What Happened To The Debt?
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And interesting post from Energy Bulletin recently.
https://www.energybulletin.net/stories/2012-08-20/greece-travelers-perspective
How crucial the informal sphere of life is! It’s interesting, because the formal sphere of economic activity (the one so adroitly captured by the banksters for so long) has only survived for as long as it has because of a net increase of energy throughput (wood to coal to oil). Now that we enter a net decline of energy throughput, the parasitic social relations become clear to everyone by way of their own social logic. What a fascinating period of history.
We are becoming more resilient by not replacing family cars when they crap out. We all have bicycles. The pickup has a radiator leak; the van is out of town with the youngest daughter, and the the 1998 Prizm without AC has more and more noise from the valve train, but it’s out of town with eldest son, anyway… Jenny carpooled to work today, but I always bike. It’s good that we live 2 blocks from groceries. I walk over to fill the 5 gallon water jugs sometimes, one at a time, they’re awkward to carry down the street.
Whatever remains now is but a wager. As in: the entire Eurozone has turned into a casino.
Comparing the Eurozone to a Casino might be generous even…
In a casino “the odds” are tightly controlled to favour the house.
In the Eurozone, I think there is too much uncertainty – as your piece states, control is illusory.
Ash, I think its good you’re keeping your finger on the pulse of the market while at the same time looking at the fundamental situation. Eventually the market will have to go along with the fundamentals, but its good to recognize when they diverge, and furthermore, acknowledge that they CAN diverge for longer than many of the players in those markets can remain solvent.
Things don’t just go straight down, as much as we expect they should.
Right now, the US market ($SPX) is retesting a cycle high at 1410, while Spanish equities ($IBEX) is testing an important moving average – the 200 MA. Breaking above that MA for more than a day or two would be a sign that money is much more willing to flow back into Spain and take risk; bargain hunting, if you will.
Unless all that bad Spanish debt gets addressed in the “bank rescue”, I think buying Spanish stocks is probably not such a wise move, but we should probably watch what happens with the prices, because that money is probably a lot more plugged in to the system information grid than you or I ever will be.
I think the ECB has learned from the Fed. The vast majority of the Fed’s influence comes from telegraphing their actions long ahead of time. That gives the insiders the ability to front-run the Fed, which effectively does the Fed’s job for it. Of course there will come a day when front running the Fed doesn’t work out, but that will be a Black Swan – nobody will see it coming.
It will be very interesting to see the market’s reaction to the first eurozone exit, whomever will be leaving. To date there has been a whole lot of smoke, but not very much fire.
davefairtex post=4909 wrote: Ash, I think its good you’re keeping your finger on the pulse of the market while at the same time looking at the fundamental situation. Eventually the market will have to go along with the fundamentals, but its good to recognize when they diverge, and furthermore, acknowledge that they CAN diverge for longer than many of the players in those markets can remain solvent.
Dave, Ilargi wrote the article.
But I wouldn’t call what he wrote “keeping a finger on the pulse of the market” aside from some early references to highs in Western markets. Personally, I think the fundamental situation is much more important than the pulse of the market, perhaps infinitely more important. The pulse is just that – a short-term indicator of [monetary] circulation and life, but tells you nothing about the terminal disease and nasty symptoms lying underneath.
The market CAN diverge from the fundamentals for significant periods of time, quite possibly wiping out many short-term investors one way or the other, but the real question is whether we can predict those divergences in any meaningful way, or whether the risk is simply too great at all times. I believe the latter is true. Like you imply, we live in an era of “black swans”. For now, these events are based around the complexities of our debt-based economies.
We may not know exactly what they will be or exactly when they will occur, but we know they will occur and they will shake the foundations of the global economy.
Can we even imagine the chaos if all the “debt” was allowed to be marked to market at once?
Could it be that the debt is being consolidated (purchased) by the central banks and held back from market clearing, long enough to allow the devaluation of the West’s currencies, and restructuring of it’s finance systems, to gain traction, whereupon it will be gradually released, to be paid back in cheaper dollars, euros, yen, ruples, dinars, stock certificates, in a tightly controlled long term procedure? In the various nations “national interests,” mind you. Maybe the “debt” has been locked down, as it were?
Bond markets are much larger than equity markets. That said, how have the worlds equity markets done over the past 4 years priced in gold?
As a side amusement, I ran across a comment on the infamous Zero Hedge recently, referring to the one and best solution to the EZ crisis. Simply require the worlds central banks to put all reserves in AAPL 😉
ash –
Sigh. Of course Illargi wrote the article. I plead brain lock. 🙂
I’m totally with you on the divergence. In fact, recognizing that divergence is key to being able to trade. A simple connection between “bad economy = bad market” doesn’t result in winning trades.
What’s more, I agree that watching today’s market performance is singularly useless when trying to predict what sort of outcome we’ll have (say) three years down the line. But market performance does drive political and monetary decision making in the near term. Right now for instance the brisk move to front-run the ECB that is going on now is definitely taking the pressure off Spain.
This site tends to focus on the long term. That’s definitely the most important. And yet, being human, we all like to know (like the 10 year old in the back of the car), are we there yet?
The way I read it, the market is saying no, we’re not there yet. Short term pressure on politicians to take immediate action is decreasing, not increasing. At least over the past 3 weeks anyway.
But I’m not suggesting we all breathe a sigh of relief and proclaim all is well. As Illargi points out, that sovereign debt is still there. And so are the bad debts of the banks, and so are the 25% unemployed Spanish people, and the massively underwater spanish homeowners. Fundamentals suck and they show no signs of turning around.
Here’s an article by Ambrose from yesterday about how the German ECB board member caved to support Spain & Italy bond-buying by the ECB once those countries hand over fiscal sovereignty (terms TBD) to the bureaucrats in Brussels.
My sense is, the market may have sniffed this out a few weeks to a month in advance. Those bond yields dropping the way they did – I don’t think it was all due to that one comment by Draghi. But that’s just my speculation based on an assumption that connected insiders get the juicy bits first so they can clean up.
And yet – what sorts of further fiscal adjustments will Germany demand from Spain as a quid pro quo for the ECB Big Gun? The same sort of things that have worked out so well in Greece to date?
If Spain relinquishes sovereignty over their budget, and The Troika comes to Spain, how long until that proves unworkable? A year or two? Less? And in my opinion that’s probably best case.
But regardless of my opinion, the market will let us know when it starts to sniff out policy failure, but we only benefit if we are paying attention. Pressure will start to build, and it will show up in money flows. And that’s why its important to watch. Not as a predictor, but an indicator – a thermometer of sorts, at least for the known knowns.
If we take 2008 as a model, a switch didn’t just flip one day and bad stuff happened. Pressure built slowly over the months, then more rapidly, until finally confidence snapped and a massive run on money market accounts happened. Astute observers were watching this pressure build by watching market prices and how they changed in reaction to events.
Of course predicting when confidence snaps is impossible. Yet we can tell if pressure is increasing or decreasing, and hypothesize that if pressure is decreasing, the chance of a massive loss of confidence is less likely to occur.
My feeling is as long as we don’t get hit by a real black swan (a geological event, for instance), I think the market will perform well as a near term pressure gauge.
You must understand that nobody believes anymore in central bank balance sheets. Most don’t know they exist and the rest don’t care. The central banks it is understood can always print more to buy new paper to pay off the old. No harm no foul as they say here.
No harm because there is no inflation, among other things. Other things being as I said the idea of a CB balance sheet meaning a thing.
The stodgy Germans still pretend central bank and bank balance sheets mean something. They don’t mean a thing. Not against the prospect of the death of the system. The political and economic system.
Adam Goodwin,
Thank you for the link. The opinions the writer expressed tally with my own.
I don’t believe in the big crash – only in the big financial crash. I believe that there is far more resilience in the non-financial (i.e. real) world than one may imagine.
Of course, loads of people have no real skills or real qualifications or real connections or real wealth or real health. For them, things are going to be bleak. I am in no doubt about that. However, a lot of people have one or more of these real resources (capital ?) and they will do quite well.
What Happened To The Debt?
Any plan that doesn’t address that question directly is worth less than the digital paper it’s written on. Any such plan won’t solve a thing.In order to address, “What Happened To The Debt?”, should we be asking first of all where did the money come from to lend and create those debts?
With the leverage numbers that are 50 to 100, then it should be obvious that most of it came from the printing press at the back of the bank vaults.
( For those who are not aware of it, Banks do not lend money that they have on deposit. They create money by the simple act of lending it.)
In the good old days, before the financial meltdown, the E.U. gov. did not print money. Now, the banks are demanding that the E.U. prints money instead of doing it themselves. The banks are in trouble because the interest payments, (cash flow), on the loans are not enough for them to continue their lavish lifestyles.
The last thing that the banks want to do is to downsize and take layoffs and pay cuts.
It would be a different world if banks only lent out the money that they have on deposit.
And
for Governments to only spent the income that they have collected.It will take a long time, (if ever), to get banks and gov. to downsize and live within their means.
Nassim,
I agree with you. I don’t believe in societal breakdown. To me it seems more like transmogrification. I’ve started to enjoy reading this Web site more over the past several months. It’s not because of the financial aspects of it (since I feel quite illiterate compared to many of the posters on even this thread!), but because I’ve noticed that the contributors have started to reach similar conclusions that I have reached through a different analytical path. There seems to be a common theme emerging among the contributors that we must necessarily contest the status quo, because we cannot rely on institutions to rectify it for us. This resonates with me greatly, because the analytical path I have used to come to this conclusion is anarchism.
I am quite surprised that the Peak Oil and financial crash niks have not breached anarchist teachings earlier in the forecasting game. It was only recently that I saw Richard Heinberg’s newest writing on energy bulletin (https://www.energybulletin.net/stories/2012-08-15/our-cooperative-darwinian-moment) and I saw my first anarchist cite. He cited Peter Kropotkin in his analysis of how our global civilization may fair during this great reckonening. Kropotkin, along with other anarchists, had always fought against the Malthusian/Hobbesian interpretations of humanity for some time. Malthusianism seems to frequently rear its ugly head among the peak oilers; though this seems almost a given considering that the peak oil argument is focused on the scarcity of _the_ key resource and that scarcity’s potential effect on humanity.
There’s no real way to know what will happen after a financial crash. It’s a social singularity, really. It affects our entire species (or near enough); and, it puts us all into a position to do something other than BAU. That’s truly revolutionary, because, as anarchists have been saying for centuries now, the only real revolutions are the social revolutions.
I have no idea what the next several months hold; but, I know that we will never forget what happens.
Do you ever wonder that maybe governments can keep this going forever. I have followed the advice of TAE but this doom and gloom that you say here it is just around the corner never comes. I have lost thousands of dollars pulling my money out of 401ks and other actions! Is it possible that you could be wrong? And you have too much invested in the doom? You are really hoping for a collapse and if it does not happen will you be disappointed? If their is a recovery you will just say, well just wait and see oil prices will climb and then we will have a crash….but what if that is not for another 10 years or 15 years…maybe just maybe the sky is not falling.
ted –
I totally understand where you are coming from. Doom and gloom websites are poor trading advisors – and they are especially bad at telling you WHEN something will happen. Its like we are all Noah, building our arks, and looking nervously skyward to see if THIS next rainstorm will be The One to last 40 days and 40 nights.
So you asked 3 separate questions.
1) are people too invested in doom?
2) could they be wrong – might we return to BAU?
3) can they keep this up indefinitely?Short answers:
1) Yes
2) Probably Not
3) No1) Yes, I think some people are completely ego-vested in The Collapse, and that tends to cause confirmation bias: they only “see” the bad news, and some even get quite angry when confronted with evidence that Doom Isn’t Happening Today. This response isn’t ideal, although it is understandable given the answers to 2) and 3).
2) So rather than saying a return to BAU is impossible, I prefer to a) look at what would be necessary to bring that about, and then examine what policy actions are occurring, and see how close those policy actions are to what would be needed. Additionally, I b) watch the macroeconomic and market numbers and assess the trends, and finally c) is the market indicating pressure on the current system is increasing or decreasing, because it is market pressure that is our most faithful indicator of the current level of systemic confidence.
a) My charts on debt and GDP have convinced me that a return to BAU would require the injection of perhaps 7 trillion dollars – per year – of new debt money to bring back the bubble years, and that’s just in the US. That is just not happening. People, finance, and corporations are not looking to get into more debt, they are either neutral, or reducing it for various fundamental reasons that seem quite difficult to control. Borrowing rates are extremely low, yet more borrowing just hasn’t happened. And the USG is unable to borrow 7 trillion more per year – its more like 1-2, which is not nearly enough. And the Fed certainly isn’t stepping up to print, at least not in those quantities. Without immense levels of money creation (i.e. debt) the party won’t return. That’s what I read in my charts.
b) The fundamental picture is a mix, divided into peripheral nations and core nations. In the periphery (represented by the PIGS), the party is clearly over, because their governments are completely incapable of borrowing more. Greece made rich people aware of default risk, and now their money flees whenever peripheral sovereigns show new signs of fundamental weakness. In the core, things are ok, but not great – no matter, money flees from weakness to (relative) strength.
The macro indicators (unemployment, GDP) are getting worse in the periphery. Sovereign debt load is increasing, and the ability to service it is decreasing. This causes rich-people money to flee, in phases, as the peripheral sovereigns receive more bad news. This fleeing money enables the core to keep the sovereign debt party going longer – not enough for a recovery, but enough to keep things afloat. Its why the US can continue to borrow 1.3 trillion each year (as can Japan, and France, and England, etc).
We’ve already seen 1.3T isn’t enough for the US to return to BAU, but it does seem to be enough to keep GDP from tipping over completely. And that fleeing money helps us continue the party.
Since debt (and thus money) is more or less remaining flat, and therefore we are not returning to BAU, and the periphery’s macro picture is getting ever weaker in stages, directionally that leads me to conclude:
c) I think market pressure (rich people money flows) will eventually cause a “confidence break” that will result in a real systemic breakdown. Presumably, more pressure = increasing likelihood of a break. I monitor a bunch of indicators of that pressure. Right now, my indicators say “pressure was high, but is now declining” due primarily (I believe) to the ECB’s actions.
3) Can they keep this up indefinitely? I don’t think so. If they had such complete control, Greece would not have defaulted. They can clearly manage things – mainly through manipulating rich people’s greed but also through fear – but since we can’t return to BAU, the peripheral nations will each eventually explode from unemployment & GDP contraction because thats what happens in a credit bust, and then the game will be up for the core since there will be no more fleeing money to help them continue to fund government debt expansion.
Now then, how long will this take? Ultimately I have no idea. All I can do is watch my indicators and see what the current level of pressure is. At some level it is about the suffering of real people in the periphery, and predicting how long will they choose to stick with the system.
Davefairtex, I think your response to Ted’s questions is very well reasoned and accurate.
I also think that Ted’s questions are totally fair and reasonable.
The biggest risk to the system is that everyone starts to think like the folks who write for TAE (that would entail immediate and total collapse). Meanwhile the biggest risk to the individual is that our best judgment is called into question and restores our faith in the status quo’s con game.
Let’s be realistic–the mindset of the status quo is deeply instilled in the majority of the population. We are swimming decidedly upstream to resist its influences. And so our doubts about whether a financial collapse is coming are probably never totally far from our thoughts. Indeed, the status quo DEPENDS on these doubts–the status quo absolutely DEPENDS on our belief that we can and WILL return to business as usual. They will stop at nothing to propagate this belief, as the system’s survival depends on it. Always has. Given that QE has never been sufficient to truly stem the tide of deflation (which is why they have to keep returning to it), it seems QE has been largely intended to restore BELIEF in the power of the system, rather than actually restore the crumbling system itself (as davefairtex points out, the QE would have to be many-fold larger to actually restore the system itself).
But the status quo cannot resist reality forever. We can only have our better judgment shaken by the status quo a little longer, as the fantasy perpetuated by the majority is often easier to swallow. It’s painful to go against the herd. Most of us are NOT hard-wired to reject the status quo–on the contrary, most of us are built to follow the status quo to the ends of the earth…and right over a cliff.
Can we be wrong? I truly, truly do not think so. Can we be wrong about how soon the real trouble starts? Yes. Absolutely. We can be really wrong in this regard. What if it takes 5 years? That could be a devastating wait in terms of lost opportunity. But in the bigger picture, losing everything is too big a gamble to worry about a month or a year or even 5 years, I’m afraid to say, WHEN YOU KNOW THAT IT WILL UNWIND.
The wait is painful, not because I want collapse, but because I know it will come and, like the horror movie when the monster is somewhere lurking in the dark, you just don’t know when it will strike. There will be false scares too. That darting shadow turns out to be a cute kitten…but the monster is still out there. And we know it has to claim some victims before the movie is over, right?
I like what Ponziworld has to say in this regard:
“I stopped questioning whether my overall thesis [about financial collapse] was right (or wrong) some time ago … from my perspective, each passing day that the point of recognition does not occur, just means that we are one day closer to the event. Time is not a friend to fantasy and delusion.”
https://www.ponziworld.blogspot.com/2012/08/comfortably-numb.html
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Well, it has been almost 5 years since I connected the dots and understood that the global Ponzi would eventually collapse. I particularly liked the way Orlov described the timing of prediction…
You see, predicting that something is going to happen is a lot easier than predicting when something will happen. Suppose you have an old bridge: the concrete is cracked, chunks of it are missing with rusty rebar showing through. An inspector declares it “structurally deficient.” This bridge is definitely going to collapse at some point, but on what date? That is something that nobody can tell you. If you push for an answer, you might hear something like this: If it doesn’t collapse within a year, then it might stay up for another two. And if it stays up that long, then it might stay up for another decade. But if it stays up for an entire decade, then it will probably collapse within a year or two of that, because, given its rate of deterioration, at that point it will be entirely unclear what is holding it up.
more…
https://cluborlov.blogspot.com/2012/06/fragility-and-collapse-slowly-at-first.htmlI only woke up from the Matrix two years ago! Five years is a long while to be holding your breath, bluebird. Then again, Michael Ruppert has been warning and waiting for, what, fifteen?! To get a sense of the destructive effects of being “too early” watch the documentary Collapse, which examines Ruppert’s life as a peak oil activist. It’s moving…and a bit of a lesson for all us Cassandras.
In response to ted’s questions …
My own decision was to consider my investments and the financial prospects in the broader context of climate change, peak oil, resource depletion, biodiversity loss, etc. Together these pointed me, both ethically and pragmatically, toward a revamped lifestyle with a lighter footprint and fewer dependencies on complex, external systems. This of course is an ongoing process, and my efforts are unique to my case but are perhaps illustrative: I sold my large house with little land in favor of a small house, a big lot and no mortgage debt; sold my car; have been learning to garden and to work with the local food cycle; cashed out my modest other investments in favour of tools and equipment; have been working with a community group focused on relocalization, etc.
Do you ever wonder that maybe governments can keep this going forever.
No.
I have followed the advice of TAE but this doom and gloom that you say here it is just around the corner never comes.
I take it you don’t live in Greece or Spain or own property in Vegas.
I have lost thousands of dollars pulling my money out of 401ks and other actions!
Funny you should say that. I read just this morning that Holland’s biggest pension plan is going to cut payments to pensioners by 15%.
Is it possible that you could be wrong?
No.
And you have too much invested in the doom?
Whether what we write is doom is a matter of opinion. I certainly never use terms like that, or collapse, or Armageddon etc.
You are really hoping for a collapse and if it does not happen will you be disappointed?
We are not hoping for a collapse. But it will still happen, so we won’t be disappointed in that sense. We will be disappointed that not more people have listened.
If there is a recovery you will just say, well just wait and see oil prices will climb and then we will have a crash ….but what if that is not for another 10 years or 15 years…maybe just maybe the sky is not falling.
There are plenty people out there who claim we are in a recovery. What do you think?
It’s fitting that you placed your comment under an article I wrote about debt. Yet another one. The topic doesn’t get nearly enough space lately. Which means that the fact that all “we” do is try to conquer debt with more debt gets snowed under. But it’s no less true, and no less futile.
“We” have simply found a new source of collateral for that debt; it’s no longer us, it’s our children (50% or more of whom are unemployed in some countries…). “We” could get away with these debt levels under one condition only: that is, economic growth like history has never seen, and that on a global basis. It would have to be China on very heavy steroids, because we would need to pay off interest and principal on the debt, and have more left over to tackle a growing population, a deteriorating natural environment, and the depletion of easily accessible energy sources.
By now, and I think this should be obvious, we’re entering the realm of fairy tales. And as much as we like fairy tales, we don’t actually believe in them.
“We” will continue to pour more of our children’s future wealth into the cauldron, until “we” ourselves don’t believe any longer that what’s in the pot will actually feed us. To put it differently, the interest we will need to pay the financial markets on any additional debt will keep on rising. Until we can’t service it anymore. This will not happen at the same time at the same level everywhere. The US will be a safe haven, the best looking horse in the glue factory, for longer than Greece or Spain or Germany will be.
But the US is drowning in debt already as well, and will be more so once Europe has fallen to pieces. The eventual outcome is not in dispute. And if people prefer to gamble on the timing, that is their perogative. It will still be a gamble, however, and The Automatic Earth is not a casino.
“What Happened to the Debt”?
It is being inflated away, it most always has been historically.
Will it work?
What would you say if I told you I used to pay a nickel for a good cup of coffee in a doughnut shop and my first brand new Dodge car cost 2,000 dollars.
No, I am not 100 years old, talking about 50 years ago.
Gasoline was around two bits a gallon, yes, 25 cents 5 gallons for a buck in periodic price wars. Somehow I think that is why it isn’t going to work this time, but I am hardly sure of that. I just cannot imagine a functioning world with 30 dollar gas and 300 dollar a barrel oil, but I would have considered the situation that exists today impossible twenty years also, let alone fifty.
As sensato discussed, preparing is an ongoing process. There is always something to learn every day. My learning curve has been my own, so that is why the process is taking me so long. Everyone else refuses to leave the status quo. I hope I have gained something to pass on to others when it is someday needed.
davefairtex post=4912 wrote: But regardless of my opinion, the market will let us know when it starts to sniff out policy failure, but we only benefit if we are paying attention. Pressure will start to build, and it will show up in money flows. And that’s why its important to watch. Not as a predictor, but an indicator – a thermometer of sorts, at least for the known knowns.
If we take 2008 as a model, a switch didn’t just flip one day and bad stuff happened. Pressure built slowly over the months, then more rapidly, until finally confidence snapped and a massive run on money market accounts happened. Astute observers were watching this pressure build by watching market prices and how they changed in reaction to events.
Of course predicting when confidence snaps is impossible. Yet we can tell if pressure is increasing or decreasing, and hypothesize that if pressure is decreasing, the chance of a massive loss of confidence is less likely to occur.
My feeling is as long as we don’t get hit by a real black swan (a geological event, for instance), I think the market will perform well as a near term pressure gauge.
I’m still very skeptical of this assertion. I think it’s easy to look at market movements after the fact (i.e. after some real news/events have happened) and read into them some predictive value that otherwise wasn’t there. Now that we know there is some discussion of Germany allowing the ECB a longer leash, we look at the market ramp in certain credit/equities and assume that we could have deduced the reason. And maybe sometimes we do deduce the reason in advance, but I’d call it more luck than deductive skill.
Now what happens if the “new” ECB developments turn out to be non-developments after all, as it seems is already starting to become apparent. Then all of that pressure that we previously thought had been relieved or at least subsided, due to the short-term market movements, comes rushing back in as if it had always been there… which should probably tell us that it had, in fact, always been there, and we were merely deceived by the market. OTOH, if the ECB were to officially act in a new capacity, then we will no doubt see pressures subside in the Eurozone for some time. I’d rather pay attention to the likelihood of that, and I think short-term market movements tell us very little, if anything, about that.
Using your analogy to Noah and the ark, I’d say we need to have a degree of faith in our fundamental base of knowledge. In his case, it was God’s specific revelation to him – he knew that Flood was coming even though the sky was clear and sunny for 120 years. In our case, it is our theoretical underpinnings, observable events, some hard data and our logical/analytic capabilities. I think it’s sometimes wise to limit the sources we use because they may give us confidence in evidence/data that extremely speculative, just like Noah had to focus on God rather than his own eyes. IMO, short-term market movements are largely irrelevant or, sometimes, designed to deceive… and we can’t even tell the difference between the two.
Golden O, ah yes, I remember those nickel cups of joe, and the two bit gas. And cruising out to Marty’s in my brand new $1600 VW Bug for a 15 cent hotdog. I also remember my first paycheck back then, $48 bucks after taxes for a 40 hour week on the pic and shovel.
Now the coffee is a buck, six bits, the hotdog is $1.55 at costco, just filled the $20K Camry with $4 gal gas the other day. Could have used my pre 65 quarters and gotten it for around two bits a gallon still, but I think I’ll save those for a hotdog someday. Seems to me, my foreman’s last weekly check came out around $1200 take home 8 or so years ago when I retired. All relative?
You stirred interesting memories with your comments. Inflation is a given in any fiat currency system. The illusion of ever increasing “wealth” is what keeps it all believable for the participants, and profitable for TPTB. I recall, on military leave to Tokyo, back around the late 60’s, I exchanged greenbacks at around 360 yen to the dollar. Japan seemed to be rolling along just fine back then. Would the US economy cease to exist at, say, $7 to the Euro? The Pound? The whatever? Or would it be forced to regroup, as would the other currencies, to new realities? And the infrastructure would still be standing, for the most part. Granted, those on a fixed income would suffer, but those still in the workforce would eventually be compensated. Lest no ticky no laundry for the elite.
Don’t misunderstand, I loathe dishonest money. Guess that’s why I have made it a point to save honest money all these years. That said, I remember, as you most likely do as well, since we’re both old as dirt 😉 , around 1975-6 my lumber supplier putting up a chalk board so prices could be adjusted daily. I had to insert clauses in my contracts “pending price increases in materials and fees.” When buying tools, it sure paid to reach as far back in the shelf as possible in hopes of finding an older one which missed getting marked up. Oh, the good ol’ days.
How does this end? (Deflation/repudiation is how it should, BUT), well, no one here, or anywhere else can see the future. If they could, they would have ALL the money by now, no? However, if past performance of TPTB is any indication, I’d place my bets on devaluation, do not pass go, do not allow deflation at any cost. What are their choices? Walk the deflationary plank, in the case of the former, or ride the ship down at the helm, in an inflationary whirlpool, hoping for a stick save. Having read “Human Action” and other works by von Mises, enough years ago to have put my faith in real money, I would venture we are headed for devaluation, on a grand scale, most likely already on track and barreling down on us as we write. It is ours to decide whether this will result in the “Crackup Boom,” or might there be one more round of the absurd pulled off by the owners and operators of the currency which passes for money among the unenlightened?
Would I invest my future based on what some blog recommends? Hell no, I’ll invest my future in myself, not the schtick of someone whom I don’t even know. And hopefully, my heirs will inherit a basket of something useful with which to start anew, not a heap of someone else’s debt.
Sorry this got so wordy, but I think I’ll cash in a 1963 half cartwheel and take the wife to a matinee 🙂
Question for TAE writers: Inheritance Tax and Your Opinion?
What is the position of TAE writers (Ilargi, Stoneleigh, Ash)
on the inheritance tax?What % taxation is correct?
The current level?
How about 100% taxation of inherited wealth?Where do you stand and why?
More Questions for TAE writers Re: Global Wealth and Wealth Redistribution.
Is global wealth (however you define it, and please do define it) increasing or decreasing in an absolute sense? How about per capita?
How should those observations affect wealth redistribution policy?
Where do you stand on the role of government in wealth re-distribution?
Forget about income: Income is a red-herring the distracts more often than it informs. I’m interested in your thoughts on wealth (marketable assets minus debt).
ash –
I think we’re talking past each other a bit. Let me start by agreeing with you. Using market prices as a predictor of events is not likely to work. Its a bad idea. I agree completely; I’d be skeptical too if someone suggested that, exactly because of the divergence I pointed out in one of my previous posts.
However, using the market’s prices as a sort of pressure gauge is not the same thing at all. We’re not trying to predict anything, we are just trying to see if the situation is getting worse, or better.
Prices change as a direct result of net capital flows. If more money flows into a market than flows out, prices will rise. How does this help us?
The mechanism by which a break in confidence will transmitted to the financial system is through massive money flows – in this case, OUT of deposit accounts and under the mattress.
But long before everyone removes their money, a few people will do it. And then a few more, and then more, and as more and more do it, pressure increases. And we can watch this by looking at various prices – we can see it almost in real time.
Bottom line: we can watch money flows. And since money flow is THE mechanism by which a confidence break is transmitted to the financial system, watching where money goes and in what quantity is effectively a measurement of what is happening to confidence.
Reply@ Professorlocknload, Enjoyed your posting immensely Prof, amazing how you have to be an old timer to understand inflation properly.
Agree also that deflation is not an option, it will have to happen sooner or later as TAE correctly points out, but you can count on TPTB to do everything imaginable to prevent it.
Regards GOLord St. Albans,
I’m not one of the holy trinity, but here’s my tuppencs.
Asset taxation is actually tricky. Is it a coupon clipping trust, or an onging business? The whole anti-inheritance tax thingy got its initial traction because taxation aimed at rentiers really did destroy family farms/machine shops/hardware stores that had to sell out because all the nominal value was tied up in the business itself.
davefairtex post=4933 wrote: ash –
Bottom line: we can watch money flows. And since money flow is THE mechanism by which a confidence break is transmitted to the financial system, watching where money goes and in what quantity is effectively a measurement of what is happening to confidence.
So what was the market telling us about general confidence in Fall 2011 when they were plummeting, and Italian bond yields breached 7%, from the perspective of someone back then? Obviously every large market move reflects something about investor confidence (assuming its not totally engineered up or down), but what does that tell us about anything else? What kind of move is necessary before you feel that confidence has “broken” or is dangerously close to breaking? What kind of % drop in equities would it take now for the Fed to immediately intervene with QE?
I have no problem looking at market movements and assessing how they may influence central authorities in the future, but I never use them to inform the fundamental picture of what’s happening. By the time the market tells me that confidence has reached some kind of breaking point, it will be much too late for that information to be of any value. I don’t think anyone can really assign probabilities to such an occurrence before the fact. We can only know how great the impact would be and how likely it is within long time frames. In the short-term, capital flows can go any number of ways without really telling us anything about how much confidence will be left next week or next month.
VST,
If you want to know what I prefer or what I think would be ideal, then there is no sense in talking about inheritance taxes or global wealth. The current world system is terminally broken and leading us to extremely destructive conditions. As long as we continue making policies at such large scales, it is inevitable that those policies will benefit a few elites at the expense of the masses, no matter what they are. Taxation rates, financial reform, stimulus plans, climate change legislation… it doesn’t matter. They will all fail to achieve their alleged goals, as history has proven to us over and over again.
After awhile, there will be no inheritance to tax for most people and no meaningful wealth to distribute or redistribute. That is the very nature of a materialist system – it grows and grows until it consumes itself, perhaps destroying other life-supporting systems in the process. Nothing short of a complete 180 degree reversal of our current priorities, i.e. economic growth and self-centered existence, will change that. If you were looking for my economic philosophy, or whether I lean towards capitalism/socialism, then there you have it – I lean towards something much more radical than either of them.
I like the reference to Noah. He never questioned God and was guided by his faith. When ridiculed by onlookers and derided as a fool he did only one thing. He thanked God for giving him more time to prepare for the disaster.
Rather than complain that the financial world did not collapse yesterday or today, we should thank God for giving us more time to prepare.
thanks for all responses to these questions….I am just confused by it all and have to wonder some times….can’t it be llike monopoly and just add more money to the game. Who knows what the federal reserve is really doing and are going to do. They are the most secretive organization out there. Maybe they are buying tons of stock one day and selling some the next…and could all things collapse in 5 years?
ash –
You point out a lot of limitations, that’s for sure, and you are right. This sort of thing isn’t a Magic 8 Ball, and it shouldn’t be mistaken for one. And it can’t be applied mechanistically either. It is just one input one uses to make a best guess as to how things are really going.
Having some experience trading, I am used to having gauges that indicate something interesting is happening, but I don’t expect such measurements to predict something absolutely. Otherwise, we’d all just use those gauges and become rich. Alas, life doesn’t work like that. But that does not mean the gauges are useless, one just has to know how to apply them. Just like unemployment levels of 25% in Spain signal something pretty dreadful – and moreover that’s an interesting data point – but you cannot use that data point to say conclusively that “a revolution will happen once it hits 33%.”
I’ve found my model to be useful in cases where the market is indicating something directly contrary to the newsflow. When news is suggesting that all will be fixed, but capital flight is increasing, that’s good to know. Likewise – and more often – I have noticed a continuing stream of doom & gloom long after the numbers say capital flight has actually reversed, and money is pouring back in.
[On that note, there is right now a decent amount of newsflow about the details of how the ECB will be coming to the rescue, while I see pressure starting to slowly rise once again]
There are actions I will take when I see things moving to what I consider critical levels. I only have data for my current model going back a year, but my data shows the crises are getting progressively worse and this last time around, I was preparing to take some more serious steps and then the financial pressure came off more convincingly 2nd week in August and a little later we find out the German rep on the ECB board caved to the rest regarding the whole bond buying scheme.
My model is something more sophisticated than just eyeballing the S&P 500 and noting that its up or down. Ultimately I want it to reflect the complex web of markets interacting with one another – equities, short & long term debt of various nations both in and out of the eurozone, foreign exchange rates.
I like being informed at a relatively granular level of detail. I keep the big picture in mind, but I also like to watch how things are unfolding week by week. I can see that possibly might not be of interest to you, and maybe even distracting, since you seem focused on a much longer time horizon. Perhaps we can just file this under “reasonable people can differ.”
Golden Oxen post=4938 wrote: I like the reference to Noah. He never questioned God and was guided by his faith. When ridiculed by onlookers and derided as a fool he did only one thing. He thanked God for giving him more time to prepare for the disaster.
Rather than complain that the financial world did not collapse yesterday or today, we should thank God for giving us more time to prepare.
Yes, I totally agree that another day without calamity is another day to prepare for the inevitable, especially given that most of us haven’t done enough. Preparation is a slow process, which is a big reason why I think Stoneleigh has advocated being “early” rather than late. Truth be told, it takes a lot longer to prepare oneself and one’s family than you imagine. There is great inertia imbued by the status quo, in addition to the steep learning curve. Just getting up the will to move your family out of a useless house on a cliff with a view of the ocean (how’s that gonna help you?) can take a lot of time/will-power (after all, it means Josh has to change schools and Steve still has a gym membership close by). Not to mention learning how to garden and build a chicken coop, collecting a store of of canned goods, fishing gear, etc. I’m not the ultimate prepper by any means! Which is why I am thankful I have had a bit more time I needed, and my friends and family haven’t even begun, so I’m still hopeful that a bit more time might help them do something too (though more time also does perpetuate complacency…what ya gonna do).
Of course, more time is a blessing I thank the universe for or I thank the incalculable variability of nature, rather than a non-existent god. Being a devout atheist in these times gives me tremendous peace of mind and spirit. May the universe bless us all.
The question about what percent of inheritance tax there should be contains way too many embedded assumptions and vagueries to be accepted as such. Accepting that question as posed is failing to look at the complexities of the inheritance of privilege and power over others.
Can humans “own” something which existed before they did, and which will exist after their species is extinct?
Our current civilization answers “Yes, and absolutely”. The logical action is to destroy what is owned as rapidly as possible, for that is the only way to “profit”.
Absolute ownership implies absolute right of transfer.
A toothbrush or a bicycle is the same as all of the mineral rights to a vast aquifer.
The idea of stewardship is better applied, but less well legally explored by our present culture. “Natural rights” is a legal argument which could begin to restore a balance.
Until then the family farmers in the 5th generation will have the same rights of inheritance as the Rothschild banking family. Well in theory they might. In our hearts, we might want to paint this differently.@skipbreakfast – very well stated!
Hi Folks,
Morpheus: The Matrix is a system, Neo. That system is our enemy. But when you’re inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it.
To unplug or not to unplug, that is the question…
L,
Sid.
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