Another day another Howard Beale moment
Today our debt has exceeded the GDP of China.
With each day spent transferring money from producers, inventors, entrepreneurs, risk takers, and hard workers who believe that work, thought and professionalism will eventually bring the result they seek, to those who simply BENEFIT by BREATHING (incidentally SMEARING those who truly have need, or illness) the dreams of the founders grow more hazy and hard to recall amid arguments over unions, free trade, wars, Obamacare, Medicaid, Weiner’s weiner, Dodd-Frank, YADDA YADDA YADDA.
Are those trying to architect this brave new society true believers, or like the CFO’s and CEO of certain large financial institutions smart enough to see the end point and are busy corruptly enriching themselves before the deluge?
I don’t care.
Tar and Feathers either way. Don’t get out and vote in 2012, that’s not an acceptable level of patriotism. Get and and WORK for the opposition to Obama.
Get out and knock on doors, and SAVE THE NATION
Spengler is NEVER WRONG.
We aren’t going to have another financial crash. In fact, nothing at all is going to happen. Forecasting the United States economy is about as exciting as predicting next quarter’s gross domestic product in 1957 Poland. You want to know what’s going to happen, comrade? Read the Five Year Plan. With 40% of US personal income coming from transfer payments, it’s almost nostalgic to call it capitalism.
The so-called American economic recovery won’t die, because it’s undead. It was a zombie to begin with. Equity investors during the past six weeks came to the collective conclusion that the US is not in the early phase of an economic recovery, but in the endless middle of a structural slump, in the term of Nobel Prize winner Edmund Phelps.
President Barack Obama’s response to the 2008 economic crisis that swept him into power has changed the character of the
American economy. Call it Zombinomics.
Back in the antediluvian age when investors took risk (and sometimes panicked), the price of option hedges on major stock market indices traced something like an electrocardiogram of market risk. When the banking system went bankrupt in 2008, the VIX index of equity option volatility spiked to 80%. That means investors placed a roughly two-thirds probability that the price of the S&P 500 index of US stocks would change by 80% over the next year. That’s the financial equivalent of cardiac arrest.
Cost of option hedges on S&P 500:
During the slow, sickening stock slide of the past six weeks, the market’s pulse barely fluttered. As the above chart shows, the implied volatility of S&P 500 options traded at the bottom of its range, at the same levels it registered before the crisis.
There’s no need to hedge risk, because there’s no risk to hedge. Banks are the least risky proposition out there, at least the big ones that can’t be allowed to fail. They’re not risky, because they’re not really alive. The safest person on the world is a coma patient in an iron lung. A grand piano might fall on the healthiest fellow in the world if he runs about loose, but the regulators have the banking system in a respirator.
United States banks are shedding exposure to private borrowers at an astonishing rate. Not since numbers were collected have we seen anything remotely like this, as the chart below makes clear: the blue line shows the total loans and leases of US banks, and the red line shows the change in the outstanding level from the peak during the two years preceding each point.
Banks reduce total loans and leases to private borrowers
Source: Federal Reserve, author’s calculations 
Apart from the nearly trillion-dollar reduction in bank lending to private borrowers, the banks have also reduced their holdings of bonds reflecting private risk (mainly mortgage-backed securities) by about $200 billion. It’s the Slaughter of the Guilty. US households that put 10% down on a house during 2000-2006 as home prices rose 10% a year earned 100% a year on their equity. Goldman Sachs’ return on equity never broke above the low 30% range. Compared to homeowners, investment banks are on the back of the line at the punch bowl.
The banks borrow at nothing from the Federal Reserve and lend the money back to the Treasury (by purchasing its securities) at nothing plus. It’s a miserable living, as the low prices for bank stocks emphasize, but it’s a safe living - sort of like living inside an iron lung. And the world banking system has a trillion dollars of excess capital. Some of that will be eaten up by continued mortgage defaults in the US and the de facto bankruptcy of Greece and perhaps other weak links in the European Union, but not enough to repeat the events of 2008.
Corporations in the US, meanwhile, are sitting on a trillion dollar cash hoard. They don’t want to borrow money. They want to lend money. Instead of borrowing to the brim and gearing up their capital structure to goose up shareholder value, as they did during the decade leading to the Great Crash of 2008, they have turned survivalist. Inventories are a thing that corporations are not buying: the inventory to sales ratio is the lowest in 20 years.
Inventory to sales ratio: Total business (ISRATIO)
Source: US Department of Commerce (Census Bureau).Zombinomics and volatility