The economy lost 651,000 jobs in three months. Auto sales have collapsed, and retail sales have “fallen off a cliff.” And there is at this point little indication that Credit Availability will normalize anytime soon for household, corporate or municipal borrowers. While the extraordinary efforts by the Fed and global central bankers have loosened the clogged up inter-bank lending market, risk markets remain hopelessly paralyzed. The unfolding collapse of the leveraged speculating community continues to overhanging the marketplace. Securitization markets are still essentially closed for business.
We can continue to analyze developments in the context of two overarching themes: First, there is the implosion of contemporary “Wall Street finance.” Second, the bursting of the Credit Bubble has initiated what will be an arduous and protracted economic adjustment. Each week provides additional confirmation of the interplay between the breakdown of Wall Street risk intermediation and the bursting of the U.S. Bubble Economy. This process has gained overwhelming momentum.
I know some analysts are anticipating an eventual return to “normalcy.” The thought is that it is only a matter of time before “shock and awe” policymaking and Trillions of newly created liquidity entice investors and speculators back into risk assets. This view is too optimistic, and history offers an especially poor guide in this respect. By and large, the unprecedented growth in Federal Reserve and global central bank balance sheets is (scarcely) accommodating de-leveraging. Between the hedge funds, global “proprietary trading” and other leveraged speculators, it is not unreasonable to contemplate an overhang of (prospective forced and deliberate sales) of upwards of $10 Trillion.
It’s popular to label Federal Reserve operations as a massive effort to “print money.” Yet it is important to recognize that, at least to this point, the expansion of the Fed assets (“Fed Credit”) is counterbalanced by the collapsing balance sheets of leveraged financial operators. The inflationary effects – the increased purchasing power created by the expansion of Credit – occurred back when the original loan was made, securitized, and leveraged by, say, a hedge fund. Today’s ballooning central bank holdings (and TARP spending) may very well stem financial system implosion. This is, however, a far cry from engendering a meaningful increase in either the market’s appetite for risk assets or the expansion of new system Credit in the real economy.
I don’t want to imply that unprecedented monetary policy measures aren’t having an impact. Overnight lending rates (Libor) were quoted at 0.33% today, down from a spike to almost 7.00% in late September. And at 2.29%, three-month Libor has dropped from early October’s 4.82%. Other measures of systemic risk and liquidity premiums (including the 2- and 10-year dollar swap spreads) have dropped dramatically over the past month.
The problem is that the “unclogging” of inter-bank and “money” markets has had little effect on the Pricing and Availability of Credit for the vast majority of borrowers operating throughout the real economy. After ending September at about 650, junk bond spreads have surged to 950 bps. Investment-grade bond spreads are also higher today than at the end of the third quarter. Benchmark MBS spreads have changed little, while Jumbo mortgage borrowing rates remain elevated. Risk premiums for municipal borrowings have been reduced only somewhat from extreme levels. Unsound borrowers everywhere have little hope of borrowing anywhere.
There are complaints out of Washington that, despite oodles of bailout funding, the banks are refusing to lend. Well, total bank Credit has expanded $575bn over the past 10 weeks, or 32% annualized. Importantly, the asset-backed securities (ABS), collateralized debt obligation (CDO), and securitization markets generally remain closed for new business.
The heart of the matter is not so much that banks are refusing to extend Credit but that the entire mechanism of Wall Street risk intermediation has collapsed. After ballooning into multi-Trillion dollar avenues for Credit expansion, intermediation through the ABS and CDO markets is basically over. The convertible bond market has also badly malfunctioned, along with the “private-label” MBS marketplace. Wall Street’s “auction-rate securities” has ceased as a mechanism for Credit expansion, along with myriad other avenues for securitization. And, importantly, derivatives markets, having evolved into an essential element of contemporary risk intermediation and Credit expansion, have suffered a devastating crisis of confidence. Scores of leveraged strategies are no longer viable. Indeed, Monetary Processes essential for funding broad cross-sections of the economy have completely broken down.
Even if banks had a desire to make the same types of risky loans Wall Street financed throughout the boom (which they clearly don’t), it is difficult to envisage how bank Credit could today adequately compensate for the interrelated collapses in Wall Street risk intermediation and leveraged speculation. And unlike previous crises, no amount of rate cuts, liquidity injections, or policymaker jawboning will revive leveraged speculation. That historic Bubble and mania has burst, and it is now only a matter of waiting to dissect the devastation wrought by the unfolding run on the industry. A typical Federal Reserve-induced return to risk-taking in the Credit markets will be stymied for some time to come by an unrivaled inventory of debt instruments overhanging the markets.
The critical issue then becomes how the system can generate sufficient new Credit to keep our asset markets and Bubble economy from completely imploding. Well, we can assume at this point that the Fed will continue to accommodate de-leveraging through the ballooning of its balance sheet. At the same time, the federal government will soon be running Trillion dollar annual deficits. GSE balance sheets will likely commence a period of aggressive expansion. And, importantly, the banking system will have no alternative than to expand rapidly. At this point, timid banks equate to a Bubble Economy spiraling into depression.
If the markets cooperate, perhaps over the coming months the now breakneck economic contraction will somewhat stabilize. I fear, however, that current dynamics are setting the stage for yet another stage of this vicious crisis. Some analysts believe – and certainly it is the Fed’s intention – for ultra-low interest rates to assist in the recapitalization of the banking system. The early 1990’s provides a nice example: aggressive rate cuts and a steep yield curve provided a backdrop for troubled banks to quietly convalesce by raising cheap deposits and sitting on a safe portfolio of longer-term government debt securities. Why can’t a similar operation bail the banks out of their current predicament?
One should note the stark contrasts between today’s environment and that from the early nineties. First of all, 10-year government yields averaged about 7.8% in the three years 1990 through ’92. Bond markets back then were commencing a historic bull run and, strangely enough, the price of government debt ran higher in the face of huge deficits. There are reasons these days to fear an emergent bond bear. Second, from the Fed’s “flow of funds” report, we know that “Total Net Borrowing and Lending in Credit Markets” averaged $770 billion annually during the ’90-’92 period. “Total Net Borrowing…” last year approached a staggering $4.40 TN. The important point is that today’s Bubble Economy Dynamics were not in play in the early nineties. Sustaining the system required a fraction of today’s Credit creation, thus there was little prevailing pressure on the banks back then to lend amid their “convalescing.”
Indeed, banking system impairment and resulting Fed policymaking engendered the emergence of Wall Street finance in the early nineties – from the Wall Street firms, the GSEs, securitizations, derivatives and leveraged speculation. All were more than happy to take up the slack in bank Credit creation – relating both the overall and banking systems.
With the Bursting of the Bubble in Wall Street Finance, the banking system will today have no alternative than to lend and expand Credit aggressively. The banks provide the only hope for reflation, and there will be no room for nineties-style risk-free spread government carry trades. Instead, it will now be the banking system’s role to take up enormous systemic Credit slack and rapidly expand its portfolio of risk assets. Especially at this precarious stage of the Credit cycle, the banking system’s predicament ensures the ongoing need for hugely expensive government funded industry recapitalizations.
In today’s interest rate and market environment, massive government deficits don’t worry the bond market. I view the marketplace as quite complacent when it comes to the scope of unfolding Treasury and agency debt issuance. Actually, the Treasury, the GSEs and the banking system have in concert succumbed to Debt Trap Dynamics. With Wall Street risk intermediation now out of the equation, the system is down to four principal sources of “money” creation – the Fed, Treasury, GSEs and the Banks. It’s that old “inflate or die” dilemma that’s already smothered Wall Street finance.
The good news is these sources of Credit creation do today retain the capacity to somewhat stabilize financial and economic systems. The bad news is that going forward all four must expand aggressively – in collaboration - to forestall acute systemic crisis. All four must expand aggressively to bolster a highly maladjusted economic system, in the process sustaining confidence in the value of their liabilities. At some point, one would expect a crisis of confidence with respect to the quality of these Credit instruments. And, you know, the way things have unfolded, Murphy’s Law would only seem to dictate a destabilizing jump in market yields.
nolan
8 November 2008
7 November 2008
A truly dismal deleveraging nightmare
We are now facing a major de-leveraging cycle and it will suppress economic growth and put a lid on the stock market for years to come.
The Absolute Return Letter - November 2008
We are only in the first or second innings of this recession, and the emerging market story has the potential to wreak further havoc. So do credit default swaps - or something else.
There is no question that hedge funds are downsizing at present. It is likely that much of the recent sell-off in equity markets around the world can be traced back to hedge fund liquidations. The problem is to obtain precise data on the phenomenon.
If we estimate that the global hedge fund industry controls about $2 trillion of capital, and we assume that 15-20% is going to be pulled out between now and year-end (which is not far from the truth according to our sources), $3-400 billion must be returned to investors between now and 31st December.
That is not the whole story though. The average hedge fund uses leverage, to the tune of about 1.4 times (see chart6).
Hedge funds need to liquidate investments of at least $500-550 billion in order to meet current redemption requests. And the real number is probably higher because some of the worst performing strategies this year are the ones using the most leverage. The real number is therefore more likely $6-800 billion, and that is a big enough sum of money to put downward pressure on the markets.
Add to this the fact that some hedge funds (mostly the bigger ones) have been selling credit default swaps (CDSs). The buyer of a CDS supposedly makes money if the underlying credit blows up. I say 'supposedly' because the payment is a function of the seller's ability to pay up.
That was why Morgan Stanley had to be saved at all cost. MS has been, and continues to be, one of the largest players in the CDS market.There is no way we can establish precisely how many CDSs hedge funds have on their books, but please consider the following: The CDS market is a $50 trillion market (give or take). Before they blew up, AIG were one of the biggest sellers of CDSs with approximately $500 billion on their books. They ran into problems (partly) because they were heavily exposed to the financial services industry which is already in recession.
If AIG, one of the largest and most sophisticated financial institutions could get themselves into trouble with barely a 1% share of the global CDS market, what will happen to the sellers of the remaining 99%?
Who 'owns' this risk? Is it hedged or not? Is it even possible to hedge the risk, knowing that your counterparty might not be able to pay up?
...de-leveraging has a long way to run yet, not so much in the hedge fund community where I suspect that much of the damage will be behind us once we pass the next major redemption hurdle on 31st December, but in society more broadly.
I have borrowed Chart 7 below from BCA Research, and it shows total US bank loans as a percentage of US GDP. Unfortunately, the picture would be much the same for many of the European countries.
European banks at risk
Stephen Jen and Spyros Andreopoulos at Morgan Stanley suggest that an already weak banking sector in the OECD could be further stifled by non-performing loans to emerging market countries. Worldwide cross-border lending now stands at $37 trillion with about $4.7 trillion going towards Eastern Europe, Latin America and emerging Asia.
Cross-border lending by European and UK banks to emerging market countries accounts for 21% and 24% of respective GDPs compared to 4% for US banks and 5% for Japanese banks (see chart 4).
Europe has about $3.5 trillion of debt outstanding to emerging market countries whereas the US has only about $500 billion on the line
The country most exposed to emerging markets is Austria with total emerging market loans accounting for no less than 85% of the country's GDP – most of it to Eastern Europe. Austrian banks have been aggressively pursuing opportunities in Eastern Europe for years.
They have in fact been so aggressive that their total lending to the region (approximately $300 billion) exceeds the amount lent by Germany to Eastern Europe. Even more worryingly, Austrian banks are the largest holders of debt on Hungary and Ukraine – two of the most fragile economies on the old Soviet bloc.
As an aside, when the global banking system collapsed in May 1931 in the midst of the Great Depression, it was a run on the Austrian banks which acted as a catalyst.
Italy is possibly in an even more dire condition. Italy's public debt is now the third largest in the world, behind the US and Japan. And, at 107% of GDP, it is almost twice the limit set by the Maastricht Treaty (so much for treaties!).
Italy is also a big lender to Eastern Europe
Unicredit alone has about $130 billion of debt outstanding to Eastern European countries. Italy's predicament is well recognised by fixed income investors. 10-year Italian government bonds now yield 1.08% more than their German sister bonds. The market is telling us that something rather unpleasant could happen to Italy.
The Absolute Return Letter - November 2008
We are only in the first or second innings of this recession, and the emerging market story has the potential to wreak further havoc. So do credit default swaps - or something else.
There is no question that hedge funds are downsizing at present. It is likely that much of the recent sell-off in equity markets around the world can be traced back to hedge fund liquidations. The problem is to obtain precise data on the phenomenon.
If we estimate that the global hedge fund industry controls about $2 trillion of capital, and we assume that 15-20% is going to be pulled out between now and year-end (which is not far from the truth according to our sources), $3-400 billion must be returned to investors between now and 31st December.
That is not the whole story though. The average hedge fund uses leverage, to the tune of about 1.4 times (see chart6).
Hedge funds need to liquidate investments of at least $500-550 billion in order to meet current redemption requests. And the real number is probably higher because some of the worst performing strategies this year are the ones using the most leverage. The real number is therefore more likely $6-800 billion, and that is a big enough sum of money to put downward pressure on the markets.
Add to this the fact that some hedge funds (mostly the bigger ones) have been selling credit default swaps (CDSs). The buyer of a CDS supposedly makes money if the underlying credit blows up. I say 'supposedly' because the payment is a function of the seller's ability to pay up.
That was why Morgan Stanley had to be saved at all cost. MS has been, and continues to be, one of the largest players in the CDS market.There is no way we can establish precisely how many CDSs hedge funds have on their books, but please consider the following: The CDS market is a $50 trillion market (give or take). Before they blew up, AIG were one of the biggest sellers of CDSs with approximately $500 billion on their books. They ran into problems (partly) because they were heavily exposed to the financial services industry which is already in recession.
If AIG, one of the largest and most sophisticated financial institutions could get themselves into trouble with barely a 1% share of the global CDS market, what will happen to the sellers of the remaining 99%?
Who 'owns' this risk? Is it hedged or not? Is it even possible to hedge the risk, knowing that your counterparty might not be able to pay up?
...de-leveraging has a long way to run yet, not so much in the hedge fund community where I suspect that much of the damage will be behind us once we pass the next major redemption hurdle on 31st December, but in society more broadly.
I have borrowed Chart 7 below from BCA Research, and it shows total US bank loans as a percentage of US GDP. Unfortunately, the picture would be much the same for many of the European countries.
European banks at risk
Stephen Jen and Spyros Andreopoulos at Morgan Stanley suggest that an already weak banking sector in the OECD could be further stifled by non-performing loans to emerging market countries. Worldwide cross-border lending now stands at $37 trillion with about $4.7 trillion going towards Eastern Europe, Latin America and emerging Asia.
Cross-border lending by European and UK banks to emerging market countries accounts for 21% and 24% of respective GDPs compared to 4% for US banks and 5% for Japanese banks (see chart 4).
Europe has about $3.5 trillion of debt outstanding to emerging market countries whereas the US has only about $500 billion on the line
The country most exposed to emerging markets is Austria with total emerging market loans accounting for no less than 85% of the country's GDP – most of it to Eastern Europe. Austrian banks have been aggressively pursuing opportunities in Eastern Europe for years.
They have in fact been so aggressive that their total lending to the region (approximately $300 billion) exceeds the amount lent by Germany to Eastern Europe. Even more worryingly, Austrian banks are the largest holders of debt on Hungary and Ukraine – two of the most fragile economies on the old Soviet bloc.
As an aside, when the global banking system collapsed in May 1931 in the midst of the Great Depression, it was a run on the Austrian banks which acted as a catalyst.
Italy is possibly in an even more dire condition. Italy's public debt is now the third largest in the world, behind the US and Japan. And, at 107% of GDP, it is almost twice the limit set by the Maastricht Treaty (so much for treaties!).
Italy is also a big lender to Eastern Europe
Unicredit alone has about $130 billion of debt outstanding to Eastern European countries. Italy's predicament is well recognised by fixed income investors. 10-year Italian government bonds now yield 1.08% more than their German sister bonds. The market is telling us that something rather unpleasant could happen to Italy.
What will happen and why
Next year, in the summer, strange things will start to happen.
Some confusion will appear in the way benchmark interest rates are quoted and disputes will openly surface between respected sources as to what is being referred to as the key indicator rate; this will be framed as more a 'lease rate' of bank capital under regulated management, and not the interest rate on interbank money borrowed. And that is because someone will know that this capital is meant to drop in value, in other words be discounted.
As said recently by Mannfmm this is an epic bear market.
The market will neither stabilise nor appear to stabilise, experiencing continued large swings in both ways - but the overall trend will be markedly down. No stable move up can occur until reported earnings underpin P/E's for more than one quarter BEYOND at least one and more likely two or three quarters after the December quarter. That is only an obvious thing, not an insider's knowledge.
The UK interest rate action is tied to a desire not to drag the money flows from extremely low US interest deposits towards a higher UK deposit environment.
The principle motivation of central banks is not the health of the stockmarket, but the preservation of the currency.
And this is where things are getting interesting.
The currency system has been destabilised by the financial assets ratio to Money Supply via the equitisation of a previously 'not financialised' asset - real estate. The bubble value of real estate is so large that it is in fact incalculably large and bears no resemblance to the amount of money issued. THIS and the reason for it - the lack of bank reserves to debt through errosion of these bank rules - has produced the so-called credit crisis which has been 'solved' by GIVING private banks capital from the public government's Treasury... There is a hidden meaning to this mechanism; it ADDS to the numerical currency issuance, and moves towards the incalculable size of the financial asset figure. If, as is expected by central banks, the underlying real estate retreats substantially in value - say by about 40% - the amount of money on issue reaches more reasonably towards the financial assets number and therein, a complete freeze in financial circulations is avoided.
And some stage in that process it is FULLY EXPECTED that the government securities donated to banks will be heavily discounted AND THIS IS THE ONLY PROCESS WHEREBY THE MARKET CAN DERIVE MARKET CREDIT SOURCES TO ONCE AGAIN PRODUCE THE BENCHMARK INDICATOR RATE THAT LEADS MARKET LENDING AND ANOTHER PHASE OF GROWTH.
The injection by say, the Saudi Government, of huge direct cash and capital, IS NOT GROWTH - it is either theft, or bribery or extortion or at best misdirection and seduction and diversion of somebody else's growth. But it is in no way 'economic growth' of the US or the UK economy.
Buying bank equity is not in itself a means of supplying new circulating credit lines to the general market - it only becomes that if the new equity is discounted to the next holder. Circulation can only occur when there is an expectation of a low risk profit in the creation of a credit - otherwise, the holder of the capital will simply not lend (interbank freeze). There is no expectation of a low risk profit when interest rates are too low combined with the clear knowledge that assets are in a bubble condition. Even when assets are no longer in an obvious bubble position, the low interest provides inadequate reward and money still does not circulate in ways that permit government to draw tax and re-finance the substance of its currency.
There is no reason for 'banks' to lend to companies. Exxon can lend to companies via circulated transferable private credit notes and maintain the entire US economy on a growth path single-handed if it wished and if companies represented a rational economic risk - but since they mostly don't, the idea of 'lending to companies' is a political pursuit by government seeking to maintain the monopoly on credit-based dollarisation.
Hyperstagflation - a fact of modern life already in existence, and a word either coined by Mannfm or Bulldog or Ras - cannot be obviously seen because of the gap between Joe the Plumber's lifestyle and Suzanne Klatten's lifestyle.
With interest rates at zero, Joe the Plumber can as little afford the real estate that Suzanne Klatten resides in as
he could have when he thought property always went up and when GE Money lent him money he never intended to pay back other than by borrowing more on his never-ending equity rises.
If you can sell products to Suzanne Klatten, you will most certainly comprehend that her companies' increased revenues in China even today are not a reason to cut your prices to her because Fox told you there was a 'severe credit crisis...'
If you can sell products to Fox, you will not be confused by the massive increase in media spend for the Presidential election - what are they referring to when they say 'recession?' Certainly not political advertising budgets that's for sure!
Thus the epic bear market must go on for Joe the Plumber.
For only the Treasury may print actual money and it is unwilling at this point to let the market determine the price thereof - until of course it falls from its throne as the official financial mediator of, what is it - the ideals and principles of Democracy, and Liberty... ...and Hope.
The Pope just now referred to Peace, and the Grand Mufti of Bosnia said Peace and Justice...
They are all correct, because Joe the Plumber lives on illusion and cannot handle Truth, Substance and Delivery.
Today, Truth, Substance and Delivery comes through a slim handheld Samsung device.
A plastic credit card is in all events, a most passe piece of style. Hope is debt to the now, and Delivery is money freehold and substance now. You are cheating yourself if you trade money for hope.
You can discount Hope today for some delivered cash, but you will not discount Delivery today for Hope.
Suzanne Klatten wants delivery today. Joe the Plumber is drunk and can afford to wait until tomorrow.
Voltaire said that Democracy propagates the idiocy of the masses.
Money can be used by idiots, but it is seldom saved by them and never stored anywhere near them.
Only a lunatic believes money is cheap to borrow. If it is cheap to borrow, it is not really money and cannot produce delivery of anything valuable. Lunatics and idiots however, believe things to be valuable, that are not, and that is what makes cleverer people money.
It is not possible to create a permanently low interest rate environment without risking someone come along and push you off the hill using substance he purchased cheaply whether you have installed clever regulations and laws to prevent it or not! Clever people are more inventive than that. The dispute among serious economists today is about whether deflation runs right across all asset classes and whether or not there is any single thing at all that holds permanent trade value at non price deflationary numbers.
It does not. Run across all asset classes.
Moreover, if you knew today what will go up fifty times in the next two years, you will have something to value and to manage as capital, rather than hope about.
I wonder whether you all think the USA is going to invest in Germany or Israel, or China - or somewhere else given the new President? What do you think? I think somewhere else.
And yes, there most certainly is an Illuminati Elite. It casts its plans well into the future, and it is patient and organised and powerful. It thrives on poverty and crime rate. Wherever you see poverty and crime rate, read profit. Of course I remember someone rubbishing me about this before... ...before you elected an African.
The day you see Samsung promote a digital device as thin as a credit card, know that the defining moment has arrived. There is no money, like new money. All Treasurers have Judas as a patron. Jesus, on the other hand, was a teknoi. Which is not a carpenter by the way.
Calvin J. Bear
Some confusion will appear in the way benchmark interest rates are quoted and disputes will openly surface between respected sources as to what is being referred to as the key indicator rate; this will be framed as more a 'lease rate' of bank capital under regulated management, and not the interest rate on interbank money borrowed. And that is because someone will know that this capital is meant to drop in value, in other words be discounted.
As said recently by Mannfmm this is an epic bear market.
The market will neither stabilise nor appear to stabilise, experiencing continued large swings in both ways - but the overall trend will be markedly down. No stable move up can occur until reported earnings underpin P/E's for more than one quarter BEYOND at least one and more likely two or three quarters after the December quarter. That is only an obvious thing, not an insider's knowledge.
The UK interest rate action is tied to a desire not to drag the money flows from extremely low US interest deposits towards a higher UK deposit environment.
The principle motivation of central banks is not the health of the stockmarket, but the preservation of the currency.
And this is where things are getting interesting.
The currency system has been destabilised by the financial assets ratio to Money Supply via the equitisation of a previously 'not financialised' asset - real estate. The bubble value of real estate is so large that it is in fact incalculably large and bears no resemblance to the amount of money issued. THIS and the reason for it - the lack of bank reserves to debt through errosion of these bank rules - has produced the so-called credit crisis which has been 'solved' by GIVING private banks capital from the public government's Treasury... There is a hidden meaning to this mechanism; it ADDS to the numerical currency issuance, and moves towards the incalculable size of the financial asset figure. If, as is expected by central banks, the underlying real estate retreats substantially in value - say by about 40% - the amount of money on issue reaches more reasonably towards the financial assets number and therein, a complete freeze in financial circulations is avoided.
And some stage in that process it is FULLY EXPECTED that the government securities donated to banks will be heavily discounted AND THIS IS THE ONLY PROCESS WHEREBY THE MARKET CAN DERIVE MARKET CREDIT SOURCES TO ONCE AGAIN PRODUCE THE BENCHMARK INDICATOR RATE THAT LEADS MARKET LENDING AND ANOTHER PHASE OF GROWTH.
The injection by say, the Saudi Government, of huge direct cash and capital, IS NOT GROWTH - it is either theft, or bribery or extortion or at best misdirection and seduction and diversion of somebody else's growth. But it is in no way 'economic growth' of the US or the UK economy.
Buying bank equity is not in itself a means of supplying new circulating credit lines to the general market - it only becomes that if the new equity is discounted to the next holder. Circulation can only occur when there is an expectation of a low risk profit in the creation of a credit - otherwise, the holder of the capital will simply not lend (interbank freeze). There is no expectation of a low risk profit when interest rates are too low combined with the clear knowledge that assets are in a bubble condition. Even when assets are no longer in an obvious bubble position, the low interest provides inadequate reward and money still does not circulate in ways that permit government to draw tax and re-finance the substance of its currency.
There is no reason for 'banks' to lend to companies. Exxon can lend to companies via circulated transferable private credit notes and maintain the entire US economy on a growth path single-handed if it wished and if companies represented a rational economic risk - but since they mostly don't, the idea of 'lending to companies' is a political pursuit by government seeking to maintain the monopoly on credit-based dollarisation.
Hyperstagflation - a fact of modern life already in existence, and a word either coined by Mannfm or Bulldog or Ras - cannot be obviously seen because of the gap between Joe the Plumber's lifestyle and Suzanne Klatten's lifestyle.
With interest rates at zero, Joe the Plumber can as little afford the real estate that Suzanne Klatten resides in as
he could have when he thought property always went up and when GE Money lent him money he never intended to pay back other than by borrowing more on his never-ending equity rises.
If you can sell products to Suzanne Klatten, you will most certainly comprehend that her companies' increased revenues in China even today are not a reason to cut your prices to her because Fox told you there was a 'severe credit crisis...'
If you can sell products to Fox, you will not be confused by the massive increase in media spend for the Presidential election - what are they referring to when they say 'recession?' Certainly not political advertising budgets that's for sure!
Thus the epic bear market must go on for Joe the Plumber.
For only the Treasury may print actual money and it is unwilling at this point to let the market determine the price thereof - until of course it falls from its throne as the official financial mediator of, what is it - the ideals and principles of Democracy, and Liberty... ...and Hope.
The Pope just now referred to Peace, and the Grand Mufti of Bosnia said Peace and Justice...
They are all correct, because Joe the Plumber lives on illusion and cannot handle Truth, Substance and Delivery.
Today, Truth, Substance and Delivery comes through a slim handheld Samsung device.
A plastic credit card is in all events, a most passe piece of style. Hope is debt to the now, and Delivery is money freehold and substance now. You are cheating yourself if you trade money for hope.
You can discount Hope today for some delivered cash, but you will not discount Delivery today for Hope.
Suzanne Klatten wants delivery today. Joe the Plumber is drunk and can afford to wait until tomorrow.
Voltaire said that Democracy propagates the idiocy of the masses.
Money can be used by idiots, but it is seldom saved by them and never stored anywhere near them.
Only a lunatic believes money is cheap to borrow. If it is cheap to borrow, it is not really money and cannot produce delivery of anything valuable. Lunatics and idiots however, believe things to be valuable, that are not, and that is what makes cleverer people money.
It is not possible to create a permanently low interest rate environment without risking someone come along and push you off the hill using substance he purchased cheaply whether you have installed clever regulations and laws to prevent it or not! Clever people are more inventive than that. The dispute among serious economists today is about whether deflation runs right across all asset classes and whether or not there is any single thing at all that holds permanent trade value at non price deflationary numbers.
It does not. Run across all asset classes.
Moreover, if you knew today what will go up fifty times in the next two years, you will have something to value and to manage as capital, rather than hope about.
I wonder whether you all think the USA is going to invest in Germany or Israel, or China - or somewhere else given the new President? What do you think? I think somewhere else.
And yes, there most certainly is an Illuminati Elite. It casts its plans well into the future, and it is patient and organised and powerful. It thrives on poverty and crime rate. Wherever you see poverty and crime rate, read profit. Of course I remember someone rubbishing me about this before... ...before you elected an African.
The day you see Samsung promote a digital device as thin as a credit card, know that the defining moment has arrived. There is no money, like new money. All Treasurers have Judas as a patron. Jesus, on the other hand, was a teknoi. Which is not a carpenter by the way.
Calvin J. Bear
6 November 2008
Obama - The Dawn of Reason
All Change
by John Needham, The Daniel Code Report | November 5, 2008
Print
By the time you read this article Barack Obama will be the 44th President of the United States elect, Democrats will control enough of Congress to pass his key legislation and a torrent of sense and sensibilities will be in full cry as Republicans come face to face with the reality that change has at last come to America.
As the leader of the free world, America’s choice of its new leader has ramifications far beyond its borders. The economic and fiscal colossus that is America stands astride the global economy in even more prominence than its military dominance. Heightened international interest in this election reflects that in a real sense the new President has the opportunity to finally fulfil the promise that so many of America’s friends have longed for.
As an Australian living on the other side of the world where your day is my night and your summer my winter, you may ask what business it is of mine what happens in US and what choices its people make. The answer is literally life and death. Australians live under America’s global shield. Our defence equipment (the part of it that actually works) is supplied by US. Our armed forces train to coordinate with US forces and serve along side them in Iraq and Afghanistan. Our treaties rely on US as our last line of defence. In the world where my children will live, push may come to shove one day, so what happens in US is of vital and legitimate interest to me.
With the advent of cable TV (provided by the monopoly satellite controller Aussie Rupert Murdoch) I have enjoyed 24 hour coverage of USA from CNN, CNBC and the ubiquitous Fox. Together with global access to America’s great newspapers I have followed the tortuous path of this epic Presidential campaign as closely as any pundit, and am well versed in the issues both spoken and still rippling beneath the surface. Additionally, living in a country that has much of what will be new to US I can tell you that there is nothing to fear and everything to be excited about.
Obama has two overwhelming properties that will surprise many of you. The banal nature of TV coverage, the overarching conveyor of the candidates, highlights the ideological schism splitting US today. The war cries of “conservatives” and “liberals” has got keener and more shrill as the dénouement approaches. In truth much of the change that will be ascribed to Obama has already happened. You just haven’t noticed. Other change that he will bring will be more obvious and uncomfortable for some. But that’s all it will be-uncomfortable.
The immensity of Obama’s potential is that he is truly a giant intellect, and has a mind like a steel trap. You will be surprised at his strength and how quickly he will bend Congress and the nation to his will. Conservatives don’t know it but Reaganomics has been dead for a while. This is Wiki’s definition:
Reaganomics (a portmanteau of "Reagan" and "economics") refers to the economic policies promoted by United States President Ronald Reagan. The four pillars of Reagan's economic policy were to: reduce the growth of government spending, reduce marginal tax rates on income from labor and capital, reduce government regulation of the economy, control the money supply to reduce inflation.
I suppose one could argue that marginal tax rates for the 2% of the wealthiest citizens have been reduced under Bush and there is no doubt that government regulation of the economy was not only reduced but completely abandoned at least on Wall Street, but in the end, Bush-Cheney have overseen not only the greatest growth of government spending in US history but the greatest intrusion of government into business ever. US Treasury is now the de fact owner of the nations greatest banks and insurers and no doubt there are more to come.
A detached observer would note that strange things happen in politics and whilst it is an old political axiom that countries get the government they deserve, that is not always the government that they need. For US there are historic parallels between the end of the Reagan era and now. During Reagan’s Presidency, there was a massive increase in Cold War related defense spending that caused large budget deficits, the U.S. trade deficit expanded dramatically, and contributed to the Savings and Loan crisis, as well as the stock market crash of 1987. In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation, Reagan described the new debt as the "greatest disappointment" of his presidency.
Strangely GOP strategists casting around for a scapegoat came up with this summary: “Theories of what went wrong this year are varied and often contradictory. Some say the party embraced conservatism too tightly, while others say the party has not been conservative enough. One popular argument among GOP partisans is that the party strayed from its principles of limited government; another is that it has lost its appeal to suburban voters over social issues and the environment. Many say Republicans could not escape the shadow of Iraq and George W. Bush, the least popular GOP chief executive since Richard M. Nixon.”
Exit polls put the number one concern of registered voters as the state of the economy and both campaigns have been thin on the specifics of what steps need to be taken. One of the priorities of governments both for policy and fiscal purposes is to provide and protect jobs. My feeling is that Treasury policy so far has been to put out bush fires and plug the holes. No cohesive plan for recovery has been advanced by the Bush administration and the ad hoc nature of battling the threatened tsunami of financial sector businesses is caught nicely by these comments from The Times:
Having been handed vast authority and almost no restrictions in the bailout law that Congress passed a month ago, a committee of five little-known government officials, aided by a bare-bones staff of 40, is picking winners and losers among thousands of banks, savings and loans, insurers and other institutions.
It is new and unfamiliar terrain for the officials, who are making monumental decisions — a form of industrial policy, some critics say — that contradict the free market philosophy they usually espouse. Predictably, the process is stirring alarm from Capitol Hill to Wall Street.
Among the problems, critics say, is that despite earlier promises of transparency, the process is shrouded in secrecy, its precise goals opaque. Treasury officials have refused to disclose their criteria for deciding which banks are healthy enough to get money — and which are too sick.
Industry sources said that banks, after filing a two-page application, are assigned a ranking from 1 to 5 — with 1 or 2 essentially guaranteeing that they are eligible, and 5 insuring they are not — by their regulator. The five officials then make what can be a life-or-death decision, with a thumbs-down generally interpreted to mean that a bank was not healthy enough to survive on its own.
“There is a real urgency to deploy this money quickly and effectively,” said James H. Lambright, who took a leave three weeks ago as the president of the Export-Import Bank of the United States to become the interim chief investment officer of the rescue effort.
A trim, self-confident former investment banker, Mr. Lambright, 38, is the chairman of a committee of relatively young officials — all are in their 30s or 40s — with backgrounds in law, banking or regulation. None of them could have expected this kind of responsibility; Mr. Lambright himself was a last-minute substitute after a previous appointee was kept in his old job.
With more than $80 billion left to spend, and hundreds of banks in line for it, the days, nights and weekends of the overworked, sleep-deprived Treasury staff members are a blur of meetings and conference calls, and constant pressure.
“This is a four-ring circus,” said Tim Ryan, a former director of the Office of Thrift Supervision, who helped run the savings and loan cleanup in the 1980s and 1990s.
Clearly nobody is at the wheel and the lack of direction has allowed musings of ever more Treasury bailouts. Reuters reports that the U.S. Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success.
In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co's GE Capital unit, CIT Group Inc and others.
Treasury may also scrap part of its early plan of purchasing assets through an auction process and instead purchase some distressed assets directly. “We are looking at many ideas for strengthening the financial system and for restoring lending," Treasury spokeswoman Jennifer Zuccarelli said. "We are weighing ideas and have made no decisions."
Without an overall plan and direction, ideas by junior Treasury officials are dangerous. The effects of the banking sector insolvencies have yet to work fully into real economies. Much more is yet to be revealed as Treasury tries to become everyone’s favourite uncle backstopping not just profligate banks but insurance companies and big business in the commercial paper market. Where it ends we know not!
But enough. We know what bought us to our present plight; I have chronicled what would be and what has arrived in a series of articles for Financial Sense stretching back to last year. As we now endure the hiatus as the Obama team plan the US and therefore the world recovery we can put a line under most of this episode and adopt these words from Australian Business:
They were old enough to have known better. Though this financial crisis is the biggest since the 1930s and involves new-fangled devices such as mortgage-backed securities, what brought the system to its knees was something we see in almost every cycle: people trying to keep the boom going and profits rising by resorting to excessive borrowing, with lenders dropping their credit standards for the same reason. In this case, matters were made worse by one regulator in particular, former US Federal Reserve chairman Alan Greenspan, who in his efforts to keep the share market happy and postpone the evil hour held US interest rates too low for too long, thereby encouraging profligate borrowing and lending.
Greenspan has admitted he "made a mistake in presuming that the self-interests of organisations, specifically banks, were such as that they were best capable of protecting their own shareholders and their equity in the firms".
That is, he assumed the players in financial markets would always act rationally, making markets self-regulating. And he assumed this despite the boundless evidence to the contrary over his long career. Talk about naive. The problem has been too many econocrats in the developed world with too much faith in the simple neoclassical model and its offspring, the efficient market hypothesis. We've had too many grown men happy to assume that all growth is good growth and all credit is good credit.
Greenspan failed to heed the mantra of his mentor Ayn Rand who asserted that rational businessmen always act in their own best interests. With few exceptions, those who played the game have walked away with the loot. That’s how the incentives were structured. Obama’s belief that American’s can not have a healthy Wall Street and a sick Main Street may be his most prescient observation.
Obama’s promise to bring Warren Buffett onto his advisory team is a game changer. Buffett’s overwhelming common sense quite apart from his fiscal savvy would have thwarted most of the scoundrels who have gamed the system to taxpayers regret.
For ordinary Americans, the credit crisis comes down to their 401k. With losses of 30%-40% in most portfolios, they no longer look for growth; they just want their losses made whole. Of course investors always assume that the high water mark is rightfully theirs and any derogation is loss. A generation of investors is just now coming to the realisation that after a decade of no gain in the Dow and S&P, the simple buy and hold strategy beloved of brokers and advisers who simply are incapable of offering more, may not be the retirement panacea they planned.
This may be the biggest challenge for the incoming team.
Markets
Almost all equity markets have found significant lows at or near their Danielcode black lines which have been published on Financial Sense for some time. The S&P index scrupulously avoided a weekly close below the which would have signaled much lower prices, and instead found support on an intra week basis at the next Daniel sequence number.
Charts
by John Needham, The Daniel Code Report | November 5, 2008
By the time you read this article Barack Obama will be the 44th President of the United States elect, Democrats will control enough of Congress to pass his key legislation and a torrent of sense and sensibilities will be in full cry as Republicans come face to face with the reality that change has at last come to America.
As the leader of the free world, America’s choice of its new leader has ramifications far beyond its borders. The economic and fiscal colossus that is America stands astride the global economy in even more prominence than its military dominance. Heightened international interest in this election reflects that in a real sense the new President has the opportunity to finally fulfil the promise that so many of America’s friends have longed for.
As an Australian living on the other side of the world where your day is my night and your summer my winter, you may ask what business it is of mine what happens in US and what choices its people make. The answer is literally life and death. Australians live under America’s global shield. Our defence equipment (the part of it that actually works) is supplied by US. Our armed forces train to coordinate with US forces and serve along side them in Iraq and Afghanistan. Our treaties rely on US as our last line of defence. In the world where my children will live, push may come to shove one day, so what happens in US is of vital and legitimate interest to me.
With the advent of cable TV (provided by the monopoly satellite controller Aussie Rupert Murdoch) I have enjoyed 24 hour coverage of USA from CNN, CNBC and the ubiquitous Fox. Together with global access to America’s great newspapers I have followed the tortuous path of this epic Presidential campaign as closely as any pundit, and am well versed in the issues both spoken and still rippling beneath the surface. Additionally, living in a country that has much of what will be new to US I can tell you that there is nothing to fear and everything to be excited about.
Obama has two overwhelming properties that will surprise many of you. The banal nature of TV coverage, the overarching conveyor of the candidates, highlights the ideological schism splitting US today. The war cries of “conservatives” and “liberals” has got keener and more shrill as the dénouement approaches. In truth much of the change that will be ascribed to Obama has already happened. You just haven’t noticed. Other change that he will bring will be more obvious and uncomfortable for some. But that’s all it will be-uncomfortable.
The immensity of Obama’s potential is that he is truly a giant intellect, and has a mind like a steel trap. You will be surprised at his strength and how quickly he will bend Congress and the nation to his will. Conservatives don’t know it but Reaganomics has been dead for a while. This is Wiki’s definition:
Reaganomics (a portmanteau of "Reagan" and "economics") refers to the economic policies promoted by United States President Ronald Reagan. The four pillars of Reagan's economic policy were to: reduce the growth of government spending, reduce marginal tax rates on income from labor and capital, reduce government regulation of the economy, control the money supply to reduce inflation.
I suppose one could argue that marginal tax rates for the 2% of the wealthiest citizens have been reduced under Bush and there is no doubt that government regulation of the economy was not only reduced but completely abandoned at least on Wall Street, but in the end, Bush-Cheney have overseen not only the greatest growth of government spending in US history but the greatest intrusion of government into business ever. US Treasury is now the de fact owner of the nations greatest banks and insurers and no doubt there are more to come.
A detached observer would note that strange things happen in politics and whilst it is an old political axiom that countries get the government they deserve, that is not always the government that they need. For US there are historic parallels between the end of the Reagan era and now. During Reagan’s Presidency, there was a massive increase in Cold War related defense spending that caused large budget deficits, the U.S. trade deficit expanded dramatically, and contributed to the Savings and Loan crisis, as well as the stock market crash of 1987. In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation, Reagan described the new debt as the "greatest disappointment" of his presidency.
Strangely GOP strategists casting around for a scapegoat came up with this summary: “Theories of what went wrong this year are varied and often contradictory. Some say the party embraced conservatism too tightly, while others say the party has not been conservative enough. One popular argument among GOP partisans is that the party strayed from its principles of limited government; another is that it has lost its appeal to suburban voters over social issues and the environment. Many say Republicans could not escape the shadow of Iraq and George W. Bush, the least popular GOP chief executive since Richard M. Nixon.”
Exit polls put the number one concern of registered voters as the state of the economy and both campaigns have been thin on the specifics of what steps need to be taken. One of the priorities of governments both for policy and fiscal purposes is to provide and protect jobs. My feeling is that Treasury policy so far has been to put out bush fires and plug the holes. No cohesive plan for recovery has been advanced by the Bush administration and the ad hoc nature of battling the threatened tsunami of financial sector businesses is caught nicely by these comments from The Times:
Having been handed vast authority and almost no restrictions in the bailout law that Congress passed a month ago, a committee of five little-known government officials, aided by a bare-bones staff of 40, is picking winners and losers among thousands of banks, savings and loans, insurers and other institutions.
It is new and unfamiliar terrain for the officials, who are making monumental decisions — a form of industrial policy, some critics say — that contradict the free market philosophy they usually espouse. Predictably, the process is stirring alarm from Capitol Hill to Wall Street.
Among the problems, critics say, is that despite earlier promises of transparency, the process is shrouded in secrecy, its precise goals opaque. Treasury officials have refused to disclose their criteria for deciding which banks are healthy enough to get money — and which are too sick.
Industry sources said that banks, after filing a two-page application, are assigned a ranking from 1 to 5 — with 1 or 2 essentially guaranteeing that they are eligible, and 5 insuring they are not — by their regulator. The five officials then make what can be a life-or-death decision, with a thumbs-down generally interpreted to mean that a bank was not healthy enough to survive on its own.
“There is a real urgency to deploy this money quickly and effectively,” said James H. Lambright, who took a leave three weeks ago as the president of the Export-Import Bank of the United States to become the interim chief investment officer of the rescue effort.
A trim, self-confident former investment banker, Mr. Lambright, 38, is the chairman of a committee of relatively young officials — all are in their 30s or 40s — with backgrounds in law, banking or regulation. None of them could have expected this kind of responsibility; Mr. Lambright himself was a last-minute substitute after a previous appointee was kept in his old job.
With more than $80 billion left to spend, and hundreds of banks in line for it, the days, nights and weekends of the overworked, sleep-deprived Treasury staff members are a blur of meetings and conference calls, and constant pressure.
“This is a four-ring circus,” said Tim Ryan, a former director of the Office of Thrift Supervision, who helped run the savings and loan cleanup in the 1980s and 1990s.
Clearly nobody is at the wheel and the lack of direction has allowed musings of ever more Treasury bailouts. Reuters reports that the U.S. Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success.
In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co's GE Capital unit, CIT Group Inc and others.
Treasury may also scrap part of its early plan of purchasing assets through an auction process and instead purchase some distressed assets directly. “We are looking at many ideas for strengthening the financial system and for restoring lending," Treasury spokeswoman Jennifer Zuccarelli said. "We are weighing ideas and have made no decisions."
Without an overall plan and direction, ideas by junior Treasury officials are dangerous. The effects of the banking sector insolvencies have yet to work fully into real economies. Much more is yet to be revealed as Treasury tries to become everyone’s favourite uncle backstopping not just profligate banks but insurance companies and big business in the commercial paper market. Where it ends we know not!
But enough. We know what bought us to our present plight; I have chronicled what would be and what has arrived in a series of articles for Financial Sense stretching back to last year. As we now endure the hiatus as the Obama team plan the US and therefore the world recovery we can put a line under most of this episode and adopt these words from Australian Business:
They were old enough to have known better. Though this financial crisis is the biggest since the 1930s and involves new-fangled devices such as mortgage-backed securities, what brought the system to its knees was something we see in almost every cycle: people trying to keep the boom going and profits rising by resorting to excessive borrowing, with lenders dropping their credit standards for the same reason. In this case, matters were made worse by one regulator in particular, former US Federal Reserve chairman Alan Greenspan, who in his efforts to keep the share market happy and postpone the evil hour held US interest rates too low for too long, thereby encouraging profligate borrowing and lending.
Greenspan has admitted he "made a mistake in presuming that the self-interests of organisations, specifically banks, were such as that they were best capable of protecting their own shareholders and their equity in the firms".
That is, he assumed the players in financial markets would always act rationally, making markets self-regulating. And he assumed this despite the boundless evidence to the contrary over his long career. Talk about naive. The problem has been too many econocrats in the developed world with too much faith in the simple neoclassical model and its offspring, the efficient market hypothesis. We've had too many grown men happy to assume that all growth is good growth and all credit is good credit.
Greenspan failed to heed the mantra of his mentor Ayn Rand who asserted that rational businessmen always act in their own best interests. With few exceptions, those who played the game have walked away with the loot. That’s how the incentives were structured. Obama’s belief that American’s can not have a healthy Wall Street and a sick Main Street may be his most prescient observation.
Obama’s promise to bring Warren Buffett onto his advisory team is a game changer. Buffett’s overwhelming common sense quite apart from his fiscal savvy would have thwarted most of the scoundrels who have gamed the system to taxpayers regret.
For ordinary Americans, the credit crisis comes down to their 401k. With losses of 30%-40% in most portfolios, they no longer look for growth; they just want their losses made whole. Of course investors always assume that the high water mark is rightfully theirs and any derogation is loss. A generation of investors is just now coming to the realisation that after a decade of no gain in the Dow and S&P, the simple buy and hold strategy beloved of brokers and advisers who simply are incapable of offering more, may not be the retirement panacea they planned.
This may be the biggest challenge for the incoming team.
Markets
Almost all equity markets have found significant lows at or near their Danielcode black lines which have been published on Financial Sense for some time. The S&P index scrupulously avoided a weekly close below the which would have signaled much lower prices, and instead found support on an intra week basis at the next Daniel sequence number.
Charts
5 November 2008
Keen on Greenspan
When he ran the US Federal Reserve, Alan Greenspan received almost reverential treatment from Congress. Last week, he went from oracle to toast, as the House Committee on Oversight and Government Reform took him to task over the current crisis.
Greenspan not only conceded that he had made mistakes, but even ventured that his entire worldview may be wrong. In reply to Committee Chairman Waxman's proposition that his ideology "was not working", Greenspan replied:
That's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
The wellsprings of Greenspan's ideology were the Austrian economist Friedrich Hayek, and the Libertarian philosopher Ayn Rand-both of whom were champions of free market capitalism. Greenspan applied that ideology throughout his tenure as Chairman of the Fed, by opposing regulation, and by rejecting the claim that markets could make mistakes in pricing capital assets.
Greenspan is famous for parroting Robert Shiller's statement that the market was subject to "irrational exuberance". But he went on to deny that claim, and in fact to actively work against it. As Committee Chairman Waxman put it last week, "Over and over again, ideology trumped governance".
In fact, Greenspan's belief that markets couldn't misprice assets led to a conflict with his ideology. The man who believed that market always get it right, spent much of his tenure rescuing the stock market from its bouts of irrationality. In October 1987, just two months after he took over from Paul Volcker, the Market dropped 20 percent in one day. Greenspan's Fed did everything possible to prevent the crash going any further-with reassuring words, reductions in the reserve interest rate, easy provision of credit, and large scale purchases of commercial bonds.
Similar interventions occurred with the Savings and Loans crisis, the collapse of Long Term Capital Management, the Dotcom bust of 2000, and Enron's failure. Greenspan then retired from the Fed in February 2007-just under 20 years after he first sat in the chair, and six months before this Daddy of all financial crises began.
Greenspan's history of activist intervention, when his ideology should have led him to leave the markets to themselves, has clouded our capacity to judge just what went wrong. Was it really his free market ideology that failed, or did his faith in markets lead him to intervene-with all the powers of The State-when he should really have left the market to sort out its own woes?
My answer to both those questions is yes.
The ideology that the free market always works out the right price for everything-including assets-is manifestly false, as any reasoned appraisal of the 19th century trade cycle will attest. There was a major financial crisis every 20 or so years, when speculative excess led to overborrowing, a crisis, and ultimately a recovery. Hayek's ideology of markets that price everything with approximate accuracy is no match for Hyman Minsky's empirically-derived hypothesis that finance markets destabilise the real economy.
But the levels of overborrowing that were reached prior to Greenspan's activist Federal Reserve were nothing, compared to the level of debt that has run up on Greenspan's watch. The irrational exuberance of the Roaring Twenties was financed by private borrowing that peaked at 150 percent of GDP in 1930-and then blew out to 215 percent, as output and prices collapsed during the Great Depression.
Coincidentally, the US reached that same debt to GDP ratio in 1987-the year Greenspan first tried his interventionist hand at a rescue. But all that rescue really did was encourage the private sector to keep on borrowing. By the time Greenspan retired, that debt ratio was 280 percent, and it is now 290 percent.
We have now reached such an excessive level of indebtedness that there is no prospect for another debt surge to restore the illusion of prosperity. Instead now we have to de-lever: to reduce the excessive debt that was run up, not only under Greenspan but before him-ever since the mid-1960s, it has not been free market ingenuity that has driven America's economic performance, but rising debt.
As that painful process unfolds, Greenspan and his intellectual heroes-Hayek, Rand, and Friedman-should be tossed into the dustbin of history. We need to replace ideology-whether of the right or the left-with an empirically grounded understanding of the workings of a market economy, warts and all.
The new, realistic economics, will be built on the shoulders of Schumpeter, Keynes, and Hyman Minsky.
Greenspan not only conceded that he had made mistakes, but even ventured that his entire worldview may be wrong. In reply to Committee Chairman Waxman's proposition that his ideology "was not working", Greenspan replied:
That's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
The wellsprings of Greenspan's ideology were the Austrian economist Friedrich Hayek, and the Libertarian philosopher Ayn Rand-both of whom were champions of free market capitalism. Greenspan applied that ideology throughout his tenure as Chairman of the Fed, by opposing regulation, and by rejecting the claim that markets could make mistakes in pricing capital assets.
Greenspan is famous for parroting Robert Shiller's statement that the market was subject to "irrational exuberance". But he went on to deny that claim, and in fact to actively work against it. As Committee Chairman Waxman put it last week, "Over and over again, ideology trumped governance".
In fact, Greenspan's belief that markets couldn't misprice assets led to a conflict with his ideology. The man who believed that market always get it right, spent much of his tenure rescuing the stock market from its bouts of irrationality. In October 1987, just two months after he took over from Paul Volcker, the Market dropped 20 percent in one day. Greenspan's Fed did everything possible to prevent the crash going any further-with reassuring words, reductions in the reserve interest rate, easy provision of credit, and large scale purchases of commercial bonds.
Similar interventions occurred with the Savings and Loans crisis, the collapse of Long Term Capital Management, the Dotcom bust of 2000, and Enron's failure. Greenspan then retired from the Fed in February 2007-just under 20 years after he first sat in the chair, and six months before this Daddy of all financial crises began.
Greenspan's history of activist intervention, when his ideology should have led him to leave the markets to themselves, has clouded our capacity to judge just what went wrong. Was it really his free market ideology that failed, or did his faith in markets lead him to intervene-with all the powers of The State-when he should really have left the market to sort out its own woes?
My answer to both those questions is yes.
The ideology that the free market always works out the right price for everything-including assets-is manifestly false, as any reasoned appraisal of the 19th century trade cycle will attest. There was a major financial crisis every 20 or so years, when speculative excess led to overborrowing, a crisis, and ultimately a recovery. Hayek's ideology of markets that price everything with approximate accuracy is no match for Hyman Minsky's empirically-derived hypothesis that finance markets destabilise the real economy.
But the levels of overborrowing that were reached prior to Greenspan's activist Federal Reserve were nothing, compared to the level of debt that has run up on Greenspan's watch. The irrational exuberance of the Roaring Twenties was financed by private borrowing that peaked at 150 percent of GDP in 1930-and then blew out to 215 percent, as output and prices collapsed during the Great Depression.
Coincidentally, the US reached that same debt to GDP ratio in 1987-the year Greenspan first tried his interventionist hand at a rescue. But all that rescue really did was encourage the private sector to keep on borrowing. By the time Greenspan retired, that debt ratio was 280 percent, and it is now 290 percent.
We have now reached such an excessive level of indebtedness that there is no prospect for another debt surge to restore the illusion of prosperity. Instead now we have to de-lever: to reduce the excessive debt that was run up, not only under Greenspan but before him-ever since the mid-1960s, it has not been free market ingenuity that has driven America's economic performance, but rising debt.
As that painful process unfolds, Greenspan and his intellectual heroes-Hayek, Rand, and Friedman-should be tossed into the dustbin of history. We need to replace ideology-whether of the right or the left-with an empirically grounded understanding of the workings of a market economy, warts and all.
The new, realistic economics, will be built on the shoulders of Schumpeter, Keynes, and Hyman Minsky.
Final Projection: Obama 349, McCain 189
It's Tuesday, November 4th, 2008, Election Day in America. The last polls have straggled in, and show little sign of mercy for John McCain. Barack Obama appears poised for a decisive electoral victory.
Our model projects that Obama will win all states won by John Kerry in 2004, in addition to Iowa, New Mexico, Colorado, Virginia, Nevada, Florida and North Carolina, while narrowly losing Missouri and Indiana. These states total 353 electoral votes. Our official projection, which looks at these outcomes probabilistically -- for instance, assigns North Carolina's 15 electoral votes to Obama 59 percent of the time -- comes up with an incrementally more conservative projection of 348.6 electoral votes.
We also project Obama to win the popular vote by 6.1 points; his lead is slightly larger than that in the polls now, but our model accounts for the fact that candidates with large leads in the polls typically underperform their numbers by a small margin on Election Day.
This race appears to have stabilized as of about the time of the second debate in Nashville, Tennessee on October 8th. Since that time, Obama has maintained a national lead of between 6 and 8 points, with little discernible momentum for either candidate. Just as noteworthy is the fact that the number of undecided voters is now very small, representing not much more than 2-3 percent of the electorate. Undecided voters who committed over the past several weeks appear to have broken roughly equally between the two candidates.
Our model forecasts a small third-party vote of between 1 and 2 points total; it is not likely to be a decisive factor in this election except perhaps in Montana, where Ron Paul is on the ballot and may garner 4-5 percent of the vote.
Any forecasting system is only as good as its inputs, and so if the polls are systematically wrong, our projection is subject to error as well. Nevertheless, even as we account for other cycles in which the polling numbers materially missed the national popular vote margin (such as in 1980), a McCain win appears highly unlikely. It is also possible, of course, that the polls are shy in Obama's direction rather than McCain's, in which case a double-digit win is possible.
Nor does McCain appear to have much chance of winning the Electoral College while losing the popular vote; in fact, our model thinks that Obama is slightly more likely to do so. McCain diverted many of his resources to Pennsylvania, a state where he narrowed Obama's margins somewhat, but which our model concludes that Obama is now virtually certain to win. This may have allowed Obama to consolidate his margins in other battleground states, particularly Western states like Colorado and Nevada to which McCain has devoted little recent attention.
Thank you for placing your trust in FiveThirtyEight.com and the New Republic over the course of the past several months. I hope that you will join me on the web tonight as well as on HDNet, where I'll be providing election coverage to Dan Rather's team.
Our model projects that Obama will win all states won by John Kerry in 2004, in addition to Iowa, New Mexico, Colorado, Virginia, Nevada, Florida and North Carolina, while narrowly losing Missouri and Indiana. These states total 353 electoral votes. Our official projection, which looks at these outcomes probabilistically -- for instance, assigns North Carolina's 15 electoral votes to Obama 59 percent of the time -- comes up with an incrementally more conservative projection of 348.6 electoral votes.
We also project Obama to win the popular vote by 6.1 points; his lead is slightly larger than that in the polls now, but our model accounts for the fact that candidates with large leads in the polls typically underperform their numbers by a small margin on Election Day.
This race appears to have stabilized as of about the time of the second debate in Nashville, Tennessee on October 8th. Since that time, Obama has maintained a national lead of between 6 and 8 points, with little discernible momentum for either candidate. Just as noteworthy is the fact that the number of undecided voters is now very small, representing not much more than 2-3 percent of the electorate. Undecided voters who committed over the past several weeks appear to have broken roughly equally between the two candidates.
Our model forecasts a small third-party vote of between 1 and 2 points total; it is not likely to be a decisive factor in this election except perhaps in Montana, where Ron Paul is on the ballot and may garner 4-5 percent of the vote.
Any forecasting system is only as good as its inputs, and so if the polls are systematically wrong, our projection is subject to error as well. Nevertheless, even as we account for other cycles in which the polling numbers materially missed the national popular vote margin (such as in 1980), a McCain win appears highly unlikely. It is also possible, of course, that the polls are shy in Obama's direction rather than McCain's, in which case a double-digit win is possible.
Nor does McCain appear to have much chance of winning the Electoral College while losing the popular vote; in fact, our model thinks that Obama is slightly more likely to do so. McCain diverted many of his resources to Pennsylvania, a state where he narrowed Obama's margins somewhat, but which our model concludes that Obama is now virtually certain to win. This may have allowed Obama to consolidate his margins in other battleground states, particularly Western states like Colorado and Nevada to which McCain has devoted little recent attention.
Thank you for placing your trust in FiveThirtyEight.com and the New Republic over the course of the past several months. I hope that you will join me on the web tonight as well as on HDNet, where I'll be providing election coverage to Dan Rather's team.
Whither the US dollar?
This dramatic growth in the monetary base has not yet been inflationary since the velocity of money may have recently fallen due to the rise of deflationary expectations. Some will argue that liquidity being injected into the bank system will be drained subsequently by the Fed via open market operations. In principle, this could abate the ultimate inflationary impact of the bailout operations. However, currently this liquidity cannot be removed without collapsing the banks and worsening the recession. Since bringing bank balance sheets back to health is probably a multi-year process, this argument does not seem to stand.
We currently stand on Occam’s razor, staring into a deflationary abyss on one side and incipient inflation on the other. The Fed and US Treasury have shown their policy hand, revealing a strong preference to avert deflation. No doubt this reflects a broad political consensus that prospects of inflation are to be preferred to deflation, if those are the two choices. Claims that these massive debt levels can be financed and ultimately retired by future economic growth, taxation and lower government spending ring hollow.
Whilst the velocity of money has been quite stable in the past several years and perhaps even fallen most recently, this will not always be the case. As spring surely follows winter, it can be relied upon that velocity will accelerate in the future. Once it does, it will combine with this huge increase in the monetary base to boost liquidity and elevate price inflation.
There also remains an open question whether foreign investors will continue to be willing to accumulate additional US dollar assets. A strong argument could be made that foreign investors are already sated with US dollar debt. Foreign holdings of US Treasury and Agency debt stands around $4.1 trillion, representing approximately 36% of publicly held issuance. The concept of Bretton Woods II -- wherein foreign investors were the lender of last resort extending vendor financing for their exports sold to the US (consumer) -- was predicated on the stability of sustained household consumption. With the US household suffering from declining home prices, falling real wages, job loss and collapsing confidence, the American consumer will take years to recover their former spendthrift ways. With this missing critical link in the global relationship, it is suspect whether foreign governments will be willing to significantly increase their holdings of US dollar debt, if there is not the quid pro quo of increased export receipts from further US consumer spending.
Any meaningful pushback from foreign investors on buying additional US Treasury debt or US dollar denominated assets will imply either a steeper yield curve or monetization of new Treasury debt issuance. Neither outcome is desirable. A steeper yield curve implies declining Treasury bond prices and, by raising interest rates, also creates a headwind for US equities. In this scenario, it is hard to imagine a strong US dollar in the face of weakness in both US stocks and bonds.
In the second scenario, if investor demand is inadequate to absorb new issuance, then the Federal Reserve will have to hold a portion of new debt issuance by the US Treasury on their balance sheet. This is sheer monetization of the debt and highly inflationary since it is equivalent to simply printing money. Such a scenario would quickly lead to higher inflation and a weaker US dollar.
Conclusions
The tsunami of oncoming US Treasury debt issuance holds the real potential to crowd-out private sector issuance both here and abroad, steepen the US Treasury yield curve, put downward pressure on the real economy, undermine the US’ AAA rating, weaken the US dollar, and if the Treasury is required to resort to monetizing new debt issuance by “selling” it to the Fed due to pushback from foreign investors, it could even threaten the Bretton Woods’ US dollar reserve status and the Greenback’s role of denomination currency for commodities: a very high price to pay for a decade-long party on Wall Street.
So it seems that, despite the violent rally in the US dollar over the past three months, it may not be long lived. Much will depend on the capacity of foreign investors to offer safe harbour for new Treasury issuance and/or the likelihood of a policy mix set in Washington, DC that runs tight money and a fiscal surplus. When was the last time that occurred?
We currently stand on Occam’s razor, staring into a deflationary abyss on one side and incipient inflation on the other. The Fed and US Treasury have shown their policy hand, revealing a strong preference to avert deflation. No doubt this reflects a broad political consensus that prospects of inflation are to be preferred to deflation, if those are the two choices. Claims that these massive debt levels can be financed and ultimately retired by future economic growth, taxation and lower government spending ring hollow.
Whilst the velocity of money has been quite stable in the past several years and perhaps even fallen most recently, this will not always be the case. As spring surely follows winter, it can be relied upon that velocity will accelerate in the future. Once it does, it will combine with this huge increase in the monetary base to boost liquidity and elevate price inflation.
There also remains an open question whether foreign investors will continue to be willing to accumulate additional US dollar assets. A strong argument could be made that foreign investors are already sated with US dollar debt. Foreign holdings of US Treasury and Agency debt stands around $4.1 trillion, representing approximately 36% of publicly held issuance. The concept of Bretton Woods II -- wherein foreign investors were the lender of last resort extending vendor financing for their exports sold to the US (consumer) -- was predicated on the stability of sustained household consumption. With the US household suffering from declining home prices, falling real wages, job loss and collapsing confidence, the American consumer will take years to recover their former spendthrift ways. With this missing critical link in the global relationship, it is suspect whether foreign governments will be willing to significantly increase their holdings of US dollar debt, if there is not the quid pro quo of increased export receipts from further US consumer spending.
Any meaningful pushback from foreign investors on buying additional US Treasury debt or US dollar denominated assets will imply either a steeper yield curve or monetization of new Treasury debt issuance. Neither outcome is desirable. A steeper yield curve implies declining Treasury bond prices and, by raising interest rates, also creates a headwind for US equities. In this scenario, it is hard to imagine a strong US dollar in the face of weakness in both US stocks and bonds.
In the second scenario, if investor demand is inadequate to absorb new issuance, then the Federal Reserve will have to hold a portion of new debt issuance by the US Treasury on their balance sheet. This is sheer monetization of the debt and highly inflationary since it is equivalent to simply printing money. Such a scenario would quickly lead to higher inflation and a weaker US dollar.
Conclusions
The tsunami of oncoming US Treasury debt issuance holds the real potential to crowd-out private sector issuance both here and abroad, steepen the US Treasury yield curve, put downward pressure on the real economy, undermine the US’ AAA rating, weaken the US dollar, and if the Treasury is required to resort to monetizing new debt issuance by “selling” it to the Fed due to pushback from foreign investors, it could even threaten the Bretton Woods’ US dollar reserve status and the Greenback’s role of denomination currency for commodities: a very high price to pay for a decade-long party on Wall Street.
So it seems that, despite the violent rally in the US dollar over the past three months, it may not be long lived. Much will depend on the capacity of foreign investors to offer safe harbour for new Treasury issuance and/or the likelihood of a policy mix set in Washington, DC that runs tight money and a fiscal surplus. When was the last time that occurred?
4 November 2008
Paul Craig Roberts: The world tires of dollar hegemony
By Paul Craig Roberts
Creators Syndicate, Los Angeles
Monday, November 3, 2008
http://www.creators.com/opinion/paul-craig-roberts.html?columnsName=pcr
What explains the paradox of the dollar's sharp rise in value against other currencies (except the Japanese yen) despite disproportionate U.S. exposure to the worst financial crisis since the Great Depression?
The answer does not lie in improved fundamentals for the U.S. economy or better prospects for the dollar to retain its reserve currency role.
The rise in the dollar's exchange value is due to two factors.
One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for U.S. Treasury bills would boost the U.S. dollar.
The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of 0.5 percent, converted the yen to other currencies and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.
The financial crisis has reversed this process. The toxic American derivatives were marketed worldwide by Wall Street. They have endangered the balance sheets and solvency of financial institutions throughout the world, including national governments, such as Iceland and Hungary. Banks and governments that invested in the troubled American financial instruments found their own debt instruments in jeopardy.
Those who used yen loans to purchase, for example, debt instruments from European banks or Icelandic bonds faced potentially catastrophic losses. Investors and speculators sold their higher-yielding financial instruments in a scramble for dollars and yen in order to pay off their Japanese loans. This drove up the values of the yen and the U.S. dollar, the reserve currency that can be used to repay debts, and drove down the values of other currencies.
The dollar's rise is temporary, and its prospects are bleak. The U.S. trade deficit will lessen due to less consumer spending during recession, but it will remain the largest in the world and one that the United States cannot close by exporting more. The way the U.S. trade deficit is financed is by foreigners acquiring more dollar assets, with which their portfolios are already heavily weighted.
The U.S. government's budget deficit is large and growing, adding hundreds of billions of dollars more to an already large national debt. As investors flee equities into U.S. government bills, the market for U.S. Treasuries will temporarily depend less on foreign governments. Nevertheless, the burden on foreigners and on world savings of having to finance American consumption, the U.S. government's wars and military budget, and the U.S. financial bailout is increasingly resented.
This resentment, combined with the harm done to America's reputation by the financial crisis, has led to numerous calls for a new financial order in which the United States plays a substantially lesser role. "Overcoming the financial crisis" are code words for the rest of the world's intent to overthrow U.S. financial hegemony.
Brazil, Russia, India, and China have formed a new group to coordinate their interests at the November financial summit in Washington.
On Oct. 28, RIA Novosti reported that Russian Prime Minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. Chinese Prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.
Europe has also served notice that it intends to exert a new leadership role. Four members of the Group of Seven industrial nations, France, Britain, Germany, and Italy, used the financial crisis to call for sweeping reforms of the world financial system. Jose Manual Barroso, president of the European Commission, said that a new world financial system is possible only "if Europe has a leadership role."
Russian President Dmitry Medvedev said that the "economic egoism" of America's "unipolar vision of the world" is a "dead-end policy."
China's massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as "the rightful and anointed convertible currency of the world."
Normally, the Chinese are very circumspect in what they say, but on Oct. 24 Reuters reported that the People's Daily, the official government newspaper, in a front-page commentary accused the United States of plundering "global wealth by exploiting the dollar's dominance." To correct this unacceptable situation, the commentary called for Asian and European countries to "banish the U.S. dollar from their direct trade relations, relying only on their own currencies." And this step, said the commentary, is merely a start in overthrowing dollar dominance.
The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication Chinastates.com, recently asked, "Why should China help the U.S. to issue debt without end in the belief that the national credit of the U.S. can expand without limit?"
Zhou Jiangong's solution to American excesses is for China to take over Wall Street.
China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America's financial reputation while exploiting the world in pursuit of multimillion-dollar bonuses.
-----
Paul Craig Roberts is an economist and syndicated columnist who was assistant treasury secretary for President Reagan and an editor and columnist for The Wall Street Journal and Business Week.
Creators Syndicate, Los Angeles
Monday, November 3, 2008
http://www.creators.com/opinion/paul-craig-roberts.html?columnsName=pcr
What explains the paradox of the dollar's sharp rise in value against other currencies (except the Japanese yen) despite disproportionate U.S. exposure to the worst financial crisis since the Great Depression?
The answer does not lie in improved fundamentals for the U.S. economy or better prospects for the dollar to retain its reserve currency role.
The rise in the dollar's exchange value is due to two factors.
One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for U.S. Treasury bills would boost the U.S. dollar.
The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of 0.5 percent, converted the yen to other currencies and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.
The financial crisis has reversed this process. The toxic American derivatives were marketed worldwide by Wall Street. They have endangered the balance sheets and solvency of financial institutions throughout the world, including national governments, such as Iceland and Hungary. Banks and governments that invested in the troubled American financial instruments found their own debt instruments in jeopardy.
Those who used yen loans to purchase, for example, debt instruments from European banks or Icelandic bonds faced potentially catastrophic losses. Investors and speculators sold their higher-yielding financial instruments in a scramble for dollars and yen in order to pay off their Japanese loans. This drove up the values of the yen and the U.S. dollar, the reserve currency that can be used to repay debts, and drove down the values of other currencies.
The dollar's rise is temporary, and its prospects are bleak. The U.S. trade deficit will lessen due to less consumer spending during recession, but it will remain the largest in the world and one that the United States cannot close by exporting more. The way the U.S. trade deficit is financed is by foreigners acquiring more dollar assets, with which their portfolios are already heavily weighted.
The U.S. government's budget deficit is large and growing, adding hundreds of billions of dollars more to an already large national debt. As investors flee equities into U.S. government bills, the market for U.S. Treasuries will temporarily depend less on foreign governments. Nevertheless, the burden on foreigners and on world savings of having to finance American consumption, the U.S. government's wars and military budget, and the U.S. financial bailout is increasingly resented.
This resentment, combined with the harm done to America's reputation by the financial crisis, has led to numerous calls for a new financial order in which the United States plays a substantially lesser role. "Overcoming the financial crisis" are code words for the rest of the world's intent to overthrow U.S. financial hegemony.
Brazil, Russia, India, and China have formed a new group to coordinate their interests at the November financial summit in Washington.
On Oct. 28, RIA Novosti reported that Russian Prime Minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. Chinese Prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.
Europe has also served notice that it intends to exert a new leadership role. Four members of the Group of Seven industrial nations, France, Britain, Germany, and Italy, used the financial crisis to call for sweeping reforms of the world financial system. Jose Manual Barroso, president of the European Commission, said that a new world financial system is possible only "if Europe has a leadership role."
Russian President Dmitry Medvedev said that the "economic egoism" of America's "unipolar vision of the world" is a "dead-end policy."
China's massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as "the rightful and anointed convertible currency of the world."
Normally, the Chinese are very circumspect in what they say, but on Oct. 24 Reuters reported that the People's Daily, the official government newspaper, in a front-page commentary accused the United States of plundering "global wealth by exploiting the dollar's dominance." To correct this unacceptable situation, the commentary called for Asian and European countries to "banish the U.S. dollar from their direct trade relations, relying only on their own currencies." And this step, said the commentary, is merely a start in overthrowing dollar dominance.
The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication Chinastates.com, recently asked, "Why should China help the U.S. to issue debt without end in the belief that the national credit of the U.S. can expand without limit?"
Zhou Jiangong's solution to American excesses is for China to take over Wall Street.
China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America's financial reputation while exploiting the world in pursuit of multimillion-dollar bonuses.
-----
Paul Craig Roberts is an economist and syndicated columnist who was assistant treasury secretary for President Reagan and an editor and columnist for The Wall Street Journal and Business Week.
Why the recent violent gyrations?
Is "synthesized unwinding of yen-carry trades" the answer? (October 31, 2008)
The recent rapid fire giant gyrations of US stock markets are certain to make observers dizzy and disoriented. Investors large and small are watching helplessly the sever pounding on their portfolios with intermittent short reliefs of the pressure. Most investors are frozen on the track afraid of making any move. Readers of this website must be eager to know why such wild gyrations and when the bottom will be reached. We certainly share the same desire and are constantly looking for the answer. Our findings will be reported on this new series of discussion titled “US Stock Market” until the bottom of the bear market is reached. The first installation of this series should have been Comment 61 though it did not carry the title of "US Stock Market (1)". That is the reason why this comment carries the title "US Stock Market (2)".
Major financial media do not provide much help in our quest to entangle the mystery of the stock market as will be discussed later. We should understand that major financial media are by nature mouth pieces of Wall Street, but not objective analysts of the actual market. Wall Street makes money when investors are euphoric and enthusiastically buy stocks whereas rainy days of Wall Street descend when investors large and small are frozen from fear like in the present situation. That is why major financial media are always biased toward bullish sentiments and urge investors to buy stocks. To make matters worse many on Wall Street are Euro-centric. For example, when they talk about strong or weak Dollar, they always mean strong or weak Dollar versus Euro and nothing else. When they encounter something that they do not have an answer, they always point their finger toward Europe for good or bad, though the slow moving Europe has failed to play any leading role throughout the drama of repeatedly forming and bursting bubbles under this ad hoc globalization scheme, which has been pushed strongly by all the US administrations since the Reagan era as discussed in article 10. Besides the Euro-centric crowd there is also a China-centric crowd that forms the core of so called “decoupling theorists”. This China-centric crowd wishes that China will rise like the superman to combat the dragon of global financial loss, that may well run into tens of trillions of dollars, by wielding its meager 1.8 trillion dollars of foreign currency reserve. In the valley between the Euro-centric mirage and China-centric fantasy lies the key, that is, Japanese Yen, to our quest. Astute readers have probably noticed already that in the recent market gyrations US stock prices as a whole are closely connected with the movement of Yen-Dollar exchange rate. When US stocks fall, Dollar falls against Yen, and when US stocks rise, Dollar rises versus Yen. The Wall Street Journal online and Bloomberg.com carried the simplistic view that when US stocks rise Dollar will go up and when US stocks fall Dollar will fall. Most guests on CNBC TV also expressed the same simplistic view, but a few mentioned the yen-carry trades as the culprit. The simplistic view is flatly wrong as will be discussed in the following paragraph. Even the view of yen-carry trade is not correct in the exact sense, though we ourselves have committed similar sin in Comment 61 by casually talking about yen-carry trades. The case of yen-carry trades will be analyzed in detail after we deal with the simplistic view on major financial media first.
The logic behind the simplistic view is as follows. When US stocks fall, Japanese investors are scared and dump their holdings. Those Japanese investors will convert the dollars obtained from dumping of their stock holdings into Yen and run back to Japan. When US stocks rise, those Japanese investors will rush back into US market by selling their Yen for Dollar and thus creating the tight correlation between US stock prices and Yen-Dollar exchange rate. If this argument is true then it should also hold for European investors, and Euro should rise and fall against Dollar as US stocks rise and fall respectively. However, actual data show that when US stock prices fall and Dollar declines big against Yen, Euro always fall sharply against Dollar but not to rise as the simplistic view should have claimed. When US stocks rise and Dollar strengthens vs. Yen, then Euro becomes stronger against Dollar, again just opposite from the expectations of the simplistic view. This evidence alone should be already enough to dispel the simplistic view. Furthermore we can analyze the amount of Dollar in the hands of Japanese nationals to show the invalidity of the simplistic view. There are around 2 trillion dollars that have flowed into the hands of Japanese from the persistent trade surplus of Japan. About half of those dollars are in the hand of Japanese Government and are invested in short-term US treasuries. A large chunk of the remaining dollars had flown through the hands of large Japanese exporters but have been invested in the factories in US, China and around the world. Japanese life insurance companies and some Japanese individuals are also large dollar holders. This group are after higher yields in dollar denominated debt instruments since in Japan the yields are near zero since the middle of 1995. Most part of the remaining dollars are held by large Japanese trading houses and banks in the form of liquid assets. Japan is also not known as a hub for hedge funds. The actual Japanese money that jumps in and out of US stock markets cannot not be so large as to be able to cause giant swings in Yen-Dollar exchange rate. If the holders of the simplistic view are true to themselves, they must believe that the Japanese players in US stock market hold such a large sum of dollars as to be able to cause wild swings in Yen-Dollar exchange rates, and then they must conclude also that this huge sum of Japanese money is causing the wild gyrations in US stock markets too as it moves in and out of US markets. In that sense we should call the holders of the simplistic view the Japan-centric crowd besides Euro-centric and China-centric crowds.
Now let us turn our attention to yen-carry trades. In order to talk about the issues surrounding yen-carry trades, we need to investigate how yen-carry trades actually work. Let us pretend to be a hedge fund conducting yen-carry trades. Suppose the Yen-Dollar exchange rate is 100 Yen/Dollar, and we borrow from a multinational bank one billion dollar worth of Japanese Yen. We dump the Yen for Dollar and use this one billion dollars to buy US stocks. Now suppose Dollar drops to 95 Yen/Dollar. Irrespective of the movement of US stocks, we are already suffering 5% loss on the currency front since we have borrowed cheap Yen but now we need to repay with more expansive Yen. Thus yen-carry trades are very sensitive to the level of Yen-Dollar exchange rate. Any time when Dollar falls below the level where yen-carry trades were installed, those yen-carry trades will be unwound by selling US stocks, converting Dollar into Yen and repaying the Yen loan. The unwinding of a large amount of yen-carry trades will cause Dollar to drop further versus Yen as well as a sinking spell of US stocks. The major players of yen-carry trades are American and European hedge funds, not Japanese entities. Until very recently Dollar has been trading above the line of 105 Yen/Dollar most of the time since the middle of 1995. Majority of yen-carry trades were installed above this 105 Yen/Dollar line. When Dollar fell below 105 Yen/Dollar line in late September, the massive unwinding of yen-carry trades must have occurred and pushed both Dollar and US stocks sharply lower. By early October most of the existing yen-carry trades should have been unwound already. The wild gyrations of both US stocks and Yen-Dollar exchange rate since Oct. 7, that is our concern, cannot be due to the unwinding of plain vanilla yen-carry trades since not much of such ordinary yen-carry trades still existed by that time. We suspect that a new kind of strategy, called “synthesized unwinding of yen-carry trades” by us, is the source of havoc since Oct. 7. The strategy will be discussed below in detail.
The unwinding of a yen-carry trade can be abstracted into two steps, they are, the sell of US stocks and the buy of Yen. These two steps can be synthesized by selling stock index futures and buying Yen futures. The new strategy is to conduct those two trades almost simultaneously to simulate an unwinding of a yen-carry trade. There is no need to have a pre-installed yen-carry trade here. The next question is what are the advantages and disadvantages of such a trade. The aim of this kind of trade is to anticipate a falling stock market and profit from the short side of stock index futures. The buy of Yen futures is aimed to push Dollar sharply lower in order to panic Japanese entities that hold dollars and induce them to sell those dollars for Yen and thus to push Dollar down further. If the attempt is successful, this strategy will be a win-win trade. However, if the market goes against the trade, it will be a lose-lose disaster. Under the current unsettled financial market condition and as deleverage has become the order of the day, even most venturesome hedge funds will be hesitant to engage in such high risky gambling unless it is absolutely necessary. The natural candidate for this kind of strategy are the already distressed hedge funds. Quite a few hedge funds have jumped back to US stock market too early and have sustained heavy losses caught in the subsequent down draft of the market. Their unhappy investors are expected to withdraw substantial sums from those hedge funds at the next quarterly redemption date, November 15. The only way for those distressed hedge funds to raise enough cash to meet the expected onslaught of redemptions is to dump their stock holdings. They know very well that their large scale dumping will send the stock market sharply lower and will cause them more losses. Thus they will try the strategy of synthesized unwinding of yen-carry trades. Those distressed hedge funds will accumulate short positions of stock index futures prior to their destined date of dumping their stocks at every chance when stock prices jump temporarily. When their dumping of actual stocks starts, they will buy large number of Yen future contracts at the same time. This double punches will send both US stocks and Dollar fall like an avalanche. The awesome shock wave of the avalanche will panic substantial number of investors frozen in the stock market from fear and causes them to dump their holdings as well. The same argument applies to the dollars in the hands of various Japanese entities as well. The joining of those dumb money will turn the avalanche into a landslide. The short sell of stock index futures will protect instigating hedge funds until the end of their stock dumping by canceling out the losses from dumping of their stocks whereas during the down leg of the land slide, those short positions will actually generate net profits for the hedge funds. Same thing can be said for their long positions in Yen futures. By this win-win game the distressed hedge funds hope to net some profits to cancel out a part of their prior losses. The sharp down turn of both stocks and Dollar from the stretch of Oct. 20 to Oct. 27 probably was the result of such strategy of synthesized unwinding of yen-carry trades.
There are two factors that will stop the landslide triggered by synthesized unwinding of yen-carry trades. The first factor is the threat of intervention by Japanese Government. Japan is determined to preserve its remaining export industry so the sharply higher Yen vs. Dollar becomes a severe threat. However, Japanese Government has reasons to be hesitant in the currency market intervention. The first is the worry about international condemnation at the time G7 is repeatedly criticizing China for its currency market manipulation to prevent rapid appreciation of Chinese Yuan. However, Facing the relent less pounding on Dollar vs. Yen, G7 gave in and issued a joint communique expressing concern about rapid movements of Yen-Dollar exchange rate. This communique is a de facto approval of Japanese Government to intervene in the currency market in order to stop further fall of Dollar vs. Yen. Another hesitation of Japanese Government about the currency market intervention must be the cost of intervention. In the period from the fall of 2003 to the spring of 2004, Japanese Government bought up 400 billion dollars to prevent Dollar to fall through the line of 100 Yen/Dollar. As has been mentioned in Comment 61, Japanese Government needs to buy up 1 trillion dollars in order to keep the rising Yen checked at the level of 100 Yen/Dollar. That probably was the reason why Japanese Government did nothing when Dollar fell through 100 Yen/Dollar and only signaled its intention to intervene when Dollar fell close to 90 Yen/Dollar on Oct. 27. The second factor that stopped the land slide is the installation of new yen-carry trades. As discussed before, yen-carry trades need to be installed at lowest possible Dollar value vs. Yen. With Japanese Government signaling that 90 Yen/Dollar is its bottom line, the Yen-Dollar level close to 90 Yen/Dollar becomes the ideal point to install new yen-carry trades and a large wave of yen-carry trades probably did be installed. Sensing the turn of the tide, the distressed hedge funds that instigated the land slide using the strategy of synthesized unwinding of yen-carry trades certainly will not stand by idly to see their hard earned profits melting away. They will join the foray by closing out their short positions in stock index futures and selling out their Yen futures as fast as they can. Thus the joined forces of the installation of new yen-carry trades and the unwinding of those “synthesized unwinding of yen-carry trades” sent both the US stock market and Dollar to a rapid ascend as witnessed on Oct. 28. Three days after the giant surge of Oct. 28, on Oct. 31 when the writing of this comment is in progress, the momentum of that giant surge is still felt throughout the markets.
Looking ahead, we should note that yen-carry trades are quick to be installed and quick to be unwound. If those newly installed yen-carry trades decide to take profit and unwind, both US stocks and Dollar will suddenly tumble again. Also not sure is whether the needs of distressed hedge funds to dump their stock holdings has been exhausted. We better prepare to see such wild gyrations to continue for a while. We are not sure that the pattern of the wild gyrations in recent weeks is a bottoming out pattern. Before we can be certain we will consider the giant pattern on the chart just as a huge consolidation pattern. It means there are substantial chance the stock prices will break downward out of the consolidation pattern and start to search for a new bottom.
The recent rapid fire giant gyrations of US stock markets are certain to make observers dizzy and disoriented. Investors large and small are watching helplessly the sever pounding on their portfolios with intermittent short reliefs of the pressure. Most investors are frozen on the track afraid of making any move. Readers of this website must be eager to know why such wild gyrations and when the bottom will be reached. We certainly share the same desire and are constantly looking for the answer. Our findings will be reported on this new series of discussion titled “US Stock Market” until the bottom of the bear market is reached. The first installation of this series should have been Comment 61 though it did not carry the title of "US Stock Market (1)". That is the reason why this comment carries the title "US Stock Market (2)".
Major financial media do not provide much help in our quest to entangle the mystery of the stock market as will be discussed later. We should understand that major financial media are by nature mouth pieces of Wall Street, but not objective analysts of the actual market. Wall Street makes money when investors are euphoric and enthusiastically buy stocks whereas rainy days of Wall Street descend when investors large and small are frozen from fear like in the present situation. That is why major financial media are always biased toward bullish sentiments and urge investors to buy stocks. To make matters worse many on Wall Street are Euro-centric. For example, when they talk about strong or weak Dollar, they always mean strong or weak Dollar versus Euro and nothing else. When they encounter something that they do not have an answer, they always point their finger toward Europe for good or bad, though the slow moving Europe has failed to play any leading role throughout the drama of repeatedly forming and bursting bubbles under this ad hoc globalization scheme, which has been pushed strongly by all the US administrations since the Reagan era as discussed in article 10. Besides the Euro-centric crowd there is also a China-centric crowd that forms the core of so called “decoupling theorists”. This China-centric crowd wishes that China will rise like the superman to combat the dragon of global financial loss, that may well run into tens of trillions of dollars, by wielding its meager 1.8 trillion dollars of foreign currency reserve. In the valley between the Euro-centric mirage and China-centric fantasy lies the key, that is, Japanese Yen, to our quest. Astute readers have probably noticed already that in the recent market gyrations US stock prices as a whole are closely connected with the movement of Yen-Dollar exchange rate. When US stocks fall, Dollar falls against Yen, and when US stocks rise, Dollar rises versus Yen. The Wall Street Journal online and Bloomberg.com carried the simplistic view that when US stocks rise Dollar will go up and when US stocks fall Dollar will fall. Most guests on CNBC TV also expressed the same simplistic view, but a few mentioned the yen-carry trades as the culprit. The simplistic view is flatly wrong as will be discussed in the following paragraph. Even the view of yen-carry trade is not correct in the exact sense, though we ourselves have committed similar sin in Comment 61 by casually talking about yen-carry trades. The case of yen-carry trades will be analyzed in detail after we deal with the simplistic view on major financial media first.
The logic behind the simplistic view is as follows. When US stocks fall, Japanese investors are scared and dump their holdings. Those Japanese investors will convert the dollars obtained from dumping of their stock holdings into Yen and run back to Japan. When US stocks rise, those Japanese investors will rush back into US market by selling their Yen for Dollar and thus creating the tight correlation between US stock prices and Yen-Dollar exchange rate. If this argument is true then it should also hold for European investors, and Euro should rise and fall against Dollar as US stocks rise and fall respectively. However, actual data show that when US stock prices fall and Dollar declines big against Yen, Euro always fall sharply against Dollar but not to rise as the simplistic view should have claimed. When US stocks rise and Dollar strengthens vs. Yen, then Euro becomes stronger against Dollar, again just opposite from the expectations of the simplistic view. This evidence alone should be already enough to dispel the simplistic view. Furthermore we can analyze the amount of Dollar in the hands of Japanese nationals to show the invalidity of the simplistic view. There are around 2 trillion dollars that have flowed into the hands of Japanese from the persistent trade surplus of Japan. About half of those dollars are in the hand of Japanese Government and are invested in short-term US treasuries. A large chunk of the remaining dollars had flown through the hands of large Japanese exporters but have been invested in the factories in US, China and around the world. Japanese life insurance companies and some Japanese individuals are also large dollar holders. This group are after higher yields in dollar denominated debt instruments since in Japan the yields are near zero since the middle of 1995. Most part of the remaining dollars are held by large Japanese trading houses and banks in the form of liquid assets. Japan is also not known as a hub for hedge funds. The actual Japanese money that jumps in and out of US stock markets cannot not be so large as to be able to cause giant swings in Yen-Dollar exchange rate. If the holders of the simplistic view are true to themselves, they must believe that the Japanese players in US stock market hold such a large sum of dollars as to be able to cause wild swings in Yen-Dollar exchange rates, and then they must conclude also that this huge sum of Japanese money is causing the wild gyrations in US stock markets too as it moves in and out of US markets. In that sense we should call the holders of the simplistic view the Japan-centric crowd besides Euro-centric and China-centric crowds.
Now let us turn our attention to yen-carry trades. In order to talk about the issues surrounding yen-carry trades, we need to investigate how yen-carry trades actually work. Let us pretend to be a hedge fund conducting yen-carry trades. Suppose the Yen-Dollar exchange rate is 100 Yen/Dollar, and we borrow from a multinational bank one billion dollar worth of Japanese Yen. We dump the Yen for Dollar and use this one billion dollars to buy US stocks. Now suppose Dollar drops to 95 Yen/Dollar. Irrespective of the movement of US stocks, we are already suffering 5% loss on the currency front since we have borrowed cheap Yen but now we need to repay with more expansive Yen. Thus yen-carry trades are very sensitive to the level of Yen-Dollar exchange rate. Any time when Dollar falls below the level where yen-carry trades were installed, those yen-carry trades will be unwound by selling US stocks, converting Dollar into Yen and repaying the Yen loan. The unwinding of a large amount of yen-carry trades will cause Dollar to drop further versus Yen as well as a sinking spell of US stocks. The major players of yen-carry trades are American and European hedge funds, not Japanese entities. Until very recently Dollar has been trading above the line of 105 Yen/Dollar most of the time since the middle of 1995. Majority of yen-carry trades were installed above this 105 Yen/Dollar line. When Dollar fell below 105 Yen/Dollar line in late September, the massive unwinding of yen-carry trades must have occurred and pushed both Dollar and US stocks sharply lower. By early October most of the existing yen-carry trades should have been unwound already. The wild gyrations of both US stocks and Yen-Dollar exchange rate since Oct. 7, that is our concern, cannot be due to the unwinding of plain vanilla yen-carry trades since not much of such ordinary yen-carry trades still existed by that time. We suspect that a new kind of strategy, called “synthesized unwinding of yen-carry trades” by us, is the source of havoc since Oct. 7. The strategy will be discussed below in detail.
The unwinding of a yen-carry trade can be abstracted into two steps, they are, the sell of US stocks and the buy of Yen. These two steps can be synthesized by selling stock index futures and buying Yen futures. The new strategy is to conduct those two trades almost simultaneously to simulate an unwinding of a yen-carry trade. There is no need to have a pre-installed yen-carry trade here. The next question is what are the advantages and disadvantages of such a trade. The aim of this kind of trade is to anticipate a falling stock market and profit from the short side of stock index futures. The buy of Yen futures is aimed to push Dollar sharply lower in order to panic Japanese entities that hold dollars and induce them to sell those dollars for Yen and thus to push Dollar down further. If the attempt is successful, this strategy will be a win-win trade. However, if the market goes against the trade, it will be a lose-lose disaster. Under the current unsettled financial market condition and as deleverage has become the order of the day, even most venturesome hedge funds will be hesitant to engage in such high risky gambling unless it is absolutely necessary. The natural candidate for this kind of strategy are the already distressed hedge funds. Quite a few hedge funds have jumped back to US stock market too early and have sustained heavy losses caught in the subsequent down draft of the market. Their unhappy investors are expected to withdraw substantial sums from those hedge funds at the next quarterly redemption date, November 15. The only way for those distressed hedge funds to raise enough cash to meet the expected onslaught of redemptions is to dump their stock holdings. They know very well that their large scale dumping will send the stock market sharply lower and will cause them more losses. Thus they will try the strategy of synthesized unwinding of yen-carry trades. Those distressed hedge funds will accumulate short positions of stock index futures prior to their destined date of dumping their stocks at every chance when stock prices jump temporarily. When their dumping of actual stocks starts, they will buy large number of Yen future contracts at the same time. This double punches will send both US stocks and Dollar fall like an avalanche. The awesome shock wave of the avalanche will panic substantial number of investors frozen in the stock market from fear and causes them to dump their holdings as well. The same argument applies to the dollars in the hands of various Japanese entities as well. The joining of those dumb money will turn the avalanche into a landslide. The short sell of stock index futures will protect instigating hedge funds until the end of their stock dumping by canceling out the losses from dumping of their stocks whereas during the down leg of the land slide, those short positions will actually generate net profits for the hedge funds. Same thing can be said for their long positions in Yen futures. By this win-win game the distressed hedge funds hope to net some profits to cancel out a part of their prior losses. The sharp down turn of both stocks and Dollar from the stretch of Oct. 20 to Oct. 27 probably was the result of such strategy of synthesized unwinding of yen-carry trades.
There are two factors that will stop the landslide triggered by synthesized unwinding of yen-carry trades. The first factor is the threat of intervention by Japanese Government. Japan is determined to preserve its remaining export industry so the sharply higher Yen vs. Dollar becomes a severe threat. However, Japanese Government has reasons to be hesitant in the currency market intervention. The first is the worry about international condemnation at the time G7 is repeatedly criticizing China for its currency market manipulation to prevent rapid appreciation of Chinese Yuan. However, Facing the relent less pounding on Dollar vs. Yen, G7 gave in and issued a joint communique expressing concern about rapid movements of Yen-Dollar exchange rate. This communique is a de facto approval of Japanese Government to intervene in the currency market in order to stop further fall of Dollar vs. Yen. Another hesitation of Japanese Government about the currency market intervention must be the cost of intervention. In the period from the fall of 2003 to the spring of 2004, Japanese Government bought up 400 billion dollars to prevent Dollar to fall through the line of 100 Yen/Dollar. As has been mentioned in Comment 61, Japanese Government needs to buy up 1 trillion dollars in order to keep the rising Yen checked at the level of 100 Yen/Dollar. That probably was the reason why Japanese Government did nothing when Dollar fell through 100 Yen/Dollar and only signaled its intention to intervene when Dollar fell close to 90 Yen/Dollar on Oct. 27. The second factor that stopped the land slide is the installation of new yen-carry trades. As discussed before, yen-carry trades need to be installed at lowest possible Dollar value vs. Yen. With Japanese Government signaling that 90 Yen/Dollar is its bottom line, the Yen-Dollar level close to 90 Yen/Dollar becomes the ideal point to install new yen-carry trades and a large wave of yen-carry trades probably did be installed. Sensing the turn of the tide, the distressed hedge funds that instigated the land slide using the strategy of synthesized unwinding of yen-carry trades certainly will not stand by idly to see their hard earned profits melting away. They will join the foray by closing out their short positions in stock index futures and selling out their Yen futures as fast as they can. Thus the joined forces of the installation of new yen-carry trades and the unwinding of those “synthesized unwinding of yen-carry trades” sent both the US stock market and Dollar to a rapid ascend as witnessed on Oct. 28. Three days after the giant surge of Oct. 28, on Oct. 31 when the writing of this comment is in progress, the momentum of that giant surge is still felt throughout the markets.
Looking ahead, we should note that yen-carry trades are quick to be installed and quick to be unwound. If those newly installed yen-carry trades decide to take profit and unwind, both US stocks and Dollar will suddenly tumble again. Also not sure is whether the needs of distressed hedge funds to dump their stock holdings has been exhausted. We better prepare to see such wild gyrations to continue for a while. We are not sure that the pattern of the wild gyrations in recent weeks is a bottoming out pattern. Before we can be certain we will consider the giant pattern on the chart just as a huge consolidation pattern. It means there are substantial chance the stock prices will break downward out of the consolidation pattern and start to search for a new bottom.
Rumours about Gold circulating
To all; for several years now I have believed that the U.S. Dollar would fail and be replaced with a "new system". I went out to supper last night and asked for the bill, the waiter went to get it and I burst out laughing. For some reason I began thinking about how stupid it is to have a system where someone gives you a product or service and you give them a piece of paper. The local currency as are all paper currencies, is not backed by anything. Yes the government has a couple $ Billion held as currency reserves but of course financially the US is "the worst in show" and Dollar reserves should now be thought of as an anvil around ones neck.
The links posted above displays further posturing for the change coming to our financial system. Mr. Putin and other global leaders have come to the same conclusions, ie. why do they send goods to the US or other nations and accept "pieces of paper" in the form of Dollar credits? This reformation of Bretton Woods will also encompass the ideology of the Basel II agreement. In other words the world is going to demand more clarity of balance sheets, more banking reserves [which means less leverage], and in general a return to a more conservative financial stance similar to days past.
Recently we have been hearing of ".899" Gold turning up all over the world. Believe it or not, Gold has its own fingerprint or "DNA" so to speak. The speculation is that this .899 Gold is actually metal received from the confiscation back in 1933. Back then the government made it illegal to hold Gold personally, recalled Gold coins and melted them into bars that were stored in West Point, N.Y.. If it turns out that this .899 Gold is in fact from West Point there will be hell to pay. Already on a global basis, Gold is becoming scarce and difficult to obtain physically. If the world perceives that coin melt Gold is being dishoarded we could witness a global panic into the metal. For over 60 years the US has been thought of as having the largest Gold holdings on the planet, can you imagine the ramifications if the world began to believe that we were selling Gold from the bottom of the barrel?
The real dilemma this is. The Dollar system has broken down and the world must move, but how? Foreigners have three choices, they can do nothing and watch the Dollar [and their own currencies] hyperinflate while trying to prevent credits, assets and markets from imploding. They can try to make a "currency basket" to replace the Dollar [which equates to a bunch of cripples leaning on a bunch of cripples]. Or they can figure out how big and how deep the "Dollar holes" are in their balance sheets and then they would compare the size of the holes to the amount of Gold they hold and simply mark the price up to to replace or fill the smoking Dollar holes.
I believe this third option is what will eventually happen. I think that global bankers will try to estimate how many Dollars have infested their systems, these will be more or less marked down and/or off. The Gold audits will begin and once they figure out at what level Gold must rise to offset these evaporated Dollar assets, credits and debts then.....walla! a new Gold price! We have fought against western efforts to suppress Gold and Silver for over 10 years now, I think it ironic that it will be governments that must remark their bullion to morph into the new financial system. This will not be a wind at our backs, it will be a category 5 hurricane that will effect a markup almost overnight. Regards, Bill H…
On the same…
Hi Bill, I just had a "thought from the past" that was buried deep. I don't know if you remember this or not but back in 1990 or '91 about 1 month before the Soviet Union fell, gold with the Czar's stamp started turning up worldwide. The Soviets were dumping "unpure" Gold similar to the coin melt for use as hard currency. I told my wife at the time that the jig was up as soon as I had heard this news. I think the same thing is now happening with the coin melt bars. They are down to the bottom of the barrel! Regards, Bill H.
The links posted above displays further posturing for the change coming to our financial system. Mr. Putin and other global leaders have come to the same conclusions, ie. why do they send goods to the US or other nations and accept "pieces of paper" in the form of Dollar credits? This reformation of Bretton Woods will also encompass the ideology of the Basel II agreement. In other words the world is going to demand more clarity of balance sheets, more banking reserves [which means less leverage], and in general a return to a more conservative financial stance similar to days past.
Recently we have been hearing of ".899" Gold turning up all over the world. Believe it or not, Gold has its own fingerprint or "DNA" so to speak. The speculation is that this .899 Gold is actually metal received from the confiscation back in 1933. Back then the government made it illegal to hold Gold personally, recalled Gold coins and melted them into bars that were stored in West Point, N.Y.. If it turns out that this .899 Gold is in fact from West Point there will be hell to pay. Already on a global basis, Gold is becoming scarce and difficult to obtain physically. If the world perceives that coin melt Gold is being dishoarded we could witness a global panic into the metal. For over 60 years the US has been thought of as having the largest Gold holdings on the planet, can you imagine the ramifications if the world began to believe that we were selling Gold from the bottom of the barrel?
The real dilemma this is. The Dollar system has broken down and the world must move, but how? Foreigners have three choices, they can do nothing and watch the Dollar [and their own currencies] hyperinflate while trying to prevent credits, assets and markets from imploding. They can try to make a "currency basket" to replace the Dollar [which equates to a bunch of cripples leaning on a bunch of cripples]. Or they can figure out how big and how deep the "Dollar holes" are in their balance sheets and then they would compare the size of the holes to the amount of Gold they hold and simply mark the price up to to replace or fill the smoking Dollar holes.
I believe this third option is what will eventually happen. I think that global bankers will try to estimate how many Dollars have infested their systems, these will be more or less marked down and/or off. The Gold audits will begin and once they figure out at what level Gold must rise to offset these evaporated Dollar assets, credits and debts then.....walla! a new Gold price! We have fought against western efforts to suppress Gold and Silver for over 10 years now, I think it ironic that it will be governments that must remark their bullion to morph into the new financial system. This will not be a wind at our backs, it will be a category 5 hurricane that will effect a markup almost overnight. Regards, Bill H…
On the same…
Hi Bill, I just had a "thought from the past" that was buried deep. I don't know if you remember this or not but back in 1990 or '91 about 1 month before the Soviet Union fell, gold with the Czar's stamp started turning up worldwide. The Soviets were dumping "unpure" Gold similar to the coin melt for use as hard currency. I told my wife at the time that the jig was up as soon as I had heard this news. I think the same thing is now happening with the coin melt bars. They are down to the bottom of the barrel! Regards, Bill H.
3 November 2008
They Made a Killing
People knew about secret, CIA-led coups and used that information to game the stock market. One wonders about the extent to which ECHELON and other electronic interception networks are used to gain commercial advantage and private gain today.
By Ray Fisman
Posted Tuesday, Oct. 28, 2008, at 7:07 AM ET
In 1951, Jacobo rbenz Gzman became Guatemala's second democratically elected president. rbenz's authoritarian predecessors had been very sympathetic to American business interests, particularly those of the United Fruit Co. (now Chiquita), which had bought up land titles on the cheap from Guatemala's corrupt elite for its ever-expanding banana empire. Once in office, Presidente rbenz sought to take it all back, nationalizing UFC's Guatemalan assets and redistributing them to the poor.
But UFC had friends in very high placesthe assistant secretary of state for inter-American affairs, John Moor Cabot, was the brother of UFC President Thomas Cabot. The secretary of state himself, John Foster Dulles, had done legal work for UFC, and his brother Allen Dulles was director of the CIA and also on UFC's board. Thanks to the Freedom of Information Act, we now know that the various Cabots and Dulleses had a series of top-secret meetings in which they decided that rbenz had to go and sponsored a coup that drove rbenz from office in 1954.
With a U.S. puppet back in the president's mansion, UFC's profits were safe. But it appears the company wasn't the only beneficiary of this Cold War cloak-and-dagger diplomacy: A recent study by economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu argues that those in on the planning process also profited handsomely. By tracking the stock prices of UFC and other politically vulnerable firms in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran, the researchers provide evidence that someoneperhaps one of the Dulleses, Cabots, or others in the knowwas trading stocks based on classified information of these coups-in-the-making.
Dube, Kaplan, and Naidu examine how the stock market reacted to events that no Wall Street trader should have known about: top-secret meetings of the coup-plotting cabals at CIA headquarters and presidential approvals of CIA-organized invasions. These events would have increased the expected future profits of companies like UFCif the CIA-led coup in Guatemala were successful, for example, UFC would get its plantations back. If stock traders were privy to the coup-planning process, we would expect them to bid up the prices of affected companies in anticipation of these higher profits. These meetings and authorizations were all highly classified, however, and since you can't trade on information you don't have, UFC's stock price shouldn't have budged until the coup actually took place and the investing world learned of the regime change.
Unless, that is, some of the Cabots, Dulleses, or other insiders were using their privileged information to profit personally from a future coup. To understand why insider trading would boost a company's stock price, suppose that someone in on the planningperhaps at UFC or at the State Department itselfstarted quietly buying up cheap UFC stock in anticipation of the price jump that would come when the coup took place (or tipped off his stock-trading cousins about the future boost to UFC so they could do the same). All of this pre-coup buying would increase demand for UFC stock, bidding up its price even before CIA operatives actually got to work overthrowing the Guatemalan government.
Such trading on inside information is illegal, and when it involves highly classified details about a future CIA coup, it verges on treason. Yet the researchers found that prices of companies affected by the CIA's regime-toppling effortsUFC in Guatemala, Anglo-Iranian (oil) in Iran, Anaconda (mining) in Chile, and American Sugar in Cubawent up in the weeks and months preceding the coups. (The authors restrict their analysis to coups for which they had access to declassified planning documents and for which U.S. companies had had property nationalized by the targeted regimes.)
Furthermore, these gains were concentrated in the days following crucial government authorizations or plans for the coup (suggesting the trades weren't simply the result of good guesswork about a coup in the making). For example, in the week that President Eisenhower gave full approval to Operation PBFortune to overthrow rbenz, UFC's price went up by 3.8 percent; the stock market overall was flat that week.
In all, shares of coup-affected companies went up by a total of 10 percent following top-secret authorizations, swamping the 3.5 percent gain that came immediately in the coups' aftermaths. If information hadn't been leaking into the stock market via insider trading, then the entire impact of the coup should have appeared only when the very public invasions took place and the investing world finally got news of the regime change. Unfortunately, there are limits to what these stock-market forensics can uncover. When the researchers contacted the Securities and Exchange Commission to find out who was trading on these days, they learned that there are limits to what the Freedom of Information Act could provide. So, we can't pin the apparent insider trading on anyone in particular.
There's also some evidence, albeit tentative, that the market was very good at forecasting the coups' success and failurea further indication that the traders driving up the price had detailed knowledge of the covert plans (and their expected outcomes). The CIA-led invasion of Cuba is referred to these days as the Bay of Pigs fiasco for a reason, and whoever was trading on insider knowledge seemed to place his bets accordingly the pre-invasion increase in American Sugar's stock price was much lower than the gains for companies affected by the other, successful coups in the study.
By Ray Fisman
Posted Tuesday, Oct. 28, 2008, at 7:07 AM ET
In 1951, Jacobo rbenz Gzman became Guatemala's second democratically elected president. rbenz's authoritarian predecessors had been very sympathetic to American business interests, particularly those of the United Fruit Co. (now Chiquita), which had bought up land titles on the cheap from Guatemala's corrupt elite for its ever-expanding banana empire. Once in office, Presidente rbenz sought to take it all back, nationalizing UFC's Guatemalan assets and redistributing them to the poor.
But UFC had friends in very high placesthe assistant secretary of state for inter-American affairs, John Moor Cabot, was the brother of UFC President Thomas Cabot. The secretary of state himself, John Foster Dulles, had done legal work for UFC, and his brother Allen Dulles was director of the CIA and also on UFC's board. Thanks to the Freedom of Information Act, we now know that the various Cabots and Dulleses had a series of top-secret meetings in which they decided that rbenz had to go and sponsored a coup that drove rbenz from office in 1954.
With a U.S. puppet back in the president's mansion, UFC's profits were safe. But it appears the company wasn't the only beneficiary of this Cold War cloak-and-dagger diplomacy: A recent study by economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu argues that those in on the planning process also profited handsomely. By tracking the stock prices of UFC and other politically vulnerable firms in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran, the researchers provide evidence that someoneperhaps one of the Dulleses, Cabots, or others in the knowwas trading stocks based on classified information of these coups-in-the-making.
Dube, Kaplan, and Naidu examine how the stock market reacted to events that no Wall Street trader should have known about: top-secret meetings of the coup-plotting cabals at CIA headquarters and presidential approvals of CIA-organized invasions. These events would have increased the expected future profits of companies like UFCif the CIA-led coup in Guatemala were successful, for example, UFC would get its plantations back. If stock traders were privy to the coup-planning process, we would expect them to bid up the prices of affected companies in anticipation of these higher profits. These meetings and authorizations were all highly classified, however, and since you can't trade on information you don't have, UFC's stock price shouldn't have budged until the coup actually took place and the investing world learned of the regime change.
Unless, that is, some of the Cabots, Dulleses, or other insiders were using their privileged information to profit personally from a future coup. To understand why insider trading would boost a company's stock price, suppose that someone in on the planningperhaps at UFC or at the State Department itselfstarted quietly buying up cheap UFC stock in anticipation of the price jump that would come when the coup took place (or tipped off his stock-trading cousins about the future boost to UFC so they could do the same). All of this pre-coup buying would increase demand for UFC stock, bidding up its price even before CIA operatives actually got to work overthrowing the Guatemalan government.
Such trading on inside information is illegal, and when it involves highly classified details about a future CIA coup, it verges on treason. Yet the researchers found that prices of companies affected by the CIA's regime-toppling effortsUFC in Guatemala, Anglo-Iranian (oil) in Iran, Anaconda (mining) in Chile, and American Sugar in Cubawent up in the weeks and months preceding the coups. (The authors restrict their analysis to coups for which they had access to declassified planning documents and for which U.S. companies had had property nationalized by the targeted regimes.)
Furthermore, these gains were concentrated in the days following crucial government authorizations or plans for the coup (suggesting the trades weren't simply the result of good guesswork about a coup in the making). For example, in the week that President Eisenhower gave full approval to Operation PBFortune to overthrow rbenz, UFC's price went up by 3.8 percent; the stock market overall was flat that week.
In all, shares of coup-affected companies went up by a total of 10 percent following top-secret authorizations, swamping the 3.5 percent gain that came immediately in the coups' aftermaths. If information hadn't been leaking into the stock market via insider trading, then the entire impact of the coup should have appeared only when the very public invasions took place and the investing world finally got news of the regime change. Unfortunately, there are limits to what these stock-market forensics can uncover. When the researchers contacted the Securities and Exchange Commission to find out who was trading on these days, they learned that there are limits to what the Freedom of Information Act could provide. So, we can't pin the apparent insider trading on anyone in particular.
There's also some evidence, albeit tentative, that the market was very good at forecasting the coups' success and failurea further indication that the traders driving up the price had detailed knowledge of the covert plans (and their expected outcomes). The CIA-led invasion of Cuba is referred to these days as the Bay of Pigs fiasco for a reason, and whoever was trading on insider knowledge seemed to place his bets accordingly the pre-invasion increase in American Sugar's stock price was much lower than the gains for companies affected by the other, successful coups in the study.
Government default the rule, not the exception
On the other hand a longer-term examination of debt markets reminds us that, throughout human history, regular default is the rule than the exception. And while sovereign defaults on external, foreign-currency debt are most common, Carmen Reinhart and Kenneth Rogoff demonstrated in a paper released earlier this year that defaults on domestic debt have happened far more often than might have been expected, particularly in times of severe economic duress.
In both the US and UK, budget deficits are poised to explode, for a number of reasons. The recession is hitting tax revenues, while government entitlement programmes should soar in cost. Then there is the steadily increasing bill for the wars being fought in Iraq and Afghanistan. But the really big impact is coming from the rescue packages being thrown at the financial sector. Morgan Stanley recently estimated that the 2009 fiscal deficit in the US would reach 12.5%, over double the previous record of 6%, set in 1983. Under the Bush administration, the US national debt has risen from $5.7 trillion, to over $10 trillion currently. The terms of the recently-passed bailout legislation increased the statutory debt ceiling to over $11.3 trillion.
When measured as a percentage of GDP, the US national debt is expected to pass 70% next year, which, though much higher than recent years, is still short of the record 122% registered in 1946, at the end of the Second World War. Some observers point to this comparison as an argument for the sustainability of the current position.
Yet others argue that government debt must be seen in the context of, and as part of, the overall debt burden on the economy. With the US private debt to GDP ratio at levels never seen before – close to 300%, according to Steve Keen, the Australian economist – the question is surely whether the whole debt pyramid can avoid crashing down via a violent and uncontrollable chain of defaults, dragging the government bond market down with it. If this seems far-fetched, it helps to remember that the Latin root of the word credit comes from credere – to believe, but also to trust. For large sections of the private sector bond market, it is precisely that trust which has disappeared over the last year and a half. To suggest that such “credit revulsion”, to use an old term, might spread to governments’ debt obligations is surely not beyond the realms of possibility
Signs of strain in the US Treasury market are already there, despite the current low yields. Recent auctions have shown poor bid-to-cover ratios, and long tails (the difference between the average accepted yield, and highest yield), both signs of shallow demand. Delivery failures in the secondary market have also hit record levels, a sign of poor liquidity. Market observers should keep a close eye on the progress of future auctions, particularly as the issuance schedule picks up.
How can investors take cover if concerns over government solvency spread? For the early part of any credit-related decline in bond prices, there are obvious hedges, such as credit default swaps, short Treasury bond futures positions and inverse Treasury ETFs. But ultimately a US debt default would have cataclysmic consequences for the financial economy, bankrupting the entire system. So the ultimate safe haven is in the precious metals, which would rapidly regain monetary status in such a scenario.
Paul Amery is European Editor of www.indexuniverse.com
In both the US and UK, budget deficits are poised to explode, for a number of reasons. The recession is hitting tax revenues, while government entitlement programmes should soar in cost. Then there is the steadily increasing bill for the wars being fought in Iraq and Afghanistan. But the really big impact is coming from the rescue packages being thrown at the financial sector. Morgan Stanley recently estimated that the 2009 fiscal deficit in the US would reach 12.5%, over double the previous record of 6%, set in 1983. Under the Bush administration, the US national debt has risen from $5.7 trillion, to over $10 trillion currently. The terms of the recently-passed bailout legislation increased the statutory debt ceiling to over $11.3 trillion.
When measured as a percentage of GDP, the US national debt is expected to pass 70% next year, which, though much higher than recent years, is still short of the record 122% registered in 1946, at the end of the Second World War. Some observers point to this comparison as an argument for the sustainability of the current position.
Yet others argue that government debt must be seen in the context of, and as part of, the overall debt burden on the economy. With the US private debt to GDP ratio at levels never seen before – close to 300%, according to Steve Keen, the Australian economist – the question is surely whether the whole debt pyramid can avoid crashing down via a violent and uncontrollable chain of defaults, dragging the government bond market down with it. If this seems far-fetched, it helps to remember that the Latin root of the word credit comes from credere – to believe, but also to trust. For large sections of the private sector bond market, it is precisely that trust which has disappeared over the last year and a half. To suggest that such “credit revulsion”, to use an old term, might spread to governments’ debt obligations is surely not beyond the realms of possibility
Signs of strain in the US Treasury market are already there, despite the current low yields. Recent auctions have shown poor bid-to-cover ratios, and long tails (the difference between the average accepted yield, and highest yield), both signs of shallow demand. Delivery failures in the secondary market have also hit record levels, a sign of poor liquidity. Market observers should keep a close eye on the progress of future auctions, particularly as the issuance schedule picks up.
How can investors take cover if concerns over government solvency spread? For the early part of any credit-related decline in bond prices, there are obvious hedges, such as credit default swaps, short Treasury bond futures positions and inverse Treasury ETFs. But ultimately a US debt default would have cataclysmic consequences for the financial economy, bankrupting the entire system. So the ultimate safe haven is in the precious metals, which would rapidly regain monetary status in such a scenario.
Paul Amery is European Editor of www.indexuniverse.com
2 November 2008
Zen carry trade second locus of Default
Fears mount in Japan over complex yen products
Leo Lewis in Tokyo
Traders in Tokyo have given warning that about $90 billion (£55billion) of complex foreign exchange products, sold mainly to Japanese households and institutions, are on the brink of falling “like a house of cards”.
A rescue effort by the product issuers - large Japanese, European and American investment banks - is expected to involve extensive hedging measures that will throw global currency markets into even deeper turmoil.
The products, which are known as power reverse dual currency notes (PRDC), were sold to Japanese households as simple products offering higher yields than regular savings but the bonds were in reality hugely complex structures “with 15 moving parts and multiple points of pain”, derivatives experts at RBS in Tokyo said.
The products combine exposure to foreign exchange, interest rate differentials and domestic inflation and have formed a small but potent part of the so-called yen carry trade - the borrowing of yen to invest in currencies offering higher interest rates - a gambit thought to have financed huge amounts of global risk-taking in recent years.
The PRDC's complexity disguised from the buyers the fact that they were taking on the same big foreign exchange risks as the regular carry trade but with additional exposure to global interest rate volatility.
The warning on PRDCs coincides with a phase of unprecedented volatility for the yen, which this week soared to levels against the dollar and euro that are likely to hurt the country's exporters. The yen traded at 97.65 to the dollar yesterday, close to levels not seen since 1995. Two months ago, the yen stood at 110 per dollar.
Foreign exchange traders have blamed the unwinding of the yen- carry trade for much of the upward pressure on the Japanese currency.
Also fuelling yen volatility has been speculation that the Bank of Japan (BOJ) may be preparing to cut interest rates this week - rumours that provoked a sharp reversal for the yen over the past two days. The speculation suggests that the BOJ could be about to trim 25 basis points from rates and bring them down to only 0.25percent.
At the same time, Japan's “Big Three” banks - Mitsubishi UFJ, Sumitomo and Mizuho - are tallying mounting losses from Tokyo's plunging stock market. Japanese banks have vast share portfolios that are bleeding red-ink.
When the Nikkei share index hit a 26-year low of 7,000 points this week, combined paper losses on the stocks held by the Big Three since March 2007 amounted to about $100billion.
Industry figures said that if the savaging of the Japanese banks' huge stock portfolios continues, it could trigger a capital crisis among institutions recently viewed as among the safest and best capitalised in the world.
The stock losses suffered by Mitsubishi UFJ alone - $41 billion - are greater than the total sub-prime writedowns of HSBC, JPMorgan or Bank of America.
Leo Lewis in Tokyo
Traders in Tokyo have given warning that about $90 billion (£55billion) of complex foreign exchange products, sold mainly to Japanese households and institutions, are on the brink of falling “like a house of cards”.
A rescue effort by the product issuers - large Japanese, European and American investment banks - is expected to involve extensive hedging measures that will throw global currency markets into even deeper turmoil.
The products, which are known as power reverse dual currency notes (PRDC), were sold to Japanese households as simple products offering higher yields than regular savings but the bonds were in reality hugely complex structures “with 15 moving parts and multiple points of pain”, derivatives experts at RBS in Tokyo said.
The products combine exposure to foreign exchange, interest rate differentials and domestic inflation and have formed a small but potent part of the so-called yen carry trade - the borrowing of yen to invest in currencies offering higher interest rates - a gambit thought to have financed huge amounts of global risk-taking in recent years.
The PRDC's complexity disguised from the buyers the fact that they were taking on the same big foreign exchange risks as the regular carry trade but with additional exposure to global interest rate volatility.
The warning on PRDCs coincides with a phase of unprecedented volatility for the yen, which this week soared to levels against the dollar and euro that are likely to hurt the country's exporters. The yen traded at 97.65 to the dollar yesterday, close to levels not seen since 1995. Two months ago, the yen stood at 110 per dollar.
Foreign exchange traders have blamed the unwinding of the yen- carry trade for much of the upward pressure on the Japanese currency.
Also fuelling yen volatility has been speculation that the Bank of Japan (BOJ) may be preparing to cut interest rates this week - rumours that provoked a sharp reversal for the yen over the past two days. The speculation suggests that the BOJ could be about to trim 25 basis points from rates and bring them down to only 0.25percent.
At the same time, Japan's “Big Three” banks - Mitsubishi UFJ, Sumitomo and Mizuho - are tallying mounting losses from Tokyo's plunging stock market. Japanese banks have vast share portfolios that are bleeding red-ink.
When the Nikkei share index hit a 26-year low of 7,000 points this week, combined paper losses on the stocks held by the Big Three since March 2007 amounted to about $100billion.
Industry figures said that if the savaging of the Japanese banks' huge stock portfolios continues, it could trigger a capital crisis among institutions recently viewed as among the safest and best capitalised in the world.
The stock losses suffered by Mitsubishi UFJ alone - $41 billion - are greater than the total sub-prime writedowns of HSBC, JPMorgan or Bank of America.
1 November 2008
Once and For All...
by Dr. James Glenn | October 31, 2008
(Let's nail the guilty so we don't have to put up with self serving revisionism.)
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises
Like most Americans I’ve been watching the dramatic, and often titillating, finger pointing exchanges between Wall Street,Congress, the media, and the candidates with a combination of glee, dismay, disgust, and jaw dropping incredulity. Mostly incredulity, because few of these people, pundits, politicians, or patricians has gotten the story right about our recent financial apocalypse. Let me set the record straight, once and for all.
link
The right likes to blame the mess on “Big Government” (surprise), and ‘The Community Reinvestment Act” passed in 1977 which outlawed “redlining” by consumer banks (cherry picking loan customers), and dictated that they must “serve” all of their market when it came to home loans, not just the most lucrative segments. In other words, they had to provide home loans to marginal customers if they could pass the underwriting guidelines. They also heap blame, not entirely meritless, on Fannie Mae, and Freddie Mac, government sponsored entities (GSEs) which were responsible for providing sub prime loans to many of the now bankrupt subprime mortgage market. The critical point missed by these people is that it was investment banks on Wall Street and Wall Street Bankers and a corrupt irresponsible Fed responsible for the meltdown, not consumer banks, sub prime borrowers, or Fannie and Freddie. Limbaugh, Hannity, and their ilk love to demonize the left with sound bites for simpletons, this latest financial debacle being but another perfect example of their taking extremely complex issues like this latest meltdown and its causes, and disgorging simplistic, vacuous, incoherent, and incorrect ruminations to their rabid listeners.
The right has part of this story right however. It was Ronald Reagan’s “big government” of the 80s, which ran up the first trillions in our now 11 trillion dollar debt, which set the ball rolling on our current meltdown. Reagans “deregulation” and “privatization” mantra, aided and abetted by that banking shill, Alan Greenspan, who he appointed as chief fed head, that “deregulated” the S&Ls, which lead to the property bubble of the late 80s, a housing collapse, and the recession of 90-91. This cost the taxpayer approximately 500 billion. Sound familiar? Greenspan just last week, under glaring Congressional testimony, admitted that his long held beliefs regarding deregulation, and banks, and Wall Street being able to “police” themselves, had “proven to be “incorrect.” His “model” of the world was erroneous he says. Thank you Sir Alan for the scintillating confession. A day late and two trillion dollars short. Thus the grubby grasping at “deregulation” by those self serving miscreants in the 80s, as a panacea for everything from the common cold, to world war, set the stage for what was to follow.
On the heels of “deregulation” of the S&Ls came “securitization” in the 90s, which banks and brokerages dreamed up to shift investment risk from themselves to “investors”. Securitization you see allowed banks to “bundle” asset classes for resale. One of the most lucrative of these “asset classes” was mortgages, which could now be taken off the banks balance sheets and sold to investors. This effectively absolved the banks of any responsibility in performing their traditional job, i.e., underwriting good loans by correctly assessing credit risk. Banks balance sheets were freed up, and their reserves replenished so they could “turn” their inventory (mortgages) virtually as fast as they could be written. They no longer kept the mortgage so who cared about credit risk? They just wanted their 1-2% origination fee that came with each loan. Profits soared. Add deregulation, and securitization, to a somnambulant, laizzez faire Fed, the evisceration under Bush of the regulatory and rating agencies, and a rapacious Wall Street, and we had the makings of a tremendously explosive financial meltdown cocktail.
The real coup de gras came in the 90s with the creation of exotic and mostly unregulated financial instruments called “derivatives” which allowed Wall Street to take an asset, like a mortgage, and “leverage” it many, many times over (30-60:1), ostensibly for “risk management” but just as often for pure speculation. Warren Buffet recently called these derivatives “weapons of financial mass destruction” and many, myself included, have been warning about the unregulated, opaque, and greed infested waters in which they trade as a financial disaster waiting to happen for many years.
What cemented our current disaster was the repeal of the Glass-Steagall Act in 1999, passed in 1933 to prevent the cronyism, corruption, and greed of the 20s, brought to you by the same cast of characters as today, from ever happening again. Glass-Sreagall for over 65 years had stood as an effective bulwark against the baser instincts of bankers, brokers, and politicians, essentially preventing banks from buying brokerages, and both of those from buying insurance companies. It strictly forbade co mingling of funds, clients, and personnel between banks, brokerages, and insurance companies because this is what had led to the meltdown in the 20s, and the Great Depression. With the passage of Graham-Leach-Blyly in 1999, the sponsor of whom recently called us all “a nation of whiners”, and said the recession was “imaginary, and all in our heads”, the last remaining semblance of any economic restraint in financial services disappeared with a flourish of the pen. Investment banks could now own consumer banks, insurance companies, mortgage companies, appraisal companies etc. Imagine the possibilities! For cronyism, conflicts of interest, rampant speculation, and unbridled malfeasance! We got it all, not necessarily in that order, and in less than ten years, the same bankers, brokers, and politicians had us dangling from a knife edge, staring into the financial abyss, staring down the barrel of another Great Depression. Amazing isn’t it? How people, and history never change?
Credit default swaps, originating from insurance companies like AIG in the late 90s, and investment banks on Wall Street like Lehman Brothers, were the real icing on the cake however. These instruments were issued to insure against bond defaults. Sounds simple right? Pay us a premium of X, and we’ll insure your bond issue for Y. If the issue went bad, the originators had recourse against AIG to collect on the losses from the issue. These CDSs (Credit Default Swaps) were used extensively at the height of the housing bubble by nervous mortgage originators worried about the solvency of the underlying mortgage pools they were creating (I wonder why), packaging, and reselling to pension funds, insurance companies, bond funds and individual investors worldwide. The collateralized mortgage obligations (CMOs), GNMAs, FNMAs all represented securitized mortgages. Many of these mortgages were of the sub prime variety.
Problem was, the people insuring these mortgage pools were not using realistic pricing models to evaluate the real intrinsic risk in the new asset (mortgage pool). Surprise, surprise. Their models were using totally unrealistic default rates of 3-4% (marked to myth) because it was more profitable (required fewer reserves) when in actuality, nearly anyone with a cerebral cortex knew the default rates on these CDSs would be much, much, higher. More like 25-30%. And of course, it turns out that the rating agencies were in bed with the purveyors of this trash, giving these bonds highly inflated, and undeserved ratings.
When the housing bubble burst and the asset underlying these derivatives and credit default swaps went south, all hell broke loose of course. The inevitable happened as it always does. The leverage of 30-60:1 started working against the hedge funds, brokers, and banks that had been buying these derivatives. Leverage of 60:1 (possible with the eradication of Gas-Steagall and a complicit Fed) against you is not pretty, as we’ve seen in the last 3 months. The value of these instruments plummeted, forcing these players to raise cash. This required selling all other asset classes from gold to stocks, creating a cascade in the financial markets, an “unwinding” of leverage the likes of which no one has ever seen.
Owners of mortgage backed securities, likewise, demanded restitution from those that had “insured” them against default, AIG and Lehman in this example. AIG was on the hook for anywhere from 40-unknown billions due to their massive issuance of CDSs in the last ten years. It had been a massive revenue generator, but was now about to bury the company. In addition, if AIG did not honor its commitments to pay, many of which were to our major creditors, Japan, China, Korea, and the EU, they would not only never lend us another dime, but a “domino effect” could ensue in which AIGs counter parties went belly up, causing their counter parties to go belly up, creating a symbiotic implosion heard around the world. Oh, and by the way, ending capitalism as we know it. Maybe not such a bad thing. So here we were.
Deregulation=S&L debacle (80s) + Securitization (90s)= financial bubbles in bonds/stocks=bust/tech wreck of 2000 = Derivatives + Credit Default Swaps (2000s)= Housing Bubble Extraordinaire= Bust + Depression. Clear? Or, if you prefer:
Deregulation—Securitization—Glas-Steagal Repeal--Derivatives—Credit Default Swaps--Financial Armageddon
This is the daisy chain that leads us to today. This financial “unwinding” as CNBC likes to put it, prompted Paulson, who ran Goldman Sachs for years, and is now head of our Treasury unbelievably, to ironically, run red faced, and panting, to that “Big Government” the right loves to demonize so much for a 750 billion “bailout” just a few short weeks ago. Talk about Socialism! A government owned banking and insurance sector??? Why the rush to pump the taxpayer you rightly ask? Kind of reminiscent of Bushes’ “war resolution” just before midterm elections, or ramming the Patriot Act through Congress, isn’t it?
Paulson has intimate ties to AIG through his days at Goldman, which would also be bailed out by the by, and AIG begged him (or paid him) to get them off the hook. Without a handout, they’d go under and the western world as we know it would cease to exist they pleaded. I’m sure this was the scenario. Their dutiful errand boy then runs to Congress and using extortion and threats (falling financial markets and possible martial law) to force Congress to pony up. A little more sophisticated than a protection racket run by the mob, but not by much. So the thugs get their money, select investment banks (Goldman) and banks (Bank of America and 7 others) get bailouts, while others like Lehman Brothers are allowed to go under. Why Lehman you ask?
Because Lehman was a major competitor to Goldman of course, and this was the perfect opportunity to let them be swallowed up by the cess pit of banking history, and free up more business for Goldman and Morgan, the two go to boys for the Federal Reserve. That is, Morgan and Goldman are the two major purveyors of government bonds, and it is they whom “open market operations” of the Fed are choreographed. Couldn’t have the major purveyors of the bankrupt governments worthless paper going out of business, could we? That wouldn’t instill much “con”fidence in what has come to the biggest con game of all, selling government paper.
So friends, as McCain would say, there you have it. PLEASE get your facts straight before showing off your ignorance. It was unbridled, unregulated, and fraudulent use of derivatives and credit default swaps, by Wall Street, and a corrupt Federal Reserve, which led to this fiasco. Not “big government”, not mortgages made to poor people (they never could have been made if the Fed had been doing its job), not Fannie and Freddie, and certainly not the Community Reinvestment Act. This tripe, drivel and vacuous nonsense peddled by the likes of Hannity would be laughable, if our economy were not at stake. These are the same charlatans calling anyone who disagrees with the bald faced lying, corruption, irresponsibility, and disgraceful and unlawful shenanigans of the last eight years, Marxists and Communists. It would be laughable if it weren’t so tiresome, ugly, and untrue. Some people just have no self respect, or shame, it seems.
Good night friends.
(Let's nail the guilty so we don't have to put up with self serving revisionism.)
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises
Like most Americans I’ve been watching the dramatic, and often titillating, finger pointing exchanges between Wall Street,Congress, the media, and the candidates with a combination of glee, dismay, disgust, and jaw dropping incredulity. Mostly incredulity, because few of these people, pundits, politicians, or patricians has gotten the story right about our recent financial apocalypse. Let me set the record straight, once and for all.
link
The right likes to blame the mess on “Big Government” (surprise), and ‘The Community Reinvestment Act” passed in 1977 which outlawed “redlining” by consumer banks (cherry picking loan customers), and dictated that they must “serve” all of their market when it came to home loans, not just the most lucrative segments. In other words, they had to provide home loans to marginal customers if they could pass the underwriting guidelines. They also heap blame, not entirely meritless, on Fannie Mae, and Freddie Mac, government sponsored entities (GSEs) which were responsible for providing sub prime loans to many of the now bankrupt subprime mortgage market. The critical point missed by these people is that it was investment banks on Wall Street and Wall Street Bankers and a corrupt irresponsible Fed responsible for the meltdown, not consumer banks, sub prime borrowers, or Fannie and Freddie. Limbaugh, Hannity, and their ilk love to demonize the left with sound bites for simpletons, this latest financial debacle being but another perfect example of their taking extremely complex issues like this latest meltdown and its causes, and disgorging simplistic, vacuous, incoherent, and incorrect ruminations to their rabid listeners.
The right has part of this story right however. It was Ronald Reagan’s “big government” of the 80s, which ran up the first trillions in our now 11 trillion dollar debt, which set the ball rolling on our current meltdown. Reagans “deregulation” and “privatization” mantra, aided and abetted by that banking shill, Alan Greenspan, who he appointed as chief fed head, that “deregulated” the S&Ls, which lead to the property bubble of the late 80s, a housing collapse, and the recession of 90-91. This cost the taxpayer approximately 500 billion. Sound familiar? Greenspan just last week, under glaring Congressional testimony, admitted that his long held beliefs regarding deregulation, and banks, and Wall Street being able to “police” themselves, had “proven to be “incorrect.” His “model” of the world was erroneous he says. Thank you Sir Alan for the scintillating confession. A day late and two trillion dollars short. Thus the grubby grasping at “deregulation” by those self serving miscreants in the 80s, as a panacea for everything from the common cold, to world war, set the stage for what was to follow.
On the heels of “deregulation” of the S&Ls came “securitization” in the 90s, which banks and brokerages dreamed up to shift investment risk from themselves to “investors”. Securitization you see allowed banks to “bundle” asset classes for resale. One of the most lucrative of these “asset classes” was mortgages, which could now be taken off the banks balance sheets and sold to investors. This effectively absolved the banks of any responsibility in performing their traditional job, i.e., underwriting good loans by correctly assessing credit risk. Banks balance sheets were freed up, and their reserves replenished so they could “turn” their inventory (mortgages) virtually as fast as they could be written. They no longer kept the mortgage so who cared about credit risk? They just wanted their 1-2% origination fee that came with each loan. Profits soared. Add deregulation, and securitization, to a somnambulant, laizzez faire Fed, the evisceration under Bush of the regulatory and rating agencies, and a rapacious Wall Street, and we had the makings of a tremendously explosive financial meltdown cocktail.
The real coup de gras came in the 90s with the creation of exotic and mostly unregulated financial instruments called “derivatives” which allowed Wall Street to take an asset, like a mortgage, and “leverage” it many, many times over (30-60:1), ostensibly for “risk management” but just as often for pure speculation. Warren Buffet recently called these derivatives “weapons of financial mass destruction” and many, myself included, have been warning about the unregulated, opaque, and greed infested waters in which they trade as a financial disaster waiting to happen for many years.
What cemented our current disaster was the repeal of the Glass-Steagall Act in 1999, passed in 1933 to prevent the cronyism, corruption, and greed of the 20s, brought to you by the same cast of characters as today, from ever happening again. Glass-Sreagall for over 65 years had stood as an effective bulwark against the baser instincts of bankers, brokers, and politicians, essentially preventing banks from buying brokerages, and both of those from buying insurance companies. It strictly forbade co mingling of funds, clients, and personnel between banks, brokerages, and insurance companies because this is what had led to the meltdown in the 20s, and the Great Depression. With the passage of Graham-Leach-Blyly in 1999, the sponsor of whom recently called us all “a nation of whiners”, and said the recession was “imaginary, and all in our heads”, the last remaining semblance of any economic restraint in financial services disappeared with a flourish of the pen. Investment banks could now own consumer banks, insurance companies, mortgage companies, appraisal companies etc. Imagine the possibilities! For cronyism, conflicts of interest, rampant speculation, and unbridled malfeasance! We got it all, not necessarily in that order, and in less than ten years, the same bankers, brokers, and politicians had us dangling from a knife edge, staring into the financial abyss, staring down the barrel of another Great Depression. Amazing isn’t it? How people, and history never change?
Credit default swaps, originating from insurance companies like AIG in the late 90s, and investment banks on Wall Street like Lehman Brothers, were the real icing on the cake however. These instruments were issued to insure against bond defaults. Sounds simple right? Pay us a premium of X, and we’ll insure your bond issue for Y. If the issue went bad, the originators had recourse against AIG to collect on the losses from the issue. These CDSs (Credit Default Swaps) were used extensively at the height of the housing bubble by nervous mortgage originators worried about the solvency of the underlying mortgage pools they were creating (I wonder why), packaging, and reselling to pension funds, insurance companies, bond funds and individual investors worldwide. The collateralized mortgage obligations (CMOs), GNMAs, FNMAs all represented securitized mortgages. Many of these mortgages were of the sub prime variety.
Problem was, the people insuring these mortgage pools were not using realistic pricing models to evaluate the real intrinsic risk in the new asset (mortgage pool). Surprise, surprise. Their models were using totally unrealistic default rates of 3-4% (marked to myth) because it was more profitable (required fewer reserves) when in actuality, nearly anyone with a cerebral cortex knew the default rates on these CDSs would be much, much, higher. More like 25-30%. And of course, it turns out that the rating agencies were in bed with the purveyors of this trash, giving these bonds highly inflated, and undeserved ratings.
When the housing bubble burst and the asset underlying these derivatives and credit default swaps went south, all hell broke loose of course. The inevitable happened as it always does. The leverage of 30-60:1 started working against the hedge funds, brokers, and banks that had been buying these derivatives. Leverage of 60:1 (possible with the eradication of Gas-Steagall and a complicit Fed) against you is not pretty, as we’ve seen in the last 3 months. The value of these instruments plummeted, forcing these players to raise cash. This required selling all other asset classes from gold to stocks, creating a cascade in the financial markets, an “unwinding” of leverage the likes of which no one has ever seen.
Owners of mortgage backed securities, likewise, demanded restitution from those that had “insured” them against default, AIG and Lehman in this example. AIG was on the hook for anywhere from 40-unknown billions due to their massive issuance of CDSs in the last ten years. It had been a massive revenue generator, but was now about to bury the company. In addition, if AIG did not honor its commitments to pay, many of which were to our major creditors, Japan, China, Korea, and the EU, they would not only never lend us another dime, but a “domino effect” could ensue in which AIGs counter parties went belly up, causing their counter parties to go belly up, creating a symbiotic implosion heard around the world. Oh, and by the way, ending capitalism as we know it. Maybe not such a bad thing. So here we were.
Deregulation=S&L debacle (80s) + Securitization (90s)= financial bubbles in bonds/stocks=bust/tech wreck of 2000 = Derivatives + Credit Default Swaps (2000s)= Housing Bubble Extraordinaire= Bust + Depression. Clear? Or, if you prefer:
Deregulation—Securitization—Glas-Steagal Repeal--Derivatives—Credit Default Swaps--Financial Armageddon
This is the daisy chain that leads us to today. This financial “unwinding” as CNBC likes to put it, prompted Paulson, who ran Goldman Sachs for years, and is now head of our Treasury unbelievably, to ironically, run red faced, and panting, to that “Big Government” the right loves to demonize so much for a 750 billion “bailout” just a few short weeks ago. Talk about Socialism! A government owned banking and insurance sector??? Why the rush to pump the taxpayer you rightly ask? Kind of reminiscent of Bushes’ “war resolution” just before midterm elections, or ramming the Patriot Act through Congress, isn’t it?
Paulson has intimate ties to AIG through his days at Goldman, which would also be bailed out by the by, and AIG begged him (or paid him) to get them off the hook. Without a handout, they’d go under and the western world as we know it would cease to exist they pleaded. I’m sure this was the scenario. Their dutiful errand boy then runs to Congress and using extortion and threats (falling financial markets and possible martial law) to force Congress to pony up. A little more sophisticated than a protection racket run by the mob, but not by much. So the thugs get their money, select investment banks (Goldman) and banks (Bank of America and 7 others) get bailouts, while others like Lehman Brothers are allowed to go under. Why Lehman you ask?
Because Lehman was a major competitor to Goldman of course, and this was the perfect opportunity to let them be swallowed up by the cess pit of banking history, and free up more business for Goldman and Morgan, the two go to boys for the Federal Reserve. That is, Morgan and Goldman are the two major purveyors of government bonds, and it is they whom “open market operations” of the Fed are choreographed. Couldn’t have the major purveyors of the bankrupt governments worthless paper going out of business, could we? That wouldn’t instill much “con”fidence in what has come to the biggest con game of all, selling government paper.
So friends, as McCain would say, there you have it. PLEASE get your facts straight before showing off your ignorance. It was unbridled, unregulated, and fraudulent use of derivatives and credit default swaps, by Wall Street, and a corrupt Federal Reserve, which led to this fiasco. Not “big government”, not mortgages made to poor people (they never could have been made if the Fed had been doing its job), not Fannie and Freddie, and certainly not the Community Reinvestment Act. This tripe, drivel and vacuous nonsense peddled by the likes of Hannity would be laughable, if our economy were not at stake. These are the same charlatans calling anyone who disagrees with the bald faced lying, corruption, irresponsibility, and disgraceful and unlawful shenanigans of the last eight years, Marxists and Communists. It would be laughable if it weren’t so tiresome, ugly, and untrue. Some people just have no self respect, or shame, it seems.
Good night friends.
Calvin on silver
I regularly say here that due to my holding active positions that I regard as vulnerable to other people cottoning onto the same or similar ideas I often do not say precisely what I am doing, but have to say things with often quite extreme elasticity of the English language.
I have said in the past that I regarded the physical prices of bullion - especially of silver as artificial and related to the Comex paper market and currency speculations.
I am now able to spell out more detail as I have finalised some positions sufficiently to not feel so vulnerable.
Today I'd like to be candid and explicit about my views on the current market. My own views are markedly different from all those banging the gong about the so-called crisis and the never-ending pushing down of market prices across all sectors. I'd personally further opine that those living and trading inside the USA are bound to have a stilted and incorrect vision of what is going on.
The 'crisis' is related to the deterioration of the Basel Committee Capital Accord for all participating banks over the last ten or more years.
This deterioration was initiated quite deliberately from US sources and with the complete and total comprehension and involvement of the US Federal Reserve.
You will not have read this viewpoint expressed in this way anywhere, ever before. It is however, utterly true without a single even small variation. Further, I can tell you as a matter of personal and certain private knowledge that it is by no means whatsoever anyone from the Rothschilds who are now or have ever been behind this type of insanity. This was expressly and completely a creation of people long held as puppets of such major banking clans (and who are absolutely NOT puppets nor associated) and who have held the White House captive to their false ideologies. George Soros is totally correct in his assessments.
There IS both a shortage of physical gold and physical silver. This is not being reflected in the bullion prices because of Basel II's consequence of permitting banks to hold no capital reserves of a testable liquid kind and the automatic resorting to government Treasuries to source payment mediums. All that is happening is an assertion in the real marketplace of Gresham's Law. Real gold and silver is being hoarded somewhere and NOT re-sold or circulated across the exchanges. Derivatives in precious metals are many times what derivatives in equities are.
Technology has moved past the Federal Reserve and the note making capacity if presentday governments.
In the back streets of China and Hong Kong today are micro-chip based forms of currency in circulation that have never before been seen anywhere. You have not seen it. No one from the Wall Street Journal has seen it.
...Which just goes to show you how far behind the curve the present popular mindset really is.
There is a deflation of certain asset sectors and almost everything tied to the US financial economy. But it's all about weak holders as opposed to strong holders.
It may yet be possible for Fox and CNN to 'inform' everyone that EVERYTHING is being deflated - and hey, they might even get away with convincing people that it is true...
However you cannot buy rare things today cheaper than you could have yesterday and you never ever will.
At the risk of ruining my own prices - although as I have said, my first line of profit has already been achieved - I can say that it simply has not been the case to date that any segment of the rare coin market has reversed in demand, clearance rate or price. There is a further reason why collector SILVER coins - even moderately collectable silver coin - will go up even further compared with all other types of collector coin with the possible exception of the extremely rare bronze lines. I shall not go into this reason now.
Personally, I have been shorting bullion (and now buying it back) whilst accumulating rare silver collectors coins...
To some effect, I must say.
Of course, this will hardly rival uncle George's ability with the Pound Stirling - however each quarter million sale of a tiny silver collector's piece goes a long way to footing the deposit on a healthy leveraged contract.
And for those with a far more modest appetite yet, Christmas is soon to be on us and your old Gran's plum duff silver pieces are showing a gain of some percentage akin to the inflation rate in Zimbabwe. Considering that what was available from the Perth Mint ten years ago for twenty dollars now goes for $100 - $200.
I wouldn't be sniffing at lowered prices offered by the ill-informed for old pre-Sixties silver content coinage. I'd be buying it all as much as you can get your hands on.
IF... ...you can get any at lowered prices. Frankly, I don't see the evidence of this famous deflation (which, mind you, is absolutely in the real estate market) in the silver coin market at all. And for good reason.
Calvin J. Bear
I have said in the past that I regarded the physical prices of bullion - especially of silver as artificial and related to the Comex paper market and currency speculations.
I am now able to spell out more detail as I have finalised some positions sufficiently to not feel so vulnerable.
Today I'd like to be candid and explicit about my views on the current market. My own views are markedly different from all those banging the gong about the so-called crisis and the never-ending pushing down of market prices across all sectors. I'd personally further opine that those living and trading inside the USA are bound to have a stilted and incorrect vision of what is going on.
The 'crisis' is related to the deterioration of the Basel Committee Capital Accord for all participating banks over the last ten or more years.
This deterioration was initiated quite deliberately from US sources and with the complete and total comprehension and involvement of the US Federal Reserve.
You will not have read this viewpoint expressed in this way anywhere, ever before. It is however, utterly true without a single even small variation. Further, I can tell you as a matter of personal and certain private knowledge that it is by no means whatsoever anyone from the Rothschilds who are now or have ever been behind this type of insanity. This was expressly and completely a creation of people long held as puppets of such major banking clans (and who are absolutely NOT puppets nor associated) and who have held the White House captive to their false ideologies. George Soros is totally correct in his assessments.
There IS both a shortage of physical gold and physical silver. This is not being reflected in the bullion prices because of Basel II's consequence of permitting banks to hold no capital reserves of a testable liquid kind and the automatic resorting to government Treasuries to source payment mediums. All that is happening is an assertion in the real marketplace of Gresham's Law. Real gold and silver is being hoarded somewhere and NOT re-sold or circulated across the exchanges. Derivatives in precious metals are many times what derivatives in equities are.
Technology has moved past the Federal Reserve and the note making capacity if presentday governments.
In the back streets of China and Hong Kong today are micro-chip based forms of currency in circulation that have never before been seen anywhere. You have not seen it. No one from the Wall Street Journal has seen it.
...Which just goes to show you how far behind the curve the present popular mindset really is.
There is a deflation of certain asset sectors and almost everything tied to the US financial economy. But it's all about weak holders as opposed to strong holders.
It may yet be possible for Fox and CNN to 'inform' everyone that EVERYTHING is being deflated - and hey, they might even get away with convincing people that it is true...
However you cannot buy rare things today cheaper than you could have yesterday and you never ever will.
At the risk of ruining my own prices - although as I have said, my first line of profit has already been achieved - I can say that it simply has not been the case to date that any segment of the rare coin market has reversed in demand, clearance rate or price. There is a further reason why collector SILVER coins - even moderately collectable silver coin - will go up even further compared with all other types of collector coin with the possible exception of the extremely rare bronze lines. I shall not go into this reason now.
Personally, I have been shorting bullion (and now buying it back) whilst accumulating rare silver collectors coins...
To some effect, I must say.
Of course, this will hardly rival uncle George's ability with the Pound Stirling - however each quarter million sale of a tiny silver collector's piece goes a long way to footing the deposit on a healthy leveraged contract.
And for those with a far more modest appetite yet, Christmas is soon to be on us and your old Gran's plum duff silver pieces are showing a gain of some percentage akin to the inflation rate in Zimbabwe. Considering that what was available from the Perth Mint ten years ago for twenty dollars now goes for $100 - $200.
I wouldn't be sniffing at lowered prices offered by the ill-informed for old pre-Sixties silver content coinage. I'd be buying it all as much as you can get your hands on.
IF... ...you can get any at lowered prices. Frankly, I don't see the evidence of this famous deflation (which, mind you, is absolutely in the real estate market) in the silver coin market at all. And for good reason.
Calvin J. Bear
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