Financial topics

[mannfm11]

I am embarrassed they would give an idiot like Paul Krugman a Nobel Prize in anything. If this is the brilliance of our world today, we are definitely screwed. I just read an article he wrote in the Times about Madoff, but it was only a reference to Madoff. I have intently followed economics since I was 13 years old, which goes back to before a good number of readers here were born. Year after year, I read how the savings rate in the US used to be around 10%, but now it is zero. Somehow, it keeps being 10% 20 years ago and zero now. I wasn't born yesterday, but these figures are repeatedly made up.

This really isn't my bitch about his article. The real bitch is again framing the Republican era as the era of greed, but those in the know will tell you that the 1990's were worse than any era in history, or at least living history. Madoff didn't create his scam in 2003 or 2005, but decades before. I suspect it fell apart in the 1990's. It seem that they forgot Enron became a massive capitalization stock in the 1990's and fell apart before George Bush had been President 9 months. WCOM, Worldcom for you guys that don't know ticker symbols was a top 5 Nasdaq cap value stock at the turn of the century, zero plus wiping out $40 billion in bondholders to boot by September 2001. JDSU went to $150 billion because they put it in the S&P 500 and its limited float created another bubble. LUC was one of the 10 highest cap stocks in the entire market and a $1 stock within 18 months. Someone lost every dime of these deflated stocks, most likely the ones that didn't own them before they went up, but some poor mutual funds investor. The loss in WCOM was 3 times the loss in Madoff and it didn't happen in 2008 or 2007, but in 1999 to 2001. There were more, as NT (Nortel) fell from the sky to a $2 stock in no time at all, having been $900 at one point. The loss from the peak in MSFT is $400 billion and it never got back over $200 billion of that at any time past early 2000, Ditto INTC and CSCO. YHOO trades at a dime on the dollar, another $100 billion loser.

Robert Rubin created this bubble and once created it took on a mind of its own. As John likes to point out, they got rid of Glass-Steagal then Sandy Weill gave Rubin a $100 million job with Citigroup. Barney Frank and Christopher Dodd made sure that FNMA and FHLMC had their bubble machines going so that they could generate all the cash necessary to blow up the economy.

Krugman economics is absurdity. Krugman mentions World War II in this article, but you must remember that the American Citizens were conscripted work and everything was rationed so that all income was used to buy government debt. I really don't know how they got rid of the debt, but my best guess is that not many people could borrow money and the debt was paid off in bankruptcy. There was a real monetary base, in that the gold and silver were money,so there was something to launch from after it was all wiped out.

John posted the link to Richard Koo's speech. I believe Koo is way off base, as we are now seeing Japan collapse faster than any other economy, having been floated for the past 60 years on American credit. The cause of depressions is too much debt in the economy and the Japanese government is over 200% of its GDP in debt, already enough debt to cause a depression. You can't compare the 1930's to the present because most of the governments of the world were in relatively good shape, but the private sector was in a mess. This is not the case today, with the implied 100% of US GDP tied up in future financial sector liabilities alone. Plus about 40% of the US GDP isn't GDP at all, but rents and interest. This is all water over the bridge.

The problem with the world is that the next 3 years of income have already been borrowed and spent and are still owed. The most damning of issues is the compound interest issue, where money is created on compound interest that reaches a point that it can never be paid, thus the monetary base cannot be continued. The banking system depends on the concept that compound interest can go on and on or banking will be outlawed or nationalized permanently. There isn't an economist whose views would ever see the light of day if they proposed that the act of earning interest on money to create more money was a fraud and dooms economies to permanent bouts of depression.

We are in a pickle because all the tricks have been tried. As long as money was gold and silver, any liens tied to gold and silver repayment could be liquidated in foreclosure and bankruptcy and someone still had the gold and silver. What we use as money today is paper liens, which when liquidated cease to exist. Contrary to popular belief, this stuff cannot be printed and have the value of the ink on the paper, but must exist as a lien and a remedy to another lien or it doesn't mean a thing. Who would take this stuff if someone didn't need it to hold onto their property. And, anyone endowed with the capacity to create it nonrecourse would clearly be endowed with a Title of Nobility, strictly prohibited by the Constitution. Of course, there are plenty of titles of nobility, called banks that operate, clearly outside the constitution along with states that emit bills of credit and take something other than gold and silver a tender in payment of debt. It is clear that we have lost sight of the law and entered into the realm of decree and legality. They are 2 different things.

[mannfm11]

StilesBC, I appreciate that link to AEP on your site. Your stuff is standard reading for me and I appreciate your work. Ditto John and Generational Dynamics. I have been a reader of Pritchard for some time.

I think it is here that John posts the chart showing the accumulated debt in the US over the past 100 years or so in relation to GDP. I have been seeing that chart in some form for 10 years now. It appears that MattS is a follower of Robert Prechters, a man that clued me into a lot of stuff back in the 1990's. Prechter was wrong about his wave timing and he missed the biggest part of the bull, but he also knew that if he didn't get mentally prepared, he would lose all his money in the market trying to find a bottom as Fred is going to do. 5000 isn't even going to be a good ledge to sit on and 7000 is going to be a long time top as the 50% point of big bulls during the bears that follow are always long term tops. The problem this time is the inability to fully deflate, as we have seen in Japan. We are now under 8000 in Japan, some 20 cents on the dollar of what the Nikkei was on the last day of 1989. 19 years later and 20 cents on the dollar. 20 cents on the dollar on the Dow is 2800. We will be very lucky if that is the bottom, as the US deflating is going to be a lot different than the rest of the world deflating. Prechters target has been under 1000 and I agree, as we are already seeing what happens to assets.

We are about to see a financial crisis that will make the Lehman collapse look like a hick town bank failure. The US is in a real paradox along with the world because the entire world system depends on them being able to allow the US to spend itself bankrupt then spend some more or everything collapses. The entire game of reserve currencies with no mechanism to rebalance is coming home to roost. So, collapsing economies that have no liquidity have no choice but to finance the US, but cannot finance the US because the system has no mathematical solution. Thus the solution is to use a solution that cannot be present. Absurdity and all its chickens are coming home to roost.

Who is going to borrow the money? In normal times, if the Fed was doing what it has been doing, we would have hyperinflation. But, the Fed isn't buying the bad debt of the banks, but debt that can be marked to a market every night at 11:59 PM. Go to the Fed website and read the loan documents and you will have a different view of what they are doing, but that is beside the point. The point is that credit worthy borrowers are those people that have CD's the bank can lend back to them. The people that have been creating all the profits that flow toward the top are out of credit and cannot pay. Anyone inbetween the top and the busted that have a brain know they would be making a big mistake to borrow a dime and those that are already busted, the banks would be making the same mistake to lend them more.

The international flow of dollars works the same way. Even though it might not be a good idea to lend the US more money, the world depends on the US sending them more dollars. The rest of the world has a hard time, especially the emerging markets, manufacturing its own money, so they need dollars as a base. Even a country like Japan imploded almost immediately once the flow of dollars slows. The Japanese deflation started with a US recession in 1990 and they never got out. It appears to me that the greater the dollar flow to a country, the greater the collapse. Look at Germany, which is also collapsing rapidly as well.

I manage the family rental property. The flow of money is getting very dicy in this fashion. I believe we are going to have a hell of a time keeping the money flowing and we have older homes, which will probably get harder to rent as time goes on. The only good thing is there isn't any debt on these properties. I had a tenant call me today and ask to pay the rent late in the month rather than in advance. Of course that would be bad business and her reasoning was that she only got one check and she needed it to pay bills and live this month. I asked her why this check, which was the same size as the next one was going to be insufficient and the next one was going to be enough? She acted as if I didn't understand her, but I understood well. She needed us to be her credit card. She would be a month and a half behind before we could get to eviction court if we allowed this. I checked with the family and I have bad news for her.

This is where the cash flow to support assets is coming from. These are the consumers that are borrowing money. Many of them have already tapped their home equity and now their homes are worth less than their loans. Obama is going to throw more money down this drain. When the gurgling down the drain ceases, the situation will be the same. It will be the same because all that have saved for their retirement, all that have accumulated property and all that have accumulated earnings and securities from this borrowed money are going to have to give it up. The monetary base is about $8 trillion if you take the layers of money into account, but the debts are $50 trillion. The GDP minus the rents is about $7 or $8 trillion and from what I understand about $15 trillion with them. This means the rents are now as big as the rest of the economy and have to be borrowed. The game is flat up. I hate to dispute John, but the entire game is a game where debt is created off securities until the compound interest runs its course and then it is up. Had they not created derivatives, there probably wouldn't have been a boom in China, but we would have had an end to the debt boom. This time they have used smaller and smaller interest rates, starting in the mid 1980's until we are now at or near zero. They are talking about creating a recovery out of an interest rate reduction on mortgage money now, but that will only require another lower interest rate reduction. In the meantime, the pension system of the US will collapse.

[freddyv]

We are about to see a financial crisis that will make the Lehman collapse look like a hick town bank failure. The US is in a real paradox along with the world because the entire world system depends on them being able to allow the US to spend itself bankrupt then spend some more or everything collapses. The entire game of reserve currencies with no mechanism to rebalance is coming home to roost. So, collapsing economies that have no liquidity have no choice but to finance the US, but cannot finance the US because the system has no mathematical solution. Thus the solution is to use a solution that cannot be present. Absurdity and all its chickens are coming home to roost.

I can't say I disagree with your argument but what you fail to enter into your equation is time. Time truly does heal all wounds.

Let's take your example of the woman who wanted to pay her rent late. You can actually help solve the problem by taking on some of the pain of your tenants yourself. By reducing their rent or allowing them to use you as their credit card you can keep the downward spiral from getting worse and time will heal her credit situation as she pays off her debt over time and allows deflation to work for her. People are starting to realize that and understand that they are part of the solution. This is part of the generational change that I think John is missing because he is too focused on the big picture; big pictures are made up of small drops of ink.

If you kick that woman out on the street along with many of your other tenants and they decide to gang up and overthrow you because now they have no reason to be law abiding since they lost their jobs because they couldn't shower or had to live in a shelter across town then you REALLY lose; everyone loses.

The deleveraging will only bring us to collapse if we (the government) choose not to change with the times and I don't think we have any choice in the matter. That means that the populace must scrimp and save and work even harder and the government must backstop the people and businesses must be frugal and creative and also must attempt to support workers by keeping more people employed even if at a lower wage.

You are looking at the system as a fixed entity that can't change and what this generational crisis is all about is change. The change is happening already and there is much more to come but as with many other experts you have an inability to peak outside of the box you know so well. I see that all the time and it is my understanding of that that has given me a huge advantage in my investing. No single person knows everything and so I accumulate expert knowledge from people like John J. Xenakis, Nouriel Roubini, Louise Yamada and Meredith Whitney and anyone else who deals with real data in a useful way.

That we could sink into a depression beyond even what we have seen in the past is a possibility but is unlikley regardless of how much debt is in the system. We should also look at how much wealth is in the system. Time will "reset" the system just as it has done in the past. Look at how much wealth has been destroyed and tell me why the world economy isn't much worse than it is? You can't because there are things at play that nobody can understand because the system in a sense has taken control of itself and is doing what needs to be done. Those "drops of ink" are changing the picture. Wealth is being vaporized and yet we continue to live our lives and drive our cars and go to work and to make babies and enjoy our lives...and survive.

People and companies will declare bankruptcy and houses will be demolished and wealth will be destroyed in many different ways, perhaps wars will be fought to destroy much of it, and then one day the sun will come out and shine and those who are too wedded to their beliefs will not belive that the end is at hand and they will go back to their basements and perhaps they will be right a few times but eventually there will be an end to this and I for one plan on being one of the few who gets the timing pretty close...we'll see.

--Fred

[MisterB]

John: Are you referring to President Obama’s victory as a political victory or as a practical victory?

This was a momentary political victory no doubt. However even politically, I’m not sure that it was successful in that he won only with a partisan democrat vote. It’s telling to me that John McCain was not brought along as a moderate republican. The partisan victory will make future actions more difficult.

As a stimulus measure the bill is not very effective. Is it a victory if this bill does little to help the economy? I find it rather sad in that what we got was not stimulus but more social spending and the timing of most of the spending is in future months and years. The democratic party used our economic crisis as an excuse to spend money on their favorite social programs. (The republicans are almost as bad. They would have cut capital gains taxes – as if we all have capital gains to pay!) I agree with you that the bill or really ANY bill can not stop the economic collapse. However, a bill that would have gotten money into the economy quickly may have helped. Conventional wisdom is that the 2008 stimulus “didn’t work”. Obviously, the 2008 bill did not and could not solve our crisis but maybe it did help somewhat. If you remember the spring/summer period was a “better time” at retail and in the markets. IMO, another rebate check would have helped soften the economic slowdown/depression. A government rebate on an auto purchase may have also helped. More direct money to the states to avoid tax increases and spending cuts on the state level may have helped

The other question for the President is: What’s next? Isn’t everything solved? Does he say that we need some other legislation to help in the crisis? It would seem that he would have to wait 6 to 12 months or more for another stimulus bill. Of course, Tim G. will be plenty busy bailing out banks and auto companies.

[John]

Dear Fred,

> I can't say I disagree with your argument but what you fail to
> enter into your equation is time. Time truly does heal all
> wounds.

> Let's take your example of the woman who wanted to pay her rent
> late. You can actually help solve the problem by taking on some of
> the pain of your tenants yourself. By reducing their rent or
> allowing them to use you as their credit card you can keep the
> downward spiral from getting worse and time will heal her credit
> situation as she pays off her debt over time and allows deflation
> to work for her. People are starting to realize that and
> understand that they are part of the solution. This is part of the
> generational change that I think John is missing because he is too
> focused on the big picture; big pictures are made up of small
> drops of ink.

I once was a landlord, long ago. It was a nightmare for me. It's
definitely not something in my skill set.

And there's the old saying, "If she can't afford one month's rent,
then she can't afford two."

There have been news stories on this kind of thing every day. Some
companies' employees take 50% salary cuts to save jobs. Other
companies' employees, especially unionized employees, refuse to take
salary cuts, and suffer lots of layoffs.

If a landlord gives one tenant a break, then other tenants will
demand the same break. I live in an apartment building, and if I
found out that the tenant next door was paying half-rent, I'd start
paying half-rent.

If many tenants can't pay the rent, then the landlord may have to
reduce everyone's rent, thinking that it's better than having an
empty building.

If you have a piece of the TARP, where's my share?

Sincerely,

John

[John]

> John: Are you referring to President Obama’s victory as a
> political victory or as a practical victory?

> This was a momentary political victory no doubt. However even
> politically, I’m not sure that it was successful in that he won
> only with a partisan democrat vote. It’s telling to me that John
> McCain was not brought along as a moderate republican. The
> partisan victory will make future actions more difficult.

As I indicated at the end of the article, I don't know if the fiscal
stimulus will be a boon or a disaster. I actually suspect the
latter, but I can't prove it.

But I really wanted to acknowledge Obama's political victory. It
really is quite historic that he got this huge bill passed within
three weeks. If it turns into a disaster, I'll be the first to say,
"See? He's just a nihilistic Gen-Xer."

Sincerely,

John

[malleni]

Very interesting article:

http://www.bloomberg.com/apps/news?pid= ... refer=home

It looks like Chinese are NOT very happy with "monetary easing" in US and EU.
With other words - they demand (!) US and EU (I personally think that those others i.e. US are especially targeted) - NOT to "print" any more money.

It is clear that with unprecedented "printing" in the last couple months the Chinese are become very, very,... very (!) - nervous.

They are (with reason) worried for their "gargantuan" currency reserves.
They have really nothing to win with "weak dollar" - but they can loose huge!!!
Of course opposite - "strong dollar" - is something Chinese love!

The Americans (AND partly Europeans) has in all these calculations little problem.
"Strong dollar" - would be good if you have enough of it! BUT it is more than obvious that USA - has VERY little of "it" (in REAL THERMS!).

Situation is dire:
1. With other words - US has NO "real" dollars, can NOT collect it from taxpayers, and obviously can NOT get them from abroad! On the other side - USA MUST (!) pay interest of all previous IOU they sold to borrower nations around the Globe!
2. Last "news" saying that US MUST (!) pay - 10 BILLIONS $ PER DAY - just in interest!!!

Since point 2 - MUST HAPPENED (!) and point 1 - saying that there IS NOT (!) of "it" in the US possession - only way to "made it" is to "produce" more of it - printing! Exactly, what happened those days. (In less than 5 months - US "produce" more that 2 TRILLIONS $...
Obviously it is VERY easy for US to "compare" with Chinese (or Japanese) - " gargantuan" reserves!

It looks like in US eyes - those "gargantuan" reserves of China are NOT at all so "gargantuan"..... or it is something other???

I am not surprised that Chinese are very, very nervous...

Lets see what happened next.

[Higgenbotham]

Very interesting article:

http://www.bloomberg.com/apps/news?pid= ... refer=home

It looks like Chinese are NOT very happy with "monetary easing" in US and EU.
With other words - they demand (!) US and EU (I personally think that those others i.e. US are especially targeted) - NOT to "print" any more money.

This is a most interesting situation. It's not like the US owes this money to its own citizens who have no recourse and no plan of action to deal with an out of control US government or central bank.

Situation is dire:
1. With other words - US has NO "real" dollars, can NOT collect it from taxpayers, and obviously can NOT get them from abroad! On the other side - USA MUST (!) pay interest of all previous IOU they sold to borrower nations around the Globe!
2. Last "news" saying that US MUST (!) pay - 10 BILLIONS $ PER DAY - just in interest!!!

Dire is a relative term. Certainly, the news is not good. US Federal tax receipts are down about 10% for the first 4 months of fiscal year 2009 vs fiscal year 2008, but government tax receipts may be down more in other countries.

http://www.fms.treas.gov/mts/index.html

At the same time, US interest expenses on the debt are down 22% last I looked. That data is harder to find. The lower interest expenses don't make up for the falling tax revenues.

The big question in my mind is: In the past, government programs eventually returned more money to the treasury. In other words, there was a return on the money borrowed for the program and the economy continued to grow. I do not believe that will be the case this time. The ChInese probably have not yet come to a conclusion on this. If it does become clear that government stimulus is not working as desired, my feeling is that the Chinese are going to put pressure on the US to stop future government stimulus programs in order to protect the value of their reserves and if the US refuses there are going to be problems.

[John]

Dear Higgie,

> The big question in my mind is: In the past, government programs
> eventually returned more money to the treasury. In other words,
> there was a return on the money borrowed for the program and the
> economy continued to grow. I do not believe that will be the case
> this time. The ChInese probably have not yet come to a conclusion
> on this. If it does become clear that government stimulus is not
> working as desired, my feeling is that the Chinese are going to
> put pressure on the US to stop future government stimulus programs
> in order to protect the value of their reserves and if the US
> refuses there are going to be problems.

That is indeed the question.

In this case, I don't believe that a "return" in the usual sense is
expected.

What's expected is a different kind of "return": Money will circulate
around and eventually end up back in the bank, in the form of either
savings or paydown of debt.

Once the bank has the money, they'll use it to buy Treasuries, as the
safest place to keep money. So the money will "return."

The real heart of the issue is protectionism. If people use the
money to purchase foreign goods, then it won't return to the
Treasury. On the other hand, protectionist legislation will trigger
retaliation that makes things worse.

This is a really hairy situation.

Sincerely,

John

[Matt1989]

Countries by Turning:


Countries in Recession (red)/Affected (pink).