Tag: economics

China chooses deflation

This announcement by the Chinese government should indicate a near-term end of the global asset bubble, as it seems unlikely that the deflationary contagion can be restricted to China, particularly given the situation in Ukraine.

China is braced for a wave of industrial bankruptcies as its slowing economy forces companies with sky-high debts to the wall, the country’s premier has said. Premier Li Keqiang told lenders to China’s private sector factories they should expect debt defaults as the world’s second largest economy encounters “serious challenges” in the year ahead.

Speaking after the annual session of the national people’s congress, Li Keqiang said: “We are going to confront serious challenges this year and some challenges may be even more complex.” He told lenders to China’s private sector factories they should expect debt defaults.

Li said China must “ensure steady growth, ensure employment, avert inflation and defuse risks” while also fighting pollution, among other tasks. “So we need to strike a proper balance amidst all these goals and objectives,” he added. “This is not going to be easy,” he said.

Li’s warning followed the failure of Shanghai Chaori Solar Energy to make a payment on a 1bn yuan (£118m) bond last week. The default was the first of its kind for China and widely seen as pointing to the end of 11th-hour government bailouts for troubled enterprises.

I’m not terribly surprised that China has decided to bite the bullet sooner than the USA, Japan, or the EU. Their banks are considerably less politically powerful and they have no need to worry about maintaining their social spending in order to appease the electorate.

The failure of easy debt-money

Remember, the size of the contraction tends to be determined by the size of the expansion:

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements.

The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion in the same period, according to data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S.’s gross domestic product.

Borrowing has soared as central banks suppress benchmark interest rates to spur growth after the U.S. subprime mortgage market collapsed and Lehman Brothers Holdings Inc.’s bankruptcy sent the world into its worst financial crisis since the Great Depression. Yields on all types of bonds, from governments to corporates and mortgages, average about 2 percent, down from more than 4.8 percent in 2007, according to the Bank of America Merrill Lynch Global Broad Market Index.

This is really remarkable considering that the USA’s total credit market debt has only increased from $52.9 trillion to $59.0 trillion. The reason that so few people recognize what is happening is that the scale is an ORDER OF MAGNITUDE bigger than the Great Depression.

Irony

Perhaps if he had said something to this effect back in 2008, the problem might have been addressed, if not necessarily averted:

George Soros, the billionaire investor, believes the banking sector is a “parasite” holding back the economic recovery and an “incestuous” relationship with regulators means little has been done to resolve the issues behind the 2008 crisis.

“The banking sector is acting as a parasite on the real economy,” Mr Soros said in his new book “The Tragedy of the European Union”.

“The profitability of the finance industry has been excessive. For a while 35pc of all corporate profits in the United Kingdom and the United States came from the financial sector. That’s absurd.”

Mr Soros outlined how the problems that caused the Eurozone economic crisis remain largely unresolved.

“Very little has been done to correct the excess leverage in the European banking system. The equity in the banks relative to their balance sheets is wafer thin, and that makes them very vulnerable. The issue of “too big to fail” has not been solved at all.”

I don’t recall Mr. Soros opposing the 2008 banking bailout. It’s not as if the intrinsically parasitical nature of the finance industry is news to anyone of Mr. Soros’s stature and occupation. No economy can expect to grow as long as a significant percentage of the profits produced are skimmed by the monetary middlemen, for the obvious reason that the middlemen produce nothing.

China’s export crash

We already know that China is due for a serious debt-crash on the basis of its successful post-2008 bubble inflation. The Zerohedge chart demonstrates the difference between US asset-disinflation and Chinese asset-inflation, all of which is debt-based.  And M2 is up by 1,000 percent since 1999. But that’s the warning; the first sign that the end was in sight was when a small bank threatened to go into default a few months ago. It was promptly bailed out and the entire matter was swept under the rug, ignored by pretty much everyone who doesn’t read Zerohedge.

However, it’s a little hard to ignore a miss of this magnitude:

Plenty of excuses out there for this evening’s colossal miss in Chinese exports (-18.1% YoY vs an expectation of a 7.5% rise) mainly based on timing issues over the Lunar New Year (but didn’t the 45 economists who forecast this data know the dates before they forecast?) This is a 6-sigma miss and plunges China’s trade balance to its biggest miss on record and 2nd largest deficit on record.

Economic statistics are largely fictitious, of course, but the size of this miss is indicative of a problem that is getting too big for even the most outrageous fictions to conceal.

35-year employment low

The average annual labor force participation rate hit a 35-year-low of 63.2 percent in the United States in 2013, according to data from the
Bureau of Labor Statistics (BLS). The last time the average annual labor force participation rate was
that low was in in 1978, when it was also 63.2 percent. Jimmy Carter was
president then.

What is often forgotten in the reporting of the economic statistics is that the statistics are merely an approximation of the economic situation; they are the map and not the territory. GDP doesn’t actually exist, and the “growth” that it represents was designed as a way to provide planners a means of determining how best to intervene in the economy. The decline in the labor force participation rate gives the lie to both the false GDP and false U3 unemployment statistics, both of which are heavily manipulated in a misguided attempt to provide a falsely positive perspective.

The contractionary effect of the increasing lack of participation in the labor force is compounded by the fact that the doubling of the female labor force means that many of the younger women now in it are considerably less productive than the older men they have replaced. Throw in the subsequent consequence of delayed marriage and fewer children, and it is readily apparent that the US economy cannot recover in the next 20 years.

Generation debt-slave

The unprecedented growth in student and federal debt still hasn’t been enough to boost Z1 out of credit disinflation:

Time reports that American students and grads were carrying $1.08 trillion in student loan debt at the end of 2013. This compares to just $253 billion a decade earlier. Aggregate debt grew 10% in the past year alone. By comparison, overall debt grew just 43% in the last decade and 1.6%
over the past year.’ About 70% of students graduate with some amount of
debt, and the average amount owed is $29,400.

This should finish off the housing market once and for all, barring mass Chinese immigration. That $1.08 trillion now represents 1.9 percent of total credit market debt outstanding and a whopping 8.3 percent of total household debt. Most of it is going to be defaulted, or rather, would have been had that not been made illegal by Congress and the Bush administration.

No house until 36

It’s hard to blame the millenials for living in their parents’ basement when they were suckered into taking out student loans on which they cannot, unlike previous generations, default. Karl Denninger spells out the math:

You mean the $500 a month student loan payment is half of a decent first-time homebuyer payment — or more?

Well, yes.  Never mind that $500 a month x 12 months = $6,000 a year saved toward a down payment, and if you put 20% down (which you should) then four years of that savings would make it possible for you to buy a $120,000 house.

Financing $96,000 @ 5% for 30 years gives you a P&I on that $120,000 house of…. $513.21, or awfully close to that student loan payment.

In other words you forego the ability to buy the house by taking the student loan debt.

And for how long do you forego it?

10 years, plus four more to build the down payment, or 14 years post-graduation.

If you graduate in four years (ha!) you’re 22, so this means you’re not buying a house until you’re 36.

The Law of Unintended Consequences strikes again. The mortgage banks are complaining about the collapse in demand for mortgage debt because indebted graduates and non-graduates can’t afford to take on the debt required to buy a house.

Everything is as my modification of the Austrian Business Cycle predicted. The limits of demand are the limits of CREDIT.

Famous last words

“We have been watching closely the recent volatility in global
financial markets. Our sense is that at this stage these developments do
not pose a substantial risk to the U.S. economic outlook.”
– Jane Yellen, Fed Head

She even sounds like Bernanke back in 2008. And, just in case it wasn’t completely obvious, we have the reassurance that the desperate money pumping will not end until the entire system collapses too.

“The Committee has emphasized that a highly accommodative
policy will remain appropriate for a considerable time after asset
purchases end.”

I’ll bet it has. After all, we’re only looking at a $29 trillion credit demand gap. The thing is, even from a Keynesian perspective, one should be able to discern that we are in a giant economic contraction. Here is the old Econ 101 question: highly accommodative monetary policy is prescribed when the economy is a) growing, or b) contracting?

The dark side of income inequality

Republicans, Libertarians, and Any Rand aficionados like to talk about income inequality as if it is an intrinsically socialist concept. And there is some truth to that. Socialists and other distributionists often appeal to income inequality in order to violate private property rights and rob from Peter in order to pay Paula, DaPaul and Pedro. Income equality can be, and has often been used to justify socialism.

However, superior talent, hard work, and luck combined with a capitalist system are not the only source of income inequality. Income inequality also comes from theft, fraud, government corruption and other evils. And that is the very sort of income inequality that is not only indefensible, but is ever bit as problematic economically as it is morally.  Zerohedge explains the dark side of income inequality:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

One need not be a socialist, or oppose capitalism, to oppose the income equality that is the result of theft. With the assistance of the Federal Reserve and Congress, the banks have financially raped the American economy and the American people through fraud and political corruption. A reckoning is overdue. Everything that has been done in the last five years has been done in order to postpone it. And yet, a reckoning is coming nevertheless, because that which cannot continue will not continue. The rich simply cannot consume enough to substitute for more equitable consumption; how many cars can a man drive? In how many homes can a man dwell?

Amazon vs BEA

So, on the one hand, the BEA is reporting 3.2 percent economic growth. On the other, retail sales are below expectations, both in physical and online terms:

Amazon.com Inc.’s shares fell almost 10 percent a few minutes past 4 p.m., after the company dropped some disappointing earnings news. The title of the company’s news release is cheerily optimistic: “Amazon.com Announces Fourth Quarter Sales up 20% to $25.59 Billion.” And its operating income actually beat estimates — $510 million, compared with $489.9 million. But fourth-quarter sales of $25.6 billion were considerably below estimates of $26.08 billion, and earnings per share were 51 cents instead of the 69 cents that analysts had been expecting.

That’s not just disappointing for Amazon; it’s also not great news for the U.S. economy. When retail foot traffic and sales were disappointing in December, the standard explanation was that people must be moving their purchases online. Obviously, they weren’t — at least, not nearly as much as analysts expected. Given how dominant Amazon is in e-commerce, this should cause most of us to revise our expectations of fourth-quarter retail sales, as well as growth in gross domestic product.

Now, I wonder if perhaps the data being produced by the government bureaucracy might perhaps be less than entirely accurate? No, surely that’s not possible. That’s crazy conspiracy talk!