COMMERCIAL BANK CREDIT FALLING STILL. REPORTS OF A US ECONOMY EXPANSION ARE WRONG.

Commercial banking has been the mainstay of the economy since the mid 1800s. When bankers extend enough of their bank credit, takers produce more in hopes of earning profits. Most times, under prudent credit lending, the economy expands.

In the days of money — coined metal by weight and fineness — bank credit expansion was easier to detect as ever more bank notes would circulate from banks of issue. When prices would get pushed up quite high, prudent men knew that a bank crisis would be forthcoming.

Today, it's much harder to see such things as no one has money. Today, everyone only has cash, which is evidence of deposits in circulation, as well as deposits that can get negotiated by check or so-called electronic transfer.

When commercial bank credit is falling, there is no way the economy could possibly be expanding. And yet, true credit is falling while politicians and Federal Reserve bankers tell you an expansion is underway.




The commercial picture doesn't look good.






The consumer picture looks as bleak.





Residential realty looks bad. Likely, it's a great time to buy a house, if you can as true prices likely are quite low, historically.


In fact, the whole realty part of commercial banking is quite bad.

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THE U.S. CONGRESS HAS WRECKED COMMERCIAL BANKING

For those who need a bit of intel about accounting, a balance sheet tells anyone what is owned and what is owed, that is, what are the assets and what are the liabilities. The third part of a balance sheet is the sum invested by shareholders, which all call shareholders' equity

The firm's operator pays for assets by either borrowing (liabilities) or paying for it from the shareholders' stake.

The name said of property, which can sell at street prices to pay off debt, is an asset. When this same property is put to production in pursuit of profit, the name said of property is capital.

Always, property is the right of ownership in something and not the actual thing itself. In the reality of commerce, all anyone ever does with another is buy and sell the right of ownership in something for the right of ownership in something else.

All too often, mistakenly, most believe they are buying milk when they buy milk from a supermarket. Rather they are buying property in some milk while at the same time taking possession of some milk in which they have the exclusive right  of ownership.

Every firm can have a balance sheet. If we look at all commercial banks as one entity, we can look at the balance sheet for commercial bankers. Conveniently, statisticians at the Federal Reserve do that for us.

Far too many believe that bankers are a risky lot, driven by never-a-care greed. However, because most don't know one whit about commercial banking, they don't how banking works at all.

Bankers structure their assets so they can make good on liabilities they have undertaken in doing business. Most of these liabilities are known as demand liabilities, which are payable in cash on demand. A typical demand liability is a checking account.

By keeping as low as likely the sum of cash on hand, bankers can engage in profit-seeking activities. So what bankers do is acquire assets with known maturities. Bankers stagger these maturities in such a way that liabilities can get met when such come due.

In short, rather than holding cash in vaults, investment assets of bankers become their primary reserve. Traditionally in banking, especially in the days of money — coined metal by weight and fineness, most often gold — the liquidating reserve assets were commercial paper.

In SEVEN YEARS LATER, WHO IS TO BLAME FOR THE CREDIT CRISIS CAUSED BY THE RESIDENTIAL REALTY BUBBLE? THE U.S. CONGRESS, I revealed how through the years, successive U.S. Congresses created Government Sponsored Enterprises (GSEs) — Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Agricultural Mortgage Corporation (Farmer Mac) — which bundle up mortgages into securities known as mortgage-backed securities (MBS) and hire investment bankers to broker those securities.

These Congress-authorized securities have ended up constituting an ever greater portion of bankers' primary reserve assets.

Between Q4 1972 and Q3 2014, Bankers' Full Risk grew at a yearly rate of less than one percent (0.4%). During the same period, Bankers' Reduced-Risk grew at a yearly rate of 3% and Bankers' Risk-Free grew at the yearly rate of 1.6%.





As you can see in the chart below, today, bankers' assets consist almost equally in thirds of Full Risk, Reduced Risk and Risk Free assets.




Since the 1970s, bankers have become far less risky precisely because U.S. Congresses have been subsidizing bankers' risk through a twisted process.

Bankers lend to individuals who buy houses on credit. Congress, through its agencies, buy those mortgages. These agencies create mortgage backed securities and hire investment bankers to sell those MBS.

Bankers then buy those MBS from the U.S. Congress, effectively buying back the mortgages they made. Now though, the sum of those mortgage payments become an income stream guaranteed by Congress.

In short, successive U.S. Congresses have so distorted the economy, spurring on excessive house building through buying mortgages from bankers and then backstopping bankers that two-thirds of bankers' assets more or less lack significant risk. A third of those assets have a direct U.S. Congress guarantee.

The members of successive U.S. Congresses could not get away with what they do without the current, flawed design, wrecked by the 71st Congress. For more on that, you can check out HATERS OF TEAM ELEPHANTS FOOLISHLY BLAME THE RICH FOR THE LOSS BY TEAM DONKEYS. OTHERS BLAME OBAMA. NONE HAVE IT RIGHT. HERE IS WHY.

The wrong story of what happened in the Banking Crisis of 2008 that led to the Long, Slow Collapse of 2009 to 2014 blames bankers for taking on too much risk precisely because of the. Even the members of the Financial Crisis Inquiry Commission claimed the banking crisis arose from "widespread failures in financial regulation and supervision." 

But the balance sheet of bankers tells another story, the true story. The U.S. Congress alone is to blame.

Risk-Free assets consist of fully-guaranteed U.S. Treasury and U.S. Agency securities, cash and interbank loans fully-guaranteed by the Federal Reserve.

Reduced-Risk assets consist of realty loans and other collateral of physical assets.

Risk assets consist of other securities, trading assets, commercial and industrial loans, consumer loans and all other loans and leases.

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S&P 500 AND THE DOW JONES INDUSTRIAL AVERAGE HIT ALL-TIME LIES!

It's another Friday and media propagandists everywhere have told yet another record lie.



Countless teleprompter readers and countless keyboard jockeys are singing the praises of record dollar closes in the S&P 500 and the Dow Jones Industrial Average.

In actual buying power, which is what counts, both the True S&P 500 and the DJIA are off all-time highs, way off. The True S&P 500 hit an all-time high way back on August 28, 2000, when the S&P closed at $313.35 in True Dollars™.

In reality, the True S&P 500 hit the all-time high a whopping 5,045 days ago! Said another way, that is 13 years, nine months and 24 days ago, or roughly 720 weeks ago since anyone can claim rightfully any talk about all-time highs.

Today, the True S&P 500 closed at $160.18, or 51.1% of its all-time high. From the August 28, 2000, peak to the March 3, 2009, low, the S&P 500 fell a whopping -69.1%, falling at an annual rate of -12.8%.

From the March 3, 2009, True Dollar™ low of $96.82 until now, the True S&P 500 has risen 65.4%, growing at an annual rate of 9.9%. That annual growth seems impressive until one discovers that $1.317 trillion dollars worth of cash and deposits have been created by Federal Reserve bankers through monetizing of new debt incurred by the U.S. Congress on behalf of taxpayers now and long into the future. Said another way, Fed Res bankers have overseen an eye-popping 93.5% growth in cash and deposits since the March 2009 low.

In the 20 years between January 6, 1975, and December 5, 1994, total cash and deposits grew 308.6%, growing at an annual rate of 7.3%. During that time, the True S&P 500 grew 50.7% growing at an annual rate of 2.0%.

Between December 5, 1994, and the all-time high hit on August 28, 2000, the True S&P 500 grew 261.9% growing at a blistering rate of 25% a year. Likely surprising to many, over those 2,094 days, or 5 years, eight months and 24 days, cash and deposits fell -6%, falling at an annual rate of -1.1% and leaving cash and deposits $69.7 billion less than before the start of the run.

In, True State of the Union: Wage-Earners' Income and Taxes, I show during that 1994 and 2000 stretch, as a percent of GDP, true private wages rose. As well, true average income rose, employment incidence rose and hit an all-time peak, and true individual taxes as a percent of GDP rose, nearing the all-time high.

Buying power matters. When output rises and instruments of buying — cash and deposits — fall, living betters for most.

Denominational stock prices don't matter much. True stock prices always matter.

From December 1994 to the August 2000 all-time high, True GDP grew at an annual rate of almost 6.4%, growing a full 54.2%. From the March 2009 low until the end of Q1 2014, True GDP has fallen at the yearly rate of -9.7%, falling a full -41.5%!

It should be clear that not only does quantitative easing not work, but engaging in quantitative easing proves to be destructive. Quantitative easing harms any economy.

During the Clinton Good Times, Federal Reserve Bank Units (FRBUs) of cash and deposits fell! During the Obama Hard Times, because of the efforts of debauched, squandering Congressmen and Fed Res bankers, FRBUs have risen to recklessly.

The purpose of cash is to do the work of money, if money existed. The purpose of money is to settle contracts, specifically to extinguish debt.

As money only ever is coined metal by weight and fineness, money has not existed for most Americans since 1933. As cash is evidence of deposits circulating in perpetuity, cash cannot extinguish debt.

The purpose of credit is to bring forth production into the now on expectation of future profits.

When production of property (right of ownership) in the pursuit of profit in purchases and sales, or trade is efficient, trade betters the lives of all. In the end, anyone wants stuff as wealth. Cash acts as a stand-in, a claim against future stuff of wealth. Credit acts as a stand-in for future profit.

Making cash and credit less efficient weakens any economy. That is what Quantitative Easing does. Ben Bernanke has wrecked the U.S.A. like no enemy ever could. His successor, Janet Yellen is bent on following in Bernanke's footsteps.

Those of the Federal Reserve don't understand banking, credit, money, cash at all. Thus, they do not understand trade.

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42 YEARS BEFORE ADAM SMITH THERE WAS A DUTCHMAN NAMED JACOB VANDERLINT. IF ONLY BEN BERNANKE KNEW ABOUT VANDERLINT.

Yes, it's true. Forty-two years before Adam Smith and his famed, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), a work highly derivative of the Physiocrats and Dudley North (read: Plagiarism), there was a guy named Jacob Vanderlint. Vanderlint had a work published in 1734 titled Money Answers All Things.   

If only Ben Shalom Bernanke, the Ukrainian-American, and former Chairman of the Federal Reserve had read the work of Vanderlint.

Vanderlint's work is concept-dense. To get a good understanding of the work, you need to know quite a bit about English, especially how a Dutchman would have expressed early modern English in 1734.

Right away, Vanderlint lays down what all should know. Money only ever is coined metal by weight and fineness. Anything made from paper never could be money.

Take notice how Vanderlint nails it when he expresses the idea that money is the measure of contract between any two men. In other words, money is the tally of property for property.

Vanderlint stresses again, that money means gold and silver with this follow up passage:

Notice here but a few paragraphs in, Vanderlint lays down the true quantity theory of money: 

Take note Vanderlint lays down the right quantity theory of money and not the bogus one preached by far too many of total money to total goods. The right one is total money to total population. After all, it's one man who trades with another man according to each of their preferences and not according to the amount of goods produced.

Once a man buys all his limited imagination can muster, any sum of buying power in excess of his fulfilled desires only goes to inflate prices through excess bidding.

Here, Vanderlint says the more money per capita, the higher prices shall be. The lesser the money per capita, the lower prices shall be:

And here, Vanderlint shows the true genius inside him as he reveals that bank credit works the same as money (gold or silver coined) and as long as a strict credit to money ratio gets maintained, credit will lift prices and circulate goods as if credit were money itself:

Vanderlint warns that if too much credit raises prices, it shall raise the cost of production and  thus exporters shall need higher prices to cover their costs. Vanderlint further warns that no amount of raising taxes on imports against superior competitors shall change the situation unless the excess credit gets taken away.

Next, Vanderlint goes on to say that when wage earners have money surplus over their necessaries, trade flourishes. In other words, Vanderlint has said that when buying power rises, or said another way, when true wages rises, trade expands:

...

In the balance of the work, Vanderlint argues to bring forth more land into cultivation to drop prices for food and drink and thus raise buying power of wage earners. The work is quite impressive even for today as Vanderlint has provided data and cited footnotes.

And truly this is the whole of it. Any policy by central bankers should be such to bring higher return to capital by bringing higher return to workers. For it is workers who buy stuff.

No amount of plying individuals with cash and bank credits is going to do anything but raise prices and enrich already entrenched players. Yet, by doing so, every one is made worse off. 

Ben Bernanke might be a genius when it comes to academia economics, but the man is functionally retarded when it comes to trade, banking and real life.

The worst bit about Bernanke is that you are paying for his personal, social experiment as he applied his fanciful academia egg head theories. 

Americans are now in the sixth year of the Greatest Depression as evidenced by the sixth straight year of true decline in GDP. Bernanke touted himself as an expert in the Great Depression caused by Franklin Delano Roosevelt. 

Had Bernanke only read Vanderlint, Americans might be living in Good Times right now rather than Hard Times.

Vanderlint's genius reminds me of another Dutchman of sorts.

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DO YOU STILL BELIEVE THAT INFLATION MEANS RISING PRICES RATHER THAN RISING BANK CREDIT?

Elsewhere, I have shown that Federal Reserve Bank Units (FRBUs), or if you like better, Federal Reserve Buying Units are what circulate goods and services in the U.S.A. and elsewhere on earth.

I have explained that as money is coined metal by weight and fineness and that money can exist without banking and government. You do not have money and never in your lifetime have you had money.

Today, there is only cash, which is evidence of past bank deposits circulating in perpetuity and checkable deposits, which, too, is bank credit.  Both cash and deposits must have banks and banking to exist. 

Many continue to accept the myth spread as a false meme that inflation means higher prices, that somehow prices cause inflation. Nothing could be sillier than to believe something could be the cause of itself.

The supposed most widely used measure of inflation fails to measure inflation precisely because the Consumer Price Index (CPI) measures prices and not inflation. The government tricksters at the Bureau of Labor Statistics who give you the CPI measure current inflated prices by a base of past inflated prices. 

Using data from the Federal Reserve and the Bureau of Economic Analysis, I have shown that prices have been falling for years even before deflation that has been underway since 2007.

Yet, if you have doubts of what I teach, read below a smattering of writing from a treasure trove of works I have at my disposal. All the writers say the same. 



Inflation is a rise of bank credit beyond trade needs. Inflation leads to the profit squeeze when the sum of sales on extant prices set by winning bidders is below the outlay for production. When many awaken to their lacking the means to pay bills, this leads to crisis and subsequent collapse of trade. This collapse all know as recession or depression.

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WHY ISN'T THE ECONOMY DRIVING ANYWHERE? THE CAPITAL ENGINE LACKS FUEL!

So I've been spreading foreboding of late, first with  IT'S LOOKING LIKE MORE RECESSION IN THE U.S.A. IN 2014 and then with S&P 500 MINI-MANIA HITS. 24% CORRECTION OR 42% CRASH UPCOMING?

And now I've had a look at where producers stand with their mixed-use capital and their circulating capital. Specifically, I've looked at commercial and industrial loans gotten from commercial banks and asset-backed commercial paper.

Those who understand financing of trade, businessmen tend to use loans to acquire property in capital retained through time subject to known loss. The known loss is known as depreciation and the name given to that kind of capital is fixed capital.

Businessmen tend to seek accomodation of property in credit receivables they hold against debtors. Such property put into negotiable instrument form is known as commercial paper. Businessmen use property in deposits, otherwise known as wealth, gained from having their commercial paper discounted by a banker, to pay expenses. In so doing, they transmute wealth into capital.

Here's the fixed capital picture.



It's hard to get a good idea of what this should look like over long time as the data set goes back only to 1985. That said, it appears that businessmen go through periods where they build up fixed capital to generate sales.


Here's the circulating capital picture.




And here is what fixed capital and circulating capital look like together.



It appears that true asset-backed commercial paper gives a good indicator ahead of what producers plan to do toward fixed capital acquisition.

Yet what is most troubling is what I call the Capital Engine ratio. Let's have a look.




Think of fixed capital as a car engine and circulating capital as the gasoline. Right now, there is $6.09 of fixed capital loans to $1 circulating capital. 

Before Q3 2007 peak credit, the Capital Engine ratio averaged $1.34:$1. Since the banking credit collapse and following crisis, the Capital Engine ratio averages to $3.22:$1. The Capital Engine ratio has grown a whopping 459% since peak credit.

In short, there isn't fuel, petrol, gasoline to power the engine beyond idling. 

What has caused this stall state? Why, Ben Bernanke, the former chairman of the Federal Reserve, the supposed expert on the Great Depression, is the man who decided to have an engine with little fuel. Death by billions and billions of cuts is what Bernanke believes is the way to handle a banking crisis and deflation after a massive inflation. 

Foolishly, while chairman, Bernanke's entire plan had been interest rate suppression. His successor, Janet Yellen agrees with Bernanke's approach.

When rates are kept low, capitalists seek return outside of the U.S.A. That further puts strain on bank deposits and thus further weakening bankers already weakened from crisis after inflation. 

The worst bit of the Greatest Depression engineered foolishly by Ben Bernanke has been to hurt wage earners. Had interest rates risen, wage earners those living on fixed incomes would have gained buying power. Their living standards 

Central bankers always should do the opposite of prolonging recession. They should accelerate the collapse. Rates should get put up. Bankers should stepped up acccomodation, discounting every bit of commercial paper presented. That is how keep work flowing.

Entrepreneur-adventurers should face the music for their wrong fixed capital structures.

The sooner one gets through hard times to the bottom the sooner revival can happen. In fact, law makers should craft law to require by law accelerated recessions.

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THE CONSUMER PRICE INDEX NEVER HAS MEASURED INFLATION, EVER. CLAIMING SO HAS BEEN AN EPIC CON JOB.

The Bureau of Labor Statistics of the Department of Labor publishes the Consumer Price Index (CPI). 

Those at the BLS claim the CPI is "the most widely used measure of inflation,"  that anyone can use the CPI as a deflator "to translate ... (economic data) into inflation-free dollars." 

Sadly, those at the BLS claim over two million workers must suffer through collective bargaining agreements, which tie their wages to the CPI.

Humorously, those at the BLS claim "the CPI is an indicator of the effectiveness of government policy."

Of course, the CPI cannot measure inflation. Never in its history has the CPI translated any dollar measures into "inflation-free" dollars.

Inflation is a consequence of banking. In the fiduciary monetary system of centralized bank notes, inflation is merely the growth of the circulating media — cash, which is evidence of past deposits circulating in perpetuity and bank credit in the form of checkable deposits.

The damaging effect of inflation becomes revealed when the growth of credit outstrips the growth of output owing to credit being priced too cheap. 


Edwin Walter Kemmerer was known as "the money doctor." This is what he had to say about inflation:

 

Kemmerer goes on to say:

All prices adhere to the one, true, infrangible law for all of trade — the Law of Prices. The Law of Prices of holds the winning bids of purchase and sale for what is on offer set the price.

Producers get constrained by the great Axiom of Profit. The Axiom of Profit holds the sum of sales must at least equal the cost of production otherwise producers go to ruin.

The prices set by winning bidders determine the sum of sales for producers. At whatever price winning bidders set, those producers whose costs are higher than their sales get forced out of production. 

Prices reflect buying power and willingness to bid. Even if bidders have more credit in their hands in the face of what is on offer and but are unwilling to bid more, prices shall not rise. 

Establishing a market basket of goods fails to measure inflation. Producers come and go depending upon efficiency of production and capital formation. Consumers tastes change as innovation replaces products altogether, e.g., the MP3 player replaced the portable CD player, even more so than improvement leads to brand switching.

Though some dispute the current numbers collected to calculate the CPI, such as John Williams at Shadowstats.com, most, including Mr. Williams, believe the idea behind the CPI as measure of inflation is right when in fact the CPI never can measure inflation.

All the CPI can measure are random changes through time for prices of specific goods with prices driven by specific market situation for each good.

No one can even use the CPI to project to a universe of prices the way random sampling with a suitable sample size can project to a universe of observation.

The CPI has been one of the biggest con jobs since the advent of the Federal Reserve.

To better understand inflation, check out INFLATION REVEALED! "REAL GDP" AND FEDERAL RESERVE BANK UNITS.

Be sure to check out the Bizarro Theater Dashboard for updated charts.

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PRICES ARE UP BUT NOT BECAUSE OF INFLATION. WITNESS THE CRAZY FEDERAL RESERVE DEBASEMENT POLICY

So today, Mish reports that food prices are on the rise. 

To understand inflation, you need to understand commercial banking and central banking. To help you, check out INFLATION REVEALED! "REAL GDP" AND FEDERAL RESERVE BANK UNITS.


 


Yet, real credit is down and down much from peak credit at the end of 2007. That is deflation.



Real bank credit is down 41% from peak credit at the start of Q2, 2008. The economy runs on bank credit mostly and not so much cash.

From a major low of 1994-January-1, peak inflation hit 2008-April-1. The first bubble, from 1994-January-1 through 2001-January-1 grew a whopping 71%!

Instead of letting it pop, Alan Greenspan, then Chairman of the Federal Reserve pushed the bubble higher still. From the 2002-April-1 pause until peak inflation 2008-April-1, the credit bubble grew another 47.1%!

The Bernanke Leg, which began Ben Bernanke became Chairman of Federal Reserve, pushed the obscene bubble even higher, to its inflation peak hit 2008-April-1. Bernanke oversaw 19.7% growth in credit in a scant two years!

From inception to peak, the massive bank credit bubble under chairmen Greenspan and Bernanke grew an out-of-sight 140.2%! To put it in perspective, from the Nixon Shock to the major low of 1994-January-1, bank credit grew only 28.57%!

Since peak credit, bank credit has fallen 41.2%. That is deflation.

Edwin Walter Kemmerer gave good description of what is inflation:



Kemmerer goes on to say:




And that is the key point. The U.S. dollar has been debased by increasing the number of dollars in circulation aggressively.

Have a look at the craziness ushered in by Ben Bernanke!

The peak GDP-to-Cash ratio hit, 1981-January-1, when $1 of cash could buy $27.35 of GDP. Today, $1 of cash buys a measly $14.80. This is the lowest ever for the dollar to GDP since the Nixon Shock, which I wrote about in ELECTRICITY PRICES. SHOCKING, ISN'T IT? THANKS, NIXON.

The GDP-to-Cash ratio has fallen a whopping 24.10% since peak credit  2008-April-1.

The sum of cash in circulation has jumped an eye-gouging 52.5% since peak credit 2008-April-1! That is why prices for goods transacted mostly in cash have gone up substantially.

In short, owing to welfare programs and bailouts, too much cash has been pumped into circulation but there hasn't been a sufficient rise in goods output.

Yet, prices of credit-based transacted goods have fallen tremendously since peak credit, in spite of recent upticks, most of which reflect pumped cash into circulation. After all, all prices get denominated in multiples or fractions of the cash unit, which is, of course, the U.S. dollar.

What is really happening then? How can prices go up under deflation?

Before deflation, there must be inflation. Inflation happened already.

Cash accretion has been ongoing for awhile. Cash and deposits are interchangeable. Sometimes bankers pay bank credit on deposits, which of course, creates more deposits.

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FIRE, BRIMSTONE, ZOMBIE APOCALYPSES, OH AND PEAK-OIL PREACHERS. BEWARE!

The Internet has been a magnet for all kinds of crazies. One kind who can attract the crazies is the doomsayer.

While some doomsayers advocate prepping for the zombie apocalypse others preach fire and brimstone over peak oil and it's cousin, climate change.

Of late, I discovered Our Finite World by Gail Tverberg. Her blog first came to my attention through an article published at Zero Hedge written by her Russia and the Ukraine – The Worrisome Connection to World Oil and Gas Problems. 

Ms. Tverberg pitches herself as "actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change." Ms. Tverberg believes that "[o]il limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply."

Ms. Tverberg has gathered what seems to be a cult into her Chicken Little church of doom over oil.

After addressing the doom and gloom of her article in PUTIN'S RUSSIANS AREN'T MEDDLING IN UKRAINE BECAUSE OF OIL and mentioning such in a comment on her blog, Ms. Tverberg directed a few comments to me among which are:

“The taxes depend on the selling price of oil and gas, as well as the cost of extraction."

and

"Russia has different tax laws that we do. It changes the taxes monthly, to get as much as the market will bear. The taxes depend both on extraction costs and price available in the market place. I am not sure how different it would be from calculating pretax profits, and taking, say, 90% of it.”

ME: Taxes have nothing to do with costs. Taxes do not depend on costs at all. Taxes are an unearned share of profits. Without profit, there cannot be taxes.

All prices get governed by the one, true, infrangible law of trade — the Law of Prices. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer sets the price. 

All firms get governed by the Axiom of Profit — the sum of sales on prices set by winning bidders must at least equal the cost of production otherwise a producer goes to ruin.

If the price of something is $10 and cost to produce is $10, there is no profit. Politicians can't levy taxes on $0. If the cost to produce is $11, there is a -$1 loss. Politicians can't levy taxes on -$1 loss.

The ability of politicians to collect taxes works the same the earth over and through all of history. Jurisdictional tax laws can't overcome reality of the constraints to trade — the Law of Prices and the Axiom of Profit. 

Only through subsidy, can politicians steal from some and either give buying power to bidders, forcing up prices to at least break even or pay for costs of producers to give the appearance of profit.

Elsewhere on her blog, she made rather outlandish claims in what seems to be attempts to support her gloom and doom preaching. 

"Since 2005, (1) world oil supply has not increased." ~ Gail Tverberg

ME: The EIA shows that world oil output has grown 6.7% since 2005.

Gail Tverberg: "Oil limits seem to be pushing us toward a permanent downturn, including a crash in credit availability, loss of jobs, and even possible government collapse."

ME: From the start of 2005 to peak credit in April 2008, loans and leases in bank credit grew 40.6%! Oil production barely grew at 1.3%. Clearly, oil is not causal for credit. 

Gail Tverberg: "Oil supply limits appear to be a primary cause of the 2008–09 recession." 

ME: An immense credit expansion arose and when expected forthcoming profit failed to materialize, collapse quickly followed. This is the same story of every undue credit expansions. 

From an interim low of $1,286.14 trillion (inflation-adjusted)  in January 1994 to a peak of $3,354.06 trillion (inflation-adjusted) in April 2008, credit grew 160.8%. During the same period, world oil output grew a whopping 23.3%! So where is the supposed oil supply limit?

In contrast, between January 1, 1980 and January 1, 1990, credit grew 19.9% (inflation-adjusted). Yet, world oil output only grew 3.8% during the same period. However, GDP grew a whopping 111%! 

[See: THE BUBBLE ALAN GREENSPAN COULDN'T SEE WITH ROUTINE DATA COLLECTED BY HIS ONE-TIME EMPLOYER, THE FEDERAL RESERVE and INFLATION REVEALED! "REAL GDP" AND FEDERAL RESERVE BANK UNITS ]

If oil were the driver of credit and economies, then doomsayers need to explain how banking and credit expansions arose before the advent of petroleum as a source of energy.

Gail Tverberg: "I have made the point several times that the price of oil is now too low for many exporters to make the money they need to and too low for energy companies to continue their exploration and drilling without borrowing huge amounts. This is a huge problem."

ME: Ms. Tverberg fails to list any exporters. Never does Ms. Tverberg mention what are the exact production costs for any of the firms much less an industry average.

If her assertion were true, there would be mass exodus of these purported many from the field of production. Supply would rapidly fall. Winning bidders would need to bid more to gain property in the smaller output of what would be on offer. Price would rise as a consequence. Excess profits would follow, which would induce new entrants.

Yet, why doesn't anyone see her false scenario happening. Instead, the EIA reports ever growing world output. 

Gail Tverberg: "Prices are either (1) too high for consumers, or (2) too low for producers, or (3) both."

ME: Exactly for which consumers and exactly for which producers? It's odd how Ms. Tverberg never identifies all whom she claims suffers.

If prices are too low for producers, then Ms. Tverberg could explain how the top revenue producers on earth with profits in the tens of billion are oil producers. The list of the world's biggest revenue producers, all highly profitable is a who's who of oil producers — Royal Dutch Shell, Exxon Mobil, Sinopec, China National Petroleum, BP, Total, Chevron, Gazprom, Petrobras, Valero.

Gail Tverberg: "You are not reading what I have written."

ME: I have read what Ms. Tverberg has written. What she writes is fiction. 

Instead, here are the facts:

In 9 of the 22 years between 1983 and 2005, as reported by the EIA, year-over-year U.S. total gasoline retail sales by refiners in thousand gallons per day fell. Yet, as reported by the Office of Highway Policy Information, Federal Highway Administration of the US DOT, in every one of those years highway vehicle miles traveled grew a whopping 80.9% from 1.6528 trillion miles to 2.9894 trillion miles!

Clearly, technological advance in automobiles has led to more miles being driven per gallon. Doomsayers never account for technological advance.

Economies grow because of efficiency in the production of property, which means the right of ownership and never the thing owned. Efficiency of production arises from technological advance.

Economies exist because those of mankind need to produce property they don’t want to trade away in purchases and sales for property they do want.

No one can enjoy something owned by someone else. They must trade for it first.

Men produce things for the purpose of trading those things through purchase and sale in effort to secure profit expressed in buying power, which today gets embodied in cash or credit. Men do so because they believe their gained buying power sooner or later will let them buy something else wanted, which better suits their living, than what it is they sell.

Credit is expected profits of the future embodied in property. Thus, credit is a kind of conditional property. 

Through borrowing and lending, a credit deal transforms hard to market property as wealth into property as capital. 

Credit coins less merchantable property into more merchantable property. Credit coins property to capital to merchantable property. In so doing, credit represents the long sought for alchemy as credit transmutes differentiated property into metaphorical gold.

Credit truly is the philosopher's stone.

The entirety of trade, or commerce, or real economics ties up with two words — property and profit. Without profit from effort, anyone would lack buying power to buy anything else. Without property, no one can trade. 

Trading property for profit is what commercial life is all about. 

Stay tuned. On, February 6, 2014, Ms. Tverberg predicted "collapse is practically right around the corner, beginning in the next year or two"  because she believes there is a limit to growth-driven worldwide trade.

Yet, the room for growth in trade is enormous almost unfathomably so. The 3.523 billion who live on less than US$2.50 a day would argue there is plenty of room for growth. The 5.637 billion who live on less than US$10 a day would argue there is plenty of room for growth. That's 80% of worldwide population!

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THE BUBBLE ALAN GREENSPAN COULDN'T SEE WITH ROUTINE DATA COLLECTED BY HIS ONE-TIME EMPLOYER, THE FEDERAL RESERVE

Since peak credit of fourth quarter 2007 of $1.134 trillion (deflated in FRBUs), loans and leases in bank credit of all commercial banks has fallen a whopping -46.31%!

Here is the bubble that Alan Greenspan claims he could not see during his reign as Chairman of the Federal Reserve of the United States. Not only did the bubble run from 1994 to 2006, but also the bubble continued into his successor's Ben Bernanke's reign.

Loans and Leases in Bank Credit, All Commercial Banks in gold window dollars.



Anyone who knows how to calculate the slope of a curve could see the rate of change in credit as time went onward.

After a steady level of credit between 1980 and 1990 and following credit decline to bottom in April 1994, credit took off in two massive stages, the first between April 1994 and January 2001 and the second, between January 2004 to April 2008. 

Anyone who dabbles in stock charts knows this pattern all-too well. 

If only Greenspan knew about Federal Reserve Bank Units, he could have calculated true credit using the FRBU deflator.

Federal Reserve Bank Units (FRBUs), or if you like better, Federal Reserve Buying Units are what circulate goods and services in the U.S.A. and elsewhere on earth.

As I show in WHY FUTURES MARKETS SHOULD SET THE FEDS FUNDS RATE RATHER THAN THE FEDERAL RESERVE BOARD OF GOVERNORS that through the brilliance of a futures market, Americans could safeguard their livelihoods for all time returning to freedom, returning to living among a people who get rich from earnest effort rather than political connection.

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INFLATION REVEALED! "REAL" GDP AND FEDERAL RESERVE BANK UNITS.

Federal Reserve Bank Units (FRBUs), or if you like better, Federal Reserve Buying Units are what circulate goods and services in the U.S.A. and elsewhere on earth.

Many Americans think they have money, but they do not. No one does. 

As I explain in BITCOIN IS SOFTWARE PROTECTED BY COPYRIGHT. BITCOIN IS NOT LEGAL TENDER CASH, money is coined metal by weight and fineness. The Romans said so. It's their word. Always, money can exist without banking and government. 

Today, there is only cash, which is evidence of past bank deposits circulating in perpetuity and checkable deposits, which, too, is bank credit.  Both cash and deposits must have banks and banking to exist. Americans have legal tender cash. 

From the banker's view, cash and deposits are one and the same. Both are liabilities of bankers. 

Everything in America gets priced in cash and deposits, which are one and the same. 

In ELECTRICITY PRICES. SHOCKING, ISN'T IT? THANKS, NIXON, I explain that Richard Nixon, then president of the U.S., through Executive Order 11615, closed the gold window, which put Americans on fiduciary bank credits as money system and thus the world on a floating exchange rate scheme for international trade settlement.


During my university days, professor eggheads who spread their false doctrine of economics, unwittingly of course, cherry-picked as their preferred base GDP from which to calculate "real" GDP average GDP between 1980-1982.  Today, it seems eggheads are fond of 2009. Either way, doing so reveals foolery.

Here, you can see GDP, every year in current dollars as well as "real" GDP expressed in 1971 GDP using the last quarter of 1971 annualized GDP, which is the first quarter of commerce after the Nixon shock of closing the gold window. The chart looks typical of any year where an official government agency "deflates" the current dollar GDP. 

 


Merely measuring today's GDP in another year's GDP fails to capture reality. All anyone is doing is measuring another year's GDP in the base year's inflated GDP.

In doing so, there is no way to isolate effects on price owing to changes in what actually circulates goods — cash and checkable deposits.

And for the foregoing, this is why everyone is wrong who publishes so-called "real" GDP stats using the method approved by economist academicians everywhere.


Edwin Walter Kemmerer gave good description of what is inflation:

Kemmerer goes on to say:

The right way to measure inflation or deflation is to measure changes to the sum of checkable deposits and cash in circulation. The sum of checkable deposits and cash is what I call FRBUs.

FRBUs give the best tool to measure inflation. The chart below reveals the quarterly changes in FRBUs. 

 
And the next chart shows the yearly change of FRBUs, which, of course, is inflation or deflation of that which circulates goods in America under a fiduciary monetary system of bank credits.

 


And here is what True GDP looks like when removing inflation in FRBUs. This is GDP calculated in gold window dollars (GWDs).



As you can see True GDP looks quite a bit different from what politicians sell you. Yet, anyone who has lived as a working-class, wage-earning adult during these years sees how the graph resonates with his or her experiences.

As I recall, the years 1980 through 1982 were bad ones. The years 1986 through 1989 were good ones. From the time the first Gulf War hit until 1993 were bad years. The years 1993 through the dot com peak of the 2000s were good ones, truly good ones.

From dot com to dot bomb were weak years. And then the final credit bubble madness hit with as expressed in the residential realty bubble.

Life has been pretty tough in America since peak credit 2008. The economy has gotten smaller every year since peak credit. Everyone can tell you this is so from their experiences.

Yet, by the shape of the curve, anyone can see the shrinking is slowing. The current economy is about the size between 1993 and 1994.

Likely, using the FRBU deflator is the most accurate tool to measure inflation you can get, unlike the Consumer Price Index (CPI) of the U.S. Department of Labor and its Bureau of Labor Statistics. The jokers at the BLS use all kinds of deceitful trickery to massage the CPI numbers.

Besides, inflation is a banking phenomenon. Without banking there cannot be inflation. As I explain in FALLACY FRAUGHT FORBES TRIES TO STOKE FEARS OF HYPERINFLATION, inflation is the growth of credit that outstrips the growth of output owing to credit being priced too cheap. 

As I show in PARTY OVER OOPS OUT OF TIME. YOU SHOULD HAVE PARTIED LIKE IT WAS 1999, prices for many things have risen substantively since 1999. For many things, today, it takes more minutes for the average wage earner in America than the comparable average wage worker in 1999.

So what is the difference between 1986 through 1999, or the Reagan-Bush Era and the Clinton Good Times versus 2001 through now, or the Bush-Obama Hard Times?

Why it's the growth of checkable deposits relative to cash. It's this growth that results in higher prices and a lower living standard for bottom class and middle class Americans. 

The blue and red bars reveal the growth of cash and checkable deposits, respectively for their respective periods. The orange bars reveal the ratio of cash to checkable deposits.




During the Reagan-Bush Era and the Clinton Good Times when the living standard grew for the average wage earner each year, there were almost two dollars ($1.97) in cash for every one dollar in deposit bank credit. However, during the Bush-Obama Hard Times, there was only about 75 cents ($0.74) in cash for every one dollar in deposit bank credit.

In YOU LIVE AT THE MERCY OF A CLOWN-CAR DRIVEN BY MEN AND WOMEN OF THE FEDERAL RESERVE, I show how clueless former egghead in chief of the Federal Reserve, Ben Bernanke is. Bernanke failed to see a bubble in residential realty brought on by inflation (too much credit). 

Bernanke pursued exactly the wrong policy. Bernanke sought to increase deposit bank credit rather than what he should have done, deflate it. More so, Bernanke should have pursued action to restore a strong cash-to-deposits ratio.

In what class do you find yourself? If you don't know, I explain it in BUT WERE YOU EVER IN THE MIDDLE CLASS?

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