Financial Alchemy19th June 2014

Little has changed. Six years after the depth of the financial crisis, our financial alchemy has achieved … not a jot.

Our remarkable era of low interest rates, high debts and deficits has become the unremarkable new normal. Yet the media speak is all about employment recovery and asset price recovery (indeed record-breaking peaks in many markets). So has the alchemy worked?

Some concerns are raised and shared, from whiffs of interest rate rises to come, London house price escalation, and disapproval over the extent of consumer credit driving the new car market. Read enough and it is easy to be baffled by the mix of positive noises, set against the fear of Eurozone deflation, where some interest rates have already gone negative. All things eventually revert to trend, and all pundits, even me, will eventually be proved correct if we live long enough. But one has to ask whether history will be kind to the current generation of policymakers.

I spend my days working positively, and great opportunities abound within new industries, businesses that get their customer offering just right, and those that effectively disrupt existing markets. Yet the economic backdrop for all of us, and the prospects for the bulk of the old economy, is engineered, for better or worse, by the fantasies of the old financial and political elite as they drive our state to ever-greater economic lunacy.

Permit me to list the top points of my current thinking. In no particular order:

1. We are not living and working in a normally functioning market economy (nor have we been for decades, but its more delusional now). We suffer from a socially engineered economy driven un-democratically by central bankers and political fixers. They need to learn that the best way of stimulating an economy for the good is to leave it alone!
2. We have 3 principal options to deal with our huge state debts; major economic growth, debt default, or continuing years of fiscal repression and currency debasement … the latter course remains the most likely political expedient, to the detriment of every man, woman and child in the country.
3. Forget what we are constantly told that QE pushes interest rates down. Because the evidence is that whilst rates have declined, the bursts of QE have actually pushed rates up! This is a direct effect of diluting our currency. Without QE rates could have been even lower. Now that most pundits are expecting rates to rise, I’m personally not so sure … when the horde are travelling in one direction it is time to look the other way!
4. Stratospheric debt increases cannot continue forever, and eventually we’ll have to decide whether to voluntarily abandon state and personal credit expansion, or hurtle, alongside other economies, towards a final collapse of our currency. History on this topic is not good, as it backs up the fact that no paper currency lasts the test of time.
5. Financial engineering is all well and good in driving the feel-good factor, but in engineering dumb statistics like GDP and house prices we forget that only true value-added work sold to other economies creates the true prosperity to sustainably enhances living standards. To evidence this, whilst GDP is now pretty close to 2007, the real test of GDP per capita remains woefully back at 2004 levels: We have made no progress in a decade. Indeed, look at the constituents of GDP and we see that much of it is just money circulating the system rather than true wealth creation.
6. Fiddling by the powers that be has absolutely failed to trickle down to the true trading economy. UK bank lending[1], which has broadly leveled off since 2011, has still declined by £345bn (15%) from the early 2009 peak. Bank lending is likely to remain constrained until all non-performing loans have been provided for, which is likely to be many years yet.
7. Banking remains a risk business, and depositors placing their money with banks should remember that fact.
8. Over this time, from a subset of the same data, whilst mortgage loans are actually slightly up, lending to small business and consumers is down by 25% … and without debt expansion, funding growth is tough to achieve. Not that growth for growth’s sake should be an ambition, but this is a real catch 22 for lovers of GDP.
9. To close the gap with current government expenditure plans, tax receipts need to rise by 5%pa to 2018. This is exactly the opposite of what we need, which is for the government to take less so that the economy can perform!
10. George Osborne has done a good job of keeping the wheels on the road, but like Gordon and Alastair before him, he has yet to even attempt to turn the direction of travel. The sooner the better please.

As the great Ludwig von Mises stated: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion of the currency system involved.”

So keep on, be confident, but lets recognise that the heavy lifting on the economy is yet to come. Whilst politicians will preen themselves as the ones to “make things happen”, lets use every opportunity to tell them to get out the way and stop their petty economic manipulations. For the hard truth is that the heavy lifting must be done by real people in the real world, and thats you and me. The earlier we can start the better.

(By the way, my economic blogs have been few and far between this year. Blame the fact that I’ve been very busy with good business for good clients, and my other interests in life. Thank-you for tuning in, and I hope to ramp up the pace of writing again soon).