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The 80/20 rule

Recent statistics are confirming “economic recovery” in the UK and even some of the weaker eurozone states. I put this in quotes, because what we are seeing is expanding nominal GDP, which is not the same thing. GDP reflects money and credit going into the economy, which everyone believes is the same thing.

Instead of economic recovery, GDP is reflecting money leaving financial markets, particularly bonds, for less interest-rate sensitive havens. Globally, bonds represent invested capital of over $150 trillion, or more than twice global GDP, so even marginal amounts unleashed by rising bond yields can be financially destabilising and the effect on GDP growth could be electric. The mistake of confusing economic progress (a better description of what we all desire) with GDP is about to bite the economic establishment big-time and pressure for interest rates to rise early and substantially will intensify as a result, dragged up by those rising bond yields.

The problem facing central planners is that this GDP chimera is driven by a predominantly financial community that has money to invest in capital assets such as housing and even motor cars. The vast majority of economic actors, comprised of pensioners, low-wage workers living from payday to payday and the unemployed are simply disadvantaged as prices, already often beyond their reach, become even more unaffordable. It is a misfortune encapsulated in the concept of the Pareto Principle, otherwise known as the 80/20 rule, the law of the vital few, where the substantial majority will be badly squeezed by rising prices generated by the spending of that few.

The central planners are understandably focused on the misfortunes of the majority. For many of them, as prices start to rise so too do costs for their employers, many of which will be squeezed out of business. How can interest rates possibly be permitted to rise in the face of these dangers?

Central banks have drawn their line in the sand over interest rates and they will eventually be forced to reconsider their position. They are almost certain to be too slow in raising interest rates and so the markets will continually expect higher bond yields and higher interest rates to come. For those of us with long memories it is a repeat of the late-seventies stagflation era. Except this time, aggressively raising interest rates to stabilise the purchasing power of the currency is not an option: it will simply break the banking system lumbered with its share of the $150 trillion invested in bonds.

Markets are blithely assuming that central banks are in control of events. They are not even in control of their own governments’ profligacy, and they are losing their control over markets as well, as the tapering episode showed. The fatal error of rescuing both the banking system and government finances by reckless currency inflation is in the process of becoming apparent to all. Unless this policy is somehow reversed we risk a global rerun of the collapse of the German mark in 1923.

This article was previously published at GoldMoney.com.

13 comments to The 80/20 rule

  • Paul Marks Paul Marks

    There is an important difference Sir.

    Whilst Germany was (just about) a Welfare State in 1923 it was quite a recent one (yes Bismark had set up various bad things in the 1880s and they had grown – but even as late as 1914 there was, for example, no unemployment benefit in Germany).

    Most people in Germany in 1923 were not dependent upon government – although far more people were dependent upon government in Germany than were in other Western lands (such as France, Britain or the United States).

    Today (just about everywhere in the Western world) about half the entire population either works for government or is dependent upon benefits.

    Therefore a monetary collapse will also lead to a fiscal collapse (as the government will be unable to finance its absurd level of spending) and this fiscal collapse may well lead to a societal collapse (as half the entire population is dependent upon bloated government).

    I am not sure how we get out of this trap – or even if it is possible to do so.

    • George Thompson

      The usual historical escape from traps such as these is, -your above modification notwithstanding – the same as that which brought the Weimar Republic out of its funk. This certainly seems to be the final solution being pursued by the current head of the American regime given all the burdens he is piling upon otherwise Freeborn American Taxpayers. His intent seems to be to either make them collapse to their knees and accept his yoke or to bring their country down upon them the way Samson brought Dagon’s Temple down upon the Philistines, except he ain’t no Samson. This will end badly; in the meantime, the debasement of paper money continues.

    • chuck martel

      What would this societal collapse look like? Are you predicting some kind of Mad Max affair with roving bands of thugs plundering the weak? Or would the few remaining job holders use their incomes to support their extended families? Would cops made redundant by the bankruptcy of their cities sell their services on the private market, providing protection for smaller neighborhoods? How do we know that the failure of the perverted international financial system and its nation/state component isn’t the gateway to a societal renaissance, rather than a disaster?

  • Paul Marks Paul Marks

    Chuck – the truthful answer is that I do not know how bad things will get, but I do know they will be very bad indeed.

    So no short to medium term “renaissance” I am afraid.

    However……

    In the longer term – as technology will (I trust) survive their may indeed be the renaissance that predict. A much better world than we have now.

    So it is a matter of perspective – from my perspective it will be terrible (I expect to be killed by it – dying in the gutter somewhere).

    But for you (if you are young and have skills) it may, EVENUTALLY, be wonderful.

    I would advice going to somewhere quite and out of the way (say a town in the south island of New Zealand, although not near a fault line) for the next decade or so.

    A farming (and other such) community – where the farmers are NOT dependent on government subsidies. And a long way away from Europe and North America.

    Stay there for a decade or so (repairing local computers or whatever) and you should be fine.

    • George Thompson

      Mr. Marks, currently South America and any country largely controlled by Islam or Marxists are to be avoided. As I ponder the globe methinks the safest spot is the interior of Antarctica, but I hear the farming ain’t so sweet way down under. Maybe I could harvest ice cubes. What do penguins use for currency? Maybe I could sell them a block of ice for a ‘fin’.

      Mr. Martel, just as Pandora had no idea what was in the large jar (aka box) given her by Zeus, we have no idea what the result of any societal collapse might be. However, the historical record is not encouraging that more freedom and prosperity will result. Our only certainty is that we are uncertain. Puzzling ain’t it?

  • Paul Marks Paul Marks

    As for Comrade Barack Obama – he has no incentive to negotiate. Not on the debt limit or on “entitlements” (such as Obamacare).

    This is because the American media will blame anything bad that happens on the Republicans.

    The generation of the 1960s now controls most of the media (and much else).

  • Paul Marks Paul Marks

    Mr Thomson – the only South American country I hold in some regard in Chile, and the announcement of the left that they intend to get rid of the constitutional limits on government if they win the elections in December (they did not when they were last in office) bodes ill.

    Antarctica? Not suitable – even if was a young man.

    No somewhere like a small town on the south island of New Zealand would be where I would pick – if I was about 20 years younger (and had some useful skills).

    In the United States (for people who can not leave America) – the Dakotas? Especially South Dakota (although hard winters – even the family of Rose Wilder Lane gave up).

    East Tenn has a wonderful tradition.

    Rejecting the Slave Power (people forget that the First and Second Districts of Tennessee have been Republican since the Civil War) and also rejecting the New Deal.

    But today even Knoxville is in the hands of the left – although Athens is still free (and has a tradition of ordinary people taking up arms against local government in order to keep their freedom – see the Battle Of Athens). An American could do a lot worse than go and live in Athens.

    Britain?

    Very small and densely populated.

    Perhaps off in Somerset? There are many attractive places in the north of England – till one remembers the winter (short growing season and short days).

    Wells is a nice town (city) to keep one’s head down in for a few years (if one has resources and/or skills) and the village of Cheddar has some families that (if DNA is to believed) go back nine thousand years. Of course there are many other places – some a bit too close to London (Chichester), others a bit further away (such as Ludlow).

    I would assume that the families in Cheddar (over nine thousand years) have seen a lot worse than what is to come.

    For the wealthy – Guernsey may be possibility (although they are adopting the same insane regulations and welfare schemes as everywhere else).

    It is matter of getting through bankruptcy and out the other side – for Chuck Martell is correct, technology will remain.

    It will NOT be like the fall of Rome – where even basic ways of doing things were forgotten.

    Of that at least I am confident.

    I just wish I was younger – and would live to see the other side.

    But then old, tired and sick men are always whining about “I wish I was ……”

    • George Thompson

      I do like Tennessee. Planning to visit Nashville in about a week. I really like going down on Broadway around the corner from the Ryman and just sitting in a honky-tonk listening to 60s rockabilly while the waitress keeps my glass filled with Kentucky’s best of the distilling arts. However, the TSA has a big target on Tennessee’s back, and since I qualify as a gun-totin’, Bible thumpin’, pro-life Constitutionalist, I am classified a terrorist in their own manuals. Best I stay clear of wherever their roadblocks be. So far I’ve not seen any on I-65 north to Louisville, nor I-24 West to I-57.

      I am thinking that a state is not necessarily the best solution but a terrain. In particular, the mountain regions of North Carolina. I once spent a rather pleasant afternoon up on Wiseman’s View with some good ol’ boys looking out over Linville Gorge passing the jar around and listening to their hounds howling at a bear they’d treed. The dogs each had microphones attached to their collars which transmitted a radio signal. Neat. Men such as these who can be dropped naked and weaponless in the most remote spot of a bigfoot wilderness and a month later have gained weight, are the folks I want in my corner when the BO-collapse is upon us.

      I’m not so confident as you that technology will survive as there will be no manufacturing, so devices will eventually be cannibalized for their parts then that’s all she wrote.

      But then New Zealand might just be out of reach of the long arm of lord obama. I thought it deserved best actor for its performance in Lord of the Rings the movies. However, if out-of-reach is the goal there’s always Van Diemen’s Land or one of the hundreds of islands around it.

      Given the current government shutdown and that the dollar index went below 80 today. The time to get out of Dodge was probably last Saturday.

  • chuck martel

    Evidently Hobbes was correct, without Leviathan, enabled by the financial community, life will be “nasty, brutish and short”, ergo we should do whatever we can to sustain the current system and pray that it endures. Thus it is better to live under a flawed but familiar regimen than to seize the opportunities presented by change. Of course, if this were true we’d still be subjects of the pharoahs.

  • Paul Marks Paul Marks

    North Carolina is indeed said to be nice Mr Thompson – up near Ashville in the mountains (the V. family had a point).

    Naughty, naughty Chuck – non one said that the current system should (or even could) be sustained.

    But the transition will not be easy – and I (and lots of people like me) will not survive it.

    You indeed (if you are a young person) will (most likely) live to see a better world – a much better world.

    I have never denied that.

  • Doughtyman George Doughty

    Gentlemen: There is room for hope. I look at Detroit where calls to 911 are responded to in an average of 53 min. Obviously useless. Calls to private “first responder” firms deliver prompt, courteous service and when they arrive they help rather than arrest everyone in sight.
    City bus service has stopped but private busses are running. They are cheap, clean, play music and have free wi-fi. Houses are available for a few hundred dollars and are being bought by (of course) tradesmen who fix them up.
    True enough, this is going to be rough, but there are opportunities in crisis. Good Luck all!

  • Paul Marks Paul Marks

    Mr Doughty.

    The terrible example of Detroit has already prompted the State of Michigan to get its own budget in order and to pass an Right to Work law (thus counter balancing the government granted powers that unions have).

    I would NOT have predicted such a response.

    So there is indeed hope.

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