Hea culpa

Paul Krugman admits that he may, perhaps, have been a little incorrect about that whole global economy thing, at least in the short term:

Concerns about adverse effects from globalization aren’t new. As U.S. income inequality began rising in the 1980s, many commentators were quick to link this new phenomenon to another new phenomenon: the rise of manufactured exports from newly industrializing economies.

Economists took these concerns seriously. Standard models of international trade say that trade can have large effects on income distribution: A famous 1941 paper showed how trading with a labor-abundant economy can reduce wages, even if national income grows.

And so during the 1990s, a number of economists, myself included, tried to figure out how much the changing trade landscape was contributing to rising inequality. They generally concluded that the effect was relatively modest and not the central factor in the widening income gap. So academic interest in the possible adverse effects of trade, while it never went away, waned.

In the past few years, however, worries about globalization have shot back to the top of the agenda, partly due to new research and partly due to the political shocks of Brexit and U.S. President Donald Trump. And as one of the people who helped shape the 1990s consensus — that the contribution of rising trade to rising inequality was real but modest — it seems appropriate for me to ask now what we missed.

There’s been a lot of this going around. Leading globalists such as Kissinger and Fukuyama have published learned tomes explaining why globalism has “unexpectedly” failed. Of course, it never occurs to them to admit that nationalist skeptics like me were correct all along, hence these revisionist self-critiques that are primarily intended to salvage the tattered remnants of their award-winning reputations.

In the meantime, I will patiently await my Quasi-Nobel Prize in Economics for creating the Labor Mobility proof of the impossibility of free trade.

And I will also fisk Krugman’s entire column on the Darkstream this weekend.

How debt destroys

Hertz is bankrupt despite owning one of the largest fleets of vehicles in the world:

What one world war, one Great Depression and numerous oil price shocks couldn’t do, the coronavirus did in less than three months and late on Friday, auto rental giant Hertz which was founded in 1918 when it set up shop with a dozen Ford Model Ts, quietly filed for Chapter 11 bankruptcy protection struggling under a massive debt load after its business was brought to a grinding halt during the coronavirus pandemic and talks with creditors failed to result in much needed relief.

The company had a total of 568,000 vehicles and 12,400 corporate and franchise locations worldwide at the start of this year.

Last night on the Big Bear’s stream, we talked about deflation, and how the debt portion of the money supply is much larger than the cash + bank accounts percentage of it. Printing the latter doesn’t help if the former is vanishing at a faster rate.

The Hertz bankruptcy is a good illustration of this. While the corporation still has more than $1 billion in cash, that’s only four percent of the total debt it owes. And that’s why simply giving it more money to service its debts isn’t going to keep it alive for long, as the only thing that will allow it to continue operations is the bankruptcy court agreeing to wipe out a significant percentage of its $24.4 billion in debt.

And that is, as Zerohedge noted, a deflationary bomb, given the size of the company and the price-depressing effects of the liquidation of its vehicular assets. Speaking of those assets, it’s interesting to note that Hertz actually listed more assets than debts on its bankruptcy petition, which would seem to indicate that it’s not actually bankrupt, but actually suggests that the real total value of its assets are less than recorded.

Deflation in Canada

The 12-year period of credit disinflation appears to be over as the global economy is finally beginning to visibly deflate despite the best efforts of the central banks:

Canadian inflation went negative for the first time since the 2009 recession after the coronavirus lockdown put the brakes on the world economy.

Consumer prices dropped 0.2 per cent in April from the same month a year earlier, Statistics Canada reported Wednesday from Ottawa. That’s down from a 0.9 per cent annual rate in March and 2.2 per cent in February.

The report adds inflation to the list of economic indicators showing an historic impact from the coronavirus pandemic. Collapsing gasoline prices have pulled inflation lower over the past two months, but weak demand should keep inflation at extremely low levels for an extended period, and could even spur worries about deflation. That will keep pressure off the Bank of Canada to ease up on accommodation efforts any time soon.

From March, prices fell 0.7 per cent, matching the largest one-month drop since 2008.

Deflation is actually good for consumers and the real economy, since their money is worth more, but it is very bad for those who are dependent upon living off the debt of others. Which, of course, is why the banks and the financial elite have been desperately fighting to delay the deflation and credit crash that has been inevitable since 2008.

Debt jubilees are coming. Intellectuals of both the Left and the Right are already calling for them. In fact, one of the primary reasons behind the systemic overreaction to Corona-chan, as well as the constant goalpost-moving concerning the lockdowns, may be the cover provided for the ongoing economic crash.

That aged well

Just months after almost everyone on Wall Street worried that a recession was just around the corner, Goldman Sachs said a downturn is unlikely over the next several years. In fact, the firm’s economists stopped just short of saying that the U.S. economy is recession-proof.
– December 31, 2019

The hilarious thing is that the downturn had already begun. This sort of thing is why I meant it very literally when I wrote the chapter entitled “No one knows anything” in RGD.

It is also why destroying your nation simply because the economists tell you that doing so will make everyone rich is a horrifically bad, horrifically stupid idea.

Whose hype do you buy?

The China-China-China crowd has been predicting the collapse of the Chinese economy for years. But is it actually as vulnerable as they believe? More than a few international economists simply don’t buy that assumption:

RT talked to economists to find out if Beijing may have foreseen the economic crash and about the Chinese government’s response to it.

“Nobody, including Beijing, could have foreseen the depth and gravity of this pandemic, specifically the cryptic transmission parameters by which the Covid-19 virus spreads. It is truly a once-in-100-year pandemic event,” said Sourabh Gupta, senior fellow at the Institute for China-America Studies.

According to him, China was better prepared because “it is in a much healthier fiscal position compared to most advanced economies and many emerging economies too.”

Gupta explained that the central government’s debt level as a percentage of GDP is fairly modest, which means there is ample space on the government’s balance sheet to ramp up policy support. Also, consumers’ debt levels relative to income is modest, so they are not overleveraged either and can open up their wallets.

He was echoed by Andrew Leung, international and independent China strategist, who said “China is always very long-term strategy-minded” and is better prepared for any crisis thanks to its state capitalism. “The state can direct massive funds and mobilize businesses and people more effectively than the West. The same capability was demonstrated during the Asian financial crisis of 1997-98 and the world financial crisis of 2008-09,” said Leung.

According to Temur Umarov, an expert on China and Central Asia at Carnegie Moscow Center, every country is in a different economic situation, so their response to the coronavirus pandemic also differs. While numerous economic stimulus packages were announced by some countries, China has focused on recovery of domestic consumption, as well as on help for small- and medium-sized businesses, he said.

All the analysts agreed that neither China nor other countries could have foreseen the magnitude of the current crisis.

“There is a tsunami of negative views about China as a result of the spreading coronavirus crisis. America’s bad-mouthing has also helped. But China remains by far the second-largest economy, bigger than the rest of the BRIC countries combined,” said Leung. He noted that many more countries have China as their largest trading partner than the United States.

I think the Chinese economy is better poised to survive the crisis simply because it is less financialized, which is another way of saying that it is less fictional. And I would remind those who cite the failed predictions concerning Japanese preeminence of the 1980s of three things.

  1. The US economy of 2020 is not the US economy of 1985. The USA of 2020 isn’t even recognizably American anymore.
  2. China is not Japan.
  3. The Japanese economy of 1985 was very heavily financialized. Most of its massive real estate wealth was as fictional as the Silicon Valley wealth is today.

Smells like deflation

Oil prices have gone negative in Canada:

And there it is… May WTI just traded below zero for the first time ever (trading below NEGATIVE $40 per barrel)… There was a small bid right into the settlement at 1430ET leaving the May contract to settle at negative $37.63.

Interesting times, my friends. Very interesting times.

The default cycle begins

Which will mark the post-2008 transition from credit disinflation to actual deflation:

We didn’t really need any more confirmations. In recent weeks, as the US economy came to a screeching halt because of the coronavirus pandemic, we have seen banks take over $20 billion in reserves  in anticipation of a looming default wave (a five-fold increase if not nearly enough based on historical precedent), Moody’s predicting that as many as 30{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of Americans with home loans – about 15 million households – could stop paying their mortgages if the U.S. economy remains closed through the summer or beyond, with the number of households that have already stopped paying their loans soaring by 1,496{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} in just six weeks, and even JPMorgan in the process of shutting down its entire net interest margin origination platform, by getting out of new loans and HELOCs and boosting the standards on new loans.

These are all clear signs that a wave of mass defaults has started and is about to break all across America as tens of millions of household suddenly lose their jobs.

2008 is when the post-war debt system finally broke. Since then, the Federal Reserve has frantically been kicking the can of consequences harder and harder, until now, when the can finally didn’t move. All of the various estimates are meaningless, but we can be confident that the current system will be replaced, we simply can’t know what the successor system is going to be as it will largely depend upon how the massive pool of existing bad debts are written off.

UPDATE: For those of you who are, apparently, still too stupid to grasp the obvious, THIS IS WHY USURY WAS HISTORICALLY BANNED IN WESTERN SOCIETIES. Because once the debt cycle starts, it ALWAYS ends this way, sooner or later. The only reason it took this long to go terminal is because, for the first time in history, the entire global economy was turned into collateral supporting the credit inflation.

The financialization of the US economy

Encapsulated in a single picture.

The coronavirus death toll in the U.S. — now topping 23,000 — skyrocketed as families continued to huddle in their homes uncertain of what’s next, while an unthinkable number of more than 16 million people have now filed for unemployment amid an economy grappling with the shutdown.

Yet, somehow, the stock market has managed to push higher. In other words, at least those fortunate enough to own stocks had something to smile about. Democratic strategist Justin Horwitz summed up the disconnect with this tweet that went viral across Twitter TWTR, +2.68{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} :

As you can see, that’s CNBC’s Jim Cramer talking about the rally in the market while the chyron points out the grim reality of the historic job losses.

One commenter captured much of the response on social media by saying, “The Dow is not the economy. It is a giant government sanctioned Ponzi scheme for the wealthy.”

Another pointed to the fact that, according to Federal Reserve data, 84{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of stocks owned by U.S. households are held by the wealthiest 10{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of Americans — essentially Wall Street vs. Main Street.

The financial industry doesn’t lubricate the economy. To the contrary, it is both a huge parasite and a massive anchor that drains more than one-third of ALL corporate profits out of the real economy. To put this in perspective, the total amount of all retail trade profit was $154 billion in 2018. The total amount of all transportation and warehousing profit was $55.6 billion. The total amount of all food, beverage, and tobacco profits was $50.5 billion.

The total amount of financial profit was $448.3 billion, and that almost certainly understates it. If you want to know what is wrong with the economy, the answer is “the transfer of profit to the financial institutions” which is done through ever-expanding debt. This is why either a debt jubilee or mass defaults and the total collapse of the US economy is absolutely inevitable.

How money is created

Earlier today, I banned the commenter “map” for his ignorant attempt to “correct” those who actually understand how money is created. And on that note, if, at this point, you are going to try to argue with me on core economic concepts, you simply will not be permitted to comment here. The fact that I have correctly predicted two out of the last two serious economic crises – and done so in a timely manner – is sufficient justification for not putting up with idiots opining in ignorance on the basis of their outdated college textbooks. I am perfectly familiar with their beliefs about everything from comparative advantage to the money supply to the woefully inaccurate belief that banks keep 10 percent of their deposits in reserve.

In any event, back in 2014, the Bank of England helpfully explained how modern money is actually created in an article entitled Money Creation in the Modern Economy (pdf). If you don’t understand that money is debt, read the whole thing. And if you still don’t understand that after reading the article, read it again.

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.  In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses…. Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach….

Lending creates deposits — broad money determination at the aggregate level

As explained in ‘Money in the modern economy:  an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy.

Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. Of the two types of broad money, bank deposits make up the vast majority — 97{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Commercial banks create money, in the form of bank deposits, by making new loans.  When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes.  Instead, it credits their bank account with a bank deposit of the size of the mortgage.  At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

Just as taking out a new loan creates money, the repayment of bank loans destroys money. For example, suppose a consumer has spent money in the supermarket throughout the month by using a credit card.  Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. If the consumer were then to pay their credit car bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.

Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.

Now, perhaps you will understand why I am a deflationista. And so are you, if you believe that any of the current outstanding debt will be written off or otherwise go unpaid, even if you don’t realize that you are. Debt forgiveness and bankruptcy-related debt write-offs are the literal destruction of money, and since deflation is a reduction in the money supply, any reduction in the amount of debt must necessarily be deflationary.

Let them go bust

NN Taleb is right about letting the airlines fail:

“Planes will fly with new owners.”

Famed author and statistician Nassim Nicholas Taleb has trained his sights on billionaire Richard Branson, urging the UK government to let the airline owned by the “tax refugee” to go bankrupt. Branson has had a torrid fortnight, drawing the ire of politicians of all stripes for putting all Virgin Atlantic staff on unpaid leave because the carrier has been walloped by the Covid-19 pandemic.

The tycoon has led the calls for a state-sponsored bailout of the aviation sector, but plans to use the funds to cover fixed costs, rather than pay its staff.

That goes for the banks too.