Cross published from my Prudent Investor Newsletter blog
Inflationism’s Major Roles: Bubble Blowing, Increased Social Conflicts and Heightened Risks of War
Breakthrough history can be seen on how global central bank’s full adaption of inflationism has spawned not only asset bubbles but likewise have been inciting increasing societal strains
The IMF declares record debt household, corporate and global debt to the tune of $152 trillion or 225% of the global economy.
This has been supported by record explosion of central bank’s balance sheets (Yardeni.com November 4), as well as record streak of interest rates cuts which now exceeds 666, as of August, notes the Bank of America, since 2008 (Business InsiderAugust 6). And central banks have moved out of Zero Interest Rates Policy (ZIRP) to deploy negative interest rates (NIRP).NIRP has been implemented by several countries led by Japan, Scandinavian and EU economies. The effect of which has been to spawn unprecedented negative yielding government bonds which has soared to $12-13 trillion (Bloomberg October 3) or about a third of total outstanding bonds (quartz July 2016)!
And because NIRP creates leakages through increased holdings of cash, many have called for an outright ban on the use of cash or eliminate high denomination notes.
Because record debt means borrowed money has to go or used somewhere, such has led to global asset bubbles.
Because part of the easing policies by central banks included bond purchases, negative yielding bonds means bond prices have soared to record highs! And bond prices have been accompanied by record pileup in bond ETFs! From the Financial Times (October 10, 2016): “Investors have piled more than $100bn into bond exchange traded funds so far this year, taking the global total to its highest ever level as fixed income investors adapt to a changing financial ecosystem”.
The IMF’s gauge of housing prices has almost reached 2008 highs! And this again has been backed by ballooning housing debt!
Record debt has also fueled stock market bubbles.
And because of the imbalances in relative levels of interest rates created arbitrage opportunities, along with BREXIT, US stock and bond markets rocketed to new records last July. From the Financial Times (July 11): A fundamental relationship between bonds and equities has broken down as the pressure for returns intensifies in an ever-expanding world of negative interest rates. An insatiable thirst for income has driven both US bond yields and equity prices — two areas that traditionally move in opposite directions — into record territory.
This occurred even when the index of global stocks (FAW) failed to correspond with the US which runs in contrast to 2014 and 2015.
Such curious developments have transpired even when the global economy as measured by World Bank’s GDP has been trending significantly lower since 2010!
The unequal distribution of economic gains has sown seeds to social conflicts.
Inflationism’s Role in the Destruction of Social Fiber
And because borrowed money hasn’t only been inflating bubbles which have apparently become dissonant with global economic performance, these have also been used to finance public expenditures, such as the welfare and the warfare state.
Based on OECD’s measure for member countries, social spending as % of GDP soared to 2009 record highs in 2016!
In other words, as economic conditions slowed, more people have become dependent on government’s largesse to sustain them. And with insufficient revenues, such government bounties have been funded by expansive debt.
And because of bigger funding requirements, governments intrusions on the economy has vastly increased—as evidenced by surges in regulations or mandates and by taxes (indirect and direct).
The intensifying politicization of domestic economies across the world, in the face of immensely burgeoning of dependency on the government, has prompted for a deepening polarization of society.
This comes as global bubbles amplify redistribution process favoring the financial and speculator class.
Don’t forget bubbles have varying effects on the populace. For instance, property bubbles impact society unevenly. Property bubbles subsidizes property speculators, but harms businesses through reduced profits via higher operating costs through increased rents and or higher property costs for acquisitions especially funded by debt or via reduced cash flows. It also impacts households through reduced affordability for potential or would be buyers homeowners, as well as, diminish the disposable incomes for renters.
A wonderful example: In the US, while economic conditions (meager jobs and wage growth) have been cited as main reason why more young adults are living with their parents –for the first time in 130 years (NPR, Pew Research May 24, 2016)—asset inflation or property bubbles may have likely been an important contributor to such dynamic. This has been happening as homeownership has slumped to the lowest level in more than 50 years (Bloomberg July 28) while rental markets skyrocketed (CNBC June 16). [As a side note, perhaps as signs of hissing bubbles, some major rental markets in August have started to drop. Wolf Street, September 2]
Also in the past [How Inflationism Spurred Singapore’s Labor Protectionism September 24, 2013] I have shown how Singapore’s property bubbles have sparked an outcry by residents against foreigners. This has led the government to impose labor protectionism or added restrictions on foreign hiring in the hope to reduce demand for housing.
So for the politically dependent class and for many other aggrieved segments of society, the unevenness of (the unseen politically, or to be more specific, mainly central bank induced) economic distribution has been seen as “inequality” brought about by “market forces”, hence, the aggravation of partisan politics predicated on immediate gratification or short-termism as evidence by the accession of a mélange of anti-immigration, nationalism, protectionism and anti-globalization forces, as well as, growing secession movements.
Scotland’s failed independence referendum in 2014 served as a precursor to the successful Brexit (UK’s withdrawal from the EU) referendum in 2016. The arguments for Brexit centered on immigration controls, rejection of EU bureaucrats and interests of the establishment, as well as reduced intervention on UK’s economy (Marketwatch June 23). PM Theresa May chastised the Bank of England for sowing inequality early October (Business Insider October 5). Unfortunately, Brexit hit a wall when UK’s Supreme Court ruled that invoking Article 50 required a vote by the Parliamentary. The government has appealed to reverse on this ruling. (Bloomberg November 4, 2016)
Italy’s government has been slated to hold a supposedly crucial referendum on “constitutional reform” in December 4. The referendum could represent a litmus test on the likelihood of Italy’s exit from the EU. And Italy has been experiencing a deluge of money outflows, partly due to the banking system’s problem, and perhaps partly, through increased risks of an “Italexit” (Bloomberg, October 17)
Inflationism’s Role in Global Conflict
And since the world operates in sheer complexity, years of central bank inflationism has also spillover to promote global conflict through the financing of the warfare state.
While global military spending expanded materially from 1991-2010, it has been static over the past few years. However, even while the aggregate numbers have been stable since 2011-2015, the distribution of global military spending has vastly differed. The biggest growth in the arms race in 2006-2015, according to the Stockholm International Peace Research Institute (SIPRI, April 2016) have been the UAE 136%, China 132%, Saudi Arabia 97%, Russia 91%, India 43%Brazil 38% and South Korea 37%.
Though expenditures fell 3.9% over the same period, US military spending accounted for 44% of the $1.35 trillion spent by the top 15 or 35% of the total world arms spending at US $1.676 trillion. US military spending accounted for 16% of 2015 budget (Heritage Foundation) and is bound to rise to $617 billion in 2017 according to USgovernmentspending.com
In short, relative growth comparisons would seem inadequate simply because of the scale of spending involved. All other nations have come from small reference numbers.
Yet, the US doesn’t spend all that humongous amount of money for nothing. Hence they have been meddling everywhere.
Former US president Dwight Eisenhower was right, in his 1961 speech he warned against the expansive influence through the domestic political and geopolitical clout of the military industrial complex: “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist”.
Today, the military industrial complex combined with the neoconservative’s embrace of the Wolfowitz Doctrine (Wikipedia) “suppress potential threats from other nations and prevent any other nation from rising to superpower status” has led to manifold US intrusions in overseas affairs and “encirclement strategies” against perceived competitors for superpower status.
Hence, this has prompted governments like China and Russia to respond with an arms race.
The US government’s interference in the Middle East affairs, in particular Syria and in Eastern Europe (Ukraine) has brought her face to face with nuclear power Russia. The US appears to be fighting a proxy war for Israel, since the Syrian leadership has been an ally of Iran and Syria supported Palestine resistance against Israel. The US government has been further involved in Libya, Yemen and, Iraq where the US seems also fighting a proxy war for Saudi Arabia [New York Times March 13, 2016].
This shows how world is faced by real risks of a nuclear confrontation between nuclear powers.
A week ago, the CNN (October 28) reported that a US and Russian war plane, “flew dangerously close to each other while flying over Syria earlier this month”.
Any possible real encounter could translate to “one thing leads to another”.
Add into this combustible cauldron are South China Sea territorial disputes, and rogue North Korea. And another potential flashpoint should include the Kashmir region (India versus Pakistan versus China) [James Hardy Asia Pacific editor of the IHS Janes Defence weekly The National Interest October 17, 2014].
Such debt financed massive arms race increases the risks of a world at war—especially once the global economy falters or a financial crisis emerge. Governments are likely to look for external bogeymen to blame their internal woes.
And wars in the Middle East have led to massive refugee flows into Europe as well. And such massive refugee flows has led to a refugee crisis that has fueled the growing anti-migration/nationalist sentiment.
In other words, trickle down central bank policies based on war on interest rates have spawned multiple social problems not limited to the economic and financial sphere.
US Elections: Political Turmoil as Post-Election Legacy?
This leads us to next week’s crucial US presidential elections.
Despite being the most unfavorable candidates today, the two major candidates appear to be products of Fed sponsored inflationism
Intense partisan politics has reduced the present election into a sham. With both proposing to solve current dilemma by focusing on short term solutions through increasing interventionism and expansive the government, there seems hardly a distinction between them. Nevertheless, the election has been projected as representing a competition between the establishment and the anti-establishment—a theme which resonates with the geopolitical milieu.
Regardless of the winner next week, the vitriol from the election campaign will likely be a legacy.
For one, investigations over the scandals that have wracked the administration’s bet will unlikely diminish.
Question is why has the FBI suddenly U-turned to reopen its investigation on the email scandals that has plagued the administration’s bet at culmination of the campaign period? Has there been a fracturing in the relationship among the establishment interests or the unelected “deep state”, for them to have abandoned the administration’s bet?
Has part of the establishment or the unelected deep state been worried that further investigations post-elections would expose them and cause prospective indictments? Will the sustained investigations, most likely to be conducted by the lower house if controlled by the rival but incumbent (Republican) party, lead to an impeachment, if the administration’s presidential bet wins?
If so, how will the administration’s bet respond to them, will she divert the public’s attention by forcing an armed confrontation with Russia and or China?
Moreover, given the unfathomable wedge that has driven many of the populace towards the populist rival, would a perceive winning by administration’s bet be calmly accepted?
Electoral violence looms especially if ballot rigging will be perceived as the cause of the underdog candidate’s loss (The Guardian November 5). Will there be civil unrest if the populist bet loses?
And what happens if the underdog anti-establishment bet wins? Will the winner eventually end up like the fate of John F. Kennedy?
Additionally, will the election of the populist leader actually lead to imposition of protectionist trade and migrant walls?
And again, regardless of next week’s winner, the imbalances from inflationism will eventually take its toll…perhaps sooner than later.
Just how will next week’s winner respond to this? Will there be more bailouts? And how will the public perceive of the leadership during the coming downturn? Will the present divide lead to a smoldering of umbrage and indignation? Will there be civil unrest?
Yet it has been pretty much a fascination to see how recent performance in the stock markets has been attributed by media to the perception of the odds of winning by the contenders for the US presidency.
When markets go up, it has been said that administration’s bet has the perceived edge. And when the markets go down this has been imputed to growing chances by the underdog. So far, the US and global markets appear to be teetering at the precipice (see FAW above).
In the case of Brexit, polls were mostly skewed towards establishment interests (Bremain) only to see an opposite outcome. At present, polls and establishment media has largely been projecting a win by administration’s protégé. Will next week be a reprise of Brexit which may cause revulsion in the financial markets? Or will next week send a massive short covering?
As said above, persistent inflationism has only spawned societal disharmony and the risks of discord
Even in the US, decisive history is in the making.
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