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Could The Markets Crash Again? | Zero Hedge
Could The Markets Crash Again? | Zero Hedge.
This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”
Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).
Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.
The Tech bubble was a stock bubble.
The 2007 bust was a housing bubble.
This next bust will be the sovereign bond bubble.
Why does this matter?
Because of the dreaded “C word” COLLATERAL.
In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.
This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.
This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).
Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.
The reason?
The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.
WHAT DOES THIS HAVE TO DO WITH TODAY?
The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.
By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.
SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?
Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.
At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.
This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…
THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.
To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:
1) The Grand Monetary experiment of the last five years is ending.
2) THE Crisis (the one to which 2008 was just a warm up) is beginning.
For a FREE Investment Report outlining how to prepare for another market crash, swing by: www.gainspainscapital.com
Best Regards
Phoenix Capital Research
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Could The Markets Crash Again? | Zero Hedge
Could The Markets Crash Again? | Zero Hedge.
This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”
Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).
Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.
The Tech bubble was a stock bubble.
The 2007 bust was a housing bubble.
This next bust will be the sovereign bond bubble.
Why does this matter?
Because of the dreaded “C word” COLLATERAL.
In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.
This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.
This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).
Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.
The reason?
The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.
WHAT DOES THIS HAVE TO DO WITH TODAY?
The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.
By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.
SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?
Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.
At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.
This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…
THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.
To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:
1) The Grand Monetary experiment of the last five years is ending.
2) THE Crisis (the one to which 2008 was just a warm up) is beginning.
For a FREE Investment Report outlining how to prepare for another market crash, swing by: www.gainspainscapital.com
Best Regards
Phoenix Capital Research
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22 Facts About The Coming Demographic Tsunami That Could Destroy Our Economy All By Itself
22 Facts About The Coming Demographic Tsunami That Could Destroy Our Economy All By Itself.
Today, more than 10,000 Baby Boomers will retire. This is going to happen day after day, month after month, year after year until 2030. It is the greatest demographic tsunami in the history of the United States, and we are woefully unprepared for it. We have made financial promises to the Baby Boomers worth tens of trillions of dollars that we simply are not going to be able to keep. Even if we didn’t have all of the other massive economic problems that we are currently dealing with, this retirement crisis would be enough to destroy our economy all by itself. During the first half of this century, the number of senior citizens in the United States is being projected to more than double. As a nation, we are alreadydrowning in debt. So where in the world are we going to get the money to take care of all of these elderly people?
The Baby Boomer generation is so massive that it has fundamentally changed America with each stage that it has gone through. When the Baby Boomers were young, sales of diapers and toys absolutely skyrocketed. When they became young adults, they pioneered social changes that permanently altered our society. Much of the time, these changes were for the worse.
According to the New York Post, overall household spending peaks when we reach the age of 46. And guess what year the peak of the Baby Boom generation reached that age?…
People tend, for instance, to buy houses at about the same age — age 31 or so. Around age 53 is when people tend to buy their luxury cars — after the kids have finished college, before old age sets in. Demographics can even tell us when your household spending on potato chips is likely to peak — when the head of it is about 42.
Ultimately the size of the US economy is simply the total of what we’re all spending. Overall household spending hits a high when we’re about 46. So the peak of the Baby Boom (1961) plus 46 suggests that a high point in the US economy should be about 2007, with a long, slow decline to follow for years to come.
And according to that same article, the Congressional Budget Office is also projecting that an aging population will lead to diminished economic growth in the years ahead…
Lost in the discussion of this week’s Congressional Budget Office report (which said 2.5 million fewer Americans would be working because of Obamacare) was its prediction that aging will be a major drag on growth: “Beyond 2017,” said the report, “CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades [due in large part to] slower growth in the labor force because of the aging of the population.”
So we have a problem. Our population is rapidly aging, and an immense amount of economic resources is going to be required to care for them all.
Unfortunately, this is happening at a time when our economy is steadily declining.
The following are some of the hard numbers about the demographic tsunami which is now beginning to overtake us…
1. Right now, there are somewhere around 40 million senior citizens in the United States. By 2050 that number is projected to skyrocket to 89 million.
2. According to the Employee Benefit Research Institute, 46 percent of all American workers have less than $10,000 saved for retirement, and29 percent of all American workers have less than $1,000 saved for retirement.
3. One poll discovered that 26 percent of all Americans in the 46 to 64-year-old age bracket have no personal savings whatsoever.
4. According to a survey conducted by the Employee Benefit Research Institute, “60 percent of American workers said the total value of their savings and investments is less than $25,000”.
5. 67 percent of all American workers believe that they “are a little or a lot behind schedule on saving for retirement”.
6. A study conducted by Boston College’s Center for Retirement Research found that American workers are $6.6 trillion short of what they need to retire comfortably.
7. Back in 1991, half of all American workers planned to retire before they reached the age of 65. Today, that number has declined to 23 percent.
8. According to one recent survey, 70 percent of all American workers expect to continue working once they are “retired”.
9. A poll conducted by CESI Debt Solutions found that 56 percent of American retirees still had outstanding debts when they retired.
10. A study by a law professor at the University of Michigan found that Americans that are 55 years of age or older now account for 20 percent of all bankruptcies in the United States. Back in 2001, they only accounted for 12 percent of all bankruptcies.
11. Today, only 10 percent of private companies in the U.S. provide guaranteed lifelong pensions for their employees.
12. According to Northwestern University Professor John Rauh, the total amount of unfunded pension and healthcare obligations for retirees that state and local governments across the United States have accumulated is 4.4 trillion dollars.
13. Right now, the American people spend approximately 2.8 trillion dollars on health care, and it is being projected that due to our aging population health care spending will rise to an astounding 4.5 trillion dollars in 2019.
14. Incredibly, the United States spends more on health care than China, Japan, Germany, France, the U.K., Italy, Canada, Brazil, Spain and Australia combined.
15. If the U.S. health care system was a country, it would be the 6th largest economy on the entire planet.
16. When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around. Instead, the federal government ended up spending $110 billion on the program in 1990, and the federal government spent approximately $600 billion on the program in 2013.
17. It is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025.
18. At this point, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years. That comes to approximately$328,404 for every single household in the United States.
19. In 1945, there were 42 workers for every retiree receiving Social Security benefits. Today, that number has fallen to 2.5 workers, and if you eliminate all government workers, that leaves only 1.6 private sector workers for every retiree receiving Social Security benefits.
20. Right now, there are approximately 63 million Americanscollecting Social Security benefits. By 2035, that number is projected to soar to an astounding 91 million.
21. Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.
22. The U.S. government is facing a total of 222 trillion dollars in unfunded liabilities during the years ahead. Social Security and Medicare make up the bulk of that.
So where are we going to get the money?
That is a very good question.
The generations following the Baby Boomers are going to have to try to figure out a way to navigate this crisis. The bright future that they were supposed to have has been destroyed by our foolishness and our reckless accumulation of debt.
But do they actually deserve a “bright future”? Perhaps they deserve to spend their years slaving away to support previous generations during their golden years. Young people today tend to be extremely greedy, self-centered and lacking in compassion. They start blogs with titles such as “Selfies With Homeless People“. Here is one example from that blog…
Of course not all young people are like that. Some are shining examples of what young Americans should be.
Unfortunately, those that are on the right path are a relatively small minority.
In the end, it is our choices that define us, and ultimately America may get exactly what it deserves.
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Europe’s Modest Proposal To End Unemployment: Slavery | Zero Hedge
Europe’s Modest Proposal To End Unemployment: Slavery | Zero Hedge.
Having spent weeks talking amongst themselves about the chronic and dangerous rise of youth unemployment in Europe (as we warned here), the Center of planning and Economic Research in Greece has proposed a controversial measure. As GreekReporter reports, the measure includes unpaid work for the young and unemployed up to 24 years old, so that companies would have a strong motive to hire young employees. “Unpaid” work sounds a lot like slavery to us… but it gets better; the report also suggested “exporting young unemployed persons.” No comment…
Europe’s youth unemployment problem is epic – 24.4% of Europe’s under-25 population is unemployed…
GreekReporter notes the solution to Greece’s problems…
Centre of planning and Economic Research in Greece has proposed a controversial measure in order to deal with the problem of increasing unemployment in the country.
The measure includes unpaid work for the young and unemployed up to 24 years old, so that companies would have a strong motive to hire young employees. Practically, what is proposed is the abolition of the basic salary for a year. At the same time the “export” of young unemployed persons was also proposed to other countries abroad, as Greek businesses do not appear able to hire new personnel.
According to the National Confederation of Hellenic Commerce, unemployment especially hits the ages between 15-24. The unemployment rate in Greece stands at 24.6% while 57.2% of young people are without a job. The majority of the unemployed (71%) have had no work for 12 months or more, while 23.3 % of the total have never worked. There were 3,635,905 people employed and 1,345,387 unemployed.
Whether it’s Europe in the 1930’s or the US during the same period (conflicts between strikers, the National Guard and armed militias), unemployment can create a powerful cocktail of unrest.
But turning your nation’s young into slaves does not seem like a good solution to us…
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Russia’s Growing Regional Debts Threaten Stability – Forbes
Russia’s Growing Regional Debts Threaten Stability – Forbes.
Editor’s Note: The following is the first installment of a three-part series on growing debt for Russia’s regional governments.
Since the 2009 financial crisis, the Kremlin has allowed Russia’s regions to take the brunt of the country’s economic decline in order to keep the federal government seemingly healthy, with a nominally small budget deficit and large currency reserves. But now most of Russia’s regional governments’ debt is so high, it is becoming dangerous for the federal government and big banks and could soon become unmanageable.
Analysis
Russia is so large that the Kremlin lacks the resources to run each region of the country directly. Currently Russia is split into 83 regions of all shapes and sizes, which fall into categories of oblasts, republics, krais, federal cities and autonomous okrugs. Historically, the Kremlin has given regional leaders (mayors, governors, heads or republic presidents) the power to run their own regions and ensure loyalty to the Kremlin and stability for the country.
However, the Kremlin is constantly concerned with its control over the regions. The federal government’s ability to maintain the loyalty of each region has been tested often throughout history. For instance, dozens of regions attempted to break away after the fall of the Soviet Union, occasionally leading to wars such as those in Chechnya.
The central government’s control over the regions was demolished during the devastating financial crisis in 1998. Many of the regional heads defied the federal government in order to look out for their own regions’ survival. It was the second-worst regional breakdown in Russia following the collapse of the Soviet Union, and it was related directly to the chaos caused by that collapse. This is why the currently growing economic strains in the regions will be of great concern for the Kremlin.
The Regions’ Mounting Debts
Most of Russia’s regional governments have always had some level of debt, but resource-based export revenues have kept it mostly manageable since the 1998 crisis. However, since the 2008-2009 financial crisis, most of the regions’ debt has risen by more than 100 percent — from $35 billion in 2010 to an estimated $78 billion in 2014, and Standard & Poor’s has estimated that this will rise to $103 billion in 2015. Russia’s overall government debt — the federal and regional governments combined — is around $300 billion, or 14 percent of gross domestic product. This is small for a country as large as Russia, but the problem is that so much of the debt is concentrated in the regions, which do not have as many debt reduction tools as the federal government does.
Of the 83 regional subjects in Russia, only 20 will be able to keep a budget surplus or a moderate level of debt by 2015, according to Standard & Poor’s calculations. This leaves the other 63 regions at risk of needing a federal bailout or defaulting on their debt.
Currently, the Russian regions are financing their debt via bank loans, bonds and budget credits (federal loans, for example). Each region has to get federal approval to issue bonds, because regional bonds create more market competition for the federal and business bonds. Most of the banking loans to the regions carry high interest rates and are short term (mostly between two and five years). The federal loans come with much lower rates and longer repayment schedules (mostly between five and 20 years), so naturally federal credits and loans are more attractive for the local governments, though unprofitable for the federal government. The issuance of federal credits or loans to the regions in 2013 was limited; initially, Moscow said it would issue $4.8 billion in new credits to the regions in 2013, but only issued $2.4 billion due to its own budgetary restrictions. This is one contributing factor to the dramatic local-government debt increases.
Economic Stagnation
The next contributing factor to the rise in regional debt is the overall economic stagnation that has plagued Russia since the 2009 financial crisis and subsequent stimulus aimed at pulling Russia out of the crisis. Despite high energy prices all year, Russia’s gross domestic product growth slowed dramatically in 2013 to 1.5 percent growth after an initial 3-4 percent growth target by the Kremlin at the start of that year. This is low compared to the 7-8 percent growth seen yearly in Russia in the mid-2000s. Most analysts believe the only way Russia’s growth remained positive was through its large energy revenues, which make up half of the federal government’s budget and 20-25 percent of the country’s gross domestic product.
There are a handful of reasons for Russia’s economic stagnation. First, investment in Russia was lower than expected in 2013. Fixed investment was down 1.8 percent year-on-year in the first 10 months of 2013, compared with a 9.1 percent year-on-year growth in the same period in 2012. Private sector outflows of capital were high in 2013, with a net outflow of $48 billion leaving Russia in the first nine months of 2013, compared with $46 billion for the same period in 2012. Moreover, the investment sentiment in Russia is poor at the moment, as the Central Bank of Russia has begun closing some 800 smaller banks in a consolidation. Many of those banks were regionally based, and their closure is making investment in the regions less attractive.
Lower investment, coupled with less corporate borrowing and a decline in demand in many sectors, such as metals, led to lower industrial production. In the first 10 months of 2013, industrial production was flat compared with 2.8 percent growth in the same period in 2012. Industrial production is region-specific in Russia; industry provides nearly the entire economy in some regions. Thirty-one Russian regions, including Komi and Barents, had negative industrial production indexes for 2013. This could get worse in 2014, as many of the metals giants are planning to continue shutting down plants due to a lack of demand and low prices. For example, the world’s largest aluminum producer, Rusal, is shutting down five aluminum plants in the Volgograd, Karelia, Leningrad and Urals regions and laying off tens of thousands of workers.
Federal Obligations
Another factor contributing to the regions’ rising debts is increasingly burdensome obligations to the federal government. Of the income generated in a particular region, only 37 percent of the income stays in that region and the rest goes to the federal budget. The federal government does return some of the funds to the region in the form of subsidies and intergovernmental transfers, but not more than 20 percent. The amount of income that the Kremlin has taken from the regions has increased 12 percent in the past three years (via increases in taxes and decreases in subsidizations), leaving less and less for the regions to work with.
There has also been a large outcry from the regional governments in response to a series of presidential edicts that Vladimir Putin declared when he was re-elected to his third term in late 2011. Putin ordered the regional governments to do a series of tasks, such as replace all dilapidated housing by 2014, and to raise regional and municipal salaries by 7-10 percent in 2014 and another 10 percent in 2015. The regions are calling these “unfunded mandates,” as the federal government is not helping the regions pay for these projects. Already, the Kremlin has had to postpone the housing replacement edict to 2016 due to lack of funding in the regions, but the salary edict remains in place and is estimated to cost the regions $56.6 billion over the next two years.
- Part 1: Russia’s Growing Regional Debts Threaten Stability
- Part 2: Russia’s 1998 Financial Crisis in the Regions: A Case Study
- Part 3: Russia Weighs its Options for Managing Regional Debts
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Chris Martenson: “Endless Growth” Is the Plan & There Is No Plan B | Peak Prosperity
Chris Martenson: “Endless Growth” Is the Plan & There Is No Plan B | Peak Prosperity.
After five years of aggressive Federal Reserve and government intervention in our monetary and financial systems, it’s time to ask: Where are we?
The “plan,” such as it has been, is to let future growth sweep everything under the rug. To print some money, close their eyes, cross their fingers, and hope for the best.
On that, I give them an “A” for wishful thinking – and an “F” for actual results.
For the big banks, the plan has involved giving them free money so that they can be “healthy.” This has been conducted via direct (TARP, etc.) and semi-direct bailouts (such as offering them money at zero percent and then paying them 0.25% for stashing that same money back at the Fed), and indirectly via telegraphing future market interventions so that the big banks could ‘front run’ those moves to make virtually risk-free money.
This has been fabulously lucrative for the big banks that are in the inner circle. As we’ve noted somewhat monotonously, the big banks enjoy “win ratios” on their trading activities that are, well, implausible at best.
Here’s a chart of J.P. Morgan’s trading revenues for the first three quarters of 2013, showing how many days the bank made or lost money:
(Source)
Do you see the number of days the bank lost money? No? Oh, that’s right. There weren’t any.
Now, for you or me, trading involves losses, or risk. Sometimes you win, and sometimes you lose. There appears to be zero risk at all to JP Morgan’s trading activities. They won virtually all of the time over this 9-month period.
That’s like living at a casino poker table for months and never losing.
Of course, Bank of America/Merrill Lynch, Goldman Sachs, and a few other U.S.-based banks were able to turn in roughly similar results. Pretty sweet deal being a bank these days, huh?
So one might think, Well, that’s just how banks are now. Bernanke’s flood of liquidity is allowing them to simply ‘win’ at trading. If true (which it appears to be), we can’t call this trading. The act of “trading” implies risk. And it’s clear that what the big banks are doing carries no risk; otherwise they would be posting at least some degree of losses. We should call it sanctioned theft, corporate welfare, cronyism – the list goes on. And it is most grossly unfair, as well as corrosive to the long-term health of our markets.
Therefore, sadly, I have to give Bernanke an A++ on his objective of handing the banks a truly massive amount of risk-free money. He’s done fabulously well there.
But will this be sufficient to carry the day? Will this be enough to set us back on the path of high growth?
And even if we do magically return to the sort of high-octane growth that we used to enjoy back in the day, will that really solve anything?
Endless Growth Is Plan A Through Plan Z
The problem I see with the current rescue plans is that they are piling on massive amounts of new debts.
These debts represent obligations taken on today that will have to be repaid in the future. And the only way repayment can possibly happen is if the future consists of a LOT of uninterrupted growth upwards from here.
It’s always easiest to make a case when you go to silly extremes, so let’s examine Japan. It’s no secret that Japan is piling on sovereign debt and just going nuts in an attempt to get its economy working again. At least that’s the publicly stated reason. The real reason is to keep its banking system from imploding.
After all, exponential debt-based financial systems function especially poorly in reverse. So Japan keeps piling on the debt in rather stunning amounts:
(Source)
That’s up nearly 40% in three years (!).
It’s the people of Japan who are on the hook for all that borrowing, now standing well over 200% of GDP. So here’s the kicker: In 2010, Japan had a population of 128 million. In 2100, the ‘best case’ projected outcome for Japan is that its population will stand at 65 million. The worst case? 38 million.
So…who, exactly, is going to be paying all of that debt back?
The answer: Japan’s steadily shrinking pool of citizens.
This is simple math, and the trends are very, very clear. Japan has a swiftly rising debt load and a falling population. Whoever it is that is buying 30-year Japanese debt at 1.69% today either cannot perform simple math, or, more likely, is merely playing along for the moment but plans on getting out ahead of everybody else.
But the fact remains that Japan’s long-term economic prospects are pretty terrible. And they will remain so as long as the Japanese government, slave to the concept of debt-based money, cannot think of any other response to the current economic condition besides trying to shock the patient back to vigorous life by borrowing and spending like crazy.
If, instead, Japan had used its glory days of manufacturing export surpluses to build up real stores of actual wealth that would persist into the future, then the prognosis could be entirely different. But it didn’t.
The U.S. Is No Different
Except for some timing differences, the U.S. is largely in the same place as Japan twenty years ago and following a nearly identical trajectory. Currently, it’s an economic powerhouse, folks are generally optimistic on the domestic economic front (relatively speaking), and its politicians are making exceptionally short-sighted decisions. But the long-term math is the same.
There’s too much debt representing too many promises. The only possible way those can be met is if rapid and persistent economic growth returns.
However, even under the very best of circumstances, where the economy rises from here without a hitch – say, at historically usual rates of around 3.5% in real terms (6% or more, nominally) – we know that various pension and entitlement programs will still be in big trouble.
Worse, we know that the environment is screaming for attention based on our poor stewardship. Addressing issues such as over-farming, water wastage, and oceanic fishery depletion – to say nothing of carbon levels in the atmosphere – will be hugely expensive.
Likewise, a complete focus on consumer borrowing and spending at the exclusion of everything else (except bailing out big banks, of course), along with a dab of excessive state security spending, has left the U.S. with an enormous infrastructure bill that also must be paid, one way or the other. That is, short-term decisions have left us with long-term challenges.
But what happens if that expected (required?) high rate of growth does not appear?
What if there are hitches and glitches along the way in the form of recessions, as is certain to be the case? There always have been moments of economic retreat, despite the Fed’s heroic recent attempts to end them. Then what happens?
Well, that’s when an already implausible story of ‘recovery’ becomes ludicrous.
If we take a closer look at the projections, the idea that we’re going to grow – even remotely – into a gigantic future that will consume all entitlement shortfalls within its cornucopian maw becomes all but laughable.
Of course, the purpose of this exercise is not to make fun of anyone, nor to mock any particular beliefs, but to create an actionable understanding of the true nature of where we really are and what you should be doing about it.
In Part II: Why Your Own Plan Better Be Different, we examine more deeply the unsustainability of our current economic system and why it is folly to assume “things will get better from here.”
Given the unforgiving math at the macro altitudes, the need for adopting a saner, more prudent plan at the individual level is the best option available to us now.
Click here to access Part II of this report (free executive summary; enrollment required for full access).
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A Comedy Of IMF Forecasting Errors: Global Trade Growth Tumbles More Than 50% From IMF’s 2012 Prediction | Zero Hedge
The comedy of errors that are IMF forecasts is well known: it was covered most recently in “Hilarious Charts Of The Day: IMF’s “Growth Forecasts” Over Time.” Moments ago we got the IMF’s first forecast update for 2014 which also included the Fund’s first 2015 forecasts for growth around the world. Not surprisingly, they were largely higher across the board except for China which has seen its 2014 projected GDP growth collapse from 8.5% a year ago to 7.5% now, and is expected to drop modestly to 7.3% in 2015. The charts showing the progression of said hilarious forecasts are shown in their entirety below, about which one thing can be said with certainty: whatever the GDP growth rate in the world is in 2014 and 2015 it will be anything but what the IMF predicts it to be.
But perhaps the most notable feature of today’s set of numbers is the IMF’s forecast of world trade. In a word: it is crashing. Consider that 2013 world trade was expected to grow by 5.6% in April 2012. Now: it is more than 50% lower at just 2.7%!
Yet what is truly hilarious and certainly head scratching, is that somehow the IMF now anticipates a pick up in global growth in 2014 from its previous forecast of 3.6% to 3.7%, even as global trade is revised lower once more to the lowest prediction for 2014, and currently stands at just 4.5% compared to 4.9% in October 2013 and 5.5% a year ago (it goes without saying that the final global trade number for 2014 will be well lower than the IMF’s optimistic forecast).
How global GDP is expected to grow on the margin compared to previous forecasts even as trade contracts is anyone’s guess…
Behold the IMF’s revision to global growth forecasts: how does one spell error bars.
And here are the GDP growth forecasts for the rest of the world.
Global:
US:
Eurozone:
China:
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China’s economic growth continues to slow – Asia-Pacific – Al Jazeera English
China’s economic growth continues to slow – Asia-Pacific – Al Jazeera English.
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| China’s economy registered a flat growth of 7.7 percent last year, maintaining for the second year its slowest expansion in more than a decade as the government warned of “deep-rooted problems” including a mountain of local authority debt.
Gross domestic product (GDP) expansion for the October-December quarter also came in at 7.7 percent, the National Bureau of Statistics (NBS) said, slowing from 7.8 percent in the previous three months. The 2013 GDP figure was the same as that for 2012, which was the worst rate of growth since 1999. It was still higher than the government’s growth target for the year, which was 7.5 percent. “Generally speaking China’s economy showed good momentum of stable and moderate growth in 2013, which is (a) hard-earned achievement,” NBS chief Ma Jiantang told reporters. “However, we should keep in mind that the deep-rooted problems built up over time are yet to be solved in what is a critical period for China’s economy,” Ma said. Since the 1980s, China has shaken off the lethargy of the Communist command economy with market reforms that brought it years of blistering growth, making its GDP second only to the US and establishing it as the world’s biggest trading power in goods. But the country is widely expected to face slower expansion in the years ahead. Its leaders under President Xi Jinping say they are committed to transforming China’s growth model to one where consumers and other private actors play the leading role, rather than huge and often wasteful state investment. “Judging from the data, our outlook for 2014 remains that China’s economy will continue slowing down in the first half,” Wendy Chen, Shanghai-based analyst for Nomura International, told AFP. Within the past decade Chinese growth was regularly in double digits, but it has been on a slowing trend and the 2013 result shows GDP growth in single figures for three consecutive years for the first time since 2002. Worries ahead Ma of the NBS said China faces problems including dealing with burgeoning local government debt. “The foundation of economic growth remains to be consolidated, the internal driving forces of economic expansion need to be further fostered, the risk of local government debt should be prevented and greater efforts are to be made to weed out out-dated production capacity,” he said. Besides shifting the growth emphasis, China’s leaders are also concerned about the country’s financial system including “shadow banking” and government debt, particularly at the regional level. China late last month announced the results of a long-awaited debt audit, revealing that liabilities carried by local governments had ballooned to $2.95 trillion as of the end of June, up 67 percent from the end of 2010. Local authorities have long used debt to fuel growth in their regions, often by pursuing projects that are not economically viable or sustainable. While few see the problem as a systemic threat, the debt issue is considered to be a serious potential drag on China’s economy unless steps are taken to rein it in. Analysts also say that shadow banking — non-transparent, less regulated credit — can stoke asset bubbles and threaten stability. |
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Over-financialisation – the Casino Metaphor
Over-financialisation – the Casino Metaphor.
The casino metaphor has been widely used as a part-description of the phenomenon of over-financialisation. It’s a handy pejorative tag but can it give us any real insights? This article pursues the metaphor to extremes so that we can file & forget/get back to the football or possibly graduate to next level thinking.
What is the Financialised Economy (FE) and how big is it?
The FE can be loosely described as ‘making money out of money’ as opposed to making money out of something; or ‘profiting without producing’ [1]. Its primacy derives largely from two sources – the ability of the commercial banks to create credit out of thin air and then lend it and charge and retain interest; and their ability to direct the first use of capital created in this fashion to friends of the casino as opposed to investing it in real economy (RE) businesses. So the FE has the ability to create money and direct where it is used. Given those powers it is perhaps unsurprising that it chooses to feed itself before it feeds the RE. The FE’s key legitimate roles – in insurance and banking services – have morphed into a self-serving parasite. The tail is wagging the dog.
The FE’s power over the allocation of capital has been re-exposed, for those who were perhaps unaware of it, as we see the massive liquidity injected by the central banks via QE disappearing into the depths of bank balance sheets and inflated asset values leaving mid/small RE businesses gasping for liquidity.
By giving preferential access to any capital allocated to the RE to its big business buddies the FE enables those companies to take out better run smaller competitors via leveraged buy outs. By ‘investing’ in regulators and politicians via revolving doors and backhanders, it captures the legislative process and effectively writes its own rule book.
Five years after the 2008 crisis hit, as carefully catalogued by FinanceWatch [2], economies are more financialised than ever. If the politicians and regulators ever had any balls they have been amputated by the casino managers, under the anaesthesis of perceived self-interest. They have become the casino eunuchs. An apparent early consensus on the systemic problems of over financialisation has melted away into a misconceived search for ‘business as usual’.
Derivatives
Derivatives are one of the most popular games in the casino.
Over the counter derivatives, which are essentially bets on the performance of asset prices, stocks, indices or interest rates, have a nominal value (as of December 2012 [2]) of USD 632 trillion – 6% up from 2007 levels – and 9 times world GDP. If the world decided to stop living and buy back derivatives instead of food, energy, shelter and all the stuff we currently consume, it would take nine years to spend this amount.
OK – it’s a nominal value. Many observers believe (even hope) that its real value is a minute fraction of this, but the only way we will ever find out is if the derivative contracts unwind. That is, prompted presumably by some form of crisis, parties progressively withdraw from the contracts or fold. The regulators (and the FE itself of course) will do everything they can to prevent this from happening, including grinding the population into the dust via austerity, because while no-one knows who precisely holds the unwound risk, most will certainly belong to the FE’s top tier.
Many of these derivatives started life as sensible financial products. Businesses need to insure against an uncertain harvest, or hedge against uncertain currency movements. But only a small proportion of current holders now have an insurable risk. So whereas in the past you could say we insured against our own house burning down, now they bet on their neighbour’s house burning; whereas in the past we bet on our own life expectancy, they now bet on the deaths of others; whereas in the past we insured against currency losses we experienced in our own business transactions, now they bet on currency movements in general. What might be expected when there are incentives to burn your neighbour’s house down? Organisations have even purposely set up junk asset classes, had them AAA rated, sold them to outsiders and then bet on their failure.
Government & Politicians
Politics operates as a debating society in a rented corner of the casino. The rent is high but largely invisible to the populace. The debaters are themselves well off, at least in the U.S. they are [3].
Now the strange thing is that the government actually owns the casino, but they have forgotten this. For the last 40 years or so, they have asked the casino managers to issue all the chips. The government use the same chips to spend on public services, and require us all to pay taxes in those chips. Mostly they don’t have enough chips for all the services they provide, so they ask the casino managers for loans. The casino managers are happy with this, provided the government pay interest on the loan of chips. This hidden subsidy effectively funds the casino. It’s perverse because the government pays interest on money they could issue themselves debt-free.
It’s not entirely clear why the government thinks the casino managers are better at managing chips than they would be. Arguably the government is elected to carry out a programme and they should be the arbiters of the country’s strategic priorities, so there should be some strategic guidance over the way the chips are spent.
But the government is only here for five years, and the casino managers are here permanently. So perhaps they think it’s safer just to trust the casino managers to get on with it. When asked, the casino managers explain that they allocate chips according to ‘what the market needs’ and no-one quite understands why that doesn’t seem to include much real investment. In any case the government have forgotten that they could issue the chips themselves, and although prompted (e.g. [4]), have failed to show any interest in reclaiming that power. Occasionally they create a whole new batch of chips themselves (QE) – if they think the tables are quiet – but give them straight back to the casino managers. Maybe it’s too complicated for politicians. Many of them haven’t had proper jobs. There are a few civil servants who understand what’s happening, but most of them don’t want to rock the boat – they are here permanently too and have good pensions. They research for the debaters and have lunch with the casino managers. That keeps them quite busy enough, thank you.
The Real Economy
The Real Economy also operates from a corner of the casino. It’s hard to put an exact figure on it, but perhaps 3-5% of the overall floor space depending how you measure.
It’s a very important corner of the casino, but not for the reasons it should be. It should be important because it’s the place where food is grown, houses are built, energy for warmth and work is created and so on. But these precious things are taken for granted by the casino managers. They have always had enough chips to buy whatever they need – they issue them for God’s sake – and they think food, shelter and energy will always be available to them. Crucially though, they have also managed to financialise this remaining RE corner, and this ‘support’ is trotted out as a continuing justification for the FE’s central importance .
The RE corner has always included important social and cultural, non-GDP activities. The enormous real value of these activities is now being properly articulated and is spawning citizen-led initiatives (e.g. sharing economy approaches, basic unconditional income) but they are often presented as beggars who annoyingly keep petitioning for their ‘entitlements’ and generally clutter up this remote corner of the casino.
On the finance side, individuals and businesses are exploring ways of funding their future activity without going cap-in-hand to the casino managers. They are exploring peer-to-peer finance, crowdfunding, prepayment instruments and so on. What these initiatives have in common is the disintermediation of the casino. They provide ways for people to invest more directly and take more control over their savings and investments. Of course a new breed of intermediary is surfacing to broker and risk-insure these new models, and these new intermediaries can also be captured.
With transparency and short-circuit communication via social media though, there is definitely scope to do things differently. We must hope for progress because the casino managers have little interest in what’s going on outside.
The Planet – outside the casino
The planet outside is used by the casino in two ways – as a source of materials and as a dumping ground for waste.
The materials are not essential to the core FE which is all about making money out of money and needs nothing but ideas, a few arcane mathematical models to give spurious gravitas, and credulous or naive investors. But RE activity performs a valuable role for the casino managers – it provides them with an endless stream of innovative ways of using chips. The shale gas bonanza for example is apparently grounded in the real world need for energy, and is presented as such. Its significance to the FE is as another bubble based partly at least on land-lease ‘flipping’ [5].
Without an RE-related rationale/narrative, the FE might disappear up its own waste pipe as it re-invested/sliced-and-diced/marketised its own products to itself. So materials from outside the casino are important for the managers’ big corporate proxies in the RE.
FE-favoured RE activities also create lots of waste, some of which is toxic, and may eventually prove terminal, as it builds up. This fact is of little interest to the casino managers. There is a minor interest in waste-related financialised vehicles – carbon markets for example are a relatively new casino game – and in the slight impact on some of the FE’s RE-friends like big energy companies. But mostly the casino managers are too busy with their games and their chips. Occasionally a manager will wake up to the dangers and defect to the real world where they, somewhat perversely, carry more credibility because of their casino experience. A small minority of managers stay within the casino and try to gently modify its behaviour. This is portrayed as a healthy sign of openness; the casino is secure in the knowledge that their ways cannot easily be re-engineered.
Combating the casino’s influence
Essentially there would appear to be three possible lines of response for those who believe there should be more to life than casino capitalism. Marginalise, convert or destroy……
These approaches map on to the three ‘broad strategies of emancipatory transformation’ suggested by sociologist Erik Olin Wright [6] – interstitial, symbiotic and ruptural. I have a fourth suggestion/ variation of which more in a moment.
The challenge for interstitial initiatives is the sheer pervasiveness of the FE. There are few spaces left where the effects of the FE can be ignored. They may not be well understood, but whenever we pursue dreams, they pop up in front of us, usually as obstacles. Developments that are most heavily attacked by the FE establishment perhaps merit the most attention – community scale renewable energy, crypto currencies, co-ops, the sharing economy, and so on. The more these alternative directions are attacked as utopian or uneconomic the more we can be sure they offer promising interstitial opportunities.
Symbiotic opportunities may represent the triumph of hope over experience. Armed with the power of ideas, we back our ability to persuade policy makers and business leaders to change the game. The main challenges here are the arrogance of the powerful and the danger of being captured by supping with the devil. Vested interests generally feel secure enough that they don’t need to negotiate or even to spend brain power on listening and evaluating alternatives. If enough interest is manifested that symbiotic trial projects are begun, their champions can be captured by being made comfortable.
Ruptural alternatives come in a spectrum from those that would destroy business models to those that would destroy societies. They probably share the above analysis but differ in their degree of radicalism and disconnection from the main. The impact of FE-driven globalisation is beyond the scope of this article, save to note that its effects have unnecessarily radicalised whole populations making more measured responses more difficult to promote than they might have been.
The role of the internet and social media in progressing both interstitial and ruptural initiatives is significant. Most of the space to develop and assemble communities of interest and mission-partners is here, explaining why both are likely to experience increasingly determined attempts to capture.
The nature of one’s chosen response will be a matter of personal choice. We should not be judgemental of those who don’t have the will, energy or resourcefulness to play a more active role. We all suffer from our subservience to a dysfunctional system, some much more than others. The fourth response? Perhaps there’s some mileage in judo principles [7].
References
[1]: http://rikowski.wordpress.com/2013/12/12/profiting-without-producing-how-finance-exploits-u s-all/
[2]: http://www.finance-watch.org/
[3]: http://www.bbc.co.uk/news/world-us-canada-25691066
[4]: http://www.positivemoney.org/
[5]: “It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.” Art Berman quoted athttp://theautomaticearth.blogspot.ie/2011/07/july-8-2011-get-ready-for-north.html
[6]: http://realutopias.org/
[7]: http://judoinfo.com/unbalance.htm
Featured image: Luxor, Las Vegas. Author: David Marshall jr. Source: http://www.sxc.hu/browse.phtml?f=view&id=90604
Olduvaiblog: Musings on the coming collapse 