Archive for October, 2013

The Bubble This Time

Tuesday, October 29th, 2013

For those who look, there are many clear signs of credit/housing bubble 2.0:

  1. Extreme levels of student loan debt (and rising rates of delinquency);
  2. NYSE Margin Debt pushing to new extremes;
  3. Covenant-Lite corporate debt issuance (high risk to lenders) hitting new extremes while interest rates remain abnormally low;
  4. Extremely high proportion of houses being bought by investors paying “cash” (aka pre-funded borrowing) rather than resident owners;
  5. House prices pushing back up toward the bubble peak, while affordability metrics drop;
  6. Corporate earnings/GDP well above sustainable levels (at the expense of high trade and government deficits, and low household savings rates;
  7. Rising income and wealth inequality since the newly-minted credit is unevenly distributed.

Taking the list in detail (links only for now; will put up the linked charts later):

(1) Student Loans – U.S. Dept of Education, Sept. 30 press release and FRED Graph of Federal Student Loans

(2) NYSE Margin Debt – Analysis by Doug Short

(3) Covenant-Lite Loans – Bloomberg article on Fed Warning to Lenders

(5) House prices rising in echo of earlier bubble – charts posted by Calculated Risk

(6) Corporate earnings vs. GDP – This is a reflection of unsustainable deficits elsewhere in national income accounting; excess corporate profitability leads to stock price bubbles, since the earnings are not sustainable without genuine median income growth – See the St. Louis Fed’s National Economic Trends report.

Footnote #1:  I haven’t located quality plots for items 4 and 7 at this time.

Footnote #2:  Smart traders can make a lot of money in a bubble.  That’s part of the process by which they happen.  But if the gains aren’t sustainable, the bubble is a net expense to the nation due to malinvestment and maldistribution. And it’s not an ethical time to invest if the outcome is a “negative sum game” (that is, if your gain means someone else loses worse).



Thursday, October 24th, 2013

Econoganda, n: What you get when “Economists” engage in Propaganda.

Econogandist, n: A person who produces Econoganda.

Examples: The popular works of most politically-driven “Economists”. Krugman, Mankiw, DeLong, half the posts on ZeroHedge, etc. The folks who decide to be pundits with an agenda, instead of scientists.

If these people were real Economists, they’d be more interested in finding a true scientific foundation for their field — not in pushing particular policy agendas. Especially 5 years after their theories were all invalidated by poor predictions.


Update 11/20/2013:

pro·pa·gan·da:  noun

ideas or statements that are often false or exaggerated and that are spread in order to help a cause, a political leader, a government, etc.

1 capitalized : a congregation of the Roman curia having jurisdiction over missionary territories and related institutions

2 : the spreading of ideas, information, or rumor for the purpose of helping or injuring an institution, a cause, or a person

3 : ideas, facts, or allegations spread deliberately to further one’s cause or to damage an opposing cause; also : a public action having such an effect

— pro·pa·gan·dist noun or adjective
— pro·pa·gan·dis·tic adjective
— pro·pa·gan·dis·ti·cal·ly adverb

Examples of PROPAGANDA

He was accused of spreading propaganda.
The report was nothing but lies and propaganda.


“We owe it to ourselves” is not a solution to the debt crisis

Saturday, October 12th, 2013

One problem with the argument that “we owe the skyrocketing debt to ourselves, so we can limit the impact”: each of those debts represents a promise to pay someone. If we can’t pay as agreed, the impact is severe. For example, if we don’t pay Grandma the $20K/year in Social Security because we can’t, and instead we only pay her $10K, that creates a problem. Alternatively, if we pay her $20K but we’ve driven monetary inflation (and skimped on the COLAs) so that it only buys $10K worth of goods, that still creates a problem. Piling on more promises now won’t change what Grandma’s going to get in real long-term value. The only thing that’s going to save Grandma is if someone else doesn’t get what they were promised… Now we have to repeat the same argument for everyone who was promised something — bottom line, we face a political vicious cycle for years to come.

Adding more to the debt without generating real GDP improvements will only aggravate the vicious cycle. And the data shows that the debt piled on since 2000 or so has done precious little to boost GDP, but represents an enormous number of promises relative to that GDP.

It is true that there are ways to break promises gently, rather than defaulting brutally, but the root problem is that our governments (at all levels) have, in aggregate, made far more promises than can realistically be kept. Politically it makes a big difference how you do it, but in practical terms the outcome is bad no matter what. There will be massive financial haircuts and broken expectations.

Furthermore, a political process, rather than a rational process, is going to decide who gets the worst cuts. This is not a recipe for peace and prosperity in a vicious-cycle political climate.

Even worse, the exaggerated promises are now so blatant that the government is losing credibility. As the promises lose credibility that creates all kinds of political and economic issues, because people here, and worldwide, will modify their behavior if they don’t think we can deliver.

Putting it all together, the problem is here and now, and aside from the immediate crises the risk of something catastrophically bad happening is rising exponentially. Papering the problem over with politically palatable platitudes isn’t a panacea.

There needs to be structural economic reform. The government needs to prioritize wants vs. needs, and we as a nation need to find better ways to direct labor to where it can generate genuine improvements in well-being.