What was the trade of the 70's?

It was gold! As the first oil shock and the Vietnam War led to recession, Nixon responded with furious money printing that the bond market didn't notice. Gold went from 60 to 800 and penny gold equities to $20.00.

We are approaching a market rhyme as this happens again.

The deflation-inflation two-step: Too complex for deflationsts to grasp?

By mistaking the short term for the long term, they are missing the trade of the century

by Eric Janszen

Over 100 books, papers, and original analysis went into developing and refining Ka-Poom Theory over the years, and model that explains how, following the collapse of the credit bubble, the US economy will experience a short (six month to one year) period of deflation that we call disinflation, such as we are experiencing today, followed by a major inflation induced by monetary and fiscal policy and the actions of US trade partners in response to that inflation.

It appears that the deflationista camp is incapable of comprehending a model, and the events that it forecasts, that lays out a two step process. For some reason they cannot grasp the fact governments will respond to disinflation with inflation, that the impact of those interventions is not instantaneous, and that markets historically are not very good at foreseeing the change in inflationary conditions in either direction.

Ka-Poom Theory in 1999, the original disinflation/reflation theory developed nearly ten years ago, does not merely forecast a period of deflation or disinflation that is inevitable after the massive credit bubble popped. A child could do that. We call it "Ka" as the first step in the two step process outlined by Ka-Poom Theory. The difficult part is forecasting what comes after the disinflation phase. Does the Fed sit back and do nothing while the debt deflation runs out of cotnrol? Does the Fed have a choice, or does it become impotent, overwhelmed by the rate of debt defaults and money destruction?

The deflationistas apparently think what comes after post-bubble deflation is more deflation, as occurred in the early 1930s in the US but nowhere else ever since. It has not occurred to the deflationists why no similar period of deflation has ever occurred since the 1930s, or when they do confront the question they explain that the debt is really, really, really big debt this time, bigger than the Fed. Or that differences between the kind of money that the Fed prints versus the kind of money that the endogenous credit markets create when money is loaned into being by businesses and consumers means the Fed cannot impact the latter.

As we explain that in The truth about deflation, the reason no deflation spiral has occurred in any nation since the one instance in the US in the 1930s is because since then no nation has chosen to remain on the gold standard through a debt deflation. Needless to say, the US is not on a gold standard today.

What governments do when confronted with a deflation spiral is take measures to increase the money supply to induce inflation. If they succeed and money aggregates are increased, over time inflation will follow.

Money first, inflation second

One of the better papers on this topic is No money, no inflation—the role of money in the economy by Mervyn King, Deputy Governor, Bank of England. It was presented to the Festschrift in honour of Professor Charles Goodhart held at the Bank of England on 15 November 2001.
Most people think economics is the study of money. But there is a paradox in the role of money in economic policy. It is this: that as price stability has become recognised as the central objective of central banks, the attention actually paid by central banks to money has declined.

It is no accident that during the ‘Great Inflation’ of the post-war period money, as a causal factor for inflation, was ignored by much of the economic establishment. In the late 1970s, the counter-revolution in economics—the idea that in the long run money affected the price level and not the level of output—returned money to centre stage in economic policy. As Milton Friedman put it, ‘inflation is always and everywhere a monetary phenomenon’. If inflation was a monetary phenomenon, then controlling the supply of money was the route to low inflation. Monetary aggregates became central to the conduct of monetary policy. But the passage to low inflation proved painful. Nor did the monetary aggregates respond kindly to the attempts by central banks to control them. As the governor of the Bank of Canada at the time, Gerald Bouey, remarked, ‘we didn’t abandon the monetary aggregates, they abandoned us’.

So, as central banks became more and more focused on achieving price stability, less and less attention was paid to movements in money. Indeed, the decline of interest in money appeared to go hand in hand with success in maintaining low and stable inflation. How do we explain the apparent contradiction that the acceptance of the idea that inflation is a monetary phenomenon has been accompanied by the lack of any reference to money in the conduct of monetary policy during its most successful period? That paradox is the subject of my talk.
This paper contributed three concepts to Ka-Poom Theory that deflationistas should think very carefully about. Read the paper and its conclusions are inescapable.

One, if "No money, no inflation" then if "Money, inflation." Two, money first, inflation second with long and unpredictable time lags. Three, the money markets always get it wrong; inflation expectations are sticky following periods of deflation and sticky following periods of inflation. The big money to be made in our fiat money era is in betting that the bond market is getting it wrong rather than assuming that a market that is forecasting future inflation or deflation is getting it right. When governments are inflating, the bond markets tend to be right short term, wrong long term.

That being the case, this may be the trade of the century because the bond markets are pricing corporates, treasury bonds, and TIPS as if it's 1931 and the US and the world was on the gold standard, or it's 1974 and recession is about to take inflation down for the count. Mike Shedlock does a good job of describing the phenomena here recently in Industrial Bond Yields Strongly Support Deflation Thesis. The error is mistaking short term for long term inflation pricing phenomena. The one step deflationists miss is the all important second step in the two-step Ka-Poom deflation/inflation process.

King demonstrates the long term correlation between money and inflation in the UK going back to 1885.

KaPoom Theory

China Gets It Right, But Hurts America

John Browne
Nov 13, 2008

The announcement of a massive stimulus package of almost $600 billion shows that China means business not just in reviving, but also in rejuvenating its economy.

As both America and China confront the prospect of a global depression, both countries have chosen to fend off potential unrest with liberal government spending. But the Chinese move is bolder and more likely to succeed.

The most remarkable aspect of the Chinese stimulus plan is its enormous size. Despite the massive publicity surrounding its formidable growth rate, the Chinese economy is still 'only' one-fifth the size of America's. Relative to its economy, China's stimulus package would be the equivalent of a $3 trillion package in America.

The Bush-Greenspan asset booms were so extreme, and the resulting deleveraging so massive, that government actions in multiples of trillions of dollars are needed to make any meaningful impact in slowing the asset bust.

Based on this yardstick we can see that the differences in the Chinese and American approaches could not be more dramatic. The divergence bodes ill for the future.

The impact equivalent of China's package of $3 trillion is 17.4 times that of America's $172 billion. Of course, this does not include the $700 billion Bush TARP that was agreed to by Congress last month. But then, China did not have a financial system which needed a massive taxpayer bailout.

Although some Chinese investors may have been taken in by smart Wall Street salesmen peddling mortgage backed securities, the scale of these investments does not present systemic risk to China's financial markets.

China has announced that the lion's share of its stimulus spending will focus on modernizing the infrastructure of its country in preparation for challenging America as a super power in just a few more years.

In contrast, the focus of the Bush Administration plan is to boost consumer spending. America's decaying infrastructure has been virtually ignored. This will render America's economy ever less competitive in an increasingly competitive world.

Even the follow-up packages in America are likely to throw increasing amounts of taxpayer money at highly leveraged banks and failed corporations, like General Motors.

When the world recovers from the looming depression, China will emerge greatly strengthened and as a far more serious challenger for super power status.

Since the ancient times of Babylon, super power status also has been reflected in any 'uber' nation's currency. While China's economy is dominated by roaring manufacturing and infrastructure development, America's economy is comprised of 72 percent by consumers. In reality, America is consuming more than it produces and is eroding its national wealth at an alarming rate.

In contrast, emerging nations like Brazil, Russia, India, and China (the so-called BRIC nations) are producing far more than they consume and are creating real wealth in the process. It follows that BRIC corporations and even their currencies should be attractive long-term investments, relative to those of the United States.

On November 15th, the G-20 leaders meet in Washington to discuss threats faced by the world economy. Today, there is decreasing faith in paper currency. The G-20 leaders must address this crucial problem. It may well be that they seize this opportunity to establish an international currency, under the auspices of the IMF, but linked to Gold.

Should they fail, a resurgent China can be expected to veto any subsequent attempts in an effort to replace the U.S. dollar with its own as the world's key 'anchor' or reserve currency. Such a change in reserve status will confer on China a number of competitive advantages previously reserved for America.

Unlike America, China is unlikely to borrow to finance its stimulus package. Indeed, it is likely to spend its own national earnings rather than continue to invest in U.S. Treasuries.

Worse still, China might even begin to sell part of its massive holdings of some $1 Trillion of U.S. Treasuries. This will put upward pressure on U.S. interest rates, tending to drive a recession into a depression.

However it is financed, China's stimulus package is decidedly bad news for America.

Buy Coal, Oil and Gold Equities imo

NOW IS THE TIME TO BUY LOW, ESPECIALLY COMMODITY SHARES (November 9, 2008): It is ironic that the investing public talks about buying low and selling high--but everyone instead likes to buy at multi-decade peaks and is afraid to buy at multi-decade lows. No wonder the vast majority of investors lose money in the stock market even with the strong long-term upward bias for global equities. Meanwhile, corporate insiders were heavy sellers a year ago, and have been equally aggressive buyers in recent weeks. It's hardly surprising that the rich get richer and the poor get poorer.

The following statement is cynical but true: the financial markets exist to transfer money from the middle classes to the upper classes. Wealthy people train themselves to buy when the media and the public are most gloomy, and to sell when the prevailing sentiment is either euphoric (as in early 2000) or irrationally complacent (as in late 2007).

Commodity shares in particular have rarely been more undervalued than they have been in recent weeks. Gold mining shares traded at the same levels in late October 2008 as when gold had been $328 per ounce in 2002. Energy shares traded at the same prices a couple of weeks ago as when crude oil was $28 per barrel in 2003. Every single major coal producer saw heavy insider buying by top executives during the past several weeks. Agricultural-commodity shares slumped to five- and six-year lows while the price/earnings ratios of many of these companies reached all-time nadirs.

Numerous other major asset classes slumped to multi-year and even multi-decade bottoms. High-yield corporate bonds, or "junk bonds", plummeted to their lowest valuations since 1933--an amazing 75-year low. Convertible bonds, preferred shares, and similar groups also became absurdly oversold. Japan's Nikkei index fell to its lowest point since October 1982--not only marking a 26-year nadir, but showing a far more ridiculous undervaluation since corporate profits in Japan, especially for small companies, have soared since 1982. With global liquidity at a multi-decade low and hedge funds forced to dump assets left and right, profitability and rationality has been completely ignored.

While global equity markets have been forming a bullish pattern of higher lows, the average investor feels emotionally that they are making lower lows. This is a classic sign of a major bottom and a strong buy signal.

If there is any doubt about whether stock markets around the world will rebound sharply, all you have to do is look at a chart of TLT, which is a fund of U.S. Treasuries averaging 25 years to maturity. As a general rule, the vast majority of Treasury traders are the world's most knowledgeable global investors. TLT has been forming a bearish pattern of lower highs for several weeks, meaning that the smartest asset allocators are positioning themselves for an environment of global economic expansion and sharply higher inflation, along with a weaker U.S. dollar. This is the exact opposite of the media's insistence on "deflationary depression" that is as dead wrong as the media's bullish Goldilocks outlook on the stock market a year ago, or their equally foolish "buy commodities" mantra a half year ago.
link

The End of Wall Street ~ A story from the belly of the beast

What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.) The default rate in Georgia was five times higher than that in Florida even though the two states had the same unemployment rate. Why? Indiana had a 25 percent default rate; California’s was only 5 percent. Why?


Moses actually flew down to Miami and wandered around neighborhoods built with subprime loans to see how bad things were. “He’d call me and say, ‘Oh my God, this is a calamity here,’ ” recalls Eisman. All that was required for the BBB bonds to go to zero was for the default rate on the underlying loans to reach 14 percent. Eisman thought that, in certain sections of the country, it would go far, far higher.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”
This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

A full nine months earlier, Daniel and Moses had flown to Orlando for an industry conference. It had a grand title—the American Securitization Forum—but it was essentially a trade show for the subprime-mortgage business: the people who originated subprime mortgages, the Wall Street firms that packaged and sold subprime mortgages, the fund managers who invested in nothing but subprime-mortgage-backed bonds, the agencies that rated subprime-mortgage bonds, the lawyers who did whatever the lawyers did. Daniel and Moses thought they were paying a courtesy call on a cottage industry, but the cottage had become a castle. “There were like 6,000 people there,” Daniel says. “There were so many people being fed by this industry. The entire fixed-income department of each brokerage firm is built on this. Everyone there was the long side of the trade. The wrong side of the trade. And then there was us. That’s when the picture really started to become clearer, and we started to get more cynical, if that was possible. We went back home and said to Steve, ‘You gotta see this.’ ”

Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference. By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged.

Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”

Would you say that 5 percent is a probability or a possibility?” Eisman asked.

A probability, said the C.E.O., and he continued his speech.

Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.

“Yes?” the C.E.O. said, obviously irritated. “Is that another question?”

“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.

Eisman’s willingness to be abrasive in order to get to the heart of the matter was obvious to all; what was harder to see was his credulity: He actually wanted to believe in the system. As quick as he was to cry bullshit when he saw it, he was still shocked by bad behavior. That night in Vegas, he was seated at dinner beside a really nice guy who invested in mortgage C.D.O.’s—collateralized debt obligations. By then, Eisman thought he knew what he needed to know about C.D.O.’s. He didn’t, it turned out.

Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

This particular dinner was hosted by Deutsche Bank, whose head trader, Greg Lippman, was the fellow who had introduced Eisman to the subprime bond market. Eisman went and found Lippman, pointed back to his own dinner companion, and said, “I want to short him.” Lippman thought he was joking; he wasn’t. “Greg, I want to short his paper,” Eisman repeated. “Sight unseen.”

Eisman started out running a $60 million equity fund but was now short around $600 million of various ­subprime-related securities. In the spring of 2007, the market strengthened. But, says Eisman, “credit quality always gets better in March and April. And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. We just thought that was moronic.”

He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies—“they were making 10 times more rating C.D.O.’s than they were rating G.M. bonds, and it was all going to end”—and, finally, the biggest Wall Street firms because of their exposure to C.D.O.’s. He wasn’t allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others. Not long after that, FrontPoint had a visit from Sanford C. Bernstein’s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. “We just shorted Merrill Lynch,” Eisman told him.

“Why?” asked Hintz.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.’ ”

Eisman read Grant’s piece as independent confirmation of what he knew in his bones about the C.D.O.’s he had shorted. “When I read it, I thought, Oh my God. This is like owning a gold mine. When I read that, I was the only guy in the equity world who almost had an orgasm.”

On July 19, 2007, the same day that Federal Reserve Chairman Ben Bernanke told the U.S. Senate that he anticipated as much as $100 billion in losses in the subprime-mortgage market, FrontPoint did something unusual: It hosted its own conference call. It had had calls with its tiny population of investors, but this time FrontPoint opened it up. Steve Eisman had become a poorly kept secret. Five hundred people called in to hear what he had to say, and another 500 logged on afterward to listen to a recording of it. He explained the strange alchemy of the C.D.O. and said that he expected losses of up to $300 billion from this sliver of the market alone. To evaluate the situation, he urged his audience to “just throw your model in the garbage can. The models are all backward-looking.

The models don’t have any idea of what this world has become…. For the first time in their lives, people in the asset-backed-securitization world are actually having to think.” He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. “The rating agencies are scared to death,” he said. “They’re scared to death about doing nothing because they’ll look like fools if they do nothing.”

On September 18, 2008, Danny Moses came to work as usual at 6:30 a.m. Earlier that week, Lehman Brothers had filed for bankruptcy. The day before, the Dow had fallen 449 points to its lowest level in four years. Overnight, European governments announced a ban on short-selling, but that served as faint warning for what happened next.

At the market opening in the U.S., everything—every financial asset—went into free fall. “All hell was breaking loose in a way I had never seen in my career,” Moses says. FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he’d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. “I spent my morning trying to control all this energy and all this information,” he says, “and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don’t get headaches. At first, I thought I was having an aneurysm.”

Moses stood up, wobbled, then turned to Daniel and said, “I gotta leave. Get out of here. Now.” Daniel thought about calling an ambulance but instead took Moses out for a walk.

Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick’s Cathedral. “We just sat there,” Moses says. “Watching the people pass.”

This was what they had been waiting for: total collapse. “The investment-banking industry is fucked,” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how fucked they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy shit, I’m wrong!’ ” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.

Not so for hedge fund managers who had seen it coming. “As we sat there, we were weirdly calm,” Moses says. “We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed.” Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to fucking deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

Truth to tell, there wasn’t a whole lot of hand-wringing inside FrontPoint either. The only one among them who wrestled a bit with his conscience was Daniel. “Vinny, being from Queens, needs to see the dark side of everything,” Eisman says. To which Daniel replies, “The way we thought about it was, ‘By shorting this market we’re creating the liquidity to keep the market going.’ ”

“It was like feeding the monster,” Eisman says of the market for subprime bonds. “We fed the monster until it blew up.”

About the time they were sitting on the steps of the midtown cathedral, I sat in a booth in a restaurant on the East Side, waiting for John Gutfreund to arrive for lunch, and wondered, among other things, why any restaurant would seat side by side two men without the slightest interest in touching each other.

There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”)

When I published my book, the 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings-and-loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State read Liar’s Poker as a manual, most TV and radio interviewers regarded me as a whistleblower. (The big exception was Geraldo Rivera. He put me on a show called “People Who Succeed Too Early in Life” along with some child actors who’d gone on to become drug addicts.) Anti-Wall Street feeling ran high—high enough for Rudy Giuliani to float a political career on it—but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street’s trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. Wall Street firms would soon be frowning upon profanity, firing traders for so much as glancing at a stripper, and forcing male employees to treat women almost as equals. Lehman Brothers circa 2008 more closely resembled a normal corporation with solid American values than did any Wall Street firm circa 1985.

The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.

I’d not seen Gutfreund since I quit Wall Street. I’d met him, nervously, a couple of times on the trading floor. A few months before I left, my bosses asked me to explain to Gutfreund what at the time seemed like exotic trades in derivatives I’d done with a European hedge fund. I tried. He claimed not to be smart enough to understand any of it, and I assumed that was how a Wall Street C.E.O. showed he was the boss, by rising above the details. There was no reason for him to remember any of these encounters, and he didn’t: When my book came out and became a public-relations nuisance to him, he told reporters we’d never met.

Over the years, I’d heard bits and pieces about Gutfreund. I knew that after he’d been forced to resign from Salomon Brothers he’d fallen on harder times. I heard later that a few years ago he’d sat on a panel about Wall Street at Columbia Business School. When his turn came to speak, he advised students to find something more meaningful to do with their lives. As he began to describe his career, he broke down and wept.

When I emailed him to invite him to lunch, he could not have been more polite or more gracious. That attitude persisted as he was escorted to the table, made chitchat with the owner, and ordered his food. He’d lost a half-step and was more deliberate in his movements, but otherwise he was completely recognizable. The same veneer of denatured courtliness masked the same animal need to see the world as it was, rather than as it should be.

We spent 20 minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered we had a mutual acquaintance in New Orleans. We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. (“I didn’t understand all the product lines, and they don’t either,” he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. (“They’re buttering you up and then doing whatever the fuck they want to do.”) He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

But I didn’t argue with him. For just as you revert to being about nine years old when you visit your parents, you revert to total subordination when you are in the presence of your former C.E.O. John Gutfreund was still the King of Wall Street, and I was still a geek. He spoke in declarative statements; I spoke in questions.

But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren’t the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression. And he was saying, very deliberately, “Your…fucking…book.”

I smiled back, though it wasn’t quite a smile.

“Your fucking book destroyed my career, and it made yours,” he said.

I didn’t think of it that way and said so, sort of.

“Why did you ask me to lunch?” he asked, though pleasantly. He was genuinely curious.

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

It was now all someone else’s fault.

He watched me curiously as I scribbled down his words. “What’s this for?” he asked.

I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

“That’s nauseating,” he said.

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He’d helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like “A man’s word is his bond.” On that Wall Street, people didn’t walk out of their firms and cause trouble for their former bosses by writing books about them. “No,” he said, “I think we can agree about this: Your fucking book destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?”

Until that moment, I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm.
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Whitehead sees slump worse than Depression

NEW YORK (Reuters) - The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.

Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.

Whitehead warned the country's financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans.

"I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America," said Whitehead, who served as chairman of the Lower Manhattan Development Corp after the World Trade Center was destroyed during the September 11, 2001 attacks.

Whitehead, who helped make Goldman a top-tier Wall Street firm and led its international expansion, left in 1984 to become a deputy secretary of state under Ronald Reagan.

He warned that the country's record deficit is poised to balloon as the public calls on government for more support.

"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."

There are at least ten "trillion dollar problems," facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.

"The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs -- all very costly and all done by the government," he said.

Large deficits can weaken the country's credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take "several years" for the current problems to be resolved.

Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.

"I just want to get people thinking about this, and to realize this is a road to disaster," said Whitehead. "I've always been a positive person and optimistic, but I don't see a solution here."

UST Bond Obelisk & Printing Press

by Jim Willie, CB. Editor, Hat Trick Letter | November 12, 2008


LIQUIDATION & USTBOND SUPPORT

The two main factors pushing up the USDollar have been liquidation of speculative trades funded by it, and redemption of credit derivatives paid in it. These are not signs of any inherent investment in the USEconomy itself, but rather its liquidation. Evidence abounds of severe deterioration within the United States, a collapse of confidence, a fall in business investment, ruin in retail demand, an avalanche of job loss, and a spread of corporate breakdown beyond the financial sector. Demands for nationalization have begun outside the financial sector in a wave certain to grow in strength and breadth. The USEconomy faces a risk of not so much recession, as DISINTEGRATION. The distribution channels within the United States are at risk from lack of credit and trust. The overseas shipping channels to the United States are at risk from refused letters of credit. These constitute arterial clots never seen before. Look for export trade also to be harmed soon, as the USDollar exchange rate is silly high, and foreign customers are damaged from export of US bond toxin.

LAST DEFENSE AGAINST USTBOND DEFAULT

The printing press is that last defense. Default can be averted, but only with extraordinary actions with clear impact on the USDollar itself, undermining USTreasury integrity at the same time. The huge funding needs in excess of $2.6 trillion cannot be even remotely met by conventional USTreasury Bond issuance. Auction failures from ridiculous under-bid conditions are next to come. Higher bond yield offered is an immediate result. The last resort to printing press usage will have an immediate and negative effect on the USDollar exchange rate. Theoretically the printing press can meet the demand, but in doing so, the risk is transferred to the USDollar from the USTBond. The two are inseparable. In fact, the USGovt-backed bond in the Treasury (which used to hold gold, now pure toxic debt) is the obverse of the USDollar. The backside risk is for the USTBond yield to rise from USDollar pressure, as foreigners sell. The USFed and Dept Treasury have fiercely resisted unbridled usage of the printing press, for fear of inflation consequences. Evidence abounds, revealed in the November Hat Trick Letter report, to reveal specifics on draining the mainstream USEconomy for the benefit of corrupt Wall Street bond redemption and general bailouts. Rob the US populace realm in order to subsidize aristocratic fraud and redemption. The unlimited risk from AIG, seen in credit derivatives, and from Fannie Mae, more hidden from interest rate swap risk, is next to be manifested in double barrel form. Already, AIG is back to the trough for the third time. Keeping a lid on credit derivative explosions has been a primary motive for bailout action in recent months. The Fannie Mae demand will be more like a gigantic intravenous supply, more hidden from view.

The pennant pause pattern in the long-term USTBond yield can be seen in the chart of the 10-yield for the Treasury Note. My expectation is for the yield to move out of the pattern to the upside. Foreigners are witnessing an artificially high USDollar at the same time as an artificially high USTreasury principal (from low bond yield), a bad combination. Auctions will thus be strained in coming weeks and months. Details on the USTreasury Bond risk and connected factors are in the Macro Economy report for the November Hat Trick Letter.



STEEP TREASURY YIELD CURVE

The gold price typically loves a steep yield curve. Banks do also, but they are struggling in a horrible manner with insolvency. A great consolidation phase is underway, described in past articles, and increasing in strength, where the Federal Reserve banks benefit. Evidence is ugly and stark, as the great majority of the initial Wall Street bailout tranche was not dispensed as bond purchase but rather of bank stock purchase of Federal Reserve primary dealers! Banks are not lending the USGovt funds from the bailouts, a violation of agreements, but then again, a Coup d’Etat took place recently as Wall Street installed a Czar named Henry who acts unilaterally. The short-term bond yield in the USTreasury complex is low, while the long-term bond yield is high. Profit margins will be aided in a pyrrhic victory for the banks, who are dead but still permitted to operate. They borrow short and lend long, so have a decent profit margin restored. Price inflation will be the phenomenon discussed in coming months, as officials attempt to turn on the switch and reflate the US financial and economic systems. The task is fraught with risk and challenge. The level of deterioration in the USEconomy is great, more than what the bankster megalomaniacs figure.



CLASH DIRECTLY AHEAD, GOLD IMPLICATIONS

The major nations and camps are heading for a power clash of historic proportions. Certain nations have long memories for having been victimized by past imperial forces. Look for them to set a series of traps, with possible military confrontation. Analysis has begun of the extent of degradation and impotence of the US military machinery. Conflict resolution will not occur at the conference table alone. Brawls on the global landscape are assured. The G-20 Meeting will serve to be a sideshow, populated by clowns. To an absurd degree, the United States and England still maintain the grand illusion of being in control. They are not, since both are deep debtor nations and operating under failed banking systems. The major creditor nations will not permit a simple restart of Western nations, under the same rules. Big changes are coming. The gold and silver prices will soon enter a powerful stage of rising price, as in go through the roof. Defaults are likely at the COMEX, so watch the December contracts.

In the next couple months, all value will be called into question on the paper side. Alternatives to the USDollar as global reserve currency are soon to be discussed and even tested. Implications to global commerce are huge and all-encompassing. Gold and silver will emerge as the primary store of value, in undisputable manner. The new global masters, from the credit side and not from the debtor side, will not permit any confiscation of gold or silver to occur. Desperate attempts might be seen by the US/UK failed team, certain to reveal their impotence. Gold & silver will emerge from these smoldering ashes of bank ruins (seen clearly as unfolding) as survivors of stored value. The next round of economic decline will occur outside the financial sector, and serve as exclamation points for the need to find true value. VALUE IS ULTIMATELY FOUND IN GOLD & SILVER.

THE BIG ELEPHANT CARCASS

As a friend and contact has said to me, “The US financial system can be killed with a single well-placed shot, much like a shotgun to an elephant.” The US is so vulnerable, its true condition is indescribable. The USTreasury Bond represents an obelisk bubble specifically originating within the bond bubble that has broken in a general sense. It rises like a narrow tower above all the other deeply damaged bonds in a perversely structured credit market. All non-government bonds have suffered, while USTBonds have benefited. The high USTBond principal value and high USDollar exchange rate will encourage foreign bond holders to begin to “spend” their artificially high valued USTreasury Bond securities before events occur to greatly undermine their value. See for instance the Chinese announcement to spend $568 billion in a stimulus package. Although great news for the commodity and reflation trade, this cannot be seen as good news for the USTreasurys. They will lose a strong Chinese bid, or see outright selling. The Chinese plan calls for strong support of public housing, infrastructure, railways, and indirectly demand for commodities. Contrast theirs to US plans to support failed financial firms and deeply rooted corruption of marquee named financial firms, at the exclusion of mainstream businesses. Other nations will soon be forced to defend their own domestic currencies against an unreasonable decline in exchange rate, the result of the Black Hole in USTBonds. Currencies from nations ranging from Europe to Brazil to Russia will react by selling their USTBond reserves, and to use them for purposes consistent with why those reserves were accumulated in the first place.

GLOBAL USDOLLAR SWAP GAMBIT

A desperate attempt was made in recent weeks by the US Federal Reserve. They installed a USDollar Swap Facility, which essentially averts failure in the form of non-government bond defaults within the credit market and credit derivative markets, flooding the global financial system with USTBonds. As the US attempts to jumpstart a Reflation Initiative, the rest of the world will be pulled into the same policy, so the US power hungry but failed wizards believe. Foreigners will grow increasingly confused and defiant, offering central bank support but not showing up with any vigor for USTreasury auctions. This is a huge risk to avert USTreasury Bond default from the back door. As the globe is reluctantly coerced to follow the US lead in a reflation, the gold and silver prices are sure to respond. The clarity of the depth and scope of attempted reflation will be vividly clear when General Motors faces further bailouts. A GM failure would have more bond damage done than the Lehman Brothers failure, but with a million jobs vaporized from a mammoth vertical integration and broad fallout zone. Implications to the USDollar will be seen. In a sick sense, the extension of bailout and rescue will grow out of control, and usher in entrance to the Third World.

The transition of the new Obama Administration seems marked clearly by continuation of Wall Street and WashingtonDC insiders, not change. Expect all four major syndicates to remain in place. An analysis, a good start and by no means complete, since names are not yet final, of the Obama Cabinet is included in the November Hat Trick Letter report. Any Dept Treasury Secretary picked by Robert Rubin will continue the Wall Street stranglehold of USDollar and banking policy, not change. A vast revolving door is clear, payback for support during the long campaign for both donor support and media coverage. Never confuse change with transition.

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Unemployment by industry: The US must Brace for Impact

Friday the Labor Department disgorged a mountain of ugly unemployment data. Another``surprising'' jump in joblessness made headlines.

iTulip has observed and analyzed changes in the US economy for over ten years. In the current economic cycle, since 2006, we have focused on median duration of unemployment to give us early warning of rising unemployment.

Here we extend that analysis to point us to where unemployment is headed overall and also delve into 14 major industry sectors, including one you work in, to fine tune our forecast.

There is no doubt in our minds that this is The Big One -- a depression is all but certain unless the US develops and executes a post WWII scale stimulus plan starting in 2009, but the structure of that stimulus is critical to avoid turning the US into a sclerotic economy dominated by large corporations and big government. In any case, we forecast 10 million jobs lost by the end of next year.

charts itulip

Financial crisis: Europe's leaders can seize this opportunity to fill the leadership gap

Even were President Bush not a lame duck, it is hard to see how he would have much credibility. This is not only a crisis that wears the "made in America" label, it is a result of the deregulatory philosophy and economic policies that he has pursued for eight years. But the absence of leadership from the US gives others an opportunity to step in to fill the gap.

France and the UK have recognised this as a new "Bretton Woods moment." This is their chance to push not only for the new regulations needed to restore confidence now and prevent this kind of global financial crisis from happening again, but also for a new global financial order. These reforms are necessary if we are to make financial market globalisation work, or at least work much better than it has been.

Clearly, we need a new, strong, global regulatory system. Wall Street tell us that light regulation encourages innovation but the financial innovation that we have seen in recent years has mostly been directed at regulatory, accounting, and tax arbitrage, figuring out ways to deceive investors about the true value of the company, or to get around regulations designed to ensure that banks act in a prudent way.

Instruments were created that were so complex that not even their creators knew their full implications. They didn't help manage risk; they created risk. Meanwhile, financial markets didn't engage in the kind of innovation that would have enabled our economy to manage the risks which it faces better. They didn't create products that would help ordinary Americans stay in their home in the face of changes in interest rates or other economic circumstances.

In Europe, they have resisted innovations, like the Danish mortgage bonds which have proven so successful in that country for more than two hundred years. They resisted innovations, like GDP bonds, which help countries and investors handle the risks associated with economic volatility. When I was in the Council of Economic Advisers, I pushed for inflation indexed bonds, of the kind that Britain has long had.

Many on Wall Street opposed it - they were worried that these bonds would not be traded over and over again, but instead people would hold them to retirement. They were more worried about their commissions than the well-being and security ofpensioners. (America eventually did issue the bonds, over that opposition.)

Good regulation will encourage good innovation - creative energy might be devoted to addressing society's needs, rather than to figuring out how to exploit loopholes, or taking advantage of ill-informed borrowers. Regulatory harmonisation would be helpful to all market participants, and institutions from countries who don't comply with basic standards should be treated as pariahs Good financial institutions should not be allowed to deal with them.

Regulation begins with transparency and disclosure, but goes much further. The complaint about banks' compensation schemes is not just the level of pay, but the form, designed to encourage short sighted behaviour that was excessively risky, that encouraged bad accounting - putting too much off the balance sheet, to drive up reported profits, stock prices, and hence the value of stock options.

Conflicts of interest have been pervasive - from rating agencies paid by those whose products they rate, to mortgage companies that owned their own appraisal companies. Commercial banks and pension funds, entrusted to care conservatively with assets of others, should not be allowed to gamble with other people's money.

But that is what they have been doing, and taxpayers are now being asked to pick up the tab. These institutions need to be ring-fenced, not allowed either to gamble (which means that derivatives can only be purchased when they can be explicitly related to reducing a specific risk exposure) or to be exposed to risks from those that do. They should, for instance, not be allowed to lend extensively to unregulated non-transparent hedge funds.

There will need to be deeper reforms in the global financial system, of the kind suggested three quarters of a century ago by John Maynard Keynes. The dollar-based reserve system is inherently unstable, and is already fraying. But a euro-dollar, or a euro-dollar-yen system is likely to be even more unstable. We need a global reserve currency, based on a market basket of currencies, to reflect the multi-polar world of today. Such a system would help prevent a recurrence of the dangerously large deficit the US has had for the last 25 years. The global financial system is unbalanced in other ways and if we don't restore the balance we will have continued global financial instability.

Currently, emerging markets are hostages to the vagaries of the markets. But when the market decides they are too risky, money flows out and, more often than not, they call in the IMF which makes them cut spending, reduce deficits and raise interest rates.

These policies make the resulting downturn worse. No wonder then that developing countries are viewed as risky; it is a self-fulfilling prophecy. That is why, strange as it seems, money is leaving developing countries, that didn't cause the current problems, and going to the US, which did. It is an unjust world, and Europe's leaders should do what they can to correct the situation.

That means dealing with the IMF and the World Bank. It is at times like these that we recognise the importance of such multilateral institutions. But the IMF did nothing to prevent the crisis, and may not even have the resources necessary to help the poorest countries.

But given its flawed governance and its lack of credibility, why should those with pools of liquid capital, in Asia or the Middle East, provide more funding to the IMF, rather than work directly together with the developing countries? It is clear that reforms in governance are imperative, but in the past, such reforms have been too little, too late.

Ten years ago, at the time of the Asian financial crisis, there was much discussion of the necessity of reform to the global financial architecture. Little - too little, it is now evident - was done. It is imperative that we not just respond adequately to the current crisis, but that we begin the process of the long run reforms that will be necessary if we are to have for a more stable and more prosperous global economy.

This is a Bretton Woods moment. I hope Europe's leaders seize the moment. Much will depend on it.

Joseph Stiglitz, Noble laureate in economics and former chair of the US Council of Economic Advisers in the Clinton Whitehouse.

Richard Russell on Gold

November 7, 2008 -- I was born on July 22, 1924. In those days, families that could afford it had their babies in a hospital. Those were the days before air conditioning. My mom told me I was born during the hottest New York July she could ever remember. I grew up during the Jazz age; I was seven when the '29 crash hit and changed everything. As a teenager, I grew up during the Great Depression. I still remember those days well. My parents' best friends lost their jobs, kids moved back with their parents, and job openings literally disappeared. I often ate lunch at the Automat. Hungry men and women would be sitting at empty tables. As you left the restaurant, your plate was studied. If there was any food on the plate, somebody would immediately sit at the table and finish up the food that was left. Outside, men on street corners had little stands at which they sold apples. My dad always bought an apple for a dime. Each time he would mumble, "He needs it more than I do." Dad had a soft heart, and hated seeing old men in tattered clothes standing in the cold with a little stand on which apples were displayed. Long lines of desperate men strung out at employment agencies, you often see pictures of those lines in today's newspapers. Parks were dotted with makeshift houses called "hoovervilles," huts made of cardboard and flattened tin cans stapled together. Hollow-eyed men walked the streets of New York, asking for "spare change." Peddlers leading horses and wagons shouted, "I give cash for clothes." (Note: Goldman Sachs was founded by a street peddler.)

Last night Ryan and Faye and I went to my favorite restaurant. We were the ONLY people in the place. "This is eerie," I remarked, "It's scary,-- it reminds me of the Depression." The owner came over to talk to us. "How are things going?" I asked. The owner replied, "It's tough, but we have one thing in our favor. We own the building."

Yesterday, Ryan and I went to a Toyota dealer to look at a Prius. A few months ago people were paying a thousand dollar surcharge to get one of the hot Priuses. This time I was tough on the salesman. I told him what I was willing to spend. He looked at me as if to decide whether I was serious. Then he brought out his sales manager. He showed us a Prius, with the company internal rundown which showed the dealer's exact cost. I told the sales manager, "Look, I'm in the financial business. I know you guys want to get rid of inventory, and you've got a heck of a lot of it (the lot was crowded with cars). Let's trade this car for cash -- your cost. I'll give you your dealer's COST for the car." The sales manager paused a few seconds and started filling out paperwork. "What are you doing?" I asked. He looked up and smiled, "It's a deal." We shook hands.

Afterwards, Ryan turned to me and said, "I didn't know you could be so tough, Dad." I replied, "Hey, I'm a Depression baby. There aren't many people alive today who have seen what I've seen." Ryan asked, "Do you think we're going to have another depression?" I thought a minute and replied, "Yeah, I think we're seeing the start of it now." Which is exactly what I think.

I also went through the 1973-74 market collapse. This thing is almost worse. This week we saw the Dow fall over 900 points in two days. Wednesday and Thursday experienced two crushing 90% down-days in volume. Lowry's Selling Pressure Index is now down just 6 points from its recent record high. There's still a mountain of stocks to be sold. I'm afraid this bear market is saying something very serious. By next year I think anyone under the age of 50 will be dealing with the toughest economic times they have ever experienced. Why do I say that? Take it as the instincts of an old guy who has been there before. Last night in the restaurant brought back ugly memories. So did our trip to the Toyota dealer. The punch bowl has been smashed, and the wine, like blood, is running into the streets.

But there's a major difference between now and the 1930's. During the '30s nobody had dollars. Dollars were scarce as frog's teeth. If you did have dollars in the '30s, nobody doubted their value. Today I doubt the viability of Federal Reserve Notes (dollars). I wonder what they'll be worth a few years from now. Fiat currency is "fool's money". It's only money because some government says it is. All fiat money is a function of debt and confidence. There's only one currency that represents intrinsic wealth (no debt) on its own. And it's gold. If you can't understand that, you'll never understand why men over thousands of years have fought, explored, and died in the never-ending search for gold.

Rogers buying silver

Legendary investor Jim Rogers, whose conversion to commodities as an investment class back in 1999 preceded the end of the 20-year bear market by a couple of months, is backing silver over gold as an asset class to beat inflation.

He recently told journalists that if pushed to choose between the two precious metals he would choose silver. Rogers has moved to Singapore and is in the process of selling all his dollar holdings because he believes the resumption of the US dollar’s long term devaluation is imminent. He is even shorting US treasury bonds.

Buying precious metals is clearly linked to Rogers negative stance on the US dollar which has an inverse correlation to gold and silver which have indeed suffered from dollar recovery over the past couple of months. Gold is down around 12 per cent to silver’s one-third sell-off.

Silver No1

Rogers admits that silver has been particularly battered down, and perhaps that is why he likes this precious metal. Silver is leveraged to the gold price, so when gold goes down, silver goes down further. But equally when gold prices rise, silver will rise even higher.

Why then should the fortunes of gold change in the near future? Rogers is surely right that the dollar is the key. President-elect Obama is currently putting his new executive team together, and we will have to wait-and-see its policies but the omens are not good.

We have already seen how economic circumstances have forced a Republican administration into a multi-trillion dollar bank bail-out plan. The follow-through is a fiscal spending package, and state bail-outs for the US car manufacturers. All this is going to require funding at a time when rising unemployment and falling company profits mean tax revenues are falling.

A huge increase in borrowing is therefore inevitable and flooding global capital markets with new dollar paper will be inflationary and devalue the US currency. How to profit from US dollar devaluation? You buy an inversely correlated asset like gold or silver.

Rogers leads the pack

Now if Jim Rogers is right - and he was the first major investor to call the commodities boom - then he is unlikely to be alone for long. Others will hear his call and act on it. Actually, markets are going in that direction whatever he says or does.

And why is silver leveraged against the gold price? It is simple really. Both are precious metals but the available supply of silver is less than one-tenth the size of the gold market, and the dynamics of supply and demand in such a situation are obvious.

Rogers has never been a gold or silver bug himself - and ridiculed long-term holders of precious metals in his classic book ‘Hot Commodities’ - so his conversion to this asset class is all the more significant. Perhaps he has also noted the pressure growing in the silver futures market where a call for physical delivery could shortly break the spot price mechanism and lead to much higher prices.

Even one rich Arabian investor would be able to buy enough silver futures and break the market by demanding physical delivery, as is the right of any contract holder. It is a one-way bet that somebody is bound to make very soon.

Thinking the unthinkable

By Serge Halimi

So, everything was possible after all. Governments could take radical action in the financial sector. The constraints of the European stability pact could be forgotten. Central banks could kowtow to governments and stimulate the economy. Tax havens could be blacklisted. Everything was possible because the banks had to be rescued.

For 30 years, any suggestion that the liberal order might be amended to improve the living conditions of ordinary people, for example, met with the same stock responses: the Berlin wall has gone, didn’t you notice?; that’s all ancient history; globalisation is the order of the day now; the coffers are empty; the markets won’t stand it.

And for 30 years, “reform” went ahead – in reverse. This was the conservative revolution, handing over increasingly substantial and lucrative swathes of national assets to the money men, privatising public services and transforming them into cash machines to “create added value” for shareholders. This was liberalisation, with cuts in wages and social security, forcing tens of millions of people to borrow in order to maintain their purchasing power, and “invest” with brokers and insurance agents in order to cover the cost of education, healthcare and pensions.

Falling wages and social security cutbacks naturally led to financial excesses. Creating risks encouraged people to take steps to protect themselves. Speculation boomed, fuelled by the ideology of market forces, and housing became a prime target for investment. Attitudes changed, people became more selfish, more calculating, less public-spirited. The 2008 crash is not just a technical hitch that can be put right by “learning lessons” or “putting a stop to abuses”. The whole system has broken down.

The would-be repair men are already at work, hoping to restore it, plaster over the cracks, give it a fresh coat of paint, all ready to commit yet another offence against society. The wiseacres who now pretend to be disgusted with the reckless results of liberalism are the very ones who provided all the incentives – budgetary, regulatory, fiscal and ideological – for the ensuing spending spree. They should feel disqualified, but they know an army of politicians and journalists are eager to do a whitewash job.

So we have Gordon Brown, whose first act as Chancellor of the Exchequer was to “liberate” the Bank of England, José Manuel Barroso, president of a European Commission obsessed with “competition”, and Nicolas Sarkozy, who invented the “fiscal shield”, introduced Sunday working and privatised the post office: all, it seems, busy “rebuilding capitalism”.

Their effrontery marks a strange hiatus. What has happened to the left? As for the official left, it just wants to turn the page as quickly as possible on a “crisis” for which it is jointly responsible. This is the left that went along with liberalisation, Democratic president Bill Clinton deregulating the financial sector, François Mitterrand ending index-linked wages, Lionel Jospin and Dominique Strauss-Kahn privatising public services, Gerhard Schröder axing unemployment benefit. So be it. But what about the other left? Will it be content, at a time like this, to dust off its most unambitious projects, the serviceable but terribly timid plans for the Tobin tax, an increase in the minimum wage, a “new Bretton Woods Agreement”, wind farms? In the Keynesian era, the liberal right thought the unthinkable and took advantage of a major crisis to impose it. Friedrich Hayek, intellectual godfather of the movement that spawned Ronald Reagan and Margaret Thatcher, stated the case in 1949: “The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which… is daily making possible what only recently seemed utterly remote.”

So will someone now call free trade into question, free trade which is the very heart of the system (1)? “Utopian”? But everything is possible when it comes to banks…

link

PHONIES in ACADEMIA Dealing With TBS & The Problems of Rare Events

(In progress)

I just came back from Paris where I listened to people defend mathematical risk management, frustrated at my attempts to conceal my anger. Then I was emailed a million versions of Greenspan's testimony --the sight of whom makes me fly into rage. I am now convinced that an (advanced) economics degree lowers one's ability to understand the difference between absence of evidence and evidence of absence. Some people need to be locked up, and locked up quickly.
Tyler Cowen, or How Bankers & Traders Go Bust, but Academic Fraudsters Stay

In a Slate review of The Black Swan (mid 2007), the economist Tyler Cowen attacked the argument that markets cannot price rare events –using bogus empirical claims. These claims were unsound (absence of evidence/evidence of absence) but were also factually incorrect, even at the time he wrote them (we did not need the current crisis to assess the invalidity of the claims).

He wrote:

Only on Wall Street do people seem to give proper credence—not too much, not too little—to very unlikely events

(more here about my reaction).

You would think that someone who made such a dangerous and misleading statement would do a mea culpa and apologize to society and try to counter it by correcting his past thought –after all it is claims like these that blew up the banking system, impoverishing hundreds of millions. But, nothing; he keeps playing guru. He can be deemed still very dangerous to society, as he does not belong to a profession where this kind of fraud can be penalized (bankers go bust, academic charlatans stay).

How can an intellectual system evolve under these conditions? From funeral to funeral?

Shouldn't he have his tenure taken away?
Academic Economists and Evidence

Spyros Makridakis has shown that supplying econometricians with data contradicting their methods does not lead to any revision of beliefs on their part (as discussed in TBS). Evidence is what they select. This does not stop me from being enraged by the following. I put a paper on Edge.Org with close to 20 Million pieces of data showing that prediction errors swell out of proportion –and questioning the use of prediction markets in Extremistan. Here is the reaction






If 20 million pieces of data on almost all macroeconomic variables, and the Rome burning aspect of the banking crisis is not empirical support, what can be deemed empirical support?
Malpractice

There is more: Statements made by Robert Merton, Alan Greenspan, etc. (later) Aren’t you horrified and shocked at the economics establishment? If you are not, you have a problem.

Indeed Robert C. Merton is perhaps the best case for the termination of tenures --malpractice.
Predictors of the Crisis

By the hindsight bias everyone now "predicted" the crisis --Ken Rogoff [suit & tie] claimed to have seen it coming but gave no evidence to having done anything about it, warned his friends and family to protect their portfolios, gone short SP500, bought puts on AIG, etc. The acid test: check the person's 401K. Did it contain bank stocks? did his portfolio include financials? Was the person long the market? (anyone long stocks cannot have predicted a crisis except, of course, if his portfolio had short ETFs). It is so simple to audit people and clear-up bullshitters.
J. Barkley Rosser, Web Harassment, Cognitive Dissonance & Ego Defense Mechanism at Work

I once received the following fan mail from J. Barkley Rosser the editor of a seemingly vapid academic journal, in which he invited me to contribute:

“Congratulations on your tour de force. (...) I would also like to invite you to submit papers to the journal I edit, JEBO. “ J. Barkley Rosser, Jr. Editor, Journal of Economic Behavior and Organization, Professor of Economics and Kirby L. Kramer, Jr. Professor of Business Administration James Madison University [August 2007]

Needless to say that my no-nonsense orientation clashes with these career-furthering venues (I despise academic resumé-builders, and the fellow has all the attributes of my academic parasite). Feeling rebuffed, the poor fellow went on an entertaining web-smearing mission which includes producing factually incorrect information about my income (it is not hard to get reports on liars playing with your reputation on the web and identify sources of calumnies; everything one puts on the web is permanent). But, interestingly, my refusal of his “invitation to submit” in his technical journal suddenly made me a ...journalist. Recently, he posted:

“BTW, no way Taleb will get it [The “Nobel”]. Krugman will get it before him, and he will not get it this year, although he might some day down the road. Taleb is a popularizer, a journalist [sic]. He has proposed no new idea of his own, except for ones that do not work, like the "barbell strategy," which would not be a Nobel-worthy idea even if it actually made money, which it does not.” [October 2008]

[note that the idiot wrote this “does not work” lie when the SP500 was down about 40% for the year, almost all my hedge-fund detractors were bust, and my own track record, which I do not discuss, is clearly present in the FACT CHECKED press. Also note that my barbell strategy has nothing to do with making money –although it does OK– but with being robust to model error]. They don’t have lie-detectors in that business.

Two-facedness: it is common for economists to call themselves “rigorous” and claim peer-reviewing as a stamp of authenticity, produce more bullshit than astrologers, yet feel superior to journalists who fact-check their statements. [plenty of evidence]

Contradictions & Loss of Consistency: Note that it is very common to find the same person calling me “unreadable” upon first encountering my work then, after the pick up in book sales, change the insult into “popularizer” (or “this is utter nonsense” first, then, after my ideas become accepted, “he is saying nothing new; I knew this” or "X wrote about it before" --as if it now made rare events now tractable). I can elicit so much hatred in economists and other academic parasites they lose consistency in their attempt to discredit me. Interestingly when they try to find the X who wrote about it before, few critics get the same X: Mill, Schumpeter, Popper, Mandelbrot, Pareto, Kahneman,Socrates, Hayek, etc. I counted around 23 alleged predecessors]
How My Warnings were Received By Parasites/Economists

If you want an interesting definition of puny and missed the point, here is Paul Seabright's review in the Times Literary Supplement (aside from Cowen, the only other economist who tried to write a review). You can't miss the point any more than the fellow. Why is it that an economics degree make people stupid, dangerously stupid.

see the links

Rant of the day ~ Collapse

Comes from Patrick Henry, Armchair economist


Hedge Fund Collapse - Major - (excerpts)

I predict and have been saying for some months now that we will experience a major hedge fund collapse soon. This will be larger than the collapse last year of the of $9 billion hedge fund Amaranth Advisors....



Also it is fascinating to see how desperately this entire process is failing...

Not even the idiots making decisions to bail out industries in Washington right now have the stomach to hand over the money to the likes of Cerebus. They would go to jail for something like that.

What if Chrysler / GMAC / Cerebus all go down the tubes? What a party that would be.

Don't be stupid. Shake all preconceived notions about the US stock market being a place to put your money for your future. The world is being reshaped as we speak and until the idiots running our government have the "balls" (for lack of a better word) to shut down the massive unregulated markets that trash the global financial system for a living and admit all of the norms that have defined the functioning of the capital markets have been completely destroyed by this massive unregulated market and their creation of "products" to place their highly leveraged bets, normal people must stay as far from this circus as possible.

If you are saving for your future, get out of the sucker's stock market before it becomes an empty dustbin.

NYT~ Frozen Iceland

REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, “It feels like you’ve been put in a prison, and you don’t know what you did wrong.”

This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.

It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.

Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.

“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.

The loss goes beyond the personal, shattering a proud country’s sense of itself.

“Years ago, I would say that I was Icelandic and people might say, ‘Oh, where’s that?’ ” said Katrin Runolfsdottir, 49, who was fired from her secretarial job on Oct. 31. “That was fine. But now there’s this image of us being overspenders, thieves.”

Aldis Nordfjord, a 53-year-old architect, also lost her job last month. So did all 44 of her co-workers — everyone in the company except its owners. Some 75 percent of Iceland’s private-sector architects have been fired in the past few weeks, she said.

In a strange way, she said, it is comforting to be one in a crowd. “Everyone is in the same situation,” she said. “If you can imagine, if only 10 out of 40 people had been fired, it would have been different; you would have felt, ‘Why me? Why not him?’ ”

Until last spring, Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (while forecasts for next spring are as high as 10 percent). A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live.

Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.

Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.

There was so much work, employers had to import workers from abroad. Ms. Nordfjord, the architect, worked so much overtime last year that she doubled her salary. She was featured on a Swedish radio program as an expert on Iceland’s extraordinary building boom.

Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing. But it promised that there would be enough to last through next summer.

The next day, everyone was herded into a conference room and fired.

Employers are hurting just as much as employees. Ms. Hedinsdottir has laid off seven part-time employees, cut full-time workers’ hours and raised prices. The Kaffitar branch on Reykjavik’s central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.

While business is dwindling, costs are soaring. When the government took over the country’s failing banks in October, Ms. Hedinsdottir’s latest shipment of coffee — more than 109,000 pounds — was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough cash into foreign currency.

“They were calling me every day and asking me what the situation was, and they got really nervous,” Ms. Hedinsdottir said of her creditors. They got so nervous that they sent the coffee to a warehouse in Hamburg, Germany, where it now sits while she tries to find the foreign currency to pay for it.

Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.

“My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.

In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.

Anthony Restivo, an American who worked this fall for a potato farm in eastern Iceland and was heading home, said all of the farm’s foreign workers abruptly left last month because their salaries had fallen so much. One man arrived from Poland, he said, then realized how little the krona was worth and went home the next day.

At the Kringlan shopping center on the edge of Reykjavik, Hronn Helgadottir, who works at the Aveda beauty store, said she could no longer afford to travel abroad. But the previous weekend, she said, she and her husband had gone for a last trip to Amsterdam, a holiday they had paid for months ago, when the krona was still strong.

They ate as cheaply as they could and bought nothing. “It was strange to stand in a store and look at a bag or a pair of shoes and see that they cost 100,000 kronur, when last year they cost only 40,000,” she said.

In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently fired secretary, said she had worried for some time that Iceland would collapse under the weight of inflated expectations.

“If you drive through Reykjavik, you see all these new houses, and I’ve been thinking for the longest time, ‘Where are we going to get people to live in all these homes?’” she said.

The real estate firm that used to employ Ms. Runolfsdottir built about 800 houses two years ago, she said; only 40 percent have been sold.

According to Icelandic law, Ms. Runolfsdottir and other fired employees have three months before they have to leave their jobs. At the end of that period, she will start drawing unemployment benefits.

Meanwhile, her husband’s modest investment in several now-failed Icelandic banks is worthless. “They were encouraging us to buy shares in their firms until the last minute,” she said.

She feels angry at the government, which in her view has mishandled everything, and angry at the banks that have tarnished Iceland’s reputation. And while she has every sympathy with the hundreds of thousands of foreign depositors who may have lost their money, she wonders why the Icelandic government — and, in essence, the Icelandic people — should have to suffer more than they already have.

“We didn’t ask anyone to put their money in the banks,” she said. “These are private companies and private banks, and they went abroad and did business there.”

Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world’s most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young and flexible population, and has triumphed after hardship before.

Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. “We sat down and said, ‘We all have ideas, and we can help each other through difficult times,’ ” she said.

But she said she was just as shocked as everyone else by the suddenness, and the severity, of the downturn. When the prime minister, Geir H. Haarde, addressed the nation at the beginning of October, she said, her 6-year-old daughter asked her to explain what he had said.

She answered that there was a crisis, but that the prime minister had not told the country how the government planned to address it. Her daughter said, “Maybe he didn’t know what to say.”

Leap 2020

Financially speaking, Iceland thought of itself as UK (1), in the same way as, financially speaking, UK thought of itself as the US and the US thought of themselves as the entire world. It is therefore quite useful to study the case of Iceland (2) in order to understand the course of events that London and Washington will follow in the next 12 months (3).

What we see today is a double historical phenomenon:

. on the one hand, since September 2008 (as anticipated in the February 2008 edition of the GEAB - N°22), the whole planet has become aware that a global systemic crisis is unfolding, characterised by the collapse of the US financial system and its contagion to the rest of the world.

. on the other hand, a growing number of global players are beginning to act on their own, in reaction to the ineffectiveness of the measures advocated or implemented by the US though they are the centre of this global financial system. What happened with this first Euroland (or Eurozone summit which took place on Sunday, October 12, 2008, and whose decisions, by their scope (close to 1,700-billion EUR) and their nature (4), resulted in a regain of confidence on financial markets from all over the world, is typical of the « post-September 2008 world ».


Map of deposit insurances in the EU - Source AFP - 10/09/2008
Indeed there is such a thing as a « post-September 2008 world ». According to our team, it is now clear that this past month will remain in the history books of the whole planet as the month when the global systemic crisis started; even if what is really at play is its decanting phase, the last of a series of four phases of the crisis described by LEAP/E2020 as early as June 2006 (5). As always when it comes to large human groups, the perception of change among the general public only occurs when change is already far on its way.

As a matter of fact, September 2008 is the month when the « financial detonator » of the global systemic crisis exploded. According to LEAP/E2020 indeed, this second semester 2008 is the time when « the world dives into the heart of the impact phase of the global systemic crisis » (6); which means for our researchers that, at the end of this semester, the world enters the « decanting phase » of the crisis, i.e. a phase when the outcome of the shock settles down. This phase is the longest (from 3 to 10 years, according to the country) and the one affecting the largest number of people and countries. It is also the phase when the components of new global equilibriums will start to appear, two of them being already described by LEAP/E2020 in this 28th edition of the GEAB in the graphic illustrations below (7).

Leap 2020