davefairtex
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Viscount –
Ilargi, you have been more than willing to talk about the movements of the markets (yes, the S&P) as long as it moved in the direction you thought it should move.
I’ve noticed this as well.
And yet – TAE has been right about the deflationary pressure – both before the pop, and now as well. Certainly I didn’t see it coming, only they and a few others actually did. I feel like the last 5 years has been a real learning experience for me about these sorts of issues, and TAE have been one of my teachers in this area.
I come here, to get the “deflationary take” on things. I figure between TAE, Mish, and Martenson we’ll get effectively complete coverage on what is really going down.
Ilargi & Golden Oxen –
Sir, I would just like to point out that Mr Dalio is strongly recommending the purchase of gold. He claims it is a must to own.
If you’re as rich as he is, you can’t go wrong with that advice.
If you’re not, he thinks your purchases will raise the value of his holdings
On the one hand, it seems to me that if Ilargi quotes Dalio as an authority worthy of reference, it seems altogether fair of Golden Oxen to refer to other things Dalio has discussed – in this case, gold.
That said, most hedge fund managers public opinions I view with great suspicion. Given how they are compensated (and that they are in this business STRICTLY to make absurd amounts of money) I would be quite astonished if they weren’t talking their book at all times – in this case, in terms of the huge disaster Dalio sees enveloping the eurozone (he is likely short euros) as well as his idea of the must-own nature of gold (he is likely long gold).
Honestly, I would recommend tuning both of his opinions out. This doesn’t mean I agree or disagree with him – but I prefer not to let his opinions influence mine in any way, except to note the likely positions he has taken.
Too many news stories these days are really lazy reporters quoting traders or hedge fund managers that are just talking their book; the traders are simply hoping they can jawbone the markets into making money for them, and the reporters are either unwitting dupes or co-conspirators.
jal –
You are not relevant. The message is the only thing that is relevant.
I am relevant to me.
Good luck convincing me otherwise. 🙂
Ilargi said –
… we have underestimated something; not the power of the central banks to prop up banks and markets, as I see suggested in this thread a few times, but the complacency, gullibility and lack of working neurons of the people who are being stripped bare and led into misery by voluntarily handing over what little of their wealth remains to do the propping up.
As someone who suggested this very thing in this thread…I’ll respond.
It kind of sounds like you are blaming the victim a little bit. And also, is it an important distinction to make whether it is actual central bank power or gullible victims as long as the outcome is the same? Of course the 22,000 people who work for the Fed don’t have the actual power (the stuff devolving from the barrel of Mao’s gun); their power resides in the faith given to them by everyone else. But faith IS power. Thats why the system is still in place today.
In addition, this outcome should not be a surprise. Japan as a society displayed this very same sheep-like effect for the past 20 years. And yet we imagined that the west is different – that people everywhere here would simply tear down the current system because the Fed hands a few trillion to the banks?
I get the sense you are upset. But at whom? At yourself for not seeing this possible outcome clearly, or at the participants for not behaving as you think they should?
It reminds me a bit of a trader who would scream at the screen when the trade did not go the way he expected it to. It was the market’s fault, you see – it didn’t cooperate with the trader’s view on how things should have gone. Of course, the market is big and apparently immune to yelling, so this strategy did not lend itself to trading success. (That was me, by the way so I can empathize with where you seem to be coming from)
Having an unchanging and diamond-hard conviction about how and when things in the trading world (or the real world) must play out causes all sorts of trouble when the real world doesn’t cooperate.
In retrospect, its easy to see why things have played out this way. Very few of the participants wants the current system to fail. They all have a stake – large or small – in it its continued existence. So the vast bulk of them are willing to allow the people in charge wide latitude to keep things going. After all, its been in place for 100 years and that’s longer than anyone here has been alive.
To paraphrase Keynes, “When my understanding of the situation changes, I change my mind. What do you do, sir?”
So now that you have new, and clear evidence that the victims aren’t going to rip things apart as readily as you once thought, and that for some reason the system (for whatever reason) is more resilient than you had expected, how has that changed your view of timelines, outcomes, and likelihoods?
Viscount –
Fascinating recounting. All these times were immediately prior to an intervention. 1st example: QE2, 2nd example: ECB LTRO, 3rd example: Dragi’s “I’ll do anything” speech followed up a month later by the latest round of money printing.
I think if anything, this lays out TAE’s underestimation of the ability of the interventionists ability to keep the game going. The forces of deflation are there, exactly as they say, but the folks in charge keep finding new ways of changing rules and/or printing money until the problem is made to vanish once again.
Of course until a good chunk of that debt is defaulted upon or nominal incomes rise to make it sustainable, these forces remain in place. How long can this go on? As you have pointed out, a good deal longer than TAE expected.
It brings to mind Keyne’s quote: “Markets can remain irrational a lot longer than you and I can remain solvent.”
Synchro –
Personally, I would be quite interested in further extrapolation of the timeline possibilities.
I’m playing around with that right now. I’ve laid out my personal favorite four scenarios in more detail, and I’m working on the triggers that have to occur to move us from one state towards another. Furthermore, I’m curious about possibly detecting these triggers automatically. For instance, the famous Bond Vigilantes – what data changes when they make an appearance? And how might it differ in the Eurozone vs. the US?
Likewise, posting charts of critical financial data (US long rates, the USD index, etc) labeled with important watershed events (QE2 ends, ECB LTRO announcement, LTRO-2 execution, QE3 starts, etc) might help see where things are headed.
Your comments about different regions experiencing this differently is a great point too. Not only about the different cultural treatment of precious metals, but creditor and debtor nations will likely have different experiences during this time too. Same goes for nations inside the eurozone and those outside. The US being a debtor this time around will likely mean some dramatic differences from 1930 – but I don’t know what they might be!
After all is said and done though, I’d guess that TAE (and a good chunk of the readership here) isn’t so interested in the nuts and bolts of this sort of thing. As I understand it, TAE’s main focus is helping the bulk of humanity on how to survive what they see as the likely outcome and discussions like this may well be just wasted energy to them.
When different people I respect have wildly different outlooks and probabilities of outcomes, it makes me uncomfortable! So I guess this is just my effort to make sense of it all. And I’ve never really seen anyone with any particular viewpoint lay out the cases in a clear, if-then sort of way that lets me understand what must (likely) transpire before things either explode (in either direction), or get better.
Perhaps I need to make my own site! After all Ash went spiritual on us and made his own place…I guess I could go all analytical and make mine!
Viscount Said –
Are you basically saying: Deflation could last 2 years or 20 years before the US Treasury Market is broken, we (TAE) are really not sure which one? Or, we don’t really care, that’s not our focus. Your mentioning 10-20 years does seem to imply a timeline.
An excellent question, if phrased slightly challengingly. 🙂 I too would like to understand the scenario that’s attached to that timeline – and what the possible branches might be.
We can always draw from history to see what’s happened before. In the case of 1929, from the time of the bubble pop to the bottom was 4 years. Now there were a whole lot of defaults happening that helped to clear the debt overhang during that period (and we have chosen can-kicking instead) but the turning point of that deflation involved a deliberate reflation event – FDR’s 45% devaluation of the buck/revaluation of gold.
In the debtor nations of that period, they did a default on their sovereign debt and a devaluation (they left the gold standard). The longer they waited to default, the longer time they put off their recovery. Since the US was a creditor nation, we couldn’t default, so we simply devalued.
We can guess that a similar thing will happen in this case. After the crash, presumably after some amount of defaults, we’ll have the bank holiday and the massive (50%) devaluation, and possibly even the sovereign default too. One would expect that to happen within a few years of the crash, if history is any guide.
One might consider picking up some gold immediately prior to this event. But as the good Professor said, it won’t be advertised in advance, it will be announced over a weekend, and after a two week holiday we’ll find out that our cash will have half the purchasing power of what it had previously.
So many great comments. I’ll choose this one to reply to.
Synchro –
My point is, that if you are saving your money for an uncertain future, why would TAE suggest you keep those savings in cash, which is continuously declining in purchasing power, when you can keep it in gold, which is not?
The famous continuous decline of USD purchasing power, which we could track back to 1913, is all because of money printing from credit growth that has gone uninterrupted except for one instance – the 1929 crash. During credit bubble pops and resulting deflation, the USD purchasing power actually increases, flying in the face of 100 years of steady inflation.
Currently the Fed is trying to engineer a back-to-benign-inflation move (Trivium doesn’t think so, but I’m going with Occam’s Razor – they mean exactly what they say regarding inflation) through occasional money printing and extremely low interest rates. Normally home rates at 3.5% for 30 years would bring buyers out of the woodwork and drive housing prices straight up. All it has done is inject a gentle bounce into the home price decline curve, and there’s not a lot of room for mortgage rates to drop.
I see four possible outcomes:
1) “Goldilocks Deflation” – government-spending-driven inflation alongside private credit deflation, with judicious Fed monetization and extremely low interest rates. The last 4 years. AKA “lost 2 decades” in Japan.
2) “Deflationary Financial System Collapse” – where TAE thinks we must inevitably end up.
3) “Return to BAU” – where the Fed & government think we can go with enough Goldilocks Deflation
4) “Hyperinflation” – what happens with too much monetization.Gold will do ok in Case 1, and very well in Case 4.
Case 2 – in my mind, jury is still out. Normally I’d agree with TAE here using price movements observed when deflation takes hold: gold futures prices curl up and die when deflation threatens. Anyone who seriously watches market prices would not dispute this claim. However there is Armstrong’s theory about serious government financial repression and how physical gold (as an international black-market alternative currency) will do well in that environment, but we need more repression before we can state one way or the other.
Case 3 – gold would likely drop since hyperinflation risk is then off the table, but I don’t assign a very high likelihood for this outcome.In our Goldilocks Deflation, the price of gold has alternately gone up and down, based on the amount of deflation or inflation at a given point in time. We popped to 1900 during the last round of monetization, only to drop slowly to 1550 once it was withdrawn.
There are a number of events that could tip us into a deflationary crash transmitted via Credit Default Swaps. To mention a few: a disorderly sovereign bankruptcy, a true anti-euro government in one of the big countries, a bank run in one of the PIGS, any sort of military action (civil war, coup) in an EZ country – the interventionists are keeping the boat afloat, but only just barely. Any unanticipated Black Swan and it sinks. And to my mind, the pressures on the populations from austerity policies will most likely bring about one of these Black Swans in the fulness of time. I can’t imagine Spain handling 20 more years of this.
If you watch carefully you can see how commodity instruments perform when deflation starts to bite – when there is no money printing, and institutions start to reduce leverage on their balance sheets. This happened last October/November. Institutions start selling off futures contracts of all types, and that includes gold, and the CCI components drop across the board. And the buck starts to rally. If you project that forward through an actual deflationary crash, things look ugly, all except for the dollar which looks quite good.
So for Case 2, my only question is can physical gold rise above the rest of the commodity complex through its capacity as an international alternative black-market currency in a time of great financial repression – Armstrong’s case. If not, the price of gold will suck along with everything else in the CCI and cash will be king right up until the reflation event occurs ending the deflation.
That’s very a long-winded way of saying, I don’t know, but I feel that in Case 2 gold most definitely has price risks identified by TAE that are not acknowledged by the vast majority of goldbugs out there.
Trivium –
I respect entirely what you say – about their power and control over the levers of government and finance. Whether these levers can actually work the way they used to at this point in time, that’s my question.
To return to business as usual, we have to find people willing to borrow perhaps an additional 4 trillion US per year, every year. I believe there is great willingness among the powerful to make this happen, but The People are not going along with the plan, simply because they either can’t qualify, or don’t want to increase their debt load any further.
Traditional levers are interest rates. Clearly, they aren’t working, which is why we’re seeing money printing. That works, but only to a point, and not nearly as efficiently as private borrowing does. And money printing doesn’t create any new debt slaves, so its not ideal.
Something might eventually break loose, but as of right now, things aren’t looking too promising along that line. To me, as always, it’s about odds, not about absolute statements – but I’m not seeing any signs that the folks in control have really effective levers at this point.
SteveB –
Leave to where?
Depends on the scenario. How about Canada? Mexico? Hong Kong? Switzerland?
I’d also like to point out that for gold to hold its value, YOU don’t have to be the one leaving. All it requires is that someone else has the desire to move along with their wealth for the marketplace to assign a good value to your little gold bars.
If your neighbor, for instance, wants to flee to Switzerland, you can trade him your bars for his slightly used roto-tiller. You might even get a premium for them given the difficulty for him to locate little gold bars under a particularly financially repressive regime.
At one point during the Greek crisis, physical gold was trading at a 20% premium to the world gold price. I’d consider that sort of thing likely in a context where a national government made gold ownership illegal.
Buying things on the black market can be dicey, but it ends up being much more commonplace once governments start passing restrictions that nobody really wants to follow. Cases in point: the old Soviet Union, modern day Thailand.
Vulcanelli –
I like Illargi’s two scenarios; I see his two scenarios (recession warm, and recession dreadful) as two valid possible outcomes. The folks you mention envision a third scenario – a money-printing-dominated outcome where gold “goes to the moon”. I’ll add another nuance to these scenarios.
Gold (the yellow stuff in your hand, as opposed to the ETF) has three virtues not found in other assets.
1) its accepted as an alternate currency in many places around the world
2) its not associated with any country
3) its portable, concentrated wealthThis is useful in limited circumstances, but when the right situation arises, there’s really nothing that can replace it. That is, when you are trying to leave somewhere with some of your wealth intact, and the government is controlling currency transfers (as in Argentina today) there’s no substitute for gold.
Jews fleeing Nazi Germany comes to mind. Can’t leave with property – can’t even sell it. Can’t take silver, livestock, or your roto-tiller – too bulky. Can’t take cash, the Swiss don’t care about Reichsmarks.
A guy named Armstrong posits that gold may hold its value even during deflationary times primarily because of government repression. Gold will be the only way to leave the repressed areas (capital controls, wealth taxes, IRA/401k confiscations, absurd Soviet-level exchange rates, etc) with some of your wealth intact, so it will remain in demand – albeit as a black market item.
Here is his paper on why (and when) you should buy gold:
https://armstrongeconomics.com/693-2/2012-2/the-truth-about-gold-why-you-should-buy-it/
Strong repression = vibrant black market = gold retains value.
But as with all things, I’d recommend diversification. Don’t put all your 401k eggs in one basket. And if you do buy gold, its probably best to buy little gold bars, not an ETF.
buddha –
Bernanke says he is going to create money ad infinitum. So where are the Bond Vigilantes who are supposed to curtail the printing? They must have been chewed up in Ben’s propellers as he drove right over them.
There are a bunch of factors, but ultimately its about confidence. In a global crisis like this, confidence collapses first in the periphery, and then moves to the core nations.
In other words, the Bond Vigilantes are busy stringing up the PIGS. They’ll get around to us in the due course of time!
Illargi said –
There is no other way. There will be no jubilee. Not under the present system. Which has it hands firmly on the steering wheel, white knuckles and all.
The phrase “jubilee” is a slippery one. If by that you mean all debts everywhere will be completely cancelled, I’d say that’s unlikely to come to pass without a complete systemic breakdown. I think such a breakdown is possible, though not probable. However, I think it is possible that eventually (5 years?) mortgage debts will be written down to current valuations; let’s call that a “partial jubilee.” Not sure what odds I give that; perhaps 35%?
From a sovereign perspective, bankruptcy is a form of jubilee, and we’ve seen that happen step by step in Greece. At first, everything had to be repaid. Now, some lenders have taken losses. At some point, even more of this debt will be forgiven. In fact, its the usual outcome; credit bubbles lead to sovereign bankruptcy which usually ends up with a combination of money printing and debt forgiveness. I’d call that “partial sovereign jubilee.” Its definitely the last resort of the current system, however, since its the powerful rich people who hold the debt; the last thing they want to do is forgive any part of it.
Adam –
The assumption of the nature of power in dave’s assessment is that power exists independently of economic activity and independently of public perceptions of legitimacy (read public obedience)
Half the time I’m not sure what Adam is talking about! From where I sit, I just look at what exists. Currently, there is a process in place in our society that will (eventually) remove your house from your ownership if you stop making payments. Such a process exists; if it continues to exist, that process (whether Adam considers it legitimate or not) holds at risk any asset you purchase using borrowed money.
Of course one should prioritize feeding kids over repaying debt; however, if you end up losing your land via foreclosure, that new roto-tiller won’t do your kids a bit of good, and all the talk of legitimacy means nothing if you are living in your van instead of farming your debt-free land – even without the roto-tiller.
My suggestion about making scenarios and then constantly looking for evidence to refine them is a constant game of Who Moved My Cheese. I’ve referred to this before – its all about maintaining situational awareness and avoiding self-delusion (either too pessimistic, too optimistic, delegating your awareness to some Guru who promises to lead you to the Promised Land, or focusing on arguments of what You Think Should Be versus What Actually Is).
Adam and I do agree on one point however. The decision of what actions to take is intensely personal, and depends on your own circumstances.
There are a vast majority who cannot ‘get out’ of debt. Purporting that ‘getting out’ of debt is some sort of ‘non-violent revolutionary action’ is classist to its core. How comfortable a position to take when one has access to the resources to do so!
Getting out of debt is both a process and a mindset. Our Overlords have drilled the necessity of being debt-slaves into the popular mind for decades. A large majority of us have the ability to either save or do without, but instead we succumb to the temptation to Buy Now using credit.
I disagree with Adam. Doing Without is not a comfortable position to take; it runs counter to our lifetime of cultural programming. But if a large majority of us with the means to do so did boycott debt-funded consumerism, the resulting deflation would threaten the system in exactly the way I say.
For those already overwhelmed by student loan debt – that’s a tough place to be. Federal loans can be forgiven after 10 years of a public service job; teacher, firefighter, police officer, etc. I’m not entirely sure what I’d do in that circumstance.
SteveB –
Do you really believe there would be a “negative payoff”, Dave? If so, could you be more specific? I’m asking for your personal opinion, not your assessment of popular opinion.
Short answer: in some scenarios, yes.
Long answer [and it did get awfully long]:
My personal opinion is that the future is a murky cloud, and that I am not smart enough to predict exact outcomes with full confidence. So I go with probabilities and scenarios. Let me give you an example.
Scenario 1: If central authority breaks down quickly, its likely that Citibank will find it impossible to convince your good buddy the local Sheriff to kick you and your whole neighborhood out of your houses for nonpayment. In that scenario, paying down that mortgage would be a misuse of resources; better to use that money to buy stuff to help you through the downturn (beans bullets & band-aids – and various helpful Home Improvements).
We’ll call this the “Adam Scenario.” Nobody suffers any penalty for nonpayment of mortgages, credit card bills, or auto loans because things break down really fast.
Scenario 2: An alternate scenario is, central control lasts long enough for your house to be seized for nonpayment and sold to one of your neighbors for peanuts. Most if not all of your investments now belong to your lucky neighbor, except for the beans you can stuff into your new home – your van!
[There are likely to be other scenarios, but let’s keep this to 2 just for brevity]
Now assign probabilities to each scenario:
50% Adam Scenario
50% Alternate Scenario50/50? Probably best not to lever up; its better to have the house for sure if there’s a 50% chance of losing it. 90/10? Depends on your tolerance for risk. 100/0? Get that credit card out and start buying!
My personal opinion is, a lot of people have the One True Answer to Exactly How Things Will Play Out. I think these people are quite dangerous. Instead, think about scenarios, your sense of the probabilities of each one coming to pass, and your own tolerance for risk.
If what you’re asking is for me to list scenarios and assign probabilities…maybe that’s a group task! And one you can help with!
Last point: as time passes, watch what is going on, and update your probability assessments as you see events occur. Perhaps add new scenarios, and delete old ones as well. This method of thinking allows you to constantly consider alternatives, and it also means your ego won’t get in the way – you won’t be so worried about “being right”. Ultimately whats important is being mentally and physically prepared for the future; the ego thing is secondary. Or at least it sure should be.
Adam asks
Debt resistance seems to be the new strategy. How many of you still promote ‘getting out of debt’ as one way to prepare for the collapse?
If you are 100% sure of a given outcome – the outcome Adam sees – then actually paying down debt is foolish. Instead, you should lever up to the max. Take out a big mortgage, and then get some credit cards, and then max them out. And buy stuff, lots of stuff, that will be useful to you in Adam’s endgame scenario.
I don’t share his confidence in The One True Outcome. The precise shape of the future is uncertain. I don’t know it. Do you? Does he? What level of risk are you comfortable taking?
Debt reduction, assuming you have the resources, has a positive payoff for some futures, and a negative payoff in others.
That said, if I had an underwater house in Las Vegas, I’d walk away, no ifs, ands or buts, even if I had the resources to pay it off. Just exactly the way Morgan Stanley did for the buildings that IT bought with borrowed money after they dropped in value….
I think its more accurate to say that Bernanke and Draghi would be happy to save our economies, but its beyond their capacity to do so. Maybe that’s just splitting hairs.
I heard the most recent Central Bank action described as “coordinated central bank intervention” and as of this moment, it has worked relatively well at least from the point of view of the bond market (i.e. rich people’s hot money). Bank deposits – I think they are less convinced.
I’ve heard the current equity markets referred to as “a liquidity detector”; the current thinking is, when newly printed money appears it needs somewhere to go, and the equity market is one candidate. My guess is there’s a certain amount of front-running that’s going on. How long this anticipatory equity buying lasts, and how well it will fare in the face of our upcoming worldwide slowdown – that’s anyone’s guess.
But honestly, don’t watch the equity market, watch bonds. The money is a lot bigger in bonds, and that’s where the rubber meets the road for sovereign financing. Equities are just a sideshow – well not if you own them, of course, but from the standpoint of analyzing at the macro situation, they are.
Think of it from the point of view of the people in power: if the equity market drops that’s unfortunate, but if the sovereign can’t finance itself, that’s a heart attack. Bureaucrats don’t get paid, anti-riot SNAP payments don’t get made…revolution level stuff.
So rather than asking “did this latest intervention work or not” I’m going to make the following observation:
Last ECB intervention was LTRO 2 – announced Dec 9 2011 and executed Feb 29 2012. After announcement on Dec 9, bond market slowly improved through execution on Feb 29 and for another 3 weeks thereafter. Then the bond market slowly lost ground. 10 weeks later, on June 1, it was back at the same pressure level it was prior to the LTRO 2 announcement. Conclusion: LTRO 1&2 were good for about a six month reprieve.
I’m going to start the clock ticking on Draghi’s “I’ll do whatever it takes” speech of July 24th. It will be interesting to see how long this one lasts. My guess is, it won’t last as long, but that’s just speculation on my part.
The tendency is sometimes to see each down cycle as “the system will for sure crash now” and each up cycle as “maybe everything is fixed” but that’s not how these things tend to work. This ongoing situation is actually a series of crises that show up as a pattern of highs and lows – but with each low being lower than it was previously.
The crisis keeps recurring because the debt cycle has peaked; the debt remains, incomes to service it have fallen, and the “virtuous” cycle of borrowing prosperity from the future feeding income growth that can be used to service new debt is now reversed.
Until debt is reduced, or incomes rise, this negative cycle remains in place and that pressure will remain – it is seen most clearly in Spain and Greece. Rescuing banks will not fix this. Its not a bank solvency issue, it’s a debt-to-income issue. But it might take some time for the markets to figure that out. Best case: the Spanish banks get rescued, and yet nothing improves (because there will still not be anyone who can possibly borrow money due to reduced income levels); at that point, confidence will snap again and pressure will rise even higher.
What will they do then? I have no idea. The system in place is run by a bunch of really smart people. It is unwise to underestimate their bag of tricks, and the lengths to which they will go to avert disaster.
How many more cycles will we have? That too is an unknown.
But until you see actual widespread debt burden reduction and/or massive nominal GDP growth, know that the basic problem still remains, regardless of the latest band-aid.
The evangelicals, like many religious groups, have a “platform” of precepts that are sometimes adopted wholesale by people within the faith. These precepts are presented as the Word of God – not open to interpretation or dispute by mere mortals.
Some of these precepts are great stuff. Other precepts I find to be intolerant self-righteous crap. And because both the good stuff AND the crap is said to be the Word of God, there’s really no discussing the stuff I see as the crappy bits in any reasonable way with the “true believers” who adopt the platform wholesale. Who can possibly argue with the Word of God? (Logical fallacy: appeal to authority; I claim God didn’t say it, some guy did)
Many people, whom I view as somewhat wiser, are members of said religious groups, and yet see fit to ignore or gloss over the crappy bits.
As a result of meeting these people, I try to determine what sort of person someone is prior to assuming they believe everything in the platform 100%. After all, one goal of mine is to co-exist harmoniously with many types of people, not simply the ones who agree 100% with everything that I believe.
So while I completely disagree with a lot of evangelical precepts, if we stick to the subjects of love and faith and we ignore what I see as the crappy bits, I’d have a lot to talk about with an evangelical.
As for issues of faith being “magical thinking” (where magical is defined as idiotic, futile, and/or dangerously stupid) I’d like to point out the placebo effect is a product of nothing more than faith – in this case, faith in western medicine. This effect is so strong that it will result in positive medical outcomes from sugar pills in 33% of cases. Its why drug trials are always double-blind placebo-controlled.
Can faith have power in the real world over and above the placebo effect? Certainly faith in ones own ability is quite important to successfully executing many real-world tasks. Backflips, martial arts techniques, interviews – all benefit from faith in ones-self that could ultimately be viewed as “magical” in nature. Yet if the magic goes away, your efforts tend to fail, regardless of the amount of training you’ve had. Faith in banking, fiat currency – faith really does have impact. Perhaps that impact IS magical (in this case, “impossible to explain”), and this confounds those of us who see existence as strictly physical.
Can faith do more than that? That is an interesting question; I think so, but it is something I haven’t resolved to my own satisfaction just yet. And that’s my spiritual journey.
Well that’s my opinion anyway. Good luck Ash with your new site.
digging –
Sure I’d believe there were millions here back in the day. Now we have hundreds of millions. What worked for them may well not scale to where we are now.
Just because our current situation is not so great doesn’t mean we should just guess and try random things in the hopes it will be an improvement. I think they call that a false choice.
Again – do we have a successful case of anarchist society for a large number of people? 320 million is the number I’m thinking of. I’d like some inkling that the place we’re jumping to is actually BETTER than the place we’re jumping FROM – and that most of us will be able to make the transition alive.
Communism in the small scale worked fine, but it didn’t scale well; things turned out a whole lot different than people expected it would. Let’s call it the failure of the human element.
With no evidence to the contrary, I’d suspect the same is true of anarchism.
digging –
Re-reading your post, I see that you did indeed say north america. Looking at the map, is Mexico City part of North America or not? Tough to say, but let’s say I agree for the moment.
I don’t know enough about the diversity of societies in pre columbian NA. I know that some were agrarian, some were hunter-gatherer. Did the Hopi coerce people? The Cherokee? They certainly made war on one another (although not those two particular peoples) at times. That’s coercive, at least it is to me.
Within the community, small tribes (and small villages) have the luxury of relying on personal relationships to keep things real, and operate just as you say. Its only when populations get larger and things become more impersonal (i.e. where you are relatively anonymous) do other problems start to crop up.
I agree that increasing respect for earth and life is a better way to go, independent of the system of government and economics.
I’d also agree that if we broke society into small tribes, anarchist, communist, and other philosophies would likely flourish and do well.
But that’s not where we are, structurally speaking. So I want to see an example of a large population operating successfully as a society under an anarchist model to be convinced it was the right way for America to go.
A lot of ideas sound great in theory, but unintended consequences and unanticipated behavior causes those ideas to break down when actually implemented.
digging –
The “native societies” to which you refer were hugely divergent. The Aztec society (15+ million people in the Valley of Mexico) had plenty of coercive elements to it. I dare say they were an empire on the grand scale of Ancient Rome.
So when you say native societies, to which societies are you referring? Small tribes of hunter-gatherers? Or the Aztecs, the Maya, and the Inca?
Dave, assuming state power remains intact during a ‘deflationary crash’ is the same mistake Steve was commiting…
You mis-read what I wrote. I never said I assumed the state power remains intact. I said (and read carefully here) I assumed that it MIGHT remain intact. This is nothing more than acknowledging that the future is uncertain. If the odds of the State retaining power are even 50/50, I think its a reasonable action to get out of debt.
Some people don’t see the future as uncertain. Marx said that the state would wither away. Generations died waiting for this to occur. I see the future as probabilities. You see the probability of the state losing power as 100%. I give that perhaps 30%. The difference in our assessments is what makes a market.
As for my statement that all types of coercive authority ought to be rejected at all times and in all places with no exceptions…this is just a simple restatement of the Golden Rule. It doesn’t make any sense to put the burden of proof on me to verify historically that coercive force is illegitimate. The burden of proof should always be on the individual employing coercive force for whatever end.
Lovely argument construction, but if you are trying to convince me of the truth of your statement regarding coercive authority, I have to tell you I find your argument simply uncompelling. If you can’t find a historical case wherein anarchist theories have worked out in practice and produced a reasonable society, I find myself completely unmotivated to change my worldview and my actions “just in case” you happen to be right.
So, you can talk about ‘getting out’ of debt as somehow putting you in a safer place than others, but it also teaches you and others that that debt (which was created without the benefit of reserve backing, so, out of thin air) was legitimate in the first place.
IF the power of the state remains in place, and IF a debt deflation occurs, THEN getting out of debt will unequivocally put me in a safer place than someone who still has assets encumbered by debt. I consider both of those IF statements as having a probability of occurring that is high enough that I have to take them into account. I don’t rate the probability as 100%, but even at 50%, it is an outcome that I simply cannot just ignore.
What’s more, I’m really uninterested in teaching anyone about the legitimacy of fractional reserve lending. I don’t care about whether debt is legitimate in your eyes, the eyes of God, against Natural Law, or whatever. The system is. Furthermore, the system MAY remain.
There may come a day when the system changes drastically in exactly in the way you describe. If that’s the case, then I’ll change my behavior accordingly. But I have the resources to remain out of debt, so I do. Illegitimate or not, I choose the easy path. I’m putting my energy elsewhere.
Adam –
After reading this Site for sometime, I am still baffled that some people think a part of prepping for the collapse is ‘getting out’ of debt. Isn’t that the mentality that got us here to begin with? If everyone could ‘get out’ of debt, whence cometh the ‘crisis’? Isn’t ‘getting out of debt’ the same mentality of the slave saving up to buy his release from his master? It may work for some, but it certainly doesn’t work for all. If it works for all, then why call it ‘slavery’?
You may be baffled, but I’m not. In the individual case, its the safest position for an individual to be debt-free during a deflationary crash. Implicit in this is the assumption that the power of the state MAY remain intact.
In the group case, getting out of debt is non-violent in form yet revolutionary in practice. If enough people did that, the monetary system could not survive in its current form. You don’t need 100% compliance to achieve radical change.
As for your suggestion that
…simply holding the world view that coercive authority ought to be rejected in all cases and across all time, with no exceptions…
Sweeping statements like that make me itchy. I feel in my gut that somewhere down the line I’m going to get bitten badly if I say yes to that.
Do we have a case where such a philosophy has been implemented and has worked in real life?
ash –
I see what you’re saying, but I think we should be careful when assuming what material relationships we are actually going to lose before we decide to preemptively detach from them emotionally. I can imagine many scenarios in which we retain those to a significant degree, and I can also imagine scenarios in which the benefits of retaining certain relationships now are worth the pain we suffer when they are lost.
I’ll say again, this is not about pre-emptively detaching from anything emotionally. And yet you will lose everything. Your job will most likely not last forever (unless you die in harness). So at some point, you will have to let that job go; perhaps at retirement, perhaps if you get laid off.
I remember being very upset when I was laid off from a job many years ago. I was quite angry. I was unable to let go of my anger for far too long. Releasing the anger would have been much better for me; ideally I could have been angry for a bit, recognized it, released it over the course of a week, and then started looking for a new job rather than holding on to (what I felt was justified) anger. But that’s not the same thing as detaching emotionally from the job prior to being laid off.
Perhaps another way of looking at this is as a technique for helping oneself get over loss once it happens – and also the desirability of doing this. Think of it this way. If you know that you can easily get over pain from loss, won’t it be easier and more fun to enter into relationships even more deeply? That’s the idea anyway.
New Age covers a huge spectrum, as you say. Something that doesn’t fit nicely into one of the classic “isms” seems to be dropped into the New Age bucket for lack of a better home and that sort of thing has really permeated society – as you pointed out. Are yoga classes at the fitness center New Age? Probably in some sense, yes.
Used only as a palliative (a pain-reliever) its about as useful as drinking, smoking weed, or other forms of self-medication although likely less impactful biologically. But if you are able to use your technique (whatever it is) to actually release negative emotion rather than simply covering it up or repressing it, then that’s a total win, since it is the retention of negative emotion that ends up inflicting trauma on the consciousness.
It is un-healed trauma that causes us the biggest ongoing problems in our lives; death of a parent, a bad break-up, losing the perfect job, financial ruin, etc. Self-healing that trauma – well, that’s priceless.
Different healing methods appeal to different people. I’m a big fan of the method that works well for you. It doesn’t have to be tied to God, or Buddha, or pick-your-religion – although it can be. As long as its about real healing, then I’m supportive, and I think you probably are too.
ash –
And there’s nothing inherently wrong or escapist with practicing some of those things in isolation… but when people turn it into the primary focus of their lives, in which they become addicted to making themselves “feel good” or “enlightened” and avoiding uncomfortable truths or situations, then I think we have a big problem.
I can only speak for myself – but I agree with you, at least mostly.
For me, practicing things in isolation doesn’t get me very far. For example, sparring is an integral part of martial arts. You can spend all the time you like learning forms, but applying it against another person who is not acting according to some script is critical to actually having martial skill.
Likewise, I believe that useful philosophy is only integrated and “owned” by the practitioner through application in real world experiences. IOW I think enlightenment doesn’t come in a cave, it comes by utilizing your philosophy in your life. I believe cave-time is helpful to reflect on experiences, but real-life must be there as well to provide opportunity for use.
Lastly, avoiding uncomfortable truths is quite antithetical to my worldview. Pretending that Mom didn’t actually pass away or that you really didn’t lose the house to foreclosure and dropping into “meditation” in order to cover up all those feelings of loss – not the right way to go.
The idea that we need to abandon relationships or attachments with either people or things in order to “avoid loss” or emotional hardship doesn’t sit well with me.
It doesn’t sit well with me either. Releasing attachments isn’t about abandoning relationships in advance, though I can understand why it might appear that way. I think the language I used wasn’t clear enough.
Releasing attachments (at least for me) is about being able to let something go that is basically already going (or gone) without becoming emotionally crippled by that experience. Non-clinginess is another way of describing it. Yet another way, perhaps more practical, is a technique by which one uses a conscious effort to first notice, then examine, and then release the negative emotions that arise in life.
In some sense, we will eventually lose everything material currently in our lives. It only makes sense that we should expect this, intensely enjoy them while they are here, and once they leave, let them go.
Sounds simple but naturally, its not.
So in your list of complacent people, you forgot to include the evangelicals, many of whom believe in an actual Rapture where the true believers are taken from the earth away to heaven (how’s that for a literal Deux Ex Machina) while the unbelievers remain in the hell on earth the Apocalypse has wrought. Presumably, the Rapture folks simply have to (sit on their asses) and believe, and they will be the only ones rescued from the world’s predicament. No need to stop global warming, or worry about peak oil. None of it will matter, because they won’t even be here! The Left Behind books sold – what was it, 60 million copies? I’d say Rapture evangelicals far outnumber the New Age folks, and have a consequently larger impact on US domestic politics.
Of course I’m one of those New Age people, at least to a degree, so I’m biased. We’re going to be here dealing with reality for the duration, while the Rapturites feel they have a get-out-of-jail-free card.
From what I understand, attachment to people and things causes suffering when those people and things are lost. As you can release your attachments (not an easy job), the suffering from loss diminishes. We will have loss of standard of living, in all likelihood. Yet if we can release our attachment to those things, objective reality is unchanged, we remain on the earth un-rescued from our predicament, but the emotional impact of reality upon us IS changed.
If we weren’t so motivated by marketing to find self-worth in the buying of things (most of which we don’t use, and much of which is funded by debt) we could likely be just as objectively happy and perhaps even more so with a lot less. And when things went away (the house, the car, the job, etc) our identity would be unaffected.
And if its going to happen anyway…
The question of when a pension fund will (essentially) default is a really tough one to answer. Its similar to asking when a nation will experience a sovereign default, or leave the eurozone, or experience a bond auction failure. Near term, it is driven by the performance of the assets (debt & equities) within the fund. Longer term, its the economic performance of the entity providing the pension (i.e. car sales & profitability at GM, the State of Illinois sales & income tax collections, etc).
Another aspect is, is this a “core system” pension or is it peripheral? If its provided by the US DOD, odds are its the last thing to go. (Funny, the establishment always manages to pay the Army). If on the other hand its the State of Illinois…man, lump sum looks good.
You can get an early warning by asking your fund what’s inside it, and then infrequently monitoring the performance of those assets. They will likely delay informing you about returns, so if you monitor it yourself, you’ll have perhaps a one-year jump on the rest of the herd. Longer term, simply realizing that every time you hear bad news about the State of Illinois, you know that your pension situation is getting more precarious.
In some sense, its a big game of Who Moved My Cheese. You have to keep alert, sniff The Cheese frequently, and be quite clear that the fundamentals driving pension inputs and outflows will eventually affect you regardless of what the current law says. Everything will be fine right up until suddenly, they’re not fine anymore.
If you have something you could be doing with the lump sum that would dramatically lower your living costs or cost-effectively making your life more resilient, you might consider doing that. For instance, paying off credit card debt, or even home mortgage debt are possibly reasonable uses for part of your lump sum. Paying off a mortgage currently at a 5% APR effectively gives you a tax-free and risk-free ROI of 5%, which is awfully hard to find these days, and likely better than a pension fund manager will do. Depends on the size of the house and where it’s located, of course. Mom bought some solar panels for a price that effectively gave her power for 10 cents per kwh assuming a 10 year breakeven. Every kw generated after 10 years is free. So protection from power inflation costs, AND free power starting at year 10 up until the panels die.
Some might argue that things will totally collapse and so you shouldn’t pay off anything, and instead take it out as cash and hide it under the mattress. Certainly if there is a deflationary crash and home prices drop by 75%, you can walk away from your existing mortgage, and buy another house with that cash for 1/4 the price. Heck, if you assess that as the “likely scenario”, sell your current house now, take out the lump sum, put the cash in a box, rent and wait for the Earth-Shattering Kaboom!
Ultimately, you have to judge for yourself who will be a better steward of the money – you, or the pension fund manager. And that depends on who provides the pension, how many reasonable choices you see for your lump sum, and what you assess as the likely outcomes of our current predicament 5-10 years down the line.
While making choices yourself might be risky, delegation of choice to a pension fund manager (who has very limited choices, all of them tightly coupled with the current financial system) comes with risk also.
Nice article. It links in pretty well with the debt article you posted previously. That’s because pension funds hold a great deal of debt. So debt (sovereign and otherwise) and what happens to it is very closely linked to the viability of pension funds.
Low bond rates = lowered pension fund viability.
Sovereign defaults/debt jubilee = destroyed pension fund capital.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.”
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.
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.
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.
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.
There’s a pretty relevant example of a central state with something similar to our globalized trade network breaking down as the ever-increasing costs of maintaining empire cross with repeated wars of succession resulting in a massive devaluation of the currency reducing everyone to a barter economy.
https://en.wikipedia.org/wiki/Crisis_of_the_Third_Century
All the current eurozone can-kicking really just eats away at confidence in the system. The current eurozone economic downturn is due (I believe) as much to debt as it is to a complete lack of confidence in what the future holds. As unrest spreads, economic activity will continue to retreat, nations will draw in on themselves, and our global economy will wither. Attempts at more centralization may just increase instability rather than reducing it.
As reported in the Third Century:
…this vast internal trade network broke down. The widespread civil unrest made it no longer safe for merchants to travel as they once had, and the financial crisis that struck made exchange very difficult with the debased currency. This produced profound changes that, in many ways, would foreshadow the very decentralized economic character of the coming Middle Ages.
Large landowners, no longer able to successfully export their crops over long distances, began producing food for subsistence and local barter. Rather than import manufactured goods from the empire’s great urban areas, they began to manufacture many goods locally, often on their own estates, thus beginning the self-sufficient “house economy” that would become commonplace in later centuries, reaching its final form in the Middle Ages’ manorialism. The common free people of the Roman cities, meanwhile, began to move out into the countryside in search of food and better protection.
Read the entire article to see what happens to the formerly free peoples of the cities. It’s not ideal.
skip –
I didn’t mean to suggest simply using scooters fixes everything long term. That said, if we did that in the US it would drop our fuel consumption in half if not more, and that would seem to buy some more time, but my real point is people here live just fine, just with less. And if even less comes, more people will just take buses and the song teo. It might even improve Bangkok traffic!
Your comments about the river are right on though. God knows whats in it. I’m not a fan of that water. There aren’t many birds in general, come to think of it. Perhaps they get eaten, I really don’t know! Upcountry even the (field) rats and the larger bugs are protein sources.
Yet poverty is a funny thing. I see vastly more street people in San Francisco than I do in Bangkok. What exactly is poor? Sure upcountry people are quite poor, I’ve been there. Poor is one solitary light bulb in a wooden house with cardboard and bamboo for “windows”, the “kitchen” is outside, food cooked over an open fire, the family eats dinner on a mat nearby, and every meal has lots of sticky rice and random protein sources with lots of spices. And a single pickup truck is shared among 5 families. There is one older TV at the rich guy’s house. And of course no aircon. And if you have a bad medical problem – well, you die. But with all this poverty you would think Bangkok would be overrun with street people. I only know of three.
On a Purchasing Power Parity basis, Thais have 50% of the purchasing power that we do in the US. On a per capita GDP basis, its more like 10%. That per capita GDP differential shows up when you talk about airfares and iphones, but the PPP comes into play when prices of street food, local clothing, and transport are measured against local salaries.
If you have time and inclination and are in the city for a few more days and want to drop by and see my neighborhood, skype me at username davefairtex. I’d have sent an email except…no facility here to do that.
skip –
If you actually live in Bangkok, you don’t buy water from 7-11, at least not more than once. You reuse your plastic bottles and refill them from the ubiquitous reverse-osmosis water filtering machines scattered all around the urban jungle. Cost: 1 baht/liter. (Water at 7-11: 14 baht)
If you look closely, the Thais have a large number of very low energy ways of getting things done. While westerners (and rich Thais) take taxis, the regular people use buses and specially-constructed red trucks with benches to get places cheaply. Often the 4-person family car is a 110cc scooter.
Locally produced natgas is used to fuel a large number of taxis and buses. There’s also a thriving business in fixing things – every neighborhood has some guy with a sewing machine and a table who charges 20 baht and takes 10 minutes to fix your old clothing. A different guy fixes shoes.
I’m not sure I’d count the Thais out so quickly. They might end up doing better than other places that have further to fall, and less of a culture of small business operation. Almost everyone in Thailand has their eye out for a way to start a small retail business, and many have family members that own a small farm upcountry. If you do something well, your Thai friend will notice this, and suggest that you might want to open a shop – something much preferred to working for someone else.
I think Thailand will do much better with less than America.
Have fun in Bangkok. 🙂
ash –
Nice article. I’ve often wondered if hollywood is simply a reflection of existing thinking or is a more causal force.
Certainly superheroes are an interesting study to me. Perhaps the storyline echoes the frustration that most people feel powerless to change the world around them.
Or maybe the takeaway is simpler and more insidious: “you ARE powerless to change anything because you don’t have super powers.”
And the vampire series, talking about the immortal overlords living secretly among us: “some of us are nice, some are not, but don’t even think of rebelling or else you’ll end up as just another tasty snack.”
I think there may be a pony in there somewhere.
It does appear that the secrets are slowly emerging, in many areas. Perhaps we’ll see something interesting here too someday soon.
I’m still waiting for my flying car.
I agree that the flight to safety is real, and it reveals itself through bond yields. The core nations of the eurozone, plus the lower debt members all have 2Y bond rates lower than 0.25%, with Germany still having a slightly negative yield, while the troubled eurozone nations 2Y bonds are yielding 3.75% or higher.
I think a few years back in 2010, after the initial panic had subsided, the Fed probably did QE2 partially to monetize treasury borrowing, but that’s just not necessary today because of the flight to safety. Right now with Operation Twist the Fed is actually selling its supply of short-dated treasuries (and buying longer maturity stuff) and still the US 2Y rate is 0.24%.
It is important to differentiate between non-markets (like LIBOR, where rates were set simply by agreement amongst the co-conspirators) and the places where prices are determined by where the really rich people decide to put their money. The bigger the market, the more unlikely it is to be specifically manipulated. Where did all the money from the rich Greeks go when it left Greece? Likely, 2 year German and Swiss treasury notes.
bluebird –
Money market checking accounts are…more dangerous than bank checking accounts in times of trouble.
MM funds are basically very short term bond mutual funds in disguise. They hold short term debt; bonds due to expire in 30 days, loans to banks (called “repos”) that pay off within 30-90 days, 4 week treasurys, etc.
Now then, when there’s no stress, these guys pay the interest they’ve received (less “administrative fees”) every month or so. And you can redeem your funds and you get $1 back for every “share” you own. But they have counterparty risk.
Let’s say some of that short term debt your fund owns is in a company that goes bankrupt by surprise. Let’s call it “Lehman Brothers”. Bankruptcy takes a while to process, and the fund likely won’t get back 100 cents on the dollar. If the fund owns a lot of those repos – say 5% or so of the funds assets are in LEH repos – then that 5% is locked up for a long time.
So basically, a money market fund is really just a bond mutual fund; if one of the underlying bonds defaults, the NAV of the money market fund will likely drop below $1.00.
Its easy to see what’s in your money market fund, just go to google finance and type in the ticker symbol. Take the Fidelity Cash Reserves fund as an example:
https://www.google.com/finance?q=FDRXX
Here are your top 10 counterparties:
U.S. Treasury Notes 0.10-0.19%
In A Joint Trading Account At 0.19% Dated 2/29/12
U.S. Treasury Bills 0.10-0.15%
National Australia Bank Ltd. 0.40-0.52%
Rabobank Nederland New York Branch 0.31-0.55%
Sumitomo Mitsui Banking Corp. 0.40-0.55%
Citigroup Funding, Inc. 0.48-0.50%
Straight-A Fdg Llc Ser 2 Iam Coml Paper
Bank Of Tokyo-Mitsubishi Ufj Ltd. 0.40-0.50%
Bank Of Nova Scotia 0.46-0.65%So a Rabobank Repo (NYC branch) is 3.76% of holdings. Let’s say Rabo goes tits up. 3.76% of the fund is locked up in bankruptcy. Once people figure this out, they will start withdrawing their money from the fund. Enough withdrawls, and the fund decides it has to stop redemptions in order to distribute the losses fairly. Your money is stuck.
This actually happened to the Reserve Fund during the 2008 crash. They owned a bunch of Lehman Repos, and ended up dropping to NAV 0.97 when Lehman went under. They stopped processing redemptions. It took a year for most of the funds to be returned. Read about this here:
https://en.wikipedia.org/wiki/Reserve_Primary_Fund
Read this article on money market funds, especially the section on “breaking the buck.”
https://en.wikipedia.org/wiki/Money_market_fund
Last point: there’s no FDIC insurance in a money market fund. The safest 100% liquid DIGITAL place to store your money is a demand deposit account – a checking account. They’re supposed to have enough reserves on hand to give you your money back, and its FDIC insured (theoretically backed by the full faith & credit of the US Treasury if the FDIC fund runs dry).
If you want to avoid the FDIC middleman and don’t mind having your money tied up for a while, use Treasury Direct and buy yourself 3 month T-bills and automatically roll them. You can always sell them (I think it costs $50 flat fee) if you need the cash immediately. Funds are ACH-transferred (2-day delay) into and out of your checking account.
Money market funds, while they were (kind of) rescued by the Fed last time around, are lower on the food chain than demand deposits. Your money could be locked up for a long time if your fund breaks the buck.
My opinion: DDA’s will be the last “liquid” vehicle thrown under the bus in a serious crisis.
Bottom line: given current interest rates, there is zero reason to have money in a money market account. In my opinion, either use a real checking account, or Treasury Direct.
ash –
Yes, you got it – consumers deliberately refusing to consume. That’s what I meant. Consumers have a great deal of power, should they choose to use it. And you are right, that’s not what is happening today. People are just acting in various stages of panic.
otto-matic –
If you carefully read your savings account agreement with your banking institution, you will note that the bank has reserved the right to not give you your money back for anywhere from 30-90 days under some circumstances. I think mine [US Bank] said 60 days, if memory serves. No need for Fed involvement at all.
From all I’ve been able to find out, checking accounts are demand deposits (as in I’m demanding my money, so give it to me) and for that guarantee of instant gratification you don’t earn any interest.
ash –
Thanks for your kind words too!
I agree the planning for bank runs in the periphery have most likely been finely tuned over the past two years. However, executing these contingency plans are not “fantastic outcomes” for the system. They’re simply stop-loss measures – can-kicking measures, if you will, with an uncertain ability to actually contain the damage. And even if they do contain it to just one country, its not a victory by any stretch of the imagination. A number of banks will have failed across the zone, leverage levels will have increased, and the “pretend” system will be that much more fragile. Perhaps – just perhaps – they’ll be forced to consider actually resolving some of these banks. I think that would be a good thing.
As evidence: during the Irish banking troubles, no losses were permitted for bank bondholders. Now in Spain, the ECB is openly talking about senior debt being given a haircut. The money just isn’t there for holding the creditors harmless any longer. That has to be progress! Maybe its not the hoped-for endpoint, but its progress!
My thesis was, people’s collective action has real power in the banking system. As a thought experiment – if a Spanish bank run results in a eurozone exit, and that results in a euro banking crisis, thats a bit more effective of a “protest action” than a march, or an election where a new batch of cronies get put in power and execute the same policies where the usual bankers keep their jobs after the usual taxpayer funded bailouts are paid for with austerity.
Imagine if everyone on a protest march were to instead all walk quietly to their bank branches and each withdraw 1000E in cash – more effective? I think so. Just having the lines outside the banks would strike terror into the hearts of the bankers.
What happens after, well that’s always the question. My only point was to say people had the power to bring about change outside the usual electoral or violent protest options. It sure beats throwing rocks at policemen. Talk about bringing a knife to a gunfight! Fight the enemy on ground where you are strong, not on ground where he is. (Not suggesting you were advocating the contrary, I was just musing to myself)
