Ten Times Worse Than RadioShack

Updated 8 February, 2015

David Stockman has written a very thorough piece on the condition of the economy – specifically the amount of debt and the impact that the debt has on inflating many things, including asset prices and favored economic indicators, specifically GDP.

I would like to focus on one aspect of his commentary – and it starts right at the top:

Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.

The implied 2.9X global leverage ratio is daunting in itself.

Keep that ratio, 2.9X, in mind.

In most cases, when people speak of debt leverage ratios, they are considering debt relative to earnings or cash flow, or debt relative to assets or equity.

Comparing debt to GDP would be similar – to the extent GDP means anything (which Stockman does an excellent job later in the post of demonstrating it means little) – to comparing debt to the revenue of a company.

This is where RadioShack comes in:

RadioShack Corp. filed for Chapter 11 bankruptcy protection in the face of mounting losses, according to media reports late Thursday.

The company filed bankruptcy.

What was the RadioShack debt to revenue ratio before this cataclysmic event?  For 2013, the revenue was $3.4 billion; the debt was $614 million.  This makes the ratio 0.2X.  The debt grew significantly in 2014 – by over $200 million – pushing the ratio to somewhere around 0.3X.

Remember, the global balance sheet is levered ten times as much, at 2.9X. 

Not a fair comparison, you say?  RadioShack was a sickly company, not healthy and vibrant like the global economy?  (Don’t write to me about the “healthy and vibrant” comment; just work with me.)  It could never carry the debt load that a healthy, cash-flow-positive company could carry, you exclaim!

OK, I’ll bite.

What about 3M?  About 0.2X.

Caterpillar?  0.7X.

Exxon Mobil?  0.06X.

How about JPMorgan?  11.0X!!!!!

So many statements can be made from this simple analysis, probably none of them terribly earth-shattering.  First, globally debt is high – at a ratio 10 times as high as the now-bankrupt RadioShack.  Second, the leverage is in the banks – no big surprise, I know.  But what is the purpose of banks other than to fund productive assets?  Why should banks be so highly leveraged?

We know in today’s Ponzi-financed world that banks are not limited to funding productive assets.  With unlimited access to and free supply of cost-of-goods-sold and a backstop of government and central bank largesse, why would banks self-limit their leverage?  Of course, they don’t.

What about so-called national, or sovereign, debt ratios?  It is easy to find the ratio of government debt to GDP, but – despite the many efforts to make it so – not all GDP is available to the government to service the debt.  What about debt as a ratio to revenue – meaning tax and other receipts?

Putting together data from a couple of sources – government debt as of 2012, and government revenues of various years (2011-2014) – for countries with more than $1 trillion in outstanding debt I come up with the following ratios for debt to tax revenues:

United States - 5.9X

Japan - 5.7X

China - 1.8X

Germany - 1.7X

Italy - 2.3X

France - 1.5X

United Kingdom - 1.4X

Brazil - 1.4X

Spain - 2.3X

Canada - 1.8X

All somewhere from 5X to 20X worse than RadioShack, with the two worst offenders being the two countries whose currencies have, in the last several decades, been in most demand globally.

Back to global debt: productive assets carry a debt-to-revenue ratio of well below 1.0X, more like 0.2X.  Globally the debt ratio is 2.9X GDP – with banks and sovereigns well above this international average.  Banks and sovereigns: the two hands that wash each other, creating credit with seeming immunity to failure – thereby securing commodities at a rate far higher than a properly functioning market would allow.

There are a lot of unproductive assets being supported by the global Ponzi.  A peek into the fate of RadioShack will give us some idea of the fate of this hypothetical global company:

Shares of the 94-year-old consumer electronics chain were delisted by the New York Stock Exchange earlier in the week.

Delisted.  What might that look like on a global scale?  This is precisely what the central-bankers have been working so hard to hide from us, especially since 2007.  

The asset-price bubble will burst – when, I don’t know.  Many assets will be worth exactly zero, or less than zero as the cost to dispose of many assets will be higher than the disposal value.  Rotting buildings, rotting equipment, rotting cities and towns – left to die in place.

But not all assets.  There will remain many productive assets; the holders of these – while they might be nominally worse off (due to the re-pricing of assets) – will at least own things of value, with the ability to generate income.

Those holding the debt of those entities too highly levered (whether banks, sovereigns, or otherwise) will be left holding the bag – an empty bag.

Checking the Narrative on Ukraine

The narrative regarding Ukraine is repeated, counter to all facts – or in the face of lack of facts.  I know I am not breaking news here; however I think it is worth a simple exercise of examining a single story, from The Globe and Mail:

Since Russia’s annexation of Crimea last March, the European Union, Canada and the United States have sought to maintain a united front aimed at pressuring the Kremlin to reverse course in Ukraine.

Since Crimea’s vote for secession from Ukraine last March, the United States has blackmailed the European Union into maintaining a united front aimed at pressuring the Kremlin to reverse course in Ukraine.  Canada, as the 52^nd state, has tagged along.

Now, with the pro-Russian rebels again on the advance in the east…

Now, with the anti-Kiev freedom fighters again on the advance in the east…

The United States, meanwhile, is considering arming the Ukrainian army in apparent anticipation of a longer and bloodier conflict.

The United States, meanwhile, is considering arming the Ukrainian army in its desire for a longer and bloodier conflict.

German Chancellor Angela Merkel and French President François Hollande flew to Kiev on Thursday and will continue on to Moscow Friday for a meeting with Mr. Putin, hoping to get him to agree to a new peace plan…

German Chancellor Angela Merkel and French President François Hollande flew to Kiev on Thursday and will continue on to Moscow Friday for a meeting with Mr. Putin to let him know they thought the Americans were crazy, but their hands were essentially tied.

While Ms. Merkel and Mr. Hollande are scrambling to try and make peace, U.S. President Barack Obama is said to now be considering providing the Ukrainian army with weapons such as anti-tank missiles, battlefield radars and reconnaissance drones to combat the Russian-backed insurgency.

No change – the Europeans want peace, the Americans want war.  An accurate statement buried in the narrative.

Mr. Kerry said the United States wasn’t interested in escalating the conflict. “We have no illusions that there is a military solution,” he said. But, he added, “you cannot have a one-sided peace.”

Mr. Kerry said the United States was interested in escalating the conflict. “We have no illusions that there is a military solution for Russia, although there is for us” he said. He added, “you cannot have a one-sided peace.  We can, but you can’t.”

Mises Institute: Hooray; Walter Block: ???

Updated below.

The Washington Post recently ran an article covering the political relationship of Ron Paul and his son Rand.  I feel no need to dive into the details of this relationship – agreements, disagreements, etc. – as both I and others have covered this enough in the past.  I have, in any case, decided to rarely comment on Rand any more as I view him as more or less another politician – somewhat better on some issues than most politicians, but not principled and therefore in the end he is no different.

There are two points I do want to cover from this Washington Post story.  First is the coverage of the Mises Institute and their recently held conference in Houston:

HOUSTON — Rand Paul wants to lead the United States. On Saturday in Texas, his father was speaking at a conference about how to leave it.

“A lot of times people think secession, they paint it as an absolute negative,” said former representative Ron Paul (R-Tex.). After all, Paul said, the American Revolution was a kind of secession. “You mean we should have been obedient to the king forever? So it’s all in the way you look at it.”

The event was organized by the Ludwig von Mises Institute, an Alabama-based think tank named after an Austrian economist whose writings are highly respected by libertarians. Ron Paul is a member of its board.

The article also cited other speakers, including Jeff Deist and Brion McLanahan.

It seems to me rather important that the Institute has such mention in one of the more important rags in the country.  It furthers that the idea that liberty and free-market economics are being taken seriously by those thereby threatened.

My second point regards two comments attributed to Walter Block:

“If I were Ron, and my son were running for president, and we were in the same situation, I would shut up…”

“Ron is a millstone around Rand’s neck…”

I will not comment further on these statements until Block comes out with an explanation – I respect him too much to jump to any conclusion based on statements in the mainstream press (other than…Walter, why do you insist on talking to them?).

All I will say for now regarding these comments: I never want Ron Paul to shut up, and Ron is no millstone to Rand.  This is like saying Murray Rothbard is a millstone to the Mises Institute. 

The issue is legacy and importance to the ultimate cause of freedom.  In this regard, Rand is millstone enough for Rand.

Update: Walter Block has replied here.  I will leave his statements to stand on their own other than to suggest it seems to be playing with fire anytime one uses the words “Ron Paul,” “shut up,” and “millstone” in the same sentence when speaking to a mainstream source (frankly, I am not sure in what audience or in what forum those words even could go together – I wouldn’t even have these words intersect on a Scrabble board). 

No matter the qualifications Block feels he made, should have made or now makes, the risk of uttering these words in close proximity to one another in front of a mainstream reporter is too high – Block’s meaning, even when clarified, is too nuanced for such an audience.

The Swiss Declare War

Well, that is what one might conclude after the events of the last week.  As is well-known, the Swiss National Bank decided to remove the peg/floor in the exchange rate for the Franc against the Euro.  This move was made suddenly, with no announcement or even a hint beforehand.

There is so much wailing and gnashing of teeth in the financial media.  There is much I might say about this event; I will use the writing of two of the more prolific economic financial writers of today to help me on my way.  Both John Mauldin and Ambrose Evans-Pritchard (with two pieces, here and here) have written about this event; they each offer comments worth addressing – comments that help give context to some of my thoughts.  (Forgive me as I will write in the language of the macro-economist; using their own words, the failure of their logic can be demonstrated.)

Ambrose offers his analysis:

The Swiss National Bank has lost control.

Think about this…while the SNB allowed the ECB to dictate monetary policy for the Franc, the SNB had control; now that the SNB has decided an independent policy, it doesn’t have control.  What?  This passes for logic?

John Mauldin regularly writes about currency wars (describing the Swissie as “The First Casualty of the Currency Wars”), as if a currency war is something new to this generation.  It isn’t.  As long as money can be manipulated by fiat, there have been currency wars; as long as mercantilism has been official economic policy, there have been currency wars.

He offers the standard eulogy to the death of a weak currency:

Every bank and business that held non-Swiss-franc debt or investments took an immediate 15–20%+ haircut on its holdings. Swiss investors lost at least 10% on investments in their own stock market and more on shares they held in other stock markets.

In Swiss Franc terms, this is true.  However, 100% of the holders of Swiss Francs saw a tremendous gain on their holdings – of course, not in Swiss Franc terms, but relative to the wealth of everyone not holding Swiss Francs.  Denominated in dollars, Euros, Yen, Pounds, and even gold, the Swiss are much wealthier today than a week ago.  This is a great trade-off.

It gets even better, although you wouldn’t know it to read Mauldin:

Forty percent of Swiss exports go to the Eurozone, and the Swiss franc is now over 30% higher than it was five years ago – with almost half that movement coming in one day. Those exporters just got hammered.

Ambrose chimes in:

…the howls of protest this morning from the Swiss export sector. Nick Hayek, head of Swatch Group, said the collapse of the floor would cause havoc. "Words fail me. Today's SNB action is a tsunami; for the export industry and for tourism, and for the entire country," he said.

This is the tired old “a cheap currency is good for exports” line.  It might be good for specific companies (and one or two CEOs can always be trotted out to express this view).  But what about the other side?  Only a small portion of all goods and services produced in Switzerland are exported (net exports of about 5% of GDP).  Meanwhile, 100% of all goods and services consumed by people in Switzerland are either produced in Switzerland or imported; well, at least I am pretty sure about this.  Therefore, for a small percentage of the population (those producing for export), one could argue (although even here I disagree) that a cheaper currency is helpful; for the entire population, a stronger currency is beneficial.

Freedom of Speech

The right of people to express their opinions publicly without governmental interference, subject to the laws against libel, incitement to violence or rebellion, etc.

The right, guaranteed by the First Amendment to the U.S. Constitution, to express beliefs and ideas without unwarranted government restriction.

The right to express information, ideas, and opinions free of government restrictions based on content and subject only to reasonable limitations…

There is only speech, and government opposition to it.

The protests in France and elsewhere – supposedly in support of free speech – are laughable.  France, having some of the more draconian speech laws, is now the center of the world for free speech and expression.  The politicians, marching arm-in-arm in support of blasphemous cartoonists, are arresting free speakers at the same time they march.

This mass killing has been turned into a free speech issue – an issue guaranteed to garner public support (if the cartoons received as much publicity in the mass media as the march did, perhaps the public outcry would be tempered).  But what does Charlie Hebdo have to do with free speech?

Nothing.

What does free speech even mean?  I do not understand the idea of “free speech” in a private context.  If you are in my house and insult me, I will throw you out.  Have I violated your rights somehow?  If you are in my store and tell every patron that my prices are too high, must I allow you this platform?  I am not asking in the context of current law – I am asking in terms of a respect for private property.

I understand free speech in the “Congress (or whatever legislative body) shall make no law” sense (too bad the protestors don’t understand the thousands of laws that violate this concept).  But not in the private sphere.

And the Charlie Hebdo event was in the private sphere.  Technically, France has laws prohibiting what Charlie Hebdo was doing – yet, did not enforce these laws.  In other words, the government did not prohibit Charlie’s free speech in this case.

In the private sphere, I cannot grasp the concept of free speech.  I understand it only in terms of property rights.  I have a right to limit what is said on my property, and remove individuals of my choosing for reasons of speech.

In the private sphere, I cannot grasp the concept of violations of the right to free speech.  I understand it only in terms of aggression.  The employees at Charlie Hebdo suffered a violation of physical aggression.

There is so much hypocrisy in this episode, not the least of which is crafting the narrative into one of free speech.  It provides a much more sympathetic narrative than does the truth.

Violence? Yes; Extremism? Yes; Violent Extremism? NO!

“We will bring together all of our allies to discuss ways in which we can counteract this violent extremism that exists around the world.” (Emphasis added)

Eric Holder

Violent extremism?  There must be something special when these two terms, violent and extremism, are joined together.  What is Holder talking about?  Let’s unpack this phrase:

Violent: acting with or characterized by uncontrolled, strong, rough force; caused by injurious or destructive force; intense in force, effect, etc.; severe; extreme.

We know that governments of the west don’t mind violence – being the leading cause of violent death and destruction on the planet.  A quick check on the number of civilians killed by actions of the western military reveals:

The ongoing conflicts in Iraq, Afghanistan and Pakistan have taken a tremendous toll on the people of those countries. At the very least, 174,000 civilians have been determined to have died violent deaths as a result of the war as of April 2014.

Or this:

The major wars the United States has fought since the surrender of Japan in 1945 — in Korea, Indochina, Iraq and Afghanistan — have produced colossal carnage. For most of them, we do not have an accurate sense of how many people died, but a conservative estimate is at least 6 million civilians and soldiers.

And my eyeball check suggests only about 100,000 of these are US military.

So, there must be nothing wrong with violence, or at least not when it is government doing it.  Well, except for the private contractors. 

Extremism: a tendency or disposition to go to extremes or an instance of going to extremes, especially in political matters

The NSA collects every bit of digital data on and from just about every connected individual on the planet.  Doesn’t that sound a little extreme?  The TSA looks at the naked bodies (or otherwise feels up the clothed bodies) of every single passenger travelling in the US by airline.  Not extreme?  The IRS requires the reporting of virtually every financial account held anywhere in the world by every US person.  Extreme, I would say.

So, extremism also doesn’t seem to be a problem, as long as government is doing it.  Well, wait, that isn’t right.  Charlie Hebdo was pretty extreme.  To my knowledge, it isn’t a government operation.

So I guess extremism is OK if either a) government is doing it, or b) it is done by individuals that government isn’t targeting at that moment – for reasons known only to the state.

What is wrong, then, with violent extremism – when the two terms are put together?  It must be a problem only when done by a non-government actor not otherwise approved to be either violent or extreme.  These days, that happens to include anyone from…well, let’s allow the government actors to provide their own definition:

"We all agree that we need to put in place better control on certain passengers, on the basis of objective criteria and with respect for fundamental liberties and without disrupting cross-border travel," he said.

Certain passengers...objective criteria.  Code for what, exactly?  Either it is vague, to allow them to do whatever they want or he has something specific in mind.  Or both.

To add insult to injury, Cazeneuve wants to control hate speech on the internet:

Cazeneuve said the Internet needs to remain a space for free expression, but that Europe should fight against abusive use of the web to spread hate speech, anti-Semitic messages and the recruiting vulnerable young people for violence.

Hate speech?  I guess this didn’t apply to Charlie Hebdo, given what we now see as an outpouring of support for Charlie by the politicians.  Maybe it is only selectively applied, ignored when targeted at those whom the west wants to target. 

Violent extremism.  Just one more subjective term useful to the government to make an enemy of whomever they will – just like the terms terrorism and hate crimes.  It isn’t enough to merely call a crime a crime.  

The crime must have a provocative label, in order to generate the desired emotional response in the people; it must have a malleable label, in order to allow government the ability to label whoever they want.

And, begging for even more “safety,” the people cheer them on by the millions.