patrick.net

Troy says

Debt to the penny:

08/11/2008 5,403,503,090,045.93

08/11/2011 9,921,146,601,533.97

$4.5T of deficit spending in 3 years. ~$40,000 per household. Technically (just the basics) $40,000 should be enough to tide a household over for 3 years.

And that was just the money we borrowed.

Exactly, Troy.
All this money is additional national debt. It was created to replace disappearing corporate and private debt. However, debt (=money) destruction goes on. Corporations do not borrow, consumers do not borrow. At the same time, existing debt requires repayment or at least interest payment. This is pure money destruction.

So, US national debt has to increase much much more. The amount of already created debt increases money destruction. The only way out of this mess is to raise interest rates the way Paul Volker did, but we don't have him around. It would cause a furious but short recession, no politicion today will agree to loose his sit to fix US economy. We do not have Jimmy Carter either.

So, there is no way out, but to have a very very long destruction of US economy (and partially World economy).

There is no way out of Greater Depression.

The Volcker rates were in response to wage-price inflation, partially if not probably caused by the expansion of credit as the baby boom entered their 20s and 30s.

Just raising rates won't fix what's wrong with the current economy.

What's wrong is that we can't pay our way in the world ($600B/yr trade deficit) and the top 5% is clearing ~33% of the income.

In graphic terms:

☺takes $
☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ ☹ has to share $$

Raising real interest rates will just make the rich richer.

Remember that debt is the flip-side of savings. For every debtor there is a creditor.

Truthplease says

moral hazard of rent-seeking can be considerable

The rent-seeking problem is EVERYWHERE in our culture right now. One blatant one that everyone talks about, but nobody DOES ANYTHING about is patent law. Patent portfolios are traded like baseball cards. The billions spent on that activity does nothing to advance our lives. Patent law is strangling real invention and advance.

Show me a person with a professional degree and I'll show you a rent-seeker : )

There's a fair amount the government can do on various levels that won't cost a penny.

For example under what argument can it be said that we should have sanctions on countries during an economic downturn? It would be hard to take sanctions off of Iran due to political reasons but what reasons are there at this point for Cuba?

On the state level some states prevent towns from sharing equipment without filing red tape. If one town needs to use some piece of equipment once they could save money by borrowing it from another rather than renting it from some company.

Local governments have great leeway. Zoning laws can pretty much prevent a fair number of businesses from opening up, licenses can be denied etc

I agree on the rates..this "We can't raise rates because it will hurt the economy" argument fails. Heck remember post 9/11 about 0% financing for everything?

We have low interest rates, a dollar we think is strong, lower taxes relative to the past and much higher government spending. This cannot hold.

Troy says

The Volcker rates were in response to wage-price inflation.

Just raising rates won't fix what's wrong with the current economy.

It would prevent it, would it done in 1998-1999 instead of printing hundreds of billion using Y2K scare. It would fix it even in 2001, but we got such a good excuse to create hundreds of billions more. Even in March 2003 it would fix most of the problems, but we prefered to believe in WMD and to print, print, print. Yes 18% interest rate will wash away most of our current economy, but we need to recognize that most of it is nothing but shit that need to be washed away, if we want to be more than a banana republic.

What's wrong is that we can't pay our way in the world ($600B/yr trade deficit) and the top 5% is clearing ~33% of the income.

Right, the only responsible way is the default. After the default start with a balanced budget. Anything else is just misleading ourselves.

Raising real interest rates will just make the rich richer.

Not sure about this.

Remember that debt is the flip-side of savings. For every debtor there is a creditor.

Not necessary. When banks issued mortgages there were no savings side to it. When they create Government Guaranteed loans today, there is no savings on the other side. There is a lot of debt created by the Government, or created using Government Guaranties, or created with assuming Government bailout as the endgame, which has no savings side at all.

michaelsch says

When banks issued mortgages there were no savings side to it. When they create Government Guaranteed loans today, there is no savings on the other side.

There's always someone's savings being used when new debt is issued.

That's how CALPERS lost billions in real estate and how BAC has $2T of liabilities (customer's money) against $2.1T in assets (loans and stuff).

That's how the system works. Banks don't get money from the Fed without giving the Fed an asset in return, that's why there's almost $3T on the Fed's balance sheet now.

Government guaranteed debt is another kettle of fish. Some of this is funded from government but most is not, AFAIK.

Anyone who thinks that interest rates will be high during an economic depression is smoking crack. Interest rates usually change in response to inflation concerns, and you're not going to get inflation in a depression.

Kevin says

Anyone who thinks that interest rates will be high during an economic depression is smoking crack. Interest rates usually change in response to inflation concerns, and you're not going to get inflation in a depression.

You need to Google "hyperinflationary depression" and read up on it. A depression does not need to be deflationary. Who's smoking crack now?

HousingBoom says

Clara says

We are not in a great depression and never will worry about food on the table.

you're joking right? do you sit at home and watch Snookie all day? there are middle class families living in tents and are on food stamps right now.

Show my the actual numbers of middle class people living in tent please?

Clara says

HousingBoom says

Clara says

We are not in a great depression and never will worry about food on the table.

you're joking right? do you sit at home and watch Snookie all day? there are middle class families living in tents and are on food stamps right now.

Show my the actual numbers of middle class people living in tent please?

Here's a vid on OPRAH. If it's on OPRAH, it must be big....http://www.oprah.com/oprahshow/Lisa-Ling-Goes-Inside-a-Tent-City

This was recorded in 2009. I will see if I can find more data on "the middle class living in tents"

Clara says

Show my the actual numbers of middle class people living in tent please?

Not tents, so much, but the multi-generational family household is coming back:

http://pewsocialtrends.org/2010/03/18/the-return-of-the-multi-generational-family-household/

>We're not Greece, and we're not really Japan for that matter either.

Agreed that Japan is a different game.

But that's not really a tent. Before the establishment of the modern welfare state the family was the primary support group. If there are cut in local and state government this only makes sense.

Houses are also larger than they were on average for a median sized home than in 1940.

Vicente says

Truthplease says

moral hazard of rent-seeking can be considerable

The rent-seeking problem is EVERYWHERE in our culture right now. One blatant one that everyone talks about, but nobody DOES ANYTHING about is patent law. Patent portfolios are traded like baseball cards. The billions spent on that activity does nothing to advance our lives. Patent law is strangling real invention and advance.

“Eagles are dandified vultures” - Teddy Roosevelt

Ok but what exactly is "advancement of our lives" On the same level millions is spent to develop better tennis shoes and not everyone plays tennis.

Troy says

We're spending $50,000 per household on government. This simply has to be cut. Cutting this burden will mean fewer government jobs.

These are not real jobs. That's one of the reasons why I have been saying the current GDP number is bogus by nearly half its magnitude. Having a bureaucrat watching over every person doesn't make the economy double in size.

The yuan is still 3-5X too weak.

Here I disagree. If China closes its door altogether like it did during their Maoist era, we would just be importing comparable amount of stuff from the next lowest priced producer, just like we did back then from Japan, Korea, Taiwan, Malaysia and Indonesia, etc.. In fact, because the next lowest priced producer would charge more than China does, we'd just get less for our money. The government deficit mentioned above is the fundamental reason why we have to import: all the bureaucrats and bureaucratic distribution that work out to be $50k per household per year has to eat, clothe themselves, have cars, and etc.. The imports are what's preventing massive inflation that take all the food, clothes, cars and etc. from the average households to give to the men/women receiving that $50k directly from the government money printing press.

We're starting to create a Jetson's economy, where productivity increases simply eliminate jobs. This is great if you can find work or have money, not so great if you can't or don't.

That doesn't make much sense at all. If goods keep falling from the sky, the result would not be mass unemployment; (ref: the old Bastiat joke about candle makers guild lobbying to ban the sun for "unfair competition") Cheaper goods should create new jobs . . . just like cheaper oil, while eliminate jobs in Texas oil fields, should create jobs in industries that use oil. What's happening is that government expansion creating "jobs" that dole out benefits to the rich via military contracts, overpriced medicine, overpriced education and above all overpriced financial gambling that is crowding out private sector job creation. Government/monopolistic "jobs" are net resource subtractors instead private/competitive sector jobs that have to create more value/resource in output than input in order to continue. Value/resources are just what is needed/available for more work to be done; i.e. more sophisticated division of labor, more jobs.

It is this net-minus effect on value/resources due to government/monopolistic resource distribution that is snuffing out the economy and killing jobs.

mdovell says

But that's not really a tent. Before the establishment of the modern welfare state the family was the primary support group. If there are cut in local and state government this only makes sense.

That's true.

mdovell says

Houses are also larger than they were on average for a median sized home than in 1940.

That's partially true. Houses built in the late 40s and 50s were typically smaller single family homes, but the bungalows of the 20s building boom were typically larger and more expandable, giving the owners the option of having an extended family or taking in tenants.

McMansions seem to be hollowed out, with two story great rooms and giant kitchens and laundries which can be nice but aren't the most efficient way of housing people.

But I'm sure we have a much better housing cushion now than we did going into the Great Depression. Even if unemployment goes up to depression like numbers, people will be doubling up in houses rather than living in tents.

Cook County resident says

people will be doubling up in houses rather than living in tents.

which is odd since we don't have a housing shortage, just a pay-the-mortgage shortage.

Troy says

which is odd since we don't have a housing shortage, just a pay-the-mortgage shortage.

Yeah, it gets tough when the house isn't paying for itself anymore and the family has to pay for it out of their paychecks when real income is stagnant or declining.

And all the huge tracts of new houses in jobless exurbs will become increasingly unattractive if gas prices continue to rise.

But, around here anyway, there are thousands of big old homes, paid or nearly paid in full, close to the remaining jobs and occupied by a single aging person or couple. There's room for their kids and maybe a couple of grandkids. By traditional economic standards, moving in with the extended family would be a reduction in the standard of living, but for alot of people it will improve their quality of life.

Vicente says

I'd be happy with rates hitting 5% or higher.

I'd be happy with rates hitting 12%. Sure it will jolt the economy, but at this point we need to encourage savings/investment and stop punishing fiscal responsibility. No one is lending because the rates are not worth the risk of lending.

bubblesitter says

We have a lost decade in front of us.

I agree. But we also have a lost decade behind us. Have we really made any financial gains from 2000-2010? If you exclude the housing bubble as you should, there's been no good economic news since the Dot Com era.

Dan8267 says

Sure it will jolt the economy, but at this point we need to encourage savings/investment and stop punishing fiscal responsibility. No one is lending because the rates are not worth the risk of lending.

Right, this is part of the problem. You can make free profits as a bankster through all kinds of government-backed methods and then give yourself a fat bonus. What incentive is there to take risks when the reward isn't so great and when the government is guaranteeing you massive profits.

If the people of Patnet put together a bank, we could do the same. Maybe we're the stupid ones.

Dan8267 says

Have we really made any financial gains from 2000-2010? If you exclude the housing bubble as you should, there's been no good economic news since the Dot Com era.

Unclear. I see the housing bubble as obscuring the aborted bust after the dotcom bubble. We never had a normal recovery, and what we saw was just a phantom recovery caused by credit. I think this is why everyone says we could get out of this by blowing another bubble.

Of course, there are asset categories that did fine from 2000-2010. Everyone focuses on S&P 500, which isn't a bad thing to focus on, but it's not the only thing in the market either.

Interesting comments as usual. My general thoughts about " The lost decade" is that we are in a situation where unless something changes with the status of the middle class then we will quite possibly be in a similar situation we're now in for untold years to come. Wages haven't budged for most in decades if you include inflation. The housing deflation is taking its sweet time and prices remain stubbornly high- especially in places like Cali where for all practical purposes the bubble is alive and well. Thus the purchasing power of the middle class remains weak.

In regards to housing, well I have to admit that I too prefer older houses in established neighborhoods. But then again- so do most rich people and hence why in most major metros these are often out of reach, leaving mostly crappy neighborhoods or a sea of anonymous Mcmansions. I fail to understand why home builders refuse to consider building houses that aren't co cookie-cutter. I've yet to see a single new house I'd want to live in. The crap they make today makes all those ugly 70's tract houses near where I grew up seem charming.

Dan8267 says

No one is lending because the rates are not worth the risk of lending.

Forget about lending. Recently I was asked by a cc company for my tax return to issue me a card,and I have a stellar credit with zero debt. Only cash can not rescue the doomed housing market. Recently I see across the board 5-10% drop in asking price of the listings that are on my watch list. Sellers and banks are in the first phase of giving up. More to come.

"I agree. But we also have a lost decade behind us. Have we really made any financial gains from 2000-2010? If you exclude the housing bubble as you should, there's been no good economic news since the Dot Com era."

I'm still amazed by some that forget the whole dot com crash. The NASDAQ hit 5,000 and now is hardly half that and it's been 11 years.

Lost decade can imply many things so I would say it more of a micro rather than macro effect. The credit boom might have made sense for those that used the money for more long term assets. If someone took equity out of a home and bought commodities they'd have the biggest smile in the world right now.

The trend of saving more certainly is not going to go away for a long time.

mdovell says

I'm still amazed by some that forget the whole dot com crash.

dotcom was small beer compared to houses.

leverage was minimal so it was just a big electronic gambling parlor. Money leaked into the bay area in the late 1990s, causing our housing bubble to lead the nation, but other than that it wasn't terribly deformative.

housing, on the other hand was the mother of all stimuli.

the home ATM was 8% of GDP during the Bush Boom:

http://research.stlouisfed.org/fred2/graph/?g=1De

$800B ~ $1.1T/yr of money influx into the population in 2003-1H07:

http://research.stlouisfed.org/fred2/graph/?g=1Dg

dot com took out people's portfolios, but there wasn't much employment in dot com stuff.

Unlike housing, construction saw a million jobs added:

http://research.stlouisfed.org/fred2/graph/?g=1Dh

plus who knows how many real estate ladies, loan brokers, etc had a taste of that trillion-dollar flow from housing -- easily another million. California alone had 500,000 licensed sales agents in 2005.

Someone said fairly recently that you cannot replace labor with capital, it's not sustainable, you can try though. At the same time we are making it against the law to be poor, or live in tent cities, etc.

Government spending,(largest employer) as it continues to drop (and it will), may or should lead us into another trench.

Health care has hyper inflated in costs, it's not an industry, it's a monopoly, not even small practices could survive. Nobody can afford to pay the costs, so government picks up the tab.

Strange country, strange times.

"dotcom was small beer compared to houses.
leverage was minimal so it was just a big electronic gambling parlor. Money leaked into the bay area in the late 1990s, causing our housing bubble to lead the nation, but other than that it wasn't terribly deformative."

I'm not saying it is in the same class by any means but I would say that bubbles keep getting larger.

"housing, on the other hand was the mother of all stimuli.
the home ATM was 8% of GDP during the Bush Boom:
http://research.stlouisfed.org/fred2/graph/?g=1De
$800B ~ $1.1T/yr of money influx into the population in 2003-1H07:
http://research.stlouisfed.org/fred2/graph/?g=1Dg"

I believe you man. Although I would say are we talking housing or credit itself? Credit extends into nearly everything.

"dot com took out people's portfolios, but there wasn't much employment in dot com stuff.
Unlike housing, construction saw a million jobs added:
http://research.stlouisfed.org/fred2/graph/?g=1Dh
plus who knows how many real estate ladies, loan brokers, etc had a taste of that trillion-dollar flow from housing -- easily another million. California alone had 500,000 licensed sales agents in 2005."

Which figures now NAR has a whole propaganda machine trying to claim housing automatically makes jobs..but their own commercials state it takes in fine print it takes the construction of two homes to equal one job.

mdovell says

"dotcom was small beer compared to houses.
leverage was minimal so it was just a big electronic gambling parlor. Money leaked into the bay area in the late 1990s, causing our housing bubble to lead the nation, but other than that it wasn't terribly deformative."

So if you cant invest in the inflated and highly risky stock market where does Joe 6 Pack invest ? Their home.. and they expect that same `10-15% appreciation year over year.

The dot.com bubble contributed to the nation turning to using their home as a primary investment.

corntrollio says

Unclear. I see the housing bubble as obscuring the aborted bust after the dotcom bubble. We never had a normal recovery, and what we saw was just a phantom recovery caused by credit. I think this is why everyone says we could get out of this by blowing another bubble.

Yep.. never corrected.

I second that.

thomas.wong1986 says

Their home.. and they expect that same `10-15% appreciation year over year.

The dot.com bubble contributed to the nation turning to using their home as a primary investment.

But it seems like most people used home equity to finance spending, not create investment. If you bought a BMW, went on a big vacation, bought a boat, etc., all that so-called "investment" was for naught. It's not like most people spent the money on healthcare, college education, and other worthy things, although maybe the smart ones did.

The DOW is headed to 7,000.

YIKES!

corntrollio says

But it seems like most people used home equity to finance spending, not create investment. If you bought a BMW, went on a big vacation, bought a boat, etc., all that so-called "investment" was for naught. It's not like most people spent the money on healthcare, college education, and other worthy things, although maybe the smart ones did.

So true...

corntrollio says

thomas.wong1986 says

Their home.. and they expect that same `10-15% appreciation year over year.

The dot.com bubble contributed to the nation turning to using their home as a primary investment.

But it seems like most people used home equity to finance spending, not create investment. If you bought a BMW, went on a big vacation, bought a boat, etc., all that so-called "investment" was for naught. It's not like most people spent the money on healthcare, college education, and other worthy things, although maybe the smart ones did.

I believe the smart ones where thinking "WTF is going on here?" in 04/05 and started reading Patrick.net

HousingBoom says

You need to Google "hyperinflationary depression" and read up on it. A depression does not need to be deflationary. Who's smoking crack now?

We're not going to have a hyperinflationary depression because all of our debt is denominated in our own currency. Countries who have experienced hyperinflation have had their debts denominated in some other currency (Weimar: gold, Argentina: USD, etc) so printing more of their own currency doesn't actually retire any debt. In our case printing money DOES retire debt - yes interest rates will go up but this will simply cause deflation to accelerate as variable interest debt will be defaulted on.

When thinking about hyperinflation, remember that this is a political event. The Fed cannot cause hyperinflation, only Congress can. And let's think about who owns most of the debt. That's right, rich people. What happens during hyperinflation? Debts are paid back with worthless dollars. Rich people do not want to lose their assets and rich people control the govt. Therefore we will not have hyperinflation. Instead we have calls for "austerity" so the rich people will be paid their money.

Deflationary depression here we come.

grywlfbg has great wisdom.

grywlfbg says

That's right, rich people. What happens during hyperinflation? Debts are paid back with worthless dollars. Rich people do not want to lose their assets and rich people control the govt. Therefore we will not have hyperinflation. Instead we have calls for "austerity" so the rich people will be paid their money.
Deflationary depression here we come.

One of the best arguements for a deflationary environment I have read.

I am so happy to have found this website....finally the truth be told!

grywlfbg says

Deflationary depression here we come.

It is pure common sense, how can we go the other way with such a massive load of debt. I just don't get it.