I wrote this May 26, 2004
http://www.depression2.tv/nwo/archives/000039.html
I'm sorry to say, but this mess is a lot older than the current administration. The bubble popped in 2000 and we should be not in a recession, but a full blown depression. I too think they should get the power out of DC, but this wasn't arranged in the 1960's, 1970's, 1980's, 1990's or in Y2K. It was created to start by giving popular election of the Senate in 1913 and moving the representation of the states from the legislature in most cases to the multinational corporate world. There was also the passage of an income tax, which wasn't a direct tax as levied, but an excise tax to be passed on as a cost of doing business. There was so much done under the eyes of Woodrow Wilson and his crony, Colonel Mandel House, a new world order communist that just slipped by us. The Federal Reserve was one of the planks of the communist manifesto and one of the organizations that few of our founding fathers favored. It transferred all money power from the people to a few.
One of the things that happened in the Wilson administration was we went to War in Europe. Our history books blame the Lucitania incident, but that occurred in 1915 and Wilson was re-elected on a platform of, he kept us out of war. Back in that day and time, the inaugeration of the President was the first week in March, not in January as we have it today. By March 1917, we were of course in war. With war came the passage of war power acts, which allowed the executive to prosecute the war. Among these powers was a law called the trading with the enemy act, the act of October 6, 1917.
Going forward, in 1933, the Federal Reserve bank was bankrupt and so were most of the other banks. The currency was not any good. Coming to the rescue was Franklin Roosevelt and his moral equivalent of war. What was this moral equivalent of war? Well, it was the repeal of traditional constitutional limitations on government under the concept of emergency and it is codified in 12USC95a and together with 12USC95b, made the President, the Secretary of the Treasury and others with delegated power dictators. Roosevelt replaced the liabilities of the Federal Reserve with liabilities to the Federal Reserve. Instead of the Federal Reserve owing us, we owed it and the only remedy was to try to borrow ourselves to prosperity.
You can also find this 12USC95a codified in 50USC5b. If you don't know what 50USC5b is, go check and you will find out. Senate report 93-547 was put out after the Vietnam war and it discusses this law broadly.
What happened under this law? Well, you have all heard of War on Poverty, War on Drugs, War on Crime, etc. In times of war, there is no constitution or private property. You might have heard of the Schecter poultry case where the New Deal was overturned. It basically said that a tax was for the legitimate support of government and what was being practiced was socialism, in direct violation of the 5th amendment of the constitution. See, there is no just compensation for taking of property and when one group is fed the property of another group by the government, that is taking and not tax. Like it or not, we have been deluded in thinking we live in a government set up in 1787 by our founding fathers.
Roosevelt and then Truman took this mess one step farther. At the end of world war II, the United States was made the banking system for the world. One of the reasons our trade deficit runs so high is we are the only country in the world that can create good and unlimited credit. Money when needed takes the path of least resistance. There are always rumors that such and such a country is going to quit buying our bonds, but the truth is that Japan and Europe went broke fighting wars decades and in some cases close to a hundred years ago. The Federal Reserve was created for no other reason but to allow for the continued modern fighting of more wars.
To wit: Much was made of the recent massive buying of treasuries by the Japanese with dollars bought with yen. Japan has tried to interest rate themselves out of their bankruptcy, social spend their way out of their bankruptcy, but the only way they could produce money for their system with any validity was to use American credit in the form of banknotes.
The 1990's and the Clinton administration was an economic nightmare. I can't say much about the administration since or the ones before either, but Robert Rubin with the assistance of Greenie created and perpetuated a bubble. Did anyone notice the Congress voting money to bail out Mexico in 1994 or 1995? No, Rubin acted on his own, a few months after he and his former employer, Goldman Sachs took all the money out of Mexico to help finance this bubble. The United States leveraged the credit out of Asia, then the IMF came in and replaced it.
What we really need is a cleanout, but that isn't politically feasible. We are in a time of permanent financial overhang and the times are going to get rough. Had Roosevelt left the situation alone and people taken their losses in the 1930's, we would be a prosperous country today, but the fib is that he saved the country. Instead he put us under the same system as Adolph Hitler set up within weeks of the same event, corporate socialism, better known as fascism. Like a frog in a cold pot of water put on the stove, we have been boiled and never knew it was happening.
Why do you think every socialist in the United States walked up to the stand in DC when a man was nominated to the Supreme Court by the name of Robert Bork, who favored something called original intent? I think people on that side of the aisle didn't want to be reminded of the law. They would rather deal with these illegalities like some right to privacy that only applies to right to privacy from other private citizens, not the government itself. Who cares about right to privacy when we are having our capacity to act as living humans taken from us by some system that now can tell us when to jump, when and where to empty our pockets, look in our bank accounts over some assinine international war or some war on drugs. Someone mentioned buying land, well Roosevelt nationalized farming in 1933 and now there aren't any farmers left, only corporations who run on huge central planned agriculture programs and subsidies.
You don't have to take my word for it. Plug in a search for war and emergency powers and look for a guy named Eugene Schroeder. Schroeder published a book called "Constitution, Fact or Fiction". Do your best to find Senate Report 93-547, as it has some very interesting statements in it. You will probably have to go to a Federal Repository. We aren't a constitutional republic any more, but an excutive branch bureaucracy that enforces and carries out powers given it by Congress and never gives the power back. In the meantime states are now sucking on the central planning tit and jump when the Feds say, do so or lose your Federal Funds.
Wednesday, November 4, 2009
Wednesday, October 14, 2009
Its still debt
The inflationists are missing the boat. In fact, those in mortgage lending mess are right on the money, not making loans. The only outfits making loans are the ones controlled by the government. That won't last for long as debt is going to continue to pile up as trash on the curve. The inflation worm turned a long time ago and the money machine was destroyed with the housing bubble. Inflation to maximum potential has occurred.
Right now the Fed is buying mortgages and to some extent treasuries. The act is being called printing money, but at this time I see it as changing who holds the debt. The money was already printed by the banking system, spent bullets. The problem we face is debt not inflation. Now the Fed owes for what someone else owes, to someone who isn't even involved. The link is debt and liquidity,not printing money. The liabilities have to be solved. There isn't any running off the roll of toilet paper, only another note for another note.
We have had a bad stock market for 10 years now. IN fact, if you go back to 1968 when the SPX first crossed 100, the dividend yield was right on 3%. If the SPX was priced to yield 3% right now, it would be priced at 732, according to SPX data. The Shiller data from June 68 showed a price of 100.5 and the CPI divisor to August 2009 was 6.22, meaning to keep up with inflation the SPX would need a price of 625. This means that if you were constantly invested in the SPX for the past 41 years, you would have beaten inflation by 17% total, less than 1/2% per year. BBB bonds did better than that. In deflation, the market is going to fare even worse, as the relative volume of business is going to fall. Back to the 1929 peak, the SPX would adjust out to 395, still less than a double over 80 years, evidence the real return on stocks over an entire cycle is less than 1% over risk free.
Knowing the SPX has the potential to fall 80% or more, I can see that people are about to get tight. Those that don't eat at home are going to be looked at as spendthrifts. Debt is going to get tighter and tigher. There is almost no way we don't deflate and this depression will be longer and harder to exit than the last one.
Right now the Fed is buying mortgages and to some extent treasuries. The act is being called printing money, but at this time I see it as changing who holds the debt. The money was already printed by the banking system, spent bullets. The problem we face is debt not inflation. Now the Fed owes for what someone else owes, to someone who isn't even involved. The link is debt and liquidity,not printing money. The liabilities have to be solved. There isn't any running off the roll of toilet paper, only another note for another note.
We have had a bad stock market for 10 years now. IN fact, if you go back to 1968 when the SPX first crossed 100, the dividend yield was right on 3%. If the SPX was priced to yield 3% right now, it would be priced at 732, according to SPX data. The Shiller data from June 68 showed a price of 100.5 and the CPI divisor to August 2009 was 6.22, meaning to keep up with inflation the SPX would need a price of 625. This means that if you were constantly invested in the SPX for the past 41 years, you would have beaten inflation by 17% total, less than 1/2% per year. BBB bonds did better than that. In deflation, the market is going to fare even worse, as the relative volume of business is going to fall. Back to the 1929 peak, the SPX would adjust out to 395, still less than a double over 80 years, evidence the real return on stocks over an entire cycle is less than 1% over risk free.
Knowing the SPX has the potential to fall 80% or more, I can see that people are about to get tight. Those that don't eat at home are going to be looked at as spendthrifts. Debt is going to get tighter and tigher. There is almost no way we don't deflate and this depression will be longer and harder to exit than the last one.
Sunday, October 11, 2009
New loans will never come back
There are a lot of green shoots, but they don't make a meal for a small horse. It will never get out to people why this depression is happening because those in charge don't want a nation of people to catch on as those in bondage in Egypt did 3000 plus years ago. There will be all kinds of explanations like Black Swans and the last administration or subprime lending, but there will never be allowed to slip the deadly nature of credit and debt in general.
We are in a mess. The entire survival of modern civilization may rest on the solution to the current financial/debt system. It would be easy enough to get rid of the debt, but few understand the power that amassed debt considered money gives an economy when it is nearing peak. The massive amounts of performing debt represents capital, retirement, savings and money all at the same time. Problem is, it is also a cancer to the economic well being once it becomes excessive.
One of the paradoxes in this economy is that savings is debt. Debt is savings, debt is money and it is the basis of rasing more debt, more money and creating more savings. But, as more is generally better, more against something relatively fixed like the size of the economy eventually becomes overwhelming. To say that they can pile debt to the moon is only true to the extent that the expectations of it being serviced or repaid.
There is more to the debt than meets the eye. The dollar is debt. It is the debt that the Euro is largely based on. It is the backbone of the Chinese financial system. If another currency was to step forward and take the place of the dollar, it would imply that the country of origin had created enough debt to sustain that much debt outside the country. Most countries don't have private property rights or enough property to float enough currency to support the credit systems of the world. It would be nice to have something like the Swiss franc as a reserve, but it would only be a few weeks that Switzerland would be drained of money and a few years of borrowing it that it would be broke. The Euro would work, but the internal and external debt of Europe is massive. The yen might work, but the asset base of Japan has been eroded by deflation and to utilize the yen would drain what was left.
What is about to transpire is the no mathematical solution problem. This past week the former risk evaluator of FNMA from the 1980's came out with a loss projection for the FHA. With it were studies that raised the question of why defaults and foreclosures on mortgages were going up during the 1990's despite a good economy. It is pretty clear with some lookback that the general level of debt in the economy was making it more and more difficult to service existing debt. Once asset inflation stopped, the game was up.
Now governments around the world are trying to stimulate borrowing and lending to get the economies going and I don't believe it is going to work. Instead, we are going to find that all new debt is going bad in with the pile of the other bad debt. The maximum debt capacity of the economy has been reached and all new debt is merely adding to the losses.
Stock market bulls think the Fed has solved this and all we need is for banks to start lending money again. Of course, the nature of the stock market is all involved have stock for sale, meaning they are really only promoting what they have,like Kroger promotes groceries. The difference being that you have to come in and buy groceries from somewhere. You don't have to buy anything financial with your money if you don't want to.
The implications of what I write are dire for stocks, which are priced at levels where only more leverage can ever make the prices go up. Corporations may have a lot of cash, but they also have record levels of debt and any that get more debt are raising their odds of going broke. I am convinced that US corporations drew their credit lines last year as the crisis approached so they would be certain to have money. Though this action may have helped many avoid bankruptcy, it may have also ensured others they were going broke. GE could very well be one of them, with the government getting the bill for the insolvency.
The level of debt has to decrease and it cannot decrease without also decreasing the pool of savings and the money supply. The Fed is attempting to keep cash in accounts by buying debt, but I suspect they are going to run in place at best. Savings has increased, but I believe this is more a matter of consolidating ownership of cash balances in the hands of fewer people and the paying down of existing debt. We will see if I am correct soon.
Going forward I sense that bankers are going to realize as well that any new debt they issue is merely going bad with the rest. As the system deflates worldwide, which it will, prices of everything will collapse as those selling literally everything will need cash to attempt to service debt. That is how liquidations occur.
At this time, the banking system is choosing to speculate rather than make loans. This is in part providing liquidity for assets, but it has it dangers. Putting out cash for assets is just as deadly as lending cash. Once it becomes clear that the bigger fools are already in the game, banks and brokers who have been throwing stock between themselves to inflate prices are going to find they are the bigger fools. We are headed for a liquidation as we saw between spring 1930 and summer 1932. I am betting the SPX goes to under 400 for certain and the Dow under 4000, taking out the entire post 1995 bubble. Tens of millions are going bankrupt and the financial bubble in Asia is going to implode along with ours. The housing market decline is going to resume, as all in the making of mortgages are going broke and the government is going to have to adapt to survive itself.
We are in a mess. The entire survival of modern civilization may rest on the solution to the current financial/debt system. It would be easy enough to get rid of the debt, but few understand the power that amassed debt considered money gives an economy when it is nearing peak. The massive amounts of performing debt represents capital, retirement, savings and money all at the same time. Problem is, it is also a cancer to the economic well being once it becomes excessive.
One of the paradoxes in this economy is that savings is debt. Debt is savings, debt is money and it is the basis of rasing more debt, more money and creating more savings. But, as more is generally better, more against something relatively fixed like the size of the economy eventually becomes overwhelming. To say that they can pile debt to the moon is only true to the extent that the expectations of it being serviced or repaid.
There is more to the debt than meets the eye. The dollar is debt. It is the debt that the Euro is largely based on. It is the backbone of the Chinese financial system. If another currency was to step forward and take the place of the dollar, it would imply that the country of origin had created enough debt to sustain that much debt outside the country. Most countries don't have private property rights or enough property to float enough currency to support the credit systems of the world. It would be nice to have something like the Swiss franc as a reserve, but it would only be a few weeks that Switzerland would be drained of money and a few years of borrowing it that it would be broke. The Euro would work, but the internal and external debt of Europe is massive. The yen might work, but the asset base of Japan has been eroded by deflation and to utilize the yen would drain what was left.
What is about to transpire is the no mathematical solution problem. This past week the former risk evaluator of FNMA from the 1980's came out with a loss projection for the FHA. With it were studies that raised the question of why defaults and foreclosures on mortgages were going up during the 1990's despite a good economy. It is pretty clear with some lookback that the general level of debt in the economy was making it more and more difficult to service existing debt. Once asset inflation stopped, the game was up.
Now governments around the world are trying to stimulate borrowing and lending to get the economies going and I don't believe it is going to work. Instead, we are going to find that all new debt is going bad in with the pile of the other bad debt. The maximum debt capacity of the economy has been reached and all new debt is merely adding to the losses.
Stock market bulls think the Fed has solved this and all we need is for banks to start lending money again. Of course, the nature of the stock market is all involved have stock for sale, meaning they are really only promoting what they have,like Kroger promotes groceries. The difference being that you have to come in and buy groceries from somewhere. You don't have to buy anything financial with your money if you don't want to.
The implications of what I write are dire for stocks, which are priced at levels where only more leverage can ever make the prices go up. Corporations may have a lot of cash, but they also have record levels of debt and any that get more debt are raising their odds of going broke. I am convinced that US corporations drew their credit lines last year as the crisis approached so they would be certain to have money. Though this action may have helped many avoid bankruptcy, it may have also ensured others they were going broke. GE could very well be one of them, with the government getting the bill for the insolvency.
The level of debt has to decrease and it cannot decrease without also decreasing the pool of savings and the money supply. The Fed is attempting to keep cash in accounts by buying debt, but I suspect they are going to run in place at best. Savings has increased, but I believe this is more a matter of consolidating ownership of cash balances in the hands of fewer people and the paying down of existing debt. We will see if I am correct soon.
Going forward I sense that bankers are going to realize as well that any new debt they issue is merely going bad with the rest. As the system deflates worldwide, which it will, prices of everything will collapse as those selling literally everything will need cash to attempt to service debt. That is how liquidations occur.
At this time, the banking system is choosing to speculate rather than make loans. This is in part providing liquidity for assets, but it has it dangers. Putting out cash for assets is just as deadly as lending cash. Once it becomes clear that the bigger fools are already in the game, banks and brokers who have been throwing stock between themselves to inflate prices are going to find they are the bigger fools. We are headed for a liquidation as we saw between spring 1930 and summer 1932. I am betting the SPX goes to under 400 for certain and the Dow under 4000, taking out the entire post 1995 bubble. Tens of millions are going bankrupt and the financial bubble in Asia is going to implode along with ours. The housing market decline is going to resume, as all in the making of mortgages are going broke and the government is going to have to adapt to survive itself.
Saturday, October 10, 2009
Why the Smart Money Missed the rally
There are plenty of falling knife catchers who pretend to be Einsteins now that the market has rallied to where it was after it had declined for a year straight. What those that missed this rally may forget, if they are now anointing these gurus as geniuses is that these same knife catchers were buying at the peak, buying in January 2008, buying in May 2008 and buying in August and September 2008, buying on October 14, 2008 and buying on election day 2008. I might also add that the first trading day of 2009, the Dow traded in excess of 9000 and the bulls were piling in and repeating the same mantra to the poor idiots that had listened to the Jim Cramers all the way down, stay the course.
For one thing, for many to have gotten into the market on the bottom, the volume of the trade would have had to have been well in excess of the clearing capacity of the exchanges. Instead, we have seen repeated massive volume in issues like FRE, FNM, AIG, C and GM, mostly defunct or near defunct on government life support entities. So the trading hasn't even been in these near healthy side of the market. Instead what we have seen is bears being forced out by nonsense moves more likely induced by Goldman Sachs trading computers, designed to unload acquired stock on the way up. In the meantime, Ben Bernanke created a new hallucination, green shoots for the bulls to munch on while they were being fattened for slaughter. Green shoots are things like statistical bounces in indexes. Reductions of unemployment claims to levels higher than any prior to December 2008. The suspension of mark to market allowed zombie banks to pretend they were solvent. Nonsense being sold as improvement?
The reason the smart money missed this rally is there isn't going to be a picking the bottom in this market. A point where dividends on the SPX are around 3% will never be a bottom in a deep bear market,nor a reason to hold stocks for the long run. At 2%, they are a game for fools to buy into. Where is the bottom supposed to be? Logically where there might be a chance for a 6% real rate of return. A 5% dividend would have been near SPX 400, not 666. In any case, the buy if someone was bottom fishing was in the bonds of these companies, not the stocks. This was the real claims on the assets of the companies in event of bankruptcy and the guaranteed returns were very much higher than the stocks.
So now we are sitting on the edge as the bulls proclaim victory while nothing in the private side of the economy is even operational. Trade wars and devaluations are in process around the world and several countries are on the edge of default. Foreclosure rates continue to go up, commercial properties are collapsing in value and many are headed for default and nothing in the banking system has been addressed. Bulls are now trying to entice others to come in and push up the value of their portfolios while the Wall Streeters are selling out with massive gains.
In late 2003 I put together the basis of a book I was going to call "So you think it is safe to get back in the water"? The SPX was roughly 1000 at the time and the Dow was about 10K. Just about 6 years later we are about the same price, meaning dividends have been the net result of holding the general market. Risk free treasuries would have paid the same return and 10 year treasuries about double the return of the market. Not a lot of people accumulated stock under the 900 level in 2002 or 2003, most having held on, the profit going to Goldman and others on Wall Street.
So we are getting the same bubble mania story we got last time. This time though we are looking at a zero Fed funds rate, clear evidence the world has reached an unsustainable level of debt, that even if growth returned the supplies of resources are insufficient for a long growth spurt and that the balance sheet of governments around the world have been irrepairably impaired. Add to that a series of job losses that haven't found a bottom or even showing signs a bottom is in the works and the real prospects for growth in equities is near zero.
Anyone paying attention to history knows there isn't a safe place to buy and hold stocks in this climate. Nor has there ever been a long term gain situation in holding the indexes at these prices. The limits of a bubble is how big it can get before it pops. Also, the real money generator of the economy, housing and real estate is not in a position to generate additional credit that drove the markets and consumer spending in the past. Holding equities is for people who don't know better.
For one thing, for many to have gotten into the market on the bottom, the volume of the trade would have had to have been well in excess of the clearing capacity of the exchanges. Instead, we have seen repeated massive volume in issues like FRE, FNM, AIG, C and GM, mostly defunct or near defunct on government life support entities. So the trading hasn't even been in these near healthy side of the market. Instead what we have seen is bears being forced out by nonsense moves more likely induced by Goldman Sachs trading computers, designed to unload acquired stock on the way up. In the meantime, Ben Bernanke created a new hallucination, green shoots for the bulls to munch on while they were being fattened for slaughter. Green shoots are things like statistical bounces in indexes. Reductions of unemployment claims to levels higher than any prior to December 2008. The suspension of mark to market allowed zombie banks to pretend they were solvent. Nonsense being sold as improvement?
The reason the smart money missed this rally is there isn't going to be a picking the bottom in this market. A point where dividends on the SPX are around 3% will never be a bottom in a deep bear market,nor a reason to hold stocks for the long run. At 2%, they are a game for fools to buy into. Where is the bottom supposed to be? Logically where there might be a chance for a 6% real rate of return. A 5% dividend would have been near SPX 400, not 666. In any case, the buy if someone was bottom fishing was in the bonds of these companies, not the stocks. This was the real claims on the assets of the companies in event of bankruptcy and the guaranteed returns were very much higher than the stocks.
So now we are sitting on the edge as the bulls proclaim victory while nothing in the private side of the economy is even operational. Trade wars and devaluations are in process around the world and several countries are on the edge of default. Foreclosure rates continue to go up, commercial properties are collapsing in value and many are headed for default and nothing in the banking system has been addressed. Bulls are now trying to entice others to come in and push up the value of their portfolios while the Wall Streeters are selling out with massive gains.
In late 2003 I put together the basis of a book I was going to call "So you think it is safe to get back in the water"? The SPX was roughly 1000 at the time and the Dow was about 10K. Just about 6 years later we are about the same price, meaning dividends have been the net result of holding the general market. Risk free treasuries would have paid the same return and 10 year treasuries about double the return of the market. Not a lot of people accumulated stock under the 900 level in 2002 or 2003, most having held on, the profit going to Goldman and others on Wall Street.
So we are getting the same bubble mania story we got last time. This time though we are looking at a zero Fed funds rate, clear evidence the world has reached an unsustainable level of debt, that even if growth returned the supplies of resources are insufficient for a long growth spurt and that the balance sheet of governments around the world have been irrepairably impaired. Add to that a series of job losses that haven't found a bottom or even showing signs a bottom is in the works and the real prospects for growth in equities is near zero.
Anyone paying attention to history knows there isn't a safe place to buy and hold stocks in this climate. Nor has there ever been a long term gain situation in holding the indexes at these prices. The limits of a bubble is how big it can get before it pops. Also, the real money generator of the economy, housing and real estate is not in a position to generate additional credit that drove the markets and consumer spending in the past. Holding equities is for people who don't know better.
Friday, September 25, 2009
What is creating deflation
I just listened to Mish Shedlock and another guy debate inflation/deflation on Jim Pulovas website. Mish and I have a lot of the same ideas about deflation, but I do believe there is more to the story than either of us knows. As I listened to this moron, who probably has more degrees and been overpaid more dollars than Bernanke could print, I realized there is a world of ignorance. Asset inflation is inflation and asset deflation is deflation. Both are end game results of inflation.
As most people that come to this site understand, I am in the minority, a deflationist. As I have pondered this idea, my sense of how it gets started and what happens grows. Deflation is always preceeded by a massive inflation of debt. There really can't be any printing of money as anything but debt or the value of money collapses in a short period of time. Thus the supply of debt itself is a prime determinant of money. But, it is also only the new supply of debt that can actually inflate, as the rest of the debt is actually a deflationary phenomenon. This is a hard idea to grasp, but technically the money that has already been created is followed by the urgency of the debtor to get it back to pay it back and not to spend it again. Along with this urgency is the interest due everyone, which is money in excess of what was created in the credit system. Thus someone is generally in default and someone isn't going to get paid. As long as the system continues to inflate at a reasonable rate and debt can be liquidated on a broad scale, it continues.
Something happens in the long credit cycle that few understand, especially those educated guys like Mish debated who say it has never happened before. that something has happened over and over again throughout history. John Law used paper money to inflate. The Bank of England used paper money to inflate with its value based on gold backing, but not based on gold 100%. Banking has never been based on having money to pay depositors, which is the missing link in most people's arguments today about inflation. I hope to describe the credit crisis and how this need to deliver liquid funds between banks themselves is the primary funding problem.
Well, by default the US dollar became the world reserve currency. In some fashion it is paper gold. Plus it is something that is created by banks alone, as it is bank paper and not government paper. The Fed is a bank as well, meaning it needs to possess good assets in place of its paper, which is what the dollar is, Federal reserve bank paper.
Lost on the side of inflation is the absolute need to liquidate in this game. Not only are assets outside of banks needing to be liquidated, but those inside banks as well. I doubt many are understanding that the Fed is merely liquidating assets or loans that have already been made so banks can have some liquidity between each other. In any case, the Fed is buying what amounts to real property in the sense that whomever sold it to them no longer has it.
The point is that what is being liquidated is needed to pay debt, not to reload and spend more. Thus the government borrows money and issues debt and the money is put into accounts and the bonds bought with the funds from the Fed, who in turn buys them back from the banks so they can cover the checks coming in from other banks. Banks don't lend this money because they owe it and they realize it won't be that easy to get back in this climate.
The real reason we deflate is the boom and inflation of the recent past. Not only were prices pushed up with inflation, so was capacity. The capacity remains, but those that were the big spenders are left with deflated credit lines and sizable debts. In many countries, there were housing bubbles which drove demand. Now these bubbles are deflating with little to stop the deflation, as with most capacity, the capacity of housing has been significantly overbuilt. Housing is not only a sizable source of employment in most times, but also has provided a sizable amount of credit to the system in the form of collateral. As the problem is currently compounding itself, there will be a net shrinkage of everything relating to housing, most importantly the capital position of those that have financed it.
In the end, the most important determinant of deflation is the fact that so many things were looked at as money, whether it be the balance of ones brokerage account, the bonds that are no longer solvent owned by many or the equity in ones house. Also, the widespread supply of credit allowed those with collateral to feel as if they possessed money whether they had need for the cash at the time or not.
What vew understand is that the Fed rarely ever puts money in the system it doesn't need. I believe it is trying to expand lending, which is the only determinant of what is referred to as the velocity of money. I don't buy the idea that money just slows down, but instead lending slows down. Most lending is done to immediately go out and buy something, which means that money immediately changes hands. Lending creates pressure on the system. Buying instruments that represent lending that has already taken place does little or nothing. Banks don't have money in the sense they could pay off their depositors, so what is being put out amounts to zero.
All said, we are in a system of insolvency and insolvent systems are no longer creditworthy. An insolvent borrower could more readily borrow money than an insolvent lender can make a loan. The entire system is insolvent and the asset values that backed it are falling. The just pretend method that the current authorities have adopted is not going to make an insolvent outfit solvent. It might allow them to fudge their earnings or losses, but it won't make dead men walk, which is what the real desire is. Zombie banks won't make many real loans. Without money available directly for what the private sector individuals desire, deflation will be the norm.
As most people that come to this site understand, I am in the minority, a deflationist. As I have pondered this idea, my sense of how it gets started and what happens grows. Deflation is always preceeded by a massive inflation of debt. There really can't be any printing of money as anything but debt or the value of money collapses in a short period of time. Thus the supply of debt itself is a prime determinant of money. But, it is also only the new supply of debt that can actually inflate, as the rest of the debt is actually a deflationary phenomenon. This is a hard idea to grasp, but technically the money that has already been created is followed by the urgency of the debtor to get it back to pay it back and not to spend it again. Along with this urgency is the interest due everyone, which is money in excess of what was created in the credit system. Thus someone is generally in default and someone isn't going to get paid. As long as the system continues to inflate at a reasonable rate and debt can be liquidated on a broad scale, it continues.
Something happens in the long credit cycle that few understand, especially those educated guys like Mish debated who say it has never happened before. that something has happened over and over again throughout history. John Law used paper money to inflate. The Bank of England used paper money to inflate with its value based on gold backing, but not based on gold 100%. Banking has never been based on having money to pay depositors, which is the missing link in most people's arguments today about inflation. I hope to describe the credit crisis and how this need to deliver liquid funds between banks themselves is the primary funding problem.
Well, by default the US dollar became the world reserve currency. In some fashion it is paper gold. Plus it is something that is created by banks alone, as it is bank paper and not government paper. The Fed is a bank as well, meaning it needs to possess good assets in place of its paper, which is what the dollar is, Federal reserve bank paper.
Lost on the side of inflation is the absolute need to liquidate in this game. Not only are assets outside of banks needing to be liquidated, but those inside banks as well. I doubt many are understanding that the Fed is merely liquidating assets or loans that have already been made so banks can have some liquidity between each other. In any case, the Fed is buying what amounts to real property in the sense that whomever sold it to them no longer has it.
The point is that what is being liquidated is needed to pay debt, not to reload and spend more. Thus the government borrows money and issues debt and the money is put into accounts and the bonds bought with the funds from the Fed, who in turn buys them back from the banks so they can cover the checks coming in from other banks. Banks don't lend this money because they owe it and they realize it won't be that easy to get back in this climate.
The real reason we deflate is the boom and inflation of the recent past. Not only were prices pushed up with inflation, so was capacity. The capacity remains, but those that were the big spenders are left with deflated credit lines and sizable debts. In many countries, there were housing bubbles which drove demand. Now these bubbles are deflating with little to stop the deflation, as with most capacity, the capacity of housing has been significantly overbuilt. Housing is not only a sizable source of employment in most times, but also has provided a sizable amount of credit to the system in the form of collateral. As the problem is currently compounding itself, there will be a net shrinkage of everything relating to housing, most importantly the capital position of those that have financed it.
In the end, the most important determinant of deflation is the fact that so many things were looked at as money, whether it be the balance of ones brokerage account, the bonds that are no longer solvent owned by many or the equity in ones house. Also, the widespread supply of credit allowed those with collateral to feel as if they possessed money whether they had need for the cash at the time or not.
What vew understand is that the Fed rarely ever puts money in the system it doesn't need. I believe it is trying to expand lending, which is the only determinant of what is referred to as the velocity of money. I don't buy the idea that money just slows down, but instead lending slows down. Most lending is done to immediately go out and buy something, which means that money immediately changes hands. Lending creates pressure on the system. Buying instruments that represent lending that has already taken place does little or nothing. Banks don't have money in the sense they could pay off their depositors, so what is being put out amounts to zero.
All said, we are in a system of insolvency and insolvent systems are no longer creditworthy. An insolvent borrower could more readily borrow money than an insolvent lender can make a loan. The entire system is insolvent and the asset values that backed it are falling. The just pretend method that the current authorities have adopted is not going to make an insolvent outfit solvent. It might allow them to fudge their earnings or losses, but it won't make dead men walk, which is what the real desire is. Zombie banks won't make many real loans. Without money available directly for what the private sector individuals desire, deflation will be the norm.
Sunday, September 13, 2009
When does it all collapse
The United States has gone to pot. Most people my age don't realize the US has gone to pot. Recently I was at a school reunion, being my 35th year out of high school. One of the guys I played golf with was a local business man. Another was a guy that is a wheeler dealer who made a lot of money out of real estate in Florida. The wheeler dealer agreed with me, though he was a liberal. His brother is more down my line and spoke to me about this mess that is brewing in the US. The business guy, who is buying more stores in a currently growing area of the Metroplex refused to believe the government wasn't going to fix this stuff.
There are only 2 type people that believe we are going to get out of this mess by spending and lending more money, morons and those that haven't studied it. Most of the experts we hear on television and are pushed forward by the Nobel Prize in economics committee propose that we spend even more, which means they are either paid liars or miseducated. Being the central bankers of the world have dictated economic education for the past 100 years, it isn't surprising that many could be miseducated in finance, economics and money in general.
Worst yet is that economics in general is nothing more than an extention of politics. The constitution of the United States set the political tone, but the Constitution no longer prevails. I have seen copies where the preamble of the Constitution had a word changed from ensure domestic to insure. One mean to help bring about and the other means to sell insurance. That is what socialism is and the economics of the day are structured to bring about the end of the original intent of the document with its guarantees of private property and limits on government in favor of a rule of necessity and constant war and bankruptcy.
Thus it is the political persuasion of intelligencia that dictates the mainstream and not fact. Because I tended toward the conservative side of politics, I happen to be able to see what has occurred that has precipitated this crisis. This leaning along with a degree in finance which led me to a sound conclusion that assets were massively overvalued clued me into the idea that something was amiss.
Austrian economics is a free market economics. The counter economics of Keynes and the Chicago school are government and banking manipulation economics and when problems like this arise, they blame the free market and the lack of regulation. This is a failure of the capacity to see that it wasn't the market, but the presense of government and quasi government organizations like the Federal Reserve, state chartered fractional reserve banking and international banking organizations that actually provided the platform for this disaster. Thus, the solution is to give over more power to these organizations that pushed the world to the brink of collapse to push us closer to the edge. The fix is the problem.
Hopefully the American population has had enough and the stomach to go through the long term solution. But, we have a problem in that the culprits of the creation of this mess are those that hold the power in US government, along with the bulk of the media. Instead of free markets, most banks of size are socialist organizations, the Federal Reserve being an idea of Marx and J.P. Morgan. Though Morgan was a capitalist, his idea of the Federal Reserve was straight from Marx. Also, Morgan was engaged in fractional reserve banking, which was the source of the problems faced in 1907 and in the 1890's.
Fatal mistakes were made by the Federal Reserve and government sponsored enterprises like Fannie Mae, Sallie Mae and Freddie Mac. The result was a John Law type fiasco that destroyed Ameican production in favor of American credit and set the country up in a debt bubble that has no solution other than painful deflation. But, being those that have bankrupted the system and themselves in the process hold titles of nobility and the governmental power itself hostage, there is no solution presented other than to bail them out. Being there isn't enough money in the world to reflate a debt bubble, more debt to create more money is going to lead to economic and financial collapse of those entities that attempt such solution.
Currently I am watching the Japan solution applied to the United States. For several years I heard these Wall Street types point fingers at Japan knowing they were going to not have any other solution than what Japan was using. The US banks are just as entrenched in the political power structure as the Japanese banks and Federal Reserve money created off US government debt does nothing more than bankrupt the country while sliding down the black hole of compound deflation. The system is bankrupt from the top down.
Being the system is bankrupt from the top down, the unwinding is going to eventually occur from the top down. This means the government itself is going to suffer a debt crisis. I don't know when this is coming, but I do believe that the US treasury market is going to be the next step down the road of collapse and to save itself, the government is going to have to abandon the saving of the too big to fail system. With this, the entire world will fall into a depression of epic proportions.
It is hard to envision saving this mess without at least a semi socialist solution. What I would propose is a plan to reorganize the debt system while putting together a plan to feed and house the population on a temporary basis. The Fed should be abolished and fractional reserve banking outlawed and replaced with a dual system. If the government has a position in the economy, it might be to serve as the holder of the bank deposits, while all lending at interest is done out of a pure capital at risk with no fractional reserve leverage allowed. The fact is that there isn't any such thing as supportable compound interest money, which is what fractional reserve banking eventually leads to and there isn't a such thing as a government guarantee of deposits.
There are only 2 type people that believe we are going to get out of this mess by spending and lending more money, morons and those that haven't studied it. Most of the experts we hear on television and are pushed forward by the Nobel Prize in economics committee propose that we spend even more, which means they are either paid liars or miseducated. Being the central bankers of the world have dictated economic education for the past 100 years, it isn't surprising that many could be miseducated in finance, economics and money in general.
Worst yet is that economics in general is nothing more than an extention of politics. The constitution of the United States set the political tone, but the Constitution no longer prevails. I have seen copies where the preamble of the Constitution had a word changed from ensure domestic to insure. One mean to help bring about and the other means to sell insurance. That is what socialism is and the economics of the day are structured to bring about the end of the original intent of the document with its guarantees of private property and limits on government in favor of a rule of necessity and constant war and bankruptcy.
Thus it is the political persuasion of intelligencia that dictates the mainstream and not fact. Because I tended toward the conservative side of politics, I happen to be able to see what has occurred that has precipitated this crisis. This leaning along with a degree in finance which led me to a sound conclusion that assets were massively overvalued clued me into the idea that something was amiss.
Austrian economics is a free market economics. The counter economics of Keynes and the Chicago school are government and banking manipulation economics and when problems like this arise, they blame the free market and the lack of regulation. This is a failure of the capacity to see that it wasn't the market, but the presense of government and quasi government organizations like the Federal Reserve, state chartered fractional reserve banking and international banking organizations that actually provided the platform for this disaster. Thus, the solution is to give over more power to these organizations that pushed the world to the brink of collapse to push us closer to the edge. The fix is the problem.
Hopefully the American population has had enough and the stomach to go through the long term solution. But, we have a problem in that the culprits of the creation of this mess are those that hold the power in US government, along with the bulk of the media. Instead of free markets, most banks of size are socialist organizations, the Federal Reserve being an idea of Marx and J.P. Morgan. Though Morgan was a capitalist, his idea of the Federal Reserve was straight from Marx. Also, Morgan was engaged in fractional reserve banking, which was the source of the problems faced in 1907 and in the 1890's.
Fatal mistakes were made by the Federal Reserve and government sponsored enterprises like Fannie Mae, Sallie Mae and Freddie Mac. The result was a John Law type fiasco that destroyed Ameican production in favor of American credit and set the country up in a debt bubble that has no solution other than painful deflation. But, being those that have bankrupted the system and themselves in the process hold titles of nobility and the governmental power itself hostage, there is no solution presented other than to bail them out. Being there isn't enough money in the world to reflate a debt bubble, more debt to create more money is going to lead to economic and financial collapse of those entities that attempt such solution.
Currently I am watching the Japan solution applied to the United States. For several years I heard these Wall Street types point fingers at Japan knowing they were going to not have any other solution than what Japan was using. The US banks are just as entrenched in the political power structure as the Japanese banks and Federal Reserve money created off US government debt does nothing more than bankrupt the country while sliding down the black hole of compound deflation. The system is bankrupt from the top down.
Being the system is bankrupt from the top down, the unwinding is going to eventually occur from the top down. This means the government itself is going to suffer a debt crisis. I don't know when this is coming, but I do believe that the US treasury market is going to be the next step down the road of collapse and to save itself, the government is going to have to abandon the saving of the too big to fail system. With this, the entire world will fall into a depression of epic proportions.
It is hard to envision saving this mess without at least a semi socialist solution. What I would propose is a plan to reorganize the debt system while putting together a plan to feed and house the population on a temporary basis. The Fed should be abolished and fractional reserve banking outlawed and replaced with a dual system. If the government has a position in the economy, it might be to serve as the holder of the bank deposits, while all lending at interest is done out of a pure capital at risk with no fractional reserve leverage allowed. The fact is that there isn't any such thing as supportable compound interest money, which is what fractional reserve banking eventually leads to and there isn't a such thing as a government guarantee of deposits.
Sunday, August 9, 2009
The savings paradox.
Michael Pettis has some interesting stuff in his site this week about savings rates, trade and deflation. I am in the early stages of the article, but it occurs to me that I need to write something here on the subject rather than lose it in his comments section. I believe the entire game to be a credit phenonmenon, including the idea of savings, which is nothing more than debt recycled from one account to another and has absolutely nothing to do with substance. i believe in the case of international trade, it actually relates to the credit excess in one country to the detriment of another. I also believe that due to the inconvertiblilty of currencies like the Chinese that savings is done by the central bank and thus there is a curtain drawn between trade and the Chinese currency. Thus all dollars drawn in for investment and trade are impounded to the extent that they aren't needed to buy minerals or other raw materials. The domestic economy has its own market separate from the international accounts. In this matter, a domestic economy could have no debt at all or piles of it, backed on the other side of the equation by savings.
Michael brings up the idea of the Obama administration encouraging savings, which is bordering on absurd. The entire Obama plan is no different than the Bush plan except more obscene on the consumption side. The only consumption he seems to not care for is energy and seems to be leaning toward endowing corporate USA and Wall Street the right to consume energy at the expense of the common every day man. This protest will be for another posting, as it is one of the greatest fascist programs of all time.
Back to savings. If someone can tell me how savings in this world economy can correspond to something besides debt, I would like to learn. This idea is kind of like the money going into the stock market, when anyone with a brain can figure out that money only changes accounts from idiots to smart people. Even if I take $100 and stick it in a matress, it is nothing more than the representation of something owed by the Federal reserve and that something is actually a paradox as it is generally a note in the amount of what I have plus interest due and represents a mathematically impossible equation other than someone taking a haircut. Investing in stocks is nothing more than an exchange of assets and has nothing to do with savings, a real pitfall for those that fool with that market and have no financial training other than what their brokerage companies can give. Speculation is no exchange or investing at all, but instead informed gambling at best.
In any case, housing in China costs about the same as in the US, yet according to what I have read by Andy Xie in Caijing, Chinese incomes are about 1/7th US. I am guessing that the Chinese consumption of housing is roughly 40% of US so the relative cost of housing is about 280% US. They aren't buying this out of their pockets, but are being financed in some fashion. My best guess is the same debt segregation of lending to the industrial so the flow can support the real estate markets that was probably part of the Japan bubble. In some fashion it is all debt.
Depressions last because there is no plan on how to give the haircut on debt and redistribute economic power. As long as there isn't a depression on the horizon it appears that all are left to fend for themselves, but once a crisis is threatened it is unheard of that the owners of Citicorp, Goldman Sachs, Bank of America, UBS, etc. should be replaced and the underlying equity be wiped out and replaced out of the current stock of money. I know the pain that pensioners would go through, but careful examination will reveal that much of this side of the equation has already been looted by Wall Street academic and actuarial formulas that just aren't true over the long term of economic cycles.
There is only one way the Japanese economy fell into the hole it fell into and that was an excess of debt. We heard for years that the Japanese savings rate was 20% to 25% of GDP. Well, what did that mean but the debt rate was also increasing at an amazing rate. Back in the 1980's, I recall the trade deficit with Japan was in the $100 billion range. I don't know about the rest of the world because Japan had to import all its raw materials or at least a very high percentage, but lets say they were even with the rest of the world. In this event, if their GDP was $1.5 trillion, then they were saving about $300 billion, $200 billion domestically. This implies that their debt level against their economy was increasing about 13% annually and their debt level was doubling less than every 6 years against GDP.
The US/China situation is also figured backwards. The situation wasn't fueled by a high China savings rate, but by a run away credit phenonomenon in the US that originated out of the activities of Government sponsored enterprises, namely FNMA, FHLMC and Sallie Mae. Collateralized were home equity and the future value of labor. It was only natural that this excess flowed beyond the US borders given the desperation with which developing countries needed developed world currencies. But, it wasn't the lending back of the money which made this bubble possible. It was only natural that the money was either used to acquire property, minerals or debt from the nation of origin. Had the US government not run deficits, had the GSE's and Wall Street finance not loosened lending standards, the lending back of money would have mattered very little and the trade would have never happened.
If I saved $1000 and loaned it to company A, of course company A would owe me back my savings plus the rent on the money commonly called interest. If Company A then wrote a check to B for $1000 and B saved the money by lending it to Company C, then the same process would occur. There would be $1000 in money in the system and $2000 in savings and debt. If A or C spent that money and cannot get it back, the debt cannot be collected and the savings really doesn't exist. Only the $1000 exists.
Once the gold standard was done away with, money was replaced with debt. The cash in my pocket is backed by the debt on reserve at the Fed, which is payable only in the notes I possess in my pocket along with the other notes in circulation. Interest is due on these notes, so the Fed is always pulling money out of the economy independent of the other activities they employ to keep the system inflated. In any case, this would be the only money that we have independent of the Fed and the sovereign debt. The money created by banking takes on a property sort of like the example in the prior paragraph, in that most of the assets backing the money at any given time are uncollectable. The difference between the bank money and the savings example is that the bank has created the money without any prior savings, instead acting as surety or guarantor of the credit they have extended. When it becomes apparent that the bank can no longer act as surety, the system no longer trusts them and they become like Citicorp and if they are large enough, they create a credit crunch all by themselves. Banks wouldn't lend to each other meant banks wouldn't lend to Citicorp, who had an amazing interbank liability that couldn't be paid. The black hole is still present, it has merely moved from Citicorp to the government which will at some point have no other alternative than to tax the economy and relocate the black hole where it has been all the time, the banking system.
Savings, debt and collateral all serve to create each other. Only in this manner can the Japanese situation be explained. The Japanese answer to the problem was more debt, which in general would be inflationary, but in this case or in the case of maximum payable principal and interest is deflationary. This is what a depression really is, maximum payable principal and interest and the longer the effort to support the money supply goes on, the worse it gets. Irving Fisher was wrong, though his thesis of swelling dollars over the short term was correct. He forgot that the dollars spent a lot of years shrinking. When the result of several business cycles and government solutions to recessions piles up to debt in the amount of several times GDP, then too much has been borrowed out of the future to go on and continue to consider the debt legitimate and the money real in any sense. Like all psychological pain, it is created and made worse by the continued avoidance. No one wants to lose their status quo except the debtors.
Michael brings up the idea of the Obama administration encouraging savings, which is bordering on absurd. The entire Obama plan is no different than the Bush plan except more obscene on the consumption side. The only consumption he seems to not care for is energy and seems to be leaning toward endowing corporate USA and Wall Street the right to consume energy at the expense of the common every day man. This protest will be for another posting, as it is one of the greatest fascist programs of all time.
Back to savings. If someone can tell me how savings in this world economy can correspond to something besides debt, I would like to learn. This idea is kind of like the money going into the stock market, when anyone with a brain can figure out that money only changes accounts from idiots to smart people. Even if I take $100 and stick it in a matress, it is nothing more than the representation of something owed by the Federal reserve and that something is actually a paradox as it is generally a note in the amount of what I have plus interest due and represents a mathematically impossible equation other than someone taking a haircut. Investing in stocks is nothing more than an exchange of assets and has nothing to do with savings, a real pitfall for those that fool with that market and have no financial training other than what their brokerage companies can give. Speculation is no exchange or investing at all, but instead informed gambling at best.
In any case, housing in China costs about the same as in the US, yet according to what I have read by Andy Xie in Caijing, Chinese incomes are about 1/7th US. I am guessing that the Chinese consumption of housing is roughly 40% of US so the relative cost of housing is about 280% US. They aren't buying this out of their pockets, but are being financed in some fashion. My best guess is the same debt segregation of lending to the industrial so the flow can support the real estate markets that was probably part of the Japan bubble. In some fashion it is all debt.
Depressions last because there is no plan on how to give the haircut on debt and redistribute economic power. As long as there isn't a depression on the horizon it appears that all are left to fend for themselves, but once a crisis is threatened it is unheard of that the owners of Citicorp, Goldman Sachs, Bank of America, UBS, etc. should be replaced and the underlying equity be wiped out and replaced out of the current stock of money. I know the pain that pensioners would go through, but careful examination will reveal that much of this side of the equation has already been looted by Wall Street academic and actuarial formulas that just aren't true over the long term of economic cycles.
There is only one way the Japanese economy fell into the hole it fell into and that was an excess of debt. We heard for years that the Japanese savings rate was 20% to 25% of GDP. Well, what did that mean but the debt rate was also increasing at an amazing rate. Back in the 1980's, I recall the trade deficit with Japan was in the $100 billion range. I don't know about the rest of the world because Japan had to import all its raw materials or at least a very high percentage, but lets say they were even with the rest of the world. In this event, if their GDP was $1.5 trillion, then they were saving about $300 billion, $200 billion domestically. This implies that their debt level against their economy was increasing about 13% annually and their debt level was doubling less than every 6 years against GDP.
The US/China situation is also figured backwards. The situation wasn't fueled by a high China savings rate, but by a run away credit phenonomenon in the US that originated out of the activities of Government sponsored enterprises, namely FNMA, FHLMC and Sallie Mae. Collateralized were home equity and the future value of labor. It was only natural that this excess flowed beyond the US borders given the desperation with which developing countries needed developed world currencies. But, it wasn't the lending back of the money which made this bubble possible. It was only natural that the money was either used to acquire property, minerals or debt from the nation of origin. Had the US government not run deficits, had the GSE's and Wall Street finance not loosened lending standards, the lending back of money would have mattered very little and the trade would have never happened.
If I saved $1000 and loaned it to company A, of course company A would owe me back my savings plus the rent on the money commonly called interest. If Company A then wrote a check to B for $1000 and B saved the money by lending it to Company C, then the same process would occur. There would be $1000 in money in the system and $2000 in savings and debt. If A or C spent that money and cannot get it back, the debt cannot be collected and the savings really doesn't exist. Only the $1000 exists.
Once the gold standard was done away with, money was replaced with debt. The cash in my pocket is backed by the debt on reserve at the Fed, which is payable only in the notes I possess in my pocket along with the other notes in circulation. Interest is due on these notes, so the Fed is always pulling money out of the economy independent of the other activities they employ to keep the system inflated. In any case, this would be the only money that we have independent of the Fed and the sovereign debt. The money created by banking takes on a property sort of like the example in the prior paragraph, in that most of the assets backing the money at any given time are uncollectable. The difference between the bank money and the savings example is that the bank has created the money without any prior savings, instead acting as surety or guarantor of the credit they have extended. When it becomes apparent that the bank can no longer act as surety, the system no longer trusts them and they become like Citicorp and if they are large enough, they create a credit crunch all by themselves. Banks wouldn't lend to each other meant banks wouldn't lend to Citicorp, who had an amazing interbank liability that couldn't be paid. The black hole is still present, it has merely moved from Citicorp to the government which will at some point have no other alternative than to tax the economy and relocate the black hole where it has been all the time, the banking system.
Savings, debt and collateral all serve to create each other. Only in this manner can the Japanese situation be explained. The Japanese answer to the problem was more debt, which in general would be inflationary, but in this case or in the case of maximum payable principal and interest is deflationary. This is what a depression really is, maximum payable principal and interest and the longer the effort to support the money supply goes on, the worse it gets. Irving Fisher was wrong, though his thesis of swelling dollars over the short term was correct. He forgot that the dollars spent a lot of years shrinking. When the result of several business cycles and government solutions to recessions piles up to debt in the amount of several times GDP, then too much has been borrowed out of the future to go on and continue to consider the debt legitimate and the money real in any sense. Like all psychological pain, it is created and made worse by the continued avoidance. No one wants to lose their status quo except the debtors.
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