Economics / Economic Theory Aug 04, 2022 - 04:56 PM GMT
According to Webster’s dictionary, the definition of prognosis is a forecast, or a prediction of a probable course of a disease in an individual, and the chances of recovery. In this article, we apply this definition of prognosis to our inanimate, yet seemingly “living and breathing” economy, and project its chances of recovery.
The world is filled with intelligent and highly experienced economists, and thousands of financial market observers who can supply us a lucid and convincing interpretation of our economy and health of our financial markets. As a result, you can find widely recognized professionals who will diagnose and predict the direction of our economy and financial health as to support our own personally biased view of reality – regardless of what that may be. But independent of our own personally preferred views, what is the most probable reality we are likely to experience? What is the real economic and financial prognosis?
Government agencies and media are increasingly filled with unjustifiably adjusted and manipulated economic data, directed and misdirected propaganda, and outright lies, such that it is nearly impossible to judge the real strength or direction of the economy and the health of our financial markets. Since small and developing nations are quickly learning these “tricks of the trade”, international media and government agencies are universally now also dispensing politically favorable rhetoric rather than truth. So what measures can we review to accurately evaluate the health of our economy?
Four measures of economic and financial health
The Gross Domestic Product, which is popularly used to portray the strength of an economy, grew by a blistering and almost unbelievable 6.7% growth rate in the 1980-2000 year period. This growth rate of GDP for the 2000-2020 period declined to a still very respectable 3.9%. However, the nation’s GDP actually declined in the first quarter of 2022 by 1.4%. In addition, the Atlanta FED recently projected through its GDPNow economic model that the second quarter for U.S. GDP growth would also be negative. Just taking these four data points, what do the two twenty-year GDP growth trends, and the current negative growth expectations for two consecutive quarters in GDP imply for America? Remember that the official definition of an economic recession is two quarters of negative GDP growth. Considering this, what is the economic and financial prognosis?
The nation’s national debt, a measure used to determine financial solidity of a nation, according to the data collected by the St. Louis Fed had grown by a destructive and economically unacceptable 9.5% over the 1980-2000 period. This growth rate has remained stubbornly high with an 8.3% growth rate in the 2000-2020 period. More recently, the national debt growth rate has surged to a 14.2% rate over the 2019-2021 period. Our economy’s national debt level first crossed $10 trillion in 2008; but by year-end 2021 it had almost tripled, and stood at $29.6 trillion – an incredibly destructive rise in such a short time period. Six months later this debt had further expanded to $30.6 trillion. Our national, corporate, and consumer debt is at an all-time high, each of which is destructive to a healthy economy. Since future budget deficits are essentially guaranteed, this debt will continue to grow!
As current intentions of the FED are to increase interest rates in order to combat inflation, it concurrently will raise the cost of servicing debt – and further budget deficits increases are indicated, which will create an unvirtuous cycle of increased debt. In addition, raising domestic interest rates strengthens the dollar, creating considerable financial stress for developing countries which have borrowed in dollars, potentially creating an avalanche of foreign debt default, which because of our interconnected world will cause a default tsunami to engulf every shore. Taking just these national debt statistics into consideration, what is the economic and financial prognosis?
The money stock of the nation, a measure of fiat currency creation as measured by M-2 and collected by the St. Louis Fed has grown by 5.8% over the 1980-2000 year period. The growth rate in M-2 money growth rocketed to a 7.0% rate over the 2000-2020 period. However, in the 2019-2021 period that growth exploded to 18.4%. Classical economics dictates that increasing the rate of the money supply increases the cost of goods – with a timing lag. Foreign countries, in order to protect themselves from exported inflation from the U.S., have printed additional amounts of their own currencies as a monetary defense mechanism - essentially creating a global debt baloon. Just taking into account the expanding growth rate of the M-2 money stock of the nation over this period, what is the economic and financial prognosis?
Inflation is the printing of fiat currency. The effect of inflation, or the consequence of printing currency beyond the increase in production of goods, is that it raises consumer prices. Such prices are generally monitored following the Consumer Price Index (CPI). Over the 1980-2000 year period the CPI has grown at a 3.8% rate. This rate reflects the very high inflation of the late 1970’s, which from the early 1980’s started to decrease from FED mandated historically high interest rates which created a protracted recession in the economy. In the 2000-2020 period that inflation had abated to a more moderate rate of 2.1%. The cost of living had started to rise again in the 2019-2021 period by 2.8%, quickly reflecting the accelerated debt and currency issuance. However, accurate cost inflation in 2022 has risen above 8%, as “real inflation rate” by credible analysts has been estimated to be roughly two times higher. The Federal Reserve’s Chairman Jay Powell has expressed the hope that the FED might be able to bring down inflation without tanking the economy, but he states that recession is “certainly a possibility”. A few days later he states more ominously, that there is “no guaranty for a soft landing of the US economy”.
The emergence of cost inflation as measured by the rise in CPI, versus “real inflation” arises from the CPI calculation having been modified in the 1980’s as an attempt by government agencies to reduce the official rate of inflation in order to reduce an increase in Social Security payments tied to a cost of living adjustment to these benefits. Therefore, the CPI indictor for cost inflation has been manipulated for decades, and substantially understates the real inflation being experienced by consumers. The most accurate measure for cost inflation, just released came in at a 40-year record 9.1%. Given the preceding explanation of the “real cost inflation rate” we can assume that even this record high 9.1% rate is phony, and understates real cost inflation.
The International Monetary Fund (IMF) directors have warned that “a broad-based surge in inflation, (are) posing systemic risks to both the United States and the global economy”. The FED’s raising of interest rates has made the dollar temporarily strong relative to other national currencies. In the absence of a stronger dollar, the measured inflation rate in an environment of a weaker dollar would have surged cost inflation substantially higher. The fact that producer price index has risen faster than the CPI suggests that higher retail prices are coming in the near future.
The FED is now suggesting a raising of interest rates at their next meeting by 0.75%. That would accelerate the negative effects of a stronger dollar globally, speeding forward the economic storm from more expensive dollars, defaulting foreign dollar debt and reducing American exports, and making the sale of Treasury bonds to international buyers prohibitively high thereby limiting the success of Treasury auctions. And interest costs of servicing our nation’s would rise dramatically, so raising interest rates is no longer really a viable solution. With this data and insight, what is the economic and financial prognosis?
Any one of these four indicators can tell a lot about the direction of the nation’s economic and financial health. But how does the probability or credibility of an assessment increase, when all four of these indicators signal slowdown or reversal from previous periods? The stock market as measured by the S&P 500 index has suffered its worst performance since 1970, perhaps confirming reality. Some will argue that many more criteria need to be analyzed to predict our economic future; however, increased complexity in economic analysis does not necessarily provide improved perspectives on divining the future. Analyzing more data, and second order effects can simply serve to obscure the overwhelming direction of reality.
Other economic and financial measures
It should clear, or at least arguable, that the preceding four indicators suffice to indicate the long-term direction of an economy, and the health of its financial system. However, resourceful economists and market predictors have developed myriad economic, financial, and market measurements which support specific viewpoints and realities.
Here we highlight a couple, just to acknowledge its multitude.
Demographics has often been called “economic destiny”. As the expansion of a population can be predictably projected more than twenty years into the future, demographics can accurately predict the spending habits of young adults, forming families, a generation of young children, teenagers, young adults, empty nesters, and older adults at the end of life. It can accurately predict the number of people to enter the job market years into the future, and attendant taxes and Social Security contributions. Accordingly, demographic charts are important economic predictors. Because family formations and births have been decreasing for several decades, and lackluster employment growth including stalled wages when adjusted for inflation, it foretells inadequate tax collection promoting further debt expansion, and dangerously diminished contributions for sustaining the Social Security and Medicare system.
Inversion of long-term and short-term interest rates has long been used as a predictor of recessions. Therefore, it is also a credible predictor of the direction of financial markets and the economy. Over accurate years, such charts have confirmed more frequent near inversion of the yield curve, and genuine inversion for brief periods of time, indicating near recession conditions. It seems that a healthy relationship between increased maturity bonds as depicted by a yield curve has been absent for years.
For those seeking more comprehensive data, one must accept the fact that any statistics which look at the United States are compounded by similar data for all of the world’s largest countries – the G7 or G20 group. Data can also be split between primary and other industries, or groups, and governments, imports and exports. There are consumer confidence indexes, disposable income gauges, and various sales and profit measures. It can be important to look at the whole banking and monetary system, Treasury financing, central bank and other open market activity, interest rates domestic and international, and those related to the building industry and mortgage loans. There is an incredible array of information relative to employment, unemployment, and jobs.
It should be clear that one can get lost in the available information. Looking at second derivatives of data, repos, convexity, and reverse repos may be overdoing it a bit. Over a longer time period, the preceding four measures just highlighted provide sufficient information to corroborate economic and financial trends and their vibrancy.
Underlying reason for these problems
Perhaps it is worthwhile reflecting on the fact that the problems of rapidly increasing national debt, extraordinary increase in the creation of additional money stock (fiat dollars), and the cost inflation that we are now witnessing in our domestic and global economies is only possible because governments have centralized control of fiat currency issuance, taken away real money (gold) from the people, and replaced it with a currency which can be increased at will by most governments. People of those nations that cannot issue their own currency, such as those in the European Union, are even more subjugated than other currency issuing countries.
It is also worth noting that once inflation becomes severe and persistent, it may supply way to hyperinflation, where meaningful trade, both national and international, becomes increasingly difficult if not impossible to conduct because with a continuously rapidly losing-value currency, it becomes impossible to value trade goods in terms of the changing value of exchange. That points to the shriveling of future global trade, and worldwide economic retardation. It is also worth pointing out that hyperinflation is only possible from a government issued currency.
In times of inflation, the government has an increasing need for more currency, as the value of that currency is declining to pay for government spending. Therefore, it is a reasonable conjecture, that government will continuously increase its issue of currency, and accelerate the devolution of its value - and over a longer period of time promote and certain its collapse.
In this period of accelerating inflation, people are motivated to spend more now, before prices increase further. Indeed, the government and FED promote spending rather than saving and investing – it is the basis of our faulty Keynesian economics. Therefore, the entire economic structure is based on a fraudulent foundation of government issued money which expands on its perceived needs, and encourages destructive government policies. Since inflation cannot persist over a long period of time, and no nation has been able to print money to make its people rich, it follows that its currency will also not persist for a long period of time.
Eventually, a reevaluation of these piles of fiat currencies takes place, and the trillions of investments in dollars and other currencies committed to equities and fixed income and real estate in global markets gets repriced by an unchanging measuring-value rod such as gold. Whether a slow-moving or a rapid devaluation – such events will be remembered historically as a collapse. A collapse of a currency can only take place when confidence of people, in media and government agencies has substantially declined or evaporated. According to the most accurate Gallup poll, our nation’s citizens are registering their lowest level of confidence in these institutions, while confidence in Europe has tanked from the effect of its long-term egregious if not destructive totalitarian governance policies and more recently from effects of being unable to maintain its energy contracts with Russia – thus making the collapse of global currencies possible.
In the meantime, the continued issuance of additional dollars domestically reduces lending costs (interest rates) and incentivizes borrowing. People who understand money, borrow to invest in markets which will benefit from inflation, or at a corporate level repurchase a company’s shares to benefit its stock price. Government control of money has never proven to work well throughout any period in human history! Government’s ability to print money has only allowed it to manipulate interest rates which have caused recessions, and the increased debt-supported money has promoted warlike geopolitical policies without which most of the wars of the last century, including WWI and WWII, Korea, Vietnam, Afghanistan, Iraq, Syria and lesser interventions such as in Guatemala and elsewhere would have been short, or not have taken place at all. With sound money, the world would have been a better, far more affluent and peaceful place for its global citizens. Can our coming technically-driven digital transformation of money usher in an era of honest money and fewer kinetic wars, and even global peace?
Manifestations of centralized fiat currency
Nations and its politicians, in accurate decades led by the US, historically have acted in a fashion which is destructive to their own and other country currencies and economies. Unwittingly, nations are thereby also destroying accumulated wealth of their own citizens, and their economic sovereignty. Among billions of global inhabitants there are thousands of competing groups – different civilizations, continents, religions, types of governments, countries large and small, capitalists, leftists, socialists, globalists, climate activists, resource rich or poor, modern day Malthusians and other doomsayers, and ideologue groups of almost an infinite variety. Such groups have programs and projects and leaders who in varying degrees can have significant influence on the future direction of the world.
An example of a prominent group is the World Economic Forum (WEF) whose leaders are creating a global crisis for the purpose of redirecting the nature and control of the world’s energy use through climate hysteria, fostering fear of inadequate food supply, and bringing change in the nature and control of the world’s money supply by aligning with the International Monetary Fund (IMF), which wants to offer a single global currency. Their stated goal for the global population by the year 2030 is “to own nothing and be happy”. It must be stated that communism has been tried for over two centuries and, and after millions of lives lost and unimaginably destructive wars - it was found not to work. Even its largest and strongest adherents, China and Russia, are no longer communist – they allow and encourage private property and individual business enterprise.
Today’s reality of surging gasoline prices worldwide and energy shortage in Europe is proving that nuclear energy, coal, oil, and natural gas-based energy is still needed for humans to thrive. No mad marches, or destruction of our city centers is needed to prod engineers to produce cleaner and abundant energy. Scientists are also diligently working to develop new sources of clean energy whether there are marches and riots or not. It just shows that the protesters are interested in violence and destruction for its own sake, rather than support science-based energy research. In other words, it is an attempted power grab by a coordinated and organized group of dissidents.
Technology-driven global solution
Science and technology are also working on developing a new and potentially better money. This technology is based on computer code limited expansion of its decentralized platform coins and token currency, that is inclusive of unbanked and underbanked population, and based on computer node confirmed transactions, which can take place with complete trust between people who do not know each other. By contrast, historical evidence shows that centralization of any process, authority, or governance increases power, wealth concentration, and corruption. That certainly has been true over the last century regarding the government’s centralization and confiscation of gold money and substituting fiat currency in its place while forcing it on the public through legal tender laws. The loss of purchasing value since the inception of the FED has been almost complete. The loss of fiat currency value just since 1971, when compared to gold’s price has declined by 98% - a criminal and evil result.
Information technology-wise systems analysts, programmers and coders have clearly understood the corrosion of fiat currency to financial systems and economies, and created scores of decentralized platforms which have issued value-carrying tokens that can function as currency. The most common known alternative currency is Bitcoin, which because of its programmed limitation to 21 million coins, has gained in reputation as a store of value. Understandably, governments and the banking industry are frightened by losing control of their centralized socialist system, and will do anything to destroy it.
Just as the first I-phone has given way to its twelfth iteration, digital currency and assets will evolve over coming years providing indispensable services for transferring money or other value. In some parts of the world, decentralized and inclusive banking services will promote privacy, foster asset accumulation, and force governments to be less invasive yet more frugal and efficient, collecting their diminished taxes through easily collectible sales taxes rather than through a burdensome income tax computation.
The larger more developed countries, which presently have greater centralization and larger budgets with greater attendant deficits and higher national debt, will resist any liberalizing financial evolution beneficial to citizens by issuing programmable, controllable, consumer-identifiable, and confiscate-able central bank digital currencies (CBDC’s). These CBDC’s are coming globally not only because the technology is now available, but because transfer to a new financial system can facilitate hiding and deceiving the public as to the incredible damage that politicians have visited upon its populace. Truth would show that politicians have not enabled the will of the people, but rather catered to giant businesses and the military-industrial complex who in turn have enriched those politicians. Unfortunately such corruption is an integral, congenital part of politics, and apparently rises to the highest office in the land.
The real prognosis?
It was almost three years ago that an unambiguous article on the prognosis of our economy and financial system entitled Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO was posted. In early 2021 the article entitled US Dollar Has Crossed the “Event Horizon” made clear that the then level of debt and money creation had created a condition wherein there was no route to financial recovery. Finally, two months ago the article entitled Greater Depression Now!? underscores that while the economy has not officially registered a recession yet, that according to Keynes definition of depression, we have been in one already for an unquantifiable period of years.
So what is the real prognosis for our monetary system and economy, and what are the chances for its recovery? A fiat monetary virus is terminal for a monetary system, even as historically it has taken about one century for such systems to die. An economy, and by extension a society, cannot function without a healthy (honest) monetary system, and as a consequence such economies decline from their hegemon roles to simply become a smaller and less important part of the global economy. Portugal, Spain, Holland, France, England, the United States are examples of historical hegemons. Once they lost their hegemon status, people still lived, loved, married, and had families, and the nation lives on, but they no longer are singular global leaders. There are no examples of a country achieving a “recovery” from this terminal virus of fiat currency – but life does go on. So no more needs to be said about the prognosis of our economy and financial markets, or the prospects for recovery.
While advancing technology will continue to Strengthen our lives, it is up to global citizens to contain the urge of politicians to control and impoverish most citizens for the sake of their self-benefiting promotions. The solution to government deficits, military aggression, and loss of currency value through inflation, and the loss of equity and debt-based financial assets is the transition of our monetary system to decentralized ledger-based electronic asset platforms which cannot be modified or controlled by historically confirmed untrustworthy governments. The prognosis of that new monetary system and such an economy deserves and needs to be tested for the benefit of all humanity.
Mr. Matison was an Institutional Investor magazine top ten financial analyst of the insurance industry, founded Kidder Peabody’s investment banking activities in the insurance industry, and was a Director, Investment Banking in Merrill Lynch Capital Markets. He can be e-mailed at firstname.lastname@example.org
Copyright © 2022 Raymond Matison - 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.
© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.