Category: Finance
Marc Faber explains our economic situation

Watch the video, and be in awe of the man’s understanding:

Zerohedge sums it up well:

If there is one thing better than Marc Faber providing a free, must-watch (and listen) 50 minute lecture on virtually everything that has transpired in the end days of modern capitalism, starting with who caused it, adjustable rate mortgages, leverage, why did the Fed let Lehman fail, why was AIG bailed out, quantitative easing, Operation Twist, where the interest on the debt is going, which bubbles he is most concerned about, a discussion of gold and silver, and culminating with his views on a world reserve currency, is him saying the following: “The views of the Keynesians like Mr. Krugman is that the fiscal deficits are far too small. One of the problems of the crisis is that it was caused by government intervention with fiscal and monetary measures. Now they tells us we didn’t intervene enough. If they really believe that they should go and live in North Korea where you have a communist system. There the government intervenes into every aspect of the economy. And look at the economic performance of North Korea.” Priceless.

Hat tip: John “Dinkum” Wagner

 
Money, Finance & Parasitoids

We examined the parasitoid nature of much of our privileged elite here. This post does the same for much of the financial sector. Money quotes being:

Here, instead, is the fable we’ve been offered: Sad as it might be for some workers, towns, cities, and regions, the end of industry is the unfortunate, yet necessary, prelude to a happier future pioneered by “financial engineers.” Equipped with the mathematical and technological know-how that can turn money into more money (while bypassing the messiness of producing anything), they are our new wizards of prosperity!

Unfortunately, this uplifting tale rests on a categorical misapprehension. The ascendancy of high finance didn’t just replace an industrial heartland in the process of being gutted; it initiated that gutting and then lived off it, particularly during its formative decades. The FIRE sector, that is, not only supplanted industry, but grew at its expense — and at the expense of the high wages it used to pay and the capital that used to flow into it.

and

For more than a quarter of a century the fastest growing part of the economy has been the finance, insurance, and real estate (FIRE) sector. Between 1980 and 2005, profits in the financial sector increased by 800 percent, more than three times the growth in non-financial sectors.

In those years, new creations of financial ingenuity, rare or never seen before, bred like rabbits. In the early 1990s, for example, there were a couple of hundred hedge funds; by 2007, 10,000 of them… Fifty thousand mortgage brokerages employed 400,000 brokers, more than the whole U.S. textile industry. A hedge fund manager put it bluntly, “The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around.”

Wealth comes from production, not its taxation – by government or the financial sector. If money printing dilutes the existing stock of money in relation to goods, effectively “taxing” and devaluing existing money, then the creation of credit money by the financial sector has the same effect. If one is bad, then so is the other. Government might be a poor allocator of capital, but aggregating ever more resources to the financial sector is just as destructive.

The fact the finance can pay so well implies that its rampant growth may be even more damaging than that of government. Finance is more likely to attract the truly talented, who ought to be founding new Microsoft’s, Apples, Fords or curing cancer. Some of them are more likely to pursue such a socially beneficial path if the other option is to become a bureaucrat rather than a stinking rich financier.

Of course the rampant growth of the financial sector is facilitated by the blurring of money with different types of assets. This is an inevitable function of the lived experience of people during a period in the economic cycle. Those who live a different experience during a different part of the economic cycle form a different view. During depressions and crashes the true value of real “money” shines forth. Assets that appeared to be money, even ones as “safe as houses” become worth less, or even worthless.

Those who have recently lived through deflation are likely to instinctively hoard their fiat currency and behave quite differently to those who have recently experienced hyperinflation. Ditto for those with other “lived” experience. “Never a lender or borrower be” can seem obvious or stupid, depending on where people sit in the economic cycle.

Truly to know where we are going and how people and markets are likely to behave it is necessary to know where we have come from. Most economic and financial commentary completely ignores this. Is it any wonder it is so often wrong?

 

 
Economic Depression

David Stockman explains why an economic collapse is all but inevitable:

You can’t live beyond your means because it’s pleasant. It’s not sustainable. Clearly the level of debt that we have is not sustainable. We have a whole generation – the Baby Boom – that’s about ready to retire, and they have no retirement savings. We have a federal government that is bankrupt, literally. Its [debt is] $16 trillion and growing by a trillion a year. Something’s going to give. We can’t pay for all these entitlements. There won’t be the revenue generation in the economy to do it.

So as a result of that, we are deluding ourselves if we think we can just continue to spend.

 

Austerity isn’t an elective course. Austerity is something that happens to you when you’re broke. And yes, it is painful and spending will go down and unemployment will go up and incomes will be impaired, but that is a consequence of the excess debt creation that we’ve had for the last thirty years. So austerity is what happens when you break the rules.

And somehow we have this debate going on. They’re making a mistake. They chose the wrong strategy. Do you think Greece chose the wrong strategy with austerity? No. No one would lend them money. That’s why they ended up in the place they were. Do you think that Spain today is teetering on the brink because they said, “Oh, wouldn’t it be a good idea to have austerity?” No, they had a gun to their head. They were forced to do this because the markets would not continue to lend, and even now their interest rate is again rising. The markets are losing confidence, and unless the ECB prints some more money and bails them out some more, they are going to have austerity. So the austerity upon us is the backside of the debt supercycle we had for the past thirty years. It’s not discretionary.

 

The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an “interest rate.” That isn’t a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he’s still in a positive spread. And you can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That’s essentially what we have today.

 

I would stay out of any security markets. These are unsafe markets at any speed. It’s all tied together. As I was saying when the great margin call comes and they start selling the Treasury bond, they’ll take everything else with it. Real estate is priced off Treasuries. Mortgaged-backed securities are priced off Treasuries. Corporates are priced off Treasuries. Junk bonds are priced off Treasuries. Everything. The stock market will go into a panic. We don’t know when the timing will come – we’ve never been in a world where there is $15 trillion worth of central-bank balance sheets, like we have today. The only thing I think you can conclude is preservation is the only thing you are about as an investor. Forget about yield. Forget about return. Just keep yourself liquid and preserve your capital, because you can’t predict the day when, as I say, the great margin call in the sky comes down.

 

When the financial markets reprice drastically, it’s going to have a shocking effect on economic activity. It’s going to paralyze things. It’s going to finally cause consumption to come down. It’s going to cause government spending to be retracted.

You know, the Keynesians are right. Borrowing does add to GDP accounts. But it doesn’t add to wealth. It doesn’t add to real productivity, but it does add to GDP as it’s calculated and published – because GDP accounts were designed by Keynesians who don’t believe in a balance sheet. So they said, “If the public sector and the household sector are borrowing, let’s say, $10 trillion next year, run it though GDP, you’ll get a big bump to GDP.” But sooner or later your balance sheet will collapse. They forgot about that one. So my point is that we’ve gone through a thirty-year expansion of the balance sheet, an artificial growth in GDP; now we’re going to have to be retracting the collective balance sheets. That means that GDP will not grow. It may even contract, and no one’s prepared for that.

Hat tip John Dinkum Wagner. Watch the video here

John also highlighted a reader comment:

Every major country in the world, except China, is unable to pay its bills without going deeper into debt. All while interest rates are at dead nuts lows. Low interest rates should only be earned on the safest of plays, but loaning to a broke country is clearly not a safe play. Once broke, a default can occur at any time, or it can be delayed until hyperinflation. That’s it. And once the whirlwind effect of inflation pushing up interest rates starts, the existence of the major currencies of the world, except the Chinese Yuan, will be measured in months.

Image courtesy of itulip