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Guest Post: Austerity And Critical Mass
Submitted by Ancient America
Austerity and Critical Mass
Some say that QE3 won’t happen. The U.S. is done with stimulus and force-feeding liquidity and inflation down the world’s throat. Okay, it’s austerity then. How much austerity does anyone think we’re going to have here in America? What is the critical mass and when will we reach it? How much inflation can our creditors handle before they reach their critical mass and have to allow rates to rise? Paradoxically enough, the real question has become ‘can we afford austerity’? I believe the answer is ‘not anymore’. Due to relatively recent events, austerity has become a mathematical impossibility.
Quantitative easing is not technically “money printing”. However, it did accomplish scaring everyone out of dollars and into “riskier” assets. So, while we didn’t print much, emerging economies certainly did as people ran screaming from the U.S. dollar. The result of which has been rampant inflation all over the developing world and near parabolic gains in commodities and equities. We’re left now with a dangerously deflating economy here in America while our creditors are heavily overheated. Not many people have much confidence in what QE or stimulus have accomplished. Our banks have fresh new reserves they can’t and won’t lend while our employment picture remains increasingly grotesque.
With QE2 ending, negative real interest rates and emerging markets unable to afford more inflation, how does the future look for U.S. government bonds? When rates rise, what of the outlook for equities and for the economy as a whole? If the economy stalls and people want to hold onto their precious cash, business will suffer and who will fund our local, state and federal governments? If our government programs can’t function, and people start to worry about their grandmothers, their pensions and their grandmothers pension, what will happen? Austerity? Not over our Masters of Debt’s (MOD’S) dead bodies! But when will we reach critical mass?
Why will congress and the fed absolutely intervene? When you figure it out, it seems almost comical to have ever believed otherwise. Simply put, that’s their nature. Nowadays, it’s what they are designed to do. Given current events, they truly have no choice whatsoever. Did Volcker raise rates way back when? Yes. Are they sort of attempting austerity all over the world? Well, kinda. But that’s not what’s happening here and now. It won’t happen...not for long. Tightening might come from the emerging markets, but not from us. Just as credit card addicts rarely cut themselves off, we’d sooner end this easy money regime as collectively give up cheap oil. In severe debt situations, the creditors usually do the tightening, not the debtors. What environment will that conflict produce? When congress and the fed stimulate, ease and shuffle around assets and liabilities in a compounding vortex of fear and arrogance, how will our creditors react when they don’t have a choice anymore?
The first point of critical mass will be when the austerity is no longer tolerable for the government. The second is when emerging markets are forced to let their currencies appreciate. The critical question is whether this can occur in an orderly fashion or not? I think not. Our economy is so over-leveraged that austerity simply isn’t an option. There was a tipping point where the cost of providing tolerable austerity became too expensive for the world to afford. That is the main concept to understand. The bizarre fact is that we couldn’t financially achieve a hard money stance if we tried. Unfortunately, this is a somewhat recent development.
The fed’s dual mandate of stable prices and maximum employment is impossibly vague and ridiculous. What are prices? What is employment? Who’s prices and what work? Defining either requires shoving a qualitative square peg into a quantitative round hole. This is why no one believes in any of the models that the fed uses. Metrics such as the CPI, PPI and BLS numbers are useful tools but create a disconnect when applied to “monetary policy”. Fiscal policy has the same fallacy built into it. However, unleashing free market forces upon interest rates currency valuations would mean a complete restructuring of the global economic matrix.
If the fed lets raise rates, payments become too onerous for everybody here. If they continue buying treasuries, emerging markets get inflation and we all get asset bubbles. These inflated economies cannot allow us to do that but if rates rise too quickly emerging markets immediately lose their biggest customer without a significant consumer base established in their own countries. Therefore, QE3 will look very different than QE2. In reality, there are all kinds of back door attempts at stimulus being performed right now. These have been well documented by many pros such as Meredith Whitney, Bill Gross and Zerohedge.
The real issue here is public opinion. Obviously, the giant auction house that is our global market place is an organic amalgam of emotional organisms clawing at each other for some profits. People dictate policy, not economic models and while Bernanke may believe that a stronger CPI and 9% unemployment means one thing, it actually means another thing. The more people hear about the CPI and unemployment data, the angrier they get and the stronger their stance gets against austerity. However, everyone is concerned about debt. America is awash in it. Some believe that we aren’t at a breaking point and that we can mathematically sustain another 5-10 trillion dollars in debt. Whether that is true or not, public opinion is that our national and consumer debt is a ticking time bomb. So, which will prove the greater inertia; fear of a national, possibly global debt explosion or fear of austerity and deflation. Many could stop reading this right now as I believe the answer is inherently undeniable. However, I will continue briefly.
The elite hedge fund managers, bankers and policy makers have the ability to profit in any environment. Whatever combination of inflation, deflation or hyper-reinflationary price deinstagflation we get, they are positioned to prosper. However, because of capital flows and velocity, inflation benefits them the most simply because they get to use the money first. The argument that inflation harms big financial institutions balance sheets and that they would benefit from higher interest rates is incorrect. Deflation slowly kills their balance while inflation gives them a flow advantage. This being said, they aren’t the only game in town.
If congress and the fed were to enforce austerity, the outcome would be unpredictable to say the least. When and how would we reemerge after a decade of gut wrenching deflation? Is it not possible that given the choice, many citizens might willfully opt for hyperinflation? I could see many possibilities in which hyperinflation would actually be better for a lot of folks. Hyperinflation is only one possibility anyway. We could have a Japanese style deflation inflation cycle for twenty years. I think that’s doubtful given the compounding black hole of debt and the public opinion regarding it, but Mish thinks it’s likely and I like Mish. In any event, the unpredictability of a hard money policy juxtaposed with that of an easy policy definitely favors the likelihood of the latter. When any attempt at austerity reaches the point of critical mass where the pain of a credit crunch overtakes the fear of hyperinflation, get ready.
In conclusion, when esoteric conjecture hits the cold hard wall of human suffering, emotion always wins. Austerity is mathematically impossible given that no one at the top benefits from it and no one at the bottom can psychologically bear it. Emerging markets may try to force rates higher, but only as much as its benefits outweigh its harm. In the end, organic responses will rule the day and the over-leveraged nature of our global economic environment ensures that the cheap money spigot cannot be closed without a complete restructuring. So, get ready for a transitory bout of tightening followed by a continuation of U.S. currency debasement and asset bubble formation.
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Exactly, my ring-tailed friend. Just as peeps call the system 'capitalism', but it ain't...
Oh, indeed they have, one only has to look at oil, cotton, wheat, PMs, etc. over the last year for proof.
"Price Inflation" That will further stop people from buying AND BORROWING. They will stop that, drop their consumption and pay off as much debt as possible.
Store Credit cards, and the rest.
Mean while debts are being written off in the hundreds of billions "MONETARY Deflation".
They can't lend, if no one borrows.
Again, you can't push a chain.
The first round had nothing to do with the consumer and the second, and worse round of escalating inflation with have even less to do with them. Going to the next level we will see all those banks unleash their massive reserves any type of loan and the purchase of securities (industrial metals, commercial and residential real estate, you name it).
It will be all about a montrous expansion to money supply, no participation from the consumer necessary for TPTB to get what they need.
It's anyone on the government payroll, which now translates to the majority of our population.
It would be interesting if corporations would have to further breakdown revenues received from government on the P&L.
Great Post............looks like we will rot from the bottom up........in other words, state and local level and the feds wont be able to do a darn thing about it....
take a look at these headlines from the last 30 days or so.....
http://nakedempire2.blogspot.com/search/label/the%20states
The only people who will not tolerate "austerity" are people who work for government. Those of us who are producers are just love "austerity". What does "austerity" mean to us? It means people who have been stealing us blind for decades steal less for a while.
Let's work through this. We stop paying taxes. We stop receiving "government benefits". Result?
No more IRS theft.
No more TSA molestation.
No more violating my privacy.
No SWAT teams invading college parties.
Wait. What benefits? I haven't received one damn benefit from government that I can identify. Not one. Not ever. I literally want nothing from "government". Zip. Zero. Nada. Nothing.
Yeah, we definitely need auterity. Let's do without the federal government and the federal reserve for a couple decades. My bet is, almost nobody would vote to re-instate them once they've tasted the good life.
Lets just forget what is best or what is right...just remember who the biggest debtor is and who benefits most from inflation and who is running the show.
We might have a whiff of deflation...just enough to astroglide the further insertion of inflation...
That is predicated on them being able to do something about it.
When Sentiment changes, the market will rule.
They can't lend, if no one will borrow(like now)
You can't push a rope.
The crisis continues and morphs; it is now a sovereign debt crisis and the approach by the ECB/IMF will not stop it. Credit downgrades of sovereign debt will accelerate and move to bigger and bigger countries. After Spain, Japan will get hit first and England, the United States will follow. For the United States and Japan, inflation is not a viable exit as there is too much debt and too many indexed costs, such as, wages, social security and medical care. Social Security is now over half of Japanese spending and moving rapidly higher. Their only exit path is very low inflation or deflation because the interest cost in the current budget at a blended 1.4% will absorb 22.4% of Japanese government revenues. If interest costs moved to 3%, it would absorb 50% of government revenue--there is no exit that direction other than sovereign default. Higher rates or a default would break all their banks as they hold a lot of government debt--again not a very pleasant direction. Their retirement fund must liquidate $78 billion of JGB's this year to fund pensions/social security. Deficits must be eliminated because buyers of debt will evaporate as central bank buying becomes the only option; it destroys credibility and the currency. That path destroys the standard of living for everyone and all the banks. Hyper inflation is not an answer. Politicians will be backed into a corner as credit continues to be down graded. They will have no good choices---it will end up austerity or collapse as they watch the evolution in Greece/Ireland/Portugal. Governments are too big and must downsize but they will not do it until they see from other sovereign debt crises that there is no realistic option in another direction. Sovereign credit downgrades will accelerate as the crisis moves forward.
human nature will mean print.. we will have deflation and government will print money and give it to government workers to spend.
unfortunately the lazy fucking government fuckfaces will be the first to receive the newly minted 1000 bills to spend.. prices will skyrocket and velocity of money will increase.
hyperinflation is the answer and the ones closest to the printing press win.
"If the fed lets raise rates, payments become too onerous for everybody here. If they continue buying treasuries, emerging markets get inflation and we all get asset bubbles."
For a different perspective, I say "so what"? Let emerging markets get inflation. Look how it's working out for us. It's causing MENA gov's to fall "naturally", compared to the miserable failure of 40 years of covert intervention and diplomacy. It's causing scarce resources to rise in price and be conserved, also "naturally" by market forces. As opposed to decades of hand wringing and fighting over policy conservation. Yes, it's raised the price of gasoline for lazy, fat consumers -- most of whom can carpool or use mass transit with mere inconvenience.
And finally, emerging market inflation is the only thing that will put a stop to the exponential population growth. That bubble needs to deflate slowly or eventually there will be a massive "event".
Bold and perceptive.
I commend you, sir.
Thanks, I would prefer to be wrong.
Alex
see above
Credit downgrades and a weaker $ will move long rates higher if The Fed keeps buying. Food and oil are already causing problems for consumers here and globally. The consumer remains weak in the US. Too much Fed buying of our debt and China, Japan, Oil states, Wall Street and England will all be selling. Mortgage rates will explode as the banks try to hedge against future rate increases. The turmoil will stop interbank lending and most borrowing in the economy as business confidence collapses. Gold would explode. In essence the easy choices are behind us and we are much more financially vulnerable than at any time in our history. The sovereign debt problem started in Iceland, moved to Dubai and immediately hit Greece, then Eastern Europe, Ireland, Portugal. Spain, italy, Belgium, Japan and England are at risk. Big countries with their own currency are not immune. The United States has more debt relative to GDP than Spain, Portugal and Ireland and that is without counting unfunded future liabilities or State and Local debt. It will take a long time to move through the sovereign debt crisis and austerity will prove to be the correct answer and the local governments and countries that get their house in order early will do the best.
Best article on here for a while, along with Reggie Middleton's.
Top work Tyler !