The Real 2013 Cliff

There’s a much bigger cliff than the so-called fiscal cliff. The absolute worst result of the fiscal cliff would be a moderate uniform tax increase at a bad time, resulting in a moderate contraction. It is an obvious — but ultimately rather cosmetic — stumbling block on the so-called “road to recovery”.

The much bigger cliff stems from the fact that the so-called recovery itself is built on nothing but sand. This is a result of underlying systemic fragilities that have never been allowed to break. I have spent the last year and a half writing about this graph — the total debt in the economy as a proportion of the economy’s output:

This is the bubble that won’t go away. This is the zombified mess that the Federal Reserve won’t let dissolve (as happened regularly in the 19th century and early 20th century each time there was an unsustainable debt bubble). This is the shifting sand — preserved by the massive monetary stimulus programs — that the so-called recovery is built upon. During the 1980s and 1990s and 2000s cheap money pumped up the debt level in America. In 2008, the bubble burst, and the hyper-connective fragile financial system was set to burn. Then central banks around the world stepped in to “stabilise” (or as Nassim Taleb puts it, overstabilise) the financial system. The unsustainable reality of debt vastly exceeding income was put on life support.

A high pre-existing residual debt level makes growth challenging, as consumers and producers remain focussed on paying down the pre-existing debt load, they are drained by pre-existing debt service costs, and they are wary about taking on debt or investing in a weak and depressed environment. It’s a classic Catch-22. The only true panacea for the depression is growth, but the economy cannot grow because it is depressed and zombified. That’s where a crash comes in — the junk is liquidated, clearing the field for new growth. That is what Schumpeter meant when he talked of “the work of depressions”, something that many mainstream economists still fail to grasp. (In fairness, a similar effect can probably be achieved without a depression through a very large scale debt relief program.)

Japan has been stuck in a deleveraging trap for twenty years, to no avail, all that has really occurred is that the private debt load has been transferred onto the central bank balance sheet — there has been very little net deleveraging) and while the Japanese central bank has completed round after round of quantitative easing — sustaining and preserving the past malinvestment and high debt load — the Japanese economy is still depressed.


That is the road America and most of the West are now on. And just as Japan’s bank stocks did multiple times even after the Japanese housing bubble burst, American banking stocks — even in spite of a year of fraud, abuse, mismanagement and uber-fragility — have been shooting up, up, up and away:


The zombie financial sector is the real cliff — as interconnective as ever, as corrupt as ever, and most importantly, nearly as leveraged as ever:

Margin Debt November 2012

This is a reinflated bubble built on foundations of sand. I don’t know which straw will break the illusion (middle eastern war? Hostility between China and Japan? Chinese real estate and subprime meltdown? Student debt? Eurozone? Natural disasters? Who knows…) but this bubble poses a far greater threat in 2013 than the fiscal shenanigans and the Boehner-Obama “Boner-Droner” snoozefest.

41 thoughts on “The Real 2013 Cliff

  1. Perhaps a better word for depression is dis-equilibrium.

    The good news about times like these is that people finally catch-on to how institutions really work, as their modus operandi are laid bare for all to see. The next generation will not allow the non-sense which is currently taking place to continue, as they were never its beneficiaries.

    In the meantime, the entire professional establishment continues feeding at the trough, some adding to their winnings, others simply holding on for dear life, but just the same, understand that EVERYBODY knows EXACTLY what’s going on, and has for several decades.

    We deceive ourselves into thinking that there are just a few bad apples in the barrel, but it is not the case, as people have bought into this, “something for nothing,” idea to such an extent, that they will rationalize away every last bit of integrity, which leaves a society that lies, cheats, and steals as a manner of course.

    Whether it is the athlete who attempts to convince observers that s/he have done what obviously s/he has not, the doctor who orders test after test after test because this is how s/he must supplement a declining income, the government bureaucrat who manufactures fraudulent data, or the politician who believes it is their job is to manage expectations, these are all characteristics of an amoral, failed society.

    Dis-equilibrium comes in all kinds of flavors, and once it affects the economy, quickly spreads. Hopefully, the main lesson learned in this era will be in the understanding of the group and its dynamics. Groups [in general] are created by the few for their own benefit.

    True charity is not the wealthy giving to the poor, but instead, those with an inner purpose giving to those who must steal from others to make their lives worth living.

    • Imp: You, like Aziz, have a good grasp of the times. But a couple of questions:

      When people finally catch on to how things work, how can you be confident that the next generation (or any generation or force) can/will turn it around? Despotic regimes (e.g., USSR, Nazis, Mao — maybe even like the Caesars’ overthrow of the Roman republic) make it a priority to entrench themselves. Such is the alliance among Wall Street, Pennsylvania, Avenue, Chicago City Hall, and Berkeley (or wherever) socialism. “Revisionist*” history and science have already taken root in public education and academia.

      What the hell does your definition of “true charity” mean?

      * By “revisionist”, I mean “Politically Correct” — flagrant substitution of FALSE but politically advantageous propaganda for TRUTH. Examples: KKK et al taught that Africans are not human; the US “left” (now influential on PA Ave.) claimed that 9/11 was a US Military/CIA operation.

      • DG, it’s not that people do anything, really, it’s just that when the stealing can no longer be tolerated [either economically, morally, or legally], then things change. Look how long it took to outlaw slavery, or the Soviet experiment to fail. Otoh, the Nazi experiment pushed the envelop a bit too far, too fast, and was snuffed-out quickly.

        Fascism was a likely outcome of this system. Centralization of wealth and power corrupting the legal/political process guaranteed a concentrated financial oligarchy. The rest is history. But, it is their enormous success that will be their downfall.

        Like I always say, though, you really can’t know anything [literally]. Each event happens because of the infinite number of events preceding, so it’s all bullshitting [more or less]. I would be the first one to tell you that I am the last person you want to listen to :).

        “True charity,” is more of a spiritual idea, that giving is about helping someone along their path, not necessarily the accepted definition of voluntary wealth distribution. Sharing what we have should be part of our very humanity, not a special category reserved for the [fill in the blank].

        It is our ego [the fear of “death”] that prevents us from carrying out this most basic task, one, quite ironically, that would accomplish the very opposite.

  2. The idea that this vast realignment of world economies can take place in a measured and peaceful way is so preposterous as to illicit snickers every time it is mentioned in “polite society”! Such has never been accomplished in recorded human history and won’t be this time. Hence, the frantic attempts by governments worldwide to disarm and disenfranchise their citizen/victims!

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  4. Where did you get your data from Japan? I had that their total debt/ GDP in 1990 was 400%/GDP and in 2008, it was 498%/GDP. They waited way too long to print money. Japan has had deflation as well.

    Also, the US doesn’t have the same structural issues as Japan. The US has a lot of natural resources and won’t have to worry about a falling population for probably over 50 years. Not to mention that the US is very welcoming to immigrants as well, unlike Japan. I don’t see the US as having the same problems Japan and most of the developed world will mainly due to structural issues.

  5. Aziz, You’re getting worked up about nothing. National debt to GDP ratios in the US and UK were over 200% just after WWII and subsequently declined without any problem. Same happened in the UK in the early 1800s.

    As to the emotive word “zombie”, that’s applicable to an institution that cannot pay its debts and that’s applicable to some banks. But the word is totally inapplicable to governments which can always raid taxpayers’ pockets for money or print money.

    In the UK, total private sector debts have been steadily declining for the last two years.

    I also completely fail to see why the fact that a proportion of banks, other firms and households are zombies stops stimulus working. Stimulus will just boost economic activity amongst the non-zombies: that’s the vast majority of households and firms. As to zombies, additional stimulus will enable them to pay off their debts quicker.

    Irresponsible borrowers and lenders will always be with us. The number of them fluctuates, but I don’t lose nights of sleep over those fluctuations.

    As for Japan, I never know what the fuss is all about. Unemployment in Japan’s so called “lost decade” (or two) never rose to the sort of levels seen recently in the US or in some Euro periphery countries. Moreover, the main reason for Japan’s high national debt is that the Japanese are compulsive savers: they actually WANT TO hold debt.

    • Ralph…real economics is work first, save second, invest third, and then, consume what’s necessary.

      Debt-economics is borrow first, pay debt second, consume your desires third, and then, invest only if anything is left [which there never is for the vast majority].

      Debt-economics is simply a legal scam run by the banking community and supported by all the 2nd tier professional parasites who are thrown a crumb now and again for their voluntary subjugation.

      • The idea that it is necessary for someone to save or forgo consumption in order for an investment to be made is not exactly the revelation of the century. We all know that.

        Re your all-encompassing attack on lending and borrowing and debt, that is not a useful contribution to the debate. Lending and borrowing make very good sense in some cases, and not in others. There is actually a paper of mine that attacks the whole idea of government debt. See:

        Milton Friedman and Warren Mosler have also advocated a system (which I agree with) under which there is no government debt. See:

        Friedman: See para staring “under the proposal.. (p.250) here:

        Mosler: See 2nd last para here:

        But the above criticisms of government debt are perfectly compatible with my attacking some of the not too brilliant worries about debt expressed by Aziz above.

        These are complex issues.

        • Ralph —

          Ongoing government deleveraging can depress the economy in precisely the same way as ongoing private sector deleveraging.

          Empirically, the fact that the Japanese economy is still depressed even in spite of a large-scale private deleveraging illustrates the fact that all debt matters all the time, and the level of total debt is the figure that matters more than just private debt.

          Mosler got burned by his MMT intuition during the Russian debt crisis for one reason — just because nations can always print money to pay their debt, doesn’t mean that they will always print money to pay their debt.

          This illustrates the fact that governments will often choose contractionary austerity even in spite of the fact they could print money to spend. They have done so in the past, and they will continue to do so in the future. Just restating the principles of MMT is not enough to make the whole world abandon the idea of the quantity theory of money, and other hard money ideological clothing. In the real economy people in general and creditors in particular are very afraid of increases in the money supply and there will always be a significant danger of deleterious currency, trade and military retaliations by creditor nations, which can disrupt the real economy. This, in a nutshell, is why it is sometimes rational for governments to choose contractionary policies, which is why the total level of debt is the significant figure.

        • “These are complex issues.”

          Ralph, economics is about the relationship between producer and consumer. Debt is a chimera, an illusion that stealing from the future will somehow end well. Debt is like a game of musical chairs with the regular guy holding the bag when the music stops.

          If issues are complex, then you know you are very far from the truth of the matter. Having an affair with the woman of your dreams might also seem like a great idea…until you get caught [by your wife].

          Debt has been a tool of massive human misery for as long as credit has been extended. It is the ultimate something for nothing scam, especially in an era where money is simply created out of thin air.

          Imagine selling widgets that you could conjure-up out of thin air. I wonder how profitable that might be?

  6. Worth noting in that cool graph for “Japanese” debt that it is the private sphere that has acted in a rational way while the government employees have produced the opposite reaction to what would be required to make for a healthier (economic) environment

  7. This Christmas was the first one since the GFC commenced where women’s credit cards are declining at my friends Beauty Salon. And this is in Australia with low unemployment, AAA credit rating and average yearly earnings of 70,000 for full time workers.

    People will be FORCED to deleverage. Basel 3 rules are rationing bank capital.

  8. In one way, at least, the Schumpeter effect of this GFC is gradually making the industry of democracy far less profitable, which may not necessarily be a bad thing, insofar as any honest thinking person can readily admit that democracy does not allow an individual to have a truly meaningful effect on governance the way theory likes to postulate, in its romantic and even useful but still all too simplistic fashion, and also considering that the whole industry of democracy (in terms of it being an income generating mechanism for individuals employed by the government; after all, even politicians have to eat!) relies on attracting to power people who can convincingly make bold promises about the future without ever really needing to show, much less prove, the medium-long term sustainability of whatever their (political) plan is. In this sense, too, it is also very easy but perhaps unfair to criticise politicians unthinkingly just because they are ‘in government’…

    • Democracy is like an incredibly beautiful [but evil] woman. She’s all smiles, soft and cuddly, until she gets what she wants [the agenda]. Having already moved on, and with great consideration, she allows you to choose the method by which you self-destruct.

      The allure of democracy is similar in that it tells you that you can possess everything your heart desires [economic prosperity, social justice, etc.], until you realize that what you have to vote for is which method will be used to rip the beating heart out of your chest, and the spirit from your very soul.

      • So what is better/less worse than democracy? We could say Constitutional Republic, but the US has shown that it, a form of democracy, can be seduced.

        • It’s not what’s better or worse. At this moment in time, you get what you get. The key is in understanding the system as it truly is instead of what you hope it can [might] be. That way, you assume that groups are going to do what groups always do, and build in precautionary measures.

          THIS is EXACTLY what the founding fathers attempted to do with the constitution. Of course, the road to Hell is paved with good intentions, and all systems eventually succumb to human frailty.

          This so-called democracy thing is just a idealistic attempt to give to those of, “any birth,” the opportunity to rise to the top. And that it did. But, it did not change any of the basic, ‘something for nothing,” character of Western society.

          Until this changes [which may be never], the basic deal with human beings will remain the same, that is, the few controlling the many through the monopolization/control of resources and the abduction of labor-value.

  9. The only idea I’ve ever seen that goes someway towards trying to ensure that society remains civil and non violent while also focusing on all members of a community becoming more rich or less poor is the principle of private property as embodied by our shared self-governance.

    IE You own you, you control your actions, you and only you can be responsible for entering into contracts (for debt or anything else)

  10. The problem, as I see it, at least, with things like constitutions is that they are essentially imposed onto people and there’s currently no clear ‘opt out’ choice. For example, I cannot opt out of my national citizenship by applying for / accepting a ‘human’ / ‘global’ citizenship. So you’re left with a ‘social’ contract (or, ‘constitution’) that you’re born into but can’t currently escape.

  11. I mean, the BIS could just rename itself “Western Peace, inc.” and start selling “passports” of some type to a global jurisdiction (hey, if you can create money out of nothing, why not!?) based in the principle of private property…

  12. Like I’ve said…the richest people and groups on Earth…the greatest family dynasties and/or corporate empires, be them in the black or white market…stand not so much to gain from instituting private property (although they presumably would, and in a very rich way) as much as doing so would insure them against LOOSING what they’ve accumulated (in wealth etc.) because otherwise people will stalk them to the point where it is really almost impossible for them NOT to pay a huge slab of their wealth towards tax…and that, I believe, would not be in the best interests of anyone

  13. he mentions that as wall street evolved towards a more ‘publicly traded’ model opposed to the idea of firms built up from partnerships in each each employee has at least some skin in the game, that appetite for risk grew as short sighted business practices also became more popular… Dr Faber has mentioned the same thing… after all, most stock markets are nowadays just government run betting rings, if you think about it…few of the managers actually have much of their own money at risk, fewer still were part of creating the company they now oversee…

  14. This is absolute genius, Aziz! Right up your alley, talking about fragility etc, large systems and risk… the speaker says:

    “One of the big dangers of modern flying is that the autopilots are so effective that the real pilots have great difficulty staying alert and awake for the very rare moments when the autopilot fails…In some sense, the story of our banking systems is not just a story of greed and incompetence and dishonesty, because greed and incompetence and dishonesty are with us all the time just as gravity is there all the time, just as gravity is there all the time and is not what explains a plan crash, even though you wouldn’t have a plan crash without gravity!”

    His book was just published by Princeton University Press

  15. “…because greed and incompetence and dishonesty are with us all the time…”

    This is key. If, indeed, greed, incompetence, and dishonesty are with us all the time [which it would appear as if they are], why would you allow such incredible concentrations of power to exist. How can that end well?

    No rationale person would, unless that person is playing a rigged game, that is, they are part of a group and therefore a beneficiary of the rigged system. And this is EXACTLY how it works. ALWAYS has, ALWAYS will.

    • Imp: This time I don’t need to dispute, only to clarify “why would (you) allow such incredible concentrations of power to exist”

      Your “no rational person” describes at least half of US voters, and includes those valuing instant gratification, something for nothing, to hell with anybody else including my own descendents. Their delusions include “thinking*” that they are “beneficiaries of the rigged system”.

      The rational citizens — those who DO realize that “greed and incompetence and dishonesty are with us all the time” — divide into three groups: (1) a small number (“elites”) who both possess and exploit** greed and dishonesty; (2) a small number who know, care and
      fight back to limit damage (e.g., tea parties); and (3) the majority who are too “busy”, lazy, selfish, complacent, spoiled and/or pessimistic to do anything***.

      * “Fool me once, shame on you; fool me twice, shame on me” — But WAIT: our government checks and food stamps don’t bounce and we pay no taxes, so we weren’t fooled!

      ** “Right” is what we can get away with; the only “wrong” is getting caught.

      *** “All that is required for evil to triumph is for good people to do nothing.”

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