Five Things for Tuesday, May 19
1) Economics 101
Whenever I mention to friends that I see a structural shift in consumer behavior and attitudes, it's almost universally dismissed as some kind of crackpot theory. Which is true, but only because the pendulum has swung so far the other way toward the broad acceptance of monetary lunacy that anything else, by definition, must be the views of a nut job. 
In the early 1990s, dozens of big time colleges and universities created degree programs centered entirely around the premise that financial engineering could escape the most basic rule of economic law; that consumption cannot exceed income indefinitely because there is a limit to how much debt can be serviced in the economy. If we can strap a monkey to a rocket and blast it into space, then surely we can strap Mr. and Mrs. Jones to a Visa card and blast them into a shopping mall. At least, that's how the reasoning looks in hindsight. At the time, however, while we were busy concocting models to support these financial illusions, Mr. and Mrs. Jones were the least important variable in the equations. And then reality caught up.
The San Francisco Federal Reserve last week released a fairly modest paper, both in scope and conclusions, on U.S. household leverage, and its inevitable unwind. As measured by the ratio of debt to personal disposable income, household leverage increased only modestly from 1960 to the mid-1980s, from 55% to 65%. However, over the next two decades, leverage more than doubled, reaching an all-time high of 133% in 2007.
Meanwhile, over that same period, the massive rise in household debt was accompanied by a steady erosion in the personal saving rate. On the one hand, the combination of increased leverage and lower savings was a powerful force driving a significant amount of U.S. economy growth. But, leverage can work in two ways; sharply increasing returns on the way up, creating losses at a terrifying pace on the way down. And even as we've spent the past 15 years enjoying the former while trying desperately to work around the latter, the reality remains: consumption cannot exceed income indefinitely because there is a limit to how much debt can be serviced in the economy.
Business deleveraging, consumer deleveraging; this is how the process of deflation runs its course. And deflation is really just a matter of a structural shift in the psychology of consumers and businesses; a shift in time preferences and risk appetites. Monetary and fiscal policymakers can make credit available, but they cannot make lenders lend, or potential borrowers take on more debt... even when it is rational to take on more debt.
So we've had our fun, now the payback time is upon us. When will it end? It's simply Economics 101, lesson two: Real lending and economic activity will only improve when real savers see real value at the right level of risk. That will only occur in the short-run with vastly lower prices, or in the long-run with stagnant prices and the benefit of time.
2) Will the Real Economic Crackpots Please Stand Up?
I saw the following headline on Bloomberg this morning, a vicious reminder of just which deranged cult is running the asylum:
Fed Should Fuel Faster Inflation to Help U.S. Economy, Mankiw, Rogoff Say
“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
"Mankiw says the central bank should pledge to produce “significant” inflation. If Americans were convinced of the Fed’s commitment, they’d buy and borrow more now, he says."
Gregory Mankiw is a former White House adviser, and Kenneth Rogoff was chief economist at the International Monetary Fund. Their credentials far exceed mine. I'm a simple man, a mere traveler who hails from the dark and bloody ground of Kentucky. Which means I have one advantage over Mankiw and Rogoff, an almost innate ability to recognize a scam for what it is thanks to the genetic assemblage of more than a century's worth of gamblers, horse traders, whiskey manufacturers, coal miners and hill people.
So whenever I hear someone make a case for higher inflation as a means of "helping the economy", what I see is someone standing on a whiskey barrel in the town square, peddling snake oil - fer all that ails ye.
-What's in it?
-Why it's an elixir, young man.
-A lick sure?
-A restorative, a healin' potion.
- But what's it made out of?
- Oh, many, many ingredients, too numerous to mention.
- If I know what's in it, maybe I can make my own?
- Ho ho, a commonly naive assumption, my young friend. This product can only be manufactured by experts, men formally trained in the metallurgical arts, like doctors, but with science on their side.
Like you, I've been there; seen that. The problem is they keep changing the branding, the label on the snake oil. These days its called "inflation." But here is all ye need know, my fellow travelers:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises
So ask yourself two things, 1) who gains by selling us this snake oil? and 2) who loses if we refuse to buy it?
3) BlackRock Draws Scrutiny as U.S. Adviser
Saw this article from the New York Times on BlackRock (BLK) making the rounds today:
Wall Street Firm Draws Scrutiny as U.S. Adviser - NYT
Ok, here's the deal. BlackRock's role as an adviser to the U.S. government and its profits as a manager of troubled assets might be... now, sit down... it might... wait, just hold on, I know this is crazy-sounding... but there's a chance.... by that I mean it's theoretically possible... not a sure thing, mind you, but in theory, there is some small probability that the company that is simultaneously being paid by by the government to price and sell troubled assets while buying those same troubled assets for private clients faces an inherent conflict of interest.
I know, it's crazy talk. How could this possibly happen? Well according to the Times, "Without naming BlackRock, federal auditors have warned that any private parties that purchase distressed assets on the government’s behalf could use generous federal subsidies to overpay, artificially pushing up the price of similar assets that they manage for their own portfolios."
Poppycock!, you say. And at least one person, James R. Wilkinson, who served until January as the chief of staff to the former Treasury secretary, Henry M. Paulson Jr., would agree with you. According to the Times, Wilkinson described BlackRock’s co-founder and chief executive, Laurence D. Fink, as a “patriot.”
4) More Unconscious Herding Impulses
Fascinating article in the Science section of the Times today on why we buy the things we buy. According to the piece, Dr. Geoffrey Miller, an evolutionary psychologist at the University of New Mexico, says that much of the pleasure we derive from the things we buy comes from unconscious instincts that they will either enhance or signal our fitness by demonstrating intelligence or some of the Big Five personality traits: openness, conscientiousness, agreeableness, stability and extraversion.
"In a series of experiments, Dr. Miller and other researchers found that people were more likely to expend money and effort on products and activities if they were first primed with photographs of the opposite sex or stories about dating."
What I most liked about the piece, however, was the unconscious shift (a meta-shift ?) that the writer made halfway through the piece:
"The grand edifice of brand-name consumerism rests on the narcissistic fantasy that everyone else cares about what we buy. (It’s no accident that narcissistic teenagers are the most brand-obsessed consumers.) But who else even notices? Can you remember what your partner or your best friend was wearing the day before yesterday? Or what kind of watch your boss has?"
See, the "grand edifice of brand-name consumerism" which rests, it is now apparently manifest, on the "narcissistic fantasy that everyone else cares about what we buy," goes hand-in-hand with the deeper herding impulses that make the conditions for deflation possible; shorter time preferences, risk aversion.
“We evolved as social primates who hardly ever encountered strangers in prehistory,” Dr. Miller says. “So we instinctively treat all strangers as if they’re potential mates or friends or enemies. But your happiness and survival today don’t depend on your relationships with strangers. It doesn’t matter whether you get a nanosecond of deference from a shopkeeper or a stranger in an airport.”
5) News & Weirdness
Morgan Stanley (MS), JPMorgan (JPM), Goldman (GS) Said to Plan TARP Repayment - Bloomberg
A wise man once said, Neither a borrower nor a lender be; and these cats were all losing money on both... at the same time.
Dept. of Looting: Efforts to Repay Bailouts May Undercut Benefit for Taxpayers - NYT
With banks scrambling to return bailout money, a question arises over the value of taxpayers' warrants: Should the government maximize profit for taxpayers, or minimize pain for banks? Hmmm, I wonder which one they will choose? Let's see, the public's best interest, or the best interest of the financial oligarchy? Which will they choose?
Wait, Nevermind: 2,500 People in Indiana Stood in Line for Hours to Pay $20 for a Penny - Evansville Courier & Press
It's increasingly difficult to say we're getting anything other than what we deserve.
Buffett Scales Back Stock Purchases as Berkshire's Cash Holdings Dwindle - Bloomberg
Berkshire Hathaway's (BRK) cash level is now approaching the $10 billion limit Buffett says is the minimum he wants on hand. It was $47 billion in September 2007, down to less than $30 billion as of April.
Derivatives Market Declines for First Time Ever - Bloomberg
Are financial weapons of mass destruction now financial weapons of fairly widespread destruction? Still talking about $592 trillion in outstanding contracts.
Florida Dept. of Transportation Received No Bids for Toll Road Concession - TollRoads News
"The lack of a bid probably reflects the rotten financial conditions for raising money for longterm projects and uncertainties over the investment environment."
Struggling Magazine 'Paste' Asks Readers to Donate - Atlanta Journal-Constitution
I believe that's what some people back in the old days referred to as the PRICE OF THE FREAKING MAGAZINE!
"Hallucination Fish" Caught Off UK Coast - Practical Fishkeeping
A species of marine fish that has been reported to cause LSD-like hallucinations has been caught off the coast of southern England. "In 2006 two men who ate the fish at Mediterranean restaurants suffered "terrifying" visual and auditory hallucinations, which toxicologists linked to their consumption of the species." 
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Ironically, as this crisis continues to get worse, we will do precisely what we are asked to do. The more desperate we become, the more likely we are to believe the snake oil salesmen.
Denial isn't just a river in Egypt.
"They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up."
"If Americans were convinced of the Fed's commitment, they'd buy and borrow more now, he says."
-Don't these statement contradict one another? The cash strapped consumer is expected to pay down debt but also want to go deeper into debt by spending and borrowing because future prices may go up. Hmmm something isn't adding up.
Also...
-Does he realize that 99% of people don't know what the Fed is. How could they understand the "Fed's commitment" if they don't know what the Fed is or what they are committing to?
"Mankiw, currently a Harvard professor, declines to put a number on what inflation rate the Fed should shoot for, saying that the central bank has computer models that would be useful for determining that."
-So Mankiw doesn't know the exact rate of inflation he wants but there are some computer programs that can figure that out for him. Such great insight from the Haaarvard professor.
âIt's a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?â
-Won't the slow growth and higher savings lead to more capital availability for faster growth in the future once this crisis runs its course?
Sad to see these are the ideas that "leaders" of our country come up with. I'd sure like some of that lick surrr right now after reading that article.
Purely anecdotal, but I was driving through downtown Chicago yesterday and saw a DiGiorno truck handing out a free Flatbread. The line was ridiculously long and didn't appear to be moving fast. The line spanned about 1.5 city blocks - all for a $3.19 sandwich. The line looked to be a mixture of "business" people, tourists, and homeless people.
Unfortunately strapping monkeys to rockets is not nearly as rewarding or satisfying as congressmen and economists (Mises and Friedman are safe) would be. No guidance system required.. they could argue forever about the best course.
Americans can't handle the truth, so we have deception.
The banks are insolvent, trillions of dollars in savings and retirement funds redistributed to those who gambled with them and lost, underwater mortgages and consumers, and inflation will cure it? Snake oil indeed.
Those fine elixirs created throngs of closet cocain and morphine addicts; housewives and seemingly responsible fathers, all hooked on a quick fix disguised as medicine.
Now we have "Bernanke's Bitters" and "Paulson's Tonic" and "Government Clove and Hambone Salve". Oh yeah, everythings going to be just fine, as soon as I can git me sum ah dem dere cures and lay down under the shady oak.
Carpetbaggers!
i can understand what you're saying, and many people very close to me feel the same way, passionately - but not sure i totally agree...
it doesn't seem like asking when the media bombards us, all of us, incessantly, with not only the msg we're to hear, but how we hear (how edited, presented, etc)
not sure even if this isn't unavoidable -
but my deep down feeling is, most people aren't like those reading minyanville, or following the comments on even marketwatch, much less reading mish, calculated risk, mises, etc
most people i see around me, regular folk, trust - "still" trust...
they trust that the evening anchor on the local news accurately said there was only x number of swine flu confirmed in houston recently, when my oldest daughter there told me how a close friend of her's (pregnant) recently saw her young boy go on a field trip and come back with 300 youngsters ill, "a few" of which were confirmed, on the news, as being infected with hini virus
they trust the twin towers fell cleanly demolition style due to other factors (design, impact force, heat) than anything other than the terroists on the planes (no idea what else, just pointing out, there's no discussion of other factors)
they trust that decades of contributing to our national social security system is a valid recognized act of faith that will be duly honored (i hope it will ;-)
they trust the guy in the on-coming lane of undivided traffic is like them, alert, conscientious, and capable of driving safely
i won't go on & on, a bad habit of mine at times ;-)
my bottom line, i truly believe very few people even suspect they are being "asked" -
what it speaks volumes of about us as americans, is, how much we "still" trust....
Unfortunately, you have a point.
If my dear Mother sees it on Network News or reads it in Newsweek it is the gospel truth.
If her financial advisor says it is so, it is.
She has complete faith in those who have led us astray. Why? She doesn't want to believe anything else.
Many people believe what they hear despite the facts simply because they want to. They don't want to believe that they have been taken, lied to, misled, grifted, or they will have to: 1. recognize it, 2. feel bad about it, 3. feel bad about themselves for falling for it 4. deal with it. It's easeir for people to pretend that "happy days are here again" even though sooner or later we will have to get the rats out of town and pay the Piper.
This is the reason the lies don't even have to be very good...
because most people really, really want to believe.
I was explaining what I believe to be some of the consequences of the impending crisis to an acquaintance recently and after thinking for a few seconds she said:
"but I don't want to be self-sufficient".
You can tell an American almost any lie as long as you've got enough slow-motion eagles and flags.
I loved this article from Edward Harrison of Credit Writedowns via Naked Capitalism a few days ago.. I think it's a brilliant summary of how we got where we're at:
http://www.nakedcapitalism.com/2009/05/populist-interpretation-of-latest-boom.html
Sadly, most of the peasants I know are still buying the mythology that the US still has some form (or other) of a "representative" government. Self delusion is a wonderful thing.
but since we're people, it's alway seems so much complex than it seems it should be -
people also trust, i believe, because we've had to, to survive, to depend on each other, to feel we belong, to exist emotionally and physically...
that's why the disruption of that trust is so scary, it could get really wrenching -
remember, the first ever contingent of american troops, assigned to guard us supposedly, was only just initiated in the last administration...
if true, who can blame the people in power for fearing a french or russian revolution
and though seldom heard or seen in print, i believe, in the depression, that regular people, farmers, teachers, etc, rioted in the streets...
that's scary
what gets a people, who've followed all the rules all their lives, and lived so conscientiously, so riled up, up to that level of physical action?
i think it's the rupture of trust
that's why i think it'd be better if (and i believe obama tried to when first inaugurated) our country's financial realities were laid out honestly, to be dealt with, open and transparently
i guess, since we've trusted our government for so long, that really, it's time the govt trusted us....
Hmmm...I don't think people don't work that way.
Most people see themselves as good and truthful at heart. (By the way, given the depths that humans are capable of, we should all be greatful for this human tendency. There is no good way to deal with sociapathic behavior other than a jail cell.)
Before and as they take action then, people convince themselves that they are acting on the truth. (IE, will lie to themselves) If people are presented with facts that contradict their truth, for the most part, they will rationalize their decision and/or dismiss the facts. The key is that the mental image of themselves remain in tact.
I think for the most part, Obama is acting in a truthful manner as any politician as successful as himself is capable of. In other words, the administration is probably presenting the truth as they see it in a politically expedient manner.
*shrug* All societies breakdown at some point to allow new ones to grow. I don't know the exact conditions of when and why that happens. I do know that the miracle is that we've got a 200+ year democracy that has seen the freeing of slaves, the elevation of women to equal citizenship and the civil rights movement. Even if it all broke down tomorrow, it's amazing that we've existed at all. And who knows, we may come out of this okay yet.
Societies break down when the food runs out. That's pretty much the rule.
Our society thinks it is overfed, but the real food is only available to the rich who can afford organics. The rest eat "cake" made from high fructose corn syrup, corn, antibiotic-laced beef, and hydrogenated soybean oils.
If our food makes us lazy and stupid, how will we ever find out?
The majority of people think they are good but only because they don't have all of the information. If we took all of the costs of Empire (oil, wars, transportation, environmental impacts, climate change) and put it into a sales tax for people to see when they make purchases, then they would have the information to be better people. Until then, the entire consumer society is a lie, since consumers don't get all of their money to make decisions with, and they don't see how the money taken from them is actually spent.
If the system is insane, how is any individual going to find meaning in it?
food, i've read several times, that with all the french people went through, beheadings, changes of govt, ruination of their currency, it was when simple bread was no longer available or affordable, that their society broke...
and the other, having the information to truly make reasonable decisions, wow, wouldn't that be a renewed experiment in democracy ;-)
oh, and i guess a third thing ;-) last yr we finally became aware of high fructose etc, tremendous chg to our lives
thanks dan
otherwise, if we didn't think so...
why would we bother even communicating 'bout all this with each other
thanks amy ;-)
Good responses all.
I write here mainly out of my frustration at losing trust.
I want to believe, I want good things to happen to good people, yet I see so much live in the moment thinking and actions.
It's a cacophony of good people with good intentions doing the exact wrong things, the bad with bad intentions taking advantage of the good people, and everyone and everything in between.
The only thing I am certain of is that the bad consequences of unethical behavior cannot be solved with unethical behavior.
Crossing my fingers, thinking positive, and saying a prayer that ethical behavior returns to a majority role.
Regards,
Eric
On the food bit, it's hard to say. Yeah, sugar is bad but starch can be just as bad in terms of it's effects on the mind/body. Grain has been messing with humans and animals for a long time. For instance, horses fed too much grain either a)become obese and listless or b) show signs of ADD. Nobody feeds them high fructose corn syrup, although I'm sure it wouldn't help the situation.
And if there weren't enough grain for our ancestors to overeat, they had bad habits of eating grains that were moldy because they had nothing else, which can be just as bad. It's thought that perhaps the Salem witch trials originated with girls given hallucinations from eating moldy rye.
Several time eras and cultures are also noted for their consumption of alcohol in copious amounts which I've heard affects thinking. ;) A short history of the Constitution suggests that it was a document that got whipped out in between the parties at local taverns. Egypt built whole empires on a cross between beer and bread. It's really a wonder that anyone thought clearly enough to plant next year's grain crop, let alone figure out all the technology that surrounds us.
Luckily, however, I eat a diet low in sugar, starch, and alcohol so I can do everyone's clear thinking for them. Please, there's no need to thank me. Just send money. *grin*
Denial allows the average person to trust and to believe. When you talk to so called average people heart to heart, they sense something is very wrong and they suspect they are being lied to all the time.
BUT to question the lies requires that they go out on the limb and DO something, to take a stand, to possibly put themselves in harm's way, to be a maverick, to go against the flow.
The average person lacks the courage to do this. It's so much easier to be passive, to convince themselves that these problems are someone else's responsibility, to step aside. Thus they turn up the TV and slip into denial.
The lies broadcast on the idiot box give them permission to be passive. They want to believe their government. Their leaders give them permission to believe. They are asked to believe and they do.
Don't ask, don't tell takes on an entirely new meaning.
The meek and the freak shall inherit the future. Let the normals eat each other.
My new T-shirt slogan: "Prove you're not a zombie."
The children are not our future: they are THEIR future. Our future has been consumed by us.
nice, very nice dan, thank you
My fear, the wants of the over 40 crowd may choke off the opportunities of the ones coming after us.
My new T-shirt slogan: "Prove you're not a zombie."
I'm pretty sure I saw a Hallmark card with this in it just the other day.
it does seem some people lack the courage to ask and probe and challenge, but then, i'm not one for anyone to expect to rush the mountain top in a hail of bullets ;-)
some of that fear, for some of us with more than a few years on us, may be sorta justified
i remember seeing in the early 70's, on a small tv, innocent people on the street corners in manhattan being rounded up with "radicals" because there wasn't time to check to see who was who...
i also remember the images of the kent state students "inadvertantly" shot dead by our own national guard troops...
it was shortly after that i think, that the "movement" well, moved on...
not a paid plug ;-) but this is one of minyanville's main attractions for me, its mission to educate young and old in the ways of finance; i know it's been important to me this past year or so - it's a way to gain personal power -
best of luck to you, and all of us, michael - keep your outrage and keep searching for ways to channel it, minyanville is as good a spot as any i've found....
It looks to me as though the opportunities have already been choked off, and humans haven't the grace to fall over.
Think "Venus", not "Tropical Paradise", and you see what I mean. The data don't lie: we just deny we see it coming.
Hope is not a plan and panic is not a solution.
I've used a shaper and it doesn't do nice things to metal when it "shapes" it into something else.
Generally, it cuts away the identity of the original piece to make it something I want it to be.
There is no "I" in "Team", but without "me", there's no "meat" in it.
That is exactly where courage comes into play, by stepping outside of the box you were conformed to and make changes. I disagree with your idea that the average person can't. They simply don't wish to. They don't lack the ability, they lack the desire and the courage.
Just because someone was conditioned in a certain manner doesn't mean they must always be that way. We can always break our conditioning. We can always ask the tough questions. But first we must ask them of ourselves. The average person lacks the courage to do so. They can't because they won't until they are forced to.
Sadly we all wish to seek the softer easier way and thus the conditioning is usually effective and permanant.
"That is exactly where courage comes into play, by stepping outside of the box you were conformed to and make changes."
The whole System is designed to herd everyone back inside the fences. If you break out of the fences, then you aren't a proper 'human', and the rest go to war on you.
Try being a vocal atheist and see what happens in this 'free speech' country between the coasts.
I fully agree about the reception you receive when you don't conform to conventional group think. We are treated like slaves and we act like slaves.
One of the tenants of keeping slaves is to condition them to police themselves. Define the parameters, brutalize a few that step out and the rest do the herding for you.
Often the herders are family members as well as so called men of learning, such as religious leaders, doctors, and lawyers and most importantly, our so called (compliant and fawning) free mass media.
