FINANCIAL CONDITIONS RED ALERT

[skyreach]

By Skyreach,      I.G. Client,      Blog, 26 August 2022

Here is my current take and innovative thinking on the economic world. I hope it sparks a new way of thinking, solving problems and lead to better theory models in economics, finance and the political arena.

In a seemingly complex financial world many wonder which way the economy will turn as of July 2022. For years central banks, particularly the Fed, worried about deflation and so hugely expanded the money supply (called QE) and the excess money went into the markets. Excess money supply creates inflation and the hope is it cancels the deflation. Deflation comes about either by prices falling for goods and services (cheaper), or by excessive growth of debts that eventually have to be liquidated.

On the other side most economists go on using the same old theories, linear extrapolations and certain assumptions that together provide a baffling array of options, and ever changing predictions that cannot match changing current realities.

Consider the agreed upon fact that collectively, households and businesses spending, saving and investments are dictated by funds in the economy, yet what has fueled the excessive levels that exists in the first place, is not recognised. That of the alluring lowest interest rates levels along with the massive money printing over an excessively long period. Because of this historical levels of debts have funded lot of the spending and investments, not genuine real money earned-based expansion. The attempt was to grow ourselves out of the huge debts in the economy and government, with more debts!!! Logical or illogical thinking? It didn't work. It defeats the purpose of reducing government debts and all others. Look at the margin debts by financial companies alone, now, mind boggling levels!!!! And no company controls its run-away expectations. It is a recipe for disaster. Then many professionals and governments will wonder why the deep recession. Having kept the rates so extraordinarily low for so long only prolonged the inevitable and build a bigger implosion to take place when inevitably the rates do go up.

Also too, during the pandemic further QE was added to the system needlessly as spending, investments and business activities were stifled at historic levels around the world. Hardly any business activity yet QE continued when there was no major industry liquidity problems!!! Government spending shoot through the roof to support the lame businesses and households by increasing their own debt levels. Huge government borrowings financed the scheme. Much of that was abused and it showed how poor governments can be at managing its use, and not be accountable for it.

What needs to be controlled? The huge surplus of money (QE) needs to be curtailed to conquer inflation, as that is what caused the over-inflated spending in financial markets, and mega-debt build up. We have a bubble everything economy because of it, over inflated prices of everything, including housing, commodities, bonds, market valuations, various types of debts at record levels. No economy can sustain that forever, something bursts or implodes and deflation results later on. That has been proven by past experiences, repeatedly.

 

Problems of inflation and deflation

There is a confusion with what inflation and deflation are. Few can see that there is good inflation and there is bad inflation. Similarly for deflation. Inflation caused by over-expansion of money supply is the bad culprit. It means purchasing power loss and more costs. Whereas inflation caused by natural price rise of product costs is not. It was needed by business to run their business well. Deflation caused by huge debt-build up is the bad culprit. This means unprepared businesses get into difficulties and cost increases stifle their business. Less jobs and less spending money means less savings, spending and less for investments. However, deflation caused by productivity increase, product price falls, and more technology lead efficiency represents good deflation (that is what we had in the recent past). Cheaper goods saves people money. That translates to more savings, spending and investments. Savings only increase if interest rates are at correct levels. Hence there are positive and negative components of inflation and, deflation. Hence a simple aggregate summing of the negative with the positive does not cancel each other out or handle the situation. Of paramount importance is that each has to be recognised and handled accordingly. Any business needs people for their sales. That is the key, the base support. So if they are not allowed to flourish and prosper then that directly affects businesses.

Governments have been “busy” enforcing “get them to spend, spend, spend philosophy” in the hope it will “cure” their reckless ever growing mega-huge debts that has been the culprit. They penalised their base support foundation that had not caused the problem. Central bankers either went along with it or advised the governments to follow this plan. Either way, neither realised they violated the foundation of the symbiotic relationship (explained below).

The cycles of equities markets and that of the economy are different. Different in rhythms, lags and laws. They both share a common bullish and bearish periods, overall.

The efficient market theory has a lot of problems standing up to the real world economic realities and results, and even with the share markets. Besides that, lot of the variables can be manipulated to juggle conditions at the micro-level but it is violating the known laws that show the faults of the theory. The theory also implies that no manipulation or unethical practices, will take place as all humans are acting rationally and consciously, with full and correct use of the known laws in the related subjects. Who is kidding who? Take a look at that theory, how the laws are violated and human psychology! A man wearing great cloths or a suit looks smart but it does not make him a “rational being”, by his looks. Some are not. Just because a man holds a grand position does not automatically make him a smart problem solver. Many are not. A man has a billion dollars does not mean automatically that he is rational, or a problem solver, only that he knows how to make money. He may know little else in life. Nothing else is proven. There are many other qualities overlooked, positive and negative.

Hence quality of products, quality of service matter with any business. It makes them or breaks them, eventually, based on the quality of management running the business. In finance it would mean how much returns they can deliver to all their clients, and give the same advise to all, not just to their rich clients

There seems to be an obsession in controlling more of the wage-increases which comes about as a result of the excessive money put into the system, or from the commodity price rises. Yet few can say, “lets control the over-inflated money supply” to handle the problem, which after all, began the problem in the first place. Handle what primarily caused it. Is that difficult to recognise, and do?

But many may not easily like that as they have gotten use to excess money to elevate the market prices without the relative increase of GDP compared to the previous bull phase. This gives a false sense of feeling good as the association is that the counterpart, the economy is really doing good too. If that were true then the mess in the system would be clearing up. Different types of symptoms present are confused when the incorrect “disease” is identified for a remedy instead of the correct “disease” / remedy, which would work.

Problem solving requires we define the problem clearly and tackle the primary cause, not juggle and manipulate variables due to secondary or tertiary causes for patch work solution and get temporary relief, then find “other major problems arise”.

Financial conditions tighten when businesses, and separately, the markets, realise where they are at. If a business is expanding that is good, if a sector is in recession then they will have to adjust to it and handle it. They should be following their business condition, not the general economy's condition alone. This is all assuming that they are left to handle their own financial responsibilities and not given financial aid from government or the over played QE drama and excessive borrowings to fund big government programs, i.e. excessive money printing, or attempt to “prevent” deflation! To get the market, and businesses efficient again then, they have to manage their own finances, and business activities.

Recession results due to debt liquidation to raise cash to pay off unsustainable loans. Any recession clears up quicker if industry is left on its own to sort itself out. It always clears out the “dead wood” for a more proper business environment which is stronger and leaner. Politicians do not seem to have realised this having been fed other assumptions as “advice”. History of the early 20th century us example shows that the only time when no government aid was given or present, the economy recovered relatively faster. At all other subsequent times aid was given (excessive money-printing schemes) and the recession lasted longer. And, governments do not have a proper system to keep a critical eye, overseeing, that businesses manage their fundamentals properly based on a workable-based empirical formula.

Life is more about micro-economics then just that macro “stuff” alone. Easy money enticed the businesses at the micro-economic level to feast on cheap debts and so some may not now be able to cushion themselves from the financial pressures of a looming recession that will come, sooner or later.

One cannot blame the government for industry's misjudgments or malpractices, and government cannot “fix” everything for them. Nor can advised governments continue to enforce people to spend, spend, spend by various clever grand schemes, especially once digital money is enforced, as money. Cutting the survival level of the financial world's support base (reducing savings and investments) does more harm than good. It penalises the good and rewards the actual wrong doers. A major irony and counter productive.

Jim Richards, analyst, lawyer, investor, author and top level advisor to governments, CIA and the fed, has written about the dire outcomes from digital money as the us president has passed an executive order to authorise it.

Japan's mega-debts and long term QE use has had relatively few major financial disasters due to the very high savings culture that has always existed and remains. It is also a major manufacturer of products sold world wide. That has sustained the system for so long, until it cracks. The world financial system is delicately linked and most follow the same monetary theory so end with similar major pit falls, though the dynamics can be different for different countries.

China's businesses are finding similar problems. Only they seem to be “new” at realising that you cannot solve an economy by excessive money printing or excessive debt build-up. Hyper-inflation build into many parts of their economy but the worst being the property market. It economically awaits a disaster, no matter how it manipulates its variables and thinks it can do patch-work solutions like the west has tried, again and again, and again.

There is no doubt that we can “improve statistical figures” by patch-work manipulations for a while but that defeats the whole focus and energy away from the true economic scene and lasting solutions. Then you wonder why booms and bursts happen so often!!!!! Following “conventional wisdom” constantly has not solved it but repeated the problems to occur repeatedly (periodically). Rarely can professionals isolate the solution by asking themselves the following: “what is it that we do wrong that leads to booms and bust, so often?” There would have to be something wrong as we keep on repeating the same problems, time after time, after time. One ex-fed chief is known to have said booms and bursts are no more well before the 2007 bearish period, all because we had QE!!!!!! And yet here we are once again, boom and burst.

Ask most people about pressure and equilibrium in the mechanical world and they will understand the concepts. Yet, few seem to have realised similar principles (not the same) exists in the real living world. “pressure valves will blow, conditions crack and non-equilibrium conditions crack open other negative events”.

Even fewer people realise that life forms and livingness runs on different laws yet may have parallels with the inorganic, non-living material (matter) of the physical universe. Matter has no consciousness but life-forms do have, at different degrees. Man stands at the top of that tree. We associate one (physical) with the other (non-physical) instead of differentiating between them. Hence the dynamics of human activities are likely to have different factors or basis on which they operate on, then are currently recognised. How we associate, or react to, or personally consider objects, ideas and people comes from our own conscious or unconscious efforts. Hence situations and world events can affect the business world. However, businesses can ride out these storms providing their business fundamentals are maintained and economic fundamentals are not violated but unfortunately many will not have been focused on that. The recession will find them out.

Primarily life is based on symbiotic relationships, not the brute force of the physical universe which we are attempting to conquer. Brute force equivalent is the dog eat dog mentality that some humans use as their negative reactions.

 

Examples

Economists extrapolate linearly assuming it will carry on the same way as it did in the past, then wonder why they have to change their prediction all too often.

Governments think that to improve “education” you handle bad run-down buildings and have good aesthetics. Yet they, like others, forget that quality of teaching is the real key. Third world countries have greatly educated people even though their surroundings are far far less pleasing and “run down”.

We get a fast inflation rise. What caused it? Blame rising prices, blame wage-increases, blame xyz that is happening now, but you forget to blame the real culprit that started it earlier on! The excessive money printing in the system and the excessive encouragement of debt-build up with low rates, and then justify that businesses need “growth”. Law of money-supply violated. The symbiotic relationship is broken too.

Should businesses not manage themselves? Do they not know what they need to do to run their business? They know, obvious as it is. So, how come fundamentals are flouted by many? Focus should have been on business fundamentals. You cannot make money if you do not sell enough and it does not matter what the rates are. Can executives run a business properly, or run it into the ground? Period.

We all know rates go up and down, a fact of economic life. Yet how surprised are companies, governments and financial institutions (who should know even better) when rates go back up and consequences of servicing debt costs will go up. Would that come under unprepared / bad management? They carried on as if “nothing” is wrong or any over-abuse is taking place (e.g. Creative accounting) or excessive loans needs to be worried about. It is as if there is no consequences to consider, or any financial destruction that could follow. Until that is, it happens.

Past long gone civilisations and empires had no survival longevity, long term. Why? Well they usually began with trade and fair exchange, and a good ideal purpose and flourished. But later on it ended up by looting, confiscation of wealth of people and other nations treasures or properties. And then followed the wars or civil unrests as a result. Even today confiscation of wealth is the main attraction and used all over the world. It cuts the base support they have and that is hardly ever realised. It also applies to governments too. This is the violation of the law of exchange. Trade is done by exchange, trust and good relationships. Break of any of these factors lead to various problems and injustices. It is bad enough having physical universe disruptions at times but man is worse at causing his own various disruptions. Just look at the problems we have in the political, economic and financial arena alone, right now. Mankind has created his own environment he has ended up with. And a francy of destructive practices pulls us back and many do not realise it is man-made. Nature definitely did not give us this.

Conquering financial problems, the planet, the moon, and mars could be our next vast expansion over the very long term. There is plenty to conquer and expand into out there without fighting amongst ourselves as the human race and ruining our own planet in a francy of malpractices that are destructive for us all. Some people will not feel the effect of a poor economy or bad practices, as much as the majority, until it gets extreme. Rare is the person who initially sees the knock-on effects that will follow.

Businesses can only thrive if they have products that are needed or wanted, have quality built in and good management. In Britain and the USA we have become far more reliant on servicing led industries instead of manufacturing. Asian countries like china got huge benefits when the western policies changed to let manufacturing be done in china. The lure of cheap production created a loss of control and dominance in manufacturing that once existed. It was not a trade war that did it but sacrifice of the ability to make things ourselves. Then government and businesses wonder why the trade imbalances occur constantly. This is where governments need to improve. Innovations and new products of the coming future will help tremendously but for now we need to look at managing the obsession with over printing of money (QE). And businesses need to manage their core business and not be obsessed with piling up debts that cannot be handled, nor used for growing the business as in share buybacks to increase share price artificially. And banks do not want to lose out with lots of bankruptcies so expect governments to bail them out via various legalised schemes.

A major breakthrough that has been made sometime ago by harry dent, economist, investor, author, who established the way demographics plays a major role in economics. So businesses and governments can plan long term based on this key model for better results.

The digitalisation of fiat money taking place soon in the USA and elsewhere will not change how the money-supply law works, nor can it be flouted. Money is money whatever form it takes. Money is a form of exchange. The pity is it is no longer backed by gold standard for stability, as it was in the past, many decades ago.

Business expanding too fast create their own problems, and expanding too slow has worse or different effects. Having a good steady controllable expansion is where the real skill of management lies. So steady viable expansion and profits represents stability. Whilst too fast a growth represents over-loaded with heavy debts and expecting excessive growth by various manipulations. Very slow growth could also means not enough is invested for growth or just have poor sales.

We are exponentially expanding our understanding of the workings of the physical universe and developing great many applications, tools and products to make life easier. Yet we keep forgetting that life and livingness, the humanities, have different operating laws for all the subjects that come under it. This area has hardly made any genuine progress in the last 100-years alone. And as profit orientated our business models are it makes no different how much is made if our civilisation is reduced in wars or by extinction and we cannot enjoy life for its sake. Then no one will be able to command anything, nor make profits. This seems to be the hardest lesson we, as the human race, find difficult to learn. Life is not about dominance and obsessive control that lead to disagreements but about building trust, relationships, and willing to live with the national population, and other nations. All past civilisations failed in that regards and eventually died. Let's hope we can all learn from the past mistakes and better manage things for a brighter future.

Disruptions often come by and affect everyone yet we manage to get through them, e.g. The pandemic, natural disasters, a bank collapses and wars. These however, are not the primary causes of the more underlying economic problems that have been infesting and brewing for a longer period until it gives way and the system erupts with a bigger calamity, such as a deep recession. Then we blame other current causes which are secondary or tertiary to the primary cause. It is a problem of correct problem identification for the many symptoms that are present. The primary cause is the common thread for all other lower order cause and effects.

Finally, how can any country be rich and prosperous if it continues to live beyond it means on debts that is at highest ever by citizens, government and companies? Normally rich would mean that most would be relatively prosperous, can afford anything needed and have cash savings, as the USA relatively was in the 1950s. Government would be balancing the books annually with rainy day deposits set aside. Majority of the companies would be in a viable state, with growing sales and cash flow. Bankers, government and financiers are all aware of the debt problem yet are unable to resolve this without passing most of the costs onto the current and future taxpayers, instead of targeting those who allowed it to happen, or to continue it, and let them take the consequences and the losses.

 

[MongiIG]

On 26/08/2022 at 13:18, skyreach said:

Here is my current take and innovative thinking on the economic world. I hope it sparks a new way of thinking, solving problems and lead to better theory models in economics, finance and the political arena.

Thanks for sharing @skyreach

 

All the best - MongiIG