GDP (Gross Domestic Product), the combined supposed output of our nation went positive in the 3rd quarter. YEAY! We’re growing, everything is roses and sunshine, the “recession” is over, right? For we all know that GROWTH is GOOD and that we should fear, be VERY AFRAID of anything that is not growing, right?
So, what is it that’s growing right now in the United States? Is it price, is it debt, is it real, what?? Understanding what it is, exactly, that’s growing is important, it helps to shine a light on why the markets are behaving the way they are.
I’m going to break economic growth down into two parts… what I call REAL GROWTH, and the other obese category being MONETARY GROWTH. Now, let’s be careful to define our terms and to break growth down into its components, real and monetary.
REAL GROWTH occurs when we create more actual products, be it goods or services. So, if Boeing makes more airplanes, or Ford makes more cars, then there is REAL growth occurring for those real products (that doesn’t mean that they are SELLING more products, just that they are producing them, so let’s ignore inventory and demand and just talk about output). If they were to make the exact same number and types of planes and cars from one year to the next, and they sell those products for a higher price, what has occurred, real growth or simply growth in prices?
If an attorney’s office handles more legal cases, then the amount of services provided grows. However, just because their total billings grow does not mean that REAL growth has occurred, get the difference?
Now, let’s talk about financial services. When JPMorgan (JPM) packages up a wad of mortgages and sells them to investors, they have supposedly performed a service, right? JPM, themselves, currently hold $79+ TRILLION of these wonderful “products” (down from $92T). Okay, well, when they ball up the wads and sell derivatives on them to “investors” in some other part of the world, they have performed a “service” and created an “export” right? Wait, I know what you’re thinking, but it’s true, financial “services” are services and they make up a huge percentage of total services, thus their activities add to GDP, both directly and as a result of adding cheap and easy credit fuel to the bubble fires that are burning. Of course the value of the assets backing these services are somewhat, shall we say, “questionable,” as they are currently marked to a future fantasy model developed by those very financial firms and this activity then receives the blessing of the Financial Accounting and Standards Board (FASB) as well as the blessing of our government. After all, the FED is JPM, GS, and other private banks and they tell the rest of our government how to behave, what really matters, and who to bail out. Note, however the trend at JPM, the world’s largest single holder of derivatives… they went from a peak of $92T down to the current $79T, a DELEVERAGING of 14.1% and it’s even greater when you consider that during that timeframe they acquired other companies that also contained large doses of derivative products.
So, REAL growth all of a sudden isn’t so real, it’s a little bit murky now isn’t it? We can touch and feel cars as they come off the assembly line, but when it comes to services, it’s not so clear. But we do know this; we have most certainly transitioned from a manufacturing economy to a services based economy. Our economy is based largely upon the consumer who consumes mostly services while we have transferred a great deal of our manufacturing overseas. And that brings me to the other type of growth…
MONETARY GROWTH occurs when the total supply of REAL money, CREDIT money, AND LEVERAGE in the system increase. Notice that I added leverage to a classical definition of money supply. This is because derivatives, although they are not real money or credit money, increase the leverage in the system effectively multiplying both of the others.
THUS, monetary growth can be broken into three components; Real money, Credit money, and additional Leverage.
REAL MONEY is money produced without the backing of debt. There is almost NO real money in the United States, nor in the entire world today. Gold backed money without debt, while “real” is still FIAT, meaning by decree of the king (government). Gold money has limitations too and is easily subject to manipulations, but for our subject here, real money is money that did not come into existence as an interest bearing debt, it does NOT mean commodity backed money.
When I show you a money supply chart from the FED (owned by private bankers) that money is almost entirely not real. It is CREDIT MONEY. All credit money carries interest and it MUST be paid back, with interest, or defaulted upon. The money supply figures simply add up values in certain accounts and reports the amounts there. Thus, those supply figures do count credit dollars, dollars that were LOANED into existence. In the good old days of simple fractional reserve banking, a bank, any bank, could lend out 10 dollars for every one it held as an asset. Today that concept has been abandoned and convoluted… why? Because they could not continue creating MONETARY GROWTH without increasing the leverage of DEBT. Thus REAL RESERVE requirements have been slackened and manipulated to the point that the REAL effective reserve requirement is ZERO, thus making the debt leverage INFINITE. How’s that for growth? But guess what… even doing that caused credit dollars to hit the mathematical wall, so the next thing to happen was they tore down Glass-Steagall leverage limits in order to spin up the manufacturing of SHADOW LEVERAGE via the shadow banking system world of derivatives.
Thus LEVERAGE is the third type of monetary growth, although debt is leverage too, what I’m talking about here is the leverage created by placing paper bets via derivatives. This is very, very FALSE leverage as there are LITTLE TO NO ASSETS backing this leverage. This leverage is not regulated and is not counted in the money supply figures reported by the FED. In fact, the FED is BLIND, because they do not track these figures and they certainly do not understand how this leverage works.
So, we have REAL goods and services and we have a monetary system. Both can go up or down in total size, and various components within each can also rise and fall, BUT, by definition, the total quantity of monetary growth can only be doing one thing at a time, growing, shrinking or remaining static. Thus, this “inflation in one thing but not in another” is true in regards to individual prices, but not true for the total sum.
What do we really have GROWTH in? Which pieces of the puzzle are moving up and down, and are the overall aggregates of REAL growth and MONETARY growth really growing at all?
Unfortunately, our government agencies that report statistics don’t think like this. They generally measure output in terms of DOLLARS, and then correct the dollars via their inflation figures to produce what they call “real” or adjusted output. But their “real” isn’t REAL at all. In fact, it’s completely trumped up because they monkey around so much with the inflation statistics. Their inflation statistics have nothing to do with the total supply of money, they track, adjust, tweak, and manipulate their “basket of goods and services.” Thus, their reality more closely resembles the reality in Wonderland.
So, what can we track that is real? Well, we could track the number of light vehicle sales, that’s real. And when you look at that chart you will see that we are currently manufacturing the same number of autos as we did around 1980, nearly 30 years ago:
Over the past 30 years we can say that this particular product production is flat – actually, it did grow, but then fell back down. Oh, cash for clunkers caused it to grow again for about 3 months, but then it fell right back down. I wish I could have a chart like this for the total amount of goods produced, but that chart does not exist. Sure, they track sales, but sales are in dollars! Dollars mean money, so let’s look at the growth of money over the same time period…
Below is a chart of MZM, currently the broadest measurement of money in the U.S.:
Note that this chart covers the same time frame as the manufacturing of autos. Growth in money, no growth in real units. But that MZM chart isn’t even half the story, because the effects of derivatives are not entirely reflected in that chart. The debt in the system has grown exponentially right along side the growth in money, that’s because almost all money is debt. Who holds the debt? Individuals, corporations, city, county, state, and our Federal Government do, that’s who. Oh, and a bunch of foreigners who were suckered into the banker’s central banking scheme.
PRICE inflation occurs when the amount of money growth is faster than the growth in production of real goods and services.
Now, note the shape of the curve of total Federal debt:
This is not all debt, just CURRENT Federal debt, no future oblications included. Amazing how the curve of debt is the same as the curve of credit money. That’s because money is debt. Exponential growth produces this parabolic shaped chart. All exponential growth curves collapse, and these curves of both money and debt WILL BE NO EXCEPTION. However, when these curves collapse, that is when you will see the end of the current version of the dollar and something new then must replace it.
In this country, the issue of overall monetary inflation and deflation is a huge MESS because of the so called “services” produced by the financial sector. Here’s what I THINK is happening in regards to growth…
The growth of REAL MONEY is completely meaningless and nonexistent.
The growth of CREDIT MONEY is occurring only at the banking/government level, not at the consumer and business level. The growth in credit at the government level does, in fact, exceed the destruction of consumer credit, and by a great deal.
The growth of LEVERAGE created by the derivative shadow banking system is SHRINKING DRAMATICALLY. Again, this is NOT what you are being told by the Treasury’s OCC who claims that derivatives are still growing, although at a slowing pace. NOT TRUE. The OCC tracks only a portion of derivatives, and only those at commercial banks. The amount the OCC tracks has only increased due to companies like Goldman Sachs (GS) who have converted themselves into commercial banks so that they can suck on the government tit and taxpayer’s blood for survival. If you removed the derivative increases from that shift towards commercial banks, the growth becomes hugely negative, witness the 14% decrease at JPM despite acquisitions. Thus, what almost all the “experts” are missing when it comes to monetary growth or contraction is what is happening in the untracked and unregulated world of derivatives. This effect is, in fact, overpowering the government’s attempts to jack up the quantity of credit money. In fact, they have failed, that is why they are resorting to outright printing, something that is not supposed to happen to a currency system that is backed by debt.
Thus, according to NATE, the TOTAL AMOUNT of growth in the money supply has risen extremely sharply in the past 30 years, but in the past two years it has contracted SHARPLY. This is not what you see in the chart.
Now, let’s go back to the real economy.
Total manufacturing is down sharply – that is an undisputable fact, it is a part of that sucking sound you hear (the other part being jobs). It was edging down as “free trade” pushed capital and manufacturing overseas, but in the past couple of years this trend has accelerated. Month to month changes are just noise.
Total services growth is difficult to determine. This is because it is measured in dollars and is squishy. What constitutes a service or a good in the first place? Is the worker taking your order at McDonalds a part of a manufacturing process of a non-durable good (hamburger), or is he performing a service? The more important issue is what is happening in the financial “services” category as it is a much larger question mark. Here, I want to break services down into REAL and NON-REAL, but I won’t. I will simply say that I believe (cannot prove) that REAL services are actually shrinking at this point in time too, and that NON-REAL services should not be counted for anything regardless. In fact, non-real services should not even be legal, they should be illegal as they provide no useful purpose to society yet they rob it of its real production and steal meaning from real working people. In fact, these non-real services skim from society, these issues are the VERY CAUSE of the middle-class squeeze.
So, overall I would contend that production of REAL goods and services is contracting.
Now then, in order to derive PRICE growth (or contraction) from all of this, there are many factors to consider. Things like the size of the population, the age and spending habits of the population, etc. But let’s ignore all that and simply look at what prices, AS MEASURED IN FALLING DOLLARS, are doing.
Stocks are sharply down over the past decade. Over the past two years they are down even more sharply. Over the past 8 months, they are up sharply. Then you need to look at the price history of each and every major asset, houses (down), oil (up, down, up), etc.; and when you do this with the major assets classes and weight them for relative size and influence on the economy, you come to the exact same conclusion that I come up with above about the total supply of money, credit, and leverage… namely that over the past 30 years our production of real goods and services has been overall flat, but that there has been growth in overall money supply and leverage, except in the past two years. Thus, inflation is what happened in the past, namely cars went from being PRICED at $10k to now $30k, houses were priced at $70k, and are now $150k or more after falling from their highs several years ago, gasoline was 75 cents a gallon and is now nearly $3, having fallen from $4+.
The point that I’m making in this very long detour of thought, is that the REAL economy is NOT GROWING and has NOT BEEN GROWING. The only growth occurring is that of DEBT and DERIVATIVES, but even that is now shrinking because the limits of debt first, and now derivatives has been exceeded. The entire system is debt saturated; all future income has been pulled forward into the here and now. Inflation going forward? Only if wages can increase to service the rising tide of DEBT, or what the central bankers and our President parlance off as credit. Guess what? Wages will not increase at the same rate because our money, our capital, will flow overseas first where it can buy lower wages, lower taxes, and lower pollution control costs. Again that sucking sound…
Because our money is backed by debt, debt should play a self-correcting monetary role. That is that politicians should limit their spending as the debts grow larger and larger making interest payments larger and thus making overall debt service a larger part of their budget. Theoretically, this means that they must raise taxes to keep it up. Of course they have reached a limit on the amount of taxes that can be raised without choking off the consumers and businesses who already can’t service the taxes and debt they are burdened with. Thus, we are at the end of the line of our debt backed fractional reserve money system.
Instead of admitting default, the Fed resorts to printing via “quantitative easing” and by using the GSE’s to buy up trillions worth of mortgages. This has allowed the politicians to continue to fight wars that they have NO BUSINESS fighting, and they continue to SPEND MONEY THEY DO NOT POSSESS. Again, this is the end of the line, this is exactly how money systems fail, and if that situation is mishandled, it is exactly the disruption that leads to civil unrest and wars on a grand scale. Thus, change is coming, it is getting closer by the day.
This ignoring of reality is exactly what is causing the dollar to sink in relative value against other currencies and why gold is raising in value. It is NOT overall monetary INFLATION, it is a loss of confidence in government, that is what I see in the various price movements.
Again, it is game over when we look at the bond market and interest rates. Interest rates over the past 30 years have fallen from 20% to nothing. There is nothing smaller than nothing (again, don’t argue going negative here). Thus, interest rates can only go higher. When they do, the leverage comes off further, the debt saturation falls off, the bubble in bonds goes POP. It’s going to happen or we’re going to wise up and do something constructive beforehand.
The IMF has a plan, they plan more of the same but on a global scale. Life under the IMF is one of servitude, a life of perpetual debt peonage and slavery. Not a system that sustains REAL GROWTH, no, their debt backed money systems are all about paper growth. They need ever larger and increasing schemes to keep their Ponzi plans in motion. They use their growth in paper to suck the real producing worth from society, from you and from the natural resources of your country.
What follows in Ponzi grandness after derivatives? Why that would be Cap & Trade, thank you very much! And, especially when you combine that with Super Bonds (Super DEBT) from the IMF. Now that’s growth, but it certainly doesn’t mean growth will be coming to a real economy or paycheck near you.
The upshot of all this is that GDP growth over the past 30 years has ALMOST ALL BEEN COMPLETELY FALSE. It’s the same false growth that now inflicts China and most of the emerging market world.
There is a better way. There’s a better money system, one that is not backed by debt, nor backed by gold. Neither systems have stood the test of time, our current system is failing now. It’s time to get off our collective rears and to develop a better way forward, hopefully BEFORE the consequences of our paper actions create more violence in the real world.
PS – “It’s not WHAT backs your money, it’s WHO controls its QUANTITY!”