This page has been archived and commenting is disabled.
The Unraveling Is Gathering Speed
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Debt saturation and debt fatigue = diminishing returns on central bank tricks.
Does anyone else have the feeling that things are not just unraveling, but that the unraveling is gathering speed?
Though quantifying this perception is more interpretative than statistical, I think we can look at the ongoing debt crisis in Greece as an example of this acceleration of events.
The Greek debt crisis began in 2011 and reached a peak in 2012. The crisis was quelled by new Eurozone/IMF loans to Greece, and European Central Bank chief Mario Draghi’s famous “whatever it takes speech” in late July, 2012.
The Greek debt crisis quickly went from “boil” to “simmer,” where it stayed for almost two-and-a-half years. But no one with any knowledge of the gravity and precariousness of the situation expects the latest “extend and pretend” deal to patch everything together for another two years. Current deals are more likely to last a matter of months, not years.
We can discern the same diminishing returns in Federal Reserve/central bank interventions, as the initial rounds of quantitative easing pushed stock and bond markets higher for years at a time, while the following interventions generated lower returns.
What factors are reducing the positive effects of intervention and causing increased volatility? Let’s start with the engine behind every central bank/state intervention and every “save” of the status quo: debt.
Debt Brings Forward Consumption & Income
Debt has one primary dynamic: borrowing money to consume something in the present brings forward consumption and income. Economists describe trading future income for consumption today as bringing consumption forward. And since debt must be repaid with interest, bringing consumption forward also brings income forward.
Let’s say we want to buy a vehicle with cash, and it will take five years to save up the lump-sum purchase cost. We forego current consumption to save for future consumption.
If we get a 100% auto loan now, we get the use of the vehicle (present-day consumption) and in exchange, we sacrifice some of our income over the next five years to pay back the auto loan. We brought consumption forward, and in essence took future income and brought it forward to pay for the consumption we’re enjoying today.
We can best understand the eventual consequence of this dynamic with a simplified household example. Let’s say a household has $2,000 a month in net income, i.e. after taxes, healthcare insurance deductions, etc., and rent (or mortgage payments), basic groceries and utilities consume $1,000 of this net income. That leaves the household with $1,000 in disposable income.
At the risk of boring finance-savvy readers, let’s briefly cover the difference between net income and disposable income. Net income can be earned (wages, salaries, net income from a sole proprietor enterprise, etc.) or unearned (dividends, interest income, rents, etc.) Net income can only rise by making more money or reducing taxes. There are limits to our control of these factors. In a stagnant economy, it’s tough to find better-paying jobs and harder to demand higher wages from employers. Since governments’ expenditures are rising, taxes are also going up; it’s difficult for most wage-earners to cut their total tax load by much.
Disposable income is more within our control, as it is fundamentally a series of trade-offs between current consumption and future income/savings: if we choose to consume now, we have less income to save for future consumption or investments. If we sacrifice consumption today, we have more money in the future for consumption or investing. If we borrow money to consume today, we’ll have less future income because a slice of our future income must be devoted to pay down the debt we took on to consume today.
If our household borrows money to buy a vehicle and the payment is $500 per month, the household’s disposable income drops from $1,000 to $500. If the household takes on other debt (credit cards, student loans, etc.) with payments of $500 per month, the household’s disposable income is zero: there is no money left to dine out, go to movies, pay for lessons, etc.
In effect, all of the future income for years to come has been spent.
The Only Trick To Expand Debt: Lower Interest Rates
There are only two ways to support additional debt: either increase net income, or lower the rate of interest on new and existing loans to free up disposable income. Suppose our household refinances its auto loan to a much lower rate of interest and transfers its credit card debt to a lower-interest rate card. Huzzah, each monthly payment drops by $100, and the household has $200 of disposable income to spend on current consumption or on more loans. Let’s say the household chooses to buy new furniture on credit with the windfall. This new consumption brought forward pushes the monthly debt payments back up to $1,000.
This additional debt-based consumption profits two critical players in the economy: the state (i.e. all levels of government) and the financial sector. The state benefits from the higher taxes generated by the sales, and the financial sector profits from transaction fees and the interest earned on the new loans.
The household’s consumption and debt rose as a result of lower interest rates, but there is a limit on this dynamic: lenders have to charge enough interest to service the loan, reap a profit and compensate shareholders for the risk of default.
If lenders fail to properly assess the risk of default. They will be unprepared to absorb the losses incurred as marginal borrowers default en masse. This places the lender’s own solvency at risk.
Using this trick to enable further expansion of debt thus creates a systemic risk that borrowers will over-borrow and lenders will not have sufficient reserves to absorb the inevitable losses as marginal borrowers default and other borrowers suffer declines in disposable income that trigger further defaults.
In other words, the trick of lowering interest rates yields diminishing returns: the more debt that is enabled, the thinner the margins of safety and thus the greater the systemic risks rise in direct correlation with rising debt loads.
The Trick To Increase Consumption: Punish Savers
While lowering interest rates increases disposable income and enables an expansion of debt, it also generates a disincentive for households to forego current consumption by saving disposable income rather than spending it. Near-zero interest rates actively punish savers by reducing the interest income earned on low-risk savings accounts and certificates of deposit (CDs) to near-zero. Savers are pushed into either investing in high-risk markets that benefit the financial sector or by spending rather than saving—a choice that benefits the state, as more spending generates taxes for the state.
The Global Expansion Of Debt Has Increased Systemic Risks
These are the basic dynamics of the entire global economy: interest rates have been pushed to near-zero to punish savers and encourage expansion of debt-based consumption. But this inevitably leads to a reduction in disposable income and current consumption, as debt brings forward both consumption and income.
Once the borrowers have maxed out their borrowing power, there is no more expansion of debt or additional debt-based consumption. This is known as debt saturation: flooding the financial sector with more credit no longer boosts borrowing or brings consumption forward.
Those who brought their consumption forward can no longer add to present consumption, as their future income is already spoken for.
That’s where the global economy finds itself today.
This vast expansion of debt on the backs of marginal borrowers and the expansion of risky investments has greatly increased the systemic risk of losses from defaults arising from over-extended borrowers.
No wonder every attempt to further expand debt-based consumption is yielding diminishing returns: net income is stagnant virtually everywhere in the bottom 95% of the populace, and further declines in interest rates are increasingly marginal as rates are near-zero everywhere that isn’t suffering a collapse in its currency.
The diminishing returns manifest in three ways: the gains from each round of central-bank tricks are declining, the periods of stability following the latest “save” are shrinking and the amplitude of each episode of debt crisis is expanding.
That the unraveling is speeding up is not just perception—it’s reality.
In Part 2: The Coming Age Of Confiscation, we’ll look at the threat of the other fundamental driver of rising instability: the broken-logic TINA (there is no alternative) mind trap our global leaders are mired in. As the trajectory of the status quo worsens for all the reasons discussed above, government will become increasingly heavy-handed in appropriating the remaining wealth in order to keep things stumbling on just a little bit longer -- justifying its actions by claiming it "has no other choice".
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
This essay was first published on peakprosperity.com, where I am a contributing writer.
»
- 38353 reads
- Printer-friendly version
- Send to friend
- advertisements -
Oh,..we are well past unraveling.
we are in full blown CRISIS if you ask me.
4TH TURNING,.........BITCHEZ !!!!!11111
Bring it bitchez.
Everywhere there are clueless people going about their business as if nothing is wrong at all. These are the people we have to thank for the fact that this charade continues to this day. Debt is now outpacing the ability of investment to create wealth. Think about that for a moment. Not only is the game over, but there are a lot fewer chairs than players when the music stops.
Post 1945:
First they allowed people to produce, because the elite were getting enough benefit from the production to increase their wealth and status at an acceptable rate (through taxes and profits on selling to two continents they had just destroyed through all-out warfare).
Then, after 1971 when that wealth production was no longer possible at a rate which fed the rich and powerful as much as they liked, they switched to using "credit" games to convince people to give them the money people had saved. Peope began living on credit as their masters sucked up all the actual rights to tangible wealth.
This game is reaching its conclusion. People are catching on to the con that is being played on us.
The next step? Flat-out confiscation. They are no longer able to convince people to give them the wealth, so next they will take it.
This is guaranteed unless some external force intervenes (=revolution or war).
Looked at from this point of view, it's not that complicated.
One doesn't put cheeze in a mouse trap because they love mice.
Indeed. The cheese is ALWAYS free in a mouse trap.
what is this unraveling that you speak of? clearly it is untrue otherwise i would have read about it on the Huffington Post. such a fine, objective, and unbiased publication.
No, the cheese is only free if you can get it without setting off the trap, or are the next mouse. Otherwise, it's very expensive, it just looks free.
^^^ Mice don't even like cheese [as much as they like peanut butter]...
On that subject:
Why isn't there any MOUSE FLAVORED cat food? [Maybe it's just because granny doesn't like it]... I dunno, I'm not that smart... I'm pretty STUPID actually [spending my time wondering why CHEESEpopes] control the global interconnected power nodes of:
- MSM
- banking
- political activism
- jurisprudence
Which is facilitated by a very simple concept of: "Give me control of the money supply [aka "printing press"] YADA YADA"...
& whereby, said concept stems from an extraordinarily underwhelming asymmetric demographic population representation base... [to the point of being mathematically IMPOSSIBLE].
Not far from that donkey meat lasagna those big box belugas were feeding on.
I'm not interested in cheese.
Too busy picking up dimes in front of the steamroller.
Which pretty much sums up everything anyone needs to know about you, your tribe, & your value system, [from a humanity standpoint]... Thank you for sharing your insights...
http://www.newsmax.com/Finance/StreetTalk/Pimco-Downgrade-Economic-Growt...
Its NICKELS you want, man.
At least they have real melt value.
https://www.youtube.com/watch?v=BzSsLiBPX38
Pointer is to: "Full Metal Jacket Private Pyle part 1 of 3"
Don't waste your time.
US debt and unfunded liabilities are at least $1,270,000 per taxpayer and rising at $70,000 per taxpayer per year. USA is Greece on steroids but it would be so unpatriotic to point that out.
Besides, Yellen can fix everything.
Forward.
Actually, it has been REAL, unfashionable American Patriots who HAVE been pointing that out, and because they are getting nowhere with the race-obsessed, politically-correct Marxists, prepping accordingly.
The crash won't be fun, but the bright side is that America's credit rating will be destroyed for a generation.
That should put an end to borrowing for a while.
Signs of Greece are becoming more and more apparent here.
lots of young formerly middle class white girls turning to prostitutes
lots of shattered dreams
lots of young people with no future.
it's coming.
im jewish, and it scares me because alot of people are going to wake up one day and realize they've been fleeced by the zio-cons once their wealth is stolen.
Taxes go up when government expenditures rise? Can't government just underwrite a bond and have the Federal Reserve buy it?
Yes. While Seignurage is not common practice now, it has traditionally been used as one means of funding a government.
Your simplification doesn't make sense. The idea that debt brings forward consumption is that it only views the situation from one individual. If a car is available to be consumed, it can be consumed by a person who gets a loan, or one who saved money, but unless there is already a car it is not available to be consumed. No amount of debt can change that.
The only person I know who has just paid cash (wrote a check) for a car is myself. I am 65 and know a lot of people.
"The Greek debt crisis quickly went from “boil” to “simmer,” where it stayed for almost two-and-a-half years."
True but this latest round has to do with Syriza backpeddling out of everything New Democracy party agreed upon. Contrary to what the author thinks this political crisis is the cause of the economic crisis.
Nice article. I've been watching the market's today and they are very frothy, apparently the Algo's aren't playing nicely but it'll still be awhile before the oscillations go completely chaotic....
I thought ludicrous speed was the top end?
"Space Balls"
getting hard to separate the noise from the chaos.
Chaos is when the noise takes over and we'll need just a few more things to go sideways for things to become uncontrollable....
Perhaps if we followed along the path of the Austrian economists we would be a lot better off.
How is it that you elect a bunch of fools that are corruptable and you end up with systemic financial problems down the road.
But just have faith in who you elected, they know what they are doing!
We have the promise of bread and circus's to lure the foolish but eventually we run out of bread and the circus leaves town.
What about those of us who knew what these utterly inept, conniving, racist, corrupt Commie motherfuckers were up to, even BEFORE they were on the ballot?
You know, prior to smug, condescending Europeans congratulating us for our wisdom and sophistication in electing the Affirmative Action POS.
Just throw on some unraveled threads and keep on trucking.
The "GREAT UNWINDING" commences. Next the "GREAT RESET".
Quite the link showing up on Drudge right now.
https://www.scribd.com/fullscreen/258605525?access_key=key-dS1ZhJJ4ZgCH6...
This type of FTX is dual-use. It can be used domestically to quell opposition by detaining (military definition, not civil) opponents of a political power structure.
Many of these teams are trained in insertion, capture of 'enemy combatants' and rendition to holding areas.
An FX of this size is certainly.....interesting.
I would like to unravel the crooked banks! Then Washington corrupt lobbying mechianism!
anyone remember when the bankers abrogate all discpline on mortgages? Well...welcome to the currencies/stock market version.
Going to end less well than the Housing Burst....
But on the good side...the major banks will be destroyed!!!
molon labe
Meanwhile........10 day chart of DOW shows higher highs & higher lows...an algo's wet-dream
I'll let the pictures speak for themselves. ~ truly staggering~ Don't forget this was $2-T ago and doesn't include any >unfunded liabilities< or derivatives.
US Debt Ceiling Visualized: Stacked in $100 dollar bills @ $16.394 Trillion Dollars
When I first read Atlas Shrugged in the 70's I thought it wild fiction. Now I feel I am reading it again as I read the news crawl.
I know with me the low interest rates have me more living for today, as the real value of my net worth is being eaten away. Party now, be poor later.
Stack now and you won't be so poor later.
That is my current plan. What else can you do? As the article points out, it is either the market (which WILL crash), or more debt (usually a bad move). Me, I have what I call my 3B plan Beans, Bullets, Bullion. The feds can't tax what I have in my safe.
Hope everyone is ready to see what The Road looks like...