Nouriel Roubini's Global EconoMonitor

Expect the World Economy to Suffer Through 2009

Some optimistic experts are now saying that though this will be a turbulent year for global markets, the worst of the financial crisis is now behind us. Would it were so. We believe that 2009 will be tougher than many anticipate.

We enter the new year grappling with the most serious global economic and financial crisis since the Great Depression. The U.S. economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the postwar period. Credit losses of close to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global “stag-deflation”: a toxic combination of economic stagnation, recession and falling prices. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

Policy remedies will have limited effect as insolvency problems constrain the effectiveness of monetary stimulus, and the risk of rising interest rates (following the issuance of a wave of public debt) erodes the growth effects of fiscal stimulus packages. Only when insolvent banks are shut down, others are cleaned up, and the debt level of insolvent households is reduced will conditions ease. Between now and then, we can expect further downside risks to equity markets and other risky assets, given the likelihood that markets will continue to be jolted by worse-than-expected financial news.

The U.S. twin fiscal and current-account deficits will rise over the next two years as the country runs trillion dollar-plus fiscal deficits. We’re all aware that foreign actors have financed most of this debt over the past several years. During the 1980s, the U.S. also faced the burdens of twin deficits, but relied on financing from key strategic partners like Japan and Germany. This time, the situation is more worrisome because today’s financing comes not from U.S. allies, but from strategic rivals like Russia, China and a number of relatively unstable petrostates. This leaves the U.S. perilously dependent on the kindness of strangers.

There’s some good news in this interdependence. The mutually assured economic destruction that this relationship implies ensures that China can’t simply pull the plug on all this financing without suffering a considerable amount of self-inflicted pain. Reducing its financing of Washington would, among other things, put significant upward pressure on the value of China’s currency, sharply undermining its export sector and, therefore, the country’s economic growth.

But over time, the ability and willingness of China and others to finance U.S. deficits will diminish as they begin to run fiscal deficits of their own. They’ll need to use their financial resources at home just as a tsunami of U.S. Treasury bond issuances peaks.

Politics will make matters worse, primarily because governments in both the rich and the developing worlds are intervening in their economies more broadly and deeply than at any time since the end of World War II. Policy makers around the world are hard at work crafting stimulus packages filled with subsidies and protections they hope will breathe new life into their domestic economies, and preparing to rewrite the rules and regulations that govern global markets.

Why is this dangerous? At the G-20 summit a few weeks ago, world leaders pledged to address the crisis by coordinating their economic policy responses. That’s not going to happen, because politicians design stimulus packages with political motives — to satisfy the needs of their constituents — not to address imbalances in the global economy. This is as true in Washington as in Beijing. That’s why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point in decades. Its politics that is creating the biggest risk for markets this year.

This is part of a worrisome long- term trend. In China and Russia, where histories of command economics predispose governments toward what we’ve come to call state capitalism, the phenomenon is especially obvious. National oil companies, other state-owned enterprises, and sovereign wealth funds have brought politicians and political bureaucrats into economic decision-making on a scale we haven’t seen in a very long time.

Now the U.S. has gotten in on the game. New York, once the financial capital of the world, is no longer even the financial capital of the U.S. That honor falls on Washington, where lawmakers are now injecting populist politics into economics decisions. Companies and sectors that should be left to drown are being floated lifeboats. This drama is also playing out across Europe and Asia. As engines of economic growth, Shanghai is losing ground to Beijing, Mumbai to Delhi, and Dubai to Abu Dhabi.

Global markets will also face the more traditional forms of political risk in 2009. Militancy in an increasingly unstable and financially fragile Pakistan will continue to spill across borders into Afghanistan and India. National elections in Israel and Iran risk bringing the international conflict over Iran’s nuclear program to a boil, injecting new volatility into oil markets. The impact of the financial crisis on Russia’s economy could produce significant levels of unrest across the country. And Iraq may face renewed civil violence, as recently dormant militia groups compete to fill the vacuum left by departing U.S. troops.

The world’s first global recession is just getting started.

Originally published at the Wall Street Journal and reproduced here with the author’s permission.

285 Responses to “Expect the World Economy to Suffer Through 2009”

GuestJanuary 23rd, 2009 at 9:16 am

These ‘first!’s are always hilarious, since it’s the whole struggle to be ahead and above everyone else that got us into this mess.

CahillJanuary 23rd, 2009 at 9:46 am

It also got us Polio vaccines, cancer treatments, air conditioning and heat to keep you comfortable. Stop with your idiotic insistance that competition is bad, it is NOT. Competition without a moral compass is what gets us in these situations. Use your mind God gave it to you for a reason!

GuestJanuary 23rd, 2009 at 12:56 pm

Some people use the mind god gave them to mentally erase the far greater cooperation that obviously has to be going on constantly, and they focus on a teenyweeny piece of the picture and say ‘see there? competition rules.’Then they tell the realists to use the mind god gave ’’s all too funny.

CahillJanuary 23rd, 2009 at 1:24 pm

You make my head hurt. Sorry if I was insulting before, but I absolutely can not fathom your argument. I agree cooperation is more necessary than competition, but competition is needed as well. If you don’t see or believe that you just don’t live in the real world.

GuestJanuary 23rd, 2009 at 3:40 pm

@cahillExplain to me: When is one head better than 10? Even an individual working alone stands on the shoulders of those who came before him/her. Your arrogance is only superseded by you ignorance.

slfJanuary 23rd, 2009 at 3:47 pm

I’m not sure that he is saying that one head is better than 10. Perhaps I am reading more into it than he intended, but I think he is saying that without people trying to do better than and/or improve upon the accomplishments of their peers or colleagues, we might never have reached as far and high as we have.

CahillJanuary 23rd, 2009 at 4:12 pm

Thanks slf, you nailed it exactly.. In addition I also mean sometimes you have to have a decision maker, You only have to look at our government to see how 10 heads often get in the way, sometimes 1 person just needs to make the call. And already see Guests argument, she/he is correct, no one makes the right call everytime, but if no one ever made one, we would still be in the stone ages. And I don’t mean all the time, note I said SOMETIMES.

GuestJanuary 23rd, 2009 at 9:53 am

Just a bit of frivolity to lighten the depression of this tragic mess with a touch of the meaninglessness, in the end, of just being first for first’s sake. 🙁 ~ :]”If there were not happiness on earth, the creation would be a monstrosity, and Voltaire would have been right when he called our planet the latrines of the universe.” Giovanni Jacopo Casanova de Seingalt: Memoirs, Paris, 1885

MorbidJanuary 23rd, 2009 at 10:56 am

Voltaire may have been onto something – but it goes deeper than that in my opinion.The real question to be answered is,

What Is The Highest Ideal?

Before you try to answerer that question – think about it in terms of how the Creator would answer it.From what I can see the Creator =’s pure Nature, which continuously strives for higher and higher life forms, i.e., evolution – i.e., of ever more conscious entities. There is incredible intentionality behind Natural Selection it seems to me. Since our consciousness does not seem up to the task of not destroying ourselves I guess we will go the way of the dinosaurs.

GuestJanuary 23rd, 2009 at 12:23 pm

The earth, air, fire (sun) and water all cooperate to make a mighty oak when the acorn dies to being an acorn to become a tree.You folks here have some pretty weirdly myopic perspectives on the amount of cooperation going on constantly in nature – in order for life to sustain and transcend.

GuestJanuary 23rd, 2009 at 1:40 pm

looks to me like in a forest the trees must be sharing the water, air, nutrients and sunlight. looks to me there’s a whole lot more sharing going on than competing.if we had til the end of days, i can point out thousands more instances of cooperation in nature – and in people, in society – for every one instance of competition you can point to.

GuestJanuary 23rd, 2009 at 4:08 pm

And I could match you 1 for 1 on competition. But I like your dream, when I die and get to heaven I’ll get to live it.

GuestJanuary 23rd, 2009 at 8:27 am

As to US’ external debt, can’t it be solved by nuking the rest of the planet? That would coincidentally also take care of all other problems that could conceivably ever result from human behaviour.

GuestJanuary 23rd, 2009 at 9:06 am

No one likes us-I don’t know whyWe may not be perfect, but heaven knows we tryBut all around, even our old friends put us downLet’s drop the big one and see what happensWe give them money-but are they grateful?No, they’re spiteful and they’re hatefulThey don’t respect us-so let’s surprise themWe’ll drop the big one and pulverize themAsia’s crowded and Europe’s too oldAfrica is far too hotAnd Canada’s too coldAnd South America stole our nameLet’s drop the big oneThere’ll be no one left to blame usWe’ll save AustraliaDon’t wanna hurt no kangaroosWe’ll build an All American amusement park thereThey got surfin’, tooBoom goes London and boom ParisMore room for you and more room for meAnd every city the whole world roundWill just be another American townOh, how peaceful it will beWe’ll set everybody freeYou’ll wear a Japanese kimonoAnd there’ll be Italian shoes for meThey all hate us anyhowSo let’s drop the big one nowLet’s drop the big one now- Randy Newman’s “Political Science”

Ajit NandayalJanuary 23rd, 2009 at 10:14 am

Every one hates you and hated through out the history. May be the author doesn’t know, what the US has done to the world. Jus skim the pages in history and go back last 3-4 decades from now, you will find answers to all questions. Go and ask the bombed Viatnamese villagers, razed cities of Afganisthan, Iraq and Palestine. You dono’t know the taste of suffering and the feeling when bombs piece through the hearts of the countries. You have lived happily for all these years, closing your eyes, to the suffering you have caused. Now, please!! don’t act as if you are deeply shattered. It is just a decline in growth for one or two years. I’m Sure US will come out and again kill the world with global warming and wars.

amacflyJanuary 23rd, 2009 at 11:18 am

Yes, but it’s a short history! Before us they hated the British, the French (well, all right, we still do, but they deserve it!) the Romans, the Greeks and the Egyptians. Top dogs are never kindly and good rulers of the planet, and I bet China won’t be either!

GuestJanuary 23rd, 2009 at 12:27 pm

Ajit, I’m very sorry you got the wrong impression. Randy Newman’s song is one of the greatest pieces of satire ever written. He was trying to slap his fellow Americans awake…to get them to see the insanity of nukes. Sincere apologies for my not stating that plainly before.

MorbidJanuary 23rd, 2009 at 9:20 am

Hey, this is my role to say such things on this forum!But now that you have brought it up we already have nuked everyone with the FWMD – that’s how Warren Buffet characterized this mess.

AnonymousJanuary 25th, 2009 at 9:09 am

The Fed is a model of optimism: the more they do, the worse it gets, and the worse it gets, the more they do. Making Geithner Secretary will transplant Bernanke’s superb “damn the torpedoes, FULL SPEED AHEAD” technology to the new Obama administration. The good thing is that after about six months with these two hyperactive idiots in charge of the Fed and the Treasury, things will stop getting worse (because they will be about as bad as they can get!).

GuestJanuary 23rd, 2009 at 9:21 am

Didn’t you get the memo? You know…the one that says that it can’t happen because it hasn’t happened yet?(mad laughter goes here)

HayesJanuary 23rd, 2009 at 9:40 am

I got this link from the Fry article referenced above: Is Gold and the Balance of Power Shifting from the West to the East?Oddly enough, the data from the Office of the Comptroller of the Currency report on Derivates shows that only two banks, JPM and HSBC, are holding almost $124,000,000,000 in gold derivatives between them, approximately 98% of all gold derivatives in the world.At $850 per ounce, that represents about 145,882,353 ounces of gold…

crgordonJanuary 23rd, 2009 at 10:24 am

The following one works – (need an “l” at the end of “htm”)

GuestFebruary 1st, 2009 at 6:44 pm

Unlike gold there is not a finite number of derivatives. Sell more. Want puts here they are, want calls here they are, want insurance how about this: People seem to think that reality and math are necessarily connected.

MorbidJanuary 23rd, 2009 at 9:48 am

Where Are the Cures?Here is a partial cure if it pans out.Cosmic View of Climate Change

Before you make up your mind about climate change you are advised to read this controversial and compelling book. Nexus Magazine

New evidence based on Henrik Svensmark’s scientific research prompts questions to be raised about the role of man made carbon dioxide in global warming. The sun, stars and cosmic rays have often been overlooked but in this radical new book they are placed centre stage in the climate change debate.

Chilling StarsGlobal cooling – which seems where we are headed next – is far more dangerous to humanity than global warming because food production will fall. That would lead to a population collapse just as it has in the past.

GuestFebruary 1st, 2009 at 5:54 pm

Fire or Ice, Sandburg isn’t it? Regardless, seems cleaning up the air, water, dirt is worth doing. Clean air and water are nice for people while pundits argue over what’s going on.

CahillJanuary 23rd, 2009 at 9:56 am

I don’t think there is a “cure”. I think you cut off the dead flesh, ampute the rotten financial sector and treat the healthy flesh. Meaning, you ditch the insolvent banks and industries that are dead, and we start moving from there. One thing we HAVE to do is teach americans to live within their means. Individual Fiscal Responsibilty, it will not cure the problem, but for those that make it through this mess it will keep them from getting back into it.

economicminorJanuary 23rd, 2009 at 10:04 am

The World Won’t Buy Unlimited U.S. DebtBy PETER SCHIFFBarack Obama has spoken often of sacrifice. And as recently as a week ago, he said that to stave off the deepening recession Americans should be prepared to face “trillion dollar deficits for years to come.”But apart from a stirring call for volunteerism in his inaugural address, the only specific sacrifices the president has outlined thus far include lower taxes, millions of federally funded jobs, expanded corporate bailouts, and direct stimulus checks to consumers. Could this be described as sacrificial?What he might have said was that the nations funding the majority of America’s public debt — most notably the Chinese, Japanese and the Saudis — need to be prepared to sacrifice. They have to fund America’s annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.These nations, in other words, must never use the money to buy other assets or fund domestic spending initiatives for their own people. When the old Treasury bills mature, they can do nothing with the money except buy new ones. To do otherwise would implode the market for U.S. Treasurys (sending U.S. interest rates much higher) and start a run on the dollar. (If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.)In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.The root problem is not that America may have difficulty borrowing enough from abroad to maintain our GDP, but that our economy was too large in the first place. America’s GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall.Neither the left nor the right of the American political spectrum has shown any willingness to tolerate such a contraction. Recently, for example, Nobel Prize-winning economist Paul Krugman estimated that a 6.8% contraction in GDP will result in $2.1 trillion in “lost output,” which the government should redeem through fiscal stimulation. In his view, the $775 billion announced in Mr. Obama’s plan is two-thirds too small.Although Mr. Krugman may not get all that he wishes, it is clear that Mr. Obama’s opening bid will likely move north considerably before any legislation is passed. It is also clear from the political chatter that the policies most favored will be those that encourage rapid consumer spending, not lasting or sustainable economic change. So when the effects of this stimulus dissipate, the same unbalanced economy will remain — only now with a far higher debt load.If any other country were to face these conditions, unpalatable measures such as severe government austerity or currency devaluation would be the only options. But with our currency’s reserve status, we have much more attractive alternatives. We are planning to spend as much as we like, for as long as we like, and we will let the rest of the world pick up the tab.Currently, U.S. citizens comprise less than 5% of world population, but account for more than 25% of global GDP. Given our debts and weakening economy, this disproportionate advantage should narrow. Yet the U.S. is asking much poorer foreign nations to maintain the status quo, and incredibly, they are complying. At least for now.You can’t blame the Obama administration for choosing to go down this path. If these other nations are giving, it becomes very easy to take. However, given his supposedly post-ideological pragmatic gifts, one would hope that Mr. Obama can see that, just like all other bubbles in world history, the U.S. debt bubble will end badly. Taking on more debt to maintain spending is neither sacrificial nor beneficial.Mr. Schiff is president of Euro Pacific Capital and author of “The Little Book of Bull Moves in Bear Markets” (Wiley, 2008).

And I say, NOR Sustainable!

economicminorJanuary 23rd, 2009 at 10:19 am

I know it was linked above by the Professor but it really is worth reading and contemplating. A lot of people in and out of the administration seem to think that there is no problem just creating more debt… But as I linked previously, it isn’t just the federal debt, it is state and local debt and consumer debt and business debt all piled up neatly in this huge pyramid of obligations…. And who is suppose to be the payee? Those at the lowest rung of the ladder, those who actually produce something of value that can be sold at a profit. Not those at the top as they need their tax breaks and loop holes, not those who create all this debt but the producers…And they also get hammered by the lack of fiscal discipline when more money is created than new production and prices rise.I guess the country will learn that there is no free lunch and that their debt pyramid has limitations when we hit the wall and interest rates and prices rise and our way of life crumbles under a huge pile of stinking rotting debts that we can not repay under any wishful dream land fantasy thinking.

GuestJanuary 23rd, 2009 at 10:24 am

finally some common sense reasoning; this should be sent directly to Obama bypassing Bernanke and Geithner so that he can think about this dilemma: you cannot buy yourself out of debt by creating more debt in a deflationary environment!

aerialJanuary 23rd, 2009 at 10:39 am

Mr Schiff is right and guests are right. THE SOLUTION: Let Obama nationalize the institutions that are deemed “too big to fail:, put their toxic assets in another place, i.e. a toxic or bad bank to be sold at a later date for whatever the market will bear, reduce the salaries of all of these crooks to cover their food and house (primary residence only) expenses and do it IMMEDIATELY for the longer this debt snowball rolls down the mountain the bigger it becomes and the harder it is to stop! If they do not act soon, protectionist policies worldwide will be enacted and then all bets to an orderly solution are off!

GuestJanuary 23rd, 2009 at 10:50 am

Next steps include: reducing principle on mortgages to stem foreclosures, resume lending with stricter criteria, fair and honest regulation of all banking activities including safeguards on leverage, ceilings on credit card interest and a strict repayment program by all of these bailout corps who gambled away taxpayer’s money!

economicminorJanuary 23rd, 2009 at 12:53 pm

Reducing principals on mortgages?Wait a minute… So if you went out on a limb and bought something you couldn’t afford, the taxpayer is suppose to bail you out but if you worked hard all your life and paid off your mortgage, you now get to pay the ignorant and the gambler’s mortgage too?What’s wrong with liberalizing the bankruptcy laws so people who made dumb mistakes can get out with some penalty and the dumb banks that lent it to them go under.No penalty and people and banks learn the wrong lessons.. That it is possible to live off your hard working neighbor. So the harder you work, the more you pay. And the more of a con you are, the better you live…There is really something wrong here and it stinks!

GuestJanuary 23rd, 2009 at 1:23 pm

I know it stinks but it may not stink as much as doing nothing. Homeowners have put alot more into their home than just a mortgage: all the maintenance fees, upgrades, taxes, homeowners fees, etc and when he/she loses that home to foreclosure-guess what-all the surrounding homes lose value, the state loses property taxes and other fees and the lender ends up losing more money having to maintain it until it can sell it. There is alot more damage to the individual homeowner whose home is his/her biggest investment then there is to a giant corporation who gets billions from the government and whose CEOs make millions of dollars, own 3 or more homes and ultimately can write it all off or let the govt buy their toxic assets. So, I agree with you in an absolute sense, it may not be totally fair, but in a relative sense it can be; the alternative, bailout NO ONE and I’m not totally against that either.

SoftwarengineerJanuary 23rd, 2009 at 3:26 pm

I AGREE WITH ECONOMICMINORThe bailout of distressed home owners’ principles was pushed by McCain too, the problem in a nut shell is how can stabilizing home prices help rentors hoping to buy [they’re Americans too]? When the price of plasma TVs, rib steaks, etc goes down its good; but if homes go down its bad?I’ve lost money too in RE, so what?Its like saying bailing out the Big Three is necessary or Toyota will be announcing lay offs today [they are by the way].No, one man’s gain or loss isn’t reason to reward reckless borrowing or investing.

MarkJanuary 23rd, 2009 at 7:16 pm

@Guest on 2009-01-23 13:23:52 wrote:I know it stinks but it may not stink as much as doing nothing.It’s impossible to do “nothing!” This is propaganda (Edward Bernays style). The message is that we have to do “something,” when in fact the “something” is all about shoveling taxpayer money toward the same thieves that perpetuated the initial crime! Fool me once, shame on me, fool me twice…What we HAVE to do is to stop doing stupid crap! We have to stop embarking on unsustainable enterprises.None of this addresses the fact that home prices HAVE to come down! Not until home prices come closer to their historical valuations of 3x yearly salaries will we even come close to stabilizing (and then there’s the issue of all the other debt out there).Mark

slfJanuary 23rd, 2009 at 7:23 pm

The message is that we have to do “something,” when in fact the “something” is all about shoveling taxpayer money toward the same thieves that perpetuated the initial crime! Fool me once, shame on me, fool me twice…What we HAVE to do is to stop doing stupid crap! We have to stop embarking on unsustainable enterprises.Exactly.

GuestJanuary 23rd, 2009 at 8:16 pm

that is crap, why should tax-payer bear the pain? foreclosure is the best and just solution to those (clueless lenders and borrowers) that caused this crisis to share the pain. ok, your argument is that will depress home equity? who cares, if you plan to live in your home for a long time (not flip-flop time frame), then why should you care? just pay the dame mortgage as if is rent.

GuestJanuary 23rd, 2009 at 11:13 am

Yes, completely agree with Peter. Especially when Obama called China currency manipulator. China will be stupid to buy anymore USA debt while China has its own problem. Same goes with other countries that buy USA debt. Time for them to go on strike. USA will be the buyer of last resort to buy its own debt via print press. Indirect Default? Hehe.

guestJanuary 24th, 2009 at 9:10 am

wake up dissenters! the issue is that by stemming foreclosures, it will help the entire economy for all the reasons listed above and more. do you think the reason we are bailing out banks is to save the individual bank or to save the ENTIRE FINANCIAL SYSTEM?! If you do nothing about foreclosures, they will continue to increase and destroy what’s left of the economy. You should be squawking about the trillions already spent on everything but the homeowner and if you are really seriously against mortgage write down then you should get off of your duffs and start doing something about it; because, guess what-it’s already happening and will continue to happen because some of our leaders actually do understand (finally) that the domino effect of foreclosures and loss of home equity absolutely will lead to huge decrease in GDP and then what do you think happens? If you can’t think ahead, then you’re thinking behind!

NailbenderJanuary 24th, 2009 at 2:52 pm

Guest, you’ve got to stop watching MSM, it’s known to increase the delusional views caused by FIV (Fiscal Insanity Virus).I believe you need to start treatment asap, it appears you’re already in the advanced stages of the disease.Somehow you must discern the difference between a “symptom” and the “disease”. Todays home foreclosures are a visual symptom (result) of an induced credit bubble over the last 30 years created by the FED.We’ve lived way beyond our means to pay back, get over it. It’s over. Done.FIV has impaired your and Washington’s ability to think in the present, yet alone think ahead.Take the cure, it’s FREE!

GuestFebruary 1st, 2009 at 6:08 pm

China will continue to buy our debt. They, too, know that Geithner is a wall street waterboy. When there is any sign of stability in the world economy the Chinese will begin buying assets. First and foremost these assests will be in the US but the allocation will expand beyond our borders as economies improve. When emerging markets are viewed as viable, the Chinese will accumulate resources by asset purchase. Even as we fight multiple wars, and have a President that seems to find Afghaistan a Good War, the Chinese send suits to Africa. Do you remember when we exported business instead of war?

GuestJanuary 23rd, 2009 at 11:16 am

The world is waiting for some of the emerging markets to tap their consumer-driven potential before it dumps the dollar. The Chinese, in terms of GDP, are still far beind the US. The US is still the mammoth in terms of GDP with many counties dependent on the US economy but some of the emerging economies have been growing very fast and once the world feels that it could sustain itself with a run on the dollar and the elimination of the dollar as reseve currency status of the dollar, make no mistake it will happen.When Lehman Brothers collapsed, there were comments abound that a “new world order” had been created with China set to take over from the US. Now that talk seems to be subsiding because, as it turned out, the Chinese– and the world– were totally dependent on the US. However, I believe no such transfer of power happens within a day, it is a strategic shift but China’s 3-4 trillion GDP and US’s 13-14 trillion…can’t be compared. Such humongous shifts of power don’t happen over night, the empire struggles to retain its power before it dies, humankind generally plummets into a period of regression and self-destruction before such cataclysmic changes in power take place, war and strife take hold, and out of this anarchy emerges a new world order, the so-called creative side of humankind. When Europe ceded global hegemony to America, two world wars had to take place. True, one such incidence is where the Soviet Union collapsed without the aforementioned things, but that wasn’t precisely a “new world order”, it was the old world order and the same equation which changed a bit.I believe the day of reckoning is not far away for the dollar, and with massive amounts of liquidity pumped into the system, we are moving much faster towards that. What will happen after that as the empire might want to forcefully weild its authority over the world is something better not imagined.

AnonymousJanuary 23rd, 2009 at 4:17 pm

The US’ GDP is 14 T compared to PRC’s 6T (based on PPP).Bill Clinton once said, IIRC – We should be putting in place rules that we will be happy to live with when we are not the top dog.Are we too late?

GuestJanuary 23rd, 2009 at 4:30 pm

The Austrian school wants to solve the problem with bankruptcy. The Keynesian school wants to solve the problem with more debt. Neither solution will work because the essence of the problem is income inequality. Something no respectable bourgeois economist will even mention, let alone discuss. When all is said and done, the average person’swages will still not be enough.

GuestJanuary 23rd, 2009 at 7:51 pm

what are you blabing about? income inequality? do you think income between doctor and burger flipper should be same? of course not. there is no such thing as income equality. you are suppose to be paid differently depending on your skill and supply/demand on your skill, and good pay negotiation skill. income equality? you wanna go back to communism?

GuestFebruary 1st, 2009 at 6:15 pm

So-called Communist nations were actually quite Supply Side. Party leaders lived high, the people lived communism. Actually the same is obvious today in the US version of capitalism, but with a Supply Side twist: Socialism at the top, laissez faire beware below. As far as pay I don’t think of equality, but do feel that a working person should make enough to pay the bills or all is dysfunctional — as we now see in the US.

GuestJanuary 23rd, 2009 at 7:53 pm

the reason burger flipper at burger king are paid in minimum wage, because they have no skill. what more do you want?

GuestJanuary 23rd, 2009 at 10:47 pm

You seem just completely unable or uncapable to break out of the thinking you never questioned but just inherited – as if there simply was no other way to organize how people are getting paid than the way things are done now. Look around at your world, for godsakes: Rome is burning – and this time Rome is the Globe! At a minimum, 34,000 children under age 5 died today while people typed here – of starvation and preventable disease. What does it take to wake you the hell up to all that unnecessary pain and suffering?? And it’s all caused by inequality!When we get non-thinkers like you out of the way of sanely re-organizing our extreme overpayunderpay into fairpay justice for all – on the entirely rational basis of what is best for all which is equal pay for equally doing what creates the wealth – you’ll thank us. We’ll put you on teevee and you’ll be famous: last guy on earth to have the big “D’oh! moment”!The reason the cook gets underpaid is because society is soft on injustice. Justice is equal pay for equal sacrifice.Now it’s up to you to prove the cook is sacrificing less of his time and energies to working than anybody else is.

GuestJanuary 24th, 2009 at 8:57 am

let’s think about this a minute: the cook, who may or may not be formally trained, is standing at a 300 degree grill 12 hours a day dealing with splattering grease and excessive heat which is causing deleterious effects on his eyes, nose and lungs while the doctor is sitting in his air conditioned office having his staff prepare all of his patients after which he/she drives home in his expensive car to his expensive home and then to an expensive restaurant until he takes his expensive vacation and repeats the cycle once again. So, who exactly is working harder here???

Victor TJanuary 24th, 2009 at 10:10 am

First of all.Your not-so-subtle promotion of communism is very obvious.Communism, with lofty ideals, leads to more grievous poverty and misery than the a severe recession in the Capitalist USA.Because we are in a crisis now, doesn’t undo the prosperity and freedom and quality of life we have known.I make $95,000 a year as an IT manager. I’ve worked very hard including the invisible hard work of brain strain to get here. The doctor has worked his brain even harder.And having worked at hard manual labor jobs myself, hauling garbage and mopping thousands of square feet of an apartment building, I can tell you that yes, it is hard physical work but not so for the brain. Doctors have to strain both body and mind.You, are a mental midget, along with your Communistic BS.

g AntonJanuary 26th, 2009 at 6:21 pm

So there is some concern about US Federal Securities being difficult to sell? Not to worry–Ben Bernanke has said that if there’s any problem, he and his Fed will be the buyers of last resort for federal securities that are otherwise unsaleable.There are some lines in Shakespeare about a monster that feeds upon himself, but, darn it, I just can’t bring them to mind.

PeteCAJanuary 23rd, 2009 at 10:20 am

It will be a miracle if the countries of USA, UK, Spain, E. Europe, and the Balkans do not fall into a full fledged depression due to economic collapse from spiralling debts. The major threat is a further significant rise in unemployment, driving defaults and bankruptcies much higher, forcing banks to curtail lending practises even further (in spite of calls from Gov’t leaders), and leading to a sharper reduction in consumer spending.At an earlier time on this blog … I commented that the price of oil has now fallen so low that it threatens global political stability. See especially this latest article here: take time to read all the sub-bullets at the end of the article, including the two items that say …1. Mexico is just getting started in its exploration of their deep water Gulf of Mexico. It expects to see its first barrels from fields in waters deeper than 1,640 feet in 2015. By 2017 the company forecasts 92,000 barrels a day in deepwater output, NOT nearly enough to offset declines it expects to see at the giant Cantarell oil field. (1/17, #10)2. Tumbling oil prices are forcing many of the richest Persian Gulf states to record budget deficits and limit a critical source of investment for poorer Arab countries. Crude is now selling at below the budget break-even point for SEVEN of the Arab world’s 10 top oil producers and Saudi Arabia, the world’s biggest exporter, is forecasting its first deficit in at least seven years. (1/14, #3)Add this to the deteriorating economic condition inside Russia and we have a recipe for political turmoil.PeteCA

ex VRWCJanuary 23rd, 2009 at 11:11 am

UK, Spain, Ireland are in depression already, I think. Iceland is even further far advanced in their spiral downward now: Iceland overview I see this progression as what we will be seeing in other countries in Europe.

GuestFebruary 1st, 2009 at 6:27 pm

Sorry, not much of a buyer of Peak Oil, Peak Soybeans or Peak Copper. Prices have not even returned to mean — check the charts. Commodities tracked equities from 2002 all the way to the peak — do you feel that equities are too low in price? Ten years ago oil hit $10/barrel. Oh by the way, this Peak Oil is not the first version. Last time they made people wait in line to buy gas, while today there is not need to play supply and demand. Now we have folks saying we have to get oil to $70 so we can free ourselves of oil. So I say when oil hits $20 let’s put a $50/barrel tax on the stuff rather than send the money overseas.

ex VRWCJanuary 23rd, 2009 at 12:37 pm

e,You are right on the money here, unfortunately. The idealogues are now in control, and they will implement their political solutions. What I think:- The liberal base does not believe protectionism is a bad thing. Some of the people at the top are avid Keynesians and Depression students and will know the dangers, but, at the level of the base, there are strong calls for protectionism. I fear they will overreach and go way too far in this direction and way too fast. Note their initial saber rattling toward China, which I think is just saber rattling now, but may have unintended consequences.- The Congress and Administration will target tax relief, foreclosure relief, bailouts, etc, toward politically favored groups, at the expense of the greater economy. Lower income groups will get the greatest relief. So called ‘victims’ of ‘predatory banks’ will see the greatest bailouts. Unionized industries saved while small businesses with little political clout are destroyed.- They will target energy policy from an environmentalist agenda. For instance, they are considering putting offshore drilling on hold . The firm belief is that wind, solar, hydroelectric, and biofuels are the way forward. They will not pursue fossil fuels and nuclear energy options, even though these may have more short term promise to move us off of foreign oil dependence.In short, ideology stands a really good chance of getting in the way of what needs to be done, at just the time when we absolutely have no time to lose in climbing out of this hole. I hope to be wrong about this.

economicminorJanuary 23rd, 2009 at 1:01 pm

You mean the other ideologues are in charge. First we have the tax break for the wealthy and spend ideologues who don’t even talk to our enemies, detain and torture those they feel like and tap every one’s phones ideologues. And now we have the tax break for the middle class and spend other ideologues who do talk and make a big show of everything but still haven’t a clue ideologues.Different tax breaks but same spend other people’s money disconnected Keynesian Ideologues. Who think that change is a different image.

ex VRWCJanuary 23rd, 2009 at 2:09 pm

I wasn’t trying to take side, but to rather lament that we need a common sense approach in the interest of the people, and we aren’t likely to get it.

GuestJanuary 23rd, 2009 at 11:40 am

We are going to wake up and hear that the Geithner Solution is Paulson Redux and we will have missed an opportunity to send our opinions to our representatives. We must tell our representatives that any aggregator bank solution that fails to provide credit to Main Street is out of the question! One of the two solutions described in the Soros article will be implemented whether we like it or not. Might as well advocate the one that harms the least!

GuestFebruary 1st, 2009 at 6:32 pm

Most important issue indeed. Executive compensation is a Red Herring. Will the Wall Street Treasury continue to keep their friends in place or will reality set in and even Wall Street sees what is necessary to survive and make $. Send the guys to the Hamptons for a few years, the same will return but at least the system will have been flushed. Time to bring in some commercial bankers.

GuestJanuary 23rd, 2009 at 10:51 am

Obama just labeled China Currency manipulator and will probably have tough trade stance with countries like China. It is time to dump Treasury, T-Bill, or any USA debt, cause USA is gonna be the only buyer of last resort. Yep, USA will fire up print press now. Stimulus and Bailout will all finance by print press.

GuestJanuary 23rd, 2009 at 12:17 pm

“Inflation is the biggest killer of civilizations, even more than war itself.” John Hospers.The power brokers in Washington have no intention of giving up their most effective tool for controlling people’s lives — control of the money system, the power to inflate the currency at will.As Henry Hazlitt put it: “[E]very inflation must eventually be ended by government or it must ‘self-destruct.'”And that’s exactly what’s happening: we are self-destructing.

PeteCAJanuary 23rd, 2009 at 1:00 pm

Moving towards more aggressive trade wars between USA and China. A war of words will spill over into economic impact. In apite of everyone saying that we are going to avoid repeating the mistakes of the last Great Depression, things have a funny way of re-occurring anyway.PeteCA

GuestJanuary 23rd, 2009 at 2:08 pm

yep, Obama’s trade war will guarantee sharper world GDP downward spiral and sharp dump of USA debt. Time for USA to fire up print press to monetize USA debt.

Little SaverJanuary 23rd, 2009 at 3:51 pm

2 days in power and already forgotten his promise of respectful discussions with other nations (cultures). First blame them and than talk with them? Not the best way, I think. Looks more like just blame the others for our problems. Nothing new, no change.Seek a solution together, please you grown-ups at the top.

GuestJanuary 23rd, 2009 at 7:47 pm

yeah, Obama just know how to sing promise and hope. But execution? Can you trust him to do what he promised?

GuestJanuary 23rd, 2009 at 11:56 am

Economics is now partisan politics.Bremmer and Roubini say: “Credit losses of close to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households…with high debt ratios and solvency problems undergo a sharp deleveraging process.So why should the latter bail out the former when the former conspired a Ponzi to steal from the latter, in the first place? Hmmmmmmmm? Why is bailout a one-way street?B & R: Policy remedies will have limited effect as insolvency problems constrain the effectiveness of monetary stimulus, and the risk of rising interest rates… erodes the growth effects of fiscal stimulus packages.What about the risk of lowering interest rates below inflation that erodes the growth effects of savings and pension income? Are policy remedies a one-way street?B&R: Only when insolvent banks are shut down… will conditions ease.Does this include the too-big-to-fails that have failed and are being bailed? Or just the ones they are wiping out? Is insolvency shutdown a one-way street?B&R: This time, the situation is more worrisome because today’s financing comes… from strategic rivals like Russia, China and a number of relatively unstable petrostates. This leaves the U.S. perilously dependent on the kindness of strangersIs nation state kindness just a one-way street?B&R: There’s some good news in this interdependence. The mutually assured economic destruction… ensures that China can’t simply pull the plug on all this financing without suffering a considerable amount of self-inflicted pain…sharply undermining…the country’s economic growth.Whatever happened to all the banker/corporate/ slave-plantation mutual admiration global baloney? Is that now a one-way street?B&R: Politics will make matters worse…China and Russia… state capitalism…have brought politicians and political bureaucrats into economic decision-making on a scale we haven’t seen in a very long time…Now the U.S. has gotten in on the game. New York, once the financial capital of the world, is no longer even the financial capital of the U.S. That honor falls on Washington, where lawmakers are now injecting populist politics into economics decisions.As far as I know, there is still telephone service between New York and Washington. Saying that Washington has any power indicates how dumb the politicians think we are. Have the major investment banks now moved their headquarters to Washington? No. Are all Washington policy decisions nothing but a one-way street to Wall Street?B&R: Global markets will also face the more traditional forms of political risk in 2009. Militancy in an increasingly unstable and financially fragile Pakistan… Afghanistan and India… Israel and Iran risk bringing the international conflict over Iran’s nuclear program to a boil… The impact of the financial crisis on Russia’s economy… Iraq may face renewed civil violence… The world’s first global recession is just getting started.What a movie. Is the NYFed Investment Bankers’ financial crisis now a Global Financial War where only The Big, The Bad, and the Ugly banksters win? Is the path to peace a one-way street?

blindmanJanuary 23rd, 2009 at 9:52 pm

g,ditto.. and….@ aboveand this…”Why is this dangerous? At the G-20 summit a few weeks ago, world leaders pledged to address the crisis by coordinating their economic policy responses. That’s not going to happen, because politicians design stimulus packages with political motives — to satisfy the needs of their constituents — not to address imbalances in the global economy. This is as true in Washington as in Beijing. That’s why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point in decades. Its politics that is creating the biggest risk for markets this year.”.the sentence “that’s why politics will drive the economy more directly (and less efficiently) in 2009 than at any point in decades. it’s politics..”what was efficient about the economics of the last several decades? i thought that these had been universally recognized as a ponzi economic scam gone global. and now in collapse requiring moral hazard, starvation, and enslavement on the part of the “unskilled” billions?i know politics is inefficient but “constituents” , real people (not statistics) have come to expect a little inefficient representation of their needs? is that an economic sin in a representative government? it certainly is not in any other form of government.who could claim to represent a people by telling them i will fight to have your community leveled and your accumulated wealth destroyed by the end of my first term? perhaps an efficient globalist ex banker who really understands finance and markets.. i just don’t get it..”This is part of a worrisome long- term trend. In China and Russia, where histories of command economics predispose governments toward what we’ve come to call state capitalism, the phenomenon is especially obvious. National oil companies, other state-owned enterprises, and sovereign wealth funds have brought politicians and political bureaucrats into economic decision-making on a scale we haven’t seen in a very long time.”.wait a bit here too. this sounds like representation again? what is going on?.”Now the U.S. has gotten in on the game.”.gotten in on the game, gotten in on the game, oh ..gotten in on the game ?? what?.”New York, once the financial capital of the world, is no longer even the financial capital of the U.S. That honor falls on Washington, where lawmakers are now injecting populist politics into economics decisions.”.honor was probably not the right word here. i think dishonor would work better. if that were capital then it maybe right that the hub has shifted..”Companies and sectors that should be left to drown are being floated lifeboats. This drama is also playing out across Europe and Asia. As engines of economic growth, Shanghai is losing ground to Beijing, Mumbai to Delhi, and Dubai to Abu Dhabi.”.setting the stage for the creation of more “companies and sectors” that will in turn be “left to drown”.

GuestFebruary 1st, 2009 at 6:40 pm

Nobody knows where the “Investment Banks” have their headquarters, not even the principals. They do know where Washington is and yes, we have a one-way telephone service to D.C. and one-way $ to post office boxes on Wall Street.

GuestJanuary 23rd, 2009 at 12:44 pm

The cause of all our miseries and danger: the stupefying love of inequality.The amazing thing that the egalitarian discovers is that no one wants equality. Some people, sometimes, to some degree want less inequality, but the passion for pay justice – equal pay for equal sacrifice, equal pay for equal work, no overpay and no underpay – is very rare.99% are paid less than the world average, so 99% would be paid more if overpay was reduced, but this generates no enthusiasm, no interest, no support.Everyone assures the egalitarian that people are too greedy for equality – as if equality would make everyone poorer! The egalitarian is regarded not as the clear-eyed realist but as an opponent of society, an outsider, a dreamer, a danger. Apparently people identify with wealth. The fact that they don’t have the wealth doesn’t seem to bother them. They are defensive towards the rich, who do have the wealth. Apparently people think that an attack on wealth is an attack on them, as though they thought: If wealth is taken away from the wealthy, I will be poor. The notions of overpay and underpay are non-existent. The superrich are not quite liked, but they are far from being thought of as just plain thieves, with money that belongs to others. Yet pay per workhour now goes up to 100,000 times world average, and down to 10,000th of average. And still there is no general idea of overpay and underpay.The people I am talking about are the people in the middle, the less underpaid. The more underpaid people are, the stronger their feelings for a better share can be. And yet even most of the severely underpaid are not certain that they deserve more, that they have been robbed.Reading history of efforts to reduce inequality, one is struck by the great weakness of the efforts. In times of war, the attitude is: If people are going to be asked to risk their lives, the least the rich can do is give some money. No one thinks of making the rich do the most they can do. Here people are risking their lives, giving their lives, and the extent of their will against the rich is to expect them to do the least they can do. Their valuation of the rich is far greater than their valuation of themselves, and they see nothing odd in this.People seem to participate in the idea that wealth proves the wealthy are better and more deserving than themselves. Is this just ignorance of the ways that money is stolen [transferred from earners to non-earners of it] legally? Even when ways of legal theft are pointed out to people, the people do not become clear that the wealthy have money that belongs to the people.People build a city, and land values go up, and landowners get the added value of the city, produced by others’ labour. A person can buy land before the city is built, wait till the city is built, and be rich for no work. The rich are buying up wherever infrastructure growth is greatest and getting a freebie in proportion to their fortune. Henry George pointed this out, and indeed groups sprang up in support of the correction of this theft. But then they faded away.Twice in the 20th century, in America, the rich have been able to quell pushes to equality by raising the ‘spectre’ of communism. And yet the concept people had of communism was egalitarian. In fact egalitarian communism had been hijacked by thugs, and was totalitarian, and the idealistic pro-worker communists agitating among workers for greater equality were dupes of the thugs who had stolen the communist egalitarian dream, but this does not come into the matter here. The rich were easily able to make people fear and loathe communism, although communists were agitating on behalf of the workers. It was easy to make people feel that communism would destroy the nation, and to make the people close ranks with the rich against the enemy, the foreigners. People have always inclined to fear outsiders far more than their up-siders. When the people were gathering their wits against the rich, the rich were able, in the two Red scares, to shout: Look, the bogeyman! – and slip away.The realism of Anatole France’s “You think you die for your country, you die for some industrialists” has never penetrated the general mind. The brave and highly decorated USMC Major General Smedley Butler, who enjoyed great respect and affection from those he commanded, author of “War is a Racket”, said that the only way to stop war is to send the rich to war, but this has never found support among the people, although the people have made some grumblings about the rich avoiding military service, and the people approve of politicians who have been to war. D H Lawrence said the people are the eternal dupe. Is it just ignorance, falling easily for tricks?It seems to be inconceivable to people that an hour’s work by a rich man is the same amount of work as an hour’s work by a poor person, deserving the same compensation. There seems to be a circular argument: The rich man deserves more because he is better, is more productive. How do we know he is better or more productive? Because he is paid more.And there is the assumption that if something is legal, it is just. This ignores the obvious fact that the rich have written the laws.Money is the joker good. It is good for just about everything. So the theft of it is the theft of just about everything – including democracy and social status. So inequality causes violence: war, crime and weaponry. Violence and inequality have been growing for 3000 years. Violence grows, as both sides try to prevail, and throw ever-bigger weaponry at each other. Money is power, power to make money, power to warmonger and to cannonfodder the people. The League of Nations was founded to try to stop arms manufacturers fomenting wars. As Ambrose Bierce put it: An arms dealer sells you rifles to protect yourself against someone to whom he has sold cannon. Jefferson, another realist, said: Merchants have no country. And he talked of the preying by the rich on the poor.America was founded by people who had fled tyrannies. And it is surely obvious that money is power and so overpay is tyranny. The warning that laws can stop the poor but not the rich goes back to the Greeks. And yet the resistance to overpay, to limitless, unjust concentrations of wealth is not yet strong, is still very weak. During the 19th century in America, the idea that freedom depended on prevention of wealth concentration was dominant, but ineffective.All through history, there have been cries for liberty, and obviously this is against tyranny, and obviously tyranny cannot exist without unjust concentration of wealth, and yet the identification of tyranny and extreme wealth is very weak.People who grumble about being wage-slaves still think they are in a democracy. At the very least, if the superrich were to be tolerated, they should have been forbidden to go anywhere near the government. But this idea has never been suggested. Instead, the rich are all over the government, and people just look at things that are happening and maybe say they aren’t right.Even if the rich had earned the money they have [which they haven’t, couldn’t possibly], there should have been a strong will to prevent wealth, which is tyranny.Part of the problem is that everyone is constantly exposed to ‘the greed ethic’, everyone wants to be rich. No one wants to be restricted to taking out no more than they put in. Clearly it doesn’t occur to people that freedom to be limitlessly rich, to take out more than you put in, without limit, opens the door for you, and even more likely so for the children you leave behind getting out less than you and they put in, without limit. Freedom for self to be limitlessly rich is freedom for others to be limitlessly rich.All the money equals all the work equals all the workproducts, the goods produced and services provided. So if someone gets out more money than they put in work, others have to get out less money [workproducts]. And violence is proportional to the overpay-underpay. People still see prevention of overwealth as restriction of freedom, although 99% are underpaid. We have our recognition of tyranny and freedom backward (Smedley B. would say FUBAR, in the language of the Marines).The net effect of everyone having free grabs on the social pool of wealth is that 99% are underpaid, 90% are paid between 100th and 10,000th of world-average pay per hour.People really believe that riches come out of thin air, or out of the productivity of the rich, although the bulk of the money comes over the counter from people’s pockets. People really believe that rich people make money, create wealth, although wealth is created only by mother nature and by work. And they think that the rich provide jobs, and investment capital. People feel dependent on the rich. They think they need the rich. The only thing that provides jobs is demand for goods and the ability to pay for them, nature’s bounty and human work.And the only thing that provides capital is savings, excess of income over outgoes. There is no need for savings to be concentrated with the rich. Savings can be with the people who earned them.People think that if the rich go, the wealth goes. Back into thin air. People believe more in concentration of wealth than in pay justice. Wealth cannot disappear. Wealth exists by nature’s bounty and people’s work. Pay justice would not reduce wealth, it would spread it. Justly. Pay justice would undo theft. The rich would come down to just pay, and the underpaid would come up to just pay. And the vast costs of violence would disappear. A person with a billion can hire a million soldiers for 1000 days at $1 a day. Warmongering and cannonfoddering. War yields high profits because the products are being destroyed. Along with many people.Even with progressive taxation, there still seems to be a feeling that this is stealing from the rich. In war-necessity, it is okay to steal from the rich, but not at other times. The people have found the will to take something from the rich in time of war, and after war this will has weakened. And all the time, the wars are caused by the power of the rich, in their pursuit of profits or in their wars with other rich people trying to steal from each other. Concentrations of wealth attract thieves. And the rich raid the public treasury to fight their wars. And raid the populace for cannonfodder. And rake vast profits from the war. And are hailed as great patriots for mobilising the war effort.People prefer wealth to be visible. They prefer wealth visibly amassed to wealth in their own pockets. One is reminded of the golden calf. People reveled in it. And could not see their now empty pockets. The Israelites had got the jewelry and gold of the Egyptians, and had given them up to make the golden calf, and they felt richer with the golden calf. With emptier pockets. No wonder Moses was so frustrated with them. [I’m not saying the story is true or false, just an illustration.]Even when people go for taking from the rich, they let the money go to the government, and are not vigilant to see that the government gives it all to them. And the government is in the hands of the rich.It is obvious that if a person was alone in the world, he could amass nothing more than by nature’s bounty and his own work. In society, nature’s bounty belongs equally to all living humans, as nature’s bounty does to all living animals. There is no reason that nature’s bounty should belong to anyone more than another. In society, there is also the efficiency of job specialisation, but this factor, whatever it is, belongs equally to all who participate in the job specialisation. So there is nothing in society that justifies anyone having more than arises from his equal share of nature’s bounty, his own work, and the efficiency of job specialisation factor.As it is, all of nature’s bounty goes to landowners, and in proportion to their holdings. Although everyone has birthright to equal share of nature’s bounty, landowners get it all, and as unequally as their holdings. No one notices this. Most people don’t suffer from greed, they suffer from the opposite vice, an uncontrollable senseless dangerous self-harming impulse to let others have wealth and power.It is extraordinary that the community allows a landowner to take all of nature’s bounty on his property, when that bounty may be billions of dollars of oil or diamonds. Even if the land is nationalised, the people allow the government to have it all. People have no notion of justice for themselves. And yet the oil has no value except by the community’s demand for it. That is, the community makes the oil valuable. People seem to have no self-esteem: It can’t belong to me.And an investment at 10% doubles every seven years and multiplies by 1000 every 70 years. That is a huge sucking straw at national and global wealth, a straw which grows with every suck. The size of the straw is proportional to the size of the fortune. Basically, the rich are sitting sucking the wealth. 1% get 98% of world income. There is enough income for every working person, including housewives and students, to have US$100,000 a year, US$40 an hour. That is, every working person, including housewives and students, is producing US$100,000 worth of wealth by a fulltime year’s work. And 99% are underpaid, are stolen from, and 90% get between 100th and 10,000th of the wealth they make, by their own work. And the violence is proportional.Interest or usury used to be regarded as bad. Interest is based on profits, and there is nothing to stop profits being in excess of work, being ‘pure profit’. Somehow people don’t have the power to realize this reality, although it is mad as mad.Pay justice is equal pay for equal work, and we have pay for a year’s work from $10 to $10,000,000,000. An inequality factor of one billion. There is the unhappiness of not having one’s earnings, and one’s fair share of political power, and there is the unhappiness of the violence, which gets to everyone, from richest to poorest. We have had inequality growing, and war, crime and weaponry growing, for 3000 years, since commerce began.People let their earnings slip away, and then get mad when they are really poor and go to a lot of trouble and danger getting it back.Everyone loves profit when they are making it. People don’t realize that opening that gate to getting something for nothing is not egalitarian: the gate is as large as the fortune, very unequal. Money makes money sounds great, and so everyone supports it, not realizing that the net effect, since the money made by money has to come from others, is giga-extreme inequality and violence. Little money makes little money for nothing, big money makes big money for nothing. Underpay for 99% and super-super-underpay for 90%. And violence for everyone. And money is power, so it also means inequality of power, tyranny-slavery, undemocracy, unfreedom, state terrorism.The richest are murdering millions at will, quite above the law. And people can see this as evil only in leaders of other countries. Russians in the 1970s were even nostalgic for the Stalin era. Wealthpower is an umbrella for people, even though that wealthpower preys on them too. The more other nations have wealthpower concentrated, the more they want their own wealthpower concentrated, which is understandable. But it is the wealthpower that is causing the wars. And the wealthpower concentration makes the nation weak, underproductive. Inequality violence destroys the nation from inside and outside. Governments grow fat and stupid from all the money they get to try to solve the problems caused by the inequality, and the bigger the government, the smaller the production. And the rich feed on the government.Even the ‘radical’ measures of the Huey Long movement were far from justice. No fortune was to be more than 100 times the average. But most people are below the average, most fortunes go well below average. And how is anyone supposed to truly earn, by own work, 100 times the average? We seem to have quite lost sight of equal pay for equal work. The average person works over 50 hours a week, no one can work more than 100 hours a week longterm, and the working rich probably work less than 100 hours a week, more like 70 hours a week. Give people the same tools, materials, time, data, etc, and how different will the production be?There is no magic in accumulation of wealth with leaders of companies. The merchant buys cheap and sells dear, as the Greeks said. It is the easiest thing in the world to make prices 10% above costs, including cost of leaders’ work. All that surplus funnels from many transactions onto the table of the leaders. A company is a funnel. Sell millions of 4c and 8c items for 5c and 10c, and you get Woolworth millions. Who can tell the exact cost of anything? How can the customer tell that he is overpaying 10%?If demand is high relative to supply, prices can be well above costs. In new technology, there is built-in scarcity. We won’t know how much computers actually cost until competition finishes forcing the price down. It takes only a 36% annual average personal profit rate to turn Bill Gates’s $5,000,000 start-up money into $50 billion in 30 years. And he wasn’t the only Microsoft multi-millionaire. New technology simply taxes people for their demand. Demand is not work by Bill Gates.And the first in the field gets a head start, and so builds up financial muscle to lean on competitors, preserving the monopoly longer. And patents are monopolies. The ones who profit by the situation aren’t complaining, and the ones who actually pay for this free money hardly know they are robbed, and are greatly uninterested in the fact. “The poor man pays for all” -Ambrose Bierce. Inequality grows, and violence, till we all fall down.The immaturity of believing in this hocuspocus is beyond belief.The two things in a trade can hardly be of equal workvalue. What is invisible in one trade is clear in the real stories of trading up from a $2 item to a house in 100 trades. So there is a tiny drop of inequality in every trade, which, with trillions of trades, grows an ocean of inequality. A very stormy ocean, in which all drown.“The State: that fictitious entity by which everyone seeks to live at the expense of everyone else” -Frederic Bastiat.One can imagine a small community in which, if someone managed by some means to amass a fortune significantly larger than others, the leader or the group of leaders would go to that person and say: Look, I don’t know how it happened, but there is no way you could have earned that much more than everyone else, you’ll have to give it up, spread it around everyone.A sane community would have no trouble seeing that person as having too much, as having somehow got more than his rightful wealth. The moral force of that clear idea in the community would be overwhelming. The person would have no choice but to agree. The moral force of that idea in the community would incline his own attitude towards agreement, if he was inclined to disagree. It is obvious the person hasn’t worked significantly harder than anyone else. There would be this clear idea in the community even if they didn’t know how the accumulation happened. If they had the explanation, say, that the overpay came from being a merchant, and making a little on a lot of transactions, their opinion would only be stronger.In ancient Israel, the idea was to cancel all debt every seven years. Clearly the community saw the obvious.Somehow this sanity has been lost in our communities. Even with the explanations.We pay people for their natural gifts. Yet these are no work of the person, but of nature. We should pay Pablo Casals for every bit of practice he did, but not for having a gift. By paying for gifts, not work, we have to work for no pay. We see nothing wrong in paying Paul McCartney half a billion for ‘his’ lovely songs. How many people can we pay for no work before running out of money? We allow superfortune to Bill Gates for his genius. But who assessed his genius? We merely assume it from ‘his’ money. And who provided the genius? Not Bill Gates.The person being paid $10 an hour is giving, or allowing to be taken from him or her, $30 an hour. Each person is producing $40 worth of workproducts an hour. It has to be so. All the annual world income divided by all the annual workhours has to be the wealth production of each hour. Annual income $300 trillion, 3 billion workers, is $100,000 a year, or $40 an hour.But the tendency of most people is to oppose pay justice, to support the status quo. I suspect they think pursuit of justice is naughty. Is there a psychological hangover from the family dynamic, the rich are Daddy, and we want to please Daddy, and the child who is against Daddy is way out of line? [Think Sugar Daddy, Daddy Warbucks.]We allow higher pay per hour for having studied. But there is no work in having studied – past tense. [There is work in studying, and so that should be paid for by the whole community, which benefits, not parents or scholarships or loans.] And we never enquire who pays for this unjust largesse of paying for the no-work of having studied. And we go on overpaying for health services, lawyers, government, etc.And that theory explains why we trust ‘Daddy’ with the money. The trouble is, it isn’t Daddy, it is some fellow who crawled in the window. In USA, Britain, and most other countries, we have given private citizens the license to print money. The American Federal Reserve Bank is privately owned. The government has to *borrow* money from this bank.This is tear-your-hair-out stupidity.Even when people notice, the word doesn’t spread. Apparently, most adults aren’t even adolescent. They are innocents. It looks as though we should educate our children from a young age in the family finances.

GuestJanuary 23rd, 2009 at 1:44 pm

I hear what you’re saying and don’t dispute your points, however, (you knew that was coming), how does one appeal to a what I call a “selfish heart”? Most, if not all, who have accumulated tremendous wealth and power will not relinquish it under any circumstances and unfortunately, they have the full support of worldwide governments. This fight over this issue transcends all others because it involves ego, power, greed, superiority, in short, a selfish heart. These are the same qualities that helped them take advantage of others to reach their wealth. I guess, this is why I often see great wisdom in the writings of Jesus, because ultimately, he is talking about equality for all; certainly, one cannot “love thy neighbor as thyself” with such pay inequality and the methods used to obtain it! Further consideration of these ideas is vitally important if man wishes to create a world of peace, love and happiness.

GuestJanuary 23rd, 2009 at 5:08 pm

The rich teach you to serve them. They “school” you until you internalize the outlook and values of the oppressor. They give you a choice between the hangman and the priest.

WiseGuyJanuary 24th, 2009 at 8:14 am

Very inciteful post! Well worth the time to read through it carefully.Could you provide a source for your “$300 trillion” annual income figure? Thanks!

PeteCAJanuary 23rd, 2009 at 12:58 pm

Significant break upwards for gold today. This is a _clear_ breakout from a long-term descending trend, showing that the most recent trading profile (new upwards channel) has strength. This marks an impact from sustained buying of precious metals by investors all over the world (who are clearly afraid of the collapse of paper assets). Manipulation of gold has failed.PeteCA

HayesJanuary 23rd, 2009 at 1:14 pm

Sester’s latest – Is the US now more, or less, reliant on China’s government for financing right now?Posted on Friday, January 23rd, 2009Rarely do nominees — or even Treasury Secretaries — make news in their written response to questions posed by Senators. But Tim Geithner’s comments on China yesterday tcertainly made news. I more or less agree with Dr. Drezner . Geithner essentially restated Obama’s campaign position — and Obama has long been more concerned about China’s pattern of sustained intervention in the currency market than the Bush Administration has been. Manipulation sounds harsh, but it more or less is a different way of stating something that Dr. Bernanke noted a couple of years ago: China’s exchange rate regime has served as a de facto subsidy for China’s exports….

MarkJanuary 23rd, 2009 at 7:23 pm

And the US government and Fed don’t manipulate the USD? What then is the “strong dollar” policy all about?This is all propaganda from the standpoint of someone who is losing…Mark

GuestJanuary 23rd, 2009 at 1:33 pm

Snipet from a conversation in The Atlantic with Michael Lewis. The fact that selling CDS was not counted for value at risk and was financially rewarded leads me to believe that the Propietary Desks of the Investment Banks sold a TON of CDS!!!Well, there’s probably no innovation that’s entirely useless. But there are some innovations whose use value is so trivial — except as a tool for disguising risk and enabling reckless innovation. A really good example of this is credit default swaps, which everyone has seen mentioned. Credit default swaps are not that complicated on the surface. On the surface they’re just bond insurance. If you buy a credit default swap from me, you’re buying insurance against a municipal bond or a corporate bond or a subprime bond or a treasury bond going bust.The difference, I guess, being that a third party can buy the swap.That’s right. And that the value of the insurance can be many times the value of the original bond. So let’s say there’s some really dodgy subprime bond out that everybody knows is going to go bust but that the market is still pretending is a triple-A bond. You might have insurance that is 100 times the value of the actual bond. So lets say there’s a million dollars in a bond out there. You might have 100 million dollars in insurance contracts on it. So it’s obviously not insurance at that point. It’s something else. It’s a way to bet on the bond. And it’s a very simple and clean way to bet on the bond.And one of the really weird things about this instrument is — well, back away from it and think about it for a second. Lets take a bond, let’s say a General Electric bond. A General Electric bond trades at some spread over treasuries. So let’s say you get, I dunno, in normal times, 75 basis points over treasuries, or 100 basis points over Treasuries, over the equivalent maturity in Treasury bonds. So you get paid more investing in GE. And what does that represent? You get paid more because you’re taking the risk that GE is going welsh on its debts. That the GE bond is going to default. So the bond market is already pricing the risk of owning General Electric bonds. So then these credit default swaps come along. Someone will sell you a credit default swap — what enables the market is that it’s cheaper than that 75 basis point spread — and he’s saying that in doing this he knows GE is less likely default than the bond market believes.Why does he know that? Well, he doesn’t know that. What really happened was that traders on Wall Street have the risk on their books measured by their bosses, by an abstruse formula called Value at Risk. And if you’re a trader on Wall Street you will be paid more if your VaR is lower — if you are supposedly taking less risk for any given level of profit that you generate. The firm will reward you for that.Well, one way to lower your Value at Risk as a trader is to sell a lot of credit default insurance because the VaR formula doesn’t count it as risk. Because it’s so unlikely to happen, the formula doesn’t grab it. The formula thinks you’re doing business that is essentially riskless. And the formula is screwed up. So this encouraged traders to sell lots and lots of default insurance because, while they get a small premium for it, it doesn’t matter to them because the firm is essentially saying, “Do it, because we’re not going to regard this risk you’re taking as actual risk.”It’s insane. That market is huge as a result. But if people actually had to have the capital, like a real insurer, to back up the contracts they’re riding, the market would shrink by — who knows? Who knows what would be left of it?So yes, if you just made the rules better, a lot of the problems would just take care of themselves. If you’re sitting in the SEC or if you’re sitting in Washington, I don’t know if it’s easier to make the rules better or if it’s easier to ban the things themselves.

crgordonJanuary 23rd, 2009 at 3:49 pm

g,Thanks for explaining in relatively simple terms the purpose and drivers behind the CDS market. I could never understand why the value of the CDS’ were so much higher than the underlying risk. Wa La! Now I do. It appears to be an unintended consequence in maximizing incentives for those who want to improve their risk profile and be rewarded for that activity. Although perhaps more difficult to resolve than adding another variable to the equation, it seems like a step in the right direction to correct the math and then stand back and watch the CDS market unravel.

Octavio RichettaJanuary 23rd, 2009 at 1:43 pm

WLI for last week: Too soon to call the worst of the recession behind us. Economy to Stay in RecessionReutersJanuary 23, 2009(Reuters) – NEW YORK, Jan 23 (Reuters) – A measure of U.S. future economic growth fell while its annualized growth rate ticked up in the latest week, but both remain deep in recession territory, a research group said on Friday.The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell in the week ending Jan 16 to 107.4 from 108.7 in the previous week, initially reported as 108.6.The index’s annualized growth rate ticked up to negative 24.4 percent from negative 25.2 percent, revised up from minus 25.5 percent.”With the WLI declining again, it is premature to objectively declare that the worst of the recession will soon be behind us,” said Lakshman Achuthan, managing director at ECRI.The weekly index fell due to higher jobless claims and weaker stock and commodity prices, Achuthan said.The WLI level and its growth rate can sometimes move in different directions, because growth is derived from a four-week moving average.A lot more stuff including videos here.

David in SeattleJanuary 23rd, 2009 at 2:13 pm

The race is on for corporate America… Freeze wages, fire workers, cut costs. At the same time, create new Fed bubbles to drive up asset prices: print money and buy long term treasuries to drive up home prices, and drive interest rates to zero to force people liquidate their saving and buy stocks.Force the average worker to fill the gap between falling wages and rising prices with debt. That’s Ben’s new plan. I wonder if the great student of the Great Depression read anything about the Wiemar Republic.

GuestJanuary 23rd, 2009 at 5:01 pm

He has a good point when he says we don’t know what it’s like to really suffer or have bombs pierce through the heart of (our) country.

GuestJanuary 23rd, 2009 at 10:46 pm

Ajit is an Indian name, since when did we have anything to do with India?You’ll have to talk to the Muslims and the Brits about their conquests of that nation. I believe something like 70 million Hindus were killed during the Mughal invasion of India. The Brits were less brutal.Also, you don’t know much American history, do you? We’ve had our share of suffering (some self imposed, some not), just like most countries on the face of this weary war torn globe.

Ryan DarwishJanuary 23rd, 2009 at 3:22 pm

“There’s some good news in this interdependence. The mutually assured economic destruction that this relationship implies ensures that China can’t simply pull the plug on all this financing without suffering a considerable amount of self-inflicted pain. Reducing its financing of Washington would, among other things, put significant upward pressure on the value of China’s currency, sharply undermining its export sector and, therefore, the country’s economic growth.”Nouriel-I doubt that this “good news” is a good as it looks. Recent reports indicate China has already started changing to shorter term Treasuries. It has been my observation, in general, that China’s policy moves are deliberative. Certainly they recognize that pulling the plug on funidng the United States would result in having shot themselves in the foot, especially with LT U.S. debt. Shifting to shorter term maturities may only be one gradual, and well timed, step towards greater divestment of U.S. debt.My guess is that the next move will be the the conversion of U.S. dollars into greater acquisition of strategic assets needed for their long term sustainability.Moreover, while China is no doubt feeling the impact of the global slowdown, this will probably turn out to be a blessing for them in that it will drive them toward internal development and increasing domestic demand.Best Regards,Ryan Darwish

GuestJanuary 23rd, 2009 at 3:24 pm

ETN WARNINGAny of you who may hold ETN’s (such as the commodity ETN DJP) through Barclays should immediately sell. In case you are not aware these vehicles are quite different from ETF’s and should Barclays go under (now likely), your investment will be wiped out.

MAJanuary 23rd, 2009 at 3:57 pm

WOW… What a run in gold. Anyone who didn’t sell at my $850 line has done very well.With that said, I’m even more bullish then ever on selling Gold. Aside from it being right at my sell peak 900, it is right at it’s value peak. (I did set a much higher “market catastrophe” artificial peak in December of around 1,200 but I think that could only be attained with a SHARP drop in the USD.)When gold ran to $1,020 last March, the USD was worth about 17% less then what it is now. (while at the same time the S&P was 35% higher) With that said, the purchase power in equities in the USD could not be stronger, in correlation to the sale proceeds of gold in the USD.I DON’T KNOW IF THERE’S EVER BEEN SUCH A HIGH YOY DIFFERENTIAL COMPARED TO WHERE WE ARE AT RIGHT NOW???Just my observation.All the best,Miss America

GuestJanuary 23rd, 2009 at 5:01 pm

Is this a short or long term view? Curious about that and what other people think.Seems that more and more people are concerned about the future value of the dollar and other currencies. Finding safety in other currencies seems to be increasingly difficult to figure out.I’ve been surprised by the number of people on Bloomberg and cnbc (hosts, guests, analysts, etc) who are not normally pro-gold but are changing their tune to varying degrees. (Not just traders talking short term.)Even Dennis Gartman, just recently started speaking/writing positively about gold as an investment.I really appreciate all the economic information and insights posted here, including in the comments. Been learning a lot.

Octavio RichettaJanuary 23rd, 2009 at 5:09 pm

“the purchase power in equities in the USD could not be stronger,..” Couldn’t help it; bought some PG today (3%) at an average of 55.92

GuestJanuary 23rd, 2009 at 7:32 pm

gold will be testing upper resistance pretty soon. if break out happen, then dollar will be crashed -> currency crisis. if no break out, then it will bounce down. right now is all about confidence now. do countries and people have confidence in dollar or gold. we will see.

Jason BJanuary 23rd, 2009 at 5:18 pm

Whatever happend to Nouriel’s commitment to keeping the access to his blog and other non-premium content free? My user account is now disabled, and when I inquired what was wrong I was sent the price list or subscription.Don’t ask me how I got in, but I bet many other regulars are similarly locked out.I remember a similar thing happened here about a year ago, and it turned out to be a technical glitch.Let me assure RGE that I am not attempting to gain illegal access to the site, but to gain access in order to bring a potential technical problem to their attention.

HayesJanuary 23rd, 2009 at 8:40 pm

the site has been a bit erratic today – but I don’t think anything has changed – out of curiosity what does a subscription cost please?

GuestJanuary 23rd, 2009 at 6:19 pm

Front page of the Telegraph this evening: “Britain on the brink of a depression, say experts.” The lead story in the Spotlight Issues section of RGE Monitor right now is headlined “Can the UK Afford to Rescue Banks?” In that article, the authors state that Britain may not be able to afford its risky effort to bail out its financial sector, and “if the bet does not payoff, the UK faces national bankruptcy.” For Iceland to collapse is one thing, as sad as it is, but if Britain is next then all bets may be off.

GuestJanuary 23rd, 2009 at 8:29 pm

Article in today’s International Herald Tribune headlined “Minister says banking system under threat since last October” describes how the UK banking system nearly catastrophically crashed on 10-10-08, quoting a city minister source in London as follows: “There were two or three hours when things felt very bad, nervous and fragile. Major depositors were trying to withdraw – and willing to pay penalties for early withdrawal – from a number of large banks.” I recall seeking subtle hints in the media that the same thing nearly happened in the U.S. around the same time, but never anything as blunt as this.

ex VRWCJanuary 23rd, 2009 at 6:49 pm

Yes Guest. All bets are off. And this: Ottawa Citizen: Analyst invokes spectre of the French Revolution over economic unrest in Europe Lets see – gold up, portending currency crises. D word being used about UK, Spain. Iceland’s government falling. Russia unable to defend currency. Downgrades of Eurozone member’s debt.In the US – Merrill Lynch execs take billions from TARP to pay bonuses. Unemployment skyrocketing. Leaders rattling protectionist swords.Mexico on the brink. Pakistan on the brink. Eastern European countries on the brink, with their own civil unrest. CHinese unemployment skyrocketing, as workers realize there are no jobs to return to after the New Year.Does anyone else sense a powder keg here? A situation just waiting for a spark?

GuestJanuary 23rd, 2009 at 7:03 pm

and is all this because banks are going downhill (drawing weaker countries first with them)? or because borrowing is no longer available? or both but to different degrees?

GuestJanuary 23rd, 2009 at 6:53 pm

I saw the following on a real estate forum discussing the efficacy of RRE loan modifications to “keep the people in their homes”:Unfortunately, the moratorium is a small bandage on a huge open wound. Recent stats reveal that 36% of properties that went through loan mods were delinquent again in 90 days and 52% of loan mods went delinquent again at 6 months. That’s not a pretty picture. With the moratorium lifting on January 30th (extended from Jan 9th), combined with all the loan mods already going bad, foreclosures are definitely going to look like a Tsunami in 2009. My guess… it’s going to hit around mid year and the public is going to be outraged because they are being filled with false hopes with moratoriums, load mods, stimulus pkg etc, etc. This problem was created over a decade or more, and it’s not going away in a year or two, especially not with smoke and mirrors! in Houston

GuestJanuary 23rd, 2009 at 7:00 pm

if US blames China to be a currency manipulator, perhaps China should blame US to be a debt manipulator?(not that I recommend either – just came to think about it. Would be nicer to just stop the blaming and work together.)

BrianJanuary 23rd, 2009 at 7:22 pm

How is this not front page news all over?Freddie needs another $35 Billion, and Fannie will need a similar amount. must be coming from prior government loan guarantees? Part of the $7 trillion+ commitment that is already starting to come due. Surely this can’t come from the second half of TARP, or it will wipe out almost all of the remaining TARP funds.I notice that they release this little bombshell on Friday just after market close.

GMeliJanuary 23rd, 2009 at 7:36 pm

Sheople are numb to all this crisis news.Even if Citi were to declare itself insolvent, you still don’t see the panic of bank runs you saw in october.

PeteCAJanuary 23rd, 2009 at 7:39 pm

Mike Shedlock has got a really interesting chart showing current values of many major banks at his site: article titled “Extreme Leverage In Reverse Portends Global Crash” , Friday, Jan 23’rd.My guess is that if a lot of depositors see that chart, they could well decide to move their money elsewhere. Not all banks are created equal.PeteCA

HayesJanuary 23rd, 2009 at 9:12 pm

an amazing graphic depiction — perhaps most disturbing is the comment that reminds the reader that things such as Alt-A are yet to be reflected …On a separate note with respect to this thread, it has been sometime since I have seen so many gloomy comments – shades of October…

AfAJanuary 23rd, 2009 at 10:28 pm

Talk about deflating bubbles.It also has been sometime since the Professor mentioned that this is a solvency crisis. One would almost conclude from the tone of this post that the crisis is unsolvable.

JamesJanuary 23rd, 2009 at 11:08 pm

John Thain’s Top Ten Greatest Momentsare right here! (with explanations)1. The Great Redecoration2. The Unfortunate Chair Incident3. Just Can’t Quit Those Mortgage Assets4. The Bonus Fiasco…

Andrew G. BernhardtJanuary 25th, 2009 at 3:10 am

How can anyone be bullish? The housing market is in decline, and will most likely drop another 20% in 2009 alone— further slaughtering MEW (mortgage equity withdraw, and thus consumer spending, since no one makes money, they just withdraw their house appreciation). Banks (and I mean the entire financial sector) are failing miserably, and this will get worse, before it gets better. Economic data will continue to get worse. The E of PE will continue to deteriorate, and PEs thus will rise, that is, until the P come on down again, so basically the stock markets are still overvalued. Especially, when you consider that PE ratios (really fractions) are nearly in line with historic norms, of 11 to 14, currently, and since we’re going into what I describe as “The Greater Depression,” then the PEs should not be near (or in-line with) historic norms, nope, they should be lower, near historic lows!! The average PE in the USA for stock indices should probably be closer to 6— not 11 to 14!!! So once again, the markets are elevated, dignified, and too high, and will depreciate some more. Secondly, the business cycle is still weakening, and faster than a lot of people thought. Things will continue to get worse, and faster than expected, and EPS estimates are still too high, and disappointments will be perceived as bad. Fixed income is best, try TIPS (ticker TIP)— principal adjusted to the CPI-U and a real yield applied to the adjusted principal, for growing principal of the TIPS and bigger coupons (assuming inflation over the long run). Also, unemployment will rise to maybe 11 to 13 percent, labor force participation rates will decline with people getting discouraged, and output will decrease, as layoffs ensue. There maybe be a 5 to 7 percent drop if US GDP!!! Then wages will decline, and corporate profits too. I also see labor force participation rates declining from here. I feel as though there is no catalyst what so ever for the stock market to rise anytime soon. Nope! The only thing we can hope for is a change in the perception of risk, and perhaps a boost to confidence. Looking ahead, long term, in the 3rd and/or 4th year of Obama’s presidency, maybe Obama will bring about some PE expansion, as confidence comes back, after the opposite happened for literally the past 8 years— when there was PE contraction during the entire Bush Administration as confidence fell off a cliff, along with the US dollar. Is the US Dollar a dead cat bounce?? I worry about that. Come next spring when things do not get much better, if at all, the potential for a summertime sell off will be horrendous— and maybe a total default will happen in the USA? Maybe that’s just too sarcastic? Maybe we’ll just get a big sell off in spring and summer, and some foreign sovereign defaults, and then things might begin to stop getting worse at that point. Come the end of this summer, maybe things will begin to hold their own, and maybe asset classes across the board will actually rise? I think the housing markets (and commercial property) will experience another twenty percent sell off in 2009, so what a mess things are, and will be.Beware of Obama’s solution, of borrowing more and more money (which reminds me of Bush— then again who would dramatically decrease government spending too fast?!), trillions at a time, for bailouts, TARP, capital injections, capital infusions, emergency economic stimulus packages, emergency economic stabilization acts too, and for saving capitalism itself, in the government’s eyes. Nope, they are (the government) in my opinion acting like socialists, and maybe even communists. They should try some Laissez-Faire attitudes and approaches themselves. They caused the entire problem (the prior administration and the entire congress), they should stop borrowing too much money too fast, as it crowds out investment and borrowing, and does great harm to the capital markets, and society at large. I fear for our future.Additionally, with bank (and the entire financial sector’s failure and looming bankruptcies) people will have to use FDIC & SIPC which will infuriate people with the entire banking sector— I see a total loss of confidence looming in American, and abroad. People will be wondering if capitalism is dead or something. Clearly, the Government scoundrels need to limit their borrowing and reckless spending of borrowed (printed, and tax revenue) funds. I see great risk of intense regulatory changes, additions, and more political risk itself. This regulatory risk is enough to make my stomach hurt. Maybe the Congress should try to regulate itself, and limit its own reckless stupid spending sprees. Nationalization of the entire financial sector is also not a good idea. Laissez-Faire, no government intervention please! The more government intervention, the more I feel as though the Government is trying its best to bring about and foster the conditions necessary to create and cause directly what I describe as “The Greater Depression”!!!~ Andrew G. Bernhardt, St. Louis, MO.,%2BRGE

Andrew G. BernhardtJanuary 25th, 2009 at 3:18 am

On a behavioral economics note… everyone should keep their head up high, and pretend that their house is appreciating! Then we can all view our homes as an ATM again, and let the good times roll, with tons and tons of MEW, by the trillions. Everyone should act like those in Los Angeles, where many pretended in the past that their house was worth $15 million dollars!— and that it rose 20% per year!!! If we could all only pull that kind of unfounded, unwarranted, and totally stupid mindset back. Those were the days.~Andrew G. Bernhardt, St. Louis, MO.

Andrew G. BernhardtJanuary 25th, 2009 at 5:34 pm

Oh, so when does everyone think all (or I mean the vast majority of them) the banks, brokerages, insurance, and reinsurance corporations will fail?? I’m expecting some bank runs, bank failures, etc. soon! And when I say “banks,” I mean the entire financial sector. Economic activity will grind to a total and complete halt, and people will go ballistic. We’re still just at the tipping point and the tip of the iceberg of this recession— I’m expecting “The Greater Depression.”~ Andrew Bernhardt,+RGE

Andrew G. BernhardtJanuary 26th, 2009 at 2:56 am

I wonder a lot when the equity markets will quit their “Obama Honeymoon” as I call it. Basically, I think the markets are completely over valued, and have been staying relatively elevated as of late, due to the new presidency. This will be, and is coming to a quick end soon. Fundamentally, if we’re going into what I describe as “The Greater Depression,” then the average PE in the USA should not be anywhere near the historic PE ratio of 11 to 14, nope, it should be in-line with historic lows, a PE ratio of approximately 5 to 7. If PEs reached historic lows (before we factor in some more EPS deterioration) then the the US equities markets will have to depreciate another 50%, that’s right, another 50% from their current levels. If EPS decline some more, and they will I believe, then the markets will have to drop further.Andrew G. Bernhardt, St. Louis, MO.,+RGE

GuestJanuary 25th, 2009 at 3:19 am

Dr. Nouriel Roubini, I heard that the bailouts, tarp, and other stimulus packages were not for some reason going to be included on the government’s deficits?! Is this true? Thanks!

GuestJanuary 25th, 2009 at 9:32 am

Roubini is a perma-bear. His job is to announce the next crash … If you followed his advice you were out of the market since 2003 hence the opportunity to make money. I will take his comments seriously when he is able to forecast bull market between the crashes … This kind of person are looking for their 15mns of glory and pushing everybody into the doom and gloom which mechanically push the world into the recession.Since economy is made of cycles, it is easy to forecast crash as well as it easy to announce bull market but you see if forecasters are good if they put a date on each of these events. It’s never been the case of Roubini and his pals. In a few month from now he will look stupid again and no one will hear from him. Shut them up asap and the world will be better earlier!

Andrew G. BernhardtJanuary 25th, 2009 at 3:49 pm

True Roubini has been bearish for a very long time, and really was only correct for 2008 out of maybe say ten years. So his accuracy and precision is about 10% I’d say (maybe more if you include 2009)…. HOWEVER… I noticed that the markets have depreciated to below the level(s) they were at 10 years ago— when he started being bearish! So is it coincidence, and just a miracle that he’s essentially been right the entire time; or is he awesome for knowing that the markets were overvalued in 1999, 1998, 1997 even?! The stock markets in the USA are now at levels first seen in 1996-97, secondly there has been approximately 37% inflation since then, so the markets are down even more on a real basis.Andrew Bernhardt,+RGE

GuestJanuary 27th, 2009 at 6:40 am

Markets are made of cycles and excessive move on both side of the range. There is no point of beeing right now for in 10 years.I can easily predict you than we will have another “crash” in 10 years and a bul market between now and the next crash. So what ?! that ‘s the way it works and it doesnt’t make a Genius of Roubini and his friends. His right now because he has been wrong for 10 years … Not a great preformance especially if wrong again for the next 10 yearas starting in 6 months !

Mr. Anonymous III, Jr.January 25th, 2009 at 5:37 pm

Here’s why we’re on the brink of a total financial catastrophe and economic collapse of the United States of America (and other countries), and what I describe as a global Greater Depression…A) The Executive Branch, George Bush, he wrote 750 billion dollar deficits per year (taking the federal gov. debt outstanding from 4.8 trillion to 10.6 trillion; which still excludes state, county, municipal, metropolitan, city, and local debt, corporate, agency, and private sector debt too). This crowded out investment, crowded out borrowing, and incited a credit crunch, and diverted money away from the real estate markets, both residentially and commercially. Oh, and if you include 5.4 trillion dollars of debt the US Gov. has assumed of the failed GSEs then the total debt is now 16 trillion, up 11.2 trillion over the Bush Administration (from 4.8 trillion to 16 trillion)!!! If you calculate it this way, including the GSE failure (government sponsored enterprise failure), then 1.4 trillion was borrowed annually during the 8 years of the Bush Administration. Doesn’t this crowd out investment and borrowing?!?!?!B) The totally financial negligent Congress, (all 435 imbeciles, senators, and representatives) they validated, ratified, and approved of Bush’s massive deficit spending spree— for a war against a terrorist, Osama Bin Laden, hiding in a cave of the mountains of afghanastan, and also the sovereign state of iraq.C) Eventually, with the severe crowding out of borrowing, this diverted enough money away from the securities markets, CDSs, CMOs, the US dollar, stock markets, and especially real estate. And on a global basis!D) The negligent Congress also created a new rule change, and allowed the banks to lend zero percent down style. Lame. Anyone that could take their thumb out of you-know-where, and if they could point at a house, they could have it, zero percent down! Why didn’t anyone decide (but only of course if they had, no income, no job, and no assets) to purchase zero percent down style, 5th Avenue, 6th Avenue, and 7th avenue for example, in downtown lower Manhattan??E) With real estate depreciating rapidly now, banks were smashed across the board, because they collateralized the mortgage risk, and traded it, from themselves to each other, and with their losses materializing rapidly, their income statements, balance sheets, and cash flow statements turned sour rather rapidly. Investors, panicking that the vast majority of all banks globally would fail (after seeing the materialization of their disgusting income statements, and balance sheets after Q1 of 2008), panicked and liquidated their stock holdings, dragging down the stock indices globally, at rates not seen in a very very long time! Volatility also increased rather rapidly to highs never before seen. The losses have been, are, and will be enormous!F) The Congress now pretends that borrowing more money in Economic Stimulus Packages, T.A.R.P. (troubled asset recovery program) funs, bailouts, capital infusions, capital injections, etc. will somehow be good, and also will amount to more than $1 dollar of GDP growth for each $1 of Gov spending! Stupid! Each dollar costs money, its borrowed funds, if borrowed at 4%, on 0.96 per year of GDP is really there at best! The gov. spending is spent and taxed also, taking it from 1.00 to maybe 0.70, where or how do they claim that each dollar is 1.57 e.g. of GDP growth!?!?!? Regardless these rather hasty government reckless spending sprees, they merely crowd out investment, and crowd out borrowing even more, exacerbating the problem further.The Government is to blame— no one else is! There is on one else to blame literally. George Bush, his budgets, and the entire Congress, and their inability to discourage the President from writing huge deficits (over the past eight years) was the entire source of the economic mayhem we’re currently experiencing globally. Duh, deficits matter folks! It’s (always) the economy stupid! Deficits matter, inflation matters, real gdp, and nominal gdp growth matters, interest rates matter too, and numerous labor force figures matter also.I would even claim that the fertility rate, birth rate, and age of first marriage matters— and no one else really cares. Weird to me. The family unit has deteriorated over the past 30 years, with the popularity of intra-uterine-devices and birth controls widespread usage among the younger age stratum. Another thing I have noticed is that apparently the department of education has failed again. Just look at how idiotic, imbecile like, and moronic the entire Congress (judicial branch and executive branch too) is— with their advanced degrees from, ha, ha, the world’s most prestigious educational institutions! Also, the cost of an education is enormous… if people only didn’t go to college, if they saved it, lets say 80k of tuition and living expenses (rent and food, and tuition over just four years!), and if they were plumbers or historians or laid the concrete for the federal highway, at a salary of $56,000 of earned income, then think of the savings they’d have!!! They’d sure be better off!! They’d be much more well off than their college graduate counterparts. Apparently, the benefits of a so called education are seemingly so costly, I wonder a lot how much time it takes the average individual to catch-up and actually reap the benefit of getting their degrees. If they attend graduate school, law school, or graduate school for an MBA, or PhD, or for medical school, the opportunity cost of such a decision is even more enormous!!! The cost is further complicated, more complex, and more costly if e.g. recessions strike and investment results are negative (as they have intensely been as of late). Sure makes the case for Treasuries— and I like TIPS best, treasury inflation protected securities; with principal that’s adjusted to the CPI-U, and the real yield is then applied to the adjusted principal, making for increased principal over time and even increasing coupons over time, assuming inflation over the long run, which historically since 1929 to the present has been approximately +3.26%, or historically from 1950 to the present has been approximately +3.88%.Total Default here we come, a default not only of the US Dollar, but also of the US Debt (the USA’s government bills, notes, and bonds), and soon! All the banks, brokerages, insurance, and reinsurance companies will fail miserably— bringing about the failure of everything else, as economic activity grinds rapidly to a total and complete halt! We’re in for a doozy of a recession, bartering, maybe some riots, a dramatic increase in the crime rates, a civil war, maybe a revolution, and a global financial catastrophe— bringing about a global depression, famine, starvation, and dehydration. Eventually, maybe we’ll be invaded by the Mexicans, the Canadians and peacefully, to keep the peace, deliver food and water, in a huge humanitarian effort for all 300 million poor Americans.Americans were in the past among some of the highest per capita GDP in the world, but not because they know how to make money, no no, no no, they are only good at borrowing money (from Japan, UK, Caymond Islands, Luxemberg, and China) and schlooshing it around, from themselves to each other!I guess we (the entire world’s people we) can literally just thank George Bush, for basically, borrowing too much money (from foreigners- Japan, the UK, Caymond Islands, Luxemberg, and China) for bad causes— and for creating this economic and financial and market chaos. Bush was basically, up to no good! Seems as though George Bush, republicans, and maybe even MBAs (since George W. Bush has an MBA), maybe they all want to practice socialism, and to socialize everything, and make it state run and/or government run, rather than free market capitalism. How lame! I much prefer free market capitalism. Perhaps, Republicans have always just stood for war, regress, and recession, and reckless spending sprees, and for doing the wrong thing? Perhaps, the Republicans want to ruin everything possible that’s important and then coincidentally the government feels as though it has to “take it over” rather than let it fail— also a mistake. I say let it (risk takers, banks, other ailed corporations) fail!!! Merging a bunch of failing corporations is not good either, it is bad, it does not bring about competition, and competition is good, mergers brings about monopolies, which I think are bad sometimes. I like spin-offs, divestitures, not mergers and acquisitions. Otherwise, we should all get Government Bailouts! Just kidding, I have a major laissez-faire approach! This government taking over everything in a bail-out mindset is practically communism, and totally financially negligent to me! The government with its bailouts, is fostering the conditions which have created the next Great Depression, what I call the Greater Depression.What will become of the fallout of the Bush administration?! Will there be malicious maniac heads of state abroad, in foreign countries, that rise to power, in the near future, in tough economic times, going through this economic depression (I call it “the Greater Depression”)? Will World War III begin? I fear for out future.

DavidJanuary 25th, 2009 at 7:46 pm

Calling China on its currency manipulation may very well be a strategy. (I may be giving to much faith)Part of any long term solution will involve me looking at my new shoes that say “made in America”Make outsourcing illegal. I would rather pay another $15 a month to a ph bill and have my neighbour working in a call center than a person in IndiaBeyond a shadow of a doubt to the guy saying one mans hour is as valuable as anothers – NONSENSE. When your on the bus in the morning all the infidels around you surely could not be as valuable to an employer as you.To all talking of God or a creator .??? Why are you posting your opinions of a creator on this board .

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