Tag: economics

100 more bankrupt cities

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?

Four economic axioms

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.

Detroit finally files

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.

Paul Krugman, mean girl

Kyle Smith of Forbes notes Paul Krugman’s unusual style:

Reading Paul Krugman isn’t like reading most other economists. In a field whose notoriously poor track record in predicting the future (or even quantifying what has already happened) tends to generate a becoming modesty, he is utterly certain about everything. Breaking with the fraternal nature of the academic community, he is extraordinarily combative. Ever-snarky but never witty, his writing emits a sour smell of contempt.

Another way he stands out among academics: He repeatedly cites the authority of the mob as support for his positions.

This is an odd tactic for someone who would impress upon you the empirical rigor of his thinking. Like a Mean Girl given to saying, “Everyone is wearing wedges this summer” or “the in-crowd knows that animal prints are super-hot right now,” he is an alpha who is constantly looking over his shoulder to reassure himself that a pack is following closely behind. At times reading “The Conscience of a Liberal” is like a dip into the psychodrama of Teen Vogue or “Glee.”

There is an important secret to Krugman’s success.  It is essentially that of EL James, JK Rowling, or Britney Spears. He tells people what they want to hear and he does so in a manner that is sufficiently dumbed-down that even the simplest reader can follow it.  It is a talent, but as anyone who has read Krugman critically will know, it is not indicative of being right about anything.  All that matters to most of his fans is that he takes a firm position and shouts in a confident manner.

I mean, one really has to read his attempt to take down Austrian economics to believe it, as it is readily apparent that Krugman has no idea what it is.

The biggest bubble

Arguably today’s most important economist, Steve Keen, writes about the biggest bubble of them all on Zerohedge

Let’s start by taking a closer look at the data than Alan [Greenpan] did. There are a number of surprises when one does – even for me. Frankly, I did not expect
to see some of the results I show here: as I used to frequently tell my
students before the financial crisis began, I wouldn’t dare make up the
numbers I found in the actual data. That theme continues with margin
debt for the USA, which I’ve only just located (I expected it to be in
the Federal Reserve Flow of Funds, and it wasn’t – instead it’s recorded
by the New York Stock Exchange). The first surprise came when comparing the S&P500 to the
Consumer Price Index over the last century – since what really tells you
whether the stock market is “performing well” is not just whether it’s
rising, but whether it’s rising faster than consumer prices. Figure 1 shows the S&P500 and the US CPI from the same common date-1890—until today. In contrast to house prices, there are good reasons to expect stock
prices to rise faster than consumer prices (two of which are the
reinvestment of retained earnings, and the existence of firms like
Microsoft and Berkshire Hathaway that don’t pay dividends at all). I
therefore expected to see a sustained divergence over time, with of
course periods of booms and crashes in stock prices.

That wasn’t what the data revealed at all. Instead, there was
a period from 1890 till 1950 where there was no sustained divergence,
while almost all of the growth of share prices relative to consumer
prices appeared to have occurred since 1980. Figure 2
illustrates this by showing the ratio of the S&P500 to the CPI –
starting from 1890 when the ratio is set to 1. The result shocked me –
even though I’m a dyed in the wool cynic about the stock market. The
divergence between stock prices and consumer prices, which virtually
everyone (me included) has come to regard as the normal state of
affairs, began in earnest only in 1982.

Until then, apart from a couple of little bubbles in stock prices in
1929 (yes I’m being somewhat ironic, but take a look at the chart!) and
1966, there had been precious little real divergence between stock
prices and consumer prices.

My causal argument commences from my definition of aggregate demand
as being the sum of GDP plus the change in debt—a concept that at
present only heretics like myself, Michael Hudson, Dirk Bezemer and
Richard Werner assert, but which I hope will become mainstream one day.
Matched to this is a redefinition of supply to include not only goods
and services but also turnover on asset markets. This implies a causal link between the rate of change of debt
and the level of asset prices, and therefore between the acceleration
of debt and the rate of change of asset prices—but not one between the
level of debt and the level of asset prices. Nonetheless there
is one in the US data, and it’s a doozy: the correlation between the
level of margin debt and the level of the Dow Jones is 0.945.

For those who didn’t follow, what Keen is saying is that the stock market has been one giant debt-inflated bubble since 1980.  And it means that when the change of debt goes negative, asset prices are going to contract at a speed proportional to the rate of the debt contraction.  This, of course, is why the Fed has been pumping so desperately for five years, and also why it was always doomed to eventual failure.

What I find particularly significant is that Keen has reached a very similar conclusion about the stock market that Karl Denninger and I both independently reached about the economy through a different approach, which involved calculating the dollar amount of debt required to buy one dollar of economic growth.  By any of our three methods, it readily becomes apparent that there has been no genuine economic growth in the USA since 1980, give or take a year.

That sense of national decline that most Americans sense isn’t an illusion, rather, it is the idea that the US economy has expanded in any material manner over the last 30 years that is the illusion.  It is actually a debt-funded mass delusion that is no more substantial than drug-fueled hallucinations.

A failure to comprehend

I’m sure you recall the various academics and would-be academics at Pharyngula crying about what PZ Myers described as the “depressing” state of reality in American academia.  The accomplished genetic scientist writes in Woe is us academics:

Yeah, that’s the reward for earning a Ph.D. Most of you won’t get employed in academia, and most of you who do will get the terrifyingly fragile job of adjunct. And if you do manage to get a real tenure-track position, after 4-6 years of graduate school and a post-doc or two, you’ll get paid $40-50K/year, and be damned grateful for it.

The comments to these posts are full of the lamentations of angry, highly credentialed, but unemployed Obama-voting progressives who consider any limitation on immigration to be racist, bigoted, and overtly evil.  Which is why, despite opposing the administration-endorsed Senate bill on “immigration reform”, I found myself laughing when reading this description of the bill by Bill Keller at the New York Times.

Any foreigner who gets a graduate degree from an American university in
science, technology, engineering or mathematics (STEM in the vernacular)
and has a job offer can apply for a green card — even if he or she
studied for a field that is already crowded with native job applicants.
The bill would award permanent residence to anyone with a Ph.D. in any
subject from any university in the world, if he or she has a job offer
in that field.

If the credentialed geniuses in academia think things are difficult for them now, just wait until they have to start competing with PhDs from Bangladesh and Zimbabwe who are willing to work for $5k per year and a green card.  It is ironic that the only thing standing between them and the complete economic devaluation of the credentials they so treasure is the Republican House that they so despise.

The immigration bill multiplies the blessings of diversity with the blessings of free trade.  Imagine how much USA will benefit if wages for PhDs are reduced by 90 percent!

Milton Friedman: heretic Keynesian

I find it fascinating that as time has gone on, more and more economists are coming around to my view, which I explained in The Return of the Great Depression, that Milton Friedman was not an opponent of Keynesianism, as was always taught in the economics department of my university, but rather, a practitioner of a heretical form of it.  The freshwater vs saltwater conflict was an entirely internecine battle between Keynesians, it was not on the level of Hayek vs Keynes, let alone Mises vs Marx.

In an excerpt from his new book, David Stockman writes about how Friedman’s activities as an influential economist completely contradicted his very good essays on human liberty:

At the end of the day, Friedman jettisoned the gold standard for a
remarkable statist reason. Just as Keynes had been, he was afflicted
with the
economist’s ambition to prescribe the route to higher national income
and prosperity and the intervention tools and recipes that would deliver
it. The only
difference was that Keynes was originally and primarily a fiscalist,
whereas Friedman had seized upon open market operations by the central
bank as the
route to optimum aggregate demand and national income.

There were massive and multiple ironies in that stance. It put the
central bank in the proactive and morally sanctioned business of buying
the government’s
debt in the conduct of its open market operations. Friedman said, of
course, that the FOMC should buy bonds and bills at a rate no greater
than 3 percent
per annum, but that limit was a thin reed.

Indeed, it cannot be gainsaid that it was Professor Friedman, the
scourge of Big Government, who showed the way for Republican central
bankers to foster
that very thing. Under their auspices, the Fed was soon gorging on the
Treasury’s debt emissions, thereby alleviating the inconvenience of
funding more
government with more taxes.

Friedman also said democracy would thrive better under a régime of free
markets, and he was entirely correct. Yet his preferred tool of
prosperity
promotion, Fed management of the money supply, was far more
anti-democratic than Keynes’s methods. Fiscal policy activism was at
least subject to the
deliberations of the legislature and, in some vague sense, electoral
review by the citizenry.

By contrast, the twelve-member FOMC is about as close to an unelected
politburo as is obtainable under American governance. When in the
fullness of time,
the FOMC lined up squarely on the side of debtors, real estate owners,
and leveraged financial speculators—and against savers, wage earners,
and equity
financed businessmen—the latter had no recourse from its policy actions.

For me, Milton Friedman is, like Margaret Thatcher, a tragic figure of history, an well-intentioned individual with a genuine love of human freedom who nevertheless betrayed his ideals with his professional actions.

The downside of corporate profits

As PJ O’Rourke points out in Don’t Vote It Just Encourages the Bastards, a high rate of profits not always a harbinger of economic good news:

[Adam] Smith spotted the exact cause of the 2008 financial meltdown not just before it happened but 232 years before, probably a record for advice to sell short. In Book II, chapter 1 of The Wealth of Nations, Smith wrote, “A dwelling-house, as such, contributes nothing to the revenue of its inhabitant… If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Smith therefore concluded that, although a house can make money for its owner if it’s rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it.” Bingo. Subprime mortgage collapse.

Smith was familiar with rampant speculation, or “overtrading,” as he politely called it. The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s thirty private banks survived. The reaction of the Scottish overtraders to the ensuing credit freeze sounds familiar. “The banks, they seem to have thought,” Smith said, “were in honor bound to supply the deficiency, and to supply them with all the capital which they wanted to trade with.”

According to Smith, the phenomenon of speculative excess has less to do with free markets than with high profits. “When the profits of trade happen to be greater than ordinary,” he said, “overtrading becomes a general error.” And rate of profit, Smith claimed, “is always highest in the countries that are going fastest to ruin.”

Judging by how America invested in 2007 and voted in 2008 that would be us.

In this vein, it may be pertinent to note that both corporate profits and their stock prices reached record highs in 2013.  Both are actually higher than the previous peak in 2007.

 
Considering the recent political and geopolitical events, with the Supreme Court solidifying the moral breakdown of the country, the Senate doing its best to cement the existing demographic fracturing, and foreign nations as diverse as Ecuador, Russia, and Switzerland all openly demonstrating their contempt for the administration’s imperial overreach, it should not come as a tremendous surprise to see that certain economic indicators are flashing signs of an incipient crisis.

Nate’s take on metals

In which he addresses the nervous Goldie-come-latelies:

You’re seeing lots of
leveraged folks being forced to sell. This is literally a forced
collapse. When this sort of thing is happening… you’re near the
bottom. It may not be the actual bottom… but you’re near it. When it
turns… we’ll be on a long term bull market in gold that is going all
the way to 3500 or so around 2015… and that’s assuming my
hyper-inflation prediction does not hold. That’s just the technicals.
If you start looking at actual claims on gold verses actual inventory…
its a much different picture… which could literally result in 1oz
coins being worth about 100k each in today’s dollars.

This is why I have repeatedly warned people not to look at metals as an “investment”.  If you’re paying attention to the daily, or even monthly, gold price, you might as well be day-trading equities. Gold, like land, is about inter-generational wealth, not short-term money making. It will be around when the most stable extant bank finally fails.  It will be valuable when the last of the current political entities collapses into barbarism and chaos. It is not an investment, it is insurance.

Those who bought in at $500 or less are simply looking at the dramatic price action and shrugging.  Perhaps it will drop to $1k next, or leap up to $5k. If you’re not leveraged and you’re not trading, it doesn’t matter which happens to come next. It’s rather like being an owner of Apple stock in the 1980s and fretting over where its price is today.  If you want to make money, then do something productive and earn it; buying X rather than Y and hoping the price goes up isn’t being productive.

Don’t put your faith in gold.  It won’t save you from anything except perhaps abject poverty. Don’t put your trust in it; it is a mindless substance. But it is more substantial and lasting than either credit money or fiat money.  And it will hold its core value in periods of inflation and deflation alike, regardless of how it is presently priced in the currency du jour.