I recently watched a video clip of Bernie Sanders laying the boots to Alan Greenspan back in 2003, for Greenspan’s seemingly out of touch perspective of the average American. Now while we do have a repentant banker in Greenspan, a rare phenomenon for sure, I found the scolding interesting in that essentially every accusation Sanders lays on Greenspan could be repeated today to our subsequent central banking gods. During the video notice that all the figures Sanders explicates not only remain true today but have gotten far worse. Particularly note the national debt figure which has now increased by more than 400% since then!!! The clip is well worth the 5 minutes...
But so let’s dig in a little to what Bernie is really saying to Greenspan. The overall theme of the trouncing is that the Federal Reserve, the keeper of American monetary policy, had implemented policies that clearly had done significant damage to the vast majority of Americans. Specifically Sanders is suggesting that the policies were a cancer to the economic prosperity of Americans and all the while creating extreme wealth for a select few. And while that is bad in and of itself, what Sanders finds despicable is that the Fed seems to not only deny the harm they were responsible for but Greenspan seemed to be alleging success by focusing solely on the massive wealth it had provided to the very few on top.
Now in a recent whitepaper by Stephen Williams, VP of the St. Loius Fed, a case is made that the Fed’s ‘recovery’ policies have not helped to boost the economy. And while I agree with that conclusion, I feel the paper is a fraud. Not only on the surface of that argument does it create a false dichotomy of either helped or not helped (dismissing the idea that the policies may have actually been harmful) but Williams explicitly suggests the policies were not harmful to the economy. And that was the real intended message. Remember nobody publicly denounces their employer without being fired. And so if Williams keeps his job we know that this message was a coordinated message. Further, by the structure of his argument the objective is clear. The Fed is already setting up the argument that while they were not entirely effective in a recovery they are not to blame for the inevitable second coming of the credit crisis (a definite dead canary).
You see the problem comes down to the moral hazard created by fiat currency. Specifically, I mean that when you have essentially infinite resources you become very careless about each unit of resource. Subsequent to ending Bretton/Woods in 1971 the US has succumb to such a moral hazard. This is clear when looking at the collapse of fiscal discipline immediately following the end of Bretton/Woods, which was a quasi gold standard that necessitated fiscal discipline.
And so that chart tells us the moral hazard absolutely exists but it doesn’t explain why that is bad. To do that we need to look at a visual representation of this moral hazard and its respective destructive characteristics over time. But before we do let’s remember, as I recently laid out in some detail in The Fed’s Fatal Flaw, the central banking system is designed to require perpetually increasing money stock. The reason is simple. The Central Banking Act of 1913 was designed by three banking families (refer to Jekyll Island) whose profits expanded along with money supply. And so a system that necessarily required the expansion of money supply was to create immense wealth for banking families that drafted the Bill. While that is certainly unethical, it is the destructiveness of such a system that is the real evil. The system is such that profits for the very few come directly at the expense of the masses. Let’s look deeper into this matter.
What must be understood but seems to be lost on most PhD economists today is that money in our system can either be a fuel or a drag, but it cannot be neither. Remember that our system attaches a unit of debt to each unit of currency. That means that each unit of currency must return an amount greater than itself. If it does, it is fuel. If it doesn’t it is a drag.
The problem then with the system is the destructive force inherent of the moral hazard (having the ability to create infinite currency) as depicted in the next chart. That is, currency created and used for consumption rather than investment becomes a drag rather than a fuel and the economy becomes less efficient. This increasing inefficiency has been occurring since the end of Bretton/Woods or since the beginning of the moral hazard. That said, you will never hear very intelligent but also very disingenuous guys like Alan Goolsbee discuss the secular economic deterioration as it doesn’t suit their role of policy champions.
The following chart depicts corporate domestic investment as a percentage of M2 money stock (blue line) and real GDP (red line).
What becomes immediately apparent is the correlation between the percentage of money stock being used for corporate investment and real economic growth and the significantly negative slope of both.
One might wonder then what are corporations doing with their money if not reinvesting it?
Well the answer is clear. While for decades domestic investment (i.e. fixed capital reinvestment) as a percent of money stock averaged around 8% today it has declined to about 5%, a 40% decline. On the other hand corporate dividend payments (green line) have increased to a 15 year average of about 7% from 4% of money stock, a 75% increase. So each year, 3% of money stock is being reallocated from private domestic investment to corporate dividend payments. And make no mistake, dividend payments do not fuel the economy as some +90% are reinvested into the secondary market. An investment which provides almost no economic benefit (with the exception of very few secondary offerings that add cash to corporate balance sheets) as opposed to domestic fixed reinvestment which is pure economic fuel.
But let’s take a closer look at the moral hazard and its direct implication on the economy.
What we see by adding trendlines to both parametres is that very shortly after the US went to a pure fiat currency in 1971, domestic investment as a percentage of money stock began to drop, resulting in the secular deterioration in real GDP that continues today. I say resulting rather than mere correlation and let me explain.
Again the reality is that excess money stock is a drag on the economy because each unit of money stock necessarily has a unit of debt attached to it. Logically then, as the percentage of money stock allocated to investment (meaning potential positive net returns) declines the percentage of unpayable debt (attached to the uninvested money stock) requires the perpetual rolling over of ever more debt.
This results in massive drag on the economy because remember that mathematically debt used for consumption rather than investment is a net negative on medium and long term output. The implication is that while all debt gets included into current GDP (through its expenditure today), all consumed debt plus interest is removed (paid back) from output later on. This effect is not easily seen because the reduced medium and long term output is being continuously offset by even more consumer debt.
So what we’ve ended up with is a death spiral of economic prosperity dressed in sheep’s clothing. The above chart depicts that every worker in America today has increased their consumer debt levels by about 40% since the ‘end’ of the credit crisis. Think about that for a moment. Perhaps the most destructive economic collapse in history that was triggered by excessive credit has led American workers to take on 40% more consumer debt.
Allow me to digress for a moment about the concept of consumer debt and why if it is such a destructive thing policymakers would allow it to continue its record expansion. Think of it like this; where a purchase made with earned money is a two party transaction a purchase made on debt is a three party transaction. Essentially banks become a party to every consumer transaction that is done on debt. And so banks essentially are feeding off of every transaction between a consumer and a proprietor. In the natural world we call that a parasite. For the corporations the parasite is helpful because it magically turns the consumer’s debt into profit and so they don’t mind. However, for consumers, the transaction doesn’t end after they eat the candy bar. The debt not only remains, it builds, and so the parasite slowly deteriorates the consumer’s ability to prosper. But because the parasite controls the economic policies of the nation the policies actually drive the indebtedness that we see in the above chart which benefit both the banks’ and the corporations’ profits but to the detriment of the working class (discussion as to the borrowers’ responsibility in the matter won’t take place here but I will note the data today suggests more than ever consumer debt is being used on inflating staples – healthcare, food and rent – rather than discretionary purchases).
And yet we are told by the very elite PhD economists that the credit crisis ended back in 2009. And worse we are told that the expansion of excess credit will end differently this time around. And still worse, any Americans who actually have savings have been forced into bloating equity valuations (along with corporations for the same reason but from the other side of the coin) because interest rate securities have been set to return effectively nothing.
The above chart depicts income from private savings (using the 2 yr rate as a proxy, which is likely being generous today) has declined from about 2.0% of GDP in the early 1980’s to 0.6% in 2000 to around 0.2% today. And so while consumer borrowers have been forced into a state of perpetual borrowing, savers has been forced to lend money into secondary markets which will once again be transferred to the very few upon the inevitable next market crash. A crash that is already being signaled around the world.
So when we watch guys like Bernie Sanders get visibly angry at guys like Alan Greenspan it behooves all of us to go beyond the entertainment of it or some prima facie agreement and to truly understand why the anger is justified. When we do we will be asking why in the hell is no one yelling at Janet Yellen??
Economics has become hostage to academia where PhD’s want to ring fence the subject with statistics and calculus to ensure only those who have done the very narrow and otherwise irrelevant studies can play. But economics has very little to do with stats and calculus. Economics is a subject of interrelatedness based on logic with a little basic math thrown in.
If we were to all take the responsibility to understand the lifeblood of our American existence i.e. the economy, we will most certainly be moved to remove not only the policymakers but the system that together serve only those at the top of the economic food chain and at a cost to the rest of us. At the end of the day the system is a zero sum game in a monetary system that is based on trading a unit of currency for a unit of debt. There is no other end than a bad one and I’m sorry my friends but that is a (simple) mathematical certainty.