"Hope Is Not Good Policy" - Saxo Bank Warns The Entire World Is Headed For A Minsky Moment

Tyler Durden's picture

By Saxo Bank's Steen Jakobsen

Surely not this old chestnut – again?

‘Interest on debt grows without rain’ – Yiddish proverb

This proverb explains most of what goes on in policy circles these days. We are now watching Extend-and-Pretend, Episode VI: Promises for improvement amid ever growing debt levels.

In brief, we’re still working with the same dog-eared script we were introduced to all of five years ago, when markets had stabilised in the wake of the financial crisis: maintain sufficiently low interest rates to service the debt burden.

In other words, pretend to have a credible plan, but never address the structural problems and simply buy more time. But while we were able to get away with this theme for an awfully long time, the dynamic is now changing as the risk of low inflation (and even deflation) is a brick wall for the extend-and-pretend meme. Yes, interest does grow without rain, and the cost of maintaining and servicing debt grows especially fast in a deflationary regime.

Mads Koefoed, Saxo Bank’s macro economist, projects US growth at around 2.0% for all of 2014. That will be the sixth year with US growth near 2.0%, so despite lower unemployment and a record high S&P500, the economy has a hard time escaping that 2.0% level.

The US may be getting back to work, but why are growth rates
so stubbornly stuck at the 2.0% mark? Photo: Thinkstock

Any talk of higher interest rates is hard to take seriously when US growth is going nowhere and world growth is considerable weaker than was expected back in January (or as recently as July, for that matter). It seems everyone has forgotten that even the US is a part of the global economy.

The fourth quarter is always the most politically interesting time of year. Countries need to get their new budgets in order. The EU, IMF and World Bank will need to pretend they agree or accept the weaker data, which has to mean bigger deficits.

It’s a tiresome exercise to watch denial-in-action as EU governments and other policymakers try to make something so obviously unpalatable go down easy in their internal reporting. '

It’s obvious that buying more time (extending) is always the number one priority, followed by projecting (pretending) that forward looking growth will reach an ever-higher trajectory in order to make the budget fit within the supposed constraints. Or in France’s case, the recent unilateral abandonment of meeting budget targets for the next two years is already a fait accompli. Who’s next?

Such behaviour would cost you your job in the private sector, but in the economic model of 2014, which reminds us more of the Soviet Union than a market based economy, it’s par for the course. But, many would protest, it would be even worse if we hadn’t done so much to “save the system”, right?

Well maybe, except for the fact that those economies where the belief in State Capitalism is strongest – Russia, China and France – are all at the end of the line. Time has caught up.

Negative productivity, capital flight and a system built on protecting the elite is failing.

France is now moving from recession to depression. China is moving quickly from denial towards a mandate for change, Russia’s future has not looked this bleak since the late 1990s. Meanwhile, the US continues at a sluggish 2.0% rate of growth. Investors and pundits seem to have forgotten that we were promised 2014 would be the end of the crisis.

China's efforts to build a better, more prosperous society has led to a rethink
of its economic policies in the last 12 months. Photo: Thinkstock

Instead, we are speeding towards the inflection point at which debt becomes harder to service because pretend-and-extend policy making has created a depression in investment and consumption.

The public debt loads continue to inflate across Europe: Portugal’s public debt has ramped up to a staggering 130% of GDP, up from about 70% in 2007. Greece’s public debt load, even after the restructuring of Greek debt a few years ago, has swelled to 175% of GDP. The EU now has far more systemic risk than it did at the beginning of the crisis.

With zero growth or as our economist Mads sees it, 0.6% with the arrow pointing down, debt levels continue to rise relative to GDP. And most importantly, the current flirt with deflation will make servicing the growing debt even more expensive.

The nightmare for both the European Central Bank and the world is deflation, as it’s a tax on debtors and a boon to net savers. The new reality is that we currently stand face-to-face with the very deflation risk that just about everyone denied could ever happen when Q1 outlooks were written.

Two other global threats (or time bombs, if you will) outside of the EU are risks from the growing costs of servicing debt in China and the US. In China, the governments – national and local – have piled up considerable debt, but it is the overall debt service costs in all of China that are the real concern, which have only grown so large with the dangerous assumption by Chinese banks, companies and citizens that they can count on a public bailout.

According to a Societe Generale analyst, total debt service costs (including maturing debt and roll overs) in China are at nearly 39% of GDP. Compare that with the closer to 25% of GDP for the US in 2007.

In the US, interest on US government debt cost over 6% of budget outlays in 2013. This is relatively down from its worst levels when interest rates were much higher, but only because the Federal Open Market Committee has so drastically lowered the costs for the US government to issue debt with a zero interest rate policy.

And now the debt load is vastly larger than it was before the financial crisis, at 80% of GDP (net debt according to IMF) versus 45% of GDP a mere 10 years ago.

So are we actually to believe that the Federal Reserve can lift the entire front-end of the curve from 0-1% (current rates out to three years) to 2-4% over the next two years without adding massive further stress onto the deficit, and only adding to the debt?

Servicing 2% interest when growth is 2% means you are doing worse than standing in place if you also have a budget deficit.

Whatever the timing, the US, China and Europe are all headed for another Minsky moment: the point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset. Productivity growth in the US last year was +0.36%. The real growth per capita was about 1.5%.

Anything which is not productivity is consumption of capital. So, the only way to grow an economy without productivity growth is to do so temporarily through the use of debt – about 75% debt and 25% productivity growth, in this case.

Since the 1970s, US productivity growth rates have fallen by 81% – the move onto the internet has ironically made us bigger consumers and less productive. Had we remained at pre-1970s productivity, the US GDP would have been 55% higher and the outstanding debt to GDP would be easily fundable.

* * *

Anecdotally, and by way of conclusion, I just returned from Singapore on business.

Singapore, to me, used to be the most rational business model around. Its founder Lee Kuan Yew was one of the greatest statesmen in history. Now, productivity is collapsing in Singapore. They are, like us, becoming the Monaco of the world — an economy based on consumption and not on productivity and growth.

The developed economies are growing old in demographic terms, but we’re still not wise enough to realise that our current model is a Ponzi scheme rushing toward its inevitable Minsky moment. No serious policymaker or central banker is talking about the truth told by simple maths and hoping that things turn out well. Hope is not good policy and it belongs in church, not in the real economy.

Bastion of forward -thrusting, aggressive capitalism Singapore has recently witnessed
a collapse in productivity that epitomises the global malaise. Photo: Thinkstock


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TuPhat's picture

So does this mean it's all bad?

knukles's picture

Not necessarily.  The guys at Goldman have a nice bridge you can buy.

NoDecaf's picture

Hope is not a plan.


A common saying in the army. It's one of the positive things I got from there...

knukles's picture

That's right.  But when you add in some Change with the Hope, then you're all set 
Now, what about a nice bridge?
Could I interest you in a Perpetual War, loved by Progressives?

rwe2late's picture


Why do you only single out alleged "progressives"?

Are Bush, Cheney, David Cameron, the Secretary Generals of NATO,

CEOs of MIC corporations,

Netanyahu, et al,  all "progressives" in your imagination?

X.inf.capt's picture

another saying from the army



something tells me when this falls apart, someone other than the bankers will catch the blame...like the liberals, conservatives, goverment, pensioners, welfare recipients, tea party, YOU, ME, my dog....or someone...

DoChenRollingBearing's picture



Well, yes, margin debt is extreme now, I wonder how THAT fits into the USD being so strong now, I am befuddled, and I dug around...

Gold, Bitcoin, crude oil, cotton, food commodities are all down.  Treasuries and stocks are only up a little bit (past three months, as the US$ has screamed higher).

EDIT: + 1 for another factor/reason the US$ is up...

"King Dollar?"


max2205's picture


KnuckleDragger-X's picture

We could do something about it right now but it would require a lot of economic pain so they keep pushing it off to the future where the pain will be so much worse. I expect to see a very uncivil war, not one started by people of the patriotic stripe but by the leeches when their goodies are cut off. The government will try to go full Marxist and nationalize everything but that'll just speed up the avalanche.

TBT or not TBT's picture

The middle class will have to take the hit.   They don't have the voting power of the new permanent majority coalition consisting of the well connected elite and the government dependent(the FSA of course, but also large businesses that own their regulators/congresscritters, the entire education establishment pre-K to postdoc, unionized government workers, social security dependents, Medicaid/care dependents.... list very incomplete).  

This is end game for our Republic.  As predicted/feared by those who set it up explicitly to have very limited means and roles.  

nmewn's picture

Here's the thing about "progressives" to me.

They live in some as yet undiscovered world (and never will be discovered because its not real) where they think people can be made to conform to the perfect model of "progressivism" which is never defined (conveniently) and highly malleable in the first place.

It manifests itself in many things such as, speech & thought control, commonly called PC. Also as (for example) Big Gulp & gun control, right up till the point they want a Big Gulp or need a gun to defend themselves against what they advocated for, then its always someone elses fault they have neither oddly enough.

How do you define "progressive"?

Anusocracy's picture

Someone who forces others to conform to a failed belief system that is different from the failed belief system that fascists force others to conform to.

nmewn's picture

Lets not bring crony-greens into the discussion ;-)

NoDebt's picture

'Progressives' is just one (in a long line of) fancy names for people who what to control everything.  Those at the top of the movement don't give a shit about the issues they claim they care about (where are all the anti-war protesters for what's going on in Syria, for example?).  It's a means to an end- control.  And nothing more.

nmewn's picture

Yes, it is always and always has been, about control.

And I wish whoever is junking rwe2late would stop, he asked a straight forward question, am I the only one who will green him?

KnuckleDragger-X's picture

Its all bread and circuses but eventually they run out of bread and the circus leaves town...

Eyeroller's picture

Yet 'progressives' have successfully convinced the sheeple (with the help of the lapdog press) that they are the ones who care about the little guy.

kaiserhoff's picture

They haven't convinced anyone. It's all about bribes and abuse of power.

If you mean the propaganda on the boob tube, the Jew York shit isn't really working any more.

booboo's picture

Don't get me started on the "crony greens".

I had a local government environmental head tell me to my face that if I (a builder) was applying for the needed permit from them there would be a fee but if the landowner on who's land the home was being built on was applying for it the fee would be waived because I was a profiteer. I just sat there mouth agap and finally said, "you do realize that the consumer ultimately pays for everything.... right?"

I don't think she understood. It's a defect in their brain, really! They are mentally retarded.



nmewn's picture

Had the same thing, don't know how I'm going to do this without divulging what I do (its important to me that I not) but here goes.

I was called to a meeting because "governmental arborists" said "You can't cut down these trees!"

After two hours of back & forth (me chuckling throughout) about why the trees had to go, another government offical finally stood up and said what needed to be said "If you (the arborists) insist on saving these trees all you have to do is sign off on this piece of paper holding ______ blameless for the design which you are creating a flaw in, with the attendent claims on property damage & public safety. We'll be happy to move forward with your revision, sign here."

Put on the spot, the trees came down ;-)

Its not like they were one hundred year old oak trees either, they were sweet gums and assorted trash trees but it was surprising to me (and enlightening) that a major project for the public good gound to a complete halt over two departments within government fighting over authority and how two twenty year old "arborists" could stop "progress/maintenance" in its tracks...they felt they had that much authority and apparently did.

For a month...lol.

Gromit's picture

An environmentalist enjoys making other people dance to his tune at no cost or liabilty to himself.


Cloud9.5's picture

A progressive is an anal retentive control freak who wants to organize the world into his twisted version of utopia.  He cares not how much misery and death he causes in the process.  The end justifies the means.  The needs of the many outweigh the rights of the few.  Square pegs will be fitted into round holes.  At the end of the day, his view of perfect order and civility is only realized in a grave yard. 

nmewn's picture

Sometimes I look on in stunned amazement. Lets take the cartoonish "Life of Julia" for yet another example of "progressive propaganda" and we'll even leave aside the entire premise of that (that the people are too stupid to be spoken to as adults and must be related to through cartoons, as children).

Here we had an political ad openly advocating that without the miracle of the state stealing from someone else in order to give to Julia, Julia would be destitute. The people doing this ad (and who approved it to air) must think Julia can't do anything for herself (misogynist-sexist?) and it also supplanted the idea of a man sharing Julia's life with .gov as that man. The same idea they did with their Great Society nonsense that wrecked the black family unit for decades, which is only now starting to recover somewhat.

The lesson of the state being powerful enough to give you everything you want is also powerful enough to take everything you have is apparently not taught in public anymore.

Moar dependency please! ;-)

TBT or not TBT's picture

The welfare state is an equal opportunity destroyer.   It's worth reading about the desolation of the permanent British underclass by the same processes.

Steve in Greensboro's picture

Progressives call themselves that because "commie" sounds so retrograde.

robobbob's picture

i offer no defense for bush, et al

but to remind you

it was quintessential progresive professor turned president that dragged america into WW1, suspended civil rights and created the nwo prototype the league of nations

and it was silver spoon trust fund baby country club progressive FDR who turned a nasty depression into a lost decade, drove america permenantly onto the road to serfdom, took every opportunity to steer america into WW2 rather than avoid it, suspended civil rights, imprisoned american citizens without cause, and had a known communist agent as a close advisor while working on forming nwo 2.0

republican chicken hawks  and neo con types are constantly starting nasty little wars for fun and profit, but when you need a massive drag out bloodletting, no one has done it better the those oh so compassionate and sophisticate progressives.

NoDecaf's picture

I'll ante up with an overpriced bridge over the Hudson (along with funds raided from the EPA), I see your perpetual war and I raise you 10 million new EBT cards.



Help Is Not Coming's picture

I'll buy it only if I can fly "white" flags from it at 3:00 AM.

Bossman1967's picture

why do you single out progressives?
because they suck ass. bush was a progressive Cheney evil but obama is the worst president of all time all progressives

Anusocracy's picture

Neocons are fascists, Obamaites are progressive flavored fascists.

Because the most effective way to survive in government is as a fascist, eventually everyone running government will be fascists.

nmewn's picture

One of my favorite sayings is "Bush came in as a social conservative and left as a conservative socialist."

I don't think he vetoed anything put before him, neither has Obama. Growth of the state is all that matters to fascists. What people should be observing is who is saying "Gimme moar!" Not who is saying no, no more, enough already.

There is where you'll find your fascists.

Anusocracy's picture

Yes. They are both governmentalists and therefore hirelings of the elites and enemies of productive people.


Excellent characterization of 43.

I remember when people pushed his compassionate conservative message. 43 is a NWO progressive just like his Daddy. He figured out that the only way to win was to lie to conservatives. I think Bush is a progressive just like Obama but Bush gets it from growing up an a blue blood elitist (He is no Texan contrary to the yarn spun about him). Obama comes to it as a committed Alynsky communist. They come from different sides of the sprectrum but they ultimately believe in the supremacy of the state. Obama will do the most damage but Bush 43 laid the ground work

TBT or not TBT's picture

The roosevelts and the supreme court of the time laid the groundwork.   That was the era we branched off onto the road to perdition.   We the people started voting ourselves goodies from the public treasury and empowering an unchecked permanent fourth branch of government to take what it and its bought off voters voted for.   Demagoguery is a word with ancient Greek roots.  

knukles's picture

Gentlemen, gentlemen, gentlemen....
I merely pointed out that the current Progressive administration has furthered the Perpetual War and its Progressive supporters support siad kinetic actions.

However, in response to why they're singled out?
As I just said, they're in charge right now... either in actuality or nominally.... I care not which for purposes of this discussion... and thus, the Progressives, who so ever screamed and yelled bloody murder about Bush's wars, killing oo f Brown People, illegally, crimes against humanity, curtailment of freedoms under the Patriot Act, so on and so forth, have doubled and tripled down upon the very same.

That's why I cited them

It has nothing to do with the blue/red analysis, Hegelian Dialectic or anything else of that nature.

They've become that which, upon principles, they despise.... they have no principles.

KnuckleDragger-X's picture

I'm pretty sure that Hegelian Dialectic crosses into Godwin's Law territory...  :-))

TBT or not TBT's picture

And so be it.   We need to remind people that fascism does not equal Hitler, and Hitler/the Nazis were not uniquely evil among totalitarian systems.   

Kirk2NCC1701's picture

Minsky moment, my ass! After all the Ponzi moments in this Potemkin village, the Gulf will widen into a Tonkin(sky) moment.

A Reset will occur, and the Sheeple will be as clueless after the shearing and fleecing, as before.

Same as it ever was, same as it ever was...

Kirk2NCC1701's picture

Hope is not a Plan or Policy in the military, Project Management or respectable Business Plans, but it's a CORE Policy in Organized Religion.

Sell 'em Hope, Faith and Heaven, and they'll buy ANYTHING off the self-appointed middlemen, and they'll maintain their lifestyle in perpetuity.

JustObserving's picture

 the point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset

You don't think geniuses like Yellen can maintain near-zero interest rates forever? Neither do I.

And let's not forget the at least $130 trillion in unfunded liabilities in the US. Only about $1,260,000 per taxpayer.  And growing at $70,000 per taxpayer per year.


NaN's picture

How long has Japan had low interest rates?

hobopants's picture

Japan (until recently) has maintained a giant trade surplus making that possible...we don't have one of those.

NoDebt's picture

Do not doubt for one second that the elites are not WELL aware of this situation.  There will be a collapse, but at a time of their choosing, when they have the pieces in place to again gain control in the aftermath.

I hope very much that you all are enjoying this "recovery" because what comes after will be a lot worse.  

NoDebt's picture

They don't need anything so overt.  Fear alone is their fencing system.  The "enemies of the state" will be turned in by their own families.

TeamDepends's picture

"Hope is not good policy." Tell that to the progressives six years ago.

knukles's picture

Don't date yourself!
Tell them NOW!
They'll say it's all the Republican's fault.
Just remind them of all the good shit they managed when they had a super majority.
So enriching to cast light upon darkness, bring love and understanding to the masses, one slight at a time.