Showing posts with label heritage_ray. Show all posts
Showing posts with label heritage_ray. Show all posts
1 December 2009
Liquidity vs. Solvency: Interview with Bob Eisenbeis and David Kotok
The current issue of Institutional Risk Analytics features an interview with Bob and David Kotok of Cumberland Advisors. To me it is a must read, literally packed with insightful analysis about the dismal situation as concerns our fiscal and monetary affairs.
In essence, “the wounded banking sector of the US is here for a very long time”. Twenty-four hundred plus banks are now rated "F" by the IRA Bank Monitor, which is a quarter of the whole industry. Something like half of the "F" banks are expected to fail. At the same time, it appears we have a situation wherein “Washington has largely destroyed confidence in the United States of America among global investors... “
“On the way back from Tokyo last week, I sat next to a guy who is running the agency desk at one of the largest primary dealers. He described to me the road show he was on to sell US agency paper to Asian financial institutions. We talked about this approach. He said very bluntly that the Asian banks are not buying it. He told me that "we have destroyed confidence and they do not trust us." My response to this was "do you blame them?"
The failed auction has not happened yet. It may not happen. But it would not surprise any of us if it eventually does happen. I expect a VAT to be introduced. I expect it to be introduced during the lame duck session of Congress in 2012.
The IRA: You think we can hold it off for that long?
(Whalen and company were on Bloomberg Radio with Josh Rosner on Tuesday when Josh leaned over during a break and predicted that the Obama Administration was preparing to impose a VAT on the US, using the supposed pressure from our aggrieved allies and global investors as the pretext. We later spoke to our friends in the conservative movement and it turns out that Brookings Institution has been working night and day on a study that will be the road map for implementing a VAT. This is to be a nation-wide sales tax on the American people to pay for the bank bailout. Apparently Bob Rubin and Larry Summers are the proponents of the VAT and they are planning to use the apparent pressure from our foreign creditors as the justification for a large, permanent increase in taxes. And David (of Cumberland Advisors), just described the failure of an auction of agency debt that could provide the pretext for just such a move.)
Liquidity vs. Solvency
The final Q3 2009 data from the FDIC is loaded into The IRA Bank Monitor and, as we reported several weeks ago with our preliminary results stress in the banking industry is up from Q2 2009 and by a significant margin.
The number of FDIC-insured bank units rated "F" rose from 2,256 at the end of June to 2,337 as of Q3 2009. Even with the heavily subsidized money center banks added back into the equation, the Stress Index results suggest that the US financial services sector is still sinking bow down under the weight of the highest loss rate experience in the post-WW II period.
Whereas 2008 was about fear, 2009 has been about buying time. But now dwindling cash positions inside some of the largest financial institutions and investors seem to suggest that 2010 will be about resolution, whether we like it or not.
This suggests that the economy will muddle along through next year and that the 2010 US mid-term elections could be problematic for all incumbents.
us
With the apparent default by the leading government-owned holding company in Dubai, investors have been reminded that solvency remains a core problem in the global economy despite ample official liquidity.
While the Fed and other central banks have thrown a great deal of fiat paper money at the solvency problem, many obligors still have piles of liabilities that were predicated on price levels and volumes in many markets that no longer pertain. Ponder why the government of China might publicly state that its banks need more capital and the next leg of the proverbial systemic risk stool may come into sharper focus.
"The bottom line is that the policies that we see including this new instrument and the other, what I call "wiz kid" ideas like the $1 trillion PPIP which is a fizzle, they do not create confidence. These polices inspire distrust and undermine confidence number two. And thirdly they are not solving basic issues with banks and markets that Bob has been describing in our comments over the past many months, chiefly the difference between solvency and liquidity. Some people in the Treasury do not understand the difference or they do not want to."
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
GEAB quote – As early as January 2009, LEAP/E2020 warned its subscribers of risks of Dubai collapse in 2009
Fourteen subjects lose momentum along the year 2009 - 1. Financial services, central economic activities: In 2009, as the collapse of Wall Street and the City will deepen (and that of financial centres of secondary importance, such as Singapore and Dubai), the demonstration will be completed that a national economy cannot be based on financial services. The only financial centers to survive will be those based on a sound real economy (that will save Hong-Kong) and representing only one component, among others, of a country’s economy. On the one hand, financial services are reducing even faster than the rest of the economy when a recession occurs due to a financial crisis (they are attacked on every front); and, on the other hand, since financial services are so easy to relocate at the time of Internet (a lot easier than industrial labor-forces), they cannot be the mainstay of anything durable in fact. In 2009, everything that depends on the vitality of these financial centers will sink into the crisis at an even faster pace than the rest of the economy.
But Minack says equities will not roll over until next year..as is sanguine on Dubai.
Finally, sovereign stress has jangled nerves. We're not convinced that what's happened in Dubai is, by itself, of broad consequence. The sums involved are, relative to the global financial losses seen in this cycle, small change. Neither Jonathan Garner, our EM equity strategist, nor Rashique Rahman, our EM credit strategist, sees an end to the rally in their asset classes. (See Jonathan Garner, China/Dubai Newsflow - China More Important and Rashique Rahman, Credit (Dis)location - The Market Will Recover, 27 November.)
However, policy makers' response to the Great Recession has been the Great Swap, and one of the things swapped was the tail risk: a year ago that was private balance sheet implosion; looking ahead, the tail risk is the sovereign equivalent. While Dubai was unexpected, the simple point is that we have seen concerns rising in a number of places, notably Japan and southern Europe.
These factors may sound good reason to call the end of the rally. We know the risks in over-finessing market timing, but on balance we think there's one more leg higher. Our sense is that the current setback has been exacerbated by year-end profit-taking and thinning market conditions. Our hunch is that investors will again see this as a buy the dip opportunity and that the New Year could start reasonably strong, particularly if investors anticipate a continuation of recovery and low rates.
Consequently, we're sticking to our view that stocks can make new rally highs over the next couple of months, although we have lower conviction than in the prior corrections. We are taking last week's events as serious warning. What we are starting to see is a hint of the forces - developed world growth threatening to roll over, and heightened concern about public sector finances - that we think will at some stage lead to a significant fall in developed-world risk assets in 2010.
18 September 2009
Global systemic crisis Alert - Summer 2009: Cessation of payment of U.S. government GEAB 37
GEAB N°37 is available! Global systemic crisis: In pursuit of the impossible recovery
- Public announcement GEAB N°37 (Septembre 16, 2009) -
Before this summer, LEAP/E2020's team announced that there would be no recovery in sight in September 2009, and not until summer 2010 in any event. Well indeed, contrary to the claims of the media, and financial and political circles, we confirm our anticipation.
The slowdown in the speed of collapse of the global economy, at the origin of all the « good news » (1), is only due to the world's enormous public financial effort of the last twelve months (2). But the « time saved » using taxpayers' money around the world should have been dedicated to redesigning the international monetary system at the heart of the current systemic crisis (3). Yet, besides a few cosmetic considerations (4) and huge gifts to US and European banks, nothing serious has been undertaken, and, when it comes to the future, the « every man for himself » rule prevails (5).
Now, as summer 2009 comes to a close, and as the three rogue waves start impacting the global economy hard (unemployment (6), bankruptcies (7) and monetary shocks (8)), the time to mend the system, or to prepare for a soft transition towards a new global system, is over (9). The first signs of a major decoupling (10) are beginning to appear: the rest of the world is rapidly moving away from the Dollar zone. As shown by the chart below, there is a 95 percent chance that 1,000 billion new USDs will be printed in a very near future... not very attractive for the Dollar zone.
Inconsistent statistics reflect a chaotic world economy
We are heading straight to the phase of geopolitical dislocation expected to begin in the fourth quarter of 2009 (11). In this issue of the GEAB, our team analyses the trends at work (real estate market, srategic issues…) within the current chaos resulting from a flood of unchecked public expenditure and a persistently uncontrolled financial system in a context of growingly inconsistent statistics. Paradoxically, dislocation has become, according to our researchers, the only way to economic recovery (a recovery that will take place around a global architecture and interaction between economic, social and financial spheres profoundly different from anything we knew in past decades. Our team believes that the first features of the “post-crisis world” should begin to appear by summer 2010 and, in the coming months, they will dedicate themselves to their identification.
Meanwhile, as anticipated in the previous editions of the GEAB, no one can now construct a true picture of today’s global economic situation as macroeconomic figures are more and more contradictory or simply absurd (12). Measurement data and instruments have been so manipulated (13) and limited to a volatile US Dollar as sole benchmark (14), that no government, international organisation or bank (15) can now tell in which direction the global system is heading. The media reflect this chaos and contribute to their readers’/auditors’/viewers’ bewilderment: depending on the day, or even the hour, that they give contradictory news on finance, economy or currency. Policy makers, entrepreneurs, employees,… economists or analysts… are reduced to Pascal’s wager (16) to assess what will happen in future months.
Global output, trade and consumer prices (2000 – 2009) – Source: BRI, 2009
According to LEAP/E2020, the chart above tells about facts that cannot be ignored: the global economic, financial and monetary system is drifting at an increasing rate, its weakness is reaching unequalled lows in modern history, and the slightest shock (financial, geopolitical or even natural) can now break it apart (17). The States’ breathtaking plunge into bottomless public debt (18) (governments feel that, without the support of public money, world economies would soon resume their collapse) is creating a literally explosive situation, conveying massive tax increase in Japan, Europe, the US… If there is any recovery in sight, it is that of tax. As a matter of fact, confronted to historic unemployment rates and a free-falling economy, Japanese voters decided to dismiss their decade-old leaders: they have probably inaugurated the great political upheaval of the next phase of the crisis (19). This summer, the Obama administration was also surprised to discover the importance of the popular anger which focused on his health system reform programme (though a much needed one).
Charter rates for container ships (in USD/day) – Showing the decline between the two first quarters of 2008 and 2009 - Source: Spiegel / ISL Port Monitor
Here is a very illustrative analogy of the crisis today that imposed itself on our researchers: a rubber ball in a staircase. It seems to rebound on every step (then giving the impression that the fall has stopped) but it falls even lower on the next step, “resuming” its collapse.
“Disoriented” economic players and policy-makers
Of course, all this doesn’t create a favourable investment climate for business. Production capacity is under-used everywhere in historic proportions. Stocks are only renewed at a drip-feed rate (eliminating any hope of a recovery based on their replacement). Consumers have become realistic economically: no money, no purchase. Their salaries fall when they haven’t simply been lost through job losses, the banks don’t lend any more because they know that they themselves are still insolvent (despite the “golden” powder thrown in the eyes of public opinion these last months) (21). The state itself, on its own, cannot substitute itself for the frenetic consumerism of the past. In the US, a return to the previous state would require about USD 2,500 billion pumped into the economy each year. Barak Obama’s stimulus package, less than USD 400 billion a year over two years is far from the amount needed if he has to replace the non-spending of households and businesses. The problem is that this is exactly the present situation of the US economy.
US retail sales during recent recessions (Rebased to 100 at recession inception, duration in months) - Source: Financial Sense, 2009
But the US are not alone in this regard. Asia and Europe are also confronted with a drastic unemployment surge that statistical manipulation (22) cannot hide beyond this summer: jobless no longer entitled to unemployment benefits, youngsters placed in waiting internships or jobless recruited for short-term public construction projects, lay-offs postponed by means of short-time allowance measures, plants artificially maintained in activity thanks to public funds,… from Beijing to Paris, in Washington, Berlin, London or Tokyo, every trick is being used to hide the situation as long as possible… until the recovery arrives. Unfortunately, the recovery will not arrive in time. It’s Blücher instead of Grouchy (23). Instead of a recovery in September, the world is suffering the impact of this summer’s three rogue waves:
. massive unemployment, for people soon to be excluded from further benefits in particular, and its disastrous consequences for nations’ political and social stability, are beginning to appear
. the number of bankruptcies (companies, municipalities,…) and deficits of all sorts, are exploding
. and, of course, the impact of all this on the US Dollar, Treasuries (and the UK, suffering collateral damage) .
The first wave already reached the shore at the end of summer 2009. The second one is coming up. And the third is beginning to appear on the horizon.
In any event, if the Eurozone and Asia are in a better situation to face up to the impact of these waves (as already analyzed in GEAB N°28 of last October), their situation is not so good that they can expect a recovery yet. It is however on the US, the Dollar and US Treasuries on the one hand, and on the UK and the Pound on the other , that the consequences of the three waves will be harder. Mid-summer night dreams also have an end!
But for those who still have enough money to travel, the holidays can go on as hotels, airline companies, holiday resorts… are giving discounts at prices never seen before. Another sign that the recovery is here!
----------
Notes:
(1) For example, the fact of talking in percentage points is part of this summer's « euphoria » operation. Indeed, many banks, whose stock price was close to zero could claim « rebounds » of +200 percent, +300 percent or +500 percent. Taking a look at Natixis, Citi or Royal Bank of Scotland stock prices helps to understand the trap: regaining 500 percent when the stock fell down to 1, that makes 5... which would leave you holding a loss of 40 if you bought 2 years ago (or if you borrowed money in exchange of this security).
(2) This is illustrated by France's recent announcement that the state wishes to continue to support the banking system until the end of 2010. Source: Reuters, 09/13/2009
(3) See LEAP open letter to the G20 published last April in the Financial Times on the eve of London's G20 summit.
(4) The great « traders' bonus hunt » is morally praiseworthy. However it should not make us forget that traders are nothing but the « privateers » of the banks hiring them and of the financial centres hosting the latter. These employers and their hosts give them their « letters of marque » (or should we say « of bonus »?) authorizing them to buccaneer the seas of global finance. Limiting their bonuses to their total salary would compel banks to hire them as master mariners instead of filibusters.
(5) Source: Times, 09/02/2009
(6) In the United States, the real rate of unemployment growth remains between 600,000 and 1 million new jobless every month, if we include those who decide to stop searching for a job (source: CNBC/New York Times, 09/07/2009). To get an idea of the socially explosive wave currently hitting the US economy, in California, since September 1st, 143,000 new jobless are no longer entitled to insurance benefits (including their families, that makes an extra 1 million people in distress... just for this month) – source : MyBudget360, 09/02/2009. In Europe, Asia, … everywhere, unemployment rates are almost the highest in modern history (at 5.7 percent, Japan already reached its historic high in July – source : Japan Times, 09/08/2009) ... despite all sorts of manipulation to reduce the figures.
(7) As an anecdote, there have been more bankruptcies in the US between GEAB N°36 (June 16, 2009) and GEAB N°37 (September 16, 2009) than during the whole of 2008, including two of the most important bankruptcies of the year. But, of course, the media cannot make their headlines on both swine fever and bankruptcies. The same goes for the rate of US corporate bankruptcies which has reached a 12.2 percent all-time high (source: Yahoo, 09/09/2009). In Spain, the number of bankruptcies in the first semester of 2009 is three times the number in 2008 (source: Spanish News, 08/06/2009). In France, employers expect 70,000 corporate bankruptcies by the end of this year (source: Capital, 09/02/2009).
(8) The accelerating pace of the weakening of the US Dollar is creating new monetary stress worldwide and the upcoming request, by the Obama administration, to increase the authorized US federal debt ceiling by USD 1,500-billion is not likely to slow down the selling of the US currency. Indeed the USD 12,000-billion debt ceiling is about to be reached. Sources: Wall Street Journal, 09/12/09; Bloomberg, 09/08/2009; Wall Street Journal, 09/12/09
(9) As we said, such a « window of opportunity » existed between spring and summer 2009. This window is now closed.
(10) See GEAB N°22, 02/2008
(11) See GEAB N°32, 02/2009.
(12) For example, US and French unemployment rate reductions at the beginning of this summer, or the growth in Chinese output. Sources: New York Times, 08/10/2009; Expansion, 07/27/2009; Wall Street Journal, 05/25/2009
(13) It is worth reading Marion Selz’s paper entitled « Statistics, a public service twisted » introducing a recently published book written anonymously by a group of French statisticians with the evocative title « The great fiddle: How the government manipulates statistics». Obviously, in these times of global crisis, the information revealed in this book applies to almost all governments. Source: La vie des idées, 09/02/2009
(14) When, in February 2008 in GEAB N°22, we anticipated that the world was heading to a « Dollar carry-trade », not many people believed us. However this is now exactly what is happening on currency markets. Source: Le Monde, 09/12/2009
(15) Banks which, in April 2009, were eager to get the right to return to the « fair value » system (I estimate my asset is worth 100) (source: Bloomberg, 04/02/2009) instead of valuing their assets at “market value” (on the market, your asset is worth 10). Thus they persist in keeping assets in their balance sheets which they cannot realistically value; precisely because they suspect these assets to be worth 10 or 20 percent of their ‘fair value. The countryside and cities of the US, UK, Spain, Latvia, Japan, China, and other countries are full of houses, flats and buildings that no one buys because their prices are artificially maintained high above the market price so that banks’ balances sheets do not show that they are in fact insolvent because almost all their assets are “rotten”. Bankers too are trying to save time, in the hope of a return to yesterday’s world. Are they old children nostalgic of their golden age or big offenders endangering society? The future will soon tell us as the next phase of global geopolitical dislocation will develop.
(16) Refering to Blaise Pascal’s argument to convince miscreants to believe in God: wager as though God exists because if it is so, paradise is the reward, and otherwise, it simply doesn’t matter; while the contrary wager might take you to hell.
(17) In the next GEAB, the October issue N°38, we shall update our country- and big region-based anticipations, including of course an assessment of the situation regarding US and UK defaults.
(18) With a record-high debt issuance in Europe (EUR 1,100-billion in 2009, and more than EUR 250-billion for the UK only), and with USD 9,000-billion federal deficit over the next ten years, there is no doubt on the fact that the situation is uncontrollable. Source: Yahoo/Reuters, 09/04/2009; CBS, 08/25/2009
(19) In the US, in Europe and in China too. Sources: Reuters, 09/08/2009; Financial Times, 09/06/2009; BBC, 07/26/2009.
(20) On the subject of banks, our team strongly recommends reading the excellent article by Matt Taibbi, “Inside the great American bubble machine” which appeared in Rollingstones on 07/02/2009. It sets out the history of Goldman Sachs and throws essential light on its financial practices and central role in the current financial crisis. In the way of deceased India companies, or the knights templars, it is likely that in five to a maximum of ten years from now, American political power, in the face of a socio-economic collapse and under public pressure, will be obliged to tear apart this institution which interferes in all levels of government activity.
(21) In the end, all these indicators depend on the US Dollar as a measure of value. But if Dollar volatility were to be transferred to a compass, we would see the needle swing between North, South, East and West every month. No wonder then that political, economic and financial leaders are so « disoriented »!
(22) Napoleon too, during the battle of Waterloo, firmly believed th at luck was still on his side and that reinforcements (Grouchy) would materialize at the decisive moment of the battle. Alas, the long awaited troops, whose dust showed their rapid progress, happened to be the enemy’s reinforcements (Blücher). We know what happened next… and we cannot bet that the G20 leaders are strategists as experienced as Napoleon was.
(23) The crisis has somewhat « British humour » and proves that we are far from having seen all its consequences. Indeed, London is now expecting to have to pay a heavy bill in order to rescue its little network of tax havens. The Cayman Islands, for instance, can no longer pay their civil servants. No doubt British taxpayers will be very happy with this perspective! Otherwise, these islands could also resort to a simple idea: create taxes. Source: Guardian, 09/13/2009
Mercredi 16 Septembre 2009
http://www.leap2020.eu/GEAB-N-37-is-available!-Global-systemic-crisis-In-pursuit-of-the-impossible-recovery_a3797.html
- Public announcement GEAB N°37 (Septembre 16, 2009) -
Before this summer, LEAP/E2020's team announced that there would be no recovery in sight in September 2009, and not until summer 2010 in any event. Well indeed, contrary to the claims of the media, and financial and political circles, we confirm our anticipation.
The slowdown in the speed of collapse of the global economy, at the origin of all the « good news » (1), is only due to the world's enormous public financial effort of the last twelve months (2). But the « time saved » using taxpayers' money around the world should have been dedicated to redesigning the international monetary system at the heart of the current systemic crisis (3). Yet, besides a few cosmetic considerations (4) and huge gifts to US and European banks, nothing serious has been undertaken, and, when it comes to the future, the « every man for himself » rule prevails (5).
Now, as summer 2009 comes to a close, and as the three rogue waves start impacting the global economy hard (unemployment (6), bankruptcies (7) and monetary shocks (8)), the time to mend the system, or to prepare for a soft transition towards a new global system, is over (9). The first signs of a major decoupling (10) are beginning to appear: the rest of the world is rapidly moving away from the Dollar zone. As shown by the chart below, there is a 95 percent chance that 1,000 billion new USDs will be printed in a very near future... not very attractive for the Dollar zone.
Inconsistent statistics reflect a chaotic world economy
We are heading straight to the phase of geopolitical dislocation expected to begin in the fourth quarter of 2009 (11). In this issue of the GEAB, our team analyses the trends at work (real estate market, srategic issues…) within the current chaos resulting from a flood of unchecked public expenditure and a persistently uncontrolled financial system in a context of growingly inconsistent statistics. Paradoxically, dislocation has become, according to our researchers, the only way to economic recovery (a recovery that will take place around a global architecture and interaction between economic, social and financial spheres profoundly different from anything we knew in past decades. Our team believes that the first features of the “post-crisis world” should begin to appear by summer 2010 and, in the coming months, they will dedicate themselves to their identification.
Meanwhile, as anticipated in the previous editions of the GEAB, no one can now construct a true picture of today’s global economic situation as macroeconomic figures are more and more contradictory or simply absurd (12). Measurement data and instruments have been so manipulated (13) and limited to a volatile US Dollar as sole benchmark (14), that no government, international organisation or bank (15) can now tell in which direction the global system is heading. The media reflect this chaos and contribute to their readers’/auditors’/viewers’ bewilderment: depending on the day, or even the hour, that they give contradictory news on finance, economy or currency. Policy makers, entrepreneurs, employees,… economists or analysts… are reduced to Pascal’s wager (16) to assess what will happen in future months.
Global output, trade and consumer prices (2000 – 2009) – Source: BRI, 2009
According to LEAP/E2020, the chart above tells about facts that cannot be ignored: the global economic, financial and monetary system is drifting at an increasing rate, its weakness is reaching unequalled lows in modern history, and the slightest shock (financial, geopolitical or even natural) can now break it apart (17). The States’ breathtaking plunge into bottomless public debt (18) (governments feel that, without the support of public money, world economies would soon resume their collapse) is creating a literally explosive situation, conveying massive tax increase in Japan, Europe, the US… If there is any recovery in sight, it is that of tax. As a matter of fact, confronted to historic unemployment rates and a free-falling economy, Japanese voters decided to dismiss their decade-old leaders: they have probably inaugurated the great political upheaval of the next phase of the crisis (19). This summer, the Obama administration was also surprised to discover the importance of the popular anger which focused on his health system reform programme (though a much needed one).
Charter rates for container ships (in USD/day) – Showing the decline between the two first quarters of 2008 and 2009 - Source: Spiegel / ISL Port Monitor
Here is a very illustrative analogy of the crisis today that imposed itself on our researchers: a rubber ball in a staircase. It seems to rebound on every step (then giving the impression that the fall has stopped) but it falls even lower on the next step, “resuming” its collapse.
“Disoriented” economic players and policy-makers
Of course, all this doesn’t create a favourable investment climate for business. Production capacity is under-used everywhere in historic proportions. Stocks are only renewed at a drip-feed rate (eliminating any hope of a recovery based on their replacement). Consumers have become realistic economically: no money, no purchase. Their salaries fall when they haven’t simply been lost through job losses, the banks don’t lend any more because they know that they themselves are still insolvent (despite the “golden” powder thrown in the eyes of public opinion these last months) (21). The state itself, on its own, cannot substitute itself for the frenetic consumerism of the past. In the US, a return to the previous state would require about USD 2,500 billion pumped into the economy each year. Barak Obama’s stimulus package, less than USD 400 billion a year over two years is far from the amount needed if he has to replace the non-spending of households and businesses. The problem is that this is exactly the present situation of the US economy.
US retail sales during recent recessions (Rebased to 100 at recession inception, duration in months) - Source: Financial Sense, 2009
But the US are not alone in this regard. Asia and Europe are also confronted with a drastic unemployment surge that statistical manipulation (22) cannot hide beyond this summer: jobless no longer entitled to unemployment benefits, youngsters placed in waiting internships or jobless recruited for short-term public construction projects, lay-offs postponed by means of short-time allowance measures, plants artificially maintained in activity thanks to public funds,… from Beijing to Paris, in Washington, Berlin, London or Tokyo, every trick is being used to hide the situation as long as possible… until the recovery arrives. Unfortunately, the recovery will not arrive in time. It’s Blücher instead of Grouchy (23). Instead of a recovery in September, the world is suffering the impact of this summer’s three rogue waves:
. massive unemployment, for people soon to be excluded from further benefits in particular, and its disastrous consequences for nations’ political and social stability, are beginning to appear
. the number of bankruptcies (companies, municipalities,…) and deficits of all sorts, are exploding
. and, of course, the impact of all this on the US Dollar, Treasuries (and the UK, suffering collateral damage) .
The first wave already reached the shore at the end of summer 2009. The second one is coming up. And the third is beginning to appear on the horizon.
In any event, if the Eurozone and Asia are in a better situation to face up to the impact of these waves (as already analyzed in GEAB N°28 of last October), their situation is not so good that they can expect a recovery yet. It is however on the US, the Dollar and US Treasuries on the one hand, and on the UK and the Pound on the other , that the consequences of the three waves will be harder. Mid-summer night dreams also have an end!
But for those who still have enough money to travel, the holidays can go on as hotels, airline companies, holiday resorts… are giving discounts at prices never seen before. Another sign that the recovery is here!
----------
Notes:
(1) For example, the fact of talking in percentage points is part of this summer's « euphoria » operation. Indeed, many banks, whose stock price was close to zero could claim « rebounds » of +200 percent, +300 percent or +500 percent. Taking a look at Natixis, Citi or Royal Bank of Scotland stock prices helps to understand the trap: regaining 500 percent when the stock fell down to 1, that makes 5... which would leave you holding a loss of 40 if you bought 2 years ago (or if you borrowed money in exchange of this security).
(2) This is illustrated by France's recent announcement that the state wishes to continue to support the banking system until the end of 2010. Source: Reuters, 09/13/2009
(3) See LEAP open letter to the G20 published last April in the Financial Times on the eve of London's G20 summit.
(4) The great « traders' bonus hunt » is morally praiseworthy. However it should not make us forget that traders are nothing but the « privateers » of the banks hiring them and of the financial centres hosting the latter. These employers and their hosts give them their « letters of marque » (or should we say « of bonus »?) authorizing them to buccaneer the seas of global finance. Limiting their bonuses to their total salary would compel banks to hire them as master mariners instead of filibusters.
(5) Source: Times, 09/02/2009
(6) In the United States, the real rate of unemployment growth remains between 600,000 and 1 million new jobless every month, if we include those who decide to stop searching for a job (source: CNBC/New York Times, 09/07/2009). To get an idea of the socially explosive wave currently hitting the US economy, in California, since September 1st, 143,000 new jobless are no longer entitled to insurance benefits (including their families, that makes an extra 1 million people in distress... just for this month) – source : MyBudget360, 09/02/2009. In Europe, Asia, … everywhere, unemployment rates are almost the highest in modern history (at 5.7 percent, Japan already reached its historic high in July – source : Japan Times, 09/08/2009) ... despite all sorts of manipulation to reduce the figures.
(7) As an anecdote, there have been more bankruptcies in the US between GEAB N°36 (June 16, 2009) and GEAB N°37 (September 16, 2009) than during the whole of 2008, including two of the most important bankruptcies of the year. But, of course, the media cannot make their headlines on both swine fever and bankruptcies. The same goes for the rate of US corporate bankruptcies which has reached a 12.2 percent all-time high (source: Yahoo, 09/09/2009). In Spain, the number of bankruptcies in the first semester of 2009 is three times the number in 2008 (source: Spanish News, 08/06/2009). In France, employers expect 70,000 corporate bankruptcies by the end of this year (source: Capital, 09/02/2009).
(8) The accelerating pace of the weakening of the US Dollar is creating new monetary stress worldwide and the upcoming request, by the Obama administration, to increase the authorized US federal debt ceiling by USD 1,500-billion is not likely to slow down the selling of the US currency. Indeed the USD 12,000-billion debt ceiling is about to be reached. Sources: Wall Street Journal, 09/12/09; Bloomberg, 09/08/2009; Wall Street Journal, 09/12/09
(9) As we said, such a « window of opportunity » existed between spring and summer 2009. This window is now closed.
(10) See GEAB N°22, 02/2008
(11) See GEAB N°32, 02/2009.
(12) For example, US and French unemployment rate reductions at the beginning of this summer, or the growth in Chinese output. Sources: New York Times, 08/10/2009; Expansion, 07/27/2009; Wall Street Journal, 05/25/2009
(13) It is worth reading Marion Selz’s paper entitled « Statistics, a public service twisted » introducing a recently published book written anonymously by a group of French statisticians with the evocative title « The great fiddle: How the government manipulates statistics». Obviously, in these times of global crisis, the information revealed in this book applies to almost all governments. Source: La vie des idées, 09/02/2009
(14) When, in February 2008 in GEAB N°22, we anticipated that the world was heading to a « Dollar carry-trade », not many people believed us. However this is now exactly what is happening on currency markets. Source: Le Monde, 09/12/2009
(15) Banks which, in April 2009, were eager to get the right to return to the « fair value » system (I estimate my asset is worth 100) (source: Bloomberg, 04/02/2009) instead of valuing their assets at “market value” (on the market, your asset is worth 10). Thus they persist in keeping assets in their balance sheets which they cannot realistically value; precisely because they suspect these assets to be worth 10 or 20 percent of their ‘fair value. The countryside and cities of the US, UK, Spain, Latvia, Japan, China, and other countries are full of houses, flats and buildings that no one buys because their prices are artificially maintained high above the market price so that banks’ balances sheets do not show that they are in fact insolvent because almost all their assets are “rotten”. Bankers too are trying to save time, in the hope of a return to yesterday’s world. Are they old children nostalgic of their golden age or big offenders endangering society? The future will soon tell us as the next phase of global geopolitical dislocation will develop.
(16) Refering to Blaise Pascal’s argument to convince miscreants to believe in God: wager as though God exists because if it is so, paradise is the reward, and otherwise, it simply doesn’t matter; while the contrary wager might take you to hell.
(17) In the next GEAB, the October issue N°38, we shall update our country- and big region-based anticipations, including of course an assessment of the situation regarding US and UK defaults.
(18) With a record-high debt issuance in Europe (EUR 1,100-billion in 2009, and more than EUR 250-billion for the UK only), and with USD 9,000-billion federal deficit over the next ten years, there is no doubt on the fact that the situation is uncontrollable. Source: Yahoo/Reuters, 09/04/2009; CBS, 08/25/2009
(19) In the US, in Europe and in China too. Sources: Reuters, 09/08/2009; Financial Times, 09/06/2009; BBC, 07/26/2009.
(20) On the subject of banks, our team strongly recommends reading the excellent article by Matt Taibbi, “Inside the great American bubble machine” which appeared in Rollingstones on 07/02/2009. It sets out the history of Goldman Sachs and throws essential light on its financial practices and central role in the current financial crisis. In the way of deceased India companies, or the knights templars, it is likely that in five to a maximum of ten years from now, American political power, in the face of a socio-economic collapse and under public pressure, will be obliged to tear apart this institution which interferes in all levels of government activity.
(21) In the end, all these indicators depend on the US Dollar as a measure of value. But if Dollar volatility were to be transferred to a compass, we would see the needle swing between North, South, East and West every month. No wonder then that political, economic and financial leaders are so « disoriented »!
(22) Napoleon too, during the battle of Waterloo, firmly believed th at luck was still on his side and that reinforcements (Grouchy) would materialize at the decisive moment of the battle. Alas, the long awaited troops, whose dust showed their rapid progress, happened to be the enemy’s reinforcements (Blücher). We know what happened next… and we cannot bet that the G20 leaders are strategists as experienced as Napoleon was.
(23) The crisis has somewhat « British humour » and proves that we are far from having seen all its consequences. Indeed, London is now expecting to have to pay a heavy bill in order to rescue its little network of tax havens. The Cayman Islands, for instance, can no longer pay their civil servants. No doubt British taxpayers will be very happy with this perspective! Otherwise, these islands could also resort to a simple idea: create taxes. Source: Guardian, 09/13/2009
Mercredi 16 Septembre 2009
http://www.leap2020.eu/GEAB-N-37-is-available!-Global-systemic-crisis-In-pursuit-of-the-impossible-recovery_a3797.html
8 September 2009
Chinese to cut and run on derivative losses ~ Official comment
Seems related to the issue we have been following. Thx to Ray.
China's State-owned Assets Supervision and Administration Commission said on Monday it would support government-run firms that take legal action over heavy losses suffered due to bad derivatives deals. The regulatory watchdog said some firms had already notified foreign banks that they were considering legal action over contracts for oil-related structured options. The remarks came about a week after a report said Chinese state-owned enterprises may default on commodities contracts they have signed with foreign banks to cut massive losses from derivatives deals. "The move is a justified action to safeguard one's rights and interests in the commercial context," the agency said in a statement sent to AFP, without naming the firms or foreign banks involved. "SASAC is giving great attention and support (to this) and the relevant trade counterparties should cooperate," it said in the statement. The agency added it was conducting an internal investigation into oil-related structured option deals. "(We) support companies' efforts to cut their losses as much as possible... through negotiation and managing their positions through legal means and reserving the right to take legal action," it said. The agency ordered state firms in March to reconsider their derivative investments overseas and back out of high-risk contracts after several Chinese firms reported huge losses. State-owned carriers Air China, China Eastern and Shanghai Airlines have reported losses of almost two billion dollars since last year on aviation fuel hedging contracts. Late last month, Caijing magazine reported, citing an unnamed state enterprise executive, that only 31 state-owned firms were licensed to enter into such deals, while many more were apparently doing so.
China's State-owned Assets Supervision and Administration Commission said on Monday it would support government-run firms that take legal action over heavy losses suffered due to bad derivatives deals. The regulatory watchdog said some firms had already notified foreign banks that they were considering legal action over contracts for oil-related structured options. The remarks came about a week after a report said Chinese state-owned enterprises may default on commodities contracts they have signed with foreign banks to cut massive losses from derivatives deals. "The move is a justified action to safeguard one's rights and interests in the commercial context," the agency said in a statement sent to AFP, without naming the firms or foreign banks involved. "SASAC is giving great attention and support (to this) and the relevant trade counterparties should cooperate," it said in the statement. The agency added it was conducting an internal investigation into oil-related structured option deals. "(We) support companies' efforts to cut their losses as much as possible... through negotiation and managing their positions through legal means and reserving the right to take legal action," it said. The agency ordered state firms in March to reconsider their derivative investments overseas and back out of high-risk contracts after several Chinese firms reported huge losses. State-owned carriers Air China, China Eastern and Shanghai Airlines have reported losses of almost two billion dollars since last year on aviation fuel hedging contracts. Late last month, Caijing magazine reported, citing an unnamed state enterprise executive, that only 31 state-owned firms were licensed to enter into such deals, while many more were apparently doing so.
22 March 2009
Rethinking meaning of mass culture in the Depression years
"Like the forces of war, depression shows man as a senseless cog in a senselessly whirling machine which is beyond human understanding and has ceased to serve any purpose but its own." - Peter Drucker quote, describing the emotional and subjective effects of the economic crisis of the thirties; taken from "Rita Barnard's The Great Depression and the Culture of Abundance.
"The worse the machine behaved, the more were men and women driven to try to understand it. As one by one the supposedly fixed principles of business and economics and government went down in ruins, people who had taken these fixed principles for granted, and had shown little interest in politics except at election time, began to try to educate themselves. For not even the comparatively prosperous could any longer deny that something momentous was happening."
Comment & Review: (book) offers a rich and insightful study of the Depression as seen through the work of two of its most important, albeit insufficiently recognized, cultural observers: Kenneth Fearing and Nathanael West." American Literature
Quote: "This book will force scholars to rethink the meaning of mass culture in the Depression years....
It's available here for free
Here's another:, by Frederick Lewis Allen
"Do you remember what you were doing on September 3, 1929?
Probably not--unless you have an altogether exceptional memory.
Let me refresh your recollection. For if we are to understand the changes in American life during the nineteen-thirties, we must first recall what things were like before this period began--before the Panic which introduced the Depression.
Perhaps the most convenient way of doing this is to imagine ourselves re-living a single day in 1929: seeing what things look like, listening to the talk, glancing at the newspapers and magazines and books, noticing what are the preoccupations and assumptions and expectations in people's minds--and doing all this with the eyes and ears and intellectual perspective of today.
I have chosen September 3, 1929, as the day to re-visit, for it was then that the Big Bull Market reached its peak: that the Dow-Jones average of stock-market prices, which had been rising so long and so furiously, made its high record for all time. If there was any single day when the wave of prosperity--and of speculation--which characterized the nineteen-twenties may be said to have attained its utmost height before it curled over and crashed, September 3, 1929, was that day.
So let us go back and look about us."
SINCE YESTERDAY
THE 1930s IN AMERICA
September 3, 1929 -- September 3, 1939 (free)
And then, there’s my favorite.
"Looking Backward", Background and discussion found here
In “looking Backward” by Edward Bellamy, Julian West, the protagonist tries to explain how someone could live as a social parasite...
"I myself was rich and also educated, and possessed, therefore, all the elements of happiness enjoyed by the most fortunate in that age. Living in luxury, and occupied only with the pursuit of the pleasures and refinements of life, I derived the means of my support from the labor of others, rendering no sort of service in return. My parents and grand-parents had lived in the same way, and I expected that my descendants, if I had any, would enjoy a like easy existence.
But how could I live without service to the world? you ask. Why should the world have supported in utter idleness one who was able to render service? The answer is that my great-grandfather had accumulated a sum of money on which his descendants had ever since lived. The sum, you will naturally infer, must have been very large not to have been exhausted in supporting three generations in idleness. This, however, was not the fact. The sum had been originally by no means large. It was, in fact, much larger now that three generations had been supported upon it in idleness, than it was at first. This mystery of use without consumption, of warmth without combustion, seems like magic, but was merely an ingenious application of the art now happily lost but carried to great perfection by your ancestors, of shifting the burden of one's support on the shoulders of others."
Bellamy proceeds to make his famous comparison of the world to a gigantic coach, with few riders and many pulling the coach along a rough and steep path. The few rich mime sympathy for the many poor during times of special stress, and "at such times the passengers would call down encouragingly to the toilers of the rope, exhorting them to patience, and holding out hopes of possible compensation in another world for the hardness of their lot, while others contributed to buy salves and liniments for the crippled and injured. It was agreed that it was a great pity that the coach should be so hard to pull, and there was a sense of general relief when the specially bad piece of road was gotten over. This relief was not, indeed, wholly on account of the team, for there was always some danger at these bad places of a general overturn in which all would lose their seats".
Yet the true sentiments of the select riders were that they were riding because they were of superior stock. Nothing could be done, and to do more than utter a pious expression that such was a shame was a waste of time and sympathy.
Besides there was a ...singular hallucination which those on the top of the coach generally shared, that they were not exactly like their brothers and sisters who pulled at the rope, but of finer clay, in some way belonging to a higher order of beings who might justly expect to be drawn. This seems unaccountable, but, as I once rode on this very coach and shared that very hallucination, I ought to be believed. The strangest thing about the hallucination was that those who had but just climbed up from the ground, before they had outgrown the marks of the rope upon their hands, began to fall under its influence.
Bellamy was also pretty prescient about the bailout of the giants of corporate finance-though he didn't separate them from industrial corporations. Much as the corporations decried help to the lowly (like mortgage holders), they were quite willing to muzzle down at the government trough themselves.
The records of the period show that the outcry against the concentration of capital was furious. Men believed that it threatened society with a form of tyranny more abhorrent than it had ever endured. They believed that the great corporations were preparing for them the yoke of a baser servitude than had ever been imposed on the race, servitude not to men but to soulless machines incapable of any motive but insatiable greed.
Free: Project Gutenberg
"The worse the machine behaved, the more were men and women driven to try to understand it. As one by one the supposedly fixed principles of business and economics and government went down in ruins, people who had taken these fixed principles for granted, and had shown little interest in politics except at election time, began to try to educate themselves. For not even the comparatively prosperous could any longer deny that something momentous was happening."
Comment & Review: (book) offers a rich and insightful study of the Depression as seen through the work of two of its most important, albeit insufficiently recognized, cultural observers: Kenneth Fearing and Nathanael West." American Literature
Quote: "This book will force scholars to rethink the meaning of mass culture in the Depression years....
It's available here for free
Here's another:, by Frederick Lewis Allen
"Do you remember what you were doing on September 3, 1929?
Probably not--unless you have an altogether exceptional memory.
Let me refresh your recollection. For if we are to understand the changes in American life during the nineteen-thirties, we must first recall what things were like before this period began--before the Panic which introduced the Depression.
Perhaps the most convenient way of doing this is to imagine ourselves re-living a single day in 1929: seeing what things look like, listening to the talk, glancing at the newspapers and magazines and books, noticing what are the preoccupations and assumptions and expectations in people's minds--and doing all this with the eyes and ears and intellectual perspective of today.
I have chosen September 3, 1929, as the day to re-visit, for it was then that the Big Bull Market reached its peak: that the Dow-Jones average of stock-market prices, which had been rising so long and so furiously, made its high record for all time. If there was any single day when the wave of prosperity--and of speculation--which characterized the nineteen-twenties may be said to have attained its utmost height before it curled over and crashed, September 3, 1929, was that day.
So let us go back and look about us."
SINCE YESTERDAY
THE 1930s IN AMERICA
September 3, 1929 -- September 3, 1939 (free)
And then, there’s my favorite.
"Looking Backward", Background and discussion found here
In “looking Backward” by Edward Bellamy, Julian West, the protagonist tries to explain how someone could live as a social parasite...
"I myself was rich and also educated, and possessed, therefore, all the elements of happiness enjoyed by the most fortunate in that age. Living in luxury, and occupied only with the pursuit of the pleasures and refinements of life, I derived the means of my support from the labor of others, rendering no sort of service in return. My parents and grand-parents had lived in the same way, and I expected that my descendants, if I had any, would enjoy a like easy existence.
But how could I live without service to the world? you ask. Why should the world have supported in utter idleness one who was able to render service? The answer is that my great-grandfather had accumulated a sum of money on which his descendants had ever since lived. The sum, you will naturally infer, must have been very large not to have been exhausted in supporting three generations in idleness. This, however, was not the fact. The sum had been originally by no means large. It was, in fact, much larger now that three generations had been supported upon it in idleness, than it was at first. This mystery of use without consumption, of warmth without combustion, seems like magic, but was merely an ingenious application of the art now happily lost but carried to great perfection by your ancestors, of shifting the burden of one's support on the shoulders of others."
Bellamy proceeds to make his famous comparison of the world to a gigantic coach, with few riders and many pulling the coach along a rough and steep path. The few rich mime sympathy for the many poor during times of special stress, and "at such times the passengers would call down encouragingly to the toilers of the rope, exhorting them to patience, and holding out hopes of possible compensation in another world for the hardness of their lot, while others contributed to buy salves and liniments for the crippled and injured. It was agreed that it was a great pity that the coach should be so hard to pull, and there was a sense of general relief when the specially bad piece of road was gotten over. This relief was not, indeed, wholly on account of the team, for there was always some danger at these bad places of a general overturn in which all would lose their seats".
Yet the true sentiments of the select riders were that they were riding because they were of superior stock. Nothing could be done, and to do more than utter a pious expression that such was a shame was a waste of time and sympathy.
Besides there was a ...singular hallucination which those on the top of the coach generally shared, that they were not exactly like their brothers and sisters who pulled at the rope, but of finer clay, in some way belonging to a higher order of beings who might justly expect to be drawn. This seems unaccountable, but, as I once rode on this very coach and shared that very hallucination, I ought to be believed. The strangest thing about the hallucination was that those who had but just climbed up from the ground, before they had outgrown the marks of the rope upon their hands, began to fall under its influence.
Bellamy was also pretty prescient about the bailout of the giants of corporate finance-though he didn't separate them from industrial corporations. Much as the corporations decried help to the lowly (like mortgage holders), they were quite willing to muzzle down at the government trough themselves.
The records of the period show that the outcry against the concentration of capital was furious. Men believed that it threatened society with a form of tyranny more abhorrent than it had ever endured. They believed that the great corporations were preparing for them the yoke of a baser servitude than had ever been imposed on the race, servitude not to men but to soulless machines incapable of any motive but insatiable greed.
Free: Project Gutenberg
18 February 2009
America will never be the same ~ Depression's here.
Earlier, Michael Hudson summed in up in a way that resonated strongly:
"The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into negative equity, so no banks will lend to them. The economy has hit a debt wall and is falling into negative equity, where it may remain for as far as the eye can see until there is a debt write-down."
And even earlier than that, Hudson said:
If people have to pay the amount of debt that they have now, there won’t be any money to buy goods and services, companies will not sell as much, they’ll invest less, they’ll hire less, and they’ll continue to downsize. (Which) is why (in) every economic chart you see, there will be a gradual rise and then a sudden collapse. Everything is turned into a vertical fall. Prices, international shipping, employment, profits, they’ve all hit a wall. And there’s no way that the economy can recover when people have to pay interest and amortization instead of buying goods and services, or companies will have to pay their junk bond holders instead of investing in new equipment.
So, Hudson asks: Is America a Failed Economy? (but, you already know the answer to that)
It may be time to ask whether neoliberal pro-rentier "Zombienomics"economics has turned America and the West into a Failed Economy.
...Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest.
I like Hudson, but he don't talk clearly, like Davidowitz. And as a great orator, Davidowitz leaves Obama in dah dust!
Hudson link: http://www.counterpunch.org/
Davidowitz nails it...
Davidowitz link: http://www.cnbc.com/id/15840232?video=1037869511&play=1
"The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into negative equity, so no banks will lend to them. The economy has hit a debt wall and is falling into negative equity, where it may remain for as far as the eye can see until there is a debt write-down."
And even earlier than that, Hudson said:
If people have to pay the amount of debt that they have now, there won’t be any money to buy goods and services, companies will not sell as much, they’ll invest less, they’ll hire less, and they’ll continue to downsize. (Which) is why (in) every economic chart you see, there will be a gradual rise and then a sudden collapse. Everything is turned into a vertical fall. Prices, international shipping, employment, profits, they’ve all hit a wall. And there’s no way that the economy can recover when people have to pay interest and amortization instead of buying goods and services, or companies will have to pay their junk bond holders instead of investing in new equipment.
So, Hudson asks: Is America a Failed Economy? (but, you already know the answer to that)
It may be time to ask whether neoliberal pro-rentier "Zombienomics"economics has turned America and the West into a Failed Economy.
...Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest.
I like Hudson, but he don't talk clearly, like Davidowitz. And as a great orator, Davidowitz leaves Obama in dah dust!
Hudson link: http://www.counterpunch.org/
Davidowitz nails it...
Davidowitz link: http://www.cnbc.com/id/15840232?video=1037869511&play=1
29 January 2009
The thing about Depressions is; there depressing...
A colleague contributes...
"Sorry guys, gotta forgive me for the following lenghtly diatribe. While we’re experiencing some disruption in the normal flow that’s typical of BearChat, I thought it might be a good opportunity to share some discussion that I otherwise would not have bothered posting. Keen’s piece is the longest, and I culled that material from a discussion thread with over 150 messages.
I begin with a discussion from Steve Keen’s Debtdeflation blog and, from there, throw in a few other items, all of which have bearing on where we are today and what might be likely scenarios going forward.
I particularly liked the quote from a clinical psychologist in Chicago who said, ”This is really unprecedented. I’ve been practicing for 20 years, and I’m seeing just an unprecedented amount of anxiety, as are most my colleagues”. They call it collateral damage from the economy, a phenomenon that latter generations of Americans seem ill-prepared to cope. An extreme example is the case of the man who killed his wife and children after being fired from a job.
Keen says that, Ultimately, the only way out of this crisis is a still painful route of debt reduction via either inflation (which he doesn’t believe our economic managers know how to create) or legislative debt writedowns. That’s the “bottom line” and makes perfect sense to me. The only thing else that matters is how this “thing” actually plays out.
Keen thinks that attempts to bailout the economy financially have to be given time to fail before more serious measures will finally be considered. Thus, if you buy his arguement, it would indeed appear that we’re in the early innings of what looks like an unfolding painful scenario. Won’t be the end of the world, but for some it will definitely feel like it.
Ballmer Gets “It”, by Steve Keen
http://www.debtdeflation.com/blogs/2009/01/23/ballmer-gets-it/
Ordinarily I’d simply post a link to a media report in either my Gems or Brickbats page. But this quote from Microsoft CEO Steve Ballmer shows that he really understands what is going on now, in a way that no other person in authority seems to have done as yet.
Ballmer’s perceptive analysis of what is going on is:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy.”
For consumers, that may mean less discretionary income to spend on....(name your poison - Ballmer was talking 2nd or third computers).
That is precisely what is happening. It is also why, though government action might slow down the decline, ultimately it can’t prevent a serious decline in economic activity. That can happen only gradually as we slowly replace debt-generated spending capacity with income-generated capacity. What the government can do is remove the logjam standing in the way of that process, which is the crippling mountain of debt accumulated by the Ponzi financing behaviour of the last 4 decades (and in particular the last one). But that will require much more drastic action than simply bailouts: given the scale of debt accumulated, either the debt has to be devalued by inflation, or written down via government decree.
We’re still a long way from any government official or politician realising that. But the fact that someone as influential as Ballmer has put his finger on the problem implies that maybe that day of realisation is approaching.
Keen says that, given the scale of the debt we’ve accumulated, and our dependence on growing debt for aggregate demand, that he thinks we’re in for a serious Depression no matter what, and it will be prolonged for as long as governments continue trying to help the private sector validate debt that should never have been issued in the first place.
I expect we’re in for currency collapses galore , and I expect deflation rather than inflation overall. Government’s can’t create inflation simply by increasing fiat money in a debt-encumbered credit-based economy–unless they’re willing to “print” a factor of ten more dollars than they’ve yet done, which I doubt. (When the deleveraging gets up a head of steam, even a deliberate 1% reduction in debt levels would take (multiple) times as much money out of the economy as the...injection pumped into it.)
So he expects we’ll see international finance collapse and debt defaults galore, with cross-border interest rates becoming prohibitive, but domestic nominal rates heading for zero amid collapsing prices and incomes. And, ultimately, the only way out of this crisis is a still painful route of debt reduction via either inflation (which I don’t believe our economic managers know how to create) or legislative debt writedowns. Keen thinks attempts to bailout the economy financially like at present have to be given time to fail before more serious measures will finally be considered.
"I expect the US dollar would plummet. As for its effect on inflation, it might simply wipe out a section of US consumption rather than drive its price all that much higher. Sales of Asian-manufactured consumer goods have already plummeted, even though the US dollar has appreciated largely so far, thus making these goods notionally cheaper. If the dollar’s oil prop were removed and its currency depreciated, sales of these items might evaporate even more. There might be some domestic stimulus in that, but don’t forget that debt dynamics dominate here. Revival via domestic consumption is still a long way off."
The problem with trying monetary means to cause inflation–which Bernanke is doing right now–is that in an overindebted credit-money economy, the increase in fiat-generated money is more than offset by a collapse in credit-created money. That is apparent in the US data right now (though there is still a time lag to be taken into account). As a result, the money supply in toto can fall, even though the government is trying desperately to increase it.
In Japan’s case, even in a country with a high personal savings rate, increased fiat money was completely absorbed into private debt reduction. Japan tried a 30% increase in base money one year, only to see the rate of deflation accelerate the year after.
Minding the Deflation Spiral, by Desmond Lachman
http://www.american.com/archive/2009/minding-the-deflation-spiral
The Fed meets this week amid bad news on labor markets, consumer spending, and industrial production
In the six weeks since the last meeting of the Federal Reserve’s Open Market Committee (FOMC), there has been a further material weakening in the U.S. economy and renewed strains on the U.S. financial system. At the same time, there has been an abrupt weakening in labor market conditions and an unprecedented deceleration in inflation that raises anew concerns about a deflationary spiral.
1. Employment conditions continue to deteriorate rapidly.
2. Labor market and output gaps continue to widen, which must be expected to exert considerable downward pressure on wages and prices.
3. Deteriorating labor market conditions and falling asset prices have contributed to a collapse in consumer confidence to its lowest level in 25 years.
4. Consumer spending, which accounts for around 70 percent of GDP by expenditure, is dropping at its fastest rate since World War II.
5. Industrial production is declining at its fastest pace in 30 years.
6. Housing starts have plumbed new lows, while housing permits suggest no sign of stabilization in the housing market.
7. Over the past three months, consumer prices have decelerated at their fastest pace in the post-war period.
In the context of a significant weakening in the U.S. economy, it is likely the FOMC will make clear in its statement that it considers that inflation risks have further receded, while the downside risks to the economy have increased.
Man kills wife, five kids, himself after being fired
http://www.cnn.com/2009/CRIME/01/28/family.dead.california/index.html
The bodies of five children and two adults -- the children's mother and father -- were found Tuesday in a home in the Los Angeles neighborhood of Wilmington. Among the dead, authorities said, were an 8-year-old girl and two sets of twins -- 5-year-old girls and 2-year-old boys.
Ervin Lupoe apparently called 911 and contacted a television station by fax before committing suicide, authorities said.
Kaiser Permanente said Lupoe and his wife, Ana, were both former employees of the medical center. Both had been terminated, Hayes said, with Lupoe's termination coming last week. It appears there were grounds for the termination, and it did not come as a result of layoffs, he said.
In Lupoe's suicide note, he offered a detailed account of his and his wife's work circumstances, calling the family's situation a "tragic story." He ended it by saying, "So after a horrendous ordeal my wife felt it better to end our lives and why leave our children in someone's else's hands."
Therapists seeing more 'collateral damage' from economy
http://www.cnn.com/2009/HEALTH/01/23/recession.therapy/index.html?iref=newssearch
No formal data exist on the number of Americans who are turning to therapy during the recession, but most clinical psychologists say that referrals are up.
"This is really unprecedented," says Nancy Molitor, a clinical psychologist in Chicago, Illinois. "I've been practicing for 20 years, and I'm seeing just an unprecedented amount of anxiety, as are most of my colleagues."
Rick Weinberg, a clinical psychologist in Tampa, Florida, says that in one recent week 80 percent of his patients were discussing the pain inflicted on them in the economy. His patients included a small business owner who was forced to lay off longtime staff, a family of four evicted from their home and moving into a rental, and a family with two teenagers that was down to a one-parent income and experiencing frequent spending arguments and acting out by the teens.
"I have many patients who come in to see me in such crisis, they haven't opened their bills in three months. They haven't opened their statements. They're not functioning," Molitor says. "We need to really address that in a very quick way to begin to help alleviate their anxiety enough so that they start functioning."
"It's gotten worse. It's absolutely gotten worse. Most people are feeling anxious about money right now," says Bradley Klontz, a clinical psychologist in Hawaii. "When you're struggling with money issues and it affects your ability to carry out your various roles -- if it's keeping you up at night -- I'd say that's when you know it's time."
Beyond elevated anxiety levels, there are concerns about depression and suicide."
"We've had people who are so depressed that they are thinking that maybe life isn't worth going on. It's a small number of people but, you know, that is something that we're becoming more concerned about.”
"Sorry guys, gotta forgive me for the following lenghtly diatribe. While we’re experiencing some disruption in the normal flow that’s typical of BearChat, I thought it might be a good opportunity to share some discussion that I otherwise would not have bothered posting. Keen’s piece is the longest, and I culled that material from a discussion thread with over 150 messages.
I begin with a discussion from Steve Keen’s Debtdeflation blog and, from there, throw in a few other items, all of which have bearing on where we are today and what might be likely scenarios going forward.
I particularly liked the quote from a clinical psychologist in Chicago who said, ”This is really unprecedented. I’ve been practicing for 20 years, and I’m seeing just an unprecedented amount of anxiety, as are most my colleagues”. They call it collateral damage from the economy, a phenomenon that latter generations of Americans seem ill-prepared to cope. An extreme example is the case of the man who killed his wife and children after being fired from a job.
Keen says that, Ultimately, the only way out of this crisis is a still painful route of debt reduction via either inflation (which he doesn’t believe our economic managers know how to create) or legislative debt writedowns. That’s the “bottom line” and makes perfect sense to me. The only thing else that matters is how this “thing” actually plays out.
Keen thinks that attempts to bailout the economy financially have to be given time to fail before more serious measures will finally be considered. Thus, if you buy his arguement, it would indeed appear that we’re in the early innings of what looks like an unfolding painful scenario. Won’t be the end of the world, but for some it will definitely feel like it.
Ballmer Gets “It”, by Steve Keen
http://www.debtdeflation.com/blogs/2009/01/23/ballmer-gets-it/
Ordinarily I’d simply post a link to a media report in either my Gems or Brickbats page. But this quote from Microsoft CEO Steve Ballmer shows that he really understands what is going on now, in a way that no other person in authority seems to have done as yet.
Ballmer’s perceptive analysis of what is going on is:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy.”
For consumers, that may mean less discretionary income to spend on....(name your poison - Ballmer was talking 2nd or third computers).
That is precisely what is happening. It is also why, though government action might slow down the decline, ultimately it can’t prevent a serious decline in economic activity. That can happen only gradually as we slowly replace debt-generated spending capacity with income-generated capacity. What the government can do is remove the logjam standing in the way of that process, which is the crippling mountain of debt accumulated by the Ponzi financing behaviour of the last 4 decades (and in particular the last one). But that will require much more drastic action than simply bailouts: given the scale of debt accumulated, either the debt has to be devalued by inflation, or written down via government decree.
We’re still a long way from any government official or politician realising that. But the fact that someone as influential as Ballmer has put his finger on the problem implies that maybe that day of realisation is approaching.
Keen says that, given the scale of the debt we’ve accumulated, and our dependence on growing debt for aggregate demand, that he thinks we’re in for a serious Depression no matter what, and it will be prolonged for as long as governments continue trying to help the private sector validate debt that should never have been issued in the first place.
I expect we’re in for currency collapses galore , and I expect deflation rather than inflation overall. Government’s can’t create inflation simply by increasing fiat money in a debt-encumbered credit-based economy–unless they’re willing to “print” a factor of ten more dollars than they’ve yet done, which I doubt. (When the deleveraging gets up a head of steam, even a deliberate 1% reduction in debt levels would take (multiple) times as much money out of the economy as the...injection pumped into it.)
So he expects we’ll see international finance collapse and debt defaults galore, with cross-border interest rates becoming prohibitive, but domestic nominal rates heading for zero amid collapsing prices and incomes. And, ultimately, the only way out of this crisis is a still painful route of debt reduction via either inflation (which I don’t believe our economic managers know how to create) or legislative debt writedowns. Keen thinks attempts to bailout the economy financially like at present have to be given time to fail before more serious measures will finally be considered.
"I expect the US dollar would plummet. As for its effect on inflation, it might simply wipe out a section of US consumption rather than drive its price all that much higher. Sales of Asian-manufactured consumer goods have already plummeted, even though the US dollar has appreciated largely so far, thus making these goods notionally cheaper. If the dollar’s oil prop were removed and its currency depreciated, sales of these items might evaporate even more. There might be some domestic stimulus in that, but don’t forget that debt dynamics dominate here. Revival via domestic consumption is still a long way off."
The problem with trying monetary means to cause inflation–which Bernanke is doing right now–is that in an overindebted credit-money economy, the increase in fiat-generated money is more than offset by a collapse in credit-created money. That is apparent in the US data right now (though there is still a time lag to be taken into account). As a result, the money supply in toto can fall, even though the government is trying desperately to increase it.
In Japan’s case, even in a country with a high personal savings rate, increased fiat money was completely absorbed into private debt reduction. Japan tried a 30% increase in base money one year, only to see the rate of deflation accelerate the year after.
Minding the Deflation Spiral, by Desmond Lachman
http://www.american.com/archive/2009/minding-the-deflation-spiral
The Fed meets this week amid bad news on labor markets, consumer spending, and industrial production
In the six weeks since the last meeting of the Federal Reserve’s Open Market Committee (FOMC), there has been a further material weakening in the U.S. economy and renewed strains on the U.S. financial system. At the same time, there has been an abrupt weakening in labor market conditions and an unprecedented deceleration in inflation that raises anew concerns about a deflationary spiral.
1. Employment conditions continue to deteriorate rapidly.
2. Labor market and output gaps continue to widen, which must be expected to exert considerable downward pressure on wages and prices.
3. Deteriorating labor market conditions and falling asset prices have contributed to a collapse in consumer confidence to its lowest level in 25 years.
4. Consumer spending, which accounts for around 70 percent of GDP by expenditure, is dropping at its fastest rate since World War II.
5. Industrial production is declining at its fastest pace in 30 years.
6. Housing starts have plumbed new lows, while housing permits suggest no sign of stabilization in the housing market.
7. Over the past three months, consumer prices have decelerated at their fastest pace in the post-war period.
In the context of a significant weakening in the U.S. economy, it is likely the FOMC will make clear in its statement that it considers that inflation risks have further receded, while the downside risks to the economy have increased.
Man kills wife, five kids, himself after being fired
http://www.cnn.com/2009/CRIME/01/28/family.dead.california/index.html
The bodies of five children and two adults -- the children's mother and father -- were found Tuesday in a home in the Los Angeles neighborhood of Wilmington. Among the dead, authorities said, were an 8-year-old girl and two sets of twins -- 5-year-old girls and 2-year-old boys.
Ervin Lupoe apparently called 911 and contacted a television station by fax before committing suicide, authorities said.
Kaiser Permanente said Lupoe and his wife, Ana, were both former employees of the medical center. Both had been terminated, Hayes said, with Lupoe's termination coming last week. It appears there were grounds for the termination, and it did not come as a result of layoffs, he said.
In Lupoe's suicide note, he offered a detailed account of his and his wife's work circumstances, calling the family's situation a "tragic story." He ended it by saying, "So after a horrendous ordeal my wife felt it better to end our lives and why leave our children in someone's else's hands."
Therapists seeing more 'collateral damage' from economy
http://www.cnn.com/2009/HEALTH/01/23/recession.therapy/index.html?iref=newssearch
No formal data exist on the number of Americans who are turning to therapy during the recession, but most clinical psychologists say that referrals are up.
"This is really unprecedented," says Nancy Molitor, a clinical psychologist in Chicago, Illinois. "I've been practicing for 20 years, and I'm seeing just an unprecedented amount of anxiety, as are most of my colleagues."
Rick Weinberg, a clinical psychologist in Tampa, Florida, says that in one recent week 80 percent of his patients were discussing the pain inflicted on them in the economy. His patients included a small business owner who was forced to lay off longtime staff, a family of four evicted from their home and moving into a rental, and a family with two teenagers that was down to a one-parent income and experiencing frequent spending arguments and acting out by the teens.
"I have many patients who come in to see me in such crisis, they haven't opened their bills in three months. They haven't opened their statements. They're not functioning," Molitor says. "We need to really address that in a very quick way to begin to help alleviate their anxiety enough so that they start functioning."
"It's gotten worse. It's absolutely gotten worse. Most people are feeling anxious about money right now," says Bradley Klontz, a clinical psychologist in Hawaii. "When you're struggling with money issues and it affects your ability to carry out your various roles -- if it's keeping you up at night -- I'd say that's when you know it's time."
Beyond elevated anxiety levels, there are concerns about depression and suicide."
"We've had people who are so depressed that they are thinking that maybe life isn't worth going on. It's a small number of people but, you know, that is something that we're becoming more concerned about.”
18 January 2009
Depression & End Game - latest "chatter"
thx to Ray......
"When you are in periods where there are deep outliers to the data because of very real turning points in the economy (such as we are going through now), the seasonally adjusted numbers can mask the real underlying trends, both up and down - - John Mauldin
The Endgame
We are in completely uncharted territory in terms of the economic landscape. Like the USS Enterprise in Star Trek, we are boldly going where no man has gone before
Employment Numbers Are Worse Than Posted
We were told Thursday that initial unemployment claims were 'only' 524,000. The talking heads immediately said that was proof the economy is simply bad, not falling off a cliff. Again, like last week, that seasonally adjusted number masks the real number, which was 952,151. That is not a typo. There were almost 1 million newly unemployed last week...
The continuing claims data leaped over 500,000 to (again, not a typo) 5,832,746. The length of time people are staying unemployed is also rising rapidly. We are up almost 1.5 million new continuing claims in just the last five weeks. That is a stunning rise of over 30% in unemployment claims in just over a month. The data is truly ugly, but it is what it is...
It is not a question of whether or not there will be massive stimulus. The question is simply how much and for how long
Deflation
The Consumer Price Index numbers...tell a tale of deflation. On an annualized basis, the CPI for the last three months was a negative -12.7%. Even core CPI, which is without food and energy, was a minus 0.3%. The CPI for 2008 was just 0.1% for the whole year. This was the smallest calendar-year increase since 1954, and it's down from 4.1% for 2007...
In the US, we have seen massive wealth destruction on personal balance sheets. At the end of the third quarter the losses totalled $5.6 trillion, between housing and stocks. They could be over $10 trillion at the end of the fourth quarter. (Source: Hoisington) The losses will almost certainly top $12 trillion by the middle of the year as housing continues to deteriorate.
Pick any country in the developed world or much of the developing world, and it's the same picture: wealth destruction
We have seen at least a trillion dollars of capital on financial companies' balance sheets disappear; and given the recent spate of bailouts, it is likely to get worse.
...a credit crisis and imploding balance sheets, a housing crisis, and a massive earnings shortfall that yields a relentless stock market drop are all independently deflationary. The combined forces are massively so.[/]
To think that a mere trillion or so dollars in stimulus will be enough to reflate the US and the world economies is simply not realistic.
...We have permanently seared the psyche of the American consumer. Consumer spending is likely to drop at least 6-7% over the next two years, and maybe more. The combination of all three bubbles (consumer spending, credit, and housing), which were made possible by increasing leverage and poor lending standards, is by definition deflationary.
The End Game
The US (and indeed soon the whole world) is in a deep recession. The US is going to try and combat that recession with stimulus on a scale never before tried. It is a grand experiment. On the one hand is the theory that you can allocate stimulus and keep the velocity of money from falling. On the other hand is the theory that once the deleveraging process starts, there is not much you can do about it: it is going to work its way through the economy. We are about to find out which theory is correct.
Pushing on a String
US debt to GDP is now over 300% and has risen precipitously in the last ten and especially the last five years. Leverage and debt fueled the growth of the economy, but debt growth hit a wall and now the deleveraging process is the painful result. This brings us to the worst-case scenario: that all the efforts of the Fed will go for naught and that we are in a liquidity trap...
Monty Guild
We...predicted several months ago that we were entering a moderate depression, rather than a recession during the current downtrend, few have agreed with our view.
"The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%"
"Consistent with a still-deepening recession, fourth quarter 2008 production showed an annualized quarterly contraction of 11.5%, following an 8.9% contraction in the third quarter."
"A depression is defined (Shadow Govermenment Statistics - SGS) as a recession where peak-to-trough contraction exceeds 10%, a level currently exceeded in annualized terms by both fourth-quarter real retail sales and industrial production."
The above data by SGS show that the trends in retail sales, which is considered a leading economic indicator, and in industrial production are strongly indicative that a depression is in the process of developing in the United States.
Another Great Depression, by James Turk
I don't like to start any new year on a gloomy note. I am by nature an optimist, but I am also a realist who readily faces facts. Right now those facts are not very pretty and suggest to me that the world has entered into another Great Depression. Here are some shockers about the US economy that are worth pondering.
The National Bureau of Economic Research reckons that the present recession began in December 2007. In only one month since then has the US economy not lost jobs, but worryingly, the job losses are occurring with increasing momentum suggesting that the economy is spiraling downward."
"When you are in periods where there are deep outliers to the data because of very real turning points in the economy (such as we are going through now), the seasonally adjusted numbers can mask the real underlying trends, both up and down - - John Mauldin
The Endgame
We are in completely uncharted territory in terms of the economic landscape. Like the USS Enterprise in Star Trek, we are boldly going where no man has gone before
Employment Numbers Are Worse Than Posted
We were told Thursday that initial unemployment claims were 'only' 524,000. The talking heads immediately said that was proof the economy is simply bad, not falling off a cliff. Again, like last week, that seasonally adjusted number masks the real number, which was 952,151. That is not a typo. There were almost 1 million newly unemployed last week...
The continuing claims data leaped over 500,000 to (again, not a typo) 5,832,746. The length of time people are staying unemployed is also rising rapidly. We are up almost 1.5 million new continuing claims in just the last five weeks. That is a stunning rise of over 30% in unemployment claims in just over a month. The data is truly ugly, but it is what it is...
It is not a question of whether or not there will be massive stimulus. The question is simply how much and for how long
Deflation
The Consumer Price Index numbers...tell a tale of deflation. On an annualized basis, the CPI for the last three months was a negative -12.7%. Even core CPI, which is without food and energy, was a minus 0.3%. The CPI for 2008 was just 0.1% for the whole year. This was the smallest calendar-year increase since 1954, and it's down from 4.1% for 2007...
In the US, we have seen massive wealth destruction on personal balance sheets. At the end of the third quarter the losses totalled $5.6 trillion, between housing and stocks. They could be over $10 trillion at the end of the fourth quarter. (Source: Hoisington) The losses will almost certainly top $12 trillion by the middle of the year as housing continues to deteriorate.
Pick any country in the developed world or much of the developing world, and it's the same picture: wealth destruction
We have seen at least a trillion dollars of capital on financial companies' balance sheets disappear; and given the recent spate of bailouts, it is likely to get worse.
...a credit crisis and imploding balance sheets, a housing crisis, and a massive earnings shortfall that yields a relentless stock market drop are all independently deflationary. The combined forces are massively so.[/]
To think that a mere trillion or so dollars in stimulus will be enough to reflate the US and the world economies is simply not realistic.
...We have permanently seared the psyche of the American consumer. Consumer spending is likely to drop at least 6-7% over the next two years, and maybe more. The combination of all three bubbles (consumer spending, credit, and housing), which were made possible by increasing leverage and poor lending standards, is by definition deflationary.
The End Game
The US (and indeed soon the whole world) is in a deep recession. The US is going to try and combat that recession with stimulus on a scale never before tried. It is a grand experiment. On the one hand is the theory that you can allocate stimulus and keep the velocity of money from falling. On the other hand is the theory that once the deleveraging process starts, there is not much you can do about it: it is going to work its way through the economy. We are about to find out which theory is correct.
Pushing on a String
US debt to GDP is now over 300% and has risen precipitously in the last ten and especially the last five years. Leverage and debt fueled the growth of the economy, but debt growth hit a wall and now the deleveraging process is the painful result. This brings us to the worst-case scenario: that all the efforts of the Fed will go for naught and that we are in a liquidity trap...
Monty Guild
We...predicted several months ago that we were entering a moderate depression, rather than a recession during the current downtrend, few have agreed with our view.
"The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%"
"Consistent with a still-deepening recession, fourth quarter 2008 production showed an annualized quarterly contraction of 11.5%, following an 8.9% contraction in the third quarter."
"A depression is defined (Shadow Govermenment Statistics - SGS) as a recession where peak-to-trough contraction exceeds 10%, a level currently exceeded in annualized terms by both fourth-quarter real retail sales and industrial production."
The above data by SGS show that the trends in retail sales, which is considered a leading economic indicator, and in industrial production are strongly indicative that a depression is in the process of developing in the United States.
Another Great Depression, by James Turk
I don't like to start any new year on a gloomy note. I am by nature an optimist, but I am also a realist who readily faces facts. Right now those facts are not very pretty and suggest to me that the world has entered into another Great Depression. Here are some shockers about the US economy that are worth pondering.
The National Bureau of Economic Research reckons that the present recession began in December 2007. In only one month since then has the US economy not lost jobs, but worryingly, the job losses are occurring with increasing momentum suggesting that the economy is spiraling downward."
16 January 2009
Hoisington's 4Q Report: The Great Experiment
Thx to heritage ray of WSE Bearchat.
-excerpts-
Presently, major sectors of the U.S. economy are experiencing a debt deflation that is causing a massive destruction of wealth, thereby curtailing jobs, income and spending.
THE GREAT EXPERIMENT
Irving Fisher who, according to Friedman, was the most brilliant of all U.S. economists has noted that when the economy enters a period of "debt and price disturbances", those forces will eventually engulf the economy.
This theory of excessive debt and its pernicious and unrelenting deflationary impulse to the economy has been best chronicled by other notable economists: Charles P. Kindleberger (1910-2003), Hyman Minsky (1919- 1996), Nikolai Kondratieff (1892-1938) and Joseph A. Schumpeter (1883-1950).
The debt level of the U.S. has reached unprecedented proportions
More important than the level, however, is the fact that for the last few years the debt was improperly loaned and financed. In the words of the late economists Minsky and Kindelberger, this type of lending activity implies there is little likelihood of repayment of principal and interest.
Stock prices have plunged, and with home prices plummeting, and commercial and industrial properties losing value, a deflation of assets has clearly begun while the underlying debt remains constant.
Will this deflation overwhelm the best efforts of the Federal Reserve, invalidate Friedman's theory and prove Fisher correct?
Our judgment is that the power of monetary policy revolves around the ability to initiate a new borrowing and lending cycle. This can only happen if lenders are willing to lend and borrowers are wanting and able to borrow. Presently, neither are so inclined.
If price declines in assets continue...a period of very low nominal growth will likely extend for a decade. Fiscal policy actions may not be helpful either and could produce unintended negative consequences
Conventional wisdom is that the current economic contraction is nothing more than a typical post war recession. In the ensuing paragraphs we intend to frame an argument that is contrary to this conventional wisdom.
CAN FED POLICY CONTROL ECONOMIC DESTINY?
Our analysis suggests that the Fed will not achieve the desired results of stable velocity.
Fisher also suggested that velocity rises when leverage increases and falls when leverage abates.
So far the evidence at hand suggests that velocity is thwarting the efforts of the Fed. In the fourth quarter velocity plummeted, completely offsetting the increase in M2. Thus, nominal GDP declined at a very rapid rate.
While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues
As the experience from U.S. and Japanese history indicates, many "false dawns" will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand.
During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase
If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation. With yields in the long Treasury market very low in nominal terms, the real return will be greater if deflation sets in.
Moreover, in Japan from 1988 to the present, as well as in the U.S. from 1872 to 1892 and 1928 to 1948, the total return on Treasury bonds exceeded the total return on stocks
Such a condition cannot happen for the long run, but it did happen in these three instances spanning two decades. As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities.
Van R. Hoisington
Lacy H. Hunt, Ph.D.
Note
In this article, Brian Bloom argues that Hoisington's analysis means an Economic Depression is inevitable.
-excerpts-
Presently, major sectors of the U.S. economy are experiencing a debt deflation that is causing a massive destruction of wealth, thereby curtailing jobs, income and spending.
THE GREAT EXPERIMENT
Irving Fisher who, according to Friedman, was the most brilliant of all U.S. economists has noted that when the economy enters a period of "debt and price disturbances", those forces will eventually engulf the economy.
This theory of excessive debt and its pernicious and unrelenting deflationary impulse to the economy has been best chronicled by other notable economists: Charles P. Kindleberger (1910-2003), Hyman Minsky (1919- 1996), Nikolai Kondratieff (1892-1938) and Joseph A. Schumpeter (1883-1950).
The debt level of the U.S. has reached unprecedented proportions
More important than the level, however, is the fact that for the last few years the debt was improperly loaned and financed. In the words of the late economists Minsky and Kindelberger, this type of lending activity implies there is little likelihood of repayment of principal and interest.
Stock prices have plunged, and with home prices plummeting, and commercial and industrial properties losing value, a deflation of assets has clearly begun while the underlying debt remains constant.
Will this deflation overwhelm the best efforts of the Federal Reserve, invalidate Friedman's theory and prove Fisher correct?
Our judgment is that the power of monetary policy revolves around the ability to initiate a new borrowing and lending cycle. This can only happen if lenders are willing to lend and borrowers are wanting and able to borrow. Presently, neither are so inclined.
If price declines in assets continue...a period of very low nominal growth will likely extend for a decade. Fiscal policy actions may not be helpful either and could produce unintended negative consequences
Conventional wisdom is that the current economic contraction is nothing more than a typical post war recession. In the ensuing paragraphs we intend to frame an argument that is contrary to this conventional wisdom.
CAN FED POLICY CONTROL ECONOMIC DESTINY?
Our analysis suggests that the Fed will not achieve the desired results of stable velocity.
Fisher also suggested that velocity rises when leverage increases and falls when leverage abates.
So far the evidence at hand suggests that velocity is thwarting the efforts of the Fed. In the fourth quarter velocity plummeted, completely offsetting the increase in M2. Thus, nominal GDP declined at a very rapid rate.
While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues
As the experience from U.S. and Japanese history indicates, many "false dawns" will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand.
During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase
If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation. With yields in the long Treasury market very low in nominal terms, the real return will be greater if deflation sets in.
Moreover, in Japan from 1988 to the present, as well as in the U.S. from 1872 to 1892 and 1928 to 1948, the total return on Treasury bonds exceeded the total return on stocks
Such a condition cannot happen for the long run, but it did happen in these three instances spanning two decades. As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities.
Van R. Hoisington
Lacy H. Hunt, Ph.D.
Note
In this article, Brian Bloom argues that Hoisington's analysis means an Economic Depression is inevitable.
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