derryl

The Unsustainable Lie of Inflation

A blogger recently quoted H.L. Mencken,

"It is the nature of the human species to reject what is true but unpleasant and to embrace what is obviously false but comforting."

That's why propagandists have such an easy time of it. Tell people the lies they want to hear and they will love you for it. Tell them the truth that they don't want to hear and they will hate you for it. Tell people they can have free health care and pensions and they will love you. Tell them there is no free lunch and they have to earn their daily bread and they will assault you. Tell them they have 'rights' that entitle them to material goods produced by others and they will love you. Tell them they have no right to anything that they have not personally worked to produce and they will try to kill you.

Is it any wonder that democracy tends inevitably toward socialism? People love hearing about all the free stuff the government is going to give them. And they will never elect an honest politician who tells them that the entire welfare system was a mistake and the country is now bankrupt and has to lay off most public sector workers and default on all the promises to pay pensions and Medicare and all the other welfare programs.

So it's not just the politicians' fault that socialism is rising. The people are demanding it. They are entitled to it. Lying politicians told them they can have it and the people will never abandon that belief because it suits them better to believe the lie.

The Global Oil Scam: 50 Times Bigger than Madoff

Mark Anthony:

It is true, as you say, that speculation in commodities futures is a zero sum game. When speculators buy commodities they increase demand and thereby increase the price of the commodity. But when it comes time for those same speculators to sell their commodities they increase supply which puts downward pressure on the price of the commodity. The excess demand of speculation on the upside is exactly equal to the excess supply of speculation on the downside so there should be no net effect on the price of the commodity. Some speculators 'win' by selling to other speculators who lose. It is precisely a poker game where speculators' money is the pot and some win and some lose.

But this is not what is happening anymore. Now we have very deep pocketed speculators who keep their money in the futures market. They are no longer buying and selling deliveries of oil. They have 'securitized' the futures market. Now they buy and sell "contracts", not oil deliveries. So they push up the price of real future delivery contracts by raising demand, but they never push the price back down by unwinding those positions and increasing supply. They just roll over their contracts again and again, with GS and friends collecting fees on each transaction. So the fee collectors like GS reap gains while investors in the GS index fund lose their money to pay Goldman's gains. Speculators who buy commodities futures as a hedge against currency devaluation may actually come out ahead, if the US$ loses 5% and their loss on the futures market is only 2%, for e.g.

Meanwhile the speculative money that is holding demand price at artificially high levels means real oil suppliers sell to real oil buyers at the inflated price. Oil suppliers get the gain. And that inflation is 100% passed on to us, the ultimate consumers of gas and diesel and jet fuel. Actually a bit less than 100% is paid by end consumers, as refiners have been suffering lower profit margins so they eat a share of the cost too.

Oil was pushed down to $30 when GS and the other big speculators faced the cash crunch of 2008-09 and had to liquidate their commodities positions to cash up and cover losses (i.e. "add capital") in their other activities. That is what happens when speculators actually sell, the price collapses to (or below) its natural supply-demand level. But TARP, etc "recapitalized" the newly converted "bank holding company" GS and friends so they're back in business inflating the futures markets and sucking money out of the pockets of consumers and the smaller scale suckers who try to profit from commodities speculation in a field that is owned and operated by GS & Co.

The Coming Consequences of Banking Fraud

Great article Mr. Kim, telling it like it is.

Re: 'conspiracy': somebody explained in a SA article or comment that explicit collusion is not required in order for a conspiracy to emerge. All it really takes is a bunch of people sharing a common world view and working to maximize their self-interest according to their common view. That worldview can be called "finance capitalism" and it is certainly the case that Rothschild banking interests are deeply entangled with global central banking. Whether these are just people who share the same agenda or whether there are masterminds lurking behind the scenes is an open question and the answer is moot because the effects are the same either way.

Mrudula Shah asks what bankster interest could possibly be served by taking down the global economy. The question assumes that wealth is the only value at play. But for centuries already the banksters have learned how to create money out of thin air. Wealth is simply taken for granted by these people. Now they want power, global power (always by proxy through frontmen, never in person). Some people want to own the world, others want to rule the world. These are the two faces of megalomania.

So if a reduced global economy is the price to gain power, so be it. In the V for Vendetta clip the lever to gain power was fear of a variety of bad things like terror and disease. Fear of bankruptcy and poverty is another good lever, so taking down the global economy would set the stage for a 'savior' to emerge. All we have to do is give him total power and he will stop the fear and pain. That's the sales pitch. We all know what totalitarians really do--mass murder and stifling of all kinds of dissent. Nobody is allowed to "talk about" the s___hole poverty economy so, "Problem solved".

Tyrants almost always believe that their rule is better than self-rule by what they consider 'the idiot serfs'. That's because megalomaniacs only see value in wealth or in power. They scoff at ideas like 'freedom', which they believe does not exist, so they cannot see that self rule serves values other than maximizing wealth and power. I would go so far as to call those other values "spiritual", as opposed to material. The whole "service to Mammon or service to Spirit" issue. We all need to make money to live but we don't have to eagerly sell our soul to do it. You can be a decent person and still make a decent living.

So in the context of an obviously manipulated monetary and financial environment is NOW the time for the powers to play the endgame? I don't think so. The mechanisms are in place for finance capitalism to destabilize our economies by pumping up debts of all kinds. These have been working in the US since the formal adoption of the fractional reserve banking/central banking system where all 'money' is created as debt. Exponential debt growth is very good for the people who have the money but very bad for people who have the debt. "Indentured servitude."

Gold was a problem until 1971 because it was an alternative form of money that banksters couldn't print to order. After Nixon nixed convertibility fiat debt-money went viral. Controlling money is key to ruling the world. So watch for any move towards a single global currency. Controlling oil, the physical lifeblood of modern economies, is also key to ruling the world, so watch out for carbon control legislation that gives governments an effective mechanism to control our energy use. The pieces aren't in place yet for the final thrust to a global currency, and there are still a lot of credible anti global warmists raining on Al Gore's ambitions, so I think we have a decade or maybe considerably longer before the final push. Meanwhile our life in bubbleville will go on. I don't think the powers will permit a deflationary depression so we could see some novel QE reflation initiatives.

Really, I'm not paranoid. I'm convinced. I'm convinced there are a lot of people out there who want to control me for my own good, and I am convinced they are diligently working towards gaining the power to do so. They are not huddling in secret places. They are explaining their agendas in detail during election campaigns, all the good things the government is going to do for us. They are convening at all kinds of "global governance" meetings, widely publicized and hailed by the bought and paid for media as wonderful advances for humanity. Sheeple love it and can hardly wait to abdicate whatever personal responsibility they are still compelled to accept. Humans, like me for e.g., are not so keen on the whole project.

Is a Crash Impending?

MadCow2 wrote, "If you’re prepared to believe that Obama can go on television and explain all this to the American people …“Sorry folks, it turns out all those stocks and bonds and real estate assets and life insurance policies and pension promises you bought into are worthless. You got tricked fair and square, and now its time to move on “ … without a USD collapse, then you should be buying US Dollars and Treasury notes with wild and speculative abandon. There will be serious real deflation, with a collapsing currency right behind it. Don’t underestimate the power of politics (here and abroad). Calls for debt and tax relief will prove overwhelming to those supporting continued enforcement of higher taxes and debt slavery to support existing covenants."

I share both of your views. Yesterday I made a bet and put a sticky on the fridge, "Within 2 years the US government will either be outright giving people money to revive the consumer economy, or the US will be falling into Great Depression 2.0." I don't mean ad hoc George Bush stimulus checks. I mean a more systematic creation and distribution of free money (or possibly consumption coupons that can be converted to dollars by retailers who accept them as money for the purchase of goods) to be given to all Americans. And I mean a real freefalling deflationary depression with collapsing asset prices and 1000s of bank bankruptcies and millions of private and small business bankruptcies.

We are in the midst of the deflation of asset prices that had been supported at bubble levels by debt. Now that the defaults are rolling in it is clear that the debtors cannot make good so the price levels supported by their debts are not sustainable. As credit fueled spending reverses and becomes increased savings and debt paydowns, first the retail sector and the commercial real estate it occupies falls putting many out of work, exacerbating the deflationary spiral. This is what the real economy is doing, deflating down from unpayable levels of debt fueled consumption.

The first consequence of this is that the banks who lent all the money to those defaulting borrowers are now insolvent, especially the big Wall St 'too big to fail' who marketed and lent against all the MBS and other derivatives based on these now deflating real estate assets. But the powers that be are desperate not to lose their wealth and power.

Rather than accept their capitalist punishment and ignobly slink off into bankruptcy, the powers are cheating by transferring their private losses onto the public via TARP and all the Fed's invisible machinations with the US currency. The powers, including the administration, Fed, and big banks, are blowing desperately to reflate asset prices to stave off insolvency. But to save these banksters from insolvency they are risking national insolvency with unrepayable levels of government debt.

Taxpayers buy $4500 clunkers from their neighbors to reflate the auto sector. Taxpayers make first time homebuyers' $8000 downpayments to reflate real estate. Taxpayers who have savings suffer near 0% interest rates on their savings so that banksters can borrow cheap money from the Fed to play the stock and commodities markets to manufacture imaginary 'profits'. Obama wants taxpayers to buy overpriced windmills and solar farms and pay carbon taxes so that cheap coal power costs more than expensive wind and solar. But 1/2 of the taxpayers are already underwater or insolvent or unemployed so how can they be expected to do 'more' to save the banksters from richly deserved bankruptcy?

The deflationary forces are too large for the present reflation measures to succeed. The entire economy is deflating. To succeed, reflation must be at least as large scale as the economy wide deflation that is now happening. I've written in a previous comment that for $2.5 trillion the government could send out a $1000 check to every American with a SS number, each month for a year. If the economy is still deflating after a year they can do it again, and keep doing it until deflation is arrested and some inflation starts to surface.

In behind the scenes play the Fed has already created and doled out about $2.5 trillion to "undisclosed recipients", so it's not as if the $2.5 trillion price tag is out of the ordinary in the current environment; and it's not as if the Fed has any qualms about nakedly creating and handing out that quantity of money. I think this is about the right scale and method of counterdeflationary measure that might actually work to prevent GD 2.0.

The banksters don't have to go bankrupt, and neither does America. If insolvent banksters can be "relieved" by injections of freshly created money, then the insolvent American consumer can be relieved in the same way.

The Seduction of America

John,
Great article. A few weeks ago a former chief economist of the IMF published an article warning of the excessive influence of bankers/Wall St on US government policy. His conclusion was that these extremely rich people were manipulating the political system to get even richer, at the expense of the interests of the nation as a whole.

I see a couple of comments claiming you are guilty of envy of 'successful' people. If some group (bankers) enjoys such power that they can hijack government policy to enrich themselves without producing anything of value for the economy, it is not 'envy' to denounce this. If socialists hijack the US agenda and implement fiscally unaffordable universal health care, would you be guilty of 'envy' for denouncing these unearned benefits which some are given at the expense of others?

In 1848 Karl Marx noted that 'capitalism tends inevitably toward monopoly'. In the tradition of Adam Smith I think what we want is not 'capitalism' per se but free enterprise. Enterprise cannot be free and competitive in a monopoly environment If some relatively small group gains control of the monetary apparatus and concentrates economic power in a few hands, this is not free enterprise but oligarchy and tyranny.

Since the beginning the Founding Fathers have warned against this development, against the 'European banking powers' (Benjamin Franklin's term) who seek to control the issue of nations' money and thereby own and control the nation. A democratic republic has the right and duty to limit the concentration of the nation's wealth in too few hands, because overconcentration chokes out real economic development and a free market distribution of incomes.

Mammon, the god of capital, is not the god of free enterprise. We do not need to honor this false god by surrendering our economy to the clutches of Money.

Washington's Dilemma: This Isn't a Recession, It's a Collapse

In a "recession" the most financially vulnerable (i.e. overly indebted) firms and individuals go bankrupt and their assets are bought up at bargain prices by other people who still have money. Those assets have value as consumable economic goods and as income generating financial investments (rents, dividends, profits) in a still overall functional financial economy. Lenders write off the debts of bankrupts so the system's total amount of debt is reduced. Then we start up again on the next debt runup. Yeehah!

In a "collapse" there is so much debt at all levels public and private that even investment assets at bargain prices offer no guarantee of income generation. There is a relatively small number of rich people who have mounds of cash (not nearly enough to liquidate the system's debts, even if you took it all), but they're too smart to invest it in a collapse and they have no need to spend more than a minute fraction on consumption it so it doesn't do the economy any good.

Who can pay the rent on the discount priced McMansion you just bought from the bank? Who will buy the retail goods in the bankrupt store you scooped up? Those assets have economic value; somebody would like to live in the house or own those goods for free; but they have limited or no financial value because nobody who wants them has money to pay.

The bank itself is insolvent and is only saved from bankruptcy by the good graces of the regulators who relax solvency standards (letting bank assets be valued at book rather than market) and regulatory capital requirements 30:1? No problem!). And you can't liquidate--convert assets to cash--if nobody has any cash and if those who do won't part with it. The only way to get more money to enough buyers is by more bank loans, more debt, but systemically unpayable debt is what is causing the collapse so more debt cannot be the solution.

The 1930s was a collapse. The economy could not get itself out of that financial hole. It took colossal WWII government spending, and borrowing, to restart the economy after that collapse.

But this time we are already starting from a position of all the debt that has accumulated since the 1930s collapse, including the War debt that was never actually paid off but was transferred from the gov't to private individuals as we financed the post-war recovery and vast economic expansion. With that economic expansion came financial expansion, which means "bank loans", which means "debt". All those neat rows of 1950s houses and stores and enterprises were financed with new private debt.

What is collapsing this time is the illusion of sustainability of a central bank sponsored fractional reserve monetary system where all money begins its existence as a bank 'loan', which is a debt, which must be repaid with interest. "It's the monetary system, stupid!" But it's also human nature. If we didn't have this catastrophe-causing monetary system we'd figure out some other way to fuck ourselves up.

Armageddon Part Two: Securitization Is Too Big to Fail

Great article!

I read Perry Merling's piece a week or two ago and I'm pretty sure he suggested that the government, not the Fed, was the only institution with sufficiently deep pockets to act as insurer of last resort. Merling said the Fed was to be lender of last resort but that was the extent of the Fed's backstop role. As you said, Merling gives a coherent explanation of the causes of the credit crisis and the way forward if we want to continue with securitization. You have done a great job of fleshing out how the insurance might work.

I am not convinced that the past few decades transformation from a commercial banking financial system to the new capital markets financial system is a beneficial innovation. I wrote a previous comment that the incentive structure of the old originate and hold banking system inherently aligns bankers' individual interests with the systemic interests of the financial system, and this is a stabilizing influence.

If you have to hold your loans on your own balance sheet, and if you are not protected by too big to fail implicit bailouts, then if you make too many bad loans your bank is dissolved by the regulators and you are disgraced from the industry in bankruptcy. In the securitization system of originate and sell, bankers collect upfront fees and ongoing administration fees for the loans they originate but don't hold on their balance sheets. As the front line underwriters bankers no longer have incentive to 'underwrite' because they make money no matter how poorly the loans they made and sold perform.

This new incentive structure inherently generates systemic risk, and I don't think there is any amount of regulation and oversight that is capable of undoing the inherent incentive to create as many loans for sale as possible with no regard for prospects of repayment. This is 'free money' and risk-free money for originating bankers. Now that the toxicity of securitized debt is widely known there will be no market for these products unless assets are sold at extreme discounts, which you estimate at nearly 100%. You are right to say that governments will have to pay people to take over these clumps (no longer elegant 'tranches') of toxic sludge.

Old style prudent banking probably can't generate the spectacular heights of bubbles that securitization is capable of. Maybe that's why the financial powers that be needed to do away with sound banking and prudent bankers. But i don't think this 'innovation' serves any interest except the bonus-gilded big bankers who receive trillions of Fed and taxpayer dollars as 'bailouts' when their excesses come home to bite them. The beast is dying of its own toxic wastes. I say let it go and return to real banking.

It's Time to Stop the Economic Gloom and Doom

johngaltfla wrote,

"When deleveraging is allowed to occur within a normal free market system, the pain is sharp but the duration short. Unfortunately there is this "mommy mommy I scraped my knee please kiss it and make it better" mentality in this country where losing is no longer an acceptable option. There are winners and losers in real capitalist economies and since we are no longer willing to accept losers..."

While I am sympathetic to Mr. Thoma's observation that there must be something wrong with a system where unmet wants live side by side with idle capital and labor, I agree with johngaltfla that the collectivist cure causes more problems than it solves.

From a broad philosophical perspective I believe that suffering is supposed to motivate us to get off our butts and think up a way to cure our own suffering. This means searching our own mind to discover why we are stuck in the pit we are in, then dumping wrong ideas that keep us in the pit and exercising our creative intelligence to replace bad beliefs with better ones. We are goaded into developing ourselves personally and in Darwinian terms making ourselves more fit for survival.

Big Nanny State wants to eliminate the pain from this equation. Should a parent insulate his/her child from all suffering? Or do we let kids suffer just enough to "learn the lesson" and change their wrong ideas and behavior?

When I was a young parent I correctly predicted the outcome of other parents who over-insulated their children: they got permanent dependents instead of kids who learned how to make their own way in this world.

For selfish personal reasons some parents want to keep their kids permanently needy and close at hand but what happens to your dependents when you die? You haven't let them learn the life skills they need to make it on their own so unless you left them a huge inheritance they're screwed when the source of their support is gone.

Politicians love being Santa Claus and keeping voters in a state of permanent dependence to ensure a large block of support. As George Bernard Shaw put it, "A government that robs Peter to pay Paul can count on the support of Paul."

Peter is the businesses and individuals in the productive economy who have to supply all the goods and services the government gives away. A society that systematically robs its productive class discourages production and encourages neediness. Leadership "works". You get more of what you encourage and less of what you discourage. Over time the whole system is producing less for everyone, as the Soviet system demonstrated.

There are probably limits to this downward spiral of productivity. The John Galts of Atlas Shrugged fame will never let themselves become needy as long as they have breath. But there is no mystical capitalist valley to go live in so the John Galts continue producing and paying taxes.

My point is you get what you pay for. If you pay people to be needy you get neediness. If you pay people to be productive you get productive people. If you pay people to speculate on financial products you get speculation replacing economic investment. So the question is, how productively diminished do we have to "collectively" become before this whole getting something for nothing system collapses?

Waiting for the Next Fed Apology

All through the Maestro's overseeing of the bubbles, William White at the BIS warned the central bankers of exactly what was happening and of the systemic risk that was building up. If any central banker didn't see it coming it was because he didn't want to see it, even though it was pointed out in the strongest possible ways by White and cohorts at every BIS annual meeting for years.

Cheap debt for too long creates massive distributive imbalances in a nation's financial economy. Too many people are able to borrow and spend too much money on overpriced assets, and too many people are able to get rich selling overpriced assets to the debtors. When the music stops the debtors have no way of repaying their loans and the rich sellers have no profitable opportunities to invest their money.

To keep an economy going you need the widest participation of all your citizens. But when half the people are broke and the other half are rich, broke people can't contribute and rich people don't want to risk what they already have on 'loser investments' like the productive economy. It is a healthy middle class working, striving, investing, producing--as they try to improve their lot who keep an economy going.

Credit bubbles hollow out the middle and bifurcate your population into winners and losers. That is the real danger of bubbles, the financial impasse of rich and poor that stymies real economic efforts on the part of the great middle class.

This is Not a Bull Market: Stocks Are Not Up, and They’re Headed Even Lower

Steven Alexander Fortin,
Around the beginning of the meltdown in October I read a series of articles, but I can't remember where to find them, by a guy showing that even though stocks had been rising in numerical terms, the goods and services equivalent buying power of those inflated stocks was flat or declining.

So if a stock sold for $10 in 1960 and the same stock sold for $30 in 2008, it looks like its 'value' has tripled. But if a pair of jeans sold for $6 in 1960 and the same jeans sell for $60 in 2008, then the price of your stock has lost purchasing power when you go to convert its 'value' into jeans.

Graham Summers is making this same point. Even though stock prices have risen a lot since 1928, consumer prices have risen more. So if you bought a basket of stocks at 1928 prices and sold them at the recent peak in 2008, you would have actually lost purchasing power when you convert your stocks into consumer goods.

So if Summers is saying stocks are still going down, what he is implying is that he thinks consumer price inflation will continue to rise faster than stock price inflation, which would mean that stocks are not a good means of holding value.

I agree that some stocks will not hold value going forward, but I think others will. The index may not hold its value, but individual stocks might. The US$ has been declining recently relative to other currencies and it seems the powers in Washington and Wall St and the Fed are doing their best to make sure this trend continues by inflating the US$ money supply. So stocks whose prices are denominated in US$ may go up, but their foreign exchange value could still go down.

The US imports a lot of commodities, especially oil, so it will take more inflated US$ to buy the same basket of imported commodities. If you believe this is what is happening then good stocks to hold would be energy and other commodity stocks, because the US$ price of these imported commodities will rise along with US dollar inflation.

The CDN$ has been rising relative to the US$. I bought Suncor (SU-Toronto) near its bottom and have enjoyed watching its share price double. I recently bought OPTI (OPC-Toronto) in a really depressed state. Both of these are Alberta tar sands companies and I think they are good long term stores of value. But who knows? Cap and trade or other government attacks on the energy industry may make these the worst kind of stocks to hold.

Gold seems able to hold its value but gold prices could also be manipulated by big players like central banks, Wall St banks and hedge funds. And if we ever go back to a gold-backed international currency system, will our gold be confiscated like it was in 1933? Nothing is certain. The future is not predictable.

Is This Just the Beginning of a Depression?

The reason David Rosenberg is long term bearish, and the reason he is right, is that he sees we are not merely in a deep cyclical downturn. Rosenberg recognizes that we are in a "balance sheet recession", a term coined by Richard Koo in his 2003 book of that name. Japan has been in a balance sheet recession since the collapse of its asset bubble. The Great Depression was a balance sheet recession that followed the 1920s credit runup, asset bubble, and its collapse.

After the collapse of a large scale debt-financed asset bubble like the 1920s, Japan in the 1980s, and most of the world in the 2000's, household, corporate and bank balance sheets are insolvent. The value of the economy's assets has sunk, but the debt owed against those assets remains at full value. Debt-financed firms and households owe more than their assets are worth. They are technically insolvent, even if they still have enough positive cash flow to service their debts. Not everyone is illiquid and headed for bankruptcy. But most of them are insolvent and in for a long period of balance sheet repair.

During a post-collapse balance sheet recession, firms shift from profit maximizing mode to debt minimizing mode. Businesses devote their cash flow to paying down debt in an effort to make themselves whole, regain balance sheet solvency. Households who retain their jobs and incomes also pay down debt to restore household solvency.

The banking system is also technically insolvent as the collateral banks hold is worth less than the loans outstanding against those devalued assets, so banks hoard capital against present and expected loan losses in an effort to keep the receiver from the door. Banks want to deleverage their balance sheets to stay alive, not expand their balance sheets to maximize profit.

This is why conventional monetary policy fails in this kind of environment. Even at zero interest rates combined with liquidity injections there is no demand for new loans, no stomach for new debt. In fact the opposite is occurring. Firms and households remove money from the economy's income stream and use it to extinguish debt. So aggregate spending is contracting and money supply is shrinking. With aggregate spending heading south, demand for production declines, firms lay off workers and reduce production, which further reduces incomes and spending, in the deflationary spiral typical of the first few years of a depression.

In his 2009 book, "The Holy Grail of Macroeconomics", Koo contrasts Japan's "interventionist" response to the Hoover-Mellon "hands-off" response. Japanese monetary easing and fiscal stimulus have succeeded in maintaining Japanese GDP throughout the past 15 years of balance sheet repair. By contrast, the Hoover-Mellon strategy shaved 46% off US GDP between 1929-1933. Obama-Bernanke appear to favor the Japanese strategy.

During the Depression, New Deal interventions began reviving the economy until attempts to rein in stimulus and balance the budget crashed the still bleeding economy again in 1937. WWII government borrowing and spending restored the economy, but in 1947 when war spending ceased and its stimulative effects were removed, the economy sank back into Depression mode.

So those who would criticize Japan's strategy for failing to restore GDP growth even after 15 years, should recognize that American GDP growth had not become self-sustaining even by 1947, 18 years after the crash. Today US public and private sector debt is 350% of GDP, so criticizing Japan's 270% debt to GDP is a little myopic. Greenspan prevented US recessions/depression by encouraging private sector debt growth. Japan has done it with public sector debt growth. Debt is debt.

After 1947 a combination of fiscal stimulus measures that included building the interstate highways system and fighting the Korean War, combined with the policy-encouraged building and mortgaging of American suburbia to house the baby boom and create the auto industry, restored the economy to rapid growth. Growth stalled in the 1960s, but the Vietnam War came to the rescue, followed by removal of the dollar from the gold standard to permit unlimited monetary growth, which continued almost unabated until Sept/08.

I would argue that the US free market never did recover from the 1929 asset collapse. Since then government spending and increasing total amounts of both public and private sector debt have created an appearance of recovery that masks the underlying unsustainability of debt-financed prosperity. Now that monetary growth has gone negative we have returned to depression, which is inevitable in a monetary system whose sustainability depends on never ending monetary growth.

No One Saw This Economic Crisis Coming?

Great research and synopsis, John.

Essentially what is being said is that the Fed's and government's models did not include DEBT. As User353732 says above, it is difficult to believe that nobody at the central bank understands the effects of debt on a monetary economy. There are billions, trillions of dollars to be made in a debt runup so the money motive trumps the financial sustainability motive.

There are 2 sides to every trade. One side takes on debt and the other side collects that money as payment for the sale of an asset to the debtor. Individuals can personally benefit from a debt runup but only 'the system' suffers when it collapses. What is individually rational behavior is nationally catastrophic.

John is right. A simple accounting balance sheet with credit balances on one side and debt balances on the other would show total debt racing exponentially higher than total credit. This is because all the debt is lent at interest, but only the principal is paid out to the sellers and becomes part of the credit balances or 'money supply'. Interest balances grow on the debt side of the balance sheet with no concommitant growth of those amounts on the credit balance side.

It doesn't matter what 'the economy' does. This is monetary arithmetic. The economy does not produce money. The banking system creates money. They are 2 separate systems that require 2 separate accounting models.

As for Greenspan's and others' contention that nobody can see bubbles forming, that is just total BS. My son was building and selling houses during the runup and I warned him repeatedly that prices don't always go up. He sold his last one in 2007 and had to drop the price $150k from what it was appraised at by his bank just a few months earlier for a construction loan draw. According to the bank this was going to be a $700k house, and I asked my son who in hell can afford to pay that kind of money for a place to live.

Even if we see that a bubble is forming it is hard not to want to get in on the insanity while there's money to be made. Timing is everything. Don't get caught owning one of these overpriced assets when the music stops. I personally think it's immoral to know you are selling at bubble prices to people who you know are paying unsustainable prices. But even I can justify it to myself by believing that my buyer can turn around and sell to a 'greater fool' for an even higher price.

The profit motive is very strong in us humans so we participate in bubbles even if we think it is 'wrong'. Apparently this same psychology is at work in the people at the Fed and government who are supposed to be the 'adults' who prevent these things from happening.

How Did the Wage / Benefit Gap Between Public and Private Sectors Get So Huge?

"Give them all a 33% haircut and let them live on their fat."

I agree with Roger. Benefits are the big ticket item in this equation. I would argue that because public sector workers receive 100% of their compensation from taxpayers, no government worker should receive higher benefits than the average in the private taxpaying sector. That would be the 33% haircut right there.

I would go further. Corporate oligopolies enjoy supportive legislation and market pricing power that enables them to compete with public sector compensation and benefits. Consumers subsidize this excessive compensation by paying higher prices. So I would say public sector benefits cannot be higher than the average paid by small to medium businesses who employ about 2/3 of all workers. That would bring public sector benefits pretty close to the $zero that most small business workers (and owners) get.

I don't care about "apples to apples" comparisons. So what if governments hire more 'professionals' with degrees. What's the market value of a gender equity consultant, in a free market where gender equity is not first mandated by the government? The market value is zero, not $120k per year, no matter how many degrees the worthless employee holds.

Even where public sector professionals do useful work like ensure engineering standards are met on projects, government "safety nazi" regulation and bureaucratic overkill ensures the projects are either overspec'd or mal-spec'd which multiplies their costs without producing any appreciable gains in safety or other benefits.

Many modern university degree programs are in a closed loop with government social engineering. Those programs and the jobs they lead to could not exist in a free economy because they generate zero economic value and zero social value. They are make work programs pure and simple, but the 'workers' doing those public jobs are actually a cost to the private businesses that have to endure their interference, not a benefit of any kind.

Shakespeare had it right, "First, we kill all the lawyers." Legalism makes the law and justice excessively complex so that ordinary people cannot understand the law and get justice without going though the lawyers. The lawyers interpose themselves as a tax on everybody's life. Modern bureaucrats do exactly the same thing. They are parasites, not 'economic contributors'.

As for public sector arguments that, "We pay taxes too!": if a parasite sucks a gallon of your blood and gives you back a quart that parasite has still cost you 3 quarts of blood. The public sector is a mosquito bloated on private sector blood. We do to mosquitos the same thing Shakespeare advocated for lawyers. Apples to apples?

More on Capital Ratios of U.S. Banks

bbro,
I think the author's point is that these big banks are in a fragile capitalization position. In the event of the highly foreseeable additional decline of their asset values they will lack sufficient capital to maintain solvency, if indeed they are not already grossly insolvent. Insolvent banks can hobble along indefinitely as long as regulators choose not to force liquidation, but if these banks are 'systemically essential' to the financing of the US economy and if they are afraid to issue new loans that could make them even more insolvent we will be Japan all over again.

Are Airlines Going Bankrupt Again?

As a number of commenters have observed above, demand for airline tickets is extremely price elastic. Unless airfares are relatively cheap people simply look at the few hundred dollar pricetag and decide to drive or choose a closer destination where flying is not necessary. At least 50%, probably much more, of air travel is nonessential, a 'luxury', and luxuries are the first items cut from deflating household budgets.

One commenter wants to reregulate and subsidize airfares. Why should 100% of taxpayers subsidize a luxury like air travel for the maybe 10% of taxpayers who regularly use it? This is just another example of the wealthier and more profligate sucking money out of the less wealthy and more prudent. Unless you are Dumbo the flying elephant, or the flying nun, or a witch on her broom, flying across continents and over oceans is NOT a 'right', and certainly not an activity that taxpayers should be subsidizing.

In the 1960s only rich 'jet-setters' flew around this planet. I'm not making an argument for elitism, but air travel is a high cost service that naturally belongs in the category of luxury consumption that few can afford. If and when oil prices return to peak oil levels the airline industry faces massive contraction and will once again become a playground for rich people and for 'once in a lifetime' middle class extravagance.