Tag: economics

Zerohedge picks up an unusual report on gold flows:

This is one of those stories about the gold market that almost seems too wild to be true since the numbers are so extraordinary. According to a Reuters article from earlier today, Australian bank Macquarie has reported that gold is flooding out of London and into Switzerland at a mind-boggling rate. Specifically, 240 tons were exported in May alone and 797 tons during the first half of 2013. That means gold is being exported at a annualized run rate of 17x the 92 tons exported for all of 2012. That’s insane.

Moreover, it seems a lot of that gold is being sent to Switzerland so that the 400oz bars can be melted down into different sizes that are more amenable to Asian sensibilities. So, as many of us suspected all along, what has happened is lobotomized Westerners have sent much of their gold to Asia just as the financial system prepares to melt down again.

 This could be an interesting autumn.

Karl Denninger understands the intrinsic connection between the two:

The availability of “cheap credit” has made everything from houses to furniture to TVs to cell phones to cars more expensive.  Virtually everyone shops a “payment” now instead of a price. 

Why else would you hear all the car dealers telling you how they can get you into a new car for “two-ninety-nine!” instead of telling you the price is $24,923? 

That’s simple — everyone buys a payment.

House — same deal.  Do you qualify for a house or for a payment? You know the answer — and the big scam nowdays (and has been for the last decade) is finding ways to get around the down payment — actual cash on the table has been reduced to record lows, with the goal for many being zero.

Then there’s student loans, as Taibbi recently went off on and which I’ve been covering for years.  They are alleged to make college “more accessible.”  Nonsense; what they do is enslave young people who are our most-vulnerable due to lack of life experience and being that these debts cannot be discharged except under extraordinary circumstance they’re one of the worst forms of debt slavery.

The truth is that the basic laws of economics tell you that when there are more buyers willing to pay a given price irrespective of how or why the price of that item will tend to rise.  This is true whether the thing is a car, a house, health care, college tuition or anything else.

Ultimately this forces anyone who wants said thing to use credit to obtain it as the ability to pay cash dwindles away.

And that, ultimately, destroys the middle class by making the true cost of such pulled-forward demand rise so high that it cannot be afforded at all.

So long as the government coerces this behavior for its own benefit so it can hand out money to its favored few, whether those be “poor” people (with iPhones of course) or defense contractors this cycle continues until it is either voluntarily abandoned or it is forced to stop by impact with the zero boundary.

“Impact with the zero boundary” is exactly what I described in my “limits of demand” in which I suggested an alternative mechanism for the Austrian Business Cycle. This points to the core flaw of the inflationista perspective, which is that even if the government prints an unlimited amount of money, it still has to somehow get into the hands of the people who are going to spend it on goods and services.

The federal government does an amount of this through its income transfer programs, which are now better understood as distributed inflation programs. The problem is that the very act of distribution tends to reduce the willingness of the recipients to do anything productive, as could be seen in this Rattlife clip from Fox News.  And the horrified tone of the reporter explains why significantly expanding these programs is politically untenable; keep in mind they would need to increase by a factor of more than TWENTY in order to compensate for five years of credit disinflation.

That leaves expanding the credit base as the other option, which is precisely what the Federal Reserve has been trying to do.  But here it runs into the “pushing on a string” problem due to its inability to print more borrowers.  It’s not so much that the banks won’t lend as the banks can’t find anyone credible to lend to as about 40 percent of the loans they are presently holding are already in default.

About the only thing the federal government can do at this point is expand its student loan guarantees to the home mortgage and credit card markets. However, that terrifies Fed officials, who are already looking at the fact that only 10.8 million of the 28 million federal student loan borrowers in the US are making any payments on their student loans.

Which points to the quasi-Soviet nature of the problem where the federal government pretends to give money to banks to lend out to borrowers and the borrowers pretend they are going to pay it back. Expanding the sham to mortgages and credit cards may buy a little more time, but it’s not going to fix anything. It is certainly not a credible basis for economic growth.

Keep in mind that this woman is widely considered to be the most credible candidate to succeed Ben Bernanke at the Federal Reserve:

“For my own part,” Ms. Yellen said, “I did not see and did not
appreciate what the risks were with securitization, the credit ratings
agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of
that coming until it happened.” Her startled interviewers noted that
almost none of the officials who testified had offered a similar
acknowledgment of an almost universal failure.

Meanwhile,
I was publicly warning about the dangerous risks facing the global
financial system from 2002 to the spring of 2008. And it wasn’t even my
job to pay attention to those things.  I see no chance, none, that these
maleducated academic idiots even posses the conceptual tools to
understand the current situation, let alone have the ability to do
anything about it.

It’s like watching monkeys try to
repair a space shuttle.  Which wouldn’t be so bad if we weren’t all out
in space inside the shuttle.

I used to wonder why people like this would take an impossible job knowing that they would likely be considered responsible for the incipient disaster. Now I realize that it’s not that they’re not totally indifferent to their historical legacy, they’re just completely clueless about the situation facing them.

The impotence of Abenomics demonstrates that Karl Denninger and others were right, Paul Krugman was wrong, and quantitative easing does not magically produce economic growth.

In April 2013, Japan announced a QE program of $1.4 trillion, an
amount equal to roughly 25% of the Japanese GDP. To put this into
perspective, the US’s QE1, QE 2, QE 3, and QE 4 programs which were spaced out over four years are an amount equal to roughly 16% of US GDP.

Japan announced a larger program relative to its economy all at once.
The idea was that by throwing around a big enough amount of money,
Japan’s economy would finally waken from its 20-year slumber and take
off.

This effort has been an abysmal failure. Japan’s second quarter GDP
grew at just 0.6% quarter over quarter, registering the single biggest
growth MISS in a year (economists were expecting 0.9% which, by the way had already been revised lower).

Put in plain terms, Japan announced the single largest QE effort in
history, and not only did its economic growth projections have to be
lowered, but it is failing to even meet these lowered growth projections.

The failure of Abe’s daring plan to print Japan back into prosperity should suffice to explode the inflationista argument.  The US equivalent would be a $4 trillion spending program that barely managed to keep GDP from turning negative. And in directly related news, it is absolutely fascinating to see Paul Krugman complaining that Milton Friedman is no longer a hero on the economic right:

Friedman, who used to be the ultimate avatar of conservative economics, has essentially disappeared from right-wing discourse. Oh, he gets name-checked now and then — but only for his political polemics, never for his monetary theories. Instead, Rand Paul turns to the “Austrian” view of thinkers like Friedrich Hayek — a view Friedman once described as an “atrophied and rigid caricature” — while Paul Ryan, the G.O.P.’s de facto intellectual leader, gets his monetary economics from Ayn Rand, or more precisely from fictional characters in “Atlas Shrugged.”

How did that happen? Friedman, it turns out, was too nuanced and realist a figure for the modern right, which doesn’t do nuance and rejects reality, which has a well-known liberal bias…. He was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve. In particular, he argued that the Fed could have prevented the Great Depression — with no need for new government programs — if only it had acted to save failing banks and pumped enough reserves into the banking system to prevent a sharp decline in the money supply.

Krugman fails to realize that the right wing is putting one of John Maynard Keynes’s few legitimate ideas into action.

“When the facts change, I change my mind.”

Friedman was a Keynesian, albeit a Keynesian heretic who rejected the use of fiscal policy in favor of monetary policy.  And, more importantly, he was completely wrong.  Ben Bernanke has followed an almost flawlessly Friedmanite policy, bailed out the banks, pumped massive reserves into the banking system, and prevented a sharp decline in the money supply.

And yet, it hasn’t worked, because Friedman’s monetarist theory failed to account for the fact that it is credit money that is the larger and more important factor with regards to prices and the limits of demand, and, as Abe has shown in Japan, even an unprecedented increase in the money supply is not enough to make up for the deflationary forces at work in the various credit sectors.  One cannot push on a string and one cannot print borrowers.

Tyler Durden sees it happening again:

#1 According to the Bank of America Merrill Lynch equity strategy team, their big institutional clients are selling stock at a rate not seen “since 2008”.

#2 In 2008, stock prices had wildly diverged from where the economic fundamentals said that they should be.  Now it has happened again.

#3 In early 2008, the average price of a gallon of gasoline rose substantially.  It is starting to happen again.  And remember, whenever the average price of a gallon of gasoline in the U.S. has risen above $3.80 during the past three years, a stock market decline has always followed.

#4 New home prices just experienced their largest two month drop since Lehman Brothers collapsed.

#5 During the last financial crisis, the mortgage delinquency rate rose dramatically.  It is starting to happen again.

#6 Prior to the financial crisis of 2008, there was a spike in the number of adjustable rate mortgages.  It is happening again.

#7 Just before the last financial crisis, unemployment claims started skyrocketing.  Well, initial claims for unemployment benefits are rising again.  Once we hit the 400,000 level, we will officially be in the danger zone.

#8 Continuing claims for unemployment benefits just spiked to the highest level since early 2009.

#9 The yield on 10 year Treasuries is now up to 2.60 percent.  We also saw the yield on 10 year U.S. Treasuries rise significantly during the first half of 2008.

It’s just a matter of time.  Of course, that’s been true since I published RGD in 2009 due to the mathematical inevitabilities involved.  The difference is that it’s a matter of considerably less time now.

So much for the vaunted urban model of the American liberal:

Detroit Mayor Bing and Michigan Governor Snyder have been quite vocal. Bing made it clear that “a lot of negotiations will go into fixing our city,” and when asked whether he will seek a Federal bailout, he responded, “not yet.” The decisions following this huge bankruptcy are likely to be precedent-setting as Bing noted that more than 100 urban US cities “are having the same  problems we’re having.” As the WSJ reports, Bing warned, “We may be one of the first. We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms how to fix our cities.”

Imagine how much worse the financial situation would be if the exurban proletariat and suburban bourgeoisie had listened to the progressive experts and moved en masse to the cities the way they were supposed to in the 70s and 80s.

And ask yourself this question.  If the Fed/USG can simply “print” credit money between them and “stimulate” the economy through massive urban bailouts, why are they not doing so already?  This solution would appear to kill three birds with one stone:

1. Preventing the insolvent cities from defaulting
2. Making up for insufficient private and public spending
3. Reducing unemployment via subsized local government employment.

So, why would neither Ben Bernanke nor Barack Obama be pursuing, or even proposing, such an economic program?  What is it that prevents them from “fixing” these three problems in this manner?

Karl Denninger spells them out:

1. Economic progress only comes through capital formation.
2. Capital formation only comes from economic surplus.
3. Economic surplus is earnings less expenses including taxes. 
4. All other forms of “development” are nothing more than leverage-driven bubbles.

The reason most people can’t distinguish between leverage-driven bubbles and real economic growth is that most people don’t read history and don’t know the first thing about economics.  They can’t distinguish between the products of government-driven malinvestment and market-driven investment, and so they confuse bank balances for wealth, statistics for substance, and digital abstractions for money.

But as Karl, Steve Keen, and myself have all demonstrated, using different methods, there has been no economic growth in the United States for nearly 30 years.  It is all an illusion of credit expansion, which is why the Federal Reserve has been so desperate to keep inflating the credit supply.  But the Fed could not maintain credit inflation, managing only disinflation, and it is only a matter of rapidly decreasing time before the credit contraction begins.

And that, my friends, is when things start to get interesting, in the sense of the apocryphal old Chinese curse.  To paraphrase Margaret Thatcher, the problem with credit inflation is that, sooner or later, you run out of borrowers capable of paying installments.

This bankruptcy filing isn’t exactly a surprise, but it does mark a potentially significant step in the deflationary process:

The city of Detroit filed the largest
municipal bankruptcy case in U.S. history Thursday afternoon,
culminating a decades-long slide that transformed the nation’s iconic
industrial town into a model of urban decline crippled by population
loss, a dwindling tax base and financial problems. The 16-page petition was filed in U.S. Bankruptcy Court in Detroit….

The Chapter 9 filing could take
years, experts say, despite hopes by the governor and Orr that the case
can be wrapped up in a year. A bankruptcy judge could trump the state
constitution by slashing retiree pensions, ripping up contracts and
paying creditors roughly a dime on the dollar for unsecured claims worth
$11.45 billion.

During a month of
negotiations, Orr has reached a settlement with only two creditors: Bank
of America Corp. and UBS AG. They have agreed to accept 75 cents on the
dollar for approximately $340 million in swaps liabilities, according
to a source familiar with the deal.

$18 billion may not sound like much, but the problem is that due to the way debt is stacked on top of debt, who knows how much more credit money will evaporate on the basis of its debt collateral having vanished.  And it’s not terribly surprising that the only creditors who are getting away without too much damage are the largest US bank and the largest Swiss bank.  They know the score, and 75 cents on the dollar is actually better than the average 60 cents on the dollar which their nominal assets are worth.

Where it’s going to get very interesting is when either Illinois or California attempts to declare bankruptcy, or, as a sovereign State, simply eliminate its debts by fiat.