Tag: finance

Despite a trillion dollars of credit spewed into the Chinese ‘economy’ speculative finance channels, Manufacturing remains in a slump as April’s China PMI tumbled to 49.4 after a brief bounce back up to 49.8 (from the 48.0 low in Feb). This is the 14th month in a row of contraction. As Caixin reports, relatively weak market conditions and muted client demand contributed to a further solid decline in staff numbers, which seems to put a nail in the coffin of anyone who believes recent price action in industrial commodities is anything but speculative fervor.

 

Commenting on the China General Manufacturing PMI data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

“The Caixin China General Manufacturing PMI for April came in at 49.4, down 0.3 points from March’s reading. All of the index’s categories indicated conditions worsened month-on-month, with output slipping back below the 50-point neutral level. The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn.”

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Authored by Ben Tanosborn,

 

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by David Haggith

 

The question begs for conspiracy theories to satisfy it, but one might more aptly say that central banks beg for conspiracy theories to explain them, since they operate in the shadows while being given charge of all the financial systems of all the world’s greatest economies. Central bankers have the unchaperoned power to create the greatest fortunes ever known to mankind at will and to invest it wherever they want. With trillions of dollars at their disposal and trillions more whenever they want to conjure it into existence, what is to stop them from cornering every market on earth?

 

Capitalist central banks have become ultimate central planners

 

Why would we even think central banks wouldn’t manipulate all markets to the benefit of their own member banks when two Fed officials have stated that by intention the Fed’s FOMC was front-running the stock market to create a “wealth effect”? (Apparently the “wealth effect” is to make the wealthy vastly wealthier because that’s what happened; I certainly haven’t seen any wealth trickling into my bank account as a result of this overt manipulation of markets.)

We used to have regulations that prevented banks from investing in stocks (and thereby central banks from indirectly manipulating the stock market by giving money to their member banks to invest). Next, the Fed will be deciding what companies to favor. Maybe they already do.

What if another corporation like GM that is too big to fail is failing? Is there any reason this time around that central banks should tell us they are going to bail it out by buying up its stocks now that central-bank intervention is standard procedure? (The Fed would argue to congress, “It was important we did that quickly and secretively so as not to create a massive market scare that could have jeopardized the recovery.”)

Anything is justifiable if it necessary for “the recovery.” The Fed, of course, wouldn’t buy those stocks directly; but will it’s member banks suddenly start sweeping up some company’s stocks with money the Fed creates as it nudges them to spend the money in that direction?

How would we know? Nudges that happen between major bankers at Federal Reserve board meetings are unseen as they are not a part of corporate reports that would explain why a large national bank suddenly bought a great deal of one company’s stock. “It just looked like a good investment for us.”

Through the decades-long process of deregulating, we removed those important barriers and have created a free-for-all between banks and markets. Central banks have the power to create unlimited amounts of money in a single day, based solely on their own discretion, with no supervision by any other entity as to what they are doing. They create that money as deposits ex nihilo in banks that know where the money is intended to go. (Where the money should go can be agreed upon as gentleman and gentlelady over a martini and cigar with no public record other than “met to discuss corporate default problems.”)

 

Central banks run their national economies unsupervised by anyone

 

Seriously? You think they’re supervised? By whom? Certainly not by congress here in the US. Congress merely asks the head banker some questions and then lets the Federal Reserve continue on with whatever its bankers were doing. We audit corporations, and government even audits the government; but the largest financial institution on earth runs audit-free year after year, decade after decade, as congress grandstands in feigned outrage at times and at other times listens in awe, but always defaults to merely trusting the Federal Reserve. Always.

If you were corrupt, wouldn’t you naturally try to get on the board of the largest financial institution on earth that never gets audited and has the power to create as much money as it wants to out of thin air to give to your bank with one the provisos that it keep inflation in check and keep jobs looking halfway respectable?

There is nothing to stop the Fed — nor probably most central banks — from deciding to create $100 billion in the accounts of its member banks, saying, “We’ll deposit this money when you show us you’ve purchased that much in oil from companies being hit the worst.” There is no risk for the bank or the Fed because it was all free money anyway. They just suddenly own lots of oil.

If there are any barriers still standing to that sort of thing, how would we or congress ever know if those barriers were being respected when congress never audits the Fed and accepts anything it says as sufficient for congressional oversight? It is in that sense that I say there is really nothing to stop central banks from soaking up all the oil for sale in the oil market right now. How would anyone ever know if they bought oil through corporate banking proxies or through other central banks who used their own proxies?

That is exactly what the Fed overtly did with US government bonds, so why not oil? They were front-running the bond market by saying to their member banks, “If you buy these government bonds, we’ll buy them directly from you the next day. That way we are not breaking the law by directly buying the government’s debt, and then we’ll create as much money in your reserve account as what you spent on the bonds plus half a percent.”

What a joke! How is that simpleton’s shell game not directly buying the government debt? As soon as you start telegraphing to banks that you will buy government bonds off of them overnight for a half a percent profit to the bank (called front running the bond market) on a no-risk deal for the banks, you know banks are going to leap to do that.

You’re creating the market for the bonds. You’re not just soaking up the banks’ bonds. The fact that you passed the bond through someone else’s hands is no different than money laundering. It’s bond laundering. “NO, we didn’t finance the government. We bought up some old government bonds that some of our banks no longer wanted.” Yeah, right.

This the Fed did overtly for years.

What a charade … and no one cared … other than a few readers of The Great Recession Blog, Zero Hedge, and other similar sites. Most didn’t bat an eye. The same thing was happening with stocks for the entire past seven years (and still is happening as the Fed reinvests its money). Even though the Fed originally denied it was pumping up the stock market; recently two major Fed board members admitted the Fed was front-running the stock market, and still few cared. It’s no surprise to anyone because most people knew that is where much of the Fed’s free money was going.

 

Are central banks manipulating the oil market?

 

Therefore, it should not seem like any big conspiracy theory, when you see total nonsense pricing (bad news is good news) in the oil market to ask, are central banks now moving on to doing the same thing in the oil market?

Why wouldn’t they? 1) What’s to stop them? 2) Clearly US banks that are members of the Federal Reserve System are being hurt by the oil price war, so the Fed can justify this as another “intervention” they need to do to save their own banks from collapsing due to bad loans throughout the oil industry.

Two more oil company’s declared bankruptcy this week. Week by week, a storm surge is building up against banks that are heavily invested in this industry:

 

The bankruptcies are continuing fast and furious across the energy sector.With the ill-effects spreading beyond just the oil and gas business — evidenced by major renewables firm SunEdison filing for Chapter 11 last month.

 

But the U.S. E&P [exploration and production] sector still remains one of the biggest unknowns when it comes to bad loans. With numerous observers having recently warned about a big wave of defaults coming in this space.

 

And a new data point late last week suggests we may be reaching a tipping point.

 

That came from leading American investment bank JPMorgan. Which said in an SEC filing Friday that its holdings of potentially bad loans took a major jump over the past quarter. JPMorgan reported on its holdings of “criticized” loans — a term used in the banking industry to refer to “substandard or doubtful” debts … leapt by 45 percent over the last quarter — to $21.2 billion as of March 31. (Oilprice.com)

 

Over twenty billion of bad debts — most of it in oil companies! That number beats many of the big bankster bailouts during the worst of the Great Recession for size. That’s just one major bank, and those are only the loans the banks is showing as bad. How many other loans does JPMorgan have that are not in some stage of default but that are with oil production companies that are sinking fast?

How bad is the pinch on other banks that invested in the oil sector? Read the “panic index”:

 

Little-reported but extremely critical data point for the oil and gas industry emerged yesterday. With insiders in the debt business saying that risk levels in the sector have risen to unprecedented levels.

 

That came from major ratings service Moody’s. With the firm saying that one of its proprietary indexes of credit problems in the oil and gas sector has hit the highest mark ever seen.

 

That’s the so-called “Oil and Gas Liquidity Stress Index”. A measure of the number of energy companies that are facing looming credit problems because of overextended debt…. In fact, that level is now considerably worse than seen during the last recession…. “This progression signals that the default rate will continue to rise as the year progresses.” (Pierce Points)

 

You may recall there was a commodities crash in energy prices running into the Great Recession, too. In other words, the pain is just beginning. The squeeze will get tighter.

What better way to keep some of these companies out of default (and thereby keep the banks who financed them out of trouble) than by getting the price of oil back up a little? So, would the Federal Reserve become proactive to support these American companies that are pressing major US banks into perilous situations, now that it is accustomed to massive interventions and financial inventions as daily procedure?

Might that explain why the price of oil goes up, regardless of what happened at Doha?

Maybe that is exactly what the surprise, “expedited” meetings of the Federal Reserve were about shortly before the Doha meeting and what the Fed’s rushed closed-door meeting with the president and vice president was about — what to do when Doha failed (as they knew it would, given Saudi Arabia’s overt statements). As anyone knew it would if they were willing to see straight.

If not the Fed, then why not some other central bank in some country where a major bank is being crippled by the oil price crush? A bank that could fall on others and create a domino effect if it fell.

Central banks are so grossly out of control with no elected oversight and unlimited financial power to create money and decide where it goes, that I have to ask, is it possible that there are no honest markets left anywhere? How would we know? No one ever gets to see inside the central bank’s inner workings to know. Just how completely have the banks taken control of every aspect of the economy — or, at least, of every aspect they care to control?

 

But you cannot manipulate markets forever

 

Suppose some central bank somewhere decided to buy up oil through proxies to keep the price rising, in spite of all risks, in order to keep a few of its major member banks from going bankrupt due to exposures even more extreme than the one known about and admitted above.

As a result, the producers keep producing because someone keeps buying. The price keeps bubbling upward, which saves some companies and their banks for the time being; but also entices more producers to come back on line. Prices keep going up, regardless, and even though Saudi Arabia and Russia actually increase production, too.

In such a situation, you might expect to see headlines, such as the following:

 

“Oil Rallies On As Traders Ignore Red Flags”

 

No matter how much crude oils stocks around the world rise, prices keep rising because of the price intervention. Oil tankers stack up at sea, but the prices keep going up. You start to wonder if the market is rigged. Why are so many speculators betting that the price of oil can go up forever? You start to think of the US housing market in early 2007 when everyone thought housing could defy gravity and climb forever.

Then one day you read a headline like …

“Rotterdam Tanks are Full: All tankers being sent back out to sea”

A week later, you read the same thing in Oklahoma and other parts of the world.

Sooner or later reality butts in. Price manipulation causes distorted markets and only accelerates the problem because falling prices didn’t result in supply correction. Instead, the prices themselves, get corrected, and supplies follows the money … until it the money had nowhere left to go. You cannot buy oil at any price — regardless of how low — if you have nothing to put it in.

Game over … just as it was for housing in the last half of 2007.

 

Bonds, stocks, the oil market — they all look as rigged right now as the Arizona Republican Convention where Trump, who won the vast majority of votes in the Arizona primary, got almost none of the delegates. The party will make sure their guy wins no matter what in order to protect the party establishment from the rogue. And “the establishment” is largely Wall Street — mostly banks.

That’s why it is is time to, above all else, vote against the establishment in either party, top to bottom.

Exxon, Chevron, PetroChina, Conocophillips, all reported heavy losses. Who are they banking with? Are they simply too big to fail?

 

from The Great Recession Blog

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Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

Last week the House Armed Services Committee approved an amendment to the National Defense Authorization Act requiring women to register with Selective Service. This means that if Congress ever brings back the draft, women will be forcibly sent to war.

The amendment is a response to the Pentagon’s decision to allow women to serve in combat. Supporters of drafting women point out that the ban on women in combat was the reason the Supreme Court upheld a male-only draft. Therefore, they argue, it is only logical to now force women to register for Selective Service. Besides, supporters of extending the draft point out, not all draftees are sent into combat. 

Most of those who opposed drafting women did so because they disagreed with women being eligible for combat positions, not because they opposed the military draft. Few, if any, in Congress are questioning the morality, constitutionality, and necessity of Selective Service registration. Thus, this debate is just another example of how few of our so-called “representatives” actually care about our liberty. 

Some proponents of a military draft justify it as “payback” for the freedom the government provides its citizens. Those who make this argument are embracing the collectivist premise that since our rights come from government, the government can take away those rights whether it suits their purposes. Thus supporters of the draft are turning their backs on the Declaration of Independence.

While opposition to the draft is seen as a progressive or libertarian position, many conservatives, including Ronald Reagan, Barry Goldwater, and Robert Taft, where outspoken opponents of conscription. Unfortunately, the militarism that has led so many conservatives astray in foreign policy has also turned many of them into supporters of mandatory Selective Service registration. Yet many of these same conservatives strongly and correctly oppose mandatory gun registration. In a free society you should never have to register your child or your gun. 

Sadly, some opponents of the warfare state, including some libertarians, support the draft on the grounds that a draft would cause a mass uprising against the warfare state. Proponents of this view point to the draft’s role in galvanizing opposition to the Vietnam War. This argument ignores that fact that it took several years and the deaths of thousands of American draftees for the anti-Vietnam War movement to succeed.

A variation on this argument is that drafting women will cause an antiwar backlash as Americans recoil form the idea of forcing mothers into combat. But does anyone think the government would draft mothers with young children?

Reinstating the draft will not diminish the war party’s influence as long as the people continue to believe the war propaganda fed to them by the military-industrial complex’s media echo chamber. Changing the people’s attitude toward the warfare state and its propaganda organs is the only way to return to a foreign policy of peace and commerce with all.

Even if the draft could serve as a check on the warfare state, those who support individual liberty should still oppose it. Libertarians who support violating individual rights to achieve a political goal, even a goal as noble as peace, undermine their arguments against non-aggression and thus discredit both our movement, and, more importantly, our philosophy.

A military draft is one of — if not the — worst violations of individual rights committed by modern governments. The draft can also facilitate the growth of the warfare state by lowing the cost of militarism. All those who value peace, prosperity, and liberty must place opposition to the draft at the top of their agenda. 

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Three months ago the Fed released its Fourth Quarter “Senior Loan Officer Opinion Survey on Bank Lending Practices”, which revealed something ominous. It showed that in Q4, lending standards tightened for the second consecutive quarter. This was a problem because as Deutsche Bank pointed out at the time two consecutive quarters of tightening Commercial & Industrial loan standards “has never happened before without it signalling an eventual move into recession and a notable default cycle. Once we have 2 such quarters lending standards don’t net loosen again until the start of the next cycle.”

As of today, we now have three consecutive quarters of tightening lending standards. In fact, based on the latest survey, net lending standards tightened even more than during Q4 as shown in the chart below, and are now the tightest on net since the financial crisis. Needless to say, if a recession and a default cycle has always followed two quarters of tighter lending conditions, three quarters does not make it better.

This is what the Fed said:

On balance, a moderate net fraction of banks reported a tightening of lending standards for C&I loans to large and middle-market firms over the past three months. Meanwhile, only a modest net fraction of banks reported tightening lending standards for C&I loans to small firms. Banks reported that they tightened some C&I loan terms for large and middle-market firms: A moderate net fraction of banks reported that they had increased premiums charged on riskier loans, a modest net fraction of banks reported that loan covenants had tightened, and most other terms to such firms remained basically unchanged on net. Banks reported mixed responses regarding changes in loan terms for small firms. A majority of the domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers as important reasons. Meanwhile, a significant net fraction of foreign respondents reported a tightening of lending standards for C&I loans.

In other words, credit availability is bad and getting worse, and may explain why the ECB had no choice but to shock the credit pipeline into action when Draghi announced that the ECB would monetize corporate bonds (and soon enough, junk bonds).

And while our focus looking at this data is on the implied probability (based on historical precedented, now at 100%) of a recession, Bank of America’s high yield strategist Michael Contopoulos is looking  at the implications of continued lending tightness on the credit market, where he has been uncharacteristically gloomy for many moths. This is what he said:

Banks tightening their grip on lending

 

Today’s Senior Loan Officer Opinion Survey on Bank Lending Practices confirmed several of our concerns from last year; that in the face of deteriorating corporate fundamentals, a weak economic outlook, industry specific woes in the commodity space and global markets that have been volatile, banks would pull back the reins on lending. Below we highlight some of the details of the report that we think are relevant when considering the durability of the post February 11th high yield rally.

• The two best predictors of the US default rate are C&I lending and the proportion of downgrades to upgrades within high yield. With both deteriorating over the last several quarters our model now suggests a default rate over the next 12 months of 5.4%. We note, however, that the model this time last year forecast a 2.7% default rate yet with the high degree of Energy defaults, we have actually realized a 5.3% rate as of April 30th. It stands to reason, then, that our model, usually highly accurate in its calculation, could be understating the actual default rate over the next 12 months. We think there is upside to our forecast of 5-6% this year, and caution investors that non-commodity defaults are also likely to rise absent a complete opening of capital markets.

• The survey noted that banks tightened their lending standards on C&I and commercial real estate loans while enforcing material adverse changes clauses or other covenants to limit draws on existing Energy credit lines. Late last year and earlier this year we wrote that one of our fears was that regional banks in areas hit hard by the energy rout would be less willing to lend than before the collapse in oil. Our theory has been that as banks set aside reserves for their Energy exposure, they will tighten lending standards in other areas. Sure enough, the survey noted that “on balance, banks indicated a spillover from the energy sector onto credit quality of loans made to businesses and households located in energy-sector-dependent regions.” As these areas of the US experience further hardship, we expect the quality of borrower to deteriorate and lending standards further tighten in these regions. This likely means the one area of lending strength, the consumer, could begin to realize tightening later in the year.
• Demand also waned for C&I loans, as large and middle market firms in particular noted decreased investment in PPE and a decline in financing needs for M&A, accounts receivable and inventories. In our mind, a lack of demand could prove to be indicative of an economy that has not only stalled, but one in which corporate CEOs and CFOs lack confidence in. Additionally, with little capex to cut, deteriorating assets, a labor market that is both tight and unproductive, and a bank lending environment that is becoming harder to leverage, we wonder how long it will be before corporates begin to cut headcount.

The survey noted that a “majority of the domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers” as the reason for tightening. As we read this statement, our first thought is that the problems are not just an Energy story any longer.

What all of the above means is simple: either lending standards will ease or the Fed will have no choice but to do what the ECB has done, and jam the credit channel open by actively backstopping bond – and loan – issuance. Either that, or the central banks will have to engage in more coordinated commodity manipulation attempts, since at the very core of the deteriorating lending standards is the collapse in the oil price which in turn has forced banks to collapse revolver availability and halt future issuance until they have some visibility on where the price of oil stabilizes.  Perhaps instead of monetizing loans, Yellen will covertly greenlight whoever is the global activist central bank du jour, with a mission to monetize enough oil to push it another $10-20 higher. At that point we will eagerly look forward to Saudi Arabia’s response as crude above $50 will mean virtually the entire shale patch is back online.

On the other hand, if just like the BOJ last week the Fed does nothing , we have little reason to doubt the historical precedent in which case the countdown to the next recession can officially begin.

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Submitted by Gail Tverberg via Our Finite World blog,

There are many who believe that the use of energy is critical to the growth of the economy. In fact, I am among these people. The thing that is not as apparent is that growth in energy consumption is dependent on the growth of debt. Both energy and debt have characteristics that are close to “magic,” with respect to the growth of the economy. Economic growth can only take place when growing debt (or a very close substitute, such as company stock) is available to enable the use of energy products.

The reason why debt is important is because energy products enable the creation of many kinds of capital goods, and these goods are often bought with debt. Commercial examples would include metal tools, factories, refineries, pipelines, electricity generation plants, electricity transmission lines, schools, hospitals, roads, gold coins, and commercial vehicles. Consumers also benefit because energy products allow the production of houses and apartments, automobiles, busses, and passenger trains. In a sense, the creation of these capital goods is one form of “energy profit” that is obtained from the consumption of energy.

The reason debt is needed is because while energy products can indeed produce a large “energy profit,” this energy profit is spread over many years in the future. In order to actually be able to obtain the benefit of this energy profit in a timeframe where the economy can use it, the financial system needs to bring forward  some or all of the energy profit to an earlier timeframe. It is only when businesses can do this, that they have money to pay workers. This time shifting also allows businesses to earn a financial profit themselves. Governments indirectly benefit as well, because they can then tax the higher wages of workers and businesses, so that  governmental services can be provided, including paved roads and good schools.

Debt and Other Promises

Clearly, if the economy were producing only items for current consumption–for example, if hunters and gatherers were only finding food to eat and sticks to burn, so that they could cook this food, then there would be no need for the time shifting function of debt. But there would likely still be a need for promises, such as, “If you will hunt for food, I will gather plant food and care for the children.” With the use of promises, it is possible to have division of labor and economies of scale. Promises allow a business to pay workers at the end of the month, instead of every day.

As an economy becomes more complex, its needs change. At first, central markets can be used to facilitate the exchange of goods. If one person brings more to the market than he takes home, a record of his credit balance can be kept on a clay tablet for use another day. This approach works as long as the credit can only be used at that particular market. If the credit balance is to be used elsewhere, or if the balance is to hold its value for a period of years, a different, more flexible approach is needed.

Over the years, economies have developed a wide range of debt and debt-like products. For the purpose of this discussion, I am including all of them as debt, broadly defined. One type is what we think of as “money.” Money is really a portable promise for a share of the future output of the economy. It can provide time shifting, if this money is held for a time before it is spent.

Another type of debt is a loan with a fixed term, such as a mortgage or car loan. Such a loan provides time shifting, allowing something to be paid for over a significant share of its life. Equity funding for a company is not really a loan, but it, too, allows time shifting. Those purchasing shares of stock do so with the expectation that they will be repaid in the future through price appreciation and dividends. It thus acts much like a loan, for the purpose of this discussion. There are many other types of promises regarding future funding that are closely related–for example, government loan guarantees, derivatives, ETFs, and government pension promises. All indirectly add to the willingness of people and businesses to spend money now–someone else has somehow made promises that remove uncertainty regarding future income flows or future payment obligations.

The Magic Things Debt Does

It is not immediately obvious how important debt is. In fact, neoclassical economists have tended to ignore the role of debt. I see several, almost magic, ways that debt helps the economy.

1. Debt brings forward the date when an individual or company can afford to purchase capital goods. Without debt, the only way to afford such a purchase would be to save up the full price in advance. Using debt, a business can add a new machine to allow it to produce more goods before the business saves up money from its prior operations. A young person can afford to buy a house or car, long before he could save up funds for such a purchase. With the help of debt, the price of capital goods can be financed over much of their working life.
2. Adding debt raises the prices of commodities. Commodities, such as lumber, iron, copper, and oil are what we use to make cars, houses, and factories. “Demand” for these commodities rises because more people and businesses can afford to buy capital goods that use these energy products. Often these capital goods also use energy products over their lifetime (for example, gasoline to operate a car), so there is a long-term impact on the demand for energy products, in addition to the demand associated with making the capital goods. Of course, with higher prices, it becomes profitable to extract oil and other energy resources from more marginal areas of production. More companies enter the field. As long as prices remain high, they are able to earn a profit.
3. Adding debt stimulates the economy, almost like turning the heat up on a stove. When debt is added for any purpose–even starting a war–it starts a whole chain of purchases, each of which acts to stimulate the economy. If a young person takes out a loan to buy a car, the purchase of the car leads to the salesman having more money to buy goods for his family. The company selling the cars is able to make a bigger profit, which the business can reinvest or pay to shareholders as dividends. The purchase of the car leads to more demand for metals used to make the car, and thus tends to increase the number of mining jobs. Each new worker in turn is able to buy more goods and services, starting a beneficial cycle that gradually radiates out through the economy.
4. Adding debt tends to lead to higher asset prices. Clearly, (from Item 2), adding debt can raise the price of commodities. Adding debt can also make it possible for more people to afford real estate and investments in the stock market. For example, Japan greatly ramped up its debt level between 1965 and 1989.
   

   Figure 1. Annual growth in non-financial debt (in Yen), separated into private and government debt, based on Bank of International Settlements data.

   During this time, a major price bubble occurred in land prices (Figure 2).

   

   Figure 2. Land Prices in Japan. Figure from Of Two Minds by Charles Hugh Smith.

   There is a reason why this bubble could occur. Because of the stimulating effect that debt had on the economy, more people had the wealth to buy real estate, especially if this too was sold on credit. Once private debt levels stopped rising rapidly, price levels crashed both for land and stock prices. TheBubbleBubble.com explains what happened: “By 1989, Japanese officials became increasingly concerned with the country’s growing asset bubbles and the Bank of Japan decided to tighten its monetary policy.” Doing so popped both the home and stock price bubbles.

5. Adding debt adds to GDP. GDP is a measure of the goods and services produced during a period. Many of these goods and services are bought using debt, so it is not surprising that adding more debt tends to add more GDP. The amount of GDP added is less than the amount of debt added, even when inflation growth is considered as part of GDP.
   

   Figure 3. United States increase in debt over five-year period, divided by increase in GDP (including inflation) in that five-year period. GDP from Bureau of Economic Analysis; debt is non-financial debt, from BIS compilation for all countries.

   The general tendency is toward the need for an increasing amount of debt per dollar of GDP added. This is especially the case when oil prices are high. In the US, the ratio of non-financial debt to GDP added was almost down to 1:1 for a time, back when oil prices were less than $20 per dollar (in today’s dollars).

6. Adding debt tends to increase wealth disparity.  Adding debt tends to increasingly divide an economy into “haves” and “have-nots.” Many of the “haves” own the means of production, including an ever-increasing amount of capital goods, and thus can earn profits and dividends from these capital goods. Others are high-level officials in businesses and the government who earn high salaries. Interest payments also tend to transfer payments from the poor to the more wealthy. We might say that the common laborers are increasingly “frozen out” of the economy that otherwise is heating up. This shift started to take place in the United States about 1981.
   

   Figure 4. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis IRS data, published in Forbes.

7. Adding debt is something that governments can influence, either by lowering interest rates or by borrowing the money themselves.  Actions by governments to reduce interest rates can be effective, because they lower monthly payments that borrowers need to make to take out a loan of a given amount. Thus, they tend to encourage more borrowing. In Figure 5, below, note that the decrease in interest rates in 1981 corresponds precisely with the rise in debt to GDP ratios is Figure 3 and the shift in income patterns in Figure 4.
   

   Figure 5. Ten year treasury interest rates, based on St. Louis Fed data.

   Figure 6 later in this post shows that changes in Quantitative Easting (which affects interest rates and the level of the US dollar relative to other currencies) also correspond to sharp changes in oil prices. Changes in the level of the dollar also affect demand for oil. See a recent post related to this issue.

What Goes Wrong as More Debt Is Added?

It is clear from the discussion so far that quite a few things go wrong. These are a few additional items.

1.There are limits to government manipulation of debt levels.  First, interest rates eventually drop so low that they become negative in some countries. Negative interest rates tend to cause bank profitability to drop and lead to hoarding by those who planned to use savings for retirement.

Second, government borrowing doesn’t work as well at stimulating the economy as investments made by the private sector. A likely reason is that private sector investments are made when the borrower believes that the return on the investment will be high enough to pay back the debt with interest, and still make a profit. Government investments often do not meet this standard. Some reports indicate that  Japan’s government has used borrowed money to fund bridges to nowhere and houses with no one home. China’s centrally directed economy seems to lead to similar over-borrowing problems. Chinese businesses also borrow to cover interest on prior loans.

2. Ratios of debt to GDP tend to rise, worrying government leaders. Debt is a way of accessing the benefits of Btus of energy, in advance of the time they are really available. As the amount of easy-to-extract oil depletes, the cost of oil extraction gradually rises. Unfortunately, the amount of “work” a barrel of oil can perform–for example, how far it can make a truck travel–doesn’t rise correspondingly. As a result, the higher price simply reflects increasing inefficiency of extraction, and thus the need to use a larger share of the economy’s output to extract oil. The amount of debt needed to keep GDP rising keeps growing, in part because oil is becoming higher priced to extract, and in part because goods that use oil in their production also tend to rise in cost. As a result, the ratio of debt to GDP tends to spiral upward.

3. Rising debt allows for a temporary false valuation of the benefit of energy products. The true value of oil and other energy products comes primarily from the Btus of energy they provide, such as how far a truck can be made to travel. Thus we would expect that the true value of energy products would remain relatively constant over time. If anything, the value of energy products will tend to rise by a small amount (say, 1% per year) as technology improvements lead to growing efficiency in their use.

What we think of as the magic hand of the economy determines a price for commodities at all times, based on “supply” and “demand.” This price clearly is not very close to the future energy profit that the energy products will actually provide, because it tends to vary widely over time. We don’t know what the true value of a barrel of oil to society is. If the true value is $100 per barrel (in today’s money), then back when oil prices were $10 or $20 per barrel (in today’s money), there would have been $80 to $90 (equal to $100 minus the actual price) of “energy profit” that could be pumped back into the economy as productivity gains for workers, interest on debt, and dividends on stock, tax revenue, and money for new investment. The economy could (and did) grow quickly. There was less need for added debt, because goods made with oil were cheap. Wages for workers could rise rapidly, as they did in the 1950 to 1968 period (Figure 4).

If prices approach the true value of oil (assumed to be $100 per barrel), the extra energy profit would pretty much disappear. The economy would increasingly become “hollowed out.”  Productivity gains that lead to wage gains would mostly disappear. Businesses would find it hard to earn adequate profits, and would cut back on dividends. Some companies might need to borrow money in order to pay dividends. World economic growth would slow.

Prices can even temporarily overshoot their true value to the economy, then drop sharply back. This happens because prices are set by demand, and demand depends on a combination of wage levels and debt levels. Oil prices can be high for a while, if borrowing is temporarily high, and then fall back as it becomes clear that profitable investments are not really available if oil is at such a high price level.

4. Wages of non-elite workers tend to drop too low. Workers play a very special role in the economy: they both (a) provide the labor for the economy and (b) act as consumers for the economy. If workers aren’t earning enough, there is a problem with many of them not being able to buy the goods and services the economy produces. This is especially the case for purchases such as homes and cars, which are often bought using debt. Indirectly, this lack of ability to afford the output of the system puts a downward pressure on the price of commodities, particularly energy commodities. Prices may fall below the cost of production, or may not rise high enough.

The reason that wages of the less educated, non-managerial workers tend to lag behind is related to the issue of diminishing returns. A workaround is a more “complex” society, with bigger businesses, bigger government, more capital goods, and more debt. In some cases, manufacturing is shifted to parts of the world with lower wages. Non-elite workers increasingly find themselves with too small a share of the output of the economy. Figure 7 shows some influences that tend to lead to too low wages for non-elite workers.

When wages for a large share of workers drop too low, there is a problem with workers not having enough money to buy goods like cars and houses. The economy tends to contract. This is a different form of too low Energy Return on Energy Invested (EROEI) than most people think of. In my view, low return on human labor is the most important type of EROEI. Falling wages of a large share of workers can lead to economic collapse, because there are not enough buyers for the output of the system.

5. Eventually, debt defaults become a problem. As the world becomes more divided into “haves” and “have-nots,” falling ability to repay a debt becomes more of a problem. To some extent, this happens at the individual level, with auto loans, student debt, and mortgages. If commodity prices fall or stay too low, it happens to commodity producers, including oil producers. It also happens to countries, especially to those who are dependent on commodity exports.

The rise in the cost of oil extraction is another factor. As the cost of extraction begins to exceed the benefit of oil to the economy (assumed above to be $100 per barrel), the energy profit from oil is no longer sufficient to allow the economy to grow as in the past. Without economic growth, it becomes much harder to repay debt with interest.

6. At some point, we reach peak debt. The economy acts like a pump. As long as the there are sufficient energy profits coming through the system (based on $100 per barrel minus the actual oil price, in our example), wages can rise and corporate profits can rise. Assets prices can rise, and energy prices can stay high. Once these energy profits start falling back, wages stagnate and business profits decline. Businesses cut back on borrowing, because they see fewer profitable opportunities for investment. Individuals cut back on borrowing, because with their lower wages, it becomes more difficult to buy a house or car. Governments try to fight declining demand for debt, but eventually reach limits of the economy’s tolerance for negative interest rates.

Once debt begins contracting, the contraction tends to bring down commodity prices. This is a huge problem for commodity producers, because they need prices that are high enough to cover their cost of production. Ultimately, falling debt, together with falling wages, and lack of energy profit have the potential to bring down the system.

Conclusion

The situation we are facing today is one in which growing debt has been holding up oil prices and other commodity prices for a long time. We are now reaching limits on this process, as evidenced by growing wealth disparity, low commodity prices, and the frantic actions of governments leaders around the world regarding slow economic growth and the need for more stimulus. These issues are becoming major ones in the upcoming US political election.

Those studying oil issues from an EROEI perspective tend to miss the connection with debt, because EROEI analysis strips out timing differences. In my view, debt is essential to oil extraction, because it brings forward an estimate of the value of the oil and other energy products, so that businesses of all kinds can make use of the “energy profit” in paying their employees and in paying their taxes. Most people don’t think of the issue this way.

In this article, I suggest a different way of thinking about the limit we are reaching–oil prices can’t rise above some price limit without adversely affecting the economy. It is the savings below this limit that aids productivity growth and government funding. Perhaps researchers should be examining this price limit approach more carefully. This is not the same approach as EROEI analysis, but has the advantage of having fewer “boundary issues.”  It also offers a check for reasonableness of EROEI indications developed through conventional analysis. If an energy product needs a government subsidy, it is doubtful that that energy product is really providing an energy profit.

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Either The BoJ steps in soon and intervenes (even by just “checking levels”) or Kuroda-san is truly terrified of The G-20. USDJPY has now crashed 7 handles since last Thursday’s shock BoJ disappointment crashing to within 5 pips of a 105 handle tonight for the first time in 18 months…

 

 

Pewrhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now? Or is China greatly rotating its Yuan devaluation pressure against another member of its basket…?

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As the make-or-break Indiana primary looms for the GOP establishment, Ted Cruz suffered a develishly-dismal day. First, as Gallup reports, Cruz's favorability has utterly collapsed in the last few days (blame Carly?) with 45% unfavorable to 39% favorable (a negative spread for the first time in his campaign). But it got worse, as not only does trump hold a commanding 15-point lead in Indiana, but the latest Rasmussen survey shows Trump (41%) ahead of Hillary (39%) for the first time as The Donald is now doing twice as well among Democrats as Clinton does among Republicans.

 

Republicans' views of Cruz are now the worst in Gallup's history of tracking the Texas senator. As Gallup details, his image among Republicans and Republican-leaning independents is at 39% favorable and 45% unfavorable, based on April 24-30 interviewing, for a net favorable score of -6. The last few days have marked the first time we have seen Cruz's image underwater since we began daily tracking in July.

The Ted Cruz Death Cross

 

In sharp contrast to the recent trajectory of Cruz's image, we find Trump's image on an upswing in recent days.

 

The remarkable aspect of this trend line is the degree to which since mid-April Trump's net favorable rating has moved steadily upward just as Cruz's net favorable rating has moved steadily downward. Cruz's image was consistently more positive than Trump's from July through the end of February; then the two closely tracked one another before the recent divergence.

But now, as Liberty Blitzkrieg's Mike Krieger details, regular readers won’t be the least bit surprised that Donald Trump continues to gain ground against Hillary Clinton in general election polling. As he recently wrote in the piece, Could Trump Beat Clinton in New York? Yes:

I continue to see Hillary Clinton as one of the most overrated political figures in American history, and Donald Trump as one of the most underrated. This is why I think “the experts” are wrong about the outcome of a potential Clinton vs. Trump showdown in the general election.

 

Hillary’s weaknesses are obvious. I’ve highlighted new shameless transgressions or scandals on these pages virtually every day for several months now. Furthermore, the fact that the grassroots campaign juggernaut known as the Sanders movement seemingly came out of nowhere, proves there’s a huge ideological vacuum on left just asking to be filled in light of Clinton’s neoconservative candidacy.

 

As far as Trump’s concerned, I’m of the view that his real genius is marketing and his tremendous force of personality. He’s not so much a brilliant businessman, as he is virtually peerless when it comes to selling himself to whomever he targets. While I don’t condone or respect such behavior, I do think a lot of what he said during the primary was carefully crafted rhetoric designed to appeal to a certain demographic in order to win the nomination. It worked. The fact that he knew exactly what to say, while most pundits kept expecting his frequent outbursts to bury him proves that he knew what he was doing, and exposed the pundits’ cluelessness.

 

If he ends up as the Republican nominee in the general election, he’ll analyze the American public as a whole, as opposed to merely registered Republicans, and he’ll campaign accordingly. Can he pull this off? If anyone can, he can. He’s a billionaire primarily because he is a genius at knowing exactly what people want and then selling himself to them.

With that in mind, check out the results from a recent Rasmussen survey:

Last week, Rasmussen Reports gave voters the option of staying home on Election Day if Hillary Clinton and Donald Trump are the big party nominees, and six percent (6%) said that’s what they intend to do for now. Clinton and Trump were tied with 38% support each; 16% said they would vote for some other candidate, and two percent (2%) were undecided.

 

But Trump edges slightly ahead if the stay-at-home option is removed. Trump also now does twice as well among Democrats as Clinton does among Republicans.

 

A new Rasmussen Reports national telephone survey of Likely U.S. Voters finds Trump with 41% support to Clinton’s 39%. Fifteen percent (15%) prefer some other candidate, and five percent (5%) are undecided. (To see survey question wording, click here.)

 

This is the first time Trump has led the matchup since last October. Clinton held a 41% to 36% advantage in early March.

 

Trump now has the support of 73% of Republicans, while 77% of Democrats back Clinton. But Trump picks up 15% of Democrats, while just eight percent (8%) of GOP voters prefer Clinton, given this matchup. Republicans are twice as likely to prefer another candidate.

 

Among voters not affiliated with either major party, Trump leads 37% to 31%, but 23% like another candidate. Nine percent (9%) are undecided.

 

Clinton’s narrow 38% to 32% lead among those under 40, traditionally a reliable Democratic group, suggests that younger voters will be a big target in the upcoming campaigning.

As Krieger so eloquently concludes, I continue to think Donald Trump is Hillary Clinton’s worst nightmare in the general election, and that the Democratic Party made a fatal error in pushing her candidacy.

 

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The US became an unsustainable service sector based economy from the 1970s onward when service sector employment diverged from manufacturing without a corresponding boost in productivity. Even Alan Greenspan has warned that America is "in trouble basically because productivity is dead in the water…" There are numerous reasons for this plunge in worker-productivity, from perverted inventives not to work to unintended consequences of monetary policy enabling zombies, but perhaps the most critical driver is exposed in the following dismal chart…

51% of total time spent on the Internet is on mobile devices – in 2015, first time ever mobile is #1 – to make a total of 5.6 hours per day snapchatting, face-booking, and selfying…

Source: @kpcb

So, while every effort can be made by Ivory Tower academics to solve the problem of American worker productivity, perhaps it can be summed up simply as "Put The Smart-Phone Down!"

As we detailed previously, adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold.

The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.

With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!

In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.

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Submitted by Jeff Thomas via InternationalMan.com,

In the fifth century B.C., Greek dramatist Aeschylus said, “In war, truth is the first casualty.” Quite so. Whenever national leaders decide to go on the warpath for the sake of their own ambition or self-aggrandisement, it’s the citizenry that will pay the bloody price for their aspirations. Since war is rarely desired by the citizenry, it has to be sold to them. Some form of deception, exaggeration, or outright lies must be put forward to con the populace into getting on board with the idea.

War, after all, represents a monumental failure of national leaders to serve the rightful national objectives of a citizenry – peace and prosperity. Of course, in the case of an empire going to war, this represents a monumental failure on steroids – the outcome may well be world war in such a case.

Readers of this publication will no doubt be well-versed in the knowledge that, when an empire is nearing the end of its period of domination, war is almost always used by leaders as a last-ditch attempt to maintain order. (During wartime, a populace tends to focus more on the war than the failure of its leaders. In addition, they’re likely to tolerate the removal of freedoms by their leaders to be “patriotic”.)

This being the case, we might surmise that an empire in decline would be likely to display similar symptoms to a country at war. One of those symptoms might well be the loss of truth, not just as it relates to warfare, but as it relates to the society as a whole. A nation in decline might even welcome the disappearance of truth, as it would allow the people to continue to feel good about themselves at a time when a truthful outlook would be too unpleasant to be tolerable. Further, the closer to collapse the country may be (economically, politically, and socially), the more extreme the self-created loss of truth would likely be.

Let’s have a look at a few cultural examples and see if that premise seems viable.

Silver Versus Chocolate

As I described in January in “Running Out of Candy,” Californian Mark Dice stood on a street corner offering passers-by either a free ten-ounce bar of silver or a free bar of Hershey’s chocolate. Without fail, each one chose the chocolate. Even though Mister Dice was standing in front of a coin shop where the silver bar could be redeemed, they rejected the silver which they knew had to have greater value.

Only twenty years ago, people would have been far less likely to deny truth in favour of a falsehood that was more palatable – the instant gratification of candy. In effect, this is the abandonment of basic truth in favour of whatever perception is more pleasant.

Kim Jong-Un on "Dancing With the Stars”

Talk show host Jimmy Kimmel recently asked people on the street if they had seen Korean leader Kim Jong-Un on the popular television show “Dancing With the Stars.” Clearly they had not, as the idea was absurd, yet many answered yes, then went on to describe their appraisal of his performance as though they’d seen it. (Some went into depth, expounding on the artistry and social value of the non-existent performance.) The interviewer went on to remind the interviewees that Kim Jong-Un is in fact a dictator and asked whether they thought it was in good taste for him to have pointed a machine gun at the audience. In spite of the now-blatant absurdity, interviewees continued to pretend they had actually witnessed the performance, offering their opinions on how well he had performed. They responded in accordance with what appeared to be expected of them rather than choose the less-pleasant option of saying, “I’m sorry, but I didn’t see it.”

Now, the video was clearly offered by Jimmy Kimmel to show his audience “how dumb people can be,” but it demonstrates something more. It shows us that a significant segment of the population is quite prepared to simply abandon reality by, first, pretending to have witnessed something they have not and, second, offering firm and even complex opinions on something that did not occur.

Political Candidacy

Certainly, political hopefuls have always had a reputation for being less than truthful and any responsible voter would be advised to look at every candidate with a jaundiced eye. But what if voters choose to lie to themselves in order to validate candidates?

Back when the US became the unquestioned empire in the world (just after World War II), Americans took a great deal of pride in truth and honour. A candidate might be suspected of personal immoral behaviour and/or corruption and still be elected, but if it were blatant, he would not.

Today, the liberal media regularly refer to the record of presidential candidate Donald Trump, highlighting the companies that have gone bust and people who have been financially ruined as a result of his dealings. They also highlight his ever-changing political viewpoints, arrogance, and disdain for virtually everyone but himself. Yet, supporters of Mister Trump virtually block out the repeated reports, focusing only on their enjoyment of his bombast toward the establishment.

And the conservative media have been equally persistent in calling attention to candidate Hillary Clinton’s long history of shady business dealings, her failure with regard to the Benghazi incident, her selling of influence whilst acting officially as secretary of state, her acceptance of large campaign donations from Wall Street and, most prominently, her (very possibly illegal) abuse of top-secret government documents.

Yet, half of all democrats at present are content to simply treat all that evidence as though it has no significance.

To put this in perspective, as recently as 1974, the American public were so outraged over their president having complied with a cover-up of an information burglary that he was forced to resign his office. Today, however, we observe not a sitting president, but candidates for president, each of whom, regardless of their glaring unsuitability, is able to attract a major portion of the public’s support and continue to campaign.

Here, we need not focus on the shortcomings of the candidates, no matter how unfit for office they may be, but on the voters, who choose to disregard the obvious truth.

Again, abandonment of basic truth in favour of whatever perception is more pleasant.

All of the above I believe are symptoms of a greater problem. As a Briton, I’m very aware that, during the decline of the British Empire, many of my fellow Brits pretended that it wasn’t happening, saying, “There will always be a Britain,” and “The sun never sets on the British Empire.” And, tellingly, they continued to behave as though Britain were still top doggie in the neighbourhood. (We still had vestiges of this, right up until the 1980s, decades after it was clearly all over.)

The US, in its own decline, is showing this same self-destructive tendency. The worse things get, the greater the inclination of the citizenry to say, “Carry on, everything’s fine.”

When a ship is going down, the very worst reaction is to pretend that everything’s fine and that it will all turn out okay. Yet, just as it occurred in Britain, we see today in the American people a desire to pretend that, although all is not well, there’s a rainbow just over the next rise, and that if the people (and their presidential candidates) will only make their hopes and promises big enough, the greatness will return along with good times for all.

I wish that that were the case, but I’m inclined to believe that self-deception does not improve the situation; it exacerbates it. Better to face reality then create a plan to address that reality.

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