September 2013 - Richard 'Jerry' Haworth: May we live in interesting times

Economies have increasingly become consumer and growth orientated. It is the philosophy of a locust to consume for its own sake and that of a cancer cell to grow for growths sake but anyway…

Governments have bent over backwards to make sure that “consumer demand” and “growth” continues unabated. It has done this over the last 30 years by steadily reducing interest rates, relaxing regulation, allowing credit excess to build up in all layers of society and last but not least, to expand the monetary base to allow the “illusion” of growth albeit nominally. With total global credit market debt standing at 360%[1] (in most countries post war, when they have borrowed to avert destruction, this figure has only reached 250%[2]), this must be approaching some sort of logical limit. Deregulation seems to have done a volte face post 2008 and interest rates approach the zero bound.

This leaves monetary base growth to do the “heavy lifting” to keep at least nominal growth positive and the consumer spending in some meaningful way.

At first glance, the world’s central banks have done an amazing job creating a “slack tide” between the forces of inflation and deflation resulting in a moribund financial casino which sloshes this way and that without direction, collateral values that are either stable or rising and employment numbers that seem encouraging. But stopping deflation at least nominally is the no brainer part of central banks mandate. Given an ability to print money anyone can make the price of an asset rise to whatever they want it to by simply inflating the denominator. The hard part is to convince the real world that the price of an asset is going up because it deserves to and as such is part of a larger net wealth creation and not just going up in nominal terms resulting in creeping inflation or stagflation.

Global macro pundits struggle with holding Spain’s youth unemployment at 56% and a high euro currency rate in their mind as a coherent view of reality. This is symptomatic of most countries and their global macro outlook as the problems have been papered over with money under the guise of stemming a “liquidity crisis”. Keeping the interest rates low stopped credit deleveraging and has reallocated resources away from the prudent to the risk takers, prompting Mr Joe Average to become the latter. Everyone is getting sucked into risk taking at a time when the economy seems to be at its most fragile.

The price of hedging uncertainty is falling to multi-year lows and looks set to continue… just as it did in 1996, 1999 and 2007.

We seem to be in a speeding vehicle about to enter a sharp corner. The driver knows our best chance of surviving intact is to accelerate and NOT to put on the brakes which would immediately send the car careening off the road.

May we live in interesting times.




[1] Anon., 2013, Bass Warns “When The Globe Is At 360% Credit Market Debt-To-GDP, There Is No Real Way Out… And Investors Should Be Really Careful Doing What The Central Bankers Want Them To Do.” [online] InvestmentWatch < [Accessed on 9th October 2013]

2 Clark, T., Dilnot, A. 2002 Measuring the UK Fiscal Stance Since the Second World War. The Institute for Fiscal Studies, Briefing Note No. 26, p. 5. Available at <> [Accessed on 9th October 2013]