Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle SeasonalStock Market Awaiting the Bonds Panic to trigger QE4Ever - 30th April 25 Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Awaiting the Bonds Panic to trigger QE4Ever - 30th April 25
US Bond Market Panic Continues Towards May Expected Japanese Rate Hike Volatility Spike - 24th April 25
Stock Market Tarrified as President Dump Risks Turning Recession into Stagflationary Depression - 21st April 25
President Dump Delivers BEAR MARKET - Stock Market Battles Between Order and Chaos - 7th April 25
Stocks Bull Market End Game Bear Start Strategy - 20th Mar 25
Gold and System Collapse: Charting the Bank Run of the Mighty US Dollar - 20th Mar 25
Tesla's Troubles — Is it Musk or is it More? - 20th Mar 25
The Stock Market Bear / Crash indicator Window - 9th Mar 25
Big US Tech Stocks Fundamentals - 9th Mar 25
No Winners When The Inflation Balloon Pops - 9th Mar 25

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Economic Outlook Darkens

Economics / Global Economy Apr 17, 2014 - 04:13 PM GMT

By: Alasdair_Macleod

Economics Many decades of Keynesian-inspired economic and monetary corruption have left advanced economies with a legacy of debt and low savings. In a nutshell, that is the problem which is driving us into another financial crisis. That moment could be drawing upon us, signalled by the recent collapse in bond yields.


This nearly happened in 2008. It was bought off by an open-ended central bank guarantee of infinite quantities of cash and credit, initially by the Fed, rapidly followed by all the other major central banks. Six years later, monetary medicine is still being applied globally in unprecedented quantities. And in some countries bank credit has finally begun expanding more rapidly than before.

The counterpart to bank credit is debt, which is fuelling economic growth wherever it can be found. Even exports are on tick, with the ultimate buyers around the world also heavily dependent on credit. Indeed, the more one looks at the current business cycle, the more its current state resembles 2007-8 and 2000-01 before that.

Credit cycles unbacked by substance start like this: print some money to inflate asset prices. Collateral values then increase, stimulating bank lending. Borrowers buy property and stocks, increasing prices and spreading the feel-good factor. Now that personal balance sheets are “repaired”, they buy new cars, new holidays and second homes, all on tick. Welcome to this point in time: the accumulation of debt has stopped us from increasing demand any further. The progression of events from here varies but the end result is easily predicted: it runs out of steam and turns into a financial crisis.

So how do we get away from this depressing and predictable cycle of events? The answer is simple: stop relying on the expansion of money and credit. We have forgotten that before Keynes told us to borrow to spend, debt was only taken on by entrepreneurs and businesses for very specific purposes as a last and not a first resort, and certainly not for everyday consumption.

This was the reasoning behind Says Law, which states very simply that people produce things so that they can buy other things. Keynes replaced this logic with a different story: there’s no need to make things in order to spend, so long as the state ensures you have the money available.

Understanding Keynes’s mistake is the key to changing course away from repetitive cycles of economic destruction. Instead of printing money and encouraging borrowing, people should instead be encouraged to save. The truth of Say’s Law can then operate, with people only spending what they can truly afford. Instead cash-strapped governments are likely to increase taxes on savings when they should be dropping them altogether.

After six years of monetary and tax policies that could have not been better designed to destroy savings and the savings ethic, you’d think governments might have learned some sort of lesson. They are having none of it. Instead Japan is hell-bent on monetary kamikaze, and the ECB is now warming us up for negative interest rates and/or QE.

The problem is far from being understood: if anything the destruction, even confiscation of savings, and the creation of yet more money are set to accelerate in a futile attempt to buy off the inevitable. And bond yields are telling us to batten down the hatches for the next crisis: it could be worse than 2008.

Alasdair Macleod

Head of research, GoldMoney

Alasdair.Macleod@GoldMoney.com

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2014 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Alasdair Macleod Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in