I’m Not Buying It – Not The Wall Street ‘Rip’, Nor The Keynesian Dope

Submitted by David Stockman – The Contra Corner Blog

First comes production. Then comes income. Spending and savings follow. All the rest is debt…….unless you believe in a magic Keynesian ether called “aggregate demand” and a blatant stab-in-the-dark called “potential GDP”.

I don’t. So let’s start with a pretty startling contrast between two bellwether data trends since the pre-crisis peak in late 2007—debt versus production.

Not surprisingly, we have racked up a lot more debt—notwithstanding all the phony palaver about “deleveraging”.  In fact, total credit market debt outstanding—-government, business, household and finance—-is up by 16% since the last peak—from $50 trillion to $58 trillion. And that 2007 peak, in turn, was up 80% from the previous peak(2001); and that was up 103% from the business cycle peak before that (July 1990).  Yes, the debt mountain just keeps on growing.

As a proxy for “production” I am using non-durable manufactures rather than the overall industrial production index for three good reasons. The former excludes utility output, which incorporates a lot of weather related noise, and also excludes oil and gas production, which, as we are now learning, embodies a whole lot of debt. Besides, if the US economy has any hope of growing, non-durables should not still be migrating off-shore at this late stage of the global cycle; nor are they subject to fashion or lumpy replacement cycles like cars and refrigerators.

THE SDR PURPOSE OF BRICS

Submitted by JC Collins  –  philosophyofmetrics

Global markets are showing increasing signs of instability and there are serious concerns about risks to international liquidity building across the spectrum.  Exchange rate volatility is deepening with the Russian ruble leading the way and the systemic contagion is spreading around the world, from European and Western banks to stock market crashes in the Middle East.

Oil continues its descent into the $30 to $40 dollar range with a strategically timed announcement by OPEC today, at the peak of the turmoil, stating it will not meet again until June, 2015, ensuring continued instability and lack of confidence in the energy markets.

Trading between the ruble and USD has been halted almost at the same time as Russia’s alternative to the SWIFT system came on line.

Since the beginning of the year we have rehearsed these moments in our minds, not sure if they would happen as we had been discussing, and hoping that they wouldn’t, but knowing full well that the amount of preparation and strategy which has gone into the transition of the international monetary system, from a unipolar structure to a multilateral structure, would eventually materialize in the real world as the Hegelian Dialectic machinations which we are witnessing now.

A look through the headlines on such sites as Zero Hedge will quickly give the reader a birds eye view of the destruction that is now taking place in the international financial system.  Much of it is exactly what we have been expecting as a part of the problem, reaction, solution dynamic which will engineer and implement the multilateral financial system.

It was always expected that the transition would require some level of crash or instability.  Like massive deflationary periods before, wealth is being transferred to the top as if it was being sucked through a straw.  The script which states the USD system is too blame for the instability has been widely distributed beforehand along with the inability of the central banks to increase liquidity in the event of another financial crisis.

Finally Some Inflationary ‘Demand’

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

It may not be Japan that falls victim first to currency collapse, as Russia is poised on the brink of 1998-style disaster. The nature of inflation in Russia right now is the basis for orthodox economics and its proposition under rational expectations theory. In fact, Russians at this very moment are “proving” the theory:

Russian consumers flocked to the stores Wednesday, frantically buying a range of big-ticket items to pre-empt the price rises kicked off by the staggering fall in the value of the ruble in recent days.

As the government considered ways to ease the selling pressure on the ruble, which has slid 15 percent in just two days and raised fears of a bank run, many Russians were buying cars and home appliances — in some cases in record numbers — before prices for these imported goods shoot higher.

When a central bank wants a little “pump priming”, as in not just Japan but all the orthodox institutions, this is what they expect. By making people think they can create inflation (what is NGDP targeting if not that?) central bankers expect people to act today on those “nurtured” expectations.

Greek Prime Minister Fails To Get Enough Votes To Elect President, Has Less Support Than Expected

Submitted by Tyler Durden  –  ZeroHedge

As previewed earlier today, in a vote whose outcome was widely anticipated, Greece’s Samaras failed to get enough votes (200) to push through his choice for president, Stavros Dimas.

• GREECE’S SAMARAS FAILS TO GET VOTES TO ELECT PRESIDENT: TALLY
• GREECE’S SAMARAS LOSES FIRST OF THREE DEC. VOTES ON PRESIDENT

As a reminder, this is the first of three votes, in which the candidate needs 200 votes. ND and PASOK have together 155 seats in the Parliament, and they expected to win some votes from independent MPs and possibly also some votes from Independent Greeks and Democratic Left MPs. According to Greek media, the government expects to win a total of 162-165 votes for Dimas in the first round.

Russian Currency Crisis and Defaults Could Create Contagion in West

Submitted by Mark O’Byrne  –  GoldCore

Russia’s currency market witnessed further huge volatility again today.  The finance ministry said it would start selling foreign exchange which are primarily in dollars. This appeared to reduce selling pressure on the battered rouble.

The fall of the rouble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.

On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.

The heavy selling pressure this week, made the central bank sharply increase its key interest rate by an unexpected 6.5 percent or 650 basis points. The move did little to buttress the currency in the short term as speculators and traders continued to sell the rouble.

True To Its Word, PBOC Confuses Economists’ Bubble Expectations

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

It is really amazing how condensed events have become once the economic and financial world shifted off its axis in August 2007. What used to be conventional wisdom about monetary affairs before then has long since been forgotten to the point that “emergency” measures that appeared in the months thereafter now pass for “normal.” However, the idea of “normal” in this new normal isn’t working very well, and alternatives have already been introduced.

In the pre-crisis era, currency elasticity was quite well-known and seemingly defined. It was also totally ill-suited to anything of the modern shadow system, most especially the global eurodollar standard that dominated in the 1980’s forward. That is why central banks were so ill-prepared for 2008 as they were using 19th century tools for a 21st century operational framework. Belatedly catching up, but only after severe damage was done, shifted “currency elasticity” to “unconventional” standards such as QE. In one sense, it was the same idea, a flood of “liquidity”, but carried out through far different methods.

The result, as it has been judged by central banks themselves, was not much by way of economic expansion though overwhelmed by financial imbalance and redistribution; i.e., bubbles. So what was “unconventional” wisdom in the immediate aftermath of the Great Recession is now, only a few years later, passé. Liquidity is still important, but “broad” liquidity has yielded to experimentation with “targeted” liquidity.

“NEOCONICA” – Fatherland for the New Millennium

Submitted by Thad Beversdorf  –  The First Rebuttal Blog

I recently wrote an piece on the comprehensive breakdown of America.  In it I laid out, from an analytical perspective, the things that are leading America to an economic collapse.  But it might be interesting to take a look at a broader view of American life today.  Policy and economic discussions are useful but in them we can lose the tangibility of what it all comes back to, which is the well being of Americans.  Whether or not the national budget is 190% of GDP and whether interest rates will rise or not are important issues but only so far as they will impact the quality of life of the people.  And so let’s have a look at the lives of the American people.  Have the policies over the past 15 to 50 years led to substantial improvements in the day to day real lives of Americans?  Let’s have a look.  And while we’ve seen a couple of these more economic charts think about them in context of the other charts or other sides of life.

The above charts inform us that the bottom 80% of income households are making less than they did in the early 1980′s, and remember the number of two income households today is far greater than it was in 1980 making this a staggering reality.  However the top 20% and especially the top 1% have seen incredible income gains since the early 1980′s.  Total net worth for the bottom 80% of Americans has also been crushed.  Since 2001 median net worth for the bottom 80% is down some 30% and this is during a period where stocks have reached all time highs.  How could this be you ask??  Well this is not happenstance or simple unexplainable market forces.  Those things do not exist in today’s world.  These results are by design.

The Russian Rubble

Submitted by Pater Tenebrarum  –  The Acting Man Blog

From Ruble to Rubble in a Heartbeat

The Russian ruble has been in panicked free-fall, not unlike the oil price. Last night the Russian central bank reacted by hiking its interest rates, not in baby steps, but rather in giant strides. This was incidentally the second rate hike in just four days and the fifth this year. From the press release:

“From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.

From 16 December 2014 in order to strengthen the efficiency of monetary policy loans secured by non-marketable assets or guarantees for 2 to 549 days will be provided at a floating interest rate, set at the Bank of Russia key rate level, increased by 1.75 percentage points (up to the present these loans for 2 to 90 days were provided at fixed rate).

Moreover, for further expanse of credit institution ability to manage their foreign exchange liquidity it was decided to increase maximum allotment amount for28-day FX REPO auctions from 1.5 to 5.0 billion USD and to conduct 12-month FX REPO auctions on weekly basis.”

To help readers to appreciate what a giant move in rates this was, here is a table showing the rates after the last rate hike on December 12 compared with those instituted yesterday:

Overnight liquidity provision goes from 11.5% to 18%, 3 month rates go from 10.75% to 17.25% – click to enlarge.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Oil Plunge Sets Stage for Energy Defaults (Bloomberg)
• Crude Collapse Prompts Great Rotation Into Cash (CNBC)
• U.S. Talking Oil Exports Just When World Needs It Least
• The Impact of Oil On US Growth (John Mauldin)
• Airlines Poised for $12 Billion Global Windfall on Oil Collapse (Bloomberg)
• Eight Things I Wish for Wall Street (Michael Lewis)
• Regional Banks Key To Wall Street Win On Derivatives (Reuters)
• Outspooking Lehman: Could A Russian Default Be In The Cards? (Zero Hedge)
• Western Banks Curtail Flow of Cash to Russian Entities (WSJ)
• Investors Take Cover From Russia Crisis, Oil Slide (Reuters)
• Raiffeisen, SocGen Plummet as Ruble Slide Triggers Bank Worries (Bloomberg)
• Plunging Ruble Unsettles Russians, Poses Test for Putin (WSJ)
• Feast Turns To Famine For China Trusts (FT)
• Giant China Mall Developer Prepares For The End Of Urbanization (Reuters)
• Asia Isn’t Ready for a China Crash (Bloomberg)
• Europe May Have A Big, Fat Greek Problem (MarketWatch)
• Samaras Seeks Greek Parliament’s Backing to Stop Syriza (Bloomberg)
• Brussels: Austerity Is For The Little People (RT)
• UK Bank Stress Tests: RBS And Lloyds Struggle While Co-Op Fails (Independent)
• Philanthropy’s Not Just Charity From The Rich: It’s Self-Serving (Satyajit Das)
• California’s Water Woes Quantified (BBC)

Continue reading: Debt Rattle December 17 2014 – The Automatic Earth