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How Malinvestment Poisons The Entire Economy
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Our Fed-fueled lottery-ticket economy will unravel with a vengeance in the years ahead.
Malinvestment--the systemic consequence of the Federal Reserve's policies of near-zero interest rates and abundant credit--doesn't just inflate destruction asset bubbles: it poisons productive assets and the entire economy.
Malinvestments arise when credit is cheap and abundant, as it costs speculators very little to borrow money for gambles, and they can in essence buy lottery tickets in the asset bubble of the day without having any skin in the game, i.e. without having to put any of their own money at risk.
The classic example in the previous housing bubble were speculators who bought houses with no-down, no-document low-interest "liar loans": with no money down and a modest interest-only mortgage payments, speculators could buy a lottery ticket in the housing mania for almost nothing, and maintain their gamble for a very modest monthly sum. Given the potential for an enormous gain should the gambler find a greater fool to buy the house in a few months, this was an entirely rational and indeed attractive bet.
Today's asset bubbles in stocks, junk bonds, housing, art, bat guano futures, etc. are being driven by the Federal Reserve, which has replaced the nuisance of no-document liar loans with unlimited liquidity for bankers, financiers and insiders.The super-wealthy and corporate cronies can borrow as much nearly free money as they want from the Fed, without even bothering with qualifying for the credit.
When credit-money is nearly free and abundant, it becomes rational to buy lottery tickets in every asset class that is soaring in a Fed-fueled frenzy of "don't fight the Fed" euphoria.
Longtime correspondent Joe H. explains how such perverse incentives to malinvest millions of dollars in asset-bubble lottery tickets poisons not just the market's ability to discover price but the entire economy:
Something that often gets overlooked in the abstract discussions of malinvestment are the potentially productive assets that get captured in the malinvestment.
There are 80 acres directly east of me that were subdivided into 12 lots. That happened about 6 year ago at the peak of the housing boom. Three of the lots sold. One additional lot was in process when the bottom fell out and never went to closing.
My neighbor to the south and west raises cattle. He has more head of cattle than he has land to feed them.
He approached the speculators and asked if he could fence and graze the unsold 60 acres of land until it sold.
They told him to pound sand. If he wanted the property he could spend the $10,000 an acre: the full asking price.
A full grown calf (1200 lbs) might go for $2000 at auction....but that is still not enough to support that kind of price. Further, there is no guarantee those prices will continue into the future. My neighbor said, "No thank-you."
The owners of the property can afford to play hardball because it costs them so little to service the debt. There is little incentive for them to activate the frozen resources in productive ways. Consequently resources that could be growing beef (or potatoes or corn or green onions) are being withheld from production.
And beef averages $5.30 a pound.
How much labor is tied up in similar locked-up ventures?
How much concrete, and copper, and petroleum derived products are trapped?
Locked up and not producing, not being reallocated to a higher value process.... because it costs virtually nothing to hold on to last week's lottery ticket in the hope that the holder will be able to redeem it in some future drawing.
Thank you, Joe, for explaining how malinvestment poisons productive investments and the entire economy. Issuing lottery tickets to the asset bubble du jour is the Fed's core policy, and the unintended consequences of the Fed-fueled lottery-ticket economy will come home to roost with a vengeance in the years ahead.
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This is how the U.S. economy works, you buy whatever you think the fed will inject $$$$$$$ FIAT into, and hope that thing you bought goes through the roof in price, then you dump it on some idiot and take their life savings and watch that asset hit the floor while it deflates.
Thats what is left of the domestic economy, the only opportunity you have to make it is to make sure someone else is on the losing side of the trade, and to make sure they lose big.
Thats the environment and culture THE FED and BANKS and GOVT have created.
Sorta.
Remember back when Walmart was the pulse of America?
That was back before they started to miss earnings projections.
This entire mkt is one giant options trade
Quitcherbitchin.. Timmah and Cramer said it's OK
your Ramen future is bright lucky number: fuck all nothing
My understanding is that profit is taken out and stashed in offshore. To make further profit economy must grow. If profit is reinvested in the same economy there will be job available for people. IMHO
a jobless person's understanding of economy.
Sad thing is, by the time enough people understand the Fed's role in blowing up the world via malinvestment, it will be far too late to matter.
Not much value in an education in Classical Economics when one is sitting in a FEMA camp fighting over rice and soybean rations.
Details aside, my Carpenters pension has gone from 87% coverage to 83% coverage over the last few years, although the "market" that our funds have been invested in have doubled....or more.
Bullish
I guess Einhorn called it, and Tyler spread the message by posting it here...
...Ben Bernanke had no answer when Einhorn asled at what point the next (say, 35th) cheeseburger no longer adds any marginal utility but actually poisons you.
Now, this article is articulating exactly what Einhorn proposed, only in a more long-winded fashion.
I guess Einhorn called it, and Tyler spread the message by posting it here...
...Ben Bernanke had no answer when Einhorn asled at what point the next (say, 35th) cheeseburger no longer adds any marginal utility but actually poisons you.
Now, this article is articulating exactly what Einhorn proposed, only in a more long-winded fashion.
The free loan turns into real free money that can be spent lavishly on any and all junk regardless of price and value. Especially when those monthly free loans are in the ten digits. It was going to be the downfall of QE from the start: corruption.
Good article, but one should never forget that "printing" is theft and that the FedRes is nothing more than a theft machine--a criminal cabal of deposit theft and counterfeiting backed up by the violence of government.
"My guillotine is a head robbing machine."
All by design folks. You cannot build a new system until you destroy the old one.
Duh.
The American people really need to realize that a choice is coming whether they like it or not: They can wither away in poverty and misery with everyday a fight to just survive or fight to take back the county, the American country, from these treasonous criminals and murderers.
The choice is coming: Persecution or Revolution.
The Four Rs
Rejection: Quit paying, quit obeying, quit playing
Revolution: It is inevitable, so prepare, as they are.
Retribution: The guilty must answer for their crimes against the American people and the Constitution.
Restoration: Restore the Constitutional republic.
Stealing your 4 Rs...
Thanks!
Propagate them to the hills and the valleys.
Time to end the Fed and all Fed enablers:
http://bit.ly/QN2u3Z
Take the NY FED, who "lends" $200 billion a day in reverse repo of treasuries to primary dealers and money market funds (which can be used to short treasuries even!) in exchange for "cash", in the process paying "interest" to their buddies for the right to use the "collateral" and gamble some more...
Do you honestly think the NY FED is taking "cash"? Who's checking?
I mean, there is a dearth of treasury collateral and they simply give it back to their bank buddies - soon there migh be no limit to the amount each of them can borrow (right now limit is $7 billion per counterparty).
Is there someone in the NY Fed doing any checks on counterparty credit risk? No, as they are taking "cash", there is no need....
It's not "cash"
Especially when those malinvestments are driven by legislation. Euro-junk 4 eva!
it isn't malinvestment. just ipo some pos and make a billion dollars.
to hell with everyone else.
How Inflation Picks Your Pockethttp://mises.org/daily/6752/How-Inflation-Picks-Your-Pocket
To me Gold and Silver are looking good again...it seems the USD dollar and the ECB is falling apart again...but Gold and Silver are down....perplexes me mucho...I go to bar tonight to think about it...
Keep your powder dry Youngman.
I think we have another three months of paper leading
PM prices, and then its game over, with the advent of Shanghai
futures trading in convertible yuan.
I'm expecting massive short raids by TPTB during that period,both to aquire phyz, and keep the cash settlement down when the LMBA and COMEX default.
We are reaching the no more gold going east point.
I agree. Dry powder at the ready.
Yes, do think about how your fingers might feel after attempting to catch fallling bowling balls with razor blades embedded in them...
Cuz that's exactly what the PM charts look like these days???
Give me a Silver Eagle over a $20 Fed Note any day.
As for gold, China set the floor at $1100. If it gets back to there, well, yay me!
Malinvestment in terms of reducing the purchasing power of the USD.
Turn the ship around or else we capsize.
They'll just continue raising the spinnaker while we're working windward. Don't worry, Capt'n Yellen sounds familiar with control system theory buzzwords, though she's never sailed a boat in her life I'm sure it will all work out swell.
More and more of us are discovering that actually doing the work, taking the risk and spending the money to produce and sell actual, real goods doesn't pay at these ridiculously low fiat currency prices.
Better to speculate, hoard cash or buy real assets.
CUE MASSIVE PRICE INFLATION.
What could possibly go wrong with diverting all of America;s resources to loan fraud and Mexican invasion?
Piketty
Don’t you just love the way the upper middle class bleeds, more and more paper, for the lower middle classes, serving as its shock absorber, growing dumber and dumber military expeditions. Association and precedence as causation only makes sense in an automaton derivative world. If you have a process A-B-C-D-A, B does not cause C. Don’t go through a door with nothing but bad outcomes and expect a happy outcome.
As provided all along, a change in direction only comes when the upper middle class is substantially removed / retired, depending on how you want to do it. War begins when the empire begins to pay interest on interest, because its operators see the end coming from their vantage point, and they begin to make increasingly self-fulfilling adjustments, accelerating the error. Capital flees, the lower middle classes get crushed, and the upper middle class becomes ever more entrenched to the false assumptions supporting it by law. That is Hillarycare.
The vast majority on this planet can no longer grow their own food or raise their own children, despite the Internet and all the other resources available, because they are too busy doing make-work, screwing themselves and looking for someone else to blame. Just the other day, some moron from Vermont put an ad on craigslist to get growers from California, to teach him how to farm organic in exchange for temporary rent. We have the three types of farmers remaining here, old-timers who aren’t going anywhere, pot growing empire firefighters destroying the forest, and near sighted organic growers growing real estate price inflation, same as Vermont.
The reason addressing inequality creates more of the same is because inequality itself is a derivative in time, consuming more time, in a bipolar, divide and conquer, empire. Inequality is a function of consumers assuming that they can force producers to produce for consumers, with only the surplus remaining for children, which, of course, results in poverty among children, by making all the land public with the proliferation of property laws, breeding stupid assumptions in public education, enforced by law, the Grand Bargain.
Nation/states exploit their own slaves until they can’t, and then swap them, with immigration. The underlying assumption of empire schemes is that an overwhelming majority can force a shrinking minority, distillation, to bend to the will of the majority, and the majority wins, government controlled by legacy feudalists, until it doesn’t, when its DNA gets flushed.
Don’t argue against freedom and expect labor to save you from yourself. A two-year-old could make a better argument. If you want to serve under Napoleon, you go right ahead. Peer pressure is as old as humanity, and it fails every time. Computers aren’t planning the majority’s future by accident. Labor will spot legacy the rockstars and inflation, and play on its knees, so our children and their children can see how ineffective peer pressure is.
The French are throwing their own under Germany’s bus at this very minute. As all the jawboning over data demonstrates, the middle class will never know the true rate of growth in the economy, because it doesn’t care. It is bred from the beginning to seek something for nothing, with make-work. Has any of the arguments proffered, based on competing lies, for or against, changed the direction of the empire one iota?
The AMA breeding program developed during WWII is going. Fight with any form of dependency you like. It is the AMA hospital, not labor, that is being replaced with a c-clamp, and all the King’s debt and all the King’s navies cannot save it. Distribute it in as many clinics as you like.
Without your health, you have nothing. Think, before you breed.
Great post. Makes those independent folks on the island of new zealand look pretty fucking smart too.
Many Questions, kevin. What "empire"...I assume empire is a metaphor for "The New World Order" or some such thing but could you explain?
"Capital flees"... Yes. But it cannot leave the planet.
It is now well documented that globalization has accelerated the collapse of the WORLDS(!) middle class and will continue to do so. The money from the middle is going to the 0.1% elite-->0.01% elite. Labor (engineers, doctors, nurses, brick layers, etc) are being played against one another in the name of "Competitive Advantage" but the winners of this knife fight are the oligarchs.
Under the current frame work we can expect the middle class to lose buying/purchasing power across the globe--> in China, India, America, EU, everywhere. Yes, various areas will appear to have a growth spurt in their middleclass but it is a temporary gain only.
This is what Piketty had to show us. Did you get that part?
The financial system of the entire world is a rigged system where oligarchs are trading lies to the rest of us.
This is all well documented now. But this realization is just holding the tiger by the tail. No bought-and-paid-for Politician dares to confront the tiger.
Meanwhile, in our everyday lives, the elites on down to their middle rung flunkies tell the everyday lies we have been hearing for THREE(!) decades: Work harder. Save. Get smarter. Get an education. Pull yourself up by the boot straps. We are self made. We earned out wealth. The economy is going to turn around. You are on the way up. Times are hard...we all need to make a sacrifice for the good of the company. You will get a raise...soon. We will, of course, make you a partner. We will of course reward you for your hard work and creativity. Of course we will place your name on the patent. Play along and we will take care of you...down the line.
The lies and bullshit have worn thin and are on the breaking point or broken. Credulity can only stretch so far.
More and more, those who thought they were on the "IN" are realizing that they are on the "OUT". Wealth is concentrating into fewer and fewer hands. Being wealthy does not make one clever. Falsehoods and fraud accelerate the accumulation of the worlds wealth into these smaller and smaller concentrations.
But Wealth is HIGH despite all the deceptions. There is a good life and prosperity waiting for the common citizen.
Thomas Piketty's book, Capital in the 21st Century, graphs and documents the irrefutable truth that we are at a point where inherited wealth has replaced our former meritocracy.
We must face this now, ZH. The system is worn to the nub and we are at the tipping point where lies and failed ideology can no longer hold us individually or the society at large to the mill wheel.
Fed policies poison every decision Americans must make for their economic future. Each decision in a central-bank controlled economy could bring more risk, debt slavery or worse.
Consider the truth and dilemma facing every ordinary American and his "choices" in this humorous tale:
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Chalmers inherited seven million dollars, but the will provided he had to accept it either in Chile or Brazil. He chose Brazil. In Brazil he had to choose between receiving his inheritance in coffee or nuts, he chose nuts. But then suddenly, the bottom fell out of the nut market, while coffee went up $2 a pound. Chalmers lost everything.
He sold his watch for money to fly back to the United States. He had enough cash for a ticket to either Miami or New York. Chalmers chose Miami. Just before he took off, the New York plane came out on the runway—it was a brand new superjet. The Miami plane was a 1948 trimotor with a sway back and took half a day to get off the ground. It was filled with crying children and tethered goats. Then over the Andes one engine fell off. Chalmers crawled up to the cockpit and said, “Let me out if you want to save your lives. Give me a parachute.”
“Okay,” said the pilot, “but on this airline, anybody who bails out must wear two chutes.”
Chalmers jumped from the plane and as he fell he tried to make up his mind which ripcord to pull. Finally, he chose the one on the left. The chute opened, but its shroud lines snapped. In desperation Chalmers cried out. “St. Francis save me! Please! St. Francis save me!”
Suddenly a great hand reached down from Heaven, seized the poor man’s wrist and let him dangle in midair. Then a gentle voice asked, “St. Francis Xavier or St. Francis of Assisi?”
-Larry Wilde, Treasury of Laughter
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Charles, Malinvestment Poisons boils down into a nutshell the financial terrorism being foisted upon average Americans by the international bankers, rendering them helpless to financially protect themselves amidst plenty in an economy where fundamentals no longer matter. Thanks!
When your employer only provides an employer match on retirement money you save using their plan, they are saying that (a) they do not trust you to invest the money yourself, (b) they want you to continue to put money into a system that will soon have to pay out to retiring boomers. The 1:1 match starts to look less attractive if you think that you will not even get 50% of the balance back.
Now let Joe H. tell that to the dumbshit posters here who think it's great if interest rates (a/k/a the time cost of money) are zero or almost so!
You guys have oligrachs on the brain.
oligarch......sheesh
The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system.
By stacking risk upon risk and transferring it off to another party who may not be able to preform or is over-leveraged you do not increase stability We must question the quality of many of these contracts and worry about the potential of them to turn toxic. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html