(Click on Chart for an enlarged view.)
Tuesday, September 29, 2009
Monday, September 28, 2009
The Taxman’s at the Door
Tax is about to hit you like a bare fisted punch in the eye. You will be stripped of all your income, assets and savings as government drowns in deficits and debt. Is this the way it will turn out? Not likely. Certainly, government is drowning in deficits and debt but the taxation will arrive wrapped in the silky touch of the best propaganda machinery ever devised by masterful spin doctors. Your unprotected wealth, income and savings will more likely be dragged naked over a coral reef to die a slow death by a million tiny cuts. Then, when you look upon the dry corpse of your once liquid wealth consider this; all stimulations must be paid for in tax!
Here is the need. Would you dare to extrapolate this chart into the future?
How much taxation will it take to turn this chart down?
The tax will arrive in direct taxes for those who cannot revolt. To the others it will arrive in the form of indirect taxes disguised as anything but tax.
The official Corporate and Individual tax data to the end of 2007 look like this.
A bursting tax bubble has thrashed 50% off the previous $400billion corporate income tax take. Who talks their book when they say we have a recovery under way (see also charts further down)? Don’t you just love a bubble economy and the 1, 2, 3, 4 tax spikes? This is the business of maximizing tax income for government. Now visualize in your mind the spike that will be required to replace the direct and indirect tax collections from the 2003-2007 bubble episode.
FED data ends on 01/01/2008 and Personal Income Tax Receipts were still peaking. Growing unemployment is going to play havoc with this number.
Again the 1, 2, 3, 4 tax spikes. For a more up to date macro assessment complete with projections into a murky future we turn to data from the White House Office of Management and Budget.
The question may be asked; how often do we see significant declines in tax receipts? Rarely.
The events of 1929 are clearly relevant given that it was the only other previous incidence in more than a hundred years, apart from the year post WW2 which saw a significant drop in tax income. The data from the White House covers this period in detail.
The 1929 crash and its aftermath share another very important characteristic with the 2007 crash and its aftermath, a significant debt bubble. So how does the fiscal experiences of the depression compare with the modern experience of a debt bubble?
The tax collected by government saw a dramatic decline of 52.6% in the aftermath of the 1929 crash, while government spending was certainly in stimulation mode. Notably, taxation accelerated in spectacular fashion by 251% from $1,9bil in 1932 to $6.4bil in 1938. Growth during this period remained anaemic. In fact, the GDP growth fell dramatically from 1930 to 1933 and even by 1940 had not yet regained the GDP level of 1930 in spite of government stimulations in the 1930’s greater than anything implemented fiscally since 2007. Monetary policy was the dominant choice since 2007 but I have written often on monetary policy, here the focus is on fiscal policy. Observe that a weak economy is no protection against increased taxation.
The modern debt bubble has been under construction from 1980 until it popped in 2007. The chart hereunder picks up the story in 1990.
So much for counter cyclical fiscal behavior when tax receipts fell short of government spending in each of the boom years of 2003 to 2007. Tax collections though down, still held up in 2008 but took a 17.8% tumble into 2009. Again we note the discrepancy between tax collection and all the talk of recovery together with the exceptional performance of stock exchanges. The 2009 estimates have been presented on the 25th of August 2009 and should be close to the expected actual number. Expectations of a rise in tax collections in 2010 may be premature. The experience in 1929 where tax receipts not only dropped by more than 50% but also did not recover to the 1930 level until six years later in 1936 may indicate potential for a less favorable outcome than the current expectation and estimates.
The subset of Income Tax data yields further interesting data.
The official estimates of Income Tax collections are optimistic, particularly regarding individual taxes which are expected to exceed the 2007/08 levels by 2012. No tax recipes are expected to fall below 2009 levels and income tax collections will start rising as early as 2010 according to current estimates. I expect the tendency of downward revisions in actual tax receipts so prevalent in the Mid-Session Review of the Budget released in August 2009, to be with us for at least thru 2010.
Be sure to note the dramatic shift towards relying on personal income taxes in the modern USA budget. What will be the origin of the tax growth when the best case scenario is a “jobless” recovery and unemployment has yet to level out? Also, for a better perspective on a trillion dollar stimulation consider carefully how it equates to the total per annum Income Tax collected from individuals as averaged between 2005 and 2009. It is of particular interest to see that estimates of Corporate Income Taxes are for a fast recovery to 2007 levels and then to remain static until 2019. I find this projection a combination of opportunism and pessimism, even contrived when one observe the relentless growth projected for Individual Income Taxes against the static projection for Corporate Income Taxes. When the politicians say “Read my lips - no increased taxes”. Don’t. Rather read the charts.
Now for a look at Income Taxes during the period 1934 to 1938.
The burden was shared equally between Individual and Corporate Income Taxes during this period of economic history. The real story remains the dramatic increase in tax collected in the shadow of fiscal deficits and stimulations. Taxes in both categories increased more than 3 fold over this period. It is no coincidence that the Emergency Banking Relief Act of 1933 was passed in March 1933 confiscating Gold holdings to boost the coffers of the state. The need was great and gold confiscation was a tax against “hoarding”, popular with all non gold owning voters.
Stimulation remorse will be of no help. What’s done is done. The tax bill is in the post. TAX is what pays back government debt, a bit of inflation just hides the method and hyperinflation pays nobody. Hyperinflation simply destroys the economy and the currency. Hyperinflation means a lot of pain but no net real gain for anybody, including government. Thus do not look upon hyperinflation as an escape route from the inevitable reality of taxation unless you are prepared to pay the ultimate economic price.
The USA has its international debt in US$’s, while most other countries’ international debt is denominated in a currency other than its own. Any depreciation of the US$ against other currencies will depreciate the international debt of the USA but at a huge cost to imported inflation. It is taxation from behind that most precious and coveted international comparative advantage, the reserve and trade currency of the world. Having the reserve currency of the world allows one the use of money creation to sneak taxation across international borders, yet it is but one of many advantages. Only the most desperate politician would cash in this chip for a short term stealth tax gain. When they do, they may prompt the Chinese and all other funding nations to ask the question; “whose tax base is it anyway?”
Stimulations from central government in whatever form they may take are “fly-now-pay-later” schemes. Japan tried the stimulation-and-recovery trick recently and it failed. In 2009 everybody is pinning their hopes on a global stimulation-and-recovery trick to work. Children marvel at magic tricks but they do not actually believe in them. Intelligent adults seem to have bet their entire economic futures and their children’s economic fortunes on the trick of stimulation and recovery. A spontaneous economic recovery may rescue the global economy. In the ensuing boom Government can collect the required tax shortfalls without a taxpayer backlash. That is the wistful thinking. Cause and effect says it is more likely that the excessive abuse of debt may force a realignment of economic structural distortions. No recovery but, as with the housing bubble and like a bad hangover, the government debt will remain after the stimulation bubbly has been consumed.
The bullish thesis is entirely reliant upon the “stimulation-and-recovery” trick. The fear that shows the white of their eyes at any talk about withdrawing “stimulation” is sufficient to expose the anchor of the bullish thesis. The bears fear “stimulation” equally but not for it’s so called potential to heal the economy, rather for its potential to cause bear rallies. Thus the bulls love stimulations for it allows speculative trading with the support and blessing of government while slaughtering the bears. It may be a tragic drama or an exiting adrenalin rush depending on your favourite candidate but in the bigger picture it is the cost of the game and who will foot the bill that counts.
Government will kick the tax can down the road until it runs out of credit like every reckless borrower eventually must. The alternative is debt revulsion for public debt but that is a responsible outcome where the opportunism of cashing in on stimulations is more likely to draw the crowds. Again, Japan has set the example running up public debt four fold since 1990 and reaped only a 20 year deflationary slump in return.
Consider the harm to the Japanese taxpaying generation who will have to pay for that gratuitous spending frenzy.
Look upon the projected US Government Spending from 2010 to 2019 (hereunder) and the very first chart in this essay of US Total Public Debt, then contemplate who will pay, when the taxman comes knocking…
Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
28 September 2009
© Sarel Oberholster
Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .
Here is the need. Would you dare to extrapolate this chart into the future?
How much taxation will it take to turn this chart down?
The tax will arrive in direct taxes for those who cannot revolt. To the others it will arrive in the form of indirect taxes disguised as anything but tax.
The official Corporate and Individual tax data to the end of 2007 look like this.
A bursting tax bubble has thrashed 50% off the previous $400billion corporate income tax take. Who talks their book when they say we have a recovery under way (see also charts further down)? Don’t you just love a bubble economy and the 1, 2, 3, 4 tax spikes? This is the business of maximizing tax income for government. Now visualize in your mind the spike that will be required to replace the direct and indirect tax collections from the 2003-2007 bubble episode.
FED data ends on 01/01/2008 and Personal Income Tax Receipts were still peaking. Growing unemployment is going to play havoc with this number.
Again the 1, 2, 3, 4 tax spikes. For a more up to date macro assessment complete with projections into a murky future we turn to data from the White House Office of Management and Budget.
The question may be asked; how often do we see significant declines in tax receipts? Rarely.
The events of 1929 are clearly relevant given that it was the only other previous incidence in more than a hundred years, apart from the year post WW2 which saw a significant drop in tax income. The data from the White House covers this period in detail.
The 1929 crash and its aftermath share another very important characteristic with the 2007 crash and its aftermath, a significant debt bubble. So how does the fiscal experiences of the depression compare with the modern experience of a debt bubble?
The tax collected by government saw a dramatic decline of 52.6% in the aftermath of the 1929 crash, while government spending was certainly in stimulation mode. Notably, taxation accelerated in spectacular fashion by 251% from $1,9bil in 1932 to $6.4bil in 1938. Growth during this period remained anaemic. In fact, the GDP growth fell dramatically from 1930 to 1933 and even by 1940 had not yet regained the GDP level of 1930 in spite of government stimulations in the 1930’s greater than anything implemented fiscally since 2007. Monetary policy was the dominant choice since 2007 but I have written often on monetary policy, here the focus is on fiscal policy. Observe that a weak economy is no protection against increased taxation.
The modern debt bubble has been under construction from 1980 until it popped in 2007. The chart hereunder picks up the story in 1990.
So much for counter cyclical fiscal behavior when tax receipts fell short of government spending in each of the boom years of 2003 to 2007. Tax collections though down, still held up in 2008 but took a 17.8% tumble into 2009. Again we note the discrepancy between tax collection and all the talk of recovery together with the exceptional performance of stock exchanges. The 2009 estimates have been presented on the 25th of August 2009 and should be close to the expected actual number. Expectations of a rise in tax collections in 2010 may be premature. The experience in 1929 where tax receipts not only dropped by more than 50% but also did not recover to the 1930 level until six years later in 1936 may indicate potential for a less favorable outcome than the current expectation and estimates.
The subset of Income Tax data yields further interesting data.
The official estimates of Income Tax collections are optimistic, particularly regarding individual taxes which are expected to exceed the 2007/08 levels by 2012. No tax recipes are expected to fall below 2009 levels and income tax collections will start rising as early as 2010 according to current estimates. I expect the tendency of downward revisions in actual tax receipts so prevalent in the Mid-Session Review of the Budget released in August 2009, to be with us for at least thru 2010.
Be sure to note the dramatic shift towards relying on personal income taxes in the modern USA budget. What will be the origin of the tax growth when the best case scenario is a “jobless” recovery and unemployment has yet to level out? Also, for a better perspective on a trillion dollar stimulation consider carefully how it equates to the total per annum Income Tax collected from individuals as averaged between 2005 and 2009. It is of particular interest to see that estimates of Corporate Income Taxes are for a fast recovery to 2007 levels and then to remain static until 2019. I find this projection a combination of opportunism and pessimism, even contrived when one observe the relentless growth projected for Individual Income Taxes against the static projection for Corporate Income Taxes. When the politicians say “Read my lips - no increased taxes”. Don’t. Rather read the charts.
Now for a look at Income Taxes during the period 1934 to 1938.
The burden was shared equally between Individual and Corporate Income Taxes during this period of economic history. The real story remains the dramatic increase in tax collected in the shadow of fiscal deficits and stimulations. Taxes in both categories increased more than 3 fold over this period. It is no coincidence that the Emergency Banking Relief Act of 1933 was passed in March 1933 confiscating Gold holdings to boost the coffers of the state. The need was great and gold confiscation was a tax against “hoarding”, popular with all non gold owning voters.
Stimulation remorse will be of no help. What’s done is done. The tax bill is in the post. TAX is what pays back government debt, a bit of inflation just hides the method and hyperinflation pays nobody. Hyperinflation simply destroys the economy and the currency. Hyperinflation means a lot of pain but no net real gain for anybody, including government. Thus do not look upon hyperinflation as an escape route from the inevitable reality of taxation unless you are prepared to pay the ultimate economic price.
The USA has its international debt in US$’s, while most other countries’ international debt is denominated in a currency other than its own. Any depreciation of the US$ against other currencies will depreciate the international debt of the USA but at a huge cost to imported inflation. It is taxation from behind that most precious and coveted international comparative advantage, the reserve and trade currency of the world. Having the reserve currency of the world allows one the use of money creation to sneak taxation across international borders, yet it is but one of many advantages. Only the most desperate politician would cash in this chip for a short term stealth tax gain. When they do, they may prompt the Chinese and all other funding nations to ask the question; “whose tax base is it anyway?”
Stimulations from central government in whatever form they may take are “fly-now-pay-later” schemes. Japan tried the stimulation-and-recovery trick recently and it failed. In 2009 everybody is pinning their hopes on a global stimulation-and-recovery trick to work. Children marvel at magic tricks but they do not actually believe in them. Intelligent adults seem to have bet their entire economic futures and their children’s economic fortunes on the trick of stimulation and recovery. A spontaneous economic recovery may rescue the global economy. In the ensuing boom Government can collect the required tax shortfalls without a taxpayer backlash. That is the wistful thinking. Cause and effect says it is more likely that the excessive abuse of debt may force a realignment of economic structural distortions. No recovery but, as with the housing bubble and like a bad hangover, the government debt will remain after the stimulation bubbly has been consumed.
The bullish thesis is entirely reliant upon the “stimulation-and-recovery” trick. The fear that shows the white of their eyes at any talk about withdrawing “stimulation” is sufficient to expose the anchor of the bullish thesis. The bears fear “stimulation” equally but not for it’s so called potential to heal the economy, rather for its potential to cause bear rallies. Thus the bulls love stimulations for it allows speculative trading with the support and blessing of government while slaughtering the bears. It may be a tragic drama or an exiting adrenalin rush depending on your favourite candidate but in the bigger picture it is the cost of the game and who will foot the bill that counts.
Government will kick the tax can down the road until it runs out of credit like every reckless borrower eventually must. The alternative is debt revulsion for public debt but that is a responsible outcome where the opportunism of cashing in on stimulations is more likely to draw the crowds. Again, Japan has set the example running up public debt four fold since 1990 and reaped only a 20 year deflationary slump in return.
Consider the harm to the Japanese taxpaying generation who will have to pay for that gratuitous spending frenzy.
Look upon the projected US Government Spending from 2010 to 2019 (hereunder) and the very first chart in this essay of US Total Public Debt, then contemplate who will pay, when the taxman comes knocking…
Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
28 September 2009
© Sarel Oberholster
Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .
Tuesday, September 22, 2009
Dr Copper speaks on the economic recovery
It is said that copper (Cu) has a PhD in economics. The logic is that copper is found in almost every human economic endeavour and it is representative in all economies around the globe. The simplistic approach is that all the pertinent information about copper will be reflected in its price. Bare bones, look at the price action of copper and it will tell you what is happening in the economy.
Well, let’s interview Dr Copper and find its views on the state of the global economy.
First the basics, where are we?
Source: Kitco.com
The five year price action says “V” shape recovery. That is when one does not place too much emphasis on the bubble-like behaviour between 2004 and 2009. The five year volume data brings some uneasiness to the basic price action observation. Stock levels are still high and they are now also rising in a “V” shape. Where is the devil’s ton, that one ton of extra production which tips the price into a downward plunge?
One year price action is, of late more muted. The rising stock levels are seemingly in harmony with a lateral movement in the US$ price action since July 2009.
Looking only at copper in US$ terms does not represent a global picture. How does Dr Copper express itself in the major economies and some regional economies? It would also be useful to have a global benchmark which will be representative of currencies and commodities. Gold is the natural choice.
GOLD
Copper is expressed in ounces of gold in the same way as the copper price can be expressed in any currency. The price action of copper expressed in gold shows a peak and decline as opposed to the lateral price movement in US$.
Price action is what we are interested in and having established a gold benchmark we can now observe the relative currency performance against the benchmark.
US$
Short term flat and in step with benchmark but copper is becoming more expensive in US$ than in gold of late.
Euro (EU)
Short term flat and the Euro price trend for copper relative to the benchmark is about the same.
Japanese Yen
Short term trending down in Yen but copper relative to the benchmark is becoming more expensive in Yen.
UK Pound Sterling
Short term trending down and copper is becoming more expensive relative to gold in terms of Sterling.
Chinese Yuan
A short term rising copper price in Yuan and only very recently becoming more expensive relative to the benchmark.
Brazilian Real
A short term falling copper price in Reals and more expensive relative to the benchmark.
Indian Rupee
The Indian Rupee copper price has hugged the gold copper price like a lovesick teenager for most of this period. The short trend for the copper price in Rupees is flat and to trend more expensive relative to the benchmark.
Australian $
The short term copper price trend in Aus$’s is down. Price action against the benchmark is in lockstep.
South African Rand (ZAR)
Similar to the Aus$. Short trend copper rand is down.
Polish Zloty
The copper price in Zloty’s is trending flat and is becoming more expensive relative to the benchmark.
Dr Copper is somewhat stingy with its price action information on the economy and the current trends are anything but robust. The copper price was up strong in some currencies, not so strong in others. Now the copper price is trending flat to down in most cases. The results can be summarised in a table.
Chinese stockpiling is probably behind the price trend in the Yuan price of copper. The rest is giving a weak down signal at this stage. Only the two gold producers and the EU managed to hold their own against the gold price of copper.
The tentative results can be supplemented by looking at the relative price change in the various currencies since the beginning of the year. How did these currencies perform relative to copper?
The relative performances can be expanded to also measure the standing of the currencies against the gold price of copper. The Euro no longer performs when assessed in absolute terms and the Real is on top with absolute performance. Now if Dr Copper would just tell us whether we should consider the Brazilian economy strong or weak? Ditto on the Indian economy.
Extracting information from Dr Copper by looking at the price action is a tedious process. The “V” shaped recovery as presented in US$ price of copper has more to do with a weaker US$ than with a recovery in the global economy when one compare the performance of copper against gold and particularly commodity producing country currencies. Stockpiling and diversification from currency risk takes another bite from the uptrend in the copper price, neither of which is indicative of an economic recovery. The short term copper price trend gives a weak downward signal in spite of the continued need for store-of-value diversification.
Dr Copper says that we should be weary of proclaiming a “V” shaped recovery and in fact should be careful with any claims to a recovery until we see some more solid evidence. The warning is a bit more pronounced when Dr Copper and gold speak in unison on currencies and the devil’s ton is lurking in rising stockpiles.
Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 September 2009
© Sarel Oberholster
(Click on any of the charts for a larger version.)
Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .
Well, let’s interview Dr Copper and find its views on the state of the global economy.
First the basics, where are we?
Source: Kitco.com
The five year price action says “V” shape recovery. That is when one does not place too much emphasis on the bubble-like behaviour between 2004 and 2009. The five year volume data brings some uneasiness to the basic price action observation. Stock levels are still high and they are now also rising in a “V” shape. Where is the devil’s ton, that one ton of extra production which tips the price into a downward plunge?
One year price action is, of late more muted. The rising stock levels are seemingly in harmony with a lateral movement in the US$ price action since July 2009.
Looking only at copper in US$ terms does not represent a global picture. How does Dr Copper express itself in the major economies and some regional economies? It would also be useful to have a global benchmark which will be representative of currencies and commodities. Gold is the natural choice.
GOLD
Copper is expressed in ounces of gold in the same way as the copper price can be expressed in any currency. The price action of copper expressed in gold shows a peak and decline as opposed to the lateral price movement in US$.
Price action is what we are interested in and having established a gold benchmark we can now observe the relative currency performance against the benchmark.
US$
Short term flat and in step with benchmark but copper is becoming more expensive in US$ than in gold of late.
Euro (EU)
Short term flat and the Euro price trend for copper relative to the benchmark is about the same.
Japanese Yen
Short term trending down in Yen but copper relative to the benchmark is becoming more expensive in Yen.
UK Pound Sterling
Short term trending down and copper is becoming more expensive relative to gold in terms of Sterling.
Chinese Yuan
A short term rising copper price in Yuan and only very recently becoming more expensive relative to the benchmark.
Brazilian Real
A short term falling copper price in Reals and more expensive relative to the benchmark.
Indian Rupee
The Indian Rupee copper price has hugged the gold copper price like a lovesick teenager for most of this period. The short trend for the copper price in Rupees is flat and to trend more expensive relative to the benchmark.
Australian $
The short term copper price trend in Aus$’s is down. Price action against the benchmark is in lockstep.
South African Rand (ZAR)
Similar to the Aus$. Short trend copper rand is down.
Polish Zloty
The copper price in Zloty’s is trending flat and is becoming more expensive relative to the benchmark.
Dr Copper is somewhat stingy with its price action information on the economy and the current trends are anything but robust. The copper price was up strong in some currencies, not so strong in others. Now the copper price is trending flat to down in most cases. The results can be summarised in a table.
Chinese stockpiling is probably behind the price trend in the Yuan price of copper. The rest is giving a weak down signal at this stage. Only the two gold producers and the EU managed to hold their own against the gold price of copper.
The tentative results can be supplemented by looking at the relative price change in the various currencies since the beginning of the year. How did these currencies perform relative to copper?
The relative performances can be expanded to also measure the standing of the currencies against the gold price of copper. The Euro no longer performs when assessed in absolute terms and the Real is on top with absolute performance. Now if Dr Copper would just tell us whether we should consider the Brazilian economy strong or weak? Ditto on the Indian economy.
Extracting information from Dr Copper by looking at the price action is a tedious process. The “V” shaped recovery as presented in US$ price of copper has more to do with a weaker US$ than with a recovery in the global economy when one compare the performance of copper against gold and particularly commodity producing country currencies. Stockpiling and diversification from currency risk takes another bite from the uptrend in the copper price, neither of which is indicative of an economic recovery. The short term copper price trend gives a weak downward signal in spite of the continued need for store-of-value diversification.
Dr Copper says that we should be weary of proclaiming a “V” shaped recovery and in fact should be careful with any claims to a recovery until we see some more solid evidence. The warning is a bit more pronounced when Dr Copper and gold speak in unison on currencies and the devil’s ton is lurking in rising stockpiles.
Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 September 2009
© Sarel Oberholster
(Click on any of the charts for a larger version.)
Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .
Friday, September 18, 2009
Twin Peaks and the macro economic model of debt.
The correlation between the Dow and the Nikkei has been picked up by a number of other authors since the publication of the first Twin Peaks. It is of limited functional use without understanding the fundamental thesis behind its original creation and also the method of comparison.
It is statistically near impossible to have a visible and enduring correlation between the peak of the Nikkei in 1989 in Japan and the peak in the Dow in 2007 in the USA. To marvel at the correlation is to be distracted by a sideshow. The relationship between the peaks must also only be established at the peaks and not rebalanced thereafter. Rebalancing the correlation will facilitate a very close match but will defeat the whole object of the assessment for it will not allow the market drift to break off the correlation.
The thesis behind the twin peaks correlation is that Japan and the USA were and are implementing a similar macro economic model dominated by similar monetary and fiscal policies in two different economies in two different time periods. It therefore opens the probability that the outcomes in the two economies would tend to be similar. What then is the model?
This macro economic model is built upon dominant Central Government and Central Bank policy interventions based on mutually complimentary Monetary and Fiscal policies.
The first phase is dominated by a loose monetary policy whereby liquidity flows to the markets are maximised. These flows are channelled through the use of regulation and institutional design into asset inflations which are described as “wealth effects”. The conduit for the liquidity is mostly private debt formation anchored in asset collateral. Inflation in consumables is actively managed and discouraged. The underlying monetary policy floods the economy with liquidity to the point of debt saturation and follows the inevitable course to zero interest rates. Boom conditions are created during this first phase which boosts Central Government tax flows for “easy” fiscal conditions.
The advent of debt saturation in the private sector causes the collapse of the asset bubbles and the boom conditions disappear. The economic model now enters a second phase where Central Government is starved of taxable income. Monetary policy is shifted to accommodate rapid debt formation for Central Government. Every attempt is made to re-inflate the asset bubbles. Central Government in turn accelerates its spending, usually under the guise of so called “stimulation” ignoring falling tax inflows. Central Government will enjoy a “honeymoon” period within which it accelerates spending while placing no additional tax burden on its citizens. In fact, Central Government may even be using some of the debt to subsidise some or all taxpayers. Examples are tax rebates or “cash-for-clunkers” programmes. Monetary policy continues to maximise liquidity absorption but it manifests predominantly as Government debt. The honeymoon period is accommodated by a widening of the tax gap, the gap between Government spending and Government income from taxation. The “deficit”. The government pledging its future taxes to the money lenders.
The liquidity not destroyed in the collapse of the asset bubbles now teams up with the Central Government supply of liquidity to search out anything that may function as a store of value. Favourites are long life commodities and Stock Exchanges. The market for “stores of value” is soon in “inflation” conditions which will last for the duration of the “honeymoon” period of tax deferment.
The third phase is a long drawn out stage of stagnation and deflation. The unbreakable, undeniable law of taxation will assert itself. Government must tax for its spending. Dollar for dollar, pound for pound, yen for yen, yuan for yuan, euro for euro or whichever currency you wish to work in. The tax may be direct and visible or indirect through redistribution of the value of money away from taxpayers towards Government. A portion of the tax will be deferred to the future through Central Government borrowing but such borrowings are also subject to the laws of diminishing returns. Central Government debt formation is not divorced from the markets even with monetary policy support and will face increased resistance with each dollar increase in borrowing. The third phase is entered at the point where Central Government is forced to start closing the tax gap.
An alternative outcome for the third stage is economic and currency destruction in a hyperinflationary depression. It requires a policy of relentless “quantitative easing” whereby the Central Government ignores markets altogether to process its debt formation via unbridled money creation. I discuss this potential outcome in “War on Savings” which can be found on my blog.
Keynesian lore will propose that the economy will start growing as a result of the “stimulations” but it is simply a wish for rescue and certainly not a forgone conclusion. The irrefutable truth is that debt is not income and government spending can never be “income” for it can only originate as direct taxes (redistribution of someone else’s income), indirect taxes (monetary redistribution of purchasing power), or as debt which is simply deferred tax. There is no way around the law of taxation. Government must eventually tax dollar for dollar for its spending (the only question is who it will be – citizens of the USA or perhaps the savers of China?). That is the stasis trap of the third phase. Government debt formation slows down as it must. The tax gap can no longer be financed or expanded. Government and society now face the consequences of having spent the future.
Central Government must deal with the tax gap and the consequences of its own debt while the private sector must content with the consequences of its debt. Bubble formation is no longer an option as both the private sector and the public sector are soaked to saturation in debt. This is the set-up for the “lost decades” economic model.
The stock exchanges are but one place where we can monitor the development of the phases. We are presently in the tax honeymoon phase where society is growing polarised into “debtors” (often also called optimists, patriots or consumers) who believe that given enough “stimulation” a new boom will defer consequences once again; opposed by “savers” (often also called pessimists, traitors or hoarders) who are desperately trying to preserve the value of their savings. Both groups are looking at stock exchanges to obtain capital appreciation for debt repayment or capital protection against money creation. The Nikkei tells us a part of the story of the outcome for the Japanese participant who had to deal with this economic model. In the Twin Peaks charts I track and compare the outcomes of Japan and the USA as but one facet of the developments in an economic model built upon foundations of debt.
Here are the updated charts to Thursday 17th September 2009.
(Click to enlarge)
The Dow has moved above the Nikkei much like the first phase of the correlation after falling below the lows of the Nikkei in March 09. The correlation will have to reassert in a downward move towards a Dow of 5000 at around the end of May 2010 (Data table points; 5208 on 29 May 2010) to remain valid. It will take longer and go lower if recent history were to repeat. This correlation now runs over 488 data points from 9 October 2007 to 17 September 2009.
That is the near picture. Now for a look at the macro chart.
(Click to enlarge)
The keen observer will note the first bounce peak in the Nikkei (on the October 2008 grid) against the current levels of the Dow. I can give the data points for the 2020 lows or the 2026 lows but it would assume this correlation staying in place until then. For now, observation will do. I would prefer to heed the warning inherent to these charts and hope for outcomes which are not steeped in habitual debt formation, private or public.
I repeat my previous observation. These charts are not for day trading. These are trends within a macroeconomic argument. There is no statistical basis for a correlation of this duration and its continuation will be supportive of the underlying economic thesis. The thesis will have to be re-assessed in time, based on the outcome of this facet as well as all the other dynamics. I see no reason to revise or abandon the thesis at this stage and now am keenly interested to see if or when the correlation in the downswing reasserts.
Happy hunting.
Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
18 August 2009
Ps. I will continue to track the peaks and will publish another update should we see an interesting development. Otherwise expect an update in another two months.
© Sarel Oberholster
Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .
It is statistically near impossible to have a visible and enduring correlation between the peak of the Nikkei in 1989 in Japan and the peak in the Dow in 2007 in the USA. To marvel at the correlation is to be distracted by a sideshow. The relationship between the peaks must also only be established at the peaks and not rebalanced thereafter. Rebalancing the correlation will facilitate a very close match but will defeat the whole object of the assessment for it will not allow the market drift to break off the correlation.
The thesis behind the twin peaks correlation is that Japan and the USA were and are implementing a similar macro economic model dominated by similar monetary and fiscal policies in two different economies in two different time periods. It therefore opens the probability that the outcomes in the two economies would tend to be similar. What then is the model?
This macro economic model is built upon dominant Central Government and Central Bank policy interventions based on mutually complimentary Monetary and Fiscal policies.
The first phase is dominated by a loose monetary policy whereby liquidity flows to the markets are maximised. These flows are channelled through the use of regulation and institutional design into asset inflations which are described as “wealth effects”. The conduit for the liquidity is mostly private debt formation anchored in asset collateral. Inflation in consumables is actively managed and discouraged. The underlying monetary policy floods the economy with liquidity to the point of debt saturation and follows the inevitable course to zero interest rates. Boom conditions are created during this first phase which boosts Central Government tax flows for “easy” fiscal conditions.
The advent of debt saturation in the private sector causes the collapse of the asset bubbles and the boom conditions disappear. The economic model now enters a second phase where Central Government is starved of taxable income. Monetary policy is shifted to accommodate rapid debt formation for Central Government. Every attempt is made to re-inflate the asset bubbles. Central Government in turn accelerates its spending, usually under the guise of so called “stimulation” ignoring falling tax inflows. Central Government will enjoy a “honeymoon” period within which it accelerates spending while placing no additional tax burden on its citizens. In fact, Central Government may even be using some of the debt to subsidise some or all taxpayers. Examples are tax rebates or “cash-for-clunkers” programmes. Monetary policy continues to maximise liquidity absorption but it manifests predominantly as Government debt. The honeymoon period is accommodated by a widening of the tax gap, the gap between Government spending and Government income from taxation. The “deficit”. The government pledging its future taxes to the money lenders.
The liquidity not destroyed in the collapse of the asset bubbles now teams up with the Central Government supply of liquidity to search out anything that may function as a store of value. Favourites are long life commodities and Stock Exchanges. The market for “stores of value” is soon in “inflation” conditions which will last for the duration of the “honeymoon” period of tax deferment.
The third phase is a long drawn out stage of stagnation and deflation. The unbreakable, undeniable law of taxation will assert itself. Government must tax for its spending. Dollar for dollar, pound for pound, yen for yen, yuan for yuan, euro for euro or whichever currency you wish to work in. The tax may be direct and visible or indirect through redistribution of the value of money away from taxpayers towards Government. A portion of the tax will be deferred to the future through Central Government borrowing but such borrowings are also subject to the laws of diminishing returns. Central Government debt formation is not divorced from the markets even with monetary policy support and will face increased resistance with each dollar increase in borrowing. The third phase is entered at the point where Central Government is forced to start closing the tax gap.
An alternative outcome for the third stage is economic and currency destruction in a hyperinflationary depression. It requires a policy of relentless “quantitative easing” whereby the Central Government ignores markets altogether to process its debt formation via unbridled money creation. I discuss this potential outcome in “War on Savings” which can be found on my blog.
Keynesian lore will propose that the economy will start growing as a result of the “stimulations” but it is simply a wish for rescue and certainly not a forgone conclusion. The irrefutable truth is that debt is not income and government spending can never be “income” for it can only originate as direct taxes (redistribution of someone else’s income), indirect taxes (monetary redistribution of purchasing power), or as debt which is simply deferred tax. There is no way around the law of taxation. Government must eventually tax dollar for dollar for its spending (the only question is who it will be – citizens of the USA or perhaps the savers of China?). That is the stasis trap of the third phase. Government debt formation slows down as it must. The tax gap can no longer be financed or expanded. Government and society now face the consequences of having spent the future.
Central Government must deal with the tax gap and the consequences of its own debt while the private sector must content with the consequences of its debt. Bubble formation is no longer an option as both the private sector and the public sector are soaked to saturation in debt. This is the set-up for the “lost decades” economic model.
The stock exchanges are but one place where we can monitor the development of the phases. We are presently in the tax honeymoon phase where society is growing polarised into “debtors” (often also called optimists, patriots or consumers) who believe that given enough “stimulation” a new boom will defer consequences once again; opposed by “savers” (often also called pessimists, traitors or hoarders) who are desperately trying to preserve the value of their savings. Both groups are looking at stock exchanges to obtain capital appreciation for debt repayment or capital protection against money creation. The Nikkei tells us a part of the story of the outcome for the Japanese participant who had to deal with this economic model. In the Twin Peaks charts I track and compare the outcomes of Japan and the USA as but one facet of the developments in an economic model built upon foundations of debt.
Here are the updated charts to Thursday 17th September 2009.
(Click to enlarge)
The Dow has moved above the Nikkei much like the first phase of the correlation after falling below the lows of the Nikkei in March 09. The correlation will have to reassert in a downward move towards a Dow of 5000 at around the end of May 2010 (Data table points; 5208 on 29 May 2010) to remain valid. It will take longer and go lower if recent history were to repeat. This correlation now runs over 488 data points from 9 October 2007 to 17 September 2009.
That is the near picture. Now for a look at the macro chart.
(Click to enlarge)
The keen observer will note the first bounce peak in the Nikkei (on the October 2008 grid) against the current levels of the Dow. I can give the data points for the 2020 lows or the 2026 lows but it would assume this correlation staying in place until then. For now, observation will do. I would prefer to heed the warning inherent to these charts and hope for outcomes which are not steeped in habitual debt formation, private or public.
I repeat my previous observation. These charts are not for day trading. These are trends within a macroeconomic argument. There is no statistical basis for a correlation of this duration and its continuation will be supportive of the underlying economic thesis. The thesis will have to be re-assessed in time, based on the outcome of this facet as well as all the other dynamics. I see no reason to revise or abandon the thesis at this stage and now am keenly interested to see if or when the correlation in the downswing reasserts.
Happy hunting.
Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
18 August 2009
Ps. I will continue to track the peaks and will publish another update should we see an interesting development. Otherwise expect an update in another two months.
© Sarel Oberholster
Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .
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