Tag: economics

It’s bad enough that the younger generation of Americans is being saddled with massive amounts of useless, permanent student loan debt. But this new concept of a multi-generational home mortage being broached in the UK is truly evil:

Forty-year mortgages that may take two generations to pay off could become the norm, ministers believe. Rising house prices will prompt more homebuyers to abandon traditional 25-year loans and opt for ever longer repayment terms, they say. Cabinet ministers who discussed claims of a new property ‘bubble’ this week believe a cultural shift is under way which means people are increasingly comfortable with extended loans.

They believe that in future householders may choose to pass on a house
with an outstanding mortgage to their children, who will pay off the
rest. ‘In Japan, the 40-year mortgage is the norm,’ said one Government
source. ‘Paying it off is a two-generation job for many families. If
house prices remain high, longer-term mortgages like those will become
more acceptable to people here.’

Imitating Japan, which has been stuck in economic stagnation and the highest proportion of debt-to-GDP, strikes me as an appallingly bad idea. And make no mistake, this is a short-term solution to a problem that is the result of the large-scale immigration into the UK as well as Russians driving up the London property market.

First it took one income to buy a house. Now it takes two incomes. Soon it will take two generations, assuming the system doesn’t collapse first. That which can’t continue indefinitely won’t.

Massive debt and native dispossession is one of the costs of free trade. But at least the indebted masses have the consolation of being able to buy cheap Korean flatscreens and poorly constructed clothes from China.

This isn’t a bad basic primer on the cause of the Great Depression and the connection between it and the beginning of the Great Depression 2.0.

The lessons of the 1920s are clear, and they bear directly on the build-up to the present crisis. Developed capitalism without social democracy and strong labor unions leads to productivity increases far outpacing wage growth, extreme inequality, insufficient working-class purchasing power, an unprecedented buildup of household debt and nowhere for profits to go but into capitalist consumption and financial speculation. With financial growth not reflecting comparable health in the productive economy, a bubble formed in stock market speculation and household debt grew faster than household income. By their nature, bubbles break. The popping of the speculative bubble brought about the stock market crash of 1929.

The crash and ensuing Depression afflicted what we have seen was a highly vulnerable economy. Because the economy had by the 1920s become industrially mature, growth no longer depended upon the breakneck expansion of the capital goods sector, but was now, and for the first time, fuelled by the production and consumption of consumer durable goods like refrigerators, radios, vacuum cleaners and, most importantly, automobiles. Consumption replaced investment as the driver of economic growth. (4) Robust growth would now require high wages.

With wages stagnant, working-class households’ ability to sustain the consumer durables boom became dependent, as it would again from the mid-1970s onward, on unsustainable household debt levels. Supplementing income-based purchasing power with credit had been a fact of life since the late nineteenth century, but the debt increments increased especially rapidly during the 1920s. The proportion of total retail sales financed by credit increased from 10 percent in 1910 to 15 percent in 1927 to 50 percent in 1929. When working-class purchasing power and household debt approached their limit by 1926-1927, the rate of growth of consumer purchases began to decline. Key growth markets like autos and construction became saturated and excess productive capacity became conspicuous. Production fell and profits were directed to financial speculation and bubble creation. The stock market and the economy responded accordingly. The Great Depression was at the door.

A comparable dynamic was in effect during the period preceding September 2008. From the mid-1970s to the year before the housing bubble began to leak, 2005, the gap between productivity growth and flat wages grew wider and wider. As in the 1920s, national income shifted steadily and increasingly to the top. Inequality approximating that of the 1920s grew. 1928 and 2007 were the highest inequality years since 1900. (Each year, not coincidentally, was followed by a major meltdown.) Workers once again resorted to debt to maintain living standards. The ratio of outstanding consumer debt to disposable income had more than doubled, from 62 percent in 1975 to 127.2 percent in 2005. Since 1995 the debt burden, measured by the percentage of household income pledged to debt service, had become increasingly concentrated in the lower three income quintiles. Financial speculation, which had accelerated since the mid-1970s, took off with a vengeance after 1999. Echoes of the 1920s were loud and clear.

That’s a great piece of data I hadn’t seen before, concerning the increase in the percentage of retail sales “financed by credit” from 1910 to 1929. It clearly shows the same debt parabola that we often observe before a period of credit contraction.

It’s not often that someone else writes a post I genuinely envy. But John Carney has put together a brilliant economic satire of various writers and their competing perspectives through the lens of Christmas: 

The Christmas equivalence theorem

By Robert Barro, Wall Street Journal
While
it’s understandable that young people across America hope that their
lives will be enriched by a sudden influx of toys and sugarplums on
December 25, it is incumbent on grown-ups to realize the truth about
this Keynesian scheme. It
has been demonstrated time and again that Christmas cannot add to the
store of toys of the nation or even a single household. Households
experiencing a surge in gifts on Christmas day compensate by withholding
gifts in the future. That is, gifts that are “spent” on Christmas are
saved during the remainder of the year. So each Christmas gift isn’t
really so much given as borrowed from the future. Sorry kids, Santa isn’t so much bringing you presents as stealing presents you would have received in the future.

Rudolph’s Ruddy Nose (Wonkish)

By Paul Krugman, New York Times
Joe
Weisenthal has a terrific take on the growth of unemployment in the
North Pole. As is well known, reindeer unemployment has surged. Yet the
Very Serious Elves who promised that sleigh austerity would rapidly
bring growth back to the Pole have learned nothing.

But
it’s not just the elves. Even economists, who should know better, go on
insisting that we need to shrink Santa’s route now despite high
reindeer unemployment. Some continue to insist that there just is a
skill mismatch in the Pole economy, so that we have no choice but to
allow the diminutive Rudolph resources go unemployed. This truly is the
dark age of North Pole economics. Imagine
for a moment that the pole suffered from an immense foggy night.
Everyone would agree in that case that we could put Rudolph’s red nose
to good use. I know it drives people crazy when I mention that a crisis
can be good for aggregate demand—but everyone who disagrees with me is
already crazy, so who cares?

The dirty secret of North Pole’s success

By Steve Sailer, isteve.blogspot.com
There
appears to be a silent rule among pundits—all of whom secretly read
me—that we not mention immigration and the North Pole in the same
sentence. The truth is that the success of Santa’s operation up there
demonstrates that the accepted orthodoxy on immigration is 100 percent
wrong. For as long as anyone can remember, there’s been zero immigration
to the North Pole—yet the economy thrives, the elves have a thriving
culture and there is very little social strife. All that is supposed to
be impossible in a monoculture.

But, of course, you’re not supposed to notice these hate-facts.

Open Borders: Why should they stop at Christmas?

By Tyler Cowen, Marginal Revolution
Every
year the American government briefly relaxes its stranglehold on our
borders to permit the entrance of Santa Claus and his team of reindeer.
If this is a good thing on Christmas, imagine how much better it would
be if we made this our year round policy? Have you ever eaten in an
Elven restaurant? The candy canes are sublime.

While
there are some who think that competition with elf workers would
impoverish American workers, there is not a lot of evidence to support
this. In fact, the toy making of the elves would likely be complimentary
to native production. What’s more, the wealth generated by elven labor
would add to economic growth.

Now that is really funny and very well done. It’s a pity he didn’t include McRapey, although I suppose it’s hard to satirize self-satire.

Santa’s Straight, White, Cis-Male Privilege
By John Scalzi, Whatever 
“I’m a jolly old elf. I’m one of those elves who likes to force myself into houses without their owner’s consent or desire. The
details of how I do this are not particularly important at the moment —
although I love when you try to make distinctions about “forced entry”
or “legitimate intrusion” because that gives me all sorts of wiggle room —
but I will tell you one of the details about why I do it: I like to eat pie.

It appears Americans are cutting back on their Christmas spending this year:

That it has been one of the most lacklustre shopping seasons in recent years has already been repeatedly covered, with average holiday spending expected to decline for the first time since the Great Financial Crisis of 2008, all this despite record promotions and an ever earlier start to Black Friday. However, while the early start to shopping season has missed expectations, driven primarily by an unprecedented weakness in traditional bricks and mortar outlets, there was some hope that the last stretch into Christmas and the New Year would provide a much needed, last minute bump. Those hopes were dashed last night when Shoppertrack reported that retail traffic plummeted by an unprecedented 21% last week, and in-store sales decreased 3.1% from the year before, dashing retailers’ hopes that the final stretch before Christmas would offset soft sales numbers earlier in the holiday shopping season.

Now, I wonder why that might be? I know we’re celebrating in a more modest fashion than in previous years. And I’m not at all surprised that we’re not the only ones.

Anyone else scenting a familiar odor? That rancid aroma of greed, fraud, cigarettes, and overpriced cologne? It smells like 1999 to me:

Pinterest is a lovely website. It provides something the internet has never had before (virtual window shopping and muffin JPEG fetishism) in a snappy, tidy package. It’s very popular, particularly within the inscrutable Midwestern Mystery Zone, which baffles most tech companies, small and large alike. It’s aspirational picture-collecting at its most refined, and certainly could end up being the way people plan future purchases. Maybe. Someday. There’s no way to be sure.

And then there’s Snapchat, the pubescent pic-sharing app du jour, enough of a phenomenon to tilt teens away from Facebook, and a cultural spike unto itself. It’s fun! It’s a very fun, very smart, very simple toy—and there’s nothing wrong with that. The world needs things that are amusing and little else, lest we all be crushed beneath cloud services and spreadsheets. Fun is fine, and it’s certainly proven popular for Snapchat’s founders.

But these are both massive maybes bridging chasms of financial uncertainty. Maybe Pinterest will drive sales, and be able to keep a cut for itself. Maybe Snapchat will be able to turn its huge demographic reach among vulnerable young minds into revenue, and hold on to its trend status. Maybe. But that’s almost $8 billion (estimated) dollars pinned on a maybe, the sort of breathless, thoughtless speculation bubble dreams are made of. It’s $8 billion in maybe snapped against two companies that haven’t even tried to make money.

In the immortal words of Public Enemy’s Chuck D: “Here we go again….”

Or in other words, Paul Krugman discovers debt. On May 12 of 2012, Paul Krugman confessed that he had no idea what Steve Keen was talking about with regards to how debt deflation reduces demand:

“Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.” (Minsky and Methodology (Wonkish), March 27, 2012)

However, it has become so obvious that without growing debt, people cannot afford to pay for things, (thereby reducing demand), that even Paul Krugman has finally noticed, Neo-Keynesian models of exogenous debt be damned. But, as is his wont, Krugman pretends to have known this all along:

“Start with the point I’ve raised several times, and others have raised as well: underneath the apparent stability of the Great Moderation lurked a rapid rise in debt that is now being unwound … Debt was rising by around 2 per cent of GDP annually; that’s not going to happen in future, which a naïve calculation suggests means a reduction in demand, other things equal, of around 2 percent of GDP.” (Secular Stagnation Arithmetic, December 7, 2013)

And notice his comment about debt rising by around two percent of GDP annually; is he finally paying attention to L1 only 11 years after I first warned about it? This is an astonishing development and may represent the first big cracks in the epic Keynesian wall of delusion concerning the exogenous, and therefore innocuous, nature of domestic debt.

In RGD, I demonstrated that debt not only effects demand, but prices as well. That’s why we can be certain that housing prices will not recover anytime soon and college tuitions cannot continue to rise, as their elevated price levels are almost entirely the result of the post-2001 explosion of easy credit. In fact, I even explained the connection between debt and demand in my proposed modification of the core mechanism of the Austrian Business Cycle on a post entitled The Limits of Demand back in June 2009:

“I suggest the cycle can be better understood if we broaden our
perspective when looking at the middle phase of the cycle and consider
how the expansion of bank credit will also lead to malinvestment for
reasons that are not dependent upon the shifting production ratio
between capital goods and consumer goods by utilizing a price-based
variant of the Keynesian acceleration principle. This begins with
recognizing the obvious causal connection between increased bank
credit and price distortions, since cheap credit permits consumers to
purchase goods at prices they could not otherwise have afforded; this is
what cheap credit is expected to do and is the reason loan
consolidations and other forms of consumer credit are advertised on
television. The easy availability of cheap credit permits the purchase
of houses, college tuitions, and cars by a much broader range of buyers
than would otherwise be the case, so as the law of supply and demand
dictates, an increase in the availability of debt will lead to an
increase in demand which will necessarily drive the price of those goods
being purchased by debt higher relative to the price of goods not being
purchased by debt.”

The converse of the bolded text is of course also true, hence my expectation of economic contraction following the debt-deflation as well as my observation of economic stagnation as a result of the current debt-disinflation. But then, I don’t have a Nobel Prize or anything.

David Stockman excoriates the House Republicans for their capitulation on the budget:

House Republicans “capitulated” in agreeing to the two-year budget deal reached last night and left the country to deal with an unsustainable fiscal situation until the peak of the presidential primaries in 2015, when nothing will get done, former federal budget director David Stockman told CNBC on Wednesday.

“First, let’s be clear—it’s a joke and betrayal,” Stockman, who served under President Ronald Reagan, said on “Squawk on the Street.” “It’s the final surrender of the House Republican leadership to Beltway politics and kicking the can and ignoring the budget monster that’s hurtling down the road.”

Stockman added that the budget deal means lawmakers would take a “two-year vacation” from dealing with the country’s fiscal situation and revisit it in 2015 at around the same time as the Iowa straw polls. Without an incumbent in the presidential race, both political parties will be too busy to touch the budget, he said. While some hailed the budget deal as a breakthrough in Washington’s political gridlock, Stockman compared the accord to “kicking the can” into “low Earth orbit.”

“There’s plenty of room, but they’re unwilling to make the tough choices,” he said. “Now, I understand Democrats doing that. The only hope of getting our fiscal situation under control is if the House Republicans stand up. And they’ve totally capitulated.”

Of course they did. With traitorous leaders like John Boehner and Eric Kantor, the House Republican “leadership” has far more in common with Obama than with the Republicans they nominally represent. They will “capitulate” on immigration too if they think they can get away with it and still preserve their political careers.

The US political system has completely failed. Many, perhaps even most, “representatives” no longer even pretend to represent anything but the interests of the financial institutions. This became apparent in 2008, and is now obvious in Washington’s every response to the financial crisis its credit money system and profligate spending have created.

The only possible way out was to let the credit money system default and collapse, but instead, the short-sighted, cowardly politicians bought the bankers’ threats to implode the economy and tied the political system to the financial system in what I expect will be a vain attempt to salvage it. And in doing so, I believe they have ensured the eventual destruction of both.

In Q1 2009, debt/GDP was 368 percent. The Q3 Z1 report came out on Monday. Total Credit Market Debt Outstanding was $58.082 trillion. The BEA reported Q3 GDP at $15.819 trillion. So, despite all of the economic pain, widespread unemployment, four rounds of quantitative easing, and two emergency fiscal stimulus plans, debt/GDP has been reduced all of 0.27 percent, to 367 percent.

(To put this in historical perspective, in 1951, debt/GDP was 132.5 percent and the government sector owed 55.9 percent of it.)

So, five years since the beginning of the crisis, we haven’t even begun the process of clearing the excess debt. And the cancer has gotten considerably worse in the meantime. In 2008, the government sector was responsible for 14.6 percent of $51.3 trillion in debt. In 2013, the government sector owes 25.7 percent of $58.1 trillion. Thanks to the capitulating Republicans, the next two years will see that grow to around 30 percent of $60 trillion… if they are successful in staving off a crash.

Look at what happened between 1933 and 1950. That’s why I believe the Great Depression 2.0 is going to be an order of magnitude worse than its predecessor.