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Yet Another Unintended Central Planning Consequence: Running To Stand Still

Tyler Durden's picture





 

Via Louis-Vincent Gave of GK Research (A Gavekal Company),

Lemmings And The Quandary of Negative Real Rates

For most portfolio managers, investable assets can be thought of as sitting somewhere on the risk-return curve shown below. Of course, depending on valuations at a particular point in time, positioning in the economic cycle, or overall geopolitical risks, some of the relative positions may change. But over long periods, investable assets have tended to display the risk-reward characteristics highlighted by the efficient frontier below.

Now in recent decades, investors could assume that across the length of an economic cycle, almost all investments would provide a positive real return. Diversification across the curve made ample sense, and this is precisely what happened: looking at the stock of global assets, one sees that out of an estimated $209trn in global financial assets (excluding real estate), $52trn sits in equity with $45trn in government debt, $65trn in loans (possibly a good chunk of which finances real estate), and $46trn in corporate debt. In other words, roughly one quarter of the world’s financial assets are in equity (on the top-right hand of the risk-return curve) with three quarters in debt (at the bottom left of the curve). This asset mix brings us to the policies followed today by most Western central banks of guaranteeing negative real rates for as long as the eye can see. This policy of negative real rates has an obvious goal: push out investors from the bottom left of the curve to the top right, thereby boosting animal spirits, creating jobs, and returning Western economies to a more solid growth environment. But could these policies suffer from the law of unintended consequences?

If we look at the risk-return curve today it is obvious that 75% of global financial assets are now locking in real losses, unless of course, inflation collapses and deflation takes hold in the major economies. Consider a 2 year treasury bond yielding 0.25% as an example. With inflation running at around 1.7%, anyone buying such an instrument is locking in a -1.5% real capital loss for the next two years. The same argument can be made for Germany where yields are even lower than in the US, even if inflation is running at the same pace (and likely to accelerate further), or indeed Japan, France or the UK... In short, in today’s world, it is almost impossible to gather any kind of real returns on fixed income instruments without either taking significant duration risk and/or quality risk, i.e.: moving up to the right of the curve.

 

Now let us assume for a second that the world will be spared a massive deflationary wave and that, consequently, the assets at the bottom left of the curve will lose 1.5% real per year every year for the next five years. This means that, for global assets to stay roughly in the same place, equities will need to provide a real return of 4.5% per annum every year for five years. This is broadly in line with the long term return of equity markets and, given that global equities are not blatantly overvalued, such returns may well be achieved. However, it is important to note that such returns will only serve to compensate for the capital destruction taking place in the fixed income market. Real returns on equities of 4.5% will not leave us any richer compared to our starting level. This means that investors will have effectively spent five years on a treadmill running to stand still. When you consider that no asset growth was registered in the previous five years, we are facing a whole decade devoid of capital accumulation. Given the world’s ageing population, isn’t this bound to be problematic?

Indeed, at a time when most pension funds are already far under water, does a policy that locks in real losses for plan managers really make sense? In short, can the world today afford the real capital destruction central banks are engineering through negative real rates (perhaps we can if that capital destruction mostly occurs on the central banks’ own balance sheets?). This quandary brings us back to the law of unintended consequences: just like the pensioner who, sitting on a fixed amount of capital, will simply buy more and more bonds as interest rates are pushed down (for he needs a fixed level of income—witness Japan over the past twenty years), won’t the world’s pension funds, sitting on real losses because of their existing large fixed income holdings, prove ever more resistant to moving to the far right of the curve? Could the negative real interest rate policies, by destroying capital, guarantee the world a period of sub-par investment growth, sub-par productivity growth, and sub-par economic growth instead? This is what occurred in Japan for a decade, once the bank of Japan moved to a zero rate policy. Basically, ZIRP meant the banks could not make much money, nor were they interested in taking much risk or making loans. And without bank credit, the economy just puttered along, while equities continuously de-rated.

 


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Sun, 02/24/2013 - 22:00 | Link to Comment thisandthat
thisandthat's picture

Can't wait for the world of tomorrow...

Sun, 02/24/2013 - 22:55 | Link to Comment The Heart
The Heart's picture

"Can't wait for the world of tomorrow..."

Granny used to say, "Be careful about what you ask for."

http://www.commondreams.org/headline/2013/02/23

Hate to say this, but anyone living east of Hanford or in the vicinity of this mess is in deep doo-doo.

 

 

Sun, 02/24/2013 - 23:07 | Link to Comment markmotive
markmotive's picture

Another consequence...we're all fat.

Seriously...decades of easy money and endless debt has allowed us to live far beyond our natural means. We buy more, we travel more, we eat more.

Same thing has happened to citizens of empires that came and fell long before us.

http://www.planbeconomics.com/2013/02/22/the-world-is-getting-fatter/

Sun, 02/24/2013 - 23:45 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

I've made a mountain of money in junk bonds and high yield REITs in the last five years so whatever.

Sun, 02/24/2013 - 23:49 | Link to Comment akak
akak's picture

Bully for you.

Let's see you repeat the performance in paper over the next five as well.

Mon, 02/25/2013 - 00:21 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

Ok, let's. Game on. Everyone said the same thing to me back in 2009 when I was doubling down.

The canary in the coalmine will be nations that import most of their food. When the SHTF in a few of those places, I will begin to think twice. Until then, ride it bitchez.

Mon, 02/25/2013 - 00:22 | Link to Comment akak
akak's picture

Pennies, meet steamroller.

Mon, 02/25/2013 - 00:49 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

You're just bitter. Nations that export food will be hit last. You watch.

I buy gold coins for my babies because I know it will end eventually but why not ride it until then?

Mon, 02/25/2013 - 00:55 | Link to Comment akak
akak's picture

I don't think I am bitter, or jealous, or envious, I merely suggest that the risk of investing based on the assumption of an indefinite continuation of the current financial and monetary status-quo is most likely rapidly rising.

Mon, 02/25/2013 - 01:31 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

I never said anything about indefinite. Re-read where I said I'm buying gold coins and watching for SHTF in nations that are net imports of food. Nice try.

Mon, 02/25/2013 - 01:31 | Link to Comment akak
akak's picture

Harumph!

Well then.

Mon, 02/25/2013 - 02:45 | Link to Comment StychoKiller
StychoKiller's picture

(SMACK!!)  And down goes Ponzi, down goes Ponzi! :>D

Mon, 02/25/2013 - 04:45 | Link to Comment bunnyswanson
bunnyswanson's picture

You could eat a mountain of shit but if there are no vitamins, minerals and essential elements our bodies must have, your will still be hungry. 

If your shit is full of high fructose corn syrup, you'll be diagnosed with fatty liver disease, impacting the metabolization process, and eventually ending in liver failure.  I know a man with NASH who has been a veggan (with a sweet tooth) for 20 years.

Do you salt your shit?  Wash your shit down with a soda ladden with salt?  Kidney failure is on the calender.  Don't drink the water though because the fluoride in it will deposit itself on the pituitary gland, I believe, which will have a profound impact on a sense of well being.  Caffeine consumption goes up to get through the day, another assault on the kidneys and CNS.

So you have overweight, undernourished citizenry whose ability to function is impaired.  Educating them with information that is formulated to keep them from asking questions so the fat cats can do as they please.  Knees and hips go out, energy required to move across the room is what one would use to get through the day.  But it's intentional because this was necessary .... before the seige. 

Movies.  That is what they used to Pacify the masses.  Netflix movies every night, sometimes 2 movies in a row on a weekend, something our grandparents did a few times a year because it was a luxury to sit in place for 2 hours and watch a movie, there was too much to do.  The malls were open 24/7 during The Great Credit Extensions.  Entire sections of undeveloped areas of the towns around central california turned into malls, outdoor, Stores and Stores and more fucking stores.  Every time you walked into the door someone would give you a credit card application; no one was ever refused.  10% off the purchase.  The gimmicks they used worked. 

 A One-World-Sewage-System - And if you think I would sit here and do nothing while globally, a group of men who are friends with George W. Bush got into position to rule the entire globe, basically ensuring that at some point in history, 200 years or 1000 years from now, a homicidal maniac is sitting in the throne, bestowing on the peasants what Billy got in Turkish Prison, you've lost your fucking mind.

Mon, 02/25/2013 - 05:22 | Link to Comment bunnyswanson
bunnyswanson's picture

It is important to add to this concept of "if you build it they will come" or "If you give them credit and high-end stores with to-die-for items priced reasonably" then will come.

But now..the new malls/stores are where everyone shops.  Leaving the original shopping arena of the towns without business, those were the entry level new businesses who had no customers.  New mall has about 15 customers walking around, Macy's has about 3 customers.  Everyone looks bored and resentful.  Credit was extended to not only home buyers but new business owners, and when the blue collar workers lost their jobs, they lost their customer base. 

China is doing well at the cost of America.  So is India.  The elected officials are alright with that.  Even in light of the tax revenue going to other nations....they have handed tax revenue to other nations all for the dick pounding they get from their campaign donors.

It is nonsensical and simply outrageous that US citizens can even look each other in the eye when considering what is clearly leading up to foreclosure.   This isn't a movie.  NZ, australia, EU, Canada, it's all right fucking there.  We cannot talk about it because the MSM meme is the only meme allowed to be acknowledged.  It's a mindphuck that will send humanity into a tailspin that will never end.  never....never.  it will never be reversed if we do not stop it now.

You are either with us or against us.  He said that and it applies to everything now.  But this is insanity.  This is a flawed attempt to guarantee financial security to the wealthiest people on earth.  Men have pride.  Competition is fun, it's a "bet" and winning is the goal.  They make mistakes.  If they were perfect, they'd have approached in a manner that would informed us and ask our opinions.  Voting perhaps would be nice.

Staged events, skits and their global Media  Cunt News Network...telling us what really happend. 

All one would need is a media outlet.  That's all.  If you could get this to the living rooms, let everyone know globalization is a scheme which will leave the middle class to go the way of teh Mayans and if you can't work, you can't live, and if you get sick, you have a duty to die.

Fuck that.  Go the opposite direct that these mad hatters.  They are sheltered from the reality and the worst of this planet is due to them and their colleagues, not the people.  It's another misinformation campaign to sway public opinion. 

Believe me, they'll thank us when it is over.  There's a better way and who will implement it will be the people, not the banks, et al.

Sun, 02/24/2013 - 23:10 | Link to Comment Groundhog Day
Groundhog Day's picture

Debt free savers have been waiting for deflation for a long time.  Are we just suckers who should piss our savings away, go into debt and wait for a bailout or will our prudence pay off? I for one am getting tired of waiting

Mon, 02/25/2013 - 01:02 | Link to Comment Diogenes
Diogenes's picture

Government is the enemy of every decent honest hard working citizen. As long as you continue to work and save they will suck you dry and call you dusty.

Mon, 02/25/2013 - 04:52 | Link to Comment bunnyswanson
bunnyswanson's picture

A merciless govt perhaps.  An unstable govt.  A corrupt govt.

In a democracy you vote for the man who will give you a stable country because this will allow you to raise your family and enjoy your hobbies and prosper as you wish without worrying about whether medical/utilities/education/water/law and fucking order.

A govt is necessary.  If you think we can all manage without a leader than well, take a look at the Katrina aftermath.

http://www.youtube.com/watch?v=-taU9d26wT4 (Gun confiscation)

It's poor leadership that brought us here.  Nothing more, nothing less.  One world govt is a fantasy by men who know they'd rather die than go down the ladder of success.

Mon, 02/25/2013 - 08:50 | Link to Comment Chuck Walla
Chuck Walla's picture

In a democracy you vote for the man who will give you a stable country because this will allow you to raise your family and enjoy your hobbies and prosper as you wish without worrying about whether medical/utilities/education/water/law and fucking order.

And in Bunny's wold, Bush is the villain, just one in a long line of Progressives. And Obama, Sugar Daddy of Welfare for votes, destroyer of people everywhere is the answer to stability?

 

Join with me then...

FORWARD SOVIET!

Sun, 02/24/2013 - 23:24 | Link to Comment bmwm395
bmwm395's picture

ok sweet showe me how i can meke more i ll do it itss all a joke

srry im drunk burrp

 

Mon, 02/25/2013 - 02:43 | Link to Comment StychoKiller
StychoKiller's picture

I can has a flying car?  Anyone for Jet-packs?

Sun, 02/24/2013 - 22:01 | Link to Comment max2205
max2205's picture

Small caps will get fucked 1st.   But we'll get 4% a month till then

Sun, 02/24/2013 - 22:05 | Link to Comment q99x2
q99x2's picture

The Shits going to hit the F'n fan before 5 years or I'm going to puke.

Sun, 02/24/2013 - 22:07 | Link to Comment Never One Roach
Never One Roach's picture
Protesters, police clash in Spain

 

 

By Laura Smith-Spark, Per Nyberg and Laura Perez Maestro, CNN updated 7:52 PM EST, Sat February 23, 2013

Madrid (CNN) -- Tens of thousands of protesters amassed in Madrid and other Spanish cities on Saturday to voice their anger over harsh austerity and the way the country's being run in the wake of its financial crisis.

In Madrid, demonstrations turned violent and two police officers were injured, Spanish national police said on Twitter. Forty people were arrested.

 

 

http://www.cnn.com/2013/02/23/world/europe/spain-protests/index.html

Sun, 02/24/2013 - 23:35 | Link to Comment dolph9
dolph9's picture

The Spaniards don't get it.

Despite the success of their soccer team, they are Germany's bitch.  Unless they grow some balls and decide not to be Germany's bitch, they will suffer just like the Greeks.

Mon, 02/25/2013 - 02:47 | Link to Comment StychoKiller
StychoKiller's picture

Austerity?  In Spain?  The Spanish Govt is spending even moar Zeuros, yet it's austerity?

Maybe for the little people...

Sun, 02/24/2013 - 22:10 | Link to Comment El Gordo
El Gordo's picture

I consider cash in the matress to even be a risk asset in today's financial environment.  No guarantee it will be worth anything in the near future.

Sun, 02/24/2013 - 22:22 | Link to Comment holdbuysell
holdbuysell's picture

That curve left out a few crucial assets.

Mon, 02/25/2013 - 02:48 | Link to Comment StychoKiller
StychoKiller's picture

Ever read "Flatland"?  Aurum is a 3-dimensional construct on those 2-dimensional graphs.

 

Sun, 02/24/2013 - 22:12 | Link to Comment shinobi-7
shinobi-7's picture

How ironic after so much criticism to see that under the same circumstances, Western countries follow the same “Japanese” policies! The “old man” would tell us to expect similar results!

Sun, 02/24/2013 - 22:13 | Link to Comment Uber Vandal
Uber Vandal's picture

Are you sure that Real Estate shouldn't be below the zero line when property taxes and business closures are factored in?

And if you get technical, with fat finger-Corzine-Madoff trades, a real return of zero may start to look good.

Sun, 02/24/2013 - 22:42 | Link to Comment holdbuysell
holdbuysell's picture

I'll add flash crashes, a structurally unsound stock exchange, market-rigging and market-destabilizing algos, and blatant non-policing of corruption/theft by the SEC.

The concept of only investing in Wall Street what you can afford to lose is eerily similar to what's said about gambling in Vegas. So sad.

 

Mon, 02/25/2013 - 00:54 | Link to Comment hidingfromhelis
hidingfromhelis's picture

There ya go, taking all the fun out of what's left above the line.  

Unfortunately, in this sham of a market, the real line is a whole lot higher due to the reasons you noted.  That forces people into the rigged markets to take greater risks to avoid a negative return.  Nice catch-22, isn't it?

Mon, 02/25/2013 - 02:50 | Link to Comment StychoKiller
StychoKiller's picture

In other werdz, the given curve is discontinuous (in the mathematical sense!)

Stay away from derivatives of that function! :>D

Sun, 02/24/2013 - 22:15 | Link to Comment Hedgetard55
Hedgetard55's picture

A Wall Street ho came in my shop this afternoon and we somehow got on the subject of Bernanke and his bailout of banks and his 85 large per month printing, and this black female ho gave me the standard line about how if he hadn't bailed out the TBTFs that the ATMs would have run dry and yadda yadda... I wanted to... well, never mind, the ho' left the shop after I predicted for her the financial collapse of the USA within 3 years. Fucking bitch.

Sun, 02/24/2013 - 22:17 | Link to Comment reader2010
reader2010's picture

What a worthless swine.

Sun, 02/24/2013 - 23:00 | Link to Comment Pure Evil
Pure Evil's picture

Of course she's happy Berstank bailed out the TBTFs.

If he hadn't there'd be no money to buy crack and pay the Ho's for giving a skully.

skully

Sun, 02/24/2013 - 22:17 | Link to Comment Mr. Hudson
Mr. Hudson's picture

This "the sky is falling" stuff is getting old.

Sun, 02/24/2013 - 22:20 | Link to Comment Hedgetard55
Hedgetard55's picture

The sky has already fallen, you stupid motherfucker, and you don't even know it yet. 

Mon, 02/25/2013 - 11:59 | Link to Comment Mr. Hudson
Mr. Hudson's picture

So, what are you going to do about it, besides whining and crying? If the sky has already fallen, and all you can do is complain, then who is the "stupid" one, dummy?

Sun, 02/24/2013 - 22:48 | Link to Comment GMadScientist
GMadScientist's picture

So is the:

- Unemployment

- Zero or negative returns on safe investments

- Lack of Wall St criminal prosecutions

- Monetization of public debt

- Deficit spending

- War

- Continuous whining from ignorant shitwits such as yourself

Mon, 02/25/2013 - 12:08 | Link to Comment QQQBall
QQQBall's picture

Not being snarky...  "Monetization of public debt".  We creaste money out of thin air to "loan" to ourselves, This will continue until it cannot.  

Sun, 02/24/2013 - 22:55 | Link to Comment holdbuysell
holdbuysell's picture

The subprime sky fell, but of course nobody in the status quo saw it coming. They were, shocked, SHOCKED when it hit. Even Bernanke said subprime was contained to the very end.

Looking back on it, they made Baghdad Bob look completely credible.

Now, all those problems and more are building once again (student loans, car loans, debt levels, and on). This is the most obvious train wreck in progress that anyone not vested to riding it into the concrete wall can see objectively.

Sun, 02/24/2013 - 22:59 | Link to Comment orez65
orez65's picture

I'm really trying to understand people like you.

Why can't you understand that the "the sky is falling"?

Do you understand what money is?

Do you understand what aggregate demand is? And that it is Keynesian fiction?

Do you know who John Maynard Keynes is and his economic theory?

Do you know what monetization of US Treasury debt is?

Do you understand what the Federal Reserve is and what it does?

Because if you did, then you would know that "the sky is falling"

Mon, 02/25/2013 - 02:53 | Link to Comment StychoKiller
StychoKiller's picture

An argument can be made that the sky has already fallen, but no one has started counting the casualties yet...

Mon, 02/25/2013 - 09:00 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

The casualities will not be counted.  Why?  They're losers.  Right?

Sun, 02/24/2013 - 22:59 | Link to Comment orez65
orez65's picture

I'm really trying to understand people like you.

Why can't you understand that the "the sky is falling"?

Do you understand what money is?

Do you understand what aggregate demand is? And that it is Keynesian fiction?

Do you know who John Maynard Keynes is and his economic theory?

Do you know what monetization of US Treasury debt is?

Do you understand what the Federal Reserve is and what it does?

Because if you did, then you would know that "the sky is falling"

Mon, 02/25/2013 - 01:08 | Link to Comment Diogenes
Diogenes's picture

I agree with you completely. I have been reading this site since 2009 and you are totally right. Unfortunately in that time I have kept out of the stock market because I was sure it was ready to collapse any minute, and missed a four year bull market.

So now I'm thinking there is a flaw in this reasoning someplace but can't figure out where. The economy is still up shit creek, all the stats are bogus, the markets are totally manipulated and I missed out on a 40% run up.

Mon, 02/25/2013 - 02:52 | Link to Comment Missiondweller
Missiondweller's picture

Because we have "normalcy bias" and think we still have a free market.

You/ I would have both been right if it were not for endless QE. Still, I don't believe this craziness can go on forever. I highly expect you'll be able to buy the Dow arounf 6500 again at some point in the future.

The Dow/Gold ratio drops to 1 every 30 years or so.  I say gold and the Dow will meet around 6500.

Mon, 02/25/2013 - 07:32 | Link to Comment StandardDeviant
StandardDeviant's picture

Annoying, isn't it?  It suggests to me that the right strategy under these conditions is short-term trading -- maybe trend-following with a fairly tight trailing stop; or one- to two-month options strategies which are short gamma?  If/when TSHTF, you'll lose on your current trade, but with limited risk, and with a string of short-term gains in your pocket.  A lot of work, though.

Alternatively, there's the approach promoted by Nassim Taleb in his latest book, "Antifragility" (highly recommended, BTW!):  most of your assets in something low-risk and boring, and a few highly risky bets which are exposed to positive "black swans": biotech, maybe?

Any comments from the pros (if any are left) on this site -- institutional traders, prop traders, CTAs, etc.?  Or has everyone thrown in the towel and joined an algo fund?

Mon, 02/25/2013 - 02:53 | Link to Comment StychoKiller
StychoKiller's picture

Whoa, Deja-vu!

Sun, 02/24/2013 - 23:01 | Link to Comment holdbuysell
holdbuysell's picture

"This "the sky is falling" stuff is getting old."

You've been signed up here for only 22 weeks...what gives?

Sun, 02/24/2013 - 22:20 | Link to Comment buzzsaw99
buzzsaw99's picture

I don't know where they get that 4.5% real return on equities. What a crock! Is the author guaranteeing a 4.5% roi for the next five years straight? Cash in the matress looks a lot better than giving it to a bunch of maggots so they can keep buying bigger fucking yachts every year.

Sun, 02/24/2013 - 22:54 | Link to Comment GMadScientist
GMadScientist's picture

B-b-b-b-b-but I've got "company match"...I'd be silly not to put 6% of every paycheck into the casino. ;)

Sun, 02/24/2013 - 23:44 | Link to Comment GMadScientist
GMadScientist's picture

One downer either doesn't get sarcasm or works for a mutual fund.

Sun, 02/24/2013 - 23:46 | Link to Comment Yen Cross
Yen Cross's picture

I'll indulge you?

Sun, 02/24/2013 - 22:27 | Link to Comment Spigot
Spigot's picture

I would put the red line two Xs up, just above Emerging Market Debt. Real Estate is dead, period (until inventory and bancrupcies are washed out of the system). Emerging Markets are severely exposed to fraud and currency depreciation and typically blow up in your face.

And one has to factor in taxation on profits as a decided negative influence...on net yeild.

Sun, 02/24/2013 - 22:57 | Link to Comment GMadScientist
GMadScientist's picture

I'd put that red line just above private equity and VC...you see, all these investments pay out in US dollars.

More succinctly: fuck paper.

Sun, 02/24/2013 - 22:27 | Link to Comment Oldwood
Oldwood's picture

How about investing in assets rather than gambling on equities? Real assets don't lose value. Equities are pieces of paper. Promises. And we know what they are worth...don't we.

Sun, 02/24/2013 - 22:38 | Link to Comment Confundido
Confundido's picture

No, we don't know what they are worth. We are simply able to touch them, so we can remind ourselves we still own them...

Mon, 02/25/2013 - 02:56 | Link to Comment StychoKiller
StychoKiller's picture

Hmm, got a trunk full of stawk certificates do ya?  DTCC pwns yo @zz!

Sun, 02/24/2013 - 22:39 | Link to Comment Spigot
Spigot's picture

Here's the rub: if you run a pizza shop you average 30% ROI/annum (at least before ZeroCare). If you think "investing" is choosing to trade yer FRNs for one pc of paper or another, then you are gonna get skrewd. If you own and run a business you are much closer to the actual profitability part of the equation. Equities and bonds assume you paid the costs of management of the company and costs of finance to issue the bond, as a detraction from the yeild you get. IOW they got paid before you took the risk, ummm hmmmm. Remove these layers and with smarts you could actually MAKE a profit. You will have to work for it, though.

In order to tap into the money stream you have to exchange value for the money. Customer too lazy to divide a #10 can of beans ($4 at SAMS these days) into 10 12ounce bags and freeze? Sell em 1# or 12 ounce cans for $2. THAT is how you make money. Not buying friggin pcs of paper.

Mon, 02/25/2013 - 02:58 | Link to Comment StychoKiller
StychoKiller's picture

Hmm, gotta check out the closest Asian/Hindu market for millet and farro...

Sun, 02/24/2013 - 22:32 | Link to Comment JustObserving
JustObserving's picture

That's what happens when your debts get too high.  Then you cannot service them.  So you have to print money and buy your own debt driving down interest rates to almost zero.

That kills yields for everyone.

And then strangles the economy.

Sun, 02/24/2013 - 22:34 | Link to Comment csmith
csmith's picture

"...perhaps we can if that capital destruction mostly occurs on the central banks’ own balance sheets?). "

Ding! Ding! Ding! What do we have for him, Johnny?

We all know that any capital loss which happens on a central bank balance sheet DOESN'T REALLY EXIST !!!

Mon, 02/25/2013 - 09:26 | Link to Comment andrewp111
andrewp111's picture

Once a central bank starts paying out more in interest than it takes in, we are on the road to hyperinflation. Every hyperinflation in modern times has had this precursor sympton.

Sun, 02/24/2013 - 22:36 | Link to Comment blindman
blindman's picture

somehow there should be a rotation about
the x axis included in this graphic over time?
and the question of "return", how does return
relate to value? r= basis value as an income
producing object x employment. as employment
goes to zero so does return but intrinsic value
is the same. this is why there is a rotation
called for as venture capital becomes a greater
loss than cash in the mattress. it is because
risk is not scalar but a vector plotted with
insufficient dimension. something like that ..

Mon, 02/25/2013 - 00:21 | Link to Comment blindman
blindman's picture

i think i figured it out.
if you rotate the entire graph 90 degrees and
visualize the third dimension also rotating vs
time with greater and greater frequency you
have the image, the flushing toilet is a perfect
analogy. the basis is a waste product or at best
a resource with no identifiable value as the frequency
of the entire dynamic in the domain increases.

Mon, 02/25/2013 - 00:43 | Link to Comment olto
olto's picture

Blindman,

Can't you see that the new is not the same as the old?

Mon, 02/25/2013 - 01:14 | Link to Comment blindman
blindman's picture

now that you mention it, no i can't.

Mon, 02/25/2013 - 02:59 | Link to Comment StychoKiller
StychoKiller's picture

LOL!  The moniker explains it all!

Mon, 02/25/2013 - 18:34 | Link to Comment blindman
blindman's picture

they always do, there are no random events or names.

Mon, 02/25/2013 - 02:11 | Link to Comment blindman
blindman's picture

another reason there needs to be a rotation about the x
axis , the return is in a unit that is being diminished
by the creation and operation of the return generating process.
that might be called "diminishing returns" in a diminishing
unit of measure.
.
another analogy might be the electric
snake used by plumbers to clear out the septic waste line
that connects to the sewer system and becomes fouled with
clogs of rootlets and feces contaminated materials. if there
is rotational energy the blades can cut and move through the
matter to clear the line but if you lose the power to rotate
the snake the line remains clogged.
yea, i know, it is all about the bathroom, feces and plumbing.

Sun, 02/24/2013 - 22:36 | Link to Comment Confundido
Confundido's picture

Private equity shall be the winner. Or why do you think in Iraq, Somalia, Argentina, Bolivia, Egypt etc., everyone owns a small business with no bank accounts, not taxable, etc?

Sun, 02/24/2013 - 22:45 | Link to Comment GMadScientist
GMadScientist's picture

Notice any missing asset classes in that chart?

 

Mon, 02/25/2013 - 03:02 | Link to Comment StychoKiller
StychoKiller's picture

And...I type again:

Ever read "Flatland"?  Aurum is a 3-dimensional construct on those 2-dimensional graphs.

Sun, 02/24/2013 - 22:47 | Link to Comment Downtoolong
Downtoolong's picture

Running as fast as you can to stay in place. Isn't that what happened to Alice in Wonderland? But, that's a different fairy tale than the one we're living now.

 

Sun, 02/24/2013 - 22:50 | Link to Comment blindman
blindman's picture

speaking of unintended consequences ...
.
Palestinians Sneak Sperm Out of Israeli Prisons
Fertility doctor cooks up smuggling scheme
By Neal Colgrass, Newser Staff
http://www.newser.com/story/163382/palestinians-sneak-sperm-out-of-israe...

Posted Feb 24, 2013
(Newser) – The wives of Palestinians held in Israeli prisons are getting pregnant in an odd way—by smuggling out the prisoners' sperm, NBC News reports. But the families won't say how they get the sperm past a glass separation, body search, and an airport-style scanner. "If I told you the way we smuggled it, definitely the army will prevent it from happening and there are prisoners we don’t want to deprive of this same chance," says mother-to-be Lidya Al-Rimawi, who only divulges that they used "a small nylon bag."
.
so it is true the prison industrial complex is about population
control, literally.

Sun, 02/24/2013 - 23:00 | Link to Comment GMadScientist
GMadScientist's picture

Hmmm...condoms up the butt...well at least the little guys will have an early inkling of what kind of future awaits them.

 

Sun, 02/24/2013 - 23:15 | Link to Comment Cheesy Bastard
Cheesy Bastard's picture

so it is true the prison industrial complex is about population
control, literally.

Seems to me in this case it's more about copulation control.

Sun, 02/24/2013 - 22:54 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

I have no capital that can be used to seek more, spare me these sob stories of capitalist lacking promising ventures, if only that could fix the economy, as far as i can tell that is how we got here in the first place.

 

The propaganda is getting deep.

Sun, 02/24/2013 - 22:58 | Link to Comment GMadScientist
GMadScientist's picture

Exactly. If they don't like the economy wrecked, why'd they wreck it in the first place?

Sun, 02/24/2013 - 23:07 | Link to Comment Pure Evil
Pure Evil's picture

So they could steal the depreciated assets for pennies on the dollar.

Sun, 02/24/2013 - 23:09 | Link to Comment Seer
Seer's picture

The "economy" was always on a collision course with "finite planet."

Sun, 02/24/2013 - 23:12 | Link to Comment GMadScientist
GMadScientist's picture

Agreed; Mother Nature is suitably unimpressed with their stack of derivatives (she made all that paper first, ya know), but these clowns didn't need to stomp on the accelerator and rip out the steering wheel.

Sun, 02/24/2013 - 23:25 | Link to Comment Rusty Shorts
Rusty Shorts's picture

Time is Money, but Money is running out of Time.

Sun, 02/24/2013 - 23:56 | Link to Comment espirit
espirit's picture

On a continuing curve plotted against time, the roller-coaster ride is about to pick up speed.

BTW - I think the bottom tracks are missing.

Sun, 02/24/2013 - 23:04 | Link to Comment Yen Cross
Yen Cross's picture

 It's 03:00 in London. Yep, It's about time for these philosophical conversations.

Sun, 02/24/2013 - 23:13 | Link to Comment GMadScientist
GMadScientist's picture

Tea Party indeed.

Sun, 02/24/2013 - 23:13 | Link to Comment GMadScientist
GMadScientist's picture

Tea Party indeed.

Sun, 02/24/2013 - 23:21 | Link to Comment Yen Cross
Yen Cross's picture

 Once was enough. You have a crumb on your right lapel.

Mon, 02/25/2013 - 00:55 | Link to Comment olto
olto's picture

Bad day/night, Yen??

Have another up of tea----kick back----give your discriminating mind a rest-----check your pulse rate----take a deep breath

Now, doesn't that feel better??

No charge---I retired in 1993

Mon, 02/25/2013 - 01:02 | Link to Comment Yen Cross
Yen Cross's picture

   I'm doing voodoo with a "dead person".

Mon, 02/25/2013 - 01:08 | Link to Comment olto
olto's picture

What??

You are doing "doo doo with a vead person"?

I don't get it-----Oh----sarc, right.

You are a really funny dude, Yen----wanna dance???

The rules say that we can't say-----shhhhh!

Sun, 02/24/2013 - 23:35 | Link to Comment hannah
hannah's picture

funny how the 'cash in the mattress' level seems to be the safest. at least you keep most of your cap(less qe).

Sun, 02/24/2013 - 23:50 | Link to Comment pbppbp
pbppbp's picture

I don't see gold or silver on that chart.

Mon, 02/25/2013 - 03:05 | Link to Comment StychoKiller
StychoKiller's picture

Sigh, once more:

Ever read "Flatland"?  Aurum is a 3-dimensional construct on those 2-dimensional graphs.

Sun, 02/24/2013 - 23:50 | Link to Comment cobra1650
cobra1650's picture

No gold or silver on the graph.....lol

Mon, 02/25/2013 - 00:43 | Link to Comment cfosnock
cfosnock's picture

Its called "The Red Queens Race"...

 

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Mon, 02/25/2013 - 01:07 | Link to Comment which way weste...
which way western man's picture

"jews" building their "jew" only land of milk and honey whilst flooding the rest.......this is what a REAL genocide looks like

 

http://www.dailymail.co.uk/news/article-2281941/600-000-decade-white-fli...

 

HITLER WAS RIGHT

Mon, 02/25/2013 - 01:24 | Link to Comment honestann
honestann's picture

A positive return on real-estate?  Yeah, right!  Suckers!

Mon, 02/25/2013 - 01:29 | Link to Comment alfbell
alfbell's picture

I'd prefer Nicole Foss's prediction. Hope it happens. Deflation and then depression and then government, in an attempt to pay its debts and stay in control, starts actually printing USD en masse, until it is worthless. Cash holders like myself can jump in and grab good tangibles for pennies on the dollar during the depression, before that super printing inflation phase takes off into the stars. Plus, deflation would get rid of all the crap clogging up our economy and financial system and would also be the end of The Fed. Yahoo! One can dream can't one?

Mon, 02/25/2013 - 02:11 | Link to Comment dunce
dunce's picture

The mention of capital destruction reminded me of another article i read earlier today. That author asserted that capital could "not be destroyed."  I thought that this guy was an isolated rare fool, but now i think he may not be rare at all. This administration is behaving as though their policies are capital neutral. They seem to think that they are just redistributing capital, not destroying capital with their wealth redistribution schemes. They seem to think it is a zero sum game. If money, wealth, and capital are all the same, then they think that they  can print capital. These are the same people that called Reagan's policies "voodoo economics."

Mon, 02/25/2013 - 02:59 | Link to Comment Missiondweller
Missiondweller's picture

"They seem to think it is a zero sum game."

That alone sums it up. Obama sees a finite economy that must be re-distributed. He has no concept of a growing economy. It doesn't fit his world view or ideology.

I don't think he has even a basic understanding of economic.

Mon, 02/25/2013 - 03:24 | Link to Comment Totentänzerlied
Totentänzerlied's picture

Unfortunately it doesn't fit with the world's energy supply situation, either.

Mon, 02/25/2013 - 08:40 | Link to Comment falak pema
falak pema's picture

All this fancy theorising to say that the malinvestment started by first world, into which Chindia second world got sucked in bigtime during/after Deng turnaround; enticed by huge outsouricng lolly; is so HUGE that what little true growth potential and wealth accumulation exists in third world countries will be jeoparidsed by the financialised mega suction pump of first world; that is destroying wealth at exponential rates in order ONLY to service accumulated debt, let alone create new wealth in its own borders. 

First world financialised cancer spreads to the whole world faster than new world can create riches; what we see on the ageing population front, on the consumer gas guzzling front, on the ecological disaster front, is all fueled by the runaway first world financial mayhem.

Marx IS laffing in his grave

Now this panic about turn logic that economic pundits start shouting about in the basket economy case of current UK malaise :

To Save The British Economy, David Cameron Will Have To Do The Hardest Thing For Any Politician To Do - Business Insider

Oh the irony of first world logic....PRIME EXAMPLE OF MAD OLIGARCHY mayhem fed on Reaganomics and Thatcherism. 

And as an aside, ZH who has always been an austerity proponent has never really told us forum members, (I've been a member since Jan 2011),  HOW the world could have avoided TARP and successive shenanigans and survived from 2009 onwards.

I still don't understand what their rationale is to avoid a) Recession b) financial systemic collapse/war if the world had followed Ron PAul's recipe in November 2008 before Tarping. 

I honestly feel that Obammy should have nationalised all banks as all leaders in Europe as of Jan 1 2009, and then purged out the financial system on a controlled concerted statist front, balancing CB printing to avoid depression with weeding out banksta malpractices. No other way out. This is NOT what ZH/RP advocated then. My point is there is Central planning to solve the cancer and central planning to spread the cancer. Its a means, not an end...subtle difference that escapes this poster. 

Of course, its all the more difficult today with the banks RULING THE ROOST, continuing their shadow banking mayhem and derivative/ZIRPED plays, egged on by this criminal FED which has NEVER checked the crimson tide of banksta crime for ONE day since 2009...

When I say FED, I mean Potus and Congress controlled by the PDs  and their shareholders who run DC/WS de-facto wise. 

Libertarians in today's reality are totally isolated in an intellectual ghetto devoid from reality; caught between past ideology gone rotten and having to pay for the betrayal of those values by their traditional scions.

Time to burn those scions, but how do you save the mantra and yet destroy its iconistic practitioners?

A bit like being a catholic under the Borgias! Or for that matter under the current incumbent on his way out! 

 

 

Mon, 02/25/2013 - 09:06 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

"Obammy should have nationalised all banks as all leaders in Europe as of Jan 1 2009, and then purged out the financial system on a controlled concerted statist front, balancing CB printing to avoid depression with weeding out banksta malpractices."

Sweden circa the mid-90s.  But we are Americans not Swedes.

You may begin chanting now.

Mon, 02/25/2013 - 09:19 | Link to Comment falak pema
falak pema's picture

that's like the Tchernobyl cloud : In 1986, when it happened the French government decreed that the toxic cloud COULD NOT cross the Alps Barrier into France; decreed, not demonstrated. Of course the cloud did cross that frontier in reality.

So your logic is similar to theirs...It ain't made here fella! Just move on, this is the USA! 

With a mega problem like this created in the USA; just a reminder of its Origin; you would have thought that the US government would have moved out of its endogenous, bunkered, hubristic, oligarchy nutshell à la GWB administration.

Especially as the G20 meeting occurred in DC just after the crisis, in December 2008. It was the world on the brink, not just the US...ya know, thats the price of being world #1. 

So I continue my chants ...and you can continue living in your intellectual ghetto. 

Mon, 02/25/2013 - 09:58 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

You missed my somewhat sardonic point entirely, but it's OK.  I got you to contribute more good stuff.

"you would have thought that the US government would have moved out of its endogenous, bunkered, hubristic, oligarchy nutshell à la GWB administration."

When an entity is a "leader", it has responsibilities as well as rewards.  The US is unfit to lead.

Mon, 02/25/2013 - 09:21 | Link to Comment falak pema
falak pema's picture

..."devoid OF reality"....

Mon, 02/25/2013 - 09:01 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

Negative returns on the left side of the curve and nickels in front of a steamroller on the right.

Mon, 02/25/2013 - 12:13 | Link to Comment QQQBall
QQQBall's picture

read "The Shock Doctrine"... coming soon to USSA - Privatization of Government Assets & Services.  First the free fall, then the oligarchs step in to provide capital to buy gov't assets are "fire sale" prices. This has happened before...

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