Stabilization
By Mr Practical May 27, 2009 3:10 pm
We need lower debt, not higher; we need production, not lending.
Of course we have stabilized. The government has bankrupted our future to do it. The government(s) control the LIBOR market, the swaps market, the bond markets with all the “money” they are printing. They are feeding “money” to banks under the table at an alarming rate.Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.
Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it. In 2002 consumer debt as a percentage of disposable income was an all-time high of 90%.
Apparently that was still low enough to spur consumers into borrowing money against their houses and spend it. This drove the ratio up to 135%! By the first quarter of 2009 the ratio dropped to about 130%. Just look at what damage that did as consumers tried to get out of some debt. The ratio is still at least 125% (we will know for sure in at the end of June as the numbers are quarterly). There's no way to know for sure, but logic says to reflate from that high level of debt is going to be virtually impossible.
The government is going all out socializing markets and the economy. This is the exact opposite approach I would take. We need lower debt, not more. We need production, not lending. Unfortunately I offer no solutions other than let an economy grow from the bottom up, by savers finding a good investment and lending to entrepreneurs. When the government provides capital (printing) money, it crowds out production.
Risk is very high.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
(18)
Reply
2009-05-27 15:21:17
Meat for the Lions
When the circus animal handlers are paid to throw meat to the lions, is it surprising to see that they continue to do so even when they've been told it's killing the Lions?
Not only do the politicians and the so called government financial experts continue to throw meat to the hungry public but the willingly deluded public demands even more.
The average American will not tolerate a recession/depression unless they are guaranteed they won't suffer from it, regardless of if it's needed or not. We've been conditioned to believe we no longer need to take our medicine. So we won't until it's forced upon us through massive unemployment and great social dislocation.
The public could stop these political and financial games in a New York minute if they wanted to. They don't and thus it won't stop until the greatest amount of damage is done.
Not only do the politicians and the so called government financial experts continue to throw meat to the hungry public but the willingly deluded public demands even more.
The average American will not tolerate a recession/depression unless they are guaranteed they won't suffer from it, regardless of if it's needed or not. We've been conditioned to believe we no longer need to take our medicine. So we won't until it's forced upon us through massive unemployment and great social dislocation.
The public could stop these political and financial games in a New York minute if they wanted to. They don't and thus it won't stop until the greatest amount of damage is done.
2009-05-27 16:13:26
Grist for the Mill
Tax payers pay the ultimate price for their debt as well as the govt's, so moving private debt to public debt punishes the frugal.
Debasement is happening faster than inflationary pressures. Prices don't have to be bid up for goods purchased overseas to become more expensive..... if the currency is no good as well as the debt being bad, prices are impacted.
Check the Treasury results today. The dollar is having a technical bounce but headed lower against even other fiat currencies from countries in trouble.
The light at the end of the tunnel is a freight train with no brakes.
Debasement is happening faster than inflationary pressures. Prices don't have to be bid up for goods purchased overseas to become more expensive..... if the currency is no good as well as the debt being bad, prices are impacted.
Check the Treasury results today. The dollar is having a technical bounce but headed lower against even other fiat currencies from countries in trouble.
The light at the end of the tunnel is a freight train with no brakes.
2009-05-27 17:06:35
states are next
48 out of 50 states are in SERIOUS FINANCIAL TROUBLE
and they are playing the one up game with the cities and counties
which will result in HIGHER PROPERTY TAXES
throw on some PUBLIC DEBT and we have a problem HOUSTON
What I see coming isn't pretty and people are ill prepared for this one
and they are playing the one up game with the cities and counties
which will result in HIGHER PROPERTY TAXES
throw on some PUBLIC DEBT and we have a problem HOUSTON
What I see coming isn't pretty and people are ill prepared for this one
2009-05-27 17:20:47
The American peasants are getting exactly what they deserve from "their" government,
nothing.
2009-05-27 19:11:31
Do we have the political will to reduce debt and increase productivity?
Mr. Practical, I agree with your analysis of the problem. However, Japan and Western Europe also suffer from extremely high debt (especially sovereign). I believe that since the 1930s the governments of the developed countries have used and encouraged debt to keep living standards higher than they otherwise would have been. Here is my question—how much of a drop in living standards would the people in Western Europe, the US and Japan have to accept in order for the workers in those countries to be competitive with workers in China and India? And is there a politician alive today that could sell (or who would even try to sell) the early-on reduction in living standards that would result from a liquidation of debt and a return to productive competitiveness? Thank you. Bill
2009-05-27 20:13:21
Debt Hangover
Excellent,
Regarding, "The government is going all out socializing markets and the economy. This is the exact opposite approach I would take. We need lower debt, not more."
You Sir are advocating a rational approach.
This is not what the "Berries" believe in.
They way they deal with problems is (as you describe)
1. Try to push the problem out as far as possible, and focus on short-term "fixes"
2. Try to mask the pain from the public, as this would be unpleasant.
So you get zombie banks, huge government debt, printing of money, pain spread out over longer time spans, etc.
We just had a drunken debt party. So instead of sobering up the patient (leads to a hang-over and bad feelings), the "Berries" will do the old Bloody-Mary cure (More hair of the dog that bit you-have another drink in the morning).
IMHO, all we can do is to try and invest properly, and be politically active.
P.S. The best cure for a hangover is lots of hard work and exercise
Regarding, "The government is going all out socializing markets and the economy. This is the exact opposite approach I would take. We need lower debt, not more."
You Sir are advocating a rational approach.
This is not what the "Berries" believe in.
They way they deal with problems is (as you describe)
1. Try to push the problem out as far as possible, and focus on short-term "fixes"
2. Try to mask the pain from the public, as this would be unpleasant.
So you get zombie banks, huge government debt, printing of money, pain spread out over longer time spans, etc.
We just had a drunken debt party. So instead of sobering up the patient (leads to a hang-over and bad feelings), the "Berries" will do the old Bloody-Mary cure (More hair of the dog that bit you-have another drink in the morning).
IMHO, all we can do is to try and invest properly, and be politically active.
P.S. The best cure for a hangover is lots of hard work and exercise
2009-05-27 20:52:45
Debt and future risk
The high risk is inflation, then. The money being printed is diluting the money in hand. The value of the dollar just doesn't have the grace to fall over yet.
I don't disagree with you at all. I just wonder about the statement that "we need less debt, not more". I wonder because if the dollar is going to be worthless in the near future, shouldn't one go into as much debt as possible and buy things that will be inflated out of reach in the future?
Second rhetorical question: Is that what the government is doing? Not only do they have the power to make the money worthless, but they have the power to spend as much as they want now in preparation for a future where money is useless.
Perhaps someone should start thinking and acting as though the money is already worthless and let us go back to local work/barter/currency and just allow the System of systems to go away.
Food is the new currency and we have to think in terms of basic necessities and invest so that they are not curtailed by the luxury markets' failures (everything but food, water, and BASIC shelter).
I don't disagree with you at all. I just wonder about the statement that "we need less debt, not more". I wonder because if the dollar is going to be worthless in the near future, shouldn't one go into as much debt as possible and buy things that will be inflated out of reach in the future?
Second rhetorical question: Is that what the government is doing? Not only do they have the power to make the money worthless, but they have the power to spend as much as they want now in preparation for a future where money is useless.
Perhaps someone should start thinking and acting as though the money is already worthless and let us go back to local work/barter/currency and just allow the System of systems to go away.
Food is the new currency and we have to think in terms of basic necessities and invest so that they are not curtailed by the luxury markets' failures (everything but food, water, and BASIC shelter).
2009-05-27 23:52:27
If the Fed were to raise interest rates and give people an incentive to save money and in the process, recapitalize the banks, what would the initial impact on businesses be? Obviously, the weak would fail and the cleansing of the economy would begin, but what would the unemloyment landscape look like and how many business could survive in that environment?
I fully agree with your analysis and your lessons have been invaluable to me, so I would like to know what you think the landscape would be if we choose to go down this path Would the initial impact of this be too much to handle, both economically and socially, or do you think it would serve as a catalyst for American businesses to wake up and act with some prudence and manage their risk properly?
Thanks in advance
-Greg
I fully agree with your analysis and your lessons have been invaluable to me, so I would like to know what you think the landscape would be if we choose to go down this path Would the initial impact of this be too much to handle, both economically and socially, or do you think it would serve as a catalyst for American businesses to wake up and act with some prudence and manage their risk properly?
Thanks in advance
-Greg
2009-05-28 02:39:32
Solution
When the engineers of the 1950s realized the smoke spewing out from their factories was toxic they "discovered" they could dilute those toxins by creating smoke stacks that reached far into the sky. "The solution to pollution is dilution" was the mantra of the day. Sixty some years later we live every day with their solution; fish contaminated with mercury and other toxins coming from who knows what smoke stack; forests and natural lakes spanning the globe are in danger of becoming extinct due to toxic rains and beaches in western Africa are contaminated with trash dumped far out into the oceans. The thing is that those toxins spread out and cover the globe because the earth is a closed environment. The atmosphere and oceans dilute and eventually distribute all those toxins; there is nowhere else for it to go.
Much the same way the atmosphere and oceans dilute then distribute airborne toxins and solid waste globally the major governments have diluted and distributed the credit risk globally through their various credit programs.
We all share in these risks equally weather we like it or not, if we participated or not we are all in this together.
Minyan
Terry
Much the same way the atmosphere and oceans dilute then distribute airborne toxins and solid waste globally the major governments have diluted and distributed the credit risk globally through their various credit programs.
We all share in these risks equally weather we like it or not, if we participated or not we are all in this together.
Minyan
Terry
2009-05-28 09:03:48
Do we have the political will to reduce debt and increase productivity?
you have drilled down to the root of the problem. go to mises.org to learn more about life without central banks that manipulate the price of money. globalization by definition equalizes standard of livings. the process over long periods of time will tend to make living standards rise due to increased production. the problem is and has been we have had central banks that have tended to increase the speed and depth of globalization past productive processes. central banks have facilitated this buy increasing overall global debt massively, thus creating imbalances that must be corrected. so they took a natural process, set it on steroids, and now we have all sorts of illness as a result. i have no idea how bad the corrective process will be as we don't know the extent to which governments will insist on continuing bad policy and we don't know when/what the next big productive invention will occur. ex the latter, i would think standard of living in u.s. will fall a fair amount.
2009-05-28 09:12:48
Debt and future risk
No you shouldn't go into debt. if you borrow money you have to buy either a financial asset, like a bond or stock, or a real asset like a house. if deflation continues, as i expect for a while, you will lose on price. if i am wrong and we go rapidly into a hyper-inflation, or dollar devaluation, the financial asset could depreciate as much if a bond and if a stock, it will be incredibly volatile...it may go up alot and then down alot. so your timing must be perfect. but the most important thing is you are increasing your risk when borrowing money. if something happens and you can't pay it back, you will be forced out of your assets just at the wrong time.
2009-05-28 09:16:48
It will be ugly, but not as ugly as the long term implication of socialization on production. i believe the corrective process would be intense, punishing those that are heavily in debt and non-productive, but rewarding those that are productive. cut spending on entitlements and cut taxes on small business. i think we would be pleasantly surprised at how quickly entrepreneurs build new productive business outside the control of government.
2009-05-28 09:55:00
market
I liked this quote about a true free market:
The two parties in a deal have exactly opposite opinions on the value of an asset, and the same opinion on the price of an asset.
The two parties in a deal have exactly opposite opinions on the value of an asset, and the same opinion on the price of an asset.
2009-05-28 10:40:30
Debt and future risk
Well, yes and no. Debt is increasing risk if one expects the system that enforces the debts to remain in place.
When you take the recent assessment of 30 trillion dollars of government debt/promises to tax, and consider that on a 25% tax rate, that means 120 Trillion dollars of taxable income,etc must be produced. TAXABLE income. Since taxable income from production probably runs, what: 50% of the actual processing of resources and labor (on a good, multiple-stage cycle), that's 240 Trillion dollars that must be GDP'd in order for the government to come up with 30 trillion. Exactly how much petroleum that would take, I'm not going to guess.
Somehow I think the dirt on the Monopoly money in the closet is worth more than the local Building and Loan company.
Yes, I'm making up the numbers. Tell me the practical ones while also considering how much the government spends (per user) on 'socialized' medicine for the military, 'socialized' food from farm programs, and 'socialized' libraries for education.
Most of the human activity in this country (the free market) is completely useless stuff, done in the name of a completely useless future, by incomprehensibly stupid human animals.
The 'socialization' that the Obama people are pushing is actually corporate socialism, not socialized programs for useful purpose. "Too big to fail" is an express ticket to the bottom.
When you take the recent assessment of 30 trillion dollars of government debt/promises to tax, and consider that on a 25% tax rate, that means 120 Trillion dollars of taxable income,etc must be produced. TAXABLE income. Since taxable income from production probably runs, what: 50% of the actual processing of resources and labor (on a good, multiple-stage cycle), that's 240 Trillion dollars that must be GDP'd in order for the government to come up with 30 trillion. Exactly how much petroleum that would take, I'm not going to guess.
Somehow I think the dirt on the Monopoly money in the closet is worth more than the local Building and Loan company.
Yes, I'm making up the numbers. Tell me the practical ones while also considering how much the government spends (per user) on 'socialized' medicine for the military, 'socialized' food from farm programs, and 'socialized' libraries for education.
Most of the human activity in this country (the free market) is completely useless stuff, done in the name of a completely useless future, by incomprehensibly stupid human animals.
The 'socialization' that the Obama people are pushing is actually corporate socialism, not socialized programs for useful purpose. "Too big to fail" is an express ticket to the bottom.
2009-05-28 10:45:53
Meat for the Lions
This is a great analogy. But it quickly transposes to a picture of trainer looking down to see that his arm is gone! Only a bloody stub! And the lions licking their chops!!!
2009-05-28 10:52:51
Meat for the Lions
I agree. And this is why the trainers practices the art of (Lion) crowd control and divide and conquer. The trainer understands all too well that if he doesn't maintain control, the Lion will turn on him.
This is why the population is told there are real differences between political parties when in reality those differences reside only on the surface. Under the covers, both parties bow to the power of (election) money and special interest.
And this is why we are in a constant state of war. Fear is the favored crow control method of the powerful and elite. Always has been and always will be. Why? Because it works, at least for a while.
This is why the population is told there are real differences between political parties when in reality those differences reside only on the surface. Under the covers, both parties bow to the power of (election) money and special interest.
And this is why we are in a constant state of war. Fear is the favored crow control method of the powerful and elite. Always has been and always will be. Why? Because it works, at least for a while.
2009-05-28 11:41:37
As far as debt goes...what are the best indicators, ratios, etc to watch to see if debt is actually being reduce/destroyed?
2009-05-29 09:17:14
"But an economy grows from production, not lending at the wrong price."
Pretty much says it all regarding our governments current strategy!
Pretty much says it all regarding our governments current strategy!
Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved
