Posts Tagged ‘deleveraging’

Walk away from your mortgage (New York Times)

January 9, 2010

Is this more anecdotal evidence of media awakening?

As stated here, there is absolutely no moral obligation not to. A mortgage is a financial transaction.

Where this essay in the New York Times fails, is in correctly identifying the reasons government attempts to persuade you that walking away is immoral. The NYTimes article says: “There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. […] The other reason is that default (supposedly) debases the character of the borrower.

Actually, the NYT only partially got it wrong. The reason government does not want you to walk away is because doing so would immediately cause a revaluation of the property to the downside. This would require a re-marking of the outstanding debt thus triggering a reduction in total outstanding debt.

Of course, if you follow this blog, you know that in an unchecked fiat monetary system inflation is the conditio sine qua non of the existence of government. Thus, the survival of government is predicated on the continued expansion of inflation thus on the continual expansion of debt.

A reduction of outstanding debt is contrary and lethal to the logic of government.

Deflation brings about a reduction of outstanding debt. Deflation is the enemy of debtors and nobody is deeper in debt than government issuer of the reserve currency.

More deflation doing what it does best… (bankruptcy of government)

November 18, 2009

“A report released Monday by the controller’s office shows that property tax revenues will likely be $35 million less than anticipated in the 2009-10 fiscal year that began July 1. Payroll tax revenues will probably be $24.8 million less than expected, the report said. To make matters worse, some city departments are going over budget, including shortfalls of $5.1 million in the Fire Department, $4 million in the Sheriff’s Department and $3.2 million in Superior Court. […] Supervisor Sean Elsbernd said he expects the $35 million figure to wind up being conservative. He said 350 property owners had filed appeals by this time two years ago, and their properties were worth a total of $2 billion. This year, the 4,000 property owners represent property totaling $25 billion.”

Deflation at work…

November 17, 2009

Nearly 35 years after taxpayers spent $55.7 million building the Pontiac Silverdome and a year after a $20 million sale fell through, city officials have sold the arena once called the most desirable property in Oakland County. […]  The price: $583,000. […] We had hoped it would have brought more, but now the city can be freed of its upkeep and get it back on the tax rolls,

This is what deflation does. It reduces nominal wealth thus it reduces overall revenue streams and so it reduces tax revenue. As nominal wealth declines, entities can no longer expand outstanding debt due to diminished collateral. As revenue declines, entities can no longer expand debt and/or service existing debt and must lay off workers. As tax revenue falls, local governments have to lay off and curtail public spending.

Allowing banks to disregard mark-to-market accounting rules aims to avoid just this type of situation in the hope to buy time.

But inflation has a limit. If that were not the case, then you would expect some degree of direct correlation between inflation and GDP progression. But that is not the case. Since 1980 government and household debt expanded by 1200% to $26Trillion but GDP only expanded by 100% to $14Trillion. Thus inflation conforms to the law of diminishing returns.

From the inception of the modern Dollar in 1913 inflation proved to be a barrier almost immediately in 1929. Subsequently, by declaring convertibility to gold but not allowing anyone to check the quantities of the metal in storage, the USA were free to pretty much print whatever amount of money they wanted. Till the late 60s when the situation was fairly similar to where we are today.

By the early 70s it was decided to abrogate the monetary agreement that had been in force since WWII in favor of floating exchange rates meaning that now Europe too was on a fiat monetary system. Thus inflation could now be pushed into the new vacuum of the European markets. Then came globalization effectively allowing us to push inflation into the last remaining markets and the Euro that allowed us to inject a further dose of inflation in Euroland. Thus till very recently, inflation could come to the rescue of governments by decreasing nominal debt outstanding.

There are no more markets of any consequence that we can bring in on the inflationary gig. Thus my contention that we’ve reached the end of the inflationary cycle.

Industrial capacity and debt obligations are at historic highs. Interest rates, savings and capacity utilisation are at historic lows.

Why would gargantuan spending by governments to add even more industrial and commercial capacity solve anything?

Incidentally. Gargantuan government spending guarantees prolonged deflation because increased taxes will erode spending, hiring and investment. Therefore, if anything, spending of this magnitude only serves to delay the eventual recovery.

So, buying time may be a viable strategy if and when inflation has room to run. I think inflation can no longer be expanded at this point and that a gradual contraction in prices, wages and asset values is with us for some years to come.

The trouble is that the existence of government if predicated on inflation. No inflation = the bankruptcy of government.

Can a Western government declare bankruptcy?



Civil unrest… tic, toc… tic, toc…

November 17, 2009

Countdown to global conflict…

Curtailing public services (mail service)

November 17, 2009

Chipping away at public services one item at the time….

As government is unable to expand credit markets and as most tax revenue is going towards debt service despite the lowest interest rates in history, public service must be curtailed.

Curtail enough public services (police, fire fighting, refuse disposal… health care…… pensions) in an environment where unemployment is rising at the same time that the power and business elites are implicated in scandal after scandal and you got yourself the ideal conditions for civil unrest.

Civil unrest means government will fall.

I know that. Some other people know that. Some politicians may know it too and of those that don’t know it, they can feel the winds of change bearing down on their little fiefdoms.

How do you prevent a total loss of power of the incumbents? You engineer a war of course and, at this rate, the next war will be a real war where Western society will be packed off to the front, civilian industry will be turned into war industry and food and energy will be rationed.

You may think I am off my rocker.

If I am right and, so far, empirical evidence tells me I am because:

The gargantuan amount of money that has been created in the past year alone has so far failed to work it’s multiplier magic on the overall economy

Graph: M1 Money Multiplier

And since the gargantuan sums that have been handed over to banks are just sitting there

FRED Graph

And because we still have significant overcapacity

Graph: Capacity Utilization: Total Industry

… and because of this…

FRED Graph

… and because of this…

FRED Graph

… and finally, in an economy that is 80% consumer based, because of this…

Graph: Personal Saving Rate

… if I am right (and the above data says I am) and we have entered a cyclical deflationary era, government won’t be able to expand credit markets no matter what it does and monetization of the debt issued by the treasury is not going to help if not to destroy the currency thus the economy.

Incidentally, considering that the Bank of International Settlements estimates global financial obligations to be worth at a minimum US$500Trillion and that world GDP was at one point hovering around US$50Trillion and that the majority of these derivatives are held by US and EU banks (and only four banks hold the lion share of the lot)… major global currencies are not going to take kindly to the moment in time when these obligations must be satisfied…

Can a Western government declare bankruptcy and, in one fell swoop, admit that, in fact, we are no better than your garden variety Mugabe?

I think not.

If any of the above indicators don’t start trending in the opposite direction we’ll have us a war by 2013/2015 latest.

White House planning to use TARP

November 13, 2009

You can’t make this stuff up…

Budget experts said committing some TARP funds toward debt reduction could help calm concerns about the size and intent of the program.

Even more proof the secular inflationary cycle has ended…

November 1, 2009

Via the team at Zero Hedge

Read the entire post and look at the graphs. This is just more proof that traditional monetary policy has lost traction and that government is “pushing on” the proverbial “string”.

Important excerpts:

It should be no surprise to anyone that household debt outstanding fell again in 2Q (the latest Fed Flow of Funds data), making this now three quarters in a row of household net debt contraction.  The important character fingerprint in the 2Q period being that debt contraction at the household level accelerated. […] Household sector credit contraction is a first in post War history (emphasis added).


If households are paying debt down, then something has to be given up for that balance sheet reconciliation decision.  And the give up is consumption.  Although you may not realize this, and this is clearly one of the key reasons why the long tenured Street truism suggests no one bet against the US consumer, personal consumption in nominal dollars has actually increased during each and every recession of the last six decades (at least).  Each and every recession until the present, that is. […]  Lastly, we believe it’s also important perspective to remember that in our current circumstances, households have been treated to some of the lowest interest rates of a lifetime and consumer product price weakness has been pronounced.  Yet still zip in terms of consumption gains 19 months into official recession territory.


All I can say, is that you should be accumulating gold and silver bullion.


David Walker former US Comptroller General telling it how it is

November 1, 2009

Take the power to create and manage the money supply away from government and central banks. Accumulate gold and silver bullion.


Example of moral implications of fiat money and the inflationary dynamic

November 1, 2009

Mike Shedlock on the deliberate government policy to keep people in debt.

Following the publication of an insightful and lengthy piece of research, Mike Shedlock distills the information to highlight what is essentially further proof that government is not acting in the interest of the public.

Below is an excerpt from a typical piece of institutional “advice” (abetted by government) aimed at preventing or at least reducing the number of homeowners walking away from what is effectively a desperate financial situation.

“Losing your home can be the worst and most devastating event to you personally, and your credit history. This is a scenario that you don’t want to occur if you can avoid it! Not only will you lose the comfort of your home and your investment, but a Foreclosure will stay pending on your credit history for as long as 10 years. This will jeopardize your ability to qualify for any future home loan purchases, it may affect your ability to access loans for car purchase and other needed purchases, and loan costs are likely to be higher both in fees and interest paid.”

In an unchecked fiat monetary system, the end of the inflationary trajectory inevitably and necessarily brings about big government – -.

Big government is inherently wasteful because as the inflationary trajectory progresses, inflation (expanding credit and money supply) becomes a goal unto itself thus consuming progressively more government resources to maintain the trajectory.

Once inflation becomes the do-or-die of the existence of government, the state has a vested interest in maintaining the nominal value of debt outstanding. Defaulting on a mortgage is the equivalent of deleveraging which is to say that the outstanding debt volume will be reduced thus putting a dent in the quantity of inflation outstanding.

Contracting inflation = contracting government

Absence of inflation = government bankruptcy i.e. = death of government

Of course, there is absolutely nothing morally wrong in walking away from a mortgage. A mortgage is not money you have borrowed from a friend as a favor at zero interest. A mortgage is not a favor a bank is doing you.


If you bought a Rolls Royce and then realized you could not afford the gasoline consumption or the maintenance on the vehicle, would you not sell it? If you were unable to sell it, you’d give it back to the bank. Would you feel guilty? Sorry maybe, but would you feel guilty?

If you had a fleet of 100 trucks and then business conditions turned down so that you would only need 50 trucks to operate in the new environment, would you not sell half the fleet to maintain profitability? If you were unable to sell the trucks, would you not hand them over to the bank that guaranteed loaned you the money to purchase those trucks? And if cutting your fleet in half didn’t help and you had to go into receivership, would you feel guilty?

A household is not different than a commercial company. A household must be able to make a profit to survive. THERE IS NOTHING MORALLY WRONG IN WALKING AWAY FROM A MORTGAGE. A MORTGAGE IS A FINANCIAL TRANSACTION. The mortgage is guaranteed by the property itself and/or collateral. You walk away and the banks keeps the house. No problem with that.

If the banks however made a mistake in assessing the value of the home when it first extended a loan to you, that was the mistake of the bank. It is their job to assess collateral properly. If they bungle things up, the bank might go into receivership and they will be taken over by another stronger bank.

It is an established fact today that our respective governments have abandoned any pretense of morality. Why should people feel guilty by making a financial decision to ensure their own survival?

Accumulate gold and silver bullion

Something nasty this way cometh…. (gold)

October 31, 2009

The reason I keep yapping about gold is two fold. An unchecked fiat monetary system within a democratic environment, must inherently and by necessity lead to an inflationary blow-off phase (2003/2007) accompanied by the total debasement of the currency. This is not an opinion. If you doubt this assertion, then take a gander at the header gracing the pages of this blog. The other reason is that in an environment of floating exchange rates where despite unimaginably low yields credit creation is contracting and currencies are deliberately devalued, nothing other than gold and/or silver can help to preserve wealth.

That is because a fiat monetary system can only survive in a context of relative values, high monetary velocity and low savings. The inescapable outcome is that financial value progressively runs away from intrinsic value and nominal profits are progressively concentrated in fewer and fewer sectors till they are concentrated in the financial industry only.

Since whether our “authorities” like it or not, gold is a rare commodity and, as such, it is nobody else’s debt, gold still plays a role in state finances. However, the fiat logic dictates that gold should be devalued by any means possible or, at least, not accounted at its true value. Thus as the fiat monetary logic develops, the authorities have a vested interest in avoiding any reference to gold and certainly have an interest in discouraging the public from demanding physical gold in exchange for currency because this is tantamount to saving thus lowering the velocity of money.

Accumulating gold in an environment of low yields and cratering credit creation is the only thing that can be done to preserve wealth. Accumulating gold is direct action to signify a loss of confidence in the monetary system, the policies and the instigators of the policies.