Nobody knows you when you're down and out

First it was the 2007 financial crisis. Then it became the 2008 financial crisis. Next it was the downturn of 2008-2009. Finally, in mid-2009, it was dubbed the “Great Recession.” And, with the business cycle’s shift onto an upward trajectory in late 2009, the world breathed a collective a sigh of relief. We would not, it was believed, have to move on to the next label, which would inevitably contain the dreaded D-word.(...) By 2011, it was clear – at least to me – that the Great Recession was no longer an accurate moniker. It was time to begin calling this episode “the Lesser Depression.”(...) A year and a half ago, those who expected a return by 2017 to the path of potential output – whatever that would be – estimated that the Great Recession would ultimately cost the North Atlantic economy about 80% of one year’s GDP, or $13 trillion, in lost production. If such a five-year recovery began now – a highly optimistic scenario – it would mean losses of about $20 trillion. If, as seems more likely, the economy performs over the next five years as it has for the last two, then takes another five years to recover, a massive $35 trillion worth of wealth would be lost. When do we admit that it is time to call what is happening by its true name? J. Bradford DeLong - Project Syndicate 

Once I lived the life of a millionaire,

Spent all my money, I didn’t care.

Took all my friends out for a mighty good time,

Buying high priced liquor , champagne and wine.

Then I began to fall so low,

Lost all my friends, had no nowhere to go.

If I ever get my hands on a dollar again,

I’ll hang on to it till that big eagle grins.

Because, nobody knows you

When you're down and out.

In your pocket, not one penny,

And as for friends, you don't have any.

"Nobody Knows You" - Traditional Blues

I wonder how much our economic stagnation is a major factor in the instability we are seeing in the Middle East and the Ukraine, etc, and not just our military "indecisiveness" and "war weariness"?  

Certainly the miserable performance of the economy is having a very destabilizing effect on the European Union with the emergence of parties on both the left and the right that want to leave the euro or even the EU itself, and I even wonder how much of a role it might play in America's political deadlock/paralysis?

No kidding, could things is far apart as Marine Le Pen, Podemos, Scottish independence, the Tea Party, UKIP and even the ISIS owe some of their success to the western world's, dead in the water, economy?

Certainly the principal charisma of our western societies since WWII has been their capacity to produce enormous wealth and to distribute it widely among our populations, who spen(d-t) it freely... Let's not kid ourselves, even the idea of "freedom" is directly connected to having enough money to exercise that freedom.

If our economy can't cut the mustard, what exactly are we selling? Where exactly are we intent on leading the rest of humanity?

I don't have the answer but I would like to hear more people asking the question.  DS

Humanity: up a tree, with no fireman in sight

Raghuram Rajan

“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.” [Marx - Capital, Volume III, Chapter 30]

“It is the end of cheap goods,” says Bruce Rockowitz. He is the chief executive of Li & Fung, a company that sources more clothes and common household products from Asia than perhaps any other.(...) China helped to keep global inflation in check. But that era is now over, (...) Nothing can replace the Chinese miracle. “There is no next,” says Mr Rockowitz. Prices will now start to rise by 5% or more each year, with no end in sight. And that may be optimistic. So far this year, Mr Rockowitz says, Li & Fung’s sourcing operation has seen price increases of 15% on average. Other sourcers of Asian toys, clothes and basic household products tell similarly ominous tales. Economist

“In the quest for growth, many countries have neglected to build a reliable system of social security that will help citizens buffer the market's volatility.(...) Democratic capitalism’s greatest problem is not that it will destroy itself economically, as Marx would have it — but that it may lose its political support.” Raghuram Rajan

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Marx's predictions of the system collapsing under the "enmiseration" of workers seem to have been foiled over and over again by the system's growing ability to produce and market ever cheaper and more abundant consumer goods and then, when incomes began to stagnate, to make available ever cheaper and more abundant credit with which to buy those goods: a form of consumption which used to be aptly known in England as "buying on the never-never". The role of the worker was replaced by the role of the consumer and the connection between the two roles became ever more tenuous.

Thus did the system square the circle: people could "own" their own home and consume just as if they were prosperous, despite stagnant or falling wages and to tide people over the rough spots, in most developed countries, there was a generous welfare state in place.  This formula for dynamic economies combined with social peace appears to be have run out of road. And in this financial crisis the "never" of never-never seems to have arrived.

In the video above, Chicago University professor and former (clairvoyant) chief economist of the IMF, Raguram Rajan lays great emphasis in improving education in order to prepare workers for a labor market demanding ever more sophisticated skills, as those without said skills, seem irredeemably doomed to Marx's "enmiseration". 

As much as I admire professor Rajan, and I admire him very much, I am skeptical about the possibility of training the mass of humanity, the grandchildren of homo habilis, in the skillful, rather obsessive, management of the abstract symbols and concepts which make up so much of the new technologies... This is a sort of skepticism I have been incubating for a long time. I remember even writing a poem when I was in my teens, with the lines:

On a rectangular plot of manicured grass,
Sits the man of tomorrow,
On yesterday's ass

My intuition tells me that we are quite a young species -- only about 200,000 years old -- and only living in permanent village-town-cities, that is to say, "civilized", for some 10,000 years. We belong to a species, which, by a quirk of evolution, is intelligent enough to have gotten itself into a situation which we are not intelligent enough to get out of... something like a kitten climbing a tree... Unfortunately, there doesn't seem to be a "fire department" to get us down from our "tree".

Let me give a simple, graphic, example of what I am trying to say. Look at today's epidemic of obesity, which I think is a perfect indicator of our dilemma. For almost all of our 200,000 years of existence as a species, right up till the very recent development of our advanced agricultural and distribution techniques, being able to gain weight quickly, when food was abundant, and lose it slowly, when food was scarce, was a vital plus for surviving frequent crop failures, droughts and other natural disasters. Suddenly, within a few generations, thanks to our logistics and food processing systems, a large percentage of the population finds itself waddling toward an early grave.  I think this will serve as metaphor for many observable phenomena today, you are welcome to make your own list.

Certainly most of humanity through most of its history and prehistory, survived and did useful work without having to manage abstract symbols and concepts and it seems to me as cruel as laughing at fat people  to make those abilities essential for living with any security and dignity today.

The challenge today is to allow the most average of people to have a decent life, with good health, as much education as they are able to absorb and a chance to work gainfully in occupations within their capacities and enjoy a dignified retirement. The person able to "re-invent" work, and make this possible would be the "Einstein" of today's world.  DS

Looking at the crisis from Spain

“Courage is grace under pressure.”
Ernest Hemingway

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The most significant thing about the financial crisis, up till now, is that it is universal.

Something with its origins in the US financial sector has hit the entire world economy and the numbers are horrible everywhere. Millions of people are suffering from the effects of an economic philosophy and ideology that was hatched in America's nest, just as those same millions enjoyed the economic boom that nest and philosophy produced, until the bubble burst.

For the first time in history we are all sailing in the same leaky boat.

Spain in no exception. Their wish to be a major player and to end the long isolation Franco brought upon them has been amply granted, for good and for bad.

I have known the country in austere and dignified poverty and as out of the world as Tibet and now, only a few years later, its banks are considered the best run in the world, its film directors and actors win Oscars, and Spanish athletes like, Miguel Indurain, Rafa Nadal, Pau Gasol and the European champion national soccer team have lifted the self confidence and self esteem of all the younger generations.

The Spanish people have taken full advantage of the opportunities a fortunate economic and political context have brought their way and now the best nourished and best educated young people in Spain's history will face a crisis which pales in comparison with what their much less educated and less well nourished grandparents faced with such fierce stoicism in the 1930s.

Spain is not a continental power like the United States with its huge population and endless natural resources, but neither is it Iceland or the Ukraine: Spain is being hit hard, very hard. However I would argue that Spain is a country, a society, that as they say in boxing, can take a punch. I have personally seen Spain take quite a few.

I have seen three really bad recessions here: at the end of the 70s after Franco's death, with double digit inflation, in the late 80s when 50 banks had to be nationalized and at the beginning of the 90s with unemployment as high as 24%... and life went on just the same. I was living entirely on the local economy by then and the good humored "grace under pressure" and lack of self-dramatization of the average Spanish person in times of economic catastrophe made the deepest of impressions on me.

Looking for the formula I came to this, not terribly original conclusion: the Spanish extended family is probably the country's greatest resource in troubled times.

The closest friends of most adult Spaniards I know are their brothers, sisters and cousins, closely followed by people they went to grade school through university with. This correlates with the extreme reluctance most Spanish men and especially their wives, have for moving to another town, even if there are better jobs waiting for them there, since this would mean losing their family social network. If you marry a Spanish girl you can go and work anywhere in the world as long as she can eat lunch with her mother and sisters at least twice a week.

This lack of work force mobility creates several percentage points of normal Spanish unemployment. That is the downside, the upside is the strength of the social fabric.

Spanish social life is an endless round of weddings, baptisms, first communions, pub crawls with friends and late dinners with lively conversation into the small hours over the ruins of a copious, well irrigated, meal. High consumption of hard goods and services adds to the charms of this existence based on eating and drinking with family and friends you've known since childhood, but cutting back on it all doesn't affect the basic underpinnings of this extended family life.

There is just as much pain as anywhere else in Spain when jobs are lost and payments fall behind or mortgages are foreclosed, but in Spain there are many shoulders to cry on and helping hands to turn to. And if you haven't lost your job you are supposed to help family, through the cousins by the dozens, that have.

If we add to this social fabric a modern, universal health system of socialized medicine, where no one, adult or child lacks for a free family doctor, hospitalization, pediatrician etc, even if unemployed, then it is obvious that the stress levels of a Spanish recession are very different from those in the states or even socially advanced northern Europe, where, like the states, nuclear families or single parent families are the rule.

In short people here are not alone for a minute of their lives and not afraid of getting ill, they are usually surrounded, practically suffocated, by their family and childhood friends. I imagine that not a few of my readers could get a little wistful thinking that proposition over.

So, summing up: this recession is going to be hard on everyone, everywhere, for a long time. The traditional Spanish family and social values were developed for hard times: Spain, through its history has rarely known any others. Coming into this universal mess, Spaniards are healthier, better nourished and better educated than they ever were before.

In a universal recession/depression, where there is nowhere to run to, nowhere to hide, there are a lot worse places to ride it out than Spain. DS

Get set

The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.(...) The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.(...) Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.(...) Bob Eisenbeis, analyst at Cumberland Advisors, said the unprecedented low yields are a sign of "dysfunction" in markets. Eisenbeis said US municipal bonds are paying upwards of 6.0 percent tax-free and corporate bonds even more, but that fears of default and a lack of knowledge about underlying bond quality have led investors to shun these alternatives. One reason for the surge in demand for Treasuries, said Eisenbeis, is the Federal Reserve's decision to flood financial markets with liquidity including through other central banks. Many central banks and commercial banks are reluctant to use this cash for traditional lending, and are buying Treasuries to ride out the storm, Eisenbeis added. A big question for the market is whether the Treasury market has become a bubble that will burst. Although the low rates allow Washington to borrow money cheaply, Eisenbeis said such a scenario could be perilous for the economy and the dollar.(...) "There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching," he said. "When you have this huge flood of liquidity into the marketplace, that can't last forever," he said. A bursting of this bubble could mean a rush out of Treasuries, forcing the government to pay higher rates on an unprecedented amount of debt. (...) Mike Larson, an analyst at Weiss Research, says the long-term bond market could be "the biggest bubble of all," worse than the dot-com and real estate bubbles.(...)"Treasury bonds almost never move this far, this fast. And interest rates, which move in the opposite direction of bond prices, almost never fall this far, this fast," Larson said. (emphasis mine) AFP

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One of the most interesting things about the decline of the American empire is that not only are the broad outlines familiar to most of the world's educated inhabitants, but even many of the details are too: details that in any other culture would be private "family" stories. That way we can use the English language and the American situation as a universal parable or mythology when broadly discussing the human condition.

Some readers of mine ask me for Spanish stories and, when I can, I am happy to oblige. The problem with doing this in an English language blog is having to provide masses of context about situations that most readers are not too familiar with.

However today there is a Spanish story that most Americans can appreciate.

As some of you may already know Spain's real estate bubble is one of the few that can rival America's and it is also deflating spectacularly.

Here is an item from an English language review of the Spanish press about Spain's second largest real estate developer, Martinsa-Fadesa:

El País notes today that the Martinsa real estate company overvalued the worth of its land by up to 19,000%. The paper claims that the company ended 2007 with profits because of these accounting irregularities, and gives as an example some land in Las Palmas worth a million € in their accounts, but valued at 179 million. A plot in A Coruña sold for 1.5 million appeared in the accounts with a value of 84 million.

That, in a nutshell is what this universal crisis in all about: cooked books, hidden debt, assets whose true value is unknown and perhaps unknowable. This has been going on at every level until value itself has become impossible to determine and wealth is frantically looking for someplace safe to hide.

We are now living through a gigantic spasm, perhaps another birth pang, perhaps the final death throes, of what Naomi Klein calls "Disaster Capitalism": the legacy of Milton Friedman.

What was once the proud ship of Marget Thatcher and Ronald Reagan, the SS Milton Friedman, for decades a powerful intellectual movement, is now sinking in a tragic farce of unregulated larceny. Viewed from outer space it must be a barrel of laughs.

When we look at economic news though, it is important to put them immediately into a human perspective. Here is some interesting context:

As jobless numbers reach levels not seen in 25 years, another crisis is unfolding for millions of people who lost their health insurance along with their jobs, joining the ranks of the uninsured. (...) Starla D. Darling, 27, was pregnant when she learned that her insurance coverage was about to end. She rushed to the hospital, took a medication to induce labor and then had an emergency Caesarean section, in the hope that her Blue Cross and Blue Shield plan would pay for the delivery. Wendy R. Carter, 41, who recently lost her job and her health benefits, is struggling to pay $12,942 in bills for a partial hysterectomy at a local hospital. Her daughter, Betsy A. Carter, 19, has pain in her lower right jaw, where a wisdom tooth is growing in. But she has not seen a dentist because she has no health insurance.(...) About 10.3 million Americans were unemployed in November, according to the Bureau of Labor Statistics. The number of unemployed has increased by 2.8 million, or 36 percent, since January of this year, and by 4.3 million, or 71 percent, since January 2001. Most people are covered through the workplace, so when they lose their jobs, they lose their health benefits. On average, for each jobless worker who has lost insurance, at least one child or spouse covered under the same policy has also lost protection, public health experts said.(...) Nearly 4.4 million people are receiving unemployment insurance benefits, an increase of 60 percent in the past year. But more than half of unemployed workers are not receiving help because they do not qualify or have exhausted their benefits. About 1.7 million families receive cash under the main federal-state welfare program, little changed from a year earlier. Welfare serves about 4 of 10 eligible families and fewer than one in four poor children. New York Times

___________

An increasing number of people who retired in recent years, confident they had set aside enough to live on comfortably, are finding themselves strapped. The stock market plunge and the housing downturn have affected many Americans, of course. But retirees have been particularly pinched because their homes and investments are the primary assets they depend on for income. As a result, many of the country's elderly are finding themselves in Nelson's situation, low on money and looking for work. "Suddenly the rug has been pulled out from under them," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. Business Week

_______________

Workers who got three days' notice their factory was shutting its doors voted to occupy the building and said Saturday they won't go home without assurances they'll get severance and vacation pay they say they are owed. (...)In the second day of a sit-in on the factory floor that began Friday, about 200 union workers occupied the building in shifts while union leaders outside criticized a Wall Street bailout they say is leaving laborers behind.(...) Organizers of the action said the company can't pay employees because its creditor, Charlotte, N.C.-based Bank of America, won't let them.(...) Bank of America received $25 billion from the government's financial bailout package. "Across cultures, religions, union and nonunion, we all say this bailout was a shame," said Richard Berg, president of Teamsters Local 743. "If this bailout should go to anything, it should go to the workers of this country." Outside the plant, protesters wore stickers and carried signs that said, "You got bailed out, we got sold out." CBS2-Chicago

So, in the snippet from AFP that opens this post we see that US treasury bonds may constitute a bubble greater than the real estate or the Internet bubbles. We may surmise that a collapse of their value would have consequences far greater than those bubbles bursting have. Among those consequences might be hyperinflation and the subsequent pauperization of all Americans except the very, very rich.

The hardships portrayed in the snippets from the Times and from Business Week would multiply exponentially and the frequency of the actions that CBS2 Chicago writes about would multiply with them in lockstep. What are now isolated incidents could become an ungovernable cauldron in a very short time if the great mass of Americans were instantly pauperized as happened recently in Argentina.

Larissa MacFarquhar has written a "must read" profile of Naomi Klein in the current New Yorker. The following snippet may give an idea where the USA is headed right now:

The only time (Naomi Klein) has ever felt a whiff of utopia was in Buenos Aires, in 2002, when the political system had virtually disintegrated—during the time that she and Lewis were filming “The Take.” “That moment in Argentina was an incredible time because a vacuum opened up,” she says. “They had thrown out four Presidents in two weeks, and they had no idea what to do. Every institution was in crisis. The politicians were hiding in their homes. When they came out, housewives attacked them with brooms. And, walking around Buenos Aires at night, there were meetings on every other street corner. Every plaza where there was a streetlight, people were meeting under it and talking about what to do about the external debt, I swear to God. Groups of one hundred or five hundred people. And organizing buying groceries together because they could get cheaper prices, setting up barters because the currency was worthless. It was the most inspiring thing I’ve ever seen.”

If the 20th century has any lessons to teach us, it is that sort of scenario we see laid out clearly before us leads to massive social unrest and upheaval: if not properly managed it can be the classic yeast culture that every apprentice fascist dreams of.

Probably the left's greatest task in the coming months and years is steering this convulsion toward peace and solidarity and away from the temptations of war and mob violence. DS

In the bowl, hand on the chain

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A reader of this blog, Nicolas Nilsen sent me an interesting video where, a couple of years before it happened, stockbroker-agent-provocateur, Peter Schiff, in Roubini mode, correctly predicted the disaster we are entering into now. The video appears to be a montage of Schiff predicting and other "prestigious" analysts literally laughing in his face.

Let's look a the video:

Wow.

Bang on.... and the best parts are all these jerks laughing at him.

Now Schiff's analysis is that, and I quote his Wikipedia article:

The US consumer in the world, saying that the US consumer thinks he's doing the world a favor by consuming what the rest of the world produces. Schiff is quick to point out that this relationship will come to an end, in his view, much sooner than people imagine, and with negative consequences for the US. Schiff has been quoted as saying: "Consumption is its own reward for Production" -- meaning that without production, the US cannot indefinitely sustain its ongoing consumption. Schiff, and other adherents of Austrian economics, promote savings and production as "the engine of economic growth -- not consumption".

Now up to here I agree totally with Schiff. I would add that in my opinion the United States at this point is a Ponzi scheme of cosmic proportions. Here is how Schiff would fix it:

Schiff has said on numerous occasions that the current economic crisis is not the problem; it is the solution. According to him, the transition from borrowing and spending to saving and producing cannot be accomplished without a severe recession, given the current imbalances of the US economy. But according to him, that transition needs to happen. He also thinks the government is doing no one a favor by trying to "ease the pain" with stimulus packages, bailouts and such. Schiff believes these actions will only make the situation worse and possibly result in hyperinflation if the government continues to "replace legitimate savings with a printing press."

It is when Schiff gets to the remedies that, while I agree that they are logical, I can't believe they will ever work, simply because people like the Americans, precisely because they have been raised, encouraged, nay brainwashed to consume endlessly on credit, are not going to tolerate the puritanical pain implicit in Schiff's solutions. As I have written recently, I also fear that hyperinflation is a real danger and for the same reason I doubt Schiff's remedies will work: the politicians will not be able to stop their printing money to try to keep consumption afloat.

Let's have another look at the figures we saw the other day:

The bailout has cost more than all of these big budget government expenditures - combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

Obviously there is no relation in value here, the bailout is being paid for with funny money. When I look at those figures I am afraid that the dollar is already worthless and I am just waiting to see how long it will be until the world finds this out and will no longer accept them in payment for goods that Americans no longer produce themselves (almost everything).

Where I disagree totally with Schiff and the whole Austrian School is that government is "the problem" or with my admired Paul Krugman that half-assed Keynesian money printing is going to fix it all. We are looking at a situation with all the ingredients necessary for fascism, even if it is dressed up in trappings of democratic government.

In many parts of the world people are going to have another hard look at socialism, but I can't imagine (yet) what it would take for Americans to get there. What progressives are going to have to organize themselves to do in the coming years is to prevent the United States from sliding into a major war.

When I look at the pain in store for Americans even my "inner Lenin" shrivels up and if I could kiss the economy and make it well I would. However... What I think or wish is not going to change anything.

Like a mule in a hailstorm we are just going to have to stand here and take it. DS

Shake your booty! What, no booty left?

"This is by far the worst financial crisis since the Great Depression" Nouriel Roubini

"A total collapse of the US financial system, while not inevitable, is a contingency which should now be planned for." Martin Hutchinson, Prudent Bear

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There is a lot of talk these days about the role of humor in American politics; whether or not a candidate is a suitable butt for jokes, whether or not they can "laugh at themselves" and so on and so on. Whether or not humor is "appropriate".

The American national pastime of navel gazing aside, whoever the next president of the United States is, he should, without delay, get fitted out for an getup like the fellow in the photo is wearing... make up and all. Because that is going to be the role of the next POTUS on the world stage in the foreseeable future.

Losing two wars is something the world can chalk off to youthful folly, people seem ready to forgive and forget unprovoked invasions and the deaths and torture of hundreds of thousands of human beings; but destroying the livelihood of millions of people around the world though ideologically driven, financial frivolity is a little harder to swallow. They are going to resent it.

Whatever the world looks like in 2012, it's going to look as different from today as the world looked after the fall of the Berlin Wall.

If I were the next president of the US, I would try to inspire the people with a ringing speech.

My fellow Americans (pause): This is the time (pause, with meaningful gaze into the middle distance) This is the time (pause) for the American people... (pause) to dig deep into the wellsprings and treasures of our popular culture (long pause) to dig deep into our roots (pause), in order to find the strength and the inspiration to carry us through the difficult days to come.

My fellow Americans, Try this on for size.

(marine band strikes up, POTUS sings in a pleasing baritone):

Once I lived the life

of a millionaire

Spending my money

Oh I didn't care

Taking my friends out

For a mighty good time

Buyin' high priced liquor

Champagne and wine

Oh but just as soon

As my money got low

I couldn't find nobody

And I had no place to go

In my pockets, not one penny

And as for my friends,

Man, I hadn't any

So, if I ever get my hands

On a dollar again

I'm gonna hold on to it

Till that big eagle grins

Cause it's mighty strange,

Without a doubt

Nobody wants you

When you're down and out

"Nobody wants you when you're down and out" - Jimmie Cox

DS

The dollar sinks

"It was sad when the great ship went down"

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Jeffrey Frankel is a professor of economics at the Kennedy School of Government, Harvard. He sees the US dollar being replaced by the euro as the world's dominant currency by 2015. As you can read below, he seems to know what he's talking about.

What does having the worlds' dominant currency really mean? What does it mean to physically produce the money that everybody around the world buys nearly everything with?

It means that when ever the USA owes anybody money they just print some and give it to them. And for years and years America's creditors have accepted that. Can you imagine how much fun it would be if you could do that too? Scribble "twenty dollars" on a piece of paper and walk away with some groceries that you could actually eat?

Can you imagine what it would be like if you had gone through life like that and suddenly had to stop? If you are an American living on dollars, you have and now you will. It's not going to be any fun. DS

Frankel: The euro could surpass the dollar within ten years - VOX
Abstract: In the past, US deficits have been manageable because allies have been willing to pay a financial price to support American global leadership; they correctly have seen it to be in their interests. In the 1960s, Germany was willing to offset the expenses of stationing US troops on bases there so as to save the United States from a balance of payments deficit. The American military has long been charged less to station troops in high-rent Japan than if they had been based at home. Repeatedly the Bank of Japan, among other central banks, has been willing to buy dollars to prevent the US currency from depreciating (late 1960s, early 1970s, late 1980s). In 1991, Saudi Arabia, Kuwait, and a number of other countries were willing to pay for the financial cost of the war against Iraq, thus briefly wiping out the US current account deficit. Unfortunately, since 2001, during the same period that the US twin deficits have re-emerged, America has lost popular sympathy and political support in much of the rest of the world. The hegemon has lost its claim to legitimacy in the eyes of many. In sharp contrast to international attitudes at the dawn of the century, opinion surveys report that the US is now viewed unfavourably in most countries. The next time the US asks other central banks to bail out the dollar, will they be as willing to do so as Europe was in the 1960s, or as Japan was in the late 1980s after the Louvre Agreement? I fear not. The decline in the status of the pound during the course of the first half of the 20th century was part of a larger pattern whereby the United Kingdom lost its economic pre-eminence, colonies, military power, and other trappings of international hegemony. As some wonder whether the United States might now have embarked on a path of “imperial over-reach,” following the British Empire down a road of widening budget deficits and overly ambitious military adventures in the Muslim world, the fate of the pound is perhaps a useful caution. The Suez crisis of 1956 is frequently recalled as the occasion on which Britain was forced under US pressure to abandon its remaining imperial designs. But the importance of a simultaneous run on the pound and President Eisenhower’s decision not to help the beleaguered currency through IMF support unless the British withdrew its troops from Egypt should also be remembered. READ IT ALL

Grace is a slippin' and a slidin'

"Fed easing will not prevent millions of US households from defaulting on their mortgages and will not prevent home prices falling 20% or more given the biggest housing recession in US history; it did not and will not prevent dozens of mortgage lenders and home builders from going bankrupt; it will not prevent a surge in corporate defaults once the economy experiences a hard landing. Monetary policy can lead with pure liquidity runs; but when such liquidity runs are related to the risk of insolvency monetary policy is mostly impotent. And most of the current problems in the real economy and in the financial markets have to do with insolvency, not just illiquidity." Nouriel Roubini

"As the country that benefits most from global economic integration, we have the responsibility of making sure that this new system is sustainable.. The hidden hand of the market will never work without a hidden fist - McDonald's cannot flourish without McDonnell-Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies is called the US Army, Air Force, Navy and Marine Corps....The global system cannot hold together without an activist and generous American foreign and defense policy. Without America on duty, there will be no America Online... " Thomas Friedman, New York Times Magazine, March 28, 1999

"Everything is subject to change. The big decadent forces will give way to the small new-born forces. The small forces will change into big forces because the majority of the people demand this change." Mao Tse-Tung

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The bigger they come the harder they fall. The United States has a systemic problem: America's loss of power is the major story of our era. What is happening, what has happened, what will happen? Don't look at me, your guess is as good as mine.

When a system gets clogged up, all the king's horses and all the kings men have difficulty getting to the root of it. The complexity of the situation is so overwhelming and there is such an accumulation of factors that even with historical perspective it is difficult to get a sure answer. They say that the lead pipes that wealthy people had in their homes brought down the Roman Empire by making the women of the senatorial caste infertile... but even after centuries to think about it, that is just speculation. Was it a meteorite that caused the extinction of dinosaurs? Go figure. Once upon a time there were hundreds of Howard Johnson's restaurants all over the USA, now there are only three left. Sic transit gloria mundi.

Some will call me a prophet of doom, but I consider myself an optimist. America will bounce back. The United States is a great country, filled with hard working and inventive people and you can't keep a great people down for very long. Ten years ago nobody would have ever predicted that Russia would be in as good shape as it is today. That should be some consolation in times to come.

When the USSR went down, most observers read it ideologically, that we in the west had "won". Our merit had cause it all to happen. This was probably a big mistake. Perhaps that collapse did little more than reveal that a huge, powerful, system, one that had industrialized an enormous, backward country and made it a scientific, political and military superpower that had defeated Nazi Germany almost singlehandedly in WWII, could just simply collapse mysteriously. Just up and die. Just like that.

The United States, instead of taking a victory lap, might have been more prudent to murmur then, "there but for the grace of God go I" and gotten busy looking to its own vulnerabilities instead of crowing and preening, because it appears that ol' Grace is seeing somebody else these days. DS

Lawrence Summers: Wake up to the dangers of a deepening crisis - Financial Times
Abstract: Three months ago it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability.(...) Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years. We do not have comparable experiences on which to base predictions about what this will mean for the overall economy, but it is hard to believe declines of anything like this magnitude will not lead to a dramatic slowing in the consumer spending that has driven the economy in recent years. Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt. Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall. READ IT ALL

Poof!

David Seaton's News Links
There is a wonderful saying in Spanish, "eramos pocos y parió la abuela", which translates literally as, "there were only a few of us and grandmother gave birth" and means, "it was the last straw". Obviously the English version gives none of the surreal exasperation of the Spanish original.

This saying comes to my mind constantly when I put the economic news alongside the geopolitical stuff. So many calamities taken all together become a thing to itself, the quantity turns into a quality, something called a "tipping point".

Tipping into what? That is the question. DS

Nouriel Roubini says:
I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized. READ IT ALL

Greenspan redefines "cleaning up"

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To understand where Alan Greenspan is coming from, it's important to know that as a young man he was one of Ayn Rand's most favored disciples and that her magnum opus, "Atlas Shrugged" could be said to be his "bible". Outside of the parameters of human relations affirmed by all major faiths, it is a book whose philosophy Gore Vidal described as “nearly perfect in its immorality.”

To make a long story short, Greenspan's years at the Fed have not been about the economy, which is now beginning to unravel: these years have been about Greenspan, who is now about to make a lot of money writing and speaking. And if what he writes or what he says about current affairs destabilizes that economy... hard cheese (that's British for tough shit). DS

Greenspan: His Fault - Portfolio.com
Abstract: Greenspan’s book will make headlines over the next few weeks, in part because of his surprisingly downbeat assessment of the economy and financial markets. But even though he left the Fed more than a year and a half ago, his recollections aren’t of merely historical interest. The current turmoil on Wall Street is largely a result of policy decisions he made during his final years. By keeping interest rates too low for too long, he encouraged a borrowing-fueled speculative binge, which has now given way to a credit squeeze. By failing to crack down on the mortgage industry, he allowed subprime hucksters to peddle dubious loans, which the financial industry’s math whizzes packaged for investors. Coming on top of his role in creating the internet-stock mania a decade ago, the mistakes Greenspan made—now playing out in home foreclosures and hedge fund collapses—will surely color historians’ views of his long tenure, if not his own account of it.(...) Since leaving the Fed, he has continued to make news, if not always in ways he would like. Within weeks, he started making off-the-record appearances before select audiences: hedge fund managers, investment bankers, and the like. Inevitably, some of his remarks slipped out, causing disruptions in the markets. In February, he said a recession was possible before the end of 2007—a comment that contributed to a 416-point fall in the Dow. In May, he put the chances of a recession at one in three. Two weeks later, he rattled international bourses by saying that a bubble had developed in the Chinese stock market and a “dramatic contraction” was inevitable. When Greenspan was chairman of the Fed, his public statements were famously delphic. While he is entitled to make a living—he reportedly charges $150,000 a speech and received an $8.5 million advance for the book—there is something jarring about his late-life discovery of clear, declaratory English. His predecessor, Paul Volcker, was barely heard from for years after he retired, and Greenspan’s failure to follow that example has perplexed some of his former colleagues.(...) Citing fears (which proved to be misplaced) of Japanese-style deflation spreading to the United States, he kept the federal funds rate at 1 percent until June 2004, by which point the economy had been growing steadily for more than two years. By failing to tighten monetary policy, Greenspan created an apparently limitless supply of cheap credit. After adjusting for inflation, the cost of cash was close to zero. Investment banks, hedge funds, and other financial operators were able to obtain money at minimal cost and use it to finance risky investments. To a lesser extent, so could ordinary Americans. In a feat of levitation almost without precedent, the prices of nearly all speculative assets moved in the same direction: U.S. stocks went up; foreign stocks went up; residential real estate went up; commercial real estate went up; oil went up; gold went up; sugar went up; coffee went up; Treasury bonds went up; junk bonds went up. To make money, all you had to do was suit up, buy something, and sit back and watch it grow.(...) Greenspan has come up with a new argument. “These adverse periods are very painful, but they’re inevitable if we choose to maintain a system in which people are free to take risks,” he said in August. Because of his Randian view of the world, there is no reason to doubt that Greenspan believes what he said, but it raises the question of whether he was ever a suitable choice for Fed chairman, given his understanding of the job. The reason the Fed was set up, in 1913, was to preserve financial stability—to break the historical pattern of ruinous boom-and-bust cycles. Central banks maintain stability by limiting the types of risks people can take, either by raising the cost of borrowed money or by enforcing regulations. If all else fails and panic breaks out, they inject liquidity into the system by acting as a bank of last resort, which is what the Fed and other central banks were forced to do over the summer. Given Greenspan’s inaction during his final years in office, our current crunch was pretty much inevitable. In addition to reducing interest rates to 1 percent, he rejected calls for more vigorous oversight of the mortgage industry. Instead of outlawing such dubious practices as the provision of “2-28” loans—which lure borrowers by offering them cheap rates for two years and then sock them with enormous increases in their monthly payments—the Fed issued vague “guidance” letters that most lenders ignored.(...) Greenspan did get one thing right, though: his retirement date. Were he still at the Fed, he would be responsible for cleaning up the mess he helped create. While his successor, Ben Bernanke, watches anxiously to see who the next casualty of the credit squeeze will be—a Wall Street investment bank? a big hedge fund? a private equity firm?—Greenspan will be busy signing autographs at Borders and Barnes & Noble. If you want to question him about all of this, get there early. The lines will be long.
READ IT ALL

Don't Look down....

David Seaton's News Links

The article that I've clipped from today's BBC News looks like it was written by Nouriel Roubini last summer. To have some idea of where this mess is probably headed, read recent Roubini. But, if instead of just sniffing at it, you prefer to take it intravenously, read this from Prudent Bear.

What notes of good cheer do I have to add to the opinions of these well qualified purveyors of doom? I would only point out discreetly that although since WWII there have been recessions, slow-downs and scares, nothing this bad has ever loomed large under the leadership of someone the entire world considers a hopeless idiot-fool and whose measure is daily taken by every tinpot dictator and autocrat in the world.

What Bush has done and is daily doing in Iraq, combined with the lack of an effective response by America's institutions... Reelecting him, for example... The images of Katrina etc, etc, have caused many to entertain grave doubts about America's health and power: social, military... everything except the economy.

Most of the world's conservatives, horrified by Bush's deflation of America's mojo, invoke the US economy the way someone with a wasting disease might invoke Saint Jude Thaddeus. If the economy tanks too, the feeling of existing in a vacuum for those all over the world who owe their safety and prosperity to holding the American coat may be extreme, and that in turn might set off chains of events, all of them disagreeable and difficult to predict. DS

World stocks tumble on US fears – BBC News
European stocks have joined a global sell-off after concerns about the US economy and mortgage industry hurt markets in Asia and dented Wall Street. The UK's FTSE tumbled 110.4 points, or 1.8%, to 6,050.8. Earlier, Japan's Nikkei index closed 2.9% lower, and New York's Dow Jones index ended down 2%. Indexes in Hong Kong, Malaysia, India and Australia fell more than 2%. The sell-off comes as stocks were starting to recover from a sharp slump that rocked markets late last month. Analysts said that market volatility was likely to continue, and any recovery would be short-lived. Although analysts said Asia's leading economies remained fundamentally strong, markets across the region are particularly sensitive to signs of a possible economic slowdown in the US. The US economy, by far the world's biggest, is a key export market for Asian companies. This latest round of selling has been sparked by concerns over the US sub-prime mortgage market. Sub-prime lenders target consumers with poor credit histories and they have been hit by an increase in defaults and bad loans. Figures have shown that late mortgage payments and home repossessions in the US had hit their highest level since records began. New Century, the second-biggest sub-prime mortgage lender in the US, is seen by many observers to be close to bankruptcy and the fear among investors is that this will ripple out into more stable parts of the economy. "If the US sub-prime mortgage problems get worse, it could begin to hurt US consumers, and that would be very hurtful for exporters," said Kim Yung-min, a fund manager at SH Asset Management in Seoul. "This month could be very bad," he added. Wall Street's slide on Tuesday also gained momentum from a US Commerce Department report that showed retail sales rose at a lower-than-expected rate of 0.1% in February, suggesting consumer spending could be slowing down.

Krugman on the coming recession - NYT

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The bursting of the housing bubble has an objective effect on the economy, of course, but I'm more interested in the subjective effects of the loss of value of the only thing most Americans possess that is of any real value. What is the subjective cost of the loss of the "wealth effect": the idea that one is rich because of the sharp rise in the paper value of one's dwelling? As the disaster in the Middle East gathers speed and steam and its complex knock-on effects make themselves evident, we could be looking at the sinister synergies of a massive "feel bad" movement. If a war went sour with everybody feeling rich it would be different from losing a war when people are feeling recently impoverished... There is a good chance that we'll soon be looking at a "perfect storm" of pessimism. DS

Abstract: The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession. If that sounds ominous, it should: the bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year. Before I explain what the bond market is telling us, let’s talk about why the economy may be at a turning point. Between mid-2003 and mid-2006, economic growth in the United States was fueled mainly by a huge housing boom... That housing boom has now gone bust. But the optimists and pessimists disagree both about how bad the bust will get and about how much damage the housing slump will do to the economy... Most, though not all, of the ... economic numbers that came out this week were ... substantially weaker than expected. Pessimists feel vindicated by the downbeat data. Nouriel Roubini..., who has been forecasting a housing-led recession for some time, ... predicts zero growth for the current quarter. Economists at Deutsche Bank say the same thing.(...) most forecasters are still telling us not to worry. So whom should you listen to? And how can you avoid believing what you want to believe? Maybe the best answer is to look at what the financial markets say. Not the stock market, which is a notoriously bad indicator of the economy’s direction, but the bond market. (Paul Samuelson, the Nobel Prize-winning ... economist, famously quipped that the stock market had predicted nine of the last five recessions). Since last summer, when the housing bust became unmistakable, interest rates on long-term bonds have fallen sharply. They’re now yielding much less than short-term bonds. The fact that investors are willing to buy those long-term bonds anyway tells us that these investors expect interest rates to fall. And that will happen only if the economy weakens, forcing the Federal Reserve to cut rates. So bond buyers are, in effect, betting on a future economic slowdown. How serious a slump is the bond market predicting? Pretty serious. Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. And since even a slowdown that doesn’t formally qualify as a recession can lead to a sharp rise in unemployment, the odds are very good — maybe 2 to 1 — that 2007 will be a very tough year. Luckily, we’ve got good leadership for the coming economic storm: the White House is occupied by a man who’s ideologically flexible, listens to a wide variety of views, and understands that policy has to be based on careful analysis, not gut instincts. Oh, wait. READ IT ALL (bootleg)

Housing Free Fall Turning into Meltdown...2007 Recession Ahead - Nouriel Roubini

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If you woke up this morning whistling and singing; with the world at your feet. If you just can't really seem to shake the feeling that the sun shines out of a certain part of your anatomy.... My friend, what you need is a dose of good Doctor Roubini's "Recession of 2007 - Elixir" to reorganize your organism. Try it and see. DS

Abstract: Now the housing recession is spreading to non residential construction. Until Q2 non residential construction investment was strong but it was only half the size of housing; but by now it is clear that non residential construction is also completely stalling; the figures for total construction spending for September show a sharp fall in residential construction and a stall of non residential construction. The reason for this contagion from residential to non residential construction is obvious: since we have now entire "ghost towns" in the West (a term used by SF Fed Prez Janet Yellen to describe many housing developments that are empty in the West) no one is going to build stores, shopping malls, shopping centers/strips, offices near these "ghost towns". Indeed, as reported in a recent lead article of the WSJ, a McGraw Hill Construction study forecasted sharp drops in non-residential construction in 2007 as lower housing leads to lower non residential construction. Indeed, the October figures for construction employment already show a fall of 26K, a fall that will accelerate in the next few months as housing construction now under completion is completed and then new starts will become sharply lower. So, the housing recession is now becoming a construction recession; and the construction recession is now turning into a clear auto and manufacturing recession; and the manufacturing recession will soon turn into a retail recession as squeezed households - facing falling home prices and rising mortgage servicing costs - sharply contract their rate of consumption. As I have predicted since July a recession in 2007 (as early as Q1 or at the latest by Q2) is now highly likely to occur. Expect the Fed to slash the Fed Funds rate as early as January and expect this Fed easing to fail to prevent the 2007 recession as the glut homes, autos, consumer durables will make the demand for these totally insensitive to changes in interest rates. The Fed easing in 2001 failed to prevent the 2001 recession and the Fed easing in 2007 will also fail to prevent the 2007 recession. Also expect this sucker rally in equity to continue for a while into the end of 2006 as expectations of a Fed easing will lead to the delusional hope that such easing will prevent the 2007 recession. But once the signals of a recession are clear to all by the beginning of 2007 expect, as in previous US recessions, for the stock market to experience a sharp contraction; as detailed in my research work, in the typical US recession the S&P500 has fallen by an average 28%. READ IT ALL