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I'm Not Buying It - Not The Wall Street Rip, Nor The Keynesian Rap
Submitted by David Stockman via Contra Corner blog,
First comes production. Then comes income. Spending and savings follow. All the rest is debt…….unless you believe in a magic Keynesian ether called “aggregate demand” and a blatant stab-in-the-dark called “potential GDP”.
I don’t. So let’s start with a pretty startling contrast between two bellwether data trends since the pre-crisis peak in late 2007—debt versus production.
Not surprisingly, we have racked up a lot more debt—notwithstanding all the phony palaver about “deleveraging”. In fact, total credit market debt outstanding—-government, business, household and finance—-is up by 16% since the last peak—from $50 trillion to $58 trillion. And that 2007 peak, in turn, was up 80% from the previous peak (2001); and that was up 103% from the business cycle peak before that (July 1990).
Yes, the debt mountain just keeps on growing. It now stands 4.2X higher than the $13.6 trillion outstanding just 24 years ago.
As a proxy for “production” I am using non-durable manufactures rather than the overall industrial production index for three good reasons. The former excludes utility output, which incorporates a lot of weather related noise, and also excludes oil and gas production, which, as we are now learning, embodies a whole lot of debt. Besides, if the US economy has any hope of growing, non-durables should not still be migrating off-shore at this late stage of the global cycle; nor are they subject to fashion or lumpy replacement cycles like cars and refrigerators.
Moreover, the virtue of the industrial production index is that it is a measure of physical output, not sales dollars which reflect inflation. And unlike indicators that are deflated into “real” terms, it is not distorted by Washington’s fudging and finagling of the prices indices.
So how are we doing on production of things the American economy consumes day-in-and-day out? Well, at the most recent data point for November, production had soared…….all the way back to where it was in January 2003!
That’s right. Domestic output of food and beverages, paper, chemicals, plastics, textiles and finished energy products (e.g. gasoline), to name just a few, has experienced no net growth for nearly 11 years.
Now that’s a lot more informative than the Keynesian GDP accounts, which presume that government output is actually worth something and that do not know the difference between current period “spending” derived from production and “spending” funded by hocking future income, that is, by borrowing.
Stated differently, the current capitalism suffocating regime of Keynesian central banking and extreme financial repression has created systematic bias and noise in the so-called “in-coming data”. These distortions are the result of mis-allocations and malinvestments reflecting artificial, sub-economic costs of debt and capital. The resulting bubbles and booms, in turn, cause highly aggregated measures of economic activity to be flattered by the unsustainable production, spending and investment trends underneath at the sector level.
Thus, during the peak-to-peak cycle between 2000 and 2007, industrial production was reported to have generated a modest 1.5% per year growth rate. But that was almost entirely accounted for by construction materials and defense equipment. Production of non-durable manufactured goods during that period, by contrast, expanded at just a 0.2% annual rate.
But, alas, defense production inherently destroyers economic wealth, whether it provides for the national security or not. And the housing and commercial real estate construction boom did not add to permanent output growth and wealth at all; it amounted to a bubble round trip that has gone nowhere on a net basis during the last 11 years. And the graph below which documents this truth is in nominal terms, meaning that real private construction spending for residential housing, offices, retail and other commercial facilities actually declined by 10-15% after inflation during that period.
Stated differently, bubble finance does not create growth; it funds phony booms that end up as destructive round trips.
Yet, here we are again. The graph below reflects production of oil and gas, coal and other mining products including iron ore and copper. It has soared by 35% since the 2007 peak, and accounts for virtually all of the gain in industrial production ex-utilities over the last seven years.
Yet the plain fact is, the above explosion of mainly oil and gas production did not reflect the natural economics of the free market, and certainly no technological innovation called “fracking”. The later wasn’t a miracle; it was just a standard oilfield production technique that was long known to the industry, if not to CNBC. It became artificially economic during recent years only due to the massive and continuous distortions of both commodity prices and capital costs caused by the world’s central bankers.
Indeed, there are two charts which capture the central bank complicity in the latest bubble distortion of the “in-coming” data. These are the charts of plunging junk bond yields and soaring oil prices which materialized after the world’s central banks went all-in powering-up their printing presses after September 2008.
At the time of the 2008 financial crisis, what remained of honest price discovery in the capital markets caused a hissy fit among traders and money managers—–who had been stuck when the music stopped with hundreds of billions in dodgy junk bonds issued during the prior bubble. Accordingly, yields soared to upwards of 20% when massively overleveraged LBOs and other financial engineering gambits went bust.
Needless to say, that urgently needed cleansing was stopped cold in its tracks when Bernanke tripled the Fed’s balance sheets in less than a year after the Lehman crisis, and then officially adopted ZIRP and the greatest spree of debt monetization in recorded history. The resulting desperate scramble for yield among professional money managers and home gamers alike caused nominal interest rates on junk to be driven to levels once reserved for risk free treasuries.
But it wasn’t cheap debt alone that fueled the energy bubble. The 10- year graph of the crude oil marker price (WTI) shown below is an even greater artifact of central bank financial repression. The unprecedented global credit expansion since 2005, and especially after the financial crisis in China and the EM, caused several decades worth of normal GDP expansion to be telescoped into an artificially brief period of time.
As a result, demand for industrial commodities temporarily ran far ahead of new capacity—–even as the latter was being fueled by low-cost capital. That’s why iron ore prices, for example, soared from $20 per ton prior to the China boom to $200 per ton at the peak in 2012, and have now plummeted all the way back to $60 ton. This implosion is still not over. Owing to this extended period of artificial sky-high prices for the iron ore commodity, the massive investment boom they triggered in mining capacity and transportation infrastructure is still coming on-stream, adding even more increments to supply even as prices plunge.
Call it “operation twist” compliments of central bank bubble finance. It embodies a temporally twisted imbalance of supply and demand that inherently results from false prices in the capital and commodity markets.
Yet this condition is neither sustainable nor stable. Indeed, now we see the back side of this central bank bubble cycle as capacity races past sustainable consumption requirements, causing prices, profits margins and new investment to plunge in a violent correction. Iron ore is just the canary in the mine shaft. The same thing is true of nickel, copper, aluminum and most especially hydrocarbon liquids.
So the oil price chart below does not represent a momentary dip. This time the central banks are out of dry powder because they are at the zero bound or close in the greater part of world GDP, while the lagged impact of the bloated industrial investment boom continues to pour into the supply-side.
Needless to say, the emerging worldwide liquidation of the energy bubble will hit the highest cost provinces first—-which is to say, the shale patch and oils sands of North America. When drilling rigs start being demobilized by the hundreds rather than just by the score—-and its only a matter of weeks and months—the present the US mining production index shown above will bend back toward the flat-line just as housing and real estate construction did last time around.
Stated differently, there is no “escape velocity” in the forward outlook—– notwithstanding the delusional expectations unloaded again this afternoon by Yellen and her merry band of money printers. Much of what meager production and job growth there has been in recent years will soon be taken back as the energy bubble comes back to earth.
Needless to say, the Keynesian pettifoggers at the Fed and the other central banks around the world see none of this coming. So once again in its post-meeting statement, the Fed majority could not bring itself to let go of ZIRP, choosing to assert that it will remain “patient” as far as the eye can see—– while presiding over a meaningless policy change which might be called N-ZIRP. That is, “nearly” zero cost money, and just as destructructive.
Needless to say, the promise of almost free money for the carry trades is all the Wall Street speculators needed to hear. Within a minute or two, the robo-traders and gamblers managed to put a half-trillion dollars of fairy-tale money back on the screen.
But here’s the thing. The meaning of the oil crash is that the central bank fueled bubble of this century is over and done. We are now entering an age of global cooling, drastic industrial deflation, serial bubble blow-ups and faltering corporate profits.
So if some headline grabbing algos want to hyper-ventilate because the clueless money printers in the Eccles Building have now emitted the word “patient”, so be it. But why would you pay 20X for the S&P 500’s bubble bloated profits which have already peaked, and which will be subject to fierce global headwinds as far as the eye can see?
Indeed, the Fed’s lunatic assurance this afternoon that the Wall Street casino will have had free money for 76 months running, and that it will remain quasi-free long thereafter only means that the current financial bubbles in virtually every class of “risk assets” will become even more artificial, unstable and incendiary.
In any event, it ought to be evident by now that “potential GDP” is a fairy tale and that N-ZIRP has no more chance of generating that magic ether called “aggregate demand” than did ZIRP. We are at “peak debt” in nearly every precinct of the world economy, and that means that central banks cannot close this wholly theoretical and imaginary gap; they can only blow dangerous bubbles trying.
What counts is production of real goods and services based on honest prices and the efficient utilization of labor and capital. And it goes without saying that cannot happen under the current central banking regime of false prices and drastic misallocation of economic resources.
The current illusion of recovery is a result mainly of windfalls to the financial asset owning upper strata, the explosion of transfer payments funded with borrowed public money and another supply-side bubble - this time in the energy sector and its suppliers and infrastructure.
But that’s not real growth or wealth. Indeed, the desultory truth about the latter is better revealed by the fact that the American economy is not even maintaining its 20th century level of breadwinner jobs.
Breadwinner Economy – Click to enlarge
And the real state of affairs is further testified to by the lamentable trend in real median household incomes.
That figure - not distorted by the bubble at the top of the income ladder - is still lower than it was two decades ago.
So much for the Keynesian rap. Yet that’s about all that underpins the latest Wall Street rip.
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eat, sleep, drink propaganda
http://www.philiacband.com/propaganda.html
Ouch!
When do we rebel?
More of a religion would seem.
Cognitive Dissonance is truly seen through the eyes of those who say the end of the world is high and not those who believe it...hence "Keynesians" (so called.). But the world doesn't end. Prices DO fall...and while obvious in the data (the collapse of the mortgage bubble in 2008) most folks "aren't allowed to see it" (how many folks were actually able to short housing in 2008? Very few.)
Oil is very easy to short...so hard to argue market forces aren't at work here. I'm not calling price fixing a crime. Torture certainly is though....
We are at “peak debt” in nearly every precinct of the world economy, and that means that central banks cannot close this wholly theoretical and imaginary gap; they can only blow dangerous bubbles trying.
So he wants to cut debt, but that destroys "money" - So Austerity? No Thanks.
END DEBT MONETARISM.
THIS THis This.
Why don't these, albeit respected, pundits ever emphasize the fraudulent atificiality of private companies (banks) issuing debt (printing money) to the government, in lieu of the government printing the money directly and without usery?
Why do these pundits consistently legitimize without question the instutionalization of private central banks?
Why cite all the ills of central bank practice without citing the fraudulent basis for central bank existence?
Inbred misdirection.
It is the perfect dual sided argument:
1) Regulators are at fault cause they should have caught it, because business should do anything that it can get away with.
2) Regulators are too expensive and anything government is a waste and should be avoided.
Really works....
As a side issue I consider it fraud when corporations issue more stock. There should be one IPO and then no more stock. It dilutes and defrauds the original buyers. However, it makes big money for the top guys starting with the CEO. If you have stock options and get paid for stock performance then a nice buy back just before retiring is the ticket.
It is funny, but when you legally give people the power to defraud and profit from it...they use that power. Amazing, eh?
All doom and gloom!
Look at the bright side. None of us will have to worry about a job much longer! Everything will be free or nonexistent.
David Stockman is one of the best at detailing the illusory debt based economy. Thank you ZH for posting awesome articles.
OT but what the hell.... Ayn Rand reviews kids movies....
http://www.newyorker.com/humor/daily-shouts/ayn-rand-reviews-childrens-m...
Dave, Dave, Dave. Your failure to fully embrace the ‘New Normal’, like so many perma-bears here, is shocking, and, expensive. You of all people should be able to see that the Fed’s limitless money creation has changed everything forever. Adding trillions of $ created out of thin air, is without precedent. This is not about old normal “earnings”, P/E’s, balance sheets, etc. It IS all about the Fed and the psychology of the masses. It is not wrong, just different. Without the constant money creation, the Dow would be struggling to maintain 7,000. This cannot be allowed to happen.
The Fed models have proven they can create $$ without causing any serious inflation. The masses love the loose credit and respond by borrowing and buying stuff. Corporations use the cheap Fed $ to buyback shares and improve their numbers.
The central bankers have proven all the debt means nothing, so more debt is fine. It will never be paid back and nobody cares. They will never raise rates and there will never be ‘austerity’ budgets. If the big banks get overextended again, bailouts will come and loans rolled over or just forgiven. The ONLY bearish case still valid might be if consumers are forced to pull back, earnings plunge, and market investors believe the Fed can do no more. It all comes down to ‘Faith in Fed’ ending. Me thinks you will be mighty poor hanging on until that happens. So, get over yourself and your old normal thinking, and embrace the ‘New Normal’. It is here to stay.
" You of all people should be able to see that the Fed’s limitless money creation has changed everything forever."
Actually, I have a family member who believes just that statement to be true. He is long the markets big time, he is long Oil investments, as he was sure it would rise with the Fed driven recovery. He believes in Printing and Fed Intervention. So far, it has made him nearly rich! So can you blame him?
Yes I can blame him. He is complicit in the raid on the US Treasury and theft from the depositors, bond holders and taxpayers.
His "gains" were not due to any underlying production but were due to being a beneficiary in a Ponzi Scheme, a massive fraud.
But as your level of complicity and participation in fraud is up to you, it is the same for your relative.
Now he can justify this any way that he wants.
But you know damn well that it is immoral.
Easy come, easy go. The one positive outcome about this kind of parasitism is that it will accelerate the collapse of the deeply-corrupt current system. People who have profited from this corruption generally don't see themselves as being "lucky" - they see themselves as being superior - slicker or smarter than everyone else. They tend to view a moral compass as a weakness - an encumberance. This hubris will also mean that they likely won't pull out of the collapse as they try to "will" things back to the way they were. There are going to be a lot of "super-smart and talented" rich folks hustling blowjobs on Main Street when all of their ill-gotten gains go "poof."
It is a common myth that the Fed is some kind of financial god. The Fed is a fiction of American legal contrivance. The Fed is not a nation- it is a parasite that feeds shamelessly on the productivity of a nation.
All the promises and double-talk contained in Fed balance sheets and pronouncements all come down to this- can the U.S. as a nation fulfill all the promises made by the Fed?
All the private jets will be queing up in New York long before the last working private sector taxpayer comes to realize the joke was on him.
there is no "faith in the fed." there is perhaps "faith in the faith in the fed." but that is really just "faith in the herd." but that is all there ever is, and it is correctly a somewhat fickle "faith."
Quite funny the way you write about "New Normal".
"Fed has proven that creation of debt is fine. Debt means nothing". Wow.
I know a lot have made money by following the Feds in Stocks. But if debt means nothing, why not simply cancel all the debt, my credit card debt included. Or are you saying, I can get into more and more debt and never has to pay back? Really?
I know US may not pay back. Does that mean the debt that US had accumulated does not have any meaning to the people who had given it willingly and those not even knowingly?
LOL "new normal" LOL, as if this is the first time in history that unlimited money creation has been tried as the key to prosperity. Crack a history book sometime, start, say, with the Sumerians in 5000 B.C. Wander past the Egyptians, between Tut and Cleopatra they had a few hundred years when "all trade ceased because the money system got broken". Have a nice tour of the Romans, you might look up the term "denarius debasement". I won't chronicle the next 2000 years except to mention a few reserve currency names: Portugal, Spain, Holland, France, Italy, England. Perhaps you've heard of them? Paid for anything with pieces of eight recently? How about assignats? Continentals?
Pick one: I'd rather be right, right, right, then VERY WRONG...or wrong, wrong, wrong, then VERY RIGHT. 5 seconds, Bob.
TT, I believe you are using sarcasm but your point is well taken. I laughed at all the articles trumpeting the new stock market highs while the average Joe scratches his head and asks the very legitimate question, "Where is my piece of the pie?". It has not arrived yet and the reasons are in this excellent article.
To your point, what makes a bigger difference in the stock market, the latest prounouncement from Janet Yellen of 0% interest rates forever or the new iPhone 7? You could have BMW, Apple, Google and ten other companies announce wondrous new products and higher profits and it will not have half the effect that two sentences from Yellen can have. BTW, that power works in reverse, too. If Yellen announces a return to sanity in interest rates, markets will drop 3000 points immediately.
I believe you can invest in this government run market with some trepidation. Yellen and the other bankers will never raise rates significantly. Why? Because the USSA is the largest debtor in the world and from my reading a 2% rise in real interest rates is game over for our budget. It is especially bad since many of the notes are short term in order to keep interest close to zero. They will turn over quickly.
So, the illusion the Fed is independent may continue but you can rest assured the Fed will not bite the hand that feeds it.
The risk is when the game crashes and frankly it has to. What cannot go on will not go on. But, trying to figure out how much staying power the Fed, governments and other central bankers have and how long they can sustain the game is difficult. No one has tried anything on this scale.
Best of luck to you professional and individual traders. I do not envy you and wish you well.
" “fracking”. The later wasn’t a miracle; it was just a standard oilfield production technique that was long known to the industry, if not to CNBC. It became artificially economic during recent years only due to the massive and continuous distortions of both commodity prices and capital costs caused by the world’s central bankers."
Today has been one of ZH's better days for a long time. So many people get what Fracking is. It was sold, and sold and sold and sold, all over the media and talking head TV. What was that about you ask? It was HYPE, to get you, to get everybody to buy into the bubble with our investment dollars. Lots of ways to play Shale Oil and Shale Gas, pick you investment vehicle or go straight in and buy their Junk Bonds, or let your brokers fix you up with a balanced energy portfolio. They were selling you a Ponzi investment. Remember housing? Remember Tech Bubble? Now we have seen media and the Investment community sell you another place to dump hundreds of billions of your dollars, much of which will soon be gone for good.
Those who keep talking the Fracking book, are talking their own books. Have we not learned yet? When they start to sell hard, to hype in the media, when the government issues lies instead of facts, you ae being set up, and somebody will get those hundreds of billions of bad investment dollars now under threat.
This makes the third major investment bubble I have lived through. Rmember NASDAQ. Jesus how they hyped it, people on the economics blogs would call you a communist if you questioned the tech bubble.
and a ship of fools
Click fraud is worth a 50% drop.....when they make it official. ....worse than Enron X 1,000
Look at GOOG diving over the last 3 months....wow
I just saw a demo of a browser extension that lets you pay $0.001 to view the next web page, much better than ridiculous ads everywhere. Internet ads will go away, and the money will go straight to the content providers. In production now, folks, not something that might happen in 5 years.
Remeber this one for a long time, it is a good lesson. America has been a ponzi nation for nearly 20 years now!
"
The current illusion of recovery is a result mainly of windfalls to the financial asset owning upper strata, the explosion of transfer payments funded with borrowed public money and another supply-side bubble - this time in the energy sector and its suppliers and infrastructure.
But that’s not real growth or wealth."
Yes, it really is hard to believe that this is all happening again, for the third time in only twenty years. But I do believe that this third time will finally eliminate the boomers from the markets, permanently.
I am not so sure. I saw Dr Zivago long ago. And see a repeat of that in real life already too many times in my 30 years of busiess life. Good people are dying. They will always keep dying. We need smarter people. more knowledgeable. Do you see them? Can you see any progress in humanity in overall understanding? No. That is the sad truth.
You may have learned a lot by now. But that will not teach you about the next game that the masters are already planning.
Sometimes it is so sad to see, some powerful people keep repeating the same game as if they have not earned enough. They keep repeating and always blame others.We did not create this. they asked for it.
You would have thought, people who seem so smart would also have a bit of heart. But, in reality they only learn that cheating can be repeated since there are so many idiots around to manipulate, while good people stay home and live a family life.
I agree with what you say. Humanity is terribly flawed. Perhaps a merciful universe will send us an enormous asteroid.
Just in case I was not clear, "boomers" was intended as a reference to the "baby boom" generation, which has been an active part of the investor class during all three of these bubbles.
I think people forget this - and it's somewhat off-topic - but if it wasn't for the parasitic Fed, we wouldn't NEED to invest for our future. For nearly 250 years the colonies and then the US had very little if any inflation - you could save enough to retire on and know it would carry you. If it wasn't for the Zionist scumbag banksters sucking the wealth out of the nation - and the value out of the money - we wouldn't need to invest to survive into our non-working years - you would invest money you could afford to lose.... ah, but I digress ;)
I kind of wonder the same thing myself. Argentina is on its third national default in about 20 years. They do the same thing over and over again. Even if the current system crashed would we learn anything? I am not so sure. I think we might even double down on the whole keynesian central planner thing. Remember, the answer to government failures is more government power and money. With another ten thousand pages of regs, a new police agency and your tax dollars they will make sure disaster X never happens again.
Liberty; political liberty, personal liberty, economic liberty take a lot of thinking and understanding so it tends not to happen. Government schools teach that government is good, wise, and caring. Before government these things did not exist. So, people grow up with that bias.
Talking heads on cable news speak about the several - year recovery we are experiencing. It appears we have two parallel planets coexisting.
Seems to me that the higher profits of many corporations are due to stock buybacks and cost cutting, not organic growth. So that party should end soon.
"That party should end soon".
uh....I'm sure the Fed and Central Bankers have a plan for that too. Just saying. Party on Garth!
David, good stuff. But, I think you start in the wrong place. What ails us is decades of the fractional reserve banking financial asset ponzi that cannot be serviced. The distortions in distribution of wealth and income are a natural consequence of the financial sector establishing claims on the flow of value from labor and productive investment born of actual savings. We came up against it on 2008 and just socialized the losses to the government from the TBTJ banks. Now, we are trying to socialize them to the world. As long as there is a fundamental disconnect between value creation and value capture from FRB debt claims conjured out of nothing, the system will always tend toward concentration and distributionally driven demand destruction...
As to your claim on hydrocarbons, I believe it to be short sighted. The energy required to produce the net energy we consume is increasing rapidly and non-linearly as we move to unconventional field. We're it not for very significant drops in energy consumption per capita here (largely because real incomes for those households having the highest marginal propensity to consume has declined), oil would be quite a bit higher.
There is 1 and only 1 semi stable path out of this mess. Financial assets (which simply cannot be serviced/justified via cash flows) must lose value in real asset terms. Gold must go parabolic as the supply of financial assets have and then currencies will adjust, then effective wages in tradable goods and so on. We are on the precipice. When gold squeezes MUCH higher, velocity of money will take off and the real economy will heal...
Or we will get cascading collapse where no one knows if there is a bottom. I prefer the stable transition that creates an extraordinarily high powered incentive to invest in domestic productive assets and innovation, without creating moral hazard throughout society that rivals Wall Street via a debt jubilee. Only by taking gold parabolic can we reliquify the system and align incentives to value creation without massive moral hazard.
"I prefer the stable transition that creates an extraordinarily high powered incentive to invest in domestic productive assets and innovation" Many people prefer this route but is it going to be an option? I wish I could be more optimistic.
To all the people who think we can just grow our way out of this or that you can count on predictions from government looking ten or more years into the future you are wrong. To all the people who think the worlds surging population will not become a problem because of new energy sources I say, wake up! Anyone with even the slightest mechanical knowledge will tell you that solar panels, wind mills and such take a lot of energy to build and often are maintenance intense.
Both these complicated systems have a short lifespan and require a great deal of energy to be expended in just keeping them up and running. Carry no illusions the days of cheap energy are behind us and not only has the low hanging fruit been picked it has been eaten. Sadly, if we look back we will see much of this energy was allowed to go to waste. The article below looks into the cost of failing to plan long-term and questions if collectively mankind is incompetent.
http://brucewilds.blogspot.com/2014/12/does-peter-principle-apply-to-mankind.html
One of the best article I have read so far.
I would like to add something.
Inflation is permanent. There are more people with more needs everyday. Thus, cost of production may move down due to oversupply of people. But the prices will continue to move up as long as the trend continues.
What happened as this article amply explains is that oversupply of money was created to produce oversupply of goods needed. To prevent the prices crashing down, more oversupply of money was created to buy up the goods produced.
The goods were sold to people who did not really need it or could afford. thus creating huge debts.
Sooner or later, the debt will not get paid. And more importantly the money printed to play this game will hemorrhage left and right. (Talk about sub prime or high yield bonds). In US it already has been happening and money is stolen big time and hidden in various off-shore vehicles.
Big Accounting and Consulting companies and credit agencies have been asking for huge fees to create bogus credit ratings and advisory. Some had paid paltry sums when get caught. More and so many more have got away scott free. I am talking about millions of smart guys, who got a piece of this action from a corrupt or colluding US Government.
Now, all those smart guys are trying to find a way out and stay out during the shit storm that is about to blow over US.
I don't care about all the theories of new economy and new financial engineering. Nothing will change this effects from basic human nature.
Sooner or later, somebody has to pay up all this debt. Or some big promises such as retirement benefits will have to be cancelled. A few Governments may have to be collapsed to push the bills to them. There are not much good options.
The last thing that is possible is some super financial enginering that can change the debt into something else. US is still the worlds biggest debtor nation.
For a while I was one of the people concerned we would see the world tumble into a massive deflationary cycle as debts went unpaid and credit collapsed. Now I have come to think inflation is getting closer every day.
This would mean the "major deflationary period" is mostly behind us and it has not been disinflation as much as inflation being kept in check because of several factors, including where the money flowed, weak demand, dropping velocity of money, and the onetime benefit of lower interest rates. Before you discount the possibility that we will move directly from where we are into stagflation then hyperinflation please consider that hyperinflation paves the way for governments and those in power to make a transition to a replacement currency and a reset of the whole system.
http://brucewilds.blogspot.com/2014/11/deflation-i-think-not.html
I think you have a unique period here where two monumental forces oppose each other. On one side is the giant inflationary force of current monetary policy. On the other side is the giant deflationary force of governments wrecking and garroting economies. So zero interest rates and money creation meet versus stalled Keystone, Obamacare and perhaps a $15/hr minimum wage.
I am not sure which wins out, even in a crash. If the economies heat up, well inflation wins. If governments choke off economic activity, deflation wins. Who knows how it goes but the insane are in charge of the asylum. They know about as much about economics as brain surgery.
This article does a great job of pointing out not all economic growth is created equal. If you spend money but afterwards have little to show for it, you have wasted it.
Sadly much of the money America "invest it itself" each year through government spending and programs falls into this category. We need the right kind of economic growth, growth that is sustainable, with a purpose, well directed, and that has long lasting benefits. A great deal of our problems come from the poor quality of what we call growth. More on this subject in the article below.
http://brucewilds.blogspot.com/2013/08/the-wrong-kind-of-growth.html
If you don't want RIP you get RAP.
Otherwise its Fascist crap and that....reminds us of "the great dictator" Adenoid Hinkeltrap.
The supreme irony could be that the Pax Americana hell's kitchen proposes us RiP, RAP and then Hinkeltrap !
Fractional Reserve Ponzi Financing may have hit a brick wall but is not over. It can continue if you incorporate niave backward economies into the system thereby leveraging their untapped resources, labor and reserves. How about Ukraine, tribes in ME, Mongolia, Cuba, Venezuela, etc. This Keynesian snake has many heads and is capable of encircling the globe before we suddenly collapse into a Black Hole.
Good thing Obama is in the fourth quarter as water boy. His followers will learn his real role in the world, quite soon!
Geopolitics of North and South
Are we not in fact inflating our way out of our debts? Debts created witha weak dollar and then paid off with a strong dollar? Was this not always the plan? If Japan loans us $1 equivalent in yen when dollar is weak, when we pay it back with strong dollar, each of our dollars pays back more of their yen. In effect, when they devalue their currency are they not also devaluing their investment returns? Can someone explain how this works? Im trying to get my brain.around it, but my ass keeps getting in the way. If I understand it correctly, if the currency value spread widens more so than the differential at the time the loan was made, and you are on the right side of the trade, you win. Right..? This makes me sad........
"Needless to say, that urgently needed cleansing was stopped cold in its tracks when Bernanke tripled the Fed’s balance sheets in less than a year after the Lehman crisis, and then officially adopted ZIRP and the greatest spree of debt monetization in recorded history."
Now the urgently needed cleansing is even bigger than it was last time. Bank bankruptcy laws were just changed to reflect that fact, along with the coming Citi derivatives tax payer bailout.
This is an especially good article and what I read ZH to find once in awhile.
In my economics club well over a decade ago we had an engineer turned amateur economist who argued about the "real" economy versus a paper economy. Even from the free market types which were most of us, he would get a bit of skepticism.
The basic idea was the same that is here in this article. There is a real economy of real goods and services (which corresponds with real wages and productivity) and one on paper. The paper one is really what the government and I would say, Wall Street are focused on. The paper one allows traders to make paper wealth which will translate into real stuff for them in the short run. It also keeps governments afloat with their collectivist deficits. It is the paramount one for them and they have the power right now.
The rest of us live mostly in the real economy where the good things like wages are down and the bad things like prices and debt are up. I suggest that most people instinctively feel this. That is why when you see traders with party hats and poppers celebrating it, you don't see real people celebrating it because there is very little correlation.