| | | Page 1, 2 | Numbers Racket: Why the Economy is Worse Than We Know
| Omega
User ID: 340280
4/27/2008 2:38 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
I know, the article is beyond you woo woo's....so sad....
hey omega..
this is a little over my head....but I will try..
this is I think from 2006....but it is still in play..
who is John Williams....meet the man...great read
[ link to www.weedenco.com]
Shadowing Reality
Economist Keeps Tabs On Government’s “Creative”
Statistical Reports
Walter J. (John) Williams is the John Williams behind a fascinating website, [ link to www.shadowstats.com,] which promises—and delivers—“analysis behind and beyond government economic reporting.”
Great article long read, and I bookmarked the site-thanks!!!
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.
Disarmament is the precursor to Genocide.
Better to take action now rather than chances later. Your choice. |
| Anonymous Coward
User ID: 424015
4/27/2008 2:40 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
"Considering inflation, where does the DOW currently stand vs 2000, 1990, and 1980?"
----------
In 1975, we faced about the same economic situation as we are today. I saved one of the financial newsletters from that time.
Friday, April 11, 1975
DOW Jones Industrial Average: 789.50
Gold Bullion: $171.90
Silver Bullion: $4.11
No figures for oil
Prime Interest Rate: 8.0
Unemployment Rate: 8.7
Times were tough, and are even tougher now with all of the tweaking, made worse by the "fine-tuning" of the economy that has taken place during the past 33 years. If you are 33 years old, you are at where we were then. I doubt, though, that the brainless ones will pull us out this time. The war in Iraq, coupled with high oil prices, the immigraton problem, and inflation is taking a far greater toll on our resources than was the case back in the 70s.
Looking back in that issue:
The deficit was climbing and would cause deepening recession with inflation. Which it did and is doing.
Industrial production had fallen in the U.S., Japan, West Germany, France and other industrialized nations. That's happening now.
Warning of major banks failing due to foreign exchange losses, and being involved in nearly insolvent real estate investment trusts. We're hearing that today.
World-wide weather fluctuations would cause recurring flooding and droughts in areas where they don't normally occur, causing crop failures. It's blamed on "Global Warming" now.
. |
| paladin
User ID: 424055
4/27/2008 2:54 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
hey omega.....thank you..
I forgot about that link......I see I need to add it to some of my on going threads.
also the shadowstats link does not work..
here it is the fix....sorry
[link to www.shadowstats.com] |
| Anonymous Coward
User ID: 392006
4/27/2008 2:57 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
Omega,
Consider that it is Sunday, you sir are, if not mistaken, in Florida? I am in Alaska. I am just waking up and getting to the days news. Forgive me this delay in responding.
This is an amazing and very powerful post, thank you.
that is all.
Alaska sleepy head (sunday's only) |
| Omega
User ID: 340280
4/27/2008 3:00 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
Omega,
Consider that it is Sunday, you sir are, if not mistaken, in Florida? I am in Alaska. I am just waking up and getting to the days news. Forgive me this delay in responding.
This is an amazing and very powerful post, thank you.
that is all.
Alaska sleepy head (sunday's only) Quoting: Anonymous Coward 392006
Naw, in Texas, and at work, blah. And thanks....
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.
Disarmament is the precursor to Genocide.
Better to take action now rather than chances later. Your choice. |
| Anonymous Coward
User ID: 406719
4/27/2008 3:24 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
Important safety tip-start bleating now.
Public faith in the federal government had sunk below even post-Watergate levels.
The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.
LOL to the suggestion for us to start bleating now!
Don't take on more debt if possible. Have a full pantry, heirloom seeds and garden.
Anything else we can/should do????
Garden
:grdn2:
Buy guns, your gonna need em'.
:gunporn: Quoting: Omega
Ok Omega I live in a city of Superior Wis. pop 27,000 and right on Lake Superior just a few miles away is lots of farms mostly dairy should my family worry about food and water like people in major cities????and as for guns everyone up here has guns so I don't think that will be a problem. Just wondering what your thoughts are on my area and how bad will this crash/hyper inflation affect us....thanks for posting |
| Redheaded Stepchild nli
User ID: 422626
4/27/2008 3:29 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
Wow, with real CPI like that no wonder the poor CEO's have to make so much money .
Thanks Omega. Nice article. The more I read the more I think it will snap. Very sudden, very quick, and very very painful. Quoting: Dervish
DERVISH:
I agree. I believe it will snap, and the backlash will be almost immediate. We won't have time to duck for cover, it will be that fast. It's the reason I'm growing food NOW, and not waiting for the excrement-hitting-the-fan moment.
OMEGA:
Good post. I see inflation at between 20% - 24% right now, based on what I'm gleaning from various boards and from what has beaten the hell out of our income. |
| paladin
User ID: 424055
4/27/2008 3:31 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
Engineering and the nature of feedback
We now come to the promised insight that should provide a clincher for anyone who still hopes for a soft landing. While nothing in the economy is impossible to exclude, there is grave doubt whether a soft landing can be engineered – or a catastrophe averted without force majeure appearing like mushrooms all over the economic landscape.
Engineers know that systems do not operate in isolation. All systems have an effect on the environment and what happens in the environment in turn affects the system. It is a closed cycle that means the system, through its operation, also affects itself. The feedback effect via the environment or even through the operation of the system itself – if that is in the design – can be of a positive or negative nature.
Negative is almost always good; positive is almost always bad.
Negative feedback counters a trend that the system my have away from stability, towards some condition of excess; positive feedback accelerates such a trend. The principles of positive and negative feedback can be easily and simply illustrated by examining what happens when someone takes a shower.
At first, when the person steps into the shower, one assumes that the temperature of the water had been adjusted to the desired level. Over time, the temperature can change for a variety of reasons, which are not important. The reaction to a change in temperature in principle can be positive or negative.
The normal reaction, typical of negative feedback, is to use the taps to counter the trend; if, say, there is a fall in the temperature of the water, one would open up the hot water tap a little further, or close the cold water tap some – or a combination of the two – until the desired temperature has been restored. Similarly, if the water becomes warmer, the cold water tap can be opened further or the hot tap closed a little, or a combination of the two.
Doing so, with due regard for the lag between changing a tap and the effect at the shower head, achieves the stability that is the domain of negative feedback.
Now imagine that the person in the shower is an avid adherent of positive feedback. Let the initial temperature again be adjusted to a desired level. Now, when the temperature of the water deviates from that ideal, the reaction is different. If the water begins to feel too warm, the hot water tap is opened further and/or the cold water tap is closed – or both – positive feedback in action.
This action raises the temperature even further, which elicits another reaction, similar to before. Again the hot water flow is increased or the cold water tap is closed even more, or both actions undertaken. It is not too difficult to imagine the end result – if the person in the shower persists beyond reason with the positive feedback – a badly scalded exterior, perhaps even requiring hospitalization if the thermostat in the water heater has been set high enough so that the water is near boiling.
Engineers rely on negative feedback to prevent machines and systems from being trapped in runaway conditions where their destruction is assured. Even economists know about negative feedback in the economy – expressed as the law of marginal returns. This law is an elegant way of saying that trends in the economy become self-limiting as conditions tend towards saturation. It is the operation of this law that to a substantial degree provides the negative feedback so necessary to maintain an economy as a whole within desirable limits of stability.
Exactly as happens in engineering and under the shower.
An example of positive feedback in an economy
An example of what positive feedback can do to an economy is found in Japan in the run-up to the market collapse in 1990. In ‘A Japanese Tale’ it is recounted how, for reasons that seemed eminently logical at the time, the Japanese government instituted measures that created a climate in which a massive and eventually unstable property bubble was the unintended consequence.
The first measure was an accounting change during the post WWII years of rapid growth to allow frequent revaluation of land. This was to enable fledgling Japanese companies in a world hungry for consumer goods to boost their balance sheets, which in turn enabled them to borrow more working capital in order to fuel their own growth relative to foreign competitors.
The second was an emergency step to prevent a sell-off of over-priced property carrying large and suddenly expensive mortgages during the oil crisis induced inflationary period of the mid-70’s. Instituting an 80% capital gains tax if the proceeds of a property sale were not ‘invested’ within a year in a more expensive property, was like the after-burner on a fighter jet; this ignited positive feedback and resulted in a property binge with no global precedent. Natural inhibiting forces in the Japanese property market were switched off; normal negative feedback was disabled, so that positive feedback came into its own. No wonder that by 1990 the land value of Greater Tokyo was 20% more than the value of the whole of the US – all 50 states of it.
When, in the extreme, natural forces eventually snapped the effect of positive effect – as must eventually always happen – the collapse of the Japanese property market was an unmitigated disaster for the banks. It was only by exploitation of various loopholes in the regulatory system that they managed to survive – as briefly described earlier in the essay.
It will be very interesting to see what happens in the US when property prices finally fall to where many home mortgages are under water. It would be quite surprising if US home owners do not follow the Japanese example and stop paying their installments.
Japan has shown that positive feedback can be equally as destructive in an economy as in any mechanical system or engine.
Negative and positive feedback in the credit cycle
We now return to the subject touched upon in the opening quotation by von Mises.
A major credit binge, inevitably accompanied by all manner of excesses and imbalances, always ends in a period of economic healing, in the form of recession or even depression. According to von Mises, the end of the credit induced boom comes about in one of two ways: either the banks become so concerned about the massive issuance of debt they had engaged in that they reduce or even stop their lending, or borrowers become debt weary and abstain from obtaining further loans; perhaps even begin to repay existing loans.
Logic and self-knowledge inform us that should the banks live up to their reputation for being prudent and conservative, they will curtail the amount of lending before the credit boom assumes real crisis proportions. Therefore, when banks act prudently, an incipient credit boom is nipped in the bud with little or no indication that the economy was on the way to become over-heated. In this respect, timely action by a central bank to maintain stable growth through the use of interest rates – reducing rates when the economy cools off; increasing rates when it gets too exuberant – plays an important, even essential, role in maintaining the economy on an even and healthy keel.
In a credit economy, banks that lend prudently, with an eye on risk, and a central bank that employs monetary policy with good effect, provide the absolutely essential negative feedback required to sustain stability in an economy.
Read the above paragraph again and ponder its significance.
If one had to rely on the consumer in pursuit of all the things the heart desires to set the limit to the credit boom, the economy is bound to pass beyond the point of safe return. By the time the consumer realises that he has moved into unsafe credit territory, it is too late. This proclivity to employ an excess of credit is exacerbated if the consumer can purchase goods where installments begin much later after the purchase date. The retailer can smile with satisfaction at the way sales are going, but consumers find when installments come due that they can no longer keep financial head above water.
Then, new credit is sought with which to service existing debt, over and above spending to maintain a desirable life style. When that becomes the rule and not the exception, the economy enters a realm of complete excess and instability that demands the more severe healing process of a depression to achieve eventual full recovery; a mere recession is no longer adequate medicine.
At the time when von Mises penned his thoughts on the dearth of credit, the banks had a strong incentive to be prudent. When a bank made a loan, it assumed all the risk for the money that is lent. If a loan defaulted, the bank suffered a loss. There was thus a good and compelling reason for the bank to investigate the credit worthiness and integrity of a person applying for a loan. When in doubt, rather than assume too great a risk, the bank would decline to make the loan. Also, there was a limit to how much credit a bank could extend and it was only common sense to make the limited capability to lend available to borrowers of good repute.
In this way, risk acted as negative feedback; it mitigated against a runaway credit boom – and yet, even with this negative feedback, over-exuberance and optimism in the economy still on occasion resulted in such a destructive credit induced boom.
Today things have changed substantially; banks and the many new issuers of credit no longer themselves carry all the risk of bad loans; the factor that used to enforce prudence. Introduction of the Asset Backed Security (ABS) enables the lending institution to pass the risk on to someone else, namely to the investor who purchases the ABS and the entity that insures the instrument against default on the cash flow inherent in the instrument – the interest due and the repayment of the capital.
In engineering terms, this means there is no longer any negative feedback to control the extent of the lending by banks and other institutions and thus to keep the volume and the quality of debt within safe limits.
In fact, and horrifyingly so, the opposite is true; the more credit a lending institution can extend the more profit it makes.
In other words, instead of enjoying the safety of a self-limiting force, positive feedback rules. Rather than inducing prudence, there is an incentive to market credit aggressively to all comers; to extend as much credit as the market can absorb, using any and all loop holes and marketing gimmicks. With no risk element to compel lenders to keep matters within safe limits, the growth in debt is destined to be off into the blue yonder.
Much like the Japanese property market in the 70’s and 80’s.
[I leave it to readers to consider, if they were to be in charge of a bank, with the objective of maximum profit, what their policy would be in respect of staff spending valuable time checking the credit-worthiness of borrowers, or refusing the loan if it would seem that the borrower may not be able to perform as expected. From that speculation, extrapolate on the integrity of the ABS’s they have sold. Assuming what they find is true of a majority of lending institutions, they can then wonder about the capacity for survival of the small number of credit insurers, if claims proliferate when the economy runs into a headwind.]
Because of risk, investor peace of mind has to be secured either by a guarantee from the seller – not very likely, except in rare cases, such as by Fannie Mae and Freddie Mac – or by means of insurance from one of the credit insurers. The ABS practice thereby assumes a cloak of respectability and apparent safety – which may well be valid for normal times, but becomes a meaningless farce when a major discontinuity in the credit market should happen and nearly all holders of ABS ‘investments’ run to the credit insurer for relief; all of them at the same time.
Every engineer knows that running a plant with the safety valve screwed down to obtain more performance carries great risk. In the past the banks played the role of safety valve in the credit system; when risk to their profitability became too great, they become more careful and prudent in their lending practice and the credit market begins to cool down. It is a self-correcting mechanism that may have come into play numerous times in the past to smother an incipient bubble before it has taken on a life of its own; even before people were aware of an incipient problem.
It functioned like a safety valve.
Today, ABS – in a broader sense, what Doug Noland at PrudentBear.com generally refer to as ‘structured finance’ – is in full swing. The apparent safety of the ‘new age financial system’, backed by credit insurers and all manner of derivatives, provides peace of mind to every one involved in the chain of recycling liquidity; apparently with full agreement from the regulatory system.
It is a case of, “Nothing can go wrong . . . go wrong . . . go wrong . . . wrong . . . ”
The safety valve in the financial credit system has been screwed down. It would seem this time there is not going to be any entity, lender or credit issuer or investor – or regulator? – who is likely to get sufficiently concerned about risk and the precarious state of affairs to let off some of the super-heated steam and bring pressure in the system down to a more prudent level.
The US credit engine is in positive feedback induced run-away mode. There is really no way to release the steam and so it must end in disaster.
If any reader wants a graphic illustration of what this really means, fill a pressure cooker to a third of water, put it on a hot plate on the stove and screw down the little thingamijig on the lid so that no steam can escape when the pressure inside approaches the danger level. If you really do so, make very sure nobody else is in the kitchen while the cooker heats up. Also make sure all insurance is fully paid up. The end result is going to be both loud and destructive.
This is exactly the situation in the US economy. Nobody is concerned because all is now working so smoothly; the credit cycle ensures maintenance of high liquidity and risk, as we have been expertly informed, is being diversified away into the derivatives market. There is no new dark cloud on the horizon, the economy booms along and Americans live in the best of all possible worlds.
Yet somewhere in the financial system there is a cooker building up steam and reaching towards the danger point. All appears normal and under control, until the BANG comes, as it must; then the event is a big and ugly surprise to one and all.
Is there a solution?
When (not ‘If’) the situation described by von Mises sneaks up on the US economy, the cause will almost certainly not be because banks have become reluctant to make new loans – positive feedback will see to that. When the banks are not prudent, von Mises writes that the credit boom ends for one of two reasons:
“The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Either consumers and household voluntarily decide they cannot afford additional debt or the currency system goes into free fall; or melt down, if that term is preferred.
Von Mises is the complete pessimist on credit fueled booms and views a recession or – in more extreme cases – a depression as the inevitable end result..
At [link to www.polyconomics.com] Jude Wanniski discusses von Mises’ view on the dearth of credit and the contraction and/or deflation that results. He comments on the role of the Federal Reserve as follows:
“If the Fed attempts to stop a contraction by monetizing debt, it only will succeed in causing an inflation. On the other hand, if the Fed is faced with a deflation caused by a surplus in the demand for "new" money, it can of course arrest that deflation by supplying the new money, with no increase in inflation.”
The question is whether there will be any takers for the ‘new’ money if this meant adding to existing debt obligations. In terms of the von Mises alternatives, if households – and therefore by implication also corporations, facing a decline in demand – were brought to the point where they have little choice except to avoid making new debt (even to reduce their obligations) the Federal Reserve may find that their attempt to increase liquidity is very much like pushing on a string.
This reminds of Bernanke’s solution to the deflation problem – calling on the helicopters – which action in terms of the von Mises recipe will change the trigger of the crisis from “ . . as a result of voluntary abandonment of further credit expansion . .“ to “ . . a final and total catastrophe of the currency system involved.”
It is difficult, seeing the commitment of the powers that be to maintain the status quo, to think that the positive feedback mechanism in the debt cycle can be reversed. Rather, the inducements for banks and other credit-granting institutions to market credit increasingly aggressively will remain irresistible, in part since they well know that any decline in the use of ever more debt to keep the credit cycle going will be catastrophic.
In this effort it would appear that they will continue to be aided by a compliant Federal Reserve; in which case one can expect a more accommodative interest cycle as soon as the economy shows signs that it is stalling, with a concomitant threat of deflation.
[link to mises.org] |
| Anonymous Coward
User ID: 423945
4/27/2008 3:54 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
As usual Omega, You da man!!
Another spot on article of what's really going on. |
| rancelot
User ID: 240916
4/27/2008 4:04 PM | | Re: Numbers Racket: Why the Economy is Worse Than We Know | Quote |
I would add that due to recent energy and commodities and food price increases, real inflation annual in the US is approaching 20%.
Who here will be getting a 20% raise this year to cover it???
Didn't think so....... Quoting: Omega
Ricky just got his base pay raised from $1.1 million to $2.2 million. Gotta keep ahead of inflation folks when you're in the driver's seat!
[link to www.autoblog.com]
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| Anonymous Coward
User ID: 355816
4/27/2008 5:35 PM | | | Page 1, 2 | |
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