Archive for August 14th, 2011
Since 81% of all stocks are owned by the top 10%, a stock market crash has little effect on the bottom 90% of Americans.
It is assumed without question that the stock market is some quasi-sacrosanct barometer of the U.S. economy. But who even cares if the market crashes? Only the top 10% who own it. Yes, millions of (generally government) workers have an indirect stake in stocks and bonds via their state/union pension funds, but it’s still informative to look at the distribution of who actually has a stake in the market’s rise and fall.
This data is from pre-recession 2007, so I suspect ownership has become even more skewed to the top 5% as those below liquidated stocks to pay the bills as household income and housing equity plummeted.
So 81% of stocks are owned by the top 10%, and 91% by the top 20% of households. Thus we can conclude that 11.7 million out of the nation’s 117 million households will actually be adversely affected by a stock market crash, while the consequences to the remaining 105 million households will be slight to zero.
A severe decline in the “wealth effect” would probably crimp the top 10% tranche’s carefree spending, which accounts for some 40% of the nation’s consumer spending. If the market crashes, high-end retailers and restaurants would likely see sales fall significantly. While there would be consequences, we should be careful not to overstate the stock market’s role in the nation’s Main Street economy.
And what are the chances of a real crash? For insight, we turn to the The Chart Store‘s chart overlaying the current rally and collapse with the Dow circa 1907.The similarity is rather uncanny:
The only difference is the Fed launched QE2 late in 2010, which kept the rally alive for another 6 months. But as we can see, it didn’t change the future decline, it simply set it forward a few months: the current market has now caught up with the 1907 decline.
The past is simply one possible pattern of many to consider, but the remarkable similarity of these two charts suggests that there may be more downside ahead.
One last point: those who exited the stock market won’t care if it crashes because they opted out of playing the risky game altogether.
Charles Hugh Smith – Of Two Minds
Steve over at Two Beers With Steve interviewed Charles Hugh Smith last week. To listen to the podcast click here.
“Is The World Going Bankrupt?”
That is an odd question.
If some people are losing money, others must be gaining money, right?
But where is all the money going?
Bloomberg’s Jonathan Weil hints at the answer in a post entitled “Is There Enough Money on Earth to Save the Banks?”
Two years ago the central planners convinced investors that the biggest surviving financial institutions would be able to earn their way back to health, in part through low interest rates and taxpayer support. The pressing question soon may be whether there is enough money on the planet to save the system as we know it, and if so, how much longer it will be before a crisis comes along that finally swamps the ability of governments to contain it.
One-hit wonders such as Fed-induced stock-market rallies can induce euphoria momentarily. They don’t fix the big problem.
As I’ve previously noted, the giant banks are drawing the American and world economy down into a black hole. If we don’t break up the giant banks now, they’ll be bailed out again and again, and virtually all independent economists and financial experts say that will drag the world economy down with them.
Indeed, many economists and financial experts say that we’ll have a never-ending depression or perpetual zombification unless the banks and bondholders are forced to write down their bad debt.
But the question remains: if all of the world’s money (of the Western world, anyway) is draining out, where’s it going to?
A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.
A “jobless recovery” is basically a redistribution of wealth from the little guy to the big boys.
Economist Steve Keen says:
“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.
And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.
The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …
… and ending up in the pockets of the top .1% richest people.
… but expecting a different result.
The policy wonks have all been out the last couple of weeks extolling the “virtue” of the need to “stimulate” the economy now, but have fiscal restraint later.
Of course “later” is defined as “when I leave office” and now is defined as “give the people more cake.”
This sort of neo-Keynesian claptrap is easy to swallow politically, since it panders to two things – the inevitability of fiscal tightening (but not now when the pain will be apparent) and the desire of people to vote for a living. Unfortunately it is black-sharpie-marker religion, just as it has been over the years for many politicians and “captains of industry” who have professed piety in some form – yet then get caught diddling a Congressional page or ripping off little old ladies.
Keynes, may I remind everyone, called for stimulus spending during recessions but increased taxes, primary surplus and retiring the debt taken on during the last recession during booms.
The problem of course is that Keynes’ theories are never followed in the real world. We had an alleged “boom” from 2003-2007, but taxes were not raised and deficits were not turned into surpluses. Instead we deficit spent each and every year.
Never mind the empirical evidence from the last four years. In 2007 I said that further “stimulus” would not work for one simple reason: The common man – the ultimate party who must spend in order for the economy to expand, had levered himself up to the point of exhaustion and thus was incapable of financing further economic expansion through borrowing.
This was no trivial amount of money either – at the height of the bubble just before it blew up in 2007 nearly one out of every three dollars in GDP was newly borrowed rather than being earned!
On a quarterly basis what we tried to do is evident right here:
There’s no way out of this box folks, except the hard way. We have pretended that we can offshore our productive jobs to China and India, yet enjoy the fruits of the assembly of all those “things” here – without the productive jobs to produce the wealth necessary to buy them with. We push paper instead of tools, skimming off bigger and bigger pieces of every transaction. Banks squeal like stuck pigs when limits on their extortion are proposed as law, such as with the credit and debit card interchange fee rules that were being considered.
Through all of this we’re admonished that we must be “compassionate” for those “less fortunate.”
It is true that some percentage of people are truly less fortunate. But that percentage is small.
Most of the “less fortunate” are in fact victims of serial financial abuse promulgated by banks and other financial institutions. We call this “progress” but it is nothing of the sort; it is in fact serial financial rape and those practicing it laugh all the way to their tawdry homes in The Hamptons while we fight over political crap such as “Gay Marriage.”
Unfortunately for those who look down their noses at the rest of us they pushed things too far. All the payday loans, subprime mortgages and confiscatory rates on credit cards did indeed entice people to believe they were “rich” when in fact they were only pretending, but mathematics doesn’t care if you’re rich or poor, honest or dishonest. It just is. 2 + 2 will always equal 4, no matter how many times someone claims it’s 6. The claim can be made all one desires but when the fourth orange is removed from the pile, there are no more – despite the belief that one can in fact consume two more oranges.
Thus we find ourselves in a policy corner. Bernanke knows this, and despite his claim that we would not reproduce the Japanese experience he has found himself backed into exactly that box.
It’s rather simple: Rather than force those who had done imprudent things, whether they be individuals or big banks, to come clean and quite possibly go bankrupt, Bernanke, like the Japanese Central Bank, tried to play Volcker in letting the banks “earn their way out of the hole.”
Unfortunately for Ben it didn’t work this time, exactly as I predicted it wouldn’t. Why not? Because it couldn’t – the consumer, the ultimate party who would have to more than double his indebtedness in order to provide enough “skim” to get the banks back to even, is out of credit capacity both as a matter of being able to cover the payments and willingness to take them on.
Our financial system has become much like the vampires in Daybreakers. Realizing that biting people in the neck provides only one meal, the banks have “captured” the people instead. But there’s a limit to the amount of blood you can suck out of a person in a day without killing them. Originally it seems easy – just take a little bit and all will be well, turning the people into something that’s literally farmed.
But along the way you run into a major problem – people don’t reproduce well when under restraint like this. More to the point they don’t produce productive citizens that can be harvested – they produce more leaches instead!
We have now reached the global point where these schemes and scams no longer are operative. Italy is just the latest example. They are passing a balanced budget amendment to their constitution, which is good. But that will inevitably shrink GDP for a while. In turn that means the banking system there has a problem in that new credit acceptance will crater – as it must.
Here in the United States we now have a “SuperCongress” that allegedly is going to draw up some $1.5 trillion in “cuts.” They won’t. First, they’re not “cuts” – they’re reductions in the rate of increase. There are no cuts. But more to the point there are simply too many people who effectively pay no federal taxes at all – through EITC and similar schemes they live federal tax free. The argument that the rich must pay their “fair share” is both hollow and immaterial, since there are simply not enough rich to cover the deficit irrespective of the tax rate you assess. In fact, you could steal all their wealth (not income, wealth!) and you’d cover the deficit all right – for one year. But now, by doing that, you would have turned every rich man into a poor man, and then the next year comes. With nothing left to tax, what do you do now?
The cold, hard truth is that we, along with the other western nations, have run into the wall of spending other people’s money. Eventually the “other people” run out of money – or credit. Unbacked credit emission is a scam – it is nothing more than promising to work tomorrow for that which you want to consume today. When used for speculation or consumption it is a Ponzi scheme that must eventually collapse, as anyone who has the mental fortitude to spend 5 minutes with Excel can ascertain.
The simple fact of the matter, mathematically, is this:
No sector of the economy, nor the economy as a whole, can acquire debt at a faster rate of growth than productive output increases in the economy. This is mathematically proved up in literal seconds and no amount of political or monetary manipulation can change the eventual outcome if this path is undertaken.
Those who claim otherwise are the ones with the burden of proof to show exactly how, in detail, one can avoid the inevitable outcome that the laws of mathematics demand.
What’s even worse is that for each day that this practice continues the amount of damage that the economy must absorb to return to balance increases. This too is a mathematical fact and cannot be avoided. Only by growing debt slower than productive output, or in the case of output shrinking causing outstanding debt to shrink faster, can stability be regained!
Those on the other side of this argument – which happens to comprise a whole lot of people – must be challenged to show their work and explain how basic mathematical relationships that everyone learns in their first algebra class – when the power function is introduced – can be avoided.
The entire point of the book Leverage, due out in November (and which you can pre-order now), is that it should never have had to be written. Every person who has passed basic algebra has the tools to understand what is going on in our economy and has been for decades – and how it must end. Computer spreadsheet and graphic programs such as Excel make understanding the outcome easier, but they’re not necessary. Back when I was in junior high and high school we plotted functions using graph paper; we didn’t have computers, as at the time the TRS-80 Model I had just been introduced in my 9th grade year.
That the 300-odd million people in the United States, and several-billion worldwide, fail to grasp the outright fraud put forward by a handful of people parading around PhDs while at the same time willfully ignoring basic mathematical functions that they cannot avoid is ridiculous. That our schools have failed to teach our youth how these basic mathematical functions apply to every day life and the economy is an outrage – that is an intentional act of malfeasance for which each and every one of those instructors, Principals and board members should literally be thrown into the gulag with the key tossed down the sewer.
There’s no wonder that these institutions and individuals fail to do this, of course. The very existence of their pension and medical “insurance”, particularly in retirement, cannot be defended once these mathematical realities are understood by the public! It is therefore essential for them to be able to suck off their alleged “benefits” from you, the taxpaying public, that you not understand these basic mathematical relationships. These “educators” are literally attempting to enslave your children and in a just world they would be brought up on felony abuse charges for doing so.
Likewise in the broader economy Medicare, for example, cannot continue to exist in its present form. It is a scam. The Medicare tax is 2.9% of wages. Median family income as of 2008 (last year for which detail is available from US Census) was approximately $50,000. This means the median family pays $1,450/year in Medicare tax, assuming all their income is taxable (of course this is not the case, but we’ll assume it is.)
Over a 45 year working life (20 – 65) the median family pays $65,250 in Medicare tax.
The median family contains, today, about 1.5 working people (many families are single-earner – either one adult with kids, or an adult alone.) We’ll be kind and assume that the median family contains just one working adult – that is, no married households at all.
Here’s the problem: The average person will consume approximately $300,000 in Medicare-reimbursed medical expenses during the time period from retirement to death.
Would you care to explain how you can pay $65,000 for something (in reality, more like $40,000 on average over your working life since there are many married households) but have each person (not household) collect $300,000 from that same program and not have it blow up?
When you hear people like Steve Southerland (and others) say that “Nobody 55 and over should have their Medicare touched” you’re hearing a man or woman who refuses to face the mathematical facts – retirees are taking some five times as much out in benefits as they paid in.
These same sorts of mathematical relationships exist throughout our financial system. None of them are sustainable. The simple fact of the matter is that debt cannot be used to finance consumption or speculation on a sustainable forward basis. Mathematically debt must grow slower than productive output does or the economic system in question is destined to collapse.
We can argue over the “when” all we want, but so long as this relationship holds we are not arguing over the outcome – only the timing is subject to debate.
This week’s wild actions on Wall Street should serve as a stark reminder that few investors have any clue as to what is really going on beneath the surface of America’s troubled economy. But this week did bring startling clarity on at least one front. In its August policy statement the Federal Reserve took the highly unusual step of putting a specific time frame for the continuation of its near zero interest rate policy.
Moving past the previously uncertain pronouncements that they would “keep interest rates low for an extended period,” the Fed now tells us that rates will not budge from rock bottom for at least two years. Although the markets rallied on the news (at least for a few minutes) in reality the policy will inflict untold harm on the U.S. economy. The move was so dangerous and misguided that three members of the Fed’s Open Market Committee actually voted against it. This level of dissent within the Fed hasn’t been seen for years.
Many economists have short-sightedly concluded that ultra low interest rates are a sure fire way to spur economic growth. The easier and cheaper it is to borrow, they argue, the more likely business and consumers are to spend. And because spending spurs growth, in their calculation, low rates are always good. But, as is typical, they have it backwards.
I believe that ultra-low interest rates are among the biggest impediments currently preventing genuine economic growth in the US economy. By committing to keep them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Low rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little.
It may come as a shock to some, but just like everything else in a free market, interest rate levels are best determined by the freely interacting forces of supply and demand. In the case of interest rates, the determinative factors should be the supply of savings available to lend and the demand for money by people and business who want to borrow. Many of the beneficial elements of market determined rates are explained in my book How an Economy Grows and Why it Crashes. But allowing the government to determine interest rates as a matter of policy creates a number of distortions.
It was bad enough that the Fed held rates far too low, but at least a fig leaf of uncertainty kept the most brazen speculators in partial paralysis. But by specifically telegraphing policy, the Fed has now given cover to the most parasitic elements of the financial sector to undertake transactions that offer no economic benefit to the nation. Specifically, it will simply encourage banks to borrow money at zero percent from the Fed, and then use significant leverage to buy low yielding treasuries at 2 to 4 percent. The result is a banker’s dream: guaranteed low risk profit. In other words it will encourage banks to lend to the government, which already borrows too much, and not lend to private borrowers, whose activity could actually benefit the economy.
This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments. American investment capital will continue to flow abroad, denying local business the means to expand and hire. It also destroys interest rates paid to holders of bank savings deposits which traditionally had been a financial pillar of retirees. In addition, such an inflationary policy drives real wages lower, robbing Americans of their purchasing power. The consequence is a dollar in free-fall, dragging down with it the standard of living of average Americans.
Until interest rates are allowed to rise to appropriate levels, more resources will be misallocated, additional jobs will be lost, government spending and deficits will continue to grow, the dollar will keep falling, consumer prices will keep rising, and the government will keep blaming our problems on external factors beyond its control. As the old adage goes, “insanity is doing the same thing over and over again and expecting different results.”
Peter Schiff for TownHall Finance