Wednesday, November 26, 2008
For new readers who aren't familiar with my first website, here are some messages of hope and courage in these difficult times:
- Each of our Individual Voices Is More Important Than We've Realized
- Hope In a Time of Hopelessness
- Fascism Is Over ... If We Want It
- Silence is the Death of Liberty
The headline of an article on Bloomberg warns "Food Prices Will Rise, Causing Export Bans, Riots".
Leading economist Nouriel Roubini warns of possible food riots.
The Financial Times points out that farmers rely on credit, and credit is drying up.
One of the top experts on derivatives, economist Nassim Nicholas Taleb, warns
that supermarkets may not be able to borrow against their inventory, and will thus be forced to shut down.
I hope they're wrong. But when experts like Roubini and Taleb warn of a potential problem, I have to listen.
After Paulson Announces New $800 Billion Bailout, Credit Default Swaps Against U.S. Rise to All-Time High
You might assume that government bailouts would assure investors about the health of the U.S. economy. After all, the government is pulling out all of the stops to make sure that the economy recovers, right?
Actually, no. As Markit's Miles Johnson writes:
CDS [credit default swapos] on the debt of the US government reached all-time highs on Wednesday as investors struggled to digest the government’s latest stimulus package splurge. (On Tuesday the Federal Reserve unveiled an $800bn injection into consumer lending markets, prompting further unease over the level of national debt and ballooning money supply.)Why?
The news pushed the cost of protecting against US default over five years to an all-time high, rising 5 basis points to 49bp. The spread on ten year contracts too reached record highs, up from a close of 48bp to 53bp.
Maybe because investors are starting to understand that the U.S. is running out of the ability to raise more cash and may go bankrupt.
The U.S. isn't alone. As the above-described article by Johnson states:
But the US isn’t the only country about which investors are increasingly concerned. Alistair Darling’s latest plan to resuscitate the UK economy has got the markets in a fluster too - UK CDS hits new highs every day.
In response to criticism of Obama's appointment of people who are not only at the center of the status quo, but who helped to create our current problems, many people argue that it is unfair to criticize Obama because he hasn't even been sworn in yet.
Are they right?
Well, as Naomi Klein says:
The key issue here I think coming back—the issue is Obama is coming to these
decisions because he is under enormous pressure from above, Wall Street.
How do you transition from a pro Obama campaign movement to an independent social movement that puts will counter-pressure on him from below? Those are the conditions under which Roosevelt sold the new deal as a compromise to elite. We do not have those dynamics right now. We have a situation where we have super-fans for Obama, constantly apologizing for every decision that he makes versus a gloves-off elite who are putting real pressure on him behind the scenes. And we are seeing the result.
In other words, the elites are successfully pressuring Obama to appoint insiders like Summers, Geithner, Clinton, and Gates - who will ensure that nothing really changes - because the American people are idly sitting by taking a wait-and-see approach.
Indeed, they are guaranteeing that - instead of change - all the American people will get in return for their trillions in taxpayer debt is chump change.
Tuesday, November 25, 2008
How Could It Be Worse Than the Great Depression When We Have So Many "Modern Tools" to Address the Crisis?
Glass-Steagall and other Depression-era legislation was repealed based upon the claim that the modern financial system was totally stable.
The basis of this argument?
The financial boys thought they were so smart that they had modeled all potential risks for every investment or transaction using derivatives. And they convinced government regulators with their big talk.
Former Fed chairman Paul Volker explained that the entire modern financial system is based upon derivatives, and the financial system today is entirely different from the traditional American or global financial system because derivatives - a relatively new concept - now underly the entire fabric of the financial system.
How Are the New Tools Working for You?
Bernanke and Paulson and Congress constantly talk about all of the "tools" we have that weren't available to stop the Great Depression.
How are those new tools working for you, boys?
Not very well, as the worsening financial crisis shows.
Why aren't they working?
Economist, highly-regarded investment advisor, and one of the world's foremost authorities on derivatives Nassim Nicholas Taleb explains (together with the creator of fractal theory and chaos theory, Dr. Mandelbrot) that the financial crisis will be worse than the Great Depression because of derivatives. Specifically, in a PBS interview, Taleb explains that the architecture of the current financial system prevents frequent periods of instability, but that when instability does occur, it is on a catastrophic scale.
Taleb is saying that - in thinking they were so smart by trying to control risk through the all-pervasive use of derivatives - the financial gambers have created a perfect storm which will result in a crash worse than the Great Depression.
All of the fancy "tools" in the world cannot solve the crisis unless derivatives are tamed, because - as Volker says - the entire financial system is built like a house of cards on top of derivatives. Or, as many writers describe it, the world economy is getting sucked into a black hole of derivatives debt.
As a writer for one of the leading British newspapers said a couple of months ago, trying to calm the financial storm without dealing with the huge derivatives liability was building a canvass tent as one's strategy to weather a hurricane.
They are right, unless derivatives are tamed.
(click for full image; and see this).
The failure of Citigroup has put the viability of the entire banking system in question.
And as a MarketWatch commentator points out:
Washington needs credit counseling. The federal government has an $11.32 trillion credit limit, and it's carrying a balance of $10.66 trillion, according to a Treasury Department spokesman.Government officials stress there's no borrowing planned as a result of Citigroup Bailout No. 2. But they also acknowledge the government doesn't have any cash to cover Citi's losses.***Throw in some tax cuts and declining demand for our debt overseas, and we have the ingredients for a toxic mix that could end up making our debt more expensive, even if we avoid default."There's no God-given gift of a 'AAA' rating," Standard & Poor's John Chambers told Reuters in September. "The U.S. has to earn it like everyone else."
Uncle Sam is in trouble.
Citigroup - Fresh From Being Bailed Out of Derivatives Black Hole - Now Selling Yet Another Type of Derivative
Citigroup has received $45 billion in direct bailout money, plus a guarantee of $306 billion. Citigroup was brought to its knees by - among other things - credit default swaps bet against it, and huge derivatives holdings.
Goldman Sachs and JPMorgan also each got $25 billion in taxpayer bailout money. The bailout money helped save them from the black hole of derivatives debt.
So what are these grateful companies doing now? Are they confessing about the error of their ways, and warning others to stay away from derivatives?
They are using a type of derivative called "Default-Recovery Swaps" to bet against other companies. As Bloomberg writes:
Goldman... Citigroup ... and JPMorgan ..., which helped turn bets on company defaults into a $47 trillion market, are among banks offering wagers on the amount investors may recover from bonds after borrowers go bankrupt.
Credit-recovery swaps are trading on the debt of about 70 companies, including automaker General Motors Corp. and bond- insurer MBIA Inc. That’s up from 40 during the summer, according to Mikhail Foux, a strategist at Citigroup in New York. ***
Also known as recovery locks, the agreements are bought as insurance by sellers of credit-default swaps, such as banks, hedge funds and insurers.
“The market definitely has potential to grow,” Foux said. “As we see more defaults -- and there’s no doubt we’re going to see more defaults -- you’re going to see more recovery swaps trading.”***
Specifics about recovery-lock contracts aren’t generally available because they are made privately and don’t trade on an exchange.
So let me get this straight.
Instead of getting out of toxic derivatives, these recipients of taxpayer handouts are selling yet another type of derivative which allows people to bet against the failure of companies like GM - that the taxpayers are probably going to end up paying to bailout.
Monday, November 24, 2008
Citibank was the biggest, and was considered one of the most stable, banks a little while ago. But its derivatives exposure killed it.
However, Citibank was only the third largest holder of derivatives as of June.
Who were number 1 and 2?
JP Morgan holds around three times more derivatives than Citigroup. And Bank of America is number 2.
As Martin Weiss, PhD writes:
Bank of America was a somewhat bigger player, holding $39.7 trillion in derivative bets, with 93.4% traded outside of any exchange.
But JPMorgan Chase was, by far, the biggest of them all, towering over the U.S. derivatives market with more than double BofA’s book of bets — $91.3 trillion worth. This meant that JPMorgan Chase controlled half of all derivatives in the U.S. banking system — a virtual monopoly that tied the firm’s finances with the fate of the U.S. economy far beyond anything ever witnessed in modern history. Meanwhile, $87.3 trillion, or 95.7% of Morgan’s derivatives, were outside the purview of any exchange.
One bank! Making bets of unknown nature and risk! Involving a dollar amount equivalent to six years of the total production of the entire U.S. economy! In contrast, Lehman Brothers, whose failure caused such a large earthquake in the global financial system, was actually small by comparison — with “only” $7.1 trillion in derivatives.***
At Bank of America, the [Office of the Comptroller of the Currency] calculated that, at mid-year, the bank was exposed to the tune of 194.3% of its capital. In other words, for every $1 of capital in the kitty, BofA was risking $1.94 cents strictly on the promises made by its betting partners. If about half of its betting partners defaulted, the bank’s capital would be wiped out and it would be bankrupt. And remember: This was in addition to the risk that the market might go the wrong way, and on top of the risk it was taking with its other investments and loans***
And if you think that’s risky, consider JPMorgan Chase. Not only was it the largest player, but, among the big three U.S. derivatives players, it also had the largest default exposure: For every dollar of capital, the bank was risking $4.30 on the credit of its betting partners.
Paulson is changing the purpose and scope of the TARP bailout program for the fifth time.
The New York Times discusses versions 1 through 3:
“First [Paulson’s Treasury Department] says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. [Version 2] Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.
Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. [Version 3]"
Then, Paulson said he'd leave half of the $700 billion TARP bailout funds unused, for Obama to control. That's number 4.
Now, Paulson is changing his mind again, saying he wants to use the remaining $350 in bailout funds in connection with consumer asset-backed securities.
Paulson - who is acting like a dictator, and not taking input from anyone - is riling the economy with his constant changes as much as anything else.
No wonder Steve Forbes has called him the worst Treasury Secretary in modern times.
The verdict on the Citigroup bailout is pretty much unanimous: its a terrible deal for America.
- Nobel economist Paul Krugman:
"Abailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more. Amazing how much damage the lame ducks can do in the time remaining."
- Economist and former labor secretary Robert Reich:
"This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened."
- Economist Paul Kedrosky:
"So far I'm not impressed"
- Financial advisor and analyst Yves Smith:
"Note key element of the deal is that the Federal government will guarantee $300 billion of Citi assets, a much bigger number than had been leaked earlier, with a rather convoluted loss-sharing arrangement, but the bottom line is that Citi is at risk for at most $40 billion. Citi also gets a $20 billion equity injection, on slightly more onerous terms than the initial TARP investments, but still more favorable than Warren Buffett's investment in Goldman. Oh, and it appears there will be NO management changes."
- Washington Post financial writer James Kwak:
"The third goal should have been getting a good deal for the U.S. taxpayer, but instead Citi got the same generous terms as the original recapitalization. 8% is still less than the 10% Buffett got from Goldman; a cap on dividends is a nice touch but shouldn’t affect the value of equity any. By refusing to ask for convertible shares, the government achieved its goal of not diluting shareholders and limiting its influence over the bank. And an exercise price of $10.61 for the warrants? It is justified as the average closing price for the preceding 20 days, but basically that amounts to substituting what people really would like to believe the stock is worth for what it really is worth ($3.77)."
Sunday, November 23, 2008
Instead of Giving Citigroup $20 Billion and Guaranteeing $306 Billion in Toxic Assets, The Government Should Have Cancelled Credit Default Swaps
As of June, Citibank was perhaps the world's third largest holder of derivatives, with over thirty trillion dollars (nominal value) in derivatives.
On Friday, Business Week wrote about the risk of counterparties to Citigroup's credit default swaps defaulting on their payments to Citibank:
For each dollar of risk-based capital, Citibank was exposed to $2.58 in such credit risk on June 30 ....
Citibank's parent corporation - Citigroup - is many times larger than Citibank. Given that Citigroup is a highly diversified financial services company, it is certain that derivatives were held by many subsidiaries besides Citibank, so Citigroup's total derivatives holdings had to have been a lot higher.
Today, the U.S. government is giving Citigroup another $20 billion dollars (in addition to the $25 billion already given), and guaranteeing $306 Billion in toxic assets.
Given that alot of Citigroup's toxic assets - which American taxpayers are going to have to pay for - are derivatives (and the failure of a major financial institution like Citigroup could have caused direct derivatives losses of $400 billion and indirect losses of $1.5 trillion), and given that part of the reason that Citigroup fell so fast is because piranhas bet against it using credit default swaps (driving the price of business way up), wouldn't it have been cheaper for the government to just rescind CDS owned or bet against Citigroup than to bailout Citigroup? Wouldn't canceling AIG's CDS have been cheaper than bailing out that giant?
And because all of the trillions spent and all of the dramatic measures taken by the government have completely failed to stabilize the economy, isn't it obvious by now that the only way to avoid a depression is to rescind the toxic CDS - the market for which is bigger than the world economy? Putting CDS on exchanges - the current proposal of the G-20, Bush, Bernanke, Cox and the gang - is too little, too late. We'll crash and burn before the exchange is even launched.
Nothing Paulson, Bernanke, Obama, Geithner or anyone else does will work unless these weapons of mass destruction are taken apart and buried in the ground piece-by-piece.Again, the legal theory for rescinding CDS is that they were sold using fraudulent claims that they were fairly safe and risk-free. It is basic law 101 that fraud is basis for rescission of a contract, and CDS are a type of contract.
And I am not for rewarding the purveyors of these weapons of mass destruction., but it would have been much cheaper for taxpayers if the government had bought out the CDS effecting the most vulnerable companies by "condemning them" in the same way the government uses eminent domain to condemn land, and to pay the sellers and/or holders of the CDS some small sum to compensate them. Again, I think they should be rescinded with no money spent. But if our leaders don't have the spine to do that, then condemn them and pay out some nominal sum. But deal with them - don't fritter away billions more on schemes which won't work because they don't address the core issues.
Everyone knows that Paulson and Bernanke's actions have been ineffective.
And they have been dishonest. For example, a New York Times article says that Paulson knowingly lied to Congress, and many people believe that Paulson has treated the U.S. like a banana republic. Indeed, as economist and former labor secretary Robert Reich said today:
“I think that the great bailout that he engineered was really sold to Congress on false pretenses,” Reich said on Late Edition.
But they might also be illegal.
As Paulson himself said last week:
Federal law, and in particular the Anti-Deficiency Act, prohibits Treasury from spending money, lending money, and guaranteeing or buying assets without Congressional approval. The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses. The Fed couldn't legally lend against the Lehman assets if it expected that loan to result in a loss of any size; this was much different than the case with Bear Stearns.
According to the Government Accountability Office, the Anti-Deficiency Act prohibits any government officials from:
The government has spent trillions of dollars on various bailouts, but Congress only authorized $700 billion.
- Making or authorizing an expenditure from, or creating or authorizing an obligation under, any appropriation or fund in excess of the amount available in the appropriation or fund unless authorized by law. 31 U.S.C. § 1341(a)(1)(A).
- Involving the government in any obligation to pay money before funds have been appropriated for that purpose, unless otherwise allowed by law. 31 U.S.C. § 1341(a)(1)(B).***
- Making obligations or expenditures in excess of an apportionment or reapportionment, or in excess of the amount permitted by agency regulations. 31 U.S.C. § 1517(a).
More importantly, when Paulson switched from the original TARP plan of buying toxic assets to giving billions to banks, he arguably "involved[ed] the government in [an] obligation before funds [were approved by Congress] for that purpose.
As well-regarded economic Michael Hudson writes:
Congress did not approve the Treasury’s $250 billion of “preferred” stock investments in Wall Street banks.Moreover, Bloomberg's lawsuit demanding that the Federal Reserve reveal what types of assets it is accepting as collateral for its trillions of dollars of loans becomes more interesting in light of Paulson's comment that "The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses."
As Hudson points out:
The Fed has refused to let Congress know any details – any details at all – about its cash-for-trash swaps with these institutions. This is what concerns Congress, and what has prompted reporters at Bloomberg to bring a lawsuit in order to discover and publicize the details. It is not hard to see why this curiosity exists.Hudson then implies that it is certain that the Fed will suffer tremendous losses on these assets.
Ineffective. Dishonest. And probably criminal.
But that's just par for the course for the Bush administration and their bipartisan allies in Congress.
Germany declined to comment on on Saturday on reports that three Germans arrested on suspicion of throwing explosives at an EU office in Kosovo were intelligence officers.
The explosive charge was thrown on Nov. 14 at the International Civilian Office (ICO), the office of EU Special Representative Pieter Feith, who oversees Kosovo's governance, but caused only minor damage. The men were detained on Thursday.
A spokesman for the German foreign ministry in Berlin confirmed that three Germans had been arrested, but declined to make any further comment as an investigation was under way.
A police source in Kosovo told Reuters: "They are members of the BND", but gave no further details.
The German weekly Der Spiegel also said the men worked for the German intelligence agency BND, and that they had told investigators they had been examining the scene of the explosion, but had not been involved in it.
Saturday, November 22, 2008
Frequent Bloomberg and CNBC commentator Scott Nations, President of Fortress Trading - a Chicago-based firm that trades options and futures - said in a CNBC interview that the PPT (Plunge Protection Team) manipulates the S&P 500.
This isn't big news, but it is impressive that Nations discussed the PPT on a mainstream news program.
Friday, November 21, 2008
Junk bond guru Martin Fridson told Bloomberg on Wednesday:
"Either the [high-yield bond] market is right and expecting a default rate considerably higher than it was in the Great Depression, or we have such profound dislocations and selling pressures going on that it really is creating extraordinary fundamental value.''In other words, corporate bond yields are in the stratosphere right now. Either investors are overreacting to corporate default risk (thus driving up the yields), or we are in for a very bumpy ride.
Thursday, November 20, 2008
In an article entitled "Deflation: Disaster or Just A Nice Discount?", the Wall Street Journal says we've already got deflation:
How can the Journal say we've got deflation "right now", when many economists are debating about whether we'll get deflation some time in the future?
When economists think deflation, they see looming disaster in the form of Japan’s deep recession of the 1990s or even the Great Depression.
But when U.S. households see deflation, they might just notice a little extra money in their pockets.
Right now, deflation appears to be that latter, better, variety: Every day is a sale.
Because people use the word "deflation" in different ways.
Everyone agrees that deflation is negative inflation. One economist writes:
Economists define deflation as a decline in the average price of the products and services in a market.Well, we certainly have a decline in the average price of goods and services right now. The U.S. has actually experienced many brief periods of deflation, so this is not uncommon.
Many people define deflation as a "persistent decrease in the general price level of goods and services." But no one agrees on how long deflation must be to be "persistent".
In fact, while they won't admit it, I believe that whether or not economists think we've got deflation comes down to whether they think we've got the "good" or the "bad" kind of deflation. Not on whether or not average prices or falling or the number of months they've been falling.
For example, the above-quoted Wall Street Journal notes:
Just as the government and media kept asking "will we get recession" long after we were already in recession, they've avoided mentioning deflation so they wouldn't scare people.
What the Federal Reserve has to avoid is the kind of chain reaction that ensues when consumers and businesses expect prices to keep falling, leading to a downward spiral of lower spending and job cuts.***As long as expectations for future inflation remain anchored in the 2% range, then falling prices are likely to remain the kind of price shock that benefits consumers, who are less likely to put off spending in hopes of getting a better deal later.
We've already got deflation. The only question is whether it is the good kind - where consumers get a price break - or the bad kind, where the economy crawls to a standstill because no one is buying and employers slash wages and jobs.
The Austrian school of economics defines deflation as a shrinking money supply, and considers falling prices as simply a symptom of the smaller money supply. Personally, I agree with that definition. See this for more information.
The world's richest man, Warren Buffet, is nicknamed "The Oracle of Omaha" for his investment foresight.
Buffet's reputation is so great that when his investment company, Berkshire Hathaway, invested billions of dollars in companies like Goldman and GE, the stock market rallied on that news alone. Buffet's investing success is such that people figured if The Oracle was buying, the market must have hit bottom.
Buffet is also one of Obama's primary economic advisors, and his advice and assistance is sought by hundreds of CEOs.
But in a sign of the times, the Oracle's Berkshire Hathaway is in real trouble. BH is down 50% from its all-time high.
More importantly, as Bloomberg points out:
The cost of protecting against default by Warren Buffet's AAA rated Berkshire Hathaway Inc. has almost tripled in two months, a sign of just how skittish investors have become amid the global financial crisis.
The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, is more than four times that of rival insurer Travelers Cos. At those levels, the swaps are typical of companies rated Baa3 by Moody's Investors Service, one level above junk. The price may have risen on concern that the billionaire's firm could lose a $37 billion bet on world stock market values more than a decade from now. ***
For the swaps to pay off, Berkshire would have to exhaust its $33.4 billion cash hoard, and Buffett's decades-long record as the world's most successful investor would have to come to a cataclysmic end.
And as financial analyst and former high-level derivatives trader, Roger Ehrenberg, writes:
Economic conditions are so bad that they even blindsided the Oracle.
Berkshire Hathaway is genuinely threatened by a potential run on its credit, due to contractual provisions in its derivatives agreements that could compel it to post more collateral at exactly the worst time . . . .
If we are even talking about Berkshire Hathaway being at risk, then ANY company is at risk of a run on its credit . . . .
Wednesday, November 19, 2008
A headline from Associated Press today reads "Dow slips below 8,000 on growing fear of deflation". See also this and this.
But would deflation be a good thing or a bad thing?
Well, lower prices are good for consumers. As Business Week puts it:
"A bit of deflation that boosts real wages may be the best way to get American households out of the hole."(higher "real wages" means that people's wages will go further because the prices of things we buy will be lower).
But Nobel economist Paul Krugman argues that deflation would be bad because it would drive up the cost which corporations have to pay to borrow money.
The Guardian points to other adverse effects from deflation:
Another effect of falling prices is to increase the burden of any given amount of debt, even as banks and households are sharply paring debt, or deleveraging, in reaction to financial turmoil and a wave of bad economic news."The problem with negative inflation is that the real value of your debts is increasing," Societe Generale economist James Nixon said. "In a deleveraging cycle you need negative inflation like you need a hole in the head." ***Deflation would be problematic because, if sustained, it could lead consumers and business to curb spending further, shrinking economic activity and reducing demand even more, and pushing prices lower still.
Citibank is (or at least until recently was) the largest bank in the world. Its parent - Citigroup - was the largest financial services companies in the world.
But as the Globe and Mail writes:
[Citigroup] announced plans yesterday to cut 50,000 jobs.***
The pace of Citigroup's decline has been breathtaking. Only last spring, it was the largest bank in the world, worth more than $250-billion (U.S.).
Today, its market value has withered to just $50-billion, making it roughly the same size as Royal Bank of Canada.
Much of that drop can be attributed to questionable lending and an overreliance on derivatives, two key ingredients in a credit crisis that has hammered pretty much every large U.S. bank.
But Citigroup now looks more vulnerable than most, and many observers are pointing to another underlying cause: a flawed business model.
And Citigroup is getting hammered by credit default swaps. As Marketwatch writes:
CDS spreads on Citi were at 325 basis points over Treasury bonds during midday action, up from a 240 basis points yesterday, according to Phoenix Partners Group.
Christopher Whalen, head of Institutional Risk Analytics predicts that "Citi will be controlled by the U.S. government by next year, and that the next logical step will be to break up the bank and sell the assets."
Is he right?
I don't know. But the fact that the world's largest bank and financial services company have collapsed so far so fast shows that the economic crisis is very severe indeed.
The big boys - such as central bankers, prime ministers and big bond holders - are afraid of the threat of deflation.
An article today in the Guardian says:
UK prime minister Brown expressed a similar sentiment:
With recession now a reality in major economies from Japan to Germany, policymakers are starting to fret about the chance of a phenomenon many see as even more deadly: deflation. ***"Deflation is probably the worst case for the financial sector because it is very difficult to overcome. Therefore all central banks are going to do everything to avoid it," European Central Bank policymaker Ewald Nowotny said on Nov. 10.***
Prime minister Gordon Brown told the House of Commons yesterday: "Next year, the problem is deflation and the problem of inflation close to zero."Fortune Magazine writes:
Forget about inflation. The opposite threat - deflation - is what has policymakers sweating now.***Treasury bond investors are also betting on protracted deflation (and see this).
Bankers are worried that the destruction of trillions of dollars of wealth in the collapse of the housing and stock markets will stem demand for goods of all sorts, creating the kind of falling price environment not seen here since the 1930s. Among central bankers, there is "a real sense of concern about falling inflation," says Lena Komileva, an economist at interdealer broker Tullett Prebon in London. ***
Update: Bloomberg writes:
"The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington.Note: I think we've already got deflation, and that it will eventually give way to hyperinflation.
I've been warning of deflation for some time. Specifically, I predicted 1-1/2 to 2 years of deflation, followed by hyperinflation.
Well, deflation is here.
As Bloomberg writes:
Today's report signals deflation, or a prolonged slide in prices, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen what some economists already call the deepest recession in decades, by making debts harder to pay off and countering the impact of Fed interest-rate cuts.Many leading economists have recently changed their predictions to forecast deflation in 2009. And central bankers, prime ministers, and big treasury bond investors are all very worried about deflation. But I agree with the analysts who say that deflation is here, now (see this and this).
"We are moving into an environment where prices are falling across the board,'' David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television. "That is going to continue. Deflation is spreading across the economy.''***
Consumer prices were forecast to fall 0.8 percent, according to the median forecast of 77 economists in a Bloomberg News survey. Estimates ranged from a decline of 1.2 percent to a gain of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed.
The Austrian school of economics points out that inflation and deflation are really about the size of the money supply, and not prices. The reason we have deflation is that it is difficult to pump money into an airplane with a hole in its side.
Remember, "cash is king" during a deflation, but gold may do well during the later stages of deflation.
Tuesday, November 18, 2008
The first line of an article about the bailout by CNBC today is "Slush fund" ... "Banana Republic" ... "Keystone Kops.", and the article includes the following quotes:
The only thing that's missing is someone using the words "looting the treasury", but I guess that's so obvious that it doesn't have to be said.
"It's hard to escape the feeling that the majority in the Congress are paying off a strong constituency that helped them enormously in the last election," says former ten-term Republican congressman Bill Frenzel, now with the Brookings Institution. "You are seeing the Congress in a role people hate to see it in—responding to powerful constituencies rather than going after solving the problem."
"This is just the beginning of corporate welfare in a big, big way," Richard Shelby (R.-Ala.), the ranking Republican on the Senate Banking Committee, told NBC's "Meet The Press" Sunday.
" The key issue there will be whether his overwhelming sense of generosity to Wall Street will force him to inject capital on terms that are much worse for the tax payer than the terms private investor insist upon," says Rep. Brad Sherman (D. Calif.), who voted against the TARP legislation. "And by having those two groups come in at the same time, the differential in how those two groups of investors are treated will be all too apparent. "
Dan Mitchell, a scholar at the Cato Institute, says the US is acting like a "banana republic."
Even after the trillions spent by the feds, the technical economic indicators are getting worse again.
Above and beyond the terrible news from Main Street (such as unemployment, weak retail, and declining shipping and manufacturing), several key technical indicators are worsening again, even after the government spent trillions on various bailouts:
- Credit default swaps against sovereign nations, European companies, and bonds are approaching their all-time wides (indicating severe risk).
- Interbank lending rates (LIBOR) have started edging higher again
- The Financial Times argues that TIPS rates point towards protracted deflation (see also this). More and more of the leading economists and analysts (such as Morgan Stanley, Goldman Sachs, and BNP Paribas) are beginning to agree about deflation (at least in the short-run) to varying degrees.
Paulson has admitted that the bailout is not about "economic recovery":
“The rescue package was not intended to be an ... economic recovery package,” Paulson said in testimony to the House Financial Services Committee in Washington.
Well, maybe that explains why things are getting worse.
Update: CDS spreads are again approaching "Armageddon levels".
It is Spring 2009.
Just as many people have warned, a series of attacks using nuclear "dirty bombs" kills thousands of Americans.
Government intelligence agencies point to Iran, China and Russia as the source of the attacks.
The president and Congress set in motion plans for war against the 3 giants. A war which will undoubtedly cost tens of trillions of dollars, kill thousands of Americans, and cause untold misery for years to come.
Of course you would.
Well, then you would also want to know whether Bin Laden was really behind 9/11, whether rogue elements within the U.S. allowed the attacks to succeed, or whether it was actually an "inside job".
Think about it. If, like Howard Zinn, you say "I don't care if 9/11 is an inside job", you are really saying you don't care if future attacks are real attacks or false flag attacks intended to justify war against a concocted enemy.
Is that what you're saying?
In addition, false flag attacks - being aided and abetted by rogue elements within the government - can easily be prevented . . . just don't aid and abet, and the attack won't happen, or at least won't succeed. So thousands of American lives can be spared if the topic of false flag terrorism is investigated and understood.
Monday, November 17, 2008
The Associated Press writes:
"Two Obama advisers said there's little—if any—chance that the incoming president's Justice Department will go after anyone involved in authorizing or carrying out interrogations that provoked worldwide outrage."And when Senate Judiciary Chairman Patrick Leahy was asked if Bush officials could face war crimes, he responded:
"In the United States, no. These things are not going to happen."This is not entirely surprising, given that Democratic congress members Nancy Pelosi, Jane Harman and John D. Rockefeller were secretly briefed on torture many, many years ago, and yet did nothing to stop those unlawful programs. Indeed, they egged the torturers on (for example, the above-linked Washington Post article says "no objections were raised. Instead, at least two lawmakers in the room asked the CIA to push harder").
Remember, those who authorize or cover up war crimes are themselves guilty of war crimes. The Democratic leadership thus has every incentive to cover up war crimes.
The fix is already in. Only massive pressure on the government can force war crimes trials.
The American economy hasn't just been wrecked, its been Iraqed.
As Senator Inhofe said Saturday:
"It is just outrageous that the American people don't know that Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone,'' the Oklahoma Republican told the Tulsa World.Bloomberg concurs, writing that the Federal Reserve has failed to comply with congressional demands for transparency and disclose the destination of at least $2 trillion dollars
"It could be to his friends. It could be to anybody else. We don't know. There is no way of knowing.''
Remember the missing billions of dollars which were earmarked for rebuilding Iraq, but have gone missing?
Naomi Klein points out that the guy initially chosen to serve as chief investment officer for the bailout program previously:
Served as executive director of Paul Bremer's infamous Coalition Provisional Authority in Baghdad, during the early days of the Iraq War. Part of his job was to hire civilian staff, which made him an integral part of the partisan machine that filled the Green Zone with Young Republicans, investment bankers and Dick Cheney interns. Qualifications weren't a big issue back then, because the staff's main function was to hand over stacks of taxpayer money to private contractors, who were the ones actually running the occupation. It was this nonstop cash conveyor belt that earned the Green Zone a reputation, in the words of one CPA official, as "a free-fraud zone." During Senate hearings last year, when [the proposed head of the bailout program] was asked what he had learned from his experience at the CPA, he said he thought that contracts should be handed out with more "speed and flexibility" — the same philosophy he cited back when he was in charge of regulating Wall Street traders.Imhofe also pointed out the parallels between the bailout and the Iraq war:
"I have learned a long time ago. When they come up and say this has to be done and has to be done immediately, there is no other way of doing it, you have to sit back and take a deep breath and nine times out of 10 they are not telling the truth,'' he said.The powers-that-be scared Congress with doomsday scenarios of Saddam helping Al Qaeda build a nuclear bomb so that Congress wrote a "blank check". Then the taxpayer's money disappeared - without a paper trail or oversight - into the pockets of the well-connected.
"And this is one of those nine times.''
"Congress abdicated its constitutional responsibility by signing a truly blank check over to the Treasury Secretary,'' he wrote.
The exact same thing is happening with the bailout. They're not only wrecking the American economy, they're Iraqing it.
The same thing happened with 9/11 as well. Congress was terrified into signing an Anti-American Patriot Act because it was told that otherwise Al Qaeda was going to get us. But instead of actually taking steps to increase the national security of the U.S., the Patriot Act has been used as a cash cow for "security consulting firms" (as well as those hostile to the Constitution).
Like all Americans, I was raised to believe that the "New Deal" got us out of the Great Depression.
The smart money is calling the New New Deal dead on arrival.
For example, Bloomberg writes:
President-elect Barack Obama and House Speaker Nancy Pelosi may throw as much as half a trillion dollars worth of stimulus at the economy -- and have little or no growth to show for it.
One of the leading authorities on monetary policy says that the Fed and Treasury are "fighting the last war", and using an approach that they think would have worked in the Great Depression, even though the cause of the 2 financial crises are entirely different.
Now, Congress and Obama are set to duplicate the fiscal stimulus approach of FDR.
Instead of being smart and taking actions which will work, all branches of the government appear to be spending sums we can never repay to take actions which will likely be ineffective.
Companies go bankrupt when they:
(1) Borrow more than they should; and
(2) Have to pay their creditors more and more interest to loan them money.
Borrowing Too MuchEveryone knows that the U.S. has borrowed too much. As of a year ago, the financial obligations of the U.S. were some $56 trillion dollars. That number has gone way up since then.
Higher and Higher Interest RatesAmerica is already paying more to borrow money.
An article from Barrons entitled "Is Uncle Sam's Credit Line Running Out?" points out:
What happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?In other words, buyers of U.S. treasury bonds are demanding a lot of interest to make long-term loans to Uncle Sam.
"Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.
It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.***
The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper.
Barrons goes on to point out the credit default swaps tell the same story:
The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.Like every company which borrowed too much and then got destroyed by higher and higher borrowing costs, America is following the recipe for bankruptcy.
Charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September. . . . Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. . . . All of which suggests America's credit line has its limits.
Of course, if a company makes something that people want, that will increase the chance that it will survive and avoid bankruptcy. America has abandoned its manufacturing base, and is selling "exotic financial products" which the world is starting to realize are nothing but snake oil.
Saturday, November 15, 2008
Credit default swaps were one of the core agenda items at the G-20 meeting this weekend.
Specifically, CDS are the focus of one of the four "Immediate Actions by March 31, 2009" to which the G-20 agreed:
"Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes."
(2 of the other 3 urgent action items involve keeping credit rating agency's honest; and the last one involves ensuring that financial institutions have sufficient capital).
The members of the G-2o also "request our Finance Ministers to formulate additional recommendations" to "Strengthen ... the resilience and transparency of credit derivatives markets and reduc[e] their systemic risks, including by improving the infrastructure of over-the-counter markets".
In fact, it was President Bush who pushed the approach of oversight and regulation - instead of banning - of CDS:
While pledging to work together on beefed-up regulation of murky investment tools such as credit default swaps, which lie at the heart of the current crisis, the summit said it was crucial not to go too far.
Again reflecting Bush's demands, the G20 said it would strive for new regulation that is "efficient, does not stifle innovation, and encourages expanded trade in financial products and services."
In other words, America's financial elite - the very people who allowed the exponential expansion without oversight of CDS and other " murky investment tools"- pushed for an approach which would would not hold accountable those who created the CDS hurricane in the first place . (Paulson and Greenspan were obviously big derivatives cheerleaders. But the U.S. Congress aided and abetted this mess, as did some of Obama's top economic advisors; and see this).
Bush and company pushed an approach which is so incremental and toothless that it will probably not prevent future catastrophic failures stemming from CDS which are already out there.
This is similar to the Neocon approach to the Iraq war debate. Any Neocon talking head asked about how we got into the Iraq war says "let's not talk about the past, let's talk about what we should do now." This is a way to try to escape blame for a massively illegal war and to try to change the subject away from getting out of Iraq, towards some mythical successful end-game.
Similarly, America's financial elite are trying to talk about the "future" of CDS and how to "safely regulate them", instead of talking about who got us into this financial mess, and how to cancel the suckers before they drag the global economy down into a black hole.
Friday, November 14, 2008
According to the Financial Times:
See also this article from Bloomberg.
"[There is a] New wave of CDOs at risk of default .
Synthetic CDOs, the risky and complex debt products that are based on pools of corporate credit derivatives, are under increasing pressure after suffering a wave of default-related losses on top of general credit market deterioration.''
There are huge volumes of credit default swaps written against collateralized debt obligations (CDOs), the specifics of which have not been made public.
Rising CDO defaults could very well lead to massive new CDS problems, sparking off another round of company failures.
When top trend forecaster Gerald Calente predicted riots and revolution, many people shrugged and thought, "he's gone off the deep end".
But leading economist Nouriel Roubini is also now warning of food riots, and blaming it on the Fed and Treasury's policies and bank priorities:
The above-quoted article is free to subscribers, and you can sign up for a free trial to Roubini's website. While I don't agree with all of Roubini's prescriptions, he is one of best economists anywhere in terms of diagnosing the severity of economic problems.
We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy. ... Whether the zombie banks are kept on life support by the central banks and taxpayers of the world is highly relevant to whether the zombie bank executives pay themselves outsize bonuses and their zombie shareholders outsize dividends with taxpayer money. It appears sadly irrelevant to whether the banks perform their function of intermediating credit and commercial transactions in the real economy along the supply chain. The bailout cash and executive and shareholder priorities do not seem to reach so far.
The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti.
The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.
Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.
If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.
Everyone along the supply chain should worry about their children going hungry.
When that happens, everyone in governments should worry about the riots.
Congressmen Kucinich, Issa and Cummings let the head of Treasury's bailout program, Neil Kashkari, have it today.
The spleen-venting might have felt good, but it is likely that nothing will change. Indeed, Congressman Cummings begged Kashkari to stay on into the Obama administration.
Many people - including some congress people and Senators - said when the bailout was being debated, giving Treasury authority over the bailout based on the government's claims of dire economic threat was just like giving the White House authority to wage war against Iraq based on claims of a dire threat of Iraqi-lined terrorism.
We were right.
If you've been paying any attention, you know that credit default swaps are one of the major factors for the current economic crisis. Even the derivatives cheerleader-in-chief, Alan Greenspan, admits they are a problem, and they should have been better regulated.
Now, the SEC, Fed, Commodity Futures Trading Commission and even President Bush are pushing regulation of CDS.
As Bloomberg writes:
U.S. regulators said at least one clearinghouse for the $33 trillion credit-default swap market will be running by year-end after they agreed on a plan to regulate the entities.
The Fed, Commodity Futures Trading Commission and Securities and Exchange Commission signed memorandum of understanding today that they said will provide consistent oversight of the clearinghouses and the credit-default swap market. The group laid out guidelines they said would provide more public information on potential risks and also lessen the chance of systemic losses.****
"Bringing transparency to this market is vitally important,'' SEC Chairman Christopher Cox said in a statement today. "The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis.''
The accord signed by the Fed, the CFTC and the SEC "establishes a framework for consultation and information sharing'' for the new entities, according to a statement.
Indeed, CDS will even be a topic of the G-20 meeting this weekend: "George W. Bush yesterday said the G-20 meeting in Washington tomorrow would discuss regulation for credit default swaps and other financial instruments".Why Now?
Why are Bush, Cox, Bernanke and the boys calling for regulation of CDS?
Well, it is certainly partly because they get that CDS are a large part of what caused the economic crisis. But that was obvious a long time ago.
The real reason is that many people are increasingly furious that CDS have helped bring down the world economy, and are increasingly demanding that the CDS "weapons of mass destruction" be canceled and rescinded (based on fraudulent misrepresentation of how "safe" they are), or declared worth a nominal amount (say $1 each). People are also calling for the heads of the politicians who let this happen.
Indeed, the pressure to grab the bull by the horns has become so great that the U.S. government is being forced to try to look like it is doing something about CDS.
Too Little Too Late?I'm glad that our "leaders" are finally addressing CDS. But they've waited until the world economy is in shambles before even mentioning them.
And I am not convinced that it will be enough.
Given the mess that Bush, Cox, Bernanke and the rest have gotten our economy into, their repeated actions in helping their corporate buddies at the expense of taxpayers, and their ongoing political theater yelling at horses to get back in the barn after they let them out of the barn in the first place, I assume that this regulation effort won't be very effective, either.
Thursday, November 13, 2008
Paulson, Bernanke and the other clowns in charge of the economy are causing "a return of systematic risk to credit markets".
As Bloomberg writes:
As Markit's Gavan Nolan writes:
Treasury Secretary Henry Paulson's decision to abandon the purchase of toxic mortgage-linked securities under the Troubled Asset Relief Program may trigger a return of systemic risk to credit markets, BNP Paribas SA said.
"Substantial risk still remains within the U.S. financial system,'' said Rajeev Shah, a London-based credit strategist at BNP Paribas. "Uncertainty about existing troubled assets could lead to increasing systemic risk.''
"Solvency issues could come back into play,'' Shah said in an interview. "The TARP has not helped to spur lending.''
The Bush administration’s change of tack on TARP - the funds will no longer be used to buy distressed and illiquid assets from financial firms - has created uncertainty and unnerved markets.See also this and this.
What's going on?
Well, the banks and big insurance companies, hedge funds and other titans are saddled with huge quantities of derivatives and other "toxic assets".
People apparently weren't aware that Paulson dropped the plan to buy toxic assets even before the bailout legislation was passed. Now that people realize that the CDOs, CDS and other toxic instruments won't be sponged up by the Feds (except perhaps in the case of AIG), they realize that we are still at systematic risk. We always have been. But many people were apparently happily asleep and dreaming that the government was doing something constructive to fix it.
It is not really a return of systematic risk. Rather - by refusing to take the bull by the horns to reign in credit derivatives and other toxic instruments - the government has ensured that the systematic risk was never solved. Instead of letting insolvent financial institutions which made wildly stupid and greedy bets fail - which is the necessary medicine - the Fed is propping up corrupt losers and encouraging them to be more corrupt and make worse investments in the future. Instead of letting the deleveraging fires burn out on their own with the minimum amount of damage possible, the government is trying to reverse the process, which will just fan the flames and make it more dangerous.
By spending trillions of dollars on fruitless efforts, Paulson and Bernanke have let the real economy decay for months, and put the credit rating (and solvency) of the country at risk by exponentially increasing our debt.
Moreover, by spending all of that money, we have less to actually help out struggling taxpayers and to stimulate the economy. Economist Robert Reich says: that we are already in a "Mini Depression", and that the bailouts wont do anything to stimulate demand, the one thing which can turn the economy around. Former Assistant Secretary of the Treasury, and former editor of the Wall Street Journal editor, Paul Craig Roberts writes:
"The bailout funds have been wasted. The expensive bailout does not address the problem of falling employment and rising mortgage defaults. Treasury Secretary Hank Paulson could not see beyond saving Goldman Sachs and his bankster friends. The Paulson bailout does nothing except take troubled assets off banks’ books and put them on the overburdened taxpayers’ books, thus endangering the US Treasury’s credit rating."Paulson, Bernanke and the rest of the clowns are putting our entire economy at risk with their poor policies.
"I am leaving tomorrow for Washington to explain that the dollar cannot claim to be the only currency in the world..., that what was true in 1945 can no longer be true today".
There have been many previous indications that the dollar would not remain the world's reserve currency for long. But this is a dramatic statement by a close American ally.
Reading between the lines, I am guessing that Sarkozy is pushing for a shift from the dollar to a basket of currencies as a world reserve standard, instead of a change to a single currency such as the Euro or the Yuan.
But we'll have to wait and see what Sarkozy is really advocating.
Wednesday, November 12, 2008
Gerald Celente has been a leading trend forecaster for years:
"When CNN wants to know about the Top Trends, we ask Gerald Celente."Celente is now predicting revolution in America:
— CNN Headline News
"A network of 25 experts whose range of specialties would rival many university faculties."
— The Economist
"Gerald Celente has a knack for getting the zeitgeist right."
— USA Today
"There’s not a better trend forecaster than Gerald Celente. The man knows what he’s talking about."
"Those who take their predictions seriously ... consider the Trends Research Institute."
— The Wall Street Journal
"Gerald Celente is always ahead of the curve on trends and uncannily on the mark ... he's one of the most accurate forecasters around."
— The Atlanta Journal-Constitution
"Mr. Celente tracks the world’s social, economic and business trends for corporate clients."
— The New York Times
"Mr. Celente is a very intelligent guy. We are able to learn about trends from an authority."
— 48 Hours, CBS News
"Gerald Celente has a solid track record. He has predicted everything from the 1987 stock market crash and the demise of the Soviet Union to green marketing and corporate downsizing."
— The Detroit News
"Gerald Celente forecast the 1987 stock market crash, ‘green marketing,’ and the boom in gourmet coffees."
— Chicago Tribune
"The Trends Research Institute is the Standard and Poors of Popular Culture."
— The Los Angeles Times
"If Nostradamus were alive today, he'd have a hard time keeping up with Gerald Celente."
— New York Post
And last month, Celente said:
Is Celente right?
"There will be a revolution in this country. It’s not going to come yet, but it’s going to come down the line and we’re going to see a third party and this was the catalyst for it: the takeover of Washington, D. C., in broad daylight by Wall Street in this bloodless coup. And it will happen as conditions continue to worsen.
What’s going on right now – this Wall Street bailout is really taxation without representation. "
Remember that Senator Dodd recently said:
If it turns out that [the banks] are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.The banks have been hoarding cash.
Note: I hope violent revolution never happens. I hope that the trends which are leading Celente to forecast revolution change.
I hope that the government starts to serve its people, starts to act lawfully, and gives up taxation without representation. "The best way to avoid all types of revolution would be for the government to start following the rule of law. I passionately hope it will do so."