Major Recession or a New Depression?
- Thread starter SouthAmerica
- Start date
Well, SA is not spot on, his is not far off.
The people that will feel the brunt of what is coming down the pipeline for 08 are the middle class.
Look at the facts.
Banking sector is laying off and will continue to layoff.
CITI bank is in the red, rumors are Bankrupt. However, there will be no "Proceedings" and there will be no press. CITI bank has already put into place lower ATM withdraw fees ...due to "Limited Fraud Activity" cough cough...so their press reports says.
If you read the business wires and read between the lines you will notice that the Banking Industry is in panic behind close doors. The meeting friday, with Bush and others behind close doors is what? A tea party.
Oil could drop heavy if the world enters a recession, its to early to say the Global Markets will follow a deep recession in America. They will be effected, but not to the degree that we will be.
The unemployment numbers are Skewed and you bet that more jobs were lost than reported.
CPI/PPI data, just and 3% to 5% to the reported number and you may have a proper %.
Retail sales numbers are dropping faster than a hookers dress in Vegas.
I am able to travel often, and to feel the "purchase-less of the US dollar", what it does not buy across europe is eye opening. The dollar is going to go a lot lower, which is no surprise.
US Manufactures? What does the US manufacture? DEBT! Period. We are not a industrialized nation, it is all outsourced, including the Military Industrial Complex.
90% of you jokers on this site are 401k holders and not traders. It is all fun and games on ET. For now.
SA is right. American's live in LA LA LAND, head in the sand. ENGLAND JUST PASSED UP AMERICAN IN QUALITY OF LIVING STANDARDS. Hum, must not ring a bell.....
I would not call for a depression. I will call for a major banking crises, many 'named" Financial Institutions shall merge to keep from Bankruptcy. There will be 4 dollar gas prices in America. Housing will limp along, consumer spending will halt for the middle class, the sub-herds will live only to pay debt.
And a deep long recession for the US is in play as we speak.
Hold your hats as the INDU makes its way back to 11000K. This will not happen overnight. It will be a slow bleed, and it has started. FEDS can't save the 401K crowd now.
On a bright note. There will be so many opportunities to make a shit load of money, more then there were during the bull of 99. It will happen for those that wake up and break away from the mind-numbing, boring lives that they live.
Plenty of money to be made, plenty!
The people that will feel the brunt of what is coming down the pipeline for 08 are the middle class.
Look at the facts.
Banking sector is laying off and will continue to layoff.
CITI bank is in the red, rumors are Bankrupt. However, there will be no "Proceedings" and there will be no press. CITI bank has already put into place lower ATM withdraw fees ...due to "Limited Fraud Activity" cough cough...so their press reports says.
If you read the business wires and read between the lines you will notice that the Banking Industry is in panic behind close doors. The meeting friday, with Bush and others behind close doors is what? A tea party.
Oil could drop heavy if the world enters a recession, its to early to say the Global Markets will follow a deep recession in America. They will be effected, but not to the degree that we will be.
The unemployment numbers are Skewed and you bet that more jobs were lost than reported.
CPI/PPI data, just and 3% to 5% to the reported number and you may have a proper %.
Retail sales numbers are dropping faster than a hookers dress in Vegas.
I am able to travel often, and to feel the "purchase-less of the US dollar", what it does not buy across europe is eye opening. The dollar is going to go a lot lower, which is no surprise.
US Manufactures? What does the US manufacture? DEBT! Period. We are not a industrialized nation, it is all outsourced, including the Military Industrial Complex.
90% of you jokers on this site are 401k holders and not traders. It is all fun and games on ET. For now.
SA is right. American's live in LA LA LAND, head in the sand. ENGLAND JUST PASSED UP AMERICAN IN QUALITY OF LIVING STANDARDS. Hum, must not ring a bell.....
I would not call for a depression. I will call for a major banking crises, many 'named" Financial Institutions shall merge to keep from Bankruptcy. There will be 4 dollar gas prices in America. Housing will limp along, consumer spending will halt for the middle class, the sub-herds will live only to pay debt.
And a deep long recession for the US is in play as we speak.
Hold your hats as the INDU makes its way back to 11000K. This will not happen overnight. It will be a slow bleed, and it has started. FEDS can't save the 401K crowd now.
On a bright note. There will be so many opportunities to make a shit load of money, more then there were during the bull of 99. It will happen for those that wake up and break away from the mind-numbing, boring lives that they live.
Plenty of money to be made, plenty!
.
Crgarcia: âLet me ask you one question:
Are one of those computer nerds Hugo Chavesâ¦â
January 7, 2008
SouthAmerica: Reply to crgarcia
Sorry, I canât answer your question since I never met anyone from Venezuela and I have never been in contact with anyone from that country. All I know about Venezuela is what I read on the newspapers in the US, Europe, and in Brazil.
But my best guess is that Hugo Chavez is not one of these computer nerds that you are talking about.
You seem to be very confused regarding a lot of things â first, Venezuela is not the capital of Brazil, and Hugo Chavez itâs not the president of neither Brazil nor Argentina.
With a name Garcia and living in California I assume you are from Latin America probably from Mexico.
Please get you facts straight before you post on this Forum â at least the right country, and the right president otherwise it would be a waste of time replying to your postings if you canât figure out even the difference between the countries in the Americas.
.
Crgarcia: âLet me ask you one question:
Are one of those computer nerds Hugo Chavesâ¦â
January 7, 2008
SouthAmerica: Reply to crgarcia
Sorry, I canât answer your question since I never met anyone from Venezuela and I have never been in contact with anyone from that country. All I know about Venezuela is what I read on the newspapers in the US, Europe, and in Brazil.
But my best guess is that Hugo Chavez is not one of these computer nerds that you are talking about.
You seem to be very confused regarding a lot of things â first, Venezuela is not the capital of Brazil, and Hugo Chavez itâs not the president of neither Brazil nor Argentina.
With a name Garcia and living in California I assume you are from Latin America probably from Mexico.
Please get you facts straight before you post on this Forum â at least the right country, and the right president otherwise it would be a waste of time replying to your postings if you canât figure out even the difference between the countries in the Americas.
.
That was a great post. Nice to read someone who has a hold on things.
Plenty of money to be made, that's right. But it'll be really tough. Prolonged bear markets are wicked for trading. Funds sell on panic, short sellers cover on panic, way too much whiplash.
I agree that oil will go way down in a recession. However, am not sure I agree with you on the usd. Have followed it for many years, this is the first time I have heard such negative sentiment....the whole world is suddenly bearish usd....all the bad news is out. That is usually when the market reverses. Just my 2 cents
.
January 8, 2008
SouthAmerica: Someone send me a copy of this article by Stephen Roach.
Thanks.
Mr. Roach is on my short list of favorite economists â I enjoy reading his articles, maybe because we are in the same wavelength, and I agree with him most of the time.
Once again I agree with him, and here is a copy of his latest article:
****
America's inflated asset prices must fall
By Stephen Roach
Chairman of Morgan Stanley Asia
Mon Jan 7, 2008 1:05 PM ET
The US has been the main culprit behind the destabilising global imbalances of recent years. America's massive current account deficit absorbs about 75 per cent of the world's surplus saving. Most believe that a weaker US dollar is the best cure for these imbalances. Yet a broad measure of the US dollar has dropped 23 per cent since February 2002 in real terms, with only minimal impact on America's gaping external imbalance. Dollar bears argue that more currency depreciation is needed. Protectionists insist that China â which has the largest bilateral trade imbalance with the US - should bear a disproportionate share of the next downleg in the US dollar.
There is good reason to doubt this view. America's current account deficit is due more to bubbles in asset prices than to a misaligned dollar. A resolution will require more of a correction in asset prices than a further depreciation of the dollar. At the core of the problem is one of the most insidious characteristics of an asset-dependent economy - a chronic shortfall in domestic saving. With America's net national saving averaging a mere 1.4 per cent of national income over the past five years, the US has had to import surplus saving from abroad to keep growing. That means it must run massive current account and trade deficits to attract the foreign capital.
America's aversion toward saving did not appear out of thin air. Waves of asset appreciation - first equities and, more recently, residential property - convinced citizens that a new era was at hand. Reinforced by a monstrous bubble of cheap credit, there was little perceived need to save the old-fashioned way - out of income. Assets became the preferred vehicle of choice.
With one bubble begetting another, America's imbalances rose to epic proportions. Despite generally subpar income generation, private consumption soared to a record 72 per cent of real gross domestic product in 2007.
Household debt hit a record 133 per cent of disposable personal income. And income-based measures of personal saving moved back into negative territory in late 2007.
None of these trends is sustainable. It is only a question of when they give way and what it takes to spark a long overdue rebalancing. A sharp decline in asset prices is necessary to rebalance the US economy. It is the only realistic hope to shift the mix of saving away from asset appreciation back to that supported by income generation. That could entail as much as a 20-30 per cent decline in overall US housing prices and a related deflating of the bubble of cheap and easy credit.
Those trends now appear to be under way. Reflecting an outsize imbalance between supply and demand for new homes, residential property prices fell 6 per cent in the year ending October 2007 for 20 major metropolitan areas in the US, according to the S&P Case-Shiller Index. Most likely, this foretells a broader downturn in nationwide home prices in 2008 that could continue into 2009. Meanwhile, courtesy of the subprime crisis, the credit bubble has popped - ending the cut-rate funding that fuelled the housing bubble.
As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies.
Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.
America's shift back to income-supported saving will be a pivotal development for the rest of the world. As consumption slows and household saving rises in the US, the need to import surplus saving from abroad will diminish. Demand for foreign capital will recede - leading to a reduction of both the US current-account and trade deficits. The global economy will emerge bruised, but much better balanced.
Washington policymakers and politicians need to stand back and let this adjustment play out. Yet the US body politic is panicking in response - underwriting massive liquidity injections that produce another asset bubble and proposing fiscal pump-priming that would depress domestic saving even further. Such actions can only compound the problems that got America into this mess in the first place.
China-bashers in the US Congress also need to stand down. America does not have a China problem - it has a multilateral trade deficit with over 40 countries. The China bilateral imbalance may be the biggest contributor to the overall US trade imbalance but, in large part, this is a result of supply-chain decisions by US multinationals.
By focusing incorrectly on the dollar and putting pressure on the Chinese currency, Congress would only shift China's portion of the US trade deficit elsewhere - most likely to a higher-cost producer. That would be the same as a tax hike on American workers. If the US returns to income-based saving in the aftermath of the bursting of housing and credit bubbles, its multilateral trade deficit will narrow and the Chinese bilateral imbalance will shrink.
It is going to be a very painful process to break the addiction to asset-led behaviour. No one wants recessions, asset deflation and rising unemployment.
But this has always been the potential endgame of a bubble-prone US economy. The longer America puts off this reckoning, the steeper the ultimate price of adjustment. Tough as it is, the only sensible way out is to let markets lead the way. That is what the long overdue bursting of America's asset and credit bubbles is all about.
The writer is chairman of Morgan Stanley Asia
Source: http://news.yahoo.com/s/ft/20080107/bs_ft/fto010720081324550910;_ylt=Aowq_52
2SCo0vjzHOs.Lr5b2ULEF
.
January 8, 2008
SouthAmerica: Someone send me a copy of this article by Stephen Roach.
Thanks.
Mr. Roach is on my short list of favorite economists â I enjoy reading his articles, maybe because we are in the same wavelength, and I agree with him most of the time.
Once again I agree with him, and here is a copy of his latest article:
****
America's inflated asset prices must fall
By Stephen Roach
Chairman of Morgan Stanley Asia
Mon Jan 7, 2008 1:05 PM ET
The US has been the main culprit behind the destabilising global imbalances of recent years. America's massive current account deficit absorbs about 75 per cent of the world's surplus saving. Most believe that a weaker US dollar is the best cure for these imbalances. Yet a broad measure of the US dollar has dropped 23 per cent since February 2002 in real terms, with only minimal impact on America's gaping external imbalance. Dollar bears argue that more currency depreciation is needed. Protectionists insist that China â which has the largest bilateral trade imbalance with the US - should bear a disproportionate share of the next downleg in the US dollar.
There is good reason to doubt this view. America's current account deficit is due more to bubbles in asset prices than to a misaligned dollar. A resolution will require more of a correction in asset prices than a further depreciation of the dollar. At the core of the problem is one of the most insidious characteristics of an asset-dependent economy - a chronic shortfall in domestic saving. With America's net national saving averaging a mere 1.4 per cent of national income over the past five years, the US has had to import surplus saving from abroad to keep growing. That means it must run massive current account and trade deficits to attract the foreign capital.
America's aversion toward saving did not appear out of thin air. Waves of asset appreciation - first equities and, more recently, residential property - convinced citizens that a new era was at hand. Reinforced by a monstrous bubble of cheap credit, there was little perceived need to save the old-fashioned way - out of income. Assets became the preferred vehicle of choice.
With one bubble begetting another, America's imbalances rose to epic proportions. Despite generally subpar income generation, private consumption soared to a record 72 per cent of real gross domestic product in 2007.
Household debt hit a record 133 per cent of disposable personal income. And income-based measures of personal saving moved back into negative territory in late 2007.
None of these trends is sustainable. It is only a question of when they give way and what it takes to spark a long overdue rebalancing. A sharp decline in asset prices is necessary to rebalance the US economy. It is the only realistic hope to shift the mix of saving away from asset appreciation back to that supported by income generation. That could entail as much as a 20-30 per cent decline in overall US housing prices and a related deflating of the bubble of cheap and easy credit.
Those trends now appear to be under way. Reflecting an outsize imbalance between supply and demand for new homes, residential property prices fell 6 per cent in the year ending October 2007 for 20 major metropolitan areas in the US, according to the S&P Case-Shiller Index. Most likely, this foretells a broader downturn in nationwide home prices in 2008 that could continue into 2009. Meanwhile, courtesy of the subprime crisis, the credit bubble has popped - ending the cut-rate funding that fuelled the housing bubble.
As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies.
Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.
America's shift back to income-supported saving will be a pivotal development for the rest of the world. As consumption slows and household saving rises in the US, the need to import surplus saving from abroad will diminish. Demand for foreign capital will recede - leading to a reduction of both the US current-account and trade deficits. The global economy will emerge bruised, but much better balanced.
Washington policymakers and politicians need to stand back and let this adjustment play out. Yet the US body politic is panicking in response - underwriting massive liquidity injections that produce another asset bubble and proposing fiscal pump-priming that would depress domestic saving even further. Such actions can only compound the problems that got America into this mess in the first place.
China-bashers in the US Congress also need to stand down. America does not have a China problem - it has a multilateral trade deficit with over 40 countries. The China bilateral imbalance may be the biggest contributor to the overall US trade imbalance but, in large part, this is a result of supply-chain decisions by US multinationals.
By focusing incorrectly on the dollar and putting pressure on the Chinese currency, Congress would only shift China's portion of the US trade deficit elsewhere - most likely to a higher-cost producer. That would be the same as a tax hike on American workers. If the US returns to income-based saving in the aftermath of the bursting of housing and credit bubbles, its multilateral trade deficit will narrow and the Chinese bilateral imbalance will shrink.
It is going to be a very painful process to break the addiction to asset-led behaviour. No one wants recessions, asset deflation and rising unemployment.
But this has always been the potential endgame of a bubble-prone US economy. The longer America puts off this reckoning, the steeper the ultimate price of adjustment. Tough as it is, the only sensible way out is to let markets lead the way. That is what the long overdue bursting of America's asset and credit bubbles is all about.
The writer is chairman of Morgan Stanley Asia
Source: http://news.yahoo.com/s/ft/20080107/bs_ft/fto010720081324550910;_ylt=Aowq_52
2SCo0vjzHOs.Lr5b2ULEF
.
.
January 28, 2008
SouthAmerica: Here is an article published over the weekend by Asian Times. This is the kind of article that the Asians who are supporting and keeping the US economy afloat are reading.
I wonder if many people in La La Land (Wall Street) also will take the time to read Mr. Liuâs latest article âTHE ROAD TO HYPERINFLATIONâ.
It is worth taking the time to read the entire article. (15 pages long) Here are some highlights of Mr. Liuâs latest article:
THE ROAD TO HYPERINFLATION
Fed helpless in its own crisis
By Henry C K Liu
Published: January 26, 2008
Asia Times â Hong Kong
...The Federal Reserve has at its disposal three tools of monetary policy: open market operations to keep Fed Funds rate on target, the discount rate and bank reserve requirementsâ¦.
⦠Yet the effects of changes in the Fed Funds rate on economic variables are not static nor are they well understood or predictable since the economy is always evolving into new structural relationships among key components driven by changing economic, social and political conditions. For example, the current credit crisis has evolved from the unregulated global growth of structured finance with the pricing of risk distorted by complex hedging which can fail under conditions of distress. The proliferation of new market participants such as hedge funds operating with high leverage on complex trading strategies has exacerbated volatility that changes market behavior and masked heightened risk levels in recent years. The hedging against risk for individual market participants has actually increased an accumulative effect on systemic riskâ¦.
⦠The Fed does, however, control the supply of "high power money" in the regulated partial reserve banking system. By adjusting the required level of reserves and by injecting high power money directly into the banking system, the Fed can increase or decrease the ability of banks to create money by lending the same money to customers multiple times, less the amount of reserves each time, relaying liquidity to the market in multiple amounts because of the mathematics of partial reserve. Thus with a 10% reserve requirement, a $1,000 initial deposit can be loaned out 45 times less 10% reserve withheld each time to create $7,395 of loans and an equal amount of deposits from borrowers.
But money can be and is created by all debt issuers, public and private, in the money markets, many of which are not strictly regulated by government. While a predominant amount of global debt is denominated in dollars, on which the Fed has monopolistic authority, the notional value used in structured finance denominated in dollars, which reached a record $681 trillion in third quarter 2007, is totally outside the control of the Fed. Virtual money is largely unregulated, with the dollar acting merely as an accounting unit. When US homeowners default on their mortgages en mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth.
As the debt securitization market collapses, banks cannot roll over their off-balance sheet liabilities by selling new securities and are forced to put the liabilities back on their own balance sheets. This puts stress on bank capital requirements. Since the volume of debt securitization is geometrically larger than bank deposits, a widespread inability to roll over short term debt securities will threaten banks with insolvency.
The Fed can create money, not wealth
Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market. Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power. In an inflationary environment, when prices are kept high by excess liquidity, monetized wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys monetized wealth.
When the central bank withdraws money from the market by selling government securities, it in essence reduces sovereign credit outstanding because a central bank never needs to borrow its own currency, which it can issue at will, the only constraint being the impact on inflation, which can become a destroyer of monetized wealth when inflation is tolerated not as a stimulant for growth but merely to prop up an overpriced market in a stagnant economy.
⦠In exoteric language, Greenspan is saying that short of moving towards hyperinflation, central banks have no cure for a collapsed debt bubble.
⦠Mortgage crisis to corporate debt crisis
Many homeowners with zero or even negative home equity cannot afford the reset high payments of their mortgages with current income which has been rising at a much slower rate than their house payments. And as housing mortgage defaults mount, the liquidity crisis deepens from money being destroyed at a rapid rate, which in turn leads to counterparty defaults in the $45 trillion of outstanding credit swaps (CDS) and collateralized loan obligations (CLO) backed by corporate loans that destroy even more money, which will in turn lead to corporate loan defaults.
Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value.
Credit insurers such as MBIA, the world's largest financial guarantor, whose shares have dropped 81% in 2007 to $13 from a high of $73, are on the brink of bankruptcy from their deteriorating capital position in light of rating agencies reviews of residential mortgage-backed securities and collateralized debt obligations that have been insured by MBIA, or similar insurers, reviews that are expected to stress claims-paying ability.
⦠Maintaining an AAA credit rating is of utmost important to bond insurers like MBIA because they need a strong credit rating in order to guarantee debt. Moody's, Standard & Poor's and Fitch are all reviewing the financial strength ratings of bond insurers, which write insurance policies and other contracts protecting lenders from defaults.
⦠The triple-A credit rating of the bigger bond insurers is crucial because any demotion could lead to downgrades of the $2.4 trillion of municipal and structured bonds they guarantee. This could force banks to increase the amount of capital held against bonds and hedges with bond insurers - a worrying prospect at a time when lenders such as Citigroup and Merrill are scrambling to raise capital. Significant changes in counterparty strengths of bond insurers could lead to systemic issues. Warren Buffettâs Berkshire Hathaway set up a new bond insurer in December 2007 after the New York State insurance regulator pressed him to do so.
⦠Myth of poor folk over-saving
Both former Fed chairman Greenspan and his successor Ben Bernanke have tried to explain the latest US debt bubble as having been created by global over-saving, particularly in Asia, rather than by Fed policy of easy credit in recent years.
Yet the so-called global savings glut is merely a nebulous euphemism for overseas workers in exporting economies being forced to save to cope with stagnant low wages and meager worker benefits that fuel high profits for US transnational corporations. This forced saving comes from the workersâ rational response to insecurity rising from the lack of an adequate social safety net. Anyone making around $1,000 a year and faced with meager pension and inadequate health insurance would be suicidal to save less than half of his/her income. And thatâs for urban workers in China. Chinese rural workers make about $300 in annual income. For China to be an economic superpower, Chinese wages would have to increase by a hundredfold in current dollars.
Yet these underpaid and under-protected workers in the developing economies are forced to lend excessive portions of their meager income to US consumers addicted to debt. This is because of dollar hegemony under which Chinese exports earn dollars that cannot be spent domestically without unmanageable monetary penalties.
⦠While the equity markets are hanging on for dear life with the Fedâs help through stealth inflation, the bond markets have collapsed worldwide, with dollar bond issuance falling to a stand still, euro bonds by 66% and emerging market bonds by 75% in Q3 2007. Lenders are simply afraid to lend and borrowers are afraid to take on more liabilities in an imminent economic slowdown. The Fed has a choice of accepting an economic depression to cut off stagflation, or ushering hyperinflation by flooding the market with unproductive liquidity. Insolvency cannot be solved by injecting liquidity without the penalty of hyperinflation.
You can read the entire article at:
Source: http://www.atimes.com/atimes/Global_Economy/JA26Dj04.html
********
You can read other articles by Henry C K Liu at:
Independent Critical Analysis and Commentary
http://www.henryckliu.com
âDollar Hegemonyâ By Henry C K Liu
(Originally published as [US Dollar Hegemony has to go] in AToL on April 11. 2002)
http://www.henryckliu.com/page2.html
.
January 28, 2008
SouthAmerica: Here is an article published over the weekend by Asian Times. This is the kind of article that the Asians who are supporting and keeping the US economy afloat are reading.
I wonder if many people in La La Land (Wall Street) also will take the time to read Mr. Liuâs latest article âTHE ROAD TO HYPERINFLATIONâ.
It is worth taking the time to read the entire article. (15 pages long) Here are some highlights of Mr. Liuâs latest article:
THE ROAD TO HYPERINFLATION
Fed helpless in its own crisis
By Henry C K Liu
Published: January 26, 2008
Asia Times â Hong Kong
...The Federal Reserve has at its disposal three tools of monetary policy: open market operations to keep Fed Funds rate on target, the discount rate and bank reserve requirementsâ¦.
⦠Yet the effects of changes in the Fed Funds rate on economic variables are not static nor are they well understood or predictable since the economy is always evolving into new structural relationships among key components driven by changing economic, social and political conditions. For example, the current credit crisis has evolved from the unregulated global growth of structured finance with the pricing of risk distorted by complex hedging which can fail under conditions of distress. The proliferation of new market participants such as hedge funds operating with high leverage on complex trading strategies has exacerbated volatility that changes market behavior and masked heightened risk levels in recent years. The hedging against risk for individual market participants has actually increased an accumulative effect on systemic riskâ¦.
⦠The Fed does, however, control the supply of "high power money" in the regulated partial reserve banking system. By adjusting the required level of reserves and by injecting high power money directly into the banking system, the Fed can increase or decrease the ability of banks to create money by lending the same money to customers multiple times, less the amount of reserves each time, relaying liquidity to the market in multiple amounts because of the mathematics of partial reserve. Thus with a 10% reserve requirement, a $1,000 initial deposit can be loaned out 45 times less 10% reserve withheld each time to create $7,395 of loans and an equal amount of deposits from borrowers.
But money can be and is created by all debt issuers, public and private, in the money markets, many of which are not strictly regulated by government. While a predominant amount of global debt is denominated in dollars, on which the Fed has monopolistic authority, the notional value used in structured finance denominated in dollars, which reached a record $681 trillion in third quarter 2007, is totally outside the control of the Fed. Virtual money is largely unregulated, with the dollar acting merely as an accounting unit. When US homeowners default on their mortgages en mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth.
As the debt securitization market collapses, banks cannot roll over their off-balance sheet liabilities by selling new securities and are forced to put the liabilities back on their own balance sheets. This puts stress on bank capital requirements. Since the volume of debt securitization is geometrically larger than bank deposits, a widespread inability to roll over short term debt securities will threaten banks with insolvency.
The Fed can create money, not wealth
Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market. Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power. In an inflationary environment, when prices are kept high by excess liquidity, monetized wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys monetized wealth.
When the central bank withdraws money from the market by selling government securities, it in essence reduces sovereign credit outstanding because a central bank never needs to borrow its own currency, which it can issue at will, the only constraint being the impact on inflation, which can become a destroyer of monetized wealth when inflation is tolerated not as a stimulant for growth but merely to prop up an overpriced market in a stagnant economy.
⦠In exoteric language, Greenspan is saying that short of moving towards hyperinflation, central banks have no cure for a collapsed debt bubble.
⦠Mortgage crisis to corporate debt crisis
Many homeowners with zero or even negative home equity cannot afford the reset high payments of their mortgages with current income which has been rising at a much slower rate than their house payments. And as housing mortgage defaults mount, the liquidity crisis deepens from money being destroyed at a rapid rate, which in turn leads to counterparty defaults in the $45 trillion of outstanding credit swaps (CDS) and collateralized loan obligations (CLO) backed by corporate loans that destroy even more money, which will in turn lead to corporate loan defaults.
Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value.
Credit insurers such as MBIA, the world's largest financial guarantor, whose shares have dropped 81% in 2007 to $13 from a high of $73, are on the brink of bankruptcy from their deteriorating capital position in light of rating agencies reviews of residential mortgage-backed securities and collateralized debt obligations that have been insured by MBIA, or similar insurers, reviews that are expected to stress claims-paying ability.
⦠Maintaining an AAA credit rating is of utmost important to bond insurers like MBIA because they need a strong credit rating in order to guarantee debt. Moody's, Standard & Poor's and Fitch are all reviewing the financial strength ratings of bond insurers, which write insurance policies and other contracts protecting lenders from defaults.
⦠The triple-A credit rating of the bigger bond insurers is crucial because any demotion could lead to downgrades of the $2.4 trillion of municipal and structured bonds they guarantee. This could force banks to increase the amount of capital held against bonds and hedges with bond insurers - a worrying prospect at a time when lenders such as Citigroup and Merrill are scrambling to raise capital. Significant changes in counterparty strengths of bond insurers could lead to systemic issues. Warren Buffettâs Berkshire Hathaway set up a new bond insurer in December 2007 after the New York State insurance regulator pressed him to do so.
⦠Myth of poor folk over-saving
Both former Fed chairman Greenspan and his successor Ben Bernanke have tried to explain the latest US debt bubble as having been created by global over-saving, particularly in Asia, rather than by Fed policy of easy credit in recent years.
Yet the so-called global savings glut is merely a nebulous euphemism for overseas workers in exporting economies being forced to save to cope with stagnant low wages and meager worker benefits that fuel high profits for US transnational corporations. This forced saving comes from the workersâ rational response to insecurity rising from the lack of an adequate social safety net. Anyone making around $1,000 a year and faced with meager pension and inadequate health insurance would be suicidal to save less than half of his/her income. And thatâs for urban workers in China. Chinese rural workers make about $300 in annual income. For China to be an economic superpower, Chinese wages would have to increase by a hundredfold in current dollars.
Yet these underpaid and under-protected workers in the developing economies are forced to lend excessive portions of their meager income to US consumers addicted to debt. This is because of dollar hegemony under which Chinese exports earn dollars that cannot be spent domestically without unmanageable monetary penalties.
⦠While the equity markets are hanging on for dear life with the Fedâs help through stealth inflation, the bond markets have collapsed worldwide, with dollar bond issuance falling to a stand still, euro bonds by 66% and emerging market bonds by 75% in Q3 2007. Lenders are simply afraid to lend and borrowers are afraid to take on more liabilities in an imminent economic slowdown. The Fed has a choice of accepting an economic depression to cut off stagflation, or ushering hyperinflation by flooding the market with unproductive liquidity. Insolvency cannot be solved by injecting liquidity without the penalty of hyperinflation.
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Source: http://www.atimes.com/atimes/Global_Economy/JA26Dj04.html
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âDollar Hegemonyâ By Henry C K Liu
(Originally published as [US Dollar Hegemony has to go] in AToL on April 11. 2002)
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