The situation in the credit markets continues to worsen as a sudden attack of risk aversion rapidly dries up liquidity. And this is before the resetting of adjustable rate mortgages (ARMs) begins in earnest - to the tune of $50 billion - in October. Watch this space.
On the Canadian energy scene, Shell pumps $27 billion into the oil sands, even as oil patch profitability falls. Abu Dhabi wants to invest in Canadian power plants, and there are plans for BC to host an LNG terminal. Wind power grows rapidly in Ontario and Quebec, making a few enemies along the way. In BC they ask: should public transit be free?
On the climate front, water is the issue - too little and too much. Finally, in the tug-of-war between efficiency and resilience, efficiency has the upper hand, but what price will we pay for allowing our life support system to become brittle?
You may remember that our definition of household cash is as broad as can be. We include all household "banking products", per se, but also include all household holdings of bonds, inclusive of Treasuries, Agencies, corporates, muni's and mortgage backed paper. Implicitly, we are assuming bond holdings could be converted to cash at a moments notice. So what follows is simply total household cash less total household liabilities over the last six decades.
For all of you folks that don't read these round-ups, you're missing out. Like Leanan's drumbeats, these are excellent "one-stop shopping" for a variety of information put together by Stoneleigh.
The Round-Up aims to integrate energy, climate and finance, and not just from a Canadian perspective.
I've been focusing quite a lot of attention on the developing credit crunch recently, because fear is spreading the contagion is so rapidly, even though the actual losses so far are only the tip of the iceberg. Things should really get interesting once the bulk of the ARMs begin to reset in October. Credit expansions proceed until the debt that creates them can no longer be supported, whereupon credit deflation follows. The consequences of this will inevitably be very serious, and global in their reach.
Households: Net Financial Investment and Sum of Liabilities Increase and Corp. Equity Sales as percent of disposable personal income
Kasriel says, in reference to chart above
"I have combined households’ net increases in liabilities and their net sales of corporate equities, scaling this sum against disposable personal income. As households began running deficits in 1999, their borrowing and sales of assets – corporate equities – increased in order to fund their deficits. In 2006, households’ combined borrowing and corporate equities sales reached a record high 17.0% of disposable personal income."
He says on his last page
"To repeat, if households are spending more than they are earning, they must fund their deficit either through borrowing and/or asset sales, neither of which is a wealth effect. To deny that MEW (mortgage equity withdrawal) has played a role in funding household spending when households have been running deficits flies in the face of logic and data. Chairman Bernanke is whistling past the graveyard if he thinks that the housing recession is not going to negatively affect consumer spending via declining MEW."
The recent drop in the US GDP (blue line) shows strong coincidence with Kasriel's increased liabilities/equity sales and decreased net financial investment in the first chart.
If this true measure of GDP (blue line) has been negative (ie recession) since 2006 and households have been running deficits for seven years, since 1999, does this mean that the US consumer spending will show, at best, no growth for the next seven years?
As consumer spending is (was?) about 70% of the US GDP, does this mean that the US could be in a recession for another seven years?
One effect of an extended recession would be that US demand for oil should drop.
Can I first suggest that you post replies such as this either at Stoneleigh's site, or maybe preferably at both? There are more reactions to her work here than at TOD:Canada, and that is simply strange, no matter how you look at it.
I see a lot of appreciative comments for the Round-Up here, in the Drumbeat, but I think it's real obvious that that kind of effort deserves reactions right where it's posted. There is of course a sitemeter that provides info on traffic, but if that remains anonymous, it's not really a booster, I would guess.
Just thought I'd point that out again, for everyone who reads all those articles over there. There is a critical mass somehow that is required to start a true conversation, and Stoneleigh deserves for that to happen, and more. I think.
As for your post: I didn't know you are following financial news, just seen your excellent oil posts so far.
Your question:
does this mean that the US consumer spending will show, at best, no growth for the next seven years?
.... doesn't go far enough yet, I think. All reported growth in the US economy since 1998 is most probably virtual. The first graph you post confirms exactly that. It shows an ever deeper level of debt. And whether it's federal, or personal, or something else, the US has accumulated a huge amount of debt since '98. Hence, any GDP number is bogus. None of us get richer by borrowing.
US GDP growth has been negative for years, and inflation has been way higher than official numbers. Housing prices have more than doubled, while the roofs have started leaking, and the paint is peeling. Getting paid just to live in a home. Yeah, feels good, right?
It's what Joe Bageant aptly calls: living in the hologram.
There has been no growth in the US economy for a long time. But it's like you when you lose your income, and have a neighbor you can go to every day for another$100. You can spend every night. but does anything grow, except for your debt? So does your neighbor give you the $100 every day beacuse he's stupid, or did you sign a paper that says he owns more and more of your property?
Stoneleigh thinks there is an unequaled economic disaster coming our way, of the kind that will make 1929 look like a 5-year-old girl's birthday party in full sunshine, and I think she's right. Housing prices have doubled in the US in 10 years, but that's nothing: Forget subprime.
The amount of leveraged credit, hedge funds, CDO's, has gone up 10-fold. And none of it is real. We are fast on our way to find out what IS real. Misery is. Debt is.
PS: the graphs Stoneleigh uses come from the ContraryInvestor, unfortunately a pay site, with some things posted elsewhere. Their strength is twofold: first, they are graphically better than just about anything I've seen, and second, they are unique in that they go back 50-60 years, which makes for great and very convincing trendlines. Just look at the first one, Household Mortgage Debt since 1947, and then tell me you think this time it's all different.
Meanwhile, nothing but appreciation for you from me. BTB, I had to look twice at your second graph, but it's true: it states "GDP, adjusted for CPI+lies". Priceless.
Personally I would be very surprised if consumer spending showed any growth for a very long time because I think we're in for a rerun of the Great Depression (at the very least). We've just lived through the largest credit expansion in history and should now IMO see the largest credit deflation (ie Enron on a very large scale).
I'm not saying that a recession isn't coming or that the housing market won't do some economic damage -- but GDP is partly a measure of what you cannot do for yourself. GDP is also partly a measure of waste and high profit margins. The internet and cell phones have probably saved me several percent of income per year of wasted money (and time). This effect multiplied over millions of consumers may mean that GDP could be "flat" while "consumption" rises.
People are providing more service for themselves, finding the correct products more often, and finding lower margins products due to the internet and cell phones. Economic efficiency could increase and neither GDP nor productivity measures would capture it.
The malaise enveloping global markets is becoming increasingly indiscriminate in choosing its victims.
At the start of July, Tunisia hired Daiwa Securities SMBC Co. and Nikko Citigroup Ltd. to help its central bank sell yen- denominated bonds. By the time the fund raising finished this week, Tunisia's borrowing costs had risen by almost a quarter of a percentage point.
So the taxpayers of an African nation suffer because Joe Blow in Detroit can't pay his mortgage
The rest of the article provides a quick summary of what's happening around the world, much of which you've already included in your excellent round-up. Contagion obviously hasn't been contained and has become global.
Triumvirate of collapse - Economy, Ecosystem, Energy
So the taxpayers of an African nation suffer because Joe Blow in Detroit can't pay his mortgage.
Not strictly true. The consumer is going to get blamed in this but the real bad guys are the bankers who created a debt based monetary system and then ran it into the ground. They are the ones that from 1913 to 2007 destroyed 95% of the dollar's purchasing power (according to the Federal Reserve itself, no less). These bankers are the ones that found ways to leverage even the already leveraged debt into a derivatives mess that is, each year, worth more than 11 times the total global GDP.
And if you want to spread the blame, there are those nations who willingly signed on to the US imperial inflation tax scheme and have aided and abetted that scheme (as opposed to those nations forced into the scheme essentially at gunpoint).
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett Into the Grey Zone
Greyzone, on that line of thought, take a look at some of the roots. As you said, the Creature from Jekyll Island (aka Da Fed) is in lead dog position.
One of the world’s top financial strategists predicted that today’s largely unregulated financial markets are going to come to an abrupt end. That self-regulation is no more possible with bankers seeking billions in bonuses than with teenagers seeking sex in the back seat of cars.
He predicted that America would react with swift vengeance and draconian regulations when they woke up and realized their past savings and future dreams have been bet and lost by the boys on Wall Street.
Here in 2007, the bets have been made and the losses are coming. America has yet to wake up.
Our collective spree started with the internet bubble and when it burst our expectations didn't. We got into the home equity piggy bank next, fraudsters of various stripes loved it, and now we have the subprime meltdown.
We, as a society, are on a truly silly consumption binge, much like crack heads who just can't put down the pipe. I wish for a soft landing but I fear the worst ...
The downturn in housing is really getting a foothold, the era of really low interest mortgages allowed the cost of housing to skyrocket. When interest rates are low, building materials and everything related to new homes fills the void left by low rates, in the last few years home prices went up by historic proportions. Home equity loans helped power the U.S. economy for the first years of the new century, now the bill comes due.
Turbulence in the credit markets has already claimed several casualties - from highly leveraged hedge funds to mortgage providers whose lenders have cut them off.
But the fallout could get worse. Some experts say the debt crunch could squeeze underperforming companies that have, until now, been able to finance their way out of trouble - and trigger a wave of corporate bankruptcies.
Landry's Restaurants looks like its fixing to declare chapter 11. Their restaurants have pretty good business, but over the last 5 years they bought way too many local restaurants and small chains. Now their year-end financial statements are late, because of a stock backdating scandal, and their bondholders have filed to call in their bonds. Landry's is "looking for financing" and just filed an injunction to prevent the bond call-in, which a judge granted.
There's another sign too. Landry's bought an old motel on the Seawall in Galveston, shut down the motel and tore it down. Now the same property is back on the market as unimproved property.
All this looks to me like bad management and financing that's caving in. The credit crunch is only partly responsible, but the cheap easy credit let them expand too fast without any controls, and now the chickens are walking home to the roost.
And what will 'they' do. How to inject more paper money? Historically this is the response. But how do you get it into the hands of the people who will spend it? Rapidly becoming poor(er) Americans are the ones who spend it, how do you give money to them? I don't see personal debt increasing to keep the party going. So what? Tax rebates for home loans? Energy tax credits? They will do something, just what will it be?
Don't forget the unsold inventory of new homes. Let's say the 580 thousand or so unsold new homes have lost an average value of 50k, that is 290 billion dollars off the balance sheets of the building companies, the numbers are huge. Plus the interest alligator that keeps knawing away at this unsold inventory must factored in.
By my way of thinking we have a huge housing surplus in the US, way above and beyond that present unsold inventory.
As gasoline prices go up, people are going to have to abandon the suburbs and relocate closer to jobs or mass transit, shopping, schools, etc. As the incomes of the Formerly Well Off continue to lose pace with inflation in general and exploding energy and food prices in particular, people are going to have to make more drastic lifestyle changes. The elderly are going to have to move in with their children (or vise versa), kids are going to have to delay leaving the nest longer, and many households will expand to include assorted other relatives, friends, or paying lodgers. You'll see a lot more subdividing of houses to create rental units; that rental income will make the difference for a lot of people between keeping and losing their homes.
The bottom line is that America is heading to a much lower level of square feet per person as far as housing is concerned. Lower s.f/person will be less expensive to heat, and thus will be necessary for that reason alone. We are going to have to decline and become a poorer country even under the best possible scenario, there just isn't any other way around it.
What this means is that, with just a little remodeling, we already have about all of the housing that we need, where we need it, with a substantial surplus left over in the low-density suburbubs (where we do not need it). Thus, we hardly need to be building any new houses at all, for a long time to come. We might just as well be taking all that money being spent on new housing, dig a hole, throw it in, and set it on fire, for as much good as it will do us in transitioning to where we need to go.
WNC,
I take it you do not recommend housing stocks? The depth of the mortgage crisis is yet to unfold, it is not just the drop in actual housing value but the leverage that goes along with it. You have to wonder about the loss to pension funds and the like that are tied to the mortgage market.
I am a bit of this trend in action - I was doing fine with my $50/mo gas + electric bill in my roundly insulated apartment, but my mother was not enjoying life in her big, old farm house.
She thinks the farm is worth $150k where it sits, but I'm finding many like it for half that within a few miles of town, and that is before any sort of correction really hits. My conundrum at the moment is how to slip some solar and a water furnace into the place without her noticing ...
You don't have to increase the supply of paper money; what you have to do is to boost people's incomes, which in turn can boost bank accounts.
There are two ways to stimulate the macroeconomy: fiscal policy and monetary policy, and these two policies work together. Here is what happens: the U.S. Federal government runs humongous deficits--i.e. the government pays out much more than it takes in through taxation. The government writes an I.O.U. (government bond or treasury bill or note) to pay the difference. The Federal Reserve System, through expansionary monetary policy makes it possible for the government to finance its deficits and also assures that liquidity is present throughout the financial system so that banks and other financial organizations can make loans.
The Fed will not permit a debt deflation, such as happened after 1929. The Fed will use Open Market Operations to pump up the supply of credit in the economy, and if all else fails the Fed can lend unlimited amounts of funds to whoever it decides to lend to. (Normally the Fed lends only to banks and to the U.S. government, but it has broad authority to do whatever is needed to avoid a financial crisis.)
In tough times the Fed is faced with a tough choice: Expand the money supply rapidly and thereby accept increasing inflation--or clamp down on inflation with restrictive monetary policy. In my opinion, the bias against deflation is so strong at the Fed that increased inflation is almost certain in the years immediately to come.
As oil goes up past eighty dollars a barrel and eventually over one hundred dollars, there will be mighty strong inflationary pressures in the economy. The Fed will have a choice:
1. Choke off the inflation and accept a severe recession (for which the Fed would be blamed) or
2. Ratify the inflation and accept abrupt and severe increases in inflation to mitigate deflationary pressures and prevent inflation.
Probable result: Something like the stagflation of the seventies and early eighties--but much worse.
Don, it sounds as though you are saying that the most likely course will be for the Fed to lower interest rates (and thereby create conditions for the next bubble). Given that the US economy doesn't exist in a vacuum -- where would the money come from? How much more money will Asia lend us?
My gut tells me that you are exactly right about rampaging inflation and wage stagnation (I've already topped out as I suspect have a lot of other Boomers). But as we stop spending on discretionary items, a whole raft of jobs are going to evaporate... a downward spiral for the US economy.
The Fed (in cooperation with the banking system and the borrowing public) can create new bank reserves (and hence new loans and new money) WITHOUT LIMIT. Much attention is given to short-term interest rates, but these are only the tail of the dog of monetary policy, which is primarily carried out through daily Open Market Operations (OMO) by the Fed. See any economics textbook for how this works, how the Fed creates money out of thin air.
What about the falling dollar against foreign currencies? This is probably a Very Good Thing (VGT) because we run big trade deficits. A cheaper dollar means that our exports become cheaper and imports become more expensive. Thus a falling dollar will eventually tend to cure our trade deficit. Against some currencies, the dollar should fall a great deal, against others not so much. Unfortunately, the Chinese won't let the dollar fall much against the yuan; the Chinese don't want their dollars to depreciate because they hold so many of them.
The U.S. is a huge debtor country. Debtors win when inflation unexpectedly increases. Double digit inflation is even more effective than mild inflation, and if you want to get rid of all those old burdensome debts that are holding down consumers and corporations, why then the way is clear: Just let the hyperinflation roar.
I have stated earlier on TOD that I expect the dollar to one day again be worth exactly the same as a Mexican peso. The Fed will not give in to inflation without a struggle, but I think Peak Oil must necessarily bring much greater inflation to the U.S.--combined with slow or negative economic growth. In other words, we may have the worst of both worlds--a depression with double-digit unemployment combined with escalating double-digit inflation.
Fasten your seat belts, economic blind curves ahead.
"Unfortunately, the Chinese won't let the dollar fall much against the yuan; the Chinese don't want their dollars to depreciate because they hold so many of them."
I get the strong idea the Chinese won't hold those dollars. My best guess is that they'll find some country that will take them in exchange for their oil rights.
I don't think they are any different from me. When the music stops and TSHTF, I wanna be the one sitting on the oil.
With oil, I can make anything.
With dollars, maybe burn them to heat the house, or possibly use them for insulation... not much else I can really think to do with a lot of scraps of paper. Or worse yet, I may get stuck with just a number.
A cheaper dollar means that our exports become cheaper and imports become more expensive. Thus a falling dollar will eventually tend to cure our trade deficit.
How about the Weimar Republic, where the average man and woman was destroyed financially? All that your comment shows, Don, is how Uncle Sam intends to get out of paying his debts honestly. It doesn't do squat to keep the economy afloat because only the consumer can do that and the government will not, absolutely will not, bail out the consumer. Why? Because the consumer owes the banks, who are the ones that control Uncle Sam's "get out of jail free" card.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett Into the Grey Zone
And that's my big concern. The US government will no doubt decide at some point to inflate its way out of debt. This isn't an option for Joe Six -- particularly if his wages are flat or (worse) he is out of work.
Do we really know that the average person was wiped out by Weimar Republic hyperinflation?
Hyperinflation today would wipe out the debts of anyone who owes debts at fixed interest rates or at variable rates that have ceilings. So hyperinflation today would pay off tens of millions of mortgages and money owed on new cars.
We can't boost the economy because we are past the point of declining marginal returns and into the world of declining *absolute* returns. The measurements aren't there - because these are typically environmental externalities or things like increasing health expenses (which show as a net *gain* as more people get sick).
A new Round-Up has been posted at TOD:Canada.
The situation in the credit markets continues to worsen as a sudden attack of risk aversion rapidly dries up liquidity. And this is before the resetting of adjustable rate mortgages (ARMs) begins in earnest - to the tune of $50 billion - in October. Watch this space.
On the Canadian energy scene, Shell pumps $27 billion into the oil sands, even as oil patch profitability falls. Abu Dhabi wants to invest in Canadian power plants, and there are plans for BC to host an LNG terminal. Wind power grows rapidly in Ontario and Quebec, making a few enemies along the way. In BC they ask: should public transit be free?
On the climate front, water is the issue - too little and too much. Finally, in the tug-of-war between efficiency and resilience, efficiency has the upper hand, but what price will we pay for allowing our life support system to become brittle?
For all of you folks that don't read these round-ups, you're missing out. Like Leanan's drumbeats, these are excellent "one-stop shopping" for a variety of information put together by Stoneleigh.
Thanks Substrate :)
The Round-Up aims to integrate energy, climate and finance, and not just from a Canadian perspective.
I've been focusing quite a lot of attention on the developing credit crunch recently, because fear is spreading the contagion is so rapidly, even though the actual losses so far are only the tip of the iceberg. Things should really get interesting once the bulk of the ARMs begin to reset in October. Credit expansions proceed until the debt that creates them can no longer be supported, whereupon credit deflation follows. The consequences of this will inevitably be very serious, and global in their reach.
You do a great job Stoneleigh. I visit them each time you post. I forward your link to my friends also.
John
Thanks for spreading the word John - much appreciated.
Thanks, Stoneleigh
Your chart on Household Cash Less Liabilities made me think more about the household.
The chart below shows the precarious state of the US consumer from Paul Kasriel, Northern Trust,
http://web-xp2a-pws.ntrs.com/popups/popup.html?http://web-xp2a-pws.ntrs....
Households: Net Financial Investment and Sum of Liabilities Increase and Corp. Equity Sales as percent of disposable personal income
Kasriel says, in reference to chart above
"I have combined households’ net increases in liabilities and their net sales of corporate equities, scaling this sum against disposable personal income. As households began running deficits in 1999, their borrowing and sales of assets – corporate equities – increased in order to fund their deficits. In 2006, households’ combined borrowing and corporate equities sales reached a record high 17.0% of disposable personal income."
He says on his last page
"To repeat, if households are spending more than they are earning, they must fund their deficit either through borrowing and/or asset sales, neither of which is a wealth effect. To deny that MEW (mortgage equity withdrawal) has played a role in funding household spending when households have been running deficits flies in the face of logic and data. Chairman Bernanke is whistling past the graveyard if he thinks that the housing recession is not going to negatively affect consumer spending via declining MEW."
This chart above shows US real GDP in the blue line, (corrected for CPI+lies) from http://www.nowandfutures.com/forecast.html
The recent drop in the US GDP (blue line) shows strong coincidence with Kasriel's increased liabilities/equity sales and decreased net financial investment in the first chart.
In the US, consumer spending accounts for about 70% of the GDP.
http://wiadomosci.onet.pl/1579466,10,1,1,,item.html
If this true measure of GDP (blue line) has been negative (ie recession) since 2006 and households have been running deficits for seven years, since 1999, does this mean that the US consumer spending will show, at best, no growth for the next seven years?
As consumer spending is (was?) about 70% of the US GDP, does this mean that the US could be in a recession for another seven years?
One effect of an extended recession would be that US demand for oil should drop.
Ace,
Can I first suggest that you post replies such as this either at Stoneleigh's site, or maybe preferably at both? There are more reactions to her work here than at TOD:Canada, and that is simply strange, no matter how you look at it.
I see a lot of appreciative comments for the Round-Up here, in the Drumbeat, but I think it's real obvious that that kind of effort deserves reactions right where it's posted. There is of course a sitemeter that provides info on traffic, but if that remains anonymous, it's not really a booster, I would guess.
Just thought I'd point that out again, for everyone who reads all those articles over there. There is a critical mass somehow that is required to start a true conversation, and Stoneleigh deserves for that to happen, and more. I think.
As for your post: I didn't know you are following financial news, just seen your excellent oil posts so far.
Your question:
.... doesn't go far enough yet, I think. All reported growth in the US economy since 1998 is most probably virtual. The first graph you post confirms exactly that. It shows an ever deeper level of debt. And whether it's federal, or personal, or something else, the US has accumulated a huge amount of debt since '98. Hence, any GDP number is bogus. None of us get richer by borrowing.
US GDP growth has been negative for years, and inflation has been way higher than official numbers. Housing prices have more than doubled, while the roofs have started leaking, and the paint is peeling. Getting paid just to live in a home. Yeah, feels good, right?
It's what Joe Bageant aptly calls: living in the hologram.
There has been no growth in the US economy for a long time. But it's like you when you lose your income, and have a neighbor you can go to every day for another$100. You can spend every night. but does anything grow, except for your debt? So does your neighbor give you the $100 every day beacuse he's stupid, or did you sign a paper that says he owns more and more of your property?
Stoneleigh thinks there is an unequaled economic disaster coming our way, of the kind that will make 1929 look like a 5-year-old girl's birthday party in full sunshine, and I think she's right. Housing prices have doubled in the US in 10 years, but that's nothing: Forget subprime.
The amount of leveraged credit, hedge funds, CDO's, has gone up 10-fold. And none of it is real. We are fast on our way to find out what IS real. Misery is. Debt is.
PS: the graphs Stoneleigh uses come from the ContraryInvestor, unfortunately a pay site, with some things posted elsewhere. Their strength is twofold: first, they are graphically better than just about anything I've seen, and second, they are unique in that they go back 50-60 years, which makes for great and very convincing trendlines. Just look at the first one, Household Mortgage Debt since 1947, and then tell me you think this time it's all different.
Meanwhile, nothing but appreciation for you from me. BTB, I had to look twice at your second graph, but it's true: it states "GDP, adjusted for CPI+lies". Priceless.
Thanks Ace - really interesting.
Personally I would be very surprised if consumer spending showed any growth for a very long time because I think we're in for a rerun of the Great Depression (at the very least). We've just lived through the largest credit expansion in history and should now IMO see the largest credit deflation (ie Enron on a very large scale).
I'm not saying that a recession isn't coming or that the housing market won't do some economic damage -- but GDP is partly a measure of what you cannot do for yourself. GDP is also partly a measure of waste and high profit margins. The internet and cell phones have probably saved me several percent of income per year of wasted money (and time). This effect multiplied over millions of consumers may mean that GDP could be "flat" while "consumption" rises.
People are providing more service for themselves, finding the correct products more often, and finding lower margins products due to the internet and cell phones. Economic efficiency could increase and neither GDP nor productivity measures would capture it.
Stoneleigh, great job, thanks. I especially like your focus on energy, climate and finance; areas which I pay particular attention to.
I came across this article today, which gives some idea of just how big the "iceberg" might be :)
Credit Brothel Raided, Even Piano Player Not Safe:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_gilbert&...
The rest of the article provides a quick summary of what's happening around the world, much of which you've already included in your excellent round-up. Contagion obviously hasn't been contained and has become global.
Triumvirate of collapse - Economy, Ecosystem, Energy
Not strictly true. The consumer is going to get blamed in this but the real bad guys are the bankers who created a debt based monetary system and then ran it into the ground. They are the ones that from 1913 to 2007 destroyed 95% of the dollar's purchasing power (according to the Federal Reserve itself, no less). These bankers are the ones that found ways to leverage even the already leveraged debt into a derivatives mess that is, each year, worth more than 11 times the total global GDP.
And if you want to spread the blame, there are those nations who willingly signed on to the US imperial inflation tax scheme and have aided and abetted that scheme (as opposed to those nations forced into the scheme essentially at gunpoint).
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
Greyzone, on that line of thought, take a look at some of the roots. As you said, the Creature from Jekyll Island (aka Da Fed) is in lead dog position.
This article shows where the CDO's came from.
HEADWATERS OF DISASTER
http://www.financialsense.com/fsu/editorials/schoon/2007/0801.html
SNIP
SNIP
Their kids won't see it that way, as the world crumbles around thier well-defended and well-supplied homes.
--
Jaymax (cornucomer-doomopian)
I second that
Canada's growing problem with illegal US immigrants - Is it time to Build the Fence?
http://www.rawstory.com/showoutarticle.php?src=http%3A%2F%2Fwww.cbc.ca%2...
LOL
That story ran in the Round-Up today :)
Our collective spree started with the internet bubble and when it burst our expectations didn't. We got into the home equity piggy bank next, fraudsters of various stripes loved it, and now we have the subprime meltdown.
We, as a society, are on a truly silly consumption binge, much like crack heads who just can't put down the pipe. I wish for a soft landing but I fear the worst ...
The downturn in housing is really getting a foothold, the era of really low interest mortgages allowed the cost of housing to skyrocket. When interest rates are low, building materials and everything related to new homes fills the void left by low rates, in the last few years home prices went up by historic proportions. Home equity loans helped power the U.S. economy for the first years of the new century, now the bill comes due.
Next up:
Corporate bankruptcies
Landry's Restaurants looks like its fixing to declare chapter 11. Their restaurants have pretty good business, but over the last 5 years they bought way too many local restaurants and small chains. Now their year-end financial statements are late, because of a stock backdating scandal, and their bondholders have filed to call in their bonds. Landry's is "looking for financing" and just filed an injunction to prevent the bond call-in, which a judge granted.
There's another sign too. Landry's bought an old motel on the Seawall in Galveston, shut down the motel and tore it down. Now the same property is back on the market as unimproved property.
All this looks to me like bad management and financing that's caving in. The credit crunch is only partly responsible, but the cheap easy credit let them expand too fast without any controls, and now the chickens are walking home to the roost.
Bob Ebersole
And what will 'they' do. How to inject more paper money? Historically this is the response. But how do you get it into the hands of the people who will spend it? Rapidly becoming poor(er) Americans are the ones who spend it, how do you give money to them? I don't see personal debt increasing to keep the party going. So what? Tax rebates for home loans? Energy tax credits? They will do something, just what will it be?
My guess is mortgage bailouts. Won't do any good, but they'll try.
Don't forget the unsold inventory of new homes. Let's say the 580 thousand or so unsold new homes have lost an average value of 50k, that is 290 billion dollars off the balance sheets of the building companies, the numbers are huge. Plus the interest alligator that keeps knawing away at this unsold inventory must factored in.
By my way of thinking we have a huge housing surplus in the US, way above and beyond that present unsold inventory.
As gasoline prices go up, people are going to have to abandon the suburbs and relocate closer to jobs or mass transit, shopping, schools, etc. As the incomes of the Formerly Well Off continue to lose pace with inflation in general and exploding energy and food prices in particular, people are going to have to make more drastic lifestyle changes. The elderly are going to have to move in with their children (or vise versa), kids are going to have to delay leaving the nest longer, and many households will expand to include assorted other relatives, friends, or paying lodgers. You'll see a lot more subdividing of houses to create rental units; that rental income will make the difference for a lot of people between keeping and losing their homes.
The bottom line is that America is heading to a much lower level of square feet per person as far as housing is concerned. Lower s.f/person will be less expensive to heat, and thus will be necessary for that reason alone. We are going to have to decline and become a poorer country even under the best possible scenario, there just isn't any other way around it.
What this means is that, with just a little remodeling, we already have about all of the housing that we need, where we need it, with a substantial surplus left over in the low-density suburbubs (where we do not need it). Thus, we hardly need to be building any new houses at all, for a long time to come. We might just as well be taking all that money being spent on new housing, dig a hole, throw it in, and set it on fire, for as much good as it will do us in transitioning to where we need to go.
WNC,
I take it you do not recommend housing stocks? The depth of the mortgage crisis is yet to unfold, it is not just the drop in actual housing value but the leverage that goes along with it. You have to wonder about the loss to pension funds and the like that are tied to the mortgage market.
I am a bit of this trend in action - I was doing fine with my $50/mo gas + electric bill in my roundly insulated apartment, but my mother was not enjoying life in her big, old farm house.
She thinks the farm is worth $150k where it sits, but I'm finding many like it for half that within a few miles of town, and that is before any sort of correction really hits. My conundrum at the moment is how to slip some solar and a water furnace into the place without her noticing ...
You don't have to increase the supply of paper money; what you have to do is to boost people's incomes, which in turn can boost bank accounts.
There are two ways to stimulate the macroeconomy: fiscal policy and monetary policy, and these two policies work together. Here is what happens: the U.S. Federal government runs humongous deficits--i.e. the government pays out much more than it takes in through taxation. The government writes an I.O.U. (government bond or treasury bill or note) to pay the difference. The Federal Reserve System, through expansionary monetary policy makes it possible for the government to finance its deficits and also assures that liquidity is present throughout the financial system so that banks and other financial organizations can make loans.
The Fed will not permit a debt deflation, such as happened after 1929. The Fed will use Open Market Operations to pump up the supply of credit in the economy, and if all else fails the Fed can lend unlimited amounts of funds to whoever it decides to lend to. (Normally the Fed lends only to banks and to the U.S. government, but it has broad authority to do whatever is needed to avoid a financial crisis.)
In tough times the Fed is faced with a tough choice: Expand the money supply rapidly and thereby accept increasing inflation--or clamp down on inflation with restrictive monetary policy. In my opinion, the bias against deflation is so strong at the Fed that increased inflation is almost certain in the years immediately to come.
As oil goes up past eighty dollars a barrel and eventually over one hundred dollars, there will be mighty strong inflationary pressures in the economy. The Fed will have a choice:
1. Choke off the inflation and accept a severe recession (for which the Fed would be blamed) or
2. Ratify the inflation and accept abrupt and severe increases in inflation to mitigate deflationary pressures and prevent inflation.
Probable result: Something like the stagflation of the seventies and early eighties--but much worse.
Don, it sounds as though you are saying that the most likely course will be for the Fed to lower interest rates (and thereby create conditions for the next bubble). Given that the US economy doesn't exist in a vacuum -- where would the money come from? How much more money will Asia lend us?
My gut tells me that you are exactly right about rampaging inflation and wage stagnation (I've already topped out as I suspect have a lot of other Boomers). But as we stop spending on discretionary items, a whole raft of jobs are going to evaporate... a downward spiral for the US economy.
The Fed (in cooperation with the banking system and the borrowing public) can create new bank reserves (and hence new loans and new money) WITHOUT LIMIT. Much attention is given to short-term interest rates, but these are only the tail of the dog of monetary policy, which is primarily carried out through daily Open Market Operations (OMO) by the Fed. See any economics textbook for how this works, how the Fed creates money out of thin air.
What about the falling dollar against foreign currencies? This is probably a Very Good Thing (VGT) because we run big trade deficits. A cheaper dollar means that our exports become cheaper and imports become more expensive. Thus a falling dollar will eventually tend to cure our trade deficit. Against some currencies, the dollar should fall a great deal, against others not so much. Unfortunately, the Chinese won't let the dollar fall much against the yuan; the Chinese don't want their dollars to depreciate because they hold so many of them.
The U.S. is a huge debtor country. Debtors win when inflation unexpectedly increases. Double digit inflation is even more effective than mild inflation, and if you want to get rid of all those old burdensome debts that are holding down consumers and corporations, why then the way is clear: Just let the hyperinflation roar.
I have stated earlier on TOD that I expect the dollar to one day again be worth exactly the same as a Mexican peso. The Fed will not give in to inflation without a struggle, but I think Peak Oil must necessarily bring much greater inflation to the U.S.--combined with slow or negative economic growth. In other words, we may have the worst of both worlds--a depression with double-digit unemployment combined with escalating double-digit inflation.
Fasten your seat belts, economic blind curves ahead.
Don:
I get the strong idea the Chinese won't hold those dollars. My best guess is that they'll find some country that will take them in exchange for their oil rights.
I don't think they are any different from me. When the music stops and TSHTF, I wanna be the one sitting on the oil.
With oil, I can make anything.
With dollars, maybe burn them to heat the house, or possibly use them for insulation... not much else I can really think to do with a lot of scraps of paper. Or worse yet, I may get stuck with just a number.
Steve
Sailorman,
What the heck do we export except jobs?
Aerospace, Weapons, Grain...
my last year living in brasil, some locals were frustrated about how much is imported from the US.
matt
Debt
How about the Weimar Republic, where the average man and woman was destroyed financially? All that your comment shows, Don, is how Uncle Sam intends to get out of paying his debts honestly. It doesn't do squat to keep the economy afloat because only the consumer can do that and the government will not, absolutely will not, bail out the consumer. Why? Because the consumer owes the banks, who are the ones that control Uncle Sam's "get out of jail free" card.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
And that's my big concern. The US government will no doubt decide at some point to inflate its way out of debt. This isn't an option for Joe Six -- particularly if his wages are flat or (worse) he is out of work.
gold
that is all.
Do we really know that the average person was wiped out by Weimar Republic hyperinflation?
Hyperinflation today would wipe out the debts of anyone who owes debts at fixed interest rates or at variable rates that have ceilings. So hyperinflation today would pay off tens of millions of mortgages and money owed on new cars.
We can't boost the economy because we are past the point of declining marginal returns and into the world of declining *absolute* returns. The measurements aren't there - because these are typically environmental externalities or things like increasing health expenses (which show as a net *gain* as more people get sick).
cfm in Gray, ME
Looks like the UK is ready to follow the US housing lead.
Home repossessions 'rise by 30%'
http://news.bbc.co.uk/2/hi/business/6929361.stm
Triumvirate of collapse - Economy, Ecosystem, Energy