Ilargi: Debt Rattle Jan 3 2014 – Dr. Doom Is On Xanax

By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth, Cross posted from Automatic Earth

I’m not entirely sure that new year’s predictions are interesting enough to write about, certainly when they concern economic systems that are subject to some of the wildest and deepest manipulations in human history, with free markets a distant memory, but I’ll give it a shot, if only to give people the opportunity to vehemently disagree with me, always a barrel of fun.

I thought I’d start out with Nouriel Roubini, an erstwhile Dr Doom, who has mellowed to such an extent I suspect the influence of copious amounts of Xanax. Either that or he’s left behind his court jester role at the parties of the rich in Davos and Aspen, counting his money and waiting to be called up again. He played that role like a Shakespearean actor, making sure that many other people who had much more sensible things to say from 2007 onwards, never got the media attention they arguably might have warranted, and I see no reason to presume he wasn’t generously rewarded for it.

As I said, he’s much more mellow, just shy of bullish, though he smartly injects more bearish points into his message, to the point of seemingly contradicting himself, so at the end of the year, he was right either way. The title already gives away the new Nouriel:

Global economy set to grow faster in 2014, with less risk of sudden shocks

After a year of subpar 2.9% global growth, what does 2014 hold in store for the world economy? The good news is that economic performance will pick up modestly in both advanced economies and emerging markets.

The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%. Moreover, so-called tail risks (low-probability, high-impact shocks) will be less salient in 2014.

The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the US, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued.

Still, most advanced economies (the US, the eurozone, Japan, the UK, Australia, and Canada) will barely reach potential growth, or will remain below it. Households, banks and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging.

Note: Roubini claims that “ … advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms) [..] will grow at an annual pace closer to 1.9%“, but also that “ Households, banks and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging.”

So economies have benefited from deleveraging, but now they’re going to get hurt by … deleveraging. It apparently wasn’t enough yet, even if they benefited. But now they will no longer benefit. Contradictory? It feels that way, but we can’t be sure. It’s like some spin doctor writes his material these days, or it’s, indeed, Xanax.

In a similar way, Roubini says first that “ … advanced economies [..] will grow at an annual pace closer to 1.9%“, and then that “ … the US, the eurozone, Japan, the UK, Australia, and Canada) will barely reach potential growth …

Again, that feels contradictory, but is it? See, I could presume when I read this that his notion of potential growth is much higher than 1.9%. That would take out the contradiction. But he doesn’t day they DON’T reach potential growth, they BARELY reach it, which means they do. What could have happened without deleveraging, he doesn’t say. Would they have gone beyond their potential? Is that even possible? We’ll never know. More predictions:

High budget deficits and public debt burdens will force governments to continue painful fiscal adjustment.

[..] … there is a looming risk of secular stagnation in many advanced economies … owing to the adverse effect on productivity growth of years of underinvestment in human and physical capital.

In the US, economic performance in 2014 will benefit from the shale energy revolution, improvement in the labour and housing markets and the “reshoring” of manufacturing.

The downside risks result from: political gridlock in Congress (particularly given the upcoming midterm election in November), which will continue to limit progress on long-term fiscal consolidation; a lack of clarity about the Federal Reserve’s planned exit from quantitative easing (QE) and zero policy rates; and regulatory uncertainties.

[..] … some emerging markets – namely, India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela – will remain fragile in 2014, owing to large external and fiscal deficits …

The better-performing emerging markets are those with fewer macroeconomic, policy and financial weaknesses: South Korea, the Philippines, Malaysia and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru and Mexico in Latin America; Kenya, Rwanda and a few other economies in sub-Saharan Africa; and the Gulf oil-exporting countries.

Finally, China will maintain an annual growth rate above 7% in 2014.

As for his belief in shale, he’ll find out. The “revolution” may continue into 2015, but chances are costs will become prohibitive earlier. Making lists of emerging markets is a fun game, perhaps, but the potential downward effect on them from US tapering, and the China Squeeze, is very large. It’s one thing to make predictions based on more of the same conditions as the past few years, but every single country he names at both sides of his self-imposed divide has enormous lurking uncertainties hanging over its head. If and when bond yields and interest rates rise in the west, ugly ghosts may be found hiding in many a closet. Not just in emerging markets either.

Let’s move on to a man who doesn’t need any Xanax, Ambrose Evans-Pritchard, and who’s not afraid to go for a strong headline:

Great dollar rally of 2014 as Fukuyama’s History returns in tooth and claw

We enter the year of the all-conquering US dollar. As the global security system unravels – with echoes of 1914 – the premium on the world’s safe-haven currency must rise.

[US] growth is near “escape velocity” – at least for now – at a time when half of Europe is still trapped in semi-slump and China is trying to cool the world’s most dangerous credit boom.

As the Fed turns off the spigot of dollar liquidity, it will starve the world’s dysfunctional economy of $1 trillion a year of stimulus. This will occur through the quantity of money effect, hitting in a series of hammer blows, regardless of whether interest rates remain at zero. The Fed denies that this is “tightening”, and I have an ocean-front property to sell you in Sichuan. It is hard to imagine a strategic and economic setting more conducive to a blistering dollar rally, a process that will pick up speed as yields on 10-year US Treasuries break through 3%. [..]

A stronger dollar is something we’ve long talked about at TAE. And while there is no doubt it will come at some point, so far there have been too many too strong parties who didn’t want it. That may sound a bit too conspiratorial to you, but I’m sure it’s only business, and nothing personal. If the Fed raises QE instead of tapering, a move that could come if numbers grow sour, bets are off when it comes to timing.

In case you had forgotten, China has imposed an Air Defence Indentification Zone (ADIC) covering the Japanese-controlled Senkaku islands. [..] While American airlines comply, Japanese airlines fly through defiantly under orders from Japan’s leader Shinzo Abe. Mr Abe has upped the ante by visiting Tokyo’s Yasukuni Shrine – the burial place of war-time leader Tojo – in a gesture aimed at Beijing.

Asia’s two great powers are on a quasi-war footing already, one misjudgement away from a chain of events that would shatter all economic assumptions. It would leave America facing an invidious choice: either back Japan, or stand aloof and let the security structure of East Asia disintegrate. Trade this if you wish. The Dow Aerospace and Defense index (ITA), featuring the likes of Raytheon and Lockheed Martin, has risen 60% over the past year, compared with 29% for Wall Street’s S&P 500. [..]

Obviously, Ambrose likes his war games. Me, I’m weary of all the alleged powder kegs we’ve seen discussed in the past few years. Of course Abe might look to boost his image and ego when-not-if Abenomics falls flat on its face, but I think it’s more likely he’ll just be thrown out of office, and I don’t see 100+year-old hostile and violent sentiments easily return to Tokyo. Being nuked once a century should seem to suffice to make people cool down.

I doubt that we are safely out of the woods, let alone on the start of a fresh boom. How can it be if the global savings rate is still rising, expected to hit a fresh record of 25.5% this year? There is still a chronic lack of consumption.

As the Fed tightens under a hawkish Janet Yellen, a big chunk of the $4 trillion of foreign capital that has flowed into emerging markets since 2009 will come out again. It is fickle money, late to the party. [..]

It is a myth that emerging markets borrow only in their own currencies these days. External debt will reach $7.36 trillion in 2014, double 2006 levels (IMF data), mostly in dollars. Some $2 trillion is short-term. It must be rolled over continuously.

That global savings rate growth has deflation written all over it, as does the ongoing deleveraging. As Treasury yields rise, so will the dollar, and both make rolling over trillions in dollar denominated debt a lot more expensive. But will Yellen really – continue to – tighten when that happens? Is that in the US’ best interest?

Euroland will be hit on two fronts by Fed action. Bond yields will ratchet up, shackled to US Treasuries. Emerging market woes will ricochet into the eurozone. The benefits of US recovery will not leak out as generously as in past cycles. Dario Perkins from Lombard Street Research says the US is now more competitive than at any time since the Second World War. America is poised to meet its own consumption, its industries rebounding on cheap energy. Europe will have to generate its own stimulus this time. Don’t laugh.[..]

The ECB’s Mario Draghi has, of course, eliminated the acute tail-risk of sovereign defaults in Italy and Spain with his bond-buying ruse, though the German constitutional court has yet to rule on the scheme. [..] Credit to firms is still contracting at a rate of 3.7%, or 5.2% in Italy, 5.9% in Portugal and 13.5% in Spain. This is not deleveraging. The effects have been displaced onto public debt, made worse by near deflation across the South. [..]

There is just enough growth on offer this year – the ECB says 1% – to sustain the illusion of recovery. Those in control think they have licked the crisis, citing Club Med current account surpluses. Victims know this feat is mostly the result of crushing internal demand. [..]

The European elections in May will be an inflexion point. A eurosceptic landslide by Marine Le Pen’s Front National, Holland’s Freedom Party, Italy’s Cinque Stelle and Britain’s UKIP, among others, will puncture the sense of historic inevitability that drives the EU Project. [..]

The jobless rate was similar on both sides of the Atlantic in 2009. It is now at a five-year low of 7% in the US, and a near record 12.1% in Euroland. It is becoming harder to disguise this from Europe’s citizens. By the end of 2014 the macro-policy failure in Europe will be manifest.

Shrinking credit and shrinking consumption in Europe. How long will the US be able to pretend it’s doing fine under those conditions? Will Yellen tighten, as Draghi loosens? Can she even?

Nobody votes in EU elections. But they can be used to raise a hell of a racket. I don’t like the inclusion of my friend Beppe Grillo in that list of right wing parties, but I do hope there will be a loud anti-Brussels voice, because the once peacemaking union seriously risks turning into a place for streetfighting men. When you build yourself multi-billion euro new offices while in some member countries two-thirds of young people have been unemployed for years, what exactly would you expect to happen?

Over all else hangs the fate of China. The sino-bubble is galactic. Credit has grown from $9 trillion to $24 trillion since late 2008, as if adding the US and Japanese banking systems combined. The pace of loan growth – 100% of GDP over five years – is unprecedented in any major economy, eclipsing the great boom-bust dramas of the past century. [..]

China may try to cushion any hard-landing by driving down the yuan. The more that Mr Abe forces down the Japanese yen, the more likely that China will counter with its own devaluation to protect the margins of it manufacturing industry. We may be on the brink of another East Asian currency war, a replay of 1998 but this time on a much bigger scale and with China playing a full part.

If so, this will transmit an a further deflationary shock through the global system, catching the West sleeping with its defences against deflation already run down.

AEP again paints it as a China vs Japan, and I don’t think that should have prevalence. China has a major fight on its hands internally, between new money and old politics, a fight wobbly floating on a sea of questionable loans and investments, and that should take up all of its energy the next year and quite possibly beyond.

And Japan has things to do at home as well:

Japan consumer prices seen rising five times faster than wages

Japanese employers will fail in the next fiscal year to heed Prime Minister Shinzo Abe’s goal of wage increases that outpace inflation, highlighting risks that the nation’s recovery will stall, surveys of economists show.

Labour cash earnings, the benchmark for wages, will increase 0.6% in the year starting April 1, according to the median forecast in a poll of 16 economists by Bloomberg News. Consumer prices will climb five times faster, increasing 3%, as Japan raises a sales tax for the first time since 1997, a separate Bloomberg survey shows.

Hey, I told you last September that sales tax rise was going to come back to haunt him:

How Japan Pretends To Fight Debt And Deflation, But Doesn’t

If you look through the numbers here, you see that the tax hike from 5% to 8% is supposed to bring in 3 times 2.7 trillion yen, or 8.1 trillion yen, about $81 billion. Abe wants to spend $50 billion of that on more stimulus, so net revenue is $31 billion. This is ostensibly “meant to rein in the government’s massive debt”. However, according to Wikipedia, Japan’s public debt was over 1,000 trillion yen, or $10.46 trillion, for the first time ever on June 30, 2013 (“twice the nation’s annual economic output”).

Which raises the question how on earth $30 billion can “rein in” a debt of $10.46 trillion. If I’m not mistaken, that comes to just 0.28%. Maybe something got lost in the translation of the term “rein in”, but even then. Note: the article calls it “the biggest effort in years by the world’s third-largest economy to contain [the] public debt”.

The sales tax raises prices five times faster than wages, and “reins in the government’s massive debt” by 0.28%. That’s a success story if ever I heard one. Way to go Shinzo. Attaboy Abe.

I want to close off prediction season by looking a bit more in detail in what has become my posterchild for how not to do things: Britain. While it has surprising growth numbers off late, with an exploding housing market, Britain too in fact floats wobbly on questionable credit (with its government adding insult to injury with plans like Funding for Lending). Still, with those growth numbers, artificial as they may be, it becomes very difficult not to let interest rates go up. And then it all will start to wobble for real:

Mortgage rise will plunge a million UK homeowners into ‘perilous debt’

More than a million homeowners will be at risk of defaulting on their mortgages and losing their properties in the wake of even a small rise in interest rates, a bombshell analysis reveals. Borrowers who have failed to pay down their mortgages when interest rates have been at record low levels now face being overwhelmed by “perilous levels of debt” when the inevitable hike comes. [..]

“When rates go up, the number in ‘debt peril’ could increase to anywhere between 1.1 million and two million, depending on the speed at which borrowing costs rise and the nature of the economic recovery.”

The warning comes as a survey carried out by Which? reveals that rather than paying off their debts, around 13 million people (25%) paid for their Christmas by borrowing. Overall, more than four in 10 (42%) used credit cards, loans or overdrafts to fund their spending over the festive period , which suggests that Britons have not shed their addiction to debt. [..]

The markets believe the base rate will increase to 3% by 2018, with what the Resolution Foundation describes as “huge social and human cost”. However, the thinktank warns that a hike of just 1 percentage point more than that, to 4% by 2018, would lead to 1.4 million homeowners facing severe financial pressure.

[.. … the levels of debt built up by families in the pre-crisis years are such that even relatively modest changes in incomes and borrowing cost assumptions produce significantly worse outcomes. [..] … one in six households are currently mortgaged to the hilt, servicing home loans that are at least four times the size of their annual salary, in further evidence of the intense vulnerability of many homeowners to rate hikes.

42% of Britons used credit cards, loans or overdrafts to pay for Christmas. Does that sound like a healthy economy to you? It’s no surprise, therefore, that retail is not doing well. People needed their credit cards to even buy hugely discounted items. The government may claim that the economy is great, but consumers are either MIA or AWOL. How can that make for a great economy? Consumers in Britain don’t account for 70% of GDP, as they do in the US, but still some 65%. And they are maxed out, borrowing, and deep in debt. Yeah, raise rates, and see what happens.

Debenhams boss say high street was ‘sea of red’ in run-up to Christmas

The chief executive of Debenhams has said the high street was a “sea of red” in the run-up to Christmas due to heavy discounting after the department store chain issued a major profits warning.

In an unscheduled trading update that confirms the tumultuous Christmas retail trading environment, Debenhams said profits will now be far lower than expected because its margins were hit by the company offering heavy discounts on clothing in December.

[CEO Michael Sharp] insisted there was not a “fundamental flaw” in Debenhams strategy. He blamed the profits warning on weak consumer confidence and heavy discounting among fashion retailers as they attempted to shift unsold winter clothing that had built-up because of the mild autumn. Mr Sharp also warned that a “final surge” in sales in the week before Christmas had not materialised. Debenhams now plans to cut prices by as much as 70% to sell clothing in January and February.

The profits warning from Debenhams could be the first of a handful from listed retailers given the widespread discounting in the run-up to Christmas. Neil Saunders, retail analyst at Conlumino, said: “It is likely that many will have had a disappointing season in terms of sales, but especially in terms of profitability.”

A “great economy” made up of maxed out consumers. 98 out of 100 of which don’t see a recovery. Well, they can still read about it in the papers, I guess. And they have no-one on their side either, because the unions get it as wrong as the government does.

Economic recovery felt by only one in 50 voters, TUC poll finds

Only one in 50 voters believes they are benefiting from the economic recovery and most expect the living standards crisis to continue in the new year, a study has found.

Almost half the 1,600 people polled for the TUC wanted services that had been cut to be restored, and one in five of those polled said they expected the gains of an economic recovery to be fairly shared across society. [..]

[TUC general secretary Frances O’Grady said:] “Voters accepted austerity as unpleasant medicine. But now they are realising that what they thought were the unpleasant side-effects are what the chancellor sees as a cure. Recovery seems to mean food banks, zero hours and pay cuts for the many, tax cuts and pay growth for the few at the top.” The union leader added that 2014 would be a crucial year, dominated by a single political question: whose growth?

“Do we want to go back to a business-as-usual version of the pre-crash economy, based on housing bubbles, an overmighty finance sector and increasing inequality as a growing proportion of the workforce fail to share in prosperity? “Or do we want to build a new, genuinely rebalanced economy that through investment, growth and active government aims for a high-skill, high-pay, high-productivity economy that shares out prosperity to all? I know which side unions are on.”

The unions want to talk about divvying up the growth. When I read things like “… a new, genuinely rebalanced economy that through investment, growth and active government aims for a high-skill, high-pay, high-productivity economy that shares out prosperity to all … “, I just want to run and hide and get very hammered.

What these unions should be actively doing, right now, is to talk about what happens to their members in case there is no growth, and/or when the economy shrinks. By ignoring that, they are sure to make things worse for the people who rely on them for support. Secure a minimum, make sure people are fed and warm, and then you can take it from there.

Anyway, so all in all, I do see some interesting elements in predictions, but I see a lot more plain blindness and manipulation as we go gently into this year. Of all I’ve read, I think perhaps Carmen Reinhart and Ken Rogoff come closest to reality in their new IMF (of all sources!) report:

IMF paper warns of ‘savings tax’ and mass write-offs as West’s debt hits 200-year high

Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.

The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups. “The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point,” said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff.

The paper said policy elites in the West are still clinging to the illusion that rich countries are different from poorer regions and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering (“forbearance”). The presumption is that advanced economies “do not resort to such gimmicks” such as debt restructuring and repression, which would “give up hard-earned credibility” and throw the economy into a “vicious circle”.

But the paper says this mantra borders on “collective amnesia” of European and US history, and is built on “overly optimistic” assumptions that risk doing far more damage to credibility in the end. It is causing the crisis to drag on, blocking a lasting solution. “This denial has led to policies that in some cases risk exacerbating the final costs,” it said.

While use of debt pooling in the eurozone can reduce the need for restructuring or defaults, it comes at the cost of higher burdens for northern taxpayers. This could drag the EMU core states into a recession and aggravate their own debt and ageing crises. The clear implication of the IMF paper is that Germany and the creditor core would do better to bite the bullet on big write-offs immediately rather than buying time with creeping debt mutualisation.

The paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression – defined as an “opaque tax on savers” – as used in countless IMF rescues for emerging markets. “The magnitude of the overall debt problem facing advanced economies today is difficult to overstate. The current central government debt in advanced economies is approaching a two-century high-water mark,” they said.

Most advanced states wrote off debt in the 1930s, though in different ways. First World War loans from the US were forgiven when the Hoover Moratorium expired in 1934, giving debt relief worth 24% of GDP to France, 22% to Britain and 19% to Italy. This occurred as part of a bigger shake-up following the collapse of the war reparations regime on Germany under the Versailles Treaty. The US itself imposed haircuts on its own creditors worth 16% of GDP in April 1933 when it abandoned the Gold Standard.

My own personal mantra has been for years now that the debt needs to be restructured, and that when a bank or a country ot industry claims it’s doing better, you always need to ask one question first: “What happened to the debt?” It is not happening, we’re still fighting debt with more debt, and hiding the existing (deleveraging hasn’t even really started yet). And when reality threatens to catch up with that, we throw on some more.

It’s not correct to state, as Reinhart and Rogoff do, that “This denial has led to policies that in some cases risk exacerbating the final costs”. That’s not a risk, that’s a certainty. And the costs will be borne by the usual suspects: you and me. The only thing we can do to mitigate the damage from this is to get out of the way, find a remote spot somewhere, and start figuring out ways not to be dependent on the economic system.

Our best and brightest minds should be on this like flies on honey, but they’re neither all that best nor bright: they’re busy making consumer gadgets, and designing high frequency trading systems for a zombified investment model. Looks like we’ll have to become our own best and brightest. Maybe we always were; we just didn’t know it yet.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. allcoppedout

    Much as I would disagree with you for the sake of it Lambert, this is the season of goodwill. I am sometimes frustrated by your permaculture garden and Yves’ woolly sweater against global warming spasms, but what import could such trivia have when even R & R are seeing the jubilee light? Perhaps their Excel system has self-corrected!

    I haven’t watched or read any mainstream news for more than a month and am all the better for this. I suspect your collative contribution alone here has more content than the annual toll of BBC and Sky rolling news. I shall rely on you and NC to keep me informed. With England playing so badly it will be a relief not to see the cricket scores. Many thanks, and fear not, I shall work on the ‘disapproval’ you have requested in order not to disappoint …

  2. Andrew Watts

    You know things are getting bad when Reinhart/Rogoff are starting to sound reasonable. Maybe they just pulled a Irving Fisher on us while everybody was busy snarking at them. Or we’re drawing closer to another Credit Anstalt moment.

  3. The Dork of Cork

    Ireland and perhaps other peripheral euro countries will be subjected to a massive capital dumping event which will slash the mean energy consumption per person as the remaining credit worthy people eat all of the energy pies.
    Expect new private car sales in Ireland to go well beyond 100,000 units for the first time since 2008.

    The greatest mortal danger for people is when the banking system escapes crisis.
    This is when the hammer comes down on life support of once conduit people who have now served their purpose.
    When these people no longer become conduits but non persons, that’s when they switch off the oxygen machine.
    Ireland will start “growing” in 2014 but much more people will fall off the cliff.

  4. Moneta

    (Debt+entitlements+equity)/GDP. The ratio has never been higher and all those with investment portfolios expect this ratio to go even higher to feed their retirements.

    Yes, the ratio can go higher but this means our system will be even more unstable. At one point, the ratio will drop. This could be due to write-offs (deflation), GDP growth (inflation) or both. Talks about inflation or deflation are a re herring because, no matter what, most of the developed population is due to go through a decline in purchasing power.

    The numerator and denominator are linked, they are communicating vases.. Remember in chemistry how it could take a while before we could see the chemical reaction. We’re entering the 5th year since the bailouts. It always seems to take 4-7 years to see a shake-out.

      1. Mansoor H. Khan

        We should not focus on debt too much. Debts are accounting.

        Double Entry Accounting (Assets = Liabilities + Owner’s Equity) is a useful tool to manage reality and our economic affairs and our economic relationships.

        We should not let the tool (Double Entry Accounting) manage us!

        At a high level an economy is not bankrupt when the accounting ledgers say debts cannot be paid. An economy is bankrupt when production of goods and services ceases.

        Debts are accounting and insolvency is accounting. Think about the great depression. At that time there was no issue with availability of raw materials or labor shortage or even peace to conduct business and produce goods and services.

        During GD deflation caused currency shortage and reduced demand. The real problem during GD was debt-based money.

        The real problem now is debt-based money AND fossil fuel depletion.

        A 100% reserve digital currency would allow the money-stock in circulation to be matched to the economy’s capacity much easier. Yes banks would lose their money creation privilege but at least we will avert a mad max scenario which a deflationary spiral will certainly lead to.

        Even with a 100% reserve digital currency most of current debts will not be repayable. This means that economic relationships in our civilization will have to be re-structured.

        My main point is this ==>

        Insolvency on a national balance sheet does not equal a bankrupt national economy (usually). All it means is that economic relationships in our civilization will have to be re-structured to match the productive capacity of the economy (that is debts needs to be discharged, forgiven, re-negotiated, assets liquidated and divided up, etc).

        We always have had a distribution problem when the rate of production of goods and services skyrocketed due to the use of fossil fuels. Specially since the start of the industrial revolution.

        This distribution problem was masked by growth. Growth did provide opportunities for most in society to get enough money to not revolt and get too upset (at least in the industrialized countries).

        We now must solve this distribution problem and we must keep in mind the dwindling fossil fuel supplies which has powered our material production/modernity so far.

        I suggest the following:

        A) we should start a social credit/Social dividend/guaranteed income program and give every U.S. citizen $500 per month regardless of income or regardless of any public assistance they currently receive.

        B) Increase taxation to keep inflation in check. Increased taxation should include stiff consumption tax to discourage too much consumption by the rich and upper middle classes.

        D) Start stringent energy conservation and run a low-grade industrial civilization with less yearly fossil fuel consumption.

        C) This will buy us time to develop another cheap energy source and possibly resume growth or if we don’t find another another cheap energy source we will have time to learn how to live without machines, fertilizers and pesticides.

        Mansoor H. Khan

        1. Moneta

          Our economy is managed according to accounting rules. But because these are an impediment to governments and banks, things are kept off balance sheet or financial engineered. When the true state of things is kept hidden or misreported, you can expect malinvestment.

          Malinvestment guarantees lackluster future production of goods and services. With extend and pretend, malinvestment has only increased since the credit crisis.

          Debt is important. It makes up a large percentage of pension plans and investment portfolios. You can not say it has no impact since it will be a grab on the younger workers’ production. These depend on future production which will most likely be negatively impacted because of rampant malinvestment.

          Production depends on the working population but all indications are that the ratio of workers to population is in a free fall. There is a large group that does not want to work and will not be able to.

          1. Cynthia

            Financialization has been setting “policy” for far too long (stealing from those that actually produce and save to give to those that profit by pushing paper). Time for the laws of physics to re-assert themselves.

          2. JEHR

            Should the last sentence read: “There is a large group that wants to work and will not be able to”? Otherwise who are the large group of people who don’t want to work?

              1. Fiver


                First, please designate, describe, define or otherwise identify the group or groups “who don’t want to work” and who are not retired or retiring.

                The entire argument re fewer workers having to support more people not working evaporates if you:

                1) Realize a huge portion of the existing economy serves no rational purpose.

                2) No 11th Commandment says we have to continue to be as stupid as we have been – we could at any time realize the quite obvious truth that we can all live comfortably using a great deal less so long as we place hard caps on greed and aggression.

                1. Moneta

                  “who don’t want to work” and who are not retired or retiring: there have always been grasshoppers and ants so I don’t feel the need to explain. I’ll only add that during episodes of malinvestment grasshoppers have even more opportunities to live off the ants.

                  1) If we stuck to the essentials, what percentage of people would be unemployed, 90%? We probably would not be 7 billion on this planet either.
                  2) We could realize something but I don’t see anything pointing to a change. Right now all I see is extend and pretend. The status quo.

                  And even if we changed something, many would lose their shirt. Transitions are messy. And change is the last thing 65+ want. unless it gives them more of what they like.

        2. Moneta

          When you follow this Debt-to-GDP ratio, you have a pretty good idea of what financial manipulations countries are or will be doing. And which countries will collapse… especially if you also keep track of net imports and energy availability.

        3. Ignim Brites

          “Debts are accounting.” If only the creditors agreed! For the creditor, debts are an income plan and a promise to escalate his demand for money (liquidity preference) or collateral if the income plan fails.

        4. coboarts

          A) How about a living wage/food, jobs and shelter for everyone?
          B) How about a total redirection of productive output toward a new energy/technology base, environmental clean up and rebuilding the built environment to prepare for the current and coming environmental changes?
          C/D) Read the Third Industrial Revolution and Reinventing Fire among many others to get an idea as to B (energy/technology) above.

          – Something about the De-Growth articles by Michael Hoexter bugged me, but I can’t disagree with his premise and his “Pedal to the Metal” recommendation. I believe that mankind is at his best when facing monumental challenges where we all work together to achieve huge goals. Well, for those who can stop screaming at themselves long enough to accept it, we have just such an opportunity right here/now. Alas, when you look at who we are, what we are and where we seem to be going – it will be the remaining few pulling themselves from the ashes that will remake any kind of world for the human species. Unless…

  5. JohnB

    Hehe, I like the final comment hinting at a return to communal experiments ;)

    A pity such a thing would have to depend upon the wider countrywide economy to meet its needs (even if just to obtain enough Euros/Dollars to pay taxes) – I wonder if a locally administered alternative currency could allow that to work, while still being able to obtain/exchange-for enough Euros/Dollars, to do trade for necessary goods, with the rest of the country.

    Bernard Lietaer (alternate/mixed currency aficionado) likely has some insight on that – it seems to me, that for any (currently only theoretical) Libertarian Socialist society to work, it would require such locally administered communal currencies.

    Rambling a bit, but it would be very interesting, to read about the results of any past communal society, that tried to work off of their own locally administered currency – if it’s viable at returning people to work and a good quality of life, it would make governments enforcement of its currency monopoly, equivalent to forcing a proportion of the population to be unable to work and sustain themselves in bad times.

    I know there are very good reasons for government monopoly on currency, but (when that is coupled with a system that guarantees unemployment in economic bad times) this is an interesting way of looking at how it ‘might’ be undemocratic to enforce this, when alternative currencies can actually put people back in employment.

  6. financial matters

    “”So economies have benefited from deleveraging, but now they’re going to get hurt by … deleveraging. It apparently wasn’t enough yet, even if they benefited. But now they will no longer benefit. Contradictory? It feels that way,””

    It seems that a lot of the monetary stimulus is trying to fight these strong deleveraging/deflationary forces. It’s interesting to view Treasuries as a small (3%) but very important base which should be stabilized as a starting point. I think the yen has enough liquidity and flexibility to act in a similar manner.

    The real estate scams seem to be largely revealed and home prices moderating with the main problem seeming to be the last gap of private equity companies trying to get into the rental market.

    “”certainly when they concern economic systems that are subject to some of the wildest and deepest manipulations in human history, with free markets a distant memory””

    The stock market seems to be the biggest problem here. I think this is where we get into regulatory failure such as with high frequency trading. And this regulatory failure also bleeds into letting financial firms fleece municipalities and pension funds.

  7. James Levy

    If this is an example of a kind of cooptation or capture, the worst example I’ve ever seen was the (once) outstanding investigative reporter, Laurie Garrett. She was doing some of the best work around on the shortchanging of public health and the emergence of a new wave of infectious diseases, then was offered a Senior Fellowship at the Council on Foreign Relations and disappeared entirely into the Davos circle jerk of high-end conferences. Her articles, which once appeared to mass circulation in the pages of Newsday and in popular books, now wind up, when they get published at all, in-house at the Council.

    My guess is she justifies this by imagining that she now has the ear of the Court and is really “making a difference” through the approving nods of her paymasters.

    1. Generalfeldmarschall von Hindenburg

      What’s worse than some journalist who goes on the payroll is the Malcolm Gladwell type who masquerades as the rebel but who was on the payroll all along.

  8. susan the other

    I predict that R&R will only appear to advocate debt writedowns when in fact what they push is intrabank debt cancelations which will not disturb any bank’s bottom line because they are so hedged out against each other. But no one will advocate debt free money because the public will still be such a fat target. There will be no jubilee for private personal/consumer debt. That debt will be used to guarantee that economies do not exceed their secret energy quotas. Nevertheless, global warming and climate catastrophes will go unabated. I predict the sudden collapse of the Pacific food chain. I predict that all western politicians will continue to grind down the poorest and most vulnerable citizens, allowing public/private partnerships and special interests to continue to extract exorbitant fees and interest rates and all the while raising prices on staples. I predict Obama will give a few bleeding-heart speeches and then spend a lot of vacation time in Hawaii. The Democrats will pontificate about reshoring when in fact they will not make a dent in unemployment and wages. Political control will be lost and military police will fill the void. The Pitchfork Party in Italy will go bananas. Germany’s manufacturing base, especially cars, will take a huge slump as China and Japan get stuck with thousands of cars they can’t sell. Global trade will crash. Godzilla will return.

    1. NotSoSure

      Godzilla will indeed return ….. to the big screen this summer and he is going to hammer San Francisco to a pulp. In the meanwhile, TWTR’s market value will probably exceed AAPL just because people will be tweeting said monster’s return.

      I was wrong last year when I predicted Indonesia will tailspin into a crisis with the dollar at 12000 rupiah (it’s now at 12200). I still believe we’ll see some kind of crisis though.

    2. j gibbs

      When the Democrats talk about ‘reshoring’, half of them think it is a new kind of whoring they can cash in on and enjoy safely at the same time.

  9. WorldisMorphing

    [“The unions want to talk about divvying up the growth. When I read things like “… a new, genuinely rebalanced economy that through investment, growth and active government aims for a high-skill, high-pay, high-productivity economy that shares out prosperity to all … “, I just want to run and hide and get very hammered.”]

    I guess you could do so in company of Yves & Lambert this Wednesday. If you do, take pictures so the audience can have one big collective gut laugh before new year’s reality starts to sink in…

  10. JEHR

    I suspect that the reason no one in authority wants to regulate derivatives is that once someone gets the data on derivatives, we will all become privy to the pickle that we are in; i.e., that the debt is astronomical and cannot ever in this world be paid. As it is now without regulation of any kind, the banks can play the game of bail-out until all resources are extracted into their own coffers (and still the debt will remain). We are doomed!

  11. allcoppedout

    Godzilla seems to be the only fictional beast in your lovely piece Susan.

    I now believe the madness is in so deep that much we have held dear like democracy and education are simply fictional covers of dark secrets. I have Joseph Heller’s excellent ‘Picture This’ in mind, though it needs writing as a ‘history of the present’. The recent series of Sherlock shows a flash-forward of Parliament blowing up if the great detective doesn’t defuse the bomb. Sue and I blurted out ‘Yes please’ in unison. The problem is that if we were gifted such a collapse of economics we would try and rebuild it as before.

  12. j gibbs

    I confess I couldn’t plow through the whole thing, but this sentence caught my eye without knowing whose sentence it was:
    “If and when bond yields and interest rates rise in the west, ugly ghosts may be found hiding in many a closet.”
    IMHO, bond yields and interest rates will not be rising any time soon, perhaps not in the lifetime of anyone old enough to vote. The banks are now addicted to free money, the speculators are addicted to free money, and even wage earners need (relatively) free money to continue the borrowing they must continue to stay afloat. Who would benefit from higher rates? Retirees running through their anemic capital. Anyone think the Fed cares about them?

  13. Hugh

    I did a word search. “Inequality” is mentioned once. Kleptocracy and class war are not mentioned at all. So how likely are any of these predictions considering that none of them really address the principal drivers of our economic problems?

    Re Roubini, he is, was, and always will be a neoliberal. It’s so easy to forget what a small and incestuous world Dr. Doom comes from. His thesis adviser at Harvard was Jeffrey Sachs. He got his first major gig in government in the late 1990s as a senior adviser to the President’s Council of Economic Advisers back when somebody named Janet Yellen was the chair. He then moved on to be a senior economic adviser to the Secretary of the Treasury when one of his heroes, Larry Summers, held the post. A name like Dr. Doom makes it sound like Roubini is a rebel, but he really isn’t. He is a member of the Establishment. He is all about defending it, not overthrowing it. He is a big supporter of “financial consolidation”, i.e. austerity. The Dr. Doom stuff masks what a thoroughly conventional and neoliberal perspective Roubini has.

    As for Reinhart and Rogoff, it is hard to see how their proposed policies of inflation and the financial repression of interest rates do anything other than hammer the bottom 80%. But then that’s probably the object of the exercise.

  14. RepubAnon

    I note two assumptions in this conversation:
    (1) Raising taxes on the corporations and the top 1% of wage earners (who alone are profiting during this recovery) is out of the question; and,

    (2) Ultimately, the price of economic recovery must be paid by the rest of us in the form of haircuts for savings accounts of the 99%, spending cuts to programs benefiting the 99% for the purpose of bailing out the rich and powerful, etc.

    Here’s a novel idea: let’s analyze the economic effects of getting rid of the “carried interest” loophole, making it illegal for banks to trade in derivatives, and raising taxes on the rich and powerful (such as France’s millionaire tax). It’s not politically feasible – but we should at least analyze what would happen if this occurred.

  15. Fiver

    Agree with Hugh re Roubini, but would just add that he’s also a lousy forecaster.

    As for R & R, one has to wonder whether we’re looking at a test flight of the new official reasoning that will, everywhere and all at once, accompany the first official acknowledgment that a “surprising” new crisis is on – with even the decisions as to who gets pilloried already made – just like they were hauled out last time to “explain” things while the insiders, banksters and speculators generally made a fortune off the public’s bailout of that most essential of services – the great life-giver, f-ing banking.

    I find none of these particularly persuasive. Here’s my short list:

    1) Markets fracture in late 2014, but don’t finally bust until Yellen establishes herself as a “hawk” with respect to QE – she won’t be anywhere near stopping purchases when her credentials as “hawk” are MSM-d for validation all around and she’s free to reverse policy, H1 2015.

    2) Congress essentially invites Netanyahu to attack Iran by passing obscene Lobby bill, but instead of attacking Iran, the infantile Netanyahu, knowing the world will not tolerate an obscenity on the scale of a war on Iran, steps up routine pounding of Gaza, more and heavier hits on Hezbollah, Syria etc., and further forced worsening of conditions for Palestinians, Israeli Arabs, refugees and the Israeli left/peace activists courageous enough to remain and fight for justice.

    3) In Syria, the fighting continues for months in 2014, but the Saudis will come to realize the magnitude of their error in sourcing the tens of thousands of mercenary “jihadists” doing the bulk of the fighting against Assad (and on the prowl in Iraq) when Netanyahu balks. Why? Because he just can’t count on Obama, having so completely, publicly and thoroughly pissed on Obama on his own home turf. The Saudis will be left holding a jumbo bag full of their own death squads, all trained in the tradition of “jihad” as they have been since the fall of the Shah. Assad survives and agrees to major changes in governance. Syria, no more than Iraq, gets not 1 dime in compensation for nearly 3 years of war with the insanely deadly proxies of foreign governments.

    4) Unfortunately for the Saudis, this is also the year their production finally peaks – but we won’t find out for some time.

    5) Mid-terms will see comfortable gains for Dems at the expense of the right so long as Obama faces down the fanatical warmongers looking for a go at Iran.

    6) Obama pursues the TPP.

    7) More Court cases brought against NSA mostly lose due to moral/ethical cretins sitting on the Bench. Should cases so important be brought to an illegitimate Court due to simple corruption, or, as just seen in the New York case, the Judge appears to have so profound a post-9/11 “security is everything” bias as to be unfit to sit on such cases? Is it better to live with a not-SC-affirmed law while waiting for better odds, or having a Supreme Court affirm what are undoubtedly unconstitutional powers, but for the deeply corrupted state of the system?

    8) China starts to rumble later in 2014, triggering a partial break. BRICS and emerging markets in general continue to chafe within a global financial system loaded against them.

    9) Extreme weather is the rule. We will also have 1 killer quake and 1 major volcanic eruption.

    10) The first really good investigation and analysis of derivatives markets is published. And I hope to read it on NC.

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