The Bank Bubble

As frequent readers may know, the mariner is at once a progressive dreamer, skeptical of human intelligence, a critic of politics in general and an alarmist about the ability of international cooperation to solve global issues. Angst should be a four-letter word.

This morning I read news about everything becoming more difficult, especially in the economic sector. Since about 2005, central banks around the world increasingly support national and international economies. Each year, pressure on the banks’ “finger in the dike” grows. Central, AKA government banks, AKA the Federal Reserve Bank in the US, are leaning against global debt, trying to prevent inflation, rising interest rates, shifts in monetary value between nations and waiting, waiting, waiting for someone’s economy to grow – anyone’s!

This morning, it was bad news about Europe. The European Union central bank has little influence over monetary exchange policies between member nations. Managing monetary policy in the EU is quite truly like herding cats. As a result, the EU GDP slipped noticeably. Add to this the unstable relationship with Russia, which supplies forty percent of Europe’s natural gas, and things don’t look good. Europe, combined with the US market is the largest international economy in the world – at the moment.

Real return on Treasury notes has been dropping steadily for twenty years; inflation, around 2+ percent, makes real return less than the 3% ceiling that has been held in place by the Federal Reserve. Each year’s inflation diminishes return value further. Consequently, several investment houses have begun dumping their Treasury holdings. PIMCO, the largest investment firm, is leading the way.

What this means to national economic policy is that the US is in no position to bail out the EU. If the EU economy continues to slow, the US can only slow with them. Further, suppose China decides the same thing and begins selling its vast investment in government bonds? Sooner or later, dumping large amounts of government securities has the effect of inflation – the US will have to cover the difference between real return and 3%.

What this means to you and the mariner is that our government, in fact many governments, are facing an inflation bubble. The situation is identical to you and the mariner extending our debt but at a higher interest rate. We may not be able to pay our debts because real income is not rising at the same time. Iowa farmers in the 1970’s know all about this. The small farm disappeared under thousands of foreclosures.

Even the BRIC nations (Brazil, Russia, India and China), competitors to the US-EU GDP, are having difficulty clearing the path to engage in rapid growth.

The mariner’s advice is to rid one’s debt held in credit cards and unsecured loans. This debt will prevent us from sustaining our discretionary spending as income remains static but interest rates rise. By no means extend your debt; pay it off the hard way, that is, pay down debt at a rate that is much greater than minimum payments. Spend cash as often as possible. If nothing else, it will frustrate Google and Experian, who know everything we do on our computers and smart phones.

The less we owe, the easier time we will have when our government must face the music and let the inflation dog off the leash.

Ancient Mariner

 

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