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Blunderov
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We're Fucked - The Coming Economic Crisis
« on: 2008-03-01 00:34:34 » |
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[Blunderov] We prophets of doom have never had it better. Climate change. Peak oil. Peak grain. Peak water. Peak fish. Peak stupidity.* Good times, good times.
“The two most common elements in the universe are hydrogen and stupidity.” ~ Einstein
An economic primer for progressives.
leftword.blogdig.net : The Coming Economic Crisis
We're Fucked - The Coming Economic Crisis
post from My Left Wing - Front Page on 29 February 2008 12:53:10 PM. © My Left Wing - Front Page
... And Public Policy: What should happen, why it won't, and what you can do about it.
I've never understood why progressives hate to study economics. There are some things that are known that run counter to all of the rah! rah! cheerleading that goes on about markets. And things that will cause progressives to appreciate markets more than less.
In order to understand the coming economic crisis, there are some basic economics insights that you must understand. They are about as ideological as the law of gravity. And there are some things that you must understand about the state of economics as an academic discipline; there are still good technical economists at work on actually trying to understand economic fundamentals from a variety of perspectives, ones who keep their ideology on the back burner as much as possible.
But to the coming crisis.
The economic crisis that we are facing is the result of thirty years of ostrich-like behavior and fifteen years of utter folly, and that is just in the public sector. What has happened in the private sector is worse--the destruction of wealth of corporations in order to maximize the gains of corporate executives. This is not to say all institutions n the public sector are complicit in this, nor is it to say that all corporations have self-destructive leadership. But enough do to affect the economy for all corporations.
What is more, the potential solutions are so counter-intuitive that they won't be implemented.
The Basics
If you've had a bunch of economics or accounting, you can skip this section.
The first fallacy that we must deal with is the conflation of the economy with the interests of corporations and that corporations are anywise interested in a competitive market. I've discovered that this, more than other reasons, is why lots of progressives ignore investigation of economics. It gets reduced to what corporations are doing and what they want. And it occurs because economic arguments are used rhetorically to shape ideological and political positions.
The Economy
When I was in college in the 1960s, "the economy" meant the national economy and in today's political discourse it still does. But in fact, the economy today and probably for the last 800 years has actually been the global economy. (One can argue that it has always been the global economy.) Marco Polo went with his uncles to trade with China; the trade there was significant enough for late medieval Italian city states. What is different is that the dramatic decrease in the real cost of transportation has caused an increase in the volume of global trade. Even a quadrupling of the dollar price of oil has barely dinted the volume of global trade.
In the global economy there are two cycles. The first is the network of exchange in which one person grows, makes, performs, sells, loans, decides, and so on for someone else. And that someone else grows, makes, performs, sells, loans, decides, and so on for yet someone else. This network closes in on itself fairly quickly so that the first person is the recipient of someone else's growing, making, performing, selling, lending, decides, and so on. The global economy is a closed network of flows of goods and services from one person to another.
The second cycle is the network of feedback information that informs people what to grow, make, perform, sell, loan, decide and so on; how much to grow, make, perform, sell, loan, decide, and so on; who to grow for, who to make for, who to perform for, who to sell to, who to loan to, who to decide for, and so on. And other decisions. This feedback can be direct or indirect using tokens. Direct feedback would be a totally face-to-face barter economy--possible in a global economy but slow and requiring travel and delivery of goods and services at each step of the way. The second uses some independent item as money--gold coins, stone wheels, pieces of printed paper, marks on a sheet of paper, bits on a computer hard drive. All of this is independent of whether the decisions using the feedback information are made on the basis of tradition (such as tithes and tributes), command (such as taxes), or bidding and haggling (i.e. prices).
Keynes's fundamental insight into macroeconomics was that the value of the total production of a cycle in the first network is equal to the total symbolic value of tokens in a cycle of the second network. Global Gross Product = Total Global Income. To say that the Global Gross Product was $40 trillion dollars does not tell the quantity of production but only the number of tokens of a certain type that measure the value of that production. You don't increase production in the same cycle by increasing the money supply. One gets wealthy by producing more value (not even by producing more goods and services, but I'll get to that later) not by printing more money. Increasing the number of tokens inflates all prices. Decreasing the number of tokens deflates all prices. Supply and demand mismatches increase the prices of the goods and services where demand exceeds supply (such as gasoline and healthcare and education services) and decrease the prices of goods and services where supply exceeds demand (such as housing in the US). Remember this distinction between inflation/deflation. Keynes's policy proposal was for government to put more money into the economy through fiscal means (government borrowing and spending for capital improvements) during times of deflation-caused depression (the proximate reason for his investigation) and to take money out of the economy through fiscal means (government debt repayment and taxation) in times of inflation-caused booms. Milton Friedman's contribution to economics was to determine that fiscal policy was too slow to deal within the cycle of boom and bust so there was a mismatch of response to the point in the business cycle. He argued that a more effective means was to use money supply policy of the central bank to more rapidly response to the cycle. More on why later.
The big problem is to determine from the data whether you are in inflation/deflation or just in a mismatch of supply and demand. And that problem has not been solved. Which is why you hear statements like "You don't know you are in a recession until after the fact." or the rise in "core inflation" as opposed to inflation that includes energy and food. You can detect that production is decreasing but you don't know by how much until after it is measured. And that sometimes can take up to six months to accumulate and validate all of the data.
Effects of Military Spending
Military expenditures are the junk food of the economy. They provide jobs without producing value. This is because military expenditures are of most value when the goods and services of the military are not used. That is called deterrence. Kenneth Boulding wrote extensively and technically about the economics of war and peace.
When they are used, national security is deemed to be of such importance that money is borrowed in order to fund the people and equipment engaged in the war.
The military-industrial-academic complex is a government-organized industry that seeks to ensure that there is a domestic base of manufacturers of advanced technology systems for military action. Envisioned as a dual-use capability at the beginning of the Cold War, by the end of Eisenhower's term even he was concerned about its implications. By the end of the Cold War, the scale of military spending itself was used as a weapon of war. The assumption was and still is that the US can outspend all other countries in developing an advanced military and do it forever, or at least until the other countries want to negotiate a build-down as the USSR did at the end of the Cold War. The Bush-Rumsfeld defense doctrine essentially is the militaries are meant to be used and used hard to obtain political objectives.
The Money Supply and the Economy
What grows the money supply is borrowing. What reduces the money supply is saving. What decreases production is expectation of reduced demand. What increases production is expectation of increased demand plus availability of investment to accurately meet that demand. What increases demand is purchasing power and confidence in the future (but mostly purchasing power). What reduces demand is stagnation or decline in real income, changes in values, increased saving, increased taxes, and increased interest rates.
The Role of the National Debt
Finally, the interest on the National Debt, which is about $259 billion (2009 Budget, a low estimate). That amounts to a $259 billion transfer of funds from all taxpayers to just those who hold Treasury bills for the national debt. That includes foreign countries, intragovernmental funds (which operate currently on a "just add it to my tab" basis) and individuals wealthy enough to be able to purchase Treasury bills. If ordinary people were financially able to buy multiple trillions of dollars of Savings Bonds, in principle we could buy our country back. But just do the math on that one. So as it stands, deficit spending creates a dooH niboR fiscal policy.
The Problem
We are entering a period of stagflation caused by fiscally irresponsible borrowing as a result of war, new military technology, tax cuts, and massive corruption. In contrast to the current fiscal irresponsibility, the stagflation resulting from the Vietnam War will be seen as minor if policy is not changed in a major way. The crux of the issue is the irresponsible borrowing. Until that is fixed, we will continue to have stagflation in real terms.
The Complications
There are several things working against a solution to this economic problem.
(1) The backlash to the Iraq War has caused several oil producing countries to constrain the growth in supply. Saudi Arabia has chosen not to make up that loss of production completely. In addition, there is a debate about whether oil production has peaked forever. More oil-producing countries are behaving as if it has. There is a mismatch of supply and demand. In addition, there is a cartel that can set and enforce pricing. And there is the expectation of dwindling supplies in the future which makes sellers reluctant to sell now instead of waiting for still higher prices. Oil-producing countries have large amounts of US dollars from oil sales (petro-dollars) that they must invest somewhere; right now, that investment is occurring in the Persian Gulf countries, especially the United Arab Emirates. Finally, because of subsidies and political concerns although US gasoline prices are the highest in history, they are still underpriced in comparison to other countries.
(2) The Republican Party, which has a operating veto in Congress that ensures that a presidential veto will not be overridden, has committed to continuing the war, not raising taxes, not cutting other military expenditures, and not investigating corruption and reclaiming fraudulently received funds. This is an election year; that petrified state of the Congress will not change.
(3) Instead of recycling the profits from tax cuts into increased wages, better training, or more productive facilities, a large amount of the money was invested in esoteric secondary financial instruments intended to hedge again risks. To the extent that hedge funds were overused, those actions increased the risk of the events they were trying to avoid and the hedge funds proved inadequate to cover those risks in a variety of investments, but most clearly in the subprime housing market.
(4) Where there has been investment in plant and equipment, it has been outside of the US, mostly in Asia but now beginning in the more stable states of Africa. To see this most clearly look at the country of origin labels on your clothing, electronics, and even certain foodstuffs.
(5) The disastrous effects of NAFTA on Mexican agriculture has caused a flood of immigrants to the US, putting downward pressure on wages even undercutting the minimum wage in black-market transactions. Irritation about the competition with Mexican workers has caused a backlash among US workers that some politicians are using to distract from the real economic problem.
(6) The US is running out of willing lenders to underwrite its budget deficits. Even China, which has geopolitical reasons for wanting to hold a lot of US debt, is beginning to pull back.
The Solution
The solution is as obvious as it is difficult: End the war in Iraq, bring troops home, reduce non-war military spending for exotic technologies, start prosecuting the fraud by companies such as Halliburton. Encourage increased wages for American workers, increased training for increased productivity, underwrite increased basic scientific research and development of public goods that will lower the cost of doing business, remove responsibility for retirement income security and healthcare from employers. Start having a budget surplus as soon as possible and dramatically bring down the National Debt.
That's it. Which candidates do you see with that solution in their policy positions? [crickets]
Until they do and until there is a mandate to move in this way, we're fucked.
Read The Full Article:
http://www.myleftwing.com/showDiary.do?diaryId=21080
*President-in-waiting John McCain. Be afraid. Be VERY afraid.
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Re:We're Fucked - The Coming Economic Crisis
« Reply #1 on: 2008-03-09 22:21:40 » |
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GLOBAL INVESTOR 'Doom and Gloom' has just begun
Bearish newsletter editor finds little cheer in most assets
Source: MarketWatch
Authors: Barbara Kollmeyer (Editor for MarketWatch in Los Angeles)
Dated: 2008-03-07
"Dr. Doom" sure is living up to his name these days. Speaking to a packed room of financial planners here on Friday, the famed money manager and newsletter editor Mark Faber literally brought down the house with talk of a worthless dollar, a helpless U.S. central bank and a dire situation in which investors have just a few avenues left to turn to.
"We may now have a hostile environment for all asset classes, with the exception of some real estate and commodities," said the editor of The Gloom, Doom and Boom Report, pointing out that since 2002 all asset classes have been rising -- a phenomenon that hasn't been seen for 200 years.
"The current synchronized global economic boom and universal all-encompassing asset bubble will lead to a colossal bust," he said.
Financial markets, currently in the grips of a credit bubble that worsens by the day, will see a protracted period of high volatility, in which 20% movements either up or down become common and the chances of making a lot of money become very difficult, he said.
He heaps much of the blame for global troubles on years of expansionary U.S. monetary policy that had a flawed fixation on U.S. consumption rather than boosting capital infrastructure and spending. Federal Reserve Chairman Ben Bernanke and his colleagues are clearly backed into a corner now as they cannot tighten money policy without causing a collapse of the entire financial system, he said.
"Easy money and debt growth has had a diminishing aspect on U.S. economic growth -- 'zero hour' may have already arrived," Faber said, adding that he thinks the U.S. is in the throes of recession and has been there for the past four to five months.
Indeed gloomy nonfarm payroll data for February further routed U.S. financial markets Friday, convincing many that recession had arrived. See Economic Report.
From bearish to deep in the woods
Faber was spouting his gloomy philosophy a year ago when in an interview with Time magazine he predicted all assets were in danger owing to easy monetary policy in the U.S. and elsewhere, with investors getting too used to constantly rising asset prices across the board. "I believe we're in the midst of the greatest asset bubble ever," said Faber in the January 2007 article.
Fast-forward to the present and you can't blame some of that "I told you so" from Faber. Indeed, credit markets have been routed and financial markets have seesawed since late October, with some notable bubbles in Asia and elsewhere last year. And he said he's not seeing enough bears out there, with investors still too optimistic.
"Before October, everyone was bullish -- rushing into assets and out of cash. Then...over the last three to six months, people went to buy the rallies. Sentiment is not that bearish. The mood has stayed optimistic and asset markets are still vulnerable," he said.
Nowhere was he bleaker than when addressing the beaten-down dollar, another victim of Fed policy which he said has ensured cash returns below the rate of inflation. "In the long term, the dollar is a doomed currency. It will go to zero," he said, which produced some nervous laughter from the audience.
Bright spots in emerging markets, commodities
Where he does see some options for investors is in some corners of emerging markets, noting that he believes the Chinese yuan could double in value in the next five years or so, which will raise the value of many emerging Asian currencies at the same time.
The Asian property market is also favorable in the long run, given low levels of urbanization and low levels of mortgage debt. He said fears that a Chinese property bubble are on the horizon are overblown given that home prices have gone down as a percentage of gross domestic product and as a percentage of household income.
Among his other emerging Asian investment themes: real estate; health care, such as pharmaceuticals and hospital management; local brands, which could replace international brands; and commodities such as sugar and cotton. Tourism is another big theme that he likes for the Asian markets, including hotels, casinos and airports, along with financial services such as banks, insurances companies and brokers. Infrastructure is also a key theme, with "bottlenecks everywhere," he said.
He is also keen on Cambodia, which he describes as having a relatively open economy, with a regulatory framework and government commitment to attract foreign direct investment. He said the country's young population, strategic location, abundant natural resources and exceptional access to trade privileges make it an attractive investment locale for light industry and agricultural businesses.
With the world population growing, especially in emerging markets, arable farmland will become an increasingly pricey commodity. He highlights First Farms, a Danish company founded by a group of farmers whose land was bought up by developers; Ukraine-based Landkom International and Astarta; and Black Earth Farming, a Swedish-run company that invests in Russian farmland and has an initial public offering forthcoming.
Other commodities worth a look: sugar cane in Brazil, palm oil in Indonesia or vegetables in China. End of Story
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Blunderov
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Re:We're Fucked - The Coming Economic Crisis
« Reply #2 on: 2008-06-09 19:11:10 » |
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[Blunderov] Just when you thought it was safe to go back into the water? There is a good reason that the Fed stopped publishing the M3 statistics - dollars are actually about as common as grains of sand. The possibility exists that they will soon have a similar worth.
ISTM that even at current prices gold is a thief's bargain.
http://www.globalresearch.ca/index.php?context=viewArticle&code=LEN20080609&articleId=9256
Potential Future Hyperinflation
by Stephen Lendman
Global Research, June 9, 2008
Walter "John" Williams thinks out of the box. He makes disquieting reading, but you won't find him in the mainstream. At least not often. He runs a "Shadow Government Statistics" site with an electronic by-subscription newsletter. Anyone can access some of his data and occasional special reports. They can also assess his reasoning. In his judgment, government data are manipulated, corrupted and unreliable. He's not alone thinking that.
First, through technical changes over time in how data are collected and/or interpreted. The intent is to portray a more rosy scenario and ignore real world experiences of ordinary people. Calculating the CPI is an example:
-- in the 1980s, the Bureau of Labor Statistics (BLS) switched from using house prices to their rental equivalent;
-- then a decade ago, BLS made a spurious assumption for reasons other than it stated; it was that consumers substitute cheaper products for ones that have risen in price - such as hamburger for steak or chicken for meat; the idea wasn't to reflect their buying habits; it was to artificially lower inflation and distort its calculation; and
-- BLS has long adjusted prices for quality improvements; it's called "hedonic adjustment" that, in fact, cooks the books; so if computer speed increases, its cost is lowered proportionally even if its price rises; the same is true for autos with better brakes or other assorted innovations; again the result is distortion, and it affects all sorts of products; as a result, inflation is artificially and fraudulently lowered.
Another example is how federal deficits are calculated. Beginning with Nixon in 1969, a "unified budget" was adopted to artificially lower them by offsetting expenditures with "off-budget" Social Security revenues. The idea was to hide government's true cost at a time wartime and Great Society spending was high and would later factor into the 1970s and 1980s inflation. If deficits were calculated then and now by GAAP methodology (required of all publicly-traded corporations), they'd be much higher than annually reported - since the 1970s, in multiple trillions of dollars; fiscal alchemy sweeps them under the rug.
A further example was Nixon's "core inflation" idea. More artificial rigging - to exclude volatile food and energy prices to produce a lower figure. No matter that these items account for a large portion of consumer spending, especially for lower income households.
Others like this are numerous. They all amount to manipulative rigging for political or financial market purposes, and the practice goes back decades. A recent Bush administration one is switching to monthly instead of semi-annual jobs data seasonal adjustments to make the number friendlier. Later on (too late for markets to react) they're matched against payroll figures for a once a year adjustment and more accurate jobs created or lost reading.
The Clinton administration was also manipulative. In calculating employment, it lowered its monthly household sample from 60,000 to 50,000, reducing it mainly in inner cities. The effect is to artificially lower jobless numbers among blacks, Latinos and the poor overall. The calculation is also rigged by keeping out the 2.3 million prison population. The overall effect is illusion, not reality - to erase "free market" capitalism's defects and make it look wondrous and beneficial to mankind.
Williams reverse-engineers the GDP, employment and inflation data for more accurate readings. He backs out manipulative changes to produce more valid figures. Take the 5.5% May unemployment rate for example. BLS calculates it on persons who looked for work in the last 30 days. Williams adds those who want to work but gave up in frustration plus people working part-time who want (but can't find) full-time jobs. Result: real unemployment of over 12%.
The same methodology works for economic growth. The real value of all goods and services produced is lower than official GDP numbers when adjusted for higher inflation. More of it means higher prices, not increased output. It's how Williams makes his calculation, and he's worried. He sees inflation rising and a threat of hyperinflation ahead. He highlighted his concern in a recent April 2008 report called "Hyperinflation Special Report" with three dramatic sub-headings:
-- "Inflationary Recession Is in Place;
-- Banking Solvency Crisis Has Opened First Phase Monetary Inflation;" and
-- "Hyperinflationary Depression Remains Likely As Early as 2010."
Time alone will prove him right or wrong. But given current economic conditions, the financial malpractice that precipitated them, continued mismanagement since then, and resultant dangers they created, it pays to examine his analysis. It's not for the faint-hearted and hopefully won't bear out. But it's happened before at other times in other countries, and when it hits it ruins lives and savings. Is America now headed for that type future? Williams thinks so, and here's his argument.
He sees the US economy in an "intensifying inflationary recession" heading for "a hyperinflationary great depression." He expects it as soon as 2010, maybe sooner, and "likely" no later than in a decade. Blame it on reckless monetary and fiscal policy - creating torrents of money, borrowing outsized amounts, and spending ourselves into bankruptcy by supporting short-term "big-monied special interests."
Things are so out of hand, Williams sees "no way of avoiding a financial Armageddon." We're nearly or already bankrupt; are creating money to cover our obligations; the more we print, the more we need; it's fiat currency unbacked by gold; and every new dollar created dilutes the value of all others in circulation. Double the money supply, and presto - every dollar is worth 50 cents. Double it again, and you get the point. We've been doing it for decades, especially since Nixon closed the gold window in 1971.
At some point, the music stops, the dollar collapses, it becomes worthless paper, and related dollar-demoninated paper assets go down with it. Williams quotes a law professor who experienced Weimar Germany's hyperinflation first hand. It was the worst by far ever recorded. "It was horrible. Horrible! Like lightening it struck. No one was prepared." Shelves in grocery stores emptied. "You could buy nothing with your paper money." At the trough in 1923, the mark plunged to an astonishing 4,200,000,000,000 to the dollar.
Can it happen here? It might, and rising world inflation is worrisome. Analyst Bob Chapman's International Forecaster reports current US inflation at 12.5%; China's 8.5%; Russia's 14%; Gulf oil producers on average 12%; India 8%; Indonesia 12%; Brazil 5%; Chile 8.3%; Venezuela 29.3% and Argentina 23%. This likely plays into the European Central Bank's (ECB) reluctance to cut rates and the Bank of England's holding off on further ones. It's also a factor affecting dollar weakness and rising gold prices that hedge against depreciating currencies and geopolitical uncertainties.
Williams is justifiably concerned as inflationary pressures build. First some definitions. Inflation results from a money supply increase that causes prices to rise. Williams refers only to goods and services, not financial assets like stocks and bonds. He also leaves out speculation and market manipulation that's key to understanding high oil and food prices. Markets don't move randomly. Big-monied speculators move them, but that's a separate topic from what Williams addresses.
He mentions various types of hyperinflation. They range from the double or triple-digit kind, several-fold that level, to what happened in Weimar Germany when it went to infinity. Once the genie is unleashed, there's no telling how bad things may get. Williams sees them getting pretty bad. So much so that dollars get dumped, holders flee to safety, and a downward spiral intensifies with no idea of a bottom.
In his view and others, the culprit is fiat currency, without gold backing. Its worth depends solely on the full faith and credit of the issuing government. Absent that and currencies crash. Print too much of it, and that's its future. Examine Fed policy under Greenspan and Bernanke, and draw your own conclusions.
They've been virtual money-creation machines unmindful of the history they should know. By issuing too much of a good thing for too many years, they fueled asset bubbles. When they burst, they made things worse and may now have headed the economy for collapse. In Williams judgment, America today is no different from other nations in other eras that followed similar policies. They all met the same fate, and today this country has already "obligated itself to liabilities well beyond its ability ever to pay off." Not a cheery assessment, and he's not alone believing it.
More definitions:
-- Deflation - a decrease in goods and services prices, generally from a money supply contraction;
-- Inflation - the reverse of the above;
-- Hyperinflation - extreme inflation, as explained above, to a level where money becomes worthless or nearly so; according to Williams, the coming hyperinflation is because of a "lack of monetary discipline formerly imposed....by the gold standard, and a (Fed) dedicated to preventing a collapse in the money supply (and preventing) the implosion of the (ongoing) extremely over-leveraged domestic financial system;"
-- Recession - officially defined as two or more consecutive (inflation-adjusted) GDP contracting quarters; many economists don't agree on this, and some gauge conditions by the relative strength or weakness of industrial production, payroll employment, retail sales, and so forth; add it up and clearly the US is in recession; how bad and for how long will only be known in time;
-- Depression - a recession "where (inflation-adjusted) peak-to-trough contraction exceeds 10%; and a
-- Great depression - one where the peak-to-trough exceeds 25%. It happened only once so far in US history in the 1930s.
Williams believes the current US contraction is about halfway to becoming a "depression," but before it ends it may become "Great Depression II" to distinguish it from the earlier one. We're now in an "inflationary recession," and available data confirm it - soaring food and oil prices, a weakened dollar, true unemployment over 12%, real inflation nearly as high, weak industrial production, and more. In his judgment, expect worse ahead when added "inflationary effects of soaring broad money growth....start" surfacing later in the year. In his judgment, by year-end 2008, "official CPI" figures should begin showing it.
Current computations cook the books, and not just for inflation. According to Williams, the economy has been in recession since late 2006 when it entered the "second down-leg" of a multiple dip contraction. It began in 1999, then showed up officially in 2001. His current outlook takes account of "further bounces and dips in economic activity." We may now be in an upward swing before reheading down. It happened during the Great Depression, only to fall to new lows.
Conditions today are hazardous. A major financial crisis precipitated them. Reckless policies caused it. It threatens the solvency of major banks and other financial institutions. It also hurts the greater economy. Solutions - massive liquidity injections, interest rate cuts and reckless deficit spending. Result - financial malpractice for a short-term fix. Consequences - "financial Armageddon" according to Williams.
M3 (the broadest money supply measure) growth is so high that the Fed no longer reports it. Economists like Williams do because it's crucial to know, and the data he reveals are disturbing - record M3 growth at a near 18% annual pace. Hyperinflationary seeds are now sown. Dollar valuation is falling, and at some point may accelerate when investors flee it for safer havens. The Fed again will respond. More debt will be monetized. It will build over time. Things will get worse and then be exacerbated when the government is less able to meet its obligations. "Therein lies the ultimate basis for the pending hyperinflation," in Williams' judgment.
He believes it will morph into a hyperinflationary depression, then a "great depression." And when it hits, it will be with "surprising speed." Already disposable income is falling in a weakened economy in crisis. As things worsen, politicians get blamed, and Williams raises an interesting possibility. If conditions get bad enough, voters may respond with their feet, declare a pox on both major parties, and turn to a third alternative around 2010 or 2012. It happened before in our history. The Republican Party is Exhibit A. It was created in 1854 at a time Democrats and Whigs were the two dominant parties. Exit Whigs, and enter Republicans with Abraham Lincoln its first elected president in 1860.
Williams shows US inflation data going back to 1665. It was fairly stable up to the Fed's 1913 creation. It then began rising and accelerated post-WW II. Government calculations mask it. Alternative ones are more revealing and accurate. Except for minor price declines in 1944 and 1955, the US hasn't had a deflationary period since the 1930s. Abandoning the gold standard is why. It imposed monetary discipline. Roosevelt went off it in 1933. He had to. The banking system collapsed, money supply imploded, and economic stimulus was needed. It released the Fed to create money freely. Therein lies the problem, and it shows up in the numbers.
Current Fed Chairman Bernanke and Alan Greenspan are students of the Great Depression. "Helicopter Ben" especially vowed never again, and his actions prove it to a fault. He knows the risks and stated them in an earlier speech. He said:
"Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology called a printing press (now its electronic equivalent), that allows it to produce as many US dollars as it wishes." By doing so, it "reduce(s) the value of a dollar in terms of goods and services" which raises their prices...."under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
So it has, according to Williams, and it caused a "slow-motion destruction of the US dollar's purchasing power" since 1933. It shows up in GAAP-based 2007 federal deficit figures - $4 trillion for the fiscal year, not the official $163 fiction reported. Williams estimates total outstanding federal obligations at $62.6 trillion. At least one other economist puts it over $80 trillion. There's no way to honor this debt level, so the "government effectively is bankrupt." At that point, it has three choices - default, declare a moratorium, or repudiate the entire amount.
Sooner or later, markets will react. Holders of US debt already are balking, but so far modestly and quietly. Ahead, that may change if dollar valuations plunge. It will force the Fed's hand. Greater debt monetization will follow. Dollar valuations will sink further, and so forth in a progressive downward cycle to oblivion if Williams is right.
If conditions get severe enough, the Fed can create huge amounts of currency in a few days or weeks - enough to match the dollar's lost purchasing power in the last 75 years. Combine it with fiscal irresponsibility and imagine the consequences.
Official data alone today are reason for concern - soaring food and oil prices, the dollar near historic lows, money growth at an all-time high, and off-the-charts federal deficits and debt. The trend continues, and it shows up in gold prices - topping $1000, then retreating, but nearly certain to soar way above previous highs on its way to numbers not discussed in the mainstream - $2000 an ounce, $3000? Who knows. Williams sees it "setting new historic highs."
In 1980, its price hit $850 an ounce. In CPI inflation-adjusted terms, around $2300 an ounce would match it today. But if the government hadn't cooked the CPI calculation, the number would be about $6250 an ounce. By that standard, gold today is cheap. It's way below its real 1980 top, and if inflation accelerates as Williams predicts, expect much higher prices as dollars keep deflating.
Under this scenario, the "US government cannot cover (its) existing obligations." Annual federal deficits are "careening wildly out of control, averaging $4.6 trillion per year for the six years through 2007." That's with all unfunded liabilities included like Social Security, Medicare, Medicaid, other social services, debt service and more.
Williams says things are so out of control that "if the government (raised taxes) to seize 100% of all wages, salaries and corporate profits, it still would (show) an annual deficit using GAAP accounting" methods. At the same time, "given current revenues, if it stopped (all) spending (including defense and homeland security) other than Social Security and Medicare obligations, the government still would (show) an annual deficit." The hole is so deep, it's impossible to dig out, according to Williams.
But given political realities, officials spend whatever it takes to get elected and keep their jobs. That's besides foreign wars, limitless corporate subsidies and more. Things, however, won't improve. They'll worsen, and that for Williams spells hyperinflation ahead. It's happening "with the full knowledge of political Washington and the Federal Reserve." It it weren't for the US's "special position," our debt would likely be rated "below investment grade instead of triple-A." Longer term bonds are especially risky. At some point, they'll lose their full value. They also risk default, and that's besides their loss in dollar terms.
It's just a matter of time before foreign investors get worried enough to act - buying fewer Treasuries down to none, then followed by redemptions. The Fed will have to compensate. Print more currency, and the problem deepens. Its value declines and inflation accelerates.
Trade policies worsen things. We're in a global race to the bottom. The once bedrock manufacturing base eroded. It's now 10% of the economy and falling. Services currently account for around 84% of it and rising. Jobs in all categories are being offshored to low-wage countries. Average inflation-adjusted wages keep declining. Real earnings are below their early 1970s peak. Living standards are falling. Consumer debt is rising to make up the shortfall. Savings are liquidated. Before the housing decline, mortgage refinancing helped when valuations rose. It meant taking on more debt. Fed policy encouraged it. Today's dilemma "is payback" for unsustainable bubble-creation policies. Recalling a relevant quote: "Things that can't go on forever won't."
Bad policy caused enormous structural change, and trade deficits are part of it. They've "risen to the highest level for any country in history." They're one more problem for a seriously over-extended economy. It places "the federal government and Federal Reserve in untenable positions, where they cannot easily or rapidly address the underlying problems, even if standard economic stimuli were available."
Given the federal deficit and out-of-control spending, fiscal policy limits have been reached. The Fed's in the same bind. It can neither stimulate the economy or contain inflation. Rate cuts have done little. Saving the dollar may require raising them, but that won't "contain non-demand driven inflation." It shows up in high food, energy, health care, and companies like Dow Chemical announcing on May 28 that it will raise prices across the board up to 20% to offset increased costs.
More cause for worry, and Williams anticipates depression. Hyperinflation will follow, and it will sink "the economy into a great depression." It will halt commercial activity. The greater disparity in income, the more negative its consequences. "Extremes in income variance usually are followed by financial panics and economic depressions. US income variance today is higher" than in 1929 and "nearly double that of any other 'advanced' economy."
Federal bailouts have worsened things. Dollar creation exploded. Crisis has been pushed into the future. Its enormity will be far greater, and foreign investors will get stuck with a lot of it. When it arrives in strength, capital outflow will follow, and dollar valuation will plunge with it. Williams believes that "both central bank and major private investors know that the dollar is going to be a losing proposition. They either expect and/or hope that they can get of (it) in time to lock in their profits (or for central bankers) that they can forestall the ultimate global economic crisis" as long as possible.
Dollars are very vulnerable in this environment. If Treasuries are dumped, the Fed will monetize debt to make up the difference. Inflation will then accelerate, multi-trillion dollar deficits will worsen things, and a "self-feeding cycle of currency debasement and hyperinflation" will follow.
Cash as we know it will disappear. A barter system and black market will replace it or possible introduction of a new currency. Since most money today is electronic, not physical, chances of it adapting "are practically nil." With hyperinflation, electronic commerce would completely shut down and economic collapse would follow. Gold and silver will be invaluable. Holders could exchange them for goods and services.
Physical goods will also be precious for survival and as a medium of exchange. Anything with a long shelf life may be stocked in advance, and providers of essential services could barter them for goods and other services. Forewarned is forearmed. Safety and liquidity are crucial. Anything retaining value is essential. Real estate, other currencies for example. Foreign equities and debt to a small degree because US financial assets hammering will spill everywhere.
With all that to deal with, consider another dilemma - the likelihood of painful political change, civil unrest, disruptive violence, and utter chaos. If Williams is right and hyperinflation arrives, Katie bar the door on what may follow. Revolutions are possible with three notable last century ones to consider - in Russia, Weimer Germany and Nationalist China. In each case, the old order ended, everything changed, but not for the good. How does Williams advise? Evaluate one's own circumstances, use common sense, and forewarned is forearmed. That will help, but hard times hurt everyone.
Hopefully they won't arrive, at least not full-blown as Williams predicts. But make no mistake. Excess has a price. The more of it the greater. America has an ocean of it. Sooner or later comes payback. "Things that can't go on forever won't."
Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.
Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on RepublicBroadcasting.org Mondays from 11AM to 1PM US Central time for cutting-edge discussions with distinguished guests. All programs are archived for easy listening.
http://www.globalresearch.ca/index.php?context=va&aid=9229
Stephen Lendman is a frequent contributor to Global Research. Global Research Articles by Stephen Lendman
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Hermit
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Re:We're Fucked - The Coming Economic Crisis
« Reply #3 on: 2008-06-10 00:09:24 » |
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The Clear Loser in the War Between 'Flations
[ Hermit : As I read Blunderov's post I wondered if he had been standing behind me as I tried catching up a few days financial reading. Then I realized that it was pretty obvious to rather a lot of people. Here is another sample ]
Source: The Daily Reckoning
Authors: Bill Bonner
Datelined: Paris, France
Dated: 2008-06-09
In the war between inflation and deflation, Friday was a bloody day.
It began with a shot from the Labor Department; unemployment registered its biggest increase since 1986 - from 5% to 5.5%. Then, all Hell broke loose.
Immediately, investors figured that there was no way the Bernanke Fed could follow through on its half-promise to give up the fight against deflation and begin fighting inflation, alongside the European Central Bank. Central banks do not increase rates when unemployment is rising. At least, that's the ways it's gone for a long time.
The Fed, we remind new readers, has a "dual mandate." It is supposed to do two contradictory and incompatible things at once - protect the dollar (guard against inflation)…and maintain full employment (guard against deflation). The two are mortal enemies. Generally, lower rates help stimulate employment; but higher rates are the way to protect the dollar. Of course, in the period known as the Great Moderation, it didn't matter. The feds could stimulate employment all they wanted and not worry about inflation. Meanwhile, the Chinese were protecting the dollar by exporting cheaper and cheaper goods to the United States.
Now, the inflation rate in China is 8.5%…labor costs are rising…energy and raw materials prices are soaring; the poor Chinese have no choice. They're exporting price increases…not price cuts. All of a sudden, the war is on!
Yesterday, amid the smoke and dust of the battle, in rode the 'crude oil vigilantes,' guns blazing. The news from the Labor Department seems to have set them off, but they seemed to be itching for a fight anyway. Soon, they had driven up the price of oil more in one day than ever before. A barrel of crude rose $11. To put that in perspective, that's about the whole price of oil 10 years ago. At the end of the day, the oil price was at a new record high: $139.
As we've been saying, there is no clear winner in the battle between inflation and deflation. There is just a clear loser - the U.S. householder. He gets blasted no matter which way he goes. Higher unemployment means lower earnings. And a higher oil price means higher consumer prices. And don't forget the falling housing market. His earnings and his major asset go down; his cost of living goes up. Heck, even Ed McMahon says the bank is trying to take his house - and he's got a lot of company. Aretha Franklin and Michael Jackson are said to be facing foreclosure as well.
Lately, most of the news has been about inflation. The threat of recession was thought to be past. The oil price has been setting records…and we're getting more and more consumer inflation-sighting reports from all over the world.
"Inflation is biggest threat to global economy," a Bloomberg poll of business executives discovered.
But last week, according to the Wall Street Journal, "recession fears [were] reignited."
Adding to deflation's firepower last week was an announcement by the European Central Bank on Thursday. Unlike the Fed, the ECB only has one job - to protect the euro. And when the inflation numbers in Europe came out higher than hoped - remember, inflation is now a globalized phenomenon - Jean Claude Trichet, head of the ECB, stepped forward to tell the world to get ready for higher rates. This, of course, had the effect you'd expect - the dollar fell, which puts additional pressure on the Bernanke forces, who had hoped to be able to talk the dollar up.
Of course, everyone knows you can't fight inflation and fight deflation at the same time. And everyone knows that when push comes to shove, the Fed will throw its weight in inflation's direction. That is, when its back is to the wall, the Fed will lash out at deflation…and let the dollar go whither it wants - down.
How much difference it makes is open to question. Because, when the shooting really starts, the Fed's policy changes often get lost in the fog of war. Even as the Fed was being pushed towards the wall…so close it could scratch its back on the aluminum siding…investors sold off stocks. You might have thought that the prospect of lower rates would be good for stocks. But now, with the crude oil vigilantes in the saddle, investors know that being soft on inflation is no guarantee of lower rates and a growing economy. Instead, they've come to see that higher oil prices…and higher prices generally…shoot so many holes in consumers' budgets, the economy goes into decline anyway.
*** Stocks sold off on Friday, sending the Dow reeling by 394 points. The banks were hit hard. You'll recall that everyone thought the banks had seen the worst back in March, after Bear Stearns collapsed. Investors expected the banks to lead the following rally.
But once a bubble pops, the hot air goes elsewhere. Instead of going into the financial sector, now it's going into prices for oil and commodities. Not only did oil hit a record on Friday, by the way, so did corn - at $6.50 a bushel.
The banks have been almost cut in half since last year's high. You'll recall that they were "adding value" by "allocating capital more efficiently" than their predecessors. Well, for some reason, they don't seem to be allocating capital very efficiently anymore. All the value they added to their own shares, ever since the merger and acquisition boom of the late '90s, has now been wiped out.
Aren't there some good bargains in the financial sector, thanks to the collapse of share prices? Yes, almost certainly…just as there were some good buys on the NASDAQ after the collapse of the dotcoms…and good buys in tulip bulbs after the blowup of the bubble in the 17th century. But don't expect to see the whole sector reflate anytime soon. Now, it's on to the NEXT bubble…
*** It looks to us as though the next bubble is in oil and commodities.
As we pointed out on Friday, markets work. And now they're working their magic on the oil market. High prices discourage consumption…and encourage new production - which is just what we're seeing.
The weekend news brings more details.
For example, Brazil has a huge new oil find. Trouble is, it's offshore and six miles down. It will cost $240 billion to get the oil to market, say current estimates - making it the most expensive oil deposit ever exploited.
Meanwhile, there's the huge Bakken field in the United States. It's huge too. But it's deep, and in a thin layer of dolomite, which makes it hard (expensive) to bring out.
As we reported last week, the bubbles in natural resources and food coincide with an even bigger bubble - the mother of all bubbles - in human population. Yes, there are more of us every minute. And as near as we can make out, we are now growing as Malthus predicted - faster than supplies of oil, food and water. The really big question is: which bubble will pop first?
This is not the first time that question was posed. Malthus himself posed it and answered it - incorrectly, as it turned out. Then, Paul Ehrlich put the question to himself in the 1970s; again, he came up with the wrong answer. Both thought millions of people were destined to starve, since it seemed to them a mathematical certainty that supplies could not rise fast enough to keep up with population increases.
Now, most free market economists believe the matter settled. 'Seek and ye shall find,' they say, adding a caveat, as long as you have a properly functioning capitalist economy.
We're not so sure…more to come…
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*** It was an odd week. We were on the train from Munich to Zurich, when we noticed a group of fully grown men in what looked like Boy scout outfits, including shorts and knee socks. Then, three of these men crowded into the tiny toilet and closed the door. Time passed; we forgot about them. Then, a half hour later, they marched out.
*** Zurich is a marvelous city. Clean, prosperous…pretty. Unfortunately, it was a soccer weekend…the beginning of an important European soccer championship…somehow involving the city of Zurich. There were huge TV screens set up around town…and temporary stands selling hotdogs, beer, won tons, pasta - practically anything you could want.
Late at night, the soccer fans were still going strong…singing, drinking, falling into the lake. The Swiss had to call in extra policemen from Germany to help control them.
"It is very un-Swiss," said a friend. "Zurich is a small town - only about 600,000 people…with a single main industry, banking. There are plenty of restaurants, but people usually go to bed early. It is a very quiet place."
But Zurich has a rich history…
We went to dinner at a famous restaurant, the Kronenhalle. On the walls were original works by Chagall, Picasso and others.
"Zurich has quite an intellectual history," Elizabeth reported, studying a guidebook. "In the early 20th century, this was the place where the Dada Movement was born. Apparently, Tristan Tzara, the founder was here. And Lenin lived here…and James Joyce…and Picasso and others…philosophers…artists…revolutionaries. Switzerland, then as now, was neutral. So, they must have felt safer or freer here."
"The key to understanding the Swiss is to realize that the place is very hard to conquer and rule," said another friend. "The Romans…or the Holy Roman emperors…or Francois Premier…or the Bourbons or the Hapsburgs could invade. But they couldn't really control Switzerland's remote valleys. It was too easy for the Swiss to ambush a foreign army in the mountain passes. So the Swiss acquired a very independent attitude and a reputation for being very warlike. Later, since they were also very poor, the Swiss hired themselves out as mercenaries. Then, no country wanted to attack Switzerland, because their Swiss mercenaries wouldn't allow it.
"The Swiss have never been part of an empire…and never had any real imperial ambitions themselves. Switzerland is not even a nation-state. It is a collection, a confederation, of cantons. The German-speaking cantons don't really like the French-speaking cantons. And the Italian-speaking cantons don't like anyone. So, it's very hard to get any cooperation for national-level policies. We don't even know who our president is…because we don't vote for him directly; it's a post that rotates among different cantonal representatives.
"Now, there is a lot of pressure for us to join Europe. But I think it would be a big mistake…we'd lose our independence."
*** European Union bureaucrats are forever telling people what to do. You'd think the Europeans themselves wouldn't put up with it. But in Europe as in America, TV and popular democracy have lobotomized the whole race. They'll go along with anything.
The latest EU directive forces fortunetellers and astrologers to warn the public that they are "For Entertainment Purposes Only"…and that their métier is "not experimentally proven."
Which just goes to show what cement heads EU functionaries are. Everyone knows perfectly well that fortune telling is a hit or miss business. Astrology and religion, too. You hardly need to warn people away from them.
But there are dozens of expensive preoccupations where a warning might be valuable - where people believe there is some "experimental proof" even though there is none at all. Central banking, for example. Psychiatry. Marriage counseling. Fund management. Stock broking. Economics. City management. Drinking 8 glasses of water. Elliott Wave theory. Global warming. Unemployment, inflation, productivity - and all the numbers put out by the Labor Department. Political science. The War on Terror. Image advertising. Higher education. Colonoscopy.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #4 on: 2008-07-10 12:08:15 » |
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Well if the Banks are actually suggesting the 'End is Nie' . It is a rather back handed story, in the that it skirts the root causes, but still that it was published at all gives me pause.
Cheers
Fritz
Source: Canwest News Service 2008
Author: Eric Beauchesne
Date: Wednesday, July 09, 2008
Lower oil prices would benefit Canada, says analyst
OTTAWA - Some easing of world oil prices would be in the best interests of the Canadian economy, reducing inflation pressures at home and abroad and energizing the oil-importing economies of Canada's trading partners, especially the United States, a Bay Street economist argues.
BMO Capital Markets economist Douglas Porter said in an analysis Wednesday the argument that the Canadian economy benefits from high oil prices, given that it's a net exporter, "is in serious need of a review."
"There is a strong case to be made that the surge in oil and gas prices crossed the tipping point this spring from providing some economic ballast for the domestic economy to acting as a heavy anchor," he said.
"Some sustained moderation in oil and gas prices would be the most positive near-term development possible for the greater good of the Canadian economy." [Fritz] then there is clearly little positive to be expected
However, Prime Minister Stephen Harper, also an economist, doubts that will happen.
"All the evidence indicates that in the long term there is going to be strong upward pressure on the price of oil," Harper told reporters at the G8 Summit in Japan on Wednesday. "That doesn't mean it can't go down in the near future but over time there is going to be upward pressure because the pace of demand growth is outstripping supply, particularly low cost supply."
But Harper played down the inflationary threat posed by high oil prices.
"I'm not sure we'd say inflation is the major concern," he said. "I think that danger exists elsewhere. In Canada it is contained."
That view flies in the face of the results of a Bank of Canada survey of business leaders released this week which found that a third, double the proportion from three months earlier, fear the Bank of Canada will not be able to keep inflation from rising above three per cent, the ceiling on its inflation target range. In May, the consumer price index was up 2.2 per cent.
Porter also challenges the view that inflation is not a major concern.
"The dramatic sprint in energy costs is also finally making an important impact on Canadian headline inflation," Porter said, noting the Bank of Canada survey found that more companies are now preparing to pass on their soaring energy costs to their customers by ramping up prices.
That, in turn, could prompt the Bank of Canada to start raising interest rates, which would be an added burden on the domestic economy, he warns.
The new inflation threat, however, is only one of several reasons why Porter feels that some retreat in energy prices would be a net benefit to Canada.
"The surge in energy costs is first and foremost a problem for domestic industry, since it raises costs across the board and hammers growth prospects in the industrial world," Porter said.
Soaring energy costs are also eating up more of the disposable income of Canadians, he said, noting that it's not just gasoline prices that have soared but natural gas prices as well, adding that it's only a matter of time before hydro companies start passing on their higher energy costs in the form of higher electricity prices.
"Accordingly, total spending by Canadian households on energy - gasoline, natural gas, fuel oil and electricity - likely hit an all-time high as a share of disposable income in the second quarter of about seven per cent and looks poised to continue heading higher."
"Meantime, the latest charge in gasoline prices has taken direct aim at U.S. auto sales, slicing them to their lowest level since the early 1990s," he said, noting that is a trend which will cut deeply into auto production in Canada, most of which is exported to the U.S., and in turn into employment here.
Lower oil prices would be painful for some investors and would deflate Canada's merchandise trade surplus, Porter conceded.
But lower energy costs would remove a tremendous burden from trading partners, and would ease pressures that pose a risk of stagflation, a period of rising inflation and anemic growth, Porter said.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Blunderov
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Re:We're Fucked - The Coming Economic Crisis
« Reply #5 on: 2008-07-15 13:28:56 » |
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[Blunderov] Capitalism. The gift that keeps on taking.
http://www.globalresearch.ca/index.php?context=viewArticle&code=ENG20080715&articleId=9588
The Financial Tsunami: The Next Big Wave is Breaking Fannie Mae, Freddie Mac and US Mortgage Debt
by F. William Engdahl
Global Research, July 15, 2008
The announcement by US Treasury Secretary Henry Paulson together with Federal Reserve chief Bernanke, that the US Government will bailout the two largest guarantors of housing mortgage debt—the Fannie Mae and Freddie Mac—far from calming financial markets, has confirmed what we have said repeatedly in this space: The Financial Tsunami which began in August 2007 in the relatively small "sub-prime" high risk US mortgage securitization market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market. But the scale of the latest wave to hit, the collapse of confidence in the two Government-Sponsored Entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.
The Royal Bank of Scotland, one of the largest financial institutions in the EU has warned its clients "A very nasty period is soon to be upon us—be prepared." They expect the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks, pension funds could lose almost 23% by September as in their term, "all the chickens come home to roost" from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and Greenspan lowered US interest rates to levels not sustained since the 1930’s Great Depression.
This all will be seen in history as the disastrous Alan Greenspan "Revolution in Finance,"—the experiment in Asset Backed Securitization, a mad attempt to bundle risk in loans, "securitize" them in new bonds, insure them via specialized insurers called "monoline" insurers (they only insured financial risks in bonds), rate them thereby via Moody’s and S&P as AAA, highest grade. All that was done so that pension funds and banks around the world would assume they were high quality debt paying even higher interest than safe US Government bonds. Fed in Panic Mode
While he is getting praise in the financial media for his "innovative" and quick reactions to the un-raveling crisis, Fed chairman Ben Bernanke in reality is in a panic mode with little short of hyperinflationary tools at hand to deal with the crisis. Yet, his room to act is increasingly bound by the soaring asset price inflation in food and oil which is pushing consumer price inflation to new highs even by the doctored "core inflation" model of the Fed.
If Bernanke continues to act to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market—its bond market—by raising interest rates, its only anti-inflation weapon, it will only trigger the next even more devastating round in Tsunami shock waves.The real significance of the Fannie Mae bailout
The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of President Franklin D. Roosevelt's New Deal. It was intended to be a private entity but "government sponsored" that would enable Americans to finance buying of homes, as part of an economic recovery attempt. Freddie Mac was formed by Congress in 1970, to help revive the home loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a $2.25 billion credit line.
The problems in the privately-owned Government "Sponsored" Entities or GSEs as they are technically known, is that Congress tried to fudge on whether they were subject to US Government guarantee in event of a financial crisis as the present. Before now, it always appeared a manageable problem.
No more.
The United States economy is in the early phase of its worst housing price collapse since the 1930’s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, most as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were "Too Big To Fail," i.e. that in a crisis the Government, that is the US taxpayer, would be forced to step in and bail them out.
The two, Fannie Mae and Freddie Mac, either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or about $6 trillion. To put that number into perspective, the entire 27 member states of the European Union in 2006 had an annual GDP of slightly more than $12 trillion, so $6 trillion would be half the GDP of the combined European Union economies, and almost three times the GDP of the Federal Republic of Germany.
In addition to their home mortgage loans, Fannie Mae has another $831 in outstanding corporate bonds and Freddie Mac has $644 billion in corporate bonds.
Freddie Mac owes $5.2 billion more than its assets today are worth meaning under current US "fair value" accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may as well go negative next quarter. As the home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.
On July 14, symbolically the anniversary of Bastille Day, US Treasury Secretary Paulson, former chairman of the powerful Wall Street investment bank Goldman Sachs, stood on the steps of the US Treasury building in Washington, a clear attempt to add psychological gravitas, and announced that the Bush Administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.
The bailout by Paulson was accompanied by a statement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.
The Federal Reserve is rapidly becoming the world’s largest financial garbage dump as for months it has agreed to accept banks’ Asset Backed Securities including sub-prime real estate bonds as collateral in return for US Treasury bond purchases. Now it agrees to add potentially $6 trillion in GSE real estate debt to that.
However, the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses in the two companies were made public. In 2003 then President of the St. Louis Federal Reserve, William Poole publicly called for the US Government to cut its implied guarantee of Freddie Mac and Fannie Mae claiming then that the two lacked capital to weather severe financial crisis. Poole, whose warnings were dismissed by then Fed Chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout
As financial investors warn the Paulson bailout is not a bailout of the US economy but a direct bailout of his Wall Street financial cronies. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from Sovereign Wealth Funds in Saudi Arabia and elsewhere to remain in business. In its May announcement, Citigroup’s new Chairman Vikram Pandit announced plans to reduce the bank’s $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup "off balance sheet" liabilities which include some of the highest risk deals in the US real estate and securitization era it so strongly backed. The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result with value of liabilities exceeding the bank’s $90 billion market value. In December 2006 prior to the onset of the Tsunami crisis, Citigroup had a market value of more than $270 billion.
Global Research Articles by F. William Engdahl
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Walter Watts
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Re:We're Fucked - The Coming Economic Crisis
« Reply #6 on: 2008-07-15 19:15:29 » |
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Just thought I'd add to this very important pile.
Go to this blog and start reading.
Don't stop until your limbic system tells you you're hungry, or horny, or need to sleep, or some other subordinated activity 
http://jameshowardkunstler.typepad.com/
Yes, we are truly fucked.
Walter
<Kudos to Sat for pointing me to this guy's blog>
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Walter Watts
Tulsa Network Solutions, Inc.
No one gets to see the Wizard! Not nobody! Not no how!
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #7 on: 2008-07-16 20:16:28 » |
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[fritz]So, in summary .....
[Blunderov] Capitalism. The gift that keeps on taking.
[Hermit]'Doom and Gloom' has just begun
[Walter Watts]Yes, we are truly fucked.
Clusterfuck Nation
<snip>With the death of the IndyMac Bank last week, and the GSEs Fannie Mae and Freddie Mac laying side-by-side in the EMT van on IV drips, headed for the Federal Reserve's ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.<snip>
PERFECT !!!
[Fritz]
And so I lay me down to sleep
I pray the Lord my soul to keep;
And if I die before I wake,
I pray the Lord my soul to take.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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David Lucifer
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Enlighten me.
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Re:We're Fucked - The Coming Economic Crisis
« Reply #8 on: 2008-07-17 01:03:36 » |
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #9 on: 2008-07-23 13:26:52 » |
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[Fritz]Oh baby this is getting uglier by the day and still nothing on the Feux Media outlets in Canada ….. I watched “I’is Wonderful Life” again and now realize Jimmy will come running out and save the day …..
Implode-O-Meter
Writedown Rundown & General Distress:
Name - ($) writedowns / capital raised and loss provisions / level III assets
• Washington Mutual - $3.8B/$7.0B/*
• Fifth Third Bancorp - $499M/$2B
• Wachovia - $12.9B/$10.5B/$30.4B
• HBOS PLC - $2.5B/$4B/*
• Bank of America - $5.6B/*/$31.4B
• Citigroup - $83.3B/$36B/$22.7B
• Merrill Lynch - $47.25B/$34.4B/*
• JP Morgan Chase - $11.0B/*/$6B
• Wells Fargo - $2.9B/0/$23B
• US Bancorp - $1.6B/*/*
• National City - $200M
• Lehman Brothers - $7.2B/$6B/$42
• Barclay’s PLC - $6.4B/$7.8B
• Canadian Imperial Bank of Commerce(CIBC) - $6.7B
• Morgan Stanley - $23.2B
• Goldman Sachs - $6.2B
• Royal Bank of Scotland - $3.6B/$24B
• Societe Generale SA- $13.7 /$8.5B
• BNP Paribas SA-$2.5B/ $0 cash
• UBS - $45.0B/$41.5B
8,500 U.S. banks; many will die soon(updated 3x)
State of the Nation
Author: Stranded Wind
Date: Sun Jul 20, 2008 at 03:49:28 AM PDT
I called the death of Indymac Bancorp on Monday, July 7th. The Federal Deposit Insurance Corporation seized Indymac on Friday, July 11th.
I called the implosion of the two Government Sponsored Entities in the mortgage business, Fannie Mae and Freddie Mac on Wednesday, July 9th. Sunday, July 13th the White House announced a bailout for them.
Want to know what happens next? It’s ape ass ugly and it’s going to happen to you, so don’t say I didn’t warn you.
• Stranded Wind's diary :: ::
•
First and foremost, let’s discuss my qualifications in this area; I know jack shit. I have, however, been through a couple of publicly held company bankruptcies, I’ve funded a couple of startups and worked for a few others, and I have an operations accounting background acquired in the context of the bankruptcy and dissolution of a firm with over seven hundred retail locations and a couple of thousand franchisees. I can read a P&L, a balance, sheet, and I can detect bullshit in an SEC 10K/10Q filing (How? Damned simple – they’re a pack of lies as a rule, labeled as "forward looking statements").
I was blessed with the good sense to follow Stoneleigh and Ilargi when they stopped doing the finance roundup on The Oil Drum and moved on to their own thing over at The Automatic Earth. Everything I know comes from studying their daily roundup of financial news with associated commentary and I check in occasionally with the Bank Implode-O-Meter and the Hedge Fund Implode-O-Meter to see the scoreboards and flow of troubles. The most complete overall timeline on this mess seems to be over at Credit Writedowns.
Now that we’ve got the bona fides for my amateur status, let’s tackle the topic at hand: The Ginormous Banking Enema of 2008
What is happening?
If you look down from a very high level what you see is this: There is $75 trillion in global real estate, $50 trillion in annual global GDP, and $675 trillion in derivatives - synthetic financial instruments loosely associated with the real world that, when inspected, prove to be worth a small fraction of their face value. Nine years ago Weathervane McCain’s chief economic adviser, Phil Gramm, got the Glass Steagall Act largely repealed. Investment houses engaged in an orgy of what can only be described as private money printing, taking real assets, puffing them up, marking them up, passing them around, and they kept at it until there were five or six dollars of funny money for every real dollar of stuff. Ssshhh, don’t anyone tell the pension funds ...
What is the connection to commercial banks?
We have 8,500 commercial banks in the United States. They take deposits from folks, they make loans, and the bigger ones are publicly held, so their fortunes influence the stock market’s so called "financial sector". It’s in quotes because it was 5% of the economy for a long, long time, then it mysteriously poofed up to 25% ... before beginning a slow motion deflation starting last August. Again, we should keep the pension funds in the dark ...
So these 8,500 commercial banks wrote and sold mortgages and they made commercial real estate loans. Now the housing market is tanking because the asset inflation associated with houses is over because five dollars in funny money isn’t going to get you a nickel of real stuff soon. The commercial real estate market, that being the strip malls and such desired by all those newly minted suburbanites, well ... as Marvin the Martian would say There’s supposed to be a huge ka-b00m! There will be and make no mistake about it ... Ilargi summed it up nicely in the July 19th Debt Rattle.
Ilargi: The rate of failure among the approximately 8500 US banks is about to start accelerating, probably in large and fast steps. The main reason for most of the smaller ones is their positions in commercial real estate and construction, where "The loss rates are just astronomical."
There is just one article supporting this statement, but Ilargi has been dead on with every other prediction and pretty close on the timing of them. I take the failure of Indymac Bancorp to be another event in this chain, with it being the third largest bank failure ever.
How bad is this going to get?
Bear Stearns got bailed out ‘cause they were highly visible (read: failure would have exposed aforementioned funny money to the average Joe), Freddie Mac and Fannie Mae are Government Sponsored Entities who now have their sickly balance sheets backstopped by the U.S. Treasury (read you & me), but all the commercial banks have is the Federal Deposit Insurance Corporation.
Great! All accounts are insured to $100,000! We’re saved!
Way wrong. The FDIC is an insurance operation. They make an educated guess as to how many banks will fail and what the total exposure is, then they collect insurance premiums from them. They’ve got $51 billion ... and Indymac alone sucked up 10% of that. If a big one lets go, like Washington Mutual or Wachovia, then the FDIC will look just like FEMA did facing down hurricane Katrina. Don’t go and look at the scoreboard on the Bank Implode-O-Meter unless you’ve got a very strong stomach. Oh, and do note that a good bit of those write downs are investment banks - the FDIC does not cover their activities.
OK, very scared now, so what do I do?
Run, don’t walk, to your bank and get the funds you have clear of this mess before it gets any worse. The safe deposit box ... isn’t. There were rules during the Great Depression such that a treasury agent got to paw through any that were opened before the owner got to touch their stuff; gold, silver, and cash could easily be confiscated in an emergency.
So, what to do? Cash at home in the First Bank of Serta? A fire proof safe? Maybe cashier’s checks in your name and leave the receipts in the safe deposit box, thusly meeting the portability requirement with safety? Nope on that last one, cashier’s checks drawn on a dead bank are dead. Treasury Bills? Wow, look at the Fannie Mae and Freddie Mac bailout ... they’ll not go *poof* instantly, but they’re going down in value bigtime. Swiss bank account? Hey, look at that first salvo in making sure dollars in the U.S. stay in the U.S.
OK, terrified, what do I do?
The GSEs, Freddie Mac and Fannie Mae are indeed "too big to fail" – they’d whack the whole U.S. economy if they went down hard. Ditto for Bear Stearns – had they not moved to conceal the troubles there the failure would have sucked all of the monoline bond insurers under. Monoline bond insurers? If you don’t know I’ve laid enough pain down in this diary – we’ll cover that mess another day. 8,500 commercial banks, putatively protected by the FDIC? Only a few are large enough to receive the "too big to fail" label. The government doesn’t dare touch the FDIC (yet) for fear of clearly communicating they expect the worst. A lot of folks got trimmed in the Indymac crash, with $BIGBUCKS reset to the $100,000 maximum and no recourse. Once this truly gets rolling there will be a reduction in the amounts covered and probably withdrawal limits even with solvent banks.
This can not be stopped. The losses have already occurred. It isn’t an "if", it’s a "when" and I was expecting it around 4/1/2008, but they held it off for another quarter. It looks for all the world like July is the lucky month with the Indymac stuff coming down right next to Fannie and Freddie’s corpses hitting the mighty U.S. Treasury Reanimator. Someone, somewhere is going to pull a joker out of this house of cards – some innocuous bond sale somewhere will fail, a monoline insurer will get pushed over the edge, and then the rout will begin.
The Ginormous Banking Enema has begun with the first little squirt from Indymac Bancorp's failure. It won't end until we're all up to our nostrils in an alphabet soup of make believe financial instruments and newly created federal agencies conceived to clean up the mess.
Some of these entities are indeed "too big to fail" ... but there is no reason we can't impoverish and imprison those that got us here. This isn't about Angelo Mozilo and a couple of unlucky bastards who worked for Bear Stearns - I'm talking a genuine housecleaning - there are thousands of cases where people facilitated fraud and got paid big bucks to do it. They should, every last one of them, be made paupers ... because it's what they've done to us, our children, our grandchildren, and perhaps even further out than that.
(UPDATE:
I've seen a few comments indicating that what I've said here is not happening. If that be the case why did the FDIC seek and receive rule changes allowing retirees to come back to work without impacting their benefits? As I recall a staffer with experience handling the S&L mess from the 1980s is worth $180k/year. Google with a mix of FDIC, hiring, and retiree if you want to confirm for yourself, but these two links seem a good starting point.
http://calculatedrisk.blogspot.com/...
http://www.fedsmith.com/...
Oh, and Stoneleigh, one of the keepers of The Automatic Earth stopped by to comment this morning, leaving a link to something she wrote a year ago that would be of interest.
The Resurgence of Risk - a Primer on the developing Credit Crunch.
OK, you guys are all talking about this now and as expected there are a spectrum of opinions. Being mindful of this impending change is the first big step in doing what you need to do to protect you and yours. I can offer no more specific advice than that you use what I've written as a measure of the worthiness of any financial advice you might seek; if the source is not aware of this stuff or doesn't think it's important it is time for you to move on to the next option.
Many is a word that only leaves you guessing
Guessing 'bout a thing you really ought to know - Led Zepplin
The FDIC admits to prepping for a hundred, the highest estimate I've seen is 1,500 gone of the 8,500. Size matters; if it's only a hundred but it's the hundred largest, well, that would be grim.
This being said, we're going out to play in the sunshine - have a great Sunday!
)
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Hermit
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Re:We're Fucked - The Coming Economic Crisis
« Reply #10 on: 2008-07-29 11:52:09 » |
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Record deficit expected in 2009
Source: [url=]USA Today[/url] [ Hermit : Source caution. I regard USA today as the Faux TV of the press ]
Authors: Richard Wolf
Dated: 2008-07-28
The White House has increased its estimate for next year's deficit to nearly $490 billion, a record figure that will saddle the next president with deepening budget problems in his first year in office, a report due out Monday shows.
The projected deficit for the fiscal year that begins Oct. 1 is being driven higher by the continuing economic slowdown and larger-than-anticipated costs of the two-year, $168 billion fiscal stimulus package passed by Congress, said two senior administration officials with direct knowledge of the report. In February, President Bush predicted the 2009 deficit would be $407 billion.
The budget update shows this year's deficit headed under $400 billion, at least $10 billion less than projected, according to the two officials. That's partly because tax revenue held up reasonably well despite the weaker economy.
The rising deficit for 2009 marks a sharp turnaround for Bush's fiscal legacy. He inherited a $128 billion surplus when he came into office in 2001. It soon turned to red ink because of a recession, the Sept. 11 attacks and the war on terrorism.
Curbing the deficit will fall to Bush's successor and the next Congress following a time when taxes were cut and major spending initiatives were undertaken, including the wars in Iraq and Afghanistan, transportation projects, farm subsidies, Medicare prescription drug coverage and a recently passed expansion of veterans' education benefits.
The actual 2009 deficit could climb still higher because the new projection does not reflect full funding for the wars. In addition, a worsening economy could add to the red ink by reducing tax revenue and increasing safety-net payments, such as jobless benefits and food stamps.
Both presidential candidates have proposed tax cuts that could further swell the deficit. The non-partisan Tax Policy Center estimates that Republican John McCain's cuts would cost $4.2 trillion and Democrat Barack Obama's $2.8 trillion over 10 years. Neither candidate has specified major spending cuts he would make to reduce the deficit.
"The picture's looking pretty dark out there," said Sen. Judd Gregg, R-N.H., top Republican on the Senate Budget Committee. He credited Bush's tax cuts with creating six years of economic growth but "on the spending side, their record is not good."
White House budget director Jim Nussle said that despite the surplus Bush started with, he faced a deficit in defense, intelligence and homeland security that had to be bolstered after 9/11.
"This is not just a mathematical exercise," he said in an interview with USA TODAY. Nussle said an economic recovery and a renewed effort by Congress to control spending could rein in the deficit.
Bush proposed in recent years to slow the growth of spending in programs such as Social Security, Medicare and Medicaid. Those efforts were ignored by Congress — most recently last week, when the House voted to sidestep a provision of the 2003 Medicare prescription drug law that would have required lower Medicare spending.
The biggest budget deficit recorded to date was $413 billion in 2004. In today's dollars, that would be about $478 billion. As a share of the economy, the 2009 deficit would be 3% to 4%, below the post-World War II record of 6% set in 1983.
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #11 on: 2008-07-29 14:19:27 » |
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Well what can you say ... this is going to quite the ride this winter as the road to oblivion opens up inviting us to "Keep'on Truck'in".
So should we set a date at CoV to do a virtual joining of hands to kiss our collective butts goodbye; and I was counting on a visual, like say, a mushroom cloud's bright glow rising on the horizon before I bent over.
Cheers
Fritz .... "Mandrake; do you worry about contamination of your Precious Bodily Fluids" DSL
Source: BBC NEWS
Date: 2008/07/29 08:29:55 GMT
Author: Michael Robinson
America's house price time bomb
With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide.
The intervention would come as a little known quirk of US law threatens to drive down house prices even faster.
Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.
In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank.
By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less.
So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.
"I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense."
Take the hit
Is the bank going to pay for my retirement because I was a good girl and paid my mortgage
Karen Trainer
As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded.
Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment.
Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.
"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."
Over to the bank
In California and much of the rest of America, there is a powerful incentive for homeowners such as Ms Trainer to walk away from their mortgage obligations.
The dangers are extraordinary
Professor Susan Wachter, Wharton School of Business
Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes.
Consequently, by walking away from her apartment, Ms Trainer has also walked away from the $200,000 loss on her property.
Her bank gets stuck with that.
Unthinkable option
Traditionally in America there is a social stigma attached to those who default on their debts, which should be a deterrent to walking away from your home.
But according to Susan Wachter, professor of real estate and finance at Wharton School of Business, in the depth of this crisis the social attitudes to such actions are changing.
"This is the kind of conversation that's going on at cocktail parties, at swimming pools," Professor Wachter says. "And suddenly this option which was truly unthinkable in the past becomes thinkable."
Worrying development
Ms Trainer says she feels no moral obligation to go on paying a loan on a property that is going to go on losing her money. She says her friends support her decision.
It's a business decision for their family that the smartest thing they can do is walk away from their home
Kevin Morgan, estate agent
"I think people are taking a more cold-hearted look at it," she says.
"Is the bank going to pay for my retirement because I was a good girl and paid my mortgage, even though legally I didn't have to?"
Professor Wachter believes that, to date, most people have had their homes repossessed because they could not manage the repayments.
The trend of people now positively choosing to walk away because it makes financial sense to do so is a worrying new development.
"The dangers are extraordinary," Professor Wachter says.
"If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation".
No renegotiation
In the city of Stockton - the foreclosure, or repossession, capital of the US for 2007 - estate agent Kevin Morgan sells repossessed houses on behalf of the banks that now own them.
This is becoming a tsunami of voluntary defaults
Professor Nouriel Roubini, New York University
According to him, walking away has become commonplace.
"I would say it's probably 70% of the volume of our foreclosures right now," he says.
"It's a business decision for their family that the smartest thing they can do is walk away from their home."
As a sign of the changing times, some 60% of borrowers do not even bother to contact their banks to attempt a renegotiation of their loan, Mr Moran explains.
"They stop paying and they stop talking," he says. "They just plain walk away."
Total disaster
It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.
But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.
"This is becoming a tsunami of voluntary defaults," Professor Roubini says.
"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.
"You could have most of the US banking system wiped out, so this is a total disaster."
Which is why it is not just US policymakers who are hoping America's new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.
Because if it fails, the economic fallout could be felt far beyond America's shores.
Michael Robinson's two-part series "The Trouble with Money" is broadcast on 30 July and 6 August on BBC World Service. You can hear the programmes online by going to:
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7529277.stm
Published: 2008/07/29 08:29:55 GMT
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Re:We're Fucked - The Coming Economic Crisis
« Reply #12 on: 2008-07-31 15:34:04 » |
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[Blunderov] 
www.globalresearch
Will the Fall of an Aussie Bank Rock Wall Street? Apocalypse Down Under
by Mike Whitney
Global Research, July 30, 2008
Counterpunch.org
Monday's trading on the New York Stock Exchange (NYSE) was a real humdinger. It started off with the White House announcing that this year's fiscal deficit would soar to a new record of nearly $500 billion. That was followed by news of rising oil prices, weak quarterly earnings and a slowdown in consumer spending. By mid-morning the markets were in full retreat. That's when investment giant Merrill Lynch announced that it would notch a $4.6 billion second-quarter loss and write-downs of $9.4 billion on collateralized debt obligations (CDOs) and other mortgage-related assets. Stocks quickly went verticle and the rout was on. By the closing bell the Dow was down 240 points. Traders staggered from floor of the exchange slumped-over and bedraggled, looking like they just got a missive from the draft board.
And, yet, on Tuesday, the market staged a valiant comeback, surging 260 points in a matter of hours. It was enough to give the fund managers a bit of a lift and hope that things are finally turning around. But the market's woes are far from over. The International Monetary Fund summed it up in warning they issued earlier in the week:
"Global financial markets are 'fragile' and indicators of systemic risk remain 'elevated'...Credit quality 'across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.' Bank balance sheets are under 'renewed stress' and the decline in bank share prices has made it more difficult to raise new capital. (There is an) 'increased likelihood of a negative interaction between banking system adjustment and the real economy.' (Financial Times)
The IMF also stuck by its earlier prediction that total losses to financial institutions from the credit crisis would reach $1 trillion ($945 billion) a sum that will have savage consequences for industry, consumers and the global economy.
Over at Nouriel Roubini's blog, Dr. Doom made this observation about the Merrill Lynch's troubles:
"Merrill Lynch's decision to 'sell' a good chunk of its remaining CDOs at 22 cents to the dollar has been widely praised as the firm finally recognizing the full extent of its losses on these toxic instruments. This batch of $30.6 billion of CDOs was already marked down to $11.1 billion. Now with the 'sale' of it to Lone Star at a price of $6.7 billion Merrill Lynch is taking another $4.4 billion write-down and 'selling' it at 22% of the original face value. But is this a market-based 'sale'? No way, calling this transaction a 'sale' is a joke." (Nouriel Roubini's Global EconoMonitor)
Indeed. This isn't a "sale"; it's more like abandoning a sinking ship. The investment chieftains are getting scorched by their downgraded assets and have started dumping them at any cost. There's no market for mortgage-backed anything now, and there won't be until housing finds a bottom.
The Merrill Lynch deal illustrates just how crazy things have gotten. Merrill said it "will provide financing to the purchaser for approximately 75 per cent of the purchase price." Whoa. In other words, the banks are so anxious to off-load their junk-paper, they're almost paying people to take it off their hands. Now that's desperation! The problems haunting the financial markets have cross-pollinated with the real economy and are spreading misery everywhere. Unemployment is rising, growth is slowing, inflation is up, the dollar is down. We've heard it many times before, but it's still jarring to see General Motors stock fall below Bed & Bath, or Starbucks shut down 600 stores, or million dollar McMansions sell for $425,000.
Now that the working stiff is maxed out on his mortgage, worried about losing his job, and trying to keep food on the table; the least congress can do is scatter the oil speculators; right?
Wrong. On Monday, the Financial Times reported that: "A US Senate proposal designed to curb speculation and increase transparency in the energy markets was blocked by Republican legislators on Friday. The move frustrates Democratic efforts to show the party is taking action on record petrol prices. The Stop Excessive Speculation Act, sponsored by Harry Reid, the Senate majority leader, fell 10 votes short of clearing a procedural hurdle."
The scariest news of the week comes from down-under, where the National Australia Bank (NAB) announced it would "slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless....The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of "senior strips" of collateralized debt obligations (CDO) worth £450m - even though they were all rated AAA. (Ambrose Evans Pritchard, "Australia faces worse crisis than America", UK Telegraph)
The original article appeared in the Business Spectator and was titled "NAB will shock Wall Street", by Robert Gottliebsen. "Shock" is an understatement. This is more like a meat cleaver crashing down on a butcher block. Schwook! This is a must-read for anyone who is following the meltdown in the financial markets. Here is an extended excerpt from Gottliebsen's article:
"The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a ‘meltdown’.
“We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.
“It means the cost of bailing out housing exposures to the two mortgage insurers will be so great that it will leave no room to bail out anything else and there are several US banks that are now in big trouble. NAB says that the dislocation in the residential market is separate from the corporate market, but the flow on is inevitable." ( The Business Spectator,"NAB will shock Wall Street")
The conduits are off-balance sheets operations run by the banks which contain hundreds of billions of dollars of bonds which are now essentially worthless. So far, many of the banks have not accurately reported the losses from these operations hoping that the housing market will stabilize and the value of the bonds will rebound. The action taken by the National Australia Bank is a "game-changer".
Gottliebsen again:
"The global banks have been marking to market the assets they held on their balance sheet, but the vast amounts held in so called 'conduit trust accounts' have not been written down because they were not marketable. NAB wrote them down when they saw the bad mortgages....US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards."(Business Spectator.)
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com
Mike Whitney is a frequent contributor to Global Research.
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #13 on: 2008-07-31 20:47:18 » |
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[Fritz]I thought this to be an interesting punctuation given the 10 year anniversary of the media coverage of this 'crisis'.
Albeit presented from a rather polarized position; a retrospective on the tables turned between US and Asia is what it afforded me.
Cheers
Fritz
Japan's banking crisis : the global implications
Source: World Socialist Website
Author: Nick Beams
Date: 24 June 1998
Talks involving financial officials of the G-7 major industrial countries plus 11 Asia-Pacific countries, held in Tokyo over the weekend, failed to advance any proposals to resolve the Japanese banking crisis, following last week's US-Japan operation to halt the free fall of the yen.
While a joint statement declared that restructuring involving the wiping out of crippling bank debt and the deregulation of markets was "urgently needed," and Japanese Finance Minister Hikaru Matsunaga declared the government would push ahead with economic reforms, no concrete measures were announced. This prompted widespread comments in financial circles that the yen would come under immediate pressure and could soon resume the downslide against the dollar which prompted the $6 billion intervention.
Whatever the immediate fortunes of the yen, the continued failure to reach any concrete agreement on "restructuring"--even though all sides are fully aware of the potentially disastrous consequences--indicates that contained within this issue are far-reaching and deep-seated antagonisms. In order to elucidate the nature of these conflicts it is necessary to consider some of the basic laws of the capitalist mode of production.
Capitalist production is not production for the sake of material wealth as such, but involves the accumulation of surplus value extracted from the labour power of the working class. The source of this surplus value is the vast difference between the value of the labour power of workers employed in the production process, paid out in the form of wages, and the new value that is added in the process of production.
This surplus value does not immediately accrue to those sections of capital involved in its immediate appropriation, but is divided up between the different sections of the capitalist class in the form of industrial profit to the major corporations, interest to the banks and financial institutions and rent to the owners of land.
However, the process of surplus value extraction--the basis of capital accumulation--is marked by a profound contradiction.
While the labour power of the working class is the sole source of surplus value--and hence of profit, interest and rent--the very accumulation of capital itself means that it has to produce sufficient surplus value to expand an ever-greater mass of capital. The process of capital accumulation can continue without interruption so long as the rate of surplus value accumulation continues fast enough to expand the ever-increasing mass of capital as a whole.
But at a certain point capital reaches such a size relative to the overall mass of surplus value that the rate of profit--the ratio of total surplus value to the total capital employed--begins to decline. The consequences of the emergence of this tendency were explained by Marx as follows:
"So long as things go well, competition effects an operating fraternity of the capital class ... so that each shares in the common loot in proportion to the size of his respective investment. But as soon as it is no longer a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another. The capitalist class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers."
In other words, under conditions where the very expansion of capital has produced a decline in the rate of profit, a violent struggle opens up between the competing sections of capital to drive each other to the wall, to destroy whole sections of capital and thereby restore the rate of profit for those which remain.
It is this conflict, now being fought on a global scale between corporations and financial institutions that are larger than many national economies, which constitutes the driving force of the deepening Asian economic crisis and the sharpening tensions between Japan and the other G-7 powers.
The "Asian miracle" itself was the product of falling profit rates which began to emerge in the major capitalist economies from the mid-1970s onwards as firms in the United States, Europe and above all Japan directed capital into the region in the search for cheaper labour and resources. For a time investment in Asia did provide a boost to profits, so much so that for the first half of the 1990s economic expansion in the region accounted for half the increase in world economic output. But by 1995 the Asian boom was starting to falter. Overcapacity was developing in industries such as cars and computer chips, while the growth of exports, which had averaged around 20 percent per annum, declined to around 5 percent.
The form of the crisis that erupted in July 1997 was a currency and financial meltdown; its underlying content was the overaccumulation of capital in relation to the available surplus value. In other words, it signified the opening of a struggle by the competing sections of capital to eliminate their weaker brethren.
It is this conflict which has formed the basis of the various International Monetary fund "restructuring" programs in South Korea, Thailand and Indonesia. The aim of the IMF measures--the closure of banks, the imposition of high-interest rates and recession combined with the imposition of a "free market" regime--has been the elimination of vast areas of capital.
The extent of the capital to be eliminated can be gauged from the fact that bad bank loans in the East Asian region are estimated to be around 30 percent of GDP, constituting one of the largest financial collapses in world history. Research conducted by the Deutsche Bank has found that already "unprecedented movements in exchange rates and asset prices have destroyed more than $1.5 trillion of financial wealth in the affected countries alone."
But the program of "restructuring"--the elimination of competing sections of capital--is not confined to the former "Asian tigers". Its chief focus is now Japan. This is the heart of the conflict between the United States and the other G-7 countries and Japan over bank restructuring.
The total bad debts of the Japanese banks are estimated to be around $600 billion, or close to 20 percent of GDP. According to Robert Litan, the director of economic studies at the Brookings Institute, the Japanese bad debt is six times larger than the savings and loans debt in the United States at the beginning of the 1990s.
To eliminate bad debt and restructure the banks means not only the closure or merger of financial conglomerates and financial institutions, but the sale of the assets which were financed by the loans. A measure of the capital deflation that such a process involves can be seen from the fact that the Nikkei stock market index is at 37 percent of the levels it reached at the height of the financial bubble in 1989, while property values in Tokyo are now only 20 percent of their peak value. However, the shares and assets purchased and financed by the banks are still recorded at the prices paid at the height of the financial bubble. The capital they represent has become fictitious, but the losses have yet to be written off.
The central demand of the US and the other major capitalist powers is that firms and institutions that are insolvent go into liquidation and that their assets be placed on the market at vastly deflated prices. But with all major financial institutions now laden with bad debts, the purchasers for such assets will have to be found outside of Japan.
In short, the demand that bank debt be restructured and massive amounts of Japanese capital be effectively devalued is a demand that whole areas of the Japanese economy, previously under the tight control of the government and the major financial institutions, be open to penetration by US and European capital.
As the Financial Times of June 13 commented: "The effect of a financial crisis is to sort out the corporate sheep from the goats. In an Asian context it also subverts long-standing protectionist barriers. Over-investment and excessive debt have together brought about what years of international trade negotiations have failed to achieve: a genuine loosening of tightly controlled ownership structures." This is why the issue of bank restructuring has become such a point of conflict.
The United States has made no secret of its aims. Its agenda was clearly set out in a speech delivered on March 19 by US Deputy Treasury Secretary Lawrence Summers.
Entitling his remarks "Opportunities Out of Crises: Lessons from Asia," Summers, who headed the G-7 push at the talks in Tokyo last weekend, made clear that the US saw in the Asian crises the means for the realisation of its long held aim of destroying the so-called "Japanese model" of economic regulation based on control by government and national financial institutions and replacing it with a system of "decentralized market incentives".
The "financial reforms" being carried out in Asia, he insisted, were "less about changing the short-term policy mix than they are about changing the long-term institutional environment." It was necessary to build "a new system of governance better attuned to the demands of an integrated modern market economy."
He made clear that the United States had been pressing to ensure that the IMF adapted its "policies and practices to meet the needs of a more integrated and market-driven global economy."
"The emphasis is on reducing direct public involvement in the productive sector--as, for example, in the Korean pledge to eliminate non-economic lending to industry. And it has been on opening the economy to foreign participation with sweeping trade and financial sector liberalization, both to improve the efficiency of the economy and to let long-term capital in."
Now that whole sections of Korean capital are in the process of being wiped out and the economy is being opened up to penetration by foreign capital, attention has turned to the biggest prize of all--Japan.
But here the process of capital deflation is very much a two-edged sword. If the write-down of Japanese capital assets proceeds too rapidly, the danger is that financial institutions will be forced to liquidate their vast holdings of international financial assets, with catastrophic consequences for the world economy.
At the end of 1996, Japanese net external assets amounted to some $891 billion, roughly equivalent to the US net external debt. Japanese institutions alone hold some $318 billion worth of US Treasury bonds.
If this capital started to flow back to Japan, in order to shore up balance sheets at home, it would bring an immediate rise in interest rates, leading to a collapse of the Wall Street share market bubble and the onset of a global financial meltdown and depression.
The political representatives of global capital insist that the world economy must be organised according to the dictates of the market and the drive for profit. But once again the very logic of this system, which has already plunged millions of people in Asia into poverty overnight, is threatening to unleash a social catastrophe worldwide.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #14 on: 2008-08-22 00:05:04 » |
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[Fritz]Some more not so good news
Source: telegraph.co.uk
Author: Ambrose Evans-Pritchard
Date: 19/08/2008
Sharp US money supply contraction points to Wall Street crunch ahead
The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
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On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.
The growth in bank loans has turned negative to a halt since March.
# More by Ambrose Evans-Pritchard
# More on banking
"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.
Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.
The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.
US Broad Money Percentage change
Household debt is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s.
The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.
Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.
"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein.
He cautioned that the three-month shifts in M3 can be highly volatile.
M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover.
The University of Michigan's index of consumer sentiment has fallen to the lowest level since the 1980s recession.
The US economy is without doubt facing severe headwinds going into the autumn.
Richard Fisher, the ultra-hawkish head of the Dallas Federal Reserve, warned over the weekend that growth would be near "zero" in the second half of the year.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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