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Don't Just Follow The Money - Follow The Income
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Lies are no substitute for truth and fantasy is no substitute for reality.
Follow the money is a good start--but what matters going forward is income, and most especially, net income and disposable income. Debt is important, money/capital flow is important, but when push comes to shove, all that matters is having net income/disposable income: to service debts, to invest, to spend.
Debt can be substituted for income, but not for long. Central banks have been playing a game for six long years: by lowering interest rates and making credit available, the central banks have encouraged households, enterprises and governments to substitute borrowed money (debt) for income.
This works as a stop-gap, but debt accrues a funny thing called interest that eventually eats the borrower alive. Income is (supposedly) the driver of stock valuations, the financial foundation of rental property and the ultimate arbiter of solvency: households, enterprises and governments whose income cannot meet their debt and spending obligations are insolvent and eventually declare bankruptcy.
The reality that all that really matters is income incentivizes gaming income. Corporations and their officers/stockholders benefit greatly when net income appears to rise smartly, as rising income boosts stock prices and the value of stock options.
So it's no wonder that S&P 500 Profits Are 86% Higher Than They Would Be Without Accounting Fudges. Fudging operating income with accounting trickery pays such huge dividends, why not indulge in a bit of financial flummery? The chances of anyone questioning the sleight of hand is nil, since the entire financial sector relies on systemic flummery for its profits.
Following the income leads us to wonder how the 99% of households whose income is declining in real terms can borrow and spend more every year.
Following the income leads us to wonder how OPEC oil exporters will manage with $250 billion less income in 2015, after suffering a $200 billion decline in 2014.That's a total of $450 billion of income that's vanished in a few years.
Since OPEC accounts for about 40% of global oil production, that means oil producers globally will earn $1 trillion less than they did in 2012.
Such primary industrial income has a multiplier effect, which means every $1 of oil income that vanishes means $3 down the spending chain vanishes as workers earn less or are laid off, the stores that depended on oil workers' spending take a hit, and so on down the line.
Thus the reality is the loss of income isn't merely $1 trillion--it's more on the order of $4 trillion, as the multiplier effect subtracts income from everyone in the food chain who depends on oil revenues in a secondary or tertiary role.
Income matters for another reason. Most households, enterprises and governments spend the vast majority of their income in one way or another. If income declines by 5%, that may not appear like much. But if the household, enterprise or government spends 98% of its income on debt service and essentials, that 5% decline puts them in the red by 3%.
It may be possible to borrow more to fill that gap--in essence, borrowing money to pay the interest on previous debt--but this is a financial Black Hole, as there is less income to service rising interest payments.
Once the gravity of insufficient income pulls the household, enterprise or government over the event horizon of insolvency, implosion is inevitable.
So when you read about ever-rising corporate profits, ask if that's pro forma or actual net income. When the government claims its deficits are declining, check whether its debts are rising faster than the media is reporting.
When your neighbor seems to be spending more, ask if they're making more net income, or simply borrowing more.
Borrowed money is no substitute for net income. The global economy has been living a Grand Lie for the past six years: that borrowing money can be substituted for declining income, and bogus accounting can be substituted for real net income.
Six long years of lies has persuaded many that the lies can be sustained for another six years--or even sixty years.
But lies are no substitute for truth and fantasy is no substitute for reality. The erosion of net income will eventually matter, maybe not in six years but within six months.
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In other words everyone has to one degree or another been doing an Enron whereby borrowed money was shown in the books as income. What could go wrong?
imagine? we all walk around with promissory notes pointing to debt instead of assets. when we offer them we are saying I will give you this debt for those assets. and now that asset prices are down, the debt is valued higher than the assets! talk about ass-backwards. the world has been hypnotized by sorcerers, and I mean that quite seriously.
Sooooo.....this is what Total TransformationTM looks like.
If your income is not a million dollars per year, you are just middle class.
Promissory Note Value less than Assets - Which is why the traditional debt to equity ratio was max of 35% until 1982 and Michael Milken began the conversion to junk bonds and virtually eliminating AAA status as a corporate objective and policy
only solution for creditors is LTV less than 50% - cash flows are being imploded - inflation wont make it up - massive problem - the top insurers BEST rated will survive - the rest: banks/ intermediaries / pension funds / etc will be marginal.
ex: Caesars cash flow take a look - BK is inevitable
And you have to have commerce to have income......not in a Communist system slave
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http://newworldorderg20.wordpress.com/
2 points for flummery.
The vast majority of the people in charge of the world today are truly out of touch with reality. My guess is that many of them grew up in very unhappy houses. They learned to lie and to spin, because the world they were able to create in their minds gave them the illusion of control, and allowed them to forget the reality they were escaping from. These people were then smart and charismatic enough (smart and mentally balanced are not the same thing) to go on to impose their fictitious worldview on others. Reality is so scary for these people that they cannot conceive of working with it. Even if there were a reality that were advantageous to them, they would lie anyway, because the behavior is so deeply coded at this point... escape reality, escape reality, escape reality, must escape reality! It's very sad. Debt is the perfect tool for them, and they will not let it go until they are killed by it and those they have hurt using it. They deserve what's coming to them, but they have never been happy people to begin with, and all they have done is spread their unhappy lives out to include a huge number of people around them. This has to end. If you don't fear reality (we're a lot materially poorer than we think, but that doesn't mean we have to be spiritually poorer), keep preaching it. It'll be the fastest way to end this insanity.
I don't particularly agree with the distortion beginning with the upbringing, it is more of a conscious decision. In the US most politicians are lawyers....need I say more?
your are naive......genetics and environment only sources for condition - lying easily with conviction at its best is --- congenital
ie:from birth
Willia Safire the best American wordsmith in the last 100 years - NYT - said: Hillary Clinton is a "congenital liar" in 1997 editorial page NYT - meaning she has no real choice she is programmed.
You and I don't really disagree. Ability to lie is largely congenital, I agree with that. But the motivation to deploy that ability? That's another question, and it suggests upbringing. In the end the result is the same. They are programmed to lie, one way or the other, and until they are removed, they will continue to do so, right to the bitter end.
On Bloomberg Perkins claims that his boat is lifting all up. While in complete denial of inequality.
Has to be the worst of the worst people on earth. The disparity continues on. Denial is not truth.
charles hugh smith is out of his element. he is not an oil analyst and has little history of analysis in this area.
in other words, he really has no clue what he is talking about with regards to opec.
the revenues and dynamics of political beggaring in the middle east are not financial equations they are oligarch's jockeying with one another.
everything is political and the only black swan is a group of thugs or princes who rebel against their OWN emirati/kings in the gulf states. and even if they did, like suharno in indonesia, it's likely ALL an american setup for one prince to take charge of the others.
the game of oil wells is the game of thrones. and this CHS analysis sucks my socialist sweaty grundle.
Proof that most professional money managers are nothing but idiots who should look for jobs digging ditches.
"Media And Wall Street Economists, By Refusing To Ask Obvious Questions, Have Left The American People Unprepared"
Jonathan Gruber said before congress: Americans are stupid - only honest guy in the Obama show - he did not go far enough
they are Exceptionally stupid / lazy / accepting / with an overwhelming composition of Shit for Brains - the solution for which is only an .....Enema!
"Debt can be substituted for income, but not for long. Central banks have been playing a game for six long years: by lowering interest rates and making credit available, the central banks have encouraged households, enterprises and governments to substitute borrowed money (debt) for income."
Here's how it falls apart...
http://www.globaldeflationnews.com/jaguar-inflation-a-laymans-explanatio...
The percentage of personal disposable income spent on household debt service is currently 10%, down from a pre-recession high of 13% and lower than at anytime in the last 25 years. Not surprising, because people deleveraged during the recession and haven't shown much inclination to releverage, perhaps due to the doldrums of household income and a declining labor participation rate.
http://research.stlouisfed.org/fred2/series/TDSP
The article above seems to say the opposite.
Thank you. Very interesting. Maybe we peons aren't so dumb after all.
Credit standards tightened during that time frame as well as the waves of forclosures/bankruptcies wiping out the debt, so I wouldn't assume all of the downward shift (or even most of it) is consumer-driven deleveraging.
Lower incomes would drive the percentage up, but that hasn't happened, so people may indeed be intentionally deleveraging as well as the banks forcing them to.