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Flow of Funds Analysis - Big Declines in Credit Market Debt (except for Government)

Thursday, September 17, 2009, 1:17 PM

Nearly every day I am writing for enrolled members in the Martenson Insider area of the site.  Here is an example from today.  ~ Chris.


The Flow of Funds report covering the second quarter of 2009 (through June) was released today by the Federal Reserve and it revealed yet another retreat in total credit despite the heroic levels of state and federal government borrowing.

One of the better windows we have into the macro credit and borrowing universe is a quarterly report put out by the Federal Reserve called the "Flow of Funds" report. While it is a bit dated already (the report covers through the end of June) it is a great snapshot of the big trends and can tell us much about the general direction in which we are headed. This report was released today (9/17/2009) at 12:00 p.m.

Here are a few of the fascinating findings…

While total credit market debt was down by -$122 billion from Q1 to Q2, or slightly less than a quarter of one percent overall, there was quite a bit of variability across all the sectors.

A quick explanation: the Flow of Funds report has two main sectors; "non-financial" and "financial."

  • In the non-financial sector (about 2/3rds of the total) we have households, non-financial businesses, and government (state and federal).
  • In the financial sector (the remaining 1/3rd) we have banks, holding companies, insurance companies, and the like.

Interestingly, the financial sector recorded an amazing -$493 billion dollar drop (or 2.9%) in the total amount of credit from the first quarter to the second.

The non-financial sector, naturally, made up the difference and had a $316 billion dollar increase.

However, there's a wrinkle to the story about this increase.

It's a tale of two parts. The government part (state and federal combined) increased by +$390 billion while the household and business parts fell by -$74 billion. Summed together we get the $316 billion increase.

As I wrote a while back in one of the more important reports I wrote this year entitled "It's Not Over - The Collapse in Household Credit Says So" , the most important determinant of recovery will be whether or not consumer credit will expand.

After all, since our money is debt, then increasing the amount of debt is an essential component of the very basis of our financial markets.  After all, if everybody is expecting a few percent return on their bonds and equities, but the money supply is contracting, then quite a bit of disappointment is in store for whomever is expecting positive returns.

For now, the government and the Federal Reserve, like nearly all of their major foreign counterparts, are busy stimulating and bailing and borrowing to fill the void left by the dearly departed corporate and public borrowers.

These next two figures showing the year over year change in household vs. government borrowing tell nearly the entire tale.

That's the big story right there, in bold green and red lines.

Households have reversed their previously uninterrupted, decades-long accumulation of ever more debt and government borrowing has countered this by a nearly ten to one margin.

This is really just a continuation of yesterday's post about the cost of the recovery (The Recovery Cost Too Much), but I've been anxiously awaiting today's report so that I could show it to you in pictures.

Conclusion

The Flow of Funds report for 2Q 2009 reveals that credit market borrowing has been shrinking for nearly every sector but government.

While it is certainly possible for the government to apply such Keynesian heroics for a while, it is also true that it cannot do so forever. Sooner or later the sputtering consumer portion of the economic engine is going to have to catch to life or the government's efforts will prove to be an expensive and possibly dangerous miscalculation.

Every report that you will soon read about a recovery in GDP must be assessed against the charts above. Can we really call an enormous increase in government borrowing the same thing as legitimate economic growth?

If the answer is "yes" then why do we even bother with working for pay when the answer is that nobody needs to work and we can all live off of fat government contracts?  Obviously that is a fantastically out-of-kilter world-view but if we are to count the next few positive GDP readings as real, then it means that we accept this view as legitimate.

Since it is not possible for the government to become the perpetual source of all new borrowing, for the old economic paradigm to work it is imperative that consumers and businesses pick up the borrowing baton and race off with it.

However, as many outside of the main economic echo chambers have already divined, it may simply be that there is a "new normal" out there that does not include a return to the former trajectory of borrowing.  If so, then the government attempts to "plug the gap," while crossing their fingers and waiting for everyone to get back in the race, will fail.

I have resolved myself to a new normal, a much lower normal, and my main concern centers on whether the government will arrive at the same conclusion before the dollar is ruined, or after.

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136 Comments

SagerXX's picture
SagerXX
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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

CM wrote:  "I have resolved myself to a new normal, a much lower normal..."

I think that sums up what the most rational and constructive response to the present/future is.  It where my wife & I are going (and increasingly, where we are).

Viva -- Sager

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

It does indeed look like a deflationary mindset has been adopted by the banks and the consumers, but the government has taken this as an opportunity to go on a spending spree and force us to take on more debt. 

Save OR Perish -vs- Spend OR Perish

The Fed/Gov have done an outstanding job at making us fear what we know is the right thing to do, which is to save our money and avoid more personal spending and debt. In just 6 months the fear of losing money by being in the market has been completely usurped by the fear of losing money by not being in the market. 

Unbelievable.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Delevering and yes the goverment is trying to pick up the slack.  The economic cycle has turned up and bank lending as it always does will lag. Keep in mind and I'm not sure how this factors into Chris's flows. But credit spreads have tightened dramatically.  BBB bonds yielding 25% six short months ago are now yielding 10%.  What does this mean?  Money is pushing out of treasuries and into riskier asset classes.  This actually started to occur late in 08 and we are now starting to see the benefits...and the goverment spend is adding a kicker.  Banks are stuffed with cash and I suspect demand for that cash will pick up as  many of 10 15 20% of the people un-employed will  surely start business's inovate ect. and existing business will borrow and invest.  The "growth" is only now just getting started.

If you are truly concerned and think the US will implode have some physical gold to hedge that risk.  But depending on your situation if you put to much capital to work in any one are than you likely are creating a risk somewhere else.

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

In my first post  someone asked me to debate Chris’s points:  So here goes.  By all means please debate. 

First is Chris's chart he states by knowing upper limits the chars are valid.  Please tell me how you can you even begin to know upper limits?  People, population, or M3.  You cannot know the upper limits because u can't begin to know through human innovation how much can be produced with new technologies.  Ie...how much corn did an acer of land yield in 1930 vs 2010?  Peak oil???  First how much oil can we now get at with new technology and furthermore how many miles can we now get out of a carbon molecule?  On upper limits of currency?  He is right in saying inflation is always a monetary phenomenon.   Too much money chasing to few goods you get inflation and deflation the other way.  We have enormous capacity right now.  Oh and the 342% of debt to GDP is joke.  To factor in future liabilities of s.security and Medicaid programs makes a HUGE assumption that we will not be able to take steps to pay for those.  Ie...push out benefits from 62 to 67.  What would that do.  Absolute debt right now is maybe 11t in a 14t trillion economy.  So more like 90% public to GDP.  Oh and by the way US household NETWORTH is just below an all time high.  Do you think maybe this country has a few assets behind that personal debt that might be of value?  Chris do me a favor add up all the tangible assets the US owns than subtract the debt.   Do this so your readers will know the US by far is net richest of any place on the planet or in history for that matter.

On the dollar?  How many times have you heard we are losing or manufacturing edge to cheap labor around the world?  For decades.  Well what  actually has occurred we have outsourced production and we reap the benefits through cheap labor along with real productivity gain we now enjoy much more material than we did even 20 30 years ago.  No as the dollar weaken our incredibly hard working efficient work force gains a pricing edge around the world and at the margin our exports absolutely soar with each tick down of the buck.  The downside is it does work to reduce our wealth as what we import cost more.  But frankly many other countries (china) anyone has been pegging their currency while we let ours float.  I would much rather have a strong dollar but the bullish secular increase of the dollar is over and I agree will see an orderly decline might even get a bit scary…but keep mind the US has tremendous assets and our dollar weakens they become cheaper to the world which like the S&P at 666 cooler heads will prevail. 

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matthewr99
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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

In my first post  someone asked me to debate Chris’s points:  So here goes.  By all means please debate. 

First is Chris's chart he states by knowing upper limits the chars are valid.  Please tell me how you can you even begin to know upper limits?  People, population, or M3.  You cannot know the upper limits because u can't begin to know through human innovation how much can be produced with new technologies.  Ie...how much corn did an acer of land yield in 1930 vs 2010?  Peak oil???  First how much oil can we now get at with new technology and furthermore how many miles can we now get out of a carbon molecule?  On upper limits of currency?  He is right in saying inflation is always a monetary phenomenon.   Too much money chasing to few goods you get inflation and deflation the other way.  We have enormous capacity right now.  Oh and the 342% of debt to GDP is joke.  To factor in future liabilities of s.security and Medicaid programs makes a HUGE assumption that we will not be able to take steps to pay for those.  Ie...push out benefits from 62 to 67.  What would that do.  Absolute debt right now is maybe 11t in a 14t trillion economy.  So more like 90% public to GDP.  Oh and by the way US household NETWORTH is just below an all time high.  Do you think maybe this country has a few assets behind that personal debt that might be of value?  Chris do me a favor add up all the tangible assets the US owns than subtract the debt.   Do this so your readers will know the US by far is net richest of any place on the planet or in history for that matter.

On the dollar?  How many times have you heard we are losing or manufacturing edge to cheap labor around the world?  For decades.  Well what  actually has occurred we have outsourced production and we reap the benefits through cheap labor along with real productivity gain we now enjoy much more material than we did even 20 30 years ago.  No as the dollar weaken our incredibly hard working efficient work force gains a pricing edge around the world and at the margin our exports absolutely soar with each tick down of the buck.  The downside is it does work to reduce our wealth as what we import cost more.  But frankly many other countries (china) anyone has been pegging their currency while we let ours float.  I would much rather have a strong dollar but the bullish secular increase of the dollar is over and I agree will see an orderly decline might even get a bit scary…but keep mind the US has tremendous assets and our dollar weakens they become cheaper to the world which like the S&P at 666 cooler heads will prevail. 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

matthewr99 -

One question, have you watched the Crash Course in its entirety?

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Start to finish...and back through a few times.  I'm a Keynsian atleast I want to be.  I do think the fed can effectively control the money supply and therefore maintain realatively stable prices.  The key is realitive!  Chris and others make it clear that on absolute basis prices have risen dramatically as we gotten completely away from the gold standard.  But so to have incomes.  And net net people are much more prosperous today then 100 years ago from a material stand point.  From a moral and spiritual stand point that is a different story and I will refrain from going there.

 I also believe that goverment should in fact step in x of panic.  Why would I not?  Since the creation of the fed in the early 1900 we have had more innovation and life expectancy leaps in 100 years than the last 1000.  I am also not naive enough to appreciate the risks to this method.  No system is perfect.  Therefore I maintain a 10% waiting to the hard asset yellow metal as an insurance policy.  But beyond that I try and stay away from extreme views.  With all due respect Chris's views are extreme like Schiff Ron Paul and some others.  History is littered with the like.  Diversification and systematic intelligent tatical allocation is key to long-term success.  Will the next 20 years be as prosperous from a material stand point?  Don't know. Although I do believe that people are waking up to the fact that material wealth is an illusion.  True happines is learning to be content with very little material wealth.  Like playing catch with your kid or going for a walk with your daughter ect.  This work til you drop hysteria in this country is pathetic.  People have put there treasure/heart in money and it's a joke.  Frankly I think the Omish have it much better than us.  There are days I long for a farm horse and buggy that I could spend my next 60 years with my children and someday grandchildren on.

 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Oh one more thing...the fed can print money till the cows come home but until joe banker decides to lend it we will not see one lick of inflation.  We might see commodity inflation but that will only go so far as price increases will snuff out demand.  150 oil anyone?  I actually think we are in the very early stages of a strong cyclical recovery.  Why?  Well lots of capacity has been destroyed.  Demand is starting to pick up savings rate is nearly 5-6% and going higher.  Job cuts continue to fall and in many cases workers are being brought back.  Banks will start to lend again the cycle will begin to feed on itself.  But the key is banks will have lend not crazy stupid like they did before but for projects and business investment the productive side.  The hours cut and 10-20% pay cut that everyone and there brother took last year will be returned in many cases and along with it confidence and more yes CONSUMER DEMAND  contrary to poplular lies the vast majority of consumption in this country is derived from INCOMES.  Not debt.  And as those hours are returned and pay cuts given back that will be a very strong reversal in incomes.  The linchpin in this will be access to capital markets and banks lending.  I can tell you for certain the captial markets are better.  Just look at bbb spreads to cd's they have closed.  Mainly since the god forsaken fasb 157 was put to death.  Do not get me started on that.  Fasb 157 was a libetarian dream.  Trouble it almost wrecked the entire economy.  You see we just can't go from Keynsian to Austrian economics overnight.  Why would we anyhow.  Yeah the theory (austrian economics) sounds good.  But please give me one example where it has been applied and much wealth and human health have benefited such as it has under the keynsian model?!

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

"The next 20 years won't be like the next 20 years"

Your arguments may have once been valid, but we have built a very fragile global system (food, manufacturing, etc) based on cheap energy.  The days of cheap energy are gone and with them the inexpensive food and lifestyle we have enjoyed.  The recovery you predict will likely occur, until it bumps its head on limited resources like oil, and down we go again.  Each cycle the damage to the economy (closed businesses, etc) will accumulate; there will likely only be a long, bumpy road downwards.

And then there's the environment...

Predicting the world's economic future needs to incorporate more perspectives than simple economics.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

"LAST" 20 years.  Sheesh!

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

to matthewr99 ---

It's difficult to debate anything with you when you race between points. Where Chris Martenson's writing is like a chapter of a book, yours is a stream of thought rambling. Let me try to pick it apart into some sort of order...

"but keep mind the US has tremendous assets and our dollar weakens they become cheaper to the world which like the S&P at 666 cooler heads will prevail."

Two good points, but (1) will the US ever utilize its assets efficiently? And (2) will the rest of the world buy them? With trillions flowing from the government into the system, there is very little in terms of an organized, efficient allocation of capital. This money should be going towards clean energy, infrastructure and education, but it is essentially going into the pockets of the people who caused the problems in the first place. Since 2001 when Bush declared the War on Terror, the US has seemed intent on trashing its international reputation. This has led to a more hostile political situation for Americans globally. When the UN and the BRIC countries make moves to depeg from the dollar, Washington will not be happy. Protectionism is rampant with protectionist measures being passed an estimated once every three days (according to an FT article on the poultry-tyre China-US incident last week). Protectionism has always preceeded war. Cooler heads will, sadly, not prevail.

the fed can print money till the cows come home but until joe banker decides to lend it we will not see one lick of inflation.

While the banks aren't lending, the money also isn't just sitting idle on their books. This money is in the system and it has and will continue to cause inflation. This will not be measured by the CPI, since Clinton and other former Presidents changed the calculations behind the CPI to exclude items that are more susceptible to inflation. These mathetmatical games will continue.

Demand is starting to pick up savings rate is nearly 5-6% and going higher.  Job cuts continue to fall and in many cases workers are being brought back.  Banks will start to lend again the cycle will begin to feed on itself.  But the key is banks will have lend not crazy stupid like they did before but for projects and business investment the productive side.

Demand hasn't picked up. Falling job cuts are due to government expansion and seasonality (many professional fields make hires in September, as this is the end of summer vacation), but jobs are still being shed at rampant rates. Banks will lend again, but regulatory bodies have made no effort to change the incentives and there is no comprehensible reason why they will suddenly become not-crazy and not-stupid. This is simply another cycle of neo-Keynseian bubble-fueled malinvestment.

The hours cut and 10-20% pay cut that everyone and there brother took last year will be returned in many cases and along with it confidence

Yeah... that's not going to happen, except in the financial sector -- where the party is.

contrary to poplular lies the vast majority of consumption in this country is derived from INCOMES.  Not debt.

Check your facts. How do you think people make those incomes? Where does this money come from? Corporations use debt, too, not just households. Nevertheless, have you seen the charts on household debt levels? And just any debt level charts at all?

I can tell you for certain the captial markets are better.

For certain? Did you take into account new accounting methods, which enable companies to mark their assets to whatever they like, ignoring market prices? Did you take into account the fact that banks are still failing? And that the dollar is collapsing? And that high frequency trading (HFT) has reached historic highs? And that HFT accounts for some 70% of market activity? And that there are obvious occurances of market manipulation by major banks?

Yeah the theory (austrian economics) sounds good.  But please give me one example where it has been applied and much wealth and human health have benefited such as it has under the keynsian model?!

Austrian economics hasn't been broadly applied in the West. But under the neo-Keynesian model, the United States has increasingly encouraged malinvestments, subsidized corporate failure at the hands of the taxpayer, and inflated bubble after bubble that have contributed to increasing instability in the international financial system. Yes, wealth and human health has seen unprecedented levels of improvement IN THE WEST. Meanwhile, wealth and human health are still miserable across the rest of the world, having grown by baby steps while the West makes leaps and bounds at the rest of the world's expense, hardwork and environment.

The rosy picture that the American government and media constantly spew (for lack of a better word) is the result of TRILLIONS of dollars of debt spent to prop up a failing system. When the effects of this money wear off, Washington can either (1) try again, by printing even more money or (2) go to war. If they print more money, nobody will finance them, especially given the dangerous political lines they have been walking with foreign creditors and the tricks they are playing with an ignorant and undereducated American public. BRIC countries' moves to diversify and marginalize the dollar internationally will only increase. So will American public anger and awareness (see the protests in Washington last Saturday). The US has the world's largest military. If you could choose to either subdue your creditor by force and take his money, or go bankrupt, what would you pick? If you answered the latter, then I applaud your morals, but I assure you they don't exist in Washington.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

to matthewr99,

I'll just add two more points on claims I find a little hard to come to terms with. First assuming that Social Security (SS) can be pushed back from 62 to 67 is more than a stretch considering who votes in our country. Particularly now that retirement aged folks have been hit economically by this financial implosion. I have always felt that SS realistically should be pegged to life expectancy in our country, oh I'm sure the Government would have fun manipulating that data.

Additionally your veiw that America has suffered from a " moral and spiritual stand point"  over the last 100 years is very objectionable considering the actual History of our country. Womens rights and suffrage, Jim Crow, Indian removal, Robber Barons are just the tip of the moral iceburg. You can then relate it to the spirituality of your liking.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Chris,

Some info from the FoF:

The "savings" myth.

Per Q2, 2009 FOF:

Personal savings = +$545B

Private Savings = +$914B (includes personal savings)

Government (dis)Savings = -$1306

Total Savings = -$392B

The personal savings number is a sham too if you use a cash basis (see the BEA tables).

And in reality, the numbers are far worse as unfunded liabilities are NOT accounted for. Same with unfunded private pension and Other Post Employment Benefits (OPEB) which for the S&P 500 alone are underfunded by ~ $500 billion.

Americans have been ripped off by Wall St. and Corporate insiders.

We need the prompt passage of Clawback laws.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Chris,

More de-shamification from the Q2, 2009 FOF:

Total net borrowing = -$241.1B
Total Gov't borrowing = +$1,895.3B
Total Private Borrowing = -2,136.4B

Total net lending = -$241.1B
Monetary Authority lending = +$1,196.1B

For crying out loud, private bank lending (not counting the Fed) was negative $1.437.2 TRILLION!

Surprise, surprise. The banks didn't use the TARP & bailout money to lend for productive endeavors as Bernanke, Paulson & Geithner said they would. The above proves an inCONvenient truth: we gave our money to the banks to fill a black hole.  The banks then used the cash to speculate on paper assets (at lower prices).  And come Christmas time, we'll get to hear all about the bonuses bankers "earned" gambling with our money!

It's a rip-off of historic proportions.  A disgraceful scam that has negative economic and social value.  A total sham. The biggest swindle in history.

The Fed and Treasury have devalued all prior productive work to bailout financial foolishness and fraud.  We should have been living with lower prices for years.  Those lower prices (trillions) were siphoned off and gathered by the financial industry.  

 

 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Lots of capacity destroyed? Increasing demand with decreasing employment? Don't think so myself.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

contrary to poplular lies the vast majority of consumption in this country is derived from INCOMES.  Not debt. 

Page 4 BEA numbers show that from 2000-2005 median and mean household incomes fell slightly while GDP rose by almost 20%.

http://assets.opencrs.com/rpts/RL33519_20060707.pdf

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

I wasn't going to do this:

I'm a Keynsian atleast I want to be.  I do think the fed can effectively control the money supply and therefore maintain realatively stable prices. 

Like the housing bubble?

Chris and others make it clear that on absolute basis prices have risen dramatically as we gotten completely away from the gold standard.  But so to have incomes. 

Oh, really? This is why I was able to see the housing bubble. Salaries are and have been FLAT!

And net net people are much more prosperous today then 100 years ago from a material stand point.  

 I'd differ, from a credit induced binge they were able, at least temporarily, to take possession of material objects. The hang over from the credit induced binge will likely obliterate their ability to hang onto these possessions, they will slip from their fingers like they had dish soap on them. In 2007 or 2008 I can't remember and I don't have time to look for the article titled the Greediest Generation, Boomer's spent 9 billion BORROWED dollars at Starbucks. 70% of GDP was consumer driven and a LARGE part of that was fueled by credit.

Credit is an halusinagenic drug economically speaking!

I do NOT have the time to go through and pick the rest of what you wrote apart. The late lumber executive I grew up with and worked for as a kid gave me 2 pieces of advice: Don't take wooden nickels (Dollar Bills) and horse manure doesn't smell like horse manure when the manure pile cures, but it is still what it is.

You can believe what you want. You can invest how you want. You can slam CM for his beliefs but if I were you I'd watch the Crash Course and I'd Google Dr. Albert Bartlett and watch his numbers videos.

Take care

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

mathewr99:

Mathew,

Your argument seems entirely too rosy.  I like the optimism, but facts are facts.  How do you smile away debt and unfunded liabilities of over $118 trillion?  ( http://www.zerohedge.com/article/sprott-september-commentary-total-us-government-obligations-1186-trillion )

I agree with parts of your descriptions: the last 100 years have seen huge increases in productivity, health, wealth, standards of living, etc.  But, starting in 1971, we started blowing history's largest debt load, and it's all on the shoulders of the American worker. 

You say the unfunded liabilities don't matter because we don't know what efficiencies we may devise between now and then.  Well, that trick must only work in government accounting work.  Look at GM:  they sure didn't come up with "efficiencies" to overcome their huge unfunded liabilities in the form of pensions and health care costs.  I would say GM is a "mini-me" of the broader US economy.  As they became a healthcare and pension fund company that happened to produce cars (poorly), we've become one giant healthcare (medicare, medicaid) and pension fund nation that produces little other than unfunded promises and invades other countries now and then.

Also, you claim that exporting production to China was a good thing because that made room for more valuable jobs here at home.  At least I think that's your argument - forgive me if I misunderstood.  Well, we certainly exported lots of manufacturing jobs, that's for sure.  However, what did we replace them with?  Looks to me like we replaced them with hundreds of thousands if not millions of jobs all having to do with housing and other real estate projects, all funded by money we didn't have, and many of which we now realize were unnecessary.  We also replaced them with low-paying retail jobs to sell all that crap we decided to have made in China.  Had we replaced them with high-tech or new energy jobs, I could see your point, but from what I can see, we exported our production, and replaced it with consumption - using borrowed dollars.

I do like your optimism, but I cannot shake the facts.  The US still has a lot of production, but it has also become a nation in which entirely too many people have been made to depend on the production of others.  More than 1 in 4 receives medicare or medicaid.  Over 30 million are on food stamps.   All the municipalities and State governments became dependent on property and income taxes derived from bubble-era valuations and incomes and now they cannot unwind those programs and are going broke.  Same goes with the Federal government.  In the meantime, 85% of the population has not lived through "hard times" and cannot even conceive of what that notion is.  When it comes, it will hit many like a ton of bricks. 

I do wish I could believe you, but the facts don't allow it.

 

 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Here is the article I wasn't going to link to. It is written by Jim Quinn, he, IMHO is another legend like CM. You might want to visit his site the Burning Platform.

What “essentials” do the Boomers invest all this borrowed money in every year? The U.S. Census bureau provides the answers:

  • $200 billion on furniture, appliances ($1,900 per household annually)
  • $400 billion on vehicle purchases ($3,800 per household annually)
  • $425 billion at restaurants ($4,000 per household annually)
  • $9 billion at Starbucks (SBUX) ($85 per household annually)
  • $250 billion on clothing ($2,400 per household annually)
  • $100 billion on electronics ($950 per household annually)
  • $60 billion on lottery tickets ($600 per household annually)
  • $100 billion at gambling casinos ($950 per household annually)
  • $60 billion on alcohol ($600 per household annually)
  • $40 billion on smoking ($400 per household annually)
  • $32 billion on spectator sports ($300 per household annually)
  • $150 billion on entertainment ($1,400 per household annually)
  • $100 billion on education ($950 per household annually)
  • $300 billion to charity ($2,900 per household annually)

 

 

 

I hope you have a LOT of money, because IMHO your going to be burning through it with the views you hold. Feel free to disprove me - but PLEASE get some facts, if I want to read fiction I'll go buy a well written novel to read next summer at the beach.

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Mathews,

One more thing.  You made the argument that the US has all sorts of assets that should be taken into account.  The US has great infrastructure, that's for sure.  Despite what the natives may think, US infrastructure is pretty good compared to most countries.  It also has millions of homes, hundreds of thousands of office buildings, warehouses, railyards, shipping facilities, IT and telecom infrastructure, etc etc.

However, how many millions of empty homes, millions of unoccupied square feet of office, retail and commercial space, and idle railcars and empty boats are out there?  And, what "value" does a home, office building, strip mall, or other asset that sits empty and nobody is willing or able to buy really have?  Many of these "assets" are serving no productive use whatsoever.  Instead, they incur maintenance and upkeep costs, and the debt that was used to build them still has to be paid.  So, you can look across the country and see "assets", but if you check the paperwork, you will find many of them are really "liabilities" that are serving no productive purpose, not even including producing the income stream necessary to pay off the debt. 

In effect, we borrowed all thse houses and commercial buildings from trading partners with whom we run deficits with.  Up to now, they have not decided to come over and scoop up those assets with their still-remaining dollar surpluses, but I think that day is coming.  Eventually, they will lose faith is the US government's ability to pay, and they will instead come shopping for hard assets, in what will be the last country that still accepts those silly pieces of green paper. 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

And net net people are much more prosperous today then 100 years ago from a material stand point.  

Temporary prosperity purchased at the price of future poverty is no prosperity at all.  Unless you hold the weal of future generations as being of no account.

Viva -- Sager

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

No, government will not suddenly realize that the new normal is lower before they ruin the dollar. That's not the nature of government authority. Every mistake is met by the resolve to do the same thing again, only harder.

I wish could share Chris's hope, but I'm convinced that the demise of the dollar is a fait accompli.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
Angry Saver wrote:

More de-shamification from the Q2, 2009 FOF:

"De-shamification"???

Quite possibly the best new term I've seen in my time on this site.

Nicely played Angry Saver.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Davos, nice set of charts and tables you linked too - like the run-down of how cups of starbucks and the like figure into the GDP. It would be interesting to see the credit card defaults not just in terms of percentage, but in total dollar amounts, as household debt has been rising during that period if I am not mistaken.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Hello CB:

Yes that would be interesting to know. I remember doing some back of the envelope calculations and thinking that GDP stripped of the Enron BS was likely around 6 trillion and Jim's fine art said that 2.2 trillion was on credit so we were likely down in the 4 trillion mark. While some of that was good credit it was still an eye opener.

IMHO Madoff is small time. Take care

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

You guys keep asking for facts so here are a couple.

Fact: The last 100 years are littered with doomsdayers and the likes one finds on this site. 

Fact: The dow jones was about 20 or so 100 years ago. 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Regarding upper limits that Chris says makes his hockey stick charts valid:  Please read this and tell me how anyone can begin to assign upper limits.  Why because of human innovation.  Read below:  "1% more land and 3.2x THE AMOUNT OF GRAIN!!!!"  Completely dismisses Chris's hockey stick charts.  Sorry!

Dr. Borlaug began his work in increasing grain
production back in the late 40’s and early 50’s, but the
real effects were not felt until the early 60’s. Then, the
world produced just a bit more than 690 million tonnes
of grain for the 2.2 billion people inhabiting the world at
the time. By the early 90’s, following Dr. Borlaug’s
lead, the world was producing 1.9 billion tonnes of
grain… 3.2 times as much!...while increasing the
amount of land used for growing grain by only 1%.
Further, not only did Prof. Borlaug “engineer” grains
that produced far more on the same land, he created
stains of grain that were resistant to the many diseases
that had often in the past destroyed entire crops in any
single year. And what he did for wheat, he did for corn,
and rice and soybeans.
Consider how many more people would have died
because of starvation had Prof. Borlaug not
undertaken his studies of grain. We’d count them in the
hundreds of millions. Or think of the huge sums of
forested land that would have been clear cut for grain
production had Prof. Borlaug’s programs not been put
into effect. Or consider the costs of food had he not
succeeded in increasing production as he has. His
programs made Pakistan, for example, self sufficient in
grain production; he made India… prone to famine for
ages… effectively self sufficient in grain. He aided
China; he made American agriculture that much better,
and we could go on.
Here was a giant among men, who had won the Nobel
Peace Prize back in 1970 for his work, and yet who
died utterly unknown to his fellow Americans. Here was
American ingenuity at its best who knew how to use
technology for the best of all reasons, and yet idiots
such as those on the eco-Left take him to task for his
modern methods of farming and the use of fertilisers to
increase grain production. The Left sees the world as
stagnant and prone to disaster; men like Prof. Borlaug
see the world as a place to be made better through
intelligence and technology. Here was a giant!
OH’ THE WEATHER OUTSIDE’S NOT

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Mathewr99:  Nobody denies that it is possible for further efficiencies to increase yields somewhat, but there is one fact that will never change:  we live on a spherical world with finite resources.  Eventually, our growth rate will not be able to be any greater than the daily renewable energy we can harness.  Just grow some bacteria on a petri-dish and see for yourself.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

This website is inspiring me to create another website that lists every book and person who has been predicting doomsdays.  Here is a quote from Forbes magazine.  Americans are over leverged in debt like no time before in the history of the country.  Forbes 1943.  Keep in mind this was just after WW2 and he had just gotten done running YEARLY dificit in excess of 100% of gdp.  Upper tax rates at the time were also 90%.

Oh and the dow...about 300. 

 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Farmerbrown:  There are upper limits I guess.  My point was Chris nor anybody else can know what they are which is the point he makes about this hockey stick charts. 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Do bacteria have the ability to create 3X as much food with 1% more land usage?   Upper limts not known hockey stick charts not valid...sorry!

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

You guys keep asking for facts so here are a couple.

Fact: The last 100 years are littered with doomsdayers and the likes one finds on this site. 

Fact: The dow jones was about 20 or so 100 years ago. 

Hello Mathew:

I truly resent that statement. I'm NOT saying this to be mean to you:

What you are doing is calling me, and others here, pessimists.

You and Dennis Kneale think you are optimists, in reality I would differ with such an assesment, I would classify this sort of a thinking as delusionalism.

I find most of the folks on this site to be realists, not pessimists.

It will be the delusional thinkers who fail to prepare themselves and their families. It will be the delusional thinkers who become the pessimists.

I have read many books and many newspaper articles from the first Great Depression. The great majority never saw it coming.

Your "facts" on the DJIA don't take into consideration what an 80 year old client of mine told me: "We used to call cigarettes 'onezies' when I was 10, because they sold them loose for a penny a piece. Today cigarettes sell for what, 5 bucks a pack or a quarter a piece?

A devalued dollar changes a lot.

Best of luck to you, I'm not a doomsdayer and I could be wrong in my assessment of what is headed our way. If someone, say like yourself, doesn't want to read stuff like this I'd highly encourage the to instead spend their time visiting Dennis Kneale or James Cramer over there on CNBC.

Take care.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
Quote:

There are upper limits I guess.  My point was Chris nor anybody else can know what they are which is the point he makes about this hockey stick charts.

Yes, there are upper limits...and guess what? One simple google search of water shortgages, food shortages and MASS Starvation will show you we are hitting several of those upper limits NOW!

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Mathew,

Perhaps what you claim would be taken more seriously if you provided source links and used complete sentences in your statements. Your writing tends to make one think that your a 13 year old.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

Farmerbrown:  There are upper limits I guess.  My point was Chris nor anybody else can know what they are which is the point he makes about this hockey stick charts. 

I don't get it. Are you saying that we should just continue consuming everything exponentially forever because we can't really estimate when we're going to run out of resources? We should wait until we hit a wall before changing our habits?

Your arguments so far seem mostly based on wishful thinking. Why should we close our eyes on the harsh realities ahead of us? Are you really convinced of what you say or are you just trying to win an argument?

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Earlier I posted that many of the pay cuts workers endured will be returned.  I chuckled when I walked past the paper this morning and the headline was "Major company to reinstate pay cuts by end of the year". 

Dellusional:  I think it is actually dellusional to believe so much in one's beliefs that you do not posistion your self properly in case you are wrong.  Ie..what about all those that thought for sure the US was finished in the previous decades and did not invest properly then came up short in retirement. 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

Fact: The last 100 years are littered with doomsdayers and the likes one finds on this site.

Doomsayer, realist, pragmatist, pessimist, whatever. 

Based on what I am seeing develop I have taken very aggressive steps to ensure my family gets through whatever happens - even if that turns out to be nothing.

So, with my approach, I can afford to be wrong.

Can you?

Or as Woodrow Wilson said, "Never murder a man who is committing suicide."

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

Earlier I posted that many of the pay cuts workers endured will be returned.  I chuckled when I walked past the paper this morning and the headline was "Major company to reinstate pay cuts by end of the year". 

Dellusional:  I think it is actually dellusional to believe so much in one's beliefs that you do not posistion your self properly in case you are wrong.  Ie..what about all those that thought for sure the US was finished in the previous decades and did not invest properly then came up short in retirement. 

So now you're saying that because you saw a headline announcing seemingly good news that everything is okay? You think that this anecdotal evidence is stronger than the chart provided by Davos?

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Mathew,

Your argument seems entirely too rosy.  I like the optimism, but facts are facts. 

 +1Smile

 No system is perfect.  Therefore I maintain a 10% waiting to the hard asset yellow metal as an insurance policy.  But beyond that I try and stay away from extreme views.  With all due respect Chris's views are extreme like Schiff Ron Paul and some others.  History is littered with the like. 

 

Fact: The last 100 years are littered with doomsdayers and the likes one finds on this site.

What history is littered with are lost empires & collapsed economies as well. I am surprised you think Chris Martenson is "extreme"?? Have you listened to him speak...he tries to find truths & present the facts IMHO. Yes the truth sometimes is not what we like to hear.

I  am sure once Chris sees something very promising & positive he will focus on that at well.

Take Care

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

What history is littered with are lost empires & collapsed economies as well.

+1!   Not to mention, those 3,000 dead fiat currencies.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

Dellusional:  I think it is actually dellusional to believe so much in one's beliefs that you do not posistion your self properly in case you are wrong.  Ie..what about all those that thought for sure the US was finished in the previous decades and did not invest properly then came up short in retirement.

Before you go:

I'll listen to George Soros, who was up about 12% in 2008. He says this is a period of wealth DESTRUCTION. I have preserved my wealth. In fact the guy who purchased some of my real estate contacted me to see if I could take an option on it. I showed him the bubble, where he bought in 2006, where it went up to in 2008 and now where he is below the point of entry now in 2009. Location, timing and timing.

My 401k would have been a 101k. Even after taxes, capitol gains, and penalties I'm WAY ahead. 

But I'm sure your smarter than Soros, or any of the people on this site with triple my IQ.

Fed: Household Net Worth Off $12.2 Trillion From Peak

According to the Fed, household net worth is now off $12.2 Trillion from the peak in 2007.

Take Care, and I'm certain James Cramer and Dennis Kneale have some super advice for you, just click on the door and don't let it hit you on the way out.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

matthewr99, in hindsight we could call Noah a pragmatist while his compatriots perhaps would have viewed him differently... LA is due for a big quake sometime in the next few decades... perhaps it will happen tomorrow, perhaps in 2020, etc, but it will occur, consequences unknown and details unknowable. That said, the scientists who have studied the geology and made the prediction are not wrong just because the quake hasn't happened yet. It is considered wise and prudent to take the possibility into account when emergency planning, building codes and restrictions, etc are being considered.

Things that are not sustainable are... not sustainable. The current world economy is built upon cheap energy - oil, coal, and natural gas. Current levels of production are not sustainable - let alone being able to service growing world demand and a growing world population. The green revolution you cite was built upon oil.

The current world economic model is not sustainable - current debt levels cannot be serviced by real economic wealth creation and plausible levels of economic growth. There will be an adjustment to these realities. Exactly what form this takes and the timeline for how these changes play out are unknowable, but not entirely unpredictable.

Good luck and best wishes.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

You are right household NW is down 12t from the top of 2007. 

 It's now ONLY 53 trillion!!  We are so broke!

 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

You are right household NW is down 12t from the top of 2007. 

 It's now ONLY 53 trillion!!  We are so broke!

Well yeah, if you consider the DEBT. Duh!

[mm2.png]

CNBC

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Davos help me out here please.  Net Worth = assets - liabilities.

What that means Dave is that assets are 53trillion dollars greater than the DEBT. 

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

matthewr99,

So far you haven't posted a single message that even remotely changes anything presented in the Crash Course. Many people on this thread have tried patiently to discuss many of your points, but you always come up with one-line half-baked replies delivered on a seemingly sarcastic tone. And they always come down to wishful thinking (human ingenuity will save us) or arrogant complacency (look at these numbers, we're not so bad).

What exactly is your purpose here? I have a feeling that so far you are not even trying to listen and contribute in a meaningful way.

 

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
matthewr99 wrote:

Davos help me out here please.  Net Worth = assets - liabilities.

What that means Dave is that assets are 53trillion dollars greater than the DEBT. 

So what do we do?

Have a big Nation-wide Garage Sale, sell the assets and service the debt?

Sounds good to me.  Traffic's gonna suck though.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

If you read the 2009 CBO budget projections, you will find a fairly passable scenario of an improving economy and declining expenses associated with stimulus and bailouts that offset increasing expenses in social security and medicare. However, the CBO is notoriously wrong! In 2000, the CBO ten year budget predicted a 3 trillion dollar surplus for the decade we are now ending (http://www.cbo.gov/doc.cfm?index=1820&type=0&sequence=1). However, the result of the decade is now estimated to end with $9 trillion dollars in new debt as apposed to the $3 trillion surplus projected at the time. A figure that is so incredibly inaccurate that if the USA were a company, it would had lead a $100 stock to fall to pennies or even to zero!!!! If the CBO is this wrong again (in percentage terms) the USA will have a $120 trillion national debt by 2020. The scary part is that it is entirely possible and realistic!!

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...
Dogs_In_A_Pile wrote:
matthewr99 wrote:

Davos help me out here please.  Net Worth = assets - liabilities.

What that means Dave is that assets are 53trillion dollars greater than the DEBT. 

So what do we do?

Have a big Nation-wide Garage Sale, sell the assets and service the debt?

Sounds good to me.  Traffic's gonna suck though.

DIAP, that is exactly what is going on, certainly at the state and individual level at the moment. Here in Arizona, and in California too, state assets are being sold to the highest bidder and then leased back. I expect to see more of this over the next year as tax revenues and economic activity continue to be down, and all the unemployed will be trying to sell each other their credit financed assets.

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Re: Flow of Funds Analysis - Big Declines in Credit Market ...

Much of Chris's presenstaion are based on charts that look well scary.  He makes the point himself that anychart you draw up can look like a scary hockey stick if you play with the vertical axis.  HOWEVER, he states the he is not doing this because he or research he has read has defined the range of upper limits on the vertical axis.  I suggest that is false.  I posted only one article about a clever fellow who helped increase food supply 3X with 1% more land!!!!  There our countless more examples that we benefit from each day and the human genious that creates that productivity capacity is growing in and of itself.  The Toyota Prius gets 60 miles per gallon.  There was a story today about a car that can get 240mi per gallon.

Peak oil PEAK ANYTHING my stinken left foot!!!

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