• jeremyburfoot1

Checks and Balances

I was discussing the world's economy a few days back with a very successful and wealthy businessman. I ventured that the whole thing was a house of cards and would inevitably crash, either slowly but surely, or at great speed due to some black swan event. He responded that it couldn't happen these days because there are too many checks and balances. I asked, "What are these checks and balances?" The response was, "According to my financial advisers, rules have been put in place since 2008 to stop it from happening again." "What are these rules?" I asked. There wasn't an adequate response to this because there couldn't be. After 2008, a few half-hearted rules were put in place that were then walked back over the following years so that the big players could resume regular profits and bonuses. In the meantime, since 2008: US debt has risen from 68%($10 Trillion) of GDP to 124% ($30 Trillion) of GDP. The US Federal Reserve balance sheet has expanded from $1 Trillion to nearly $9 Trillion. Worldwide debt has effectively doubled to over $300 Trillion Shadow banking debt(UNREGULATED financial intermediaries which were at the centre of the 2008 crisis) has doubled to over $50 Trillion. Derivatives outstanding are currently estimated at between $650 Trillion and a Quadrillion. These played a large part in the 2008 crisis. Interest rates since 1980 have slowly but surely reduced from 20% to 0% and are soon headed back up. Note: A trillion is $1,000,000,000,000. A quadrillion is 1,000 trillion (In the long scale). Central bankers, until recently, have been falling over themselves to print more money and support failing asset classes, but now, it seems they have painted themselves into a corner. Inflation has arrived, and in order to fight it, they have to raise interest rates and reduce their asset holdings. They will tell you that they are confident they can do it without causing a recession, but that is just more bluster than reality. At a US 10 year bond yield of 3%, many nasty things will start happening. As I write, it's 2.93% and rising. If any realistic checks and balances could have been achieved after 2008, they would have been headlined by breaking up all the institutions deemed 'too big to fail'. Did this happen? Well no. Actually, they just got bigger as they hoovered up the failed banks from 2008. There is something morally sickening about institutions that can take any risk they want for personal profit, knowing that the taxpayer will bail them out if things go wrong. The taxpayer should be irate, but mostly they aren't because they have no idea what's going on. At this point, I planned to raise some other issues, but I'll need to take a break because the numbers have scared me so much that I'm off to hide under the bed for a bit. So talk amongst yourselves for a while, and I'll be back. Right, I'm back, and my nerves have settled a little, so I'll get on with the story. So there are no checks and balances except fear, greed, and human nature. But because the last two generations have never really seen anything terrible and have only ever seen interest rates go down and assets go up, they think they are invincible. So at the moment, greed rules the roost. It doesn't do any good to tell the average person anything about this because you get accused of being a doomsday merchant. After all, all their 'experts' are telling them otherwise. And what would I know compared to an expert? Financial advisers will rarely admit that anything is wrong as their whole business model relies on gaining fees from you investing money. So what good would it do them telling you that, chances are, you'll lose money? Real estate agents are the same. They trot out all sorts of cliches and reasons why property will go up forever. I tend to find their bullshit quite offensive because it assumes you are a fool. But on reflection, perhaps they really believe what they are saying. Who knows? I had one agent friend tell me recently that raising the minimum wage would help push the property market up. I asked, "Mike. Who on the minimum wage can afford a house in this country?" Another agent who is not a friend told me recently that Auckland property was guaranteed to go up 15% per annum for the next five years. I asked him how this was guaranteed. He replied that his mate in the ASB bank had told him. I told him he was/is an idiot. So that's a summary of the markets, but it would be remiss of me not to comment on the general structure of New Zealand's economy. So to do that, I'm going to borrow some theories from Economics 101. The first theory is that a country's prosperity is inversely proportional to the amount of corruption in it. In places like Pakistan, corruption is endemic, and as a result, their economy is, shall we say, not very robust. But we here in New Zealand should not be too quick to pat ourselves on the back. I've seen an awful lot of corruption and mutual backscratching in my relationships with friends in various industries. Most think it's more 'clever' than corrupt, but corruption is an insidious disease, and it spreads quickly if you don't cut it off at the knees. The second theory is that a country's prosperity is equal to the sum total of all the productive work of its residents. So let's take a deep dive into that and look at what New Zealand has become. We have a population of about 5 million. The number of working-age people (Aged 15 to 64) is about 4 million. Welfare recipients in the working-age group are about 350,000 So there are 3,650,000 workers contributing something. But what are they contributing? In the old days, things were reasonably efficient. If a house needed to be built, all the men in the town except one would turn up and build it in a couple of days. The women would feed them and look after the kids. The one remaining guy would be making beer for after each workday. There were no consultants or councils requiring resource consent or other parasites wanting to clip the ticket. The job just got done. Only productive work happened. These days it's the complete opposite. 'Parasites' absorb a large percentage of the costs of anything substantial. Resource consent by councils and consultants who work with councils come to mind. The consultants only sign off work with provisos that they must be consulted multiple times in the future throughout a job. Health and safety companies have successfully convinced legislators that their services are essential. Road safety companies have become big business. If the New Zealand economy's prospects are inversely proportional to the number of road cones and stop-go signs, then we are in big trouble. Most of you would have seen the big road safety trucks with their bright traffic control arrows. Every time I see one slowing up progress, I mutter," What are these f**kers doing now." They even put two of them on the side of the motorway when some bloke is picking up rubbish with a pointed stick 20 metres off the road. Yet, every day we all drive towards oncoming cars, a few metres apart, unseparated, and with closing speeds of 200kph. Shouldn't we all have a safety truck to accompany us? It won't be long! The meth lab cleanup scam was another example of people ripping off the system. Maori co-governance and big government are other examples of a massive waste of resources. Recently we read that the government spent around $60 million on investigating an Auckland Harbour bike bridge. How is this possible? Has no one asked for a breakdown of the $60 million? Where did the money go? Consultants and engineers? I want some of that action. For about a million a year, I reckon they could run a bike ferry back and forward across the harbour, which would be efficient and fun. Did no one think of this? The system's efficiency is what's important, yet we have this vast parasitic drag on it. It's hard enough for an economy to work without all that. It can't possibly work in the long term the way it is now. Burglars and gangs are not subject to all these inefficiencies, so they are thriving, of course. It wouldn't be practical to plan a burglary or drug deal delivery and involve risk analysis, safety consultants and the like, so they don't. Having a bunch of safety wonks standing around a house with hard hats and clipboards and telling the burglars that someone needs to hold their ladder just doesn't cut it. And imagine applying for a road closure and giving the reason,' To ensure no one is hit by the getaway car'. So returning to my figure of 3,650,000 workers, how many are actually being productive? As my grandfather would have put it, how many are doing an honest day's work? It would be an interesting task to define the numbers. There would be lots of howling and pulling out of hair by the main offenders who are sucking the system dry. Burglar getaway car drivers and gang delivery car drivers would say that they were doing honest work, but I doubt that could be justified. I would hazard a guess that less than half of the 3.65 million are doing an honest day's work. That's a sobering thought. Moving on, a short comment about MMT or modern monetary theory, if I may. Its become popular amongst even seemingly intelligent people to support the concept. That is, the government can keep printing money forever and not worry about the debt. If this was actually the case, then we should all stop paying taxes, go to the beach and have cases of Dom delivered to us there. Please don't ask me who's going to deliver it because no one will be working. Suffice to say, MMT doesn't work. So, in summary, where do we all stand? Well, with supply chain disruptions, imminent deglobalisation, rising inflation, rising interest rates and war, dreams of soft landings are just that. So next time you see a consultant wearing a safety hat and holding a clipboard, take the hat as you'll need it to protect your head when the sky falls. And as for checks and balances, I would recommend that unless your investment portfolio is fully conservative, going forward, you don't check the balances.


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