Mish’s Retort to the WEF Report

From Mish’s blog:

The accompanying PDF entitled More Credit with Fewer Crises is 84 pages of economic claptrap. The main mission of the World Economic Forum appears to cram more credit down the throats of a world so stuffed with credit it cannot possibly be paid back.

Australian economist Steve Keen found three major flaws in the report. There are many others. Inquiring minds will certainly want to read Keen's WEF-mocking analysis entitled How I learnt to stop worrying and love The Bank.

The three flaws Keen spotted are:
• Poor starting year for the report
• Report ignores financial sector debt
• Report ignores Ponzi schemes

The WEF brags "To create a robust fact base for the study, a detailed global credit model was constructed to map credit volumes between 2000 and 2009, and to project potential credit demand to 2020. The model spans 79 countries representing 99% of world credit volume."

I would specifically like to point out the absurdity of calling a study "robust" that only encompasses only the last 10 years, ignoring the great depression, WWI, WWII, the Great Society, the rise and fall of unions, the effects of baby boomers moving through the economy, and the move from one to two wage earners in a family.

I also point out the study does not mention Bretton-Woods, Nixon closing the gold window, or how wealth has become increasingly concentrated in the hands of fewer and fewer people, while those in debt have become debt slaves for life.

It's important to understand that rampant credit expansion is in and of itself inflation. My precise definition is "Inflation is a net expansion of money and credit, with credit marked-to-market.

The primary beneficiaries of "inflation" are those with first access to credit: banks, government, and the wealthy. By the time credit filters down to those lowest on the totem pole, those who take credit are screwed. The housing bubble is proof enough.

Credit bubbles pop, they always do. Thus, the idea that the WEF can put in place procedures to identify bubbles while openly promoting the doubling of credit is simply preposterous.

Note that McKinsey interviewed all the people who benefited from the bubble. CEOs, rating agency executives, central bankers, and regulators all were beneficiaries of the credit expansion. Of course they are going to agree on the need for more of it even if they cannot come up with a precise definition.

Report bias is even more basic than interview bias. The study's mission seems to be to determine how much credit is needed to achieve desired GDP growth. What if the desired GDP growth is flawed?

I can easily define "sustainable credit" conditions. All it takes is a 100% gold-back dollar and no fractional reserve lending. Heck, abolishing fractional reserve lending alone would do it.

I have to laugh at the ridiculous question the report asks: Will Credit Growth Be Sufficient to Meet Demand? In short, there will be significant challenges in channelling credit to where it is needed.

In a fractional reserve lending system with credit priced too cheaply and central bankers willing to act as lenders of last resort, the last worry anyone should have is whether credit growth will be sufficient to meet demand.

By the way, did you catch the flaw in the question itself? There is unlimited demand for credit if credit is cheap enough. As I pointed out before, the article forgot to address "the price of credit" and that silly question highlights the flaw.

Bear in mind that in a deflationary environment the price of credit might have to drop to zero, perhaps even negative, before any credit worthy borrowers want it, but priced right, there will unlimited demand for credit.

The financial crisis not only shook the foundations of the world economy, it also suggested to many observers that overall credit levels were unsustainably high and would need to be scaled back. The analysis in this report provides a different perspective: credit demand will grow strongly in the decade ahead, and meeting this demand is not only sustainable in principle, but also essential if the world is to meet its economic development goals.

Flaws after flaws after flaws mount up. The paragraph above shows the authors do not know the difference between real growth (production and output), vs. "economic development goals" as measured by arbitrary measures of GDP and government spending.

Government spending, no matter how ridiculous, adds to GDP by definition. Note that it has taken fed balance sheet expansion by $2 trillion and deficit spending of $1.5 trillion just to get a GDP rising at a 3% clip.

Also note that taxpayers bailed out the banks but still hold the debt. That situation holds true in the US, Ireland, and Spain (places where the housing bubble popped). The housing bubble is bursting in Australia right now and will burst in Canada, the UK, and China at some point.

Every one of those bubbles was caused by credit expansion yet the report's conclusion is we need more credit. The report's major worry is credit expansion will be insufficient.

Summary of Flaws
1. Failure to understand the role of Fractional Reserve Lending
2. Failure to consider the price of credit
3. Failure to discuss the beneficiaries of inflation and credit expansion
4. Interview bias
5. Report bias
6. Failure to encompass sufficient economic history
7. No consideration of credit expansion as a cause of the Great Depression
8. No discussion of the role of Bretton Woods or central bankers on credit bubbles
9. Participants do not understand inflation
10. Report did not properly factor in wage growth or taxes
11. Report did not consider global wage arbitrage as a limiting factor in Western economies
12. Report did not consider income inequality
13. Report does not understand the infeasibility of perpetual compounding at 6% annualized
14. Report has no concept of valid human rights
15. Report fails to consider wealth effect
16. Poor starting year for the report
17. Report ignores financial sector debt
18. Report ignores Ponzi schemes

http://globaleconomicanalysis.blogspot.com/2011/01/world-economic-forum-endorses-fraud.html