The Federal Reserve would like to raise target interest rates because of inflation concerns and concern that asset bubbles are forming. Part of their concern seems to arise indirectly from the rise in oil prices, relative to their low level in early 2016.
Figure 1. WSJ figure indicating likely reasons for rate hike.
A finite world does not behave the way most modelers expect. Interest rates that worked perfectly well in the past don’t necessarily work well now. Oil prices that worked perfectly well in the past don’t necessarily work well now. It seems to me that raising interest rates at this time is very ill advised. These are a few of the issues I see:
[1] The economy is now incredibly dependent upon rising debt to prop up its spending. The pattern of total debt to GDP for the United States is shown in Figure 2.
Figure 2. United States’ debt to GDP ratios based on Federal Reserve Z1 data and BEA GDP data. The red line represents the increase over the latest three years.
There was a huge increase in debt in the period leading up to the 2008 crash. Every year between 2001 and 2008, the increase in debt was greater than four times the increase in GDP. In fact, for some years in that period, more than $8 of debt were added for every dollar of GDP added.
We now seem to be starting a new run up in debt. In 2015, the amount of debt added was $2.5 trillion ($66.1 trillion minus $63.6 trillion), while the amount of GDP added was only $529 million. This indicates a ratio of over 4.7 for the single year of 2016. (Figure 2 shows only three-year averages, because of the volatility of amounts.)
[2] The vast majority of the debt run-up since 1981 (Figure 2) seems to have been enabled by falling interest rates (Figure 3). Given how dependent we are now on large increases in debt to produce GDP, it would seem to be dangerous for the Federal Reserve to raise interest rates.
Figure 3. US Federal Bonds 10 year interest rates. Graph produced by FRED (Federal Reserve Economic Data).
With falling interest rates, monthly payments can be lower, even if prices of homes and cars rise. Thus, more people can afford homes and cars, and factories are less expensive to build. The whole economy is boosted by increased “demand” (really increased affordability) for high-priced goods, thanks to the lower monthly payments.
Asset prices, such as home prices and farm prices, can rise because the reduced interest rate for debt makes them more affordable to more buyers. Assets that people already own tend to inflate, making them feel richer. In fact, owners of assets such as homes can borrow part of the increased equity, giving them more spendable income for other things. This is part of what happened leading up to the financial crash of 2008.
The interest rates that the Federal Reserve plans to change are of a different type, called “Effective Federal Funds Rate.” These also hit a peak about 1981.
Figure 4. US Federal Funds target interest rate. Graph produced by FRED (Federal Reserve Economic Data).
[3] The last time Federal Funds target interest rate was raised, the situation ended very badly.
Figure 4 (above) shows that the last time Federal Reserve target interest rate was raised was in the 2004-2005 period. This was another time when the Federal Reserve was concerned about the run-up in food and energy prices, as I mention in my paper Oil Supply Limits and the Continuing Financial Crisis. The higher target interest rate was somewhat slow acting, but it eventually played a role in bursting the debt bubble that had been built up. In 2008, the amount of outstanding mortgage debt and consumer credit started falling, and oil prices fell dramatically.
It is ironic that the US government is again trying to bring down food and energy prices, when they are at a price level similar to the price level when they tried this approach the last time.
Figure 5. Monthly average Brent oil prices, with notes regarding when the Federal Reserve changed its target interest rate.
The Federal Reserve looks at its favorite metrics, PCE inflation and PCE inflation excluding food and energy. From this high-level view, it is likely that they have no real understanding of exactly what energy price problems are causing the strange result. With this high-level view, they do not realize that a big contributor to the rising costs is the increase in oil prices between the January – March 2016 period, when they were under $40 per barrel, and recent prices, which were above $50. (They are now back below $50 per barrel, but this would not be apparent from the metric.)
When this high-level view is used, it is easy to miss how low energy prices are today, relative to the needs of energy producers. Most people who have been following what is happening in the oil industry know that prices are not high, relative to the prices needed for profitability. Even if some US companies claim to be profitable at $50 per barrel, it is clear that, in general, the industry cannot withstand prices as low as they are today. At the current price level, investment is too low.
Part of the problem is that oil exporters need higher prices if they are to obtain adequate tax revenue to fund their programs. For example, Saudi Arabia has found that because of its falling tax revenue, it needs to borrow money to maintain its programs. This is a big change from being able to set aside money in a reserve fund, out of excess tax revenue. This is another place where the shift is toward more debt.
[4] The pattern the Federal Reserve seems to want to follow is the 1981 model, in which temporary high interest rates seemed to force energy prices down for a long time.
If we look at oil prices compared to US wages per capita (dividing total wages by total population), we find that oil “affordability” was at a low point in 1981. We saw previously in Figures 3 and 4 that interest rates were raised to a very high level at that time. The gray stripes in Figures 3 and 4 indicate that a recession followed.
Figure 6. Average barrels of crude oil affordable by US residents, calculated by dividing the average per capita wages (calculated by dividing BEA wages by population), by EIA’s average Brent oil price for each year.
Figure 6 shows that after interest rates fell, affordability rose until 1998. To a significant extent this was the result of falling prices, but it also was the result of a larger share of the population working, and thus contributing to rising wages.
There were many things that allowed this benevolent outcome to happen. One was the fact that we already knew about available oil in the North Sea, Mexico, and Alaska. When this oil came online, oil prices were able to drop back to a much more affordable level. It is very doubtful that shale oil could play a similar role today, especially if it is likely that higher interest rates will drop oil prices from today’s $50 per barrel level.
One thing that helped improve affordability in the post-1981 period was improved gasoline mileage. There were also cutbacks in oil use for home heating and for electricity generation.
Figure 7. Average on-road fuel efficiency by Sivak and Schoettle, “On-Road Fuel Economy of Vehicles in the United States: 1923-2015,” http://www.umich.edu/~umtriswt/
Figure 7 suggests that the earliest changes in fuel economy provided the biggest savings. In fact, overall savings after 1993 are quite modest.
One factor that helped reduce oil consumption both in the 1970s and in the 2008 to 2013 period was high prices. Now that oil prices are lower, we cannot expect as good a result. If oil prices drop back further, there is even less incentive to conserve.
[5] Adjustments made using Quantitative Easing (QE) (a way of producing low interest rates) appear to have had a rapid, significant impact on oil prices.
In late 2008, after oil prices had crashed, the US Federal Reserve implemented QE. Using QE created very low interest rates, which seem to have had an impact on world oil prices.
Figure 8. Monthly Brent oil prices with dates of US beginning and ending QE.
Clearly, lower interest rates encourage more borrowing, and discontinuing a program that gives very low rates would tend to have the opposite impact. Thus, we would expect the direction of the oil price changes to be similar to those shown on Figure 8.
One hypothesis regarding the rapid impact of QE was that it encouraged borrowing in US dollars, in order to purchase bonds in other currencies with higher interest rates (“carry trade”). When QE ended, the carry trade was cut off, reducing investment in countries with higher interest rates. Instead, there was more interest in investing in the US. These changes led to the US dollar rising relative to many other currencies. Since oil is priced in US dollars, these shifting relativities made oil more expensive in non-US dollar currencies. Thus, the affordability of oil declined for buyers outside the US. It was this decline in affordability outside the US that brought down oil prices. Figure 9 shows the shift in currency levels when the US discontinued QE in 2014.
Figure 9. US Dollar vs. Major Trade Weighted Currencies. Chart created by FRED (Federal Reserve Economic Data).
Increasing Federal Reserve target interest rates would seem to have the effect of further raising how high the US dollar floats compared to other currencies. If this happens, we would expect lower oil prices, and more problems with excessive supply.
[6] The way increased lending seems to move the economy along is by using time shifting to provide a “layer” of future goods and services that can be used as incentives for businesses to invest in making goods and services now.
The problem when making goods of any kind is that resources need to be purchased and workers need to be paid, before the finished product is available for sale.
Figure 10. Image created by author showing how goods and services are created. It also needs a “government services sector,” but it didn’t fit easily on the slide.
As a result, at the time goods and services are produced, there aren’t enough already-created goods and services to pay all of those who have contributed to the effort of making the goods and services. To work around this problem, debt or a product similar to debt is needed to pay some of those contributing to the process of creating future goods and services.
One way of thinking about the situation is that an increase in debt during a time period adds a layer of future goods and services that can be distributed to those contributing to the effort of making the goods and services (Figure 11). This significantly increases the amount of goods and services to be distributed above the level that would be available on a barter basis, based on goods that have already been produced.
Figure 11. Figure by author showing how the “increase in debt” effectively adds another layer of goods and services that can be distributed. (As with Figure 10, this chart should include a category for government services as well.)
[7] The spending ability of US citizens has been lagging behind, even with the huge amount of debt being added to the economy. If the Federal Reserve raises interest rates, it will tend to make the situation worse.
The biggest expenditure for most households is housing costs, either for an apartment or a new home. As with oil, we can compare affordability by comparing prices to per capita wages (total US wages/total population). On Figure 12, one amount shown is the median rent for unfurnished apartments in the US, based on US Census Bureau data; the other is The People History’s estimate of “new home” prices over the years. In general, affordability has been falling. Figure 12 shows that the fall in affordability of apartment rent is a relatively recent phenomenon. The fall in affordability of home prices is a long-term phenomenon, no doubt enabled by falling interest rates since 1981.
Figure 12. Comparison of new home prices from The People History and median non-subsidized rental asking prices based on US Census bureau data. These are divided by (total US wages/ US population) from the US BEA. The indexes are different for home and apartments, chosen so that two would show separately on the chart. If amounts shown are falling over time, housing is becoming less affordable.
Another product whose affordability is of interest is electricity. Electricity is an energy product whose affordability is important, because it is used in residential, commercial, and industrial locations. The affordability of electricity tends to be less volatile in pricing than oil, whose affordability was shown in Figure 6. Because the pricing of electricity is more stable, I have shown the affordability of electricity at three different spending levels:
- Per Capita Wages – Total US wages divided by total US population.
- Per Capita DPI – Total Disposable Personal Income (DPI) divided by total US population. Disposable Personal Income includes government transfer payments (such as Social Security and unemployment payments), in addition to wages. It also includes “proprietors’ income,”which is a relatively smaller amount.
- Per capita DPI+Debt – Total Disposable Personal Income, plus the increase in Household Debt during the year, divided by population.
Figure 13. Quantity of electricity that an average worker could afford to buy, using three different definitions of income. (Average wages are based on BEA total salaries and wages, divided by BEA total population, and Disposable Personal Income is defined similarly, using BEA data. DPI plus debt includes the change in Household Debt, from the Federal Reserve’s Z1 report, in addition to DPI in the numerator.)
Based on Figure 13, electricity was becoming more affordable until 2001 on a wages-only basis. Since then, its cost has been relatively flat.
On a DPI basis, electricity was considerably more affordable until 2004, after which it declined, and then rose again.
On a DPI + Debt basis, there was a much bigger jump in affordability. This big increase in debt corresponds to the housing bubble of the early to mid 2000s. Interest rates were lower and underwriting standards lessened, so that almost anyone could buy a home. This allowed a run-up in home prices. Homeowners could borrow this equity and use it for whatever purpose they chose–for example, fixing up their home, buying a new car, or going on a vacation. The big increase in DPI+Debt, relative to DPI, gives an indication of the extent to which the housing-related debt bubble in the early 2000s affected spendable income.
Which of these scenarios is really correct? It depends on the segment of the economy a person is looking at. For people of modest income, in other words, those who rent apartments, the wage-only scenario is probably the most representative. For people who have high incomes and own a home, the DPI plus Debt scenario is probably more representative.
[8] All income seems to ultimately derive in part from rising debt, and in part from energy consumption. If interest rates are too high, the required interest payment exceeds the benefit of time shifting.
We can see from Figure 13 that debt is very helpful in producing income for workers. Some of this comes from the government transfer payments, funded by debt. Some of this comes from the wages paid by businesses, funded in part by shares of stock, which are debt-like in nature. The currency with which workers are paid is, in fact, debt. A person can see the connection, by thinking of currency as being similar to “gift cards,” issued by a business. The business would need to record the value of these gift cards as a liability on its balance sheet.
The underlying problem giving rise to the need for debt is “complexity,” and the need to obtain the services of many trained people and of many types of tools, before goods and services can actually be created. All of this builds extra expense and delays into the system, in the manner described in Figures 10 and 11. Somehow, there must be interest payments to compensate for the time shifting that is necessary: the whole string of events that must lead up to producing the products that are needed. Tools must be made far in advance of when they are needed. In fact, there is a whole string of “tools to make tools” that takes place. Factory buildings need to be built, and roads need to be built. Workers must be trained. In order for the people and businesses involved in these processes to be compensated for their effort, and induced to delay their own consumption of goods and services, there need to be interest payments made for the time-delay involved.
Debt (together with shares of stock, which are debt-like) cannot operate the economy alone. Energy products are also needed to provide the physical transformations required. These include heat and transportation, and electricity to operate devices that use electricity. Of course, human workers are needed as well. The major pieces of the system, and the way they operate together, are shown in Figures 10 and 11.
It would appear that an economy can start “from scratch,” using only debt, plus available resources (including energy resources, such as biomass for burning), and some sort of government (perhaps a self-declared king). If the king sees a productive project that might be undertaken–perhaps building a bridge, or cutting down more trees for farmland–the king can impose a tax on the citizens, and use the tax to hire a group of laborers to use the available resources. Once the tax is imposed, it is a debt of the citizens. It can be used to pay the laborers who do the work.
The debt-based system seems to build upon itself. As more wages are available, these wages allow workers to take out loans, and allow businesses to create new goods and services that can be purchased using these loans. These loans are promises that can be exchanged for future goods and services. Since energy is used in creating all goods and services, these loans are more or less guarantees that the economy, and its use of energy products, will continue in the future.
The thing that connects debt to the rest of the system is the interest payments required for time shifting. When the system is relatively efficient, the return on investment is high, so interest payments can be high. As diminishing returns set in, interest rates need to be lower. We are now encountering diminishing returns in many areas: extracting fossil fuels, extracting minerals, producing enough fresh water for a rising population, creating an adequate supply of food from a fixed amount of arable land, creating new antibiotics as bacteria become drug resistant, and the cost of finding new drugs to treat diseases that affect an ever-smaller share of the population.
[9] It is relatively easy to make economic growth occur when energy products are becoming more affordable, relative to spendable income. When energy products are becoming less affordable, it becomes virtually impossible for economic growth to occur.
We know that historically, the cost of energy products has tended to fall over time. This has been described in more than one academic paper.
Figure 14. Figure by Carey King from “Comparing World Economic and Net Energy Metrics Part 3: Macroeconomic Historical and Future Perspectives,” published in Energies in Nov. 2015.
A United Nation’s report also shows the same pattern (the bottom two categories are energy related):
Figure 15. Figure from UNEP Global Material Flows and Resource Productivity.
The only way that energy costs can fall relative to GDP, at the same time that energy use is rising, is if energy products are becoming less expensive over time, compared to the incomes of the citizens. This falling price level allows more energy products to be purchased. As energy prices drop, it is possible for the economy to afford the increasing quantity of energy products required to produce even more goods and services.
There are many ways that energy products can become less expensive. For example, the mix can shift among different energy products, shifting to the less expensive products. Or new techniques can be found that make extraction less expensive. Finding more efficient ways to make use of energy products, such as the increasing miles per gallon shown in Figure 7, also contributes to the falling relative cost to workers. Of course, “falling EROEI” tends to work in the opposite direction.
Unfortunately, we are now running out of ways to truly make energy use cheaper over time. The ways we seem to be down to now are (a) paying energy companies less than their cost of extraction, and (b) reducing interest rates to practically zero.
We can see from Figure 6 that oil was becoming more affordable relative to wages between 1981 and 1998. Falling interest rates and rising debt seemed to play a role in this, as well as success in drilling for oil in places such as the North Sea, Mexico and Alaska. Since then, the only way that oil affordability could rise was by oil prices falling below the cost of extraction, starting in mid 2014.
The situation for electricity is shown in Figure 13. Electricity was becoming more affordable on a “wages-only” basis, until 2000. Since then it has plateaued. The economic push that would have come from falling electricity prices must come from elsewhere–presumably from adding more debt.
Affordability of electricity on a “DPI plus debt” basis rose considerably more, with a peak in 2004. Thus, adding more debt, in the form of transfer payments and rising debt for homes and vehicles, added considerable spendable income. But it has not been possible to regain the affordability of the 2004 period in recent years.
We are now reaching limits because we no longer are truly seeing a reduction in energy costs. Instead, we are seeing very low interest rates and oil prices lower than the cost of production. These seem to be signs that we now are reaching limits. Energy prices really need to drop for the economy to grow; the economy will make them drop, whether or not producers can profitably extract oil at the low cost that is affordable by the citizens.
[10] China seems to be cutting back on growth in debt now, at the same time the US is talking about increasing interest rates. Energy products, especially oil, are sold to a world market. If China cuts back on debt at the same time as the US raises interest rates, energy prices could drop dramatically.
Figure 16. UBS Total Credit Impulse. The Credit Impulse is the “Change in the Change” in debt formation.
UBS calculates a global “credit impulse,” showing the extent to which there is a trend toward increasing use of debt. According to their calculations, since 2014, it is China that has been keeping the Global Credit Impulse up. If China is cutting back, and the US is cutting back as well, the situation starts looking like the 2008-2009 period, except starting from greater problems with diminishing returns.
Observations and Conclusions
The economy looks to me like a type of Ponzi Scheme. It depends on both rising energy consumption and rising debt. Judging from the problems we are having now, it seems to be reaching its limit in the near term. Raising interest rates will tend to push it even further toward its limit, or over the limit.
Debt is used to pay participants in the economy using a promise for future goods and services. This allows the economy to appear to distribute more goods and services than are actually available. In a way, adding debt is like being able to manufacture future energy supplies that can be used to pay those who participate in making the goods and services we produce today. When energy products are high-cost to produce, and delayed in timing (such as wind and solar PV), the need for debt especially rises.
Part of our problem today is the extent of specialization of those analyzing our current problems with energy and the economy. This means that virtually no one understands the full problem. Bankers seem to think that debt, and interest rates on debt, can solve all problems. Energy analysts think that energy resources in the ground are all-important. They both create incorrect analyses of the overall problem. Rising debt is needed, if energy products that have been created are to be absorbed by the world economy. The energy gluts we are seeing are signs of inadequate wage growth. A major function of growing debt is to add wages. Unwinding debt leads to the kinds of problems that we encountered in 2008.
It is tempting for world financial leaders to think that they can find a solution to today’s problems by using higher target interest rates to slightly scale back economic growth. I don’t think that this is really a good option. The world economy is operating at too close to “stall speed.” The financial system is too fragile. If any solution can be expected to work, it would seem to need to be in the direction of re-starting QE. Even if it produces asset bubbles, it may keep the world economy operating for a bit longer.
I’ll summarise this as best I can. A comfortable chair and some whiskey or equivalent may be advisable. Sitting comforably?
For all practicable purposes in today’s economies, government deficits create the profits of the private sector.
Now, think about the implications.
Let’s see here — more profits?
“For all practicable purposes in today’s economies, government deficits create the profits of the private sector.” Right.
Mac10 summarizes:
Debt Is “GDP”
The only reason that the U.S. can fake reflation and monetary tightening right now is because the rest of the world is doing the opposite. The world’s capital flows to the U.S., financing the 1% GDP growth that is 2.9% borrowed money. A sleight of hand projecting the delusion of reflation for a stoned Idiocracy desperate to believe anything other than the truth. Leave aside that the economic fundamentals deteriorate continuously in the background as the economy can’t sustain higher borrowing costs eight years into a debt binge. Inbound liquidity is hiding insolvency. Bernie Madoff is wondering why he’s the one in jail.
http://ponziworld.blogspot.co.uk/2017/03/aging-empires-papers-tigers-and.html
Note: Deficit is the derivative of Debt. As Flow is the derivative of Volume.
Nice statement of the obvious. Anything new to add? What brand of whiskey?
Economic ‘growth’ and Rate-of-Growth are not really the same thing – they do look similar, but are not. In physics speak, velocity (speed) is NOT the same as acceleration. The first is distance/time whereas the second is distance/time/time. Economic growth is the latter – more stuff/time/time. Much more tricky to get your head around accelerations – they are complex functions. Economic Rate-of-Growth is actually a compounding exponential function (analogous to compounding interest) which describes (in mathematical form) the behaviour of our physics-based, dissipative, developed economies – and some very bad things can occur in physical systems with that characteristic. Look at Fig. 14. Is it possible that the two plots actually show inverse exponentials (in disguise)? What occurred (in Northwestern Europe) between 1450 and 1600? Why is there a possible maximum near 1800? And we know what happened after 1860.
Maybe its time to re-read Albert Bartlett. His analysis of the affects of an annual, percentage compounding increase in our use of fossil energy resources suggests that between 1998 and 2021 global consumption of fossil energy resources should exceed the total of all those resources consumed from 1860 – 1998 (caveat: need to be careful about Nat Gas use). Is that 1998 – 2021 level of consumption of fossil resources even possible? Could we actually extract that much – again? Hmmmm.
Once you get well into the upward curve of exponential growth then, it becomes impossible to keep up the physical extraction of resources to keep the system running. It just amazes me how intelligent people don’t understand what is happening and why things have stagnated. There is no way we can do another doubling of energy consumption. And there is certainly no way we can do it in a shorter period of time. The first few doublings weren’t so bad. Now we are getting into some nasty doubling of energy requirements to continue growing the (now) global economy. It just isn’t going to happen. When you look at new discoveries it becomes glaringly obvious.
“The greatest shortcoming of the human race is our inability to understand the exponential function.” -Albert Bartlett
https://sites.google.com/a/underwoodschools.org/mr-bachman-s-website/_/rsrc/1299530547067/classroom-content/graded-work/chapter-8-exponential-and-logarithmic-functions/8-1-exponential-growth/World%20Population%20Growth.gif
RE: Train Graphic – You can make it if you cut off the load your dragging up the cliff.
2017 looking more and more likely for GFC 2.0:
“Towards the end of QE3, the money-creating burden was once again handed to the banks.
“Banks reacted positively and lending growth expanded quickly.
“But in recent weeks, bank lending has actually contracted pulling the money supply growth rate into negative territory.
“Typically, these developments signal not only a looming GDP recession, but also increased probability of an economic crisis and a stock market crash.
“Following years of artificial growth, the U.S. economy now therefore appears to be at a major inflection point…
“The faster the money supply growth rate falls following a period of expansion, the quicker an economic reaction is triggered. Outright contraction in bank lending is therefore a major warning sign that a reaction of some sort (referred to as a “shock” in some circles) might be approaching…
“The chart shows that lending on this basis has now contracted for four consecutive weeks. To put this in context, the last time this happened, ignoring the aftermath of the previous banking crisis, was in the run-up to the Lehman collapse in September 2008. In fact, it is highly unusual that lending ever contracts on a 13-week basis.
“But when it does, it tends to precede or occur during an economic crisis of some sort…”
http://seekingalpha.com/article/4054678-inflection-point-u-s-economy-recession-trigger-now-put-motion
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But Dr Roger Dargaville, of the Melbourne Energy Institute at the University of Melbourne, told news.com.au he believed the pledge would ultimately be too expensive to deliver.
He said Mr Cannon-Brookes could struggle to finance the project because it would probably make a loss in today’s market.
According to the institute’s calculations, the price for batteries needs to come down to less than $250 kilowatt hour before it can be profitable.
During his Twitter exchange, Mr Musk quoted a price of $US250kWh for a 100 megawatt hour system.
But this converts to $331kWh in Australian dollars, and the price doesn’t include installation costs.
Dr Dargaville said there was also confusion about whether Mr Musk meant to quote for a 100 “megawatt” system, or for a 100 “megawatt hour” system. It’s also unclear how many hours of storage the system would provide, either two hours or four hours.
Mr Cannon-Brookes asked for a quote for a “100MW” system, but Mr Musk responded by giving a price for “100MWh” system.
The difference could be significant.
“If you want to build a system with four hours storage and 100 megawatt capacity, it would be a 400 megawatt hour system, and that would cost four times as much as a 100MW system,” Dr Dargaville said.
“I know energy professionals that get this confused, it’s a real issue in understanding what people are talking about.
“It’s a bit confused at the moment, and more details need to come out before we can properly assess what’s on offer.”
http://www.news.com.au/technology/innovation/confusion-over-elon-musks-battery-offer-for-south-australia/news-story/8f06c79ecc676cb82336ee8f77e91f8b
Musk is a clown…. not sure why anyone takes anything he says seriously….
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This about sums up our predicament!
https://youtu.be/_NpdLwHMeQ0
http://4.bp.blogspot.com/-XsR1-LcLPNQ/Tmt4onNA_xI/AAAAAAAAA4I/IWKQ1vIt7gA/s1600/442230-Cartoon-Black-And-White-Outline-Design-Of-A-Man-Stuck-Between-A-Rock-And-A-Hard-Place-Poster-Art-Print.jpg
LOL!
WHATEVER IT TAKES – means – WHATEVER IT TAKES
Back in August 2014, we reported that in what appeared a suspicious attempt to boost the pool of eligible, credit-worthy mortgage recipients, Fair Isaac, the company behind the crucial FICO score that determines every consumer’s credit rating, “will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.” In doing so, the company would “make it easier for tens of millions of Americans to get loans.” Stated simply, the definition of the all important FICO score, the most important number at the base of every mortgage application, was set for an “adjustment” which would push it higher for millions of Americans.
As the WSJ said at the time, the changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. “It expands banks’ ability to make loans for people who might not have qualified and to offer a lower price [for others],” said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association, a trade group.” Perhaps the thinking went that if you a borrower has defaulted once, they had learned your lesson and will never do it again. Unfortunately, empirical studies have shown that that is not the case.
Now, nearly three years later, in the latest push to artificially boost FICO scores, the WSJ reports that “many tax liens and civil judgments soon will be removed from people’s credit reports, the latest in a series of moves to omit negative information from these financial scorecards. The development could help boost credit scores for millions of consumers, but could pose risks for lenders” as FICO scores remain the only widely accepted method of quantifying any individual American’s credit risk, and determine how much consumers can borrow for a new house or car as well as determine their credit-card spending limit
http://www.zerohedge.com/news/2017-03-13/12-million-americans-are-about-get-artificial-boost-their-fico-scores
We need people to continue to run up debt and buy more stuff – otherwise we collapse….
Where does this end? Just keep dropping FICO standards until a crack addict qualifies for a home loan?
We plunge deeper into absurdity every day…..
Yes, I agree, this is definitely one of those moments when you can see the Emperor’s slip is showing. Perhaps he has no clothes at all…
You asked. Why be dismissive when I send you a peer reviewed paper?
Just because it’s peer reviewed does not mean it is sensible.
Particularly if the peers reviewing you are also crazy….
http://www.auditionsfree.com/content/user/2014/10/insane-asylum-extras.jpg
Well that’s goes without saying. 🙂
And if the research is paid for then, you will get the results you paid for.
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The pressure is building….
http://wolfstreet.com/wp-content/uploads/2017/03/US-Treasury-yield-2-year-2017-03-13.png
http://wolfstreet.com/2017/03/13/bond-carnage-rising-mortgage-rates-hit-housing-bubble-2/
Remember what happened the last time this happened….
http://www.marketoracle.co.uk/images/2014/Feb/emerging-markets-crisis_image002.png
I agree with this.
There is no reason to raise interest rate. America can dump its debt to the rest of the world, and the rest of the world will have to suffer accepting deflated dollars.
Raising the rate is only going to make businesses worse.
I personally think the big companies and big landowners can be bailed out for unlimited times, but that will sink a lot of now-viable businesses which might make the difference in the future.
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If you take a look at the converging trends, they all point to system end somewhere in mid 2020s to late 2030s timeframe, give or take.
-Generational trends (final retirement and end of post ww2 1945-1970 generation)
-Resource trends (declining eroei to point of abandonment of infrastructure and cost overrun projects)
-Political, financial, cultural trends (just how many more bubbles and useless stuff can we have in our lives?)
I base my analysis on both facts and deep thought. It is clear we are at the point of exhaustion, but like a person hanging on to life, we will do everything it takes to make it one more year, one more decade, etc.
What joy and bliss another decade would be!
So you are coming around the conclusion that when the end comes — it will be rapid?
Maybe, maybe not.
Remember that 3-4 billion people can die and the industrial system can still continue.
right now—
1 bn people live in the affluence created by industrial infrastructure and development,
while the remaining 6.5 bn live in their effluence as part of the support structure.
remove that support structure and all of us will be living in effluence
I heard an interesting figure yesterday. In 1895 the average person in the western world lived on one dollar a day in todays dollars.
you are probably right
back in 1895 there was very little ‘stuff’ available for general mass purchase, so the prime occupations were work sleep and eating for most people.
that meant basic subsistence living pretty much everywhere
And basic subsistence living was just about the only thing that is/was sustainable in the long term. As soon as we moved past that stage we were essentially doomed to be facing the wall that we are now facing. It was good while it lasted.
Nope, Fast Eddy don’t give up hope! After you end of the world shipping container Party, there is a bright future for you in a new business venture. Here is your business plan already set up for you! No, please do not thank me, after all you inspire us all to make the most of a had situation.
https://m.youtube.com/watch?v=uNVXZBvFOQU
Another IPO story for sure. I want to become famous and known ” Simple as the Old Man” and well in his 70’s. I knew today would be a good day as I gazed upon my domain, the cat woke up his human servant and the day begins.
Good post!
For clarification just the old part not the ‘Land Lord’ part, did not pay attention to the very end. Powerless to edit my hasty reply…
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“Do you get sick? He looked at me indignantly.”
I just had to respond to that comment.
If the gods protect you then why are you drinking sh/t water?
Pretty clear refutation of the hindy gods.
Do you want your burger with sh/t sauce because “god” loves you?
It sounds like lunacy to me.
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I think the Fed talks a lot to manipulate people into thinking they are in control, and in so doing suggest they will increase interest rates a lot this year, but if past performance is any indication it’s highly unlikely they will increase interest rates anymore than 1/4 of 1% in 2017. So it may have a minor effect but not all that dramatic.
That being said, we are in a time period in which anything that increases the value of the dollar will cause a drop in the price of oil (which I think you mentioned in this latest post, Gail). The oil price is at a price now at a stall speed for the oil industry, needing more to incentivize exploration. More and more it looks like we are simply using what we already found and squeezing a bit more out of non-conventional. The world economy moves forward on debt shoved out into the future, so it really is a time period of playing a chess game of making slight alterations to the system parameters like interest rate, etc., but nothing too big is going to be done to upset the apple cart, while we experience some more time enjoying BAU.
I think what we are increasingly seeing is higher levels of impatience between countries due to all of the economic pressures building and the consequence of that when it’s obvious BAU cannot be held up any longer is war. War is an inevitable outcome of untenable economic predicaments and in a sense in this case will act as a bottle neck enforcement to reset with lower numbers of people to better match available affordable resources.
Except that nobody can afford a war right now. Wars require money, resources, national unity…all in short supply these days.
the precarious nature of banks seems to fit this financial pattern
https://global.handelsblatt.com/finance/german-public-banks-president-sees-massive-reduction-banking-sector-724333#.WMW3CWkBpS1.twitter
I’m not so sure we can reduce banks by 30%, reduce lending and leaving people and companies without additional debt, without everything going Ka-Boom!
What he nonchalantly described there, is just the end of industrial civilisation, thats all. When that starts, everything ends.
without the constant increase in debt flow—banks cease to have a function
or at least thats the way i see it
modern style banking only kicked off as part of the industrial revolution, and that required permanent debt
Yup, but we need the debt to be growing exponentially, annually. Not to be reduced by -30%.
That there is like saying, I’ll double your debt, but halve your salary, just deal with it..
Just wondering if we’ll see IMF SDR:s in any form, and a Bitcoin international reserve currency for international trade.. before that.. starts/ends
What about a globalized barter economy? We trade barrels of oil for bauxite in Africa. Wheat for spare parts from China. We could trade Fiji coal for pineapples! Locally, I’ll give you a cord of firewood for some dentistry. They guy who keeps the electric plant running, gets to eat for free on Tuesdays. There will be all sorts of things to trade, for awhile…
Local barter is always on the menu. I’ll fill up all your lighters for some fresh fruit you got there.
But man.. would international barter be slow.. first contact the raw material guys, if they can get it to china, and try to figure out what they want for it. Then the chinese spare manufacturer. Then the wheat guys. Then the shipment guys. Then the trucking guys. And check out what all of them want, for them to do that one job, and how to actually get that barter item to those guys. Talk about complexity..
I’d probably just outfit a pirate ship and go get what I need. Would be a lot easier. And then I’d stop by Eddy’s harem and take ’em along also. ARRR..
Believe you me… if Madame Fast was not prone to the sickness of the sea…. that is exactly what I would do …
Instead of the shack on the beach I could have picked up a really nice pirate ship — paint it black — skulls and cross bone logos —- nail a pike to the stern and bow for displaying severed heads to warn away any villains…
Load that sucker up with provisions — fishing nets – rods — guns – ammo — a floating godamn battle ship that would be —- bring it on villains … bring it on!!!!
Alas… I will be confined to the container… with deep regrets….
https://briansandberg.files.wordpress.com/2013/10/ac4-pirates.jpg
i don’t think your comment was meant to be taken seriously
but in case anybody did—we have the problem of shifting stuff around
Further on the WS analysis……
The markets are coming to grips with a new-new normal, which replaced the old-new normal: a Fed worried about inflation and “over-extended” asset prices, with some segments, such as commercial real estate, being now officially mentioned as big potential risks to lenders. But the markets aren’t coming to grips with this nearly fast enough.
Steve Barrow, currency and fixed-income strategist at Standard Bank, in a note to clients, cited by MarketWatch, put it this way:
Indeed, it is interesting that, at a time when many fear the Fed is falling behind the curve given full employment, near-target inflation, and the likely easing of fiscal policy, the market is even further behind.
This is clearly a dangerous situation because it suggests that if the Fed has to scramble to push rates up, as the – likely – March hike suggests, the market needs to adjust much faster still.
This “adjustment” means that government debt would fall further, and yields would continue to rise.
There are consequence in the real economy, among them: Mortgage rates follow yields of mortgage-backed securities – of which the Fed bought $1.76 trillion to repress mortgage rates to artificially low levels. MBS yields follow Treasury yields with longer maturities. See above “bond massacre.”
And mortgage rates have risen every trading day but one since February 27! Today, the 30-year fixed rate, according to Mortgage News Daily, “is easily up to 4.375% on top tier scenarios with a growing number of lenders moving up to 4.5%.”
That’s the highest rate since April 2014. And it’s up over a full percentage point from the 3.34% low quoted last July.
For the median home price in the US, at $228,900, a full percentage point increase to 4.4% would raise mortgage payments by $1,560 a year. For a condo near the median price in San Francisco, it would raise mortgage payments by $8,256 a year.
http://wolfstreet.com/2017/03/13/bond-carnage-rising-mortgage-rates-hit-housing-bubble-2/
I like your conclusion that excessive specialization is a major cause of our being unable to understand and mitigate current circumstances. All of the incentives still encourage hyper specialization by individuals. I guess the theory is that sufficiently diverse teams can collectively solve complex, multidisciplinary problems. Well, I think the verdict is in and this model does not work. Everyone just assumes that some other specialist is looking after the demons, the vultures, and the barbarians gathering at the gate. When everything was growing and resources were plentiful it was a plausible model. In today’s world with no growth or even contraction, hyper specialists will discover that they have nothing to contribute.
There is also a mega dose of normalcy bias at play here. Nothing has ever gone wrong, so nothing ever will go wrong. What could possibly be wrong? Things will get better. They always do. THEY will think of something.
Good point InAlaska. It is easy to fall into that trap.
All we have to do is is flog white men for their sins and the Prosperity Gods will bless our blossoming renewable energy, knowledge , and, sharing economies.*
For those who faithfully follow the creeds of Disruption and Critical Theory, they will be be given immortality. Their consciousness uploaded into the cloud where they will reign forever and ever.
/sarc
*There are non-liberal versions of this where a society is socially simplified via exodus or genocide, Terrorism, homogeneous groups threatening to form their own nation fall into this line of thinking..
In a finite world, there is NO such thing as increasing opportunities for everyone. One group gains, another loses.
Replying to DJ a couple of days ago.
“How could we survive in space?”
The ISS guys seem to be doing ok.
“https://en.m.wikipedia.org/wiki/Biosphere_2”
Don’t make living areas out of concrete.
“How long before health breaks down without gravity?”
The assumption is that we spin the habitat to provide g like on earth.
“How long before going insane on a small space ship?”
Not a ship. Construction site needs at least a couple of hundred people. Current thought is a 50 m sphere spinning at 6 rpm to give one g at the equator. The internal volume is about 330 cubic meters per person.
http://i2.wp.com/4dgamers.com/wp-content/uploads/2017/02/Flatout-4-logo-fader.jpg
You thought so also?
Techno Narcissism.
Gosh people are struggling to survive here on Earth and folks think we can handle surviving on Mars?
They are watching to many movies about Mars… And eating to many Mars!!
We’re saved, who needs to go into space?
http://www.abc.net.au/news/2017-03-14/seasteading:-the-plan-to-build-floating-cities-a-innovation-hubs/8349642
So, what can I say. We were not meant to live in space. A very small percentage of the population might be able to survive in space but, so what?
What would this small % of people eat – drink – breathe?
https://drive.google.com/file/d/0B5iotdmmTJQsVkUzbENlZFVaU3NpZGhpcTliQTA3R1JmcDlB/view?usp=sharing
Keith – there is something profoundly wrong with you —- you need to seek help.
Keith, not to worry, The Borg are coming. We are saved!
Shirley you can’t be serious!
Keith — please tell us that when you post this stuff you sit back and have a real deep belly laugh and say to the Missus ‘look at all those FWers…. they actually believe I believe this madness!!! — what great fun this is’
Because if you are not — then you are the resident Mad Man of FW….. this is epic madness — and we have a front row seat.
I’ve seen mad men on street corners many times — people shouting about being the second coming and that sort of thing…
But I have never actually engaged one of them (although I have thought about asking them for their autographs…. in the event they really are Jesus 2 that could be worth a few bucks on Ebay)
You would be the first — fascinating stuff!
Greg…I am serious, and don’t call me Shirley….
Awesome! You took the bait! We got to get these people to a hospital!
Always room for humor, even at the end!
So a few(?) has spent a year(?) in space. What does that prove regarding long term health in space?
Because of the hard selection criteria you can’t even perform a good study of health effects. And what is a month, a year? We’re talking about being conceived, born and living the whole life in the same space ship.
Which is the successful non-concrete “biosphere”? I am really surprised biosphere failed despite cheating.
Marty peer reviewed the paper and signed off…
https://s-media-cache-ak0.pinimg.com/736x/37/a1/6f/37a16fce654734eeb3ee74463136a95c.jpg
Rolling on the floor laughing my ass off!
“What does that prove regarding long term health in space?”
You want to spin the habitat to provide normal gravity. That’s cheap, the shielding is not.
“surprised biosphere failed”
We learned something important, so in that sense it didn’t fail. If you have enough dirt inside your habitat, it will eliminate the need for burners to keep metabolic gunk out of the air. (The bacteria eat it up.)
Of course, a lot of people who work in this area think we can build power satellites using robots and teleoperator systems. Proposing people do the work in space is a minority view.
And then we have Keith…..
Keith is like the crazy uncle you keep locked up in the attic when you have guests….
Very different from Glenn who should always be locked up in the attic.
HA! That would apply to me too if I were to discuss the topics of OFW with my friends.
I think this is an important piece about debt fueled growth. In this case China’s debt to underlying gdp ratio to reach 500% by 2020.
https://surplusenergyeconomics.wordpress.com/2017/03/11/89-chinese-whispers/
The small blip in 2008/9 almost caused a complete seisure in the financial system. Tapering isn’t really tapering, its just pausing. And of course, tapering will have its own portion of diminishing returns.
Glenn
‘Right. OFW is all-knowing and all-seeing, and everybody else is stupid and ignorant. Believe it or not, that’s one of the hallmarks of a cult.’
You’ve got it pretty much right — I cannot speak for the entire Core — but I firmly believe that most people are stupid and/or ignorant — I firmly believe that they live within a matrix and the the MSM is the main tool that creates the matrix. The term cattle or ‘goy’ is most appropriate in describing them
I can say that with confidence that I am right — because I used to be part of the herd.
Where I disagree is that I am not a member of a cult
cult
noun
1. a system of religious veneration and devotion directed towards a particular figure or object.
“the cult of St Olaf”
2. a person or thing that is popular or fashionable among a particular group or section of society.
Rather I am a member of a very exclusive club — the requirements are an open mind — a willingness to question everything – curiousity. Anyone can join — very few do.
https://4.bp.blogspot.com/-MoyyIPgO5SU/VbMGXOM6dMI/AAAAAAAAAg8/kE9fTYG8Kb4/s1600/creationism+funny.jpg
Nailed it FE!!! And I think it does echo many of us in the Core 🙂
Glenn just hides behind words. Cult, naturalism, determinism.
I’m uncertain what Glenn gains out of commenting on OFW if he truly believes words can bring warmth, energy, resources, fire, food and just about anything else. Everything, just by changing the words that are used to describe the situation.
If resource constrains are not real for Glenn, then he represents the antithesis of OFW. If I was a paid troll, that’d probably be the strategy I’d take..
Glenn is essential
Think of comments like a storm at sea—the truth crests in crashing waves, the denials lie in deep troughs
If we had a flat calm without either, we would be permanently becalmed in the doldrums
Freedom of speech.
Freedom of belief.
Freedom from Glenn ?? Nah, your right, as usual Norm.
Glenn is a benchmark — for delusional thinking – ignorance – and likely profound stupidity (apologies in advance for that in the event that you were beaten about the head as a child resulting in this inability to reason)
And this serves the purpose to remind us that as low as he is —- most people are even worse…they are barely functioning beyond the level of a dead tree stump….
And how totally awesome we are…
https://sd.keepcalm-o-matic.co.uk/i/keep-calm-because-we-are-awesome-3.png
If Glenn is paid for his trolling — I think he needs to be fired — he is not even remotely convincing…. he has failed absolutely
No, not a cult. Instead, I belong to a hive mind and am currently communicating with the Borg. Don’t worry, they are coming, are almost here in fact. Just passing the rings of Saturn. We will be assimilated and our technology absorbed. Resistance is futile.
“Rather I am a member of a very exclusive club — the requirements are an open mind — a willingness to question everything – curiousity. Anyone can join — very few do.”
Very true. Maybe my flunking out of college wasn’t such a bad thing, after all. All they seem to do is brainwash people. Like economists who think the price of oil can rise forever. The Catholic Church tried to brainwash me, I guess they didn’t try hard enough. I wouldn’t mind really. Ignorance is bliss!
the requirements are an open mind — a willingness to question everything – curiousity – and the ability accept the truth when it is obvious.
Yes – definitely. Even further – welcoming facts and logic that conflict with one’s previous positions — changing those positions — and taking great satisfaction from having learned.
A Real Black Person
‘What is going with shale oil is no different than the ghost cities in China. Things are being produced for customers that don’t exist. This mismatch between demand and supply is a symptom of an economy that is driven by monetary policy instead of sound economics.’
+++++++++++++++++++++++++++
Hello!
“Raising Interest Rates Can’t End Well!”
This is the main objective of the Secular Ruling Families.
How much did their WEALTH grow since the last (2007/8) intervention?
When you run the planet … when you control the money machine …. I do not think that increasing your wealth factors into the decision-making process.
The process is driven primarily by ‘how do we keep our golden goose alive — because if it dies — we lose our power — and our lives’
Increasing Wealth in the MONETARY SYSTEM (with the current rules) is the same as increasing CONTROL!
And an increase of, at least, $57 Trillion is in fact another warranty that the “golden goose” is alive and under control!
Debt is the Wealth of the Secular Ruling Families.
And they are Wealthy as F$€£YB
vozaodb,
Well, Jeez! Like Fast Eddy said, how much do they need? If they control everything anyway, whats the point? I agree that those in charge are just trying to extend and pretend as long as is possible. When it ends their goose is cooked just as much as ours is.
The brain of the human animal is highly conditioned. They all always want more growth, no matter what the subject!
When the system pops, they don’t lose any control. In the last centuries many pops occurred and the secular ruling Families are the same!
This time is different my friend….
Why?
because in previous eras there were fresh energy resources to tap into
now that’s all used up–no matter how rich you are, there’s just nowhere to go.
That is not a reason for the loss of power of the SRF!
as i see it, it means exactly that
unless I’m missing something
Voza — do you think you can handle the truth?
Do you want to open the box and see what is inside?
You will not like it….
Everyone dies.
The power of the SRF is not directly dependent on the availability of energy resources.
Of course it’s not. Their power is inherited. There power is immutable. Even when there is no more oil – no more coal – no electricity — and we are scratching in the ground with sticks …. the great families will remain great.
This time is not different. Same as it ever was… same as it ever was….
I suggest you read through all the archived articles — and if you have time skim the comments — you need to get up to speed
The CBs obviously understand that increasing interest rates impacts growth negatively.
The CBs can see that GDP is falling – particularly in the US
http://wolfstreet.com/wp-content/uploads/2017/03/US-GDPnow-q1-2017-03-08.png
The CBs are aware of this https://www.theguardian.com/news/datablog/2015/feb/05/global-debt-has-grown-by-57-trillion-in-seven-years-following-the-financial-crisis
The CBs saw what happened in 2008 after interest rates were increased.
So why are interest rates on the rise when the outcome is obvious?
Do the CBs have no choice — if the rates remain too low does that trigger a collapse of the financial system? Are they playing a Goldilocks game — as they are with oil prices?
Or are they planning a ‘controlled demolition’ for the purposes of rolling out the next phase of trying to hold this together?
The 2008 ‘crisis’ looks like a controlled demolition — I suspect Lehman was allowed to die so they could say ‘see — you need give us a free hand to do whatever it takes’
Just 911 was a controlled demolition — a means to various ends.
I am leaning towards the former…. they seems to be trapped in a corner….
Very good questions. My guess is that the CB’s top priority is the preservation of their own business, which is the creation of money. They do not want the confidence in and value of their product to fall too much. Everyone’s top priority is the preservation of their own means of making a living.
Wow. 200 trillion in debt! That’s means there are a whole lot of assets out there that will soon become worthless. It’s alright though. We’re all getting wealthier!
http://www.seattletimes.com/business/stock-markets-surge-lifts-us-household-wealth-to-928-trillion/
Hopefully we really are living in a computer simulation — and when this all unravels we will all meet again and have a good chuckle over all of this
you mean after we’ve unplugged ourselves, waited ten seconds, then restarted?
Or we just insert new batteries… something like that….
Fast Eddy, you had me until the last three paragraphs. Our masters are just not that clever.
You don’t get to run the world without being fairly clever….
Naw, you don’t need to be clever. You just need to know the right people…or be related to them for generations!
Someone up-thread suggested a ‘starter home’ would provide very little return. I disagree, but with a caveat. In addition to Location Location Location…., you should add debt debt debt to the ROI equation. I have always made quite modest wages. However, I did buy a house in my twenties and paid it off, asap. I bought a crappy house, and fixed it up instead of trading up. I did this again in my thirties when I had to move for a job. We drove crappy cars, with no payment. Far from being a poor investment, owning a home free and clear is like getting a $2,000/month pay raise.
I am 61 and have been retired for 4 years. I just spent the morning working in my shop building furniture. My wife and I were able to retire due to having no debt. As a workingman, this was only possible due to living ‘below our means’ as compared to my cohorts. Fishing instead of golf, camping instead of Hawaii, cooking at home instead of dining out (and that includes over-price coffee). Is it realistic for a working person to be able to afford a tropical vacation or a jaunt to Europe? I think not. We have always lived and been well fed. My children have been well cared for and are now doing well in their own careers. My son is a contractor and my daughter teaches school. They also watch their debt and seldom use credit or credit cards.
If I were having to start over again I would still buy a house, or some property with a shack or a mobile on it. It sue wouldn’t have granite counter tops, though. Or a great room, or 3 bathrooms…. you get the idea. Best of luck people as this winds down, or continues to do so.
question: when it hits, with the Donald take the blame? It should be quite interesting.
Should Donald take the blame?
Paulo
I used to think that way until I a business associate showed me the benefit of irresponsibility. He got wrapped up in the subprime housing bubble of 2005. He owned two houses all bought on credit no money down. As the equity increased he took second mortgages until he had net debt of 1.2 million as the bubble burst. He short sold the second house for a $300,000 loss (bank loss) but got stuck with the first house because of the second mortgage. However this saved his bacon because he lived there paying no mortgage for three years. In the end the bank holding the second mortgage out of the blue writes off the whole $250,000.00 loan. He then put the house on the market which had improved and walked away with $160,000.00 from the sale. He still isn’t in a trailer and he’s not particularly skilled at anything. As a matter of fact he likely fits into the lower intellectual boundaries in that he doesn’t know what he doesn’t know. And this experience has taught him nothing he’ll do it again. And why not? Who’s the greater fool the one living in a container when BAU ends or the one living at the Ritz? The self driving car analogy is a good one. We have all been conditioned to believe hard work and prudence combined with frugality brings prosperity. Just not true. That thinking drives productivity but prosperity comes from the control of the money supply. And I might add only for as long as money can be exchanged for energy.
Although it would be satisfying for Donald to take the blame, its sure not his fault and we’re all in this one together. Guilty as charged. We were all born into this system, participated in it, and now we all get to hang together. Donald can perhaps be blamed for not dragging BAU out for the maximum possible. We/He should be doing everything possible to extend and pretend. That would be nice.
Thanks for the new post!
I think the world needs a “benevolent dictator”. 🙂 Who’s up to the task of winding down modern civilization? I suppose world domination is pretty useless now!
Pretty impossible.
I would say trading the last of your antibiotics for spear heads and women with the tribe in the next valley is more likely.
I vote for Fast Eddy.
I see myself as more the malevolent … venal type… with an extensive harem….
You may want to reconsider.
https://lh3.googleusercontent.com/-mzTNVqlts-Y/TWpjtCy4leI/AAAAAAAACr0/WixaCCHpraQ/s1600/HAREM.jpg
i only counted 69
short measure—thats no good!!!!
Happy March 14th guys!
Seems to lack variety, all dressed in black suits. Display rack seems a bit low end,would hope the storage accommodations to be a bit more upscale.
Another vote for Fast Eddie from me! If you can guarantee a harem like that for everyone, then I’m in. A harem doesn’t run on oil, so I still think it can be done, even if oil has peaked.
PS. What does “malevolent” mean? It means “good”, right? You are going to be a good and kind dictator, right? I used to be married to an evil dictator, so I’m not really a huge fan of those, but you seem to know what we little people like, and you already mentioned you are kind to animals.
i think your harem would dump you once they found out your oilwell had run dry
“i only counted 69”
And the blonde to the right is not a virgin!
Will you guys stop ogling my harem!
Otherwise I will sent you to be eunuchetized….
maybe not all of them go for 69
Dirty old men. Leave some for the younger guys.
I was once caught in a storm on a sinking small boat with an angry grey reef shark circling in the water. i had to wait for my scuba pals to surface, so all i could do was concentrate on bailing. anchored off Enjebi, northern Enewetak Lagoon in the summer of 1982. you live in the moment.
Wonderful work as usual Gail, thanks!
Everything you say is true however you do not discuss the implications of maintaining low interest rates. Both low and rising interest rate policies have negative outcomes. As you explain, rising interest rates will result in less money and a depression, at best. I think continued low interest rates will eventually make money worthless, perhaps very quickly if panic sets in.
So the question is, what is best for social stability? Less money or worthless money? I think the former. I’d be interested to know why you seem to think the latter is better.
We need an overall system that works–pays workers, gives enough money to the government, encourages enough energy production, allows banks to stay open.
Low interest rates make pensions (of the type where workers and/or employers contribute to them) un-payable. We are starting to see this happen. A minority of the population have these pensions. Typically, the people who have these pensions are states or municipalities, or are union members or relatively high-paid individuals. The vast majority of those receiving these pensions also receive Social Security in this country. I don’t know what the practice is in other countries. So if these people don’t receive their pensions, it wouldn’t be a great outcome, but it wouldn’t be the end of the world. They would find themselves like everyone else. Actuaries would be embarrassed. (I am not a pension actuary; I have worked on property-casualty insurance.) The US Pension Benefit Guaranty Corporation is supposed to insure pensions, but it is running out of money (big surprise!). This is an article about its current woes. http://www.nydailynews.com/news/national/federal-insurance-company-funds-cover-union-pensions-article-1.2985531 Also, very low interest rates tend to make asset prices inflate. Stock market prices become very high. Housing and farm prices become very high. Most people don’t complain about these things.
High interest rates tend to reduce the total amount of debt outstanding. This tends to significantly reduce wages. This is similar to the situation in 2008. This is a big problem for the world economy. Commodity prices tend to fall. The value of assets (stocks, homes, farms) tends to fall. In my view, this is a much worse set of problems than those brought on by low interest rates.
Thanks for explaining. I agree the short term term is much better with low interest rates. Perhaps where we disagree is that I think the longer term will be much worse with low interest rates because destroying the value of money will destroy the social fabric. I think society could survive being poor better than it could survive a monetary system reset.
The thing is…
There is no longer term…
Thanks. I don’t subscribe to NTHE but if you do then I understand why you would prefer low interest rates.
Even if we do not go extinct when BAU goes down…. I don’t think interest rates are going to be a topic of conversation over the plastic bagged-fueled fire under the overpass where the sewer rats are roasting….
I agree things will be very bad. My belief is that destroying the value of money will makes things much worse. I think the key reason Hitler was elected was because hyperinflation destroyed the middle class’s wealth. On the other hand, many countries have endured severe depressions without electing despots.
Hitler? If that is as bad as it could get we should be rejoicing — fire up the marching band!
https://img.clipartfest.com/be10ef8484b6f81b68a54ddccce65931_trees-clip-art-and-art-on-high-school-marching-band-clipart_2555-1694.png
Rob – you are so underestimating the nature of this beast — we are talking about total collapse — famine to end all famines – spent fuel ponds exploding — absolutely no energy — your electricity is going off — forever.
There will be no banks – there will be virtually no food – money will be for starting fires.
Think WW1 and 2 + The Depression + African Famines + Mad Max + Apocalypse Now + The Road x 100000000
This is the end of days.
I hate to be so pessimistic….
I expect we have a few decades to get to your destination. There will be severe but not fatal pain before then.
Think of it this way….
You are in a boat in the middle of the ocean — it has caught fire and the flames are raging — things are completely out of control —- there are no life boats…. sharks are circling….
Do you worry if your tie matches your shirt?
Wait, what? Why would you be wearing a tie in a lifeboat in the first place. Please explain.
Another great article Gail. Thanks for clarifying the necessity of debt. Of course, I don’t know exactly how this will all play out (and part of me wishes I didn’t know any of this stuff!), but I suspect that before some sort of collapse, the US may be forced to “live more within its means”. I think the strain on our country is especially acute, with an aging demographic and maybe the rest of the world wiseing up to the fact that we consume way too much per capita, or rather, perhaps the special role the US Dollar and the myriad advantages and benefits it gives to this country will become a thing of the past.
Perhaps a reshuffling of the world order will be required, but I’m not sure if that happens without a world war. Nobody wants a world war in the age of nuclear weapons, but if the strain on the global economic system is great enough the pain of certain powerful economies great enough, perhaps certain leaders will see it as the only (desperate) option.
“perhaps the special role the US Dollar and the myriad advantages and benefits it gives to this country will become a thing of the past. ” – Yes, it seems since oil (and energy products in general) are priced in US Dollars, then that is really what gives the US Dollar its power. I suspect that is why we often go to war with countries to enforce that relationship between energy and dollars. As we approach the insolvency of oil production so too will we approach the insolvency of the US and the Dollar.
You may be right.
There is no living withing one’s means — if that means reducing debt.
We all have to live beyond our means — because if we don’t the global economy collapses.
More debt = good.
The debt ceiling will be increased. If it is not – then collapse will soon follow
Actually Fast Eddy … some of us lucky / blessed / fortunate enough to be in the position to do so have ‘ downsized ‘ to a sustainable and reasonably comfortable lifestyle shedding appearances , oversized homes , ostentatious cars , collections and unused possessions , buying quality over quantity and buying what we need and will use/enjoy rather than every bauble and bangle dangled before us leaving behind all traces of debt . As in Zero . The Harvard School of Business even has a term for us along with a textbook . OWMNB’s [ out with money not buying ] The amazing thing once you’ve shed all the excess is how less complex and more enjoyable your life becomes . What’s frightening is according to a friend formerly of the NSA .. is we are considered one of the biggest threats in America second only to terrorism . In part because as you say Debt begets Money which then Sustains the Economy . In no small part though due to the fact they have less control over us .
Suffice it to say Debt is not just money … but as the movie ” The International ” put it … debt is .. power
But trust me Fast Eddy … I know all too well how fortunate a position I/we am in … as well as knowing all too well how few can .. and even fewer will try and follow our choices .
JT, I too am debt-free and happier that way. But I am indebted to all the folks including corporations and governments who are drowning in debt, because I know their debt is helping sustain the system that keeps me comfortable.
I remember hearing explanations long ago about the central banks being lenders of last resort. Adding to the Keynesian idea of governments being borrowers of last resort, we have the makings of a perpetual money-go-round regardless of whether you and I go into debt or not.
Your friend formerly with the NSA’s comment provoked the thought that being deep in debt makes individuals safer because it doesn’t pay to destroy the lives or the livelihoods of people who owe you money as long as they are servicing the debt. Bumping off your creditors, including those to whom you owe social security payments, pensions and healthcare entitlements, on the other hand, could make a lot of sense. And for this reason I have long been inclined to view the bulk of those millions of hospital surgery and prescription drug “errors” that are decimating the ranks of the middle-aged and elderly as quite possibly “accidental/on purpose”.
I agree a large part of the problem is demographics. But I don’t think there is a particular conspiracy at work it’s just the system will readjust during this twilight to support productivity.
The point I was making on personal accountability is that it is a grand illusion because the government has borrowed in your behalf. This has lead to a perception of the “self made man”. The fact is many people in this world work as hard or harder than Americans or Westerners with little comparative compensation. The reason is accumulation at the capital core. So personal discipline has little to do with prosperity more to do with self worth. Like a rock star vs a subsistence farmer. One has value one has none but it’s not reflected in compensation.
Ironic, isn’t it, that in the short term we have a demographics problem of not enough people, but in the long term it is the fact that we have too many people, that is causing overshoot and collapse. An interesting conundrum, predicament. Ponzi Earth.
We can downsize on an individual basis — but if too many people did that — we get a deflationary death spiral…
That said —- public debt has skyrocketed — so nobody is really downsizing — we all are responsible for a piece of those trillions
Wars certainly have been a way of dealing with the problem of not enough resources to go around, in the past. I don’t know if it will work out that way today. One “advantage” of war is the fact that they are a great excuse for building up debt. This build up of debt can greatly increase wages, and make citizens less unhappy with the government.
If a person looks around the world, the US’s share of GDP is far higher than its share of population. I am sure that some other governments have noticed this as well. If the US could be made to live at a much lower standard of living, it could leave more resources for others. I have a hard time seeing how this could work out in practice today; there simply are too many interdependencies.
The reason why I am doubtful that wars will be used today is the fact that our big issue today is too little demand to keep fossil fuel prices up to a high enough level. It seems like getting rid of the country with the highest demand is counter-productive. Prices would drop even lower, and the system would stop all together.
Gail
If I’m not mistaken wars have been tried. Hasn’t the US been in perpetual war since 911? Perhaps since WWII. I agree that killing off consumption would be negative on prices but not if you kill off the indigenous populations who are consuming their subsidized oil. From a western perspective that is wanton consumption because it isn’t cycled through the banking system. So particularly in Iraq population was curtailed wasn’t it? Same in Libya now Yemen. Where next? Just follow the high value low cost oil.
I am thinking that only OECD countries matter —- if we exterminate all people in all other countries (with possible exceptions – I have not completely thought this through) we might buy ourselves a few more years…
We’d have to do it in bits and pieces so as not to trigger a deflationary death spiral — perhaps we start with the extremely poor — the people who don’t use a lot of energy — we cull them first….
I reckon Venezuela gets it first — we completely stop all imports – no spare parts no food – nothing gets in — we crash their financial system — and we just starve them to death…
And for good measure douse the country with nerve gas …
Here in NZ we drop 1080 poison to kill rats and possums and other pests…. humans are actually worse than rats —- so once the starvation hits in a target country — we drop Food Aid — but we spike it with 1080!!!
‘Whatever it Takes’ surely needs to consider this side of the equation — it can’t just be all about the financial and energy production systems.
Wow, Fast Eddy. Thinking “outside the box!”
I take great pride in my ability to push the limits… I am standing by if the Fed requires my expertise … my ideas…. 🙂
Wars are also very expensive, and who has the money to conduct a large enough war on a global scale for those scarce resources? Oops there is one…
When war is mentioned – particularly one that is global in nature … we need to defer to Korowicz Trade-Off….
As well as CTG’s explanation of how fragile the JIT supply chain is
Exactly there can be no World War since that would collapse the whole global financial system and with it JIT…we are no longer in 1939….like CTG said (roughly), back in the day, before our economy became interdepent on a global supply chain, you could have California collapsing, say because it being hit by “The Big One” and the farmer in France would barely notice…we do not live in that world anymore…if any important part of the world collapses today it would bring down the whole world economy…
Yeah, its pretty damn hard to prosecute a decent war these days with JIT ammo deliveries, JIT Hummer spare parts, etc.
interesting article on zero hedge check out the the first comment to the article which mentions Gail’s message and totally explains the truth behind the article Oil Tumbles Below $48 As JPM Warns Of Possible Commodity Liquidations
Any hopes for an early rebound in oil following last week’s torrid plunge in WTI and Brent appear to be dashed, at least at the open, when WTI promptly tumbled below $48/barrel.
While there have been no materal adverse catalysts over the weekend, three factors are being mentioned by Sunday night trading desks as drivers behind the latest seloff.
First: price momentum has simply persisted from the Friday US selloff, as Asian funds catch up to the US action.
Second, some have pointed to a report by JPM’s Nikolaos Panigirtzoglou from Friday evening, which warns of “commodity downside” as a result of persistent near-record net long futures positioning, and warns that “a pending normalization/mean-reversion of spec positions in commodity futures has begun.” Here are some of the reports highlights:
Spec positions stood at pretty elevated levels as of last Tuesday March 7th, the latest available snapshot, suggesting that this normalization is at its beginning rather than its end phase.
Even if we assume that the change in the open interest since last Tuesday reflects entirely a build up of short spec positions or a reduction of long spec positions, the commodity position overhang would remain.
This pending mean reversion in commodity spec positions is unlikely to be prevented by the growth of commodity index products.
In our opinion, the demand for long positions in commodity futures contracts created by passive commodity index products acts merely as a background force.
Mean reversion is primarily driven by active investors such as hedge funds and in particular CTAs.
Simple return momentum trading models suggest that CTAs are turning incrementally more negative across most commodities.
We get a similar overbought picture in commodity equities, by looking at the short interest of the biggest commodity stocks in world equity markets.
Therefore any further unwinding of commodity futures positions is likely to be accompanied by an increase in the short interest of commodity stocks.
A third possible catalyst for the drop is the yet another prominent voice in the oil industry has slammed the OPEC gambit, this time Leonardo Maugeri, a “Senior Fellow with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School’s Belfer Center”, though better known as the former head of strategy at Italian energy giant, Eni. His reported is titled simply “OPEC’s Misleading Narrative About World Oil Supply” and as the title suggests, Maugeri is the latest to point out that the OPEC emperor is naked and that OPEC’s actions have, at best, served as psychological support to oil prices:
At a time when energy market headlines focus mainly on OPEC cuts, observers may be forgiven for concluding that a supply crunch and higher prices are imminent. On the contrary, there is still too much oil in global markets. In this context, OPEC production cuts (which notably fall short of the original target envisaged by the organization) appear to serve mainly as a psychological support to oil prices.
… the global oil market remains highly vulnerable to the actual status of oil supplies. There’s a paradox: so far, OPEC’s effort to convey the message of an exceptional level of compliance with cuts has helped sustain oil prices—but in so doing it has also incentivized oil output increases in many countries. The United States is by far the main beneficiary of such price support. In early February, almost all US shale oil producers have presented plans to strongly increase their shale oil output in the course of 2017.
To make matters worse, a heavy global refinery maintenance of around 3 mbd—concentrated in March and April—would lower crude demand and could add to temporary crude builds. When it starts to ease, the OPEC and non-OPEC cuts will be close to expiration—June 30, 2017.
Whatever the reason, for now the selling has continued, and if JPM is correct and momentum and trend chasing CTAs are now in charge
Here is the comment which explains what’s really happening using Gail’s message which the comment states as the right explanation Escrava Isaura Mar 12, 2017 8:23 PM
Greg Machala: If Gail is right (which I suspect she is) then the current “oil-glut” is not really a glut, but an oversupply of expensive oil that economies of the world can no longer afford. If that is the case then, we are facing a massive problem. It means we are out of zone where oil is both profitable to producers and affordable enough to grow the economy. If that is true then financial collapse cannot be far off.
https://ourfiniteworld.com/2017/02/20/oops-the-economy-is-like-a-self-driving-car/comment-page-30/#comment-118456
Oil has seen a more than a 10% downward adjustment in less than a week. We cannot shake the low oil price not matter what tricks are tried. If we cannot get prices to go up significantly (and stay up) then, oil drilling is essentially finished. We need QE now to keep the drillers solvent.
IF/WHEN things get bad enough, governments around the world will nationalize the big producers and run things more like a command economy. Rationing and ration cards will be next. This could possibly keep things afloat for a few extra years.
This is a link to the article you quoted. http://www.zerohedge.com/news/2017-03-12/oil-tumbles-below-48-jpm-warns-possible-commodity-liquidations
For now, the price seems to be back above $48 dollars, but it does seem vulnerable in the longer term. We will see what Wednesday’s oil inventory report says.
Max Keiser in a video said that 65 barrels of oil are traded for every single barrel of actual oil. He didn’t elaborate but that is an important statistic being ignored in the conversation.
How does this “paper oil” effect the realities of the industry?
In fact, it is the universe telling: “If you own more than you need, the surplus is worthless”.
We have what we have right now. Our only real way of evaluating things is in terms of what benefit they provide today. So if I have a fancy swimming pool that I don’t really need, but I enjoy it, it has worth for me, right now.
For the long term, we don’t know what we will have. Expecting paper wealth to be helpful is very iffy. The main thing we have is our families, and the love and concern we can provide each other.
A lot of people have made solid gains on assets since 2008 — since there is no future then these gains are all fake — unless at least some of the chips are cashed in and redeemed for real things now.
I have to smile when people I know who have doubled their money on properties in recent years… they eagerly await news of new record highs…. it makes them feel good
Rather ridiculous considering it is a) all based on money printing and b) it will all soon be worthless.
But they don’t see it that way – obviously
I just want my gold and gold ETFs to go up through the roof just one more time so I can cash in before the end. Convert them into useful things like solar panels and tools. Damn it, just give me one more chance!
I think it is most the very rich people that demand ROI again, just like in the old days. In fact, their stockpiled money is worth nothing if they cannot make investments that give some return. Now their money has to compete with the new fresh money from te federal reserve, which is invested for free.
Or am I wrong ?
As I understand it, the US is no longer adding to its QE, although it is buying new bonds to replace the ones that expire. Several other countries do have QE programs. The EU is considering ending its QE program at the end of 2017. So the competition from new money isn’t really as much the issue any more.
As I see it, low interest rates tend to push investors into stocks, and toward low-rated bonds. Also ETF’s following preferred Indexes.
The big investors are pension plans and insurance companies. They really need the return on investment, especially to make pension target returns.
Banks need long term interest rates to be higher than short term interest rates, so that they can “borrow short and lend long,” and make money on the difference. I expect that they have been the ones arguing for the end of QE, because QE tended to bring down long interest rates as well as short term interest rates.
In my region, Flanders, Belgium, the QE has transformed my city of birth in private owned bricks and concrete. The houses will be usefull for some time at least, but is not really growing an economy for the future.
I believe that healthy economies, where good strategic decisions are made, can prosper from QE, but when the decisions are wrong, then the economy even suffers from QE.
Many pensions are insolvent at this time because of collapsed ROI.
http://cdn.images.express.co.uk/img/dynamic/1/590x/Pensioner-583379.jpg
Yes, that is a huge problem worthy of a dedicated post. I think that ultimately, retired and near retiring voters will dictate federal reserve policy.
Speaking for everyone in my position, and I think it may be important to consider the exact portion we occupy: the household debt ceiling has been reached. I will not, I can not, use debt. Period. How many Americans are entirely stalled with student loan debt? How many are working two jobs, 50 to 60 hours per week, because wages cannot keep up? At that pace, medical debt will mostly replace student loan debt. Still, in the current climate, the only thing the government can meddle with for any positive result is providing avenues to offload education debt via work. I can’t begin to think about retirement. I don’t want employer matched 401k contributions, I want my employer to help me pay student loan debt! If Uncle is going to change interest rates, how about lowering the interest on existing loans and leave the rest alone. It’s not the interest on physical assets that America is drowning in. It’s the interest on our existing debt, because even a bachelor’s degree isn’t exactly an asset that immediately turns money. It could be, but where it seems most of the country went back to school during the recession, the value of education took a hit.
Maybe someone has done the numbers already, but I seriously question the return on investment of debt the size of a starter home. I can use a house, car, or other physical asset to derive income easier than my education. In the same vein, employers can realize roi on a robot far quicker and surer than a laborer.
In my opinion, we have saturated the workplace with education debt, and few companies have figured out how to leverage it to turn a profit.
Goose, none of this would be an issue if we had the wage growth we had in years past. Growth is over and that is causing all of the problems we have with un-serviceable debts.
This is a chart I made of US three year average growth rate in per capita wages–in other words, total wages divided by total population. Total wages don’t really rise as much as a person might expect. “Disposable personal income” rises more, because it fills in the recessionary dips with unemployment benefits. Part of the increase, before 2000, comes from a growing share of the population working.
The big increase was during World War II. Also, during the first attempt to get out of the Depression. These big increases were basically debt related. The big fall in wages that precipitated the depression seems to have been the popping of a debt bubble (related to inadequate wages) as well.
Back fifty years ago, a high school education was “good enough” for most jobs. Health care didn’t cost anywhere near 18% of GDP. We didn’t try to save 1 pound babies. A high school graduate could expect to get a reasonably good job and raise a family on the wages. Education costs and health care costs did not eat up a huge chunk of total income.
Someone noticed that high school graduates tended to make more money than those without a high school education. They jumped to the not-quite-right conclusion that if a whole lot more people received college educations, all of the college educated would receive the income boost of the college degree. With a job market saturated with folks with college degrees, wages really didn’t really jump much at all. Instead, businesses started using college degrees as screening tools. A job that previously would have gone to a high school graduate now required a college degree. Certainly, people who were conscientious enough to go to four years of college would make better employees? Well, yes, but then that left a lot of high school grads, and folks without high school diplomas, having difficulty finding jobs that paid half-way decently. Too many jobs were part time, and at odd hours. Transportation costs were greater than what a person could earn on the job.
So then we end up with all of the education debt problems as well.
Regarding, “Why not reduce interest rates on current loans?” The big problem with high interest payments is that, most of the time, there is someone “on the other end” depending upon them. Pension plans are heavily dependent on interest payments on loans, as well as on how high the stock market rises. Insurance companies in the US tend to have most of their investments in debt. Thus, they are dependent on interest rates.
History tells us that there were a lot of “debt jubilees” in ancient times. These were possible, when the government leader or the church was ultimately behind the loans, and the loans were not passed on to someone else who now considers them an “asset.” Once an economy starts building other things, using loans as assets, forgiveness becomes more difficult. I don’t know about the specifics of student loans. If nearly all of them are government loans, and they have not been “sold” to someone else, then it might be possible to reduce the interest rates on the loans.
I think you nailed it, solidly. It sounds like we basically created an artificial need for higher education across the board. However, without that education for the masses unlocking an equally (but preferably greater) rise in GDP, it is nothing but a liability. Like trading in the old Honda that ran okay for a newer one with higher expenses but no other real payback.
I am not terribly well versed in economics, but treating a liability as an asset seems to violate the basic rules of math in accounting.
I agree that our educational move was pretty silly. But it did provide a lot of jobs for faculty members. Someone also got the idea that publishing a lot of academic papers was useful, so now we have an amazing number of faculty members teaching low loads of students, and turning out what are mostly pretty much worthless academic papers. Also a layer of deans, involved in getting grants to fund all of these papers. This is at least part of the reason the cost is so much higher now. Also, having apartments for students, in which every student has his one bedroom and bathroom. Like you say, trading in the Honda for a newer one, with higher expenses but no other real payback.
Regarding the debt being an asset to someone else, the problem arises because a person can look at debt from two points of view. From the point of view of the person who owes money for, say, a house or a car, it is an obligation to pay a future amount, out of future wages. The debt can also be looked at from the point of view of the organization to whom the money is owed. They see it as a flow of future income. Rather often, an expected flow of future income is used as the basis for taking out a new loan. Or the future stream of payments can be sold to some other organization. There can be a situation of “slice and dice” as well, where the flow of payments are repackaged, and sold in layers, with the “better” layers having a higher chance of repayment.
I did an internship in higher education a few years back and the fact that it was hollow underneath was very apparent to me. I found the job I did very enjoyable, but it also felt pointless. I worked in a more “nuts and bolts” field before that. I ended up steering clear of higher ed because it felt immoral to imagine people going into debt to pay my salary when I didn’t feel truly productive. One side effect of too much complexity is that people have to constantly justify the existence of their jobs by proving that those jobs are very difficult, very complicated, and can’t possibly be done by someone without proper qualifications. This takes the form of endless certification, professional development, and continuing education, to the point that it is hard to take seriously anymore.
90% of all jobs not related to producing food, shelter, clothing and the other basics of life such as tools, raw materials, (perhaps art) are only artifacts of complexity.
Nice article! I guess the question is how long can this debt game go on? Most studies just look at what has happened in the past with individual countries. Now, virtually the entire world is in deep debt and we are in uncharted waters.
We are dealing with a situation where a single large event could push things over the edge. Predicting exactly when this takes place is virtually impossible.
Hopefully, the US debt ceiling is not a problem. There will be a vote to get it raised again, so it doesn’t cause a problem.
But there are so many things that could go wrong, it is hard to know what can happen. About all we can do is go on living, and accomplish as much as we can each day, keeping our fingers crossed that things will hang together. Or if they do start falling apart, the collapse will take a while.
Maybe things can stay together for another couple of years. We can always hope that someone will find some tricks to keep things going a bit longer.
Gail . If I may . A quote if i may I’d like your honest opinion on that indirectly relates to todays topic and discussion . The words are Morris Cohon’s [ Stock market baron -in his day one of the wealthiest men in the US – one of the founders of over the counter trading – capitalist to the core etc ] from 1972 to his son Peter Cohon [ known better as Peter Coyote who was and is the polar opposite of his father ] edited for profanity only ;
“ Capitalism is dying boy . Its dying of its own internal contradictions . You think the revolution is gonna take five years . Its gonna take fifty . So keep your head down . And hang in there for the long haul because I’ll tell you something , The ( censored ) running things don’t give a damn about their children or their grandchildren and they certainly don’t give a ( censored ) about you . They’ve paid their dues and they want to get out with theirs . They’re gonna sell off everything thats not nailed down to the highest bidder . Don’t get crushed when it topples down . Take care of yourself and your family . If you can make a difference do it but there are huge forces at work here and the have to play themselves out according to their own designs not yours . Watch yourself . “
FYI; In my opinion much as his words and time period disturbs me I think Morris may of hit it on the head .
Capitalism may be dying, but it is hard to see any other system that works very well either. Communism tends to stay away from debt. It tends to die of other problems: too little investment, and too little reward for good work.
The basic issue is that the economy is a dissipative system. This is a term from physics, relating to systems that are able to use energy to grow. Humans and other animals and plants are dissipative systems. So are hurricanes, stars, ecosystems, and many other things. Dissipative systems have a finite lifetime. This finite lifetime comes about when the system can no longer function. The reason varies with the dissipative structure. We seem to be reaching the end of the economy’s lifetime.
“We seem to be reaching the end of the economy’s lifetime.” …. And by extension…the end of 95 to 100% of us quite quickly after that…
So in essence you’d agree with Mr Cohon’s prediction ? FYI You and I are in complete agreement again . Its hard to see any replacement on the horizon that would work much better other than perhaps a restrained , responsible and compassionate capitalism [ or a fiscally responsible socialism ] both of which seem to be all but impossible to create or sustain . But it does seem relatively obvious to me that this present form of capitalism we’re in [ would it be correct to call it hypercapitalism verging on Ayn Randian anarcho-capitalsim ] is on the verge of consuming itself if not imploding entirely .
PS; Thank you for your reply and opinion
This would mean downsizing: a restrained , responsible and compassionate capitalism [ or a fiscally responsible socialism ]
See http://www.endofmore.com/?p=1464
We have been using ultra-low interest rates to compensate for our ever worsening, collective material impoverishment and to borrow our way out of a debt-crisis partly caused by the same. Putting those rates up, when the underlying issues are only getting worse, is tantamount to playing systemic Russian roulette, unfortunately.
Gail, thank you for another terrific article. Am I correct in thinking you might be heading over to Europe in the not too distant?
I am giving a Skype talk to a group of actuaries in London tomorrow. No travel plans for that one.
I plan to travel to Brussels to give a talk on April 20. This is a talk at a European Commission related workshop. I am leaving on April 17, so will be there a bit in advance.
I’m not convinced that much can be done, as so many of our problems are now double-binds and risk can only be shifted around the system rather than mitigated – but I still hope your analysis reaches the ears of clever policy-makers.
Have fun! I spent a little time in Brussels in the 90’s. Ate a lot of chips (French fries), mussels and Leonidas chocolates, and drank a lot of beer. It’s probably a good place to fatten up and get famine-resistant before supply-chains start crumbling, lol.
As always Gail great article…as to your last paragraph, I totally agree, people in different professions cannot see the big picture because they work in silos…your blog is one of the few anywhere to deal with the whole problem and how the Energy and Economy tie in together! Thank you for all the time you put into these articles!
You are welcome. I had a huge number of charts I had made and collected, and couldn’t figure out how to put them together in a coherent post. So I ended up simply discussing one topic at a time.
If the FED matched the true cost of living inflation, owners in the high realestate markets, may have to be real patient. Subprime auto owners will not be able to roll over the car loans, and think about the poor students. Still waiting on that detailed plan on how things will be GREAT.But some companies are in great shape compared to the country.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/03/09/20170313_goog_1_0.jpg
The corporation of USA just needs a little polish, steep slope on that curve. Some have claimed for years that rates would be stuck, never to normalized, like our old friend Ben Bernanke.
This Simon guy seems to be blaming the Donald, huge mistake.
“On the day of Donald Trump’s inauguration, the government’s cash balance was $384 billion.Today the US government’s cash balance is just $34.0 billion.”
http://www.zerohedge.com/news/2017-03-13/us-government-now-has-less-cash-google
Wow! This is not good at all. Cutting back government debt, besides raising interest rates, seems like a formula for disaster. Lay off government workers, close government offices. How can this help? Or maybe this is a prelude to an event similar to the fall of the central government of the Soviet Union back in 1991.
Exactly ! How or why the ‘ so called ‘ president thinks laying off up to a million government workers most of whom are middle to upper middle class all to build a wall that will serve no purpose other than as monument to bigotry , hatred and racism as well as bolstering the worlds largest yet ineffective military [ the blame falling on the military brass ] is going to benefit the economy is beyond logic or reason verging on delusion and insanity
But then again looking at Trump’s past – his multiple past bankruptcies – the fact that Trump Tower is on the verge of bankruptcy at this very minute – who and where he’s getting his information/advice from etc – et al – ad nauseam is it any wonder as the Breitbart , Bannon & Trump train rolls down the tracks that illogic and delusion is what is guiding ” Casey Jones ” ?
“exactly ! How or why the ‘ so called ‘ president thinks laying off up to a million government workers most of whom are middle to upper middle class all to build a wall that will serve no purpose other than as monument to bigotry , hatred and racism as well as bolstering the worlds largest yet ineffective military”
How much is George Soros paying you write this propaganda?
Trump’s policies, while destructive, are much more in tune with a finite world.
In a world with finite resources, “Bigotry”, meaning territoriality make a lot more sense.
You are going to , by necessity, spend much more resources on taking care of people close to you before you take on outsiders. In the expert from you that I quoted earlier,
outsiders are economic refugees from Latin America. I doubt that there are enough, low-paying agricultural jobs are there that could employ ever Latin American migrant.
We already know there are not enough jobs for American citizens …but the issue isn’t about facts for the Anti-Trump people .on the far Left. it’s about correcting the wrongs of the past…by by punishing white people, and Americans, for colonialization, Jim Crow Laws, “global warming”, [insert grievance here] , by taking economic opportunities away from white people, and Americans and giving it to migrants who are being oppressed by them. Some of the people who are against Trump seem to be people who think economic opportunities in the U.S. are expanding rapidly and that all is keeping us from material progress is political corruption and Bigotry. This a belief system, not reality.
I suspect that the rise of the alt-Right is , in part, a response to the hatred for white European men that appears on the Left from time to time, and failed economic and social policies based on the “melting pot” theory .
*excerpt,
not expert
“are there that could employ”
should be
“out there that could”
No solutions here, I really just wanted that graph!
Russia did recover sorta, had help with those high oil prices, had many grim years though.
Those pension promises are already getting trimmed. I knew early on that there would not be a company pension plan in my future. Oh well, no kids of my own to worry about that’s a plus.
This guy’s insight instilled real confidence, so calm, a classic video. It really could have been different, like maybe a slower decay?
https://www.youtube.com/watch?v=_RpSv3HjpEw
Thanks for the new topic, should be interesting to following the comments.
This editor seems very limiting, well have to get some tips from the others.
Have a fine day
I don’t think pension plans and retirements work without growth in wages and spending. Then what if populations grow and people start to live a lot longer? Also, there is a phenomenon I have heard called destructive growth. For example, growth in corruption, pollution or unintended consequences of growth that should be subtracted from GDP. But, any growth is always added to GDP even if it is destructive. So now we may well be at a crossroads where we have more destructive growth in the system than productive growth. Even though the official numbers seem to imply that things “OK”. So, it all is a very complex symphony of actions and reactions going on in the economy that 20 years ago made early retirement work.
‘Destructive growth’ sounds a lot like entropy.
There are two kinds of pensions:
(1) Ones that workers and/ or their employers contribute to
(2) Government sponsored plans, such as Social Security.
The government sponsored plans (Type 2) are far bigger than the ones that workers or employers contribute to (Type 1).
The government plans (Type 2) are pretty much all “pay as you go.” The amount you pay in today, goes to pay someone else’s grandma today. There is essentially no fund balance that builds up. Social Security attempted to do a little pre-funding because of the big group of baby boomers coming through, but as a practical matter, it made no difference. The government itself is on a pay as you go basis, so the result was only that a non-marketable US government IOU acts as funding for some of the funding for Social Security. If the economy is not earning enough to support the pay as you go benefits, the intent of actuaries has been that somehow, legislation would reduce the amount of benefits. If the economy does very poorly, there may need to be big cutbacks in benefits. In fact, if everything falls apart, then the government is likely to change, perhaps to a more local government. It will be up to the new local governments to put together whatever new retirement plans they consider affordable.
The pension plans that workers or their employers contribute to (Type 1) are the ones that have had huge problems to date. Actuaries calculate necessary annual funding for them. In years past, it was fairly common to see 10% average annual returns assumed. (I imagine that pension actuaries looked at stock market growth, including dividends, in the years after 1981 when interest rates were being reduced.) The assumed interest rates have been gradually been reduced, but they are still quite high–say, 7%. The big risk on these pension plans is that the stock and bond markets won’t yield as much as planned. If things completely fall apart, they could theoretically have very little value.
Most retirement plans for newer workers are “401K” plans. These are simply based on whatever the money that is contributed, actually builds to.
In other words… if you are not already collecting a pension — the money you contribute to your pension will never see your pocket.
Spend now. Spend hard. Spend fast. There is no tomorrow
Unfortunately I can only cash mine out when I leave employment (and even then I take a hefty tax penalty). I did this about 5 years ago when I changed jobs, took everything out that I’d accumulated my whole life and put it into my property.
Now it’s just a waiting game to see what happens with everything I’ve again accumulated in the past 5 years: when collapse happens, will I be laid off (and able to cash out my 401k) before money loses all value? Or will there already be capital controls in place by that time, and I’ll never be able to touch it.
The scope and scale of my EOTW party depends a lot on the answer to this question!
A little background about that cash balance, the drop is intentional: https://www.bloomberg.com/news/articles/2017-01-18/debt-ceiling-dilemma-redux-gives-u-s-treasury-bills-a-squeeze
Oops ! Though I’m in complete agreement with all you say there is one simple yet devastating problem lurking on the horizon you’ve ignored in your essay ;
With Interest Rates at its current near zero level … when … not if this Potemkin Village/ Emperors New Cloths bubble bursts and another recession [ or worse depression ] comes upon us because the present situation is unsustainable : the Fed has nothing left in its tool box to help mitigate the situation [ unless they’re willing to go below zero ] leaving the Fed stuck in a ‘ Goat Rodeo ‘ scenario with no viable way out
I agree. I think we are at the end of the line. We pretty much have to use the low interest rate availability that we have now. We can no longer “store up” higher interest rates, which we can later reduce.
I too agree, low interest rates is the last ace in the hole to keep the party going a bit longer. It should be obvious by now that the economy is indeed a ponzi scheme. And ponzi schemes don’t end well.
Unless we can add more “growth!” I don’t believe we have enough left in the tank to achieve “lift-off”! (anything above 3% GDP). So basically, yeah, we’re screwed.