IN-DEPTH: TRANSCRIPTION - UnderTheLens - 08-21-24 - SEPTEMBER - The Road to Regulatory Repression
SLIDE DECK
TRANSCRIPTION
SLIDE 2
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 – COVER
I talk with a lot of people as part of my research process and I get from them a clear sense of anxiety and uncertainty about the developments occurring around them. They often describe it as chaotic, confusing and unfamiliar. All signs of change trying to happen!
That change is about a major ongoing realignment of how our world economic system actually works!
There is no master plan that I can discern but rather the world adapting to the realities of a world shifting from a Uni-Polar world to a Multi-Polar world; from Capitalism to increasingly Socialism; from Industrialization to Service centric … and the list goes on.
Change is messy!
SLIDE 4
As a consequence how we finance governments, and global trade is changing. That is what I want to discuss in this session.
Our Monthly UnderTheLens video primarily focuses on Macro issues while our monthly LONGWave video focuses on Markets.
Since putting out our Annual Thesis paper on the “Regulatory State” we have focused the UnderTheLens videos on macro developments that broaden that focus.
As such in this session we will consider the road we are currently on that we feel will lead towards “Regulatory Repression” as an expansion of the macro prudential policy of Financial Repression.
As such I would like to discuss the subjects outlined here.
SLIDE 5
We have been talking a lot about Economic Growth and Debt growth recently as the US is about to explode through the $100T level in total debt.
The relationship between these two measures and the potential limits to their growth are where we need to start this session.
SLIDE 6
Total US Credit and Debt has grown geometrically from $1T in 1964 to breaking through $1ooT in Quarter 2 just completed.
Credit is equal to Debt over time and is the opposite side of the same coin.
SLIDE 7
Meanwhile Global Debt hit a new record in the first quarter of 2024, increasing by $1.3 trillion in just three months to $315T
SINCE THE PANDEMIC Global debt has surged by 21%, adding $54.1 trillion to the global total.
SLIDE 8
Total Global Government Debt has exploded by $20T since Covid.
We HAD ~$62T in government debt, on a global economy as measured by GDP in 2020, of ~$84.96Tdebt
SLIDE 9
It will be $82T in 2022 with an expected GDP of $104T.
This is ~$20T of new Debt to grow the Global economy by the same ~$20T!
ARE WE GROWING DEBT OR GDP??
It makes you wonder whether we are growing the economy or just debt??
SLIDE 10
Well that is exactly what has shifted in our global economy to achieve economic growth.
US government debt since the advent of Quantitative Easing has actually been growing faster than Economic Growth as measured by GDP.
There are profound implications of this occurring that for some reason few discussed and the media completely ignores.
SLIDE 11
As I recently pointed out in an UnderTheLens video:
In the US it takes as much as $2.50 of New Debt to produce $1 of Growth.
In the US it takes as much as $1.50 of Deficit Growth to produce the $1 of Growth
An adjustment crisis can be counted on to occur when debt growth is unable to produce economic growth or is insufficient against the cost of the debt.
In fact it is highly likely that debt growth required can itself even be achieved!
SLIDE 12
We are actually very close to that point.
As we discussed in last week’s newsletter we have now reached the point that GDP growth will require debt growth at sufficient levels that maintaining an inflation level below 3% will be impossible based on the path we are on.
Something must change and it will – the world is not coming to an end.
We will show in a moment what that change is most likely to entail.
SLIDE 13
Before we do however, we need to fully understand the importance of Credit creation in today’s global economy.
My long time colleague Richard Duncan has long held the belief that Capitalism since the US came of the Gold Standard has changed to what he terms “Creditism”
He just released a six part video series entitled Creditism 101 with an extensive numbers of slides showing the evolution which supports his book “The Money Revolution”.
SLIDE 14
This chart from Richard captures the migration since 1968 when the US first initiated the shift from settling its debt in Gold to credit IOU’s.
Today, Credit Creation accounts for 61% of the funding of US government debt owed.
As a consequence our world has shifted from Capitalism where Savings is redeployed as Investment in Productive assets to Creditism where Credit is redeployed as spending on Consumption.
The black bars have been more or less flat since the late 1990’s and Dotcom Bubble and as Savings continued to fall has been made up of financing from the rest of the world (ROW) and the Federal Reserve increasing its balance sheet and bank reserves.
SLIDE 15
The funding of the exploding US government debt has been created by two primary drivers:
Domestically by growth of the Federal Reserve’s balance sheet and bank reserves thereby ensuring banks, financial institutions and investors have the liquidity to buy US Treasury debt – and
Internationally, by an ever expanding US Trade Deficit which creates foreign FX reserves or EuroDollars to invest in higher yielding US Treasury Debt. This is most quickly understood by reviewing the concept of the Triffin Paradox.
Both have lead to credit growth that has allows the US to continuously consume far more than it produces for decades, yet still realize a rising living standard.
It has been nothing short of a game of masterly modern alchemy!
SLIDE 16
With the further advent of Quantitative Easing (QE), Ben Bernanke’s Enrich-thy-Neighbor Doctrine and the stunning increase in the Wealth Effect, basically a well disguised Ponzi scheme has emerged.
Like any Ponzi scheme, unless an ever increasing number of new investors are continuously found the system will implode on itself.
SLIDE 17
Going forward, obviously Savings is not going to propel further geometric US growth in total Credit and Debt. It will be lucky to stay flat rather then continue shrinking as a percentage of debt growth.
SLIDE 18
The Fed plus Rest-of-World Contribution is falling as China reduces its holding of US debt, De-Dollarization continues to gain momentum in the application of FX reserves of money sanction targeted countries. Recent selling by Japan, the largest holder of US government debt to stop a falling Yen along with Yen Carry Trade unwinding is adding further pressure to existing US debt – ever mind increasing holdings significantly.
SLIDE 19
The US Investor is also under mounting pressure as the explosion in net worth versus Disposable Personal Income has reached historical highs against at 776% versus an average of 550%.
SLIDE 20
All the contributors are simply facing significant headwinds to even maintaining their current levels, ever mind significant and frankly massive levels needed to keep the geo-metric growth going.
SLIDE 21
But it gets worse and may be the single ingredient that forces action sooner than later.
That driver is China and the degree of its’ slowing of economic growth.
SLIDE 22
I have written about this money times that it has been China that on four separate occasions since the 2008 Financial Crisis has come to the rescue of a global economy facing troubles.
The Chinese Credit Impulse has delivered the massive new credit and debt to further power a global economy facing ever increasing imbalances between creditor and debtor nations.
SLIDE 23
WORST ECONOMIC CRISIS IN DECADES
- China is in the midst of its worst economic crisis in decades.
- The property market, accounting for roughly a quarter of economic activity in China, is facing an oversupply of empty apartments on an inconceivably large scale, meaning that all activity in this industry should (but won’t) cease.
- The other pillar of China’s economic strategy, export-led growth, is also under severe strain because the rest of the world is simply no longer willing to absorb China’s glut of manufactured goods.
SLIDE 24
CAN CHINA AVOID A GREAT DEPRESSION?
- China is facing a demographic nightmare.
- Its population is shrinking and is widely expected to contract by at least one-third by the end of the century.
- Government debt will have to skyrocket over the coming decades to prevent China’s economy from collapsing into a Great Depression, just as Japanese government debt has since Japan’s Economic Bubble popped in 1990.
- The grave economic challenges confronting China were discussed in last October’s UnderTheLens video entitled: “Can China Rescue the World Again?”
The truth is China, may need to world to soon help it?
SLIDE 25
The world is facing a looming financing problem due to the lack of growth of unencumbered collateral!
Credit is not extended and debt incurred without collateral being posted to secure the debt!!
That is now the limiting critical factor!
SLIDE 26
As I have written many times, COLLATERAL IS REAL WEALTH
You must either:
-
- Grow it
- Mine It
- Produce It
- Build It
YOU CAN’T PRINT IT!!
PAPER IOU’s are only claims on real wealth – They themselves are not Wealth. Honoring those claims in tumultuous times often depends on solvency and continuing operations of intermediaries, third parties and banks.
SLIDE 27
Today, a vast amount of paper wealth is highly dependent on the vagrancies of the highly leveraged quadrillion dollar derivatives market. Claims which can suddenly be worth nothing – there are endless examples of this.
SLIDE 28
As an example today markets are operating and trading on creative vehicles such as collateral swaps, collateral transformations and Liabilities Derivatives. The later recently brought down the British Prime Minister, the Gilt and almost sent the UK pension industry into collapse. Without anyone being aware of what was going on the global derivatives market.
It has made everyone more aware of the Rehypothecation and Novation of collateral.
SLIDE 29
What are the consequences and conclusions from this? What should we expect?
SLIDE 30
We can expect governments to soon (if they are not already doing this) to begin the use of off-balance sheet accounting for Contingent Liability Guarantees.
The US has long used the process for Foreign Aid. The US doesn’t necessarily give foreign aid directly but rather guarantees the loans banks make to countries receiving the aid. That aid comes with terms that if defaulted on loan becomes due and the US is on the hook for payment if thwe defaulting country can’t or won’t make settlement.
In 2015 Professor Laurence Kotlikoff presented to the Senate Budget Finance the Fiscal Gap which includes US government Contingent Liabilities of ~ $210T. His report is still currently available online.
Pretty soon governments will be in the Guarantee game to ensure that ever increase credit and debt streams are generated to keep the Ponzi scheme from imploding.
SLIDE 31
In response to future crisis and disruptions we should expect the state to resort to drastic measures such as:
-
- Imposing price and capital controls,
- Nationalizing banks and large corporations, and
- Transforming the economy into a highly regulated command economy.
As I close the video I see that VP Kamala Harris has just announced Price Controls as a pillar of her economic plan to counter act rising food prices.
These developments may be sooner than we all currently think.
There is little doubt in my mind that Regulatory Repression will soon be an addition to the long practiced macro-prudential monetary policy of Financial Repression.
We will continue to outline developments regarding advancing Regulatory Repression in our weekly newsletter.
SLIDE 32
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
SLIDE 33
I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
