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What Happens When Cash Is No Longer Trash?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Those who actually create value as opposed to chasing yield with nearly-free money will actually have some traction once the swamp of excess liquidity drains.
When those closest to the money spigots of the Federal Reserve can borrow billions for next to nothing, cash--laboriously saved from years of paychecks--is reduced to trash. What chance does a saver have in a bidding war for a house or other asset against a financier who can borrow essentially unlimited cash?
Answer: none. The saver can leverage his cash at best 4-to-1: a 20% down payment leverages a mortgage of 80% borrowed money. The financier can borrow as much he wants for next to nothing.
The saver will lose every bidding war, thanks to the excess liquidity created by the Fed and other central banks. The reason given for this vast expansion of credit is that if credit is cheap enough, people and businesses will put that nearly-free money to work.
The problem with cheap credit is that it does not flow to productive investments--it flows to safe yields. Launching a new product or service is risky, especially in a stagnant economy, so the safe way to play unlimited credit (i.e. liquidity) is to chase assets that reliably generate returns.
Consider housing as an example. If a saver wants to buy a house to rent out as an investment, he is going to be paying 4.5% or so for the 80% of the money he is borrowing via a mortgage.
The rental income has to exceed his costs--the mortgage, property taxes, maintenance, etc.--by at least 3%. Otherwise he might as well buy a long-term Treasury bond and earn the 3% without the risk of vacancies, unexpected expenses like a new roof, etc.
Since his mortgage costs 4.5%, the yield has to be considerably higher than 5% to make buying the house a good investment. Let's say the rental has to generate a return of 10% to yield a net return (after paying the mortgage, property taxes, etc.) of 3%.
The financier paying less than 1% for his borrowed money has an entirely different calculus. Since the cost of his borrowed money is so cheap, he can bid the asset price up and still earn a return above 3%. Raising the price of the house quickly raises the costs of owning for the saver, as the interest costs of the bigger mortgage eat away at the yield.
The financier can raise his bid by 25% and the additional interest on the nearly-free money is trivial.
The systemic result of excess liquidity (cheap credit) is bubbles in every asset class that yields a low-risk return. Buying low-yield assets is still profitable if you can borrow money for next to nothing.
Though the timing of the collapse of excess liquidity is unknown, we can safely predict excess liquidity will collapse because all extremes eventually revert to the mean. At some point assets reach such heights that even free money isn't earning a real (i.e. adjusted for inflation) return.
At that point, participants lose faith in the easy-money policies that have issued cheap credit as the cure-all for stagnation. The excess liquidity is still gushing out of central banks, but even financiers don't want any more as there's no way left to earn a return even with nearly-free money.
As correspondent Jay F. observed, the collapse of excess liquidity will be a positive development, as it will restore the equilibrium between cash that is saved and the real returns on assets.
"A worthy subject for your attention and treatment is how the collapse of credit liquidity is actually a very helpful thing for individuals who are real creators of real value-- as they now get to compete on a much more level playing field. I see this phenomenon unfolding all around us as overvalued assets and professions go on the chopping block to maintain the status quo. It's actually a very good thing."
Well said, Jay. Those who actually create value as opposed to chasing yield with nearly-free money will actually have some traction once the swamp of excess liquidity drains.
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Value? What's that? Is that the same as price?
The problem with the argument above is when the equilibrium returns and the excess liquidity is gone is the ability to produce anything useful will have be gone. Productive organizations will have gone bankrupt fighting the financiers. Too late.
Real creators of real value are terrorists in the New Normal New Rome.
That's sweet. Now fetch me another glass of bollinger.
The 64$ (new money) question is: When will cash be no longer trash? When will cash be king again?
Charles is doing better ... had my doubts a week or two ago
Agreed, but he's still a long way from his sane and useful former self.
Kill the Fed, and price discovery will improve, but Federal employees will still get paid 3-8 times more than equivalent real jobs. How and when do we kill the deep state?
Off topic:
Look what Bulgarian Central bank has to say about Corpbank today: "In the bank's activities, unusual for the banking system, bad business practices are observed, which were carried out though sophisticated operations aimed to cover the nature of deals and transactions," the central bank said on Wednesday.
"Bad business practices? "Sophisticated operations aimed to cover up the nature of the deals"?
Now THAT'S unusual...
http://www.reuters.com/article/2014/10/22/bulgaria-banking-idUSL6N0SH4CJ...
"Good Luck, LOSERS!" - Janet Yellen
$4.10 Per Pound: Ground Beef Price Climbs to Another Record High | CNS News
The average price for a pound of ground beef climbed to another record high--$4.096 per pound--in the United States in September, according to data released today by the Bureau of Labor Statistics (BLS).
In August, according to BLS, the average price for a pound of all types of ground beef topped $4 for the first time--hitting $4.013. In September, the average price jumped .083 cents, an increase of 2.1 percent in one month.
But, but...
Uncle Scam says price inflation is only 1.7% so SS and Vet checks will only be 1.7% more next year.Millions of older Americans who rely on federal benefits will get a 1.7 percent increase in their monthly payments next year, the government announced Wednesday.
It's the third year in a row the increase will be less than 2 percent.
The annual cost-of-living adjustment, or COLA, affects payments to more than 70 million Social Security recipients, disabled veterans and federal retirees. That's more than a fifth of the country...
"In the last several years we have had extremely low inflation," said economist Polina Vlasenko, a research fellow at the American Institute for Economic Research. "Basically because inflation is low, the cost-of-living adjustment is going to be low, too. It's supposed to just compensate you for inflation."
http://www.foxnews.com/politics/2014/10/22/social-security-benefits-to-g...
An American, not US subject.
One of my brighter employees has calculated that he will be 1.7% behind next year without a raise. This is due to changing from vacation/sick time to PTO, increased health insurance costs and increased parking costs. He is setting me up to give hime a bigger raise.
If the pure market reigned in regards to beef production, pink slime would be $4.10 per pound. Good thing the industry is subsidized by government.
And in Bolivia every worker gets a Christmas bonus equal to double their salary and paid for by the government.
Cash is KING: It buys you hookers, blo and bling.
If you dislike/hate it so much, send it to me.
i always go with what money drug dealers have stuffed in duffel bags ...
King Dollar kicking azz
not much the Federal Reserve can do if other countries don't play nice (ie: print) ... while US ends QE
What makes this schmuck think that they are going to turn off the "free money" tap any time soon?
Sorry, that's like saying that these fuckers are going to indict themselves... FAIL.
Because deep inside, many still want to believe that 'honesty' will creep in somehow and set it all right. Where they 'Fail' as you so accurately put, is in believing that honesty can be restored, without a complete economic - and perhaps even, societal collapse. It is simply too overwhelming for them to comprehend that we are really that far gone.
Excellent article with one exception, a drained liquidity swamp won't have a meaningful amount of savers left for traction. Those will only come much, much later, once people have the ability to save.
It's not like cash represents tangible wealth, after all. IOUs can hardly sustain a society.
"IOUs can hardly sustain a society." -- Bingo. The opportunity for the real structural reforms (and prosecution of bad actors) has long passed...
And I hope one day in the near future as I am standing in the crowd watching these criminal marched up to the gallows\guillotine\lamppost\chipper-shredder, and I will look around the crowd and wonder to myself...."How many ZHer's are here...
(I can dream)
The financial industry has started having to cannibalize itself. With no real productivity, goods production, or organic sales revenue to speak of, all they can do is target one another's profits...the paper money goes from one to another and back again.
I bet they so, so DESPERATELY want retail to get back in "the market"...!
There was no difference in the APY for a mortgage with 20% down and one with 5% down back in 2012. I ended up doing the latter option in order to keep the remaining 15% liquid in the event of job loss or other emergency. Even with PMI, my PITI is still less than 20% of my net take-home salary, and lower than comparable rents. And in my neck of the woods, they both reduced the tax rate as well as the assessed value of my property, so my PITI has gone down since I bought.
If/when I feel confident enough in my job prospects and can bank 1+ year's salary over and above the remaining 15%, I can just send them a lump principal payment and remove the PMI. Otherwise, it's nice to have the spare $$ around without having to dip into a higher-rate HELOC for emergencies or improvements.
So you don't need to get a pricey appraisal to remove your PMI?
"What happens when cash is no longer trash"? Why, simple -- it means you are walking out of your local coin shop after magically transforming your cash into PMs.
"we can safely predict excess liquidity will collapse".....
Might as well buy yourself a pair of ice skates as hell freezes over while you are waiting.
over valued professions??? like ben's??? like the enlitled govt beaurocrats??? like congress??? the national debt will be 22 trillion or more before ebola gets out of office. who is this guy kidding???
Just had to break out Steve Miller's bluesy "Your Cash Ain't Nothin' But Trash'" tune, from "The Joker" LP. Great tune with hilarious lyrics.
I feel they'll take out the savers before excess liquidity is allowed to drain. Last thing they want is to have them afterwards, compete for the same deflated asset.
The only relief is armed revolt.
The FED is a domestic enemy that is destroying our savings & financial markets.
The FED is a creation of the Congress, from which the FED derives ALL of its powers. Since the crash in 2009, there has been ONLY one member of Congress, Ron Paul, who has been urging the Congress to audit & curb the FED, and Ron Paul retired in exhaustion & frustration.
The obama regime's contribution has been to appoint granny yellen, the ultimate money creation witch.
Therefore, the true underlieing enemy is the Congress & the obama regime. Elections change only the names, NOT the policies.
Unless & until Americans are willing to go to WADC with pitchforks & muskets, NOTHING of substance will change for the better.
Those that think cash is trash are sadly mistaken. Cash is King... and will remain ever more so for some time to come.
http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...