Monday, December 4, 2017

24 years, Borio says. It's not a coincidence.

Zero Hedge 4 December 2017: BIS Issues An Alert: Tightening "Paradoxically" Leading To Excessive Risk Taking; Reminds What Happened Last Time:

Valuations in asset markets are “frothy” and investors are basking in the “light and warmth” of the “Goldilocks economy” ...

The Goldilocks economy? It's right on schedule. I've been predicting it since March 2016, the same month Zero Hedge told you "The world economy is on the precipice of another Great Depression."

Oh, and if asset markets are "frothy" it just means we need a small tax on asset market transactions. Or, if we already have a tax like that, it means increase the rate a little. Just like the Fed would increase interest rates. It's not rocket science.

The Zero Hedge post links to BIS Quarterly Review, December 2017 - media briefing where Claudio Borio says:

The expansion broadened and gained momentum. Above all, despite vanishing economic slack, inflation - central banks' lodestar - generally remained remarkably subdued.

Vanishing economic slack? No, it's way too early for that. Borio probably uses the wrong measure, like everyone else. Financial slack must be measured as the size of accumulated debt relative to the size of the circulating money which is used to make payments against that debt. Or accumulated debt relative to Federal debt held by Federal Reserve banks. Or accumulated debt relative to base money. Any measure that shows how far a dollar has to stretch to cover all the debt it has to cover.

Scott Sumner has often said the economy is bad because money is tight. He's right about that, but he doesn't know how to show tight money. To see tight money, look at spending-money relative to accumulated private debt -- or relative to total public and private debt. Look at narrow money relative to broad money. Look at the total cost of finance relative to the money available to make the payments. Work with me here.

Borio says:

Even as the Fed has proceeded with its tightening, overall financial conditions have eased. For instance, a standard indicator of such conditions, which combines information from various asset classes, points to an overall easing regardless of the precise date at which the tightening is assumed to have started. Indeed, that indicator touched a 24 year low.

I can show you the 24 years:

Graph #1: Credit Market Debt per Dollar of Circulating Money
This is my debt-per-dollar graph. The higher the blue line, the faster a dollar has to move to cover all the debt it has to cover. When the line goes up, money gets tighter. When the line goes down, the financial system gets more slack.

24 years ago it was the end of 1993 and the economy was just getting ready to start its "Goldilocks" phase. And things are just now ready to start improving, again.

BIS is right to worry, because the blue line on the graph is going to go up again until we get in trouble again. But we still have time to prevent a recurrence of the problem.

We need to make sure debt (especially private debt) does not accumulate too rapidly. That means people have to pay down debt faster. Instead of having policies that encourage people to accumulate debt, we need policies that encourage people to pay down debt. Instead of letting people deduct their mortgage interest, for example, give people a tax deduction for making an extra mortgage payment or two each year. You can even design the new policy to create the same amount of tax advantage as the old policy.

We must make debt grow more slowly. That's crucial. As a bonus, a policy that gets us paying down debt faster is a policy that fights inflation. Why should interest rates have to do all the work?

Oh, and it's no coincidence, that "24 years" thing.

H/T Tom Hickey

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