Tag: economics

I got your “recovery” right here

The Federal Reserve Z1 report came out on Friday and the only surprise was that the decline in Household debt has not kept pace with the decline in Financial debt.  However, the pattern to which I alerted you in RGD has continued; Federal debt has grown an astounding 48% since Q2 2008 while overall debt has fallen by 0.6%.  Since G (government spending) is a primary component of GDP, this proves that there is no private economic growth, there is only a massive amount of government borrowing and spending being used to temporarily prop up the economy. 

Note to inflationistas.  Remember that the formal M2 money supply is only $8 trillion, so the central bank manages about 13% of the debt+M2 money supply in the US debt-money system.  Even with the refusal to recognize tens of thousands of home mortgage defaults, (which is why household sector debt hasn’t declined as much as one would expect), private sector debt has fallen $2.5 trillion.  As Robert Prechter has explained, debt is deflating faster than the central bank and federal government can inflate.  This is exactly the process described in RGD as the Great Depression 2.0 scenario.

A few notes. First, notice that the 2010 Q1 decline in financial sector debt is HUGE. At -4.4%, it’s more than TWICE the -2.15% average quarterly decline since the sector debt growth turned negative in Q1 2009. Second, this is even bigger when you realize that 2%+ quarterly debt growth was normal for decades. Second, the rate of federal debt expansion is slowing. It was only 6% in the previous quarter, down from nearly 10% the second half of 2008. As I have repeatedly written, the federal strategy of replacing private debt with public can only work in the very short term; 6% of $8 trillion is less than 4% of $15 trillion. Third, the WSJ reported last week that the relatively small 1.75% cumulative decline in household debt is ENTIRELY the result of debt defaults, not reductions in the level of debt. So, we can expect the -0.44% average quarterly decline in that sector to shrink faster in the coming quarters. Fourth, the inability of state and local governments to even maintain their debt levels at their 2% pre-2008 norm is what prompted Obama’s call to provide $50 billion to them today. So, federal debt isn’t merely supposed to cover the decline in financial and household sector debt, but now has to make up for the lack of growth in state and local government debt too.

Needless to say, it simply is not going to work. My guess is that the public perception of the Great Depression 2.0 will take effect when household sector debt declines by more than 2% per quarter. RGD readers will remember that I expect this to take place in Q4 2010.

“The stimulus failed”

In which I am not exactly surprised to be proven correct again:

Originally, I intended to just clip out the statement from Keynesian economist Jeffrey Sachs that “the stimulus failed,” which Joe Scarborough had to dig to get, but the entire segment is worth viewing. First, Sachs confirms — on MS-NBC, no less — that the Obama administration and Democrats in Congress had no strategy for long-term growth. The stimulus was a collection of short-term minor stimuli, combined with liberal hobby horses that Democrats had ridden for twenty years. Scarborough tries to defend Keynesianism from the Keynesians, but the failure can’t be separated from the philosophy.

The amusing thing about the failure of the stimulus isn’t that its failure was predictable, but rather that the shameless excuse-making of the Neo-Keynesians regarding its failure was also not only predictable, but predicted too.

And note all the talk about double-dip recessions, coming right on schedule in Q2 2010. Remember, as per RGD, the Great Depression 2.0 talk isn’t supposed to kick off in earnest for another two quarters.

Wait, so pulling demand forward doesn’t work?

Housing Double Dip a Done Deal

Everybody take a nice long look at today’s Pending Home Sales Index from the National Association of Realtors, because it’s just about the last positive picture we’re going to see for a while. Yes, the index rose even more than expected, as buyers rushed in to take advantage of the home buyer tax credit. And yes, those numbers will show up in Existing Home Sales in May and June, but then look out.

This index is based on contracts signed in August, and that’s how the credit was set up; you had to sign your contract by April 30th and close by June 30th in order to get your $8000 if you’re a first time buyer and $6500 if you’re a move up buyer.

And then came May, traditionally the height of the spring housing season. Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.

That means real organic buyers are exiting in droves.

This is precisely why I haven’t conceded anything about my home price predictions for 2010 even though prices have been rising instead of falling this year.* Notice how the language is beginning to sour, as “V-shaped recovery” has been gradually supplanted by “double-dip” and worse terminology. The so-called recovery has been nothing but a statistical illusion caused by carefully targeted Federal intervention designed to make things look better in an attempt to fool the economy into stabilizing itself. While this may sounds incredibly stupid, it’s actually the correct action if you happen to subscribe to Keynesian economic theory, based as it is on “animal spirits”.

The problem is that animal spirits are a symptom, not the disease. It is the amount of debt that is the issue, the economic cancer that has metastasized throughout the entire global economy. Getting the patient pepped up on financial coke and methamphetamine might make him feel invincible for a while – see the equity markets – but it’s not going to forestall his demise. It should be interesting to see what the estimated 40-percent drop in housing demand will have on the markets this fall.

*It seems I was correct not to concede anything, because in looking up the current NAR data to see how far prices had to fall this year in order to salvage my prediction, I discovered that my prediction of national median existing home prices falling below $165k before the end of 2010 had already been proven correct! NAR reports US prices as having fallen to $164,600 in February; they have since risen back up to 173,100. We’ll have to wait until December 31st to see who is more correct at the end of the year, Lawrence Yun at $179,500 or me at $165,000. However, at this point, I wouldn’t count out the possibility of a collapse below $140,000.

Contra Nietzsche and Mises

I don’t think atheists who strive to argue in support of the existence of non-religious objective values, regardless of whether they are based on philosophy or science, have any idea how weak their case is from the atheist perspective:

“There are no such things as absolute values, independent of the subjective preferences of erring men. Judgments of values are the outcome of human arbitrariness. They reflect all the shortcomings and weaknesses of their authors.”
– Ludwig von Mises, Bureaucracy

It seemed strange to me why atheist arguments related to objective morality were always so crudely simple and vaguely familiar until I realized that this is because I had seen very similar arguments before in a different context. As it happens, the current atheist attempts to determine an objective basis for morality are following exactly the same path that economists of the 18th and 19th century trod in attempting to determine the objective basis of value. They are literally 200 years behind the best efforts of economists from Adam Smith and David Ricardo to Karl Marx and Thorstein Veblen to find something that does not exist, and due to their general ignorance of economics – Michael Shermer excepted – they have no idea that their quest is destined for complete failure.

I can only conclude that sometime around the turn of the next century, the marginal utility of morality will become the dominant paradigm for a time prior to the whole quest being abandoned in response to a series of massive and inexplicable moral depressions.

The original Dr. Doom speaks

Marc Faber pronounces his verdict:

Central banks will never tighten monetary policy again, merely print, print, print.

Bubbles used to be concentrated in one sector or region in the 19th century, but off of the gold standard this concentration has ended.

“The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”

“Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this.

US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US.

“You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004.

Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked.

However, last year Economist Gregory Mankiw articulated the position which according to Faber essentially echoes that of Fed #2 Janet Yellen and pervades much of the Fed generally, that “The problem is that people are saving money instead of spending, and we have to get the bastards spending to keep the economy going,” so the key is to inflate the money supply at something like 6% per annum. Thus, Faber says “As far as I’m concerned, the Federal Reserve will keep interest rates at 0, precisely 0…in real terms”.

I understand and respect his case, but for reasons I have delineated in RGD, I do not think the hyperinflation scenario will proceed as Faber assumes. That being said, I agree that the central banks will leave their interest rates at zero; the more important question is if that will ultimately have any relevance to anything during an ongoing debt-deflation process. Notice that contra both Keynes and Friedman, very liberal monetary policies are not instigating growth of the money supply.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

Wake up and smell the depression

Some silly and formerly-rich women clearly do not understand the dynamic nature of investments:

Michelle Young was supposed to face her estranged husband Scot in the High Court this week, but has had to postpone the hearing while she finds further funding. For the last three years, the couple has been embroiled in a bitter fight over his alleged multi-million pound fortune which she says he is hiding and he claims he no longer exists.

Last December, Mr Young was ordered by the court to pay his wife £27,500 a month pending their divorce settlement but he has since been declared bankrupt. At their last court appearance, Mrs Young said she was down to her last £13,000 of savings and owes £660,000 in unpaid legal fees.

The guy has been declared bankrupt. The money is gone. Clearly his creditors understand this, so what sort of cretin finds it hard to grasp the concept? You don’t make £400 million without leverage, so it’s not at all hard to figure out where the money went. Profit by the leverage, die by the margin call.

Crackpot credentials

VDH considers the other European volcano.

Few wanted to listen when it was pointed out — well before the Greek meltdown — that on key questions of demography and immigration, the future of the European Union was bleak. The very idea that, in historical terms, socialism, agnosticism, pacifism, and hedonism were not only interrelated and synergistic, but also suicidal for civilization, was considered crackpot.

I seem to recall a certain cowardly atheist who thought I belonged in the category. I didn’t mind that characterization in the least because the reality is that most intelligent and independent thinkers are considered crackpots and lunatics by the unthinking masses, right up until the moment that they are proven correct.* And, of course, at that point, everyone who previously dismissed them immediately begins to pretend that what they had once characterized as “crackpot” was never anything out of the mainstream.

Today, the smarter progressives and equalitarians find themselves in a state of intellectual shock. The foundations of the erroneous beliefs for which they have so confidently thrown away centuries of history and tradition are crumbling before their eyes and they have literally nothing upon which they can fall back. The less intelligent ones, of course, have no idea that anything out of the ordinary has been happening in the diverse areas of economics, genetic science, and government pensions and so they continue to blithely advocate their empty progressive, equalitarian, big government ideas even as a world that has been built upon them teeters on the verge of complete collapse.

This most certainly does not mean that a freer, more traditional, more capitalistic world is in the making. The opposite is more likely true, at least in the intermediate term. But the truths of these matters will be known and the seeds of future freedom find fertile soil in which to grow.

* A relevant quote from Mises happened to pop up today: “Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. . . . The mark of the creative mind is that it defies a part of what it has learned or, at least, adds something new to it.”

As predicted

The mainstream media has gradually moved from discussing a jobless recovery to the “Great Recession” and is now beginning to contemplate a Great Depression 2.0.  Robert Samuelson is among the first:

It is now conventional wisdom that the world has avoided a second Great Depression. Governments and the economists who advise them learned the lessons of the 1930s. When the gravity of the financial crisis became apparent in late 2008, the response was swift and aggressive. Central banks like the Federal Reserve and the European Central Bank dropped interest rates and lent liberally to threatened financial institutions and rattled investors. The United States and many countries approved “stimulus” programs of tax cuts and additional spending. Panic was halted. A downward spiral of falling private spending and rising unemployment was reversed. The resulting economic slump was awful. But it was not another Great Depression. The worst has passed.

Or has it? Greece’s plight challenges this optimistic interpretation. It implies that celebration is premature and that the economic crisis has moved into a new phase: one dominated by the huge debt burdens of governments in advanced societies. Comparisons with the Great Depression remain relevant — and unsettling. Now, as then, we may be prisoners of deep and poorly understood changes to the world economic system.

As I explained in the book, the problem is debt combined with the fact that neither Keynesian nor Monetarist economics place much significance on it.  Even now, you will find some stubborn neo-Keynesians insisting that debt is good, that it cannot possibly be the root of the problem.  As Karl Denninger has repeatedly shown, their attempts to explain the situation demonstrate little more than their ignorance of simple mathematics as well as political economy.

The massive sovereign debts can never be repaid.  Nor can many of the private and corporate debts.  So, once the burden of servicing them becomes too great, they must be eliminated with either default or hyperinflation.  The frantic efforts of the various Western governments to shovel nearly $1 trillion into the maws of the desperate bankers is little more than an attempt to buy a little more time in the futile hope that the magical revival of Keynesian animal spirits will trump the inexorable mathematics.

So bankrupt indeed

Perhaps Helicopter Ben needs to tell Fannie Mae to relax and enjoy the grass shoots and GDP growth:

“When Treasury provides the requested funds, the aggregate liquidation preference on the senior preferred stock will be $84.6 billion, which will require an annualized dividend of approximately $8.5 billion. This amount exceeds our reported annual net income for each of the last eight fiscal years, in most cases by a significant margin.”

This, in English, means “We do not earn enough in a quarter to pay the dividend – that is, the interest on the borrowed money.”

So it’s not just homeowners who can’t pay their mortgages anymore. By the way, I don’t mean to worry anyone unduly, but I seem to recall that FNMA was the last big investment made by Ben Bernanke prior to this weekend’s Euro stabilization gambit. I’m beginning to think we’d be better off turning the Federal Reserve over to Goldman Sachs. After all, their traders didn’t lose money on a single business day during the first quarter. They must be really good!

Contagion

It looks like Portugal is coming to the plate, with Spain on deck:

Portugal
2-Year: 797 basis point spread over US Treasury
5-Year: 427
10-Year: 363

Spain
2-Year: 260
5-Year: 187
10-Year: 118

By way of comparison, the UK/US spread is 29.2 on the 2yr. The Greek/US spread is around 1840.