Back in the 1930s, the humorist Will Rogers coined the term “Trickle Down Theory.” He meant to ridicule the idea of spreading aid and support to the top tier of society, on the expectation that it would eventually “trickle” down to the broader population. John Kenneth Galbraith, perhaps the best known economist of the post-World War era, had an earthier definition of Trickle Down Theory — “the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.” Dr. Rexford Tugford, who was part of the braintrust of the Great Depression-era Hoover administration and agriculturalist, saw it as “[…] trying to fertilize
Source: Eric G. Lewis
(The cartoon below makes light of this strategy. Source: Source: Eric G. Lewis.) Perhaps eventually, the banks may again begin lending aggressively. The more likely outcome is that when this finally happens, the banks will be lending money for the purpose of financial speculation. This will only contribute to a further asset inflation in asset markets … an even greater decoupling of the financial world from the real economy. While it may delay another round of financial collapses, it only serves to worsen them when they do again occur.
On another front, central bankers have been specifically attempting to levitate asset markets (primarily bond and stock securities) by artificially keeping interest rates low. The working (and desperate) theory is that if stock and bond markets can be made to rise in price, then people will feel “wealthier” and be more inclined to spend. Yes, various economic studies have shown that there seems to be a relationship between “economic well-being” and spending levels. But this impact is very low. At best, it is likely to be largely ineffectual at this time. Why? For one, most people are in a “bunker” mode, striving to save and pay down debts. Secondly, and this is the most important reason, the wealth skew is now so extreme in America, that rising asset markets will largely accrue to a very small number of households. As Galbraith quipped, feeding oats to these wealthy households, at best, will provide a few “road apples” for the chickadees to feed upon.
The more serious worry about these “trickle down” policies is the tendency to produce a greater decoupling between the financial and industrial economies. What this means is that financial markets may very well hold up — perhaps even rise sharply — even as overall economic conditions remain difficult for the majority of households. But that will only makes matters worse over the longer-term. Here are listed 10 contributing factors:
1. Financial Decoupling: First, financial circulation today has decoupled from industrial circulation (in other words, the “real” economy). Ultimately, a painful convergence of the two is unavoidable. It is an era where “Financial Capitalism” has trounced “Production Capitalism,” … of “wealth extraction” versus “wealth creation” or as the old German school of economist used to term the distinction, “raffendes kapital” (grabbing capital) versus “schaffendes Kapital (creative capital).” Today, rather than money being in the service of mankind, societies have been taken into the bondage of servicing money. Whenever such a state of affairs has occurred in past history, it has ultimately led to a demise of that society. Unless things change, this same outcome is likely to befall America, Canada and a host of other countries. There exists hundreds of books written over the last 200 years, warning of these consequences. Yet, Wall Street’s economists remain largely ignorant or quiet. To this point, the largest industry in the world has been saved from annihilation, more than a few major financial institutions having been rescued through government intervention. It is back to usual; but now manufacturing financial wealth with even bigger “too big to fail” financial companies than before. If the G20 has its way, a select group of 20 global financial institutions will be ring-walled and preserved as the world’s financial backbone.
2. Policymaker Posterity: By hook or crook the deflationary financial implosions of the past few years must be stopped … flooded and averted, or so policymakers may think. Central bankers, like politicians, worry about their posterity. They do not want to go down in history as having been the captain of the White Line’s Titanic. Instead they will want to arrive triumphantly on the command deck of a high-floating Cunard QE II. As such, they must err on the side of excess … of not failing to attempt any and every technique that could possibly contribute to an economic recovery, no matter how marginal.
3. Big Monetary Polluters. By extension, for at least a time longer, the central banks of three of the world’s four largest economies will not consider ending QE (Quantitative Easing, namely the UK, the U.S. and Japan). They will not tolerate rising interest rates because it does not meet orthodox theory for a period of low economic growth and low price inflation. It’s as if the Fuzzbuster has signaled the “all-clear” for the next 10 miles. The message? There will be no speeding tickets issued for “pedals to the metal.” Given such an environment, what’s a hedge fund manager to do?
4. Save Slavery. Those households dependent upon interest income (primarily the elderly) or households that have yet to buy retirement income, are being savaged by the most brutal and virulent inflation of all. The price of retirement has soared. And this, at the very time that a dominant demographic group that is nearing retirement (namely the “boomers”) has grossly under-saved. Conventional monetary theory does not recognize such dynamics as resulting from inflation. But, explain that to a 50-something who now realizes that they will have to nearly triple their personal savings rate (or investment returns) relative to a decade ago. Currently, based on average U.S. production-worker income, it requires more than 50 weeks of labor to buy an equivalent week of either equity dividends or 5-year interest income. This demographic group could choose to respond in several ways. Soon-to-retire households will boost their savings and reduce consumption. Or they may “go for broke” and take on much investment risk. Either outcome adds fuel to securities markets.
5. Deepest Channel. Monetary liquidity, like water, travels in the channels of least resistance. Central banks can only stimulate that which wants to be stimulated! Currently, monetary channels into the real economy remain calcified. Households are not expanding their borrowing and the corporate sector is not yet spending their cash hoard. More likely, during periods of slow economic growth and low interest rates, corporations are likely to resort to financial engineering, promoting takeovers and acquisitions. In short, QE and/or monetary expansion will tend to find its outlet in security markets, not the real economy. This further corroborates point #1 — Financial Decoupling.
6. Stealth Wealth. The most nefarious impact could be the policy shift to wealth theory. In the Age of Global Capital (though we now appear to be in a period of its demise), wealth is seen as being the market value of financial paper, securities and “balance sheet” assets. Quoting an article that famously laid bare this shift to disregard incomes and profit as the real underpinnings to wealth:
“Securitization — the issuance of high-quality bonds and stocks — has become the most powerful engine of wealth creation in today’s world economy. […] Overall, securitization is fundamentally altering the international economic system. Historically, manufacturing, exporting, and direct investment produced prosperity through income creation. Wealth was created when a portion of income was diverted from consumption into investment in buildings, machinery, and technological change. Societies accumulated wealth slowly over generations. Now many societies, and indeed the entire world, have learned how to create wealth directly. The new approach requires that a state find ways to increase the market value of its stock of productive assets.” (John C. Edmunds, Securities—The New Wealth Machine, Foreign Policy, Fall 1996, pg. 118.)
Without question, policy makers are counting on the “wealth effects” — as little as they may be — of soaring securities markets to stimulate spending.
7. Equity Thermometer. According to the comments of central bank policymakers, equity market trends are being considered as the indicator of QE success. During past periods of QE in various countries, there has been a fairly close correlation between the two. If stock markets are rising, then this is popularly taken (though wrong) as an indication that economies are improving. This being the case, it suggests that QE will continue or be further expanded until equity markets have risen.
8. Innate Preference. Not surprisingly, people prefer asset inflations to asset deflations. Asset inflation is the sweetest, most alluring, deceiving inflation of all. It feels good on the upside.
9. Institutional Reason for Existence. A cornered animal will behave differently than one that is not. The same applies to institutional and professional investors. There is no lack of cornered asset managers in the world. For example, they may be managing an underfunded pension fund. At a time of extremely low interest rates, asset managers may succumb to the lure of risk-taking to secure capital gains. Yes, it is true that GFC trimmed the risk appetites of many investors, including large institutions and pension funds. However, a period of incessant asset market gains and velocity inflation will in time surely change sentiment.
10. Willingness to be Deluded. Finally, people these days want to be deceived. There is so much grim news, uncertainty and hardship that bouncy financial lunacy will attract its believers. It is only human to hope. If doom can be deferred through delusion, it will be.
There are so many people inescapably intertwined with the non-sustainable system of prosperity — cheap oil, debt, consumption, cheap calories, and amusement — that they virtually must choose to lie to themselves rather than to face the facts and the inevitable. (See American Theocracy by Kevin Phillips) As Aldous Huxley said “Most ignorance is vincible ignorance. We don’t know because we don’t want to know.”
Will global financial markets first enter a period of alluring decoupling, before succumbing to another round of crashes? This is already happening. Will there be one more massive asset inflation of securities markets … the last death rattle of an over-indebted, over-inflated financial system? This certainly would fit the prophetic timeline as the final collapse does not occur before the latter half of the Great Tribulation. When and if this does happen, professional investors cannot afford to miss it. It would be viewed as the last money-making opportunity — the “last call.” In effect, an opportunistic money manager ethic can produce an organized collusion to produce a mighty asset inflation. Is this fantasy? It is possible. Why? Because corruption and materialistic greed is rampant everywhere.
In the meantime, there are plenty of unhealthy signs monetarily, economically, geopolitically … actually everything. Many regions of the world, sectors and large swathes of U.S. households are already living in a Great Depression II. All of these conditions and developments (too numerous to mention) guarantee — yes guarantee — that even greater financial troubles lie ahead for the world in future years.