old steel
19th August 2014, 12:23 AM
The Market Ticker ® - Commentary on The Capital Markets (http://market-ticker.org/akcs-www?blog=Market-Ticker)
2014-08-15 07:15 by Karl Denninger (http://market-ticker.org/akcs-www?email-send=genesis)
in Editorial (http://market-ticker.org/akcs-www?blog=Market-Ticker&page=1&cat=Editorial) , 3134 references (http://market-ticker.org/akcs-www?post=229300#) http://market-ticker.org/smilies/ignore.gif (http://market-ticker.org/akcs-www?ignore_thread=229300)
What You Ought To Tie Together (But Aren't)
http://market-ticker.org/akcs-www?get_gallerynr=87 Charles Hugh Smith has a rather insightful piece out that is worthy of a comment or three. (http://www.oftwominds.com/blogaug14/phantom-wealth8-14.html)
Phantom wealth cannot possibly fund unprecedented retirement and healthcare promises.
The narrative that Social Security, Medicare and pension funds invested in stocks and bonds can fund the retirement of 65 million people is a misleading fantasy. The sad reality is we can't fund the enormous expense of retirement/healthcare for 20% of the populace out of our national earned income, and the savings that have been set aside are either fictitious (the Social Security Trust Fund) or based on phantom wealth created by speculative asset bubbles in stocks, bonds and real estate.
It's an intentionally-misleading fantasy, but a distressingly common one. Indeed, it's one that many members of Congress will try to tell you they share, although I harbor my suspicions as to whether they really believe their own bull****.
The fiction part is easy -- the US Government claims to have a monstrous amount of "wealth" in the Social Security and Medicare "trust funds." However, in fact what they have done is "bought" Treasury certificates and turned over the cash they received in payroll taxes to the government in exchange, which immediately spent the money on social programs. In other words, the funds are gone, replaced with debt -- a promise to pay in the future.
From what will the payment come, when the government is running a deficit and in fact used those funds to pay for programs they have no intention of curtailing or discontinuing?
Remember that in order to actually pay a debt you must make more than the combined total of the debt service payments (interest) and your operating expenses. It is not possible, mathematically, to do so otherwise.
As a result Social Security and Medicare are an open and notorious fraud -- a fraud that continues right up until people figure out that absent gross reductions in federal spending the debt will never be repaid but instead will be continually accumulated while the incoming cash flow from payroll taxes is siphoned off!
The Federal Reserve, for it's part, has financed this ridiculous profligacy in large part. But not entirely. The rest of that functional counterfeiting has come from private banks, but the effect is the same no matter where it comes from.
Now let's look at the other part of the problem because it's even worse there; indeed, it's the classic Ponzi scheme!
You may look at your portfolio of stocks and see "one million dollars" represented there. However, you don't possess one million dollars -- you hold instead a piece of paper with a pretty number printed on it with a factual value of zero. The theoretical value of that portfolio is the liquidation value of the companies in it; with price-to-book values at ridiculous levels if all those firms were shut down and their asset valuations were truthful in such a situation you might get 10% of your alleged "money." But that's a fantasy in and of itself, as "assets" typically include things like intangibles (e.g. the "value" of patents) which are dubious at best.
Your retort is likely to be "But I can sell my stocks right now and have the one million dollars!" My response is simple: Ok, then do so, and then you can make such a claim -- but only so long as you actually hold that fistfull of Benjamins -- the moment you "re-invest" it, you no longer can.
At this point most people simply shake their heads and walk away from me, considering me a lunatic. After all, everyone knows you can hit the SELL button any time you want, and if you do it right now you'll almost-certainly have your million dollars.
And that's true, provided you're the only one (statistically) who wants to do it.
Therein lies the problem as it does with all Ponzi schemes. They work just fine and "everyone" can cash out so long as nobody, statistically, actually does.
The underlying problem is that in order for you to receive one million actual dollars someone else has to give them to you in exchange for your shares. There are only two ways that such dollars can come into existence:
A person can labor in some fashion, pay their expenses of doing so, and wind up with an economic surplus. That is, some percentage of the GDP they added to the economy is reserved for other than their own personal use (and the cost of its production) and then is given to you in trade for your shares. This is the essence of economic progress, savings and investment; capital surplus accumulated through output in excess of consumption.
A person can convince someone to increase the number of dollars without first producing anything. That is, they can borrow unsecured on the premise that they will produce later. They then exchange these counterfeited dollars for your shares. This is either the pulling forward of demand or it is outright fraud, but in either case it immediately reduces the value of every dollar in existence in terms of real goods and services.
The second act has the effect of causing the price of your shares to rise in dollar terms, but not because they become more valuable -- they rise because for each unit of economic output there are more dollars in existence!
This would be all fine and well except that you can't eat shares of stock nor fuel your car with them. For that you need actual physical products and provided services. Unfortunately the price of those things rises also; if there are only 100 pounds of steak and 100 dollars in the world, and nothing else of value, the equilibrium price of a pound of steak is likely to be $1. If you double the number of dollars without changing the number of pounds of steak in the world what do you think happens to the price of a pound of steak?
Now consider the converse; you have your $1 million stock portfolio, or so you believe. You wish to sell it, because you need to live on that portfolio. However, the price of food, gasoline, medical care, education and pretty much everything else leaves the other people in the economy with no free money.
How much is your stock worth if there is no free cash in anyone's hands to exchange for it?
Now contemplate this: 2/3rds of the nation's households, according to the Federal Reserve, cannot raise a mere $400 in an emergency without going into debt or selling some item from their household!
So long as people can keep creating credit in order to buy your shares the illusion holds. But this requires ever-larger, indeed exponentially growing amounts of credit to be created, and each dollar that is created forces a greater and greater percentage of the whole to be spent on necessities, leaving less to support those asset prices. And as such this belief, and thus the printed number on your brokerage statement page, only holds up so long as nobody, statistically speaking, actually tries to sell!
When a critical mass of people stand up and say "bull****!" to the claim that the next borrower will repay them the pyramid collapses, exactly as it does in all pyramid schemes.
How far do we go today before this happens again as it did in 2000 and 2008? I have no idea. But what I do know is that from a standpoint of household income we're about where we were during the heyday of that bubble (e.g. ~2006ish) and yet food, fuel, medical care and education are all dramatically more expensive than they were 8 years ago.
In other words in terms of systemic leverage and liquid, available funds in the actual economy ex funny money credit we're in far worse shape than we were then.
You wouldn't know it with the price of companies like Facebook and Amazon, or even Salesforce for that matter. But reality is what it is and reality is that when, not if, people try to redeem that alleged wealth into spendable form it will evaporate like a fart in the wind.
http://market-ticker.org/akcs-www?post=229300
2014-08-15 07:15 by Karl Denninger (http://market-ticker.org/akcs-www?email-send=genesis)
in Editorial (http://market-ticker.org/akcs-www?blog=Market-Ticker&page=1&cat=Editorial) , 3134 references (http://market-ticker.org/akcs-www?post=229300#) http://market-ticker.org/smilies/ignore.gif (http://market-ticker.org/akcs-www?ignore_thread=229300)
What You Ought To Tie Together (But Aren't)
http://market-ticker.org/akcs-www?get_gallerynr=87 Charles Hugh Smith has a rather insightful piece out that is worthy of a comment or three. (http://www.oftwominds.com/blogaug14/phantom-wealth8-14.html)
Phantom wealth cannot possibly fund unprecedented retirement and healthcare promises.
The narrative that Social Security, Medicare and pension funds invested in stocks and bonds can fund the retirement of 65 million people is a misleading fantasy. The sad reality is we can't fund the enormous expense of retirement/healthcare for 20% of the populace out of our national earned income, and the savings that have been set aside are either fictitious (the Social Security Trust Fund) or based on phantom wealth created by speculative asset bubbles in stocks, bonds and real estate.
It's an intentionally-misleading fantasy, but a distressingly common one. Indeed, it's one that many members of Congress will try to tell you they share, although I harbor my suspicions as to whether they really believe their own bull****.
The fiction part is easy -- the US Government claims to have a monstrous amount of "wealth" in the Social Security and Medicare "trust funds." However, in fact what they have done is "bought" Treasury certificates and turned over the cash they received in payroll taxes to the government in exchange, which immediately spent the money on social programs. In other words, the funds are gone, replaced with debt -- a promise to pay in the future.
From what will the payment come, when the government is running a deficit and in fact used those funds to pay for programs they have no intention of curtailing or discontinuing?
Remember that in order to actually pay a debt you must make more than the combined total of the debt service payments (interest) and your operating expenses. It is not possible, mathematically, to do so otherwise.
As a result Social Security and Medicare are an open and notorious fraud -- a fraud that continues right up until people figure out that absent gross reductions in federal spending the debt will never be repaid but instead will be continually accumulated while the incoming cash flow from payroll taxes is siphoned off!
The Federal Reserve, for it's part, has financed this ridiculous profligacy in large part. But not entirely. The rest of that functional counterfeiting has come from private banks, but the effect is the same no matter where it comes from.
Now let's look at the other part of the problem because it's even worse there; indeed, it's the classic Ponzi scheme!
You may look at your portfolio of stocks and see "one million dollars" represented there. However, you don't possess one million dollars -- you hold instead a piece of paper with a pretty number printed on it with a factual value of zero. The theoretical value of that portfolio is the liquidation value of the companies in it; with price-to-book values at ridiculous levels if all those firms were shut down and their asset valuations were truthful in such a situation you might get 10% of your alleged "money." But that's a fantasy in and of itself, as "assets" typically include things like intangibles (e.g. the "value" of patents) which are dubious at best.
Your retort is likely to be "But I can sell my stocks right now and have the one million dollars!" My response is simple: Ok, then do so, and then you can make such a claim -- but only so long as you actually hold that fistfull of Benjamins -- the moment you "re-invest" it, you no longer can.
At this point most people simply shake their heads and walk away from me, considering me a lunatic. After all, everyone knows you can hit the SELL button any time you want, and if you do it right now you'll almost-certainly have your million dollars.
And that's true, provided you're the only one (statistically) who wants to do it.
Therein lies the problem as it does with all Ponzi schemes. They work just fine and "everyone" can cash out so long as nobody, statistically, actually does.
The underlying problem is that in order for you to receive one million actual dollars someone else has to give them to you in exchange for your shares. There are only two ways that such dollars can come into existence:
A person can labor in some fashion, pay their expenses of doing so, and wind up with an economic surplus. That is, some percentage of the GDP they added to the economy is reserved for other than their own personal use (and the cost of its production) and then is given to you in trade for your shares. This is the essence of economic progress, savings and investment; capital surplus accumulated through output in excess of consumption.
A person can convince someone to increase the number of dollars without first producing anything. That is, they can borrow unsecured on the premise that they will produce later. They then exchange these counterfeited dollars for your shares. This is either the pulling forward of demand or it is outright fraud, but in either case it immediately reduces the value of every dollar in existence in terms of real goods and services.
The second act has the effect of causing the price of your shares to rise in dollar terms, but not because they become more valuable -- they rise because for each unit of economic output there are more dollars in existence!
This would be all fine and well except that you can't eat shares of stock nor fuel your car with them. For that you need actual physical products and provided services. Unfortunately the price of those things rises also; if there are only 100 pounds of steak and 100 dollars in the world, and nothing else of value, the equilibrium price of a pound of steak is likely to be $1. If you double the number of dollars without changing the number of pounds of steak in the world what do you think happens to the price of a pound of steak?
Now consider the converse; you have your $1 million stock portfolio, or so you believe. You wish to sell it, because you need to live on that portfolio. However, the price of food, gasoline, medical care, education and pretty much everything else leaves the other people in the economy with no free money.
How much is your stock worth if there is no free cash in anyone's hands to exchange for it?
Now contemplate this: 2/3rds of the nation's households, according to the Federal Reserve, cannot raise a mere $400 in an emergency without going into debt or selling some item from their household!
So long as people can keep creating credit in order to buy your shares the illusion holds. But this requires ever-larger, indeed exponentially growing amounts of credit to be created, and each dollar that is created forces a greater and greater percentage of the whole to be spent on necessities, leaving less to support those asset prices. And as such this belief, and thus the printed number on your brokerage statement page, only holds up so long as nobody, statistically speaking, actually tries to sell!
When a critical mass of people stand up and say "bull****!" to the claim that the next borrower will repay them the pyramid collapses, exactly as it does in all pyramid schemes.
How far do we go today before this happens again as it did in 2000 and 2008? I have no idea. But what I do know is that from a standpoint of household income we're about where we were during the heyday of that bubble (e.g. ~2006ish) and yet food, fuel, medical care and education are all dramatically more expensive than they were 8 years ago.
In other words in terms of systemic leverage and liquid, available funds in the actual economy ex funny money credit we're in far worse shape than we were then.
You wouldn't know it with the price of companies like Facebook and Amazon, or even Salesforce for that matter. But reality is what it is and reality is that when, not if, people try to redeem that alleged wealth into spendable form it will evaporate like a fart in the wind.
http://market-ticker.org/akcs-www?post=229300