Some Black Humour

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Jon Stew­art at “Com­edy Cen­tral” put together a mas­ter­ful rip into the stock mar­ket spruik­ers on the CNBC net­work, expos­ing how their so-called exper­tise was lit­tle more than a blind exhor­ta­tion to join in the euphoric excess of the bub­ble, and to keep it alive as it died an inevitable death.

It’s both infor­ma­tive and very amus­ing. Click here to watch it.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Bull­turned­bear

    Hi Pru­dent,

    Big pic­ture. Not lit­tle.

    Peo­ple and banks were not broke in 2003. The mar­kets had a pre­ced­ing cor­rec­tion but busi­ness and con­sumers were bull­ish and felt rich. They wanted to bor­row to spec­u­late.

    Now busi­ness and con­sumers are bear­ish and feel very poor. Credit money has crashed and is crash­ing (that is the true money sup­ply). Why would peo­ple and busi­ness want to load them­selves up with debt again? Par­tic­u­larly when assets are falling and the debt model has been a mon­u­men­tal fail­ure in Ice­land, Rus­sia, Dubai, The UK, Ire­land, The US, Etc, etc, etc. Why would banks want to loan money to failed and risky cus­tomers again? Banks only want to lend to clean cus­tomers with a good busi­ness model. They do not exist in this world.

    In Oz the prop­erty indus­try can hardly get a credit card any­more. Let alone a con­struc­tion loan. The only peo­ple look­ing for finance are the risky ones. The smart ones are delay­ing plans and wait­ing.

    Money in the real world is shrink­ing not expand­ing. The money sup­ply graphs paint a mis­lead­ing pic­ture. The world is run­ning out of money fast. That is why I say 4 to 6 months before the real crunch comes. The mar­ket will crash first and then 6 months after that the skele­ton will come out and we will see that the cup­board really was bare.

  • I appre­ci­ate the effort Pru­dent,

    But the one fac­tor that I take into account that doesn’t appear in your brain­chart is the accu­mu­la­tion of pri­vate debt over time. Since this is what I see as dri­ving the entire dynamic, I don’t think that insights can be gained by com­par­ing what is hap­pen­ing now to events in the last ten or twenty years. If you want to use his­tory as a guide, you have to go back to 1930, 1890, 1870, etc., and see what hap­pened then. Defla­tion ruled, and I expect it will again now.

  • pru­dentsaver

    If this chart of mine is sup­posed to work out, it assumes that the long term inter­est rates starts to head so much up, because of the return of liq­uid­ity / ani­mal spir­its and also that this fur­ther push an increase in oil prices, com­modi­ties, etc through spec­u­la­tion, so that it becomes ratio­nal for already over lever­aged con­sumers to bor­row short, and push pri­vate debt even higher. If the short term rate is 0–1 % and the long 10 year rate 4–5 %, I think that could work out.

  • Bull­turned­bear

    Hi Pru­dent,

    I have another idea to add for you to con­sider. Some esti­mates float­ing around at the moment talk about 45% of the world’s wealth being destroyed in the last two years. Ouch!

    Under­stand­ing the prop­er­ties of debt is cru­cial to real­is­ing the seri­ous­ness of wealth destruc­tion. Assume you own an asset worth 100 and you owe 50. Then the asset falls in value to 75. In that case you have lost 50% of your wealth. At 50% you felt mod­er­ately geared and wealthy. Now that you are geared at 67% you start to feel very ner­vous. The like­li­hood of increas­ing debt to gam­ble fur­ther quickly becomes unlikely. 

    Also, the high­est geared bor­row­ers (the big risk tak­ers) are wiped out com­pletely. They can’t bor­row again. The lower geared bor­row­ers (low risk) could still bor­row if they wanted. If the low risk bor­row­ers didn’t gear up when times were good. There is no way they will when val­ues are crash­ing and busi­nesses are fail­ing. Who then will gear up fur­ther this time?

    As the asset value falls the debt stays the same. Unless you default and part of the debt is wiped out. There­fore your avail­able equity (buffer) crashes. 

    This is one of the rea­sons why each time you try to start the debt bub­ble it gets harder and harder. My con­clu­sion is that the debt build up and crash has been too large to start the bub­ble again this time.

    You on the other hand must think there can be one or two more throws of the dice. Do you think the debt bub­ble can keep restart­ing for­ever?

  • ueber­baer

    how much do super founds get every quar­ter? Where do they invest now?

  • pru­dentsaver

    I think that if the debt bub­ble have what should we call it? One last blast? Then I think it will be extremely infla­tion­ary, because the forces to over­come this defla­tion­ary delever­ag­ing process lately are so huge, so it’s impos­si­ble to avoid over­shoot­ing. I see liq­uid­ity com­ing back now. Look at the AUD vs the dol­lar now.

  • Bull­turned­bear

    Hi Pru­dent,

    Let’s assume you are right. 

    We have one more infla­tion­ary bub­ble. Debt lev­els surge again. Infla­tion, assets and com­modi­ties shoot for the moon. 

    Then what after that? Then do we have a defla­tion­ary unwind? Or do we start another infla­tion­ary bub­ble again?

  • pru­dentsaver

    I think that when the dow/gold ratio, eighter through infla­tion or defla­tion, goes towards 1:1 like in 1980, in this case, in an infla­tion like boom, stocks will get very cheap in real terms, and the real value of the debt will get very low. That means that stocks have to rise, don’t go lower, as they are extremely cheap on real terms, if we now get an infla­tion­ary boom, that brings the dow gold ratio to 1:1. So there will not be a defla­tion­ary bust then, but more of a defla­tion­ary boom, as after 1950, and even after 1982. Buf­fet think’s the US might have worse infla­tion than in the sev­en­ties. That only hap­pened in WW2, and in the Civil War before in the 1860-s. China are com­plain­ing about the integrity of US trea­suries, and the US are respond­ing — we are pru­dent, there are ten­sions build­ing in the south china sea between the US and China. I think the wild card here is the integrity of the dol­lar, and the integrity of US trea­suries, even the pos­si­bil­ity of a round of com­pet­i­tive deval­u­a­tion, maybe even a war.

  • john c. halasz

    It’s not a lot of laughs, but just in case any­one is inter­ested, he’s a link to Jon Stewart’s fol­low up inter­view with Jim Cramer, in which he takes the creep to school:

    http://www.nakedcapitalism.com/2009/03/daily-show-and-jim-cramer.html#links

  • pru­dentsaver

    The lat­est speech of larry sum­mers is quite good, to be found here:

    http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vwXM86xCprLo.asf&vCat=/av&RND=015166273&A=

    Around 1 hour.

  • pru­dentsaver

    I have been look­ing at some charts, and based on it, I have made the fol­low­ing sug­ges­tion.

    The US in 1929 was a cred­i­tor nation, they never helped them­selves in 1932, through buy­ing ger­man bonds, instead them dumped it. The result, hitler and nazi ger­many.

    Japan in 1989, was the huge cred­i­tor nation. In around 1992, there was books and videos cir­cu­lat­ing stat­ing the US was bank­rupt.

    I think the US suf­fered a dif­fer­ent fate than nazi ger­many, Japan that were in the same role as the US in 1929, in 1989, choosed to prop up the US, and west. The japan­ese pump prim­ing booms, have been the same as the 1930-s and 1940-s, it is sim­i­lar to as if the US, instead of the Great depres­sion, had primed their econ­omy through prop­ping up ger­many and other coun­tries through cur­rency manip­u­la­tion.

    What this could mean, if this way of look­ing at it is right, is that this is actu­ally like 1948–1949, and that long term rates in the US will start to rise a lot.

    I have tracked a per­fect rela­tion­ship between the nikkei and 10 year US trea­sury notes.

    The nikkei is down more than 80 % since 1989, if yields on US trea­sury notes was to fall to 2 %, the nikkei would go to 4000. If it was to fall to 1 %, the nikkei would go to 2000. I think it’s highly unlikely, when I add that the nikkei was down at 80 % in 2003, and that the price of gold have almost quadru­pled since then. I think Japan and China as cred­i­tor nations are more impor­tant than the US, and that this means, that trea­sury bonds will enter a bear mar­ket sim­i­lar to after 1950. The debt lev­els in the US sim­ply does not mat­ter, just as it had been irrel­e­vant, if the US had boosted ger­many with cheap credit from 1932–1949, instead of bank­rupt­ing ger­many.

  • pru­dentsaver

    Just to add it short:

    Japan in 1989 = US 1929
    US in 1992 = Ger­many in 1932, only the US was “lucky”.

    US from 1992–2009 (bank­rupt all the time), the lev­els of debt is irrel­e­vant, as it’s all worth­less debt.

  • pru­dentsaver

    Imag­ine that the US instead of dump­ing Germany’s gov­ern­ment bonds in 1932, had kept prop­ping them up, giv­ing Ger­many a hous­ing boom, and even a dot com bub­ble, all so the US could had their export machine going, and suf­fer a lighter depres­sion, more like Japan have now. It had in real­ity not increased the value of the ger­man mark a dime. Under­stand this, and you under­stand that us trea­sury bonds are liv­ing on bor­rowed time, and some­thing very very bad, can hap­pen any time, if the Asians get their act together.”