Tuesday, July 3, 2012

Update-1: Lost In Stimulus

World markets and investors continue to scratch their heads about the market's direction and the problems it's facing. There is seemingly only one thing they all agree on, and that is they all are "hoping for more stimulus". On any speculation of such hope, markets rise - which should confirm for any observant citizen that supply and demand has been thrown out the window. Actually, its not thrown out the window, its just manipulated. Instead of the market being used as a tool to manage the supply demand and production of goods for the people, it is being used to gauge how successful the latest confidence P.R. ploy is. The market has now become about the supply and demand of only one commodity, of currency itself.
Stimulus is a tool being used to create demand for currency in the form of cheap loans. It is through this manufactured demand that central banker's imagine that they are "averting the crisis" by meeting their manufactured demand through an unlimited supply of new currency. There is clearly something missing from this equation to happiness and that is whether or not the public can sustain even more debt or are even eligible to get it.
Every time I write a blog post, I'm trying to explain this problem and it never comes out just quite right. It's complex. I'm going to try again tonight to explain why growth is dead and why articles like this are complete nonsense.
Growth is dead

Exhibit A - World GDP 1960-2010
This chart looks great, doesn't it? GDP is flying after a little bump in the road. Here is the problem though, as I see it. Growth and "growth" are two completely separate things. No really, let me explain.
Let's take 1990, and to use simple numbers say GDP was a flat $20T. So if the economy in 1990 was to grow 1%, we would require an increase in GDP of $200 Billion. No sweat. However, for the economy to grow in 2000 (with let's say a GDP of about $30T) by the same "1%" we would require an increase of $300 Billion.
Then take a look at what happened after 2001 (9/11), it practically shoots straight up. Why? Well as we now know it's because of a massive derivative bubble. So where does that leave global GDP? About $60T, which requires $600 Billion increase to grow a measly 1%.
"Growth" doesn't care that the last 10 years of "growth" were completely precipitated on fraud you see, for the global economy to "grow" GDP must exceed unprecedented growth levels (in which no real "growth" actually happened), however the difference between the requirements for "growth" between $30T and $60T are staggering. Add to this all of the fake "growth" fraud as yet undiscovered and you should start to see why world leaders are running around like chickens with their heads cut off. For financial "stability and confidence" to return, growth must return and for growth consumers must spend money and take out debt and that debt all has compound interest attached to it. Loans are given out on the premise of growth, but if that premise is uncertain then there can be no growth if the loans are needed to fund it in the first place, further since all existing debt already has interest attached to it which exceeds the available currency loans must be given out timely in order for the people to continue servicing existing debt as well.
The energy factor
So why is growth dead now? Why not 12 years ago? Why can the banks not just pull off another magic economic bubble and get things rolling again? you might be asking these questions and I'll try to answer them.
Have a look at these two links:
From March: Higher gas prices threaten economy if they persist
From June: Sliding oil price could herald the beginning of a recovery
Notice a trend here? Low prices are needed for a "recovery", but in the era of "extreme energy" a low price can cause instability.
Extreme energy is extreme because of the cost to extract it and as we rely more and more on it to replace conventional oil which has peaked we're going to find more and more of our resources going into the energy extraction versus our pockets. Not to mention the actual increase in energy demand to achieve growth at all.
So, here is the situation people. It's a circle of economic fun. First however I'd like to point out that risk has to be based on factual historical data. So once the cheap loan scheme got underway, and a little bit of economic historical data was created, other banks' risk calculations would have shown an increasingly likely capacity for more and more people to service their debt. The people, who work for businesses which take out (cheap) loans saw how well their businesses were doing being leveraged on loans which were seemingly risk free. That is until $147 / barrel oil hit (the actual trigger was probably a lesser number, but you have to remember how much credit was available back in 2007 that people used to absorb the shock).
So this is why growth is dead, its not that there can't be economic growth, it's that we set the bar too high and we're trying to stimulate more growth than there is surplus energy to stimulate while at the same time dealing with a global banking cartel hell bent on staying on top and in control.
Over the last 4 years we have largely lost sight of the fact that this global banking crisis was already here. Statements I've seen by "analysts" such as "Europe's debt crisis is holding back the recovery" is complete nonsense. There is no recovery because globally growth is dead and our globalized economy which has food and gadgets imported from all over the world requires stability to keep that supply chain stable.
Before we can return to stability and growth we must redefine what "growth" is. Fiddling with the levers of interest rates does nothing more than put more nails in our economic coffins. We don't need more debt, what we do need to do is figure out how we're going to service the existing debt and allow at the very least the market to re-balance (after the bankers manipulating it are put in jail) to see where we really are actually at.

Update-1

Since then...

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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