THERE was a young lady of Niger …

2017 September 12
by drdog09

Who smiled as she rode on a Tiger;
They came back from the ride
With the lady inside,
And the smile on the face of the Tiger.

An old poem often recited. Well I would suggest that in the current scheme of things economically the central banks are in the same pickle. But there is a contrarian at play —

Between the 1980s and the 2000s, the largest ever positive labour supply shock occurred, resulting from demographic trends and from the inclusion of China and eastern Europe into the World Trade Organization. This led to a shift in manufacturing to Asia, especially China; a stagnation in real wages; a collapse in the power of private sector trade unions; increasing inequality within countries, but less inequality between countries; deflationary pressures; and falling interest rates.

This shock is now reversing. As the world ages, real interest rates will rise, inflation and wage growth will pick up and inequality will fall. What is the biggest challenge to our thesis? The hardest prior trend to reverse will be that of low interest rates, which have resulted in a huge and persistent debt overhang, apart from some deleveraging in advanced economy banks. Future problems may now intensify as the demographic structure worsens, growth slows, and there is little stomach for major inflation. Are we in a trap where the debt overhang enforces continuing low interest rates, and those low interest rates encourage yet more debt finance?

There is no silver bullet, but we recommend policy measures to switch from debt to equity finance.

Excerpt as provided by Kevin Muir

Now I would hazard to say if this were 1970 or even up to 1990, yes we would see an onrush on inflation like what was experienced during the heady days when Volker was Fed Chair. But there are not those times and here is why:

  • The State can’t afford it. As it is right now the US Guv is spending about half a Trillion just in interest payments on 20+ Trillion in debt. This at Treasury rates in the 1.5-2.5% range. Imagine if the rates were in the 5-6% range, the interest payments would nearly double.
  • Given that first bullet of information what would the Guv cut back? The NeoCons are hell bent for leather to find a war, any war they can dabble in their version of Strategum.
  • Based on the second bullet there will not be a cut in defense spending. Too many snoots at the trough and they are all K Street’ed up to back their claim.
  • Again based on the second bullet cuts in Social Security will not occur as the second biggest voting block, Boomers, will raise Holy Hell. The Guv will have to wait at least another decade to pull that one off. (Boomers are all dead.)
  • Rising rates would impact corporate internals. Remember all those stock buybacks that have been going on?? Well they were financed by debt for the most part. In a rising interest environment stocks tend to flatten. Then couple that with the higher interest payments on the buybacks and you have a recipe for a heck of a lot more zombie corps walking the land.
  • And what about Average Joe consumer? He was paying 15-18% on his credit cards. As the T-Bill rate rises the Chase’s of the banking world will jack that to the max permissible. Average Joe is reamed again.

Yes Guvs generally have inflated their ways out of debt. But that may not be possible this time around. Time will tell who is right and who is wrong.

8 Responses leave one →
  1. 2017 September 12 3:17 am
    MI Conservative permalink

    Good post but I got caught thinking—What is the biggest challenge to our thesis?

    People who want the system to fail.

  2. 2017 September 12 4:47 am
    drdog09 permalink


    A very good observation. Though they are all externals. Anyone who has their nose in the federal trough wants to keep that gravy train going. Even the Chinese know its good to keep it going, only because they know their own alternate system is not fully complete yet. The Russians, Indians, etc might consider there is some benefit for not trading in dollars.

  3. 2017 September 12 5:32 am
    justrand permalink

    Safe to say that the average working stiff will be thoroughly buggered…eh?

  4. 2017 September 12 5:44 am

    The above bullet points would seem to point to inflation as the only way to pay the piper, in spite of
    there being ” little stomach for major inflation”. The only way of extracting 9 lbs of shit from this 7 lb sack is through the issuance of funny money.

    They who ride the tiger of the welfare state will ultimately be eaten by it.

  5. 2017 September 12 8:11 am
    bc3b permalink

  6. 2017 September 12 8:14 am
    bc3b permalink

    Speaking of Canada, here’s a healthy Canadian. Not beautiful, but definitely healthy.

  7. 2017 September 12 8:40 am
    drdog09 permalink

    “They who ride the tiger of the welfare state will ultimately be eaten by it.”

    Including the state itself when rates are so high they can’t pay their bills. VZ is a good example.

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