Where's the Bottom? Still Anybody's Guess 29 comments
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I look out my office window and see a suburban scene pretty much as usual--a few parked cars, an occasional pedestrian, a tree-lined street, a bird flying by. Yet the headlines say we are in the midst of the worst financial crisis since the Great Depression:
- Fannie Mae (FNM) and Freddie Mac (FRE) are bailed out by the government.
- Bear Stearns (BSC) is forced into a government-orchestrated sale to JPMorgan (JPM).
- Lehman (LEH) goes bankrupt.
- Bank of America (BAC) is buying out Merrill (MER).
- AIG (AIG) is fighting to avoid becoming an 80% government-owned company.
- Morgan Stanley (MS) takes a 10% to 20% investment from Mitsubishi UFJ.
- Citi (C) is surviving, but staggers around like a wounded elephant with arrows in its back.
Moreover, many pundits say we have not yet reached the bottom.
What's the root cause of this financial mess? Some point to the falling housing market, particularly in
There's a thought-provoking video entitled "Money as Debt," pedagogically praiseworthy if not completely accurate in all detail, which explains how money itself can be viewed as a form of debt that is created by our financial system. If you can spare 47 minutes of your day to watch the video, here's the link. The video's thesis is that our modern system of money is intrinsically unsustainable, since money's very existence depends on the continual creation of more and more money (or debt, depending on your perspective) to pay the interest (in addition to principal) owed by all us borrowers who have drawn down loans from banks and other financial institutions.
The picture here is that of an ever-increasing pile of debt, an exponentially growing mountain of indebtedness that inevitably leads to the outcome we all fear like the plague--a collapse of our entire monetary system and its consumer-capitalist lifestyle that we just "can't live without" - Right? Try to imagine a world without WaMu, Citi, JPMorgan, Goldman (GS), or BofA, maybe even no Wal-Mart (WMT), Costco (CSCO), or Nordstrom (JWN). It’s pretty hard to visualize, isn’t it?
A friend wrote to me the other day, saying that he has heard that one way to fix the
And where does this $700 billion come from? Well, that's why Congress is being asked to approve a higher statutory limit on federal debt, to the tune of some $11.3 trillion. With a higher debt ceiling, the government can borrow the $700 billion from investors through the capital markets (i.e., foreign governments and institutions, since that's who buys government bonds these days). The net result will be a "re-leveraging" of our financial system here in the U.S., which, over time, will likely lead to higher interest rates (to persuade foreigners to continue to lend), a need for more borrowing to pay off this principal and interest, the creation of more money. Does this sound familiar?
From an investment point of view, I believe stock market direction in the short run is anyone's guess, as the dynamics (I first mistyped "dynamics" here, which, come to think of it, better captures the spirit of today's volatile, "manic" market!) of the current situation change from day to day, if not hour to hour. Longer term (i.e., over the next five to ten years), I believe that the equity markets (both stocks and real estate) will stabilize, rebound and even see new highs. Both economically and politically, "the powers that be" - meaning the billionaires who own stock and real estate, the politicians who wish to be re-elected, and the business executives who want to keep their jobs - will do whatever they can to protect their own self-interests. In so doing, they will keep that awakening credit monster with a voracious appetite for more and more debt confined to its ever-expanding cage.
. . . Essentially it was an aristocracy, in which old and rich families, through ability and privilege, held office for hundreds of years, and gave to Roman policy a tenacious continuity that was the secret of its accomplishments.
But it had its faults. It was a clumsy confusion of checks and balances in which nearly every command could in time of peace be nullified by an equal and opposite command. . . . What astonishes us is that such a government could last so long (508 to 49 B.C.) and achieve so much. . . . Devotion to the state marked the zenith of the Republic, as unparalleled political corruption marked its fall. Rome remained great as long as she had enemies who forced her to unity, vision and heroism. When she had overcome them all she flourished for a moment and then began to die.- (Will Durant, The Story of Civilization: Part III, Caesar and Christ, pp. 34-35)
As the historical record indicates, the expansive Roman Empire (146 B.C. to 192 A.D.) followed the earlier Republic (508 B.C. to 30 B.C.) stage, and the fall of
Although Wall Street's headline events of these past few months may be eye-popping, our debt-laden system, despite its flaws, will most likely bring lots of volatility (both upside and downside) but will not collapse anytime soon.
In short, the end will come one of these centuries, but I do not think that the end is near.
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This article has 29 comments:
They loan each dollar to the government with an attached interest. Every dollar produced is actually: a dollar + a percent of this dollar in immediate debt. Since the central bank has the monopoly on the production of the money supply, the only way to pay the debt is to borrow more money from it. This creates even more debt. This system is a self-generating debt machine.
The central bank has to continually produce money to cover the debt that is created from borrowing. This method creates even more debt. It is impossible for the government to get out of this self-induced debt.
This was why the US broke away from England. King George III outlawed the interest free and independent currency that was being used by the American Colonies. This forced the colonies to borrow money from the Central Bank of England with interest, putting the colonies into debt.
"The refusal of King George III to allow the colonies to operate an honest money system, which freed the ordinary man from the clutches of the money manipulators was probably the prime cause of the revolution."
Benjamin Franklin
"I believe that banking institutions are more dangerous than standing armies... If the American people ever allow private banks to control the issue of currency, the banks and corporation that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered"
Thomas Jefferson
We didn't implement a Central Bank until Woodrow Wilson was in his presidency. The Federal Reserve act was created during this time, along with the Federal Income Tax. The Income Tax only assists in paying the debt, not the governments budget, as some people like to think. Prior to that, the government (and the economy) operated just fine.
www.cnbc.com/id/268673...
or new age slavery if the 'donor nations' overtake the debt-ridden and credit-frenzied nations
Thats where we all start living in caves.
I have read the articles on this site and have come to the conclusion that we had all better start choosing which variety of soup (with water or with extra water so you get more) you will be getting at the soup line.
Starbucks is going to open a "premium" soup line option.
I vote for "or else" and encourage Congress to push for other remedies: e.g., suport the Fed continuing to pump liquidity into the system. Also, raise the FDIC limit to $500k. The last change to $100k was in 1980, when banks were faced with 'disintermediation.' Let consumers raid their 401k's to pay mortgage debts, etc.
www.beearly.com/pdfFil...
M3 money growth = GDP growth + inflation growth.
But the US Federal Reserve stopped publishing M3 money growths years ago with the weird argument 'This number gives no additional economical insight' (or words like that).
Of course a fiat money system can blow itself up if it is too far in the debt, this is called a Ponzi financial unit.
In a Ponzi financial unit the debt is so high that even for the interest more borrowing is needed.
As soon as the debtors find this out, the plug will be pulled.
An example of such a Ponzi unit is the combined US financial sector;
Even this last year when the credit crisis started they borrowed over 1500 billion more, now the total debt is over 16,500 billion US$ and is growing 10% a year.
The whole problem only emerges when the speed of borrowing is far above GDP growth, this is the case for many years in the USA.
And that is simple to explain: Alan Greenspan never did see the dangers coming with entire sectors borrowing themselves to death...
With one easy move by our genius legislators in DC, we the investing public will be able to say to the Paulson posse, "Thanks, but no thanks!!" All they have to do is lower the capital gains tax to ZERO for ten years. You can almost see and hear that three trillion racing by!
A far-out idea, perhaps, but the unpalatable alternative is to have the govt control another hugely important aspect of our lives.
However as much as I despise the socialism of the rich, I think it be prudent to consider that "rich" is simply a concept in which the rest of the world still frowns upon even me.
I'm more and more confident that participation by all will "help" the problem, and now that the rush is mitigated in lieu of sacrifice, I'm ready to move on...
This is my first investor crisis, and as such, have learned a tremendous amount, notably in emotion, and stability.
Though the broader economy is yet another matter, we're all in this boat together, and i think more ores are rowing in the same direction after the last couple of months than the prior decade.
My tone and attitude is changing, and the opportunist is coming back.
(Adapted from William Shakespeare's Hamlet)
(WilliamBanzai7)
To Bail, or not to Bail, that is the question:
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous loss of fortune,
Or to take arms against a sea of financial troubles
And by opposing end them. To die—to sleep,
No more; and by a sleep to say we end
The heart-ache and the billion market shocks
That investor hubris is heir to: 'tis a consummation
Devoutly to be wish'd. To die, to sleep;
To sleep, perchance to dream—ay, there's the rub:
For in that sleep of death what dreams may come,
When we have shuffled off this market coil,
Must give us pause—there's the respect
That makes calamity of so long life.
For who would bear the whips and scorns of time,
The CEO banker's wrong, the proud man's contumely,
The pangs of write offs, the law's delay,
The insolence of office, and the spurns
That patient merit of th'unworthy takes,
When he himself might his quietus make
With a bare quill? Who would Federal oversight bear,
To grunt and sweat under an ordinary life,
But that the dread of something after death,
The undiscovere'd country, from whose bourn
No traveller returns, puzzles the will,
And makes us rather bear those ills we have
Than fly to others that we know not of?
Thus conscience does make cowards of us all,
And thus the familiar hue of resolution trust
Is sicklied o'er with the pale cast of thought,
And enterprises of great pitch and moment
With this regard their currents turn awry
And lose the name of action.
As long as the Fed starts buying a carefully calibrated set of tranches (e.g. 30/60/90 days past due payments, home in foreclosure for 3/6/12 months, etc. or something similar - you figure it out), designed to price recognizable types of paper assets, reference prices will be set. A few billion worth of such tranches should be all it takes for sideline cash to start moving in once it knows the price.
Regardless of whether the Fed buys high or low it won't matter. Whether it sets a floor or a ceiling, the market can adapt and establish a market price above or below the Fed's price. As soon as there is a Fed price, an avalanche of cascading mark to market adjustments across asset holders worldwide will immediately take place. In an instantaneous Bang! portfolios will be adjusted, assets can be bought and sold, and liquidity restored.
No one wants to be too early, thus they sit and wait. Only fools rush in, and therein lies the appropriate role for the Fed - to play the wise fool whose actions unlock liquidity by establishing prices. With the entire $700 billion at its disposal, even without spending another dime beyond some initial billion dollar tranches, the Fed will represent a threat to buy at its price that other parties will not be able to ignore.
In addtion, the banks who hold the bad paper now should be incentivized to continue holding a portion of it. In fact, the more they hold, the more the Fed should agree to buy. Similarly, the more capital they raise, the more bad paper the Fed should agree to buy. In other words, they need to earn the right to sell the bad paper to the Fed. They would have held some bad debt anyway, why shouldn't they continue to do so? They would continue to seek additional capital, why shouldn't they continue to do so and why shouldn't the Fed's solution be dependent on such actions? That would serve as a damper on the effects of the Fed's actions and serve to reduce the overall Fed contribution.
The bottom for the dollar, however, does not exist. It will continue asymptotically approaching zero until it becomes inconvenient to quote prices in it, at which time it will have zeros lopped off or otherwise be replaced by something else with indistinguishable characteristics, which will itself promptly begin its own asymptotic march toward zero.
Nope. I dream about it every night, and wake up smiling. The big banks are the vehicles for pillaging the working public. Let 'em die.
"In short, the end will come one of these centuries, but I do not think that the end is near."
The inflection point came (and your thoughts on debt and the need to grow it forever make me thing you would agree) when the gold standard was destroyed. We prospered on the gold standard; we left it because of the need to inflate for a war. Since then, the ability ti inflate has brought us still more expensive wars. The war on drugs, the war on terrorism are all fought as wars on our civil rights. If we want to restore our civil rights we must stop inflating to fund the war machine.
The absolutist "zero" end is not near. But we are I believe one big black swan away from a major, forced economic realignment. We are running on confidence right now, and confidence is waning. A domestic bank run, or a foreign bank run that starts a scramble for assets leading to a dollar run, is all that it would take for the US to declare martial law.
Lloyd Sakazaki's analysis is similarly flawed--if otherwise "wise" and somewhat "hopeful". Global warming is the trump card in the collapse of the debt-based systemic dynamics of global capitalism (and the supporting fiat currencies and central bank system of regulating the inflation of monetary growth).
It is an oxymoron to think one can build social security on unregulated social exploitation and environmental extraction policies within the context of such being a public good. Whether an oxymoron or not, however, it is what is trusted. This irrational trust (an example of motivated reasoning--simply: trusted thinking that is feeling without thinking) creates a blind faith.
Such a non-rational faith is proof, for me, that in the classic meaning of the term "faith" (faith being the substance of things hoped for, rather than the modern understanding where it is a synonym for belief) the separation clause of the constitution has been systemically abandoned. Congress has established a state sponsored religion and it is global capitalism. As an ironic aside, the new test for citizenship has, as one of its questions, what the economic system of the United States is (or is it was!).
None are so blind as those who--in this case--cannot see.
The current leadership cannot embrace, responsibly, the rational bankruptcy of our debt-based fiat currency, and allow the just redistribution of wealth (as Durant's model points to as being the next step). I am not sure Congress even knows its sworn obligation to support and defend the Constitution requires it to reclaim its constitutional power under Article 1, Section 8, "to coin money and establish the value thereof...and the value of foreign coin. These two Constitutional crisis have siblings: the personhood of corporations and the unified executive.
Therefore I somewhat concur with Lloyd. This culture emotionally sees no option but to irresponsibly continue to inflate our way--and this will include short-term fluxtuations--into ever deeper bankruptcy. And this will exacerbate the kilmakatastrophe (a german word--English, tellingly, does not have one) we have already passed the tipping point for.
The science community is scrambling to figure out why models cannot explain the 10 fold error they contain between predicted Arctic ice extent decline and observed changes. The positive feedback factors have not been able to be modeled and have therefore been "conservatively" factored in with the expected massive errors such a "conservative" approach engendered. Scientifically it the factoring was not conservative, it was incomplete science.
Personally I would prefer to go through the guaranteed economic and environmental collapses independently of one another. If we responsibly do the economic one now, the resulting collapse of the global economy will greatly change some of the otherwise uncontrollable positive feedbacks of global warming: the unsustainable lifestyles we are addicted to and cannot, rationally, give up. Such an economic collapse might, in fact, be enough of a change the dynamics and avoid the second one. Should the scientific models get the positive feedbacks factored in correctly, such modeling might prove, after the fact, that the responsible economic collapse avoided what is otherwise assured: the thawing of the methane hydrates and, based on what is known from past thawings, a massive die off and a dead zone of millions of years in duration.
If, systemically, one cannot not trust, in what do we trust?
Listen to Ron Paul, let prices fall and get the vultures off of our backs!
However, it's clear that the existing monetary system will survive. It has survived, and grown from the Rothschilds in Frankfurt and Patersons creation of the Bank of England several hundred years ago.
The next step on the march is the establishment of a world bank with world currency based on the same principles. You see the central bankers and politicians calling for it already. The only way to have a stable financial system they say...
Eh... how about not basing it on debt...
It does mean that we and our children are born into and live our lives within a tremendous fraud, a massive financial trap... I'm buying gold and silver because they are freedom. How ironic.