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The Economy is in Liquidation Mode
by Keith Weiner
If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?
You milk it.
You spend nothing on capital improvements, slash maintenance, and reduce operating expenses. There’s no return on investment, so you cut to the bone and wring out as much cash as possible. When a business has no future, you operate in liquidation mode.
Your rink generates cash flow, but this is no profit. It’s simply the conversion of accumulated capital into present income. You are consuming capital, almost literally eating the business.
I have used a family farm as an example to paint a clear picture of capital consumption. Imagine using your farm, not to grow food, but to swap for it. You tear down the barn to sell the oak beams for flooring, auction off the back 40 (acres), put the tractor on Craigslist, then finally sell the farm and house. All to buy the produce you can no longer harvest.
Let this sink in. The farm’s falling crop yield can’t feed you any longer, but you still need to eat. You’re liquidating the farm merely to buy groceries.
The conventional view encourages you to be grateful that the purchasing power of the farm is high, that it trades for a big stash of food. While it may be true that you can eat for years on the proceeds, it’s small consolation for the loss of what had been an evergreen income.
Roller skating was just a minor entertainment trend. Only rink owners were harmed when it ended. By contrast, we would all be in big trouble if the same phenomenon happened to farming. And unfortunately it did. Not to farms—but across the whole economy, a decent return on capital is disappearing. Interest has gone the way of big hair and disco music.
Businesses borrow to expand production. The additional production increases profits. A portion of this profit is what pays interest. The problem is that fewer and fewer businesses can find decent opportunities to expand. If they could, they would be borrowing aggressively at today’s dirt-cheap interest rate. Their borrowing would push interest up. They’re not, and the proof is the fact that interest has been falling for three-decades.
The Federal Reserve is now pumping mass quantities of credit into the market, while productive demand for credit is lethargic. Borrowing—much of it for financial purposes such as share buybacks and acquisitions—now depends on the Fed and its artificially low administered interest rate.
The Fed operates on the theory that lowering interest stimulates the economy, at the cost of causing prices to rise. This is dubious, at best. However, so long as purchasing power holds steady, the Fed feels it has latitude to keep doing it. In its vain attempt to stimulate the economy, the Fed is actually suffocating it.
For centuries, people living in Western Civilization have been accumulating capital. They have not simply subsisted, and left the world the same as when they entered it. They have been creating more than they consume, passing on new wealth to their children.
The Fed’s falling interest rate has slammed this process into reverse. It has put the entire economy into liquidation mode. It has forced people to consume their capital.
This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.
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Great explanation in simple terms! My grandfather's farm in Arkansas during the times of the Dust Bowl and Great Depression was gradually sold off, bit by bit until it was gone. He was forced to consume the farm. First sold off some of the work horses and equipment. Tried novel crops and business. Then sold possessions. Then parcels of land. Finally ended up loading his family into their car and driving to California to pick fruit.
I don't know whether to up or down arrow this comment. Damn! Thats a sad story. But I always have the same question when I hear a story like this. How can something go so bad for someone that they need to sell eveything, and yet at the same time go so good for someone else that they get to buy everything?
Suppose an interest rate i was offered by the government which reflected an annuity which was the tax revenue per year on that property forever forward, and a person was allowed to pay 1/i, per dollar, the up front cost of future taxation forever in one lump sum, and never be taxed again.
Then the gum-ment would get a pot of money now,, the present value of future taxation, and the property owner would be inoculated against future tax raises. (given they keep their end of the contract). IF we ever get hyperinflation, the government will try to raise the tax rates to keep up, and on ordinary folks on a fixed income, this is tantamount to confiscation but the people who have paid up front at a some fixed rate would be theoretically safe.
The government, desperate for funds NOW, might actually offer this deal. What do ya-all think?
If the deal went with the property, it would just be an additional asset which could be financed up front and the value would stay with the proplerty. voila a new asset class of tax exempt property, and with todays low interest rates, might be tempting. The government is mighty stupid to see away future revenue streams. Look at chicago so sold the rights to future parking meter revenue for a lump sum from some German company. the Gov can't really raise rates cause they could not roll over their existing debt, so maybe this is a way for some part of the finances of the country to free themselves from the claws of the government. Then the reverse mortgage would really work cause the tax bufden if often worse than the mortgage,
and if you could finance the whole package, well maybe.
You don't inherit a farm from your father, you borrow it from your children.
Yeah, your Millennial children? Not.
Good article, BUT ...
Quote: "For centuries, people living in Western Civilization have been accumulating capital. They have not simply subsisted, and left the world the same as when they entered it. They have been creating more than they consume, passing on new wealth to their children."
Yes 300 years ago, at the start of the Industrial Revolution, the World seemed limitless still and so did the economic growth necessary to the financial system, but NOW even die-hard believers in "the wonders of modern civilization" have some inkling that we live on a finite planet, with ever-diminishing resources.
In short. We are fucked and nothing our ancestors did is any longer possible. Nice whilst it lasted, I do not enjoy being 72 and going down hill, but I saw the 'best' of what could be had and I sure as hell do not envy young folks.
PS By "ever-diminishing resources" I specifically mean easily-extracted, e.g. whilst there will always be oil and gold in the ground, they become increasingly costly to extract
We? The welfare state has grown exponentially in the last century. I won't miss them, their multitude of tats and their FU attitude. They're just as mad about being here. Ask Obama, he's one of them.
To the American People! To Hell with useless talk and criminal politicians! Take action and save America:
(1) Destroy the privately-owned Federal Reserve System;
(2) Destroy the POSEDs* and POSERs**;
(3) Destroy the rich who are waging Class Warfare against YOU;
(4) Destroy the fraudulent, credit-based money and banking system;
(5) Destroy the system of rigged elections that the rich use to keep their Uni-Party POSED and POSER whores in office;
*POSEDs—Pile Of Stinkin' Excrement Democrats
**POSERs—Pile Of Stinkin' Excrement Republicans
Umm, O.K. And --- ?
How to get hard assets and kill the banks; introducing "National Credit Card Debt Day" & "Credit Card Default Day". Anyone with a face gets as many credit cards the banks will give and on a certain day; max them out with hard assets, then never pay it back. Banks die, economy stimulated, and the people have the last laugh.
I figger if 45% of american human beans, in 30 years, can only find ONE lying, cheating, incompetent, cheesy thighed, puffy faced hermaphrodite----disguised as a woman, a sucker for some smooth silvery tongued serial rapist, abuser, and power mad egomaniac who was disbarred, impeached, and fined , bill clinton, to run for POTUS, then there is no hope to get a dozen people to act in concert to achieve any goal whatsoever.
The idea is great, but the execution is impossible.
well put, i see the same thing managing a trust, you have unde performing assets, which you can sell but it doesnt solve the problem of earning income, you just swap one nonperforming asset for another (money is the prime non performing asset) then you chase yield which implies risk, and then you can start a new business of some type, even greater risk, and you can make long term investment decisions, such a building a house, but who knows where the market for these things will be after you are finished, you might build a house and find its only worth half of what it cost you to build.
the only strategy i do know that works is using cash to offset income which is flowing out, like building a solar system to offset an electric bill, although its possible electric rates could go down, not likely. too bad there isnt a water use system that would make you self sufficent. jimmy rogers has been trying to sell farmland as a means to hedge the next crash, it didnt work in the first depression, and now a lot of the farmland where they grow your food is in mexico which has a prohibition on foreign land ownership.
so it aint easy
about foreign land ownership in mexico - this is something i read a couple months ago:
"Fideicomisso/Bank Trust
The lower house of Mexico's congress voted Tuesday to loosen longstanding restrictions on foreigners buying property along the coast and the nation's borders. Many of you will know that for decades there has been a law that foreigners could not legally own property near the coast or the borders.
Instead, foreigners could get a Bank Trust (called a fideicomisso) by which the bank is the legal owner of the property but you lease it for 100 years. This also roles over every year so you perpetually have a lease on the property for 100 years.
The fideicomisso, in our minds, was just a way for the government and banks to get extra money (about $500/year for the fideicomisso). The fideicomisso was also a bit of a nuisance as it just added an extra step to the process of purchasing property in Mexico and added an extra 4-8 weeks to the purchase process.
While the legislation removing the fideicomisso hasn’t fully passed yet we are happy to see that this is a topic of discussion as any way to make it easier and/or cheaper to buy property in Mexico will greatly increase the amount of potential buyers and create a more robust market."
There is already a prohibition on land ownership in the US. It is called Fee Simple title. In otherwords, if it is taxed in perpetuity, you don't own it.
Wiener is for usury. Surprise.
Humans have typically operated their economies in liquidation mode. Western Civilization provides us with perhaps the most extreme example of "liquidation mode" economic practice and ideology.
Up until recently, the effects were typically local, on a local scale. Forests were cleared, farmlands exhausted, fisheries destroyed, wildlife wiped out, etc. Generally, it has been regarded as "profitable" to cut forests, "harvest" wildlife, exhaust mineral deposits, etc.
According to the prevailing economic ideology, there was no "cost" in building the ('free', natural) inventory, and no "cost" in reducing the inventory (fisheries, forests, etc.). Hence, the seeming "profitability".
Nonetheless, on a global scale, the human impact has been more or less "sustainable", ...up until recently.
But with the recent surge in human population, and the latest increases in "production" capabilities, the global biomass is being depleted faster than it is replenished.
What was formerly unsustainable locally, local liquidation,
has now become aggregated to be unsustainable globally, global liquidation.
I was in business or self employed in some fashion since the late 70's.
I wouldn't open a road side stand to sell shit sandwiches now for fear I might make more than the minimum to pay, NOT ONLY, SS & MEDICARE TAXES but the obamanation tax they call obamacare. <----- yes this country is close to collapse and I refuse to participate in trying to keep the last pillars from toppling.
It needs to go ahead and collapse before I'm too old to dig out of the rubble.
The US is where the USSR was in then 80's. Our 'comrades' in academia and the media told us they were superior in every way! I actually had a teacher who took one of those fake tours they offered. Sure enough, when the price of oil collapsed, it only took a few years for the whole house of cards to collapse.Then came the stories about the black market keeping things alive for years. There's already a good chunk of the real, not Wall Street, US economy in the black market. I'm sure Obamacare has increased that amount, maybe doubled it. Wal-Mart(US version of Gum department store) doesn't restock it's shelves as fast as it used to either, sounds very familiar.
So why is demand for credit lethargic? It’s because the consumer is maxed out with debt and is in survival mode saving for an anticipated rainy day.
They sense the upcoming financial crisis as they see the 23% unemployment and the 20% annual food price inflation.
We’re now going to inherit a world whose population numbers and economic activity have been pumped up by the criminal central bankers with their fiat currencies.
The entire global population along with the vast surplus of extra people put here by the population bubble are going to be in survival mode – spending only on necessities like food and the energy to cook it.
The entire globe is going to get a rude lesion in the folly of counterfeiting fiat currencies. The natural laws of economics are going to be as cruel as the laws of nature to those who have chosen to ignore history.
All that is holding back the doors of hyper-inflation, is the illusion that the debt will be paid back.
"...going to be in survival mode – spending only on necessities like food and the energy to cook it. "
Um, I'm pretty sure there are already many millions who live in that survival mode. And about a hundred million more who can only survive due to .gov handouts.
Excess population, you say?
https://www.youtube.com/watch?v=AVQ5Jk5qWWE
@sam - You hit it on the head. I've got excellent credit, and I'm bombarded with loan offers. I throw them all out. I don't want any debt. It's just a wealth transfer program from me to them. And you are right: the lesson is coming.
At least you won't have to worry about getting eaten by Cecil the Lion.
A very strong case could be make that a slew of new tools added the the central banks' tool boxes have masked and distorted the economic landscape. This can be seen in the explosion of derivatives, more debt leveraging, and in the growing carry trade. It is a fact that unproven tools can produce damaging results when not prudently applied still efforts to "extend and pretend" seem almost unlimited.
Many people thought Modern Monetary Theory (MMT) was to be our salvation and a tool to even out economic cycles but instead it has morphed into a massive dept machine. While those in charge appear undaunted by what is occurring the fact is by a series of off-book and backdoor transactions they have transferred losses from the banks onto the shoulders of the people. The article below explores the lessons to be learned from this experiment.
http://brucewilds.blogspot.com/2015/08/lessons-from-financial-world.html
You just described how the TBTF's rigged everyhing with the housing bubble... and why the SEC , IRS and .GOV is trying to keep them afloat by refusing to bind them to the laws... Every "REMIC" created 1999-2007 is falsely created , no trusts , no ownership by the investors ... it's a knot that cannot be unwound , just cut... and when the time comes there will be massive disruption but it'll be better than going through several more decades of the same before it happens.
Oroborous bitchez !!!!!!!1111
Ouroboros.
Greek spelling is a bitch.
Milking the dead carcass of roller rinks. That's also happening in hotels.
I stayed at a Quality Inn recently for $65/ nite and the good rate was offset by a towell rack that was nearly falling off the wall.
Obviously management was cutting out maintenance expenses to milk the rooms for income with no regard for the long term health of the hotel.
Most of the public I know believe a crisis may be coming but the government will just muddle through as in the 70s or 2008. They don't understand that our debt is maxed out and we're at the end of the fiat road.
It's as if no one understands the history of money and collapsing fiat currencies because it was censored out of our news and education. The public doesn't understand that all fiat currencies eventually reach terminal and max debt and run out of road.
Haha, ever been to a Knight's Inn?
Huh? Fiat currency? Max debt? Default and economic oblivion?
Sounds like a conspiracy theory. /s
The public isn't just ignorant, they're programmed to believe certain things are paranoid or conspiracies. So even smart people can remain blind to the obvious realities right in front of them, until it hits them upside the head and it's too late. We can't have too much sympathy for them.
The anaologies were good, but where are the actual case histories? You provide the first one.
Too lazy to google it yourself -- who has time to educate you -- not me
The main problem in the US is that we have off-shored many factories. When you are a service-based economy that is suffering from wage deflation it's not a good idea to build or buy anything unless you can make a nice quick profit.
Offshoring subsidized by US deficits. W/o these deficits, we'd have nothin' to trade(US bonds) for all the cheap China junk. Yes, your taxes help to take your jobs.
...
I hear Charlie Murphy kicked your ass.
You know, the problem with ZH is every article is breathlessly expounding how
currencies are not backed by anything, that they are manipulated, that
institutions like the Fed are not helpful -
YES WE KNOW THAT THE CURRENCIES ARE FIAT
WE KNOW THEY ARE NOT BACKED BY ANYTHING
WE KNOW THE FED IS BAD
WE FUCKING KNOW ALL THAT ALREADY....
jeez...
So why the fuck do you come here then?
To bitch about each article in all caps?
Well at least ZH is pointing it out, unlike the MSM.
DavidC
we will soon be a decade into zirp QE 4 is coming; China just shat her pants... but its ok sheeple everything is just tickety boo... now get back to flipping burgers useless eaters.... oh and did you hear the kardashins have a roller skating rabbit - focus on that while we rape your ass.
www.teamramgold.com
Another buy gold article
great post
Sooo.... I should buy a farm and build a roller rink?
I'm confused.
No, buy a video game arcade or a DVD rental place.
The drive through beer stores are folding up.
It's still tourist season, and hot.
Teach the cows to rollerskate and charge admission.
Who doesn't want to see rollerskating cows?
taxes/regulations/licensing/insurance/predatory monopolies-all a multitude of reasons capital is now worthless in the USA.
For 200 years seeding capital into the USA was the most profitable business decision on the planet earth-because of the limited government harnessed to the service of individuals via the Bill of Rights. Those freedoms were upheld under rule of law that was reliably uniform..
This has all been dissolved. The apologists in DC and on TV all make noises about things like "we're still the cleanest dirty shirt in the laundry"
Until capital becomes valuable-yes interest rates will remain in the basement. The powers that be aren't aware they haven't "a lifetime" ahead of them if interest rates remain sub-5%. Ben Bernanke has "boasted" interest will remain suppressed the rest of his life.
The inability of the average Joe to earn a return because of all the above is going to assure a chaos they cannot even begin to imagine.
Potemkin economy, everything looks shiny, but there's nothing behind it......
When the economy is sluggish, let's increase taxes and fees, and some new regulations, that'll do the trick.
--Your .gov