Archives for Insolvency

“This Time Is Different”

A good piece of advice is to be wary when you hear the hackneyed phrase “this time is different.” Just as one should never say “never,” one should never suggest something is unique enough to suggest it never happened before.

Yet that is exactly what is claimed by Gordon T. Long and John Rubino in the slide presentation below. While it may sound like I am negative regarding their presentation, I am not. In fact, it is probably the best short explanation as to why the end of this economic death spiral is so hard to call. That is true both regarding timing and the manner in which the collapse occurs.

Whether you are an investor, concerned citizen or merely someone trying to understand the current economic situation, you should be worried. Watch this to get an outstanding overview of what is occurring:

I disagree with Mr. Long’s suggestion that world government or world institutions must be created in order to deal with the future. Perhaps I misinterpret his short comments, almost throwaway lines, on this subject, but it seems to me that less rather than more government is required. After all, government is the cause of the present problems and will be the cause of future problems. Bigger government is capable of causing even bigger problems.

It Is All Coming Down

As the stock markets of the world rise on a sea of liquidity, economies become increasingly dysfunctional. Credit and money creation is no remedy for economic distortions and mis-allocations. Liquidity can drive asset and commodity prices higher but it also leads to additional distortions. Credit and money creation is not an economic tool, it is a political tool. It is a means to fool people a bit longer.

The reality is that the massive Ponzi schemes of the social welfare states around the world are imploding. There is no mathematical way to sustain these schemes and no political will to stop them. As a result, these cancers are destroying the very societies and economies that support them. Their demise will drag down the economies and governments which allowed them. Nation-states may fall in the process.

Since the turn of the century, all government economic policies have been attempts to cover up the decaying programs of the welfare states. Nothing can be done to correct or maintain these Ponzi schemes. Nor can anything be done to avoid the inevitable reckoning that is coming as a result of impoverishing economies and people with these programs. Governments may defer the collapse, but only by increasing the ultimate pain and suffering that is incurred when the Piper appears for his due.

There is no economic recovery underway anywhere in the world, despite the pronouncements of governments and their media lackeys. An economic Armageddon lies ahead. The damage done ensures that there can be no escape from the coming cataclysm.

Michael Snyder, focusing on Europe, provides twenty signs that a Great Depression is already underway there:

The following are 20 signs that the next Great Depression has already started in Europe…

#1 The unemployment rate in France has surged to 10.6 percent, and the number of jobless claims in that country recently set a new all-time record.

#2 Unemployment in the eurozone as a whole is sitting at an all-time record of 12 percent.

#3 Two years ago, Portugal’s unemployment rate was about 12 percent. Today, it is about 17 percent.

#4 The unemployment rate in Spain has set a new all-time record of 27 percent. Even during the Great Depression of the 1930s the United States never had unemployment that high.

#5 The unemployment rate among those under the age of 25 in Spain is an astounding 57.2 percent.

#6 The unemployment rate in Greece has set a new all-time record of 27.2 percent. Even during the Great Depression of the 1930s the United States never had unemployment that high.

#7 The unemployment rate among those under the age of 25 in Greece is a whopping 59.3 percent.

#8 French car sales in March were 16 percent lower than they were one year earlier.

#9 German car sales in March were 17 percent lower than they were one year earlier.

#10 In the Netherlands, consumer debt is now up to about 250 percent of available income.

#11 Industrial production in Italy has fallen by an astounding 25 percent over the past five years.

#12 The number of Spanish firms filing for bankruptcy is 45 percent higher than it was a year ago.

#13 Since 2007, the value of non-performing loans in Europe has increased by 150 percent.

#14 Bank withdrawals in Cyprus during the month of March were double what they were in February even though the banks were closed for half the month.

#15 Due to an absolutely crippling housing crash, there are approximately 3 million vacant homes in Spain today.

#16 Things have gotten so bad in Spain that entire apartment buildings are being overwhelmed by squatters…

A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters.

“This is happening all over the country,” said Jose Maria Fraile, the town’s mayor, who estimates only 100 apartments in the block built for the council have rental contracts, and not all of those tenants are paying either. “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.”

#17 As I wrote about the other day, child hunger has become so rampant in Greece that teachers are reporting that hungry children are begging their classmates for food.

#18 The debt to GDP ratio in Italy is now up to 136 percent.

#19 25 percent of all banking assets in the UK are in banks that are leveraged at least 40 to 1.

#20 German banking giant Deutsche Bank has more than 55 trillion euros (which is more than 72 trillion dollars) of exposure to derivatives. But the GDP of Germany for an entire year is only about 2.7 trillion euros.

No doubt many are surprised at this list. After all, this news is not being reported. It is deliberately being ignored or covered up.

This is Europe and Europe is not America. It is impossible to disagree with that tautological sentence. But America’s economic situation is much like Europe’s. Our economy was stronger when the maelstrom began. Some of our numbers (CPI, unemployment, GDP, etc.) appear better, but they may be manipulated more than the comparable data in Europe.

Whether we are better off than Europe or not is irrelevant. The key point is that the American situation is bad enough on its own to be irreversible. A similar collection of statistics regarding America would be just as shocking as the list prepared by Mr. Snyder. Perhaps he will present such a list (or perhaps he already has), as this is one of his strengths.

Suffice it to say that the developed world is choking on the debt and distortions driven by political mismanagement and the attempts to sustain an unsustainable welfare state. In an attempt to support increasingly failed Ponzi schemes, debt levels have surpassed the levels that can be sustained. Economies no longer grow or function properly under the debt and distortions it has caused. The attempt to sustain the political scam of welfare is about to sink the productive sectors of all developed economies.

It is all coming down. Humpty Dumpty cannot be fixed.

When Suckers Finally Realize

The fleecing of the American public continues.

The theft takes different forms, but it all serves one purpose — to transfer wealth from the average Joe to the crony corporatists and their political lackeys. Here are but a few examples of how this has been accomplished:

Bailouts for the wealthy and well-connected are paid for by the unconnected middle class.
Subsidies are provided for unworkable schemes submitted by political donors and favorites. These schemes inevitably fail and the tax-payer is left holding an empty bag.
Laws are routinely ignored when “friends” need help. In identical circumstances, would you receive the same treatment as Jon Corzine?
Despite the biggest theft in world history, no one was prosecuted. The Savings and Loan crisis in the 1980s was trivial in comparison to the recent financial crisis. More than a thousand S&L executives were prosecuted.
Ever-increasing sacrifices in the form of higher taxes from the productive sector are demanded to continue the plush living of the ruling class.

Capitalism and free markets depend upon trust, integrity, property rights and the rule of law. Without these, there are no advantages to free markets. Nor are there any incentives to create wealth. Instead, an economy becomes little more than a massive plunder scheme where the powerful exploit the weak. No economic recovery is possible under such circumstances.

When Suckers Revolt

As people recognize what is happening, they alter their behavior. Three reactions are to be expected:

1. Some will become discouraged when they realize the game is stacked against them. They will diminish their efforts to succeed, even perhaps dropping out of the game altogether. Given the enhanced returns to not working, it should not be surprising that this alternative has become popular.

2. Others will adopt the same behavior as the ruling class. They will exploit those lower on the food chain than themselves. Justice Brandeis warned of the implications of government misbehavior:

In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy.

Daniel Patrick Moynihan described the process of declining moral values as “defining deviancy down.”

3. Others may resort to acts of violence. These reactions could be isolated domestic terrorist acts against government and corporations seen as the exploiters. Or the acts might be broader based where the poor see fit to attempt to take from the wealthy. They also could manifest in wide civil unrest against the government if it is seen as the cause of misery or if it is seen as intending to default on promises made.

All of this behavior is anti-social and it is unproductive. It reduces the output of the economy, further exacerbating the problems.

How Does This End?

It is difficult to know how the current condition ends. Here are a few possibilities, with some opinion added:

Will our ruling class alter its behavior? That is very unlikely. History provides no examples where power is willingly relinquished.
Will our economy collapse? That is a likely outcome, although the process could take years or decades.
Will social unrest occur? Probably. The government, at some point will be unable to honor its promises. It is broke and left with the printing of money as its primary source of funds. Stopping the printing means dishonoring promises and likely plunges the country into civil unrest.
Will hyperinflation occur? If the government continues to print, that seems to be the inevitable result.

Issues That Need To Be Solved

We are too far into this economic disaster to escape without an economic collapse of some sort. Return to normal economic times is impossible without a complete and thorough purging of the economic distortions and capital mis-allocations produced from decades of government interventions.

The following issues prevent a recovery:

No economy can prosper without a strong middle class. They are the productive class in society. They are the small businesses and job creators. Without them, society does not produce. Without production, there is only poverty.
Inflation, the cruelest tax of all, is driving up prices while wages and salaries do not keep pace. For those without wealth, there is no way to protect against this theft. For those with wealth, they can rearrange investments to take advantage of inflation, particularly if they are privy to what is coming next.
The economy is dysfunctional. It no longer functions efficiently as a result of the burdens it is forced to labor under. The price system has been made less efficient as a result of inflation, manipulated interest rates, subsidies, penalties and other impediments. It no longer provides the information needed by economic actors to make proper decisions.
Regime uncertainty discourages action. When economic actors are unable to judge the future, they pull back. Money goes to the sidelines or out of the country.
US economic policy and the uncertainty of what comes next has been a great job creator for other countries.
Economic growth cannot be forced by central diktats. It occurs only in a climate that is receptive and friendly to risk-taking. It is hard to imagine a worse environment than the current one. That is why there is no investment and no hiring.

What Is The Outlook?

There should be no optimism regarding government changing its ways. History suggests it never does.

The recent plunge in the gold market suggests government has gone all in in its attempt to continue exploitation. Chris Martenson commented on this event:

I am very disappointed by, but not surprised at, the latest transfer of weath to the bankers from everyone else. The most recent gold bear raid has vastly enriched the bullion bankers, once again, at the expense of everyone trying to protect their wealth from global central bank money printing.

Gold is considered a safe-haven against government plunder. It is one of the few escapes from fiat currency debauchery that the small investor has. Whether this latest attack on gold was to make the bullion bankers better off or to scare those trying to protect themselves against government exploitation is irrelevant. When government intervenes (assuming it did, and the circumstantial evidence is pretty strong) in markets in such a manner, it is no longer a referee. It has chosen a side and is a participant in the game. There can be no fair competition when one team owns the referee. That is what happens when government participates in markets.

Historians judge that it took Rome almost two hundred years to die. That determination depends very much upon what you mean by “die.” Arguably Rome died much earlier than historians acknowledge. Rome was dead-man walking before the couple of hundred years it took for it to fall down.

The US is in similar position. Unless you believe in the miracle of sovereign resurrection, the US is over. The coroner-historians have not pronounced death yet, but they, like with Rome, are behind the curve. This dead man too will eventually fall down.

Is Inflation A Cause Or An Effect Of A Dying Country

I recently posted “The Country Is Dying.” If you read the post you should understand that this slow death need not happen.

Countries and civilizations do not have biological clocks. Unlike humans, there should be no constraints on their lifespans. A corporation is a similar construct. It is assumed under the law to have an infinite lifespan. Obviously corporations don’t live forever. Even great companies rise and fall. The reason is competition. In free markets as in nature a form of Darwinism operates. Companies that adapt survive, while stragglers are culled out.

Civilizations, like corporations, should have infinite lives. But just like corporations, both are subject to something resembling market forces. Competition among nations sometimes results in damaging wars. Tragedies like plagues, earthquakes, floods or the like can weaken or destroy civilizations. Mal-treatment of citizens can produce internal strife. Like corporations, civilizations are subject to various forces to which they must adapt or weaken and eventually perish.

History suggests the life cycle of a country from rise to fall is about two centuries. There is nothing inherent in the nature of countries that dictates such a cycle, but there are ample examples supporting this length. Unless conquered from the outside, most countries fall under the baggage they themselves create. Two hundred years appears to be the time that it takes government to morph into an all powerful State that behaves in its own interest. In virtually all cases, debauchery of the currency is an accompanying condition. In 1525, Nicholas Copernicus observed this tendency:

Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through excessive quantity.

Copernicus’ observation almost 500 years ago reasonably describes one of the key attributes of our dying modern economies — Europe and the US. That one element seems to have been present in the demise of all countries. Correlation is not necessarily causation, although in this case it may be a bit of both. Debauchery of the currency can be both a cause and an effect.

It is likely that governments don’t look to inflation as an initial tool, although even that probably doesn’t hold in all instances. More than likely, the inflation results from government overextending itself with promises that should never have been made and cannot be kept. Bread and circuses to distract the populace are expensive and inflation becomes a tool to perpetuate government’s control. In that sense, inflation can be looked at as an effect. It arises out of an inherent defect of government — the universal need to spend more than it has.

Once inflation is introduced into a society, however, it then produces its own effects and none of them are good. Two effects are especially ruinous: it destroys economic calculation and it pits sectors of society against one another. Thus, once introduced it becomes a causal factor in a country’s decline, perhaps the causal factor.

Gordon T. Long and Ty Andros discuss what is happening in the US. Focusing on the current situation, they consider the following factors important to create what they term as the Something-For-Nothing Society:

There are five elements to creating a SOMETHING-for-NOTHING Society

The first and most important element is UNSOUND money and the destruction of private property rights.
The second element is a CENTRALLY controlled public school system to destroy the wealth of the nation by crippling the ability of citizens to solve problems, be economically productive and self-reliant, think for themselves, and understand history as to learn its lessons.
A mainstream media that reports misinformation as fact to manipulate the masses (useful idiots created by the public school monopoly’s) for the benefit of socialists and elites who control things.
The fourth element is to make the middle class into SERFS and slaves to government and Banks in one form or another.
The last element is to embrace the very leaders who have preyed upon them and support them in ROBBING the very parts of their economies which are the only hope of a prosperous future aka KILLING the GOLDEN Goose.

This list is correct in our case. It is somewhat situational in that several of their causes have not accompanied other declines. But note the influence of Copernicus in item number one above.

For further perspective on our situation, Mr. Long and Mr. Andros have a slide show which goes into more detail:

Slideshow url: http://financialsurvivalnetwork.com/2013/04/macro-analytics-something-for-nothing-societies-gordon-t-long-with-ty-andros/

The Country Is Over

Data are hard to deal with when your vision is on the wrong side of it. Those wanting to claim there is a recovery underway are having just this problem. These people either have no understanding of economics or they believe falsely that they can inflate “animal spirits” with their hyped reports and that will initiate a recovery.

There will not be an economic recovery given the economic policies of this country. A recovery is not unlikely, I would argue it is closer to impossible if not impossible. The reasons for this position are not complicated. In short, the nation has become an out-of-control welfare state that is rapidly destroying the incentives to work or create jobs. Government policies appear designed toward this end. One doesn’t need a high IQ or an advanced degree in economics to understand the problems.

There are innumerable factors responsible for the decline of the US. Only three important ones will convey why the economy is dying:

1. The rule of law and property rights are under attack.

What do you really own? The depositors in Cyprus believed they owned what was in their bank accounts. They found out otherwise. Bondholders of General Motors believed they were protected by bankruptcy laws when GM was bankrupted by the government. They found out otherwise. Do you own your pension plans and IRAs. Well you always believed you did except now there is talk about confiscating a portion or all of these funds.

How much of your income do you own? For those doing well, let’s say 60%. But that portion is under attack with the “need” for higher taxes and “fair share” gobbledegook. What about Social Security? Although the government sold it as a retirement policy and told you it is yours, the government says in fine print it is not. That is their excuse for not treating it as a liability on their balance sheet.

The fact is that the rules are being changed at will by the side who has lots of guns. The number of rules and laws that have been changed or ignored in the past several years makes one wonder what laws will remain. We are approaching the point where there are no rules which means there can be no society. Without cooperation, markets will cease to function efficiently or perhaps at all. Millions of people will starve to death under such conditions.

2. Obamacare has raised costs

The costs associated with Obamacare are still not known or calculable. The rules are still being written. Already there are thousands of pages. Even though we passed it as Speaker Pelosi suggested as a means to find out what was in it, we still don’t know as the rules are still being made up.

For sure the program is driving up the costs of medical care and driving down the quality. That is exactly the opposite of what was promised. Business firms face great uncertainty as to what this mandate will do to their costs and operating procedures. Obamacare is rising the cost of employees. When you penalize something, you get less of it. That is a prime reason why there is no employment recovery in this country.

Employers have frozen their hiring until clarity develops. The development of clarity is no assurance that they will change their behavior. If the costs are too high (and they appear to be for many smaller businesses who create the most jobs), then hiring will not return.

The effect on hiring is only one negative. Full-time workers are being made part-time in order that they be exempted from the Obamacare mandate. These steps are not something business wants to do, it is something they must do in order to survive.

3. Government policies have made the dole more lucrative than work

As we make it easier to get unemployment benefits for longer time periods, more people take advantage of the system. So too with food stamps and disability. All programs are at or near record levels in what is supposed to be four years into an economic recovery. For many, the benefits of becoming a government dependent exceed what they can earn. One study reported that a family of four, collecting all the benefits for which they were entitled, would have to earn $65,000 per annum to have the same after-tax purchasing power.

If you are a product of the government schools and are legal to work (i.e., have skills enough that you are affordable at the minimum wage or higher), at what point do you realize that there is no need to go through the hassle of actual work. You can live pretty well by staying home and taking advantage of the entitlements available to you. That is exactly what a larger and larger percentage of the population are realizing. In many cases, it is economically irrational to work.

This behavior creates a social pathology that only worsens over time. Kids learn from their parents that work is not necessary and the many ways to game the system. In this regard, look for this problem to become worse over time unless these programs are cut back.

There Can Be No Recovery

Despite all you hear coming from the government’s media megaphone, there is no economic recovery underway, nor can there be one. The policies in place ensure that one will not happen. Economics is not a top-down science as Keynesians and politicians want you to believe. You can throw as many Fed dollars into the system or devise innumerable government stimulus programs. These are all top-down. Economics is a bottom-up process that starts with individual decisions and behavior. Individuals respond to available choices and incentives. They act in their own self-interest not in the manner in which some government planner wants them to act. Top-down programs do not affect the incentives of the individual decision-makers.

We raise the costs on those who work (higher taxes) and the businessmen who provide the jobs. One of the basic laws of human nature is that when you penalize something or make it less pleasant, people will want less of it. It is not a mystery why business is not hiring and the number of workers is declining. The return to both is declining as a result of government policies.

We raise the rewards for not working. Another basic law of human behavior is that when you increase rewards for a particular kind of behavior, you will get more of it. It is not a mystery why more people are choosing the dole than ever before. Government has encouraged them to do by providing higher rewards.

Add in the regime uncertainty associated with unstable or unpredictable laws and regulations and you have the perfect storm. There is no incentive to hire. Business hunkers down not knowing what is coming their way next. They understand they are targets of this Administration. It is unlikely that there will be any improvement on this fron while Obama remains in office. This behavior has nothing to do with politics. Even businesses headed by Democrats are behaving in this fashion. It is self-interest as in the desire to survive that motivates this behavior.

Why The Economy is Dying

As government grows the private sector shrinks. As the private sector shrinks there are fewer goods and services produced (government produces no goods and few services). I believe it was Dick Armey who described this situation with the wagon analogy: there are more people riding in the wagon and fewer pulling the wagon. As the wagon becomes heavier, the remaining pullers must work harder to move it.

The pullers must support the riders. Government does not support the riders or anyone else for that matter. Whatever government has it has taken from the pullers. Whatever it doles out it must get from taxes, borrowing or printing new money. Regardless of which means it uses, it is all coming from the pullers. They pay the borrowing back. They have less as a result of higher taxes. They are made poorer by the rising prices from the printing of money.

As the burdens increase on the pullers and the benefits increase for the riders, more pullers decide to ride. The truly creative and talented can always make enough money to continue to work rather than ride. However, when their efforts can be expended in other countries that penalize them less, at some point they no longer pull the wagon. They leave the country to climes where they are treated better.

Each increase in government spending means requires more money from the private sector. That means greater distortions in the incentive-disincentive calculus that produces fewer people pulling the wagon. Now fewer people must support more non-producers. Every time someone gets in the wagon, the burden on the productive sector increases. More must be extracted from a smaller group to serve the increasing riders.

That is what is happening in this country. If it is not reversed, the economy will stagnate and eventually implode. This conclusion is dependent upon nothing more than simple arithmetic. How bad is the imbalance today? Tyler Durden provides some information (my emboldening in red added):

The punchline: 110 million privately employed workers; 88 million welfare recipients and government workers and rising rapidly.

And since nothing has changed in the past two years, and in fact the situation has gotten progressively (pardon the pun) worse, here is our conclusion on this topic from two years ago:

We have been writing for over a year, how the very top of America’s social order steals from the middle class each and every day. Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually works and pays their taxes. One can only also hope that in addition to seeing their disposable income be eaten away by a kleptocratic entitlement state, that the disappearing middle class is also selling off its weaponry. Because if it isn’t, and if it finally decides it has had enough, the outcome will not be surprising at all: it will be the same old that has occurred in virtually every revolution in the history of the world to date.

But for now, just stick head in sand, and pretend all is good. Self-deception is now the only thing left for the entire insolvent entitlement-addicted world.

Mr. Durden’s article is worthwhile and informative. I encourage you to read it in its entirety, including the PDF attached.

Is The Decline Inevitable?

Of course not. As Lawrence of Arabia stated: “Nothing is written.”

The Economic Solution

The solution to solving the problem is quite simple for an economist. Merely reverse the process. Make it attractive for people to jump out of the wagon and begin pulling. For businesses, make it attractive for them to hire. Make it unattractive to be on the dole. Reverse the growth of government and you increase the size of the private sector. More capital is made available for productive activities rather than being squandered by government. Talent stops leaving the country when they are treated more favorably here, whether this be via lower taxes or less onerous regulatory burdens. Then, get government out of the way and let markets solve the problem.

The Political Barrier

For the political class, the solution borders on the impossible. Politicians have bribed the citizenry with goodies for votes. They have sold the notion that government is responsible for all good things. The economic solution runs counter to everything that politicians have peddled. Further it reduces their power and ability to retain office, at least in a manner in which they are accustomed. It shrinks their perquisites. It shrinks their vote-buying ability. In short, it is virtually impossible for them to go along with such a solution.

What politicians thrive on is what created the current problems. Reversing this behavior is alien to them. They would not know how to behave under such conditions. Yet the economic solution is the only solution!

Do I expect politicians to change and save the country? No! Is it possible they could? Probably not, but “nothing is written.”