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Reaching Debt Limits: With or without China’s problems, we have a problem | Our Finite World

Reaching Debt Limits: With or without China’s problems, we have a problem | Our Finite World.

Credit Problems are a Very Current Issue

In the past several years, the engine of world’s growth has been China. China’s growth has been fueled by debt. China now seems to be running into difficulties with its industrial growth, and its difficulty with industrial growth indirectly leads to debt problems. A Platt’s video talks about China’s demand for oil increasing by only 2.5% in 2013, but this increase being driven by rising gasoline demand. Diesel use, which tracks with industrial use, seems to be approximately flat.

The UK Telegraph reports, “Markets hold breath as China’s shadow banking grinds to a halt.” According to that article,

A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.

The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore fell 8.3pc.

Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard.

Many recent reports have talked about the huge growth in China’s debt in recent years, much of it outside usual banking channels. One such report is this video called How China Fooled the World with Robert Peston.

Why Promises (and Debt) are Critical to the Economy

Without promises, it is hard to get anyone to do anything that they really don’t want to do. Think about training your dog. The way you usually do this training is with “doggie treats” to reward good behavior. Rewards for desired behavior are equally critical to the economy. An employer pays wages to an employee (a promise of pay for work performed).

It is possible to build a house or a store, stick by stick, as a person accumulates enough funds from other endeavors, but the process is very slow. Usually, if this approach is used, those building homes or stores will provide all of the labor themselves, to try to match outgo with income. If debt were used, it might be possible to use skilled craftsmen. It might even be possible to take advantage of economies of scale and build several homes together in the same neighborhood, and sell them to individuals who could buy the homes using debt.

Adding debt has many advantages to an economy. With debt, a person can buy a new car or house without needing to save up funds. These purchases lead to additional workers being employed in building these new cars and homes, adding jobs. The value of existing homes tends to rise, if other people are available to afford them, thanks to cheap debt availability. Rising home prices allow citizens to take out home equity loans and buy something else, adding further possibility of more jobs. Availability of cheap debt also tends to make business activity that would otherwise be barely profitable, more profitable, encouraging more investment. GDP measures business activity, not whether the activity is paid for with debt, so rising debt levels tend to lead to more GDP.

Webs of Promises and Debt

As economies expand, they add more and more promises, and more and more formal debt. In high tech industries, supply lines using materials from around the world are needed. The promise made, formally or informally, is that if more of a supply is needed, it will be available, at the same or a similar price, in the quantity needed and in the timeframe needed. In order for this to happen, each supplier needs to have made many promises to many employees and many suppliers, so as to meet its commitments.

Governments are part of this web of promises and debt. Some of the promises made by governments constitute formal debt; some of the promises are guarantees relating to debt of other parties (such as nuclear power plants), or of the finances of banks or pensions plans. Some of a government’s promises are only implied promises, yet people depend on these implied promises. For example, there is an expectation that the government will continue to provide paved roads, and that it will continue to provide programs such as Social Security and Medicare. Because of the latter programs, citizens assume that they don’t need to save very much or have many children–the government will provide funding sufficient for their basic needs in later years, without additional action on their part.

What is the Limit to Debt?

While our system of debt has gone on for a very long time, we can’t expect it to continue in its current form forever. One thing that we don’t often think about is that our system or promises isn’t really backed by the way natural system we live in works. Our system of promises has a hidden agenda of growth. Nature doesn’t  have a similar agenda of growth. In the natural order, the amount of fresh water stays pretty much the same. In fact, aquifers may deplete if we over-use them. The amount of topsoil stays pretty much the same, unless we damage it or make it subject to erosion. The amount of wood available stays pretty constant, unless we over-use it.

Nature, instead of having an agenda of growth, operates with an agenda of diminishing returns with respect to many types of resources. As we attempt to produce more of a resource, the cost tends to rise. For example, we can extract more fresh water, if we will go to the expense of drilling deeper wells or using desalination, either of which is more expensive. We can extract more metals, if we use as our source lower grade ores, perhaps with more surface material covering the ore. We can get extract more oil, if we will go to the expense of digging deeper wells is less hospitable parts of the world. We can even use substitution, but that will likely be more expensive yet.

A major issue that most economists have missed is the fact that wages don’t rise in response to this higher cost of resource extraction. (I have shown a chart illustrating that this is true for oil prices.) If the higher cost simply arises from the fact that nature is putting more obstacles in our way, we end up spending more for, say, desalinated water than water from a local well, or more for gasoline than previously. Much of the cost goes into fuel that is burned, or building special purpose equipment (such as a desalination plant or offshore drilling rigs) that will degrade over time. Our system is, in effect, becoming less and less efficient, as it takes more resources and more of people’s time, to produce the same end product, measured in terms of barrels of oil or gallons of water. Even if there are additional salaries, they are often in a different country, around the globe.

At some point, the amount of products we can actually produce starts shrinking, because workers cannot afford the ever-more-expensive products or because some essential “ingredient” (such as fresh water, or oil, or an imported metal) is not available. Since we live in a finite world, we know that at some point such a situation must occur, even if  the shrinkage isn’t as soon as I show it in Figure 2 below.

Figure 1. Author's image of an expanding economy.

Figure 1. Author’s image of an expanding economy.

Figure 2. Author's image of declining economy.

Figure 2. Author’s image of declining economy.

The “catch” with debt is that we are in effect borrowing from the future. It is much easier to pay back debt with interest when the economy is growing than when the economy is shrinking.  When the economy is shrinking, there is less in the future to begin with. Repaying debt from this shrinking amount becomes a problem. Even promises that aren’t formally debt, such as most Social Security payments, Medicare, and future road maintenance become a problem. With fewer goods available in total, citizens on average become poorer.

Governments depend on tax revenue from citizens, so they become poorer as well–perhaps even more quickly than the individual citizens who live in their country. It is in situations like this that richer parts of countries decide to secede, leading to country break-ups. Or the central government may fail, as in the Former Soviet Union.

Which Promises are Least Affected?

Some promises are very close in time; others involve many years of delay. For example, if I bring food I grew to a farmers’ market, and the operator of the market gives me credit that allows me to take home some other goods that someone else has brought, there are some aspects of credit involved, but it is very short term credit. I am being allowed to “run a tab” with credit for things I brought, and this payment is being used to purchase other goods, or perhaps even services. Perhaps someone else would offer some of their labor in putting together the farmers’ market, or in working in a garden, in return for getting some of the produce.

As I see it, such short term promises are not really a problem. Such credit arrangements have been used for thousands of years (Graeber, 2012). They don’t depend on long supply lines, around the world, that are subject to disruption. They also don’t depend on future events–for example, they don’t depend on buyers being available to purchase goods from a factory five or ten years from now. Thus, local supply chains among people in close proximity seem likely to be available for the long term.

Long-Term Debt is Harder to Maintain

Debt which is long-term in nature, or provides promises extending into the future (even if they aren’t formally debt) are much harder to maintain. For example, if governments are poorer, they may need to cut back on programs citizens expect, such as paving roads, and funding for Social Security and Medicare.

Governments and economies are already being affected by the difficulty in maintaining long term debt. This is a big reasons why Quantitative Easing (QE) is being used to keep interest rates artificially low in the United States, Europe (including the UK and Switzerland), and Japan. If interest rates should rise, it seems likely that there would be far more defaults on bonds, and far more programs would need to be cut. Even with these measures, some borrowers near the bottom are already being adversely affected–for example, subprime loans were problems during the Great Recession. Also, many of the poorer countries, for example, Greece, Egypt, and the Ukraine, are already having debt problems.

Indirect Casualties of the Long-Term Debt Implosion

The problem with debt defaults is that they tend to spread. If one major country has difficulty, banks of  many other countries are likely be to affected, because many banks will hold the debt of the defaulting country. (This may not be as true with China, but there are no doubt indirect links to other economies.) Banks are thinly capitalized. If a government tries to prop up the banks in its country, it is likely to be drawn into the debt default mess. Insurance companies and pension plans may also be affected by the debt defaults.

In such a situation of debt defaults spreading from country to country, interest rates can be expected to shift suddenly, causing financial difficulty for those issuing derivatives. There may also be liquidity problems in dealing with these sudden changes. As a result, banks issuing derivatives may need to be bailed out.

There may also be a sudden loss of credit availability, or much higher interest rates, as banks issuing loans become more cautious. In fact, if problems are severe enough, some banks may be closed altogether.

With less credit available, prices of commodities can be expected to drop dramatically. For example, during the credit crisis in the second half of 2008, oil prices dropped to the low $30s per barrel. It was not until after  QE was started in November 2008 that oil prices started to rise again. This time, central banks are already using QE to try to fix the situation. It is not clear that they can do much more, so the situation would seem to have the potential to spiral out of control.

Without credit availability, the prices of most stocks are likely to drop dramatically. In part, this is because without credit availability, it is not clear that the companies listed in the stock market can actually produce very much. Even if the particular company does not need credit, it is likely that some of the businesses on which it depends for supplies will have credit problems, and not be able to provide needed supplies. Also, with less credit availability, potential buyers of shares of stock may not be about to get the credit they need to purchase shares of stock. As a result of the credit problems in 2008, the Dow Jones Industrial Average dropped to $6,547 on March 9, 2009.

Furthermore, lack of credit availability tends to lead to low selling prices for commodities, making production of these commodities unprofitable. Production of these commodities may not drop off immediately, but will in time unless the credit situation is quickly turned around.

Can’t governments simply declare a debt jubilee for all debt, and start over again?

Not that I can see. Declaring a debt jubilee is, in effect, saying, “We have decided to renege on our past promises. In fact, we are letting others renege on their promises as well.” This means that insurance companies, pension plans, and banks will all be in very poor financial situation. Many who depend on pensions will find their monthly checks cut off as well. In fact, businesses without credit availability are likely to lay off workers.

If it is possible to start over, it will need to be on a much more restricted basis. Everyone will be poorer, so there won’t be much of a market for expensive new cars and homes. Instead, most demand will be for will be the basics–food, water, clothing, and fuel for heat. Unfortunately, it is doubtful that prices will be high enough, or the chains of supply robust enough, to again produce fossil fuels in quantity. Without fossil fuels, what we think of as renewables will disappear from availability quickly as well. For example, hydroelectric, wind and solar PV all work as parts of a system. If the billing system is unavailable because banks are closed, or if the transmission system is in need of repair because lines are down and the diesel fuel needed to make repairs is unavailable, electricity may not be available.

As indicated above, demand will be primarily for basics such as food, water, clothing, and fuel for cooking and heating. It will still be possible to use local supply chains, even if long distance supply chains don’t really work well. The challenge will be trying to shift modes of production to new approaches in which goods can be made locally. A major challenge will be training potential farmers, getting needed equipment for them, and transferring land ownership in ways that will allow food to be produced in ways that do not depend on fossil fuels.

Belief in credit will be severely damaged by a debt jubilee. The place where credit will be easy to reestablish will be in places where everyone knows everyone else, and supply lines are short. Debt will mostly be of the nature of “running a tab” when one type of good is exchanged for another. Over time, there may be some long-term trade re-established, but it is likely to be much more limited in scope than what we know today.

Conclusion

Long-term debt tends to work much better in a period of economic growth, than in a period of contraction. Reinhart and Rogoff unexpectedly discovered this point in their 2008 paper “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.” They remark “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”

Slowing growth in China is likely to mean that world economic growth is slowing. This will add to stresses, making failure of the system more likely than it otherwise would be. We can cross our fingers and hope that Janet Yellen and other central bankers can figure out yet other ways to keep the system together for a while longer.

Reaching Debt Limits: With or without China’s problems, we have a problem | Our Finite World

Reaching Debt Limits: With or without China’s problems, we have a problem | Our Finite World.

Credit Problems are a Very Current Issue

In the past several years, the engine of world’s growth has been China. China’s growth has been fueled by debt. China now seems to be running into difficulties with its industrial growth, and its difficulty with industrial growth indirectly leads to debt problems. A Platt’s video talks about China’s demand for oil increasing by only 2.5% in 2013, but this increase being driven by rising gasoline demand. Diesel use, which tracks with industrial use, seems to be approximately flat.

The UK Telegraph reports, “Markets hold breath as China’s shadow banking grinds to a halt.” According to that article,

A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.

The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore fell 8.3pc.

Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard.

Many recent reports have talked about the huge growth in China’s debt in recent years, much of it outside usual banking channels. One such report is this video called How China Fooled the World with Robert Peston.

Why Promises (and Debt) are Critical to the Economy

Without promises, it is hard to get anyone to do anything that they really don’t want to do. Think about training your dog. The way you usually do this training is with “doggie treats” to reward good behavior. Rewards for desired behavior are equally critical to the economy. An employer pays wages to an employee (a promise of pay for work performed).

It is possible to build a house or a store, stick by stick, as a person accumulates enough funds from other endeavors, but the process is very slow. Usually, if this approach is used, those building homes or stores will provide all of the labor themselves, to try to match outgo with income. If debt were used, it might be possible to use skilled craftsmen. It might even be possible to take advantage of economies of scale and build several homes together in the same neighborhood, and sell them to individuals who could buy the homes using debt.

Adding debt has many advantages to an economy. With debt, a person can buy a new car or house without needing to save up funds. These purchases lead to additional workers being employed in building these new cars and homes, adding jobs. The value of existing homes tends to rise, if other people are available to afford them, thanks to cheap debt availability. Rising home prices allow citizens to take out home equity loans and buy something else, adding further possibility of more jobs. Availability of cheap debt also tends to make business activity that would otherwise be barely profitable, more profitable, encouraging more investment. GDP measures business activity, not whether the activity is paid for with debt, so rising debt levels tend to lead to more GDP.

Webs of Promises and Debt

As economies expand, they add more and more promises, and more and more formal debt. In high tech industries, supply lines using materials from around the world are needed. The promise made, formally or informally, is that if more of a supply is needed, it will be available, at the same or a similar price, in the quantity needed and in the timeframe needed. In order for this to happen, each supplier needs to have made many promises to many employees and many suppliers, so as to meet its commitments.

Governments are part of this web of promises and debt. Some of the promises made by governments constitute formal debt; some of the promises are guarantees relating to debt of other parties (such as nuclear power plants), or of the finances of banks or pensions plans. Some of a government’s promises are only implied promises, yet people depend on these implied promises. For example, there is an expectation that the government will continue to provide paved roads, and that it will continue to provide programs such as Social Security and Medicare. Because of the latter programs, citizens assume that they don’t need to save very much or have many children–the government will provide funding sufficient for their basic needs in later years, without additional action on their part.

What is the Limit to Debt?

While our system of debt has gone on for a very long time, we can’t expect it to continue in its current form forever. One thing that we don’t often think about is that our system or promises isn’t really backed by the way natural system we live in works. Our system of promises has a hidden agenda of growth. Nature doesn’t  have a similar agenda of growth. In the natural order, the amount of fresh water stays pretty much the same. In fact, aquifers may deplete if we over-use them. The amount of topsoil stays pretty much the same, unless we damage it or make it subject to erosion. The amount of wood available stays pretty constant, unless we over-use it.

Nature, instead of having an agenda of growth, operates with an agenda of diminishing returns with respect to many types of resources. As we attempt to produce more of a resource, the cost tends to rise. For example, we can extract more fresh water, if we will go to the expense of drilling deeper wells or using desalination, either of which is more expensive. We can extract more metals, if we use as our source lower grade ores, perhaps with more surface material covering the ore. We can get extract more oil, if we will go to the expense of digging deeper wells is less hospitable parts of the world. We can even use substitution, but that will likely be more expensive yet.

A major issue that most economists have missed is the fact that wages don’t rise in response to this higher cost of resource extraction. (I have shown a chart illustrating that this is true for oil prices.) If the higher cost simply arises from the fact that nature is putting more obstacles in our way, we end up spending more for, say, desalinated water than water from a local well, or more for gasoline than previously. Much of the cost goes into fuel that is burned, or building special purpose equipment (such as a desalination plant or offshore drilling rigs) that will degrade over time. Our system is, in effect, becoming less and less efficient, as it takes more resources and more of people’s time, to produce the same end product, measured in terms of barrels of oil or gallons of water. Even if there are additional salaries, they are often in a different country, around the globe.

At some point, the amount of products we can actually produce starts shrinking, because workers cannot afford the ever-more-expensive products or because some essential “ingredient” (such as fresh water, or oil, or an imported metal) is not available. Since we live in a finite world, we know that at some point such a situation must occur, even if  the shrinkage isn’t as soon as I show it in Figure 2 below.

Figure 1. Author's image of an expanding economy.

Figure 1. Author’s image of an expanding economy.

Figure 2. Author's image of declining economy.

Figure 2. Author’s image of declining economy.

The “catch” with debt is that we are in effect borrowing from the future. It is much easier to pay back debt with interest when the economy is growing than when the economy is shrinking.  When the economy is shrinking, there is less in the future to begin with. Repaying debt from this shrinking amount becomes a problem. Even promises that aren’t formally debt, such as most Social Security payments, Medicare, and future road maintenance become a problem. With fewer goods available in total, citizens on average become poorer.

Governments depend on tax revenue from citizens, so they become poorer as well–perhaps even more quickly than the individual citizens who live in their country. It is in situations like this that richer parts of countries decide to secede, leading to country break-ups. Or the central government may fail, as in the Former Soviet Union.

Which Promises are Least Affected?

Some promises are very close in time; others involve many years of delay. For example, if I bring food I grew to a farmers’ market, and the operator of the market gives me credit that allows me to take home some other goods that someone else has brought, there are some aspects of credit involved, but it is very short term credit. I am being allowed to “run a tab” with credit for things I brought, and this payment is being used to purchase other goods, or perhaps even services. Perhaps someone else would offer some of their labor in putting together the farmers’ market, or in working in a garden, in return for getting some of the produce.

As I see it, such short term promises are not really a problem. Such credit arrangements have been used for thousands of years (Graeber, 2012). They don’t depend on long supply lines, around the world, that are subject to disruption. They also don’t depend on future events–for example, they don’t depend on buyers being available to purchase goods from a factory five or ten years from now. Thus, local supply chains among people in close proximity seem likely to be available for the long term.

Long-Term Debt is Harder to Maintain

Debt which is long-term in nature, or provides promises extending into the future (even if they aren’t formally debt) are much harder to maintain. For example, if governments are poorer, they may need to cut back on programs citizens expect, such as paving roads, and funding for Social Security and Medicare.

Governments and economies are already being affected by the difficulty in maintaining long term debt. This is a big reasons why Quantitative Easing (QE) is being used to keep interest rates artificially low in the United States, Europe (including the UK and Switzerland), and Japan. If interest rates should rise, it seems likely that there would be far more defaults on bonds, and far more programs would need to be cut. Even with these measures, some borrowers near the bottom are already being adversely affected–for example, subprime loans were problems during the Great Recession. Also, many of the poorer countries, for example, Greece, Egypt, and the Ukraine, are already having debt problems.

Indirect Casualties of the Long-Term Debt Implosion

The problem with debt defaults is that they tend to spread. If one major country has difficulty, banks of  many other countries are likely be to affected, because many banks will hold the debt of the defaulting country. (This may not be as true with China, but there are no doubt indirect links to other economies.) Banks are thinly capitalized. If a government tries to prop up the banks in its country, it is likely to be drawn into the debt default mess. Insurance companies and pension plans may also be affected by the debt defaults.

In such a situation of debt defaults spreading from country to country, interest rates can be expected to shift suddenly, causing financial difficulty for those issuing derivatives. There may also be liquidity problems in dealing with these sudden changes. As a result, banks issuing derivatives may need to be bailed out.

There may also be a sudden loss of credit availability, or much higher interest rates, as banks issuing loans become more cautious. In fact, if problems are severe enough, some banks may be closed altogether.

With less credit available, prices of commodities can be expected to drop dramatically. For example, during the credit crisis in the second half of 2008, oil prices dropped to the low $30s per barrel. It was not until after  QE was started in November 2008 that oil prices started to rise again. This time, central banks are already using QE to try to fix the situation. It is not clear that they can do much more, so the situation would seem to have the potential to spiral out of control.

Without credit availability, the prices of most stocks are likely to drop dramatically. In part, this is because without credit availability, it is not clear that the companies listed in the stock market can actually produce very much. Even if the particular company does not need credit, it is likely that some of the businesses on which it depends for supplies will have credit problems, and not be able to provide needed supplies. Also, with less credit availability, potential buyers of shares of stock may not be about to get the credit they need to purchase shares of stock. As a result of the credit problems in 2008, the Dow Jones Industrial Average dropped to $6,547 on March 9, 2009.

Furthermore, lack of credit availability tends to lead to low selling prices for commodities, making production of these commodities unprofitable. Production of these commodities may not drop off immediately, but will in time unless the credit situation is quickly turned around.

Can’t governments simply declare a debt jubilee for all debt, and start over again?

Not that I can see. Declaring a debt jubilee is, in effect, saying, “We have decided to renege on our past promises. In fact, we are letting others renege on their promises as well.” This means that insurance companies, pension plans, and banks will all be in very poor financial situation. Many who depend on pensions will find their monthly checks cut off as well. In fact, businesses without credit availability are likely to lay off workers.

If it is possible to start over, it will need to be on a much more restricted basis. Everyone will be poorer, so there won’t be much of a market for expensive new cars and homes. Instead, most demand will be for will be the basics–food, water, clothing, and fuel for heat. Unfortunately, it is doubtful that prices will be high enough, or the chains of supply robust enough, to again produce fossil fuels in quantity. Without fossil fuels, what we think of as renewables will disappear from availability quickly as well. For example, hydroelectric, wind and solar PV all work as parts of a system. If the billing system is unavailable because banks are closed, or if the transmission system is in need of repair because lines are down and the diesel fuel needed to make repairs is unavailable, electricity may not be available.

As indicated above, demand will be primarily for basics such as food, water, clothing, and fuel for cooking and heating. It will still be possible to use local supply chains, even if long distance supply chains don’t really work well. The challenge will be trying to shift modes of production to new approaches in which goods can be made locally. A major challenge will be training potential farmers, getting needed equipment for them, and transferring land ownership in ways that will allow food to be produced in ways that do not depend on fossil fuels.

Belief in credit will be severely damaged by a debt jubilee. The place where credit will be easy to reestablish will be in places where everyone knows everyone else, and supply lines are short. Debt will mostly be of the nature of “running a tab” when one type of good is exchanged for another. Over time, there may be some long-term trade re-established, but it is likely to be much more limited in scope than what we know today.

Conclusion

Long-term debt tends to work much better in a period of economic growth, than in a period of contraction. Reinhart and Rogoff unexpectedly discovered this point in their 2008 paper “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.” They remark “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”

Slowing growth in China is likely to mean that world economic growth is slowing. This will add to stresses, making failure of the system more likely than it otherwise would be. We can cross our fingers and hope that Janet Yellen and other central bankers can figure out yet other ways to keep the system together for a while longer.

Economist Warns of Collapse Risk: “Will Not Allow Life to Continue As We Know It”

Economist Warns of Collapse Risk: “Will Not Allow Life to Continue As We Know It”.

Mac Slavo
March 7th, 2014
SHTFplan.com

theendisnear-wide

Earlier this week we noted that an invasion of the Ukraine by Vladimir Putin would likely lead to a complete destruction of U.S. stock markets. It’s not so much the invasion force itself, but rather, the economic maneuvers that would come with it should Russia take this course of action.

Well known economist and founder of the Shadow Stats web site John Williams seems to agree. If Russia were to begin unloading US Dollars it would almost instantly lead to a collapse of not only our financial markets, but our entire way of life. And while Russia alone may not have the economic power to single-handedly crush the U.S. economy, if their trading partners and allies like China got into the mix, coupled with front-running investors who may suspect the move is about to happen, it could well be a blood bath on a global scale.

This wouldn’t even be an issue if the U.S. economy were operating at healthy levels, but as Williams notes in the following interview with Greg Hunter’s USA Watchdog, it’s anything but:

What you have to keep in mind is that back in 2008 we had one of the greatest financial crises the United States ever faced. The system was on the brink of collapse at that point in time. 

What the Fed and the federal government did was spend every penny they could, anything they could create or anything they could guarantee.  They did everything they could possibly do to keep the system from crashing.  They guaranteed all bank accounts.  So, they saved the system, but now what they did has not borne fruit.  We have not seen an economic recovery.  We have not seen a return of health to the banking system.

So, the system is very vulnerable; and if the Russians carry through with their threat, you have, indeed, the risk of it collapsing the system.


(Video via Alt Market)

It does have the effect of creating a hyperinflation, which I think it would.  It’s the type of circumstance that will not allow life to continue as we know it because the U.S. is not able to handle hyperinflation.

We’re not structured for it.  Zimbabwe had one of the worst hyperinflations that anyone has ever seen.  They were still able to function for a while because they get paid in a rapidly depreciating currency.

It was so rapid it became like toilet paper overnight… they would go to a black market and exchange it for dollars.  We (the U.S.) don’t have a black market to escape from our dollars.  Gold is probably the closest thing to that.  Gold will tend to rally here as the dollar sells off, barring very heavy intervention by the central banks which you may see.

The fundamentals will eventually dominate, and you will see a very weak dollar and very strong gold coming out of this.

As it stands now, even without Russia and China, our economic system is, once again, on the cusp of a serious deleveraging. John Williams highlights that January retail sales, a leading indicator of economic health, gave the strongest signal since September 2007 that a recession is looming, if not already here.

One huge indicator of this is that Staples, a leading supplier of office supplies nationwide, is shutting the doors on 225 stores. And, they aren’t the only ones getting hammered by a pullback in consumer spending. The world’s largest retailer, Walmart, saw sales drop over 20% year-over-year in the fourth quarter of 2013.

And as trend forecaster Gerald Celente once noted, “as goes Walmart, so goes America.”

So, in reality, Russia can probably sit back and watch the U.S. economy slip into a coma over the next couple of years. Of course, if their intention is to return their nation to super power status, an attack on the US economy by dumping the dollar would speed up the process and amplify the fall-out, causing a multi-generational depression.

Last year Barack Obama faced off with Russia over Syria, a situation that could easily have led to a much wider conflict.

Now, the same players have taken the game to Ukraine.

In both instances we’ve heard warnings of a potential collapse of our economic system in the event of an escalation.

The point is that it really doesn’t matter if it’s Syria, Ukraine, Iran or some other periphery conflict.

It should be clear that eventually this is exactly how it’s going to play out with respect to the US dollar.

China and Russia will make their move when they are good and ready.

When that day comes the implosion will be so fast that most Americans won’t even realize what has happened or know how to cope.

Economist Warns of Collapse Risk: "Will Not Allow Life to Continue As We Know It"

Economist Warns of Collapse Risk: “Will Not Allow Life to Continue As We Know It”.

Mac Slavo
March 7th, 2014
SHTFplan.com

theendisnear-wide

Earlier this week we noted that an invasion of the Ukraine by Vladimir Putin would likely lead to a complete destruction of U.S. stock markets. It’s not so much the invasion force itself, but rather, the economic maneuvers that would come with it should Russia take this course of action.

Well known economist and founder of the Shadow Stats web site John Williams seems to agree. If Russia were to begin unloading US Dollars it would almost instantly lead to a collapse of not only our financial markets, but our entire way of life. And while Russia alone may not have the economic power to single-handedly crush the U.S. economy, if their trading partners and allies like China got into the mix, coupled with front-running investors who may suspect the move is about to happen, it could well be a blood bath on a global scale.

This wouldn’t even be an issue if the U.S. economy were operating at healthy levels, but as Williams notes in the following interview with Greg Hunter’s USA Watchdog, it’s anything but:

What you have to keep in mind is that back in 2008 we had one of the greatest financial crises the United States ever faced. The system was on the brink of collapse at that point in time. 

What the Fed and the federal government did was spend every penny they could, anything they could create or anything they could guarantee.  They did everything they could possibly do to keep the system from crashing.  They guaranteed all bank accounts.  So, they saved the system, but now what they did has not borne fruit.  We have not seen an economic recovery.  We have not seen a return of health to the banking system.

So, the system is very vulnerable; and if the Russians carry through with their threat, you have, indeed, the risk of it collapsing the system.


(Video via Alt Market)

It does have the effect of creating a hyperinflation, which I think it would.  It’s the type of circumstance that will not allow life to continue as we know it because the U.S. is not able to handle hyperinflation.

We’re not structured for it.  Zimbabwe had one of the worst hyperinflations that anyone has ever seen.  They were still able to function for a while because they get paid in a rapidly depreciating currency.

It was so rapid it became like toilet paper overnight… they would go to a black market and exchange it for dollars.  We (the U.S.) don’t have a black market to escape from our dollars.  Gold is probably the closest thing to that.  Gold will tend to rally here as the dollar sells off, barring very heavy intervention by the central banks which you may see.

The fundamentals will eventually dominate, and you will see a very weak dollar and very strong gold coming out of this.

As it stands now, even without Russia and China, our economic system is, once again, on the cusp of a serious deleveraging. John Williams highlights that January retail sales, a leading indicator of economic health, gave the strongest signal since September 2007 that a recession is looming, if not already here.

One huge indicator of this is that Staples, a leading supplier of office supplies nationwide, is shutting the doors on 225 stores. And, they aren’t the only ones getting hammered by a pullback in consumer spending. The world’s largest retailer, Walmart, saw sales drop over 20% year-over-year in the fourth quarter of 2013.

And as trend forecaster Gerald Celente once noted, “as goes Walmart, so goes America.”

So, in reality, Russia can probably sit back and watch the U.S. economy slip into a coma over the next couple of years. Of course, if their intention is to return their nation to super power status, an attack on the US economy by dumping the dollar would speed up the process and amplify the fall-out, causing a multi-generational depression.

Last year Barack Obama faced off with Russia over Syria, a situation that could easily have led to a much wider conflict.

Now, the same players have taken the game to Ukraine.

In both instances we’ve heard warnings of a potential collapse of our economic system in the event of an escalation.

The point is that it really doesn’t matter if it’s Syria, Ukraine, Iran or some other periphery conflict.

It should be clear that eventually this is exactly how it’s going to play out with respect to the US dollar.

China and Russia will make their move when they are good and ready.

When that day comes the implosion will be so fast that most Americans won’t even realize what has happened or know how to cope.

The Fed’s Bubble – Monty Pelerin’s World

The Fed’s Bubble – Monty Pelerin’s World.

The Fed’s Bubble

bernanke444444images

Debt is the great palliative that has enabled the US and other major economies to escape reality, at least for a time. Ayn Rand described such behavior:

You can avoid reality, but you cannot avoid the consequences of avoiding reality.

It is possible to steal from tomorrow to improve today but only at the cost of having less of a future. That is what both nations and citizens have been doing. The ability to continue doing so has about run its course. The damage done to the future is real and will result in substantially lower living standards for those who foolishly believed that spending beyond one’s income was a miracle created by John Maynard Keynes.

The ability to continue the debt charade is nearing its end. As it slows down and reverses, the poverty and hardship that is covered up will surface. When that occurs, another Great Depression, likely to be known as The Great Depression or The Greater Depression in the history books yet to be written will emerge.

For those wanting to learn more about the emergence of debt as an economic palliative and its implications for markets, a refreshing interview with Fred Sheehan is available at The Daily Bell. Here is one of Mr. Sheehan’s observations:

All asset markets are disengaged from their foundations. They have been elevated by governments and their central banks. Central banks have done so by prodding savers into stocks and bonds. They have set artificially low borrowing rates. These artificially low rates are the source of so many perversities that are not immediately evident but have fractured the structure of companies, industries and the stock market. With Treasury rates so low, the issuance of investment grade, junk, covenant lite, PIKs and almost every other category of sloppy finance that met its maker in 2007 set new world records in 2013. The present and future consequences should be obvious.

Mr. Sheehan captures in one sentence my opinion of today’s markets:

The stock market is a mood ring for faith in the Fed.

Read this article if you want to learn some history and honest economics and understand the risks inherent in today’s financial asset markets.

The Limits of Stock Chart Reading – Ludwig von Mises Institute Canada

The Limits of Stock Chart Reading – Ludwig von Mises Institute Canada.

Tuesday, February 11th, 2014 by  posted in Economics.

Any time people are compelled to decipher the future, strange methods and theories are sure to abound. The stock market has long been a haven of such folly.  Among the diviners in that arena, there are believers in the notion that planetary movements affect share values, that stock prices move in predictable wave sequences, and that certain geometric patterns on stock charts presage a change in trend. Nor are these habits of thought restricted to tiny corners of the stock exchange. Such is the eagerness to gain a clue into the future that there’ll always be numerous takers for far-fetched prognostications.

Scary Parallel

Source: http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11

The latest example of this is a chart (see above) that is getting wide dissemination on Wall Street. The chart depicts two prices series, one of the Dow Jones Industrial Average between 1928-1929 and the other of that same index from mid-2012 to the present day. The two lines are strikingly similar in their undulations. Indeed, since the resemblance first caught people’s attention this past November, the correlation has persisted. What this is supposed to portend, of course, is a crash along the lines of October 1929.

Yet this presumes that patterns from the past can be reliably expected to recur in the future. It is, as Ludwig von Mises might have put it, to assume that there are constant relations in economic life — that the fact that events of type B have previously followed events of type A means that B will recur whenever A happens to arise. But there are no constant relations in human affairs. For, unlike natural objects, human beings are continually exposed to novel  experiences, from which they learn and orient their actions accordingly in unforeseeable ways.

Even the original purveyor of the above chart, Tom McClellan (publisher of the McClellan Market Report), concedes that: “Every pattern analog I have ever studied breaks correlation eventually, and often at the point when I am most counting on it to continue working”. Undaunted by this realization that the past is no certain guide to the future, he nevertheless persists in warning us to be wary about the market.

The only historical pattern with any semblance of predictive significance is the proclivity of the stock market to trend in the same direction for a significant period of time. These trends are commonly known as bull and bear markets. Why these exist is actually something of a puzzle. Stock prices, being time-discounted estimates of future company dividends, ought to gyrate randomly in response to new information. To the extent one ought to expect a trend, it should be a very gently rising one mirroring the long-term rate of economic growth.  The reason why this does not occur, however,  is that the central bank generates booms and busts with its monetary policies, booms and busts that the stock market ends up reflecting in bull and bear markets.

All that can be usefully gleaned, then, from a stock chart is the prevailing trend. To gauge that one need not draw precise historical parallels with past price movements. A simple moving average — like a 10 month — might do.  In other words, if a major index like the S&P 500 is above its 10 month moving average, the trend is up. Conversely, if the index is below the average, the trend is down. Even then, there is no guarantee that the indicated trend will continue for any specific amount of time.

Tomas Salamanca is a Canadian Scholar.

Is the Stock Market Repeating the 1929 Run Up to the Great Depression? Washington’s Blog

Is the Stock Market Repeating the 1929 Run Up to the Great Depression? Washington’s Blog.

Is History Repeating … Or Throwing a Head-Fake?

Chart courtesy of Tom McClellan of the McClellan Market Report (via Mark Hulbert)

Hulbert notes that the chart “has been making the rounds on Wall Street.”

On the other hand, Martin Armstrong predicts that a worsening economy – and bank deposit confiscation – in Europe will cause people to flood into American stocks as a “safe haven” for a couple of years.

And the Fed has more or less admitted that propping up the stock market is a top priority.

The Dow Has Already Fallen More Than 1000 Points From The Peak Of The Market

The Dow Has Already Fallen More Than 1000 Points From The Peak Of The Market.

 By Michael Snyder, on February 3rd, 2014

Stock Market Decline - Photo by Nodulation

That didn’t take long.  On Monday, the Dow was down another 326 points.  Overall, the Dow has now fallen more than 1000 points from the peak of the market (16,588.25) back in late December.  This is the first time that we have seen the Dow drop below its 200-day moving average in more than a year, and there are many that believe that this is just the beginning of a major stock market decline.  Meanwhile, things are even worse in other parts of the world.  For example, the Nikkei is now down about 1700 points from its 2013 high.  This is causing havoc all over Asia, and the sharp movement that we have been seeing in the USD/JPY is creating a tremendous amount of anxiety among Forex traders.  For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable.

Unfortunately, there does not appear to be much hope on the horizon for investors.  In fact, troubling news just continues to pour in from all over the planet.  Just consider the following…

-Major currencies all over South America continue to collapse.

-Massive central bank intervention has done little to slow down the currency collapse in Turkey.

-Investors pulled more than 6 billion dollars out of emerging market equity funds last week alone.

-The CBOE Volatility Index (VIX) has risen above 20 for the first time in four months.

-Last month, new manufacturing orders in the United States declined at the fastest pace that we have seen since December 1980.

-Real disposable income in the United States has just experienced the largest year over year drop that we have seen since 1974.

-In January, vehicle sales for Ford were down 7.5 percent and vehicle sales for GM were down 12 percent.  Both companies are blaming bad weather.

-A major newspaper in the UK is warning that “growing problems in the Chinese banking system could spill over into a wider financial crisis“.

-U.S. Treasury Secretary Jack Lew is warning that the federal government could hit the debt ceiling by the end of this month if Congress does not act.

-It is being reported that Dell Computer plans to lay off more than 15,000 workers.

-The IMF recently said that the the probability that the global economy will fall into a deflation trap “may now be as high as 20%“.

-The Baltic Dry Index is now down 50 percent from its December highs.

If our economic troubles continue to mount, could we be facing a global “financial avalanche” fairly quickly?

That is what some very prominent analysts believe.

Below, I have posted quotes from five men that are greatly respected in the financial world.  What they have to say is quite chilling…

#1 Doug Casey: “Now is a very good time to start thinking financially because I’m afraid that this year, in 2014, we’re going to go back into the financial hurricane. We’ve been in the eye of the storm since 2009, but now we’re going to go back into the trailing edge of the storm, and it’s going to be much longer lasting and much worse and much different than what we had in 2008 and 2009.”

#2 Bill Fleckenstein: “The [price-to-earnings ratio] is 16, 17 times earnings,” Fleckenstein said on Tuesday’s episode of “Futures Now.” “Why would you pay 16 times for an S&P company? I don’t care about where rates are, because rates are artificially suppressed. Why isn’t that worth 11 or 12 times? Just by that analysis, you’d be down by a quarter or 30 percent. So there’s a huge amount of downside.”

#3 Egon von Greyerz of Matterhorn Asset Management: “Nothing goes (down) in a straight line, but the emerging market problems will accelerate and it will spread to the very overbought and the very overvalued stock markets and economies in the West.

So stock markets are now starting a secular bear trend which will last for many years, and we could see falls of massive proportions. At the end of this, the wealth that has been created in the last few decades will be destroyed.”

#4 Peter Schiff: “The crisis is imminent,” Schiff said.  “I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”

“We’re broke, Schiff added.  “We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”

#5 Gerald Celente: “This selloff in the emerging markets, with their currencies going down and their interest rates going up, it’s going to be disastrous and there are going to be riots everywhere…

So as the decline in their economies accelerates, you are going to see the civil unrest intensify.”

—–

Those that do not believe that we could ever see “civil unrest” on the streets of America should take note of what just happened in Seattle.

After the Seahawks won the Super Bowl, fans celebrated by “lighting fires, damaging historic buildings and ripping down street signs“.

If that is how average Americans will behave when something good happens, how will they act when the economy totally collapses and nobody can find work for an extended period of time?

We are rapidly approaching another great financial crisis.  Unfortunately, we didn’t learn any of the lessons that we should have learned last time.  It is being projected that the debt of the federal government will more than double during the Obama years, the “too big to fail banks” have collectively gotten 37 percent larger over the past five years, and the big banks have become more financially reckless than ever before.

When the next great financial crisis arrives (and without a doubt it is inevitable), millions more Americans will lose their jobs and millions more Americans will lose their homes.

Now is not the time to be buying lots of expensive new toys, going on expensive vacations or piling up lots of debt.

Now is the time to build up an emergency fund and to do whatever you can to get prepared for the great storm that is coming.

As you can see from the financial headlines, time is rapidly running out.

NASDAQ MarketSite TV studio - Photo by Luis Villa del Campo

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Should We Wallow in the Rising Stock Market?

Should We Wallow in the Rising Stock Market?.

by David John Marotta & Megan Russell | 01-19-2014

sad puppya

Keynesian economists have cited the rising U.S. stock market as evidence that the economy is picking up steam. Then they’ve been surprised by the unemployment and lack of hiring. The stock market, despite record highs, is not correlated to the performance of the overall economy.

The misery index is an economic indicator of unemployment plus inflation. Together these two measurements represent significant economic hardship for the country. The misery index was used frequently during the Nixon, Ford and Carter years as a scorecard to show how government policy can harm working people.

In December, the official unemployment rate decreased to 6.7% . But this was not really good news .

In contrast, officially reported unemployment numbers decrease when enough time passes to discourage the unemployed from looking for work. A decrease is not necessarily beneficial; an increase is clearly detrimental.

In the United States, we need to add a minimum of 127,000 jobs per month just to account for our annual population increase . Last month, only 74,000 jobs were added, the lowest increase since January 2011. Of those, 55,000 were added in the retail sector during the holidays. With so many unemployed experienced workers, many recent college graduates are left chasing too few rookie positions.

The purported decrease in unemployment largely reflects how the government measures it. The unemployment rate only describes people who are currently working or looking for work.

Labor force participation rate 2013/12

During particularly bad times, the unemployment rate frequently decreases by the number of people dropping out of the jobs market entirely . In December, the job participation rate fell to 62.8%, its lowest level in 35 years. According to Heidi Shierholz of the Economic Policy Institute , if these missing workers were included in the calculation, the unemployment rate would be 10.2%.

Unemployment has never been measured very accurately . Calculations do not count those who have just entered the labor force and haven’t found a job yet, who have been searching for employment so long they have given up the search , who work part time but are actively seeking full-time work and who are actively seeking employment but were not included in the monthly jobs survey.

Unemployment in its truest definition, meaning the portion of people who do not have any job, is 37.2%. This number obviously includes some people who are not or never plan to seek employment. But it does describe how many people are not able to, do not want to or cannot find a way to work. Policies that remove the barriers to employment, thus decreasing this number, are obviously beneficial.

In contrast, officially reported unemployment numbers decrease when enough time passes to discourage the unemployed from looking for work. A decrease is not necessarily beneficial; an increase is clearly detrimental.

So how could our stock market be at such record highs while so many are unemployed? Given current government policies, it is specifically by avoiding U.S. workers that companies are keeping their profits strong. Obamacare punishes large companies for each full-time worker and provides strong incentives for small businesses to stay below 50 full-time-equivalent employees. Automation and outsourcing are making U.S. companies more profitable at the expense of U.S. employment.

Inflation, the other half of the misery index, assists stock prices as well. Every month, the Federal Reserve has been injecting $85 billion into the money supply. This devaluation of the currency causes inflation that naturally pushes all prices, including stock prices, higher.

The broadest measure of inflation is the Consumer Price Index. But since 1997, the government has manipulated the raw data and significantly underreported inflation. Now they use a “hedonic deprecator.” If the quality of a commodity increases more than its price, the quality increase is counted as deflation. And because consumers use “creative substitution,” switching from an expensive good to a similar but cheaper good, the government argues that only a portion of price increases should be counted as inflation.

ShadowStats Inflation

These tricks, along with a host of other dubious accounting schemes, underreport inflation by about 3%. Today, inflation is officially 1.24%. According to Shadow Stats , which computes the old way, it is closer to 4.5%.

Think of that 4.5% of actual inflation as a tax on anyone who is storing their money in dollars. And since 1997 that 3% annual underreporting has had the effect of cutting Social Security benefits by a cumulative 40%.

Today, the misery index would be 7.54 using official numbers. Using Shierholz’s measurement including discouraged workers (10.2%) and the historical method of calculating inflation (4.5%), the current misery index is closer to 14.7, worse even than during the Ford administration.

The younger and more economically disadvantaged members of society feel the misery most acutely. But the economics is much more complex than adding laws to help them directly. Longer unemployment benefits or subsidized government-run health care contribute to systemic government policies that discourage production and employment.

Meanwhile, the stock market can occasionally benefit from the misery index. It does not correlate to an economic recovery but is a powerful financial asset for those wise enough to remain invested and diversified during all kinds of economic movements.

Photo by Fiona McAllister used here under Flickr Creative Commons.

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10 Reasons The Market Will (Or Won’t) Crash – STA WEALTH

10 Reasons The Market Will (Or Won’t) Crash – STA WEALTH.

 

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