The dangers of exponential economic math

Got an hour to invest in your own future?  If so, this interesting video will probably be educational on many fronts.  Lebed’s stuff always appears a bit more dramatic than many people think it should be but I think that at some point within the next decade (perhaps a good deal sooner) there's a better than even chance that his drama might actually turn out to be understated.  If you choose to watch it then note he is calling for immediate hyperinflation which I think cannot happen as long as housing prices are still falling (and they most certainly are).  But after they do bottom then there is no doubt that we will see massive inflation (10-20% per year) or hyperinflation (20-200% per year) because money printing is all that the fiat currency con men really can do once the people are taxed to the limit. When people see money getting printed like that they lose confidence in the currency and begin to look for ways out.  Is it any wonder that the price of gold went from $35/oz in 1971 to $1350/oz today?  In case it's not immediately obvious, this has far outpaced the Dow Jones Industrial index even when dividends are factored in.  Gold is the escape hatch.

For people who are still putting money into a government controlled retirement account, think for a second what those levels of inflation will do to your savings.  Right now you can still take your money out by paying taxes and a 10% penalty (with other necessary preconditions).  Sooner or later the government will cut off that avenue of escape and that will be a major sign for me that massive inflation is very near.   I say again, retirement accounts are the only significant remaining source of wealth in this country now that housing equity has gone bust and so the government will at some point have to confiscate them in some form or fashion just like Argentina and many other governments have done in the past.  They will do it in the name of your safety but it will be handing the keys to the hen house over to the foxes.  The easiest way for them to do this will be to lock you into the account and then inflate the buying power of it away.

Underpinning my views is the fact that the national debt has gone exponential:

It was allowed to do this because all of the safeties and restraints on economic prudence were completely removed when we left the gold standard in 1971.  You can clearly see how the debt took off after that event from the following graph.  I am disinclined to believe that it is a coincidence that the debt began to unveil itself as an exponential function so shortly after that event occurred.  I just don’t think that we get 30 years of a certain behavior (1940-1970) changing so rapidly unless there is a good reason – some sort of trigger:

A closer inspection reveals the sad truth that exponentially higher debt is being required simply to maintain the status quo.  We do not have exponentially better anything (infrastructure, education, health care, etc.) because of exponentially higher debt.  We just have massive government that cannot exist as it has been without taking on ever higher debt.  The following chart overlay is good evidence of this.  The spikes represent recessions and the dips represent recoveries and even boom times. 

We had several rapid recessions just after leaving the gold standard but since then recessions happened about once every 10 years or so.  From 1965 to 1980 it didn’t take much government stimulus/intervention to recover as you can see from the slowly rising debt chart for that time period but as time went on it took exponentially rising debt in order to maintain the one recession per decade frequency.  I have to ask whether we ever really got out of a recession if we had to use the national credit card to do it (i.e. jobless recovery).  It looks to me like we’ve just been kicking the can down the road for several decades now but that exponentially rising debt will soon put a stop to it.  We are at a point where if the artificial stimulus even flattens then it will whack the economy like nobody living has ever seen before.

One of the big lies we are told is that during bad times the government has to borrow and stimulate - Keynesian style - in order to keep things humming but that we shouldn’t worry because when good times come we can pay it back.  The government thus represents itself as a giant economic shock absorber.  Unfortunately, it is the big lie because the economy is so much bigger than the government is.  The truth of my statement is right there in the data.  1995-2000 was the dot bomb boom fueled by Greenspan removing all the safeties and limitations from the fractional reserve banking system.  As a result, credit based money was flowing.  Boondoggles were flowing.  Anyone with a pulse could get a business loan.  Credit induced corporate profits were flowing and salaries were skyrocketing leading to a massive short term tax windfall.  It was such a massive (albeit unsustainable) influx of tax revenue that it even allowed President Clinton to take a victory lap for having a balanced budget.  Think about it.  Dot bomb was wild economic times like we may never see again in our lifetimes and the best we could do with all that additional tax revenue was to barely keep debt constant for 3-4 years.  So much for paying it down in good times.  This is not a shock absorber, it’s a one way ratchet.  It’s a bold faced Keynesian lie.

Of course, a fair economic analysis shows that all that really happened was that banks and corporations took on the debt instead of the government and the housing bubble was blown up.  When all of that bad debt failed it simply reverted to the government anyway.  So truthfully, banks and corporations can be thought of as having held onto the government debt during those years but in reality it was always destined to be government debt because otherwise the associated corporate defaults would have scared creditors away from the USA.  In other words, it was a financial shell game of “who owns the debt”.   It was always government debt in disguise.  Clinton's loud talk back then about never having deficits again was just more substance-free political posturing and grandstanding.  Clinton was a class A con man.

The most important aspect of this exponential debt expansion is NOT that the debt is getting very large but rather that it is approaching a breaking point (whatever that may be) a LOT faster than most people understand.  It is the time aspect we should be most concerned with.  Chris Martenson totally gets it and he has a great website that explains the coming changes.  He explains the time aspects of exponential math with a story that goes something like this:

Imagine a big water pipe that feeds a football stadium.  The pipe is about to spring a leak that will get exponentially worse over time.  Imagine that when the leak starts it will drip one drop of water the first minute, two drops the next, 4 drops the minute after, doubling each minute without limit. This is an example of exponential growth. Now imagine that you are chained into a seat at the very top of the water-tight stadium.  The leak begins dripping exactly at noon. 

Here’s the question: How much time do you have to free yourself from the seat and leave the stadium before the water reaches your seat at the very top? Think about it for a moment. Is it hours, days, weeks, months?

The answer: You have until exactly 12:49pm. It takes this exponentially growing water leak less than 50 minutes to fill a whole football stadium with water. That may seem impressive but the really important part of the lesson is that at 12:45 the leak has only filled 7% of the stadium.  This leads you to think that you have hours and hours of time left before you are affected so you don’t work as hard on escaping as you should be doing.  Unfortunately, the nature of exponential functions means that the stadium fills up only 4 short minutes later.

When you see someone who is supposed to be an economic authority say “I never saw it coming” you can bet that exponents were involved in the math somewhere.  The time to think about this stuff is now because when the problems arrive they will do so relatively suddenly, Madoff style.

Bottom line is that our debt cannot go up exponentially forever yet at this point it must go up exponentially in order to maintain the status quo in this country.  What cannot happen will not happen.  At some point it will become impossible to continue the exponential debt increase and it will result in a huge economic crash because government spending is just too big a part of our economy to live without at our current level of consumption. Government itself is a bubble that is mathematically guaranteed to burst.

Meredith Whitney video with Maria B. regarding state finances

This video is only a couple weeks old.  Meredith is a “numbers person” which is why her past calls on the banking sector were so incredibly accurate.  She also correctly predicted a bottom for banks in early 2009 on the basis that the government would bail them out.  In this most recent video she applies her numerical analytics to the states and has, apparently, rated the states in terms of financial soundness.  #1 is Texas in no small part to the fact that TX had its banking crisis in the 1980s and thus had more conservative banking rules in place.  Worst state of course is my birth state, California, whose corrupt government never saw a vote buying program that it wasn’t willing to spend money it didn’t have on.

Perhaps most eye opening is that Meredith draws a close parallel between the states and the banks pre-crisis.  The same kind of off balance sheet con games are being played by state bureaucrats as were being played by banking bureaucrats in order to cash in on the system.  I see it as all part of a larger problem.   The banks are marginal in the big picture relative to states so banks were hurt first and ultimately will be hurt the worst.  But states are in for some serious pain and there will be no easy solutions.

Lots of people talk about recovery, etc. but the way I see it nothing has been fixed yet.  The day of reckoning has only been kicked down the road a bit more.

http://www.youtube.com/watch?v=-sbk_Zlt9bI

Businesses flee California's taxation

I have written about this trend in the past but with major corporations throwing in the towel the CA government better get a clue before silicon valley becomes silicon wasteland.

http://nevadanewsandviews.com/2010/08/25/companies-fleeing-california-for-utah-over-confiscatory-tax-rate/

Obviously the software centric companies are the first to leave because they don’t have huge silicon fabrication plants or other manufacturing assets in place which can be impossible to move cost effectively.  This makes them canaries in the tax exodus coal mine.  But make no mistake: if the exodus is allowed to reach critical mass then CA will be screwed for many decades to come.  Each business that leaves means that the “fixed cost” of government has to be divided by the remaining tax slaves.  In this regard it can easily turn into a situation similar to that which has been seen with Florida condos. 

In case you were not aware, when the condos were full of owners the HOA fees were manageable because they were divided by lots of people.  But as people fled their plummeting condo investments, the HOA fees were considered fixed costs to be divided by those remaining.  This caused these ridiculous condo fees to skyrocket in a very short period of time.  In many cases the condo fees ended up being more than the monthly bank note payment.  The people who cut their losses early and moved on got out with minimal damage.  Those who failed to see the new reality got devastated because the more people that left, the higher the condo fees became for current and new prospective owners.  The end result was that the condo values had to fall to the point where bank note payment+HOA payment was still affordable.  Some of these places are nearly empty as a result.  The condo fee scam has made them un-sellable.  Eventually the HOA fees will not be paid at all.  Those collecting the HOA fees serviced their customers to death.

CA is treating government like a fixed expense, as if taxes were HOA fees that will be paid before anyone else gets anything.  What it should be doing is focusing on downsizing government, especially the government business of giving away money to social services whose real goal is vote buying.  One way or the other, CA government is going to get a lot smaller but the worst damage will be done by trying to stay as big as possible for as long as possible.  Once the jobs leave, good luck getting people to pay $300-$700k for a shoebox ranch home built in 1960.  People will follow the jobs.  CA legislators should be absolutely freaking out about the loss of Ebay, Electronic Arts (EA) and Adobe jobs.  These are high paying jobs which have low environmental impact.  Collecting taxes from these salaries is the easiest money a government could ever want.  People that make big salaries can buy expensive shoe box homes and pay property taxes on them.  But if the big paying jobs leave the state and the majority of the tax collection has to come from migrant worker salaries then good luck making ends meet. The fact that CA government is not even talking about it does not bode well for the future of CA. 

We are now in a very unique time here in the US.  This will likely turn into a big state vs. state struggle for survival.  The states with the best overall tax revenues will win and they will only win by stealing the best jobs and workers from neighboring states.  The way they will generate more overall taxes is to cut individual taxes and to make it up in volume.  That means that states will have to engage in beggar thy neighbor policies, providing all manner of long term incentives to attract businesses and workers. 

The states that figure this out the quickest will be the biggest winners and those who never figure it out will probably go bankrupt.  Sadly, CA appears to be a mania entering the decline phase.  The best thing CA voters can do for themselves at this point is to demand smaller government sooner rather than later.

China offering to prop up weakest players in Eurozone?

"With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter. "China will undertake a great effort to support euro zone countries and Greece to overcome the crisis."

http://www.foxbusiness.com/markets/markets/markets/2010/10/02/chinas-wen-offers-buy-greek-debt/?test=dcreport

The way I see it, the US oligarchy only cares about a recovery in which US hegemony is maintained.  Any recovery which results in someone else being seen as the new global leader will actually be considered a threat to US security IMO.  In other words, they really don’t care about recovery, they only care about staying in power.  

So what happens when someone else comes in to play the white knight that the US cannot play this time due to our own internal problems?  China certainly knows that the Greeks (and other PIIGS) are already in over their heads with debt and thus cannot afford to repay additional debt underwritten by the Chinese.  Chinese are not buying Greek debt because they think it is a good investment but rather in order to create indebted minions/allies in the game of global politics.  Greek leadership can easily become a puppet of the Chinese government if China becomes the lender of only resort to Greece.  I wonder how long until other PIIGS take the Chinese debt. 

If this happens, the US cannot openly complain about it.  That means our “leaders” will have to come up with some other response.  By no means will they just sit there and watch US hegemony slip away due to inaction.  They will justify any action they take in the name of protecting US security.  If you think about it, US hegemony and US security can easily be argued as synonymous by our oligarchs.  One way to foil China’s move would be to surreptitiously accelerate the collapse of the PIIGS (and thus the whole Eurozone) before China can stabilize it.  If I can come up with this analysis then you can bet 100 government “analysts” came up with the scenario years ago and have already set up trigger points at which action must be taken along with specific actions to take.

“Only the paranoid survive”

-Andy Grove, ex-CEO Intel corporation

Ecuador government welches on Wimpy Promises to police and other public "servants"

In response, the police staged an armed coup which was put down by the military.  These are the kinds of things that can happen when you promise people things and then come back later and tell them you were just kidding about those fairy tale promises…

http://www.bbc.co.uk/news/world-latin-america-11451470

When you read in media stories that there is unrest regarding “austerity measures” that is just doubletalk for “the government made unkeepable promises which it is now admitting were a pack of lies”.  No, the government should not lie to people.  No, people should not blindly believe what governments tell them, especially if the basic math doesn’t add up.  There was fault on both sides.  It’s a simple interaction between a con man and a victim who was willingly conned because the good sounding promises played to his greed.

Japan warns of Chinese military rise

http://www.bbc.co.uk/news/world-asia-pacific-11450791

Hmmm.  What’s the order here?  If I were writing the history book it might read something like this:

1. Japan screws up and preemptively strikes the USA during WW2 at Pearl Harbor.
2. Japan gets double nuclear smack down courtesy of Fatman and Littleboy.
3. Japan surrenders to USA.
4. USA behaves like victorious Romans of old, collecting the spoils of war capturing women and children as slaves, putting all the men to death and burning their villages is one of the first nations in human history to realize that all future value comes from human labor, that slaves have always been the best way to achieve cheap labor, and that dead slaves are of little use.  America also perfects the notion that the best slave is one who thinks he is free.
5. USA installs puppet government in Japan and then promises to protect it.  As a result, military bases go up in Japan and never leave forgives Japan and allows Japanese people to go about their way to develop themselves and their culture without any interference or strings attached. 
6. In 1950 the USA sends Demming to Japan.  He goes to impose upon them discipline in manufacturing that we ourselves lacked in many cases.  Demming’s job was to ensure that our war slaves served us efficiently.  Japan goes to work building cheap goods for US consumers. to help them better themselves out of the goodness of his heart and as an expression of his close kinship to the Japanese people.
7. Over the next 20-30 years, Japan becomes extremely efficient and productive at manufacturing causing the USA to become fearful about the Frankenmanufacturer that we created.  Steps are taken to crash the Japanese economy and to keep it down for more than 2 decades running but not before GM is dealt a death blow.  The slave uprising is thwarted but Japan’s utility as slave labor is diminished going forward.
8. After many years of America vilifying Chinese simply because they have a different political orientation than we do, Nixon turns to China as a new source of slave labor for USA consumers.  At the time, China is a serious backwater that has cheap labor but nearly nothing else to speak of.  The people are poor and uneducated and the leaders are corrupt making the Chinese easy to exploit.  A few Chinese at the very top become wealthy but most of the people continue to live hand to mouth to this very day embracing them in the selfless spirit of human kinship and love that has always characterized American politicians.
9. China eventually grows up in many ways, takes out Japan as the #2 economy of the world and then starts to thumb its nose at USA leadership.  Repeated “suggestions” over a period of several years that China is manipulating its currency to the detriment of the US economy fall on the deaf ears of Chinese leadership who are quietly but rapidly building up internal infrastructure, a massive military strike capability, and a big gold reserve.
10. Opting for an indirect initial confrontation, the USA orders Slave Japan to pick a fight with Slave China.  In reality it is just a political shot across China’s bow by the USA.  China knows full well that the US military is finishing its baseless war in the middle east and has some spare time on its hands.  Slave Japan agrees to participate because China has been pushing its newfound economic and political strength in the region for the past few years and also because it knows that the USA is still required to defend Japan should a pissing match turn into a shoving match or a fist fight.  Japan and Chinese boats meet in disputed waters literally in the middle of nowhere. The Japanese captain, who is rumored to be a military officer on a supposedly civilian fishing boat, actually rams the Chinese patrol boats thus conveniently creating an international incident at the same time that US moneymen are publicly vilifying Chinese monetary policy and US congress is legislatively enabling Obama to start a trade war with China.
11. Japan’s Prime Minister goes public with fears that Chinese are amassing a scary military capability.  Intelligent people are wondering how a small, non lethal boating incident in the middle of nowhere can possibly have turned into such big stink.  At the same time, supposedly random people off the Japanese streets surround a bus load of Chinese tourists and begin to kick the bus and shout insults.  The bus must have had a big sign on it that read “evil Chinese civilians inside” when it drove into a section of town where there were a bunch of unemployed Japanese people just milling about with nothing better to do.  The USA knows that if tensions get too high that capital flight will occur from China and their pumped up economy will crash potentially to the point of destabilizing its disobedient government.  

Wondering how many more convenient coincidences will happen this year...

~~~~~

Top 10 signs of a precious metals bubble

With so many people beginning to reawaken to the importance of gold, the noise level was bound to increase.  People who hated gold a couple years ago are becoming big fans all of a sudden.  They don’t know why they are fans except that the price is going up.  They are just jumping on the band wagon and so they are dangerous people to listen to about anything.  One way to cut through the noise is to look into the past writings of people who turned out to be correct on the subject and who were telling their story when others were laughing at them.  Peter Schiff is one such individual.  Like any analyst, Peter isn’t always right about everything but like any good analyst he’s right a lot more than he is wrong.  Also, when he is wrong it is generally a matter of timing, not faulty logic or being an agenda-driven con man.  Also, Peter provides sound reasoning to back his views and there is a lot of good old fashioned common sense to be found there.

So here is an article he wrote in 2006 regarding 10 tongue-in-cheek signs to look for so that you can determine if gold is in a bubble.  Of course, the real signs to look for are informally given before the actual top 10 list and the list itself is really just a way to say that metals must again go main steam before there is any chance they can be a bubble.  Note that this was written during a time that he was (correctly) saying both the stock market and real estate markets were bubbles in progress.  It’s not often that you find an analyst whose overarching view of the economy doesn’t affect his view of each of the smaller markets therein. 

http://www.europac.net/commentaries/top_ten_signs_precious_metals_bubble

Gold will have pullbacks during its ascension but I don’t think it is anywhere near a speculative peak simply because I don’t think the dollar is anywhere near its full debasement.  Most people simply have no idea about all the risk factors in our super leveraged global economy that could come crashing down.  And even if it doesn’t crash suddenly, there is zero doubt that the leverage is being systematically and structurally dismantled. 

Take the $300 trillion in derivatives contracts that our government estimates exists.  Other informed estimates have come in as much as 4x higher than this government number but, hey, who really knows because it’s all completely unregulated!  All we do know is that the numbers are beyond huge.  Using the US government numbers, if just 4% of those contracts (they are really a type of insurance policy) go bad (i.e. have to be paid) in aggregate, it represents a wealth loss equivalent to the national debt.  Where is the money going to come from to pay this when government steps in to take on the loss in order to “save our system” at all costs? 

The economic crisis is finally making government wake up to this threat and so they are putting regulations in place to regulate (and thus greatly reduce) these transactions.  Of course, doing so is deflationary.  A derivative is a (Wimpy) promise to pay should contractually defined conditions occur and thus it has to be viewed as a form of conditional credit (this definition assumes that there is not enough cash on hand to pay the promises as was certainly the case for AIG).  However, the real deflationary aspect of reducing them is that they are primarily used as hedging mechanisms for risk taking activities that directly increase the credit supply (and thus the money supply).  In other words, leveraged gamblers buy lots of stocks and other financial assets on credit and use the derivatives to reduce their downside risk in the event that they gambled wrong.  If these insurance contracts are reduced then there must be a corresponding reduction in the risky economic activity which they were designed to support. That is not conditionally deflationary, it’s directly deflationary.

Deflationary activities reduce the money supply and thus slow the economy down.  In response the government will have to debase the currency in order to re-flate everything lest the banking system crash due to housing price reductions that will need to be marked in their books (thus rendering them insolvent).  In other words, the status quo government at this point has little choice but to betray those who thought they could safely save for their long term retirement needs using dollars.  Someone will have to pay for this mess and inflation has always been the easiest way to steal from people.  On the positive side (if you can call it that), inflation steals from everyone, not just US citizens and US taxpayers.  Anyone who holds the currency is a victim so we will spread the pain around.  Of course, the net effect is to make everyone in the world more interested in buying metals for their long term savings given that fiat currencies around the world are being exposed as fraudulent scams.

My current outlook for gold:

- Short term: wait and see.  The chart could be forming a pattern that would signify a short term peak with the possibility of a significant pullback but it has not been confirmed technically yet.  In opposition, silver just broke out to a new high thus confirming gold’s long standing breakout.  Time is needed to get a better view here.

- Long term: gold is very cheap even at current levels given the unfixable structural problems with all fiat currencies globally.  Unlike real estate, gold does not have any carrying costs such as maintenance and property taxes.  Gold is by far the best asset one can have for building up long term retirement savings.  It places your retirement out of reach of government’s greedy reach.  Ideally it should not be viewed as an investment or a way to make money.  It should be viewed as another type of universally fungible money which cannot be debased by corrupt government politicians.  It is a way to keep what you already earned, nothing more.  Dollar cost averaging into gold is going to be a winning strategy for years to come IMVHO.