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Guest Post: How Does It End?
Originally posted at Monty Pelerin's World blog,
The days of reasonable economic forecasting are over. Today, an economic forecast is more like the analysis of a criminal mind than the evaluation of economic data. The dominating role of government overpowers markets intentionally. In the short-term that will continue. Reactions to Federal Reserve minutes referencing continuation, alteration or cessation of quantitative easing cause stock markets to move by over 100 points. Other markets are affected by government interventions, just not so noticeably.
Long term, markets will overpower government. But, to paraphrase Keynes, in the long term many of us will no longer be around. In the meantime, economic forecasting is more political than economic. Dinosaur government affects everything it touches. Markets remain important although government is currently overpowering them. These deliberate distortions may continue for some time.
Markets left alone would reveal the truth about the sorry condition of our country. Government is doing everything it can to hide this condition from the populace. The nature of any government is to make itself look better in the eyes of the people. Big government has the power and means to do so.
Some recent articles generated comments from readers, some pro and some con. Most were very thoughtful. A common theme among the dissenters appeared to be regarding the likelihood of high inflation. There are valid reasons to argue either side of this position. My reason for leaning toward an inflationary outcome is more related to politics. However, all the unused bank reserves in the system is the basis for such a conclusion on economic grounds.
There is no way to definitively predict how this economy ends. Ultimately it ends in another Great Depression. The issue is whether the Depression is preceded by very high inflation, what Ludwig von Mises referred to as the “crack-up boom.” Some readers believe the inflation will not occur. Some seem to think that neither will a Depression. I am going to deal with two views that believe high inflation will not occur. These positions are valid and no better than mine. I will attempt to discuss their positions in a way that seems to reconcile them with my own. My comments are not meant to imply that an inflationary blow-off must happen.
One thoughtful reader argued that the excess reserves in the system are only important if the banks are willing to lend:
Central bank balance sheet expansion transmits into inflation by causing others in the economy to leverage up. But the end of that game comes when everyone is already leveraged to the max. At that point, the central banks can print to their hearts’ content, without generating an explosion of inflation, simply because very few can take on more debt, and there is very little good collateral left that isn’t already leveraged to the max.
In this latest round, most of the new debt has been in the government sector (and student loans, but those are basically government too, aren’t they). But most governments are near or past any sane level of leverage on their projected tax receipts. And even the Fed is starting to realize that they can’t expand their balance sheet to infinity. We may get inflation down the line, but not until after the deflationary collapse of the debt house of cards.
The level of indebtedness is serious and could cause a landslide of defaults and bankruptcies. That would prevent inflation and produce deflation ala The Great Depression. Barring this, however, the fact that banks won’t lend or borrowers won’t borrow does not in and of itself eliminate the concern for inflation. Lack of cooperation in the banking system and private sector only reduces the expected magnification of Fed efforts.
So long as government runs deficits and funds them via the Federal Reserve, inflation is a risk. If the deficits on an annual percentage basis are greater than the rate of growth in the economy, then the money supply is increasing even if banks refuse to lend. That will cause price rises because the money supply is increasing at a faster rate than the supply of goods and services.
Admittedly it would be at a slower rate than if the banking system multiplied the Fed’s efforts by tenfold. Additional money enters the system each year and floats around somewhere. Eventually conditions change and both banks and borrowers become less risk adverse. When that happens, the Fed is helpless as it has no means of withdrawing all this excess liquidity.
A different perspective was provided by another reader. This take was predicated upon deficits decreasing as a result of tax increases:
I think the “crack-up boom” is farther away than you probably do. My prediction is that with the sequester, end of the payroll tax cut, various increases on high earners, and ObamaCare taxes, the deficit for ’13 will be around $800 billion, with it falling to around $600-700 bn for ’14. A deficit of $500 bn would be managable for a long time. Of course another major foreign expedition or domestic terrorist attack would alter this significantly.
Tax increases, using static analysis, always promise more revenue than they deliver because their negative effects on economic activity are assumed to be zero. That assumption is obviously fallacious, contradicting everything we know about human nature. But that does not mean that tax increases cannot increase revenues. Here we get into a Laffer curve type discussion which is moot. Even if it is assumed that higher taxes do not reduce tax revenues, they are a form of blood-letting of the private sector which bleeds resources away from it and into the less productive public sector. Government does not produce growth except in the sense that GDP accounting falsely claims it does.
I think there is even less reason to assume that spending cuts will result from the sequester. This Administration shows no inclination to cut spending. Their every instinct is to increase it, except perhaps in the area of national defense (which is greatly overbloated). Unfortunately they seem to want to reduce waste in this area only to commit these and more to bigger wastes in areas such as solar energy, internal defense (government defense against US citizens) and spending that will make more people dependent upon government.
Republicans are little better than Democrats. They will readily cave on spending-cut demands as soon as they perceive it to be in their own political interest. When the economy weakens. as I suspect it will as a result of the tax increases coming, there is apt to be a tidal wave of additional support for new stimulus programs.
If we indeed reach a “crack-up boom,” it will be as a result of politics. That is what makes our near-term future so difficult to predict. In prior times, markets provided a degree of rationality and limits. Government has overruled them with its Leviathan status and behavior.
It is entirely possible that a massive deflation rather than a massive inflation results. It is all dependent upon the reaction of politicians, a scary and unnerving thought. Markets used to ensure that the economy and country could not get too far off course. Today, it is truly frightening to have our future and the futures of our grandchildren at the mercy of corrupt fools in Washington.
I see few in Washington that even think in these terms. Corruption ultimately kills societies unless reversed. Power-wielders have no incentive to give up their positions or plunder. I don’t believe the US will contradict the rest of recorded history in this regard.
There is no economic recovery in the US or much of the world. Most developed economies are spent welfare states. Politicians have mortgaged their countries’ futures in order to get and stay in office.
Welfare states can no longer maintain their level of spending, services and welfare. However, they dare not stop lest civil unrest and violence break out. The bind they are in has no solution. The welfare concept itself was extended beyond reasonable safety net considerations and morphed into a political vote-buying scheme as well as an attractive alternative life choice.
Governments everywhere are doing anything they can to prevent the inevitable. Social unrest and likely civil strife will result when dependants no longer receive what they feel is theirs. Entitlements worked well for the political class when the resources were available. They represent terrible liabilities when they no longer can be honored.
Governments around the world are doing whatever is necessary to survive. Lying, stealing and outright confiscation will begin in order to support their bankruptcies. Cyprus was a minor precursor of what is coming. Like desperate, cornered and wounded animals they have promised their citizens. There is no solution to this problem other than to default on promises. Debt defaults will also occur in many sovereigns.
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can we round up the 535 representatives and have a Hunger Games type of event. I'd pay big money for front row seats.
And then each year we'll pick 4 individuals from each party to remember the fraud.
May the odds be ever in your favor
"In the end, more than they wanted freedom, they wanted security. They wanted a comfortable life and they lost it all - security, comfort and freedom. When the Athenians finally wanted not to give to society, but for society to give to them; when the freedom they wished for most was the freedom from responsibility, then the Athenians ceased to be free." - Edward Gibbons, "Decline and Fall of the Roman Empire"
The only thing this article gets right is almost quoting Keynes - 'Markets can stay irrational longer than you can stay solvent.' Markets themselves are a human construct that mean little to nothing. This ridiculous idea that 'markets' will defeat the US gov is so silly, as if the market is a magical being waiting for its time to strike.
The history of UK debt is instructive:
http://en.wikipedia.org/wiki/File:UK_GDP.png
At the height of its empire it was running massive deficits way beyond what the US is facing.
What the 'market' at the macros scale really boils down to is this: people with guns and the will to use them and people without them - everything else is smoke and mirrors.
Great plot re: the UK....
Do recall that the Brits went all in when confronted with Napolean and they had plenty of cheap coal to fuel the needed growth....
Thought experiment: take away the US military and what happens to American financial 'markets'?
And one other thing... Rome was ultimately defeated militarily.
Yep, the dollar is backed by DU... And the fact that there is still significant net exports of oil that are priced in dollars...
The endgame for the dollar as a major reserve currenct will likely be triggered by the fall of the House of Saud...
The endgame for the dollar as a major reserve currenct will likely be triggered by the fall of the House of Saud...
If the Fed ends QE, the interest wil go up, and it's unsustainable,IF anyone has their cash stiil IN banks, they are fools.
ALL Western nations have NOW instituted Bail In's, and if anyone thinks Cypress was a "One Off" event, dream on.
Ck out www.jsmineset.com for the laest.
And check out the foreigners cashing out of UST's/Bonds, at a rate that will bring down the house, esp if QE is stopped.
Rome was defeated from within; economically, politically, and culturally.
The military defeat was an epitaph, merely the crushing of an emptied out shell.
The fall of Rome is endlessly debated but there's a few facts everyone can agree on.
- the Roman empire was not uniformly ruled, they controlled a gargantuan landmass through associations
-Rome was doing well economically as it expanded and controlled huge territories, but when it started to lose control of the map their economy also fell
- final defeat was militarily
These three facts are the crucial ones imo, the other things people focus on (inflation is no doubt a hot topic with people here) are simply side affects of these three. These crucial elements are reflected almost verbatim in the fall of the British empire - which is a much better model to look to as the history is more solid / recent / relevant.
James Cole: At the height of its empire it was running massive deficits way beyond what the US is facing.
There is no reason to define a nation buried under piles of debt to be regarded as at 'the height of their power' as though that were a good thing.
In fact, since the Brits thus began to lose power shortly after (otherwise they were not at their height), it is apparent that the derivative of the UKs progression would show that they were sick and dying, all the cultural momentum to their expansion having been expended and lost, and so they began to collapse.
So to suggest that anyone should emulate them at the height of their power is to curse the target of the ill will.
Look at the chart closely...
Now google up British coal production and take note that coal production peaked in 1914...
That what the inflection point, not the Debt/GDP ratio in 1815...
Also, notice the debt / gdp ratio 1815 - 1912 and then consider how that would've looked if they'd lost the war?
It would have been utter collapse of the GBP, the hyperinflation of the Weimar republic would have been played out in Picadilly....
The thing that I am mystified about (well sorta) is what is keeping the Pound from collapsing now....
The end will be a shithole where people will live just to survive. It is happening in many countries outside of the western fantasy land propped up by magic money.
will here be food today.
and the word tomorrow will never be used again...
...the less productive public sector
The public sector produces nothing, it only consumes. Also, when public sector employees "pay taxes", they are merely only returning a portion of the tax money they have been given. They are net tax consumers.
It is entirely possible that a massive deflation rather than a massive inflation results.
Disagree. If a massive deflation does occur, tax revenues will collapse and stay collapsed. This will cause a default on US obligations, destroying the currency, which holders of USD will experience as inflation.
I trust we are not going to get into stupid fucking semantic arguments.
Yawn...
Very simplistic and misguided view of the public sector...
Edit: To those junkers, what fundamentally changes when public services are privatized? Think very very carefully.....
The individual can choose whether or not to use the 'services'.
Thats true, we can all live in shacks in the boonies and live off the land...
You get a prize for solving the western worlds socio-economic issues...
If that's what interests you, go for it.
BTW, stop making your childish assumptions.
what fundamentally changes when public services are privatized? Think very very carefully.....
No men with guns come and make me pay for them, that's what.
No men with guns come and make me pay for them, that's what.
As long as you ignore history and American corporate practices elsewhere in the world this is a very believable delusion, I agree.
The political economy is very simple when you have blinders on.....
Some flavor of neo-feudal tyranny, perhaps?
We wonders...
Yes.
on that theme...
http://www.cnbc.com/id/100809693
Meh.....my eyes glazed over soon as he jumped into the red/blue team politics nonsense for the sheeple herd.
Indeed.
Upside down S$P ramp today. I think they sprung a leak. It's a start.
It's just a "SEE YOU NEED ME!!!" trick
people will beg Bernanke to do another term and Obama will suck his dick if he do it and destroy the dollar once and for all.
How does it end???
Badly of course, very badly. It's probably time to put on those big boy pants.
Yes, and the days of forecasting when the "total economic collapse" will happen should be over too. Because anyone so forecasting is only making a WAG using data that is suspect.
If the published data can't be trusted, how does one forecast anything?
Tomorrow, in a month, in a year, in 5 years, never?
No one knows.
Very true, but three things come to mind which might help turn the WAG into a SWAG:
1: that which cannot go on forever wont. It has to end, that much we know.
2: yes the data is suspect. But since their motive is to hang on as long as possible, it is a safe bet in which direction the data is manipulated. (to look better)
3: Because psychology will play as big a role as economics; once a critical tipping point is hit, it will tip very fast and the increased tipping will increase the rate of increase in the tipping.
So I think sooner rather than later. (less than 5 yrs) But much like a tidal wave, from the time you see the water pull back you have very little running time before the wave arrives. Best to move inland too soon than too late.
Still a SWAG, I know.
Isn't this article itself an economic forecast, something you profoundly declare is not valid?
Yes.
Food, water , PM, & guns will be confiscated and shared amongst the puppet masters. Real ugly shitstorm.
The End
Prophetic message ... delivered by a deep insider.
But it's taking them a lot longer than they had expected ... and it still ain't over yet....
It will end with a painful whimper, the crack-up boom already happened....
The real buying power of gold appears to have topped out.... Measure the price it in terms of things you need and not in things that you want and then the gist of what I am saying becomes clearer....
Flakmeister, there is a case to be made that the "crack-up boom" already happened and that we are faced with 8-10 years of slow-grinding Japan-style disinflation.
"...end with a painful whimper"?
This depression will end with a recovery, like all others. It is the road to that end that is in question. How many bumps, how big?
No one knows.
Since 1973, every major recession except the dot.com bubble collapse was preceded by oil price shocks. In each case new supplies of cheap oil provided the impetus to return the growth and recovery. There are no new supplies of cheap energy, the growth paradigm is over. The overleverage is the system has to be unwound a la Japan (as you point out) and something like a steady state could emerge....
The gist of the what is happening is that our economic system relies on ever increasing supplies of cheap energy. That phase is over.
How does it all end eh?
Let me give you my two bobs worth monty. Not the way you lot in power think it will. Thanks to todays news that the big old USA will now arm the people who brought us the war on terror and will now try and usurp an elected leader of his own country you have logically played through to the only end game you stupid fuckers can.
You think we are all as fucking daft as you lot of murdering bastards? Newsflash boys of the NSA and GCHQ, we aint.
Pass this message on boys, give me an economic collapse first, lets see how that works eh? 'Cos you want to go tell the 'O', McCain, Pelosi, Clinton, Fienstain, Cameron, Osbourne, Clegg, Millipede and the rest of you fuckers your families and your loved ones including your children go in fighting first. You want this shit you pathetic fucks, so you go and sort it out first while we stay back here and try to rebuild fucking destroyed economies and job situations for the rest of us.
The only people I have real malice and direct hate for is you nation wrecking sons of fucking whores.
This will not play out the way you think it will big men, no chance. Think about it. There comes a time in mans life when he looks back and regrets some of the things he did with his life, I know for fucking sure I have. I am apauled I did so little to stop you bastards from destroying and killing other people using lies, manipulation and fucking fraud.
I will see you bastards burn in hell before I or mine burn for you.
Fucking bank on it.
Oooh, you're a mean one alright. So, what exactly are you going to do?
Besides post inane gibberish?
i assume a thumbs up on this rant will confirm your rez at gitmo?
"Thanks to todays news that the big old USA will now arm the people who brought us the war on terror"
Do you not understand that "al Qaeda" (morphed from the Mujahadin in the Iran/Contra-Reagan era) is a CIA-created & backed group that does the bidding of TPTB, for any "foreign policy" objective that yields control over any other countries' valuable resources? The Dems and Republicans are just tools.
Everyone should own some Physical Gold and Silver in their possession. I think this is absolutely vital for the upcoming termoil we are about to enter.
We should expect a state of great disturbance and uncertainty as a result of termites?
Some relatively isolated farmland would be a good idea too. I have some gold and silver, but if there's not enough food to sell to me, what good are my metals?
i'll have two turnips and some bok choy. can you break a kruggerand?
Good points. Metals are for preserving whatever you have left AFTER you have secured a source of food, water,protection, etc.
And "relatively isolated" is a good point also. Too isolated can equal vulnerable. I had 35 acres near a river 25 miles from the nearest town. It seemed like a good idea at first. But since I cant be there all the time, it could have burnt, been looted, etc and noone would have known. Plus 25 miles is a long walk. I traded it for 2 acres on a peninsula in a lake, 6 miles from town, and not off of a highway that goes anywhere. I still have most of the advantages, but fewer of the disadvantages.
Food for thought.
The FED CAN expand its balance sheet infinitely. All it needs is an ok from Congress.
Rules change when the circumstances change. Just like bailing out banks. Next...bailout governments.
IF the FED tried that. eventually Market Rates would rise and the balsnace sheet would get torched; although the hold 'til maturity meme would be trotted out. The bad debt has to be extinguished. The FED policy is sustainaning marginal businesses, whcih depress margins for entire sectors. The martginal debt, businesses, etc., mus be trimmed. Infusing $7 in debt to get $1 increase in GDP is unsustainable. The Gov't needs more tax revenues, the easiest tax tim implement is a tax on inflation.
Good article.
Don't be fooled into thinking the Fed's paper losses are relevant. They're only loss is the paper money that they can replace with new printing. Otherwise, I agree with your analysis. Those bonds will stay on the Fed's balance sheet till maturity.
No doubt the rest of the world will be fine parting with real things for toilet paper.
Unless your a proctologist ,get your head out of your ass and look at what's
happening around the world.
WWIII was declared yesterday.By Xmas it will be a direct confrontation,not thru'
proxies.Expect the $ to lose sole RC status around the same time.
Doesn't matter what the FedRes balance sheet is then,.It will just be a bigger bag of shit
at that point.
How will it end? Something like this:
https://www.youtube.com/watch?v=WwlNPhn64TA
holy shitake
End? 35 years and the boomers will mostly be dead. If the country can survive that major suck on its resources then there is a chance it will continue. They will leave a scorched economic environment but a place for new generations to rebuild. It never ends unless the sun refuses to shine.
Boomers did not ask to be born it just happens as life is sexually transmitted.
boomers have their heads where the sun never shines
End? 35 years and the boomers will mostly be dead. If the country can survive that major suck on its resources then there is a chance it will continue.
You are a heartless bitch.Boomers PAID their way,worked their asses off, (many still are) and the SYSTEM is the leech that destroyed the FUNDS Boomers put into the systems,so be careful of judging evidently that which you not a damned thing about.The MAJOR suck, is the US Gov't, and Congress stealing the funds that HAD they been left alone, would amount to trillions in surplus!.
Put the blame where it started, and WHO ends it.
No, sorry, but Boomers are withdrawing 3x the real value of their contributions to the system. If they were just taking out the fair value of their contributions we wouldn't be in such a mess.
The boomers paid something at least...The current crop of 1/2 the population are all takers.
Furthermore
I'd like to join a class action suit to demand reimbursal for my loss of savings interest due to Fed manipulation downward. Yeah. I WORKED and then they proceeded to steal my interest. You can't go back and relive you life. Anti-boomers: you'll find out sooner than you think. There is only "resume play" in life, not "start over".
This market used to be about identifying future "causes" of market movements and then if correct, watching the "effect" of your accurate forecast. Now, thanks to the Atlas Shrugged envronment, where pols and banksters are one, it is all about the "effect". Markets are now all "effect" thanks to 33 Liberty and have nothing to do with "cause" and that's why investing is a mug's game in 2013. It would all equalize if the Fed could be sent any kind of margin call but they can't so you are fighting a infinity-deep-pocketed manipilator who wants the Dow at 30,000.
So my finally comment is "Fuck them." I am not playing in their sandbox anymore.
"So my finally comment is "Fuck them." I am not playing in their sandbox anymore."
That's a very odd response given the rest of your comment. You know how things will play out but refuse to use your knowledge to your own advantage.
To each his own.
Outright Thread Jack
Michael Bloombust got caught with his pants down to his ankles and going commando here in Nevada.
He launched a series of radio ad stating that 85% of Nevadans wanted gun registration in sales...even to your son...between private parties. A law was passed by local Democrats that actually conflicted with Federal law and sent to the governor. Bloomberg launched another series of ads urging folks to demand the bill be signed.
A phone hot line was set up and 75% of callers urged the governor veto the bill. Of the 25% urging that he sign it all were from the NY area code.
The day that the governor's veto was announced his pissynees roared that the governor had not listened to the people. The statement he put out after the veto was 'full of lies' according to knowledgable sources.
What a small person. I also hear he is vindictive.
Anyway he lost and now his MO is known. It is spend money, tell lies, weep if you loose.
How the people of New York tolerate this man is beyond understanding but please never tell me again about how tough New Yorkers are. To throw a drink in my face they are limited to 16 ounces and according to the mayor most are so in need of parental guidance they would have to get a ride from the State to get here.
oh...and thank you Governor Sandoval
http://www.youtube.com/watch?v=RCC-rEx81PE
" Some readers believe the inflation will not occur. Some seem to think that neither will a Depression."
We are in a depression. 10% real unemployment, 4 years after the end of a recession, is depressionary.
10% "real unemployment"????
To believe that you have to make 10-15% of our working age population invisible!
Which the .gov has, 1-3% of working age adults (18-55) have been added to full time disability roles, 5-7% of working age adults 18-35 years old have been put on student loans for as little as 9 hours of instruction a week, and another 5-7% have completely given up and are living in the homes of family and friends, off the system!
But every single one of these people are unemployed, used to have jobs in the old economy, and don't count in current unemployment statistics in our gov controlled reality!! And this doesn't count the 5-10% of people WITH a job, who are now working 20-28 hours a week, when 4-5 years ago they worked 40+
10% real unemployment............shit that would be awesome and I might believe shit could get better! Try 25% friend!
23% real unemployment, based on how unemployment was calculated before it was changed in the1990's.
"Corruption ultimately kills societies unless reversed. Power-wielders have no incentive to give up their positions or plunder. I don’t believe the US will contradict the rest of recorded history in this regard."
This is exactly why the 535 are standing up in favor of destroying the US Constitution via PRISM, etc.
www.truthinaccounting.org
"Welfare states can no longer maintain their level of spending, services and welfare. However, they dare not stop lest civil unrest and violence break out. The bind they are in has no solution. The welfare concept itself was extended beyond reasonable safety net considerations and morphed into a political vote-buying scheme as well as an attractive alternative life choice."
Yeah, that's an attractive alternative life choice. And yeah, all the problems are because of the vast welfare recipient conspiracy. Somebody wanna tell me where I can go to get this free money I hear so much about?
It's got nothing to do with a debt-based fractional reserve central banking system that is corrupt to the core. There's always plenty of money to bail out the bankers, but "welfare" for the bottom is what's destroying the economy. Yeah.
It is merely a convienient narrative to those that think Atlas Shrugged is a coherent self consistent socio-economic treatise....
After all Takers gotta Take; problem is that it requires a critical non-selfserving approach to honestly answer the question about who is really taking...
End result: Greece. Well I guess that's actually the mediocre result. But you get the idea.
How does it end? It ends how it began. Revolution.
What happens after that? Depends who wins.
We could get the 'crack up boom' if things were allowed to play out like they have in the past but it seems the computer models keep that same scenario from happening...for now.
An alternative collapse could happen if the gold market collapses. This is never discussed by the Fed because gold exists only as a commodity to them.
If there were a major failure to deliver gold in size what might happen? First the dollar price of gold would go to ??$$/ounce...,This would raise the question of the true value of the dollar at the central bank level as at least the ECB still has gold marked to market as its major balance sheet asset. The ECB would then have gold at possibly infinite value ramping the asset side to infinite (in dollart terms) until a new market could be established. There would be a period in which the dollar would look very bad as the Fed has NO GOLD.... All US gold is held by the USG. It has no bearing on the value of the dollar.
If a physical only market were to be re-established (and it must as the value of the Euro is dependent upon some appraised value for gold) then the dollar would depend upon how much gold would be sold for dollars. If the flow is low then the value of the dollar tanks. ..and I doubt China or the other producing countries are going to be tendering gold for dollars as they know they can never spend those dollars.
A collapse in the current gold market could be the key to the destruction of the dollar, all without a weeks worth of increased prices. The effect would be the same as hyperinflation.
Today, it is truly frightening to have our future and the futures of our grandchildren at the mercy of corrupt fools in Washington.
I see few in Washington that even think in these terms. Corruption ultimately kills societies unless reversed. Power-wielders have no incentive to give up their positions or plunder. I don’t believe the US will contradict the rest of recorded history in this regard.
This comment is just to skew the NSA algorithims. No reply is necessary.