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This review is from: The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation (Hardcover)Yes, the CPI measure of inflation could continue to stay near zero for years due to housing accounting for 43% of the weighting. But metals are 3 to 5 times more expensive now than in 2000, not just Gold and silver. Food commodities could be next. Commodities account for 1/3 of our income expenses, so if they double in the next 5 years while housing deflates another 30%, we will see only 3% annual inflation, which is considered close to zero inflation. Real estate can fall even more because we have 3 times more sq ft per person than we did in 1970. Wages will also fall which will keep services less expensive.
Shilling wrote basically the same book in 1999 which had a chapter titled "Avoid commodities and real estate" which was terrible advice for real estate up until the crash of 2008, and commodities are still doing great. The primary error I see he is making is that he assumes the dollar will remain viable as the world currency. Other than this, his ideas seem good and well written. It's just that buying bonds now is possibly the worst possible advice, as well as not realizing that agriculture commodities could sky-rocket. Already interest rates are getting near the max of what Shilling predicted. Not enough people trust treasuries enough to keep buying them.
A 40-year housing bubble has been in progress, caused by mortgage interest deduction and capital gains rolling over into new larger houses. It got much worse much faster as a result of the Fed's low interest rates and pervasive lending fraud that both Bush and Obama have stopped the FBI from pursuing (see Bill Black's video). The tax benefits and fraud have motivated people to get larger houses than they need and has increased competition between buyers, and sends more interest profit to banks who did nothing beneficial for the economy in exchange for that profit. So we have given tax breaks to large houses (which does not increase our productivity), sent more of our income to banks (often twice the value of the real estate), and shifted the taxes to productive workers, which raises the international cost of our goods and services. Instead of sending interest to banks, the government could have extracted larger property taxes to keep prices down while decreasing tax on income. Germans pay half as much of their income on housing because they were not persuaded to buy big houses. Larger properties also causes city sprawl which requires larger vehicles, longer commutes, more infrastructure, and makes mass public transport nearly impossible.
Besides finance being in bed with government, overpopulation in Asia causes harder working conditions that the U.S. and Eurozone can't compete with. Our standard of living has to fall as theirs rises. Limited resources (certain metals, farm land, fossil fuels) mean we can't rise together. We can't do much to decrease world population, but we can try to get our lives back from the finance industry that is "taxing" us and the gov to death with interest on credit...credit that the gov gave them or allowed them to produce out of thin air. The interest being sent to banks should have been tax money going to the government. Why in the world is both our government and citizens paying interest to banks? Why not let our interest payments go to the government as tax revenue, and let the government have interest-free money? (see Modern Monetary Theory...austerity with debt deflation or hyperinflation is a false choice the banks want us to believe in. There is a THIRD option..see michael hudson's March 13, 2012 blog)
If we had let borrowers default, deflation might have been the dominant factor as Shilling describes, with good and bad. The bond market would not collapse nor would there have be serious inflation in commodities. But the government has been continuing to keep house prices inflated to protect itself and the banks. This spells disaster for dollar as will be seen soon if the bond market collapses and there is a sudden rise in commodities. Half of the $13 trillion in mortgage guarantees could easily fall on the taxpayer if QE does not devalue the dollar fast enough. QE or not, it became a no-win situation after the bail-outs. But even worse, the banks are not using QE to protect the gov by giving out loans to keep houses inflated. They are using it, along with leveraged loans, to buy overseas assets. The result is more deflation in U.S. real estate, while the banks and traders getting loans are sneaking out the back door to inflate things we'll need in the future.
The false alternative to QE, and false solution to hyperinflation, is massive government spending cuts in social security, medicare, and the military. This will lead to more unemployment, but not a decrease in our cost of living because we are not exporters nor self-sufficient and therefore other countries will be able to drive commodity prices up relative to our devalued dollar and wages.
There is simply too much government debt for the dollar to keep its value. Our exports can't increase until our wages are 3 times less...which is still more than what Asians are getting today on a purchasing power parity basis. Despite being an exporter of wheat and corn, our producers will not sell to us for less than they can get on the world market. Gov spending cuts may also reduce food subsidies, especially on corn, which would cause our food prices to rise even more.
Shilling is diametrically opposed to Peter Schiff on the future of bonds and inflation. Schiff was giving much more detail about the housing problems in 2006. Michael Hudson also gave greater detail in 2006, but he takes no side on inflation/deflation for the next 5 years. He is my primary source of info. He predicts we are going to get a dose of our own medicine much like what we used the IMF/Chicago boys/Washington consensus to do in latin america and Russia. They were allowed to go deep in debt, and instead of defaulting they were required to sell off government infrastructure, private assets, and resources. Social spending was decreased while taxes were raised, just to pay the gov debt. We may be a little kinder to ourselves and simply default on the treasuries. So foreign countries, in effect, will be the ones paying for a large part of the U.S. bank bailout....banks who have been using foreign treasury purchases to buy foreign assets...even *leveraging* Chinese and Japanese treasury loans in order to buy real Chinese and Japanese assets. It's insane. They will not tolerate it much longer: they will refuse to buy treasuries to support our debt and we will then face interest rates too high for taxes to pay banks the interest they demand to take on the risk of holding our dollar-backed bonds....a risk that resulted from bailing out the banks themselves. The choice then becomes incurable money printing hyperinflation or austerity that our grandparents couldn't dream of. Never mind Greece...Latvia could be our future. But we have a bright spot: besides outright default on treasuries (something we refused to allow other countries to do), we also have the ability to default by inflation. This is another option other countries did not have because they had their debts in dollars or Euros rather than their own currency that they control.
In any event, the biggest victims will be U.S. workers and the biggest beneficiaries will be U.S. banks. The government is just the facilitator that only halfheartedly obscures the banks' actions against taxpayers.
Interest rates could rise to 13% as in 1980 as QE gets larger and the debt becomes impossible to carry. This may make bond purchases at that time much better than many other investments, assuming the government does not default outright or by hyperinflation. At that time, the government will probably announce a crisis and institute Volker-type austerity. But make no mistake: "austerity" is simply a euphemism for bailing out banks for making bad loans, here and in Europe. This is what the U.S. and Eurozone did to Latvia, Greece, Iceland, Ireland, Chile, and Russia. A fundamental tenet of good economics is that the creditor take as much responsibility and risk as the debtor. Not allowing debt-cancellation is the 2nd biggest mistake of our age that leads to austerity plans that crush societies, enabling banks to do it all over again some place else. Lending for non-productive reasons such as houses should be a government function that provides tax revenue, not a scheme for driving up asset prices that no one can afford without going into debt servitude for life.
Longer term, we have been making the bigger mistake of shifting taxes from non-productive forms of wealth and onto productive forms of income. We slowly and increasingly lost this fundamental American style of taxation in the past 40 to 60 years. It is crushing our industry by diverting income from production into the hands of non-productive finance and insurance. Even Buffet admits it's wrong for him to pay zero taxes while his secretary has a lot to pay. U.S. taxation interest-extracting feudal "lords", who have a monopoly on credit given to them by the government...and now we owe them more for our real estate than the real estate is worth. Share-cropping was a recent example. If we can't "plow the fields" well enough to pay them back, they are going to get it through the tax collector who has assumed their debt. Shifting the owner of the debt provides more legal tools to extract more "interest" which now takes the form of higher taxes and the stripping down of government infrastructure that our parents paid for.
In short, Shilling's book provokes reflective thinking that is important and I did not see an error in his reasoning, except that he does not see the fundamental change that makes "this time different" from his life-long passion with deflation and bubbles: the currency itself is in a bubble that is bursting. The bubble started in 1972 when we finished the process of getting off the gold standard. The BRIC countries have started to exchange without the dollar, including Niger, Malaysia, Iran, and Turkey. Niger and Iran being the most important as it accelerates the decoupling of the dollar from oil. The Euro flailing has given a little breathing room for the U.S. banks to get out of Fed-generated dollars before the collapse.
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Initial post: Jan 11, 2011 4:05:37 AM PST
Last edited by the author on Jan 13, 2011 3:22:01 AM PST
Possibly all bubbles are caused by interest rates that are higher than increases in production efficiency. If the interest acquired is allowed to be re-invested into the assets that are loaned out again, especially at near zero taxes as we've done with housing, then the day will come when productive labor of the economy will not be able to pay the interest on the bank-inflated assets. This is the "miracle of compound interest" when bankers loan out money faster than workers can add to the economy: the bankers eventually take control. We are now share-cropping for the banks, many of us no longer the owners of our real estate, nor or government, nor the beneficiaries of our social security payments which have been basically pledged to pay the banks for their toxic assets.
The impending doom from too much interest is obscured by a GDP that includes useless (non-productive) transactions in the finance and insurance sector and in inflated asset prices rather than the real increase in the productive capacity. That's why our industrial base has been getting smaller while the fake GDP goes up. Finance has benefited greatly from the government's GDP reporting at the expense of Industry. GDP allows finance to pretend it somehow benefit the economy and society. Equity investment in production capacity is fine, but there's nothing for society as a whole to gain from interest-bearing loans, especially on non-productive asset inflation. The creditor must take as much risk and responsibility as the debtor. Taking loans out on existing assets takes risk off the creditor. Loans should be given only to increase productive capacity, and the creditor should lose if the business venture fails. Houses are not a business venture.
Taking a loan out on the place where you live used to be considered a final desperate act for someone in deep financial trouble.
There is no fix until our trade imbalance (actually, our balance of payments) is fixed. In addition to shifting taxes off labor and onto finance to lower the price of our goods, we can use Buffet-style import certificates to balance trade (our exporters get certificates proportioned to what they export, and foreign importers must buy them in an open market before they can import). A bill was introduced in 2006, but no action has been taken.
Building more and larger houses is only a drain on the productive parts of the economy which needs the labor and materials to make things that society (here and abroad) actually needs. China is making a similar mistake in thinking building real estate just for the sake of building raises the useful production simply because province leaders can point to increased GDP. Since they don't have the same destruction finance system, their bubble collapse in real estate in coastal cities will not be much of a problem. So construction metal commodity prices should go down (in terms of RMB, but not necessarily in terms of the dollar).
To say that German workers are bailing out Greece workers is a wicked way of viewing how German (and American) workers are bailing out German banks for making bad loans to Greece. Loans that can't be paid, won't be paid. If you loan $10 to someone in poverty, who's fault is it if they do not pay you back?
QE is the Fed buying treasuries from the banks. Those treasuries were originally bought by the banks as loans to the government. So basically, the Fed is loaning money to the treasury in exchange for IOUs, while the banks get a cut from the exchange. According to Bernanke, this was not really "money printing" out of thin air, it was as an "asset purchase" by the Fed. It got something in return for the money printing. But that's just the government owing money to itself as a way to support the government. When the treasuries were privately owned, there was more of a legal requirement to pay them back. QE just makes it politically easier to default on the loans in the future without anyone complaining. The government defaulting on itself is equal to default by inflation. QE plus the default in the future is what will retroactively makes QE "money printing". QE gets "worthless" treasuries off the backs of the banks so that they can use QE to buy real assets that will not be subject to the inflation it causes. Taxpayers are the victim by decreased purchasing power of wages and social security.
To not default on itself, there would have to be a government surplus in the future to pay the Fed to cancel the trillions of dollars it holds in treasuries. Using the most optimistic numbers, assuming the toxic assets are never released and that social security is fully funded, government spending will have to be cut by 70% for 13 years to cancel the debt.
QE has to be faster than bond sellers ("vigilantes") in order to keep interest on the debt low (1.1% in 2010, only $168 B, thanks to short term notes). QE lowers interest rates by creating a false demand for the treasuries. If QE is stopped, bond buyers might require 5% which would send 1/3 of tax revenue to finance the debt. The debt has been switched from long term to short term notes which can cause this change to be sudden. QE causes people to lose faith in the dollar, which will someday, if it continues, cause interest rates to rise despite the QE. At some point QE will not be able to buy treasuries faster than people are selling them. That's hyperinflation. If that point is reached, QE will have to be stopped before the dollar becomes worthless, but by then, people will demand 13% interest on treasuries and there will not be enough tax revenue to pay even the interest on the debt.
TV hosts push their more reasonable guests into talking about the bright side of this picture. Reluctantly, the guests dream up scenarios that don't look so bad. More often, they just invite more optimistic guests. I often see a negative picture painted and then they start talking about the way out, or what we can do. They want to end on a cheery note, but it's obscuring the problems. The voters are not intelligent enough to get back to classical economics. The number of economists even capable is too small. Academia has been flooded with "pro-finance" economists rather than on those who want to see production increased. There are articles on how this occurred. It's very similar to how doctors and gov were blinded by pharmaceutical influence.
So there is not a solution. Finance won the war in extracting all the productive output from the real economy. We never knew the devil was right there in front of us: tax deductions for owning a large house and for paying interest on it. This extracted 35% in taxes (don't forget the 15% total FICA) from our income, killing our employers.
The outcome: flat housing and stocks for a decade or two. Devaluation of the dollar. Banks hitting the jackpot with foreign assets. Fed will be brought under control. Loss of military power, social security, and medicare. True privatizing of postal service so that letters cost $2, before the inflation hits. More toll roads/bridges. Even less government checks and balances on corporations. Crisis in oil around 2020.
In reply to an earlier post on Jan 30, 2011 8:30:31 AM PST
Robert Thomas says:
Interesting analysis. I hope you are wrong, but I do find your views on shifting taxes from assets to production very interesting and they sound plausible. Seems a fair question, though, in view of Schilling's credentials and track record, to ask what yours are. Care to share?
In reply to an earlier post on Jan 30, 2011 10:30:53 AM PST
Last edited by the author on Jan 30, 2011 6:09:06 PM PST
Shlling's call on real estate and commodities the past 10 years has been horrendous. I would take his extensive self-aggrandizing that ignores his failures with a grain of salt. Others here have pointed out how self-promotional he is.
I've done good on investments. I averaged 10% each year above the indexes for the past 10 years. My public investments now are equally weighted between only 4 things: Apple, gold, oil, and agriculture. I'll shift weightings after the next crisis, but I don't know which crisis will be first: stocks, currency, oil, or agriculture. I recently sold emerging markets and silver ($30).
But I greatly prefer that you read what I've written and think very carefully about the legitimacy of it, rather than trying to determine if I am someone to trust. Check, change, and incorporate the knowledge until you can call it your own. Modern economics teaching is moronic. I know electricians and car mechanics that understand economics better than Paul Krugman and Ben Bernanke. The only people with videos out there I have been able to find that I like are Michael Hudson, William Black, Jim Rogers, David Einhorn, and Peter Schiff with caveats. I got interested in Shilling because his view seemed to contradict my own. My conclusion is that h is making a big mistake ... again. Roubini is too confident for the number of errors he as made the past 5 years.
My "analysis" is simply classical economics, and a very dense summation of everything Michael Hudson has written in his blog over the past 3 years. It's a book's worth of info.
My 3 paragraph on QE are hard to follow and do not come from Dr Hudson. I wanted explain QE because it is never explained in the media. Yes, it's money printing if the gov treasury is never able to pay back the IOUs that the Fed is taking off the hands of the banks. It's not exactly money printing now, but it will be turned into money printing retroactively in the future. The markets expect this, so it forces QE to act exactly as if it is money printing today. It's confusing but the sound bite from the media is correct: QE is money printing.
In reply to an earlier post on Jan 30, 2011 1:22:28 PM PST
Last edited by the author on Jan 30, 2011 2:57:17 PM PST
Robert Thomas says:
Fair enough. Thanks for the list of resources. I'm not familiar with those.
I've just listened to Michael Hudson's lecture at the AMI 2010 conference; definitely a different perspective than I'm used to. I'll need to think about this and hear more.
You aren't by any chance the Steve Keen mentioned on his website are you?
In reply to an earlier post on Jan 30, 2011 6:01:38 PM PST
Last edited by the author on Jan 30, 2011 6:05:24 PM PST
ha ha, no, no. Dr Hudson stopped replying to my emails after I would not let him off the hook for concluding the U.S. is morally corrupt for planning on defaulting on the Chinese et al treasury purchases. It's true, we will *not* repay the $7 trillion we owe to other countries. He believes we have been criminal in not being a good caretaker of the world's currency, and walking away with trillions upon trillions by being in this currency position. We basically used all those loans over the past 10 or 20 years to finance our 850 foreign military bases, surrounding the very countries that helped financed the military. But my position is 1) the world and the stability of the dollar benefited from that military presence and 2) a key principle he taught me is that the creditor has as much responsibility as the debtor in making sure the debtor uses the money wisely in order to pay the loan back, or else the creditor must be willing to accept default. China and others are being bad creditors, and will reap what they sow, along with us, the debtor. My point is that China is to blame too.
Dr Hudson is often very hard to understand and long winded. If you slave through my posts here, you'll probably have a much easier time understanding him. My writing is hard to understand, but that's mostly because I'm trying to cram so much in so little a space. For each sentence I've written, Dr Hudson has written 4 paragraphs in the past 3 years on his blog, but there's not much more in his articles than what I've typed here. Peter Schiff gets too far carried away with his strong republican viewpoints, but it's interesting how Dr Hudson's far left viewpoints almost merge to be equal to Peter's predictions. From an investment perspective, they lead me to the same conclusions, but they would run the government completely opposite. I've decided Dr Hudson is going several layers deeper into the science and knowledge of history than Peter. Peter wants very little government and a flat tax, which means he does not think a wide disparity in income is a problem that needs correcting. He thinks the market will blindly do what's best for the very few people who deserve it.
It was an argument between Peter and Shilling that got me interested in Shilling. Shilling was the first one who could argue convincingly against Peter (about where bonds are headed). And Shilling pointed out something Peter could not answer: where are consumers getting so much money to spend in late 2010 without taking on more debt and unemployment so high? I think the answer is that somehow house deflation has freed up money for spending.
Posted on Feb 15, 2011 7:04:30 PM PST
Last edited by the author on Feb 15, 2011 7:09:01 PM PST
Andrew Furst says:
Steve wrote: [... Shilling wrote basically the same book in 1999 which had a chapter titled "Avoid commodities and real estate" which was terrible advice for real estate up until the crash of 2008, and commodities are still doing great. The primary error I see he is making is that he assumes the dollar will remain viable as the world currency. Other than this, his ideas seem good and well written. It's just that buying bonds now is possibly the worst possible advice, as well as not realizing that agriculture commodities could sky-rocket. ...] By the way, bonds HAVE continued to decline in value and agricultural commodities HAVE continued to sky-rocket in the 5-6 weeks since you wrote that - good call!
Very astute remarks, and I love the "other than this, [Shilling's] ideas seem good and well written". It makes me think of what someone might have observed about an early medical practitioner: "Other than the fact that his patients died immediately after receiving their treatments, I thought the doctor's unconventional theories sounded quite sensible".
In reply to an earlier post on Feb 23, 2011 7:17:28 AM PST
Last edited by the author on Feb 23, 2011 7:25:03 AM PST
Now in Feb 2011, shilling is saying in various places that U.S. stocks are not in a bubble and a slow down in china will result in a pricking of the commodities bubble. While I agree that china could have a pull back that will be hard for metals (except for Gold), I do not agree that food commodities will drop. Oil is high now with the Egypt/Bahrain/Lybia/Saudi unrest and it could go a lot higher or drop with china in the next 6 months to 2 years. I do not agree that U.S. stocks are going to continue rising, so I just transferred an old 401k to cash. My Gold/Apple/Food/Oil primary position has barely kept up with the 15% rise in the markets since the book was published 4 months ago. This a lot better than holding Shilling's choice (bonds) which gave 1% over the same 4 month time period. Agriculture has pulled back in the past few days, but still a lot better than the stock markets. Of course Shilling is talking about longer time frames, but so am I.
As the currency crisis gets closer, I'll jump out of Apple and oil and into gold and agriculture. They survived the best in in the last downturn. The dollar did the best last time, but it's the dollar that's most in danger now because of QE post-2008 and Obama accelerating Bush's efforts to shift all our future dollar-denominated wealth to the banks. Republican talk of budget balancing is a farce. We either have to stop government spending which will be a bursting of stocks and oil, or continue to print more dollars which will help stocks almost as much as it will help agriculture and gold. Printing also helps oil and metals, if the world economy keeps chugging along despite this fiat currency train wreck.
As shilling describes at a Feb 2011 speech to students, fear of inflation will lead to hoarding of commodities which will cause even more hoarding which will lead to a bursting of the commodity bubble when the currency issue is resolved (but he does not forecast this, he's just describing the past). But I'm forecasting it. The trick will be to get out of gold and commodities and into stocks moments before the world currency issue is resolved. Peter Schiff says this is when both Gold and the DOW are a 1:1 ratio (like $5,000 for both), but I'll probably settle for 1:2. 1:1 will be a very narrow window like it was in around 1980.
Anyway, stocks are in a short-term bubble if the Chinese do not suddenly increase the RMB for domestic demand. Commodity picture is complex, except for agriculture and gold which should be the most reliable if not profitable for the next 5 years.
Longer term, if China can avoid a U.S.-style 1930's depression by increasing domestic demand, then commodities will rocket. Remember, we were a great world producer in the 1920's, just like China is now and our great mistake was not being able to shift to domestic demand. See Michael Pettis' comments, who now lives in Bejing. If they increase demand enough to balance their trade surplus, it will be disastrous for U.S. treasuries and interest payments on the debt, and therefore social security, medicare, military, dollar, and domestic economy. We'll actually have to find jobs that provide something useful for the external world economy....working at competitively low wages. The dollar amount will be the same, it's just that dollars won't buy anything except large houses that don't put food on the table or provide transportation and cost a lot to heat and cool. It will be disastrous for Shilling's viewpoint (bonds, bonds, bonds).
Posted on Mar 29, 2011 8:53:50 AM PDT
Steve Kohn says:
I'm finding this conversation fascinating, even if I understand only small parts of it.
More than fascinating, actually. It's like standing on the tracks of a bridge, watching the train coming toward you. What to do? Stay and be run over by the train, or leap off the bridge?
I think about the photos of 1920s Germany when hyper-inflation made it more economical to burn the paper money for heat than to use it to buy coal or wood.
In my 6th decade, after a life of frugality, I'm no millionaire but I am debt-free. My concerns are for me personally and for America as my country. How do I preserve the value of my savings, and how does America recover from our long binge of borrowing?
Right now, I'm paralyzed with indecision. Stay in the market or go to cash? (Or bonds, as Shilling recommends.) Will Wall Street become the next Japan 1989? Should I cash in my profits on the Asian markets? And if so, where to put the money? My GNMA fund has always been great; how will it be affected by the further decline in housing?
So many questions.
Sometimes I wonder if my best investment hasn't been the three pistols and a shotgun I've got in the house. Sometimes I think it could get really ugly here.
In reply to an earlier post on Jun 25, 2011 8:45:50 AM PDT
At the risk of making a serious response to intended jest, your last paragraph addresses an aspect that cannot be ignored. One cannot disassociate street-level economic stress from sociological stress. Some 20 years your senior, my concerns are similar. So all investment decisions are right on, how does one protect the gain from having been right? I am not a movie star or other mogul of some kind living behind an eight-foot fence and an army of personal guards, so that I may safely and thoughfully prescribe socially responsible behavior for the masses. That behavior has not been exemplary in the best of times, and I agree that it could get real ugly real fast. Recommend you add a big caliber rifle to your arsenal so to keep the problem at a distance to the degree possible.
In reply to an earlier post on Jun 25, 2011 9:22:22 AM PDT
You only need to look at the U.K in the 1900's, france in the 1800's, and spain in the 1700's to see that societies do not fall as a result of losing top dog economic position and going to pot. The only type of danger that could result in society collapsing as you two describe is lack of oil. If that happens, you have to have food and your location has to be defensible, in addition to guns. Having only guns will just make you one of those taking offensive action. Being 20 years his senior, you should chill out and spend the money and remaining days on something else. :)