Friday, October 31, 2008

Our "Trailers"

The rate of growth in household borrowing has been slowing for almost two years now, dropping to 1.4% annualized in the second quarter of 2008 (see chart below). It is almost certain that when the Fed releases third quarter data (due in Dec. 12) the rate will show a household credit contraction, i.e. a negative rate.

Data: Federal Reserve Z1 Report

I believe this is a positive development leading to a lower debt burden and a more sustainable economic model, overall. Unfortunately, our "leaders" are doing everything possible to avert such an outcome. They are stuck in an outdated growth model, quite obviously at odds with financial, environmental and geopolitical reality. So from now on
I shall call them our "trailers" - they are nothing more than modern day economic Luddites.

Let's focus on geopolitics, an area that should theoretically be of particular expertise amongst our leaders... oops, I meant trailers. How much brains does it take to realize that continuous credit expansion vs. earned income leads mathematically to a vast wealth transfer to commodity producers, particularly the petro-dictatorships. We are not only putting the rope around our own necks - we are financing it, too!

And how about the environmental effects? Our trailers' actions aim to salvage the borrow-consume model, i.e. Permagrowth. It's simply not possible on Terra; not with nearly 3 billion Indo-Chinese now clamoring to join Our Club.

OK then, let's borrow a few trillion dollars on the government's credit, by all means. But for heavens sake, let's invest it wisely to transform our economy and society while it is still possible. Because it soon won't be: a) the lenders won't lend to us (US) and b) the environment won't wait. Or how about this novel idea: let's finance everything ourselves by increasing our saving rate back to a double digit percentage, like we did 20 years ago,
instead of spending every penny. Shocking, eh?


  1. I've been following your blog for about a year now and find it a refreshing read. Thanks for your perspective, it is certainly informative!

    (Indo-Chinese usually refers to Indonesian citizens who are ethnically Chinese; there are definitely not 3 billion of them. I believe you intend to refer to "Indians" and "Chinese"?)

    Anyway, keep up the good work!

  2. Re: Indo-Chinese

    I'm taking hyphenation liberties here.. Thks. for your kind words.

  3. The financial system has crashed but all the effort will be used to rebuild with some modification such as more regulation or other such hoopla. A huge waste of time and energy but that is the reality of our political process.

  4. Like above Hell thanks for your postings. Your insightful writing has motivated me gain, I hope, an rudimentary understanding of macro-economics.

    Let's hope our future leaders lead rather than follow the advice of toxic ideologues like Grover Norquist.

    Glad I got that in before Kalifractalicious Thai could tell us leaders don't matter.

  5. I e-mailed the WA state "trailers" (senators, representatives, and Democratic Party) to protest the 700B bailout when Mish was raising an uproar. Most "trailers" voted for it even though the electorate's opinion was overwhelmingly against it. One was up for reelection this year so I had the choice of not punishing him or voting for someone who is my ideological polar opposite. #$%#$.

    So anyone have any state secession updates?

  6. H,

    A question re. savings.

    If the citizens of any state embarked on a savings spree - absent a prudent credit creation process - would this lead to a significant decrease in consumption?

    If your economy is relying on manufacturing of high value goods then savings will definitely be needed. But if it is a consumer-based economy the savings will ultimately have to be used to pay down any accumulated debt.

    Brian P

  7. Marcus, leaving aside the issue of whether leaders matter or not (of course they do, only less than most people think), all the leaders I am reading about seem to definitely be in following mode yet again... who knows, maybe things will change, but I haven't see ANY sign of it yet.

    "Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric"

    - Bertrand Russell

  8. Thai quotes old Bertie.

    "Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric"

    Santayana put it differently:

    "The only true realists are idealists."

    These guys understood that human history does not travel a linear path.

    However, it is does not happen that large groups of people are ever ahead of the curve, just individuals, like the author of this blog and some of his readers.
    All this by way of saying prepare for hard times.

  9. Edwardo says "All this by way of saying prepare for hard times"

    This is the part that really saddens me as I unequivocally believe this still does not need to be the case.

  10. I do not vote. Voting means giving tacit support to the system.

    What do you do, when you ask for cold drink at a store and they offer you either hot tea or hot coffee?

  11. Greenie,
    There are cold drinks out there but they have no chance of winning (yet) but that doesn't mean you shouldn't vote for them and at least make a statement and maybe force D&R's to take notice of issues they'd rather ignore.

  12. Thai says:
    "All this by way of saying prepare for hard times"

    This is the part that really saddens me as I unequivocally believe this still does not need to be the case.

    You care to expound on that belief?

    Last year total debt increased $4.3 Trillion, 5.5 times more than GDP.
    External debt owed foreign interests increased $2.2 Trillion;
    Household, business and financial sector debt soared 7-11%.

    80% ($42 trillion) of total debt was created since 1990,
    a period primarily driven by debt instead of by productive activity.

    Don't really know if these figures are true but what seems to be true is that our debt has been growing at close to geometric rate (pyramid scheme) and our financial system can no longer support this scheme.

    We hit the wall that Hell, Roubini, Stiglitz... have been warning about. Design and reconstruction must be done before a new economy can begin to produce efficiently.

    How do you avoid change and pain while the new structure is being built? Tax wealth? Joe the Plumber would object.

  13. Marcus- cooperation, what else?

    ... And how will confiscating (say) 1/2 of Hell's wealth solve this problem?

    And who ever said pain and change are to be avoided? To what destination are you hoping society move towards (who will be the slaves to run the society you want)? Last time I checked, pain was about the only thing that gets people or systems to change, wherever you want them to go.

    So I do not look at pain nor change as bad at all (in fact I think it is probably the only thing we can really ever be sure of)... And to the extent more people move away from the fantasy of 'living off wealth' or 'pleasure above all else', I personally think everything that is happening is a good thing (isn't that what Hell has been preaching all this time: more work, less wealth, less 'permagrowth'?)

    Yes there is tons of debt and yes the debt will either need to be repaid or defaulted upon AND fundamentally nothing is different today than it was yesterday. It is only our perception of expectations of the future that have changed.

    Debt is about a promise on people's labor in the future. Debt is about expectations. And nothing today is different than it was yesterday other than our expectations of a tomorrow we thought we saw but now know is an illusion.

    Today still looks the same to me- which is probably why I am "Kalifractalicious".

    It is what it is

  14. (You gotta love the weekend benders when people argue about the nature of man and the trajectory of their future due to it)

    So I imagine a bunch of aliens sitting in a casino arguing about how to bet on where humankind will be in 50 years:

    Q: "These guys are toast. Exponential population growth and haphazard psychological development. I'm betting 1000:1 against."
    J: "Fool! Their science acquisition is also exponential. They unlocked their own genome less than 100 years after even realizing they had one. They've gathered a lot of metrics recently about the planet and realize there is a problem that they need to solve. They'll totally pull this one out."
    X: "Really tough call. Can their intellect overcome their innate psychological problems? Problems exacerbated by some really weird cultural traditions? Tough, tough call."
    V: "I'd feel better about betting for them if their energy tech weren't so primitive. They're freakin' clever, but they can't self-control worth jack. Hmmm."
    Q: "1000:1, baby."
    J: "You're on! Conditionally, though. Black swan pathogens don't count. Neither do asteroids."

  15. Ha !
    Love this blog today.
    You guys are at your absolute philosophical best.
    (No, no, philosophy is not a four letter word...)

    In philosophy mode :

    It really blew my mind when I realized that the debit/consumption economy that we are currently mired in is basically a PERVERSION of what Judaism has always recognized as the TRUE nature of human exchange through gift and not payment : I enrich myself through totally and gratuously giving all of myself in a desire to share, and to be present with my fellow human being.
    This total gift unlocks exponentiel potential in the effects it has on all around : on myself, the giver, on he who receives, to the effect that I am richer and richer, and that my recipient is richer and richer.
    This is the meaning of the multiplication of the loaves and the fishes, my friends.
    Christ knew about it, probably more so than his Pharisien counterparts.
    Yes, this is utopy. But... it is reality too.
    What stops us from inventing, from concretizing this economy ? FEAR
    That's it. That's the ultimate reason.
    And it's not because utopy isn't possible, it's because WE ARE AFRAID.
    Being afraid is the ultimate reason for the collapse of any economy.
    Care to dispute that one with me, Hell ?
    I think not, am I right ?

    Yes, this is a mystical point of view.
    There are times when mysticism and reality intricate, because mysticism is just really another way of looking at the world. A way which is possible for anyone, basically, on the condition of shedding...FEAR.

    Lots of fun this blog.
    And thanks for accepting me in your midst.

  16. The only way to to stop trailors is stop yourself as a consumer. Avarice in history has a way that common people are relieved when the old system does go. There will be no need for additional regulation to protect people’s money because they will now know not to trust anyone with their money. Bankers and financial experts and the like will be treated, as they always should be, with a healthy degree of suspicion if not contempt. While each Wall Street crisis is unique, human nature remains constant. I enjoy the content and have moved captital to other areas already. Meanwhile the taxpayer is being looted to consolidate the political reality to mutual mass socialistic mass destruction. Americans think they know the truth. "Whatever you say to the person in front of you to keep them from shooting you may be the very reason the person behind you shoots you," This attitude of carelessness will destroy the finanacial system's as we know them. When you destroy the middle class the history of mankind is soaked in blood.

  17. Thai said, "...And who ever said pain and change are to be avoided...Last time I checked, pain was about the only thing that gets people or systems to change....So I do not look at pain nor change as bad at all...”

    Had I not sought (free) weekly meditation for 4 years at a Buddhist Temple and inadvertently been inculcated with Eastern Buddhism philosophy, I would be befuddled and flummoxed by Thai's commentary.
    Instead, I laughed as I heard the voice of our beloved former Reverend ringing in my ears, admonishing us that "There is no ‘Good'; there is no 'Bad'. There simply ‘is’ ", while reading Thai’s commentary.
    To think that concept use to flummoxed me; now it transmutes the ‘senseless’ into the sensible, and I use it all the time, much to the consternation of colleagues.
    Thanks Thai.

  18. avl, I have never studied or read anything on eastern philosophy or Buddhism (except for a chapter in Daniel Boorstin's (former US Librarian of Congress) The Creator's many years ago which... Oh how I love Daniel Boorstin, if I could chose 10 people from all of history to chat with for just a few hours, he would definitely be on that list... just thinking about him has piqued my curiosity to review some of his books...

    Anyway, do you have any suggested readings or links?

    Marcus- Okie sent me this link from Barry's Ritholtz' The Big Picture yesterday and I thought you too might find it interesting in case you are at all interested in tasting my Kool Aid.

    Yoyomo- You too might see in it why I think the underlying structure of society is as immutable as gravity and not worth worrying about.

    Hell, you too might be interested as there is a section which discusses a 'fundamental law' (a scientific observation actually) that the energy consumption of all life forms follows fractals.

  19. While reading Henry Miller tonight, "The Air-Conditioned Nightmare", I came across his comment about a Mr. William Hope Harvey (Coin), from Monte Ne, Arkansas.
    Mr. Harvey's history is fascinating, and I will let y'all discover it in Henry Miller's prophetic book.

    A short quote :

    "Harvey by all accounts was one of those eccentric, independent, free-thinking men who have the courage of their convictions -- a type now fast becoming extinct in America. He had made quite a fortune, it appears, through the sale of a book (a little greenback book, illustrated, 224 pages, price 25 cents) which he had written and entitled "The Book" (sic). The book had to do with the effect of usury "on the organism of governments since the birth of this civilization down to the present time and the destructive effect of a financial system based on usury (Usury always in capital letters !) in the United States and in the world." In the early 1930's Harvey called a convention in order to organize a New Political Party, having lost all faith in either of the two old political parties."

    Interesting, huh ?
    I would love to get my hands on a copy of "The Book", but it is now a collector's item, and I have fat chance of doing so. Miller had a copy, apparently.

    A must read, Miller.
    I am laughing (green) all the way through this book.

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  21. They want to let the banks de-lever but at all costs they do not want the consumer to de-lever.

    If they had any morals they would help the consumer de-lever and let the banks blow up.