"To-morrow and to-morrow, and to-morrow..."
"Tomorrow and tomorrow and tomorrow" is the beginning of the third sentence of one of the most famous soliloquies in Shakespeare's tragedy Macbeth. It is the response of the protagonist, Macbeth, to the news of his wife's death. The speech can be divided into two parts, with the line "Tomorrow and tomorrow and tomorrow" marking the beginning of the second part. The full soliloquy reads:
"She should have died hereafter;
There would have been a time for such a word.
To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury
Signifying nothing." -- Macbeth (Act 5, Scene 5, lines 17-28)
To which the folks contributing to the Wiki page offer this...
Interpretation
The first sentence has caused much debate. Whether Macbeth was more concerned with the timing of his wife's death than the fact of her passing remains open to interpretation. The rest of the speech is a rush of despair. Macbeth...has seen so much death, and caused so much pain to others, that he has become numb to it...
(Hmmm...kind of reminds me of a few folks soon to be looking for new work in about three weeks.)
But, Nabokov brings it all home, at least as far as this diary's concerned...
"...to borrow and to borrow and to borrow..."
Vladimir Nabokov makes a pun on "Tomorrow and tomorrow and tomorrow" in the final pages of Lolita when he has Quilty say "I have not much at the bank right now but I propose to borrow--you know, as the Bard said, with that cold in his head, to borrow and to borrow and to borrow."
I. PREFACE
If you've read some of my recent diaries on the economy, I'm a big fan of Columbia University Economics Professor and Nobel Prize Winner Joseph Stiglitz. I truly believe his easy-to-read piece in the January '09 edition of Vanity Fair, entitled, "Capitalist Fools," is the most concise look at the history--and the specific historical reasons that caused this mess--leading up to our economic nightmare(s) today.
My focus herein, however, is to take a look at what lies ahead.
If you thought 2008 was bad, as far as our economy was concerned, know this: Most pundits (and even President-elect Barack Obama and Vice President-elect Joe Biden), agree, in 2009 things are going to get worse before they get better.
In 2009, our economic dystopia will become more real with every passing day, a trillion dollar middle class bailout following the inauguration of Barack Obama notwithstanding (those realities).
That's because our economy is like an express locomotive. It's going to take years to undo eight years of George Bush's laissez faire mismanagement (let alone 28 years of Reaganomics), and that's assuming we're successful at attaining that semi-tangible goal.
And, despite the rantings of many Republicans desperately looking for a theme--ANY THEME--to latch onto given their pathetic record on the economy for decades, I'm very much in favor of the proposed stimulus package now being discussed in detail by the incoming Obama administration.
But, if you think that fixing this mess is going to be either quick and/or easy, you're in for a very, very rude awakening.
II. HARSH REALITIES ABOUT OUR FINANCIAL SERVICES SECTOR AND OUR "PROSTITUTES AND BEER" ECONOMY
A.) Most major US banks are widely acknowledged as being insolvent. More then one pundit on our economy is now saying it: "Jim Rogers calls most big U.S. banks "bankrupt."
Jim Rogers calls most big U.S. banks "bankrupt"
Thu Dec 11, 2008 1:53pm EST
By Jonathan Stempel
NEW YORK (Reuters) - Jim Rogers, one of the world's most prominent international investors...
...Speaking by teleconference at the Reuters Investment Outlook 2009 Summit, the co-founder with George Soros of the Quantum Fund, said the government's $700 billion rescue package for the sector doesn't address how banks manage their balance sheets, and instead rewards weaker lenders with new capital.
"Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt," said Rogers, who is now a private investor.
"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."
And, if George Soros' business partner doesn't float your boat, prescient economist Nouriel Roubini said the same thing a week ago: "Roubini, Sunshine Say U.S. Banking System Is `Insolvent.'"
As far as the "Doom School" of U.S. economics is concerned, we cannot forget world-famous contrarian financial consultant and commodities investor Marc Faber, a contemporary and colleague of both Roubini and, particularly, Rogers. (Roubini and Faber share the same nickname: "Dr. Doom.") Like many other pundits, Faber sees most of America's wealth being shipped overseas these days. Clearly, this guy's from the Hunter S. Thompson School of Economic Theory. This gem from his Wiki bio (concerning Bush's tax rebate earlier this year), linked in the previous sentence:
"The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer/Software it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I've been doing my part . "
B.) International banks and related agencies provide unnoticed, flat-out warnings of an impending global economic collapse."BIS warns of collapse in global lending." If you follow Ambrose Evans-Pritchard in The UK's Telegraph, the record show's he's been eerily prescient this year, too.
BIS warns of collapse in global lending
By Ambrose Evans-Pritchard
Last Updated: 8:53AM GMT 09 Dec 2008
The City of London has suffered a dramatic collapse in its core business as global lending falls at the steepest rate since records began, according to new figures from the Bank for International Settlements (BIS).
Cross-border loans worldwide fell by $1.1 trillion (£740bn) in the first half of the year, reflecting the scramble by the financial industry to cut leverage by pulling credit lines and slashing risky exposure.
--SNIP--
In its quarterly report, the BIS warned the US Federal Reserve, the Bank of England and other central banks that near-zero interest rates and emergency monetary stimulus may come at a cost.
--SNIP--
The money markets are a crucial lubricant for the financial system, but they cannot function if rates fall too low. The sector can wither away, as Japan discovered during its "Lost Decade".
C.) The subprime crisis in the mortgage industry was just an appetizer. Coming up, in 2009, and beyond, it's going to be all about Alt-A defaults and Option ARM resets. Yes, while the MSM has been focused upon losses from the subprime mortgage mess, the reality is that bank losses from "Alt-A" and "Option A.R.M. resets" are estimated to account for more than $1 trillion in additional writedowns at banks and mortgage brokerage firms throughout 2009 and 2010.
Read about this mess right here: "Is $700bb really enough? How insolvent are the nation's leading banks?"
Posted on October 9th, 2008 in Daily Mortgage/Housing News -
The Real Story, Mr Mortgage's Personal Opinions/Research
Level 1, 2, and 3 assets are ways of classifying a company's assets based on the degree of certainty around the assets' underlying value. For example, Level 1 assets can be valued with certainty because they are liquid and have clear market prices. At the other end of the spectrum, Level 3 assets are illiquid and estimating their value requires inputs that are unobservable and reflect management assumptions. Think of it like Prime, Alt-A and subprime mortgage loans for example.
Somehow we have skipped right over Level 2 and are judging bank risk by looking at Level 3. Maybe in a robust credit market full of securitizations and leverage like 2006 this would have been just fine, but not now. Perhaps this is unfolding in a linear way just like the mortgage crisis beginning with subprime (level 3), now onto Alt-A (level 2), then to Prime (Level 1). Walls Street did a similar thing last year when it went right to focusing on CDO's and forgot about all of the toxic whole loans and MBS on the balance sheet.
And, many banks that may have appeared to have circumvented default in the subprime fiasco are lining up for a train wreck in '09 and '10 with regard to their holdings in "Alt-A" and "Option ARM resets."
Now, all you short-sellers out there, cover your eyes, because here's the list of banks with heavy holdings in Alt-A and Option ARMs (also commercial holdings are noted; more about those, below): Clearly, the top 200 banks on this list have big problems!
D.) Upwards of 1/3 of all hedge funds are expected to either tank, merge, or simply attempt to save face and shut down in the next 12-24 months, too: "Third of Hedge Funds Face `Wipe Out' After Slump, Godden Says."
Third of Hedge Funds Face `Wipe Out' After Slump, Godden Says.
By Tom Cahill
Dec. 15 (Bloomberg) -- Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money.
"The failure rate is going to go up, the closure rate is going up, and the merger rate is going up," IGS Chief Executive Officer John Godden said in an interview in London. "It's going to be a 30 percent wipe out."
The number of hedge funds more than tripled in the last decade to a record 10,233 at the end of June, according to Chicago-based Hedge Fund Research Inc. That number will likely tumble after funds dropped 18 percent in the year through November, the worst year since HFR started its Fund Weighted Composite Index in 1990.
III. WHAT THIS ALL MAY MEAN WITHIN OUR SOCIETY OVER THE NEXT 12-24 MONTHS
E.) Unemployment encroaches upon (or exceeds) the 20% mark. One of the best websites for cutting through all of our government's propaganda about all things statistical is: http://www.shadowstats.com. As you'll see by taking a quick tour of John Williams' charts, the actual unemployment rate in the U.S., today, is a little over 16%, not 7.5% as has been reported in the MSM recently. Given the other realities described in this diary, surpassing 20% unemployment during 2009 is more likely than not.
F.) Potential labor unrest unlike anything this country's witnessed in 90 years. Stoneleigh, over at The Automatic Earth had a great diary on DKos, about 10 days ago, concerning the inevitable labor unrest that will occur as a result of the ongoing tanking of our economy over the next year, entitled: "War in the Labour Markets."
"War in the Labour Markets"
by Stoneleigh [Subscribe]
Sun Dec 21, 2008 at 09:20:07 AM EST
The attempts on both sides of the US-Canadian border to bail out the auto industry are a taste of things to come for many other sectors. The cuts that unions will be required to agree to will be very significant, almost certainly unacceptable to the membership, and ultimately will not be sufficient to save the companies in any case. Bailouts can postpone, but not prevent the recognition of losses that have already occurred.
--SNIP--
During deflation (ie a fall in the effective money supply relative to available goods and services), there is no disguising economic malaise, in fact its appearance is enhanced. As the value of money increases, wages would have to fall in order for purchasing power to remain the same, but people will do not tolerate falling wages well, especially when their own budgets have been increasingly squeezed by the demands of debt repayment. They think in nominal terms, not real terms. To compound the problem, employers, who are also being squeezed, cannot afford to pay wages that leave purchasing power where it used to be. They will need to pay wages that amount to a cut in purchasing power, a cut that in nominal terms will look far worse than it actually is. This is very likely to lead to unrest.
Unions are unlikely to agree to cuts of the magnitude that would be required for businesses, municipalities and public services to remain viable. Their members have fixed costs which prevent them from working for less than a certain amount, but that amount will almost certainly be more than employers are in a position to pay. This means war in the labour markets.
My guess is that employers, particularly in public services such as education, will decide to break the unions, even at the cost of, for instance, an entire school year. I can imagine them firing all their teachers, or other public service workers, and inviting them to reapply for their old jobs at half the pay and no benefits. This is the kind of action that can easily lead to a general strike, where other unions come out in support of the particular workers under threat. The potential for extreme disruption is very high...
G.) Municipal and county bankruptcies will coincide with massive layoffs of local government employees throughout the U.S.
Expounding upon Stoneleigh's projections of intensive labor unrest in coming months, we have this, from just a few days ago, from Rebecca Wilder via Nouriel Roubini's RGE Monitor website (it includes some outstanding and compelling statistical documentation; well worth a look): "State and local governments expected to fire in bulk--mass layoffs will rise."
...rising state and local government budget deficits show the next shoe to drop in the labor market: government mass layoff events are expected to rise.
--SNIP--
Since December 2007, 20,712 total mass layoff events sent 2.1 million workers to their state unemployment claims offices. The manufacturing sector continues to dominate mass layoff events - 39% in November - but the following industries saw record-level average mass layoff unemployment claim filings (since the series started in 1995): accommodation and food services; construction; finance and insurance; real estate and rental and leasing; retail trade; transportation and warehousing; utilities; and wholesale trade.
But federal, state, and local governments executed just 72 mass layoff events, essentially unchanged from the 70 events in November 2007. State and local governments are hoarding workers, but with surging budget deficits, the pace of government mass layoff events will rise.
Wilder continued to expound upon this, citing California Governor Arnold Schwarzenegger's recently announced mass layoffs and unpaid furloughs for state workers.
Under his executive order, 238,000 employees will be forced to take off two unpaid days per month through June 30, 2010. Managers will receive either the furlough or an equivalent salary reduction during the same period.
H.) Basic social services will collapse as a byproduct of a rapidly eroding tax base.
While Stoneleigh noted deflationary pressures affecting the labor market, in general, above, with a special note about how this will affect our public education infrastructure; one of the nation's leading experts on municipal defaults, John Moorlach, has bird-dogged at least 10 municipalities and counties that will go belly-up during 2009, here: "Moorlach Sees Up to 10 Municipal Bankruptcies in Coming Year."
Moorlach Sees Up to 10 Municipal Bankruptcies in Coming Year
By Joe Mysak
Dec. 23 (Bloomberg) -- The accountant who predicted the nation's largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year as public finances worsen amid calls for federal aid to state and local governments.
John Moorlach said in 1994 that Orange County, California's leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion.
--SNIP--
States project a $97 billion shortfall over the next two years, according to the National Conference of State Legislatures. This mounting pressure on public finances gives President-elect Barack Obama's administration "strong incentives" to provide federal aid, wrote George Friedlander, a municipal strategist at Citigroup Inc., the largest U.S. underwriter for tax-exempt bonds, in the firm's Dec. 12 Municipal Market Comment.
Others are predicting a much more dire situation when it comes to municipal and county finances over the next 24 months:
There may be 36 bankruptcies over the next two years, said Richard Ciccarone, chief research officer of McDonnell Investment Management LLC of Oak Brook, Illinois.
--SNIP--
Ciccarone predicts a dozen defaults in 2009 "and at least double that number in 2010." He didn't identify cities or counties and said his forecast is based on studying how municipalities respond to economic crises.
IV. SMALL BUSINESS, THE RETAIL SECTOR, AND THE ONGOING LIQUIDITY CRISIS
I.) Commercial loan defaults projected to triple. "Commercial Loan Defaults May Triple as Rental Income Declines."
Commercial Loan Defaults May Triple as Rental Income Declines
By Hui-yong Yu
Dec. 22 (Bloomberg) -- U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.
Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.
Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. Lenders who sold commercial mortgage-backed securities to pension funds, investment banks and foreign governments have been hit by more than $1 trillion in losses and asset writedowns connected to bad residential loans.
--SNIP--
The biggest property developers in the U.S. are asking to be included in a new $200 billion loan program, the Wall Street Journal reported today. Thousands of office complexes, hotels and shopping centers may be at risk of default, the newspaper said, citing a letter from real estate trade groups.
J.) Illiquidity runs rampant in the retail marketplace, even now. And, it's all blue smoke and mirrors. The reality is the banks don't want to lend in retail, because there are more profitable places where they want to invest their money.
As you'll understand in the next paragraph, this is my pet peeve! It is common knowledge in the retail credit industry that most--not all but most--credit card portfolios are performing almost as well as they were in 2007!)
In the real world, I run a small software company that processes retail credit applications for consumers, mostly at point-of-sale, and then for big-ticket items primarily, such as furniture, jewelry, etc. The reality is, roughly six or eight lenders control most of the marketplace for these lines of credit (firms such as CitiFinancial, GE Credit, Wells Fargo, American General and HSBC, to name a few of the better-known credit-grantors). Reports are coming into our offices from our retail clients all across the country all with the same story: lenders simply aren't lending money to much more than 25%-30% of the population. The actual results may vary, depending upon the particular location and the particular lender; but, to contrast this with what was considered standard operating procedure in the retail finance industry--at least up through the second quarter of 2008--retail lenders were, generally speaking, approving 50%-60% of the population prior to this downturn. Most folks not running retail operations can only begin to understand what kind of adversity this reality drives in the operations of these hundreds of thousands of small businesses now.
But, one has to ask, with hundreds of billions of dollars going out to these firms, in particular, why aren't they injecting this taxpayer-provided capital back into the marketplace?
Then I read stories such as this: GE Wins FDIC Insurance for Up to $139 Billion in Debt. And, it becomes increasingly clear to me that the problem is that all of this intended liquidity is being hoarded by the very recipients of it.
GE is one of the top three lenders in the retail sector in the United States. This past month, they virtually completely withdrew from many of the retail consumer financing programs in which they were participating! (I had a major client--a southern furniture retailer--call me a few weeks ago to tell me that GE was rejecting their credit applications from consumers in their stores with 760 FICO scores! That's roughly in the top quintile of all consumer credit scores.) Meanwhile, read this:
GE Wins FDIC Insurance for Up to $139 Billion in Debt
By Rachel Layne and Rebecca Christie
Nov. 12 (Bloomberg) -- General Electric Co. said the U.S. government agreed to insure as much as $139 billion in debt for lending arm GE Capital Corp., the second time in a month it has turned to a federal program designed to help companies during a global credit crunch.
Granting GE Capital, which isn't a bank, access to a new Federal Deposit Insurance Corp. program may reassure investors and help the unit compete with banks that already have government protection behind their debt, said Russell Wilkerson, a spokesman for the Fairfield, Connecticut-based company. Coverage would be for about $139 billion, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.
"Inclusion in this program will allow us to source our debt competitively with other participating financial institutions," Wilkerson said. GE sent investors an e-mail about the program today and posted the letter on its Web site. "Our participation is a positive development for our investors."
GE's finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. GE last month started using a new Federal Reserve program designed to revive demand for commercial paper amid the global crisis.
So much lip-service with regard to how the major financial services institutions are 'finally starting to inject liquidity back into the marketplace' is nothing short of a crock. And, this is a comment from someone with a fairly unusual vantage point, where I'm considered qualified to make an assessment of this sort, too.
As you read stories in the press with regard to how GMAC is being granted a bank charter, and how this will improve the credit marketplace for folks trying to buy cars, remember that the GM-issued press releases are conveniently leaving out the harsh reality that they sent a memo out to all of their dealers over the past month whereby they notified them that they would no longer approve any credit app's with less than a 700-720 FICO score; and even then, they wouldn't be approving all app's that met even this stringent criteria. (Basically, in one fell swoop, GM might as well have said, 'We won't even look at credit app's from 60% of the population.')
All you have to do is talk with virtually any big-ticket retailer in the U.S. to get corroborating feedback for the comments I'm making herein in this regard.
But, point-of-sale is not the only place where retailers are getting hammered by the major financial services firms right now. The entire global export-import market is being clobbered: Frozen Ports in Long Beach, Singapore Mean Bleak 2010 .
Frozen Ports in Long Beach, Singapore Mean Bleak 2010
By Michael Janofsky and Mark Drajem
Dec. 23 (Bloomberg) --
...Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.
--SNIP--
"Everybody expects 2009 to be a bleak year," said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. "Now, it looks like 2010 is going to be just as bleak."
--SNIP--
"The problem is that people can't get financing, no matter what their credit situation," said Ed Rice, president of the Coalition for Employment through Exports, which represents companies such as Boeing Co., Caterpillar Inc., United Parcel Service Inc. and BNP Paribas SA. "Banks are cancelling credit lines even for creditworthy customers."
--SNIP--
Slowing trade is both a cause and an effect of the first simultaneous contraction in the world's largest economies since World War II. Throughout this decade, trade grew by 12 percent a year to $13.6 trillion in 2007, propelling growth in nations from Germany to China and Chile. Now the evaporation of financing and collapse in demand threaten an activity that accounts for a quarter of the $54 trillion global economy.
"We are having this dramatic reversal," said Michael Finger, a trade economist in Geneva since the early 1970s. "I'm a long time in this business, but this is unique."
K.) Hundreds of thousands more stores to close as some items become harder to find in the marketplace. Over the past 24 hours, from Bloomberg.com: "Holiday Sales Drop to Force Bankruptcies, Closings."
Holiday Sales Drop to Force Bankruptcies, Closings
By Heather Burke
Dec. 29 (Bloomberg) -- U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.
Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.
More than a dozen retailers, including Circuit City Stores Inc., Linens `n Things Inc., Sharper Image Corp. and Steve & Barry's LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.
"You'll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out," Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. "There are a number that are real causes for concern."
Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the ICSC said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy's Inc. are among retailers that will report December results on Jan. 8.
L.) My comments about the money being there as I heard it from my Wall Street friends. As I indicated above, I'm in a fairly unique position, in terms of my ability to observe what's going on in retailing around the country. But, I also assist retailers with the development of their relationships with the Wall Street firms that fund their in-house lines of credit, too. As a colleague--someone who manages almost a billion dollars in retail credit wholesale lines--told me a few weeks ago, "The money's there. But, it's not being released for what amounts to strictly political reasons. They don't have to release it; or they're sitting on inordinate amounts of reserves, etc."
V. DEFLATION IS TEMPORARY AND PAINFUL. INFLATION, OR HYPERINFLATION, COULD FAR MORE PAINFUL AND LONGER-LASTING. As the New York Times put it on Saturday: "Debt Sweat. Printing Money -- and Its Price."
Debt Sweat. Printing Money -- and Its Price
By PETER S. GOODMAN
Published: December 27, 2008
...So it may seem perverse that in this new era of reckoning -- with consumers finally tapped out, government coffers lean and banks paralyzed by fear -- many economists have concluded that the appropriate medicine is a fresh dose of the very course that delivered the disarray: Spend without limit. Print money today, fret about the consequences tomorrow. Otherwise, invite a loss of jobs and business failures that could cripple the nation for years.
--SNIP--
In the case of the Fed, the money comes from its authority to print dollars from thin air. Since late August, the Fed has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the trillions wiped out by falling house prices and vengeful stock markets. The Fed has taken troublesome assets off the hands of banks and simply credited them with having reserves they previously lacked.
In the case of the Treasury, the money comes from the same wellspring that has been financing American debt for decades: Investors in the United States and around the world -- not least, the central banks of China, Japan and Saudi Arabia, which have parked national savings in the safety of American government bonds.
--SNIP--
The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop -- or at least slow -- their deposits of savings into the United States.
That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.
But, Japan and China, our second and first largest creditors, respectively, are already beginning to make noise about this.
In the case of Japan, it's a friendly overture suggesting that country erases U.S. debt currently on their books: "Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says."
Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says
By Stanley White and Shigeki Nozawa
Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes "drastic measures" to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
"It's difficult for the U.S. to borrow its way out of this problem," Mikuni, 69, said in an interview with Bloomberg Television broadcast today. "Japan can help by extending debt cancellations."
The U.S. budget deficit may swell to at least $1 trillion this fiscal year as policy makers flood the country with $8.5 trillion through 23 different programs to combat the worst recession since the Great Depression. Japan is the world's second-biggest foreign holder of Treasuries after China.
As far as China's concerned, paraphrasing Barack Obama earlier in the year, someone should send Hank Paulson the memo entitled: 'Don't Piss Off Your Banker!'
"Recession Reopens U.S.-China Trade Rift Paulson's Talks Bridged."
Recession Reopens U.S.-China Trade Rift Paulson's Talks Bridged
By Kevin Hamlin and Mark Drajem
Dec. 29 (Bloomberg) -- The global recession is re-exposing fissures in U.S.-China relations that Treasury Secretary Henry Paulson spent more than two years smoothing over.
Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities.
"The American economic slump is running into the Chinese economic slump," says Derek Scissors, a research fellow at the Washington-based Heritage Foundation. "It's creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship."
M.) Some folks are saying that deflation now is merely a prologue to potential, upcoming hyperinflation.
"Flurry Of Fed Moves Could Lead To Hyperinflation"
WEDNESDAY, DECEMBER 17. 2008
Flurry Of Fed Moves Could Lead To Hyperinflation
Posted by: The Prudent Investor @ 9:10 AM
In what was a surprising move yesterday, the Fed dropped the Fed funds rate basically to zero, surpassing market expectations. Everyone fears deflation, and the Fed is willing to do whatever it takes to avoid it. But as Toni Straka from The Prudent Investor points out, these drastic moves could soon lead us to hyperinflation.
--SNIP--
The announcement that the Fed is looking into buying longer term US Tresuries raises immediate fears that the Fed will be monetizing the federal debt again after a portfolio shift towards MBS in the recent past. Any talk about deflation misses the point of unprecedented monetary inflation that will show up in the real economy 2009/10.
Eric de Carbonnel argues at...that monetary inflation does not even have to pump up money supply - my favorite theory - but that it is a loss of confidence that increases the velocity of money, resulting in the danger of hyperinflation.
And, among my favorite commentators on the economy, the folks over at The Automatic Earth have this to say: "Debt Rattle, December 28 2008: Do As The Romans Do."
Debt Rattle, December 28 2008: Do As The Romans Do
Printing Money - and Its Price
Borrowing and spending beyond ordinary limits largely explains how Americans got into such economic trouble. For decades, businesses and consumers feasted relentlessly, as if gravity, arithmetic and the tyranny of debt had been defanged by financial engineering. Armed with credit cards and belief in a bountiful future, Americans brought home ceaseless volumes of iPods and cashmere sweaters, and never mind their declining incomes and winnowing savings. Banks lent staggering sums of money to homeowners with dubious credit, convinced that real estate prices could only go up. Government spent as it saw fit, secure that foreigners could always be counted on to finance American debt.
So it may seem perverse that in this new era of reckoning -- with consumers finally tapped out, government coffers lean and banks paralyzed by fear -- many economists have concluded that the appropriate medicine is a fresh dose of the very course that delivered the disarray: Spend without limit. Print money today, fret about the consequences tomorrow. Otherwise, invite a loss of jobs and business failures that could cripple the nation for years. Such thinking carries the moment as President-elect Barack Obama puts together plans to spend more than $700 billion on projects like building roads and classrooms to put people back to work.
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But where does all this money come from? And how can a country that got itself in peril by borrowing and spending without limit now borrow and spend its way back to safety? In the case of the Fed, the money comes from its authority to print dollars from thin air. Since late August, the Fed has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the trillions wiped out by falling house prices and vengeful stock markets. The Fed has taken troublesome assets off the hands of banks and simply credited them with having reserves they previously lacked. In the case of the Treasury, the money comes from the same wellspring that has been financing American debt for decades: Investors in the United States and around the world -- not least, the central banks of China, Japan and Saudi Arabia, which have parked national savings in the safety of American government bonds.
Americans have gotten accustomed to treating this well as bottomless, even as anxiety grows that it could one day run dry with potentially devastating consequences. The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop -- or at least slow -- their deposits of savings into the United States. That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.
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"Our government doesn't have enough spare cash to bail out a lemonade stand," declared Peter Schiff president of Euro Pacific Capital, a Connecticut-based trading house. "Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover."
Many in the Progressive blogosphere, including Stoneleigh and Ilargi over at the Automatic Earth, as well John Williams, over at Shadow Stats, see this ending very badly at some point during Obama's first term. (Due to no fault of Obama's I might add.) To them, it's just a question of which collapses first: the dollar or the country, with the wheels having been set in motion long before we ever even heard the name, Barack Obama. To them, that locomotive that I talked about at the opening of this time simply cannot be stopped. It is what it is.
I'm more optimistic than that. (At least I'd like to think I am.)
I'm more in line with what Jerome a Paris wrote in his diary on Friday: "Making Sense of the Financial Crisis."
...Thus the layoffs, shrinking activity, and economic pain all around.
Government spending can solve that problem, by creating new demand - but it needs to be generated by claims on real assets, not by yet more paper value. Conveniently, there is a way to do that: raise taxes, especially the higher marginal rates, to start moving the redistribution pendulum the other way. It is also essential that the spending be focused on things that are useful to people rather than to corporations and their owners: spending should be focused on social services, basic necessities, investment that will benefit all (energy-use transforming infrastructure like public transport and grid networks, healthcare) and core functions like education.
But the core requirement is to admit that the prosperity of the past few years as fake and inexistent. Acknowledging this does not mean shrinking the economy, it just means measuring it properly, and telling the truth about the Bush years. Most people outside the Village know it already anyway.
Runaway debt, private or public, is not a sustainable path. And there is an alternative - it simply requires that blame be properly allocated, instead of everybody pretending that this crisis 'just happened.'
So, I go into 2009 with some optimism about our ability to work things out. I'm sure that'll reach its peak around January 20th. But, I keep asking myself--no matter how much I try not to--what about the remaining 345 days of the year? What happens then? And, because I like sleeping well at night, I answer myself: "Things will work themselves out...tomorrow."