Markets have frosted nostrils

Say you knew somebody who had recently suffered a near fatal drug overdose.

What would you suggest they do?

Hopefully, your answer to that question is not “Take some more!”

The idea of treating an excess of something with even more doesn’t make a lot of sense. Almost like solving a credit crisis with more credit. Oh, wait.

Debt is a drug   

The 2008 financial crisis (or more accurately the “credit crunch” as it was initially labelled) was a hangover from a global economic binge on cheap credit.

Governments, companies, and citizens alike were all snorting Toblerone-sized lines of debt and enjoying one long, wild night. Prices swelled as great waves of cheap credit poured across markets. Money overflowed from the shares of quality companies into poor ones. Market participants were in a state of mania as endless bids kept the party going and prices rising.

The enablers of this drug abuse were the financial elites – banksters, financial regulators and the government.

The drug is not sourced from the coca farms of Peru, but from Threadneedle Street in London, and Constitution Avenue in Washington DC. It is the central banks who farm money.

The bankers loved low interest rates as it allowed them to speculate cheaply. The regulators were keen to get jobs and perks in the same industry they regulated, and failed to criticise excessive risk-taking. And governments love low interest rates, as it allows them to expand the size and role of the state.

Rumour of a bear

The property market in the US was where it began to dawn on the revellers that somebody would need to clean this mess up in the morning. What were we thinking, they wondered, when we decided to leverage our assets forty-four to one betting on the US property market?

Suddenly the rumour of a bear in the building spread through the party. Panic rose in their chests. Suddenly everyone wanted out. Lehman Brothers was trampled as a deadly rout began. Mentally and physically drained, many more would follow. But it was not to be.

In strolled Ben Bernanke, the host. “The situation is under control,” he declared. “Just take this.” And out from his leather briefcase he drew great sacks of more credit-cocaine, and potent forms of Valium-like “credit easing” and “dollar swap lines” to ease everyone’s nerves.

And so the party has continued.

There is so much cocaine in the financial world today I can almost taste it in the water. Perhaps I’m just a killjoy… but I think something has changed. The mood just isn’t the same. It’s as though everyone’s running out of energy, desperately going through the motions of a dance that used to be fun, as the eventual hangover grows larger with every ounce of credit they ingest.


This land of such dear souls, this dear dear land,
Dear for her reputation through the world,
Is now leased out, I die pronouncing it,

John of Gaunt in Richard II, Act 1 Scene 2 (emphasis added)

It’s no consolation to John of Gaunt, but today all lands are “leased out”. Governments around the globe are now almost £55 trillion in debt. The £1.7 trillion that the British government owes seems almost respectable, considering we’re the fifth largest economy on the planet.

The US government now owes £15 trillion ­– the Obama administration’s deficit spending was on a higher level than that of any previous president. And now the precedent has been set, the debt will only grow. Some say the promised social security and Medicare payments for the future make that debt closer to £78 trillion.

A trillion pounds in debt. The very word “trillion” sounds ludicrous, and completely incomprehensible.

What do you even think of when you hear it? What image springs to mind? £1,000,000,000,000? The average person won’t even live to experience three billion seconds in their lives.

A trillion seconds ago was more than 10,000 years before the cave paintings discovered in France were smeared on to walls with animal fat and spit. Millennia before the Vikings, Romans, the pyramids and Stonehenge – literal prehistory. Now just imagine a pound coin for every second between now and then.

This will never be paid back

To get an idea of the scale of this issue just in the US, I highly recommend you watch this – it’s what the US government debt would look like in $100 banknotes. The music in the background makes it grimly hilarious.

There have only ever been three answers to the debt question.

  1. Generate enough economic growth to pay off both interest and principal. Huge amounts of government debt already accrued were in pursuit of this mirage. The “borrowing to invest” political mantra is a false idol that will lead us to ruin, and ultimately ends in answers 2 or 3.
  2. Inflate it away. Depending on the method, this could (paradoxically) increase government debt, as government debt is the base from which all pound notes are created. No matter how this is achieved or even targeted, it’s bad news for the everyman (and woman) as your buying power is stolen to pay for the excesses of the state.
  3. Default. If a total default ever does occur (or should I say, is ever allowed to occur) the result would be a monetary apocalypse.

None of them are good news. And the question of debt isn’t going away. For those of us not content to just buy survival gear and batten down the hatches, my colleague Tim Price has prepared a “fail-safe” portfolio for whatever monetary mayhem may head our way.

Ever closer to the sun

Centralised power over interest rates is the wings of Icarus. It can lead economies to speculative booms as they soar (magnificently at first) towards economic growth, but burn up and bust in dramatic fashion when the wax holding the feathers together starts to melt.

A gold standard by comparison, is a pair of hard-wearing hiking boots. Not very fashionable, and won’t raise us to greatness and glory any time soon, but we’ll get there in the end.

Guess which one is favoured by politicians?

Short periods in power create incentives for short-term results to secure re-election. No time for porridge, bring out the white powder.

Once they’ve had their fun in power, they retire with pensions paid straight from the treasury. The hangover is for whoever is in power next, who will impose similar self-destructive policies on the economy to keep the party going.

I wish you all a great weekend – don’t follow the example of central banks this evening.

Until next time,

Boaz Shoshan
Capital & Conflict

PS Do you think this is a good metaphor? Let me know:

Your feedback is much appreciated.

Category: Central Banks

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