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The Bondsman's "Fear of Death"?
I
spent the afternoon reading a fascinating paper by Shimshon Bichler and
Jonathan Nitzan, Systemic Fear, Modern Finance and the Future of
Capitalism (PDF file is available here). The introduction sets out the intent of their research:
The
specific focus of the article is two historical ruptures of modern
finance – the periods of 1929-1939 and 2000-2010. During both periods,
capitalists abandoned the conventional forward-looking ritual of
capitalization, resorting instead to the backward-looking posture of
pre-modern finance. In our view, these rare episodes are of great
importance for understanding the nature of capitalist confidence and the
capitalists’ ability to rule – as well as the possibility that this
system of rule will collapse. Our inquiry seeks, first, to characterize
key features of these episodes; second, to speculate on their causes;
and third, to assess, however speculatively, what they might imply for
the future of capitalism.
While I recommend you carefully read the entire article,
I want to focus on a few passages that are particularly interesting to
financial market observers and pertinent to my post. First, let's begin
with the takeoff:
The capitalist class is finally seeing
light at the end of the tunnel. For many months now, its analysts,
statisticians and public officials have been spotting “green shoots”
everywhere they look. The snowballing global recession, they say, seems
to have slowed down and perhaps even ended. Managers the world over are
purchasing more inputs after a period of buying much less; the factories
of Asian exporters are running at full steam; raw material prices have
rebounded strongly; bank lending is reviving and home owners are
starting to refinance their mortgages at lower rates; and in the United
States, the world’s biggest producer-consumer, initial unemployment
claims seem to have peaked, while consumers are beginning to loosen
their purse strings. But the most important sign that the worst of the
crisis is over comes from the equity market: stock prices are the
ultimate barometer of capitalist health, and they have been soaring.The
market takeoff is evident in Figure 1 (above). The chart traces the
U.S. dollar price of three key indices – all world equities, U.S.
equities, and the equities of the U.S. FIRE sector (finance, insurance
and real estate). All three indices show a sharp, synchronized rise. In
slightly more than a year, from February 2009 to April 2010, the world
index gained 67%, the U.S. index 62%, and the U.S. FIRE index –
previously the most battered of the three – a whopping 93%.Suddenly,
the bulls are everywhere. The greatest returns are usually earned
during the initial part of a rally, and no respectable fund manager
likes being beaten by a rising average. With the economy apparently
bottoming out and with the stock market having been in a major bear
phase for nearly a decade, investors are no longer afraid of losing
money; their fear now is not making enough of it. And so arises the
specter of “panic buying,” a frenzied attempt to jump on the bandwagon
before the really large gains are gone.Of course, not everyone
buys this rosy scenario. Many observers continue to feel that the recent
stock market rally is no more than a dead-cat bounce. In the eyes of
the pessimists, investors are knee-jerking to a false start. The
economic recovery, they say, will be W-shaped, and the market will
re-collapse before any real boom can begin. This recession, they warn,
is nasty and likely to linger for years.
Bichler and Nitzan then discuss why this debate is fundamentally wrong:
Regardless
of who is right, though, there is something fundamentally wrong with
the debate itself. The current news may be good or bad, revealing or
misleading – but, then, investors aren’t supposed to take their cue from
the current news in the first place.To
trade assets on the basis of today’s statistics is to be backward
looking. It is to be retrospective rather than predictive, to react
rather than initiate, to trail rather than lead. It puts investors at
the tail end of social dynamics.Needless to say, such
behavior is entirely improper. According to the sacred annals of modern
finance, formalized a century ago by Irving Fisher (1907) and
popularized during the Great Depression by Benjamin Graham and David
Dodd (1934), asset prices are forward looking: “The value of a common
stock,” dictate Graham and Dodd in their immortal doorstopper, “depends
entirely upon what it will earn in the future” (p. 309).
The authors then explore why investors depart from this conventional forward-looking practice:
In
our view, the reason is systemic fear. Systemic fear is a class of its
own. It has little to do with the periodic downswings that make
capitalists cautious, and it has no connection to the dread and
apprehension that regularly puncture their habitual greed. “Business as
usual” is always uncertain, and with capitalism constantly in flux,
investors are forever fearful about profit and wary about risk: they are
concerned that earnings may not rise as quickly as they hope, or that
they might fall; that volatility will increase; that interest rates will
rise; and so on.But these fears, no matter how intense, are
self-contained. They pertain to the level and pattern of profit, not to
its existence. They do not impinge on the normality of profit – i.e., on
the belief that assets have a “natural” tendency to grow and that
capitalists have the power and right to enforce and appropriate such
expansion. And most crucially, they reflect the belief that expected
profits, whether high or low,could always be priced to their present
value. Regardless of the market’s ups and downs, the underlying
assumption is that the capitalization process itself – the ritual that
creorders modern capitalism and anchors its dominant ideology – will
remain intact.Occasionally,
though, there arises a very different and far deeper type of fear: the
terrifying thought that the entity of profit – and, worse still, the
very institution of capitalization on which the entire capitalist
megamachine stands – might cease to exist. This latter fear is
associated with systemic crisis – that is, with periods during which the
very future of capitalism is put into question. It is what Hegel meant
when he spoke of the bondsman’s “fear of death”:
For
this consciousness [of the capitalist bound to the steering wheel of a
megamachine gone wild] was not in peril and fear for this element or
that [such as falling profit or rising volatility], nor for this or that
moment of time [like a sharp market correction or a declaration of
war], it was afraid for its entire being; it felt the fear of death, the
sovereign master [the ultimate wrath of the ruled]. It has been in that
experience melted to its inmost soul, has trem-bled throughout its
every fibre, and all that was fixed and steadfast has quaked within it
[will capitalism survive?]. (Hegel 1807: 237)The
first time capitalists were gripped by such systemic terror was during
the Great Depression of the 1930s. The second time is during the present
crisis, a protracted turbulence that started in the early 2000s and is
still ongoing.
Looking at the current crisis, Bichler and Nitzan write:
And
then there are those, like financial commentator Gideon Rachman, for
whom the problem is largely temporary. The economists, Rachman suggests,
have actually made great strides in understanding how the economy
works. But from time to time the delicate machine gets infected by a
“new type of economic virus,” and we need to be a bit patient until the
economists discover the cure (Rachman 2009).By 2010, though, it
seems that the virus continues to elude the pundits. The threat of
default has spread from business enterprise to sovereign governments,
with countries like Iceland, Dubai, Greece and who-knows-who-is-next
flirting with bankruptcy. Participants at a special conference hosted
by Soros’ Institute for New Economic Thinking at Kings College,
including five Nobel-winning economists, expressed grave concern that
“many investors now find it hard to judge the ‘real’ riskiness of
sovereign debt.” Gillian Tett conveys the atmosphere of theoretical
bewilderment and ideological anxiety:
Three years ago, it
seemed inconceivable that a country such as Greece would be allowed to
default, or exit the eurozone. But back then it seemed equally hard to
imagine that Lehman Brothers might fail. Now that Lehman has gone, who
knows what the worst-case scenario might be? Could the eurozone break
up? Could Greece default? What might happen to other debt-laden nations,
such as the US, if the worst case scenario occurred? The one thing that
is clear is that the answers to those questions now depend as much on
culture and politics as on macro-economics. . . . In this new world of
sovereign risk, what really matters is a set of issues that cannot be
plugged into a spreadsheet. The old compass no longer works. (Tett 2010)The
predicament is so serious that even the know-all the
collective brain of the capitalist class – has become disoriented.
According to Martin Wolf, chief economics commentator at the Financial
Times, "the markets don't know what to fear: will it end up in
deflation, default, inflation, financial shocks, or all of these?' "Markets are unpredictable, he informs his son, like children. . . ."
And when the youngster asks: So what's going to happen next? the elder,
who is usually able to answer questions that most people cannot even
ask, replies: "If I knew that, I wouldn't be a mere economic journalist..."
(Wolf 2010)
Finally, Bichler and Nitzan ask whether capitalism is heading for systemic collapse:
The
decade-long breakdown of capitalization is no fluke. The fact that for
ten years now capitalists have been pricing equities based on past
profit betrays deep distress. Their fear now is not only that the level
of capitalization may be bumping into a glass ceiling; it is also that
the very ritual of capitalization – the universal crystal ball through
which they have been seeing the future for nearly a century may be
giving them awfully wrong signals. And
when the future looks bleak, and the dominant ideology appears opaque if
not misleading, there arises the specter of systemic fear.Given the foregoing, the obvious question to ask is: does systemic fear signal the imminent collapse of capitalism?
They conclude with these thoughts:
In
order to see that something is systemically wrong, we need to think not
positively, but negatively. Specifically, we need to look for market
patterns that are inherently inconsistent with forward-looking
capitalization. The manifestation of such patterns would then prove, by
negation, that the ritual is broken. The specific pattern emphasized in
this paper is one in which stock prices, instead of looking into the
deep future, nervously trace the ups and downs of current and past
earnings. This backward-looking pattern goes against the very gist of
forward-looking finance. And when it emerges – as it did during the
crisis of the 1930s and again in 2000 – we can be fairly certain that
capitalization has broken down and that the ruling class has lost its
confidence in obedience.A shrewd academic might have leveraged
this apparent anomaly into a full-blown mechanized model, complete with a
universal taxonomy of “fear-of-death” eras, a sliding scale of
price-profit correlations alerting investors when to switch and reswitch
between forward- and backward-looking postures, and an easy-to-follow
list of “how to profit” from both. And judging by what is on sale in the
analysis market, this model could end up having plenty of paying
followers.We prefer to forego this investment opportunity and
instead keep our speculations tentative and free. Capitalism may survive
this systemic crisis, as it survived that of the 1930s. As before, this
survival may require a significant transformation – one that
restructures the entire architecture of power, including its material
technology and dominant ideology – and such transformation is certainly
possible.But there is also a
very real possibility that the current crisis will prove too much for
the capitalist class to handle. “The history of all hitherto existing
society,” write Marx and Engels in the opening paragraphs of the
Communist Manifesto, “is the history of class struggles.” And that
struggle can end “either in a revolutionary reconstitution of so-ciety
at large, or in the common ruin of the contending classes (Marx and
Engels 1884: 57-58).So far, the capitalists’ loss of
confidence in obedience hasn’t elicited significance opposition – but
that can change quickly. However, if the opposition fails to establish
an effective and hopefully progressive alternative – an alternative that
so far seems absent – it is not impossible for the reverberations of
the clash, amplified by the high complexity of capitalism, to culminate
in systemic collapse and collective ruin.
Tomorrow, I will
go over some leading indicators that are being misinterpreted and show you why
I'm more optimistic that the economic recovery will continue. As for the
stock market, it is in the best interest of the financial oligarchy to
reflate risk assets, and inflate their way out this mounting debt problem.
Debt deflation will ultimately lead to systemic collapse and
"collective ruin".
»
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To understand their mentality, you have to go back to the European aristocrats when they really were the big bullies of their time. They have a sense that their power and their position in society is just one of those givens, like the sky being blue. They live and breathe their power without even a wisp of doubt. As Putin said of terrorists, we are but dust to them. We must get inside their heads and see ourselves as they see us. Yes, on the surface they are "nice", principled, etc, but just try questioning their sense of themselves and observe their wrinkled lip, their sneer of cold command, their glacial disdain. We are condemned to crawl on our bellies like serpents.
Reading your post makes me feel the same.
I read somewhere on this site about a social, political and economic paradigm shift we are experiencing. It was a great piece and it ended with the notion that yes, our lives will change dramatically and the end result is not necessarily an absence of "western" lifestyle or wholesale famine and lawlessness, just different.
I wonder how many find change as something to be feared?
Morph. Not start over.
Capitalism may survive this systemic crisis, as it survived that of the 1930s.
Given that the crisis of the 1930s led to the creation of the Federal Reserve System, I'm not sure it is correct to say that capitalism survived the crisis of the 1930s.
In a general sense, I see much of the developed world's crises stemming from most folks having purchased what they need. This is a variation on Hang the Fed's discussion of increased complexity. For any given developed population, at some point everybody is going to have basically what they need. The fact that much of those purchases was paid for with debt that needs to be paid off only extends the time before more purchases may be made. The governments may wave money in front of that population in an attempt to stimulate purchases. But they are likely to be met with the response - "no thanks. I'm going to die soon anyway. I have pretty much what I need." On the other hand, if the governments were to wave that same money in front of the people from underdeveloped nations in a way that corrupt leaders could not get their hands on it, I think we would see an explosion in manufacturing driven by an explosion in purchases.
Even as a system can be refined to a level of complexity such that a person of average education would not know how to run it, I think affluence leads to a point where people just aren't going to buy much anymore. At least not like the folks from underdeveloped nations would buy if given a chance. True capitalism needs a steady supply of buyers in order to work. In that truism lies the seed for capitalism's own demise. Most consumers don't need an infinite number of things. Which means that, at some point, purchases will stop. What do we do with the factories and laborers until purchases start up again?
On the other hand, there is probably not anything wrong with the developed world that oil at $20 a barrel wouldn't cure. But GS wouldn't let the price stay there, and I think that is also part of the problem. In real capitalism, price is set by the interaction between buyer and seller. In our "capitalism", the interaction between buyer and seller is irrelevant. The price is set by the speculators.
Richard,
"On the other hand, if the governments were to wave that same money in front of the people from underdeveloped nations in a way that corrupt leaders could not get their hands on it, I think we would see an explosion in manufacturing driven by an explosion in purchases."
This may be the only comment I have read that makes sense. I mean think about it...the world trade agreements back in the 90's have done nothing but fueled growth in the emerging Asian markets and helped Germany in their manufacturing efforts, all the while the good old USA digressed in every category of personal (middle class) advancement.
This will enable a handful of American Corporations to basically control the world in their markets. Caterpillar, Boeing, McDonalds, Citibank, AT&T just to name a very few.
Now could this have been planned?????? One, I'm not so sure. Two, the emerging market populations still have a LONG way to go before they can begin to offset US consumption (I think?).
Needless to say, this is a very interesting take on things.
There will only be a huge supply of eager purchasers in the undeveloped world if the people there too can be convinced that their salvation and happiness lies in the acquisition of more and more physical possessions, made from commodities of which there is only a finite supply ( unless recycles).
I was thinking first of basic infrastructure, like roads, water systems, power distribution, well-built housing, sewer systems, transportation, etc. That is why I specified if it could be done in a way that kept it out of the hands of corrupt leaders in my original post. I should have been more specific.
On the other hand, there is probably not anything wrong with the developed world that oil at $20 a barrel wouldn't cure.
Completely agree. And this is what the bears are missing big time. Cheap energy is a huge huge win for the economy and its coming to a theatre near you. Thx to the new technology of fracing nat gas reserves have ballooned in the US to about 100 year supply. The marginal cost of new nat gas is down around $4. Which converts to $25 dollar crude for a BTU equivalent. Nat gas consumption and production in the US has taken off since 2005 and is up about 10%. Oil aint going nowhere. Despite the protestations of many the energy stocks have been the worst performing group off the lows of march 2009. This is the same reason XOM spent 31 billion to acquire XTO. Whatever you may think about big oil they sure do like to make money. If XOM is parting with that kind of coin you can be pretty certain its for a good reason. Maybe they should have bought a few airlines but hey that would have left nothing for the rest of us...
"In a general sense, I see much of the developed world's crises stemming from most folks having purchased what they need"
Want, need and must have
Most of the "developed" world has purchased it's must haves and needs and has been borrowing to satisfy it's wants.
The rest of the world is struggling for it's needs by manufacturing many of our wants.
This is why stimulating demand will typically lead to an increase in demand for imported goods.
Strangely sometimes wants become must haves. I don't have a mobile phone, I don't need one, I don't want one, but everybody tells me I must have one.
Advertising tries to move us from want to need and then to must have.
Peer group pressure ( now assisted by viral marketing) is a huge influencer from nursery to retirement home.
Resist Chrisina.
I see commercials for pet grooming gadgets, better-picker-uppers, drugs for conditions that did not exist before the drug, and insurance I don't need. Maybe we are barking at the wrong boogie man in demonizing financial systems. They have simply provided what we asked them to: More money to buy what we don't need, and the ability to pay for it with future earnings. Bah.
I think your point applies - but not at the margin of excess that can crash capitalism. Carefully think through what role oil at $150 a barrel likely played in the Lehman, AIG, Goldman turmoil of the past two years. Oil was not at that price level because producers and consumers had negotiated that price (recall the articles that have been posted here about how speculators created that price level). If oil had remained between $40 - $70 a barrel over that period of time, I wonder whether the "real-estate crises" would have happened. (The real-estate/derivatives problem would have still been there. I just wonder whether it would have been forced into visibility the way it was.) I don't think pushing us to buy doggie treats or cell phones we don't need has that kind of effect.
How 'bout if we throw in some granite counter tops, media rooms, and atrium foyers?
That'll spark a run on granite.
1. "Given that the crisis of the 1930s led to the creation of the Federal Reserve System"
The Federal Reserve System was created in 1913.
2. "Most consumers don't need an infinite number of things. Which means that, at some point, purchases will stop."
Things break down and need to be replaced, food gets eaten, energy gets used... If the end of capitalism was predicated solely on having satisfied all inhabitants needs, I can assure you that it would still have a very long way to go. Needs are evidently not the relevant constraints.
The constraints are the inputs to the system (energy with diminishing EROI, water, top soils, raw materials) combined with the fact that the growing quest for efficiency and productivity of the system drives its complexity. And growing complexity means reducing resilience, so that it eventually becomes too fragile.
3. " In real capitalism, price is set by the interaction between buyer and seller. In our "capitalism", the interaction between buyer and seller is irrelevant"
You think a "speculator" isn't a buyer or a seller ?
First define speculator, then tell me how to get rid of it. Be precise. And also make sure you forget about the unintended consequences. You'll make the bureaucrat's dream come true.
Hint : in doing so, rest assured that you'll add another layer of complexity to the system and that's not going to make things less fragile...
Also, please explain what "real capitalism" is and why it has no speculators, and how, absent speculators you'd deal with illiquidity and too high bid-ask spreads?
Answer your own questions. If YOU have a problem with the statement, then YOU explain how the questions you pose are relevant. I think it is funny when someone tries to get another to debunk their own argument. Surely you have considered the questions you ask. Do you have answers as well or are you merely baiting?
Jeez, now you've got me doing it!
No, I don't have any answers, and I don't think there are any:
I don't think you can have markets without speculators. We can try to limit some speculative behaviours but each time we do this (eg ban on short selling, tobin tax, volcker rule, etc...), rather than going towards a more simple system, it becomes more complex, more rules.
Also, I don't think there exists such thing as real capitalism and false capitalism. The system that exists at any moment in time is what it has evolved into, its rising complexity is a consequence of rising efficiency and productivity demands.
I see a place for distribution and distribution often times needs to be an area for speculation... buying a quantity of parishables before the end use is determined is a risk and speculation.
However, I have a problem with speculation for speculation's sake (unless confined to Las Vegas) when it interferes with producer/consumer relationships. Creating 45 gold contracts for every 1 that physically exists, creating 23 oil contracts for every one that exists, increasing/counterfeiting the supply of a company's stock shares by shorting (naked or otherwise) and upsetting free market supply and demand dynamics. These things add no value and add only complexity and opportunities for abuse.... and it is all fueled by fiat money and the fiat money creators who use their money creation power to alternately sledge hammer and shackel humanity.
Ditto. If these activities actually added value and were actually a necessary component of producer <-> consumer capitalism, they could and would be done in public, open for all to observe. The fact that so much effort is expended to conduct these activites in secret speaks to what they are actually trying to accomplish - enrich the speculators at the expense of the producers and consumers. How does that process contribute to the sustainability of capitalism if it ends up bringing markets down? (Think in terms of what we have just been through re. derivatives and whether that was good for the long-term survival of capitalism.)
1. Thanks for the correction. My thinking got ahead of my typing. I was trying to make the point that some folks think the Fed caused the financial problems of the 1930s - and my words came out backwards.
2. We are not the growing country we once were, particularly as the baby-boomers began setting up households. The group setting up households now is far smaller, and need far fewer things, than the baby boomer generation needed. My point rests alongside what you say in Point 2; it doesn't replace it.
3. I should have said "between consumer and producer". Think smaller geographic areas in the past where producers and consumers traded amongst themselves and lived close to each other. Price discovery on goods and services was different under those conditions than it is today. It was based on the close physical proximity of consumer and producer. And it was those conditions, not today's, that gave rise to the term "capitalism". That was my point. What is called capitalism today is nothing like what was going on when the term was created.
Because I didn't mean "buyer and seller", but "producer and consumer", the rest of your comments at Point 3 about speculators belong to a different point. My comment was about speculators who are neither producer nor consumer of the materials they are buying and selling. Their activity in the market place sets prices at a different level than they would be set if it were producer and consumer who were negotiating a price. ZH has posted several articles on this topic in the last 18 months. Regular readers should remember them, and I simply was referring to the ideas they contained.
First define speculator, then tell me how to get rid of it.
The article at the top of the thread is about capitalism and whether it will survive. My point was simply that the acitivities which the word "capitalism" referred to when that word was created are different from the activities going on today that are labled "capitalism". The thrust of my point was not that we should get rid of speculators. (I think we should get ride of some of them, but that was not my point here. That's a point for a different discussion.)
Keep the system we have. Just don't call it capitalism, as capitalism was first defined.
Speculation is inherent to markets. Markets are inherent to capitalism. Even the earliest proto capitalistic societies had speculators, merchants, traders, and not only producers and end users.
The fact that our societies have become far more complex today stems from the constant quest for more efficiency and productivity. For instance increasing market efficiency requires increasing liquidity which requires increasing speculation, you can't have one without the other. You can't manufacture Ipads in every small town in America. You can't have all this variety of appliances, garments, food stuffs and produce all in every village.
We could go back to a much simpler society but I'm not sure we'd get all the goodies we consider for granted today. Maybe that's where we'll end up to when the system breaks down but I'm not so sure that's what people really aspire to.
The way capitalism exists today is in direct relationship with our way of life today. If you want to return to capitalism as it once was and a much simpler society, I'm afraid you'll have to take that time's way of life too. Oh, and that time's population too... (there were less than 4 million Americans in Adam Smith's time).
Speculators in a capitalistic system face risk of loss. The individuals at the large end of banking and commerce face no risk of loss. Don't conflate speculation with what's going on in our markets right now.
Our complexity is derived almost solely from financial and legal mumbo jumbo designed to exempt our ruling class from harm, effort and risk.
I am sorry but I cannot follow the logical path to your assumptions (maybe because there are so many assumptions and few facts) and the conclusion of how a more simple capitalism would be a horrible and inferior capitalism.
In my experience running businesses, complexity generally is not better. What complexity is very good at is creating the opportunity for waste and abuse and for allowing parasitic, but unnecessary relationships to exist ... friction in the pipe.
Our modern day civilization and capitalism may be a result of all of the complexity, abuse, parasitic relationships and such. But what has today's capitalism been able to provide that more simple capitalism cannot provide; other than a place for PhD economists and to allow the wholesale theft of assets by societal parasites? Is that really good?
I like markets and especially free markets if capital is real and not fiat. The creation of fiat money is the first and largest opportunity for abuse, since those that control the creation of fiat completely kill any thought of a free market (and I am not assuming that markets are or need to be completely fair). The creators of fiat cleverly assign value to nothing and then distribute as they see fit to their friends, cronies and people who will provide a quid pro quo. A level or two down in the system it may work, but then there are always those who are able to create or get disproportionate amounts of capital from their "special friend" and control markets (killing free markets ... think Goldman).
Should the entire goal of capitalism be to suck up to the entity that controls distribution of fiat? Might as well have a Imperial Monarchy... although I would argue that on a global basis we might have an imperial monarchy through the central banking system.
My conclusion isn't that "a more simple capitalism would be a horrible and inferior capitalism". Never said that.
I said, complexity is a consequence of rising efficiency and productivity demands. And more complexity means less resilience.
I don't make judgement calls. But we should be conscious that we are never going to get the best of both worlds, a system that is both simple and resilient as well as highly productive and efficient.
You are very right! The only question remains who are the speculators? As Big Ben admitted they intervene in the market. There is no real price discovery process anymore because markets are adjusting to their policy of intervening and they play on it.
I'm pretty sure that the global economic system (which really is capitalist, whatever that means anymore under the layers of bullshit that have been heaped upon it over the last two centuries) is headed for ruination, along with much of our social and political structures. Call me rubber-room-ready if you like, but it seems to me that if you want to have a tactile grasp of the behavior of a population as massive and dynamic as human beings, thermodynamic laws make an excellent allegory. Specifically, entropy, in this case...let a given system evolve for long enough, and eventually efficiency will be degraded, maybe even to the point of total collapse. After all, more complexity demands more moving parts, which then leads to more pieces that have to work in harmony to keep the shit-show running. At that point, the total amount of effort that's required eventually becomes insurmountable. I suppose that the only real questions are, how long until things boil out of control, and, does it result in a complete collapse, or merely the implosion of some parts of the system?
I don't really have much optimism on that last count...like it or not, we now live in a world in which tremors in one place can turn into a full-blown earthquake in others. I've always thought that elegance was most firmly rooted in simplicity. If I'm right, then it's a sad state of affairs that we have now.
Excellent view and well put.
I believe you have answered your own question. The system is falling apart piece by piece. In saving the financial area, a new weakness was created elsewhere -- several elsewheres actually. In the larger picture of the chaotic pile of sand which collapses with the addition of one more grain, we are seeing the adjacent particles slide. Soon enough it will be impossible to track each grain, even though we are obsessed with doing so. We have to give it up and let the system reset.
I've seen simple problems be swamped with resources. A simple, easily solved problem becomes one of infinite complexity in an instant. Turf wars and power struggles amongst government agencies becomes apparent when a child is lost, or a vehicle with hazardous materials simply rolls into a ditch. The abundance of tax money thrown at "budgets" that never went down, and had to be spent, will unwind. The pain is seen in the firing of non-essential personnel. If they were non-essential why were they hired in the first place? To give the director a 2nd and 3rd assistant to pick up his dry cleaning. Those perks are going to have to go. With no manufacturing base to speak of as a shock absorber we will have unemployment high for a long time to come. Industry will have to be built to make the low-priced stuff we import to domestic production. Regression to a mean is mandatory.
Plus capital moves at the speed of light.
Perhaps this is all going according to plan? Some think the plan is to destroy the American middle class, although their (middle class) greed and stupidity is also to blame.
The idea that a home (which in many cases is a liability if you include the mortgage, cable, gas, electric bills) could forever increase in value is ridiculous. Of course, much of our current system is very strange.
A home is a very effective store of wealth, and over time it does create growth in wealth. The problem with today's real estate investment model is that the underlying value of the home wasn't driving valuations.
If you truly own a home, you have an asset that is constantly paying a dividend -- namely, the rent you would have to pay to live anywhere else (or, conversely, the rent you can charge someone else to live in it).
A well-constructed, well-maintained home is a fantastic asset, not in an abstract/speculative sense, but because of the value it provides when used properly. A home is a place of safety, shelter, warmth, rest, family.
The problem with the housing bubble is that the true benefits of a home weren't what was driving prices. Homes became objects of speculation. Homeowners became speculators investing with 10/1 or higher leverage. This transformation was created by the finance industry, in order to expand THEIR business, not out of any interest in the underlying homes supporting this leveraged speculation. It had nothing to do with actual home ownership.
The "growth" in home values during the bubble wasn't based on the underlying benefits of home ownership, but on a perceived supply shortage/demand growth. That doesn't mean that homes weren't continuing to provide the underlying real benefits to those who weren't playing the game.
This is exactly true...summarily, somewhere along the way, we forgot what the real and tangible values of owning a home, namely that you don't have to sleep in a cardboard box. Treating it like a personal balance sheet in the context of a system that is rife with usury and fraud is, well...sort of like shitting in your own bed, so to speak.
I can't disagree with what you say.
However, my belief is you put 5% or even 20% down to buy an 'asset', you don't own it. The financier does.
aaronb wrote: A home is a very effective store of wealth, and over time it does create growth in wealth.
For this to be true, over time, you must pay the property taxes, homeowner association fees, gas bills, insurance and mortgage payment.
And for home values in your neighborhood to maintain their value, your neighbors must comply with their financial obligations too.
arronb, your assessment of housing prices with relationship to equity are correct during normal, healthy economic times. You also correctly nailed the bubble. I have had endless arguments that a house is only worth what someone is willing to pay for it plus the actual value as a shelter. Remove the shelter effect, a house has no value whatsoever if everyone is broke. The result is if someones owns a good, structurally sound house with a mortgage, it will soon be a massive liability to the owner as prices depreciate. It is worthless in economic terms.
The way to keep a degree of sanity (respects to CogDis) in this situation is to stop thinking of that house in terms of economic value. If the owner is secure, happy and comfortable in the house, and doesn't want or need to relocate, he can sever in his mind any connection of the house with the world of money. Then the gyrations of insane markets become unreal, and all that is left is a safe, warm, pleasant environment to spend one's days.
I do not believe that a home can be considered as an income-producing asset.
I don't believe it can ever be considered to be an "investment"!
And I think that that is where everyone went awry.
I think that a home is a commodity ... and like virtually any other commodity,
it gets used up. All of the different components of a home are subject to decay
of some sort or other. Systemic to the nature of capitalism is the tendency to change social norms, including building codes, in order to continually generate needs.
Outhouses give way to iron pipe, which is replaced with copper, which gives way to pvc.
To my thinking, the idea that you can live in a house for a certain period of time
and then sell it for a profit, is akin
to the idea that you can eat food and then make a profit out of selling
what your body discards from the processing!
A caveat,
Two inmates, serving sentences for armed robbery, were able to escape from a ‘high security’ Argenentian jail this week by calmly scaling the fence and climbing the exterior wall - before cooly strolling off into the sunset. It seems the jail was so cash-strapped it only had two men to cover the watchtowers and had been manning the watchtowers with scarecrow guards - complete with footballs for heads and prison officers’ caps.
Very thought provoking piece, thank you for posting it.
I'm not sure that "threat" is a strong enough word; it looks like the surety of default is more true in the present situation.
These exogenous factors are the virus that infect all technical analysis, eating away at the supposed surety of a comforting chart. Until these factors can be isolated and an antidote developed there is no clear sailing. This is what could bring down the system.
I don't want to see a system collapse any more than any other person -- that is to say I don't want to see total lawlessness. I do have precious metals but seeing their value skyrocket to stratospheric levels is not good for me or anyone else. The best scenario would be that some sanity prevails, but it's just not going to happen. I believe that we have jumped the shark as a society and political system. Happy Days has been discontinued.
I love the jump the shark reference. We have entered a completely ridiculous economic system whereby you can exchange paper for resources (i.e. dollars for producing oil wells).
On can call it 'collective ruin' but that is also based on past examples. The Roman empire was overun by the Goths, the Sogdianians by the Turks, but the US is unlikley to face an successful invading army. ..so, a collapse..would present the problem, to government, to provide the basics. That's about all that they can do in the event.
The massive edifice that is the US government should be able to do that with room to spare. The only issues are paying for Law and Order, Distribtion of Food and Utilities - the only real issue is determining what constitutes a federal means of exchange, etc.. If that can't be negotiated by the Treasury then the States will decide that for themselves and Washington is supplied by Pennsylvania... ironically, this plays as great television, Walden or President... at the end of that particular day, the people who have the skills will be around, the groups of people who worked together will be in touch, the balance sheets that determined what level of risk could safely be borne, won't. ..it needs calm leadership with a sensible, inclusive vision and a functioning participatory infrastructure.
"I can hire one half the working class to kill the other half" - Jay Gould.
You're assuming that this is a stock market crisis. This is a social crisis, political crisis, environmental crisis. All built upon the greatest misallocation of resources witnessed in the (available) history of the world. (Suburban America)
The high priests of the monetary system are flying at night without instrumentation.
Right. Nobody is even accounting for the increasingly scarce inputs of globalized commerce. Nobody.
The Jay Gould quote says a lot. It speaks to his arrogance and disregard for others. It ignores the frailty of his own existence, since there is no way to stop a single killer who will sacrifice himself to kill Jay Gould.
The "elite", who fail to be leaders and are instead parasites are a problem. They want obedience but have only earned disdain because of their disregard for the people they depend on.
Also, I would argue that since today only 12% of the US economy is manufacturing as opposed to 70% in the 30s something has fundamentally changed with US capitalism. It is no longer capital deployment for value adding activity. It is something else that adds no value.
And, since we do not have a closed loop economy, real capital has been draining from the US to value adding countries at an alarming rate for maybe 30 years and we have been replacing the real capital with fiat money, inflation and borrowing on the (incorrect) assumption of future value creation.
Lastly, just the fact that there are so many PhD economists, think tanks, traders, lawyers, professional politicians and consultants etc. churning money, but not creating any value through their labor, one has to question whether this is now the normal evolution of capitalism or a sign of its upcoming demise. Where is the ROI in these non-value adding activities?
Bart- Excellent observation. So many professions in this American economic system create nothing but accounting gimmicks, legal loopholes and white papers announcing how great the elite are.
My concern is that the Nazis became known for asking everyone for "zee papers." Whenever I fill out my 1040 form, I am reminded of this.
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