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A Crash Is the Economic System Fixing Itself

Economics / Financial Crash Jun 17, 2014 - 04:01 PM GMT

By: Raul_I_Meijer

Economics

Just a bunch of numbers Reuters published today. Read and weep. While remembering that this spring, after that horrible winter that threw the recovery so terribly off course, would see pent-up demand go crazy. That after the Q1 GDP growth, which has by now been revised to -2% after initially having been predicted to be in the 3%+ range, Q2 would certainly, according to pundits, economists and government agencies, top 3%, if not more. We already know for a fact that’s not going to happen. Unless the US grows faster in June than China did in its heyday.


The American economy is getting very seriously hammered, and nobody with access to all the right channels will ever let you know about it other than in a long range rear view mirror where things always look smaller than they appear. The American consumer is necessarily getting hammered just as badly, but as long as the message remains one of growth, bread and circuses (or pink slime and Kardashians), (s)he will wait it out until that glorious promised tomorrow on the horizon just around the corner arrives.

May Home Construction Data Paint Gloomy Picture

U.S. housing starts and building permits fell more than expected in May, suggesting the housing recovery will likely remain slow for a while. Groundbreaking for homes fell 6.5% to a seasonally adjusted annual pace of 1 million units, the Commerce Department said on Tuesday. March’s starts were revised down to show a 12.7% increase instead of the previously reported 13.2% rise. Groundbreaking for single-family homes, the largest part of the market, fell 5.9% in May to a 625,000-unit pace, while starts for the volatile multi-family homes segment decreased 7.6% to a 376,000-unit rate.

Permits to build homes declined 6.4% to a 991,000-unit pace in May, pulling back from the 1.06 million units touched in April. Economists had expected permits to dip to a 1.05-million unit pace. Permits for single-family homes rose 3.7% to a 619,000 unit-pace. They continue to lag groundbreaking, suggesting single-family starts could fall in the months ahead. A survey on Monday showed confidence among single-family home builders increased in June, but fell short of reaching the threshold considered favorable for building conditions. Permits for multi-family housing tumbled 19.5% to a 372,000-unit pace.

Michael Snyder throws together some numbers on US debt, and I’m not even sure he counts all entitlement programs in the proper manner.

Total Debt In America Hits A New Record High Of Nearly 60 Trillion Dollars

What would you say if I told you that Americans are nearly $60 trillion in debt? When you total up all forms of debt including government debt, business debt, mortgage debt and consumer debt, we are $59.4 trillion in debt. That is an amount of money so large that it is difficult to describe it with words. For example, if you were alive when Jesus Christ was born and you had spent $80 million every single day since then, you still would not have spent $59.4 trillion by now. And most of this debt has been accumulated in recent decades. If you go back 40 years ago, total debt in America was sitting at about $2.2 trillion. Somehow over the past four decades we have allowed the total amount of debt in the United States to get approximately 27 times larger.

Total consumer credit in the U.S. has risen by 22% over the past three years alone, 56% of all Americans have a subprime credit rating, 52% of Americans cannot even afford the house that they are living in. There is more than $1.2 trillion dollars of student loan debt, $124 billion dollars of which is more than 90 days delinquent. Only 36% of all Americans under the age of 35 own a home, a new record. US national debt is $17.5 trillion dollars. Almost all of that debt has been accumulated over the past 40 years. In fact, 40 years ago it was less than half a trillion dollars.

By now I’m thinking it’s no wonder the housing numbers for May were so atrocious. What else can you expect? Michael also points to a WSJ article from May 2013 on global debt numbers:

Total World Debt Load at $223.3 trillion, 313% of GDP

Economists at ING found that debt in developed economies amounted to $157 trillion, or 376% of GDP. Emerging-market debt totaled $66.3 trillion at the end of last year, or 224% of GDP. The $223.3 trillion in total global debt includes public-sector debt of $55.7 trillion, financial-sector debt of $75.3 trillion and household or corporate debt of $92.3 trillion. (The figures exclude China’s shadow finance and off-balance-sheet financing.) Per-capita indebtedness is still just $11,621 in emerging economies (and rises to $12,808 if you exclude the two largest populations, China and India). For developed economies, it’s $170,401. The U.S. alone has total per-capita indebtedness of $176,833, including all public and private debt.

Every child born in America has a $176,833 debt sticker on its head. But wait! Central banks to the rescue! As I wrote yesterday, US and UK and Japanese and Chinese government debt, which still keep growing very rapidly, have increasingly been swallowed up whole by their respective central banks, which are now well on their way to buy up their own and each other’s asset markets too. And that, too, increases debt, and not a little bit, though it’s perhaps through a backdoor. The process keeps the money- and powerholders of a present failed and long since broke(n) system in place at a huge cost to everyone else, including future generations. And perhaps the only hope of escaping it is a crash, which will be far more severe than merely heartbreaking. Excerpts from a Nassim Taleb and Mark Spitznagel discussion explain how that might work.

Inequality, Free Markets, and Crashes

Mark Spitznagel and Nassim Taleb started the first equity tail-hedging firm in 1999. Since then these two friends and colleagues have helped popularize so-called “black swan” investing, with Spitznagel as the founder and CIO of hedge fund Universa Investments and Taleb as an academic and author of The Black Swan. The two men recently sat down to discuss Spitznagel’s new book, The Dao of Capital.

Nassim Taleb: Mark, your book is the only place that understands crashes as natural equalizers. In the context of today’s raging debates on inequality, do you believe that the natural mechanism of bringing equality — or, at the least, the weakening of the privileged — is via crashes?

Mark Spitznagel: … one can absolutely say logically and empirically that asset-market crashes diminish inequality. They are a natural mechanism for this, and a cathartic response to central banks’ manipulation of interest rates and resulting asset-market inflation, as well as other government bailouts, that so amplify inequality in the first place. So crashes are capitalism’s homeostatic mechanism at work to right a distorted system.

Taleb: I see you are distinguishing between equality of outcome and equality of process. Actually one can argue that the system should ensure downward mobility, something much more important than upward one. The statist French system has no downward mobility for the elite. In natural settings, the rich are more fragile than the middle class and we need the system to maintain it.

It may seem unacceptable, or tough, or unfair, that the only way out of the present illusionary economic system, and all the trinkets we have to thank it for, is by a giant crash. But once you realize that it must crash no matter what, and that you are really nothing but an animal caged by the system, what should you choose? I think perhaps it’s a choice between your weaknesses and your strengths. Though I know it’s not nearly as simple as that, because the crash will erase much of what we hold dear, for whatever reason we do that. It’s probably good to acknowledge that the choice is not between crash or no crash, but between weakness and strength, and that a crash is a system fixing itself back to health, something that has a lot of positive connotations, even if that is the only positive feature it has. Wait, there’s one other: our children will see a lot of the debts they are now being born with, disappear. But it will come at an unprecedented price.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

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