What are "bubbles"?
by Alfred Adask
In economics, "bubbles" are typically entire markets wherein virtually every product in that market is significantly and artificially over-priced.
For example, if the housing market goes into a "bubble," most homes in that market will be selling for prices that seem unreasonably high. If tech stocks go into a "bubble," virtually all of the individual stocks in that particular market will be selling for unreasonably high prices.
Bubbles can occur in a particular nation's bond, stock, housing, and commodity markets. All bubbles have a single common denominator: they're significantly over-priced.
But when we say "over-priced," we necessarily mean "over-priced" in relation to something else. What's that "something else"? It's the free market. Bubbles are over-priced in relation to the prices that would normally exist in the free market.
For example, suppose the real estate market is in a "bubble". Prices for homes could be ridiculously high. A house that should sell for $250,000 on the free market, is nevertheless selling for $1 million. That's a bubble. Motivated by greed, people nevertheless buy that home for $1 million believing that the bubble will continue to expand and the price of the $1 million home will soon go even higher to, $1.5 or even $2 million.
The important point to grasp is that when stock, bond, commodity and home markets become "bubbles" they're over-priced in relation to a true, free market.
Given that "bubbles" describe over-priced markets, we can ask, How did the "bubble" come to exist outside of the free market?
Any free market is capable of over-reacting so as to produce excessively high or low prices. But generally speaking, when a particular free market produces irrationally high or low prices, the more astute members of that market will sense the irrational price and reverse course so as to produce a good profit. Free markets tend to correct their excesses in a more-or-less timely manner.
But a true "bubble" will persist long after the free market might've cause a price correction.
Why?
Because a true "bubble" isn't caused by mere forces of supply and demand in a free market. A "bubble" is caused by influences from outside of the free market. These outside forces cause a market to be artificially stimulated, manipulated and controlled in way that defy and overcome the true forces supply or demand.
What's the source of outside forces?
It might be a very wealthy corporation. It might be conspiracy of individuals bent on cornering a market. But in this day and age, when you see a "bubble," you see the result of legislation, policies and/or regulations that've been imposed by government and/or the central bank.
Bubbles exist in the un-free, manipulated markets. Manipulated by whom? Government and central banks like the Federal Reserve.
How long will "bubbles" last and continue to grow? Until the government and/or Federal Reserve change policy or run out of sufficient fiat currency to continue to inflate the "bubble".
(What's the Federal Reserve's favorite song? "I'm Forever Blowing Bubbles.")
What's the meaning of Economic "Confidence"?
by Alfred Adask
In the January newsletter from Elliott Management, Paul Singer wrote in part.
"If investors lose confidence in paper money, as evidenced by either a hard sell-off in one of the major currencies or a sharp fall in bond prices, the Fed and other major central bankers will be in a pickle. If they stop QE and/or raise short-term rates to deal with the loss of confidence, it could throw global markets into a tailspin and the worldwide economy into a severe new recession. However, if they try to deal with the loss of confidence by stepping up QE or keeping interest rates at zero, there could be an explosion in commodity and other asset prices and a sharp acceleration in inflation."
"Loss of confidence." "Loss of confidence." "Loss of confidence."
A "loss of confidence" seems to be an important subject, but what's it mean?
Primarily, in economics, a "loss of confidence" means a loss of the willingness to borrow.
It may also mean an unwillingness to lend.
But mostly, the loss of confidence in the economy means a loss of confidence in one's ability to repay debts.
Thus, a "loss of confidence" means a loss of the willingness to borrow currency and go into debt. Given that we use a debt-based monetary system in a fractional reserve banking system, a refusal or unwillingness to go into debt is arguably anti-social and, if sufficiently widespread, poses a threat to the entire financial system.
I.e., if I borrow $250,000 for a home, I actually create a new $250,000 in credit with my signature and promise to repay the alleged debt. By borrowing I create capital needed to fund our economy.
If I borrow $250,000, the banks can then use my $250,000 promise-to-repay/note as collateral (an "asset"). Under fractional reserve banking, the bank can use my note to justify lending up to ten times the note's face value. My $250,000 note can justify the bank's lending up to $2.5 million to other consumers/debtors.
Thus, my mere signature on a $250,000 note could be sufficient to create $2.75 million in new credit to stimulate the economy. However, if I lose confidence in the economy and don't believe that I'll be able to repay that $250,000 loan, I will refuse to borrow the $250,000, and the economy can suffer a $2.75 million dollar loss of potential "stimulation".
You can see how important a public "loss of confidence" can be. If enough people lose confidence and also refuse to borrow (and thereby go deeper into debt), the financial system could collapse. If enough new funds aren't created by going further into debt, the pre-existing debts might not be paid and the Ponzi scheme might collapse.
In the event of a serious loss of public confidence (and a resulting refusal by the people to create more credit by borrowing and going deeper into debt), we could expect the government and/or the Federal Reserve to use their powers to create a comparable sum of fiat currency to inject into the economy. The purpose would be to compensate for and supplant the loss of "stimulation" caused by people who lost confidence in the economy, and therefore refused to borrow more currency.
Under such circumstances, the Federal Reserve and/or national government might describe their creation of fiat currency as "Quantitative Easing"-which is exactly what we've in the aftermath of the onset of the Great Recession in A.D. 2007-2008. The public lost confidence in the economy and stopped borrowing. The government/Federal Reserve tried to replace that lost borrowing by injecting QE into the economy and lowering interest rates to make borrowing irresistible.
But even with lots of additional cash to be loaned and low interest rates, the public still could not be persuaded to borrow, go deeper into debt, and thereby stimulate the economy. QE and low interest rates have done enough to prevent further economic decline, but they have not yet caused enough "stimulation" to precipitate a recovery.
Point: A "Loss of confidence" means a public refusal to borrow and go deeper into debt. A debt-based monetary system can't survive a widespread refusal to borrow.
Borrowing Authority vs Borrowing Capacity
by Alfred Adask
Reuters recently reported in "Treasury's Lew warns that U.S. default could happen quickly," that,
"The Obama administration warned on Monday it could start defaulting [OMG! OMG!] on the government's obligations "very soon" after hitting a limit on the national debt later this month.
"Treasury Secretary Jack Lew said the federal government should hit the [dreaded] debt ceiling by the end of February unless Washington raises the nation's limit on public borrowing."
"The federal government would then burn through its remaining cash more quickly that it would at other times of the year because the Treasury will be issuing tax refund checks, Lew said."
Were you counting on a tax refund in February to fund your March vacation? Well, maybe you'd better reconsider you plans because your IRS refund check may be "in the mail" a bit longer than you'd hoped.
"Without borrowing authority, at some point very soon, it would not be possible to meet all of the obligations of the federal government," Lew said in prepared remarks at a Bipartisan Policy Center event.
OK, we're about to witness another sock-puppet melodrama of the Perils of Pauline (actually, "the perils of national government") as it negotiates a new "debt ceiling limit".
But, we all know that very soon, after much heated debate, warnings, and seeming dangers, the Congress will raise the debt ceiling and authorize enough additional borrowing to meet government's spending needs.
Thus, Congress will soon enact more "borrowing authority".
But, what about more "borrowing capacity"?
Is authority to borrow all that's required? Or does the national government also require more capacity to borrow?
Just because government may have "authority" to borrow more funds, doesn't necessarily mean that government also has the capacity to borrow more funds.
For example, what if the interest rates rose to, say, 5%? Could the national government afford to borrow more currency at a 5% interest rate? It would have the authority to borrow, but would it also have the capacity to borrow?
What if the world's confidence in the government's ability to repay its debts fell so low that no one would lend currency to the national government at any rate of interest? The government would still have the authority to borrow, but would it have the capacity to borrow if most of the world doubted that the US would be able to repay its debts? Of course not.
In fact, most of the world has stopped purchasing US bonds. The Federal Reserve picked up the slack by purchasing 70% to 80% of the bonds issued by national government under the guise of Quantitative Easing (QE).
If the world has generally stopped purchasing US Bonds, what if the Federal Reserve also slowed its purchase of US Bonds? The government might then still have the authority to borrow, but not the capacity.
And, in fact, the Federal Reserve has begun to "taper" its current monthly rate of QE from $85 billion/month, to $75 billion/month, to, most recently, $65 billion per month. About half of that QE has been going to major banks, and about half has been used to purchase government bonds. As QE tapers by $10 billion/month, the government's apparent capacity to "borrow" is falling by $5 billion/month or $60 billion/year.
$60 billion isn't a devastating loss to government. It will probably reflect less than 2% of government spending.
Nevertheless, the trend is clear. Government's authority to borrow may be rising, but government's capacity to borrow is falling.
All of which implies that:
The national government is so broke that it can't continue without more borrowing and more credit;
The national government's capacity to borrow is drying up;
Government must increasingly rely on tax revenues to support its spending;
Without sufficient borrowing, government will be forced to significantly raise tax revenues and/or significantly cut government spending (and, in fact, that's already happening).
* An era of difficult and painful choices now faces government-and the nation. This difficult era will probably last for several years. This era will be excused as the result of ideological "gridlock" between the Republican and Democrat parties in Congress.
But ideology and political philosophy won't be the issue. The real issue will be government's inability to borrow enough currency to continue to fund existing or promised governmental programs. As there is less and less currency to make good on each political party's promises to their special interests, the parties will fight each other ever more fiercely for the last few dollars in the public coffers. Gridlock is not about political ideology. It's about no money in the Treasury.
Many of those who depend on the national government for welfare or subsidies will soon be seriously impoverished.
Insofar as over 35% of the US GDP can be traced to government spending, our "consumer" economy has become almost as dependent on government spending as a welfare recipient. As government's capacity to borrow falls, the economy, itself, will also suffer significant reductions.
Thus, an increase in government's authority to borrow is largely irrelevant without a corresponding increase in government's capacity to borrow.
* We can expect to soon see the day when Congress grants the government the authority to borrow another $1 trillion-but learns that even with that added authority, government lacks the capacity to borrow more than another $500 billion.
At that point, it'll become obvious to all the emperor is buck naked. It'll be obvious that government's capacity to borrow-that is to say, government's capacity to REPAY its debts-is far more important than government's authority to borrow. No one will lend to the government if they don't expect to be repaid. Therefore, when we talk about government's "capacity" to borrow, we're really talking about government's capacity to repay its existing debts.
For the past five years, I've argued that the national debt is not the "official" $17 trillion claimed by President Obama but, now, at least $90 trillion (as alleged by John Williams at Shadowstats.com) or, including unfunded liabilities, over $200 trillion (as alleged by the Congressional Budget Office). I've argued that the National Debt is, in fact, too great to ever be repaid in full.
Government lacks the capacity to repay its existing debts. That's not news. For the past decade, anyone who cared to look has seen that truth. Nevertheless, most people didn't look. Very few cared to see.
But, now, as the world slowly begins to recognize that the U.S. government can't repay its current debts, the world is openly disputing the government's capacity to borrow more currency. Without that capacity, the size of government will be significantly reduced, the economy will be significantly reduced, and the average American's standard of living will be significantly reduced.
"Washington will start scraping up against the debt ceiling by Friday, the day a suspension on the borrowing limit is scheduled to lift. The Treasury will then use accounting measures that will allow the government to keep adding to the debt, but Lew said this strategy would only get the administration to the end of the month."
And what are these "accounting measures"?
They're lies. They're evidence of criminal acts committed by Government.
The current law says the maximum the government can borrow is $17.2 trillion-which, coincidentally, is the same size as the "official" version of the National Debt. But, according to Shadowstats.com, the real National Debt is closer to $90 trillion-about five times the size of the "official"/"legal" National Debt limit.
$17.2 trillion of that $90 trillion is legal in the sense that it's within the "debt limit" established by LAW.
The other $72.8 of the National Debt that's been concealed from the public is in excess of the LEGAL "debt limit" of $17.2 trillion and is thus evidence of criminal acts perpetrated by our own government.
These fiscal crimes aren't only attributed to the Obama administration. The past several presidential administrations have been equally guilty of using "accounting measures" to conceal the crime of spending more money than is legally allowed by the debt ceiling law.
I don't know how long government has been committing the crime of borrowing more money than the debt ceiling limit allows. There's a good chance that such "accounting measures" started somewhere between 20 and 40 years ago. If so, government has been unable to support itself and the economy for at least 20 years without relying on its own criminal acts.
How long can a government survive whose operations have depended on fiscal crimes for over a generation?
The crime, alone, of falsifying the size of the National Debt should create a moral issue sufficient to insure the government's eventual comeuppance.
Once the crime of falsifying the size of the National Debt so as to exceed the "Debt Ceiling Limit" is generally recognized, and the criminal nature of our government is seen, who will want to lend more currency to the criminal enterprise operating out of Washington DC? Lending currency to the government is like lending currency to the Mafia; what makes you think that you'll ever be repaid?
* Whether government is a criminal enterprise is almost irrelevant on a moral basis. Whether government will or even can repay its existing debts is the crucial factor in any decision to lend more currency to the government.
It's increasingly apparent that the government is bankrupt and won't or can't pay most of its debts. Thus, the bankrupt government's capacity to borrow will be reduced until government escapes its bankrupt condition.
Government might escape its insolvency with a global monetary "reset". If might escape its bankrupt condition with a year or two of hyper-inflation. But, until, government abandons its criminal ways and bankrupt condition, its capacity to borrow will continue to decline and the "good times" will no longer "roll".
