Thursday, September 22, 2016

What If We're in a Depression But Don't Know It?

If it isn't a Depression, it's a very close relative of a Depression.
Just for the sake of argument, let's ask: what if we're in a Depression but don't know it? How could we possibly be in a Depression and not know it, you ask? Well, there are several ways we could be in a Depression and not know it:
1. The official statistics for "growth" (GDP), inflation, unemployment, and household income/ wealth have been engineered to mask the reality
2. The top 5% of households that dominate government, Corporate America, finance, the Deep State and the media have been doing extraordinarily well during the past eight years of stock market bubble (oops, I mean boom) and "recovery," and so they report that the economy is doing splendidly because they've done splendidly.
I have explained exactly how official metrics are engineered to reflect a rosy picture that is far from reality.:
I also also asked a series of questions that sought experiential evidence rather than easily gamed statistics for the notion that this "recovery" is more like a recession or Depression than an actual expansion:
Rather than accept official assurances that we're in the eighth year of a "recovery," let's look at a few charts and reach our own conclusion. Let's start with the civilian labor force participation rate--the percentage of the civilian work force that is employed (realizing that many of the jobs are low-paying gigs or part-time work).
Does the participation rate today look anything like the dot-com boom that actually raised almost everyone's boat at least a bit? Short answer: No., it doesn't. Today's labor force participation rate is a complete catastrophe that can only be described by one word: Depression.
Wages as a percentage of GDP has been in a 45-year freefall that can only be described as Depression for wage earners:
Notice what happened when the Federal Reserve started blowing serial asset bubbles in 2000: GDP went up but wages went down. Is this a recession or depression? It's your call, but if you're the recipient of the stagnating wages, it's depressing.
Meanwhile, the top 5% who own most of the assets that have been bubbling higher have been doing great. The Depression is only a phenomenon of the bottom 95%:
Look at the rocket ship of corporate profits. What happened around 2001 to send corporate profits on a rocket ride higher? The Fed happened, that's what:
Here's the Fed balance sheet: to the moon!
Free money for financiers and corporations fueled the stock market buyback boom:
Which fueled the stock market bubble:
Is the economy in a Depression? Not if you're a corporate bigwig skimming vast gains from corporate buybacks funded by the Fed's free money for financiers.
But if you're a wage earner who's seen your pay, hours and benefits cut while your healthcare costs have skyrocketed--well, if it isn't a Depression, it's a very close relative of a Depression.
Recent interviews:
Optimizing Bad Policy Guaranteed to Fail (Financial Sense Newshour podcast) (24:35 min)


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Why the Coming Wave of Defaults Will Be Devastating

Without the stimulus of ever-rising credit, the global economy craters in a self-reinforcing cycle of defaults, deleveraging and collapsing debt-based consumption.
In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system.
Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.
Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature's solution is a conflagration--a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth.
Unfortunately, central banks have attempted to outlaw the healthy credit cycle.In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant.
The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.
They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets-- at the expense of everyone with cash, of course.
Having unleashed tens of trillions of dollars in new credit since 2008, the central banks have simply increased the likelihood and scale of the coming default conflagration. Now the amount of deadwood that's piled up is many times greater than it was in 2008.
Very few observers explore what happens after defaults start cascading through the system. Defaults mean loans and bonds won't be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.
Recall that banks rarely own the debt they originate: mortgages and auto loans are bundled and sold to investors such as pension funds, insurance companies, mutual funds, etc. So banks aren't the only institutions at risk: every institutional owner of debt-based assets is at risk.
Two things happen in a default/deleveraging conflagration. One is that lenders get very wary of lending more money to anyone or any entity other than those with the lowest-risk profiles. That constricts lending to the bottom 95% who are already over-indebted.
Please note the Federal Reserve and other central banks cannot force banks to lend to uncreditworthy borrowers. Low interest rates puts additional burdens on lenders: why issue a loan to a risky borrower when the yield on the loan is so meager?
The second thing that happens is that owners of debt-based, interest-bearing assets such as mortgages and bonds not only lose the principal that will never be paid back--they also lose the future income stream. So let's say a pension fund owns $1 million in auto loans that default. The fund must book that loss on their balance sheet as a $1 million reduction in assets.
But the truly devastating hit is to future earnings. All the interest that would have been collected on those loans also vanishes. Now the fund has two losses to book: a loss in assets and a loss in future earnings.
At today's low rates around 4%, over the course of a 30-year mortgage, borrowers end up paying around 100% of the initial mortgage as interest on the original mortgage: in other words, the borrowers pay $200,000 over the 30 year period: $100,000 in interest and repaying the $100,000 principal.
So a fund doesn't just lose 100% of the loan principal--it loses all the interest income it was counting on.
Where is the fund going to find high-yielding, low-risk debt-based assets to replace the ones lost to default? There won't be any such assets available: the only debt that will be available will be zero-interest (or negative-interest) rate sovereign bonds that pay no interest at all. Since lenders have no incentive to make low-interest loans to borrowers at a high risk of default in a global recession, debt issuance dries up.
Without the stimulus of ever-rising credit, the global economy craters in a self-reinforcing cycle of defaults, deleveraging and collapsing debt-based consumption.
Recent interviews:
Optimizing Bad Policy Guaranteed to Fail (Financial Sense Newshour) (5:51 min)


If you find value here, please consider becoming a $1/month patron of my work via patreon.com.
My new book is #6 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
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Wednesday, September 21, 2016

The Three Stages of Empire

I consider it self-evident that we are in the third and final stage of self-serving Imperial decay.
Though Edward Luttwak's The Grand Strategy of the Roman Empire: From the First Century CE to the Third is not specifically on the rise and fall of empires, it does sketch out the three stages of Empire.
Here is the current context of the discussion of Imperial lifecycles: the U.S. defense budget is roughly the same size as the rest of the world's defense spending combined:
Luttwak describes the first stage of expansion thusly:
"With brutal simplicity, it might be said that with the first system the Romans of the republic conquered much to serve the interests of the few, those living in the city--and in fact still fewer, those best placed to control policy."
The second stage spread the benefits of Empire much more broadly:
"During the first century A.D., Roman ideas evolved toward a much broader and altogether more benevolent conception of empire... men born in lands far from Rome could call themselves Roman and have their claim fully allowed, and the frontiers were efficiently defended to defend the growing prosperity of all, and not merely the privileged."
The third stage is one of rising inequality:
"In the wake of the great crisis of the third century, the provision of security became an increasingly heavy charge on society, a charge unevenly distributed, which could enrich the wealthy and ruin the poor. The machinery of empire now became increasingly self-serving, with its tax collectors, administrators and soldiers of much greater use to one another than to society at large."
That line describes the American state and central bank perfectly. The burdens of an increasingly self-serving hierarchy are falling most heavily on the middle and upper-middle class, while bread and circuses (i.e. Medicaid-paid opiates) are freely distributed to the restless masses to distract them from the immense concentration of wealth and power at the top of the pyramid:
At some point, Collapse Is Cheaper and More Effective Than Reform (November 5, 2015). The third stage Luttwak describes can be broken down into a chart of the Lifecycle of Bureaucracy, for every Imperial Project is ultimately the combination of a vast concentration of wealth/power and the sclerosis of self-serving bureaucracies that serve themselves rather than society at large:
I consider it self-evident that we are in the third and final stage of self-serving Imperial decay. That said, we don't have to follow that trajectory; we can fashion a much better future outside the status quo, as I outline in A Radically Beneficial World.


If you find value here, please consider becoming a $1/month patron of my work via patreon.com.
My new book is #5 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
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Tuesday, September 20, 2016

The ZIRP/NIRP Gods and their PhD Priesthood Have Failed

The priesthood's insane obsession with forcing people to spend their savings by punishing savers with ZIRP/NIRP has failed spectacularly for a simple reason: it completely misunderstands human psychology.
Let's start with a simple chart of the Fed Funds Rate, which the Federal Reserve has pinned near zero for years. This Zero Rate Interest Policy (ZIRP) is the god the PhD economists in the Fed and other central banks worship as the supreme force in the Universe, along with its even more severe sibling god, NIRP (negative interest rate policy), which demands that banks and depositors must pay for the privilege of holding cash.
Precisely what have ZIRP and NIRP fixed in the global economy? The short answer is "nothing." Instead of fixing what's broken, ZIRP and NIRP have pushed a broken system further along the path of self-destruction.
Let's stipulate that not all economics PhDs are members of the failed Keynesian Cargo Cult Priesthood. A few "professional" economists get it, but they are heretics who are kept far from the priesthood's temples of power: central banks, central state Treasury departments, major university faculties, etc.
The basic problem with the professional priesthood is they believe that their cult is a "real science," and their "proof" is a bunch of equations that they claim map and predict human behavior. Like the other social sciences, economics suffers from a pathologically obsessive envy of physics, i.e. "real science" that actually predicts the actions of materials and objects in the real world.
The truth that the economic priesthood cannot accept is that "economics" is more psychology than physics. Human behavior cannot be reduced down to simple models and equations, as the variables are many and difficult to quantify, and the spectrum of potential responses is too wide.
The entire Keynesian Cargo Cult Priesthood boils down to this absurdly wrong-headed model of capital and human psychology: the economy suffers when people "hoard" their earnings. So the goal of the priesthood is to persuade them to stop "hoarding" their cash and force them to spend it. (This spending is known as "aggregate demand" in the priesthood.) The priesthood worships the gods of ZIRP and NIRP because they are believed to force people to spend rather than "hoard."
The ultimate goal of the Keynesian Cargo Cult Priesthood is to force people to borrow more money from banks, as this increases bank profits and boosts "aggregate demand" by tapping future earnings. Taking out a loan brings future demand forward by issuing a claim on future earnings.
All of this priestly mumbo-jumbo is of course insane. "Hoarding" is not an evil to be stamped out by the cruel god NIRP who destroys any yield on savings;"hoarding" is the foundation of capitalism, as savings ("hoarding" to the insane) are the capital that is invested in productive assets which generate the wealth that funds wages and taxes.
Destroy savings and you destroy productive capitalism.
The priesthood's insane obsession with forcing people to spend their savings by punishing savers with ZIRP/NIRP has failed spectacularly for a simple reason: it completely misunderstands human psychology. Now that ZIRP and NIRP have destroyed the income that was once earned on savings, the only rational response is to save more, not less, despite the priesthood's policy of negative rates.
The priesthood is absolutely blind to another key aspect of human psychology.The policy of negative interest rates is so extreme and so destructive that it proves the priesthood and its Keynesian Cargo Cult have completely lost their way, yet their grip on power only increases.
Who could possibly have faith in such insanity? The only rational response is to fear the future consequences of such craziness, and the only rational response to this well-grounded loss of faith in the future is to save more, not less, regardless of the costs imposed by the insane priesthood.
The Keynesian Cargo Cult Priesthood is not just clueless--it is forcing everyone to drink its toxic Kool-Aid. Like the crazed dictator in the Woody Allen comedy, the Keynesian Priesthood may well order us all to wear our underwear on the outside of our clothing, if they reckon that would boost "aggregate demand."


My new book is #5 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

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Sunday, September 18, 2016

Fun with Fake Statistics: The 5% "Increase" in Median Household Income Is Pure Illusion

The truth is the rich are getting richer and everyone else is losing ground as inflation chews through stagnant incomes.
Supporters of the status quo nearly wet their pants with joy when the Census Bureau reported that real (adjusted for inflation) median household income rose 5.2% between 2014 and 2015. Too bad it was completely bogus: the supposed increase in everyone's income is pure statistical trickery.
First, the marks who fell for it: here's the Huffington Post wetting itself with glee: Average Americans Just Got a Huge Income Boost.
This headline is risibly wrong on a number of counts. Most importantly, a notch up in median household income doesn't mean "average Americans Just Got a Huge Income Boost": It means that half of households in 2015 earned more than $56,516 and half earned less than $56,516.
It does not mean every household saw a boost in income.
Please follow along as I show you how median household income works. Let's start with a simple sample group of ten households. Household #1 earns $40,000, #2 earns $41,000 and so on, as each additional household earns $1,000 more than the previous household. Household #10 earns $49,000.
The median income of our group is $44,500, as 50% earn less than $44,500 and 50% earn more than $44,500.
As the economy expands, it adds two households earning $48,000 and $49,000 respectively. Meanwhile, the income of the two households that had earned $48,000 and $49,000 respectively each leaps to $250,000 each.
The median household income of the group increases to $45,500, but only the top two households experienced any increase in real income--and their income soared. The "average household" didn't make a dime more, even as the economy expanded and income for the entire group rose an astonishing 45%.
You see what happened as median household income increased: all the gains went to the top layer--"average" household income didn't rise at all. See how much fun we can have with misleading statistics?
Yes, median household income would rise if every household earned an additional $1,000. But an increase in median household income does not prove every household gained.
In fact, other statistics reveal that the increases in income and wealth have been concentrated in the top 1%, 5% and 10%.
Increases in household wealth continue to accrue to the top of the wealth pyramid: The "Devastating" Truth Behind America's Record Household Net Worth:
According to the CBO (Congressional Budget Office) report Trends in Family Wealth:
"...families in the top 10 percent of the wealth distribution held 76 percent of all family wealth. ...the difference in wealth held by families at the 90th percentile and the wealth of those in the middle widened from $532,000 to $861,000 over the period (in 2013 dollars). The share of wealth held by families in the top 10 percent of the wealth distribution increased from 67 percent to 76 percent, whereas the share of wealth held by families in the bottom half of the distribution declined from 3 percent to 1 percent."
Just to remind you how meaningless "median" measures really are, the "median household wealth" increased to $81,000 while the rich became much richer and the poor became poorer.
But this isn't the end of the "median household income" trickery: the key trick word is "real," which means adjusted for inflation.
I hope you see this coming: it all depends on how you measure inflation. As explained in this insightful expose, the Census Bureau didn't use the conventional Consumer Price Increase (CPI) measure of inflation; they used a lower deflator of income which magically boosts income--not in the real world, of course, but in the world of trickery, magic, smoke and mirrors, all designed to manage perceptions of a status quo that has failed the bottom 95% of households.
"Sentier Research uses the more familiar Consumer Price Index (CPI) for the inflation adjustment. The Census Bureau uses the little-known CPI-U-RS (RS stands for “research series”) as the deflator for their annual data.
The choice of the inflation-adjustment deflator makes all the difference in these median household income calculations."
If CPI is used, the "real median household income" has not even regained its 2008 level.
If "real" inflation is running hotter than "official" inflation--which it is if we properly weight the big-ticket items such as rent, healthcare and college tuition--then "real household income" has declined sharply since 2008: the 5% "gain" is completely illusory.
The truth is the rich are getting richer and everyone else is losing ground as inflation chews through stagnant incomes and rising debt loads stripmine disposable income. Bought and paid for cheerleaders for our failed, corrupt status quo will always hype bogus, purposefully misleading statistics--but don't mistake fakery for fact.


My new book is #4 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Edward C. ($5), for your most generous contribution to this site-- I am greatly honored by your support and readership.

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