ANALYSIS: Whether Boris is on the home straight or in a corner, the debt Tsunami is heading straight for us

by John Ward

The faux-drama of backstops on knife edges continues. Meanwhile, two things are being overlooked: first, I have yet to see any sign at all that this WA is different (beyond Ulster) to the disaster proposed by Theresa May….of which, more anon; and second, the world beyond the end of our myopic* noses is still a multiple train wreck in the making.

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The closer we get to the wire in Stalag Luft Brexit XIX, the less it looks like The Great Escape. Boris Johnson is either the most accomplished actor in British diplomatic history, or the most insensibly brainless puffball on the planet.

Like most thoroughly bored observers of this revival of As you Don’t Like it at the Globe Theatre (a play in 63 Acts) I really don’t give a hoot about what the DUP will or won’t accept. What matters to me and 17.4 million other Leave voters is this: what’s the departure timetable for Brexit, is it a no-strings clean Brexit, how much of Hammond’s Horrible EIB Bonanza is still intact, and have the May WA elephant traps been removed or not?

If any of these fail to pass muster, then frankly I’d rather Remain than have (as a eurozone resident) the worst of all worlds: no representation, a problematic passport and no rights.

The MSM is studiously directing eye traffic at the floodlit centre stage, while ignoring the Noises Off of Mogherini’s Barmy Army, Verhofstadt’s Venomous Vetos, and Trichet’s Undead Euro.

To reiterate previous Slogposts this week, from November 1st the sole worthwhile task of any British government must be to eschew the route of woffle and shore up our defences against the coming econo-fiscal and banking disaster. We are perilously close to a series of events that will make 1929 look like Jeux sans Frontières….and zero prep has been underaken in amelioration of that Gotterdammerung.

With a capital G and that rhymes with D and that stands for DEBT

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“Speculate to accumulate” is one of the oldest adages in business. Entrepreneurs wanting to expand quickly will always need to borrow. If handled responsibly by borrower and lender, the process can represent the capitalist model working at its most efficient and market-responsive level.

Originally, Apple founder Steve Jobs borrowed $170,000, using the money to produce something better than a pc. Customers, investors and lenders all won.

Since January 2018, I have posted three times about how hopelessly out of wack the relationship between investment in debt and the output generated by that investment now is. The rapidly worsening relationship between the two is one more reason why global economic disaster is unavoidable.

For real gdp growth to occur, you have to get more back from the borrowing (per Dollar) than you put in.

What do you imagine every Dollar borrowed produces in net returns today – $1.30, $1.50, $1.75 or $2.00 Dollars?

Since 2017 – including such data as we have for 2019 so far – each Dollar of global debt generated just 42 cents of GDP growth. The economy is getting less back than borrowers put in.

Since 2007, debt productivity has fallen by 11%.

The largest percentage decrease in debt productivity, of more than 38%, was registered in China since 2009. The decline in the marginal revenue product of debt in Japan, the United Kingdom and Europe were all more than two and one-half times greater than in the United States.

Is speculate via debt to accumulate on this basis sustainable? No, it isn’t. In the gdp context, borrowing will actually shrink growth to zero: the system is being eaten by its own debt.

Like negative interest rates, the concept is insane. But it doesn’t end there: gross domestic product is not a measure of either gross or net margins. Although the analogy is technically not correct, it is useful to think of the difference between turnover and profit. To borrow a Dollar and get 40 cents of turnover, you have to pay interest on the debt, and the more you borrow, the bigger and bigger maintenance of that growing debt is going to represent. Borrowing to get turnover ROI at these levels simply isn’t worth it for a private sector company.

Since the invention of QE, this inevitability of falling profits has been hidden, because we got something close to Zirp reducing the borrowing cost overhead. Profit on sales falls, but the share prices rise because corporations borrow yet more to pay out dividends. As the share price rises, directors of the company invest in their own shares; and you’ll never guess – that’s right, they mire themselves in debt to do it.

Anxious not to miss out on this magic boom which has little to do with profitable sales growth, investment funds, traders, hedgies and so forth borrow in order to maximise the profit from share positions they take.

So you can sort of see why people like me scoff at the idea of normalising – that is to say, raising – interest rates, because to do so would ruin everyone associated with the bourses….and that’s before you even begin to think about the cataclysmic effect on emerging economies, most of whose ginormous debt is denominated in Dollars.

Hence the US Fed’s adoption of five reverse gears on its interest rate ‘normalization program’ this year.

But that still leaves us back at the better off ‘silver’ consumers in or approaching retirement, who can’t get any capital return on their money. And if they can’t do that, consumption levels fall because they avoid debt. Further down the age demographic, neoliberal capitalism has crushed real wage values (and lied about it) so the only way the repeat-purchase levels required by this St Vitus dance economic model can be maintained is for them to, um, borrow. 

Unwilling to borrow, silvers look to put their properties on the market to release more capital and downsize. This increases housing supply and depresses prices. Those younger people who borrowed to get on the housing ladder now find their investment going backwards…and they daren’t ask for a raise, because er, the economy is looking dodgey and all their mates in the City are looking nervous.

All of which more or less gets us to where we are today. And I don’t mind telling you Reggie, we didn’t get to where we are today by knowing whatTF we were all doing yesterday.

Now of course, to the likes of Barnier, Verhofstadt, Merkel, Macron and Draghi, none of this is of the remotest interest. Only Draghi knows how awful it’s going to get, but he doesn’t give a whatnot because his pension is bombproof, and his Watch is drawing rapidly to a close.

But you know what? Five years from now some very hacked off citizens are going to be asking why Britain didn’t (a) issue Article 50 six months earlier than it did (b) tell the EU we would not negotiate a leaving “Deal” until we’d seen some free trade suggestions from them (c) dismiss the ‘divorce fee’ as fantasy and (d) have a media set putting out real, live investigative and informative information about the real balance of power between Brussels and Westminster.

Because when the Monnet Monolith finally chugs over one cliff or another, at this rate the UK is going to be asked to pick up a hefty percentage of the bill. And there is no reason why we should.

*Yes, I know noses can’t be myopic on account of not being eyes. It’s a figure of speech.

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