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« The Path - Episode I: From Where We Are | Main | Is Occupy Wall Street a Testament to the Need for Systems Thinking? »

October 31, 2011


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George, allow me to add parenthetically that there is a non-trivial risk to local and smaller regional banks from a flood of deposits.

With charge-offs elevated, the yield curve flattening at very low or negative real spreads and banks' net margins falling, and weak economic conditions discouraging bank lending, a surge of deposits to small banks would require them to significantly increase reserves against liabilities, forcing them to sell assets to raise cash or engage more frequently in inter-bank borrowing to satisfy their higher reserve requirements.

Thus, this might be one of those instances when we must be careful what we wish for.

Moreover, WRT "going Greek" (after having already turned Japanese since '00), examining the fiscal and demographic conditions in the US, we are much closer to the "PIIGS" situation than most realize, or those who know what us to know.

Consider that the US economy is nearing tipping into another recession along with the EU. Myriad conditions that have coincided over the past 40-60 to 80 years currently suggest a virtual certainty that a new recession will commence (or perhaps has already begun de facto) in the next 3-4 months.

Historically, contractions have lasted on average 11-18 months; the U rate has risen 40-100%; corporate profits fall 35-50%; stock market indices decline on average 32% (35-40% during secular bear markets, as we have today); and we could see fiscal deficits for '12-'14 of 70-100% of receipts.

Now imagine a US fiscal deficit at or near $2 trillion, a U rate of 13-14% to 18% (and U-6 at 25-30%); S&P 500 back to the 600s-800s (or lower); house prices falling another 15-20%; foreclosures accelerating again; Social Security and Medicare receipts plunging; the Fed printing still more fiat digital debt-money to flood the insolvent banking system; and China-Asia rolling over into regional contraction.

The financial media pundits and Wall St. shills will not warn us. Academic eCONomists will never forewarn us. Corporate CEOs will not tell us until the pink slips are flying. Politicians are paid to lie to us. Firms' advertisers will sell you your last breath before expiring and then send your heirs the bill. The clergy are selling "truth" but justice and salvation only after we're dead.

As for timing, the US gov't has borrowed and spent an equivalent of 50% of private GDP and near 100% of private wages since fiscal '09 just to keep GDP from contracting another 7-10%. Two or more years of fiscal deficits of 70%+ of receipts will have us borrowing and spending 100% of private GDP by '14-'15, increasing the federal debt held by the public by 50-60% and increasing net interest to receipts from 10-12% to 15-17% by '15-'16 and 20-25% before the decade is out.

Net interest to receipts of 20-25% has historically been the tipping point for insolvency for states, implying that the US is on course for virtual certainty of insolvency, and the only question is when and how it plays out.

Mathematically, what we can discern with confidence is that the cumulative differential rates of growth gov't spending and deficits to private GDP will reach an order of exponential magnitude by no later than '16-'18, which constitutes a "Jubilee" threshold at which further growth of gov't debt is impossible without overt hyper-inflationary central bank monetization of US gov't debt at whatever quantity and interest rate is necessary to fund interest on the outstanding debt, irrespective of the necessary cuts to gov't spending.

Again, given the Jubilee threshold and implications, gov't spending will have to be cut by at least 30% nominal and as much as 50% in real terms per capita over the next 10-20 years.

And this will occur with now half of US households receiving gov't transfer payments in one form or another, not counting the direct and indirect effects of gov't spending for services, subsidies, and other private business transfers and the results for employment, incomes, and benefits.

Needless to say, no one in authority is preparing us for this eventuality, and thus the overwhelming majority of Americans have yet to even consider how such likely outcomes will affect their material standard of consumption and well-being.


George: absolutely great essay on the predicament - you speak the truth no one wants to hear, but Mother Nature is a stern task-master.
Bruce: exceptional analysis.

What we have here can be modelled by some sort of differential equation with variables of climate change, financial change, population change and resource change being the big ones (many others, like disease, war, and intangibles like earthquakes and volcanic eruptions also in the mix).

So in "global" terms (ie. without real #'s and eqns.) lets just go with positives and negatives.

As resources become more negative (scarce) financial stability also goes negative (insolvency), effecting populations in a negative way (increased unemployment, homelessness etc.). Throw in accelerating climate change (causing havoc to food production and property damage that will overwhelm insurance companies) and we have the perfect storm brewing on our planet.

The time-line is the thing:
i expect this to begin within the year (to 3 at the most) and continuing until humanity and many other species are extinct.
i expect things to ramp up rather than settle down, since most humans are exceptionally irrational, and for our model to be influenced by war (possibly nuclear), profound civil unrest in every country (against governments, the police or security apparatus, or each other), and the breakdown of civilization - meaning hospitals will cease to exist (so disease will skyrocket), governments will lose control of their citizens, and utter chaos will ensue almost everywhere until some significant thinning of the herd at which point binding together small communities for survival will be the norm.

Perhaps at that time barter may become the means of exchange, but with all the guns around, it'll still be brutal and desperate for most of humanity.


"With charge-offs elevated, the yield curve flattening at very low or negative real spreads and banks' net margins falling, and weak economic conditions discouraging bank lending, a surge of deposits to small banks would require them to significantly increase reserves against liabilities, forcing them to sell assets to raise cash or engage more frequently in inter-bank borrowing to satisfy their higher reserve requirements."

Posted by: Bruce | October 31, 2011 at 11:12 AM

Quite the opposite........
An influx of deposits(cash) increases the reserves and the reserve ratio above the minimum and hence forces the bank to either write loans (not in this economy) or invest in instruments that throw off yield(That would be BUY assets....not much out there)......or pay little to nothing on deposits (which is what is actually happening).
Cash is an asset to the bank..........


Reserves against liabilities are cash that is separate from the deposits. An increase in reservable deposits requires the bank to set aside a portion of the bank's net cash (3-10%, depending upon the amount of the bank's reservable deposits) as reserves against the reservable deposits.

An increase in deposits does not itself increase bank reserves.

Since the onset of the financial meltdown and banking system insolvency in '08, the Fed has increased its balance sheet by $1.8 trillion, and banks increased their cash assets from under $300 billion to nearly $2 trillion recently and reserves at Fed banks from less than $10 billion to $1.6 trillion.

Banks' reserves went from virtually nothing against reservable deposits in '08 to a deposit-reserve ratio of 4.5:1 (~22%) today.

In the meantime, loans have fallen 5% from the peak; however, the historical precedent for a debt-deflationary regime is for at least a 30% decline in bank loans and as much as 40-45%, as in the case of Japan since '98 and the US in the 1930s and 1890s,

Moreover, the monetary base will likely converge with the level of bank loans (100% Fed reserves against loans) before the debt-deflationary regime resolves later in the decade or in the early '20s, implying that bank loans will fall another 25-35% and the Fed will further expand reserves by another $2 trillion (primarily via purchases of MBS, no doubt).

The overwhelming majority of Americans are woefully uninformed or misinformed (not an accident) about how the US banking system works, i.e., our system of fiat digital book-entry debt-money.

Were even a significant plurality of us to understand how the system actually works, I suspect that we would be enraged and overthrow the rentier criminal bankster syndicate and their co-opted politicos and start from scratch.


To control population we need to control rich-poor gap. Also not forget the life span, invest more in education and less in sick care (by percentage). Health education (prevention) is more effective than medicine (cure).


Tony, I don't dispute your reasoning, but who is "we"? And how do "we control" the rich-poor gap?

Public and private sick care spending is now an equivalent of nearly 50% of private wages and approaching an astounding 30% of private GDP. At the current differential rate of sick care spending growth and private GDP since '00, sick care spending will reach 50% of private GDP by '23-'24 and 100% before mid-century; obviously this won't happen, and growth of sick care spending must cease and contract thereafter.

Spending for war, sick care, and "education" are the only sectors contributing net incremental reported GDP growth since '00-'01, and they are growing in aggregate at TWICE the rate of private GDP during the period.

50% of sick care spending goes to the sickest 5% among us, and a significant share of the rest of the spending is associated with life extension and end-of-life care for chronically and terminally ill elders.

The most recent "health care reform" is hardly more than gov't-guaranteed growth of profits for private insurers, doctors, pharma companies, and hospitals, the criminalization of uninsured Americans, and the creation of catastrophic high-deductible medical "insurance" that pays nothing before the "insured" first pays $10,000+ a year in premia, deductibles, and coinsurance.

And, yes, by definition the sick care and pharma industries emphasize "treatment" over prevention, which, if reversed and successful, would put them out of business. In many other sectors, this kind of behavior would be a blatant conflict of interest, but it is BAU in a growing number of industries in the pick pocket eCONomy of the US over the past 30 years.

Whenever one hears of a new hospital, clinic, or research facility being built or expanded in one's city or region, rather than cheer the development, one ought to cringe and grab for our wallets, as the disproportionate share of the spending and income will flow from workers and taxpayers to execs and shareholders of insurance, pharma, hospital, and "benefits management" companies, and the bills will go to you and me.


Health sector groups most aggressively lobby the Supercommittee.

Anglo-American imperial military spending.

US student loans surpass $1 trillion ($3,500 per capita equivalent and $8,000 per employed American).


Hi Bruce, by 'rich pay poor for not to give birth' initiative. It will auto-regulate rich-poor gap and population, as well as improving our quality. "We" are all the stakeholders, rich or poor, who want a shared better future (vision).

George Mobus


Thanks for the insights. You are right that the majority of people are not prepared, but that really means not prepared for anything. And a lot is about to happen.

This student debt situation is a possible trigger waiting to be pulled. I've talked to a few Occupiers who are students and in debt pretty deeply. They astutely observed that there was little point to continuing their education since no one they knew in their fields (one was a psychology major, another a history major, didn't find out what the other majors represented were, but one talked like a business major!) had gotten a job since graduation. Their thinking was going toward the: "Screw this. Society promised me that if I played by the rules and got an education, I would have a job that would allow me to pay back the loans AND have a decent life." They were seriously talking about defaulting simply because they had no real options. Imagine if a large portion of the $1T debt is defaulted on. Would this be anything like the bursting of the housing bubble?

In your reply to Porge you talk about starting from scratch. Of course that is the scenario that seems most probable to me!


I suspect you greatly underestimate the stupidity of the vast majority of people when it come to such things. Also the tremendous amount of selfishness that they harbor. In the west anyway, we have become a population of mostly greedy, selfish people who fail to see the greater good of the species. Pity.


George Mobus


Hence my thinking about what comes after the crash.


L Pilolla

Bruce, your insights re: the sick-care/hospital industries are astute. I call them the "watch out or they might kill you" industries. I'm nauseated when hearing of or seeing new mega hospitals, "health" centers, or cancer treatment facilities. I hope others will start to catch on to the ruse.

William Hunter Duncan

I want what you want for the future of humanity. However, I'm sure nature will take care of any need for a reduction in numbers of people. I also believe the universe is divine. I presume you would have me eliminated, or at least sterilized? I think any attempt to sterilize 98% of the population will probably result in the 98% killing off most if not all of the 2%. I would resist the belief that anyone has the wisdom to eliminate people. I'm a little dismayed, actually, to find this where I did. It pulls down my estimation of The Oil Drum.

George Mobus


I suggest you re-read the piece, especially about the 98% sterilization. You should be able to see that I am not promoting such a plan. I am using it to show the extreme requirements that would be needed to solve the population problem with something like a soft landing.

Your comment re: my having you sterilized because you believe the universe is divine is totally unwarranted.


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