Tag: news

Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.

In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally.

The only events due today in the US include the usual US weekly mortgage applications (up 1% this week compared to a -12.8% drop last week) and the monthly US budget statement estimated to post a $140 billion budget deficit. There will be no other major data releases across Europe or the US.

 

Overnight news bulletin from Bloomberg and RanSquawk

• US Representative Ryan said he and Senator Murray reached an agreement on the US budget deal and that the deal would reduce the deficit without raising taxes and would avoid a government shutdown in January.
• Looking ahead for the session there is a relatively light macroeconomic calendar with the release of the DoE inventories and a US 10y note auction.
• Today also sees the FTSE Quarterly rebalance which is due after-market where Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year and is expected to be replaced by the recently privatised Royal Mail.
• Treasuries steady, 10Y yield at 2.80% before U.S. sells $21b of the securities; yield 2.81% in WI trading after drawing 2.75% in November.
• Congressional negotiators are touting a U.S. budget accord that will ease the automatic spending cuts for the next two years, remove the risk of a government shutdown and cut the deficit by $23b
• Wall Street banks avoided their worst fears of the Volcker rule after regulators crafted the ban on speculative trading to leave market-making operations intact
• China’s stocks fell as investors speculated the government may cut growth targets at an economic policy meeting this week
• European Union finance ministers headed toward a showdown with the bloc’s parliament over a bank-failure fund as they struggled to put together a blueprint for their leaders to agree upon next week
• Royal Bank of Scotland Group Plc said Nathan Bostock resigned two months after becoming chief financial officer as Britain’s biggest government-owned lender struggles to return to profit
• Ukrainian activists swarmed into central Kiev, reclaiming the center of anti-government protests after an overnight police raid that left dozens injured
• Sovereign yields lower. EU peripheral spreads narrow. Asian stocks fall, Shanghai down 1.5%, European stocks mixed, U.S. equity index futures decline. WTI crude little changed, gold falls, copper gains

 

US Event Calendar

• 7:00am: MBA Mortgage Applications, Dec. 6 (prior -12.8%)
• 11:00am: POMO – Fed to purchase $1.25b-$1.75b in 2036-2043 sector
• 1:00pm: U.S. to sell $21b 10Y notes in reopening
• 2:00pm: Monthly Budget Statement, Nov., est. -$140b Central Banks

Market Re-Cap from RanSquawk

In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB, which is being lead lower by Mediolanum following a share placement, with DiaSorin also seeing losses as they are set to be removed from the FTSE MIB. In terms of sector specific movements, basic materials are the only sector in the red following an ebbing lower in gold prices after the recent rally. This move has also been exacerbated by reports that Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally. Looking  ahead for the session there is a relatively light macroeconomic calendar with the release of the DoE inventories and a US 10y note auction.

Asian Headlines

Asian-Pacific GDP growth is set to rise in 2014, according to an S&P report.

The Chinese government will likely maintain its targets of 7.5% for growth and 3.5% for inflation next year, according to Barclays.

S&P says India’s rating may come under pressure if parliament elections show hung result, new government unable to implement reforms.

Goldman Sachs says China’s state-owned enterprise reform may reverse stock underperformance.

EU & UK Headlines

Finance ministers from the biggest euro-zone countries reached a political understanding on SRM, but the final signoff will have to wait until next week.

Single Resolution Mechanism (SRM) board to be responsible for banks under direct ECB supervision and some cross border banks, according to a draft paper.

BoE’s Andy Haldane, head of financial stability, has called for a revival in the market for bundled-up debt in Britain.

French Non-Farm Payrolls (Q3 F) Q/Q -0.1% vs Exp. -0.1% (Prev. -0.1%)
French Current Account Balance (Oct) M/M -2.1bln vs Prev. -3.9bln (Rev. -3.6bln)

German CPI (Nov F) M/M 0.2% vs Exp. 0.2% (Prev. 0.2%)
German CPI (Nov F) Y/Y 1.3% vs Exp. 1.3% (Prev. 1.3%)

Italy PM Letta says is to aim for 1% economic growth in 2014 and 2% in 2015.

Germany sold EUR 4.38bln of 0% 2015 Schatz, bid/cover 1.7, prev. 2.2 (yield 0.21%, prev. 0.10%) and retention of 12.4% (Prev. 19.4%).

US Headlines

US Representative Ryan said he and Senator Murray reached an agreement on the US budget deal and that the deal would reduce the deficit without raising taxes and would avoid a government shutdown in January. US Senator Murray also commented, stating the the budget deal covers 2 years and added that extending unemployment aid isn’t part of the accord. The deal which is expected be voted on by Congress later this week also spurred comments from US President Obama who called the deal a good first step and that the budget pact clears path for critical investments. Obama further stated that the accord breaks the cycle of crisis-driven decisions but that it doesn’t incl
ude everything he’d like.

US Senate vote on confirming Janet Yellen to head Federal Reserve likely next week according to a Senior Democratic aide.

S&P forecasts the US economy expanding 2.6% next year, which is down from a prior forecast of 3.1%. S&P said it lowered it’s forecast for US GDP growth in light of additional sequester spending cuts in 2014 and also commented that low inflation in US means the Fed will likely taper its asset purchases slowly.

Equities

In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB, which is being lead lower by Mediolanum following a share placement, with DiaSorin also seeing losses as they are set to be removed from the FTSE MIB. In terms of sector specific movements, basic materials are the only sector in the red following an ebbing lower in gold prices after the recent rally. This move has also been exacerbated by reports that Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year, with the FTSE Quarterly rebalance due after-market. In terms of other stock news this morning, HSBC Holdings have agreed to sell its entire 8.0% shareholding in Bank of Shanghai to Banco Santander with the transaction expected to complete during first half of 2014.

FX

From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally, which has translated through into GBP/USD which is currently trading near the lows for the session. Furthermore, EUR/GBP is currently trading just below the 0.8400 handle and therefore could see some further movement in the pair during today’s session. NZD is still one of the underperformers for the session following overnight news that Fonterra maintained its 2013/2014 Farmgate milk price forecast at NZD 8.30/kg vs. some expectations of a hike, which pressured the currency as New Zealand exports around 90% of its dairy products.

Commodities

US API Crude Oil Inventories (Dec 6) W/W -7500k vs. Prev. -12400k
– Cushing Crude Inventory (Dec 6) W/W 693k vs. Prev. -58k
– Gasoline Inventories (Dec 6) W/W 6270k vs. Prev. -119k
– Distillate Inventory (Dec 6) W/W 1180k vs. Prev. 540k

The IEA monthly oil report raised forecasts for global oil demand growth by 145,000bpd to 1.2mln bpd for 2013 and by 110,000bpd to 1.2mln bpd for 2014. They see persistent upside risks to oil from both supply and demand sides of the market. This follows OPEC’s crude oil supply falling in November for a fourth straight month by 160,000bpd to 29.73mln bpd, led by losses in Libya. The IEA also stated that making room for Iran, after years of sanctions could be a challenge for other oil producers as non-OPEC supply rises.

North Korea has begun to sell large amounts of gold to China in a bid to tide over its economic crisis, according to multiple sources familiar with the nations affairs. Furthermore, according to South Korean government data, North Korea holds about 2,000 tons of gold reserves worth at least USD 8bln.

China refined copper production at 654,803 tonnes in November vs 637,958 tonnes in October

– China refined lead production at 386,973 tonnes in November vs 432,710 tonnes in October

Credit Suisse says gold’s modest rally is a chance to start new shorts.

* * *

DB’s Jim Reid concludes the event recap:

Yesterday was certainly a day that could have done with a bit of a touch-up to make it more exciting although news of a budget deal way after the US close is an important story. The interaction between the budget deal and markets is complicated though as many feel the Fed are more likely to taper if a deal is reached so these negotiations are not easy to interpret from the macro side. The deal was announced by Senate Budget Committee chair Patty Murray and House Budget Committee chair Paul Ryan. The terms of the 2 year agreement will set spending levels at $1.012 trillion for fiscal 2014, reversing a two-year decrease in spending, and increasing slightly to $1.014 trillion in fiscal 2015. The 2 year budget increases spending by $63bn compared with sequester spending levels. An extension of long-term jobless benefits, sought by Democrats, wasn’t included in the budget package. The cost of the near-term spending increases will be offset by spending cuts and tax increases over the next decade including $12.6bn higher security fees for airline passengers, $8bn in higher fees for federal insurance of private pensions, $6bn in reduced payments to student-loan debt collectors and $3bn saved by not completely refilling the nation’s strategic petroleum reserves. Another $12 billion of savings will come from reduced contributions to federal pensions, split evenly between military retirees and new civilian workers who start after Jan. 1. This last measure is a strong point of contention amongst Democrats (Washington Post).

The budget deal now goes to the House and Senate for approval. According to the WaPo, the House could stage a vote as soon as Thursday before they officially adjourn for the year on Friday. The Senate will vote before adjourning next week. There is no guarantee that the deal will be approved by both houses, though last night’s announcement did provide a rare display of bipartisanship on Capitol Hill. The level of spending increases and decade-long savings measures are relatively small at $63bn and $85bn respectively which may favour the odds of getting it approved by Congress. For the fiscal conservatives, the budget outlines a net $22bn in savings over the next decade but one could argue that the magnitude of spending cuts are fairly immaterial over a ten year time frame. For the liberals, the deal replaces sequester-level spending cuts, but approves spending at much lower levels than the Democrats had sought earlier in the year. If a deal is approved by Congress, it will likely avoid a government  shutdown in mid-January (and for the next two fiscal years), and would bode well for the next debt ceiling debate which is due early next year.

As mentioned above the interaction between the budget deal and markets isn’t likely to be straightforward. Indeed, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Outside of Asian equities, risk sentiment is a little firmer with S&P500 futures up 1pt or 0.1%. Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.

Outside of the US budget, it was a fairly dull day but we did note that the 800+ page Volcker rule text had little impact on banks – perhaps because of the long lead time to implementation (mid 2015).. This month’s Eurogroup/ECOFIN meeting ended inconclusively with no agreement on a Single Resolution Mechanism for banks but an additional meeting has been scheduled for 18th December, which is the eve of the next EU Leaders Summit. Finance ministers are also considering approving the creation of a common resolution fund that would become a last-resort fund after a transition period of 10-years.

Turning to the day ahead, Italian prime minister Enrico
Letta is expected to hold a confidence vote in parliament to confirm support for his reform agenda. Letta is expected to win the vote. The usual US weekly mortgage applications and the monthly US budget statement are the highlights on the data calendar. There will be no other major data releases across Europe or the US.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KTzbFDoVisE/story01.htm Tyler Durden

Submitted by Shannon Tiezzi of The Diplomat,

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Absni7IQT54/story01.htm Tyler Durden

Earlier, Deutsche Bank’s iconoclast Jim Reid dared to point out the painfully obvious: that something has drastically changed since the Great Financial Crisis (what that “something” is, is clear to all those whose year end bonus does is not contingent on never pointing out the printerphant in the room). This time around, instead of looking back, he looks forward, to the year 2014, and brings up the two questions nobody dares to ask: i) what happens if 2014 is the year when the recession can no longer be delayed, and ii) how will the Fed, already having doubled down on every last “bullet” in its arsenal, use monetary policy to provide a burst of growth when even $85 billion in flow per month is no longer enough…

From Deutsche Bank’s Jim Reid

The curveball for 2014 – A US recession

One topic no-one is really discussing is a US recession in 2014. We should start to at least consider the risk given the maturity of this cycle. By the end of 2013 this expansion will be 54 months old which is longer than the average of 39 months (median 30) since data started to be compiled on US business cycles in 1854. The average in the 100 years since the Fed was formed in 1913 is 50 months (median 42). This cycle is now the seventh-longest of the 34 cycles since 1854. Economists will explain that recessions don’t die of old age but because of imbalances that they might argue are not yet present. However consensus never forecasts a recession in advance so one has to find other ways to help us identify the end of the cycle. Across most other regions, business cycles have shortened post the GFC with many economies experiencing a dip into negative territory again sometime between 2011 and 2013 after the recovery in 2009 and 2010. A lack of policy flexibility (fiscal and monetary) post crisis is our main explanation. The US has just about escaped this due to extraordinary monetary and fiscal stimulus. However with both likely on the retreat at the same time in 2014 it’s prudent to acknowledge the already mature length of this cycle.

So the most obvious driver of financial markets in 2014 does seem likely to be how the Fed, the global economy and the market manage to handle the question of the QE taper. Whether the ECB need to implement negative deposit rates or introduce QE will also be a big driver. However experience teaches us that it’s not usually the obvious theme that ends up dominating in the following 12 months.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/H8UIc7BYIzc/story01.htm Tyler Durden

“The attitudes toward cannabis are shifting rapidly,” says a former DEA-agent-turned-pot-growing-company-lawyer, adding that “the potential social and financial returns are enormous.” As ironic as that maybe, perhaps it is why Uruguay has just become the first nation in the world to allow its citizens to grow, buy and smoke marijuana. As Reuters reports, the pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals. “Our country can’t wait for international consensus on this issue,” said one politician as demand is rising globally as the following chart shows…

 

DEA Agent becomes Pot-growing-firm lawyer… (via The Atlantic):

Patrick Moen is a 36-year-old former supervisor at the U.S. Drug Enforcement Agency, where, until recently, he led a team based in Portland that fought methamphetamine and heroin traffickers. 

 

Now, he is embarking on a career change. A rather dramatic one.  The Wall Street Journal reports today in a delightful article that Moen has become the in-house lawyer at Privateer Holdings Inc., “a private-equity firm that invests solely in businesses tied to the budding legal marijuana industry.”

 

In other words, the revolving door between business and government just made an unexpected, and very druggy, turn.

 

…

 

“The potential social and financial returns are enormous,” Moen told the Journal said of his new business. “The attitudes toward cannabis are shifting rapidly.”

 

Indeed they are.

As Uruguay appears to show (via Reuters):

Uruguay’s Senate is expected to pass a law on Tuesday making the small South American nation the world’s first to allow its citizens to grow, buy and smoke marijuana.

 

The pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals.

 

Cannabis consumers would be allowed to buy a maximum of 40 grams (1.4 ounces) each month from state-regulated pharmacies as long as they are over the age of 18 and registered on a government database that will monitor their monthly purchases.

 

Uruguayans would also be allowed to grow up to six plants of marijuana in their homes a year, or as much as 480 grams (about 17 ounces). They could also set up smoking clubs of 15 to 45 members that could grow up to 99 plants per year.

 

The bill, which opinion polls show is unpopular, passed the lower chamber of Congress in July and is expected to easily pass the Senate on the strength of the ruling coalition’s majority.

 

…

 

“Our country can’t wait for international consensus on this issue,” Senator Roberto Conde of the governing Broad Front left-wing coalition

 

Rich countries debating legalization of pot are also watching the bill, which philanthropist George Soros has supported as an “experiment” that could provide an alternative to the failed U.S.-led policies of the long “war on drugs.”

 

…

 

“This development in Uruguay is of historic significance,” said Ethan Nadelmann, founder of the Drug Policy Alliance, a leading sponsor of drug policy reform partially funded by Soros through his Open Society Foundation.

 

“Uruguay is presenting an innovative model for cannabis that will better protect public health and public safety than does the prohibitionist approach,” Nadelmann said.

But who is “using” the most…

 

 

So USA is #1 in something!!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6WabS7vqY6w/story01.htm Tyler Durden

“The attitudes toward cannabis are shifting rapidly,” says a former DEA-agent-turned-pot-growing-company-lawyer, adding that “the potential social and financial returns are enormous.” As ironic as that maybe, perhaps it is why Uruguay has just become the first nation in the world to allow its citizens to grow, buy and smoke marijuana. As Reuters reports, the pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals. “Our country can’t wait for international consensus on this issue,” said one politician as demand is rising globally as the following chart shows…

 

DEA Agent becomes Pot-growing-firm lawyer… (via The Atlantic):

Patrick Moen is a 36-year-old former supervisor at the U.S. Drug Enforcement Agency, where, until recently, he led a team based in Portland that fought methamphetamine and heroin traffickers. 

 

Now, he is embarking on a career change. A rather dramatic one.  The Wall Street Journal reports today in a delightful article that Moen has become the in-house lawyer at Privateer Holdings Inc., “a private-equity firm that invests solely in businesses tied to the budding legal marijuana industry.”

 

In other words, the revolving door between business and government just made an unexpected, and very druggy, turn.

 

…

 

“The potential social and financial returns are enormous,” Moen told the Journal said of his new business. “The attitudes toward cannabis are shifting rapidly.”

 

Indeed they are.

As Uruguay appears to show (via Reuters):

Uruguay’s Senate is expected to pass a law on Tuesday making the small South American nation the world’s first to allow its citizens to grow, buy and smoke marijuana.

 

The pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals.

 

Cannabis consumers would be allowed to buy a maximum of 40 grams (1.4 ounces) each month from state-regulated pharmacies as long as they are over the age of 18 and registered on a government database that will monitor their monthly purchases.

 

Uruguayans would also be allowed to grow up to six plants of marijuana in their homes a year, or as much as 480 grams (about 17 ounces). They could also set up smoking clubs of 15 to 45 members that could grow up to 99 plants per year.

 

The bill, which opinion polls show is unpopular, passed the lower chamber of Congress in July and is expected to easily pass the Senate on the strength of the ruling coalition’s majority.

 

…

 

“Our country can’t wait for international consensus on this issue,” Senator Roberto Conde of the governing Broad Front left-wing coalition

 

Rich countries debating legalization of pot are also watching the bill, which philanthropist George Soros has supported as an “experiment” that could provide an alternative to the failed U.S.-led policies of the long “war on drugs.”

 

…

 

“This development in Uruguay is of historic significance,” said Ethan Nadelmann, founder of the Drug Policy Alliance, a leading sponsor of drug policy reform partially funded by Soros through his Open Society Foundation.

 

“Uruguay is presenting an innovative model for cannabis that will better protect public health and public safety than does the prohibitionist approach,” Nadelmann said.

But who is “using” the most…

 

 

So USA is #1 in something!!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6WabS7vqY6w/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If you understand the difference between the first pair of shoes and the 25th, you understand why America’s debt-dependent consumer economy is doomed.

Yesterday I explained Why We’re Stuck with a Bubble Economy:

Now that interest rates are near-zero and mortgage rates are rising from historic lows, there is no more juice to be squeezed from low rates. Asset bubbles always burst, destroying collateral and rendering borrowers and lenders alike insolvent.

Without organic demand from rising real income and new households with good-paying jobs and low levels of debt, the consumer-debt based economy stagnates. This has left the economy dependent on serial asset bubbles that create phantom collateral that can support new debt, albeit temporarily.

The other critical dynamic is the marginal utility of additional consumption in a debt-dependent consumer economy. In an economy in which 49% of all residents (156 million people out of a total population of 317 million) receive a direct transfer of cash or cash-equivalent benefit from the central government, and millions of these people also receive cash and/or benefits from state and local governments (49% of Americans Get Government Benefits), poverty is relative rather than absolute for the vast majority of Americans.

The American economy is highly dependent on consumption. Household consumption accounts for about 35% of developing economies’ activity–roughly half of America’s 70% consumption economy.

As noted yesterday, with the earned income of the lower 90% of wage earners stagnant for four decades, America has enabled consumption by leveraging income and collateral into ever-rising mountains of debt.

The problem with debt, of course, is that it accrues interest, and that paying interest reduces the amount of income left to spend on consumption.

In this way, depending on debt to finance consumption is akin to the snake eating its own tail: at some point, the cost of servicing the debt reduces the income available to be spent on additional consumption to zero. Additional consumption becomes impossible without asset bubbles to temporarily enrich the households that own assets or “helicopter drops” of interest-free cash into household checking accounts.

This is how we have reached the point that a majority of U.S. households live paycheck to paycheck, as earnings are eaten up by essential bills and debt service.

Given that the majority of Americans already enjoy a considerable array of consumer goods and services, the only way to fuel more consumption is to entice consumers into buying more of what they already own or buy a replacement for a perfectly usable good or service. Let’s illustrate the concept of marginal utility with shoes.

To those with no shoes at all (a common enough occurrence in the 1930s Great Depression), the utility of one pair of shoes is extremely high: the utility (i.e. the benefits) resulting from owning that one pair of shoes is enormous.

Now consider an aspirational-consumer (i.e. someone striving to look wealthier and more successful than they really are) of the upper-middle class: this consumer might own several dozen pairs of shoes, and his/her problem is finding space for more shoes.

The retailer attempting to persuade this consumer to buy a 25th pair of shoes must overcome the diminishing utility (i.e. marginal utility) of yet another pair of shoes. This is accomplished by offering a “deal you can’t pass up” or appealing to the always pressing need to jettison last year’s style in favor of this year’s “new thing.”

Here’s the critical point of this dynamic: to the consumer who already owns so much stuff that he has to rent a storage facility to store all the surplus goods, the utility of any additional purchase is low. In practical terms, the utility has declined to the thrill of the initial purchase and the initial wearing/use of the new item. Beyond that, it’s just another pair of shoes in the closet.

To the manufacturer/retailer/government dependent on more sales for survival, the value of the first pair of shoes sold and the 25th pair sold are the same. The manufacturer/retailer needs to sell more shoes just to stay in business, and the government living off sales and other consumption-generated taxes also needs more sales.

In an economy in which most people have the essentials of life–i.e. the first pair of shoes with the highest utility–all consumption beyond replacing a hopelessly broken essential is of marginal utility.

An additional $1 of debt adds the same burden to the household whether it is spent on the first pair of shoes or the 25th pair. Taking on debt might make sense for the first pair of shoes, or the first bicycle, but it makes increasingly less sense for each additional pair of shoes or replacement bicycle: the debt piles up but the utility derived from the purchase is increasingly marginal.

The $3,000 I could spend on a replacement bike for the perfectly serviceable bicycle I bought used 15 years ago for $150 is of marginal utility; the better-quality parts and lighter frame, etc.–all the benefits that would flow from spending $3,000 for a “better, more modern” bike are extremely marginal to me, even though I put well over 1,000 miles a year on my bike. All those improvements are too modest to matter. This is the essence of marginal utility.

If you understand the difference between the first pair of shoes and the 25th, and the increasing diversion of income to interest payments that results from debt-based consumption, then you understand why America’s debt-dependent consumer economy is doomed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Eazwd_9MNbM/story01.htm Tyler Durden