Tag Archives: Financial crisis

Wasting the Lehman Crisis: What Was Not Saved Was the Economy, by Michael Hudson

Debt as the solution to a debt collapse only harms the economy and sets it up for an even bigger fall later on. From Michael Hudson at counterpunch.org:

Photo Source futureatlas.com | CC BY 2.0

Today’s financial malaise for pension funds, state and local budgets and underemployment is largely a result of the 2008 bailout, not the crash. What was saved was not only the banks – or more to the point, as Sheila Bair pointed out, their bondholders – but the financial overhead that continues to burden today’s economy.

Also saved was the idea that the economy needs to keep the financial sector solvent by an exponential growth of new debt – and, when that does not suffice, by government purchase of stocks and bonds to support the balance sheets of the wealthiest layer of society. The internal contradiction in this policy is that debt deflation has become so overbearing and dysfunctional that it prevents the economy from growing and carrying its debt burden.

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Anger Mismanagement, by Robert Gore

A new bull market is coming that will wipe out many of the current bull markets.

Its chart looks good—building a base for decades, lately bursting through the top of its range. The ascent has been steep, pullbacks minor, and it looks like it’s gathering steam for a long run.

Anger is lifting off in what market technicians would call the first impulsive wave of a new bull market. That’s the technicians’ way of saying this is just the beginning. Punctuated by brief remissions, there are many more and much larger waves to come before this trend is exhausted.

One of the best technicians of them all, Robert Prechter, has spent his career analyzing the indicators and dynamics of social mood, his touchstone term that has yet to make it into the popular lexicon. By the time this trend exhausts, perhaps there will be more widespread recognition of both the term and its awesome power. The anger waves will lay waste to the best laid plans of mice, men, women, and whatever you want to call those witless, arrogant creatures who inhabit central banks, governments, and globalist fronts…and those who pull their strings. Continue reading

Debt Clock Ticking, by John Mauldin

The clock is ticking and the hour is very late. From John Mauldin at mauldineconomics.com:

Rather go to bed without dinner than to rise in debt.

—Benjamin Franklin

What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?

—Adam Smith

There are no shortcuts when it comes to getting out of debt.

—Dave Ramsey

Modern slaves are not in chains, they are in debt.

—Anonymous

Debt isn’t always a form of slavery, but those old sayings didn’t come from nowhere. You can find hundreds of quotes on the Internet discussing the problems of debt. Debt traps borrowers, lenders, and innocent bystanders, too. If debt were a drug, we would demand it be outlawed.

The advantage of debt is it lets you bring the future into the present, buying things you couldn’t afford if you had to pay full price now. This can be good or bad, depending on what you buy. Going into debt for education that will raise your income, or for factory equipment that will increase your output, can be positive. Debt for a tropical vacation, probably not.

And that’s our core economic problem. The entire world went into debt for the equivalent of tropical vacations and, having now enjoyed them, realizes it must pay the bill. The resources to do so do not yet exist. So, in the time-honored tradition of lenders everywhere, we extend and pretend. But with our ability to pretend almost gone, we’re heading to the Great Reset.

I’ve been analogizing our fate to a train wreck you know is coming but are powerless to stop. You look away because watching the disaster hurts, but it happens anyway. That’s where we are, like it or not.

And we don’t even really like to talk about it in polite circles. In a private email conversation this week, which must remain anonymous, this pithy line jumped out at me:

The total of Federal (remember they do not use GAAP) debt, state debt, and city debt [unfunded liabilities included] exceeds $200 trillion dollars. There is no set of math that works to pay this off. Let me be sure it’s heard by repeating it: There is no set of math that works to pay this off. Therefore, there has to be some form of remediation. This conversation is uncomfortable, so it is avoided.

Today’s letter is chapter 5 in my Train Crash series. If you’re just joining us, here are links to help you catch up.

Last week, we discussed the Italian political crisis and potential eurozone breakdown. That is a dangerous possibility, but far from the only one. As we’ll see today, the world has so much debt that the cracks could happen anywhere.

To continue reading: Debt Clock Ticking

Cataclysm, by Robert Gore

Collapse generally comes as a surprise, even to those who predict it.

The USSR didn’t just fail one day, as does a person who dies of a sudden heart attack or stroke. It was more like a wasting illness brought on by an unhealthy lifestyle. A physician tells a morbidly obese patient: “Your daily consumption of twelve cocktails, three packs of cigarettes, and 4,000 calories, and your refusal to engage in exercise more strenuous than walking to the refrigerator will kill you, but I can’t say when.” For both individuals and governments, certain choices are incompatible with continued existence, and the Soviet government made plenty of those.

Very few people foresaw its failure when it was imminent, even purported experts. The small group who said Soviet communism wouldn’t work because it couldn’t work were disparaged right up until it didn’t work. However, the deck is always stacked in favor of those predicting this or that government will fail. Ultimately they all do because they all come to rest on a foundation of coercion and fraud, which doesn’t work because it can’t work.

There is both a quantitative and qualitative calculus for individuals subject to a government: what the government takes versus what individuals get back. Government is a protection racket: turn over your money and it promises physical security from invasion and crime, and adjudication and restitution in the event of civil or criminal wrongs. The quantitative calculus: am I getting more back than I put in? The qualitative calculus: what activities and people does the government help or hinder?

Need a good laugh before the shtf?

AMAZON PAPERBACK

KINDLE EBOOK

Protection rackets are often indistinguishable from extortion rackets, the “protector” a bigger threat to the “protected” than the threats against which they’re supposedly protected. Such is the case with the US government, as it was with the former Soviet government. Blessed with naturally defensive geographies and huge nuclear arsenals, the chances of the US being attacked are (or were, in the case of the former Soviet Union) remote. The cost for actual protection provided by those governments has been a tiny fraction of what’s been extracted by force or fraud from their citizenries, the very definition of an extortion racket.

Freedom militates against stupidity; coercion compounds it. Competitive markets and a wide-open intellectual climate either kill the worst ideas or impel their improvement. Power corrupts so completely because those who hold it rarely face negative feedback or consequences. Critics are mocked, stifled, imprisoned, or murdered. The costs of failure are borne by the victims. The perpetrators blame those failures on lack of funding or authority and receive more of the same.

Nothing succeeds like failure in coercive systems. Just look at the US governments “wars” on poverty, drugs, and terrorism. For rational people in free, competitive systems an ever-expanding gap between shining intentions and dismal reality prompts psychological turmoil. The powerful salve outbreaks of cognitive dissonance with arrogance, which expands apace with their failing programs. Just look at Obamacare, which its progenitor hails as his greatest accomplishment.

As the protection racket and its sub-rackets expand, the “protected” receive less and less, but pay more and more. By now, both the quantitative and qualitative calculuses are clear to productive Americans: they’re being reamed by people they despise, who in their arrogance and willful blindness despise them. The government steals trillions directly, but still resorts to financial sub-grifts—debt, fiat money, and central banking—to feed its insatiable money-lust. Like the government’s debt, stupidity compounds exponentially and rational people wonder how long unsustainable rackets can persist. The racketeers, if they realize their rackets can’t last, don’t care; they’re going to milk them as long as they can.

With the world’s most powerful military, largest nuclear arsenal, and most intrusive surveillance apparatus, the ostensible power of the US government is daunting. Yet, if a tenth of the US population ran up their debts, withdrew their funds from the financial system, and then stopped making debt service payments for a few months, it would propel a run on the banking system, choking the government’s financial lifeline and exposing its worthless fiat debt scam. Thus, the government is hardly invulnerable. As stupidity compounds, so too do its vulnerabilities.

The foundation of the global economy and financial system is interlinked debt. Anyone paying attention during the last financial crisis recognized that it took surprisingly few defaults—debt markdowns that marked down the value of the corresponding credit-assets—in a highly leveraged and interconnected system before that system unraveled and imploded. Anyone with a modicum of analytic ability and intellectual integrity realizes that the “solution” to that last financial crisis—more government and central bank debt—was another instance of stupidity compounding itself. Now, there’s more craziness in the debt asylum than there was in 2007.

There probably won’t be a voluntary debt payment moratorium, although for anyone asking how “we the people” can throw off the burdensome yoke of “our” government that would be a fine place to start. There doesn’t have to be; the mechanics of debt implosion guarantee the same result. Most of the world’s financial assets are debt or equity claims. Equity has a lower legal right to a debtor’s assets than debt. A debt collapse will leave the world impoverished, and so too its governments. Many real assets will be tied up in creditors’ squabbles. Governments’ and their central banks’ vaunted abilities to drive interest rates to subzero, go further into debt, and exchange their pieces of paper or computer entries for other pieces of paper or computer entries will mean little in a world submerged in debt, worthless paper and computer entries.

Those who scoff at the notion of cataclysmic collapse ignore ubiquitous signs of deterioration and recent history. Real economic growth and incomes have been trending downward since the turn of the century, even by official statistics. One has to question how much of the growth in either is the product of statistical legerdemain—government statistics leave much to be desired—and debt. If debt grows at 5 percent and the economy and incomes grow at 2, is the economy actually growing? Should some present value accounting be made of the fact that the longer debt growth exceeds economic growth, the greater the burden that debt imposes on the economy?

Some say the last financial crisis proved that governments and central banks can prevent a debt implosion. They’re drawing the wrong conclusion. It “proved” that massive injections of fiat debt defibrillated the patient, and it still serves as essential life support. However, not even life support will keep the patient alive the next time the EKG flatlines. All governments will then have are lots of weapons, worthless debt, millions of angry beneficiaries, and whatever loyalty they can still command, literally, from the police-military-surveillance complexes.

At which point, the calculus becomes intolerable for those long milked and bilked by governments, and offering them only further pain with no gain. Inevitably, they will consider their options: flight, secession, devolution, or revolution. Governments are only temporary arrangements and pendulums swing. Cataclysm should afford, for those inclined, opportunities—if they’re willing to fight for them—to live under arrangements more conducive to individual freedom and voluntary interaction.

THE PINNACLE OF OPTIMISM

AMAZON

KINDLE

NOOK

This Is the Start Of The Sell-off, Not The End, by Bill Bonner

From Bill Bonner, at bonnerandpartners.com:

BALTIMORE, Maryland – Is Donald Trump broke yet? We don’t know. But at the end of the first quarter, investors held about $24 trillion in stocks. Stock prices are down about 10% since then… leaving the rich $2.4 trillion less rich.

Government bonds have generally gone up. Junk-grade corporate bonds have gone down.

And real estate? It takes longer to react. Real estate is not “marked to market” immediately. Buyers and sellers discover prices slowly.

Phony Wealth

The “wealth” created in Stage III of the U.S. credit boom was largely phony. It came as the Fed dropped the price of money to zero. Underpriced credit gave the gamblers, schemers, and cronies the wherewithal to manipulate markets and bid up their own assets. But now…

All that whining and complaining about how the “One Percent” were getting rich…

All those calls for more regulation and redistribution to solve this “problem”…

All that claptrap about how capitalism always made the rich richer and the poor poorer…

All a total waste of time and a fraud. Capitalism is innocent. This was an inside job – a crime committed by the cronies and their enablers in government.

It was their way, not only of giving themselves trillions of dollars of other people’s money, but also of holding onto the power, status, and wealth they’d accumulated over the last three decades.

Politicians had no more interest in solving this “problem” than a wolf wants to solve the problem of too many fat sheep. But don’t worry. A real bear market will take care of it!

To continue reading: This Is the Start Of The Sell-off, Not The End

No Kidding? by Karl Denniger

From Karl Denninger, on a guest post at theburningplatform.com:

No, really?

As I’ve discussed at length, there are many catalysts in play in the market’s turn, from fears about China to corporate earnings and commodity prices. But at the core, much of this plunge is about a loss of faith in cheap money stimulus. It’s as simple as that.

Loss of faith?

The problem isn’t simply that “central banks will rescue us.” It’s that the world economic system has become addicted to a 30 year trend of fiscal irresponsibility that long ago crossed the line into abject fraud, and utterly nobody has gone to prison for it.

Specifically, the “I can afford $10,000 in interest, so how much can I borrow?” paradigm has become embedded not only among business but more importantly among governments of all stripes as well.

When the rate of interest is 10% the answer is $100,000, of course.

The problem is not that you borrowed the money, it’s that you did so for any purpose other than capital investment that has a return greater than the carrying cost and principal over the life of the loan.

That in turn means you never intended to pay the debt off at all, only to roll it over. In other words you didn’t “borrow” at all; you instead took someone’s money and spent it, permanently removing their capital and placing it into the marketplace for the purpose of consumption on the premise that you will forever more be able to continually pay that interest expense.

That’s bad enough. What’s worse is that when the prevailing rate of interest is falling over a three-decade period (as has been the case) whenever the rollover time comes you “borrow” even more because you can do so with the same interest payment, spending that money on non-productive things as well.

So the $100,000 loan, as interest rates fall from 10% to 1% becomes a $1 million loan, and the entire million dollars gets spent into the economy as a whole.

That trend has now ended because there is a hard floor at zero. In the best case rates simply flat-line here at which point you can no longer borrow more money — and the game collapses as so-called “economic growth” also goes to zero.

In the worst case rates rise and you instantly go bankrupt as you can’t afford to rollover.

Incidentally, if I remove this expansion just on a federal level just in the last few years in the United States then GDP “growth” is under 1%, and since the population is expanding at about 1% as well this means that per-capita GDP is actually NEGATIVE and has been for the last several years.

How do you sustain so-called “market price increases” (for stocks among other things) when there is no per-capital GDP expansion and hasn’t been for the last many years — in fact, coming up on a solid decade of said non-performance?

Eventually people wake up to the lies as it flows through to the corporate balance sheet, and at that point you’re done as debt-funded dividends collapse and non-dividend paying stocks are discovered to in fact be worth zero.

http://www.theburningplatform.com/2015/08/27/no-kidding/

Where is Neo When We Need Him, by Paul Craig Roberts

From Paul Craig Roberts, at paulcraigroberts.org:

In The Matrix in which Americans live, nothing is ever their fault. For example, the current decline in the US stock market is not because years of excessive liquidity supplied by the Federal Reserve have created a bubble so overblown that a mere six stocks, some of which have no earnings commensurate with their price, accounted for more than all of the gain in market capitalization in the S&P 500 prior to the current disruption.

In our Matrix existence, the stock market decline is not due to corporations using their profits, and even taking out loans, to repurchase their shares, thus creating an artificial demand for their equity shares.

The decline is not due to the latest monthly reporting of durable goods orders falling on a year-to-year basis for the sixth consecutive month.

The stock market decline is not due to a weak economy in which after a decade of alleged economic recovery, new and existing home sales are still down by 63% and 23% from the peak in July 2005.

The stock market decline is not due to the collapse in real median family income and, thereby, consumer demand, resulting from two decades of offshoring middle class jobs and partially replacing them with minimum wage part-time Walmart jobs without benefits that do not provide sufficient income to form a household.

No, none of these facts can be blamed. The decline in the US stock market is the fault of China.

To continue reading: Where is Neo When We Need Him