Monday, March 3, 2008

A Lifetime Of Leverage

The period 2001-07 saw the fastest ever rise in US household debt versus disposable income (see chart below). People were urged to spend more now against their future income because "modern finance" had - supposedly - created the tools allowing them to do so easily and safely. A whole slew of structured and derivative debt instruments thus flooded the market, financing the consumer demand that followed. (Note: In many ways the Chinese "economic miracle" is just a manifestation of easy credit.)

Data: FRB St. Louis

Well... it was fun while it lasted. The spring has been sprung and those lured by the bait are now stuck inside the debt servitude mousetrap. Like Kafka's Josephine the Singer of the Mouse Folk, they must sing the tune demanded or face starvation.

Interestingly, many sensible people that vehemently dismissed as speculative leverage for the purchase of securities or commodities (i.e. margin), borrowed heavily to buy consumer goods. They thus accepted a lifetime of leverage for the immediate satisfaction of their desires, regardless of their means. Pushing this line of thought a bit further, they fashioned their lives into a speculative marketable instrument which must constantly go "up" in price, or face ruination.

This may be the ultimate victory for free market extremists, but it is a cruel one and may yet prove very hollow. The credit crisis which is already rendering some classes of debt worthless (e.g. sub-prime mortgage write-offs) is still in its very early stages and, in my opinion, has a lot more to go before it is finished.

I won't be at all surprised to see a debtors' revolt at some point; warning signs can already be spotted: newspapers are increasingly giving front page status to "human interest" stories about debt and a cottage industry is springing-up around "walking away" from debt. Also, watch the politicians: debt is becoming a prime issue and I bet it will get to center stage for the general elections in November.

37 comments:

Anonymous said...

I find it ironic that wealthy (relatively speaking) western consumers think nothing of defaulting on their debts at the first hint of discomfort but starving Africans and Asians are granted no relief from predatory loans (foriegn aid) even if millions of them have to die repaying those loans (Confessions of an Economic Hitman). According to an article on Counterpunch.org (sorry can't remember by who) more than 150,000 farmers in India have committed suicide because they couldn't repay debts for fertilizer, pesticides and terminator seeds from Monsanto and the like.

Hellasious said...

The West has always been "Do as I say, not as I do". But it is not fair to only blame the "West", as such. All those previously comfortably in power, be they nations or persons, act this way when their station in life becomes diminished and they have to "eat" their own words.

Regards,
H.

Anonymous said...

I was wondering, did we win Iraq....? Don't hear much about the war anymore....

Hey...! Where's my Bentley....? Someone seems to have taken my Bentley.... Oh my....!

Econolicious

OkieLawyer said...

They thus accepted a lifetime of leverage for the immediate satisfaction of their desires, regardless of their means. Pushing this line of thought a bit further, they fashioned their lives into a speculative marketable instrument which must constantly go "up" in price, or face ruination.

To compound the problem, much of what they bought on credit were items with known depreciating values: SUVs, foreign cars, stereos, TVs, trinkets ... and even "million dollar" homes.

I think we have inherited the ancient Chinese curse: "May you live in interesting times."

Anonymous said...

anonymous Idiot, who do you think is the overwhelming source of aid to Africa? Spew your nonsense to your other America hating useful idiots.

Anonymous said...

You don't hear much about the war because it has been successful of late...can't let the facts get in the way of good propaganda.

OriginalFrank said...

"You don't hear much about the war because it has been successful of late...can't let the facts get in the way of good propaganda."

Don't worry, the facts won't get in the way of the propaganda. The propaganda just shifts to ignore the facts. Now it's "we are spending too much on the war".

Funny how the press thinks it's reasonable that we spend many multiples more on government transfer programs than on defending ourselves against Islamic extremists that want to kill us.

wkwillis said...

Most transfer payments are for rich people. Aid to Farmers with Dependent Creditors, for instance. Social Security is just giving you your money back. They took it out of your paycheck, deducted some for expenses, and sent back some of what you had already sent them. Ditto unemployment. They take it out of your paycheck every week.
Pensions are another big government expense that is not a transfer. My uncles were 'lifers' in the armed forces. They get a pension just like the United Steel Workers, or your 401K. That is money they earned in Vietnam or Korea or just sitting behind some damned desk clearing the inbasket every day.
Your government gives away less than one percent of your taxes on transfer payments to poor people.
I don't like welfare because it destroys the fabric of society, not because it is too expensive. Aid to Farmers with Dependent Creditors is much less destructive on that basis. You only corrupt one tenth as many people since you are paying each of them so much more money than a welfare mommy.

Anonymous said...

Please!

They will just default on the debt. They have no motivation to pay it back.

They got a singular shot at living far above their means, and they had a good time. After that, it's the bank's problem not theirs.

FrontierPsychiatrist said...

Regarding the first comment, the Indian government has just written off the entire debt of all small farmers in the country, a move that will cost $15bn, still $2bn LESS than the subprime writedowns HSBC have announced today......


Indian farmers

Greenie said...

"free market extremists"

Oh my gosh - there goes our dear commie ranting against free market for all the problems in our life. Where do you see free market, dear friend? House purchases are given better tax status than all other assets. Adding to that, there are GSEs and fifteen other government agencies promoting home purchases. Government regulates pension funds to only buy AAA instruments. And, last but not the least, there is a federal agency that comes out to lower interest rate every time SPX drops by 50 points. You think a company like Countrywide would have survived this long in a free market?

Now I understand why you do not blame Greenspan for any of the problems. Because you are a commie, and a commie must support the government under strict party order.

Greenie said...

"more than 150,000 farmers in India have committed suicide"

Ha - counterpunch is a reporting agency??? Seems like this blog has become the den for all commies around the world. Let's see the obvious fault with the above statement - in what time frame did the farmers commit suicide - month, year, decade or century? How did they determine that the farmers committed suicide because of debt? Can you find your source and respond?

Anonymous said...

To anon@4:19PM
If you knew anything about how foreign "aid" works you wouldn't be calling anybody an idiot. First of all most foreign aid is in the form of loans at interest rates only marginally less than market rates and not in the form of grants. I've never heard someone taking out a bank loan claim that the bank was bestowing charity on them. Second, these loans are restricted to the purchase of goods at higher prices from the loan grantor than available on the open market erasing any minimal saving on the interest rate. Third and most important, political pressure is applied on weak or corrupt govts. to do deals that don't benefit their countries and to accept loans that they can never finish paying off, otherwise known as debt slavery. Pull the flag out of your hiney so you can sit down and read the book - Confessions of an Economic Hitman by John Perkins.

Ignorance said...

@ Greenie:

I think the Cold War is over.

And free market extremists are indeed part of the problem. No one is claiming the government did not have a hand in the current state of affairs, but it certainly is not the only entity at fault.

Anonymous said...

Greenie, pesticides were not available a century ago much less terminator seeds; the time frame in question is roughly the past 10-12 years. The article refrenced Indian govt figures and debt is listed as the cause because they left notes; the Indian govt refused to include suicides without notes in the farm debt statistics to try to minimize the scope of the epidemic.

the red queen said...

Greenie,

Hellasious is a "commie"??? hahaha How many communists work in The City or on Wall Street? Mmhm. That's what I thought. He's is probably a pragmatist of the William James variety if anything.

1952 just called, they've been wondering where you've been. Please phone home. If you need a rotary dial phone I think there might be one in the basement closet right behind the box of IBM punchcards.

john c. halasz said...

Of course, you do recall that Josephine was fickle and increasingly refused to sing for her demanding audience, but rather faded away?

Thai McGreivy said...

Why the mud slinging?

The keys issues for any economy is/are and will forever be productivity growth and societal trust. The rest is just the way we get there.
It is a simple fact that we must trust each other-- we argue over what system best allows this. The answer... There is no answer!.

Our innate trust of government is partially determined by biology. Some of us just seem hardwired to trust contractual societies more than we trust beehive societies. Diversity plays a role (it is harder for diverse societies to trust each other), fairness plays an even bigger role: watch Howard Riengold talk about collaboration.

Some of you trust a regulated system controlled by elected representatives... an approach often viewed by skeptics as a recipe to hide unproductive assets within masses of medioctrity leading to eventual system breakdown 'if not done right'.

Some of you trust a free market system based on 'personal reputation' and perceptions of integrity (the free market equivalent of regulation)... to supporters of this system, I might add the drive to get more information/reputation about perople can lead to 'civil rights nightmares', 'if not done right'.

Some of you want to 'split the difference'-- 1/2 free market, 1/2 regulated (I fall somewhere here, relly just a matter of propportions: 50-50 or 20-80, etc)... to 'splitters' I might say there is no evidence this approach works any better than the others.
Their is no Holy Grail

History clear shows regulated societies can sometimes do a better job with productivity growth than 'free market' societies can. Yet the natural inclination for any society to 'take the wrong path' can lead any regulated economy to fall behind if reorganization become 'too difficult'... for those who know anything about network sciences, this is the fundamental issues of lattice vs. random and dense vs. hierarchical networks on a societal scale.
The Danes have taken societal trust to a point they feel comfortable leaving babies unattended outside in strollers, unimagiable to me in America-- no wonder they don't fear big government... but if this trust comes at the long term expense of productivity growth, others will outcompete their system over time. And fif they fall behind, this will destroy some of the trust they have built amongst each other. If they solve the productvity growth issues, they will continue to succeed.


Remember, not only must you trust the system, your peers must trust it too-- many who think differently than you. Are we designing the system for me or for you? Are we designing it so that WE both will trust it?

And all these events play out over a very long time. Lots can happen, who knows who is right!

Anonymous said...

"You don't hear much about the war because it has been successful of late."

Would that be the Iraq war, the Afghanistan war, the War on Palestinians, the war on the Constitution, the war on reason, or the all encompassing Global War on Terror? Please enlighten us with your infinite wisdom, Anonymous.

Dink said...

Greenie,

There's a great article for you on TheOnion.com this week titled "You Know What's Stupid? Everything I Don't Understand".

I get a feel from some free market zeolots that they have strong anti-authority complexes and believe that a free market economy means that no one will be able to tell them what to do. This would be incorrect. No market rules would be anarchy and you could be sold into slavery (instead of voluntarily getting yourself into debt slavery per Hell's blog).

Now let's go read Thai's links. Maybe we'll get the insight to fix the world so we don't have to live in such cursedly "interesting times".

Anonymous said...

IF the global money supply continues to grow, these people will have had their free lunch. Can anyone present an M1/M2/M3 graph for any country where the money supply is contracting?

I am not an inflationist, just a stubborn thinker.

Johan

Anonymous said...

@WKWILLIS

dude, any farmer with half a brain has pulled his land out of the system and planted crops. Gov't payments to lay fallow are worth less than what you can grow now, and there is minimal need for any price supports at this point. ever get tot he supermarket?

Thai McGreivy said...

Anon, said... "Would that be the Iraq war, the Afghanistan war, the War on Palestinians, the war on the Constitution, the war on reason, or the all encompassing Global War on Terror? Please enlighten us with your infinite wisdom, Anonymous"


I have to agree with the earlier anon who said "can't let the facts get in the way of good propaganda"

as dink comments about my links, I just left this the other day: violence is dropping all over the world according to fractal patterns. Some of you have even alluded to this issue in recent comments.

So anon, not only is the implication of your posting false, in fact the opposite is really true (I don't think it has anything to do with Bush or Republicans mind you).

Thai McGreivy said...

And greenie, except for the mudslinging/commie stuff (Hell is sort of a commie), I think you you are absolutely correct. Government did screw this up-- or more correctly, elected representatives with particular agendas did not see all the interrelated links in the economoy when they pushed certain policies.

Dink, free markets very much want cooperation. And last time I checked, acceptance of slavery was written into the language of the US Constitution.

Doesn't anyone understand evolutionary psychology?

Cooperation is just as much THE NATURAL STATE OF FREE MARKET SYSTEMS as war and 'survival of the fittest' are. They are two sides of the same coin.

Sometime I think some of you literally need to go back to college-- 1950's policital views on communism are not the only sins being perpetrated today.

Greenie said...

"No market rules would be anarchy and you could be sold into slavery (instead of voluntarily getting yourself into debt slavery per Hell's blog)."

Oh gosh -- where did that straw man argument come from?? Who asked for no rules and anarchy? Do we have only two options - total chaos and full bailout of banks.

I presume you are in the camp that proposes full support of government bailing out countrywide and WaMu and Bear Stearns and all hedge funds, because anybody against these bailout is 'free market zealot'.


Commies do not work in Wall Street? Have you heard the expression 'Socialize the risk'? Go read Paulson's speeches and you will have some clue.

OkieLawyer said...

Thai:

Your comment about how we are "hardwired" is very interesting. I am not sure I completely buy it as I grew up in a fundamentalist Christian environment. But this caught my attention:

Some of us just seem hardwired to trust contractual societies more than we trust beehive societies.

The "contractual societies" that you describe sound more "authoritarian" than democratic. Perhaps I am just bringing my own life experiences with me. Is the fact that I later rejected fundamentalism evidence that I am "hardwired" to believe in "beehive" societies? I am inclined to think it is more a result of personal observation of the abuses by "contractual societies" than any DNA.

Still, it is an interesting discussion.

"Contractual societies" fail because of unequal bargaining power of the two contracting parties. As far as "gaining information" goes, in my experience it is almost exclusively used to gain bargaining power via a kind of "soft blackmail" (or even outright blackmail) rather than "verifying trustability."

BTW: I watched the previous link on "a short history of violence" that you put up. That was also very interesting.

When you start talking about "Fractal Patterns" you start to lose me. I guess I don't understand the relationship between a mathematical concept and violence decreasing (if it really is).

Yoski said...

Matthew 6:12
"And forgive us our debts, as we forgive our debtors"
I reckon that works for me. Whip out that credit card one more time!

the red queen said...

Ah, I see now, Greenie has confused communism with oligarchy.

They do like to say "socialize the risk," but the next part is "privatize the profit." That is not now, nor has it ever been, communism.

OuterBeltway said...

Thai said:

The keys issues for any economy is/are and will forever be productivity growth and societal trust. The rest is just the way we get there.

I think there are two other "key issues" for an economy. Resource depletion, and ecological collapse.

What does evolutionary psychology have to tell us about societies and species that indulge in boom-bust overpopulation and over-consumption?

Thai, you go on to suggest that our attitudes about government stem from a hardwired bias toward either contract or beehive society. I think a more accurate basis for our attitudes might be our recent experience with government. If it works, we like it; otherwise not.

Finally, on the topic of "not letting the facts get in the way of propaganda" about our recent "success" in Iraq. If the U.S. doesn't elect an administration that immediately ends our active occupation of Iraq, the "success" will be short-lived.

Study the conduct of the VietNam war, from the perspective of the VietCong. There's a time for active battle, and there's a time to just wait.

enigmafoundry said...

This has already started to happen in other countries, namely India:

Two stories, confirming the unsustainability of the debt based economic shell game that the globalized banking sector has been advancing the past several years. They both involve about the same amount of money, 15 or 16 billion USD. There are two problems: one is the bank’s wet dream of a massive pile of debt running headlong into the realities of democratic institutions, where the debt is just canceled, en masse:

India cancels small farmers’ debt
The Indian government is to cancel the entire debt of the country’s small farmers in a giant scheme that will cost 600bn rupees ($15bn; £7.6bn).
The move is a centrepiece of India’s latest budget, with the government also increasing education spending by 20% and health funding by 15%.

Thai McGreivy said...

Okie, fractals are 'fundamental to the fabric of the universe'. Any physicist, biologist, or economist who studies things like evolution, quantum mechanics, social networks or wealth disctibutions in society uses the language of fractals (Cauchy or Lorentz mathematics).

Hellasious, you may be unaware of aware of this-- Taleb's 'Black Swan' is dedicated to Benoit Mandelbrot (the mathematician to first described fractals)... "a Greek among Romans".

Fractals describe a staggering array of the known universe (especially biologic, economics and social systems, where fractals are fundamental outcomes of information networks).

To be precise, I use the term fractal incorrectly (though most use the term the same way). Technically, fractals are scale invariant geometric shapes , whereas I use the term 'fractal' to describe ANY mathematical formula which follows Power Law distributions. Scale invariance means that no matter how much bigger or smaller you make a fractal, or no matter how much you divide it up to study it, it always looks the same.

The first fractal ever described was in 1906-- when Villedo Pareto developed his charts on land ownership distributions in Europe.

Wealth distributions clearly follow fractal patterns-- in this case the fractal followed a 80-20 rule-- i.e. 80% of the wealth owned by 20%... but if you look at JUST that wealthiest 20% (who own 80%), and study them, 80% of their wealth is owned by just 20% of the 20%. And if you study the 20% of the 20%, 80% of their wealth is owned by just 20% of 20% of 20%... no matter how much more you subdivide the group, a few own the majority.

So to answer your question regarding fractals and the decline in violence, no matter what time frame you look at the issue over, millenium, centuries, years, the decline in violence is apparant.

O@uterbeltway... agreed. Though you could argue these are encompased in the term 'productivity improvement'-- No resources, no opportunity to be productive. I like your term 'if it works, we like it... I couldn't agree more)

I may have oversold my message of moral hardwiring just to make a point-- certainly morality is hardwired in us, but to seperate this into the classic nature vs. nurture argument is stupid-- no hardwired morality can operate in a vacuum. There is no seperating out environmental factors.

As for evolutionary psychology and societal 'booms and busts' (I assume you mean of the Jared Diamond Collapse variety), evolutionary psychology does not really deal with this. Its concepts are used in the field of Complex Adaptive Systems to study things like this-- CAS in fact has quite a bit to say on this subject (though I am nothing more than an amature reader of this field-- it is VERY technical)-- I did comment over a month ago on the relavance of a Swedish Professor named Kristian Lingren, who famously combined two game theory models into one game-- he combined The Prisoner's Dilemma with another model known as The Game of Life" into a new game which added the twist of an 'evolutionary' generator: he discovered there is no permanent stable model.
Everything is a Red Queen Game.

As for Iraq, I am not a spokesperson for the current administration (which I am not fond of). I was just reminding anon that war in general, and violence in particular, is decreasing.

I really don't want to get into an economics of empire discussion, too easy to misunderstand.

Leave it to say that I think America's Social Security and Medicare twin deficits are an even bigger financial issue that the war is-- but at least we are getting healthcare for the spending. And by the way, healthcare spending definitley follows fractal patterns.

Edwardo said...

For someone as sophisticated as you, Thai, I am very surprised at your following statement:

"As for Iraq, I am not a spokesperson for the current administration (which I am not fond of). I was just reminding anon that war in general, and violence in particular, is decreasing."

Says who, and pray tell what evidence is being proffered to assert that a social phenomenon as complex as "violence"-simply defining violence adequately is the sort of task that would require a grant from The Ford Foundation- is becoming less common planet wide?

As for the moronic poster who has resorted to calling people commies, save your puerile, anachronistic epithets for "right wing" talk radio or piss off.

Edwardo said...

For someone as sophisticated as you, Thai, I am very surprised at your following statement:

"As for Iraq, I am not a spokesperson for the current administration (which I am not fond of). I was just reminding anon that war in general, and violence in particular, is decreasing."

Says who, and pray tell what evidence is being proffered to assert that a social phenomenon as complex as "violence"-simply defining violence adequately is the sort of task that would require a grant from The Ford Foundation- is becoming less common planet wide?

As for the moronic poster who has resorted to calling people commies, please save your puerile, anachronistic epithets for "right wing" talk radio.

Thai McGreivy said...

Edwardo, what part are you suprised at?

Source-- Steven Pinkert, professor of Linguistics at Harvard University.

I do not know where he got his funding (may have been the Ford foundation), but someone did give him money to study this.

Watch the link yourself-- Okie said he enjoyed it. I certainly did (I enjoy most of the TED lectures-- was first place Al Gore presented 'inconvenient truth').

Expat said...

Iraq is now being fought as part of the War on Terror? Let's see. Al-Qaeda, which was made up by the US anyway, did not exist in any form in Iraq prior to the US invasion. What would the Iraqi Islamic insurgents and "Al-Qaeda" be called if Iraq had been invaded by Russia? Hmmm? Anyone? Anyone? Bueller?

Yes, Iraq is filled with Freedom Fighters! Non-Iraqi fighters are most likely either sponsored by Iran or Saudi Arabia. There is no reason why Iran should not be involved; after all, we let Turkey invade with an entire frickin' army.

If you want to go after the source of Islamic extremism, you should invade the rest of the Gulf countries, above all Saudi. That is the source of their funding.

I have supplied hundreds of millions in "aid" to Africa and most, if not all, was tied aid, leading to massively higher costs and tremendous profits. Most was also in the form of loans.

Americans are greedy, short-sighted, and ignorant. They are, according to recent surveys, unable to calculate simple interest rates and compounding. So they borrow, borrow, borrow and fail to understand that credit is not the same thing as equity.

House prices need to drop another 35% to become affordable (which is the only measure that matters). Banks will fail. Funds will fail. Unemployment will rise. Taxes will go up.

Yes, we're America dammit! and we will recover, but it will be long, painful, and ugly.

wkwillis said...

anonymous
You may not have noticed this, but the Department of Agriculture is still dispensing largesse, the crop qoutas are still raising your grocery prices, and the government has added a new program called ethanol production and expanded it this year.
We will get rid of agricultural subsidies soon because we are bankrupt.

Ben Bittrolff said...

Good thing the banks aren't already f'd. Oh wait.

Really Scary Fed Charts: March