Does the Potemkin Village Need an Addition?

Executive Summary

Presently, the average Joe and Jane have no idea they are living in a Potemkin Village. After the 2008 Financial Crisis, global monetary experiments were implemented to “save” the economy. The economic “recovery” resulted in a decade of 2% average real GDP growth, 36 percent below the long-term average. Simultaneously creating a massively overvalued stock market which is over two standard deviations above the mean, and record debt levels. Three of the central banks of the world participated in the money printing experiment to the tune of about $14 trillion. The booming recovery never materialized, and the business cycle will complete as always. However, a new wing will be added to the Potemkin Village if certain politicians and economists get their way. Many are floating an old idea with a new name: Modern Monetary Theory (MMT). The gist of MMT is government can spend whatever they want since they can always print money. See below for more on this doomed-to-fail proposition.

“And thus I clothe my naked villainy with odd old ends stol’n out of holy writ; And seem a saint, when most I play the devil.”

– William Shakespeare, Richard III

The Details

Presently, the average Joe and Jane have no idea they are living in a Potemkin Village. They go about their business, buying Starbucks, purchasing a new car every few years, and often rolling the underwater balance from the previous car loan into the new loan. It seems that only when the brown matter hits the wind producer and companies begin mass layoffs, they begin to question what happened. Those who study the economy and the actions of the Federal Reserve Bank (Fed) together with global central banks know what is transpiring.

Unfortunately, the vast majority of citizens are caught by surprise when massive experiments, such as the monetary policy implemented over the past decade, fail. Please don’t misunderstand, the monetary experiment did allow the economy to limp along providing the appearance of recovering. More jobs were added, and more loans became available to individuals and corporations enabling ever-increasing debt-financed consumption. The by-product, a lackluster bump in economic growth. But a “booming” recovery did not result, despite what pundits espouse. A boom did occur in asset prices as they inflated far beyond what could be justified fundamentally. A couple charts will put these points into perspective. First, real GDP growth over the past decade has averaged about 2% annually as can be seen in the graph below from Advisor Perspectives. Note: this remains about 36% below long-term average growth.

And, stock prices are currently over double their long-term mean. See below.

It should be quite evident what benefited the most from the Fed’s dropping interest rates to zero percent and creating just under $4 trillion in new reserves out of thin air, through their Quantitative Easing programs. Economic growth only received short-term sugar-boosts which soon faded, while the stock market, by some measures, reached the most over-valued bubble in history. A quick note on economic growth, the following graph from the Atlanta Fed shows their GDPNow model is predicting first quarter 2019 annualized growth at 0.4%.

The Fed has not been alone in this experiment. The three major central banks, the Fed, the Bank of Japan (BOJ), and the European Central Bank (ECB) effectively printed a combined $14 trillion since the Great Recession. Does anyone really think: (1) this massive increase in liquidity didn’t create the current asset bubbles, and (2) there won’t eventually be significant negative consequences from these actions? It is important to note that prior to the Great Recession, the combined assets on these three balance sheets was a mere $3.3 trillion.

The Potemkin (economic) Village is the direct result of the actions of global central bankers – massive loan growth, asset price bubbles, low economic growth, and non-existent interest rates. The can continues to get kicked down the road.

As the business cycle approaches its end, asset prices near record high valuations, loan balances back at peak levels, short-term interest rates just over 2%, and close to 22% of outstanding global sovereign debt maintaining negative interest rates, what will be the formula to “save” the economy next time?

A new wing will be added to the Potemkin Village if certain politicians and economists get their way. Many economists and some politicians are floating an old idea with a new name: Modern Monetary Theory (MMT). MMT, according toCaseyResearch.com via Zero Hedge, “is an economic theory which essentially argues that the U.S. government wouldn’t need to collect taxes or borrow money to finance spending. It could simply print more money if necessary.”

Doug Casey explains it this way, “MMT centers around the notion that the economy in general, and money in particular, should be the creatures of the State. It’s not a new idea – the meme has been around in one form or another since at least the days of Marx. MMT basically posits that the wise and incorruptible solons in government should create as much currency as they think is needed, spend it in areas they like, and solve any problems that occur with more laws and regulations.”

Many reading this are probably thinking this will never be allowed to occur. However, how many people a decade ago thought that global central banks would over quadruple the global monetary base and resort to negative interest rates? There are those today touting the benefits of MMT. Imagine if accepted as a global solution to a global financial crisis.

Delaying the global debt reset merely allows the future crisis to grow. Crafting new versions of old unrealistic, unviable theories could leave us in even much worse shape. If left unchecked, MMT would lead to a global Venezuela. Massive inflation and a financial crisis of unbelievable proportions. It is time now to debunk the doomed-to-fail policies of continued Quantitative Easing and MMT. A new wing on the Potemkin Village is still nothing but a deception.

The S&P 500 Index closed at 2,822, up 2.89% for the week. The yield on the 10-year Treasury note fell to 2.59%. Oil prices increased to $59 per barrel, and the national average price of gasoline according to AAA rose to $2.55 per gallon.

At Cremerius Wealth Management, portfolios are developed to take into account the state of the economy, market cycle and valuation, and relative strength. Our goal is long-term growth with limited downside potential. If you need assistance with your portfolio, please give me a call. I would be happy to review your situation and explain how we can help you work towards achieving your goals.

Best Regards,
Bob Cremerius, CPA/PFS

© 2019. This material was prepared by Bob Cremerius, CPA/PFS, of Cremerius Wealth Management, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

Securities offered through First Heartland Capital, Inc., Member FINRA & SIPC. | Advisory Services offered through First Heartland Consultants, Inc. Cremerius Wealth Management is not affiliated with First Heartland Capital, Inc.

Want to learn more about our Insurance strategies?

Set up a time to chat with us.

SCHEDULE A CALL