₿oogaloo
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bluebird,
The banks will get bailed out. It might not be from fiscal spending authorized by legislative bodies, but instead from central banks through the back door. Banks will offload their bad assets for cash from the central bank. You suggest that there may be bail-ins. So it is true, some depositors may also take a haircut. But bail-out or bail-in, the purpose is still the same: to save a failed institution, to save the system. In the end the politicians and power brokers will save the system — in nominal terms. Base money will replace credit money and the deflationary spiral deepens and the central banks save the TBTF banks, and then one day there will be a spark that ignites all that base money and the whole forest will burn down.Dear Ms. Foss, thank you for your reply. I think we are 99% on the same page. The only point where we disagree is about the political response at the very end of the process. I think that TPTB, though they cannot prevent the collapse, can and will “do something” after it happens — they will destroy the currency by buying all the bad debt with new base money. The precedent was already set in 2008. TPTB prefer bailouts, and they have the political power to make sure they get bailouts. Even if there is political opposition to bailouts, the central banks can and will execute the bailouts through the back door of monetary policy. The central banks will purchase the bad debt. Base money as a percentage of bank assets will continue to rise until it first reaches 100%, then exceeds 100%, then the whole system will go up in a short lived hyperinflationary conflagration. The central bankers and politicians will have political cover because they are doing whatever it takes to save the system. As you say, many assets will be destroyed. Many who hold vast sums of financial wealth will see it go up in smoke. But on a relative basis, the people who are now rich will still come out ahead on the other side (though with major casualties, and psychologically they will not see it as coming out relatively unimpaired), and those who are in debt now will be massacred even with a hyperinflationary reset.
We both agree on the play up until the final act . . . .
TheTrivium4TW,
I’m afraid I have to agree with PLnL. Once the deflationary spiral begins, there will be enormous political pressure to “do something”, and that will translate into the central banks saving the system (nominally) at all costs by buying up all the bad debt. This will not be out of concern for the serfs, but out of concern for the holders of all that debt (serfs don’t own it). The lenders want to be paid 100 cents on the dollar, and sooner rather than later. They do not want massive defaults, where they have to foreclose on collateral they do not know how to manage or maintain. Hyperinflation will not help the serfs. The serfs will be the last in line to touch the new money will all the new zeros, and they will be wiped out by the blowout costs of necessities. Hyperinflation will help the political class because they are the ones closest to the printing press. When the dust settles they will be miles ahead of the serfs and they will still own everything. Hyperinflation will help everyone who cares about nominal performance — like pension fund managers who cannot survive with interest rates at zero. Think about it: Deflationary collapse is bad for social stability and can easily lead to revolution. Hyperinflation is no picnic, but usually had more social stability and is usually short lived. If you are one of the elites, which outcome do you favor when looking at it from that perspective?I would like to believe that Tspiras has a Plan B. If Varoufakis can now say that Germany wanted to push Greece out all along, then there is no excuse for the failure to make emergency plans. However, the word from all sources, MSM or otherwise, sympathetic to Syriza or otherwise, is that there is no Plan B. If that’s true, Tspiras is no hero. He’s incompetent. I hope I am wrong. I hope there is a secret plan. But I am not holding my breath.
Raul,
I am surprised that you would consider the US Supreme Court’s decision to be a positive development. My initial reaction was “This is par for the course. Another nail in democracy’s coffin.” Regardless of whether one believes in gay marriage or not, the conservative Justices are right that this should be decided by the legislative branches. This is one issue over the last 20 years that led to a lot of political engagement. The effect of this decision is to signal to the masses that it does not matter what you think or how you vote. You have no direct input on policy. Your masters will decide for you. In that sense this decision is no different from the narrative about the unstoppable NSA, about the FED, about the TPP, about an unregulated Wall Street, about fracking up our groundwater, about anti-Russia NATO propaganda, about the sale of the political process after Citizens United, about the destruction of the planet to suit the agenda of big oil, about all the related narratives where the underlying theme in the centralization of power. The lesson of this case is this: Just when you get people interested in politics, we will take the decision out of the hands of the voters. How can that be something to celebrate?I find it odd that people think it is unhealthy for adult children to live with their parents. In Asia it is actually the norm for children to live with their parents until they get married. Even after the kids get married, historically it was considered ideal to have multiple generations under one roof. However, the smaller living spaces often make this impractical.
Compare this to the West where the homes tend to be way too large and people idealize owning a home where most of the rooms will be empty and unused. Seems bizarre to me.
I think it is a healthy thing for the children to return home. It might actually strengthen some of the social bonds that have been growing progressively weaker over the last half century. If economic necessity forces that, so what?
I generally find myself in agreement with almost all of the essays on this site. But for today’s essay I somewhat disagree. Germany/Schäuble are in the position of wealthy creditor. Greece is in the position of impoverished debtor. The debtor-creditor relation and dynamic goes back to time immemorial. This time, once again, the creditor demands a pound of flesh. Can we really express SURPRISE? Can we really pretend to be shocked and outraged when a creditor expects to have some say in the debtor’s affairs? I think not. That has always been the rule. Of course Greece should tell Germany to go to hell. But c’mon. Surprise that Germany wants to call the shots? No surprise here.
Do I really blame the victim? Do I really regurgitate what I read in the MSM? I do not live the US anymore, and I do not read the MSM. I think every case of homelessness has a different story, and I try to resist making generalizations.
@V Arnold
I agree that we certainly need to ask “What is the reason the homeless, drug addicted, and mentally ill are forced to live like that?” And yet while we meditate on the answers to that question, what does that mean in the meantime? Should the homeless drug addicts be able to sleep in the church alcoves — or not? There are several charities that are operating in the Tenderloin to help, and they have rules that the homeless need to follow to get a bed (such as no drugs and no violence). If these charities toss out epople for breaking the rules, does that mean they are being merciless? Does that mean they are asking the wrong questions? I’m sorry, but I think this is a more complex issue than you seem to make it out to be.
Hmmm. I used to live in San Francisco, close enough to the Tenderloin to see quite a few members on the San Francisco homeless community on my way to and from work every day. I tried to keep an open minded view, realizing that many were probably down on their luck. And yet in the Tenderloin there is a lot of chronic homelessness where drug addition and mental illness are pretty common. And for those who do manage to take up residence in the Tenderloin, there is a higher than average concentration of sexual offenders. The Church that had the sprinklers installed in located just outside of the Tenderloin. They do quite a lot of charitable work for the homeless community. They initially defended this action on the ground that there were hypodermic needles found in the alcoves where people had been sleeping, that children pass by this area on their way to and from school, and some elderly who attend services at the church felt harassed. I don’t know what to think. I can see the reasons for concern. In my mind, this is a little more complicated than a simple case of the well to do having contempt for the poor. Once high rates of drug addiction, mental illness, and criminal history are mixed into the picture, well, what then? This is a chronic problem in San Francisco, and has been for decades, regardless of all the governmental and private charitable attempts to improve the situation. Am I heartless and merciless if I don’t want drug addicts sleeping in the alcoves? Hmm. Lord have mercy on me.
Crack dealers and faith healers? Better make that OMNIPOTENT crack dealers and faith healers. At least for now.
Before the era of omnipotent central banks, we had a series of economic potholes spread a few years apart: 1987 crash (1987), S&L crisis (1989), Asian Flu (1996), LTCM (1998), dotcompop (2000), subprime (2007) leading to the Bear/Lehman meltdown an Paulson’s abyss (2008) and and S&P500 low of 666 (2009). All of these events had the potential to bring down the system, or so it was thought. Then the central banks revealed themselves to be omnipotent, and see what has happened? Peace and stability in the financial markets. Poverty in the streets, for sure, but peace and stability and prosperity in the financial markets.
Look at what happened in the wake of 2008. Peter Schiff and his ilk promised imminent hyperinflation and chaos, but there was no sudden loss of confidence, at least not among the people whose opinions matter. Hard landing in China (2008-2015)? Commodities have crashed, but China keeps plugging along. PIGS debt crisis (2010)? Just breathe the words “anything it takes” and the crisis just melts away like an ice cube in the Santorini sun. Abenomics and the expected implosion of the Yen (2012)? The Yen is doing just fine, thank you. Student loan bubble (2013)? Just keeps going higher. Negative interest rates in Switzerland (2014)? The market shrugs it off, even as NIRP spreads like a virus. Busted SNB Euro peg (2015)? Got people excited for a couple days, but is now long forgotten. Oil price implosion (2015)? Yawn. The theme behind all of these recent crises is that they get everyone upset and worried, for a few weeks, and then … nothing happens.
The take home lesson for me is this: Throw out all of your preconceived ideas about how long this stability can (or cannot) last, and if you can, enjoy the moment. Sure we can all plan ahead with the expectation that this will not last forever, but let’s plan without all of the anxious hand-wringing.
The previous government was obviously corrupt, but was also democratically elected. The situation was stable. Until Victoria Nuland changed that. There would be no war if it had not been for the US sponsored coup. Nobody suggested to blame a centuries long feud on a single person. But the key event that was calculated to start the current war can be.
If the Greek banks are all insolvent, why not sacrifice the banks, declare a debt jubilee, and then recapitalize the banking system with the new currency? People are broke because they are weighed down by debt. They have no equity in their homes, no positive net worth. Erase the debt and they suddenly have net worth again. Not a good plan for renters, but they could add a law that any tenant living in a rented unit that had a bank mortgage can purchase the unit for a nominal payment. If people suddenly have unencumbered assets, it should be no problem to jump start the economy again as long as they have a medium of exchange. What’s wrong with this plan?
Syriza needs time to find wider support from the other peripheral countries. They have two choices. They can use the 30 day playbook or they can use the 150 day playbook.
If they engage in brinksmanship too soon, they risk loss of ECB support at the end of February. If they can get past the end of February, the next looming deadline will be in June.
They need to drag this out. Yanis is a great spokesman. Come March 1 I would rather see him making impassioned speeches to his fellow Europeans rather than scambling to impose capital controls and hastily roll out the new dranchma.
Why do you blame the debtor? the creditors knew what they were getting themselves into, and they should have known better.
Let the new Greek government drag this out long enough to inspire the Italians, the Spanish and the Portuguese to follow in their footsteps. Strength in numbers.
With regard to the “50% of Americans receiving some kind of government benefit” — this ris eally the key to the master plan. If not for those government benefits, the situation could potentially become very volatile and get out of hand. Imagine if hungry formerly middle class people actually started marching in the streets and demanding reforms! Imagine how terrifying that would be for the ruling elite! The government benefits are designed to suppress all that. Sure conservatives hate them in theory and rail against them, but if push comes to shove, they prefer government social programs to social upheaval and revolution. They will talk about eliminating these programs, but the talk is just that — talk. They may scale them back a little bit or trim them at the margins, but these government programs are now the key to maintaining order and a clueless/dependent populace.
Triumvium, I generally share your deep aversion to the banks, especially the biggest banks, but I am not so sure about this part: “The bust is being orchestrated to transfer the physical assets of society to the oligarch corporate fronts.” I recall that during the 2008 crisis, the big banks pretty much did the opposite. They were in no hurry to move the foreclosure process along. They had no interest in taking title because they were not set up to take care of the vacant properties and there were not enough buyers to show up at the foreclosure sales because credit had dried up. The banks would much much much rather be paid 100 cents on the dollar from the Fed on all those bad loans than to deal with the mess. They don’t want your house. They really don’t.
The distinction is important, because in the end the big banks will get what they want. That’s the key lesson from history. Think like a TBTF bank! You have two choices: Behind Door No. 1 50% of the people are defaulting on their mortgages, car loans, small business loans, whatever. Do you think any bank is really set up for this? Sure in theory they can make your life miserable and turn you into a debt slave, but can they do that with you and 50% of your neighbors simultaneously? Who is going to buy at all those foreclosure sales? Behind Door No. 2 the Fed says “No worries, just turn all of those bad loans over to me, I will pay you full value, and then you don’t have to worry about it anymore.” If you are a bank, which alternative is most attractive?
Now once the Fed buys all of that debt, in theory they can resell it. But who will be the buyers? And what happens when 50%+ of mortgages are in default? That’s when populist politics will finally influence policy, and the people will welcome hyperinflation with open arms as a better alternative to the deflationary spiral. Hyperinflation resets the system. The deflationary spiral just makes things worse and worse and worse. Pressure builds. Extremist political partys rise. Bad news all around. Hyperinflation solves all the problems after 6 months of chaos.
daisychain, regarding your first point, some corporations do fund their operations out of their own capital. For those that don’t, many of the times it’s by design. The design is to strip everything of value out of the company and load the company under a mountain of debt. If the company does well, the company distributes the profits to the shareholders. If not, let the company’s creditors pick over the carcass.
Regarding your second point, “Collateral becomes worth way less than before, and if repossessed will find no buyers at any price” — yes, that’s theoretically how it’s supposed to work in deflation (and that is what Ilargi is predicting if I understand him properly). However, I think there’s 0% chance that the authorities will allow deflation to run its full course all the way down the spiral. Instead, they will do exactly what they did in 2008. They will save the debt, save the big banks, save the system, at all costs. They Fed will buy up all of that bad debt and socialize it. They will support collateral prices in nominal terms even if they destroy the currency in the process. We will never, ever, ever see the day when things ground down to the point that respossed items cannot find buyers at any price. The Fed will buy everything, and when the political pressure is high enough, the government will have no choice but to write off and forgive much of that debt.
The lesson from the oil crash and the SNB surprise is that leverage will kill the system. Stability (as evidenced by years of a very low VIX) in a low growth environment is what encourages increased leverage. And increased leverage works until there is an unexpected downside surpise. We have now had two surprises in relatively rapid succession. The house of cards is tottering.
I turned on my BS detector as soon as I saw the first headline. But you know what stands out to me as being so odd? businessinisder.com has been really really quiet about the whole thing. Why do they suddenly have nothing to say about a headline grabbing event? In contrast, their site was plastered with propaganda stories the day of MH-17 and the day of the Sony Leak. Maybe they did not get a phone call from the government this time asking them to write something? Still scratching my head wondering what’s really going on.
The propagandists have been with us as long as I have have been alive, and have controlled the MSM for longer than any of us would acre to admit. The change I have noticed this year is the aggressive spread into alternative media, particularly a source that Raul links to occasionally: businessinsider.com The propaganda on that site is so brazen that it makes anyone half grounded in reality laugh (or cry) out loud. Mixed in with the Elon Musk, Mark Cuban, Richard Branson, Marissa Mayer, Steve jobs hagiographies, there is a steady stream of anti-Snowden, anti-Russia, pro-Sony, pro-Wall Street, “the world is wonderful and the economy is doing great” drivel straight out of Orwell.
Ilargi, it’s impossible to even have a civilized conversation about politics in the United States anymore. Americans of all political stripes have been fed a steady stream of propaganda for too long, and not just from the MSM. People hold all sorts of contradictory positions, all based on conflicting ideologies. The so called right is full of people who simultaneously describe themselves as religious, but who now try to justify torture because their guys Cheney and Rumsfeld supported it. They embrace Ayn Rand, even though she detested their religion as a sign of weakness. The so called left tries to sound as progressive as possible, but without actually adopting any progressive policies, and has now wholeheartedly embraced war and empire. There is no rule of law anymore. The ruling elite is exempt from enforcement. On the flip side, everything has now been criminalized, so anyone who crosses a prosecutor may spend years in prison for no good reason. It’s all arbitrary. There is no common culture anymore, so the idea that the people can collectively rise up and reclaim their democracy is laughable. You think that white folk and black folk in Ferguson are going to join forces to demilitarize the police? Ha! You think that poor white folk and Hispanic folk are going to find common ground in anything with all the pent up resentment against illegal aliens? Ha! All of the groups in the U.S. that should be coming together have been thoroughly divided so they are not a threat to anyone. The only way out of this mess is through the rise of secessionist movements. Their is no way to change the whole because there is no common ground, no common culture, to appeal to. The only way is to retreat at the local level to start rebuilding communities.
“Then the old man got to cussing and cussed everything and everybody he could think of, and then cussed them all over again to make sure he hadn’t skipped any, and after that he polished off with a kind of a general cuss all round, including a considerable parcel of people which he didn’t know the names of, and so called them what’s-his-name when he got to them, and went right along with his cussing.”
-Adventures of Huckleberry Finn, Chapter 6.
The reason we desire growth is because we have a debt-based monetary system. There is not enough money in existence to repay all of the existing debt with interest. For that reason every year the economy must expand to cover the existing interest payments — it’s part of the architecture of the system. Otherwise we enter into a deflationary cycle of cascading defaults. There is no avoiding it.
When growth is insufficient, we can mask it with debt. But when the debt grows too large, the choice is either debt collapse or monetary collapse. I am betting on the latter, but right up to the very end I think it will look a lot more like the former.
huckleberryfinn, get a life. It’s not like TAE is the only blog out there that accepts donations. Take a look at all of the highly rated financial blogs and you will discover that virtually ALL of them accept donations. Virtually ALL of them. Let that sink in. You might not like the message on this site, but don’t complain that the blog accepts donations. Next point: you bitch and moan that TAE believes that “we are all eventually completely doomed.” I don’t think that any of the regulars around here understand that to be the take home message. But I think most of us accept the premise that the global financial system is on an unsustainable course, that there has not been enough organic growth to sustain the course, and that the system has relied on debt for decades to make up for the shortfall. Eventually something has to give, and on that point the world generally divides into the deflationist camp and the hyperinflationist camp. Ilargi is a deflationist and I am a hyperinflationist. But do I think the systemic collapse is going to be the end of the world? Of course not. Just a stormy transition to a new system.
You can dismiss this out of hand and say we’re all nuts and we do not know anything about finance. Fine, go about your business and take your venom and personal insults with you. If you think that everything is just great, the economy is fine, the BLS numbers prove we’ve turned the corner, real estate can never go down, the world will continue to get better and better, the markets are well regulated (or need no regulation), the Fed has masterfully managed the economy, wealth will trickle down from the overclass . . . if you believe all that, then why are you here vandalizing the message board? Go back to your MSM sources, keep drinking the kool aid, and remember to say a prayer for all of us lost souls.
huckleberryfinn, you have no manners. If you want to come on the board and debate, fine. If you want to strongly disagree with TAE, great. Just stick to the issues and avoid the ad hominem attacks. If you need to study a template for how to disagree, even strongly, without unnecessarily insulting the host, check out alan2102’s post in the Elephant post. I welcome a robust discussion, but attitudes like yours we can all do without. Cheers.
Sounds like huckleberryfinn is a big believer in “the recovery.”
I think Nicole is being conservative with that 90% figure. What would you pay for this?
Ilargi, not a comment on this piece, but on the topic of deflation in general. I know you reject the hyperinflationary thesis because you do not think there is any excess savings out there, only a mountain of dollar denominated debt that will guarantee a constant demand for dollars as far as the eye can see. This piece may answer your questions/objections:
https://fofoa.blogspot.com/2014/12/global-stagnation.html
It is long, and requires two or three reads, but I think it is well worth the time. Among other things, it explains why there has been price stability despite massive printing (and even cites sources going to back 1999 explaining why this is so), and it also explains where all of those dollar savings are hiding. YMMV.
alan2102, I cannot remember when or where I read it, but I vaguely recall a story by a Japan bear whose perspective dramatically changed after he actually visited Japan. He was so in awe of everything he saw, he came away with the impression that the Japanese will be just fine. Even when the end comes, the sun will come up tomorrow, and Japan will still be an amazing place.
The big risk I see is war. That could be the wrench in the machinery that changes everything.
alan2102, I wonder whether the positions are mutually exclusive? I fully agree with you that China has been positioning itself the right way. I would go further and say that China has used these last days of current global monetary financial system to amass as many physical assets as possible, with the full knowledge that its own course and the entire system is unsustainable. A crash is coming, China knows it, and the entire system will reset. A massive amount of debt will be destroyed. And when the dust settles, China will be sitting on a mountain of gold and a country full of new infrastructure. In the meanwhile, it is in China’s interests to keep the present system going as long as possible. If that means cooking the books, so be it. If that means a massive unregulated shadow banking system, so be it. Smart move in my opinion.
Yet it doesn’t change what the China bears are saying, does it?
I also disagree with TAE that all of this is going to end in a big deflationary collapse. I agree that there will be a collapse, and I agree that in the beginning stage it will be deflationary, but I think it will culminate in a one-off reset event where the dollar will be subject to an (almost) overnight revaluation — not just against other currencies, but against the real world (including gold, all of those new Chinese cities, and everything that exists in the material world). But enough of what I think. The point I wanted to make is that I don’t see that much difference between what you are saying and what TAE is saying.
Sounds like Stephen Hawking and Elon Musk finally got around to watching the Battlestar Galactica reimagined series, which was a superb production IMO.
Ilargi, I mean the bondholders, not us small fish little people. And I disagree with you about the Euro. The Euro will remain a strong currency as long as Germany is a part of it.
Golden Oxen, I just don’t see the so-called Leftists you speak of as having much interest in the debate. The opposition to gold comes from banking interests and is thoroughly mainstream in the West. And as long as gold is priced through the futures market it is and will remain just another a financial asset under the thumb of the bankers. But gold will be by far the best asset to own if an when the system really breaks. When could that happen? On one hand it could happen any day. On the other hand, in this day and age of central bank coordination, it could be a long time. Your reassurances that gold has performed well over the last 10 years will be small comfort to those who bought two years ago.
I think falling oil prices is a mixed bag. Obviously good for some parts of the economy. Obviously a disaster for over-indebted drillers, and yes, the loss of jobs in this sector will turn North Dakota into a ghost town. It was not too long ago that the conventional wisdom was that we would never see recovery because oil prices would never fall back below $100. High oil prices were the problem. Now it seems that the problem is low oil prices that are too low.
I for one suspect that oil prices were manipulated lower to try to kickstart a “return to growth.” They already tried monetary policy. That failed. So why not try lowering the price of the most important commodity to the entire world?
Ilargi, I have a question about this sentence in your post: “And sure, the USD will fail at some point, but who would doubt the euro will go first?” Here I guess it depends on what you mean by the Euro failing. When I imagine failure of the dollar, I imagine holders of dollars wanting to see their dollars to buy something else, perhaps gold, perhaps another currency, perhaps an operating business, perhaps land … you get the idea. And what would trigger that? Because virtually everything on the Fed’s balance sheet are dollar denominated financial assets.
But when discussions come up about the “failure” of the Euro, the topic tends to focus on the breakup of the Euro zone. The focus is more on the politics, rather than holders of Euros losing faith in the value of their Euros and wanting to hold something else instead. I think it is altogether possible, if not likely, that a political crisis could actually cause the Euro to strengthen. If Greece leaves the Eurozone, for example, what do you think Greeks and Greek banks would prefer to hold, Euros or the new Drachma?
Take one look at the ECB balance sheet and you see that gold makes up more than 50%. For the Fed the amount is miniscule.
So I think the eventual crisis for the dollar and the eventual crisis for the Euro are going to be completely different in character, and a political failure of the Euro might actually enhance its strength as a currency.
John Day, Raleigh, my grandmother was born in 1917. Before she passed on a couple of years ago, I sat down with her one afternoon and peppered her with all sorts of questions about living through the Great Depression. She shrugged it off like it was no big deal. She said: “We lived on a farm. We grew our own food. Sure we were all poor, but it wasn’t much different from before or after the depression.” On another occasion I asked her why the whole family moved from Nebraska to California during World War II. She said: “Everyone was poor back then, and the best job opportunities on the West Coast.” It was only after the move to California that they started climbing the ladder into the middle class.
I guess that’s when it hit me. The Great Depression was a bigger calamity for rich people than it was for poor people. For poor people it was just life as usual, maybe a bit worse, but not the “sky is falling” panic it must have been for the banking class.
Of course my grandmother was a teenager during those years, and I guess if you don’t own anything, you just sort of shrug everything off.
Patricia, I think our fears of disorder and breakdown are greatly exaggerated. Periods of chaos and upheaval following economic collapse tend to be brief and localized. The only exception is when all of the angst gets channeled into the war engine, and I think that is where the real risk lies.
In fact many fund managers did quit once the Fed became the market. I do not begrudge Hugh Hendry. Yes, he is making money, but his position also gives a certain legitimacy to his warnings and criticism. If he had closed up shop and retired, would anyone pay attention to him anymore? Many of the sharpest critics of the financial system are themselves products of the system. Rather than suggest they should stop making a living off their knowledge of how the system works, I think our efforts should be directed to waking people up to hear their message about how the system should be changed.
