Financial Bubbles | timiacono.com - Part 3

Bathtub Economics and Aggregate Demand

In this item at his Contra Corner blog, David Stockman again has a hard time accepting the idea that the solution to our economic woes is as simple as spurring aggregate demand after the savings rate went to zero and the nation reached peak debt a few years back.

The Fed can do only do two things to influence these income and credit sources of spending—–both of which are unsustainable, dangerous and an assault on free market capitalism’s capacity to generate growth and wealth. It can induce households to consume a higher fraction of current income by suppressing interest rates on liquid savings. And it can inject reserves into the financial system to induce higher levels of credit creation.

But the passage of time soon catches up with both of these parlor tricks. When household savings decline to the vanishing point, as has occurred since the turn of the century, there is no more incremental spending to be extracted from current income.

Likewise, when balance sheets become totally exhausted with leverage—as is also the case at present—there are no more one-time increments to spending available from the simple expedient of ratcheting-up household and business leverage ratios. That condition amounts to “peak debt” and it characterizes upwards of 90% of US households today.

Of course, this condition is more politely called “a balance sheet recession” and, as we’ve learned in recent years, one of the common side effects of central bank handling of balance sheet recessions is ever larger, increasingly dangerous asset bubbles.

Running to Stand Still

It’s that time of the year again when families all across the country are grappling with the increased cost of health insurance during open enrollment (our premiums rose about 20 percent, necessitating a change in plan with higher deductibles, etc.).

This WSJ story looks at where spending has increased and decreased in recent years (much of which is due to prices that are rising or falling) and, not surprisingly, it has become increasingly difficult for many families to make ends meet.

Importantly, a 25 percent gain over six or seven years is an inflation rate of only 4 percent, but this has come at a time when wage gains have been only a fraction of that or much less for those who have transitioned to lower paying jobs since the last boom went bust.

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Hoarders

Future historians will no doubt have some fun with 20th and 21st century Americans’ propensity to buy stuff that they really don’t need with money they don’t have and then go store it in some shed. Businessweek recounts the dramatic increase in self-storage capacity in this story today, from which the graphic below was drawn.

While much of this is no doubt temporary storage due to life changes (divorce, relocation, etc.) much of it is likely akin to people who mindlessly pay the minimum balance on their credit cards every month, not really thinking about how this sort of thing adds up over the long haul, and, like banks, storage companies are more than happy to take their money.

Awash in (Expensive) Oil

WTI crude oil is rebounding this morning and the price for one barrel of the stuff now sits at a little over $66 dollars, a number that somehow seems equally odd and menacing.

The financial media is replete with stories of impending doom with the consensus being that marginal supplier Saudi Arabia has taken aim at johnny-come-lately marginal supplier U.S. shale, shown in green below via this offering from Prof. James Hamilton at Econbrowser.

Between Canada’s oil sands production and the boom in U.S. shale oil, North America has foisted upon the world a lot of dear oil and, now, OPEC appears to have seen enough of it.

Obviously, the solution here is for Wall Street and the Fed to provide even more cheap money in order to facilitate even bigger negative cash flows in the shale oil patch that will go on in perpetuity – let’s see how the Saudis like that.

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