Friday, February 05, 2016

The Chart of Doom: When Private Credit Stops Expanding...

Once private credit rolls over in China and the U.S., the global recession will start its rapid slide down the Seneca Cliff.
Few question the importance of private credit in the global economy. When households and businesses are borrowing to expand production and buy homes, vehicles, etc., the economy expands smartly.
When private credit shrinks--that is, as businesses and households stop borrowing more and start paying down existing debt--the result is at best stagnation and at worst recession or depression.
Courtesy of Market Daily Briefing, here is The Chart of Doom, a chart of private credit in the five primary economies:
Why is this The Chart of Doom? It's fairly obvious that private credit is contracting in Japan and the Eurozone and stagnant in the U.K.
As for the U.S.: after trillions of dollars in bank bailouts and additional liquidity, and $8 trillion in deficit spending, private credit in the U.S. managed a paltry $1.5 trillion increase in the seven years since the 2008 financial meltdown.
Compare this to the strong growth from the mid-1990s up to 2008.
This chart makes it clear that the sole prop under the global "recovery" since 2008-09 has been private credit growth in China. From $4 trillion to over $21 trillion in seven years--no wonder bubbles have been inflated globally.
Combine this expansion of private credit in China with the expansion of local government and other state-sector debt (state-owned enterprises, SOEs, etc.) and you have the makings of a global bubble machine.
In other words, the faltering global "recovery" and all the tenuous asset bubbles around the world both depend on a continued hyper-velocity rocket rise in China's private credit. What are the odds of this happening? Aren't the signs that this rocket ship has burned its available fuel abundant?
Three out of the five major economies are already experiencing stagnant or negative private credit growth. Three down, two to go. Helicopter money--government issued "free money" to households--is no replacement for private credit expansion.
Once private credit rolls over in China and the U.S., the global recession will start its rapid slide down the Seneca Cliff: The Global Economy Could Fall Farther and Faster Than Pundits Expect.
Admin note: I will be busy with family commitments until mid-month. As a result, blog posts will be sporadic and email responses will be near-zero. Thank you for your understanding.

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Wednesday, February 03, 2016

The Opaque Process of Collapse

The ultimate cost of protecting the privileges of the few at the expense of the many is the dissolution of the social order that enabled the rule of the privileged few.
When I write about the demise of unsustainable systems, readers often ask me to describe the collapse I see as inevitable. This is a tough assignment, as there are as many kinds of collapse as there are systems: fragile ones can collapse suddenly, and resilient ones can decay for years or even decades before finally imploding or withering away.
Another way of describing collapse is: complex systems become much less complex.
Certain features of modern life could collapse without affecting everyday life much--for example, the derivatives markets could stop working and the impact would be enormous on those playing financial games and those who entrusted money to the gamblers, but the consequences would be extremely concentrated in the gambler/speculator class. Despite the usual cries that financial losses in the gambler/speculator class will destroy civilization, the disruptions and losses would be widely dispersed for the economy as a whole.
Other collapses--in food or energy distribution, digital communications, etc.--would have immediate and severe impacts on daily life.
My three primary models of decay and collapse are:
1. Historian David Hackett Fischer's masterwork The Great Wave: Price Revolutions and the Rhythm of History (given to me by longtime correspondent Cheryl A.)
3. The decline of the Western Roman Empire (the process, not Edward Gibbon's epic 6-volume history). My recommended book on the topic (a short read): The Fall of the Roman Empire
Fischer's primary thesis is that society and the economy expand in times of plentiful resources and credit, and this increased demand eventually consumes all available resources. When demand exceeds supply and excesses of credit reach extremes, inflation and social disorder arise together.
Though we have yet to see inflation on a global scale, it is inescapable that demand will soon outstrip supply of essential resources and that the global credit bubble will pop, depriving the economy of the means to buy resources regardless of cost.
The Upside of Down describes the process of increasing complexity adding fixed costs to the system, and the way in which this diminishes returns: more and more labor, capital and resources must be devoted to maintain production. At some point, the yield is negative--costs are higher than the output.
At that point, systems start unraveling, and people simply abandon costly complex systems because the means to support them no are no longer readily available.
This is similar to John Michael Greer's process of catabolic collapse, in which costly complex systems go through a re-set to a much lower energy consumption and less complexity. The system stabilizes at that level for a time, and then as costs rise and resources dwindle, it goes through another downsizing.
The Western Roman Empire (along with the Tang Dynasty in China) is the premier historical template for slow decline/decay leading to an eventual collapse. (Recall that the Eastern Roman Empire, the Byzantine Empire, endured for another 1,000 years.)
Depending on how you slice it, Western Rome's Imperial decline took a few hundred years to play out. Unusually competent and energetic leaders arose at critical junctures in the early stages, and these leaders managed to stem the encroachment of other empires and "barbarian" forces and effectively re-order Rome's dwindling resources.
By the end, The Western Roman Empire was still issuing a flood of edicts to the various regions, but there was no one left to follow the edicts or enforce them: the Roman legions existed only on parchment. The legion had a name and a structure, but there were no longer any soldiers in the field.
A number of real-world examples of decline/collapse are playing out in real time. Venezuela is one; Greece is another. Both demonstrate the opacity of the process of collapse; it is not as clear as we might imagine. A recent first-hand account of a sympathetic visitor to Venzuela captures the flavor and despair of slow-moving, uneven collapse:
"A dollar traded in the bank officially, or pulled out of an ATM machine, however, is worth about six bolivars only. This is how big the gap is between the black market rate (600-700 to the USD) and the official rate.
Despite the fact that the price of petrol is incredibly cheap, the government has not raised the prices even a slight amount, although this would create revenue for the state and despite the health risks of pollution.This suggests that the government is engaging in populism by refusing to take a step demanded by common sense due to its need to get reelected in December when parliamentary elections will take place.
One can easily get assassinated, as Venezuela has one of the highest homicide rates in Latin America and there are enough people who would not mind killing someone for the fee of $200.
However, when there is massive violence in the streets and many in the government seem to be corrupt, while a sense of anarchy prevails and it seems that the government turns a blind eye to violence when it takes place by local bandits, preferring to continuously blame outsiders, then there is indeed a source for concern."
Reports out of Greece demonstrate the dynamics of decline and collapse:medicines are unavailable, pensions have been slashed and many households are now below the EU poverty level in income.
But we also hear that life goes on; the social order does not appear to have broken down into anarchy.
Clearly, the Greek economy has contracted, and millions of households have less income than they did before. But has daily life broken down? Have the institutions of public order collapsed?
Perhaps not, but what is collapsing is public trust in these institutions' ability and willingness to manage the financial crisis and the political disorder that follows.
There is no good solution to the multiple crises in Greece, and the small circle of financial and political elites that benefited from Greece's entry into the Eurozone remains largely untouched by the crisis. When the status quo is rigid and unbending, the odds of sudden collapse rise: what doesn't bend will snap.
The process of collapse is thus heavily dependent on how the financial and political elites respond to the decline of resources and credit. If they manage the contraction skillfully and absorb their share of the inevitable losses, then the re-set will likely be successful and the pain short-lived.
If however the ruling elites cling to every scrap of their power and wealth, and begin fighting over the spoils while forcing the underclasses to absorb the losses of the re-set, then the fragility of the system rises in direct proportion to the policy extremes being pursued by vested interests focused on protecting their privileges regardless of cost.
The ultimate cost of protecting the privileges of the few at the expense of the many is the dissolution of the social order that enabled the rule of the privileged few.
This essay was drawn from Musings Report 40. The weekly Musings Reports are emailed exclusively to subscribers and major contributors ($50+ annually).
My new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All is being published in China later this year.
Admin note: I will be busy with family commitments until mid-month. As a result, blog posts will be sporadic and email responses will be near-zero. Thank you for your understanding.

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Tuesday, February 02, 2016

Why We Won't Have a "Lehman Moment" in the 2016 Crash

What the central banks cannot do is create productive places to invest the credit they've generated in such excess, or force qualified borrowers to swallow more unproductive debt.
One way to lose a war is to focus on preparing to fight the last war. Preparing to fight the last war is a characteristic of losing generals, militaries and nations. The same is true of finance and economies.
General Grant's difficulties in breaking the trench warfare around Petersburg, VA in the last year of the American Civil War (1864 to early 1865) telegraphed the future of trench warfare to astute observers. Few took heed of the lessons of the "first modern war," and many of the same strategies of 1864 (digging a tunnel under enemy lines and filling the tunnel with explosives to blow a hole through their defenses, for example) were repeated in the Great War of 1914-1918 fifty years later.
When a weapon system capable of breaking the stalemate emerged--the tank--its potential for massed attack escaped planners on both sides, and the new weapon was squandered in piecemeal assaults.
"The last war" in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation--commercial and investment banks, insurance companies, etc. The concentration of capital, leverage and risk in these behemoths rendered the entire system vulnerable to their collapse (or so we were told).
Saving imploding private-sector banks was no problem for central banks that could create $1 trillion in new money with the push of a button and offer essentially unlimited lines of credit to banks facing a liquidity crunch.
But the current financial meltdown is not like the last war. Central banks are ready to extend unlimited credit again to private-sector financial institutions, but this time around, the problem won't be a lack of liquidity.
By refusing to allow a house-cleaning of risk, leverage and mal-investment, central planners have simply pushed the risk into systems they don't control: foreign-exchange (FX) currency markets, shadow banking and the economy that depends not just on available credit but the willingness of qualified borrowers to take on the risks and costs of more debt.
Central banks have created abundant credit and liquidity, but no productive places to invest that ocean of nearly free money Creating abundant credit works to spur growth when growth has been restrained by a lack of credit.
But when credit has been abundant for decades, what's scarce isn't credit--it's productive investments that are scarce. Central banks are powerless to create productive uses for the credit they create.
The inevitable consequence of this failed strategic error is defeat. Central banks issued trillions of dollars, yuan, euros and yen in new credit to stave off defeat in the last war (the Global Financial Meltdown of 2008-09), but the problem wasn't a lack of credit. Now, seven years into the strategy of flooding the global economy with credit,the problem is a scarcity of productive uses for all that money sloshing around the global economy.
There won't be a "Lehman Moment" in the 2016 meltdown, because central banks can prop up or "save" any new Lehman with a few keystrokes. What the central banks cannot do is create productive places to invest the credit they've generated in such excess, or force qualified borrowers to swallow more unproductive debt.
The global economy is choking not just on an excess of debt, it's also choking on the consequences of an unprecedented mal-investment of the credit central banks have issued in such over-abundance.
Issuing more credit will only make the 2016 crash worse. Trying to stop the current crash with more credit and lower interest rates is like sending the cavalry on suicide charges against entrenched machine guns, artillery and tanks. The coming financial slaughter will be as senseless, wasteful and ineffective as any suicide attack in the Great War.
My new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All is being published in China later this year.
Admin note: I will be busy with family commitments until mid-month. As a result, blog posts will be sporadic and email responses will be near-zero. Thank you for your understanding.

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The Global Economy Could Fall Farther and Faster Than Pundits Expect

Systemic fragility doesn't respond to central bank jawboning or Keynesian claptrap; unlike those "policy tools," fragility is real.
The core narrative of central bank/cartel capitalism is centralized agencies have the power to limit downturns and extend credit-based "good times" almost indefinitely. The centralized power bag of tricks includes fiscal policies such as deficit spending to boost "aggregate demand" in downturns and monetary policies such as lowering interest rates to zero and buying assets, a.k.a. quantitative easing.
If we crawl under the barbed wire and escape the ideological Keynesian Concentration Camp, we find thinkers such as Ugo BardiJohn Michael Greer and Dimitry Orlov, whose work explores the dynamics of collapse, resilience and sustainability.
All three have added a great deal to my own (emerging) understanding of the many dynamics of collapse.
We can summarize the dynamics of collapse in many ways; here's one: collapse is latent fragility manifesting. A familiar (and tragic) health analogy offers an example: a middle-aged man doesn't appear ill, a bit thick around the middle perhaps, but neither he nor his intimates can see the fragility of his clogged arteries and blood-starved heart. Seemingly "out of the blue," the man has a massive heart attack and passes from this Earth, to the shock of everyone who knew him.
Financial collapse isn't "out of the blue," any more than a heart attack is "out of the blue." Actions and choices have consequences, and as resilience and redundancy are slowly stripped from complex systems, systemic fragility builds beneath the surface. At some difficult-to-predict point, a threshold is reached and the complex system fails.
In the financial realm, fragility builds as the system relies ever more heavily on marginal lenders, borrowers, buyers and investments for its "growth." The current "recovery" (smirk) is completely dependent on marginal lenders (China's shadow banking), borrowers (auto buyers taking subprime 7-year loans), buyers (corrupt Chinese officials buying $3 million homes in Vancouver B.C. with their ill-gotten gains) and investments (empty malls, empty factories, stock buy-backs, etc.).
The problem for "growth" based on the fragile margins is that the entire system becomes fragile as a direct result of this dependence on fragile margins. The current global real estate bubble is predicated on one condition: that the supply of corrupt Chinese officials fleeing China with ill-gotten millions to invest overseas is endless.
But no supply of corrupt officials, even in China, is truly endless, and markets based on this thin edge of corrupt capital will collapse once the corrupt capital dries up.
The same can be said of marginal oil production, marginal auto/truck buyers, marginal cafes, marginal malls, etc. When fragile (i.e. highly risky) shadow banking becomes a dominant force in credit, the system itself becomes fragile.
Conventional economists are entirely blind to system fragility. There is no ready Keynesian Cargo Cult econometric formula that measures systemic fragility, so it simply doesn't exist within conventional economics.
This is why financial panics and collapses always appear (like fatal heart attacks) to be "out of the blue" to conventional economics.
I propose that the Global Recession of 2016 will trace the Seneca Cliff as described by Ugo Bardi. This application may not align with Bardi's own work, and I want to make it clear this application is my own, not Bardi's. But I think a strong case can be made that the global financial/economic system is primed for a ride down the Seneca Cliff:
Recall that the global "recovery" 2009 - 2015 was entirely based on the expansion of debt taken on by marginal borrowers. Systemic fragility doesn't respond to central bank jawboning or Keynesian claptrap; unlike those "policy tools," fragility is real.
Admin note: I will be busy with family commitments until mid-month. As a result, blog posts will be sporadic and email responses will be near-zero. Thank you for your understanding.

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Sunday, January 31, 2016

Stupor Bowl 2016

The Unicorn-believing Bulls will need the financial equivalent of The Catch just to avoid being skunked.
When I use the phrase Stupor Bowl, I refer not to the upcoming Super Bowl or the crazy mid-winter bicycle free-for-all in Minneapolis, but to the economic game of watching the Bear's Recession Offense crush the Unicorn-believing Bulls.
Let's follow the score here in the opening minutes of the Recession 2016 contest:
1. Sales have only one way to go: down. Touchdown Bears.
2. Profits have only one way to go: down. Touchdown Bears.
3. Stock buybacks have only one way to go: down. Touchdown Bears.
4. Global "growth" has only one way to go: down. Touchdown Bears.
5. Risk premiums have only one way to go: up. Touchdown Bears.
6. The efficacy of central bank "easing" only one way to go: down. Touchdown Bears.
This is getting stupefyingly repetitive, and the game has barely started: the Bears have racked up 42 points while the Unicorn-believing Bulls are scoreless.
The Unicorn-believing Bulls are going to need not just one Immaculate Reception, but a half-dozen miracle scores just to stay in the game. But the Bears have barely dented their playbook:
7. Government deficits have only one way to go: up.
8. The growth rate of private-sector debt has only one way to go: down.
9. The number of nations with crashing currencies has only one way to go: up.
10. The number of nations defaulting on sovereign debt has only one way to go: up.
11. The number of IPOs that quickly fall below their initial price has only one way to go: up--way up.
12. The number of margin calls to be issued to overleveraged "investors" has only one way to go: up--way up.
13. The number of junk bonds that will default has only one way to go: up--way up.
14. The number of Greater Fools willing to pay outlandishly absurd prices for homes in hot markets is plummeting; as a result, the market value of real estate globally has only one way to go: down--way down.
The Bears can fumble a few plays and still score another 42 points with ease.
The Unicorn-believing Bulls will need the financial equivalent of The Catch just to avoid being skunked:
But even that won't change the outcome--a recession that will leave all the Unicorn believers, Keynesian Cargo Cultists and the rest of the delusional mob of Bulls stupefied by their crushing defeat.
Admin note: I will be busy with family commitments until mid-month. As a result, blog posts will be sporadic and email responses will be near-zero. Thank you for your understanding.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
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