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June 30, 2016 | Explaining Social Anger, Brexit, Donald Trump in One Chart

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Voters are angry. Donald Trump, Marine Le Pen, Nigel Farage, UKIP, and the AfD party in Germany have all been accused of stirring up anger and hatred.

But anger is not the problem. None of those individuals or political parties are the problem.

Protectionism and isolation culminating in the Brexit vote in the UK, and the nomination of Donald Trump in the US are not the problem.

What is the problem? Why the anger?

Shrinking Middle Class

Wealth Gap

The above chart from the Wall Street Journal article IMF’s Grim Long-Term U.S. Outlook in Six Charts.

People Angry Because

  1. Banks were bailed out and they weren’t
  2. Middle class is shrinking
  3. President Bush’s Bankruptcy Reform Act of 2005 made kids with student loans debt slaves for life.
  4. Warmongering by the Bush and Obama administrators alike made billions for defense contractors at the expense of everyone but the contractors and their employees.

Instead of blowing up the world, making enemies in the process, and creating ISIS in the process, wouldn’t we have been better off building US infrastructure?

Social Anger

The above chart explains rising social anger perfectly. However, that chart does not portray the real problem.

Income inequality, the shrinking middle class, angry voters, and the rise of extreme political parties are all symptoms of the real problem: Central banks and their inflationary policies.

Productivity

Fed Chair Janet Yellen is very concerned about falling productivity. A chart from the same article shows the concern.

Productvity WSJ

Productivity Will Rise Again — Will the Fed Like the Result?

Autonomous cars, truck, and buses are coming. Millions of jobs will vanish by 2024 if not sooner. Productivity will soar.

The loss of millions of truck driving jobs will be a catastrophe to those who cannot do anything else, but will be a boon to everyone else who pays lower prices.

The Fed will get productivity, but will the Fed like the result when it comes?

Central Banks Insist on Inflation in Deflationary World

The big problem is central banks insists on inflation in a deflationary world.

Even the BIS says routine price deflation is not damaging (See Historical Perspective on CPI Deflations: How Damaging are They?)

Productivity enhancements are inherently price deflationary. More goods produced at less cost should mean falling prices unless demand from population growth more than makes up for productivity gains.

Few could afford big flat panel TVs when they first came out. Everyone has them now. Improvements on top-end cars eventually make their way into every car. The same applies to cell phones and technology in general.

If price deflation was a problem, it sure does not show up in sales of flat panel screens.

The things that have risen most in price are the places where the Fed and Congress meddled the most: The Fed with financial assets, and Congress with health care, education, and affordable housing.

Central Banks — The Real Problem

In the wake of the Great Financial Crisis, central banks launched round after round of QE. Bernanke praised his own efforts for the wealth effect. The result was yet another massive bubble.

The only winners were the banks, the brokers, and the already wealthy. Asset prices inflated, but who has the assets? The poor?

Minimum wages hikes cannot possibly help. Nor can negative interest rates in the Eurozone and Japan. Both will make matters worse.

Much of corporate financing is already used for stock buybacks at insane prices. Lower interest rates fuel asset prices, not investment. Wage hikes sure don’t encourage mores stores.

People are angry, but they protest the wrong things.

Whom to Blame?

  1. Socialists in France and Spain who cannot find a job need to point a finger straight at socialist work rules that inhibit firing. If corporations cannot get rid of employees, the only solution corporations have is to not hire employees in the first place.
  2. US students mired in debt should blame Congress, public unions, and themselves for going deep into debt in pursuit of useless degrees.
  3. Most importantly, people should picket the Fed (central banks in general) for insisting on the extremely misguided policy of 2% inflation in a deflationary world.

The first chart speaks for itself.

Worse yet, central banks, led by the Fed, have blown another bubble in the absurd attempt to defeat routine price deflation.

This is the third major bubble in fifteen years. The result will be yet another round of asset price deflation, a crisis largely of central banks own making.

Mike “Mish… Shedlock

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June 30th, 2016

Posted In: Mish Talk

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