I am now going to point out how this type of data can effectively hide problems within the economy and thereby confuse and shock mainstream economists as things fall apart. This is especially true when the problems start in subprime loans and are expected to remain there. The average person doesn't even have a subprime loan, right?
Consider the following two hypothetical economic situations. They are based on an economy with just three workers (which I have named "A", "B", and "C").
As seen through the eyes of "average" and "median" data, both situations are 100% identical. I would ask you these questions though.
1. Which situation is more unstable?
2. Which situation would be hurt most by rising oil prices?
3. Which situation would see payday loan stores become a growth industry?
I would argue that the economy as a whole is in far worse shape under situation #1 than it is under situation #2.
Now let's discuss situation #2. It might seem silly to you to see everyone in the economy have $30,000 in savings and $30,000 in debt. Why don't they just pay it off?
I actually have a short story based on this premise. My memory is a bit fuzzy as it has been 30+ years, but I will share it the best I can.
My dad was the bank manager in a small farming community. One day one of his customers (a farmer) came into the bank. He used his $250,000 in savings to pay off his $250,000 loan. In one day, my dad managed to lose $500,000 in business. Needless to say, the higher ups within the bank were not happy with my dad's performance that day. They thought he could have done a better job talking the person out of doing it. My dad saw it differently of course. There was no way he was going to try to talk someone out of doing a very rational thing.
That brings me to another point. We clearly "need" more banks under situation #1 than we do under situation #2. That's what we are told anyway. We "need" lots and lots of banks. In fact, the more banks we have the more prosperous we become. That seems to be the thinking. I'm not exactly a believer, but then again I'm not exactly a mainstream economist. I have no economics degree. I tended to study things like gravitation in college instead. What goes up must come down. That sort of thing.
Fed likely to hold near-zero rates to spur recovery
The Federal Open Market Committee (FOMC) headed by Fed chairman Ben Bernanke likely will stay its highly accommodative course to help get credit, the lifeblood of the economy, flowing as the recovery progresses in fits and starts, analysts said.
Heaven help us. I am a believer that there will be many, many fits and starts though. In fact, I'm starting to have a fit ("a sudden, acute attack or manifestation of a disease") just thinking about it.
Having been a farmer and asked by a bank to pay my borrowings back on demand I know what you are saying makes sense. You never read the small print too closely when you sign up.Still here though
ReplyDeleteStag,
ReplyDeletelikely will stay its highly accommodative course to help get credit, the lifeblood of the economy, flowing as the recovery progresses in fits and starts,
It's a good thing that credit is the lifeblood of our eCONomy and not income. Our CONsumption based eCONomy would be totally screwed otherwise.
Maybe we should pass a "use it or lose it" law in order to force Americans with huge net worths to stop hoarding their money. In the alternative, we could just stop bailing out the value of faux assets and let their "wealth" disappear.
Your post brings up an important point. In a credit money system, the assets are only as good as the liabilities. The Fed allowed venal, bonus seeking bankers to posion our money supply - the biggest crime ever committed against America. Rather than being punished for their crimes, bankers are set to receive record bonuses while tens of millions of families come to grips with insolvency.
What a sham(e).
Side topic...
ReplyDeleteTIPS (and gold) are supposed to do poorly during periods of productivity miracles, low inflation, and stock market euphoria. However, my TIP fund is having another good day today. Gold is too.
1. Productivity? Check! Fewer workers!
2. Low inflation? Check! Fewer consumers!
3. Stock market euphoria? Check! Fewer disbelievers!
Somethin' somewhere be devaluin' its way back to prosperity! Yee-haw! Ride 'em cowboy!
Good luck on that one long-term. That burr under the saddle might make the horse faster in the short-term, but at some point it's likely to break the/and/or "buck"!
anonymous,
ReplyDeleteThanks for posting. Banks will allow you to borrow the umbrella until you no longer want it OR until it starts to rain, whichever happens first.
mab,
"Your post brings up an important point. In a credit money system, the assets are only as good as the liabilities."
Indeed. In my situation #1 example person "A" is $60k in debt and person "C" has $60k in savings. It isn't just person "A" that will feel pain if things head south. Brace for more sarcasm!
That's why we need a new person "D" to make things better. Let's call that one a government worker. We'll give him the power to print $60k to bail out person "C" when person "A" can no longer afford to pay his debts. We'll also allow him to introduce fractional reserve banking so that person "A" can borrow $600k next time. That should clearly add stability.
Stag,
ReplyDeleteHowever, my TIP fund is having another good day today.
You should CONsider the company you are keeping:
http://finance.yahoo.com/q?s=shld
Sears just hit a 52 week high! Up ~ 5% today on top of an ~ 8% single day gain last week! Talk about front running the "recovery".
mab,
ReplyDeleteI completely agree. Do I really want to be long inflation heading into the most important Christmas shopping weekend? During parabolas in commodities?
It's tough to hold here.
Bernanke blew it again. He should have never said interest rates would remain low for an extended period. Inflation expectations don't take extended periods to change. They changed a lot just today.
They say the markets like to inflict the maximum pain on the most investors. Bernanke just ran in there naked with a gift of tar(p) and feathers to destract it. Now he's being chased by the market as we all cheer from the stands. Hurray for Bernanke! Our hero!
This will be a good example to use when a friend gets distracted by "averages" and forgets to look at the underlying data for other trends and patterns. (The actual data can be, you know, important and stuff.)
ReplyDeleteThanks for the post!
Mark,
ReplyDeletea really great post! Real world information hardly fits into textbooks so I can understand that our officials get easily confused.
I'm glad you liked it.
ReplyDeleteI think this goes a long way to explaining the Great Depression. Any stimulus based on averages would always undershoot. Things were always worse than they appeared.
I could have supplied an even more brutal example of course. I could have given one guy ALL of the income and savings and the other two ALL of the debt. The "average" situation would still look the same even though 2 out of the 3 guys are unemployed (66% unemployment).
How could we get there? Picture a fully automated/outsourced workforce with most workers unemployed. We must remember to pay the CEO an obscenely high wage to keep the average income and savings up though. Oh yeah, and we'd need even more payday loan stores and NINJA (no income, no assets) loans so the average guy could survive the "cyclical" downturn. And lastly, should the "cyclical" downturn start looking like a "secular" downturn, the president himself could look into job creation ideas at some point. What are the odds of THAT happening though? That's just crazy talk.
Stag,
ReplyDeleteBernanke blew it again. He should have never said interest rates would remain low for an extended period. Inflation expectations don't take extended periods to change. They changed a lot just today.
Bernanke absolutely needs inflation expectations to be positive otherwise he has no shot of preventing deflation. Bernanke's actions and words are those of someone trying to control deflation, not inflation. Bernanke's task of preventing deflation is is much easier if the private sector cooperates.
But it's just mind numbing how much bad debt there is globally. There is a huge glut of over-valued American, European and Chinese real estate all leveraged to the hilt. Global banks are loaded with dubious collateral and assets and former Soviet Bloc countries are crumbling under unpayable debts. The losses on bad debts aren't going to disappear just because Bernanke is "printing" a trillion dollars.
Imo, the fear of "printing" money is being used by central bankers to get the private sector to create credit to front run inflation. But if the banks don't expand credit, the inflation just won't happen despite all Bernanke's jawboning.
In order for banks to create credit, they need collateral. And I believe most of the available collateral is already over-mortgaged and over-priced.
The "printing" money schtick is a play on ignorance as 98% of our system is credit based (soon to be 96%). And all that credit is debt with interest. No matter what Bernanke thinks, in the real world, debt has limits based on incomes. Even the Fed's buying of mortgage paper with dollars is just a matter of who holds the assets and collects the interest.
As far as I can tell, banks are not limited or governed by reserves. The massive increase in bank reserves negates the likelihood of bank runs and also serves to spark inflation fears.
Bernanke is creating some free money for the banks to inflate asset values but he is definitely not increasing the ability of non-bank debtors to service their debts. To me that means that any "green shoots" or asset value increases are tenuous. The banks are gettng a freebie but the real economy will have to earn its way out of debt. Good luck with THAT competing against billions of Asians making $2/hr.
Our eCONomy's debts ballooned alongside rising nominal wages and falling interest rates. Interest rates are near the bottom and wages are falling. Not exactly an ideal environment for expanding credit and creating inflation.
One more thought. China's industrial out soared 16% yoy in October. They must be hoarding another city.
mab,
ReplyDeleteEven if Bernanke succeeds in creating inflation, we've already seen once that it will be the wrong kind. Rising oil prices will just freak people out. Anyone with even a hint of conspiracy in them uses oil prices as proof that inflation is completely and utterly out of control. That's why I think he blew it.
I continue to be deflationary in the short-term and I actually did sell quite a bit of TIP today. I'm not paid interest on inflation expectations. I'm paid based on actual inflation. That pretty much goes right along with what you are saying.
There is no better time to sell TIP than when inflation expectations make promises that inflation itself can't deliver.
Only time will tell if this is one of those times, but I suspect hindsight won't beat me up too badly even if I am wrong.
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros
Stag,
ReplyDeleteEven if Bernanke succeeds in creating inflation, we've already seen once that it will be the wrong kind. Rising oil prices will just freak people out.
Very good point. Unfortunately, I don't think Bernanke cares what type of inflation he creates as long as he creates it. Helicopter drops aren't exactly exactly smart bombs.
From what I see, Bernanke's entire game plan is centered around preserving the value of fraudulent credit. For some reason he acts as though the world would end if aggregate credit declined (fraud was purged from the system). No doubt a lot of banks would fail and a lot of faux wealth would vanish, but that seems preferable than making the majority pay for the misdeeds of the minority.
I don't see how the public can trust Bernanke and his fellow Fed members. As much as anything, I think they are hell bent on papering over their own incompetence.
Going forward, be it inflation or deflation I think the future is bleak for most Americans. The hidden tax of preserving the value of fraud will take its toll one way or another.
In the end, I think Bernanke wants to keep deluding people with positive inflation. I have no doubts his Wall St. masters demand it.
Here's an example of the Wall St. inflation delusion. Since 1983, real annualized earnings growth for the S&P 500 has been 1.25%. During that same period, nominal earnings growth was 5.9%. When 79% of earnings "growth" is due to inflation, it's definitely an "Illusion of Properity".
BTW, I chose 1983 for the above example because that's the year we started implementing OER in the CPI. Had we included actual house prices in the CPI, I'm quite certain real earnings since 1983would have been much closer to zero.
Our entire financial system has become geared around 6% nominal GDP growth and even higher debt growth. If nominal growth in GDP and debt don't materialize anywhere near anticipated levels, we are going to have a very painful adjustment.
mab,
ReplyDeletehttp://www.investorplace.com/experts/douglas_mcintyre/articles/crude-oil-xom-exxon-stock.html
"Hoarding oil is tricky, because at some point physical barrels are involved. For most of this year, U.S. crude inventories have been well above historical averages. There are millions of barrels of oil in floating storage on the world's oceans. That situation should drive the cost of oil down, not up.
That the reverse is happening strengthens the story that investing in crude is a hedge against inflation. There is little chance that there will be any change in that investment pattern in the near term."
There is little chance that oil prices will drop even when they should. The reason is clear. Oil prices are going up when they shouldn't.
Dizzying circular logic! The Fed does want us to invest in risk. Clearly it is getting its way.
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ReplyDelete