Welcome to the Everything Boom, or Maybe the Everything Bubble
nytimes.com
nytimes.com
Look, I quickly rearranged their figure by just reversing the order of the 6 tranches (which is arbitrary, and not actually connected - though they seem that way). Original:
Reversing the order of the 6 charts:
Just flip back and forth! It shows a different impression. I haven't changed any of the data.
The original impression only exists because they sorted the six downward (by end-point of each of the 6 charts - they even make those end-points bold dots). That's an awful shifty way to tell a story of something moving down over time.... Plus - how did they select these six? Indonesian Stocks - Manhattan Office buildings? Could it be they selected six that fit well together? (Mine, lacking this preselection, is way more jumpy.)
That said, I enjoyed most of the article and don't like this sleight-of-hand, which calls it into question for me.
Regardless, it is a rather small point and I will readily agree that all six assets have been falling. But arrange them vertically - or better yet, superimpose them - instead of listing them side-by-side, sorted in descending order by 2014 value and selected to dovetail together! and the story isn't nearly as clear.... Just try it.
The graph is set up to tell a macro story far beyond 2 years. It looks hastily like a 12-year story of rising from 6% to a high of under 8 and falling sharply and steadily down to 3 (briefly under 2).
But that's not what the graph says at all. It just looks that way visually.
There is a plethora of good opportunities to be exploited out in the world, but not if you're holding $180 billion in savings (I'm looking at you Apple). These huge savings gluts are, effectively, liquidity traps, because these entities (besides, perhaps, governments) can't possibly hope to effectively deploy such large amounts of capital effectively. Add to the mix that inflation is so low, and hanging on to vast sums of cash starts to look like one of the least foolish things the Fortune 500 are doing right now. There isn't a shortage of good opportunities, it's just that good opportunities look so tiny to the big boys.
I don't have much hope that targeting a higher inflation rate will do much, but I think it's worth a shot.
Apple's case has been dissected here http://www.quora.com/Apple-company/What-would-be-a-good-use-... - having a large pile of cash is generally better than not having a large pile of cash if you're in the manufacturing business, and need to convince your partners that you have enough financial strength for them to commit to a factory build-out that could take years to accomplish.
Well, that is in fact exactly what a savings glut is: there's so much accumulated capital that it has to compete for investment opportunities, pushing down the rate of return on investments.
Defining "worthwhile" as "has positive return that can be captured" is the business definition, but very limiting for society as a whole. We could do with some Fordism returning money to the public.
The central banks' actions seem to be providing more and more reasons for people to take a sustainable (defensive) view.
It looks like a self-fulfilling prophecy unless you manipulate it fundamentally. There is plenty of manipulation built-in to the system already -- its just mainly opportunistic or used to preserve the existing structures.
What is needed from the financial system is an institutional honesty and willingness to grow into an optimistic structure that incorporates more hard science and technology, focused on human and environmental well-being.
Integrate more physical and social science, better utilization of technology, and a greater degree of holism, into the field of economics, while still preserving the values of freedom and appreciation of complexity that will allow for diversity and evolution of systems.
Apologies for my economics 101 questions. I like finance but don't pretend to know much about it or understand any of it :)
*Note: when I say assets I'm thinking more bonds, treasuries etc. than physical real estate.
https://www.google.com/webhp?espv=2&es_th=1&ie=UTF-8#q=defin...
So is the "Everything Boom" going to be the new polite way of saying inflation is happening? I mean that is the expected outcome of the economic policies of the past several years is it not?
An example: buying debt is more expensive, if the price is the same, but the interest rate is lower.
If the price of e.g. a car or a sandwich is the same as before then we haven't had inflation.
Stagnant or deflating wages means stagnant or falling consumer spending, resulting in an environment where there don't seem to be any good growth investments (no customers). As a result, you get bubbles in "safe" assets like real estate and bonds and lots of trendy speculation.
I'd say both inflation and deflation are happening. We're getting inflation everywhere it's harmful, and deflation everywhere it's harmful.
We are in a depression.
http://www.bls.gov/news.release/cpi.nr0.htm
It is well in line with historic norms.
Wage Growth is net positive adjusted for inflation again:
http://www.nytimes.com/2014/04/05/business/economy/sign-of-s...
It has a nice graph if you scroll down and don't want to read.
The underlying problem with trying to "fix" wages is the simple fact that with globalization you can't really push the wages for the US much higher than they are [except at the bottom where you can't really outsource the guy working in fast food for minimum wage].
It seems to be more the standard bubble event on investments due to cheap credit and poor allocation of tax burdens/govt spending. We need to do things like shift the tax burden to Capital and reduce it on the poorest of the working population. We need to fix our infrastructure issues while we can do so on cheap credit and when interest rates rise we simply cut back to "normal" (which is really just generating a different kind of debt, you can't ignore infrastructure forever).
The CPI (used to gauge inflation) has been modified in a variety of ways over the past 35 years. Various estimates of what the annual rate would have been over the past four years if earlier methods of calculation had been continued come up with numbers in the 5%-to-10% range.
http://business.time.com/2013/03/12/if-theres-no-inflation-w...
http://www.bls.gov/cpi/cpiqa.htm#Question_5
Its a variance of less than 00.3% due to methodology changes. I understand its a popular myth.
Please provide a source that accurately copies the methodology from the 1970s and agrees with your claim.
If you are unable to do so without citing Shadowstats or another source that wants money to see their full methodology, its an invalid claim intended to milk money from people with fixed belief systems.
CPI is intended to gauge the general rate of inflation over the economy as a whole, not that of specific purchasing patterns by individuals. As such, comparing a CPI from years ago (1999) to now (2014) is roughly equivalent.
You can claim the number itself is wrong but not that is wrong compare to the values it held previously under the same methodology. [e.g. CPI can be claimed to be X% lower than reality, but if CPI is 2.7% in 1999 and 2.1% in 2014 under the same methodology the relative level of inflation is effectively identical]
Even the title is wrong: "If There’s No Inflation, Why Are Prices Up So Much?"
If you look at the CPI from that point in time: http://www.bls.gov/news.release/archives/cpi_03152013.htm
It shows 2% inflation.
It is a linkbait article with a false premise and lots of cherrypicking.
1999: http://www.bls.gov/news.release/history/cpi_01142000.txt
I'm old enough to have lived through a good economic period with widespread optimism: the 1990s. We are in a depression.
Economists. Y'know, people who do that professionally.
> Which choices are correct, and which ones are not?
Or do they use chicken entrails?
2) I never said inflation didn't exist. I said it was normal. Overall, inflation is in line with norms. Yes, you can pick one category and say its higher...that is called cherrypicking data.
Strangely, people need clothes and shelter and such too...which was left off. Hmm. I wonder what else could cause this food inflation?
Perhaps droughts in states that normally produce significant amounts of crops perhaps?
http://online.wsj.com/news/articles/SB1000142405270230328780...
Hmm. Same paper, completely different point of view.
However, since I actually want you to be able to read the article:
http://www.usatoday.com/story/money/business/2014/03/18/food...
"Droughts, unusually cold winter weather, rising exports and a virus outbreak in the hog population are among the causes of food inflation, which is expected to accelerate in 2014."
It is almost like the weather and a farmer's access to sufficient water supplies is involved in farm production. :/
It remains a mystery to me why people always cite "food inflation" during unusually tough conditions for food production as "proof" the CPI is wrong. :/
https://www.goodreads.com/book/show/32082.The_Great_Wave
If you think inflation is "normal". It may be, but rather in the sense that historical experience shows us that authorities use inflation to confiscate the economic power of the downtrodden.
That is what an economy with no inflation looks like in the modern world.
The correct way to phrase this is: Our inflation rate is on the upswing (so that's like a third derivative), but workers are getting screwed because their wages are under downward pressure.
Supposedly this will make people want to buy things now (instead of later). There is this odd effect though, that increasing prices also can make people insecure, as in: Worldwide, more money is piling into savings than businesses believe they can use to make productive investments. In other words, the people WANT deflation.
The net effect though is we will be transferring wealth from the poor to the rich; and then the bubble will pop, the rich will cash out of their assets early, and people with slower investment classes (401ks, pension funds, etc.) will get screwed. And some of these other people will even get fired, putting them into even greater risk.
I'm not going to defend "supply-side" economics, either, because that's got it's own brand of stupid going on.
There is a modest distinction between bubbles and inflation. While inflation guns bubbles and aggregates small, local bubbles into bigger, systemic bubbles, there can be bubbles during deflationary periods, and systemic inflation doesn't necessarily end in a bubble. Bubbles are characterized by a specific set of price dynamics that are guided by human psychology; the most characteristic, but hardest to notice, is when the asset price collapses, typically around twice the speed that it rose.
Pretty much.
>Broadly, the only tool to do this is to "print money"; read: lower interest rates, twiddle with the reserve ratio requirement, directly pay off banks for certain types of activities.
Well, those are the only tools central banks have available to them, but there are much better options. Unfortunately those tools are only available to legislatures, who have decided not to use them.
As I have understood demand-side economics, one additional difference to supply-side views is the source of the demand: demand-siders do not only see business investments as the source of demand, but also private consumption. To support that, wages have to rise (as is happening in China). I think that partly explains the currently active basic income discourse in Europe and the US and the introduction of minimum wage in Germany (done by a coalition of center and right parties!). Both instruments would directly benefit the poorer half of the population, who has a low to non-existant savings ratio (in Germany the "poorer" 60% of the population hold only 3% of the privately-held wealth). Increasing wages for these classes would immediately result in more demand.
Infinite growth is finally being revealed as the financial dogma it is.
tl;dr there's a severe shortage of treasury bonds, leading to a worrying lack of liquidity in the interbank market.
So markets are thinking "central banks will never allow another 2008 to happen. What could possybli go wrong!!" and throw billions at Snapchat and Somali pirate bonds.
There are cheap financial assets. Basically any tail hedge that would benefit if it ever turns out that it's simply not up to central banks to fully decide what happens and when.
Death may have taken a holiday but his return to work won't be announced much in advance.
“If you ask me to give you the one big bargain out there, I’m not sure there is one.”
There is one. Human labor.
"Everything" being expensive means that currencies are losing value, which means that wages are declining in terms of what the money buys. Ever look at the S&P in houses? Or in oil? Or in (though I don't find it as useful) gold? That alone makes our 21st-century look like Japan's lost decade (1990s). No, that's not something we could fix by moving to the gold standard. Human labor is just worth less, and capital is worth more.
Like most bubbles, the process is actually faster-than-exponential. (Normal economic growth is already exponential.) The meltdown of the middle class is, for example, driving up college tuitions, creating demand for expensive high schools (now that it's extremely difficult to go to Harvard from a public high school, when it wasn't that rare 15 years ago) and, in the few urban areas where unconnected or semi-connected people can find good jobs, pushing rents into the ionosphere (and prices to 40-50x annual rent, which one hopes is due to various money-laundering shenanigan but may be in anticipation of further rent increases). The disintegration of middle-class America is a self-fueling feedback loop as talented people strive to get away from the old order into the new (expensive urban centers, elite universities). The goal (in this forceful middle-class in-pressure toward expensive, elite places) is to get enough connections to people who can keep their own lights on, before things start going out. Some of these changes are good (such as the movement away from environmentally unsustainable suburbs) but most are bad.
Our society has stopped valuing labor, whether it's the skilled kind or unskilled. That's why a talentless dickhead with connections gets to be a "founder" and take 40%, doing nothing but monetizing his own social position, while you write all the code and get 1%.
Is this a bubble? It sure is. The "crash" will probably be a revolution. It will be global, and it may not be violent here but it will probably be violent in many places. The funny thing about bubbles is that their ends are impossible to predict. This one, especially because it is political and social as well as economic, and a bit unprecedented (the large middle class of the US was unprecedented, much less its destruction) is impossible to time. It could happen next week, or it could be 100 years from now.
But at the moment I am replying, people are downvoting it, trying to make it go away, without having made a single counter-argument.
If someone can refute this viewpoint, I would like to see that. If not, don't shoot the messenger.
Being critical and pessimistic is not the same as being wrong, and sometimes the most realistic and important viewpoint is the one that we most dislike.
Some labour is also overvalued - where a small group can basically push the price of their labour upwards by manipulating the system. For instance, executive pay with share buybacks.
As far as revolutions, pressure will definitely mount but it won't spark, not within the middle class, unless things get really bad. By bad I mean bad enough not to being able to afford things like food. That's how the arab spring started - food prices spiked beyond affordability. If you have responsibilities like family, people value their (relative) comfort, even if it's dwindling, over the risk of physical injury and chance of losing everything.
Healthcare. 45,000 people die per year of health insurance (or lack thereof) in the U.S. This number may improve under the PPACA ("Obamacare") but insurers will fight and struggle against it, and as soon as Republicans regain control (which is inevitable) we'll see new laws that allow health insurance companies to kill even more people.
The one thing that makes it not revolution-provoking is that it's mostly old, sick people who are affected. Also, people think they're better off than they actually are, that because they "have insurance" they're not going to get fucked over.
"Obamacare" improved the situation, but he had to fight hard to get very little progress, and I think that his work will be undone in the next 5 years since it didn't change the underlying problems. This situation requires a complete overhaul (single-payer system, or public-option at the least).
What I'm saying, however, is that things legitimately are that bad. Dying of health insurance is the 21st century's version of dying of starvation. It is, nonetheless, completely unpredictable when and how these things will come to a head, and there's still a possibility that society will reverse its own decline in another way.
In the first sense you have to balance it is historically unlikely on any given date although historically highly likely over time. Like dying of old age, my odds of doing that this year are quite low, but I'm under no illusion of immortality. Also its a funny stereotype that all riots / revolutions happen when someone is claiming they'll never risk it. I'm sure someone was saying the same thing in minority neighborhoods in the 60s right before they started burning.
In the second sense it seems highly likely. Lets build all our infrastructure and culture around everyone being middle class, and then destroy the middle class. By infrastructure I don't just mean streets, but employment, corporation, "consumer culture", middle class values, all that. 2000 to 2010 was very evolutionary, take the middle class in 2000 and make them a little smaller and a littler poorer and a little lower disposable income and you pretty much have 2010, and similar in previous decades. Take my grannie in 1980 and air drop her in 2010 if she were alive and she would pretty much recognize society, our peaks would look worse than her deepest recessions but it would at least be recognizable. The pace of change will be faster in in the future and more dramatic, 2010 to 2040 is going to look a lot more like 1860-1890 or 1920-1950 than the relatively stable and evolutionary 1980 to 2010.
And that's the social political aspect, in that unionized skilled trades will be (or, are) the last middle class group left standing. You see the crab pot effect of trying to pull down anyone trying to get out, whenever the union question comes up.
Edited to add commentary on other grandparent post topics:
The process of financialization is like squeezing blood out of rocks.
It says a lot about our centrally controlled economy, that the leadership have decided to squeeze a moderate amount of blood out of young rocks, rather then the alternatives.
For example, if you build a large and expensive medical industrial complex, you can squeeze the entire net worth out of old people before they die.
But before that, there's people trying to squeeze 1/3 or more of lifetime income by boosting house prices. Ideally, the FIRE sector would extract the last $ from a victim before the victim even entered the medical sector at the end of their lives.
Before even them, there's an exploding business in school loans. Ideally, the educational sector would extract every $ from the lifetime income of victims before the victim even enters the clutches of the FIRE sector. Not just the student mortgaging their future, but get them to take all the money from their parents and grandparents if possible.
So what happens to an economic system built on a financialization business plan where you find ever earlier spans of life to extract all familial net worth (and when you run out of familial net worth to extract)? What happens to the historically earlier, later in life pyramid schemes when the base of the pyramid drops out because someone already ate "their" lunch at an earlier stage? Sorry hospital, you can't take my $1M estate as you budgeted because the bank already took all the money for the foreclosed house... not a good day to be in the medical sector. Sorry subdivision developer my generation won't be buying your $1M housing product because the banks already took all past and future familial wealth for school loans so I'll never afford your $1M house, I could buy it for $50K but that'll implode your financials.
There does not appear to be any further way to innovate the pyramid scheme, so like all cancerous growths it'll kill the host and die itself and something else entirely new will live in that niche.
One interesting commentary on financialization as a business model, is all three models I list above only are alive on life support anyway because the .gov backstops each loan with a "heads you win, tails I lose" or "privatize the gains socialize the losses" purchased legal system. A hiccup there might also be a problem, and/or if its ever widely recognized by the public that the second great depression is pretty much due to .gov intervention, thats the kind of stuff revolution is made out of, at least in other more civilized countries. Maybe here we'll just get gulags and secret police, or really good bread and circuses, donno.
The next couple decades are going to be super exciting.
There's a lot of language that sounds superficially positive ("innovation", "fast-paced") especially in the corporate theater, but what's really happening is that the rapacious elite is eating society, like a cancer, while the middle class falls apart.
There's actually quite a lot of law (starting with -- and largely tieing into -- the prohibition of slavery, but this also includes things like limitations on non-compete agreements, restriction on requiring specific performance in contracts, etc.) that limits the ability of capital owners to invest in "human labor", other than their own, as an asset -- as that amounts to owning other people (or, at least, their ability to produce economically-valuable output, which largely amounts to the same thing.)
https://www.upstart.com/ and https://www.pave.com/ seem to be startups exploring this market.
The "best" greediest smartest whatever-est minds over centuries of human history have never found a way to keep a global reserve currency for longer than a century or so. There's a famous chart of ranges of time where the Spanish had the worlds reserve currency or the English or whatever. And the US dollar is gettin kinda old as global reserve currency. This is very much like the graphs of devastating earthquakes in CA, you can't predict the day and time CA will be pretty well flattened, but pretty much everyone in SFO does die and every building gets flattened "about once a century". Changing reserve currencies happens about the same way. I'd be an idiot to claim it'll happen tomorrow or next year, yet its also a near 100% certainty looking at history that my grandkid will grow up under a new reserve currency. China is getting ready to economically collapse and have their own great depression looking to be about 10x worse than ours, until they have another revolution, so not them, they'll be too busy starving and killing each other. My guess is after the .eu and the euro collapse, the German Mark will be re-issued and become the new global reserve currency that is used for all world trade. Or some game in name only, where the .de totally take over .eu, rather than the current just mostly having control of .eu, and what we will call a euro will really be a German Mark. I'm thinking 5% odds its bitcoin or a derivative digital currency, maybe 55% odds its German Mark or synonym, and the remainder is an unclear mix of a new S.U. currency, or maybe Africa will get itself together (gonna happen sooner or later unless someone stops them). Or the century old battle of hemispheres has the south rising, perhaps some kind of Pan South American euro-like "thing" will arise. At least most of them speak more or less the same language. So we're getting a new reserve currency "within a generation" and it definitely isn't going to be the dollar. This isn't the end of the world, London is still a nice place to visit, but it does mean certain changes will occur.
Another topic worth discussion is the end of cheap oil, which has more or less already happened (unless you're getting gallons of gas for 90 cents in the USA?). All the fields worldwide are in decline and discovery and production per dollar invested is in permanent long term decline. So all business models oriented around pumping oil/natgas out of the ground are on borrowed time. Generally any good news as a counterexample is innumerate, either no understanding of quantities (so the lifetime production of a TDP plant is about 5 minutes of USA consumption, awesome) or the standard manipulation of statistics (so production at one well went up 10% month on month last month therefore if you extend that into infinity we're going to have worldwide oil prices of 10 cents/barrel) or just technoutopia, usually horribly out of date "Hey guys, I just heard about this new thing, ethanol plant, and its going to save the world" LOL thats already crashed and burned.
There is probably some connection in that the USA .mil will probably hold things together enough to keep the $ as the reserve currency as long as oil tankers import oil into the USA. Once that stops, and it'll stop soon enough on existing trends, the motivation to maintain global conomic control will likely evaporate and thats when we'll get a new global reserve trading currency. Watch for S.A. oil exports to irreversibly start to fall and then expect some financial chaos. Everyone else, .mx, UK north sea, all in decline already (LOL Britain has gone from being a natgas exporter to being an importer in just the last couple years)
The middle class is made of natgas, which is interesting. You turn natgas into AN fertilizer and turn that into corn and turn corn syrup into lots of middle class biomass. Also you turn natgas into plastic consumer garbage and that gives the middle class something to advertise, make, ship, retail, purchase, use, aspire to... Without natgas that whole segment of society simply evaporates away. What kind of fish you got when you take the water out of the fish tank?
If India ever got a competent government, they might have a chance. (Perhaps similar to how AK Party managed to turn Turkey around in the 2000s---even though they've grown autocratic since.)
That's a big problem if your competitors are growing, but, they aren't, and even worse the worlds capacity for oil production, natgas production, fertilizer production, food production, arable land, drinkable water, economically exploitable oil and metal ores, all in decline, so maybe its not so bad. If you're running a pyramid scheme stopping the bottom floor is a big problem... and if its worldwide, its a problem everywhere, so the question is who's best positioned to survive, and thats Germany. Its not going to be... Mexico, or the US, or Bangladesh.
Or rephrased if you run out of working age jobs about as fast as you run out of working age people, no problemo. If you do the USA thing and get rid of 10 megajobs per decade and import 10 megaimmigrants per decade, you got a real big problem ahead.
I agree with you on India. Assume you're a space alien and you hear all about their population, their philosophical history, geography, natural resources, educational system, blah blah blah and the space alien asks "And India is the ruler of the world, of course". Well it never seems to work out for those guys, much like the continents of South America and Africa.
Oil is cheap right now. If it ever becomes rare, and thus expensive, everyone can just switch to nuclear. Once you have cheap energy, the other problems (fertilizer, ore, etc) are manageable.
So, (the rest of) the world won't decline.
Germany has huge problems. I lived there for more than two decades.