Tag: economics

Which will mark the post-2008 transition from credit disinflation to actual deflation:

We didn’t really need any more confirmations. In recent weeks, as the US economy came to a screeching halt because of the coronavirus pandemic, we have seen banks take over $20 billion in reserves  in anticipation of a looming default wave (a five-fold increase if not nearly enough based on historical precedent), Moody’s predicting that as many as 30{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of Americans with home loans – about 15 million households – could stop paying their mortgages if the U.S. economy remains closed through the summer or beyond, with the number of households that have already stopped paying their loans soaring by 1,496{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} in just six weeks, and even JPMorgan in the process of shutting down its entire net interest margin origination platform, by getting out of new loans and HELOCs and boosting the standards on new loans.

These are all clear signs that a wave of mass defaults has started and is about to break all across America as tens of millions of household suddenly lose their jobs.

2008 is when the post-war debt system finally broke. Since then, the Federal Reserve has frantically been kicking the can of consequences harder and harder, until now, when the can finally didn’t move. All of the various estimates are meaningless, but we can be confident that the current system will be replaced, we simply can’t know what the successor system is going to be as it will largely depend upon how the massive pool of existing bad debts are written off.

UPDATE: For those of you who are, apparently, still too stupid to grasp the obvious, THIS IS WHY USURY WAS HISTORICALLY BANNED IN WESTERN SOCIETIES. Because once the debt cycle starts, it ALWAYS ends this way, sooner or later. The only reason it took this long to go terminal is because, for the first time in history, the entire global economy was turned into collateral supporting the credit inflation.

Encapsulated in a single picture.

The coronavirus death toll in the U.S. — now topping 23,000 — skyrocketed as families continued to huddle in their homes uncertain of what’s next, while an unthinkable number of more than 16 million people have now filed for unemployment amid an economy grappling with the shutdown.

Yet, somehow, the stock market has managed to push higher. In other words, at least those fortunate enough to own stocks had something to smile about. Democratic strategist Justin Horwitz summed up the disconnect with this tweet that went viral across Twitter TWTR, +2.68{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} :

As you can see, that’s CNBC’s Jim Cramer talking about the rally in the market while the chyron points out the grim reality of the historic job losses.

One commenter captured much of the response on social media by saying, “The Dow is not the economy. It is a giant government sanctioned Ponzi scheme for the wealthy.”

Another pointed to the fact that, according to Federal Reserve data, 84{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of stocks owned by U.S. households are held by the wealthiest 10{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of Americans — essentially Wall Street vs. Main Street.

The financial industry doesn’t lubricate the economy. To the contrary, it is both a huge parasite and a massive anchor that drains more than one-third of ALL corporate profits out of the real economy. To put this in perspective, the total amount of all retail trade profit was $154 billion in 2018. The total amount of all transportation and warehousing profit was $55.6 billion. The total amount of all food, beverage, and tobacco profits was $50.5 billion.

The total amount of financial profit was $448.3 billion, and that almost certainly understates it. If you want to know what is wrong with the economy, the answer is “the transfer of profit to the financial institutions” which is done through ever-expanding debt. This is why either a debt jubilee or mass defaults and the total collapse of the US economy is absolutely inevitable.

Earlier today, I banned the commenter “map” for his ignorant attempt to “correct” those who actually understand how money is created. And on that note, if, at this point, you are going to try to argue with me on core economic concepts, you simply will not be permitted to comment here. The fact that I have correctly predicted two out of the last two serious economic crises – and done so in a timely manner – is sufficient justification for not putting up with idiots opining in ignorance on the basis of their outdated college textbooks. I am perfectly familiar with their beliefs about everything from comparative advantage to the money supply to the woefully inaccurate belief that banks keep 10 percent of their deposits in reserve.

In any event, back in 2014, the Bank of England helpfully explained how modern money is actually created in an article entitled Money Creation in the Modern Economy (pdf). If you don’t understand that money is debt, read the whole thing. And if you still don’t understand that after reading the article, read it again.

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.  In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses…. Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach….

Lending creates deposits — broad money determination at the aggregate level

As explained in ‘Money in the modern economy:  an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy.

Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. Of the two types of broad money, bank deposits make up the vast majority — 97{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Commercial banks create money, in the form of bank deposits, by making new loans.  When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes.  Instead, it credits their bank account with a bank deposit of the size of the mortgage.  At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

Just as taking out a new loan creates money, the repayment of bank loans destroys money. For example, suppose a consumer has spent money in the supermarket throughout the month by using a credit card.  Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. If the consumer were then to pay their credit car bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.

Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.

Now, perhaps you will understand why I am a deflationista. And so are you, if you believe that any of the current outstanding debt will be written off or otherwise go unpaid, even if you don’t realize that you are. Debt forgiveness and bankruptcy-related debt write-offs are the literal destruction of money, and since deflation is a reduction in the money supply, any reduction in the amount of debt must necessarily be deflationary.

NN Taleb is right about letting the airlines fail:

“Planes will fly with new owners.”

Famed author and statistician Nassim Nicholas Taleb has trained his sights on billionaire Richard Branson, urging the UK government to let the airline owned by the “tax refugee” to go bankrupt. Branson has had a torrid fortnight, drawing the ire of politicians of all stripes for putting all Virgin Atlantic staff on unpaid leave because the carrier has been walloped by the Covid-19 pandemic.

The tycoon has led the calls for a state-sponsored bailout of the aviation sector, but plans to use the funds to cover fixed costs, rather than pay its staff.

That goes for the banks too.

The God-Emperor may – I stress MAY – have already nationalized the Federal Reserve, if these complaints from Bloomberg are on point:

The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be….

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump. [emphasis added – VD]

In 2008 when something similar was done, it was on a smaller scale. Since few understood it, the Bush and Obama administrations ceded total control of those acronym programs to then-Fed Chairman Ben Bernanke. He unwound them at the first available opportunity. But now, 12 years later, we have a much better understanding of how they work. And we have a president who has made it very clear how displeased he is that central bankers haven’t used their considerable power to force the Dow Jones Industrial Average at least 10,000 points higher, something he has complained about many times before the pandemic hit.

When the Fed was rightly alarmed by the current dysfunction in the fixed-income markets, they felt they needed to act. This was the correct thought. But, to get the authority to stabilize these “private” markets, central bankers needed the Treasury to agree to nationalize (own) them so they could provide the funds to do it.

In effect, the Fed is giving the Treasury access to its printing press. This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election. Why stop there?

The concerns about inflation – which as a deflationista I don’t take very seriously anyhow – are obviously far less important than the potential prospect of the USA taking control of its own money supply again.

It’s quite common for stupid and self-righteous conservatives to object to student loan debt cancellation on the basis of “personal irresponsibility”, moral hazard, and the fact that the student signed the loan contract. But as Zippy Catholic points out, Thomas Aquinas conclusively answered that objection a long time ago.

Accordingly we must also answer to the question in point that it is by no means lawful to induce a man to lend under a condition of usury: yet it is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need. Thus too it is lawful for a man who has fallen among thieves to point out his property to them (which they sin in taking) in order to save his life, after the example of the ten men who said to Ismahel (Jeremiah 41:8): “Kill us not: for we have stores in the field.”
– Thomas AST II-II, Q78, A4):

Since borrowing at usury is inherently scandalous, it probably depends on the extent of the need. But you’ve got pretty wide moral discretion to hand over your property to thieves, so you’ve probably got similar prudential latitude here.  As a matter of intrinsic morality, usury – insisting on interest when making a mutuum loan – is a sin on the part of the lender, not the borrower.

The lender is the wrongdoer, not the borrower. Therefore, there is no moral hazard created by cancelling student loan debt, unless the government then proceeds to bails out the lender. It is bailouts, not debt cancellations, that are both immoral and morally hazardous by nature.

It’s not often that I agree with socialist economics, but in this case, my only disagreement with Michael Hudson’s argument is that we are quite obviously already in a depression. It’s too late to avoid it, but a debt jubilee – as commanded by the Bible – is both a way to end the depression and free the productive classes from the chains of a relentlessly rapacious and entirely anti-productive financial elite:

Even before the coronavirus appeared, many American families were falling behind on student loans, auto loans, credit card balances and other payments. America’s debt overhead was pricing its labor and industry out of world markets. A debt crisis was inevitable eventually, but covid-19 has made it immediate.

Massive social distancing, with its accompanying job losses, stock dives, and huge bailouts to debt-strapped corporations, raises the threat of a depression. But it doesn’t have to be this way. History offers us another alternative in such situations: a debt jubilee. This slate-cleaning, balance-restoring step recognizes the fundamental truth that when debts grow too large to be paid without reducing debtors to poverty, the way to hold society together and restore balance is simply to cancel the bad debts.

The word Jubilee comes from the Hebrew word for trumpet — yobel. In Mosaic Law, it was blown every fifty years to signal the Year of the Lord, in which personal debts were to be cancelled. The alternative, the prophet Isaiah warned, was for smallholders to forfeit their lands to creditors: “Woe to you who add house to house and join field to field till no space is left and you live alone in the land.” When Jesus delivered his first sermon, the Gospel of Luke describes him as unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of the Lord, the Jubilee Year.

Until recently, historians doubted that such a debt jubilee would have been possible in practice, or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler “raised the sacred torch” to signal the amnesty.

It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis) and communities would have been prone to attack from without.

The parallels to the current moment are notable. The U.S. economy has polarized sharply since the 2008 financial crisis. For far too many, the debts in place leave little income available for spending on goods and services or in the national interest. In a crashing economy, any demand that newly massive debts be paid to a financial class that has already absorbed most of the wealth gained since 2008 can only further split our society.

The way to restore normalcy today is a debt writedown. The debts in deepest arrears, and most likely to default, are student debts, medical debts, general consumer debts and purely speculative debts. They block spending on goods and services, shrinking the “real” economy. A debt writedown would be pragmatic, not merely a moral sympathy with the less affluent.

Financialization does not help the economy by making it more efficient. To the contrary, it makes the economy far more fragile while destroying the underlying society for the benefit of a few foreign invaders.

It’s fascinating to see people preaching against “hoarding” when they have no problem with debt-funded purchases. Both involve pulling the demand curve forward, but debt is considerably worse than hoarding because you’re making the purchases with money you don’t have.

And yet, people have no problem when it’s done in the much more harmful manner, mostly because they don’t understand the underlying mechanics or the inevitable consequences. Whereas, they are capable of grasping the cause-and-effect resulting in an empty shelf at the local supermarket.

Five percent, 24 percent, it’s hard to say exactly:

Goldman Sachs predicts the coronavirus crash will be bigger than it originally thought. In a Friday research note, the bank projected a 24 percent drop in the U.S. GDP in the second quarter — a stark revision from its prediction of a five percent drop earlier this week. 

Even that’s not going to be enough to clear the outstanding debt issue. But the important thing is not the size of the estimated contraction, it is the fact that the margin of error over the course of less than a week is so massive.

Meanwhile, the federal government is about to prevent Americans from travelling out of the country. Curiouser and curiouser….

The State Department is preparing to issue the strongest travel advisory it can, two individuals familiar with the decision told Politico Thursday. It’ll tell Americans abroad to either return to the states or prepare to shelter in place — a Level 4 advisory, those sources said.

China and Mongolia are currently the only countries subject to a State Department level 4 travel advisory due to spread of the new coronavirus. The rest of the world is under a level 3 global health advisory, which suggests travelers reconsider their plans. The escalated level would instruct Americans to halt all travel out of the country; Secretary of State Mike Pompeo has approved the measure, Politico reported.

They will never fix anything no matter how sternly they are warned about “the consequences next time”. After the last round of bailouts, all they did was double down on what they were doing prior to 2008 and continue their financial rapine without restraint. All the paper wealth everyone “has” is nonexistent, it’s just multiple claims on the same underlying property that allows the financial elite to skim off the incessant churn and turn it into stronger property claims. And that is why every debt-based system always collapses over time, as the current financial system is in the process of doing.

Before sunrise this morning, a normally calm and very senior Wall Street banker texted me: “All hell is about to break loose. No safe havens.” His text could not be ignored, coming as it did on the morning after hedge fund manager Bill Ackman’s 28-minute cri de coeur to CNBC yesterday, during which he essentially demanded that the U.S. immediately shut down for 30 days to stop the spread of the coronavirus. What was he talking about, I asked….

Now, apparently, the scourge of interconnectivity is back. Companies are drawing down their lines of credit with abandon. The senior banker seemed to be especially concerned about the portfolios of private equity companies, which are by definition mostly piled with debt and therefore at higher risk of default as the economy contracts. The big worry now among private equity types is that the $1.5 trillion or so of so-called “dry powder”—money that is sitting unused in their coffers or on-call from their limited partners—will now be needed to shore up existing portfolio companies with acute cash needs, rather than for new investments, which would be the preferred course of action in a more normal time, especially with stock prices down around 35{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} from their February highs. The big worry currently is that the limited partners of private equity funds have enough of their own problems that now they won’t be able to honor their capital calls as they start coming in from the general partners.

That’s yet another scary thought: the domino effect of one private equity portfolio company after another getting into trouble could well be a further negative catalyst to an economy already on the brink of collapse. If one private equity portfolio company after another slips into bankruptcy because limited partners don’t make good on their capital calls, that could mean hundreds of billions more of creditor and shareholder losses.

This is why usury was banned by Christendom and is prohibited by the Bible. I warned everyone back in 2008-2009 that if the banks were not permitted to fail, the next failure was going to be more difficult. It’s really not hard to see these things coming, as the patterns of the crisis developing are easily recognizable. And the bigger the bank, the more internationally interconnected it is, the more likely it is to be taken down by the “unexpected” collapse of the system which will likely begin with the failure or bailout of a massive, well-respected institution like Deutsche Bank.