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Monday, October 29, 2012

Erace with Debt.

In an article in the NYT last week, Annie Lowrey decided that  American households taking on more debt than they are shedding is an epochal shift that might augur a more resilient recovery.

This one sentence alone has so many things wrong with it I dreaded the rest of the article, and was proven, upon its subsequent perusal, completely right.

Let's look at another headline,   "Three years ago, Greece could borrow for two years at about 2.0%.  The marketplace recognized that Greece had buried itself in debt, although players were as well confident that Europe would never allow a Greek default.  By May of 2010, Greek two-year yields surpassed 18% and the nation was hopelessly insolvent. "

So a sovereign nation with the full backing of the ECB had its interest rate soar from a mere, better-than-inflation rate, (so the more they borrow, the better off they are, right?) 2% to 18%. Why? Because it had buried itself in debt. Albeit cheap debt. Cheap because the Euro was the currency it was based in and Players (yes, those with the prospects of hundreds of millions of people under their control are mere "players", always poised to take their stake off the table at a moments notice) were confident. As though confidence, no matter that it's based on lies, distortion, fraud, financial manipulation and outright chicanery, is always and everywhere a good thing.

But like leverage itself, it depends on the underlying collateral and how many claims are supposed to be satisfied with it.   Is their confidence based on subprime facts or real data? If interest rates are not really a cost of borrowing, but are, more accurately, a measure of risk how does a sovereign state's risk profile change so dramatically, and if theirs does, how much easier for an individual's to.

For let there be no mistake about it, what Annie Lowrey is really saying, is that the US consumer is once again taking on even more risk when they have no capacity to mitigate the disastrous consequences of that risk they took on years ago. And in fact, when Ms Lowrey states that it may augur a more resilient economy, is she mad? Does she not hear herself echoing the words of GW in 2008, as the economy was clearly imploding, as he assured Americans (no one else was stupid enough to still be listening to the King of Krony Kaputilsim) that the "resilience" of the US economy would enable it to weather the subprime debacle he'd created, when in fact, it had become increasingly brittle and unstable from confidence in debt instruments that were based on eroding foundations.

Debt based on real assets with the prospects that those assets will engender return on the Capital invested, such that interest payments can then be provided for by the ensuing profits, can result in a robust economy. And returning to THAT paradigm, might now be considered epochal. However just because:
"consumer confidence has soared to a five-year high, according to a survey by Thomson Reuters and the University of Michigan. And economic growth numbers for the third quarter showed household spending picking up pace as well", doesn't necessarily mean future prospects are as sanguine as she pretends. For she mentions nothing of household INcomes, just household Spending. And in fact, per the BEA:  "While Personal Income rose at the expected pace of 0.4%, (an increase completely cancelled by inflation) Spending in the last month came well above expectations of 0.6%, printing at 0.8%", making the creaking sound of this resiliency make me go running for the WD40.

Meanwhile, Doug Noland in his latest Credit Bubble Bulletin on, entitled, "The Perils of Bubbles and Speculative Finance", writes: "we live in a highly over-indebted world that becomes only more so each year.  Moreover, the global system is today in an exceptionally high-risk phase of rapid non-productive debt growth in concert with historic financial and economic imbalances.  Global policymakers are desperate to reflate debt and economic structures, in what I believe is both ill-advised and inevitably destined for failure."

He stated a similar reservation of the future of the financial mania infecting the globe in 2008, while the Fed's beige book published 6/28/2008 stated it foresaw no true economic contraction, clearing the way for Fed to concentrate on inflation, thereby intensifying the severity of the downturn, as the economy had been in recession since Q4, 2007.

This makes Taleb's "Black Swan" comment that "almost all bankers, and most economists, are subhuman and very, very dangerous", quite germane.

As if to prove as much, Ms. Lowrey ends her article with the observation that: "The Great Depression scarred an entire generation,  affecting how households borrowed and spent for decades.   We don’t yet know whether consumer behavior has been fundamentally changed by this crisis or not.”

Annie apparently has no concept of the US economy pre-Great Depression: most households simply had no access to credit, so the GD had practically no affect on how the vast majority of households borrowed: they didn't. 

Watching hurricane Sandy pummel the East coast, while hearing Climate-change deniers from the same vicinity, one wonders how many times the US has to be hit over the head to realize the center of the problem is, for once, receiving the brunt of the consequences of its actions. How much longer before the same will be true for the monetary madness it's currently, once again, inflicting on its citizens, and, more ominously, the world?

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