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Economics for the people, not for the privileged

The majority of central banks focus on a 2% inflation target. In the developed world, we are experiencing inflation well below this level. I argue this is creating a debt spiral which is completely unnecessary if the true objective should be to increase GDP per capita and equality of income and wealth.

Over the past decades, technology enhancements in extractive industries has increased supply of commodities for any fixed cost. The transfer of knowledge and processes to the developing from the developed world has increased supply and reduced the price of a wide range of industrial and consumer products. The benefit of this should have been a reduction in the general level of prices and a corresponding increase in real wages.

This technology shift, as a result of the digital age, increases potential supply. If real wages were allowed to increase (through falling prices), that supply could have been met by increased demand.

The desire to raise inflation back to 2% has increased outstanding debt across economic business cycles as interest rates are cut to a lower terminal rate as the debt level rises with each cycle. The fear of deflation causes central banks to ease monetary policy too soon, too far in the hope of meeting the 2% inflation target. Debt does not get the chance to either be repaid of written off. Central banks are forced to cut even deeper in the next downturn to cut the interest burden. This creates a spiralling cycle of easy money and increasing debt.

Far better I say, to maintain the money supply as fixed across the business cycle, allow it to increase only to reflect productivity gains. This puts a cap on over-zealous expansion as confidence rises from a recession and forces inefficient operators to default in a slump.

Increasing the money supply, through QE or lower rates, in an attempt to increase prices adds to GDP in the less productive industries if it is not accompanied by rising real wages. Money needs to find a home. Currently it is fed into financial markets increasing asset prices. To some extent this generates activity and GDP; e.g. property sales, but far better to increase output of goods and services which give utility. How does a house or bond sale increase utility yet they add to GDP just as house construction or car production?

But if we allow prices to fall and real wages to rise, the demand will be across all levels of income but have most impact upon those on lower incomes. The demand will not be focussed on financial assets but since it is in the hands of the lower earners, it will create demand for goods and utility based service not financial services.

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There is a press conference being held at 2.30 GMT today by the China State Council in relation to the trade deal. The fact it is not a joint presser with the US does lead me to think they are not going to announce a “Big deal”. Could be a volatility event. Take care.

The market doesn’t have a clue what is going on.

The Chinese presser held Friday announced a Phase 1 trade deal but no paperwork. You may remember there was a US presser held in October of a similar nature. No numbers were given Friday and there were contradictions not least of all over when Phase 2 talks could start.

I think the markets may now forget about the upside of a Phase 1 deal. Expectations are limited to $50b of agriculture products. It looks like some existing tariffs will be partially lifted and the December tariffs will not be applied. The muted reaction from equities on the announcement showed it was all built in to expectations.

Phase 2 is not coming any time soon. However, it will be interesting to see if Trump tweets positively about Phase 2 and the algos buy the news.

The risk-on trade is supported by QE. If markets falter going in to the year end (the repo crisis) then expect the Fed to step in quickly. I think however this will be troubling for people and hence confidence as it gets reported more widely in the press.

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If the central banks are back with QE or in the repo market, either way governments are going to be encouraged to increase deficit spending. If the central banks continue to push cash in and suck government bonds out then governments are going to feel entitled to spend freely without raising interest rates.

Perhaps that’s where all this ends. If governments have to increase deficit spending to meet the demand for more government securities then one can expect deficits to rise.

And doesn’t this then remind you of developing countries who lean on the IMF and World Bank only to find themselves defaulting years later. Governments are not known for increasing productivity but give them enough rope and they often hang themselves.

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how is that related to Forex/Commodities? Long Gold?

So as an example, if a country’s govt decides or the electorate decides that money is free it could spell considerable longer term risk of default. This is bad for the currency. One day through Interactive Brokers we may be able to trade bonds as well!

This is long term stuff but just to be aware of profligate governments. Trump despite being Republican strikes me as someone who would like to spend his way to success. The Germans however are digging their heels in. I’m actually negative on the Euro because I think the Europeans will have to spend their way out of the hole they are in.

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The Fed and other central banks across the globe are printing more money. Even India is buying their government bonds at a sharper pace. The globe is monetising debt. That is to say, under this fiat money system, we are printing cash to spend on (currently) financial assets relative to producing assets and services.

Governments are already running budget deficits and the burden of debt will continue to increase as central banks and the population at large condones the behaviour.

So what? Where is this all going and when?

I believe we are almost at the stage where the public will question central banks about their plans. The questions to ask are: are you going to stand behind all the debt issued in our country? Will you always be there to support the markets or will you ever step away and let prices float freely?

These are questions the central banks cannot answer. If they do, either way, the markets will panic. To admit to stepping away will lead to a massive sell off in bonds and equities. To publicly state the central bank is behind the markets is to admit to a communist style regime and investment will collapse since returns are not at the behest of the market and skill but rather all will be treated equally and none will fail - why take any risk if you don’t have to.

So when will people ask this question of their governments (read central banks as they become one and the same?).

We are seeing the gap between the rich and poor grow in terms of assets. As long as the central banks never answer the question, eventually government power will end up in the hands of the extremists - socialist or fascist will depend on who emerges as a voice for the people. Anyone who can promise what the people want and reach a wide enough audience will win.

The end game will be reached all the quicker if food and fuel inflation rises strongly. Any surprise upside in these figures may lead to falling asset prices and a relative increase in lower risk assets.

What does the word ‘debt’ even mean nowadays, when Central Banks can print money as if it’s nothing?

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They should call it “Death Clock”… :skull:

It’s truly depressing (and frightening).

Central banks have been expanding the money supply hoping to raise inflation to their arbitrary 2% target. The theory they are working from is that increasing money supply generates aggregate demand through encouraging lending and investment. The problem they face however is that money is not in short supply. Indeed there is too much money and hence it remains in the financial economy pushing up asset prices as opposed to the real economy acting on demand.

Central banks have been implicitly asking governments to increase their budget deficits in order to increase aggregate demand directly. Whether this be through tax cuts increasing disposable income or raising spending, either way governments can increate aggregate demand. If there is insufficient demand in the economy versus the supply of goods and services this will close the gap and eventually lead to inflation picking up - provided of course the supply of goods and services does not increase at the same time (a lack of both supply and demand typical of a recession).

This shows the interrelatedness of the economy. The target of any economy is to increase real GDP, i.e. the amount of goods and services in the economy. To avoid unrest those goods and services should also be distributed not too unevenly across the country, age and classes. An imbalance between the supply and demand of goods and services creates inflation or disinflation and even deflation. Any excess imbalance in the money supply vis a vis aggregate demand acts on the price of financial assets.

As we sit today, with employment at record highs and excess money supply, the missing element we have in this economy is aggregate demand. Whilst interest rates are at record lows and hence the interest burden is not impinging on the ability to spend, the level of debt outstanding and lack of employment security amongst the lower and middle classes does not encourage them to increase spending.

If central banks had allowed defaults and layoffs to run their full extent before adding stimulus then debt levels would have been lower moving into the next cycle upturn. It is the fault of central banks to not allow the down-leg of the cycle to run its natural course which restricts the expansion on the upturn and requires ever lower interest rates to continue the expansion.

Given the appropriate monetary expansion, an economy can expand at a natural rate which equates to how quickly it can expand the supply of goods and services. With idle labour and technological advances, growth can be faster than otherwise. In advanced economies, without either an increase in the workforce or productivity, it is not possible to increase the real economy. In this circumstance, increasing aggregate demand adds to inflation or increasing money supply adds to financial asset prices (if working through the banking system) or demand and inflation if working through fiscal channels.

Democratic governments will always try and increase GDP but they face the political challenge whereby increases in population and expanding the public sector are often vote-losers. This has been very evident in the UK and was a force for the Brexit vote. It is also evident in Trump’s campaign rhetoric promising the building of a wall to keep out immigrants who would likely be just what the US economy needs right now.