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.


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Tuesday, May 23, 2017

The Keynesian Cult Has Failed: "Emergency" Stimulus Is Now Permanent

Can we finally admit that eight years of following the Keynesian coloring-book have not just failed, but failed spectacularly?
What do we call a status quo in which "emergency measures" have become permanent props? A failure. The "emergency" responses to the Global Financial Meltdown of 2008-09 are, eight years on, permanent fixtures. Everyone knows what would happen if the deficit spending, money-printing, zero interest rates, shadow banking, asset purchases by central banks and all the rest of the Keynesian Cult's program stopped: the status quo falls apart.
Keynesianism Vs The Real World
Let’s start by reviewing the core contexts of the economy.
1. The dominant socio-economic structures since around 1500 AD are profit-maximizing capital (“the market”) and nation-states (“the government”).
2. The dominant economic theory for the past 80 years is Keynesianism, i.e. the notion that the state and central bank must aggressively manage private-sector consumption (demand) and lending via centrally planned and funded fiscal and monetary stimulus during downturns (recessions/depressions).
Simply put, the conventional view holds that there are two (and only two) solutions for whatever ails the economy: the market (profit-maximizing capital) or the government (nation-states and their central banks). Proponents of each blame all economic and social ills on the other one.
In the real world, the vast majority of Earth’s inhabitants operate in economies with both market and state-controlled dynamics in varying degrees.
The Keynesian world-view is doggedly simplistic.  The economy is based on aggregate demand for more goods and services.  People want more stuff and services, and as long as they have the means to buy more stuff and services, they will avidly do so (this urge is known as animal spirits).
The greatest single invention of all time in the Keynesian universe is credit, because credit enables people to borrow from their future earnings to consume more in the present. Credit thus expands aggregate demand for more goods and services, which is the whole purpose of existence in this world-view: buy more stuff.
But credit, aggregate demand for more stuff and animal spirits make for a volatile cocktail.  The euphoria of those making scads of profit lending money to those euphorically buying more stuff with credit leads to standards of financial prudence being loosened.  In effect, lenders and borrowers start seeing opportunities for profit and more consumption through the distorted lens of vodka goggles.
Lenders reckon that even marginal borrowers will earn more in the future and therefore are good credit risks, and borrowers reckon they’ll make more in the future (i.e. the house they just bought to flip will greatly increase their wealth), and so borrowing enormous sums is really an excellent idea—why not make more money/enjoy life more now?
But the real world isn’t actually changed by vodka goggles, and so marginal borrowers default on the loans they should never have been issued, and lenders start losing scads of money as the value of the collateral supporting the defaulted loans (used cars, swampland, McMansions, etc.) falls.
Oh dear! The hangover of credit expansion is brutal, as lenders go bankrupt, wiping out their owners, and borrowers go bankrupt as they are unable to make their payments or sell the collateral to pay off the loan.
Just as credit expansion feeds on itself—everybody’s making a fortune buying and flipping houses, let’s go buy a house or two on credit—the hangover is also self-reinforcing: the value of collateral falling pushes more marginal borrowers into insolvency, and the lenders who made the loans are pushed into insolvency as defaults increase and collateral melts like ice in Death Valley.
In the Keynesian universe, this self-reinforcing contraction of imprudent credit and widespread losses of speculative wealth are Bad Things. Very Bad Things.  Important, Powerful People tend to own issuers of credit (banks), and losses are not something they signed up for.
If all the Little People stop borrowing more money, the Powerful Owners of the credit-issuing machines (banks) can no longer reap enormous profits from issuing more credit, and that is a Very Bad Thing.
As a nasty side-effect of the credit hangover, businesses that depended on people borrowing more money to buy more stuff also shrink, and this contraction is also self-reinforcing: as sales decline, businesses must cut costs to stay solvent, which means laying off employees, abandoning under-utilized offices, closing factories, etc.
The euphoria of credit expansion turns to painful contraction.  Nobody’s happy in the hangover phase, and people naturally cry out, Somebody do something to stop the pain!
The Keynesian answer is simple: the government should borrow and spend lots of money to replace all the money that the private sector is no longer borrowing and spending, and the central bank should lower interest rates and create a lot of new money that private banks can borrow cheaply to loan out to private-sector businesses and consumers.
In the simplistic Keynesian Universe, the credit contraction is like a temporary drought: all the government and central bank have to do to fix the drought is release a flood of new money onto the parched landscape of the credit-starved private sector, and aggregate demand and new loans will blossom like spring flowers.
Horray for central states and banks! Given the power to borrow (or create out of thin air) as much money as they need to flood the private sector with fresh money and credit, the drought ends, animal spirits are revived, people get to buy more stuff by promising to give their future earnings to banks and Powerful Owners of banks are once again earning great gobs of cash from lending to the Little People (i.e. borrowers in danger of becoming debt-serfs, whose earnings go largely to service their debts).
In the crayon-coloring book of Keynesian ideology, this is The Way the Universe Works. The problem is always a temporary drought of aggregate demand caused by a temporary drought of private-sector credit, and the solution is always a state-central-bank issued flood of money and credit: the government borrows and spends more money to replace declining private spending, and central banks make it cheaper and easier for private banks to issue new loans to enterprises and Little People.
That this coloring-book ideology no longer describes the problem or solution is incomprehensible to the Keynesians.  That neither “the market” nor “the government” can solve the current set of problems is equally incomprehensible—not just to Keynesians, but to everyone who unthinkingly accepted that the market and/or the state can always fix whatever problems arise.
Oops! The Flood of Money and Credit Didn’t Fix the Economy
The post-credit/asset bubble crashes in 2000 and 2008 and the state/central-bank responses--fiscal and monetary stimulus, a.k.a. flood the land with borrowed money—seemed to confirm the Keynesian world-view: marginal borrowers, lenders and collateral all went south and the stimulus restored animal spirits, which promptly inflated a new credit/asset bubble.
But this time around, the drought never ended, no matter how much money was poured into the economy, and the earnings of borrowers stagnated or declined. (Recall that debt is borrowed from future earnings; if earnings decline, it becomes much more difficult to service existing debt, much less borrow more.)
Federal debt has more than doubled just since 2009 (and tripled since 2001) as the government flooded the land with fiscal stimulus:
Central banks have flooded the global economy with trillions of dollars, euros, yen and yuan, and continue to do so to the tune of $200 billion per month:
Central banks have dumped over $1 trillion in new monetary stimulus in the first four months of 2017—eight years after the “emergency” stimulus began:
Meanwhile, wages are stagnant or declining for the vast majority of wage-earners—even the highly educated:
Household income has fallen across the board:
Stagnating incomes is not a new issue for the bottom 90%; it’s a structural reality going back four decades:
Clearly, fiscal and monetary stimulus policies that were supposed to be temporary are now permanent.  That isn’t what was supposed to happen.
Earnings were supposed to rise once private-sector credit and consumption returned to expansion.  As we see here, bank credit and consumer credit have surged higher, but the incomes of the bottom 90% have gone nowhere.
Meanwhile, total debt—government, corporate and household—has rocketed higher, more than doubling from 280% of GDP in 2000 to 584% of GDP in 2016:
As if these weren’t bad enough, wealth and income inequality have soared during the era of permanent fiscal-monetary stimulus:
In sum: nothing has worked as the Keynesians expected.  Instead, state/central bank measures that were supposed to be temporary are now permanent, and the expansion of private-sector debt has failed to “trickle down” to earnings.
The Keynesian solution—borrowing from future earnings to “bring consumption forward”—has expanded consumption at the cost of enormous increases in debt throughout the economy, which has exacerbated income-wealth inequality and declining real incomes.
Can we finally admit that eight years of following the Keynesian coloring-book plan have not just failed, but failed spectacularly, and not just failed spectacularly, but made the economy even more vulnerable and fragile, as more and more future income must be devoted to service the skyrocketing debts?
Isn’t it obvious that there are deeply structural problems in the economy that inflating yet another credit/asset bubble won’t fix?
Clearly, the real-world economy does not function like the simplistic Keynesian coloring-book model.
What Comes Next: Contraction
Given the extraordinary failure of both Keynesian stimulus and private-sector credit growth to create a self-sustaining cycle of expansion whose benefits flow to the entire workforce rather than to the top few percent, what can we expect going forward? Can we just keep doubling and tripling the economy’s debt load every few years? What if household incomes continue declining? Are these trends sustainable?
In Part 2: Prepare For The Great Global Contraction, we detail why the economy’s structural problems languish unaddressed, and how the inflating of yet another speculative credit-asset bubble has not fixed these problems.  Instead, the current credit-asset bubble has dramatically increased the fragility of the economy by diverting capital from potentially productive investments to unproductive speculative gambles, and by increasing the unproductive burdens of soaring debt.
When the Great Reflation does finally roll over, there will be plenty of time to ponder what investments might do well—but only those who exit well before the rollover will have the cash to take advantage of the opportunities.
Click here to read the report (free executive summary, enrollment required for full access)
This essay was first published on Peak Prosperity.com under the title "How Long Can The Great Global Reflation Continue?"


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Monday, May 22, 2017

Does the World End in Fire or Ice? Thoughts on Japan and the Inflation/Deflation Debate

Japan has managed to offset decades of deflationary dynamics, but at a cost that is hidden beneath the surface of apparent stability.
Do we implode in a deflationary death spiral (ice) or in an inflationary death spiral (fire)? Debating the question has been a popular parlor game for years, with Eric Janszen's 1999 Ka-Poom Deflation/Inflation Theory often anchoring the discussion.
I invite everyone interested in the debate to read Janszen's reasoning and prediction of a deflationary spiral that then triggers a monstrous inflationary response from central banks/states desperate to prop up their faltering status quo.
Alternatively, economies can skip the deflationary spiral and move directly to the collapse of their currency via hyper-inflation. This chart of the Venezuelan currency (Bolivar) illustrates the "skip deflation, go straight to hyper-inflation" pathway:
If we set aside the many financial rabbit holes of the inflation/deflation discussion, we find three dominant non-financial dynamics in play:demographics, technology and energy.
As populations age and retire, the resulting decline in incomes and spending are inherently deflationary: less money is earned, and less money is spent, reducing economic activity (gross domestic product).
The elderly also sell assets such as stocks, bonds and their primary house to fund their retirement, and if the elderly populace is a major cohort (due to low birth rates and increasing life spans, etc.), then this mass dumping of assets is also deflationary, as the increasing supply of sellers and the stagnating supply of buyers pushes prices lower.
Recession and stagnation are also deflationary. Shift 10 million workers from secure fulltime employment with full benefits to low-paid, insecure part-time jobs with few benefits, and you have a self-reinforcing deflationary spiral in action: a significant percentage of the workforce is now receiving far less income, which necessarily slashes their spending and just as importantly, their ability to borrow huge sums of money to buy vehicles, homes, overseas vacations, etc.
In consumer-dependent economies that are dependent on debt for much of the consumer spending, this decline in borrowing and spending power is extremely deflationary, as there is a lot less money available to chase the existing output of goods and services.
Japan is a case in point. A friend of ours who lived and worked in Japan for a decade (the 1990s) recently visited Japan again after 15 years working in Europe and the U.S., and he was surprised to find prices were the same or lower as when he was living in Japan.
This is the result of multiple sources of deflation operating in Japan.
A recent NHK TV program reported some young people in Japan are trickling back to rural villages and renting large traditional farm houses and the adjoining land for $200/month, a fraction of what they were paying for cramped studios in big cities. This is an example of deflation in action: people abandon costly housing, transportation, etc. and adopt lifestyles that generate far less income and far lower expenses--both are deflationary.
Given the structural rise of part-time employment, an aging populace and the deflationary impacts of technology and globalization, no wonder Japan is experiencing deflationary/stable prices.
Technology is relentlessly deflationary. Where consumers once spent small fortunes buying stereo equipment and music storage (LPs, cassettes, CDs, etc.), cameras, film, photo printing, etc., game consoles and equipment, small-screen TVs, and paying for telephony, now a single device--a smart phone--combines all these functions (with some obvious limitations) in one device.
Globalization and commoditization are also deflationary. Global wage arbitrage and automation lowers production costs, and the commoditization of labor and inputs (capital and materials) push prices lower.
Declining energy costs are also deflationary, as the cost of energy affects the pricing of almost every good and service.
We now discern the outlines of why money created out of thin air needn't be as inflationary as expected. If economic activity declines by $1 trillion due to lower incomes, spending, etc., creating $1 trillion out of thin air and injecting it into the economy as monetary and fiscal stimulus is more or less simply replacing the $1 trillion of deflation.
The Bank of Japan has tripled its asset purchases (monetary stimulus and support of the stock and bond markets) with little apparent effect on conventional measures of inflation.
This print-to-offset deflationary declines may appear to be stable and sustainable, but the expansion of bonds (to fund fiscal stimulus) accrues interest, which even at low rates eventually starts burdening state spending.
All this new currency doesn't necessarily lead to productive spending or investment; rather, it may increase mal-investment and systemic asymmetries that eventually destabilize the entire financial system.
Japan has managed to offset decades of deflationary dynamics, but at a cost that is hidden beneath the surface of apparent stability. Building bridges to nowhere and creating money from thin air to buy stocks and bonds only appears sustainable because the risks and imbalances are piling up out of sight. Eventually the "perfect balance" between deflation and inflation tips one way or the other, and a systemic crisis "nobody saw coming" unfolds.


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Sunday, May 21, 2017

TINA's Legacy: Free Money, Bread and Circuses and Collapse

TINA's legacy is revealed in this chart of the Venezuelan Bolivar, which has plummeted from 10 to the US dollar to 5,800 to the USD in a few years of rampant money-emission.
Every conventional "solution" to the systemic ills of our economy and society boils down to some version of free money: Universal Basic Income (UBI) schemes-- free money for everyone, funded by borrowing from future taxpayers (robots, people, Martians, any fantasy will do); debt jubilees funded by central banks creating trillions out of thin air, a.k.a. free money, and so on.
Free money is compelling because, well, it's free, and it solves all the problems created by burdensome debt and declining incomes for the bottom 95%. Just give every household $100,000 of free money that must be devoted to reducing interest, then give every household $20,000 annually for being among the living, and hey, a lot of problems go away.
But is creating money out of thin air really truly free? There are two appealing answers: yes and yes. If the Treasury literally prints money, it's almost "free," and if the Federal Reserve creates money and buys bonds paying near-zero yields, the money that is borrowed into existence is almost free because the interest due is so minimal.
The problem, of course, is that creating free money is not quite the same as creating new wealth. New wealth is a new gas/oil field that comes online, new cropland that produces a new source of food, new goods and services, etc.
In effect, every dollar of free money reduces the purchasing power of all existing units of currency unless the expansion of output (additional goods and services) matches or exceeds the added dollar.
This line of thinking is driven by two realities: governments have issued many promises to their citizens, employees, corporations, etc. These include pensions, medical care, backstops against losses, tax breaks, subsidies, and on and on in an endless profusion.
In order to fund these promises, governments must borrow immense sums of money that will never be paid back. The only way governments can afford to borrow immense sums that pile up oh-so quickly is if interest rates are kept near-zero for all eternity (or until the current generation of politicians retires, or the currency follows Venezuela's currency to near-zero, whichever comes first).
As long as interest rates are kept near-zero, even $20 trillion in debt is manageable. Never mind if debt triples every few years--it's affordable if interest rates are near-zero.
Everybody can borrow more at near-zero rates: governments, banks, consumers--it's the cure-all to every debt burden. The problem is rates can never rise, lest the house of cards collapses.
$20 trillion at 5% interest requires an annual interest payment of $1 trillion--one-third of all federal revenue. $30 trillion at 10% interest would consume 100% of all federal tax revenues, leaving nothing for all the programs, obligations and promises of the central state.
Allow me to introduce TINA--there is no alternative to low rates forever and emitting of immense sums of new currency (not new wealth or productive output--just new currency) to fund various modern-day versions of bread and circuses for everyone.
TINA's legacy is revealed in this chart of the Venezuelan Bolivar, which has plummeted from 10 to the US dollar to 5,800 to the USD in a few years of rampant money-emission. Free money is certainly compelling, at least to those desperate to cling to power, but sadly, newly emitted currency is never actually free.
At the height of its giveaways of free bread and endless distractions of public entertainment, Rome's population is estimated to have been close to 1 million.
After the collapse of bread and circuses, the population of Rome eventually fell to roughly 25,000. But no worries--this time it's different. We'll get away with it because we buy our own debt, technology is deflationary, and so on. Simply put: the free bread and circuses will never end because we're so powerful and nothing is outside our control.


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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