Guest Post: "A Mathematical Certainty", by Thad Beversdorf

24
Fri, Aug 21, 2015 - 11:43am

I found this at ZeroHedge a few days ago and I like it so much that I contacted the author via twitter to ask if we could reprint it here. He accepted the invitation I'm very please to post it here as required weekend reading.

So what is it about this piece that makes it such an important read? It's this...

How many times have you looked around and thought: "Gee, my wife and I work our butts off and still can't get ahead. My parents were able to work, save, put kids through college AND have money left over but my generation can't possibly do that. It takes everything we have just to stay afloat."

The answer to this question lies with The Federal Reserve system and the unlimited creation of fiat dollars demanded by politicians and bankers since the closing of the gold window in 1971. In the article below, the author explains in relatively plain English excatly how and why this is the case. It's a must read for everyone and it's also something that you should print off and add to your SFP (Stack For Posterity)...and, no, this is not meant as a ringing endorsement for Sanders 2016. The video just comes with the article.

TF

"A MATHEMATICAL CERTAINTY"

by, Thad Beversdorf

Original link here: https://www.firstrebuttal.com/an-almost-perfect-predictor-of-gdp-growth-...

I recently watched a video clip of Bernie Sanders laying the boots to Alan Greenspan back in 2003, for Greenspan’s seemingly out of touch perspective of the average American. Now while we do have a repentant banker in Greenspan, a rare phenomenon for sure, I found the scolding interesting in that essentially every accusation Sanders lays on Greenspan could be repeated today to our subsequent central banking gods. During the video notice that all the figures Sanders explicates not only remain true today but have gotten far worse. Particularly note the national debt figure which has now increased by more than 400% since then!!! The clip is well worth the 5 minutes.

So let’s dig in a little to what Bernie is really saying to Greenspan. The overall theme of the trouncing is that the Federal Reserve, the keeper of American monetary policy, had implemented policies that clearly had done significant damage to the vast majority of Americans. Specifically Sanders is suggesting that the policies were a cancer to the economic prosperity of Americans and all the while creating extreme wealth for a select few. And while that is bad in and of itself, what Sanders finds despicable is that the Fed seems to not only deny the harm they were responsible for but Greenspan seemed to be alleging success by focusing solely on the massive wealth it had provided to the very few on top.

Now in a recent whitepaper by Stephen Williams, VP of the St. Louis Fed, a case is made that the Fed’s ‘recovery’ policies have not helped to boost the economy. And while I agree with that conclusion, I feel the paper is a fraud. Not only on the surface of that argument does it create a false dichotomy of either helped or not helped (dismissing the idea that the policies may have actually been harmful) but Williams explicitly suggests the policies were not harmful to the economy. And that was the real intended message. Remember nobody publicly denounces their employer without being fired. And so if Williams keeps his job we know that this message was a coordinated message. Further, by the structure of his argument the objective is clear. The Fed is already setting up the argument that while they were not entirely effective in a recovery they are not to blame for the inevitable second coming of the credit crisis (a definite dead canary).

You see the problem comes down to the moral hazard created by fiat currency. Specifically, I mean that when you have essentially infinite resources you become very careless about each unit of resource. Subsequent to ending Bretton/Woods in 1971 the US has succumb to such a moral hazard. This is clear when looking at the collapse of fiscal discipline immediately following the end of Bretton/Woods, which was a quasi gold standard that necessitated fiscal discipline. (click chart to enlarge)

And so that chart tells us the moral hazard absolutely exists but it doesn’t explain why that is bad. To do that we need to look at a visual representation of this moral hazard and its respective destructive characteristics over time. But before we do let’s remember, as I recently laid out in some detail in The Fed’s Fatal Flaw, the central banking system is designed to require perpetually increasing money stock. The reason is simple. The Central Banking Act of 1913 was designed by three banking families (refer to Jekyll Island) whose profits expanded along with money supply. And so a system that necessarily required the expansion of money supply was to create immense wealth for banking families that drafted the Bill. While that is certainly unethical, it is the destructiveness of such a system that is the real evil. The system is such that profits for the very few come directly at the expense of the masses. Let’s look deeper into this matter.

What must be understood but seems to be lost on most PhD economists today is that money in our system can either be a fuel or a drag, but it cannot be neither. Remember that our system attaches a unit of debt to each unit of currency. That means that each unit of currency must return an amount greater than itself. If it does, it is fuel. If it doesn’t it is a drag.

The problem then with the system is the destructive force inherent of the moral hazard (having the ability to create infinite currency) as depicted in the next chart. That is, currency created and used for consumption rather than investment becomes a drag rather than a fuel and the economy becomes less efficient. This increasing inefficiency has been occurring since the end of Bretton/Woods or since the beginning of the moral hazard. That said, you will never hear very intelligent but also very disingenuous guys like Alan Goolsbee discuss the secular economic deterioration as it doesn’t suit their role of policy champions.

The following chart depicts corporate domestic investment as a percentage of M2 money stock (blue line) and real GDP (red line).

What becomes immediately apparent is the correlation between the percentage of money stock being used for corporate investment and real economic growth and the significantly negative slope of both.

One might wonder then what are corporations doing with their money if not reinvesting it?

Well the answer is clear. While for decades domestic investment (i.e. fixed capital reinvestment) as a percent of money stock averaged around 8% today it has declined to about 5%, a 40% decline. On the other hand corporate dividend payments (green line) have increased to a 15 year average of about 7% from 4% of money stock, a 75% increase. So each year, 3% of money stock is being reallocated from private domestic investment to corporate dividend payments. And make no mistake, dividend payments do not fuel the economy as some +90% are reinvested into the secondary market. An investment which provides almost no economic benefit (with the exception of very few secondary offerings that add cash to corporate balance sheets) as opposed to domestic fixed reinvestment which is pure economic fuel.

But let’s take a closer look at the moral hazard and its direct implication on the economy.

What we see by adding trendlines to both parameters is that very shortly after the US went to a pure fiat currency in 1971, domestic investment as a percentage of money stock began to drop, resulting in the secular deterioration in real GDP that continues today. I say resulting rather than mere correlation and let me explain.

Again the reality is that excess money stock is a drag on the economy because each unit of money stock necessarily has a unit of debt attached to it. Logically then, as the percentage of money stock allocated to investment (meaning potential positive net returns) declines the percentage of unpayable debt (attached to the uninvested money stock) requires the perpetual rolling over of ever more debt.

This results in massive drag on the economy because remember that mathematically debt used for consumption rather than investment is a net negative on medium and long term output. The implication is that while all debt gets included into current GDP (through its expenditure today), all consumed debt plus interest is removed (paid back) from output later on. This effect is not easily seen because the reduced medium and long term output is being continuously offset by even more consumer debt.

So what we’ve ended up with is a death spiral of economic prosperity dressed in sheep’s clothing. The above chart depicts that every worker in America today has increased their consumer debt levels by about 40% since the ‘end’ of the credit crisis. Think about that for a moment. Perhaps the most destructive economic collapse in history that was triggered by excessive credit has led American workers to take on 40% more consumer debt.

Allow me to digress for a moment about the concept of consumer debt and why if it is such a destructive thing policymakers would allow it to continue its record expansion. Think of it like this; where a purchase made with earned money is a two party transaction a purchase made on debt is a three party transaction. Essentially banks become a party to every consumer transaction that is done on debt. And so banks essentially are feeding off of every transaction between a consumer and a proprietor. In the natural world we call that a parasite. For the corporations the parasite is helpful because it magically turns the consumer’s debt into profit and so they don’t mind. However, for consumers, the transaction doesn’t end after they eat the candy bar. The debt not only remains, it builds, and so the parasite slowly deteriorates the consumer’s ability to prosper. But because the parasite controls the economic policies of the nation the policies actually drive the indebtedness that we see in the above chart which benefit both the banks’ and the corporations’ profits but to the detriment of the working class (discussion as to the borrowers’ responsibility in the matter won’t take place here but I will note the data today suggests more than ever consumer debt is being used on inflating staples – healthcare, food and rent – rather than discretionary purchases).

And yet we are told by the very elite PhD economists that the credit crisis ended back in 2009. And worse we are told that the expansion of excess credit will end differently this time around. And still worse, any Americans who actually have savings have been forced into bloating equity valuations (along with corporations for the same reason but from the other side of the coin) because interest rate securities have been set to return effectively nothing.

The above chart depicts income from private savings (using the 2 yr rate as a proxy, which is likely being generous today) has declined from about 2.0% of GDP in the early 1980’s to 0.6% in 2000 to around 0.2% today. And so while consumer borrowers have been forced into a state of perpetual borrowing, savers has been forced to lend money into secondary markets which will once again be transferred to the very few upon the inevitable next market crash. A crash that is already being signaled around the world.

So when we watch guys like Bernie Sanders get visibly angry at guys like Alan Greenspan it behooves all of us to go beyond the entertainment of it or some prima facie agreement and to truly understand why the anger is justified. When we do we will be asking why in the hell is no one yelling at Janet Yellen??

Economics has become hostage to academia where PhD’s want to ring fence the subject with statistics and calculus to ensure only those who have done the very narrow and otherwise irrelevant studies can play. But economics has very little to do with stats and calculus. Economics is a subject of interrelatedness based on logic with a little basic math thrown in.

If we were to all take the responsibility to understand the lifeblood of our American existence i.e. the economy, we will most certainly be moved to remove not only the policymakers but the system that together serve only those at the top of the economic food chain and at a cost to the rest of us. At the end of the day the system is a zero sum game in a monetary system that is based on trading a unit of currency for a unit of debt. There is no other end than a bad one and I’m sorry my friends but that is a (simple) mathematical certainty.

About the Author

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  24 Comments

BIGNASTY
Aug 21, 2015 - 5:04pm

Lost mind..............

Since when have the boomers been called the Greatest Generation? I'm with you on the boomers selling their children future. But the GI/Greatest Generation,eats boomers and shat Xers. Sorry, but it's true. I'm an Xer if it matters.

goldcom
Aug 21, 2015 - 5:19pm

Totally agree Lost Mind

I'm a Baby Boomer and there are few my age and older I like much anymore. I've been preaching generational theft to those I can but few listen or want to hear. Sad to say though, my son a generation x'er himself was instrumental to me with his support of Ron Paul and why I listened more intently to Dr Paul who explained sound money principals leading to why I'm even here. Well, he is now a raging Socialist/Progressive, but deep down he knows better, and when the big kick the can down the road fails I think he will figure it out.

coin collectress
Aug 21, 2015 - 5:32pm

@Goldcom - Lost Mind

Ditto with my son. He got our attention after doing his own research with Bill Still, Aaron Russo, and the great Ron Paul.

lakedweller2
Aug 21, 2015 - 7:23pm

@several

The Greatest Generation was a book and TV documentary or something...Bilderburgs and other people that were into self aggrandizement until the truth started surfacing in the blogs. More spin crap from the media bought out by those calling themselves TGG. So bullshit is the theme and truth is nothing more than covering the goal of theft and transfer of wealth ending in the NWO. So move along ... More of the same.

SteveW
Aug 22, 2015 - 12:13pm

Beversdorf

makes some good points but IMHO somewhat misses the mark.

It is not a peculiar feature of the Fed that the system requires monetary expansion. The same is true of any currency/money loaned at interest since the interest can only be derived from monetary expansion.

More serious though is the idea "That is, currency created and used for consumption rather than investment becomes a drag rather than a fuel and the economy becomes less efficient." This implies that credit used for investment is not a drag on the economy. But much of our current problem is the tsunami of credit that has been used for investment over the past 40+ years that has created excess industrial capacity. For example China is reported to have used more concrete in 3 years than the US did in the 20th century. In contrast Beversdorf focuses on the obvious terminal phase of mal-investment, crony capitalism, and the fraudulent criminality or unethical self-interest so evident today in corporate buy backs.

https://www.washingtonpost.com/news/wonkblog/wp/2015/03/24/how-china-use...

Credit used for over or excessive investment or mal-investment is eventually a drag on the economy. So now we see the collapse in oil, copper, iron ore and other industrial inputs as the over heated global economy contracts and individual producers maintain production to hold market share and keep their company solvent.

I've been of the opinion for almost 50 years that much of economics is bunk (unscientific) and the worship of GDP expansion is crazy. A sea change is necessary to reflect that incessant expansion of GDP is not necessarily more desirable than stability and sustainability. One alternative approach is the Happiness Index developed by the New Economics Foundation, that focuses more on individual well being rather than slavishly focusing on "growth".

https://en.wikipedia.org/wiki/Happy_Planet_Index

I read this earlier this week and had my objections, as noted. Thanks for posting this thought provoking article for discussion.

SteveW
Aug 22, 2015 - 12:41pm

@LostMind

No point blaming the individual baby boomers (although I married one, I'm a war baby myself). The tragedy lies more with Nixon, or Kissinger, who rather than revaluing gold and thereby transferring more power to the Europeans, who had acquired gold from trade in the 50's and 60's (especially Germany) decided to promote US hegemony by doing a deal with the Saudi's to create the petro-dollar.

The details are well known but these are the folks responsible not the individual boomers who have no more power than you have to influence elections. While some of the boomers are indeed selfish a**holes I also see them as Walmart greeters and understand that many over consumed during their working years and have no pension savings.

Regarding life, liberty and the pursuit of happiness, 9/11 happened. The Patriot Act and its Homeland Security is simply a redux of the Fatherland. Obvious in 2001 and glaringly obvious now.

SS121
Aug 22, 2015 - 1:32pm

All Currencies Will Be Silver And Gold "Backed" When Charts End

The system charts have overinflated prices on all the things the folks use in their daily lives. And depressed the prices of Silver and Gold to perpetuate the fiat system.

Don't be surprised to see food, energy, construction stuff etc all much cheaper, while physical Silver and Gold are going for many thousands per oz. and system pixels (stocks, options, etc) going :::poof:::

People will still be paid in currencies, and currencies will still buy food, cars, clothes, gas, ..., ..., etc. The "charts" will just no longer determine the value for Silver and Gold. This will create a situation where all investment/savings minded people will want Silver and Gold.

They will be trying to dump all things pixel and transition to phyzz.

The system will be killing the USD on their world of charts and media stories, but the real world use of the currencies is the arena that will things will then be playing out. i.e. if the USDX went to zero, ...Bob still cuts hair for 15 bucks, and Jim's Cafe still sells the Daily Special for 10 bucks. Whether the USD chart is at 300 or 3.

The charts are believed to come from the markets, yet they definitely do control the prices of all things main st. This connection is what is ending. That is all.

You do not want to be positioned in anything Wall St. It will vaporize like the little pixel dream that it is.

The media constantly talks currencies, but the system's secret power is it's charts. That's why the legitimacy of the charts themselves are NEVER discussed (except here).

So, this maybe an oversimplification, but the currencies will continue based on the momentum of their use by the people, and they will become free market "backed" by Silver and Gold to the extent that they are exchangeable for Silver and Gold on the free market. All after the charts and "market" pixels have ceased to be relevant or exist.

Way different than the failure of currencies that has occurred throughout history. Because- This is not a fiat currency based global economy. This is a fiat system based global economy.

The system (media) is trying to leverage memories of fiat currency failures past by projecting the system's current woes on the USD. They hope to replace the USD, frame it all as one of the many cyclical changes in the world's reserve currency, and then extend the system of control under the flag of that next new world reserve currency.

It's actually the USD's position of world currency standard that they want to replace. Which again is why they never discuss that position and instead keep things in the 'reserve currency' context. But that's a whole other story and since nobody is probably reading this anyway,.. i'm going to go get a turkey sandwich. with lots of horseradish sauce and hopefully some sharp cheddar if there's any left. . .

lakedweller2
Aug 22, 2015 - 4:28pm

@ss121

I was following you until the horseradish.

silver66 SS121
Aug 22, 2015 - 5:54pm

SS121 'backed' currencies

People will still be paid in currencies, and currencies will still buy food, cars, clothes, gas, ..., ..., etc. The "charts" will just no longer determine the value for Silver and Gold. This will create a situation where all investment/savings minded people will want Silver and Gold.

Nice post, but I got to tell you. When I read what you typed and posted I thought of Freegold(sorry about that ).

To me the whole ten thousand pages that have been written on that subject is this.... save in gold and spend in currencies.

Or put another way, governments will not give up their fiat but your savings will not be measured with a measuring stick that they can devalue they will be measured in true money. If governments print more fiat our savings will not be hurt

Silver66

Stack till it hurts

imfd
Aug 22, 2015 - 6:42pm

SS121 for A2A

TF, what`s your thoughts ?, I know Turdville has often opined that one of our own would be great for an A2A and SS121 would be a great start, plenty of talent out there I know but just sayin`...have a great weekend everyone, first beer of the night is now due, cheers !

SS121, hope you don`t mind my suggestion, it is well intentioned.

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