Is Internet Sales Just Mail Order Self-Service?

For all his precoccious perspicacity, Mish can make seom glaring errors.  Maybe it is just his age and wasn't there.

Retailer inventory-to-sales is a reflection on a huge move towards online shopping and a massive buildup of new retail stores despite the clear shift towards online shopping.

Whoa, Mish... what huge move to online shopping?  Still no more than roughly 6% of retail sales, what is massive about that?  94% is brick and mortar, and even Amazon is opening brick and mortar stores.   And maybe ex nihilo credit dinosaurs are not opening new, but specialty sure are.

And did the internet really take sales from brick and mortar?  I don't think so.  To what degree did online sales cannibalize its market share from mail order catalogs?  

And even the mail order catalogs are still working, in both senses, operating and profitable.

Victoria Secret as $4.5 billion in "online sales" and 450 million catalogs.  Do you know what it cost to open enveopes and prcisses cheacks and credit cards back in the 80's and 90's?  I don't know, but VS remembers.  I was probably in the hundreds of millions at least.  With the internet VS pushed all that order processing back onto their customers, getting that work done free, money not spent that went straight to the bottom line.  Alaska Airlines saves a lot of money now that I book my flights, not resevation clerks. Ka-ching!

Or did they save money?  The easier online shopping gets, the more returns there are.  All these "sales figures" don't take into account returns.  I never see that mentioned.

I was speaking with an international banker once asking if deflation was a problem.  He waived the question off and said "Everybody is lying.   that is the huge problem. We cannot make a loan decision because we cannot trust the information."  Well, with ex nihilo credit, nothing matters, so why not lie?  About such things as sales figures.

People try to copy people losing money on the internet, like Jeff Bezos and Bill Gate. Learn from the people making money, like Les Wexner and Steve Jobs.  It is unlikely the Hegemon will find you like he did the money-losers, but the Hegemon won't get in the way of you making money like Wexner and Jobs.

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Did The FED Just Signal Wage and Price Controls?

A FED governor gave a speech which is as appalling as anything Caligula ever said, but the difference is today few people would object.   Does this paragraph in a FED speech represent the way back to full circle, where this false economy started?  Nixon going off he gold standard (lite) and wage and price controls?  Are we back to the future, wage and price controls?

Mish of course covers the speech well, but he missed something I spotted.

A second alternative would be to replace the inflation target with a flexible price-level or nominal GDP target, where the central bank targets a steadily growing level of prices or nominal GDP, rather than the rate of inflation.

How?  It is a horrible idea at any rate, but how would they target steadily growing prices?  Pause for a moment and let the wave of nausea pass, as yet another blithe insult to you, where the hegemon's minion can openly ponder how to harm you and your family, with impunity, on behalf of the 1%. Recovered a bit?  OK.  Now, specifically how would they cause you this harm?

Would they order retailers to raise prices 4%, and then wholesalers, manufacturers, etc?  Nixon ordered business NOT to raise prices back in 1971 in a positive interest rate, inflation regime, so is the reverse to order business to raise prices the corollary in a negative interest rate, deflation regime?  (And raising prices does not make inflation).

Wait, there are mark-ups and margins to maintain in relation to each stage of production.  So say in housewares the margin is 50%, and the retailer reprices a $1.00 item to $1.04, does the wholesaler raise his price from 50 cents to 52 cents (4%)?    I'd love to hear what the plan is, and then consider it.

Mish does say this, with which I part company:

It’s asset deflation not CPI deflation that central banks ought to fear. Even the BIS agrees with that statement.

There will be no economic recovery without asset deflation commensurate with bubble inflation, with a regression to the mean for full effect.  If the BIS agrees, then Mish ought to disagree. The real estate boom, that asset class, must go bust.  Million dollar houses need to return to their 1998 $200,000 price for there to be an economic recovery.  And then lower to draw in buyers, for the tax man will leave the properties on the books at a million, and collect taxes as 6% as though nothing changed.  The home will have $60,000 tax bill, when $12,000 would be correct at the marked-to-market valuation.  The house thus must drop in price to amortize the unchanging "6%" tax rate, or the buyer won't pick it up.

But but but....  that would wipe out countless Americans.  Well, it would restore the economy to an organically sound foundation.  Those who assess theor accumulations in ex-nihilo credit tallies would certainly find their pensions, paycheck, properties, marked-to-market, are not worth much.  but that would just reveal how much they depended on a warfare/welfare chimerical economy.

And then stocks need to get marked to market.  And pensions.  And medicine, and every other inflated class.

We all love a system that works for us. All policies harm one side and reward another.  The hegemon thrives on the class warfare, could care less about which policy is regnant.  Even if either is being wiped out at any given time, all love a system at which they can win (but a Charlie Sheen kind of "winning".)

Anyone with a  pizza oven will do well, in spite of the fact that pizza prices would be dropping too.  but the difference is the tomatoes, flour, cheese prices would be dropping as well, and the pizza parlor would be dropping prices slower than his costs were dropping.  So he'd be getting wealthier as his prices were dropping.  This is how a free market works anyway.  Wealth is redistributed widely, those who work serving others earn best, and communities become more creative as the pizza man invests in other small businesses and  united as the pizza man extends credit to people in a jam.  It was only 40 years ago that the USA was this way.  Problem is most of productive USA has no idea there is an alternative and the way to it is through massive deflation.

Start your own business, fire up a pizza oven, if that is your thing.  Make sure it is on wheels, not bolted down, so it is your property, not a fixture that becomes legally the landlords.

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Are Negative Interest Rates Debt Deflation?

I've repented of using the terms malcredit and benecredit, since modifying perfectly good words to account for degeneration cedes ground to the bad guys.  There are apples, and there are rotten apples. There is credit, and then there is ex nihilo credit.  Clear and simple.

Credit and debt necessarily balance out.  If I lend you $20, you owe me $20. Everbody does that.  It is not ex nihilo, cuz if I am not paid back, I've lost $20 in purchasing power.  This is private extension of credit, and there is a debt on the other side.

If I ship you $500 in goods at net 30, you owe me $500, and I have an accounts receivable, an asset, worth $500.  If you don't pay, I am out my income, and the books I sold you. This is commercial extension of credit, and there is a debt on the other side.

That's all just credit.  And debt. At no interest.  All good.

Now, sometimes, some people would extend their $20 at interest. In most of history, this was illegitimate, if not illegal, since lending any amount at any rate of interest for any duration causes damage.    People lending at interest had no recourse to courts for enforcement, any more than a casino operator can enforce gambling debts (hence extra-legal enforcement of gambling debts).

In any event, credit is good, but it can be abused by adding interest.

Now banks, where gold and silver were stored, at first could not lend out their stores, for example, it was illegal in ancient Rome.  In time things change, so just like I might lend you $20, a bank could too. OK, if the owner of the deposit agreed.

But the temptation to lend money out at interest is of course just too strong.  So that happened.   It distorts an economy, but that is not as bad as it can get.

Instead of releasing gold as a loan, the depositor could write a note stating the note-holder was as good as gold.  These notes could move around, the proto-currency.    Nothing wrong with that.  It's a loan, and there is an asset on the other side.  But of course it also could have interest attached.

One currency happened, bankers figured out they could write more currency than there was gold, initially a crime that carried the death penalty.  We call this fractional reserve banking now.   In the measure there is only a fraction of reserve backing loans, that measure is ex nihilo credit.  If your bank holds 100 pounds of gold, and you write 200 pounds in currency notes, then you have a 50% fractional reserve.  Of course this is fraud, and "bank runs" followed discovery.  If ruined depositors did not kill the bankers, it was only because he authorities hanged them first.

Things change.  It's quite common for what is criminal among citizens becomes de riguer for the Hegemon.  Now our entire banking system worldwide is built on fractional reserve, hard to say exactly, but best estimates is 3%.  97% ex nihilo. Fractional reserve is so dicey it is stupid without some insurance premium so to speak, and that is interest on the loans of the fractionally reserved credit.

So imagine that.  For the portion of the economy which depends on bank credit, some 97% is ex nihilo credit.  There is a debt on one side, but no asset underlying credit on the other side.

It sounds like there is.  Ford got credited ex nihilo for the Mustang of which title was transferred to you, upon your promise to make payments, in ex nihilo credit, plus interest, out of your income stream, largely tallied in ex nihilo credit.  Whole lotta ex nihilo credit going' round.  Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments.  What's wrong with that?

Before I explain what's wrong with that, let me translate the previous paragraph from reality to capitalism.

You get a loan from a bank for the money to buy a Ford Mustang. Ford gets that money for the Mustang and transfers title to you, upon your promise to make payments, in money, plus interest, out of your income stream.  Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments.  What's wrong with that?

Well, it's not money.  (But experience the social conditioning: the second version sounds correct, but it is utter fiction.) It's ex nihilo credit. It suggests a wealth that is not there, and people calculate economic decisions in prices, prices that are not denominated in money, but in ex nihilo credit.

Ex nihilo credit has no rational limit.  Ex nihilo credit appears to be wealth.  People who would not qualify for asset backed loans certainly qualify for ex nihilo credit.  They want more better cheaper faster, and as ex nihilo credit-based demand grows,  Ford can deliver, at least what is advertised as such.

What's wrong with that?  Well, as Bastiat noted, there is the seen and unseen.  We like what we see.  And as I note, we all love a system that works for us.

Ex nihilo credit is paid into the economy, causing inflation, and an appearance of wealth that is not there.  People overextend.

With false wealth, the most egregious borrowers are necessarily calling forth what array of goods and services we see.  The least perspicacious are the most powerful economic actors, given the leverage ex nihilo credit offers. A Dick Cheney tells us "deficits do not matter" (ex nihilo credit is also deficit spending) as he gleefully prosecutes criminal wars with impunity, and immunity.  The poorest person in USA can whip out his EBT card to pay for a couple of corn dogs and a supersized Coke at a gas station. There is no difference in kind between those two people, only in scale. Neither has any money.  Both are dependent on ex nihilo credit.  Both are economic actors. Both simply put their purchases on the tab denominated in ex nihilo credit.  It all adds to the power, denominated in ex nihilo credit tallies, of the bankers, etc.

Sure auto payment delinquencies are up, but only to 2.6%.  So what?

On the margin, much of the recent growth of auto sales has been attributable to sub-prime borrowers, which are now up to 31% of all loans. These loans carry onerous interest rates—often 20% or more—-and are available primarily due to junk debt financing of non-bank lenders. That is, fly-by-night start-ups organized by Wall Street and private equity funds.

What is unseen is what that 31% would be buying if they were not

A. using credit or money to buy a car (public transportation?  different car?)

B. forking over the 20% interest on their ex nihilo credit loan to the bankers.  We'll never know.  the only thing we do know, is they cannot afford to what they are "buying" with ex nihilo credit.

Their losses go on our tabs.  Recall it is ex nihilo credit, the banks are out nothing. The delinquent buyer may have a note on a credit score, but Ford has the $35,000 in ex nihilo credit on the books as an asset.  Where is the asset underlying the deal?  Why, the Mustang itself, right?  Well, it's been repo'd and sold for $20,000. That's a $15,000 difference.  Is the bank out?  No.....  Is Ford out?  No....  Is the borrower out?  No....  well, then who picks up the $15,000 loss?  If you cannot tell who is the mark in a poker game within the first 20 seconds, it's you.

Hi Ho Hi Ho, it's off to work you go...  You have to work to pay down the tab of everyone from Dick Cheney to the delinquent Mustang short-faller to the unemployed fellow dining on corn-syrup dogs and diabetes-bev at the Mini-mart.  That's capitalism.

What is unseen is what we would have without ex nihilo credit.  Less war?  Less surveillance?  Better medicine, education, clothing, food, housing?    More peace and prosperity?  History says yes, but we see the Mustang in the driveway and say "what's wrong with that?"

We all love a system that works for us. 150 years ago the English would look at the Irish for whom the system did not extend, dining on the 1850s version of corndog and coke, and say they are genetically inferior.   Today we look at those who do so and say the same things.

Ex nihilo credit distorts the array of goods and services we would reckon we could buy.

It retards true wealth creation by tapping into income streams with interest payments.

It concentrates wealth in ever fewer hands, by means of interest stream if no default, and titles returned to the lenders if default, who in turn then hold sway over those who borrowed ex nihilo credit (we've noted in your file), if not enslave them as with student loans.

What do we care?  We have big screen TV, KFC, Mustang, iPhone and a house.  And Romney/Obamacare.  And poverty draft.

Well, you might not care, but the 1% are sure worried.  There was no rational limit to lending ex nihilo credit at interest.  But something that defies understanding, never seen before in history, is happening.  An utterly irrational negative interest rate phenomenon.  With wealth tallied in ex nihilo credit, an undoing could result in all tallies being marked to market.  Pro rata?  Or politically distributed (OK, I know the answer.)  Or war?  If the 1% is worried, you should, because they decide.

Inflation comes from printing too much currency.  We have inflation in housing, medicine, education, some categories of food, and certainly equities.  So what happens when you "print too much credit," or more accurately too much ex nihilo credit?  That is the head scratcher.  Deflation?  We do see prices dropping in shipping, but that is overcapacity based on misallocation of resources and malinvestment due to reckoning prices in ex nihilo credit. Dropping prices is not necessarily deflation.

Perhaps deflation in relation to ex nihilo credit is not in the price of goods, but the price of debt.  The negative interest rates are showing up in bonds, in other words, debt.  So if we had hyperinflation of credit with ex nihilo incontinence, is the reverse hyper-deflation in debt?

Is negative 2/10th of 1% interest on a ten year bond an abberation, or just the beginning?  We can see various actors chafing with ten trillion at negative 2/10ths of 1%. Has anyone studied the impact of negative interest rates to 2%, 5, 10, 25%?    Is that the denouement?  Deflation in debt, the debt on the other side of the balance sheet for ex nihilo credit?

If the hegemon's power is tallied in ex nihilo credit-based debt (for the one who holds the paper is in control) the debt deflation means a commensurate loss of power.  Is that what is going on?  You tell me, I haven't figures it out yet.

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Best Economic Essay in Ten Years

What have I been saying?  After delineating good and bad credit, finally someone in academia is saying it!

Only then can we understand how the bubble economy’s pseudo-prosperity was fueled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.

Again and again I have pointed out the winners only had to be willing to take on the most debt.  I thought I was the only person pointing this out.  Comes now a couple of professors who explains well why if you have paycheck, property or pension, for the next forty years, you're toast.

That is what makes the seemingly empirical accounting format used in most economic analysis an expression of creditor-oriented pro-rentier ideology. Households do not receive incomes from the houses they live in. The value of the “services” their homes provide does not increase simply because house prices rise, as the national accounts fiction has it. The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.

Some will argue, all those tellers and loan officers and Vice Presidents and janitors and rent-a-cops are certainly being paid wages generated and stockholders and Presidents get profits.  No.  They are just minion-rentiers who are tossed some redirected revenues for making actual the redirection in toto.

Here is an important point, upon which I will intrude...

Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income.

How is this distribution of wealth effected?  Titles.  Ex nihilo credit is available to borrowers from hegemon-chartered entities.  People who are wholly engaged in loaning credit, something from nothing, are able to attach at least a partial lien, if not a clear title, to at least a portion if the means of production and real wealth such as homes.  A slice here, a chunk there, it can add up.  Their slice is purely inflation, but since all loan-involved investments are marginal, and the lender's title is superior, when the economic actor is overwhelmed in his measure, all spoils go to the lender.  It is a neat trick.  Wait a minute.  It is just the pigeon drop scam!

What you don't know at this point is that your new acquaintances are running a scam, and you're the target. The first stranger earned your confidence, so that when the second stranger presented a moneymaking opportunity, you had someone you trusted telling you that it was a good idea. The first tip-off to the pigeon drop, then, is when you find yourself with a new friend, followed soon after by a chance for the two of you to cash in with the help of a third person.

Your new acquaintance is a real estate broker who instills the confidence, and the second stranger is the banker, who can make a money maker happen, a home (or a job ((a degree)) or a car...  you name it.)  It's the same set up over and over, but it is legal.  There is nothing in the bag of value, except what money or title obligations you put in.  Later, you realize you got nothing, they got the titles.  Titles to your future income stream. Except no one hides this, because it is enforced by law.

For example, in one instance, as homes are sold and debt is assigned, who has the title to the goods?  Well, you, as long as you can make payments and pay taxes. But one gross distortion is since the 1980s in USA you cannot get a mortgage without very special circumstances (maybe farmland).  Now you get a deed of trust, which allows banks to fast track foreclose, so they can get the home resold faster.

Onward,

James Tobin already in 1984 worried that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services” (Tobin 1984, 14)

Yes, a specialty retailer who had a storied life was closing down and lamented we lost two, maybe three generations of entrepreneurs.  They went instead for the skim.  After noting a business loan is paid for out of the proceeds from the new means of production created, home loans must be paid out of the current income of the borrower.  The house itself provides no income.

Mortgages are also special in that real estate assets have grown into the largest asset market in all western economies, and the one with the most widespread participation. Following classical analysis, if every real estate asset bought on credit skims off the income of the owner-borrower, then the rise in home ownership since the 1970s has sharply increased rent extraction and turned it into a flow of interest to mortgage lenders. 

Everything changed in the 1970s.  When Nixon took us off the gold standard (lite).

Bank credit to the nonbank “asset” sector (mainly for real estate, but also LBOs and takeover loans to buy companies, margin loans for stock and bond arbitrage, and derivative bets) does not enter the “real sector” to finance tangible capital formation or wages. Its principal immediate effect is to inflate prices for property and other assets. Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories.

Any real estate agent in the 1990s could have told you that if you could afford a $200,000 house at 9% interest, you can afford a $300,000 house a 6% interest.  Academics figured this out only in 2014? So, when the interest rates dropped from 9% to 6% did people trade up to more or better homes?  No way.  A $200,000 house at 9% interest becomes a $300,000 house at 6% interest.  Imagine how overpriced the homes people are getting now at 4%.  That $200,000 house is now priced at $600,000.  If and when the economy crashes, wages, income, etc goes back to at least lower, one way or another.  But the nominal debt stays at $600,000.  Because of your marginal exposure, Warren Buffett picks it up for pennies of ex nihilo credit on the dollar for Berkshire Hathaway, and you must at best bankrupt your "loss."

How does this asset-price inflation affect the economy of production and wages and profits? In due course this process involves increasing the debt-to-GDP ratio by raising household debt, mortgage debt, corporate and state, local and government debt levels. This debt requires the real sector to pay debt service — a fact that prompted Benjamin Friedman (2009, 34) to write that “an important question — which no one seems interested in addressing — is what fraction of the economy’s total returns … is absorbed up front by the financial industry.”

Yes.  Good question.  And the follow-up question would be, to whom does it go?  The answer will be, the 1%.

To ignore this rising fraction is to ignore debt and its consequence: debt deflation of the “real” economy. Of course, the reason why debt leveraging continued so long was precisely because credit to the FIRE sector inflated asset prices faster than debt service rose — as long as interest rates were falling. The tidal wave of post-1980 central bank and commercial bank liquidity drove interest rates down, increasing capitalization ratios for rental income corporate cash flow.

He is hitting on something here... credit inflation, debt deflation.  Two sides of the same coin? I'll have to turn that over in my mind.  And this is good stuff:

A debt-leveraged rise in asset prices has a liability counterpart on the balance sheet of households and firms. Homes, commercial properties, stocks, and bonds are loaded down with debt as they are traded many times by investors or speculators taking out larger and larger loans at easier and easier terms: lower down-payments, zero-amortization (interest-only) loans and outright “liars’ loans” with brokers and their bankers filing false income declarations and crooked property valuations, to be packaged and sold to pension funds, German Landesbanks, and other institutional investors. Each new debt-leveraged sale may bid up prices for these assets.
But the credit can be repaid (with interest) only by withdrawing payment from the “real” sector (out of profits and wages), or by selling financialized assets, or borrowing yet more credit (“Ponzi lending”). The rising indebtedness approaching the 2008 crest was carried not so much by diverting current income away from buying goods and services or by selling financial assets, but by loading down the economy’s balance sheet and national income with yet more debt (that is, by borrowing the interest falling due, for example, by home equity loans). What kept the “Great Moderation” income growth and inflation levels so “moderate” was an exponential flood of credit (i.e., debt) to carry the accumulation and compounding of interest. It was like having to finance a chain letter on an economy-wide scale, with banks creating the credit to keep the scheme going.

And this...  well, it also constrains the creation of means of production the would generate a surplus from what it produces.  What cannot go on will end at some point.

This is the institutional reality behind the negative correlation coefficient of credit and income growth, reported in the previous section. In fact, to assess credit for its income growth potential is to miss its true function in the rentier economic system. The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.

Now this needs a bit of explication.

Financial markets can grow sustainably — that is, without rising fragility — only when loans to the real sector are self-amortizing. For instance, the thirty-year home mortgages typical after World War II were paid over the working life of homebuyers. The interest charges often added up to more than the property’s seller received, but the loans financed about two million new homes built each year in the United States in the early post-war decades, creating enough economic growth to pay down the loans.

Things were very different then. Home loans were for mortgages, not deeds of trust, financed largely by Savings and Loans and Credit Unions in which the interest rate, about the same today, 4.75%. in 1955, barely covered the costs of administration of the loan.  The loan was against money,  the cash in the pay envelope deposited on the first Friday of the month into the S&L or CU, backed by gold and silver.  And the loan terms were usually 20 years, because that is all it took to comfortably pay off a note.  There was no Freddie Mac to create inflation by vacuuming up as much paper as anyone could generate.  That would not come until... wait for it... the 1970s.  But there were assumable loans, meaning instead of flipping homes and inflating values, I might get a job offer in another town and just pass my mortgage onto someone else who continued the payments.  The S&L just wanted its money back, could care less from whom.  So yes real estate markets can grow sustainably, but nothing we have today resembles when last we had a sustainable market.

And this too:

Many U.S. students could not attain a college degree without student loans.

 Not true, false dilemma. The fact is EZCredit is merely more attractive, buy-now pay-later, than a pay-as-you-go degree, granted that ex nihilo credit woefully overpriced an ever degraded degree.

In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. 

OK, useful figure, let's call it the 5 point growth.  That 5 point growth generated, as this essay demonstrates, a false economy, unreal GDP proportion reported as GDP. So then we must ask, what per cent of 5 point growth is of the distortion of reported GDP, generated by financial engineering?  And better yet, net of false economy FIRE financial engineering portion, to what does the "7.9% of GDP" truly amount?

This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?

As for today's economies, the question is moot.  Retirees are being "sicked-in" to hospices, shaken down for all of their assets, and dispatched at necessary rates to help maintain balance.  So the question is not vital for today, today's retirees are being queue'd up for extinction in this Darwinist polity.  The question is vital to whomever makes it through the progressing disintegration.

Financial and other investors focus on total returns, defined as income plus “capital” gains. But although the original U.S. income tax code treated capital gains as income, these asset-price gains do not appear in the NIPA. The logic of their exclusion seems to be that what is not seen has less of a chance of being taxed. That is why financial assets are called “invisibles,” in contrast to land as the most visible “hard” asset.

Yes, as I have been saying here, when we switched from vendor-financing for industry and commerce to bank finance starting in the 1970s, that which was near impossible to tax for the impracticality of it, such diffuse records, now became easy to tax with ex nihilo credit ascendency since the records could be found in one place: banks.

That this was a conscious agenda item is revealed in the fact when the FED was first set up back in 1913, the FED engaged in an intensive campaign for business to switch from vendor financing to Trade Acceptances ostensibly to improve commercial efficiency.  "Let the banks process your receivables for you."  It did not work, USA business did not fall for that ruse.  But with ex nihilo credit after 1971, it worked like a dream. No a ten cent retail purchase can be tracked and taxed.

Here again, as perspicacious as this essay is, it is prolegomenous.  It will be interesting to know what the prescriptions are, just how to save the Hegemon's system from its greediest outliers?  Sure, whoever borrowed the most won for a while, but not any more.  They are dropping like flies.  Now let's discover what the sustainable limits are in the pigreon drop scam.

It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. 

Yes, to what I have referred here elsewhere on the blog as "exceptional wealth."  the 1% did not earn their exceptional wealth, in a free market.  They stole it fair an square, legitimately.

Should it be redistributed?  No way!  Simply delegitimize charging interest, that is deregulate finance at least as far as making interest a non-enforceable contract item, just as gambling debts are non-enforceable in USA, and watch the "wealth" first deflate as it is marked to market, and then redistribute perfectly as the accumulators lose the wherewithal to ever corrupt more and more players: economists, politicians, professors, Wall Street actors, industry, religion, law, ad nauseum.  Delegitimize and redistribution happens automatically and fairly.  Will capital fly?  Sure, when it is that light, ligher than air, mere notional, it sure will.  But where?  "I have $10 billion tallied in ex nihilo credit obligations due me, will you give me refuge in Switzerland?"  "Convert it to gold first, then show up in our airport.  Good luck."  Good luck indeed getting away from the Hegemon with that.

Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.

A good portion of it forfeited to the state, hence its recurrence.  The Hegemon could care less if this is unwound rationally, fairly peacefully, or if there is a world war.  Note when the Soviet empire crashed, existentially ended, all of the previous players remained at the top. The gentle unwinding process of eliminating the legitimization of interest (for without it ex nihilo credit will disappear too) would be acceptable to the hegemon, just as the surprise insurgency of a Donald Trump is acceptable (and the moment he is not acceptable, he'll get a serious headache, like a Kennedy).

The summary is excellent, I recommend highly clicking on the link up top and reading the whole thing.

Somehow, I haven't figured it out yet, and apparently no one else has either, if ex nihilo credit and negative interest rates are correlated, and the significance thereof.  There may be a clue in ex nihilo credit inflation/price deflation. I dunno. Whoever figures this out will be so far ahead of everyone else.

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No Pension Recovery, More Loss for 30 Years

When a financial advisor uses terms correctly, give him a listen:

“Either deflation is going to accelerate, which is most likely, or they [central banks] will turn to real inflation, real printing, rather than just credit inflation. Either way it’s disastrous.”

Good, he has money and credit right.  But disastrous for whom?  Just about everyone, since just about everyone in in this pickle:

 “The whole idea you buy stocks and hold them for 30 years was never correct. … The typical investor should be out of stocks and out of bonds and wait for a crisis, and buy during a crisis.”

But our entire patterns, practices and laws are based on this being true.  For anyone who has been deferring income into pension plans, guess what, the longer you wait, the less you get.  Since how and when you withdraw is set by law, you are a sitting duck.   With inflation your money will buy less as it comes out, with deflation it will bu more, but Uncle Sam will them tax is more heavily on the way out, even if it is tax exempt.

People who think medicare or social security will do, well, it is worse off than the pensions.  This from Mish:

My favored scenario is a series of five to fifteen percent declines over a number of years, with smaller and less frequent rallies, where every rally is a trap.
Such a slow bleed would be far more painful to pension plans counting on eight percent annualized returns.

Crash?  It probably already happened.  The damage is done during the boom.  What have we seen?  The slow bleed. The elders are the first to be harmed, and they are not in a position to complain.  This will get around to everyone, no matter what happen on Wall Street or in Washington.  Neither has anything to offer Main Street.  A real estate crash is inevitable at some point, since it is wildly overpriced.  The bottom of the market is not low prices, but no customers.

Don't get in the fight over dwindling assets.  Start creating your own by starting up your own business.

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Kiva Zip: Mark Sent Me $1.39!

Received a loan update notice from Kiva Zip:

Mark sent you a $1.39 repayment!

I have no pension, paycheck, nor property.  Got rid of it all.  With my children all growed up and established, I am now free to do what I want.  So I am doing what I always did, because I love my work.

No pension?  Never wanted one.  My retirement plan is to grab my chest mid-sentence and drop dead in some trade show booth or in a classroom lecturing.  "Tag 'im and drag 'im."    Paycheck?  I am employment proof, and by the grace of God I find plenty of work to do every day, and sometimes it pays!  Property?  I am an American Indian when it comes to real estate, no one should own property.  Lease for 99 years?  Sure, that is a good foundation for all real property rights laws.

What to do with excess cash?  Loan it out.  A loan is always a charitable event, unless the intent is to advantage oneself and harm others by lending it out at interest.  I am not a financial advisor, but if you want to keep assets safe in the coming years, lend them out.  Especially to non-interest lending orgs that make microloans, like Kiva Zip that mediates between small farmers and people with money to lend.  Mark just made a payment above, to me and no doubt 199 others who all kicked in about $50 each to front Mark the money to expand his sales presence.  I am encouraged by Kiva Zip to roll it over into a new loan.

Now, as a matter of economics, since we are in deflation, I am getting back more buying power with the credit I extended then I lent.  Nothing I can do about this, except when I re-lend tis excess, it will go farther.  Too bad for Mark, and the rest of us who owe anything.

Kiva has an interest-loan division, so be careful.  Here is the no-interest section:

https://zip.kiva.org/

I am not a financial advisor.  neither is Kiva zip.  But if i wanted to keep a million cash away from the hegemon's grasping hands, and it does not matter who wins, it must be taken from you, I would not hide it in cash in a safe-deposit box or bury it in the back yard, I would not put it in Canadian gold stocks with physical certificates in hand, I would not buy gold and put it in a floor safe in the basement. I'd lend it all out in $50, $100, $500 increments to small enterprises all over the world.  It would be so atomized he hegemon would never get around to stealing it.  And I could practice layering, that is have micro-repayments layered in such a way that they come back to match any foreseen expenses or opportunities, and in any event, I'd have an asset (accounts receivable) against which my credit would be good since I have a reliable income stream.  If unneeded, just roll over the payment from Mark and off it goes, back to an atomized free field.

With a pension, there are so many rules regarding how much you must take out and when, and what age and how much you can work or this penalty happens.  Why live for the hegemon?  So you can defer taxes? Ha!  There are dozens of ways to tax, and since when does the hegemon keep the rules?

Once you reject usury,and live "interest-free (both ways)" the alternative ideas come pouring in.

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World Trade Crashing: Ho Hum!

The newest Census report on imports and exports show world trade is crashing for USA too!  Look at it go!  Both imports and exports!  I read the articles too!  Baltic dry index down! Maybe people should gain some perspective!  This is one year!

http://www.census.gov/foreign-trade/data/index.html?eml=gd&utm_medium=email&utm_source=govdelivery

Much more useful is to observe what has happened over the last 40 years, starting with Nixon going off the gold standard (lite).  Those trend lines accelerate after 1971.

https://www.census.gov/foreign-trade/statistics/graphs/gands.html

Let's begin with Earl Butz, Nixon's Sec of Agriculture, who announced the policy of USA is "get big or get out."  Now, this does not mean that Uncle Sam was to help only big business, it means they will harm small business at the same time.  Stated policy, enacted means, results achieved.  At what point do you believe them?

Although regulations, taxes, death taxes all helped destroy the family business, even more insidious was unleashing banks to create and lend malcredit, at interest, when previously the vast majority of lending in USA was at no interest, and almost all the rest at cost of loan processing, through thrifts and credit unions.

The trick became rocking the cantillon effect, the more money you borrow, the closer you get to the source, the lower the cost: crush the competition, roll up the industry.

First they came for the USA manufacturers, countless small businesses. And those who fell for the folly of price cutting, down they went.  When the big box stores had wiped out USA industry, then they went to China, whose credit became good, give the untapped resources of the world largest country in people.

That big dip is 2008, which would have been a good peak to end the damage, but as you see in eight years things have gotten much worse, fatter problem.  Well, the next crash will be all that more bad for those engaged in the false economy (if you are employed, have a pension or stock portfolio, own property...  you are probably to that degree tied up in the false economy.  You'll learn how much by how bad this next crash hurts.).

A few points;  the damage is done during the boom, the crash is simply the correction.  The longer the boom, the more gets corrected.

The bottom of a market is not low prices, it is no buyers.  If you think anything is low priced now,  you ain't seen nothing yet.

The right side of the 2nd graph will look like the left, except 40 years of downward.  Deflation instead of inflation.  Rent, don't own.  Delay getting paid, not hurry up and pay me.  Work for yourself, family business with no benefit plans, not a "job with bennies."  This will be the path to wealth, properly defined.  It is the path to your peace and prosperity.

(Incidently, the 2nd is also a graph of the growth of government in USA, and a graph of the growth of microsoft, and so many other false economy monsters.

The drop in exports, small as it is, is mostly big business trades, not small specialty trades, as I have demonstrated here several times.

So get self employed, if retail great.  If wholesale, competing on design, take advantage of the worlds excess capacity to source your items, and in the coming years, when USA real estate crashes (and commercial crashes far faster and deeper than residential) families will be able to start small businesses in USA, manufactories, etc, and slowly we'll see a renaissance in USA small business.

It's about time!

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Hyperinflation in Credit?

So it is easy enough to figure out the effect of the reverse from inflation to deflation on an asset such as homes and the right strategy.  With inflation (over the last 40 years) buy a home, any home and watch your investment grow.  With deflation, sell your home and rent, and watch the home prices drop.  Renegotiate rent lower every three years.  Your landlord will love you because he has a renter.

Now where it gets tough for me, is to wrap my head around what's going on in malcredit, and that is junk bonds (high yield) are faltering.

So junk bonds pay say 10% and there are investors hungry for that yield, in spite of proper labelling: this stuff is very risky.  it's risky, but bondholders are ahead of everyone else in a bust because they lent credit, not bought into the company. Who buys this is people with fairly solid tallies of credit, so it is not quite malcredit, or at least not the bank-generated toxic waste credit.

Next, we have these four parts: the bond issuer (borrower), the junk rate offered, the bond buyer (lender) and the junk rate earned.

Bonds are debt, not equity, so their process is different than equities.  So, when junk bonds sell at ever higher yields, and AAA debt at negative interest rates, then is the spread the thing?  The gap between the two yields?

in hyperinflation, your currency will not buy much of anything.  When dealing in debt and bonds, which pay in interest rates, what is the extreme/  When your yield offer will not get you much of anything?

Still trying to figure this out.

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Learn From Chipotle!

I have never eaten at Chipotle only because as a fast food joint I assume I can't get a cerveza with my combo plate, and a Mexican meal is incomplete without a Negra Modelo.  And anywhere there is a Chipotle, there is a mom and pop taquiera with beer.

Now Chipotle is billed as "fast and fresh" and I have to admit the fast food aspect of their stores is also a bit off-putting.  But never mind, fast is part of their thing, and so is fresh.

The problem with fresh is it takes big Ag to supply 1900 stores with "fresh" and e-coli outbreaks come with big Ag, not small mom and pop.  In modern "insurance" big biz assumes a certain amount of death of customers, and credit is set-aside for payouts (as opposed to insurance companies regulating how and when they will cover a risk. )  Mom and pop cannot afford to kill customers, they being more free market, as opposed to the capitalists who can afford to do so.  Mom and pop just make sure the food is wholesome.  Chipotle just makes sure the shift is covered.

Now Stockman, ever interesting, has taken apart the financial success, and distress, of Chipotle, which has become McDonald's bete noire.  While interesting to rentiers, we who actually must produce may take a additional very important lesson Stockman does not offer.

Thus, at its early August peak, CMG’s $24 billion market cap represented 48X the $500 million of net income it had posted in its most recent LTM filing. But the 1,900 Chipotle restaurants that fetched this nosebleed PE multiple are not high-end food emporiums serving gourmet fare at luxury prices to the top tier of affluent households.
Actually, they slop out burritos, tacos, salads, black beans, salsa and chips at $9 per ticket. Its customers are mostly millennials, who have an average of $155 per month of discretionary income, including the ones living in mom and pops basement.
The business has no barriers to entry and miniscule brand advertising. It is being assaulted by an army of competitors including established chains like Taco Bell, and newcomers like Qdoba and countless more, who have belatedly discovered the popularity of Tex-Mex fare. And CMG is also now running into saturation of prime locations and markets—–the fate that always and everywhere brings down high-flying retail and restaurant roll-outs.
Yes, CMG has a clever marketing gimmick and value proposition. That is, that its food is fresh, organic, locally sourced and that the pigs and chickens which end up in the burrito bowls have not been ill-treated on an industrial farm.

Those metrics, $9 fresh mex meals to $155 discretionary income are useful to anyone contemplating self-employment by means of a restaurant.  Keep in mind just becasue nominal stock valuation changes does not mean the productive capacity of the chain, or its survivability is in question.  Cisco never returned to its high valuations of 15 years ago, but it is still a productive powerhouse. Stockman is only pointing out you'd be nuts to invest in Chipotle (or have been nuts) at this stock price.

So what? Is there anything in that proposition that could not be eventually duplicated by aggressive competitors——even if they needed to play catch-up ball for awhile?
The fact is, no company has ever permanently dominated a new chain restaurant category indefinitely——-from hamburgers joints to pizza chains, seafood eateries, pasta places and high end steakhouses. Nevertheless, Chipotle’s absurdly high PE multiple reflected exactly that proposition—–hyper-growth and complete dominance, world without end.

Now David, hold-on...  at 50 years and counting, Micky D has had a run that was great to many who have come and gone from that org.  But true, there are far more gone in each category than surviving, but that was the point of the last 40 years of capitalism: collectivization.

In fact, Chipotle’s approximate 25% annual earnings growth since 2009 was taken exactly out of a tried and true cookie cutter. Profits were growing because the company was rolling out 200 new stores per year based on leasing costs that were dirt cheap due to the Fed’s repression of interest rates and an abundance of gig-based labor at the minimum wage.

Since 2009?!  It took McDonald's 50 years to get to 2000 restaurants.  But then came Nixon, and McDonald's started opening 1000 a year (McD donated a quarter million to Nixon's re-election).  MeDonald's never experienced that crazy valuation, but it is exactly that lending credit that incites crazy valuation and excess production capacity.

McDonald's was started in the 1950s, along with a million other burger joints, all building on vendor financing...  so with KMart and WalMart in 1962, and countless other companies who had built management teams that had coalesced into tight machines, and could take advantage, right place at right time, of Nixon going off the gold standard, one mistake, and then banks lending credit, another.  Not all teams could manage it, In the 1950s, A&W Root Beer, started in 1919 in Lodi, had 450 shops, already the biggest.  The Marriotts, of hotel fame, got started as an A&W franchisee. By 1960 they had 2000 restaurants, but no standardized menu (the Root Beer was the only common thing).  Although each was essentially a burger joint, a non-standard menu meant each store could buy local, wholesome.  it is the only chain where you can approximate the better quality food of the 1960s, and accordingly, you see hot Rod conventions with geezers and their vintage cars at the few remaining A&W locations.  Point being, when the right time and place was there, A&W's original team had broken up, and so they could not act on the new regime.

Now, note, just because Nixon did something wrong, does not mean the banks must do something wrong too.  Bankers might have shown some integrity, but they didn't, or the ones who did were obliged to eave banking.  There were some test runs of lending credit at a very high level, and then the rot began to work down to this day where welfare is generated on the fly at places like ExImBank and at gas stations when someone buys a meal with an EBT card.

Economics is taught as though it is value free, like math, but it is not, it is a subset of ethics on the field of philospohy.  A dead give-away is the economic term "moral hazard."  The fact that bankers could not resist making something for nothing shows going off the gold standard is not a value neutral event, it has consequences that matter.  One might study it dispassionately, but once known, one is obliged to act accordingly, right or wrong.

But back to the data:

For instance, Panera’s food costs is 34% of sales compared to 33% for Chipotle. Even in the case of the burger chains, food and paper costs run in the same zone, and were about 32% in Wendy’s most recent quarter.

As long as I can remember the metric for restaurant is 1/3rd of the cost is food.  I wish I could find the source, but somewhere there is a proof that all competitors eventually fall within key business rations... profit margins, cost of goods sold, ROI, etc.  An autographed book to the first person who can remind me of it!

That’s especially true for a wholly owned restaurant operation that now has upwards of 2,000 locations and 53,000 employees paid at an average rate of just $20k per year.

Ach!  Who can live on 20k per year as an employee?!   On the other hand, as self-employed (customer employed) you would never want to make more than say $20,000 per year.  Whereas mmost people work as employees to earn enough to live a given lifestyle, after giving their best hours making someone else's dreams come true, for the customer-employed the work is the lifestyle.  And just about everything personal is also a business expense.   In Seattle a surviving 1950s burger shack chain called Dick's pays probably in the $20,000 per year range, but also pays the Community College tuition of any worker with more than 6 months seniority.  This is family stuff...  instead of paying someone $25K and that person taxed on it, make a donation before tax as a business expense and make the employees' earnings go farther. (Two new rules may ruin this: 1. The IRS now taxes scholarships as income.  2. Seattle's $15 and hour min wage, a 50% increase at Dick's, will no doubt wipe the company out.)

In Chipotle’s case, there was even more foolishness embedded in its high PE multiple. Competitor risk was coming. Supply chain risk was self-evident. Constant prices increases to its less than affluent customer basis were a ticking time bomb. Choice locations in most of the US had been used up. Tex-Mex wasn’t catching on abroad.

Tex-Mex saturation?  Maybe so, but maybe your flavor is Peruvian...  or, who knows.  I watched Dick Clark interviewing a singer in 1981...  Clark could not remember the word for raw fish on rice at Japanese restaurants, because it was so new.  In 1978, Japanese restaurants were pretty exotic, but only served sukiyaki and tempura.  By 1981, they were becoming hip and cool and a new thing.

Stated differently, the earnings from intangible goodwill not backed by brick and mortar assets, patents, proprietary know-how, breakthrough technology or super-heavy advertising and marketing on a permanent basis cannot possibly be worth 48X. The fact that CMG reached this lunacy only a few months ago is screaming evidence of the monumental complacency that prevails in the casino.

So those are the key elements in a mass food chain success?  As a mom and pop, or as I prefer, specialty, you'll need brick and mortar, but rent, down own it,  you won't need patents, you'll have your know-how, as to tech, well, a griddle and folding card tables and chairs to start?  As to advertising, well, your every customer is within 5 mile radius, and they will be reached with your business sign, and maybe a 2-1 intro coupon in the local mailer.

Yet you don’t have to be excessively observant to recognize that the 20-year global credit and economic boom led by the Red Ponzi in China is coming to a screeching halt because the central banks have well and truly run out of dry powder and credibility. The world economy is self-evidently in the midst of the greatest commodity deflation since the 1930s, while industrial prices and profits are getting whacked hard and CapEx is plunging into a veritable depression.

This is not 20 years old, it is 40.  I wonder at his mantra "China Ponzi" scheme.  Deng Xiaoping took a world tour victory lap in '79 and was schooled on how to play the hand the USA hegemon dealt 7 years earlier.  Deng played it masterfully.

Forget the fact that China allegedly grew at just under 7% last year, when power consumption did not grow at all and rail freight volume plunged by an unprecedented 10%. Or that Korean exports are now down by 15% on a Y/Y basis. Or that crude oil, copper, iron ore and ocean freight rates are in a death plunge.
Already honest GAAP earnings for the $&P 500 companies have plunged from a peak of $106 per share in the September 2014 LTM period to $90 in the most recent LTM period—–or by 15% and the bottom line weakness is just beginning to spread outward from energy, materials and industrials. Macy’s anyone?
Even then, the broad market multiple at 22X is not the half of it.
( To be continued)

This bad part is USA policy of lending credit at interest inevitably, inexorably gutted USA manufacturing and transferred technology (know how) out of USA.  The coming crash is condign punishment, and those who believe they have savings or financial assets are going to be fighting over the productive capacity of Chipotle to support them in old age, or on disability, or provide for retirement health care, or whatever promises made but impossible to keep.  Your best bet: get slef employed (customer employed.

I look forward to his 2nd instllemtn

In the meantime, all that talk of Mexican food has me yearning for Mexico.    I first heard this song in Puerta Vallarta.

Ladies and Gentleman, Luis Miguel:


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Miasma

The Big Short folks have got back together for an update, and here are some points:

• The people who brought us the Crash of 2008 profited from it rather than being punished, a replay of the dot-com bubble and crash. It is always “ the little guy” who pays. At the same time, even the little guy needs to take responsibility for falling for the blandishments of snake oil salesmen.

Exactly!  When the next wipe-out happens, countless will be unemployed and angry.  But the problem was self-inflicted and all unemployment is voluntary.  It is going to be ugly when it could get better.

• The free money ( for Wall St.) interest rate policy  “broke the social contract” that had existed for generations and encouraged people to work and save. There really is no such thing as “ free money.” Somebody always pays, in this case small investors and Main St. businesses. Government is creating the very economic inequality it claims to deplore.

Unfortunately, note he objects to calling it free and not object to calling it money.  It's neither free, since it is enslaving debt, and debt is not money.  How will anyone figure out what is going on, let alone happened, if they do not use proper terms?

• Risk cannot be priced without market interest rates, so the economy is floundering without reliable road markers.

These are capitalists.  As rent-seekers they are always looking for the big short, the main chance.  They believe in risk (a concept pushed in by bankers who had credit to burn). In business, people avoid risk, usually even in capitalism (hence so much insider trading) and always in a free market. They forget the free market has its own sets of signals, called prices.  There is no price signal via interest rate in a free market because there are no interest rates (outside of the unethical).  In a free market all goods and services are accomplished without interest.

This crack-up is going to be a tremendous opportunity.  I recall in Seattle circa 1971, "Last person to leave turn out the lights."  Within a decade it was booming with inflation, pro-big biz.  Back then the right move was to buy real estate.  A buddy of mine cooked in Alaska summers and bought and refurbed houses winters.  He is a multimillionaire, as a fish processors' cook.  He knew what to do. The next 40 will be deflation, pro small biz.

The next move is to replace, rebuild the USA gone.  Small business.  It's the only safe place.

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An Alternative: An Interest-free Economy

In his latest jeremiad, David Stockman has this to say:

In fact, bond defaults will be the transmission channel by which the global deflation pounds the Wall Street casino and brings another recession cycle to main street. In that respect, one of the most egregious evils of ZIRP and financial repression is that they prolong and distend the bad credit cleansing cycle.

So... bonds, that is debt "sold" in the form of credit extended (for if there are assets underlying, then they are no doubt over-valued) is the key.

Bond dealers sell debt, all sorts, that is credit at interest.  Note, again, not money, but credit, that is the nominal tally of what credit the seller is "good for."  For example, bond buyers (your pension) may load up on mass transit bonds, allocating your pension accumulation (which is just digital promises to pay you something someday) to get a light right system built, after which fares repays your bond holdings plus interest.  Sadly, the light rail is 1880s technology which will never generate enough revenue to repay the bond, let alone interest.  See Chicago, Detroit, Stockton, etc.  That's what happens when there is not strict separation of business and state. You are next.

First, there need be no such arrangement, because light transit could be financed as a private enterprise.

Second, private enterprise would not use 1880s technology, it would move to something more, say, 2001.

Third, private enterprise would turn a profit.  See Hong Kong mass transit.  (It's hard to follow Hong Kong machinations, but since owning real estate is not allowed in Hong Kong, you must pretend the government is in charge as you acquire the real estate necessary to achieve your goals.)

Let's here from the time Bill Clinton was elected president, and his response, the child, when he was told how the world works:

According to Bob Woodward's account in The Agenda, Clinton replied to this news in a half whisper: "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?"

Sorry for the bad words, but it's a quote.  His agenda was of course in service of the hegemon, so really that is how most of the world works, but not necessarily all of it.  There are alternatives, like the free market.

But note the simple fact: there is no denying that credit at interest is the game, the great distorter, deformer, malformer, misallocater, malinvester.   Everyone is clear on that.

But is anyone saying "let's not do that"?  We at the same time know it is utterly unnecessary to a thriving economy to have interest bearing instruments at all let alone for finance.  Yet, is anyone saying "let's not do that?"  All major religious systems say "don't do it because it does harm..." but not even the religious folk argue against it (except for some followers of Islam).

But we are in a regime called capitalism, although with dozens of definitions, essentially the idea that capital amassed is gratification delayed, and reward is later wealth.  The main vehicle of this accumulation is usury, charging interest on loans, something once limited to those regnant, then an elite,  and only in the 20th century to the middle class and amazingly now extended to the most impovershed.

That gratification delayed (time preference theory) is raw Calvinism, he who gained popularity for protestantism by unleashing usury as a means to overwhelm and destroy the papacy's hold on rents (the actual motivation for the reformation - reallocation of rents).  As accumulation began to redistribute northward, and accumulation be put in the service of individuals, the very definition of wealth changed to wealth as personal accumulation instead of weal.  As more and more assets were arrogated unto fewer and fewer people, who had less and less ability to make economic decisions, what once went to charities and organic community development now went to industries, the hegemon and war.  The bottom of this was captured by Dickens and the Russian novelists, labor movements resisted and carved out a middle class, temporarily, until the capitalists could figure out a way to ruin the weal again.  They figured it out.

Incidentally, by 1905 this destructive process was conceptualized by Weber as "the protestant work ethic," a halo on despoliation.

Now, 100% of the blame goes to those who will be wiped out in the coming years.  To agree to work for 40 years at a job that cannot possible be real economy, and expect to be paid for another 20 years to continue doing nothing is culpable.  As your mom said, just because everyone else is doing it, doesn't mean you have to.  Further, you can be part of the solution immediately as well, so there is excuse for being "wiped out."  You lost nothing when nothing was there except empty promises. All unemployment is voluntary.

Just start your own business.  Ignore what you "lost" (there is nothing to speak of there anyway) and get going creating weal, correctly defined, as the contributing to the range of goods and services available to an ever widening range of people who can afford them with their own money.  This is the free market, the only true path to peace and prosperity.

Work is self-employment (well, actually, customer-employment), your work is your lifestyle, and your lifestyle is your work, and wealth is something you contribute to, not accumulate for yourself.

When there is a shortage of something, its price goes up.  Given extremely few people will be starting up badly needed businesses, the business you start up will be all the more valuable.

And recall, no entrepreneur takes risks; you need customers, not money, to start up a business.

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Deflation in Trucking? Then Just Make Things Worse!

In yet another stupid move, the hegemon is dealing with the fallout of bad policies with more bad policies.  What do you do when your economic policies lead to overcapacity in freight?  Slow the vessels and trucks down.

Vessels are now operating at an average of 9.69 knots, compared with 13.06 knots seven years ago, according to data compiled by Bloomberg.That means Nike sneakers and Barbie dolls made in China can now take two weeks to arrive in Los Angeles and a month to reach Le Havre, France — a week longer than if the ships were moving at full speed. And there's scope for ships to go even slower, according to A.P. Moeller-Maersk.

Not only ships, but trucks...

The rule would require the installation and use of speed limiters on heavy trucks, though FMCSA hasn’t said what the governed speed would be.

Now ocean freight rates, contrary to what they teach in schools, are pretty much irrelevant in int'l trde of specialty goods.  They are critical to the "get big or get out" mass merchandiser welfare-queen businesses like walmart, petc, toys-r-us, etc.

When it takes 10% longer to deliver goods, it takes 10% more capacity to deliver all the goods.  That truck taking 22 days to deliver instead of 20 cannot carry any other freight while it is taking its first load.

So invite misallocation and malinvestment thru lending credit at usury, and then put an unwarranted stress on the economy when the harm manifests.  Crazy policies.

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MalCredit: You Cannot Give it Away

So the EU has now officially introduced negative interest rates.  So what does this mean?

The ECB pledged on Thursday to continue its €60bn-a-month bond buying quantitative easing plan until March 2017 and cut a key interest rate to a fresh record low of minus 0.3 per cent. But the measures disappointed investors that have come to rely on Mr Draghi to smash expectations, with a broad market sell-off after the ECB failed to deliver deeper cuts and an increase in the pace of QE.

If inflation is a monetary event in which the currency, warehouse receipts for gold or silver (or salt), are printed beyond the stock of money backing the currency, then prices rise in terms of the currency inflated.

The reason inflation is a hegemon policy (2%) is the bankers who create the inflation use the money before the prices rise in response to the mal-currency introduction.  The burden of the inflation is borne by the retail customer, who experiences a price rise with an income rise.  This is the heart of capitalism as practiced, and only the Austrian School of economics condemns this practice. (Although they have no objection to usury).  All hegemon policies are inherently evil, for they pick winners and losers.

If inflation is a monetary event involving money, and deflation is a monetary event involving...?  Money?  When there is less currency to go around, then less will be needed to buy a loaf of bread, or in other words, when a loaf of bread was $5, in deflation, a loaf of bread can be had for $1, since there are fewer dollars around to make purchases, those fewer dollars buy more.

My brain aches trying to wrap around that truth.  But that is how it works...  but now let's look at the credit twist and deflation.

Currency represents an asset, money, gold or silver or salt sometimes.

Debt represents something owed, and in its beneficial form it is backed by an asset, and in its malicious form it has no asset backing it.  Most of the world debt today has no asset behind it, the great unknown, to be discovered, is just how much mal-debt there is.

So cutting the interest rates paid on mal-debt to negative is deflation, but how so?

The practical reason for negative interest rates is proposing investors lose only 97% of their tallies come the next crash, when the popular alternative, equities, will see a 40% loss.

But what is happening as an economic phenomenon? Credit deflation has to be the mirror image of monetary inflation, so... deflation is a monetary event in which the debt,  receipts for currency loaned, is generated beyond the assets backing the bonds, then prices fall in terms of the assets underlying the bonds (debt).

Whew!  My brain aches... it take less Euros to buy a EU10,000 bond today than it did yesterday.  Clearly that is deflation.  Do I have the mechanics right?

As far as I can tell, no one is trying to figure out the mechanics of this, only looking at how to trade the event.

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Will they Pay You to Take a Mortgage?

Euribor, to which euro mortgages are linked, has hit a new low.  So the question will arise, will the time come when the bank pays you to take a mortgage?  This is not farfetched.

Think about it.  In the next crack-up, the banks will be stuck with bank owned properties on the books at a nominal value of say $250,000.

But we are in deflationary times, so the value of assets will be dropping.  So say now the house payment is $1200 per month at 4% interest... over thirty years that is about $175,000 interest paid on the loan.

Now in deflation you have to think the other direction.  At 4% deflation over thirty years the value of the $250,000 asset, the house is dropping, in monetary terms.

By charging zero interest, the bank has an asset on its books, and it getting its money back from a safe credit bet, you.  You pay about $695 a month for 30 years. Also the longer you take to pay, the harder the currency with which you pay, the happier the bank is.

So zero makes sense, but how about the bank paying you to take a loan?

It will happen.  The gimmick is you will take a loan at zero interest rate, and the bank will "pay you" the difference in deflationary interest say $200 a month, so you net out $495 per month in house payments.

Of course you'll be agreeing to a house at $250,000 when the cash price is more like $200,000, but there will be credit foolish buyers aplenty to take this lousy deal.  You'll also be paying property taxes on the nominal $250,000 valuation, a 20% premium on your property taxes, in an era when those taxes will be rising.

Of course the banks will start with other freebies first, toasters, homeowners insurance, "skip a payment" plans, 10,000 psychological blandishments before they get to hard cash.

Get away from credit completely, cash will be king, and property, paychecks and pensions will be forfeit.  Get self-employed.

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Colloquy on Gold as Money

For some reason a post announcing a seminar becomes a colloquy on gold as money -

Anonymous said...In what way is gold less of a tally? It is a commodity but what practical use does it have. Its a piece of metal after all. There is no absolute or universal value as far as I see it. I just want a medium of exchange, that is all, that isnt controller by a central authority. Is that too much to ask for?

In no way is gold a tally at all.  Gold is money, not a tally.

The practical use of gold primarily is a conductor of electricity in industrial applications, and for silver, it is development of photographs.  Of course each has many other practical applications, which make it always and everywhere valuable in its own right.  The value is universal, but as to absolute, well the value is relative, as in anything else.  We all badly want that first beer, but when the thirst is slaked, that 4th beer is not so valuable.  That is no reflection on beer, just a reflection on its' perfidious devotees.

You contradict yourself when say you want only a medium of exchange, and in the same sentence want it also not controlled by a central authority.  OK.  Gold, and the price thereof, is not controlled by any authority, which is why it is hated by all central authority, and only by law is the good money (gold) driven out by the bad, legal tender currency (copenicus's law, or gresham's law).

No one would use gold to buy a house, as money, when you can use federal reserve notes, monopoly currency, to acquire the same rights.  Why use perfectly good money when sellers will take fiat currency?  Same with a good plate of beef chow yuk. Or a car.

Now, you may not really care one way or another for a medium of exchange, perhaps what is really missing is benecredit.  Especially as we head into deflation, the self (customer) employed who have their assets tied up as credit extended to customers are going to be in the best position for the next forty years.

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When the Pusillanimous Mulct

A reader inquires:

Hi John, is deflation linked to negative interest rates? What is the rationale for negative interest rates? Why banks would do this does not make any sense. Wouldn't depositors just change banks or remove most, if not all of their funds?
Swiss alternative bank breaks negative rates taboo:

Well, I am no economist, but I think it is like this:  the negative interest rate is a symptom, not a cause.  When you know an irreversible haircut of some 30% at least is coming to equities in the near term, you can leave your money in stocks and have say 70% of a million, or $700,000 in value, or 98% of a million, or $980,000 after the crash.  The price of bonds are bid, and the bond vigilantes keep the markets as real as can be hoped, so they are the smart money.

Now smarter yet is to have a million in cash, that is $100 bills, because after the crash you'll have a million.  Problem there is the hegemon will seise anything anyone have over a few hundred dollars, and is doing so currently on our nations highways and the borders.  So take your losses with bonds.

But the very best place to have your equity in deflation is in the form of asset-backed credit extended to customers of yours.  It is in microscopic amounts, making it too difficult for the hegemon to steal, its necessarily laddered, meaning it comes at intervals (usually not more they 30-60 day terms), you control then you want to book it as income by either doing so, or not, by extending the credit again, so you roll-over at your convenience.  When you match this control with business expenses, or in small business "lifestyle costs" you are simply too marginal and too squirrelly to mulct.  (Such an ugly word for taxing, I love it.)  As pusillanimous as the hegemon is, he does have limited resources. Almost all fruit is hanging lower than you, you being to high and too small to pick.

Navigating this all depends on how you define wealth.  Personal accumulation, or the range of goods and services people can afford with their own resources?

If personal accumulation, then you will be in hand to hand combat with looters fighting over what little resources are available to cover the gargantuan claims the hegemon has made.  Condign punishment for  accepting a erroneous definition.  If the other, the your work is your lifestyle, and you are pretty much denied nothing.

Get self-employed.

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If Too Much Currency is Hyperinflation, is Too Much Debt Hyperdeflation?

Money, properly defined, is a positive.

Debt, properly defined, is a negative.

Mish notes both money and debt have monetary aspects, and all deflation and inflation is a monetary event.

Now, if inflation is positively printing too much (positive x positive) currency, the the result is hyperinflation at some point, too much currency for too little goods.

Now a negative times a positive yields a negative.  A positive three times a negative five gives you three negative fives, or negative 15.  So the more debt you multiply, the more negative you get in the hole.    When there is more credit (debt facility) than demand for credit (debt facility), then there is credit deflation, hyper-deflation?

High and low, left and right, there is a head-scratching going on regarding the debt markets:

As we stated before, a negative swap spread holds no interpretative meaning, the very fact of which is the most important element.

Do they not see what they have done?  Hyperinflation of debt means hyperdeflation of currency, it seems to me.  Correct me if I am wrong.

If I am right, do not own property or pension or either, nor have a paycheck.  All bad news. Get self employed.

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Gold is Money for a Purpose; We Need Benecredit

Now recall these fantastic sums are merely nominal.

We just had another confirmation that banks are dealing in sums which they don’t understand themselves. A junior employee in Deutsche Bank (DB) paid $6 billion to a hedge fund which was the gross value of a position. He should have paid the net. That in a nutshell shows the uncontrollable exposure of the banking system which will lead to its downfall.

It really does not matter how fantastic they are, the show will be when the crash comes and all the people who feel entitled (literally) begin the 40 year march in the desert trying to be "made whole" on their "losses."  When you lose part or all of your property, paycheck, pension, Feel free to forward this by email to three of your friends.

Just take Deutsche Bank, their derivatives position is officially $75 trillion. The real figure is probably over $100 trillion but let us accept the $75T. DB’s equity is $83B. This means that just 0.1% loss on the gross derivatives position is enough for DB to go under. It is virtually guaranteed that any loss on their derivatives would exceed 0.1% of gross value. DB is also too big for Germany. DB’s derivatives position is 24 x German GDP and equal to global GDP.

It is not just banks, governments are as whimsically run as well.  Now, as I teach in my classes entrepreneurs take no risks, nor do I expect my customers will do so either.  For example, the schools with which I partner when lecturing are paid in advance by the students who attend my lectures (and I am paid out of the gate receipts.)  Nonetheless, I am often paid by warrant.

Why so?  Schools have too many revenue streams and too little control to know where they are financially at any given time.  They just hope that at the end of the month they can somewhat balance the books and do it again, until the games they play catch up.  But this is police departments, parks, one and all. And as a int'l bankers told me recently the business is extremely tough because everyone to whom he would lend money are simply lying about their circumstances.  That is capitalism, which is not the free market.

Now the fellow with the article cited summarizes thus:

Physical gold (and some silver) is the best protection against both hyperinflation and deflation. Remember with a deflationary implosion, no loans will be repaid and the banking system would not survive. Thus gold will be money as it has been for 5,000 years.

Yes, but so what?  Money is gold, but money is not the problem.  All those nominal figures are tallies of credit, not money.  We do not have a monetary problem, but a credit problem.  The problem is malcredit, and hyperinflation thereof, wherein a $32 million skyscraper in downtown Seattle is valued at $640 million, by the hyperinflationary calculations.  Whole lotta pension funds depending on the nominal income from that nominal valuation.  Come the crash, the building value goes back to $32 million, rents adjust to real world, but the debt is nominally there (perhaps $600 million?)   Those pensions may seize the property, but the rents on a $32 million building are not going to cover the expectations of pensioners, or at best at ten cents on the dollar.  Ouch!

Gold is money for a purpose, the purpose of liquidating a debt and a relationship.  People in business do not need money, now should want it, for we are building relationships, not liquidating them.

The solution is not to get out of currency and into money ("buy" gold) but get out of hyperinflated assets into the means of production.  Get out of malcredit and into benecredit.  Start a business in which you begin to generate benecredit, an asset the hegemon just cannot mulct.

Be like Russia: get rid of debt, build up your productive capacity and your rolodex.  Network with the others who get it.  Whatever happens, don't join the mob trying to recover assets to which people feel entitled.  Start making your own.

Wealth is not accumulation, but the range of goods and services you can access by what you earn on your own.  Prices are going to drop dramatically as we get into this crash.  Just as students who are drowning in debt will not be in a position to get an education that matters, so will the unemployed trapped in home they cannot afford nor buy a cheap car to escape since their last one was repossessed and they cannot get more malcredit (or even benecredit for that matter).

On the other hand the self-employed will access just about anything and everything they want and need at very low prices.  Too high for those who accumulated much in the way of tallies, but astonishingly cheap for those who are actually producing what customers want.

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