DM to Financial Market Guru guy

That is a fanastic post. Bump diggitty. People should read this.

I froze on this piece:

What we are now witnessing in China is amazing when viewed from a historical perspective ~ the trajectory of the accumulation of capital, coupled with the continuing build out of infrastructure which will continue to be supported by way above average new household formation, and way below average cost of manufacturing due to the still way below cost basis of labor and materials is launching them into the strongest economic position we have seen since the American industrial revolution.[/i]

What this seems to tell me is that the good times for which everyone pines is when you're in the high-growth trajectory part of the cycle. Capital and wages are at the right point of equilibrium, you have few externalities screwing it up, and you have real, organic growth measured by something real - incremental household establishment. You're right ... what better way to measure how well you're doing than incremental household formation? It factors in so many things in one, clean, easy-to-understand variable.

I wonder ... does that mean we are past our heyday? Do we just need fewer people in the US who have higher levels of education for high-level service and technology jobs? Export that and import the stuff that comes out of manufacturing economies? In other words, truly laissez faire capitalism (will be hard to sell these days ... take a spin in the Tug to see what I mean). Or said another way, is it just more fun to be in an emerging economy than a mature economy?

Your comment about China and India also resonates with me relative to a post @godawgst made in response to my dogmatic "where else you gonna go" routine when responding to arguments that the US economy is fundamentally a house of cards that will collapse. @godawgst posited, "China and India". Perhaps time to consider that as a reality. Does this threaten our perch as world leaders with the chosen reserve currency?

Anyway, this was brilliant @DawgsCanDance .

@DerekJohnson are you paying attention? Quality stuff Stalin.
 
Although I agree with most of this thread the one thing to remember about China though is that they lie and cheat. When it comes to banking, that entails a huge number of non-performing loans that the state or corrupt officials ordered done and are sitting there doing nothing and never will.

An example...a company is ordered/incentivized by the state to build a skyscraper...they borrow the money (in many cases from the state), employ a bunch of people, wrack up a boatload of debt and wallah...a skyscraper is born. In normal times they would sell it to a real estate company or lease space out themselves and generate income from it. In China's case however, nobody in a million years will ever enter the building, much less spend any money leasing from it. Its useless. But it shows up as GDP...bank loans...cement used...all sorts of "good" things.

China doesn't disclose real estate occupancy rates...bank nonperforming loans...etc...etc... Its all a black box and a 'trust us'. In some cases they get away with it (like building coal plants to generate electricity to mine bitcoin and sell them to westerners...or print more NIO stock and sell it to westerners), but there is a LOT of useless shite over there that will never in a million years generate economic value.
https://www.wsj.com/articles/fancy-...-chinas-banks-face-costly-cleanup-11579627734
Small to mid sized banks are ~1/2 of China's banking now...
 
Although I agree with most of this thread the one thing to remember about China though is that they lie and cheat. When it comes to banking, that entails a huge number of non-performing loans that the state or corrupt officials ordered done and are sitting there doing nothing and never will.

An example...a company is ordered/incentivized by the state to build a skyscraper...they borrow the money (in many cases from the state), employ a bunch of people, wrack up a boatload of debt and wallah...a skyscraper is born. In normal times they would sell it to a real estate company or lease space out themselves and generate income from it. In China's case however, nobody in a million years will ever enter the building, much less spend any money leasing from it. Its useless. But it shows up as GDP...bank loans...cement used...all sorts of "good" things.

China doesn't disclose real estate occupancy rates...bank nonperforming loans...etc...etc... Its all a black box and a 'trust us'. In some cases they get away with it (like building coal plants to generate electricity to mine bitcoin and sell them to westerners...or print more NIO stock and sell it to westerners), but there is a LOT of useless shite over there that will never in a million years generate economic value.
https://www.wsj.com/articles/fancy-...-chinas-banks-face-costly-cleanup-11579627734
Small to mid sized banks are ~1/2 of China's banking now...
Click to expand...

Alas, that is always the problem with China: transparency. You don't really know what you're looking at for sure.
 
But there won’t be inflation.

Everybody says so.
Click to expand...
Have you seen it in the last decade?
Click to expand...
Yes. The idea house prices have, what doubled or tripled in the last 10 years but inflation is 1% makes zero sense when you step back and look at it. The fact the govt changed the calculation to try and pay less SS doesn't mean it doesn't exist...
Click to expand...

@HoustonHusky , we've written much here, and we are on the same page, about what we should be seeing. I don't get it. I think your position is more intellectually-based, mine is more gut-level, "how can that be?" based.

But, fuck, the one thing on which I do not think we (the royal we) have settled is, what is the "right" inflation test analysis? Even if we settle on the right bundle of goods, it doesn't feel inflationary to me if there is a reasonable, or at least rational, economic explanation for price increase other than monetary inflation and pure loss of buying power. That is, if the currency is still a proxy for a robust economy, or the expectation / speculation of it, then do we have real inflation? So stories about supply chains and actual robust demand need not apply to our conversation.

One example is the stock market. Earnings, real value stories and other normal measures of the pie getting larger are disconnected from prevailing prices. There has to be some speculation built in there for post-COVID economis parties. But still, major disconnect. Not inflation in the Germany post WWI sense; but inflationary nonetheless.

For monetary policy inflation, I'm still waiting for the $15 loaf of bread. Am I wrong here?
Click to expand...

Interesting questions regarding inflation... My observation is that inflation normally occurs only in markets when you have real world limitations which prevent the ability to rapidly increase capacity of production of commodities, real property, proprietary and commoditized tangible products, goods or services either because of reality based barriers of entry such as the required capital needed to achieve the size and scale to successfully compete on a profitability basis for introducing new capacity [marginal cost of production exceeds todays prevailing price band] , or because of artificially applied constraints on capacity either as a result of government regulation, or because of oligopoly and or monopolistic control forces.

The above discussion now includes the availability to also access foreign goods with higher excess capacity and lower costs of production as well.

Another unseen driving force for price increase occurs within industries which are consolidating via buyouts... the increase in debt to finance the acquisition adds to the cost of production which serves to limit production at previously lower cost basis levels.

The other caveat is that inflation will only occur when the above conditions are met and existing capacity utilization is maxed out... in other words, either new capacity can not be manufactured via freely competing local and global marketplace entities to meet existing demand, or because of logistical issues such a shortage of parts required for sub assemblies somewhere in the production line.

The reason that inflation has been low in many to most markets is because of the excess capacity that has existed in so many basic industries, products and services [again, this includes the availability of foreign produced goods]. So, yah, you will not see $15 loafs of bread unless there is either a shortage of the excess capacity required to satisfy demand at incrementally increasing price points, or there is such control of the bread distribution network via artificially imposed monopolistic price control increases.

 
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But there won’t be inflation.

Everybody says so.
Click to expand...
Have you seen it in the last decade?
Click to expand...
Yes. The idea house prices have, what doubled or tripled in the last 10 years but inflation is 1% makes zero sense when you step back and look at it. The fact the govt changed the calculation to try and pay less SS doesn't mean it doesn't exist...
Click to expand...

@HoustonHusky , we've written much here, and we are on the same page, about what we should be seeing. I don't get it. I think your position is more intellectually-based, mine is more gut-level, "how can that be?" based.

But, fuck, the one thing on which I do not think we (the royal we) have settled is, what is the "right" inflation test analysis? Even if we settle on the right bundle of goods, it doesn't feel inflationary to me if there is a reasonable, or at least rational, economic explanation for price increase other than monetary inflation and pure loss of buying power. That is, if the currency is still a proxy for a robust economy, or the expectation / speculation of it, then do we have real inflation? So stories about supply chains and actual robust demand need not apply to our conversation.

One example is the stock market. Earnings, real value stories and other normal measures of the pie getting larger are disconnected from prevailing prices. There has to be some speculation built in there for post-COVID economis parties. But still, major disconnect. Not inflation in the Germany post WWI sense; but inflationary nonetheless.

For monetary policy inflation, I'm still waiting for the $15 loaf of bread. Am I wrong here?
Click to expand...

Interesting questions regarding inflation... My observation is that inflation normally occurs only in markets when you have real world limitations which prevent the ability to rapidly increase capacity of production of commodities, real property, proprietary and commoditized tangible products, goods or services either because of reality based barriers of entry such as the required capital needed to achieve the size and scale to successfully compete on a profitability basis for introducing new capacity [marginal cost of production exceeds , or because of artificially applied constraints on capacity either as a result of government regulation, or because of oligopoly and or monopolistic control forces.

Another unseen driving force for price increase occurs within industries which are consolidating via buyouts... the increase in debt to finance the acquisition adds to the cost of production which serves to limit production at previously lower cost basis levels.

The other caveat is that inflation will only occur when the above conditions are met and existing capacity utilization is maxed out... in other words, either new capacity can not be manufactured to meet existing demand, or because of logistical issues such a shortage of parts required for sub assemblies somewhere in the production line.

The reason that inflation has been low in many to most markets is because of the excess capacity that has existed in so many basic industries, products and services. So, yah, you will not see $15 loafs of bread unless there is either a shortage of the excess capacity required to satisfy demand, or there is such control of the bread distribution network via artificial monopolistic price control increases.
Click to expand...

Right. That all makes perfect sense. But am I wrong to not be particularly worried about that [/i]kind of inflation? I mean, sure, if it occurs in too many key industries at the same time, we all have a problem.

But the kind of inflation that worries me is more, umm, for lack of a better word (and at the risk of attracting the Tug goons into this fine, clean thread), system inflation. The kind @HoustonHusky writes about so often. You're injecting too much supply of anything into the system, and we know what is supposed to happen if market forces are left to work the way they want to work.

Or, a closely related version of that kind, the sort of inflation that is more generalized and indicative of the overall and general loss of buying power of your currency because it represents a proxy to an economy and related political complex that is just not viewed as desirable, stable, whatever, by economic participants. In other words, when the dollar becomes analogous to a share of common stock in a declining company. That's the kind that scares me. The kind that helped to give rise to Nazi Germany, where literally within (months was it?) your entire live savings was worth less than 1/5th of what it was (I'm making that number up). That, I think, is the kind of inflation that scares the shit out of people.

In our case, it won't be those geopolitical affairs that did Germany in; but could it be a combo of declining fundamentals in the US coupled with a money printing machine that is working overtime at the Treasury?
 
@creepycoug

"The kind @HoustonHusky writes about so often. You're injecting too much supply of anything into the system, and we know what is supposed to happen if market forces are left to work the way they want to work.

Or, a closely related version of that kind, the sort of inflation that is more generalized and indicative of the overall and general loss of buying power of your currency because it represents a proxy to an economy and related political complex that is just not viewed as desirable, stable, whatever, by economic participants. In other words, when the dollar becomes analogous to a share of common stock in a declining company. That's the kind that scares me."

Yep, scares me too... the obvious issue that others are talking about and that I see as well is the eventual cost of servicing ever increasing cost of debt. I mean if you triple the amount of new short term debt at the government AND corporate level, and interest rates double from historically unsustainably low levels as seems overwhelmingly probable, you create the same kind of debt bomb that doomed the mortgage backed market in 2008 and created the liquidity crash which sunk the market... seems like a series of insanely stupid moves by central banks around the world as to be incomprehensible in design.

Your comments regarding the dollar ring true as well... affordability of lower priced foreign good disappears geometrically as the dollar sinks in value. LSD trips as a kid was helpful to understand this at the cellular level.
 
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