iTulip's Eric Janszen has long referred to our FIRE economy. FIRE is an acronym standing for Finance, Insurance and Real Estate. You've likely heard me refer to our Phony Economy or more recently, our Ripoff Economy. These are all names for the same thing, and stand in opposition to a Real Economy based on production, savings & consumption. In a recent note, Janszen observes that our FIRE Economy re-start has flamed out.
Much of the confusion stems from the bi-polar nature of our economy, for ours is not one economy but two. One production-based, governed by the stern rules of profit and loss. The other financed with capital gains and guided by the mutable laws of finance. Political influence on the former is direct and visible, such as through tax policy, the latter through inscrutable regulations, or lack of enforcement thereof, that results first in private debt, then in public when the private over-indebtedness leads to financial crisis. Public debt is nothing more than today’s taxes collected tomorrow, plus interest.
The performance of the productive economy is measured six ways from Sunday. Data on unemployment, inflation, productivity, and output are dutifully reported by the business media. We question its veracity, but what of measures of the health of the FIRE Economy? Where are the monthly reports on the ratio of mortgage debt to household income? What of measures of asset price inflation and deflation? How much household cash flow is pledged to pay interest on debt. At least the last one we can calculate...
Interest on mortgages is now over 20% of personal consumption expenditure versus 5% in 1980 before the FIRE Economy. This despite the fact that 60% of housing is owned outright and mortgages only apply to less than half of households.... The so-called Great Recession was a continuation of the recession that would have occurred in 2001 had the process of debt-deflation then been allowed to run its course instead of the housing bubble FIRE Economy intervention. The partially re-inflated FIRE Economy, and its distortions of labor markets, interest rates, and inflation, produced the Photo-shopped economy with its incongruous mix of recovery in one area and ongoing collapse in another.
In contrast to a productive economy, the FIRE economy grows only if credit (and its obverse debt) expands. Fees for intangible services must also expand. Monthly (or quarterly, etc.) payments (e.g. car insurance, mortgages) or one-time payments (e.g. title insurance) must increase as money flows to the banks, insurance companies and real estate brokers. Janszen's graph shows the success of the FIRE economy in expanding mortgage interest cash flows starting in the early 1980s.
You may have noticed that all—not some, all—government stimulus programs or Federal Reserve actions are designed to jump start the FIRE economy. Most of these programs are designed to re-capitalize the banks from the bottom-up (e.g. HAMP mortgage modifications) or from the top-down (e.g. government shares in Citigroup).
Perhaps you have asked yourself a pertinent question: what is the general social benefit of these multi-trillion dollar guarantees and bailouts for the big banks? Outside of the fact that you might be able to get a slightly better interest rate on a mortgage or a car loan or a student loan at some unknown time in the distant future, these enormous public cash flows going to the banks provide no social benefit whatsoever to the Real Economy. All government policies are designed to get credit & fees flowing as they did before.
Janszen's point, which is also a point I've made a few times, is that the FIRE economy can not be reignited. This is one FIRE you can't rekindle no matter how many matches you put to it. Once you've run up the debt beyond some tipping point by inflating asset values—this occurred during the Housing Bubble—it takes years for the system to come back into equilibrium after asset prices collapse.
One reason this is confusing to people is that mainstream Neoclassical economic theory does not and will not acknowledge the inevitable death of an economy based on increasing debt, little or no savings and stagnant (or falling) real wages. Indeed, savers have been punished over and over again in this economy. More confusion stems from temporary asset price improvements (in the Dow, in housing) achieved recently through exorbitant government giveaways
The FIRE is out not only in the United States, but in Europe & Japan too
People talk as though Bearish versus Bullish views of the "recovery" are mere opinions. Nothing could be further from the truth. What must be will be. There is no question now of a "V"-shaped recovery—it did not happen. That "argument" is over, the Bears have "won" because they could not lose. There could not possibly have been a sharp recovery because such an event would imply that it was somehow possible to get the FIRE burning again.
That flattening and dip in 2007-2009 in Janszen's graph represents the beginning of a correction that will go on for many years. What remains to be seen is how bad things are going to get.
The real tragedy here is that Inside the Beltway, they are fighting a lost battle in yesterday's war. That's one important reason why the Empire is in Decline. In our Imperial Capital, they are either very confused about the distinction between a Phony Economy and a Real Economy, or they no longer care about it. My opinion on this crucial matter is that they are indifferent to your fate. I believe they are drunk with power and corrupt beyond any redemption.
Their callousness will one day come back to haunt them, but that day has not arrived, and may not for quite some time. See The Great Depression and the Revolution of 2017.
It's official—the FIRE is out. Speaking theoretically, it would take years to re-build a Real Economy to replace the current mess if we started now. Are the Powers That Be confused or indifferent about all this? It doesn't really matter in the larger sense: if the FIRE economy didn't make you rich, you're screwed.
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