Some things should not, indeed cannot, be ignored:
This matters. This is important.
The merger between the U.S. government and the earth’s most powerful corporate interests was not a “hostile” takeover by any means. The government, the TBTF banks, and other corporate interests use each other, they’re happy about it!, and because they do the political system in the U.S. becomes a little more corrupt each day. Destroying any real democratic representation, destroying the little guy’s recourse to the courts, undermining the very fabric of our neighborhoods, and stripping the 99% of their voice.
The only question, or at least the only question that matters, is how to unwind this unholy combination.
As it stands, whether you’re a libertarian or a socialist, your preferred policies cannot be implemented. The crony capitalist ship of state will continue to steam toward the berg until the federal government is forced, through direct action, to rid itself of its corporate backers. And the corporate sector is forced, through direct action, to stop pulling the levers of government for its own benefit.
I don’t know the endgame of this movement and, frankly, don’t want to. All I know is that #occupywallstreet and occupytogether.org matter. They matter a lot. They deserve support.
Well, I always said this blog would last until the lawsuits started hitting. And now they have.
I’ll keep my email active, and may pop up now and again, but the time has come to bid you all farewell.
With apologies to Pastor Martin Niemöller:
THEY CAME FIRST for the Subprime Borrowers,
and I didn’t speak up because I wasn’t a Subprime Borrower.
THEN THEY CAME for the unemployed,
and I didn’t speak up because I wasn’t unemployed.
THEN THEY CAME for the failed small business owners,
and I didn’t speak up because I wasn’t a failed small business owner.
THEN THEY CAME for me
and by that time no one was left to speak up.
You have a voice. Use it.
Good luck to you all.
With apologies to the two or three of you out there that give a fuck, I spent the last week vacationing at a friend’s summer home, drinking margaritas, working, and generally contemplating life. Ultimately, I determined that the path I was on was pretty much right – notwithstanding the (albeit mild – really mild!) slings and arrows from mydebtcomeback.blogspot.com/ about the relative virtues of paying “back” debt and telling the banks to go fuck themselves.
As is always the case when I take an extended leave from blogging, it was an embarrassment of riches in subject matter over the last week. But one piece of news seemed particularly telling Dwindling Retirement Savings ‘Undiscussed Explosive Bomb’ Of Recession:
After working in executive management for over ten years with a steadily increasing salary, Rick Stephens, 51, was laid off from his job in June 2008. Two years of steady unemployment later, he has sold his car, moved in with his 75-year-old father and blown through all his retirement savings to stay afloat.
“I pay my bills with what is left of the savings I accumulated by being frugal all my life, but I’m going through that pretty fast,” he said. “I have tapped my IRA, and the result of that is I will be heavily taxed on it next April. I honestly believe that there will be no recovery from this. If there is a recovery, it will be too late for me, as I will have exhausted my savings and my retirement that I had socked away by not living the high life.”
This is what happens when people have an obsession with paying bills. Retirement saving should be non-negotiable, but an unhealthy desire to appear solvent makes it one of the first things to go – before credit cards, before the mortgage, before all the things that should be cut. 401ks are (I believe) insulated in bankruptcy, and are the ultimate safety net. Draining an IRA or a 401k to make payments on credit cards and mortgages is probably the most self-destructive activity that anyone can engage in this side of snorting meth, but, as is our motto around here, desperate people do stupid shit, e.g. payday loans, student loans, teabagging, supporting Obama, etc., etc. etc.
“This is the undiscussed explosive bomb in all this, is all the pension benefits, all the 401(k) money that’s been drained out by workers trying to stay afloat until they find a job,” Rep. Jim McDermott (D-Wash.) told HuffPost. “There are a lot of people who, when this is over, are going to have nothing. They will have lost their house, they will have used all their pension money.”
Many Americans seem to be losing hope. Only 16 percent of respondents to the EBRI survey expressed confidence in their ability to retire comfortably, the second lowest point in the 20-year history of the survey.
Given what is happening to retirement savings, both on the asset value side and the voluntary draining to keep Jamie Dimon and Richard Fairbank living the lifestyle to which they have become accustomed, this strikes me as, to put it mildly, a particularly bad time to start fucking around with Social Security and Medicare. Raising the eligibility ages, for example, while there are huge numbers of people in their 40s and 50s who will never get back on their feet seems, well, cruel. In fact, if anything, this is when we should be expanding the social safety net.
But Peter G. Peterson is striving for his pound of flesh on the backs of the “lesser people,” so I tweeted the following:
I think that pretty fairly summarizes my feelings toward the founder of Blackrock and world-class asshole that is Peter Peterson, his Foundation, and his pet deficit commission.
Unfortunately, I did not tweet this to the right Pete Peterson (If anyone knows the Blackrock Pete Peterson’s twitter, please let me know!). It was just some struggling author. He could have been a much bigger dick about my error, so here’s his book if you want to buy it.
But the basic point stands. Here at AFEP, we’re not big fans of structural deficits of 10% of GDP, and we don’t just sit around and whine about stuff – We want to help! So here is AFEP’s strategy for eliminating the deficit:
- Print enough money for everyone to pay off their household debt;
- Give it to them;
- Watch the entrepreneurial revival in America swamp the Treasury with tax revenue!
Of course, that’s not the only solution. Here’s another way to eliminate the deficit:
- Make education free (eliminate student loans) – rationing will be required;
- Make healthcare free (single-payer baby!);
- Ration healthcare by letting people die with dignity (no ventilators for people 85+, no biopsies for 90-year olds), and if I’m a vegetable, pull the plug on me right quick!
- Legalize drugs (and a bunch of other stuff) and get rid of all the fucking prisons;
- Pull the military out of the vast majority of places we have them;
- No more bank bailouts!
- Raise taxes on the finance sector – a lot!
Optimally, we’d do some combination of the items from list 1 and list 2, but either list works. Note, that neither requires forcing people to eat cat food.
But this is America, and since Americasux, I’m sure we’ll go for door number 3:
Or, you know, instead of asking the well-off to contribute as much as everyone else does, we could maybe just not give people their Social Security until they are 70, instead of 65. That sounds like a fine and sensible idea if you are a currently old person whose work is easy and enjoyable and rewarding enough that you continue doing things like being on deficit commissions long after you could’ve retired.
Of course, most currently young Americans who aren’t on deficit commissions will be working minimum wage service jobs cleaning and shining the robots that feed and nurse the nation’s Aspen Ideas Festival panel participants, and those Americans might enjoy the opportunity to retire with their meager checks before the robot wax completely blinds them.
And since Peter G. Peterson lacks the conscience required to do the right thing and kill himself with a lit stick of dynamite, we’ll watch the middle class in America die – not with a bang, but a whimper:
Once upon a time this was called the American Dream. Nowadays it might be called America’s Fitful Reverie. Indeed, Mark spends large monthly sums renting a machine to treat his sleep apnea, which gives him insomnia. “If we lost our jobs, we would have about three weeks of savings to draw on before we hit the bone,” says Mark, who is sitting on his patio keeping an eye on the street and swigging from a bottle of Miller Lite. “We work day and night and try to save for our retirement. But we are never more than a pay check or two from the streets.”
I don’t think anyone would mistake me for a fan of Obama and his mancrush Timmeh Geithner, but you do have to give the guy credit for some monster-sized balls. After shepherding a toothless financial regulation bill through Congress, implementing a perpetual bailout mechanism for the biggest Wall Street players, and enshrining the predatory, extractive, and sleazy big banks as the cornerstone of the American “economy,” Timmeh has decided he’s not done quite enough to fuck over American households.
But before we get to that, let’s start with the mythmakers at the Washington Post doing their best impression of a panegyrist:
These officials said Geithner endeared himself to Obama and senior White House advisers by advocating a response to the financial crisis that later proved correct. Geithner vigorously resisted calls by some lawmakers and financial experts to nationalize the nation’s largest and most troubled banks during the most perilous days. Instead, he helped get the financial system back on its feet, in particular by pressing for stress tests of big banks. The results of these tests showed that nearly all the banks would be able to weather the financial storm and quickly restored investor confidence.
These people don’t seem to know, realize, or care that the unemployment rate is still near 10%, the underemployment rate near 20%, and banks that are only able to show “profits” through accounting tricks and playing the yield curve on government debt with free money. There is not one demonstrable way of significance to real people in which Timmeh’s “response to the financial crisis later proved correct.” Not one. As Naked Capitalism points out with respect to Financial “Reform,” the bill left out just about everything that actually matters, and that might help resolve the economic crisis:
Make no mistake: this is Timmy’s bill, plain and simple, as the Post makes clear: “The bill not only hews closely to the initial draft he released last summer but also anoints him — as long as he remains Treasury secretary — as the chief of a new council of senior regulators.”
The Geithner Treasury repeatedly pushed back against many sensible legislative proposals that would have made significant structural changes to practices that brought about the current economic crisis. And the article itself represents latest in a series of attempts to embellish the Treasury Secretary’s hagiography.
Reading it, one wonders whether the Washington Post inhabits a strange parallel universe. Have the writers actually paid attention to what is truly happening in the economy?
What is happening in the real economy is exactly the opposite of an approach that has been “proven correct.” First, millions of people have been or are being thrown into foreclosure, but despite two years of “effort,” the HAMP program has resulted in only a few hundred thousand “modifications.” Modifications, btw, which are almost certain to fail given the overall debt burdens of the participants:
If we look at the HAMP program stats (see page 3), the median front end DTI (debt to income) before modification was 44.8% – the same as last month. And the back end DTI was an astounding 79.9 (up slightly from last month).
Think about that for a second: for the median borrower, about 80% of the borrower’s income went to servicing debt. And the median is 63.7% after the modification.
Second, small business formation is falling off a cliff because there aren’t any customers and, shocker!, banks won’t lend to and investors won’t invest in businesses without prospects for revenue and profit:
The activity of new entrepreneurs plunged in the first half of 2010, falling to the lowest rate in more than two decades as more workers found employment or were driven away from start-ups by a feeble economy.
Start-up activity fell to an average 3.7% in the first two quarters of this year, down from 7.6% in the first half of 2009 and 9.6% in the second half, according to a survey of about 3,000 job seekers by global outplacement and executive coaching firm Challenger, Gray & Christmas, Inc. Many of those surveyed are former managers and executives.
Third, desperate and unemployable young people are heading off the college and grad school in record numbers and signing themselves up for a lifetime of debt slavery, because there isn’t any fucking work for them to do. By way of example:
UC Berkeley’s Boalt Hall School of Law saw a 4.7 percent increase in applications for its class of 2010, setting a new record for the number of applicants, officials said yesterday.
The school has counted a total of 8,317 applications, compared to 7,940 last year – which, by the way, broke the previous record. In fact, the school has seen a 19 percent increase from 2007 to 2010. Applications had to be postmarked by Feb. 1, so a few more could still trickle in, spokeswoman Susan Gluss said.
Gluss attributed the rise, in part, to the tendency of more people to apply for graduate school during a recession, and in part, to Berkeley’s enhanced loan forgiveness program (AFEP: Hooray!) for students who work for nonprofit public interest groups or government agencies and earn below a certain threshold.
The news comes as several media reports have documented the increasingly tough job market that law school graduates face, a problem that is compounded by law graduates’ high levels of debt.
And now, for the coup de grâce, Timmeh has decided to tube Elizabeth Warren as the head of the consumer protection agency – one of a relatively small number of useful things in the Financial “Reform” bill. And why?
On top of all this, it now appears that Secretary Geithner will oppose Elizabeth Warren becoming the new chief regulator responsible for protecting consumers from defective financial products – despite the fact that she has led the way for this issue, on both intellectual and political fronts, over the past decade. The financial sector has abused many of its customers badly over the past decades. This simply needs to stop.
Throughout the Senate debate on financial reform, Treasury insisted that complex details regarding consumer protected need to be left to regulators – and thus the Geithner team pushed back against many sensible legislative proposals that would have tightened the rules. Treasury also promised – although in a nonbinding way – that the new generation of regulators would be an order of magnitude more effective that those who eviscerated whatever was left of our oversight system during the Bush years.
With his track record of survival, Geithner and his team apparently feel they can push hard against Elizabeth Warren and give the new consumer protection job to someone closer to their philosophy – which is much more sympathetic to the banking industry.
While Timmeh is denying that he’s try to kill a Warren nomination, if you believe that, I’ve got a bridge I’d like to sell you, really! email me at angryfutureexpatATgmail.com!
What Timmeh can’t, or perhaps refuses to, see is that the problem isn’t liquidity, it isn’t a matter of kicking the can down the road and letting ourselves “grow” out of the problem. It’s that people owe too much fucking money, and make too little. Period. Full stop.
Last week The IRA spoke to Lee Quaintance, co-founder of QB Asset Management. Lee had worked in high yield credit and government bonds for several decades for the likes of Goldman Sachs (GS), CSFB and DLJ. Lee and his partner Paul Brodsky write a fascinating monthly market comment.
The IRA: So Lee, we see deflation as far as the eye can see but also rising costs. What’s your view of the inflation/deflation debate amongst the chattering classes?
Quaintance: Credit inflations create asset bubbles that destroy the organic equilibrium mix between the factors of production. The deflation process curtails production and shrinks overall wealth but, ironically enough, redistributes a vast portion of the wealth that’s left to the privileged few, mostly banks and government.
Quaintance: We have some basic views on what should be done and it comes in two steps. First, there needs to be a coordinated global currency devaluation. We argue for the Fed to tender for private gold holdings at something like $5,000 per ounce and to maintain that bid/offer. This would be the true economic/regulatory function of a central bank and/or monetary authority.
Quaintance: Precisely. The second step would be a major policy-mandated contraction in unreserved bank lending. These two simple steps would not only rebalance the financial books globally but would prevent leverage from over-inflating asset prices going forward, in turn creating another non-sustainable bubble economy. This isn’t just theory. Let’s look back. Employment trends in developed economies are being strangled presently by prior asset price inflation. As an admittedly crude example, the cost of shops on Main Street are overvalued and require artificially high rents to service debts. The average would-be shop owner can choose to pay his inflated lease or choose to pay workers – but not both. So, asset price inflation due to excessive unreserved credit expansion is not wealth enhancing but, rather, productivity destroying.
Quaintance: You want organic employment growth? Lower the relative price of other factors of production. Boosting asset prices unilaterally while wage rates remain relatively stagnant is a recipe for unemployment. This is just common sense and it’s what we’re seeing today. The system yearns for more money, not more credit.
The IRA: Yes, their operating costs are rising but selling prices are compressed, just like our favorite Italian food dispensary in New York. As we have long argued with our friend Bill Greider, consumers and small businesses who do not do business with JPMorgan and Goldman Sachs are the big losers in the fiat system. You must be smart enough to surf the waves of inflation, not just swim with the tide, and that makes us all speculators. (It is really the arbitrariness of the money that is a root cause, and the creation of a monopolization of credit under an incompetent/corrupt Federal Reserve – Jesse)
Quaintance: Agreed. In the end, credit inflation historically leads to asset inflation while base money inflation leads to wage and basic goods/consumables inflation. No matter how you slice it, the ratio of outstanding global debts to global base money is irreconcilable. This is a mathematical tautology. From this imbalance flow many of the imbalances you cite, in my mind. Chris, as I said, we think this is as simple a problem as too little “money” in existence attempting to service and ultimately reconcile too much debt.
The IRA: So where do we go from here?
Quaintance: When the ratio of productive asset prices exceeds a theoretical limit vis-à-vis the other factors of production, the productive process breaks down. In the case of the U.S., it headed to developing economies overseas where labor demographics, regulatory apparatuses and asset pricing environments were far more in balance. This trend should continue until there is a serious reconciliation of that debt-to-base money gap.
Quaintance: It’s all about excessive unreserved credit having created real economic distortions that can’t be reconciled through further debt creation. For a true financial reconciliation to occur the debt-to-monetary base ratio has to narrow significantly, and to set a sustainable course the growth rate of global money should be capped in a credible fashion. The easiest way to do this is by reinstituting and maintaining a true gold standard, at least for base money. This is not a radical notion. Remember the reason the gold standard “failed” historically was not the basic mechanics of hard money being “too restrictive”. The problem has always been unreserved leverage that accompanies “gold standards” creating non-sustainable economic imbalances. There is plenty of gold, at the right price, to reserve all money and credit.
Basically right. Too little “money,” too much credit floating on top of it. Get rid of the debt, create wage inflation, or some combination, but we can’t resolve the economy by continuing to treat the banks, the skimmers of wealth, as too important to the economy to fail or rein in.
But then again, Geithner knows who he works for:
The deflation process curtails production and shrinks overall wealth but, ironically enough, redistributes a vast portion of the wealth that’s left to the privileged few, mostly banks and government.
And it ain’t us. Heckuva job, asshole.
[Update] My effort at Xtranormal filmmaking from a few months ago has held up pretty well:
Martin Wolf has a piece in the Financial Times noting the shocking statistic that 58% of all income gains in the United States in the three decades between 1976 and 2007 went to the top 1% of the income distribution (h/t Naked Capitalism). Standing alone, that fact is pretty damning, but the reason it’s really bad, lies in the supposed “solution” to the problem:
In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.
“The political response to rising inequality … was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”
In other words, the “solution” to wage stagnation among the lower and middle classes was to encourage lifestyle leverage, or borrowing so you could continue to acquire the accoutrements of a middle-class life, whether houses, cars, consumer items, or higher education. Talk about a cure that’s even worse than the disease! So it’s no surprise that starting around 1980, levels of household debt in the economy really started to take off, growing to more than 120% by 2007.
Now, I don’t mind inequality per se. Individuals that come up with great ideas, particularly those who follow-up their ideas with great execution deserve big rewards. Bill Gates, Sergey Brin, Larry Page, and Steve Jobs, for example. These guys actually create[d] useful products that enhance productivity and make us all better off. They deserve their money! But over the past three decades more and more of the profits of the economy have been funneled from real product entrepreneurs to the paper “entrepreneurs,” especially in the finance sector.
As Robert Reich noted back in April, “The Paper Entrepreneurs Are Winning Over the Product Entrepreneurs (A Thirty Year Retrospective):”
The paper entrepreneurs are winning out over the product entrepreneurs.
Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt.
Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.
Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments, legislatures, agencies, public utilities. It stimulates platoons of lawyers and financiers.
It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing. Paper entrepreneurialism also promises the best financial rewards, the highest social status.
The ratio of paper entrepreneurialism to product entrepreneurialism in our economy — measured by total earnings flowing to each, or by the amoung of news in business journals and newspapers typically devoted to each — is about 2 to 1.
That’s not how it should be. Finance has a place in the economy, but that place should be nothing more or less, than facilitating movement of capital from savers to product entrepreneurs. Once finance became the primary means for formerly middle class people to continue living like they were middle class by taking on ever escalating amounts of leverage, aka debt, finance became predatory, extractive, and destructive to the economy. And, once that happened, the returns to finance dwarfed returns to the real economy. Take a look at when financial sector profits began to diverge from profits in the real economy – just about the time the economy recovered from the 1982 recession.
Our current “Great Recession” was our best chance to rein these fuckers in. Perhaps through nationalizing the banks, or simply letting them fail en masse and taking a true shared depression. But that didn’t happen. Again, back to Reich:
Americans are keeping their jobs or finding new ones only by accepting lower wages.
Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.
We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.
It’s not inequality. It’s that the financiers are creaming off too much…from everyone. They have households over a barrel with debt, and they’re destroying the “product entrepreneurs.” As Michael Hudson puts it, “From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy.” They’re winning, perhaps they’ve already won.
Unless you want to head out and start pushing a guillotine down Wall Street (not a bad idea, BTW), the best tool you have at your disposal is to simply not play their game. They levered you up, and levered themselves on the assumption that you would make every effort to pay back those jackals.
To paraphrase William F. Buckley, the time has come to stand athwart the bankster takeover of the economy and yell “Stop!“
Next to the Fed’s flow of funds data, which tells us just how much debt has been written off and thrown into the secondary and tertiary collection markets, my favorite piece of economic data is the survey from the National Federation of Independent Business. The NFIB is the Voice of Small Business, after all! But it shows what those on the ground are seeing in the economy. And, as usual, and no surprise to those of us who think that recovery summer is bullshit spin, it ain’t looking too good or (.pdf report):
The National Federation of Independent Business Index of Small Business Optimism lost 3.2 points in June falling to 89.0 after posting modest gains for several months*. The Index has been below 93 every month since January 2008 (30 months), and below 90 for 23 of those months, all readings typical of a weak or recession-mired economy. Seventy percent of the decline this month resulted from deterioration in the outlook for business conditions and expected real sales gains.
Ruh roh! And why?
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months lost four points, falling to a net-negative 15 percent, 19 points better than June 2009, but still far more firms are reporting negative sales trends quarter-to-quarter than positive. The net percent of owners expecting real sales gains lost 10 points, falling to a net-negative 5 percent of all owners (seasonally adjusted).
To put this in Haiku form:
Have no money for products
Buy cheap Gin instead
Of course, since there are still some small businesses to be surveyed, they must be surviving somehow:
The weak economy continued to put downward pressure on prices. Thirteen percent of owners (down one point) reported raising average selling prices, and 27 percent reported average price reductions (down one point). Seasonally adjusted, the net percent of owners raising prices was a negative 13 percent, a two point increase in the net percent raising prices. June is the 19th consecutive month in which more owners reported cutting average selling prices rather than raising them. Plans to raise prices fell three points to a seasonally adjusted net 11 percent of owners.
Or to put this in Haiku form:
Prices falling fast
Some customers would be nice
But small business owners are an inherently optimistic lot, and they’ll hold onto their people and try to position themselves for the inevitable upturn by making investments in their people and their businesses, right, right?
The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, two points above the 35-year record low (reached most recently in December 2009).
Average employment growth per firm turned negative in April of 2007 and has remained negative for 10 of the 12 following quarterly readings ending with a negative .18 in April (seasonally adjusted). May and June show no reversal in the bad news, posting average declines of negative .48 and negative .28 workers per firm respectively.
Or to put this in Haiku form:
Debt all around me
Banksters take their monthly tithe
Who can I sell to?
Unless you’re in the business of selling to big businesses with massive hoards of cash, I’m afraid you’re out of luck.
The big question for those of you with money to invest is just what type of “flation” is coming down the pipe. Will it be inflation, or OMG!! hyperinflation, or are we heading into a period of secular credit revulsion and a deflationary debt spiral that will last for decades. No one really knows. You can always reverse deflation just by printing a lot of money and giving it to people. And you can always reverse inflation, just by – well bringing on a recession and issuing a new currency.
Even Weimer Germany only had hyperinflation for about 18 months. And since Zimbabawe shelved it’s own currency, they’ve been in deflation. Ultimately, what will happen is all political. Do we have the intelligence and political will to break out of deflation? Do we have to intelligence and political will to get some inflation, but not too much? Meh, beats the hell out of me.
All I know is that I look around and I see nothing indicating any willingness to allow even trivial amounts of wage inflation, which, as I’ve said many times, is necessary to break out of the deflationary trap we find ourselves in. So, I’ve thrown in my lot with the deflationists. Pretty sure I’m right, but I certainly could be wrong, and if you think I am, by all means go out there an buy the most expensive house you can with the biggest most levered mortgage possible. Run up your credit cards, take out as many student loans as possible, buy a new car – hell, borrow money from payday lenders.
But let’s talk for a minute or two about why this matters. What’s wrong with deflation? What’s wrong with inflation? Why it is that every time I say we need to print money someone comes by and says, “inflation will kill us all, haven’t you ever heard of the Nazis!?!?!” In the most obvious sense, inflation and deflation are flip sides of the same coin. In one case – too much money chasing too few goods leads to price increases. In the other, the reverse – too little money, chasing “too many” goods leads to price decreases. But with both inflation and deflation, what really happens is that incentives relating to investment, savings, and consumption decisions get all fucked up, and it causes markets to break down. That’s the problem.
John Malkin over at the American Enterprise Institute makes the case for the Rising Threat of Deflation:
As we enter the second half of 2010–the “postcrisis” year–while markets have been obsessed with Europe’s debt crisis, they have failed to notice potentially more ominous developments. The United States and Europe are heading toward–and Japan already suffers from–deflation, a classic prolonger of crises that boosts the real burden of debt and crushes profit margins.
[T]he Bank of Japan, slow to ease after the real estate bubble burst in 1990, has pre-sided over two decades of disinflation that has become outright deflation. Japan’s nominal GDP, as of the first quarter of this year, at ¥480 trillion has dropped by an extraordinary 7 percent over the past two years because of a combination of outright deflation and low-to-negative growth. Perhaps even more dismaying, in 2010, Japan’s nominal GDP is equal to its 1993 GDP.
Financial crises are deflationary because they create a rise in the demand for cash that depresses aggregate demand at a time when substantial excess capacity exists. The excess capacity is created during the run-up to the crisis, where underpricing of risk cuts the cost of capital and leads to substantial increases in the capital stock.
In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses. That development is deflationary because it means that a sharp boost in the monetary base engineered by the Fed does not translate into faster monetary growth at a time when the precautionary demand for money has been boosted by elevated uncertainty.
There is a bigger risk that deflation will intensify sharply because once the price level actually starts to fall, the demand for money will be further enhanced. A deflationary spiral–a self-reinforcing, accelerating drop in the price level–can result. This is because a falling price level means that cash “earns interest” since it enhances the purchasing power of otherwise sterile cash assets that pay zero interest, just as interest on a bond adds to its value in terms of its ability to be used to buy goods and services. That is why deflation drives down nominal (market) interest rates just as inflation drives them up. The “real” return on cash rises as inflation falls, thereby further boosting the excess demand for money and, in turn, exacerbating deflationary pressure. The fact that deflationary real returns on cash are not taxed further exacerbates deflationary pressure by enhancing the demand for cash.
The piece is worth reading in full. As John points out, the classic problem in deflation is that it increases the returns to cash, i.e. you can stuff cash in your mattress and have it earn “interest” – so people stop buying “stuff” and stop loaning it to financial intermediaries to lend or invest, and as wages decline and businesses fail, pre-existing debt obligations increase in real terms. So, as we cascade down the deflationary spiral, expect to see more stories like this:
NEW YORK (CNNMoney.com) — Debt collectors are getting desperate and dirty.
Harassing phone calls, abusive language and physical violence are becoming a bigger part of business as debt collectors struggle to round up money from people who don’t have it.
“The American consumer is really hurting and collectors are having to fight harder to get money,” said Robert Andrews, a senior analyst specializing in the debt industry at research firm IBISWorld.
Complaints of harassment by debt collectors surged 50% to 67,550 in 2009, according to the Federal Trade Commission. And they are on track to jump 13% this year, based on the number of FTC complaints filed in the first six months.
As I’ve pointed out, paying down debt is itself a deflationary act, and wage garnishments are the equivalent of further wage deflation. I’ll keep banging this drum until, well, until I stop, but what we need to do to break out of this is to print some money and give it to people to pay off their pre-existing debts. I mean, hell, even Libertarians who believe in things like the “sanctity of contract” agree.
Print, Baby Print!
The New York Times ran a piece today that won’t be much of a surprise to readers of this blog, but it’s worth looking at. As the New York Times tends to do in all its douchey glory, it focuses on someone who’s not really “suffering” from the effects of the Great Recession. The NY Times specialty being banksters who had to give up the summer home in the Hamptons and the like – and this piece is [almost] no different:
GRAFTON, Mass. — After breakfast, his parents left for their jobs, and Scott Nicholson, alone in the house in this comfortable suburb west of Boston, went to his laptop in the living room. He had placed it on a small table that his mother had used for a vase of flowers until her unemployed son found himself reluctantly stuck at home.
The daily routine seldom varied. Mr. Nicholson, 24, a graduate of Colgate University, winner of a dean’s award for academic excellence, spent his mornings searching corporate Web sites for suitable job openings. When he found one, he mailed off a résumé and cover letter — four or five a week, week after week.
And then we find out why the Times was so willing to feature this kid:
Many hard-pressed millennials are falling back on their parents, as Scott Nicholson has. While he has no college debt (his grandparents paid all his tuition and board) many others do, and that helps force them back home.
Of course, grandpa and grandma paid his way…too cute. The story includes all those facts and figures that we’ve written about extensively here at AFEP, getting your first job in a recession leads to lower lifetime earnings, the Great Recession is making the millennials risk averse (who can take chances when there’s no right to fail!), etc. etc. etc. But there were a couple things in the article that really stood out for me. First, grandpa is a rock star!
Complicating the generational divide, Scott’s grandfather, William S. Nicholson, a World War II veteran and a retired stock broker, has watched what he described as America’s once mighty economic engine losing its pre-eminence in a global economy. The grandfather has encouraged his unemployed grandson to go abroad — to “Go West,” so to speak.
Good call William S. Nicholson!!! Now, despite an obviously wealthy relative encouraging it, and despite this:
“As frustrated as I get now, and I never intended to live at home, I’m in a good situation in a lot of ways,” Scott said. “I have very little overhead and no debt, and it is because I have no debt that I have any sort of flexibility to look for work. Otherwise, I would have to have a job, some kind of full-time job.”
Scott, for some reason, is still in the U.S., living off his parents, doing odd jobs, and, well, basically wasting his time. Now, look, I’m not going to call this kid a whiny douchebag and a wimp because that would be unfair, since I don’t know anything about him. Un and underemployment are soul-sapping experiences, and they can warp your perspective into something that merely seems douchey and wimpy. But, really, man you have to listen to grandpa:
They said it was connections more than perseverance that got them started — the father in 1976 when a friend who had just opened a factory hired him, and the grandfather in 1946 through an Army buddy whose father-in-law owned a brokerage firm in nearby Worcester and needed another stock broker.
From these accidental starts, careers unfolded and lasted. David Nicholson, now the general manager of a company that makes tools, is still in manufacturing. William Nicholson spent the next 48 years, until his retirement, as a stock broker. “Scott has got to find somebody who knows someone,” the grandfather said, “someone who can get him to the head of the line.”
Grandpa’s right again. Take some of grandpa’s money, and get your ass to South America, or Europe, or China, or India, or the Middle East. The people that you meet will be the ones in your network that are the risk takers, the future entrepreneurs, the people that can move you to “the head of the line.” Hell, maybe some of their risk tolerance and adventurous spirit will rub off on you.
Get the fuck out of Dodge. Do it now, seriously, right now! You have no excuse.
As I sit here downing my whatever number Miller High Life and munching on some celebratory beef jerky and pretzels, I can’t help but ponder some of the things I’ll miss about the good ‘ole U.S. of A. on this, her 234th birthday. Of course, the Grim Truth, is that I really won’t miss many of the most significant things about my homeland. Here’s a few:
- Jamie Dimon
- Wells Fargo
- Capital One/Richard Fairbank
- The Pete Peterson Foundation/Pete Peterson
- Stephen Schwarzman
- Fat (like, Orca fat) People
- Annoying Foursquare Facebook updates (Are you really that proud of your consumption habits?)
- Larry Summers
- Timmeh Geithner
- The American News Media
But I’ll admit that there are things about the U.S. that are pretty fucking cool. Here are a few:
- The First Amendment (Ironic, since our news media sucks)
- Native English Speakers
- Taco Bell (are they global yet?)
- Miller High Life
- Ummmm, other stuff too…probably
The simple fact is that the U.S. has gone off the rails. But what’s different this time – and, of course, the U.S. has gone off the rails before – is the almost absolute inability of individuals to remake themselves. We have a massive overlevering of American households, but no right to fail. Collection company databases used to forget, but they don’t anymore. As much as I love the Internet, a single ill-advised comment under your real name can doom you forever. Credit reports are necessary to get a job, and if you declare bankruptcy, everyone knows by typing the few letters that correspond with your name into Google.
In the U.S. the frontier is dead. 150 years ago, if you were a failure in Boston, you could move to St. Louis and try again. And if you failed in St. Louis, move to San Francisco and try again. And your debts? Fuck ‘em, leave ‘em behind.
It may be nothing more than the inevitable result of the march of technology that the frontier dies, and the right to fail with it. But I don’t quite believe that. It’s just that the frontiers of opportunity aren’t in America anymore.
Well, maybe not fine, since the global economy is completely, totally, and irredeemably fucked (only a household debt jubilee can save us!). As we’ve been saying for a while around here, the future holds two decades, or more!, of deflation, defaults, bankruptcy, sovereign restructuring their social program obligations (Note that in the lingo of dominant creditor class, this is called “austerity” instead of “default” because the people they’re fucking are poor and middle class). But let’s start with a comment from the Economist magazine:
The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.
This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.
Everyone get that? Let me just repeat that, “the defining struggle of the next generation.” This is absolutely true. The creditors don’t want to accept less that full repayment, and the debtors know that there is no fucking way in hell that they will ever be able to repay it. So, what happens? Well, the banksters trundle the world down the Road to Neoserfdom (read the whole thing):
On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. “Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes.” The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.
Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.
The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.
Pretty much right. And the result? First, John Hussman:
In short, my concerns about the economy and financial markets are escalating quickly. Given the already vulnerable condition of the U.S. economy, a second phase of weakness would most likely contribute to already troubling levels of mortgage delinquency and foreclosure, and could be expected to push the unemployment rate toward 12%. It is not useful to rule out unfavorable outcomes simply because they seem unpleasant or unthinkable. It is also not useful to place superstitious hope in the Fed and the Treasury to fix the consequences of irresponsible lending without any ill effect. In the coming quarters, remember that every time you hear an incomprehensibly large bailout commitment from government, it will equate to an unconscionably large extraction of public resources, possibly through overt taxation, but more likely through the long-term destruction of purchasing power.
I sincerely doubt, that we are going to a “long-term destruction of purchasing power,” unless he means that people won’t have any fucking money, and therefore can’t buy anything, but he’s right that we’re about to head into the biggest leg down yet. Not to be outdone, however, is Paul Krugman:
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
[B}oth the United States and Europe are well on their way toward Japan-style deflationary traps.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
Now look, this is all playing out very much as we thought it would over here at AFEP, but that doesn't make it good. Let's put what's happening in bullet point form as it is my preferred presentation method.
- We (the "citizens") can't pay off our mortgage, credit card, car, student loan, and other debt;
- The Government takes our tax dollars to make the banks and other creditors whole on the loans we can't afford to pay off;
- The Government then raises our taxes (not yet, but probably will) and cuts our social safety net to make up for the cost of making the banks whole;
- We (the "citizens") suffer a massive recession and severe increases in unemployment;
- We (the "citizens") - now because we don't have jobs or income - can't pay off even more mortgage, credit card, car, student loan, and other debt;
- Rinse, repeat, all the way down.
Of course, the way to cut off the cycle is to have the Government intervene at step one, and eliminate, or force a major write down of household debt, but, hey banks are in control of the government, and that might mean they would lose a few percentage points (or optimally, a lot of percentage points) to inflation. And we can't have that.
So, crack open that bottle of tequila you've been saving for a special occasion because the great unwind is here.