Tag: economics

Debt outstanding 2005 – 2010

The Z1 report released earlier this week looks superficially positive from a mainstream perspective.  Total credit increased from $52.3 trillion to $52.6 trillion, which is nearly back to the pre-bust level of $52.9 trillion in Q1 2009.  This is in keeping with the theme of a fragile, but real economic recovery.  However, a closer look at the debt by sector reveals that it is merely more of the same pretend-and-extend at work, with public debt filling in the gap created by deflating private debt.  Whereas the financial sector debt has contracted $2.9 trillion (16.7%) and the household sector has contracted $500 billion (3.7%), the federal government sector debt has nearly doubled with an increase of $4.1 trillion (78%).   This means that the government debt (federal, state, and local), has now increased from 16% of the total debt market in 2005 to 22.5% now.

Notice that state and local government debt has been increasing even as their ability to service their debt has dramatically declined.  This increase cannot continue, which is why more political conflicts like the one in Wisconsin can be expected and why more state and local governments will be expected to default on their debts.  Moreover, we can expect the decline in household debt to pick up speed in the near future, since many defaults are not being registered yet and the only area of growth has been student loans.  As more home defaults enter into the system and more prospective students begin to understand the declining value of university credentials, we can be confident that the household sector will begin to contract at a rate approximately 5x faster than before.

This will put more pressure on the federal government to increase its rate of debt expansion beyond the 5.5 percent per quarter growth that it has been averaging since the crisis began in Q3 2008.  I estimate that in 2011, the federal government will have to continue expanding its debt at a rate of at least 6% per quarter in order to prevent total credit from contracting.

One-third there

Americans speed along the road to socialism and economic contraction:

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement. Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.

It is certainly fascinating to see that people are still decrying the evils of capitalism when more than one-third of all wages and salaries are actually socialist distributions. We can’t even call them “transfer payments” anymore because the money isn’t being taken from anyone prior to being distributed, it is being created through credit expansion.

Furthermore, we can deduce from this that the economy is only about two-thirds as productive as it is purported to be. What we’re seeing here is a Great Depression-sized economic contraction being masked by massive federal borrowing and distributing. Keep in mind that this is the same sort of masking that preceded the Soviet collapse, although the pretense necessarily took a different form due to the pretense of a market structure in the United States.

Most Americans recognize that having the federal government pay 100 percent of the nation’s wages and salaries is not possible. At this rate, it will have to pay 50 percent or more by 2020, which I note tends to correspond nicely with my long-standing prediction that by 2033, the U.S.A. will no longer be an independent, sovereign nation.

They never learn

Just in time to get burned again:

As a historic bull market reaches its second birthday, everyday investors are piling back into stocks, finally ready for more risk and hoping the rally has further to go. The Standard & Poor’s 500 index has almost doubled since March 9, 2009, when it hit a 12-year low after the financial crisis. And the Dow Jones industrials are back above 12,000, about 2,000 points shy of their all-time high.

Little-guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds, according to the Investment Company Institute. They withdrew $96.7 billion in 2010.

The March 2009 rally has certainly lasted longer than I thought it would, but I very much doubt it has much more left in the tank given that valuation ratios are higher than they were in 2000 and the strong hands are passing on stocks to the weak ones. With QE2 winding down, consumer credit growth coming entirely from the federal student loan industry. Karl Denninger notes:

This is one of the most-outrageous abuses I’ve ever seen perpetrated on anyone. It radically exceeds anything done to the subprime and ALT-A borrowers in that the young adults abused by this practice are by definition simply due to age and experience ill-equipped to understand what they’re getting into. They are relying on the adults advising them, from High School and College counselors to “Financial Aid” officers and their parents. To put a number on this abuse the cumulative damage inflicted on our youth between the first of 2009 and January of 2011, just two short years, is almost two hundred and twenty-four billion dollars.

Very little of that expanded credit is going to be paid back. And it can’t be defaulted, which means that the interest payments are going to cripple consumer spending from 2009 forward. With the market up, the positive GDP numbers and declining U3 unemployment, I understand why the unsophisticated buy into the recovery story. But it’s all a credit-inflated illusion and the illusion isn’t going to last much longer.

How much longer? I couldn’t possibly say with any degree of certainty. But back in 2008, I warned of coming problems in March. So, if the pattern repeats, the problems should come to a head in September.

Mailvox: the replay link

Cocomoe sends a link for the benefit of those who couldn’t listen live yesterday:

The Vox Schiff interview can be relistened and relistened to here for free Mar 3 hour 1: (Vox starts at minute 27). I thought Vox did real well and even better the 2nd time you listen and get Schiff to be more background.

Actually, I don’t feel as if I even began making a case, for as I mentioned in the comments yesterday, I had no idea that there was going to be a debate about inflation. I was told that we’d be discussing inflation and deflation in the context of Bernanke’s recent testimony to Congress. So, what you’re hearing is my attempt to be polite and avoid simply telling the host “congratulations, you’ve figured out the basics of supply, demand, and the quantity theory of inflation, which has only been around since Ssu-Ma Chien in the second century BC.” There is literally nothing that Schiff is saying that any economics student didn’t learn in Econ 101 except the bit about the Federal Reserve Notes. That doesn’t mean he’s necessarily wrong about high rates of inflation coming, only that repeating what the Wall Street Journal has been saying since April 2008 isn’t telling anyone anything new nor does it explain in any way the various anomalies that I have noted in the money supply and the credit markets. Just saying “housing is an asset”, which isn’t even true in the case of housing, is not a meaningful response, let alone a substantive rebuttal. For all that there are multiple definitions of inflation, all of them include the concept of a general increase in prices and there can be no price inflation if wages and housing prices are falling even though prices are rising in other sectors.

“The only Chinese with notable views in the more strictly economic realm was the distinguished second century B.C. historian, Ssu-ma Ch’ien (145c. 90 BC)…. Ch’ien was one of the world’s first monetary theorists. He pointed out that increased quantity and a debased quality of coinage by government depreciates the value of money and makes prices rise. And he saw too that government inherently tended to engage in this sort of inflation and debasement.”
– Murray Rothbard, An Austrian Perspective on the History of Economic Thought, pp 26-27.

By the way, here are the specifics on the incidences of default versus hyperinflation in Europe since 1800 that I mentioned in the interview. There have been 73 sovereign defaults compared to 20 total years of hyperinflation in Austria (2 years, 1,733%), Germany (2 years, 2.22E+10%), Greece (4 years, 3.02E+10%), Hungary (2 years, 9.63+26%), Poland (2 years, 51,699.4%), Russia (8 years, 13,534.7%). Similar ratios are seen in Latin America and Africa. However, high rates of annual inflation are quite common historically and the USA is actually quite unusual in having had only one year since 1800, 1864 to be precise, where inflation exceeded 20 percent. One thing inflationistas might find interesting is the fact that hyperinflation is NOT necessarily dictated by the increase in the quantity of money, because in at least two cases, those of Germany and Hungary, the amount of inflation exceeded the increase in the money supply.

UPDATE – WND has a nice, if somewhat tongue-in-cheek article on RGD hitting #1 in its category on Amazon. Of course, the headline is a little unfortunate, as I would hope demand for it hasn’t actually peaked at this point.

Be prepared

Since it doesn’t do to wing it before discussing economics with someone who has a reasonably sophisticated grasp on the subject, I thought I had better acquaint myself with the latest statistical updates before attempting to talk about them in public. What is interesting to note in all of this recent inflation hysteria is that the rate of increase of the CPI-U measure of price changes and the M2 money supply measure are both presently below their 50-year average.  Below is a chart showing the change in CPI-U and M2 on a monthly basis since January 2008.

The average annual growth over this period is 1.44% for CPI-U and 6.16% for M2.  That sounds like a lot, but to put it in perspective, the average annual growth over the 51 years from January 1960 to January 2011 is 4.13% for CPI-U and 6.86% for M2.  It’s far below the record three-year periods of 1978-1980 in which CPI-U averaged 11.6% growth per year, or when M2 growth averaged 12.2% growth in 1977-1979.  And while it is absolutely correct to doubt the veracity of these government-published figures – anyone who goes through the M2 statistics won’t miss the discrepancy between various H6 reports for the exact same month – but since these statistics are being used to support the inflationary case, the fact that they are not increasing at an unusually rapid rate must be taken into account.

It hasn’t escaped my attention that gold, oil, and commodity prices are all increasing.  Neither have I failed to note that other prices are continuing to fall.  The collapse of housing prices, down 31.4% from their 2006 Case-Schiller peak and falling at an annual average rate of 7.9% over the three years covered in the chart above, are much more indicative of a deflationary environment rather than an inflationary one.  How do we balance these contradictory indications?  I expect that is a question that Mr. Schiff will probably want to discuss.

Now, in the video entitled Four Keynesian Inflations, I explain why attempting to measure inflation in terms of CPI and GDP makes absolutely no sense, despite the fact that this is how the financial media always describes it.  But, even if we accept the idea that inflation is the rate of dollar price changes (CPI) in excess of the rate of economic growth measured in dollars (GDP), it should be obvious from the chart entitled Inflation 1960-2010, which subtracts Real GDP from CPI-U, that inflation is neither at a historically high level nor is it even increasing at the moment.  I think the chart demonstrates even more clearly that the Samuelsonian metrics involved are almost completely worthless as they clearly do not measure what they purport to measure, but since they presently frame the context of the mainstream economic analysis, it is necessary to take them into account.

Since we’re apparently also going to be discussing Federal Reserve Chairman Ben Bernanke, it may be helpful to read his most recent report to the Congress if you want to follow along.

Attn: inflationistas

Name of Guest: Vox Day
Date: Thursday, March 3, 2011
Interview Start Time: 10:35 AM ET
Interview End Time: 11:00 AM ET
Program Name: The Peter Schiff Show
Host: Peter Schiff
Topic: Ben Bernanke and the debate over inflation.

Just in case you’re interested. You can listen live here.

Where is the depression?

Occasionally economically ignorant critics attempt to nip at my ankles by making reference to the apparent absence of the global economic contraction that I believe is happening and predicted would start to become widely recognized by the end of 2010. But the failure of the Great Depression 2.0 to be recognized in the conventional macroeconomic statistics yet doesn’t bother me in the slightest, because the map is not the territory. And, as I demonstrate in the chapter entitled “No One Knows Anything”, those statistics cannot be trusted in the least. Keep in mind that the National Association of Realtors is having to revise its numbers to account for the 3.1 million home sales that were reported by its statistical model in 2009 and 2010 but cannot be found in any real-world recording process; a similar correction to GDP would indicate a 30 percent decline from $14,870 billion to $10,306 billion. It’s interesting to see how this is roughly in line with the confidential Goldman Sachs report cited by the Market Ticker.

What have I been saying? That the only thing keeping us from recognizing a full-on economic depression was government deficit spending? Spending that, at present levels, cannot possibly continue.

Worse, there’s no way out of the box. Raise taxes and you subtract directly from private spending. Refuse to raise taxes and you are forced to continue to borrow. Extrapolate out the $1.7 trillion from calendar 2010 and removing that would result in a decrease of twenty-eight times Goldman’s estimate, or some fifty percent of GDP.

Were you sitting down when you read that? Did you have an incontinent moment? If you didn’t then you don’t believe Goldman’s confidential report. If you do believe it you now know what’s going to happen. Not might, will.

One way or another, the artificial support to GDP that is embedded in our insane deficit spending will stop. It mathematically must stop. And when it does stop, if you believe Goldman’s analysis, even if we only cut deficit spending in half GDP will fall by 25%. If we eliminate it? GDP is halved.

And there, my dear critics, is precisely where your missing depression is. I don’t mind admitting that the Fed has been able to keep the situation strung together with string and chewing gum longer than I thought they could, but it doesn’t matter if they manage to keep it up for another five years. The end result will still be the same. Although it’s not quite correct to say that it doesn’t matter, as the longer they manage to postpone the inevitable, the more painful it is going to be.

Socionomics told us 10 years ago that there we were going to be seeing a huge increase in violent political upheaval around the world. That’s exactly what we’re seeing now across the Middle East, but don’t think that it is going to end there. Once the desperation spending stops, it’s going to spread across the East and West as well. We’re not talking cannibalism in the streets, but we’re also not talking about a stroll in the park either. But just so we’re clear, I expect at least one more round of stimulus, and probably two, before the Keynesians throw in the towel. This indicates that Republicans will eventually cave on the debt ceiling; given their strong rhetoric there will have to be some sort of crisis that will excuse the abandonment of their position.

Overstated

Long-time readers will recall that NAR Chief Economist has been my bitch for the last two years that I made existing home sale price predictions. So, you can probably understand that I was amused at the news that the basic NAR model badly wants revision:

Case-Shiller also released its quarterly index covering all homes in the country. It showed prices fell 3.9 percent in the fourth quarter and 4.1 percent for all of 2010. All of that may be the good news. The bad news is the Wall Street Journal reports that the National Association of Realtors may have been overstating existing home sale figures as far back as 2007.

“The group reported that there were 4.9 million sales of previously owned homes in 2010, down 5.7% from 5.2 million in 2009. But CoreLogic, a real-estate analytics firm based in Santa Ana, Calif., counted just 3.3 million homes sales last year, a drop of 10.8% from 3.7 million in 2009. CoreLogic says NAR could have overstated home sales by as much as 20%.

If the Realtors have overstated sales, the existing overhang of unsold homes is even greater than what’s been thought.

In determining annual sales numbers the Realtors have been using a model “that is benchmarked to the figures reported in the decennial U.S. Census. The model requires making certain assumptions for population growth and other measures in between the census surveys,” reports the WSJ.

The model may have overstated the number of sales “due to recent consolidation among multiple-listing services, which has resulted in those firms having wider coverage of housing markets. NAR’s tally could be distorted if the firms ‘are sending us more home sales because they have a larger coverage area, but without informing us that their reach has grown,’” said Lawrence Yun, who is the chief economist at NAR and the one keeping an eye on the model.

Needless to say, if they overstated the sales numbers, there is a very good chance that they overstated the average prices paid as well. Once more, it looks as if I was insufficiently pessimistic in RGD, positive GDP reports notwithstanding. Of course, now that we’ve brought up the subject of erroneous statistical reports….

The economic contraction isn’t over. It has still barely begun.

Fortunately, deficits don’t matter

For Paul Samuelson told us so:

President Obama‘s budget, released Monday, was conceived as a blueprint for future spending, but it also paints the bleakest picture yet of the current fiscal year, which is on track for a record federal deficit and will see the government’s overall debt surpass the size of the total U.S. economy. Mr. Obama‘s budget projects that 2011 will see the biggest one-year debt jump in history, or nearly $2 trillion, to reach $15.476 trillion by Sept. 30, the end of the fiscal year. That would be 102.6 percent of GDP — the first time since World War II that dubious figure has been reached.

Neo-Keynesians such as Paul Krugman insist that the deficit isn’t a problem because of this line of argument, first presented by Paul Samuelson in his landmark 1948 textbook entitled “Economics”.

“There are also burdens involved in an internally held public debt like our present one, but the burdens of an internal debt are qualitatively and quantitatively different from those of an external debt. This is the first and most important lesson to be grasped, without which nobody can go far in understanding the economics of the public debt. The interest on an internal debt is paid by Americans to Americans; there is no direct loss of goods and services. When interest on the debt is paid out of taxation, there is no direct loss of disposable income; Paul receives what Peter loses, and sometimes – but only sometimes – Paul and Peter are one and the same person. . . . In the future, some of our grandchildren will be giving up goods and services to other grandchildren. That is the nub of the matter. The only way we can impose a direct burden on the future nation as a whole is by incurring an external debt or by passing along less capital equipment to posterity.

Of course, it is probably worth considering that the situation in 2011 is not exactly the same as the situation in 1948, as can be seen in the chart below.  Note the green line, in particular.