The Demise of Linearity

SUBHEAD: The future is not linear. And so it goes. Ashes to ashes, our society is left with its own excreta.

Image above: Creation of iconic statues on Rapanui (Easter Island) may have broken the ecology that people depended on. Mashup by Juan Wilson. From (http://aidontheedge.info/2010/09/14/history-on-the-edge-of-chaos). By Steve Ludlum on 19 September 2010 in Economic Undertow - (http://economic-undertow.blogspot.com/2010/09/demise-of-linearity.html) One of the remarks in the recent report leaked from the Bundeswehr was this:

3.2 Systemic risks after reaching a “tipping point”

In addition to the gradual risks, there might be risks of non-linear events, where a reduction of economic output based on Peak Oil might affect market-driven economies in a way that they stop functioning altogether, leaving the possibility of a relatively steady downward trajectory.

Such a scenario could develop through an initially slow decline of trade and economic activity, combined with higher stress on government budgets from lower tax income, higher social cost and growing investment into alternative technologies.

Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains – because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.

The "steady downward trajectory" witnessed since 2004 - obscured by the greatest credit bubble since John Law's Mississippi Scheme - bears evidence that Peak Oil has already taken place - having done so in 1998! The ... "challenge of debt service leading to crashes in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains – because trade is no longer possible - leading to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns ..." is already occurring. Both the Bundeswehr and our cultural narrative - along with most finance analysts - are behind the 'reality curve'. What is left are the famines and total collapse. Lock- stepped alongside post- peak oil, the human trajectory of limitless growth and linear progress has been short- circuited. We created for ourselves a mindless economic structure that meters waste and nothing else. The excreta of our immediate 'civilized' forebears was Venice, Tuscany, antique Japan, ancient China, the Renaissance: ours' is our landfills. We lack the returns on consumption to propel reality to the point suggested by progress's own narrative. We are long past the point of flying cars: this failure discredits the entire narrative concept. The future is not linear. It is a myth we cooked up for ourselves. A few generations of 'progress' would have us first colonizing our own solar system, then in a few more the pestilential human race would afflict the entire galaxy. This would take place no doubt with SUV's, giant pickup trucks, cheaply- built 'homes' and 'No Money Down'! This was the linear promise of 'Progress' and industrial development, limited only by our comic book imaginations and willingness to learn the mechanics (not the essence) of the natural universe and (ruthlessly) adapt technology to exploit its weaknesses for profit ... for a few. According to the myth, our relentless press toward an inevitable future would exact penalties early on in the process - our environment would be destroyed by the same technologies required for progress - but future wealth and even more technologies would repair the damage after the wealth generated by the tech would allow us to pay for it. Annihilation was merely a stumbling block on the way toward flying cars for all. That we do not have them - as suggested by the promoters of Business As Usual - is because we have been too restrained in our exploitation and destruction of nature. More ruthlessness rather than less is required. We have no one to blame for our misery but Al Gore and radical environmentalists! It turns out the failure of the narrative to fulfill itself turns out to be a feature not a bug. Enriching a handful of billionaires is not the stairway to a warp- drive star- ship. Instead, the receding tide of credit has uncovered the frauds at the bottom of the linearity myth. Nature and its invaluable services is in the process of becoming a giant shark in a tank of formaldehyde leaving us with a surplus of greedy crooks and little else. What will our surplus of greedy crooks eat? Perhaps we can starve the crooks and eat them in turn. The linear future taboos must only be adjusted for cannibalism and our digestions evolved to 'process' more grease. One of the non- linearities being exposed by the out-flowing tide of credit is in real estate. From Susan Webber (Yves Smith):

As readers no doubt know, there is a lot of actual and shadow residential real estate inventory in the US. The time from serious delinquency to foreclosure has lengthened considerably, due not just to crowded court dockets, but also bank/servicer disinclination to take possession (reasons include that investors take a dim view of bank real estate holdings; the bank is liable for expenses, most important real estate taxes, once it takes possession; more foreclosures would lead banks to have to write down clearly overvalued second mortgages, leading to losses and lowering bank capital levels). Most analysts have argued that it would be preferable to accelerate the process of clearing the overhang of housing inventory, since prices need ultimately to return to price level in relationship to incomes and rent rates more in line with long standing historical norms. And the officialdom seems to accept this view, since Fannie and Freddie are pressuring servicers to move faster on foreclosures.

A foreclosure represents an 'Extended- Pretended' loan loss recognition which effects banks' capital levels. The rate of foreclosure is strictly a cash- flow issue for the banks. If the rate of foreclosure exceeds cash flow the result is bank insolvency. Banks' earnings are derived from the Treasury 'carry trade' where they borrow short from the Fed at near- zero rates and lend the same funds back to the Treasury at higher yielding long term rates. Besides than this and similar carries, the banks have no other profitable business. Cash flow is determined by the yield curve: as the yield curve flattens the cash flow to banks decreases. Cash returns from the carry trade determine how many homeowners are foreclosed at any given time. If there are returns from the trade, the banks can afford to foreclose and recognize the resultant losses. As funds flow into Treasuries the yield curve flattens further. The flattening yield curve means less cash flow for the banks. The outcome is fewer foreclosures and more pressure on the real estate market. The overhang of non- paying homeowners along with unaffordable high real estate prices shrinks the market for 'homes' placing more in foreclosure risk. It is not only banks that require a turnover in home loans, it is home buyers and sellers as well. Commerce itself is a flow, not a stock. Without a flow of good business the economy morphs into a collection of vicious cyclical bad ones. Sez Yves:

... it appears that the very same sort of corners-cutting that led financial firms to shovel money to weak borrowers could impede working through the inventory of seized residential real estate. An article discusses an analysis by AFX Title, a title search company, that shows problems with title on foreclosed properties to be widespread:

As the number of real estate foreclosures skyrockets, the odds are higher that a home you live in today, or at some point in the future may have had a foreclosure in its history. Even if the foreclosure has long since passed, a loophole in the way mortgages are recorded can create a serious title defect for future owners. Title analysis performed this month by AFX Title has detected this error to be common in random samples of properties it reviewed. “This could affect the property ownership of millions of homes nationwide” said David Pelligrinelli, of AFX Title. “The mortgage recording method which created this title flaw did not exist until recently. As title abstractors are just seeing this problem emerge now but a wave of title claims is coming over the next year or so.”….

The problem is created through a break in the chain of mortgage ownership. Until the 1980’s, most mortgages were loans between the homeowner and a bank, who lent the money directly. More recently, the mortgage financing system transformed into an international system of securitization, with mortgage lenders packaging their loans into securities, bought and sold by investors like stocks. These transactions even split individual mortgages into sections, where each loan could have parts owned by different investment banks.

The transfer of ownership in these mortgage backed securities (MBS) was done with contracts on the balance sheets of Wall Street investment banks, such as Morgan Stanley and Goldman Sachs. The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Lending Tree, who typically acted as a sales company, and sometimes remained contracted to service the loan.

In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place…

There are reports that some title insurers are indicating that they will not insure for this title defect.

Wells is sufficiently concerned about the risks of selling properties out of foreclosure that it is springing an addendum on buyers, shortly before closing, which effectively shifts all risk for any title deficiency on to the buyer. Now why is this a big deal? Go reread the boldfaced sentence above. If a bank like Wells does not have the right to foreclose, it cannot have clean title to the property. So the bank could conceivably be selling something it does not own.

Let’s say you buy a vase from a store. You open the box when you get home and find out the box is empty. You’d clearly be within your rights to get your money back.

With the Wells Fargo addendum, even if the bank has sold you the equivalent of an empty box, you have no recourse to Wells. Zero. Zip. Nada.

But per the AFX article above, the bank may own nothing. It may have foreclosed without having a clear enforceable right to the property (this is the basis of the burgeoning number of cases where borrowers are successfully challenging the bank/servicer’s right to foreclose, because it cannot prove it actually owns the note, which is the IOU between the borrower and the lender; if you don’t own the note, in 45 states, you have no right to enforce the lien on the property).

This is an unaffordable energy non- linearity: the inability of the productive economy to service its debts. In 'normal' times there is a sufficient flow of funds to satisfy both ordinary business and the criminal element. With cheap energy, any kind of business can gain a return. Not any longer. Here's Mike Shedlock:

Fort Worth, Texas Insolvent

The Star-Telegram reports Fort Worth pension bubble will blow up in our faces.

To understand why Fort Worth's pension system is such a financial disaster, look at one month's list of recent retirements. In January, a 53-year-old policeman retired with an annual benefit of $90,312 for life, plus $256,000 in a lump sum payment. Another policeman, 57, got almost $74,000 annually, plus $313,000 in a lump sum. A 54-year-old firefighter got an annual pension of $90,130, plus $178,000 in cash. With an average age of 50 for the police and 54 for the firemen in this group, they're likely to spend more years in retirement than they worked. An analysis for the City Council, presented in July, projected that the retiring policemen would collect $3.1 million in pension pay. You don't have to be an actuary to know that this pension plan will end badly. The technical phrase is "trending toward insolvency." Except that the city is on the hook for all the promised benefits. Taxpayers will have to pony up hefty contributions for years, even generations, and the city may have to cut services to afford it. The pension for city employees is currently projected to pay out $432 million more than it brings in over the next 30 years.

This is what it always comes down to: corrupt politicians pandering to public unions to win votes for reelection. Moreover, the result is always the same, greedy public unions wanting to raise taxes to pay for their exorbitant wages and benefits.

Shedlock has been ranting about ruinous government employee pensions for years. Truth be told, the non- linearity is rooted in sprawl, which hid its costs during the 'John Law' period but are exposed now that credit used to 'pay' for them has receded. High energy costs have stranded sprawl as well as the high salaries and retirement benefits promised to sprawl's enablers. As the stranded expire - the overpaid government retirees will be severed from their benefits - the services they embody will expire with them. Sprawl will be devoid of firefighters, teachers, police and other services. Sprawl can only subsist with cheap energy inputs. At higher marginal costs there are no returns available: $5 a gallon gas would have meant that much of our 'communities' would never have been built in the first place. We would have fewer moldy McMansions - and less debt. There would be less of a bubble to deflate. There also would have been less 'growth'. Our past growth in the form of its costs weigh against whatever we gain upon shrinking returns. We have made our bed and now lay in it with our enemy. And so it goes. Ashes to ashes, our society is left with its own excreta. There is not much left with which to build a future, narrative or no.

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