1976, the author Astrid Lindgren of Pippi Longstockings fame incurred a
102% marginal tax rate by the Swedish Government,
she countered by writing a satirical fairytale, « Pomperipossa in
Monismania » – I think the title explains itself. She not only raised a
fierce debate but also imparted a major loss on the Social Democratic
government in elections later that year, as they lost
power for the first time 44 years.
bring you the story because Astrid Lindgren’s main argument with the
government was the overreaching power of government
to not only tax her, but to decide everything. Pomperissa in the book
exclaims: « 102%, that’s not even possible ». Well I think the lesson over
the last two months is that everything – literally everything – is
the last couple of months we have seen austerity abandoned, central
banks losing independence, fiscal rules in the
EU out the window, infinite QE all around the world, an explosion of
the Fed’s balance sheet to bail-out Wall Street and high risk corporate
debt, billions extended a bit less efficiently to bail-out Main Street,
an introduction through the back door of Universal-Basic-Income
(grants), Modern Monetary Theory (Monetizing debt of government through
central banks balance sheet expansion). The most aggressive actor in
all of this, the US Federal Reserve under Chairman Powell has ripped
open swap lines to global central banks and in
some of its more creative moves has violated the Federal Reserve Act by
by using SPV’s, yes that old chestnut, to « make everyone whole ».
make everyone whole argument is a descent into terrible moral hazard,
as we now not only abandon price discovery, but
also the market based economy. This bailout means that airlines
executives who left no cash on their balance sheet, and who allotted
themselves 100 of millions of stocks in options through depleting the
same balance sheet with massive stock buy-back programs.
Or take IBM, which has spent $157 billion worth of stock last ten years
but has a current market cap of $102 billion. Maybe we need to call on
another Scandinavian author – the Danish H.C Andersen and his fairy tale
of « The Emperor’s new clothes” – to fully
understand what is going on.
infinite support in all shapes and forms means we now have paradigms
and business models which should not be possible:
Negative Interest Rates, being paid to borrow money, and even this
week, negative oil prices, or being paid to consume fossil fuel. I could
try to explain why everything is at it is, but the task is simply too
tall, because it just doesn’t make any sense.
Sure, I can come up with a “talking head” explanation, but this market
environment is simply too nonsensical to understand.
is clear though is that both negative yields and negative oil prices
are a function of ‘Pomperissa in Monismania’
– government and central bank policy overreach. Government has replaced
markets in determining prices and therefore supply and demand. Oil got
too cheap – and briefly negative because of the « free ride » enjoyed by
oil producers in subsidies and mal-investment
inducing low interest rates. This « support » kept marginal operators
pumping oil despite never having realized a positive cash flow, even
when oil prices were much higher. Simply put, oil prices have now also
reached the zero bound as well and more importantly,
as my friend Mark Voller told me this week, we now have ‘liquid, but
insolvent companies’operating in all sectors but in particular in the ones with big
jobs, big investments and of strategic importance. Welcome to
1970s started with big government and a strong USD and saw the USD
weaken all decade and then high inflation and high
unemployment after Nixon depegged the USD from gold in 1971. Marring
the decade were supply constraints and terrorism. Geopolitics saw the
enlargement of the EU, the opening up of China. Environmental policy
crept up on the radar for the first time.
now? We have in my opinion gone full circle over the last 50 years and
learned absolutely nothing. The first Earth
Day was exactly 50 years ago today, and the environment is an even
bigger issue today with our ever more anthropocentric world view, China
is at risk of being « cut off », the USD is veru strong and is still the
world’s reserve standard – a standard the world
desperately needs to depeg from as the US Fed and government have
decided to pay anyone holding US debt with IOU’s based on printing
money. EU membership has peaked will most likely be reduced again (Who
will be first, Hungary?, Italy?).
is still lacking despite the desperate policy attempt to “achieve 2%”.
But the bottlenecks and real capital destruction
this crisis has created, together with infinite spending and grants to
make everyone whole will see inflation returning again with a vengeance,
sometime in the next two years. Unemployment is hitting 20% or worse in
the US, and it will eventually fall, but
100-million plus American families have been impacted for this
« inconvenience » here and now, and the UBI-type programs will act a bit
like old trade unions did by requiring companies to bid up labor costs
to get people to work any job. In short, welcome back
to the 1970s.
What however concerns me more than the resonance with the setup in the 1970’s is that other aspects of our current situation remind me of the Post World War One timeframe. This was the last time we saw truly massive sovereign debt failures. This time around, Ecuador has already declared bankruptcy, African nations have received an eight month moratorium and Argentina has declared its own moratorium and told creditors to get lost. In the Middle East Oman and Bahrain are effectively shut out of the bond market and are seeing their CDS prices (default insurance) rise and rise.
Sovereign-debt relief and its aftermath: The 1930s, the 1990s, the future?
Carmen Reinhart, Christoph Trebesch 21 October 2014
Look at the debt forgiveness needed in 1930s: France at 52% debt relief relative to GDP, the UK at almost 25%, Italy at
36% and Greece at 43%.
And here is an « instructional chart » on debt crisis’
And here is an « instructional chart » on debt crisis’
President Macron raised a critical question on Friday in the F.T – Is
Europe a political union or a mercantile club?
The answer needs to be answered this Thursday at the EU Council
meeting, but I think we all know the answer. If so, there will be
countries leaving the EU and soon, and on that note, the ultimate risk
of sovereign defaults is on the line.
monitor Italian BTP’s (sovereign debt) as the proxy for the belief that
the EU holds together. The BTP market is sending
stress signals despite the fact that most italian debt is in domestic
hands, but we may soon have a situation where being part of a mercantile
EU club no longer makes sense, when there are no goods to trade and the
legacy of past debt is denominated in a currency
Italy can’t directly control. Also if the Covid19 crisis is not the
time for Europe to step up and act in total solidarity, when is the
Most important though, the real reason for a break-down of sovereign debt is not the collapsing international cooperation
but the fact that governments and central banks have gone too far this time in bailout Monismania.
that the integrity of government financing is based on one thing only:
the infinite ability for government to
tax its companies and citizens. What we will see over the next ten
years will be similar to what we saw in the 1970s, bigger and bigger
government ownership of companies, dictating business and boardroom
decisions, less and less return on invested capital,
but also muchhigher taxes on first technology companies, but
also other corporates and financial income. The VAT will rise, as will
inheritance taxes and real estate taxes. Deficits will keep growing, but
will be more affordable this time around because
of the brave new world of Yield Curve Control, which will keep funding
for governments artificially cheap and devalue past debts as inflation
vastly exceeds policy rates. This is the very definition of financial
repression and will lead to a massive bull market
in tangible assets. It’s not new, either – the Fed was tasked with
yield curve control after WWII to devalue the stock of US treasury debt
used to pay for the war effort.
Prepare yourselves, as the world is fast accelerating to a place of no price discovery, one guarantor of all risk good
and bad, higher taxes, and big society changes. This will require that we recalibrate the « good life » we have gotten used to.
Lindgren forced a government change, I am absolutely sure the
over-reach and 1970s style government will do the
same, but first this policy response needs to fail. Only through
failing will we learn. That’s the combined lesson of 1920 and 1930s, the
1970s and now 2007/2020.