Robert Loftus'  Instablog

"Credit Rents" is an umbrella term describing all of the costs associated with making use of lines of credit.  In prior articles I've hinted at the notion that the real cause of recessions is an excess of credit rents becoming a burden on both businesses and consumers, and that creating a limit on consumption because progressively larger portions of the M1 money supply have to be diverted to satisfy costs associated with the Timed Repurchase Agreements component of the M3 money supply that consumption is no longer able to keep up with output and the economy is forced into a period of stagnation.  During periods such as the sub-prime mortgage boom, excessive marketing of credit lines and fantasies of untold and endless wealth overwhelm more reasonable notions such as "You don't really have anything though until people pay those loans back."  

Before I continue let me say that the notion of creating a tax structure to prevent the excessive marketing of credit instruments is just a notion that I'm toying with at this point, and extensive study of such an idea would be necessary before an effective policy solution could be approached.  The basic idea is that the government should create a progressive tax table of fees that are levied upon those companies that offer lines of credit for consumers.  Essentially, large firms would be paying the government for the privilege to offer lines of credit in the commercial marketplace.  As the Timed Repurchase Agreements portion of M3 expands, the amount that companies that offer credit would be required to pay to the government in tax would increase.  At 2010 baseline levels, when we see M3 in significant decline, the tax on lines of credit extended would be zero.  Although a tax table would be put into place, at baseline rate levels there would be no surcharge on firms that extend lines of credit.  During an economic "bubble", when the Timed Repurchase Agreements portion of M3 is bloated, the taxes excised on firms that offer lines of credit would be significantly higher, to prevent the over-extension of credit and the excessive drawing forward of demand that inevitably contributes to an eventual period of economic recession or depression.  Such excise taxes would not be levied on private individuals nor in the case of family loans, and would not apply to those firms which carry total assets below a to be determined threshold.  

I'm hoping for a lively debate on this topic and am eager to hear readers' responses. 


Disclosure: No position

It's becoming clear, Consumers' habits are changing.  Two trends that seem to be gaining prominence are that: 

1. Consumers are tired of seeing "Made in (any country that's not the USA)" on the items they buy. 

2. Consumers are focusing more on the quality of goods rather than "newness" or convenience and seem more likely to substitute higher quality vintage goods in place of brand new goods.  

I've been observing the prices asked for high-quality second-hand furniture lately and the asking prices for these items appear to be rising rapidly.  For those who have some patience, and clean dry storage space vintage hardwood furniture, especially pieces from prior to 1970 are escalating in value at a rapid pace.  This author is guessing that this is largely a response to the incredibly poor quality of most modern furniture.  It appears that a consumer who is going to spend $300 on a desk would rather have a vintage Ethan Allen maple desk from the late 1960's - for example - than a modern piece made from some South American mystery wood. This represents a viable opportunity for those who - as I mentioned before - have extra clean dry storage space in their home and who are seeking an alternative investment strategy that is based on long-term changes in consumers' values rather than the daily fluctuations of the markets.  


Disclosure: Owner of many pieces of vintage hardwood furniture.

 A lot of pundits have been making dire predictions about the future of the economy so maybe it's time we all start getting over the anger phase of this situation and start thinking about acceptance.  I present this article as a thought exercise, so that readers may start thinking about how to deal with these conditions.  Here are three conditions that could become realities given current economic circumstances. 

1. Consumers Revolt: Personal consumption shows modest numeric gains, but those gains fail to keep up with the CPI, indicating a long term downtrend in real rates of personal consumption.  Anger over imported goods and their effect on the economy leads many consumers to stay away from Big Box retail stores and to focus their spending - whenever possible - on used and reconditioned goods.  The timed repurchase agreements portion of M3 contracts significantly over the course of the next ten years as consumers shun McMansions and SUVs in favor of tiny cottages and gas-sipping econoboxes.  The service, hospitality and entertainment industries contract significantly while a more thrift-oriented culture decides to avoid going out to dinner or the movies, and to spend vacations getting caught up around the apartment. 

2. Real Estate never recovers: New home construction contracts significantly from current levels of 600,000 units per annum.  Many property owners are forced to convert large suburban homes into duplex rental properties to maintain solvency. Those communities that refuse to allow such modifications suffer record high rates of property vacancy and abandonment. Many properties that were thrown up during the real estate boom by less than reputable builders fall into states of disrepair and have to be condemned - resulting in waves of lawsuits all across the country, as well as popular calls for "Boy Scout Laws" (If you can't sell that property or find a tenant for it you have to return the land to it's original state, you cannot leave empty properties in this community) that paralyze the real estate development industry.  

3. Continuous Calls for Government Bailouts of Multi-National firms leads to taxpayer fatique: Taxpayers get disgusted with executives who earn multi-million dollars salaries and expect the government to bail them out of a tough spot. Supply-Side pro business lobbyists come to be regarded by the media as irrelevant coots.  Companies that expect hundreds of millions of dollars of interest free municipally backed loans to create a few dozen new jobs within a given community are rapidly shown the door.    

If all three of these conditions came to pass, how would you structure your portfolio to weather the storm?  Would you even stay in the market, or consider taking a portion of your funds out of the markets to back a local entrepreneur instead? What alternative investment strategies might you consider?  What changes regarding material expectations are you willing or able to make to help preserve your chances of some day being able to retire?  


Disclosure: No positions