Yves here. In the “great minds work alike” category, former derivatives trader Satyajit Das sent the post below, on the high odds of bad outcomes in financial markets the same day we were writing The Inevitable Financial Crisis and Nouriel Roubini argued in his usual detailed manner in Project Syndicate that the crisis was already here, as shown by tight and increasingly illiquid markets for new borrowing, particularly for risky credits.
Michael Pettis is voicing similar worries:
2/5
This is an important point. Banks are famously subject to bank runs because their role is to mismatch maturities – specifically by borrowing short and lending long – and this makes them vulnerable to a sudden shift in the relative liquidity of each side of the balance sheet.— Michael Pettis (@michaelxpettis) October 5, 2022
5/5
The real problem is when certain features of the economy (e.g. central bank policy) encourage a very large number of “banks” to mismatch their assets and liabilities in exactly the same way. When that happens the economy suffers from systemic risk.— Michael Pettis (@michaelxpettis) October 5, 2022
And from reader Li: “Ray Dalio quit Bridgewater just before the market implodes.”
Mind you, the point is not so much that credible analysts are coming to broadly similar conclusions. It’s that when you look at the state of the financial markets and the global economy, there is almost nothing to like, yet asset prices don’t reflect that.
By Satyajit Das, a former financier whose latest books include A Banquet of Consequences – Reloaded (March 2021) and Fortune’s Fool: Australia’s Choices
The spectre of financial crisis now looms alongside pestilence (Covid19), war (Ukraine and unreported hidden Middle East and Africa conflicts) and famine (real in emerging nations, high food and energy prices elsewhere). Frantically cutting growth forecasts, the IMF entitled its latest economic forecast ‘Gloomy and More Uncertain’.
Noise – day-to-day gyrations and speculation- masks the fact that a major re-set, the largest since 2007, may be underway.
End of Magical Economics
The first driver is that magical economic thinking and era of ultra-cheap money is coming to a close.
The 2008 financial crisis, the great recession that followed, and the more recent pandemic led to unprecedented government spending, low interest rates and liquidity injections by central banks. This underpinned a large proportion of activity. But these factors contributed to excess demand which combined with supply shortfalls due to Covid19 disruptions, the Ukraine conflict, especially poorly thought through sanctions, resource scarcity, and extreme weather caused sharp price increases.
Debates about recessions notwithstanding, a slowdown is evident. One factor is states embarking on varying degrees of budget repair. Another is central banks increasing interest rates to counteract inflationary pressures, although how this will resolve supply side issues, the pandemic, climate change or wars is unclear. Over-zealous rate rises risk exacerbating the downturn undermining employment which remains strong in developed economies.
Significantly, China, a major engine of global growth, faces difficulties from its disruptive zero-Covid policy, the unwinding of a large debt fuelled real estate bubble and Western restrictions on technology and market access. As the world’s factory, China matters, remaining pivotal to supply chains. It also is an important source of demand, especially for raw materials and commodities.
There are significant long-term headwinds. Adverse demographics in many countries will create unsustainable dependency ratios with shrinking numbers of workers expected to support a growing aged population which is living longer.
There is the accelerating costs of climate change, with growing parts of the planet becoming increasingly uninhabitable. Scarcity of food, energy, water and other resources is emerging. Geo-political tensions are at their highest level in decades. The mega-rich are already planning their escape, colonising outer space.
Future growth -modern civilisation’s panacea for all problems- will be patchy and volatile.
Financial Fantasies
The second factor is the brutal destruction of ludicrous financial fantasies. Everything and everywhere asset price bubbles, fuelled by decades of debt financed consumption and investments and low cost of funds, now face their most rigorous examination.
High flying new enterprises prospered in an unhealthy cycle where investors backed those with strong sales growth, which then used the cash to attract more unprofitable customers to boost revenues to attract further capital etc. That game is over.
Even established technology firms, some heavily dependent on advertising revenues and facing regulatory scrutiny, may struggle. Lacking radical new products and satiated consumers, at least in advanced countries, many industries now face more challenging times.
Cutting through the quantum opacification, all values depend on future cash flows. An annual payment of $1 discounted back at 4 percent rather than 0 percent results in a reduction in present value of 19 percent over 10 years and 32 percent over 20 years. That is before you consider that many businesses are not profitable or cash flow positive as well as other deteriorating fundamentals. Equity valuations based on finding a greater fool to pay you more than you did were never sustainable.
Borrowings are high. Individuals, businesses and governments have, in the words of Bruce Springsteen, debts that no honest man can pay.
Slower economic growth and lower asset values may result in rising bad debts. While better capitalised than before, banks are still highly leveraged and vulnerable to financial shocks. This is compounded by the still large shadow banking system to which is connected by financial dealings. Ultimately, any problem will work its way through the hyper-linked global financial system.
Already weakened by the pandemic, many emerging market borrowers may need to restructure debt. The unresolved European debt crisis is remerging. The European Central Bank acted as buyer of last resort for almost-bankrupt members to cover up the problem. Rising rates will pressure highly indebted countries; France (government debt at 113 percent of GDP), Greece (193 percent), Italy (151 percent), Portugal (127 percent) and Spain (118 percent).
Fault lines between inflation-phobic creditor and debtor nations will increase. The indebted eurozone-member’s lack of independent monetary policy, fiscal capacity, currency flexibility and ability to monetise away debt will again become problematic.
Currency instability is a visible manifestation of the rising dysfunction. The Euro, the Yen, Pound and many emerging market currencies have fallen sharply against the US dollar. The sharp moves affect domestic inflation and trade competitiveness as well as foreign capital flows. Desperate chatter about a new Plaza accord highlights the problems.
Serial Crises
The reckoning may not be immediate. The Great depression, 2000/ 2001 tech bubble and 2008 mortgage problems took years to develop. As economist Rudiger Dornbusch noted: “the crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.“
Authorities will resort to the old rule book to stretch the game out for a little longer. But the narrowing path out of the problems means it will be difficult to contain the ultimate dislocation.
Governments have high debt levels, central bank balance sheets are bloated and real (inflation adjusted) interest rates already negative. While inflation will ease over time, rates are unlikely to retrace as central banks will be cautious about elevated absolute prices and wary of reigniting inflationary expectations.
The much vaunted pivot (front end loaded rate rises followed by cuts in 2023) may only occur if the economy and financial markets crashes. The ‘bad-news-is-good news’ meme (poor economic data boosts asset prices through greater central bank support) may be a case of wishful thinking.
The paucity of policy tools is evidenced by the European Central Bank’s Transmission Protection Instrument to prevent financial fragmentation. Designed to lower the borrowing costs of vulnerable members (whose rates are rising relative to Germany), it contradicts increases in official Euro interest rates. In a similar vein, the Bank of England’s rapid turnaround – injecting liquidity to avoid imminent collapse rather than reducing accommodation to fight inflation- highlights the dilemma.
Social and political matters are increasingly likely to dominate.
Populations exhausted by the sequential problems are unlikely to remain quiescent. Globally, resentment of governments, unable to deliver on promises, and elites, emblematic of wealth inequality, underlies social unrest. In China, in an unusual sign of disharmony, a growing number of home buyers stopped paying mortgages on incomplete and stalled projects, forcing the government to act.
But few are, for the most part, unwilling to acknowledge conflicting priorities. Additional investment in public services and cost of living assistance is incompatible with lower taxes and sound public finances. Deregulation and interventionism on pet issues are inconsistent. Sacrifices and lower living standards are firmly rejected.
These interlocking crises risk the impoverishment of large sections of the population, creating conditions for social and political upheaval. French political scientist Alexis de Tocqueville held that such events occur when a period of objective economic and social development is followed by a sharp reversal. People’s mood and attitude shifts when they fear that the gains acquired with great effort may be lost. He wrote: “Evils which are patiently endured when they seem inevitable become intolerable once the idea of escape from them is suggested.”
Despite going on for more than a decade, parties, as Prince sang, were never meant to last!
© 2022 Satyajit Das All Rights Reserved
An earlier version was published in the New Indian Express.
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Didn’t the authorities ban short selling of financial stocks back in 2008? Next time, they’ll have sudden market and bank holidays which will last till “sentiment improves”.
https://www.newyorkfed.org/research/current_issues/ci18-5.html
Thank you, Yves.
Friedman fan boy Dornbusch should know as he was sent by the IMF to Latin America to advise on their structural adjustment programmes and laid the ground for the crises of the 1990s.
Socal Jim above wonders about action until sentiment improves. How about putting banksters in the stocks outside the Bank of England and at Canada Square and they get thrashed, birched, stoned etc. until morale improves.
Excellent overview. Thank you.
A quibble: China’s situation is brighter than our media let on.
China faces no great difficulties from its zero-Covid policy. In the first three Covid years it has grown GDP 400% faster than the US, at a cost of 7000 Covid dead and 35,000 Long Covid. The US had a million deaths and three million new invalids.
China does not face the unwinding of a large debt fuelled real estate bubble. It wasn’t debt-fueled any more than most real estate developments are, developers’ assets still exceed their liabilities (Beijing’s bridge loans were made on that basis), and there never was a ‘bubble’. Prices are down 3% YoY, but 90% of homeowners have no mortgage and those who do owe an average of $65,000. Late accounts are 0.2%. There is no national real estate market. There are thousands of discrete markets delimited by hukou.
Restrictions on technology and market access have made even less impact on China than on Russia. China leads the world in all the sciences and new technologies, its domestic market is the the world’s biggest, and it is the only country with a complete set of UN classified industries.
Any day now, China will announce an embargo on Taiwanese chip exports to unfriendly countries, then join Russia in announcing the new reserve currency.
Fun times!
The article provides a very good laundry list of the problems. I’d like to add one key item to that list.
Labor – the middle and lower classes – have been factored out of the production equation in the West.
What most of us (labor) can no longer earn from wages is currently supplemented by household debt and transfer payments funded by public debt.
Assets of enduring value are concentrating into the hands of the few, and the fire-hose of cheap money causes those assets to skyrocket in price (housing, food, energy) further exacerbating the pressure on the household.
Two parties are ending:
Party 1: asset-price run-up fueled by cheap money and related ponzies because the free money is now (just slightly) more expensive, and
Party 2: further public assistance and debt issuance to households is ending. It’s ending because the assistance was funded by money supply expansion, causing inflation in both the real and financial economy, so the central bank has to reduce the size of the money supply to fight that inflation.
One core question is “how to restore wages to labor?”
If we’re not willing to restore wages, the question becomes “how to provide for household needs else-way, if wages are not sufficient to buy what households need?”
Plan A – debt expressed as money supply expansion – appears to be hitting the wall, and the recent inflation is the key indicator of that fact.
I assert that a major re-design of our economy is needed.
Conspicuously absent from the top-down dialog is the subject of “what new industries can be devised which deliver on societal needs and pay good wages”.
New industries like hydrogen economy, new housing design (not bleed energy), new core processes (materials, energy, food, transportation, mfg’g) which cycle existing materials (.vs. once-and-done), for ex. Processes that are much more energy- and materials-efficient and emphasize labor over capital in the production processes.
Industries like that. Cut out major waste, and direct the savings to households as wages.
Reformulating once-and-done national supply chains to become local materials-cycling supply chains offers a lot of promise.
The design of our existing economic processes, in several important ways, are obsolete because they’re creating more problems than they solve. They waste energy and materials. They exclude labor from production. They damage the environment. They facilitate wealth concentration. They actively discourage individual innovation, entrepreneurship, and creativity. Those problems are now really severe.
The design of the Western economy is the problem, and debt is the means by which we are perpetuating these poor designs. Not just zombie companies: zombie _designs_.
War is another method to delay the inevitable. War gives our “team” access to new resource pools which can be squandered for fun and profit. It also provides access to new consumers who will buy what the Western middle class no longer can afford.
So, when we talk about “resetting”, maybe we should get a grip on what we want to reset _to_.
Those are some of my ideas. What are your ideas on the “reset-to” options?
https://www.democracyatwork.info/about_co_ops
Great stuff. Pls continue to educate us about co-ops. Nice website, btw.
If you’re like me and you worship at the Church of the Spoked Wheel, here’s a worker co-op that’s worthy of your support:
https://www.baltimorebicycleworks.com/
“New industries like hydrogen economy, new housing design (not bleed energy), new core processes (materials, energy, food, transportation, mfg’g) which cycle existing materials (.vs. once-and-done), for ex. Processes that are much more energy- and materials-efficient and emphasize labor over capital in the production processes.”
Tom- These things should have been mandated 40 years ago. It may be too late for your energy intensive fixes because of the opportunity costs. Hydrogen should be seen as an energy storage scheme like batteries & pumped hydro and quite limited- unless you are talking about a massive nuclear buildout, which will take too long, be too expensive & be politically difficult to achieve, not to mention the tail-risk issues.
Yves is correct about radical conservation. The impending/ongoing economic crisis will accelerate the process.
Radical conservation must be at the core of any global economic transformation. Unfortunately, it is politically unpalatable and so is not considered at all. Tweaking this, and tweaking that will not get us to where we need to be, yet that is the approach of global governments. The bumpy rides will continue until we all drive off a cliff.
John:
I agree hydrogen’s key role is energy storage. I don’t agree that its usage is limited-applications. I see it as ubiquitous. The gear to do renewable elec -> hydrogen -> fuel-cell produced elec is very highly scalable, from refrigerator-size to a few acres’ foot-print. It’s getting cheap fast.
Solar panels nor windmills (3KW or less output) take up that much space.
I also agree on radical conservation. How to radically conserve? Where’s the energy getting used now? Building env (HVAC), transport, industry (heat, mainly). Take a gander at EIA’s sources and uses of energy in the U.S.
So, insulation (easy band-aid) or refit housing stock (big deal). Replace heater fuel with heat pump (big changes in efficiency, even in cold climes, lately). Moderate fix.
Telework. On steroids. One benefit of Covid is that the dam against telework now has a major crack in it. Flood will ensue shortly. Good news. Knocks out 10-20 pct of HH transport.
Local production of energy, food, light manufactures. Materials cycling. How big a deal? Local ag already has momentum, will accelerate. Energy already present (solar panels) and elec-hydrogen-elec components already commercially, and viably, avail. Need implementation.
Industry (heat, mainly) and transportation use up bulk of energy. Once-and-done policy uses up bulk of materials. There – right there in that bulls-eye – lies the target for radical conservation activities. That’s why local (less transport, and good shot at materials re-use) can make such a big difference.
Materials cycling means convert landfill to reclamation center. Every county should have one. Put the local fabrication center there, too. Big building houses a whole battery CAD/CAM of machines to cut, bend, weld metal parts there.
Teach CAD/CAM in local schools (already happening).
Convert the landfill from social and environmental pariah into the place smart people congregate, work, socialize in the pursuit of the future they want.
A few million invested per landfill, spread out over a decade, gets it done. Put it a 1/2 mile adjacent to the landfill @ outset, then gradually displace the landfill over 2 decades.
Put a design workstation in every home. Household spends $800 on the computer, all the software is already good, and it’s free. (see FreeCAD for metal and plastic part design, and see KiCad (for computer boards). Both are relatively easy to learn, used at local MakerSpaces (that’s where I got my training on KiCad). Design your part at home, transmit the mfg’g design specs (CAM file from the CAD/CAM app) to the county fabrication plant, swing by next day to pick up your parts, and and assemble them into your new product prototype at the MakerSpace.
Put major emphasis on Makerspace-at-Reclamation-Center and entrepreneurship and team-building coursework @ high-school and continuous-learning programs sponsored by the County. There’s your “build me a new industry” engine. Finally, “your tax dollars at work”.
Stuff’s already mostly in place now, John. People just haven’t heard about it or tried it yet. It’s a knowledge-diffusion prob, not that much a new-innovation problem anymore.
I have never seen so many good ideas regarding how to live for the future as you have suggested, Tom. If we each tried to follow the ones we know we can do/learn from we would be beginning to make the changes we need to make. It is better to make the changes as in your suggestions than to have the the future force those changes upon us (which will happen).
I especially like the landfill as a reclamation centre. We could take all those Saturday yard sales and move them to the landfill site. Every object should have a second (or third) life before being discarded.
Paging Yves, Lambert, and company: Could Tom Pfotzer’s great ideas be hoisted from these comments and made into an NC post?
Yes, this is good stuff!
We have some first initiatives in Stockholm, where a local recycling/waste disposal site has a first station called “Återbruket” “Re-use-town” filtering all stuff which can be re-used immediately.
Its unpopular in the US but i’ll say it… waste-to-energy. We have the emissions controls to manage pollution for a WTE facility, mostly because of the 200 plus coal plants that have been shut down since Obama, those type of suppliers would beg for the work. Florida has built 3 WTE facilities in the last 10 years and it works. It also can provide a variable/adjustable base load power for renewables.
It also can shrink a landfill footprint by 90% which helps in dense areas as well as reduces overall exposure to groundwater contamination. Landfills already are air polluters, might as well make the most of it and capture energy in the most efficient manner. No matter what society we live in, we will produce trash.
Most European countries improved or built their facilities after the 70’s following the acid rain fiascos while the US shut them down because we don’t have real estate constrains and absurd land values like Europe does.
Thank you TP, for your, imo, clear sum of the Big Picture.
Something is going to change with the momentum–whether we’re ready/prepared or not.
I got no Prescription–but History has given us a bin of dusty Tools–as the one antidlc points to.
The design of the Western economy is the problem, and debt is the means by which we are perpetuating these poor designs. Not just zombie companies: zombie _designs_.
And that 300 year history has consolidated a lot of Power to too few with the wrong heart and viewpoint, imo.
The Climate Crises Looms as THE Change Agent.
Embracing Radical Conservation (itself greasy in definition–try to google that with meaningful results quickly) can begin redirecting Economies.
Human Resourcfulness is not to be underestimated–as is the Resistance to Change (when your lively hood depends on the Staus Quo).
But, with back to the wall and confusion in the head–
“Adversity is the first path to truth.”
― Lord Byron
and Consumption does have 2 definitons.
I’ll add- Outlawing planned obsolescence would free up more resources/energy than any of us realize, I suspect. It is a crying shame that this issue is not discussed more often.
Don’t they do a version of this in Germany, at least for some products? Aren’t the manufacturers of some classes of products made in Germany legally forced to take their spent and worn out product back for disposal or recycling at manufacturer expense? At least if the item was in fact bought and used in Germany?
“The design of our existing economic processes, in several important ways, are obsolete because they’re creating more problems than they solve. They waste energy and materials. They exclude labor from production. They damage the environment. They facilitate wealth concentration. They actively discourage individual innovation, entrepreneurship, and creativity. Those problems are now really severe.”
amen to all that, brother!
it’ll begin way out here, because there’s simply less oversight, more than anything else.
i’m gon talk to my welding guy sunday, i hope…about the charcoal retort ive commissioned.
pioneers’ great grandkid…hasnt a clue what i’m talking about.
but ive installed a fold up whiteboard in the frelling Wilderness Bar for just this purpose.
told him i’d cook dinner for him and wife and kids.
not even a tiny city like the one in my county would allow a charcoal retort in a neighborhood.
like a jet engine when it gets going.
waiting for this device to arrive before i even start covering greenhouse.
want to test run it…with several kitchen thermometers scattered around, etc.
because that will inform the engineering decisions ahead.
masonry wall/heat sink?
or waterwall heatsink?
etc.
will it smoke if the cut up brush is insufficiently dry?
how much wet, or smoke, is problematic?
etc
and all in the service of Tierra Prieta, to mitigate the Persistent Herbicide Problem in the manure and hay.
” Tierra Prieta” . . . do you mean ” terra preta”? Like this? . . . .
https://www.sciencedirect.com/topics/agricultural-and-biological-sciences/terra-preta
http://biochar.info/?p=en.terra_preta
And all this time I thought you was a country bunkin like me, and then you go and make a post like this.
Totally freaked me out. What’s worse, you use words I ain’t never heard of, like “eudaimonia” (below, next post). I had to look that up.
A fold-up whiteboard. Implies abstract thinking, Amfortas. Them’s dangerous. And what’s worse, an on-site prototype that used welding and fabrication.
Gawd, what new affronts will the neighb have to endure.
And if it seems – to the casual onlooker – as tho I’m giving Amfortas a Hard Time, well, that’s because I am.
He feeds on it. Pile on, folks!
:)
Retort, indeed. Who in their right mind would have a retort in their back yard? Smacks of industry.
It actually ‘smacks’ of Alchemy.
I can imagine Amfortas wandering around the homestead arguing with Paracelsus.
These times are so degraded. There are good reasons why we do not call our Techlords names like Elon Trismegistus, and The Hierophant of Windows.
What a lost opportunity when Roger Bacon failed to formalize the Rules of Magic.
aaaannnddd….you’ve not escaped yet, Amfortas.
Just got done putting the film cover on my greenhouse. Major pain in the rse. 5-person job, no labor avail, many tricks needed to get it done.
Whiteboards. I have a design on my white board for an advanced rocket mass heater (RMH), with a post-combustion electrostatic precipitator and a polarized cloud chamber to capture NOX and POX and SOX and any particulates.
Dirt simple, but I’m pretty sure it’ll work, mostly.
Also doing some castings for the the RMH made from foam-entrained refractory cement (contoured castings for max air-flow). Light, cheap, cast-able. Good stuff.
Post your design somewhere when you get it done, and let me know where it is. Wanna see it.
much agreement, but first you have to over come this, and its not going to be easy, if it can be done at all,
in 1993 when i saw how bill clinton was going to free trade america away. i said there can be no reform of just about anything after those eight long years of terror.
try to fix finance, taxes, regulations, privatization, jim crow laws, health care, safety net etc., most likely not, because free trade opened the world up to a world wide oligarchy.
many years ago when i was a lurker here, there was a fellow that got on every once in a while who said we cannot have medicare for all, or any universal health care, because under bill clintons free trade, it was forbidden.
i have not seen the fellow in years, i wonder who he was? but he saw what i saw. you try to reform anything, and this is what you face.
one senator is of course nafta type, who got helped us get into this mess. and i am betting they know it can’t be fixed till bill clintons disastrous policies he foisted onto america and the world, have been reversed. so i take what these senators are doing as simply camaflague they know will never become reality.
https://wallstreetonparade.com/2022/09/two-senators-a-republican-and-a-democrat-testify-to-senate-banking-committee-on-chinas-threat-to-u-s-national-security-and-competitiveness/
some excerpts,
Senator Casey explained the problem as follows:
“At the heart of this is manufacturing, which is core to our economic competitiveness. In the United States, manufacturing represents about 11 percent of GDP, but is responsible for 70 percent of R&D [Research and Development], according to analysis from the consulting firm McKinsey. Manufacturing drives innovation. When you lose manufacturing, you lose innovation. Countries that don’t make things don’t endure.”
(casey at least walked the talk sorta,
https://www.ontheissues.org/Senate/Bob_Casey.htm
Rated 50% by the USAE, indicating a mixed record on trade. (Dec 2012))
Senator Cornyn added the following points in his testimony:
“I’d like to note that this is not a hypothetical example – this happened. That’s why this is so critical. There’s an old saying attributed to Vladimir Lenin. ‘The capitalists will sell us the rope with which we will hang them.’ That’s exactly what China is trying to do – use the enterprising minds of America to choke our economy. The challenge we face with regards to China in particular requires a shift in our way of thinking – a new paradigm. The focus on proxy wars and diplomacy are a relic of the past. We need real action.”
he was pretty much a yes man on free trade,
https://www.ontheissues.org/International/John_Cornyn_Free_Trade.htm
Senator Sherrod Brown (D-OH), Chair of the Senate Banking Committee, had this to say in his opening remarks:
“Protecting U.S. technological leadership is an important part of this conversation, and it’s why we’re here today. It’s also not the whole story. Part of this story is an issue that Ohioans know all too well. Over the last 30, 40 years, corporations searched the globe for cheap labor. First, they went to anti-union states in the South. Then, corporations lobbied for tax breaks and bad trade deals to help move jobs overseas – always in search of lower wages. They started with manufacturing jobs, but they didn’t stop there — corporations moved R&D jobs abroad too. And Wall Street rewarded them for it, over and over and over. In some cases, investments abroad outpaced investments in American workers. It undermined our national security and hollowed out our middle class.
“Protecting technological leadership and protecting jobs are connected. Ohioans know how much innovation happens on the shop floor.””
this is why there most likely will not be any reform, as long as bill clintons policies which killed americas ability at democratic control of just about anything.
“One of the impediments to getting this legislation passed is expected to come from lobbyists and trade groups representing multi-national corporations in the U.S. that don’t want to see any restrictions placed on their ability to improve their bottom line from outsourcing – regardless of its impact on American workers or national security. (There’s a good reason these corporations are called “multi-national.”)
Other witnesses testifying at the hearing included:
ITI’s members include some of the largest multi-national technology companies in the world, including Apple, Amazon, Google and Microsoft. Testimony from ITI’s Robert Strayer at yesterday’s hearing attempted to straddle the fence between sounding supportive of U.S. national security while cautioning curbs on technology companies’ ability to make profits in foreign countries.”
So long as new money gets created by expanding Fed balance sheet, hot money flows and magical finance will be the norm going forward, forever. Sanjait must have been having a flashback to the pre-bailout period.
QE does not create new money since the Fed is not funding the creation of new financial assets. QE is an asset swap. See here for details: https://www.cnbc.com/id/100760150. But I agree with the general point.
left out of all such digressions is the problem of value.
that dollar in yer pocket…or that set of pixels on a screen…only has value because enough humans believe it has value.
this is not all that easy to change…but it has changed before…many times.
for all their physics envy, it’s curious that economists(sic) dont spend a lot of headline time on this,lol.
eudaimonia, and all.
And don’t forget that dollars are needed to pay your tax bill. Uncle Sam is gonna want his cut.
All the money in the world at this very moment is only worth all the everything for sale in the world at this very moment.
What “value” does money have if there is nothing anywhere to be bought with it?
Would you rather go scuba diving with a tank full of gold coins or a tank full of compressed air?
Well, “that dollar in yer pocket … or that set of pixels on a screen” have value because the US government demands them (and only them) in payment of its taxes, fees and fines. So the “belief” isn’t so much in the object or symbol of the currency itself, but rather that the sovereign WILL enforce its tax collection (and its prevention of counterfeiting) with extreme prejudice — a “belief” backed by the judicial system, its police and prisons, and ultimately US armed forces.
In short, it’s Chartalism.
It’s be unusual having bank runs in the midst of the War on Cash, what if the cupboards were somewhat bare?
That would only ratchet up the fear factor…
Thanks for this post. More good economic reporting I’ll never read in the MSM.
The older I get and the more I learn about how finance works, the less it seems like a credible industry and the more it seems like one giant check kiting scheme.
At the end of the day, the check kiter always gets caught unless they can come up with some actual cash. Pretty sure these institutions don’t have it – just a bunch of IOUs from other institutions that don’t have any real money either. That’s what you get when your “wealth” is based on loans taken against assets that are often rather arbitrarily valued (“Mark-to-market”, but only if you force us to!) and may be worth nothing.
dude! isn’t that what “derivatives” are?
“…can come up with some actual cash. Pretty sure these institutions don’t have it – just a bunch of IOUs from other institutions that don’t have any real money either.”
that’s why its so layered on thick with esoterica and other complex larding.
so we dont understand what they’re doing, which is really simple as shit,lol.
carney’s have taken over the halls of power…and even keeping yer keys in yer boot wont stop them from stealing yer car and running off to Slidell and crashing it into a river under hot pursuit.
“keeping yer keys in yer boot wont stop them from stealing yer car and running off to Slidell and crashing it into a river under hot pursuit.”
What a vivid image this creates! Yes, sometimes it does boil down to having some actual cash at hand and not just someone’s “promise to pay on demand”.
Pre Great Recession, most of the big Money Center banks/brokerages had different Fiscal Year Ends so that they could hide their crap with one another just before each reporting period, in order to make them look “clean”.
Dodd Frank made them have calendar FYEs so they couldn’t undertake this control fraud, supposedly.
So, the Federal Reserve, which is owned by the Banks, took on this role, not having to disclose for 2 years, in esoteric tables. Tables that Wall St. on Parade can barely parse.
Re: And from reader Li: “Ray Dalio quit Bridgewater just before the market implodes.
In all fairness, he’s been working on a transition plan for 10+ years, and he still holds a significant investment in the organization — he’s just no longer making investment decisions, and doesn’t have voting rights (but still holds a seat on the board). I wouldn’t say the timing of his stepping down is more than coincidentally related to the state of the market. He’s 73, and ready to retire.
And Ray Dalio has been very actively telling people – in writing, and in public – that Empires end when they stop creating and start stealing from the weak, from other societies, and from the future.
He’s also told his fellow high-fliers that they need to address the wealth disparity in order to avoid the pitchforks.
so…he’s not for eating, then?
One of the last on the list, Amfortas.
He’s at least aware, and communicating. Cut him a break, and see what else he’s capable of.
Apply pressure, tho. There are no free passes in this game, and that sword, as I’m sure you appreciate, cuts both ways.
There are a lot of self-professed “progressives” that are boat-anchors.
Mr Market is telling the Fed to get out the scrabble board for another print money to buy our dogs program. Dollar is strong enough to handle it and it would cut a break to the UK and Europe. Increasing rates is just to drive unemployment.
Sorry if this sounds too over simplified, but we’ve seen this movie a few times now.
gee, i thought that deregulation, free trade, privatization, low taxes on the rich would unleash the animal spirits that would end boom and bust, coupled with slashed social safety nets to get the lazy deplorable off their lazy asses, well that was according to bill clinton/tony blair types.
could they have been wrong? SARC!
https://www.theguardian.com/society/2002/jun/10/socialexclusion.politics1”
A stable and dynamic economy, ending the years of boom and bust and reaching out to the new markets that globalisation and technology are creating
· A welfare state based on rights and responsibility where we gave opportunity to people on benefit to get into work; but demanded responsibility in return; where we came down hard on crime; but offered ways out to those committing crime;
· Modern public services through a combination of investment and reform;
· A modern constitution; and
· Britain ending its years of isolation in Europe and playing a leading role there and elsewhere in the world events that inevitably affect us as a nation.
…
Wow, that’s some Lambert-level deadpan right there:
Whatever fund crashes and bank crashes happen, remember that the US govt has full capability to mitigate any financial crashes. If a big financial crash happens the US govt (because it has full monetary sovereignty) can create out of thin air all the money needed to shore up poorly run banks, shadow banks, etc. Remember huge 2008 crash and QE? Umpteen billions of dollars given to banks for mostly worthless assets? With no auditing or oversight? Well, that can easily happen again. Remember that the US budget deficit is just a number. No one needs to “pay back” the deficit cuz the govt is the sole issuer of the dollar and can make all the dollars it wants. If those dollars don’t go into the real economy, all they do, like in QE, is make wealthy bankers even more wealthy. Has nothing to do with “taxpayer money”.
In the US, federal taxes in no way, shape or form fund federal spending. All federal spending is the creation of band new money by order of the US Congress. The money is created by federal govt employees at their computers typing numbers into bank account spreadsheets.
The Japanese budget deficit is way larger than the US, and the Japanese economy is doing fine. Almost everyone in Japan has the goods and services they need at reasonable prices and the people are well fed, well housed, well educated with mostly free govt national health care. And with very low unemployment. And amazing infrastructure that puts the US to shame.
Anyone who’s worried about the US budget deficit simply doesn’t understand how the US monetary system actually works. Learn MMT to get the real picture.
The US can easily mitigate *any* financial crash as long as the federal govt responds properly. If they don’t, well, then it’s our fault for voting idiots into office.