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The wheel of misfortune
Print – Issue 166 | Article of the Week

Once capitalism only creates a permanent-debt-serf class and a technocrat, financier, entrepreneur and speculator class that harvests over 70 percent of the wealth and income, then democracy dies by the slow poison of rising inequality and the ever-greater collusion of wealth and political power.

 

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The theory of the happy union of capitalism and democracy rests on capitalism creating secure middle-class employment for millions. Once capitalism only creates a permanent-debt-serf class and a technocrat, financier, entrepreneur and speculator class that harvests over 70 percent of the wealth and income, then democracy dies by the slow poison of rising inequality and the ever-greater collusion of wealth and political power. Trump, Brexit the unravelling Italian crises are all products of this process.

Article by David Scott, Investment Manager & Market Commentator – Andrew Gwynne

The top jobs do not attract the best talent if the salary package is half of what the market rate is. But for many, income has remained static for what is now a very sizable chunk of their careers. Most people think that it is their employer that has failed to make steady increases in profits, that has arrested their wealth increment, and that may well be so. But there is a much bigger picture that is impacting and affecting us all. Markets are the mechanism that makes price discovery possible, and vice versa for efficiently functioning markets. Given the interdependence between the two, when there is no price discovery, there are no functioning market. And a market that doesn’t function is not a market at all. By implication if you don’t have functioning markets, you have no real investors. Because serious investors will not spend money purchasing things they can’t determine the value of. In a consumer-based economy like most in the West, where 70 percent of economic growth is driven by consumption, you must question both what is driving consumer spending and how are they funding it? For the last thirty years it has been unsustainable debt expansion. If finance had not been able to ‘securitize’ debts (turn them into assets) and sell them to speculators/investors over the past two decades, then debt creation could not have gone to such extremes, and consumers would not have been able to borrow and spend themselves so far into financial ruin. If western consumers had not been able to borrow themselves so far into ruin, they would not have been able to buy so many goods from Asia and other developing nations. Asia and developing nations would not then have been able to produce so many new millionaires and billionaires in their governments and businesses who then funnelled capital into western property markets, and western property markets would not have appreciated so far beyond domestic income gains. If property prices had not increased so far beyond income gains, then households would not have had to borrow so much just to get a roof over their heads. If they had not been able to borrow so much, property prices, education and related services would never have been able to rise so much for so long and become so unaffordable for the masses. But this all happened and so the world is upside down and the centre cannot hold.

“Central banks bought ten years respite, but it is all fake. They piled on insane amounts of debt, killed pensions and made markets a meaningless measure to achieve this stay of execution. They killed the markets to create the illusion that there still were markets.”

The old need the young to drive productivity and innovation, pay taxes and support the ever-increasing cost of the social safety net. They also need the young to buy their assets (property, securities, businesses) when they wish to downsize and raise liquidity. If the young are broke: under-employed, over-indebted and under-saved, they cannot get a footing and the social contract is broken. Twenty years of central bank and government-enabled debt-driven asset bubbles, have broken long-standing laws of financial and social equilibrium. A secular global repricing cycle is necessary to break the impasse and reboot the global financial system. The status quo is unravelling now, as it must. For the millennials to have faith in Capitalism, they need to have the ability to accumulate capital.

Since 2008, Central Banks around the world have bought many trillions in ‘assets’, mortgage-backed securities, sovereign bonds, corporate bonds, etc., often at elevated prices. It’s hard to gauge how much exactly, but it’s in the $20+ trillion range. Just so all these financial instruments wouldn’t be sold at prices markets might value them at after going through that revealing process of ‘price discovery’. In addition, central banks reduced interest rates. Giving ultra-low interest rates and even negative ones, which have led to ultra-low yields and the perception of ultra-low volatility, ultra-low risk and ultra-low fear, which in turn contributed to ultra-low savings. Because of this we have ultra-high prices for stocks, bonds and housing. People wanting to buy a home are under the impression they can secure “more home for their pound” because rates are so low, which in turn drives up home prices, which means the next buyers pay a lot more than they would have otherwise and receive “less home for their buck”. In the same vein, ultra-low rates allow for companies to borrow on the cheap to buy back their own stock, which leads to surging stock prices, which means ‘investors’ pay more per share. There is no way of knowing true price under these extremes so if you buy a stock, or a bond, or a home, you no longer have a means of finding out what they are truly worth because their value is determined by central banks printing debt out of thin air, not by what it has cost to build a home, or by what a company has added to its value through hard work or investment in labour, knowledge or infrastructure. Values have therefore been rendered meaningless.

Central banks currently determine what anything and everything is worth. Because investors are not getting any return on their savings, they will ‘invest’ in something, and anything, that get them a return. When the only guidance investors have left is what central banks purchase, this is much poorer guidance than an actual market place. The one thing investors can be sure of is that you’re paying more for ‘assets’ -probably much more- than they would have had to if central banks remained on the side-line. Central banks bought ten years respite, but it is all fake. They piled on insane amounts of debt, killed pensions and made markets a meaningless measure to achieve this stay of execution. They killed the markets to create the illusion that there still were markets. With the implied promise that they will be able to get out when they had ‘restored growth’. This is really the central theme of today’s world.

Central bankers and massive financial institutions have worked together to manipulate global markets for the past decade. Major central banks gave themselves a blank cheque with which to rescue problematic banks; purchase government, mortgage, and corporate bonds; and in some cases – as in Japan and Switzerland – stocks. They have not had to explain to the public where those funds were going or why. Instead, their policies have inflated asset bubbles, whilst cosying up to private banks and corporations under the guise of helping the real economy. The zero-interest-rate and bond-buying central bank policies prevailing in the U.S., Europe, and Japan have been part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks. It has, in turn, created asset bubbles that will explode into an even greater crisis the next time around. We stand on the edge of a dangerous financial precipice. The risks posed by the largest of the private banks still exist, only now they’re even bigger than they were in 2007-2008 and in a world of even more debt. What this means is that the same dangerous policies are still being promoted today as before 2008.

When politicians and regulators are asleep at the wheel, its society that will suffer sooner or later. Because of the collusion that’s gone on and continues to go on among the world’s main central banks, that problem next time will be an international one making the great financial crash of 2008 look timid by comparison. Without markets’ price signalling mechanism, the world’s wealth creators and preservers are blind, making the typical mistakes of someone operating without crucial pieces of information. The resulting malinvestment is piling up like underbrush in a forest where fires have been suppressed for too long. When the inevitable fire does break out it will be one for the history books. We must discriminate between the momentary problems faced by central banks and the inevitable systemic global crisis at the end of this credit cycle. Dealing with problems as they arise has become routine and the justification for continual interest rate suppression and the buying of assets with free printed money. A systemic credit crisis is a different matter. Central bankers do not seem to realise it, but this unfolding systemic credit crisis is of their own creation. It is the way markets eventually unwind the distortions created by earlier monetary policy excess. So long as central banks suppress interest rates and expand money and credit, there will be crises to follow. Just like night always follows day.

www.andrewsgwynne.co.uk


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