We have spent a very long time now deforming our economies with irresponsible monetary and fiscal policies.
We have borrowed a LOT of money.
And we’ve pumped it into a lot of crazy schemes with no discernible business models.
Like Facebook, and Tesla, and Twitter.
This process of malinvestment is a grotesque misallocation of the funds we need to grow our economies.
So they aren’t growing – we spanked the money on that crazy stuff instead.
And that’s ok – business cycles are what we call this process. We get a bit too confident and we borrow money from banks.
Money that the banks are supposed to have solicited from savers in exchange for a rate of interest sufficient to convince savers to defer gratification and not spend it.
So……….people borrow money and then they start businesses doing some wacky s**t that no-one needs and then you see them on Dragon’s Den panhandling for our amusement and then they go back to whatever they were doing before they said to their wife “I have a brilliant idea!”
And the bank that lent them the money writes it off and their bottom line looks a little worse than it might have done and their executives don’t get bonuses.
By which I mean “continue to get massive bonuses regardless”
This used to be the business cycle. People gamble and win, or lose, and businesses start, and fail, and our economies rise and fall as this process of creative destruction plays out.
Except………….not any more.
The last time around, they panicked. The business cycle had been magnified by an enormous credit cycle, and the result was a horrific downturn causing Gordon Brown to s**t his pants and say “If we don’t save the banks there will be tanks in the streets”
Very few people remember that he said that, or know what he meant when he said it.
In any case, this peak of the business cycle is the point where a body economic gets a bit too much altitude and develops a nasty case of frostbite, which swiftly develops into economic gangrene – the deformations I mentioned earlier.
And the healthy creative destruction response is to amputate – you chop off a finger, the economy heals, and goes back to work.
But one day about a decade ago, the bankers and politicians decided they didn’t want the body economic to endure the grisly amputation process, and they certainly didn’t want to be seen holding the bone saw when the voters woke up sans digit.
So they did what all good politicians do when faced with a seven-year business cycle and a five-year political cycle.
They kicked the problem down the road for the next chap to deal with.
You can do that in a number of ways – you can fudge the numbers, flatly deny the problem, borrow a bit more heavily for a while, oooh the ways in which politicians can hand the s**t sandwich to the next guy to avoid eating it are considerable.
In 2008, they chose to do it by printing money.
Slightly more precisely (not completely correct, but close enough for government work), they did it by making central banks lend money to their governments at nice low rates that they could afford, thus forcing the investors who usually lent to their governments (at a higher rate, that the governments could no longer afford) to lend their money out into the economy and get the investment process moving again.
Sadly, investors found that the only people wanting to borrow in a failing economy were……….failing businesses, so they lent a bit to them to keep them staggering on (despite having no customers – the famous zombie businesses we hear so much about) and in a classic Cantillon Effect parked the rest in the stock market.
And that’s not amputation brothers and sisters. That’s painkillers.
And not generic over-the-counter stuff either – these are painkillers that you need a celebrity doctor for.
So the gangrenous body economic sighed and went to sleep.
For a decade.
The finger went green, then black.
Then the whole hand. Then the arm.
Then both arms. Then both legs.
And every time the patient blinked awake and took a deep breath to begin screaming, Doctors Bernanke, Yellen, Draghi, Carney and Kuroda pumped him full of stronger opioids again – naptime.
But here’s the problem.
They recently realised they couldn’t give him any more – his tolerance was now enormous. And it was way too late to amputate – he’d have just been a head on a pillow.
So they snuck out the back door, before the screaming began.
Sometimes I think they let Trump win just so they had someone to pin it on.