Blog Archives

Financial Storm Clouds Gather

The financial storm clouds are gathering, and no, I’m not talking about impeachment or the Fed and repo troubles–I’m talking about much more serious structural issues, issues that cannot possibly be fixed within the existing financial system.

Yes, I’m talking about the cost structure of our society: earned income has stagnated while costs have soared, and households have filled the widening gap with debt they cannot afford to service once the long-delayed recession grabs the economy by the throat.

Everywhere we look, we find households, enterprises and local governments barely able to keep their heads above water–in the longest expansion in recent history. This is as good as it gets, and we’re only able to pay our bills by borrowing more, draining rainy-day funds or playing accounting tricks.

So what happens when earned income and tax revenues sag? Households, enterprises and local governments will be unable to pay their bills, and borrowing more will become difficult as the financial markets awaken to the re-emergence of risk: as shocking as it may be in the era of Central Bank Omnipotence, borrowers can still default and lenders can be destroyed by the resulting losses.

The era of Central Bank Omnipotence has been characterized by two things:

(more…)

Tagged with: , , ,

“Wealth Effect” = Widening Wealth Inequality

One of the core goals of the Federal Reserve’s monetary policies of the past 9 years is to generate the “wealth effect”: by pushing the valuations of stocks and bonds higher, American households will feel wealthier, and hence be more willing to borrow and spend, even if they didn’t actually reap any gains by selling stocks and bonds that gained value.

In other words, the mere perception of rising wealth is supposed to trigger a wave of renewed borrowing and spending.

This perception management only worked on the few households which owned enough of these assets to feel wealthier–the top 5%, the top 6 million out of 120 million households. This chart shows what happened as the Fed ceaselessly goosed financial assets higher over the past 9 years: the gains, real and perceived, only flowed to the top 5% of households earning in excess of $200,000 annually.

Spending by the bottom 95% has at best returned to the levels reached a decade ago in 2007.

(more…)

Tagged with: , ,

Ungovernable Nation, Ungovernable Economy

Yesterday I described the conditions that render the U.S. ungovernable. Here is a chart of why the U.S. economy will also be ungovernable. Longtime readers are acquainted with the S-curve model of expansion, maturity, stagnation and decline.

This is why the economy will be ungovernable: all the financial gambits that have been played to create the illusion of “prosperity” have reached stagnation/decline.

(more…)

Tagged with: , , , ,

What the Fed Hasn’t Fixed (and Actually Made Worse)

The Federal Reserve claims its monetary interventions saved America from economic ruin in 2009, and have bolstered growth ever since. Don’t hurt yourself patting your own backs, Fed governors past and present: it’s bad enough that the Fed can’t fix the economy’s real problems–its policies actively make them worse.

(more…)

Tagged with: , ,

What Happens When Rampant Asset Inflation Ends?

Yesterday I explained why Revealing the Real Rate of Inflation Would Crash the System. If asset inflation ceases, the net result would be the same: systemic collapse. Why is this so?

In effect, central banks and states have masked the devastating stagnation of real income by encouraging households to take on debt to augment declining income and by inflating assets via quantitative easing and lowering interest rates and bond yields to near-zero (or more recently, less than zero).

The “wealth” created by asset inflation generates a “wealth effect” in which credulous investors, pension fund managers, the financial media, etc. start believing the flood of new “wealth” is permanent and can be counted on to pay future incomes and claims.

Asset inflation is visible in stocks, bonds and real estate:

The sources of asset inflation are highly visible: soaring central bank balance sheets, credit expansion that far outpaces GDP growth and ZIRP (zero interest rate policy):

Destroying the return on cash with ZIRP and NIRP (negative interest rate policy) has forced capital to chase any asset that offers any hope of a positive yield. As asset inflation takes off, the capital gains attract more capital (never mind if yields are low–we’ll make a killing from capital gains as the asset inflates further) which creates a self-reinforcing feedback: the more assets inflate, the more attractive they become to capital seeking any kind of return.

In effect, gambling on additional future asset inflation is the only game in town.Institutional money managers are buying bonds that yield less than zero not because they’re pleased to lose money, but because they anticipate rates dropping further.

As bond yields decline, the value of existing bonds paying higher interest rises. As crazy as it sounds, buying a bond paying -0.01% will be a highly profitable trade if the yield on future bonds drops to -0.1%.

With the cost of borrowing less than zero once the loss of purchasing power (i.e. consumer price inflation) is factored in, it makes sense to borrow money to increase speculative asset purchases to leverage up any gains from future asset inflation.

Look at how margin borrowing and stock prices move in lockstep:

The question that few ask is: what happens to pension funds that need 7.5% annual returns to remain quasi-solvent when asset inflation turns into asset deflation, i.e. assets decline in value? Take a look at the S&P 500’s rise to the stratosphere and ponder the monumental losses that would accrue to any institution that thought asset inflation was a permanent feature of modern life:

There are only two ways to keep asset inflation alive: one is for central banks and states to buy up major chunks of all asset classes, i.e. hitting every higher bid regardless of the risks of such a strategy, and the second is to pay households to borrow money to chase future asset inflation, for example, paying households to buy a house with a mortgage:

The insanity of these two strategies is no hindrance to their implementation.The collapse of asset inflation will implode all the fiscal and financial promises based on ever-inflating assets and reveal the unsustainability of the status quo’s strategy of substituting debt and asset bubbles for stagnating real income.

My new book is #7 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.

Tagged with: , ,

Is the World Getting Crazier, But We No Longer Notice?

If we step back and look at what’s happened since the Global Financial Crisis of 2008-09, it’s easy to see that the global leadership has chosen to do more of what’s failed spectacularly.

Since the Global Financial Meltdown, central bankers and planners have pursued policies designed to boost global stock markets to create a wealth effect in which people will be psychologically inclined to borrow and spend more because their stock market/IRA portfolios are rising. This supposedly encourages them to spend this “paper wealth.”

But the policy runs aground on two realities: 1) only the top 5% of the households own enough stocks to make a difference to their wealth (and their perception of wealth, i.e. the wealth effect), and 2) the wealth effect only occurs in “good times” when people feel the economy is healthy and their prospects are improving.

When people sense the economy is unhealthy and their prospects have dimmed, they save more regardless of how much the stock market rises.

Signs of financial craziness abound:

— 25% of all stock market gains occur after Federal Reserve meetings: in other words, central banks “own the market.”

— The Swiss central bank admitted to spending $470 billion on currency market manipulation since 2010.

— Other central banks have intervened in the stock and bond markets to the tune of trillions of dollars/yen/euro/yuan.

— The central bank of China has spent over $100 billion in a few months propping up the yuan.

— China has made it easier to borrow money again, sparking yet another housing bubble in First Tier cities like Shanghai and Beijing–as if another housing bubble will fix what’s broken in China’s economy. (more…)

Tagged with: , , , ,

Will this Manic Stock Market Rally End in Tears?

Judging by October’s rocket launch, the stock market is back to where it should be, i.e. in rally mode. Yee-haw! All it took to keep the party going was another rate cut in China, another “whatever it takes” assurance from Mario Draghi and blowout earnings from a few tech giants.

(more…)

Tagged with: , , , , , , ,

Here’s Why Housing Must be Propped Up

The Powers That Be have gone to extraordinary lengths to prop up housing by whatever means are necessary since the collapse of the housing bubble in 2008: the Federal Reserve has pushed mortgages rates down by buying mortgage-backed securities, the federal housing agencies (FHA, VA) have issued millions of low-down payment loans, and the federal government has essentially taken over the mortgage industry, backing 90+% of all mortgage loans.

Why is the status quo so keen on propping up housing?

(more…)

Tagged with: , ,

Why Artifice Rules the World: We Have No Choice

There’s only one small problem with relying on artifice: we haven’t actually fixed what’s broken in the real world.

As I noted yesterday, we now game dysfunctional systems rather than actually repair them. Rather than fix the dysfunctional system of higher education, for example (as I proposed in my book The Nearly Free University and The Emerging Economy), students and their parents go to extraordinary lengths to game the Ivy league university admissions system.

Rather than actually address the structural causes of unemployment, we lower interest rates to zero and reckon the resulting financial bubble will fix unemployment (and everything else).

(more…)

Tagged with: , , , , ,

The Five-Year Fantasy Is Ending

Since these monetary/fiscal fixes (i.e. distortions) didn’t address the real issues, all they can possibly do is increase the magnitude of the next collapse.

For five long years, we have pursued the fantasy that we could return to “growth” without having to fix or change anything. The core policy of the fantasy is the consensus of “serious economists,” i.e. those accepted into the priesthood of PhD economists protected by academic tenure or state positions: what we suffered in 2009 was not the collapse of leveraged crony-state financialization but a temporary decline of “aggregate demand” and productive capacity.

The solution, the economic witch doctors asserted, was simple: replace temporarily slack private demand with government-funded demand (deficit spending) and flood the impaired financial system with liquidity (i.e. free money) and increase the incentives to borrow money.

In other words, the “serious economists” solution was to transfer all the interest earned by savers to the banks and push households to buy more low-quality junk from Asia on credit.

(more…)

Tagged with: , , , , , , ,