Monday, September 9, 2019

Pull Up, Pull Up!!

The Great Depression of 2008 never happened because central banks in the US and Europe flooded the system with truly titanic (yup, pun intended) amounts of cash.  In addition, governments threatened, blackmailed and extorted the "healthy" banks into salvaging the global financial system by taking over the "sick" ones.  Where governments couldn't do that, they just took over the sick ones themselves and passed the cost to the taxpayer. Well, actually they didn't - not in cash terms, anyway.  They didn't raise taxes and/or cut expenses, they just issued even more bonds which were purchased by the central banks.

This has led to an unprecedented explosion of government debt.  In the US alone, Federal debt now stands at $22 Trillion (chart 1). 

 

 Chart 1


Even more worrisome is the jump in debt as a percentage of GDP, now at 105%, up from 65% before the 2008 Great Crisis (chart 2).
 
 
 Chart 2

The private sector is no better.  Mortgage debt is currently $16 Trillion, surpassing even the "bubble" top in 2018 (chart 3).

 
 Chart 3

Now, ten years ago the economy was prevented from going into a tailspin by Ben Bernanke's helicopters raining down cash, driving interest rates to zero and keeping them there for a long, long time.(chart 4).





 Chart 4

The important point to notice in chart 4 is that US interest rates are still very low by historical standards and - most crucially - too low for any cut to have a meaningful positive monetary effect on the economy, .  Putting it in Bernanke terms, the Fed helicopter is simply flying too low. I can almost hear the mechanical warning voice in the cockpit: Pull UP, Pull UP !! 

In the absence of "real" growth potential (I prefer the term "development", btw) monetary policy alone cannot function as an economic catalyst, not from these low levels.

For proof of that point, just look at what is happening in the EU: even after years and years of zero and negative rates the economy is stalling - again! - and the ECB is most likely to resume its heavy bond buying to try and reflate the economy. Good luck.....

So, what is to be done? In my humble opinion we need real socio-economic development to take over from monetary/financial "growth".  A prime candidate is the total transformation of our society towards Sustainability, starting with a New Energy Paradigm.