The global fiat monetary system is a ponzi scheme, when growth contracts, slows and stops the pyramid collapses. That is why we are in a period of constant quantitative easing, without this liquidity injection the whole pyramid comes crashing down but is that a terrible thing? It would be if there was not a system to replace this one and that is the Real Bills Doctrine. Courtesy of Alistair Macleod @ Gold Money:
When US money supply measured by M2 stood at $11 trillion in December 2013, I calculate that total broad money of the next largest 50 countries ranked by GDP amounted to the equivalent of a further US$67 trillion at current exchange rates. And that’s only on-balance sheet: we must add in global shadow banking, estimated by the Financial Stability Board to have been an extra $67 trillion in 2011, probably about $75 trillion today, given its recent rapid growth in China. So when we look at US broad money supply, we should be aware there is a further mountain of money thirteen times as big ultimately based on the dollar.
As long as bank lending, industrial investment and consumption are all expanding, the sun smiles. It’s when it stops that problems arise, and why markets reacted badly to the idea of tapering and are increasingly nervous about China’s credit bubble and attempts to rein it in.
More specifically the danger arises from a slow-down and possible reversal of cross-border investment, particularly with emerging economies. Between 2000 and 2007 investment from advanced economies into emerging markets grew at an annual compound rate of about 18%, and between 2008 and 2011 it slowed to about 5% (McKinsey, 2013). The beneficiaries of this investment, global financial assets (all equities, bonds and loans) averaged growth of only 1.9% annually in dollar terms between 2007 and 2011. If we could measure it today the overall return would probably be a big fat zero.
So whatever analysis of individual countries might tell us, it has been easy to miss the threat of a deepening global recession, a risk increased by diminishing cross-border flows. What a time for the Fed and the Peoples Bank of China to decide to reduce the rate of monetary expansion for the two largest economies! These actions are too late to achieve the hoped-for orderly exit from excessive monetary expansion. Continue reading