atomic_fungus (atomic_fungus) wrote,

#3422: You have to honor a contract

Woke up from my coma to this bit of news.
LONDON—Investors fled from Spanish government debt on Monday, an immediate rejection of the country's planned bank bailout by the constituency it most desperately needs to impress: the buyers of its own government bonds.

The market rout puts Spain and the euro zone in a dire position. The bailout plan—in which Spain agreed to accept up to €100 billion ($125 billion) to recapitalize banks—was hatched to alleviate the concern that Spain itself could be dragged down by the declining fortunes of its lenders.
You see, if you tell bondholders, "Yeah, you no longer have right of first recovery," ex post facto and regardless of what the fine print says, you bet people are going to run away from your bonds as fast as they can.

You're an idiot for thinking anyone would volunteer to keep holding paper that you've just declared to be worthless.

* * *

Europe is preparing for Greece to leave the euro even though everyone has said that won't happen. Even though such a move is a good thing for Greece--and ultimately a good thing for a lot of us, long-term--in the short term it'll be, simply put, bad.

* * *

Ace: "There was--is--something fundamentally wrong with the economy."

Most of us are 40% poorer than we were four years ago. Who's not? Rich people like Warren Buffett and Barack Hussein Obama. John Kerry. A host of banksters. Wall Street types.

The people who have advocated the policies that have led us to where we are now. They're richer; the rest of us are poorer.

Karl Denninger also discusses this story.

* * *

So this morning the financial news was all about how futures were pushing the Dow up; and at open the Dow went up 90 points. It's morning in America!

...and immediately headed down again; after 50 minutes it went below the open. Three hours later it went positive, briefly...and then rolled off to end up closing down 143 points.

Whee! It's a roller coaster!

All of this is really just fiddling. 143 points is 1% of the index and such a shift is really meaningless, long term. So let's look at trends.

Month-on-month: we're down almost 500 points from one month ago.

We're down a bit more than 500 points from where we were in March.

We're up about 200 from where we were in January.

We're up 460 from this time last year.

We're down 1,000 from five years ago.

The year trend and the 5-year is probably the most instructive about what the economy is doing. Things were in reasonably good shape in 2007, though the cracks were beginning to show.

To be down 1,000 points from five years ago is not good. Stock prices are indicative of how much value and wealth are in the economy; that's why in the LONG TERM stock prices always go up.

It's expected for the indices to go negative at times. They can move both up and down, after all (as some investors learned to their chagrin in 1927 and other years) but the long-term trend is (or should be) positive just because that's how economics works.

So it's correct and normal for the stock index to have tanked during an economic crisis like that of 2008. What's not correct and normal is for it not to have recovered.

The Dow hit its all-time high of 14,093 in October of 2007. Since then it's barely cracked 13,000 four times, and did not stay there long.

Two years after the precipitous drop in 1987, the market had climbed above the pre-drop level and stayed there forever after with only a brief dip below it during 1990, the Bush recession that was at least partially engineered by a Democrat Congress and also partly due to Saddam Hussein seizing Kuwait. That particular drop lasted three months, but the market came back very quickly and never saw a number that low again.

Compare that to the "Great Recession", which is only called that because of how bad the real name for the current economic condition--depression--would be bad for Barry O's reelection chances. 2007 was the high point; when things went to shit in 2008 BO's answer was "spend money! Print it and spend it!"

...thinking that the economy always recovers because, well, that's what it does. People have to make money, and automatically make as much as they can regardless of taxation or other economic conditions, so of course the economy will recover and go great guns like it always does!

Except it didn't. It can't.

We're reaching that place that deficit hawks always warned us against: the place where each new dollar of government debt consumes, rather than produces, a dollar of wealth. We can argue how much government spending is desirable, and how much is stimulative and how much isn't; what we can't argue is that we're well past the point where new government debt does any good whatsoever. Government spending--government deficit spending--is at an all-time high, and the economy is shuddering along like a jalopy with a clogged fuel filter. We're now at a point where the only thing standing between us and an official depression is government spending we can't afford...and government agencies which are fudging the numbers to make it look as if things are not as dire as they are.

Keynesians think that government spending is the key to pushing through a recession; they got their way and our government is spending $1,300 billion more per year than it collects in taxes. And the best our economy can do is an unemployment rate of 8.2% (official; 11% is closer to reality) and a 40% loss of real wealth for most people.

But because of how GDP is calculated, it makes everything look better. Consumer spending plus private investment plus the differential between exports and imports plus government spending--and if the other factors are too small you can make GDP look bigger if you increase government spending. Which is what has been done since 2009. Of course the recession officially ended; government increased its spending to insane levels.

But it's not real economic growth. Government consumes wealth; it cannot produce it. Keynes is wrong, but since we count government spending as wealth creation there's no way to tell using official statistics. Black is white! Freedom is slavery! Government spending is productive!

So all we have is what our guts tell us. And a lot of people know that unemployment is really bad. They know they can't buy as many groceries for $100 as they could even a year ago. Gas might not hit $5 per gallon this year but it's hovering near $4 and that's bad enough. They can look around their neighborhoods and see which houses have been foreclosed on just by looking at the uncut lawns or the boarded-up doors. They look at the interest rates on their savings accounts (under 1%!) and compare that to the interest rates they must pay for various debts owed.

And through all this, the media and the government are saying, "The private sector is doing just fine!"

They might not be stupid enough to say it in so many words the way Dear Leader did the other day, but that's the picture they try to paint...and it's not flying. Not any more.

So if you look at the trend at a sufficiently long term, you see that the Dow is beginning to level off. It's not climbing; it can't--the engines of wealth creation are faltering. What it's doing--what it has been doing since 2008--is gaining ground, then losing it, gaining ground again...but it's always gaining less with each bound upward, and it looks to these admittedly untrained eyes as if it's going to level off somewhere around 13,000.

That is to say, if nothing changes, 13,000 is about the limit. Our economy can't support a Dow higher than that under current circumstances.

That is a bad thing. Because, for one thing, "current circumstances" can't last.

Before 1999, the market average had begun to ramp up into the vertical part of the asymptotic curve. About halfway up the knee of the curve, it ran into a brick wall, and from there the rate of increase has been a simple slope, and slow to boot. The trend has been about 1,500 points of growth over 12 years.

But it hasn't been monotonic; if you look at the long-term graph you see that the curve turns noisy--chaotic--starting around 1997. There's no longer a smooth curve with relatively minor day-to-day fluctuations; the changes grow in magnitude.

Should it be like this? Somehow I doubt it. It doesn't look good, it doesn't look "nice". Statistical curves aren't under any obligation to be pretty but when I see something that noisy it leads me to believe that the system being depicted by the curve is not operating in a good regime. You wouldn't accept that kind of performance curve from any real-world system (such as your kid's grades or the reception of ESPN on your TV).

Leaving the smooth and natural asymptotic curve for this--if I could figure out where to start I'd wager I could demonstrate that 1997 was when we hit the tipping point of "too much goddamned government". Too much taxation, too much regulation.

In all probability that would not be the sole cause, but it'd be a significant factor.

On the other hand, it's also true that no real-world system can support an indefinite geometric expansion. Somewhere along the line the asymptotic expansion would have failed, because sooner or later you reach a point where there isn't enough money in the world to support it.

I don't know what it means for us, but I suspect that the noisy characteristic is indicative of a system which is on the verge of becoming wildly unstable--and the links at the beginning of this post don't do anything to mitigate that suspicion.

I wish it were otherwise.

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