Leverage, Risk and the Future

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Not sure if this is the right place. Michael Burry, MD, from the Big Short, has a few prescient words about the state of the global economy.

Well, we are right back at it: trying to stimulate growth through easy money. It hasn't worked, but it's the only tool the Fed's got. Meanwhile, the Fed's policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.

So no, we're not going down now. But eventually, yeah.

There's nothing new about negative real interest rates, which is quite simply when the rate of interest is below the rate of inflation. A few years ago in the UK inflation hovered between 2% and 5%, but the Bank of England's Base Rate was 0.5%, ie a negative real interest rate of between 1.5% and 4.5%. For a considerable part of the 1970s interest rates were in the 10%-14% range, but inflation averaged around 20% for much of this period, so again a strongly negative real interest rate. Economists of the Keynesian outlook (ie most of them) tend to approve of this state of affairs as it discourages saving, promotes spending and dilutes the debt which would otherwise overwhelm the finances of individuals and the state.

I wonder if the writer you quoted was thinking more of negative nominal interest rates, ie when the Central Bank sets an actual negative rate. This is already the case in Denmark, Sweden and Switzerland, but could become the 'norm' in developed world economies if even a moderately severe recession comes along in the next few years. I'm not sure some 'emerging' economies with high inflation and weak currencies could survive negative nominal rates though. I think he's right about the potential problems - it could be a case of the cure being worse than the disease.

If all this does come to pass, it's good remember that the Fed's board overlaps highly with those of the largest banks and it is not a government agency. I'm sure that when capitalism does finally fall apart, those decision makers will be just fine...

China dropped 7% and they stopped trading. It will hit here in three hours.

No interest money buying everything, making the rich richer, till the market drops, and the debts are still real.

That's why Corporate share-buy-backs are at all-time-highs, not to mention massive M&A activity. Why wouldn't they when they can borrow @ or near ZERO%?

Oh and remember, the debts are only real for the taxpayer.
You know the drill....privatize the winnings, socialize the losses.

So let's perform a thought experiment.

The majority of the G20 move to NIRP(nominal and real).
QE continues to have an ever diminishing effect over time.
Sovereign debt continues its Lunar trajectory.
Price discovery remains broken.
Fed is already levered 78 to 1.
Japan has already done 25% of their GDP in QE.
China has 68 000 000 empty flats, in their slightly over-built RE sector.
The numerous housing bubbles in UK, Hong Kong, Australia, Sweden, Canada, et al. teeter on the brink of imminent collapse.
The middle classes continue to shrink.

Where do we go from here?
Is there any outcome that isn't a disaster?

We have been here since the crash, QE and other programs only covered over the problem while making it worse.

There has been no recovery. It is time in the business cycle for another recession.

Japan beat us to the Zombie Economy by twenty years. We followed their lead and got the same results.

Capitalism is creative destruction, once the Moral Hazard of government picking winners and losers happens, it is no longer Capitalism. It is Cronyism, it is Kleptocrats, it is a gang of people with friends in government stealing from everyone else.

This parasite class will never stop. They will suck the life out of America.

Do you think the Globecon becomes a Zombie like Japan for an extended period -OR- do you think there will be a crash/collapse(2008 Remix)??

A politically impossible solution to improve domestic economic health would be to impose a special wealth tax or limit the deduction for debt. Use the tax revenue to pay down the 3 trillion dollars spent on the Bush era wars and invest in upgrading our worn out infrastructure.

Actually using fiscal policy is one of my silly little day dreams.

The IMF agrees with you and has proposed a special wealth tax as a measure for all developed economies. They have also recommended drastic increases in property tax levels.

I think that those measures will be used after the confiscation of deposits/pensions (ie. bail-in) that they have already codified in law for the next time the SIFI's/TBTF face insolvency.

I suspect you will get your wish, fairly soon.

What wish is that? All I want is a government that helps all its people prosper in the modern world.

Monetary policy is used because it does not appear as spending in the Federal budget. Our elected officials do not need to craft legislation or make difficult votes. The trillions lost by savers with low interest rates is not seen as a tax. All they talk about is lower borrowing costs. Monetary policy is a hidden tax on savers and a tax subside for borrowers.

I am not sure what economic apocalypse you are concerned about? Bad things happen, people get hurt and somehow we muddle through. History does not always repeat, but it does rhyme.

Having a policy would help.

That is, one that covers the costs of being a country.

What we got was tax cuts for the rich.

What we need is more money in the hands of spenders.

Sending jobs abroad only benefited a few, and harmed many.

The result was income tax no longer covered the costs of government.

Hope got us twice as deep in debt, $10 Trillion added on Obama's watch.

We cannot continue on this path, and the only thing left to tax is assets.

Early on Trump proposed a 14.2% tax on Net Worth, which would pay off the National Debt, fully fund Social Security, and spread out as 4% a year for four years would eliminate our debt and produce a few Trillion for repairing our neglected country.

Congress would have to tax income to fund the government, 100%.

The good is paying off the debt would make the money worth more. It is a tax with an instant rebate.

A second effect is, people would want to borrow money to pay the tax. Savings and CDs would go back to 5% return, which would mostly go to small holdings.

Half of America has no net worth. They do not pay income taxes. It would be a tax on the winners of the last thirty years.

We have real estate bubbles that break, we have downturns in the stock market, having your Net Worth drop 14.2% is not a disaster.

2008 saw a 50% decline in housing and stocks, the result of bad policy, we have suffered for years but lived.

A planned decline of 4% a year would not be a disaster.

A Tariff on imports would be a new income source. Adding 5% to the wholesale price, is 1% of the retail price.

It is not a market killer, but if the Tariff income was used to offset the business income tax rate here, that plus the cost of transportation, the cost of managing something on the other side of the world, would make American manufacturing competitive.

Big items, cars, Germany and Japan have manufacturing plants here.

Only 60% of our people are employed, only 50% pay tax, and the only way to raise tax income is paying higher wages. We can increase the total workforce, and even if they do not pay income tax, they do pays sales tax, Social Security, Unemployment, which covers the cost of government.

Our system is without a doubt a Ponzi. Government, Cities, and Employment only work when the number of people increases. It works when the income per person increases.

We got here over policies that got votes, but tax cuts for the rich did not trickle down, the sands of time did, and here we are.

We are facing an age of robotics where labor is not going to be in demand. We need a system that directs some of the national income at the bottom half, soon to be three quarters, to make less income distance between the top and the bottom. It will enhance our ability to find the new things of the future.

This is not an impossible situation.

You make many good points. My biggest fear is from a black swan event. Something like, Saudi Arabia goes to war against Iran or North Korea launches an attack. Some big country or bank goes into default. You get the picture.

Saudi Arabia has been at war with Iran and Russia for over a decade. Lebanon, Iraq, Yemen, Syria. They also funded thousands of Mosques, Imams, which lead to an over production of oil to pay for it.

Now with falling prices they have to produce more.

The United States paid for Iraq and Afghanistan, which hollowed out the economy, along with offshoring jobs which lead to the 2008 crash. A zombie is the living dead, our economy might be a Ghost. A zombie is stable, half dead, but stable.

Economics is a recent Religion, in which the strongest prayer is to ignore it and leave it alone.

The Keynesian Heresy claims that a falling economy is the place to throw borrowed money, preventing a bottom, while rising markets should be starved, taxed, and the money spent on something Non Tangible. This is to prevent inflation.

During a boom is the easy time to borrow excess Capital, and fund something like a Super link between the Port of Houston and Chicago. A proposal got to the drawing stage of a mile wide Interstate with truck only lanes, high speed passenger and freight rail, pipelines for oil and gas, water, an electric backbone grid, which housed all the services needed to operate. It was judged inflationary. It would drive up the price of Labor, Cement, Steel, and distort the labor market for years.

The main action of inflation is reducing the value of debt. It also raises wages, and combined with a created labor shortage, creates more jobs.

We could do with a decade of rising numbers. We get the wrong kind.

Bush had no problem going three trillion in debt for his wars.

When Obama took office during the worst economic downturn in world history, he had no problem finding trillions for his shovel ready projects, as he shoveled borrowed money into the banks and Brokers, so they could buy up everything during the crash they caused.

For that kind of money more than Houston to Chicago could be connected. Three east west. and four north south, and we would have a brand new energy grid. We would have trains half the speed of planes. We have self driving cars, trucks are next. Truck Bots running 75 on truck only roads, stopping only for fuel.

Junctions would be logical places for new cities. Lots of underground services leaves the surface free for a park like setting. Subways can replace surface roads. We can be Morlocks! Give me a few hundred years and I can produce old growth forests, with cities beneath them.

Robotic factories work underground. connected to a rail line, raw materials in, finished goods out.

Liquid Nitrogen supercooled power transmission, and the excess gas for Nitrogen storage, where things do not age, rust, get damp. It is a good way to store grains long term. We have no food reserves, and if some Monsanto experiment wiped out the seed crop, we have nothing.

We need to hire people to pretend to be adults.

Sry

I got the impression that you were advocating that the gov't should impose a special wealth tax....that you were in favor of that action(ie. your wish).

Pls forgive my error.

I'm confused by your question.
There is only one economic crisis I am 'concerned about' and that is the global one that is to come.

The SIFI's will obviously face insolvency again and I was just referring to some of the responses of gov'ts to their upcoming insolvency, which gov'ts have already codified into legislation.

Of course that is a separate issue from the sovereign and municipal debt levels which will lead to a significant alteration of the Globecon down the road, when deleveraging and austerity are forced onto the system.