Elaine Meinel Supkis
Before the internet, TV weather would often mis-forecast weekend and holiday weather, putting a sunny day spin on looming storms. This was due to advertisers wanting customers to come out of their homes. Today, this is less common thanks to easy access to raw data on the internet. So it is with economic forecasters: even though there is lots of raw data online, they all act as if no one knows what is going on so they give merry forecasts in the teeth of giant typhoons of chaos and economic destruction.
ANALYSIS: Subprime Woes To Force Japan To Reshape Growth StrategyTOKYO (Nikkei)--Senior officials from the Finance Ministry's International Bureau and the Bank of Japan's Financial Markets Department met quietly on Tuesday to discuss market moves in the wake of the subprime loan turmoil. They shared the perception that the liquidity of securitized instruments has been sharply reduced in the U.S. and Europe, causing financial institutions to face a severe credit crunch.
The machinery that is Fortress Japan is quite different from the US system. All of Asia, the world's biggest export countries, sat out nearly the entire liquidity crisis while the US and Europe struggled like crazy to paddle our economic ship out of the giant sucking hole that Ross Perot talked about. Yes, that hole which is the outsourcing of European and American industrial and now, office work. Right now, by spending nearly a trillion dollars in one week, the managers of the US/European mess have managed to pull out of this vortex sufficently to make it look as if all is well so long as we look out at port side. But anyone peering over the gunwhales on the stern side can clearly see the giant whirlpool that is sucking us in, bit by bit.
And the rowers will tire. This is inevitable. To understand the mess we are in, we must look realistically at the dynamics of debt: how much more debt can we accumulate or are we at the end of our collective ropes? The picture I posted above is from the Independent, UK. It is a pretty good pie chart showing how the building boom put the nation into total debt. Namely, the debts now equal the annual GNP. There has to be some method of judging indebtedness and this is a pretty good gage. Any nation that reaches this point is at the end of its ability to sop up debts. The US is also at this same mile stone.
Of course, the US can ignore all this and dream of accumulating debts that are double our GNP. This process of accumulating negative earnings has been an ongoing process for the last 100 years as first, the British Empire and then the United States Imperium both glide downwards thanks to the huge costs of running a global military occupation. The recent battles with Japan over the costs of moving our military bases around Japan reflect the woes of our empire.
Nearly no Amerians are aware of what happened in this business. It barely made the back pages of the news services. Since I write about diplomatic matters, I tracked all these stories in the past. And the game was, Japan wanted us to pay for nearly all of the costs of defending them while making nice to them. The Japanese people were against these bases being moved and it was unpopular so the government of Japan said our own government should shoulder the costs. But the US can't afford this anymore so the wrangling went on and on with Japan slyly suggesting the US get a loan from Japan so the Japanese could collect interest on the costs of moving as well as forcing us to pay the principal! This astonishing proposal was the basis of the 'compromise' which simply put us further in debt to a trade rival who is reaming us out in international trade, beating us out in other countries as well as at home!
The costs of protecting our rivals who are killing us in the marketplace is bankrupting our nation. Britain, besotted on the wines of empire, still imagines it is a Great Power and is struggling to pay for its own military pretensions which is why it is back in Iraq which chased them out years ago and is chasing them out again. This is bankrupting England.
Now the English convinced themselves as well as their American allies, that there is no need to produce anything at all, both our nations could be covered for ever by soaking up all the savings of all the 100 nations ruled by the Anglo/American empire. The miscalculation in all this is pretty obvious to me: the money this imperial machine soaked up has this charming item attached: interest rates. Namely, we have to pay MORE for the money than we borrowed. The logic of interest rates is compelling. Back when it was first invented, it broke the 700 year depression caused by the Roman Empire.
Interest rates reflected RISK. If someone borrows money, there is a RISK it won't be repaid. So the loaning party needs to make a profit and protect themselves by charging enough interest in the first half of the loan to cover the investment in case it goes bad after, say, 30 years. The nature of loans is, people must be very careful to not borrow more than they earn in a year.
This concept, a very old one going back 500 years, has been thrown out recently. When my husband and I earned $40,000 back in 1978, we bought a house and took out a mortgage of $36,000. We paid this off, easily. In the middle of this, my husband's corporation went bankrupt and we had to sue to get the money owed to us from them. Yet, during the time we were struggling to deal with all this, we could still keep afloat because our house didn't cost two or three times our income.
In the old days, banks would sit down with buyers and go over these very details. If someone wanted more than they could afford, the bank would refuse to loan the money. How simple is that? Over the years, due to easy money seeking to make loans via mortgages, the price of housing climbed while the standards fell. Now, it is common to be 3X one's income. This is still managable but it shot through the roof as people took on loans that had no relationship with their incomes. Instead, games were played that allowed them to get sub-inflation rate loans that were well BELOW the risk value rather than above the risk value.
These 'easy' loans didn't just go to homeowners, they went to many nations and too many countries spent more than they earned in taxes due to the cheapness of these loans. All the top nations in the West told each other, the debt levels didn't matter, it was manageable so long as one paid off the annual interest on these loans and if this was cheaper than the inflation created by these countries printing money then all was well! The government can always print money faster than the interest accumulates! So the temptation to inflate is very powerful. Note how, over time, as the world's biggest empire struggles with ballooning debts, it has inflated the currency tremendously, 30% in the last 10 years, while piously saying it is doing no such thing! The Fed this very week has inflated our currency quite suddenly and Europe, even more, while pretending there is no inflation, they will keep the rate set at its present level...which is ridiculous. They have to raise the rates!
The Bank of Europe is raising rates because they are in as deep red ink as the US in this regard. England has been raising rates steadily and now they are in a crisis identical to ours: they have to give away magic money even as this forces interest rates up which kills their domestic markets and puts their government deeper in debt since it has to pay a higher interest on loans to keep it afloat! And the US is the Mount Everest, the Pacific Ocean of global domestic/government debt. No one comes near us in this regard. And mass matters.
Edward Cahill, who ran the European CDO business at Barclays Capital, Barclays' investment banking business, resigned on Monday. On Wednesday, two investment funds set up by his business had their credit ratings slashed by Standard & Poor's, the rating agency, because of losses from investments in US mortgage-backed securities.CDOs are investment products that parcel up different grades of debt - from very risky to the supposedly safe - in a way that gets them high credit ratings. But massive defaults on sub-prime mortgages in the US, which feature in many CDOs, have caused huge losses for institutions and made investors steer clear of any debt they cannot understand.
These credit ratings are what creates the sense of wealth. Since these CDOs are nothing but pieces of paper that are based on more pieces of paper which were signed by millions of people taking on excessive debt they could barely pay even the interest on, forget paying off anything! These things represented 'wealth' and had a supposed added value which USED to be 'interest rates' but thanks to banks and mortgage companies selling 'teaser loans' that were BELOW not only risk-weighted interest rates reflecting the possibility of a certain percent going bankrupt, these teaser loans were at rates below the value of CDs sold by banks to attract savings!
Sigh. Normally, this is IMPOSSIBLE. But we saw this develop because the Bank of Japan has kept interest rates way below the rate of real inflation in the world and they were able to do this because the ability of Japanese workers to go into debt was virtually eliminated and on top of this, their wages cut! So enforced poverty allowed the Bank of Japan to make the yen very weak and to also give the giant exporting companies money to expand that was literally for free. And boy, did they ever expand!
So much money flowed back into Japan which has the world's biggest export profits bar none, they could keep this 'free money' system going more and more and they needed to farm it out and make interest on it somehow since it made 0% interest at home. Thus, the carry trade was born. And so the main capitalist countries discovered they no longer needed savings at home, they could drop interest rates below the rate of inflation because even with that, it still brought a profit to the Japanese because of the differential between Japan and the other G8 nations! So the loans were super-cheap and thus, banks could lure people into homes they couldn't afford via 'teaser rates' that were easy to write off since they were based on 1.5% loans from the Bank of Japan.
Now here is the key to this unfolding mess: these loans from Japan were SHORT TERM. Not 30 year. This is why the 'teaser rates' were for only 2 years! These loans, made when the US dropped its rates to 1%, are now 'resetting.' And it is THIS 'resetting' that has caused the world's banking system to seize up. For there was another player in this cheap loan game: China. And China has no more cheap loans to give out. It has been raising interest rates rapidly this year!
From the Independent:
The downgraded funds were so-called SIV-lites, versions of structured investment vehicles which invest in long-term assets and finance themselves with cheap short-term debt called asset-backed commercial paper (ABCP). Mr Cahill's team has been a leader in setting up SIV-lites for clients.The commercial paper market has seized up because investors do not trust the credit ratings of the assets contained in the investment funds that issue the debt. US commercial paper plunged yesterday as buyers fled debt linked to sub-prime mortgages. The US Federal Reserve cut the lending rate it charges banks last week to try to get the market going again, but investors are still cashing in their ABCP and moving the money to the haven of US government bonds.
The ratings system went silly. The feckless youths and careless old people running our economic system gave fantasy ratings to the funny money systems they set up. Anything can be rated 'AAA' if the guys rating them want to move money. Like used car salesmen, they simply lied about the condition of these instruments with a million curious names. Like SIV-lites, this is all fantasy. They had to madly 'create' one instrument after another but all of these did the same thing: they denied reality and papered over the dire problem of dealing with long-term debt in an increasingly inflationary cycle. Namely, as it rises, as inflation rages, the short term loans rise rapidly and this causes everything else to go into a crisis because now, the long term rates set just a year ago are BELOW THE RATE OF INFLATION.
And the cure? Why, the top banks of all the nations causing this inflation just loaned out nearly a trillion dollars in FAKE MONEY that will cause inflation! They are hoping to recoup this money in three months as all the banks go to Japan to reset their loans from the central banks. Only Japan doesn't have over a trillion in reserves they can let go or the yen will become strong! And they need a weak yen and so do the other nations borrowing from Japan and the only way---this is the trap, the vortex!---the only way they can get free money from Japan is to let Japan ravage the other G8 nations in world trade! Which is why we are going into debt in the first fucking place.
Ouch. Understanding all this can lead to despair. How can we stop this? Can we stop this? I warn everyone: we MUST stop this because it ends in our bankruptcy, the elimination of the American empire and the collapse of Europe into yet another depression as the US closes world trade due to our over-indebtedness.
Small businesses let out a yell of protest after Britain's big four banks had price controls lifted on accounts for small and medium-sized companies (SMEs).The Competition Commission said it would remove the controls on HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB because the market had become more competitive since the measures were introduced in 2003.
But the Federation of Small Businesses said the banks were not complying with agreements they made when the price controls came in. Mike Cherry, the FSB's financial affairs chairman, said: "We are utterly bewildered by the Competition Commission's provisional decision in this case. It flies in the face of all the evidence we have given and completely contradicts the experience of thousands of our members."
The FSB said its survey of more than 4,000 businesses found that more than 70 per cent did not know about the banks' agreements to give them a better deal, and more than half had not been offered either of the options on pricing. The FSB said it would try to get the commission to change its mind during a consultation that ends on 28 September.
The semi-socialist situation in supposedly capitalist countries is causing a lot of problems because this allows the bourses and stock markets as well as bankers to ignore economic reality. This is also working like a poison in our systems for do note the collapse in savings in nearly all the G8 if not all the G8 countries: only China is saving money! Wow. I am furious about this because no economic system can have all elements run in the red! Japan isn't saving: Japan's central bank is fat and happy only because they run a trade surplus with the world. Absent that, Japan collapses. And Japan is triggering a world recession so this will lead to a collapse anyway. This is why the Japanse stock market fell much faster and further than the stock markets in Europe or America.
As Americans tremble at the fear of an epidemic of mortgage foreclosures, Britain is already living one.Foreclosures here are at an eight-year high. So far, lenders have repossessed a record 14,000 properties this year, 30 percent more than a year earlier, according to the Council of Mortgage Lenders. And an additional 125,100 households are behind in their mortgage payments.
Personal bankruptcies have set an all-time record, spurred largely by a crushing increase in mortgage debt.
Amazingly, house prices are still rising. As I keep saying, the rise in house values is not a fact that enriches a nation, it makes a nation POORER as it piles on debts! Far and above normal levels. For 60 years, the US debt versus home equity level was around 60%. Suddenly, when the Bank of Japan allowed the US and then all of Europe to drop interest rates way lower than inflation, these nations had a housing asset rise that should had made us all richer but instead, it destroyed this equilibrium that served us for over half a century!
So instead of asset value rising while debt remained the same, it did the opposite: debts shot up, equity vanished! Governments should have been alarmed by this. A nation in debt is a nation that is weak and will fall the minute the winds of recession blow. People might ask me, why should we worry? We weathered many an oil-hike inflation. We simply destroy other nation's economies or inflate the currency so our debts vanish into smoke. But alas, this time it is different. All previous recessions, we had an equity cushion of 40% of the value of our properties. So things could fall 40% and we wouldn't lose our flexibility to work our way out of the recession by...MAKING LOAN RATES CHEAP AGAIN.
The last time we could do this was when Greenspan goosed us after the collapse of the .com stock frenzy.
A CDO processor writes to Big Picture:
1. XXXXXX and I were talking in 2003 about how shaky these low FICO, high LTV, 2/28 ARM's that were being created were. People in the know knew then those loan products were going to be a problem in the future. Way back in 2003, it didn't make sense.2. In early '05, XXXXXX tried to hook me up with a HF he knew that wanted to play the CDO issuer game. I talked to the guy and told him that at the risk of talking them out of hiring me, I wouldn't do it. I thought that game was topped-out even back then. A bit early, but perhaps the right call.
I looked at the stats back in November, 2005, and said the housing boom was over. Only a few areas might see price hikes, specifically New York, due to it being the place where money floats to Wall Street. And I also predicted the stock market would soar because the funny money flowing to loans would shift to Wall Street and the reason I said this was simple: this is what happened in 1929. Everyone deep inside this system knew what was happening. This is why they kept creating all those funny named thingies held mostly by irresponsible and UNREGULATED hedge funds! They thought, if they chop up these ridiculous, irresponsible loans, and parked them next to good loans, sure, they would be valueless but NO ONE WOULD KNOW! It would slip past most people's notice!
But being greedy, they kept doing this more and more. It went from 2% bad tranches in a CDO package to 20% to 50%! And even as the ratings dropped, the profits rose because the interest rates on return, rose! So everyone piled into the ABS--BBB market! And went bankrupt. This made the money vanish, fast. Faster than the central banks can print money! And so vanishing money runs headlong into inflation and the only way to cancel the inflation is to destroy the incomes of the working class. Voila! No inflation.
I heard on NPR last night that the railroad capacity rate has dropped and is dropping every month so rail road stocks are falling. This is EXACTLY the same news in August, 1929! This is important because it means that buying at the consumer end is dropping. Walmart is complaining that their sales at the end of each month are collapsing because no one has money by then! This is another bad sign. Inflation isn't the real problem: depression is far, far worse. And the only way to stop a depression is to raise wages but in America and England and increasingly, Europe, wages can't go up! Because of the...hold on here...the trade deficit with the oil nations and Asia! This is the vortex.
Bank of China Ltd. had its biggest drop since going public last year after the nation's second- biggest bank said it holds almost $9.7 billion of securities backed by U.S. subprime loans, the most of any Asian company.Bank of China shares fell 5.4 percent to HK$3.87 at the market close in Hong Kong after earlier plunging as much as 8.1 percent. Almost 1.5 billion shares were traded, more than four times the daily average over the previous six months.
*snip*
The collapse in securities backed by subprime mortgages has caused losses at lenders around the world, helping send Asian banking stocks lower in the past month. Industrial & Commercial Bank of China Ltd., the world's largest bank by market value, said yesterday it had $1.2 billion of subprime-related securities.
We think the Dragon of China will pour money into our purses no matter what. Instead, I would suggest this dragon followed the advice of rich fools in America and since the leadership there told me they would never talk to me again back in 1989 (yes, they called and yelled at me), they don't read my news service so they fell into a trap. They listened to fools. Who don't listen to me.
Paulson sent his second in command last month to China to scream, yes, scream at them to continue to buy our stupid CDOs that were rotten to the core. And China refused. Thus, the collapse in 'liquidity'. I wonder what they will do next? Will they begin to close out all their accounts with us? The government is quite capable of doing this. The Chinese leaders, like the Japanese today, are probably furiously discussing what to do next. This is happening faster than they anticipated. They thought we had 2 more years.
The main thing is, as we go back to China, hat in hand, they will hand us our heads. They are angry about Taiwan, angry about our interfering with them as they go out buying oil facilities, angry about the G7 protecting the Japansese as they ravage world markets thanks to the super-cheap yen.
Few U.S. banks have taken advantage of the Federal Reserve's offer last Friday to lend them unlimited amounts of money at 5.75%, Fed data released Thursday show.
*snip*
Borrowing from the discount window has been rare except during extraordinary times. Such loans from the Fed typically carry a stigma because market participants assume that only a desperate situation would compel a bank to use the lender of last resort.
Bank stocks went up on the news that the Federal Reserve was going to bail them out. But if anyone goes to the Reserve for money, they get hammered in the stock market, I am guessing. Also, the Federal Reserve is offering over 5% interest while the Bank of Japan is offering loans at below 3%. So guess where everyone runs for loans! Duh. This freezing up of credit ended swiftly but like the previous event at the end of February this year, it is a harbinger of the storm, not the actual storm itself. This is why, breathing deep and saying we can resume our incredibly stupid economic set up is so childish.
Another strong month at Boeing should boost the headline figure, said David Greenlaw, an economist for Morgan Stanley. He expects modest 0.5% increases for both orders and shipments of nonaircraft, nondefense capital goods, also known as "core" orders.Most of the improvement in manufacturing has come from transportation; capital spending on business investment goods has been tepid.
One of my first articles was called 'Boing Boing Boeing.' It was all about how we hope to fix our trade deficit with the world via selling jets. I even predicted this was a fool's errand since the numbers didn't work: there was no way Boeing could balance trade no matter how hard we market them to dictators and rich oil nations or our trade partners who are reaming us out. They all look at the bottom line and then buy exactly as many jets as they needed so long as it was less than 30% of their annual trade surplus with the US. And in a recession this would drop rapidly to zero. The buying of food is one item we can keep going if there is a recession but like in the Great Depression, in that sort of mess, even food exports collapse.
Jobs now follow the capitalist on his travels throughout the world. They leave the West, only to reappear elsewhere. They turn up in an Indian software company, a Hungarian toy factory or a Chinese automotive engine plant. Despite frequent claims to the contrary, jobs don't simply disappear into thin air. Instead, they are replaced by technology or by workers located somewhere else.The unheard of has happened, something no one really expected. A global labor market has developed, a market that is expanding daily and palpably changing the way billions of people live and work. People today are connected through an invisible system of conduits, people who don't know each other and, in some cases, aren't even aware of the existence of the country in which their counterparts live.
This is precisely what distinguishes today's globalization from the trading nations of the past, the colonial empire and industrial capitalism of the mid-19th century. For the first time in history, a largely homogeneous economic system has developed that encompasses all production factors. Capital, raw materials and human labor are traded just as silver and silk were in the past.
I win no awards for economic writing. But I know more of history than this guy. What has happened during the pre-WWI world? What did everyone 'export' since 1500? Why are most of us in America? Why are so many people in the New World, African? The first flood of human 'export' items were slaves from Africa. Europe had only occasional African slaves before 1500. But with the discovery of the New World and the sudden death of nearly everyone there due to enslavement and the plague, the conquerers needed labor to make export products like gold, silver, indigo, sugar cane, rum, etc to Europe! MILLIONS of Africans were kidnapped and enslaved and many died on the ships that carried them off and they were super-cheap, cheaper than even serfs who had developed too many rights and privilages and had learned to shirk labor in kind.
Then the industrial revolution came. Workers were carried out of England and to the US. Then more poured in from Italy, France and Germany and then all of Europe, a flood of MILLIONS. Who went to work producing export items as well as stuff for at home The railroads ran into the Midwest, conquered from the Indians who were brutally imprisoned in various Gaza strips! The food produced by the workers shipped over from Europe flowed back into Europe. And world trade took off!
And was destroyed by WWI. The US reestablished it after WWII thanks to the Marshall Plan. The new round of world trade didn't base itself on shipping workers about, it did the opposite: capitalists began to move the work around, instead. And we know the ending of this expansion of 'free trade.' History loves to repeat Herself.
Culture of Life News Main Page
So what is your time frame for the coming collapse?
Posted by: native american | August 24, 2007 at 05:35 PM
All bank hysterias happen in August and all major stock market crashes come in October. The elves working the presses for Santa Clauses in the Bank of Europe and the Federal Reserve will try the 'let's print lots and lots of money and lend it at a rate way below inflation!' first.
This will last about 1 year.
Posted by: Elaine Meinel Supkis | August 24, 2007 at 07:51 PM
I think it is time we had a serious discussion about our present financial system and whether or not our forefathers (and foremothers) made the correct decision in implementing it many decades ago. I personally would favor a financial system where people would borrow money from savers, and not from a fiat money financial system which allows money to be created out of thin air, and injected into our economy as debt. When our predecessors created our present financial system, I do not think a major factor in their decision was whether or not it was sustainable over the long term. I think all they were concerned about, was, what is good for us right here and right now. It kind of reminds me of our current situation, where generally speaking, in the decisons we are making not enough thought is given to how these decisons will affect future generations (ie massive expansion of the money supply (and skyrocketing debt levels) and environmental concerns.
You have a great blog going here with lots of information about our financial system.
Posted by: ken | August 24, 2007 at 10:51 PM
At this point in time, if you were a person who had no debt, did not own property or a home, lived in a progressive rural area, and had a decent amount of cash in CD's and online banks, what would you do to protect the purchasing value of the cash against massive inflation on one hand, and possible deflation (through a depression) on the other?
Do you agree it could go either way?
Posted by: Listener | August 24, 2007 at 11:42 PM
I have no debt and lots of land. But whatever one has, governments can take away. They have thousands of excuses and lots of tools. They can even rouse mob anger and steal everything like Hitler did to the Jews in Germany.
When a government inflates or deflates, the best thing to be is not in debt! This is harsh but it is also reality. And in times of inflation, hoarding is best, in times of deflation, holding cash is best. We still don't know which way our government will go.
Europe is going the depression route. So if you are in Europe, cash is king. Here in America, except for a few times, long ago, we are pure inflation plus. So I expect inflation here and am hoarding as best I can.
Posted by: Elaine Meinel Supkis | August 25, 2007 at 01:01 AM