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The One Chart You Need to Predict the Future
The One Chart You Need to Predict the Future
We are witnessing a profound secular sea-change: the failure of expanding debt and leverage to lift the real economy of wages and household income.
When push comes to shove, you only need one chart to predict the future: debt and wages ( credit and compensation). This chart displays debt and wages as a ratio: debt/wages. What it reveals is the endgame of financialization: creating more debt no longer pushes wages higher.
I have broken the past five decades into easily recognizable economic periods. During the organic growth of the 1960s that many view as the ideal–what I term the pre-financialized economy, the line is almost flat, as debt and wages expanded in a balanced fashion.
The 1970s, a rocky period of stagflation, higher energy costs and painful adjustments to the economy, is remarkably stable when boiled down to the debt/wage ratio.
Financialization–the securitization of previously stable assets, the expansion of leverage and speculative financial instruments–began in the early 1980s. We see the effect of rapidly expanding debt on the economy: the line leaps higher and only flattens out in the tech-boom 1990s.
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Role of Wages of the Common Worker in Oil Prices, Collapse
Role of Wages of the Common Worker in Oil Prices, Collapse
In their book Secular Cycles, Peter Turchin and Surgey Nefedof point out the important role falling wages of the common workers played in early collapses. I got to thinking that this might be an issue with our current situation as well, including the low level of oil prices.
I explain this in two presentations. The first one is called “Overview of a Networked Economy“. The second one is called, “Economic Growth and Diminishing Returns.”
A couple of (amateurish) slides that need explanation are the following ones:
The cloud above my representation of the economy is supposed to represent the cloud of goods and services that the economy makes. Many people would like us to believe that as long as this cloud is growing, everything is fine.
What Peter Turchin discovered is that there is a smaller cloud that really needs to be growing, as well.
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Fears over deflation thwarted Bank of England vote to raise interest rate
Falling oil prices driving inflation down to 0.5% in January, forced Martin Weale and Ian McCafferty to back down
Fears that Britain could sink into a damaging “deflationary spiral” have stayed the hands of Bank of England policymakers who had pushed for an early interest rate rise, monetary policy committee member Martin Weale has revealed.
Weale was one of two MPC members who had consistently voted for higher borrowing costs from August last year, as the economy recovered. But after falling oil prices drove inflation down to 0.5% in January, Weale and his fellow anti-inflation “hawk”, Ian McCafferty, backed down and agreed that rates should remain at their record low of 0.5%.
In an article for the Observer, Weale, an independent member of the MPC, which meets each month to set interest rates for borrowers across the UK, explains publicly for the first time what made him change his mind.
Falling oil prices have so far been a boon for consumers, Weale says. But if everyone starts to assume that prices will continue declining, deflation can take hold.
“If very low expectations of inflation were to become entrenched there would be a risk that the economy would sink into a deflationary spiral. Wages and prices could fall, people might put off spending if they thought things would be cheaper in the future, and they would find that, even though interest rates were very low, their mortgages became a burden which was difficult to manage,” he writes.
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Something Rotten Is Piling Up in this Economy
Something Rotten Is Piling Up in this Economy
Total US business inventories balloon to Lehman-Moment levels
“We do have more work to do in the US,” admitted John Bryant, CEO of Kellogg’s which makes Pringles, Pop Tarts, Kashi Cereal, and a million other things that consumers are increasingly reluctant or unable to buy. He was trying to explain the crummy quarterly results and the big-fat operating loss of $422 million, along with a lousy outlook that sent its stock careening down 4.5% during the rest of the day.
A peculiar side note: he also said that the “Russian business posted good results in the quarter and for the full year” – despite the ruble crash and whatever sanctions might have gotten in the way.
Then in the evening, ConAgra, with brands like Healthy Choice for consumers and something yummy they call “commercial food” for restaurants, cut its fiscal 2015 earnings guidance, citing a laundry list of problems, including the “strengthening dollar” and “a higher-than-planned mark-to-market loss from certain commodity index hedges.” But it blamed two operating issues “for the majority of the EPS cut: “a highly competitive bidding environment” and “execution shortfalls.”
After which confession time still wasn’t over: it would be “evaluating the need” for additional write-offs. What had gone well? Cost cutting – “strong SG&A efficiencies,” the statement called it. But the pandemic cost-cutting by corporate America represents wages and other companies’ sales.
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oftwominds-Charles Hugh Smith: We Just Enjoyed the Last Christmas in America
oftwominds-Charles Hugh Smith: We Just Enjoyed the Last Christmas in America.
The end of rising wages = the end of mass affluence: we just enjoyed the Last Christmas in America (TLCIA).
As unemployment topped 10%, the January 1975 cover of Ramparts magazine blared: The End of Affluence: The Last Christmas in America. (TLCIA)
The government responded to the high unemployment, rampant inflation and rising budget deficits by manipulating data to mask the politically inconvenient realities of inflation, unemployment and deficits by playing with Social Security Trust Funds, inflation data, etc.–games it continues to play to cloak reality from the media-numbed public.
The economic stagnation, despite various stock market rallies and false starts, essentially lasted 10 years, from 1973 to 1982.
The malaise had a happy ending: huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum. President Reagan re-set Social Security for a generation and introduced a lower taxes, higher permanent deficits ideology that is now accepted as the only possible way to sustain the Status Quo: deficits don’t matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever and ever, keeping interest low forever and ever.
Belgium unions protest against austerity cuts – Europe – Al Jazeera English
Belgium unions protest against austerity cuts – Europe – Al Jazeera English.
Labour unions in Belgium have begun a 24-hour nationwide strike against government policies that will extend the pension age, contain wages and cut public services.
Angry strikers gathered on Monday to protest against what they called the government’s lack of support for the Belgian economy.
An activist stood at one picket line in the capital Brussels for the country’s CSC trade union, saying protesters are here on a common front to denounce government measures.
“Austerity measures imposed by the government will cost the economy $2.5bn, and we are denouncing it because the SNCB will not be able to support this debt, this economy,” he said.
Train services like Eurostar and flights standstill, causing inconvenience for travelling passengers who thought they could catch an early escape before protests erupt.
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oftwominds-Charles Hugh Smith: Central Banks Have Failed Because They Can’t Push Wages Higher
oftwominds-Charles Hugh Smith: Central Banks Have Failed Because They Can’t Push Wages Higher.
You can print all the money you want, but it will never boost wages to keep up with prices.
Central banks have been pursuing two goals for the past six years: ignite inflation and an expansion of debt that will supposedly generate “growth.” Despite squandering trillions of dollars, yen, yuan and euros, central banks have failed to ignite sustainable inflation or growth.
There’s nothing mysterious about their failure: you can’t get “good” inflation or growth if wages are stagnant or declining.
The central banks don’t bother to distinguish between “good” and “bad” inflation: any and all inflation is considered not only wonderful but essential to propping up the Ponzi scheme of debt-dependent consumption, a dynamic I described in Central Banks Create Deflation, Not Inflation.
“Good” inflation is wages rising faster than prices. When wages rise faster than consumer prices, households have more money to spend on consumption, and it’s progressively easier for them to pay down debt and support additional borrowing.
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