Archive for April 30th, 2012
It was rather amusing to read this over the weekend from Bloomberg’s editorial department:
How would all the mortgages for these apartments and houses be funded? Lenders simply followed the people. For decades, urban investors had bought stakes in farm mortgage bonds. With the agricultural economy in such straits and the urban economy booming, groups such as the Farm Mortgage Bankers Association of America (which later dropped the “Farm” from its name) reoriented their sights on the cities, looking for ways to lend to these new urban dwellers, bringing their experience in turning mortgages into bonds.
Banks loved the new invention because it allowed them to skirt regulations. Although the Federal Reserve regulated the proportion of savings that could be lent as mortgages (half of savings deposits) there were no restrictions on mortgages funded by bonds. These bonds, however, had a maximum length of five years, forcing the mortgage debt to be refunded, at minimum, every five years. But since the balloon mortgage, so popular in the 1920s, was refinanced every three to five years, there shouldn’t have been a problem as long as more investors could be found.
Did you detect the elements of a Ponzi Scheme in there? You should have.
In point of fact the reason this collapsed is the same as the reason it collapsed this time around — the “values” lent against were nothing but hot air and when the next sucker failed to appear to buy at a higher price the scheme collapsed. Since the borrower was never able to perform to maturity on the original terms it was mathematically impossible to avoid the collapse; we were simply arguing over when, not whether, the collapse would occur.
The same thing happend this time around. And just like the in 1930s the government this time bowed to political pressure and refused to force those who made bad loans — knowing full well that they could not be performed on their original terms, and that the collateral was not worth the amount lent — to eat their own cooking and collapse.
Having pemitted regulations to be “skirted” (a convenient word for counterfeiting) there were in fact only two options — lock everyone up who engaged in these frauds, starting with the CEOs of the financial institutions involved, clawing back every nickel they had in the process, or attempt to transfer the debt to the taxpayer in some fashion.
The government did the worst of all of it. FDR not only allowed the depositors of the institutions involved to get hosed he also didn’t lock the banksters up and he transferred the losses to the citizens — even those who had not been a part of the scams — through currency devaluation.
In short he did basically what we’ve done this time and the result was the destruction of our economy for more than a decade, ending only when we entered WWII.
There is no answer to these dilemmas once the government turns a blind eye or worse, becomes explicitly involved in public frauds of this sort. The choices are only to prosecute and force those who committed the evil acts to eat them or to force everyone in the economy to eat them and protect the politically powerful who committed the crimes.
The simple fact of the matter is that at the root of this crisis, as it was in the 1930s, is counterfeiting by the lending institutions involved. The lending of money against nothing but hot air depresses the value of the currency which drives the price of assets and the real income of earners in opposite directions. This is inherently a fraud upon the public in each and every instance, committed with license and therefore given “legality” by the government in question as that which is counterfeited is the nation’s currency.
There is no solution that can be found to this problem until it is faced head-on and stopped.
Simply put so long as banksters are allowed to counterfeit the currency we are arguing over whether we’d like to be financially raped a bit, some or deeply and long rather than whether we’re going to suffer this ignoble act at all.
It becomes even worse when, as has happened this time around, the counterfeiting becomes part and parcel of how government funds itself. Government borrowing is inherent vice — a perhaps-necessary vice in a handful of circumstances (e.g. declared war) but nonetheless it is inherent vice, as government never borrows against value, it borrows against the promise that you will get up and go work tomorrow to pay taxes – the very definition of “hot air” unless enforced at gunpoint (at which point we call it what it is — slavery.)
There is nothing wrong with borrowing against actual market value of an asset — that is, liquifying that asset for the purpose of commerce. That sort of lending is essential to modern commercial flows; without letters of credit, for example, international trade would be nearly impossible at any rational level of risk.
But as soon as you allow someone to lend money unbacked by anything — that is, not backed by the actual liquidation value of the asset nor actual capital put forward by an investor or equity holder then you have committed a public fraud. You have allowed the lending institution to counterfeit the currency in question by increasing its quantity in the market simply on whim.
This is exactly identical, in mathematical and economic terms, to the lending institution running off stacks of $100 bills on the office copier. That act, when performed, is universally recognized as a serious felony worthy of prosecution and incarceration.
It is no different in economic and mathematical impact when a bank creates credit money out of thin air, backed by nothing other than a promise to get out of bed and go to work tomorrow, irrespective of whether that credit money is created by The Fed or a commercial bank.
We will never solve our economic problems until we face the mathematical reality of what has been done and thus why these acts must, in each and every instance, fail and lead to economic ruin.
“Headline” government data is massaged, falsified or spun for the purpose of perception management: believe the headlines at your own risk.
Modern investing offers the promise that investors who “do their homework” and use data more intelligently than the herd can gain a valuable edge. But what if the underlying data available to the investing public is fundamentally flawed?
The federal government agencies that issue headline data and the mainstream media that reprints the data without skeptical analysis would have us believe that these indicators — the unemployment rate and the consumer price index (CPI), for example — accurately reflect economic realities.
The other indicator that is implicitly or explicitly assumed to reflect the economy’s health is, of course, the stock market, generally represented by the S&P 500 index.
That the government indicators and the stock market are both suspect is now a given.
The chart below, one of many possible examples, proves this suspicion is well-founded. This is a chart of a broad measure of employment in the U.S. published by the U.S. Department of Labor, Bureau of Labor Statistics (BLS). As we can see, when 140 million people had jobs in 2009, the official unemployment rate was 7.3%.
Yet when 140 million people had jobs in early 2012, the unemployment rate was 8.3%. How can the rate change when the number of jobs remain constant? The reason is that the unemployment rate is based not just on the number of jobs but on the number of people who are ready, willing and able to work—the labor force. The unemployment rate is based on the labor force minus the number of employed equals the number of people counted as unemployed.
The government games the unemployment rate by keeping the labor force number artificially low. Despite the working-age population rising by 9.4 million people since 2008, the official labor force has been 154 million since 2008. Where did the government put all those millions new workers? In the “not in the labor force” category, which rose by roughly 8 million since early 2009. In other words, dropping millions of people from the labor force artificially lowers the unemployment rate.
It doesn’t take any fancy analysis to conclude that if the true labor force were counted, then the unemployment rate would be much higher — and that is, of course, politically unacceptable.
So the numbers are gamed, massaged, adjusted… However you choose to describe it, the “headline number” of unemployment reflects political expediency, not reality.
The same can be said of the CPI and a slew of other headline data points issued by the government and blithely accepted by a corporate mainstream media committed to presenting the “recovery” as real.
If We Can’t Trust Headline Indicators, What Can We Trust?
If these headline indicators are not a reliable reflection of economic reality, what is?
To the degree that any government statistic can be massaged, seasonally adjusted, or simply rejiggered behind the curtain, we must always be alert to the possibility that numbers have been gamed for political expediency.
But the farther we move away from headline numbers, the farther we also get from the political pressure to make the numbers either positive or benign. For example, relatively few people are going to study chart PRS85006173, showing labor’s share of the non-farm business sector (i.e., the vast majority of the economy).
This charts reveals that labor’s share of the economy has been falling sharply since the dot-com top in 2000, and has been in a downtrend of lower highs and lower lows since 1982. This suggests that the number of counted jobs (which includes part-time, temporary, and self-reported self-employed) may be less valuable as a metric of economic recovery than income and labor’s share of the economy.
Indeed, if income is adjusted for inflation, then real household mean incomes have been declining since the housing-credit bubble topped in 2006-7:
In the following chart, income is not adjusted, and so it appears to be resuming its decades-long ascent. But if we add household debt, then another picture emerges, one of household debt rising far faster than income. Debt must be serviced, and rapidly rising debt imposes a burden on household income. Income may be rising in nominal terms, but if it is declining in real terms and the debt that must be serviced out of that income is skyrocketing, then how meaningful is nominal income?
Rather than reflecting meaningful growth, the apparently rising nominal income deceptively masks the reality of declining real income and avoids the costs imposed by a stratospheric rise in debt.
Since income is taxed, then tax receipts are another measure of income. Obviously the amount collected depends on the tax rates that are in effect for that year, so tax receipts may decline if tax rates fall. Nonetheless, in aggregate, tax receipts are a metric that is difficult to game or “seasonally adjust” to serve political expediency.
Here is a graph of total federal tax receipts.
Note that the data is not adjusted for inflation; it is nominal. We can see the sharp declines in federal tax receipts after the dot-com and housing bubbles popped, along with the resurgence of tax receipts in the “recovery.”
According to the BLS, what cost $1 in 2008 now costs $1.07 — an absurd under-reporting of inflation by many analysts’ calculations. But the point here is that tax receipts remain well below 2006 peaks; they are also 7% less just from the loss of purchasing power. If official inflation is grossly underestimated, that loss might well be much greater. In other words, simply getting back to the previous peak in nominal terms still leaves tax receipts down 7%-10% (or more) in real terms.
The recent resurgence in tax receipts can be presented as evidence of “recovery.” But just as the financial health of households can only be measured by plotting both income and debt, we must look at government debt, not just its income. Here is a chart of federal debt held by the public — that is, all federal debt excluding “intergovernmental” debts that arise from the government “borrowing” (i.e., expropriating) Social Security funds.
Notice how the federal government borrowed/squandered $6 trillion from 2008 to the present. Once we understand the enormity of this unprecedented borrow-and-spend policy, it is underwhelming to find that $200 billion “trickled down” in increased federal taxes paid.
Since virtually all workers drawing a wage or salary and all self-employed people with a meaningful net income pay Social Security taxes, the next chart, ‘Contributions for Social Insurance,’ offers a reasonably accurate reflection of actual earnings.
This decline is at odds with nominal increases in income and supports the notion that earned income is actually declining regardless of how many jobs are being counted (or imagined) by government agencies.
How about all of those corporate profits, which are presumably the foundation of the stock market’s glorious double from March 2009 lows? Corporate taxes have yet to recover pre-recession levels, too; perhaps this is the result of American corporations’ famous ability to lower tax liabilities, or perhaps the recovery in real corporate profits hasn’t been quite as spectacular as is broadly assumed.
No enterprise can be accurately assessed without understanding its profit and loss statement and balance sheet of assets and liabilities, and why should it be any different for households and government? In looking at the income and debts of both households and our government, we have a more balanced and accurate assessment of the “recovery” than that afforded by politically expedient headline numbers.
In Part II: The Three Key Indicators to Watch, we ask the question, what investment-actionable indicators of financial and economic reality can we rely on?
The “good” news is that the options of potential outcomes for the macroeconomic picture are narrowing, making the future a little easier to predict and plan for. The sobering truth is that the narrowing choices ahead of us each involve a magnitude of pain we’d rather avoid. Now more than ever, investors need reliable compass points by which to navigate.
Click here to access Part II of this report (free executive summary; enrollment required for full access).
Spain’s sickly economy faces a “crisis of huge proportions”, a minister said on Friday, as unemployment hit its highest level in almost two decades and Standard and Poor’s downgraded the government’s debt by two notches.
Spain has tried to do what we tried to do, what Greece tried to do, what the rest of the EU tried to do — continually borrow and spend money to prop up a monster lending bubble.
This strategy failed because it mathematically must fail. It is impossible for it to succeed over the intermediate and longer term, irrespective of what politicians would like or what they promise the people.
De Guindos also said Spain would increase the value-added tax and other indirect taxes next year, but would seek to reduce payroll taxes. Spain has a low VAT compared with other European countries even after raising it in 2010.
Which will cause GDP to contract further, since that which you tax must come out of either “C” (consumption) or “I” (investment.)
But — simply cutting spending doesn’t avoid this outcome. That reduces “G”, which in turn reduces GDP.
The problem we continually have in this country and in Europe is that we keep doing the same things that led us down the hole, attempting to protect the banksters who made loans that cannot be covered. Spain remains unwilling to actually force those who made the bad loans to eat their own cooking, even if it chokes them:
Spain’s government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers.
That relieves nothing. It is either a scam (that is, it transfers nothing) or it takes the bad debts of private entities and transfers them to the taxpayer, thereby turning them into permanent impairments in the economy that then must be financed and covered from tax revenues.
The latter is an open, public and outrageous act of fraud and sedition that deserves prosecution, imprisonment and were we to still have the original Coinage Act, capital punishment.
The simple fact of the matter is that there is no resolution to these problems until and unless budgets are reconciled with current taxes. That’s the beginning and end of it; that which we demand government provide in services, whether here or elsewhere, must be paid for with current tax revenues.
I know this is politically unpalatable but it simply doesn’t matter — addition hasn’t changed its fundamental character ever in history, and neither has subtraction.
The sooner we stop lying to ourselves and governments stop lying to the people the better off we will all be.