Archive for July, 2012
Economic Depression

David Stockman explains why an economic collapse is all but inevitable:

You can’t live beyond your means because it’s pleasant. It’s not sustainable. Clearly the level of debt that we have is not sustainable. We have a whole generation – the Baby Boom – that’s about ready to retire, and they have no retirement savings. We have a federal government that is bankrupt, literally. Its [debt is] $16 trillion and growing by a trillion a year. Something’s going to give. We can’t pay for all these entitlements. There won’t be the revenue generation in the economy to do it.

So as a result of that, we are deluding ourselves if we think we can just continue to spend.

 

Austerity isn’t an elective course. Austerity is something that happens to you when you’re broke. And yes, it is painful and spending will go down and unemployment will go up and incomes will be impaired, but that is a consequence of the excess debt creation that we’ve had for the last thirty years. So austerity is what happens when you break the rules.

And somehow we have this debate going on. They’re making a mistake. They chose the wrong strategy. Do you think Greece chose the wrong strategy with austerity? No. No one would lend them money. That’s why they ended up in the place they were. Do you think that Spain today is teetering on the brink because they said, “Oh, wouldn’t it be a good idea to have austerity?” No, they had a gun to their head. They were forced to do this because the markets would not continue to lend, and even now their interest rate is again rising. The markets are losing confidence, and unless the ECB prints some more money and bails them out some more, they are going to have austerity. So the austerity upon us is the backside of the debt supercycle we had for the past thirty years. It’s not discretionary.

 

The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an “interest rate.” That isn’t a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he’s still in a positive spread. And you can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That’s essentially what we have today.

 

I would stay out of any security markets. These are unsafe markets at any speed. It’s all tied together. As I was saying when the great margin call comes and they start selling the Treasury bond, they’ll take everything else with it. Real estate is priced off Treasuries. Mortgaged-backed securities are priced off Treasuries. Corporates are priced off Treasuries. Junk bonds are priced off Treasuries. Everything. The stock market will go into a panic. We don’t know when the timing will come – we’ve never been in a world where there is $15 trillion worth of central-bank balance sheets, like we have today. The only thing I think you can conclude is preservation is the only thing you are about as an investor. Forget about yield. Forget about return. Just keep yourself liquid and preserve your capital, because you can’t predict the day when, as I say, the great margin call in the sky comes down.

 

When the financial markets reprice drastically, it’s going to have a shocking effect on economic activity. It’s going to paralyze things. It’s going to finally cause consumption to come down. It’s going to cause government spending to be retracted.

You know, the Keynesians are right. Borrowing does add to GDP accounts. But it doesn’t add to wealth. It doesn’t add to real productivity, but it does add to GDP as it’s calculated and published – because GDP accounts were designed by Keynesians who don’t believe in a balance sheet. So they said, “If the public sector and the household sector are borrowing, let’s say, $10 trillion next year, run it though GDP, you’ll get a big bump to GDP.” But sooner or later your balance sheet will collapse. They forgot about that one. So my point is that we’ve gone through a thirty-year expansion of the balance sheet, an artificial growth in GDP; now we’re going to have to be retracting the collective balance sheets. That means that GDP will not grow. It may even contract, and no one’s prepared for that.

Hat tip John Dinkum Wagner. Watch the video here

John also highlighted a reader comment:

Every major country in the world, except China, is unable to pay its bills without going deeper into debt. All while interest rates are at dead nuts lows. Low interest rates should only be earned on the safest of plays, but loaning to a broke country is clearly not a safe play. Once broke, a default can occur at any time, or it can be delayed until hyperinflation. That’s it. And once the whirlwind effect of inflation pushing up interest rates starts, the existence of the major currencies of the world, except the Chinese Yuan, will be measured in months.

Image courtesy of itulip

 
Splendid Links 2

A couple of videos:

  • Charles Ferguson on the Financial Landscape after 2008’s “Inside Job”: More pointed commentary on the lack of prosecutions.  He has released a book, Predator Nation in addition to his documentary Inside Job. He suggests that the financial sector has subverted the legal system in addition to the regulatory one. If he is correct there will be interesting times ahead. If something can’t last, it will not.
  • Sheila Bair: Keeping Banks Honest: Bill Moyers interview with Sheila Bair. Bair was appointed by President Bush in 2006 to chair the FDIC. During the 2008 meltdown, she argued that in some cases banks were NOT too big to fail — that instead of bailouts, they should be sold off to healthier competitors. Hat tip The Big Picture

A text post:

And to round it off, an audio:

 
Inside Job

Inside Job is a great documentary. When I viewed it the cinema audience clapped at the end. Watch it here for free (Hat tip Jesse).

It does an excellent job of highlighting the corruption behind the Global Financial Crisis. But it does not cover the deliberate breaking of the law on the transfer of property titles in many states. The lack of criminal prosecutions of senior bankers in relation to this is beyond scandalous, it proof of how far down the path of crony capitalism America has strayed. Let’s hope this is not another case of where the USA leads, the rest of the English speaking developed world follows.

If the legal system continues to fail to do its job there will eventually be a wholesale loss of trust in the system. When that happens the country becomes ungovernable by anything other than brute force and terror. Let’s not go there. That’s why this report of a sheriff launching a criminal investigation for mortgage fraud is so heartening:

Oh Mr. Sheriffs — GO GET ‘EM!: Christopher Conley, High Sheriff of Carroll County NH, holds a press conference at the County complex on 7/2/12. He announces that he is forming a task force to investigate mortgage fraud. Fraud is occurring across the United States. Properties being foreclosed on that are owned outright. Financial institutions that stake claim to a property without a deed. The Sheriff states: “In each case there is no accountability be the financial institution, no one to present a reply, no decision maker to speak with. If you are a property owner and are experiencing any of the above. Contact the Sheriff at CarrollCountysheriff@carrollcountynh.net, Carroll County Sheriff’s Office, Attn: Deputy Brian King, PO Box 190, Ossipee, NH 03864, 539-2285 x317. Hat tip Market Ticker Guy

There is more at stake than many realize. The tide of sleaze and corruption must be turned around before the descent into despotism and anarchy. Otherwise the resultant conflagration will leave civil war like levels of carnage. The lives of many will be brutal and short or brutally cut short.

Since the making of Inside job we have had the MF Global theft of segregated accounts and the LIBOR manipulation scandal. The public exposure of the LIBOR manipulation will turn many trusting of people into a diehard cynics. The implications of the manipulations are enormous:

The Libor Scandal Explained: Barclays Bank has today been fined a combined £290M by regulators in the USA, UK and EU for manipulating the LIBOR; an acronym which stands for “London Interbank Offered Rate”. If you think this doesn’t sound sexy, you’re right. But if you think it isn’t critically important and one of the worst scandals to be exposed from the GFC so far, you’re wrong. The LIBOR is meant to be an objectively-set interest rate. It is used as the reference rate for an estimate $350 trillion in derivatives, not to mention an unknowable number of mortgages, international loans and financing arrangements. Many GFC scandals have involved institutions and hedge funds swindling each other out of paper wealth which never really existed. This one has involved one or more banks ripping off any number of governments, businesses, pensions funds and homeowners, and the fines so far are only the precursor to civil lawsuits and further criminal investigations. Hat John “Dinkum” Wagner.

MF Global shows you that you can’t be sure your money is safe anywhere in the system. A recipe for money under the mattress, falling prices and a full on depression if ever there was one. Of course many have been aware of this problem for some time – do check out some of the links in the attached document. Allocated accounts aren’t what they used to be. “What’s mine is mine and what’s yours is mine too” comes to mind. Who else might that have appealed to?

People’s foul nature echoes down the ages. It is not just in adversity that the character of a man is revealed, but in their moments of greatest triumph. It is not just absolute power that corrupts, little Hitlers can spring up anywhere. Perhaps there was more to the old fashioned cultural pressure to be a gracious winner than first meets the eye. It evolved in the culture for a reason, it may have increased the ability of the culture to propagate through time. I’m not sure if the bragging self aggrandizement of much of contemporary English speaking society will prove similarly helpful for its constituents. Time will tell.

In the mean time, stay safe. Do not trust even formally trustworthy brands with your money. There are tougher times ahead, but they will not be totally unprecedented. History may not repeat, but it does rhyme. The nimble and quick witted can not just survive, but thrive. Although life being what it is even the best of us can be caught by black or grey swan events. But setting in place fall back options now, while it is still possible, can pay enormous dividends. Your health as well as your wealth may depend on it.

There are actions and options you can take to maximize your freedom of movement in the troubled times ahead. These will greatly increase your chance of maintaining some control over your destiny. Let’s do what we can now so we can later be called happy. Happy in times when the truth of the old adage “Until he is dead, do not yet call a man happy, but only lucky.” becomes more apparent. But these will be the subject of future posts.