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Saturday, November 16, 2013

Who are the savers being harmed?

Karl Denninger explains QE and its consequences for the economy:
Let's simplify "QE" and "low interest rates" generally into the most-basic view -- a lending transaction for $100,000.  We'll say, for the sake of argument, that this is to buy a house, although the purpose of the loan is not really material.  We'll further start with an interest rate of 7% -- not particularly high in the historical context, nor particularly low....

We'll take this $100,000 and borrow it for 30 years @ 7%.  This produces a payment of $661.44 per month for 360 months (30 years of 12 months each.)  The total paid is $238,119.87 over that time, so just over $138,000 is paid in interest, or just over $4,100 a year on average (this is misleading, however, as at the start of the loan most of the payment is interest and that falls off over time.)  We will further assume that this 7% rate reflects a reasonable return for the risk that you will not pay and that inflation will occur -- that is, the rate is negotiated between the lender and borrower using all known facts and no lies or distortions.

Now let's assume we "lower rates" (by any mechanism) but the risk does not materially change.  We lower them to 4% by employing "QE".

The payment is now $475.83, or a total of $171,298.51 over 30 years.  Note that approximately $65,000 in interest was saved by the borrower... The borrower saves that $66,821.36 and can thus spend it on something else but every one of those dollars is not collected by the lender and thus he cannot spend them.

Net benefit?   Uh uh. 

Every dollar benefiting one person comes out of someone else's back side.

Remember that Bernanke and Yellen have admitted that "savers might be harmed somewhat" by these policies.  They want you to think of "savers" as the little old lady who is stupid and has all of her money in CDs at the local bank -- indeed, Yellen, Bernanke and Congress have even used that precise example.

But in fact that is intentionally misleading too.

Who do you think actually owns all that paper?  For example, the FHA, Fannie and Freddie paper?

Let me give you a hint: If you have an interest in some sort of "stable" means of income or support against catastrophe, ordinary or otherwise, you can find one of the persons who own that paper by getting up and going into the bathroom, staring into the mirror!

Are you a teacher?  Firefighter?  Cop?  Have any sort of pension at all?  Have a life insurance policy?  An annuity?  Have any sort of insurance at all?

That is where all those loans are.  They're in bond mutual funds, they're in insurance companies, they're in pension plans and they're in various entities that have long-dated obligations -- because these are long-dated instruments.
This is why the pension plans and cities are all going bankrupt now. Their fate was obvious several years ago, and mathematically sealed long before that, but those preordained consequences are now coming to pass because QE is continually devouring the value of their remaining assets.

Keynesian manipulation of the economy has always been a short-sighted strategy dependent upon putting off today's pain until tomorrow and counting on dying before tomorrow dawned. The magical thinkers don't understand this; they simply cannot fathom why something that worked yesterday isn't working today, hence their prescriptions for more of the same even when the same is causing the very problem they are intent on solving.

It's interesting, because I've yet to hear anyone even attempt to describe a scenario where QE will be successful. All I've ever heard is that "we'll stop when the economy magically recovers".  Okay, fine, but that raises the obvious question: as a result of what?  People can't spend money they don't have. People can't use credit they can't repay. People can't retire on bankupt pensions.

It appears Mr. Keynes's long run has finally arrived.

Labels:

76 Comments:

Anonymous Steveo November 16, 2013 9:13 AM  

Krugman's, Greenspan's, Bernanke's, et al, faces are destined to be in history's picture of these economic events. It's a picture of scoundrels reading the goat entrails of the times; there's nothing they can do about it except blame others. Goat guts & Keynes... No different: flawed model, flawed results... note that they tolerate no feedback mechanism to adjust the plan. Blame is the liberal nation's final product. I hope you like your blame sandwich dry as there will be no condiments.

For those not paying attention, Krugman's blame is "we didn't spend enough, so it's your fault not mine."

Blogger Nate November 16, 2013 9:21 AM  

well see.. you really can smother a fire with gasoline if you just use enough gasoline... and apply quickly enough.

Anonymous Idle Spectator November 16, 2013 9:39 AM  

Look, all we have to do to solve this problem is massage these numbers like I made 2 + 2 = 37. Similar to "Assume a rational market..." in the economics models.

It will work.

Anonymous Cryan Ryan November 16, 2013 9:41 AM  

Here is what torques me about the younger folks whining about how bad they've been screwed by the boomers.

Youngsters often hold the following two beliefs...

a) Boomers have outrageously overpriced retirement pensions that we young folks will have to pay...

b) The pensions held by the boomers are on the verge of collapse, as the math is impossible...in other words...they cannot and will not be paid for...

Okay kids. You can't have it both ways. You can't cry and stamp your feet and complain about how the boomers have it made and are spending your money....and at the same time saying the money really isn't there.

BTW... I love Karl's blog and have read him every day for years. And agree with him.

It just appears to me the boomers have screwed themselves, not the younger folks who can't pay.

Seriously, today's kids cannot even take care of themselves. Who among the ilk can seriously state they can take care of the boomers?

Anonymous Stilicho November 16, 2013 9:43 AM  

In a credit based economy, creation of new credit is essential for systemic growth. Nate would have a point if cash were being created at a rate that would replace the previous rate of credit expansion. As it is, inflationists rely on the disproven monetarist theory of credit creation.

Anonymous dh November 16, 2013 9:43 AM  

People can't use credit they can't repay.

Really?

Anonymous Idle Spectator November 16, 2013 9:46 AM  

Who among the ilk can seriously state they can take care of the boomers?

Well... I can. But my plan involves lye and a shovel.

Anonymous Roundtine November 16, 2013 10:24 AM  

Youngsters often hold the following two beliefs...

a) Boomers have outrageously overpriced retirement pensions that we young folks will have to pay...

b) The pensions held by the boomers are on the verge of collapse, as the math is impossible...in other words...they cannot and will not be paid for...

Okay kids. You can't have it both ways. You can't cry and stamp your feet and complain about how the boomers have it made and are spending your money....and at the same time saying the money really isn't there.


A. True on several levels. Level 1 is the straight up pension, social security and Medicare costs. Until there's talk of means testing benefits or changing the CPI, the costs will be borne by higher debt or more borrowing, which will fall on younger people eventually. Level 2 and above are the high prices young people must pay, such as home prices.

B. Also true. The question is, when they collapse, what happens? Maybe some people do with less, but many may go on to SS and Medicare, see A.

Right now younger people are getting screwed in every way possible. There are high taxes to support entitlements and healthcare spending, Obamacare being the latest log on the back. Perhaps the final straw, we shall see. Meanwhile, the Fed is propping up asset prices. Stocks, bonds, homes, etc. pricing them out of the reach of younger workers. Now, when the market collapses, there may be Boomers selling their homes for 50% less to younger people, and selling stocks yielding 8-10% to younger savers, but we're not there yet. Right now young people are paying for lavish retirements for government workers and they're paying for everyone else's retirement with SS and Medicare, and Boomers get to keep their inflated homes and stocks, not needing to sell them off and send prices crashing because they rely on SS and Medicare for the bulk of their expenses.

Anonymous Harsh November 16, 2013 10:29 AM  

well see.. you really can smother a fire with gasoline if you just use enough gasoline... and apply quickly enough.

Dynamite works much better, Nate.

Anonymous Harsh November 16, 2013 10:30 AM  

It just appears to me the boomers have screwed themselves, not the younger folks who can't pay.

Nah, baby boomers screw every generation. They simply don't give a fuck.

Anonymous Godfrey November 16, 2013 10:33 AM  

An ideologue will never question his ideology because his ideology is the core of his being.

We don't have capitalism. The accumulation of capital - saving - has become meaningless. I don't receive a return on my savings because the Fed (i.e. the banker cabal) literally creates fiat money out of nothing. This act by the Fed devalues my "capital".

Fiat currency is incompatible with capitalism. Capitalism requires... capital. It requires a store of value.

Anonymous Steveo November 16, 2013 10:39 AM  

Nate, scale up the analogy... with a fire burning across all of New Jersey. Every square inch on fire.

It's the consequences are the problem, even if you could get enough gas to try & deliver it...
first, gas costs somebody something (real dollars & opportunity costs)
second, there would be gas everywhere... severe toxic fallout would occur w/ long term effects.
third, you solved one immediate problem while leaving the underlying causes & re-ignition is highly likely.
fourth & perhaps most importantly, most everyone would wonder why you put the fire out since it was NJ.

Anonymous DonReynolds November 16, 2013 10:40 AM  

The Keynesian cure for a cold has been taken up by hypochondriacs as a daily health habit and the normal dosage steadily increased until it crowds out the better elements of a healthy diet and becomes a mania.

Now the government has become a junkie with a full-time habit, some very serious health issues, and a personality of reckless abandon and obscure heavy metal, mixed with Satanic worship and skinhead Nazi social policy. Even the government's best friends are wishing it would just go somewhere else and die quietly, without causing too much fuss, anxious of what this goverment might attempt do once it realizes that time is indeed short. Let's all hope the fever ramps up soon and calms them down, but we need to consider the use of poison as a last humane gesture for an old friend.

Anonymous Anonymous November 16, 2013 10:43 AM  

Okay kids. You can't have it both ways. You can't cry and stamp your feet and complain about how the boomers have it made and are spending your money....and at the same time saying the money really isn't there.

I'm not one of the kids, but sure you can: the money isn't there because the boomers have already spent it. And now they're writing IOUs to themselves and spending that.

Whether they "have it made" depends on whether they die before it runs out, I guess; but they've had an awfully pleasant few decades. I still remember the early 80s, when it was common knowledge that Social Security didn't even pay enough to keep a person alive, and non-rich retired people regularly had to choose between food and medicine. Today, many retired people I know -- none of them rich when they were working -- have a second home, or at least a share in a vacation home. They treat their SS checks as spending money. They can afford all that because they were set up with sweet pension plans at a time when money was being generated on credit and thrown in that direction.

Blogger Jamie-R November 16, 2013 10:44 AM  

I'm interested in minimum wage. Now, if you went from $9 to $15, it may hurt the share price, but apart from that, it hurts who? The profit goes on or it does not.

Anonymous Joe Doakes November 16, 2013 10:52 AM  

People don't understand when I tell them the movie "Dumb and Dumber" is not a comedy but a political allegory for Congress and Social Security. Just wait a bit until Congress has to admit that there is no money in the lockbox, only IOUs from the General Fund.

"See this IOU? That's your pension. Might want to hang onto that one. It's only an IOU but it's a good as money sir. My colleague and I have every intention of paying your pension as soon as the magical recovery occurs."

.

Anonymous RC November 16, 2013 10:57 AM  

The other side of this coin is that those savers who were depending upon their capital for $x/month of income now receive $x/5/month instead. What are they to do? Most end up spending close to the $x/month anyway, effectively eating their seed corn, probably widows whose husbands worked to save for retirement, only to see the income-producing ability of their savings plummet from every perspective.

Our current society feeds the ants to the grasshoppers, thereby decreasing any incentive to put in the hard work to become an ant. Rare is the man who needs no incentive to become all that he can become, to produce all that he can produce.

The man who puts capital to work today takes on increasing risks, only one executive order or clueless law or unjust legal decision or one IRS audit from financial disaster. I have built a substantial list of good and productive men who've ended up in prison or stripped of their assets. The most productive are stripped of their assets every quarter in amounts that are unconscionable. I know another who's built a substantial health insurance company who knows not whether he'll even survive the Obamacare changes. And the world turns, crushing its most productive.

Anonymous Harsh November 16, 2013 11:02 AM  

I'm interested in minimum wage. Now, if you went from $9 to $15, it may hurt the share price, but apart from that, it hurts who? The profit goes on or it does not.

The two out of every five people who lose their job because of the wage increase.

Anonymous Cryan Ryan November 16, 2013 11:04 AM  

My point remains.

Young people may decry the generous pensions promised to boomers (and many middle aged folks) but as Denninger points out, those pensions CAN NOT AND WILL NOT be paid.

So you younger ilk need to just not worry your empty little heads about paying for something you can not and will not pay.

Your mission needs to be more on the order of.... How am I going to take care of myself??

Your government is determined to screw you, using whatever tactics available. Mostly, they are using divide and conquer, entitlement mentality, destruction of the family, and the takeover of the healthcare industry.

You would be better off worrying about how you can take care of yourselves, than to worry about how you cannot possibly pay for pensions that cannot possibly be paid.

This is Denninger's basic message...what cannot be paid..won't.

By definition then, you don't get credit for paying for something you cannot and will not pay.

Now get off the computer and go do something.

Blogger Jordan179 November 16, 2013 11:12 AM  

It's interesting, because I've yet to hear anyone even attempt to describe a scenario where QE will be successful. All I've ever heard is that "we'll stop when the economy magically recovers". Okay, fine, but that raises the obvious question: as a result of what?

Technological progress, basically. As new technologies such as thorium fission, nuclear fusion, advanced robotics, fabricators, and nanotech assembly are deployed, they will greatly increase economic efficiency and hence overall wealth. HOWEVER ...

... we are currently increasing our debt far more rapidly than the likely growth rate from technological progress, and what's more, technological progress requires active investment the wealth for which our debt is draining.

So it may not save us if we don't halt the slide off the precipice. It may, instead, help some other countries which have managed their economies better than we have managed ours, and we may wind up as later adopters of the new technologies, after going through a protracted economic agony.

Blogger Positive Dennis November 16, 2013 11:13 AM  

The social security pensions can be paid with modest reforms. Denninger agrees with this. This reforms will be made. Medicaid on the other hand ....

Anonymous Harsh November 16, 2013 11:17 AM  

Now get off the computer and go do something.

And troll ban in 3, 2, 1...

Anonymous Harsh November 16, 2013 11:22 AM  

OT: Nate, when's the next ATF show?

Anonymous aaaaturkey November 16, 2013 11:26 AM  

What use is saving if it doesn't translate into increased productive capital so that future production is higher?

Western industrial base and productive industry has been shrinking and resources have been grossly mis-allocate.

Debts that can't be repaid won't be (eventually...)

IOU's that are undeserved won't be delivered.

Anonymous Blaster November 16, 2013 11:36 AM  

Interesting thesis about the effects of QE but there is a weakness in the basic premise, specifically that all lending transactions (all economic transactions in general?) are zero-sum. What he says is true when there is no net value in "moving money", but not when there is.

A bank loan is designed to limit risks to a lender. Lenders trade the opportunity to earn surplus value in the transaction (for example, a house that quadruples in value) to borrower in return for the borrowers commitment to repay the full dollar amount loan plus interest. Denniger appears to dismiss this as "inflation", which may or may not be the case.

Contrast with a stock investment, where the risks and potential rewards are shared more evenly between the investor and the company.

Denniger's argument does not seem to account for this at all.

Anonymous Roundtine November 16, 2013 11:41 AM  

You would be better off worrying about how you can take care of yourselves, than to worry about how you cannot possibly pay for pensions that cannot possibly be paid.

The best thing you can do to take care of yourself is to move overseas.

Anonymous Cajin November 16, 2013 11:42 AM  

Even if a pension plan is doing rather well, the governments at both the federal and state level are determined to confiscate it to pay for other things. And when they say pay for other things, they mean that they will outsource the money to their cronies.

Anonymous Jack Amok November 16, 2013 11:44 AM  

It just appears to me the boomers have screwed themselves, not the younger folks who can't pay.

The worst damage the Boomers have done is not economic, though they have done a very great deal of damage there. Their worst crime is the destruction of so many institutions. Political institutions were iffy enough when the Boomers took over, but they ran them straight into the toilet. Banks and Stock Markets are similar. But other institutions, from business to churches to the Boy Scouts, Boomers have cut a swatch of destruction across American society like no other. They haven't just sucked up all the money, they've wrecked society. When they're dead and gone, before we can even begin to rebuilt prosperity, we'll have to rebuild the basic framework of society and learn how to get along with one another again.

Anonymous Roundtine November 16, 2013 11:44 AM  

Technological progress, basically. As new technologies such as thorium fission, nuclear fusion, advanced robotics, fabricators, and nanotech assembly are deployed, they will greatly increase economic efficiency and hence overall wealth. HOWEVER ...

... we are currently increasing our debt far more rapidly than the likely growth rate from technological progress, and what's more, technological progress requires active investment the wealth for which our debt is draining.


Think of the 1930s. Automobile still spreading. Radio, places still with no electricity. A depression seems impossible with so many growth opportunities ahead of it. Too much debt will mess up any economy.

Anonymous LES November 16, 2013 11:47 AM  

The federal tax rates on income tax, Social Security and Medicare have not gone up. The federal government borrows what it wants. State and local governments cannot borrow money to operate but they can and do raise taxes, especially property taxes which hurt retired homeowners the most.

Businesses don't hire workers they don't need. If the minimum wage goes up they won't let people go if they need them. Otherwise why are they keeping them now?

Harsh is a Vox wannabe and a troll.

Blogger ashepherd November 16, 2013 11:55 AM  

I'm interested in minimum wage. Now, if you went from $9 to $15, it may hurt the share price, but apart from that, it hurts who? The profit goes on or it does not.
Raising the minimum wage has the opposite effect of what politicians intend because they don't grasp basic economics.
Politicians intend that the poor, unskilled workers will earn more. But businesses are not stupid, at least the ones that survive aren't. It's a simple matter of common sense. The businesses can't afford to pay unskilled labor the higher wage and stay in business so they stop hiring the unskilled labor thus increasing the population of the out-of-work poor. I didn't make this up. Read a few of the more classic economic texts.

Anonymous LES November 16, 2013 11:59 AM  

If businesses stop hiring unskilled labor then they didn't need them in the first place.
Are businesses altruistic?

Anonymous VD November 16, 2013 12:06 PM  

People can't use credit they can't repay.

Really?


To be more precise, most prospective borrowers won't take on debt they know they can't repay. Hence the problem known as "pushing on a string". That's the problem with a debt money system. You can print paper. You can't print borrowers.

Anonymous Anonymous November 16, 2013 12:07 PM  

Maybe a better way of phrasing it is "they will stop hiring legal unskilled labor"

-Andy

Anonymous Harsh November 16, 2013 12:07 PM  

Businesses don't hire workers they don't need. If the minimum wage goes up they won't let people go if they need them. Otherwise why are they keeping them now?

Harsh is a Vox wannabe and a troll.


Nah, I know I could never be Vox. So if employees don't get let go when wages go up, why not just pay everyone $100,000 a year and make everyone happy?

Anonymous Harsh November 16, 2013 12:11 PM  

If businesses stop hiring unskilled labor then they didn't need them in the first place.

There's a false premise in your logic that companies only hire the employees they need and not the employees they can afford.

Anonymous Josh November 16, 2013 12:20 PM  

To be more precise, most prospective borrowers won't take on debt they know they can't repay. Hence the problem known as "pushing on a string". That's the problem with a debt money system. You can print paper. You can't print borrowers.

And prospective borrowers who would take on debt they know they can't repay aren't borrowers the banks want to lend to.

Anonymous Roundtine November 16, 2013 12:28 PM  

If businesses stop hiring unskilled labor then they didn't need them in the first place.
So why are businesses pressing Washington to increase the number of unskilled immigrants coming into the country, at the same time unemployment is at 40 year highs? I can buy the minimum wage argument in a closed economy, but not one where they're actively trying to push down wages by bringing in more unskilled labor.

Anonymous LES November 16, 2013 12:37 PM  

" I can buy the minimum wage argument in a closed economy, but not one where they're actively trying to push down wages by bringing in more unskilled labor."

Exactly. As Vox has pointed out, labor is subject to the Law of Supply and Demand." If there was a labor shortage then wages would go up. The reason you don't hire all the workers you can afford is that it not efficient. Who would pay 10 workers to do the work that only required 8 workers?

Anonymous LES November 16, 2013 12:42 PM  

" I can buy the minimum wage argument in a closed economy, but not one where they're actively trying to push down wages by bringing in more unskilled labor."

So, without a minimum wage how far down could wages be pushed?

Anonymous Mike M. November 16, 2013 12:44 PM  

The pensions will be paid...but the money won't be worth much. QE is the classic recipe for inflation...as we are seeing in food prices, gas prices, and is now showing in the stock market.

Anonymous Roundtine November 16, 2013 1:30 PM  

So, without a minimum wage how far down could wages be pushed?

Welfare creates a better wage floor now. People exit the labor market. Without welfare, but with open borders, they'd ship in boatloads of Bangladeshis to work for whatever they work for in Bangladesh. Or maybe less, since conditions in the U.S. would be better.

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Anonymous DonReynolds November 16, 2013 2:13 PM  

You would be better off worrying about how you can take care of yourselves, than to worry about how you cannot possibly pay for pensions that cannot possibly be paid.

Roundtine....."The best thing you can do to take care of yourself is to move overseas."

I wish it were that easy. But I do not know of anyplace where there is a government that would not steal everything you have of value to try to save even a few desperate people when things begin to go badly. When things become difficult, there is no government that will not confiscate what they feel they need to save a few percent of their own people from starvation. If you are a foreigner, there is very little reason to respect your right of private property or even your right to life, for that matter.

Anonymous Harsh November 16, 2013 2:13 PM  

So, without a minimum wage how far down could wages be pushed?

Only to just above the point where workers would refuse to do the job for that wage. For unskilled positions they would likely be considerably below minimum wage.

Anonymous Harsh November 16, 2013 2:17 PM  

The reason you don't hire all the workers you can afford is that it not efficient.

Your second false premise is that all companies operate efficiently.

Anonymous DonReynolds November 16, 2013 2:51 PM  

In ancient Rome, the primary cause of economic distress for the ordinary citizen was slaves. Employers found foreign slaves (mostly war captives) to be cheaper, even if one had to purchase many times more, than to hire Roman citizens. The government tried to officiate this conflict by requiring employers to hire a certain percentage of free laborers as opposed to slaves, but it was difficult to enforce, as you might imagine. We have the same situation today (only worse actually). We still have the foreign slaves imported for slave wages, but with the added issue that the foreign slave's wages are subsidized by the welfare system. The present slave owners do not have to house or feed their own slaves, that is done out of the public treasury nowadays. But the biggest difference between slavery in ancient times and the present is the modern slave owners want their slaves to be able to vote, so as to continue their own welfare subsidy. Ancient slave owners did not insist on making foreign slaves into voting citizens, except occasionally by merit or adoption. It was certainly much more of a selective process than what the US Chamber of Commerce has in mind.

Anonymous kh123 November 16, 2013 4:34 PM  

"Lenders trade the opportunity to earn surplus value in the transaction (for example, a house that quadruples in value) to borrower in return for the borrowers commitment to repay the full dollar amount loan plus interest."

Right, but (iirc) as has been brought up here before, lenders aren't realtors. Having underwater homes on their books, whether as a result of a direct loan or as a MBS, has been something of an albatross that they've apparently been trying to write off ever since.

Blogger Whiskey November 16, 2013 5:18 PM  

Vox, QE is of course, being done on a similarly massive scale in China. The FT calls it financial repression, the idea of screwing over savers to benefit debtors. In China's case, the massive SOE and the princelings who run them. Yesterday the FT had an article on how China's massive infrastructure expansion results in empty cities and roads to nowhere so the princelings and those under them can skim off part of the money. While eroding ordinary people's wealth. Savings rate in China like here are net negative, you lose money by saving in a bank.

This has profound implications. It means a Chinese or Craigslist "black" economy, where people scrounge around for off-book money/employment, view government (correctly) as a gang of thieves who have power, nothing more, and loss of any patriotic or communal spirit, save whipped up media hysteria over foreigners (a feature of Chinese life).

Moreover, QE DOES NOT WORK. Dirt cheap interest rates merely prop up assets in financial and commodity markets. DIRT CHEAP ENERGY is another thing. All of a sudden, lets imagine gas at say $1 a gallon, consumers have more money in their pockets. Can afford big vehicles, distant homes, and energy inefficient things. Businesses face much lower operating costs, because energy prices flow through everything.

Clinton had far higher interest rates than this clown, but had oil at or below $20 a barrel for much of his Presidency.

I will conclude that the US being "diverse" and hugely welfare dependent with a massively over-leveraged princeling class of our own, also needs fairly high growth rates just like China to maintain social peace. For China that has historically been 8%, growth is now projected to officially 7% and real terms probably 5%. For us we need AT LEAST 4% growth rate.

I fear both countries are facing rivers of blood. To quote Enoch Powell. Over what else, money?

Anonymous bob k. mando November 16, 2013 5:22 PM  

Cryan Ryan November 16, 2013 11:04 AM
So you younger ilk need to just not worry your empty little heads about paying for something you can not and will not pay.


fine.

now what about the $10 TRILLION in debt you assholes ( and the Greatest Generation before you ) have saddled us with? we're NOT going to pay that either? we're NOT going to suffer a currency collapse or hyperinflation or any other major financial disruption because of that?

you assholes went out and shit all your money away on Harley-Davidson's and second homes in Florida and expecting to live til 90 never earning a dime after you turn 65. is that really going to work? of course not. but it's not going to stop you clowns from spending my money ( via T-bills ) trying to make it happen.

Anonymous DonReynolds November 16, 2013 5:26 PM  

Thanks, Whiskey. Very good analysis.

Anonymous Rock Me Not Unlike A Hurricane November 16, 2013 6:18 PM  

"If you are a foreigner [viz., an American overseas], there is very little reason to respect your right of private property or even your right to life, for that matter."

If you are white, you are already a foreigner right here at home, so what difference does a little extra risk make? Plus if you choose the right place, better food and architecture, for a while at least. The invaders will still be the same predictable, dull-eyed color of shit, but at least they'll be babbling in Arabic, which hurts American ears less than ebonic ghetto-yapping and naco monkey-Spanish. And it'll be somebody else's language they'll be destroying, not yours.

Anonymous Too-Soon-ami November 16, 2013 7:21 PM  

DonReynolds: there is no government that will not confiscate what they feel they need to save a few percent of their own people from starvation. If you are a foreigner, there is very little reason to respect your right of private property or even your right to life, for that matter.

You really think that when revenue and bond sales dry up, the US government, or most of the States, will respect your rights to property or life? How about in 10 years, when the Left demographically controls the vote? Do you think the only "haircut" we will take, will be from our 401Ks and savings accounts over $100,000, when every dollar earned and every parcel of land already "takes a haircut" every year?

When the dollar collapses, the sensible thing would be to quickly disband the federation, thereby nullifying the debt. Unfortunately, 90% of Americans have no sense, and will cling desperately to their dying dragon until it no longer breathes fire.

And "Rock Me", when the Philippines get their internet turned back on, they're going to be deeply offended by your name. I love it.

Blogger Jamie-R November 16, 2013 7:24 PM  

Pursuant to my post and run before, what are your thoughts on the McDonald's situation, Vox? It impacts a lot of people. To me, being one on the wages scheme, I obviously pursued the highest in the city and got it, but apart from less employment, are wage fights always bad in a capitalist economy? Is that globalism in a nutshell, pursuing the worst nations to lower wage costs, or can it work in the first world, the balance of profit and decent wages. I know employment numbers are affected by wages, but what I care about is citizens having some purchasing power.

Anonymous Dr. Kenneth Noisewater November 16, 2013 8:22 PM  

When the dollar collapses, the sensible thing would be to quickly disband the federation, thereby nullifying the debt. Unfortunately, 90% of Americans have no sense, and will cling desperately to their dying dragon until it no longer breathes fire.

My hope is that Texas secedes when this comes to a head, and that the progressive coastal states are happy to see it go. Perhaps Texas can secede and Puerto Rico can become a state, and the US flag would need no modification.

Anonymous Geoff November 16, 2013 8:26 PM  

Disband the federation? I hope. More afraid of sdr replacing the dollar.

Anonymous Dr. Kenneth Noisewater November 16, 2013 8:29 PM  

Incidentally, the minimum wage is a fail for a number of reasons, but the most obvious is: businesses won't pay more than a task is worth economically, so they'll adjust the role to fit the cost (adding more work to the better employees in order to fire the worse ones), or else they'll automate the task and eat the upfront capex (and get some nice writeoffs for awhile) in order to squeeze out the labor expense. So a fast food restaurant will go from say 10 workers on a shift (manager, 3 cashiers, 4 cooks, 2 cleaners/sweepers) to 4 workers (manager/engineer, technician, 2 cleaners/sweepers), 2 of which are paid more for more skills, in order to maintain payment systems (cashier replacements) and food prep machines.

The world's history of schemes to fix wages and prices is an unending story of complete failure when those wages and prices vary too far from the actual economic value of those things. Why is It Different This Time?

Anonymous Stilicho November 16, 2013 8:48 PM  

In order to achieve a Keynesian stimulus of a credit-based economy, one must expand credit. The Fed has tried and failed (it cannot print what the banks consider credit worthy borrowers). Direct monetary expansion could, in theory, substitute for credit expansion, but only if the rate of increase is sufficient to replace or exceed the former rate of credit expansion. Otherwise, the economy stalls and slips into deflation since there is no more nominal expansion to suppress the effects of the prior credit expansions. Moreover, to the extent it does succeed, it runs a very real risk of being concentrated in a limited area creating a bubble (e.g. stock market) no less than the last major credit expansion was responsible for the housing bubble.

Anonymous DonReynolds November 16, 2013 9:04 PM  

DonReynolds: there is no government that will not confiscate what they feel they need to save a few percent of their own people from starvation. If you are a foreigner, there is very little reason to respect your right of private property or even your right to life, for that matter.

Too-Soon-ami....."You really think that when revenue and bond sales dry up, the US government, or most of the States, will respect your rights to property or life? How about in 10 years, when the Left demographically controls the vote? Do you think the only "haircut" we will take, will be from our 401Ks and savings accounts over $100,000, when every dollar earned and every parcel of land already "takes a haircut" every year?"

Read more carefully. There is NO government that will not confiscate what they feel they need, and YES, that includes the US Federal government, any one of the fifty state governments, county government, and municipal government. And NO, your property rights are by no means guaranteed in the USA, once the SHTF. We are incomplete agreement on that point but I am not sure that you agree there is no safe place for expats to escape to with their money. Rich foreign citizens are even easier to mug than your own citizens.

Anonymous Too-Soon-ami November 16, 2013 9:47 PM  

Don: We are in complete agreement on that point but I am not sure that you agree there is no safe place for expats to escape to with their money.


We agree on both. I thought you were discouraging expat'ing because maybe they would be safer at home. The enormity of US debt, the growing masses of shit in our Melting Toilet, and the lust for asset seizure already present in all levels of govt, make me think it will be worse.

My assumption is that wealthy expats would have already learned their lesson, and keep their assets in several off-offshore locations, so their jealous new neighbors can't easily steal them. Being non-US citizens would make that much easier to pull off.

The idea that Americans should seek refuge in a foreign nation is revolting.

Anonymous Carlotta November 16, 2013 10:15 PM  

@ DonReynolds and Roundtime

DR is right. Many other countries are nothing like the US. The racial, cultural, class and familiy ties are way tighter.
If you can account for it that is one thing. Like a spouse from the area or moving their long ago.



Anonymous dh November 17, 2013 12:03 AM  

To be more precise, most prospective borrowers won't take on debt they know they can't repay. Hence the problem known as "pushing on a string". That's the problem with a debt money system. You can print paper. You can't print borrowers.

I suppose there's always the helicopter of redistribution...

I am not finely read and educated in economics or the competing theories. I see these things happening:

1. The ONLY juice that politicians have to say that the economy isn't really terrible is the stock market. The elevated prices in the stock market prop up banks, prop up Wall Street, prop up those little old ladies who diversified their investments away from just CD's. But, why is this bad? Corporations are overvalued by historical ratios of price/earnings and other such factors, but if everything else in the world is bad, especially currency based investments, stocks may be safer, and so why is this necessarily bad?

2. QE at all are transfers from the saver generations to the working and and middle class. Isn't this good?

3. Isn't the US able to borrow money right now at very very low rates?

Anonymous Eric Ashley November 17, 2013 12:17 AM  

When I hear the Right complain about Minimum Wages, I wonder which does more damage to the economy, the great subsidies or the gov't telling Jack's Plumbing Shoppe they have to hire Steve the Cashier for eight bucks rather than six bucks. And then I wonder why they whine way more about minimum wage than farm subsidies, and then the question answers itself because such whining is not really about rational economic motives, its about the fun and joy of sneering at the less skilled or less moral. If the Right wants to beat minimum wage down, which would be a good idea, they have to first prove they are trustworthy by taking the bankstas and the corporats outside, and putting them out of power, which probably means killing a few of them.

Point Deux. In a thoroughly rigged economy, could someone please tell me what the natural wage is to being a cashier?

Anonymous bob k. mando November 17, 2013 2:42 AM  

Eric Ashley November 17, 2013 12:17 AM
If the Right wants to beat minimum wage down, which would be a good idea, they have to first prove they are trustworthy by taking the bankstas and the corporats outside



you DO understand that Obama and the Clintons are every bit as bought and paid for by the bankstas as McCain and the Bushies are, right?

Anonymous Eric Ashley November 17, 2013 5:16 AM  

Yes, of course. Then again, I'd say the GOP has a small advantage.

You're saying that this is hopeless tilting at windmills and the Right yelling about M. Wage is because its an actual possible victory? Interesting. Still disagree with it as strategy.

Anonymous PhillipGeorge(c)2013 November 17, 2013 7:12 AM  

Hey Vox.
I don't expect 1/1000 people walking the streets could give you a working definition difference between Commonwealth and Communism.
In a perfect vacuum of rational perspective it doesn't matter what people call themselves. Left right central pan trans or supra:- It's all only meaningful if you can reference yourself to something intelligible. Given most people, can't it's gibberish.


Anonymous Stilicho November 17, 2013 7:44 AM  

1. The ONLY juice that politicians have to say that the economy isn't really terrible is the stock market. The elevated prices in the stock market prop up banks, prop up Wall Street, prop up those little old ladies who diversified their investments away from just CD's. But, why is this bad? Corporations are overvalued by historical ratios of price/earnings and other such factors, but if everything else in the world is bad, especially currency based investments, stocks may be safer, and so why is this necessarily bad?

They want you to think of "savers" as the little old lady who is stupid and has all of her money in CDs at the local bank -- indeed, Yellen, Bernanke and Congress have even used that precise example.

But in fact that is intentionally misleading too.

Who do you think actually owns all that paper? For example, the FHA, Fannie and Freddie paper?

Let me give you a hint: If you have an interest in some sort of "stable" means of income or support against catastrophe, ordinary or otherwise, you can find one of the persons who own that paper by getting up and going into the bathroom, staring into the mirror!

Are you a teacher? Firefighter? Cop? Have any sort of pension at all? Have a life insurance policy? An annuity? Have any sort of insurance at all?

That is where all those loans are. They're in bond mutual funds, they're in insurance companies, they're in pension plans and they're in various entities that have long-dated obligations -- because these are long-dated instruments.


2. QE at all are transfers from the saver generations to the working and and middle class. Isn't this good?

It isn't generational. You seem to think of it as a wealth tax, and to a certain extent it is. However, it's primarily a transfer from those with long time preferences to those with short time preferences. Thou shalt consume. Now. Additionally, QE is a tax on every dollar in existence and every dollar that will be earned in the future (by those non-savers among others) through dilution of value and transfer of that diluted amount to the issuer of the currency.

3. Isn't the US able to borrow money right now at very very low rates?

Somewhat, but this is largely distorted by the fact that the U.S. isn't actually borrowing that much because the Fed is monetizing the bulk of the deficit right now. This also distorts the rates at which the U.S. can borrow to the extent it does some borrowing (i.e. selling treasuries to market, not Fed), which leads to market distortions and bubbles which, historically, have catastrophic results (it encourages more borrowing and increased debt and increased debt service payments, not just rolling over older, higher cost debt into lower rate debt). At some point interests rates will rise and the debt service costs can explode beyond the ability of the government to pay. At which point, those working for a living will have to bear an even greater burden through higher taxes on their earnings or via the "hidden" tax of further dilution of the value of their earnings through more money printing.

Anonymous E. PERLINE November 17, 2013 7:59 AM  

My information to date has it that it takes a year and a half of red tape (minimum) to open a business, plus substantial money for overlapping licenses

The cold turkey cure is to cut taxes by half and erase 90% of government regulation and licensing. Do that, and the economy will bloom. I believe the American people are still capable of doing that. But alas, it's only a dream.

Anonymous E. PERLINE November 17, 2013 8:13 AM  

Another thing. My social security payments are less than $500 a month. This was paid in far more expensive dollars. Medicaid was not paid for at all. It comes from the general fund.

Blogger James Dixon November 17, 2013 8:20 AM  

> for example, a house that quadruples in value

Houses don't quadruple in value. Only in price,

> Isn't the US able to borrow money right now at very very low rates?

I'd have to check to be sure, but my understanding is that non-fed debt purchases have pretty much dried up.

Anonymous dh November 17, 2013 9:15 AM  

Houses don't quadruple in value. Only in price,

Of course they do. I have a 5 bedroom house. But it's just me. Then I get a wife and four kids.

Anonymous dh November 17, 2013 9:15 AM  

JD, that's an important point.

Anonymous Stilicho November 17, 2013 9:30 AM  

Value is subjective at all times, in all places. Exhibit A:

Of course they do. I have a 5 bedroom house. But it's just me. Then I get a wife and four kids.

Alas, labor theory of value, we hardly knew ya, you smelly turd-polisher.

Anonymous John Regan November 17, 2013 10:55 AM  

Yves Smith has a really good post from a day or two ago, although I was on top of this subject way before that. Not that it matters, because Japan:

http://strikelawyer.wordpress.com/2013/11/16/deflation/

The way to address a debt deflation is to address the debt. As in cancel it. That's terrifying in many ways because it changes so much, but it's all going to be changed eventually anyway, so we might as well get it out of the way and move forward in an economically healthier environment. As it is we are just going to stagnate like Japan has for two decades, and it changes nothing except the timing, by dragging everything out.

It's no wonder that there has been a popular fascination with zombies, people who are really dead but act alive. It's a metaphor for our economic condition.

Anonymous bob k. mando November 17, 2013 1:34 PM  

dh November 17, 2013 9:15 AM
Of course they do. I have a 5 bedroom house. But it's just me. Then I get a wife and four kids.



that's not a change in the inherent 'value' of the house, it's a change in the amount of 'utility' that YOU get from the house. '# of occupant' impact on comparative market value is nonexistent.

Blogger Poppop November 19, 2013 3:01 AM  

>>> All I've ever heard is that "we'll stop when the economy magically recovers". Okay, fine, but that raises the obvious question: as a result of what?

Doesn't matter what. When deus ex machina does arrive to fix things, post hoc ergo propter hoc will rationalize all the decades of QE. See, we took the long view and we fixed it.

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