Wednesday, July 9, 2014

Economic news


There are several articles that have caught my eye over the past couple of days.  I highly recommend that you take the time to read each of them in full.  They're important.

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Karl Denninger notes that central bank lies have finally run headlong into mathematical reality.

Remember this folks -- we invented out of whole cloth six times as much economic activity as actually existed.  We pretended that it existed by creating credit out of thin air without anything behind it.  That credit got spent on consumption exactly as if it was wealth created from past production and had exactly the same effect on stimulating demand as if the funds came from that past production.

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Utterly nobody in media or government wants to deal with this.  When I raised this very issue several years ago with Congressional offices (including but not limited to Cathy McMorris-Rodgers staff), particularly during the debt limit mess a few years ago, it was dismissed with complaints that we "can't" deal with that because it would mean massive spending cuts that are politically impossible. 

So what -- arithmetic doesn't care about your political problems and the refusal to deal with it just means that the magnitude of the problem gets worse!

There's much more at the link.  Indispensable reading to understand why we are where we are, economically speaking - and why the next crash is already baked into the fiscal cake.

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Gail Tverberg produces eight reasons why our debt burden is different from previous economic crises.

The problem we are running into is the fact the world is finite. Growth can’t continue indefinitely. The way that the physical world enforces the end to growth is not obvious, until we start hitting the limits.

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As governments cut back, whether these cut backs are in education, unemployment benefits, military spending, or healthcare spending, there are indirect effects on the economy as a whole. The problem is that government spending creates jobs. As government spending is cut, it pushes the economy toward contraction–even if part of today’s spending is clearly wasteful. It creates a conundrum–fixing one problem makes another problem worse.

We live in perilous times. We have leaders who think they know the answers but, in fact, they do not. The debt problems we face now are not just overspending problems; they are signs that we are reaching limits of a finite world. World leaders do not seem to understand this connection. It is not even clear that they understand the connection of debt problems to the need for cheap-to-produce, high-quality energy products.

World leaders are nevertheless convinced that they know the answers, based on complex, but very flawed, models. Unfortunately, actions taken based on these models have a good chance of making the situation worse rather than better. For example, trying to tie a world economy closer together, when it is already heading toward collapse, seems like a recipe for disaster.

Again, more at the link.  This dovetails well with my earlier article about the problem of debt.

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Charles Hugh Smith points out that 'The global housing market has been dominated by magical thinking for the past 15 years' - but now reality is intruding.

This is the result of housing transmogrifying from shelter purchased to slowly build equity over a lifetime of labor into a speculative bet that credit bubbles will never pop. This transmogrification is the final stage of the larger dynamic of financialization, which turns every asset into a speculative commodity that can leveraged via debt and derivatives and sold into global markets.

The magic of something for nothing is especially compelling to a populace whose earnings have stagnated for decades. The housing bubble fed the fantasy that a household could set aside next to nothing for retirement and then cash out their "winnings" in the housing casino when they reached retirement age.

More at the link.  Again, this dovetails with my earlier articles about the housing market.

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Finally, remember how Cyprus essentially stole the money deposited by its citizens in its banks to help bail them out when they crashed?  And remember how warnings have been sounded ever since that this might have been the first time that happened, but probably wouldn't be the last?  Well, Germany has just officially approved doing that to its depositors, if necessary, to rescue ailing banks in that country.

Germany's cabinet Wednesday approved plans to force creditors into propping up struggling banks beginning in 2015, one year earlier than required under European-wide plans that set rules for failing financial institutions.

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Germany "leads the way" in Europe by implementing European rules quickly and "creates instruments that allow the winding-down of big systemically relevant institutions without putting the financial stability at risk," the country's finance ministry said in its draft bill seen by The Wall Street Journal.

"This ensures that in times of crisis mainly owners and creditors will contribute to solving the crisis, and not taxpayers."

More at the link.  If you think the same thing won't happen here when push comes to shove, you're deluded.  Where else is the Fed going to get the money to rescue banks?  It can't reduce interest rates any further - they're already at an effective zero (below zero if you factor inflation into the measurement).  The bond market is saturated, and buyers are likely to become less rather than more common in future.  No;  depositors will be on the hook, whether they like it or not.

(This is the best reason I've yet found to keep a fair-sized chunk of your reserves at home, in cash, and put more into gold coins or other hard assets that can be easily exchanged for cash in an emergency.  That way the money isn't sitting in a bank account or Certificate of Deposit where a greedy government can get its hands on it.)

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I highly recommend reading all four of the articles linked above . . . and then checking your own financial bill of health.  How vulnerable are you to the sort of problems discussed above?  How can you make yourself less vulnerable in the short (the very short) term?  You may not have much time left in which to do so . . .

Peter

2 comments:

smithgift said...

IIRC the European Central Bank has negative rates before adjusting for inflation, so there's precedent for the Fed to do the same. Though, I suppose there's no reason the retail banks can't pull the same trick and essentially confiscate money that way.

smithgift said...

Also in re: energy, I think some of our energy crisis has to do less with running out of energy and more with running out of energy we'd like to use. Nuclear energy will not run out, and it is incredibly powerful. Ditto with space-based solar. But do you imagine either of those happening within the current political climate?

True, both have their risks, but unless we want to go back to horses and carriages, we don't really have a better option yet.

Then again, apparently Brazil has a successful sugarcane-based ethanol economy. So on further thought I don't think, even if we were to run out of fossil fuels, we would necessarily go back to a pre-industrial state.