I normally start my morning reading newspapers and online magazines in Europe before the US markets open. The graph to the left shows in percentage to GDP of loans that the Austrian banking knuckleheads made to the developing countries of Eastern Europe. Note that this is as of September 2007. There are no dollar figures and so I will provide them. These figures were obtained from the Austrian national newspaper derStandard in an article describing the frantic efforts of their finance minister Joseph Proll to put together a rescue package for a banking sector which looks like it could blow sky high. There was a similar coverage in the superb German news magazine Der Spiegel. It seems that Austrian Banks recently lent 230 billion Euros to the countries listed to the left. Austria’s GNP is about 330 Billion euros and thus they lent a figure equal to 70% of the country’s GNP, a gigantic figure. DerStandard said that if only 10% of these loans fail, the Austrian banking system could collapse. They provided no explanation how a seemingly small figure of 23 Billion euros could destroy their banks and why Joseph Proll is trying to raise a rescue package of 150 Billion Euros but something dangerous is clearly afoot. I would expect it might have something to do with leverage. Many other countries have lent to Eastern Europe as well but for reasons unknown, the Austrians went hogwild. These losses could rival the blunders of our own homegrown banking imbeciles on a per capita basis. The financial meltdown is afflicting other countries in the Eurozone as I have noted before and include Iceland, Spain, Greece ,Italy and the UK and Ireland as particularly at risk.Ireland seems to sink almost day by day with businesses like Dell Computer fleeing the country this past month. Now the politicians have pledged sums to the banks equal to 220% of the country’s entire GDP and the really worrisome figure in my opinion is not that almost unimaginable number but the shocking jump in CDS quotes for the Irish debt. One year ago it would have cost you 10 cents to insure $100 of Irish debt via a Credit Default Swap(CDS). Last week it had jumped to $3.50 per $100 and that quote had tripled in about a week! I should mention that CDS premiums are soaring for many countries but clearly Irish debt looks really shaky.
The news from Japan is horrible with their GDP falling 12.7% in the most recent Oct to Dec quarter which compares to the US at -3.8% and Eurozone -1.2%. It’s hard to decide which region is going to hit the ground first with so many countries in a flat spin death spiral.
The Bushobama Depression
Well it’s official. It’s a Depression. Two days ago at a regional conference in Kuala Lumpur, IMF Managing Director Dominique Stauss–Kahn said that the big world economies are already in a depression. Of course this is coming from a guy with a hyphenated name like a Singing Nun who is also known in France as le grand seducteur for bonking a colleagues wife at last years Davos festivities. Maybe we should wait for a second opinion from someone not from France. How about say, from Japan? In the 1990’s they went through their own depression and only briefly pulled out of it in the past 5 years with the debt fueled world boom but now it looks like they are back in their depression with the rest of us in our globalized death spiral. But take heart. Bushobama has picked some real winners to pull the US out of it’s flat spin with some really creative ideas tried during the Japanese depression. Bushobama’s first face plant was picking some real winners to head his economic team like Larry Summers and Tim Geithner. This is the same Larry who was fired as the Dean at Harvard for saying women are too dumb to do math and science. I’m sure they are too stupid to do the kind of economics practiced by old larry. Geithner and the terminally arrogant Summers actually have some knowledge of Japan’s attempts to fix their depression and they say that that those attempts failed because they were too halfway and weak and too poorly timed. We will take a detailed look at their comments but I am starting to think that men are too stupid to do economics. In 1990 Japans public debt was 19% of their GDP and now it’s the highest in the developed world at 180%. The US by contrast was 60% in 2007 but obviously much higher now with $9.7 Trillion dollars in debt already borrowed or promised as of this month. Does this sound like a country who used half way measures? In the 1990’s the Japan spent more than $1 Trillion on 10 stimulus programs which most observers including Summers said was money down a spiderhole. The NY Times last week did a segment of the Japanese stimulus concluding it was a waste of money building bridges and highways to nowhere. The Japanese prevented the default of insolvent banks and corporations by preventing markdowns of their debt and buying equity and commercial paper. The more money they poured into their banks, the more the banks hoarded the money. And what was worse the companies actually tried to pay down their debt and the doggone Japanese consumers wouldn’t consume and instead saved their money at a 12% clip, one of the highest in the world.
So you ask, is it fair to compare the US economy to the Japanese economy or for that matter the Swiss or Swedish or Chilean economy if we are trying to avoid a repetition of their mistakes? If you believe in John Maynard Keynes it is fair, because the solutions are the same Keynesian solutions of digging a hole and filling it up. In 1980 the Japanese Central Bank interest rate was 9%. By 1987 Japan was fueling a ferocious bubble in real estate and their stock market. The central rate was 2.5% and cheap and easy credit fueled a boom which drove the Nikkei from 8000 in 1983 to almost 40,000 near the end of the decade. As an aside, the Nikkei is now today exactly where it was in 1983. The bubble finally popped when the Central bank suddenly raised their rates to 6%. Then to stop the carnage they tried dropping interest rates to nearly zero in the 1990’s. Nada. They cut taxes following the lead of Reagan and other Alzheimer economists. Nada. Nothing trickled, not up, not down, not sideways. The citizens of Japan were fried and refused to consume and instead did the only rational thing: they saved while their government borrowed and floundered and spent to no avail. Do these blunders sound familiar? The so called stimulus working its way through the Washington pork and sausage factory is a a real mishmash of unrelated plundering of of my children’s future. . The national debt at the end of the Texan Bushwhacker was said to be about 10.8 Trillion which is 78% of our GDP. There are all manner of trillions allocated or promised which run from about another 4 Trillion to $9.7 Trillion which will take us to well over 100% this year and Bushobama promises trillion dollar annual deficits into the future and so it appears the US is catching up with Japan’s 180% debt to GDP at a rapid clip. The perps who fueled our own real estate and debt driven boom are in charge of the solutions which are attempting to solve the problem with yet more debt and propping up the wealthy and the financial institutions by running the printing presses which serve to increase the power of the Wall Street and Beltway Elite and increase the power and reach of the government. It goes without saying that this will produce inflation down the line which will destroy the savings of our citizens who are only just now trying to stop consuming and start saving. This is a cruel betrayal and a cynical disregard for the millions of young people who voted for change who will soon find their futures are being sold down the river by a charming black president with a good jump shot and a bad cigarette habit. So the depression is on and will be likely picking up speed in coming months as other dominoes fall like the commercial real estate market, commercial paper,credit card and student loan debt, regional banks and assorted and sundry corporations who made the mistake of not trying to suck on the Federal Tit while they had the chance. The financial meltdown which started under the bushies is picking up speed under the already failed policies of a corporate financial and military state which like the Bourbon Dynasty, has learned nothing and forgotten nothing.
Thoughts on Default
This is a hundred billion mark note from Germany circa 1923. With this bill you could buy 2 beers during the episode of German hyperinflation which ended in November 1923 when the government finally capitulated and issued the new and improved Rentenmark. You could exchange 10 of these bills to obtain one Rentenmark or 1 trillion old marks to 1! Could hyperinflation happen here? The short answer of course is that it probably could happen almost anywhere. Countries default in different ways. Kenneth Rogoff and Carmen Reinhart are one of the most prolific economic writers and you will see them cited in many searches on economics. They wrote a fascinating study for the IMF and the NBER(National bureau of economic research) where they searched the last 800 years for government defaults:http://www.nber.org/papers/w13882.
They concluded that national defaults were hardly rare. They even used the phrase that these bankruptsies were a “universal phenomenon.” France went bankrupt 8 times from 1500 to 1800 and it wasn’t always a pretty phenomenon. The regents after the Revolution expropriated chuch property and lands of the wealthy and you bankers take note: they executed many lenders. Spain went bankrupt 7 times in the 19th century alone!
It would seem likely that we will see some national bankruptcies in the near term. The obvious candidates are Zimbabwe and Iceland. The 3 largest banks in Iceland have defaulted on their debt of over $120 Billion which has left every man woman and child in the icy country owing over $500,000! The bank debt to GDP is an astronomical 1000%. Much of the rest of Europe is in terrible shape with the UK, Ireland, Spain, Italy and Greece suffering the most. There are many requirements to join the EU, one of which is a deficit to GDP not exceeding 3%. The EU central bank estimates that the average debt of all members could rise above 4% in 2009 with 17 EU states above 3%. By comparison, the US looks to be above 10% which leaves us out from consideration I suppose. This could pose grave dangers to the EU if some of its members default and according to Der Spiegel, if several countries default, the Euro could collapse. The countries are funding these deficits with bonds which are in the case of Italy and Greece becoming a hard sell without ever escalating interest rates, Most of the European banks including the economic heavyweights like Germany and Switzerland have banks full of poisoned US toxic debt as well as loans to emerging markets in Eastern Europe which are turning sour fast. The UK is in terrible shape with plummeting oil exports from the North Sea and almost total collapse of their financial services industry and their real estate market. The pound is off 40% in the past 6 months and is approaching parity with the Euro. The Brown administration has been pouring money into their banks with the same terrible results there as here and their most recent idea this week is an insurance plan for the toxic debt also eerily similar to the ideas floated by Geithner and his blockheads in Washington. It all hearkens back to Tom Lehrer’s song”We will all go together when we go, Every Hottentot and every Eskimo…” The major difference in the US is that we depend upon other countries, chiefly China and Japan, to buy our debt from their historically large current account surpluses. But those surpluses look to be dropping fast. In Japan the Yen has become the strongest currency in the world just as their exports have literally fallen off a cliff . MSNMoney reports that Japan’s industrial production is now falling at at a jaw dropping 63% annual rate followed by Korea at 43%. China is keeping a brave face on and figures are hard to come by lately but it appears now that their job losses in the last 6 months are now over 23 Million! It would seem to this observer that if the surpluses go, so will the need to buy treasuries. The surpluses are dropping in the oil exporting countries as well posing obvious potential problems for the treasury auction market. The problems in Japan are particularly acute with a soaring yen and exports so vitally important to their economy. They also have a huge public debt to GDP ratio of 170% surpassed only by Zimbabwe and Lebanon. With a limited understanding of World financial markets, I find it difficult to see who faces the greatest risks other than a few outlier train crash states. Most of us are broke but some are more broke than others. I am preparing a blog on the Japan at the moment which has gone through its own depression in the 1990’s and it appears the Japanese government utilized many of the same actions being done by the current geniuses in the BushObama administration.
Economists and the Corporate State
The ongoing debate about the stimulus package illustrates to this writer the utter futility of politicians invoking economists to support their arguments . Economists pack the upper echelons of government, academia and wall street and their assumptions drive policy like no other discipline. Economics has evolved over the years with one school of thought such as Keynesian Macroeconomists slugging it out with the Neoclassical economists over how to manage capitalistic markets as these markets with a mind of their own lurch from one extreme to the other. The economists using their particular econometric models try to prove what is most important in a particular situation: demand! No supply! No!:Fiscal policy, monetary policy! No! tax policy! So I will not mince words. Economics is a social science and as such, it is descriptive. It begins with assumptions and incorporates observations of patterns using historical perspective. With the advent of applied mathematics and statistics and behavioral psychology and modeling theory and better data handling, its priests have endeavored to become prescriptive movers and shakers in government and industry. And they have succeeded. My conclusion is going to be seen as harsh. This is a stature that they do not deserve because the field of economics is too inexact to be utilized as the driving discipline in formulation of economic and social policy. I will state my background is in science. The scientific method also utilizes assumptions but then performs tests and experiments to prove or disprove those assumptions. The results are examined and subjected to statistical analysis and peer scrutiny and then if possible, replicated by other scientists. If the same results are obtained by others, you now have a body of work you may be able to hang your hat on. If enough people can verify the work, it can become a defined principle or even a law. The same can be said of other disciplines which have a scientific basis such as engineering. They have a certain body of laws and principles that allow you to build a skyscraper, a bridge or an airliner. The same cannot be said of economics and many of the other social sciences. As such, any conclusions they offer may have value or may not.There is no way to know. George Bush Sr used the term “voodoo economics” to deride Ronald Reagan’s trickle down supply side ideas in the 80’s during a campaign. Old George got that right. The problem is that economics is little removed from voodoo. Economists on one side of the argument can argue with each other and reach opposite conclusions. Thus there is no way to prove which opinions are correct. Today we hear our political and financial corporate leaders saying things like”If such and such a program isn’t enacted in this time frame, then the result will be such and such.” And the incredible thing is, almost no one questions these assumptions! As John Stewart said recently, these people live in Bizarroworld !!! So I must conclude since there is no way to test most of their assumptions, there is no way to know whether they know what they are talking about and therefore there is no way we can trust their decisions. The Kenesians think they know. The supplysiders think they know. They all behave like doctors and high priests. They have a religion with a body of dogma and they act on it. This body of dogma has become incorporated into the genome of our Military Corporate State to justify and augment their power and wealth at the expense of the rest of the population. The large corporations and the financial establishment marshal armies of lobbyists many of whom are former politicians to provide the care and feeding of the current politicians who write the laws to benefit the corporate state. I can only conclude that the Military Corporate State is the government and the government is the Military Corporate State. And the corporate media controls and modulates the flow of information you read and see and hear to protect the corporate state, hopefully distracting the baying sheep outside the palace walls with infomercials of consumerism, reality games and fostering a cult of trivial celebrities. Now that the wheels are starting to come off the wagon, we had a new election based on “change you can believe in” and the bankers and economists who were architects of the current debacle, the Rubins and Summers and Paulsons and Geithners of the banking world are the very people in charge of formulating the solutions in the new Obama administration. This is NO change you can believe in! Is it then any surprise that the solutions offered by bankers have been”Save the banks and the bankers!” The country has binged for almost 30 years on easy credit, lax lending and debt assumption and the solution these voodoo bankers are offering is more credit, more lending, more tax cuts and more mindless consumption, more consuming??!! And how are these monsters of industry and government proposing to do this? By borrowing from our children and our children’s children. By assuming more debt! What other word can you use to describe these people except to say they are insane. They propose to utilize the same policies that caused the current blowup but are hoping for a different result. That meets the definition of insane. I hope in future blogs to compare and contrast how other nations have met similar crises in the past and try to see if we can learn from their actions but in the back of my mind I know I may be relying on the voodoo science of economics.!!
How low can you go
I stumbled upon this graph the other day which really stunned me. I have an investment friend, F, and the other day he idly wondered where the bottom in the markets might be. This graph represents the inflation adjusted DJ Industrial average from 1949 to the present. That big dip in the middle is 1982. Draw your own conclusions. Double click on the image to enlarge it.
The Big Picture
I started this blog with the goal of trying to understand the society within which I live. I do it as much for my benefit as to inform any readers I might have. Most of this country has little understanding of the causes and effects of the events impacting their lives, myself included. If you don’t understand the system , you are likely to to feel like an impotent victim, subject to despair and ultimately unable to develop effective coping strategies. It really comes down to a battle for survival. You have a choice to be a hammer or a nail, to live or to die. I have made it my goal to study and educate myself in the important subjects of history, philosophy,economics,commerce,ecology, anthropology, geology, engineering and design, agriculture and many others. I had seven years of postgraduate education in which these disciplines played no role whatever. I let schooling get in the way of my education. No mas. I spend 3 to 4 hours every morning starting well before sunup studying world news and markets and if I find a stunning tidbit that I find fascinating, I am likely to include it in my blog, my glorified notebook, my diary. Ted Williams had a great expression:”Life is hard and it’s even harder if you’re stupid.” I would add that not only is it hard if you’re stupid, it could be unpleasant, painful, dangerous, and even fatal. With this preamble out of the way, i think it is time to step back and reconsider and reassess the significance of recent events. I have spent a lot of time teasing out statistics and graphs and articles and other data to illustrate my viewpoints and my biases. I have drawn certain conclusions and I fully expect some of them to be wrong. There is no such thing as absolute truth and absolute certainty. That said, I will continue to dwell upon the details of our human civilization on this spinning insignificant rock in the Andromeda Galaxy. I will continue to report and comment on the factors govern and influence our society and our economy and I will come back time and again to the Big Picture of our history as a civilization. I have always been fascinated on how civilizations come and go, rise and fall. This has fascinated many historians from Toynbee to Diamond. The Romans are the most studied but how can you ignore the Harappan and Mesopotamian empires, the Egyptians and the Mayans, Chacoans and Minoans and Mycenaeans, not to mention the various dynasties in China. And who can ignore the spectacle of the lonely basalt icons of Easter Island. Joseph Tainter is a little known anthropologist who teaches at a small state university several hundred miles from where live who has spent much of his professional life studying this very subject who wrote a thin monograph now out of print called “The Collapse of Complex Societies” in 1988. He concluded that there are common threads to societal collapse. At the risk of oversimplification let me summarize his conclusions.
His most oversimplified conclusion is that civilizations eventually reach a point of diminishing returns. He relates it to the Law of diminishing marginal productivity. To wit he says that
1. Human societies are problem solving organizations.
2. Society requires energy for its maintenance and expansion
3. As complexity increases in a society there will be increased costs per capita
4. Investment in increased complexity as a problem solving response often reaches a point of declining marginal returns. He relates this to what he calls the marginal productivity of increasing complexity. Since oil is the dominant energy source in our civilization, this feeds directly into the implications of Peak Oil to our society.
Tainter’s conclusions and methodology are stunning and they been picked up by many current observers one of the most notable being Richard Heinberg who has made a study of how energy flows through a society from an economic and ecological perspective. I will continue to come back time and again to collapse scenarios and how they might play into our current predicament. My bias should be obvious by now. I believe that our current industrial civilization, and more particularly our current American civilization is approaching collapse. Is collapse inevitable? Of course not! Economic collapse does not necessarily imply societal collapse although they often go together. Economic collapse is expensive but societal collapse is dangerous. In this blog I will continue to offer mitigating strategies to deal with and forestall both and I will try to educate and inform and allow the reader to draw their own conclusions. Once observation I would make is that as the complexity of the financial collapse upon us has increased, the pace has markedly increased. Perhaps there is another law working here as yet undiscovered that might relate the rate of complexity to the rate of collapse. At any rate, unless useful strategies are put in place soon, economic collapse is inevitable in my opinion. I also believe that the current economic assumptions of our political and business leaders are flawed and when you combine that with greed and the innate human hardwired inability to plan for the future by sacrificing today, economic collapse is almost inevitable. In future blogs I will try to show why these assumptions are wrong and I hope to offer suggestions to soften the impact of these changes upon our lives.
To nationalize or not to nationalize
Well I am no longer alone in the wilderness crying out for the establishment of a new national bank. As my reader(s) know, I have vacillated back and forth between nationalizing the banks(some of them) and starting from scratch with a new bank. And by a new bank, I mean a new GOOD BANK. Not a bad bank as proposed by the agents for change within the Obama administration. I really fell for Obama’s mantra of change but just a few weeks into this administration I am getting a sick feeling in the pit of my stomach. It is beginning to look like we have replaced and ignorant inarticulate Texan Bushwhacker with an intelligent articulate Chicago charmer with a good jump shot and a cigarette habit who is continuing the same failed economics of the bushwhackers. For me the honeymoon is over. Change? NOT! This is the administration who has given us Tim Geithner, Larry Summers and Robert Rubin…Bankers ALL.Both Geithner and Rubin have made it abundantly clear in the past week what they think of bank nationalization. Rubin is a former Treasury Secretary under Clinton who helped start the current roller coaster ride to hell and who until just a few days ago was senior advisor to one of our largest insolvent banks, Citigroup. If we nationalized the banks, all his buddies might lose their jobs and their money. So Obama has made the decision to stand with crooks, incompetents and bankers or “banksters” as I heard them referred to recently. I was asked by some family this weekend to offer some concrete suggestions for a solution to this mess. I told them that I had offered ideas in this blog which I felt would help individual people to get through this recession or depression but as to a solution…..There will be no immediate solution to 3 decades of enormous credit and debt assumption by consumers, government and business. There will be no solution to the criminally incompetent business models devised by the Wall Street financial establishment which has brought the entire world economy to the brink of ruin. The solution for these bankers in both administrations has been injecting more and more money with virtually no accountability into the very companies that caused this destruction in the first place. Their solutions are to create more lending, more DEBT to solve a problem which was caused by excessive debt and credit in the first place! Classical economics is a failure. The tools used by our Keynesian economists have failed and keeping these assumptions and economists and bankers in positions of authority guarantees continued failure. At best their actions just delay the inevitable. The tools of the greenspans, and the bernankes and the paulsons and now the rubins and the geithners have failed and will continue to fail. The interest rate from the Fed is effectively zero. The interest rate in the UK this week will drop to the lowest rate since the Battle of Hastings. Seriously, the BOE will soon drop the rate to the lowest in 315 years. I am a former ER Doc and when we exhausted all measures to save a dying patient, we quit. We “called the code.” When the patient dies, you quit. The banking system of too big to fail banks is dead. They are insolvent. So now what? We quit.I think we meed to look at what we need banks for. They are a place to put and retrieve our money and if we think it’s safe to poke our head out like Punxsutawney Phil to borrow a few bucks, they have a function. That is all they really have to do. And I almost fell out of my chair this morning reading that the Business Secretary in the UK, Lord Mandelson has proposed that a new good bank with these fundamental banking functions be established in the UK in the post office! So now you know who the mystery face is up at the top left. What a great idea! Iwish I had thought of it. And despite my trashing of economists, I may have to get behind Paul Krugman who has finally proposed bank nationalization in today’s NY Times. It is time for the Obama administration to stop trying to rush through a gigantic stimulus package screaming there is no time to waste. Nonsense. All the government packages so far have been just that:WASTE. There is time. There needs to be time. They need to take the time to think this bailout through and listen to voices of intelligence outside Wall Street and the Beltway. The senate is the last hope. If it takes a filibuster to stop these heedless maniacs, lets have a filibuster. I have always thought of myself as a democrat but these guys are scaring the wits out of me.
It’s still possible that this “R” word will not turn into the “D” word but in parts of the world it is a depression already. The quarterly economic output numbers are in. In our Great Depression GDP fell 6+ percent in 1931. In Korea last quarter it was down 22%. In Japan 12%. In Germany 7% and here 6%. Recessions are usually under a percent or two. China has lost 10 million jobs. Brazil lost 650000 in December and we are losing 500000-600000 a month. Obama’s economic advisers are a disaster packed with bankers and Fedsters like Robert Rubin and Larry Summers and Geithner for Treasury lately of the NY Fed. I mean we just got rid of old Mr conflict of interest himself, Henry Paulson and we have replaced the pigs in the barnyard with new pigs of the same species. The WSJ reports today that Geithner’s new Chief of Staff, Mark Patterson, was chief lobbyist for Goldman Sachs. Great. So we can expect more of the same disastrous bailouts with Obama as with Bush and Obama is calling for a hurry up offense to push the bailouts forward. Not a minute to waste. Is this Deja Vu all over again? So it’s more money to insolvent banks, more purchases of corporate paper(corporate bonds), more purchases of mortgage debt commonly known as toxic waste, bailouts of sinking car companies and so on. And no oversight, no voting rights to go along with all these enormous injections of cash. The same executives are still there. And if these bailouts haven’t worked, then it must be that we haven’t spent enough. Obama and his gang of well connected intelligent morons never learned the first rule of problem solving: when you’ve dug yourself a hole, the first thing you need to do is stop digging! The congressional Dems have learned nothing from the Bush bailouts and the Republicans ideas to handle a massive increase in the public debt is to cut taxes on the corporations and the wealthy. I have a primitive understanding of global financial markets but is it possible that buying up hundreds of billions to trillions in corporate bonds and toxic scum while simultaneously having Treasury sell bonds with almost no return to our own Federal Reserve pose some risks going forward? Like collapse of the bond market? Like collapse of our currency?My fear is that all these expensive antics will just delay the final reckoning. Obama’s team believes that we have a liquidity crisis but it is a debt and credit crisis. Their way to solve the problem is to get people lending again, get people borrowing again. 70% of our GDP has been consumer driven consumption so let’s get those Wall Mart shoppers shopping! But those shoppers are tapped out and their only friend in the world is their credit card. Average credit card balance in this country is over $11000. Fifteen years ago it was $4000. Credit card default is soaring. Total credit card debt is over $1 Trillion and I read that 5.8% is in arrears with estimates going forward of 10 to 15% this year. If unemployment hits 10 or 12%, those default numbers could be conservative. The news from the states is also not good. Most will be running deficits and a variety of governors from Pennsylvania to California are calling for furloughs, 4 day workweeks, paying bigger share of their generous health and retirement benefits and of course cancelling bond issues, capital projects and the like. California looks particularly iffy with 230,000 of some of the highest paid union workers in the country. My brother has told me that Police and Fire get 90% of their salary at retirement which is often 6 figures as well as lifetime health coverage. The deficit in California is said to be $28 to 48 Billion going forward. California could be the next Argentina. England could be the next Iceland. Latvia could be the next Lithuainia. Personally, I’m pulling for Iceland. The Pots and Pans Revolution finally had an effect. The 17 week protest in front of the Althingi, the Parliament, finally brought the government down and it looks like a woman PM by the name of Johanna Sigurdardottir will be a temporary Prime Minister with a Left Green coalition running things until general elections in May. Could be chaotic but bound to be interesting. Meanwhile over in Davos the World Economic Forum is meeting to resolve this little problem of global meltdown. I suspect there will a lot of grist for John Stewart there. I can’t wait to see what happens tomorrow.
The Debt Depression
I know. You’ve seen my debt to GDP graphs before and I have been beating you over the head with them but I am entirely convinced that understanding the role of debt is crucial if you want to understand how we got to this current catastrophe. I particularly like the colors in this one. That red ellipse needs additional labels. Put Reagan at the bottom left and Bush at the top right. I have read many cogent articles on the causes of the Great Delamination and I commend them to you for your required reading. One of the best was Michael Lewis et al in the Jan 3rd issue of the NY Times entitled”THe End of the Financial world as we know it” and here is the link:
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?_r=2&scp=1&sq=michael%20Lewis&st=cse. If you are not familiar with Jeremy Grantham, you should be. He is principal at the investment advisor firm GMO and his recent 4th quarter 2008 news letter is a gem. He along with a very few others has been sounding the alarm and here is the link to that report:http://www.gmo.com/websitecontent/JGLetter_4Q08.pdf. Take particular note of his use of the term “Stranded debt.” A word of warning: he is not kind to the dearly departed bush administration and he has many doubts about the incoming Obama folks. I will soon add some websites of writers and analysts who I feel are the best of a small bunch of clear heads on this blog. You will note that most of them have no background in economics and it is the classical economists who certainly bear enormous blame for the current predicament. I recall Napoleons’s remark about the Bourbons: “They know nothing and they have forgotten nothing.”
I have told my wife, and friends and family that no matter how worried and pessimistic I have been, each day brings more news which shows how optimistic I have been. So far things haven’t gotten really ugly but the first stirrings of social unrest are showing up in Iceland, Latvia, Lithuania and parts of eastern Europe and it can’t be far off in in the PIGS of Europe(Portugal, Italy,Greece and Spain). China looks to a tinderbox and once the clueless underclasses in America wake up we could be in for it here as well. Nothing focusses the mind more than losing your job and your house. If you can stand a lot of profanity, click on the video in the Daily Bail website. It is hilarious in spite of an avalanche of 4 letter words:http://dailybail.com/home/2009/1/25/there-are-no-words-to-describe-the-following.html.
Frankly, I fail to see how the bank bailouts now taking place worldwide will have any useful effect. The debt is simply too huge to print our way out in the US or in the countries with debt problems thjat mirror the US. There are countries with low debt to GDP and many of them are not our traditional friends such as China, Russia and the Middle East. And there is another time bomb ticking and that is Peak Oil and scarcity, availability and price of that, the most important commodity will be a potential coup de grace to a struggling world economy. But that is the subject of another post.
I continue to write forcefully on today’s economic and social events as much to inform others as to clarify my own thinking and understanding of these events. I would urge any readers to seek out their own oracles and data sets and come to their own conclusions. Cast an especially wary eye at government and corporate leaders and believe no bankers. We are in the midst of what I will call today The Great Delamination. You may call it what you wish. This recession or depression seems to be worsening by the day both here and in the rest of the world. Social unrest and street protest is springing up in coutries with little history of that sort of activity. Like Iceland and Latvia for example. The street protests outside the Parliament in Reyjkavik have become larger and more virulent with fires and garbage and flying skyr , their local yoghurt. They have been
demanding accountability from their prime minister and their elected officials and new elections. Until today the parliament has ignored them. But 5000 skyr flinging citizens finally had an effect. Prine Minister Geir Haarde has announced he will step down and call for new elections in May. Over in the US Senate Chuck Schumer and Richard Shelby are calling for $110 Million to be spent on hiring new FBI and SEC staff to go after the obvious fraud of Wall Street and the banking industry officials who have brought the US to the brink of financial ruin. They will attempt a “claw back” of the hundreds of billions essentially looted from taxpayers , investors and depositors. This will not”fix” the current disaster but finding another way to fund bailouts beside stealing it from our children seems like a good first step. As I wrote in a previous blog:”Let them be known. Let them be hated. Let them be hunted for the remaining days of their miserable lives.” I hope that the first person they subpoena will be our former Treasury Secretary.
An ominous statistic I read from Jim Jubak over at msnmoney.com was sobering. The good old Federal Reserve is looking wobbly. On Jan, 16, 2008 the Fed had $868 Billion in “reserves” of which 84% represented T bills and notes which are even today considered pretty secure reserves. One year later on Jan 14th, 2009 the reserves had ballooned to $2.1 Trillion. T bills now had dropped to a paltry 23% of reserves. As you may know, the fed has been out buying up commercial paper and swapping T Bills for toilet paper in the form of CDO’s from our insolvent banks.
However, I am beginning to see some hopeful signs . Some prominent academics and economists are suggesting that some of the banks may need to be nationalized. I continue to try to dig up more information on what I will term the Swedish Solution . I found a pdf from a symposium in 1998 at the FDIC which dealt with how the FDIC and RTC responded to the savings and loan debacle of the 1980’s. Tucked into that meeting was a presentation by Arne Berggren, a consultant from Stockholm. Here is the link and his presentation starts on pg 3:http://www.fdic.gov/bank/historical/managing/sym1-09.pdf.
It seems that in the late 1980’s, Sweden went through a deregulation of banks much like the US combined with a run up in debt and explosion in the property market. Sound familiar?
In just a 2 year period from 1989 to 1990 their percentage of debt to GDP went from 90% to 140%. Nordbanken, the largest bank had an asset base equal to 23% of GDP. The Swedish government fully nationalized Nordbanken and it took an amount equal to 3% of Sweden’s GDP to fully recapitalize it. The important thing to remember is that it worked and eventually the bank was resold and privatized at almost no ultimate cost to the Swedish taxpayer. Keep in mind that at the time Sweden had no FDIC deposit equivalent and all countries are different and comparisons are odious but there are similarities between our two economies and lessons we could almost certainly use as we grope for solutions. I hope that some of Obama’s advisers are looking at the Swedish Solution. But I fear the worst. I think there is a chance that events are proceeding at a pace faster than the Fed’s printing presses can keep up.