The case for unexpected, rapid deflation runs something like this.
The total market capitalization for "debt" in the United States is approximately $90 trillion or to make the number more comprehensible, $820,000 per household.
The total market capitalization for "equities" in the United States, that is, stocks is approximately $50 trillion or $454,000 per household.
The total market capitalization for "commercial real-estate" in the United States (apartment and office buildings) is approximately $180,000 per household.
If the specter of the Covid-19 response is resurrected when owners of commercial real-estate were not allowed to enforce rental agreements, that is, renters could continue to inhabit the space without paying rent...and if jurisdictions required the owners to continue to pay taxes like they did during Covid...then there will be a massive rush to liquidate those holdings and move those funds into equities and bonds.
One wild-card is a recent precedent that some jurisdictions will prosecute owners if they do not instantly mark-to-market using the lowest possible assessment. That will gut property owners' access to the credit market because they will not be able to offer the property as collateral for loans. They will be unable to finance even minor expenses like maintenance in the face of non-payment of rent by tenants and/or increased work-from-home pressures.
Commercial real-estate will be seen as a toxic investment to be divested at any loss. Think Love Canal, Johns-Manville, J&J Baby Powder all rolled into one ball.
In a perfect world, the divestment would be orderly and assets could be moved to bonds and equities but it seems unlikely that it would be orderly. A loss of 2/3 of the value of commercial real-estate values would evaporate $14 Trillion out of the US economy.Evisceration of the commercial real-estate sector will taint the collateral held by commercial banks and tank the bond and derivative markets.
A point to consider is that most commercial real-estate is "leveraged" so risk is diluted but profits accrue to the partnership. During market downturns, that leverage works in reverse and clobbers partnerships. Evaporating value hammers the equity partners and the banks are protected until....the equity-partners stop making payments. Then it becomes the bank's problem.
Interest rates will skyrocket and credit will be locked-up as banks frantically increase their loan-loss reserves. The market-value of all housing will plummet. In 2008/2009 the banks muddled through by NOT marking-to-market (if they had they would have technically been bankrupt) but held onto the properties, whistling past the graveyard, until property values rebounded.
But now we have the precedent of aggressive prosecution of entities that do not instantly mark-to-market, again, not just the median estimate but the very lowest estimate. Violation of this new precedent exposes the business entity to punitive fines on the order of the entire value of the property in question.
The wealth effect (the halo that owning property that seems to appreciate in value) will evaporate and domestic spending will fall into the septic tank, impacting equities as demand for iPhones, Teslas, Chinesium trinkets on Amazon hits the wall. Revenues of municipalities will plummet as home owners demanded that property taxes be adjusted for the new, much lower market-value of their homes.
The Chinese economy falls off a cliff and they start a hot-war with Taiwan and Vietnam.
Red. Hot. Mess.
Ya know, I get outa bed, push the coffee button, take a leak, feed the woodstove, and then check to see if it's all gonna come crashing down today.,
ReplyDeleteI don't know what I'd do without you!
A Little East of Paris
Reading old Newpaper headlines of the 20's "All is well", Market Stronger than ever" and so on. Like that Famous Newpaper photo of "Dewy beats Truman" so wrong as but a few hours in the Truman election or weeks in the Stocks are GREAT stories the multiple crashes known as Black Friday.
ReplyDeletehttps://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
My point is that the "Next Economic Disaster" will be pumped as ALL IS WELL. Until it isn't.
I know WAY TOO MANY "Preppers" and such who are waiting until it GETS Scary before dumping more money into storage foods and such.
Heck, me and my beloved had discussions about "do we need more"? We're eating one plus year outdated foods now and BTW they are excellent as we replace them 2 for one.
Remember a happy wife is a happy life. Don't doom prep yourself into a marital problem. But the paradox will be WHEN S does hit the fan "Why didn't we get more".
Got trusted friends, trusted family and faith in God?
More valued in a spicy situation than gold and silver.
Any country with a central bank doesn’t have to experience deflation unless they want deflation
DeleteLOL, the solution to money printing is MOAR MONEY eh?
DeleteMMT isn't modern it was done in France and was part of the madness of the French Revolution as the common man's lifetime earning vaporized in hyperinflation.
People are chattering that China is in distress but in reality, they are ALLOWING the decompression and distress of wildly uncontrolled credit expansion NOW rather than papering it over with MOAR MONEY.
Controlled crashes are far better than pumping the cliff you're going to fall off of higher with MOAR MONEY.
The slippery slope of high inflation to HYPERINFLATION is nasty. Ask Zimbabwe and Venezuela about MOAR MONY solutions.
Well good morning....a couple of add on points Joe:
ReplyDelete1.) Follow global capital flows. Just because the US from our perspective looks horrible, does not mean that the rest of the world is in automajically better shape. We may well be in fact the cleanest dirty shirt, and when WAR breaks out globally, some significant amount of global capital will flee to our markets (unless the conflict is actively centered here).
2.) Widespread Deflation is rarely allowed by the banksters.
In fact throughout history they tend to devalue the currency to inflate their asset bases out of debt. However - that game has a limit as all ponzi schemes do. Then all bets are off and it's time for a currency reset ala Bretton Woods I/II. Historically our benevolent dictators in the bankster/political class will NEVER stand in front of the public and admit the reality of it all.
No they always have a big DIVERSION: "Sorry about your pension/401k/savings - it was all well and good until this darned old WAR broke out. Now that we're all in this together, here is your per-contrived solution to the problem we've just fomented."
3.) When they DO choose to foment/allow a massive deflationary collapse, THEY GO TO THE MAT HARD and take the majority down for the massive rug pull. This assures that very few asset holders are left standing, and the chosen ones scoop up the majority of the physical assets for mere pennies on the dollar. The rest of us are dead or in bread lines, filled with rage at whichever boogyman they have chosen for us to hate and fight.
https://goldalliance.com/wp-content/uploads/2021/11/world-reserve-currencies-through-time.png
DeleteThat graph should show "1972" and not "present". Ominous. I suspect the end date of each also marked the end of their dominance in world affairs.
DeleteERJ, I will have to read this again (well, really three times - economics is not my strongest suite). A minor thought in your discussions of major economic events, but the fear of halting rent is one of the things that makes me paranoid indeed about renting the house at The Ranch. Yes, the income would be great, but the fear of having another "rent holiday" and not being able to do anything is fearful to me.
ReplyDeleteConsider the VRBO temporary rental arrangement. I keep hearing how wonderful it is but have not jumped into the pond myself. Roger
DeleteI have thought about that, Roger. My concern is that I am not really close geographically speaking and would need both to manage the cleaning/maintenance side as well as have someone "on-site" just to check into things. But certainly a more palatable option.
DeleteI hear you. My observations are speculative from writing insurance on such properties. I hear a lot that way. I think I would only do it to fund paying off debt. Otherwise I am too stinking busy with my day job which involves variable income (more time spent equals more income) so there is little incentive to give in one palace to get in another. I do have a couple rentals and when the leases turn over next I will keep the water in my name. Roger
DeleteIf property owners have to mark to market using low values, there will be a push for property tax valuations to do the same, since in most places they are supposed to follow the market.
ReplyDeleteI suspect that won't actually happen - governments won't let go of the revenue.
Jonathan
Watched "The Big Short" on the flight back yesterday. One of the stand outs was the manipulation to hide the truth until certain banks had unloaded the hazardous assets on mutual funds and pension funds. Another was how hard it is to take a stand against the common narrative. My thought is you should not take the disconnection of precious metals from inflation as an indication that it is a bad investment. The rate at which I see Central Banks, Banks and Funds buying big chunks of gold make me think they are holding through manipulation the price of gold flat for their own benefit. So I take the long view. Roger
ReplyDeleteI think you’re right. People do realize (don’t they?). That the same fractional reserve approach used for banking deposits has been applied to the precious metals market. An organization owning a PM uses the actual PM as collateral for the issuance of 10x the amount in “paper gold/silver certificates than they actually hold in physical PMs.
DeleteThe purchasers of the paper PMs are assured that their paper certificate can be exchanged for physical. Yep, as long as no one actually tried to convert it into physical PM’s all is well. But one little bobble and the house of cards will come crashing down.
If you own gold or silver own physical and have it in YOUR safe not someone else’s.
I also think that outside big cities, the courts will continue to enforce property law. The wrinkle is in whether you are in a tennant friendly State or landlord friendly. I think I would engage in a landscape project and dump compost in the driveway of anyone that did not pay me. Another fellow I know kept the water in his own name and just quit paying the bill and withheld tranfer. They found a way to pay rent.
ReplyDeleteI intended to sign "Roger"
DeleteWhen fedgov steps in to buy commercial debt, and/or take possession of commercial real estate, it will be the time of shooting the SOBs.
ReplyDeleteOr, to remove the same from the levers of power by whatever force necessary.
I am not kidding.
When idiots and DEI rule, the system suffers
ReplyDeleteI would also throw out there that rather than the series of disasterous dominos you have staged I would suggest that if our Federal Government just balanced its budget it would trigger a cascade of devaluations. And I think I would be okay with that. Roger
ReplyDeleteIt's just part of the Agenda. The Fall of Western civilization by a million cuts.
ReplyDelete