Archive for the ‘Financial Crisis’ Category
There’s a much bigger cliff than the so-called fiscal cliff. The absolute worst result of the fiscal cliff would be a moderate uniform tax increase at a bad time, resulting in a moderate contraction. It is an obvious — but ultimately rather cosmetic — stumbling block on the so-called “road to recovery”.
The much bigger cliff stems from the fact that the so-called recovery itself is build on nothing but sand. This is a result of underlying systemic fragilities that have never been allowed to break. I have spent the last year and a half writing about this graph — the total debt in the economy as a proportion of the economy’s output:
This is the bubble that won’t go away. This is the zombified mess that the Federal Reserve won’t let dissolve (as happened regularly in the 19th century and early 20th century each time there was an unsustainable debt bubble). This is the shifting sand — preserved by the massive monetary stimulus programs — that the so-called recovery is built upon. During the 1980s and 1990s and 2000s cheap money pumped up the debt level in America. In 2008, the bubble burst, and the hyper-connective fragile financial system was set to burn. Then central banks around the world stepped in to “stabilise” (or as Nassim Taleb puts it, overstabilise) the financial system. The unsustainable reality of debt vastly exceeding income was put on life support.
A high pre-existing residual debt level makes growth challenging, as consumers and producers remain focussed on paying down the pre-existing debt load, they are drained by pre-existing debt service costs, and they are wary about taking on debt or investing in a weak and depressed environment. It’s a classic Catch-22. The only true panacea for the depression is growth, but the economy cannot grow because it is depressed and zombified. That’s where a crash comes in — the junk is liquidated, clearing the field for new growth. That is what Schumpeter meant when he talked of “the work of depressions”, something that many mainstream economists still fail to grasp. (In fairness, a similar effect can probably be achieved without a depression through a very large scale debt relief program.)
Japan has been stuck in a deleveraging trap for twenty years, to no avail, all that has really occurred is that the private debt load has been transferred onto the central bank balance sheet —there has been very little net deleveraging) and while the Japanese central bank has completed round after round of quantitative easing — sustaining and preserving the past malinvestment and high debt load — the Japanese economy is still depressed.
That is the road America and most of the West are now on. And just as Japan’s bank stocks did multiple times even after the Japanese housing bubble burst, American banking stocks — even in spite of a year of fraud, abuse, mismanagement and uber-fragility — have been shooting up, up, up and away:
The zombie financial sector is the real cliff — as interconnective as ever, as corrupt as ever, and most importantly, nearly as leveraged as ever:
This is a reinflated bubble built on foundations sand. I don’t know which straw will break the illusion (middle eastern war? Hostility between China and Japan? Chinese real estate and subprime meltdown? Student debt? Eurozone? Natural disasters? Who knows…) but this bubble poses a far greater threat in 2013 than the fiscal shenanigans and the Boehner-Obama “Boner-Droner” snoozefest.
The weather conditions in the middle part of the country during the last couple of months have been highly unusual. The following is from a recent article in the Los Angeles Times….
It’s not that the Midwest hasn’t been extremely hot before, and it’s not that it hasn’t been incredibly dry.
But it’s unusual for a vast swath of the Midwest to be so very hot and so very dry for so very long — particularly this early in the summer.
The current heat wave — which is spurring comparisons to the catastrophic heat of 1936 – is “out of whack,” meteorologist Jim Keeney said Friday in an interview with the Los Angeles Times.
Corn crops typically pollinate and mature in June and early July. That is why this time of the year is so vitally important for corn. We have reached a make it or break it moment.
The following is how an Accuweather.com report described what is happening right now….
Either heat or drought can stress the stalks, but both can basically shut down the pollination process. When this happens few, small or no ears of corn form.
According to AccuWeather.com Agricultural Meteorologists, you can’t raise a corn crop with less than an inch of rain over six weeks, combined with 100-degree and higher temperatures. However, these conditions have taken place in much of the southern corn belt through the week of July 4, 2012.
If pollination does not happen, corn farmers might as well give up.
Just check out what agricultural economist Chris Hurt said the other day….
“Pollination problems just can’t be overcome, even if the weather turns. There’s no turning back. There’s just failure.”
At this point, half of all corn in the state of Indiana is already in poor shape.
With each passing day, the condition of the corn gets even worse.
As a recent article in the Chicago Tribune detailed, many farmers feel completely helpless at the moment….
Dave Kestel, who farms about 1,300 acres in Manhattan about 40 miles southwest of Chicago, said he feels helpless.
“Every day you get out there and it’s the same heat and cloudless sky,” he said. “You see your corn just withering out there, knowing you can’t do anything about it.”
The United States is suffering from a severe lack of rain. Just look at the chart posted below. According to the U.S. Drought Monitor, most of the country is experiencing drought conditions right now….
These drought conditions have also played a major role in the huge number of wildfires that we have seen lately.
There are a few northern states that are not feeling the drought right now, but otherwise the rest of the country is extremely dry.
So what does all of this mean for you and I?
A recent article by Holly Deyo summarized why we should all be praying for rain….
Since 75% of grocery store products use corn as a key ingredient, expect food prices to skyrocket. Corn is also a staple in many fast foods. Corn is in ethanol and the main food source or chickens. In addition to this, maize is in many things that aren’t obvious like adhesives, aluminum, aspirin, clothing starch, cosmetics, cough syrup, dry cell batteries, envelopes, fiberglass insulation, gelatin capsules, ink, insecticides, paint, penicillin, powders, rugs and carpets, stamps, talcum, toothpaste, wallpaper, and vitamins. That’s just for starters…
This is a huge heads up for you to purchase corn-using products NOW before these conditions reflect in grocery goods. It will be a narrow window of opportunity.
These thoughts are being echoed by many agricultural economists as well. According toBusinessweek, the outlook for U.S. food prices is bleak….
“When people look at rising prices for hamburger, butter, eggs and other protein sources from higher corn costs, that’s when more money ends up in the food basket,” said Minneapolis- based Michael Swanson, a senior agricultural economist at Wells Fargo & Co., the biggest U.S. farm lender. “We were hoping for a break, and we aren’t going to get it.”
Unfortunately, the fact that the corn is dying all over America is not just a problem for the United States.
As Businessweek also recently noted, the fate of U.S. corn affects the entire globe….
When rain doesn’t fall in Iowa, it’s not just Des Moines that starts fretting. Food buyers from Addis Ababa to Beijing all are touched by the fate of the corn crop in the U.S., the world’s breadbasket in an era when crop shortages mean riots.
This year they have reason to be concerned. Stockpiles of corn in the U.S. tumbled 48 percent between March and June, the biggest drop since 1996, the U.S. Department of Agriculture said last week. And that was before drought hit the Midwest.
The United States is the world’s biggest exporter of corn by far, and if there is a massive corn crop failure in America it is going to be felt to the four corners of the earth.
Just check out what Abdolreza Abbassian, a senior economist with the U.N. Food & Agriculture Organization, said the other day….
“Everyone watches the U.S. because they can rely on it. Without it, the world would starve.”
Back in February, I wrote an article that suggested that we could see dust bowl conditions return to the middle part of this country in the years ahead.
A lot of people were skeptical of that article.
Not quite as many people are skeptical today.
The following is from a recent article posted on MSNBC entitled “Fears of new Dust Bowl as heat, drought shrivel corn in Midwest“….
Crop insurance agents and agricultural economists are watching closely, a few comparing the situation with the devastating drought of 1988, when corn yields shriveled significantly, while some farmers have begun alluding, unhappily, to the Dust Bowl of the 1930s. Far more is at stake in the coming pivotal days: with the brief, delicate phase of pollination imminent in many states, miles and miles of corn will rise or fall on whether rain soon appears and temperatures moderate.
As I wrote about last week, if the weather does not turn around soon the implications are going to be staggering.
Even if we got some significant rainfall at this point a tremendous amount of damage has already been done according to the Washington Post….
Jay Armstrong, owner and operator of Armstong Farms in Kansas, flew his small plane over a portion of the affected area and landed with the impression that the potential damage is far worse than is commonly understood.
“At this time of year, when you look down in a place like Indiana or Illinois, you should see just lush green fields,” Armstrong said. “I saw bare soil. I just thought to myself, the market has no idea what’s coming.”
So is there significant rain in the forecast?
Unfortunately, the answer is no.
The National Weather Service says that the corn belt will experience “above-normal temperatures” and “below-normal rainfall” over the next week.
At this point it does not look like there will be any significant rainfall for the foreseeable future….
“We got a break in the temperatures over the weekend but no rain of significance is in sight for next seven days,” said Jim Keeney, a meteorologist for the National Weather Service the US central region based in Kansas City, Missouri.
Needless to say, that is really bad news.
Right now we just have more heat and more dryness to look forward to. The skies are like iron and the earth is like brass. We like to think that we have conquered nature, but at moments such as these we see that is not true at all.
A couple of weeks ago I wrote an article about all of the reasons why we should be concerned aboutthe second half of 2012. In that article I did not even mention drought and crop failures. Sometimes major problems have a way of piling on top of themselves.
The U.S. economy is already in bad enough shape without adding major crop failures to the mix. This is something that we just don’t need right now.
But it looks like we are going to have to deal with it. Unless there is a major change in the weather, food prices are going to go up even more and large numbers of farmers and ranchers are going to be absolutely devastated.
Let us all pray for rain. We desperately need it.
I’m going to reprise a Ticker from 2011-10-18, which you can read here if you want the original, but in a political context.
There was once a nation that was comprised of fish. The fish lived in a pond that was 64×64 in size, or 4096 square units of surface area. As with all fish they survived on dissolved oxygen in the water, which came to the water by exchange with the atmosphere above. Plants grew in the water, receiving their energy from the sun while recycling the waste emitted by the fish as nutrients, and the fish ate the plants. All was well in the nation of fish.
But the economy of fish was limited by its growth. Some of the bottom where the fish lived was rather rocky, and not much suited to cultivation of aquatic plants. Some of the bottom was fertile, and beneath still more were various rare and natural treasures, such as energy sources that the fish could use for manufacturing.
One day a bright fish that worked for a bank called “Goldfishbank” got the idea that since plants were food, and more growth is better, the nation would be served by faster “growth.” He introduced to the pond a species of lilly that reproduced very rapidly. In fact, it produced a new lilly once each day. He began by placing just one lilly of one unit of size, or 1/4096th of the surface of the pond, in the water.
The next day there were two, and the fish nation cheered. Then four, and the fish nation demanded that this fine fish be President. Then eight, and all was even better in the world.
There were, however, some fish that became alarmed, for they had not been sleeping in school. They knew, as well, that their very survival depended on the exchange of oxygen with the air above, and that absent this exchange all of the fish would surely die.
The great prosperity that appeared to flow, however, led the scholars to be shouted down.
Unfortunately the great prosperity resulted in the price of fish dwellings, foods and fuels rising precipitously. The credit created by all of this growth, which had heretofore appeared to be impossible, made everyone feel wealthy. After just eight days what was 1 lilly had become 128; both great and permanent prosperity appeared to have blessed the fish.
Two days later the pond was 12.5% covered with lillies.
But in the middle of this prosperity there was much corruption and theft. The interest rates charged to lend money were corrupted by some of the fish banksters, who reasoned that they were merely making very smal changes in what they reported, and due to the leverage they employed, reaping billions of profits. This they did by stealing pennies from each fish per day. Nobody would jail them.
There were other fish that were involved in lending for dwellings, and they too scammed the public. Some of the lenders collapsed, yet they paid only small fines while most of the fish suffered monstrous losses, with many losing their homes.
Still other parts of the fish economy were involved in health care, and they got laws passed to make differential pricing, cost-shifting and other monopoly behavior protected, for this was their way to riches. Soon the fish nation spent twice as much on health care as a percentage of its economy as all the other fish nations, but all these monopoly protections, enacted into law, were not seen as the corruption they were.
Unemployment became a problem and the fish nation saw its standard of living decline. This was puzzling, for the proponents of the new lily had said that such prolific growth would lead to permanent prosperity. There were many who claimed that the lily was simply not prolific enough, and that means must be found to spur even more lilies to grow.
The three major political parties sparred over the unemployment and economic malaise. The two largest ones offered that taxes should be increased on the most-fortunate fish and that taxes should be decreased for all fish, respectively. But neither put forward a plan to cut down the size of the government, which was sapping an increasing amount of the economy.
The third party decided to state that it should cut the size of the government by 43%. But it refused to address the main growth drivers of the government, that being the medical industry’s special protections. Nor did that party appear to give a damn about all the scams and frauds, which had stolen monstrous amounts of wealth from all the fish.
Soon the political debate within that third party turned to whether fish should be able to smoke pot, which was currently prohibited under penalty of law, and whether a fish named Steve should be able to marry one named Larry. Some fish believed this was a civil right and of the utmost importance, while others believed it was Satanic.
Yet these were the only points of political debate on which this third party focused, instead of on the financial institutions that had skimmed off all the “prosperity” that had been promised to the fish nation by the Goldfishbank and others in the financial industry, along with the medical industry that had lobbied for their special protections and which were bankrupting the fish nation’s government.
A few of the third party analysts saw that in point of fact the lily issue was soon to kill all the fish and the entire fish nation economy. They were poo-pooed and called alarmists, for the sun was still visible in the sky above, and their rising stridency was called “divisive” or that “if you simply changes your approach you could actually influence people.” They were even told that their commentary was “self-righteous.”
But that commentary, labeled “divisive” and in fact dismissed with “that ends our conversation and damages both our working relationship and friendship” was based the simple fact that while just 12.5% of the pond was covered, the entire fish nation was only three days from extinction, and the last two days had been wasted arguing over gay marriage and dope smoking instead of addressing the impending and mathematically-certain disaster.
Government promises to public employees have created “zero-risk” Wonderlands protected from the market forces of risk and consequence. These islands of privilege are snapping back to join the real economy.
Every government entity that reckoned it was moated from the market economy will be snapped back to “discover” risk and consequence. Let’s lay out the dynamic:
1. Every government can only spend what its economy generates in surplus.
2. Every government transfers risk and consequence from itself, its employees and its favored vested interests to the citizenry and taxpayers.
3. Every government collects and distributes the surplus of its private sector to its employees, favored constituencies and vested interests.
4. Since the government (State) promises guaranteed salaries, benefits and entitlements to its employees and favored constituencies, these individuals believe they are living in a risk-free Wonderland that is completely protected from the market economy.
5. Risk cannot be repealed or eliminated, it can only be masked or transferred to others.
6. The Federal government and the Federal Reserve have pursued a policy of inflating serial speculative credit-based bubbles.
7. These bubbles inflated assets, profits and taxes, creating the illusion that blow-off speculative tops were “the new normal.”
8. Speculative credit-based bubbles misallocate capital and incentivize malinvestment on a spectacular scale.
9. Once the bubble deflates, the capital is lost or trapped in illiquid malinvestments.
10. As a direct result of the dot-com bubble, Stockton’s tax revenues (general fund) leaped to $139 million in 2001. As a direct consequence of the housing bubble, it jumped to $186 million in 2007.
11. This “new normal” encouraged the belief that the stock market would double or triple every decade into the future, generating 8%+ annual returns for public union employee pension funds.
12. The city government granted employees open-ended guarantees of lifetime healthcare coverage.
13. This meant that there was no limit on the cost of each employee’s benefits.
14. As noted here many times, healthcare costs rise by 7%-10% every year, even as the economy which supports healthcare grows by 2% on average.
15. Healthcare alone will bankrupt the nation, and the bankruptcy of entities that promised open-ended healthcare is merely one manifestation of the coming bankruptcy of the entire sickcare/entitlement Status Quo.
16. Once the stock market reverts to the mean and is revalued to the “new normal” of global recession and low earnings growth, it will decline by 40% or more and yields will remain around 2%.
17. Pension funds earning 2% at best based on expectations of permanent 8% returns cannot sustainably pay the benefits promised.
18. If the city attempts to make up the shortfall annually, the services provided to the citizenry will be gutted. The risk and consequence of malinvestment and favoritism has been offloaded onto the citizens while those protected by the government moat live “risk-free” lives of guaranteed pensions and benefits.
19. The public-employee pension and healthcare benefits were separated from the market economy with this government guarantee: regardless of what happens in the real economy, you will be paid pensions and benefits that have zero exposure to the market economy and private-sector pensions/benefits.
20. In effect, the government has placed its employees and vested interests in a moated “risk-free” zone outside the market economy. The risk that is distributed to all participants in an open market (i.e. a democracy) is transferred to the citizens and taxpayers.
21. Any government that siphons off an increasing share of its taxpayers’ disposable income (to distribute to the privileged few) in return for declining services will eventually be overthrown by the citizenry and taxpayers who must bear the full consequences of the city’s mismanagement of their capital and income.
22. Every city, county and state in the U.S. which has secured a risk-free wonderland for its favored few will “snap back” into the real economy and face the discipline of the credit market and the “discovery” of price and value.
23. Risk cannot be eliminated by government mandate, it can only be transferred to others. No government entity can maintain a “risk-free” fortress outside the market forever. The moat around Wonderland will be drained or filled, regardless of what promises were made.
24. Government has no mechanism to transparently price risk, value and return on investment. The market will “discover” all these and re-set government services and salaries accordingly.
Charles Hugh Smith – Of Two Minds
Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals.
Sorry, Bucko–Europe is still in a financial death spiral. Friday’s “fix” changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:
1. Growth was dependent on borrowing money and blowing it on consumption and malinvestment. Replacing old impaired debt with new impaired debt does not generate growth.
2. Borrowing more money to pay the interest on past borrowing will not generate growth. Money must be borrowed to pay the interest and additional money borrowed to fund current consumption. As interest increases, this creates a geometric increase in debt and interest costs.
3. Borrowing more money to fund current consumption is a death spiral, as the interest payments eat up future revenues, starving productive investment and future consumption.
4. Borrowed money must be backed by either collateral or future income streams. The collateral remaining in malinvestments (villas in Spain, etc.) is either impaired, near-zero or simply non-existent. There is no legitimate collateral on which to base more borrowing.
5. Future income streams are already committed to paying interest on past debt and mandated consumption (entitlements, government payrolls, etc.), so there is no legitimate collateral on which to base more borrowing.
6. Interest rates will rise as investors question whether their capital will be returned in full or if it will be returned in depreciated currency.
7. Export-based economies will contract as China’s expansion slows to a crawl. Future projections of national income are overly optimistic.
8. As income is bled off to pay rising interest, there is less money available for consumption or investment. Without investment, income declines. As taxes rise, there is less private-sector income available for either investment or consumption. This is the “austerity death spiral,” and borrowing more for State malinvestment will not halt it.
The more money that is borrowed to maintain Status Quo consumption, the higher the future interest payments. This is a financial death spiral.
9. There is no collateral for more borrowing, but “growth” depends on more borrowing.
10. Transferring bad debt to central banks does not mean interest will not accrue: interest on the debt still must be paid out of future income, impairing that income.
11. Lowering interest rates does not create collateral where none exists.
12. Lowering interest rates only stretches out the death spiral, it does not halt or reverse it.
13. Centralizing banking and oversight does not create collateral where none exists.
14. Europe will remain in a financial death spiral until the bad debt is renounced/written off and assets are liquidated on the open market.
15. Anything other than this is theater. Pushing the endgame out a few months is not a solution, nor will it magically create collateral or generate sustainable “growth.”
16. The Martian Central Bank could sell bonds to replace bad debt in Europe, but as long as the MCB collects interest on the debt, then nothing has changed.
The Martians would be extremely bent when they discovered there is no real collateral for their 10 trillion-quatloo loan portfolio in Europe.
Charles Hugh Smith – Of Two Minds
The USSC upheld Obamacare by, basically, twisting the Constitution into a pretzel, crapping on it, whizzing on that and then eating it.
Finding first that the Commerce Clause bars the government from compelling one to enter into commerce, the analysis then turned to whether there was any way to save the constitutionality of the act.
The justices found one.
They re-interpreted the penalty clause as a tax.
And of course, Congress can levy taxes.
That’s the path taken by this tortured process — a path that could only be dreamed up if someone had already determined the outcome they sought instead of being an independent jurist.
The real surprise, however, is that Chief Justice Roberts, believed to be a strict constructionist on the court, managed to not only agree with this piece of tortured logic he found and constructed it as the opinion is his!
So much for judicial restraint and strict construction!
You really ought to read the dissent that starts on page 127 of the opinion. Justice Scalia, Thomas, Kennedy and Alito eviscertate the majority, saying in part:
Here, however, Congress has impressed into servicethird parties, healthy individuals who could be but are not customers of the relevant industry, to offset the undesirable consequences of the regulation. Congress’ desire to force these individuals to purchase insurance is motivatedby the fact that they are further removed from the marketthan unhealthy individuals with pre-existing conditions, because they are less likely to need extensive care in the near future. If Congress can reach out and command even those furthest removed from an interstate market to participate in the market, then the Commerce Clause becomes a font of unlimited power, or in Hamilton’s words, “the hideous monster whose devouring jaws . . . spare neither sex nor age, nor high nor low, nor sacred nor profane.” The Federalist No. 33, p. 202 (C. Rossiter ed. 1961).
What little was left of The Constitution died today, June 28th, 2012.
And incidentally, the math on federal health spending coupled with this decision means that by the time a 55 year old man reaches 85 (his life expectancy, roughly) the Federal government will be attempting to spend roughly $15 trillion a year on health care.
(No it won’t, no we won’t get that far, and the detonation of our government on the fiscal side is now assured — or your health care will be sacrificed. This is mathematics, not politics.)