Boom And Bust

In a capitalist system, the bust portion of the cycle occurs because misallocated capital is cleared out. In other words, people who have invested capital in a venture in order to gain a return on that capital either voluntarily or involuntarily discover that the expected return will not materialize and that capital is then reallocated to another venture in which a return is expected. It is a healthy thing and it occurs frequently, in fact in a capitalist system it should occur on a small scale daily. This is the beauty of the self-regulating portion of a capitalist system, misallocated capital is discovered quickly and reallocated quickly in relatively small amounts.

The system for which the statist advocates the government will provide an incentive for misallocated capital to remain misallocated and in fact for ever more capital to be misallocated. Rather than a free market capitalist system where capital is cleared out frequently and reallocated, in statist systems the misallocated capital remains misallocated for years and grows and grows because that is the behavior the state incentivizes, coerces, compels and forces. In statist systems, when the misallocated capital eventually clears out (as it always does) it results in a major economic catastrophe.

In a capitalist system the boom and bust cycle is much more frequent and of much smaller scale. In the system that statist advocate for the boom and bust cycles are much less frequent but they reach much higher highs and much lower lows. In a capitalist system people lose money. In statist systems people lose houses, careers and hope.

These are different.

Where Are The Adults?

Peruse some headlines from this weekend:

The Pin To Pop This Mother Of All Bubbles?

“Metastability” Will Lead To “Cataclysmic Events”

Can We See A Bubble If We’re Inside The Bubble?

Undercurrents Of Worry

The Glaring Resemblance Between 2017 And 1999

Illinois In Massive Crisis

Tax Overhaul In Trouble

Fear Of Contagion In Italy

I can go on and on and on – but you get the idea.

In a nutshell – here is what is occurring:

What has been called the ‘Trump Trade’ is in doubt. The ‘Trump Trade’ was premised on political promises of tax reform, Obamacare repeal, massive deregulation, Dodd-Frank repeal, and so forth. These items appear to be in serious jeopardy due to the political climate in DC. Many markets inflated based on the assumption that these promised legislative changes would become reality. The more that doubt grows that these changes will become reality the more corresponding doubt appears that market investments predicated on those legislative items were a sound investment.

Despite what partisan motivated headlines may declare the economy is weakening – not just in the United States but also globally. Yield curves in various countries are inverting and this is a highly reliable indicator of pending recession. What is more – the demand for credit is weakening significantly. These are not signs of a happy healthy economy. These are reliable signs that the economy is likely to shrink rather than grow in the near future.

Over the last eight plus years the Federal Reserve and central banks around the world re-inflated the real estate and equities bubbles that burst in 2008 and 2009. This was primarily accomplished by adopting negative interest rate policies or zero interest rate policies. These policies by and large remain in place around the globe. The other tool the central banks have used the last eight plus years are liquidity injections. These continue even now at the rate of $200 billion a month being injected in order to keep the system solvent.

In other words – we have fixed nothing since the great meltdown almost nine years ago.

If we enter into a recession in the near future – what will be the policies? Interest rates going even deeper into negative territory? More asset purchases and liquidity injections by central banks? Undoubtedly that is what they plan. The problem with that plan is that every dollar of liquidity injected is marginally less effective than the previous dollar injected. For example, if you are my age and you had an Econ 101 class in college many decades ago you had a textbook that said something to the effect that “Due to the multiplier every dollar of credit introduced produces $4 dollars of economic growth.”

Many people still assume and believe that is true – but it is not. It currently requires about $4 of credit to be introduced in order to generate $1 of economic growth. That ratio has completely reversed – and it is only getting worse. Four years ago, every dollar of liquidity the Federal Reserve introduced produced 73 cents of economic growth – a terrible decline from decades ago – but not nearly as terrible as the first quarter of this year where every dollar of liquidity injected produced only 25 cents of economic growth.

It does not take a PhD to grasp the problem here – and to extrapolate out that in the case of a recession and massive amounts of additional liquidity being introduced that the return on credit will only decline further. The people in charge study Keynes and do not study von Mises and Hayek – if they did study von Mises and Hayek they would have realized long ago that the marginal decline in the effectivity of credit would have been the inevitable outcome.

These are real problems. These problems at some future point will overwhelm the petty melodramas that our politicians allow to engulf their lives and attempt to ensure engulf our lives.

In conclusion, reality is a bitch. All of the play-acting that constitutes American politics will not change the glide path we are on.

Where are the adults in the room when you need them?

Morning Reading

A few articles and posts from this week that are worth your time to read:

Charles Hugh Smith ask “Can We See a Bubble If We’re Inside the Bubble?”– “We want this time to be different so badly, we can almost taste it.”

James Kunstler posted “Things To Come” – “Quite a bit of that wealth was extracted from asset-stripping the rest of America where financialization was absent, kind of a national distress sale of the fly-over places and the people in them. That dynamic, of course, produced the phenomenon of President Donald Trump, the distilled essence of all the economic distress “out there” and the rage it entailed. The people of Ohio, Indiana, and Wisconsin were left holding a big bag of nothing and they certainly noticed what had been done to them, though they had no idea what to do about it, except maybe try to escape the moment-by-moment pain of their ruined lives with powerful drugs.”
Ray Keating wrote “All Uncertainty from Washington Is Not Created Equal” – “As Knight wrote, “The fact is that while a single situation involving a known risk may be regarded as ‘uncertain,’ this uncertainty is easily converted into effective certainty; for in a considerable number of such cases the results become predictable in accordance with the laws of chance, and the error in such prediction approaches zero as the number of cases is increased.” Meanwhile, a “true uncertainty” is a “form of uncertainty not susceptible to measurement.””
Lance Roberts posted “US Jobs Market: Much Worse Than Official Data Suggests” – “President Trump ran on a campaign that repeatedly touted “jobs, jobs, jobs.” His emphasis on jobs creation and bringing employment back to America struck a chord with voters. Trump’s election in itself contradicts the popular narrative that the US jobs market is tight and robust.”
Pedro Nicolaci da Costa “The Fed’s plan to shrink its giant balance sheet dodges the market’s most pressing question” – “The Federal Reserve’s detailed plan for reducing its balance sheet likely starting later this year, presented alongside this week’s interest rate hike, was a bit of obfuscation via transparency.

There was a ton of information, but none of it answered the central question on the minds of investors and bond traders: What will be the balance sheet’s ultimate size?”

Jonathan Garber observed “A predictor with a perfect track record on the American economy is moving closer to signaling a recession” – “An inversion would most likely be a signal that a recession is imminent. An inverted yield curve has a perfect track record of predicting recessions.”
Danielle DiMartino Booth eloquently produced “Housing in America: Movin’ on Up” – “This should be welcome news for renters. (Do you sense a however coming your way?) However, the vast majority of new construction in recent years has been in luxury units. That helps explain why half of would-be renters cannot afford to set out on their own – that $1,300-plus monthly pill is too big to swallow based on the affordability standard of 30 percent of income.

That’s assuming, mind you, you draw a decent salary. According to a recent report detailed in the Washington Post, no city in America has low enough rents on two-bedroom apartments for someone earning minimum wage to call home. All of 12 counties nationwide boast rents low enough for minimum-wage earners to let, that is if they can confine their belongings into a one-bedroom unit.”


Systemic Threat

Let us make a few connections on China, Greece, Europe and Puerto Rico: the common thread on all of these is defaulting on debt. Each debt is a credit to another party. Each of those credits has, in all likelihood, been used as collateral on a derivative of some sort. Due to hypothecation and re-hypothecation it is probable that each of these credits presented as collateral has been used for multiple derivatives.

Grasp that chain. That is the key to understanding what happens from this point forward. This is key to understanding why these different events in far off places matter to your life.

The Chinese markets are highly leveraged, that is that many people and institutions borrowed money to invest in these markets. If these markets dive in value then paying back the borrowed money becomes even more difficult. China in the recent past has prevented people from selling. Each share may have a number associated with it on a board somewhere but if you are not allowed to sell that share then the effective value becomes zero. The inability to pay back these loans will daisy chain into other markets, both in and out of China. Go back to the model, each of those debts taken on to buy stocks is a credit to someone else and that credit has probably been used as collateral.

As I have mentioned before, banks are no longer a bank as we traditionally know them to be. They are now effectively hedge funds and they monetize this credit, not by having you pay back the loan, but by collateralizing that credit. This is the systemic threat. The same model goes for Puerto Rican and Greek bonds.

No single person or entity in the world knows where the trail of counter parties, collateralizing, hypothecation, and re-hypothecation leads. This is a problem that central banks and governments have in trying to react to this problem.

Another problem is that, due to our electronic trading and communication ability, this can theoretically melt down worldwide in milliseconds. It is on cruise control.

Yet another problem is that, due to the ability to hypothecate and re-hypothecate, the same credit collateral has been used over and over again to secure more debt. For example there are nearly $700 trillion in the notional value of derivatives the world over. This is secured by about $70trillion in collateral. To make it worse, due to be able to use the same collateral over and over, the actual base value of the collateral securing all of that $700trillion is estimated at $7-10trillion.

As debts are defaulted on there is a scramble for the ‘quality’ collateral. As you can see from the numbers above, there is not a seat for everyone when the music stops. In fact there will be a seat for hardly anyone.

To summarize: each debt represents a credit that has been collateralized many times over. In a default situation, if that credit has been collateralized ten times, nine of those counter parties will not be made whole. Because those nine would of used that derivative which is now in failure as collateral for even more derivatives you end up with a cascading failure.

This is the systemic threat to the world that China, Europe and Puerto Rico represent today.

Government Beggars, Bluffers, and Bullies, and the Truth about Colorado’s Taxpayer Bill of Rights.

They fib about everything. In their endless campaign to get their hands deeper into Coloradans’ pockets, all the government pleaders, the non-profit advocates, the squinting analysts, and the sniffing journalists agree on their biggest enemy. The main target, the bête noir, the great white whale, public sector enemy number one is the Colorado Taxpayers Bill of Rights, the TABOR Amendment.
The taxing crew is forever trying to convince the skeptical public that TABOR, adopted by voters in 1992, has changed Colorado from a bountiful land of milk and honey into a North American colony of Somalia. This post is the first in a Tribe series that will explain why that charge is bogus and the taxers know it’s bogus.
The Moaners’ Litany:
First lets review a few of the descriptions of TABOR from the taxers.
The Denver Post is more measured than most when it says TABOR is “inefficient and ultimately hurtful to our growing state. [snip] TABOR’s powerful check on government spending in reality has been a padlock on the purse-strings. [snip] We are convinced Colorado needs more revenue to fund the quality of life we’ve all come to expect from this great state.”
The Colorado Fiscal Institute laments that TABOR saddles the state with “antiquated tax policy” that produces “painful results.”
The Center on Budget and Policy Priorities warns that TABOR is a “formula for decline” that causes “essentially a permanent revenue shortage” that “slowly starves the services on which state residents rely”
And, of course, to protect the children, the National Education Association weighs in to condemn TABOR as
“a proven failure” that is “destroying public services in Colorado.”
Simple Proof They are All Dissembling:
So, are the critics right? Is Colorado withering on the vine? Does state government lack the resources to provide quality modern services? Does its budget put it in the company the bottom 10% or 5% of states? Or closer to the level of a developing nation?
Not at all, any of that. The basic budget fact is that Colorado has about as much money for its population as any other state. Less than some, more than others, and above the national average.
A recent study by the Kaiser Family Foundation (no libertarian outfit) analyzed the budgets of all 50 states, including general funds, federal funds, and other state funds. The study reports Colorado at $6,320, ranks 23rd in per capita spending, right in the pack and a little above the middle.
It’s a very interesting list, and poses questions about some of the high and low placers. But, importantly, here are a few of the states that spend less per capita than Colorado: 26. Maine–$5,811; 28. Pennsylvania–$5,746; 31. Virginia–$$5,623; 32. Ohio–$$5,609; 33. Washington–$5,598; 34. Michigan$5,364;
As it turns out, California, at $6,420 lands just three spots above our Rocky Mountain home. And if government spending more money is the key to better living, why are so many Californians coming to Colorado? The US average, incidentally, is $5,777, landing between 27 Nebraska and 28 Pennsylvania. Colorado spends 9% more than the national average on each of its residents
The takeaway from these figures is that money, like all resources is finite. We all would like more. Your kid’s baseball team holds fundraisers because it needs more. Your school PTA does too. And the Girl Scouts. Every person, family, institution, and government would like and could use more money.
But, next time of one of Colorado’s public money hungry sob sisters tells you that TABOR is tightening his/her corset, don’t give in to guilt. Don’t let them off the hook without demanding better information. Smile and ask, why are you such a poor budgeter? Why do you need 9% more than Virginia for decent schools? Why do you need 9% more than Washington for decent roads? Why do you need 8% more than Kansas to provide health and human services?
The answers should be enlightening.
To be continued…

Strip-Mining The Middle Class And Poor

For the eight years of the Obama administration the middle third of Americans suffered a 30% loss in their net wealth (everything in) and the bottom third suffered a 45% decline in their net wealth. Only the top 7% of Americans saw an increase in their net wealth while billionaires on average doubled their net wealth. This was the sum total of what eight years of Obama brought us.

It gets more interesting from there – if you look at a map of counties which voted for Clinton or voted for Trump (easy to find online) the Trump and Clinton counties match more than 80% with the counties that the Progressives strip-mined assets from and where that wealth went. These assets strip-mined from the poor and middle class were redistributed to a few counties heavily populated with the 1% that also voted for Clinton. The people from whom the assets were taken are Trump counties and not populated with the 1% what so ever.

For the millionth time – “If socialist understood economics they would not be socialist.” – Hayek.

Over the last eight years my experience has wholly and completely been that Progressives will stop at nothing to deny, obfuscate or dissemble in regard to this data. This data simply destroys any myth of ‘progressivism’ that the Progressives would like to spread. Over the last eight years Progressives have executed the largest asset transfer in all of history – a transfer of assets from the poor and middle class to the very wealthiest. It is undeniable and the data is there for anyone who cares to look at – unfortunately it appears that zero Progressives care to look at that data for if they did they would certainly no longer be a Progressive.

The folks living in the counties that had the wealth taken from them certainly understand that this happened. They may not be able to explain how, or what the mechanisms were, but they certainly know that this has occurred. This is exactly the reason that you have a President Trump.

The folks living in San Francisco and New York and Boston appear oblivious. They apparently have acquired the belief that because they are good Progressives the $15 trillion in additional net wealth magically landed in their laps. “See how well progressivism works!” These folks are reticent to give that wealth up – and even more reluctant to let go of the levers of elitist power that allow them to strip-mine assets from the poor and middle class in order to continue the flow of wealth into their pockets – because, you know, strip-mining wealth from the poor and middle class is ‘Progressive.’

The rank-and-file Progressives generally have no clue as to any of this – and they certainly do not have the intellectual or moral curiosity to go explore any of it. Rank-and-file Progressives are so focused on hating whomever they are supposed to hate this week that any accusation that they are tools of the 1%, regardless of the volume and irrefutability of the data presented (“It’s a Republican trick you Trump supporter!”), that they simply have no time to explore their own conscience or the who actually benefits from their beliefs.

If Progressives did explore their own conscience and who actually benefits from their beliefs and if they could muster that moral courage in the face of the evidence then this country would not on the verge of civil war. The perfect awareness of the 1% is that by inflating the rank-and-file Progressives with not just hate but the belief in their own moral supremacy then the chances of the rank-and-file Progressives ever saying ”I was wrong” is greatly diminished – no matter how irrefutable the data demonstrating that they have made an error.

We have now reached the point where Facebook and Twitter are aflame with Progressives celebrating and advocating for violence against Republicans. If there are Progressives who stand against the violence I have not heard them. The verdict of history will be that silence is acquiescence.

The net sum of the current environment is that Progressives are advocating for killing Republicans in order that wealth transfers from the poor and middle class to the 1% can continue. Get through all the spin, all the propaganda, all the fake news, all the false allegations, all the hate – it simply comes down to Progressives who are willing to stop at nothing in order to strip-mine the poor and middle class and enrich the 1%.

Still not at peak absurdity.

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