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A Better Model For Predicting What Happens Next

Only by understanding clearly can we avoid the carnage ahead
Friday, July 14, 2017, 11:39 PM

Executive Summary

  • The dangerous shortcomings of the world's dominant 'Neoclassical' economic models
  • The predictive advantage of understanding the Overton Window
  • The alternative (and very likely better) models of Keen and Minsky
  • The critical improvement to ALL models of tying economics to energy/resources

If you have not yet read Part 1: Bad Models Result In Terrible Outcomes available free to all readers, please click here to read it first.

So let’s see if we can understand the model errors for the central banks.  Again this is important because if they’ve got it wrong, then we all will pay a very heavy price -- with Venezuela, Argentina, and Zimbabwe all providing vivid examples of what happens when the social contract of money is ruined.  

To begin, the current crop of monetary practitioners at the world’s central banks are all devotees and advocates of the neoclassical branch of economics.  It’s an odd dogma for them to hold because its track record at explaining or predicting what has either happened or might yet happen is utterly dismal.

As Steve Keen explains:

[Economics as understood by the central bankers] has always been grounded in the beliefs that (a) capitalism is inherently stable, (b) that the financial sector can be ignored—yes that’s right, ignored—when doing macroeconomics, and (c) that the Great Depression was an anomaly that can also be ignored, because it can only have been caused either by an exogenous shock or bad government policy, both of which cannot be predicted in advance.

(Source)

The main flaw in the neoclassical approach to economics is that it completely ignores, or rather assumes away, any and all trends in debt creation.  In this bizarrely incomplete system of thinking, the financial system is considered to be, essentially, a self-correcting zero-sum entity (that balances itself out nicely with a little help now and then). 

So such things as carefully tracking GDP increase per new unit of debt, overall indebtedness ratios and understanding that crises are bred from complacency are of no practical concern to a neoclassical economist, such as those fully occupying the halls of power currently.

One way to understand the dogma that infects the central banking halls of power lies in what Jim Kunstler recently surfaced in a piece he wrote on the Overton Window, which, importantly... » Read more

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Off The Cuff: The Schizophrenic Fed

Rates are going higher. No they aren't. Yes they are. No...
Friday, July 14, 2017, 12:59 PM

In this week's Off The Cuff podcast, Chris and Axel Merk discuss:

  • No Rate Hike After All?
    • Yellen sings a dovish tune this week
  • Wait, Wasn't The Fed Just Warning It Would Tighten?
    • Yep. It was talking tough up until now
  • Why Can't The Fed Make Up It's Mind?
    • Because it's in a box. Jawboning is all it can do at this point
  • The Next Fed Head
    • A complete transformation may be in store soon

Chris and Axel unpack the latest guidance from the Fed issued this week. For those listening, the Fed's inconsistency is understandably infuriating. One week it's warning about tightening ahead, the next it's telling folks rates are just fine where they are.

Axel, who has more inside access to current & past Fed officials than anyone we know, feels that the Fed is simply trying to walk a tightrope it knows will one day snap. At this point, it's trapped. It needs to normalize rates, but doing so will crash the markets. So it's using the only tool it has -- confusion -- to keep the system fooled that everything is under control. Of course, one day the ruse will be discovered. But until then, the Fed will obfuscate, vacillate, prevaricate -- whatever it can do to keep the status quo in place for one more day...

Click to listen to a sample of this Off the Cuff Podcast or Enroll today to access the full audio and other premium content today.
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The Time Thief

How the Fed steals from tomorrow (and today, too)
Wednesday, July 12, 2017, 10:14 PM

Recently, the Federal Reserve has been on a mission to boost stock prices and make sure that no financial crises ever happen again.

They’ve been doing this by explicitly propping up financial markets (and, I believe, suppressing others) in ways that enrich the speculator class generally, and the big banks specifically. » Read more

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A Blueprint For DeGrowth

How to enter the future with grace
Friday, July 7, 2017, 10:46 PM

Executive Summary

  • Why we can cut energy consumption by 50% and still function
  • Why new systems of work, income & resource distribution are needed
  • The need for a new type of currency that can't be manipulated by the elites
  • The need for de-centralized governance & processes

If you have not yet read Part 1: The Inevitability Of DeGrowth available free to all readers, please click here to read it first.

In Part 1, we surveyed the fundamental dynamic of the present-day status quo, which is fatally dependent on expanding debt, energy consumption per capita, income and consumption of goods and services. Once debt and/or energy expansion stalls, the status quo collapses.

Which brings us to the question: what sort of economy could we have that consumes less energy every year and distributes resources to the populace in some sort of stable, reasonably just arrangement?

We can imagine a variety of unjust repressive regimes that hoard whatever energy and goodies are available for the ruling elites, and there are any number of dystopian films depicting a chaotic endless-war-anarchy scenario of ruthlessly Darwinian distribution systems ( “my lead takes your gold,” etc.).

But neither of these possibilities are set in stone. We could consciously choose to pursue DeGrowth, a set of guiding principles orbiting one basic idea: using less is not a bad thing, it’s a good thing, and it could be coupled with improvements in our quality of life.

Here in Part 2, we provide the blueprint for a DeGrowth Economy.

What Is DeGrowth?

These are the basic concepts of DeGrowth... » Read more

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Off The Cuff: Colliding Crises

Energy, debt & resource shocks are in our near future
Friday, July 7, 2017, 8:17 AM

In this week's Off The Cuff podcast, Chris and Charles Hugh Smith discuss:

  • The Approaching Energy Crisis
    • It's not a matter of if, but when
  • The Approaching Debt Crisis
    • There's no escaping it
  • The Unfolding Resource Crisis
    • Scarcity is growing in nearly every system
  • The Inevitability of DeGrowth
    • We're going to have to transition, whether we want to or not

This week's podcast is a particularly sobering one. Chris and Charles discuss the inevitable arrival of several approaching crises: declining net energy, too much debt, and depleting key natural resources.

What this mean is that "DeGrowth" in our near-term future. As a global population, we are simply going to have to learn to do more with less: either on our terms or Mother Nature's. 

Click to listen to a sample of this Off the Cuff Podcast or Enroll today to access the full audio and other premium content today.
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Preparing For The Coming Shock

The economy -- and EVERTHING -- will get smaller
Friday, June 30, 2017, 10:11 PM

Executive Summary

  • The importance of understanding the difference between depleting vs declining
  • Why the shale "miracle" can't rescue us from this predicament
  • Why 2019 will be a seminal year
  • How high will oil prices go when the shock arrives?
  • Why the next oil shock will force the economy -- and EVERYTHING we depend on -- to diminish

If you have not yet read Part 1: The Looming Energy Shock available free to all readers, please click here to read it first.

There are two words that are related but important to understand the distinction between. One is depletion, which refers to the amount of oil that is removed from a reservoir. The other is decline, which refers to the amount of oil flowing from a given well or field.

Depletion is a relatively straightforward process. If there are 100 units of removable oil in a field and you pump out 3 of them, the field has depleted by 3%.

But you might be able to hold the rate of pumping constant for a long time by injecting water or performing other stunts to force more oil out of a given well. If in our example we kept removing those same 3 units year after year, our decline rate would be zero. But the depletion rate would be increasing, because 3/100 = 3% but 3/97 = 3.1%. And after ten years the rate would be 3/70 = 4.3%.

That is, all efforts to keep oil flowing out of the wells at a maximum rate results in increasing rates of depletion. But we should also point out here that fighting decline rates is an expensive proposition. And that funding, too, has dried up of late.

The bottom line is that depletion is what really matters. Because once the oil gone, baby, it’s gone. All of the MSM headlines will keep you focused firmly on rates of extraction but only rarely on the rates of depletion.

So where is the world in the story of depletion? This is where our various sphincters should be involuntarily tightening. Rates of depletion are increasing, and they are substantial as seen here in... » Read more

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Off The Cuff: No More Financial Crises "In Our Lifetime"

Did Janet Yellen really just say that???
Friday, June 30, 2017, 2:04 PM

In this week's Off The Cuff podcast, Chris discusses:

  • Market Jitters
    • What will happen if the central banks turn off the money?
  • No More Financial Crises "In Our Lifetime"
    • Did Janet Yellen really just say that???
  • Our States Are Falling Into Bankruptcy...
    • Illinois, Connecticut, Maine & more
  • While The Banks Get Even Fatter
    • Income from excess reserves to rise to $50 Trillion by 2019

This week, Chris takes a moment to share his thoughts in depth on where we are in the global debt saga. The overhang is getting worse, growth is not riding to the rescue as hoped, and the central banks are running out of both smoke and mirrors to keep the game continuing. Should the $200 billion monthly bonanza of central bank liquidity start decreasing -- as is now being increasingly discussed -- expect markets to go south quickly.

Click to listen to a sample of this Off the Cuff Podcast or Enroll today to access the full audio and other premium content today.
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Pre-ALERT: Trump Risks War With Russia

The Syria powderkeg threatens to explode
Tuesday, June 27, 2017, 6:44 PM

Trump has now backed his administration into a corner.  If there’s another suspected poison gas attack in Syria, he’s promised to escalate the situation by beginning bombings.

It appears that what I feared might happen under a Clinton presidency (and I still think probably would have, anyways) is now happening under the Trump administration.

Let me be perfectly clear: bombing Syria risks a direct confrontation with Russia.  If that happens, all bets are off. Anything could happen next, up to and including a nuclear exchange.  » Read more

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The Value Drivers Of Cryptocurrency

These factors will determine which coin(s) will win out
Friday, June 23, 2017, 9:27 PM

Executive Summary

  • The critical value of scarcity
  • Understanding the utility of the blockchain
  • Will (can?) governments ban cryptocurrencies?
  • A coming geometric explosion in the price of cryptocurrency?

If you have not yet read Part 1: Understanding The Cryptocurrency Boom available free to all readers, please click here to read it first.

In Part 1, we surveyed the exciting but confusing speculative boom phase of cryptocurrencies. Here in Part 2, we will contextualize this mad swirl by running it through two filters: scarcity and utility.

What’s Scarce? Scarcity Creates Value

Regardless of one’s economic ideology or system, scarcity creates value and abundance destroys value.  When we say supply and demand, we’re really talking about scarcity and abundance and the rise or fall of demand for the commodity, good or service.

In classical economic theory, scarcity is met with substitution: ground beef too expensive due to relative scarcity? Buy ground turkey instead.

But this model has weaknesses.  There aren’t always substitutes, or the substitutes are more expensive or problematic than what is now scarce. 

As a general rule, profits flow to any scarcity of goods and services with high utility value.  We value what’s scarce and useful, and place little value on what’s abundant and of limited utility.

Currency has three basic functions: a store of value (it will retain its purchasing power over time), means of exchange (we can use it to trade goods and services, pay debts, etc.) and as an accounting mechanism to track assets, debts, income, expenses and exchanges/trades.

We assume all currency has this function, but only currency that is easily divisible and easily tradable enables easy accounting.  If a notched stick is a unit of currency, and one stick buys a pig, what do I use for purchases smaller than a pig?

In today’s world, a currency must be.... » Read more

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Off The Cuff: The Approaching Minsky Moment

The world is unprepared for the reset heading our way
Wednesday, June 21, 2017, 9:00 PM

In this week's Off The Cuff podcast, Chris and Mish Shedlock discuss:

  • A Study In Failure Of The State
    • Chris shares his on-the-ground observations from So. America
  • It Can Happen Here
    • Mish shares his on-the-ground observations from Illinois
  • Virtually All The Macroeconomic Data Is Miserable
    • Yet the Fed & the markets are acting like everything's great
  • The Approaching Minsky Moment
    • It's a matter of if, not when

This week's Off The Cuff discussion is an interesting one. Both Chris and Mish have front-row seats to two failing governments -- Chris in Argentina, and Mish in Illinois. It feels to them like they are getting a preview of the economic pain soon to come to the rest of the world.

Both are *very* concerned that citizens and investors across the globe are being duped by the (lack of) signals and messages today's ""markets"" are providing. Looking at the steady drumbeat of bad & worsening macroeconomic data, as well as the immense gap between fundamentals and asset prices, Chris and Mish are as confident as they have ever been that a massive painful reset is nigh. But too many of our leaders, and too much of the public, remain complacent/ignorant (willfully or not) regarding this risk. 

Their conclusion? The world is woefully unprepared for the Minsky moment headed its way.

Click to listen to a sample of this Off the Cuff Podcast or Enroll today to access the full audio and other premium content today. » Read more