The Real Reason the Economy Is Broken (and Will Stay That Way)
Despite the trillions that have been printed and injected into the world’s economies, things are barely limping along. In order to understand why QE has failed, we have to appreciate the headwinds presented by conditions of too much debt and expensive energy.
Oil and GDP are highly correlated and always have been. Without growth in oil consumption, GDP growth doesn't advance. Since 2007, there has been a decline in oil consumption in the US and Europe, with China and India pretty much making up the difference for everything that the West didn't consume.
Yet as we pour more and more money into the economy, hoping desperately that it will sputter back to life, no one is asking what happens if it does not. If there are other factors at work besides a simple case of too much debt, then the Fed is not only barking up the wrong tree, but is unaware that a very dangerous animal with a bad attitude is resting up there.
These are extraordinary times. Too many believe that the Fed has things safely in hand. The amount of market insanity and complete disconnect from reality is astonishing. Thin-air currency, attempting to print one's way to prosperity, and spending more than you have are proven losers in the history books. Yet the Fed is doubling down.
The economy is broken and it will stay that way. The only alternative would be to immediately cut the losses in those enterprises that do not make sense in a world of increasingly expensive liquid fuels, and invest heavily in those things that will allow for a future without fossil fuels.
All energy transitions require four to six decades (under ideal conditions) where one is transitioning to a higher quality fuel source and capital is expanding. Under less-than-ideal conditions, it could take much longer.
In the meantime, the markets are reflecting liquidity, not reality, and until the world suddenly starts to produce a lot more crude oil and the US and Europe increase their consumption of it, Martenson will remain skeptical of all pronouncements of recovery in the West.
Time to Choose
Two opposing views exist regarding the future of America’s economy and standard of living. One side tells a tale of recovery and return to growth: shale oil and gas deposits are ushering in a new energy boom; the stock market is thriving; the global economy is on the mend; housing is in recovery; jobs are being created and consumer income is on the rise.
The other side tells a tale of growing instability, downside risk and inequality: expensive oil is here to stay; financial security valuations are dislocated from the fundamentals of the underlying companies; the economic recovery is anemic at best; the housing market will not return to its former glory; globally, the US is the best of a bad bunch; the risk of external shocks is under-appreciated and unplanned for.
Taggart is inclined to doubt the optimistic case, and offers the following guidance: Exchange paper assets for tangible ones; find an advisor whose outlook is closely aligned with yours to manage any remaining paper wealth; cultivate resiliency; cultivate community; defend your income stream.
“If you take the above steps, regardless of what happens, you'll be able to sleep at night knowing that you've acted conscientiously according to your convictions. And in the event the bulls turn out to be 'right', few of these steps will serve you poorly. In a secular bull market, hard assets should still appreciate measurably. And personal and community resiliency is always a net positive, regardless of the economic environment.
But if the bulls turn out to be the ones in error, the value of these actions could be priceless.
So get to it. Do your own personal calculus of the risks. Determine where you need to be positioned. And take the necessary steps to get well situated where you assess you need to be.
It's time to choose a side.”
Is Today’s Argentina Tomorrow’s America?
Americans wondering what to expect as their government piles on more debt and refuses to cut spending need look no further than Argentina. A nation once among the most prosperous in the world, it is now deeply in debt and trying to inflate its way out of the mess. Inflation has caused prices to rise sharply, and so the government is doing what all governments do in such a situation: instituting price controls.
Argentina’s government claims the annual inflation rate is 10 percent; private economists believe it’s closer to 30 percent. The IMF has censured Argentina for exploiting the difference between the official and private inflation rates to make it appear as though the country had saved $6.8 billion since 2007.
Tighter controls were imposed on Argentina’s foreign exchange market, and currency controls were instituted. Now there is a two-month price freeze on every product in all of the nation’s largest supermarkets, which will ultimately result in shortages, higher prices and a thriving black market.
Today’s Argentina could be tomorrow’s America. Once, Argentina was one of the most prosperous nations in the world. Then came the rise of demagogues such as Juan Peron, who nationalized industries, gave vast power to labor unions and spent lavishly. The country has never fully recovered, having suffered multiple rounds of inflation, price controls, and even debt default in the ensuing decades.
So, too, with the US. It was prosperous until President Roosevelt accelerated the process of centralizing power in Washington, cartelizing industries, boosting union leverage and spending enormous sums of money. Since then the US has had inexorable inflation, price controls (under Nixon), and ballooning debt. The US government spends over $1 trillion more than it takes in each year, is roughly $16 trillion in debt, and has many trillions more in unfunded liabilities. Decades of gargantuan government have taken their toll.
Instead of price controls, the Argentine government should reduce government spending, which is financing an expansion of the money supply. Unfortunately, slashing spending is about as likely to happen in Argentina as it is in Washington. Equally unfortunately, the results of such profligacy — debt, inflation, price controls, and national decline — are also about as likely in the US as in Argentina.