The crash of 2016?
washingtonpost.com
washingtonpost.com
A US investment bank finds that most US banks are OK? Boy that's reassuring.
Edit: My all-time favorite pronouncement http://www.cnbc.com/id/26332773
But even if there was no conflict of interest in the data you presented. (Fractional reserve) banks are built on trust. Not on money, not on reserves, not on loans, insurance or credit default swaps, not on any of that. If the trust goes, reserves won't last long, and can't cover the losses. This is by design, not because something weird happened.
The banks in the US in theory should have 0, 3 or 10% of the money needed to cover depositors, depending on size, bigger banks having more. However the laws state that if a bank goes bankrupt that money won't actually be used to reimburse depositors, but rather lenders (ie. mostly other banks). So from your perspective as a depositor, money you have a legal claim against that's likely to be fulfilled (the original meaning of reserve ratio, decades ago), reserve ratio is 0%. In Europe due to bail-in legislation introduced during and after the 2008 crisis and the Greek debt crisis, the reserve ratio, while nominally 1%, is effectively 0 from the perspective of depositors. If a European bank goes belly-up, depositors will see what the government gives them, if anything.
You might think, but there's FDIC insurance, so why worry ? But in history there has never been a big payout resulting from FDIC insurance, either in the US, or anywhere. The big examples are the Greek and Cypriot debt crisis. People lost access to their money, and their banks were bankrupt. The result : they couldn't transfer money anywhere, nor get money from ATMs. Then they were "bailed in" (the depositor's money was used to pay off other debtors) and they took haircuts on the money in their accounts. You might think the ECB's equivalent of the FDIC insurance would have made up the difference, but this was of course explicitly excluded in the legislation.
In the Cyprus examples, depositors < 100k euro found their funds blocked for years and halfway through them being blocked, the amounts on the accounts were reduced by 6.75%. > 100k euro accounts, same, but 9.9%.
Therefore, banks will default when (enough) people believe they will default. Why ? Exactly because enough people believe they will default. That's the nature of the beast. When a large bank fails, the government will refuse to honor FDIC insurance. Granted the US government hasn't yet proven that it would do this, it has never been forced to make that choice. But it came damn close in 2005 and again in 2008, and we all know what choice they made.
Banks default when their annual losses are more than ~1% of their loan book. Anything else is illiquidity, and that is solvable.
https://www.goodreads.com/book/show/2857587-how-to-prosper-d...
The author certainly prospered; it was on the bestseller lists for months.
The crash will come, sooner or later, and compared to that, 2008 was only a road bump, with all of us sitting in a big oil truck heading at a steel wall of a nuclear plant.
Either provide data, or avoid pretending you know what the future will be.
My special area are rare earth metal bonds and EU government bonds. The derivative markets are not a good direct indicator for stability (because they are unstable), but they set the bar for what one can expect. If you look at the M1-data by the FED [0] (M3 is _censored_), you'll see how large the bubble really has become. And this is consistent across all global markets.
Call me an apocalyst, I don't even care. Invest, crash and burn, have fun!
However, just realize this is exponential growth. You don't need a maths degree to realize that you can't keep on printing money like crazy and expect the markets to stay stable for much longer.
It takes one person to dig into the matter and ask the question: "But what covers this money?" and bang, you got a stock market crash.
And let's not call it money. What the FED "prints" is currency, sheets of paper. Money has inherent value (gold is money for instance), but not this FED-Dollar lie we live in every day. Since 1914, America has been tricked into believing into this system. When Nixon turned off the Gold standard in 1971, the entire Bretton-Woods-System (built on top of the Dollar) sort of went Berserk.
It's a system built to fail.
You don't get to redefine terms like "money" to make your arguments work better - not if you want to talk to the rest of the world. And by the definitions the rest of us use, you are factually wrong.
Commodity money and fiat money are both forms of money.
https://en.wikipedia.org/wiki/Money#Types
But it's fairly simple to see which money holds its value better over time. Gold/silver have held value over millennia while fiat moneys live and die with the states that oversee them.
So gold and silver are more stable over decades to millenia. They're more volatile over the short run (months/a few years), presuming a competent central bank.
On the other, hand the government benefits tremendously from both growth and moderate price inflation, so when one of the "peaks" needs to be moderated a bit it almost never actually happens.
The gold standard was turned off far earlier than 1971. In fact, all commodity money standards have suffered subversion or suspension by financial institutions (suspending convertibility of notes) and governments at various times. Nor was gold arrived at by the will of market forces. It was imposed through bank charter, displacing the then-dominant silver in the process. Nor was the international gold standard well designed, for R.G. Hawtrey and Gustav Cassel presciently anticipated its collapse and resulting great depression thereof.
Monetary reform is definitely in order, but commodity money has nothing to do with it. Convertibility requirements can be satisfied with interbank clearinghouses and other means.
Haven't gold and silver been used as money for thousands of years?
Carl Menger's Origins of Money makes the argument that gold/silver naturally emerge as money through the barter system.
Precious metals best satisfy the characteristics of money:
- Durability - Portability - Divisibility - Uniformity - Limited supply - Acceptability
https://www.stlouisfed.org/education/economic-lowdown-podcas...
The primary standards of international trade during the mercantilist and merchant capitalist eras were silver bullion coins like the Spanish dollar.
Formal gold specie standards arose during the 19th century by royal fiat and soon displaced other currencies.
It is likely that free currencies would settle on precious metal convertibility because of prior art, but there's no reason to presume it has to be gold in particular, or to single out gold as being "special".
Fine, but that doesn't answer jwallaceparker's point, which was that gold and silver had been used for money for thousands of years. And weren't ancient Greek coins electrum (gold/silver)?
> Formal gold specie standards arose during the 19th century by royal fiat and soon displaced other currencies.
Fine, but weren't gold and silver used as coin long before that (even if not by formal royal fiat)?
I also am skeptical of that. I think that, since 1975 or so when the value of gold was allowed to float, the Fed has kept the value of the dollar more stable than the value of gold (or silver). And "in light of modern financial institutions and public finance", it's pretty important to hold the value of the unit of account more or less constant...
Silver has most of these qualities however it is second only to crude oil in its industrial usefulness (best conductor of heat, best conductor of electricity, shiniest metal when polished, antimicrobial/antibacterial, whatever you call its property that makes it suitable for photography, etc).
Of course you are correct about the use of spanish dollars... this was the origin of the US dollar, which was originally specified as certain quantity of silver in the Coinage Act of 1792. In colonial times it was not uncommon to cut a Spanish dollar into eighths (like a pizza pie) to make change... this is why even today we call $.25 "two bits" and why until a few years ago stock prices were quoted to 1/8 precision. Ironically most markets are electronic now and there are (coincidentally?) 8 "bits" to a byte to so maybe we never should have changed that at all ;)
There's no way that I'm going to lug around a block of gold, a scale, and snips when I have a credit card.
If the Feds return to QE, stocks and real estate go up further. I think stocks do so first, and real estate a bit more slowly.
And I think that what the Fed wants to do is unwind QE reasonably quickly, without causing the economy to tank (the real economy, not just the stock market). The real question is, how rapidly can the Fed unwind QE without damaging the real economy? Or can it unwind it at all?
What does that mean?
> many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.
This is how commodity money works. The dollar (as well as almost all paper currencies) originated as commodity money. The paper dollar was backed by and convertible to gold.
> This is how commodity money works.
No, its how representative (or commodity-backed money) works, as distinct from commodity money.
> The dollar (as well as almost all paper currencies) originated as commodity money.
The dollar (whether you mean the US dollar or its Spanish predecessor) originated as commodity money -- actual silver coins -- true. But most paper currencies (including the -- later -- paper dollars) originated as representative, commodity-backed, money.
> The paper dollar was backed by and convertible to gold.
The original dollar was silver. The original paper dollar was ... a trickier question. If you count the 1861 demand notes as "paper dollars", then, as they were initially redeemable for gold (as the US had switched from a silver to a gold standard) money, they were convertible to (redeemable for) gold -- but they were not backed by gold (and redemption was soon suspended.)
If you mean the first legal tender paper dollars (U.S. Notes) issued soon after the 1861 demand notes, they were pure fiat currency, not backed by or convertible to anything.
It means that the important part is the obligation and the real value, not the units which get used to track this obligation. Under market-based social norms, if you give someone an awesome massage, then they now "owe you" for it. Perhaps this is in terms of making a website, or cooking lunch, or whatever. The most general form of this is a promise of a favor-not-yet-specified - but that concept needs some unit to measure whether or not you're "even" after making that promise.
The benefit of this is that lots of people like to receive a favor-not-yet-specified, because it can be turned into whatever sort of thing they need most in the future.
In short, that is what money represents - a promise that someone made to provide something of value to whoever winds up with that money.
Now, not any old promise will work well, since the other party wants some kind of guarantee that it can be redeemed later for something of value. This is where the banking system come into play: it creates money by convincing debtors to sign believable contracts to pay the bank back. In the past, it used gold and silver. Notes were convertible to hard currency at banks, and there was a general expectation that you could trade those for the things you wanted at a later point of time. But again, it was that expectation that was important, not the note, and not the commodity backing it.
watch Warren Mosler: https://www.youtube.com/watch?v=Z1uWVj0YJ3M
I'd be wary of the chartalist/state theory of money, since it's somewhat of a truism (state theory of money is correct for money chartered by the state). It tends to ignore that many local currencies have also emerged through different channels.
MMT as promoted by Mosler, Wray, Kelton and Tcherneva is also a syncretic and often uncredited mix of a variety of economic ideas, generally as a clout for the policy activism that its founders promote.
Glad to see you know some of the heterodox. Some other names to add: Bill Mitchell, Frank Newman, James K. Galbraith, Abba Lerner.
My favorite Bill Mitchell video to date: https://www.youtube.com/watch?v=YnyDRwSqp2E I've learned a lot from him.
I'm guessing you know that Bernie Sanders hired Stephanie Kelton as his Chief Economist for the Senate Budget Committee.
Bill Mitchell's economics frequently take a backseat to his rabid quasi-conspiratorial rantings about the neoliberal order that are in turn instrumental to influencing his economics, unfortunately. James K. Galbraith is far less erudite than his father, who was actually a decent institutional economist, if disagreeable. Abba P. Lerner was a great economist, but his functional finance proposal proved theoretically untenable in light of public choice critiques and has yet to practically materialize anyway. He was also against unions, interestingly enough, in his famous paper "Money as a Creature of the State".
I'd overall rank MMTers are some of the lowest quality of the heterodox, honestly. The circuitists like Marc Lavoie are much better out of the broader Post-Keynesian school.
Implies periodicity. But it isn't periodic, it's a chaotic system.
> My special area are rare earth metal bonds and EU government bonds.
If they don't, I send them off to think about the bi-metallic standard.
There are non-crazy things to worry about the future - where will jobs come from for average people after we increasingly automate? Not everyone can be a programmer, and we don't need 95% of the population to do that. You can say medical care of palliative care or something. I don't know where the jobs are coming from.
And people that work in the financial industry, trading gold or CDOs, you aren't actually doing anything that helps society. If we stopped have people making money by trading on gold, would it matter to the world? No. Create something useful, that helps people, a new kind of drug. Teach kids. Don't sell real estate or work on faster stock trading algorithms. Grumpy me, my programming is the good kind, not the useless kind :-)
If you're in it for the second reason, you wouldn't buy the stock if you know there isn't someone else to sell it to in future. The second buyer needs a third buyer, the third need a fourth and so on. And presto. Stock market.
CDOs and other synthetics are a little more questionable. Some arguably lower stock market transaction and search costs: derivative markets provide a source of information that allows stocks to be efficiently priced. Other instruments like CDSs allow risk to be spread and hedged throughout the economy (which in some cases is efficient, particularly if at least some people have risk averse utility functions).
But I'm still learning; I'm a little allergic to finance in general. HFT just seems like cheating to me and adds uncertainty to other transactions. But maybe there's some good argument out there (and feel free to enlighten me if you have one).
All that aside, I personally have much more respect for 'the makers' than 'the ticket clippers' :)
As for the apocalypse, I've been waiting since 1980. And its coming to the point I've about given up. I'm still eating long term dried food rations packed in 2006 and they don't taste very good. I'm kind of starting to suspect that things change but somehow life keeps right on going.
Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.
-Marcus Aurelius
Hence my coding job and investments on one hand, and living on a self-sustainable homestead on the other. If I never need to use my homestead, and just end up giving my children a piece of land worth enough to retire on... that sounds just fine.
> but a lot of people in rural areas/small towns aren't upper middle class programmers who live off the grid with "sustainable homesteads".
Just moving out of a big city with a similar job gives you a lot of extra cash for saving / planning. It gives you extra time, because you don't need to commute and the one shop is just down the street. You get calmer, more relaxing life.
You don't need to live completely off the grid or fully sustainable. But the extra savings gives you ability to invest in some solar energy/heating. And a tiny garden requires next to no effort and can give you a lot of food once you get a hang of it.
And actually yes, there are a few remotely working tech people in my village of ~2k.
It won't be to apocalyptic, but it will hopefully bring the gold rush in the internet erä down. I'm not sure if it will be in 2016, however I'm really sure that once in a while the markets (not just the us) needs to cleanup from everything overvalued. Also even when that happens, it will happen again, once in a while it must happen cause we (the humans) are just too dumb to learn from our mistakes.
the bad part of this, is actually that mostly renewable energy will also suffer from big market drops since investores will be scared a bit from 'new' technologies after a bigger hit into the market.
However what I'm telling is nothing special, it happens as there a people who handle everything based on their greed.
So unless you say when, why, and what are the steps to validate it on the way, why should anyone believe the collapse happens in their lifetime?
theres a lot of that sentiment around since '08.
... which might be his goal. Short the market, and spread FUD.
It's a meaningless prediction, as it is non-falsifiable. and non-actionable.
> The crash will come sooner or later
I also am preparing for a continuing slow burn (i.e., slow and steady downward trajectory in our economy and the world's economy). I would bet that there is less than a 10% chance the there will be a huge crash this particular year.
The thing is, and the reason I basically agree with you, is that preparing for a long slow downward economic trajectory is the same as preparing for a possible crash: maintain your health (physical, mental, spiritual); without going crazy, try to reduce your debt as much as is possible while still caring for our families; when possible spend some non-working time on education to learn new skills.
I think it is important to keep a cool head though - I believe that your last sentence was an overstatement.
They may not be able to drop interest rates (much), but they can always print up money and use it to buy things as a way to inject cash into the economy. That's what QE was, after all.
You may be right about The Crash, and if your only time frame is "sooner or later", you are certainly correct. We will eventually have some sort of large economic downturn. But that's like predicting rain will fall, eventually. It may not happen until everyone reading this is long gone.
Who's to say most economists are any good at their jobs? Did you see what many of them were saying during the obnoxiously obvious real-estate bubble of 2004-2007? The dotcom bubble? And so on.
Theodore Dalrymple had a column proving that Shakespeare did _not_ have a formal medical education, because he described symptoms correctly. (He contrasted this with a book by a practicing doctor from the time, who described patients purely in terms of the four humors -- creating fanciful descriptions unrecognizable to a modern practitioner.)
Come to think of it, there was also a book published a few years ago about US president James Garfield's death in the late 19th century. He didn't die of being shot in the back; he died of receiving the best medical care in the world.
When you get paid for lending academic legitimacy to politically 'useful' recommendations, accuracy isn't necessarily priority #1.
If you want to see some decent economic commentary, look here: http://www.macrobusiness.com.au/ . These guys have been screaming bloody murder for at least the past year.
Of course you could say "well, the good managers beat the market, even though on average they don't". But you could also say that the few people who correctly predict three coin flips in a row are "good at predicting coin flips" - it's easy to say this in retrospect but impossible to predict who the "good ones" are upfront.
Doing company valuations and making share market predictions are very different from having an understanding of macroeconomics or tax theory in a public policy context.
And very few people are good at prediction (myself included), and even fewer when it comes to timing. Economists have predicted 8 of the last 2 recessions :)
It's listening to someone standing on the deck of the titanic talking about the complexity of the design of the ship, how many great and esteemed members of the establishment signed off on it, and how crazy it is that anyone on the deck is pointing out that it's sinking because they can actually see it sinking, like anyone else can that actually looks at the horizon.
This is not a rebuttal. Arguments from authority about why the masters of the universe have it all figured out and those who are pointing out that they have no clothes are just clueless barbarians at the gate are fundamentally invalid.
Complexity, obfuscation and worship at the altar of authority do not actually make for solid fundamentals. This ship is going down, massively increasing the tokens for the representation of scarce resources so that the people who controlled the tokens back the last time they completely failed, does not make the people that controlled those tokens any more competent than they were at the actual game in question last time they failed.
All the central bank moves, the macroeconomic obfuscation, lies, Keynesian nonsense, negative interest rates, cash ban proposals, underhanded capital controls, worldwide currency wars, geopolitical games with oil to back fundamentally worthless scrip, bail-ins, bail-outs etc, none of it changes the underlying fact that the presently dominant system ordering the allocation and distribution of scarce resources is, as you sit here on the deck of the ship dismissing that fact, sinking below the horizon.
EDIT: Well this is embarrassing. I apologise to the guy above and below me. I guess it was actually my superior reading comprehension...
And when I say the top 1% are significantly better at making predictions than the average person, I mean better in certainty and specificity.
Look at yours and spangry's comments. Full of vagueness.
"Appropriate to scream bloody murder".
About what exactly? It's certainly appropriate to scream bloody murder about things that are happening. It would be nonsensical to scream bloody murder about something that isn't happening.
"the economic depression that will occur in the next 5 years will be started by bubbles popping in residential property markets"
What a huge range of uncertainty. So when is this economic depression occurring? Tomorrow? 2017? 2021? What kind of economic depression? Minor? Major? Capable of plunging the world into the Great Depression? Such vague predictions are fundamentally worthless to the average person.
Look at the charts, the writing is on the wall, denying at this point because the talking heads on the television are telling you that everything is going to be alright while it's very clearly not is not taking a cautious stance and saying one cannot predict the future, it is ignoring the facts on the ground as they are.
Baltic dry index, Deutsche Bank CDS spread on 60 trillion of derivative exposure, Sovereign Debt CDS', the leverage of gold on the primary exchange in the world for paper vs physical gold, the buckling price of oil, the desperate moves of the central banks in the previous 8 years coupled with begging from the too big to fail banks that even more reckless and wild moves need to be undertaken (Let the banks charge negative interest on deposits, ban cash so the consumers can't avoid it, allow the banks to make the spread, give us more quantitative easing, keep manipulating the roulette wheel so we remain on top despite our utter incompetence, pay no attention to the market moves that say we're about to be destroyed, except of course to the extent you need to understand that if we are it's the end of the world as we know it because we're too big to fail, etc).
The systemic cancer needs to be destroyed for the actual effective allocation of scarce resources to be performed, the existing central banking system, its oversight, and basically everything about it, needs to undergo creative destruction.
"Mark my words: the economic depression that will occur in the next 5 years will be started by bubbles popping in residential property markets (China's first, most likely). Consequently, we'll be looking at financial system collapse when this is transmitted to banks via insolvent residential property speculators (to whom they've loaned significant amounts of money). This ain't going to be pretty...
On the hopeful side, countries like the US, Ireland and Iceland who 'took their medicine' during the GFC (sustained heavy property price declines or significant bank collapses), will be closer to fundamental values already. So they may have less distance to fall, even though there will probably be some overshoot. Also, OPEC flooding the world market with oil (to try and kill the US shale oil industry in the crib) and the likelihood that China will run down its foreign currency reserves to pay for stimulus (depreciating the US dollar) will mean US export industries (excluding oil and natural gas) become very competitive indeed.
Countries like China, Australia, Canada and the UK on the other hand, who staved off significant property market corrections during the GFC (especially Australia), are in for a very bad time (http://www.economist.com/blogs/dailychart/2011/11/global-hou...). Like worse than 1920s depression bad time (closer to 1890s depression)."
So: enormous crisis, china run down fx reserves, crisis will originate from distorted chinese property market driven by speculative bubble popping.
Here are a few news articles, some from just today:
http://www.marketwatch.com/story/kyle-bass-warns-chinas-fore...
http://www.cnbc.com/2016/02/08/latest-chinas-fx-reserves-dro...
http://www.wsj.com/articles/this-chinese-citys-property-mark...
And this is where I bow out. I'm done trying to reason with the unreasonable.
EDIT: I lied. Christ, you even misquoted me from a few posts up: "If you want to see some decent economic commentary, look here: http://www.macrobusiness.com.au/ . These guys have been screaming bloody murder for at least the past year."
That's probably a good part of why everyone has an opinion - when the "experts" are so clearly clueless, everybody's an expert.
"If we've got data, let's look at data. If all we have are opinions, let's go with mine." -- Jim Barksdale
And you know why we have a bunch of economic dullards in power? Because the public (i.e. you), that keeps electing these idiots, can't even tell the difference between 'politics' and 'economics'. Nor can they tell the difference between 'share traders' and 'economists'. Go ahead and look at the top thread on this page.
And you know what? It's pretty clear you people (yes, you) are quite happy wallowing in your own ignorance, so that you can hold on to some smug sense of illusory superiority, while whining about 'how you could do so much better than these so called professionals'. Meanwhile, the few non-political and sensible economists left in government have been tearing their hair out for years because the public keeps electing a bunch of economically illiterate jackass politicians who refuse to see reason (truly a representative democracy).
So I hope you all enjoy the economic disaster that is now upon us, once again. You've earned it.