How The Middle Class, Or The New Rentiers, Is Stuck Between Deflation And Hyperinflation
Rentiers Are Headed for Trouble, but Who Are They?
June 24, 2010
By John R. Taylor, Jr.
Chief Investment Officer, FX Concepts
The world is currently overwhelmed with debt, but underwhelmed with growth. Everyone is trying to
export, but no country has embraced the concept of expanding domestic consumption. Although I
personally like consumption, I am an American and therefore over-borrowed and unable to service the
debt loads of my city, my state, and my country, not to mention my own personal debt load. With the
Americans no longer available as consumer of the last resort, and no one else stepping up, global final
sales will stagnate in the years ahead. As a result, global debt loads will become relatively larger. If the
world economic pie can not grow strongly, thereby lessening the relative size of global debts, the magic
of compound interest will certainly bankrupt many governments and commercial entities. Currently
there is a growing solvency crisis impacting many Eurozone sovereigns and another one that is
occurring within many states and jurisdictions in the United States. It seems quite obvious that many of
these problems will lead to default and the loss of principal on a grand scale. In the next few years, a
greatly increased percentage of all outstanding investment grade global debt will default.
Historically, whenever debt levels have become overwhelming, countries defaulted on their debt, often
by killing the bankers or by changing the terms of the debt. Kings came up with many nefarious
schemes to escape the burden of repaying the debt they owed, but they had an advantage that modern
governments do not have. The people that owned the debt in the old days were identifiable; Karl Marx
referred to them as the rentiers. They were the ones who lived by clipping coupons, doing no work;
they were the leeches that lived off the work of others. The rentiers were not only the ‘sometimes’
enemies of the king and his court, but they also were the ‘constant’ enemy of the working masses and
the middle class. As such they could be singled out by the authorities and persecuted or robbed
without much fear. Some European monarchs like Philip IV defaulted many times, but continued their
aggressive (military) spending policies. Modern democratic governments bound by the rule of law
might find it hard to be so creative, but that is not the biggest restriction indebted governments face.
They can’t identify the bad guys, Keynes’ “functionless investors.” Who are those who benefit from this
passive income, today’s rentiers? They are not the owners of the banks like the ultra-wealthy JP
Morgan or John D. Rockefeller owner of Standard Oil, as people of this type now hold only a tiny
percentage of the outstanding debt. The owners of the debt are us, the vast middle class. We public
and private pensioners and life insurance holders are the ones who are the rentiers. About 30% of US
GDP can be classified as passive. European numbers are similar. And, now that more and more of us
are at retirement age, we are expecting to live on our savings. Our retirement income might look like
an entitlement to some, but to us it is our right. What happens next?
In 2010, the authorities seem to have only two choices: allow defaults, which lead to deflation and
tremendous stress to the political system and public order; or inflate so that debts lose their
significance, which eventually leads to hyper-inflation and tremendous stress to the political system and
public order. Growth is a theoretical way out of this dilemma, but with shrinking populations and
increased regulation, Europe cannot manage this option. The US might, but the way will be difficult.
Cascading defaults will strip away many entitlements upsetting the rentiers and those who had planned
to become rentiers in the future. Countries that choose to allow defaults will see their currencies rally
as there will be a shrinkage of currency outstanding increasing the value of the rest, but collapsing
equity markets will test their resolve at every turn. We rentiers will be lucky if we can enjoy our dotage
h/t Teddy KGB
June 24, 2010
By John R. Taylor, Jr.
Chief Investment Officer, FX Concepts
The world is currently overwhelmed with debt, but underwhelmed with growth. Everyone is trying to
export, but no country has embraced the concept of expanding domestic consumption. Although I
personally like consumption, I am an American and therefore over-borrowed and unable to service the
debt loads of my city, my state, and my country, not to mention my own personal debt load. With the
Americans no longer available as consumer of the last resort, and no one else stepping up, global final
sales will stagnate in the years ahead. As a result, global debt loads will become relatively larger. If the
world economic pie can not grow strongly, thereby lessening the relative size of global debts, the magic
of compound interest will certainly bankrupt many governments and commercial entities. Currently
there is a growing solvency crisis impacting many Eurozone sovereigns and another one that is
occurring within many states and jurisdictions in the United States. It seems quite obvious that many of
these problems will lead to default and the loss of principal on a grand scale. In the next few years, a
greatly increased percentage of all outstanding investment grade global debt will default.
Historically, whenever debt levels have become overwhelming, countries defaulted on their debt, often
by killing the bankers or by changing the terms of the debt. Kings came up with many nefarious
schemes to escape the burden of repaying the debt they owed, but they had an advantage that modern
governments do not have. The people that owned the debt in the old days were identifiable; Karl Marx
referred to them as the rentiers. They were the ones who lived by clipping coupons, doing no work;
they were the leeches that lived off the work of others. The rentiers were not only the ‘sometimes’
enemies of the king and his court, but they also were the ‘constant’ enemy of the working masses and
the middle class. As such they could be singled out by the authorities and persecuted or robbed
without much fear. Some European monarchs like Philip IV defaulted many times, but continued their
aggressive (military) spending policies. Modern democratic governments bound by the rule of law
might find it hard to be so creative, but that is not the biggest restriction indebted governments face.
They can’t identify the bad guys, Keynes’ “functionless investors.” Who are those who benefit from this
passive income, today’s rentiers? They are not the owners of the banks like the ultra-wealthy JP
Morgan or John D. Rockefeller owner of Standard Oil, as people of this type now hold only a tiny
percentage of the outstanding debt. The owners of the debt are us, the vast middle class. We public
and private pensioners and life insurance holders are the ones who are the rentiers. About 30% of US
GDP can be classified as passive. European numbers are similar. And, now that more and more of us
are at retirement age, we are expecting to live on our savings. Our retirement income might look like
an entitlement to some, but to us it is our right. What happens next?
In 2010, the authorities seem to have only two choices: allow defaults, which lead to deflation and
tremendous stress to the political system and public order; or inflate so that debts lose their
significance, which eventually leads to hyper-inflation and tremendous stress to the political system and
public order. Growth is a theoretical way out of this dilemma, but with shrinking populations and
increased regulation, Europe cannot manage this option. The US might, but the way will be difficult.
Cascading defaults will strip away many entitlements upsetting the rentiers and those who had planned
to become rentiers in the future. Countries that choose to allow defaults will see their currencies rally
as there will be a shrinkage of currency outstanding increasing the value of the rest, but collapsing
equity markets will test their resolve at every turn. We rentiers will be lucky if we can enjoy our dotage
h/t Teddy KGB
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