Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘money supply’

• Pre-Conditions for a Sustained US Economic Revival

Posted by Ron Robins on April 21, 2008

The US has achieved many periods of sustained and rapid economic growth. And it can do so again. However, as history demonstrates, a big bust results if the growth is spurred by excessive monetary and credit expansion. For the past 25 years or so the US economic expansion has followed the woefully excessive monetary and credit expansion script. The US will not be able to pull itself out of the present economic malaise without dealing with its inordinate levels of debt and ‘exponential’ credit growth.

It is rather sad when most economists and investment industry professionals do not talk about the enormity of the debt and credit expansion problem. Unfortunately, it seems these ‘experts’ are either told to shut-up, prefer to overlook the obvious, or to simply lie about it being a problem! After all, what bank economist wants to tell his bank that its customers should reduce their borrowings, and thereby reduce the bank’s lending and subsequent earnings! More than likely the bank’s stock price would plummet. There is simply no incentive for most establishment economists to be truthful and every reason for them to lie.

For the US to experience a true long-term economic revival, I believe four things need to happen.

1. US debt growth will have to about match, dollar for dollar, GDP and income growth.
Presently it takes around $6 of new debt to create $1 increase in GDP and $4.75 of new debt for every $1 increase in national income. This is bubble territory. Look at this historical chart showing the explosive growth of America’s debt in relation to its national income.

Source: Michael Hodges America’s Total Debt Report/financialsense.com

If income grows slowly while borrowing grows rapidly, eventually there is a solvency problem. That is where the US is today. If the borrowing were primarily to increase overall productive capacity – the increase in production would have created greater income to help offset massively increased borrowing. But this has not happened. Much of this bloated US debt load is concentrated in the financial, mortgage and government sectors, and for the financing of its trade deficits. The debt contraction will be particularly acute in areas related to the financial and mortgage industries and generate extraordinary difficulties for the economy at large.

2. Debt to GDP ratio has to come down by around one-third
Debt at around 350% of GDP and growing 50-100% faster than the rate of GDP growth for more than 25 years – is utterly unsustainable. Following on from point 1 above, the US is basically beginning to experience an insolvency problem. Credit availability is declining while default rates soar. As a result, it has to reduce its overall debt burden. Nations frequently resort to inflating their money supply to deal with their debt burden, as Germany did in the early 1920s and Zimbabwe is doing today. So with the significantly increased amount of money swashing around, debts not being indexed to the growth of the money supply, are more easily paid off. Present moves by the US Federal Reserve now indicate that this is the path they have chosen. According to shadowstats.com, the broadest measure of US money supply is growing at an annual rate of around 17%!

3. Personal savings rates have to move beyond 10% per annum– from around zero at present.
High growth economies have high savings rates. It is that simple. The savings go towards spurring productive capacity – rather than to consumption – and produce fast income growth. In most years between 1952 to the late 1980s, the US enjoyed a personal savings rate above 10% of income. (See this graph by the Bureau of Economic Analysis.)

4. The above 3 conditions have to persist.
It is no secret as to what are good, or bad, macro-economic conditions. The above are key conditions that have to be met to ensure true, long-term, high growth macro-economic performance.

The message is that the US must significantly reduce its overall debt levels, avoid building-up new debt in excess of GDP or income growth, and for individuals to start saving again. I have no-doubt that these conditions will be met. But before they are met the US is likely to experience an extended period of rolling recessions over many years. And a depression cannot be ruled out either. During this process I expect to see among Americans a transformation to higher consciousness and a growing understanding of economics and its relationship to natural law and the environment. Americans, and people everywhere, will come through this much wiser. A new global Enlightened Economics framework will be created and form the basis for improving living standards and quality of life for all in our world in the years to come.


© Ron Robins, 2008.


Posted in Economics | Tagged: , , , , , , , , , , | 3 Comments »

• Out of the Ashes. A Global Central Bank!

Posted by Ron Robins on March 12, 2008

Our financial overseers will create a world central bank in the next few years. Growing higher consciousness in the world will enable it to become a reality. This bank will have a mandate to monitor, regulate, and maintain global currency, credit, and debt issuance. It will ensure that growth of these activities roughly matches global economic output. It will come about as the chaos and inadequacies engendered in our present monetary system become evident to everyone and a world central bank seen as the best solution.

Individuals and groups in financial markets everywhere, lacking inner fulfillment, have demonstrated inordinate greed resulting in reckless financial games and gambling – are bringing the financial system to its knees.

Such mismanagement in the financial system, I believe, will require the new world central bank to disallow banks everywhere from continuing in unfettered debt creation and speculative excesses. In search of ever higher returns, banks created overly lax lending standards, highly leveraged loans, obscure financial entities bearing major financial risks unconsolidated in their financial statements, and generally ran down the quality of their assets and reserves to unsafe levels.

‘Shadow banking’ system larger than conventional banking
All the while an even bigger, massively leveraged, totally unregulated, thinly capitalized, ‘shadow-banking’ system was allowed to balloon by bank regulators. And it is now in the process of imploding! Bill Gross, managing director of PIMCO, the world’s largest bond fund, said this recently about the shadow banking system: “Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

Due to the enormous growth of irresponsible central bank and banking activities globally, plus the vast, mushrooming credit creation of the shadow banking system – the world’s money supply is expanding out-of-control.

Unprecedented money supply growth creates inflation as bad as 1970s
Globally we see that, “China [is] registering an 18% plus growth in money, India 22.4% a year growth, Singapore 14%, Britain up by 12.3%, Western Europe 11.5%, Australia 16%, Canada 13%, and Saudi Arabia 22%!” So says The Mogambo Guru, Richard Daughty. These are ‘broad money supply’ figures. John Williams of www.shadowstats.com shows the US broad measure of money supply, as of early February 2008, increasing at annual rate of 16.8%. (The US Federal Reserve stopped publishing this measure in March 2006 claiming it costs too much to produce. Many economists suspect that they just wanted to hide the ramping-up of the US money supply.)

Even Marketwatch’s chief economist, Irwin Kellner, is concerned about US money supply growth. He said recently, that, “The rate of growth for highly liquid funds which the St. Louis Fed calls MZM [i.e. physical money, checking and money market accounts, etc.]… soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.” He adds, “… it has created a whole lot of inflation.”

The link between an expanding money supply and inflation is firmly established. As the Bank of England’s Governor, Mervyn King quoting a highly respected study, said, that “Over the 30 year horizon 1968-98, the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99.” Thus in the words of Milton Friedman, the recently deceased Nobel Economics prize winner, “… inflation is always and everywhere a monetary phenomenon.”

In the US, consumer price inflation using the politically biased, understated, consumer price index (CPI-U) is in January 2008 up 4.3% from a year earlier. But using the CPI methodology as of 1980, it is almost hyperinflationary at close to 12%! Inflation in China is now running at 8.7%, while in the EU and the UK, though more moderate at 3.4% and 3.1% respectively, it is picking-up significantly and well above their respective central bank targets.

The foregoing suggests that the present global monetary and financial system is reaching a state of extraordinary instability. The danger is the possibility of rapidly growing, unstoppable inflation culminating in a hyperinflationary episode such as is now occurring in Zimbabwe. Or, a threat of a deflationary bust similar to the Great Depression.

Higher consciousness the only real answer
The only real answer to such economic threats is higher global consciousness. This, I am convinced, will gain traction. (See my post, The Missing Ingredient In Economics — Consciousness!). In future years, this higher consciousness will, amongst other things, first manifest itself by allowing our financial overseers to see the need for, and create, a world central bank.

In ages past central banks utilized gold to help create monetary order. A new world central bank might well find a role for gold again, but in an updated, modern form. I will write about this in another post.


© Ron Robins, 2008.

Posted in Banking, Monetary Policy | Tagged: , , , , , , , , , , , , , , , , , | 6 Comments »

• Debt. Americans Search For fulfillment

Posted by Ron Robins on December 3, 2007

For each of the past thirty years or so, total US debt (government, business, consumer, etc.) has grown much faster than either national income or Gross Domestic Product (GDP). (See chart below: ‘Total America Debt.’)

Source: Grandfather Economic Report by Michael Hodges/financialsense.com

I believe that this debt growth is likely to end in the next few years — or sooner — for the simple reason that creditors will fear non-repayment of principal! Consumers’ ability to take-on more debt is extremely limited, as savings rates are close to zero and continue trending down (see chart below ‘Personal Savings Rate’). When creditors begin to back-off lending, the effects on US growth will be decidedly negative unless the country can learn to create growth on much less debt. This is possible, as the US came close to that between 1950 -1980 (again, see above chart ‘Total America Debt’).

Source: Grandfather Economic Report by Michael Hodges/

Why has debt grown so much faster than income or GDP?
I believe there are two ways of understanding the furious pace of US debt growth. Firstly, I think it is a failure of individual consciousness, and secondly, a failure of collective consciousness as it relates to federal and international economic or financial structures.

It is primarily a failure of individual consciousness as it relates to the lack of personal fulfillment and critical thinking. Bereft of inner fulfillment, the individual seeks it mostly in material well-being. Thus he or she focuses, uncritically, on material accumulation, no matter what the cost, and avails themselves with massive amounts of debt to satisfy that material quest. Just like a drug junkie, they need more and more ‘stuff’ to sustain the thrill.

It is a failure of federal and international economic or financial structures because they have encouraged mass, loose credit, and unfettered monetary expansion and leverage. Examples of this are many. They include:

  • The lowering of bank lending standards (i.e. the sub-prime mortgage fiasco).
  • Massive growth of money supply (http://www.shadowstats.com/cgi-bin/sgs/data modeling US M3 growth at 14+% annually, many times faster than GDP growth).
  • US Federal Reserve’s forcibly reducing market interest rates (especially between the years 2002-5).
  • Foreign lending to the US of huge, accumulated dollar surplus holdings by China, Japan, and others in order to help keep US interest rates low and maintain, forced, low rates of exchange for their own currencies.
  • The lack of international oversight (read collective consciousness) regarding financial leverage and the development of over five hundred trillion dollars in derivatives (with a ‘notional’ value forty times the size of the US economy) and which Warren Buffett has labeled, ‘potential weapons of financial mass destruction.’

How will this debt growth stop?
The credit growth stops when creditors become nervous about repayment of their principal. Loan standards tighten and a credit crunch ensues. This is beginning to happen. However, we are just in the early stages of this process. Attempting to mitigate a credit collapse, the US Federal Reserve, European Central Bank, Bank of England, Bank of Japan, and others are beginning to provide huge sums to lenders who get into trouble and infuse into financial markets unimaginable sums to aid market liquidity. Thus they hope to convince lenders to keep lending.

However, this whole process of pushing liquidity into the markets is flawed from the start, as it circles round to the numerous Americans not being able to meet their mortgage or other loan payments to begin with. Mortgage default rates are skyrocketing (RealtyTrac Inc. says they are up 100.1% in third quarter of 2007 over one year ago) and credit card debt defaults are rising too. With enormous loan write-offs, the capital of lending institutions will also be lower, requiring them to reduce their outstanding loans even further. Eventually, no matter how much the central banks push money onto the lenders, the lenders begin to balk at offering new loans, while overstretched consumers resist taking on new debt. Before this process ends, monetary and price inflation could escalate and create a possible hyper-inflationary environment, leading to a classic deflationary bust.

The conditions for non-debt growth. The way forward.
Conditions for economic growth where increases in debt and income are better balanced, are possible. This can be attained if Americans — and individuals everywhere — first gain more inner fulfillment and improve their ability to think critically. That will bring greater balance and creativity to their minds and reduce their addiction to material goods. It requires the materialistic drug junkie to go on ‘methadone drug replacement programme’ to ‘chill-out’ and see the world anew.

Please do not misunderstand me about the need for continuing gains in material comforts and economic security. Such things are fundamental to human life and progress. But practically, Americans must get back to much higher rates of saving to reduce their demand for debt and to re-balance their economy.

Historically, American savings rates have been 10-15+% of disposable income. In part, that was due to the fact that individuals living in past decades did not have the comprehensive government and private safety nets of today, nor was credit so easily available.

Over the longer term though, higher savings rates will provide superior financial stability and income for consumers, while providing the foundation for sound economic growth.

On the collective level, a similar psychological transformation has to occur among those who govern federal and international, economic and financial structures. The governors and directors of such institutions have to go back to the mindset of Paul Volker, who as Chairman of the US Federal Reserve in 1980, stood fast against the enormous threat of inflation. He raised interest rates to as high as 19%. America then suffered its worst recession since the 1930s. But he possibly saved the US from something much worse. That could have been a hyper-inflationary event possibly leading to a depression on an unimaginable scale.

I am not saying interest rates need to go anywhere near 19%. What I am saying is that the present mindset of the individuals at the top of the economic and financial establishment of throwing ‘money on to the fire’ by downward manipulation of interest rates and encouraging consumers to take-on even more debt — is simply nuts! (I would love to talk more about the dangers of present day central, and fractional reserve banking, but I will leave that for another post!)

At the present time, despite the protestations to the contrary by Mr. Paulson, the Treasury Secretary, the American government probably wants a lower US dollar versus other major currencies in order to reduce its trade and current account deficits. This would help the US to stimulate exports and jobs at home, as well as pump-up the earnings of US based companies who translate their foreign currency profits into dollars. This, therefore, would also help to support US stock prices. Conversely, at home, higher prices of imported goods would reduce material consumption, help slow down consumer loan demand and encourage savings.

The Euro, Canadian and other floating currencies are rising fast against the US dollar. However, the big Asian ‘partners’, China and Japan do not want to see their currencies appreciate against the US dollar. At this time it looks like there is paralysis at the international level to adjust exchange rates to market levels that allow for free-market determination of rates that incorporate fundamental trade and services imbalances. In fact, we might be close to an era where countries engage in competitive devaluations of their currencies.

Such currency ‘wars’ is what the French President, Mr. Nicolas Sarkozy, recently described as being entirely possible. Following on from that could be trade protectionism and a repeat of the 1930s trade wars.

Such national, international and global deadlocks must, and can only be resolved with a change in consciousness in America and all the participating nations. The reduction of US debt and increasing its savings rates is an international enterprise. And it can be done peacefully with a change in individual and collective consciousness, or forcefully and painfully, which will happen, if the change in consciousness does not occur soon!


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Posted in Economics | Tagged: , , , , , , , , | 1 Comment »

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