I have been mulling over the fundamental economic picture alot over the past few months and thought I would like to share a few thoughts...
I think there are two distinct opposing forces currently at work and that is one of the reasons why it is becoming so darn difficult to read the markets.
On the one hand we have falling PMI and other data (really bad in may countries), falling business revenue on every continent, falling or stagnating property markets on every continent, falling confidence and deleveraging leading to rising bond markets, falling stock, commodities and a slow push back to reserve currencies.
Lets face it the world economy is on a downward slide.
On the other hand there is a constant belief and hope that central governments and banks are somehow going to be able to turn this ship around (inflation, bank stimulus & fiscal support etc).
It is clear that though the markets rise and fall on a daily basis, not all is well with the global economy and whatever stimulus (unprecidented) that has been thrown at the system thus far has failed to turn the tide (more on that later).
There are a few key players in this drama:
*Governments *Banks (Central & Commercial) - IMO they are one - a large multinational cartel that really only has one agenda and that is profiting from lending from money created from thin air *Other Business *General Public
The real struggle here is between two groups and two opposing agendas - that of the general public and the banks.
The way this is playing out is the opposing forces of deflatioin and inflation.
To make this clear, I personally believe that it would under normal circumstances, be the clear agenda of the government and banks to keep the economy at a steady rate of 2-3% inflation.
At this point, the governments are able to secretly tax the general public gradually through the process of inflation (money printing) - yes you read that right...
while the banks are able to control their profits by moving the central bank rate (to protect them from the loss caused by inflation or slower credit growth in deflation) - oh yeah - when they say they are raising rates because the don't want to "overheat the economy" don't kid yourself, this is not for our benefit...17% interest in the early 80's was not just to stop a growing economy and protect the savings of pensioners believe me...
Yes every heavily indebted government would love to go the whole way and do a Mugabe or Hitler and monontize their debt away with hyperinflation...but there is no way any banks would want that to happen in a normal situation...as it would ultimately bankrupt them, no-one could borrow at the rates necessary to protect thier position - so I would say 2-3% inflation is exactly where they would want it (and that is the Reserve Banks clear primary objective as stated on thier website)...
So what is the problem...
For the last five years since GFC began the governments around the world have made a concerted effort to do one thing...save the banking system. They have taken from the general public (governmenet debt...we will pay this one way or the other) and shored up the reserves of the banks.
What is happening seems on one hand perfectly plausible. Since in a credit money system real money (spending power) is created by debt... they best way to fix this is keep conditions perfect for the creation of new debt to continue...
...hey it almost sounds altruistic...and from many levels it just seems the right thing to do...
The news we saw yesterday is just the same ruse in a new package. I personally don't believe for one split second the euro is going to split. I think the fear that is being generated is playing right into the hands of the leaders so they can continue to centralise the banking system...
But it is also not necessarily going to fix the problem either...taking from Peter to give to Paul never did any good...
(The new European Stability Mechanism is now going to shore up banks without taking money from soverign states...one question though, where is the money going to come from...I will leave you to figure that one out...)
So we have governments wanting inflation and a stable economy, banks wanting to freely lend created money to whoever they can...and this is all in the good of the general people. Under normal circumstances all they want to do is get things going again...that is not so bad is it?
What is the problem?
Three words: Demographics, Debt & Deflation
Demographics - these are not normal circumstances. The demographic break down in the Western World has turned upside down in the past couple of years, and is not getting any better till about 2023 according to some commentators (you can easily check this stuff by looking at demographic pyramids on Google, it is correct).
Basically, in a nutshell the peak spending group of 45-50 year old Echo Boomers is now declining into retirement. In short we are aging...we didn't spend enough time you know, wink wink...well not producing babies anyway. The situation is dire in Europe, bad in US, China and many other countries. It is also bad here though we are in a better state than most - Europe is the real issue...their demographic situation is just dreadful...
Debt - This group is now paying down debt and we are on a whole in the process of deleveraging...I don't need to labour this as the word is out everywhere on this one...the deleveraging is destroying credit dollars thus leading to a massive drag on the economy...money is being destroyed by us...it is possibly an unstoppable force...you just need to see the history of Japan for the last 20 years or even the Great Depression (demographics were a key issue then as well) to see how this could possibly play out...the US has had near zero interest rates for five years and property is still falling...and we are starting to see the same patterns here...
So Deflation is happening folks and the banks and governments are trying hand over fist to crank the engine. They don't want the lending to stop... but there is one group standing in their way...us...they can create all the laws in the world and every incentive for us to play the game...but if we don't want to borrow...or can't...well it is going to be an interesting few years...
I think this has only just begun and we are going to see this constant battle play out over the next decade or more so buckle up for the ride.
The battle between inflation and deflation is on, and the markets will continue to reflect this so long as the deleveraging game continues...
This time presents some unprecidented financial challenges ahead but also some real oppourtunities for those who see them...though I don't think this is going to be a straighfoward ABC road to profit for anybody...
Sorry for the long spiel - I hope that is helpful for someone...(don't really have time to write more, but would love to hear peoples thoughts)...
(20min delay)