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Each week, In Theory takes on a big idea in the news and explores it from a range of perspectives. This week, we’re talking about financialization. Need a primer? Catch up here.

Our economy has increasingly been financialized, and the result is a sluggish economy with stagnant wages. Weneed to decide whether to stop the cycle and save the economy at large or to stay in thrall to our banks and bondholders. Without clearing our debt, theeconomy will continue to languish in debt deflation and polarization between creditors and debtors.

As a statistical measure, financialization is the degree to which debt accounts for a rising proportion of income or the value of an asset, such as a company or piece of property. The ratio tends to rise until defaults lead to a crisis that wipes out the debt, converts it into equity or transfers assets from defaulting debtors to creditors.

As an economic process, financialization makes money through debt leverage — taking on debt to pay for things that will increase income or the value of assets: for instance, taking out a loan for education or a mortgage on a property to open a store. But instead of using credit to finance tangible industrial investment that expands production, banks have been lending to those who want to buy property already in place — mainly real estate, stocks and bonds already issued — and to corporate raiders — those who buy companies with high-interest bonds. The effect often leaves a bankrupt shell of a company, or at least enables corporate raiders to threaten employees with bankruptcy that would wipe out their pension funds or employee stock ownership plans if they do not agree to replace defined benefit pensions with riskier contribution schemes.

The dynamic is more extractive than productive. Corporate financial managers, for example, can raise their company’s stock price simply by buying back shares from investors — financing the move by borrowing money. But in addition to raising debt-to-equity ratios, these short-term tactics “bleed” companies, forcing them to cut back on research, development and projects that require long lead times to complete. Corporate managers are paid by how much they can raise their companies’ stock prices in the short run. When earnings are diverted to pay dividends or buy back shares, growth slows. But by that time, today’s managers will have taken their money and bonuses and run.

On an economy-wide scale, rising debt can inflate prices for real estate, stocks or bonds on credit. Asset prices reflect whatever banks will lend against them, so easier credit terms (such as lower interest rates, lower down payments and more time to pay back loans) increase the asking prices of everything else.

Banks have found their biggest loan markets in mortgages for real estate, natural resources (oil and mining) and infrastructure monopolies. Most of the interest that banks receive from their lending is thus paid out of property and monopoly rents. To make it easier for companies to pay back their bank loans or stock issues, the financial sector defends tax benefits for these major customers, recognizing that whatever the tax collector leaves behind can come back to the banks in the form of interest payments on further loans. These loans create debt-leveraged “capital” gains, which receive favorable tax treatment compared with profits and wage income. But the savings end up in the hands of banks rather than individuals who would spend that money back into the economy.

At the household level, buying a home with a 25 percent down payment leaves the home buyer with 75 percent equity. This was the normal rule of thumb for mortgage lending in the 1960s. If interest and loan payments absorb a quarter of the buyer’s overall income (a rule of thumb for bankers in the 1960s), then that person’s income is said to be 25 percent financialized.

But today, home buyers can put up as little as a 3 percent down payment for a Bank of America mortgage guaranteed by the government agency Freddie Mac (and 3.5 percent for an FHA-insured mortgage), leaving homeowners with 97 percent financialization.

Government-guaranteed home mortgages absorb up to 43 percent of the buyer’s income just to service their debt. Student loans, auto loans, credit cards and other bank debt may absorb another 10 percent of the debtor’s income. This leaves only half of personal income available to spend on anything else one might need.

Meanwhile, wage withholding for Social Security and Medicare (paying in advance to build up a fund that may not even exist to help them later in life) absorbs more than 15 percent of income, and other taxes (income taxes, property taxes and sales taxes) take up another 10 percent to 25 percent. In the end, the combination of financialization and the taxes shifted off the finance sector and onto individuals can eat away as much as 75 percent of a wage earner’s income. The result is regressive taxes reducing purchasing power, on top of debt deflation, as more income has to be paid to banks and other creditors.

Loading the economy down with debt therefore leaves less disposable income for both individuals and businesses that could otherwise be buying consumer goods and investing in real production. To illustrate this, just take a look at how our economy has changed since financial institutions inflated asset prices in the housing market until the bubble burst in 2007. The cost of paying the mortgage loans that bid up real estate prices has led to austerity: Markets have shrunk; new investment and hiring slowed; and profits and wages have stagnated. The asset-price inflation that seemed to be making the economy richer has turned into debt deflation, leaving many households strapped to meet their monthly“nut.”

ORDER IT NOW

As the “One Percent” of banks puts the “99 Percent” deeper into debt, financialization has become the major cause of increasing inequality of wealth and income. In due course, the amount of debt will exceed the economy’s ability to produce a large enough surplus to pay it back. This makes a financial breakdown inevitable.

This financial dynamic always leads to a transfer of property from debtors to creditors, unless debts are forgiven or brought in line with the debtor’s ability to pay. In 2008, banks persuaded governments to “solve” the debt problem by taking bad bank debt onto the public balance sheet and then bailing out the banks. But while a government bailout or International Monetary Fund loan may enable private creditors to jump ship, it shifts the burden onto the government — mainly to be borne by taxpayers. This requires governments to cut back spending, or to raise taxes to transfer income from taxpayers to bondholders.

In the end, society must choose whether to save the economy at large, or to save bondholder and banking claims on the economy.

Michael Hudson is distinguished research professor of economics at University of Missouri-Kansas City. His most recent book is “Killing the Host: How Financial Parasites and Debt Destroy the Global Economy.”

(Republished from The Washington Post by permission of author or representative)
 
• Category: Economics • Tags: American Debt 
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  1. Financialization rewards high-time-preference “I want it, and I want it NOW” behavior. Economist-soothsayers landed Big$$ jobs rationalizing this with the canard about the economy being driven by consumption.

    Every trend has been aligned to render an infantilized populace, who live in the Perpetual Now and have no concept for delayed gratification.

    A flood of credit availability set off a (seemingly) virtuous circle:
    More credit at lower interest rates led to a feeding frenzy in asset markets, rising asset prices then confirmed that enabling credit creation was an unmitigated good, so MOAR OF IT. The resultant rise in volume of IOU’s (bonds) filled a veritable OCEAN, all of it rising in capital value with every small decline in interest rates.

    You have a perfect storm of the seemingly pleasant variety: Wealth (in terms of stock market capitalization, real estate capital value and total bond market value) rose, then rose, then rose, then rose, then rose…. seemingly forever. Of course the Rich (who owned stocks, real estate and everyone’s IOU’s) got richer as Joe Citizen watched the price of college, cars, homes, and NFL season tickets spiral higher…necessitating BORROWING to play the game.

    Doh!

    Is this a perpetual motion machine? I didn’t think so, but it sure as hell has spiraled higher than I could have imagined 20 years ago. It’s the biggest credit inflation bubble in recorded history, propping up the nominal dollar value of all those assets. Theoretically, it depends upon a continuous growth in credit (and thus debt), but I submit that this is not a tree that can grow to the sky.

    • Replies: @Jay
  2. If central banks actually dropped banknotes from helicopters we know that anyone with a brain would LINE UP to catch them, and each marginal banknote would reduce the value of all others in circulation arithmetically.

    In fact, central banks enable credit creation (mostly.) As long as people (firms, households, governments) can imagine swinging the repayments, credit offered is debt created. Someone borrows it and spends it and the supply of money and wealth rises. Given the leverage involved, when this cycle is virtuous even small increases in credit can yield huge increases in the money supply and wealth. Look at the last 20 years for that measure.

    What happens when individuals, then firms, and then (ultimately) governments reach the point where the burden of current debt repayment (even at ZIRP, or NIRP!) is large enough that adding more repayment is deemed insane? At that point, credit ceases to behave like money.

    Banknote inflation is sticky. Banknotes, once printed and distributed, never disappear. Rising prices due to banknote inflation is almost mechanical and highly subject to Cantillon Effects. Welcome to Zimbabwe.

    Credit inflation, distributed as debt, is subject to two total valuation measures: interest rates and repayment/default. Repayment/default eliminates the value of credit from the money/wealth supply directly, dollar-for-dollar. Rising rates evaporate capital value of debt and market value of assets, but do so with leverage that is proportional to the size of the OCEAN of preexisting debt and total capital value of assets…in other words, the larger the “Total Market Cap” of bonds and assets, the greater the effect of even small changes in interest rates.

    NIRP, an interesting policy reaction to stalled credit growth (“Please, borrow some money…you won’t even have to pay it all back!”) is paradoxically deflationary. It actually engages credit origination in a deflationary process. Imagine a -50% 1-year “yield” where $100 borrowed is an obligation to repay only $50 after 12 months. Such a system actually sets out to destroy $50 in credit for every $100 of credit created. NIRP policies in place now are thus quite hilarious. It is as though the people pushing them are literally too stupid to see what they are doing.

    I suggest that the OCEAN of IOU’s now in existence was undertaken during a period of intense, manic optimism and that when this mania passes, eventually there will be panic about the unsupportable burden of all these promises of future cash flows.

    It should set off the largest credit-collapse deflationary depression in recorded history. Time will tell if this plays out, when it plays out, or if some sort of policy Jiu Jitsu will save the day.

    • Replies: @dc.sunsets
  3. mtn cur says:

    Oversimplifying greatly, the mess mimics the old enclosures of Britain, with unwarranted easy credit for an infantile public serving as the economic commons becoming progressively less valuable the more it is overgrazed. Of course it will prove immensely valuable to the economic Kings and nobles of these latter days. Concentration of resources in the hands of the Party chieftains as well as concentration of the peons in urban centers not only means that uncooperative peons can be denied food, water and shelter; but can be bombed for their own good as needed if they object to the enclosure of all resources. The apparent lack of interest in this article is telling.

    • Replies: @dc.sunsets
  4. @dc.sunsets

    Hmmm. On second thought, NIRP has the effect of creating credit that doesn’t extinguish at repayment…sort of like electronically printing banknotes…?

    In a -50% one-year note, for $100 borrowed, at the end of the year only $50 would disappear due to repayment. The other $50 would remain in existence presumably forever.

    Does this make NIRP kind of like direct debt monetization (AKA quantitative easing or QE) only at the (distributed) borrower level rather than the central bank level?

    How perverse. I guess once “money” is no longer defined by a consistent physical yardstick, no level of monetary legerdemain is forestalled. Truly are the productive in society now robbed blind, deaf and dumb by extortion and by con artistry.

  5. @mtn cur

    The apparent lack of interest in this article is telling.

    I agree, but in truth I often ignore this author’s columns on the basis of my perception of a fairly hard leftist bias. This column’s proximity to my own personal thesis (manic optimism led to decades of excess credit creation & borrowing, led to a 40+ year asset boom and galaxy-sized promises of future cash flows, all of it lifted by the most volatile of engines, mass psychology) pulled me in.

    What we know from history is that life is dynamic and somewhat cyclical. Wherever we are, we know that this, too, shall pass. The last 50 years were characterized by the embrace of palpably daffy policies across the board, all emanating from social optimism too extreme for proper description. The pendulum was swung to the left with greater abandon than ever before. When “this, too, passes” I suspect it will do so with astonishing speed and result. I just wish I knew “when.”

    • Agree: The Anti-Gnostic
    • Replies: @NoseytheDuke
    , @gwynedd1
  6. As a trained economist and financial analyst, I used to buy into all that free-trade stuff. In a theoretical world, comparative advantage makes perfect sense, but in the real world human capital is sticky and usually in multi-generational terms, so expecting people to simply retrain to higher order activities is right up there with good, old-fashioned snipe hunts in terms of plausibility.

    A lot of ink is spilled to tell us of the devastation of Smoot-Hawley, but the simple truth is that while Smoot-Hawley did indeed have a minor effect on trade and US exports, it was a minor trigger that exploded the far larger problem of a seriously over-leveraged US economy.

    There is little reason why the US could not in-source some of its previously outsourced manufacturing capabilities; the bulk of the impact would be felt by the top 1%, who enjoyed a disproportionate share of the benefits of the outsourcing. The net benefit to the society as a whole is that idle hands that would be free to riot, loot, and live off the dole might actually be put to more productive and peaceful employment.

    Yes, this means the economy is not running at peak efficiency, but are we really running at peak effectiveness in the current configuration?

  7. @The Alarmist

    I totally agree.

    Social cohesion and promotion of fellow citizens are beneficial, even if we can’t assign a dollar value to them. Free trade has turned into a suicide pact for Americans, and if we keep on going down this path few Americans will have jobs even as citizens of export-merchantilist countries like China, Japan and Saudi Arabia will bring all those dollars we sent them for their stuff and they’ll buy our entire country right out from under our feet.

    (If they haven’t done so already.)

    • Replies: @The Anti-Gnostic
  8. Human societies fail for lack of humans.

  9. Jay says:
    @dc.sunsets

    I completely agree that this credit bubble is historically unique, and that its end will be historically painful. Gail Tverberg at Our Finite World has frequently written about debt in relation to natural resource extraction. https://ourfiniteworld.com/author/gailtheactuary/

    One quibble: in your list of costs that have risen you include college, cars and homes. Cars actually cost the same or less now than when Henry Ford sold one for $850, but are much more reliable, safer and more comfortable today, so value-wise car prices have declined. Homes now are of course larger than 50 years ago. College is the item that has increased the most, and considering that its quality has declined, it reflects the predatory activities of college administrators and faculty at least as much as it does inflation.

    • Replies: @anonymous
    , @stickman
  10. … concentration of the peons in urban centers not only means that uncooperative peons can be denied food, water and shelter; but can be bombed for their own good …

    General purpose bombs are too messy and inefficient, while nukes are too destructive. Plagues, on the other hand, are just the thing, especially if there is a limited and valuable supply of medical care to be rationed out to those who can afford it or “deserve” it.

    As long as the debt bubble can be maintained the masses have value as “consumers”, but after it breaks they are likely to become a rambunctious liability.

    We live in interesting times.

    • Replies: @mtn cur
  11. @mtn cur

    See Enhanced Radiation Weapon, and one of those would still take a major chunk out of the infrastructure of any city in which it was used.

  12. Greg S. says:

    Here is the most succinct way I can describe the current economic situation:

    Significantly higher interest rates would correct almost everything that is wrong with the American / global economy. However, before that happened, it would wipe out the wall street stock bubble. Since wall street owns government, everything possible is being done to prop up the failing system. How long this can continue is anyone’s guess.

    • Replies: @guest
  13. guest says:
    @Greg S.

    Wall Street owns elected officials, or a lot of them, not the government. Things would be a lot different if they did. Actually, they were different when they did, back before the New Deal. Then we had something of a plutocracy, now we don’t.

  14. guest says:

    Capital formation is the material basis of civilization. This protracted War on Savers, as much as anything, is killing American Civilization.

    • Replies: @edNels
    , @dc.sunsets
  15. Greg Bacon says: • Website

    Maybe Americans should ask why we pay around 500 BILLION a year in interest to the privately owned Federal Reserve, which is basically a fee imposed to borrow our own money.

    • Replies: @gwynedd1
  16. @dc.sunsets

    On the topic of cycles of wealth creation and destruction, consider thumbing through The Forth Turning by Straus and Howe. I found it very interesting.

    • Replies: @neprof
  17. edNels [AKA "geoshmoe"] says:
    @guest

    This protracted War on Savers, as much as anything, is killing American Civilization.

    Sorry to start with an unrelated sounding analogy, and a dismal one at that, But it has been said that when the population of rats (rodents) increases to the maximum and food sources are out stripped by the numbers, the rats turn to cannibalism.

    Now when you use the term ”civilization”, I’m guessing you hold humans to a higher standard than… rats!

    But when things are reduced to the basics, animal behavior trumps the ”niceties” and the basics are similar to my analogy in a sense, that, there is a starting to be a perception of the beginning of and end to a future of untapped, unlimited, easily exploited resources including Lebensraum, and air space, for the Billions and Billions to… bask in!

    For the most part, the ”Savers” are the fat ones to be harvested, the process of extraction never was absent, but is becoming more and more the focus, just as companies have been stripped by acquisition capitalists, who have been at this…

    as America sleeps, and drifts toward a dodgy future.

  18. anonymous • Disclaimer says:
    @Jay

    If you haven’t had a raise in 20 years cars are much more expensive, existing housing stock in what was once working class neighborhoods have increased in price 3 or 4 times. So, like an ever larger number of Americans, you say “no thanks”. Kids today don’t care as much about houses, and cars aren’t worth it, maybe college too.

    Consider how the Government measures inflation and what it takes into account and doesn’t. You won’t hear a mainstream economist use the Zimbabwe metaphor, but $5 for a loaf of bread is still “a lot” of money for someone making $15 per hour.

    I think the Fed decided that growing the economy depends, more than ever, on people selling each other real estate or selling to investors from anywhere, including organized crime to put money in the economy. One of the safest scams to store money in the world. Of course, there’s a downside for some Americans, but who cares about them, the whole thing collapses without real estate, laundering the world’s money and building the worlds most expensive (inflated in real dollars) military machine.

  19. @dc.sunsets

    As I like to put it, you can pay welfare at the cash register or you can pay it via government transfer payments. The former is a lot less dysfunctional.

  20. If you haven’t had a raise in 20 years cars are much more expensive, existing housing stock in what was once working class neighborhoods have increased in price 3 or 4 times. So, like an ever larger number of Americans, you say “no thanks”. Kids today don’t care as much about houses, and cars aren’t worth it, maybe college too.

    Consider how the Government measures inflation and what it takes into account and doesn’t. You won’t hear a mainstream economist use the Zimbabwe metaphor, but $5 for a loaf of bread is still “a lot” of money for someone making $15 per hour.

    I think the Fed decided that growing the economy depends, more than ever, on people selling each other real estate or selling to investors from anywhere, including organized crime to put money in the economy. One of the safest scams to store money in the world. Of course, there’s a downside for some Americans, but who cares about them, the whole thing collapses without real estate, laundering the world’s money and building the worlds most expensive (inflated in real dollars) military machine.

    • Replies: @gwynedd1
  21. “At the household level, buying a home with a 25 percent down payment leaves the home buyer with 75 percent equity. This was the normal rule of thumb for mortgage lending in the 1960s. If interest and loan payments absorb a quarter of the buyer’s overall income (a rule of thumb for bankers in the 1960s), then that person’s income is said to be 25 percent financialized.

    But today, home buyers can put up as little as a 3 percent down payment for a Bank of America mortgage guaranteed by the government agency Freddie Mac (and 3.5 percent for an FHA-insured mortgage), leaving homeowners with 97 percent financialization.”

    – Something is a bit off in the article. If someone paying a quarter of their overall income is said to be 25% financialized, then For someone putting down 3% of their home cost, we know nothing about their income, so cannot say how financialized they are (they could be committing 3% or 25% or any other % of their income); we cannot say they are 97% financialized.

    • Replies: @Jeff Barnes
  22. “At the household level, buying a home with a 25 percent down payment leaves the home buyer with 75 percent equity. ”

    Wrong.

    • Replies: @Jeff Barnes
    , @edNels
  23. @The Alarmist

    I can’t help thinking that the blank slate theory of human nature, which most educated people are taught to believe, doesn’t help.

    Assumptions are made that a highly liberalised banking system will work because the vast majority of people are smart and restrained enough to make sensible borrowing decisions. Asssumptions are made that students will only borrow money for courses that will increase their earning power and that colleges will be frank with them about graduate outcomes. Assumptions are made that non-rational factors such as social conformity and mental illness won’t undermine people’s ability to make rational economic decisions. Assumptions are made that all races, cultures and sexes have equal ability to succeed in all spheres of the economy.

    Economic systems need to take into account that humans vary greatly in IQ, temperament, talent, energy and focus and that many people will make dumb decisions in an unstable environment where the economic predators are given free reign to prey on their weaknesses.

  24. @Bill Jones

    Right. Hudson is writing (which seems to be confusing to you and another poster) is that Banksters will lend to someone KNOWING that they are leaving the homeowner with higher equity. Joe Somebody in 2005 gets a loan from Countrywide, probably with a piggyback, puts down maybe 13K on a 375K loan. Which is about 3%. That’s about 360K equity. In 2005 of course, banks mostly didn’t care how financialized their “targets” were, they handed out the loans with a good idea they would fail. They got away with it too.

  25. @Grandpa Jack

    Banks are supposed to (as we all once believed before the financial crisis) that they know all about the financial situation of the people they are lending too.

    How you surmise that “we really don’t know” is absurd. Banks “really did know” who the people that they gave loans too, but they ignored risk, underwriting, and the Government was collusive in this bubble..

    It’s so “important” to the economy to issue new debt, common sense is simply ignored.
    How else are we going to pay for our military unless we drive more folks into debt servitude? Think about it. It really helps “the program” if you have endless millions of folks who look at personal indebtedness and don’t understand how damaging it is. These folks are model prisoners.

    • Replies: @Grandpa Jack
  26. edNels [AKA "geoshmoe"] says:
    @Bill Jones

    I caught that too, Equity is the part of the value that is owned, after the encumbrances (loans) are deducted from the value of a thing (house). Equity is the part that is owned. (Money in the bank). That leads to the recent type of loans called Equity loans, like 2nds and third mortgages, but Equity loans, people can in some setups, write checks on the equity they own on their house. They are freed up to go shopping, spend down their capitall Not to good on the tax treatment though. Not too good on the bottom line.

    Mike makes some great statements, must a been brain fart.

  27. stickman says:

    As an economic analyst, Hudson is one of the best out there ~ particularly when it comes to the wherefore of that pseudo-science. As to the whys, he has a lot of splainin to do. He does a bang-up job of hacking away the branches, but in order to maintain his professional ranking, credibility and status, he dares not attempt to dig away at the roots. (paraphrasing Thoreau).

    The roots of America’s financial crisis were firmly planted by a rump Congre$$ and a blackmailed President Wilson on Christmas Eve, 1913, as a Holiday gift to the Rothschild crime family and the other bankster financiers; when the unlawful Federal Reserve Act was passed and rubberstamped by the sexually blackmailed Wilson, the proper, prim and pious Presbyterian Preacher and former chancellor of Princeton University and Governor of New Jersey.

    Babylonian money magick has long been practiced by the inheritors of those bloodlines who have essentially run the Western world during these latter couple thousand years or so of the Kali Yuga. Debt-based, fractional financing has enabled the plotters and schemers to suck up most real wealth from the people of the U$ and the We$tern world.

    It may take a revolt by the middle ranking officers in the U$ puppet military against their brown-nosed C.O.’s (who are salivating at the thought of retirement and then being taken on at multi-million dollar salaries by the WarDefense industry minions (and biggest profit-makers) of the Rothschilds, Rockefellers and other owners of the so-called “Federal” Reserve Bank.

    City of London could be placed under neutron bomb threats if the banksters are not immediately arrested and obliged to give up their ill-gotten gains.

    The prostiticians running the District of Corruption would be tried and found guilty of treason and in some cases High Treason against our ruptured Republic and so would the presstitutes for lesser high crimes and misdemeanors against the American people.

    All the British offshore holdings where corrupted banking is done for the uber-wealthy such as the Channel Islands, the Cayman Islands and the Bahamas would be relieved from control by the British Crown and all bankster assets seized and wherever possible used to establish a Jubilee across the Western world, where all debts to these parasites would be eliminated.

    • Replies: @interesting
  28. stickman says:
    @Jay

    Minor quibble. Actually only the fully tenured faculty at most institutions of higher socialization on behalf of the current bankster controlled economic system, are getting in on the goodies. You are 100% correct about the personnel inflation in administration. There are many part-time instructors, to say nothing about grad students who are massively underpaid in terms of their skill-sets and time dedicated to their tasks.

  29. neprof says:
    @NoseytheDuke

    The Fourth Turning is an interesting read. I find Marin Armstrong’s theory on the cyclical nature of just about everything to be even more enlightening.

    https://www.armstrongeconomics.com/

    • Replies: @NoseytheDuke
    , @dc.sunsets
  30. @Jeff Barnes

    You clearly didn’t read what was written at all before responding, did you?

    • Replies: @Jeff Barnes
  31. @stickman

    “where all debts to these parasites would be eliminated”

    so the people that played along with the charade get to keep all their “assets” while those of us that didn’t feed the beast and lived a frugal lifestyle get nothing.

    thanks a lot. that seems real fair.

    • Replies: @stickman
  32. “Asset prices reflect whatever the banks will lend against them” is a credit stopper. It misleads those who don’t know much and think they can learn from you and it damns your arguments in the minds of your peers because it is so carelessly inadequate.

    It is a vacuous statement to say that what banks are willing to lend has an effect on asset prices. It says nothing of substance. Interest rates also have an effect in a predictable direction which is not dependent on bank valuations which partly determine how secure a loan is likely to be. And it is quite untrue of assets largely bought without gearing like most stock market securities. (“Assets” includes corporate junk bonds which clearly doesn’t support your causal generalisation but let’s stick to equities and the pount hardly differs). Margin loans for share trading or investment are not in the same league as real estate mortgages. Surely you know all that. So why not take care to be accurate?

    • Replies: @gwynedd1
  33. @neprof

    Thank you for that neprof, highly relevant. I am much obliged to you. Cheers.

  34. gwynedd1 says:
    @dc.sunsets

    He is just trying to tell you the society is run by a concentrated power, which is far worse in the shadows. The financial cartel is already centrally planned.

  35. gwynedd1 says:
    @Wizard of Oz

    “It is a vacuous statement to say that what banks are willing to lend has an effect on asset prices. It says nothing of substance.”

    I beg to strongly disagree. It isn’t the only factor, but it is a rather vital ingredient in the eventual starvation of valuable things to rentiers. Ease of credit when there is no equity left will naturally do nothing. However if their is equity in the system is will quickly become change ownership from equity to debtor.

    You’d also do well to understand his FIRE sector model isn’t about volatile equities which make debt saturation less like due to volatility. Its hard to soak a bucking bronco. That is why R is for real estate. Most of the asset value is tied up in the relatively boring real estate. This is certainly valued much more by what a bank is willing to lend against it when there is equity and disposable income in the region. This has happened several times in the Bay area. Stock options quickly flow into real estate and credit , and then the industry around it cannot even attract workers because 150k buys you nothing….

    • Replies: @Wizard of Oz
  36. gwynedd1 says:
    @Greg Bacon

    Red herring. it is no doubt a fat public institution , but the profits are rebated to the treasury. You can read the reports at the FRB. No reason to look there since they just printed up treasuries as needed and handed them to the banks right in from of us.

    It certainly isn’t 500 billion either.

  37. gwynedd1 says:
    @Jeff Barnes

    “If you haven’t had a raise in 20 years cars are much more expensive, existing housing stock in what was once working class neighborhoods have increased in price 3 or 4 times. So, like an ever larger number of Americans, you say “no thanks”. Kids today don’t care as much about houses, and cars aren’t worth it, maybe college too.”

    That isn’t even the half of it. If houses were only 3 to 4 times as expensive, the net financial flows would at least be equal , albeit in a class oriented way. That was the Malthus position , such that the landed wealth was still a consumer of the capitalist’s output. However what happens when its debtor owned? Stories of people buying large but empty houses because of their huge mortgages were common place. Its creates a local economic black hole once the assets are loaded with debt.

    • Replies: @Jeff Barnes
  38. @gwynedd1

    I am not sure how I could have made my point clearer but I’m afraid I haven’t conveyed it to you. As other readers may have also suffered the same problem let me try again and explain.

    The statement is “vacuous” in the old sense of “empty” because it is obviously true without conveying any precise information about the result of the banks’ willingness to lend affecting prices. But…..

    That was not what I was criticising. I was saying that he must be taken to be saying more than something so nearly tautologous. I was criticising what Hudson said which seemed to be that there was a linear and causal relationship between what the banks were willing to lend and prices of assets (even if one overlooks his loose use of “assets” when he must have beem thinking of real estate). For reasons I indicated that is plain wrong and therefore, as I said, bad for the author’s credit as an economic analyst and expositor.

    • Replies: @gwynedd1
  39. gwynedd1 says:
    @Wizard of Oz

    I don’t think the readers are suffering the problem. I think you are trying to eat the cardboard box the cereal comes in . The sort of phrase like – what goes up must come down – isn’t really an argument. Its a label on an observable pattern, often conditional. Slogans are just that, slogans.

    – Debt’s that can’t be paid, won’t be – is another one of his oft used phrases. An asperger’s approach to that statement would be even more ridiculous. It is however a good way to ridicule , say one hit by a water balloon being astonished, that water tends to be wet. Given the large pile of logically fallacious junk we receive from the credit industry, that’s about the sum of it. I think it is useful to distill it down to the seasonal element. At some point, usually when the economy is going well for the working classes, assets will rise to what ever a bank will lend against it. A cold day in June may not be the trend . However when late summer arrives , a cold day is the trend. So one cannot really prove winter is coming because the next day is colder, even though the coming of winter has cold days ahead.

    This ain’t philosophy class.

  40. stickman says:
    @interesting

    @Interesting. Last time i took out a loan was in ’89 for a two Y.O. van i needed as an upgrade for my 25 state antiques roadshow business. Paid it off in a couple years. My home and bit of land has been freehold since July of ’74. Heat with wood, cook with wood, walking water, running outhouse. Mega gardener. You want frugal? Have never had a $10k yearly net income. Period.

    That all said, people who have maintained frugal life choices and have done little or nothing to feed the beast, deserve special recompense ~ perhaps including full eligibility for election to public office. Maybe you have some further ideas.

  41. @guest

    Debt-for-consumption creates the illusion of eating one’s cake and having it too.

    This must be in the form of over-consumption of capital. Since ONLY that which exists can be consumed, if debt pulls demand forward, by definition “muscle and bone,” not just stored fat, must be getting burned.

    Capital wears out. It becomes obsolete. Thus capital requires constant nurturing and renewal. We must infer that this 30-40 year orgy of debt is destroying capital, and as a matter of fact, the wholesale movement of manufacturing overseas reflects this.

    A crowd showed up at a large farm for a party. All the grain and animals ready for market were consumed, but the party goers are still drunk…and the FED shows up with some methamphetamine and spikes the punch. Party-goers then slaughter and cook the breeding stock and then consume the seed corn.

    Not to worry, the debts will be paid from future production of swine, milk and corn. Party-goers show signs of crashing and, in fear of the hangover, the FED adds MORE crystal meth to the punchbowl.

    Party-goers now break up the furniture, tear down the barn and even the farmhouse for kindling to keep the bonfires going.

    This is our world today. Not only has capital formation been utterly ignored and crippled, all of the IOU’s coming due will do so in an environment of weakened production.

    Yay, FED. Yay economists. Yay, idiots.

  42. @neprof

    If you like Armstrong, consider sampling Prechter. http://www.robertprechter.com/

    Elliott’s Wave Principle (Prechter’s “thing”) posits that nature grows in a fractal pattern, which of course includes elements of cycles. I find it compelling, even though I aver that trading with it is an invitation to the poor house. It is NOT a trading system in my view.

    Also, the problem with all these things is that they posit Big Changes, and that’s all fine and dandy, but NO ONE (and I mean NO ONE) knows when anything will happen.

    There was a strong case to be made that the denouement to all this idiocy was imminent in 1995, then 1998, 2000, 2007 and….here we are, still at nosebleed levels after markets more than doubled in the last 6 tears…I mean, years.

    There is simply no way to know in advance WHEN things will happen. Only hindsight is 20/20.

    • Replies: @Jay
    , @neprof
  43. Jay says:
    @dc.sunsets

    Advance knowledge of WHEN is not necessary. All that is necessary is knowing that NOW (whenever that is) is IT, and such knowledge is Bayesian in that future actions can confirm a conclusion that the past NOW was in fact IT.

  44. @gwynedd1

    Why would banks do such a thing, create a black hole? Well, it’s better than doing it with military planes and bombs – yet they did it all over the country. Unless you want to blame the buyer, or the government, or a politican or a political party, or the civil rights era.

    Americans were declared war upon and they still can’t see it. I’d take Unz seriously if he told people not to vote, because it is truly pointless.

  45. neprof says:
    @dc.sunsets

    A movie about Armstrong, “The Forecaster” shows that his wave theory can predict the date. He predicted to the day the 1987 market crash . His prediction of Japan’s market crash was within days. The government falsely imprisoned him for years without charges. What he knows his feared by the people in charge. They can’t control the wave and their attempts to do so are the same throughout history (with the same results).

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