|
Greenspan’s bubbles – more scary graphs
From Marc Faber and Jim Puplava (links found by Bernhard) come the following graphs which explain in no uncertain terms why the current economic situation is worrying:
My analysis of these graphs, and other scary ones, below.
The first graph is telling a simple story: people are cashing in on the increased value of their houses – by piling on more debt, which simply appears more sustainable when the asset backing these debts (your house) is more valuable. (“extraction” in the graph means debt extraction, i.e. adding on to mortgages and spending the money).
The debt burden on US consumers has increased steadily for the past 20 years. In part, this reflects more sophisticated financial instruments and a general trend towards lower interests throughout the period (as the 70s inflation was fought off successfully). What is really worrying is that, contrary to what happened in the early 90s, the 2001 “recession” did nothing to reduce that debt burden: debt service to disposable income (i.e. the portion of your cash that you use to pay off debt – the red line above) has remained at record highs, and the net savings are at record lows – they have actually negative: Americans now spend more than they earn.
The second graph above the fold (which is formatted to make the two curves look similar, but is nevertheless very scary) shows that the increase in homebuilders’s share prices (a proxy for the real estate market) is looking distinctly frothy.
What this means is that US consumers are spending real money based on the virtual increase in the value of their homes – after spending the real money based on the virtual increase in the value of their shares a few years back.
As this graph shows, consumption has grown in the US faster than real GDP in every year since 1997, fuelled by the two successive asset bubbles. This consumption growth has fuelled an import boom which has widened the trade deficits to new records.
What these graphs mean is that consumption is not fuelled by a healthy economy, but by increasing debt. The absence of savings means that there is little investment in the US economy (all investment is financed by foreigners and not by local savings), and therefore the money is spent elsewhere.
Contrary to what many of you on this site think (from the comments in my previous diaries), this is not a sign that the US economy is not competitive – it is simply a sign that you are choosing, as consumers, on an a macro level, to spend on “stuff” and not to invest, and that the local production capacities are therefore not extended to provide for this demand – not because they would be unable to compete, but because you (the Amercian population as a whole) would rather buy foreign stuff now than US stuff a little bit later.
This graph shows that US banks are significantly reducing their loans to the commercial and industrial sector. As Marc Faber writes:
So, all Mr. Greenspan has created is a huge financial and asset bubble everywhere in the world, but no real improvement in the US economy, which is like a drug addict and requires more and more credit to stay afloat. As someone once said, in order to avoid a hangover, you must keep on drinking…
The problem, however, is that the US requires an increasing amount of credit growth in order to keep real estate and stock prices up and to make them move higher, which in turn supports the US consumer’s excessive consumption. But, at the same time, while asset prices in the US are soaring, output is not rising for the simple reason that the market has discounted this “evil” Fed induced con game.
Meanwhile, things are reaching their limits:
– the number of homes available for sale is at record highs. Should demand slow down (because debt gets more expensive with increased interest rates), supply will be too plentiful, thus leading potentially to a nasty fall in prices – and makind all that “virtual” equity worthless – but nonetheless already spent.
– the accumulation of US dollars by foreigners is reaching macro economic levels which are worrisome. In the case of Japan, the first holder of reserves, these reserves represent a growing portion of the country’s GDP. That means they are working, giving the fruit of their labor to the Americans and are getting in exchange that growing pile of IOUs which is beginning to steadily lose its value (against some currencies). This is NOT a good deal for them anymore…
Turning into a nation of sharecroppers may end up being a nice outcome…
And remember – it IS Greenspan’s fault.
(clicked prematurely on the POST button above, sorry)
one of my favorite pseudo economic indicators (MUST credit me !) is the first graph at the top showing the total num of active setiathome participants, here (i’ll explain this below). now for my short reply to the posting.
Contrary to what many of you on this site think (from the comments in my previous diaries), this is not a sign that the US economy is not competitive – it is simply a sign that you are choosing, as consumers, on an a macro level, to spend on “stuff” and not to invest, and that the local production capacities are therefore not extended to provide for this demand – not because they would be unable to compete, but because you (the Amercian population as a whole) would rather buy foreign stuff now than US stuff a little bit later.
while i agree with pretty much of the rest of the article, i disagree with this specific passage because what is happening is IMHO not “the choice of you, the american consumer”, but an effect of economic policies whose seeds were planted in the 70’s and which are coming to fruition now.
americans are not spending their money on imported “stuff” because they prefer it but because basically american “stuff” is becoming scarce and unaffordable. just two examples for the sake of it: HP calculators, known to everyone and probably THE cool spinoff from space age and to me THE symbol of cool american tech, are fabricated in brazil, mexico, singapore and other places since at least the late 70’s. another exponent of cool american tech is Sherline who make miniature lathes and other really nice stuff. If you check their page, you’ll see “Made in USA” right at the top. I see them as one example of what constitutes the backbone of any economy: small and middle enterprises who make a tangible product of good quality and who actually give work to people and pay salaries which enable people to live with some dignity. HP under messrs. hewlett and packard was probably the same kind of place until they decided to turn over business decisions to people who had nothing to do with their core business, prime suspects would be people pushed into the board by banks, culminating in carlys apotheosis of destruction.
seen in another way, in my very stereotyped view companies like sherline and the old HP were in the business of making something: good products, customer satisfaction, livelihoods, wealth.
banks, OTOH, are fundamentally different animals. they are in the business of wealth accumulation, capital building, money lending, of making something out of nothing because lending money at 10% when the economy grows at 2% cant be called anything else. what banks do is variously called capitalism, mercantilism (since the medieval venetian days, from where it originates and is also mentioned in a famous play by shakespeare), speculation, usury.
why i mention this all ? it is IMO important for understanding how the graphs presented above come into existence because these graphs are what happens when you cross an animal which makes “something” with an animal which lives of “something for nothing”. so now lets look at those horrible graphs using my small example involving HP and sherline.
when the engineers hewlett and packard started their company they had one good product, they became big and wealthy based on customer satisfaction and sound management, at least that is what the legends say (lets take them for granted). due to their industriousness, at some point they were sitting on a pile of money so big that somebody in the banking universe noticed. they were eventually talked into converting their company into a corporation and placing the shares on some stock exchange. probably the hewlett and packard families understood that the benefits by far outweighed all other implicaitons of relinquishing part of their control over the company to an abstract entity, ‘the market’. the implications were probably “more stringent audits”, having people from certain banks involved in business decisions, a bigger reliance on credit or “outside capital”. this is the event IMHO which marks the transition of a sound business into a walking cadaver, when the first blue fly has deposits its first egg on the corpse.
sweet times come. the influx of money makes many things possible, increases income for those at the top and makes the bankers smile. the “stringent audits” and constant intromisions by soft spoken people like andersen consulting (remember those ?) brought in by the bankers make the cutting of edges possible, streamline production and administrative processes, make the bottom line look even fatter, make the company even more “credit worthy” (and credit loaded) and everything looks just fine. the company is paying nice dividends, pays their credits back, sell their stuff. like with helminthiasis, the company becomes thinner (“streamlined”) but nobody suspects an illness. to cut it short, eventually people like fiorina arrive, or the company turns into a abominations like oracle who thinks nothing of screwing over a healthier company like peoplesoft, or microsoft, which has more or less destroyed the IT industry in the US and europe for perhaps 20 years now.
“streamlining” means cutting edges and ends everywhere. once a company has been assimilated by the banking combine via introduction to the capital market or overloading it with credit, the until-then main business becomes a secondary consideration vis-a-vis “shareholder value”. production lines are stopped because making stuff in some sweatshop in malaysia is cheaper, customer service is offshored to india, assembly is done in maquiladoras in mexico. research into new products is defunded because developing a new product takes at least 5 years and spending (no mention of investment here) that money without a return in duch a long time means less “competivity” and besides the chinese develop lotsa gadgets in their reeducation camps. people get laid off and those who remain get less salary the same as the new hires who must come in cheaper and be “flexible” meaning that a 40-hour contract means you stand 60 hours in the factory and dont get the difference paid. eventually the company, lets call it HP, is a rotting shell consisting of paper-pushers pululating cubicle-hell in some glass-skinned rent-a-tower in downtown somewhere
the effects for society are reflected in the graphs presented above. laid off engineers still have to eat and pay back mortgages and send kids to school and drive to and from suburbia when they chase after badly paid jobs. so what do they do ? get a second mortgage on the not-yet paid house, overload the credit card, do three jobs, lower their living standard, go bankrupt, whatever. the “home equity extraction” graph above would reflect exactly this. people have no income and have to live somewhere and have to eat, that would be massive amounts of people mortgaging their houses at the far right of the graph. same goes for the savings rate graph. people seem not to be saving but instead living off whatever savings they had or off credits (mortgages).
so why would banks not lend to industry and commerce but still lend to private persons ? simple. industry has no chance against cheap “stuff” from the chinese gulags and commerce is not viable in a place where people have no money to “consume”. getting back to our example, companies like sherline who apparently live off honest business will sooner or later be crowded out of their market by chinese “stuff” or assimilated by bankster-controlled kombinats like microsoft.
privates get credit because they are good business for banksters, because they always pay back. few persons have the wherewithal to take on the legal depts of banks in case they default on debt, what means the bank will never lose. that is not me but those are stats known to anybody who wants to know. private persons are easy prey for the usurers. 40% yearly interest on credit card debts qualifies as usury IMO and by the definition i linked above.
so, why do i mention Seti@Home users in relation with a commentary on the economy ? if you look at the first graph in the page i linked above you’ll note that since about end of 1Q2003 the number of active participants in Seti@Home has declined constantly. I would interpret this as the number of people worldwide who are keeping their computer turned on 24/7 and using energy. obviously there are lots less now than 2 years ago. people get layed, dont have access to computers with constant net access, stop the computer at home because it is a factor in the electricity bill, … you get the picture. Dont know if it is true but i still like to think it is.
an afterthought: because it comes to mind, here is a serving of shit for the fan of lore:
“The freedom of capital to establish a monopoly of industry and trade will give political force to those engaged in industry, and that will … oppress the people.”
Posted by: name | Mar 10 2005 20:14 utc | 42
@ Name, 3:14 PM
I agree with you in general, but what the heck are you talking about when you complain about Microsoft? The IT industry in the U.S. and Europe basically exists because of Microsoft; it’s another bubble which, unfortunately, will probably never pop.
Corporate IT likes to claim that companies need software which is only available on Windows, but that isn’t really true; generally, techs who think Windows has an exclusive lock on software are either lying or haven’t done their homework. The real reason—and I left IT as a career because I couldn’t handle the dishonesty of it, which is frequently quite blatant—is that unreliable technology makes the IT department indispensible, and the IT people know it. You should never give a monkey the key to a banana plantation, and you should never let an IT person choose a technology, because the IT person’s goal will not be to find a good technology, it will be to bind the technology, in some way, to the IT department.
A Unix or Linux machine will basically run forever with practically no maintenance if properly set up. A Mac used to crash periodically but avoid serious problems, but now is just another Unix variant with a pretty face. Windows, though—
First you need antivirus software. Then you need a Firewall, because the antivirus software is always a step behind the latest viruses, and the Firewall won’t be a cheap, reliable piece of hardware, but a specially configured Windows PC, because, the IT department will assure you, hardware-based firewalls aren’t as flexible. And then you need to keep buying new versions of Office, because you’re running Windows in order to use Office (and your IT department didn’t tell you about OpenOffice.org, or Office:Mac). And you need to upgrade Windows every so often to keep up with Office. And you need to buy more RAM and larger hard drives to run Windows. And you’ll need a completely new PC every two or three years, because that’s cheaper and easier than upgrading all the components individually and you need faster and faster processors to run later versions of Office and Windows. And you’ll want to have training, so that your employees can create badly-formatted documents in Word and boring presentations in PowerPoint and still not understand how to copy and paste correctly. Then you’ll want some corporate spyware—much easier to implement if you’re using Microsoft mail servers and web proxies, naturally—because trained employees with Internet connections are going to spend their time looking at the Internet and doing personal e-mail unless you stop them. And you have to keep installing patches for Windows, because otherwise the e-mail that gets through the Firewall will spread viruses, and of course you can’t update without testing the updates first, which has to be done by the IT department because nobody else knows what sorts of problems to look for. And of course, with this huge avalanche of tasks, the IT department will need one employee for every fifty machines (the number is more like one for every 200 with Macs or Linux), and more space for all the employees, and offices for the supervisors because now they have a great big department with a great big budget.
So don’t blame Microsoft; they’re doing a tremendous job for IT, better than any other group out there.
Posted by: Blind Misery | Mar 11 2005 7:01 utc | 54
|
