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David Stockman: The Global Economy Has Entered The Crack-Up Phase
Submitted by Adam Taggart via Peak Prosperity,
Few people understand the global economy and its (mis)management better than David Stockman -- former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier.
David is now loudly warning that events have entered the crack-up phase, which he predicts will be defined by the following 4 developments:
- Increasingly desperate moves by the world's central banks
- Increased market volatility and losses
- Deflation in industrial and commodity prices
- Decreasing demand due to Peak Debt
As the crack-up phase gains momentum, he predicts an increasing number of "financial breaks" that will add to the unpredictability and instability of the environment for investors. Even 'dancing close to the door' sounds excessively risky at this point.
We’re in the crack-up phase. I think there are four big characteristics of that which are going to shape the way the economy and the markets unfold as we go forward.
You’re going to see increasing desperation and extreme central bank financial repression because they have gotten themselves painted so deep into the corner that they're lost and desperate. Almost week by week, we have another central bank – this week, it was Sweden – lowering their money market rates into negative territory. The Swiss Bank is already there, the Denmark Bank is there, the ECB is there on the deposit rate, the Bank of Japan’s there. All of the central banks of the world now are desperately driving interest rates into negative territory. I believe that they’re lost; they're in a race to the bottom whether they acknowledge it or not. The central bank of China can’t sit still much longer when the reminbi has appreciated something like 30% against the Japanese yet because of the massive bubble of monetary expansion that’s being created there. So that’s the first thing going on. Central banks out of control in a race to the bottom, sliding by the seat of their pants, making up really incoherent theories as they go.
The second thing is increasing market disorder and volatility. In the last three months, the stock market has behaved like a drunken sailor. But it’s really just a bunch of robots and day traders that have traded chart points until somebody can figure out what is happening directionally in the world. It has nothing to do with information or incoming data about the real world. We have today the 10-year German bond trading at 29.5 basis points. Well, the German economy’s been reasonably strong, fueling the Chinese boom. That export boom is over. The Chinese economy is faltering. Germany is going to have its own problems. But clearly, 29 basis points on a 10-year is irrational, even in the case of Germany, to say nothing of the 160 available today on the 10-year for Spain and Italy.
Both of those countries are in deep, deep fiscal decline. There is no obvious way for them to dig out of the debt trap that they’re in. It’s going to get worse over time. There’s huge risk in those bonds, especially because there’s no guarantee that the EU will remain intact or the euro will survive. Why in the world would anybody in their right mind be owning Italian debt at 160 other than the fact that they’re front-running the massive purchases that Draghi has promised and the Germans have acquiesced to over the next year or two. But that only kicks the can down the road. One of these days, the central banks are going to falter and the market is going to reset violently to prices that reflect the true risk on all this sovereign debt and the pretty cloudy outlook that’s ahead for the world market.
We now have something like four trillion worth of sovereign debt spread over Japanese issues, the major European countries that are trading at negative yields. Obviously, that is one, irrational and second, completely unsustainable. And yet, it’s another characteristic of what I call these disorderly markets. Investment is now coming home to roost. It will be driving a huge deflation of commodity and industrial prices worldwide. You can see that in iron ore, now barely holding $60 from a peak of $200. Obviously, it’s seen in the whole oil patch. Look at the Baltic Dry Index. That is a measure, one, of faltering demand for shipments and, two, massive overbuilding of bulk carrier capacity as a result of this central bank driven boom that we’ve had in the last 10 to 20 years. So that is going to be ripping through the financial system, the global economy, in ways that we’ve never before experienced. And so therefore, in ways that are hard to predict what all, you know, the ramifications and cascading effects will be. But clearly, it’s something that we haven’t seen in modern times or ever before – the degree of over investment, excess capacity, and everything from iron ore mines to dry vault carriers, aluminum plants, steel mills, and on down the line.
And then, finally, clearly, demand has run smack up against peak debt -- I think that’s the right word for it. We had a tremendous study come out in the last week or so from McKinsey, who do a pretty good job of trying to calculate, track and total up the amount of credit outstanding, public and private, in the world. We’re now at the $200 Trillion threshold. That’s up from only about $140 Trillion at the time of the crisis. So we’ve had a $60 Trillion expansion worldwide of debt just since 2008. During that same period, though, the GDP of the world saw a little more than $15 trillion from $55 or mid-$50s, roughly, to $70 Trillion. So we’ve generated, because of central bank money printing and all of this unprecedented monetary stimulus, we’ve generated something like $60 Trillion of new debt in the world and have barely gotten $15-17 billion of new GDP for all of that effort. And I think that is a measure of why the fundamental era is changing. That the boom is over and the crackup is under way when you see that kind of minimal yield from the vast amount of new debt that has been generated.
Now I’d only wrap this up by calling attention to the fact that within that global total of $200 billion, the numbers from China are even more startling. At the time of the crisis, let’s go back to 2000, China had $2 Trillion of credit outstanding. It’s now $28 Trillion. So we’ve had just massive 14X growth in 14 years. There’s nothing like that in recorded history, nor is there any plausible reason to believe that an economy, which is basically under a command-and-control system that is run from the top down to the party cadres, could possibly create $26 Trillion in new debt in that period of time without massive inefficiencies in waste and mistakes everywhere within the systems, especially since they have no markets. They have no feedback mechanisms. It all comes cascading down from the top and everybody lies to the next party above them. And I think the system is irrationally out of control.
In any event, my point was that at the time of the 2008 crisis, China had allegedly – if you believe their numbers, which no one really should – but as reported, they had $5 Trillion worth of GDP. It’s now $10. So they’ve gained $5 Trillion of GDP. Their debt at the time of the crisis was $7 Trillion, now it’s $28. So the debt is up more than $20 Trillion while the GDP is up just $5 Trillion. These are extreme unsustainable deformations, if I can use that word, that just scream out, “Danger ahead. Mayhem has happened.” And the unwinding of this and the resolution of this is not going to be pretty.
Click the play button below to listen to Chris' interview with David Stockman (54m:29s)
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I have yet to hear any economist explain to my satisfaction how printing money fixes anything. Correct me if I'm wrong, but the only way to increase true GDP is 1) increase labor efficiency (through technology, deregulation, etc.) or 2) increase the workforce size.
3) Stage an alien invasion so that people flip the fuck out and start working really, really hard. (I think that an economist said that, though in a less crass manner. Or maybe it was a bearded sack of potatoes.)
You can omit "alien", then it's just called war.
In theory, printing money is a tax on capital so it will hit the 1% the hardest.
In practice however it is given right back to them but not to the other 99% so once again you lose.
The difference beween theory and practice, hey.
No. The newly printed money first goes to the 1% ( via the banks ), they spend it on hard assets before inflation kicks in and by that time, the sheeple who have a few thousand bucks on their accounts see those get worthless before they can spend them.
Well, there exists this fundamental equation in eCONomics that is equivalent to roughly
GDP ~ Money velocity * money supply
As they try to keep nominal GDP afloat, and as money velocity is sinking like a stone in troubled waters, that leaves them only one choice. As the real economy shrinks, their actions scream more and more "vicious circle". That's my simple take on things anyway. Hope that helps.
and 3) have a populace with enough money to consume the increased production.
2011 Over US$ 100 Trillion Additional Credit Needed to Support Global GrowthNew York, USA, 18 January 2011 – Credit levels will need to double over the next 10 years, growing by US$ 103 trillion, to support consensus-projected economic growth. This doubling of credit could be achieved without increasing the risk of major crisis, finds More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit, a report released by the World Economic Forum in collaboration with McKinsey & Company. The study develops a detailed global credit model using historical credit volumes and forecasting potential credit demand to 2020 across 79 countries, representing 99% of world credit volume. The study applies a sustainability methodology to the projected credit demand, using newly developed metrics to answer the following two questions: Will credit growth be sufficient to meet demand? Is there a risk of future credit crises and, if so, where?
The report finds that meeting credit demand will be challenging. Globally, financial protectionism may constrain cross-border financing, a key to the provision of sufficient credit in the next decade, as global imbalances persist. In addition, the regions will experience varying issues: Asia will face the challenge of meeting the high credit demand growth of US$ 40 trillion with less developed financial systems and capital markets. In the European Union, a further US$ 13 trillion of credit in the form of bank lending will be needed. To supply this, banks will require additional capital that, after retained earnings, could lead to a capital shortfall of US$ 2 trillion. Analysis shows that the US would continue to need to draw on global savings, potentially by up to US$ 3.8 trillion in 2020, in order to fund its credit needs, unless there is a marked increase in US domestic savings rates.
“Leaders in the private and public sectors must take decisive actions to avoid contributing to credit hotspots and coldspots, while still meeting the US$ 100 trillion of credit demanded to sustain economic growth over the next 10 years,” said GianCarlo Bruno, Director, Financial Services Industries, World Economic Forum.
Despite widespread deleveraging, a number of “hotspots” – i.e. segments where credit levels grow in excess of sustainable levels – will persist, while new ones emerge. By 2020, these will include retail credit segments in countries representing almost half of the global GDP. By contrast, government credit hotspots are projected for a much smaller set of countries, between them representing 13-14% of world GDP. In wholesale credit, Asia and Western Europe will be the main drivers of hotspots in 2020.
The report finds that the large projection in credit demand can be safely met, but financial institutions, regulators and policy-makers need more robust indicators of unsustainable lending, contagion risk and credit shortages – and better mechanisms to ensure credit promotes development.
“This report is a timely contribution to the discussion of what’s needed to secure stable and sustainable credit for the world economy in the years ahead. Given the huge financing needs of both developed and developing markets, it’s a crucial issue for policy-makers and the financial industry to tackle globally,” said Deven Sharma, President, Standard & Poor’s.
“The banking system has a critical role in supporting future economic growth and this report highlights ways in which it can do so with reduced risk of crises. In particular, there is a pressing need for continued development of capital markets in developing economies to support their continued economic success,” said Charles Roxburgh, Director of McKinsey Global Institute.
The report concludes with eight recommendations that financial institutions, regulators and policy-makers can follow today to ensure sustainable credit levels for the future:
1. Integrate the concepts of sustainable credit into the regulatory agenda
2. Create standardized government accounting practices to increase transparency and accurately assess sovereign finances
3. Encourage responsible borrowing through financial education
4. Encourage financing of local “coldspots” through targeted mechanisms
5. Task a single agency with monitoring global credit levels and system-wide credit sustainability
6. Align banks’ risk appetite with sustainable credit criteria
7. Drive innovation by financial institutions, developing new mechanisms that can safely meet future global credit needs
8. Establish goals for efficient and deep capital markets by 2020 in developing economies
The findings and recommendations of the report will be discussed by experts from the industry, policy-makers, regulators and academics at the World Economic Forum Annual Meeting 2011 in Davos-Klosters, Switzerland.
This report was developed by the World Economic Forum in collaboration with McKinsey & Company.
pdf report: http://www.weforum.org/pdf.php?download=97835
http://www.weforum.org/news/over-us-100-trillion-additional-credit-neede...
Telegraph report: http://www.telegraph.co.uk/finance/financetopics/davos/8267768/World-nee...
I wish I could be more optimistic about this Frankenstein.
The only thing that is "cracking up" is David Stockman.
The best decision Reagan ever made was to fire him.
THE PERFECT STORM (see p. 59 onwards)
The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf
That Tullett Prebon report is worth reading, all their stuff is.
Dave,
I'm a fan of yours but reality beckons.. So...
Was that wise? Now all the whiners will sign in.
Just from these last two written posts about David Stockman's Opinions and Analysis... and recent Videos viewed from Yanis Varoufakis I would agree. And I know this is an odd coupling a Libertarian or old style Conservative & a Communist Economist.
I can't provide any great examples at this time to support my opinion however.
" at the time of the 2008 crisis, China had allegedly – if you believe their numbers, which no one really should – but as reported, they had $5 Trillion worth of GDP. It’s now $10. So they’ve gained $5 Trillion of GDP. Their debt at the time of the crisis was $7 Trillion, now it’s $28. So the debt is up more than $20 Trillion while the GDP is up just $5 Trillion."
- I think this quote is importantly showing what the Prominent Economic Force, Financial Engineering, is doing and why we see a rise in police state powers, and political power thrown behind protecting our Financial Powers (Big Corporations, TBTF Financial Institutions)
- So far the Currency War seems Orderly, except the sanctions on the Russian Federation, threat of War between NATO and the Russians, 6 years of lost confidence leading to NIRP and global demand for US LT Treasuries, and LIRP & ZIRP for all Common people of Europe & USA(Canada?)... well maybe not orderly if you add endless war in Iraq, Afghanistan, Libya, Syria, Turkey, Yemen, Somalia, etc.
- Not clear who instigated the first flower revolution, but could be the unrest we see is a result of endless low wages for common people in many regions... for instance was the US State Department or CIA or George Soros or other intelligence agencies behind revolutions and government response... just as CIA seems aware of arms shipments in Africa & the Middle East, but never stops them
- English, French, Russian, & US Borders set up in Northern Africa, the Middle East, Central Asia... along with their Kings in Iraq, Iran, Jordan, Morocco, Egypt, Libya, Syria, UAE, Qatar, Oman, Kuwait, Saudi Arabia... would seem to be at question... and their Economic Systems, Petroleum Systems, Central Bank Systems
- "Ethiopia was the only African country to defeat a European colonial power and retain its sovereignty as an independent country.[17][18][19]".... (and we know how that turned out, poorest country around)
- Somalia? "In the late 19th century, through a succession of treaties with these kingdoms, the British and Italians gained control of parts of the coast and established the colonies of British Somaliland and Italian Somaliland.[17][18]"...wow, Money Transfer Companies? "According to the CIA, Somalia has maintained a healthy informal economy, based mainly on livestock, remittance/money transfer companies and telecommunications.[3][29]" "major world supplier of frankincense and myrrh.[202]" "energy industry representatives believe that the nation contains substantial unexploited reserves of oil.[214]"
- South Sudan? "In 2010, Sudan was considered the 17th-fastest-growing economy[105] in the world and the rapid development of the country largely from oil profits even when facing international sanctions was noted by The New York Times in a 2006 article.[106]" "..secession of South Sudan, which contained over 80 percent of Sudan's oilfields" "The People's Republic of China is a major trading partner, and owns a 40 percent share in the Greater Nile Petroleum Operating Company.[111] The country also sells Sudan small arms, which have been used in military operations such as the conflicts in Darfur and South Kordofan.[112]" ...(so big powers will divide the profits)
Assumption: No matter the Economic State, the Currency Wars, the Domestic unrest, the Foreign Insurrections,... the Model of Empires & Kings DEMANDS Big Corporations Retain Power, Expand or Reduce Production Costs, and pick the Countries, Central Banks, Financial Centers that will "Win" ....over Lesser Kingdoms & Common People.
Conclude: TPTB have severed ties with the common people in their foreign, domestic, free market, interest rate, and trade policies. The Ghost in the Machine continues aimlessly forward. People & Politicians feel more tension each year. Compensation is awarded aimlessly. There is no Negative Feedback or punishment for making cuts to the US or Eurozone Economies, for those that ship jobs or capital overseas, or those that loot corporate or national assets, and for using slave labor to offset US Jobs while increasing Welfare Rolls.
Parliament, US Congress, and EU Commission/EU Council would seem to be responsible for Trade Effects on Economies, Job Quality, and Job Environment... as well as MIC Budgets, National Budget Increases, and Stewardship of Currencies.
https://www.youtube.com/watch?v=EJgLDPZ5QRg
It's clear that banksters are pushing peoples money out of banks into stocks or mattress to get off any guaranties, typical for preps to currency change into say amerigo or globo.
But it won't be any CRASH. If you look carefully all what’s happening now elites trying to avoid wide spread shocks that would wake up sheep from their torpor and incept a thought of solidarity against common enemy. What all ZH-ers completely miss is that in ZIRP, NegIRP, QE recycling there is underlying process of unprecedented consolidation of world elites which has about 150 thousands of camera shy members (10000 actively ruling) of all races and creeds (all worshiping god of power) in the world supported by 500 million courtiers, servants, lackeys and security apparatus. Already they outright "own" 75% and control remaining 25% of world’s resources.
Just walk out the door what you see is own by virtually one entity if you look deep you will understand inconceivable. It will all make sense.
All governments submit to their own/global elites one way or another.
Forget money, they do not care about money, if you print money you do not care about cost of ink and paper, what you want is control. They control almost all the resources needed to support life of 90% of world populace and use it to implement rat exterminator strategy against people.
For those who do not know, exterminator does not try to kill 100,000 rats (they are too smart) he entraps them and catches them and then puts them into metal tank and locks the door. He comes back in several weeks to kill remaining single monster rat. That's what they try to do to us.
They want us to cannibalize ourselves and remaining human-monsters (America Sniper types) will be used to devourer the rest of us or will be killed by other monsters. You see rats think that it is worth to survive another day, rescinding all rat morals and rules of rat society, because they believe that they alone will be able to escape and survive, they hold on to false hope in face of extermination exactly like people. This is a method of extermination intelligent creatures.
They’re isolating groups (workers, home owners, small business, small financial companies, engineers, scientists, teachers, physicians, lawyers, independent economic and political thinkers, etc.) as we speak, enclosing them into metaphoric tanks of lies and propaganda telling them: you can make it just the other “rats” (Christians, Muslims, Jews, commies, rich, poor, gay vegetarians, FOX/MSN viewers, ZH readers, your pot smoking neighbor etc.) stand your way to survive.
The Ivy league geniuses figured it out that elites need no more than fixed half a billion, slaves to be able to thrive for next millennium with practically no resource limitation for themselves.
There will be no sudden CRASH of civilization but measured, deliberate extermination of at least 6 billion people through political, economic, social manipulations, poverty, disease, hunger, military and financial means including big or small market (stocks or not) crashes staged to suck up the rest of the money from populous (meaning denying people control over their resources).
Are we going to prove that we are superior to rats? I doubt that.
This thing with the negative interest rate has me fascinated. It sounds to me like free money for the right people.
Punish safety, coersively encourage speculation, all hands on deck, increase velocity. From a micro economic point of view I can't wait to be able to go to the bank and ... the more I borrow the more interest I collect.
How is free money for the right people any kind of surprise ... been that way for centuries.
Charlie Ponzi get ready to meet John Exter and payback for all the misery.
http://www.oneism.org/images/Elite_pyramid_web.jpg
https://paperempire.files.wordpress.com/2010/11/exters-pyramid.png
Be prepared and stack!
The pyramid is not accurate. There are approximately 50 million private company tax paying jobs in the USSA that support a 320 million plus population. Those fifty million are the slaves feeding the top. The rest are zombie blood sucking users...
The solution to Stockman's mismatch between a huge growth in debt -vs- GDP growth is to seasonally adjust the GDP figures, upwards.
End of problem.
/s
we reached peak debt in 2008. QE and nirp is adding currency back into the economy.
banks create money when they make loans. banks loan/ create the principle but not the interest that they charge. the interest eats money out of the money supply (deflation). the government creates money through bonds again with interest attached. this interest gets taxxed from the majority and given to the holders of bonds. and people wonder why theirs income inequality LOL .
look at the whats going on. the fed removed the interest payments on bonds, only problem here is that the government should have given the population tax refunds like GWB did. fannie and freddie are paying huge amounts of interest to the government again they injecting the interest payments back into circulation.
Interest = USURY
News flash banks do NOT spend the interest payments back into the economy thats why jefferson wrote if we allowed banks to issue/ create out currency through inflation and deflation the corporations and banks theat grow from them would deprive us of everything.
not a single dollar go into reel economy...
Interest is not deflationary because the interest payments must also be created through debt ( inflationary ). All fiat money creation, regardless of how it is used, is inflationary by its nature.
Relatively speaking, the Rubicon has already been crossed. Debt is not inflationary at this point. It is deflationary. The numbers scream of deflation and despair. The the current mariginal productivity of debt is NEGATIVE, probably negative four to 1 GDP.
A "day's wages to buy a loaf of bread" is just as much a description of a deflationary depression as it is (hyper)inflation. Nope, deflation is always baked into the cake of debt inflation. Pumping fiat backed debt into a world economy with a Negative Marginal Productivity of Debt at minus four, standing on top another gazillion dollars in derivatives wreaks of deflation.
In the end inflation vs. deflation doesn't matter to most people. In one case food is too expensive so they can't afford it. In the other food is cheap but they have debts and no job and still can't afford it. Which of these caused Jean Val Jean to break the window and steal the loaf of bread? Javert doesn't say or care.
OT- BATFE now officially going after M855.
The plane stalls and there is no pilot in the cockpit.
I love Stockman, enjoyed his last book, and think there is alot of value in this article. However, if we go back to his book ( its been a while since I read it ) he clearly called for massive INFLATION...not deflation. Dont get me wrong i dont expect anyone to be able to call the exact turn of events that will happen in an economic collapse, his logic is sound but it doesnt always pan out the way that he lays it out. I do not recall him calling for a period of deflation in his book, but he clearly is now.
Peter Schiff, Marc Faber, and Stockman have all been calling for an inflationary collapse for years now. To my knowledge, Jim Rickards is the only high profile guy I have heard who, from the beginning, has described basically a battle between inflationary forces ( central banks ) and deflationary forces ( fundamentals ). He has always remained nuetral about which would win in the end but maintained that one must give way and when it does we have the 'crack up' and collapse.
While Schiff and Stockman's advice basically boil down to hording gold, Rickards has always advised hedging your investments by holding equal parts cash, stocks, gold, and commodities. This is the strategy that he claims Buffet is employing quietly, while outwardly cheerleading the phony bull market, he's been buying alot of hard assets.
The endgame is massive decline of essentially fraudulent fractional reserve banking financial assets in real terms... But, TBTJ engages in nearly infinite abuse of what is actually quite finite real asset leverage, knowledge of positions and control of effective money supply to gain control over as many real/productive assets as possible before inflationary period. That's what the oil takedown is about. It's what the Fed's new communication on farm/commodities is about. People need to read through the lies. There are ORDERS OF MAGNITUDE more fraudulent FRB financial assets than real assets. Liquidate long duration financial assets certain to lose value to raise cash and buy gold and you'll do great...
John Mauldin's book, "Endgame", pretty much nailed the situation so far. He didn't predict whether deflation or inflation or hyperinflation would result, but he laid out the case for each. Looks like deflation is winning over inflation, but failure of a currency like the Euro can only mean hyperinflation.
May be this will help you clarify inflation/deflation conundrum so confusing because it relates to more or less stable economy. The US and world economy is programmatically collapsing. All bets are off.
https://contrarianopinion.wordpress.com/2015/01/29/invisible-hand-and-ot...
Excerpt:
In order to even begin to talk about inflation/deflation, which is wrongly defined as rise/fall of nominal prices of market assets, we need to ask: inflation/deflation of what? Relative to what? Expressed or measured how? In whose interest or benefit? And at what market, run by whom?
bankster games - by bankster rules - looking for truth from those that sell illusion. stockman and mostly all of us play by the game rules, think within them, are molded by them (even marxists).
get outta the bankster box. There is no debt- some greek leaders understand this, but get pulled back into the bankster game when they must deal with those working for the banksters
. that monster cheney was right: Debt is not a problem. This is known from biblical time: jubilee.
seek the truth of money and debt can drive one insane or perhaps be one of the few who is not insane.
for debt to work we must have men of honor who will comply with the contract. look around at the banksters and leadership do you see men of honor? this is the problem for the banksters..by destroying morals of the people you create the death of honor and the ability to collect on a debt promise.
I nominate David Stockman for first kenotic Fed Reserve chair.
You mean "defenestrate"?
Does this mean I have to cancel my vacation in June?
I believe before this all comes down the dollar and the equity markets will increase even more as people will look to put their money anywhere and the US will look the best of the worse, then the collapse. That could take us into 2016.
It may never come to a blow-up/crash/hyperinflation. After all, in Zimbabwe/Venezula/Cuba/Norks the lights always remain on the presidential palace.
But after years and years of misallocation and crony fascisim, the government has clawed in everything of value. And, outside the government, there are just weeds and Detroits.
Excellent work Tyler….. The ‘project’ is underway
“….Danger ahead. Mayhem has happened.”