Transcription
The stock market has set 53 all-time record highs since the election for the first time in their lives. We want to protect those values. We want to keep those values up.
People keep saying this time is different. I don't think we've ever seen anything like this. Cash keeps coming into these markets. You don't see it ending.
Well, I guess my question would be when? I mean, if I can use an Australian expression, I'm completely pissed off by having spent over a decade now publishing data showing the extremely strong correlations between credit, which is change in the annual change in debt, and unemployment in America. They refuse to look at it because it's outside their priaryy notions that credit plays no role.
What if the global economy was built on a theory that never actually worked? Steve Keane, who predicted the 2008 crash years before it happened, built models that exposed the hidden instability while mainstream economists failed to see the collapse coming.
The United States currently owes almost $40 trillion. It's on pace to reach 50 trillion by 2030 and it's increasing at a rate of $6 billion every single day.
As the economy starts to get back to that peak level of debt once more, uh it'll run out of air and you'll start falling down again. And at this stage, the economics profession had just given up. They they'd put their hands up in the air. We don't know what the hell's happening.
I break the world into two types of economies. I call the walking debt of debt and the zombies to be. The walking debt of debt are countries like America, Spain, the UK, to some extent Ireland, which all had crisis back in 2008, slumped afterwards, and now they've got this huge anchor of private debt around them. They they won't grow very quickly.
The zombies to be are countries that managed to get avoid the crisis in 2008 by continuing to borrow money. Australia is the standout example there. Uh they doubled and trebled grants to people from the government to buy their first home to restart a housing bubble. Uh China did a similar thing. Those countries are the zombies to be because you can only do that for a while before you reach the ceiling level of debt the economy can carry varies radically between economies. It's in the case of America lose 1.7 times GDP. In the case of of uh the Netherlands, it's 2.4 times GDP. And th those zombies most importantly include China, Canada, it's secondly in size after that, South Korea, Australia. So those are the those are the zombies to be.
So what isn't a question of when, it's also where, and my my standout nominations are Canada and Australia, also South Korea for where the next crisis is going to occur and in the next 1 to 3 years certainly.
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The US economy is is moderately strong, but one of the main reasons it's strong. Well, there's two major reasons it's strong. First of all, the level of credit which is the annual annual change in private debt creates an identical change in the money supply which is then spent into existence and adds to demand and that the slump in that from being plus 15% of GDP before the financial crisis to minus 6 afterwards which is what actually caused the financial crisis.
Now, after about 10 years of that, with all the government attempts to boost spending and the reserve cutting rates to zero for over for over a decade, you've now got people borrowing money again, and that increase in borrowing is roughly about 6 or 7% of GDP, and it's starting to flatline at that level. Now, that's giving you a reasonable boost on top on top of what QE has done to the economy, but it's so it's recovering. There's growth occurring again. There's a bit of optimism coming back as well, but it's by no means robust.
The main reason I see it as being fragile is with the level of private debt that was accumulated through the bubble of the financial crisis only being reduced from 1.7 times GDP to 1.5 and now growing again. It's a bit like you're in the rarified extremes of Mount Everest and you think you can take your oxygen mask off and climb up to the top again. Uh I'm sorry, the two don't work together. So as as the economy starts to get back to that peak level of debt once more, uh it'll run out of air and you'll start falling down again. And the Reserve by putting up interest rates which it's doing in ignorance of the real economy will actually trigger people going back to trying to reduce their debt again. Credit will turn negative once more and this the wind will come out of the economy as the as the Fed believes it's returning back to normal again.
We're in a period of credit stagnation. The idea of secular stagnation comes Larry Summers reviving a dead idea from Alvin Hansen in the 1930s. Hansen put the idea forward to try to explain why unemployment had which had fallen from 26% in 1932 down to 11% in 1936 then increased to 20% again in 1937. And at this stage the economics profession had just given up. They they put their hands up in the air. We don't know what the hell's happening. That's why they worshiped at the the altar of canes when canes came along with the aggregate demand explanation.
But before they came out along comes Alvin Hansen who says it's secular stagnation which is caused by two things. population growth slowing down and a drop in the rate of technological change. Now, of course, this was before the baby boomer generation came along after the Second World War and it's before we invented nuclear power, jet travel, computers, you name it. Fundamentally, what economists were doing is they were blaming the slowdown in the economy on families not having enough babies and 10 engineers not having enough ideas.
Now, fast forward to Larry Summers, he comes up with the same nonsense. Yes, it's true families aren't having as many babies before. So in that sense there is a a tendency for the total level of GDP growth to decline. But GD growth per capita depends upon engineers coming up with new ideas. Now call me crazy but I think a rocket that lands on its own ass after going into outer space is a new idea. I think carbon fiber is a new idea. There's all sorts of new technological ideas still coming out of engineers. So I'm not going to blame engineers for the slowdown.
The slowdown is occurring because aggregate demand is lower than it would be if we had what you might call a a 1950s or60s level of credit growth because the great depression and the second world war eliminated the private debt burden on the American economy that had been caused by the great depression. You began with a very low level of debt and a very low level of debt you can take on more debt each year and servicing it doesn't take much out of your income. So you got a aggregate demand boom in the 50s and 60s that what's gave you the golden age of capitalism.
Now you're back in the dark ages of capitalism because that credit growth each year without deliberate attempts to reduce it means the debt burden gets higher and higher. It takes more and more years to repay the debt. You stop borrowing money and you get credit stagnation. So it's not secular stagnation, it's credit stagnation. And the institution that could do something about it very directly is the Federal Reserve. They could use their money creation capability to create fiat money to to replace credit money and get us out of this trap. But their mindset is stopping them from doing what they could do. In other words, they're a sorcerer that has a set of spells that could end the problem and they don't even know they've got the power.
I mean, if I can use an Australian expression, I'm completely pissed off by having spent over a decade now publishing data showing the extremely strong correlations between credit, which is change in the annual change in debt, and unemployment in America, both before the crisis, during the crisis, and after the crisis. The empirical data is overwhelming that credit is what drives the economic performance. the Federal Reserve because they're run by a bunch of of economics PhDs from Stanford and and Princeton and all the the mainstream economic departments, they refuse to look at it because it's outside their priaryy notions that credit plays no role now.
They've been ignoring undeniably powerful data for over a decade. So they they could be doing a far better job. They could have used their powers to create money to inject money into the real economy and let and require people to pay their debt down. And by paying the reducing the private debt, we could have got out of this crisis for on a permanent basis rather than being stuck in it all the time. So they have plenty of power, but they're like a sorcerer who doesn't understand her own spells.