Tag: economics

The 12-year period of credit disinflation appears to be over as the global economy is finally beginning to visibly deflate despite the best efforts of the central banks:

Canadian inflation went negative for the first time since the 2009 recession after the coronavirus lockdown put the brakes on the world economy.

Consumer prices dropped 0.2 per cent in April from the same month a year earlier, Statistics Canada reported Wednesday from Ottawa. That’s down from a 0.9 per cent annual rate in March and 2.2 per cent in February.

The report adds inflation to the list of economic indicators showing an historic impact from the coronavirus pandemic. Collapsing gasoline prices have pulled inflation lower over the past two months, but weak demand should keep inflation at extremely low levels for an extended period, and could even spur worries about deflation. That will keep pressure off the Bank of Canada to ease up on accommodation efforts any time soon.

From March, prices fell 0.7 per cent, matching the largest one-month drop since 2008.

Deflation is actually good for consumers and the real economy, since their money is worth more, but it is very bad for those who are dependent upon living off the debt of others. Which, of course, is why the banks and the financial elite have been desperately fighting to delay the deflation and credit crash that has been inevitable since 2008.

Debt jubilees are coming. Intellectuals of both the Left and the Right are already calling for them. In fact, one of the primary reasons behind the systemic overreaction to Corona-chan, as well as the constant goalpost-moving concerning the lockdowns, may be the cover provided for the ongoing economic crash.

Just months after almost everyone on Wall Street worried that a recession was just around the corner, Goldman Sachs said a downturn is unlikely over the next several years. In fact, the firm’s economists stopped just short of saying that the U.S. economy is recession-proof.
– December 31, 2019

The hilarious thing is that the downturn had already begun. This sort of thing is why I meant it very literally when I wrote the chapter entitled “No one knows anything” in RGD.

It is also why destroying your nation simply because the economists tell you that doing so will make everyone rich is a horrifically bad, horrifically stupid idea.

The China-China-China crowd has been predicting the collapse of the Chinese economy for years. But is it actually as vulnerable as they believe? More than a few international economists simply don’t buy that assumption:

RT talked to economists to find out if Beijing may have foreseen the economic crash and about the Chinese government’s response to it.

“Nobody, including Beijing, could have foreseen the depth and gravity of this pandemic, specifically the cryptic transmission parameters by which the Covid-19 virus spreads. It is truly a once-in-100-year pandemic event,” said Sourabh Gupta, senior fellow at the Institute for China-America Studies.

According to him, China was better prepared because “it is in a much healthier fiscal position compared to most advanced economies and many emerging economies too.”

Gupta explained that the central government’s debt level as a percentage of GDP is fairly modest, which means there is ample space on the government’s balance sheet to ramp up policy support. Also, consumers’ debt levels relative to income is modest, so they are not overleveraged either and can open up their wallets.

He was echoed by Andrew Leung, international and independent China strategist, who said “China is always very long-term strategy-minded” and is better prepared for any crisis thanks to its state capitalism. “The state can direct massive funds and mobilize businesses and people more effectively than the West. The same capability was demonstrated during the Asian financial crisis of 1997-98 and the world financial crisis of 2008-09,” said Leung.

According to Temur Umarov, an expert on China and Central Asia at Carnegie Moscow Center, every country is in a different economic situation, so their response to the coronavirus pandemic also differs. While numerous economic stimulus packages were announced by some countries, China has focused on recovery of domestic consumption, as well as on help for small- and medium-sized businesses, he said.

All the analysts agreed that neither China nor other countries could have foreseen the magnitude of the current crisis.

“There is a tsunami of negative views about China as a result of the spreading coronavirus crisis. America’s bad-mouthing has also helped. But China remains by far the second-largest economy, bigger than the rest of the BRIC countries combined,” said Leung. He noted that many more countries have China as their largest trading partner than the United States.

I think the Chinese economy is better poised to survive the crisis simply because it is less financialized, which is another way of saying that it is less fictional. And I would remind those who cite the failed predictions concerning Japanese preeminence of the 1980s of three things.

1. The US economy of 2020 is not the US economy of 1985. The USA of 2020 isn’t even recognizably American anymore.
2. China is not Japan.
3. The Japanese economy of 1985 was very heavily financialized. Most of its massive real estate wealth was as fictional as the Silicon Valley wealth is today.

Oil prices have gone negative in Canada:

And there it is… May WTI just traded below zero for the first time ever (trading below NEGATIVE $40 per barrel)… There was a small bid right into the settlement at 1430ET leaving the May contract to settle at negative $37.63.

Interesting times, my friends. Very interesting times.

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.