Monday, April 12, 2010

Where Financial Matters Stand Today

Breakfast with Dave (Rosenberg) today reminds the reader that strategic defaults on mortgages are freeing up between $120 B and $190 B for people to spend. Call it 1% of GDP. What is happening just in that specific area is the modern inflationary process at work. One way or the other, through Fannie/Freddie and the like, or through FDIC bailouts of smaller banks, the losses on those defaulted mortgages are passed on to the taxpayer and are monetized through what we call money printing.

Absent direct welfare-type payments such as extended unemployment insurance, food stamps and the like, personal income would be (it is said) only 80% of what it is reported to be.

The Gallup polling shows absolutely no uptick in discretionary spending.

All this explains why NBER is still unwilling to state unequivocally that the Great Recession has ended.

The basic problem of the economy relates to debt and its related phenomena, the various swaps and repos. There is such a confusing web of cross-obligations that the system can suddenly fall apart, or it can stagnate even if mild deleveraging could occur. This sort of mess requires simplification. Whether the modern industrial and post-industrial economy are even profitable after accounting for environmental and other external costs is not so clear. After all, taking care of one's elderly parents is not a traditional profit center; it is a cost of living, an obligation, but it does not yield savings or return on investment as defined by traditional economics. You cannot trade the result of a high-quality retirement and associated medical and other care to a Brazilian factory worker who is helping to produce a commuter airplane.

As the West ages and provides disincentives to its young people to reproduce above the replacement level, there exists a headwind against economic growth.

This is what the Economic Cycle Research Institute is predicting longer-term: a declining level of real economic growth. Thus mild perturbations to growth occur closer to the zero-growth line and will more easily produce recessions--often mild ones but ones that are not in the Obama/CBO multi-year financial projections.

Physical precious metals, like them or not, represent a popular and governmentally-approved method of signifying a claim on society's wealth. They are purer than debt instruments as ownership of physical metal comes with a storage cost and pays the owner no interest. In a free market, they may be traded in the future for real goods and services, with the intermediary being perhaps an electronic credit on a computer or a colored piece of paper called money.

Until the Europeans solve the Greek crisis and related ones without more debt, the expectation that the U. S. solution to the economy-- monetize the housing bust-- will occur one day in Euroland.

Whether the solution is pure money (gold) or a tangible useful asset (oil etc.), investors are increasingly inclined to hedge their ownership of paper/electronic "money". These matters are unpredictable and political. This is a time of change, a la the late 1970s pre-Volcker when the unthinkable was happening.

Diversified high-quality assets with an overweight in gold continue to make sense for many people.

Copyright (C) Long Lake LLC 2010


  1. I agree with this post as i have experience in business that supports it completely. My landlord however does not agree. He seems to think we are in a recovery.

  2. Your landlord trusts the headlines too much.