Tuesday, September 24, 2013

Was full employment a debt-illusion?


The Great Debt Illusion began with "Supply Side Economics" in Reagan I, a con game that provided definitive proof that tax cuts for the rich do not provide growth that "trickles down" to everyone else. Here's the picture of federal debt:


Notice where the take-off occurs. Add to this insight that it was a Republican, Nixon, who took us off the gold standard in 1971, setting the stage for massive monetization of federal debt, and it is hard not to conclude that the modern-era Republicans are the most fiscally-irresponsible party in American history. All their talk of austerity is in fact mere mean-spiritedness. This is the distinguishing characteristic of the Republican Party today.

Today, the House Republicans take pride in being the most hard-hearted folks in the country, proving it by taking their greedy frustration out on women and children by cutting funding for food stamps.

This is a party without a future.

On the employment issue: in the Sixties, it was possible to support a family on one (male) income. Not so today except for the top few percent. Multi-generational living is a growing trend, and maybe not such a bad one if it brings families closer together.


Thursday, September 19, 2013

The Fed is (probably) insolvent; bank margins to suck more

John Hussman has come and said what many have believed for some time now, that the Fed is probably insolvent (here).

The Fed has become the dumping ground for bad assets. Here’s what happens: they take them in from the banks at some highly notional (what is called “mark to unicorn”) value and hold them as “reserves” against the bank’s putatively active lending; which may or may not occur because the Fed now pays interest on reserves even as the reserves are likely deteriorating in value.

The Fed is the proverbial carpet under which the bad debt of the banking system is swept. Hence, the creditors and owners of banks and bank holding companies are relieved of having to recognize losses, and the fiction of “simulative monetary policy” is maintained. As Zero Hedge is fond of pointing out, the only known transmission mechanism from loose money to anything is to asset bubbles, the current one being stocks again, with a bubblet appearing in real estate.

This is capitalism without failure writ large. The antidote, in the view of the “Washington [/New York] consensus” (to borrow a term) is “more of the same.”

Like Bernanke, Janet Yellen didn’t a thing coming of the last crisis (even though the world-wide ramp-up of housing pricing made front page news in “The Economist,” as I recall.

And I can say from personal experience that many in retail banking wondered what would happen to Consumption when the housing ATM was shut off.

Thus I believe MMT will win out in the end, as war and/or infrastructure projects demand funding. Whether a major inflation or hyperinflation gets going remains an open question to me, as I believe an inflation (wage-price spiral) is a labor market phenomenon accommodated by monetary policy, and there seems little indication that the PTB have any intention of raising anybody’s wages.

Bad debts, those destined for charge-off, don’t go away by themselves; they have to be charged off. A major deflation will occur when that reconciliation finally takes place. Even if accounting fiction remains in place, the fact that such debts when returned to the banking system do not contribute revenues tells us bank margins are going to get a lot thinner in the future. A bank may be able to dress up its balance sheet but not so much its income statement.

Saturday, September 14, 2013

‘Animal spirits’ and the natural unemployment rate

The San Francisco Fed reports median estimate of the natural rate of unemployment in 2013 is 6.6 percent (source). Other estimates put the rate at 7.9 percent (source). Assume the current unemployment rate is the current natural rate, at 7.3 percent. How long until confidence collapses if the rate remains fixed at that level? Obviously it will take infinitely long for the adaptation level to converge to the current level, but when does it get within 0.1 of the adaptation level? That actually doesn’t occur until March 2016. But this is not a realistic path.

The crossover from “unemployment rate below adaptation level” to “unemployment rate above adaptation level”—the signal of collapsing confidence—is always preceded by a leveling out of the smoothed (12-month MA) unemployment rate, which has not yet happened. This is a necessary but not sufficient condition for a collapse of confidence to be imminent.


We will monitor developments for this occurrence.

Friday, September 6, 2013

‘Animal spirits’ update: taper off

The downtick in unemployment raised the A metric marginally but its topping formation remains in place. The onset of the next crisis of confidence—the signature characteristic of the business cycle downturn--will probably come in 2014.


As I have pointed out before, ZIRP lasted from 1934 to 1946 last time and there’s no indication it will go away soon this time. There has been less banking reform, the debt load is greater, and the distribution is even more skewed. Here is Shiller’s long term bond rate data:


Note that from 1936 to 1946 the rate went down. Data is through 2013 YTD. We are still awaiting our 1937-38 analog slump.

Unless, of course, the fools running things manage to get a big war going soon.

The next big thing, especially if Summers gets in, will be crypto-MMT debt explosion as America leaders (ruling class) feather their nests with “infrastructure spending.” Saez and Picketty showed us what happened in to the last such “growth endeavor”: it went 93 percent to the top 1 percent.

Sucks, doesn’t it? Find a faith and practice it, and congregate with like-minded people. Stay away from psychopaths (and that means almost anyone at a senior level in a large corporation, nowadays, as they are shooting the zombies climbing up beneath them in the head to protect their positions).