This guest commentary was written by "Fed Up" author Danielle DiMartino Booth. Make sure to watch her recent conversation with Hedgeye CEO Keith McCullough.
"I know nothing! I see nothing! I hear nothing!”
So light was Hogan’s Heroes, one could easily forget the sitcom, which debuted September 17, 1965, was set in a Nazi P.O.W. camp. More than any one character, Sergeant Schultz deserves credit for the show’s laughable levity. His gregarious girth, sincere sympathy and wonderful weakness for tempting treats — let’s just say Shultz had anything but steely resolve, convincing affable audiences that war could be whimsical. For the prisoners of the Luft Stalag 13, Schultz made an ideal witness to their eternal escape endeavors. His robustly repeated response, “I know nothing!” faithfully failed to fulfill his German superiors’ suspicions.
One can only imagine the proliferation of late 1960s era’s pretentious political philosophers chafing at the bemusement beckoned by Schultz’s channeling Socrates. The Socratic paradox, “I know that I know nothing,” back-translated to Katharevousa Greek, was relayed by Plato in Apology.
Apparently, Socrates attributed his wisdom to not imagining that he knows what he does not. At the intersection of Schultz and Socrates, humility and hilarity collide.
Yellen: Financial Crisis in Our Lifetime? 'I Don't Believe it will Be'
It was neither humor nor humbleness, but rather hubris, being highlighted in London on June 27, 2017 when Federal Reserve Chair Janet Yellen managed to make light of a heavy subject in a live televised Q&A with British Academy President Lord Nicholas Stern. Chuckling in response to one query, Yellen offered up the following on our collective financial future:
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“Would I say there will never, ever be another financial crisis? You know probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes, and I don’t believe it will be.” |
It was these last few words that ignited the ire of so many central banking detractors. Was she hoping we’d come to see the softer side of central banking?
Clearly, she takes faith in the radiation detection facilities the Fed has installed in the years since the worst of the financial crisis engulfed the global financial system. If not, why would she have also offered up these words of reassurance, that those at the Fed, “are doing a lot more to try to look for financial stability risks that may not be immediately apparent … in order to try to detect threats to financial stability that may be emerging.”
Though this particular quote got much less in the way of play in the media, marrying the two threads of thought helps explain why Yellen, who no doubt means well, was able to strike a jovial tone at the prospect of future financial crises. Blind faith in those who’ve been assigned tasks has long handicapped Fed leadership.
On a deeper level...
One has to question the qualifications of the architects who’ve built out the risk monitoring system in recent years. The February 2015 McKinsey report Debt and (Not Much) Deleveraging did not gain the rank of ‘seminal’ without captivating most front-line veterans of the financial crisis.
The study’s findings were startling in their simplicity: Rather than address the underlying over-indebtedness that detonated systemic risk and culminated in a full-blown catastrophe, policy had simply catalyzed further indebtedness.
The numbers, with which we are all familiar, are as follows. From a starting point of the end of 2007 through mid-year 2014, global debt rose by $57 trillion to $199 trillion. As a percentage of global gross domestic product (GDP), global debt had risen to 286 percent from 269 percent.
Though deleveraging had indeed occurred in some corners (referred to in America as defaulted mortgages), the overabundance of liquidity generated by central banks’ machinations had simply found new places to stoke unquantifiable risks. In the case of the seven years through 2014, some usual suspects made their presence known on the leveraging-up-to-their-eyeballs scale such as Greece and Ireland.
But it was China that stood out in the McKinsey study, specifically, “the quadrupling of China’s debt, fueled by real estate and shadow banking, in just seven years.”
McKinsey was also kind enough to offer a bit more historic perspective for those of us rookies who might have thought this type of perverse approach to treat over-indebtedness novel. It all started at the end of 2000, just about the time investors were reeling from Internet bubble implosion portfolio losses. In the seven ensuing years, global debt rose to $142 trillion from $87 trillion. As a percentage of global GDP, debt had grown ‘smartly,’ to 269 percent from 249 percent. (Lest you’ve forgotten the name of that starlet in the annals of dumb debt, it was referred to as the subprime housing bubble).
CONCLUSION: Do NOT attempt to resolve over-indebtedness by applying more debt to the problem.
The Risks of Global Debt Levels
Presumably the task force monitoring the global financial system for signs of building dangers was armed with this simple guiding tenet.
It follows that our protectors were blindsided by yet another report released the very same day Yellen made her fate-tempting London remarks about how much safer we are.
The Institute of International Finance (IIF) is a Washington, DC-based global tracker of capital flows with a stellar reputation for sniffing out risks. In its newest report, the IIF warned of the risks posed by global debt levels that had ballooned to $217 trillion. In the event you are about keeping score, the math works out to 327 percent of global GDP.
The good news: Developed economies continue to delever; in the past year, they’ve offloaded some $2 trillion in debts. The not-so-good news: Central banks’ manning the printing presses 24/7 necessitate their crisp, fresh product find a home, fungible as global quantitative easing has proven to be. Enter developing countries, where debt has grown by $3 trillion over the past year to a new record of $56 trillion.
Filling in the blank with the main driver is akin to gaming a multiple-choice test for which you’ve not studied. When in doubt, choose ‘C,’ as in China, which accounted for 2/3rds of last year’s debt growth. Chinese debt now stands at $33 trillion. This most recent spurt of growth has been led both by households and companies.
At least Uncle Sam has that in common with his Red Dragon counterpart. Household debt has recaptured its record high levels led by unsecured debt (lovely). And corporate debt stateside is now at record levels, even when compared to earnings and cash flow, which remain strong. (Note to Fed: tightening into a weakening economy when debt burdens are at record highs has yet to end well.)
The IIF shrewdly expressed unease that all of this debt could pose “headwinds for long-term growth and eventually pose risks for financial stability.” Party poopers.
For good measure, the International Monetary Fund and Bank of International Settlements share the IIF’s concerns. But what do they know?
In the event you sense tongue squarely in cheek, hence the cheekiness, you are correct.
Either you laugh and channel Sargent Schultz. “In (currency) wars, I do not take sides! I see nothing! I know nothing! I didn’t even wake up this morning!” You pray God central bankers are making the best of a gravely unstable situation by making light of it to calm the masses. If you present a strong face, the minions will hopefully buy into your outward confidence.
Well played? Consider the alternative.
What’s worse than the monetary myopia that’s blinded central bankers into believing moral suasion can resolve the teensiest $217 trillion problem?
What if they believe what they are saying in the face of irrefutable evidence to the contrary? Socrates’ self-discovery followed a journey wherein he tried to find a wiser man than himself, whether it be politician, poet or craftsman. His findings were as follows: Politicians boast wisdom without knowledge (some things never change). Poets, for their part, touch people with their words, but don’t grasp their meaning. Finally, craftsmen claim knowledge but it is restricted to too narrow a field.
Socrates concluded that there was no such thing as indelible intellect, but rather ingrained ignorance. Recognizing your fallibility was thus the secret to achieving greatness, to know in your very soul, “I know that I know nothing.”
Future generations across the globe would be well served by central bankers of the strongest constitutions, those who are neither politicians, nor poets, nor craftsmen who bow to econometric models that have scant application outside tight academic circles. May they rather live by Socrates’ humble mantra, may they know they know nothing, and nothing more.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Danielle DiMartino Booth. DiMartino Booth spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas under Dallas Federal Reserve President Richard W. Fisher. Her brand new book “Fed Up” explains why the current Federal Reserve system is due for a serious revamp. DiMartino Booth currently runs Money Strong, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.
