Jul 272012
 
 July 27, 2012  Posted by at 10:36 pm Finance


Robert Shiller, co-creator of the Case-Shiller index for US housing and author of Irrational Exuberance, has an interesting perspective on markets. Unlike the vast majority of economists, he recognizes both the role of speculative fervour in driving prices to over-reach themselves as a bubble develops and the fact that bubbles and their aftermath are swings of positive feedback inherently grounded in ponzi dynamics. As such, his position has considerable overlap with ours at The Automatic Earth:

Markets and the Lemming Factor (2008)

Some trends are persistent enough that they eventually attract a very wide pool of participants, as apparent gains amongst one's peers eventually overcome the caution even of many inherently skeptical people. When they last long enough to overcome the caution of bankers, the result is easy credit to fuel the fire, and a blatant disregard for systemic risk. This is how the largest speculative bandwagons are formed – the ones that become manias and eventually lead to ruin for a large percentage of the population.

Prices are continually pushed up, irrespective of any reasonable objective measure of value, by those who think that it does not matter how much they pay for something if there will always be a Greater Fool who will pay even more. The evidence of pyramid dynamics where insiders and early movers benefit at the expense of later generations destined to become empty-bag holders – should be abundantly clear. The pool of Greater Fools is not limitless.

In our view, major bubbles, of which there are many examples in history, represent a highly contagious collective taking leave of the senses. Over time, as they develop, the largest bubbles come to encompass and to drive much of the way in which a given society functions. The trend that takes hold, and which is destined to over-reach itself, becomes the defining the zeitgeist of an era, before reversing sharply with devastating effect.

The best known examples can be clearly seen in financial charts that allow the progression of the phenomenon to be quantified. This is possible when the infectious idea manifests as a parabolic increase, and subsequent implosion, in value of something that has become a focus of speculation.

 



However, speculative bubbles that manifest financially, and therefore lend themselves to quantification, represent only a subset of socioeconomic or sociopolitical swings that can spread exponentially within societies and come to define certain periods of their history. This broader category of transformative social movements that come to capture the collective imagination, and often later deliver the reigns of power into the hands of extremists, is also subject to over-reach and reversal.

The fundamental point is that Ponzi dynamics do not have to be quantifiable for their essential nature to drive cycles of expansion and retrenchment. Mr Shiller recognizes this point, and recently wrote a piece comparing what he calls "social epidemics" that occur within the context of market economies with those that do not.

Bubbles Without Markets

A speculative bubble is a social epidemic whose contagion is mediated by price movements. News of price increase enriches the early investors, creating word-of-mouth stories about their successes, which stir envy and interest. The excitement then lures more and more people into the market, which causes prices to increase further, attracting yet more people and fuelling “new era” stories, and so on, in successive feedback loops as the bubble grows. After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy.

But, before we conclude that we should now, after the crisis, pursue policies to rein in the markets, we need to consider the alternative. In fact, speculative bubbles are just one example of social epidemics, which can be even worse in the absence of financial markets. In a speculative bubble, the contagion is amplified by people’s reaction to price movements, but social epidemics do not need markets or prices to get public attention and spread quickly.

Some examples of social epidemics unsupported by any speculative markets can be found in Charles MacKay’s 1841 best seller Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. The book made some historical bubbles famous: the Mississippi bubble 1719-20, the South Sea Company Bubble 1711-20, and the tulip mania of the 1630’s. But the book contained other, non-market, examples as well.

MacKay gave examples, over the centuries, of social epidemics involving belief in alchemists, prophets of Judgment Day, fortune tellers, astrologers, physicians employing magnets, witch hunters, and crusaders. Some of these epidemics had profound economic consequences.

Mr Shiller asserts that, in the absence of quantitative feedback mechanisms, "social epidemics" can carry further into over-reach and therefore lead to worse consequences when the trend reverses.

There was no way, of course, for anyone either to invest in or to bet against the success of any of the activities promoted by the social epidemics – no professional opinion or outlet for analysts’ reports on these activities. So there was nothing to stop these social epidemics from attaining ridiculous proportions …

… China’s Great Leap Forward in 1958-61 was a market-less investment bubble. The plan involved both agricultural collectivization and aggressive promotion of industry. There were no market prices, no published profit-and-loss statements, and no independent analyses. At first, there was a lot of uninformed enthusiasm for the new plan. Steel production was promoted by primitive backyard furnaces that industry analysts would consider laughable, but people who understood that had no influence in China then. Of course, there was no way to short the Great Leap Forward. The result was that agricultural labor and resources were rapidly diverted to industry, resulting in a famine that killed tens of millions.

The Great Leap Forward had aspects of a Ponzi scheme, an investment fraud which attempts to draw in successive rounds of investors through word-of-mouth tales of outsize returns. Ponzi schemes have managed to produce great profits for their promoters, at least for a while, by encouraging a social contagion of enthusiasm.

Mao Zedong, on visiting and talking to experts at a modern steel plant in Manchuria, is reported to have lost confidence that the backyard furnaces were a good idea after all, but feared the effects of a loss of momentum. He appears to have been worried, like the manager of a Ponzi scheme, that any hint of doubt could cause the whole movement to crash. The Great Leap Forward, and the Cultural Revolution that followed it, was a calculated effort to create a social contagion of ideas.

There are many similar historical examples. While they are often known as periods of top down control, this is misleading, as Mr Shiller points out in relation to the Maoist example.

Some might object that these events were not really social epidemics like speculative bubbles, because a totalitarian government ordered them, and the resulting deaths reflect government mismanagement more than investment error. Still, they do have aspects of bubbles: collectivization was indeed a plan for prosperity with a contagion of popular excitement, however misguided it looks in retrospect.

Societal transformation is much more comprehensive when galvanizing change catches on from the bottom up, delivering an effective mandate for consolidating power around an idea into the hands of whomever can give a mass movement a focus that fits the collective mood. The personality cult of Mao Zedong was a very clear example of an idea that gripped, and temporally consumed, the social fabric of a nation (for a superb description of the era and its underpinnings in social mood contagion see Wild Swans: Three Daughters of China by Jung Chang).

Witness, for an additional historical example, the Stakhanovite movement in the early days of the former Soviet Union (1935), which celebrated heroic (and mythical) achievements in worker productivity. This initiative spread across many industries and initially inspired greater (and greater) effort over longer (and longer) working hours, leading to substantial productivity improvements 'for the glory of the socialist workers' paradise' that people felt they were engaged in building.

Unfortunately, bottom-up idealism did not deliver any such thing. Instead, people's commitment was used to set ever higher quotas that everyone was then expected to live up to, codifying these at a societal level in national five year plans. Effort initially freely given was later institutionalized as formal expectation to which bonuses and penalties were attached.

Given that the foundational claims of superhuman productivity were almost certainly fictitious, and that subsequent 'achievements' became more exaggerated over time, the burden on ordinary people increased substantially. Unachievable goals combined with strong incentives led to major divisions and resentment within the workplace, particularly between workers and managers.

This destabilization of relationships in the factory environment facilitated a divide and rule approach from the top down that played a role in the consolidation of central power under Stalin. As with Mao's China, an economic initiative for expanding prosperity based on a popular movement backfired as empowerment morphed into disempowerment, and very unpleasant consequences followed.

Greater emphasis on interpreting the historical record in terms of cycles, whether or not they can be quantified in market terms, makes greater sense of the rise and fall of imperial structures as well as the smaller scale cycles within cycles that these examples represent. Ponzi dynamics are the underlying commonality at all degrees of trend for a fractal system based on swings of positive feedback in both directions:

From the Top of the Great Pyramid (2008)

At the largest scale, empires are also grounded in pyramid dynamics, which is why they too have a limited lifespan. They grow by assuming control, either politically or economically, of new territories, positioning themselves to cream off surpluses from an ever-expanding geographical area in a form of involuntary buy-in …

… Wealth conveyors in favour of the economic centre, at the expense of the hinterland, are the very heart of empire, but without continual expansion to feed rapidly developing central complexity, they eventually fail, leaving the centre unable to sustain its existing complexity level. As with economic bubbles, empires hollow out in the latter stages, consuming their own substance in a catabolic manner in order to compensate for the inability to strengthen wealth conveyors sufficiently quickly to keep pace with the expanding requirements of the centre.

Where The Automatic Earth parts company with the views of Mr Shiller is in his opinion of the prospects for the bursting of our current bubble. He believes that systems which do appear to be quantifiable through market mechanisms contain sufficient control mechanisms to limit the downside:

Bubbles Without Markets (cont’d)

Modern economies have free markets, along with business analysts with their recommendations, ratings agencies with their classifications of securities, and accountants with their balance sheets and income statements. And then, too, there are auditors, lawyers and regulators.

All of these groups have their respective professional associations, which hold regular meetings and establish certification standards that keep the information up-to-date and the practitioners ethical in their work. The full development of these institutions renders really serious economic catastrophes – the kind that dwarf the 2008 crisis – virtually impossible.

From our perspective this view seems incredibly naive, especially coming from someone who sees bubbles as Ponzi schemes and should therefore understand the implications. It appears that Mr Shiller lacks an appreciation of just how large a bubble we have actually blown in the era of globalization, not to mention an understanding of just how badly the putative control mechanisms have devolved into pervasive blindness and corruption. We need only look at the extremely permissive financial regulatory framework – a result of comprehensive regulatory capture – to see where the power lies in the financial world. Most of betrayals of public trust we have seen in recent years are legal.

In our era of catabolic casino capitalism, the financial system has been hollowed out. Huge risks have been taken with other people's money for short term private profit. Reserve requirements have been whittled away to almost nothing in an attempt to maintain monetary expansion, and now there is virtually no cushion against financial crisis. The lack of capital adequacy requirements in the derivatives market has left a large construct of virtual value with toxic levels of counterparty risk, and a built-in meltdown mechanism thanks to perverse incentives to burn things down for profit.

It has been legal in places to rehypothecate collateral infinitely, meaning it is permissible to employ a small amount of collateral to underpin a vast quantity of loans, again leaving no margin for error. We have seen complex financial instruments mis-sold to municipalities all over the world, and 'assets' sold to customers then shorted by the financial institutions that sold them.

We have seen loans made to people, companies and governments that could not possibly repay them, because the sellers were able to collect their fees upfront, while selling the huge risk on to investors through securitization. Due diligence was virtually non-existent for many years, while systemic risk grew unchecked. In the USA, the mortgage securitization process broke the chain of title for property, and the banking system attempted to cover this up through fraudulent reconstruction of paperwork after the fact. Naked shorting has been used to create artificial selling pressure.

The benchmark LIBOR rate has been fiddled since its inception, creating enormous private profits at public expense. As crisis has developed as a result of these, and many other, abuses, the response has been austerity for the masses while the insiders, who should have know better, have been able to walk away from the consequences of their recklessness. The public sector is being asset-stripped as the great collateral grab gets underway.

The formal 'control' mechanisms have done nothing of substance to reign in the development of a global Ponzi structure, in fact they have more often acted to facilitate it. In reality they do little beyond lulling us into a false sense of security. The existence of an institutional framework is no guarantee of effective function. The substance is long gone, and what we are left with is a shell. The appearance of a large, robust structure is an illusion, and the risk we are facing is one of implosion. This is how all bubbles come to an end.

By way of analogy, not only has the Titanic already hit the iceberg, but most of the regulatory response constitutes rearranging the deckchairs. Most of society is still obliviously listening to the band, while the few are busy locking the third class passengers below decks. There are not enough lifeboats …..

Image top: M.C. Escher Hand with Reflecting Sphere 1935

 

Home Forums Bubbles and the Titanic Betrayal of Public Trust

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  • #8456
    Nicole Foss
    Moderator

    Robert Shiller, co-creator of the Case-Shiller index for US housing and author of Irrational Exuberance, has an interesting perspective on markets. Un
    [See the full post at: Bubbles and the Titanic Betrayal of Public Trust]

    #4875
    jal
    Participant

    There are not enough lifeboats …..

    Therefore, only those picked from the 99% will be those deamed capable of rowing the lifeboats for the 1%.

    #4876
    seychelles
    Participant

    Powerful metaphors in that last paragraph. Most are “fitting in” as they have been programmed to do, marching in step unwittingly to the cliff edge, stupefied by their dull, daily make-work grinds and educationally-induced uncritical thinking. And functionally illiquid owing to anchors of indebtedness and networks of familial interpersonal dependency. Even for the scattered malcontents, a serious impediment to action derives from not knowing how to formulate with certainty the mental image of a functional lifeboat.

    #4877
    Lucas Durand
    Member

    John Greer has made a case for a sort of slow implosion…

    If I understand his argument properly, he suggests that, historicaly, the “complex centre” always finds a way to force the continuation of basic functions of the economy – slowing down what might otherwise be a rapid collapse into a slow, painful process of empovrishment.

    But, myself, I when I consider the historically unprecedented complexity industrial civilization has achieved, the degree to which that civilization has over-extended itself, and the degree to which the natural world has already been plundered for resources, its hard for me to imagine that it won’t all unravel in a rapid collapse…

    The complexity really is mind boggling – when the cascades start to occur in rapid succession, what tools could a government or other “high institution” possibly muster that might create Greer’s temporary reprieves within such a complex context?

    I don’t see it… Is it possible that the world is so complex that such reprieves in the implosion might result from some type of self-organizing force within the chaos?

    #4879
    Ken Barrows
    Participant

    The current financial bubble has one different aspect from earlier ones, i.e. the actions and words of central banks. One can make a good case that investors still react to what the CBs say and do. What will trigger a negative reaction (falling nominal stock prices) to CBs that stimulate? Hasn’t happened so far.

    #4880
    Dubs
    Member

    Lucas,

    JMG certainly is of the opinion that our descent will be a drawn out process, although he certainly avoids providing more specific impirical reasons. I would be interested in why Nicole thinks an implosion is more likely? Barring worldwide contagion in the financial system as Greece and more importantly Spain head towards default (is contagion a foregone conclusion?), a drawn out descent characterized by fits and starts seems most likely.

    #4882
    Nassim
    Participant

    Just as a historical footnote about the Soviet Union and the Stakhnovite movement.

    As recently as 1980, when my wife was a medical student at Smolensk, students were forced to pick potatoes every Autumn for 9-10 weeks at some remote collective farm and neglect their studies. The first year, wife developed a severe sore throat and a persistent fever so she was excused these duties and allowed to do some menial work close to the university. The other girl-students were quite indignant and convinced that she had found a way around this arduous and unpleasant manual work. Afterwards, the students were expected to catch up with their missed studies.

    #4883
    gurusid
    Participant

    Hi folks,
    I think the idea of ‘lifeboats’ and other psychological palliatives such as Greer’s idea of a ‘long descent’ are simply not born out by historical examples; just look (for a long while) at the graphs at the beginning of the piece). I think the Titanic analogy holds true on one factor: only just under a third survived. They survived because they had access to an available resource, the lifeboats; but these ‘resources’ were themselves underused/not universally available because of the resource allocation ‘system’ (class/gender bias), and the ‘zeitgeist’ that the ship itself was unsinkable. In all likelyhood it would’ve made little difference if there had been enough ‘lifeboats’ – by the time ‘everyone’ realised the ship was sinking it was then going down too fast.

    Again:Ro/Rs

    “…where Ro equals the amount of Reality which fails to reach the Control Unit, and Rs equals the total amount of Reality presented to the system. The fraction Ro/Rs varies from zero (full awareness of outside reality) to unity (no reality getting through).” (From: “The Systems Bible: the Beginners Guide to systems large and small”, John Gall, 2006. P.46-7)

    Your biggest ‘lifeboat’ is going to be that little ‘system’ inside your own head. What will work for you will be dependant upon your own unique situation, from forming community, growing food (sustainably e.g. Robert Hart, Masanobu Fukuoka, /Sepp Holzer) but also including facing the prospect of your own immanent demise. That, if nothing else will fuel much of the coming chaos. Now what was that saying… if you can keep you head when all about are losing theirs… hmmm something like that. IMHO I think most of the so called developed world will end up looking like most of the rest of the world, there will just be a lot less people around:

    https://www.google.co.uk/imgres?imgurl=https://jdmoyer.files.wordpress.com/2011/03/longtermpopulation2.gif&imgrefurl=https://jdmoyer.com/2011/03/25/how-it-might-go-down/&h=476&w=692&sz=56&tbnid=iCOUJahExUhwCM:&tbnh=85&tbnw=124&prev=/search%3Fq%3Dgraph%2Bof%2Bhuman%2Bpopulation%26tbm%3Disch%26tbo%3Du&zoom=1&q=graph+of+human+population&usg=__ZNp6Z6UGQW0YM8AwhkudVl6SjbY=&docid=NHpewBBThqL9SM&hl=en&sa=X&ei=WdoTUInLNcbR0QWqn4HYCA&ved=0CGAQ9QEwAQ&dur=4006

    And this one:

    https://www.google.co.uk/imgres?imgurl=https://www.theglobaleducationproject.org/earth/images/final-images/g-pop-growth-chart-map-sm.gif&imgrefurl=https://www.theglobaleducationproject.org/earth/human-conditions.php&h=287&w=700&sz=21&tbnid=v_DmXKJgrX9XsM:&tbnh=55&tbnw=133&prev=/search%3Fq%3Dgraph%2Bof%2Bhuman%2Bpopulation%26tbm%3Disch%26tbo%3Du&zoom=1&q=graph+of+human+population&usg=__v9P7ZKMg7AEGr7PnXqmk3QkG0cM=&docid=RgVqQ5n6PWyJ0M&hl=en&sa=X&ei=WdoTUInLNcbR0QWqn4HYCA&ved=0CGYQ9QEwAw&dur=11659
    The biggest Bubble of all?

    L,
    Sid

    #4884
    g-minor
    Participant

    Nicole,
    Please comment on this piece by Paul Craig Roberts.

    https://www.paulcraigroberts.org/2012/07/19/the-libor-scandal-in-full-perspective/

    Thanks.

    G

    #4885
    Otto Matic
    Member

    Accountability lies at the heart of trust and trust lies at the heart of confidence.

    Together they are the Venn Diagram that holds up any form of belief in fair exchange.

    Max K as part of his ‘shtick’ coined a phrase years ago, partly in sarcasm and partly dead serious, “Should Crimes of Capital Get Capital Punishment?”

    Well looky, looky, how life is beginning to imitate art.

    That hypocritical Murdoch bastard child presstitute rag the Wall Street Journal ran a piece yesterday:

    “Should Crimes of Capital Get Capital Punishment?”

    https://blogs.wsj.com/totalreturn/2012/07/27/should-crimes-of-capital-get-capital-punishment/?mod=WSJBlog

    Looks like a ‘deathbed conversion’ apologist/rationalizing piece by financial propagandists and collaborators in crime who now see the noose coming into view and the Bell for Thee beginning to Toll.

    #4886
    TheTrivium4TW
    Participant

    @Board,

    My family has about equal money in both an IRA and a 401k money. Needless to say, this makes me uncomfortable. Since I’d probably lose about 60% of it by cashing out now, I’ve been playing a sort of game of “chicken.” I’ve left it in place gambling that I might lose my job before I cashed out the IRA.

    While I’m happy to still be employed, especially after last week’s 10% layoff, I do get more nervous as time goes by.

    I can’t get the 401k money out until I leave. However, I can start taking out IRA money – that is unless they change the law to prevent it.

    Let’s go with a round number pulled out of thin air – $100k. Assume each account has $100k in it.

    What would you do with it? The 401k money can’t be touched until our employment is terminated, so that’s off limits for now.

    Would you take the 60% (possibly more) hit on the IRA money now or gamble for a lower unemployed style tax rate later? Would you mix it up – 30% IRA now, evaluate the rest when tax law for next year become transparent?

    #4887
    TheTrivium4TW
    Participant

    @Board,

    If I short some stocks now (think hedge) and they ban short selling later (I expect this), will I be able to cover my shorts then or will they nullify the whole trade?

    How did the short sale bank in Europe work out?

    TIA…

    #4888
    regionswork
    Participant

    Has Mr. Shiller updated his views? 2008 was a long time ago.

    #4889
    DespicableMe
    Member

    Collapse, it’s the new black 😉

    #4890
    skipbreakfast
    Participant

    Trivium, I think you’re asking for comments about what to do with the $100k in an IRA account.

    TheTrivium4TW post=4551 wrote: I’d probably lose about 60% of it by cashing out now […] What would you do with it? […] Would you take the 60% (possibly more) hit on the IRA money now or gamble for a lower unemployed style tax rate later?

    We don’t see many specific “financial advice” Q&A’s on TAE, as the site seems to focus more on the bigger macro picture, and for good reason I think–the variables and risks are just so myriad, I don’t think any answer can possibly satisfy the asker. If “maximizing profit” is the goal, we’re almost sure to make the wrong decision 99% of the time. Just look at the investment grand-masters’ call on interest rates and how wrong they were:

    https://www.businessinsider.com/21-rates-have-nowhere-to-go-but-up-2012-7?op=1

    I would never pretend to do any better than them…although, they were so tragically wrong in this instance, it would be hard to do worse.

    Personally, I’ve re-trained my “investing” brain to think about these things a lot differently today. This has taken a while and is still not always easy–I’m only interested in preventing catastrophic loss; gains are secondary. I want to live to fight/garden/build/invest another day.

    As such, if it were my IRA account, I would take most if not all of it out now, reflecting the proverbial 40,000 birds in the hand now are worth more than 100,000 birds in the bush later. From a “classical” investing point of view, this is TERRIBLE advice. But I don’t think we live in “classical” times anymore. I’m willing to take a loss today in order to hedge against what I see as a rather likely scenario–you’ll take a bigger loss tomorrow if you don’t. I’m sure “proper” advice would take into greater account what exactly is held inside your IRA account. But even cash might be hard to withdraw once the deflation ball gets rolling (cf. MF Global et al.). I’d still stick with the adage that you want to be liquid and you want to maintain that liquidity under your own control (having it stuck inside an IRA account is NOT in your control).

    I can foresee a lot of pension/retirement fund accounts simply being frozen or greatly reduced or vanishing altogether. I feel lucky to get anything out now that I can–lots of people can’t get anything out because they have nothing but debt. I like Stoneleigh’s adage that the only people who “win” in a deflation are those who “lose the least”–it presupposes we’re ALL going to lose somehow, and I think that is accurate.

    I’ve concluded for myself that if the worst does not transpire, and a collapse doesn’t occur, then we will return to growth, so I will simply chalk up the “bad investing” to a necessary choice given current risks and move on. At least in a “return to growth” scenario I’ll be able to get a job again. I’m not banking on a return to growth scenario, though. And I’m not banking on making many decisions that will increase my limited money in the near-term either.

    Just don’t kick yourself (or me) if you realize in hindsight some other course of action would have saved you another 10 or 20 or 30%. Any money I preserve is pretty much a windfall, from my perspective. We’re all different though.

    #4891
    bluebird
    Participant

    Trivium, a few other things to think about.

    1. If you are under 59 1/2, you will pay a penalty for withdrawing early, in addition to paying taxes on the larger amount of income.

    2. If you are 64, and about to apply for Medicare, consider that the monthly premium for Medicare could be based on your larger amount of income from the IRA. It would depend on the timing of your age and when/if the IRA is redeemed.

    3. Consider transferring the IRA to Credit Union or local small bank, and put it in a Certificate of Deposit with the shortest term, usually 6 months. Eventually, the banks will fail and credit unions too, but in the interim, the principal amount of the IRA will be preserved.

    4. I have been told that if one has legal issues and could be sued, do not cash out the IRA. If one has an IRA, then no one can legally take it. Consult attorney as I’m not sure if I have said this correctly.

    5. As you still have your job, in the 401k transfer the money to a Treasury Bill mutual fund to preserve the principal, if your company has that option.

    6. If you do lose your job, immediately either cash out the 401k, or transfer it to IRA holding short term certificate of deposit.

    P.S. I am not a financial adviser, so what was best for me, may not be best for you. This is free, you get what you pay for. It may be helpful to you or maybe not.

    #4892
    Jb
    Participant

    @ Lucas,

    With all due respect to Mr. Greer, I share your frustration with his prognostication. I do not understand how there can be a “really spectacular financial crisis” followed by “a lot of poverty and suffering” globally without the social order breaking down.

    Yes, I’m sure the government will nationalize the banks, oil companies, etc. It would not surprise me to see rationing as well as martial law declared in urban areas where things are sure to get particularly nasty. I think the “next round of temporary recovery” is unlikely to look like a recovery at all, more like a period of relative stability at best.

    I am also not convinced that the US government will confiscate gold held by private citizens. To what end? Collecting and storing gold costs money! I think the US government would do this only if they intended to use it as money for settling international debts, or for buying oil or other vital raw materials.

    #4893
    seychelles
    Participant

    Visions of Stakhavonite movement updated: As implosion accelerates, an ultimate patriotic act will be to invest in “financial war bonds”, voluntarily or involuntarily. These may be 30 yr Treasuries yielding -2% with a 20% early withdrawal penalty. Heroes are needed to keep America great, er,
    keep the lights burning on Jerkyll Island. TPTB will not want any of their
    capital depleted or illiquid on the rebound when 10 year notes will possibly yield in excess of 20%. Useful citizens will keep their retirement accounts intact and fully funded, hold their heads high and proudly display their gold “99” lapel pins. Oh yeah, minimum Federal inheritance tax on unused pension funds will be 95%.

    #4894
    John Day
    Participant

    Financial bubbles are less interesting. The financial fractal appears to me to be a finer fractal upon the coarser fractal pattern of human species resource destruction. All of our creation is based upon destruction, releasing bound energy in the process and harnessing it to a lesser creation, upon which we place higher value. So forests become pulp for disposable newspapers.
    The bubble is our lives, all of our many human lives. The peripheral depletion we have harnessed to drive this magnificent bubble of human population growth is oil. Look at the correlation over the past century.
    At this point, the population will be dropped by drastic global warming if we use the known reserves of oil, and it will be dropped by lack of food, fuel, transport, AC, water, complexity if we don’t. This is really a case where we can have it both ways, and drop the human population deeper and longer. A non-bubble population is approaching, and it will be a big surprise to those raised on oil, with a very few exceptions.

    #4895
    Nicole Foss
    Moderator

    G-minor,

    I disagree with most of that article. The US dollar is in no danger. It bottomed more than a year ago and has quite a way to go still to the upside. The flight to safety is quite real. Under deflationary conditions, the real rate of interest is always higher than the nominal rate. Those low nominal rates exist because no one is asking for a higher risk premium. Investors are prioritizing capital preservation.

    #4897
    Nicole Foss
    Moderator

    I certainly don’t think we are facing a decline that will be in any way gradual or smooth. Fractals don’t work that way. The next decade should be one of initially rapid contraction followed by years of grinding depression. However, this should only be phase one of the unwinding of such a large bubble. I would expect the overall contraction to last for decades, as we have seen before when particularly large bubbles have burst. Large contractions typically demonstrate sharp falls interspersed with periods of (relative) recovery of varying lengths, some lasting many years. As always, markets spend more time in upward mode, as rises are driven by hope and greed, whereas declines are driven by fear. Fear is simply a sharper emotion.

    #4898
    Nicole Foss
    Moderator

    regionswork,

    Mr Shiller’s article is recent. The 2008 quotes come from our own work in the TAE primers. The Shiller article is the one called Bubbles Without Markets.

    #4900
    Golden Oxen
    Participant

    stoneleigh post=4560 wrote: G-minor,

    I disagree with most of that article. The US dollar is in no danger. It bottomed more than a year ago and has quite a way to go still to the upside. The flight to safety is quite real. Under deflationary conditions, the real rate of interest is always higher than the nominal rate. Those low nominal rates exist because no one is asking for a higher risk premium. Investors are prioritizing capital preservation.

    With all due respect may I voice my objection to both your erroneous assumptions?

    The dollar bottomed against what the Euro? Is that really a bottom signaling deflation and a rise in purchasing power for the dollar? Absolutely not!

    As to looking for guidance from interest rates, the most manipulated and artificial rate that exists, that would be just plain foolish.

    #4901
    skipbreakfast
    Participant

    Golden Oxen post=4565 wrote: The dollar bottomed against what the Euro? Is that really a bottom signaling deflation and a rise in purchasing power for the dollar? Absolutely not!

    Well, obviously not just against the Euro. The US dollar has been gaining strength against the Kiwi dollar for the past year (with the Kiwi dollar attaining ever lower highs against the greenback since about September 2011).

    #4902
    Nicole Foss
    Moderator

    Golden Oxen,

    Yes, look to interest rates for a clear picture of where the fear is and where the fear is not.

    Capital Flight, Capital Controls, Capital Fear (https://theautomaticearth.com/Finance/capital-flight-capital-controls-capital-panic.html)

    #4904
    Lucas Durand
    Member

    “I do not understand how there can be a “really spectacular financial crisis” followed by “a lot of poverty and suffering” globally without the social order breaking down.”
    Jb,
    I share your skepticism…

    It seems like sometimes the gradual descent described by Greer might be possible if the processes of decline were strictly technical in nature – or not affected by the irrationality of a freaked-out populace…

    “There’s too many men, too many people, making too many problems”

    I’m not sure if it’s possible to know for certain, but it seems to me that any actions that might be taken by the state to establish control would be out of proportion to systemic risk – is it even possible to confiscate enough bullion to pay for more than just a few days or weeks worth “liquid hegemony”?

    #4906
    PastTense
    Member

    Trivium, I mostly agree with Bluebird–except I think you should split your assets among at least three financial institutions–so do partial IRA transfers to these three local institutions.

    As to withdrawing the funds I frankly don’t understand how you can lose so much money–I think it would be the top income tax rates you pay plus 10%. (say 28% + 10% = 38% (plus your state rate)). But I would only withdraw if I had a very good use for the money.

    #4907
    Jb
    Participant

    @ Lucas,

    Agreed. Government responses to restore order during a cascading series of global defaults would be disproportional to the risks. We have plenty of modern examples such as the Rodney King riots, the failure of FEMA post-Katrina, the overthrow of governments in the MENA, etc. to appreciate the dangers of non-linear events. Further weaken these governments through unmanageable debts (Spain, Greece, Michigan, etc.) and you can forget any kind of meaningful response.

    One thing that concerns me is that companies that make products that I might find useful during or after such a scenario (wood stove for example) might go out of business due to debt / lack of access to credit. It would seem prudent to purchase or stockpile those items ahead of time.

    BTW, I should have mentioned that my quotes came from Mr. Greer’s current post.

    My gut says, that since gold is not in circulation as ‘money’ the government won’t confiscate it in order to re-value the currency against it (again). Only the perception of gold’s value against the dollar (which is gaining in strength) represents a threat to the Fed.

    The wealthy international billionaires, who contribute heavily to political campaigns, stand to lose the most if it’s confiscated. Besides, Bernanke will have to explain why gold is suddenly no longer just a ‘tradition.’ https://theautomaticearth.com/components/com_kunena/template/default/images/emoticons/wink.png

    In the meantime, central banks around the world continue to buy, ship and store this little tradition at great cost…

    #4908
    Franny
    Member

    @Trivium
    If you decide not to cash out the IRA, you certainly should make sure that it is not located with an institution that engages in prop trading, a la MF Global. There are other providers — I would stay away from banks and credit unions, they are leveraged too. I use Vanguard because it is owned by it’s customers via it’s funds. Less motive for theft. I also have some in a self-directed IRA which for low fees allows me to store gold in a depository near where I live. Make sure the depository will agree to security procedures to preclude the admin from stealing your gold without the depository’s collusion.

    #4910
    Candace
    Member

    My understanding is that Greer’s long descent does not look like this

    –__
               –__
                          –__
                                     –__
                                                –__
                                                           –__
                                                                       –__
                                                                                   –__
                                                                                              — -__
                                                                                                       __
    but looks more like this

    -__
           
             |
             .    _
                -/.  ____
                               __—-__
                                             
                                              |__—–_____
                                                                  |
                                                                  |_____________________

    Not a slow steady decline, but some big cliffs, with smaller cliffs, with smaller recoveries and some periods of stability.  These drops, cliffs, recovery and stability will happen in different degrees in different places at different times.  So for purely for illustration…
                  Where I live….                                Where Greer lives…
    1980.    __/–                                          -_
    2000.           -/_                                      __
    2020.                  |                                          —-
    2040.                  |                                                ^—–_/_^______
    2060.                   ^–_                                                  
    2080.                         — ________. (reached long stasis in 2040)                                                     

    Different places will have forces that may mitigate decline in some instances, i.e. I live in a place where rich people (and poor people) will spend large sums of money for medical care, JMG lives in a place that has already experienced major economic contraction, but still has infrastructure that links it to other regions.  When resources become so scarce that certain medical procedures won’t be available to anyone, my area is likely to see a strong contraction, JMGs area may even experience some growth, due to certain things being redeveloped in the US because it is too expensive to ship things from over seas.  All areas are likely to experience various types of social disruption as well depending on how vulnerable they are to international, national, and regional changes.  A populist demagogue might make headway in Minnesota, but Maryland might stay fiercely independent of group movements.

    That’s my understanding at any rate.
      Candace

    #4911
    Dubs
    Member

    Pat of the difference between Greer’s calculation and the dominant opinion on this site is largely, I believe, due to focus. JMG seems more interested in the oil et al. side of the discussion, regardless of the interplay of energy and finance. TAE, of course, is more concerned with finance. One primary difference is that one is tangible, while the other isn’t, but for the impact it may have.

    If left to market mechanisms alone, our descent would be drawn out as one energy source would be replaced by another with a slightly lower EROEI, and energy-intensive habits give way to more efficient/less costly ones. I think this will still provide the backdrop against which the contraction of over-extended credit will play out. Don’t forget, if cheap energy were actually unlimited, growing debt burdens would not be nearly as big of an issue. Financial turmoil will lead to some periods that are more difficult than others, of course, and likely cause more pain than otherwise, but the end game will depend first and foremost on energy and its accessibility. Who knows how much is left, but more than half a century’s worth seems like as reasonable a guess as any, which provides enough time to begin to adapt locally (for example rebuilding soil fertility).

    What seems more important (i.e. unpredictable) than decline itself is how this will play out politically. When will food costs become unbearable? When will overly complex supply chains break down?

    #4912
    skipbreakfast
    Participant

    @Trivium, @PastTense, @Lucas, @bluebird, @Franny

    This is interesting advice regarding Trivium’s IRA account conundrum. Not being a US citizen, I am completely unaware of all the IRA account nuances. But it raises the dilemma I have also wrestled with in Canada and New Zealand (where I live). Because absorbing the penalties and fees incurred by withdrawing cash out of the system can really sting. It reminds me, however, that one of the primary purposes of these penalties and fees is to DISCOURAGE PEOPLE FROM WITHDRAWING THEIR MONEY. Clearly, the system prefers that we do not, and indeed depends on the fact that we do not.

    There is undeniably an element of political resistance in deciding to withdraw everything no matter the “price”. But that for me is only icing on the cake. I am actually more concerned about the fact that if it costs X today to get my money out, it will NOT be cheaper later and will almost definitely cost X*Y, if you can even do it at all. Having recently looked my bank manager in the eye as I moved money out of their institution, it was clear I was a bizarre anomaly–from her reaction, no one else is doing it really…not yet anyhow. I felt awkward and almost criminal, like she must suspect the worst (drug dealer? weapons dealer?!!!). She didn’t dissuade me, although she did gently inquire as to the reason. “Chicken coop”, was my answer. (In greater seriousness I admitted that I just didn’t trust the whole mess and she didn’t argue.)

    There is tremendous resistance in the system and it’s deeply instilled within us NOT to withdraw our money. It’s actually incredible how powerful the psychological disincentives can be. (More than one financial analyst has written about their shock over how FEW Greek citizens were withdrawing their money from the banks given the risks.) I can only imagine how much HARDER it will be as the months progress . I’d rather do it sooner than later, as it will undoubtedly get more difficult and more expensive.

    The advantage of waiting and changing your IRA or moving account-types is that you can see how things play out, and there may be last-minute changes to the rules you can work around. You might be able to maximize gains and minimize the penalties by timing things really well. But I am convinced that the risks grow daily and it will become harder and more expensive to get our money out. Certainly, you don’t want to be trying to do it when everyone else suddenly has the same idea. Better to do it while you’re still an oddity and your bank manager does nothing more than smile, a little bit perplexed.

    #4913
    davefairtex
    Participant

    I agree that the flight to safety is real, and it reveals itself through bond yields. The core nations of the eurozone, plus the lower debt members all have 2Y bond rates lower than 0.25%, with Germany still having a slightly negative yield, while the troubled eurozone nations 2Y bonds are yielding 3.75% or higher.

    I think a few years back in 2010, after the initial panic had subsided, the Fed probably did QE2 partially to monetize treasury borrowing, but that’s just not necessary today because of the flight to safety. Right now with Operation Twist the Fed is actually selling its supply of short-dated treasuries (and buying longer maturity stuff) and still the US 2Y rate is 0.24%.

    It is important to differentiate between non-markets (like LIBOR, where rates were set simply by agreement amongst the co-conspirators) and the places where prices are determined by where the really rich people decide to put their money. The bigger the market, the more unlikely it is to be specifically manipulated. Where did all the money from the rich Greeks go when it left Greece? Likely, 2 year German and Swiss treasury notes.

    #4914
    bluebird
    Participant

    @ all

    I previously held an IRA at Vanguard. It was the Money Market Mutual Fund holding only U.S. Treasury Bills, VUSXX

    Although it was the safest Mutual Fund to preserve my principal, the main reason I transferred this IRA to my Credit Union holding a Certificate of Deposit was this…

    1/27/10 Suspending Money Market Redemptions Is Now Legal;

    SEC Approves New Money Market Regulation In 4-1 Vote

    Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote.

    …at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.”

    much more…
    https://www.zerohedge.com/article/suspending-money-market-redemptions-now-legel-sec-approves-new-money-market-regulation-4-1-v

    In other words, if one has a Money Market MUTUAL FUND, the SEC could deny access to withdraw any of your money.

    Edit to add ZeroHedge first link about denial of access to Money Market Mutual Funds and more detail discussed about Money Market Mutual Funds…

    1/3/10
    https://www.zerohedge.com/article/government-your-legal-right-redeem-your-money-market-account-has-been-denied

    #4919
    pipefit
    Participant

    The current bubble is the one started by President LBJ in the mid 1960’s, ‘guns and butter’. The question is which item will go first, the guns or the butter? In order to extend ‘guns and butter’ Nixon took us off the gold standard in 1971, and pretty much insured that we would move to the point where we now find ourselves.

    If it is ‘guns’ that collapses first, the USA dollar quickly loses world reserve currency status, so we will have a hyper inflationary crash. Quick. Blink and you will miss it.

    If it is ‘butter’ that goes first, then the outcome is a little more difficult to predict. This outcome will feature the formation of a massive Lumpenproletariat. As one can see from the shadowstats.com unemployment numbers, this process is already well underway. As with the ‘guns’ first outcome, this one is featuring massive inflation. However, I think this collapse will be of a more gentle slope.

    The dominant feature is not the defaulting of debt, as the deflationists would have you believe. Rather, the end game is being forced on the world by the end of easy to produce oil, and the greater and greater reliance on marginal farmland. Also, with the mammoth world population, drought in key agricultural areas, the present situation, are far more devastating that in 1988, when the same thing happened.

    A store owner today told me that fruit, vegetable, and other grocery prices will be going up 30% across the board in two to three weeks. This is going to happen across the country. So you see, the Lumpenproletariat will be expanded greatly this year, but the sheeple won’t understand the underlying issues. Just the opposite, they will be goaded into begging the govt. to increase the defense budget, if I’m reading the situation right.

    #4920
    skipbreakfast
    Participant

    pipefit post=4585 wrote: A store owner today told me that fruit, vegetable, and other grocery prices will be going up 30% across the board in two to three weeks. This is going to happen across the country. So you see, the Lumpenproletariat will be expanded greatly this year, but the sheeple won’t understand the underlying issues. Just the opposite, they will be goaded into begging the govt. to increase the defense budget, if I’m reading the situation right.

    Hm, let’s see. I buy about 5 tomatoes per week. In my outrageously inflated country, that costs me $7 USD. If it goes up 30% that’s another $2 USD per week or so. Let’s go for broke and say $3. It means over the course of the year, I’ve spent another hard-earned $156 on tomatoes. My entire average grocery bill will have “inflated” about $2300 per year. That’s a lot…especially if I’m already living hand to mouth.

    But wait…the house I want to buy– [sarcasm] because in a hyper-inflation, land ALWAYS goes up [/sarcasm] — has dropped at least another 5% this year. Where I live, that’s about $25,000. The used car I was going to buy last year was $12K…this year the classified listing says NEWER models of the same vehicle are selling for $8K! That’s $4,000 less.

    I could go on. If I’m only measuring my life in tomatoes (which the poorest of us are! and that’s important!) then I’m in trouble. Food prices really hit low incomes the hardest. It doesn’t mean we’re not in deflation though. Compared to the rapidly dropping prices of bigger ticket items–TVs, houses, cars, computers, oil, gold–over the past year, it sure looks deflationary to me. Just the house and car has deflated nearly $30,000 easily wiping out the $2300 annual inflation in my groceries.

    #4921
    Franny
    Member

    Money market funds are definitely not a safe place. I keep my Vanguard cash in the shortest term U.S. Treasury obligation ETF available. For cash one may need soon that one is not willing to keep in the house TreasuryDirect is far safer than money market funds.

    #4922
    PastTense
    Member

    Skipbreakfast: Trivium has retirement accounts.

    For your normal salary you pay income tax on this salary. For retirement accounts the idea is you DO NOT pay income tax on this money before you put it into the account–instead you pay income tax after you are retired, when you take the money out of the account. Then you are probably at a lower income tax rate.

    And as a discouragement for people to take money out before they retire there is a 10% penalty–if people didn’t want to save the money for retirement they shouldn’t have put the money into this type account to begin with.

    #4923
    pipefit
    Participant

    skip-“It doesn’t mean we’re not in deflation though.”

    According to shadowstats.com, consumer prices are up 5% yoy. That is inflation my friend. And that is going to go up a lot in the very near future, in my opinion.

    The problem with your analysis is that you are relying on anecdotal evidence, which merely reinforces our preconceived prejudices. We know from shadowstats that inflation is the dominant feature.

    The main problem with the deflation argument is the amount of time that has already passed since the start of the credit collapse in 1997. 5.5 years later, inflation is still roaring along. Obviously, there has been a lot of wealth destruction since then, but consumer prices keep going up, year after year. So there is something wrong with your model.

    Instead of looking for a few outlier prices that are bucking the inflationary trend, why not focus on figuring out what is wrong with your deflationary model. Why isn’t wealth destruction on a massive scale resulting in a drop in consumer prices? The preponderance of the evidence indicates that it relates to key shortages that I mentioned in my prior post, but there are probably other factors as well.

    #4924
    skipbreakfast
    Participant

    pipefit post=4589 wrote: skip-“It doesn’t mean we’re not in deflation though.”

    Instead of looking for a few outlier prices that are bucking the inflationary trend, why not focus on figuring out what is wrong with your deflationary model. Why isn’t wealth destruction on a massive scale resulting in a drop in consumer prices? The preponderance of the evidence indicates that it relates to key shortages that I mentioned in my prior post, but there are probably other factors as well.

    Keep in mind that measurements and definitions of inflation and deflation are extremely contentious. There is no one measurement anywhere that I would conclude is definitive. I think it’s important to recognize that how YOU intend to spend your money is as important an indicator of inflation as anything. I am not picking a “few outlier prices”. I am picking the essential prices based on where I would spend my money. If one only has $10,000 per year to spend, then it may seem that one lives in an inflationary world as a greater and greater percentage of living costs is eroded by a rise in food prices. If one has $1 million per year, then one is living in an entirely different world and the broad inflation/deflation definitions do NOT apply equally. The individual with $1 million per year is NOT going to spend it all on groceries! The individual with $1 million per year couldn’t even spend the interest (where I live) on groceries if she tried. Therefore, what would the individual with $1 million spend it on? Pretty much everything that individual would consider buying is DOWN in price.

    You could argue that the people with only $10K vastly outnumber the people with $1 million. You’d be right. Again, inflationary definitions apply differently to different people. Low-income or marginal income individuals will experience a squeeze in standard of living as basic essentials like food increase even a few percent in price. But it seems to me you are actually picking outlier prices (groceries) as an indication of inflation. And in fact, rising food price is a deflationary pressure, as there is less expendable income available in the greater economy for ANYTHING else.

    Yes, yes, you’re relying on shadowstats. I don’t rely on them alone. I rely on a wide-range of measures, including the ones in my own life, which are the “least manipulated” and “most measurable” by me. I know how far my money goes on certain things in my own life. It’s going less far in food (a fraction of my spending) versus much farther in terms of bigger ticket items across the board, including travel, vehicles, petrol, land, etc.

    EDIT: I should add that “prices of things” isn’t even a definitive indication of whether we’re in deflation/inflation. I think it’s a “practical” one though. The supply of money/credit is MUCH more influential in the long-term implications. Deflating money/credit is going to have a much more far-reaching implication for our lives than the individual price of tomatoes or cars.

    EDIT 2: No I don’t have a million bucks per year to spend. But I have more than $10K per year. Just sayin’ in case y’all think I’m a Rockefeller.

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