Satyajit Das, a man gifted with a unique insight into financial markets, was welcomed to the stage at the World War D conference on Tuesday. Part of his introduction was a mention that he doesn’t own a mobile phone.
Yes, that’s right. Apparently it’s news if someone doesn’t own a mobile phone.
The crowd politely laughed. Das wasn’t here to talk about technology, so it didn’t matter that he doesn’t own a mobile phone.
What did matter to the audience was Das’s take on the current mess we call a financial system…
Now Das is an entertaining speaker. His turn of phrase and emphasis had the masses laughing almost every minute. But underneath every line to elicit a giggle or snort was a serious message.
As he stood in front of the attendees, he opened with ‘Problems, what problems? We’re rich. Every minute of every day the Dow makes a new high.’
He then bombarded the audience with truly frightening statistics to demonstrate the absurdity of this statement.
Like the fact that Japan’s market is almost 50% below its all-time highs, and Australia’s share market is about 20% below its all times high. ‘But,’ he paused, ‘You are rich.’
Alarming the crowd further were the inflation-adjusted figures for superannuation over the period of 2000–2013. His calculations show we’re only up 3.51% on average. ‘But again, you ARE rich,’ Das told the room.
If anyone knows how to keep a crowd hanging, it’s Das. From here, no one dared shift in their seat…just in case they missed some valuable information from his rapid-fire presentation.
Americans on food stamps have risen to 47 million today, from 27 million in October 2007. These are essential, he argued, to keep people from rioting in the streets. He may have been joking. But that one line demonstrates two things: The rise in poverty in a ‘rich’ nation and the increasing dependency on the government to provide.
Moving on, Das wanted to ‘…look at the real economy, where they don’t shuffle papers around.’
But looking at the real economy paints a bleak picture, Das noted.
America needs US$1.6 trillion to create US$300 billion dollars of ‘growth’ in the economy. What’s more, debt levels haven’t been this high since the Napoleonic Wars.
Emerging markets, America and the other countries considered ‘rich’, financialised their economies. They spend more time shuffling assets and financial engineering rather than any real engineering.
Increases in debt levels, financial imbalances and entitlement culture were the causes of the crisis Das tells us.
‘The real solution is to reduce debt, reverse the imbalances, decrease the financialisation of the economy and bring about major behavioural changes,’ says Das.
‘But rather than deal with the fundamental issues, policy makers substituted public spending, financed by government debt or central banks, to boost demand.’
What no politician or central banker will ever tell you, expresses Das, is that we need a 30% drop in gross domestic product.
The historically low interest rates also got a mention from Das on Tuesday. This, he reasons, continues to create imbalances in the economy. However central banks have to keep fiddling with the interest rate. Simply because no one in the Western world has sustainable debt.
‘As an example’ Das explains, ‘a 1% rise in rates would increase the debt servicing costs to the US government by around $170 billion. A rise of 1% in G7 interest rates increases the interest expense of the G7 countries by around US$1.4 trillion.’
Without economic growth, you can’t pay back your debt. However, there is no economic growth. So interest rates won’t go any higher for now.
He points out when then Federal Reserve Chairman Ben Bernanke announced QE3 — quantitative easing — Bernanke said himself that it would not significantly increase economic activity directly.
This leads to the relevance, and perhaps stupidity, of central banks.
Forward guidance, he declared is an abused term in the central bankers handbook of doublespeak.
‘Nobody actually believes central banks anymore,’ he declared.
He likens their language to something similar to a Monty Python skit.
One European Central Bank member said last year, that ‘[forward guidance is] a change in communication but not in monetary policy strategy.’
Or this, from the current US Federal Reserve chairwoman, Janet Yellen. ‘If I thought that was a situation we will likely encounter in the next several years we would probably have revised our forward guidance in a different way. We revised it as we did, eliminating that language because it didn’t seem at all likely.’
However, Das said, nothing ever lives up to the comments from Alan Greenspan (former Fed Chairman): ‘I know you believe you understand what you think I said, but I am not sure you realise that what you heard is not what I meant.’
Later, Greenspan added: ‘If I have made myself clear then you have misunderstood me.’
Finally, when the crowd stopped laughing, Das reminded everyone that, ‘They get paid to do this.’
After the sledging on central bankers was over, he moved on to how we get out of this mess.
And right now, there is no ‘stage left’, according to Das.
Higher interest rates will crash the economy. And the actual limit of money printing isn’t known yet. Das wondered aloud just how much more the world can handle.
Policy incompetence, ‘pointy heads in financial markets’ and plenty of people talking but not actually saying anything aren’t going to dig the world out of the ongoing financial calamity.
From here, Das reckons there’s no path to normalisation. Perhaps secular stagnation or slow global bankruptcy.
More likely, he thinks we’re looking at a life of financial repression from governments. ‘After all, isn’t the art of taxation to pluck the goose with the least amount of hissing?’
With that, he offered the crowd a tip or two on where to stick their money (hint: it’s not shares). And then told the attendees ‘there’s no way out.’
Shae Smith+
Contributing Editor, Money Morning
PS: We captured Das’s full 90 minute presentation on tape. You can find out how to watch it, plus more than 15 hours-worth of other intriguing material and financial insight from the conference, here.