Forget everyone who's been talking about when the recovery'll start; we're just about to take the big dive....
Wonks everywhere have been panicking about the Baltic Dry Index, which represents the amount of good being shipped in containers over the seas. As this article mentions, global orders are down precipitously (Volvo's YoY truck orders are down 99.6% from 41,970 to 155!). With no-one buying goods, who needs employees? Retail's gonna get creamed; demand for short-term commercial loans will skyrocket to cover the fact that no-one's buying, and demand for retail loans will plummet. Visa(V) has already taken it in the proverbial shorts (pun intended), but all those banks who've been using the projected proceeds from usurious lending rates will find themselves in deem kim-chee.
Pension funds are also in big trouble:1,2,3,4,5,6, and CalPERS, for locals.
Like I said, hang onto your hats, 'cuz it's gonna be scary.
Friday, October 31, 2008
Monday, October 27, 2008
Exploding Money Supply
Ben Bernanke is known, among other appellations, as "Helicopter Ben", because he believes that the Federal Reserve Bank caused the Great Depression by reacting to the financial crisis of the time by killing the nation's money supply. His response, when interviewed years ago, as to what he'd do in a similar situation was to drop money from helicopters if necessary to preserve money/credit liquidity. As you can see from the chart below, this's pretty much exactly what he's doing:
All the folks who claim it's the Great Depression all over again are wrong: last time the spike was in the opposite direction. Here's the broader picture:
As you can see from the picture, what we're currently doing is exacerbating the symptoms of the current problem, as opposed to what they did last time, which was to look at the symptoms and say "Whoa -- we've gotta put a break on this!"
Both, though are approaches to dealing with the primary symptom of the real problem: the overexpansion of money supply through loosening credit standards. There are a lot of dollars in circulation that only exist for real if you pretend their corresponding IOU's don't exist, just like the situation that occurred last century. In both cases, the result is a vastly increased number of dollars representing the same actual amount of national wealth. Thus each dollar represents much less wealth than it used to. But when credit increases like mad, people don't tend to keep their dollars -- they offload their dollars fast, converting them into assets instead. This is relatively OK if the assets themselves were paid for with cash, but when those assets were paid for with money that was itself purchased, that IOU sits out there demanding more cash to repay it. If the IOU is small, then it can be paid down and there's no big deal. If it's big, though, then when a hiccup hits the economy the demand for money suddenly outstrips the demand for assets, since the banks won't let us pay off our credit-cards by mailing them fancy sneakers. All the IOUs come home to roost and the money that people thought they had starts going "poof" -- suddenly cold hard cash looks much nicer than a shiny IPod and everyone starts taking money out of circulation if they can, or else they do the whole matter-antimatter thing and pay down their debts, destroying the illusion of wealth that wasn't really their in the first place (and in a real panic, selling the Lexus for $10k). This's the exact opposite of the "wheelbarrow of money" scenario of Weimar Germany and Zimbabwe, but just as bad.
Bernanke's attempting to snatch stagnation from the jaws of implosion by running the printing presses hard; maybe it'll work.
But in the long run, all those dollars will be coming out of our hides in the form of higher interest rates (to halt hyperinflation), vastly higher taxes (if we figure out how to borrow the money instead of print it), or some combination of the two. Regardless of how that plays out, we're dodging Scylla by stearing straight at Charibdis, so hang onto your hats, 'cuz the next decade's gonna get rough.
All the folks who claim it's the Great Depression all over again are wrong: last time the spike was in the opposite direction. Here's the broader picture:
As you can see from the picture, what we're currently doing is exacerbating the symptoms of the current problem, as opposed to what they did last time, which was to look at the symptoms and say "Whoa -- we've gotta put a break on this!"Both, though are approaches to dealing with the primary symptom of the real problem: the overexpansion of money supply through loosening credit standards. There are a lot of dollars in circulation that only exist for real if you pretend their corresponding IOU's don't exist, just like the situation that occurred last century. In both cases, the result is a vastly increased number of dollars representing the same actual amount of national wealth. Thus each dollar represents much less wealth than it used to. But when credit increases like mad, people don't tend to keep their dollars -- they offload their dollars fast, converting them into assets instead. This is relatively OK if the assets themselves were paid for with cash, but when those assets were paid for with money that was itself purchased, that IOU sits out there demanding more cash to repay it. If the IOU is small, then it can be paid down and there's no big deal. If it's big, though, then when a hiccup hits the economy the demand for money suddenly outstrips the demand for assets, since the banks won't let us pay off our credit-cards by mailing them fancy sneakers. All the IOUs come home to roost and the money that people thought they had starts going "poof" -- suddenly cold hard cash looks much nicer than a shiny IPod and everyone starts taking money out of circulation if they can, or else they do the whole matter-antimatter thing and pay down their debts, destroying the illusion of wealth that wasn't really their in the first place (and in a real panic, selling the Lexus for $10k). This's the exact opposite of the "wheelbarrow of money" scenario of Weimar Germany and Zimbabwe, but just as bad.
Bernanke's attempting to snatch stagnation from the jaws of implosion by running the printing presses hard; maybe it'll work.
But in the long run, all those dollars will be coming out of our hides in the form of higher interest rates (to halt hyperinflation), vastly higher taxes (if we figure out how to borrow the money instead of print it), or some combination of the two. Regardless of how that plays out, we're dodging Scylla by stearing straight at Charibdis, so hang onto your hats, 'cuz the next decade's gonna get rough.
Tuesday, October 14, 2008
Nuff Said: Sinfest on Paulson's New Bailout Plan
Paulson:
(UPDATE:
According to the Washington Post, the deal is not voluntary.
Federal regulators said they did expect some banks to volunteer, though none stepped forward yesterday. But they added that they would not rely on volunteers. Treasury will set standards for deciding which banks can be helped, and the regulatory agencies will triage the banks they oversee: The institutions faring best and worst will not receive investments. The institutions in the middle, whose fortunes could be improved by putting a little more money in the bank, will be pushed to accept the money from the government.)
Clearly someone gets it.
Thursday, October 02, 2008
Nuff Said: That Giant Sucking Sound
If I weren't already incensed as to the "good judgement" McCain's showing by nominating Palin (is he tring to force me to vote for Obama?!), this would certainly do it. The whole "it's a crisis, let's elect a king" reflex is never good, but the "we have to act yesterday" drums keep beating....
For half that amount we could simply buy all the foreclosed houses outright and transfer them to HUD (not that I think the Feds have any business having a HUD, but it's better than making Paulson the most powerful man in the world).
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