They Expect Buyers To Be Plentiful
A reader suggested a topic on QE. “Does anyone know the opportunity cost of quantitative easing to U.S. savers? I never hear much discussion of the wealth redistribution inherent in the Fed’s monetary policy, other than from my 80-something dad, who thinks the stock market and bond market are too risky for him, but otherwise can’t figure out what to do with his savings.”
From MarketWatch. “By suppressing interest rates in an effort to stimulate the economy, the Federal Reserve’s quantitative easing campaign boosted borrowers and banks at the expense of retirees and other income-oriented savers and investors. A recent report from McKinsey Global Institute (MGI) attaches some dollar figures to these ‘distributional effects,’ and the sums are eye-catching: They estimate that between 2007 and 2012, U.S. households cumulatively lost $360 billion in interest income compared with what they would have earned if rates had followed their pre-recession trends.”
From Peter Schiff. “Herd mentality can be as frustrating as it is inexplicable. Once a crowd starts moving, momentum can be all that matters and clear signs and warnings are often totally ignored. Financial markets are currently following this pattern with respect to the unshakable belief that the Federal Reserve is ready, willing, and most importantly, able, to immediately execute a wind down of its quantitative easing program…The herd is blissfully unaware that the Fed may not be able to reverse, or even slow, the course of QE without immediately sending the economy back into recession.”
“Things look very different on Main Street, where the employment picture has not kept pace with the rising prices of financial assets. The work force participation rate continues to shrink (recently falling back to levels last seen in 1978),real wages have declined, and since the end of 2009 the temporary workforce has grown at a pace that is 14 times faster than those with permanent jobs. Americans are driving less, vacationing less, and switching to lower quality products and services in order to deal with falling purchasing power. But the herd is closely watching the Fed’s rocket show and does not understand that stocks and housing will likely fall, and bond yields rise steeply, once the QE is removed.”
“When it comes to tapering, the Fed is all bark and no bite. In fact, toward the end of last week, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, said that the Fed ‘won’t taper its bond-buying until the economy is ready.’ He must know that the economy will never be ready. It’s like a drug addict claiming that he’ll stop using when he no longer needs them to stay high.”
The Wall Street Sector Selector. “In a recent interview, David Stockman, former director of the Office of Management and Budget, said that the Fed argument that quantitative easing is designed to help the economy, has been proven to have failed. Over the past 13 years that the Fed has been printing money in huge amounts, the US has had the lowest GDP rate, 1.7%, at any time in the modern history of the United States for any comparable time frame. Furthermore, investment growth has been less than 1% in real terms since the beginning of this century. The US has lost 30,000 full-time bread winner jobs per month for the past 13 years since this monetization policy began. Only the 1%, ‘the very top,’ Stockman said, have benefited from this ‘windfall from the Fed.’”
“If Yellen becomes Chair of the Fed, Stockman said, ‘What the new chair of Fed will be doing and saying, is she’s going to take this lunatic policy that we’ve had for years, right over the edge in a Keynesian spree of money printing.’”
“Stockman sees the greatest danger as the Fed. He said, ‘It has become a serial bubble machine.’ He argued that three times already this century, during the dot com boom and bust, the housing boom and bust, and the Wall Street collapse in 2007-8, we have seen bubbles driven by deliberate Fed policies.”
“Stockman mentioned the housing market as well as markets for fine art, wine and diamonds as experiencing severe bubbles driven by the Feds easy money policy of low interest rates. He argued that the Russell 2,000 is up 230% since the bottom in barely four years, yet the environment for small businesses has not improved anywhere near that much in four years. ‘There is a complete disconnect between the Main Street economy that is struggling,’ Stockman said, ‘and Wall Street bubbles that are being driven by the lunatic policies of the Fed.’”
“The Fed’s policies have not just been a danger to the United States. Stockman said, ‘The Fed has created massive danger for the world.’ Other Central Banks have either bought into the policy of easy money or are doing it defensively. Therefore, you have, he said, ‘A race to the bottom amongst Central Banks.’”
The News Press. “Builders pulled 159 single-family-home permits in November, down from 188 in October — but developers still are ramping up production in expectations of a strong winter selling season. Meanwhile, lenders in November filed 241 foreclosure lawsuits in the county, down from 259 in October, according to a report by the Southwest Florida Real Estate Investment Association.”
“‘They’re looking forward to the season, which makes sense,’ said Michael Timmerman, a Naples-based senior associate of economic consultant Fishkind & Associates. ‘I think the season’s going to be pretty decent. The builders have seen any house they put up, somebody comes by and buys it.’”
“Now, he said, the major homebuilders are trying to put up as many houses as they can, building ‘on spec’ (on speculation, without a particular buyer locked in). That’s because they expect buyers to be plentiful.”
“As for foreclosures, November’s numbers show they’ve settled into a relatively low pace compared to the post-boom bloodbath when investors walked away in droves from the houses on which they’d put down payments, said Jeff Tumbarello, an agent with Steelbridge Realty in Fort Myers and director of the investment association. ‘There’s nothing in that report that tells me the market of today will change,’ he said.”
The Las Vegas Sun. “On A&E’s ‘Flipping Vegas,’ abandoned homes across the Las Vegas Valley get a second chance in the hands of real estate investor Scott Yancey and his interior designer wife, Amie. I visited the couple onsite during a flip in Summerlin, where they were filming their upcoming fifth season.”
“Q: Since you first started doing the show, when the housing market had just tanked, how has its recovery since then affected what you do? Scott Yancey: There was such a huge supply vs. demand, we were killing it. And then, years later, people got into it, and the supply and demand changed. Now there’s excess inventory, and the days on the market are taking longer.”
“But I think there are a lot of amateur-type flippers who have gotten in in the last little while, and they have short fuses because they’ve borrowed money to their properties. Buyers have a lot of options now, and I think those people who are in the business who don’t have staying power are probably going to start discounting their properties. So I see prices maybe going down in Vegas again for a little while. Especially the next quarter or two because you’re going to have the holidays when buying slows down and people are going to get desperate and need to fill their places. Things have definitely changed.”
‘markets are currently following this pattern with respect to the unshakable belief that the Federal Reserve is ready, willing, and most importantly, able, to immediately execute a wind down of its quantitative easing program’
Schiff has put his finger on something important here, IMO. That the crux of the matter isn’t that the Federal Reserve has the ability to continue QE, but rather that they can’t stop it without crashing several speculative markets.
But QE and other policies create ongoing economic distortions. These “extraordinary measures” have been going on for so long that market participants now see them as normal, and as Schiff says, also expect that the Fed can prevent them from getting burned.
So we have distortion built upon distortions. But what is the problem with that? How do distortions manifest themselves? Well, you might have people gambling when they otherwise might not have:
‘The builders have seen any house they put up, somebody comes by and buys it.’ Now, he said, the major homebuilders are trying to put up as many houses as they can, building ‘on spec’ (on speculation, without a particular buyer locked in). That’s because they expect buyers to be plentiful.’
‘people got into it, and the supply and demand changed. Now there’s excess inventory, and the days on the market are taking longer. But I think there are a lot of amateur-type flippers who have gotten in in the last little while, and they have short fuses because they’ve borrowed money to their properties. Buyers have a lot of options now, and I think those people who are in the business who don’t have staying power are probably going to start discounting their properties.’
So you have to consider that millions of people have been making financial decisions based on what are actually distortions. They see multiple offers, for instance, and get carried away. Enough of that and you get irrational decision making, or even a bubble and the downside that comes with it.
“So you have to consider that millions of people have been making financial decisions based on what are actually distortions.
And there it is…. the outcome of actions of millions of misguided people is the mold growing on the crux of the biscuit… which is Federal Reserve Price Fixing. And let’s just get honest and truthful about Federal Reserve Price Fixing. They, the “central bank”, practices what the CCCP did. 5 year plans, central controls and price fixing.
So don’t be surprised when someone calls you a communist when you start squealing about incomes.
HA
Very good post. You are right about price fixing.
“Well, you might have people gambling when they otherwise might not have: …”
So long as bailouts are available to make gamblers whole on their losses, where is the problem?
The problem is malinvestment and moral hazard. These have blowback consequences which last longer than the current quarter.
Those who advocate bubbles focus on the salubrious effects of higher employment during a bubble runup, but completely ignore the aftermath of the bubble, which is an attempt to redirect investment to productive activities, meaning those which actually improve the quality of life of the population.
Regarding moral hazard, the more destructive behaviors are rewarded, the more they will occur.
Also, the runup of a bubble does lead to higher employment. Does it improve the quality of life of the average person? Or are the just ponzi-esque wealth transfers from late entrants to early entrants? They are certainly driven by a ‘Greater Fool’ mentality in that the product is certainly not worth the value it commands in currency but that its value is that a greater fool will pay more for it in the future.
Bubbles are like drugs - an initial good feeling, followed by a hangover/crash.
Bubble advocacy can only occur if the aftermath of the bubble is ignored.
Historic bubbles: http://www.pbs.org/wgbh/pages/frontline/shows/dotcon/historical/bubbles.html
Here’s a concrete example of malinvestment - the best and brightest going into finance instead of engineering or medicine or other fields which might actually advance society.
Alzheimers, cancer, heart diseases. Car wrecks, construction accidents. Environmental destruction. These are areas which could benefit from the attention of the best and brightest. Instead many are sucked into Wall Street to run very lucrative swindles. That’s bad for the society.
But then the most powerful single economic entity on the planet is the US central which looks benevolently on the world of finance, so it sees no problem. And we have a bought Congress - they try to shake down businesses, businesses discover that they can make the Congress critters dance by giving them money. A symbiotic relationship (the less polite might call it a circle jerk).
Malinvestment and moral hazard are quite real, and have real-world impacts despite not appearing in economic models.
“Here’s a concrete example of malinvestment - the best and brightest going into finance instead of engineering or medicine or other fields which might actually advance society.”
And we don’t need good minds in finance because…?
“Schiff has put his finger on something important here, IMO. That the crux of the matter isn’t that the Federal Reserve has the ability to continue QE, but rather that they can’t stop it without crashing several speculative markets.”
Some HBB posters have regularly pointed this out ever since the Fed started the taper talk.
It’s a tenet of modern finance theory that investors get paid to hold interest rate risk during recessions. I’m expecting large banks plus Pimco will do very well over the next several years as the Fed continues to hold down short rates while freeing the long-term rate to rise through a QE3 taper. Given the massive runup in long-term Treasury yields so far this year, this should work out very well for them.
Those introductory paragraphs on this topic drive home the point that it is a good idea to diversify and have a low cost basis in mutual funds. If you invested for more than 25 years in mutual funds I am confident your cost basis would be well less than 70% of what the current market value is. Another 50% crash in one asset such as stocks won’t crash your short term treasuries and certainly won’t crash your savings bonds.
Good idea to build up cash for when (or if) the fixed rate on US series I Savings Bonds go to 2%.
“The US has lost 30,000 full-time bread winner jobs per month for the past 13 years since this monetization policy began. Only the 1%, ‘the very top,’ Stockman said, have benefited from this ‘windfall from the Fed.’”
Success!
“The US has lost 30,000 full-time bread winner jobs per month for the past 13 years ??
Dot com crash and the the Great recession within 7 years of each-other…Couple that with all the other reasons through tech productivity, outsource, offshore, illegal workers and here we are…
Footnotes:
(1) 30,000 X 13 X 12 = 4.7 million.
(2) It would have been far worse if not for quantitative easing.
“It would have been far worse if not for quantitative easing.”
Who would have been hurt more?
a) The billionaires
b) The millionaires
c) The working stiffs with little to lose
c)….When you are a) or b) you can lose 75% of what you have and still be at the top….When you are c) the little to lose is all you have…Its soup kitchen and a sleeping bag under a bridge after that…
You’re correct Dave.
See? You’re learning just how communism(Federal Reserve
price fixing) harms people.
c)…When you are
Wrong. The working stiff are already heading to soup kitchen in droves in this wonderful world of QE. Just look up unemployment…underemployment…SNAP…disability…
What’s the definition of insanity again?
“The US has lost 30,000 full-time bread winner jobs per month for the past 13 years since this monetization policy began.”
Wait, 13 years? Isn’t this the same Stockman that Lola was quoting as blaming 30 years of Reaganomics?
What happened 13 years ago besides Bush getting elected? The bursting of the internet bubble and the Nasdaq crash?
Confidence in the manipulated stock market controls all.
He argued that three times already this century, during the dot com boom and bust, the housing boom and bust, and the Wall Street collapse in 2007-8, we have seen bubbles driven by deliberate Fed policies
That is the bubblenomics that I stated took over for Reaganomics during the Clinton Administration. Lola did misuse Stockman.
mopping up bubbles is a great excuse to make your cash worth less by firing up the printing press. I think these bubbles are intentional.
“But the herd is closely watching the Fed’s rocket show and does not understand that stocks and housing will likely fall, and bond yields rise steeply, once the QE is removed.”
Why is this so hard to understand? It’s not exactly rocket science.
There actually is a tricky detail, which is the relationship between when the Fed tapers/exits QE3 and when it lets short-term interest rates back up off the floor. My understanding is that the latter is not anticipated for at least several years out. And if the last time short-term rates reached such low levels for a protracted length of time is any guide (the 1930s), the time until they increase again could extend past a decade.
’stocks and housing will likely fall…once the QE is removed’
The Fed doesn’t operate in a vacuum. You have supply and demand, and price. Price sends a signal in the economy. It tells producers to create more. It limit’s demand. The latter is where we find even more distortion.
Lower rates qualify a borrower for a bigger loan. Lower standards make loans available to a bigger pool of potential buyers. This creates artificial demand.
Now, let’s consider the Vegas article. We find rapidly rising prices. (Should set off alarm bells when it happens with houses, but no matter). Speculators discover they can borrow money to buy houses and boom, speculation runs wild, prices rise even more.
Eventually, the prices rises such that returns are negative, and eventually the price message creates over-supply. (Add to that these markets are already over-supplied).
An often over-looked aspect of prolonged distortion: creating/speculation in the wrong type of housing. Queen Creek in Arizona is up over 100% from its lows. Yet all the things that made it such a colossal disaster a few years back are still in place; it’s too far from jobs, etc. I understand many of the new houses going up in Las Vegas are McMansions, priced at $400k and up. Look at Miami: thousands of condos are going up backed by pre-construction “sales” to people from South America, Russia, etc. Just about every mistake is being repeated.
All of this is a long-winded way of saying the distortions the central banks are encouraging are what will cause house prices to fall. Rates don’t have to go up. QE doesn’t have to end. Actually, the longer these distortions are perpetuated, the worse the crash will be. Over-supply will grow. The borrowed money will be defaulted on. The wrong type of housing will be revealed as the speculative play it really is; no real value.
This is the calamity awaiting the idea that the Fed can’t stop QE. IMO, the crash is baked in the cake at this point. Heck, it’s already happening.
It is an even worse mistake this time. At least in the 2004-06 timeframe people could look to what appeared to be a stronger economy. Now we are clearly on life support and it’s still going on. And even with a negative example of where this leads in the very recent past.
It’s a smoking drinking overweight patient who just had a heart attack sidling up to the all you can eat barbecue and fries buffet with a smoke and a whiskey in hand.
On a rascal with an oxygen tank.
“Now, let’s consider the Vegas article. We find rapidly rising prices. (Should set off alarm bells when it happens with houses, but no matter). Speculators discover they can borrow money to buy houses and boom, speculation runs wild, prices rise even more.”
Is this the market dynamic the Fed references when they insist there is no Housing Bubble?
“Rates don’t have to go up. QE doesn’t have to end. Actually, the longer these distortions are perpetuated, the worse the crash will be. Over-supply will grow. The borrowed money will be defaulted on.”
This is precisely why we have 25 million excess empty houses(most limited to within 500 miles of the east and west coasts) in the US today.
‘Olympia Companies in Las Vegas is announcing a new 1,700-acre community in the northwest part of the city called Skye Canyon. The $300 million project will have 9,000 homes when completed. It is the first major master-planned community to be built since the Recession.’
‘In the past 20 months, the Greater Las Vegas Realtors Association says housing prices have climbed 19 times.’
The issue is NOT understanding it. The issue is accepting it.
DENIAL is the leading cause of death for ….
Denial i well-known to be a symptom of both alcoholism and heart attack.
Luckily I suffer from neither condition.
Buyers aren’t plentiful but the liars sure are.
The number of real estate liars always goes up.
Never would I have thought that the S&P would have almost tripled in four and a half years. And reading this blog in 2005 convinced me to sell my California house in 2005 and rent. As I read commentary from many news sites, people seem very defensive about their stock gains–and smug–which would normally mean an imminent and severe downturn. But there also are a surprisingly large amount of people predicting a bubble and subsequent burst. Usually the bubbles don’t burst if a reasonable number are expecting them. I have very little in stocks, but my expectation is they will probably go up significantly higher short-term based on this.
I don’t think this is true. The Economist had a series called “House of Cards” - in 2003. Lots of people were seeing a bubble but it was another 2 years before it slowed, and five years before Fannie and Freddie had to be bailed out.
Also, anecdotally, a stockbroker told me that stocks were radically overvalued in 1997, when the dow was around 7500. Well, in the following ten years, we hit that 7500 number twice after run-ups. Only when the Fed started QE has the stock market retained some staying power over the past five years.
Note the date of the article
House of cards
In many countries the stockmarket bubble has been replaced by a property-price bubble. Sooner or later it will burst, says Pam Woodall, our economics editor
May 29th 2003
How long can the party last? Estate agents, builders, lenders, many economists and even Alan Greenspan, chairman of America’s Federal Reserve, have all insisted that there is no house-price bubble. Rising house prices, the argument goes, are fully justified by low interest rates, rising real incomes, growing populations and a fixed supply of land. But this sounds a little like the “wall of money” argument used to defend inflated share prices in the late 1990s.
http://www.economist.com/node/1794873
“A&E’s ‘Flipping Vegas’ with Scott and Amie Yancey”
This is exactly the sort of hustle that the federal reserve is stoking with their easy money policy. You know we’re finished when our basic needs are being gamed-up by the psychopath money manipulators on Wall street.
Welcome to the Facebook economy. Nothing of value being made or sold. Everyone linking up to stalk their old acquaintances. We’ve all got to be networked up to each other to tweet out any random thought and appear cool and trendy and successful and in the know.
It is all Stone Soup being sold at ten dollars a bowl.
I watch that show for the “entertainment” value. Every project he and she does has the same mesa taupe/ light taupe on the walls. Every one has granite and stainless (heaven forbid you use Corian or Silestone).That red rimmed and black Porsche he drives looks like something Bozo the Clown should own. He hardly ever loses money, because real estate always goes up! A&E should go out and do another show in a couple of years going back to the same houses this jerk flipped and show the results after the next crash. That would be some “real” entertainment!!!! P.S. I feel sorry for Amie; how did she get hooked up with that twerp?
When they go into a house that has been trashed it’s painfully obvious it was staged as the spray paint style on the walls and themes have simularities.
More warning signs than positive economic indicators. Do you think I’ll have enough time to sell my house before the rocket crashes back to earth??
The window is closing fast and nearly shut entirely.
Do you think I’ll have enough time to sell my house before the rocket crashes back to earth??
By the time you have enough warning to be sure it will be too late.
Time to pull the rip cord this late winter.
‘More than half of Denver residents recently surveyed, about 53 percent, are concerned that another real-estate bubble is forming, according to the Country Financial Security Index.’
“Given rising home prices and persistent trepidation about the economy, it’s understandable that a majority of Denver residents are expecting an ‘echo bubble’ in the housing market,” says Troy Frerichs, director of investments/wealth management at Country Financial in Illinois.’
‘KUALA LUMPUR, Dec 8 — First-time house buyers in Penang will need to get state approval if they intend to sell their properties within a specified time frame, under new housing rules that will take effect from February 1 next year. Chief Minister Lim Guan Eng said the new rules - created to clamp down on property speculation - will impose a moratorium of up to 10 years on the sale of houses by first-time homeowners.’
‘The moratorium applies to low-cost homes costing up to RM42,000 and low-medium cost homes worth up to RM72,500 and covers all past and future purchases.’
“As a responsible government seeking sustainable economic growth and development, the Penang state government is careful to avoid the pitfalls of any property bubble that will bring hardship to the rakyat and damage the economy,” the Bagan MP explained in a statement.’
While interesting, note that these measures around the world are aimed at “preventing” a bubble. From the article:
‘News reports have cited property analysts as claiming that property prices in urban centres had shot up by between 20 and 30 per cent per annum from the mid-2000s until now.’
will impose a moratorium of up to 10 years on the sale of houses by first-time homeowners and covers all past and future purchases ??
Wow…Those are some serious restrictions…
FWIW, I would favor some type of restriction on any government backed/insured loans on single family residences…Lets say, the median price in your zip or below…Must be owner occupied to buy it or sell it…Maybe a logistical nightmare but it would squeeze out the speculators/flippers thereby making it more affordable/available to the entry level home buyer….
It is not just home prices that get distorted by all the Fed’s intervention, it is the entire US economic model.. I was living an CA during the 2008 crash and I was amazed at the number of commercial office spaces that were vacated shortly after the crash started to take hold… entire complexes vacant… my takeaway from that is that far too much of the US economic model relies on risking home prices and housing turnover (much driven by speculation).. that model only works so long as each turnover normally results in a corresponding larger and larger mortgage on the other end.. eventually the wage/price ratio starts to look ridiculous and the market stalls, which is where were again in many places… the only problem now is each time we stall, the debt level is higher and higher..
high home prices distort many, many things economic and otherwise in this country..
The US central bank is arguably the most powerful economic entity on the planet. It is setting economic policy. Naturally, its policies will be bank-centric - policies which take a bank-centric view of the world. Banks make loans - that’s their profit-making business. Thus, the emphasis on pushing debt.
Greed drives speculation. Taxation tames it. Where is the government during this equities boom ?
Fed ? The US economy is only 25% of the world economy and the world is already moving away from central bank easing. The Fed no longer drives the world. What do they lose for the US next?
“Taxation tames it.”
Higher interest rates tame it. You can only BS the masses for so long about the relationship between interest rates and crazy speculation before they begin to suspect something.
The masses will begin to suspect something after their TVs and smartphones go dark, the power goes out at home, and there’s no food to be bought at the market.
This is what New Era financial innovation is all about!
Bitcoin a platform for brazen scams
By NATHANIEL POPPER
THE NEW YORK TIMES
December 08, 2013
The call went out on Twitter: “For insane profits come and join the pump.”
It was an invitation to a penny stock-style pump-and-dump scheme — only this one involved Bitcoin, the soaring, slightly scary virtual currency that has beckoned and bewildered people around the world.
While such bid ‘em up, sell ‘em off scams are shut down in the financial markets all the time, this one and other frauds involving digital money have gone unchecked. The reason: Government authorities do not agree on which laws apply to Bitcoin — or even on what Bitcoin is.
The person behind the recent scheme, a trader known on Twitter as Fontas, said in a secure Internet chat that he operated with little fear of a crackdown.
“For now, the lack of regulations allows everything to happen,” Fontas said in the chat, where he verified his control of the Twitter account, which has thousands of followers, but did not give his identity. He added that Bitcoin and its users would benefit when someone stepped in to police this financial wild west, and that he would stop his schemes when they do.
…
The bitcoin crash of 2013: Don’t you feel silly now?
A little less glitter on these things today. (Rick Bowmer / Associated Press / December 7, 2013)
* Bitcoin’s value tumbles after China moves to limit its use Bitcoin’s value tumbles after China moves to limit its use
* Bitcoins: I’d buy that for a dollar Bitcoins: I’d buy that for a dollar
* 2 suspected Bitcoin counterfeiters are arrested in Germany 2 suspected Bitcoin counterfeiters are arrested in Germany
* QUIZ: How much do you know about the Bitcoin?
By Michael Hiltzik
December 7, 2013, 7:28 a.m.
People who thought that bitcoins could serve as either an investment vehicle or an alternative world currency got their heads handed to them on Thursday and Friday. That’s when the price of the attention-grabbing crypto-currency got crushed, falling from a quoted $1,200 per “coin” to less than $600. At this writing, it’s quoted on the Mt. Gox exchange at about $830.
The whipsaw validates what we wrote about bitcoins just two weeks ago: they’re useful as a medium of transfer, but even then you have to be nimble. If you were a Greek or a Spaniard using bitcoins to move money out of your home country without having to worry too much about your local foreign exchange or banking rules, and you figured on Thursday that you could get around to transferring your asset back out of bitcoins and into dollars or sterling–whoops! You lost half your stake in a matter of hours. The minimum time required to complete a trade in bitcoins is ten minutes; that’s about how long you should hold them to keep exchange rate risk low.
And if you were taken in by all the talk about bitcoins replacing gold as a storehouse of value, well, now you’ve been taken down. Much of that talk was generated by the peak quote of bitcoins last week at $1,200, which was sometimes described as equivalent to or even higher than the price of gold. That’s an absurd statement, of course: $1,200 bought you an ounce of gold bullion, but on the bitcoin market it only bought you a putative claim on the outcome of a mathematical algorithm.
The proximate cause of the bitcoin crash was a warning by China’s central bank against treating bitcoins as legal tender. The Beijing government didn’t ban bitcoins, however, stating that Chinese citizens are still free to engage in bitcoin transactions at their own risk.
The bitcoin market’s reaction underscores what Stanford economist Susan Athey has said–that the value of bitcoins lies in their potential to facilitate transactions. The more transactions you think can be done in bitcoins, the higher their price. Because the Chinese government’s statement may reduce confidence in bitcoin trades there, the market plunged.
…
‘One of the three Americans who won this year’s Nobel prize for economics said bloated public deficits on both sides of the Atlantic meant that recession remained a real risk for 2014. Eugene Fama said on Saturday that highly indebted governments in the United States and Europe posed a constant threat to the global economy.’
“There may come a point where the financial markets say none of their debt is credible anymore and they can’t finance themselves,” he told Reuters. “If there is another recession, it is going to be worldwide.”
“For 34 years, Gwendolyn Beasley worked as a clerk at the Detroit Public Library and paid a portion of her salary into a fund that would someday help pay for her pension. Now retired, Beasley, 67, receives $1,500 a month from that pension. But she’s cutting back on spending after a judge ruled last week that Detroit’s pension funds, like other city creditors, may have to take a hit as the city reorganizes its finances under bankruptcy.’
“I think it’s so very unfair,” Beasley said. “We retired expecting to get a certain amount of benefits. Now you’ve pulled the rug out from under us.”
‘It’s not just Detroit retirees who are worried about their pensions. Financially troubled cities in California, Illinois and Pennsylvania will soon face decisions on what to do with chronically underfunded pension funds, and experts say the Detroit ruling has made it easier for cities to argue that pensions must be cut.’
‘They are also being unfairly blamed for financial mismanagement of their pension funds, said Sharon Levine, who represented the American Federation of State, County and Municipal Employees in the Detroit case.’
“For example, in Detroit, it’s been years and years of layering new debt on top of old debt,” she said. “To somehow or other have part of the discussion to be that Detroit’s plight is the fault of the retirees is devastating for those folks.”
‘In reality, Novy-Marx said, many pension funds face such shortfalls now because the accounting standards for public employee pensions are lax, which allowed governments to stop payments to pension funds whenever they had budget troubles. Rather than raising taxes or balancing budgets, governments borrowed from pension funds, he said.’
‘which allowed governments to stop payments to pension funds whenever they had budget troubles. Rather than raising taxes or balancing budgets, governments borrowed from pension funds’
First of all, everybody, and I mean even freshman accounting students, know the pension rules were a time bomb. Why didn’t anyone do anything about it? Golly, the regulators didn’t step in and prevent these greedy capitalist cities from robbing their employees?
Sorry Gwendolyn. Looks like borrowing and spending might have some limits. Unfortunately, that may mean you’re working a register at Burger King for a while.
First of all, everybody, and I mean even freshman accounting students, know the pension rules were a time bomb. Why didn’t anyone do anything about it?
Shhhh. No one is ever supposed to state the truth about pensions in such a plain and damning manner. Certainly the MSM never state it so plainly. It is not PC.
NO one will do anything about it until people, politicians & media all start statements about pension plans like this: “The foredoomed and certain to fail pension plans are…”
As if that will ever happen.
Do you understand that houses depreciate?