Saturday, May 29, 2010

Pure Spending Power! Rarr!

Let's start with the ballpark idea that our spending power is a combination of money we have in the bank as seen in M2 plus the money we borrow as seen in the total consumer credit outstanding plus the money we borrow as seen in the real estate loans at all commercial banks. It isn't perfect, but it might illustrate a point or two.

It's kind of scary how we fell off the exponential trend line back in 1989, but let's conveniently ignore that for a while. Trust me. You won't even be thinking about it at all by the time you've read the rest of what I have to say.

Let's now factor in the rise of modern mining equipment to meet our spending power needs.

This shows what the aluminum price might be if it all of the world's aluminum was still in existence, we owned it all, and it fully backed our M2, consumer debt, and real estate loans. I've also shown the actual price of aluminum.

And lastly, let's see how stable the system might look under such a scenario. I'll divide the prices as seen in the black line by the actual price as seen in the red line to come up with a ballpark stability proxy. The more stable that ratio is the more stable the system should be, at least in theory.

Let me summarize this a bit for those not quite following along. I know it is complicated. I'm basically suggesting that the growth in the money supply and debt compared to the actual production of aluminum should be enough to actually guess the price of aluminum. That's pretty much what the chart shows from the 1970s to 2008. It just hovers around 7, give or take.

Now for the bad news.

I started with the assumption that our spending power is a combination of the money we have plus the debt we are willing to take on. That's pretend spending power in my world. It's an illusion. I'm retired. I can't spend money like that. My real long-term spending power is the money I have in the bank MINUS the amount I owe.

Cash and credit are not the same things to me. In fact, they are the exact opposites. The more I have now the more I can spend in the future. However, the more I owe now the less I can spend in the future.

Therefore, let's try again looking at cash and credit in a different way. We'll update those three previous charts using a new economic model based somewhat on common sense. We won't think of our spending power as the amount of money we have plus the amount we can borrow. Instead, we'll think of our spending power as the money we have in the bank minus the amount we have borrowed.



Oh my. What a difference a few minus signs make. What are we going to do with all that extra aluminum if this trend continues?

This may seem very complicated, and it is. These are arguably the most complex charts I've done yet. I had to break it into two groups of three to even have a hope of explaining what I am thinking to others, or even myself for that matter.

Unfortunately, these charts are way too simplistic to do our economy justice. This analysis is just a flea on the back of an elephant. It does, however, suggest why I might be more deflationary than most though. A vacuum exists where growth once was, but aluminum production continues on almost as if nothing had happened.

Aluminum is a new hope for the U.S.

In brief: Aluminum production in the U.S. begins to grow at a steady pace because of rising demand for the metal in the manufacturing sector.

A new hope? I saw that movie. The empire's death star blew up in a "one in a million" black swan type event.

China Becomes Net Aluminum Exporter for First Time Since 2008

China’s aluminum production capacity will expand 20 percent this year, Neil Buxton, managing director at London-based researcher GFMS Metals Consulting, said May 21. Stockpiles monitored by the Shanghai Futures Exchange have climbed almost 65 percent this year to a record 489,495 tons.

I'm not quite done yet. Here's the worst news of all. I've made the bearish case without even mentioning our national, state, and local government debts. Technically, I should be subtracting that from my long-term spending power too. That's assuming I don't get the unborn grandchildren of others to pay for it of course. Sigh.

I really don't think now would be the best time to be swinging for the fences using leveraged high risk bets. Just an opinion!

See Also:
The Quantity Theory of Aluminum
Trend Line Disclaimer

Source Data:
St. Louis Fed: M2 Money Stock
St. Louis Fed: Total Consumer Credit Outstanding
St. Louis Fed: Real Estate Loans at All Commercial Banks
USGS: Historical Mineral Statistics


Anonymous said...

- jus me

GawainsGhost said...

Hmmm. A fascinating study.

You know, I've been working on this historical price opinion for this stupid duplex. The "as of" date is Aug. 1, 2007. Problem is that there were no duplexes sold in the prior year, so I have to use fourplexes. There were lots of those sold. Not sure how I'm going to make adjustments though. Probably take the sales price and divide by four to calculate the price per unit, then multiply by two and deduct that amount from the sales price to arrive at a comparable value for a duplex.

Anyway, the research has been interesting, to say the least, because the time period involved was right at the peak of the bubble, immediately before the credit crash in Sept. 07 and the subsequent market meltdown.

I'm looking at fourplexes (2 bedroom, 2 bath, equipped kitchen and utilities) that sold for like #350,000, and I'm trying to wrap my mind around why anyone would think that could possibly be construed as a sound investment. The most you could rent a unit for is $500/mo. So you're looking at rental income of $2000/mo for the complex, assuming full occupancy of course. I fail to see how that can cover the principal, interest, taxes, and insurance payments on the loan.

Also, there were a lot of fourplexes built, so there's a lot of rental units available, which means landlords have to compete for occupants, thus driving rent prices down. See the dilemma?

One might wonder why all these fourplexes were built. Oh, that's right, I remember, the city council kept approving the developments to provide "housing" for the students at the university. The problem with that logic, or illogic as the case may be, is that most of the kids in this area live at home and walk or drive to school, so they don't need to rent an apartment! Duh.

Now there are entire streets full of empty fourplexes that all have "For Rent" signs in the windows. Gee, I wonder how this is all going to end. $350,000 for a fourplex you can't rent.

Actually, I know how it's going to end, because lately we've been getting more and more assignments for repossessed fourplexes. Why these sell, and astonishingly they do rather quickly, is beyond my ability to comprehend. Oh, that's right, because "investors" believe they'll pay for themselves. Uh huh.

Oh, and this stupid duplex, it sold as a repo for $107,900 in January. It is currently active on MLS for lease at $750/mo. Only one unit is occupied.

Stagflationary Mark said...


Actually, I know how it's going to end, because lately we've been getting more and more assignments for repossessed fourplexes. Why these sell, and astonishingly they do rather quickly, is beyond my ability to comprehend. Oh, that's right, because "investors" believe they'll pay for themselves. Uh huh.

I can't help but wonder how many real estate "investors" thought the same thing in Detroit over the years.

I still can't wrap my mind around the fact that the entire Silverdome sold for less than $600k.

GawainsGhost said...

Yeah, I can't wrap my mind around that either. Super Bowls were once played in the Silverdome, but no more.

I'm wondering whether the same thing is going to happen to Jerryworld. I've been there, and for all the hype, in my experience it's a very poorly designed stadium. No Texas Stadium, that's for sure.

You know, when I used to go to Cowboys games at Texas Stadium, I was a star. This because I wear a silver suit, blue silk tie and grey fedora, with Blue Star lapel pin and cufflinks. In the parking lot where the tailgaters partied, literally hundreds of people would ask me to pose for pictures with them. The band at the Corral Club would introduce me to the audience as the Ghost of Tom Landry and invite me up on the stage. In fact, once a cameraman for NFL Films asked me to pose beside the Bronze of Landry, and I made the highlights of the game (against Indiannapolis in 06) on the NFL Network.

Jerryworld sucks compared to that. Tailgating is only allowed along the perimeter of the parking lot. It is not possible to walk around the stadium. Sections are blocked off. In fact, you are limited to certain areas based on your ticket section. Once inside the stadium, the only way to get from one end to the other is to go up four flights of escaltors--in the nosebleed sections you can walk freely--then four flights down. (I realize this is probably for crowd control purposes, but it's very inconvenient.)

Not only that, but it's a carnival. There are all these barkers selling beer and cotton candy, what have you. It totally sucks. It's like Barnum & Bailey squared. You know, "A sucker is born every minute." $8 beer, $5 pretzels, $10 nachos.

I will say that once you get to your seat, you do have a good view of the field, and the Jerrytron video screen is impressive, though. It's just that getting to your seat is an exercise in idiocy.

But I'll still go to games, because that's where they're played.

Stagflationary Mark said...

I really should point out that M2 isn't our entire money supply nor are real estate loans at all commercial banks our entire mortgage debt. I'm mainly just trying to demonstrate that credit can provide short-term spending power while simultaneously reducing long-term spending power.

In my opinion, our economy has built itself on the idea that credit based short-term spending power is sustainable long-term. I am not a believer.

Mortgage Debt Outstanding

Stagflationary Mark said...

My link appears to be broken.

Mortgage Debt Outstanding

Stagflationary Mark said...


Forbes just named Seattle the #1 Most Miserable Sports City. We have a decent arena but our basketball team left, lol.

I saw Michael Jordan play in the playoffs, in person. I had a 6 game package that turned into MANY games at season's end. We finally lost to the Bulls though. I still enjoyed every minute. What a way to go. That was the peak though. I lost interest after that.

GawainsGhost said...

Well, I'm not much into basketball, although I do watch when the Spurs are in the playoffs, as I was born in San Antonio.

I'm pretty much all Cowboys all the time. It's because that's how I was raised. My grandmother was the most devoted fan in the world.

These days I live about 20 miles from where Tom Landry was born. The high school where he played named its stadium after him, there's an impressive mural of his career on the side of a building on Tom Landry Boulevard, and a nice little museum dedicated to his memory. So when I go to Dallas I feel like I'm representing the Old School.

Problem is, Dallas is about 800 miles north of here. It's an all day drive. But I refuse to get on a plane unless it's absolutely necessary. Too much hassle.

I only get to go to one game a year. Because I fly my brother down from Maine for a game every year (it's a tradition I started after our father passed away), and for what that costs I could go to two more. However, I don't like going by myself, so that's that.

This year we'll be going to the Monday Night game against the New York Giants. Should be fun.

Stagflationary Mark said...


I'm pretty much all Cowboys all the time. It's because that's how I was raised. My grandmother was the most devoted fan in the world.

For what it is worth, I seem to recall being a Cowboy Cheerleaders fan in my youth. ;)

GawainsGhost said...

Yes, well, me too.

The Dallas Cowboys Cheerleaders are the highest level precision drill team on the planet. Not even the US Marine rifle company can compete with these girls.

It's amazing really. There are what 38 girls, dancing this complex choreography, all doing the exact same thing at the exact same time. And none of them make mistakes. Or at least I've never seen one make a mistake, and I've been watching for over 40 years now.

I've always said it's harder to become a Cheerleader than it is to become a Cowboy. They are held to a much higher standard.

How many girls try out to be a Cheerleader every year? Thousands, from all over the world. How many guys try out to be a Cowboy? Maybe a hundred. That's it right there.

I remember a couple of years ago on CMT they were showing the tryouts. The lady in charge, and she is a lady, had to dismiss one of the girls because she had depended on her boyfriend to get her to practice on time and he was late. The lady asked her if she thought that it was a good idea for her to depend on her boyfriend.

"I didn't think nothing of it."

"You didn't think ANYTHING of it."

The lady corrected the girl's grammar. Think about that for a second.

If a coach used correct grammar as a criterion for making the team, there wouldn't be any players on the field! Please.

I love the Dallas Cowboys Cheerleaders. They are the best of the best.