Recently, I was involved, in a limited basis, with a bankruptcy. The company that went belly up had over a million dollars in debts and no assets. Most of their debt was in the form of accounts receivable, but they had some loans and leases as well. Up until the point they filed for bankruptcy protection, they had paid all of their bills on time. In fact, they paid most vendors in ten days, something that is just about unheard of these days. This prompt payment is what led their vendors to be so generous with them.
This story reminded me of something that happened years ago. There was a house party at a mansion (are there mansion parties?) and many party goers were out on a balcony of some sort that extended over the pool area. The balcony was large enough to hold dozens of people, but it started to give way due to the mass of people. Panic set in and that made things worse as the frightened party goers scrambled to get off the balcony. The whole thing collapsed and took a bunch of people down in the process.
The connection here is that it is human nature to observe the actions of others, trust those actions and to infer things from them. The vendors extended terms to that business saw that they paid in ten days and that others were more than happy to extend credit, so they did the same. The party goers saw everyone else out on the balcony and just assumed it must be safe. They never stopped to think that maybe it was not built to hold a hundred people. In both cases, when reality came rushing in, there was a rush to the exit.
That’s something I think about when I read stories like this regarding the global economy. The entirety of the world economy is built on one thing. That is the rock solid belief that the US government will never miss a debt payment and never devalue the dollar to arrest its debt. The entire global economy is built on the asset value of US Treasuries. If there ever comes a time when people begin to doubt the security of that debt, the panic will plunge the world into a new dark age or possible something worse.
The people in charge of the Federal Reserve understand this. The people running the ECB know this. The PBOC knows this. The masters of the universe all agree on one thing and that is they have to protect the foundation stone of the world economy. Guarding the underlying stability of the financial system is their overriding concern. That means they are willing to risk recession and maybe worse in order to protect the asset system. It’s not unreasonable from their perspective, but it does reveal the bigger problem.
That bigger problem is we have reached the logical end point of the credit economy. If the US economy does lurch into recession, the world economy will follow. The central banks will not have many options as they have used all of their big tools to prop up the asset base over the last decade. The Fed can lower rates a bit and maybe restart their Quantitative Easing program, but they will have little or no success in blunting a recession. The world will just have to wait it out and hope for the best.
That is not how the world ever works. A 2017 recession will cause the new US president to propose “solutions” and new governments in Europe will demand relief from Brussels. Bad economics always leads to worse politics and the politics of the West are already fairly rotten. The rise of nationalist and populist parties in Europe will only complicate an already fragile set of arrangements. Imagine if something like a Syriza were to take over the Italian government just as the world is headed to recession. Fun times.
The fact is, there’s a limit to how much the world can borrow from the future. We are probably near that limit. With recession looming, the ability of central bankers to blunt it with credit issuance is limited. That means it becomes a political problem. The record of politicians coming up with useful reforms in times of crisis is not good. What’s needed is a sustained and organized retreat from a money system that has outlived its usefulness, but that is probably impossible. Instead it means a disorganized and haphazard retreat.
As Evans-Pritchard concludes in his story, the possible outcomes are mostly grim with some of them very grim. If the central bankers get it wrong and plunge the economy into a deep recession, the politicians will most likely respond with massive spending of money that does not exist. That could unleash price inflation and a collapse of asset values. It’s not guaranteed, but the fact that it is one possible outcome is grim news in itself. The future is grim and things will mostly likely be worse than we expect.
“…The fact is, there’s a limit to how much the world can borrow from the future. We are probably near that limit…Instead it means a disorganized and haphazard retreat…”
They’ve already got this figured out. They’re going to Special Drawing Rights SDR’s. There will be a big financial crisis and SDR’s will come in to save the day. It will of course be the same rip off but on a bigger scale. See below. They explain it all.
http://philosophyofmetrics.com/
http://redefininggod.com/
Our money supply system is stupid. A child can see it’s stupid. All money is created as debt so to pay off the interest you have to have more money…created with more debt. Simple arithmetic will show you that the interest portion will grow to unsustainable levels as the debt compounds. Maybe this is the reason we are suffering so. Mass interest and debt accumulation. The people in control of this FED and other central bank owners are allowed to create any amount of currency while sticking us with the debt. Nice racket if you can get it. Since money i based on debt if we pay off all the debt…we would have NO MONEY!
There’s another way of thinking about this. If all the goods and services in the economy were backed or shadowed by an equivalent amount of currency we would have a situation were there would be debt but it would be owed to no one in particular. The cash would be a direct substitute for goods and services. Benjamin Franklin wrote about the currency in Pennsylvania that worked like this but based on land. It worked very well and provided prosperity for the whole community. Of course when the Bank of England found out about it the King made them stop causing the whole community to crash into a downward spiral. Possibly being one of the reasons for the revolution.
http://www.philadelphiafed.org/publications/economic-education/ben-franklin-and-paper-money-economy.pdf
Look at Scott Smith, a guy running for president, ideas on debt and taxes. I don’t work for him or have any dealings with him I just ran across his ideas surfing the web.
http://www.scottsmith2016.com/
His ideas are extremely good. For revenue instead of getting most from income taxes he would get revenue from settlements. Like every time you buy something or deposit a check in the bank, etc. The value of this is it massively raises the tax base so that the amount of each transaction is minuscule. I read, “For Good and Evil: The Impact of Taxes on the Course of Civilization” by Charles Adams a book on taxes and it talked a lot about raising the tax base in order to lower the percentage taken from each transaction and to spread out where revenues came from.
Let’ look at the numbers he quotes.
Payrolls total $15 trillion.
Not much for filling a $4 trillion federal spending.
The base for what he calls payments, (transactions), is 3,600 Trillion. Big difference. So using this big difference he would only take a tax rate of just 1/8 of a percent.
He also would stop charging interest as the money is made and backed by the taxpayers. He would only give banks a service fee. (I don’t agree with this. I think a small interest paid to the Federal Gov. would be helpful providing the majority of it went to the treasury and bypassed the FED and banks.)
He’s got some great ideas on lots of issues. He’ll never get any publicity from the media with his cut out the FED ideas but they’re worth thinking about. My biggest problem is just how, even with such small percentage of tax, he would keep corporations and the 1% from gaming it so they pay none.
Another thing Smith wants to do is pay the debt off. He points out that all the debt pays interest so it gets bigger and bigger. There’s a not so evident twist to the debt. Here it is…as soon as the debt is issued it is financialized. It becomes money. It may be debt but in today’s world you can use this promise to pay to raise cash. Therefore the money supply is already inflated by the debt. Get it? Debt becomes cash through financialization.
He says,”…Coupon stripping would not be inflationary
because it would replace our existing supply of interest bearing
money with non-interest-bearing money…”
When he says coupon stripping he’s talking about the old time bonds. Here’s a picture.
http://www.coxrail.com/images/bond&coups.jpg
Each bond has coupons that when torn off at a certain date become money. He says we pay all the bonds off with non interest bearing CASH now instead of letting the debt inflate further. The bonds have become cash already so it’s not necessarily inflationary to turn them into cash.
Here’s another quote,”…Ironically, we would have inflated the money supply less if we had issued new money to pay for the deficit each year rather than selling Treasury bonds. At least ordinary money does not accrue interest…”
That being the case he says we should pay off all debt within five years.
Here’s a link to his pay off the debt page.
http://www.scottsmith2016.com/wp-content/uploads/2016/03/Pay-Off-the-Debt.pdf
I think he’s somewhat right about turning debt into cash not being inflationary but not 100%. Some debt is parked and if they were forced to accept cash I have no doubt they would buy assets for cash causing some inflation. His point over all I believe is sound. That printing cash is less damaging to the economy than continuously expanding debt. Yes there is a limit to this. The damage is less when you have instant inflation that the delayed case of delayed debt. When you have instant feedback from printing cash you also can see the damage and correct it faster. The debt is hidden as it takes some money out of circulation while NOT extinguishing it. When debt is turned to cash it’s influence can’t be stopped as easy.
Accounts Receivables are an asset, not a debt
The other source of plunder for the connected grifters and grafters is the endowments of NGO world, private universities most definitely included. Plus, unlike 401k’s they have the easy possibility of being effectively demonized by the Dirt People. So an inviting target for the aspiring pseudo-populist political entrepreneur.
Perhaps the few actually smart Cloud People realize this, hence the visceral fear of Trump.
Evans-Pritchard is just as weak an analyst as possible. If he stays on the doom/gloom loop eventually he’ll be right. A broken clock kinda right. Cue Albert Edwards.
Thanks, I was going to get another cup of coffee but now I’m just going back to bed.
Denationalisation of the currency. Unilateral abolition of the legal tender acts. Allow currencies to compete with each other in domestic markets. You don’t have to do anything with the Fed.
I’ve always been interested in the Great Depression. Maybe it’s because of the impact on my grandparents. I think the major thing that people don’t realize is that those people did not expect to get hit with a major depression. It was good times in the late 20s. People had jobs and could buy nice stuff. And just like that, it went bust.
There is nothing special about us, that prevents the good times from going away. There are Hoovervilles even now, but we don’t talk about them because Obama is in office. If Trump wins, it will be all over the news. And these Hoovervilles are full of people that could use a job. But we can’t have them working, because we must take in all the brown people of the world and give them jobs instead. One of these days, I’ll be in Portland and take pictures of the people with their tarps, shopping carts and piles of stuff, set up on the sidewalks, some next to the freeway. it’s the Portlandia they don’t want to talk about.
The IMF has a clean balance sheet. The Jim Rickards scenario is what will unfold.
More debt will be issued under the auspices of the new global central bank, the IMF.
Ought to be good for extend and pretend for at least another decade, though the US will have to do with much less.
War abroad seems to be the preferred way to juice the economy and distract the masses from bad economics at home. Perhaps that’s why they’ve been poking the bear. Woo! Team Amurica! Git dem filthy russkies!
Well, if they try to conscript me for something other than deportation forces, I’m gone. Dust in the wind. I’d gladly fight for my grandfather’s America. This America, no thanks. I’ve no interest in dying for a country of Blacks, Mexicans, and White sluts.
But I’d love to join the deportation forces.
God, I hope we get deportation forces.
Maybe there will be catapults involved!
Sorry, YRH, war is coming to these shores. The Globalists have done really po’ed the rest of the world and they are tired of our crap.
Prepare accordingly.
This popped out at me while reading the Bloomberg article.
“That scenario underscores what may be the biggest risk of the nationalist groundswell: increasingly fragmented parliaments that will be unable or unwilling to tackle the problems hobbling their economies.”
Wait a minute. Aren’t we in this fix because unfragmented parliaments have been unable or unwilling to tackle the problems hobbling our economies?
It’s the way they tackled them that caused the problems
Yes. Do you have another question? 🙂
“The connection here is that it is human nature to observe the actions of others, trust those actions and to infer things from them.”
You just connected the dots for me concerning the usage of polls in election campaigns. Campaigns not only use polls to determine the effectiveness of their advertisements and messaging, but to also to offer self confidence to questioning voters. I’ve long speculated that many voters care more about voting for the winners than they do about candidates. You observation fits the truth better than my speculations.
The media’s job this time around is to thwart a preference cascade for Trump. They are (probably correctly) afraid that the Trump bandwagon could be “yuge” if he showed some real momentum in the polls.
If the central bankers get it wrong and plunge the economy into a deep recession, the politicians will most likely respond . . .
Well I certainly feel better already! Cinnamon rolls and coffee in the morning until the world ends, or my ammo runs out.
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You’re not thinking creatively enough. There’s $25 trillion in 401k accounts just waiting to be confiscated. Any good Democrat can tell you that prudence requires investors to move increasing percentages of their IRA assets into safe investments, e.g., Treasuries, as they age in order to avoid risks due to market fluctuation. And hey, if Treasuries bear a negative interest rate it’s still better to lose 2% or 3% every year than to risk a wholesale loss in a market collapse. This requirement can probably be imposed administratively and doesn’t ever require an act of Congress. See how easy that is?
I’m always a little skeptical of Ambrose. He’s been writing these “collapse is right around the corner” articles since 2008. In a financial system in which money is nothing more than credit created from thin air–we don’t even print much physical paper anymore–there’s no theoretical limit to the level of debt that can be absorbed by the system. As long as producers of real goods and real services continue to exchange their goods and services for credit money the game keeps going. If the petrodollar collapses then all bets are off and it’s get your guns and ammo time.
I read these events as more of a preparation to crash the global economy in the event that we dirt people have the audacity to elect Trump instead of Hillary. Or maybe the central banks are signaling to Trump that, if elected, he either plays ball with them or they will crash the global economy, thereby ruining his presidency.
Apparently I’m not the only one who reads the Fed’s motives this way:
http://www.zerohedge.com/news/2016-10-20/federal-reserve-hillary-clintons-secret-weapon
Universal suffrage is a one way street. No reform is possible. A pause is possible, or once was. Reagan was a pause. But that type of possibility by now seems to be, well, impausible. As we see in the real world there is only one solution to exponential bullshit–and it is a solution–and that is bankruptcy. All pretext stops. What is left is real. Why couldn’t we see that before, when it was so obvious? That will solve financial equations. No fiat money. No omnibus spending. On and on. What small fraction of today’s wealth did depression era Americans need to live, love, get a haircut, and watch his neighbor fall off the roof? But that will not so easily solve our political bankruptcy–diversity, equality, tribes, creeds, gender–for which universal suffrage is the magnet. If the Right is ready that is the only opportunity it will have to re-shape America. It’s advantage is that it does not need to invent, but rediscover.
Excellent comment. Iirc, there was a US senator from Kansas or Oklahoma who voiced principled objections to New Deal programs. He was defeated in the next election, an object lesson in what the electorate valued even then.
It’s a wonder the man’s face isn’t on Mt. Rushmore to teach that lesson through all eternity for politicians in democratic polities.
Since at least 2008, the byword of our elites has been “what’s good for Goldman Sachs is good for the USA.”
The bailout of 2008 was largely orchestrated for the purpose of making sure that Goldman Sachs did not collapse like Bear Stearns and Lehman. This was eagerly done because it was widely understood that if Goldman collapsed it would take a hefty chunk of the DC-Wall street elite nexus with it – and so it was done, with a massive amount of fiat money and Fed manipulations, and called wise and good.
This “solution” has distorted central bank policies on a global scale for nearly a decade, and in the process has transformed private banks into giant hedge funds – just look at Deutsche Bank – speculating on stocks, real estate and derivative paper to make a profit. Which, surprise surprise! was what triggered the 2008 crisis in the first place. So, we’ve returned to square one, with the only change being we are massively more in debt and the central banks are out of magic bullets. This almost guarantees that our next “normal” business cycle recession will quickly escalate into a global financial crisis. This time not only will it take out a good chunk of the DC-Wall Street nexus, state pension funds will certainly go, and quite possibly a good chunk of the welfare state.
Should Trump lose, my siliver lining is that I can’t imagine a better person to preside over this debacle than Hillary Clinton, since her greed and corruption are so emblematic of it.
I’ll file this one in the “buy a small farm far away from urban areas” folder. That folder keeps getting fatter.
The problem is what “far away from urban area’s” actually means. There is very little tillable land in this country that is far away from at least some urban area.
There is the small detail of being able to ‘maintain title’ if the SHTF against the local broke-but-charismatic ‘entrepreneurs’ (aka local warlords) that are bound to arise if only to ward off raiding parties from the urbs. As a non-local non-resident you are an obvious first target. So you must either must become that warlord or be quick to identify and ally with him.
You will have an opportunity to divert the disposed against the local corporately owned hi-tech, hi-capital ag holdings. But after plundering likely comes hunger since high tech farming requires a vast business ecosystem that is unlikely to survive. Amish-style low tech farming requires significantly more land per bushel of output plus considerable expertise plus different ag-machinery capital (involving horses so there’s the required pasturage + woodlots for heat ).
The system is built on growth. We have had no real growth for at least 15 years, so it gets papered over with credit creation for the masses, while real assets flow to the top 1% over time.
The resolution is a debt jubilee, either planned and structured, or unplanned and chaotic. The ancients knew that too much debt is destructive, so the debt jubilees were planned and put on the calendar for all to see. That way both borrowers and lenders knew what they were getting into, and structured their transactions accordingly. The evil of Washington and the Federal Reserve is that they have structured a system that ignores the reality and the need for debt jubilees, and instead ties success to pulling tomorrow’s wealth forward into today through credit, and then hopes and prays that the real growth in the economy continues to support it all. At the same time, the system evolves away from a meritorious one where valued work is rewarded, and instead graft and cronyism bleeds down the vigor of the economy. So we end up where we are today, in a box with no good way out. In the meantime, the 70 year olds in charge try to “keep-things-going-just-a-bit-longer”. Their time frame and preferences are a bit different than those of the rest of us, sadly.
Very good! You’re only the second person I’ve ever heard that mentioned a debt jubilee. The first was Ray Dalio, who I think is the one of the smartest investors I’ve ever met. One other issue about growth. It used to be that growth brought jobs but technological growth is creating a surplus of unemployed who have to be fed and warehoused. So technology not only has the potential to drive down wages but it also may serve to increase taxes so we can feed the “forgotten brigade.”
One theory that has always been floating around is that war is the elite’s way to reduce the population of poor but fierce young males. Economic progress always seems to create untethered, underemployed hormonally active boys that can be sent off as “cannon fodder”. Tech is a modern version of the same old story. I am not sure how the theory can ever be proven or disproven.
Technology does change the career landscape and will have an effect on job availability but the most of those changes will be limited to large employers. Small bakeries, one and two man software development shops, the convenience store on the corner, the dentist’s office, the insurance agents and beauty shops may gain some efficiencies, they will all still need accountants to manage taxes, secretaries to handle the mail and file forms, answer the phones and lawyers to handle legal issues.
Only the very large firms will have the stability and wealth necessary to allow for the very expensive development of robotic systems or other automation techniques that technology offer.
Anyone with fewer than a hundred employees may be able to shed a clerk or two, but most small businesses just don’t have the business volume or stability necessary to automate.
Crony capitalism encourages government regulation that small businesses simply cannot handle. Most doctors are now employees working for hospitals or other medical providers instead of running independent offices and managing their own practices.
It is the growth of government bureaucracies and regulations that have the largest impact on jobs and employment, not technology per se.
You couldn’t be more wrong.
CNC machining is automation. It allows manufacturers large and small to run multiple machines with one man, and to produce parts complete that decades ago would have required secondary operations and more man-hours.
CNC machining is approachable even for small companies. A used piece of equipment can be had for $30,000 or less. A very good turning center with live tooling, just a few years old, for $100,000.
And of course this doesn’t even factor in the enormous benefits to all companies from things like the internet and affordable computing power — these things mainly benefit small employers, who can’t afford, say, an entire marketing department, but who can now easily outsource such functions to freelancers.
Seriously, the amount of debt in the world is unpayable. And that is before you get into unfunded entitlements and unvoted on government pensions. None of it is going to be paid for or out, so what happens then? War happens. You can already see the various players getting ready to go at it. And like a fire in the forrest, the survivors will have a nice bunch of nutrients (so to speak) to grow in. Man I would love to be the person that plugs ole Soros when the SHTF 🙂
Brandon Smith has some great essays on precicely this. He does on about once a week and is always well worth the read.
http://alt-market.com/
Does this mean my robot butler is going on hold?!
Time for a debt jubilee I think!
At least theoretically, interest rates go through the roof after a debt jubilee since no creditor can be sure that there isn’t another one right around the corner.
Maybe 🙂 But I notice that when various countries (e.g. Argentina) renege on their debt (an auto jubilee?) they get new credit at only a few point higher interest. The lenders are kind of stymied; if they don’t lend they don’t make any profits. So borrowers can wait them out…
There is no spoon.