Zero Interest Rates Encourage Companies to Sacrifice their Future

The below is an extract from my 2015 book Dire Straits: Money for Nothing, Debt for Free

“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their own companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Larry Fink, CEO and Chairman of Blackrock, March 21, 2014

Generally speaking, there are seven major decisions that companies can make when choosing what to do with the money they have sitting on their balance sheet. The first three choices involve investing funds, either in upgraded plant and equipment, in acquisitions, or in the hiring of additional staff.

Those decisions cost
 money, but companies will only take that course if they see the potential for higher sales or more efficient production. In simple terms, while these decisions remove a bit of flexibility from the balance sheet (because a pool of cash is no longer free), the growth and future profitability of the business should be enhanced.

Companies can also choose to hold onto their cash. That won’t help them grow, but it does provide protection, for there’s nothing wrong with having a little rainy-day money sitting around. It also gives companies flexibility, as they can use that cash at any point in the future in the case that good opportunities arise.

The next option would potentially be to pay down any debt they might have. That won’t help them grow either, as it’s money they’re not investing in their business, but it will at least give the company peace of mind that those loans have been repaid.

There are two final options. Pay out higher dividends, or buy-back your own stock off the market. Rewarding shareholders through regular dividends is certainly a good thing, and it’s the sign of a disciplined
organization, but companies can go too far. Worse still, feeling forced to pay out ever higher dividends because investors are desperate for any kind of yield in a zero- interest-rate environment definitely isn’t a good sign.

Furthermore, both higher dividend payouts and buying back your own stock reduce flexibility, which can have a negative impact on a company’s future prospects. That’s because doing so sacrifices a pool of capital companies would otherwise have been able to utilize at some point in the future.

Sadly, stock buy-backs and higher dividend payouts are exactly what companies have been focusing on since the GFC hit. Capital expenditure sustains longer-term growth, but it has been an afterthought, and remains incredibly weak today (as I discussed in the post-GFC chapter).

Starting with dividend payouts, Credit Suisse produced a report (after profit season in early 2014 in Australia) that highlighted the worrying trend I’ve discussed above. They highlighted the fact that while a full 50 percent of companies did not meet their free cash-flow targets, barely 20 percent missed their dividend-per-share expectations. As the report states, “We applaud companies attempting to keep their shareholders happy. However, we hope they are not spreading themselves too thinly.”

CEOs and company boards are loathe to disappoint dividend-hungry investors. A Commonwealth Bank 2015 report summarized Australia’s latest reporting season, stating that 75 percent of companies maintained or increased dividends. That is despite the fact that revenue growth was flat and net profits fell substantially.

As a final example of how worrying this trend has become in Australia, consider research released in early 2015 by Goldman Sachs. They noted that in Australia, between the 2010 and 2014 financial years, there was $122 billion in free cash flow generated by non-financial companies. Amazingly, those same companies returned $177 billion to shareholders through dividends and buy-backs.

A full 50 percent of companies are returning more in cash to shareholders than those companies are actually generating themselves. As you can see, money for nothing and debt for free hasn’t just infected governments.

When we look at the U.S. stock buy-back situation, the picture we see is truly astonishing. Rather than
investing money in their own operating businesses, companies are increasingly using that money to buy back their own stock. An article that appeared in Bloomberg on October 7, 2014, reports that since the equity market started rallying in 2009, companies are estimated to have spent $2 trillion buying back their own stock.

Factset, who produce a Buyback Quarterly report, show similar numbers over that time period. They also highlighted that, based on their last set of results, annual stock buy-backs are now running at $567 billion per year. That’s an increase of 27 percent from the previous year. In other words, that’s $567 billion worth of cash that those businesses no longer have to invest.

Indeed, had companies (rather than buying back $2 trillion of their own stock) instead decided to hire workers at $50,000 a year, they could’ve employed an
additional 6.5 million Americans for each of the past six years. I’m not blaming companies that are doing this. I’m sure they’d rather hire and invest in their own companies. But they know that the economy has changed, that there is no real recovery, and that demand is weak. They are, therefore, rightly nervous about adding to their
payroll with any great haste.

They’re also under extreme pressure to constantly increase dividends, for investors are desperate for yield in a zero-interest-rate world—yet another unintended consequence of central banks meddling in our economies and our financial markets.

But what is more concerning is the fact that many of these buy-backs have been funded with borrowed money. Indeed, despite the mainstream financial-media focus on the amount of cash sitting on company balance sheets— which is near record highs—corporate debt levels have grown even faster in this post-GFC period. Higher cash levels imply robust corporate health and the potential for significant capital deployment, but analysis from Societe Generale highlights the fact that net debt levels for U.S. corporates are now some 15 percent higher than they were during 2008 and 2009.

This story got some overdue airtime in August of 2014, when Brett Arends, writing in Marketwatch, encouraged readers to “watch out for the corporate debt bomb.” He pointed to a $2.4 trillion increase in corporate debt outstanding for U.S. non-financial corporations, with these companies now carrying debts equivalent to 50 percent of their net worth. That’s much higher than long- term averages, and worse than where corporate debt levels were during the height of the GFC.

With interest rates at zero, none of this is causing problems just yet. But the idea that there will be no ramifications at all from this over the next decade or so seems unlikely.

Jordan Eliseo is the Chief Economist of ABC Bullion and the author of Dire Straits: Money For Nothing–Debt For Free, which can be purchased via the Apple IBOOK store.


Negative Gearing – Let Sleeping Dogs Lie

There is arguably no more emotional topic in Australia today than the debate taking place surrounding our residential property market, which according to the latest estimates, is now worth over $6 Trillion.

The question is now openly being asked about whether the rise in prices we’re witnessing, especially in Sydney and Melbourne, is sustainable, let alone desirable, with young Australian’s finding it almost impossible to get on the property ladder today.

And when one considers the interconnectivity between the housing market, the ASX, the investment profile of major superannuation funds and the governments imprimatur on the balance sheets of our major banks, it is an important debate to have, with every Australian having a dog in this fight, one way or the other.

My personal view is that the rise in prices does little good for the overall economy, and indeed is a major impediment to productive enterprise, even though proponents of the boom are technically correct that it makes us ‘wealthier’ on paper.

I’ve also written in the past about why today’s record low mortgage rates do nought but disguise how unaffordable property really is (see Housing Arggghfordability), why I wouldn’t be an investor in the housing market today (see Don’t Buy the Boom?), and why in Australia, we are no longer economically “the lucky country”, even though record high house prices technically make us the wealthiest country on earth (see Lucky Country).

In short, broadly speaking, I think Australian property is horribly overvalued, that it holds back productive enterprise, and that the investor led debt fuelled mania that is pushing prices ever higher now poses a genuine threat to the health of our financial system and our economy going forward.

I’m also dismayed at some of the traditional arguments the Coalition government, the Federal opposition (when they were in government) and vested interests from the real estate lobby put forward to defend negative gearing.

Chief among these are the arguments that if negative gearing is abolished, housing supply will dwindle, and that rental costs will explode. The data completely debunks these theories, as rental increases nationwide during the mid 80s, when negative gearing was quarantined for a time were in line with historical norms, whilst over 90% of investors in housing purchase pre-existing dwellings. That means the great majority of negatively geared investor money plowed into housing does nothing to boost supply,

With that in mind, I’m incredibly tempted to agree with the exceptionally well researched and undeniably well intentioned arguments that push for the abolition of negative gearing, including those put forward by MacroBusiness and LF Economics amongst others.

Policy makers are now getting in on the act, led by the Greens, with Senator Scott Ludlam in late 2015 announcing a proposal that would remove negative gearing for new investment properties, though it would not be applied retrospectively.

Other proposals argue for the abolition of negative gearing if the money is invested in a pre-existing dwelling, but maintaining the policy if the investment is for a new build, with the argument that these investments will at least add to the nations housing stock. The logic behind this is that it will help create jobs, and be cost neutral as it’s adding to both supply and demand for housing.

Labor leader Bill Shorten is seemingly a fan of the above proposal, and now, it seems, we have a ball game, with the ‘sacred cow’ set to be slaughtered, one way or the other. The coalition government will be forced to deal with this issue in the lead up to the next election, though at this point, they are yet to announce any policy developments of their own.

Undeniably, there is some merit in the proposals put forward by the Greens and Labor, and on the surface they make sense. But as Bastiat observed over 150 years ago, it is important to not only consider what appears on the surface, but also that which is unseen, and the potential unintended consequences of taking a particular course of action.

For the following reasons, we think negative gearing should stay as is for now.

Grandfathering is Unfair

Negative gearing benefits a lot of Australians who are very well off. That is no surprise, as any ‘tax break’ will benefit those who pay more tax in dollar terms on their income.

Nevertheless, it hardly seems fair to say to 1.3 million Australians that they can keep a tax lurk that will be closed forever more to the remaining 20 million plus Australians, the great majority of whom are nowhere near as well off financially as a large portion of those who will get to keep the sweetheart deal in perpetuity.

If it is bad policy it should be junked outright. Changes to taxation rates and policy in general is something every income taxpayer and business person has to live with, and I can see no good reason why this should be different for property investors.

Grandfathering could also cause prices to rise in the short-term, for two reasons. Firstly, it would limit supply, as no property investor with half a brain would sell a home they can claim the losses on, especially as any future purchase would not come with the tax benefit they’re currently enjoying.

It could also bring forward demand, as if grandfathering were implemented, it would most likely have to have a cut off date at some point in the near future. If you say to 20 million Australians, many of whom dream of owning property, that up until a certain date (say 31st December 2016), they will be able to claim tax deductions on any property investment they make, but not after that date, don’t be surprised if you see a mad rush of speculative buying.

Limiting to New Builds is Fraught with Danger

Limiting negative gearing to new builds is a bad idea, however well intentioned. The reason is simple. If people know they can get a tax break on new builds only, then that’s where their dollars will go. It’s not hard to foresee endless unit construction, much of it likely of average quality.

We’ll end up with more property than we actually need, and investors in these new builds will face an extremely bleak future in terms of the income they’ll earn on their properties.

This is already a potential problem in Australia, with a recent CoreLogic RP Data rental index result indicating that nationally, rents are rising at the slowest level on record, up just 1.5% for the year. In real terms, rents are now falling, testament to the lack of wage growth Australians are faced with, and some of the highest private debt levels in the world.

And whilst there are undoubtedly pockets of Australia where housing supply is tight, and more construction would be welcome, the idea of a nationwide housing shortage doesn’t stack up, with BIS Shrapnel recently stating that Melbourne could be looking at an oversupply of up to 15,000 units by 2016.

LF economics have also released research on this subject debunking the idea of a nationwide undersupply of housing. Recent data from the ABS Housing and Occupancy Costs report is also noteworthy, as it suggested that a full 78% of households occupied dwellings have at least one spare bedroom.

With a slowing economy, there is plenty of room for kids to live with their parents longer, renters to find an extra tenant to share the extra room, and for households to downsize their expectations that they need at least one spare room in the family home.

Building for the sake of building is no solution.

It will hurt a lot of low to middle income Australians.

When i last checked (late 2015), it looked like in total, some 1.97 million Australians report net rental income to the ATO, and 65% of them, or 1.26 million, use negative gearing. And whilst the government and property industry are wrong to claim in their oft repeated claim that the majority of this group are low to middle income earners, that doesn’t change the fact that a lot of them actually are.

This was made clear in a Macrobusiness article from a late June 2015, which did a great job of debunking the myths that surround negative gearing. This article highlighted the fact that 55% of those who utilize negative gearing earned more than the $55,228 average taxable income from 2012-2013. Furthermore, those people claimed 61% of all negative gearing losses in actual dollar terms.


End negative gearing and yes you’ll close a tax lurk that 692,000 Australians who are doing better than most currently enjoy. That doesn’t change the fact you’ll be punishing 567,000 Australians who are at best average income earners, with an effective tax hike. Right now negative gearing saves them $4.6 billion per annum (2013 data). Thats real money!

You can read that article from Macrobusiness there, its worth a look.

These are likely the very people most at risk in the event of a housing correction, and who in many cases are also likely to be those struggling most with the current lack of real wage growth and heightened job uncertainty.

Is now really the time to take away a program that, for right or wrong, does keep more money in their pockets? I would argue no, and no doubt this is one of the reasons Labor want to grandfather the rules, but that leaves you back in the unpalatable position I described before – where only a handful of Australians get to keep a tax lurk denied to others forever.

Ending Negative Gearing Could Push the Problem Elsewhere

It’s worth mentioning briefly that negative gearing is available on all asset classes, not just property. As such, any move to end negative gearing in an attempt to cool the property market could end up pushing the problem elsewhere.

Indeed we can easily imagine salivating stock brokers and fund managers who will adjust their marketing push for a greater share of investors wallets with a “roll up, roll up, get your tax break here” strategy.

Negative gearing has clearly added to the distortions in the housing market. Pushing the problem elsewhere, and fuelling speculative behavior in the equity market, or any other asset class for that matter, is hardly a solution.

A final worry!

One final concern regarding changing the rules around negative gearing today is that it could very well be the prick that bursts the bubble of the Australian housing market. Whilst I stated above that in the short-term it could reduce supply and increase demand, after a period there’s almost no question those dynamics would sharply reverse.

The lack of a tax incentive would reduce investor demand, whilst there’d also likely be a decent portion of the 567,000 low to middle income Australians finding themselves with no choice but to sell their houses, as they’d have less disposable income required to support their loss making investment.

Should our housing market decline meaningfully, the pain will be felt nationwide, and it would be first home buyers, and those who’ve only entered the property market in the last few years that would bear the brunt, with a huge number of these people likely to fall into a negative equity position on their primary asset.

The likely hit to the bank heavy ASX and superannuation funds would only compound the “loss of wealth” effect, which couldn’t come at a worse time considering the challenges the good ship Australia is currently facing.

The reality is that the risk that the Australian property market now poses to the broader economy, our financial markets and our banking system is something of a Gordian Knot.

Attempting to disentangle it via changing the rules around negative gearing may well end up being a pyrrhic victory for those who rightly worry about housing affordability, both in terms of the damage it could cause across the nation, and who will bear the most pain.

Sometimes it’s best to let sleeping dog’s lie

Jordan Eliseo is the Chief Economist of ABC Bullion and the author of Dire Straits: Money For Nothing–Debt For Free, which can be purchased via Amazon or the Apple IBOOK store.

Looking for Stimulus – Then Cut Red Tape – Not Rates

With H1 2015 nearly done, there are at least two things we can safely say we know about the global, and indeed Australian economy.

  • 2015 will not be the year that a self sustaining economic rebound eventuates
  • 2015 will be yet another year where policy easing remains the modus operandi for central banks, with nearly 50 reductions so far (as at mid may 2015).

Even the Fed, the only major central bank that’s even considering hiking, is likely to postpone the decision to at least December 2015, if not Q1 2016.

One might assume that after the first 500 rate cuts post Lehman didn’t work to stimulate a self sustaining economic recovery, central banks and government would re-consider even cheaper credit as the kick-starter they’re looking for, but sadly that doesn’t appear to be so.

It’s also a shame they’re not listening to business people more, rather than PHD economists, most of whom have never run a business or had to worry about hiring staff, managing cash-flow and making a profit.

If they did, they might find that the key to higher growth rates lies in cutting red tape, rather than cutting rates.

After all, consider the following chart, which comes from the National Federation of Independent Businesses (NFIB) in the United States. It highlights the results of years of asking small business owners what issue plagues them most.


As you can see, the overwhelming problem for these companies is not borrowing costs (which are in the fact the least of their concerns), but instead taxes, and government red tape.

Indeed, as a major factor hindering businesses, red tape has grown from less than 10% when the GFC hit to almost 25% today, whilst taxes have been a perpetual thorn in the side.

That this is a major factor hindering free enterprise, and society at large is hardly a surprise. The Competitive Enterprise Institute (CEI), in their annual publication “Ten Thousand Commandments”, calculate that the burden of the complying with federal regulations costs the US Economy $1.88 Trillion, some 11% of GDP.

Outside of housing, it is by far the largest burden households themselves must bear, as the following chart from the CEI illustrates


And the situation is only getting worse, with the code of federal regulations hitting an impressive 175,000 pages in 2014, up nearly 20,000 pages since the GFC hit.

Indeed it would appear that the seemingly perpetual increase in the number of regulations individuals and businesses must comply with, not to mention the tax code itself, are the only bull markets that can hold a candle to the once in a century bond bull which began in the 1980s, though it remains to be seen which one will end up causing most damage to the economy.

The burden of all this regulation is especially acute for smaller businesses, where regulatory costs can be some 29% higher per employee than they are for larger companies.

All this should give investors, analysts, fund managers and the like pause when we hear traditional economists state that the key to generating higher GDP growth is a combination of even looser monetary policy, or more fiscal stimulus.

Looking at fiscal stimulus first, it will not be easy to achieve, not with the majority of developed market governments already running deficits, existing debt burdens at record highs, and the challenge of the ageing population on the horizon.

As for looser monetary policy, why bother, when it is clear that borrowing costs are not an issue at all (anecdotally, in the consulting I do with businesses, I NEVER hear about the price of credit being a barrier to growth).

To fully appreciate how pointless further monetary easing will be, imagine the chart from the NFIB was a ‘scorecard’ that a company board used when assessing the barriers to growth they were facing.

And imagine for a moment the regulations and red-tape issue was a result of operational processes a compliance manager had implemented, whilst the borrowing costs the company was paying was up to the CFO to manage.

Now imagine that for the last few years the board, in their conversations with the CEO, found out that he or she had done nothing to rein in all the operational processes the compliance manager was adding every year, but kept bashing the CFO, pressuring them to find even cheaper debt.

And imagine the CEO’s plan for 2015 was to again pester the CFO to look for cheaper credit, whilst continuing to blithely ignoring the cancer within the business that is the growing compliance burden.

I’m pretty sure the CEO would be shown the door quick smart, as would the compliance manager, whose ever growing pile of “process documents” are clearly killing the company, destroying shareholder wealth and jobs along the way.

Well, that’s what this survey is telling us about the economy as a whole, unless of course you believe we don’t need businesses creating jobs. As Richard Yamarone of Bloomberg, quoting Vivaldi stated, small business is being “agitate da due venti” – battered by the two winds of regulation and tax.

The key to higher levels of growth going forward clearly lie in huge reductions in red tape, a simplification of the tax code, and lower company taxes themselves.

Einstein once defined insanity as doing the same thing over and over again and expecting different results.

500 plus interest rate cuts haven’t worked. They wont.

Jordan Eliseo is the Chief Economist of ABC Bullion and the author of Dire Straits: Money For Nothing–Debt For Free, which can be purchased via Amazon or the Apple IBOOK store.

What’s Going on with the American Consumer?

The jobs picture in the United States appears incredibly robust. The latest non-farm payroll report showed over 275,000 jobs were created in May, whilst the unemployment rate is already close to the Fed’s definition of “full employment”.

With the majority of the financial media putting the negative Q1 GDP figure down to cold weather, and with expectations of a Fed interest rate hike in Q3 or Q4 2015 firming, the only missing piece appears to be the American consumer. And on that front, the news is still troubling, with consumer spending for April still flat.

Not only was the headline result a big donut, but what was under the covers was even more troubling, with the only areas of growth being “essentials”. Leisure, clothing, consumer electronics, dining out, travel, i.e. the items that make up discretionary spending, they all declined, which is even harder to understand when it looks like Americans are finally starting to see some wage growth too.

In reality, the reason for the stagnant pace in consumer spending growth could well be demographics. For, as the following graphic shows, it is people aged between 35-44, and 45-54 that are the largest spenders in the economy, and by some margin.


And in the years since the GFC hit, it’s been these two age brackets that have suffered most. This is made clear when looking at the following table, which shows the change in net worth by people in various age brackets between 2007 and 2013


As you can see, in percentage terms, it’s been people between 35-54 that have seen the largest fall in their net worth, with the key 45-54 demographic some $100k worse off than they were pre GFC. In a sporting sense, a table like the one above suggests that the whole team is playing badly, but it’s the MVPs who are really off their game, like the great Chicago Bulls team trying to win on a day that both Michael Jordan and Scottie Pippen are having shockers.

Indeed, consider what’s happened with employment in these age-brackets over the past year alone (data courtesy of Jim Quinn)

  • Only 117,000 jobs were added in the 35 to 44 year old bracket in the last year.
  • In the last year the number of employed 45 to 54 year olds has DECLINED by 67,000.
  • The Boomers have added 824,000 jobs in the last year,
  • So the age brackets that do the most spending in the country (35 to 54) have a net increase of 50k jobs in the last year

The lack of recovery in net worth for people in these age brackets , and the inability to save, was even featured in the Australian Financial Review lately, with an article that mostly focused on people in their mid 30’s.

Bottom Line: We’re not surprised to see the lack of real consumer spending growth in the United States, even with the improvements in headline unemployment and job creation we’ve seen lately. The consumer will not be returning to the go-go credit days of the pre GFC era, and it portends lower growth for many years to come.

Jordan Eliseo is the Chief Economist of ABC Bullion and the author of Dire Straits: Money For Nothing–Debt For Free, which can be purchased via Amazon or the Apple IBOOK store.

Why the Wealth Effect Won’t Work!

On paper – we Australians are a wealthy lot. Indeed the latest Credit Suisse Global Wealth report shows the people in the land Down Under are On Top of the global wealth pile, at least as measured by median net worth.

At $225,000 (USD) per head, Australian’s are a mile ahead of the pack in this regard. And with soaring property prices (especially in Sydney and Melbourne), and a share market that is back at all time highs (once factoring in dividends), it’s not hard to see why many economic commentators expect the ‘wealth effect’ to translate to higher economic growth in Australia.

Sadly, those commentators are likely to be disappointed – for the reality is that, in Australia at least, a large portion of the ‘wealth’ is trapped.

For evidence of this, look no further than the pie chart below, which comes courtesy of a Roy Morgan research report into Household Net Wealth that interviewed over 250,000 Australians.

As you can see from the report – some 50% of Australian’s net worth is in owner occupied housing, whilst a further 28.6% is in Superannuation.

This is a huge problem, for a number of reasons. Firstly, owner occupier can’t really ‘spend’ their housing worth in any meaningful way, unless of course they are willing to borrow against the value of their house.

Pre GFC, this may have occurred, but in more conservative times, Australian’s are not surprisingly reluctant to tap into their home equity so they can engage in discretionary consumer spending.

The other angle of course when it comes to housing is the record high private debt levels that Australian’s are exposed, the majority of which has been borrowed to pay for housing.

Not surprisingly, Australian’s are both needing too and choosing too focus on paying the mortgage down first. Some commentators focus only on the fact that record low rates make homes more ‘affordable’ – but the reality is that Australian’s are spending a larger percentage of their disposable income on mortgage repayments today, compared to what they were in the 1990s when interest rates were over 10% higher.

That holds back consumer spending and confidence, even if the underlying asset price is rising. Fear of an eventual rate hike is also a major factor, encouraging people to plow as much money as possible into their mortgage now, at the expense of consumption elsewhere.

Compounding this is of course the Superannuation effect. As it stands, individuals are having to put 9.5% of their salary into this system every year. And whilst that will give them a pool of funds to spend in retirement – it is also money they can’t spend, or even better invest in the meantime.

Considering half the country isn’t saving a cent on a regular basis (according to survey from ME Bank in 2014), forcing people to put 9.5% of their money into Super is clearly inhibiting economic growth in the short term.

And whilst retirees can take and spend their Super – they’re generally a conservative lot, who tend to spend less (on discretionary items anyway) in the first place.

 They also tend to keep a larger portion of their money in ‘lower-risk’ investments – and on this score they’re growing increasingly frustrated with the record low interest rates on offer in Australia today.

It’s no good having your home go up in value by 10% a year (when you can’t spend that growth), whilst your term deposits are withering away earning less than the rate of the inflation.


Indeed, in an era where wage growth is negative in real terms – the only way the consumer can ‘step-up’ and spend more is by decreasing their savings rate, or going into debt via the credit card. As the savings rate (ex-super) is effectively zero, most Australian’s have little in the way of extra free cash-flow to spend. And according to the latest from the Australian Bankers Association, “The balance accruing interest for credit card customers has been in decline for the past three years. “

No joy there either then.

Make no mistake about it – those who think the ‘wealth effect’ will allow Australia to seamlessly rebalance from a mining boom a housing led consumption boom are likely to be sorely disappointed. As much as we are still “the lucky country” Down Under – our 20 plus year golden run since our last recession is well and truly over.

The problems that reared their ugly head in other nations several years back with the onset of the GFC are inexorably making their way south, and we have much to be cautious about in the years ahead!

Jordan Eliseo is the Chief Economist of ABC Bullion and the author of Dire Straits: Money For Nothing–Debt For Free, which can be purchased via Amazon or the Apple IBOOK store.

What would Keynes Say

In the several years since the GFC hit, governments and central banks have attempted to use Keynesian ‘solutions’ to the economic turmoil we’ve faced.

With private sector credit growth, and private sector demand weak – no surprise after a multi-decade build up in debt levels in the majority of the developed world, governments have attempted to stimulate the economy with large budget deficits, much of which has been paid for with printed money.

Seeking justification for these historically extreme policies, they’ve invoked the ghost of John Maynard Keynes, stating that Keynes would have advocated higher levels of public spending to offset private sector weakness.

On the surface – this is correct – but it’s worth reflecting on how different a world we live in compared to the one Keynes lived through. After all, Keynes wrote his Magnum Opus – the General Theory of Employment, Interest and Money back in 1936.

Around that time, public debt to GDP ratios were much lower, and much of what little there was had been borrowed to pay for WW1. Today, public debts, not only in the USA but in many developed nations, are well over 100% of GDP. Unfunded liabilities weren’t a factor at all in Keynes time, whilst today number in the tens of trillions of dollars.

As this recent article in the Telegraph points out, “The US cannot easily launch a fresh New Deal. Public debt was just 38pc on GDP when Franklin Roosevelt took power in 1933, and there were few contingent liabilities hanging over future US finances.”

Indeed, we doubt even Keynes himself would approve of the measures governments and central banks are taking today, with the great man himself once observing that “…in 1950 every Treasury in the world will be talking about my ideas, and by that time, of course, the problems will be quite different, and my ideas will be not only obsolete, but dangerous.”

Not only obsolete, but dangerous. Prophetic words – though they are sadly likely to be ignored by those in power today.

Jordan Eliseo is the Chief Economist of ABC Bullion and the author of Dire Straits: Money For Nothing–Debt For Free, which can be purchased via Amazon or the Apple IBOOK store.