Sunday, Mar 21, 2010
Hyperbole? Decide for yourself
SWARM: THE Most Important Chart of the CENTURY
The latest U.S. Treasury Z1 Flow of Funds report was released on March 11, 2010, bringing the data current through the end of 2009. What follows is the most important chart of your lifetime. It relegates almost all modern economists and economic theory to the dustbin of history. Any economic theory, formula, or relationship that does not consider this non-linear relationship of DEBT and phase transition is destined to fail.
Posted by devo @ 10:39 PM (2378 views) Add Comment
30 Comments
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1. devo said...
2. Tochinoki said...
Good read.
3. hpwatcher said...
This seems to be about the US debt spiral.
4. paul said...
I'm not sure how that graph has been created and neither are the commenters on the site.
That's why its not a particularly great graph.
5. Tim said...
That is a brilliant chart and a brilliant article. This absolutely nails so much of the rubbish talked about money and the economy. Thanks for posting!
6. ttimgg said...
Paul, look again. That is a fantastic chart and a fantastic article. It absolutely nails the situation. Thanks for posting it devo!
7. smugdog said...
What! a greater chat than our sacred Bubbles chat, I don't think so, wash your mouth out.
Incidentally, at what stage do the site's experts think we are at on this Holy Grail of charts?
8. Pyracantha said...
smugdog - look closer, there are years marked on the x-axis. This is historical data not a projection or theoretical construction.
9. smugdog said...
What! a greater chart than our sacred Bubbles chart, I don't think so, wash your mouth out.
Incidentally, at what stage do the site's experts think we are at on this Holy Grail of charts?
Sorry, lost the ability to spell at this early hour.
10. ant said...
It shows a clear point of a financial pyramid collapse. This is not really a Holy Grail of charts. There are plenty of other economic measures including consumer confidence or what Greenspan called "transition from euphoria to fear". Read: http://gregpytel.blogspot.com/2009/04/alan-greenspan.html
However the mainstream economists and media live in a state of denial. They seem to ignore a basic fact that the financial system was turned into a giant global pyramid scheme. All these charts are absolutely representative of a pyramid collapse process and for any half-intelligent person do not come as surprising at all. Read also: http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
11. smugdog said...
Sorry Ant, I didn't make myself clear. I meant the 'Bubbles' Holy Grail of charts from a HPC viewpoint.
12. inbreda said...
I'd say we were approaching the peak of "return to normal" phase - I'd have thought that was obvious
13. hpwatcher said...
I'd say we were approaching the peak of "return to normal" phase - I'd have thought that was obvious
Definitely yes. Though, I feel that the real ecomony is still very, very insulated from the real effects of the recession - especially with regards to house prices etc.
14. icarus said...
@ant - The relationship described in the chart is at least 44 years old. Pytel's explanation seems to refer only to more recent events. He doesn't really give a timeframe but he talks of the old days when the amount created by £1 deposit was finite because the loan/deposit ratio was less than 100%. He then says the trouble started with "the modern banking insruments of securitisation, hedging, leveraging, derivatives" which "turned this process on its head. They enabled banks to lend more out than they took in deposits". These problems appear to be far more recent than 1966. So how does his theory explain the chart?
15. Yuriy said...
Can anyone give me a working link to the article? or e-mail me it to my e-mail?
16. ant said...
@icarus - it is a narrow interpretation of Pytel's analysis. (Although Pytel does not give much of historical context.) For the last 40 (or more years) the Loan to Deposit Ratio was increasing and until a decade or two ago it was increasing but up to 100%. This period is represented by a linear downward correlation. When Loan to Deposit Ratio went above 100% and started depleting the reserves for some time - until the pyramid collapsed - it continued to look "business as usual", i.e. was still showing downward linear correlation. Then, when the pyramid collapsed, you can see downward dramatic fall on the graph. The delay between Loan to Deposit Ratio going above 100% and actual collapse can be quite complicated to explain: it depends on actual Loan to Deposit Ratio and speed of money circulation - i.e. the speed at which cash reserves were depleted - and market confidence (influenced by things like general economic and political conditions) which also dictate how high money multiplier the market is prepared to accept.
I am not say that Pytel's writing is explaining EVERYTHING but it is absolutely consistent with a lot of economic phenomena that for some may look surprising.
17. uncle tom said...
There are several surreal elements in the economies of the developed world at the moment, elements that I view collectively as being indicative of great underlying instability.
It is like a novice skier who has recklessly decided to go hurtling downhill off-piste. Sooner or later he will hit a tree, a boulder or fly off a cliff; but you don't know which will happen first, or when exactly it will happen..
..what you do know is that the aftermath will be messy..
18. icarus said...
ant - Not convincing. You explained the chart via Pytel. Pytel reckons that 100% loan/deposit is critical - below that the system is sustainable, above that you get problems. Cycle speed is immaterial - with every cycle the reduction in amount of money created from deposits "reduces exponentially and quickly". For Pytel to explain the chart you need 100%+ since before 1966.
19. ant said...
@icarus: you wrote: "For Pytel to explain the chart you need 100%+ since before 1966." No, you do not for the following reasons:
1. If cash reserves amassed were very large, the system can function with Loan to Deposit Ratio 100%+ for a very long time. (It is similar to you losing income and having either large or small savings. I hope you see the difference.)
2. Even with Loan to Deposit Ratio below 100% you can still drive the money multiplier (which the mechanism of pyramid building) to any arbitrary high figure. And with Loan to Deposit Ratio equal 100% the growth to money multiplier is linear. Such system would not be sustainable although technically it would not be a pyramid.
Furthermore Pytel does not really state that with Loan to Deposit Ratio below 100% is sustainable (it may or may not be depending on many factors including actual level of Loan to Deposit Ratio: if it is 99.99999999999999999% it is clearly not sustainable according to Pytel, if it is 98% I seriously doubt it is sustainable as well). Pytel is clear that if Loan to Deposit Ratio is above 100% the system is unsustainable. With respect, it seems to me that you do not understand this critical distinction of Pytel's analysis.
In view of the above, I invite you to read again my comment @12
20. icarus said...
ant - still not convincing. You invoked Pytel to explain the graph. Pytel said nothing about the ad hoc additions you've made - if they were important why didn't he bring them in?. He clearly talks about "traditional banking", (which he doesn't date but the period he's thinking about appears to be before securitisation took off) and he gives an example (presumably typical of its day - why else would he mention it?) of a bank with a L/D ratio of 86.5%, which he says was sustainable. Next we go to the post-securitisation period (last 15-20 years?) where L/D ratios go to over 100% - the root cause of the problem according to him. Again this cannot possible explain the graph starting in 1966. I'd like somebody else to read his "Largest heist in history" and the rest of his collected works and contradict my interpretation of Pytel.
I'd put the graph in this context:
In the decades since the post war booms of the '50s and '60s developed economies have slowed down. The growth of output, investment, job creation, wages, and profitability has progressively stagnated and overcapacity has increased. Stable but stagnant has been the overall condition. Wages have had to be kept down to support profitability and to counter this drop in demand governments have underwritten more and more debt and, as the chart shows, have been getting less and less GDP growth per unit of borrowing.
In the early 90s governments tried to overcome stagnation through balanced budgets but this just reduced aggregate demand and caused recessions, followed by the US "jobless recovery". The next trick was to replace Keynesian public deficits with private deficits and asset inflation. The 1995-2000 boom was based on borrowing, mainly for consumption, against paper wealth expansion for companies and better-off households. You had an equity boom but falling profitability. Any investment that was boosted by this borrowing only increased the overcapacity problem. The stockmarket crashes of 2000-01 followed. This was countered with....another bout of borrowing and asset-price inflation, resulting in the greatest world housing bubble in history - greater than 1929 - and a boom based purely on consumption and residential investment, with US debt powering a global boom. But the real economy could produce profit not by investment and expansion but only by holding down real wages and depressing demand (the latter supported only by borrowing against paper wealth). Instead of investing, companies exploited low borrowing costs to engage in financial manipulation - paying out dividends, buying their own stocks, merger and acquisition activity etc. The slowest growth in the real economy has coincided with the greatest expansion of finance.
Borrowing has kept flagging economies alive and now that's an option that's closing as real disposable income, MEWing and capital gains nosedive.
21. uncle tom said...
"The slowest growth in the real economy has coincided with the greatest expansion of finance. "
Correct.
But there are no direct links between banking practice, debt growth and GDP. However, what is clear is that sustainable GDP growth - the ability of a nation to achieve more per capita, year after year; has been slowing for the past couple of decades, and will come to a complete halt in many countries without substantial increases in the pension age.
For generations, governments have relied on GDP growth borne of advancing technology and population growth to diminish the impact of past debt. That is no longer going to happen. It follows that most developed nations must either balance their budgets, and move them towards surplus, or indulge a period of high inflation to diminish their obligations.
The latter option looks far more likely.
22. ant said...
@icarus: I think you neither understand Pytel's analysis nor my explanation. Pytel does not explain the graph. Pytel's analysis is consistent with the graph. (I basically imposed time line of Pytel's analysis on the graph and it is all consistent to me.) Like any good analysis (or theory) Pytel's may have infinite number of add-ons in many situations. (I also encourage you to read other than "The largest heist in history" articles on his blog.)
Having said that there may be better theories of explaining that graph than money multiplier (which is the basis of Pytel's analysis) and the whole phenomena is definitely more complex than just the effect of money multiplier. I think the graph shows a good correlation with the growth of money multiplier and for the last couple of years the overriding effect of a pyramid collapse . You may of course speculate on other influencing factors. I can only reiterate my statement from @12:
I am not saying that Pytel's writing is explaining EVERYTHING but it is absolutely consistent with a lot of economic phenomena that for some may look surprising.
23. icarus said...
ant - @7 you wrote "All these charts are absolutely representative of a pyramid collapse process" and then you invoked Pytel's pyramid theory, the very timeline of which means it cannot possibly explain the chart under review. So now you're saying his theory wasn't an explanation of the chart but is 'consistent with' it. And those 'add-ons'. You can't have those unless they're somehow implied in the theory - and they're not. The only 'theory' Pytel puts out is that traditional L/D ratios (around 85%) are sustainable and L/D ratios over 100% lead to disaster. You're trying to build a lot on that base - a bit like an inverted pyramid really.
24. ant said...
@icrus: I can repeat: "All these charts are absolutely representative of a pyramid collapse process". "Representative", it does not explain that you may explain, especially in full. You are trying to change the meaning what I was writing about. However although Pytel's does not write about it I still stand by explanation @12 as showing a process consistent with Pytel's view. Please note that L/D below 100% may or may not be sustainable (depends on the level and other circumstances), L/D above 100% lead to disaster regardless of anything else (it is a sufficient condition for a disaster).
25. flashman said...
ant: I admire your doggedness but sometimes you have to know when you are beaten. Icarus has conclusively proven that you are wrong at every turn. Instead of rethinking your argument, you choose to keep digging a bigger hole for yourself with increasingly poor ripostes. For what it is worth, I think your logic may have become a bit ragged because you tried to shoehorn Greg Pytel into one too many posts.
As an aside …this is a house price site and not a vehicle for shameless promotion. If you have no respect for the purpose of this site, then you should not be surprised that the occasional poster becomes irritated by your monomaniacal obsession with Greg Pytel.
26. ant said...
@flashman: what is the point of your response if you do not provide any argument on the merit? I can also write to you back "that you are wrong at every turn. Instead of rethinking your argument, you choose to keep digging a bigger hole for yourself." That is easy, isn't it?
27. luckyjim said...
ant
You misquoted Flashman.
He said "Icarus has conclusively proven that you are wrong at every turn".
He didn't simply state that you are wrong. He pointed to the evidence - Icarus's comments (and your replies) which are there for all to see.
Flashman does not need to produce a further 'argument on the merit' of this. Icarus has indeed conclusively proven that you are wrong. Conclusive is conclusive. Any further evidence from Flashman would be superfluous.
28. ant said...
@luckyjim: Icarus did not conclusively proved that I was wrong. It is rather unwise for you to use fantasy as a substitute for rigorous reasoning. The fact is, beyond any doubt whatsoever, based on the evidence presented, that I conclusively proved that Icarus was wrong, which is there for all to see. You, Icarus or flashman (or anyone else) are unable to change this fact since it is objective.
29. Ticktock said...
ant, just stop it, leave it alone.
The towel should have come in to save you long ago and It's now becoming quite upsetting to watch this unfold any further.
Stay down man, stay down.
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