Canada's Financial Post reports that Canada won't fall victim to foreclosure wave, saying:
Canada's housing market is expected to cool off this year and next, but isn't at risk of falling victim to a U.S.-style foreclosure crisis anytime soon, according to a new report by debt-rating firm DBRS Ltd.
True. However, that doesn't mean that Canada won't have similar problems economically, and here the arguments are much less persuasive:
The report also highlights that Canadian households continue to have a particularly high level of debt, something that the DBRS notes is part of an ongoing trend. But it tempers that by adding that household debt is not as worrying as some analysts have suggested.
"We think the measurement of household leverage is subject to a fair amount of interpretation," said Mr. Marriott.
For instance, the debt-to-disposable income shows Canadians are generally more indebted than Americans - however, the report outlines that this doesn't reflect certain differences between the two countries that affect income, such as the fact that the U.S. has lower taxes but that Americans pay more money toward their health-care bills.
One can read on, but you get the point. Canada's lenders have loaded lots of debt onto their citizens, just as American lenders have. Or you can say it the other way, which is that the citizens have gone heavily into debt in both countries.
Under the gold standard, malinvestment related to unproductive borrowing and lending forced reduction in those practices. The alleged cure for the Great Depression was to remove the cop on the beat and get rid of the gold standard. Nowadays the prescribed cure for malinvestment involves more "money" creation, which by its nature in our system necessitates borrowing and lending, given that a dollar bill is a Federal Reserve "note" and therefore technically debt. Though good luck trying to redeem it for something other than coins made of base metal.
In medicine, when a process becomes unstoppable and drains the rest of the organism, one could be describing cancer.
Most of the developed world has a financial disease. Canada is no exception.
Copyright (C) Long Lake LLC 2010
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Saturday, May 29, 2010
Wednesday, May 12, 2010
More Evidence that Stocks Are Ahead of the Real Economy
The ABC News Consumer Comfort Index continues to be abysmal at -49. Gallup.com shows little rebound in consumer spending and hiring; they are off their lows but not much. A newer firm, Consumer Metrics Institute, finds evidence of a mini-double dip (not a true recession). Nouriel Roubini is just beginning to rebound and some leveraged bear market securities recently underwent reverse splits, indicating to contrarians that the bull is tired.
The bull market is in debt-based solutions to problems of too much debt.
Not only are people not talking about their killing in precious metals at cocktail parties, the Rydex Investor Class of its mutual fund investing in precious metals, RYPMX, actually lost assets today, and its asset level of about $143 MM is near its low level of the past year. So I do not believe the public is fully engaged in gold investing, indicating that the technical target of $1350 for gold's next stop is do-able. Will another $100+ surge in the price of gold suck in the public? If that happens, let's see.
Given the lack of volume in stocks on the upmoves and rising volume on the downside, yours truly worries that last Thursday's discontinuous price action in stocks could be a harbinger of things to come before anyone thinks, just as the rising but small number of "fails" in auction rate securities in 2007 presaged the complete shutdown of that market in early 2008. Who knows, but with the S&P 500 yielding at most 2%, with 6% a tradional yield at market bottoms, who needs stocks?
Meanwhile, the simple moving average of silver for the past 40 weeks (200 days) has set an all time high in nominal dollars (for the past 30 years or so, ignoring the post-Hunt brothers craziness). The 150 day and 50 day smas have a ways to go, but for now, silver has passed an important hurdle. Its spot price is below its 2008 high, but when a long term moving average hits a high, it means that the asset has spent more time near its high than previously. China may already be in a post-bubble collapse (or it may not be) and commodities may be in for a big fall thereby, but silver is one step closer to joining gold in a breakout. Speculators should be aware that silver has the potential to collapse in price in a rout far more than most people think is likely to happen to gold.
All in all, prices are rising given that some of the excess credit "money" has been converted to transactional economic activity. Whether much of this activity represents productive use to create more growth is a very open question. Keynesians appear to believe that consumption for its own sake is to be celebrated. I beg to differ.
Methinks gold and perhaps silver have a long way to go before the public is sucked into a precious metals bubble. Of course, policy-makers could surprise on the free market side. But the Sun could rise in the west as well.
Copyright (C) Long Lake LLC 2010
The bull market is in debt-based solutions to problems of too much debt.
Not only are people not talking about their killing in precious metals at cocktail parties, the Rydex Investor Class of its mutual fund investing in precious metals, RYPMX, actually lost assets today, and its asset level of about $143 MM is near its low level of the past year. So I do not believe the public is fully engaged in gold investing, indicating that the technical target of $1350 for gold's next stop is do-able. Will another $100+ surge in the price of gold suck in the public? If that happens, let's see.
Given the lack of volume in stocks on the upmoves and rising volume on the downside, yours truly worries that last Thursday's discontinuous price action in stocks could be a harbinger of things to come before anyone thinks, just as the rising but small number of "fails" in auction rate securities in 2007 presaged the complete shutdown of that market in early 2008. Who knows, but with the S&P 500 yielding at most 2%, with 6% a tradional yield at market bottoms, who needs stocks?
Meanwhile, the simple moving average of silver for the past 40 weeks (200 days) has set an all time high in nominal dollars (for the past 30 years or so, ignoring the post-Hunt brothers craziness). The 150 day and 50 day smas have a ways to go, but for now, silver has passed an important hurdle. Its spot price is below its 2008 high, but when a long term moving average hits a high, it means that the asset has spent more time near its high than previously. China may already be in a post-bubble collapse (or it may not be) and commodities may be in for a big fall thereby, but silver is one step closer to joining gold in a breakout. Speculators should be aware that silver has the potential to collapse in price in a rout far more than most people think is likely to happen to gold.
All in all, prices are rising given that some of the excess credit "money" has been converted to transactional economic activity. Whether much of this activity represents productive use to create more growth is a very open question. Keynesians appear to believe that consumption for its own sake is to be celebrated. I beg to differ.
Methinks gold and perhaps silver have a long way to go before the public is sucked into a precious metals bubble. Of course, policy-makers could surprise on the free market side. But the Sun could rise in the west as well.
Copyright (C) Long Lake LLC 2010
Sunday, April 18, 2010
Too Much Debt, Too Much Trading
Transitory matters such as an SEC wrist-slap civil action against a bank or a volcanic explosion in Iceland can lead to reflection on larger matters. The Goldman Sachs complaint by the SEC involves a credit default swap (CDS) on mortgage-related products. As Paul Volcker has opined, this sort of "innovation" or "technology" may be useless.
I am thinking that we would all be better off with the financial products equivalent of the FDA. Let a product be demonstrated to be both safe and effective before being marketed interstate or internationally. The simplest solution is to ban CDS and let insurance companies prepare such a product as an insurance product per se, with identical regulation and reserve requirements as any other insurance product.
Other, older "innovations" are harmful. Most oil should be marketed under long-term fixed-price contracts, though shipping costs would be subject to the free market, and of course inflation/deflation clauses could be involved. After all, pumping costs of discovered oil fields are known and stable. Instead we saw in 2008 the price of oil soaring to $145 per bbl and in half a year plunging below $35. How can it be a good thing that this could occur? How is it even possible, absent supply disruptions such as from war that would send the price skyrocketing? There was no force majeure, though. Year after year, the oil traders in essence take a vigorish that belongs in the pockets of producers and consumers alike.
Who has benefited from the debt explosion the past decades? The first and greatest beneficiaries are the purveyors and traders/repackagers of the debt. Thus Japan keeps selling more and more government bonds, beyond any comprehension given that doing so has not led to any obvious benefit for their economy. Yet it keeps doing so. The US public is suggested that it does so to "fight deflation". As if lower prices are not good things for a trading country.
In the US post-Civil War, the advent of industrial processes applied to farming and manufacturing, plus cheap rail access to the mineral and other wealth of the West, deflation was the order of the day, as was a general trend toward much higher living standards.
As went Japan, so went the US and the UK. It is the bankers who benefit from all the government debt. And if the debt ultimately needs restructuring, they benefit from that as well. Those who purchase the debt may or may not benefit. If the purchaser is an insurance company, it purchases the debt simply so that it can sell an insurance product at a spread profit. If the purchaser is a central bank, then the purchase may well be for political reasons. But those who sell and endlessly resell the swelling amount of debt-- whether it be on houses (mortgages) or direct claims on the Treasury-- continue to benefit from the Bushbama Continuity on bailouts and the like.
We need more equity and less debt in society. Ultimately, traders' pricing and mispricing of securities notwithstanding, investors should be in honest situations where those who price securities actually own them for real rather than acting as middlemen or, even worse, "analysts" who cleverly are forced to disclose they have no ownership of what they recommend. Far better that a bullish analyst own the security recommended and be prohibited from selling for the time frame of the recommendation. And the opposite for a bear.
Fundamentally, the allure of alternative investments ranging from precious metals to lumber is that they are what they are. You don't need an analyst to evaluate whether Oracle is going to make money from the Sun Microsystems purchase. Thus the sell-off in gold on Friday concomitant with the Goldman news appears misplaced. Was the Friday announcement on options expiration day part of market manipulation on the SEC's part, the same SEC that is now known to have sat on the Allen Stanford scam for many, many years? (Not to mention Madoff.) Considering that the pros very recently added numerous short positions in gold futures recently, one has to take this possibility seriously. It is becoming less and less of a fringe position, I believe, considering the growing evidence of governmental involvement in the bubble and cover-up.
Copyright (C) Long Lake LLC 2010
I am thinking that we would all be better off with the financial products equivalent of the FDA. Let a product be demonstrated to be both safe and effective before being marketed interstate or internationally. The simplest solution is to ban CDS and let insurance companies prepare such a product as an insurance product per se, with identical regulation and reserve requirements as any other insurance product.
Other, older "innovations" are harmful. Most oil should be marketed under long-term fixed-price contracts, though shipping costs would be subject to the free market, and of course inflation/deflation clauses could be involved. After all, pumping costs of discovered oil fields are known and stable. Instead we saw in 2008 the price of oil soaring to $145 per bbl and in half a year plunging below $35. How can it be a good thing that this could occur? How is it even possible, absent supply disruptions such as from war that would send the price skyrocketing? There was no force majeure, though. Year after year, the oil traders in essence take a vigorish that belongs in the pockets of producers and consumers alike.
Who has benefited from the debt explosion the past decades? The first and greatest beneficiaries are the purveyors and traders/repackagers of the debt. Thus Japan keeps selling more and more government bonds, beyond any comprehension given that doing so has not led to any obvious benefit for their economy. Yet it keeps doing so. The US public is suggested that it does so to "fight deflation". As if lower prices are not good things for a trading country.
In the US post-Civil War, the advent of industrial processes applied to farming and manufacturing, plus cheap rail access to the mineral and other wealth of the West, deflation was the order of the day, as was a general trend toward much higher living standards.
As went Japan, so went the US and the UK. It is the bankers who benefit from all the government debt. And if the debt ultimately needs restructuring, they benefit from that as well. Those who purchase the debt may or may not benefit. If the purchaser is an insurance company, it purchases the debt simply so that it can sell an insurance product at a spread profit. If the purchaser is a central bank, then the purchase may well be for political reasons. But those who sell and endlessly resell the swelling amount of debt-- whether it be on houses (mortgages) or direct claims on the Treasury-- continue to benefit from the Bushbama Continuity on bailouts and the like.
We need more equity and less debt in society. Ultimately, traders' pricing and mispricing of securities notwithstanding, investors should be in honest situations where those who price securities actually own them for real rather than acting as middlemen or, even worse, "analysts" who cleverly are forced to disclose they have no ownership of what they recommend. Far better that a bullish analyst own the security recommended and be prohibited from selling for the time frame of the recommendation. And the opposite for a bear.
Fundamentally, the allure of alternative investments ranging from precious metals to lumber is that they are what they are. You don't need an analyst to evaluate whether Oracle is going to make money from the Sun Microsystems purchase. Thus the sell-off in gold on Friday concomitant with the Goldman news appears misplaced. Was the Friday announcement on options expiration day part of market manipulation on the SEC's part, the same SEC that is now known to have sat on the Allen Stanford scam for many, many years? (Not to mention Madoff.) Considering that the pros very recently added numerous short positions in gold futures recently, one has to take this possibility seriously. It is becoming less and less of a fringe position, I believe, considering the growing evidence of governmental involvement in the bubble and cover-up.
Copyright (C) Long Lake LLC 2010
Wednesday, April 14, 2010
More Downbeat Consumer Economic Polling Data as Stocks Soar
ABC's Consumer Comfort weekly poll (but based on a rolling 4 week average) is back to -47, a 5 week low and a level never seen from the poll's inception at the beginning of 2002 until May 2008.
Gallup's consumer polling shows a tad more personal optimism (feeling cheerful) but spending and hiring/not hiring statistics remain dismal.
So far, I suspect that the U. S. profit gains from domestic sources are mainly due to price increases and job cuts.
If oil prices do not go crazy on the upside, we are however likely in the past of the financial and economic cycle where all the money printing will go into sales increases due to volume as well as price increase. The ECRI has probably nailed it in predicting a yet lower baseline level of growth.
The country--and most of the world--simply needs to pay down debt.
Instead what is happening is that governmental deficits are being transmuted into private profit gains. It's a shell game that is leading to overall overvaluation of the private enterprises that are currently benefiting from this wealth transfer, and it is difficult to see why this existing trend will not continue tomorrow and then the next day. China bursting? Oil? War? Dirty nuke somewhere important?
And so this body of a stock market continues in motion while real people continue to experience depression-like circumstances.
Copyright (C) Long Lake LLC 2010
Gallup's consumer polling shows a tad more personal optimism (feeling cheerful) but spending and hiring/not hiring statistics remain dismal.
So far, I suspect that the U. S. profit gains from domestic sources are mainly due to price increases and job cuts.
If oil prices do not go crazy on the upside, we are however likely in the past of the financial and economic cycle where all the money printing will go into sales increases due to volume as well as price increase. The ECRI has probably nailed it in predicting a yet lower baseline level of growth.
The country--and most of the world--simply needs to pay down debt.
Instead what is happening is that governmental deficits are being transmuted into private profit gains. It's a shell game that is leading to overall overvaluation of the private enterprises that are currently benefiting from this wealth transfer, and it is difficult to see why this existing trend will not continue tomorrow and then the next day. China bursting? Oil? War? Dirty nuke somewhere important?
And so this body of a stock market continues in motion while real people continue to experience depression-like circumstances.
Copyright (C) Long Lake LLC 2010
Wednesday, March 10, 2010
Lithuania: "We Can't Live Endlessly on Debt"
Bloomberg.com is reporting Greece Should Copy Baltic Adjustment, Sarkinas Says.
In it, the governor of little Lithuania's central bank compares his country's adjustment to the Global Financial Crisis to the options open to Greece and says:
Lithuania’s central bank governor said Greece should avoid seeking international aid to solve its fiscal crisis and follow the example of the Baltic nation, which suffered the European Union’s second-deepest recession last year without a bailout.
“Greece must show determination that it is willing to solve its problems,” Reinoldijus Sarkinas, 63, said in an interview in Vilnius. The EU will probably assist Greece “with loans to tackle the most acute problems. But only Greeks can solve their problems, nobody else will do that for them.” . .
“We must save because we can’t live endlessly on debt and by simply consuming borrowed money,” the central banker said.
In it, the governor of little Lithuania's central bank compares his country's adjustment to the Global Financial Crisis to the options open to Greece and says:
Lithuania’s central bank governor said Greece should avoid seeking international aid to solve its fiscal crisis and follow the example of the Baltic nation, which suffered the European Union’s second-deepest recession last year without a bailout.
“Greece must show determination that it is willing to solve its problems,” Reinoldijus Sarkinas, 63, said in an interview in Vilnius. The EU will probably assist Greece “with loans to tackle the most acute problems. But only Greeks can solve their problems, nobody else will do that for them.” . .
“We must save because we can’t live endlessly on debt and by simply consuming borrowed money,” the central banker said.
Good for Sarkinas. Not that anyone is listening in Washington.
Copyright (C) Long Lake LLC 2010
- Unlike Greece, Lithuania is an EU member but not a Euro currency member. It wants "in" enough to do the right things.
Friday, January 1, 2010
New Year Theme Similar to 2009: Too Much Debt
I owe he as you owe me and you owe he and we all owe together. (Apologies to Lennon/McCartney and I Am the Walrus.)
It's the debt, stupid. With the U. S. and other countries such as Australia and I believe the U. K. at record levels of debt to GDP, the web of who owes what to whom is more and more complex, and using a different metaphor, the ladder of debt is higher and less well-supported. All the "extend and pretend" accounting schemes have delayed recognition of the problems of the banks, and the stock charts of every large bank in the U. S. show weak long-term charts, even JPM. Past may not be prologue, but the charts of the top tech and medical companies show long-term accumulation.
And count me skeptical that China's any better.
Our government has done exactly the wrong thing by dealing with the housing collapse by guaranteeing more low-downpayment loans. At least the large complex financial institutions have sold stock, and while Citi and probably BofA are truly impaired, at least they have repaid TARP by selling equity rather than borrowing.
Anyone who is not in power in Washington who predicts on the record whether inflating prices or deflating prices are to come in 2010 is pretending. There are too many known unknowns and possibly unknown unknowns to even guess. Increasing economic activity is baked in the cake and baked in the markets for the next 6 months; but could even the modest tax increases that likely would come with healthcare "reform" legislation plus the expectation of the 2011 expiry of the Bush tax cuts derail the recovery just as a tax increase in Japan about a decade ago was said to have helped turn the economy down? Or could economic vigor in the BRIC countries pressure the price of oil enough that our economy turns down even without any monetary or fiscal tightening? Or will the economy just sail along given all the pro-cyclical stimulus, and perhaps China's property situation will turn into a burst bubble.
It smells like an interesting year.
Copyright (C) Long Lake LLC 2009
It's the debt, stupid. With the U. S. and other countries such as Australia and I believe the U. K. at record levels of debt to GDP, the web of who owes what to whom is more and more complex, and using a different metaphor, the ladder of debt is higher and less well-supported. All the "extend and pretend" accounting schemes have delayed recognition of the problems of the banks, and the stock charts of every large bank in the U. S. show weak long-term charts, even JPM. Past may not be prologue, but the charts of the top tech and medical companies show long-term accumulation.
And count me skeptical that China's any better.
Our government has done exactly the wrong thing by dealing with the housing collapse by guaranteeing more low-downpayment loans. At least the large complex financial institutions have sold stock, and while Citi and probably BofA are truly impaired, at least they have repaid TARP by selling equity rather than borrowing.
Anyone who is not in power in Washington who predicts on the record whether inflating prices or deflating prices are to come in 2010 is pretending. There are too many known unknowns and possibly unknown unknowns to even guess. Increasing economic activity is baked in the cake and baked in the markets for the next 6 months; but could even the modest tax increases that likely would come with healthcare "reform" legislation plus the expectation of the 2011 expiry of the Bush tax cuts derail the recovery just as a tax increase in Japan about a decade ago was said to have helped turn the economy down? Or could economic vigor in the BRIC countries pressure the price of oil enough that our economy turns down even without any monetary or fiscal tightening? Or will the economy just sail along given all the pro-cyclical stimulus, and perhaps China's property situation will turn into a burst bubble.
It smells like an interesting year.
Copyright (C) Long Lake LLC 2009
Tuesday, October 6, 2009
Same Old Same Old But More So
The debt monster continues to mutate, as commented upon by Mish in Japanese Moratorium Will Postpone Collection of Principal and Interest on Consumer and Business Loans:
It's important to remember that no matter how nutty things have gotten during this credit bust, even nuttier solutions are waiting in the wings.
The Japanese Minister of Finance has proven that in spades by proposing a debt moratorium to individuals as well as firms. The moratorium would postpone repayment of principal and interest on loans, in an effort to spur more bank lending.
Please consider Kamei Says Moratorium Won’t Increase Japan Bad Loans.
I won't confuse this post further by quoting from the linked Bloomberg.com article; please go to Mish's site to read on or click on the link here.
What is happening is tragic. The financialization of the world has proceeded in ridiculous ways. There is no disclosure to the owners (stockholders) of the complex financial companies as to what these companies own and owe. All is gambling. Rather than deal with matters of equity, the U. S., U. K. and Japanese governments all just want to increase the debt load. Write it off later? No biggie.
It is no surprise that gold has surged to a nominal all-time high. That this occurred relatively quietly is bullish.
In the meantime there is no leadership on virtually anything from the White House.
It is believed here that gold prices will trend higher as other parts of the globe that did not go wild on credit and derivatives resume a normal functioning of their economies. The two major countries that did are the U. S. and the U. K. Each country is undergoing "quantitative easing" (or "qualitative easing") AKA money-printing to allow their Treasuries to issue more and more debt for less and less productive purposes.
Note that this debt is NOT the same as true money-printing a la Zimbabwe. These are interest-bearing securities. They can crowd out other players from the debt markets and can be associated with a decline in the general price level. In any case, they reflect a sick financial system. Whether the sick financial system stems from or is caused by a sick general economy, or whether the two co-evolved, I have no opinion.
Most asset classes remain in some reasonable balance, which is why Jim Rogers recently reiterated that he has no short positions. The momentum and the political-economic trends are with physical commodities, as the regulatory forbearance being shown in Japan and the return of bubble era home lending standards in the U. S. exemplify.
Copyright (C) Long Lake LLC 2009
It's important to remember that no matter how nutty things have gotten during this credit bust, even nuttier solutions are waiting in the wings.
The Japanese Minister of Finance has proven that in spades by proposing a debt moratorium to individuals as well as firms. The moratorium would postpone repayment of principal and interest on loans, in an effort to spur more bank lending.
Please consider Kamei Says Moratorium Won’t Increase Japan Bad Loans.
I won't confuse this post further by quoting from the linked Bloomberg.com article; please go to Mish's site to read on or click on the link here.
What is happening is tragic. The financialization of the world has proceeded in ridiculous ways. There is no disclosure to the owners (stockholders) of the complex financial companies as to what these companies own and owe. All is gambling. Rather than deal with matters of equity, the U. S., U. K. and Japanese governments all just want to increase the debt load. Write it off later? No biggie.
It is no surprise that gold has surged to a nominal all-time high. That this occurred relatively quietly is bullish.
In the meantime there is no leadership on virtually anything from the White House.
It is believed here that gold prices will trend higher as other parts of the globe that did not go wild on credit and derivatives resume a normal functioning of their economies. The two major countries that did are the U. S. and the U. K. Each country is undergoing "quantitative easing" (or "qualitative easing") AKA money-printing to allow their Treasuries to issue more and more debt for less and less productive purposes.
Note that this debt is NOT the same as true money-printing a la Zimbabwe. These are interest-bearing securities. They can crowd out other players from the debt markets and can be associated with a decline in the general price level. In any case, they reflect a sick financial system. Whether the sick financial system stems from or is caused by a sick general economy, or whether the two co-evolved, I have no opinion.
Most asset classes remain in some reasonable balance, which is why Jim Rogers recently reiterated that he has no short positions. The momentum and the political-economic trends are with physical commodities, as the regulatory forbearance being shown in Japan and the return of bubble era home lending standards in the U. S. exemplify.
Copyright (C) Long Lake LLC 2009
Monday, September 14, 2009
Statism Update
Despite having done little asserting of state power to reform the behavior of bank holding companies in a way that would make the "system" stabler, the Administration moves more deeply to involve the state in the economy in other ways. From the New York Times in U.S. Is Finding Its Role in Business Hard to Unwind :
When President Obama travels to Wall Street on Monday to speak from Federal Hall, where the founders once argued bitterly over how much the government should control the national economy, he is likely to cast himself as a “reluctant shareholder” in America’s biggest industries and financial institutions.
But one year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.
Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.
If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.
Government at all levels already controls a very large share of medical expenditures, even before Washington acts on health care. Add in military spending, education, transfer payments, and it becomes harder to see what is left of private enterprise. Restaurants, computers and television, toothpaste?
The U. S. has joined much of Europe in practicing a large and growing mix of corporatism and socialism: statism.
All financed with an ever-growing ratio of debt to real economic output.
Regardless of what one thinks of the prior points, I think that most people agree that the debt aspect is troublesome.
The Governmental solutions in the U. S. and the U. K. are not encouraging in that regard.
Copyright (C) Long Lake LLC 2009
When President Obama travels to Wall Street on Monday to speak from Federal Hall, where the founders once argued bitterly over how much the government should control the national economy, he is likely to cast himself as a “reluctant shareholder” in America’s biggest industries and financial institutions.
But one year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.
Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.
If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.
Government at all levels already controls a very large share of medical expenditures, even before Washington acts on health care. Add in military spending, education, transfer payments, and it becomes harder to see what is left of private enterprise. Restaurants, computers and television, toothpaste?
The U. S. has joined much of Europe in practicing a large and growing mix of corporatism and socialism: statism.
All financed with an ever-growing ratio of debt to real economic output.
Regardless of what one thinks of the prior points, I think that most people agree that the debt aspect is troublesome.
The Governmental solutions in the U. S. and the U. K. are not encouraging in that regard.
Copyright (C) Long Lake LLC 2009
Thursday, June 11, 2009
Common Sense from Nassim Taleb
CNBC reports on an interview it had Wednesday morning with the author of "The Black Swan", Nassim Nicholas Taleb, Ph.D. Here is the text of CNBC's summary of the interview in its entirety:
The Obama administration's attempts to fight the financial crisis with more cash is like treating a bad tooth with Novocain instead of a root canal, Nassim Taleb, author of "The Black Swan," told CNBC Wednesday.
The main problem is the level of debt, and Taleb compared the authorities' efforts with those of a not very skilled pilot who is trying to land a Concorde on a narrow strip, between an ocean of deflation and a mountain of hyperinflation.
"These people failed us, they're going to fail us again," Taleb told "Squawk Box."
"They tell the banks to lend more but have less leverage," and expect people to go out and consume while unemployment is rising, he added.
"The way to restart everything is restructuring, conversion of debt into equity, convince people that debt is not good," Taleb said.
"Do not delay a root canal," he added. "Don't do piecemeal solutions to a problem that is fundamental."
"The solution is there, convert debt to equity. Usually it happens with Chapter 11, let's do it faster, and across the board," Taleb said.
Dr. Taleb is my number one man in this crisis. One reason is that he looks at matters in a system-wide fashion.
No one knows whether the recession/depression/banana will end this month, next quarter, etc., and no one really needs to know. How does the long-term value of, for example, IBM or McDonald's, or a medical technology company, change if the abstraction called the "economy" bottoms in one quarter or another?
What really matters is risk-reward, which Taleb has been top-notch at.
There's no doubt at Econblog Review that the U. S. needs to move to equity rather than debt. Piling debt upon debt will fail. When? No one knows. But it will fail. Is the President or Congress listening to this advice? No.
More's the pity.
Copyright (C) Long Lake LLC 2009
The Obama administration's attempts to fight the financial crisis with more cash is like treating a bad tooth with Novocain instead of a root canal, Nassim Taleb, author of "The Black Swan," told CNBC Wednesday.
The main problem is the level of debt, and Taleb compared the authorities' efforts with those of a not very skilled pilot who is trying to land a Concorde on a narrow strip, between an ocean of deflation and a mountain of hyperinflation.
"These people failed us, they're going to fail us again," Taleb told "Squawk Box."
"They tell the banks to lend more but have less leverage," and expect people to go out and consume while unemployment is rising, he added.
"The way to restart everything is restructuring, conversion of debt into equity, convince people that debt is not good," Taleb said.
"Do not delay a root canal," he added. "Don't do piecemeal solutions to a problem that is fundamental."
"The solution is there, convert debt to equity. Usually it happens with Chapter 11, let's do it faster, and across the board," Taleb said.
Dr. Taleb is my number one man in this crisis. One reason is that he looks at matters in a system-wide fashion.
No one knows whether the recession/depression/banana will end this month, next quarter, etc., and no one really needs to know. How does the long-term value of, for example, IBM or McDonald's, or a medical technology company, change if the abstraction called the "economy" bottoms in one quarter or another?
What really matters is risk-reward, which Taleb has been top-notch at.
There's no doubt at Econblog Review that the U. S. needs to move to equity rather than debt. Piling debt upon debt will fail. When? No one knows. But it will fail. Is the President or Congress listening to this advice? No.
More's the pity.
Copyright (C) Long Lake LLC 2009
Wednesday, April 22, 2009
Bloomberg Headline Inadvertently Lets the Banksters' Cat Out of the Bag
There is a deeper implication of the headline than the obvious ones. This blog has argued since its inception last year that the Obama administration was going to follow the Bush policies and support the banksters: there would be no change in that key regard. Now, let us think of the massive government spending not in terms of Keynes but in terms of money flow to explain why two otherwise very different Presidents have had such amazing policy continuity vs. Big Finance.
Who benefits first from increasingly massive government bond/bill sales? Why, it is the primary dealers, that's who, plus the entire debt distribution chain. So, whether or not the cost to the public per job created (name your metric) is a good deal is, in fact, not very relevant to the Establishment. The Establishment- call it banksters plus their allies in Government and the media etc.- loves debt financing because it is so profitable from day one. Eliminate the debt and you eliminate the initial fees plus all the unending fees from trading the debt, sliced and diced as the debt may be, forever and ever.
Viewed from this perspective, the current economic depression is fine for the financial industry. States and other localities now "need" to float more and more debt just to finance their operations. (Cutting spending in a serious way just won't serve the needs of the financiers until the very brink of bankruptcy.) How else can one explain a 9% expenditure increase in New York State's next proposed budget at a time of falling revenues and no price inflation? How else can one explain the truly massive California debt sales to "invest in the future" in the face of already large current deficits?
The only way to truly reduce the influence of Big Finance, and the financial industry in general, is for all of us and our governments to go on a fiscal diet, live within our means, and only issue/take on debt only when it is really and truly needed. From a policy perspective, it means such things as avoiding another quagmire in Asia (think Pak-ghanistan) and making the shareholders and bondholders of troubled companies responsible for the consequences of the troubles the businesses are undergoing before the taxpayer steps in. Forget "better" regulation. Instead, follow Nassim Taleb's advice and ban complex financial products. Then put in the financial equivalent of an FDA and only allow new financial products if they are proven both safe and they are effective in that they solve an existing problem that cannot be solved by existing financial instruments.
If you analyze the current crisis from the standpoint of what government policies are best for the Merchants of Debt and ignore the competing policy arguments (e.g. Keynes vs. Friedman), you will have a coherent framework that will allow you to readily understand all governmental and business decisions that have been made.
Copyright (C) Long Lake LLC 2009
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