Money from air

Money from air

The world is weird right now. 

Here in Sydney, we exited COVID lockdown thanks to a sudden spurt in vaccinations and a decision to live with the virus after 18 months, thinking it could be kept out. 

Lockdown is hard for folk used to freedoms. Everyone is over it, and yet the exit vibe felt more cautious than euphoric while fronting to the GP for a double jab.

Then we lost our state premier, Gladys, forced to resign because the ICAC had to investigate her involvement in dodgy deals by a disgraced Liberal MP, her secret boyfriend at the time. That is a shame because she was one of the few pollies holding it together. The federal government ministers, and especially the PM, are just racing to cover their arses.

Now La Nina has dumped weather on us for weeks. We try to be upbeat and say that the cold and wet is better than wildfire. It is, but even that sounds hollow.

Meanwhile, in Australia…

The 2021-22 Budget committed an additional $41 billion in direct economic support, bringing total support since the beginning of the pandemic to $291 billion as of May 2021.

The Treasury, Australian Government

Such large numbers are hard to fathom, so for comparison government revenue was  $472.4 billion in 2020-21 (24.3 per cent of GDP) and in 2021–22, Government revenue is forecast to be at its lowest level as a share of the economy since 2011–12. Submarines notwithstanding, they are hard up for cash.

COVID economic support has cost the government nearly one year’s revenue. 

This is way above the initial fiscal commitment and goes onto the books as debt.

Here is a graph of the government debt loads for OECD countries in 2020, essentially the pre-COVID numbers from the OECD website

Australia is a mid-ranking OECD country for debt relative to GDP. However, the debt load rising steadily since 2007, has spiked with this extra expenditure. 

Alloporus has already mentioned that the global debt load has climbed to nearly $240 trillion, a number so big that it cannot fit on the screen of a standard calculator. Australia has made its modest contribution.

Gran always lived by thrift, a frugal approach that ensured there was no debt. Before people had access to credit there was no option but to live within means. 

Then the economists told us that 

the two primary causes of hyperinflation are (1) an increase in money supply not supported by economic growth, which increases inflation, and (2) a demand-pull inflation, in which demand outstrips supply. These two causes are clearly linked since both overload the demand side of the supply/demand equation.

Investopedia

Not being an economist my naive observation is that borrowing money or printing it to maintain the economy during a crisis that kicks economic growth in the nuts, fits primary cause number one.

But not to worry because…

“In the U.S., the central bank does not pay debt with the money it creates. Rather, it lends money at its targeted interest rate and the private sector employs that capital more productively. The money created is paid back, which is a crucial reason this monetary policy doesn’t produce hyperinflation.”

Economist Asher Rogovy

Truly, the world is weird right now. 

Please mind the gap

Please mind the gap

Photo by Tim Hüfner on Unsplash

Here are some interesting numbers

  • Jeff Bezos is worth $US183 billion according to Bloomberg’s Billionaires Index.
  • Since March 2020 when the COVID pandemic was declared, Bezos’ wealth has swelled by $US67 billion.
  • His income is roughly $US2,000 per second.

The arrival of the COVID pandemic with its lockdowns, social distancing, and unprecedented hand sanitisation has been a shock. It’s jolted perception of the way the world works and made a few folks think twice about how our societies function.

People are reminding themselves of exactly what goes on in the system of economic production and social organization. The one structured around profit. The successful are those who are able to sniff profit from gaps in the market, new products, and price anomalies — the everyday activity of trade.

And trade makes us all happy from shoppers to shopkeepers, groceries wholesalers or investment bankers who trade in futures, derivatives and their latest invention for a complex financial instrument. It doesn’t matter what type of financial transaction you’re engaged in, ultimately you’re looking for more in return than you give away.

It is often said that the best products are those where the buyer perceives greater value than he’s giving you in payment. Only you must receive from him more than it costs you to deliver the goods or service.

When this happens everyone wins.

So what is there to question given that the pandemic is, after all, just a blip in the never ending growth trajectory? Well, how about the privatization of asset recycling and the fundamental belief that free trade and minimum government will maximize our society and the profit opportunity?

Apparently, the theory of free trade and the mathematical formula that underpin it still holds true. Minimum government is ideal until there is no work for people to do and then maximum government is necessary, spending big by printing money to prevent everything crashing, and, of course, maintaining the opportunity for profit. Governments whose prime agenda had been to balance the books have racked up extraordinary levels of debt. Global debt in US dollars is now pushing US$270 trillion. That’s an increase of $50 trillion in less than five years.

Great success according to Jeff; US$2,000 a second anyone?

Over the years of promoting profit, growth and more growth, many economists jettisoned an equally important concept on the other side of the ledger. They forgot about distribution. What should happen for any system of trade to be sustainable is that the wealth creation is evenly distributed or at least has the potential to flow down to the lower levels of the system. If it doesn’t flow fast or far enough then a critical mass of people might become disgruntled enough to cause a ruckus.

Only what we’ve seen is that the distribution of wealth is now concentrated more and more into fewer and fewer people.

Check out this excellent website that shows just how much wealth is concentrated into first Mr Bezos’ accounts and then those of the 200 most wealthy people in the US.

Take your time, it is hard to fathom.

The gap between the unimaginable levels of wealth of the people controlling the money compared to working-class living is growing and not because living standards in the developed world have declined in recent decades. The decline that fueled the popularism that delivered Trump his presidency.

It is because of wealth creation and concentration.

The liberalization of financial markets has seen debt levels explode at a national corporate and personal level. There’s now so much cash injected into the global financial system by reserve banks that the traditional business cycles have halted. It’s added to our past excesses, rather than curbing them. And all the while the wealth has become ever more concentrated at the top.

The .com crash added debt. The global financial crisis was solved with more debt. Now we have the COVID health crisis shutting down the global economy and the solution is even more debt.

Remember what debt is ”an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor” only a huge chunk of this printed money is making a handful of people… Well, you know what I am saying.

There are only three possible outcomes. One is that central banks wind that an economic recovery allows them to withdraw their stimulus without collapsing asset prices like stocks and housing. The second is that governments take over pick up the slack in jobs and corporate cooperate with each other the solved global poverty and equality. The third is war this yard uses the most likely and the least pleasant outcome.

Victor Schvets, Macquarie group managing director and group head of Asia Pacific.

Go on, read another post or better still share this one on Facebook — they are looking for material these days!