Friday, October 24, 2008

Debt Rattle, October 24 2008: Shot to Rippons

Lewis Wickes Hine Here's looking at you, kid 1911
Mississippi girl, works all day in a cannery.

Ilargi: The losses in Asia and Europe are so large that there's no telling whether Wall Street will be open for trade by the end of the day. A fall of 1100 points before 2 PM EDT will trigger an automatic 1-hour trading halt. Pre-market stock futures trading was suspended when they reached their daily limit.

Still, I don’t think it’s wise to focus on Lower Manhattan too much. At noon, Wall Street was down "only" 4%, and there's always a chance that somehow the downfall can be mitigated, although it's getting hard to see how it could be achieved. Hey, at least there's a beautiful excuse here to spend more of your money on heroic rescues. Does Paulson still need to announce the next plan, or can he just implement the next trillion dollar blowout sight unseen?

No matter how the Dow fares, it'll be a weekend to remember. And I don't think American stocks will be the main story.

On the international front, there are many miles of dams and dikes about to burst. Denmark joins the list of trouble with a desperate rate hike; Romania does the same. ING Groep loses another 20%, even though it got $14 billion last week. Sterling and the Euro keep plunging (which makes Europeans happy). The Yen is heading for the skies beyond infinity, which takes enormous additional amounts of credit out of the markets, a much bigger issue than you might think.

The IMF announces a plan to help developing nations, but even if we were to assume that they have noble intentions -which we don't-, it is too little too late. The Fund is now talking to perhaps a dozen countries at the same time, and it can't seem to conclude any deals. It doesn't want to, it won't, and it can't. There'll be token amounts handed out, but only to countries that agree to give up what can basically be labeled their sovereignty.

The Fed’s huge dollar swap injections included only the "richest economies" (it's starting to get funny just to write that). For all the rest, it's every man for himself. So now the poorer nations face steeply rising interest rates on their loans. Not good. East Asian stock exchanges lost $860 billion this week, and they come with an $80 billion rescue plan. Anybody got a calculator?

I don't think the world markets have ever had a Black and Blue Sunday, but they could see a first. Investors have lost all confidence in Russia, and even though it has huge foreign reserves, there is a breaking point in every system. However, I still doubt that Russia will be exposed as the weakest link.

There is simply no way that all the holes around the planet can be plugged for much longer; it's a matter of days now. Trillions of dollars 'worth' of global equity value have vanished today alone, regardless of Wall Street. We have started down the path towards the worst financial crisis in history, an unprecedented event. Don't listen anymore to anyone anywhere saying there 'might' be a recession. This is a depression, and it will be much worse than the Great One.

How it will unfold is impossible to predict, but one thing is for sure: the rich will attempt to save themselves at the cost of the poor. And that should be a wake-up message for all of you. Politicians and bankers everywhere will keep insisting that their particular economy is in better shape than the others; they will continue to say this until it is no longer credible. I just see Canada's central banker and Treasury secretary pull that very rabbit from the same old hat. No matter that personal debt in Canada is higher than in the US, I guess. Politics and economics are faith-based systems.

Politicians lie; it's an integral part of their job description. It gets them votes. You vote for the guy and gal with a happy tale.

The problem with that is that it prevents their countries from preparing for what is the real, instead of the imaginary, future. And that in turn is a deadly threat for the poorer people within their societies, as well as the poor elsewhere in the world. The sense of entitlement of the middle classes, those who are not among the poor, is being maintained at unrealistic fantasy levels, and for an unrealistic length of time. The proof in the pudding: today’s report that US existing home sales numbers are up. You have to wonder what these folks are thinking. 98% are digging themselves into a hole for life.

Our societies, all of them, need to spread their remaining wealth, because if they don't, they will fall apart. The poverty this crisis will unload upon our lands will make that inevitable. You either share, or you face street fighting men. Over 90% of the 'money' that makes the world go round is make believe, and it's being renditioned and disappeared at lightning speed, to never be heard from again.

In a sense, that's a very healthy development. Yet, the way we are approaching it to date will not end well for many of us. Forget the Wall Street "bloodbath". Unless we change our ways real soon, we are talking real physical bloodbaths.

U.S. Stock-Index Futures Plunge by Daily Limits
U.S. stock-index futures plunged by their daily limits after slumping earnings at automakers and technology companies spurred concern the financial crisis has infected the broader economy. General Motors Corp. declined 13 percent and Ford Motor Co. lost 10 percent after Toyota Motor Corp., the world's second- largest automaker, reported its first sales decline in seven years.

Apple Inc. fell 8.4 percent as Samsung Electronics Co., Asia's biggest maker of chips and mobile phones, had its steepest profit drop in more than three years. Exxon Mobil Corp. lost 8.2 percent as oil and gasoline prices retreated. "It's the spillover of the banking crisis into real economies around the world," said Michael Mullaney, a Boston- based money manager at Fiduciary Trust Co., which oversees $10 billion. "Everything's going down hard. Diversification is not working right now, that's what it amounts to. We're throwing everything out."

Standard & Poor's 500 Index futures expiring in December fell 60 points, or 6.6 percent, to 855.20 as of 9:11 a.m. in New York. The SPDR Trust Series 1, an exchange-traded fund tracking the S&P 500 that was not subject to the trading limit, slumped 8.9 percent to $83.54. Dow futures dropped 550, or 6.3 percent, to 8,224, while Nasdaq-100 Index futures retreated 85, or 6.8 percent, to 1,168.50.

S&P 500 futures will not trade below 855.20 until U.S. exchanges open for regular trading at 9:30 a.m. New York time, said Jeremy Hughes, a London-based spokesman for the Chicago Mercantile Exchange. Dow Average futures won't trade below 8,224, while Nasdaq-100 futures won't fall below 1,168.50, he said. The "limit down" suspension allows both contracts to trade above those levels, he said.

The New York Stock Exchange plans to open for U.S. trading today, spokesman Richard Adamonis said. Under so-called circuit-breaker rules, the NYSE will halt trading for an hour if the Dow drops 1,100 points before 2 p.m. A 2,200-point decline before 1 p.m. will halt trading for two hours, while a 3,350-point slide will close trading for the remainder of the day.

Today is the 79th anniversary of "Black Thursday," the first of three sell-offs on the New York Stock Exchange that erased a quarter of the Dow average's value over five days. Some investors speculated that today's declines were being exacerbated by hedge funds facing margin calls, or demands to repay borrowed money used to buy shares.

"This must be forced selling, probably hedge funds," said Nick Sargen, chief officer at Fort Washington Investment Advisors, which oversees $30 billion in Cincinnati. "A rational investor, and I emphasize rational, wouldn't be selling now." The MSCI All-Country World Index, a gauge of equity markets in 48 developed and emerging nations, has tumbled 47 percent this year as a freeze in credit markets sparked by $659 billion of asset writedowns and credit losses at banks raised concern that the global economy is headed for a recession. About $30 trillion of market value has been erased from global equities in 2008, according to data compiled by Bloomberg.

Europe's Dow Jones Stoxx 600 Index slumped 7.4 percent today and the MSCI Asia Pacific Index sank 5.2 percent. The S&P 500 has declined 3.5 percent this week, while the Dow average has dropped 1.8 percent. The Nasdaq Composite Index is down 6.3 percent. GM, the biggest U.S. automaker, dropped to $5.30 today and Ford, the second-largest, declined to $1.81. GM reiterated today that bankruptcy is "not an option" for the company. Speculation regarding GM's financial stability is unfounded, spokesman Tony Cervone said in an interview.

Toyota sold about 2.236 million vehicles worldwide in the three months ended Sept. 30, down 4.3 percent from 2.336 million a year earlier. GM will release its third-quarter sales figure on Oct. 29. Volvo AB, the world's second-largest maker of heavy trucks, cut its industry growth outlook for this year, and PSA Peugeot Citroen, Europe's second-biggest carmaker, cut its full-year targets. Apple, the maker of iPhones and iPods, dropped $8.21 to $90.02. Intel Corp., the world's largest chipmaker, declined 6.6 percent to $13.55. Samsung's profit tumbled as oversupply drove down prices of semiconductors.

Earnings at the 200 companies in the S&P 500 that reported third-quarter results so far dropped by an average of 23 percent, trailing analysts' expectations by 1.6 percent, according to data compiled by Bloomberg. General Electric Co., the economic bellwether whose products range from power-plant turbines to locomotives, dropped 5.9 percent to $17.70. The company said it plans to use the Federal Reserve's short-term funding facility when it starts next week. American International Group Inc. declined 14 percent to $1.81. The insurer said it has used $90.3 billion of a U.S. government credit line since it was bailed out last month, an amount that exceeds the size of the original loan meant to save the company. Microsoft Corp. retreated 6.1 percent to $20.96 even as the world's largest software maker reported profit and sales that beat analysts' projections.

Exxon, the biggest U.S. oil company, declined to $65.86. Chevron Corp., the second-largest, lost $5.79 to $64.60. Crude oil lost 6.9 percent to $63.18, copper dropped 7.6 percent and corn lost 4.2 percent. An S&P GSCI index of 24 raw materials has dropped 35 percent since September, poised for a record quarterly decline. The U.K.'s FTSE 100 Index dropped 7.4 percent after the economy shrank for the first time since 1992. South Korea's Kospi Index sank 11 percent as the country's economy grew at the slowest pace in four years. Russia's Micex Stock Exchange suspended trading until next week.

The yen climbed to a 13-year high against the dollar as the prospect of a global recession prompted investors to dump higher-yielding assets funded in Japan. The dollar rose to a two-year high versus the euro.

"This is once-in-a-lifetime stuff, we're all sat under our desks with tin hats on"
The Dow Jones Industrial Average and the Standard & Poor's 500 tumbled as fears of a full-blown global recession intensified and investors dumped risky assets. Within minutes of the exchanges on Wall Street, the Dow Jones was down 2.6pc and the S&P was off 3.2pc. The drops comes after futures on Dow Jones and Standard & Poor in New York have been limited after they fell by more than 6pc.

To trigger a one-hour suspension of stocks trading on Wall Street, the Dow would have to fall 1,100 points, or currently 12.6 percent, before 2:00 pm New York time. "It's carnage," David Buik, of BGC Partners said. "Confidence is shot to rippons. We need action now. It is a catastrophe that we have got to recession, but we have got to learn to live with it, and that means saving the markets." In London, the FTSE 100 has joined a worldwide rout of stock markets today as fears of a full-blown global recession intensified and investors dumped risky assets.

The index of 100 leading shares tumbled 292 points, or 7pc to 3,794 as official figures confirmed Britain is on course for its first recession since the early 1990s. The FTSE collapse is being led by the banks, once again, with HBOS sinking 19pc to 59p, Barclays off 14.4pc to 187p and the London Stock Exchange down 14pc to 453p. Mining stocks also tumbled, with Eurasian Natural Resources Corporation (ENRC) fell 14pc and Vendanta Resources was off 11pc.

"This is once-in-a-lifetime stuff, we're all sat under our desks with tin hats on,'' said Neil Mellor, a currency strategist at Bank of New York told Bloomberg. Sterling plunged seven cents against the dollar as official figures showed the UK's gross domestic product fell by 0.5pc, the first contraction since the 1990 recession.

The chancellor Alistair Darling told the BBC: "It's obvious now that our economy, other economies across the world, are moving into recession. Yes, it's going to be difficult, yes it's going to be tough, but we can get through it." Across Europe Germany's Dax 30 fell 9.1pc to 4,105 and France's CAX 40 is down 8.4pc to 3,032. Overnight some Asian markets tumbled to five-year lows, as economic indicators brought back ugly reminders of the Asian Financial Crisis a decade ago.

Tokyo's Nikkei 225 average led the slump closing down 811.9 or 9.6pc at 7,649.08, its lowest level since May 2003. It has lost half its value this year, much of that this month as the economy was reported to have officially contracted. South Korea's Kospi index, which has been in freefall all week, fell another 10.6pc or 110.96 points at 938.75, breaking the psychologically important 1,000 barrier for the first time in three years. In Hong Kong, the Hang Seng index fell 486.87 points, 3.5pc, to 13,273.62.

Russian default risk tops Iceland as crisis deepens
Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default. Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland's debt before it sought a rescue from the International Monetary Fund. Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe.

Romania had to raise overnight interest rates to 9% on Wednesday to stem capital flight, recalling the wild episodes of Europe's ERM crisis in 1992. The CDS spreads on Ukraine's debt have topped 2,800, signalling total revulsion by investors. Rating agency Standard & Poor's issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

S&P said Russia's budget was likely to slip into deficit in 2009 as result of the dramatic slide in oil and metal prices this autumn, and cautioned that "the ongoing concentration of the financial system in state hands" had become a political risk. Russian companies must roll over $47bn of foreign loans over the next two months, and a further $150bn or so next year, a task that has become close to impossible as investors flee Eastern Europe.

President Dmitry Medvedev said yesterday that disaster could still be kept at bay. "We can avoid a banking, forex or debt crisis and get through today's difficulties. Russia has not yet got in this difficult situation. It must avoid this," he said. Hans Redeker, currency chief at BNP Paribas, said markets no longer believe Russia is strong enough to guarantee the estimated $530bn of foreign debts accumulated by its companies during the break-neck expansion of the oil boom. "The surge in Russian CDS spreads is paralysing the whole system. The government can offer very little help to the banks at this point because its own sovereign debt is in question," he said.

"This crisis is starting to look like the Black Wednesady in 1992. Unless we see an extension of central bank swaps in dollars and euros to Eastern Europe within days to stop this uncontrolled process of deleveraging, this could get out of control and do serious damage to Western Europe. We could see the euro fall to parity against the dollar by next year," he said.

Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog, said Russia's Achilles Heel is the lack of a proper rouble bond market. This had forced companies to raise half their money abroad, in foreign currencies. "The consequence is that foreign debt repayment has had a dramatic impact. It has led to a scramble for assets and forced selling of good assets in order to raise cash to pay debt. The only way for oligarchs to raise money at present is by selling their equity," he said. Russia's "unique fragility" is that over $1 trillion of debt needs to financed from a domestic capital pool of $600bn.

Even so, Mr Bond said Russia is still sitting on over $500bn of foreign reserves – the world's third biggest – despite losses of $67bn since August from capital flight. "The government still has enormous firepower to solve the problem," he said.

Global auto market may "collapse" in 2009: J.D.Power
The global auto market may experience an "outright collapse" in 2009 amid growing concerns around credit availability of credit and general economic stress, an influential industry tracking firm said on Thursday.

J.D. Power and Associates forecast U.S. light vehicle sales would fall to 13.2 million units in 2009 after likely settling at 13.6 million units this year, adding that a pronounced recovery is more than 18 months away.

"While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse," said Jeff Schuster, executive director of automotive forecasting for J.D. Power.

"While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil," Schuster said.

Asian indexes fall hard on bloody Friday
Asian markets were mauled Friday, with Japanese, Indian and South Korean indexes slumping more than 9.5% each to end below crucial psychological milestones as fears of a global recession swept across the region. Benchmarks in Hong Kong, Australia, Singapore and Taiwan dropped to their lowest levels in at least three years.

Japan's Nikkei 225 Average sank 9.6% to end at 7,649.08, a closing level it hasn't seen since April 29, 2003. The benchmark is now valued at less than a fifth of its all-time high of 38,915.87, which it touched in December 1989. "There is a complete loss of confidence and it was brought on by the decline in Japan," said Francis Lun, general manager at Fulbright Securities in Hong Kong. "We are going back to the stone ages."

South Korea's Kospi index dropped even more, plunging 10.6% to close at 938.75, registering its first fall below the 1,000-point level since June 30, 2005. India's Sensitive Index hit the day's bottom at 8,566.82, a level it hasn't seen since November 2005, before ending down 11% at 8,701.07. During the tumultuous week, the Nikkei lost 12% and the Sensex shed nearly 13%, while the Kospi sank more than 20%. Hong Kong's Hang Seng Index, which ended below the 14,000-point level a day earlier, fell past even the 13,000 milestone during the session for the first time since October 2004. The index ended down 8.3% at 12,618.38.

"I don't think the turmoil will be finished any time soon. I think it'll continue this quarter and the next. It's very difficult to see the bottom in the near-term," said Hirokazu Yuihama, head of regional strategy at Daiwa Institute of Research in Shanghai. The losses in Tokyo were led by Sony Corp., which slumped 14.1% to end at its lowest level since 1995, after the company on Thursday cut its full-year profit forecast to 150 billion yen ($1.54 billion) from 240 billion yen, citing a stronger yen, weaker sales in its electronics unit and hard times in the financial-services segment. Other exporters were also hammered in the wake of Sony's profit-warning after the U.S. dollar fell below the 96 yen-level, as risk-averse investors unwound their carry trades.

Australia's S&P/ASX 200 dropped as low as 3,830, the lowest it has seen since November 2004, before paring some losses to end at 3,869.40 for a loss of 2.6%. Taiwan's Taiex ended at its lowest point of the day -- 4,579.62, a level it hasn't seen since May 2003. Singapore's Straits Times index touched the day's bottom at 1,590.36, a level it hasn't seen since September 2003, before ending down 8.3% at 1,600.28. China's Shanghai Composite and New Zealand's NZX 50 index were among the best performers of the day, with the Shanghai index ending down 1.9% at 1,839.62, while the NZX 50 index lost 1% to 2,778.55.

Yuihama said recession worries were in place, and that it was "almost certain" that the U.S. and Europe could go into a recession during the third and fourth quarters of 2008. "That is very negative for Asian economies. Export-dependent economies like South Korea, Taiwan and China will be hit hard," he added. He said Hong Kong's Hang Seng Index was expected to find support near the 12,000-point level, Singapore's Straits Times index near 1,500 and Taiwan's Taiex close to 4,300. Analysts said fears of further earnings downgrades for regional corporations also likely contributed to the sell-offs.

Peter Hilton, head of Asian equities research at Royal Bank of Scotland in Hong Kong, said analysts were likely to downgrade corporate earnings for 2009. "In general, strategists and economists had held some hope that in the second half of 2009, we might be moving ahead, but now, that's being rapidly discounted and analysts are going to have to continue to discount 2009 earnings," said Hilton. After the crisis in the financial markets and the credit markets, "the next step is for the real economy, which is slowing quickly in the third quarter," said Hilton.

Over $820 billion wealth lost in a week The weekly losses this week across the top eight stock markets in the region -- Tokyo, Hong Kong, Shanghai, Sydney, Mumbai, Seoul, Singapore and Taipei -- totaled nearly $820 billion, according to FactSet Research data. Of those losses, Tokyo, the largest stock exchange in the region by market capitalization, lost more than $190 billion, while Hong Kong lost almost another $180 billion.

The credit crunch claims its biggest victim - Argentina
The credit crisis could be about to claim its biggest victim so far. It started with subprime borrowers, moved on to banks and has now progressed on to whole countries.

Iceland has already virtually thrown in the towel, and now Argentina has returned to the verge of bankruptcy. It's all further proof that the 'de-coupling' concept is a load of junk, as well as another big sign that the 'crunch' is a very long way from reaching the finishing straight. And Argentina won't be the last country to succumb…

Iceland clearly didn't have its troubles to seek. Any country with gross domestic product (GDP) – i.e. annual output - of $20bn, but whose banks owe almost three and a half times that amount in foreign debt, is in very hot water indeed. But Argentina's a different kettle of fish altogether. Its GDP is roughly 13 times the size of Iceland's – yet for the second time this decade, it looks like the country's creditors could be unlucky.

Though perhaps unlucky's not the right word. Naïve, or just plain daft, might be a better one. That's because Argentina has form, and quite recent form at that. In December 2001 it reneged on its $95bn of sovereign debt. At the time, that was the biggest default in world history, though these days such a number looks like chicken feed compared with what the world's bankers have recently managed to mislay.

Only in 2005 did Argentina sort the final details, with a 'take-it-or-leave-it' 70% 'haircut' on face value, again the largest sovereign debt markdown ever. Three years later, it's back to square one. Inflation is rocketing (some estimates put it at 20% annualised) and the government is once again running out of cash. Argentina's borrowing needs will swell to as much as $14bn next year from $7bn in 2008, says RBC Capital Markets. And any confidence that the country will be able to repay what it owes is fast flying out of the window.

Argentina's 8.28% government bonds are due to be redeemed in 2033. Fat chance of that, the way things are looking right now. Now priced at 22 cents on the dollar, they currently yield 31%, as against 'just' 12% a month ago. And still no one wants them.

What's more, the price of credit default swaps – market insurance that investors can buy to protect themselves against default - covering the country's sovereign debt has more than quadrupled over the past month. These CDS now stand at more than three times the Icelandic level, and suggest there's almost a two to one chance that Argentina will go bust this year.

In fact, things have now got so bad that the state has decided to take over $29bn of the country's privately managed pension funds to get its hands on some cash. This is being presented as an emergency move to meet financing costs that have soared as commodity prices have tumbled.

In a breathtaking piece of bravado, President Cristina Kirchner said the proposal would "protect" retirees from the global financial crisis, according to Bloomberg, while denying she was trying to "grab the cash" to pay off debt or to finance new programmes or projects. Pull the other one. The last time Argentina sought to tap into workers' savings was just before that 2001 default.

For now, the funds being targeted are 'just' retirement accounts, but the entire $97bn pool of private pensions contains a lot of juicy and much-needed hard currency. Understandably, this hasn't gone down at all well in the money markets. "It's the final of many nails in the coffin from an institutional investor perspective," said Bill Rudman at WestLB Mellon Asset Management. "Argentina is disappearing into irrelevance".

It's all a classic sign that the de-coupling concept – whereby some areas of the planet remain unaffected by the woes of the rest of the world – is as big a load of junk as all those Argentine bonds. At least the country's track record means it's been shut out of international capital markets, so that even the most gullible lenders should have avoided loading up on its dodgy debt.

But Argentina's problems also show that the credit crisis still has a long way to run. So is it a harbinger of similar dangers elsewhere? As the recession bites harder, more governments will start to find out that their tax take is on the slide. What's more, bond markets aren't going to be very keen on making up the revenue shortfalls, as least at the sort of cost that taxpayers will be happy to pay. So with state coffers under siege, there could be more of this sort of appropriation in the pipeline.

"The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property", says the Telegraph's Ambrose Evans-Pritchard, "it's a foretaste of what may happen across the world". Already governments in the US, Britain, and Europe have got the taste for meddling in the markets under the guise of 'saving the system', such as taking stakes in banks that rank above the existing owners, and then telling these banks how much to lend.

And those same governments have shown themselves quite prepared to bend the rules if they think they can get away with it, like letting bank mergers go through regardless of so-called competition rules. There have already been vague mutterings about government-backed hedge fund bailouts, to stop the stock markets sliding. So if the excuse arrives to 'help out' the odd pension fund or two, what are the odds of Gordon Brown importing the Argentine model and finding a way to hoover up some of the available cash? It may not seem likely right now, but then a year ago, nor did the nationalisation of half our banking system.

Libor for Overnight Dollars Rises as Recession Concern Mounts
The cost of borrowing in dollars overnight in London rose as the increased likelihood of a global recession spurred banks to hoard cash even after policy makers pumped record amounts of the U.S. currency into financial markets.

The London interbank offered rate, or Libor, that banks charge for such loans climbed 7 basis points to 1.28 percent today, British Bankers' Association said. It gained for the first time in 10 days yesterday. The comparable rate for U.K. pounds jumped 19 basis points to 4.75 percent. The Libor-OIS spread, a measure of cash scarcity, widened by the most since Oct. 10.

"The level of activity in the money markets remains significantly below standard norms and subject to sporadic abnormalities that can only be a function of illiquidity," said Charles Diebel, head of European rates strategy at Nomura International Plc in London. The thaw in lending that began earlier this month after policy makers pumped cash into money markets and governments bailed out banks may be faltering as the global economy slides into a recession. Credit markets froze after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15 as financial institutions hoarded cash on concern more banks would fail.

Stocks plunged around the world, sending futures contracts on the Dow Jones Industrial Average and Standard & Poor's 500 Index down by their daily limits. The U.K. pound fell the most in at least 37 years against the dollar after the British economy contracted more than forecast in the third quarter. The yen surged to a 13-year high versus the U.S. currency, while 10-year Treasuries headed for their biggest weekly gain since 1987.

The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, widened 8 basis points to 262 basis points today. It was at 364 basis points on Oct. 10, widening from 354 basis points a day earlier. A basis point is 0.01 percentage point. The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was at 261 basis points, up from 257 basis points yesterday. It was at 112 basis points two months ago.

U.S. Treasury Secretary Henry Paulson is preparing to take stakes in a number of regional banks as he seeks to halt the freeze of credit to businesses and households, according to a person briefed on the matter. The plans may be announced as soon as today, the person, who was briefed by bankers and Treasury officials, said on condition of anonymity.

The purchases would be the second round in a $250 billion program to inject capital into financial companies, after an initial $125 billion was allocated to nine of the largest banks. Regional lenders, already suffering from the housing slump, are now getting hit by rising loan delinquencies as the economic downturn deepens, with unemployment at a five-year high. The European Central Bank said Oct. 21 its lending to banks reached a record 773.2 billion euros ($979 billion) through monetary operations, up from 739.4 billion euros a week earlier and a 68 percent surge from the first week of September. Policy makers in Europe and Japan have been offering banks an unlimited supply of dollar funding.

Libor is set by a panel of banks in a daily survey by the British Bankers' Association at about noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year. About $360 trillion of financial products worldwide, from mortgages to company loans and derivatives, is tied to the Libor.

The three-month lending rate for Hong Kong dollars, known as Hibor, rose for the second day, gaining 5 basis points to 3.29 percent. Australian three-month interbank borrowing costs rose 3 basis points to 5.89 percent, the highest since Oct. 15. South Korea's benchmark 91-day certificate of deposit rate rose 1 basis point to 6.17 percent, the highest since January 2001. Indonesian three-month interbank rates climbed 4 basis points to 12.25 percent, 275 basis points above the central bank's main benchmark. That's the largest premium in three years.

Which country will go bust next?
Emerging markets and currencies are feeling the heat as the crisis in Iceland has turned the spotlight on other potential blow-ups across the world. So who else is in trouble? The western financial crisis is going global. Investors have been selling out of "anything remotely risky", notes Dresdner Kleinwort's Jon Harrison.

Commodity producers such as Brazil and Mexico have been hammered as jitters over global growth have mounted. Their stockmarkets are now down by around 56% and 40% respectively this year. But the spotlight has fallen mainly on countries with high debt levels and banking sectors that are dependent on external funding. There are "quite a few" more potential Icelands out there, says Lars Christensen of Danske Bank.

In Asia, Pakistan, struggling with political turmoil, a huge current-account deficit and dwindling foreign-exchange reserves, has had to turn to the IMF, the World Bank and the Asia Development Bank to secure funding to cover $3bn of debt that it will soon have to pay. The Korean won posted its biggest one-day fall in a decade last week.

The highly indebted private sector and Korean banks' heavy reliance on short-term foreign borrowings make it far "more fragile than other Asian financial systems", notes Leo Lewis in The Times; around 12% of the banking sector is funded by the gummed-up wholesale debt sector. And the current-account deficit is in the red. Early this week, the Korean authorities calmed the markets with a $100bn government guarantee of banks' foreign-currency debts maturing between now and June 2009. It also injected $30bn of highly sought-after dollars into the banking system.

Citigroup has highlighted Indonesia – where the stockmarket "recently seems to have spent more time closed than open", says the FT – and Korea as the Asian countries most vulnerable to the sudden reversal of external financial flows. Still, Korea looks much healthier than it did in 1997, says Capital Economics. The ratio of short-term external debt to foreign-exchange reserves was then 300%; now it's 72%. Moreover, Asia as a whole has over $4 trillion in foreign-exchange reserves that can be used to bolster currencies.

It also has little consumer debt and is by and large "a continent of current-account surpluses, well-capitalised banks and modestly leveraged balance sheets", as Louise Lucas says in the FT. So this time round, Asia's capital-flight problem looks "manageable". The larger problem is "how to cope when western markets lose their appetite for Asia's exports". The Asian Development Bank points out that 60% of Asia ex-Japan's exports go to America, Europe and Japan. Given the darkening outlook in these economies, and the fact that Asian earnings are still expected to grow by an unrealistic 14% in 2009, the Asian bear market is unlikely to be over.

But the risk of financial crises has been highest in central and eastern Europe. Virtually all the economies in this region (except Russia, which is using its foreign-exchange reserves to bolster banks and businesses hit by the shutdown in global borrowing) have large current-account deficits and hence high external debt to GDP ratios. So they are dependent on foreign financing just as investors flee risk. Current-account deficits have reached 15-20% in the Baltics and Balkans, and 10% in Ukraine. The downturn in western Europe is also denting confidence.

A particular worry is that in central and southeast Europe and the Baltic states, consumers and companies have borrowed in foreign currencies, notably euros and Swiss francs; last year almost 90% of loans were made in these currencies in Hungary. The interest rates on foreign-denominated loans were lower, but now that the local currency is sliding – it has hit a two-year low against the euro – consumers and firms are struggling as they are spending more on repayments. The western banks who supplied these loans via local subsidiaries are now under pressure and local lenders are cutting back on or raising the cost of foreign-denominated loans.

Hungary has received a €5bn credit line from the European Central Bank to cover local banks' shortage of euros, while the IMF is lending Ukraine and Iceland up to $14bn and $6bn respectively. It may also help Serbia. Such moves may help avoid the "poisonous cocktail of currency devaluations, spiralling inflation, sharp increases in bond yields and steep drops in output" that typify balance of payments crises, according to Capital Economics. But plunging commodity prices and hence export revenues may soon cause currency crises in poorly managed and hence especially vulnerable Ecuador, Venezuela and Argentina, reckons Win Thin of Brown Brothers Harriman. The emerging-market firestorm isn't over yet.

IMF bailout of Iceland delayed until fate of UK, Dutch savers’ frozen cash is resolved
Stalemate in talks between Iceland and Britain over the fate of the money from UK savers that is frozen in an Icelandic bank was being blamed last night for delaying a bailout of the stricken North Atlantic economy.

The International Monetary Fund is believed to be insisting that Reykjavik’s dispute with London over British savings held in Icesave, the UK offshoot of Iceland’s nationalised Landsbanki, is resolved before it will make a decision on the scale of emergency support for the tiny island nation.

The IMF’s governing executive board was meeting last night to debate a potential rescue package for Iceland, which could total $6 billion (£3.7 billion and is likely to be backed by several Scandinavian central banks and the Bank of Japan. It would make Iceland the first Western country to receive an IMF loan since Britain went to the fund in 1976. But it was feared last night that a deal to shore up the Icelandic economy and financial system could be delayed by the continuing obstacle posed by Reykjavik’s still unresolved row with Britain over Icesave.

Talks in the Icelandic capital between officials from the country’s government and the British Treasury broke up last night with no agreement. The negotiations are thought to revolve around Britain lending Iceland sufficient funds for it to repay the savers. Some reports have suggested that a loan from the UK of £3 billion may be required and is being sought by Reykjavik. However, Whitehall sources played down the figure.

About 300,000 British savers had accounts worth about £4 billion in Icesave, which suspended operations on October 7 and stopped customers from both depositing and withdrawing money. Before the talks broke up last night, Geir Haarde, the Icelandic Prime Minister, told a newspaper in the country that; “We have not accepted their [Britain’s] legal arguments.”

On Wednesday, Mr Haarde admitted on Iceland’s national radio services that IMF emergency support for his country’s economy was contingent on a deal with Britain being settled first. “The IMF would like to see those matters solved before any further steps are taken,” he said. He added that a package from the IMF was also contingent on a new national economic forecast being made, and one factor that would affect that would be the scale of other foreign loans to his country – presumably including a potential loan from Britain.

Iceland’s once-booming financial sector has been undercut after the global financial crisis of recent weeks sent the krona, the country’s currency, into virtual freefall, leading its government to seize control of banks including Kaupthing and Glitnir as well as Landsbanki. As a consequence, the bulk of the money that belongs to British savers, which is being held in Icesave, has been frozen since early October.

Petur Bloendal, chairman of the Icelandic Parliament’s tax and economic affairs committee, told reporters yesterday that he did not believe that Icelandic MPs would approve the proposals for a British loan. He said that British and Dutch demands over Icesave accounts in the two countries amounted to the equivalent for every Icelander of three to four times the reparations that were imposed on Germany after the First World War.

Last night the Treasury insisted that it was continuing to talk to Reykjavik, despite the winding up of the present round of negotiations. A spokesman said: “Any agreement with the IMF is always dependent on countries honouring their debts and treating creditors equally. The UK is not the only country involved in this process and other creditors will also expect payment. “The UK Government continues to work constructively towards a resolution with the Icelandic Government and looks forward to a swift solution.”

An Icelandic Government spokeswoman said: “This round of discussions has ended, but talks are not overand will be continued in the very near future.” She declined to give details of the talks or what progress was made, and did not give the exact date of the next round of talks.

Yen Rises to 13-Year High as Investors Exit High-Yield Assets
The yen climbed to a 13-year high against the dollar as the prospect of a global recession prompted investors to dump higher-yielding assets funded in Japan. The dollar rose to a two-year high versus the euro.

The Japanese currency also surged to the strongest in six years against the euro, posting its biggest gain, after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. The pound fell below $1.53 in its biggest drop in at least 37 years after the U.K. economy shrank in the third quarter, bringing it to the brink of recession.

"There's a powerful de-leveraging and risk-aversion dynamic globally across all financial markets and that's helping prompt the strengthening of the yen," said Robert Minikin, a currency strategist with Standard Chartered in London. "We're seeing a lot of weakness in higher-yielding currencies and the yen is performing well. As balance sheets shrink and assets are repatriated, that can help the U.S. dollar."

The yen rose to 91.81 per dollar at 7:23 a.m. in New York, the highest level since Aug. 9, 1995, from 97.31 yesterday. Against the euro, it climbed 9.6 percent to 113.81, the strongest level since May 22, 2002, and the biggest daily gain since the euro's inception in January 1999. The dollar also headed for its best week ever against the euro, rising to $1.2497, the lowest since October 2006, from $1.2934 yesterday, and $1.3410 a week ago. The pound fell to $1.5269, the lowest level since August 2002. Against the euro, the pound weakened to a record 81.96 pence, from 79.69 pence.

The yen typically rises when demand falls for so-called carry trades, where investors borrow in currencies with low interest rates and buy assets in nations with higher rates. Japan's target rate of 0.5 percent is 550 basis points below Australia's and 325 basis points less than the euro region's. The yen touched a post-World War II high of 79.75 against the dollar on April 19, 1995, prompting the Group of Seven nations to intervene that year by buying the greenback to stabilize currency markets. The G-7 is comprised of Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

The yen rose 8.9 percent this week against the dollar, the biggest gain since October 1998. It surged 14 percent against the euro, the biggest weekly advance since the 15-nation currency's 1999 debut. The euro headed for a 6 percent decline versus the dollar. The Australian dollar fell 15 percent to 55.13 yen. The New Zealand dollar declined 13 percent to 50.12 yen. The two currencies are favorites for carry trades. Financial-market moves risk erasing those profits.

The dollar advanced against every major currency except the yen as stocks tumbled after Samsung Electronics Co.'s profit slumped and Air France SA said it will be difficult to meet earnings targets. Volatility on one-month dollar-yen options, a measure of expectations for future price swings, rose to 28.14 percent, the highest since Oct. 13, indicating greater risk market moves may cut carry trade profits. It rose 32.175 percent on Oct. 10, the highest since Bloomberg began compiling data in December 1995.

Coordinated rate cuts by major central banks on Oct. 8 and financial system bailouts in the U.S. and Europe have failed to revive stock markets or encourage banks to resume lending. The MSCI World Index of shares lost 3.6 percent. It has fallen 44 percent in 2008 as credit-related losses and writedowns topped $660 billion in the worst financial crisis since the Great Depression. Europe's Dow Jones Stoxx 600 Index fell 7.1 percent, and the MSCI Asia Pacific Index sank 5.4 percent.

Trading in futures on the Standard & Poor's 500 Index and the Dow Jones Industrial Average was limited today after declines in the contracts of more than 6 percent triggered a so- called limit down restriction. The futures will not trade below 855.20 until U.S. exchanges open for regular trading at 9:30 a.m. New York time, said Jeremy Hughes, a London-based spokesman for the Chicago Mercantile Exchange. Dow Average futures won't trade below the 8,224 level, he said. The "limit down" suspension allows both contracts to trade above those levels, he said. The common European currency fell to a two-year low versus the dollar after Standard & Poor's Ratings Services threatened yesterday to cut Russia's debt ratings, adding to signs the credit crisis is spreading.

U.K. gross domestic product dropped 0.5 percent from the second quarter, the first contraction since 1992, the Office for National Statistics said today in London. Economists predicted a 0.2 percent decline, according to the median of 35 forecasts in a Bloomberg News survey. Growth stalled in the prior three months. The pound dropped and U.K. stocks fell after the report, which confirmed Prime Minister Gordon Brown's prediction this week that a recession is likely. His government's 500 billion pound ($805 billion) bank rescue package and the Bank of England's half-point rate cut this month, the biggest since 2001, may have come too late to prevent further contraction.

The euro and the pound may weaken as European and U.K. banks have five times as much loan exposure to emerging markets as the U.S. or Japan, with most lending to Eastern Europe, according to Morgan Stanley. "Part of the reason why euro-dollar continues to drift lower has to do with the rising risk that pressures in Eastern Europe will have a negative boomerang effect on Euroland," London-based currency strategists Stephen Jen and Spyros Andreopoulos wrote in a research note yesterday.

European banks' lending to emerging markets is about 21 percent of Europe's GDP and U.K. banks' loans are around 24 percent of national output, compared with 4 percent for the U.S. and 5 percent for Japan, the strategists wrote, citing data from the Bank for International Settlements.

"There are concerns over country risk in Europe," said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's biggest bank. "Some currencies there appear to be under speculative attack because their banking sectors aren't sufficiently guaranteed by the governments." The euro may weaken to parity with the dollar by year-end, he said. The Hungarian forint weakened by 3.4 percent to 222.60 per dollar. The Polish zloty fell 3 percent to 3.0922 per dollar.

Danish Krone Thrown A Bone
Denmark has become the second country in Europe this week to raise interest rates in an attempt to prop up its currency. The Danish central bank said Friday morning that it was bumping its key rate of lending by 50 basis points, to 5.5%.

It follows a move by Hungary's central bank to increase interest rates to boost the Hungarian florint, which has fallen sharply in the wake of the credit crisis. The central bank of Denmark said it was raising rates "as a result of continued intervention to support the Danish krone." The move is in stark contrast to most of the world's other large central banks, which have been cutting rates recently in order to combat economic weakness.

Sweden's central bank on Thursday slashed interest rates by 50 basis points, to 3.75%, to stem the impact of its involvement in economically troubled Baltic nations. Denmark's trading at 7.4590 crowns to the euro compared with Thursday's low of 7.4609 crowns. The central bank's move illustrates the priority that Denmark is currently placing on the krone over its economic growth. A sharp decline in a country's currency can lead to imported goods becoming too expensive.

The recent collapse in Iceland's currency, for instance, has led to a potential public health problem as grocery chains find it more difficult to buy new supplies, leading to fewer products on their shelves. The Danish central bank may also be more comfortable to raise rates since Denmark's economy has already gone into, and out of, a recession in the first quarter of this year. Its economy has since recovered slightly, growing by 0.5% in the second quarter.

Bank of America analyst David Powell said Denmark's move was a perfect example of the vulnerability that some small countries, including Iceland, face when they have their own currencies, and said Denmark would now be moving more quickly toward trying to adopt the euro.

Denmarks' currency is pegged to the euro, but that peg has been under significant pressure in the last few weeks. The country's rates also typically follow euro zone interest rates, but they are currently now 175 basis points above the European Central Bank equivalent compared with 35 basis points in the beginning of October.

IMF plans rescue of emerging nations
The International Monetary Fund is working on a package it hopes to approve by early November which would let several emerging market economies exchange local currencies for dollars to ease short-term credit strains. The so-called liquidity swap facility would be available to a group of pre-selected “top tier” emerging market countries - those that are well-run but may be having difficulties obtaining credit.

Countries which could be eligible include Hungary, which is already in talks with the IMF, Belarus, Ukraine, Serbia and Pakistan. An IMF spokesman said the Washington-based fund was in discussions on possible loan packages for a number of countries.

“The IMF has sizable resources available for lending, which it can make available quickly if needed. IMF lending has a catalytic effect by generating other financing from private and public sources.” The size of the IMF’s financial package has not been revealed. The body said rumours that it could be as big as £500bn were untrue.

“It will help compensate for the deleveraging of countries’ traditional sources of external finance... "The objective is to wrap this up quickly because the need is now,” one official told Reuters last night. Hungary has already received a loan of £3.9bn from the European Central Bank.

U.K. Pound Weakens Most Since at Least 1971 as Economy Shrinks
The pound tumbled below $1.53 in its biggest drop in at least 37 years after a report showed the U.K. economy contracted more than forecast in the third quarter, bringing the nation to the brink of a recession.

The decline surpassed that of Black Wednesday in September 1992, when the U.K. was driven out of Europe's Exchange Rate Mechanism. Gross domestic product contracted in the three months through September by more than twice as much as analysts forecast, a report showed today, putting the economy on course for its first recession since 1991. The FTSE 100 index slumped as much as 9.1 percent and the yield on the U.K. 10-year gilt headed for its biggest weekly decline in a decade.

"This is once-in-a-lifetime stuff, we're all sat under our desks with tin hats on," said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. "The U.K. is in the first step toward a recession and the dollar's bid because of repatriation flows." The U.K. currency fell to $1.5269, the lowest level since August 2002, and was at $1.5618 at 2:34 p.m. in London, from $1.6230 yesterday. Against the euro, the pound weakened to a record 81.96 pence, dropping for a fifth day, before trading at 80.80 pence, from 79.69 pence.

A collapse in credit markets and the worst housing slump in a generation have buffeted the British economy, Europe's second- biggest. The U.K. is already in a recession and the economy will contract for the next three quarters, Ernst & Young's ITEM Club, which uses the same forecasting model as the Treasury, said in a report on Oct. 20. The economy shrank 0.5 percent in the third quarter, the Office for National Statistics in London said today. The median forecast of 35 economists in a Bloomberg survey was for a contraction of 0.2 percent.

Today's drop in the pound brought the decline this week to 10.1 percent, the most since at least 1971, when former U.S. President Richard Nixon suspended the dollar's convertibility into gold and ended the global fixed exchange-rate regime established at the Bretton Woods conference after World War II. The currency lost 9.8 percent in the week when U.K. Prime Minister John Major pulled the pound out of the Exchange Rate Mechanism on Sept. 16, 1992 in what became known as "Black Wednesday." "These moves are absolutely without precedent," said David Watt, a Toronto-based currency strategist at Royal Bank of Canada Ltd. "The 1970s are pretty much the extent of the data you're going to get because currencies didn't even float that far back."

Volatility on one-month pound-yen options, a measure of expectations for future price swings, rose to 47.24 percent, the highest on record, indicating greater risk market moves may erode profits. The pound may fall to the $1.40s "very soon," said Hans- Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, the most accurate forecaster in a 2007 Bloomberg News survey. "It has a lot to do with the underlying conditions in the British economy and how the situation in Europe as a whole is currently developing," Redeker said today in an interview on Bloomberg television.

House prices will continue to fall and the pound may depreciate further, King said in a speech to executives in Leeds, England on Oct. 21. Prime Minister Gordon Brown predicted the next day that the U.K. will slip into a recession for the first time since he took charge of Britain's finances in 1997. The remarks were Brown's first admission that the country's longest unbroken streak of economic growth in more than a century is over. "The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand," King said. The Monetary Policy Committee "will act promptly to ensure that inflation remains on track to meet our target."

The chances that the Bank of England will lower its benchmark interest rate by as much as three-quarters of a percentage point by year-end rose to 30 percent today, a Credit Suisse Group AG index of derivatives showed. The odds of a cut of that magnitude were 5 percent yesterday. Government bonds rose, with the yield on the two-year gilt falling 18 basis points to 3.03 percent. The 4.75 percent note maturing June 2010 climbed 0.28, or 2.8 pounds per 1,000-pound ($1,530) face amount, to 102.68. The yield on the 10-year security dropped 16 basis points to 4.31 percent, on course for its biggest weekly decline since at least 1998. Bond yields move inversely to prices.

$123 Billion Loan Not Enough for AIG: $90 Billion Spent in 1 Month
American International Group Inc. has used $90.3 billion of a U.S. government credit line since it was bailed out last month, an amount that exceeds the size of the original loan meant to save the insurer.

AIG may need more than the $122.8 billion now available to the New York-based insurer, Chief Executive Officer Edward Liddy said yesterday. The company, which agreed Sept. 16 to turn over majority control to the U.S. in exchange for an $85 billion loan, got access to an additional $37.8 billion this month. AIG's latest debt was revealed today by the New York Federal Reserve, and is up from $82.9 billion a week ago.

Liddy, the former Allstate Corp. CEO appointed by the government to run AIG last month, is selling businesses including U.S. life insurance, plane leasing and consumer finance to repay the loan. He named Paula Rosput Reynolds today to lead the restructuring six months after she arranged the $6.2 billion sale of Safeco Corp., AIG said. "Paula brings to AIG deep experience, not only as an insurance industry leader, but also as someone who has successfully realigned organizations to meet new challenges," Liddy said today in a statement.

Reynolds, the former CEO of Safeco, the Seattle-based auto insurer until it was sold to Liberty Mutual Group Inc. for $6.2 billion, was named AIG's chief restructuring officer. AIG, which averted collapse last month with the Fed loan, is dependent on "what happens to the capital markets," Liddy, 62, said late yesterday on PBS's "The NewsHour With Jim Lehrer." AIG needed cash after credit downgrades forced the insurer to post more than $10 billion in collateral to clients who purchased guarantees on bonds that lost value.

"To the extent they continue to go down and we have to keep posting collateral, as it's called in the vernacular of the industry, it's possible it may not be enough," Liddy said. "This emphasizes the uncertainty for anyone trying to put a number" on AIG's cash needs, said Bill Bergman, an analyst at Morningstar Inc. in Chicago. The financial-products unit responsible for most of the firm's losses "is a big black hole."

Liddy said in the interview that he thinks AIG "should be OK," that he still hopes to stay within the $122.8 billion ceiling and that Treasury efforts to spur lending "seem to be working." A spokesman for the New York Fed declined to comment. Brookly McLaughlin, spokeswoman for the Treasury, didn't immediately return a call seeking comment. "The money is to meet our cash needs while we work out the rest of our solution, it's not the total solution," said AIG spokesman Nicholas Ashooh. "We still have to sell businesses and still need a permanent solution to the liquidity drain" from securities lending and the fixed-income guarantees known as credit-default swaps.

AIG got the $85 billion credit line on Sept. 16 to stave off bankruptcy. It was given access to an additional $37.8 billion on Oct. 8 to shore up its securities-lending program, which lost money on investments made using collateral from assets it loaned to third parties. AIG agreed to turn over an 80 percent stake in the firm to the U.S. in exchange for the first loan.

The insurer may seek a third source of cash by tapping a Fed program that buys commercial paper, a person familiar with the matter said last week. AIG will probably borrow less than $10 billion through the program, which is scheduled to start next week, the person said.

Paulson Is Said to Plan Buying Stakes in Regional U.S. Banks
Treasury Secretary Henry Paulson is preparing to take stakes in a number of regional U.S. banks as he seeks to halt the freeze of credit to businesses and households, according to a person briefed on the matter. The Treasury may announce the plans as soon as today, the person, who was briefed by bankers and Treasury officials, said on condition of anonymity. The purchases would be the second round in a $250 billion program to inject capital into financial companies, after an initial $125 billion was allocated to nine of the largest banks.

Regional lenders, already suffering from the housing slump, are now getting hit by rising loan delinquencies as the economic downturn deepens, with unemployment at a five-year high. The 19- member Standard & Poor's 500 Banks Index has lost half its value in the past year. "We're going to give them initial indications very quickly," Neel Kashkari, the interim Treasury assistant secretary running the department's financial-rescue office, told lawmakers yesterday, referring to the next group of banks to get government stakes. "It will be a few weeks before the next batch are actually funded," he told the Senate Banking Committee.

The decision to buy stakes in more lenders comes after some of the mid-sized American financial institutions report mounting losses. National City Corp., Ohio's largest lender, Oct. 21 posted a wider loss, put aside more money for unpaid loans and announced plans to eliminate 4,000 jobs. Its third-quarter net loss widened to $729 million, from $19 million a year earlier. SunTrust Banks Inc., Georgia's largest lender, posted a 26 percent decline in third-quarter profit yesterday. The bank's board authorized the sale of $1.6 billion to $4.9 billion in preferred shares to the U.S. Treasury, Chief Executive Officer James Wells said in a conference call.

Paulson's focus on injecting funds into banks is a shift away from his initial emphasis on unclogging balance sheets by purchasing troubled mortgage-backed assets from financial institutions. Last week, the Treasury agreed to take stakes in nine firms including Citigroup Inc., Morgan Stanley and Bank of America Corp. Congress three weeks ago approved a $700 billion rescue package that gave the Treasury wide authority to buy and guarantee assets to prevent a U.S. financial collapse. Equity purchases "are on the front burner and the heat is under the pot," said Wayne Abernathy, a former Treasury official who is now an executive vice president with the American Bankers Association, a group that represents lenders of all sizes.

Paulson had to shift gears because "markets deteriorated much more quickly than we had expected," Kashkari, a 35-year-old former Goldman Sachs Group Inc. banker, told lawmakers. Taking stakes in banks offered a faster way to inject funds, he said. The person briefed on the matter didn't identify the financial companies getting the next round of money, or specify the total amount. Firms have until Nov. 14 to apply for government funds, though the department has indicated it may extend that for some, such as those that are privately held.

The Treasury's plans to buy devalued assets such as mortgage- linked bonds and collateralized debt obligations are weeks, though "not months" away from being put into effect, Kashkari said. Congress gave the Treasury 45 days, or until mid-November, to publish guidelines for how it would identify, value and purchase the assets. A Treasury official said then that it would take at least four weeks until the first auction was set up in an effort to price the toxic securities.

While the Treasury picked Bank of New York Mellon Corp. to keep the books for the purchases, it is still completing a review of more than 100 bids to serve as asset managers, Kashkari said. The aim of the asset purchases is to help restart a market for the securities, providing benchmark prices and inducing private capital to return. Both Republicans and Democrats on the banking panel yesterday urged the Treasury to use its new authority -- and a chunk of the bailout money -- to help the millions of American homeowners who are facing foreclosure.

The Bush administration hasn't shown "the required dedication" to curb mortgage foreclosures, Christopher Dodd, the Connecticut Democrat who chairs the Senate banking panel, said at yesterday's hearing. Richard Shelby, the committee's top Republican, said that unless the government deals with housing problems, "we're going to be wasting a lot of money." Kashkari told the panel that the Treasury is "looking very hard" at a proposal by Federal Deposit Insurance Corp. chief Sheila Bair to use federal loan guarantees to entice mortgage servicers to modify loans.

Bair's agency is developing experience in changing mortgages to make them more affordable after taking over IndyMac Bancorp Inc., the failed lender seized by regulators in July. The Treasury could offer "loan guarantees and credit enhancements" to help persuade the holders of home loans to modify them, Bair told the Senate committee yesterday.

Sarkozy lays out radical state intervention
French president Nicolas Sarkozy has pledged "massive" state intervention to support his country's industry, defiantly ignoring EU competition rules in the biggest shift to dirigiste ideology in 40 years. Calling for a fully fledged "economic government" in Europe to back up the single currency and tackle the credit crisis, he laid out far-reaching plans for a €175bn (£139bn) fiscal boost to the French economy and proposed a "strategic investment fund". It will start funnelling money into key sectors by end of the year.

Mr Sarkozy said the state would take dramatic action in all fields of economic management to head off the worst crisis since the "franc fort" deflation of the 1930s. "We will intervene massively whenever a strategic enterprise needs our money," he said. The fund managed by Caisse des Depots – the investment arm of the French state – will be used to buy shares in any company falling prey to sovereign wealth funds from Asia and the Middle East, hoping to snap up Europe's crown jewels on the cheap after the stock market crash.

"We mustn't be naive and leave companies at the mercy of predators. Europe must not be the only one not to defend its interests. There is no reason why we shouldn't do what the Chinese do, and the Russians do. There is no reason why France can't have an industrial policy worthy of the name," he said. It will focus on the car industry, aviation and high-technology, and any sector threatened by job losses abroad.

The proposals received a chilly welcome in Berlin, where economy minister Michael Glos said such notions clashed with Germany's deep-rooted philosophy of free trade and open markets. "Germany will remain open to capital from around the world", he said. The political shift in France came as countries across Europe continued to adapt to the sudden downward lurch in the region's economy. Sweden's Riksbank cut rates by half a point to 3.75pc yesterday to "alleviate the effects of the financial crisis in the Swedish economy".

New Zealand's central bank cut by a full point to 6.5pc earlier, fearing that the collapse in global commodity prices will push the country deeper into recession. Mr Sarkozy's sweeping reforms include a major cut in business taxes to kick-start investment and the creation of a "credit mediator" to police the banks and ensure loans are steered towards firms in distress.

He warned that bankers were now on probation after receiving a €360bn bail-out from the French taxpayer. "Public opinion will be their judge, and those who don't step up to the plate and fulfil their responsibility will forced out immediately." Any attack on sovereign wealth funds would be a major blow to the City, which is Europe's chief conduit for investment funds from China, East Asia and the oil-exporting states.

Ruth Lea, director of think-tank Global Vision, said the French plans were a warning to Britain that the free market is increasingly vulnerable as the backlash from this crisis gathers force. "It is quite clear that Sarkozy is using this an opportunity to roll back Anglo-Saxon free competition and to push the agenda of further integration in Europe," she said.

Is international trade grinding to a halt?
Trade finance exists thanks to what the Financial Times's Lex calls "one of the most disruptive technologies ever invented... the humble box". Two features of our modern economy – globalisation and our reliance on shipping – mean that huge volumes of everything from basic commodities to finished goods travel from sellers in one country to buyers in another in standardised metal containers crammed onto cargo ships.

But the fact that a shipment can take days or weeks to arrive raises some problems about payment. How can sellers ensure a buyer will pay on time, or indeed at all, and what do they do for cash in the meantime? A buyer's potential headaches include whether the right goods will turn up in the right port, and at the right time – clearly they're not keen to pay up until the goods have arrived intact. Throw in different laws, currencies and time zones, and what looks like a simple deal to ship iron-ore from one country to another could quickly become a nightmare. That's where trade finance comes in.

Trade finance: how does it work? In short, a bank or specialist trade finance boutique will take payment risk away for a fee. There are many 'trade finance' solutions, most of which have been around since the Middle Ages. The most commonly used is the letter of credit. Drawn up typically for a seller by a bank, the basic letter guarantees payment for goods once they are safely on board a ship, but before they arrive with a buyer. Without it the two parties may not trust each other to honour their side of a deal.

There are many variants – for example, a small exporter with cashflow worries may request the bank to pay it cash up front, where payment would otherwise not be due from the buyer for several months. This up-front payment is usually arranged at a 'discount'. In other words, the bank offers the seller less than the total value of the invoiced goods shipped, confident it can eventually collect the full amount due from the buyer later using the shipment as security ('collateral'). As such, trade finance, an industry expert tells Bloomberg, is normally "the easiest, cheapest and (being backed by a shipment of goods) most collateralised form of credit".

Trade finance: is it big business? Huge. As Jonathan Lynn notes on Reuters, the development of standardised containers and port equipment has "helped spur a 90-fold growth in the annual value of world trade" to around $14 trillion today. According to a trade official quoted in the Lloyds List shipping newspaper, "90% of that is financed in some way by credit". Individual letters of credit can underwrite some massive shipments – Deutsche Bank for example was recently involved in three shipments for Russian clients, each with a value of above $3bn.

How is trade finance coping with the credit crunch? Badly. Steve Rodley, director of London-based shipping hedge-fund Global Maritime Investments, puts it bluntly: "The whole shipping market has crashed." The trouble is that credit is the lifeblood of commerce, but it is built entirely on trust. And that has evaporated. As such, many ship owners can't get banks to issue letters of credit, particularly on cargoes of price-volatile commodities that no longer look like adequate collateral. Even those who can get letters of credit are finding that their counterparties may no longer trust the credit rating of anything other than large, well-established banks, many of which are now charging big premiums. Letters now cost three times the going rate of a year ago, according to Lynn.

How does this affect world trade? "Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay," says Khalid Hashim, head of Precious Shipping, in the Lloyds List. The freeze has seen commodity shipping rates plunge to "the lowest in more than five years", reports Bloomberg. The Baltic Dry Index – a key barometer of global freight activity and therefore world trade – fell 11% in just one day last week (see chart). As a result, grain cargoes have begun piling up in ports in the Americas, reports The Economist. So bad have things got for Brazil that the government plans to use its foreign-exchange reserves to increase credit lines for exporters in a bid to keep trade flowing.

What's being done about it? The World Trade Organisation (WTO) has hastily scheduled a meeting of key financial institutions on 12 November specifically to discuss the impact of what the director-general, Pascal Lamy, calls "very difficult conditions in international financial markets" on trade finance. Anxious to be seen to act, ahead of the key meeting the WTO raised its trade finance programme by 50% to $1.5bn. But Lamy wants a global solution, warning that "uncertainty... could fuel protectionism".

"It's one more thing in a big negative melting pot" is how one Danish shipping chief executive summarised the trade finance crisis on Bloomberg. The FT agreed, noting that if the November meeting of the WTO fails as comprehensively as July's world trade talks in Doha, the prospect of Smoot-Hawley-style unilateral action (US legislation in the 1930s that raised US tariffs, slowed global trade and helped turn the crash into a depression) can't be ruled out. Even if that is avoided, "without trade finance, global commerce will shrink".

Post-default liquidation now more likely -S&P
Companies that file for bankruptcy are more likely to be forced into liquidation in the current environment as the availability of financing for restructuring has dried up, Standard & Poor's said on Thursday. S&P said that's the conclusion of a review of some of the largest speculative-grade issuers rated "B-minus" or lower.

That rating is six notches into speculative, or "junk" status. "Under current market conditions, the availability of debtor-in-possession financing for some defaulted issuers may be in question, with the number of DIP providers dropping sharply," said S&P recovery analyst Tom Mowat. DIP is a loan made to help bankrupt companies reorganize their operations.

"We think it's reasonable to expect that we will see a rise in the number of bankruptcies leading to liquidation," Mowat said. In that scenario, the debtholders of defaulted entities may face recovery prospects below their original expectations, he said.

Earlier, Fitch Ratings said the coming wave of U.S. high-yield corporate bond defaults could be the worst ever and impact more industry sectors that the downturn of 2001 to 2002.

Polish, Hungarian, South African Currencies Head for Worst Week
The Polish zloty, Hungarian forint and South African rand headed for their biggest weekly declines as the global economic slump fuels concern of a worsening credit crisis in emerging markets. The zloty fell 3 percent against the dollar today, taking its weekly decline to more than 16 percent, the steepest since Bloomberg began tracking the data in 1993. The forint extended its weekly loss to a record 14 percent while the rand fell almost 17 percent in its biggest five-day slump since 1975.

Investors are selling emerging-market stocks, bonds and currencies as the rout that began with the collapse of U.S. subprime mortgages last year pushes the world toward a recession and lowers the price of commodities that sustain developing economies. South Korea's central bank said fourth-quarter economic growth was the slowest in four years, sending the Kospi stock index 11.7 percent lower today, capping its worst week since 1997, and pushing the won near a 10-year low.

"We're seeing funds fly out of Hungary, Poland and other eastern European countries," said Silvia Marengo, who manages about $130 million of emerging-market bonds at Clariden Leu in London. "The countries with the biggest falls are the economies that were most connected to developed nations." Foreign-currency loans make up 62 percent of all household debt in Hungary, up from 33 percent three years ago, and the nation has a larger budget deficit than anywhere else in eastern Europe. Hungary's economy grew 2 percent in the second quarter, compared with 5.8 percent in Poland.

The forint has plunged almost 30 percent this year against the dollar. The Budapest stock exchange index, which has lost more than half its value this year, fell 3.4 percent today to the lowest since 2003. Polish central bank Governor Slawomir Skrzypek said today he doesn't envisage any "intervention on the foreign exchange market" after the zloty's more than 20 percent slide against the dollar this year. The nation's benchmark WIG20 stock index dropped 5.9 percent today.

"The financial crisis is changing its nature at the moment, away from fear of systemic risk attached to money and credit markets and toward emerging markets and the economic consequences of the financial crisis," Lars Christensen, an emerging markets analyst at Danske Bank A/S in Copenhagen said in a research note. The plunge in commodity prices, which this week slid to the lowest level in four years, has contributed to a more than 70 percent drop in the rand this year. Commodities make up more than half of South Africa's earnings abroad, according to data from the Department of Minerals and Energy.

South Africa's key stock index fell to the lowest since June 2006, dropping 4.3 percent, as investors sold commodity stocks led by BHP Billiton Ltd., the world's largest mining company. Emerging-market stocks fell for a fourth day, with the MSCI Emerging Markets Index declining 6.2 percent to a five-year low of 482.24 at 11:25 a.m. in London. The Korean Kospi stock index was 11.7 percent lower today, capping its worst week since 1997, and pushing the won near a 10-year low. India's Sensex benchmark headed for the biggest daily slump since 2004 after the central bank said it will continue fighting inflation, reducing the likelihood of easier lending to bolster growth. The Czech PX index slid 8.6 percent, the most in a week.

Russia's Micex Index tumbled 7.5 percent before trading was halted for an hour. The yield on Russia's 30-year, 7.5 percent dollar notes increased to more than 12 percent for the first time since 2002. The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries rose 11 basis points to 8.68 percentage points, a six-year high, according to JPMorgan Chase & Co.'s EMBI+ Index.

GLG chief warns thousands of hedge funds on brink of failure
Emmanuel Roman, the co-chief executive of Europe’s biggest hedge fund GLG, has warned that thousands of hedge funds are on the brink of failure as the global economy contracts with unexpected severity. Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world’s 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.

"This will go down in the history books as one of the greatest fiascos of banking in 100 years," said Mr Roman, who with Noam Gottesman, co-runs GLG, a former division of Lehman Brothers Holdings with assets of $24bn (£14.8bn). "There need to be some scapegoats, and the regulators are going to go hunt people. That will be good in the long run." His views were echoed by Professor Nouriel Roubini, a former US Treasury and presidential adviser known for his accurate prediction of financial crises, who estimated that up to 500 hedge funds would fail within months.

Both men were speaking at the same hedge fund conference in London yesterday, and Prof Roubini said he would not be surprised if the US and other countries soon had to close their stock markets for more than a week to halt descent into "sheer panic". The economist warned that the world is heading for a protracted recession that will end the US’s financial dominance. "It’s the beginning of the decline of the US financial empire. The Great Depression ended in a massive war. I hope that’s not going to happen but it’s pretty ugly now," Prof Roubini said.

He added that turmoil over world trade, currency markets and debt is likely to cause geopolitical tensions between the Western world and emerging superpowers such as Russia, China and "a bunch of unstable oil states". The conference saw analysts, economists and hedge fund managers discussing the possibility that global recession could now last two years on fears that government bail-outs and nationalisations have failed to stop the markets slumping.

"We’re now paying the price for the biggest asset and credit bubble in history," Prof Roubini said, advising investors to stay clear of risky assets and keep money in cash. "The bail-outs have not worked because the markets are no longer rallying, and the policy-makers have run out of options." The global financial meltdown accelerated this month, with the UK and US governments being forced to take stakes in some of the world’s biggest banks. Stock markets around the world have fallen sharply this month as investors’ concern switches to the impact on the wider economy.

"It’s like we’re walking blind in a minefield," said Prof Roubini. "Every situation has become risky and no one can trust each other. The banks are too big to be allowed to fail, but they’re also too big to save." Research from Hedge Fund Intelligence (HFI) shows that despite one of the worst months on record for credit funds, US hedge funds alone still have $1.7trillion (£1trillion) in assets.

JP Morgan Chase chief Dimon sent death threats
The US Postal Inspection Service has offered a $100,000 (£62,000) reward for information after Jamie Dimon, the chief executive of JP Morgan Chase bank, was sent death threats. Jamie Dimon and various outlets of his bank – one of America's biggest - were targeted in at least 45 anonymous, typewritten letters which all seem to be from the same source.

The sender accused Mr Dimon of stealing Washington Mutual, whose banking operation was bought by JP Morgan Chase last month. "You need to be pay back. You will be killed in 10 days," one of the typewritten letters read, investigators told ABC News. Another letter sent to Mr Dimon in New York threatened a series of attacks culminating in a bombing similar to that in Oklahoma City, in which 168 people died in 1995.

At least 45 letters, all postmarked in Amarillo, Texas on October 17 and 18, were sent to Chase bank offices in nine US cities as well as the Federal Deposit Insurance Corporation, the Office of Thrift Supervision in Dallas and the Federal Home Loan Bank in Atlanta. The letters contained a powdery substance which tests have shown to be harmless but Chase branches across the US were said to be "on alert".

Federal investigators believe the letters could have been sent in anger about the downward spiral of the US economy. Authorities say the letters "articulated threat of bodily harm" and appeared to be connected to the bank's lending practices. Postal inspectors said the public should "take no action to apprehend this person" by themselves. Mr Dimon has been seen as a potential US Treasury Secretary if Barack Obama wins the presidential election.

Last week, just hours after his bank was forced to sell a stake in itself to the US government, he accused Washington politicians of worsening the banking crisis through dithering. In a separate case, the FBI is investigating a series of letters sent to the Los Angeles Times and the campaign offices of Senator Barack Obama in New York, Philadelphia and Los Angeles.

Those letters also contained substances, including sand and food seasoning. Officials said one letter claimed "the world will end" if Obama is elected. A letter containing similarly harmless white powder was also received by the New York Times on Wednesday.

Treasury bonds are perfect for dumping
"I can't stand to sell at these levels. But I don't have any choice. I need the cash now..."
One of my cycling buddies has a huge house. He spends $30,000 on property taxes every year. He's retired. So to make these payments, he sells a few shares of stock whenever the bills arrive. He built his portfolio around financial companies. This year, they cratered. "I used to sell 500 shares to pay my tax bill. Now I sell 5,000 shares. It's devastating my holdings. Even if the stock market rises again, I'm still screwed."

This story illustrates why the stock markets are falling so much. The world's financial system is founded on debt. Payments must be made every month to service this debt, like my friend must pay his property taxes. If cash runs out, the debtor must sell assets... or declare bankruptcy. Last week, the whole world rushed for the door. Everyone tried to make payments on their debt by selling assets. Corporations, states, hedge funds, governments, and millions of people like my friend. The stock market collapsed.

The best place to be in a debt crisis is government bonds. Credit crunches lead to recessions and depressions. Recessions are deflationary. Prices fall. Government bonds' fixed coupon payments and safe-harbour status make them the most attractive investments in the market. (Of course, debt crises end up being inflationary as governments pump lots of money into the economy, but that comes later.)

We're passing through the worst credit crunch in America's history. You'd think government bonds would have soared. But they didn't. The problem is, if Treasury bonds were the last investment on Earth, it wouldn't matter right now. The world needs cash. And it'll sell any asset to get it... even Treasuries. Look at the recent spike on the chart below. It shows the 10-year Treasury bond yield. When the yield rises, the bond price falls. So you can see bond prices have had a massive collapse, starting September 17. That's one day after the government bailed out AIG... and two days after Lehman declared bankruptcy.

Treasury bonds are perfect for dumping. They are liquid, so investors can sell them easily. And they have high prices. Unlike my friend's bank stocks, you can generate lots of purchasing power by selling them. My concern is, if this credit crisis gets worse, it's going to trigger even bigger whales to liquidate their Treasury bond holdings... whales like the Chinese, the Japanese, or the oil exporters. So far, we've only seen what happens when banks and hedge funds liquidate. If Japan and China start unloading – or even if they just slow down their purchases – the Treasury bond market will fall through the floor.

This sets off another vicious cycle. As prices fall, the interest rates Uncle Sam must pay rise. The higher interest rates rise, the more the US must pay... which makes bond traders mark down the country's credit rating. This sends bond prices even lower... If the trend grows, we'll see a biblical collapse in the Treasury bond market.

Mesa AZ faces huge budget crisis
Mesa is bracing for what could be the worst budget crisis in city history. City Manager Chris Brady said Thursday that in about a month the City Council will be forced to decide what essential services Mesa can afford in an economy whose daily headlines speak of home foreclosures, drastic slowdowns in construction and a calamitous drop in sales-tax collections. "Every department is going through and making reductions now," Brady said.

But when the council puts pencil to paper Nov. 20, Brady said, not every department will be treated equally.
Decisions will boil down to one question, Brady said. "What are the critical services we want to continue with?"
"There are no sacred cows," Brady said. "Everything's on the table. . . . It's a new economy. We're having to re-evaluate everything."

The Fire Department is already an early casualty. Fire Chief Harry Beck sent an e-mail to his staff Wednesday outlining $1 million in budget cuts beginning Monday. Mesa's budget problems are not unique to Valley cities. Phoenix and Scottsdale, among others, are struggling with unprecedented cutbacks. Phoenix's cuts could reach $250 million by June 30. Mesa budget officials have said they will not have figures on the city's total projected shortfall until shortly before the Nov. 20 council meeting.

For most of its modern history Mesa has lived on sales taxes, an increasingly iffy source of money as other Southeast Valley cities have become retail centers in their own right. Now, a desperate national economic picture, which has seen home values and people's retirement savings plummet, has devastated the retail segment.

Mesa first began grappling with lagging tax collections late last year and by spring was forced to impose $21 million in budget cuts to cover the fiscal period ending June 30, 2009. City officials took the slowing economy into account for the 2008-09 budget, expecting that sales taxes would drop somewhat from 2007 levels. The reality has been far worse than the forecasts.

Figures released Thursday show Mesa's sales-tax collections for June, July and August dropped 13.6 percent from what was collected during those months in 2007. In sheer dollars, retail sales taxes those three months were $5.3 million less than in 2007, and came in at $4.5 million less than what was budgeted. Beck's memo hit the streets just days before Mesa voters will decide whether to approve about $170 million in bonds for street, police and fire projects - bonds that more than likely would trigger the city's first property tax since World War II.

Budget numbers

• Fiscal year 2008-09 operating budget (day-to-day city operations): $340.9 million.

• Estimated sales and use taxes for year: $147.2 million.

• Actual collections, June-August 2007: $38.7 million.

• Actual collections, June-August 2008: $33.5 million.

• Year-to-year drop, 2007-2008: almost $5.3 million.

• Budgeted sales- and use-tax collections, June-August 2008: $38 million.

• Deficit between budget and collections: $4.5 million.

Top Theorists Examine Rippling Economic Turbulence
As the financial sector shifts, so does the reach of the jolt to economic structures around the world. Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis.

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.
Here is the pair's sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world's hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who's been warning of a crash for years, betting on one, and winning big. He's been ubiquitous in the financial media of late, from cable TV's "Colbert Report" to the BBC's "Newsnight," where he was infuriated by what he called "bogus accounting."

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they're both scared.

NASSIM NICHOLAS TALEB: I don't know if we're entering the most difficult period since -- not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we've been in since the American Revolution?


PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It's very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

Complexities of the banking system

PAUL SOLMAN: Mandelbrot's key insight came in the '60s with a study of cotton price surges and plunges, suggesting the world moves in fits and starts, especially the human world. Decades later, after the stock market crash of 1987, Taleb came to the same conclusion. He appeared on the NewsHour two years ago to help explain the death of a hedge fund before the current crisis. He dubbed the event "a black swan," impossible, Europeans had always thought, because they'd never seen one.

NASSIM NICHOLAS TALEB: We saw a lot of white swans. Every white swan was confirming that, you know, hey, all swans were white.

PAUL SOLMAN: Taleb's book, published in April 2007, was called "The Black Swan" because, in 1697, Dutch explorers discovered Australia and black swans.

NASSIM NICHOLAS TALEB: And, sure enough, they saw that black version and said, "Hey, one single observation, OK, can destroy thousands of years of confirmation." So, likewise in the markets, all you need is one single bad month to destroy years of track record.

PAUL SOLMAN: In the book, Taleb wrote, "The increased concentration among banks seems to have the effect of making financial crises less likely. But when they happen, they are more global in scale and hit us very hard. True, we now have fewer failures, but, when they occur, I shiver at the thought."

NASSIM NICHOLAS TALEB: The banking system, the way we have it, is a monstrous giant built on feet of clay. And if that topples, we're gone. Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding of its properties.

PAUL SOLMAN: But there's been complexity before. There has been overextension of credit before. We've had crashes in American history many times before. We're a resilient system. Won't we pull out of it?

NASSIM NICHOLAS TALEB: Let me tell you why it's not like before. Look at what's happening. The world is getting so fragile that a small shortage of oil -- small -- can lead to the price going from $25 to $150.

PAUL SOLMAN: A barrel.

NASSIM NICHOLAS TALEB: A barrel. A small excess demand in an agricultural product can lead to an explosion in price. We live in a world that is way too complicated for our traditional economic structure. It's not as resilient as it used to be. We don't have slack. It's over-optimized.

PAUL SOLMAN: What do you mean by "over-optimized"?

NASSIM NICHOLAS TALEB: Let me tell you what is happening in the ecology of the banking system. They're swelling to large banks, OK, because it's vastly more optimal to have one large bank than 10 small banks. It's more efficient.

PAUL SOLMAN: Well, we've certainly seen the consolidation of the industry.

NASSIM NICHOLAS TALEB: Exactly. And that consolidation is what's putting us at risk, because we are -- when one bank, large bank makes a mistake, OK, it's 10 times worse than a small bank making a mistake.

PAUL SOLMAN: And I guess I'm realizing that that's where your famous work comes in. It's always been characterized by the work that you're central to as the butterfly somewhere disturbs a little bit of air and, halfway across the world, a tornado hits or something, right? Is that what we're talking about here?

BENOIT MANDELBROT: Certainly very similar. The word "turbulence" is one which actually is common to physics and to social scientists, to economics. Everything which involves turbulence is enormously more complicated, not just a little bit more complicated, not just one year more schooling, just enormously more complicated.

PAUL SOLMAN: Turbulence is why, because it's badly understood, weather forecasters can't necessarily get it right.

BENOIT MANDELBROT: Precisely. In fact, the basic -- the basis of weather forecasting is looking from a satellite and seeing a storm coming, but not predicting that the storm will form. The behavior of economic phenomena is far more complicated than the behavior of liquids or gases.

Impacts from sudden changes

PAUL SOLMAN: So, getting back to your fundamental work and insight, this is a system that can become turbulent or is inherently turbulent, that doesn't have enough of a buffer, and that's the danger?

BENOIT MANDELBROT: That is not well-understood. In fact, that is misunderstood for which tools have been developed which assume that changes are always very small. If one of them comes, nothing bad happens. If several of them come together, very bad things have happened. And the theory does not take account of that, and the theory doesn't take account of very large and sudden changes in anything. The theory thinks that things move slowly, gradually, and can be corrected as they change, whereas, in fact, they may change extremely brutally.

NASSIM NICHOLAS TALEB: Now you understand why I'm worried. I hope I'm wrong. I wake up every morning -- actually, I don't wake up every morning now. I start to wake up at night the last couple of weeks hoping that I'm wrong, begging to be wrong. I think that we may be experiencing something that is vastly worse than we think it is.

PAUL SOLMAN: And we think it's pretty bad.

NASSIM NICHOLAS TALEB: It's worse. Of all the books you read on globalization, they talk about efficiency, all that stuff. They don't get the point. The network effect of that globalization, OK, means that a shock in the system can have much larger consequences.

Hedge funds' looming impact

PAUL SOLMAN: What is the doomsday scenario? I mean, what actually happens tomorrow, next week?

NASSIM NICHOLAS TALEB: I mean, I am convinced -- there's been a package recently of $700 billion. It's pocket money, because you don't understand -- they don't understand the ripple effect that hedge funds have, OK, that the banks not lending to hedge funds will force hedge funds to liquidate positions.

PAUL SOLMAN: Sell off?

NASSIM NICHOLAS TALEB: Sell off positions. These positions, sold off by hedge funds, will impact other entities.

PAUL SOLMAN: Driving down the price.

NASSIM NICHOLAS TALEB: Driving down the price. Driving down some prices. That a supermarket, OK, needing funding, will not be able to find a bank solvent enough to lend them money against inventory to make payroll, OK? You may have chain reactions we've never imagined before. And these come from the intricate relationships in the system we don't understand.

PAUL SOLMAN: You've been around a lot longer than we have. That's possible. Is it likely?

BENOIT MANDELBROT: Well, we don't know the probability. We don't have enough knowledge. We don't have enough information. We don't have enough reliable information on data which are not published. I mean, I sleep better, perhaps, than Nassim, but I don't sleep very well.

Challenges to prediction

PAUL SOLMAN: Is it possible that what's also unimaginable, which is that this will simply right itself, is that a possibility?

BENOIT MANDELBROT: Everything is a possibility. I mean, again, it is not -- I try my best to answer questions which are scientific, and which I can respond to and which have scientific evidence and not personal opinion. Everything is imaginable. What's the joke, that prediction is very easy when you predict the past or something?

PAUL SOLMAN: Well, predictions are -- predictions are difficult, particularly about the future.

BENOIT MANDELBROT: That's what I wanted to remember.

PAUL SOLMAN: Benoit Mandelbrot, Nassim Nicholas Taleb, thank you very much.



Destroying Companies For Profit
If you ever wondered how or why a stock price suddenly drops like a rock on incredible volume, or why executives battle damaging reports in the NY financial press and in analyst reports, see this video. But only if you want to know how Wall Street really works.

Wall Street has a profitable trading strategy that it has been carefully hiding, because it involves the destruction of companies. Just recently Deutsche Bank was found by the NYSE to have been selling massive amounts of shares it did not have nor deliver over a period of 22 months. This floods the market with "shares" and sucks out investors money - unbeknown to investors - and damages the companies - the more the better. This trading scheme is called "Naked Short Selling". And it is very profitable for those who do it. The more a company goes down - the more they make.

NYSE spokesman Scott Peterson said that Deutsche Bank sold "A LOT.” But this is just one example of many instances. Wall Street firms and hedge funds carefully hide this activity because it is amoral and illegal. But is is possible because the regulators, while they know about it, do nothing and journalists and analysts help put out the needed messages. Companies that need access to the markets or bank on their good reputation are choked off this way. It's easy money. Collect investor money, then kill the company.


Anonymous said...

God that picture made me cry.

Anonymous said...

Ilargi said: Go fuck a duck, nitwitdrillbit.

When a person resorts to this kind of thing, it typically means one of two things:

(a) their argument has fallen apart

(b) they feel scared or threatened

In the past here at TAD, it was the cornucopian deflation-deniers who resorted to personal insults. These people were scared. And time showed that they were wrong.

The present value of the dollar is mostly a sideshow; the action is in the bond market/treasuries, which are beginning to unravel (e.g., see TickerForum breaking news page). Their collapse will, de facto, take the dollar down with them.

It happened in Argentina, it happened in Iceland. To think the U.S. is immune is foolish, especially in light of the unprecedented levels of U.S. debt that cannot possibly ever be paid back.

Anonymous said...

Did any of you ever see the extraordinarily horrible move with "rowdy" Roddy which he and his buddy, if they put on these special glasses, can see that all of the people walking around are really walking corpses??? A cinema classic...

Anyhoo, sometimes I feel like that as I absorb the news...and then watch the world going along its merry day to day way....which of course it HAS to do because what else would it do?

kinda surreal.


Ilargi said...

Look, Anon 75846598746378563427985689643

I don't have time to respond to all false flags that are thrown at me. You claim something without providing any proof or reference whatsoever, and that will make people think I actually said what you fake-flag, which I obviously didn't.

So we are talking about nothing, about a fart of hot air that you throw up at random, some vague insinuation about Stoneleigh and me being blind to what happens to the US dollar, and which for the life of me I can't imagine where you got it.

Whose argument falls apart here? The one I didn't make?

If you keep posting as anonymous, your comments will be deleted. Take your pick. Perhaps, given the 'content' -or lack thereof- of your comment, I should have done that to begin with. If you want a discussion, do so openly and with references. If you're just looking to look smart in a vacuum, go do it somewhere else.

Greyzone said...

You must have struck a nerve somewhere, Ilargi. Good for you!

BTW, I notice anonymous called this blog "TAD", which makes me think of TOD, which gives me a suspicion from where Mr. Anon hails. That's just a suspicion, mind you. :) Note that I am not suggesting one of the regular editors of TOD would do that, but rather one of the readers. TOD has more than its share of trolls and your recent references over there may have attracted a few this way.

And as to your daily comment, yes, things look like we're reaching the unglued stage. I doubt there is any single one of us who have been preparing for this who are as prepared as we want to be. It makes me wonder how it will go for those totally unprepared.

I fear some large ugliness will soon be set loose. I really hope I am wrong but that's my fear. There's a saying that fear grows in the darkness. Sadly, it looks like the sun is only beginning to set so there is far more darkness coming before we will ever see the light.

Anonymous said...

JP Morgan Chase...inside scam!?!?

Check out today's numbers for JPMC...shoots up to over 37 $ at the opening bell...then slips throughout the day....wathc it end in positive territory...I predict JPM ends the day @ 37.50...Hmmmmmm....JPM, the dirty dog of the Paulson regime...???

Anonymous said...

Dirty Dirty Pool...


NEW Real-time: 36.19 Down 1.66 (4.39%) 3:02PM ET

Anonymous said...


I think you made the same assertion (deflation plus dollar collapse) on October 6th and I asked how people will purchase deflated assets. Your answer back then didn't get to what I wanted to know which is this: With simultaneous massive deflation and dollar devaluation what will be the medium of exchange? Put another way what will be cost in dollars of say, a can of tuna: 10 cents, 1 dollar, 10 dollars or some other currency?

Anonymous said...

"Well, we don't know the probability. We don't have enough knowledge. We don't have enough information. We don't have enough reliable information on data which are not published."

Stoneleigh said...

Anon @12:56 (from yesterday),

I'll repeat what I said earlier: Stoneleigh and Ilargi refuse to acknowledge that we can have, simultaneously, a deflationary spiral and the destruction of the dollar.

They have done a admirable job reporting the deflation, which is unimaginably massive. However, this appears to have blinded them to the imminent destruction of the dollar.

We've been round this loop with you before, and in great depth. We do think the dollar will eventually tank, but not now. For now it's upward move isn't over, although we may well see a counter-trend pullback coincident with a coming stock rally before the ascent resumes.

The main point, however, is that the value of the dollar against other currencies internationally is less important than its value domestically in comparison with available goods and services. The same is true of other currencies.

What a shame it will be, to those who foresaw this coming, when their wealth evaporates into ether. All because they naively believed that 'cash was king' and that 'short-term treasuries were practically infallible'.

Cash will be king for quite a while yet, and short-term treasuries are a far safer bet in an unsafe world than most options. Eventually people will need to move into hard assets, but that time is not now. For now you need liquidity.

Ilargi said...

"Well, we don't know the probability"

Oh, great, more blubber.

Stoneleigh said...

(Repeated from yesterday's thread)

So far the stock decline has lead to a flight to safety into US long bonds, which has increased prices and dropped yields. That move probably isn't quite over yet (for the time being), but should reverse with the coming stock rally. I'm not really with Karl Denninger, who thinks that it'll be a definitive move in that direction now (ie a break-the-back-of-the-treasury-bond-market kind of move), but I do think we'll see a trend reversal, and quite possibly a sharp one into the end of the year. I think the definitve move that could lead to debt default comes later though.

The ebb and flow of liquidity, as we see sharp falls and rises driven by sentiment swings, has tended to make groups of trends unfold in sync. Stock falls tend to go with higher demand for treasuries (ie rising bond prices and falling yields), a rising US dollar (ie flight to safety), falling Canadian dollar, and falling commodity prices (part of the reason for the falling Canadian dollar), among other things. Stock rallies should be accompanied by the opposite.

Next year may well see a bigger move in treasury yields - Karl's scenario where interest rates shoot up into double digits.

Anonymous said...

dis·sem·ble Listen to the pronunciation of dissemble
Inflected Form(s):
dis·sem·bled; dis·sem·bling Listen to the pronunciation of dissembling \-b(ə-)liŋ\
Middle English dissymblen, alteration of dissimulen, from Middle French dissimuler, from Latin dissimulare — more at dissimulate
15th century

transitive verb 1 : to hide under a false appearance 2 : to put on the appearance of : simulate intransitive verb : to put on a false appearance : conceal facts, intentions, or feelings under some pretense

Question: how long can Paulson and Berspanky and Bair and Bush and all of the other members of the syndicate keep up appearance whilst all goes to poop? What will be the straw that breaks the people's back and sends the 3rd Estate zipping on their mopeds to Versailles?

Ilargi said...

"God that picture made me cry."

Ya maan.

Thanks for the comps, Dan.

As for JPM, they're down 6.5%, not really feeding conspiracy. I'm watching 5th 3rd and National City (despite a PND bid), both off 25%. It's 3.38 PM, and I feel I'm right once more, saying that Wall Street overall won't be all that bad, even as volatility could go anywhere; I see 200 point jumps within 5 minutes.

For now, though, I'm keeping my eyes outside of the US. Sunday bloody Sunday?!

The Lizard said...

Stoneleigh, you have the patience of a saint.

To coin a phrase...

Anonymous said...

RE: JPM and DOW 200 point jump...

I think you're right.

DJ said...

Ilargi and Stoneleigh,

Do you think this rally could be due in part to Paulson using some of his new power to prop up the market a bit? I just can't understand how anyone could be buying right now.


Anonymous said...


I try to follow what I read here and I've tried to talk to my parents about it. They are 69 and 70 and retired. They own their own home and two cars outright. No real debt other than living expenses. They live what I would describe as a middle to upper middle class life in retirement. Comfortable for sure.

They have a ton of money in the stock market and have lost a lot already. They are of the opinion that it is a team thing. To keep your money in is good as "what if everybody took their money out?" mentality. I try to tell them it won't matter as it's headed staright down eventualy anyway--might as well get out. I suggested that you have indicated things might rally once more atleast and that might be a good time to get out if it happens.

My question is to Stoneleigh, Ilargi or anybody else here: What is a short and sweet way I could tell two people that age what they might think of doing with their money once that rally comes? They are not unbelieving but their financial advisor(lifelong friend--) keeps telling them the market always comes back, historically speaking balh blah..

What can I tell them about cash?

Unknown said...

Of course there are a lot of people buying right now. I honestly run into these people every day, and they're not the same people each day. From regular non-savvy folks with mutual fund-based RRSPs to "investors", there are a LOT of people who believe in the mantra that boom follows bust and, in order to make big monies, you gotta buy when the market's low.

Bull traps exist for a reason, right?

Anonymous said...

@ Rumor

Right. It's all smoke-and-mirrors science (fiction)...not based upon real numbers. People live by slogans and "rules" that they somehow bleieve exist in a vacuum and are not contextual.

In this case, everyone is talking about bottoms as if once a bottom is reached than THAT is the time to get back in. The old Jimmy Buffett....I mean Warren...plan. But this way of thinking lacks any context...and as such is not only obtuse, but somewhat insane---like literally insane, not pejoratively.

Anonymous said...

Case in Point...

"...the fact that we're not down 1,000 is telling me the market's sensing value,'' said John Lynch, the Charlotte, North Carolina-based chief market analyst at Evergreen Investments, which manages $245 billion..." (Bloomberg)

First off, the "market" doesn't sense anything. Millions of investors do...and investors are using the wrong "sense", in this case. They are choosing to NOT use their EYES to read or EARS to listen, but instead are "sniffing" around looking for roadkill.

But as is so very clear, for those folks who are taking time to read all of the REAL information here and elsewhere on the WWW, the folks who are "sensing value" are about to fall of off the cliff, even as they have their noses to the ground.

Ilargi said...

"Do you think this rally could be due in part to Paulson using some of his new power to prop up the market a bit?"


Anonymous said...

Stoneleigh said...
Cash will be king for quite a while yet, and short-term treasuries are a far safer bet in an unsafe world than most options. Eventually people will need to move into hard assets, but that time is not now. For now you need liquidity.

Short term better than Intermediate-Term Treasury?
What about ST Treasury funds?

Anonymous said...

With simultaneous massive deflation and dollar devaluation what will be the medium of exchange? Put another way what will be cost in dollars of say, a can of tuna: 10 cents, 1 dollar, 10 dollars or some other currency?

Good question! Hell if I know :)

What I do know is that the epic magnitude of the coming deflation, and the rippling effects it unleashes, will bring this country to its knees. The unprecedented levels of unemployment alone, will be enough to destroy the fabric of American society. Even people who 'get it' with regards to the scale of deflation, don't seem to have internalized the horrific implications. This is likely why Taleb isn't sleeping. I'm talking mass starvation, no access to basic hygienic goods, infectious disease, etc. It WILL make the Great Depression seem like a walk in the park.

How will the many millions of unemployed men feed their families? How will they acquire/afford clothing after the first couple years once the global supply lines break down? After the first couple years, tens of millions of Americans will have NO dollars.

The point I'm trying to get at is this: Compared to the coming deflationary horrors, the abandonment of currencies will seem 'run-of-the-mill.' It's been argued that abandoning the dollar will effectively wiped the debt slate clean so to speak.

Of course, there's a reason why Jay Hanson et al., are so absolutely certain we're facing nuclear war.

Unknown said...

Serial Anonymous,

If you're going to be running conversations in the comment section, could you please pick a name, even something as simple as "AnonX"? This courtesy would make following the comments much easier.

Wyote said...

Please spare us the repeated drama. We know it's going to get worse. Looked at another way, it is also a enormous opportunity to begin the economics of steady state. Because all the primary trend lines for money, energy and population are going exponential, get busy with that brain of yours and try to prioritize your own interactions with it all. Perhaps you can actually help solve these crises and become part of the new future economies that may be based on homestatic models.

Bev said...

I tried to transfer money out of my ING account today and discovered that my daily online limit was half of what it was last year. I had not been notified of any change in this before now. When I proceeded with the smaller amount, a pop up window appeared offering helpful advice about maximizing CDIC coverage. Perhaps I'm not the only one moving relatively large (large for me - less than 100k) sums of money out of ING?

Anonymous said...

Economics novice here.

What would an Austrian economics approach to the current monetary system look like? What are the pros/cons? Is it too late for such a transition?

Unknown said...

I was poking around corporate bond rates today, for fun, while purchasing some canada savings bonds... most commercial paper is running at about 3% return for short term bonds, 5-7% for long term bonds...

What really stands out against this background are the bonds being offered by Chrysler, GM and Ford (in this case, the Canadian subsidiaries). They are offering from 18-56%, respectively, for bonds maturing in less than a year.

What are the chances that those bonds will get paid? My guess would be nil.

MNlawyer said...

IMHO as telling as all the unraveling we are witnessing around the world is the growing unemployment here at home and the consumer's ever constricting check book/spending, which will only accelerate as the heating season begins in the Midwest and NE. Further, few understand or are willing to accept that it isn't only Wall Street and corporate America that is deleveraging, the American consumer in addition to pay cuts and job cuts is deleveraging as well, resulting in an ever growing and accelerating downward cycle. The MSM continues to talk as if the recession isn't here yet, while most consumers and small businesses, if asked, will tell you they saw it and have been experiencing it for at least the past 3-5 months. Finally, forget about what all the squawking heads are talking about, listen to what they are NOT talking about, i.e., when things will be better. Yes, I do not like the "D" word, however given the track record of the greenspans, paulsens, etc. versus the observations and predictions of TAE and economists such as Roubini, someone tell me why its a good time to start buying snake oil.

Farmerod said...


When I tried to transfer cash from ING a few weeks ago, the limit was $50k/day. Has that changed? Anyhoo, I just had to call them up and do it verbally. No problemo.

Ilargi said...


Them's funny numbers, even though I haven't verified them.

I have held for a long time that Detroit is likely to be flushed down the loo between Nov 4 and Jan 20. I simply see no other venue. A GM/Ford merger is still in the cards, but the pensions et al might make that impossible. Toyota buying GM is another one, but in a crashing market, not very likely. Unless, of course, a trillion dollar plan is launched for the next president to deal with.

Kerkorian wants out, Cerberus are licking their wounds. Granted, it's a toss-up, but none of the Big 3 will survive another 4 years, so sometime just after X-mas still looks like the right time. January 10?!

Anonymous said...

Ilargi, having rented a range of US cars over the last year, I really don't see what legitimate car company globally would be interested in any of them.

The car that Ford holds as its 'economy' hope, the Focus, is one of the worst pieces of crap I've ever driven, as the rental car guy said, correctly, a 'rattle bucket'.

The SUVs are the worst cars I've ever driven, bar none... well, ok, I never drove a Yugo.

The Jeeps etc are dinosaurs that have no real role in a the modern age, especially if fuel is going to cost real money. Same with all the profitable lines of cars.

Honda / Toyota will hopefully focus on car brands with futures, whatever those may be, and any merger would be between other mediocre car companies, but one has to suspect that the Chrysler failure with Mercedes is going to make any serious car company think more than twice before trying to salvage any American car company.

I guess trucks have some value, but not as consumer items, just work stuff, maybe a split like Volvo did?

Bev said...


Last fall I'm pretty sure the limit was 99999. I also had no trouble on the phone at that time. I guess they changed the limit sometime between last fall and a few weeks ago. And it was nice of them to remind me my deposit is CDIC insured.

Anonymous said...

Hi ilargi, sounds like maybe a touch of the nicotine and Django would be soothing on the day?

Actually also found a very interesting video of a bit in the life and times of D. Reinhardt

If it weren't for the idea of a world of suffering innocents, I could really look forward to that sort of rugged Romany life. I imagine a great feeling of relief, as one has when waking from a dark rather meaningless dream.

Farmerod said...
This comment has been removed by the author.
Anonymous said...


The work you and Ilargi do completely overwhelms me. Please clarify for me how you foresee the transition between the time when "cash is king" and when the dollar crumps. What form will currency/assests take? How will day-to-day transactions take place?


The Lizard said...


The Nav Canada link brings up a login page only.

(And even my IM network ID doesn't get me in. :> )

Unknown said...

They Live. "I came here to kick ass and chew bubblegum and I'm all out of bubblegum"

Farmerod said...


By any chance do you have my comment cached? I just lost it and am too lazy to re-type. You and B were the only ones that might have wanted to know (if you didn't already) so I don't think I'll bother reposting.

Anonymous said...

it is also a enormous opportunity to begin the economics of steady state. Because all the primary trend lines for money, energy and population are going exponential...Perhaps you can actually help solve these crises and become part of the new future economies that may be based on homestatic models.

Setting up new economies takes capital, energy, and time. This needed to happen in the 1970's.

Just to focus on the capital aspect, Where's the money going to come from?

The Federal government? Our politicians and their overlords are too busy throwing money at the credit markets, banks, biofuels, and war.

Of the people who do understand the futility to the Fed/Treasury's actions, very few are receptive to the looming population and energy issues. For example back when Roubini suggested building a new 'green infrastructure', the folks at the TickerForum nearly went into hysterics. They simply don't see the need.

States and municipalities are also utterly bankrupt. Soon, the entire nation will start to turn into one big California/Detroit. How long before our own locales begin resembling the pictures that Ilargi posts up each day?

Local communities and neighborhoods are equally helpless. Most people have no choice but to continue participating in the current system. They are dependent on their weekly paycheck for food, rent, and so on. Only when they lose their job, will they stop working. By then it will be too late to do anything.

The Russians were able to respond relatively swiftly to their collapse, growing their own food and engaging in a sort of barter system. But America's situation is vastly different. Vastly. Many Americans are too overweight, inexperienced, and unskilled to produce a meaningful portion of their own food within any reasonable time frame. The nation lacks the inexpensive mass transportation that Russia already had in place. The list goes on and on.

get busy with that brain of yours and try to prioritize your own interactions with it all.

My advice is to help yourself and your loved ones. Buy land, try to grow your own food, and try to stock up on enough necessities (clothing, critical medicines, food, etc.) to give you a legitimate shot at establishing your own self-sufficient systems. It could be a while.

Keep in mind that most people in your community won't have any of this; the first significant supply disruption will put their lives in jeopardy. Good luck trying to explain to them why they should stock up (assuming they can even afford it).

Unknown said...


You're not telling anyone here anything we don't know. We all read TOD too.


I know, I really didn't believe the offered bond yields either, but I have double checked. As far as I can tell, they're real.

Anonymous said...

Here's a conundrum: I'm at the stage where I'm trying to take control of the essentials of living: next week a hand-pump well is going in down on the farm, and I've planted an acre of wheat (partly as a cover crop to smother the ever-present bindweed, partly food insurance).

I could build a crude thresher, along the lines of what Gene Logsden outlines in the book "Small Scale Grain Raising." But the directions are sketchy, and it calls for some technologies I don't currently have in my skill set (welding).

Alternatively, I could purchase an Italian-made thresher that runs off a tractor PTO. The expense is huge, but I could almost talk myself into it on the grounds that it may someday be a valuable community resource. However, the lead time is 10 weeks to get from Italy to here, and a lot could happen in ten weeks.

So, the question is, how big a risk do you think it would be at this point to put $12k into the delivery of something from half-way around the world, in the midst of this current leg down? I'm thinking I should just chase the thoughts out of my head until the MSM resumes the "we're past the worst of it" mantra.

The Lizard said...


I still have a page with your comment on it, yes.

The Lizard said...


Regulars here are acting rationally and firmly now so they don't have to act in the panic that comes later.

Ever watch late-night TV where they ridicule Cubans repairing 50-year-old cars, or Africa where they distill water with plastic sheets, and then actually SHARE it with others?

Next time - take notes.

scandia said...

Crystalradio, thanks for the music! I recall the first times I heard both musicians. Blew me away!
I had the opportunity to attend a Grapelli concert in Vancouver very long ago- Talk about being " in the presence"!

Anonymous said...

Ever watch late-night TV where they ridicule Cubans repairing 50-year-old cars, or Africa where they distill water with plastic sheets, and then actually SHARE it with others?Next time - take notes.

Sharing is great. Personally, I WILL be sharing with everyone in my proximity. You'd be a fool not to, as individuals will cannot survive this alone. But here's the rub: how many people are going to have enough to share with their entire neighborhood?

Also, corporate America has turned most people into illiterate hyper-individualized slobs. Not the kind of (heavily armed) people you want to experience economic collapse and resource scarcity with. Ever seen any documentaries on the genocide in Rwanda, or post-Weimar Germany?

Next time take notes.

You're not telling anyone here anything we don't know. We all read TOD too.

Rumor: That's probably part of the problem. ;)

IMO, spending time and money playing the markets is risky business. As WV Farmer can attest to, it takes large amounts of time and effort to take control of the essentials of living. (I was overwhelmed merely reading his post!) It's not something you do after things go to Hell.

Besides, will it even be possible to acquire the necessary equipment once the capital markets and supply lines shut down? Perhaps better to cash out, and get what you need while the gettin's good.

mink said...

First of all thank you for the site and the comments thread.

The advice you give here, Stoneleigh, is to keep cash or cash-form. I am wondering why would cash hold value in a collapse of the kind you are envisaging - practically the entire global banking system closing its doors. It seems to me that these are uncharted waters, and it is dificult to perceive. Are you deducing from previous crises (Argentina etc)? After all these pieces of paper represent a general level of trust in the system and its future, no more and no less.

Anonymous said...

A November to Remember...

1. A exponentially accelerating global Economic Catastrophe with all of its attendant impacts (too many to list)
2. The MOST vitriolic and potentially violence-tainted Presidential election in the USA since Reconstruction
3. A Wild Fire Deluge in California's and Arizona, as November's Winds combine with continued dry weather
4. Unemployment explosion past 7% nationally---regionally as high as 11%
5. A TET-like Thanksgiving offensive by the TALIBAN in BOTH Afghanistan and Pakistan

Please pass the stuffing...

Starcade said...

I truly thought we were going circuit-breaker today. It's the second Friday in about a month I've felt this way -- and the PPT came rushing in minutes from the open. Today, the Nasdaq was off 7% on the opening bell. The Dow went down about 450 -- and then got about 150 or so back, and then it held there.

The fact is that, eventually, countries are literally either going to utterly collapse, or other countries are going to seize sovereign control of debtor nations as "payment". (One example I could easily see is the UK taking Iceland. A scarier one would have the same country be taken by Russia.)

The real question is no longer if the US falls. It will. It's inevitable. The question now, vis-a-vis government, is, instead of the US being the *first* to fall, whether it might be one of the *last*...

In that case, the entire concept of a sovereign nation-state may be a thing of the past, and the One World Government types (and that's where we're heading, like it or not!) will have their day.

East Asian markets are now down 35-40% since August 29. At what point does it become full-blown capitulation of nations like Japan? China?? Hong Kong???

The fact is, Ilargi -- it is no longer just the United States which is finished. LaRouche is right -- we are headed to a Black Plague. A New Dark Age. The concept of nation-state on this Earth is ending.

(The only thing he's wrong about is that this situation is, now, COMPLETELY unsavable. The only question now for the world is will millions die, or billions?)

I believe the mass physical bloodbath begins somewhere around the Christmas shopping season here.

Frank said...

Blogger says this post went up at 9:43 AM. I didn't see it till after 2pm. (I checked first at 1:30)

I've frequently notice a half hour discrepancy, but 4 hours? What gives?

Anonymous said...

Starcade - If we are indeed headed for a New Dark Age and the death of the nation-state (i.e., the birth of a New World Order), then it strikes me that Ilargi's suspicion is correct -- all of this was planned, all of it...except, of course, for the unintended consequences.


Anonymous said...

unintended consequences.... none of which I expect to be good...


Starcade said...

anon 1355: Not hard to feel threatened in days like this. You begin to wonder what will be the final act which sends us over the side once and for all... At that point, millions here and billions abroad can kiss their arses goodbye.

Everything has fallen apart for them -- they are dead men walking.

dan w: You're thinking of the movie "They Live", right?

dark_matter: They'll hold the dollar as a medium of exchange as long as they can -- for the moment they lose it, they lose it all. The medium of "exchange", then, becomes guns with hot bullets. Then, probably a combination of above-ground new currency in a fascist totalitarian regime, and under-the-table barter for the citizenry who remain.

dan w: My guess is either the theft of the election and a McCain "victory" or someone shooting President-elect Obama. One is going to happen. TPTB and the racist pig culture in this country will not let Obama take the Oval Office.

And then, it is freaking on.

dan w: Anyone who ascribes a non-zero value to anything in this market will be pancaked like Wile E. Coyote when they fall off the cliff. Every company in this "nation" is so tied into these derivatives -- the moment this comes flying apart, EVERYTHING GOES BANKRUPT.

ilargi: Both Bush and Paulson, on the same day (the first Friday in this crash I thought we were circuit-breakering), admitted as much. The tools they are using aggressively are meant to sucker new blood (money) into the "market".

anon 1632: The only question is how many million die... 10? 20?? I'm guessing upwards of 50 million just in the USA (by the means you propose)... What we are learning is that the credit bubble is probably a manifestation that we are far beyond societal sustainable population.

wyote: The problem with your theory is that, similarly to what I just said to (presumably) the person you are opposing, things have to get to a sustainable level first. What if someone does (as suggested by writers referenced before you) just push the big button and nuke the planet?

Given what our media has been playing us for, I wouldn't be so flippant as to think otherwise.

ilargi: I predict most anything which requires a consumer economy is dead by Q1 2009 (auto industry, most entertainment industries outside the main backbone, etc.) -- the only other result would be to print money and just hand it out to anyone (not just taxpayers, not just corporates, everybody...) to spend to their heart's content.

"Drink and be merry, for tonight your very life will be required of you."

Starcade said...

GSJ: Exactly. Mass population elimination is part of the plan, and has been for a long time. Think: Every person on Social Security dead = another several to ten thousand a year for the wars which are coming.

And the end of world history (as it has been the last 100 to 200 years) will be the Inside Job on 9/11/2001.

They don't want to be right (correct).

They want to be the only ones left.

Anonymous said...

Hi Scandia, well I guess that makes you a degree or three closer than me to the two. My art instructor in LA had lived in Paris in the 30's and had frequented the same cafe as Django. He said he was a quiet spoken man and would preface what he had to say by doing a light run on his quitar. Struck me as a good way to allow one time to do their thinking. (I play guitar but unfortunately not well enough to allow for all that much clear quiet thinking, maybe later when there is more time and less money).

Figured I better add that about money or risk being totally frivalous and off topic here;)

Anonymous said...

starcade, it seems like you've inadvertently taken on the role of spreading hope and cheer:

"LaRouche is right -- we are headed to a Black Plague"

Any time anyone quotes LaRouche as supporting any position, I am immediately filled with a sense of relief, since he's been an idiot as long as I can remember, so if this is what he thinks, that's a great sign, a wonderful one in fact, and I'm sure he'll be as wrong and out there as he has been for decades now.

Maybe what's so terrifying is the idea of losing a bit of the corporate safety blanket and actually living our lives for real? I have no sense of how this will turn out, but one thing I do know, if LaRouche says something, it's bs, and I've been suspecting the super doomer scenario is just an extreme of thought for a while now, fun as it is to sink into.

If we all settle for less, and stop being so damned greedy in our daily personal lives, this country will be fine, that's a big if of course, but who knows, this isn't an African country, and it never has been, so that's not a worry I have. It's also not Russia. Whatever happens here I think will be strongly regional and uniquely American, including whatever happens to all those idiots that fill our malls and suburbs, with their expectations of unsustainable consumption.

Anonymous said...

Bloomberg interviewed Roubini in Madrid.

He was asked where was a safe place to put savings, he said short term treasury bills but Not in the US. Some other currency.

I thought Stoneleigh recommended short term treasuries in your own currency, what ever it might be.

Blue Monday

The Lizard said...

Where are all the nameless goons with guns suddenly arriving from?

scandia said...

Crystalradio, I thought you were right on topic with Reinhardt and Grapelli, with their history in the 30's.
I'm wondering what music will be written to express our current times....

Anonymous said...

It seems to me that these are uncharted waters, and it is dificult to perceive. Are you deducing from previous crises (Argentina etc)? After all these pieces of paper represent a general level of trust in the system and its future, no more and no less.

Hi Mink,
The dollar will become worthless, the question is when. Some people think not for a while, others think soon.

Here's some relevant commentary from Option ARMageddon:

(emphasis his)

Right now Treasuries and the dollar are a refuge, but what happens when there’s the inevitable reversal out of the dollar and dollar-based assets? In the case of China, for instance, Brad quotes the following:

“Charles Dumas of Lombard Street Research estimates that China makes 1-2 per cent on its (largely) dollar reserves. It then loses up to 10 per cent on the exchange rate and suffers a Chinese inflation rate of 6 per cent for a total real return in renminbi of about minus 15 per cent. That is a loss of $270bn a year, or a stunning 7-8 per cent of gross domestic product.”

When the Chinese decide it’s too expensive to keep recycling their dollars back into the U.S., what then?
We could see a spike in U.S. interest rates as the demand for U.S. debt can’t come close to meeting supply. Where do people think the money is going to come from to fund trillions of dollars of bailouts and “stimulus?”

It has to be borrowed, which means we have to sell more Treasury bonds and hope people will buy them. Right now they are, because they perceive Treasuries as a safe haven in a violent market. But it’s my belief that, eventually, the supply of Treasury bonds will vastly outstrip demand to buy them.

That is to say, our need for borrowed money will eclipse the rest of the world’s ability to provide it. That will lead to higher interest rates and possibly a run on the dollar.

It’s been said that the Chinese have to keep this reciprocal relationship going. They have no choice. If you owe the bank a little bit of its money, they own you. But if you owe them all of their money, you own the bank. But that sentiment ignores the obvious truism that unsustainable things do not sustain themselves. We may own the Chinese, but if we go bankrupt, so do they. This Ponzi game we have going with them, where we spend to infinity and they lend to infinity, is just not sustainable forever. It will reverse.

Maybe not today, maybe not tomorrow, but soon and–possibly–for the rest of our lives.

EBrown said...

anon at 1000
I couldn't agree more. LaRouche has been a d-word that rhymes with his name for longer than I've been alive. Anyone who cites him as a source for anything is asking for their opinion to be discounted immediately.

I recommend talking to a professional counselor about your fears. I've been there, and it sucks, but talking about it with a real person can help. You'll be able to take much more productive action if you can get past some of the paralyzing agony of fear.
You might be right about how bad things are going to get. If it gets that bad as fast as you aticipate I'm toast and so is everyone else I know. So what? We'll all be gone in a few weeks. I think it's going to be a lot slower and more agonizing than you seem to beleive.

Anonymous said...

I&S I have a question,If you have a moment.

Life goes on.I have a meeting with a tax kind of guy on monday.Due to the fact I have started a small business,a organic orchard/pollination&bees/herb farm kind of thing,and invested every nickle I could spare in it,I expect to be on the plus side of taxes this hopefully5-8 grand that would arrive at a exquisitely good you two think its going to hang together long enough to see this cash from uncle sugar to make a appearance...?? this would help out in such a incredibly good way...


Anonymous said...


In response to B at 17.27 and the ING question, I am in Europe and encountered the same difficulties with shifting money to my outside (non ING) account. So I called up thinking I would talk to an ING person, but the robot offered to transfer the money using the phone, so I did. No problem. But, it was for a small amount, less than 10 k€.

In short, try the phone.


Anonymous said...

Economic observations from Heidelberg, Germany:

1. Tourism in downtown Heidelberg is still strong though most tourist are Chinese.

2. BASF in Mannheim will soon announce a profit warning.

3. SAP in Waldorf has enacted a hiring freeze.

4. SAP/BASF are currently cutting back on English speaking training.

5. Most of my friends are expats who teach English or Germans who work for SAP/BASF. Last week we all agreed to spend New Year's skiing in the Alps but this week the trend is to stay in Heidelberg to save on cost.

The last time I witnessed these warning signs was back in 01-02. I went to war in 03.


Anonymous said...

The information in this post was excellent. It is appalling that there is no code of ethics in the financial system.

In my profession if I became that reckless, I would be fired, have my license revoked and possibly go to jail.

scandia said...

Starcade, this seems to be a good time to ask my question in response to your words a few days ago..."I'll be blunt: I don't have long left,..."
Have you been diagnosed with a terminal condition. Other than the system collapse we are discussing?

el gallinazo said...

At least Starcade has the courage to sign his posts. That's more than we can say for anon FAD (fuck a duck). If you don't sign it - I don't read it. I also don't take unsigned checks.

Anonymous said...

Regulators Seize Ga. Bank

Alpha Bank & Trust of Alpharetta, Ga., was closed by regulators, making it the 16th U.S. bank seized this year. The Federal Deposit Insurance Corporation has transferred all accounts to Stearns Bank, based in St. Cloud, Minn.

Alpha has $354 million in assets and $346 million in deposits. The FDIC said Alpha's two branches will reopen Monday as branches of Stearns Bank.

Most of the bank's customers are covered by FDIC insurance. But 59 of Alpha's bank accounts exceed the federal limit of $250,000.

Wyote said...

Dear Starcade:
Indeed you are the biggest, baddest bear in the woods. Now uncrimp and get some rest.

Anonymous said...

Scandia said:

"...I'm wondering what music will be written to express our current times...."

What do you think about this from Waites.

Reminds me of my cousin, one of the brighter people I have known, even his father told him, one trying day, "You are smart you are smart but you are not so smart" He spent a year in Lompoc doing time and reading authors I never heard of till years later, overdosed at 22 and never grew up.

Anonymous said...

Well...guess I'll stick my neck out and take a little bit of the opposite side on LaRouche. Although many negative adjectives can be applied to him (and self-serving might be the best one), "idiot" doesn't fit. He's got to have a least 30 IQ points on me and I know I'm not an idiot because I read TAE!! :) Also, FWIW, LaRouche was the first commentator/writer, or one of the very first, to publicly connect the international drug trade with TPTB, while reminding folks that the Chinese Opium Wars with Britain were all about Britain pushing opium on China. Anyway, just my .02.


P.S. I don't think Starcade needs counseling or is in some sort of paranoid state...I'd say he is an extreme, pessimistic realist...and that would mean he lives only 3 or 4 floors away from most of us here.
I would just remind him, as I remind myself on occasion, to look up and enjoy the blue sky and white clouds every now and then.

Stoneleigh said...

wv farmer,

So, the question is, how big a risk do you think it would be at this point to put $12k into the delivery of something from half-way around the world, in the midst of this current leg down? I'm thinking I should just chase the thoughts out of my head until the MSM resumes the "we're past the worst of it" mantra.

I think you'd be safe at this point looking at that kind of timescale. If it was 6 months it might well be a different story.

Your point about such a thing being a community resource is a very good one. Do you have fuel stored to run your tractor on? If you can, store fuel in a way that it isn't obvious or it could be a target for theft.

Starcade said...

anonymous 2200: Good to see you are another one who tries to dictate "truth" through public consensus -- hence separating the concepts of "truth" and "fact".

LaRouche is quite "out there", yes (he needs to stop making everything a meta-discussion on Man (I can sum Man up simply: The most evil creature God created and the Devil successfully polluted.) and basically keep hitting people over the head with 2X4's on all this.), but that doesn't change the fact that he is factually correct. The problem is that he proposes a solution which would require some degree of faith in the human condition (macro- and micro-) that I do not have, and that his theses on Man (and American society) do not support.

You are quite correct that the concept of "really living our lives without a corporate security blanket" is a really scary thought for society. This is because most people can't -- and many people simply won't, and will choose to kill or die first. Without that blanket, this country goes back at least 100 years. The entire social infrastructure fails, and fails spectacularly.

The only way those of us, societally speaking, who will choose to settle for less will survive is either with great grace of God (you may read that as "luck" if you so desire) or at least a means to protect oneself -- and the willingness to use it.

thehangedman: I'll give you three sources of "nameless men with guns":

1) People finally coming out of the woodwork in their true colors (be they racists, class-ists, whatever)...

2) Types like Blackwater and the military.

3) Agent provocateurs to draw #2 into the mix.

anonymous 2339: And that (the fact that they go down with us) is the only reason we even made it past a couple weeks into September. I kept telling people that I felt TEOTWAWKI would probably hit this fall, give the Olympics and a small honeymoon period.

Two weeks after Beijing closed, Fannie and Freddie were nationalized, and the road to TEOTWAWKI has started in earnest. The ONLY reason, if we even are to hold an election in 10 days, that we get to hold the election, is because the rest of the world is even more f*cked than we are.

ebrown: The problem with that is that you are probably right. You're as f*cked as I am. Right now, I'm one of those people who has to "draw a check" and use most of it to keep my friend housed too after she got spit on by her "family".

Here's the kicker: The longer and more agonizing this takes -- the worse it'll be for all of us. Even if you _DO_ stock up on food and the like, you still have to defend it. You still have to sleep sometime.

scandia: The system collapse will kill me. Unless I were literally to win the lottery within a few days or weeks, I can't see surviving the aftermath. Might make it a few months or a couple years (I'm guessing, if TSHTF today, next spring or summer), but, either through economic attrition or Martial Law/internment camp, I'm most certainly a goner when this goes down.

anonymous 0926: You're right "extremely pessimistic realist". I believe we have no future -- as a society, as a civilization, nor as a species. I've seen what people really think -- and what people are willing to do when all (at least by the old conventional rules) is lost. What happens when the conventional rules no longer apply?

scandia said...

Crystalradio, Waites! Of course he would lead the list of composers commenting on our human condition! Absolutely perfect song re our discussion at TAE," I don't wanna grow up..." either!

Stoneleigh said...


I just can't understand how anyone could be buying right now.

The buy-the-dips crowd has been well trained, and there are always people who'll take the other side of any bet made by a crowd. It's risky, but in most cases the people doing it are playing craps with other people's money anyway.

scandia said...

Blue Monday, I do not recall Stoneleigh recommending local currency treasuries. I do recall her recommending local cash currency in the near term as that will be the currency operendi. She recommended treasuries under one's own control to facilitate sudden and easy cashing in. I suppose this would lead one to conclude the treasuries would have to be in local currency denomination. I don't interpret Stoneleigh's comments as a recommendation of any currency. I think her point is to be flexible, to have as much control in one's own hands as possible. This would include tangible/hard assets as well.
The floor is open for other suggestions as to how to accomplish this goal...

el gallinazo said...

It seems that Ilargi and Mish both believe that the PPT is manipulating the market with taxpayer money and prevented the meltdown on Friday. However, I thought it strange that the TSX only lost less than a half a percent. Are they operating north of the border?

Stoneleigh said...


The last time I witnessed these warning signs was back in 01-02. I went to war in 03.

Indeed. When times are hard enough that there isn't enough to go around, especially if the fall is large, rapid and unexpected, then humans find another tribe of humans to blame and punish. It won't give them back what they've lost, but kicking someone else in anger somehow satisfies the dark side of human nature.

I fully expect large scale conflict as the 'us versus them' dynamic heats up. 'Us' becomes ever more tightly defined and 'them' becomes an ever more pejorative term. As someone who treasures multiculturalism, I find the prospect beyond tragic.

I very much hope you aren't flung into some senseless conflict out of shear national vindictiveness.

el gallinazo said...


Stoneleigh recommends that during the deflationary period we are going through which will last at least a year and probably quite a bit longer, that you hold your non-physical assets in currency or short term treasuries. She also recommends that said currency or cash equivalents be in the currency of the country in which you are residing as there will be tremendous and essentially unpredictable forex fluctuation.

Stoneleigh said...


Do you two think its going to hang together long enough to see this cash from uncle sugar to make a appearance...?? this would help out in such a incredibly good way...

If it's due any time soon then I would think you'll get it. Although deflation can unfold very quickly, there is still residual inertia in the system, especially in the government as that always lags behind what's happening in the real world. I have my fingers crossed for you.

scandia said...

Starcade, Okay, I'll conclude you are making a realistic assessment of your needs to survive and coming up short...Me, too, in the sense of stash at hand. However if we develop our community/network we may last longer and may be key players in the survival of other good folks. Sounds like you already are sharing with a friend in need.
I have been acutely aware of millions of people on the planet already living and surviving in conditions that we fear for our future. Just watched a video on al Jezeera of minors( under 14 yr olds) risking a perilous boat journey from Africa to Europe, reading of Poles returning to Poland from England only to discover the security blanket at home is under threat. threat everywhere it seems... An economic migration is now playing out. We may also need to search for better the world over fleeing to cities...children sold to the sex trade, monuments to greed being built with slave labour in Dubai. How anyone could have a good night's sleep in one of those constructions is beyond me!
For me History reveals that we are not better nor worse than other people in other times. My being afraid centres not so much in the time left to me but in how I live the time left to me. I want to exit on the high road with good companions.

Stoneleigh said...

Blue Monday,

I thought Stoneleigh recommended short term treasuries in your own currency, what ever it might be.

I generally recommend cash in whatever your own currency is, but bonds are trickier. Some countries bonds will be riskier than others as some countries are already teetering on the brink of default and don't have the cushion of a flight-to-safety effect (or worse, they may already be suffering from the opposite). If you live in Argentina, the Ukraine, Pakistan or Zimbabwe for instance, then even short term bonds are not be such a good idea. In some places (like Zimbabwe), even cash is a bad idea. There you would need hard goods already.

In places where I suspect most of our readers live, cash and short term bonds should be fine for quite a while (cash probably longer than bonds, but for many keeping everything as cash is either impractical or too much of a risk in itself). As always, I have to point out that there is no risk-free solution, only safer and less safe options.

The point is to have access to a medium of exchange that's recognized in your country, as you may not be able to trade currencies later and their relative valuations could be all over the map anyway. If you don't feel comfortable with too much cash, and you have some spare space for storage, you could also consider stocking up on some currently cheap things that would make good barter goods later - soap, painkillers, basic medicines, first-aid supplies, cigarettes (even if you don't smoke yourself), rechargeable batteries etc.

Anonymous said...

el pollo said...

Stoneleigh recommends that during the deflationary period we are going through which will last at least a year and probably quite a bit longer, that you hold your non-physical assets in currency or short term treasuries. She also recommends that said currency or cash equivalents be in the currency of the country in which you are residing as there will be tremendous and essentially unpredictable forex fluctuation.

What about treasury bond mutual funds? It can be a pain buying separate treasuries, creating a ladder etc.

el gallinazo said...


"What about treasury bond mutual funds? It can be a pain buying separate treasuries, creating a ladder etc."

Assuming you are a Yankee, I think the best way to do short term treasuries is with

It is very convenient, once you are set up. You just put your dollars into the bank you sign up with, order that amount for the next auction (13 week is on Mondays) and a few days after the auction your cash disappears. When you buy your bonds, it is important to tell TD to put your funds upon maturity into their non-interest paying sweep which they call C of I. Otherwise, they will send it back to your bank (which may no longer be there). You then purchase new bills using your C of I account to buy the bonds. Repeat and rinse until the USD goes down the toilet.

I have friends with IRA's, and TD doesn't offer an IRA blanket, so they have to hold them through some sort of brokerage. But if you are not in tax deferred money, you don't want any intermediaries between you and your T- bills.

Anonymous said...

elpollo said:
I thought it strange that the TSX only lost less than a half a percent. Are they operating north of the border?

See this graph

Quite used to see those two two snakes in tandem but never saw the linear jumps in different directions at the end before, very strange!

Stoneleigh said...


Setting up new economies takes capital, energy, and time. This needed to happen in the 1970's. Just to focus on the capital aspect, Where's the money going to come from?

Exactly. We will adapt through deprivation, not massive new public infrastructure projects. The Keynesian approach wont be an option.

Of the people who do understand the futility to the Fed/Treasury's actions, very few are receptive to the looming population and energy issues.

Agreed. We focus on finance here as it has the shortest timeframe and very much needs to be understood in a hurry, but we were energy and environment writers first and do understand that this is a broader crisis. Many pure finance types don't. They can't get beyond thinking about investment opportunities to contemplate system collapse.

States and municipalities are also utterly bankrupt. Soon, the entire nation will start to turn into one big California/Detroit. How long before our own locales begin resembling the pictures that Ilargi posts up each day?

Agreed again. My guess is that Wall Street effectively eats Main Street for breakfast next year.

The Russians were able to respond relatively swiftly to their collapse, growing their own food and engaging in a sort of barter system. But America's situation is vastly different. Vastly. Many Americans are too overweight, inexperienced, and unskilled to produce a meaningful portion of their own food within any reasonable time frame. The nation lacks the inexpensive mass transportation that Russia already had in place. The list goes on and on.

Agreed once more. I was a researcher into Soviet affairs (energy in particular) for a long time. They were vastly better prepared to weather this storm than we are.

My concern with regard to Russia today is that they are about to experience their second collapse. People typically grit their teeth through such a thing the first time, but having the rug pulled out from under their feet a second time makes them much angrier. I think Russia is already moving towards fascism at an alarming rate. European dependency on Russian energy will become an acutely uncomfortable position to be in over the next few years. As Eastern Europe already discovered, energy comes with strings attached.

My advice is to help yourself and your loved ones. Buy land, try to grow your own food, and try to stock up on enough necessities (clothing, critical medicines, food, etc.) to give you a legitimate shot at establishing your own self-sufficient systems.

I recommend that people try to achieve as much self-sufficiency as they can, but they also need to get out of debt (or they will lose their leveraged assets) and hold cash (or cash equivalents) in order to retain purchasing power for as long as possible.

Those few who still have liquidity will be able to buy the hard assets they'll need for much less later (with the exception of things that may not be available at all later, which should be purchased now if at all possible).

Keep in mind that most people in your community won't have any of this; the first significant supply disruption will put their lives in jeopardy.

Very sadly true. There's nothing you can do to save the system or help everyone, but you can try to help your family, friends and community, and the sooner the better. There will be social disruption as many will be caught completely unawares. This will be awful to witness and will probably make you feel very guilty for being better off, but their problems are not your fault and not within your power to address. Help where you can, but don't stretch yourself too thin.

Anonymous said...

RE: all the blood bath by Christmas posts.

I think you are underestimating average Americans. Yes it will be hard if this all pans out the way it looks, but we are not going to just start killing each other by the millions. People have lived through remarkable times and circumstances and will again. Please take a deep breath to clear your head. Panic can destroy you and blind you to possibilities. Peace.

Stoneleigh said...


It WILL make the Great Depression seem like a walk in the park.

How will the many millions of unemployed men feed their families? How will they acquire/afford clothing after the first couple years once the global supply lines break down? After the first couple years, tens of millions of Americans will have NO dollars.

Agreed. This is likely to be significantly worse than the Great Depression, as were the excesses which preceded it. People now have much higher expectations, far fewer useful skills, much greater structural dependencies on things and on life support systems that won't be there etc.

For most, purchasing power will fall to nothing at all as they lose access to credit and probably whatever savings (if any) they may have had. Entitlements and benefits will be a thing of the past, unemployment will be rampant, and working conditions for those lucky enough to have a job will be awful, as workers will have no bargaining power at all.

Holding liquidity now will reduce the impact somewhat, giving you a chance to move into hard assets over time. For instance, buying land (that you couldn't currently afford without access to credit) within a couple of years would be a good idea. By then, if you have preserved enough capital, you (or you and a few others) might be able to buy it outright.

Of course if you can afford to do so earlier, then you would buy yourself extra time for the necessary learning curve, but buying without debt isn't an option for most people at the moment.

Farmerod said...


That graph is a yahoo problem, methinks. IIRC, around 3:45 yesterday, their DOW numbers essentially stopped and didn't update until well after the market closed. The TSX did climb at the end but nothing out of the ordinary.

el gallinazo said...

the newbie

"Yes it will be hard if this all pans out the way it looks, but we are not going to just start killing each other by the millions. "

Probably true but we better deport Mel Gibson back to Australia first.

el gallinazo said...


Yeah, checked it with the NY Times graph. The vertical spike was a yahoo FU (although not as big as turning down Bill Gates :-)

But still found it interesting that the TSX was so unaffected.

Anonymous said...

You say that we either "share or face angry men in the street". I am always confused by statements like that.

If the problem is central banks inflating by making money out of nothing why doesn't the answer come: Abolish them?

You cannot have debt like this without a government empowered central bank (the Fed, the IMF, etc.)

Explain to me how we "share" without using more government force to put your ideas into motion.

mink said...

If all mortgage owners are in negative equity, and half of them are unemployed, the chances that the debt will be pursued (by the government, who practically owns it now) are as good as the chances for a debtors' revolt. If people simply stop paying, and squat their own houses - as they will under such circumstances - it would be very difficult to get them out, and quite pointless too.

This could not save all mortgage-payers, but most, in my view. In this sense, organising a movement to refuse payments and to protect against evictions is of political urgency.

I&S, while I think that your analysis of the financial unwinding has so far been impressive, we will at some point - soon, if you are right - enter uncharted waters. What will happen then will depend as much on the political crisis as it does on economics and finance.

Anonymous said...

Watched James Galbraith, son of John, last night tell how there was unlimited time left ifor the US dollar as a reserve currency and therefore unlimited debt to be enjoyed. With treasuries running at between .5% and .3% lately i don't follow that talk. I don't even understand why we haven't moved back to multiple currencies as reserve. I think it worked before and "Hey Dude don't we know we got tech now"?

Is it just because too many top hats would get rugs jerked from under shiny shoes?

Thanks el pollo and OC, the falling apart on the graph I found strange but what I found most odd was that the TSX went where I would have expected the DOW to go. Should there be dark forces, which I would find quite likely, then they seem to not have been able to stem the forces of 'down'. The TSX just being caught off guard and continuing on it's happy mindless following ways.

I experienced the similar years ago in another incarnation with a skipper of a herring boat who was following the high-liners so closely we ended up miles ahead in the wrong direction. Much giggling in the foc'sle!

Farmerod said...


I found yahoo's rejection of MSFT ample evidence that this financial collapse will take longer than I think (I thought it was all over in January, then March, then a few weeks ago- I'm starting to ignore myself now). Many people with lots of money don't think this meltdown is going to be catastrophic. Because of that, it will take more time to play out. This can be good for anyone who is maximizing their planning efforts now to cope with the inevitable.

Anonymous said...

el pollo -

great idea. Now if we could just figure out where to deport Ted Nugent.

Anonymous said...

Mink, if one is unable to continue paying down their mortgage, the least they could do, I think, is to offer their services to the mortgage holder as live-in caretakers. What do you think?;)


Gee, don't you know it is all over and will continue being all over until Gia drives a stake through our hearts? ... Okay, that's it, time for me to go out into the sunshine and work in the garden!:)

WILDBLUESbysus said...

In your considerable understanding perhaps you could stretch your imagination to come up with a possible senario supposing that instead of "bail-out", debts were forgiven, wiped clean. How would that have changed our economic outlook?

el gallinazo said...


It's definitely a slow motion train wreck, but as I&S predicted, it is accelerating, and I think that the function of the acceleration is exponential.

You know we are living in interesting times when the NYTimes Saturday business columnist, Joe Nocera, essentially calls SecTreas Hankenstein a lying sack of shit and starts predicting pitchforks in his last paragraph. timestopics/people/n/ joe_nocera/index.html

the newbie

"great idea. Now if we could just figure out where to deport Ted Nugent."

I read that NASA was planning a shot soon scheduled to leave the solar system in a few decades. Maybe we could all pitch in to buy him a berth.

wildbluesbysus said...
In your considerable understanding perhaps you could stretch your imagination to come up with a possible scenario supposing that instead of "bail-out", debts were forgiven, wiped clean. How would that have changed our economic outlook?

In our fractional reserve system, 97% of our money/credit supply is constructed of debt. No debt - almost no money. Which may be where we are headed anyway through debt default.

My solution to the problem is to make all Federal Reserve notes exchangeable on demand for walrus tusks. Good for Canada and the Rooskies.

Anonymous said...

el pollo said...

In our fractional reserve system, 97% of our money/credit supply is constructed of debt. No debt - almost no money. Which may be where we are headed anyway through debt default.

Any links data to show the 97% funny money?


el gallinazo said...


"Any links data to show the 97% funny money?"

Well, I think there are basically two types of money - fiat paper and debt. I learned a couple of months ago (and I think but am not sure that Stoneleigh was one of the sources) that in the USA, fiat paper is about $900B. All the rest is credit/funny money. So, you can do the arithmetic. I don't have any links handy and don't feel like looking for them right now.

Anonymous said...

I, along with others here, agree that Starcade is not insane. Starcade is simply anticipating a possible ultimate scenario sooner than most of us are.

Outtacontrol, thanks for your input to the question on timing of land purchase I posed a few days ago. I think Stoneleigh addressed the topic on her comment at 12:17 PM today.


Anonymous said...

Here's a working NY Times Nocera - So When Will Banks Give Loans? link.

Anonymous said...

Ahimsa, who said anything about insanity? Many people who fall for paranoid conspiracy theories and their promoters are just mentally slothful and don't want to actually do real thinking, although of course many others are in fact suffering from some form of mental disorder. The thing that makes conspiracy thinking so attractive to such types is that it always uses pieces of truth, but the overall assembly is a fictional construct, which is almost always readily identifiable by large leaps in reasoning which have no real foundation in reality, but which sort of sound good. LaRouche has always been good at that type of pseudo reasoning, and nothing is more boring and less rewarding than trying to reason with such types.

Anonymous said...

To all:

Friend who is a broker/pusher for Merrill/BoA told me today that there has been no PPT activity the past few weeks, just bargain-hunters and hedge funds buying on the dips. I expressed marked skepticism, but he held firm: no PPT activity.

Anyone have an opinion on this? I find it hard to believe.


el gallinazo said...


re currency Image:Components_of_the_United_ States_money_supply2.svg

remove spaces where appropriate

go to graph

Image:Components of the United States money supply2.svg

and enlarge. Currency is the bottom green. Does look to be about $900B. The money supply including M3 which Greenspan stopped publishing in 2005 to reduce expenses of the Fed :-) is probably about $17T right now, but that does not include most of the funny money.


I don't think anyone here has implied or stated that Starcade is insane, so I don't know where that is coming from. I think Scandia and others are worried that he is very depressed and may be self-destructive. Even if Starcade is 100% accurate as to where we are heading, I still would not wish to inhabit his mental space. We are all going to die - some sooner than others. As a dude entering geezerhood, I expect to be sooner than most. That doesn't mean that I have to be miserable.


It's like Sherlock Holmes' dog that didn't bark. And I always thought that the PPT was a part of my fervid imagination.