Seeking Alpha

EcPoFi's  Instablog

Send Message
Atle Willems, CFA, is an equity investor with a long-term view investing in undervalued listed shares with solid operational track records and sensible balance sheets. He holds a Master degree in finance from Nottingham University Business School and is a Chartered Financial Analyst (CFA)... More
My company:
My blog:
EcPoFi - Economics, Politics, Finance
View EcPoFi's Instablogs on:
  • Waiting For Economic Growth Is Wishful Thinking

    Originally posted on 4 April 2014

    I constantly come across reports claiming economic growth in Europe and the US is picking up. Many draw this conclusion from looking at changes in GDP. An increase in GDP is an increase in economic growth the thinking goes. But true economic growth is defined as "an increase in living standards". Without getting into a long debate of whether GDP growth is an indicator of economic growth, it perhaps suffices to ask whether U.S. citizens today really are 16.3% better off than they were at the end of 2007. This happens to be the overall growth in GDP from Q4 2007 to Q4 2013?

    A higher living standard means we are able to satisfy more of our wants. To achieve this we need to save and invest in order to produce goods and services to satisfy this end. The more efficient we become at these tasks, the more we produce and the more we can ultimately satisfy these wants through the act of consumption. By producing and consuming more of what we want and allocating resources in the direction of producing the most urgent wants first (and then proceeding down the wish list), we become better off economically speaking.

    It's the role of businesses to produce goods and services that satisfy consumers wants and needs. For these business to operate and to become better at what they do, they require savings which can be channeled into investments and producers goods which leads to the building up of capital. Capital accumulation means that business can produce not only more consumer goods than before, but also produce those goods more efficiently. This leads to not only cheaper goods and services ceteris paribus, but also higher wages as workers become more productive as a result. Taxes reduces the amount of savings in an economy and hence the resources available for investments.

    The market is an intricate web of actors and prices that interact on a continuous basis to exchange those goods and services produced. It consists of people who exchange something they want less off (selling) for something they want more (buying). Everybody choosing to exchange based on their free will wins (at least ex ante). This market is made up of all of us, both producers and consumers, independent of religion or political beliefs and includes actors which are short and tall, nice and mean, black and white and rich and poor. The market is an integral part of civilized society, without it there would be no society as we know it. It's the most wide spread form of social co-operation that exist. Strangely, this is too often forgotten about by politicians, voters and even some economists. Worse yet, some are not even aware of this fact.

    For businesses to produce and for the market to work as efficiently as possible, both require minimum government intervention, which only serves to substitutes coercion for voluntary actions and to distort all important price signals.

    To summarise, for economic growth to take place the following are prerequisites:

    • An increasing proportion of people need to take part in the actual production of goods and services
    • Increased savings to fuel investments and capital accumulation
    • A reduction of government intervention

    We here come to the crux of the matter: for economic growth to take place, governments must shrink in size and a larger proportion of people need to work in the productive sector. The overall tax burden must be reduced to allow an increase in savings. In addition, government intervention in the market needs to end and unnecessary regulations of the market must be removed. If not, nothing will fundamentally change as these factors combined explain much of the reason both Europe and the US entered the recession in the first place.

    Finally, all that went wrong in both the U.S. and Europe was made possible through fractional reserve banking systems supported by central banks. Such a system makes it possible to create money out of thin air which can then be used to finance a range of projects that otherwise would not have been able to attain finance. The monetary system hence also need to be improved to make it impossible for undue expansion of the money supply (see here for more on this).

    To raise the prospects for achieving economic growth going forward, we need to change what was wrong with the economy in the first place. Otherwise, expecting and waiting for economic growth would be wishful thinking at best. Above I have tried to highlight some of the key areas that are holding economic growth back. Of course, businesses become better every day at producing even with high taxes and intervention*. This by itself creates some growth, but the growth would be modest at best and significantly below what it could be.

    *And we could of course suddenly discover a giant deposit of oil reducing the price accordingly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 09 8:32 AM | Link | Comment!
  • U.S. Money, Credit & Treasuries Review (As Of 19 March 2014)

    The U.S monetary base increased USD 71.5 billion during the last month according to the most recent bi-weekly monetary statistics released by the Fed. During the past 12 months the base has increased a total of USD 978.8 billion, or 33.1%. Though a significant increase, it was the lowest increase in the base in percentage terms since early September last year. It has gradually fallen since hitting 39.4% at the end of last year. This decline in the year on year (YoY) growth rate will continue going forward if the Fed proceeds as planned as it has now tapered its asset purchases by USD 30 billion a month to USD 55 billion a month starting April this year.

    (click to enlarge)

    As I have explained on numerous occasions before, as the Fed is tapering an increased burden is put on banks to keep the growth rate in the money supply up. If they don't, the money supply growth will plummet and drag with it both the stock market and the economy. Should that look like becoming the case, the Fed will likely widen the monetary flood gates further once again. Bank Credit is now however showing some revived signs of increased growth. Having bottomed at 1.14% toward the end of 2013, the YoY growth rate has climbed to 3.02%, the highest reported eight months. This increase in bank credit has helped push up the YoY growth rate of the M2 money supply, from 4.87% in early January to the current 6.06%.

    (click to enlarge)

    This growth in Bank Credit was driven by an increase in Loans & Leases. After bottoming at 1.86% in the early part of this year has since increased to the current YoY growth rate of 3.57%. This was the highest growth rate since early May last year.

    (click to enlarge)

    The treasury yields were largely unchanged on two weeks ago. Compared to the same period last year, the 1-year yield is down 1 basis point while the 10-year is up 82 basis points leading to a 83 basis point widening of the spread.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 03 3:50 AM | Link | Comment!
  • Norwegian Debt Slaves And The Bloated Norwegian Government

    Originally posted on EcPoFi 28 January 2014

    Here's an update of the table originally included in the "One of the Richest Countries on Earth has Turned its Citizens into Debt Slaves: House Prices and Debt Growth in Norway" post, now including figures for 2012:

    (click to enlarge)

    Back in August of last year I wrote "The numbers for 2012 are yet to be published, but there is little reason to expect an improvement in the ratios as household credit grew by 5.2% in 2012". As the figures for 2012 show, the numbers got even worse in 2012. Compared to 2004, the percentage of households with debt at 2 times or more of pre-tax income has increased from 22.0% to 30.3%, an increase of 8.3 percentage points or 37.7%. On the same basis, the percentage of households with debt of 3 times or more has increased from 9.3% to 15.2%, an increase of 5.9 percentage points or 63.4%!

    According to numbers released by Statistics Norway for Q3 2013 a couple of weeks ago, the debt to income ratio for Norwegian households now stands at 209.8%. To my knowledge, only a couple of countries in the world can match such a high debt level (Denmark is one). Meanwhile, the market value of the Government Pension Fund Global (Norway's "oil fund") ticked in at NOK 4.714 trillion as of the same quarter. Despite this enormous wealth, the overall tax burden (including income tax, VAT, duties etc) in Norway remains very high by any standard (yes, the new government has reduced the capital gains tax from 28% to 27% effective this year, a very small step in the right direction). Worse yet, even as the country's citizens are being, in my opinion, looted every day by the government, the bloated state bureaucracy still needs to tap into the oil fund for additional funds every year to finance the massive and ongoing mainland fiscal deficit.

    During the last five years, the Labour Party led government spent an average of NOK 101.3 billion every year of Norway's oil savings to make the wheels go round, i.e. not for substantial investments or a lower overall tax burden to make Norway more productive and competitive. The budgeted deficit for 2013 was a record NOK 123 billion and the new coalition government plans to spend even more in 2014. Granted, they are planning to invest more than the previous government and to reduce taxes. But I've seen nothing yet of an ambitious plan to cut the number of government and public employees or other measures to cut public spending. Unless public spending is cut, any tax reduction will be financed by drawing down even more from the oil fund. The result is that tax payers, especially those working in the private sector, are no better off (i.e. tax cuts are financed by drawing down on the citizens savings - they are the true owners of the oil fund).

    Bottom line: the citizens of Norway, perhaps the richest country on earth, are debt slaves and this will not end unless some visionary and prudent politician, one who understands and applies real economics (read: how the free market really works and how big government and fractional reserve/central banking impoverish citizens) and care about the country's long term prosperity appears out of nowhere in four years time (next election).

    Access more articles on Norway here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: Macro, Norway
    Apr 03 3:48 AM | Link | Comment!
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.