Jan 152014
 
 January 15, 2014  Posted by at 8:47 pm Finance Tagged with: , , , , ,
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Howard Liberman Fort Belvoir, Virginia. Soldier using a barbed wire anchor spike August 1942

Last week, there was a discussion in our comments section about the financial “crunch”, the big kahuna, and how it still has not happened despite our insisting it is inevitable, with people saying things like: ‘but the stock markets are way up!’, and ‘in my area home prices are up 30%’. As much as I understand the sentiments, at the same time I don’t really. Certainly for people who read The Automatic Earth, I would have thought it would be clearer what is going on “out there”. I have certainly written more articles than I care to remember about what goes on. Debt is what goes on.

Because in order to understand what really goes on in the world of finance, and the economy at large, today, you need to know only one word: debt (aka credit). And you then ask yourself with everything you read: what about the debt? It’s a question largely absent from the media, other than in yet another Mexican standoff at the US Congress about the debt ceiling.

But you don’t need to be an Einstein to figure out why the stock markets set records, or why housing prices in the US and UK are rising, even if the media prefer to ignore why they do. All you need is that one question: what about the debt? Once you start looking at things with that question always in the back of your mind, the picture becomes – literally – painfully clear.

As I put it in that comment thread:

“As for that crunch, being skeptical of a crunch is what we do, all the time, day after day after day. But all I see is a crunch that grows in size day by day, because people let themselves get fooled into thinking that not only can debt be paid off with more debt, but that they will actually profit from this being executed in their name, and with their money. Look, the S&P breaks another record! Well, you certainly earned that look, because you’re paying for it.

If people still think we were wrong, and are wrong, about that crunch, let’s talk, but they need something better to bring to the table than S&P records or home prices. Because we can’t have that conversation without looking at debt levels. And I think that’s where the turning point still is, whether in conversations or in real life. You think things are looking up? Okidoke, so what happened to the debt that caused the 2007/8 crisis? Well, personal debt went down a tad (foreclosures), though plastic is all the rage again, bank debt (by far the largest) has been hidden behind a too big to fail wall, and federal debt is on its way out of the ballpark, going going but by no means gone.

But hey, everything seems normal right? Well, unless you’re in Greece, or Italy, or Spain, or Detroit, or you’re in that fast growing American army that just lost your foodstamps and your unemployment benefits. So is it possible that maybe things seem normal for you because they no longer do for other people? If it looks like what it was before, that must be real, right?, that couldn’t be an temporary illusion bought with debt, like getting a new credit card and using it to pay the mortgage and the kids’ school fees and dentist bills till it’s maxed out after a few weeks or months? How many people do you think went routes just like that? And where are they now?

Does anyone think that the debt pays off itself? And even if you do, please note that it hasn’t so far: it’s only grown. How do you think that will end? How could it possibly end?”


Let’s say there are three important kinds of debt: household, financial and federal (national) government. That is, if you allow me to skip over lower level government debt and non-financial business debt for now. Which shouldn’t be ignored, I know, we’ll see a surge in bankruptcies in municipalities and businesses, but let’s look at the three “big ones” today.

Household debt has gone down a little, despite resurgent plastic and soaring student loans. People have a lot less, homes have lost a lot of value, foreclosures have been executed, and what new jobs there are pay much less than those that existed before the crisis (not that I would argue the crisis ever ended, but many do).

Financial sector debt is a whole different story. Both financial institutions and governments (including Fed and other regulators) go through huge troubles to hide financial sector debt from view. It still just lies festering in the vaults, though for quite a few “assets” there’s been a change of vaults: from private banks to public coffers like the Fed. It’s been so ridiculous for so long that we’ve lost track and sight of it, but it’s still true: the most important factor in causing the 2007/8 crisis is still completely hidden from scrutiny. That fact alone should make you very weary: if there were no very large problems with all these smelly assets, they would have been hauled out into the open, and long ago.

A point I have belabored ad nauseum. Just so you know I’m not a lone fool on the hill in this, Zero Hedge had a piece recently on the topic, from Phoenix Capital Research:

To This Day, No One Knows What Financial Firms Are Sitting on

As powerful as it may be, the Fed is not the market. And since the Fed failed to restore trust in the system by forcing all bad debts to light, the financial world has grown increasingly volatile and broken as investors grow increasingly distrustful of the system and begin to pull their money from it: see market volumes continuing to plunge.[..]

That lack of trust continues to this day. In the post-Lehman collapse, instead of forcing real derivative and credit risk out into the open, the Federal Reserve and regulators instead suspended accounting standards and allowed financial firms (and other corporate entities) to continue to lie about the true state of their balance sheets. As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?).

Those times in which a company was forced to value its assets at market prices have always seen said values losing 80%+ value in short order: consider Washington Mutual, which sported a book value north of $70 billion right up until it was sold for… $2 billion. This type of fraud is endemic in the system. Indeed, we got a taste of just how problematic a lack of transparency can be with MF Global’s bankruptcy, in which a firm with $42 billion in assets lost over 80% of its value since August only to reveal in bankruptcy that it had stolen over $700 million worth of clients’ money.

That MF Global engaged in fraud and stole clients’ money is noteworthy. However, the far more important issue is: HOW did this company receive primary dealer status from the NY Fed nine months before imploding? The Primary Dealers are the banks that actively engage in day to day activities with the New York Fed regarding the Fed’s monetary policies. Primary Dealers also participate in US Treasury auctions.

Put another way, Primary Dealers are the most elite, well-connected financial firms in the world. They have unequal access to both the Fed and the US Treasury Dept. In order for MF Global to have attained this status it must have passed through a review by: 1) The New York Fed and 2) The SEC. [..] This is not a quick nor superficial process. MF Global passed through all of these reviews to became a primary dealer in February 2011. A mere nine months later, the firm is in Chapter 11 and has admitted to stealing clients’ funds to maintain liquidity.

These developments reveal, beyond any doubt, that financial oversight in the US is virtually non-existent. This returns to my primary point: that trust has been lost in the system. And until it is restored, the system will remain broken.

A final note on this: the NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt? If the NY Fed cannot accurately audit a financial firm’s risks during a six month review, then there is NO WAY an ordinary investor can do so.

This is one of the biggest risks in the system: that no one has a clue what financial entities are sitting on in terms of garbage derivatives and debts. As MF Global proved, this risk can result in a TOTAL loss of funds.


So, financial sector debt? Nobody knows but the people with the legal and political power to hide it away, and slowly transfer it to the public. When you’ve seen numbers like $1 quadrillion for the derivatives trade, it’s hard not be very afraid about how it will all end, but we apparently prefer temporary rosy illusions to being afraid. After all, who talks about derivatives these days?

But, as bad as it may be, we don’t even need to scrutinize financial sector debt to get an idea of what we’re in for. Government debt will do that for us.

As we know, US federal debt is now over $17 trillion, and growing fast:



While the Fed balance sheet has surged to $4 trillion:



In that context, Mish wrote a piece over the weekend on the interest America pays on its debt:

When Will Interest on US National Debt Exceed $1 Trillion?

Really think the Fed is going to hike? They know they can’t, and the Fed is disingenuous as to why.

A year ago the Fed was discussing 6.5% as a trigger point. In December, the Wall Street Journal noted the “Fed’s Shifting Unemployment Guideposts”. Now, in the wake of a massive collapse in the labor force in which unemployment rate just dropped to 6.7% it’s easy to understand why the goalposts shifted.

The Fed pretends its interest rate policy is about a dual mandate of jobs and GDP growth. The above charts show the real reason for the shift: the Fed is in a box of its own making and it has no freaking idea how to get out of the box.

Mish also quotes Peter Tanous in his piece, who says 2012 total income tax revenues for the US government were $1.1 trillion. So the real question becomes: when will interest on the debt be more than income tax revenue? How far away can that moment be? The Fed may not hike, but the Fed is not the market. And what will happen when the moment comes that all tax revenue goes to interest payments? Raise the debt ceiling, no doubt. But that must surely stop when the interest on the debt overpowers income tax revenue.

This interest thing made me think back of a graph I published some time ago, from Zero Hedge. It’s also about interest. In this case, the interest lost to savers through the ZIRP policy. Chris Turner calculated there that American savers lost $10.8 trillion over 12 years, when compared to average interest rates over a 50-year period.



That’s another trillion a year, on top of the threat of a fast rising interest rate on government debt. Better start working real hard, guys. $2 trillion is $6000 per capita per year that you need to cough up. Of course you can argue that rising interest rates would be good for savers, so those numbers are not entirely correct, but America’s a nation of debtors, not savers, and rising interest rates will hit for instance the housing sector like a sledgehammer. By the time this becomes reality, you’re going to wish you were losing savings only.

For a global picture, let’s return to an article I wrote in July 2013, with help from quotes sent by my friend VK:

Oil and Credit

Credit growth precedes GDP growth. In the 2002-2011 period world credit growth has been close to 12% per annum & GDP growth at 4% (11.7% vs 3.6% actually as per Hayman Capital Research ). Total global debt (public & private) is about $210 trillion today. And global GDP is $65 trillion. If you project the trends forward, total global debt will be $635 trillion in a decade! Global GDP will be $96 trillion, i.e. total global Debt-to-GDP of over 650% in 10 years.

Key point, for the next decade to equal the last one: to achieve global growth someone needs to borrow $425 trillion over the next decade. US total debt must rise to $166 trillion by 2023 & EU total debt must rise to $195 trillion. In the next 6 years more money must be lent out than in all the previous thousands of years of human history combined!! [..] Assuming US Treasury yields rise to 5% and thus assuming the global average interest rate is 7%, total debt repayment will be $26.5 trillion roughly annually.


It gets surreal pretty fast, doesn’t it? But it’s really just projecting recent trends into the near future, no more, no less. 12% annual credit (aka debt) growth is how the story of stock market records and rising home prices is kept alive. In the US, in Japan, in Europe.

And if you think the US is bad, look at the story Tyler Durden had on China:

… while the Fed creates $1 trillion in reserves each year, and dropping post taper, China is responsible for $3.6 trillion in loan creation annually – yank that and it’s game over for a world in which “growth” is not more than debt creation.


Applying a realistic, not made up bad debt percentage, somewhere in the 10% ballpark, and one gets a total bad debt number for China of… $2.5 trillion, and rising at a pace of $400 billion per year. No, really. Good luck.

I would think 10% is a very low bad debt percentage for China and its economy effectively controlled by a shadow banking system to a rapidly increasing extent. That’s like saying only 10% of US bank assets were bad in 2007. But the gist of this is obvious: China is a huge credit bomb, rivaling the US in that aspect too.

What’s more, there is a side to credit that is not often mentioned, but is absolutely essential. Credit can be a good thing, provided it is used for constructive purposes (and I don’t mean the construction of ghost cities). In the US, the days when that applied are long gone, and credit is a burden only (except for building illusions), because it’s heaped upon this incredible pile of already existing debt. China, though only for a fleeting moment, has it somewhat better in this regard.

The data leave little room for doubt. I think everyone can understand the principle behind this graph:


Debt aka credit can stimulate productivity, but not indefinitely, and absolutely not when it’s piled upon an existing mountain of debt. Credit overshoots productivity, and keeps rising while the latter is on its way down. Until it no longer can. It’s real simple. We all get it instinctively.

Where the US is in this process becomes clear in this pretty familiar graph:



Which can also be expressed this way:



By 2015, an increase in debt in the US will no longer produce any growth at all. Then it’s all just pushing on a string. Or game over, or whatever you want to call it, pick a flavor of your taste. And then? What then? VK had a nice comment on that as well, especially when combined with Durden’s graph above:

Credit growth in China was 5.9x faster than GDP growth in Q1 2013. 17 cents GDP gain for every dollar borrowed! They’re approaching the US and Europe.

Dollar for dollar, or cent for cent rather, China is where the US was just 10 years ago … As I said, that last graph is pretty familiar, and while it’s not cast in stone, you can bet it serves as a flashing beacon for many people. But most are going to sail the boat anyway, thinking they’ll be smart enough to jump off before it hits the Victoria Falls. They can’t help themselves. The smarter ones have been saying their goodbyes for a while now.

There are a few major, and inevitable, events we’re approaching: US (and EU, and Japan) debt payments that become larger than total income tax revenues, and marginal productivity of debt sinking below zero for real. If you think the most important signals coming out of the economy are stock market records and rising home prices, I would urge you to think again. As for China, all we can do is wait. And perhaps pray, if that’s your thing. Take your pick of inflection points there, how could you go wrong?

But remember, always, when you read anything at all about the economy, ask yourself: “what about the debt”? If something, anything, that happens or is decided, certainly in the west, means more debt is piled on, beware.


This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!

Home Forums Why We Can Not Purchase Our Way Out Of Debt

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January 15, 2014 at 8:47 pm #10497

Raúl Ilargi Meijer

Howard Liberman Fort Belvoir, Virginia. Soldier using a barbed wire anchor spike August 1942 Last week, there was a discussion in our comments section
[See the full post at: Why We Can Not Purchase Our Way Out Of Debt]

January 15, 2014 at 11:54 pm #10499

boilingfrog

Good evening Ilargi,

I, for one, enjoyed that thread. Speaking for myself, different parts of this whole complex mess become “clear” (if that’s possible) at different times… the whole “energy needed to support this level of complexity” is one I’m still trying to wrap my brain around.

With regard to the debt, it’s a tough one to even begin to grasp for a lot of reasons, and I’ll name two: (a) the CONSTANT message – brainwashing? – coming from the powers-that-be (and their shills) that everything is good, and (b) the sheer ENORMITY of the numbers. It’s like trying to think in geological time or something… incomprehensible.

I appreciate you and Nicole and others reaching out to give a mental “hand-up” to me when I’m stuck on aspect that may be clear-as-day to you/them, but a new and/or confusing concept to me. Back in the late 80′s, fresh out of college, I was working for a Fortune 500 company and I remember the plant manager of our flagship plant telling me that government debt didn’t matter… (sure would be interesting to run into HIM today!)

Thanks for more clarity. The folks you have commenting on your blog are unsurpassed, in my book.

January 16, 2014 at 12:14 am #10500

rapier

Probably 90% of Americans have no idea that debt has two sides. The borrower gets the money and that they understand. But then they think the other side is the lender gets the money back as the debt is paid, end of story. That isn’t the end of the story at all. For the lender that loan is an asset on a balance sheet and balance sheets have to balance.

Or do they? Since most people don’t know that debts are assets on balance sheets they don’t care about balance sheets. If nobody cares about balance sheets then it in theory could make no difference if the balance sheet doesn’t balance. Since mark to market accounting was thrown out the window we are already have put balance sheets behind us. Nobody has to declare bankruptcy if their balance sheet doesn’t balance. The balance sheet is no longer a determinate of bankruptcy. What forces bankruptcy of a bank or financial institution is if they can meet their obligations today. Flood the world with liquidity today and the system continues on today.

A whole school called Modern Monetary Theory, propounded by liberals especially of the neo variety, banishes the idea of a central bank balance sheet. They propose that central banks simply print money and hand it out. No need to get an asset in return. While the naive followers of this think the money could and would be given to citizens, somehow, we know that won’t happen. It will be given out to the financial sphere. In essence this is what is going on already. The Fed prints and in return takes financial assets, Treasury paper and MBS, but they price they pay is inflated because of, guess what? Their previous purchase of those assets. A virtuous circle is created. They are not officially getting nothing in return, just getting less and less, except it does not look like less on their balance sheet. The one they still keep for appearances and out of tradition or habit I suppose but nobody really cares about that silly old balance sheet anyway.

Sorry to be so long winded. What I am trying to get at is financial and government debt does not have to collapse under this regime until someone says the emperor has no clothes. The the only ones watching the parade are partners with the emperor. The only reporters at the parade are partners with the emperor. Well there are other reporters but they are not ‘credible’ and are perhaps enemies. What I am trying to say is the US and other favored nations could keep this game going for a very long time. Keeping the financial and government economy running, as the people economy runs down. If nobody can or will say BAC or the Treasury or the Fed is bankrupt, then they aren’t bankrupt, today, as long as they system is liquid.

I am sure this isn’t clear.

  • This reply was modified 11 months, 1 week ago by  rapier.
  • This reply was modified 11 months, 1 week ago by  rapier.
January 16, 2014 at 12:14 am #10501

pipefit

As bad as the picture painted by your first graph (gross fed. debt) looks, it really only tells about 1/10 of the story. A more accurate picture would be a graph of debt PLUS unfunded liabilities (present worth). I don’t have one, but the consensus seems to be that the current total is now approaching $200 trillion. Even if that figure is $40 trillion too high, at $160 trillion we would still have an order of magnitude more debt than the size of the economy.

The total of debt plus unfunded liabilities increased by $6.8 trillion last fiscal year (2013), on a GAAP basis, or about 35% of GDP. So you can see that the money supply is increasing in hyperbolic fashion.

The question continues to be, how will the USA federal govt. make good on its promises? Will they arbitrarily renege on these promises (social security, medicare, VA benefits, etc.) , or will they continue to mail out checks to individuals and hospitals, sparking massive price inflation at the consumer level?

I believe we will get the answer within a year or so. If a large nation could run deficits of 35% of GDP for sustained periods of time, surely someone would have figured that out a long time ago.

My guess is that they there will be some sort of crisis within a year, and our masters will inform us that we need to switch to a one world currency or go back to the Dark Ages. I further predict that the fear levels will be so high that everyone will either meekly go along, or be on the rooftops cheer leading the move to a new currency.

January 16, 2014 at 2:07 am #10505

Professorlocknload

With the “value” of the debt itself denominated in credit instruments, ie; “Federal Reserve Notes,” rather than in money, what other choice does the issuer of said “credit notes” have, but to devalue?

Re-valuation (deflation) of these “promises to pay” (in what, wampum?) at this point would result in the implosion of the entire Worlds financial systems in one big irreversible Bang.

Devaluation, on the other hand, kicks it all down the road a little bit farther, buying time, until it all dies with a whimper.

Maybe that’s why GMO sees it all going down like this, in “Real” terms, not nominal,,,over a longer time span?

http://globaleconomicanalysis.blogspot.com/2014/01/bubble-valuation-blues-gmo-7-year.html

I’m with Mish on this. Periods of high inflation and minimal deflation (or, more like dis-inflation) extending out years, or even decades. Slow, controlled burning of the excesses, until their dollar is no longer accepted.

January 16, 2014 at 2:46 am #10506

Professorlocknload

I should have added, as well; in the Fed’s eyes, deflation, once started can’t be stopped until universal default is complete. But since the currency involved is theirs, they believe they can control inflation through interest rate and special market operations, and other forms of voodoo.

But it, too, can develop a life of it’s own, once confidence in it’s creators fails.

Watch COLA Reform for clues.

First shot across the bow is the canceling of said COLA’s for retired military.

Debasement becomes less “efficient” if protections are in place to help the average Prole.

So, no we can’t purchase our way out of debt, but we can surely inflate our way out,,,for a spell, anyway.

January 16, 2014 at 3:25 am #10507

g-minor

Why, since the Fed is not owned by the public but by the banks, are toxic assets on the Fed’s balance sheet taxpayer obligations? I should probably know the answer to this by now, but don’t.

January 16, 2014 at 5:47 am #10509

Raleigh

Here’s what Karl Denninger has to say:

“The Fed will cease QE on schedule. The taper is not only on, it won’t be suspended. And, withdrawing liquidity, that is, allowing short rates to rise, is on the table too, and almost-certainly sooner than you think.

It doesn’t matter if the market sells off, even if it sells off hard. [...]

So now The Fed comes in and does QE, buying the long end. What happens? Long rates go down. A year on your 1 year to maturity bonds mature, and you must replace them. With what will you replace them? All things being equal, when you replace them you will get less interest income from the new issues.

So let’s say the effect of QE is that your mortgage goes from 6% to 3%. This is a 50% reduction in your interest payment. But — that MBS gets sold into the market. MBS have a typical maturity profile of about 7 years (which is why the 10 is the benchmark; it’s the closest), fluctuating somewhat. When rates are high and falling the profile is shorter (because people refinance), when rates are low and going higher it extends (because you’re a nut to refinance a 3% loan into a 4% one — nobody does that unless you have to sell and move for some reason.)

So the guy who buys it gets a 50% reduction in his interest income, but that’s only 1/10th of his portfolio. For the first year, anyway. As such his impact the first year is 5%, then 10%, then 15% and so on.

We’re roughly five years into this crap now.

The pension funds and insurance companies that are the backbone of this market are probably doing plenty of screaming, and with good cause. If this keeps up their cash flow will collapse; they can’t absorb it. Further, Bernanke and the rest of the Fed know that factually the damage they took on by buying those instruments during QE cannot be gotten rid of either; it has to roll off, because if you sell that bond you’re going to take a capital loss and crystallize the entire loss right now instead of spreading it out!

This is what is forcing the end of QE. It is also what is going to force The Fed to pull liquidity and let the short end come up.

They don’t have a choice but they will never breathe a word of this, because to confirm it would be to give a clean opportunity to gang-bang all those bondholders by Hedge Funds and others who can play in the derivatives market, and that could (read: probably would) set off a crisis far worse than 2008.

That’s my read on it.

We’ll see, over the next months, if I’m right.”

http://market-ticker.org/akcs-www?post=227616

January 16, 2014 at 5:52 am #10510

Tiny Green Grasshopper

Hi, Ilargi:
Thanks for all you do. I’ve learned a ton from reading you and other economic bloggers. I Paypal’d you some money to help out with the computer; hope that situation settles out for you.

Commenting on this column– every time I see something about all the debt it seems to scream to me, “Jubilee!” As in the Biblical jubilee, in which “all debts are forgiven” every 50 years. I’m not sure “all” debts would be practical to forgive, however. Some amount of people’s 401(K)’s are based on debt. I wonder, how much and which debt?

On the other hand, how much of the insane debt you describe above is notional, existing only on the balance sheet of one of the Five Banks of the Apocalypse* or the Fed? For example, the Fed has possession of a significant amount of Treasuries. The FBotA have most of the derivatives (according to this) Who has possession of the MBS? And so on.

Suppose a dictator popped out of the woodwork and took over the U.S., and nationalized the FBotA and the Fed. Would it be unreasonable, or destructive, for this hypothetical dictator to say, “OK, we have all these derivatives in our possession– we are now going to make them disappear. We have all these Treasuries in our possession– we will make them disappear too. (Don’t worry, if you are not one of the FBotA or the Fed, we will still honor your Treasuries.) We have all these mortgages in our possession. We will write them down to balances, based on the incomes of the borrowers, that they can pay with a 30-year fixed mortgage. It’s jubilee time– time to kill off some debt!”

Would this dictatorial debt-slaying spree help or destroy the financial world? What do you think?

* Chase, Citi, BofA, Wells, and, of course, the Vampire Squid, Goldman Sachs

January 16, 2014 at 6:06 am #10511

Professorlocknload

Yeah, pipefit, I hear ya. I also wouldn’t rule out the Military “Solution.” That’s usually where these things end.

Faber said it the other day. Something like,’The Fed, Treasury and Government are one in the same.’
And I add, they also have an in house Pentagon.

January 16, 2014 at 2:18 pm #10513

pipefit

@Raleigh-Not to be argumentative, but you and Denninger are quite wrong on short rates rising. Perhaps Denninger is not familiar with the work of John Hussman. Hussman has established, through his ‘liquidity preference’ work, that one of the most rock solid mathematical relationships, when it comes to finance, is the one between short rates and base money.

Hussman says, “we define liquidity preference as the amount of base money that individuals choose to hold per dollar of nominal GDP, given any particular level of short-term interest rates.” I don’t post links, but google ‘john Hussman liquidity preference’

As with stocks, gold, or anything else, all of it is owned by someone, 100% of the time. When short rates are low (present case), the fed can get away with creating more base money (as a % of nominal GDP). They do this by creating money (reserve notes) and trading that to bankers for Treasury Bonds and mortgage securities.

When short rates are near zero, people and institutions holding money have little incentive to exchange their money for interest bearing securities. But if short interest rates rise, ” upward pressure on interest rates which reduces the attractiveness of non-interest bearing cash. If the Federal Reserve does not reduce the monetary base sufficiently to move left to the appropriate point on the “demand curve,” the burden of adjustment is instead thrown onto nominal GDP. Since variations in real GDP have a fairly limited range, the majority of that adjustment is forced to take the form of price increases (i.e. inflation) sufficient to bring the ratio of the monetary base to GDP down to the appropriate level.” hussman

According to Hussman, in order for the fed to raise short term rates even a paltry 25 basis points (without sparking massive price increases) they would have to stop QE entirely AND SELL over a trillion dollars worth of bonds from their portfolio. And that was many months ago. It is probably closer to two trillion dollars worth of junk now they would have sell BEFORE even raising short rates.

January 16, 2014 at 6:11 pm #10515

Cory

Well as I am the one who noted the “home prices are up 30%” perhaps I should elaborate.

Believe me, I get the whole debt thing (its the one part of this whole thing I get) – and as long as there is a chance of a 80-90% drop in home prices I WILL NOT BUY – no way no how.

However, I live in a divided house, with a spouse who simply is running out of patience. It was a major effort to convince her we need to sell, rent, and wait out the crash back in 08, and unfortunately, that (for now) appears to her and all other “nonbelievers” to be the bottom of the market. For years, she trusted me to make the right financial decisions for our family. But after 6 years of being proven wrong, that trust is wearing thin.

So yeah, while the “up 30%” hurts when you expected prices to drop another 40-50% – the thing that REALLY hurts is the ever increasing rent (now higher than my monthly payment when buying) and my loss of credibility within my family. Buying a house isnt like buying stocks. I didnt want to “make money” on appreciation – all I wanted to do by renting is limit my downside, but this is a decision that looks worse and worse as rent increases.

So going back to the issue of the debt – while I absolutely believe it is “inevitable” I am beginning to wonder how “imminent” it is. If it hits now then I am vindicated and my marriage is back on solid ground. However, if it doesnt hit until say 2025 or later when my house would have basically been paid off – renting for all those years would have been a major mistake.

So again, while I personally believe Stoneleigh that we are VERY CLOSE to the cliff’s edge – I simply cannot continue to repeat this in perpetuity and expect my spouse to continue to trust my judgment.

I hope you understand my dilemma.

January 16, 2014 at 6:30 pm #10516

Professorlocknload

The Fed really can’t exit this thing gracefully.

Control the official short rates as they might try, well, what is the price of shadow money in China about now? (One of the reasons I can like TAE’s partial (20%?) cash/equivalent holding strategy is, I might be persuaded to loan some at multiple digits farther down the line, with the right collateral) If it doesn’t work out that way, it’s not hard to trade into tangibles.

The reckoning is going to be in the spread. Short of Tyrannical Executive Order, that Tug-of-War rope between the Fed and the rest of what’s left of the Economy can only stretch so far before it breaks.

As it stands, the Fed’s mandate here seems to be to print whatever Wall Street, and it’s Congress, spends, plus interest. When this all fails, and Congress points blame at the Fed, to save it’s own ass, the paradigm will shift.

I’m still confidant my Morgan Dollar will buy me dinner or 3+ gallons of gas when this is all over. As usual.

January 16, 2014 at 7:02 pm #10517

Professorlocknload

@cory,

Perhaps of interest?

http://www.forbes.com/sites/kellyphillipserb/2013/09/27/11-reasons-why-i-never-want-to-own-a-house-again/

Disclosure, I still own Real Estate, but would NEVER buy a property to live in, that wouldn’t rent to cover it’s costs plus a return equal to the Corporate Bond rate.

That way, if times got gnarly, I could rent it out and go live in the woods for a while.

Best of Luck.

January 16, 2014 at 7:12 pm #10518

pipefit

Cory. Don’t feel too bad. We all make mistakes. The problem is that people brag about their successes and hide their failures, so it feels like you are much worse at finance than most, when you are more likely average.

That being said, even the most outspoken deflationists that I read made it very clear that they did not advocate the selling of one’s primary residence, IF you could afford the monthly payment, you planned to stay in the area, close to your employment, good school nearby, etc. All the chatter about selling real estate was strictly regarding rental/investment property. Instead, why not take advantage of low rates and refinance down to once in a century low cost capital?

At this point, the water is muddier than ever. It looks like deflation and hyper inflation are both at arm’s length, or closer, at the same time!!! This is probably by design. The people rigging the system have no reason to tip their collective hand, so why should they. This is why people like gold, since it should do reasonably well in either scenario.

I have decided to sink most of my capital and time into developing a permaculture project. Everyone’s gotta eat, they say. In the coming collapse, however, I’m wondering how many people will die of starvation. Most folks think food comes from the supermarket. Of course that is and will be true, until the market closes.

January 16, 2014 at 10:42 pm #10520

Tiny Green Grasshopper

@Cory:
No, no, I don’t think you made a mistake at all. I thought the exact same thing you did back in 2008. Any glance at a Case-Schiller graph made an iron-solid case that housing had peaked and had a long way down to go. Any glance at a Case-Schiller graph today makes an iron-solid case that housing has been manipulated, pumped, and huffed-and-puffed to a fake price “bottom” far higher than the real thing back in the 90′s.

What it is is, you and millions of other people who believed the market was actually free, have been punked. (Many of these people are savvy investors. Karl Denninger’s one– that’s why he’s so P.O.’d all the time.)

Furthermore, it appears the PTB are trying to turn us all into a nation of renters. And what the Forbes guy failed to mention in his rosy “renting is good” essay and you did in your post, is that landlords will raise the rent, year after year, as high as the market (not necessarily you) can bear. It used to be that a lot of rentals were owned by Mom-and-Pop, who if they liked you would have mercy on you viz rent increases. Now, more and more rentals are owned en masse by large corporations, who bought them as foreclosures from the banks a couple years ago, and these corporations will squeeze their renters for every penny they can get. See Charles Hugh Smith’s essay.

We are pointed down the road to becoming a nation of rent-serfs, squeezed to the max for everything we need to live, and never having the margin to save up money at all. There is no middle class in such a scenario.

January 17, 2014 at 2:03 am #10522

Raleigh

Green Grasshopper – and if you do have a house, eventually you will be taxed out of it. It’s not a pretty picture. Moving back towards feudal times.

As Charles Hugh Smith also likes to say, none of this will stop until the people stop it, but they are loath to stop it because so many are gettng some form of pay check/entitlement/benefit/credit from the government, and they don’t want to upset the status quo lest that gravy train end. They don’t realize it’s going to end, anyway.

So while TPTB are busy looting, they make sure they keep the money flowing to the masses, just to shut them up. Someone posted a good hierarchy yesterday:

“The “99%” is just a slogan.

In reality it is more stratified on a power law with a ratio of .1 to .2

.001 to .002 represent the true owners of the global system who are descendants of old inherited fortunes.

.01 to .02 are the figure head puppets that everyone THINKS runs things. This includes politicians, CEOs, etc.

.1 to .2 are the mangers. This is the most important group and they are the enablers of the oppressive hierarchy. This group largely identifies with the class above them and stands to lose a lot if the system fails. These are the people that need to be changed.

.8 to .9 are the disenfranchised. This group is owned and considered livestock.

Until the situation is framed in these terms we will get nowhere. The 10 to 20% enablers are the key and they will fight just as hard as the few above them in the pyramid to keep their position.”

January 17, 2014 at 2:07 am #10523

Raleigh

I think that should say “.1 to .2 are the managers,” not “mangers”. They have a vested interest in seeing the status quo remain the same (top advisors in government, financial advisors, etc.)

January 17, 2014 at 3:57 am #10524

ted

I have heard talk of a re-issue of currency…is that possible? I am sure they are trying think of everything…and before collapse we will see everything and things we never thought possible. There is all this talk that the FED won’t print money and hand it out….but put a gun to their head and I think they will see things differently. Ted

January 17, 2014 at 6:03 am #10525

Glennjeff

Astro APRIL looks doubleplus ungood.

January 17, 2014 at 2:03 pm #10526

bluebird

Raleigh said “if you do have a house, eventually you will be taxed out of it.”

This worries me a lot, as our property taxes are already quite high. Plus there is maintenance that never gets any cheaper.

January 17, 2014 at 4:11 pm #10540

ted

I hate to say it but it is almost futile to prepare for an economic collapse. If you really want to move to a farm and do permaculture do it because you enjoy it…not because it will keep you safe….If you have food and everyone is starving around you do you really think you will be able to keep it? If there is the collapse you are talking about there will be no police to protect you…Canada the U.S or else where. It is best to enjoy your time now and love those around you and visit people while you still can. You can prepare for a collapse but without knowing how it all falls out will be like building the Maginot line…Ted

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