19 March 2014

Not Tonight Honey. No Interest.

Narrator: Return with us now to the thrilling days of yesteryear... Mr. Peabody (and Sherman...) please set the WABAC to 1790, France where we'll have some cake with Marie Antoinette.

Control Room: Ummm... Mr. Peabody is an animated dog, there is no WABAC, and Marie likely had nothing to say about cake and starving peasants.

Narrator: It's a bleeding metaphor, you stupid sod!! For the behaviour of those parasite Banksters!!! So shut up and get Mr. Peabody's ass in gear!!

Ah, got that out of my system. Time, once again, to go on An Albert Adventure.

The Banksters, and their political enablers have been going on and on about crushingly low sovereign interest rates, aka Treasuries. They keep beating their jungle drums for 10%/annum payment for letting their moolah sit idly by. (All the while, China is headed for its own over extended housing crisis; when will they ever learn?) Let's think about that for a minute, or two.

In classical economics, one is taught about IS/LM. The problem (among many, as the Wiki piece explains) with this construct is that it ignores the pressure of returns to real physical capital; the magnitude of such returns are the controlling factor (i.e., you won't get more than that), irregardless of what the finance folk insist. The tsunami of moolah which hit the US housing market, to some degree in response to Greenspan's cratering of Treasuries, was just a recent case of fiduciary capital avoiding physical investment (China, are you listening? Thought not. You're up next). Make no mistake (the major one made by Bankster and Quant alike): there is no real return on residential real estate (while one can make a tenuous argument for real return on commercial; although I don't buy that, either); the vig comes out of the pockets of mortgage holders, which is to say either rising wages or current consumption. With stagnant to lowering wages, folks used the Ponzi gains *for* consumption. The Titans were happy for the demand, until they needed a scapegoat to blame. In the end, real returns on physical capital controls all investment since this is the only way to increase output through investment.

Without growth in productivity in real production, there can be no returns, beyond simplistic avoided consumption. The right wing folks, not surprisingly, have been clamoring for just that. "Americans should save more!!!" Yet there are trillions of $$$ not being invested now? Borrowers pay the vig out of improvements in production or non-consumption (killing consumption, as one might expect, reduces return on the investment through the simple expedient of lower demand for output). Raising rates on Treasuries will simply divert ever more funds from production improvements to fiduciary robbing Peter (today's citizens) to pay Paul (tomorrow's). Naturally, the moolah hoarders, who always complain that high interest rates on Treasuries "crowd out" real investment, are now clamoring for just such rates; ignoring the plain fact that the Titans can't figure out how to make money on physical investment with rates near 0.0. Who's crowding out who? They possess no wage earning skills, and the intent to live the good life irregardless. Make 'em sell pencils at the curb.

Why might that be?

The answer: our Titans of Industry can't figure out how to make productive use of their profits (investible funds). Recall that the rush to US housing was driven by Greenspan's cratering of Treasuries. Viewed historically, and ignoring the huge volume of mortgages manufactured by the Banksters (the fundamental mistake), US housing was "nearly" risk free, and the assumption that no significant number of mortgages would go belly up at once made sense to both Banksters and Quants. There was nothing in the historical data to point to such. But then, there hadn't been such a massive fiddling with the rules of engagement before; as always, policy beat the crap out of data. There was also nothing in the historical data to evidence the tragic bifurcation of median house price and median income (thanks to the fiddling), which became clear in 2003, and screamingly obvious by 2004.

In the end, trillions of $$$ were, and are, seeking 10% return for doing nothing and taking no risk.

So, to the question: what would happen to the Banksters and Quants if, all around the globe, sovereigns borrowed no net money? All countries ran a balanced budget? What would they do? Apple, et al, sit on their own trillions of $$$, not being able to figure out what to do with it. What if there were no zero-risk 10% instruments? Wouldn't that force the Titans of Industry to actually earn their keep: making intelligent capital allocations? Which they surely avoid doing, like a dark ages peasant did plague corpses.

A death spiral of deflation seems most likely. Remember: when in conflict, policy beats data like a rented mule. The data say, "Titan, you must invest to earn your 10%". But the Titan, being in control of sovereigns and having no clue what to do with its moolah hoard, yet demands its 10% tithe. There are two avenues to that 10%: tax the populace sufficiently to transfer said 10% on nominal "borrowing" (the balanced budgets would remain, but the transfer is now obvious) from the populace to the Titan, or the sovereigns do no nominal "borrowing" and allow deflation to run rampant.

Dystopia for most, luxury for a few. But, in due time, ever fewer of the 1% would be able to afford luxuries. On the one hand, there would be rampant deflation due to lack of moolah in the hands of the masses, and the resulting collapse of demand. So prices fall. That's good for the moolah hoarders. Until it isn't. In due time, inventories are burnt off, but not replaced since real demand has disappeared. Take healthcare, for example. Most, save vaccines in particular, modern medicine results from massive investment in capabilities, financed by widespread demand for the resulting goods/services. It is the widespread demand which keeps average cost under control, despite what one might think about Medicare and Medicaid freeloaders. With such demand gone Poof!, average unit cost of nearly everything gets out of hand. Now, cost push inflation sets in, for those who actually have some moolah. Even the 1% eventually need Obamacare.

Will the Titans finally start converting fiduciary capital into real capital? That is the question. I think not, since capitalists have evinced an ever shrinking time horizon. A recent story (sorry, didn't save a cite) passed by, in which Silicon Valley VCs were forthright: why should I put my money into a capital demanding startup when I can put it into some knucklehead web app (aka, advert pusher) and get back ten times as much, with the same level of risk? Just as the US/Chinese housing markets went berserk under the fusillade of moolah, so too, in its time, will the web app. $19 billion for WhatsApp? I guess we're back in Kansas.

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