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jk
04-15-12, 01:29 PM
pulling together some of what i've been mulling over lately.


THE DEBT SUPERNOVA

One supernova mechanism: After the core of an aging massive star ceases generating energy from nuclear fusion, it may undergo sudden gravitational collapse into a neutron star or black hole, releasing gravitational potential energy that heats and expels the star's outer layers. [wikipedia]

the debt supernova: after a financialized economy ceases to be able to generate growth from increasing debt, it collapses via debt deflation until social and market forces produce an inflationary explosion.



here's what happened in argentina when its dollar-pegged borrowing could no longer be supported by its export earnings.


http://www.oftwominds.com/blogaug09/KaPoom2CHS_files/mht4D2(1).tmp


http://itulip.com/images/argentinaGDPinflation.gif



<big>of course, the u.s. is not argentina. also it enjoys the "exorbitant privilege" of having its debts denominated in its own currency. and it maintains its persistent trade deficit by exporting tbills, not automobiles.</big> <big>thus it is accumulating an external debt, the interest payments on which add to domestic deflationary forces.</big> <big>ever shortening average duration on the debt, combined with zirp, restrains this factor.</big>

over time, as the u.s. economy has accumulated both private and public debt, an ever increasing amount of debt has been required to grow gdp.

http://media.chrismartenson.com/images/debt-saturation.jpg

http://static.seekingalpha.com/uploads/2009/5/5/98115-124157949683905-John-Lounsbury.jpg




the compounding nature of that debt adds to the parasitic effect of debt service on the economy. financial services drain an ever increasing rent from the real economy. <big>financial services originally served the real economy. as financial services have grown, that relationship has been reversed.</big> <big>a parasite that grows too much will eventually kill its host.</big>

The gravitational contraction of the economy in debt deflation: both at the national account level, and at the individual worker level, debt service drains potential demand from the economy, and retards growth or promotes contraction. if debt is used to fund investments which produce income at a rate higher than the interest payments on the debt, then the debt can be repaid. but 80% of bank credit in the u.s. and u.k. has been going to real estate, not industry. there has been no real wage growth since 1968. family incomes rose because women went to work. "the 1%" makes its money not from wages, but from interest, dividends, and capital gains. workers spend 40% of their income on housing [much in the form of interest, either directly on a mortgage, or via their landlord's mortgage], 15% goes to social security [counting the employers' share], 10% to other credit payments [credit cards, student loans], 10-15% to other taxes. <big>what's left to produce demand in the economy?</big>

http://tommytoy.typepad.com/.a/6a0133f3a4072c970b015391c20ce9970b-500wi



The conditions for the mathematical impossibility of paying down debt: <big> if debt is growing faster than income, it can never be repaid.</big>

austerity amplifies the economic contraction, speeding the process. austerity reduces incomes in the economy, while increasing the tax burden. the debt, however, remains and its burden increases as the income to service it declines.

i had a question arise in my mind: why aren't i fantasizing about a cheap vacation in greece, or even buying a villa in greece? usually countries in those straits become bargains. but as part of its austerity program, greece has been forced to raise taxes dramatically, making travel there less attractive. social instability and pictures of riots aren't attractive, either. if greece had its own currency, it would have devalued, and travel there would be cheap. a tourism boom would help its balance of payments. the domestic inflation greece would have experienced in this scenario, as the price of imports like oil skyrocketed in terms of their hypothetical devalued currency, might have produced social instability, however. witness the food riots around a the world a few years ago after commodity prices spiked. but i doubt it would have been worse than what they have in fact experienced.

The process by which confidence is lost: look at spain. <big>the ecb's 2 ltro's funneled money to spanish banks [among others], which were then compelled to use it to buy spanish sovereign debt. in fact, they bought 110% of the debt being issued over that period, as private investors used the opportunity to unload some of their holdings. thus, the ltro's failed to provide the confidence required for all debt holders to at least keep their pre-existing positions, let alone add to them.

why are investors fleeing spanish debt? spanish unemployment is 25% iirc, youth unemployment is 50%. spain had an enormous real estate bubble, and the uneconomic housing inventory is enormous. the economy is contracting, not growing. thus tax revenues are shrinking and social expenses rising. were this merely a cyclical recession, observers could predict a cyclical recovery. but the imbalances here are much larger than a mere cyclical recession, and the eurozone political-economic process appears set to further turn the screws. how can spain service its compounding debt?

first come the denials: "spain is not greece." then the inadequate bailout plans, like the ltro's. there have already been demonstrations bordering on riots. then, not quite yet, the shtf. spain appears to be following the same trajectory as greece, but a couple of years behind. spain is too big to fail, but too big to bail. more and more spanish debt is being accumulated by governments, national central banks, the ecb, spanish banks. soon there will be few private investors left to take haircuts if a greek-style restructuring is to occur. so a greek style restructuring won't occur. something else must happen instead: either all those official entities take haircuts, and then they themselves have to be recapitalized by the european governments, or the ecb must in some fashion print.

the process which leads to this will likely follow the path blazed by greece: ratcheting up interest rates as current debt holders dump their positions, accompanied by skyrocketing cds prices. note that in the u.s. the fed both controls the short end of the yield curve, and has been buying long-dated treasuries to control the rates at the other end of the curve.

[john mauldin's letter this weekend mentions that there are 23 members of the ecb board, and only 2 are from germany. i.e. the board may choose to print over german objections. pure speculation: this might provide the impetus for germany to leave the euro, allowing the euro to plunge and providing the devaluation that most euro members need.]

back to the u.s., its debts, and its status as the world's reserve currency: no one official has yet had the need to say: the u.s. is not greece. [though when i google "the u.s. is not greece" i get 22,000 hits. when i google "the united states is not greece" i get 25,000.] but our own debt dynamics- both domestic and international - combined with the mild austerity that appears in the works, will continue to strengthen the gravitational undertow of debt deflation.

in the metaphoric supernova, there is a collapse and subsequently but instantly, an explosion.

1. the ows demonstrations of last summer, eliciting an overly zealous official police response [oakland and nyc come immediately to mind], might have been the start of social unrest. this coming summer we must take note of their reappearance, or lack thereof, as a measure of broad domestic confidence in the economy, or lack thereof.

2. the fed has been the buyer of last resort for treasuries.

http://goldnews.bullionvault.com/files/041311_Commodities_Fed_Purchases.png

</big><big>
[good thing there's no inflation, huh?]</big>

<big>the increasing absence of other buyers for treasuries, either private or from surplus nations, is another trend to watch.

3. can the fed lose control of the long end of the treasury yield curve? the fed has been buying about 80% of issuance, but it hasn't been forced - like the spanish banks were after ltro - to buy 110%! when or if the fed is buying over 100%, we will know that current bond holders, private and/or foreign-official are starting to dump positions. this would represent a real inflection point, after which the process will accelerate. alternatively, if the fed gives up on controlling the long end, and rates spike, that too would signal the same thing.

kapoom- ej made up this word in 1999 to name a contraction and then explosive expansion of money/prices/inflation, such as occurred in argentina. the mechanism he described then was that foreign dollar- holders would see the value of their hoards collapsing, and rush for the exits. dollar velocity would accelerate rapidly as dollars were unloaded to buy other assets as quickly as possible. we've seen the beginnings of this in the fact that china's holdings of treasuries have ceased to expand, even as it continues to generate trade surpluses with the u.s. so where are its surplus dollars going? to buy other currencies and real assets all around the world. that moves the dollars to other foreign entities. as foreign entities in general cease to see the dollar [in its concretized form as a treasury instrument] as a desirable asset to hold, they will turn around and as quickly as possible buy something else with those dollars. that is, until they refuse to accept dollars in the first place. so where will there be asset holders who will be willing to sell assets for dollars? the u.s. the dollars will come home to the u.s. to buy up u.s. assets. the stock market will surge IN NOMINAL TERMS as equities are purchased. real estate, collectibles, commodities, will all be the target of trillions of dollars, previously frozen in the form of treasuries held abroad, now unleashed as a tsunami of liquidity hitting american shores.
</big>

vinoveri
04-15-12, 07:19 PM
Given what the Fed has been doing in monetizing the debt through it's bond purchases and now the ECB via the LTRO (and I no longer follow what other CBs do but assume it's similar), I am at a loss to explain why the current scenario cannot continue indefinitely (note I did not say forever; but indefinitely can be a long time , e.g., longer than ones remaining lifespan).

My simple (and obviously simplistic questions are)

Who are the "private investors", anyway and how much economic power do they really have (remember the bond vigilantes? no where to be found)? With CBs around the world, funding gov debt purchases, sovereign wealth funds with enormous assets that can be applied anywehre, and private pension funds coming under pressure to buy sovereign debt, and the potential for capital controls , etc., the idea of private investors having great power over or within a globally coordinated currency scheme (which we are clear in - all fiat) becomes suspect to me. The fed has been buying ONLY 80% of issuance; why would the jump to 100% really matter that much? Where is evidence that the mass of private capital around the world (in the hands of individuals and corporations) can really exit the system and realign against TPTB in today's world to force sovereigns with larger economies and own currency into some sort of fiscal/monetary responsibility. I'm coming to understand that any such event(s) is or will be political and not economic ..... which brings me to my second question (or point in this case)....

Modern Macro GeoPolitcial Economics is best bullshit and at worst a scheme to transfer wealth from the population to those who run the system. The whole global monetary system is a fraud and facade. I mean come on .... "oh there are debts that can't be paid so voila we'll just create money (debt) to pay it .. in order to sustain the global banking system" (read sustain global central banking and government/state financing). And now the silly question:

Why not print enough money to retire the debts (sounds absurd right), but I submit that is what they are doing slowly (frog boiling slowly). $7 trillion in liquid savings in the U.S. alone, receiving 0.1% interest vs 5% in normal non-ZIRP environment (that's $350billion per year stolen from the savers (and we're in year 4, so already over $1T and on our way to $2T by the end of 2014) and transfered to whom.....????.

jiimbergin
04-15-12, 09:02 PM
Given what the Fed has been doing in monetizing the debt through it's bond purchases and now the ECB via the LTRO (and I no longer follow what other CBs do but assume it's similar), I am at a loss to explain why the current scenario cannot continue indefinitely (note I did not say forever; but indefinitely can be a long time , e.g., longer than ones remaining lifespan).

My simple (and obviously simplistic questions are)

Who are the "private investors", anyway and how much economic power do they really have (remember the bond vigilantes? no where to be found)? With CBs around the world, funding gov debt purchases, sovereign wealth funds with enormous assets that can be applied anywehre, and private pension funds coming under pressure to buy sovereign debt, and the potential for capital controls , etc., the idea of private investors having great power over or within a globally coordinated currency scheme (which we are clear in - all fiat) becomes suspect to me. The fed has been buying ONLY 80% of issuance; why would the jump to 100% really matter that much? Where is evidence that the mass of private capital around the world (in the hands of individuals and corporations) can really exit the system and realign against TPTB in today's world to force sovereigns with larger economies and own currency into some sort of fiscal/monetary responsibility. I'm coming to understand that any such event(s) is or will be political and not economic ..... which brings me to my second question (or point in this case)....

Modern Macro GeoPolitcial Economics is best bullshit and at worst a scheme to transfer wealth from the population to those who run the system. The whole global monetary system is a fraud and facade. I mean come on .... "oh there are debts that can't be paid so voila we'll just create money (debt) to pay it .. in order to sustain the global banking system" (read sustain global central banking and government/state financing). And now the silly question:

Why not print enough money to retire the debts (sounds absurd right), but I submit that is what they are doing slowly (frog boiling slowly). $7 trillion in liquid savings in the U.S. alone, receiving 0.1% interest vs 5% in normal non-ZIRP environment (that's $350billion per year stolen from the savers (and we're in year 4, so already over $1T and on our way to $2T by the end of 2014) and transfered to whom.....????.

I think it could go on forever, except for political mistakes. Sometime politics will get in the way.

Chomsky
04-15-12, 09:28 PM
<big>
back to the u.s., its debts, and its status as the world's reserve currency: no one official has yet had the need to say: the u.s. is not greece. [though when i google "the u.s. is not greece" i get 22,000 hits. when i google "the united states is not greece" i get 25,000.] </big>



Geithner April 2012: Q: “If we don't deal with these debt problems we are going to be Greece in two years” - Tim Geithner: “No risk of that.”

http://www.zerohedge.com/news/tim-geithner-glitch-matrix-special-will-america-become-greece-two-years-no-risk

c1ue
04-16-12, 11:57 AM
the debt supernova: after a financialized economy ceases to be able to generate growth from increasing debt, it collapses via debt deflation until social and market forces produce an inflationary explosion.

A very nice analogy.

Extending the supernova analogy: the fundamental properties of financial physics for Argentina are different than the US.

For Argentina, gravity in the form of debt accumulation is fixed. Thus once the economy loses its ability to generate productivity - equal to the fusion reactions going on side the star - gravity(debt service burden) takes over and cycle of rapid collapse/compaction/nova begins.

The US, however, can moderate gravity (interest rate control, money printing, etc).

What happens when you have a star which is unable to generate sufficient compaction for nova? A brown dwarf. Lifeless, dead, and drifting through space.


I am at a loss to explain why the current scenario cannot continue indefinitely (note I did not say forever; but indefinitely can be a long time , e.g., longer than ones remaining lifespan).

Because at some point in a representational system involving votes, the 99% are going to do something about their situation (i.e. the frogs realize the water is boiling).


Why not print enough money to retire the debts (sounds absurd right), but I submit that is what they are doing slowly (frog boiling slowly).

Several reasons:

1) The creditors for the debts are generally those in power. Why would these creditors allow the purchasing power of their debts destroyed?

2) The debts aren't all repayable instantly. Those immediately at risk of default would benefit, but those further away would be hurt badly by a massive debt jubilee via money printing.

3) Weimar. And more recent examples: Turkey, (Italy and Greece) prior to EU/post WW II

vinoveri
04-16-12, 07:28 PM
A very nice analogy.



Because at some point in a representational system involving votes, the 99% are going to do something about their situation (i.e. the frogs realize the water is boiling).



Several reasons:

1) The creditors for the debts are generally those in power. Why would these creditors allow the purchasing power of their debts destroyed?

2) The debts aren't all repayable instantly. Those immediately at risk of default would benefit, but those further away would be hurt badly by a massive debt jubilee via money printing.

3) Weimar. And more recent examples: Turkey, (Italy and Greece) prior to EU/post WW II



perhaps it's not the 99% against the 1%. the top 10% certainly top 5% and maybe even the top 20% are hooked on the system b/c they are either keepinp up or benefitting tremendously (top 1%). The bottom 30% (perhaps 50-60%) are supported by some jobs, and government safety nets and entertainment (bread and circuses). The leaves 20-40%, middle class that may be fed up and have enough wherewithal to act (if they recognize how they are getting screwed ... but again, once the frog boils its too late).

on the 2nd point, I would argue that the printing of money is offseting debt deflation; the creditors are getting bailed out in exchange for "taking the loss" on debt write off - and their purchasing power isn't declining b/c they get the money first; who bids up assets in the first place, but those with the funds and access to cheap money. Of course they're not going to print $10 trillion overnight; but they will suck ($350 billion per year in the US alone) from the pockets of savers. Add in the world CBs doing the same thing of ZIRP for 5-10 years and it amounts to the same thing in my view ... again slow boiling

raja
04-16-12, 07:37 PM
c1ue: "The creditors for the debts are generally those in power. Why would these creditors allow the purchasing power of their debts destroyed?"

I believe the plan of TPTB is to keep inflating, because they don't think it will affect them.
As the economy declines, they will buy up real assets from distressed owners with their accumulated wealth. Then, what do they care if the money becomes progressively worthless? They just raise the rent. Their earnings are from real assets, not from accumulated fiat, so they figure that their income is inflation adjusted.

For example, let's say your renter is paying you $1000 a month, and the money becomes devalued, you just raise the rent. What choice does Joe the 99%er have? He has to live somewhere. In order for Joe and his family to pay the increased rent, they must take a big cut in discretionary spending. Their quality of life decreases. Debt Servitude, as Hudson calls it.


c1ue: "Because at some point in a representational system involving votes, the 99% are going to do something about their situation (i.e. the frogs realize the water is boiling)."

Yes. At what point will the 99% refuse to accept their slavery? What will be their reaction?
I guess we've can watch Europe to get an idea.

thriftyandboringinohio
04-17-12, 09:23 AM
....the creditors are getting bailed out ...their purchasing power isn't declining b/c they get the money first...

That's a great point. Inflation is a dynamic process, not a static condition. It does not affect all parties the same way. Those who gather increased revenue early stay ahead of the curve, while those who are last to gather increased revenue suffer ever more damage.

During the oil shock of the1970s the oil companies raked in huge profits as energy price increases washed inflation through the economy. They got the higher oil prices on day one of any inflation cycle. Much later, after the inflation came back around to bite them in the form of increased costs for drill pipe and wages, they could pay, no problem. They had already banked that revenue, plus a couple other inflationary increases that had not yet circled back around to bite them yet.

If you get the printed money first, inflation can be delightful. So what if the stockpile of wealth you receive is diminishing? The last 30% of a new fortune you would not otherwise receive is a wonderful windfall.

If, on the other hand, you are a simple wage earner or a pensioner living on your life savings, well, it hurts to recoup only part of the inflation rate, and to get that late in the cycle after you've paid out more for everything.

jk
04-17-12, 10:09 AM
The fed has been buying ONLY 80% of issuance; why would the jump to 100% really matter that much?
it matters as a signal of what's going on.

1. if it reaches 100% it means that ALL private purchasers and surplus nations have left the market. the exporters ceasing to buy treasuries in turn implies that they have given up on supporting the dollar: they are content to let the dollar plunge and give up the u.s. market for their goods.

2. if it exceeds 100%, it means that current holders of bonds are selling, and a run on the currency has begun.

Prazak
04-17-12, 03:07 PM
1. if it reaches 100% it means that ALL private purchasers and surplus nations have left the market. the exporters ceasing to buy treasuries in turn implies that they have given up on supporting the dollar: they are content to let the dollar plunge and give up the u.s. market for their goods.

I don't mean to be thick, but does the second really follow the first? Must a nation's central bank purchase U.S. debt instruments for its industries to sell goods and services to the U.S. market?

jk
04-17-12, 03:14 PM
I don't mean to be thick, but does the second really follow the first? Must a nation's central bank purchase U.S. debt instruments for its industries to sell goods and services to the U.S. market?
if it's running a trade surplus, its currency will tend to rise vis a vis the dollar unless it intervenes in the market by buying dollars. i'm talking here about major export surplus countries, especially china. japan, too, is very concerned re the strong yen, and has intervened to lower their currency.

Raz
04-23-12, 03:15 PM
pulling together some of what i've been mulling over lately. ...

Thanks, jk. Much food for thought, although I don't think Americans are going to like the taste when the dish is finally served!

Bundi
04-23-12, 10:31 PM
Thanks, jk. Much food for thought, although I don't think Americans are going to like the taste when the dish is finally served!

If the appetizer is an indication, it already doesn't taste good so please hold the main course.

What else may cause a change in the game theory chess match and/or drive a phase change in confidence or whatever it is being called now? Seems like a lot of angles on finance/markets related thresholds. One thing that may be a contributing cause is the oil/energy market. I live in a pretty normal medium sized town and I can tell you with certainty that the vast majority of the folks I speak with are absolutely clueless about the following. As revealing, bringing up the topic is like dropping a s..t in the middle of the room.

Looking to EIA (US Gov.) data for crude oil producing countries and aggregating net exporters (netting out the amount any export nation may import), then relating this net export volume to the aggregate oil production for all of these net exporters yields the amount of net exporter crude oil production that is exported. Long winded way of saying what seems like a logical definition of the crude oil export market although many permuations probably exist depending on the source.

The following trend emerges. These data are only through 2009 so quite dated now but if oil prices are indicative, it is perhaps a continuing trend. I looked at BP statistical review data also and the BP calculated crude oil export market volume declined into 2010 as well after beginning a decline in 2007. It is unclear to me exactly what differences may be clouding the comparison between how BP calculates the net export market volume vs. the above. Anyway according to the EIA data calculated as indicated above, here are the amounts being exported relative to production by these export countries. It is the first time I actually pulled EIA oil data so it is new to me and perhaps I missed something but the arithmetic was straight forward. Also this is just crude oil specifically, not nat gas liquids or any other type of liquid fuel that is often grouped with crude oil as "oil" production.

2004 = 67.1%, this is the peak percentage since 1992.
2005 = 66.1%
2006 = 66.4%
2007 = 65.5%
2008 = 64.4%
2009 = 62.9%
2010 = ?
2011= ?
2012 =?

Net exporter crude oil production did not increase from 2005-2009 so the effect is a shrinking of total volume of crude oil provided by the world's net exporters of crude oil at least in the 05-09 years. Of course some countries are now importing more and others less but the law of large numbers may be applying an increasing squeeze on this equilibrium. China likes coal and coal use is growing faster than oil use but that doesn't mean China's oil needs aren't formidable and growing off of an increasingly large base. For all I know the export market trend reversed in 2011 and to date in 2012, not sure but if not, good luck to central bankers intervening with this issue.

I'm sure this has been debated many times by EJ and others here so it is certainly not novel on this site but the degree to which many of the normal folks I come across have no idea of this trend, is significant. I can tell you that this includes working class and up. The interesting thing though is that most of my working class friends (not a lot US Treasury exposure here) are much more willing to acknowledge the possibility of an oil supply problem than those a little further up the economic ladder. There may be a threshold of understanding related to this issue that shows itself in any number of ways and spills over into finance/markets.

I know EJ has discussed oil and energy at length and its potential as a forcing function. If looking for timing, I wonder if finding detailed real time data on the oil export market may be a way to estimate a potential choke point. EIA data are free but import export data are dated, some of the IEA data may be more recent though it is quite expensive to purchase. If anyone out there knows of better sources, feel free to make suggestions.

Is it me or is the oil issue receiving short shrift in these debates, again not so much on this site but in general? Lots of finance/markets focus but I'm struck by how infrequently the interplay with oil is part of specutation on timing of events and thresholds. Society just doesn't seem all that aware of it at this point. Do others see shrinking availability of oil, if this is in fact true and continuing to be the case, as virtually certain to cause a crisis? Wouldn't anyone speculating that the current world dynamic (CB induced stasis) is set to continue as is, for many many years to come, have to account for this issue in such a thesis?

c1ue
04-24-12, 05:50 AM
Is it me or is the oil issue receiving short shrift in these debates, again not so much on this site but in general? Lots of finance/markets focus but I'm struck by how infrequently the interplay with oil is part of specutation on timing of events and thresholds. Society just doesn't seem all that aware of it at this point. Do others see shrinking availability of oil, if this is in fact true and continuing to be the case, as virtually certain to cause a crisis? Wouldn't anyone speculating that the current world dynamic (CB induced stasis) is set to continue as is, for many many years to come, have to account for this issue in such a thesis?

The information you point out concerning percentage of oil exported by oil producers is valid, but the reasons for this shift are cloudier.

For one thing, the primary consumers 30 years ago were the 1st world nations. This is still true today, but the economies and populations of the 1st world nations have largely plateaued. This in turn pretty much guarantees that oil imports aren't going to increase that much.

In contrast the populations of the oil producing nations have by and large exploded in the past 30 years.

So how much of the export shift is due to oil scarcity, as opposed to internal per capita consumption, internal aggregate consumption due to massive population increase, 1st world efficiency increases, etc etc?

On top of this you can pick out the US as a particular outlier. US oil consumption is so outsized compared to the rest of the world that a shift in US oil consumption affects overall worldwide oil industry numbers. The effects on the US economy due to the property bubble very possibly affects both the numbers going up until 2006 as well as the numbers going down since.