The global financial and economic crisis
US standard of living is dropping
The crisis didn’t start last year, it was building up for some time.
The real reason was not the housing bubble. Yes, housing prices soared due to
Greenspan’s ultra easy monetary policy in the early 2000-s,
but, in fact, in gold terms they are quite average historically, as of late 2009/early 2010.
The real problem was falling US standard of living, and that has been happening for some time,
as seen on these charts below. The falling standard of living is a direct consequence of
the falling currency.
Stocks and dollar
Thanks to the Fed promising to keep interest rates at zero for some time, the US dollar has
already partially replaced Yen as #1 carry trade funding currency. As a result, the anticorrelation
that developed between stocks and the dollar is worth noting. The chart below illustrates
SP 500 index vs inverse US dollar index. While both could rally sharply on positive news like
better than expected jobs number, eventually the currency trade should prevail. Don’t be surprised
if stocks correct sharply early next week.
SP500 vs inverse USD, 3 months
SP500 index vs inverse dollar, 6 months
Injecting liquidity to inflate the derivative bubble.
It is well known mathematically that liquidity injections cause
volatility to decline. How does it do the job? By inflating the derivative bubble.
This has been our “solution” for every financial mess since 1987 crash.
It has been our “solution” in the Fall of 2008, when TED spread
(spread between 3-month libor and t-bill rates) soared to unimaginable
highs. Why did it soar? Simple, really, as a few large firms went under,
counterparty risk skyrocketed, for which Ted spread is a direct indicator.
While CDS were blamed for the crisis, naturally, these beasts are only a tiny part
of the whole universe. The real values for interest rates contracts skyrocketed
much further. Unlike CDS, however, interest rate swaps are “slow bleeders” -
they don’t bankrupt a firm right away when the bet goes bad, rather, they
cause insolvency and large payments over time.
A little problem here – the derivative Ponzi scheme inflated 10-fold during
the last decade due to these policies and now stands at 10 times the GDP
of the World. Thus, bailing it out in 2008 required enormous liquidity injections.
About 23 Trillion in government guarantees, loans, and direct printing for the US,
or 1.5 times US GDP, by some estimates.
Instead of being the lender of last resort for this Casino, don’t we need to just let
the gamblers go broke and go home, then deal with the economic mess that results?
Yep, we do. But that requires political courage because of incredible mess
the blowup will cause, and that’s not what we did.
BIS derivative report for June 2009 is out.
Highlights? It “worked” yet again
1. Volatility declined.
2. Markets soared as a result.
3. Notional values increased, except for CDS market, where they dropped
4. Real values declined (expected with decline of volatility)
Resume: Derivative bubble, the biggest bubble of them all, inflated again to 605
Trillion dollars notional. Note that this is only a part of the derivative universe.
The other, much smaller part, trades on the exchanges.
Next time the mess will be even bigger.
Key developments:
•notional amounts of all types of OTC contracts rebounded somewhat to stand at $605 trillion at the end of June 2009, 10% above the level six months before,
•gross market values decreased by 21% to $25 trillion,
•gross credit exposures fell by 18% from an end-2008 peak of $4.5 trillion to $3.7 trillion,
•notional amounts of CDS contracts continued to decline, albeit at a slower pace than in the second half of 2008 and
•CDS gross market values shrank by 42%, following an increase of 60% during the previous six-month period.
The “new bull market” – the rally goes bye bye in real terms
Both stocks and bonds are now losing value in real terms due
to the dollar decline. US treasury bonds lost value all year relative
to gold, US stocks started to decline in real terms in August
after a 5-month rally.
SP 500 in gold Oz
30 year Treasury bond in gold
Former managing director at Goldman Sachs reveals the truth about the bailouts
Nomi Prins, former managing director at Goldman Sachs, exposes the revolving door
between Wall Street and Washington. This is a must read. Corruption must end
and the system must be restored before we can talk about the new boom and the
end of the crisis in the USA. The crisis is a culmination of what has been going on for
some time – the crony capitalist system and unfair profits for Wall Street at the expense
of the real economy. By perpetuating the same system that has led to the crisis, the
collapse will only deepen. This economic crisis cannot be solved by printing money;
the financial system must be reformed and the corruption must end.
JH: Now, we hear a lot about the little people’s irresponsibility
in all this — in the collapse. They took on more debt than they could sustain,
they thought the good times would roll forever. You argue this was never about
the little guy, right?NP: Neither the crisis, nor the bailout was about the little guy. Former
Treasury Secretary Henry Paulson was explicit in stating several times,
and in several ways, that the government should not be bailing out homeowners
who got in over their heads. And true to those sentiments, it didn’t. Instead, amidst
trillions of dollars of subsidies to the industry were made available in the most original
and creative of ways, and no heed was paid the jointly humane and economical solution
which would have been to find ways to restructure personal mortgages and loans,
as opposed to dumping buckets of money over the top layers of the financial community
and promising it would somehow trickle down and loosen credit for the “little guy.”The people that blame the Community Reinvestment Act for the avalanche of
predatory lending are missing the true numbers that represent the situation.
Only $1.4 trillion worth of subprime loans were extended between 2002 and 2007.
On the back of those loans, the industry created $14 trillion worth of various types
of assets and borrowed up to 10 times that amount using those new assets as collateral.If the government had wanted to help homeowners and contain the costs of the bailout,
it could have subsidized underwater mortgages directly at the loan level, or made it mandatory
for banks to renegotiate credit terms or mortgage balances with individuals, as opposed to
making it a mild suggestion that the banks have no incentive to follow.For the money spent on subsidizing the industry, the government could have bought
out every single outstanding mortgage in the country. Plus, every student loan and
everyone’s health insurance. And on top of that, still have trillions of dollars left over.That’s why I get so enraged at the bizarre notion that a 10-year, $900 billion health
care option is somehow egregious and government interfering with our lives. We should
all take $90 billion a year to sustain our health and access to health care over lavishing
trillions on the banking system any day, no matter what our political party affiliation is.
Option Arms resets and a double dip recession
Option Arms resets wll start to accelerate some time in the Spring of 2010,
most likely causing another leg of the credit crisis in the Fall of 2011.
Credit Suisse (CS) estimates that the resets will begin to accelerate next
spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in
September 2011. The current level is about $1 billion. About $500 billion of option
ARM loans are outstanding, according to the bank. “Things have gotten pushed out,”
says Chandrajit Bhattacharya, director in U.S. Mortgage Strategy for Credit Suisse.
“Right now it looks like the big increase is probably going to be somewhere toward the
middle of next year.”Option ARMs typically reset after five years, at which point the monthly bill increases
65% or more. About 37.5% of option ARMs originated in 2005 are still outstanding, 63%
of the 2006 vintage are outstanding, and 82% of the 2007 loans remain, according to
Barclays Capital (BCS). And about a third of the outstanding loans in these years are
deeply delinquent.In a given month, between 4% and 5% of borrowers who are current on their option
ARMs taken out in 2006 and 2007 default in the following month, says Sandeep Bordia,
Barclays’ head of residential credit strategy, who also expects resets to be delayed until
next year. “These things have been performing horrendously,” Bordia said. “I don’t know
how much of it will last into the recast.”
Option arm resets
Mortgage loan resets – all
Do you feel like you’ve been robbed?
If so, it’s not far from the truth, and you are not alone.
Why did the government and the Fed bail out some and let others collapse?
- because of extreme corruption and cronyism
What are the amounts involved?
- enormous, the bailout of AIG went directly to Goldman, which is why they were bailed
out in the first place. The Fed created the money that was necessary out of thin air.
Does this have any bearing on you?
- of course. The Feds don’t have the money required for these huge bailouts, so they print it.
As a result, all prices go up.
What did Thomas Jefferson say?
- it will keep happening until the American people abolish the Fed.
“I believe that banking institutions are more dangerous to our
liberties than standing armies. If the American people ever
allow private banks to control the issue of their currency,
first by inflation, then by deflation, the banks and
corporations that will grow up around [the banks] will deprive
the people of all property until their children wake-up
homeless on the continent their fathers conquered. The issuing
power should be taken from the banks and restored to the
people, to whom it properly belongs.”
- Thomas Jefferson
Do I have anything to add to that?
- No, except follow the smart man, abolish the Fed, and do so quickly.
Otherwise we will all have to deal with the dollar losing a couple of
zeroes (99% of its current purchasing power) or more within 5 years.
Will any of that cash find its way into your pocket?
- No.
Is the current money printing operation enough to shave 2 zeroes off the dollar?
- Thank God, no. Unfortunately, it’s a start down the road of peril, and it’s
enough to drop the purchasing power of the dollar 70%.
Why Austrians call for a return to free-market money.
by Thorsten Polleit
For a full essay, see
The Dark Side of the Credit Boom
Austrians maintain that international monetary affairs have entered a vicious cycle: a credit boom, epitomized by a relentless expansion of circulation credit and money supply that is bound to collapse at some point. That said, could the world then enter a period of deflation, comparable to the scale of output and employment losses witnessed in the early 1930s of the 20th century?
As things stand it seems that inflation rather than deflation remains the real danger. Whatever the relative costs and benefits of inflation and deflation might be, deflation is now feared much more than inflation. And indeed it seems that the path the Great Depression took had much to do with the monetary and economic paradigms prevailing back then.
Anna Jacobson Schwartz and Milton Friedman wrote in their famous book A Monetary Historic of the United States, 1867–1960 that the US Federal Reserve
[…] was operating in a climate of opinion that in the main regarded recessions and depressions as curative episodes, necessary in order to purge the body economy of the aftereffects of its earlier excesses. […] regarded it as desirable that the stock of money should respond to the “need of trade,” rising in expansion and falling in contractions; and attached much grater importance to the maintenance of the gold standard and the stability exchange rates than to the maintenance of internal stability.
Today, as soon as the credit pyramid showed the slightest signs of potential unwinding, central banks would be pressed to lower interest rates. This is because the public at large sees lower borrowing costs as a remedy against crisis — rather than its cause. What is more, highly indebted social groups have a preference for inflation, and an aversion to deflation. That said, a highly leveraged society might even be ready to accept a deliberate policy of (”controlled”) inflation rather than agree to a period of declining prices.
Critics of the Austrian School might argue: The rise in credit growth and debt ratios has been going on for decades now. Credit has been expanding, but so have incomes and real wages. In fact, no major disaster, at least not on the scale predicted by Austrian economists, has occurred so far. Isn’t there a flaw in their theory?
The answer, say the Austrians, is that it is still too early to reject their prediction as false.
In fact, the credit boom is not, in the words of Murray Rothbard, a “one shot”:
It proceeds on and on, never giving the consumers the chance to reestablish their preferred proportions of consumption and saving, never allowing the rise in cost in the capital goods industries to catch up to the inflationary rise in prices. Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom.
Seeking to prevent the final crisis — which would most likely entail a debasing of the currency — Mises concluded: “The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Being fully aware of the dark side of the credit boom — that is its socially destructive ramifications — Mises argued for returning to free-market money, which he saw as the only monetary regime that would allow preserving the ideal of the free society.
US economic slump is 8 years old
Fiat currency creates a lot of obfuscation. You pay taxes on profits when actually
there were none. It was all inflation. Did you know that 90% of all DOW index long term gains
actually comes from inflation? So, with that statistics, how about a 20% tax on all your gains?
You lost some. Well, not really, given the dividend, but that’s the only thing that saved you.
What is gold? Gold is honest money, not subject to excessive printing. Gold also shows the
true picture of economic malaise, since it subtracts the currency obfuscation from the picture,
such as the government (BLS) inflation statistics, also known to some as inflation lies.
No wonder all central bankers hate gold and try to suppress the price. It shows the true picture,
and the truth makes them look bad.
What does gold say? Let us see.
1) The Secular bear market for stocks started in 1999
2) Crude oil was not a bubble, but it was somewhat overpriced in 2008. It is currently fairly priced
3) Home prices were in a bubble, but currently dropped to fair value
4) Home prices are fine long term
5) However, median income is not. Instead of prosperity, we had 50 years of stagnation.
6) USA has been in depression since 2001, and its Gross Domestic Product was halved in real terms.
7) US disposable income keeps dropping thanks to the currency depreciation and an economic depression.
For more insight, see this wonderful web site:
The Fed is the major cause of this economic crisis
What did they do?
They defended and propagated the use of derivatives, the very same extremely leveraged
instruments that blew up in 2008, and the key reason why the libor rate and Ted spread
went ballistic.
Read and weep – this legal document removed all regulations from the expansion of OTC
derivative markets, including the infamous Credit default swaps that blew up Bear Stearns,
AIG, and Lehman. Nobody talks about 400 Trillion notional in interest rates swaps. Apparently,
JP Morgan and Goldman who hold most of these “slow bleeder” but “deadly” securities are
regarded as the safest “banks” (Goldman is only a bank cause that status allows them
to go to the government and beg for money)
Over-the-Counter Derivatives Markets and the Commodity Exchange Act
Specifically, with respect to OTC derivatives, the Working Group is unanimously
recommending:
• An exclusion from the CEA for bilateral transactions between sophisticated
counterparties (other than transactions that involve non-financial commodities
with finite supplies);
• An exclusion from the CEA for electronic trading systems for derivatives,
provided that the systems limit participation to sophisticated counterparties
trading for their own accounts and are not used to trade contracts that involve
non-financial commodities with finite supplies;
• The elimination of impediments in current law to the clearing of OTC derivatives,
together with a requirement that any clearing system for OTC derivatives be
regulated by the CFTC, another federal regulator, or a foreign financial regulator
that satisfies appropriate standards;
• A clarification of the Treasury Amendment that clears the way for the CFTC to
address the problems associated with foreign currency “bucket shops” and
excludes all other transactions in Treasury Amendment products from the CEA,
unless they are conducted on an organized exchange;
• A modification of the exclusive jurisdiction clause of the CEA to provide greater
legal certainty to hybrid instruments; and
• A statutory clarification of the inapplicability of the Shad-Johnson Accord to
hybrid instruments that reference securities.
Yes, the very same Larry Summers from the current Obama team.
For background on derivatives, see Wiki entry. According to the BIS report, the Real
value of these extremely leveraged instruments (not notional) was about equal to the
Global Stock market cap back in December 2008.
So, what did they do after the systemic crash of 2008?
They injected enormous amounts of liquidity into the financial system yet again,
and the derivative mega Ponzi scheme continues to grow in size exponentially. Cheer up, folks!