Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

[jtabeb]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

Cowboys vs. New Englanders. Both philosophies lay claim to the real America. I will put EJ's trial balloon in the New Englander camp.

Good luck with perfect Justice.

NOT looking for perfect, just SOME.

[goadam1]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

As a small business owner I can tell you that you are wrong. Many business use lines of credit and confuse the crdit with income. But a business can only hold so much cash as a cushion. I keep a years worth of basic overhead as savings. But if I can't generate revenue then what is he point of running a business out of past profit
As far as leases go, you don't want to use all your cash on hand for every cApital improvement. Equipment generates revenue over time And you get to depreciate it. And it is the right thing for the interest to be deductable because it encourages growth. As a business you are always. Caught between recievables and expenditures. You never want to be caught without enough to cover expenses. The problem isn't debt or credit. The problem is bad judgement. I keep my business small because I don't want to grow my way to bankruptcy. But I do use leases and depreciation as part of my business.

[raja]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

The issue of current laws being poorly enforced is a huge one. I would argue that that the current situation has directly undermined what used to be a "strong rule of law." Now it seems that all you need to do to get away with a crime is to make it big enough. If someone walks into my house and steals $10, they go to jail. If someone else destroys my bank, my neighborhood and my life savings with fraudulent loans, they get a slap on the wrist and a big bailout.

The Banksters and Wall Streetniks acted either foolishly or criminally, or both.

My "Recovery Plan" would require that the upper level management of any firms that require government assistance reap the consequences of their actions by immediately being fired, and forbidden to work in the financial industry for at least 10 years. Where criminal behavior can be proven, the criminals should be stripped of their profits and go to jail. Management at regulating and rating agencies should receive similar treatment.

Why should I do anything for "America", when the country is controlled by greedy criminals and/or idiots who have ruined the economy, resulting in incredible hardship to many, many people.

If these financial "wizards" are fired and punished, then I'll think about contributing. Until then, it's every man for himself. :eek:

[goadam1]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

So why rely on bonds (a form of taxation)? Why not rely on the 1% to invest in new business as the ideas and needs arise. In the meanwhile, there is plenty of political will to invest in "smart grids" and such which would lay the groundwork for new productive means.

If you did the bond route, then the bonds might have more appeal if they were marketed as say, "Green Bonds" for some projects or some other name for projects like high speed rail.

I volunteer my services to a marketing campaign. I have a talented graphics team. Write a proposal and I will make a viral piece for you.

[goadam1]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

Cowboys vs. New Englanders. Both philosophies lay claim to the real America. I will put EJ's trial balloon in the New Englander camp.

Good luck with perfect Justice.

[jtabeb]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

r cover. You can't build a new future hiding it all under the bed.

Absolutely! But Justice is the cornerstone of society, as one Ituliper has in their motto. SO, you can't make meaningful progress UNTILL you restore JUSTICE by making meaningful reform. (and until that is done, it is ENTIRELY APPROPRIATE for all investors to "run for cover").

[goadam1]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

We expect payroll employment to decline by another 5% in the coming months to decline to 1998 payroll employment levels in 2010, matching the percent decline in payroll employment that occurred after WWII[/QUOTE]


It seems the entire drop from peak unemployment in 1948 was 5%.

[EJ]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

Thank you for the very thoughtful question. My response, below.

EJ,

I’m new to the site , I've been an observer for about 3 months, this is my first post.
I have been following your comments very closely and they are greatly appreciated. I believe that only you, Steve Keen and Michael Hudson really have an in depth understanding of the many dynamics of the unfolding catastrophe.

Welcome. I appreciate your careful attention to our ideas.

Unfortunately Steve Keen is focusing a lot on Australia (if you can, you should interview him more often or have a monthly contribution from Keen on general topics non Australian) but his comments are nonetheless very interesting even when they are on Australia.
Michael Hudson is also very interesting but particularly when you are interviewing him and he does not digress too much towards his absolute hatred of the FIRE economy actors (although he has many valid points on the topic).
But I believe you manage to have a pragmatic approach on a very solid intellectual/academic base and you focus your work on topics that are most relevant to the itulip community (ie, our survival). So thank you for being a beacon of light in this increasingly darker world that we live in.:p:p
I have the following question/argument which as you will see his based on your writings::p:p

Aristotle said that a man is what he does. I am a business person who also has a background in finance and a business person's understanding of economics. As an entrepreneur it is my nature to look for solutions; we are as a creed problem solvers. Academics are better at defining problems in an in-depth and scholarly way, as Hudson and Keen have independently from the established academic economics community, much to our benefit.

How can the US consumers do anything else than try to frantically reduce his suffocating debt level/burden in view of:
- Household savings sufficient to finance cash flow for ONLY two months (from your "Modern Depression: Focus on US GDP" article. How does this compare with 18 days figure from your Dual Cycles of Demand Destruction and the Economic Face Plant article.)

Going back to our early days here we posted three charts, one showing distribution of income gains, the second distribution of liquid net worth, and the third distribution of debt. The point of these charts was to support our thesis that when the economic collapse took place, it would be far more rapid and deep than most expected because of a high concentration of debt and little savings among approximately the lower 50th net worth percentile of US households. This leaves households vulnerable to a decline in incomes, and as both Elizabeth Warren and James Scurlock pointed out years ago, loss of income that makes households cash flow negative today commonly means the loss of only one income out of two. A business in this situation can lay off employees to reduce payroll, the largest expense for any business, but all a household can do is cut expenditures, and that is what we are seeing starting with those households that are the most indebted and have the least liquid net worth in 2007, and cascading at a rapid pace starting in Q4 2008.

This has been an accident waiting to happen for a long time. It was only avoided in 2001 by the dramatic and desperate creation of the housing bubble by the Public Private Partnership of the Fed, the Treasury, and Wall Street financial institutions.

- Household debt service as % of disposable income higher than great depression level (Dalio’s interview in Barron’s)
:p- falling income and sky rocketing unemployment
:pHence today any US consumer investment whether in T-bills (to replace foreign creditors when the “Road to Ruin” sudden stop will happen) or Infrastructure bonds can only happen after a “steve keen” type politically unthinkable general debt reduction.

I have an idea in my book about how to execute the debt reduction. I can't talk about it here because my publisher will not allow it, but after talking to a few members of Congress I think it's potentially workable within both the current economics orthodoxy, legal framework, and shifting political alignments, but not likely before the crisis get a lot worse and the political will builds.

The IMF calculated that should the personal saving rate rise to 8% by 2010 that creates only 830 Bn $ of savings available and even if you add an estimated 500 Bn $ from foreigner (I think unrealistically high in view of collapsing export worldwide), that’s 1.3 Trillion $ of possible t-bill purchases out of a government funding need of 4 TN $ over 2009/2010 (argument made by gaius marius on Setser’s blog).

Liquid net worth is what most people think of when they think of savings, as it is the result of saving net of debt liabilities. But most economists confuse these terms and concepts. Nearly all of the saving going on today is repayment of debt and is contributing to net worth only insofar as the debt liabilities are reduced. In the past you could say that this repayment of debt is as good as cash on household balance sheets because households are improving their creditworthiness by paying down debt. That is true. Unfortunately, lack of employment and deterioration in the credit markets that results in a tightening of credit standards is reducing their creditworthiness more quickly than they can improve it by paying off debt. And unlike previous FIRE Economy recovery periods, credit will remain tight; the long era of cheap credit is over. Thus the savings that you are seeing today is, tragically, getting tossed down a bottomless hole of post FIRE Economy debt where it does nothing to rebuild household balance sheets in a way that contributes to economic recovery in the future.

I believe that the 4 TN $ figures of funding the US government needs is seriously underestimating the loss of tax receipt the likely 24% decrease ("Modern Depression: Focus on US GDP" article ). Specially that in case personal saving rate rise to 8% by 2010 this will most probably lead to a worst case scenario type GDP contraction of 15% (again gaius marius on the brad setster blog but I believe this is also close to a roubini estimate).
I don’t think they are enough “Americans who can afford it “to finance the upcoming fiscal deficit of us government.

For Road to Ruin we did a scenarios of federal outlays, receipts, and GDP to come up with a fiscal deficit in the range of 10% to 15% of GDP in 2010. These are 3rd world levels. If local and state governments continue to contract at the current rate, outlays as transfers to states may rise significantly above projected outlays. Such levels, especially if they are reached quickly and "unexpectedly" -- and that is the reason for the Road to Ruin warning, so that if it occurs our readers are not surprised -- will test the thresholds of our sovereign credit rating. How our one remaining active creditor -- China -- will respond is anyone's guess. Our contacts there describe a deeply divided government with the more hawkish older members increasing in influence over the debate as social unrest increases inside the country.

I don’t see how the US hyper inflation scenario can be avoided except that it might not necessarily mean an automatic dollar crash as the euro might disintegrate beforehand (with the possible secret 25 Trillion $ of impaired assets see last part of interesting presentation in http://www.arpllp.com/core_files/The...ter%200309.pdf ).
So we will either be in a world where domestic hyper inflated USA will look like a safe haven compared to the rest or no more fiduciary currency and back to the gold standard with gold at 5000$ with the added bonus of monetizing a good chunk of US debt.

Readers know that my long gold position is also as short on the FIRE Economy since 2001. I am long USA, however, and am not about to get on a plane to move to China. To do so is to fail to grasp the critical advantage of America's culture, history, and institutions. Everyone will be quite shocked by how quickly the US can recover once the right people with the right philosophies take charge of those institutions. The idea of the Infrastructure Bonds is similar to War Bonds, which were both a way of financing WWII at a time when foreign sources were nil and also to extract excess money from the economy that was creating high inflation. We will be faced with both the challenges: one, of inflation as the dollar weakens and supply crash meets money supply later this year or early next, and two, of financing our transition from one form of economic structure to another, in the previous case from a war economy to a civilian economy, and in the current case from a FIRE Economy to a Re-Industrialized Economy, with our own money. The goods news is that there is plenty of money. The bad news is that it is concentrated in 1% of the population. Politically and philosophically, I don't believe that progressive taxation -- redistribution of wealth -- is the answer. We are going to need both capital and the profit motive of entrepreneurs to move us forward. Rather, we need a simple tool and a simple philosophy behind it to guide its use: that we're all in this together, that we need to transition from a FIRE to a Production based economy, and some of us are more able than others to help finance that transition, and at the moment there is no way anyone can help do so even if they wanted to.

[c1ue]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

JT,

In principal the idea of a hard asset backed currency as a limit on government fiscal shenanigans is a fine one.

However, an immediate conversion of present fiat dollars to hard asset backed dollars would be a huge mistake. By Obama's own estimates, the deficit will be in the order of $15T by 2013.

A rise in interest rates to historical average numbers would mean $750B a year in interest alone - vs. a GDP of $15T or so.

Or in other words - the growth of the GDP must equal the interest rate to have a prayer of ever paying it off. Whether that interest is 4% or more likely 6%+, the aforementioned likelihood seems low.

What is far more likely is either a deliberate or an accidental inflationary period first to reduce to debt. Then there will be much more benefit to 'hardening' the dollar, but of course in doing so the US will have effectively at least partially defaulted on its existing debt - with all the likely consequences.

For a nation which (in my opinion) is not going to reverse the currency account deficit any time soon - the result is not going to be pleasant.

[Serge_Tomiko]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

Dear EJ -

You forgot another plus...

the corrupt, self-serving, bought and paid for, asleep at the wheel corporate media is also going the way of the dinosaur:


http://newsosaur.blogspot.com/2008/0...ock-value.html

This is very, very true.

[GeraldRiggs]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

Jtabeb:

I agree with you wholeheartedly on all points! However, killing the FED is not going to be easy. Remember, they run the country and their counterparty CB's in other countries run them. They will not standby while the gutless CONgress tries to pass a law repealing the federal reserve act of 1913. No way! btw, I think Obama is bought and paid for by this group. Look at his cabinet picks and actions so far.
I personally think this economic collapse is orchestrated to allow for a global solution. Not sure what that would be but there are a lot of people throwing out ideas.....new global currency.....??
You can tack this to the bank....Whatever the solution put forward is.....it won't be good for the average citizen!

[Sharky]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

On the minus side:

• The FIRE Economy is collapsing
• Unemployment is rising rapidly
• We have minimal savings
• Our credit is in question

I would add:

• Way too much debt

On the plus side:

• We have a surfeit of human capital, millions of well educated people who are willing to work hard
• We have strong institutions that took generations to develop, albeit under marginal management lately
• We have a strong rule of law, although poorly enforced as of late, especially for property rights, which is why so much is invented here

What to do to build for the future? How to finance it?

The issue of current laws being poorly enforced is a huge one. I would argue that that the current situation has directly undermined what used to be a "strong rule of law." Now it seems that all you need to do to get away with a crime is to make it big enough. If someone walks into my house and steals $10, they go to jail. If someone else destroys my bank, my neighborhood and my life savings with fraudulent loans, they get a slap on the wrist and a big bailout.

IMO, one of the first things that needs to be done is to enforce laws already on the books. For example, people who lied on their mortgage applications, bankers and their agents who knowingly accepted those loans, should be brought up on charges. Mortgage fraud is a felony. Current law does not allow criminals to financially benefit from their crimes. The fees they obtained should be clawed back even if already spent, etc, etc.

Also, transparency and accounting honesty need to be established. Who owns toxic assets? As things are now, the market seems to be assuming that everyone does. You can't believe anyone's financial statements any more, and the level of market manipulation that's happening is beyond criminal. As long as that continues, the capital markets are dead.

Americans need to rediscover their roots. In particular, sound money, individual rights and the fact that wealth flows from production. You don't get rich by borrowing-and-spending or with a service-based economy. You get rich by making things and selling them. And it's not just the wealthy that get rich(er) in a production-based economy, it's everyone.

Unfortunately, I don't think any of this is going to happen without a BIG housecleaning in Congress. And that chances of that happening are, well, pretty damn small.

[BiscayneSunrise]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

So Eric,

Regarding these infrastructure bonds, what kinds of interest rates should they offer to attract investors?

In WW2, war bonds were offered at lower than market rates but people bought them anyway to do their part. Given that the investor class is currently on strike, it seems like that today, you'd have to offer them at much higher than current rates.

Possible scenario: Infrastructure bonds offered at let's say 7% tax free, then the money lent at 5%. Sure the feds would have to cover the cost of the 5% point difference but that would be cheaper than running trillion dollar deficits.

[nael]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

Yes, I'm being intentionally provocative here, and glad I've smoked out comments from members of the community we have not heard from before.

Consider our unfortunate situation.

On the minus side:

• The FIRE Economy is collapsing
• Unemployment is rising rapidly
• We have minimal savings
• Our credit is in question

On the plus side:

• We have a surfeit of human capital, millions of well educated people who are willing to work hard
• We have strong institutions that took generations to develop, albeit under marginal management lately
• We have a strong rule of law, although poorly enforced as of late, especially for property rights, which is why so much is invented here

What to do to build for the future? How to finance it?

EJ,

I’m new to the site , I've been an observer for about 3 months, this is my first post.
I have been following your comments very closely and they are greatly appreciated. I believe that only you, Steve Keen and Michael Hudson really have an in depth understanding of the many dynamics of the unfolding catastrophe.
Unfortunately Steve Keen is focusing a lot on Australia (if you can, you should interview him more often or have a monthly contribution from Keen on general topics non Australian) but his comments are nonetheless very interesting even when they are on Australia.
Michael Hudson is also very interesting but particularly when you are interviewing him and he does not digress too much towards his absolute hatred of the FIRE economy actors (although he has many valid points on the topic).
But I believe you manage to have a pragmatic approach on a very solid intellectual/academic base and you focus your work on topics that are most relevant to the itulip community (ie, our survival). So thank you for being a beacon of light in this increasingly darker world that we live in.
I have the following question/argument which as you will see his based on your writings:
How can the US consumers do anything else than try to frantically reduce his suffocating debt level/burden in view of:
- Household savings sufficient to finance cash flow for ONLY two months (from your "Modern Depression: Focus on US GDP" article. How does this compare with 18 days figure from your Dual Cycles of Demand Destruction and the Economic Face Plant article.)
- Household debt service as % of disposable income higher than great depression level (Dalio’s interview in Barron’s)
- falling income and sky rocketing unemployment
Hence today any US consumer investment whether in T-bills (to replace foreign creditors when the “Road to Ruin” sudden stop will happen) or Infrastructure bonds can only happen after a “steve keen” type politically unthinkable general debt reduction.
The IMF calculated that should the personal saving rate rise to 8% by 2010 that creates only 830 Bn $ of savings available and even if you add an estimated 500 Bn $ from foreigner (I think unrealistically high in view of collapsing export worldwide), that’s 1.3 Trillion $ of possible t-bill purchases out of a government funding need of 4 TN $ over 2009/2010 (argument made by gaius marius on Setser’s blog). I believe that the 4 TN $ figures of funding the US government needs is seriously underestimating the loss of tax receipt the likely 24% decrease ("Modern Depression: Focus on US GDP" article ). Specially that in case personal saving rate rise to 8% by 2010 this will most probably lead to a worst case scenario type GDP contraction of 15% (again gaius marius on the brad setster blog but I believe this is also close to a roubini estimate).
I don’t think they are enough “Americans who can afford it “to finance the upcoming fiscal deficit of us government.
I don’t see how the US hyper inflation scenario can be avoided except that it might not necessarily mean an automatic dollar crash as the euro might disintegrate beforehand (with the possible secret 25 Trillion $ of impaired assets see last part of interesting presentation in http://www.arpllp.com/core_files/The...ter%200309.pdf ).
So we will either be in a world where domestic hyper inflated USA will look like a safe haven compared to the rest or no more fiduciary currency and back to the gold standard with gold at 5000$ with the added bonus of monetizing a good chunk of US debt.

[Down Under]

Re: Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen

I would easily use a good portion of my capital and buy a "build-a-bond." Think of it as war bonds. What happened to common interest? What happened to thinking of the greater good? You should as an example, pay taxes to immunize your neighbors' kid, not just because it is right, but because you benefit from him not having a disease.

I thought we were Jeffersonian around here.

I would like to see a bit of accountablity.