There are no extreme "fixes" to secular declines in
sales, profits, employment, tax revenues and asset prices.
The saying "never let a
crisis go to waste" embodies several truths worth pondering as the stock
market nears new highs. One truth is that extreme policies that would raise
objections in typical times can be swept into law in the "we have to do
something" panic of a crisis.
Thus wily
insiders await (or trigger) a crisis which creates an opportunity for them to
rush their self-serving "fix" into law before anyone grasps the
long-term consequences.
A second truth is that crises
and solutions are generally symmetric: a moderate era enables moderate solutions, crisis eras
demand extreme solutions. Nobody calls for interest rates to fall to zero in
eras of moderate economic growth, for example; such extreme policies may well
derail the moderate growth by incentivizing risk-taking and excessive leverage.
Speculative credit bubbles
inevitably deflate, and this is universally viewed as a crisis, even though the
bubble was inflated by easy money, fraud, embezzlement and socializing risk and
thus was entirely predictable.
The Federal
Reserve and other central banks are ready for bubble-related financial crises:
they have the extreme tools of zero-interest rate policy (ZIRP),
negative-interest rate policy (NIRP), unlimited credit lines, unlimited
liquidity, the purchase of trillions of dollars of assets, etc.
But what if the current
speculative credit bubbles in junk bonds, stocks and other assets don't crash
into crisis? What if they deflate slowly, losing value steadily but
with the occasional blip up to signal "the Fed has our back" and all
is well?
A slow, steady decline is
precisely what we can expect in an era of credit exhaustion, which I've covered
recently: ( The Coming Global Financial Crisis: Debt Exhaustion).
The central bank "solution" to runaway credit expansion that flowed
into malinvestment was to lower interest rates to zero and enable tens of
trillions in new debt. As a result, global debt has skyrocketed from $84
trillion to $250 trillion. Debt in China has blasted from $7 trillion 2008 to
$40 trillion in 2018.
A funny thing happens when you
depend on borrowing from the future (i.e. debt) to fund growth today: the new debt no
longer boosts growth, as the returns on additional debt diminish. This leads to
what I term credit/debt
exhaustion: lenders can no longer find creditworthy borrowers, borrowers
either don't want more debt or can't afford more debt. Whatever credit is
issued is gambled in speculations that the current bubble du jour will continue
indefinitely-- a bet guaranteed to fail spectacularly, as every speculative
credit bubble eventually implodes.
As expanding credit no longer
generates real-world growth, growth slows.Over time, marginal borrowers default as
revenues and profits erode, and this triggers a corresponding erosion in
employment and wages.
This erosion is so gradual, it
doesn't qualify as a crisis, and therefore central banks can't unleash
crisis-era fixes. Not only do they lack the political will to launch extreme
policies in a moderate decline, it would be unwise to empty the tool bag of
extreme fixes at the first hint of trouble; what's left for the crisis to come?
Even worse,
if the extreme policies fail to restore rapid growth and more importantly,confidence in future rapid
growth, then ramping up extreme
policies will be correctly interpreted as the desperate acts of clueless
authorities. This will crush confidence and trigger the very crisis the
authorities sought to forestall.
There are no extreme "fixes"
to secular declines in sales, profits, employment, tax revenues and asset
prices. Moderate
stagnation will not be reversed with moderate fixes (lowering interest rates a
quarter of one percent, etc.), and any attempt to institute extreme policies
will expose authorities' desperation right when confidence is vulnerable to
collapse.
The Fed and
other central banks are trapped in more ways than one.
THREE
NOTES OF NOTE:
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Liberation: A Model for Positive Change is on sale this month: $4.95
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Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.
My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
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If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.
