Jan 282013
 January 28, 2013  Posted by at 10:10 pm Finance

Artwork: Ilargi for The Automatic Earth

That thing in Davos is on again, the World Economic Forum, sort of like the Academy Awards without awards but with the same peacock factor. And snow. Full of business leaders and government leaders and media leaders, the vast majority of whom are the same folks who attended before this crisis broke you but not them into pieces, and easily enough to make you realize with a shudder what an unmitigated disaster it is that these are the people who are supposed to take the world back to financial health. Simply because they are the people who profit most from the state of the world as it is, or they wouldn't be there. And they are the chosen ones destined to save you? They are only out to save themselves.

One of the people always present, well, actually, he's a bit of a new addition to the flock who rose to claim and fame because of the crisis, is Nouriel Roubini. And at first sight, you may think: why is he there? He's Dr Doom after all, he has what may look like negative messages for the in-crowd, so why welcome and tolerate him? And then you understand what Roubini's role is.

He's as vain as the others, and he gets paid really well to play his role in the grand scheme. That is to say, Nouriel is the court jester. Every ruler needs someone to make fun of him/her. That creates the impression that (s)he can laugh at him/herself, an indispensable quality if one wishes to impress one's guests. A sign of strength indeed.

The media have continued quoting Roubini for 5 years now, even though he's said a lot of quirky things since he became their darling. He's quoted because he predicted the crisis, yeah, but so did quite a few other people, including ourselves here at The Automatic Earth. So that's not the whole story.

Why then do we find Roubini again in Davos? Because he says things that may sound doomerish and critical, but never in a way that would make the rich and powerful he hob-nobs his way into increasing wealth with uneasy. Sure, they don't like what he says, but they also don’t believe most of what he says. We've all lost track of the number of times through the years that Roubini has – literally – said there's a perfect storm coming just around the corner. So much so that "perfect storm" no longer means anything if coming from him – if it ever did in the context -.

That said, there was something he said last week that does deserve some attention, albeit more or less despite himself. The upside is, Roubini had a good idea. The downside is he got it wrong.

Money printing 'amounts to theft from our children'

Speaking at the World Economic Forum in Davos, Davide Serra, founder of leading hedge fund Algebris, and Nouriel Roubini, the head of Roubini Economics known as Dr Doom for predicting the financial crisis, set out the case against those who think quantitative easing (QE) and low rates are benign policy tools. "When governments borrow, they are taking money from our children. QE is the same – we are lowering returns for future generations. QE creates an inter-generational dilemma," Mr Serra said.

Mr Roubini warned that central bankers need to think about turning off the cheap money tap or risk creating another, possibly even worse, bubble. He argued that policymakers have encouraged markets and individuals to take on crippling levels of debt by leaving asset bubbles unchecked in a boom and coming to borrowers’ rescue in a crisis. [..]

He said loose monetary policy is creating a system biased to creating bubbles, "that's why we've been moving to more unconventional territories" in policy responses – from low rates to QE to credit easing.

"Central bankers have affected the behaviour of the private sector. They have to think about that," he said. "As you do a slow exit out of QE you may create another bubble and make another crisis. "At some point, the consequence of postponing deleveraging is that you end up with zombie banks, zombie companies, zombie households, and zombie governments."

Roubini has identified the fact that there was a crisis, as it was building up, but he's never understood what brought it about (well, either that or he's not telling). The crisis creates zombie everything, he's got that right, but what he doesn't get is that this happens because bailouts and QEs spread around zombie money.

"… the consequence of postponing deleveraging is that you end up with zombie banks, zombie companies, zombie households, and zombie governments." Roubini doesn't identify why that is. Which is that you can only postpone deleveraging with zombie money. In a sense, he himself is a zombie.

Zombie money is what you're left with if you don't restructure debts and financial institutions. If you don't do that, any public money you provide to banks through QE or other stimulus measures is not real in the sense that it can be freely spent or lent out, because at the other end of the ledger it's balanced out (and more) by the unrecognized losses that remain in the books. As long as there's no restructuring, it may plug holes below ground, but because of the size of the holes, above ground it builds only zombies. That is the essence of the financial crisis, and none of it has been resolved.

The only thing that keeps the zombie money from falling through the floor and into the holes is faith, hope, charity and make-believe. Yes, it keeps things going in a more or less acceptable-looking manner if you don't look too close, and yes, it makes the "right people" money, but in the end its most important effect will be procrastination, and that will come at a huge cost. We should be restructuring, but we don't. Those who would stand to lose most in a thorough restructuring of financial institutions are the same "right people" who make money by refusing to restructure.

There is no mystery here. A government or central bank, or both, can resort to QE and bailouts, and do some good, provided they are temporary measures that are balanced out through restructuring. And that they are aimed at relieving pressure for the people in general (whose money pays for it all), not the stakeholders in the very institutions that are being bailed out. We are more than 5 years into this thing and not as much as a second hand car has been marked to market. In fact, the whole concept sounds so foreign by now you can be sure hardly anybody knows what it means anymore.

Another Davos stalwart, Stephen Roach of Morgan Stanley Asia, also mentioned zombies in an article for Project Syndicate, which makes a bit – but only a bit – more sense:

The Fed Just Doubled-Down On A Plan That Led Us Into The Financial Crisis

From the first quarter of 2008 through the second quarter of 2012, annualized growth in [US] real consumption spending has averaged a mere 0.7%—all the more extraordinary when compared with the pre-crisis trend of 3.6% in the decade ending in 2007.

The disease is a protracted balance-sheet recession that has turned a generation of America’s consumers into zombies – the economic walking dead. Think Japan, and its corporate zombies of the 1990s. Just as they wrote the script for the first of Japan’s lost decades, their counterparts are now doing the same for the US economy.

[..] Steeped in denial, the Federal Reserve is treating the disease as a cyclical problem—deploying the full force of monetary accommodation to compensate for what it believes to be a temporary shortfall in aggregate demand.

The convoluted logic behind this strategy is quite disturbing—not only for the US, but also for the global economy. There is nothing cyclical about the lasting aftershocks of a balance-sheet recession that have now been evident for nearly five years. Indeed, balance-sheet repair has barely begun for US households. The personal-saving rate stood at just 3.7% in August 2012—up from the 1.5% low of 2005, but half the 7.5% average recorded in the last three decades of the twentieth century.

Moreover, the debt overhang remains massive. The overall level of household indebtedness stood at 113% of disposable personal income in mid-2012—down 21 percentage points from its pre-crisis peak of 134% in 2007, but still well above the 1970-1999 norm of around 75%. In other words, Americans have much farther to go on the road to balance-sheet repair—which hardly suggests a temporary, or cyclical, shortfall in consumer demand.

[..] Just as two previous rounds of quantitative easing failed to accelerate US households’ balance-sheet repair, there is little reason to believe that "QE3" will do the trick. Quantitative easing is a blunt instrument, at best, and operates through highly circuitous—and thus dubious—channels. Significantly, it does next to nothing to alleviate the twin problems of excess leverage and inadequate saving. Policies aimed directly at debt forgiveness and enhanced saving incentives—contentious, to be sure—would at least address zombie consumers’ balance-sheet problems.

Moreover, the side effects of quantitative easing are significant. Many worry about an upsurge in inflation, though, given the outsize slack in the global economy—and the likelihood that it will persist for years to come—that is not high on my watch list.

Far more disconcerting is the willingness of major central banks—not just the Fed, but also the European Central Bank, the Bank of England, and the Bank of Japan—to inject massive amounts of excess liquidity into asset markets – excesses that cannot be absorbed by sluggish real economies. That puts central banks in the destabilizing position of abdicating control over financial markets. For a world beset by seemingly endemic financial instability, this could prove to be the most destructive development of all.

That's all fine and well, and Roach provides some interesting numbers, but he doesn't address the core of how zombified the US economy has truly become. Roach names America's consumers as zombies, but not its banks (or other companies and institutions), perhaps due to his own job description. And while one might argue that this is due merely to Mr. Roach focus in this particular piece, it does at the same time prevent one from fully comprehending the issues at hand.

When Roach talks about the "massive amounts of excess liquidity" injected by central banks, he fails to mention that these amounts were never – primarily – aimed at remedying household debt. Similarly, where he writes:"Just as two previous rounds of quantitative easing failed to accelerate US households' balance-sheet repair, there is little reason to believe that "QE3" will do the trick", he tempts his reader to overlook the fact that QE was never meant to repair household debt.

Zombie banks become what they are because their debts are too large for them to overcome, pay off, conquer. Throwing massive amounts of stimulus money at them can by definition only work if the banks' debts are restructured at the same time, and to an equal standard. This has not been done, and to this day still isn't, because such restructurings bring about large losses for the banks' stakeholders, and it's these stakeholders have as strong and rich a hold on political power as they have on the banks. This political power enables them to evade their own losses and use public money to keep the banks afloat.

But they can't live in a world replete with zombies anymore than the less fortunate can, though they don’t understand that this is so, or why that is. A rich owner of a zombie bank in the end can only be, turn into, a zombie him/herself. The worst may hit the poorer a bit earlier, but then, we all have kids.

There's a striking similarity with how we all live in this world where we "harvest" all resources we can lay our hands on and kill off much of the natural world in the process, totally oblivious to the obvious fact that we have developed the way we have because that natural world was composed of the elements it was, and there is no guarantee we will survive in the world we create by driving millions of these elements into extinction. But that's topic for another day.

What people like Roubini and Roach, along with most of the financial world and hangers on (re: Davos), don't see, quite likely because their livelihoods depend on them not seeing it, is that through trying to save their own world by allowing public funds to turn into zombie money, i.e by not restructuring debt, down the line they hold only zombie money and themselves turn into zombies.

Roubini states that we WILL end up with "zombie banks, zombie companies, zombie households, and zombie governments", but he gets his timing wrong – it's already happened – and he doesn't understand why. He gets close, though, got to give him that, saying that it's: "…the consequence of postponing deleveraging". Still that's merely part of the story. What Nouriel doesn't mention is that we can only postpone deleveraging by turning trillions of dollars of the public's funds, and their children's, into zombie money, the kind designed to cover bottomless pits to such a degree you think we can all of us walk on water.

Stephen Roach talks about the failure of QE in repairing Joe Blow's finances (household debt), but neglects the reality that no QE was ever intended to do that. In fact, it's exactly because Joe and Jill Blow's – and their children’s- money is used not to save them from ruin, but to save the banks that rule their world, that their money has gone zombie. As in not real, perhaps appearing to be real, but in essence empty and out for your blood.

It's attractive and tempting to watch all the news and opinions on offer right now that promise you recovery, but there's no substance in them, they're as zombie as the economy they try so hard to celebrate. It really is simple: The debt is still there, nothing's been fully marked to market, all that's happened over the past five years is that your money has been used to cover up a whole bunch of bottomless holes. And precisely and ironically because it's your money has been used for the cover up, it's your children who are going to fall into those holes.

We can either opt to deal with reality or accept that we continue to roam our lives as the zombies we now are. And yes, we do still have that choice.



Home Forums How To Spot A Zombie

This topic contains 0 replies, has 0 voices, and was last updated by  Raúl Ilargi Meijer 1 year, 2 months ago.

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January 28, 2013 at 10:10 pm #8404

Raúl Ilargi Meijer

Artwork: Ilargi for The Automatic Earth That thing in Davos is on again, the World Economic Forum, sort of like the Academy Awards without awards but
[See the full post at: How To Spot A Zombie]

January 29, 2013 at 5:39 am #6839


Illargi, beautiful post in your typically well structured prose( and nifty artwork BTW) laying out the opaque anatomy and physiology of the financial devil serpents holding sway over the world economy and squeezing the life out of us. I’m not stupid enough or naive enough to demand that you offer up a solution to this predicament because there isn’t one, at least one that can be implemented through the democratic process or by free market dynamics.Wait! There was a solution, and Iceland took it. Some years back President Olafur Grimsson asked the Icelanders to decide whether they wanted to bail out the evil bankers in a referendum. 93% said no, and today it was settled for good and for all by the EFTA court ruling. Unfortunately George Bush did not offer us that option.We had long since put the central banks in place because of repeated boom bust cycles and having a quasi independent head of financial and monetary policy seemed like a possible solution given the prevailing economic assumptions of the day but packing the Fed with Bankers and banks was the fatal flaw along with flawed economic assumptions of that crowd. I’m really starting to hate this roller coaster to hell that goes up and down but never jumps the rails. I wonder what the proximal event will kick it off the tracks….

January 29, 2013 at 6:41 am #6840

Ken Barrows

Mr. Roach doesn’t understand it, either. He talks of a 1970-99 average and ignores the trend within. GDP/total credit market debt certainly began to decrease around 1970 but went hyper exponential around 1980. The Federal Reserve is the misinformed clean up crew forty years into the problem.

Net energy does the work that leads to the growth. Oh, Messrs. Roach & Roubini, show me how that’s going to happen.

January 29, 2013 at 7:06 am #6841


Clearly I have doubts that people get the intent of China, Russia, and India. The process will have as an outcome the ending of the US as the international currency of trade. This is certainly why zombie money doesn’t matter in size and shape to the basket of currency model and the ending of deficient governments.

January 29, 2013 at 7:19 am #6842


The current generation does not believe debt exists. Well let me put it another way. They don’t believe balance sheets exist. Particularly bank balance sheets. They could care less what the market value of the debt on the balance sheet is. It doesn’t matter to them. What matters is the money is created and what that money does is real. What is on a balance sheet of a bank or the Feds is just an abstraction. This is the root of MMT and MMT is ascendant .

If balance sheets don’t matter to citizens (never did in America), accountants, bankers, the central bank, the wealthy and financial elite and finally the government then how is it going to matter in the real world. I mean MMT has a point in that balance sheets are an abstraction and so is money. Money has always been an abstraction. The thing is the abstraction has simply become ever more profound. Everyone knows money is backed by nothing and they have no problem with that.

I cannot imagine what economic event or events occurring which would shake peoples faith in money, the dollar specifically. They have an unshakable faith in it now for no possible reason that would be understood for the previous thousands of years in the history of money. I simply cannot imagine what could force a society and culture to suddenly reject it. A few million committed action oriented anarchists perhaps but at this date there are none. (I am not encouraging or hoping for such, just saying)

January 29, 2013 at 9:01 am #6843

Golden Oxen

Moreover, the side effects of quantitative easing are significant. Many worry about an upsurge in inflation, though, given the outsize slack in the global economy—and the likelihood that it will persist for years to come—that is not high on my watch list.

Sir, This is an error in your analysis in my opinion. All serious bouts of inflation occurred during times of economic stagnation and malaise. It is no different this time. We have already been witnessing the inflation since the big print began and it will only get much worse from this point onwards.

Witness the insane stock markets, commodities prices, ludicrous current advance in real estate prices from specualtors in bed with banksters, Japans current Yen bashing etc etc

Inflation is a Monetary Event, it has as much to do with slack in the general economy as the stock market does, namely Zilch.

These mad men in charge have made their intentions to inflate their problem away vividly clear, fight them on moral grounds all you wish and I agree with you, but on a practical level they are as you say evil, and in total control of the Fiat Printing Press. Negative interest rates will most likely be their next move if their inflationary goal doesn’t ignite quick enough to please them.

January 29, 2013 at 10:32 am #6844


” we can only postpone deleveraging by turning trillions of dollars of the public’s funds, and their children’s, into zombie money,”

And postpone it will be, until the guns are collected. An armed society doesn’t go “Zombie” passively.

As in Spain, Argentina and Greece, and soon in France and Italy, Americans will find themselves beating on pots and pans and torching newspaper racks as their only recourse. Tyranny won’t care. He who is left with the only guns, will make the rules.

We are quibbling over nickles and baubles while our Liberty is evaporating. The worlds rulers have entered self preservation mode. Proles beware.


January 29, 2013 at 11:42 am #6845


Mounting evidence in graphs, stats, and in meatspace observations, points to the rentier generation being the one who was bailed out, not “the banks”.
Just saying.

January 29, 2013 at 2:37 pm #6847

Raúl Ilargi Meijer

“Moreover, the side effects of quantitative easing are significant. Many worry about an upsurge in inflation, though, given the outsize slack in the global economy—and the likelihood that it will persist for years to come—that is not high on my watch list.”

Sir, This is an error in your analysis in my opinion…

That’s Stephen Roach speaking, not me. I would tend to agree with what he says here, but I think he defines inflation as rising prices, and I do not.

January 29, 2013 at 3:34 pm #6848


Ilargi – excellent article. Thank you. Your artwork is wonderful. Intelligent and artistic too! Stoneleigh, your Scale Matters article was brilliant.

Re “Obama has one last chance to be a great president” – I agree, but I don’t think he’s running the show; just a paid hire. He’s being a great president for some, though, the ones who put him there. I hope he proves me wrong.

Re Dennis Meadows’ quote – “…we are going to evolve through crisis, not through proactive change.” Sadly, I totally agree with this quote. We seem incapable of long-term thinking. Like addicts, we think for the moment. We continue on doing what we’ve always done until we hit the wall at full speed, IMHO.

“Two viewpoints (on revolution) are always tenable. The one, how can you improve on human nature until you have changed the system? The other, what is the use of changing the system before you have improved human nature? They appeal to different individuals, and they probably show a tendency to alternate in point of time. The moralist and the revolutionary are constantly undermining one another.”

George Orwell

January 29, 2013 at 10:02 pm #6850


Golden Oxen -

Had a great conversation over at Chris Martenson’s site about hyperinflation. Came up with a bunch of metrics to detect it. Executive Summary: not happening right now, but size of monetization is getting closer to being worrisome.

Here are the indicators we came up with:
* monetization of at least 40% of US govt spending + increasing consumer confidence
* TIPs yield rising
* Loss of reserve currency status
* US Dollar dropping
* Money velocity increasing

See the page I constructed to show these indicators. Note that some of the timeseries on the page only update every 3 months, so they haven’t spotted the current monetization effort just yet. But you will get the idea.

* Monetization: was zero, now (about) 25% of spending
* Consumer Confidence: rising, but still low (below 2000-2008 levels)
* TIPS yield: at all-time lows
* USD as reserve currency: very slowly dropping, at 61% of global CB reserves
* USDX: moving sideways
* Money velocity: dropping

hyperinflation page

January 30, 2013 at 3:21 am #6852


Prof L&L, you do know that pots and pans brought down the PM in Iceland, right? As I recall the story, the Reykjavik chief of police told the PM that his officers were not about to arrest their grandmothers, and he wasn’t about to ask them to. And that was that.

Then when the new PM tried to sell out to the EU, there was a very impressive torchlight parade outside the presidential palace. Being Iceland, absolutely nothing was burned.

I believe that many, but not most, Icelandic farms have a long gun for predator control. Somehow they weren’t needed for anything else.

January 30, 2013 at 8:23 pm #6853


HI Folk,

A reminder of the stories we tell ourselves:

Footsie at 6344 (29-01-13), UK housing recovery under way with mortgages available again , unemployment down, the economy is really buzzing!

£600m worth of flats sold in less than five days:

Prices start at £338,000 for a studio, from £423,000 for a one-bedroom apartment, from £613,000 for a two-bedroom and from £894,000 for a three-bedroom.
… It is expected to be announced as sold out and the fastest selling development of all time after this weekend when a tour of buyers in Hong Kong and Singapore finishes.

UK Gov’t launches new green deal:

The Government hopes that its Green Deal will ‘transform’ British homes, which are among the least energy efficient in the world.
… The initiative replaces the Warm Front scheme, which offered free insulation and help with bills to households on income-related benefits.
… Households can choose from 45 different types of improvements, including insulation and new heating systems. The money borrowed through the scheme is paid back through your electricity bill – the idea being that money saved on bills should cover the cost of having the work done.
… As the money is a loan it comes with a fixed interest rate attached and this will be confirmed in the plan. The Green Deal Finance company has been set up by the Government to provide funding at a rate of 6.9%, but not all providers will need to use this mechanism so rates could vary considerably.


Luciana Berger MP, Labour’s Shadow Climate Change Minister, hit out at the loans and said that the Green Deal will cost most people more that it will save “because of sky high interest rates, hidden charges and penalty payments”.

Australia set to become energy independent and a net oil exporter:

http://uk.finance.yahoo.com/news/major-20-trillion-shale-oil-040750293.html;_ylt=AqPMW_roS8hwHaMx9UkhNDozvrFG;_ylu=X3oDMTNqNDMwdTI4BGNjb2RlA2N0LmMEcGtnA2FkZmNmNmVlLWZkMzYtMzBkZC1iZDJlLThjNjQ3Mjk4NDBjYgRwb3MDNQRzZWMDbW9zdF9wb3B1bGFyBHZlcgNmZWQzZjkxNC02NmQ4LTExZTItYmU1Yy0yYTk4NDBlZTUwYzg-;_ylg=X3oDMTJydXFwaHJlBGludGwDZ2IEbGFuZwNlbi1nYgRwc3RhaWQDZWI2NWZkMzItYzRhNC0zMmZlLWEyZWUtMDJhNjVkMTA3NDJmBHBzdGNhdANwcm9wZXJ0eQRwdANzdG9yeXBhZ2U-;_ylv=3 “>

Tom Koutsantonis, mining minister in South Australia state, where the deposit is located, said the sheer amount of oil would be enough to see Australia become a self-sufficient net exporter.

“If the reserves and the pressure was right over millions of years and the rocks have done the things they think they’ve done, they think they can extract vast reserves of oil out of South Australia which would have a value of about $20 trillion,” said Koutsantonis.”

(but watch out for the small print)

“He warned that it was not yet known “whether it was economic to recover or not”, with the oil trapped in “low-permeability, clay-rich rocks” that needed to be fractured to release the fuel.

So what’s not to like? Every silver lining has a cloud huh?

Weeeeell this kind of puts a dampner on a few things:
How much UK house prices have really risen (note the error in their early data, out by a factor of twenty due possibly to conflating PSD with decimal – see reply to Nassim below:):

Compared to now (ish –2011):

This neat little graph sums it up:

Note the most recent ‘rise’ is actually due to falling income.

Oh, and not only but also:

Britain’s economy shrank 0.3 percent in the final quarter of 2012 and recorded zero growth for the year as a whole, official data revealed on Friday, placing the country on the brink of a “triple dip” recession.”

And don’t forget the myth before the flame that is Greece:

The International Monetary Fund estimated on Friday that Greece faced a financing gap of between 5.5 billion and 9.5 billion euros (4.6 billion and 8 billion pounds) for 2015 and 2016 and said it had assurances from Europe it would deliver the aid in the final years of the bailout.

It was the first time the IMF had estimated a range of possible financing needs for Greece’s international bailout program beyond 2014. The European Commission said in December the money needed for Greece over the two-year period encompassing 2015 and 2016 would amount to 5.6 billion euros.

… The IMF board agreed on Wednesday to pay the next aid tranche of 3.24 billion euros to Greece under the 240 billion-euro international bailout involving a troika of lenders including the IMF, European Union and European Central Bank.

Brazil, which has long expressed concern over the IMF’s large financial exposure to Greece, opposed the decision, arguing that the prospect of Greece regaining market access in the medium term was “highly doubtful.”

… IMF staff also questioned in documents released on Friday whether Greece would be able to repay the IMF if its program “went irretrievably off track” and Europe halted support for Athens.

… Thomsen said Europe had not said exactly how it would provide additional debt relief, but options included reducing interest rates on Greek loans.

“The key is that Europe has recognized for the first time that debt is not sustainable without direct transfers in one form or another from Europe to Greece and that there is a commitment to do that,” he added.

… He said the new Greek government was determined to crack down on tax evaders and to boost tax revenues, although there had been no significant impact on tax collections so far.

After all said and done, “it’s the system, stupid”:

The observant Systems-student will no doubt be able to supply a number of variant readings of the same Law, gleaned from the newspapers and his own observations of government officials, corporation executives, et al. The net effect of this Law is to ensure that people in systems are never dealing with the real world that the rest of us have to live in but with a filtered, distorted, and censored version which is all that can get past the sensory organs of the system itself.
Corollary No. 1:
A System Is No Better Than Its Sensory Organs.
This Corollary, the validity of which is crystal clear to you and me, is viewed with perplexity by the personnel living within the system. For them, the real world is simply what their intake says it is, and any other world is only a wild hypothesis. A true Systems-person can no more imagine inadequacy of sensory function than a Flatlander can imagine three-dimensional space.
Corollary No. 2:
To Those Within A System, The Outside Reality Tends To Pale And Disappear.
This effect has been studied in some detail by a small group of dedicated General Systemanticists. In an effort to introduce quantitative methodology into this important area of research, they have paid particular attention to the amount of information that reaches, or fails to reach, the attention of the relevant administrative officer. The crucial variable, they have found, is the fraction:
Ro equals the amount of reality which fails to reach the relevant administrative officer
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). It is known, of course, as the COEFFICIENT OF FICTION.
Positive Feedback (P.F.) obviously competes with Reality (R) for input into th.e System. The higher the P.F., the larger the quantity of Reality which fails to gain entrance to the System (Ro) and the higher the C.F. In systems employing P.F., values of C.F. in excess of 0.99 have been recorded.[*] Examples include evangelistic religious movements, certain authoritarian governmental systems, and the executive suites of most large corporations.
[Footnote. In theory the C.F. may attain 1.00, but in practice removing the last shred of reality from the sensory input becomes increasingly difficult.]
A high C.F. has particular implications for the relationship between the System and an Individual Person (represented by the lower-case letter i).[*] We state the relationship as follows.
[Footnote. In mathematics, i represents an imaginary quantity.]
Corollary No. 3:
The Bigger The System, The Narrower And More Specialized The Interface With Individuals.
In very large systems, the relationship is not with the individual at all but with his social security number, his driver’s license, or some other paper phantom.
In systems of medium size, some residual awareness of the individual may still persist. A hopeful indication was recently observed by the author in a medium-sized hospital. Taped to the wall of the nurses’ station, just above the Vital Signs Remote Sensing Console that enables the nurses to record whether the patient is breathing and even to take his pulse without actually going down the hall to see him was the following hand-lettered reminder.
The Chart Is Not The Patient.

Unfortunately this slogan, with its humanistic implications, turned out to be misleading. The nurses were neither attending the patient nor making notations on the charts. They were in the hospital auditorium taking a course in Interdisciplinary Function. (*)
(*Footnote. Interdisciplinary Function: The art of correlating one’s own professional activities more and more with those of other professionals while actually doing less and less.)

If a medium sized system has a problem, there is absolutely no hope for a global system. After all, the patients been dead for years… sorry kept on ‘life support’ like some totalitarian leader (mmm..) And Zombies make for such a good story too!


January 31, 2013 at 2:01 am #6855


Ilargi, I request a new year’s statement. A year or so ago Ashvin posted a rant about how we are not back to normal. It was great. With so much discussion in the mainstream media about recovery, it would be great to have a list of bullet points–just off the top of your head–why any talk of a recovery is fantasy. I’m trying to convince some radio people at KPFK that a 20-minute radio interview with you would be a good thing.

January 31, 2013 at 5:16 am #6856


Hi Sid,

While I entirely agree with your sentiments, I think some of your data went astray. :)

Your 1950′s diagram made the following points:

Income per year – £8,896
House price – £2,000

Well, I went to an expensive public school (one of the top ten) and the fee was £692 per year in 1964. It is now almost £30,000 per year. An income of £8,896 would have allowed Mr average to send 10 kids to such a school!

Let me give you another example. When I graduated as a civil engineer in 1971, my salary was £1,500 per year. I suspect the figure for income given above should be divided by 10 – £889.6


January 31, 2013 at 7:23 am #6859

Raúl Ilargi Meijer

Hey Scott,

Good to see you here.

I’m not sure I’m any good at doing lists and bullet points, I think once I start, I’d want to subdivide each bullet with ten more etc. And I don’t know that you best fight bullets with bullets in this field to begin with. I don’t try to write finished all-encompassing things, that’s not something I have faith in, I’d like to think I take people on a journey, perhaps bumping them slightly left-right, up-down, back-forth from time to time, providing food for their own personal thought.

I’ll try to think in bullets. But I can still explain quite well without why recovery is fantasy.

January 31, 2013 at 6:45 pm #6864


@ Nassim:

Riiiiiiiighhhhht ok. Do you know what propaganda really is? (no its not slang for taking a look aka proper gander) In my mind it’s the telling of a lie using selected truths and creative story telling that the teller believes to be the whole truth. Ro/Rs internalised in the mind of the propagandist, and often the propagandee

In the ‘propaganda’ in question here, there is also the ‘historical’ anomaly of the old ‘sterling currency’ of pounds (P) shillings (S) and pence (D). As twenty shillings to the pound gives a factor of twenty, when applied to ‘their’ data I suspect that the spread sheet might have choked. That or they are just making it up as above! (The old PSD pounds shillings and pence could be seen as the ultimate in feudal control, one currency for the elite, pounds (or ‘Guinies’ £1 S1), Shillings for the middle classes, and pence for the serfs.)

In terms of ‘their’ data, they have obviously conflated shillings with pounds, hence the factor twenty error in ‘their’ 1950s and 1960s slides. As for the other slides, I think they have cherry picked ‘their’ data. (The original slides were by Savills of London Estate agents so they may be referring to their own historical wages! LOL!)

You went to Stowe – bully for you! As for public and other schools real purpose, check out John Taylor Gatto, and as Rugby state on their website:

Rugby’s greatest Head Master Dr Arnold (1828–42) instigated this practice so that boys could see him privately and the tradition continues today. Arnold is famed for ridding the School of its Flashmans and emphasising subjects that were a good ‘preparation for power’. He treated his senior boys as gentlemen, increasing their power and duties so that they shared responsibility for moral tone and discipline with him. As Arnold put it: ‘First religious and moral principle, second gentlemanly conduct, third academic ability.’ Masters were expected to supervise as well as teach; the dames’ houses were abolished and pastoral care was born.

“preparation for power” make no mistake, indoctrination at all levels must start early.

The Antithesis to the propaganda? Education as in Educe: 1, bring out or develop from latent or potential existence; elicit. 2 infer; elicit a principle, number, etc, from data.Origins from middle English from Latin educere educt- ‘lead out’. As in to lead out of darkness… just how deep does the rabbit hole go?

Take Athens:

For a long time, for instance, classical Athens distributed its most responsible public positions by lottery: army generalships, water supply, everything. The implications are awesome— trust in everyone’s competence was assumed; it was their version of universal driving. Professionals existed but did not make key decisions; they were only technicians, never well regarded because prevailing opinion held that technicians had enslaved their own minds. Anyone worthy of citizenship was expected to be able to think clearly and to welcome great responsibility. As you reflect on this, remember our own unvoiced assumption that anyone can guide a ton of metal travelling at high speed with three sticks of dynamite sloshing around in its tanks.

When we ask what kind of schooling was behind this brilliant society which has enchanted the centuries ever since, any honest reply can be carried in one word: None. After writing a book searching for the hidden genius of Greece in its schools, Kenneth Freeman concluded his unique study The Schools of Hellas in 1907 with this summary, “There were no schools in Hellas.” No place boys and girls spent their youth attending continuous instruction under command of strangers. Indeed, nobody did homework in the modern sense; none could be located on standardized tests. The tests that mattered came in living, striving to meet ideals that local tradition imposed. The word sköle itself means leisure, leisure in a formal garden to think and reflect. Plato in The Laws is the first to refer to school as learned discussion.

Know Thy Self. Self educate.
In the Buddha’s parting words:

“Therefore, O Ananda, be ye lamps unto yourselves. Rely on yourselves, and do not rely on external help. Hold fast to the truth as a lamp. Seek salvation alone in the truth. Look not for assistance to any one besides yourselves.
“And how, Ananda, can a brother be a lamp unto himself, rely on himself only and not on any external help, holding fast to the truth as his lamp and seeking salvation in the truth alone, looking not for assistance to any one besides himself? Herein, O Ananda, let a brother, as he dwells in the body, so regard the body that he, being strenuous, thoughtful, and mindful, may, whilst in the world, overcome the grief which arises from the body’s cravings. While subject to sensations let him continue so to regard the sensations that he, being strenuous, thoughtful, and mindful, may, whilst in the world, overcome the grief which arises from the sensations. And so, also, when he thinks or reasons, or feels, let him so regard his thoughts that being strenuous, thoughtful and mindful he may, whilst in the world, overcome the grief which arises from the craving due to ideas, or to reasoning, or to feeling.
“Those who, either now or after I am dead, shall be lamps unto themselves, relying upon themselves only and not relying upon any external help, but holding fast to the truth as their lamp, and seeking their salvation in the truth alone, and shall not look for assistance to any one besides themselves, it is they, Ananda, among my bhikkhus, who shall reach the very topmost height! But they must be anxious to learn.”

“But they must be anxious to learn”


February 1, 2013 at 5:17 pm #6872



I am not really interested in discussing public schools – I am simply using the fees as historical data points. They have good and bad points, are pretty different from one another and they change over time so I am unqualified to comment about their latest incarnations.

The website http://www.measuringworth.com suggests that in 1955 average nominal annual earnings were £434 and that that was equivalent to £8,887 in 2010.

Personally, I think that was probably equivalent to twice that value at least if the RPI was honest. I mean, people actually used to save money. Sure, their houses were tiny and cold, but that is the way it is in many modern houses. OK, they only had black and white TV and one or two channels, but so what. Few drove, but they were not fat. I could go on in that line …

I don’t really know why these estate agents fudged the numbers. I don’t think it is a conspiracy – more a case of bad maths. I studied maths at a 3rd world school and didn’t need to learn anything in that line between the ages of 12 and 16 when I moved to the UK.

It always amazes me how price inflation destroys peoples’ ability to think rationally. I gave some gold coins 3 years ago to my grown-up boy. Today, I told him that they had gone up in value by 30% in terms of US dollars. He quickly said that a 30% profit was great. I tried to explain to him that since inflation is really around 10% per annum they had not generated any profit, but had not made a loss either. He shook his head and said that he could not really understand what I was getting at. He gets upset and confused when I offer any of the nuggets that I glean from this website. :)

February 4, 2013 at 6:19 pm #6876


Nassim wrote:

The website http://www.measuringworth.com suggests that in 1955 average nominal annual earnings were £434 and that that was equivalent to £8,887 in 2010.

There’s that factor twenty again!


February 4, 2013 at 6:24 pm #6877


Hi Folks,

Of course, some people tell an entirely different story:

House prices back on track and no sign of a crash… :whistle:


February 8, 2013 at 6:57 am #6896


davefairtex post=6561 wrote: Golden Oxen -

Had a great conversation over at Chris Martenson’s site about hyperinflation. Came up with a bunch of metrics to detect it. Executive Summary: not happening right now, but size of monetization is getting closer to being worrisome.

Here are the indicators we came up with:
* monetization of at least 40% of US govt spending + increasing consumer confidence
* TIPs yield rising
* Loss of reserve currency status
* US Dollar dropping
* Money velocity increasing

See the page I constructed to show these indicators. Note that some of the timeseries on the page only update every 3 months, so they haven’t spotted the current monetization effort just yet. But you will get the idea.

* Monetization: was zero, now (about) 25% of spending
* Consumer Confidence: rising, but still low (below 2000-2008 levels)
* TIPS yield: at all-time lows
* USD as reserve currency: very slowly dropping, at 61% of global CB reserves
* USDX: moving sideways
* Money velocity: dropping

hyperinflation page

Note that the degree of formal acceptance by central banks
of the USD as reserve currency is one thing; the acceptance
(and probable coming non-acceptance) of the USD as
universal currency in trade is another. Vis:

Pitched Currency War & USDollar Rejection

The Coming Isolation of USDollar


February 8, 2013 at 8:07 pm #6898


Hi Folks,

The never ending story continues, with the caveat that the following article does not mention that food prices have fallen to a third of their 1971 ‘value’ due in part to cheaper food, but also to earnings increases:

How house prices have risen 43-fold since 1971
A carton of milk would cost £10 and a roast chicken would be a £51 price tag if food costs had risen in line with house prices.
A carton of milk would set a family back by £10 and a roast chicken would have a £51 price tag if food costs had risen in line with house price increases over the last 40 years, research by Shelter has found.
The charity said that the typical value of a house had increased by just over 43 times since 1971, from £5,632 to £245,319.
If a family’s weekly shop had increased at the same rate, it would now stand at £453, which is six times the actual figure of around £75.
Applying the house price rate of inflation to everyday food and drink items means that a bunch of six bananas would cost £8.47, a four-pint carton of milk would cost £10.45 and a leg of lamb would be £53.18, Shelter said.
Shelter’s chief executive Campbell Robb said: “The high cost of food is already a real concern for people, so if prices reached these levels there’s no way we’d accept it.

If food prices had risen with house prices:
- 4-pint carton of milk would cost £10.45
- a chicken would cost £51.18
- a bunch of 6 bananas would cost £8.47
- a box of 6 eggs would cost £5.01
- a loaf of sliced white bread would cost £4.36
a leg of lamb would cost £53.18

So maybe time to move to sunnier climes? (But watch out for the Zombies…)

Is now the time to buy property in Spain?
Cheap places in the sun…

One problem for prospective British buyers is that Spain currently has a two-tier property market. There are the prices you see advertised by estate agents and property developers, and then there are the true prices from sales, which often take place at discounts of up to a quarter (25%) off ‘official’ prices.
In other words, this is the sort of buyers’ market where bargain hunters thrive, snapping up premium properties at bargain-basement prices. This is especially the case in such a stagnant market, where a near-total lack of selling activity means that prices are purely guidelines.
For example, some Spanish banks have been off-loading repossessed (seized) properties at discounts of 60% to 70% from original purchase prices. With such deep markdowns on offer, there should be no need to rush into buying, especially if prices continue to weaken this year.

…but there could be more pain to come
While the arguments for investing in post-crash Spanish property are growing, only fools would rush in to this bombed-out sector without doing their homework first.
Indeed, one leading economic consultancy in Spain, RR. de Acuña & Asociados, warned last December that the Spanish property slump could continue for another 10 to 15 years. The firm expects prices in major cities to fall a further 30% by 2018, while popular coastal regions could see prices halving from their current levels.
This would be a disaster for the estimated 400,000 Brits who already live in or own homes in Spain, some of whom might see their homes fall in value by three-quarters (75%) from peak to trough.
In a strongly worded report, RR. de Acuña & Asociados warned that “The [Spanish property] market is broken,” because there are close to two million properties awaiting sale. This unsold stock breaks down as follows:
Used homes on the market 800,000
Completed development units 700,000
Foreclosures 300,000
In foreclosure proceedings 150,000
Under construction 250,000
Total 2.2 million
Of course, classical economic theory tells us that when supply greatly exceeds demand, prices can go only one way: downwards. With a massive glut of 2.2 million unsold homes and only 200,000 to 250,000 properties changing hands each year, Spain has a property overhang that could take a decade to clear.
In this scenario, there is simply no way that the Spanish market can gain any upwards momentum. What’s far more likely is that prices will resume their downward slide, before levelling off when Spain’s economy finally starts to show sustained strength

The true picture: Spain in numbers
To show you how dangerous it could be to bet on Spanish property right now, I’ve pulled together some stats on the state of Spain (and the UK) today. As you can see from my table below, there are plenty of problems for property investors to worry about.

Country Spain UK
Population 48 million 62 million
Yearly property sales 200,000 900,000
Unemployment rate 26.6% 7.8%
Youth unemployment rate 56.5% 20.2%
Economic growth (2012) -1.8% 0%
Predicted growth (2013) -1.3% 0.7%

As you can see, the UK economy was flat in 2012 and is expected to grow slightly this year. Alas, Spain is still firmly in recession, with its economy expected to keep shrinking until 2014. Also, with unemployment running at more than three times the UK’s rate of 7.8% and youth unemployment at record high, there seems to be no light at the end of the tunnel for Spain just yet.
What’s more, with Spain’s ‘zombie’ banks and property developers locked in a ‘death spiral’ of fire sales, write-downs, bad debts and defaults, there is no reason to expect any lasting property recovery in the immediate future.
In summary, while property prices in Spain are well below their former highs, they could yet have further to fall. So this is a market only for the brave, foolhardy or risk-hungry!

And as we know, ‘classical economic theory’ is mostly bunk: as TAE often points out, its what people can afford that is important and drives the market, and people are being squeezed left right and centre by higher rents/expensive mortgages that need 20% deposits (a sign of the real risk of falling prices), rising fuel costs and falling income and the increasing scarcity of full time work.
Also, as TAE have also pointed out, government and bureaucratic responses to the crisis can prove devastating:

Bedroom tax: why social tenants will soon be taxed on their spare bedrooms
There are over 26 million households in the UK, of which nearly 3.8 million are classified as ‘social housing’. These rented homes are owned by local authorities or non-profit housing associations and usually occupied by low-income tenants.

Taxing extra rooms
One way the Government aims to curb the bill for social housing is by imposing a yearly cap on total state benefits paid to working-age households. This limit has initially been set at £26,000 and is already affecting thousands of households, particularly in high-priced London.
In what’s being already called the ‘bedroom tax’, housing benefit will be cut from April for those tenants who have one or more spare bedrooms in their homes. One extra bedroom triggers a cut in housing benefit of a seventh (14%). Two or more spare bedrooms produce a cut of a quarter (25%).

What will be the consequences?
For a family receiving, say £100 a week in housing benefit, a 14% cut equates to a loss of £14 a week from April (£728 a year). Likewise, a 25% cut to the same benefit would mean losing £25 a week (£1,300 a year). For many council tenants, this shortfall could mean the difference between heating and eating.
Of course, this coming cut to housing benefit is intended to encourage council tenants to ‘downsize’ by moving from larger, under-occupied homes to smaller, more affordable social housing.
But people living in social housing (notably those that rely solely or mainly on state benefits for their income, such as the unemployed, disabled and low-paid) are not renowned for living the high life. Many struggle to make ends meet already, particularly when big bills suddenly hit the doormat.
So these cuts are sure to send many thousands more council tenants into rent arrears. With yearly rises in other working-age benefits capped at a below-inflation 1% from 2013 to 2016, the household budgets of welfare claimants will be placed under even greater pressure.

What’s more, families that do agree to move to smaller homes may find that such housing stock simply isn’t available in their area. So while being physically unable to move to smaller accommodation, they must carry on paying the bedroom tax. How absurd is that?

Bedroom tax? Almost matches the ‘window tax’:

The Window Tax existed from 1696 to 1851. It was introduced during the reign of William III as part of the beautifully named “Act of Making Good the Deficiency of the Clipped Money”.

Though the burden of that tax fell on the better off.

The point of all this rambling is that the story is always much more complex than the black and white crash/no-crash, inflation/deflation type dichotomies that tend to dumb down any real analysis.

Here is ‘This is Money’s’ story of how the value of money has changed since 1900, with a snap shot of the last 49 years:

and with a snap shot of the ten years between 1999 to 2009, where its interesting to note that house prices rose 123%, salaries only 13.6% and UK consumer debt by 158%!

Take away debt, and what can they afford then?



March 3, 2013 at 8:45 pm #7020


Hi folks,

Sorry just couldn’t resist:

This is Money:

‘Super zombie’ households face disaster – even without an increase in loan rates

On top of fears that one million or more ‘zombie households’ face instant insolvency the moment interest rates return to normal comes new research today uncovering a sub-category of ‘super-zombies’.
These specimens of the financially undead are households unable to pay what they owe, even if interest rates stay where they are.

Zombie households: These specimens of the financially undead are unable to pay what they owe, even if interest rates stay where they are.
More than one million households have interest-only mortgage debt totalling £120 billion on which they are currently on course to default.
Some have no investment plan of any sort to pay off the capital sum. About 700,000 mortgages are in this position, with a value owed of about £75 billion.
Some have a plan that on current form will be unable to clear the debt. About 400,000 mortgages fit this description, with a total owed of £45  billion.
The message from today’s report, by research consultancy BDRC Continental and published exclusively by Financial Mail, is that 1.1 million households are in effect hoping for the best.
Not only that, but the option of simply selling the property for a big capital gain is not the tried and trusted solution that it once was, given the subdued state of the UK housing market.
Zombie households are made up of those individuals and families who are barely keeping afloat financially and who would slip beneath the waves were the current level of interest rates – the lowest in more than 300 years – to return to anything like normal.
There are about one million such households, the influential National Institute of Economic and Social Research estimated last year.
Now BDRC’s findings have exposed another, more frightening aspect of the phenomenon.

Its survey found only 31 per cent had an investment plan that was on course to clear their debt, while eight per cent of the total either did not know or answer.
Wornell added: ‘Many interest-only borrowers are not engaged with the end-game – what happens when their mortgage term finishes and they have to repay the capital? Everyone with such a mortgage needs a credible repayment plan.’
Elsewhere in the financial graveyard, new figures from R3, the body representing insolvency professionals, has found a rise in the number of people who are paying only the interest on their credit card statements – to 3.4 million against 2.9 million a year ago.
One ray of light is that the total number who are paying only interest on their overdrafts has declined over the same period, from 2.4 million to 2.2 million.
But figures last month from the Office for National Statistics showed the proportion of people who said they would be unable to meet an unexpected but unavoidable expense had risen from one in four in 2007 – at the start of the economic downturn – to two in five today. And a detailed Business Department report from 2011 found 23 per cent of the adult population either ‘constantly struggling’ or ‘falling behind with bills and commitments’.
The Bank of England has expressed concern about the effect of large household debts on consumers’ willingness to spend, and City regulator Martin Wheatley, head of the new Financial Conduct Authority, described the £120 billion of unfunded interest-only mortgages as ‘a ticking time-bomb’.

As I just posted elsewhere, and Stoneleigh and Illarghi have been saying, things are about to get very interesting… as in historically interesting – like 300 years since interest rates were this low, oh and the South Sea Bubble burst about then as well, oh and the Mississippi bubble…

Dawn of the Dead anyone?


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