Grant Williams: The End Of The Road

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Grant Williams returns this week to set the context for this week's FOMC meeting, where the Federal Reserve is widely expected to hike interest rates for the first time in nearly a decade. To say he is very skeptical of the Fed's ability to continue to control market forces much longer is a gross understatement:

None of this has been tried before and, to me, that just demonstrates the dangers. Once you get into a situation like the central banks did in ’08 with this panicking -- everyone calls it the Hotel California -- you can’t get out. And, so incrementally, they have to keep doing something. Instead of stepping back and letting free markets and business cycles and forces of nature have their way and flush out all of the impurities in the system, this is what happens. And, yet, this time, for whatever reason, I think since post-Volker, Greenspan has basically started this ball rolling with this knee-jerk reaction to slash interest rates. And, you can kind of understand it, because everyone was still traumatized by the high inflation of the ‘70s. But, they started and they started down that road.

And, if you look at a chart of interest rates in the U.S., you can see. It’s just, from 1980—I’ve marked two points on all my charts for presentations. One is the end of the gold standard, August 15, ’71, when Nixon closed the gold window. And, the next is peak interest rates in 1980. And, if you look at those two charts and you see what’s happened with interest rates since, they’ve been on a course to hit zero ever since.

But, if you step back from that and you say forget the creeping nature of this and how we’ve gradually got here, try and parachute yourself in and look at the situation, and look at it through clear eyes, you'll say, “Hang on, we have negative nominal interest rates, and we have people queuing up to buy the debt of what are clearly bankrupt governments at negative interest rates.” It would take you no time at all to think, “Well, this is, this is ridiculous. Not only that, but this is the end of the road. It has to end here or near here.”

And, so I think that’s where we are. I think we’ve reached the end of the road. That’s not to say the end of the road is a brick wall. We can be trying to turn the car around for a year, who knows, trying to find another way out of this thing. But, we’re there. I mean, believe it or not, we are there. And, so how this thing plays out, none of us know. But, I suspect that the tactics that are going to be employed are going to get more and more desperate, because they have to keep going now. They’re so far in, they have to keep going, and keeping going means doing more and more extraordinary things.

It’s a relative game. There are people that have to be invested. And, so you can herd them by taking away the chance of investing into one thing, i.e., putting rates at zero so you can’t just put your money in cash or short-term Treasuries. By doing that, you know, psychologically, you’re going to herd them somewhere else, and that’s been into the stock market, it’s been into asset prices, which is fine. But, it’s not a temporary removal of that ability to put stock in cash. You have to keep that away from them, because if you give it back to them, if you give them back that option, it’s going to mean interest rates are at much higher levels, which is going to screw all the debt payments. They are going to run for the hills faster than you can imagine, because none of this stuff is what you would choose to invest in, all things being equal. You wouldn’t invest in the S&P where it is now, after the run it’s had. God knows you wouldn’t invest in government bonds where they are now. You might take a long hard look at asset prices and think, “Well, you know what, actually, I might buy some base commodities here, because they’ve been just completely slaughtered.” But, you certainly wouldn’t be investing in the two things that they need you to invest in, which are government bonds and equities.

So, that’s the real problem. And, the fact that they realize that tells me that we are getting to the end of this road, because that credibility is not something they can maintain forever, particularly when they’ve boxed themselves in with negative interest rates.

Click the play button below to listen to Chris' interview with Grant Williams (59m:06s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/grant-williams-the-end-of-the-road/

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And, if you look at a chart of interest rates in the U.S., you can see. It’s just, from 1980—I’ve marked two points on all my charts for presentations. One is the end of the gold standard, August 15, ’71, when Nixon closed the gold window. And, the next is peak interest rates in 1980. And, if you look at those two charts and you see what’s happened with interest rates since, they’ve been on a course to hit zero ever since.
There was also something else that happened in 1971 -- US peak oil. Since positive real interest rates in a financial system that is growing implies that the real economy is also growing, and since real economic growth implies growth in energy use, it only stands to reason that interest rates would go down over that period. Also, prices of debt go up as interest rates drop, so those at the center of the debt universe have profited greatly over this period. Interest is a promise that the future will be larger than today. With peak oil, the future won't be larger than today which is why we have zero percent today. This also explains the rise of the dollar as the worlds reserve currency to facilitate the trade deficit to import the rest of the worlds oil instead; and the military industrial complex to enforce the dollar, the fact that the world has hit peak oil now, and you can see why everything is collapsing. 
 
It seems there is so much discussion about what the fed should do differently or should have done differently in 2001 or 2008, as if there is an alternative course of action for this system. Well no, this monetary system is inherently flawed, and since it began in 1971 it was guaranteed to fail and and follow a similar fate to what we see unfolding. The sooner everyone realizes this the sooner we may be able to free ourselves from the grip of the bankers and build a new sustainable monetary system. 
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It would be better for the Finns to leave the Euro and back currency with gold.  The Basic Income Act is full of unintended consequences that will kill Finland.

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There was a rule that said that anyone who owned a mining lease was obliged to work the lease. I guess that the uber-wealthy  may be able to reduce production, but not close the mine down. 
The other point is that a gold mine is in the basket of goods that the uber-wealthy  desire and therefore should be inflating.

We really should be discussing the future role of automation in displacing warm bodies in the economy. The wealth generated by this phenomenon needs to be redistributed to those warm bodies.   Additive manufacturing, 3d printing among others technology.  I was thinking of the Cloward-Piven strategy of enforcing wealth distribution.  https://en.m.wikipedia.org/wiki/Cloward–Piven_strategy

But if those 10s of millions of warm bodies require life support they may will be seen as a liability, not an asset. Especially if those warm bodies will not or can not buy the products of the machine. They may remove themselves from the economy completely. 

Which brings me to the conclusion of the LTG report.  We have to move capital from industry into agriculture, or starve. It seems as though most have chosen. Life on the land is no Shangri-la. But it is where human wealth is. 

 

 

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I can't agree more with Mark_BC and Arthur R. This entire discussion was the perfect recap and exposition of the basic economic principle of decreasing marginal utility. It explains just about every economic downturn I can think of. Thanks to cheap energy, "The faster we go, the behind-er we get." will be the rule of thumb for the impending future. But what to do? A consistent, gradual reduction on our resource use, incremental population reduction, increased focus on transition to historic, renewable, energy systems and a psychological change in our human expectations may be a good place to start. You guys at PP can't sound this drum any louder or more frequently than what the deaf can take in. Keep preaching to the choir and start the choir preaching to the congregation. Somebody's got to hear it eventually.Great discussion.

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As some point all this shit just gets old.

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Yep, no arguments on that one.

I think we need to overhaul the education system, but sadly I don't think the people in charge are of the right "mindset" to do it. For example, here in the UK our school dinners are notoriously poor in nutritional value - back in 2005 several articles were written about it (back when people were bothered). A chef named Jamie Oliver, beloved by all, even did a TV series on it. Did it not occur to anyone that kids should be outside learning to grow their own food rather than remain cooped up in classrooms being bored into submission? That perhaps they might like digging holes and planting bulbs rather than reciting the latest curriculum mantra? Hell, they might even be intellectually stimulated and learn about that magic force which keeps them alive. Even more radically they might suggest improvements to the process. But, Lukus, who will operate the machines and wipe the tables… OK, I concede.

So instead the children fester in their urban asylums and we continue to remain dumb-founded as to why they remain so disconnected and insular. Still, all going to plan…

Well, my mission remains simple; tell people about my garden (along with the plans I have for it) and try to show that healthiness leads to happiness. Whoever has ears, let them hear…

All the best,

Luke

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Think tank floats 'basic income' idea for all citizens

A think tank is calling for fundamental change to the system of tax and benefits in the UK.

The Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) is recommending a basic universal income.

In a new report, the author calls the approach the best alternative "to help people improve their own lives".

The RSA estimates that its proposal would cost about an extra 1% of annual national income (GDP).

The idea is in principle fairly straightforward: a standard payment is made to every citizen. The report illustrates how it might work using data for taxes and benefits in 2012-2013.

The basic income for people aged between 25 and 65 would in this example be £3,692. There is a pension of about double that amount for those older than 65.

There would be a basic income for children too: for the first child it would be higher than the working age adult basic until they reach school age. Above that age, and for all children after the first, it would be below that level.

Some cities in the Netherlands are also looking at the idea. There is also a debate in Switzerland about introducing a basic income.

 

 

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Aka "helicopter drop" for the masses? Rather than a lump sum, a monthly trickle? 
Might help prevent sudden onset inflation this way…the slow liquidity injection.

Paging Dr. Martenson…

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The left in the UK are still pissed off about the enclosures of the commons and fields. Redistribution of land to the peasantry is impossible now, but a financial equivalent of everyone having their own bit of land ? interesting.

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Hmmm…yes the trial balloons are being floated left and right, almost daily now.  Will it be negative interest rates with cash controls?

Or perhaps another big QE, but this time directed more honestly and openly at equities and corporate bonds by the Fed?

Or a Keen-like debt jubilee with a big $50k/household bolus of money?

Or will it be basic income for all?

With "basic income" we get the Goldilocks approach…not too hot, not too cold.  That's the idea.  The reality is that as claims on 'stuff' goes up but the amount of stuff does not pressure will build.  Politically, once people have free money it will be extremely difficult to take it away. Hence, the entire scheme relies on inflation coming along and returning most of that free money right back into government coffers via the miracle of rising taxes on nominal income.

At this stage, they might as well try it.  Why not?  Nothing else is working and they seem to lack the appreciation for the role of declining net energy per capita in reshaping the workings of the system.

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these experts for their opinion.
https://www.youtube.com/watch?v=8GAWEVNQdnI

 

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Thanks for your suggestion DennisC!  Here's mine for untapped wisdom on this subject:
https://www.youtube.com/watch?v=ss2hULhXf04

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Yes, and then the basic income will become the main income and scapegoats will be pointed to and war war war.   All these ideas have been tried before and failed.

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 Politically, once people have free money it will be extremely difficult to take it away. Hence, the entire scheme relies on inflation coming along and returning most of that free money right back into government coffers via the miracle of rising taxes on nominal income.

At this stage, they might as well try it.  Why not?  Nothing else is working and they seem to lack the appreciation for the role of declining net energy per capita in reshaping the workings of the system.

https://www.youtube.com/watch?v=rcC4i9WQctw

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I believe many are failing to see the point of the basic income concept.  It is not meant to address underlying failures within conventional economic circumstances.  It is an attempt to maintain the status quo for just a bit longer.  Kick the can a little further down the road.

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One…last…gasp…

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Not meant by who ?

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So is "basic income" revenue neutral, or will it cost more money?  If its revenue neutral, sounds like a fine plan.  If it costs more money, that can either come from borrowing, or raising taxes.
Certainly its directly stimulative, and its probably also more efficient than the government providing services directly such as housing and whatnot.

It would theoretically get rid of a bunch of bureaucrats running dozens of different programs.

If its a cash payment into a bank account, that's one thing.  If its an EBT card, that allows government direct access to tracking spending - and presumably yanking your income if you get out of line.  Its a more centralized direct axis of control.

Is it supposed to replace national health care?

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You make it sound so simple! We would initiate a quantitative easing program designed to insure future prosperity, or increase mandatory financial support structures to assist government expenditures going towards the Prosperity for the People Program, silly! I mean, if we don't CALL it borrowing or taxing, it isn't right? Right?

It reminds me of how the last Republican governor of my state promised he would not raise taxes, which he didn't…he just raised all fees, tolls, and other "payments" to the state. And people fell for it.

A pig in a tutu is still a pig, after all, not a ballet dancer. 

 

This at least seems more Keynsian to me than the last three rounds of QE. At least it goes to Main Street, in theory.

 

In my experience with history, dismantling bureaucracy has never happened peacefully nor easily. That would be a lot of lost jobs. At least they'd have a basic income to fall back on!

 

That would employ all those unemployed bureaucrats, too! You'd need a lot of humans to track that, or a very adaptive computer software.

 

You say "replace" as if we have a system of national healthcare. We have a myriad of private healthcare companies and a hodge-podge attempt at a national healthcare "backstop," not a truly national healthcare system ala Canada or Germany.

 

So, would this work? As in, how far down the road do you think this kick could get us? I'd welcome the chance to have the government finance our family's prepping efforts, but I'd rather not be on its "radar" for such activities either.

 

PS- Half of this post is made with tongue firmly entrenched in cheek, fyi.