Tag: debt

Can paradise be found in prudence?

by Economoralist in ChiefIn the NewsLeave a Comment on Can paradise be found in prudence?

Bloomberg: A Polynesian Paradise Sacrificed Its Economy to Stay Virus-Free

https://www.bloomberg.com/news/articles/2020-05-26/polynesian-cook-islands-sacrificed-its-economy-to-end-coronavirus

We know the knee-jerk reactions…

  • The Right – That horrible government, treading on their people’s liberties, shutting down their economy like that…

  • The Left – That wonderful government, making the decision for their people because their people wouldn’t have known any better, regardless of economic impact…

We’ll take no particular position on the role of government in this particular case. We simply read this article to mean – the less debt you have, and the more savings you prudently accumulated while times were good, the more flexibility you’ll have to make a choice, either way. And isn’t choice what it’s really all about?

Choice, coconut drinks, and no central bank. Sounds like paradise to me.

“With no central bank of its own, the policy options are limited. A relatively low debt-to-GDP ratio of 21% gives the country room to borrow, Brown says. The government is in talks with the Asian Development Bank and the New Zealand government to provide loans until border restrictions are relaxed and visitors can return.“

“During the recent run of good economic times, Puna’s government had the foresight to bank NZ$56.7 million in an emergency reserve fund to be used during downturns or to recover from cyclones. The funds helped pay for the stimulus measures.“

Or to just cut right to the important parts…

“no central bank of its own”

“relatively low debt-to-GDP ratio”

“foresight to bank NZ$56.7 million in an emergency reserve fund”

To be fair, we do, of course, hope all the individual business owners (including ones like the Napa family and their Kiikii Inn & Suites) in the Cook islands had also been just as prudent with their savings.

“I thought the same thing as everybody else: What are we going to do?” says Napa, 59, recalling the moment he found out there would be no more guests arriving at the motel. “I was just gearing up for busy season.”

Thanks to Emmanuel Samoglou writing for Bloomberg BusinessWeek for chronicling this inadvertent case of prudence being the ticket to paradise – at least in relative terms?

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When even the Fed is warning on asset prices (or when the rules just keep on changin’)

by Economoralist in ChiefIn the NewsLeave a Comment on When even the Fed is warning on asset prices (or when the rules just keep on changin’)

Bloomberg Law: Fed Warns of Significant Hit to Asset Prices If Crisis Grows

https://news.bloomberglaw.com/banking-law/fed-warns-of-significant-hit-to-asset-prices-if-pandemic-grows

When even the Fed is warning of a “significant hit to asset prices”, is that a sign we should be worried? Or are they just warming us up for even more #QE? (in which case, you might want to re-think who should be doing the worrying…)

An excerpt from Bloomberg Law’s coverage of the Fed’s recent statement which, at face value, sounds awfully logical:

“Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge,” the Fed said in the report. It cited commercial real estate as being particularly susceptible to falling valuations because “prices were high relative to fundamentals before the pandemic,” and there have been severe disruptions in the hospitality and retail industries.

In the old days, “asset prices remain vulnerable to significant price declines” would mean #savers get rewarded (by waiting, prudently, to buy low and re-establish equilibrium in markets at more appropriate valuations) while #debtors take the hit – and perhaps deservedly so, because “prices were high relative to fundamentals before the pandemic”.

In the new (or at least recent) normal, “asset prices remain vulnerable to significant price declines” would simply be cover-speak for ::printing more money to ensure asset prices don’t decline:: which would mean #savers get duped (by waiting, apparently foolishly, for their savings to be devalued) while #debtors get rescued and rewarded for their irresponsible behavior of having driven up prices to be “high relative to fundamentals” in the first place.

What will the very latest version of “normal” turn out to be?

Can someone just tell us what the rules will be once and for all?

Or is it time to walk away and find another game to play altogether?

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The kids are angry because they’re not getting “value” – are any of us?

by Economoralist in ChiefTimely CommentaryLeave a Comment on The kids are angry because they’re not getting “value” – are any of us?

We knew the college kids were angry, but as Bob Van Voris and Janet Lorin described in their recent piece for Bloomberg, we could be in for yet a whole new round of conversations about how we “value” things.

In this case, it’s the value of that good ol’ college education – you know, the one everyone’s been demanding student loan forgiveness on in recent years as it was.

But, as the kids are debating the “value” of their experiences in the face of the COVID-19 pandemic, let’s not forget, also, that a big part of the reason those tuition bills were able to reach numbers like “$70,000/year” in the first place (all the “value” they were bringing notwithstanding) – well, you guessed it – #moredebt.

Not unlike in the case of the housing market and other types of assets over the past two decades, when monetary policy remains loose, interest rates remain near zero, and #QE rules the day, it’s easy to convince everyone they should take on #moredebt because low interest rates! And “because low interest rates”, the actual price (in theory, the actual value) of the asset, good, or service, can be artificially inflated to no real end (as can the profits that flow to the owners of said assets and those who benefit from the production of said goods & services – whether they be real estate speculators, bailed-out corporations and private equity firms, or tenured college professors & administrators…)

Now, we’re all for profits flowing to those who create genuine value in our economy & society – as best determined by the exchange of value someone is willing to offer for whatever it is they want in return. The problem is, whenever the fuzzy math of #moredebt is involved, that means your values are most likely not being considered… (especially if you were someone who played by the rules, worked hard, saved money, sacrificed time, and hoped to be able to exchange the value of your hard work & sacrifice for something of genuine sound value to you in return…)

Bloomberg: Angry Undergrads Are Suing Colleges for Billions in Refunds

https://www.bloomberg.com/news/articles/2020-05-01/angry-undergrads-studying-online-sue-for-billions-in-refunds

“To justify annual prices that can top $70,000 a year, colleges have long advertised their on-campus experience…”

What students are saying:

“I am missing out on everything that Drexel’s campus has to offer”

“…making claims of “unjust enrichment,” arguing that it’s unfair for the schools to profit from services they didn’t provide.”

“…seeking compensation for what is known as “diminution of value,” or the difference between the worth of an on-campus education and one delivered online.”

What colleges are saying:

“…called the suit against it “misdirected and wholly without merit.”

“…the crisis hasn’t changed the “core value” of its education.”

We’ll anxiously stay tuned to see how this particular series of battles plays out.

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When debt is always the solution, what is the final solution?

by Economoralist in ChiefIn the NewsLeave a Comment on When debt is always the solution, what is the final solution?

The quotes below speak for themselves – and will make you want to read the full story for one man’s relevant perspective; an engaging piece by Rana Foroohar for Financial Times, after “lunching” with investment strategist & research firm founder Kiril Sokoloff…

Financial Times: Kiril Sokoloff: ‘There will have to be massive debt relief’

https://www.ft.com/content/b8639ab6-8936-11ea-9dcb-fe6871f4145a

“Recently, he has been trying to make the financial elite see the dangers of seeking to solve the problems of debt with more debt.”

“Then as now, he says, “central bankers were pushing on a string”, trying in vain to whip up a real economic recovery with monetary policy.“

“…a debt-phobic Midwestern child of immigrants who never understood why more people (not to mention companies) didn’t save for a rainy day.”

“…we collected money from a lot of poor devils and gave it over to the four winds.”

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Banking on bad times? (or what happens when you know you’ll be made immune from a downturn)

by Economoralist in ChiefIn the NewsLeave a Comment on Banking on bad times? (or what happens when you know you’ll be made immune from a downturn)

While the world waits for “herd immunity” to take hold to help protect us from ongoing waves of the Coronavirus, a different kind of “herd” is once again being made immune from bearing any responsibility for their irresponsible debt-fueled actions over the past decade. And unlike with COVID-19, the government is guaranteeing their survival.

Forbes: Stimulus Money May Jumpstart The Economy, But Who Is Picking Up The Tab?

https://www.forbes.com/sites/georgeschultze/2020/04/09/irs-plans-to-start-releasing-stimulus-checks-next-week/

“There’s no doubt that it’s socially desirable to rescue our economy; but are we attempting to solve a debt problem by piling on more debt? That’s a scenario that may not end so well. “

“Also, why were we so focused on stopping a market correction? Doesn’t the mere drop in prices caused by a dramatic market sell off automatically help form the basis of the next market recovery? Socializing losses while privatizing profits sounds great politically, but with each successive crisis, the likelihood of future victories grows more remote.”

“…efficient markets, which automatically reallocate capital from failed businesses to successful ones, get unsettled when politically-powerful zombie firms (with far too much debt) successfully lobby for handouts when times get tough.”

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