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Since The 70S The Superpower Has Been Locked Into A Cycle Of Bubbles, Busts And Growing Debt

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Mark Faber: The Old World Order Is Over

‘The US reached a peak in prosperity and influence in the world in the 1950s or 1960s,’ said Faber. But since the 70s the superpower has been locked into a cycle of bubbles, busts and growing debt. There are some people who claim to be economists who will tell you debts do not matter. But the real story is different…. Faber explained the flaw at the heart of expansionary monetary policy (such as QE). ‘When you drop dollar bills into the economy…it won’t lift all prices and assets equally at the same time,’ he said. In the 60s and 70s, extra money flowing through the economy inflated wages; in the early 2000s, money printing inflated commodities. But, Faber points out, this price and asset growth is never equal. In other words, money printing creates more bubbles. Some assets go up, they overshoot, collapse and cause significant damage which necessitates, in the view of the US Federal Reserve, more money printing. It is a vicious cycle we’ve seen since the 70s: each time there was an economic problem, the Fed printed money and created more distortions.

Bernanke’s tenure saw this trend continue, he’s been a disaster, not only did Bernanke not notice the subprime disaster, he actually helped create it. ‘Under his tenure at the Federal Reserve and under his intellectual influence when working for Mr Greenspan they created the gigantic housing bubble,‘ he said. At the heart of this expansion in debt, and cycle of bubbles and busts is the reliance of the US economy on consumption. For the last century, policy makers have encouraged consumption on all levels of society including government, and discouraged savings. Consumption doesn’t create a strong economy. Wealth doesn’t come from consumerism, it comes from capital spending. And the problem for the US economy is that while debt has continued to rise, capital investment hasn’t. In fact, it’s been falling sharply for a long time. If we have growing debts, there’s a difference in quality of those debts. Japan, South Korea and Taiwan used their debts to invest in factories, plants…investments that generated wealth. According to Faber however, the US has just acquired debt to fuel consumption. ‘Where’s the future income?‘

‘We live in a new word. We live in a world where the balance of power has shifted to emerging countries. China’s massive growth triggered massive commodity export booms in emerging economies. China’s real success was exporting the products it produced back to emerging economies. This has created a significant shift in the global economy: exports from China to emerging countries are higher than exports to the US or Europe. This is the new world, where the old world is largely bypassed. China has a much greater influence now than the US.

It's bit like Detroit, after years of neglect and deterioration.

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Consumption doesn’t create a strong economy. Wealth doesn’t come from consumerism, it comes from capital spending. And the problem for the US economy is that while debt has continued to rise, capital investment hasn’t. In fact, it’s been falling sharply for a long time. If we have growing debts, there’s a difference in quality of those debts. Japan, South Korea and Taiwan used their debts to invest in factories, plants…investments that generated wealth.

Perhaps, perhaps not.

I mean, it seems intuitive, but maybe is deceptive.

I dug out an old economics textbook the other day that had investment as a % of GDP figs for UK, Italy, France, Germany. UK, not surprisingly, came bottom in the 50s,60s, 70s,80s, and yet it made no difference to long term GDP growth. Indeed british business is notorious for investing less in the long term than european counterparts.

And yet, no difference.

Unlikely, but maybe we just invest more wisely...or other countrries waste more. We've all heard of Japans roads to nowhere for example. And while Frances fast trains may make our Department of Transport salivate, do they actually deliver any economic benefit, or are they just a vast pet project?

Yes, intuitively, more investment is good...but it doesnt necessarily mean it is spent wisely.

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...I dug out an old economics textbook the other day that had investment as a % of GDP figs for UK, Italy, France, Germany. UK, not surprisingly, came bottom in the 50s,60s, 70s,80s, and yet it made no difference to long term GDP growth. Indeed british business is notorious for investing less in the long term than european counterparts....

Of course this assumes GDP is a reliable indicator of the sustainable wealth of the nation... Isn't this a bit like a mewed indebted over-leveraged family saying "but our house is so much bigger than the people in the next street who work all hours...?

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Of course this assumes GDP is a reliable indicator of the sustainable wealth of the nation... Isn't this a bit like a mewed indebted over-leveraged family saying "but our house is so much bigger than the people in the next street who work all hours...?

This is key..because public sector spending has the same impact on the GDP equation as a farmer growing and selling crops...one requires the other to pay tax to add to the equation....if printed, the farmer isnt required at all.

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Erm hasn't the US always been locked into a cycle of bubbles and busts and the only way to keep the US bandwagon going after the war was to use the magic of debt?

Perhaps if they had listened to Keynes at Bretton Woods we'd have different problems?

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Consumption doesn’t create a strong economy. Wealth doesn’t come from consumerism, it comes from capital spending. And the problem for the US economy is that while debt has continued to rise, capital investment hasn’t. In fact, it’s been falling sharply for a long time. If we have growing debts, there’s a difference in quality of those debts. Japan, South Korea and Taiwan used their debts to invest in factories, plants…investments that generated wealth.

Perhaps, perhaps not.

I mean, it seems intuitive, but maybe is deceptive.

I dug out an old economics textbook the other day that had investment as a % of GDP figs for UK, Italy, France, Germany. UK, not surprisingly, came bottom in the 50s,60s, 70s,80s, and yet it made no difference to long term GDP growth. Indeed british business is notorious for investing less in the long term than european counterparts.

And yet, no difference.

Unlikely, but maybe we just invest more wisely...or other countrries waste more. We've all heard of Japans roads to nowhere for example. And while Frances fast trains may make our Department of Transport salivate, do they actually deliver any economic benefit, or are they just a vast pet project?

Yes, intuitively, more investment is good...but it doesnt necessarily mean it is spent wisely.

Repeat after me: Economics Is Not A Science.

The consumption and investment components of GDP are completely vague, artificial constructions where the reality doesn't always match the concept. Building a motorway to nowhere is valued as the equivalent to building the M25. Consumption of Candy Crush Saga is valued the same as consumption of fresh fruits and vegetables. Investment can be good or bad. So can consumption. Just looking at the published GDP figures isn't really going to tell you.

Having said that though, spending on investment can have impact. If you look at France, all that investment in railways and roads might not show up in higher GDP growth, but it certainly makes for a much higher quality of life. It's possible to live outside of Paris and still have access to goods and services. The population and economic activity can be more dispersed, so housing is better and access to amenities is improved. If it weren't for the high level of past investment, France would be completely screwed right now given that the government has made it so difficult to start businesses or to employ people.

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Some of the (what would have been) US investment has simply relocated to China to produce the same goods more cheaply and increase profits for US entities.

It's not very worthwhile looking at the US unless you also look at China. Chimerica.

Without the expansion in US deficits and US debt, China wouldn't have invested in production.

Never understand why Faber doesn't 'get' this. I suspect he's mostly just trolling for Austrian hits.

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Some of the (what would have been) US investment has simply relocated to China to produce the same goods more cheaply and increase profits for US entities.

It's not very worthwhile looking at the US unless you also look at China. Chimerica.

Without the expansion in US deficits and US debt, China wouldn't have invested in production.

Never understand why Faber doesn't 'get' this. I suspect he's mostly just trolling for Austrian hits.

I see, so your "deficit" with Sainsburys is the cause of your lack of production of food. RKainsburys.

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I see, so your "deficit" with Sainsburys is the cause of your lack of production of food. RKainsburys.

Of course not. They're not buying my bonds.

It is however more efficient for me to use my capital buying grapes etc imported from the Cape using Sainsburys and their buying power and supply chain rather than flying out to South Africa myself to pick them up every week.

Edited by R K

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Of course not. They're not buying my bonds.

It is however more efficient for me to use my capital buying grapes etc imported from the Cape using Sainsburys and their buying power and supply chain rather than flying out to South Africa myself to pick them up every week.

Im puzzled where the purchase of bonds comes into the trade deficit equation....globalisation has moved production to the cheap industrials of China and other Countries....Im sure the Chinesee need not have used their profits to buy any particular bonds...lucky for the US there were people out there willing to borrow, otherwise it could well have been time to balance the budget some years ago.

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Some of the (what would have been) US investment has simply relocated to China to produce the same goods more cheaply and increase profits for US entities.

It's not very worthwhile looking at the US unless you also look at China. Chimerica.

Without the expansion in US deficits and US debt, China wouldn't have invested in production.

Never understand why Faber doesn't 'get' this. I suspect he's mostly just trolling for Austrian hits.

But it is a black hole...a DEBT spiral.

Wake up!

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Im puzzled where the purchase of bonds comes into the trade deficit equation....globalisation has moved production to the cheap industrials of China and other Countries....Im sure the Chinesee need not have used their profits to buy any particular bonds...lucky for the US there were people out there willing to borrow, otherwise it could well have been time to balance the budget some years ago.

Clearly.

That's utter nonsense. The US trade deficit with China = China buying US bonds. The capital accounts have to balance.

If China bought someone else's bonds but still decided to run a trade surplus with the US then someone else would be forced to buy US bonds.

I'm incredulous you still make posts like this frankly. Global trade MUST (and does) balance. That's why they're called trade balances.

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Clearly.

That's utter nonsense. The US trade deficit with China = China buying US bonds. The capital accounts have to balance.

If China bought someone else's bonds but still decided to run a trade surplus with the US then someone else would be forced to buy US bonds.

I'm incredulous you still make posts like this frankly. Global trade MUST (and does) balance. That's why they're called trade balances.

Why must it balance with a particular entity?

As I said earlier, you buy from RKainsburys....you run a deficit with them...yet your books balance...you run a surplus with someone, its not RKainsburys though.

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Why must it balance with a particular entity?

As I said earlier, you buy from RKainsburys....you run a deficit with them...yet your books balance...you run a surplus with someone, its not RKainsburys though.

US trade deficit DOESN'T have to balance with China. But it DOES have to balance with the rest of the world's surplus overall.

It just so happens that the largest deficits and the largest surpluses are the ones that matter.

But as I said in previous post, China can run it's own trade deficits with other countries (buying commodities from Australia or South America for instance) which will force those countries to run trade surpluses with China, which in turn will come back to the US as a trade deficit overall. The US current a/c deficits must de facto be balanced by a surplus on their capital a/c i.e. US receives inward capital flows. e.g. They create US treasury bills and bonds which they sell to China. China buys these quite happily to reflect China's exports to the US, job creation for tens of millions of happy migrant workers, and prints up Renminbi against these US treasury reserves to ensure the happy Chinese workers have domestic currency to spend.

Read it for yourself - it's a very simple concept. Current a/c surplus are balanced by capital a/c deficits and vice-versa, and the global sum of all flows balances out. There is no other entity involved (e.g. the moon) so they patently must do.

http://en.wikipedia.org/wiki/Balance_of_payments

http://en.wikipedia.org/wiki/Capital_account

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US trade deficit DOESN'T have to balance with China. But it DOES have to balance with the rest of the world's surplus overall.

It just so happens that the largest deficits and the largest surpluses are the ones that matter.

But as I said in previous post, China can run it's own trade deficits with other countries (buying commodities from Australia or South America for instance) which will force those countries to run trade surpluses with China, which in turn will come back to the US as a trade deficit overall. The US current a/c deficits must de facto be balanced by a surplus on their capital a/c i.e. US receives inward capital flows. e.g. They create US treasury bills and bonds which they sell to China. China buys these quite happily to reflect China's exports to the US, job creation for tens of millions of happy migrant workers, and prints up Renminbi against these US treasury reserves to ensure the happy Chinese workers have domestic currency to spend.

Read it for yourself - it's a very simple concept. Current a/c surplus are balanced by capital a/c deficits and vice-versa, and the global sum of all flows balances out. There is no other entity involved (e.g. the moon) so they patently must do.

http://en.wikipedia....nce_of_payments

http://en.wikipedia....Capital_account

OK, so we have established the Double entry bookeeping of national entities balance just like everyone elses do.

So, what has this to do with one particular entity, say China....

of course, a trade imbalance is bad for an extended period of time...thats obvious as the entity running a loss is doing just that..losing wealth by the hour.

balancing is almost irrelevent in the reality...like a body stabbed, a loss of blood is balanced by a pool of blood on the floor, the result is a dead body...that is the issue.

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