The Hard Facts: This is what Really Drives the World Economy

October 21, 2004

I just read an article written by Cliff Droke, who appears to be expecting an end to the "micro mini" recession because M3 is growing.

Below is a table showing the movement of M3 relative to GDP from 1982 to 2003:

Of course I may be wrong, but in my mind M3 is nothing more nor less than "grease". Clearly, grease does not "drive" anything.

By contrast, here is a similar table showing "public debt" over the same period:

Currently Public Debt:GDP is back around 66%. DEBT is what has been facilitating growth since 1982 - when the economy came close to stall speed after oil supply availability peaked.

The question is whether debt as % of GDP will grow to its WWII levels. There is a slim possibility that public debt:income could remain at 66% for the next ten years or so despite a projected growth in US public debt of $2.3 Trillion to fund Bush's programs - but I'm not holding my breath.

This is what happened from 1929 onwards:

To me, the above tables speak volumes. When the economy stalls, debt grows to compensate. When the economy is strong, debt shrinks. The important number is not absolute debt, but debt relative to income.

The "motor car", "roads" "oil pipelines and tankers" "synthetic materials" "associated infrastructure" is what drove the US economy from 1947 to 1974. The motor car market approached saturation in Europe and Japan in 1975 - at the same time as oil availability peaked. It is reaching saturation in the USA as we speak.

To keep the economy from imploding - after oil and related technologies ceased to have the previous economic driver effectiveness that they had had up to 1975 - the US Fed and the Reagan administration working in concert pushed the button the facilitate debt growth in 1982.

They did this by "forcing" interest rates down after 1981:

Savings rates fell as debt rose. This allowed the multiplier to rise.

The IT industry exploded so as to facilitate an improvement in "productivity" of legacy industries, but we should not lose sight of the fact that it was the legacy industries that were driving the economy, not IT. All the excitement surround IT as the "new era" economic driver has been and is nothing more than noise. Energy and related technologies drive the economy. Oil has historically been the "yin" energy whilst Transportation and other oil related technologies have historically been the "yang" energy. Together, they facilitate all industry, commerce and trade.

Around 10% of world GDP is directly related to "oil". The rest evolves either as a facilitator or as a consequence. The rest is what falls into the multiplier effect. At current weighted average of World-Wide savings rates, the Multiplier is effectively 10X

10X 10% = 100%

Savings rates are now around 1% in the USA and there is no more room for private debt to grow further, so "printing money" is not going to achieve anything. i.e. The Multiplier effect cannot be artificially tampered with anymore. The velocity of money will slow down to compensate, and the "micro mini recession" that Droke talks about will continue for months/years, (just as it did in Japan) unless the true "driver" - energy and related technologies - starts to grow.

Here is what has happened to "Total American Debt" relative to National Income. Look at the date when it started to grow exponentially.

If there is no longer room to increase household debt, the question is whether - like in the years leading up to and including WWII - PUBLIC debt is going to be allowed to rise to finance "war". Growth in Public Debt could still act as a driver.

The only other alternative is to find a replacement for Oil and to develop technologies that will replace oil based technologies.

In WWII we had both. An explosion of new (oil related) technologies - and manufacturing capacity for these particular technologies - and an explosion of debt

The new technologies will "drive" the economy once again, and will allow debt levels to fall over a period of 20 years or so.

Which brings us back to Kyoto.

The technologies all happen to be "green" but, more importantly, they will represent the base line economic drivers off which the Multiplier effect can feed.

They are:

  • Hybrid electric cars in the short term, followed by hydrogen powered fuel cell cars in the longer term (initially on-board hydrogen conversion from synfuel, and then later, pure hydrogen)
  • The manufacturing, delivery and storage infrastructure required to support pure hydrogen powered fuel cell cars
  • Magnetically levitated trains
  • Superconductor electric cables.
  • Unrelated to energy, but directly influencing the quality of life on Earth, Chemical free water treatment (Ozonation, Ultra Violet, Micro Filtration, ceramic piping with high glaze interiors to minimise biofilm build up. Possibly, the pipe glaze will incorporate silver)

The above summarises roughly 25 years of research - and personal activity - and is ultimately why I became a Venture Capitalist. I thought I could help "make it happen".

But political corruption and commercial greed got in the way. I have many "coal face" stories to tell on these subjects - ranging from the USA, to Mexico, Brazil, China and South Africa. We even hit the front pages of the Mexico City Press some years ago, when we exposed corruption in their Auditor General's Department. The Australian Ambassador and I got an acknowledgement from the Mexican Deputy Minister of Health. Nothing more. Not even an apology.

In the end analysis, Human Nature keeps getting in the way of progress, and I keep studying the charts to see if there are signs that Human Nature is changing. In 35 years of looking, I have never found these signs. Human Nature appears to be genetically entrenched, and predictable.

It is this predictability that validates Dow Theory, which has been telling us for some years that we are in a Primary Bear Market. In this context, the 2nd Down Leg is imminent, and the downside target counts are between 55% and 70% below current levels. If you want a view point on Dow Theory that is not Mr Richard Russell's, you can read pages 11-41 of Edwards and Magee's book - Technical Analysis of Stock Trends, 1977 edition; originally published in 1948. At page 19, you will see a reference to the importance of volume. "Volume goes with the trend". That's why falling volume and rising prices have represented a screaming validation over the past few months that we are indeed in a Primary Bear Market.

Cheers

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.

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