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InvisibleBlack -> Another long-winded economic post... (5/16/2010 3:00:20 AM)
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[I know there's a small segment of people out there who are actually curious about what I think about the current economic situation, so I'm putting up something I wrote today. Pardon me for removing any incriminating links.]
It's another one of those long-winded economic posts. I know, it's been a while. Feel free to avoid it like the plague.
Things aren't pretty. I realize that there's a large crowd of people constantly trumpeting that they are, but it's a smokescreen. It's scary how much the statistics are manipulated now. No one I know working in the industry even uses the government numbers any more. A new industry has arisen around determining and providing real numbers for things like unemployment, GDP, inflation, and the like. That fact alone should scare the hell out of you.
So. Okay. Back here I said that pushing all this unsecured debt into the system would cause a "pop" and then when the stimulus was turned off, there'd be a crash. Over here I said that they were trying to re-ignite a low-interest rate, excess money supply "bubble". Admittedly, I said I didn't think it would work - but that if it did, when it imploded again, the next time around, we'd have a real Depression. Over here I said we'd probably be seeing riots in the streets by 2012.
Well - this is where we are now. They did manage to ignite another bubble. You're seeing riots in the streets. Admittedly, it never occured to me that it would be in Greece but my knowledge of the economic situation of southern European countries was sadly lacking at the time, except in a very general sense. It's somewhat improved since then.
My analysis is as follows:
Ben Bernake (Why does anyone ever listen to this idiot!? He's been wrong so consistently and so frequently it's astounding. Even a clock that doesn't work is right twice a day!) is doing exactly what Alan Greenspan did when the tech bubble burst. He's driven interest rates into the ground and is pushing money into the economy as fast as he possibly can. Greenspan's actions are now regarded as directly contributing to (or causing) the housing market bubble and crash. The bubble we're seeing now is even bigger. It's huge. It's terrifying.
All of this loose money was fed into the banking system by the Fed and what the banks (by which I mean the brokerage houses because they're now the same thing) did with it is they all stuffed it into the market. So the stock market is vastly inflated beyond all comprehension. None of it was loaned out to businesses or consumers. Those "record profits" the financial industry is reporting are all made from investing. None of them came from loans or financing or any economically productive activity. So the bankers are all speculating in the market with "free" government money. This should not make you feel secure. These are the same people who created credit default swaps and derivatives.
Better than 80% of all home loans in America are now in the hands of Fannie Mae and Freddie Mac - so none of the banks are now on the hook for any of the mortgage debt out there. You'll notice that Fannie and Freddie are back begging for another bailout since they're bankrupt.
The government has sucked a lot of the bad debt out there into itself. This is not a solution. Understand, it doesn't matter where the debt is in the economy - as long as that much debt exists, it's a problem, a drag on the system - and now that it's government debt, it can never go away. When it's private debt - if a company goes bankrupt that debt is wiped out and those resources are freed up to be put to better use. Government debt is forever. It has to be paid off since defaulting on your debt (for the U. S. anyway) is unthinkable. That means the system can never clear - can never come into equilibrium. You've locked in the malinvestment.
Across the pond, our friends in Europe are in worse trouble. The ECB has just violated its own rules and is "monetizing" member debt as fast as they can. They've borrowed Greenspan & Benrake's playbook and are buying up bad debt on the back end to bail out insolvent nations. I suspect that the euro is doomed - although it may take some time (i.e. years) for its death throes to play out. Just to put things in perspective, none of the major European powers (like France or Germany) now qualify for membership in the EEC (European Economic Community) based on the terms of the Maastrich Treaty.
That trillion dollars they just threw at Greece and Italy and the like is going to be wasted. You'll never see that money again. The sad part is, and everyone knows this, that money (just like the AIG bailouts were all funneled to other banks) isn't really going to those nations, it's immediately going right back out to pay off their creditors - who just happen to be the major European banks. It's really a bailout of the European banking community. It's a pretty rough deal to be telling your citizens that they're going to be taking a 30% loss to their livelihood in order to bail out foreign banks. (Does any of this sound familiar!?)
You remember a couple of years ago when I quietly said it might be a good idea to start buying gold and silver on the dips in price (pardon me if I don't look for the link)? Gold just hit an all-time high.
Look. I said it before. I'll say it again.
This isn't going to work.
You can see the cracks starting to form in the system. Wealth, real wealth, is starting to slide all over the place, looking for "safety". There is no safety. Nothing is safe. Not the euro, not the dollar, not treasury bills, not your bank account, not the loonie, not commodities, not bonds, not even "hard" currency. Fortunes are going to be made and lost as these things spike to crazy highs and crash to dismal lows. If you can deduce in advance where people think safety is and buy it up early, and then sell it when the money floods in and the price spikes, you can become rich beyond the dreams of avarice. Opportunities like this come along once every couple of generations.
Of course, you've got to have the money to invest - which is why the rich get richer. The poor get smashed like a bug since their "investment" is in whatever cash they have on hand and in their home - which they've saved up for and put money into all their lives.
(As an aside - the day before the "mini-crash" I sold out most of my long positions and bought gold. It was partially luck and partially a terrible unease looking at a variety of charts.)
We've probably got months of "bubble" yet to go. The "big boys" are nervous as all hell, though. That's why things are so volatile. You're going to see a lot of crazy fluctuations. We'll probably see a market "correction" of something like 20% after which we'll see a wild spike upwards as money floods in to "buy in" at a good price. Sometime after that we'll see a crash. A real crash. (Don't go shorting the market or anything based on my opinions, mind. I'm good at predicting what will happen, I'm terrible at timing it right.)
A while back I talked about a "negative multiplier rate". Normally, when the government prints a dollar, it cycles through the system multiple times and creates multiple dollars in the economy - this is the classic "multiplier rate". My theory on a negative multiplier rate is that you get to a stage where people are so worried that every time the government prints more money, rather than it being multiplied, people pull more money out of the system and that by printing money, the government is actually reducing the money supply. I got a lot of laughter for suggesting that one.
Well, if you look at the charts - the M1 money supply has spiked in ways that are scary. The government doesn't publish M3 statistics anymore, but other sources estimate it and M3 is falling steadily. M1 is the amount of actual "cash" in the system. M3 is money and all "money equivalents" such as money market funds, CDs, time deposits, etc. So the amount of dollars out there is going up, but the amount of "money equivalents" in the system is dropping. Why? Because people are pulling money out of the system faster than the government can put it in.
The reason why we haven't had hyperinflation even though the money supply has more than tripled is that the money isn't making it into the economy. The banks are sitting on it, or speculating with it - and what is out there is being used to buy "safe" things to "preserve wealth" instead of being invested in something that will increase productive value.
If the Fed tries to "unwind" this stimulus, we're going to have deflation - which is why they keep talking about it but at every FOMC meeting, they push back the date when they're going to do it.
So, how long can this go on? That's the big question. I don't know. Nobody does. As I've said before, we're breaking new and exciting economic ground here. Well. I'm excited. A lot of people I know are terrified. Best case, I'd say - they've bought themselves a couple of years. Worst case - end of the year the wheels come off.
Now, bear in mind, this might work if you took the year or so you've bought yourself and fixed things. Really fixed things. Then you could pull your loose currency out and have a smash (the smash part is inevitable) but have build a solid economic base out of it, so that after the crash you'd potentially have a period of significant growth. Since they're doing dick-all during this window of opportunity, when the money trick plays out and the bubble pops, it's going to be nasty - because there's no one bigger around with more assets to bail out the governments.
Look at it this way. First, back in the late 80s and early 90s - you had the small businesses needing to be bailed out. (Anyone remember the S&L crisis? Anyone? Bueller? Bueller?) Then at the end of the 90s and the early 2000s you had a lot of mid-sized firms smash. A couple of years ago it was the big firms that went under and needed money. Now you've got small nations and U. S. states going belly up and needing money. What comes next is that the big nations hit the wall.
The problem, as I keep saying, is too much debt. You can't solve this by moving the debt around or by taking on more debt. That's just crazy talk. If you reach into the pit to pull someone out, you only stand a chance if they weigh less than you do. If everyone else is in the pit and you reach in, you don't pull them all out - they pull you in.
There isn't enough money in the world to fund all this debt. That's the problem. Excuse me. I'm being imprecise. You can print all the money you want. There aren't enough resources in the world to fund all this debt. By taking it all in, by absorbing every crazy-ass mistake made by every inane greedy idiot in the world into the government, they've ensured that there's nowhere to hide when the whole thing goes bust.
Cheery, aren't I?
Actually, I love it. I'm in a great mood. First, in my heart I'm an economist and for someone like me, this is one of those situations where the big theories are made and broken. The global economy is a big lab experiment right now and we're getting real validation and testing of long-standing theories even as I type. Second, I'm crazy enough to think I can navigate this mess. I may be wrong, it's thrilling to try. After all, I can't possibly do worse than Alan Greenspan or Ben Bernake, can I?
Anyways, my guess - Greece is doomed. It looks to me like it's mathematically impossible for them to get out of their problems without defaulting. I suspect that the ECB came to the same conclusion - which is why they've bailed out all the banks holding that bad PIIGS debt. Whatever country bails on the euro first will come out the best (and possibly ahead). Whoever's stuck using the EMU near the end is screwed, blued and tattooed. Sometime after this pot boils over, the pound sterling will crash. Sometime after that, the dollar will go.
If the eager minds in the BRIC (Brazil, Russia, India, China) or "developing" nations can figure out how to put together something that will function as a new reserve currency, they may be able to cut the cords and sail away to prosperity but I wouldn't bet the farm on that. Not that I don't think they'll try - but they don't have the same experienced hands running their shows that built the vast financial empire that the Western world has run on for centuries - and you can't learn that kind of stuff on the fly in a few years. It took centuries to go from Adam Smith to J. P. Morgan. They might get lucky and produce some sort of economic or financial Napoleon however and usher in a new order.
Is this the end of the world? No. The global economy crashed before. Eventually things turned around. We did have a World War along the way. Are things going to be okay? For some people, yes. For others, no. The status quo is going to change and all this effort to keep things "the way they were" is going to fail and relying on things being "the way they were" isn't going to work. If your livelihood is based on the status quo - odds are you're in trouble. If you're in a position where whatever the new system is will support you, you'll be fine. How do you know where you are? Well, that's the trick now, isn't it?
Ah, it's 5:00 AM and I've blathered on enough. Time for bed. Brace yourself. We're headed into the lightning round where the prices can really change.
'Night.
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