Category Archives: Economy

China Suffers “Delusion” like 1980s Japan, Faces Long Stagnation, by Wolf Richter

With everything going on in Illinois, Puerto Rico, Greece, Italy, and Spain, among others, it’s easy to take your off the Chinese ball. China is not in danger of imminent default, but the country is in for a long stretch of Japanese-style stagnation. From Wolf Richter at wolfstreet.com:

Sudden Financial Meltdown is less likely.

The Chinese government has the situation under control and will do whatever it takes to keep it under control — that’s in essence what Premier Li Keqiang said today in a speech at the World Economic Forum in the Chinese city of Dalian.

“We are fully capable of achieving the main economic targets for the full year,” Li said. The mandated growth rate this year is 6.5%.

“Currently, China also faces many difficulties and challenges, but we are fully prepared,” he said, according to Reuters. He said this because everyone from the IMF and the New York Fed on down has been pointing at and fretting about the debt powder keg that China keeps filling with ever more volatile compounds.

“There are indeed some risks in the financial sector, but we are able to uphold the bottom line of no systemic risks,” he said. “We are fully capable of preventing various risks and making sure economic operations will be within a reasonable range.”

So the powder keg isn’t going to blow up. As ever more debt is added, the government is pursuing the shift to a consumer-driven economy, while trying to tamp down on excess and outdated capacity in some select industries such as steel and coal. These cuts, Li said, would continue.

“No development is the biggest risk for China,” he said, so China wants to “sustain medium- to high-speed economic growth over the long term.” But given the size of China’s economy, it “will not be easy.” In other words, come hell or high water, credit creation will continue in order to maintain this mandated growth.

So when will this powder keg blow up?

It might not blow up; China might be able to prevent that kind of event, and it is less likely that China will melt down financially despite its terrific credit expansion, and there are no signs of an immediate crisis. But China, like Japan in the 1980s, is suffering from a “delusion” about how to fix its economic problems.

To continue reading: China Suffers “Delusion” like 1980s Japan, Faces Long Stagnation

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The Technicolor Swan, by James Howard Kunstler

An exorcism of the demonic forces in American politics is coming. From James Howard Kunstler at kunstler.com:

When I think of the Democratic Party these days, the image instantly comes to mind of little Linda Blair playing the demon-possessed child in the classic horror movie, The Exorcist (1973), most particularly the scene in which she spews a stream of pea soup-like projectile vomit into the face of kindly old Max von Sydow, as Father Merrin, the priest come to rescue her.

The pea soup represents the sort of ideology that the Democratic Party has spewed out in recent years — a toxic mush of racial identity politics, contempt for men, infantile entitlement tantrums, corporate whoring, and a demonic quest for war with the Russian Federation. Father Merrin, the priest, stands for incorruptible American men, who have been, at last, killed off by this barrage of diabolical idiocy.

Can you think of a single figure in the Democratic faction who dares to oppose the lethal nonsense this party has been sponsoring and spewing? Who are its leaders? Chuck Schumer in the Senate — a mendacious errand boy for Wall Street? Nancy Pelosi in the House, who wears her cluelessness like a laminate of pancake makeup. Got anyone else? Uncle Joe (Biden)? That’s rich. Bernie? (Looks like his wife is about to be indicted on a federal bank fraud rap for running a small Vermont college into the ground. Whoops.)

Who else you got? Governor Andrew Cuomo of New York. I live near Albany, the state capital, and I can assure you that Governor Cuomo is ripely loathed and detested by anyone who has had actual dealings with him. Insiders tell me he makes Nixon look like Mr. Rogers. And this is apart from the fact that he seems to stand for nothing.

To continue reading: The Technicolor Swan

A Jubilee is Coming, by Robert Gore

The greatest debt expansion in history draws to a close.

Conventionally measured economic growth is related to two aspects of debt: its growth rate and its marginal effectiveness. In terms of economic growth, debt should be thought of as a factor affecting production, like the supply and cost of labor, capital goods, and land. A business can increase the supply of whatever goods or services it produces by borrowing money. Whether it does so depends on the cost of debt service versus the expected return from the expansion. As long as the latter is greater than the former, the business should add debt and expand. This analysis applies to an economy as a whole: debt should increase as long as the return from debt is greater than its cost.

The more debt an entity incurs, the less productive each additional unit of debt becomes—diminishing marginal returns. For the global economy, the point has been reached where the benefit of an additional unit of debt is less than its cost. That point was probably reached years ago, but debt-funded consumption, and governments and central banks machinations, have obscured this reality. In GDP accounting, an increase in consumption is treated as an increase in GDP, regardless of where the money came from to pay for it. Increasing debt to fund consumption increases GDP. However, such debt, because it does not fund investment, does not increase production. There is no economic return to offset its costs; it’s economically counterproductive.

For at least the last seventy years, debt in the US has grown faster than GDP. The same is true for most of the developed world, including, since the turn of the century, China. The increasing absolute level of debt relative to GDP has only been partially offset by generally falling interest rates. The debt service burden has increased, debt is increasingly funding consumption, and that which is funding production has run into minimal or negative returns.

DEBT THAT PAYS FOR WAR IS THE STUPIDEST DEBT OF ALL

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If this were happening in a strictly market economy, debt would be reduced, either paid off, rescheduled, or repudiated and written off. However, government and central bank fiat debt—debt that can be incurred in unlimited quantities by governments and central banks—stifles these adjustments. The central bank can use its fiat debt to purchase the government’s fiat debt (debt monetization) and in so doing set the price, or interest rate, for the government debt, influencing the configuration of interest rates throughout the economy.

Some who despair at these machinations conclude that there are no longer any adjustment mechanisms and that the machinations can continue in perpetuity, the tree of some asset prices (equities and real estate) growing to the sky. Perhaps they are right; the global expansion of central bank balance sheets since the last financial crisis is unprecedented; it’s at least a theoretical possibility that it will never end. However, this game of central banks conjuring fiat debt and monetizing governments’ debt (and other financial assets) doesn’t operate in a vacuum, rather it has promoted debt growth in the overall economy. There, signs that the marginal return on debt is now negative, that the burden of debt service outweighs the benefits of debt, are abundant, and debt contraction will happen regardless of the desires of central bankers and government officials. There are only so many private income streams that can pay debt service, only so many private assets that can be collateralized.

Global debt stands at a record 325 percent of global GDP. That number includes government and private debt, but not unfunded pension and medical liabilities. Their inclusion would significantly raise that percentage. As a greater proportion of income is devoted to debt service, a smaller proportion is left for saving and investment, which funds future growth, and consumption.

The long downtrend in global growth confirms the increasing toll of interest and principle repayment. In the most heavily indebted nations—Japan, Greece, Italy, Spain, Portugal, Puerto Rico, Brazil—GDP has been in multiyear contractions. In much of the rest of the developed world’s welfare states—the US and Western Europe—growth has been in long-term decline, and suspect price index calculations and seasonal adjustments cast doubt as to whether those economies are growing at all. In the US, annual growth never reached 3 percent during President Obama’s tenure, a first for a US president. Debt-fueled economic growth in China is slowing, probably more than suspect Chinese statistics are allowed to show.

US household debt has surpassed its 2008 peak and corporate and US government debt are at all time highs. Puerto Rico and Detroit have sought relief from creditors and Illinois and Chicago will soon join them. The municipal insolvency parade is just starting. Mounting unfunded pension liabilities are swallowing an ever-increasing share of municipal budgets.

Banco Popular in Spain was sold earlier this month for one euro after it exhausted its credit lines in a vain effort to contain depositor withdrawals. Equity and bond owners bore the brunt of the bank’s losses. Last Friday, two banks in Italy were shut down by the European Central Bank after repeated rescue attempts failed. More Italian banks will fall; their entire system is essentially insolvent and the economy hasn’t grown in years. Europe is holding its breath hoping that Italy’s depositors don’t panic, but they will

The last financial crisis started in the housing, mortgage, and mortgage-backed security sector, but was not, contrary to numerous official assurances, “contained” there. A debtor’s debt is a creditor’s asset. When the credit creation process reverses and a debtor’s debt is either rescheduled or repudiated, its creditor’s assets are impaired. That can impair the creditor’s ability to pay its own debt and curtail its extension of new debt. The 2008 crisis demonstrated how this chain reaction quickly spreads beyond the sector in which it began. Now there are multiple sectors that are as inflated as housing was back then and some are already unraveling.

According to Citibank, the growth in total global credit has just gone negative after eight years of the greatest expansion of government debt and central bank balance sheet expansion the world has ever seen. Their fiat debt can expand without limit, but not so the debt of individuals, businesses, and smaller governments bound by legal restrictions on debt issuance and without recourse to central bank monetization. Declining long-term growth trends and outright contraction, increasing outbreaks of fiscal stress around the globe, huge and growing unfunded pension and medical fund liabilities and aging populations that will draw on them are all indications that debt expansion by every class of entities but central banks and governments has hit a wall and is reversing.

There are proposals for central banks to simply hand out their fiat debt to everyone—helicopter money—and for partial or complete debt jubilees—legally mandated debt forgiveness. Helicopter money would be hyperinflation, which would devalue all debt and amount to a partial jubilee. One shouldn’t underestimate the political potency of such proposals. There are always more debtors than creditors and governments themselves are the biggest debtors. In the US there have been calls for student loan forgiveness, which are, not surprisingly, popular with millennials.

Whether or not governments enforce debt forgiveness, a de facto jubilee is coming. The world has far more debts and pension and medical liabilities than it can support and they will not be repaid, regardless of how much fiat debt governments and central banks crank out. There has never been a worse time to be a creditor: maximum risk, minimum yield. That serial defaulter Argentina was able to issue 100-year bonds at 8 percent interest is emblematic of the credit market’s thirst for yield and disregard of risk. The next ten years will a lender’s nightmare.

WHEN BUSINESS RAN ON INGENUITY, NOT DEBT

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Why The Next Recession Will Morph into a Decades Long Depressionary Event…Or Worse, by Chris Hamilton

One critical, but often overlooked, factor in macroeconomic analysis is population trends. From Chris Hamilton at economica.blogspot.com:

Economists spend inordinate time gauging the business cycle that they believe drives the US economy.  However, the real engine running in the background (and nearly entirely forgotten) is the population cycle.  The positive population cycle is such a long running macro trend thousands of years in the offing that it’s taken for granted.  It is wrongly assumed that upon every business cycle downturn, accommodative monetary and fiscal policies will ultimately spur greater demand and restart the business cycle once the excess capacity and inventories are drawn down.  However, I contend that the population cycle has been the primary factor in ending each recession…and this most macro of cycles is now rolling over.  Without this, America (nor the world) will truly emerge from the next recession…instead it will morph into an unending downward cycle of partial recoveries…contrary to all contemporary human experience.

The evidence for my contention begins with the 25-54yr/old US population, which peaked in December 2007 and remains below that peak ever since (this population is presently about 400k fewer than Dec of ’07).  However, total US full time employment is now 3.6 million above the previous peak in 2007.  This 25-54 to FT employment relationship is now 1:1…just as it was in 1980 and 1970.

Annual change in 25-54yr/old US population vs. annual change in total full time US employees (below).  The macro population cycle provided millions of new adults (consumers) and their increased demand restarted the more frequent gyrations of the micro business cycles…until 2008 and again now in 2017.  Some may take note that the Federal Reserve cost of money (the Federal Funds Rate in blue) generally followed the population cycle, only making some deviations for the business cycle along the way.

The ‘Sharing Economy’ Is A SCAM, by Karl Denninger

You can tell by the shining eyes and expressions of benevolent goodness that characterize proponents of the so-called “sharing economy” that its nowhere near what it’s cracked up to be. From Karl Denning at theburningplatform.com:

This is a nasty indictment of so-called “sharing economy” entities.

We found that 85% of side-gig workers make less than $500 a month. And of all the side-gig platforms we examined, Airbnb hosts earn the most by far.

In other words there’s not a prayer in hell you can make a living doing any of this; excluding AirBNB the average person was making under $400 and the median person is making under $200!

What’s worse is that none of this appears to account for costs.

If you make $200 driving for Uber but spend $100 of that on fuel then how much an hour are you actually making?

Oh, and you must account for the deterioration of your vehicle (each mile has a cost in maintenance, deterioration of and consumption of the engine, transmission, suspension parts, tires, etc) as well.

And let’s cut the crap on the name of this thing too.  You share something you would already be doing.  If I’m driving to work and your home and office locations are betweenwhere I would otherwise travel then we could be sharing a ride to work.  If you page me on some sort of app and I make a trip I would otherwise not make I’m not sharing anything — I’m selling you the service of carting your ugly ass from one place to another.  Likewise, the premise of “Task Rabbit” or “Doordash” has nothing to do with sharing; I would never bring you food or deliver your package without being paid to do it because there’s no part of my daily life that involves performing some random task for you.

Note that since this data set comes from people applying for loans the error, if any, is likely to be in overstating their income and expenses are not asked for.

To continue reading: The ‘Sharing Economy’ Is A SCAM

 

Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains, by Tyler Durden

One reason to suspect that the debt party is just about over is that credit growth has gone negative. From Tyler Durden at zerohedge.com:

One week ago, we reported that UBS has some “very bad news for the global economy”, when we showed that according to the Swiss bank’s calculations, the global credit impulse showed a historic collapse, one which matched the magnitude of the impulse plunge in the immediate aftermath of the financial crisis.

But why is the credit impulse so critical?

To answer this question Citi’s Matt King has published a slideshow titled, appropriately enough, “Why buying on impulse is soon regretted”, in which he explains why this largely ignored second derivative of global credit growth is really all that matters for the global economy (as well as markets, as we will explain in a follow up post).

King first focuses on the one thing that is “wrong” with this recovery: the pervasive lack of global inflation, so desired by DM central banks.

As he notes in the first slide below, “the inflation shortfall isn’t new” and yet the current “level of credit growth would traditionally have seen inflation >5%”

To be sure central banks always respond to this lack of inflation by injecting massive ammounts of liquidity, i.e., credit, in the system: according to Citi, the credit addiction started in 1982 in the UK, while in 2009 it was in China. However, there was a difference: while in the 1982 episode, it took 3 credit units to grow GDP by 1 unit, by 2009 this rate had grown to 6 to 1. Meanwhile, central bankers “simply stopped worrying about credit.” That also explains the chronic collapse in interest rates starting in 1980 with the “Great Moderation” and their recent record lows: the world simply can not tolerate higher rates.

And while the central bank experiment had limited success in stimulating inflation, there was one obvious consequence: credit fuelled asset bubbles around the world.

This is where the credit impulse comes into play: it allows market participants to track the instantaneous change in central banks’ credit creation, and more importantly,  The change in the flow of credit drives GDP growth.

To continue reading: Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains

We had just experienced exactly the type of free and honest fight club conversation that ZeroHedge enables, by Hedgeless Horseman

I attended the conference that is the topic of this article, and made a presentation on “Breaking the Alternative Media’s Dependence on the Mainstream Media.” Soon I will release the text of that presentation, probably in parts since it was about a 45-minute speech. It was a great conference, and Hedgeless Horseman and Zero Hedge deserve a world of credit for hosting it. From Hedgeless at zerohedge.com:

At the time, my life just seemed too complete, and maybe we have to break everything to make something better out of ourselves.” 

-Chuck Palahniuk, Fight Club

I am still trying to interpret and integrate all that I experienced and learned about disintermediation, about myself, and about y’all at last week’s First ZeroHedge Symposium and Live Fight Club in Marfa, Texas. I hope that writing this after-action report will help me to better assimilate it.

Last Wednesday, I picked up the aquaponics speaker, Tim, upon his arrival from Hawaii at the airport.  My family and I got to know him well during our short 10.5 hour drive out to Marfa, and over the course of the next 6 days.  We now grok the differences between aquaponics and hydroponics, and the similarities between our two families.

For us, staying in the tepees, tents, and vintage aluminum trailers at El Cosmico proved to be a very good choice.  ZeroHedgers arrived and immediately coalesced around the open-air showers and community kitchens.  Usually the question of, “Are you here for the symposium?” was answered with a yes, a big smile, an offer of a beer or mescal, and an introduction such as, “Hello, I am hedgeless_horseman.”  

[The guy in the picture is Hedgeless Horseman]

Some of us had come a day early to tour the art at the Chinati Foundation.  I had very high expectations based on the reading I had done, and they were exceeded.  It was sublime to experience Donald Judd’s 100 untitled works in milled aluminum, in that particular light, architecture, and environment.  Another favorite was Robert Irwin’s relatively new permanent installation where we literally moved out of the darkness and into the light.  The full-day tour served as the perfect appetizer to clear, open, and prepare my mind for the three-day symposium.

Thursday afternoon, I learned from our gracious hosts in Marfa that a few special snowflakes, which had only recently fallen in this hot and dry desert, had started a petition for the city to ban us from holding the symposium in “their” town. I asked what the perceived problem was, and was told that they were afraid we were violent and white supremacists.  We all laughed, especially the non-whites and pacifists.  Someone asked if the special snow flakes were able to read the list of speakers and topics.  Apparently not.  However, I immediately suspected that their concerns and petition were just another clear case of FEAR, False Evidence Appearing Real.  This was confirmed when I agreed to be interviewed by one of them, a young woman from New York, who also claimed to be a freelance journalist.

To continue reading: We had just experienced exactly the type of free and honest fight club conversation that ZeroHedge enables