Is It Time to Recognize Reality? 63 comments
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Or must we go entirely off the cliff and play Wile-E-Coyote?
Yes, I know, we "came back from the brink." Or did we?
Let's look at a few facts:
The Fed is literally the entire mortgage market. Yes, really. As Chris Martenson points out (correctly) we have issued roughly $685 billion in new mortgages through August, while The Fed has bought $722 billion of mortgage paper and GSE debt (I argue illegally, and have for months) with printed money. That is, they are the market - not a part of the market. But reality is much worse - there is no market when a central bank simply buys with printed money, intentionally overpaying. After all it's not their money, right? (On the contrary, it's yours they're spending - without your consent! Must be nice eh?)
Fannie announced a change in lending policies today, effectively tightening mortgage credit. The "new criteria" will get rid of the 50%+ DTIs they used to allow and demand a 620 FICO. This is still massively below anything that can be considered "prudent"; the average FICO is reported to be 680. But Fannie (FNM) has found that FICOs under 620 are in fact defaulting at a rate nine times higher than those with a higher score (!) Nine times is 900% - that's bad, right? They didn't release the percentage of loans that they had bought with the lower scores - so we don't know how ugly their book is - but remember, The Fed effectively owns all of their current-year issuance. This could end very badly for them - and us.
We claim that we're "helping homeowners" yet a recently-run study by Amherst (on Bloomberg Tuesday morning) shows that missing just one payment on your house places the probability of eventual default at 75%. Miss two and the probability is 95%. Any loan against which there is a "reasonable likelihood" of default must be reserved against according to GAAP (and just plain common sense) according to its probability of loss and recovery value. Yet most banks don't even consider an account "late" until it reaches 120 days behind! This is outrageously optimistic and is well beyond the threshold of intentional fraud if those numbers from Amherst prove up (and I suspect they do; consider that if you miss a payment you must make two at once to catch up!) Banks are willfully hiding probable losses on these loans for the simple reason that were they to reserve against them they would be instantly recognized as bankrupt. The fact of the matter is that they are bankrupt and our so-called 'regulators' are looking the other way rather than recognize massive control and accounting fraud.
The Fed has run monetary policy on a "Ponzi" basis for nearly three decades; in only one year out of 28 has their "monetary policy" resulted in improving rather than degrading credit stability1. This is a mathematical fact. We have become inebriated with excessive credit consumption throughout society, including the private and government sectors. This in turn has led government regulators to willfully and intentionally ignore the foundational principle of sound banking: one must never lend more unsecured than one has in excess capital and willfully stick their heads in the sand as credit growth has exceeded GDP expansion. In addition the government has "cooked" both GDP and inflation indices ("CPI") as a means of further justifying bankrupt policies by distorting reported economic statistics.
We ask "where did the credit go" repeatedly as consumer leverage has risen but personal consumption has risen at a slower rate. There is in fact no mystery: production was offshored to China, India and Vietnam (among others) and replaced with lower-wage "service" jobs. We have used credit as a means of masking our falling real standard of living by engaging in serial Ponzi Finance - first with the Internet Bubble and now with the Housing Bubble. But the Internet Bubble was small potatoes compared to the Housing Bubble, and we've run out of "bigger bubbles" we can blow to take the Housing Bubble's place. As defaults mount the facts are exposed whether we want them to be or not: our earnings power has been severely damaged as a whole by the intentional off-shoring of high-quality jobs and the importation of lower-quality (and lower-wage) workers into the US and we have tried to make up for the deficiency through borrowing. But borrowed money has to be paid back - and we can't make the payments.
Every nation that has ignored the foundational principles of sound banking and credit for a sufficient period of time has suffered either severe economic depression or monetary collapse. There are no exceptions. The United States and other western nations suffered ugly Depressions in the 1870s and 1930s. Weimar Germany, Zimbabwe, Argentina and others suffered monetary collapses. Going further back Tulip Mania and the Fall of Rome were both caused by monstrous mis-allocation of credit leading to hyperinflation in assets, the monetary supply, or both. The cause of these collapses and depressions is mathematics, not political. It can no more be avoided given improper banking and credit policy than can perpetual motion be achieved.
A "mere" 7% growth rate - what many economists would call "robust" economic expansion - causes the amount of whatever is being grown (or consumed) to double every 10 years. Each doubling in fact consumes (or grows) more than all of the previous time ever in history put together! Jimmy Carter lost his re-election bid in no small part because he had the audacity to make the (true) statement that this was impossible to continue into the indefinite future in regards to energy consumption. It is equally impossible to continue this into the indefinite future when it comes to GDP or, for that matter, credit.
Two functions of growth, where one is greater than the other, will always eventually run away from one another and, where the larger is dependent on the smaller to be able to be sustained, collapse becomes inevitable2. This is an extension of the above point. In economic terms if credit expansion exceeds real output expansion (since output is necessary to pay the servicing costs of credit of course) collapse of the system is inevitable, with the only variable being the amount of time that elapses before the collapse occurs.
Ok, so given all of these facts what can we do about it?
We can force improperly-granted credit - that is, credit granted to those who can't pay, to be recognized as bad debt and defaulted. This will result in the bankruptcy of lenders who imprudently made loans, but it also will result in the clearance of that bad debt from the system.
We can force lending going forward to take place such that all unsecured lending must be made only against excess capital on a dollar-for-dollar basis. This provides an immutable counter-cyclical check and balance on lending and leverage. If a bank wishes to grant someone a 100% LTV mortgage, they can - but since real estate fees and closing costs average 8%, they must at closing have 8% of the value of the loan in segregated cash reserves! If the loan is for 92% or less of the current value they need no immediate cash reserves. There remains the risk of asset valuation declines, of course, which could force the immediate sale or capital raising requirement; as such most institutions would choose to build in some sort of "cushion" against that contingency by requiring a larger down payment. Credit card loans would carry a high interest rate (as they do now) and be limited in line size since they would require 100% reserves (being entirely unsecured); auto loans would likewise have a sizable down payment requirement since new automobiles depreciate markedly upon delivery.
We can demand that system liquidity (and thus interest rates) be set no lower than that which holds the "Ponzi Finance Indicator"1 to a slight positive bias with automatic (per statute) corrections made should the ratio fall negative. This will cause rates to be sufficiently high so that "ponzi finance" (that is, debt taken to finance consumption) is never a large enough percentage of the whole as to imperil the stability of the monetary system. We must also demand and insist upon accurate reporting of GDP and inflation statistics, of course; both of these computations need to have the built-in "adjustments" that currently distort their results removed.
We have but two choices: we can accept the mathematical reality of compound growth rates and our attempt to cheat math through fraud or we can plunge off the cliff of history, as every other government and economy that has willfully ignored these mathematical realities has done.
Credit demand has effectively collapsed in The United States3 as we have reached the limit of debt service given the degradation of earnings power in the American People along with grossly-imprudent credit expansion. Further attempts to "stimulate the economy" via yet more credit creation cannot succeed, as we have reached the limit of the geometric progression of both credit and output in terms of sustainable debt service.
Attempting to hide credit deterioration will only cause the inevitable contraction of both to be more violent and disorderly.
It is mathematically impossible to prevent the outcome that now faces us; we are choosing only between the violence with which it comes and whether we have control over the process, or whether it will inevitably jump any "fire lines" we try to establish and potentially consume not only many private businesses and individuals but the government itself.
It is time to choose wisely; we face not a matter of politics or "pie in the sky" economics as practiced by ivory-tower academics, but rather the cold, hard mathematical realities that are inviolate and impersonal - the mathematical realities that control our destiny.
Charts used in this Ticker
1: The "Ponzi Finance Indicator" - when the indicator is negative then debt is compounding at a greater rate then GDP, and vice-versa. Negative values denote decreasing monetary stability, positive values denote increasing monetary stability.
2: A simple chart showing how badly (and quickly) debt "runs away" from GDP. Assumptions are that both debt and GDP begin with $1,000 outstanding at "year zero" and GDP increases at 5% a year, with the "spread" as indicated for each curve.
3: Credit outstanding in the US, by sector, cumulative. Note that with the exception of Federal Government debt all other sectors are either flat or contracting.
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This article has 63 comments.
He rants about the political system failing to change and continuing to turn a blind eye. Why is this happening? Simple. The underemployment rate among the politically relevant population--those with a Bachelor's degree or higher--is only 10%. These are the people who matter politically, and frankly, it isn't that bad for them yet. Just ask them.
Yeah, they're not happy with their stock portfolios or the decline in the value of their houses--or a lot of other things. But as long as the job is there, the house is there, and the TV is there, you will not see THEM get politically active and move for any kind of change.
Maybe it's too bad, but then, maybe it won't happen either. Unemployment in this class never reached a level high enough during the Depression to produce any important policy change--and the country was STILL in the depression when the war began.
So if this guy wants to see change, all he has to do is sit around and wait until underemployment among the educated class reachs 40%. NOTHING will happen at 39.99999999999%.
40%.
By the way, we are moving from the West Coast Hotel v. Parrish "scrutiny" regime--which allowed this catastrophe by denying individually enforceable rights and gave the political system nearly all power over the facts (blame people themselves for this)--and toward the "maintenance" regime I discuss in my book The Eminent Domain Revolt.
You will never see economic activity increase again--NEVER--until the scrutiny regime is booted out of power, the maintenance regime is put in power, and the New Bill of Rights is enforced.
Enforce it or starve. It's up to you clowns.
Sorry. All the players have now been benched. Congratulations on making such a magnificent catch! Now what?
The banks are having an absolute hay-day. They have do downside risk (b/c they are selling the FHA loans to the government) with limited downside risk. This is so appealing and they are making so much money (getting money at effectively zero) that there is no need to be competitive and seek out business opportunity (e.g. JUMBOs) or support small business loans.
This is what one might call "unintended consequence" of government safety net in the banking system- it's not lending itself to more lending but, rather, less.
Well stated!!
Let's get Bernanke his Nobel Prize and hustle him off to Goldman Sachs before he destroys the lives of our great-grandchildren.
People lost investment money in the dot-com bust. The smart money was already out. Wall Street wasn't hurt in the dot-com era except that insane IPOs- rememeber pets.com- stopped and that revenue stream wore out. Those revenue streams were replace by Private Equity and M&A. CDOs and RE are unrealted- sorry.
We won't get a recovery though until dumb-ass hillbilly bankers start lending again.
However, you have to believe that thing will get better inorder for inflation to happen. Without lending by banks (to samll businesses) don't expect a trunaround.
Of course we've been moving high-quality off-shore for years...
But 'importing low-quality workers into the US'? Immigrants? Are you saying our immigrants are low-quality? Yes you are... Its right there in black and white.
What does low-quality mean? I think I know, but can barely believe someone would publish something so pathetic.
Here's a fun little fact: our medical schools would be starving for qualified students, except for the immigrants that feed their classrooms. First or second generation Asians account for 25% of all med school graduates this year. Yup, our brilliant little 'American' kids (which by I think you mean 'white', am I right?) can't compete with these dang foreigners who have silly names and wear different clothes...
Just for the record: We are a country of immigrants, and this idiotic immigrant bashing sounds like the stupid-fat-white-male-... that it is...
If the author cloaks medieval social arguments in an economic thesis, he destroys his whole argument and reputation with it.
When you see data specifying 7.6% of ALL mortgages are 30 days delinquent and 44% of sub-prime mortgages are delinquent you know there's still trouble in the deck.
www.reuters.com/articl...
This combined with credit card defaults is setting up a big fall. I honestly don't know how analysts can predict these huge earnings increases in the S&P 500. Where are the profits coming from if consumers have no spending cash? Sure there are a lot of people that still have jobs and enough disposable income, but its the margin that creates earnings growth and loss. A small change in consumer activity can cause a big change for companies.
On Sep 29 12:59 PM HardwoodFlooring wrote:
> Donald- what are you talking about? The dot-com bust to the housing
> market correlation? Yes they were both bubbles but I fail to see
> your conspiracy theory as reality.
>
> People lost investment money in the dot-com bust. The smart money
> was already out. Wall Street wasn't hurt in the dot-com era except
> that insane IPOs- rememeber pets.com- stopped and that revenue stream
> wore out. Those revenue streams were replace by Private Equity and
> M&A. CDOs and RE are unrealted- sorry.
Pain avoidance has been the game for decades, at least. Recovery starts by admitting the truth. Until at least that happens, we face death by a thousand cuts with plenty of big ones thrown in.
On Sep 29 01:34 PM Pat C wrote:
. I am an accountant not an economists
> and my auditor nose says OK what's this stuff worth? Does anyone know?
Only the Fed (which is why there is a bill afloat to madate an audit [the first Ever] of that institution, which even barney frank supports).
>At what price are the buying these assets? Are they discounted?
They are buying them aBove market value - that's the whole point of there exercise.
> When it comes time to sell it will there be a buyer?
Clearly not, unless you believe that the Recovery Fairy has come in the night, waved her magic wand, and made it al better.
> Really bone head questions
No, perfectly good questions. Just not very PC. You are unfashionably ahead of the curve. Tsk, tsk,
The most salient part of the FOMC Communiqué: To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.
The Fed has monetized $862B of its $1.25 trillion MBS plan, and $129.2 B of its $200B agency program.
The Fed has started talks with bond dealers about withdrawing an unprecedented amount of cash injected into the financial system the last two years. Evidentially some of the $1 trillion may be removed from the system. The only effective way they can do that is by buying paper bank and pay for it with more money created out of thin air, which is further monetization.
If no one buys treasuries and rates rise (finally) after being held down by Mister Bernanke for more than a year, why does this not threaten the recovery?
I'm actually all for the Fed to back off and stop using our grandchildren's money to inflate assets back toward unreasonable levels. But what is Ben up to?
Is Ben still planning to continue funding the stock market rally?
On Sep 29 02:16 PM conceptwizard wrote:
> The two most important features of the Fed’s communiqué are: quantitative
> easing via Treasuries will end as scheduled in October but the quantitative
> easing via MBS and agency debt will be extended through Q1 2010 instead
> of ending at year end. The Fed must accommodate foreigners as they
> keep jettisoning agency debt.
>
> The most salient part of the FOMC Communiqué: To provide support
> to mortgage lending and housing markets and to improve overall conditions
> in private credit markets, the Federal Reserve will purchase a total
> of $1.25 trillion of agency mortgage-backed securities and up to
> $200 billion of agency debt. The Committee will gradually slow the
> pace of these purchases in order to promote a smooth transition in
> markets and anticipates that they will be executed by the end of
> the first quarter of 2010. As previously announced, the Federal Reserve’s
> purchases of $300 billion of Treasury securities will be completed
> by the end of October 2009.
>
> The Fed has monetized $862B of its $1.25 trillion MBS plan, and $129.2
> B of its $200B agency program.
>
> The Fed has started talks with bond dealers about withdrawing an
> unprecedented amount of cash injected into the financial system the
> last two years. Evidentially some of the $1 trillion may be removed
> from the system. The only effective way they can do that is by buying
> paper bank and pay for it with more money created out of thin air,
> which is further monetization.
The theory behind quantitative easing is that entrepreneurs can be fooled into making new investments by artificially low interest rates.
The theory behind government stimulus is that consumers can be fooled into consuming by short-term, unsustainable government spending.
These theories might have worked in the past, but with the ready availability today of information about these artificial, distortive government manipulations, nobody is fooled anymore.
Put another way, after watching the Fed inflate the dot.com bubble and watching it burst in 2000-2002 and then watching the Fed inflate the real estate and equities bubble and watching it burst in 2007-2008, we are all getting more skeptical.
Traders can ride this up and down, but long term investors don't want to play.
So the toilet needs to be crapped in before it can be flushed.
Regardless of what anyone says the system is on a one way irreversible track.
The dollar as I predict will test USDX 71.18 by the end of October or at least by the end of the year.
On Sep 29 02:34 PM Michael Clark wrote:
> Ok, so I have a question ConceptW: If the QE of the Fed is ending
> in October in Treasuries, who is going to buy the TBonds and TBills
> and keep the yield from rising, affecting mortgage rates, and choking
> the so-called rally to death in its crib. Can the Fed control rates
> effectively through the MBS manipulation?
>
> If no one buys treasuries and rates rise (finally) after being held
> down by Mister Bernanke for more than a year, why does this not threaten
> the recovery?
>
> I'm actually all for the Fed to back off and stop using our grandchildren's
> money to inflate assets back toward unreasonable levels. But what
> is Ben up to?
>
> Is Ben still planning to continue funding the stock market rally?
>
This immediately forces the banking system to operate counter-cyclically, because at ANY TIME asset price deterioration can force what amounts to an immediate margin call on the bank (forcing it to either divest assets or raise capital.) In the extreme it can force them out of business.
This single change would end - immediately - the games.
Tying liquidity to the ponzi indicator would stop the overuse of credit for consumption pull-forward. That will never go completely away (nor does it have to) but overuse of credit for this purpose is extremely damaging in that it eventually forces depressions (or worse, monetary collapses.)
Those two items are the solution. Now the trick is figuring out how to make them happen.
That would be great, and would definitely allow more stable growth patterns to emerge, however, realistically do you think politicians would be a proponent of this (I'm assuming this would be done by regulatory and legislative measures)? Doing something like this would probably cause a lot of short-term economic pain, and if there is one thing that can be said about policy measures, it's that politicians are not incentivized to create long-term solutions if short-term pain has to be taken. Also, I don't know if it's human nature or what, but crises seem to never be circumvented or pre-empted, rather they are reacted to (probably one of the reasons the Government seems necessary hah, although many times they are reacting to things they helped spawn to begin with). Necessity is the mother of invention, and maybe, just maybe, something like you described will be implemented after a future crisis.
What about on an individual level, is there anything we do in our everyday lives? How do we make this a priority, talk to our non-finance/economics minded friends? I think this is why a lot of people get down about discussing solutions for these problems, they seem so far away from us and impossible for us to have any impact on - our faith has to be put in the hands of politicians, and well, that is a miserable option.
We are clearly living in a make believe world of magic money and meaningless obligations that mean no one has an obligation but the taxpayer. Moral hazard is so commonplace I think we just call it the nuts and bolts of banking 101 these days. A country premised on financial lies eventually must fact the truth. Karl, thanks for pointing out once again the plain and simple economic truth that you can't get something for nothing forever. And you can't fool all the people all the time. After all, is all about simple math and logic.
And now, another government agency, the FDIC is going to the same banks for a bailout (contribution prepayments) whose deposits it's supposed to insure! Talk about irony. With FDIC releases stating that its fund will be negative by the end of the month, an insolvent entity is backstopping the deposits of all US banks.
On Sep 29 05:51 PM conceptwizard wrote:
> The intersession of the Fed into markets has to continue or the system
> will collapse and deflation will take over. This desperate situation
> will force more and more players into the dollar carry trade into
> gold and silver. Monetary stimulus is the only thing that can keep
> the ship from sinking. Monetization is running rampant even at Treasury
> auctions as dealers buy for the Fed, the Fed buys through the Cayman
> Island and their swap partners use swap dollars to buy at the auctions
> as well.
>
> Regardless of what anyone says the system is on a one way irreversible
> track.
>
> The dollar as I predict will test USDX 71.18 by the end of October
> or at least by the end of the year.
I'm dead serious! Is there any way the dollar escapes alive, is there any way the Fed can continue with 0% forever? And if not, are there two better investments?
This doesn't mean the government can't cock it up and make it happen, but it won't be The Fed that causes that outcome; such a belief is equivalent to expecting Bernanke to stick a pistol in his own mouth and pull.
Ain't gonna happen.
The juggling match here is to play their monetization game up until it becomes clear that Treasury will issue into them with wild abandon (there's Weimar!) At that point they WILL stop it, because they have to or they blow their own heads off. And guess what: They ARE stopping it. Hmmmm....
The GSE paper problem is more perverse. The most likely explanation for what happened there is that China told The Fed that either they eat all the trash GSE paper (they held a nutty amount of it up until about a year and a half ago) or they were going to detonate the economic world. This is one of the reasons that an audit would be so useful - we'd find out what had ACTUALLY HAPPENED that led to the buying of MBS. Note that under Section 14 The Fed's purchase of that paper is illegal - so who twisted their arm hard enough that they did it anyway?
"End of the world"? Nope. This is a prescription for fixing the problem. Yes, there is short-term pain that comes with repairing the mess, but we either fix or we will suffer the consequences.
Do you think that Russians woke up one day when their system collapsed thinking that they would not survive? Germany went through it. Great Briton, and of course Rome. Iceland more recently. And we will go through it and survive.
We Americans just can't perceive that this could happen to us. Its easier to stick your head in the sand instead of trying to make people aware and possibly change the direction in which we are heading.
History dictates that any country this far in debt will not survive as it stands. Benanke himself said in front of congress " If we don't cut back on entitlement programs and reduce spending, that he would not be able to roll the debt this year". That's pretty plain. What he said was, our system will not float. The response was increased programs, health care reform and so on.
We cannot pay back our debt, and countries wont or can't finance it. So you tell me where the money will come from to purchase the debt. Monetization is the only resort and that is nothing but a slippery slope.
On Sep 30 08:22 AM stocknerd wrote:
> More end of the world. How many posts are allowed by SA that are
> plain silly. This is another the WORLD IS ENDING SOON!!!!! These
> posters must be sore loser republicans or they just like screaming
> wolf. Sorry to bring sunshine to these doom and gloom posts but the
> world is not going to be thrown into the financial abyss.
On Sep 29 07:49 PM Mike Mezzadri wrote:
> What about on an individual level, is there anything we do in our
> everyday lives? How do we make this a priority, talk to our non-finance/economics
> minded friends? I think this is why a lot of people get down about
> discussing solutions for these problems, they seem so far away from
> us and impossible for us to have any impact on - our faith has to
> be put in the hands of politicians, and well, that is a miserable
> option.
P O N Z I.
"And we will go through it and survive."
More than survive, the USA will go thru a dollar collapse and nothing will change. Current policies will continue and an even greater expansion of the US government (the ones who caused the collapse and approved the debt increases). Any collapse analysis will conclude free markets were to blame and government is the answer. Worked for FDR. Nice racket.
The politics of the world run on government debt. The USA just happens to be leading the way.
Wake me when a strong-dollar, pay-down-the-debt candidate has a chance at winning the White House. Until then, dollar-denominated assets are for suckers.
One comma makes all the difference in meaning. You need to read "Eats Shoots and Leaves."
There is no market "problem" that an objective currency wouldn't remedy. The challenge comes in dismantling the the incalculable number of government spending schemes for which fiat currency was designed. Until Americans grow up, accept reality and adopt the philosophical premises necessary to abandon the welfare state (amongst all the other illegitimate spending), and deregulate the market, our economy is on a one-way track to hell. There's no question *if*, but only *when* we'll see a total collapse.
It's time to decide if we want to have our cake or eat it.
On Sep 29 07:03 PM Mike Mezzadri wrote:
> Ok, reality has been recognized, now what? There's little use in
> restating these situations which have been recognized and accepted
> by the majority of people who are paying attention and can think
> for themselves - now we have to figure out what to do about them.
> So, let's start thinking about the solutions, there are a lot of
> smart people on here, it shouldn't be hard.
You Asian geniuses are going to be singing a different tune when your little Asian princess brings home a tattooed Pedro for dinner. What will the dinner chatter be about? Prison food!
On Sep 29 01:28 PM zagrebzagreb wrote:
> Just for the record: We are a country of immigrants, and this idiotic
> immigrant bashing sounds like the stupid-fat-white-male-... that
> it is...
You are making too much sense and pointing out reality again Karl!
Wherefore art thine koolaid?
The banks and the FED and the IRS needs more blood from us turnips!
Don't you know there are millions of illegal immigrants who need a free education and healthcare!?! Don't you realize that there are plodding bureaucracies of tyranny that need to grow their tumorous bulk at the expense of the individual!?! Don't you know there are Wall Street dealers and pit bosses and casino owners who need to build another mansion and send their mewling brats to an Ivy League school and ensure their continued oligarchy over the average citizen!?!
Don't you see that you should be going on CNBC and telling all those silly retiree's and prudent investors to throw their money into equities before they "miss out" on the recovery?
Karl, unfortunately nothing will change as a commenter had stated, "Until the educated classes reach a 40% underemployment rate, nothing will change." I agree.
Instead of looking out for the greater good of our nation, and its economic national security, those that are getting by OK sit back because they feel they still have "theirs" in their pocket. Once they lose "theirs" the nation's pain will be horribly severe.
China will no doubt feel the pain of their unsustainable stimulus program. Unless their own people begin buying their over-supply of stuff, since we have cut back our purchases, they will feel the pain, as well.
Thanks for your honest writing!!!
This morning on CNBC a fund manager, when asked whether or not he was concerned about unemployment, said "Well, I'm employed, so I won't be concerned about it untill I'm unemployed."
What an A$$!
But...it's typical...unfortunately.
On Sep 30 10:56 AM geewow wrote:
> Karl is once again putting forth an argument with solutions. The
> quote, "The crapper must get filled up before it can be flushed"
> is so true. All that the CONgressional members are doing is pushing
> the load down the road hoping they can make it through another election
> cycle without getting the boot. The president appears to so enjoy
> the national spotlight that he, too, cannot see the forest through
> the trees and is playing politics hoping to push the load beyond
> his second term.
>
> Karl, unfortunately nothing will change as a commenter had stated,
> "Until the educated classes reach a 40% underemployment rate, nothing
> will change." I agree.
>
> Instead of looking out for the greater good of our nation, and its
> economic national security, those that are getting by OK sit back
> because they feel they still have "theirs" in their pocket. Once
> they lose "theirs" the nation's pain will be horribly severe.
>
> China will no doubt feel the pain of their unsustainable stimulus
> program. Unless their own people begin buying their over-supply of
> stuff, since we have cut back our purchases, they will feel the pain,
> as well.
>
> Thanks for your honest writing!!!
Your first paragraph stated a FACT. Your second paragraph stated a logical derivative. But your last paragraph stated an illusion and wishful thinking.
No one wants to see the dollar collapse. Not China, not the US government, not foreign holders of US treasury bonds, not US investors, not the people of the United States or the people of the world, not me, not you. No one want to see the dollar fall.
But that does not mean it will not happen. The dollar WILL COLLAPSE, due to the natural force of free market. Bernanke is not going to kill himself but that does not mean he can live forever. Natural force will take care of all. The FED doesn't want to see the dollar fall, but it is POWERLESS to do anything about it.
You think the FED is powerful? Nothing is more powerful than the free market itself. Let them keep printing the dollar. When the printing no longer means anything, then the FED no longer has any power. The FED would have some power if it can magically print out tons of gold. But it doesn't have that magic power. There is nothing backing up the dollar.
Or you think the US government is power? A government that is buried in mountains of debt can NOT be powerful. It can collapse under its own weight, without any outside invasion.
The dollar is done. No one can do anything about it.
On Sep 30 09:00 AM Karl Denninger wrote:
> Budd, remember that all The Fed has is the dollar. Should the dollar go into the toilet they lose all.
>
> This doesn't mean the government can't cock it up and make it happen, but it won't be The Fed that causes that outcome; such a belief is
> equivalent to expecting Bernanke to stick a pistol in his own mouth and pull.
>
> Ain't gonna happen.
You may have done one up on our david:
blog.atimes.net/?p=1152
blog.atimes.net/?p=1157
The Fed being responsible for the entire mortgage market recovery is a hot one, I'll have to give you that ........
blog.atimes.net/?p=1155
".......The only way to finance a Treasury deficit pushing $2 trillion is through the banking system. Even if savings rise to 10% of GDP and all savings go into Treasury securities, that only covers a trillion dollars. Foreign purchases might reach $300-$400 billion as China and other creditors are forced to swallow more US obligations for lack of other things to buy........."
Gee, I wonder if he is saying the same thing?........
The FED has the power to print as much money as it wish. It's money printing press is highly efficient. But it is UP to the rest of the world to recognize how much value the printed money has, or even if it has any value at all. The more money the FED prints, the more it is held hostage by its own printed money.
The value of Federal Reserve Notes (FRN) that the FED prints, is based on another paper, the US treasury bonds. The US government can issue as much treasury bonds as it wish. It costs only electricity to issue the US treasury bonds now. But it is UP to the rest of the world to recognize how much those US treasury bonds should be valued, or whether they have any value at all.
The recognition of the value US treasury bonds is based on the full faith and credit of the US government that it will have the ability to pay back the debt, PLUS interest, in real purchase power term, at a future time. But base on WHAT do you have that full faith and credit that the US government will be able to pay back the debt?
It is based on the belief that the US government can TAX its people, in excess of the service it provides to its people. The excess of taxation subtracting government cost is the basis for the US government to pay back its debt. So it is based on the belief that the US government will be able to tax more, spend less, and run a fiscal surplus. The surplus is used to pay the debt. It is also based on the belief that the economy will turn around and so the government can start to tax more and spend less.
But that faith and credibility is being DESTROYED. Market capitals (the smart money) is smarter than any human being. The market capital, sensing a hostile taxation environment, will escape from US soil and go to other land to seek better investment return.
When market capital escape from this country, it is like blood is drain from a body. Jobs and tax revenue are all gone, forcing the government to jack up tax rate, which in turn forces more market capital to escape to foreign soil. Social disturbance forces the government to spend more to pacify the people, which causes further collapse of the US dollar and the US treasury bonds, making it even harder for the US government to borrow money. Therefore it must keep printing more and more paper money.
This vicious cycle continues until the dollar is finally worthless, the land is ripped bear, and it could even leads to the collapse of the US government itself, as individual states may seek secession from the union for its own survival.
Are you still going to hold the dollar and "short the phone book", Karl Denninger? Do you still think there is any hope in the dollar? Just because the FED wished so?
It will be a nightmare but at least we'll get to flush ALL of our inept political leaders as well.
"and the hot potato was passed back to the financial sector who once again promptly - hup hup, passed it to the FED, who in no time at all went deep and passed that hot spud to all the taxpayers."
I cringe when people talk about taxpayers in the US getting the brunt of the fallout because that is not where the brunt is really being felt. Taxpayers did not pay enough taxes to run the empire BEFORE the stimulus started. That's what they call running a deficit government. So while all of this unpayable debt may be getting placed onto the account of the US taxpayer, rest assured that someone else will be eating the bill.
I believe that the only hope of America maintaining its hegemony over the world (which is required in order to maintain the current quality of American life) is to start a preemptive war with China and then enslave its people. Do I want US to do this? HELL NO!! That's why I voted against the warmonger McCain because I could see that he was leaning in this direction (first bomb Iran and then increase US military presence in the area as a staging point for further conquest).
God help us all because Obama and Bush sure as Hell aren't.
The founding fathers envisioned a republic in which states would compete with each other and citizens could "vote with their feet" in favor of those states with the most enlightened laws. We've largely been robbed of that privilege in all important respects, so I, for one, would favor a secessionist movement in a "civil war" between producer states and entitlement states.
Excellent article, Karl.
Look at a bill... says "Federal Reserve Note", meaning that the money they authorize the Treasury to print is a debt obligation.
They own the money, and we the people pay them interest on it for the privilege of using it.
Other than your stat about unemployed with bachelors degrees (it is way over 10% - even NASA/ government (taxpayers) has off shored rocket scientists (sending our shuttle loads to Russia soon) and is using cheaper imported foreign bodyshops/immigrants - you are mainly right.
For the protection of the few, we have sacrificed the freedom and security of the many.
We the people don't have the balls to wake up and stop this nightmare, and many like it this way.
On Sep 29 12:36 PM John Ryskamp wrote:
> It's the same old analysis, over and over again. What new is there
> to be said? One thing:
>
> He rants about the political system failing to change and continuing
> to turn a blind eye. Why is this happening? Simple. The underemployment
> rate among the politically relevant population--those with a Bachelor's
> degree or higher--is only 10%. These are the people who matter politically,
> and frankly, it isn't that bad for them yet. Just ask them. <br/>
>
> Yeah, they're not happy with their stock portfolios or the decline
> in the value of their houses--or a lot of other things. But as long
> as the job is there, the house is there, and the TV is there, you
> will not see THEM get politically active and move for any kind of
> change.
>
> Maybe it's too bad, but then, maybe it won't happen either. Unemployment
> in this class never reached a level high enough during the Depression
> to produce any important policy change--and the country was STILL
> in the depression when the war began.
>
> So if this guy wants to see change, all he has to do is sit around
> and wait until underemployment among the educated class reachs 40%.
> NOTHING will happen at 39.99999999999%.
>
> 40%.
>
> By the way, we are moving from the West Coast Hotel v. Parrish "scrutiny"
> regime--which allowed this catastrophe by denying individually enforceable
> rights and gave the political system nearly all power over the facts
> (blame people themselves for this)--and toward the "maintenance"
> regime I discuss in my book The Eminent Domain Revolt.
>
> You will never see economic activity increase again--NEVER--until
> the scrutiny regime is booted out of power, the maintenance regime
> is put in power, and the New Bill of Rights is enforced.
>
> Enforce it or starve. It's up to you clowns.
If they tried to collect, it could mean war.
On Sep 30 03:01 PM Did U Think The Ponzi Scheme Would Last? wrote:
> On Sep 29 12:54 PM Donald Ingram wrote:
> "and the hot potato was passed back to the financial sector who once
> again promptly - hup hup, passed it to the FED, who in no time at
> all went deep and passed that hot spud to all the taxpayers."
>
> I cringe when people talk about taxpayers in the US getting the brunt
> of the fallout because that is not where the brunt is really being
> felt. Taxpayers did not pay enough taxes to run the empire BEFORE
> the stimulus started. That's what they call running a deficit government.
> So while all of this unpayable debt may be getting placed onto the
> account of the US taxpayer, rest assured that someone else will be
> eating the bill.
>
> I believe that the only hope of America maintaining its hegemony
> over the world (which is required in order to maintain the current
> quality of American life) is to start a preemptive war with China
> and then enslave its people. Do I want US to do this? HELL NO!!
> That's why I voted against the warmonger McCain because I could see
> that he was leaning in this direction (first bomb Iran and then increase
> US military presence in the area as a staging point for further conquest).
>
>
> God help us all because Obama and Bush sure as Hell aren't.
The entire late 90s was fueled by TWO related, yet seperate once-in-a-lifetime events. Y2K and dotcom.
People have forgotten, or maybe they never even knew, reality. Y2K created a multi-trillion dollar industry that employed millions in America and world wide. As the clock struck 12:01, these employees and many of their companies because 100% useless.
Unless you were in the industry, you didn't realize the destruction started for the IT industry in 2000, not 2001. Dotcom and easy credit were covering it up until 9/11 happened.
By the time the housing bubble started to inflate, manufacturing was shedding over 1 million decent (and up) paying jobs a year and IT not only never recovered, Congress continued to allow in upwards of 160,000 foreigners a MONTH to steal our jobs.
Wall Street should have been bleeding all over the place, instead Greenspan and our politicians allowed housing to inflate away the real losses that were being dealt to our middle class.
Most Americans didn't even notice and didn't listen to those that were directly affected.
When you consider the brilliant minds that consult and guide our leaders, how can you believe it is just a comedy of errors?
How many times do you have to hit your head into the wall to figure out it hurts?
It IS a conspiracy and regretfully the proof will come too late to do anything about it.
On Sep 29 12:59 PM HardwoodFlooring wrote:
> Donald- what are you talking about? The dot-com bust to the housing
> market correlation? Yes they were both bubbles but I fail to see
> your conspiracy theory as reality.
>
> People lost investment money in the dot-com bust. The smart money
> was already out. Wall Street wasn't hurt in the dot-com era except
> that insane IPOs- rememeber pets.com- stopped and that revenue stream
> wore out. Those revenue streams were replace by Private Equity and
> M&A. CDOs and RE are unrealted- sorry.
It was the whole "new era" mentality that "All things were possible" that ultimately led to one bubble after another in apparently different areas. And the belief that CEOs should be richly rewarded for making it all possible.
Of course it was (mostly) a fantasy and a fraud, as we found out to our chagrin, but mainly after the fact.
On Sep 30 07:04 PM TeresaE wrote:
> Not true.
>
> The entire late 90s was fueled by TWO related, yet seperate once-in-a-lifetime
> events. Y2K and dotcom.
>
> People have forgotten, or maybe they never even knew, reality. Y2K
> created a multi-trillion dollar industry that employed millions in
> America and world wide. As the clock struck 12:01, these employees
> and many of their companies because 100% useless.
>
> Unless you were in the industry, you didn't realize the destruction
> started for the IT industry in 2000, not 2001. Dotcom and easy credit
> were covering it up until 9/11 happened.
>
> By the time the housing bubble started to inflate, manufacturing
> was shedding over 1 million decent (and up) paying jobs a year and
> IT not only never recovered, Congress continued to allow in upwards
> of 160,000 foreigners a MONTH to steal our jobs.
>
> Wall Street should have been bleeding all over the place, instead
> Greenspan and our politicians allowed housing to inflate away the
> real losses that were being dealt to our middle class.
>
> Most Americans didn't even notice and didn't listen to those that
> were directly affected.
>
> When you consider the brilliant minds that consult and guide our
> leaders, how can you believe it is just a comedy of errors?
>
> How many times do you have to hit your head into the wall to figure
> out it hurts?
>
> It IS a conspiracy and regretfully the proof will come too late to
> do anything about it.
Seen any pictures of daily life for the masses in Zimbabwe recently?
On Sep 29 02:25 PM waf76 wrote:
> While for intents and purposes the country is bankrupt, this realization
> across the world will take decades. So is there reason to be bearish?
> Absolutely. But if you think we're going to be hiding out in our
> fall out shelters with water and canned food and nobody is gonna
> make money in the market on quality or toxic assets you're mistaken.
On Sep 29 12:36 PM John Ryskamp wrote:
> It's the same old analysis, over and over again. What new is there
> to be said? One thing:
>
> He rants about the political system failing to change and continuing
> to turn a blind eye. Why is this happening? Simple. The underemployment
> rate among the politically relevant population--those with a Bachelor's
> degree or higher--is only 10%. These are the people who matter politically,
> and frankly, it isn't that bad for them yet. Just ask them.
>
> Yeah, they're not happy with their stock portfolios or the decline
> in the value of their houses--or a lot of other things. But as long
> as the job is there, the house is there, and the TV is there, you
> will not see THEM get politically active and move for any kind of
> change.
>
> Maybe it's too bad, but then, maybe it won't happen either. Unemployment
> in this class never reached a level high enough during the Depression
> to produce any important policy change--and the country was STILL
> in the depression when the war began.
>
> So if this guy wants to see change, all he has to do is sit around
> and wait until underemployment among the educated class reachs 40%.
> NOTHING will happen at 39.99999999999%.
>
> 40%.
>
> By the way, we are moving from the West Coast Hotel v. Parrish "scrutiny"
> regime--which allowed this catastrophe by denying individually enforceable
> rights and gave the political system nearly all power over the facts
> (blame people themselves for this)--and toward the "maintenance"
> regime I discuss in my book The Eminent Domain Revolt.
>
> You will never see economic activity increase again--NEVER--until
> the scrutiny regime is booted out of power, the maintenance regime
> is put in power, and the New Bill of Rights is enforced.
>
> Enforce it or starve. It's up to you clowns.
And it is for this reason I fear the future in the hands of powerful multinational corporations (and the people who run them). They have no national allegiance and only know the profit motive. They go where labor is cheap and don't care how what they do might affect the health of the locals. They cajole and strong arm governments with threats of moving their factories and plants out of town or out of the country. They are bullies. And politicians worldwide allow themselves to be pushed around and bought out by these companies. And of course many of the more powerful politicians themselves come from and return to these companies when they are not in then government (Hank Paulson, Dick Cheney, etc.) In this view, the role of Goldman Sachs (just as an example) in the "recovery" is not so much a conspiracy as a natural result of already observable behavior. Karl Marx had it half right. He saw the problem of capital concentrations. His solution sucked, but he clearly predicted what happens when powerful money surrounds itself with it own and seeks to make more money at any cost...
So what do we do now?
On Sep 30 07:04 PM TeresaE wrote:
>
> It IS a conspiracy and regretfully the proof will come too late to
> do anything about it.
On Sep 29 01:28 PM zagrebzagreb wrote:
> From the article: '..Earnings power has been severely damaged as
> a whole by the intentional off-shoring of high-quality jobs and the
> importation of lower-quality (and lower-wage) workers into the US...'
>
>
> Of course we've been moving high-quality off-shore for years...<br/>
>
> But 'importing low-quality workers into the US'? Immigrants? Are
> you saying our immigrants are low-quality? Yes you are... Its right
> there in black and white.
>
> What does low-quality mean? I think I know, but can barely believe
> someone would publish something so pathetic.
>
> Here's a fun little fact: our medical schools would be starving for
> qualified students, except for the immigrants that feed their classrooms.
> First or second generation Asians account for 25% of all med school
> graduates this year. Yup, our brilliant little 'American' kids (which
> by I think you mean 'white', am I right?) can't compete with these
> dang foreigners who have silly names and wear different clothes...
>
>
> Just for the record: We are a country of immigrants, and this idiotic
> immigrant bashing sounds like the stupid-fat-white-male-... that
> it is...
>
> If the author cloaks medieval social arguments in an economic thesis,
> he destroys his whole argument and reputation with it.
On Sep 29 12:58 PM Michael Clark wrote:
> Thank you, Karl. Sometimes I wonder what sane government implies
> -- and I'm reassured to see that others are thinking the same way
> I am thinking about this.
>
> Let's get Bernanke his Nobel Prize and hustle him off to Goldman
> Sachs before he destroys the lives of our great-grandchildren.
We do the very best we can and hope for the best.
This is best done in a free society with freedom to choose.
What has made America great is the greed for the all mighty dollar and the chance to make it. It will continue!
First, however, comes cancellation of debts that never will be repaid: bankruptcy reorganization. With so much on the line, though, is it any wonder there is resistance? Is it any wonder benefactors of recent decades' unsustainable fantasy built on a credit bubble behave as though their system, right now, were not already dead?
Yet are these benefactors really persisting in fantasy, or are some using a likely, last-gasp moment of calm to batten down the hatches?
Your analysis behind this statement is so bad a child could see through it. After I read your blurb and the linked Chris Martenson article I realized your analytical abilities are so questionable that I stopped wasting my time reading any more of your article.
You compare the amount of new mortgages originated in 2009 through August to the amount of mortgages purchased by the Fed in 2009 through August. But the Fed is not purchasing these new mortgages! These mortgages haven't even had time to become 'troubled' yet. Obviously the Fed is buying mortgages older than these.
The relevant statistic would be the sum of the Fed's mortgage holdings compared to the whole of the mortgage market, i.e. the unpaid principal value of ALL mortgages regardless of the year of origination. Comparing the Fed's purchases in '09 to mortgages originated in '09 is meaningless.
As if this scare tactic wasn't enough, you are implying that if the Fed owns it, it must be toxic and potentially worthless. Where's the statistic on how many of the Fed's mortgages are delinquent or in default? Where's the stat on the market value of the homes collateralizing their mortgages? Those are the relevant statistics.