the Pleasure of Being Deceived
Wilfred Hahn ((Eternal
in the 1930s, the humorist Will Rogers coined the term “Trickle Down
Theory.” He meant to ridicule the idea of spreading aid and support to the
top tier of society, on the expectation that it would eventually “trickle”
down to the broader population. John Kenneth Galbraith, perhaps the best
known economist of the post-World War era, had an earthier definition of
Trickle Down Theory —
“the less than elegant metaphor that if one feeds the horse enough oats,
some will pass through to the road for the sparrows.” Dr. Rexford Tugford,
who was part of the braintrust of the Great Depression-era
administration and agriculturalist, saw it as “[…] trying to
cartoon below makes light of this strategy. Source:
Source: Eric G. Lewis.)
Perhaps eventually, the banks may again begin lending aggressively. The more
likely outcome is that when this finally happens, the banks will be lending
money for the purpose of financial speculation. This will only contribute to
a further asset inflation in asset markets … an even greater decoupling of
the financial world from the real economy. While it may delay another round
of financial collapses, it only serves to worsen them when they do again
another front, central bankers have been specifically attempting to levitate
asset markets (primarily bond and stock securities) by artificially keeping
interest rates low. The working (and desperate) theory is that if stock and
bond markets can be made to rise in price, then people will feel “wealthier”
and be more inclined to spend. Yes, various economic studies have shown that
there seems to be a relationship between “economic well-being” and spending
levels. But this impact is very low. At best, it is likely to be largely
ineffectual at this time. Why? For one, most people are in a “bunker” mode,
striving to save and pay down debts. Secondly, and this is the most
important reason, the wealth skew is now so extreme in America, that rising
asset markets will largely accrue to a very small number of households. As
Galbraith quipped, feeding oats to these wealthy households, at best, will
provide a few “road apples” for the chickadees to feed upon.
The more serious worry about these “trickle down” policies is the tendency
to produce a greater decoupling between the financial and industrial
economies. What this means is that financial markets may very well hold up —
perhaps even rise sharply — even as overall economic conditions remain
difficult for the majority of households. But that will only makes matters
worse over the longer-term. Here are listed 10 contributing factors:
1. Financial Decoupling:
First, financial circulation today has decoupled from industrial circulation
(in other words, the “real” economy). Ultimately, a painful convergence of
the two is unavoidable. It is an era where “Financial Capitalism” has
trounced “Production Capitalism,” … of “wealth extraction” versus “wealth
creation” or as the old German school of economist used to term the
distinction, “raffendes kapital” (grabbing capital) versus “schaffendes
Kapital (creative capital).”
Today, rather than money being in the service of mankind, societies have
been taken into the bondage of servicing money. Whenever such a state of
affairs has occurred in past history, it has ultimately led to a demise of
that society. Unless things change, this same outcome is likely to befall
and a host of other countries.
There exists hundreds of books
written over the last 200 years, warning of these consequences. Yet, Wall
Street’s economists remain largely ignorant or quiet. To this point, the
largest industry in the world has been saved from annihilation, more than a
few major financial institutions having been rescued through government
intervention. It is back to usual; but now manufacturing financial wealth
with even bigger “too big to fail” financial companies than before. If the
G20 has its way, a select group of 20 global financial institutions will be
ring-walled and preserved as the world’s financial backbone.
2. Policymaker Posterity:
By hook or crook the deflationary financial implosions of the past few years
must be stopped … flooded and averted, or so policymakers may think. Central
bankers, like politicians, worry about their posterity. They do not want to
go down in history as having been the captain of the White Line’s Titanic.
Instead they will want to arrive triumphantly on the command deck of a
high-floating Cunard QE II. As such, they must err on the side of excess …
of not failing to attempt any and every technique that could possibly
contribute to an economic recovery, no matter how marginal.
3. Big Monetary Polluters.
By extension, for at least a time longer, the central banks of three of the
world’s four largest economies will not consider ending QE (Quantitative
Easing, namely the UK, the U.S. and Japan). They will not tolerate rising
interest rates because it does not meet orthodox theory for a period of low
economic growth and low price inflation. It’s as if the Fuzzbuster has
signaled the “all-clear” for the next 10 miles. The message? There will be
no speeding tickets issued for “pedals to the metal.” Given such an
environment, what’s a hedge fund manager to do?
4. Save Slavery.
Those households dependent upon interest income (primarily the elderly) or
households that have yet to buy retirement income, are being savaged by the
most brutal and virulent inflation of all. The price of retirement has
soared. And this, at the very time that a dominant demographic group that is
nearing retirement (namely the “boomers”) has grossly under-saved.
Conventional monetary theory does not recognize such dynamics as resulting
from inflation. But, explain that to a 50-something who now realizes that
they will have to nearly triple their personal savings rate (or investment
returns) relative to a decade ago. Currently,
based on average U.S. production-worker income, it
requires more than 50 weeks of labor to buy an equivalent week of either
equity dividends or 5-year interest income.
This demographic group could choose to respond in several ways.
Soon-to-retire households will boost their savings and reduce consumption.
Or they may “go for broke” and take on much investment risk. Either outcome
adds fuel to securities markets.
5. Deepest Channel.
Monetary liquidity, like water, travels in the channels of least resistance.
Central banks can only stimulate that which wants to be stimulated!
Currently, monetary channels into the real economy remain calcified.
Households are not expanding their borrowing and the corporate sector is not
yet spending their cash hoard. More likely, during periods of slow economic
growth and low interest rates, corporations are likely to resort to
financial engineering, promoting takeovers and acquisitions. In short, QE
and/or monetary expansion will tend to find its outlet in security markets,
not the real economy. This further corroborates point #1 — Financial
6. Stealth Wealth.
The most nefarious impact could be the
policy shift to wealth theory. In the Age of Global Capital (though we now
appear to be in a period of its demise), wealth is seen as being the market
value of financial paper, securities and “balance sheet” assets. Quoting an
article that famously laid bare this shift to disregard incomes and profit
as the real underpinnings to wealth:
“Securitization — the issuance of high-quality bonds and stocks — has become
the most powerful engine of wealth creation in today’s world economy. […]
Overall, securitization is fundamentally altering the international economic
system. Historically, manufacturing, exporting, and direct investment
produced prosperity through income creation. Wealth was created when a
portion of income was diverted from consumption into investment in
buildings, machinery, and technological change. Societies accumulated wealth
slowly over generations. Now many societies, and indeed the entire world,
have learned how to create wealth directly. The new approach requires that a
state find ways to increase the market value of its stock of productive
(John C. Edmunds, Securities—The New Wealth Machine, Foreign Policy, Fall
1996, pg. 118.)
Without question, policy makers are counting on the “wealth effects” — as
little as they may be — of soaring securities markets to stimulate spending.
7. Equity Thermometer.
According to the comments of central bank policymakers, equity market trends
are being considered as the indicator of QE success. During past periods of
QE in various countries, there has been a fairly close correlation between
the two. If stock markets are rising, then this is popularly taken (though
wrong) as an indication that economies are improving. This being the case,
it suggests that QE will continue or be further expanded until equity
markets have risen.
8. Innate Preference.
Not surprisingly, people prefer asset inflations to asset deflations. Asset
inflation is the sweetest, most alluring, deceiving inflation of all. It
feels good on the upside.
9. Institutional Reason for Existence.
A cornered animal will behave differently than one that is not. The same
applies to institutional and professional investors. There
is no lack of cornered asset managers in the world. For example, they may be
managing an underfunded pension fund. At a time of extremely low interest
rates, asset managers may succumb to the lure of risk-taking to secure
capital gains. Yes, it is true that GFC trimmed the risk appetites of many
investors, including large institutions and pension funds. However, a period
of incessant asset market gains and velocity inflation will in time surely
10. Willingness to be Deluded.
Finally, people these days want to be deceived. There is so much grim news,
uncertainty and hardship that bouncy financial lunacy will attract its
believers. It is only human to hope. If doom can be deferred through
delusion, it will be.
There are so many people inescapably intertwined with the non-sustainable
system of prosperity — cheap oil, debt, consumption, cheap calories, and
amusement — that they virtually must choose to lie to themselves rather than
to face the facts and the inevitable. (See American Theocracy by
Kevin Phillips) As Aldous Huxley said “Most ignorance is vincible
ignorance. We don’t know because we don’t want to know.”
Will global financial markets first enter a period of
alluring decoupling, before succumbing to another round of crashes? This is
already happening. Will there be one more massive asset inflation of
securities markets … the last death rattle of an over-indebted,
over-inflated financial system? This certainly would fit the prophetic
timeline as the final collapse does not occur before the latter half of the
Great Tribulation. When and if this does happen,
professional investors cannot afford to miss it. It would be viewed
as the last money-making opportunity — the “last call.” In effect, an
opportunistic money manager ethic can produce an organized collusion to
produce a mighty asset inflation. Is this fantasy? It is possible. Why?
Because corruption and materialistic greed is rampant everywhere.
the meantime, there are plenty of unhealthy signs monetarily, economically,
geopolitically … actually everything. Many regions of the world, sectors and
large swathes of U.S. households are already living
in a Great Depression II. All of these conditions and developments (too
numerous to mention) guarantee — yes guarantee — that even greater financial
troubles lie ahead for the world in future years.
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About the Author:
Wilfred J. Hahn
is a global economist/strategist. Formerly a top-ranked global analyst,
research director for a major Wall Street investment bank, and head of
country’s largest global investment operation, his writings focus on the
endtime roles of money, economics and globalization. He has been quoted
around the world and his writings reproduced in numerous other publications
and languages. His 2002 book The Endtime Money Snare: How to live free
accurately anticipated and prepared its readers for the Global Financial
Crisis. His newest book, Global Financial Apocalypse Prophesied:
Preserving true riches in an age of deception and trouble, looks further
into the future.