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American Businesses and Consumers are NOT Deleveraging ... They Are Going On One Last Binge

George Washington's picture




 

Washington’s Blog


Everyone knows that the American consumer is deleveraging ... living more frugally, and paying down debt.

Right?

Well, actually, as CNBC's Diana Olick pointed out
in April, many consumers are stopping their mortgage payments, and then
blowing the money they would usually pay towards their mortgage on
luxuries:

I opened up a big can of debate
Monday, when I repeated some chatter around that consumer spending
might be juiced by all those folks not paying their mortgages.

 

They have a little extra cash, so they're spending it at the mall.

 

Some of you thought the premise had some validity, others, as is often the case, told me I was an idiot.

 

Well after the blog went up Erin Burnett put the question to Economist Robert Shiller, of the S&P/Case Shiller Home Price Index, during an interview on Street Signs.

 

He didn't deny the possibility, and added:

"In some sense there might be a silver lining in that."

Then I decided to ask Mark Zandi, of Moody's Economy.com, who will often shoot down my more ridiculous theories.

 

I asked him if this was a crazy idea:

 

No,
not crazy. With some 6 million homeowners not making mortgage payments
(some loans are in trial mod programs and paying something but still
in delinquency or default status) , this is probably freeing up roughly
$8 billion in cash each month.

Assuming this cash is spent (not too
bad an assumption), it amounts to nearly one percent of consumer
spending. The saving rate is also much lower as a result. The impact on
spending growth is less significant as that is a function of the
change in the number of homeowners not making payments.

I'm not sure I would say this is juicing up spending, but resulting in more spending than would be the case otherwise.

 

Many
of these stressed homeowners (due to unemployment) are reducing their
spending, just not as much as they would have if they were still making
their mortgage payment.

Okay, so 6 million
American homeowners are not being super frugal about either paying their
mortgages or saving the money for another investment.

But surely the hundreds of millions of other Americans are reducing debt and deleveraging, right?

In fact, as the Wall Street Journal notes
today, the overwhelming majority of debt reduction by consumers is not
due to voluntary debt reduction, but due to defaulting on their debts
and having them involuntarily written down by the banks:

The
sharp decline in U.S. household debt over the past couple years has
conjured up images of people across the country tightening their belts
in order to pay down their mortgages and credit-card balances. A closer
look, though, suggests a different picture: Some are defaulting, while
the rest aren’t making much of a dent in their debts at all.

 

First,
consider household debt. Over the two years ending June 2010, the
total value of home-mortgage debt and consumer credit outstanding has
fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve.
That’s an annualized decline of about 2.3%, which is pretty impressive
given the fact that such debts grew at an annualized rate in excess of
10% over the previous decade.

 

There are two ways, though, that
the debts can decline: People can pay off existing loans, or they can
renege on the loans, forcing the lender to charge them off. As it
happens, the latter accounted for almost all the decline. Over the two
years ending June 2010, banks and other lenders charged off a total of
about $588 billion in mortgage and consumer loans, according to data
from the Fed and the Federal Deposit Insurance Corp.

 

That means
consumers managed to shave off only $22 billion in debt through the
kind of belt-tightening we typically envision. In other words, in the
absence of defaults, they would have achieved an annualized decline of
only 0.08%.

The Journal graphically shows that virtually all debt reduction is due to loan charge offs:

 

Karl Denninger notes:

From a peak in 2005 of $13.1 trillion in equity in residential real estate, that value has now diminished by approximately half to $6.67 trillion!

 

Yet outstanding household debt has in fact increased from $11.7 trillion to $13.5 trillion today.

 

Folks, those who claim that we have "de-levered" are lying.

 

Not
only has the consumer not de-levered but business is actually gearing
up - putting the lie to any claim that they have "record cash." Well,
yes, but they also have record debt, and instead of decreasing leverage levels they're adding to them.

 

In
short don't believe the BS about "de-leveraging has occurred and we're
in good shape." We most certainly have not de-levered, we most
certainly are not in good shape, and the Federal borrowing is what, for
the time being, has prevented reality from sticking it's head under the
corner of the tent.

Indeed, as I've pointed out
repeatedly, the government has done everything it can to prevent
deleveraging by the financial companies, and to re-lever up the economy
to dizzying levels.

As Jim Quinn wrote last month:

You
can’t open a newspaper or watch a business news network without seeing
or hearing that consumers and businesses have been de-leveraging. The
storyline as portrayed by the mainstream media is that consumers and
corporations have seen the light and are paying off debts and living
within their means. Austerity has broken out across the land.

 

***

 

Below
is a chart that shows total credit market debt as a % of GDP. This
chart captures all of the debt in the United States carried by
households, corporations, and the government. The data can be found
here:

 

http://www.federalreserve.gov/releases/z1/current/accessible/l1.htm

 

Total
credit market debt peaked at $52.9 trillion in the 1st quarter of
2009. It is currently at $52.1 trillion. The GREAT DE-LEVERAGING of the
United States has chopped our total debt by 1.5%. Move along. No more
to see here. Time to go to the mall. Can anyone in their right mind
look at this chart and think this financial crisis is over?

 

 

During
the Great Depression of the 1930′s Total Credit Market Debt as a % of
GDP peaked at 260% of GDP. As of today, it stands at 360% of GDP. The
Federal Government is adding $4 billion per day to the National Debt.
GDP is stagnant and will likely not grow for the next year. The
storyline about corporate America being flush with cash is another lie.
Corporations have ADDED $482 billion of debt since 2007. Corporate
America has the largest amount of debt on their books in history at $7.2
trillion.

Indeed, as this chart courtesy of Zero Hedge confirms, traditional banking liabilities are higher than ever:

Granted, the liabilities of the shadow banking system have fallen off of a cliff.

But Tyler Durden argues:

The
latest plunge in the shadow banking system is merely the most recent
confirmation that the deleveraging in America is only just beginning.

So what does it all mean?

The government, big financial companies and the American consumer are all guilty of fighting deleveraging instead of voluntarily paying down their debt.

Like
a junkie looking for "one last score", the entire country has sold out
our future to try to keep the artificial high going a little longer.

As I pointed out in July 2009:

Every independent economist has said that too much leverage was one of the main causes of the current economic crisis.

 

However ... the Federal Reserve and Treasury have, in fact, been encouraging massive leveraging.

 

***

 

Economists
pushing voodoo theories justifying the tremendous increase in leverage
were promoted and lionized, while those questioning such nonsense were
ridiculed.

 

In other words, economists and financial advisors - in
academia, government and elsewhere - have been subservient to the
financial elites, and have trumpeted the safeness and soundness of
cdos, credit default swaps, and all of the rest of the shadow economy
which allowed leverage to get so out of hand that it brought the world
economy to its knees.

 

This is no different from the promotion of
sports doctors to become team doctor when they are willing to inject
various painkillers and feel-good drugs into an injured football star
so he can finish the game. If he is willing to justify the treatment as
being safe, he is promoted. If not, he's out.

 

Economists have
acted like team docs for the financial giants. When the football team
doctor who gives the injured patient steroids and stimulants and tells
him to get back in the game, it might be good for the team in the
short-run, but the patient may end up severely injured for decades.

 

When
economists have prescribed more leverage and told the banks to go
trade like crazy to get the economy going again, it might be good for
the banks in the short-run. But the consumer may end up being hurt for
many years.

 

Using another analogy, this is like prescribing"hair of the dog" to the suffering alcoholic or heroin to the withdrawing junkie.

 

And as I wrote in August 2009:

In an essay entitled "The risk of a double-dip recession is rising", Nouriel Roubini affirms two important points:

This
is a crisis of solvency, not just liquidity, but true deleveraging has
not begun yet because the losses of financial institutions have been
socialised and put on government balance sheets. This limits the ability
of banks to lend, households to spend and companies to invest...

 

The
releveraging of the public sector through its build-up of large fiscal
deficits risks crowding out a recovery in private sector spending.

In other words, Roubini is confirming what Anna Schwartz and many others have said: that the
problem is insolvency, more than liquidity, that the government is
fighting the last war and doing it all wrong, and that we should let the
insolvent banks fail
.

 

Roubini is also confirming that
incurring huge deficits in order to have the federal government itself
act as a super-bank is causing a reduction in - and "crowding out" a
recovery in - private sector spending. [Roubini also said
last year: "Deleveraging requires the writing down of debt as
reflationary policies are not a free lunch and won't solve the debt
overhang problem"].

 

As I have repeatedly pointed out, a
recovery cannot occur until we move through the painful deleveraging
process. But instead of allowing this to occur, the government is
trying to increase leverage as a way to try to re-start the economy and save the insolvent banks. See this, this and this.

Of course, all of the massive government spending might also be putting

governments themselves at risk . . . but that is another story.

 

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Sun, 09/19/2010 - 11:18 | 590556 bughousebuzz
bughousebuzz's picture

Our economy is an example of highly educated intellectuals and not experienced and savvy business people in charge.   

Sun, 09/19/2010 - 12:41 | 590655 three chord sloth
three chord sloth's picture

Yep. The rise of the New Class.

Sun, 09/19/2010 - 10:41 | 590530 kaiserhoff
kaiserhoff's picture

Fine article and some great comments.  What is always missing from these discussions is that government, at all levels, has gone on one last spending binge.  That's about to come to a screaming halt.  Can you say Obama's Depression?

Sun, 09/19/2010 - 10:31 | 590526 max2205
max2205's picture

Timing is everything. Even getting prepared for this. Paying off CC's and selling the house and renting. Now with a pile of cash looking for bargains guess what there are no bargains and zero interest on the cash. The govt propped everything up.

Timing is everything. Still not biting.

Sun, 09/19/2010 - 10:20 | 590517 Thucydides
Thucydides's picture

Oh
The rules have changed today (Hey)
I have no place to stay (Hey)
I'm thinking about the subway (Hey)
My love has flown away (Hey)
My tears have come and gone (Hey)
Oh my Lord, I have to roam (Hey)
I have no home (Hey)
I have no home (Hey)

Now the time has come (Time)
There's no place to run (Time)
I might get burned up by the sun (Time)
But I had my fun (Time)
I've been loved and put aside (Time)
I've been crushed by the tumbling tide (Time)
And my soul has been psychedelicized (Time)

The 60's predicted this time???????????????????????????

Sun, 09/19/2010 - 09:45 | 590503 covert
covert's picture

the stupidity of the majority knows no bounds. seems funny, except, the entire economy is interconnected.

http://covert2.wordpress.com

Sun, 09/19/2010 - 10:13 | 590497 Bob
Bob's picture

"many consumers are stopping their mortgage payments, and then blowing the money they would usually pay towards their mortgage on luxuries"

What percent of these insolvent consumers are buying "luxuries" and how much do these luxury purchases account for in relation to the total spending of these insolvent consumers? 

Fact is, you can't answer these questions because you have shit data and lurid conclusions based on suspicion, rumor, anecdotal "evidence" and the burning envy that still defines America . . . particularly the astonishingly perverse envy of the "haves" for the "have nots." 

No doubt a "significant" number of the falling middle class are insanely maxing out their cards and gaming the system--this is America--but in an environment of 40 million-plus on food stamps, 20% real unemployment/underemployment, ARM blow-ups, and so on do you really believe most people are spending the money they don't have to pay their mortgage payments on luxuries?   I would suggest that before asserting common sense defying conclusions, you dig up some actual data that meaningfully supports something stronger than this bullshit.

What is this, National Enquirer for the educated set? 

Okay, the put-down is a rhetorical one, George.  I generally admire your work and, of course, ZH is the shiznit.  But this developing story line of the average underwater American bleeding the rest of us dry while they continue living The Life is getting real old.  See Tyler's similar post from just yesterday. 

I suspect these unsupported conclusions say more about the audience than they do about the typical insolvent consumer, regardless of the testimonials.  Sampling bias, anyone?

Final thought that apparently is not widely known here: If you have both income and overwhelming credit card or other debt, you can't just skate by not paying the bills.  It might work for a while with the house, since the banks are complicit in hiding the bad debts on their books, but it doesn't work anywhere else for long.  One late payment and your credit line is cut off (and we all know card credit limits have been slashed to begin with.)  Then you get taken to court.  My daughter is an attorney working for one of the nation's largest debtor-relief firms and she's been blown away by the onslaught of suits brought by creditors in the last 6 months--her workload just writing Answers has increased about 600%.  When it's not the banks themselves, it's the collection agencies that have bought the paper--don't pretend that a charge-off by the original creditor means the debt disappeared for good.  Many people on unemployment are being garnished.  People who have retirement accounts are tapping them out. 

I look forward to some quality analysis of these issues as the data emerges and creative, conscientious analysts applying themselves to doing it--wish I didn't have to keep hearing this incessant drumbeat of unsupported resentment until that day arrives. 

Sun, 09/19/2010 - 11:32 | 590573 RockyRacoon
RockyRacoon's picture

Thanks for your comment.  You point out that the consumer credit industry is still in control of its record keeping and ability to prosecute deadbeats.  (I use all the colloquial and industry jargon so as to be intelligible.)  There will probably come the day when the sheer volume of default will overload the recovery systems.  The time to default on credit card and other retail credit has not come if one is hoping for anonymity in the "system".  It will be apparent when that time arrives.  One will not get notices from the credit companies in a timely manner, and letters of protest will go unanswered.  Then, the time will be nigh.

Sun, 09/19/2010 - 12:37 | 590599 Bob
Bob's picture

A year ago I expected the same thing, but the recent avalanche of creditor lawsuits my daughter has seen indicates, to me at least, that the process has been completely automated.  Law firms still ostensibly file the Petitions, mail the Notices and so on, but hiring in the legal field has not, to my knowlege, shown the kind of increases that human labor would require to produce the massive surge my daughter has observed.  Many of her tapped out clients receive multiple Notices from different law firms (for different accounts) on the same day.  Given that obtaining a Judgement is just a matter of shuffling paper--since the only adequate defense to the suit is that you don't really owe the money--I expect that the Courts will soon completely automate their processing as well (if they haven't already.) 

With ultimate garnishment of income a foregone conclusion for those who have income, I'm now thinking that a jubilee for debtors who are not banksters (and other fat cat losers) may never come until a complete collapse of the financial system.  Until that day, SkyNet will track down and financially terminate every average debtor who remains on the grid. 

EDIT: Actually, thinking about this further, I would expect the various governments to join forces with their bankster handlers to implement tight systems for automatically collecting on Judgements.  It's already been done for the infamous "deadbeat dads."  In Michigan, being on the grid in any way gets you crushed.  Renewing your driver license or professional license?  You're first checked against a database and, if you're "marked," no license results.  You can't even get a hunting or fishing license.  Not to mention that should you have the good fortune to be employed, a substantial portion of your income will automatically be taken.  This system operates nationwide and is justified on a "social policy" theory.  Deadbeat dads are a menace that hurts society as a whole. 

So the system is already in place.  All that remains is to successfully demonize insolvent debtors as a menace to society at large. Somebody's got to be blamed and held responsible. And everybody's gotta do their part to keep those bankster bonuses flowing.  With cheap stories like the post here and Tyler's yesterday fanning the embers of division, and the banksters putting all available resources to feeding the fire, how long will it take before the Average Joe and Jane find themselves in the same position as "deadbeat dads"? 

Damn, thanks for helping me to really bum myself out! 

[Disclaimer: I'm no deadbeat dad.]

Mon, 09/20/2010 - 04:52 | 591517 Kobe Beef
Kobe Beef's picture

ouch. can wages be garnished while working overseas? Would a 2nd passport be necessary?

Exodus, bitchez.

Sun, 09/19/2010 - 12:40 | 590652 three chord sloth
three chord sloth's picture

It's all done with temp workers now. If you go to the law blogs you'll find many recent lawschool grads complaining that they can only get $15/hr temp work churning out default and dunning notices for collection agencies.

Sun, 09/19/2010 - 08:40 | 590466 newstreet
newstreet's picture

Upstate NY.  In 1964 my parents bought a house for $34,000.  Now they are looking to sell for @ $175,000.  I priced it in '64 Kennedy Half-Dollars.

68,000 Kennedy half's in 1964. At $175,000 they would get @ 23,333 Kennedy half's today.  Factor in all the mortgage interest, taxes, upkeep - looks like they would have been better off renting the past 46 years.

Sun, 09/19/2010 - 11:27 | 590566 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

But it'll sell for $160,000 and the broker'll take $10,000, misc. other expenses they net $148,000 or so, right?

Sun, 09/19/2010 - 08:02 | 590438 stev3e
stev3e's picture

When it all runs out and the piper has to be paid, all these idiots are going to get crushed and I'm looking forward to it.

Sun, 09/19/2010 - 08:00 | 590437 Diggintunnels
Diggintunnels's picture

If your plan is to go bankrupt, you have to spend the money on consumables, right?  They are the items that will not be liquidated as an asset in the settlement. I assume cash in the bank would have to go to pay mortgage debts.  Of course at the end of this trail, the taxpayer ends up paying for the misconduct of the banks and borrowers thru the endless bailout of Fannie/Freddie.  What a disgrace...

Sun, 09/19/2010 - 10:42 | 590531 Iam Rich
Iam Rich's picture

Cash under the mattress, PMs under the floor boards, etc.  So no, it doesn't need to be spent on consumables...just sayin'.

Sun, 09/19/2010 - 07:25 | 590423 MarketTruth
MarketTruth's picture

Why pay your home mortgage when you are upside down on th loan and banksters can not show you the actual contract? Now that MERS has been legally proven as not the real holder and by law banks can not prove who owns your home, simply wait it out and perhaps you can enjoy your home for free. This is why they are trying to get people to refinance at super low rates as then NEW documents are created as proof of who owns the home.

Bottom line, call your bank NOW and ask to see the ORIGINAL contract. No contract, no bankster ownership... enjoy living for payment free.

Sun, 09/19/2010 - 08:07 | 590440 stev3e
Sun, 09/19/2010 - 10:52 | 590538 Rogerwilco
Rogerwilco's picture

Thanks for that link -- great article. After all the legal wrangling over these titles and deeds, after the lawyers on both sides have collected huge fees, the ultimate solution will be found in the nationalization of the guilty parties! Heads I win, tails you lose.

Is this a great country or what?

Sun, 09/19/2010 - 07:39 | 590427 Miss Expectations
Miss Expectations's picture

I would really like to hear from someone involved in the title insurance/title search business and hear about what kind of issues are cropping up. 

Sun, 09/19/2010 - 09:10 | 590487 silvertrain
silvertrain's picture

Inquiring minds want to know...

Sun, 09/19/2010 - 07:08 | 590418 Freewheelin Franklin
Freewheelin Franklin's picture

What I want to know is, how many kids will be getting the "GI Joe with the Kung-Fu grip" for Christmas, this year?

Sun, 09/19/2010 - 07:05 | 590416 virgilcaine
virgilcaine's picture

With 100-200k spent on degrees they could have spent that money on a basic course in financial literacy.   Going to be a rough road ahead for them with out a good credit rating.

Always protect your credit , they are possibly immature/lazy and just don't want to work or sacrafice.

 

 

Mon, 09/20/2010 - 04:41 | 591512 Kobe Beef
Kobe Beef's picture

huhuhu huhhhuuh huhuhuhuhhhuh huhuh uhuhuhuh

Love the avatar, Beavis.

Sun, 09/19/2010 - 04:57 | 590401 Howard_Beale
Howard_Beale's picture

Some of us never had debt in the first place and continue to pay our bills. Others have taken the road to stuff it to the banks. Whatever. It is an accepted attitude once one reaches a certain level of debt and dissatisfaction. I know more than a few that are doing the same.

It's like quarterly market thinking--so short term that the longer term consequences don't matter.

Sun, 09/19/2010 - 04:57 | 590400 Sudden Debt
Sudden Debt's picture

When I was 14/15 years old, we learned about the economic systems of countries all around the world.

I still remember how the teacher scetched the Americans:

"Americans are people whe spend 1500$ for every 1000$ they earn.

THAT WAS 20 YEARS AGO!

And one wonders why that system is collapsing :)

Sun, 09/19/2010 - 03:33 | 590386 Taint Boil
Taint Boil's picture

How I stuck it to the credit card companies and bought a house with a cash advance

 

Now this is what you call a binge:

http://patrick.net/forum/?p=25968

Sun, 09/19/2010 - 21:59 | 591294 Bananamerican
Bananamerican's picture

the People WILL have their revenge. An un-coordinated "paydown strike" is still in progress and will only gather steam in the years to come...As a renter, i only wish i could take part.

The colonists had "Tea Parties"...We'll have "Title Parties".

They had Royalists to throw off. We have Corporatists to defeat....

Sun, 09/19/2010 - 02:44 | 590372 Conrad Murray
Conrad Murray's picture

Nice work bringing all that together.  I can attest to the fact that in my little corner of the globe paying down debt is nearly non-existent.  I know 2 couples who went BK in the last 6 months.  Prior to that, they maxed out what they could and just stopped paying bills.  Unfortunately, I couldn't convince either of them to buy PMs.  One couple actually sold me all their silver.

I'd say roughly 90% of the 20somethings I know are in debt, blowing through CCs, student loans, UE, and food stamps.  There are no jobs here unless you are a nurse or CNC programmer.  It's hard to watch what everyone is up to.  A lot of people tell me things like, "Fuck it, this is my bailout".  Strange times.

Sun, 09/19/2010 - 03:30 | 590383 Eternal Student
Eternal Student's picture

Don't they have to worry about the IRS treating the difference in what they owe as income? Or is that just absolved via bankruptcy?

Sun, 09/19/2010 - 02:56 | 590374 pitz
pitz's picture

So what's the scenario here? All the debt goes 'kaboom', and only commodities are left standing?

Sun, 09/19/2010 - 11:01 | 590545 LiquidBrick
LiquidBrick's picture

And who will buy those commodities when there is no more credit left and the perceived value becomes irrelevant besides a shrinking pool of other commodity holders offering 80 cents?

If you owned all the silver bullion in the world in rising unemployment and psychological perception shifts from PM being a store of wealth to irrelevant (bc you cant eat it) you are a target not a genius.

We are only as strong as our weakest link, not as an isolated oasis of pm hoarders.  Sure, it helps you to arbitrage your next door neighbor's assets but that doesn't add any value.  Good luck with that trade but I'd bet arbitraging your neighbors instead of really helping them delivers for you the same fate in the end.  You can't arbitrage your way to prosperity.

A man only earns according to his value to to society. No more and certainly no less.

 

 

Sun, 09/19/2010 - 12:14 | 590628 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

disintermediation...

Sun, 09/19/2010 - 12:13 | 590625 jeff montanye
jeff montanye's picture

history is against you.  pm's did great the last time in a deflationary depression with commodities taking the baton after about seven years from the first stock crash.  re: no more and certainly no less -- in heaven maybe.  here the race is not always to the swift nor struggle to the strong but that's the way to bet it.

Sun, 09/19/2010 - 07:53 | 590433 More Critical T...
More Critical Thinking Wanted's picture

So what's the scenario here? All the debt goes 'kaboom', and only commodities are left standing?

The scenario is that we are in a deflating economy (disinflating one to be more precise), in a zero interst rate (ZIRP) environment, and that we are responding the worst way possible: via savage austerity.

Paradoxically, while "paying down your debt" is a sane thing to do in an economy that is in balance, it's the worst possible thing to do in a ZIRP economy. (!)

There is no lack of money. The system is aflush with money. Where is that money? In corporation's bank accounts mostly. Why are they not spending it? Because not only do they not see actual growth (due to lack of demand), but they are already much under-utilized - the average utilization rate is around 70%.

Individuals don't have money to spend: the unemployed have already over-extended themselves and they are on a trajectory determined by others. The rich wont spend, because that's how rich people react to economic crises instinctively: by saving some more.

Enter 'austerity': a stupid call for everyone to save even more. It's a self-reinforcing cycle of violence: workers get laid off, they spend less, companies see less demand, downsize more, et cetera.

This is what happened in the Big Depression. The road out of that depression was the unintuitive measure of 'turning on the money printing': it causes people to spend again, which creates demand and growth, which causes companies to spend some more, which creates jobs, which creates some inflation (but not hyper-infation until the printing presses go into massive overdrive).

Where do we stand now? The stimulus helped for a year, but it was half as big as it should have been (to close the 'output gap' - instead it should have been as big (inflation-adjusted) as the New Deal), so we are left with the worst of both worlds: inflated balance sheets everywhere but a generally depressed economy with depression psychology.

Interestingly, economies which applied the right stimulus are doing fine right now: China with an explicit stimulus and Germany with an implicit stimulus. (Germany has automatic stabilizers via the 'Kurzarbeit' laws which allow workers to not go unemployed but stay with reduced pay and reduced work time - paid by the german government.)

The countries that are doing badly right now are the ones that applied savage austerity: Ireland (austerity wunderkind) and Greece (they will go bankrupt with or without a bail-out. The law of compounding interest is unstoppable in a depressed economy and Greece cannot inflate away their debt like the US did it after the New Deal - they don't print their own money ....).

It's not pretty - and hyper-inflation is the least of our worries. I'm kind of sad how ZH ran hyperinflation story after hyperinflation story a year ago - while it was clear at that point that the run-up would end in disinflation. I certainly made money on it :-)

Sun, 09/19/2010 - 10:32 | 590521 Widowmaker
Widowmaker's picture

Your comment has zero truth, all perpetuation of the same ol' fraud regardless of money you may have made.

Sun, 09/19/2010 - 10:54 | 590540 More Critical T...
More Critical Thinking Wanted's picture

Your comment has zero truth, all perpetuation of the same ol' fraud regardless of money you may have made.

That it has zero truth is certainly a possibility - I could be wrong. (I'd like to dispute the 'fraud' portion - I certainly know that I'm not lying to you.)

Also, it would be nice if you could elaborate a bit more on the 'zero truth' portion - so that we can discuss things in a rational manner. Do you dispute that the chinese applied a stimulus? ZH was full of that news. Do you dispute that Germany applied a stimulus? It's certainly well documented and I also have first-hand experience of it. Do  you dispute the recursive destruction that a ZIRP enviroment plus a depressed economy can show?

Or do you accept the factoids but dispute the analysis? That would certainly be a fair point to make (and I'd also love to hear about the alternate analysis you applied that matches the outcome) - but is also somewhat different from 'zero truth' and 'fraud' statements you made.

What is certain is that these views/predictions matched reality to the effect of allowing me to play the markets successfully. How do you explain that? Was it dumb luck on false premises?

Sun, 09/19/2010 - 12:06 | 590609 jeff montanye
jeff montanye's picture

you're bumping into an ideology popular here:  gov't spending, especially by "liberals" or "socialists" (obama is neither) is wrong.  this is sometimes applied even to conservatives, which at least has the virtue of consistency.  keynes is the devil here.  no matter that the kernel of policy truth in the general theory of employment interest and money is a more rigorous version of what good kings have done since the invention of agriculture: save up reserves in plenty to spend in famine.  

the problem with the theory's application is that in the more permissive (?) times since, say, 1965 (nixon: we are all keynesians now), federal (and, to an extent, state) fiscal policy has been biased toward deficit spending and debt accumulation even in prosperity such that at the onset in 2008 of the real end of the credit cycle which started sometime between 1932 and 1942 the u.s. has a federal deficit knocking on 100% of gdp (and the nation as a whole nearing 400%) instead of a clean balance sheet, totally new and green infrastructure, a military in the best of repair, etc. etc.  oh well.  as someone once noted we are fallen creatures.  that and the campaign finance laws.

Sun, 09/19/2010 - 12:40 | 590653 More Critical T...
More Critical Thinking Wanted's picture

the problem with the theory's application is that in the more permissive (?) times since, say, 1965 (nixon: we are all keynesians now), federal (and, to an extent, state) fiscal policy has been biased toward deficit spending and debt accumulation even in prosperity such that at the onset in 2008 of the real end of the credit cycle which started sometime between 1932 and 1942 the u.s. has a federal deficit knocking on 100% of gdp (and the nation as a whole nearing 400%) instead of a clean balance sheet, totally new and green infrastructure, a military in the best of repair, etc. etc.  oh well.  as someone once noted we are fallen creatures.  that and the campaign finance laws.

Yeah. But also note that a higher federal deficit (which was near 120% in the 1930-1950 timeframe and was subsequently grown and inflated away) coupled with deflation can be considered a hidden tax cut for the wealthy. (!)

That is because high indebtedness transfers resources from those who are debtors to those who are creditors.

Deflation makes that process exponentially worse: it forces people to pay for 'debts' that are inflated up. (deflation of money is inflation of debt)

The end game is visible: as people come beyond the point where they consider their mortgage payments 'just' (relative to the work they have and relative to the standard of living they are in) they stop paying the morgage. A collective "f*ck you".

In the end the creditor will lose that way as well.

So I dont see how "more savings" would be helpful (which is the premise of austerity) to anyone. Those who are indebted are not able to save and eliminate the debt. Pretty much the only non-violent way out appears to be some amount of inflation. That splits the 'loss' between debtors and creditors and allows everyone to continue from scratch, in a much more positive economic environment.

The problem is that inflation is very hard to achieve in a ZIRP environment.

Sun, 09/19/2010 - 14:27 | 590769 stev3e
stev3e's picture

The 'loss' between debtors and creditors is not split and certainly not absorbed by the creditors.  Follow the money and you will find that is always paid out of savings through taxes.  In the current crisis, it is not even obtusely hidden, it is out in the open and unabashedly declared by the government - we are taking your money and giving it to the banks; we are taking your money and giving it to delinquent mortgagees.

The saver is the one who always gets screwed - the saver is the same person who would benefit from no stimulus.

Sun, 09/19/2010 - 15:51 | 590830 More Critical T...
More Critical Thinking Wanted's picture

The saver is the one who always gets screwed - the saver is the same person who would benefit from no stimulus.

I am what you would call a saver, and I see the exact opposite happening: I can achieve an insane increase in the real value of my money, by simply leveraging in USD or EUR and going into the high-growth periphery markets.

While I dont get much interest on my money in USD or EUR, there's another and much bigger benefit: I can leverage it out and use it as a carry trade base currency. That way ZIRP is an advantage to those who have capital. The real interest rate would have to be around -4% (yes, minus 4%) for this to be unviable.

The capital gains taxes on it are ridiculously low. If I earned it via a payroll I'd be paying much higher taxes.

The average american who is indebted does not have this possibility of making use of deflation/disinflation. In the end they are the ones hurting: their jobs are shipped to China, and China is growing rapidly from foreign investments and will replace the US as the top economy at around 2020 (which is just around the corner). Plus, their effective debt is rising in real value as the economy disinflates. Their mortgages are more and more underwater in 'real dollars'. It makes less and less economic sense for them to keep up paying - and often they are unable to pay, due to lost jobs.

The only way this cycle could be broken is higher long-term interest rates (i.e. future US growth and a resulting price inflation). Which wont be happening anytime soon without some massive intervention ...

Meanwhile, all those who have capital are winning from this steady transfer of wealth.

Mon, 09/20/2010 - 00:45 | 591432 stev3e
stev3e's picture

>>by simply leveraging in USD or EUR and going into the high-growth periphery markets. While I dont get much interest on my money in USD or EUR, there's another and much bigger benefit: I can leverage it out and use it as a carry trade base currency.<<

You are not a saver really - you are a currency investor/speculator - and I'm not saying there is anything at all wrong with that.  The "savers"  are the large body of folks who save their earnings and are not nearly as sophisticated as you.  These are the folks that are easy pickings.

Mon, 09/20/2010 - 05:03 | 591521 More Critical T...
More Critical Thinking Wanted's picture

You are not a saver really - you are a currency investor/speculator - and I'm not saying there is anything at all wrong with that.  The "savers"  are the large body of folks who save their earnings and are not nearly as sophisticated as you.  These are the folks that are easy pickings.

That's a fair point to make, but the numbers appear to show something different: most of the free capital in the US is controlled by the top 1-5% earners. Look at the wealth distribution charts:

       http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

The top 1% control 42% of the financial wealth. The top 5% control something like 80% of financial wealth. (trend: growing) The "bottom 80%" (which includes the middle class!) controls only 7% of financial wealth. (trend: shrinking)

So the top 1-5% is the main body of creditors who are helped by deflation.

The numbers show that the 'unsophisticated, saving middle class' is almost non-existent, in economic terms.

And I'd not assume that those top 5% earners are not reasonably 'sophisticated'. They are rational economic actors as well. Do you suppose that above $500k yearly income they'll let their money lie in the bank and earn 0.25%? From all what I'm seeing I think it's fair to assume that they are making good use of the current economic environment.

Mon, 09/20/2010 - 06:19 | 591539 stev3e
stev3e's picture

Your link would seem to support your argument but some of the "facts" are hard for me to believe.

For example, the section on inheritance tax starts with-

"Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000."  Clearly something is amiss here when the article has already stated that the top 20% control the majority of the wealth.  Somebody's playing with words and concepts.

Is this believable to you?  Do you think the people who put this article together may have an agenda?  And if you believe everything in the article how did you come to the conclusion that "those top 5% earners are not reasonably 'sophisticated'"?

Mon, 09/20/2010 - 11:44 | 592078 More Critical T...
More Critical Thinking Wanted's picture

 

For example, the section on inheritance tax starts with-

"Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000."  Clearly something is amiss here when the article has already stated that the top 20% control the majority of the wealth.  Somebody's playing with words and concepts.

I dont think this is necessarily a contradiction. Most of the current US billionaires are self-made and acquired their wealth in the past 2-3 decades. It's all a 'new' concentration of wealth and there simply wasn't enough time to inherit much of it. So inheritance stats will naturally be muted.

On a sidenote, I dont know how lax the inheritance tax legal environment is in the US, but I would not be surprised if much of the wealth is 'inherited' via family trusts - which are not inheritance events per se, but which inherit wealth to their offspring de facto. This could be a channel to avoid the inheritance tax.

Any such loophole to inheritance law would dampen the inheritance stats you cited as well.

Tue, 09/21/2010 - 00:40 | 594043 stev3e
stev3e's picture

Well, you make many good points as do the article you point to.  However, I believe the stats are culled and the conclusions are forced.

Let's look at the simple statement that 75% of the people have little of no savings - the middle class as you stated.  Let's run that by a small sample and determine the statistical power of the result.

The posters on this site are most likely not rich.  I would bet they fall into the 75% middle class category.

Do they have savings?  Responses please.

Sun, 09/26/2010 - 08:05 | 605317 More Critical T...
More Critical Thinking Wanted's picture

However, I believe the stats are culled and the conclusions are forced.

Maybe - so do you suspect that both the Census and the Fed - both of which have been doing these large-sample surveys for a long time, produce similarly biased results, for such an important metric?

From one data source alone I could accept the potential of a systematic (political or accidental) bias. From two distinct organizations - which have distinctly different political dynamics - to get such surprisingly matching results would rather suggest to me that the data is real and reliable.

Also consider how long these surveys have been going on - spanning multiple republican and democratic administrations. Do you see a shared interest in all of them to produce such a biased result? I dont - at least half of those administrations have an active political interest in showing that these results and trends are wrong.

In fact there's a third, lower quality but independent data source as well: the Forbes list of wealthy people. Sum up the top 20 in the US and you'll already see well above 10% of total wealth. This too indicates (albeit does not prove, as the Forbes list only includes the top ~100 people) similar conclusions.

So on these multiple grounds I'd be inclined to apply Occam's razor here - unless you have some good proof against the validity of this data.

Mon, 09/20/2010 - 11:37 | 592060 More Critical T...
More Critical Thinking Wanted's picture

 

And if you believe everything in the article how did you come to the conclusion that "those top 5% earners are not reasonably 'sophisticated'"?

I think there's a misunderstanding on that point, I meant to say that they are highly sophisticated - albeit in hindsight I said it in a somewhat convoluted way:

And I'd not assume that those top 5% earners are not reasonably 'sophisticated'. They are rational economic actors as well. Do you suppose that above $500k yearly income they'll let their money lie in the bank and earn 0.25%? From all what I'm seeing I think it's fair to assume that they are making good use of the current economic environment.

So yes, I do think the top earners are financially sophisticated.

For an empirical proof for that see the Federal Reserve data I cited earlier:

    http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf

Check the leverage ratios in 2007, by family, by income class and by age. It was already very visible in 2007 - the lower the income, the higher the leverage ratio - 40x in some categories, such as younger than 35 years low-income families!

(Sidenote: it was bound to blow up. In many european countries there isnt even such a thing as leveraged home ownership - so I'm not surprised at all that many european financial institutions were caught with the wrong kind of US positions during the housing melt-up. In most of Europe a real-estate investment is a linear, physical piece of property with no leverage or other derivative properties.)

But note that how the leverage ratios of the top 10% are significantly lower than that of the low income categories. If then that is a proof of sophistication and proper risk management. (although even they lost quite a bit during the crisis)

Mon, 09/20/2010 - 11:26 | 592010 More Critical T...
More Critical Thinking Wanted's picture

Is this believable to you? 

Yes, it looked believable - and I've seen similar numbers from several sources to not doubt this particular source. (this one had the most useful graphs)

Their raw data is from the Census:

http://www.census.gov/hhes/www/wealth/wealth.html

If you dont trust the Census then there's wealth distribution data from the Federal Reserve:

http://www.federalreserve.gov/pubs/oss/oss2/2007/scf2007home.html

Look at this summary for example:

http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf

For example table A2 on page 53 tells us this distribution of net worth (millions of dollars):

   25%:   14,100
   50%: 120,300
   75%: 372,000
   90%: 908,200

I.e. according to the Fed, the top 10% have 64% of the net worth. The top 25% have 90.4% of the net worth. The broad 'middle class' and lower (75% of all families) have only 9.6% of net worth.

Different methodology, different timeframe, but similar qualitative results.

Do you think the people who put this article together may have an agenda?

If you look at their web page they certainly seem to have an agenda - most researchers involved in social sciences do have an agenda. (or have to fake an agenda, to be supported financially by one of the sizms)

So I tend to double check data and I try to identify hidden agendas.

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