First, some definitions.
Deposits include foreign deposits, checkable deposits, currency, time and savings deposits, and money market fund shares.
Credit Market Instruments' Assets include open market paper, treasury securities, Agency- and GSE- backed securities, municipal securities, corporate and foreign bonds, other loans and advances, and mortgages.
Credit Market Instruments' Liabilities include home mortgages, consumer credit, municipal securities, bank loans n.e.c., other loans and advances, and commercial mortgages.
Tangible assets such as real estate and durable goods are not included, nor are stocks, mutual funds, life insurance, or pensions. Some of that could easily be cashed out for extra spending power, but as seen in recent years, it gets a bit dicey if everyone wishes to do the same. Further, the point of this post is to actually show that tangible assets, stocks, and mutual funds are at risk. I have little doubt that they will eventually be sold at some point to provide at least some future spending power.
I can spend money by withdrawing deposits I have at the bank, by selling the credit market assets that I own (savings bonds), or by simply taking on more credit market liabilities in the form of a loan (payday loan). That is my combined spending power at any moment in time.
This type of spending power is not sustainable though. Every dollar I borrow to fuel my current spending is one less dollar I'll have to fuel my spending at some point in the future.
This charts shows spending power as the money we have in savings plus the amount of money we are owed minus the amount of money we owe. That is just about the nastiest chart I could possibly put on my blog. Sorry.
It gets worse though. See that recovery in recent years? Our government borrowed that for us. Technically speaking, at least in my world, it isn't real spending power. It's just more illusionary spending power intended to help prop things up.
There's $5 trillion in new public debt since I turned bearish in 2004. It's long-term spending power that we've permanently lost. If we continue down this path then I can say with 100% certainty that we will reach a point when we cannot borrow any more. We will have simply postponed The Great Depression.
From where I sit, it will not be a black swan event. It will simply be destiny catching up to us, much like it has for Greece. The goods news is, if you can even call it good news, is that I think the entire world is in the same boat. At least we won't be alone.
See Also:
Pure Spending Power! Rarr!
Trend Line Disclaimer
Source Data:
FRB: Flow of Funds
Well, for every great debt there is a great asset on someone's books.
ReplyDeleteBasically the asset-holders are not as rich as they think they are.
How we back out this transaction is the tricky bit, of course.
Fred,
ReplyDeleteYeah, I hear that.
I've also been thinking about what happens if someone decides they need more spending power and therefore decides to sell stocks, real estate, and/or durable goods.
The person on the other side of that transaction decreases their spending power by a similar amount in order to make the purchase.
In other words, if net spending power as a whole is negative (as I suggest in that second chart), it won't be improved if everyone panics and tries to sell their hard assets to raise cash.
Stag,
ReplyDelete"...if everyone panics and tries to sell their hard assets to raise cash."
Let's define "everyone" as only those with hard assets to sell.
That fact alone turns "everyone" into a far smaller subset of all of us.
Panic "contained". No problems.
Am I being too simplistic?
G.H.,
ReplyDeleteAm I being too simplistic?
You might be!
Let's define "everyone" as only those with hard assets to sell.
I think we may need to take a subset of your subset.
Let's redefine "everyone" as only those with hard assets to sell who can actually find those with cold hard cash who will buy.
Now look what you've done!! ;)
You're very good with charts and graphs, Mark. So is Karl Denninger.
ReplyDeleteInteresting debate between him, at Market Ticker, and Gordon Gekko, at Clusterstock, on gold, money, credit, and wealth. You should check it out. I'd be interested to read your thoughts on the matter.
Sorry, Gordon Gekko is at Zero Hedge.
ReplyDeleteGawainsGhost,
ReplyDeleteI read some of that debate on market ticker. I'm pretty much siding with Karl Denninger in the long run, although there's no telling what people will pay for hypnotic rocks. I owned many krugerands from 2004 to 2006. They were very hypnotizing to me but I sold them just the same.
If aluminum isn't a decent store of value at about $150 per cubic foot, then I have no interest in gold at $20+ million per cubic foot.
They say the answer to high commodity prices is high commodity prices. That was true in the early 80s and it was true of oil in 2008.
Gold was an extremely unsafe store of value twice in the last century. It's been confiscated once. It's crashed big time once, and I do mean big. The grocery store will not take it as payment. So exactly how is gold "money"?
The odds of going back to a gold standard are right up there, at least in my opinion, of going back to a horse standard. We used horses to travel for many, many centuries. I think we're pretty much done. We've moved on.
I'm not buying the theory that gold is a long-term inflation hedge AND a long-term deflation hedge. The real reason gold did so poorly in the 1980s and 1990s was that inflation was far less than investors expected AND gold was extremely overpriced. That's my opinion and I'm sticking to it.
I agree with you. And I like your take on aluminum. There are other metals, particularly those used to make transistors, circuits and microchips, that I think would be a sound investment. (China's been hoarding those by the way.)
ReplyDeleteMy thing with gold is this. It has all the appearance of a mania. And I think it's way overhyped. I mean, you got guys all over the internet and television and radio saying, "Buy gold!" They all pretty much make the same argument as Gekko.
"Gold has never been worth zero." Yeah, well, neither has real estate. But that doesn't mean you can't buy a house in Detroit for $1.
It seems to me that these people who bought gold at the low want to keep pushing the price higher so they can cash out before the inevitable decline. I wouldn't call that a conspiracy, I'd call it push selling, but I wouldn't buy into it.
It's like when ET came out. There was this constant barage--the greatest movie ever! A No. 1 hit! An absolute must see! It was nonstop, the hype, the commercials. So I founded the Never Have Seen ET club and declared myself president.
What I think is going on is uncertainty surrounding highly leveraged public and private debt. But I seriously doubt the world will ever go back to the gold standard. That is just not feasible economically.
I believe in a sound currency, but what it should be backed by I haven't a clue. Well, other than the deadliest military on the planet that says, "Our money is good."
Denninger is right about one thing though, that wealth is created through production--farming, mining, building, manufacturing. An economy built on those things will have a sound currency. An economy built on debt will not.
Stag,
ReplyDelete"Let's redefine "everyone" as only those with hard assets to sell who can actually find those with cold hard cash who will buy."
My premise was based upon the fact that people like me (who fit the above description) do exist. And that we would gladly snap up the assets of "distressed" sellers (those panic sellers you referred to) if such an occasion arose.
And from my perspective, that would be an orderly process. I would, in an orderly manner, take over for example, CRE, from over-indebted folks.
And this is how it would have happened had it not been for .gov price controls.
Remember this:
"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."
GawainsGhost,
ReplyDelete"Gold has never been worth zero." Yeah, well, neither has real estate. But that doesn't mean you can't buy a house in Detroit for $1.
That's almost always true of stocks too.
Take Jones Soda. It trades at a dollar. At its peak it traded at $30.
Hansen vs. Jones Soda
Hansen created the Monster Energy drink. It became a huge success for the company. Its stock price rose exponentially. Investors were on the constant lookout for a similar stock to ride up as well.
I can't tell you how many times Jones Soda was mentioned on the Hansen message board.
Well, it did ride up on Hansen's coattails for a while. The effect was only temporary though. Jones Soda was no Hansens. It did not have a "hit the ball out of the park" product, unless you thought fruitcake flavored soda pop would go completely mainstream that is.
Jones Soda: 2004 Holiday Pack 2004
This pack contained five new seasonal flavors which included: Green Bean Casserole Soda, Mashed Potato & Butter Soda, Fruitcake Soda, Cranberry Soda and Turkey & Gravy Soda.
Cute? Yes. Clever? Yes. Funny? Absolutely. Able to generate untold profits for the company? Um, okay, maybe not so much, lol.
I bring this up because to me, gold has been riding up on oil's coattails. Oil is a "hit the ball out of the park" product.
What exactly does gold do for me though? Its only real purpose is as something to hoard on the hopes someone else will eventually pay me roughly what I paid for it (in inflation adjusted terms). That's about it. It might work. It might not work. If it doesn't work, I'd be stuck with it and I doubt I'd be all that happy about it.
G.H.
ReplyDeleteAnd this is how it would have happened had it not been for .gov price controls.
Price controls never work long-term. They always fail at some point. It just requires patience.
"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."
Fantastic quote.
Four Thousand Years of Price Control
With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation's productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.
The same thing works in reverse. The government can't stop the price of something from falling either. If housing prices are kept higher than the cost to produce housing, then more and more and more housing will be built. Eventually nothing can prop up prices.
The government is powerless to stop market forces long-term, try as it might. I absolutely believe that.
Stag, I'm plagarizing this from somewhere I just can't remember the source and don't have the inclination to search it out tonight but...
ReplyDeleteFrom 1776 to 1912, the value of the dollar, relative to the Consumer Price Index, increased by 11%. Thus, if in 1776, you held your savings of $10,000 for 136 years, it would then be worth $11,100 in purchasing power.
The United States Federal Reserve was created in 1913.
From 1913 to 2008, the value of the dollar, relative to the Consumer Price Index, decreased by 95%. Thus, if in 1913, you held your savings of $10,000 for 95 years, it would then be worth only $500 in purchasing power.
I've come across some people who believe "we have the best in the world" when it comes to the strength of our Fed banking system.
I guess that's true if you measure strength by the force of the chokehold.
G.H.,
ReplyDeleteThe source of your information had it backwards. There was some inflation over the period but it was rather modest. The purchasing power actually declined by about 11% over the period. That said, those who buried cash for those 136 years could hardly complain. It held up quite well.
Purchasing Power of Money in the United States from 1774 to 2009
$11100.00 in the year 1912 has the same "purchase power" as $10000 in the year 1776.
That's not to say the dollar was stable though. Check this out.
Annual Inflation Rates in the United States, 1775 - 2009
There were a lot of big swings. Up 25% in 1863 and up another 25% in 1864. That was followed by many years of deflation though. So it averaged out in the long run, but an investor sure better have been on the right side of the trade.
This is the most interesting thing from the site though, at least to me.
How Much Would Your U.S. Savings Have Grown?
In 1912, $10000 saved in 1798 would be worth:
$5,810,000.00 if saved in a long-term asset at a term of 1 years.
$10,700.00 if saved in a gold portfolio.
Wow. I've posted my thoughts on the "Death of Real Yields" in the past. Real yields are SO dead compared to that era. As savers, the best we can now really hope to do these days is simply tread water.