Jason Cawley

Value, banks, modern portfolio theory, monetary economics
Jason Cawley
Value, banks, modern portfolio theory, monetary economics
Contributor since: 2015
Jonas - I did not listen to Yellen today. I would not expect public testimony in front of congressmen to be terribly revealing about Fed thinking. I also don't expect the coach to say to the reporter at halftime when down by 14, "we are getting creamed out there". I expect instead a "we have to execute better" stream of meaningless and upbeat bromides. Which is why I don't listen to such things.
Jonas Chord - all fair questions. First on oil and natural gas extraction, the valued added for that component of the mining industry classification is about 2/3rds of the total, and specifically is $302 billion for the 2014 year. But understand that is not a measure of total receipts, but of the value added within that industry.
When an industry buys components and services from a different one outside its industry classification, the measure "gross output" will show the overall sales, but then the portion purchased from the other industry classifications is deducted from those overall "sales". A "make and use" table tracks these flows between industries. The same occurs e.g. when the oil refining industry classification pays for the raw material it got from the oil extraction business. Only the increase in values from the activities in the industry classification constitute "value added".
Factor incomes, though, are not purchases of raw materials or supplies in this sense. Labor pay in an industry, the gross operating profit earned within it, and any direct taxes the industry pays (net of any subsidies) form the "outgo" side of value added.
In the case of the US oil and natural gas extraction sector in 2014, the measure of gross output shows $430.5 billion. Much of that is oil, as your estimate tallies with. Some of it is natural gas. Of that $430,5 billion in total receipts, $302 billion was true value added.
Then in addition, within the "mining" total, $70 billion more of the value added in 2014 is "support activities for mining", which has $105 billion of gross output. With those support activities, about 1/3 is explicitly for drilling oil and gas wells, as an example.
Next you asked about value added for imported oil. If it is sold for more than was paid for it, the transportation area might record some value added for that, but only on the mark up. If it is refined into product (gasoline etc) and those products are sold for more than the crude oil cost, then that operating profit will occur in the "oil products" sector within non-durable goods manufacturing, because that is what refining is considered to be. In 2014, there was $170 billion of value added in all "oil and coal products" combined, at that late stream (refining, not extraction) stage. That is where the "crack spread" profits occur, for example.
I am explaining the accounting in detail to be entirely clear about it. The oil sector isn't that large, even with upper stages of production included. The declines we are seeing in the market right now are not, in my opinion, directly caused by oil.
But they may be correlated with oil, because both oil and other market prices may be reacting to the same driving developments, rather than oil driving them. Chinese economic weakness, fears of a yuan devaluation, plummeting yields on US Treasuries, general fears of recession in the developed world, fears of banking weakness or crisis in Europe - all may correlated with a lower oil price without being caused by the lower oil price. General deflation might be the broader term that encompasses all of those factors or forces.
All of which may be reason enough to be defensive at the moment, or to expect better prices to buy in to stocks later this year rather than right now. I am not by any means trying to argue against such a defensive stance. I'm mildly defensive myself, on cycle timing and some of the concerns above. In the long run I am still bullish on the US economy, and I consider stock market corrections and even occasional recession perfectly normal occurrences within that long run bullish stance.
I do also think the US is the best house on the block right now. Our banks are much sounder than those in Europe. Our domestic service and real estate economy, which is relatively insulated from foreign competition and effects of a strong dollar, are doing fine. My US economic forecast for this year is for continued slow growth with no inflation, largely on the strength of those non-trade-sensitive sectors, along with continued growth in employment and in overall personal income.
Could international or market developments slow all of that? Of course they could. I think it more likely they are giving us a somewhat panicked and overblown financial market correction, and that we see some weakness in business to business rather than consumer facing activity, and further weakness in sectors most exposed to commodity prices and to international price competition generally.
In all of that, it isn't the oil price that seems to be the biggest indicator of possible further weakness ahead. It is the US 10 year Treasury falling to a yield of 1.6%. That is down 0.7% since the close of 2015, and that's a large move in a short time for a key rate. To me that is a bigger deal than the fact that oil is going to be more like $30 than $100 over the next several years. Oil never had any business being up at $100 in the first place. That was the anomaly, in my opinion.
I hope that all helps.
Kurt - I explained several years ago on SA that the EU banks needed a major recapitalization, and that the best way to do it would be to have swaps of junior debt for additional common equity. (See my instablog post on the subject). They didn't do it - not nearly enough, anyway. DB did manage to reduce its leverage from about 50 to 1 to 33 to 1 before the latest wave of losses hit, and the CEO since last summer is trying to seriously restructure the bank. But that 3% equity layer was always way way too thin, and after high single digit billion losses with no end of them in sight, it is getting thinner not thicker.
Most of the rest of the EU area banks are between 20 and 25 times leverage to common equity. Their regulatory capital ratios are only met by holding lots of cash and government bonds to get low risk adjustment marks. But that means they don't earn much of anything on those portions of their assets, especially with sovereign rates across Europe moving into negative territory. You can't make a bank work by earning nothing on half of the assets and pretending that makes it safer.
Basically, the EU authorities and financiers have made remarkably poor use of the last 5 or so years of comparative normalcy to repair the aftereffects of the 2008 crisis. The US banks are way, way ahead of them. I don't disagree with your comment that the senior creditors and depositors will get official support. But that is actually little comfort here. Losses to them are not the potential risk that threatens to spread to other banks in Europe and to financial markets generally.
As for the comments about EU banks all being local and only pretending to be true international trading banks, I can agree with it in major part. I might make an exception for UBS, however. If you like, its pretensions to be a US style true trading bank are better than those of most of the rest of the EU crowd. It has a major wealth management business akin to Morgan Stanley's, as well, which is a good banking business to be in. FWIW.
rlsco - I don't think that transactions matter more, or much at all. The point is that the mechanical idea that income happens when money moves so that incomes can rise either by there being more money or by the money there is moving faster, is just false to the bottom. I am not saying that one focuses on transactions volume in order to understand or prediction inflation. I don't think it helps. Neither do imaginary measures like income velocity.
On the beanie baby or candy car example, the difference is not between "spending" and "transaction", which are the same thing really. A transaction is a change in who owns a given sum of money, and there is always something moving in the other direction given in exchange for it, whether that something is a service, a physical good, or a financial claim of some other description. That is always spending and buying, but again those don't have anything to do with income.
If I have a beanie baby that I think is only worth $15 and that is what I paid for it, and I sell it to you for $20, there is of course your $20 bill and my beanie baby before the transaction, and my $20 bill and your beanie baby after it. But the total value in existence was $35 before and is $40 after the transaction - *because you value the item you received higher than I did*. That creates a true *income* of $5. The collective world is better off with goods in the hands of those who want them more, than it was with them in the hands of those who wanted them less.
Even "production" processes at bottom produce value in exactly this same manner. Worker time is valued higher by the employer than by the worker, hence the latter's willingness to accept the former's money offer to direct said time. Assembled products are valued more highly by their intended end users than the value of material from which they are made, plus the employee time needed to arrange those materials in the new form. Present goods being valued higher than future ones is the source of interest phenomena. Thus all value added is reducible to such "gains from trade", in which items pass into hands and forms valued more highly than their previous states and owners.
Literally none of which has anything at all to do with money, specifically. It is simply one good among others obeying the same relationships. It falls in value (inflation) when and if the demand for it falls or the supply of it increases more than the demand for it does. Speed of any kind has nothing to do with it.
rlsco- You are most welcome, and glad is helps. As you look into transactions, I recommend the data at the following -
That shows the transactions cleared by the FedWire system, monthly aggregates. Notice the latest month shows the rate was running $3.25 trillion per *day*, with 13 million separate transfers of an average of $5.6 million each during the month of December. Notice also the extreme month to month changes, 10 and 20%, and the seasonality - up in December, down in January, etc.
Transactions simply dwarf incomes...
"Things will get much worse before they have any chance of getting better. The only thing available in the stocks of the oil patch are value traps."
Complete agreement. The oil majors - the strongest names in the world in the sector - may become buys in a year. Nothing in the sector is a buy right now. Also agree on the banks having minimal exposure and not looking to take on more.
LK - You need to drop the entire idea that you speak for some great mass of people that agree with you. You don't. If you disagree with me about what I own, I sincerely recommend to you that you don't try your luck at pretending that your opinion in the matter is more real than mine is. If you do, you may learn what I mean by political force. Your presumption that everyone else in society will agree with you in the matter beforehand is unfounded. I am just as capable of enlisting them to bust up your operations as you can be at enlisting them to invade my rights. I will not proceed in that matter by asking your permission. I won't even be asking theirs. I'll be acting strategically and deploying political force against an enemy. My sincere prior suggestion is that you don't deliberately make me your enemy, when you just don't need to do so. That suggestion extends to everyone and to society at large. Societies that treat that suggestion from all owners of property with the respect it deserves, as the most potent base fact in practical politics, prosper. Those that flout it divide their would be citizens needlessly, and weaken or destroy themselves in the process. Which is not just a bad idea, though it is that. It is also unjust, uncivilized, illegitimate, and stupid. Stop pretending that it is common sense or your prior political right.
LK - nope, my ownership does not exist in the minds of others. They recognize it or they don't, their affair, but my property is mine before their consent or approval or permission is ever sought. It rest on a poltical fact, certainly, but the basis of that is who I will regard as an enemy and who I will regard as a friend. Other owners of property, and anyone who simply expects their own rights to be respected, act in a similar enough fashion to create the operative alliance that is "civilization".
To be perfectly clear about the matter, you have never given me the slightest right to anything. I took it, with my own two hands, and defend it, with my own politically directed and principled force. Those who cross me in the matter do so at their own peril - that standing promise from all men committed to defending their own, is the underlying basis of property, and with it of civilization. Where political authorities are wise enough to respect that prior fact and force, peace and order prevail. Where they are too stupid to see their interest in doing so, civil war and private armies proliferate instead, and those "authorities" lose any legitimacy they could hope to claim.
Not really a problem in the modern world, developed especially, and America in particular. You aren't society, you don't speak for it or for any principle of government, I don't have to agree with you in the slightest about any of these things, and none of them have anything to do with Seeking Alpha or understanding modern finance or economics or income distributions or any of it. The subject only comes up because you presume to speak for people other than yourself, and assume agreements or principles as settled or obvious, that are merely your private opinions, and then intruded those violent assumptions into this thread, and sought to impose them on the rest of us. Consent not given, nothing agreed. And truly just hopelessly off topic, in my humble opinion.
AA - Oh I know why, perfectly. That I completely deny the legitimacy of a claim does not remotely mean I don't understand it. To me it simply means I understand it quite thoroughly, well enough to see right through it. I would also deny that you or anyone else here speaks for imaginary "masses" in the matter, rather than just for yourself - but that is a secondary point.
snoopy - last I checked, quite a few bankers became the opposite of super wealthy in the 2008 smash. A quarter of their industry got fired, their stocks fell by billions, the high flyer's stock options became worthless, etc etc. Trust me, it wasn't what they wanted. Also, law had precious little to do with it, beyond some political encouragement of low quality loans. And we've read everything you have (and likely more besides), we just didn't reach the same conclusions from it.
62283371 - not if they went up in price, which most assets did in the last 7 years, many of them substantially. Also, no one can own an exchange value, only some actual asset. Everything I do changes the future value of everything you can name. Does that give you a right to veto any economic action I might choose to take? No. You are responsible for the trading success or lack thereof, of your own investment decisions, and I am responsible for mine. Also, inflation over the last 7 years has been lower than in any other 7 year period in my entire life, and I was born in the 1960s.
rosco - I predict that the demand for money will increase, and that in a progressive, growing economy like ours, that it will increase continually and exponentially, forever. The rate at which the demand for money increases will vary from time window to time window, now faster, now slower, for reasons of its own - like any demand time series in a progressive, growing economy.
But there is no more any normal assured or "capped" level of the demand for money than there is for the demand for roomy SUVs, or larger houses, or the best education, or the ritziest vacation resort. The wealthier the society is, the higher the demand for money will be - forever.
Local cyclical variations will layer atop that secular trend. The scarier the last five years were financially, the higher the demand for money will be. Other things being equal, the higher the rate of return available on savings deposits compared to other, riskier investments, the more people will want to hold their wealth in a money savings form. And so forth, through a dozen other independent influences on the rising demand trendline. It's just a demand series, like any other.
Clear enough?
The ratio isn't even remotely constant. Actual transactions can rise or fall 20-25% over a two year period in which GDP barely moves, or increases only slightly. The reason the point really matters, though, is that it shows there is no "mechanical" interpretation of the term "velocity".
The term itself is borrowed from mechanics and is trying to imply that any movement of money will translate into the "use" of said money, that the monetary theory posits and is trying to track. But in fact, moving money does not cause income to occur. Income only occurs when all items are worth more to their new holders after the transaction than they were collectively worth before.
No transaction creates or destroys any matter or real object. No transaction with money on one side and a real good on the other uses up money, or changes the amount of it in existence. You and I can pass a beanie baby back and forth with our right hands, while we move a $20 bill the other direction with our left hands, 30 times a minute. We will create a lot of "transactions" but no income at all, doing so.
Before we start, there is one $20 bill and one beanie baby we both value at $20 between us. After each and after all of our "trades", the same exists between us. No value has been created anywhere, none of the totals of things have changed. Ergo, there is no income in that picture. That money moved has exactly nothing to do with that conclusion, because income simply is not the movement of money.
The underlying mechanical idea that any flow of money creates an income is simply wrong. A flow of money is a cash flow, but cash flow is not income. Value added, the total wealth in the world going up, is not fundamentally a monetary phenomenon. It is instead a "gains from trade" phenomenon, that occurs only where and as the parties to the transaction value the items involved in it *differently*, so that the total value of all goods *in their new owner's hands*, is worth *more* than they were worth before the trade occurred. At bottom, *only* such gains from trade *differences* create true income. Money moving has nothing to do with it, at bottom. We'd have real income from voluntary trade of differently valued items even in a pure barter economy, with no money in existence. Again, income is simply not at bottom a monetary phenomenon.
We can record and measure increases in total value via differences in values put on flows, and measure those differences in units of money. An income statement tracks all the positive and negative contributions to such sums to arrive at a measure of true income.
But no business confuses its income statement with its cash flow statement. No business thinks it earned an income by issuing a bond, for example. That's a financing transaction on the cash flow statement, and on the balance sheet will show up as equal and offsetting increases in cash assets (received as proceeds of selling the bonds) and long term debt liabilities. But not as income - there was no change in the firm's net worth from doing that.
I go through all this to highlight how loose, unsound, and removed from ordinary economic reasoning and ordinary business accounting, the monetary economics of "velocity" actually is. Frankly, it is an intrusion of pseudoscience and tautology into those sounder spheres. FWIW.
Wanda - yes all depositors are creditors of the commercial banks. In most of the developed world, though, including the US and most of the EU, depositors are senior to most bondholders. Normally, equity investors are first on the hook for losses, then bond holders, then deposit insurance where applicable (subject to amount caps, to be sure), then depositors. In a case like Cyprus, most of the deposits were foreign CD investments seeking higher rates, and the institutions were so deep in the red those depositors did get hit, too. But that is very rare these days. The FDIC layer did have some losses in the last US recession, e.g. but depositors did not, even in completely failed banks. Normally, it is the responsibility of regulators to step in before losses at any given weak firm get so large they threaten the depositor layer, and that has mostly worked as designed.
LK - Property isn't a nuisance as you put it, but the legitimate basis of all of human civilization. And I don't recognize anyone in your term "we", other than yourself.
User21284 - Socialism is a real thing out in the real world that has actually existed and governed billions for generations. It also failed abjectly and killed tens of millions of innocent people. The thing between your ears that you imagine has all the nice characteristics you associate with the word and imagine has nothing to do with the actual history of mankind in the last century isn't real socialism. Real modifies any given concept by making it independent of the opinion of parties, ascertainable by all, objective, in the shared world of men and rocks and pigs and such. Socialist parties created those regimes; they wrote entire economics treatises about what they were doing and why; they proceeded to do it and innocent people proceeded to die in large numbers. Facts are stubborn things and all that.
Meanwhile, actual capitalism, also a real thing in real human history, lifted the majority of mankind out of grinding poverty to the only prosperity they have ever enjoyed, anywhere on earth, at any time in human history. I realize the contrast is inconvenient for you. I just don't care. It is your problem and not mine.
LK - On the contrary, I see no referee, other than the SA mods perhaps, who seem to be resented for asking for decorum. What I do see is men declaring that the free choices of others with their own property do or don't further some imaginary thing they are calling "social utility", by which they merely mean other men obeying their imaginary edicts. I'm on an SA thread talking about economics and finance. We are not in some imaginary House of Commons debating pending legislation. And neither is anyone else here.
John - It is a fair comment. Here are the details.
For the longest span in my graphs, 2014 vs 1997, the total change in the CPI was 1.48 times for an average rate of inflation of 2.34%. For the periods in the table rather than the plots, last 10 and last 5 years ending 2014, the price level changes are 1.106 - 2% annual rate (10 year) and 1.256 - 2.3% annual rate (5) year. The absolute levels of the CPI in the middle of the relevant years are 1997 - 160.5, 2004 - 189.1, 2009 - 214.7, 2014 - 237.6.
Your estimates within the 2 to 2.5% range are not misleading, therefore. Slightly weaker in the period since my last data point, and on the lower end of that range for time frames that include the 2008 recession.
Long term, it is normal for about half of the change in nominal GDP to just reflect price increases, while the other half reflects real economic growth. Slightly above half, actually. The inflation rate has been falling throughout the period, but isn't zero. Neither is real economic growth.
snoopy - let's look at it.
"Printed" may be meant narrowly, and would then refer to actual currency. Currency in circulation is $1.415 trillion. To be charitable I will correct "last 7 years" to mean "last 8 years" to take a total from before the crisis, in February 2008. Currency outstanding then was $812 billion. That is $603 billion in actual money actually printed, in the literal sense of the word "printed", so if that is what you meant the allegation is off by a factor of 20.
OK, maybe you meant "printed" in a looser sense. The Fed's total balance sheet increased in those 8 years from $913 billion to $4.528 trillion, or an increase of $3.615 trillion. On that meaning it is off by a factor of 3.3. But did the Fed just give away that much money? Did it receive nothing in exchange for it?
In February 2008, the Fed owned $713 billion in Treasuries, nothing in agencies and nothing in agency MBS. It did also have $81 billion in term auction credit and repurchase agreements, so $794 billion in those categories of securities and loans. Today the Fed owns $2.461 trillion in Treasuries, $1.744 trillion in agency MBS, $30 billion in direct agency bonds. Its bonds are worth $171 billion above their face value at today's market prices. The total in those categories is thus $4.406 trillion.
The Fed thus has $3.612 trillion more in securities on its books than in did 8 years ago. Hmm, the total balance sheet increase version of "printing" was $3.615 trillion. Is it a coincidence?
The Fed received bonds fairly worth when purchased, and still worth, every dollar it paid out to anyone over the last 8 years. Those people were not "given" anything. They sold bonds to the Fed for their fair market price, and got bank deposits in place of them. That is all. Nobody in the middle class lost a dime in the process.
Rockymount - considering the fact that the world would be not a single dime richer or poorer if none of those contracts existed, I think the fear of them is decidedly misplaced.
rod_s wrote in relevant part - "I would venture that the velocity of money increases the further down the income curve you go." There is no sign of it - not that "velocity" even exists in the first place. But the place money turns over fastest is in the heart of the financial center - 1000 times faster than in the drawers of retail establishments, to say nothing of the pockets of working folks.
How many working people do you know who do their transactions by direct ACH transfers? Not many, I'd venture. But FedWire clears transactions at over 40 times the run-rate of US GDP. Nowhere does money move faster than on Wall Street. If velocity were the test, we'd want all money to be in the hands of stock brokerages and hedge funds. They buy and sell as a pace that makes main street's head spin.
Needless to say, I don't think that actually matters at all. But just empirically, it is simply untrue that more money in the hands of poorer people would increase the transactions velocity of the money stock.
No Free Cake - as a parlor room exercise, one can certainly ask such questions. But they all beg the question - who is the person asking them to tell other men what they ought to do with their own money?
Why should the commentator's opinions of social utility trump the opinions of people making their own decisions, for themselves? Is he their king, their lord and master? No. It is at bottom none of his business what they do with their own money, and his kibbitzing and trying to tell them what they ought to do with it, is really just a way of his pretending that their money and indeed their entire lives, belong to him.
Well, they just don't.
Namron wrote in relevant part "those who own the assets will benefit. Those who don't, will not benefit." True, but not benefiting is not at all the same as having one's own money taken from the benefit of others. The middle class was also helped by the Fed's policies over the last 7 years. It was helped less than the rich, fine, agreed, those with the largest stock holdings benefit the most from a higher stock market. But a higher stock market does not pick the middle class's pocket or break the middle class's leg.
The whole point is that resentment of others doing well when it has not come at any cost to oneself is simply illegitimate, morally. If someone can show actual injury, that would be a different matter. But there simply isn't any, not from the Fed's policy at least. Did TARP and such injure the middle class? No, because it cost the Treasury less than 0, turning a profit for it.
What I actually see is people who don't know what actually happened, or what policy or government did during it, conflating everything that happened to them with outcomes of policy. The crash hurt them. Falling house prices hurt them. Unemployment hurt them. Not lower interest rates or higher stock prices. But the latter didn't cause the former - in fact they softened and shortened those blows.
6228371 wrote in relevant part "If a family earns $200K a year and has three children attending Harvard, they feel very poor!"
Their feelings have nothing to do with it. They are rich. Their children are rich. Their children are probably getting a very good edcuation, though an expensive one (and they can muck that up if they study irrelevancies with quacks instead of real knowledge from real experts, but that they can control themselves if they are wise).
It is perfectly normal that people try to get ahead themselves, and pass those advantages on to their kids in better starting points, in education, stability of life, assets, freedom from want and so forth. It is also perfectly legitimate. But those who manage to have such things are not poor; they are well off and have much to be grateful for.
As for the claim that "income is only meaningful" relative to expenses, I deny it. People can move about and seek fair prices. If they pay higher ones it is because they see sufficient extra value from where they live and the opportunities clustered there, that make up for and more than make up for the differences in their expenses. Choosing to live in an expensive city is a consumption decision every bit as real as choosing to buy a luxury car or a bigger house. And it is a real benefit, not a "fake" one to be deflated away by some cross-locality price index.
When a man tells you he is poor because of how much his wife charges at Neiman Marcus, don't believe him. The fact he is advancing as evidence that his expenses are high is actually the proof that he is rich.
snoopy wrote in relevant part - "fed policy transferred much money from the middle class to the rich". Did it? What money did the middle class have before that they don't have now? It is certainly true that the bull market in stocks and recovery in real estate prices benefited the rich, and the upper middle class to a somewhat lesser extent. Who did it hurt? How?
Namron - Fair, I should add more explicit lessons paragraphs to the original articles.
To me the biggest lesson here is that the current market is overly fixated on the commodity sector, oil especially, but also the rest of resources and primary materials. There is little perspective in the financial press as to just how small a portion of the US economy those industries really are. Of course it it understandable that the dramatic movements in the price of oil get attention. Fracking did propel the US mining sector to 10% annual growth rates over the last 5 and 10 years, and increased its share of GDP - but from 1.4% to 2.6%. That's just tiny in the grand scheme of things. If the new tech in that area got us lower energy prices and halved our oil import bill, those are positives for the overall US economy.
I see people expecting that weak oil prices can cause large defaults that people speculate could be like 2008 all over again. Such ideas do not understand how huge the US real estate sector is compared to primary extraction of commodities. The oil patch just doesn't have the potential to cause the kind of damage that a fundamental breakdown in residential real estate had.
So, moral number one, commodities just aren't that big a deal for a ship this big, that generates most of its value added in ways far removed from commodity prices.
The second set of lessons might not be too clear yet because this article is setting up one to follow, that focuses on the factor incomes breakdown in different US sectors. You see that in the line graphs above as the "shares" going to gross profit vs employee pay in the different sectors. The main story there is that the sector to sector differences in capital intensity are a big deal, and much more important than any sea-change within them, over time. They really don't change much with time, but they are quite different from one industry to the next.
Why focus on that aspect? As a follow up to the concerns about income, distribution of the same, and where high incomes actually come from. Basically, sectors with large capital per worker and with highly skilled work have high incomes per employee. The recipe for higher worker income, then, is to work with more capital first of all, and to work smart with it, second. That is meant to "bust" the too common notion that capital and labor shares are antagonistic at bottom. It is not the case, for example, that sectors with the lowest wages per employee have the highest portion of value added going to capital. Quite the contrary.
Policies that favor capital and capital intensity are therefore what actually lifts earned incomes, of the labor portion as well as the capital portion. The two factor's interests are aligned, not contrary. Unskilled work with little capital generates low wages, but also narrow profits and most of the value added in such industries is going to labor already. Skilled work with lots of capital generates high wages, and also the thickest share of value added as gross profit of capital.
Those lessons are only being prepared by the article above, however. They will become clearer with the follow up included, showing a scatter plot of absolute employee compensation vs profit share, by industry.
The whole series is designed to give SA readers a more accurate, top down view of the whole US economy as it actually is, than I find available in a "politics and crisis" dominated popular press. All the data are out there. They just aren't researched and reported in the day to day press, when they don't fit a narrative of why the market just moved this way today, or some urgent ideological concern coming from political movements or passions.
Some sober realism about our real economic situation - which is at bottom quite strong in my opinion - is what I am trying to spread.
rlsco - The mechanism whereby high inflation expectations lead to the commodity price bust is easily explained. Those expecting higher prices overall bought real commodities, thinking those could not be "printed", and would rise in nominal price when inflation rose. Some follow that initial move, momentum fashion, and commodity prices rose, while other prices had not do so. Producers therefore saw a rise in the real value of their outputs with no rise in their input costs, and raised their physical production to earn from that gap. As soon as added capacity caught the elevated speculative demand, prices stopped rising. When they turned down instead, the momentum players all exit, but find insufficient buyers on the other side. So the boomed price busts.
The initial illusion was that commodities aren't made out of money. They are, just through the intermediate step of increased investment and physical output.
Once that capital has been invested, it does not so easily withdraw from the sector. After the commodity price drop and losses on repricing of inventories, there is still the higher capacity to produce the stuff, left by the previous real investment. That capital was invested on a price expectation that proved false or temporary. It appeared profitable at such prices, but most of it won't be at the prevailing lower prices afterward.
If it was equity financed, that just shows up as lower values for that equity, and hits those who made the bet. If it was debt financed, after the previous, a portion will hit the lenders instead. Assets then pass, in part, to lenders hands, who may operate or liquidate, but won't recoup the full initial value of their investment.
As for how many bankruptcies seen, the more the sector is equity financed, the fewer of those there will be. An Exxon or Chevron is just going to see lower equity values, because their common shareholders own $300 billion and $150 billion in tangible book value. A Kinder Morgan with $41 billion in debt mortgaging most of its real property is going to see a much steeper fall, and dividend cuts, and will be lucky if it stops there. Even though the latter's line of business was and is less cyclical, more aggressive financing more than made up for that.
We will also see some stronger companies in depressed sectors bought out at lower prices by competitors, or rescued by founders or outside shareholder activists funding secondary share offerings, to move them into more equity financing. That will dilute existing owners but leave to the companies alive. And some will go through bankruptcy and end up owned by their creditors, of course.
As for China, sure, but they were big speculators in all of this, themselves. They expanded the yuan money supply, and yuan debts, far more than dollars or dollar debt out expanded. They spent much of it on piles of industrial commodities which have not since held their value, and on real estate that hasn't found end buyers at prices high enough to justify its construction in the first place. That is not a separate issue, but part and parcel of the same inflationary brainstorm. They too thought that if they exchanged new money or debt claims for "real" things, those real things must hold their value while the money and debt proved "fake". That was and is the inflation expectation. And it was and is false.
I hope that helps.
rlsco - Mostly right. The only issue is that the velocity measures are GDP income divided by a money supply measure, and do not reflect actual transactions. GDP measures income, a value added, not a transactions measure.
Actual transactions are much, much higher than GDP. Like 40-50 times GDP, just counting the funds electronically cleared by FedWire (which dwarf all other, non electronic transactions). They also move around quite independent of changes in GDP or to money supply. That's part of why I continually insist that "velocity" has no technical or mechanical meaning. The term invites a transaction interpretation, but as actually used, has exactly no relation to actual transactions.
rod_s - Tell you what, you decide what you consider as "socially beneficial" and spend your own money on it, and I'll decide what I think is beneficial and spend my money on that. Cheers...
rlsco - Since velocity doesn't exist... But you knew that.
What velocity is actually "measuring" is the ratio of income - measured by GDP - to a money stock measure - typically M2 in the graphs one usually sees. If the money stock is 10 times as high, then it is relying on people willingly holding 10 times as much money, than if it is lower. If they aren't that willing, then the price level will rise until the real purchasing power of that fixed money supply drops low enough that people are actually willing to hold that much money, in real purchasing power terms.
If you already know that people willingly hold X amount of money with no change in the price level, what else is there to ask? Can it be "more dangerous" if that willingness refers to more money rather than less? Only if you have some prior reason to think that people's already expressed and acted upon willingness to hold that much money is transient for some reason. And in that case it isn't the quantity that is "to blame", but whatever is causing that transient demand to be transient rather than lasting.
Basically, there isn't a single deduction or inference that one can make from "velocity" that isn't false, erroneous, misleading, and better understood by thinking instead about the demand to hold money. The latter - demand for money - is real economics. The former - velocity - is a busted, incorrect theory and a bit of pseudoscience, immunized against falsification by reality.
Just give up the velocity concept. It is useless.
PP - Jesus give it a rest please. Can we have a civilized discussion about the state of actual finance in the world on Seeking Alpha without it degenerating into a Fed slandering festival and fairy tales of lizard men from Sirius?
User21284 - No I didn't lump Nazism into it, just communism killed that many people in the 20th century. Fascism killed another 50 million or so. And no, capitalism didn't kill more, it isn't even close. Green ideology can arguably be put even higher, if one wants to blame it from banning DDT and thereby letting malaria recover and then spread again, after we had it on the ropes, but if we stick to the actual mass murder, communism leads the parade of disgrace. Why anyone would want to defend it, even in reaching comparisons, is a complete mystery.