Financial topics

[Matt1989]

The Nuer call something similar the "money of shit."

Perhaps an expletive is warranted at this stage!

[John]

The Nuer call something similar the "money of shit."

Perhaps an expletive is warranted at this stage!

"The Nuer are a confederation of tribes located in Southern Sudan and western Ethiopia. Collectively, the Nuer form one of the largest ethnic groups in East Africa.

They are a pastoral people who rely on cattle products for almost every aspect of their daily lives."

http://en.wikipedia.org/wiki/Nuer

[Higgenbotham]

Having junk money on your balance sheet is kind of like being a slumlord who owns a lot of beat up junky houses full of deadbeat tenants. If the slumlord goes to a bank to get a loan to buy more slum property, the banker (in normal times) will drive by the houses listed on the balance sheet and decide that said balance sheet does not constitute worthy collateral to make a loan on, and that any future purchases by the slumlord likely will not either. On the other hand the "new " banker (in the abnormal times of the past few years) made a subprime loan, folded it into a derivative product, and sold the derivative product to someone who has never driven by the slumlord's property and has no idea where it is, except that now some of it is in default and payments are not being received. Meanwhile, Ben Bernanke and Hank Paulson, who have also never driven by these slum properties, are trying to convince the American taxpayer that we should provide money so that they can buy these properties, and maybe even make some money on them.

Going further with this idea of comparing houses with money, at the height of a bubble in "junk houses" there are lots and lots of "quality houses" that have been converted to junk houses and everyone is happy to keep them on their balance sheets and rent them or own them and live in them. And at the height of the "junk house" bubble, everyone pretty much agrees that because there are so many of these junk houses and people are willing to accept them on the same terms as quality houses that houses really aren't worth very much (kind of like the dollar wasn't really worth very much a few months ago when "junk dollars" were accepted on the same terms as "quality dollars"). But at some point, there is sort of an epiphany and lots and lots of people decide they are not going to live in junk houses anymore and they begin moving to quality houses. And the slumlords lower the rent on the junk houses, but still nobody will live in them. They just sit empty and there are no bids. As they sit empty, they deteriorate even further and now nobody wants to live in the junk houses at all. Meanwhile, the rent on quality houses goes way up and there is a shortage. All of a sudden, everyone wants to get their hands on quality houses, even the slumlords, similar to how the slumlords on Wall Street want to get rid of their junk money and get a hold of quality money. As this process goes on, eventually the junk houses are bulldozed and written off, or they continue to deteriorate until the elements of nature cause them to collapse.

This is one way to look at the process of widening TED spreads, credit market lockup, and the possible advent of deflationary debt collapse.

[John]

Here's something from an online correspondent:

Dear American:

I need to ask you to support an urgent secret business relationship
with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country
has had crisis that has caused the need for large transfer of funds of
800 billion dollars US. If you would assist me in this transfer, it
would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my
replacement as Ministry of the Treasury in January. As a Senator, you
may know him as the leader of the American banking deregulation
movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the
funds as quickly as possible. We cannot directly transfer these funds
in the names of our close friends because we are constantly under
surveillance. My family lawyer advised me that I should look for a
reliable and trustworthy person who will act as a next of kin so the
funds can be transferred.

Please reply with all of your bank account, IRA and college fund
account numbers and those of your children and grandchildren to
wallstreetbailout@treasury.gov so that we may transfer your commission
for this transaction. After I receive that information, I will respond
with detailed information about safeguards that will be used to
protect the funds.

Yours Faithfully Minister of Treasury Paulson

[Matt1989]

"The Nuer are a confederation of tribes located in Southern Sudan and western Ethiopia. Collectively, the Nuer form one of the largest ethnic groups in East Africa.

They are a pastoral people who rely on cattle products for almost every aspect of their daily lives."

http://en.wikipedia.org/wiki/Nuer

Not sure what you mean here. Anyway, the Nuer won't touch money that's been tainted (collected via shady means -- usually by cleaning latrines, hence the name), and being in possession of such money harms your business reputation. No one wants to touch it.

[The Grey Badger]

The Nuer call something similar the "money of shit."

Perhaps an expletive is warranted at this stage!

Dana Blankenhorn calls it "The big shitpile." Good enough!

[DisIllusionist]

John:
I like that distinction between "money" and "junk money."

This reminds me of Exter's Inverse Pyramid where small quantity, higher quality "money" is on the bottom and large quantity, lower quality "money" is at the top. In financial crises, people seek safer assets or "money" and try to crowd into the lower level creating demand for cash, treasuries, etc.

This is from an interview with Exter in 1991:

This will be a deflationary collapse rather than an inflationary blow-off because creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid -- junk bonds, failing banks, S&Ls & insurance companies, Donald Trump, & Campeau. Creditors will try to get out of those weak debtors & go down the debt pyramid, to the very bottom: currency (dollar bills), even though they pay no interest. Next above currency are Treasury bills, issued by the government & backed by the Federal Reserve, which supports the market through its open market operations. They are by far the largest component of Reserve Bank credit, so are really as safe as currency notes, plus they pay interest. Still, you can’t buy anything with Treasury bills; you have to liquidate the bills to get money of some sort to buy something.

The higher debtors sit in the pyramid, the less liquid they are. At the top are all the least liquid debtors that I’ve already mentioned. This explains why we are headed for deflation. Creditors will move out of debtors high in the debt pyramid as many of those debtors fail through defaults & bankruptcies. That is very deflationary.

http://www.lbo.lk/fullstory.php?newsID=1692291840

[Gordo]

I gotta call BullSpit here. Purely from an anecdotal point of view - credit is flowing more easily than I have ever seen before in my life. You can still get mortgages at great (historically low) rates. And just because of how stupidly easy it is right now, I personally opened up about 7 new credit cards in the last 2 weeks and pulled out about $230,000 in cash at 0% (yes, there is such a thing as free money). If the credit market is really crashing, it hasn't hit normal everyday people yet. I was surprised at how easy this was - I mean some of these companies were practically egging me on, only too eager to directly deposit the cash into my bank account so I didn't have to bother waiting 3 business days for a check to clear. I'm still not sure what I'm going to do with this money but I won't take much risk with it.

The bond market is starting to assume Wachovia will go under. I saw Wachovia bonds TODAY that expire NEXT MONTH with a 30% annualized rate of return, or issues maturing on 12/1 (two months from now!) with a remarkable 396% annualized rate of return. The funny thing is that these are still rated Aa3/ A+ by Moodys and S&P. Existing holders are panicking out.

What does "credit market crashing" mean? No more credit cards? No more student loans? No more mortgages?

Just curious.

It means all of the above, if you don't have the very highest credit rating, and even then,
you'll be paying sky-high interest rates.

It's very hard to get credit now, but in a while it'll be almost impossible.

John

[John]

Bailout of the World (BOTW) status report, Sunday, 28-Sep-2008

As I understand it, the "details" of the $700 billion Bailout of the
World will be posted on the internet at noon today (Sunday).

The American public is overwhelmingly opposed to the BOTW -- by
something like to 300 to 1, according to what I've heard.

The two Presidential candidates completely punted on this question
during the debates. Their scripted answers threaded the needle
between not endorsing anything so unpopular, and not rejecting
something that might save the world.

In fact, there's one overwhelming fear in Washington that's so great
that it overshadows everything else and makes everything else almost
irrelevant. It's not a great fear of economic cataclysm -- that
almost seems to be the expectation. No, the greatest fear that each
person has is being blamed for the economic cataclysm.

In listening to the commentary for the last few days on the BOTW, the
most telling thing that I've heard was the answer by Treasury
Secretary Henry M. Paulson Jr. to these questions: "Why are we in such
a rush? Why can't we do this in stages? Why do we have to approve
the entire $700 billion in just a couple of days?"

The answer: "We have to restore confidence to the markets, and we
need the full amount to do that, and we have only a couple of days to
do that before we face disaster." (This is paraphrasing, but that's
essentially what he said.)

By the weekend, we're faced with a familiar deadline: The bailout
agreement has to be reached by about 7 pm ET on Sunday, because that's
when the markets are opening Monday morning in Asia. 7 pm Sunday ET
has been a do or die deadline for several recent weekends.

And listening to the pundits this weekend, they're all going to be
holding their breath watching the markets on Sunday evening and
Monday morning.

"If it doesn't work, then we face cataclysm on Monday, but I don't
think that's going to happen," said one.

The phrase "doesn't work" means "doesn't restore confidence to stock
market investors."

There's an airhead quality to all this discussion. There's no
connection with anything real. It's not exactly like playing a move
in a chess game ("If I do this, he does that, then I do this.")

It's more like a big poker game: "I've lost every bet so far. This
time I'm going to go all in, and bet every penny I have on the next
turn of the card. I hope this works."

It's hard to overestimate how incredible this is, since it's not a
poker game. The prevailing view in Washington is that the fate of
the entire world economy hinges on the turn of a card, and I don't
think that there's anyone who even claims to have any idea which way
that card is going to turn.

And so, everyone in Washington is going to be paying rapt attention
to the markets on Monday, because you have to be a very nimble player
to avoid the greatest catastrophe of all -- being blamed.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[John]

A question from a web site reader:

> What is your take on the government's promise of protection on
> the money market funds? Do you think this will make them any
> safer as an investment vehicle?

One of the major goals of the Bailout of the World proposal is to
stem the tide of withdrawals from money market funds. Basically, a
lot of people are scared to death that their money market fund
investments are going to be lost, and they're withdrawing the money
while they can.

There's a feeling among the Washington officials that the money
markets correspond to ordinary banks in the 1930s. That is, the view
is that a series of bank failures can't happen today, because of FDIC
insurance. But, according to this view, the real danger is the run
on money market accounts, and this would have the same devastating
effect on the economy today as the bank panics of the 1930s.

And so, it's felt that a chunk of the $700 billion will end up saving
the money market funds.

Returning to your specific question, remember that we're still
waiting for a specific event that HAS to occur at some point: A total
generational panic and crash, a day that will be remembered forever.
On that day, and in the weeks that follow, a lot of money market
funds, banks, hedge funds, and so forth will collapse.

What's going to happen at that point cannot be completely predicted,
but it appears that money market funds will be safe ONLY if they're
backed by short-term Treasuries.

At the very least, you should have a plan prepared for withdrawals
from banks and money market funds when the generational panic occurs.
Even in the worst scenarios, it's expected that you'll have at least
a few days, PROVIDED THAT YOU DO SO IMMEDIATELY. But this will be a
high-risk time in any event, and a lot of people will certainly lose
everything.

John