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The Chart That Really Has The Fed Worried | Zero Hedge

The Chart That Really Has The Fed Worried | Zero Hedge.

While complaining (just this morning once again) that its fiscal policy that is dragging growth, we suspect The Fed knows full well just how screwed the US is. The following chart comparing GDP growth to the elder demographic of the population offers some serious doubts that the Fed will ever be able to step away. With the Boomers retiring en masse, 65-or-overs will represent over 20% of the population within a decade and thus no economic growth. Japanization here we come… and no end to QE or the entire status quo is over.

 

GDP growth correlates strongly with the percent of population over 65 (with Greece, depression and Japan, hyper-QE the stand-outs)

 

It doesn’t look good for the US…

 

You can’t print more young people to change this percentage… so they’ll have to keep printing money to prop up asset markets to maintain the bumpy illusion of growth.

 

Chart: @M_McDonough

Goldilocks And The Dog That Didn’t Bark | Zero Hedge

Goldilocks And The Dog That Didn’t Bark | Zero Hedge.

Submitted by Ben Hunt of Epsilon Theory

Det. Gregory: Is there any other point to which you would wish to draw my attention?

Holmes: To the curious incident of the dog in the night-time.

Det. Gregory: The dog did nothing in the night-time.

Holmes: That was the curious incident.

— Arthur Conan Doyle, “Silver Blaze”

Goldilocks And The Dog That Didn’t Bark

The market was down more than 2% last Monday. Why? According to the WSJ, CNBC, and all the other media outlets it was “because” investors were freaked out (to use the technical term) by poor US growth data. Disappointing ISM number, car sales, yada, yada, yada. But then the market was up more than 2% last Thursday and Friday (and another 1% this Tuesday), despite a Friday jobs report that was more negative in its own right than the ISM number by a mile. Why? According to those same media arbiters, investors were now “looking through” the weak data.

Please. This is nonsense. Or rather, it’s an explanation that predicts nothing, which means that it’s not an explanation at all. It’s a tautology. What we want to understand is what makes investors either react badly to bad news like on Monday or rejoice and “look through” bad news like on Friday. To understand this, I sing the Epsilon Theory song, once more with feeling … it’s not the data! It’s how the data is molded or interpreted in the context of the dominant market Narratives.

We have two dominant market Narratives – the same ones we’ve had for almost 4 years now – Self-Sustaining US Growth and Central Bank Omnipotence.

The former is pretty self-explanatory. It’s what every politician, every asset manager, and every media outlet wants to sell you. Is it true? I have no idea. Probably yes (technological innovation, shale-based energy resources) and probably no (global trade/currency conflict, growth-diminishing policy decisions). Regardless of what I believe or what you believe, though, it IS, and it’s not going away so long as all of our status quo institutions have such a vested interest in its “truth”.

The latter – Central Bank Omnipotence – is something I’ve written a lot about, so I won’t repeat all that here. Just remember that this Narrative does NOT mean that the Fed always makes the market go up. It means that all market outcomes – up and down – are determined by Fed policy. If the Fed is not decelerating an easy money policy (what we’ve taken to calling the Taper), the market goes up. If the Fed is decelerating its easy money policy, the market goes down. But make no mistake, the Common Knowledge information structure of this market is that Fed policy is responsible for everything. It was Barzini all along!

How do Narratives of growth and monetary policy come together? Well, there’s one combination that the stock market truly and dearly loves – the Goldilocks scenario. That’s when growth is strong enough so that there’s no fear of recession (terrible for stocks), but not so strong as to whip the flames of inflation (not necessarily terrible for stocks, but sure to provoke the Fed tightening which is terrible for stocks).

Over the past few years the Goldilocks scenario has changed. Inflation is … well, let’s be straight here … inflation is dead. I know, I know … our official measures of inflation are all messed up and intentionally constructed to keep the concept of “inflation” and the Inflation Narrative in check. I get that. But it’s the Narratives that I care about for trying to predict market behaviors, not the Truth with a capital T about inflation. If you want to buy your inflation hedge and protect yourself from the ultimate wealth-destroyer, go right ahead. At some point I’m sure you’ll be right. But I’m in a business where the path matters, and I can’t afford to make a guess about where the world may be in 5 to 10 years and just close my eyes. The Inflation Narrative is, for the foreseeable future, dead. It’s a zombie, as all powerful Narratives are, so it will return one day. But today Goldilocks has nothing to do with inflation.

The Goldilocks scenario today is macro data that’s strong enough to keep the Self-Sustaining US Growth Narrative from collapsing (ISM >50 and positive monthly job growth) but weak enough to keep the market-positive side of the Central Bank Omnipotence Narrative in play. That’s the scenario we’ve enjoyed for the past few years, particularly last year, and it’s the scenario that our political, economic, and media “leaders” are desperate to preserve. So they will.

On Monday we had bad macro data on the heels of the Fed establishing a focal point of $10 billion in additional Taper cuts per FOMC meeting, a clear signal that monetary easing is decelerating on a predictable path. This is the market-negative side of the Central Bank Omnipotence coin, which turns bad macro news into bad market news. And so we were down 2%. And so the Powers That Be started to freak out. Did you see Liesman on CNBC after the Monday debacle? He was adamant that the Fed needed to reconsider the path and pace of the Taper.

And then we had Friday. Honest to God, I thought Liesman was going to collapse of apoplexy, what my Grandmother would have called a conniption fit, right there on the CNBC set. The Fed MUST reconsider its Taper path. The Fed MUST do everything in its power to avoid even a whiff of deflationary pressures. Heady stuff. By 10 am ET that morning the WSJ was running an online lead story titled “U.S Stocks Rise as Focus Returns to Fed”, acknowledging and promulgating the dynamic behind bad macro news driving good market news.

It’s not necessary (and is in fact counter-productive from a Narrative construction viewpoint) to switch the Fed trajectory 180 degrees from Taper to no-Taper. What’s necessary is to inject ambiguity into Fed communication policy, particularly after the non-ambiguous FOMC signal of two weeks ago that led directly to Monday’s horror show. The need for ambiguity is also something I’ve written a lot about so won’t repeat here. But this is why Hilsenrath and Zandi and all the rest of the in-crowd are writing that the Taper is still on track … probably. Unless, you know, the data continues to be weak. What you’re NOT seeing are the articles and statements by the Powers That Be placing a final number on QE3, extrapolating from the last FOMC meeting to a projected QE conclusion. And that’s the dog that didn’t bark. It’s the projection that Yellen won’t be asked about in her testimony; it’s the article that won’t be written in the WSJ or the FT. Is the Taper still on? Two weeks ago the common knowledge here was “Yes, and how.” Today, after a stellar bout of Narrative construction, the answer is back to “Yes, but.” That’s the ambiguous, “data dependent” script that Yellen and all the other Fed Governors now have the freedom to re-assert.

If I’m right, what does this mean for markets? It means that our default is a Goldilocks scenario between now and the next FOMC meeting in mid-March. It means that bad macro news is good market news, and vice versa. If the next ISM manufacturing number (no one cares about ISM services) is a big jump upwards, the market goes down. Ditto for the February jobs number. If they’re weak, though, that’s more pressure on the Fed and another leg up for markets.

Place your bets, ladies and gentlemen, the croupier is about to spin the roulette wheel. Pardon me if I sit this one out, though. My crystal ball is broken.

If I’m right, what does this mean for the real world? It means an Entropic Ending to the story … disappointing, slow and uneven growth as far as the eye can see, but never negative growth, never an honest assignment of losses to clear the field or cull the herd. That’s not my vision of a good investment world, but who cares? I’ve got to live in the world as it is, even if it’s a long gray slog.

Welcome to the Grand Delusion, come on in and see what’s happening…

Welcome to the Grand Delusion[i], come on in and see what’s happening…

We live in a state of delusion, not merely illusion. As Wikipedia[ii] points out, “A delusion is a belief held with strong conviction despite superior evidence to the contrary. As a pathology, it is distinct from a belief based on false or incomplete information, confabulation, dogma, illusion, or other effects of perception.” The fact that a belief persists despite ‘superior evidence to the contrary’ is what makes the difference. This is why the majority live in a delusional state, not just one of illusion.

Sure, this delusion is aided and abetted by various ‘agents’ (i.e. corporate/mainstream media; government; bureaucrats; academics; corporations; etc.), including our own thought processes[iii]; however, despite growing, incontrovertible evidence to the contrary the majority persists in clinging to specific, unfounded beliefs.

Another aspect of our Grand Delusion is that the majority of us don’t want our fantasy to end. We are ‘benefiting’ from the lies and deceptions being perpetrated upon the world. The benefit may come in the form of unsustainable social services, a global economic Ponzi scheme, power and privilege, or something as simple as a ‘safe and secure’ position in society. We know deep down inside, however, that something is wrong with the world: that it is inequitable and violent; that the people in charge are corrupt and psychopathic; and, that greed and money rule the day.

We avoid reality. We tell ourselves that problems exist somewhere else. We persuade ourselves to continue living in the delusion. Don’t make waves. It’s safer to be wrong with the majority than stand out from the crowd and yell the sky is falling, especially if the-powers-that-be are doing all they can to keep the Grand Delusion alive just a bit longer.

Here are just a couple of the delusions that we hold:

1)    The banking/financial/economic system is sound.
The foundation of the banking system is built on a fraud, there is no other way around the scheme that is fractional reserve banking. When an institution can create money from air by hypothecation and rehypothecation ad infinitum, we have what is essentially a pyramid scheme. When these very institutions grow to the point where they are too big to fail, or the perpetrators of the scam too big to jail, then it is time to recognise that the system is not sound, despite it being legalised and legitimised by our politicians.

2)    Governments serve their citizens.
Edward Snowden joins a list of ‘whistleblowers’ who have shed light on the shadowy world of politics, and the power that is wielded in the name of ‘security’ and ‘nation building’. How many more lies and deceptions do we need to catch politicians in to realise that we are being fed a load of horseshit almost every time one of them makes any statement about anything. I quote economist Murray Rothbard in his essay, Anatomy of the State, when he summarises what the State is: “…the State is that organization in society which attempts to maintain a monopoly of force and violence in a given territorial area…[it] provides a legal, orderly, systematic channel for the predation of private property; it renders certain, secure, and relatively ‘peaceful’ the lifeline of the parasitic caste in society…[and] the majority must be persuaded by ideology that their government is good, wise, and, at least, inevitable…ideological support being vital to the State, it must unceasingly try to impress the public with ‘legitimacy,’ to distinguish its activities from those of mere brigands.” The State, mere brigands of a parasitic caste who get their revenue through force and depend upon support through the manufacturing of consent. It’s difficult not to view the government in this light given daily events.

3)    Economic growth can continue forever.
Our current economic system is built upon growth and not just any kind of growth but exponential growth. Such growth, however, is impossible on a finite planet. Economists defer to the belief of substitutability and market forces to assume it can. This is perhaps the most disturbing delusion because the mathematics to show it cannot is irrefutable. Yet, the consequences of this are ‘assumed away’.

4)    Civliisation is not threatened by energy issues.
Energy is the foundation of everything. Without it there can be no banking system, no governments, and no economic growth. Here is the biggest delusion, that our civilisation will continue unabated even as we come to the end of a one-time windfall of cheap, easy-to-retrieve, and easily-transportable energy. Ignoring the devastating consequences of mining, producing, and using vast amounts of energy (coal to nuclear), we must face the very real wall that is quickly approaching. Peak Oil is a geologic certainty, it is not a theory and it is not going away. Finite resources are finite and there must come a time when we confront this reality.

The world appears to be crumbling in various ways as we attempt to squeeze the last remnants of long-stored energy from the planet in order to sustain what is unsustainable. In what is likely to be a classic example of ecological overshoot and collapse, we race towards the cliff, hearts pumping knowing that the end is close but afraid to try and change directions. But that is what is needed. We need to change direction, as of yesterday, to avoid the continuing trap of the Grand Delusion.

SB

 

Styx: The Grand Illusion

Welcome to the Grand illusion
Come on in and see what’s happening
Pay the price, get your tickets for the show
The stage is set, the band starts playing
Suddenly your heart is pounding
Wishing secretly you were a star.

But don’t be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they’re just someone else’s fantasy

So if you think your life is complete confusion
Because you never win the game
Just remember that it’s a Grand illusion
And deep inside we’re all the same.
We’re all the same…

So if you think your life is complete confusion
Because your neighbors got it made
Just remember that it’s a Grand illusion
And deep inside we’re all the same.
We’re all the same…

America spells competition, join us in our blind ambition
Get yourself a brand new motor car
Someday soon we’ll stop to ponder what on Earth’s this spell we’re under
We made the grade and still we wonder who the hell we are

The Grand Illusion lyrics © Universal Music Publishing Group


[i] Apologies to Dennis DeYoung and Styx
[ii] http://en.wikipedia.org/wiki/Delusion
[iii] Reduction of cognitive dissonance having one of the strongest impacts. As social psychologist Leon Festinger has stated: “Humans are not a rational animal, but a rationalizing one.”

 

What the TransCanada Pipeline Will Really Cost Us | Carl Duivenvoorden

What the TransCanada Pipeline Will Really Cost Us | Carl Duivenvoorden.

Carl Duivenvoorden

Sustainability consultant

 What the TransCanada Pipeline Will Really Cost Us
Posted: 02/06/2014 5:30 pm

As the Energy East Pipeline dominates ever more headlines, editorials, ads and press conferences in my home province of New Brunswick and elsewhere, I’m reminded of an interview given by Calgary Mayor Naheed Nenshi on the CBC Radio’s The House in February 2013.

Mayor Nenshi said:

We’ve got a resource that is valuable to us and to our kids and to our grandkids, and we know that someday it’s not going to be that valuable; someday we’ll have a low carbon world. And I think it would be deeply irresponsible for us to leave that resource in the ground so that it will be worthless for future generations.

Ponder that statement and you get to the heart of the current lust for pipelines out of Alberta, whether south, west, north or east. You get to the heart of why the Energy East Pipeline, a project barely contemplated just a year ago, has quickly received nearly universal adulations and blessings, and seems on an ultrafast track to reality.

But before we place our chips on the pipeline, perhaps the costs and benefits are worth closer scrutiny.

Economic gains

Almost every assessment of the pipeline stresses the economic gains it will provide to New Brunswick. A recent report by Deloitte and Touche (commissioned, interestingly, by TransCanada, the company building the pipeline) suggests our province will earn about $700 million in tax revenues over 40 years. That sounds like a lot, but, in context, it’s roughly $20 million per year in a province with an annual budget of about $8,000 million, or about 0.25 per cent of our budget. Not exactly a windfall.

The same report suggests NB would see about 1550 direct jobs as a result of the pipeline. That sounds tempting too. But over 90 per cent would be temporary, lasting three years at most. In context, NB’s construction industry presently provides 27,000 jobs, or nearly 20 times as many.

Finally, because Alberta oil is landlocked and therefore traditionally sold below world prices, it’s been suggested that bringing it east will lower energy prices for us. As rosy as it might be to imagine that world oil prices will suddenly drop because Alberta crude has arrived in Atlantic Canada, it’s probably more realistic to expect that Alberta crude will get more expensive as soon as a pipeline links it to us, and the world market.

So — economic glitter perhaps, but not necessarily economic gold.

Environmental costs

It’s interesting, and perhaps telling, that the Deloitte and Touche study specifically excluded any assessment of the environmental aspects of the pipeline project. So has much of the official conversation. That’s like ignoring elephants in the room.

First, there’s the issue of pipeline integrity and the potential for spills. Pipelines have a long and mostly successful history, so it’s probably fair to assume that if they are well engineered, constructed, maintained and operated, the risk of ruptures is small. A spill is possible, but it’s probably the baby elephant in the room.

The jumbo elephant, quietly ignored in most of the conversation so far, is climate change. No matter what any of us may wish to believe, burning oil produces greenhouse gases, and greenhouse gases are warming our planet and disrupting our weather. The Energy East Pipeline, the Keystone XL Pipeline, the Northern Gateway Pipeline and the hinted Beaufort Sea option – all are big, new drinking straws stuck into that bituminous milkshake called the oil sands, serving it up to an addicted world that needs to break its addiction.

The International Energy Agency, a leading global authority, has stated that if we are to put the brakes on climate change, most of our known global fossil fuel reserves must remain untouched in the ground. Kudos to Mayor Nenshi for implicitly acknowledging that; but shame on those who interpret it as a signal to get as much oil to market as quickly as possible while it’s still worth something. Hence the pipeline bonanza in which we are being asked to partake.

Our choice

Jobs come and go but climate change is permanent. Years from now, our grandkids will look back on the decision we are facing today. I can’t imagine them being very sympathetic or understanding if we choose to trade away their long term climate stability for our short term prosperity. But that’s the very trade we’re contemplating as we consider the Energy East pipeline.

Who Are The Biggest Losers From The EM Crisis | Zero Hedge

Who Are The Biggest Losers From The EM Crisis | Zero Hedge.

Some very relevant observations from Louis Gave of Evergreen GaveKal

Who Will The Emerging Markets Crisis Adjust Against?

In last summer’s emerging market sell-off, India was very much at the center of the storm: the rupee collapsed, bond yields soared and equity markets tanked. The Reserve Bank of India responded by raising rates while the government introduced harsh restrictions on gold imports. Promptly, the Indian current account deficit shrank. So much so that, in the current emerging market (EM) meltdown, India has been spared relative to most other current account deficit emerging markets, whether Turkey, Brazil, South Africa or Argentina. And on this note, the inability of the Turkish lira, South African rand, Brazilian real, etc. to hold on to gains after recent hawkish moves by their central banks is problematic. Markets won’t be calmed until there is clear evidence these countries’ current account deficits can improve. But how can these adjustments happen?

The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate.

When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus.

Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia…? There are really five candidates:

  • China, again? That seems unlikely. Instead, China’s policymakers continue to do all they can to deleverage, despite the cost of a slowing economic expansion. Moreover, mercantilism still rides high in the corridors of power in Beijing and so the willingness to move to a current account deficit is simply not there.
  • The US, again? As discussed in our recent book (see Too Different For Comfort), the Federal Reserve’s attitude since the global financial crisis has consistently been one of: “the US dollar is our currency and your problem.” The Fed has been happy to print and devalue the US dollar, leaving other countries to deal with the consequences. The days of the US acting as the backstop in the system are now behind us.
  • Oil: In the past, collapsing oil prices have come to the rescue during emerging market crises. Of course, this accentuates problems for the EMs dependent on high energy prices for their growth, but is a boon for others (including India, China, Korea, Turkey). Unfortunately, for now, energy prices are not falling, with some more localized markets, like US natural gas, seeing a surge amid record cold snaps.
  • Japan: Japan, which has been such a non-player for twenty years, is once again finding its feet. However, it is doing so by exporting its deflation through a central bank orchestrated currency devaluation. How this “beggar-thy-neighbor policy” will help the struggling emerging markets is hard to see, except perhaps through a) capital flows from rich Japanese savers into by now higher yielding EM debt, or b) import substitution on the part of threatened emerging markets where the end consumers will perhaps replace high priced US dollar/euro denominated imports of manufactured goods for cheaper yen denominated ones?
  • Euroland: The currency zone’s slight trade surplus is largely due to Germany. However, Germany’s exports to Turkey, Russia, Brazil, etc., will likely suffer as domestic demand implodes in these countries. In this sense—the euroland will be the likeliest candidate on the other side of the EM current account adjustment. Unfortunately, odds are this will take place through falling European exports rather than rising European imports and/or rising EM exports to the eurozone. This is not a good harbinger for global growth.

In short, either oil collapses very soon, or the US dollar shoots up (with Janet Yellen about to take the helm, is that likely?) or we could soon be facing a contraction in global trade. And unfortunately, contractions in global trade are usually accompanied by global recessions. With this in mind, and as we argued in Eight Questions For 2014, maintaining positions in long-dated OECD government bonds as hedges against the unfolding of a global deflationary spiral (triggered by the weak yen, a slowing China, busting emerging markets and an uninspiring Europe…) makes ample sense.

Marek Dabrowski says that the global economy’s glory days are in the past. – Project Syndicate

Marek Dabrowski says that the global economy’s glory days are in the past. – Project Syndicate.

WARSAW – The global economy’s glory days are surely over. Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. This is a mistake. When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy.

Consider each of those growth factors. Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia. Europe, Japan, the United States, and eventually China and East Asia will face labor shortages.

Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support. Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age populations.

The world economy cannot count on higher investment levels either. The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term. Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia. But high rates of investment there are also unsustainable. As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises.

The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s. During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies. Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows.

It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy. No new technological revolution appears to be on the horizon. The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall.

Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism. Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat.

The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course. The easy gains have already been banked; any further structural change will take longer to agree and be tougher to implement.

Thus, with supply-side factors no longer driving global growth, we must reassess our expectations of what monetary and fiscal policies can achieve. If actual growth is already close to potential growth, then continuing the current fiscal and monetary stimulus will only create more bubbles, exacerbate sovereign-debt problems, and, by reducing the pool of global savings available to finance private investment, undercut long-term growth prospects.

Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.

The list of growth obstacles in emerging markets is even longer: corruption and weak rule of law, state capture, organized crime, poor infrastructure, an unskilled workforce, limited access to finance, and too much state ownership. In addition, markets of all sizes and levels of development continue to suffer from protectionism, restrictions on foreign capital flows, rising economic populism, and profligate or poorly targeted welfare programs.

If these problems can be addressed, both globally and at the national level, we can end the dangerous fiscal and monetary expansionism on which the world economy has come to rely and allow growth to be sustained over the long term – though at lower rates than in recent years.

Read more at http://www.project-syndicate.org/commentary/marek-dabrowski-says-that-the-global-economy-s-glory-days-are-in-the-past#7I5qemdSvu2IukCr.99

Chris Martenson: “Endless Growth” Is the Plan & There Is No Plan B | Peak Prosperity

Chris Martenson: “Endless Growth” Is the Plan & There Is No Plan B | Peak Prosperity.

After five years of aggressive Federal Reserve and government intervention in our monetary and financial systems, it’s time to ask: Where are we? 

The “plan,” such as it has been, is to let future growth sweep everything under the rug. To print some money, close their eyes, cross their fingers, and hope for the best.

On that, I give them an “A” for wishful thinking – and an “F” for actual results.

For the big banks, the plan has involved giving them free money so that they can be “healthy.” This has been conducted via direct (TARP, etc.) and semi-direct bailouts (such as offering them money at zero percent and then paying them 0.25% for stashing that same money back at the Fed), and indirectly via telegraphing future market interventions so that the big banks could ‘front run’ those moves to make virtually risk-free money.

This has been fabulously lucrative for the big banks that are in the inner circle. As we’ve noted somewhat monotonously, the big banks enjoy “win ratios” on their trading activities that are, well, implausible at best.

Here’s a chart of J.P. Morgan’s trading revenues for the first three quarters of 2013, showing how many days the bank made or lost money:

(Source)

Do you see the number of days the bank lost money? No? Oh, that’s right. There weren’t any.

Now, for you or me, trading involves losses, or risk. Sometimes you win, and sometimes you lose. There appears to be zero risk at all to JP Morgan’s trading activities. They won virtually all of the time over this 9-month period.

That’s like living at a casino poker table for months and never losing.

Of course, Bank of America/Merrill Lynch, Goldman Sachs, and a few other U.S.-based banks were able to turn in roughly similar results. Pretty sweet deal being a bank these days, huh?

So one might think, Well, that’s just how banks are now. Bernanke’s flood of liquidity is allowing them to simply ‘win’ at trading. If true (which it appears to be), we can’t call this trading. The act of “trading” implies risk. And it’s clear that what the big banks are doing carries no risk; otherwise they would be posting at least some degree of losses. We should call it sanctioned theft, corporate welfare, cronyism  the list goes on. And it is most grossly unfair, as well as corrosive to the long-term health of our markets.

Therefore, sadly, I have to give Bernanke an A++ on his objective of handing the banks a truly massive amount of risk-free money. He’s done fabulously well there.

But will this be sufficient to carry the day? Will this be enough to set us back on the path of high growth?

And even if we do magically return to the sort of high-octane growth that we used to enjoy back in the day, will that really solve anything?

Endless Growth Is Plan A Through Plan Z

The problem I see with the current rescue plans is that they are piling on massive amounts of new debts.

These debts represent obligations taken on today that will have to be repaid in the future. And the only way repayment can possibly happen is if the future consists of a LOT of uninterrupted growth upwards from here.

It’s always easiest to make a case when you go to silly extremes, so let’s examine Japan. It’s no secret that Japan is piling on sovereign debt and just going nuts in an attempt to get its economy working again. At least that’s the publicly stated reason. The real reason is to keep its banking system from imploding.

After all, exponential debt-based financial systems function especially poorly in reverse. So Japan keeps piling on the debt in rather stunning amounts:

(Source)

That’s up nearly 40% in three years (!).

It’s the people of Japan who are on the hook for all that borrowing, now standing well over 200% of GDP. So here’s the kicker: In 2010, Japan had a population of 128 million. In 2100, the ‘best case’ projected outcome for Japan is that its population will stand at 65 million. The worst case? 38 million.

So…who, exactly, is going to be paying all of that debt back?

The answer: Japan’s steadily shrinking pool of citizens.

This is simple math, and the trends are very, very clear. Japan has a swiftly rising debt load and a falling population. Whoever it is that is buying 30-year Japanese debt at 1.69% today either cannot perform simple math, or, more likely, is merely playing along for the moment but plans on getting out ahead of everybody else.

But the fact remains that Japan’s long-term economic prospects are pretty terrible. And they will remain so as long as the Japanese government, slave to the concept of debt-based money, cannot think of any other response to the current economic condition besides trying to shock the patient back to vigorous life by borrowing and spending like crazy.

If, instead, Japan had used its glory days of manufacturing export surpluses to build up real stores of actual wealth that would persist into the future, then the prognosis could be entirely different. But it didn’t.

The U.S. Is No Different

Except for some timing differences, the U.S. is largely in the same place as Japan twenty years ago and following a nearly identical trajectory.  Currently, it’s an economic powerhouse, folks are generally optimistic on the domestic economic front (relatively speaking), and its politicians are making exceptionally short-sighted decisions. But the long-term math is the same.

There’s too much debt representing too many promises. The only possible way those can be met is if rapid and persistent economic growth returns.

However, even under the very best of circumstances, where the economy rises from here without a hitch  say, at historically usual rates of around 3.5% in real terms (6% or more, nominally)  we know that various pension and entitlement programs will still be in big trouble.

Worse, we know that the environment is screaming for attention based on our poor stewardship. Addressing issues such as over-farming, water wastage, and oceanic fishery depletion  to say nothing of carbon levels in the atmosphere – will be hugely expensive.

Likewise, a complete focus on consumer borrowing and spending at the exclusion of everything else (except bailing out big banks, of course), along with a dab of excessive state security spending, has left the U.S. with an enormous infrastructure bill that also must be paid, one way or the other. That is, short-term decisions have left us with long-term challenges.

But what happens if that expected (required?) high rate of growth does not appear?

What if there are hitches and glitches along the way in the form of recessions, as is certain to be the case?  There always have been moments of economic retreat, despite the Fed’s heroic recent attempts to end them. Then what happens?

Well, that’s when an already implausible story of ‘recovery’ becomes ludicrous.

If we take a closer look at the projections, the idea that we’re going to grow – even remotely – into a gigantic future that will consume all entitlement shortfalls within its cornucopian maw becomes all but laughable.

Of course, the purpose of this exercise is not to make fun of anyone, nor to mock any particular beliefs, but to create an actionable understanding of the true nature of where we really are and what you should be doing about it.

In Part II: Why Your Own Plan Better Be Different, we examine more deeply the unsustainability of our current economic system and why it is folly to assume “things will get better from here.”

Given the unforgiving math at the macro altitudes, the need for adopting a saner, more prudent plan at the individual level is the best option available to us now.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

A Comedy Of IMF Forecasting Errors: Global Trade Growth Tumbles More Than 50% From IMF’s 2012 Prediction | Zero Hedge

A Comedy Of IMF Forecasting Errors: Global Trade Growth Tumbles More Than 50% From IMF’s 2012 Prediction | Zero Hedge.

The comedy of errors that are IMF forecasts is well known: it was covered most recently in “Hilarious Charts Of The Day: IMF’s “Growth Forecasts” Over Time.” Moments ago we got the IMF’s first forecast update for 2014 which also included the Fund’s first 2015 forecasts for growth around the world. Not surprisingly, they were largely higher across the board except for China which has seen its 2014 projected GDP growth collapse from 8.5% a year ago to 7.5% now, and is expected to drop modestly to 7.3% in 2015. The charts showing the progression of said hilarious forecasts are shown in their entirety below, about which one thing can be said with certainty: whatever the GDP growth rate in the world is in 2014 and 2015 it will be anything but what the IMF predicts it to be.

But perhaps the most notable feature of today’s set of numbers is the IMF’s forecast of world trade. In a word: it is crashing. Consider that 2013 world trade was expected to grow by 5.6% in April 2012. Now: it is more than 50% lower at just 2.7%!

Yet what is truly hilarious and certainly head scratching, is that somehow the IMF now anticipates a pick up in global growth in 2014 from its previous forecast of 3.6% to 3.7%, even as global trade is revised lower once more to the lowest prediction for 2014, and currently stands at just 4.5% compared to 4.9% in October 2013 and 5.5% a year ago (it goes without saying that the final global trade number for 2014 will be well lower than the IMF’s optimistic forecast).

How global GDP is expected to grow on the margin compared to previous forecasts even as trade contracts is anyone’s guess…

Behold the IMF’s revision to global growth forecasts: how does one spell error bars.

And here are the GDP growth forecasts for the rest of the world.

Global:

US:

Eurozone:

China:

IMF set to upgrade UK growth forecasts as global economy expands | Business | The Guardian

IMF set to upgrade UK growth forecasts as global economy expands | Business | The Guardian.

IMF Christine lagarde

IMF managing director Christine Lagarde says optimism is in the air, with growth forecasts for the global economy and the UK raised, Photograph: Paul J Richards/AFP/Getty Images

The International Monetary Fund is widely expected to raise its outlook for the UK on Tuesday, pushing up the country’s growth forecasts by more than for any other major economy.

The Washington-based fund has been a critic of the UK’s over-dependence on consumers as well as the government’s Help to Buy housing market scheme. But it will bring a welcome boost to chancellor George Osborne when it updates its World Economic Outlook from last October’s forecasts.

Back then it predicted UK national output would rise 1.9% in 2014 but is now expected to predict growth of 2.4%, according to a Sky News report. The IMF said it did not comment on leaks.

The fund is also expected to upgrade its outlook for the global economy, which in October it said would expand by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year’s speech from its managing director, Christine Lagarde, last week.

“This crisis still lingers. Yet optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years,” she said.

If confirmed, the substantial upgrade to the UK is likely to be seized on by Osborne as further proof the coalition’s “economic plan is working” – an oft-used phrase in recent weeks as indicators have largely pointed to growth picking up.

The fund has in the past been highly critical of the coalition’s austerity drive. In a damning indictment of the British chancellor’s economic policies last year, the IMF’s chief economist Olivier Blanchard warned Osborne would be “playing with fire” unless he eased the pace of budget cuts.

The IMF has also echoed other economists, including experts at the UK’s own Office for Budget Responsibility, who said that the UK remains over-dependent on debt-fulled household spending to grow.

The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.

Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK’s outlook.

The business group CBI has pencilled in 2014 growth of 2.4%, theBritish Chambers of Commerce expects 2.7% and the OBR forecasts 2.4%.

report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.

Peter Spencer, chief economic adviser to the EY ITEM Club said: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government’s Achilles heel and could prove to be the weak spot in the recovery.

“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.”

There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.

study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

The overall unemployment rate for the UK has been coming down faster than policymakers and most other forecasters had expected. Official data on Wednesday are expected to give a jobless rate of 7.3% for November, down from 7.4% the previous month.

Many economists expect the continuing drop in unemployment will prompt the Bank of England to tweak its forward guidance. At the moment, the BoE’s guidance is that, barring various exceptions, it will not consider raising interest rates from their current 0.5% until a threshold of 7% unemployment is reached. The Bank may well lower that threshold for considering a hike to 6.5% unemployment, economists say.

Growth is good for kids but not always for society — Transition Voice

Growth is good for kids but not always for society — Transition Voice.

economic growth

Photo: Lending Memo.

In the Western World, growth is our mantra.  Our schools, our religions, our governments, our businesses, all our institutions bombard us with the same message that to be all that we are meant to be means we have to grow.

Growth in and of itself can be a good thing, but unfortunately the growth that can be our doom is material growth, which has limits.

Falling Upward cover

Falling Upward: A Spirituality for the Two Halves of Life by Richard Rohr, Jossey-Bass, 240 pp, hardcover, $19.95.

So instead of thinking for ourselves – we take these messages literally and we over feed our bodies and become obese; we fill our cities with ever expanding populations, we produce more and more babies filling our planet with people; and to try and meet our never ending demand for more and more stuff, our economies drive us to consume more and more resources.  As a result, there is little space left for anything else but the material expansion of the human race.

This pure focus on material growth however leaves most of us feeling empty, lonely, hurt, angry, and numbed.  So how did we get this way, why have we forgotten how to think for ourselves?

Falling Upward:  A Spirituality for the Two Halves of Life by Father Richard Rohr, a Franciscan priest, provides a good explanation of why we are stuck in a meaningless pattern of growth.  The book points out how healthy cultures value two halves of life, but in our postmodern culture we discourage people from growing up.

So immature

In the first half of life, our external laws, traditions, customs, boundaries, and morality form a container that helps to shape who we will become.  They also provide us with the friction we need to move on and develop our own inner guidance systems that lead us beyond these simple, limited guidelines appropriate to the first half of life but that fall apart when applied to our complex world later on.

As we move through life and experience the struggles that life throws at us – our brushes with the law, our failed relationships, and our other failures – we begin to realize that simple rules and regulations, or escapes, do not isolate us from the struggles in life, or the pain they bring us.

It is by embracing these falls – these failures – that we begin to see the limits of first-half-of-life thinking.  We learn to live in tension, instead of searching for ways to avoid it.  We learn to transition from conditional love based on compliance, into an unconditional love based on connection.   Instead of repeating mistakes over and over again, we embrace our mistakes and learn to try new ways.

That is how real growth occurs – not by clinging to old ways, old rules, or old moralities.  That is how we move beyond the limits of our egocentric first half of life.

Our institutions and the people who make them up are stuck in first-half-of-life management methods.  They discourage real growth by imposing rigid rules designed to keep people stuck, to keep systems in place, to keep certain people in places of power.

Yet, by now, it might just be that the friction that all this control produces is reaching a point where the resulting heat can melt down these immature structures of hierarchy.  And from the ashes we can rise up to reclaim our second half of life – to really grow up.

As Rohr reminds us,

No one can keep you from the second half of your own life except yourself.  Nothing can inhibit your second journey except your own lack of courage, patience, and imagination.   Your second journey is all yours to walk or to avoid…some falling apart of the first journey is necessary for this to happen, so do not waste a moment of time lamenting poor parenting, lost job, failed relationship, physical handicap, gender identity, economic poverty , or even the tragedy of any kind of abuse.  Pain is part of the deal.  If you don’t walk into the second half of your own life, it is you who do not want it.

This piece originally appeared on Ecological Leadership.

– Tom Jablonski, Transition Voice

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