Black Monday 2: Economic Boogaloo

[Selenite]

Just reading some analysis (and again, don't bet any real money on it!): Assuming ND and PASOK form a pro-euro/austerity coalition, they've just managed to kick the Grexit can down the road for another few months or so. Greek GDP will contract another 7% this year and they will not meet the targets. Debt to GDP will be getting worse, not better, and we'll have another crisis come October or November, just in time to coincide with our own election.

At what point is there nothing left of the can to kick?

I really started believing that the end of the torment for Greece would come fairly swiftly, until it dawned on me that in fact this could be dragged on for years with more half-baked solutions and more borrowing piled onto countries that had no hope of repaying their original public debts, never mind the added burdens now being targeted at them. I also fear the longer the fuse burns, the bigger the explosion. Maybe that works in the interest of certain parties. Gives them more time to clear the blast zone.

Likely, we'll soon see Oxfam and Unicef working the streets of Greece, Spain, etc.

The 21st century is not looking too promising. Oddly, the centennial of the World War One is coming up. I've heard it said that the slaughter of trench warfare on the Western front was much like the classic definition of insanity. Trying the same thing over and over again and expecting a different result. Looking at our can-kicking and fiscal policies, not much has changed.

[publius]

Well, the markets, at least ours, didn't soar too much, did they? And I see Spanish yields jumped again, with the 10yr around 7.3% and the 2yr spiking 65 bps in one day. And AEP is hitting the panic button, as witness these two latest of his:

http://www.telegraph.co.uk/finance/c...s-elected.html

That was dated the 17th, and before the Greek results were known to him, I assume:

Then this one dated today, the 18th:

http://www.telegraph.co.uk/finance/f...slam-shut.html


AEP is right about a lot of things, and sees the problems very well. But as I think I was rambling about before (probably more than once), he just falls in with the money printers when it comes to solutions. I was also shaking my head when Steve Keen, Aussie economist whose debt analysis stuff I'd become enamored with, pulled the same thing.

They both realize debt is the problem, and we've been running up debt faster than GDP and have finally hit the wall, the limit to that process (it really is just like a heroin addiction -- it feels great until it ruins you and then you die). However, they both want an easy way out. Keen wrote something about "state money" being showered to cure the debt problem, which would, in our case, be Uncle printing up wads of US notes (or digital equivalent) and showering that on everybody.

I just wanted to pull my hair out when I read that. There is no way to avoid the pain of debt deflation, just as there is no easy way out for the junkie (or drunk, or morbidly obese, etc etc).

[Ara Pacis]

I just wanted to pull my hair out when I read that. There is no way to avoid the pain of debt deflation, just as there is no easy way out for the junkie (or drunk, or morbidly obese, etc etc).

Do you include Debt destruction as debt deflation? I'm not sure which one is better in the long run.

I also fear the longer the fuse burns, the bigger the explosion. Maybe that works in the interest of certain parties. Gives them more time to clear the blast zone.

Gives me time to prepare my plans for world domination. I've been slacking.

[Heid the Ba']

The 21st century is not looking too promising. Oddly, the centennial of the World War One is coming up. I've heard it said that the slaughter of trench warfare on the Western front was much like the classic definition of insanity. Trying the same thing over and over again and expecting a different result. Looking at our can-kicking and fiscal policies, not much has changed.

Cute quote but with no historical basis. The tactics of the Great War varied dramatically from the 1914 essentially C19th infantry attacks to 1918 combined arms attacks with tanks and ground attack aircraft. The results also varied dramatically, the 1914 Battles of the Frontiers had markedly different results from the 1914 Battle of Tannenberg, Caporetto from the Kaiserschlacht etc.

[profloater]

Perhaps the point is in the causes of the great war rather than the warfare tactics. At that time a century ago there was a global empire (British) and several parties wanting to knock it and the dominant currency (pounds) off the pedestal. The war escalated and was disastrous, reduced Britain, and set up the next global superpower USA but did not solve any problems because within a generation we had the second WW. which completed the bankrupcy of Britain. The current situation is not a rerun of that set of mistakes, I hope, unless maybe others think there are direct lessons there? I have figures for 1913 of capital exported by country:
1 britain 3,700, M GBP
2 france 1,600, M GBP
3 Germanay 1200, M GBP
USA 500 M GBP
Netherlands 400
Switzerland 260
Belgium 200
Japan and Russia 60 each
The biggest debtor then was USA 750 M GBP which then after the war became the second greatest investor in a big switcharound.

[Hlafordlaes]

....
They both realize debt is the problem, and we've been running up debt faster than GDP and have finally hit the wall, the limit to that process (it really is just like a heroin addiction -- it feels great until it ruins you and then you die). However, they both want an easy way out. Keen wrote something about "state money" being showered to cure the debt problem, which would, in our case, be Uncle printing up wads of US notes (or digital equivalent) and showering that on everybody.

Found this fairly good summary of Kyle Bass' analysis of the debt overhang and its lack of easy solutions. Presentation is rather pedestrian and needs a lot of skimming, but the flowchart makes sense of what's been going on, imo.

As for Bass, I tend to agree with the core analysis but not with some rather outré views on the political history of the last 30 years, which I shall not discuss here.

[profloater]

Debt can be said to have been invented in the 17th C as an extension of trust in people and in the future and became an expression of the relationship between generations as well as between neighbours, so governments impose debt on future generations until at some point the youngsters cannot or will not pay. Devaluation is obviously a form of default but it is meaningless if everyone is doing the same, there can then only be inflation and that is a vicious spiral. Reasons to be cheerful?...............

[peteshimmon]

Weeeeeee...I hear there is an outbreak of
finger pointing at the latest G20 get together.
Wondered when it would start

If some outfits were let go on Wall street
in the late ninties, there would have been
no derivatives and no Greek whatjamacallit.

Yep.

[publius]

Debt can be said to have been invented in the 17th C as an extension of trust in people and in the future and became an expression of the relationship between generations as well as between neighbours, so governments impose debt on future generations until at some point the youngsters cannot or will not pay. Devaluation is obviously a form of default but it is meaningless if everyone is doing the same, there can then only be inflation and that is a vicious spiral. Reasons to be cheerful?...............

Debt goes back a bit further than the 17th Century. It goes back to Sumer, and is as old as recorded history. In fact, debt and its flip side credit most likely predate money itself.

A word about debt. I think I rambled on before about this, so forgive the rerun if you've seen it before, but there is good debt and bad debt, and really a third kind, really bad debt, Satanically evil, 666, demonic debt. Good debt is productive. That is it allows (or spurs) production that wouldn't otherwise occur. Classic example: farmer borrowing to put in a crop. With productive debt, the fruits exceed the costs. In modern terms, productive debt results in GDP increasing more than the increase in debt. IOW, one dollar of debt produces more than one dollar of incremental GDP, dGDP/dDebt > 1. Debt to GDP decreases.

Bad debt is non-productive, debt that merely fuels consumption and does nothing to increase future production. This is merely pulling foward demand. You're eating a hamburger today for which you will pay next Tuesday (as Wimpy, the famous Popeye character would always promise), and, with interest, you're paying more next Tuesday for that hamburger than you would today. You are spending future economic surplus today and not spurring any future production. Keep doing this and dGDP/dDebt < 1. Debt to GDP increases. You're digging a hole in future economic production to build a mound up in the present. When tomorrow comes, you either have to decrease you current spending to make up for the hole, or dig a deeper hole yet further in the future.

Evil debt is basically borrowing to go to Vegas. That is, borrowing for speculative purposes. If cosumptive debt is heroin, then speculative debt is "bath salts" or something.

[Extravoice]

I saw some talking heads who were debating whether a bigger Keynesian response is needed. The pro-Keynes guy went on about how the government should borrow during a downturn to stimulate the economy.
As I've said before, I'm no economist, but shouldn't the flip-side to that approach be that government should pay down debt during an upturn?

Checking Wikipedia, this chart for the US shows public debt pretty flat from the end of WW II through 1980, and something that approximates an exponential rise since. Things don't look quite as bad if you compare debt to GDP; there is even a noticeable dip in the late 1990s, but the very right side of both charts is pretty scary. We'll just pay it down during the next upswing (Let's hope it is a big one, we'll need a lot of cash to down that debt).

[Extravoice]

Debt goes back a bit further than the 17th Century.

I blame mathematicians for inventing negative numbers.

Imagine what could happen if Wall Street discovers imaginary numbers.

[Hlafordlaes]

I saw some talking heads who were debating whether a bigger Keynesian response is needed. The pro-Keynes guy went on about how the government should borrow during a downturn to stimulate the economy.
As I've said before, I'm no economist, but shouldn't the flip-side to that approach be that government should pay down debt during an upturn?

That's what I always thought. But the government actually running a surplus, as iirc it did for a short time during Clinton, has almost been unheard of in the last 30 years. Imagine for a minute someone suggesting we raise taxes enough to run an intentional surplus and/or pay down debt principal.

It's also true that debt is more sustainable if there is net capital inflow, but the US has run a current account deficit since the early 1980's. When I was in B-school getting my '80s indoctrination, I tried asking around about how the US could allow manufacturing to wither so, that not producing meant net importing. The profs were all about Wall Street and couldn't care less. The Japanese students used to grin at me knowingly (not that their country has handled their budget any better; in fact, worse.)

[publius]

Checking Wikipedia, this chart for the US shows public debt pretty flat from the end of WW II through 1980, and something that approximates an exponential rise since. Things don't look quite as bad if you compare debt to GDP; there is even a noticeable dip in the late 1990s, but the very right side of both charts is pretty scary. We'll just pay it down during the next upswing (Let's hope it is a big one, we'll need a lot of cash to down that debt).

That is only public debt (and federal at that). To see the true story, one must look at total debt, public (including state and local) plus private debt. I've posted those charts before and they may still be around in the "upload thingy". Ah, here we go.

[publius]

Somehow, those got put in at the very top. The trouble is FRED data doesn't go back far enough to see the Great Depression and those two are charts I got from somewhere with that data. At any rate, you can see what GD 1.0 was. And you can see that the federal debt incurred during WWII, while significant when you only look at public debt, was barely a little bump in the overall deleveraging wave.

We "went Ponzi" in the 20s, running up debt faster than GDP. Note in '29 to the depths of the Depression around '34 debt/GDP was *still rising*. This was due to GDP collapsing faster than debt was. When the debt was finally destroyed, the market cleared and we started humming again. And it didn't hurt that after WWII, most of the industrial world save us was destroyed. We were on top of the heap.

Note debt to GDP (and again, this is total debt) remained stable at around 150% after that process. We then went Ponzi again in the mid 80s and managed to get debt to GDP higher than even the Depression peak before it started collapsing. The housing bubble was the last hurrah of that Ponzi process. Both consumptive and speculative debt were involved there. Speculation fueled by easy credit drives up house prices. People are sitting around and note their home value has been going up. They stupidly take out "home equity" loans (used to be called second mortgages and there was a strong stigma against it) and blow it on consumption (new cars, fancy vacation, stock market speculation, etc, etc).

[publius]

FRED data on this goes back to around 1950. Here is total credit market debt outstanding:



Now, let's divide that by GDP:

[publius]

You can see that our current "deleveraging" is just a drop in the bucket compared to GD 1.0. To clear the market, you can see how far that needs to come down. And that will be weeping, wailing, and gnashing of teeth indeed.

In absolute dollar terms, debt started to come down, then turned around and is a smidge higher than before. That is the federal govt trying to take over the debt, ramping up its own deficit spending as private debt starts crashing. That is simply the public sector trying to keep the bubble going. It will fail. The private sector can't take over until the debt is cleared. And the public sector will itself reach its own debt wall and crash if it keeps trying to maintain the Ponzi.

[publius]

And another thing. I pull up those graphs, print them out, and show people. There are the dummies who don't know what it means and continue in blissful ignorance. But the reaction of those who do understand it interesting. Their eyes sort of bug out when the realize yes, we've been running a debt Ponzi for the last 25 - 30 years. They realize it is unsustainable, and it means a lot of our purported prosperity was really a lie, an illusion created by the debt Ponzi. Then they begin to ponder what it means for the future. Most of them just shut off at that point, refusing to accept reality.

It's sort of like the doctor telling the patient who just had a heart attack that he's going to have make some major changes. He's going to have to stop smoking, stop stuffing his face, etc, etc. He can't bear the thought of what that means to his current lifestyle.

[profloater]

Oh yes and Publius did not mention another bit of history going back between the world wars. You could say before WW1 countries were competing by trade, then there was the costly fighting war then currency war began. Countries came off the idea of currency backed by gold, the gold standard (and silver standard for China, Iran, Hong Kong, Saudi...) Coming off the gold standard allowed devaluation to compete internationally, Britain 1931, USA 1933, France 1936, these devaluations whipped around the world and the silver standard was dropped too. Germany was ruined and...WW2. That was expensive and as Publius said, USA came out on top and with most of the gold that became good news again. All that paper money from 1931 on allowed modern inflation to be backed by promises alone. Now we can see that these promises just cannot be kept. As prof. Nial Fergusson is saying in the Reith lectures on the BBC, the debt implied (more than implied) for the next generation is just huge in terms of pensions,health and welfare for the aging population of the mostly western world. The figures are just mind boggling.

[Hlafordlaes]

.... Then they begin to ponder what it means for the future. Most of them just shut off at that point, refusing to accept reality.

Not me. I am proactively searching sites like BAUT for a means to shift among multiverses. I'm sure there's one in which Bill Gates serves me coffee.

[Extravoice]

I am proactively searching sites like BAUT for a means to shift among multiverses.

Yeah, the investment in the Large Hadron Collider had better pay off.

[profloater]

I propose economics global history goes in cycles something like this:

Hunters,, Farmers,, Warriors,, Traders,, Bankers,, Derivatives,, Survivors,,, Hunters,, Farmers,,,,,

[HenrikOlsen]

Debt goes back a bit further than the 17th Century. It goes back to Sumer, and is as old as recorded history. In fact, debt and its flip side credit most likely predate money itself.

"If you let me use your rock, you'll get it back tomorrow with a bit of the antler-beast I'll kill with it."

Lending with interest is old enough that the Bible forbids it, which indicates that the guys who wrote it were aware of some of the problems even back then.

I blame mathematicians for inventing negative numbers.

Accountants are perfectly capable of counting dept even though after more than half a millennium they still don't know what a negative number is.

When Pacioli described it in 1494, he wasn't writing about something new but was rather putting down "current best practices" is a school textbook.

[profloater]

On the defensive, the debt idea from the 17th C is paper debt that is kind of universal, not tied to a specific transaction or trade and not intrinsincally valued as were the gold coins before. The government invented this paper debt to fund spending that would be paid for vaguely in the future, not really based on the wealth held in a coffer. The concept that you could just print wealth was novel.

When we come to pensions, say, there are "pensions pots" but most are current account pensions. That is the pension for the retired is paid by contributions from the currently working. That sounds all right until the promise or commitment for such current account pensions clearly encumbers the not yet born. Good pensions are vote winners because the unborn don't get the vote.

[syzygy42]

What happens if Greece beats Germany today?

[Extravoice]

They move to the semi-finals?

[HenrikOlsen]

What happens if Greece beats Germany today?

Winner gets to leave the eurozone?

[publius]

On the Spanish front, there is talk of a new plan. They've apparently realized they can't solve a debt problem with more debt. Spain can't recapitalize its banks because it can't handle the new debt, not even from a EU bailout. "Debt saturation" is a term they're using (duh, I say). So, the talk is a massive, *forced*, debt for equity swap on the bondholders, amounting to somewhere north of €100B. Maybe close to €200B. So, if you own bonds of one of these banks, you suddenly own stock, not bonds, and thus the debt side of the balance sheet is reduced, and the losses are absorbed by the new stockholders.

Note this is debt destruction by accounting means (backed by the force of govt.), and would be much like a bankruptcy "package", but it won't be called that. If done, it will be done quickly, essentially at the point of a gun to all involved.

[publius]

And the ECB is trying to relax collateral rules, but the latest is Germany, in the form of the Bundesbank, may be balking at it. Basically, with all the credit downgrades, of sovereigns as well as banks, by the rules, much of the collateral has become near junk. So change the rules, ignore the credit ratings and make up your own rules. The ECB announced that, but apparently the Germans contingent is balking at that.

[Extravoice]

So, if you own bonds of one of these banks, you suddenly own stock, not bonds...

This gives new meaning to the old saying that goes something like:
"If you owe the bank $1,000, it owns you; but if you owe the bank $1,000,000 you own the bank."

[publius]

I'm getting in the Central Bank/monetary weeds about the ECB system, specifically the TARGET2 transfer system. Here's a chart that shows that how monetary slight of hand is essentially keeping the system from falling apart.



I'd seen reference to this TARGET2 "imbalance" business, but only just now did what's really going on hit me. Money is essentially being created at will to finance capital outflows of the PIIGS that go to Germany and the other "good" (so far) countries.

If the system flies apart and there are big X-exits, this is going to be a nightmare. If you want to appreciate this, I'm going to have to ramble on and we'll really get into the weeds of how the ECB/Euro operates. The Fed, in the form of the regional banks actually does something similiar, but they "settle" as need be.

So if you want to know what the above chart means, get ready to go into some monetary weeds. But it is sham really and it just hit me.