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Every Asset That Depends On Cheap, Abundant Credit (Housing, Bonds, Stocks) Is Doomed
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Four words: financialization, debtocracy, diminishing returns.
About a month ago I asked What If Stocks, Bonds and Housing All Go Down Together? (May 24, 2013). Why would such an outrageous thought even occur to me?
Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo.
I have long endeavored to explain the harsh reality of neofeudal, neocolonial financialization: Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012) and the neofeudal debtocracy that depends on low yields (interest rates) to enable enormous deficit spending: Why Krugman and the Keynesians Are Lackeys for the Neofeudal Debtocracy (April 24, 2013).
The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this:
1. As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value
2. As mortgage rates rise, there's nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff
3. Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity
4. As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.
Let's take a look at four charts about housing and household net worth. For the middle class, the home remains the key asset, so housing and household net worth are correlated.
Here is a chart of mortgage rates since 1970. Rates were pushed to 17+% to snuff inflation in the early 1980s, and they've dropped over the past 30 years to historic lows: the rate for a fixed-rate 30-year conventional mortgage was about 3.5% a few weeks ago. It has now risen above 4%.
In the golden age of growth from 1991 to 2002, mortgages rates bounced between about 7% and 9%. The band from 1970 to 1979 was about 7.5% to 10%.
In other words, in eras of strong growth and low inflation, mortgage rates have been around 7% to 9%. So what happens to the monthly payments when the mortgage rate doubles from 4% to 8%? The payments double, too. And what happens to the price of houses when rates double? They fall to the point that households borrowing money at 7.5% - 8% can afford to buy a house, i.e. a price much lower than today's Housing Bubble 2.0 prices.
Here's mortgage debt. If mortgage debt had expanded at the previous rate, total debt would be closer to $5 trillion instead of $10 trillion.
You see what happens when debt becomes cheap and abundant: debt rises faster than wages or assets.
But hasn't household wealth increased mightily in the past decades? Here is a chart that plots the relationship of household net worth and total credit owed, i.e. debt:
Household wealth may be rising, but what this chart reveals is debt is rising even faster--that's why the line is declining. Put another way, every dollar of new debt is generating less and less wealth.
You might think that The Federal Reserve's policy of making credit cheap and abundant would goose people to consume and invest more money. Alas, the velocity of money is hitting historic lows: the Fed may be creating credit but people and enterprises aren't putting that money into circulation.
It's called diminishing returns: every dollar of debt creates interest payments, but it's no longer doing households or enterprises any good. The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013).
That's why all asset classes that depend on cheap, abundant credit are doomed: once yields/rates rise, the valuations of those assets implode. And once valuations implode, there's not enough collateral left to support the loans used buy all those cheap-credit-inflated assets. So the financial system also implodes.
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Wow. The pro-taper crowd is in today at zerohedge. QE infinity! They have no other choice (even if it is not working).
Results will be the same.
The price of everything you own = DOWN
The price of everything you need = UP
Every crack head that needs crack is fucked!
Credit does not exist. There is only debt, masquerading as Credit, which we have been taught because it sounds better. To your credit etc.
It is a debt crisis and the other side of debt is not credit, but a counter-party/underlying asset.
Big switcheroo.
Too much liquidity and now everyone is drowning. From here to the FEd shutting off the tap is really near, 1929 redux.
ori
http://aadivaahan.wordpress.com/2013/06/21/strange-days-especially-now-t...
There will be no shutting off of the tap..., at least until we have no budget deficits.
Nothing to worry about if you believed you are on your own.
The question of what happens to the $100 trillion worldwide that sits in debt instruments has not been answered in this article.
As interest rates rise, defaults increase, and bonds lose value, bond holders are not just going to sit there.
Many bond holders will sell and buy assets of inate value driving up the price of those assets.
Energy, food production, precious metals, etc.
http://www.bloomberg.com/quote/USGG10YR:IND
We are presently 1 hundreth of a percent away from IR swaps becoming a problem (2.5% on the 10 year).
But betting on permanent low interest rates seemed such a good idea at the time! Bernanke and Greenspan both told me they had my back! /sarc
"Every crack head that needs crack is fucked!"
Wait until the inner-city residents get priced out of crack and embrace meth.
It's cut a swath through rural-poor-white America already. They're not as effectively plugged into the multi-generational welfare benefit system, and crack cost is beyond their capacity to steal in low population density areas.
Only a matter of time.
That's the right comment.
What the article missed is the most debt-dependent thing on the face of the Earth- the Federal Government of the United States.
When that "asset class" blows up, you won't care about little things like stawks, bawnds or reel estate. Because they will already have confiscated or taxed away most of those things from you.
The right action would be??? sell the mutha fucker, convert the cash to???
Hint: it is shiney and 1 lb is worth mucho. 50/50 $/G and wealthy renter/serf in disguise free to roam about.
One sold, one to go...
Credit is a good thing to have, until you use it. Then it turns into debt which is a bad thing. I'm surprised this is so hard to figure out.
kind of like a gun
Yeah, I always loved those "turn your equity into cash" commercials. Should have been "turn your equity into debt".
That's why they won't stop. Can't stop until the cure(QE) is worse than the disease. That's when drug addicts quit. When they look in the mirror and finally admit the long term pain is just simply not worth the short term high. It's true with drugs, money, food, sex, power etc.
Is your life style sustainable??
No life is truly sustainable, if it were there would be no such thing as death.
nice.....
is that the cliffs notes version of the quote at the top of ZH
He said life style. Is your life style truly sustainable?
Here's a visual for you: Imagine a politician having that moment of clarity you just described. Looking himself in the mirror one day and saying "My GOD, what are we doing? What am I doing?"
Can't imagine it, can you? And with good reason. Because it will never happen. They are all politicians, not leaders. Leaders can see the big picture, politicians can't (and wouldn't even if they could).
"Interest rates are still low aren't they? So what's the problem?"
Or: It's not the drugs that hurt. It's going without them that hurts.
"Here's a visual for you: Imagine a politician having that moment of clarity you just described. Looking himself in the mirror one day and saying "My GOD, what are we doing? What am I doing?"
I saw a little old guy from Texas when I read that.
i always want to think the Evan Bayh, had that mirror moment
Not that I disagree, but given all the spying going on, as someone pointed out in the last few days, TPTB get to all key politicians who have 'unacceptable' ideas or intentions.
Very few who were 'clean' and actually managed to get elected, get to be the voice of reason, the John the Baptist, around whom the Dissidents can gravitate.
They are happy to have a few of these, as they too serve a purpose and get to be 'branded' as an 'un-electable' brand, but they just don't want them to get too large a following, nor can they risk of having them assume any position of real power. IMO.
Mine isn't. And I suspect not many people lead sustainable lives. Sustainable isn't living debt free, putting money away... even if you are stacking it. Our world runs on cheap energy and cheap credit/debt. I don't think many people can grasp just how intertwined it all is. Your life is only sustainable if you live off of the grid and are completely self sufficient. Even if you are growing your own food, living off of the land... if you go to a feed store for chicken feed, or are using fertilizer other than compost, you are still tied to the system. If you feel good about yourself because you run your own business... most of the people who buy your goods and services are collecting a paycheck from some corporation or government entity. Hard to say what things might look like when the wheels fall off.
Some time doctor thinks this patient is not worth saving.
Every asset at risk of going down? Uh, Canada is doing pretty well now, better than we in the USA are. Resource rich Quebec included! Yes, gold mining areas especially!
"Trip to Val d'Or, Quebec" (Gold Valley...)
http://tinyurl.com/kla4uml
Canada is very vulnerable. Much of their economy is dependent upon exporting raw materials to China, made into final goods for US consumers. So yes their economy and housing prices has/have been booming, but that may not last as China's growth slows. And Gold Miners (even in Val D'Or, like AEM) are starting to sweat as gold costs and gold prices converge, narrowing their margins. If real interest rates continue to rise, that does not bode well for gold either. I like gold a lot here, but if the reason for other assets declining is rising real rates, gold could suffer and decline in correlation with stocks and bonds. It's real purchasing power may still do pretty well, but it's something to be thinking about.
Canada's Mfg industry got clobbered in this Recession/Depression, and they've down-shifted to the traditional primary industries.
The traditional model of being a branch-plant economy of the US has maxed out and shown its limits/weakness. Provincial governments are probably doing a better job than Ottawa, in creating the climate and infrastructure for Made in Canada industries.
And if/when such industries do evolve, they get culled by the US giants or politicians, lest they become too 'competitive'. E.g., Avro, Nortel, RIM.
If inflation(money supply) is still falling even with 12 trillion in central bank injections then tapering will just drop us into a turbocharged deflation. Its preventing a total collapse, whether its being used badly or not. It should just go straight to consumers as tax breaks or freebies to juice spending but in the end the banks arenusing it to squat on.
Canada (which depends heavily on the U.S. - its largest trading partner) & its twin, Australia (which depends heavily on China, its largest trading partner), are both in a state of collective, cognitive denial that is large enough to be fairly deemed "epic."
It's not that I have some burning desire (or any desire) to see the Canadian & Australian economies fare poorly; it's just that basic arithmetic ultimately catches up with all deniers and pummels them into bloody submission & admission of the truth.
I told my dad two days ago "If there is a recovery under way, why has the US stock market rallied 45% in the last 2.5 years, and the TSX is up 3% over that time? Don't they need natural resources if the return to growth is imminent?"
+100
QE for the proles.
If my reading of earlier post here are correct the reason this can't happen i.e. direct payments to the hoi polloi is that it will be used to pay off debts. Thereby reducing over all credit/debt and that can't be allowed to happen as it is used as collateral in an infinite loop of rehyoped dirivatives. So, pull all your money out and pay off all your debt and the system dies ;)
Sounds good to me
"but in the end the banks are using it to squat on."
Now consider the question of what the banks would like to have happen to those excess reserves, in terms of value. Imagine the fire sale they could take advantage of.
It's called Biflation.
I prefer to call it BiWinning.
-Charlie Sheen
The price of everything you own = DOWN
The price of everything you need = UP
Only if you need to use what will be the very scarce credit to buy it. If you have cash, silver or gold, stuff will be very, very cheap! That's how the smart money made out after the Great Depression, they bought huge quantities of productive assets at deflationary depression prices. There will probably be a deflationary depression followed by inflation, so there will be a window of opportunity.
"The price of everything you own = DOWN
The price of everything you need = UP"
Bingo! "Bi-Flation" defined.
Yes, qualitatively both will result in pain. No, quantitatively QE infinity will result in more pain.
Some people can not understand the distinction, because they can not understand that there is no "we", as in "we" are not all in this together.
More like the people who passed basic math....
There will be no taper only more coin clipping. Just my opinion but either way is going to be a disaster. http://tinyurl.com/mem7o7x
I'm not so much pro-taper as I am pro-sanity. Look at those graphs, particularly implied velocity. People aren't spending. Wanna know why? Many were stung during 2008, either lost money in the markets, or lost their job/house in the recession. Easy credit is a lousy substitute for a good job - a paycheck beats a credit card each and every time. QE has had very little effect on wages, which are low due to labor arbitrage. If bond yields continue to rise, and I think they will, QE will become irrelevant, the market will crash. A massive government-funded jobs program, combined with QE might have worked, at least temporarily, but the sequestration budget is certain to lead to recession. That's right - RECESSION.
One almighty cluster-fuck dead ahead..
today is prob the most volatility i have seen in a while.
watching the banks on my level 2, the trades are insane, never seen this much consistent volatility in a long time.
it makes it more fun to watch that there all down 3 plus percent.
I was thinking it was going to be one of those Nanex days. Everything is bouncing around like a bad day on the Neikki
i hope we see volatility like we saw on the nikkei when they were down 7 percent a few weeks ago.
thatd be a great way to go into the weekend.
Article quote:
"...armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo..."
So if I were the status quo, would they suck me off? Cuz I love that. You know, getting sucked off.
Your comment sucks.
Correct.
(Seize Mars can't be brilliant, witty and incisive all the time. Sometimes Seize Mars is just...wasting...time.)
Since 2008 this blog has been predicting Weimar Republic. Now it is deflationary catastrophe?
Interest rise because there is inflation. Inflation erodes debt.
See: Ka-Poom Theory
Its all about inflation.
Look at the bout of deflation that Aregentina got before they went into hyperinflation.
http://www.latin-focus.com/content/countries/arg_gifs/argcpi.gif
+ 1
Nice perspective, we can all be on guard for inflation even if we go down for now.
+1
First the deflationary catastrophe then the Weimer Republic. Did you sleep through ZH101?
So where is the inflation? Ben says it's around 2%. Is he lying (again)?
Still
Go to the grocery store or the gas station. You will find it there in abundance.
If you include Value Deflation it isn't even in abundance.
More for less!
pods
So..., what you are saying is..., we can all substitute road kill for beef if we choose.
Cat..., the other white meat.
Everyone knows the CPI is a cooked number. Compare your grocery bill this week to wha it was a year ago. If that does not convince you compare the package size and weight of food products to a year ago. Prices are higher than 2% and / or the package content is less than 2% from a year ago. Stop paying attention to government numbers!
And the coffee quality is far worse than 2% of what it used to be. It tastes like brown shit water nowdays...
Go to sweetmarias.com and buy your own and roast it at home. The bean quality is higher and it is cheaper.
My Stella Artois only has 11.2 fl oz
But I bought some ice cream at Costcos and was shock to see the huge container, so I look to see how much was in the carton. It was a half gallon. I hadn't seen one of those since Clinton was in office.
Bag of chips down to 6 oz from what, 8 oz.
Sugar water now comes in packs of 20 instead of 24. But its the same price as before, so no inflation right? /s
is their a new list of elimination....energy, food, and now health care cause my personal premiums have been soaring for at least ...ever...
And nothing erodes fixed income faster than cutting Interest rates by 60%.
Interest rise because there is inflation. Inflation erodes debt.
Not always. Nominal rates increasing faster than real rates would imply higher inflation expectations. Recently, we have seen the opposite as real rates have incresaed faster than nominal rates (look at TIPS vs. TLT). Equity markets, commodities, PMs are getting crushed because of the 70 bps increase in real rates since mid-May (TIPS breakevens down 25 bps over that timeframe).
No Crystal Ball is perfect, but they are profitable.
p.s. Cognitive dissonance gets junked, even if truthful. Ironic, isn't it?
"That's why all asset classes that depend on cheap, abundant credit are doomed:"
if you mean boom and bust then yea...but that doesn't mean the bust is coming this year. we're in a protracted repeat of the early 2000's. Rates are still very low and cheap credit, atleast in housing is being extended to good quality borrowers(so far)
Sorry about the -1, but you are mistaken about credit. Cash purchases of a house are much higher then the early 2000s. Loose money is not being lent out, but being "invested" by the banks. Why lend at these rediculous rates?
An FHA loan at 3% down backed by Fannie/Freddie (with taxpayer money) is a repeat of what caused 2008.
That is where we are; yet another unsustainable debt bubble.
"Neofeudal debtocracy."
Perhaps we disagree on the creditworthiness of your average REIT, who're the only ones actually buying right now.
http://www.finviz.com/quote.ashx?t=REM
Tells you everything you need to know about the state of housing finance.
QE was all crony loans to bankers. It was worse than Mugabee paying off his retired soldiers in Zimbabwe, which started their hyperinflation. There is a whale out there with 2 trillion dollars. Guess what? I don't want dollars. I don't want to be in this game until the whale unloads.
Exactly. Mugabe's mistake was in giving the funny money to his soldiers, who spent it. The Bernank, having learned from the 1930's and Mugabe, gave the funny money to the banks, on the very condition that they not spend it. The banks are merely swapping their worthless paper for the funny money, and cycling the funny money itself back through Treasuries. In theory, at least, it's a closed loop like an air conditioner coolant cycle. But of course air conditioner coolant loops leak, and then things get...a lot hotter. So far, The Bernank's cycle hasn't leaked much. But it has leaked some, and that leakage has flowed into equities. Which is why if there's even a hint of the influx "tapering," the equities hold their breath until they turn blue. The whale may unload, but when he does, he poisons the water he has to live in.
Banks now bail-in depositors.
Hence depositors are at greater risk at the moment (compared to the pre-bail-in era). Hence they will (one way or another) demand to be paid interest on their deposits.
Thats when the reserves that banks are sitting on will have to be lent out.
The electorate will not allow another broad in-your-face bailout. The only out now is distraction, and the most effective distraction is...porn...I mean war!
We don't know when it will end because few if any of us here were at Watford U.K. this past week.
Who was the poster dumping on mining stocks the other day ?
He was saying that Pretium was in a remote location and its a joke to buy these stocks.
Get with the program. This is ZIRP. Fundamentals don't matter. Buy some minning stocks. The hot money will eventually flow their way.
I don't care if Pretium is on Mars.
Mining friendly jurisdiction is more important than supposed remoteness. What is it, 50km from the ocean and Stewart BC?
They have some of the best grades I have seen... Ever. Probably anyone has seen for 30+ years!
You should see how remote some of these oilsands projetcs are. Its insane.
It would appear that the rising interest rate meme is not good for the big banks...
Apparently that only is good if it is based on growth...
as long as banks can mark to fantasy rising rates are fantastic for banks. falling rates on the other hand, are fantastic for banks.
When rising rates means they are earning more interest income, thats fine.
But this is going to mean a return to them having to PAY interest.
Indeed, everything will look like the My Little Pony universe, right up until an animated Rob Zombie crashes the party and chainsaws pony heads.
If housing prices decline again...........then think Big Biz buying more......Rental America...
Gold also heading to 1000...wheels have already fallen off
Good luck getting any physical at those prices.
Physical almost dried up at $1350
Freegold is coming
http://freegoldobserver.blogspot.ca/2011_09_01_archive.html
Disagree. Given the latest PM price whack, I visited my local PM shop yesterday.
Had no problem getting PM. Ironically, got some marginally numismatic stuff because ppl were selling it to the shop. Unless they pulled LoP and bought at $300, they are selling at a loss.
Last night I checked several online sites, and availability was not an issue. As a matter of fact, KITCO had more variety than I have seen at $1700.
The PM shop thought that people are more cautious since the last bullion rush of two months ago, lest they "overpay" on a downward spiral.
Unless you're the Fed, JPM or GS you are merely crystal ball gazing where it will all end. But obviously the tipping point will eventually he reached, but I doubt that anyone here knows for sure where that point is.
Maybe.
Gold backing of the US monetary base in 1/15/1980 with gold at 800 = 145%
Gold backing of the monetary base today with gold at 1300 = 10.8%
Gold backing of the monetary base in 9/1/1999 with gold at 250 = 11.6%
There are a lot of ways to look at it. But I am very comfortable taking banker, government, and hedgey gold here. IMO, they messed up and are trying to cap it way below any possible sustainable level. It amuses me.
Damn I hope so. I would prefer $100 or maybe $10, but $1000 works for now.
"That's why all asset classes that depend on cheap, abundant credit are doomed: once yields/rates rise, the valuations of those assets implode. And once valuations implode, there's not enough collateral left to support the loans used buy all those cheap-credit-inflated assets. So the financial system also implodes."
That sounds rather DEFLATIONARY.
UKIPWEBMASTER TWEETED THIS SHIT
game, set, and match: ZeroHedge
Excellent stuff Charles.
"...cheap, abundant credit...which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo."
Bravo.
With rising rates, you'll see demand come back, but it's future demand getting pulled in. You'll see home prices rise in the short-term, but fall in the long-term as demand falls off a cliff.
Callin BS on lame duck BB.. QE will b tempered NOT as any initative of BB will be out done the other way 2X by new FED head LARRY SUMMERS in 7 months
Fiat (money) IS easy debt, so what will (and has in the past) stand the test of time? Hyperinflation or deflationary collapse lead to very similar economic outcomes. Trust in the fiat ponzi is what keeps things together, for now. Prepare accordingly.
This is stupid - if interest rates increase the biggest worry is the gubmint default because the interest payment on $17T (currently $500B/yr at 2.9% interest) could go well over $1T/yr and is in no way feasible.
yeap, biggest debt holders have the biggest worries, .gov i am looking at you
If you have any income and/or own anything that can be taxed, you'd better worry too.
they can tax me 100% and they will still go bankrupt in front of my eyes.
I don't get it, we've been following the Fed's actions for years now, if the tapering causes the economy to slow down, they will resume QE Infinitum. This game can go on for 30+ years. Look at Japan.
No, YOU look at Japan.
Wake the fuck up.
The mortgage bubble was brushed under the rug
by QE, but the bugus value had to run somewhere.
For every self important banker who was left holding
overvalued assets there was a seller of the
bubble up until 2008. The latter of course has suffered
a policy of hand it over and has also been compelled
to underwrite every day another way of taxpayer assisted
loss sharing.
All savers’ incomes have existed at sufferance to free
reserves rained on the banks, and all the privatize
retirement types amazingly ignore how everyone’s
retired parents’ retirement nest eggs have been
ripped off for the same purpose.
The banks themselves declined the following
http://www.bloomberg.com/news/2012-07-09/dealers-decline-bernanke-twist-bids.html
because they expected the events we’re seeing presently.
Undoubtedly they’ve been shorting the bond market.
In soccer, the ball handler can wait for the defender to
flinch, and then the handler can simply kick the other way.
Defenders can implicitly understand negotiating and
wait for the handler to make the first move.
But what if the handler can know in advance what the
defender will be doing?
Thus spoke the Liquidity Trap.
http://www.youtube.com/watch?v=Y9QxaJLt7EA
Another Way To Look At It Is
This Is All About Who Gets
Off The Sinking Ship And Who
Climbs Aboard Value.
http://www.youtube.com/watch?v=zCy5WQ9S4c0
Then Comes The Municipal
Take-It-Or-Leave-Its
http://truth-out.org/news/item/8016-wall-street-confidence-trick-the-interest-rate-swaps-that-are-bankrupting-local-governments
And Privatizations
http://www.nytimes.com/2012/12/06/world/europe/oligarchs-play-a-role-in-greeces-economic-troubles.html?pagewanted=all&_r=3&
http://goo.gl/jB9is
One Shouldn't Be A Turkey.
http://henryckliu.com/page117.html
The Metaphors As To The Titanic I Think Are
Appropriate. Our Habitat Is Also A Sinking Ship.
As Our Demagogues Need Somewhere To Live
Also, One Of Two Things Is Operable.
We Need To Shake Off The Corruption.
We A Species Unable To Escape Sell-Out’ism
Long Enough To Survive Undemocratically
Self-Consumptive Policy.
Freddie's dead.
"Once you get +5% rates on Cash"?
Note that Cash and Bonds are teo different things. Fed will maintain ZIRP which means bank accounts will still pay ZERO. Bonds offer less risk than equities and flight to safety + falling inflation will work to restrict rise in Govie yields...at least until Ben's next experiment, maybe destroy the USD if it keeps ramping up. Then the markets will look like the firefight in "Platoon" when the Captain orders Napalm on his own position. Nice.
In the meantime, Govie curve should keep flattening. Mortgage rates can still widen out as banks re-price risk.
Anybody run 5-year charts on HYG and LQD. Yikes!
According to historian Theodor Mommsen, the Roman Empire prospered when their "prime rate" was 6%. Until the oil shock of 1973, when the barrel price of oil skyrocketed, the US economy prospered having a prime rate of under 6%. When Volcker took over as head of the Federal Reserve Bank in 1979, he targeted money supply, restricting the amount of money banks had available to lend. The interest rates on loans spiked up as the prime rate topped out at 21%, Jimmy Carter lost his Presidential re-election attempt and the U.S. economy crashed. The situation now is vastly different from 1979 because of the 600 to 700 trillion dollars in derivatives propping up the financial markets, derivatives backed by either overvalued assets or by algorithms.
Whoever takes over the Fed, there really is no solution to the problem of what to do with paying off derivatives. Keeping the federal funds rate at near zero is a stopgap measure that allows the Fed to keep the stock markets and money center banks from collapsing by buying up derivative-based debt on credit. The only real solution is to devalue by 80% the derivatives out there: the CDOs, the MBSs, the SIVs and the like. But how do you devalue a synthetic CDO when you cannot even locate the assets behindf this CDO to determine the real value of the derivative? You can't.
So all Bernanke can do is borrow trillions of dollars and hope the world economy starts booming, generating enough real wealth to increase tax revenues to pay off government debts. That ain't happening anytime soon. Meanwhile, governments here in the USA and in western Europe are looking the other way as big banks and financial giants like Goldman Sachs are looting the western world, stealing middle class citizens' pensions, government assets and citizens' sovereign rights, all for the insiders to make out like bandits before things get even worse.
Sounds right, Judge. The borrowed money by the Fed is making the extraction of wealth by the giants even easier.
Very true JC....I would really like to see an article with a ZH perspective on the topic of derivatives and their relation to the banking sector and governments. This is the elephant in the room. My view is that this situation is entirely untenable and unresolvable as the counter parties to derivatives are the very assets that people own and rely on for future income. What can be done? Massive write-off of debt worldwide (haircut...think mohawk). What will probably happen? A financial crash that will reduce 2008 to insignificance. When? No idea. What to do? Pay off debt and lower your standard of living expectations. LIve near sources of cheap and abundant food. Travel and have a good time now if you have no debt and good savings. Buy gold?? (Confiscation??)
Jubilee. The Great Debt Restructuring.
Doomed and overpriced, a bad combination.
We should be in the midst of the Great Rebalancing...the process whereby there is a balancing out of trade deficits and standards of living between the West and the ROW. This process has been hijacked by the multinationals who are raking in massive profits while paying little or no taxes....to the tremendous detriment of people around the world. The process is still happening but is much more painful for all than it needs to be thanks to multinationals...governments are borrowing to pay for social programs, etc. which has a hugely negative impact on future growth and stability while the multinationals continue to use tax havens to avoid paying their share. The G8 is supposed to be 'looking into' this problem but I doubt anything meaningful will come of it.......too many politicians are bought and sold by the same people they are supposed to be overseeing. The squabbling in congress over the deficit is a pathetic sideshow compared to the trillions that are being stolen from people around the world by the multinationals........if these corporations were to pay even half of what they are supposed to pay in taxes, there would be no deficit and the debt of the US and most countries would drop dramatically....the whole Fed lending from Paul to pay Peter game could end and interest rates/inflation would return to normal levels.
how about - every single asset was inflated with cheap credit including "safe heaven" assets
there is simply no place to hide
partly true. there are numerous corporations that have zero debt and high cash balances that will be unaffected by the rate rise. given the lower chart of velocity i could never understand the touting of gold as a good idea. just couldn't make sense of what the attraction was. in any event, the washout may be nearing an end. some of the miners are beginning to look worthwhile. ZH's constant gold touting has probalbly hurt a lot people financially.
The USD is the biggest bubble in the world. Gold is the insurance policy against that.
If I don't have any debt, why should I care?
geewhiz190 said - ZH's constant gold touting has probalbly hurt a lot people financially.
ZeroHedge said in disclaimer - Zero Hedge is a financial news and information site, not an investment advisor. Making investment decisions based on information published on Zero Hedge, or any internet site for that matter, is more than unwise, it is folly.
James says - If one chooses to take anybodies word regarding their investment portfolio and not doing their own due diligence on any investment vehicle they have no one to blame but the person in the mirror and frankly deserve to have their financial ass handed to them. Maybe then they'll learn. Myself I recomend everybody go long FaceBook.
Gold is just as much at risk as stocks or bonds are (gold and silver may not be the big SAVE that many goldbugs think it wii be). We've got cronyism, fascism, totalitarianism (or whatever you want to call it) slowly settling upon the developed countries. Insurmountable debt will tear everything to shreds. No one can predict what governments will do. Governments are big, corrupt, stupid and self-interested. They are inverted in their purpose (and their primary purpose is to retain power, at the expense of everything, including the citizenry). When they get desperate it is tantamount to your being in a windowless and doorless room with a wounded tiger (you will most likely wind up as collateral damage). Everyone has to determine the following for themselves... what is wealth for me? what will sustain me? what is true preparation? what will happen in the area that I live? do I need to move (and if so, where)? how can I survive the all the possible end scenarios that could manifest as a result of our FUBAR systems? etc?
I wanted to add the link to ZH's bond rout column but
couldn't find my earlier comment. Here's the C-P w/ the edit.
The mortgage bubble was brushed under the rug
by QE, but the bugus value had to run somewhere.
For every self important banker who was left holding
overvalued assets there was a seller of the
bubble up until 2008. The latter of course has suffered
a policy of hand it over and has also been compelled
to underwrite every day another way of taxpayer assisted
loss sharing.
All savers’ incomes have existed at sufferance to free
reserves rained on the banks, and all the privatize
retirement types amazingly ignore how everyone’s
retired parents’ retirement nest eggs have been
ripped off for the same purpose.
The banks themselves declined the following
http://www.bloomberg.com/news/2012-07-09/dealers-decline-bernanke-twist-bids.html
because they expected the events we’re seeing presently.
Undoubtedly they’ve been shorting the bond market.
In soccer, the ball handler can wait for the defender to
flinch, and then the handler can simply kick the other way.
Defenders can implicitly understand negotiating and
wait for the handler to make the first move.
But what if the handler can know in advance what the
defender will be doing?
Thus spoke the Liquidity Trap.
http://www.youtube.com/watch?v=Y9QxaJLt7EA
Another Way To Look At It Is
This Is All About Who Gets
Off The Sinking Ship And Who
Climbs Aboard Value.
http://www.youtube.com/watch?v=zCy5WQ9S4c0
To Properly Complete The
Analogy, Though, The
Passengers Who Didn't Make
It Onto The Lifeboats
Would've Had To Have Bought
The Rescued Passengers'
http://www.zerohedge.com/news/2013-06-21/treasuries-worst-week-50-years-stocks-worst-week-2013
Worthless Assets Before
Anyone Saw The Iceberg
Coming.
To Fully Understand The
Continuing Economic Saga, To
The Extent The Drowning
Passengers' Overpaid For Those
Assets, With That Measure A
Moving Target (The Percentage
Of Overpayment Likely Growing,)
That's An Inflation Pocket That
Will Flow Somewhere Else.
Before One Can Suddenly Decide
They Can See The Future, Recognize
This Is A New Risk Set-Point That
In Itself Was A Point For Forecasting
Last Week, Last Month, And So On.
Then Comes The Municipal
Take-It-Or-Leave-Its
http://truth-out.org/news/item/8016-wall-street-confidence-trick-the-interest-rate-swaps-that-are-bankrupting-local-governments
And Privatizations
http://www.nytimes.com/2012/12/06/world/europe/oligarchs-play-a-role-in-greeces-economic-troubles.html?pagewanted=all&_r=3&
http://goo.gl/jB9is
One Shouldn't Be A Turkey.
http://henryckliu.com/page117.html
The Metaphors As To The Titanic I Think Are
Appropriate. Our Habitat Is Also A Sinking Ship.
As Our Demagogues Need Somewhere To Live
Also, One Of Two Things Is Operable.
We Need To Shake Off The Corruption.
We A Species Unable To Escape Sell-Out’ism
Long Enough To Survive Undemocratically
Self-Consumptive Policy.