Mortgage debt will probably not be a problem in this cycle. People have this bias to remember most recent event, but it's rarely the same thing twice in a row: https://imgur.com/a/0dT7iHK
And frankly with the amount of outstanding US govt debt and underfunded pension & healthcare liabilities the USD may either get dethroned and devalued or sent into the negative interest rates purgatory like Japan is currently living in. Japan cannot possibly ever raise rates, at 2% rates 100% of their tax take will go towards paying the interest on their 250% national debt.
Add to that the history of Smoot-Hawley and the general outlook of the 1930s ...
There definitely seems to be motive and opportunity on the housing side though right? Student debt among other things is high and not many 25-35yo people are buying houses but there's a lot of cash chasing returns. These mortgage backed securities are always seen as a reliable way to make a buck but nobody is questioning the market because "It'll never happen the same way twice".
Is there a reason why Japan shouldn't monetize the debt? The usual explanation is that it would cause inflation, but I'm not sure how that works for government debt that trades near 0% anyway. It's a tradeable store of value that you can trade 1:1 for money, so might as well be money?
Bernanke was pitching them this idea. He suggested the Japanses government issues zero-coupon perpetual bonds and the BoJ buys them. Ha, ha, "bonds".
As crazy as this sounds I think it makes sense - just admit honestly that the situation is fucked up, monetize, generate stagflation and eventual normalization.
It seems like I'm missing something basic. I would like to understand when the inflation happens and where it comes from. More money chasing fewer goods, sure, but if we already have too much of a money-equivalent, why aren't bondholders chasing goods with it already? And, clearly there isn't any inflation.
It seems like demand should have increased when the government sold the bonds and spent the money.
You and everybody else. Japan's current situation seems to stump most economic models.
I wonder if there's something about culture and having basic survival needs met. Most economic models assume effectively unlimited long-term demand: as productivity grows and people in existing sectors are thrown out of work, they will find new things to do, and the people who have reaped the financial rewards of productivity growth will find things that they want to spend money on, creating new jobs for the previously unemployed. What if this doesn't happen? What if instead of using money as a means to an end, people use it as the end itself, effectively treating it as a scorecard to be maximized without spending it? And what if on the other end, instead of people finding new ways to obtain money, they opt out of the economy instead, creating alternate games (literally - video games are apparently the main extra-economic outlet) to play. With basic survival needs taken care of by parents, there's no forcing function that makes them participate in the economy. You'd get a reality that looks fairly similar to our actual reality, in Japan and increasingly in other developed areas of the globe.
>What if instead of using money as a means to an end, people use it as the end itself
This line got me thinking about so many things from my own life. You opened my eyes to another view point I had missed for the past 10 years. I am truly thankful to you for posting this comment.
I would be really grateful if you can let us know your thoughts that if interest rates go to zero, would the asset prices continue to increase to infinity?
I've thought about negative interest rates specifically at length, and I can't imagine a situation where they don't lead to a chaotic breakdown in capital markets or even a currency collapse. The problem is in the compounding: normally there's a negative feedback loop against borrowing too much because you have to pay back more than you borrowed, and if you don't, you go bankrupt and can't borrow any more. With negative rates, there's a positive feedback loop: the more you borrow, the more you make in profit, so everybody is incentivized to borrow as much as they possibly can, nobody wants to pay anything back, total debt increases to infinity, and with it the amount of money in circulation and asset prices also increase to infinity. Additionally, the most profitable sector of the economy becomes borrowing money, so all productive work stops and people focus on financial gains.
This is pretty much the definition of hyperinflation, so there's a template for what happens here, but not in the developed world.
I suspect that a lot of the demand for Bitcoin is also driven by fear of this scenario. In the world above, the incentive for savers is to simply not play in the established financial world; they'll take their savings and put it in assets that are not rapidly going to zero. If only there were a transferrable currency that's deflationary by design and immune to manipulations of supply & interest rates...
> I would like to understand when the inflation happens and where it comes from. More money chasing fewer goods, sure
It comes from weakening the perceived future security of the currency, which reduces demand for it; once you monetize fiscal needs, your currency is perceived as one more at risk of being devalued to monetize fiscal needs, which itself devalues it.
So it's all about perception? The Bank of Japan has been trying to credibly promise 2% inflation for a while and failing [1]. Maybe if they monetized some of the debt, people would take them seriously?
Japan however is shrinking in population and missed the whole baby boomer generation for obvious reasons. Without the population growth, they can't grow their GDP to get their debt levels in a reasonable range.
But on the flip side, being unable to pay the interest on your debt and also being unable to show any sign of growing the economy enough to fix its structural weakness has the same effect. It at least seems like an either/or situation at this point.
So if the USD becomes weak, who out there could be in a position to become stronger? I don’t see any candidate. Euro growth is weak. CN bookkeeping’s suspect...
IMO Americans are biased to overweight this. It doesn't matter as long as China can keep up appearances better than other countries for long enough. Investors will happily invest in a bubble believing that they are smart enough to get out before everyone else if things go south.
Bad bookkeeping doesn't keep the NBA and Activision from kowtowing to China, I don't see why it would keep people from investing there either.
One of the many Buffett-isms is to only make investments where, if the market were to close for five years, you'd sleep well. It is that premise that shapes my investing theses relating to China.
1. Yeah plenty of non-Americans think this too, _maybe_ if you said “westerners” it’d be defensible, but it’d still be wrong.
2. The nba & activision are selling goods to China, or maybe they put a little money into real assets to reach that audience. They’re not investing in Chinese financial instruments which is what the entire thread is about
I don't see the distinction. If they have Activision, Apple, Tesla and Disney as customers why wouldn't banks, financial markets and investors trust them? I would argue they already do, I highly doubt China has trouble floating debt or attracting foreign investment right now.
Why would investors not want to invest in a country that flush with liquid cash? I don't see how this is an argument that investors wouldn't see China as desirable.
By all means, investors want to put money into China. It’s the amount of money you want to put into an immature market that is the question. And that’s not a dig and it’s not jingoistic, it’s just a fact, when you run a large market for over a century you kinda build solid foundations that can’t just be replicated on the spot. China’s market developing is a great thing but it’s just too young to seriously think it’s ready to be a reserve currency today.
Americans aren't the only ones to overweight the shady monetary policy in China, and as a result it'll not become the defacto standard like the US Dollar is, as long as that shadiness remains.
Such as who? I agree with GP and still think this is biased projection. Factors such as growing trade control over APAC and a middle class larger than the population of the U.S. only speak in favor of the Yuan. Also, what you call shady currency control can be viewed as a be a signal of ensuring stability.
If the USD is stronger than it should be, what should happen is that the USD becomes weaker, that is, that every other currency becomes relatively stronger. None of them need become the new "stronger than it should be". They can just all move up relative to the dollar.
India, still a youngish population compared to China but with 1.4 billion people and still rapidly developing. Also helps they're strong in service industries, deliverable to the world.
I grew up in India and have family in India. India is not ready for PRIME TIME not in my life time.
It's complicated, its nation of nations. Still caste is a still is strong basis of political patronage. It has come a long way, but has long way to go!
India's Navy is a joke, Airforce is a flying junkyard and Army is an amalgam of bad ideas, and pension commitments.
I do not see India going anywhere. India has been hope of Asia since 1950s, and it will remain that way into 2050!
Queue the ZeroHedge style conspiracy theories and watch the sparks fly. That idea of a dethroned dollar is interesting, any thoughts at was is likely to take over? The Euro?
Consumer debt (auto loans/credit cards) spooks me more than corporate debt, since that's the tentpole that's kept up spending with stagnant wages. Auto loans are especially sketchy, it's way too easy to buy a car you can't afford.
Going through mortgage application now, they grill the shit out of you on every little detail of your life now. They're aware of the last crash, and have done a lot to compensate.
On the other hand, I recently sold a house that received a lot of offers. Only one person actually had the down payment money. Everyone else's loans were approved, but most were people were coming with low cash and lower income than I would have expected. Some looked like irresponsible loans to me.
When I was a whippersnapper 15% down was considered pretty low. These days you can get pre-approved with less than 10% down and no validation that your downpayment isn't a loan itself. Kinda crazy.
Why would I tie up funds in a mortgage where I can make more in the market with those funds? Just have to make sure I actually put my funds into the market, heh...
This was in Colorado. The market's hot, and I think that's in part because people are afraid that Colorado is going full California on real estate. They want to get a piece while they still can.
When you sell a house and the buyer is paying via mortgage, do you get paid cash by the mortgage company in full (the purchase price) at once, or do you receive a monthly amount from the mortgage company that sums up to the house price you sold for?
Why would you be involved in their loans at all, if you're the seller of the house? How would you know what they were putting as down payments or what their incomes were?
I was given the information to help base my decision on which offer to accept. The idea is that the better qualified buyer has a better chance of actually closing. I thought it was a little strange as well. Each of my offers came with details about their financing, and in a few cases, the buyer's income information.
I was one once, they may sort of be right. Gold will never become a "standard" again, but it could be extremely useful for preserving wealth from one standard to another.
Gold has always been touted as a hedge against inflation, it's not, it's a hedge against financial system instability, inflation being a major symptom of such instability.
Since around 1970 (US leaves the gold standard) gold has slightly outpaced inflation according to the US BLS inflation calculator [0].
Calculator thinks $6,000/kg => $41,000/kg, actual price $6,000/kg to $48,000/kg. That makes sense because 'true' inflation (consumer goods + assets) probably outpaces official inflation (consumer goods only).
Gold can't exactly get more or less valuable over time. It is a rock. We have no practical uses for it.
Gold can't exactly get more or less valuable over time. It is a rock. We have no practical uses for it.
My impulse to point out that it's a very useful metal is tempered by my surprise that only 10% of gold production goes to applications where gold does something other than look golden or just exist as a physical store of value. It seems a little silly. Gold mining is quite destructive; environmentalists should fly around the world, giving speeches on the worthlessness of gold, but where's the glamor in that?
Yeah, it would have lots of uses if we had industrial quantities of it.
> Gold mining is quite destructive; environmentalists should ...
If it makes you feel better, it is common for gold to be found as an enriched layer sitting on top of a copper deposit. So a big chunk of gold mining isn't gold-for-gold's sake, it is something mined on the way to a much more practical substance - copper.
Actual gold mines doing environmental damage are a thing (cyanide ahoy!) but the footprint is small and hopefully not important.
I'd put my bets on student loan debt. The push for forgiveness is so strong, there must be some other force at play--something more than just pandering to millenials.
It's more than just pandering to millenials. This is also about pandering to Academia.
Depending on how the student loan bubble bursts, it could wind up with a number of institutions being forced to shut their doors, or make large cuts to staff/programs/etc.
Student loans are basically a variable tax to attend college. There should be a relief valve of pay like 10% extra in taxes until the principal is paid off. People paying interest on the loans can get a tax deduction for the interest as well (it actually makes no sense to have interest on the loans because that interest is going back to the Feds in 90% of cases).
that's also what they said about residential mortgage debt in 2007. never underestimate the bankers' ability to use one large batch of shitty loans to back an even bigger batch of them.
> Mortgage debt will probably not be a problem in this cycle.
Disagree if you consider that many people are getting mortgages on overvalued properties at or near market peaks now, and in another significant downturn those could easily be underwater by 15%-50%. The same thing happened widely in the prior real estate bust in many trendy areas, leading to many foreclosures.
I only see this happening in exploding tech markets like SF, where the impact would honestly be minimal - some people might have to downsize but we wouldn't see mass unemployment or homelessness/crippling debt like after 2008.
Corporate debt may be: https://imgur.com/a/b54hMSg
And frankly with the amount of outstanding US govt debt and underfunded pension & healthcare liabilities the USD may either get dethroned and devalued or sent into the negative interest rates purgatory like Japan is currently living in. Japan cannot possibly ever raise rates, at 2% rates 100% of their tax take will go towards paying the interest on their 250% national debt.
Add to that the history of Smoot-Hawley and the general outlook of the 1930s ...