This is a guest post by friend of TAE Dave Fairtex, who writes at Market Daily Briefing.
I've recently been exploring the statistical data warehouse provided by the ECB, and I was able to assemble the following chart, comprising MFI Loans (MFI = monetary financial institution) + Bonds (sovereign & corporate). It was good timing, because it shows that for the first time during this whole crisis, the eurozone has dropped into deflation.
Now don't get me wrong, if the Spanish banks (among others) had been marking their loans to market, deflation would have arrived long ago, but according to the data series provided by the ECB, Official Europe has now recognized that they are in deflation.
However you slice it, deflation is NOT a good sign for the equity markets. Fewer bank loans means less money to buy stuff. I'm ... perhaps not calling a top (that was back in 2007) but I am leaning short here, at least in the eurozone and especially Spain. Fun exercise: the Spanish credit growth during the bubble years was a good 20% per year growth for 4 years. That's twice what the US did during that same period. If you look at Ireland, it's even worse.
Here are the charts.
First - the growth (year/over/year) in credit in the eurozone. When the line goes below zero, that says credit is contracting year-over-year.
Next, the overall credit - bank loans and bonds. You can see bank loans have taken a bit of a spill recently.
The table below describes the state of credit among the countries of the eurozone. The columns marked with time periods (3M, 1Y, 3Y, etc) are the annualized credit growth (or decline) over that time period. The "State" column says a nation is in deflation if the 1Y annualized credit growth in credit is negative - the column marked 1Y.
Note that Greece has already gone through a default and thus their credit decline is quite dramatic. The 10Y column is the average credit growth over the past 10 years, which is meant to give a sense of what "normal" credit growth looks like, although one might argue that the last 10 years may have been a bubble period in many nations.
One really important note: the data is collected by the ECB, and records the values of the loans and bonds as reported by that nation's banking system. If the banks in that nation have not yet written down their bad loans it is almost guaranteed that there is a substantial amount of deflation yet to occur. If you examine Ireland, you will see that the banks there have written down a large amount of their nonperforming loan portfolios. This is not true for most of the other nations in the eurozone.
To be continued ...
Well, after all said and done, an “Englishman’s home is his castle” n’est pas? Such is the power of propaganda and social norms. That and the fact that decent affordable housing for rent has always been problematic in the UK due to the feudal class system of serfs and lords and the dehumanisation by each party by the other. So the serfs (latterly working class) saw the upper class as greedy morons; the upper class saw the poor as ignorant wretches. (Noblesse Oblige, if it ever existed was killed off with the French revolution.) Thus the rise of the slum landlord, both then and now. It was only with the rise of socialism in the twentieth century that saw a brief respite with the ‘homes for heroes’ and slum clearances, which worked for a while (in the inter war years) till the elite saw again a way to make a quick buck with cheap poor quality development rolled out across the land in the sixties and seventies. Couple with bad government planning and the destruction of existing communities it was a recipe for disaster. Then came neo-liberalism in the 1980’s and the buy your own council house bonanza (though that right had in fact existed for quite a while already), which saw lucrative gains for those fortunate enough to live in a ‘nice’ area, and total loses for those on sink estates.
The British model of renting and the whole attitude is summed up in that FT article:
By Ed Hammond, FT. March 1, 2013 7:16 pm
"Britain’s inability to wean itself off home ownership is perplexing. Every other large European nation has managed to foster a sensible market for rented housing alongside traditional owner-occupation. From the sprawling ex-industrial workers’ estates of West Germany, now leased out on 30-year terms, to Switzerland’s luxury housing complexes, renting is a professionalised mass-market phenomenon. In those two countries, half and two-thirds, respectively, of all households rent. In the US, too, renting, both short- and long-term, is – certainly within the country’s metropolises – the norm.
In contrast, renting has never been considered a “grown-up” option in Britain. Rather, it is still seen, predominantly, as a stopgap between parental nest and home ownership. This view of renting as a dissolute middle ground has stunted the growth of a functional market. The country is the poorer for it. Where continental Europeans have an efficient rental market stewarded by responsible and, crucially, accountable institutional landlords, Britons have buy-to-let: the opportunistic love child of Dickensian skulduggery and pointy-shoed speculation.
The British rental model, if it can rightfully be called that, is primarily a way for the landlord to siphon some cash from his investment while waiting for the market to inflate enough to flip it. In this lies a big part of the problem. If the homeowner is renting only as a passing measure, the uncertainty inherent for any tenant makes it impossible to consider it as a realistic long-term option any more than they might a friendship with a lion."
Thus status in the caste/class system is paramount:
Of course that doesn’t mean that they are actually that ‘sharp’:
By Jessica Winch | Telegraph – Mon, Feb 25, 2013 09:40 GMT
British home owners who took out foreign currency mortgages have been badly hit by the strong appreciation of the Japanese yen and now face crippling debts.
“The key reason to take out a foreign currency mortgage should be to take a view on exchange rates, in particular if one expects sterling to improve against the currency in which the mortgage is denominated. Too many people took out these loans simply because the interest rate was lower.”
In 2004, yen mortgage rates were around 1pc, while UK rates were around 5pc.
However, the risk with a foreign currency mortgage is that if sterling falls in value against the foreign currency, the monthly repayments go up in sterling terms and more importantly the total amount of the debt in sterling also rises.
The rising level of debt meant that borrowers had to stump up more collateral, such as cash or savings, or the bank could switch their mortgage back into sterling to avoid further losses.
Some of the affected borrowers said they were not fully warned of the risks. Others also discovered they were not covered by UK financial services jurisdiction.
“If individuals do not understand the risks associated with borrowing in foreign currency, then it’s incredibly dangerous to do so.”
The Sunday Telegraph was initially contacted by Paul Coates, 51, an ex-financial agent who works in Singapore as a property agent. He had a yen mortgage with RBS (LSE: RBS.L - news) switched back to sterling in December 2008, which increased the size of his loan by 50pc to £302,688.
Four years later, he is facing legal action in the UK to repossess the property in north Wales, which Mr Coates had bought for his mother.
He said: “I have been very stressed about this for four years and it’s very likely I’ll lose my home in the UK.
“I expected currency risks but what I did not understand and what wasn’t made clear to me was that the bank would switch the mortgage the way it did.
“I think they should have had a stop-loss arrangement to convert the loan at an earlier stage.”
He had fallen behind with his mortgage repayments as he was out of work for a year when the financial crisis hit.
An RBS International spokesman said: “Due to client confidentiality, we are not able to comment on the specifics of this matter.”
David Lewnes, a retired advertising executive, went to live in Singapore nine years ago, after working in east Asia since 1985. He bought a two-bedroom property in east London in 2004 as an investment and was advised to take out a yen mortgage to help reduce the payments on the property.
He took out a mortgage of £345,000 with RBS’s Singapore office following advice from an adviser.
However, the rapid appreciation of the yen from 2007 onwards led to RBS forcing Mr Lewnes to switch his loan back to sterling as the loan exceeded the maximum loan-to-value of 75pc. As a result, his debt increased by 50pc and the total debt of £525,000 exceeded the value of the property.
“While everybody appreciated there was some currency risk, they had no idea of the magnitude of that risk,” Mr Lewnes said. “When the exchange rates started to move the bank should have warned their clients, but they didn’t. They waited until it was a disaster.”
Mr Lewnes has paid down the debt to £450,000 and intends to continue with interest repayments until the loan expires in 2021. He plans to sell the house and use the proceeds to service the debt.
An RBS International spokesman said the bank did provide foreign currency mortgages to clients who requested them in Singapore from 2004 to 2011.
Again hindsight is always 20x20, but as for being a sharpie, I think this shows their edge is somewhat blunted.
But ““When the exchange rates started to move the bank should have warned their clients, but they didn’t.” I mean, didn’t they think to check the exchange rate and set a bail out point themselves? Didn’t they bother to check their mortgage repayments? Seems to me they were perhaps too attached to their ideas of who they were in the world and about how things work. Attachment truly is the source of suffering…
Shed with a bed anyone? Somewhere to store your tulip bulbs I suppose…
Here is another interesting article, this time by the FT
But I found myself puzzled that these self-styled Masters of the Junior-verse were hell-bent on home ownership, ready to spend every penny they had – and more – on something that may yield no financial reward and which they will probably have to soon abandon when dispatched to make money in some distant corner of the non-economically paralysed world.
Even among these sharpies, owning is still, in spite of all the difficulties of getting on the ladder – mortgage requirements for first-time buyers are at their highest level for generations – the only game in town.
It seems to me that lots of young people in London seem to be very keen to become debt-slaves - despite all the warning signs over the past 5 years. Intriguing!
Europe is indeed tipping over the edge again, into phase II of the credit crunch. For those minded to gamble with something they can afford to lose, shorting would be the way to go at this point IMO (bearing in mind that all gambling is risky, that governments can change the rules so that you may not be able collect on having been right, and that there will be far more ways to lose your shirt than to make a lot of money, even if you're right about the trend).
The unnaturally low level of volatility, combined with strong insider selling against a backdrop of optimism verging on euphoria, is a strong red flag warning. deflation is a very powerful force, and can take hold very quickly. When it does it very rapidly becomes a self-fulfilling prophecy.
Watch Europe as it's in the vanguard of deflation, and in some countries acute liquidity crunch already. This is where the rest of us are headed.
And so it begins (again and in earnest this time):
Bank of England mulls negative interest rates
Negative interest rates would mean high street lenders paying the central bank to place their money with it. The move would be intended to encourage more lending to businesses and households. But it could also lead to a reduction in the interest paid on individual savers’ accounts held with high street banks.
The Bank has considered cutting rates from their record low of 0.5pc in the past but decided against doing so for fear of bankrupting a number of smaller building societies. To get round the problem, the Bank is reviewing a possible change to its remit so it can set a separate interest rate specifically for excess deposits placed by financial institutions at the central bank.
Other central banks, such as the European Central Bank, have two rates – a base rate and a deposit rate. In the UK, Bank sources said, a new so-called deposit rate could be charged on funds placed with the central bank above a certain level. For example, the first £1bn of banks’ money held could be charged at the existing base rate, and the rest at the new ‘deposit rate’.
So in other words the banks can no longer get ‘cash on their cash’, albeit at the paltry 0.5%, but rather are effectively paying the BoE to hold their money for them so forcing out into the ‘market’.
But maybe they don’t want to lend due to all the ‘risk’ that they suddenly see out there, and so will find other ways to get their pound of flesh:
By August 2012, with under two years to run, UKAR said that monthly payments of £2,982 were due – and these were now being added to the Jacksons’ total mortgage in the form of arrears.
Arrears on their account today are £15,000 and increasing at the rate of £2,700 a month. When the property is eventually sold, UKAR will claim these arrears along with the original mortgage balance.
The arrears could, within less than a year, wipe out all the equity in the property. The Jacksons say UKAR is effectively enforcing a brutal mortgage arrears policy to obtain a far greater part of the property’s eventual sale value.
‘We are sick with worry over these arrears,’ the Jacksons say. ‘We accept the house will have to be sold to pay the outstanding mortgage but all we ask is that we are allowed to pay interest only for the rest of the term, which we can afford to do.’
UKAR admits that its handling of the Jacksons’ case has been poor in some minor respects, but maintains it is right to demand full monthly repayments and, if these are not met, to add them to the total owed.
And even if you can pay the mortgage now, you may not be able to for much longer:
The Bank of Ireland is about to increase the cost of its tracker mortgages, despite the base rate not increasing, but is your mortgage rate safe?
Thousands of Bank of Ireland mortgage customers are to be hit with higher repayment costs on their tracker mortgages, whether the Bank of England Base rate changes or not.
The lender has announced rate hikes to take effect from May, seeing rates for 13,500 customers on base rate tracker deals double.
The changes mean that a buy-to-let mortgage customer on a typical interest rate of 2.25% will see their rate climb to 4.99% from May 1.
Residential customers will see increases introduced in two stages: 2.49% plus base rate will take effect from May 1, changing again to base rate plus 3.99% on October 1, jumping to an overall rate of 4.49% if the base rate stays at 0.5%.
I guess they must think that the ’greedy landlords’ are putting up their rents deliberately to cash in a make money, but while there are many who are profiteering – usually those with little in the way of debt and or who bought before the boom, the fact is being a landlord does still (just) have its obligations, such as providing appliance and services safety certificates and maintaining the property to a reasonable standard. That costs money, and those costs are also going up. Also given that many bought on ‘interest only’ mortgages, at some stage they might find themselves in negative equity. As TAE have often said, and even despite increasing rents, the risk to the landlord is still greater.
Maybe that is why the FSA are targeting Banks who ‘game’ their liabilities:
Banks wary as FSA targets "gaming" of risk weights
* UK tells banks to take more conservative view of loan risk
* Bankers see risk to economy and models from standardisation
By Steve Slater
LONDON, Feb 25 (Reuters) - Britain's banks could need tens of billions of pounds more capital as part of a crackdown on internal risk models that are deterring investors and undermining efforts to shield the global financial system from future shocks.
The Financial Services Authority has been assessing how lenders calculate the riskiness of their mortgages and other loans to make sure they are setting aside enough money to cover potential losses.
The FSA has stepped up that scrutiny in the past two months, banking sources said, as part of a wider trend in Europe towards standardising guidelines on how banks should calculate the riskiness of loans amid concern some are gaming their internal models to flatter their financial health.
To meet the new rules, lenders are cutting their risk-weighted assets (RWAs) through disposals, by cutting risky businesses, and hedging. They are also tinkering with their internal models to make their holdings appear less risky, undermining the credibility of Basel III.
A DELICATE ISSUE
The Bank of England's Financial Policy Committee (FPC), which looks out for trouble spots in the financial system, said in November the way that banks calculated RWAs was too "complex and opaque" and needed fixing. The FSA was told to assess the problem and report back for a March 19 FPC meeting.
No wonder then that some have started to remove ‘insurance’ cover for certain ‘liabilities’:
[quote]Ireland to remove bank deposit guarantee from end-March
DUBLIN (Reuters) - Ireland (OTC BB: IRLD - news) will remove a state guarantee on bank deposits next month to help ease pressure on loss-making lenders and move the country further towards exiting its EU/IMF bailout, finance minister Michael Noonan said.
Ireland's almost fully state-owned banks, whose rescue cost the equivalent of 40 percent of annual economic output, have had widening losses partly because of fees they had to pay for the guarantee, and they have been clamouring for its removal for months.
The removal of the guarantee will not impact the vast majority of bank customers because deposits over 100,000 euros are covered by a separate guarantee which has been in operation in Ireland since 1995.
The Eligible Liabilities Guarantee (ELG) scheme guaranteed deposits over 100,000 euros in case banks got into trouble. Lenders had to pay a fee to the government for the guarantee, which cost the country's three remaining domestic banks 1.1 billion euros last year.[/quote]
So between the hard place (negative interest on their capital) and the rock (inherent risk re-emerging and no way to cover it up) it looks like the future of lending is getting decidedly Hobsonian…
and deflationary. Has the FIRE finally gone out?
Good time to go back to the link I posted earlier in this thread, Losing Our AAA Rating Could Mean Bank Collapse And Deflation. From that link:
Banks in this country are doubly exposed, because regulators have forced them to hold vast amounts of UK government debt.
If that is true in the UK, it is even more so in Spain, which had/has a shadow policy to have its banks apply for EU money in order to buy sovereign bonds; a nice topic for Dave to run with.
Still pulling together the research on Spain. To give you a flavor:
Spain's new Bad Bank (Banco Malo - actually named Sareb) has run off and bought 37 billion euros in bad debt; 66% are developer loans, 33% are foreclosed homes and property under construction. For these loans it paid 46% of face value - a discount of 54%. While a lot of articles I read suggest the loans are simply being "transferred", what is happening is, the bad loans are in fact being SOLD, and the price averages 46 cents on the euro.
When sold, the selling bank must at that point crystallize losses, so after pretending for so long these loans are performing just fine and are worth 100 cents on the euro, now the selling banks must immediately write down these loans and take their losses so they are not super happy about that part. As for the prices they are getting - I'd say the level of joy should be relatively high, since Banco Malo is dramatically overpaying for these loans.
It may sound like a 54% discount is a good price, but all you have to know is that fully completed homes are selling on average right now for 53 cents on the euro to understand that overpayment is occurring. Should we imagine that raw land and half-finished houses should get only a 54% discount? Not bloody likely. NAMA, Ireland's version of Banco Malo, having had 3 years of experience trying to sell the crap they picked up for 42 cents on the dollar, are getting on average 25 cents on their recoveries. And some of NAMA's crap is only worth about 10 cents.
In all things like this, there are winners and losers. The Loser, in this case, is taxpayer-backed Banco Malo, which is paying 47 cents for an asset that might be worth 20 cents at best. The worst, most offensive, most underwater, hopeless, and nonperforming loans are being sold (oh I'm sorry, "transferred") to Banco Malo. I wish there was another name I could give the bank - Banco Pathetico, perhaps, or maybe Banco Estupido, for paying 46 cents when it likely should be paying at most 20.
If the Spanish people realized that 37 billion of their euros were being basically handed over to their friendly bankers, they'd be more than slightly annoyed, I suspect. But somehow its all happened under the radar. Perhaps it is because of the neutral and obfuscatory language used in the articles describing what is happening. Who knows.
Anyhow, this is just a taste. Coming up with estimates for just how much has gone bad, how much has been written off, how much overpayment is occurring, and how much remains is complicated. Perhaps I can get it done this weekend.
yes - Britain, then Bulgaria, and recently Italy too:
In fact, as the ABI notes, loans to families and companies dropped by record amounts in January.
Dave - looking forward for your take on Spain (where the amount of bad loans started to decline?)
IMHO I see it as differing 'systems' reacting. The 'political' system which in the UK tends to be very 'policy' reactive compared to the say Germany's more 'precautionary' approach, though more recently the Germans have been forced down the reactionary path due to the shear force of circumstance, something which will be much more prevalent as things really start to kick off. Thus in terms of energy, the Germans tended to have a more forward looking precautionary approach with plenty of structured planning, the UK on the other hand with its ridiculous 'laissez fair' leave it all to the market approach has only a reactionary response. Thus, instead of doing something about the problem which they knew about years ago which has led to the current looming crisis with fuel bills and supply constraints:
- The Impact of the 'Real' Energy Gap on GDP Will be Equivalent to GBP108bn a Year
- GBP3.7k a Year Cost for Every Working Adult In The Country
- Powercuts are Now Just as Likely in the Summer as the Winter
The UK energy gap is much larger and closer than currently being reported, according to a new white paper issued by LogicaCMG, a leading provider of business services to the energy sector. Within ten years the gap could cost UK businesses over GBP108 billion a year.
It’s a good job the Prime Minister is in India he can get to see how a country manages with constant blackouts and power shortages, as that is soon to start happening here in the UK.
The only upside would be if the UK gov’t pushed some of the ‘quantitative easing’ into the power industry to renew the infrastructure. Who knows that might even boost GDP and ‘Growth’.
However the other system of Finance and Investment will put paid to all that by betting, sorry ‘speculating’ on fuel and energy prices, regardless of the actual costs of production. Fuel prices in the UK are set to hit record highs due in part to a falling sterling but also to speculation.
Two things strike me:
1) Just as Greece is part of EU periphery (with Germany at the center), Bulgaria is part of the South Eastern Europe Periphery (with Greece at its Center). Prior to the Greek sovereign debt crisis, Greek banks lent heavily to banks and businesses throughout Serbia, Bulgaria, Romania, Macedonia, etc. One might expect to see a collapse of Greece's peripheral trading colonies before an outright Greek collapse. The unrest in Bulgaria fits.
2) Bulgaria becomes a cautionary tale regarding the dangers of selling off / privatizing critical national infrastructure to companies in foreign nations.
Bulgaria is a net electricity exporter throughout Southeastern Europe. Its electricity generation and distribution assets are more than sufficient to supply the Bulgarian population with enough left over for export. In 2004, Bulgaria privatized most of its electrical distribution assets by selling them to several foreign companies including the Czech company CZE. Net result: domestic Bulgarian electricity bills have skyrocketed precipitating mass protests (the largest since the fall of Communism in 1989) and a demand to re-nationalize the electricity distribution assets.
Losing our AAA rating could mean bank collapse and deflation
If our growth prospects deteriorate even further, then without even higher inflation, UK households will default on their mortgages, bankrupting British banks and thereby bankrupting the Government if it stands behind the banks. We have already seen that happen in Ireland and Spain. It could happen here, too.
Banks in this country are doubly exposed, because regulators have forced them to hold vast amounts of UK government debt. Even relatively modest rises in government bond yields, implying some fall in government bond prices, would impose huge losses on UK banks. The Bank of England has suggested that UK banks already need £60bn of extra capital. Taking large losses on UK government bonds could push them over the edge.
Bulgarian prime minister Boiko Borisov resigned this morning after days of mass protests against austerity across the country.
“I will not participate in a government under which police are beating people. Every drop of blood is a shame for us,” he said. “Our power was handed to us by the people, today we are handing it back to them.”
This is really interesting to me - a great example of how price inflation happens differently in the different sectors. Its not a simple question of money creation or destruction, it requires a more complicated model than that. I think money creation plays a pretty big role, but the shortage of "new land" plays a part too. You can import cheaper food to lower costs, but the amount of land remains the same. Lastly, cheap energy was used to build the older houses, while building a new house is built under the current energy & resource cost structure.
Pop growth from 1971 until now: 12%.
So a combination: mortgage lending (likely much higher debt levels), pop growth, expensive energy, and no more land. Bananas and milk seem easier to manage costs for.
So many interesting problems, not enough time to model them all.
Glad it worked out! Hopefully people will learn to follow the data regardless where it leads. That's what I try and do.
I have another article I'm preparing analyzing the situation in Spain, with a more focused set of charts. I still need to do a bit more research but from what I see right now, Spain is pretty far from "hitting bottom."
Not to spoil the surprise or anything.
I love the international flavor here. More perspectives can only help us figure out the truth.
How UK house prices have risen 43-fold since 1971
just want to thank to Dave and TAE, I used your material in my article about deflation in Europe - and some people found it interesting and it went to prime time in TV News - so maybe some people will wake to the reality of deflation, though other "analysts" think Eurozone has already "hit the bottom", so lets see....
I quite agree there are definitely things you should probably not do, and one of them is earn money in one currency, and have a loan in another currency. Especially if the borrowed currency is one of those safe-haven currencies. Unless you really enjoy currency risk of course.
I think its possible for there to be conditions under which buying a house using a loan is a good idea. I'm certainly not going to so do, simply because the math doesn't work out where I live, I abhor debt, and my income is not so dependable right now. But the math might work out better elsewhere, and I'm going to keep an open mind about such a possibility. Real Estate is always local.
I am more than passingly familiar with how rules differ around the world. I'm living right now in Asia, for instance. Even though I still write as an American and I still think of myself that way, I don't currently live in North America. Where I am, the rules are most definitely more flexible, especially if you are well-connected.
thanks for insight. No worries there, I do not intend to go into any kind of debt, since that takes my freedom of act (in the long-term).
I also do not have children (yet), since I did not figure out how would I explain to them the tragic state od the world in the coming decades and hey, had my potential children to grow up, they will likely to have their on children etc., so I am not sure thinking in decades ahead it long enough perspective.
I think "bottleneck" years are ahead of us starting today and each new soul to this world will have to experience that - soooner or later. Unsustainable growth (and then contraction) of credit is just one of many irresponsible things people do for greed and immediate survival, or something like that.
I am not even mentioning the climate change issu here, since this is absolute manifestation of our collective failure as a species....
I'd venture to say that borrowing money from Vinnie the Kneecapper (or any of his close cousins) might easily fall under the heading of a "full recourse loan", which was one of the things I suggested it might be wise to avoid!
I think we both read the same stuff.
One reason why I think its important to be clear about why certain prices are rising is that mis-assigning responsibility to a particular cause could lead one to make a bad policy decision.
For instance, if the political class thought that oil prices were rising for monetary reasons, they might consider tightening credit, which wouldn't really help the situation if oil prices were actually rising because of scarcity and/or resource depletion.
History rhymes but never repeats? Unlike the 1930s when oil was in a glut due in part to the Texas wildcat strike, today we have an increasing 'difficulty' increasing oil and other energy supplies without incurring huge fiscal costs too, yet alone the extra energy needed to find the 'extra energy' which decreases the EROEI. And as Ayres and Warr have shown, energy or more specifically 'work' (exergy services) is a key (if not the key) driver of economic expansion.
…Since crude oil production has been on an undulating plateau since 2005 while demand has increased (Hirsch et al, 2010), this has put huge upward pressure on the price of oil, and several commentators have drawn the conclusion that these high oil prices signify the end (Heinberg, 2011; Rubin, 2012) or at least the twilight (Alexander, 2011a; 2012a) of economic growth globally. If this is true, we are living at the dawn of a new age, and should be bracing for impact.
We are in a new paradigm: not only has the rug been pulled out from under all the old world theories of perpetual economic growth, but the ground beneath is not there, but way back yonder at the cliff edge we passed over a while back, having been hidden by said rug. All 7 billion of us and counting...
As I have posted elsewhere:
And as Dave said (which could be said of most neo-classical economists):
Ain't that the truth!
I would be extremely wary in giving financial advice and green-light to debt for someone in Eastern Europe (or just about anywhere in general). Things may be very different from bankruptcy laws to repo methods. Vinnie the kneecapper, Stoneleigh's favourite character, may be closer than you think in some parts of the world.
Dead Right by John Holbo
"The thing that makes capitalism good, apparently, is not that it generates wealth more efficiently than other known economic engines. No, the thing that makes capitalism good is that, by forcing people to live precarious lives, it causes them to live in fear of losing everything and therefore to adopt – as fearful people will – a cowed and subservient posture: in a word, they behave ‘conservatively’. Of course, crouching to protect themselves and their loved ones from the eternal lash of risk precisely won’t preserve these workers from risk. But the point isn’t to induce a society-wide conformist crouch by way of making the workers safe and happy. The point is to induce a society-wide conformist crouch. Period. A solid foundaton is hereby laid for a desirable social order."
It has occurred to me that deflation is evidencing itself not in the decline of prices but the decline of the number of people participating in the economy or participating less, or to put it simply becoming poorer. This is the sort of deflation which the system can exist with. Truth be told it is the deflation the Anglo speaking political elites embrace. They want a growing underclass in the belief that this will lead the underclass to be more 'conservative'. Of course there would come a point where either the deflated class becomes too large for corporations to garner profits, ie. Walmart, or where the underclass revolts. Well such is an impossibility in America. In America the losers hide away by choice or are hidden away by force. As for the EU in this regard I have no clue. I would add Mitt Romeny put his finger on the accepted number for the underclass, 47%. We will see.
I say if you can buy a house for less than it costs to rent that same house, its a grand idea. Otherwise its just various versions of leveraged speculation which is a fine thing as long as you know that is what you are doing, you don't anticipate major deflation, and you aren't using a full recourse loan.
Steve Keen observed that banks these days don't need reserves first in order to lend - step #1 is to get a willing borrower, and only then do they engage in step #2 where they run out and find the reserves to backstop the lending before the regulators get upset. The argument made sense to me.
In other words, more reserves won't do squat to encourage lending because that is Just Not How Things Work. Credit growth isn't happening because there aren't enough willing borrowers, not because of some lack of reserves.
H&S pattern ... looks like one, but as a practical matter, I'm gonna say it won't function the same way, because its a % change y/o/y chart first of all, and second of all because those chart patterns are useful because of the fear/greed psychology of market participants interacting with various historical price levels and this is a derivative of the change in total credit which is kind of not the same thing. I don't think regular people in the nation look at this month's credit growth and either act to get a loan or not based on the net change!
However I do see a pattern of lower lows, and as trends go, it looks ugly. I predict things will go lower, absent any dramatic intervention. As they say, the trend is your friend, so go with the odds.
I read the Professor's link, and it reminded me of those econ classes I took during my over-lengthy undergraduate career. Honestly it felt like I was listening to a pair of virgin psych grad students having a long and detailed discussion about sex. But that's just my opinion, worth the paper its printed on, etc.
As I understand it, the deflation spiral happens after a bubble pop because both default AND repayment result in credit money being destroyed, which results in money becoming more scarce, which makes it more difficult systemically for others to get the money to repay their debts causing more defaults resulting in more credit money being destroyed. This continues until the overall debt level is reduced to a point where the debt level is sustainable for the incomes available to service that debt.
One of the very confusing things about this pop is that absolute prices of many things are rising. I believe resource constraints (declining ore grades, oil finds, etc) are a big reason why some prices are increasing. Government support of particular sectors is another reason. It is important to be clear about which prices are going up, which ones are going down, and why. But I believe that over time, the level of credit money in the economy will eventually have a strong influence in the general direction of prices, so that's the thing to watch.
- ► 2013 (13)
- ► May (2)
- ► April (3)
- ► March (3)
- ► February (2)
- ► January (3)
- ► 2012 (90)
- ► December (3)
- ► November (2)
- ► October (5)
- • 29 - Nicole Foss And Max Keiser Talk Greed, Fear, Downward Spirals And Risk Divisions
- • 23 - Japan Is Not A Good Example Of How Deflation Typically Plays Out
- • 16 - Household Net Worthless: Poverty Here We Come
- • 11 - What Happens When The Core Starts To Rot
- • 05 - The IMF -Inadvertently- Condemns The Eurozone
- ► September (5)
- ► August (8)
- • 30 - A Big Bad Brick Wall
- • 25 - Dear Angela, It's Time To Do The Right Thing
- • 19 - India Power Outage: The Shape of Things to Come?
- • 14 - The People Are Guaranteed to Lose
- • 10 - The Seductive Promises of Counterfeit CULTures
- • 07 - Here's The Science That Can Solve The Crisis
- • 04 - Lessons From the Full Tilt Ponzi
- • 01 - Culturally Programmed Myths of Omnipotence
- ► July (10)
- • 29 - How Will We Handle Our Losses?
- • 26 - Our Debts Must be Redeemed
- • 24 - Einstein's Definition of Gluttony
- • 22 - Super Rich Stash At Least $21 Trillion In Secret Tax Havens
- • 18 - Jeff Rubin and Oil Prices Revisited
- • 16 - Report: The Golden Dilemma
- • 12 - Europe Is Sliding Back Into Its Own Past
- • 10 - Libor was a criminal conspiracy from the start
- • 08 - Hubris Before The Storm
- • 03 - Unconventional Oil is NOT a Game Changer
- ► June (11)
- • 29 - Angela Merkel is Playing You For Fools
- • 23 - This Is Not America
- • 21 - Spanish Cook Books
- • 18 - Capital Flight, Capital Controls, Capital Fear
- • 18 - The Orkin Man: Which Side Are You On?
- • 15 - Goodness! Gracious! Great Wall's on Fire!
- • 13 - Autoimmune Finance: The System Attacks Itself
- • 09 - Europe: A Thousand Miles Behind
- • 06 - Welcome to the No-Growth Paradigm
- • 03 - If you love your kids, stop the bond bonanza
- • 01 - The truth about Europe - There is no solution Part 2: Growth doesn't rhyme with crunch
- ► May (9)
- • 29 - Espana en Fuego
- • 27 - Mammon is Hungry: Husband's Suicide One Day, Wells Fargo to Evict Wife The Next
- • 23 - All Hail the Greek Exit
- • 20 - Homo sapiens v. FWS
- • 18 - Deterrence is Dead
- • 17 - A world terrified by impotent ghosts from the past
- • 13 - Discovering the "End" in "Extend & Pretend"
- • 11 - There Is Not Enough Money On Planet Earth
- • 05 - China, or How To Live in Interesting Times
- ► April (8)
- • 29 - Beyond Zero Emissions: What's Wrong with Big Green Tech
- • 27 - The Limits to Mankind
- • 25 - Revisiting the Physical Risks of Debt
- • 22 - General Thoughts about Luck
- • 18 - Spain, Land of Magical Financial Realism
- • 09 - Money in Politics
- • 06 - Learning to Think in Multiple Scales
- • 02 - Disaster Capital Hits Europe
- ► March (14)
- • 29 - The Nature of Tipping Points
- • 28 - The Death of the Entertainment Industry
- • 27 - The Shock Doctrine has come to New Zealand
- • 24 - Becoming the Bank
- • 22 - To Where Our Oppositional Culture Takes Us
- • 20 - You wouldn't know it to look at it
- • 16 - An Introduction to Agent-Based Modeling
- • 13 - Juking the Stats: Our Culture of Manipulation
- • 11 - Get Ready to be Disappointed With "Sterilized" QE3
- • 09 - Revisiting the Financial Fingerprint of Instability
- • 06 - Why Liquidity is No Longer Enough
- • 05 - Their Assumptions are Getting Very Ugly
- • 03 - The Original Street Artist
- • 01 - Modern Myths that Destroy Humanity
- ► February (9)
- • 28 - When the Deflation Tsunami Hits, Losing the Least is a Winner
- • 26 - Our Depraved Future of Debt Slavery (Part III)
- • 24 - Our Depraved Future of Debt Slavery (Part II)
- • 22 - Our Depraved Future of Debt Slavery (Part I)
- • 20 - The Torture of the European Periphery
- • 18 - We're Still Sinking With the Titanic
- • 15 - Political Theater Will Kill the Status Quo
- • 13 - Die Wahrheit Macht Frei
- • 04 - Who Killed the Money Printer?
- ► January (6)
- ► 2011 (4)
Nicole Foss Lecture Tour:
AUSTRALIA/NEW ZEALAND March-June 2013
New Zealand May/June Dates still available
May 24 Waiheke Island
Palm Beach Hall 6.30pm
May 27 Auckland
The Hillsborough Room, The Fickling Centre (Mount Eden) 7.30pm
May 29 Tauranga
May 30 Wellington
Sustainability Trust, 2 Forresters Lane 5.30pm
June 1 Otaki
Clean Technology Centre 47 Miro St. 1.30pm
US Fall 2013 - Dates Available
Request Lectures: StoneleighTravels •at• gmail •dot• com.
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