Thursday, March 29, 2012

That Minsky Moment

As my depiction of the Idiocracy would predict, today's thought dealers (politicians, economists, media infotainers) have an infantile obsession with avoiding the truth and reality.  So we ask, what would it take to get our policy-makers to face reality and begin to craft some realistic long-term solutions to these economic problems?

Waiting for the Minsky Moment
We have what I would call a Wile E. Coyote economy that has run off the cliff and is suspended (temporarily) only by Central Bank liquidity programs.  All we are waiting for now is the Minsky Moment.

The Minsky Moment is the point of recognition when overleveraged speculators are forced to unwind their positions into a one-sided (sellers only) market and therein experience "discontinuous price discovery" aka. market collapse.  That's the point at which Extend and Pretend will come to a sudden and violent end.

For this blog, I have to give a lot of credit to Minsky's teachings, which had they been more widely studied and adhered to, would have avoided this latent catastrophe.  For example, he coined the term "Ponzi borrower" which is someone who borrows additional principal to pay back interest on existing debt i.e. a negative amortizing loan that grows uncontrollably larger over time.  This is what the U.S. (and many other) developed governments are at this juncture - Ponzi borrowers.

Our ever-procrastinating ever-campaigning leaders can't even agree on the problem, much less apply a solution.  There are now multiple fragmented trains of thought, as depicted in this timely and informative article from Down Under.  All of these theories actually have a lot in common - they are all delusional and unsustainable.  Staggeringly, the Keynesians still believe that we can borrow our way out of a debt problem, which as the article states would imply a 5:1 economic multiplier i.e. $5 of economic growth for every $1 of new debt.  However, as I noted here recently, we don't have anywhere near a 5:1 economic multiplier. Given that the $1 trillion increase in deficit spending since 2007 has only equated to 2.5 million jobs, that implies about a .1:1 economic multiplier (90% loss of value) - at least when it comes to jobs.  So they are only off by about a factor of 50.

The Supply Siders always think that deficits don't matter and we can grow our way out of any debt problem.  Unfortunately, with taxes (revenues) at 20% of GDP, it would require a 50% increase in economic growth in order to offset a fiscal deficit that is now at 10% of GDP.  So once again, we have another camp that is not only mathematically illiterate but outright delusional.

Monetarists apparently believe that we can just buy up all of the government debt - case closed.  No problems.  You wonder why the Founding Fathers didn't write a Constitution that just said, don't worry about working for a living, just create a Federal Reserve and pay your debts by printing more money.

As I said above, all of these Keynesians, Monetarists and Supply-Side ideas have all morphed into one big delusional circle jerk.  Fiscal expansion which is inherently Keynesian can no longer survive without debt monetization (Monetary expansion), because without it, interest rates would rise.  Meanwhile, monetary policy thrives on ever-increasing fiscal deficits - the larger the deficits the more control exerted by monetary policy.  If the U.S. government had no debt, monetary policy would be neutered - no debt equals no monetary expansion.  Supply-side economics (aka. Voodoo economics) meanwhile is the jobs outsourcing machine that creates the "disinflation" that makes this entire Ponzi Pyramid function without generating run-away wage-induced hyperinflation.

Here is an article from just this week, which states that 750,000 additional jobs will go offshore in the next 4 years:

"Some 750,000 jobs in IT, finance, and other business services will be offshored from the U.S. and Western Europe to developing nations between now and 2016, according to a study released this week by the Hackett Group. Among the positions going overseas will be 270,000 IT jobs."

"Even more stunning is the researchers' assertion that only about half of the 8.2 million services jobs that existed in the U.S. and Western Europe as of 2002 will exist in four years. A total of 2.3 million business services jobs, including 1.1 million IT jobs, will have gone offshore in by 2016 since the trend started in the 1990s."

It's the self-promoted Country Club MBA-set who have paved the way for outsourcing the entire economy.  These overpaid morons dominate every major corporation and since they have no clue how to make anything, they have instead concocted self-interested business strategies idealizing foreign outsourcing aka. industrial arbitrage.  Obviously, they all assume they will continue to have full and unfettered access to the U.S. market, even though they have done their utmost to liquidate the Middle Class.  Meanwhile, obviously, when one company outsources jobs it can improves its bottom line, but when they all outsource at the same time, as indicated above, they destroy the economy.  Let me clue these dumbfucks in to a piece of latent reality - it doesn't matter how high your profit margins are, if you don't have any revenue.

Yet what no one anywhere really wants to admit let alone come to terms with, is that we have a totally unsustainable standard of living.  The so-called deleveraging that took place after 2008, was a total farce - all  it did was shift debt accumulation from consumers to sovereign governments.  The only deleveraging that came on the consumer side was as a result of defaults and bankruptcies.  There was no overall sustained movement to downsize to more sustainable levels.

Why deflation is inevitable:
Recently I wrote that markets are indicating the nascent return of deflation.

Once the Minsky Moment arrives, none of the above rearranging of deck chairs will even matter.
Forced asset "repricing" aka. credit deflation/default/bankruptcy will collapse the global money supply, leading to massive price deflation and supply gluts.  Demand will likewise collapse as confidence and purchasing power evaporate into thin air.  Those waiting around for hyperinflation miss the point, the dollar has already lost 95% of its value in the past 100 years as the money supply has increased commensurate with the increase in debts.  So to expect hyperinflation, one would expect that debts will continue to increase inexorably and there will not be a Minsky Moment of recognition and unwinding.  Yet 2008 was a tremor before the earthquake - it was a warning as to what can happen when credit deflates.  Only massive and unprecedented global central bank intervention saved the day (barely) that time, but of course we learned nothing in the process.  More to the point, banking-related special interest groups have ensured that essentially the same rules and regulations that allowed the Lehman meltdown, are in place today.  So nothing structurally has changed and risks have amplified and placed the onus on governments worldwide to maintain the illusion-formerly-known-as-the-economy.  So, unfortunately, I can't buy into the fantasy that the status quo is inherently stable.  Another of Minsky's critical observations is that as the business cycle progresses and debts accumulate, the economic and financial system become increasingly fragile and unstable.  This is exactly what commonsense would predict of a massively overleveraged economy and financial system i.e. that small reverberations can have outsized impacts as assets are repriced in real time.

One thing that is entirely clear from the above analysis is that the economics profession is morally and intellectually bankrupt and soon to be financially bankrupt as well.  Mainstream economists are out of ideas. Their delusional theories are what allowed this fiasco to occur, so they won't be the ones to find the solution.  The only sound ideas left are from the "Austrian" school of economics which prescribes a return to hard money (gold) and fiscal prudence.  As we know, Ron Paul is a proponent of the Austrian School and yet he can't garner more than 10% of the Republican vote at any Primary.  To think that he is the only guy on the stage who is not lying non-stop and yet almost no one wants to vote for him.  You can imagine the Idiocracy sitting in the audience listening to Ron Paul, and saying "Did he just tell the truth?  I can't be sure, but I think that's reality he's talking about up there.  The gall of him !  We need a candidate who will lie and obfuscate and whisper sweet nothings !"

What can you say about a society that has not only bankrupted itself but also bankrupted its children and grandchildren?  Not much there worth saving...