Courtesy of The Automatic Earth.
Dorothea Lange No food, no work, baby died, to be sent back to OK from CA Spring 1937
Just a bunch of numbers Reuters published today. Read and weep. While remembering that this spring, after that horrible winter that threw the recovery so terribly off course, would see pent-up demand go crazy. That after the Q1 GDP growth, which has by now been revised to -2% after initially having been predicted to be in the 3%+ range, Q2 would certainly, according to pundits, economists and government agencies, top 3%, if not more. We already know for a fact that’s not going to happen. Unless the US grows faster in June than China did in its heyday. The American economy is getting very seriously hammered, and nobody with access to all the right channels will ever let you know about it other than in a long range rear view mirror where things always look smaller than they appear. The American consumer is necessarily getting hammered just as badly, but as long as the message remains one of growth, bread and circuses (or pink slime and Kardashians), (s)he will wait it out until that glorious promised tomorrow on the horizon just around the corner arrives.
May Home Construction Data Paint Gloomy Picture
U.S. housing starts and building permits fell more than expected in May, suggesting the housing recovery will likely remain slow for a while. Groundbreaking for homes fell 6.5% to a seasonally adjusted annual pace of 1 million units, the Commerce Department said on Tuesday. March’s starts were revised down to show a 12.7% increase instead of the previously reported 13.2% rise. Groundbreaking for single-family homes, the largest part of the market, fell 5.9% in May to a 625,000-unit pace, while starts for the volatile multi-family homes segment decreased 7.6% to a 376,000-unit rate.
Permits to build homes declined 6.4% to a 991,000-unit pace in May, pulling back from the 1.06 million units touched in April. Economists had expected permits to dip to a 1.05-million unit pace. Permits for single-family homes rose 3.7% to a 619,000 unit-pace. They continue to lag groundbreaking, suggesting single-family starts could fall in the months ahead. A survey on Monday showed confidence among single-family home builders increased in June, but fell short of reaching the threshold considered favorable for building conditions. Permits for multi-family housing tumbled 19.5% to a 372,000-unit pace.
Michael Snyder throws together some numbers on US debt, and I’m not even sure he counts all entitlement programs in the proper manner.
Total Debt In America Hits A New Record High Of Nearly 60 Trillion Dollars
What would you say if I told you that Americans are nearly $60 trillion in debt? When you total up all forms of debt including government debt, business debt, mortgage debt and consumer debt, we are $59.4 trillion in debt. That is an amount of money so large that it is difficult to describe it with words. For example, if you were alive when Jesus Christ was born and you had spent $80 million every single day since then, you still would not have spent $59.4 trillion by now. And most of this debt has been accumulated in recent decades. If you go back 40 years ago, total debt in America was sitting at about $2.2 trillion. Somehow over the past four decades we have allowed the total amount of debt in the United States to get approximately 27 times larger.
Total consumer credit in the U.S. has risen by 22% over the past three years alone, 56% of all Americans have a subprime credit rating, 52% of Americans cannot even afford the house that they are living in. There is more than $1.2 trillion dollars of student loan debt, $124 billion dollars of which is more than 90 days delinquent. Only 36% of all Americans under the age of 35 own a home, a new record. US national debt is $17.5 trillion dollars. Almost all of that debt has been accumulated over the past 40 years. In fact, 40 years ago it was less than half a trillion dollars.
By now I’m thinking it’s no wonder the housing numbers for May were so atrocious. What else can you expect? Michael also points to a WSJ article from May 2013 on global debt numbers:
Total World Debt Load at $223.3 trillion, 313% of GDP
Economists at ING found that debt in developed economies amounted to $157 trillion, or 376% of GDP. Emerging-market debt totaled $66.3 trillion at the end of last year, or 224% of GDP. The $223.3 trillion in total global debt includes public-sector debt of $55.7 trillion, financial-sector debt of $75.3 trillion and household or corporate debt of $92.3 trillion. (The figures exclude China’s shadow finance and off-balance-sheet financing.) Per-capita indebtedness is still just $11,621 in emerging economies (and rises to $12,808 if you exclude the two largest populations, China and India). For developed economies, it’s $170,401. The U.S. alone has total per-capita indebtedness of $176,833, including all public and private debt.
Every child born in America has a $176,833 debt sticker on its head. But wait! Central banks to the rescue! As I wrote yesterday, US and UK and Japanese and Chinese government debt, which still keep growing very rapidly, have increasingly been swallowed up whole by their respective central banks, which are now well on their way to buy up their own and each other’s asset markets too. And that, too, increases debt, and not a little bit, though it’s perhaps through a backdoor. The process keeps the money- and powerholders of a present failed and long since broke(n) system in place at a huge cost to everyone else, including future generations. And perhaps the only hope of escaping it is a crash, which will be far more severe than merely heartbreaking. Excerpts from a Nassim Taleb and Mark Spitznagel discussion explain how that might work.
Inequality, Free Markets, and Crashes
Mark Spitznagel and Nassim Taleb started the first equity tail-hedging firm in 1999. Since then these two friends and colleagues have helped popularize so-called “black swan” investing, with Spitznagel as the founder and CIO of hedge fund Universa Investments and Taleb as an academic and author of The Black Swan. The two men recently sat down to discuss Spitznagel’s new book, The Dao of Capital.
Nassim Taleb: Mark, your book is the only place that understands crashes as natural equalizers. In the context of today’s raging debates on inequality, do you believe that the natural mechanism of bringing equality — or, at the least, the weakening of the privileged — is via crashes?
Mark Spitznagel: … one can absolutely say logically and empirically that asset-market crashes diminish inequality. They are a natural mechanism for this, and a cathartic response to central banks’ manipulation of interest rates and resulting asset-market inflation, as well as other government bailouts, that so amplify inequality in the first place. So crashes are capitalism’s homeostatic mechanism at work to right a distorted system.
Taleb: I see you are distinguishing between equality of outcome and equality of process. Actually one can argue that the system should ensure downward mobility, something much more important than upward one. The statist French system has no downward mobility for the elite. In natural settings, the rich are more fragile than the middle class and we need the system to maintain it.
Spitznagel: … what’s hidden beneath all the aggregate income-inequality data is much cross-sectional downward mobility, in that most people in the right tail of income spend very little time there. The transience of success is assured by natural entrepreneurial capitalism, and is precisely what works about it: unseating the top, driving out the lucky and unworthy. Without this dynamic, capitalism doesn’t work. It isn’t even capitalism, but rather oligarchic central planning. Yet modern government chips away at this dynamic in so many ways, most significantly by providing floors and safety nets to crony bankers and other financial punters.
That we so casually ignore the implications of this goes to the main point of my book: In the words of Bastiat, we pursue a small present good which will be followed by a great evil to come, rather than a great good to come at the risk of a small present evil. The latter is what I call roundaboutness, which is central to strategic decision making, especially investing. It is about counter-intuitively heading right in order to better go left, or taking small losses now — and willingly looking like an idiot — to build a strategic advantage for later. In Daoism it is wei wuwei or shi. In economics it is Robinson Crusoe, who starves himself by not spending all his time fishing by hand and instead spends time making a boat and net, in order to catch many more fish later. We have roundaboutness to thank for civilization itself.
Taleb: … we need a “negative state” for law enforcement, something like the U.S. federal state or the traditional empire during Pax Romanaor Pax Ottomana. In this idea the role of the state is protection, not to promote education or, say, corn fructose, which we know have worse adverse consequences when coming top-down from a powerful centralizer and, hence, implemented at a large scale. In my work the central mission of the state is to protect the environment, to shield me from irreversible harm done to my backyard by people who don’t have skin in the game and are protected by limited liability. There are things that can be done by the state, and only the central state. Do you agree?
Spitznagel: I definitely agree that the only conception of the state that makes any sense is the “night watchman” variety, which exists only to enforce the rules of the game rather than trying to pick the winners and losers (whether it’s financial institutions or monoculture crops). There is a deep tradition in classical liberalism and modern libertarianism that stresses the importance of limiting government action to the defense of life and limb — a defense of “negative liberty” — rather than the “positive” conception where it is the job of the government to promote literacy, full employment, equality, and so forth. [..]
… I see the whole “R>G” [meaning return on capital is greater than the rate of growth] thing as taking bubble observations and rationalizing their extrapolation forever, thus simultaneously neglecting both the incidence of asset bubbles and what’s so bad about them. Such enormous shortsighted errors follow from the noisy duration of the “long term.” And exploiting these errors is the name of the game. In everyone’s scorn of the roundabout lies its greatest edge.
The main metaphor of my book is the “Yellowstone effect”: A massive fire in Yellowstone Park in 1988 opened the eyes of foresters to the fact that a century of wildfire-suppression, and with it competition- and turnover-suppression, had only delayed, concentrated, and by far worsened the destruction — not prevented it. This isn’t just about dead-wood accumulation creating a fragile tinderbox network. The real issue is how our tinkering artificially short-circuits the fundamental capacity of the system to allocate its limited resources, correct its errors, and find its own balance through the internal communication of information that no forestry manager could ever possibly possess.
But that capacity is still there, and homeostasis ultimately wins through a raging inferno. This is a cautionary tale for our economy. A crash, or the liquidation of assets that have grown unimpeded by economic reality (as if there were more nutrients in the ecosystem than there actually are), looks to academics and bureaucrats – and just about everyone else as well – like the system breaking down. It is actually the system fixing itself.
Taleb: … First, intervention — in general, whether medical, governmental, or other — has side effects and needs to be treated exactly as we do with other complex systems: only when extremely necessary. Second, counter to naïve conservatism, nature is not conservative, it destroys and creates species every day, but it does so in a certain pattern: Its destruction has the effect of isolating the system from large-scale harm. It does not try to preserve the past; it only tries to preserve the system. Finally, liberty is not an economic good, but an existential one. The economic good is a mere bonus. The argument that liberty is good for economic activity or for growth of the system feels lowly and commercial. If you were a wild animal, would you elect to be in a zoo because the economy is better over there than in the wild?
It may seem unacceptable, or tough, or unfair, that the only way out of the present illusionary economic system, and all the trinkets we have to thank it for, is by a giant crash. But once you realize that it must crash no matter what, and that you are really nothing but an animal caged by the system, what should you choose? I think perhaps it’s a choice between your weaknesses and your strengths. Though I know it’s not nearly as simple as that, because the crash will erase much of what we hold dear, for whatever reason we do that. It’s probably good to acknowledge that the choice is not between crash or no crash, but between weakness and strength, and that a crash is a system fixing itself back to health, something that has a lot of positive connotations, even if that is the only positive feature it has. Wait, there’s one other: our children will see a lot of the debts they are now being born with, disappear. But it will come at an unprecedented price.
