biggest buyer of iron ore, but its demand is rapidly dwindling. Construction activity in China has fallen considerably over the last year or so.
A global glut of iron ore has sent prices to below $45 a tonne this year, less than a quarter of record highs seen in 2011.
Think about that: iron ore prices are less than a quarter of what they were just four years ago. That’s an epic crash.
Here’s how the NY Times describes it:
"The fall in prices for a variety of products, including crude oil, iron ore and agricultural crops like corn and soybeans is reminiscent of the collapse of the technology boom in 2000 or the bursting of the housing bubble nearly a decade ago. And behind the pain and anxiety are headwinds blowing from China and other emerging markets, where growth is slowing and demand for the raw materials that drive the global economy has dried up.”
Economists describe trends as either cyclical (repeating in shorter-term ups and downs, aka booms and busts) or as secular, meaning they are long term. There is every reason to believe that commodities are now in a secular down trend.
China is not about to build 200 more cities of at least 1 million people over the next 20 years.
That means the global economy is also likely on a long term downward trend. Growth will not match previous levels.
Slow growth and stagnation are likely the new normal.
The only thing growing at a great clip is global debt.
Slow growth and rapidly rising debt are a really unhealthy combination.
But, again, that’s our new normal.
No one wants to hope for an economic expansion that might follow WWIII.
Wednesday, November 04, 2015
There has been a lot of discussion over many years about the decline of the American middle class. That’s because the process has been decades in the making.
But a closer look reveals a broader economic decline, involving almost all Americans, from all classes.
The stagnation of incomes and wages isn’t merely a recent phenomena. When adjusted for inflation, both have suffered a long term decline.
A new report by the Social Security Administration has some rather stunning findings.
In 2014, 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.
Put another way, if you make more than $30,000, you earn more than 51% of Americans. And if you make more than $50,000, you earn more than 72% of Americans.
That is simply breath-taking, and it doesn’t square with the notion that America is a prosperous society where anyone can get ahead with some hard work and discipline.
In fact, the U.S. dropped out of the top 10 and into 11th place in the 2015 Legatum Institute Prosperity Index, which measures economy, education, entrepreneurship & opportunity, governance, personal freedom, social capital, health and safety.
If you’re still recovering after digesting those depressing findings from the Social Security Administration, get ready to be shocked again.
In September the US Census Bureau released its report on US household income by quintile. The findings are brutal.
Every quintile (or 20% share), as well as the top 5%, has experienced a decline in real household income since their peaks.
The bottom quintile (the lowest 20 percent) has experienced a 17.1% decline in real income from the 1999 peak (from $14,092 to $11,676). The 4th quintile has had a 10.8% fall in real income since 2000 (from $34,863 to $31,087). The middle quintile has had a 6.9% decline in real income since 2000 (from $58,058 to $54,041). The 2nd quintile has had a 2.8% fall in real income since 2007 (from $90,331 to $87,834). The top quintile has had a decline in real income since 2006 of 1.7% (from $197,466 to $194,053). The top 5% has experienced a 4.8% reduction in real income since 2006 (from $349,215 to $332,347). Only the top One Percent or less (mainly the 0.1%) has experienced growth in income and wealth.
Meanwhile, the US stock markets are still flirting with their all-time highs. Quite a disconnect, huh?
Many American corporations have been actively buying up their own shares with the use of very cheap money — the result of the Fed’s zero-interest-rate policy.
However, stock buy backs are just gimmicks to improve share prices. They don’t actually improve business, and they aren’t a productive use of capital. Stock buy backs may increase earnings per share, but they don't increase earnings. Fewer outstanding shares doesn’t help the bottom line.
Likewise, a company can trim costs (such as personnel) without actually increasing revenues. Ultimately, profits may increase for a while, but there are limits to cost cutting. If revenues aren’t growing, then neither is the company.
The use of stock buybacks and similar gimmicks amount to nothing more than smoke and mirrors.
Corporations engage in such shenanigans as a means of increasing earnings per share, which pleases Wall Street. And, as we all know, what Wall Street wants, Wall Street gets.
Companies will engage in unsustainable practices just to improve their stock price and/or earnings per share in an effort to satisfy the Street.
All focus is on the short term. Live for today, and don’t worry about tomorrow. More precisely, it’s live for this quarter — don’t worry about anything that comes after. There is no concern for the long term.
Wall Street’s takeover of the economy is what is known as “financialization.”
Over the last 35 years, or so, the financial sector has become more important than the industrial and agricultural economies — the sectors that actually produce tangible things. Leverage (debt) has taken precedence over capital, or equity.
Finance is not a productive activity. It is extractive, robbing from the economy. Nothing is created, other than debt.
Joan McCullough, of Longford Associates, sums it up quite nicely in her recent piece, The Financialization of the Economy.
Financialization is characterized by the accrual of profits primarily thru financial channels (allocating or exchanging capital in anticipation of interest, divvies or capital gains) as opposed to accrual of profits thru trade and the production of goods/services.
Economic activity can be “creative” or “distributive.” The former is self- explanatory, i.e., something is produced/created. The latter pretty much simply defines money changing hands… Financialization is viewed as largely distributive.
Business (and government) does the bidding of its financial masters on Wall Street. And Wall Street’s game is pumping out debt, which hangs like a grotesquely outsized albatross around the neck of our economy.
With the Federal Reserve keeping its benchmark at near-zero for the last seven years, companies have loaded up on debt.
“They now owe more in interest than they ever have, while their ability to service what they owe, a metric called interest coverage, is at its lowest since 2009,” notes Bloomberg.
As of the second quarter, high-grade companies tracked by JPMorgan incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysts. Companies have already issued $9.3 trillion in new debt since the financial crisis.
That’s a big hinderance to economic growth.
As the IMF notes, “the marginal effect of financial depth on output growth becomes negative … when credit to the private sector reaches 80-100% of GDP …”
In other words, too much financialization restricts growth.
We’ve long since surpassed that critical threshold. As of 2014, the US ratio of private sector debt to GDP stood at 194.8.
Making money out of money creates nothing.
“By creating nothing, the economy relies on the financialization process to create growth,” writes McCullough. “But the evidence supports the notion that once overdone, financialization stymies growth.”
However, as we all know, debt is not just corporate America’s problem.
The federal government owes over $18.4 trillion in debt (not including trillions more in unfunded liabilities), and the 50 states have a collective debt of over $5 trillion.
Then there’s the debt of ordinary Americans. As of June 30, total household debt was $11.85 trillion — 6.5% below its third quarter 2008 peak of $12.68 trillion, according the the New York Fed. Despite the improvement, Americans are still heavily indebted — or, more accurately, over-indebted.
The point that I’ve made many times through the years is that Americans are tapped out. Despite their shrinking wages and incomes, Americans don’t want to take on further debt. Diminished incomes and large debts have only served to shrink demand and diminish consumption.
Without adequate demand and consumption, business slows, as does investment. In the long run, job creation will be negatively affected as well.
Now the economy just hobbles along, a shadow of its former self. The days of 3,3% annual economic growth (our historic average) are a thing of the past. In fact, the economy hasn’t surpassed 3% annual growth since 2005.
This is our reality. This is what financialization has done to us. It has squeezed and siphoned from the economy. It is leaving a ravaged carcass, as it eats all the meat from our economic bones.
Thursday, October 29, 2015
Of unicorns and interest rates...
The Federal Reserve decided to leave its benchmark interest rate unchanged on Wednesday, maintaining its zero-interest-rate policy (ZIRP) that has been in affect since December 2008.
The decision likely surprised no one. It is an open admission that the Fed doesn’t have much faith in the US economy, or its alleged recovery.
Markets (and the economy) are moved by sentiment (including fear), and this decision signals that economy still isn’t healthy in the eyes of America’s central bank.
For many months, the Fed has led us to believe that would soon raise its key rate; first in June, then in September, and then again in October. Instead, there has been no change in policy.
It's all been much ado about nothing.
The federal funds rate — the benchmark rate for all long term lending in the US — has never been this low, this long.
Inflation is nonexistent (it was literally 0% in the 12 months ending in September), negating the reason to hike. The Fed generally raises rates when it is concerned about inflation, and lowers or maintains them when it is concerned about unemployment and weak economic growth.
After eight years, zero interest rates are no longer shocking — especially in a world of negative interest rates.
Over the last two years, four central banks in Europe moved interest rates into negative territory. The negative interest rate policy (NIRP) was introduced when ZIRP wasn’t working as intended (stimulating the economy through the increased lending of cheap money).
The problem is that, even at these extraordinarily low rates, there aren’t enough borrowers.
The European Central Bank (ECB), along with the central banks of Sweden, Denmark, and Switzerland, all charge large depositors to hold cash.
That’s pretty shocking. It would be even more shocking if it were to be employed here in the US.
But what was once unimaginable in the US is suddenly quite imaginable. After all, the template has been created in Europe. The playbook has been written. There is a precedent taking place right now.
While individuals might be able to close their accounts to avoid the fees — moving to an all-cash payment system where they can — corporations are not able to do this. That would be very costly and disruptive for them.
In a normal world, banks take cash from depositors, pay them interest, and then lend the money at higher rates to borrowers. This helps fuel economic activity and growth.
But this is no longer a normal world.
US rates are significantly higher than the rest of the developed world. The 10-year U.S. Treasury bond yields around 2.0%. Meanwhile, the German 10-year pays a mere 0.5%, and Swiss 10-year bonds are yielding -0.3%.
This is attracting foreign depositors and strengthening the US dollar. That’s making our goods more expensive overseas and hurting trade. In fact, quarterly profits and revenue are set to decline together for the first time since the financial crisis.
Rather than concerning ourselves about when the Fed might finally raise interest rates, maybe we should instead be wondering when they might actually cut them to negative.
No one had ever seen ZIRP before 2008. It was a mythical notion, like a unicorn.
However, now that we’ve seen one unicorn, another may be on the horizon. We might call it NIRP.
Friday, October 16, 2015
I’ve been following the unfolding crisis in Brazil, where economic problems are leading to national misery. This is a really sad and grim time for most Brazilians.
I always try to view these economic crashes through the dimension of human suffering — the suffering of individuals and families. The situation in Brazil is just awful, and terribly painful for millions of its citizens.
And this suffering is going on all around the world right now. It's how political instability begins.
Brazil’s unemployment rate has risen to 7.6 percent from a record-low 4.3 percent at the end of 2014. That’s a 76 percent increase in less than a year, which is enormous.
Latin America’s largest economy is now in recession — already the worst since 1990 — and the situation is expected to worsen.
The spike in unemployment is particularly troubling since the country based its growth model in recent years on a credit-fueled boom in consumer spending. But now millions of Brazilians may be unable to repay their loans for houses and cars.
Over the past decade, Brazil's banks engaged in a massive credit expansion that enabled some 40 million Brazilians to rise out of poverty and into the middle class. Total loans in the banking sector climbed five-fold over that time to 3.1 trillion reais. Family household indebtedness, as a percent of annual income, jumped to 46 percent from 20 percent.
The following is summary of the country's economic malaise:
Brazil officially entered recession four months ago. Its currency, the real, has fallen more than any other major currency in the world this year; annual inflation has soared to almost 10 percent; the budget deficit has swelled to the widest in at least two decades; and the government’s credit rating was cut to junk by Standard & Poor’s.
Last week, analysts at Itau Unibanco Holding predicted the economy will shrink 3 percent this year and unemployment will top 10 percent by 2016.
This means Brazil’s economic woes are expected to worsen over the next year, and with that there will be an increase in human suffering.
Brazil is a major exporter of commodities, and the slowdown in China and the rest of the global economy means that fewer of its commodities are being bought by other nations. This has crushed exports and hurt the overall economy.
Yet, Brazil does not exist in isolation. As the largest economy in Latin America, its pain and suffering will likely be felt more broadly, throughout the Latin world. Economic crashes often have a domino affect.
As I said earlier, this isn’t just about numbers; it’s about human lives. It’s about dashed hopes and dreams. It's about the suffering of millions of people who will lose their jobs and houses, and often wonder where they will find their next meal.
That’s especially difficult for children, who have no idea why any of this is happening.
Brazil is not unique. A number of countries around the world are confronting economic recession right now, including our northern neighbor, Canada, as well as Russia, Japan, and Greece — which is actually in a full blown depression.
Recessions are not merely things that give economists and analysts something to talk about. They are crises that negatively impact the lives of millions of ordinary, everyday working people, whose standard of living usually declines while their suffering typically increases.
That’s the stuff I always keep in mind.
Tuesday, October 13, 2015
One of the primary themes I’ve written about on this page in recent years is how little bang for the buck the Federal Reserve has gotten from its massive -- and unprecedented -- monetary policies.
Near-zero interest rates, three rounds of quantitative easing (QE), Operation Twist, etc., have gotten essentially nothing in return.
Consider that the Fed increased its balance sheet from $869 billion in August, 2007 to $4.5 trillion today. That’s a 450% increase in just eight years.
Yet, the US economy remains stuck at roughly 2 percent annual economic growth -- less than two-thirds of its historic average. That's clearly not the result the Fed was anticipating.
However, the Federal Reserve hasn’t acted alone. Central banks around the world — the Bank of Japan, the Bank of England, the European Central Bank, for example — have initiated their own QE schemes (money printing) and zero-interest-rate policies (ZIRP).
The central banks took these extraordinary measures in the belief that they would stimulate their beleaguered economies in the wake of the 2008 financial and economic crash.
After seven years of easy-monetary policies in developed countries, central bank balance sheets have risen to nearly $8 trillion!
And what do they have to show for it? Roughly 1 percent annual economic growth. Simultaneously, inflation has descended toward zero. In fact, deflation has become a genuine, and growing, threat.
After so much manipulation, so many schemes, and such gargantuan efforts by central banks, investment and growth both remain below pre-crash levels.
Bloomberg described it this way:
"More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world’s economic woes.
"Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market’s outlook for inflation worldwide is approaching lows last seen during the financial crisis. In the U.S., Europe, U.K., and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying.”
The emperor has been revealed to have no clothes. Central bankers, who see themselves as masters of the universe, have been exposed as having little power after all.
One Fed official has even publicly admitted that QE failed.
Stephen D. Williamson, vice president of the St. Louis Fed, says that quantitative easing has, at best, a tenuous link to actual economic improvements.
"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed — inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” wrote Williamson.
Williamson also said the zero interest rate policy in place since 2008, which was designed to spark "good" inflation, has actually resulted in just the opposite.
Even as monetary policy has failed to meet its goals, government leaders around the world have (through the utilization of fiscal policy) vigorously added to their already enormous piles of debt. They seemed determined to spend their economies out of the doldrums and invigorate them with new debt. But it hasn't worked as planned.
In just eight years, they have added nearly $60 trillion in new debt to the existing mountain — while GDP grew by only $12 trillion over the same time period, notes Chris Martenson, over at Peak Prosperity.
Despite the debt binge, global nominal GDP is projected to be $68.6 trillion in 2015 — virtually unchanged from 2013.
In other words, that massive debt increase got the world very little in return, and essentially nothing over the last two years. The global economy continues to struggle and is, in fact, barely growing at all.
Taken as a whole, developed and emerging countries racked up debt at five times the rate of nominal GDP growth.
This is madness!
Massive debts are not a solution to economic woes if they aren’t accompanied by commensurate economic growth and higher tax collections. Absent those things, debt is an albatross that ultimately weighs down a nation and hinders its government from serving the public interest in areas such as education, health and infrastructure. Servicing the interest on massive debts buys you nothing.
Back in 2010, I wrote that the world’s answer to the debt crisis was to add more debt. In essence, the solution was to treat the disease with more of the same disease.
Five years later, nothing has changed. Somehow, the world still hasn’t learned that you cannot cure a debt crisis with even more debt.
The lack of economic growth presents an epic challenge for global leaders.
They all need economic growth to service their enormous debts. The trouble is, there can be no growth without debt. Growth equals debt. In order to grow, the world's economies will have to incur even more debt. But that’s like adding more disease to an already sick patient.
Central bankers keep doing more of the same, expecting different results. By the way, that’s the definition of insanity.
The IMF recently downgraded its growth outlook for the world, and warned of a rising risk of a global recession.
Meanwhile, the Organization for Economic Cooperation and Development says leading indicators on a wide variety of data show that the world’s three largest economies — the U.S., China and Japan, as well as the U.K. and Canada -- are poised for slowdown.
This has got to be stunning, and depressing, for central bankers and government planners (not to mention the rest of us).
They’ve given it their best shot — utilizing every resource at their disposal, really — yet they’ve failed to re-inflate the bubble. All they’ve done is create absurdly unstable balance sheets, while racking up absolutely massive amounts of debt.
Maybe they’ve so far prevented a global depression. We’ll never know, since you can’t prove a negative.
We’re now in uncharted waters. These are unprecedented times. The world has never seen so much debt. Nor has it seen interest rates this low, never mind for this long.
In a normal world, this should be sparking massive, out of control inflation. But that hasn’t happened. This isn’t how the playbook says things should be. Economic textbooks will have to be re-written.
At this point, the Federal Reserve and other central banks appear to be trying to hold back the tide. Obviously, such an effort is in vain. The forces of global deflation are gaining steam, and world economic growth has reached a standstill.
There is plenty of academic work showing that massive debts -- both government and private -- ultimately hold back economic growth, and we're likely seeing that right now.
Again, global debt has increased at five times the rate of nominal GDP growth over the past eight years.
Clearly, that isn’t a solution. It’s more like a recipe for disaster.
Hold on tight. Things are about to get very bumpy.