Category Archives: Debtonomics

No Debt Ceiling Debate in the Presidential Race, by Jacob G. Hornberger

Posted on March 17, 2016 | Leave a comment

From Jacob G. Hornberger, founder and president of The Future of Freedom Foundation, at fff.org:

Among the many issues not being debated in the presidential nomination races in both political parties is the matter of the debt ceiling, which both political parties continue to raise each time it is reached. Given that the debt ceiling is an acknowledgment that too much debt is a very bad and very dangerous thing for a government and a nation (See Greece and Puerto Rico), wouldn’t you think that this would be something that would be discussed and debated in the course of a presidential race? Well, apparently not in this one.

Check out this website, which is called the US Debt Clock.org. It shows that the national debt currently stands at $19 trillion. The amount of that debt allocated to each citizen is $59,150.

Advocates of ever-growing federal spending have long maintained that the national debt doesn’t really matter because “we owe it to ourselves.”

It would be difficult to find a more inane statement than that in the annals of history.

The fact is that the government owes all that money to people who own U.S. government bonds and other U.S. debt instruments, including foreign regimes like communist China, which loaned the George W. Bush regime the money he needed to invade and occupy Iraq.

There is one big problem: The U.S. government doesn’t have a giant pool of money that it has saved up to pay what it owes. That means that in order to pay bondholders, including the communist regime in China, what it owes them, the U.S. government must extract the money from the American people.

That’s what taxation is all about. Here is the reality: If the government were to pay off all its debt, it would have to seize and confiscate an average of $59,150 from each citizen. Take a family of four: That would amount to $236,600.

You don’t have that much in savings, you say? Well, let’s add up all your retirement accounts and the equity value of your home. That should get you closer to your share of what the government needs to cover its debt.

What about all the money that the government borrowed? It’s gone. Spent. Poof. You don’t think that the national-security state’s invasion, assassination, and killing machine in the Middle East comes for free, do you? Troops have to be paid. So do “defense” contractors. So do the armaments manufacturers. Don’t forget all the suppliers to the death machine. Everyone, no matter how patriotic, demands to be paid for his service to the national-security state’s death machine.

There is something else everyone should understand: That $59,150 that each citizen owes doesn’t cover what he also owes — and will continue to owe — to seniors for Social Security and Medicare. Ditto for Medicaid recipients. And the same for recipients of education grants, food stamps, farm subsidies, foreign aid, and all the other recipients of welfare largess.

All that money has to be paid too. The reason it isn’t carried on the books as part of the government’s debt is that its welfare, not a bond. Theoretically, a welfare program can be repealed today and so it’s not a legally binding debt. But as a practical matter, as long as the program continues, the money has to be paid. And every American citizen is on the hook for welfare “entitlements” and the federal government’s $19 trillion debt.

To continue reading: No Debt Ceiling Debate in the Presidential Race

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No Free Lunches Be Damned, by MN Gordon

Posted on March 12, 2016 | 1 comment

From MN Gordon at economicprism.com:

“There ain’t no such thing as a free lunch,” is one of the essential axioms of economics. No doubt about it, there’s no getting around this simple truth. Everything has a price.

For example, even if someone buys you lunch the lunch still isn’t free. The opportunity cost, your time to eat the lunch when you could’ve been doing something else, has a price. In addition, even if you don’t consider your time a cost, there’s no denying the fact that someone paid for the lunch. Hence, it wasn’t free.

Nonetheless, despite this simple fact, politicians promise free lunches for the many at the expense of the few. This offense is especially on display during a presidential primary election. Free college. Free drugs. Free housing. Free food.

You name it, there’s hardly a lunch out there this season’s crop of presidential candidates haven’t already laid claim to. This is what they must do to get elected. This is how presidential politics works in a democracy.

We don’t like it. We don’t agree with it. But what we think really doesn’t matter. The facts are lucidly clear. On the national level, the populace has shown for the last 80 years – or more – that they’ll vote for whatever candidate promises the most stuff for free.

Nothing for Something

The politicians know there’s no such thing as a free lunch. But they also know that modern day economic policy is predicated on financing government programs through ever expanding debt. This means someone else, perhaps you, will have to pick the tab.

The Federal Reserve makes it all possible by creating enormous amounts of central bank credit, which is then loaned to the government. This also has the secondary effect of debasing the currency. Obviously, the Treasury welcomes this ongoing dilution of value. Over time it lightens the debt burden and allows them to make good on yesterday’s promises with a currency of diminishing value.

For extended periods this may seem to work remarkably well, on the surface. Spendthrift politicians get elected. The populace collects their ‘entitlements.’ Lunches appear to be free.

When an economy’s demographics are young, and growth is strong, the price of lunches looks minimal. The miracle of getting something for nothing seems possible. But as the economy ages, and growth peters out, debt levels become unsustainable.

Eventually, the bill comes due. The lunches must be paid for. Instead of something for nothing, the populace now gets nothing for something.

In other words, the credit expansion reaches its natural limits when the economy can no longer service the debt. That’s when a breakdown, government default, and depression, must occur to purge the debt – the rot – from the system. Prices, assets, and wages are readjusted so they are in line with the economy. Unproductive activities vanish. New, useful, undertakings rise from the ashes.

To continue reading: No Free Lunches Be Damned

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Are Asian Central Bankers Even Crazier Than Our Own? by Raúl Ilargi Meijer

Posted on February 21, 2016 | Leave a comment

From Raúl Ilargi Meijer at theautomaticearth.com:

That the world’s central bankers get a lot of things wrong, deliberately or not, and have done so for years now, is nothing new. But that they do things that result in the exact opposite of what they ostensibly aim for, and predictably so, perhaps is. And it’s something that seems to be catching on, especially in Asia.

Now, let’s be clear on one thing first: central bankers have taken on roles and hubris and ‘importance’, that they should never have been allowed to get their fat little greedy fingers on. Central bankers in their 2016 disguise have no place in a functioning economy, let alone society, playing around with trillions of dollars in taxpayer money which they throw around to allegedly save an economy.

They engage solely, since 2008 at the latest, in practices for which there are no historical precedents and for which no empirical research has been done. They literally make it up as they go along. And one might be forgiven for thinking that our societies deserve something better than what amounts to no more than basic crap-shooting by a bunch of economy bookworms. Couldn’t we at least have gotten professional gamblers?

Central bankers who moreover, as I have repeatedly quoted my friend Steve Keen as saying, even have little to no understanding at all of the field they’ve been studying all their adult lives.

They don’t understand their field, plus they have no idea what consequences their next little inventions will have, but they get to execute them anyway and put gargantuan amounts of someone else’s money at risk, money which should really be used to keep economies at least as stable as possible.

If that’s the best we can do we won’t end up sitting pretty. These people are gambling addicts who fool themselves into thinking the power they’ve been given means they are the house in the casino, while in reality they’re just two-bit gamblers, and losing ones to boot. The financial markets are the house. Compared to the markets, central bankers are just tourists in screaming Hawaiian shirts out on a slow Monday night in Vegas.

I’ve never seen it written down anywhere, but I get the distinct impression that one of the job requirements for becoming a central banker in the 21st century is that you are profoundly delusional.

Take Japan. As soon as Abenomics was launched 3 years ago, we wrote that it couldn’t possibly succeed. That didn’t take any extraordinary insights on our part, it simply looked too stupid to be true. In an economy that’s been ‘suffering’ from deflation for 20 years, even as it still had a more or less functioning global economy to export its misery to, you can’t just introduce ‘Three Arrows’ of 1) fiscal stimulus, 2) monetary easing and 3) structural reforms, and think all will be well.

Because there was a reason why Japan was in deflation to begin with, and that reason contradicts all three arrows. Japan sank into deflation because its people spent less money because they didn’t trust where their economy was going and then the economy went down further and average wages went down so people had less money to spend and they trusted their economies even less etc. Vicious cycles all the way wherever you look.

How many times have we said it? Deflation is a b*tch.

To continue reading: Are Asian Central Bankers Even Crazier Than Our Own?

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Is This Debt’s Last Rattle? by Raúl Ilargi Meijer

Posted on February 12, 2016 | Leave a comment

By Raúl Ilargi Meijer at theautomaticearth.com:

What we see happening today is why we called our news overview the “Debt Rattle” 8 years ago. The last gasps of a broken system ravished by the very much cancer-like progress of debt. Yes, it took longer than it should have, and than we thought. But that’s pretty much irrelevant, unless you were trying to get rich off of the downfall of your own world. Always a noble goal.

There’s one reason for the delay only: central bank hubris. And now the entire shebang is falling to bits. That this would proceed in chaotic ways was always a given. People don’t know where to look first or last, neither central bankers nor investors nor anyone else.

It’s starting to feel like we have functioning markets again. Starting. Central bankers still seek to meddle where and when they can, but their role is largely done. It’s hard to pinpoint what exactly started it, but certainly after Kuroda’s negative rate ‘surprise’ fell as flat on its face as it did, and then fell straight through the floor and subsequently shot up through the midnight skies, a whole lot more ‘omnipotence credibility’ has disappeared.

Kuroda achieved the very opposite of what he wanted, the yen soared up instead of down -big!-, and that will reflect on Yellen, Draghi et al, because they all use the same playbook. And the latter so far still got a little bit of what they were shooting for, not the opposite. Still, one could also make a good case that it was Yellen’s rate hike that was the culprit. Or even Draghi’s ‘whatever it takes’. It doesn’t matter much anymore.

Though what should remain clear is that it was in their interference in markets to begin with, as extremely expensive as it has been extremely useless and dumb, that the real guilt resides. Or we could take it even a step further back and point to the credit bubbles blown in the west before 2008. Central banks could have let that one go, and allow it to run its natural course. Instead, they decided they should inflate their own balance sheets. What could go wrong?

Then again, these inane policies concocted by a bunch of bankers and bookworm academics who don’t even understand how their own field works, as Steve Keen once again explained recently, would have blown up in their faces long before if not for China’s decision to join in and then some. Some $35 trillion, that is.

Money, debt, spent on ghost cities and on what now turn out to be ghost factories. Ghost jobs, ghost prosperity,a ghost future. Makes us wonder all the time what people thought when they saw China used as much cement in 2011-2013 as the US did in the entire 20th century. Did anyone think that would continue for decades, even grow perhaps? Have we lost all sense of perspective?

To continue reading: Is This Debt’s Last Rattle?

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The Chart of Doom: When Private Credit Stops Expanding… by Charles Hugh Smith

Posted on February 5, 2016 | Leave a comment

It really is just about as simple as Charles Hugh Smith makes it in this article. From Smith at oftwominds.com:

Once private credit rolls over in China and the U.S., the global recession will start its rapid slide down the Seneca Cliff.

Few question the importance of private credit in the global economy. When households and businesses are borrowing to expand production and buy homes, vehicles, etc., the economy expands smartly.

When private credit shrinks–that is, as businesses and households stop borrowing more and start paying down existing debt–the result is at best stagnation and at worst recession or depression.

Courtesy of Market Daily Briefing, here is The Chart of Doom, a chart of private credit in the five primary economies:

Why is this The Chart of Doom? It’s fairly obvious that private credit is contracting in Japan and the Eurozone and stagnant in the U.K.

As for the U.S.: after trillions of dollars in bank bailouts and additional liquidity, and $8 trillion in deficit spending, private credit in the U.S. managed a paltry $1.5 trillion increase in the seven years since the 2008 financial meltdown.

Compare this to the strong growth from the mid-1990s up to 2008.

This chart makes it clear that the sole prop under the global “recovery” since 2008-09 has been private credit growth in China. From $4 trillion to over $21 trillion in seven years–no wonder bubbles have been inflated globally.

To continue reading: The Chart of Doom: When Private Credit Stops Expanding…

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Crisis Progress Report (16): It’s Gone! by Robert Gore

Posted on February 3, 2016 | 8 comments

Sixteen trillion dollars is a lot of money. That is approximately the size of the combined balance sheets of the world’s major central banks: the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People’s Bank of China. It is 35 percent of their nations’ GDPs, up from only 14 percent in May 2006, when balance sheets summed to just shy of $6 trillion.

Here’s a larger number: $225 trillion. That’s the estimated global grand total of individuals’, businesses’, and governments’ nominal debt. It is over 14 times as large as major central bank balance sheets; the smaller figure is 6.23 percent of the larger figure. In the good old days when central bank balance sheets were larger relative to total debt, economics students were taught that when a central bank expanded its liabilities (currency and member bank deposits), the expansion had a multiplier effect as it worked its way through the banking system (those liabilities were sometimes called “high powered money”). In the good old days, a 166 percent increase in central bank liabilities in just ten years would have produced rip-roaring economic activity and galloping inflation. Pull out the end of the year polls of economists since 2006 and that has been the annual consensus, without the colorful adjectives: stronger growth and a pick up in inflation.

The economists have fixated on the smaller number and ignored the larger one. They rarely look at debt as an economic input that affects investment, production, and consumption. Like every other input, increasing debt leads to diminishing marginal returns. Debt’s return is automatically negative when it finances consumption, which yields no economic return versus debt’s interest and repayment burdens. Too much debt can lead to negative marginal returns for speculation, investment, and production as well, because as they increase, their expected returns decline below the costs of additional debt. It is safe to assume that with $225 trillion in global debt versus roughly $76 trillion in gross world product, the marginal return on debt, much of which has funded consumption, is negative. It is also safe to assume that most income streams are implicitly or explicitly servicing debt, and that most assets serve as either implicit or explicit security for one or more loans.

People are rational—sometimes—and when the real costs of debt outweigh the psychic` benefits of consumption, they usually seek to reduce debt. Enterprise does so as well when returns on speculation, investment, and production are below the hurdle rate implied by prevailing interest rates. Governments can temporarily exempt themselves, but even they eventually run into reality. As the marginal return on debt goes negative, debt is paid down or written off, liquidity is hoarded, and the velocity of money slows.

Central banks have been trying to foster credit expansion, but other than facilitating governments going deeper in debt and promoting speculation, their actions have had no discernible economic impact. Contrary to the textbooks, increases in their balance sheet liabilities, which are primarily reserves of the banking system, now has no multiplier effect at all. They either lie inert on banks’ balance sheets or, for the large money center banks, transmogrify into funding for their speculative activities.

Because what used to be high-powered money—fiat currencies plus banking system reserves with the central bank—is now no-powered money, in the inflation versus deflation battle, central bank units will be matched, unit for unit, against non-central bank debt. That’s $16 trillion against $225 trillion, which is why deflation has taken the lead and will win. If credit contracts a mere 6.23 percent, either through voluntary reduction, rescheduling, or repudiation, that offsets all central bank debt.

In response, central banks can theoretically issue an infinite amount of their own debt to exchange for an infinite amount of assets, but most central banks already have three digit debt-to-equity ratios (which would get them shut down if they were private banks). Every asset they purchase is subject to price risk, so it would require only a small price “correction” to wipe out their equity. Central banks don’t mark to market, and their governments make up losses and recapitalize them when necessary. That shifts the loss to those funding the government: taxpayers and creditors. However, from the standpoint of economic analysis, the most important point is the loss, not who bears it.

The more central banks have used their powers, the less powerful they have become. Negative interest rates, and proposals to ban cash and hand out fiat debt are last gasp confessions of complete impotence from a snow shovel brigade in front of an avalanche. The credit contraction underway will wipe out much more than 6.23 of the world’s debt, and it will wipe out the central banks, no matter how much government debt they monetize, savings and wealth they confiscate through negative rates and cash bans, and fiat debt units they paradrop. Most of what the world today reckons as wealth is simply someone’s debt (or worse, a residual after debt has been paid, i.e., equity), and as debt contracts, the world will come to a painful realization about its “wealth”: It’s Gone! At that point, pick your analogy: the avalanche buries the town, the dominoes fall, the skyscraper of cards collapses, the bubble bursts. The last analogy can be extended: no amount of central banks and government huffing and puffing will re-inflate the bubble.

Manias are a herd phenomenon; sanity restoration an individual project. Eventually, some, maybe enough, individuals will rediscover enduring truths. Deferred gratification, saving, investment, production, hard work, voluntary exchange, and honest capitalism are real. Fiat debt from central banks and governments, taxation, regulation, and crony capitalism are shell games designed to extract compliance and every last penny from the rubes. While waiting for sanity restoration to kick in, realize that if you can’t touch an asset or hold it your hand, it’s not an asset on which you can depend. Prepare accordingly.

AND IT’S GONE!

IF YOU DON’T READ NOVELS, MAYBE IT’S

BECAUSE YOU HAVEN’T FOUND A GOOD ONE

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AMAZON

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A Dangerous Moment for Social Security, by Justin Spittler

Posted on January 27, 2016 | 1 comment

From Justin Spittler at caseyresearch.com:

Social Security funds are drying up…will there be any money left when you retire?

Social Security is America’s largest federal program. In 2015, it paid out $870 billion to more than 59 million Americans.

Most Americans see Social Security as a retirement savings program. During your working life, you pay 6.2% of every paycheck to Social Security. In return, the government sends you a check every month after you retire.

However, unlike a retirement plan like a 401(k), the money you pay into Social Security doesn’t land in your own personal account. Instead, it goes into one big pot called the “Social Security Trust Fund.”

The Social Security program pays retirees from this pot. As long as enough money flows into the pot, the program works, and retired people get the payments they expect.

• Last year, the Social Security Trust Fund lost money…

On Wednesday, Investor’s Business Daily reported (emphasis ours):

The Social Security Trust Fund just suffered its first annual decline since Congress shored up the retirement program in 1983.

The unexpected $3 billion decline is an indication of the precarious state of Social Security’s finances. Since 2010, the program has been paying out more in benefits than it gets in tax revenue.

In 1955, there were 8.6 workers paying into Social Security for every one person receiving Social Security. Today, due to America’s aging population, there are just 2.8 workers for every recipient. And that number will decline as the “baby boomer” generation continues to retire.

The Congressional Budget Office (CBO) expects Social Security to go broke within 13 years, according to Investor’s Business Daily.

Social Security’s cash shortfall is expected to rapidly escalate from $74 billion a year to $361 billion in 2025 alone, the Congressional Budget Office projects. Under current policies, the CBO says the trust fund will be gone by 2029.

• To fix Social Security, the government would need to cut benefits by 29%…

According to Investor’s Business Daily, this would bring the program’s costs in line with how much money it takes in.

The average retiree receives $1,355 each month from Social Security. A 29% cut would reduce that to $962 per month.

That’s not going to happen. Because senior citizens are a huge voting bloc, most politicians consider Social Security benefits to be untouchable.

• The U.S. government will continue to make promises it can’t keep…

To keep the scheme going, Washington will run bigger deficits. It will go deeper into debt.

To continue reading: A Dangerous Moment For Social Security

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With EMs And SWFs Pushing Markets Lower, Here Are The Three Dramatic Conclusions, by Tyler Durden

Posted on January 25, 2016 | Leave a comment

The second of two important articles from Tyler Durden at zerohedge.com, citing Citi’s analyst Matt King:

Earlier today we showed an amazing schematic courtesy of Citi’s Matt King: if one includes the reserve liquidation by various EMs and SWF, and nets it against liquidity injections by DM central banks (and the PBOC), one gets a perfect quantitative, not just qualitative, walk-thru on how to trade markets: in other words one can measure, using high frequency data in real-time, just where markets should trade based on liquidity flows, and promptly profit from any arbitrage opportunities.

But aside from the potential for substantial profits, there are more profound implications. Matt King lays them out as follows:

If this relationship were to continue to drive markets, it would point to three conclusions.

First, if outflows from EM continue to be “worse than previously thought”, as the IIF put it this week, that may continue to weigh also on developed markets. We recommend the IIF’s monthly ‘portfolio flows tracker’ as the best high-frequency indicator as to how those flows are developing; we also use data from those EM central banks that promptly publish reserves information as a guide to the broader universe.

Second, the relationship suggests individual central banks are considerably less in control of their own destinies than they might have hoped. Our rates strategists have already pointed out that long-term inflation expectations in Europe and the US have more in common with a global – Chinese – factor than with domestic wage and price developments. With the current magnitude of EM outflows seemingly entirely offsetting ongoing ECB and BoJ QE, it seems fair to wonder whether the sorts of increases likely from the BoJ next week and the ECB in March will have as great an effect as investors seem to be hoping.

Third, the fact that just one variable, with nothing in common with credit or equity fundamentals at all, does such a good job of explaining changes in market prices is in itself disturbing. It points to just the sort of herding effects we have argued were in play all along, and suggests that recent complaints of illiquidity, and sudden bouts of volatility, are being driven by more than just regulatory constraints on dealer balance sheets. Such a relationship leaves little room for heterogeneous market views.

To continue reading: With EMs and SWFs Pushing Markets Lower, Here Are The Three Dramatic Conclusions

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The One Chart Which Explains “Why Markets Are All Falling Down” by Tyler Durden

Posted on January 25, 2016 | Leave a comment

This article and the next one, both by Tyler Durden at zerohedge.com citing analyst Matt King at Citigroup, are  important.   From Durden:

Yesterday we felt like a brief moment of gloating was deserved, when we noted that, based on the WSJ’s reporting, the somber mood among Davos “prominent investors” and billionaires was “irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long…. from this anecdotal sampling, at least, that has created growing distortions in nearly all asset prices—from stocks to bonds to real estate.”

In other words, precisely what we have said all along. But there is much more work to do before the victory lap, most importantly in explaining what happens next.

Well, since it is now common knowledge that it is all about central bank and rigged markets, the next logical step is to predict what happens to markets when looking at “asset prices” from a purely central bank liquidity standpoint, aka the Austrian money flow perspective.

Here, we remind readers that in early 2013, just as the BOJ was preparing to unleash an epic QE episode in order to offset the lost liquidity injections which the Fed’s upcoming taper would lead to, we explained that instead of looking at central banks as standalone entities operating within their own liquidity domains, one has to look at global liquidity as a coordinated whole, one in which every central bank is now an integral cog and where inside money liquidity is not only globally fungible, but transferable from point A to point B at the push of a buy or sell button.

And while for the longest time many, including us, were focused on DM central banks, over the past year a new market participant emerged: Emerging Markets, whose $7 trillion in reserve assets had become a source of reverse liquidity, or “quantitative tightening” as dubbed here over the summer, as numerous nations have been forced to liquidate USD-denominated assets to compensate for the loss of trade exports and oil revenue in the aftermath of the death of the Petrodollar which initially was noticed on this site alone and subsequently everywhere else.

Which brings us to the topic of this post, namely “why are markets all falling down?” and the answer by Citigroup’s iconic, and one of Wall Street’s very best, analyst Matt King who adds that “many investors have been struggling to explain the magnitude and violence of the recent sell-off. Why are EM and commodity price weakness proving such negatives for DM as a whole?”

To continue reading: The One Chart Which Explains “Why Markets Are All Falling Down:

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Davos, Dalio, and a Depression?! by Bill Tilles and Len Hyman

Posted on January 24, 2016 | Leave a comment

From Bill Tilles and Len Hyman at wolfstreet.com:

When Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, referred to a possible economic depression as he was being interviewed at the World Economic Forum at Davos, it does not mean what most people think it means.

Most of us think about recessions and depressions in a linear way. That is, a depression is a really, really bad recession featuring even higher levels of unemployment and lower overall levels of economic activity.

But for Mr. Dalio, recessions are kind of normal, business-cycle related economic events that regularly occur every 5-10 years or so. The economy begins to overheat, the Fed raises rates in response (the removal of the “punch bowl”), business activity slows perhaps a bit too much in response, and voila! A recession results.

Depressions on the other hand are secular or long term, occurring much less frequently. That’s because according to Mr. Dalio, it takes a long time (perhaps decades) to accumulate the excess levels of corporate and government debt that end up triggering this type of economic event. A depression is a condition where more debt cannot be added to the system and instead it must be reduced, or as we say, deleveraging must occur. A depression always threatens systemic solvency.

There are several hallmarks of a systemic deleveraging or depression if you will:

  1. Various asset classes begin to be sold (like oil and gas wells today for example)
  2. As a result of these widespread asset sales, prices decline
  3. Equity levels decline as a result
  4. This triggers more selling of assets
  5. Since there is less worthwhile collateral available credit levels contract.
  6. Overall economic activity declines. In short, there isn’t enough cash flow being generated to service all the accumulated debt. As a result assets have to be sold, bankruptcies become more common

What makes this such a pernicious process is that it is a self-reinforcing cycle of economic negativity.

To continue reading: Davos, Dalio, and a Depression?!

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