Monday, May 29, 2017

How Debt-Asset Bubbles Implode: The Supernova Model of Financial Collapse

Gravity eventually overpowers financial fakery.
When debt-asset bubbles expand at rates far above the expansion of earnings and real-world productive wealth, their collapse is inevitable. The Supernova model of financial collapse is one way to understand this.
As I noted yesterday in Will the Crazy Global Debt Bubble Ever End?, I've used the Supernova analogy for years, but didn't properly explain why it illuminates the dynamics of financial bubbles imploding.
According to Wikipedia, "A supernova is an astronomical event that occurs during the last stellar evolutionary stages of a massive star's life, whose dramatic and catastrophic destruction is marked by one final titanic explosion."
A key feature of a pre-supernova super-massive star is its rapid expansion. As the star consumes its available fuel via nuclear fusion, the star's outer layer expands. Once there is no longer enough fuel/fusion to resist the force of gravity, the star implodes as gravity takes over.
This collapse ejects much of the outer layers of the star in an event of unprecedented violence.
The financial analogy is easy to see: when rapidly expanding debt consumes a critical threshold of earnings (fuel), the equivalent of gravity (default, inability to service the enormous debt) triggers the collapse of the entire debt/leverage-dependent financial system.
As I explained yesterday, if earnings stagnate or decline while debt races higher, eventually earnings are insufficient to service the debt and default is inevitable. The other problem that arises as more and more of earned income goes to debt service is that there is less and less disposable income left to support consumer spending--the lifeblood of economies worldwide.
Once debt service absorbs a significant chunk of household earnings, recession is the inevitable result as spending collapses once more debt cannot be loaded on households. In other words, debt is limited by earnings. If earnings decline, or fall far behind the expansion of debt, eventually borrowers can no longer borrow more, or refuse to borrow more.
At that point, consumer spending falls and recession generates a self-reinforcing cycle of declining sales, profits, employment and wages. Recession further reduces the ability and appetite for more debt, and this acts as "gravity" in the super-massive debt-star.
Financial supernova collapse has two pathways which we call deflationary and inflationary. But the key point here is these are simply different pathways to the same result: the collapse of the financial system.
In a deflationary supernova, defaults--and the avoidance of additional debt--are the gravity that overwhelms the forces of expanding debt. Once the losses and risk are visible to all participants, the herd psychology changes, and participants no longer believe that central banks "are now the ultimate power in the Universe."
Central banks can create currency and credit, but they can't create earnings or productive real-world wealth. These are the limiting dynamics of any debt-dependent system.
The fantasy is that free money--limitless credit to corporations and Universal Basic Income to debt-serfs--will magically create earnings and expand productivity. But this FantasyLand exists only in overheated self-serving imagination: in the real world, free credit is used to buy back stocks and indulge in other financialization trickery, not invest in higher productivity.
And the debt-serfs scraping by on Universal Basic Income have no ability to borrow more and few means to generate meaningful productivity gains.
The other pathway to implosion is to print currency with sufficient abandon that debtors have enough money to service their debts. Emitting sufficient new free money to re-set all the unpayable debt destroys the purchasing power of the currency--a supernova implosion that is little different than the deflationary implosion. The inflationary pathway results in the destruction of the currency, impoverishing everyone holding the currency.
While the idea of debt jubilee is appealing to everyone who doesn't own debt-based assets (mortgages, auto loans, student loans,etc.), it is anathema to those who do own most of the debt-based assets--who just happen to be the wealthy and powerful who run our pay-to-play "democracy."
If history is any guide, the wealthy and powerful who run our pay-to-play "democracy" will never relinquish their wealth. Only a financial collapse can re-set the system.
The financial implosion triggers social and political upheavals. Recall that one person's debt is another entity's asset. When debt is blown off in either a deflationary or inflationary implosion, all the "wealth" represented by debt is also blown off.
So what survives a financial supernova? There are three classes of things that are still functioning after a debt/fiat-currency supernova: real-world tools/productive assets that were owned free and clear, and non-fiat-currency financial assets that are difficult for failed states and central banks to steal/expropriate.
The third class is human/social capital, i.e. the knowledge and experience in your head. Not only will my Skil 77 power saw still be around, so will my knowledge of how to be productive with this tool.
Proponents of precious metals and cryptocurrencies both see their favored assets as survivable assets that are difficult to steal/expropriate. It's difficult to predict just how desperate failing Status Quo institutions will get as their debt-fiat-currency dependent "wealth" and "power" implodes, but we are probably safe in assuming they will get fanatically zealous about stealing/expropriating everything they can get their self-serving hands on before the tides of History wash them away.
If they take my Skil 77 power saw, what are they going to do with it? Sell it for pennies to a crony of the central state? How will removing my ability to be productive help sustain their imploding regime? Removing productive capacity and suppressing my willingness to be productive will only hasten the collapse of their failed regime.
The Venezuelan Bolivar is the model of currency collapse: this is not some long-ago history--this is the present:
And how much did expanding debt boost productivity? Oops! Rapidly expanding financialized (i.e. unproductive) debt is Kryptonite to productivity.
Expanding credit has fixed everything! That's precisely what the Imperial managers think just before the debt supernova implodes.
Federal debt has tripled--no problem, let's triple it again, and then triple that.There is no upper limit on how much currency the Empire can borrow or print, right? "We are the ultimate power in the Universe now," etc.
Gravity eventually overpowers financial fakery. Central banks can add zeroes to currency and the super-wealthy can use their unlimited lines of credit to buy up everything in sight, but when the Empire collapses, the debt-assets of the super-wealthy are blown off in the supernova along with all the other artificial constructs of our corrupt, corrupting, rapacious, exploitive system.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Sunday, May 28, 2017

Will the Crazy Global Debt Bubble Ever End?

There are multiple sources of friction in the Perpetual Motion Money Machine.
We've been playing two games to mask insolvency: one is to pay the costs of rampant debt today by borrowing even more from future earnings, and the second is to create wealth out of thin air via asset bubbles.
The two games are connected: asset bubbles require leverage and credit. Prices for homes, stocks, bonds, bat guano futures, etc. can only be pushed to the stratosphere if buyers have access to credit and can borrow to buy more of the bubbling assets.
If credit dries up, asset bubbles pop: no expansion of debt, no asset bubble.
The problem with these games is the debt-asset bubbles don't actually expand the collateral (real-world productive value) supporting all the debt. Collateral can be a physical asset like a house, but it can also be the ability to earn money to service debt.
Credit card debt, student loan debt, corporate debt, sovereign debt--all these loans are backed not by physical assets but by the ability to service the debt: earnings or tax revenues.
If a company earns $1 million annually, what's its stock worth? Whether the market values the company at $1 million or $1 billion, the company's earnings remain the same.
If a government collects $1 trillion in tax revenues, whether it borrows $1 trillion or $100 trillion, the tax revenues remain the same.
If the collateral supporting the debt doesn't expand with the debt, the borrower's ability to service debt becomes increasingly fragile. Consider a household that earns $100,000 annually. If it has $100,000 in debt to service, that is a 1-to-1 ratio of earnings and debt. What happens to the risk of default if the household borrows $1 million? If earnings remain the same, the risk of default rises, as the household has to devote an enormous percentage of its income to debt service. Any reduction in income will trigger default of the $1 million in debt.
If a household earns $100,000 annually, how much can it borrow? The answer depends on the terms of the debt: the rate of interest and the percentage of principal that must be repaid monthly.
If the interest rate is 0% and the monthly payment is fixed at $1, the household can borrow billions of dollars. This is how the game is played: there is no upper limit on debt if the interest rate is effectively zero, or adjusted for inflation, less than zero.
Would you lend the household your savings, knowing you'll never get any interest and the principal will never be repaid? Of course not. Nobody in a functioning market for capital would throw their hard-earned savings away on a debtor who can't pay any interest or principal.
The only institutions that can play this game are central banks, which create money out of thin air at zero cost. As for risk--the way to manage defaults is to print more money.
But once again--printing money doesn't create collateral or income needed to service debt. As I have explained, printing money is akin to adding a zero to currency. Every $1 bill is now a $10 bill. Are you ten times wealthier once the central bank adds a zero to every bill? No, because the $5 loaf of bread is re-set to $50.
The other problem with this game is interest keeps ticking higher while earnings remain flat. Even at very low rates of interest, interest payments keep rising. This is not an issue if income rises along with interest payments, but if income is flat, paying higher interest costs eventually pushes the borrower into default.
The household that borrowed $1 billion at 0% paid no interest. But let's say the lender now demands 1/10th of 1% interest--nearly zero interest. The household now owes $1 million in annual interest. Oops! Even near-zero interest can generate crushing interest payments once the debt reaches the stratosphere.
The whole game is a bet that future income will rise faster than debt service.Unfortunately, we've already lost that bet: household income has been stagnant or declining for years (or for the bottom 90%, for decades), and tax revenues have a nasty habit of falling sharply in recessions and stagnating along with private-sector earnings.
Which leads to the second game: blowing asset bubbles. If the household's earnings are flat or declining, one magical fix is to inflate the household home's value from $100,000 to $300,000 in a few years.
Now the household has $200,000 in new wealth it can tap. Wow, was that easy or what? That's the easiest $200,000 we ever made!
Of course the house didn't actually gain any additional functional or utility value; it still has the same number of rooms, etc. It still only provides shelter for the same number of residents. The $200,000 in "wealth" that can now be borrowed or accessed via selling the house does not reflect an increase in the collateral's utility value--it's all financial magic leveraged off an unchanging utility value and household income.
These games look like a Perpetual Motion Money Machine. There is no cost, it seems, to expanding debt and assets bubbles; if future income doesn't rise enough to service the growing mountain of debt, we either print more money, lower the interest rate or create "wealth" with even grander asset bubbles.
But there is eventually a problem. At some point, even 0.1% interest becomes unaffordable, and adding zeroes to the currency devalues the currency faster than incomes rise. Asset bubbles run out of greater fools to buy at elevated prices.
Borrowers default, asset prices crash and everyone holding the currency is impoverished.
There are multiple sources of friction in the Perpetual Motion Money Machine.State-cartel inflation eats  away at stagnating incomes, rising interest payments eat away at stagnant incomes and tax revenues, and printing money eats away at the purchasing power of the currency. Eventually these sources of friction cause the Perpetual Motion Money Machine to grind to a halt and then shatter.
Put another way, the debt-asset bubble supernova consumes all the available fuel and implodes. I've employed the supernova analogy for many years, as it captures the expansion of debt and asset valuations and the resulting collapse once all the fuel in the system (i.e. earnings and real collateral) has been consumed.
State-protected cartels jack up prices with abandon, slashing disposable incomes. Get rid of competition and enforce a monopoly, and this is what you get:
Real earnings for the bottom 90% have gone nowhere but down for decades:borrowing from the future doesn't work if future earnings are lower.
While incomes stagnated, housing has ballooned into Real Estate Bubble #2.
Central banks have printed currency with abandon. Everybody loves free money--especially bankers and financiers.
Federal debt has tripled--no problem, let's triple it again, and then triple that.There is no upper limit on how much the Empire can borrow, right? "We are the ultimate power in the Universe now," etc.
All the games end badly. Tomorrow we'll examine the paths to impoverishment we can choose from.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Thursday, May 25, 2017

Is Your Cost of Living Rising? Why the Elites Aren't Worried About Inflation

If you want to understand why we're fragmenting as a society, start by looking at the asymmetric burdens imposed by inflation.
In our household, we measure real-world inflation with the Burrito Index: How much has the cost of a regular burrito at our favorite taco truck gone up?
The cost of a regular burrito from our local taco truck has gone up from $2.50 in 2001 to $5 in 2010 to $6.50 in 2016.
That’s a $160% increase since 2001: 15 years in which the official inflation rate reports that what $1 bought in 2001 can supposedly be bought with $1.35 today.
My Burrito Index is a rough-and-ready index of real-world inflation. To insure its measure isn’t an outlying aberration, we also need to track the real-world costs of big-ticket items such as college tuition and healthcare insurance. When we do, we observe results of similar magnitude.
Our money is losing its purchasing power much faster than the government would like us to believe.
According to official statistics, inflation has reduced the purchasing power of the dollar by a mere 6% since 2011: barely above 1% a year. We’ve supposedly seen our purchasing power decline by 27% in the 12 years since 2004—an average rate of 2.25% per year.
But our real-world experience tells us the official inflation rate doesn’t reflect the actual cost increases of everything from burritos to healthcare.
The cost of a regular taco was $1.25 in 2010. By official standards, it should cost a dime more. Oops—it’s now $2 each, a 60% increase, six times the official rate.
The cost of a Vietnamese-style sandwich (banh mi) at our favorite Chinatown deli has jumped from $1.50 in 2001 to $2 in 2004 to $3.50 in 2016. That $1.50 increase since 2004 is a 75% jump, roughly triple the official 27% reduction in purchasing power.
So let’s play Devil’s Advocate and suggest that these extraordinary increases are limited to “food purchased away from home,” to use the official jargon for meals purchased at fast-food joints, delis, cafes, microbreweries and restaurants.
Well, how about public university tuition? That’s not something you buy every week like a burrito. Getting out our calculator, we find that the cost for four years of tuition and fees at a public university will set you back about 8,600 burritos. Throw in books (assume the student lives at home, so no on-campus dorm room or food expenses) and other college expenses and you’re up to 10,000 burritos, or $65,000 for the four years at a public university.
University of California at Davis:
2004 in-state tuition $5,684
2015 in state tuition $13,951
That’s an increase of 145% in a time span in which official inflation says tuition in 2015 should have cost 25% more than it did in 2004, i.e. $7,105. Oops—the real world costs are basically double official inflation—a difference of about $30,000 per four-year bachelor’s degree per student.
Here’s my alma mater (and no, you can’t get a degree in surfing, sorry):
University of Hawaii at Manoa:
2004 in-state tuition: $4,487
2016 in-state tuition: $10,872
Sure, some public and private universities offer tuition waivers and financial aid to needy or talented students, but the majority of households/students are on the hook for a big chunk of these costs. And remember that many students are paying living expenses, which doubles the cost of the diploma.
If you think I cherry-picked these two public universities, check out this article.
So the divergence between real-world costs and official inflation isn’t limited to burritos; it’s just as bad in items that cost tens of thousands of dollars.
As for healthcare: feast your eyes on this chart of medical expenses.
According to official inflation calculations, the $12,214 annual medical costs for a family of four in 2005 "should cost" around $15,000 today.
Oops—the actual cost is $25,826, $10,826 higher than official inflation, which adds over $100,000 in cash outlays above and beyond official inflation in the course of a decade.
So let’s add the $30,000 per university student above and beyond inflation for two college students over a decade and the $100,000 in healthcare costs that are above and beyond inflation over that decade, and we get $160,000.
Since deductions for education and healthcare don’t completely wipe out income taxes, the household has to earn close to $200,000 more over the decade to net out the $160,000 to pay typical college and healthcare costs above and beyond what education and healthcare “should cost” if inflation in big-ticket items had actually tracked official inflation.
$100,000 here, $100,000 there and pretty soon you’re talking real money in a nation in which median household income is around $57,000 annually.
So if a household’s income kept up with official inflation over a decade, that household would have to earn at least $20,000 more per year just to keep pace with real-world, big-ticket cost increases.
That’s the problem, isn’t it? If the household’s wages only kept up with inflation, there isn’t another $20,000 a year in additional income needed to pay these soaring big-ticket costs. So the shortfall has to be borrowed, burdening the household with debt and interest payments for decades to come, or the kids don’t attend college and the household goes without healthcare insurance.
Once again, real-world costs have soared at a rate that is almost six times higher than the official rate of inflation.
The reality is real-world inflation in big-ticket essentials is crushing every household that doesn’t qualify for government subsidies of higher education, rent and healthcare.
No wonder the political and financial Elites don't care about inflation: their incomes have soared far above mere inflation. When you're skimming millions, who cares about a mere $150,000 for a university education, or $25,000 for healthcare insurance?
Do you reckon the lobbyists for Big Pharma and the rest of the healthcare racket are spending millions lobbying politicians to slash the soaring costs of healthcare? Do you think all the universities collecting billions in government-guaranteed student loans are lobbying politicos to reduce loans to debt-serf students? Sorry, but that's not how pay-to-play "democracy" works.
In pay-to-play "democracy," the goal is to raise prices without improving service, and have the federal government enforce this racket on powerless debt-serfs.
If you want to understand why we're fragmenting as a society, start by looking at the asymmetric burdens imposed by inflation. The Elites aren't worried about inflation because they don't even feel it. And since they rule to benefit the top 5%, they don't really care what the bottom 95% are experiencing.
In other words, "Let them eat cake."


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Wednesday, May 24, 2017

Inflation Isn't Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs

Welcome to debt-serfdom, the only possible output of the soaring cost of living for the unprotected many who are ruled by a hubris-soaked, subsidized Protected Elite.
The Consumer Price Index (CPI) measure of inflation is bogus on a number of fronts, a reality I've covered a number of times: though the heavily gamed official CPI is under 2% for the past four years, the real rate is 7% to 12%, depending on whether you happen to live in locales with soaring rents/housing and healthcare costs.
But the other reality is that inflation is not evenly distributed throughout the economy or populace: many people have little exposure to the crushing inflation of healthcare and higher education. For these people, inflation is a non-issue or a minor impact on their wealth, income and lifestyle.
Those fully exposed to the skyrocketing costs of healthcare insurance and higher education are being reduced to impoverished debt-serfs.
The key factor here that is missed in the official CPI is the relative size and impact of each cost input. Televisions, for example, have plummeted in price as LCD screens have become commoditized.
But how often does a household buy a new TV? Every four years? Every five years? And how big a difference does a $50 or $100 drop in the cost of a new TV make in their lifestyle?
Items that decline in price are modest slices of household budgets, while items that are soaring higher every year are big-ticket expenses that dominate household budgets. So a new TV drops in price by $100. If you buy a new TV every four years, that's $25 savings per year. Big Freakin' Deal: that deflationary price "bonus" means you can buy one extra pizza.
Meanwhile, households exposed to the actual cost of healthcare are absorbing increases of $5,000 or more annually. $5,000 increases every year add up: $5,000 + $10,000 + $15,000 + $20,000 = $50,000 was extracted from the household budget over the four-year period.
The household paying the unsubsidized cost of higher education is paying tens of thousands of dollars more for the same marginal-value education. Where a four-year college degree once cost the equivalent of a new car (i.e. $30,000), now it costs the equivalent of a house ($120,000 and up).
So a retiree with a small fixed-rate mortgage in a state with Prop 13 limits on property tax increases who qualifies for Medicare may complain about modest increases in co-pays for office visits and medications totaling a few hundred dollars annually, a young self-employed couple might be facing thousands of dollars in rent increases, healthcare insurance costs, childcare expenses and so on--each a big-ticket item with a crushing impact on household spending and debt.
Households protected from actual big-ticket inflation by subsidies or luck (i.e. buying a house 30 years ago when prices were a fraction of today's prices) have no experience of real inflation. Only the unprotected, unsubsidized households struggling to pay rising rents, soaring college tuition and fees and skyrocketing healthcare insurance premiums have an unmediated experience of the real inflation ravaging the the U.S. economy.
If you're on Medicaid, Medicare or your premiums are mostly paid by your employer, you have no idea of the system's actual costs. The self-employed aren't subsidized, so we are exposed to the full inflation rate of healthcare, in which the costs of medications are jacked up by 4,000% because, well, Big Pharma has a free hand, thanks to our pay-to-play "democracy".
Getting that often-worthless diploma now requires debt-serfdom, enforced by your private-profits-are-guaranteed, losses-are-dumped-on-the-taxpayers federal government. Needless to say, the government is here to help you--help you become a debt-serf whose serfdom enriches state-cartel cronies.
We're supposed to accept that because TVs are cheaper,the rate of inflation is near-zero. Meanwhile the unsubsidized costs of big-ticket items are rising by thousands of dollars annually.
My insightful colleague Lance Roberts prepared this devastating chart that shows how debt-serfs deal with soaring prices--they borrow more to fill the widening gap between what they earn (stagnating) and the cost of living (skyrocketing).
The inside-the-Beltway crowd that dominates Washington and the overpaid technocrats that dominate our financial skimming machine are both protected from the true ravages of inflation, so our corporate media never mentions the impact on the unprotected. Our job is to shoulder the higher prices by taking on more debt.
Welcome to debt-serfdom, the only possible output of the soaring cost of living for the unprotected many who are ruled by a hubris-soaked, subsidized Protected Elite.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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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