Saturday, July 18, 2009

July 18 2009: Is reality in the eye of the beholder too?

Arthur Rothstein Bronx December 1936
Scene along Bathgate Avenue in the Bronx, a section from which many of the New Jersey homesteaders have come

Ilargi: I posted part of Barry Ritholtz's post from yesterday, US Housing Starts Fall 46%, in a Daily Kos thread earlier today. A commenter reacted:

#! blogger Calculated Risk smacks down Ritholtz for his stupidity that you have reposted: Clacluted Risk has said "It now appears that single family starts might have bottomed in January."

This refers to a post by Calculated Risk, Ritholtz: "Why are people calling a bottom for Real Estate?", in which CR takes offence at a graph Barry Ritholtz posted today in:

New Home Starts
I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now.

Green shoots anyone?

click for larger white chart

CR's complete reaction goes like this:

I'm working on a housing start post, but first ...

Barry Ritholtz presents the following graph and asks: "I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now."

Well I'm one of the people who wrote yesterday that a bottom for single family housing starts might have happened: It now appears that single family starts might have bottomed in January.

A few quick points:
If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won't bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis. Barry also conflates calling a bottom in housing starts with: 1) "a bottom in Real Estate" and 2) "a snap back".

First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. [..] Most people think prices when they hear the word "bottom", and the bottom for prices usually trails the bottom for housing starts - sometimes the two bottoms can happen years apart!

Second, looking for a bottom in housing starts doesn't imply "a snap back" in activity. As I noted yesterday, "I expect starts to remain at fairly low levels for some time as the excess inventory is worked off." I'll have more on why the housing start report is somewhat good news soon.

Both the commenter on Daily Kos and CR are way off the mark here. In CR's case the particular phrasing of "It now appears that single family starts might have bottomed in January." should say enough. Wanting something badly to be true, but not having the goods. I reacted thusly (let me first emphasize that I have a lot of respect for CR, but not so much this time; he can’t just start making stuff up, no matter that the beholder makes his own reality).

I don't like false claims of recoveries and green shoots. Not only are there plenty of those around as it is, they are dangerous things. Decisions are being based on them, both by governments and by individuals. And false claims lead to false decisions.

Ilargi: CR unfortunately gets into semantics and then flies off into territory Ritholtz never addressed. Not a terribly convincing stance. Ritholtz, on purpose, doesn't distinguish between separate bottoms, and injecting them into the discussion makes no sense, at least not in reaction to the original statement:
I cannot figure out why people continue to call for a bottom in Real Estate

CR calls for two separate bottoms; calling for 5 or 10 would have been just as credible (it all depends on what you want to talk about), and just as much not a reaction to what Ritholtz says. It's just CR's pet theory. And he's entitled to those, but it's either disingenuous or simply not too smart to imply that Ritholtz wouldn't be able to tell the difference between housing starts and prices. He simply doesn't bring it up because it's irrelevant to his point.

CR's main flaw in general, which takes nothing away from the quality of his analysis of past events, but does dent the credibility of his predictive powers considerably, is perfectly summed up in this line he uses:
It now appears that single family starts might have bottomed in January.

That is plain suggestive wishful thinking based on nothing but what the author would like to see in the data. It's obviously not supported by the Ritholtz graph he comments on, and whether there's a lagging indicator in play is, in that regard, pure semantics. Single family starts might have bottomed, and they just as much might not have. It has the same merit as the headline yesterday that read:
US housing starts rise to 7-month high

Looking at this Barron's graph of the starts, it's hard not to laugh at that interpretation of the numbers. It's not untrue, but it is a weird conclusion. June starts are a mere notch above those in January, while April looks at par with January. All in all not exactly a confidence booster. As Ritholtz rightfully states, a 3.6% rise in starts with an 11.3% margin of error means you don't know a single thing.

June Housing Starts

To call CR's piece a smackdown of Ritholtz's "stupidity" doesn't bode well for your analytical skills. There is no stupidity in what Ritholtz states, and if there's any smacking going on, it misses by a mile and a half. I won't call CR stupid; suffice it to say this is not one of his best posts.

There is no hard evidence of a bottom (Ritholtz's one and only theme), and CR has none to provide; he's just wishfully hypothesizing about a different topic than Ritholtz and thereby unwittingly exposing a glaring weakness. You can't take people to task by randomly changing the subject. Which is what CR does.

Here’s Why It’s Time to Ban Credit Default Swaps
Ask U.S. Rep. Maxine Waters, D-CA, about credit default swaps and she’ll offer this warning: Ban them now or expect a reprise of the ongoing global financial crisis – which the derivative securities helped create. When it comes to elected officials, Congresswoman Waters is not one I would typically feel that I have a lot in agreement with. A representative of a low-income district in Los Angeles, Waters is a senior member of the House Committee on Financial Services and has distinguished herself in the past by her sharp attacks on the financial sector and capitalism in general – what her own Web site describes as her “no-holds-barred style of politics.”

However, Congresswoman Waters’ bill to prohibit credit default swaps – introduced last Friday (July 10) – is strangely appealing, even for a crusty old capitalist like myself. If you want a more pro-capitalist confirmation of Waters’ view (and George Soros doesn’t count) try Warren Buffett’s sidekick Charles T. Munger, who has called the CDS prohibition the best solution, and said “it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”

Waters has also pointed out – quite reasonably – that unless credit default swaps are banned outright, “the industry will find a way to loosen standards and widen exemptions for customized contracts and we will be right back to where we are today.”  As a free-market enthusiast, my natural instinct is to resist such calls. But I have to recognize that, as we speak, we’re actually not operating in a free market. Key U.S. banks were bailed out by the U.S. government last fall, after which such financial institutions as Fannie Mae , Freddie Mac and Citigroup Inc. have been permitted to carry on as though nothing bad ever happened.

Furthermore, a number of big players in the CDS market – most notably Goldman Sachs Group Inc. – were bailed out through the rescue of busted insurer American International Group Inc.. In that case, the government injected $180 billion into AIG, largely to allow it to make good on the CDS contracts it had written – $13 billion of which were with Goldman Sachs. If Citi, Fannie, and Freddie had gone bankrupt – as they would have done in a free market – and Goldman had lost the best part of $13 billion (which might well have sent it bankrupt in turn) the financial market today would look very different.

The financial industry would be rife with unemployment and apple-selling ex-Citibankers would be on the streets of New York keeping bankers’ salaries and bonuses way down from their pre-crash levels. But such as it is, Goldman Sachs is said to be heading for record profits in 2009, and its partners are expecting record bonuses. The investment-banking firm reported stellar second-quarter profits of $3.44 billion [Tuesday].

If U.S. taxpayers are going to be called on to subsidize the very banks that got us into this mess – just so these institutions can continue to carry on as if it was still 2007 – then another expensive and damaging financial crash is almost certainly in the making. There are a number of product areas in which such a crash might occur, but for my money, credit default swaps top the list. That makes it crucial for us to at least rein in the derivative securities with the utmost urgency. And Congresswoman Waters makes an excellent point when she says that it may prove impossible to rein in credit default swaps without actually banning them altogether.

Indeed, there are two fundamental problems with CDS securities, neither of which appears easy to solve:
  • First, there is no watertight way of settling credit default swaps in case of default. The current method is by a mini-auction of the obligations on which the swaps are written to determine a settlement price. But this doesn’t work because the mini-auction relates to only a few million dollars of paper, whereas the credit default swaps in question may have a nominal value of billions – hence it’s in the interest of holders to play games at the auction and distort prices. This might not be a problem for non-participants in the CDS market, but it causes huge risks to the financial system – which in extreme cases, must be bailed out by taxpayers, as was the case with AIG.
  • The second problem is that holders of credit default swaps have an incentive to push companies into bankruptcy. In the 1930s, short sales of stock (except on an “uptick”) were prohibited to prevent speculators from driving companies into bankruptcy. Well, the leverage available on CDS securities is much greater than on stock, and in the case of financial institutions, the amount of CDS outstanding is also much greater. That means speculators have correspondingly more incentive to load up on CDS and push a company into bankruptcy.

And it doesn’t end there: Since CDS holders also hold a company’s debt, their position in bankruptcy negotiations is a completely false one. This has already been a problem in the bankruptcies of the Canadian paper company Abitibi-Bowater and the shopping centre developer General Growth; it also caused problems in the massive General Motors Corp. reorganization. The stellar bonus prospects of the lucky employees at Goldman Sachs, in a year that has been thoroughly lousy for legitimate financial business, are an indication that we are not currently operating in a free market. Credit default swaps provide a means whereby Wall Street insiders can make huge amounts of money on corporate bankruptcies and disrupt the U.S. economy while doing so.

Until we can be absolutely sure that the poisons of the most-recent global financial bubble have been fully eradicated from the financial system, the safest measure is to ban those financial products like CDS that seem likely to cause the most trouble. Congresswoman Waters may go too far in wishing to ban credit default swaps altogether. However, I see no reason not to impose a five-year moratorium on the securities.

If, by 2014, the poisons of speculation have been removed from the world’s financial system, and a newly sober Wall Street can convince us that credit default swaps are both useful and sound, the derivative securities can then be reinstituted on a controlled basis, most likely restricted as swaps on “indices” of credit representing an entire sector or country, rather than on single companies alone. That would make it more difficult for CDS dealers to engage in their dangerous bankruptcy games. Perhaps Goldman Sachs employees can do without that third Porsche – at least or now …

Commercial Paper Falls Most Ever as ConEd Sells Bonds
The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.
The market for company debt due within nine months has plunged 28 percent since April 8 to $1.1 trillion, its longest and deepest slump, Federal Reserve data show. Investor demand for all but top-rated commercial paper, or CP, evaporated after September’s collapse of the $62.5 billion Reserve Primary Fund sparked a run on money-market accounts, and as the recession sapped companies’ need for short-term credit to expand.

Proposals from the U.S. Securities and Exchange Commission in June may worsen the slump by restricting money-market funds, which hold 40 percent of the paper, to only top-rated debt. That would force more companies to sell bonds that may cost an extra 8 percentage points in interest, or $8 million a year for every $100 million borrowed. “You’re not going to build that plant, you’re not going to expand, you’re not going to hire folks,” said Brian Kalish, a director at the Association for Financial Professionals, which represents 16,000 corporate treasurers, bankers and investors. “We’re creating this world of haves and have nots.”

Higher corporate interest costs may slow the economic recovery, Kalish said in an interview from his Bethesda, Maryland, office. The U.S. economy, after contracting 6.3 percent in the fourth quarter and 5.5 percent in the first, is forecast to start growing in the third, according to the median estimate of 72 economists surveyed by Bloomberg. or now, companies are willing to pay higher rates to ensure access to capital after watching credit dry up almost overnight as the subprime mortgage contagion spread in 2007 and 2008 and Lehman Brothers Holdings Inc. collapsed in September.

More than 60 companies sold bonds this year to repay commercial paper, including Consolidated Edison, Verizon Communications Inc. in New York and Kellogg, the 103-year-old maker of Keebler cookies and Rice Krispies cereal, according to data compiled by Bloomberg. Non-financial companies have sold $306 billion of investment-grade bonds this year, a record pace. “Treasurers aren’t sleeping at night because they don’t know if they can roll over commercial paper,” said Anthony J. Carfang, a partner at Treasury Strategies Inc, a Chicago consulting firm. “They’d rather lock in money for five years and pay a little more.”

Con Edison, New York City’s biggest utility, sold $750 million in 5- and 10-year notes on March 23 to yield as much as 6.67 percent, more than 6 percentage points above the average rate on commercial paper the company retired, according to a March 24 regulatory filing. Con Edison has cut its CP borrowings to $300 million, from $1 billion in March 2008. “We went through the problems last fall when things tightened considerably,” said James O’Brien, treasurer of New York-based Con Edison. “I don’t know that we would carry our paper balances as high as we did in the past.”

The higher costs have so far not affected the company’s capital expenditures, which were reduced by $200 million this year to $2.3 billion because of slower economic growth, he said. The commercial paper market was roiled when the Reserve Primary Fund, based in New York and opened by Bruce R. Bent’s Reserve Management Co. in 1971, fell below the standard $1 a share, or broke the buck, on Sept. 16 because of losses on Lehman debt a day after the investment bank declared bankruptcy. The fund held $785 million, or 1.3 percent of its assets, in Lehman CP and floating-rate notes.

Investors pulled $744 billion from prime money funds over the following three weeks, and so-called second-tier 30-day commercial paper rates doubled to 6.02 percent within two days. Corporations couldn’t issue short-term debt as the funds stopped buying new issues. The Reserve Fund is being liquidated. The SEC wants to make the $3.62 trillion money-market industry safer by preventing the funds from holding debt sold by second-tier companies, or those with investment-grade ratings one level below what is considered the top, such as Con Edison.

The Investment Company Institute, an industry trade group in Washington, proposed in March to prohibit money funds from purchasing second-tier debt, ranked A-2 by Standard & Poor’s, P- 2 by Moody’s Investors Service or F2 by Fitch Ratings. The group also said money funds should keep minimum levels of liquid assets on hand and hold debt with shorter average maturities -- changes that would limit demand for commercial paper. Ten funds that helped draft the proposals, including those run by Pittsburgh-based Federated Investors Inc. and New York- based JPMorgan Chase & Co., plan to adopt them voluntarily, said Jack Brennan, chairman of Vanguard Group Inc. in Valley Forge, Pennsylvania, and head of the panel that drafted the recommendations.

The SEC followed in June with similar recommendations that included even shorter maturity restrictions and higher minimum cash levels. In the year ended July 10, prime money funds reduced their commercial paper to 39 percent of all assets, from 45 percent, and increased Treasuries and other government-backed debt to 17 percent, from 6 percent, according to IMoneyNet Inc. in Westborough, Massachusetts. Commercial paper outstanding fell $39.7 billion, or 3.5 percent, during the week ended yesterday, its 14th straight decline, the Fed said today. At $1.097 trillion, the CP market is less than half its peak of $2.22 trillion in July 2007, with about 10 percent of it owned by the Fed, central bank data show.

The market for second-tier CP also has also shrunk by almost half to $44.1 billion since August 2007, with daily issuance down to $2.66 billion in June, the least in more than a decade and a third of what was sold a year earlier, Fed data show. “The CP market, particularly for 2-rated issuers, has been less reliable since the credit crisis occurred,” said Brad Fox, chairman of the National Association of Corporate Treasurers, who holds that job for supermarket chain Safeway Inc. in Pleasanton, California. Second-tier companies are “trying to increase their liquidity through alternate sources,” he said.

Markets may be coming back after the Federal Reserve and President Barack Obama pledged $12.8 trillion to pull the economy out of the worst calamity since the 1930s. All but $81.3 billion has flowed back into prime funds. “The commercial paper market has had many cycles over the years, so I think it will come back,” Fox said. “It’s an extremely attractive way for corporations to manage their cash flow requirements and daily reconciliations, by far the most efficient way to do it rather than borrow from your banks.”

Duke Energy Corp., owner of utilities in the Carolinas and the Midwest, has had less trouble issuing commercial paper than some issuers because it had a diversified buyer base, assistant treasurer Donna Council said in an interview. The Charlotte, North Carolina company, with second-tier ratings from S&P and Moody’s, sells directly to lenders that include insurance companies, banks and pension funds. Money funds own less than 1 percent of its commercial paper, Council said.

“Issuers need to focus on developing more diverse sources of funding, rather than just relying on an investor class that will run for cover when credit conditions deteriorate,” David Glocke, who helps manage $203 billion in money-fund assets as head of taxable money-market investments at Vanguard Group Inc. in Valley Forge, Pennsylvania. Kellogg raised $750 million on May 18 from a seven-year bond offering to repay commercial paper and “maintain liquidity in this difficult environment,” Chief Executive Officer David Mackay said at the Deutsche Bank Global Consumer & Food Retail Conference in Paris on June 9. Company officials declined to comment further.

The largest U.S. cereal maker, deemed second tier by the three biggest ratings companies, agreed to pay yields of 4.49 percent, almost four times higher than the 1.19 percent mean rate on its commercial paper, the Battle Creek, Michigan-based company said in a May 19 SEC filing. “Clearly we would be concerned about liquidity and about the ability of investors to buy our paper” if the SEC’s proposals are adopted, said Chuck Zebula, treasurer at Columbus, Ohio-based American Electric Power Co. Cutting second-tier borrowers off from federal aid and money-market funds “starts to disadvantage an important part of the economy,” he said.

American Electric, which delivers electricity to more than five million customers in 11 states, borrowed about $2 billion last fall under two revolving credit facilities to pay off about $400 million of commercial paper and bolster its cash reserves, according to the company. While the company is issuing commercial paper “actively,” the higher cost of capital has translated into higher electricity rates for customers, Zebula said.

Panel Probing Financial Crisis Has Wall Street Ties
Two appointees to a congressional panel investigating the financial crisis work for law firms that represent either Wall Street or its antagonists, raising concerns about the commission's impartiality and likely effectiveness. Congressional leaders earlier this week announced their choices for the 10-member Financial Crisis Inquiry Commission, a panel that has drawn comparisons to the Pecora Commission that investigated the stock-market crash of 1929. Its mission is to explore the causes of the crisis, as well as the collapse of specific Wall Street firms.

Some congressional observers are already predicting it could be bogged down by philosophical divides between its pro-consumer and pro-business wings. A nonpartisan watchdog group, the Center for Responsive Politics, released a report Friday saying that some appointees gave substantial amounts in campaign contributions, many of them to Democrats. The professional ties of some of its members also could be a complication, legal experts said. One Democratic appointee to the commission, lawyer Byron Georgiou of Nevada, works with a securities-litigation law firm, Coughlin Stoia Geller Rudman & Robbins LLP, which has filed suit on behalf of shareholders against subsidiaries of several Wall Street firms, including Bear Stearns, J.P. Morgan Chase & Co. and Morgan Stanley. Mr. Georgiou was a pick of Senate Majority Leader Harry Reid of Nevada.

A Republican appointee to the commission, former U.S. Rep. Bill Thomas of California, who was tapped by GOP congressional leaders, is a government-relations adviser for a law firm, Buchanan Ingersoll & Rooney PC, which represents several banking and financial-services clients. Stephen Gillers, an ethics expert at New York University, agreed that "both appointments could present problems." That could lead the commission to restrict the issues that some members take part in, which could impede the panel's work, he said. Mr. Gillers said a conflict doesn't mean either member would act improperly, only that an unacceptable risk could exist.

"Ideally, we should have a commission where no member is sidelined from any part of the inquiry. On the other hand, to get the most knowledgeable, experienced members, it may be necessary to accept some limitation," Mr. Gillers said. Mr. Georgiou is described as "of counsel" by his law firm, and functions as a liaison with institutional investors. He has worked closely with the commission's chairman, former California Treasurer Phil Angelides. Mr. Georgiou also is a business owner and an adviser to a Harvard Law School corporate-governance program. He had a long career in state government in California in addition to his work with plaintiff law firms, and has litigated on behalf of farm workers.

He referred requests for comment to Mr. Reid. Jim Manley, a spokesman for the Senate majority leader, noted that Mr. Georgiou had helped investors in Enron Corp. recover $7.5 billion. "It's precisely because he has in the past represented investors and shareholders victimized by financial fraud that we wanted Georgiou on the commission," Mr. Manley said. "We need a diversity of opinion on this commission to learn more about why our system failed us." A spokesman for Mr. Georgiou said he has no financial interest in the law firm's current cases against Wall Street companies and isn't an equity holder in the firm.

Mr. Thomas, the vice chairman of the commission, is known in Washington as the hard-charging former chairman of the House Ways and Means Committee, and a pro-business conservative. His title at Pittsburgh-based Buchanan Ingersoll is senior government-relations adviser. A spokeswoman for House Republican leader John Boehner of Ohio defended Mr. Thomas Friday, and suggested the commission might address such issues by adopting rules to reduce the potential for conflicts of interest. "Bill Thomas will bring the same impartiality, distinction and integrity to the Financial Crisis Commission that he brought to the halls of Congress," said spokeswoman Antonia Ferrier.

A spokeswoman for Mr. Thomas's firm described him as an independent consultant, and said he doesn't consult with the firm's financial-institution clients. Mr. Thomas didn't reply to an email message seeking comment.
The commission is armed with sweeping powers to gather information, including through judicially enforceable subpoenas. Its work will be closely watched as Congress labors to overhaul financial regulations. The commission is expected to provide a final report in December 2010.

State Tax Revenues at Record Low, Rockefeller Institute Finds
The anemic economy decimated state tax collections during the first three months of the year, according to a report released Friday by the Rockefeller Institute of Government. The drop in revenues was the steepest in the 46 years that quarterly data has been available. The blow to state coffers, which the report said appeared to worsen in the second quarter of the year, reflects the gravity of the recession and suggests the extent to which many states will probably have to resort to more spending cuts or tax increases to balance their budgets.

Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year. After adjusting for inflation, new changes in tax rates and other anomalies, the report found that tax revenues had declined in 47 of the 50 states in the quarter. All the major sources of state tax revenue — sales taxes, personal income taxes and corporate income taxes — took serious blows, the report found.

As more people lost their jobs, took pay cuts or worked fewer hours, personal income tax collections fell 17.5 percent in the quarter. Weak retail sales sent sales tax collections down 8.3 percent. Corporate income tax collections, which are often highly variable, declined 18.8 percent. States in the Far West had the largest declines in tax revenue, the report found. Arizona reported the largest drop in personal income tax collections, at 56.1 percent. Alaska experienced the largest overall drop in tax collections, 72 percent in the first quarter, and that was attributed to the state’s unusually high revenue collections in recent years because of high oil prices.

Local governments have fared better during the downturn. The report found that local tax collections rose 3.9 percent in the first quarter, largely because of increased property tax collections, which tend to be relatively stable and which are often based on assessments of value that do not keep pace with true market conditions. As bad as the first quarter was, the second quarter is shaping up to be even worse, the report said. Preliminary data for the first two months of the quarter, April and May, collected from 45 states, indicated that tax revenues declined by 20 percent compared with the same period last year.

That will force states — many of which are already raising taxes or fees, resorting to layoffs or furloughing employees — to come up with more ways to raise or save money. “The continuing sharp decline in revenues will likely force more unwanted choices for states in the months ahead,” wrote the report’s authors, Donald J. Boyd and Lucy Dadayan.

1.5 Million To Exhaust Unemployment Benefits By The End Of The Year
More than 500,000 Americans will exhaust their unemployment benefits by the end of September. And by the end of the year, the number will near 1.5 million, according to a report released Friday by the National Employment Law Project. "It is clear we are coming up on a tidal wave of need for more extensions and help from the federal government," said Andrew Stettner, NELP deputy director, in a statement. David Smith, spokesman for the Pennsylvania Department of Labor & Industry, told the Huffington Post that up to 25,000 people will exhaust their unemployment benefits this weekend alone. "It's the first large wave," he said.

In California, 177,759 will lose their benefits come January; in New York, the total is 131,893. More than 72,000 people in Michigan, where the unemployment rate hit 15.2 percent in June, will stop getting checks at the beginning of the year. The NELP praised the $787 billion stimulus package for covering the full cost of extended benefits for 2.8 million workers. But the report, noting the record number of long-term unemployed -- 4.4 million people have been out for 6 months or longer -- calls for an expansion of benefits for people who will run out in September.

"Never in the history of the unemployment insurance program have more workers been unemployed for such prolonged periods of time," Stettner said. "With an onslaught of exhaustions just around the corner, Americans still need robust benefits to keep their families and communities above water." Federal Reserve leaders forecast on Wednesday that they don't expect the economy to get its act together for another five or six years. Many economists are calling for additional stimulus spending by the government.

Boomers in Trouble: The Unheralded Economic Mega-Trend, Part 1
Thus far, analysis the financial collapse has been framed almost entirely in terms of money. All the research I’ve seen has delved into lending standards, securitization, inflation, interest rates, housing and the like. Yet underneath this veneer lies one larger, mega-trend that has driven all of these themes to a greater or lesser degree. It created one of the largest stock bull markets we’ve ever seen from 1982-2001. It helped drive the Bubbles in Tech stocks AND Housing. And now it will guide the coming collapse in stocks and consumer spending.

That trend is AGE: specifically the Boomer generation and its retirement. For the sake of simplicity, I will define a “Boomer” as someone born in the post war boom years from 1946-64. Using this data, today’s Boomers are between 45 and 63 years old. All told there are 76 million Americans in this age category. As of late 2008, Boomers:
  • Comprised 38% of the US population
  • Controlled $13 trillion (50%+) in US investable assets
  • Controlled 50% of all discretionary income
  • Purchased 43% of all new cars
  • Accounted for 79% of all leisure travel spending
  • Ate out four to five times a week
  • Outspent younger generations by 2 to 1

You can see Boomers’ imprints on every major investment trend of the last 30 years whether it’s the rise in consumer spending, the Tech Boom, the Housing Boom, etc. These folks ARE the investing crowd or tide as far as money goes. Please understand, I am not BLAMING the Boomers for ANY of these developments. I am merely pointing out that these folks were the primary participants who drove ALL of these trends due to their ever-increasing economic clout. Between 1980 and 2007, Boomers were “the money” behind virtually every economic development in the US.

The Boomers first came of age in the ‘80s (they were 16-34 years old at the start of the decade). Boomers were the first generation to fully adopt credit cards: between 1980 and 1990, credit card spending increased more than five-fold while average household credit card balances quadrupled. They were also the first generation to see stocks as THE means of securing ones retirement: stock-based 401(k)s were introduced in 1983.

By the time the ‘90s rolled around, Boomers had completely entered the workforce (ages 26-44). Thanks to easy credit and cheap goods from China (formal trade with the US opened on 1971), the Boomers operated under the illusion they were getting richer almost every year, when in reality they were spending their and their parents’ savings. Having seen stocks rise almost continuously from 1982-1990, Boomers were only too happy to take over own investment portfolios with the introduction of low cost online brokerage accounts. In 1950, 10% of US adults owned a stock. By the end of the ‘90s more than four in ten American adults were investing in the market. This massive influx of money helped, in part, to create the Tech Bubble.

By the end of the 20th century, Boomers were ages 35-53. They had truly come into their own as THE major wealth demographic, making most of the income and spending most of the money in the US. Having accrued debt for 30+ years without trouble and seen housing prices rise almost continuously during their lifetimes, they began speculating in homes and other higher value assets. This trend was fueled in large by Wall Street’s securitization and the dramatic drop in lending standards in the US. Which brings us to last year.

In 2008, the Boomer generation was already in the process of or at least beginning to consider retiring. In the decade from 1992-2003, more than 70% of Boomers had seen their wealth increase by more than half. An additional 20% of them saw their wealth increase better than 25%. And they were set to inherit some $7.2 trillion in wealth from their parents over the coming decades. Then the Financial Crisis hit and the Boomers got crushed.

Last year’s collapse in housing and stocks wiped out $11 trillion in household net worth in the US. That’s roughly 18% of total US household wealth at that time. Put another way, the Boomers just lost nearly 1/5th of their wealth in a single year (the same goes for they money they were set to inherit from their parents which was largely tied up in stocks and real estate). Boomer wealth continues to plunge: Commentators celebrated the fact that home prices ONLY fell another 0.6% in June, but none of them mentioned that this represents another $100 billion in US wealth gone.

Bottom line: The 20+ year expansion in Boomer came to a screeching halt last year. We’ve now entered what may in fact be the greatest period of wealth destruction in American history. The effects this will have on Boomer spending, investing, and the like will completely change the investing and economic landscape for the US REGARDLESS of what the Fed, Obama, or any other economic/ political authority attempts.

Boomers in Trouble: The Unheralded Economic Mega-Trend, Part 2
Part 2Yesterday we discussed the Boomer generation and how they’ve driven every economic/ financial development of the last 30+ years. Today, we’re going to analyze how the Financial Crisis has changed Boomer sentiment, spending behavior, and investment strategies. Ben Bernanke, Barack Obama, and the rest of the government can implement whatever policies they like, but if the Boomers aren’t buying it… it ain’t gonna work. And right now, the Boomers are FED UP.
Let’s consider where Boomers sat before the financial crisis occurred. In early 2008, Boomers:
  • Controlled $13 trillion (50%+) in US investable assets
  • Controlled 50% of all discretionary income
  • Purchased 43% of all new cars
  • Accounted for 79% of all leisure travel spending
  • Ate out four to five times a week

In simple terms, Boomers were THE money flow for the US. In light of this, for the US economy to get back on track any time soon (whether it’s through Stimulus, job growth, etc), Boomers need to participate in a big way. The only problem is that they won’t.

During the recession in the early ‘80s, Boomers were just entering the work force (ages 16-34). The market demographic was technically still in its infancy and growing in economic clout. In the recession in the early ‘90s, Boomers were ages 26-44. Now controlling most of the wealth in the US they could take a hit and come right back buying more stuff, using their credit cards, and investing in stocks and other investments.

Moreover, in the brief recession in the early ‘00s, Boomers were ages 36-54. The younger Boomers were just coming into their own, looking to buy homes, advance their careers, etc. Which brings us to today… on the verge of 2010… when Boomers will be ages 46-64 and focusing on one thing: RETIREMENT. Having just lost 18% of their net worth, potentially lost their jobs, and with record amounts of debt (one in five of Boomers owe more than $50,000 in non-mortgage debt), Boomers are no longer looking for growth or gains, they’re looking for security. Dreams of retirement are no longer soon to be realized (if they will be realized at all). And several key myths have been broken:
  • Myth #1: You can’t lose money with real estate
  • Myth #2: Stocks ALWAYS offer the best gains in terms of risk/reward.
  • Myth #3: Social security and medicare will work

Indeed, if one were to describe the Boomer market demographic in one word, it’d be “disillusioned.” And you can see this disillusionment playing out in the financial markets. First and foremost, many commentators make a big deal about the S&P 500 clearing 950… well that simply brings stocks back to where they were in July 1997. Boomers (who then were largely in their 40s then) have essentially seen NO GROWTH in their 401(k)s in 12 years. That’s simply astounding when you consider that 1997-2007 saw two of the largest investment bubbles in the history of mankind.

Boomers aren’t too happy about all of this and have begun looking for new sources of investment advice. According to the Financial Times, the number of inquiries on changing asset managers rose 40% during the first five months of 2009. Indeed, Charles Schwab reports 69% of the firm’s new clients said they jumped ship from full-service brokerage firms to independent advisor shops because they had lost trust in their previous firm.

Boomers are also giving up hopes for retirement and instead are taking on more work. The (American Association of Retirement Professionals) reports that 24% of Boomers have postponed retirement. David Rosenberg of Gluskin Sheff adds that the 55+ age demographic is the only segment of the US population that is gaining jobs. Boomers are also spending a lot less than they used to. The afore-mentioned AARP survey shows that 56% of Boomers are postponing a major purchase. Unit sales of sailboats is down a third in the first five months of 2009. Year over year, auto-sales for May 2009 were down in double digits ranging from 21% (Ford) to 38% (Toyota); remember Boomers accounted for 43% of purchases of new cars in 2007.

This slowdown in spending pertains to just about any other high-end part of the retail market. Wine sales for bottles priced above $25 are down 12% year over year. Swiss watches are down 24%, The list goes on and on. Folks, we are experiencing seismic shifts in consumer spending patterns. The US consumer (the Boomer) is NOT coming back. Boomers are trying to simply get by with less, working longer than they’d hoped, spending less, and saving more. These patterns are here to stay (remember Boomers outspent younger generations by 2-to-1 during the last decade) until someone implements changes that create sustainable job growth (an ultimately wealth) in the US.

After the Foreclosure: Downsizing and Doubling Up
Moving in with roommates and family: It's what happens to folks who lose their homes, and it ain't pretty

Downsizing their living spaces and doubling up with roommates and relatives: The housing collapse has left many victims of foreclosure looking for a place to call home. For many investors, the once-solid decision to invest in real estate has turned into a financial blunder, leaving the market awash with extra inventory and further depressing prices. In 2006, 4 out of every 10 homes sold were investments or second homes, according to Alex Charfen, CEO of the Distressed Property Institute, an Austin (Tex.) company that teaches real estate agents how to deal with foreclosed properties. In the ensuing crash, that 40% now represents a wave of foreclosures by lenders.

Chris Henning, 66, actually lived in her investment property, a $150,000 South Palm Beach (Fla.) condo overlooking the Atlantic. Despite a solid job and good pay in the 1990s, Henning has refinanced her condo three times since 2002. During the boom, Henning subscribed to the conventional wisdom that housing prices couldn't slide. "Looking back, I thought, 'How naive could I have been?' " she says. Now, after her boyfriend's death and a lack of revenue from a cookbook she co-authored, Henning is unemployed and her condo is on the short-sale block. In the case of short sales, lenders shave money off the loan balance in order to more quickly sell the house and recoup debt money.

"So, here I am, after having a successful career making a six-figure income," Henning says on the telephone from her smaller, cheaper condo in Cocoa Beach. To cover costs, Henning is renting out the Palm Beach property until a buyer materializes. Still, she hasn't found a job—and if she can't secure one soon, she plans to move in with her son and his family to cut costs. "I would much rather help people, vs. them helping me!" she says.

Henning is part of a larger trend of moving in with others that has softened the rental market, which was once expected to strengthen during the wave of foreclosures. According to a survey by, an eBay unit that lists apartment rentals, at 40 large property owners representing more than 850,000 units across the country, almost half the vacancies are the result of people doubling up to save money. Bridge Property & Asset Management, a division of Salt Lake City-based Bridge Investment Group, manages more than 9,000 units across nine states and has seen one-bedroom vacancies skyrocket as more renters seek two- and three-bedroom apartments.

"I certainly believe that many people are now moving in with someone else, whether a family member or not, and that this is having a significant effect on the demand for apartment residences," Mark Obrinsky, chief economist and vice-president of research at the National Multi Housing Council, said in a news release. The NMHC is a Washington-based rental advocacy group. Henning would have a few additional months of rent money if she had gotten the few thousand dollars she expected to bring in from selling off her belongings. In the end, she pulled in $355 for two vanloads of furniture and collectibles, accumulated over the past 40 years. Downsizing to the condo meant divesting herself of a lot of her possessions, including a cane rocking chair from the '20s and a signed Steuben art glass, a popular antique decoration. Henning says she sold her belongings to an estate liquidator but isn't sure she was compensated fairly. "I didn't ask enough questions because I was overwhelmed," she said.

Like Henning, many people going through foreclosure have to leave behind belongings or sell them on the cheap. Real estate agents typically recommend their clients find another residence before foreclosure filings adversely affect their credit to the point that they can't rent. "Clients are doing the right thing [trying] to move out as quickly as they can," says Valerie Torelli of Torelli Realty in Orange County, Calif., the U.S.'s foreclosure epicenter. California had some 500,000 foreclosures in 2008, 115,000 more than Florida, second on the list. In her work, Torelli sees lots littered with furniture and, sometimes, pets still locked in their owner's former home. Many people leave their belongings because they can't afford to move them, she says.

Charlotte Jensen and her husband, Dennis, of Glen Allen, Va., declared bankruptcy in May 2008, about a year after they borrowed against the house to consolidate debt. That added an extra $900 onto their monthly mortgage payment. Almost immediately, Jensen says, the housing bill became too much to manage and they were forced to move to an apartment. "Truth be told, we should have never been allowed to refinance," she says. "It put all our eggs in one basket, and it was a very expensive basket we couldn't undo." The couple agonized over the decision to sell their grill and riding mower, two signature representations of homeownership for many people. "It was like some big symbol of our failure," says Jensen.

The Jensens enrolled their 8-year-old son in a new school and say they try to shield him from the reality of the family's bleak financial situation. To protect herself and her husband from the raw emotions that bleed into discussions about economic hardships, Charlotte Jensen says she began referring to her family as Jensen Inc. "As you can imagine, we had to make some very painful decisions," she says. "It is an approach I still use, and I am convinced it has kept my marriage together." Jensen admits that moving in with her father would help Jensen Inc.'s bottom line, but she's concerned about her son and his schooling. "He has two smart parents with good careers who made poor decisions," she says. "It is not fair or healthy to him to shuffle him around." There's also the issue of their two golden retrievers. Her father extended an open invitation for her family, but not to the pooches. She hopes to avoid a merger of households,

Making the transition from ownership to renting—and the new strictures that can bring—can be tough. For example, the foreclosure crisis is also spawning a severe abandoned pet problem in many areas. "No one is going to rent with three dogs," says Torelli, who often has to put pets up for adoption after they've been abandoned by foreclosure victims. The Arizona Humane Society, which covers the hard-hit Phoenix-Scottsdale metro area, saw a 100% increase in abandoned pet calls between 2007 and 2008, and is on pace to match the 2008 numbers.

Animal abandonment falls under the animal cruelty umbrella, and 3,046 of the 7,979 cruelty calls last year were for abandonment, society spokeswoman Kimberly Searles says. While not every abandonment call is tied to foreclosure, "you can tie the numbers in," Searles says. "There's a correlation, obviously." In August 2008, California amended its animal abandonment law to require that anyone who finds a discarded animal in a foreclosed property report the pet to animal control.

On the other side of a pinched homeowner, Jason Stevenson, 27, and his girlfriend Kristin Garrison, 28, of Las Vegas, have been relatively lucky. On May 28, the bank foreclosed on their landlord's single-family house, which they were renting month-to-month. The couple was waiting to close on a short-sale property of their own, but by mid-June the landlord kicked them out and they were essentially homeless—and still waiting to learn whether the short sale will happen. "We started packing boxes with nowhere to go," Stevenson says. With the only other option being the street, the couple's realtor—who is helping them purchase the short-sale—is letting them stay for free at her former home, which she is now trying to sell.

White House foreclosure plan a bust so far
The Obama administration’s $50 billion program to curb foreclosures isn’t working, and the White House knows it. 

Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution. Whatever the reason, the program hasn’t stopped the rising tide of foreclosures: Experts predict that at least another 2 million homes will be lost this year, and the administration’s plan has so far reached only about 160,000 of the 3 million to 4 million homes it was supposed to protect over the next three years. 

That’s bad news for the economy — and bad news for the Democrats. 

The Democrats’ political and policy fortunes rest on their ability to persuade voters that they’re fixing the economy. But experts say that rising foreclosures will only exacerbate the nation’s economic woes, pushing down home prices, slashing state and local tax revenues and imperiling consumer confidence. “Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in unusually harsh words for a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far. 

“It’s just hard to explain to the working families in America how it is we could move so fast with extraordinarily complicated deals with the huge financial institutions, and we are moving so incredibly slowly, mired in paperwork, in rules, in talking to banks back home,” said Sen. Jeff Merkley (D-Ore.). 

The foreclosure listing service RealtyTrac Inc. reported Thursday that the number of homeowners in foreclosure in the first six months of 2009 was up 15 percent from the same time period a year ago. 

The Center for Responsible Lending, a nonpartisan research and policy organization, projects at least 2.4 million additional foreclosure starts this year, causing nearly 70 million surrounding households to lose a combined $500 billion in property value. 

The group estimates there will be 9 million foreclosures through the end of 2012, at the cost of $2 trillion in lower home values — enough to pay for the House Democrats’ health care plan, twice. 

The White House realizes the stakes. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan took the 27 participating servicers to task in a July 9 letter to their CEOs, telling them to add more staff, improve training, create an appeal path for borrowers dissatisfied with the service and fulfill other measures to do more modifications, better. 

The servicers were told to designate a liaison with the administration who will meet with Treasury and HUD on July 28. The servicers have to tell the administration by July 23 what specific steps they’re taking to improve performance. 

In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders. 

“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee. 

But assurances that the administration is paying attention were not enough to satisfy senators on either sides of the aisle — and Republicans are ready to make the case that slow progress on the foreclosure front is just one more example of the Obama administration overpromising and overspending. 

“I see these extravagant promises in just about everything that happens here, ... and then I see this terrible execution,” said Sen. Mike Johanns (R-Neb.). “The stimulus money isn’t getting out, you’re not getting on top of the foreclosure numbers, you know, and that has nothing to do with what you inherited. Execution is what you do every day.” 

“I’m not happy where we are at, and I think there is a lot more to be done,” Republican Sen. Mel Martinez, whose home state of Florida has the third-highest foreclosure rate in the country, told the Treasury and HUD officials there to testify.

“What’s your Plan B?” he asked later.

That’s exactly what some outside experts are asking; they say that the situation requires more drastic action than the modifications the White House is pursuing.

Many housing advocates argue that Obama’s plan was fatally flawed from the start because Congress refused to pass a controversial measure to allow bankruptcy judges to modify primary residential mortgages — recommended by the White House as the one stick in its plan, which is chock-full of carrots for servicers and borrowers.

“You have got to have some leverage, something to hold people’s feet to the fire,” said CRL spokeswoman Kathleen Day. “If you tell the industry this [judge] can do the loan mod if you don’t, that is going to get their attention.”

Andrew Jakabovics, a housing expert with the left-leaning Center for American Progress, believes revisiting bankruptcy is a political nonstarter. But he says there are other sticks the administration could consider, including taking away the tax advantage enjoyed by the trusts that hold mortgage-backed securities if the investors refuse to allow modifications.

“That’s a pretty big stick,” he said.

And while it was the Senate that killed the bankruptcy measure, the White House took flak for not spending a single cent of its political capital on getting it through the upper chamber.

Economist Mark Zandi — whose advice congressional Democrats relied upon during the stimulus debate — has argued that the Obama plan was too complicated. His recommendation for a Plan B: a simple program that covers any homeowner who took out a mortgage between 2005 and 2008 that was clearly unaffordable when it was made, with straightforward criteria to determine that.

Zandi and others argue that the modifications should focus on reducing struggling homeowners’ outstanding principal on homes that have lost much of their value. A major criticism of the Obama housing plan was that it failed to aggressively encourage principal write-downs, focusing instead on reducing homeowners’ monthly payments, largely through interest rate cuts.

But other experts say there’s not a whole lot the administration can do directly on the housing front anymore — and that might be the worst news of all for the White House.

Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said that while the Obama plan was well-crafted for the issues at hand in February, the cause of foreclosures has changed. Now they are less about the creative, variable-rate loans that buried many homeowners and more about an unemployment rate that has even those with fixed-rate loans struggling to keep up.

“The issues have changed, and in some ways the solutions haven’t kept up with the problems,” Retsinas said. “The most effective intervention would be to put people back to work.”

Housing Finance Debate: A Return to ARMs?
They were one of the scourges of the housing crisis, but are adjustable-rate mortgages on the verge of a comeback? It depends on whom you ask. Last week homebuilder Toll Brothers announced that, in certain housing markets, it would offer its homebuyers ARMs featuring a 3.75 percent interest rate for the first seven years of the loan and a reset rate capped at 8.75 percent for loans at or below $417,000. To qualify, home buyers must have credit scores of at least 720.

Don Salmon, the chief executive of TBI Mortgage Company, Toll Brothers' mortgage division, told that on the weekend following the announcement, the homebuilder saw a spike in interest that's unusual for the typically slow summer season. Other homebuilders and lenders, he said, might follow Toll Brothers' lead. "If the product makes sense to the consumers, then consumers will demand it (and) then the lender will offer it," he said. But others, like senior financial analyst Greg McBride, are skeptical.

"People have been scared away from adjustable-rate mortgages and at the same time, the factors that led them to pick adjustable rate mortgages in the first place have dissipated," McBride said. As of July 10, roughly 5 percent of borrowers chose ARMs, according to the latest data from the Mortgage Bankers Association. That represents an uptick from earlier this year but it's still far from the highs last seen in the summer of 2007: At that time, more than one in five borrowers chose adjustable-rate loans.

Toll Brothers' rate notwithstanding, McBride said the average interest rate for 7-year ARMs is 5.55 percent -- just 0.2 percentage points lower than the average rate for a 30-year fixed loan. "The value for the overwhelming majority of homeowners is in fixed-rate mortgages," he said. Adjustable-rate mortgages, McBride said, were a niche product that became popular during the housing boom as buyers used them as an "affordability crutch" -- in other words, buyers who might not have been able to afford the rates on a traditional, 30-year-fixed mortgage could qualify for with the lower initial rates on adjustable loans.

While the housing market was strong, many homeowners with ARMs figured they could sell their homes before their interest rates reset or refinance into fixed-rate home loans. Those assumptions often proved false and defaults by adjustable-rate mortgage homeowners -- particularly for homeowners with bad credit who took out subprime adjustable-rate loans -- played a key role in driving foreclosures to record highs.

McBride said that a homebuyer today would be foolish to assume they could find a bank to refinance them out of an ARM. And taking the bet that you'd be able to sell your home before the reset requires a "cast iron stomach," he said. Banks and investors who buys home loans from lenders aren't keen on ARMs either, McBride said. "The secondary market been dead for a couple of years," he said. Salmon says that Toll Brothers, however, won't have trouble selling its ARMs. The delinquency rate for Toll Brothers borrowers, he said, is less than 1.7 percent. The homebuilders' underwriting standards -- including the 720 credit score minimum -- are prudent, Salmon said.

"We have a very strong buyer profile and our delinquencies historically are lower than the market, therefore our product is more attractive to banks," he said. There may be more than just buyer stats working in Toll Brothers' favor. McBride said that since Toll Brothers is a homebuilder and a lender, they have a flexibility that traditional lenders don't -- the costs of offering ARMs could be offset by the increases in home sales. Still, David Ledford, the senior vice president for housing finance and land development at the National Association of Homebuilders, said that as of now, most other homebuilders haven't followed suit.
Instead, to combat the continued lack of demand from would-be homebuyers, other builders are subsidizing fixed-rate mortgages to offer lower rates, he said.

Some homebuilders have gone a few steps further, offering pre-paid homeowner association dues, free parking, free flat-screen televisions or new furniture. Such incentives have become more common among homebuilders because, unlike many individual home sellers, the builders stand to lose more money the longer their homes go unsold, Scott Nagel, the vice president of real estate operations for the online realty company Redfin, recently told

"Most of the time, they've got their costs sunk," he said. "They're making payments on the construction loans that they used to build those condos and those homes. Every month they're not selling, it's another month it's eating into their profit margin." Toll Brothers, which finds that many of its buyers are existing homeowners, offers some help in selling their old homes. In some communities, they assist in making old homes look more attractive to buyers by eliminating clutter, paint touch-ups and other small fixes. Toll Brothers also offers guidance on marketing your old home. "We do many things to help people sell their homes," Salmon said, "because we know that that eases the path to settling in our home."

Morgan Stanley to Get Top Underwriting Role on AIG Share Sales
Morgan Stanley, the world’s third- biggest stock underwriter, won a lead role from the Federal Reserve Bank of New York in arranging initial public offerings of American International Group Inc. units. Morgan Stanley, which is advising the New York Fed on its bailout of AIG, will reap fees from the IPO’s and from sales of other units to buyers, according to documents the agency posted on its Web site yesterday. The bank gets an initial $4 million payment and $2.5 million a quarter for its advisory role.

The New York Fed extended an $85 billion credit line to AIG in September to rescue the insurer and avoid a financial-system collapse. AIG agreed to sell businesses to repay a federal bailout that has swelled to $182.5 billion. The firm plans to hold public offerings for its two largest non-U.S. life units. “The New York Fed shall, to the extent that it has the power or authority to do so in connection with a specific transaction, retain or appoint Morgan Stanley to act as global coordinator and lead book-running manager, as applicable, in connection with any such IPO,” according to the Oct. 16 document on Morgan Stanley letterhead, marked confidential.

AIG has struck deals to raise more than $6.7 billion since the rescue, finding buyers for assets including a U.S. auto insurer, an equipment guarantor and a Japanese office tower. The IPO fees may be the most lucrative part of Morgan Stanley’s arrangement. The bank may earn about $72 million on the public listing, for example, of AIG’s American International Assurance, an Asian insurer to be listed in Hong Kong, according to calculations based on figures disclosed by the New York Fed. Mark Lake, a Morgan Stanley spokesman, declined to comment.

The IPO, slated to take place next year, may raise as much as $8 billion, people familiar with the matter said in May. Deals of that size in Hong Kong have typically yielded their underwriters a total of 2.5 percent of the IPO, and Morgan Stanley, as co-global coordinator, might get about 36 percent of that amount, according to the Fed document. Deutsche Bank AG was selected as AIA’s other global coordinator. Morgan Stanley is entitled to transaction fees if any of 11 major AIG business units are sold. For instance, if AIG were to sell its American Life Insurance Co. unit for $11 billion, Morgan Stanley would earn about $23 million.

MetLife Inc. offered $11.2 billion for the unit earlier this year, people familiar with the bid said in February. The talks haven’t led to a transaction yet, and AIG announced plans this week to sell shares of Alico to the public.
Morgan Stanley will also bill the New York Fed for expenses including travel costs and outside advisers, the bank said, and must get permission for expenses beyond a total of $5 million.

JPMorgan, U.S. Lenders Lean on Investment Banking for Profits
Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., the three biggest U.S. lenders, reported a total of $10.2 billion in profits for the second quarter that relied on investment banking and asset sales to counter growing losses on consumer loans. Goldman Sachs Group Inc., which gets almost none of its revenue from retail consumer banking, had a record quarter, reporting earnings of $3.44 billion.

Nine months after accepting more than $200 billion in government rescue funds aimed at preventing a collapse of the financial system, U.S. banks are girding for more losses from mortgages, credit cards and other businesses linked to consumers, while their underwriting and trading units generate revenue at or near all-time highs. “Capital-markets businesses are going very well right now, and Goldman Sachs is the best of the best,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. “But the consumer is still struggling out there and anybody with a lot of consumer exposure is struggling along with it.”

Profit at JPMorgan, the second-biggest U.S. bank, was $2.72 billion, or 28 cents a share, and increased for the first time since 2007 on record fees from trading and stock and bond underwriting. The bank ranks No. 1 in underwriting stocks globally and in managing bonds sold in the U.S., according to data compiled by Bloomberg. Chief Executive Officer Jamie Dimon, 53, predicted more losses on consumer loans and said credit cards probably wouldn’t be profitable next year. The lender boosted its loan loss reserve by $2 billion in the quarter, adding to the $28 billion set aside to cover credit losses as of March 31.

Bank of America, No. 1 in the U.S. in deposits and assets, reported net income of $3.22 billion, or 33 cents a share. Earnings at the unit that includes trading of bonds, equities and currencies more than quadrupled to $1.38 billion on improved credit markets. Chief Executive Office Kenneth Lewis, 62, predicted the weak economy would persist into next year, and the Charlotte, North Carolina-based company said debts it no longer expects to be repaid jumped 25 percent to $8.7 billion. The credit-card unit’s $1.62 billion loss compared with a $582 million profit last year.

At Citigroup, the $4.28 billion second-quarter profit was the result of $6.7 billion the New York-based company booked on the sale of a controlling stake in its Smith Barney brokerage. Without that money, the company lost 62 cents a share as costs for bad loans jumped 75 percent to $12.2 billion. Consumer-banking profits at Citigroup tumbled 78 percent, while profit from businesses linked to securities and investment banking increased 13 percent, the company said.

“Our most significant challenge now remains consumer credit,” Chief Executive Officer Vikram Pandit, 52, said in a statement. “Losses in our consumer businesses have been growing for some time, but we see some positive signs of moderation in those loss trends.” Pandit said in a June 15 speech in Detroit that he expects slow U.S. economic growth in coming years because Americans are saving more and borrowing less. That means Citigroup must use profits from its global banking network, especially in emerging markets, to restore its health, he said.

Goldman Sachs’s record net income was driven by fixed- income, currencies and commodities, the company’s biggest unit. Revenue from the business totaled a record $6.8 billion in the second quarter, which compared with $6.56 billion in the first quarter and $2.38 billion in last year’s second quarter. “We also continue to benefit from having virtually no direct exposure to the retail consumer business,” Goldman Sachs Chief Financial Officer David Viniar, 53, told analysts on July 14. JPMorgan and Goldman Sachs were among 10 lenders that repaid a total of $68 billion in TARP funds last month.

Citigroup and Bank of America are the two biggest banks yet to repay government rescue funds from the Troubled Asset Relief Program. Both received $45 billion. The U.S. continues to back billions of debt sold by the companies through the Federal Deposit Insurance Corp.’s loan guarantee program. “The government is out there throwing a lot of money behind this whole thing, and if the government ever decides to pull out of this thing, a lot of these Wall Street earnings will go away very quickly,” Miller at FBR Capital said.

CIT Group’s Banks Said to Weigh Bankruptcy Financing
CIT Group Inc. advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said. JPMorgan and Morgan Stanley are talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, according to the people, who declined to be identified because the negotiations are private. CIT and its advisers, including Morgan Stanley and Evercore Partners Inc., are also trying to arrange rescue financing to avert bankruptcy, they said.

CIT may need as much as $6 billion to avoid filing for bankruptcy protection after the U.S. wouldn’t give the firm a second bailout, according to CreditSights Inc. A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse by that measure since regulators seized Washington Mutual Inc. in September. “This thing doesn’t have a future,” CreditSights analyst David Hendler said yesterday in a telephone interview. “Anything is possible but the problem is not solvable anymore. They’re just in denial it’s finally over,” the New York-based analyst said referring to the rescue financing.

The century-old lender that finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc. is “continuing to evaluate alternatives” after failing to convince the U.S. government to back its debt, the New York- based company said July 16 in a statement. CIT, which has reported $3 billion of losses in the last eight quarters, received $2.33 billion in funds from the U.S. Treasury in December and hasn’t been given access to the Federal Deposit Insurance Corp.’s debt-guarantee program.

Pacific Investment Management Co., CIT’s largest bondholder based on regulatory filings, was to host a call this week to discuss a debt exchange, and bondholders were considering hiring financial and legal advisers, said a person familiar with the discussions. The company hasn’t proposed an exchange offer. CIT bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter who declined to be identified.

Thomas Lauria, a lawyer at White & Case LLP, said in an e- mail that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy. He said the group was waiting for a response from CIT and didn’t name its members. Lauria was the lawyer who represented Indiana pension funds that fought the sale of most of Chrysler LLC’s assets to a group including Fiat SpA, the U.S. and Canadian governments and a United Auto Workers benefit trust.

Bondholders held calls this week to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation. CIT’s $300 million of 6.875 percent notes due in November rose 7.5 cents on the dollar to 64 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Shares rose 29 cents, or 71 percent, to 70 cents in composite trading on the New York Stock Exchange.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” said Scott Peltz, a managing director focused on restructuring at consulting firm RSM McGladrey Inc. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.” Another route for CIT to raise cash -- selling parts of its business -- might run afoul of bankruptcy laws. Asset sales need to be carefully handled, because if CIT later winds up in bankruptcy the purchaser could be accused of having robbed creditors of value due to them, lawyers said.

“A buyer will be liable if it buys assets at a steep discount,” said Michael Cook, a lawyer with Schulte Roth & Zabel LLP in New York. “That’s why skittish buyers tell the seller to go into Chapter 11 so they can buy the assets with the insurance of a court order blessing the sale.” Even if the buyer does pay “reasonably equivalent value” outside of bankruptcy, unscrupulous creditors may sue to set aside the sale as a fraudulent “to squeeze more money out of the buyer,” he said.

Roasted vampire squid turns out to be dish of the day on Wall Street
It ought to have been a moment of triumph for Goldman Sachs, the most feared, revered and envied of Wall Street's investment banks. Long synonymous with power and wealth, the firm delivered the biggest, healthiest profit since it was established in a one-room Manhattan office by a German immigrant, Marcus Goldman, in 1869. But hunched over their computer screens from dawn until late at night, Goldman's elite bankers were unprepared for the ferocity of the looming backlash.

Over the three months to June, Goldman clocked up $3.44bn of profits, amounting to $38m a day or $1.58m an hour. Making money has suddenly become easier. Under Goldman's policy of dedicating half its revenue to staff pay, the firm's 29,400 employees can expect average take-home packages of between $700,000 and $900,000 for the year if the present level of prosperity continues. Not everybody is impressed - far from it. In Congress, senators fulminated against the divide between two Americas: Wall Street trumpeting its return to prosperity while citizens on the high street lose jobs and homes. A leading US union, the Service Employees International Union, accused Goldman of emerging from the credit crunch "unrepentant and unreformed".

An article by writer Matt Taibbi in Rolling Stone magazine compared Goldman Sachs to a parasitic vampire squid squeezing the life out of humanity. The New York Times said that Goldman employees were known in New York as the "bandits of Broad Street". The rightwing television host Bill O'Reilly referred to Goldman as "swine". And the Nobel Prize-winning economist Paul Krugman weighed in, declaring that what the bank does is "bad for America". "Goldman made profits by playing the rest of us for suckers," wrote Krugman, pointing out that the firm made a fortune in the run-up to the financial crisis by betting on a collapse in the sub-prime mortgage market.

In Westminster, 33 MPs have signed an early day motion demanding a 90% tax on bankers' bonuses that are worth more than 15% of salary. Across the English Channel, President Nicolas Sarkozy's top adviser, Henri Guaino, declared that the bank had posed a "gigantic" moral problem: "Goldman Sachs wouldn't exist had American taxpayers not come to its aid. To be drowning in dollars and bonus money today is utterly scandalous."

Goldman's critics fall into two camps. There are those who object to the sheer scale of its profits, on the grounds that such sums can only be made by taking irresponsible risks bound to end in financial disaster. And there are those who, while welcoming its return to fiscal health, are disgusted that Goldman still insists on giving 49% of its revenue to already well-off staff. This, after all, was the bank that handed pay packets of more than $20m to 50 of its employees before the credit crunch began to bite three years ago. Why, asked former New York governor Eliot Spitzer, could Goldman not reinvest the proceeds in job-creating industries such as green energy or biotechnology?

Most galling of all is that, in the eyes of many, the money has been made with the help of the US government. In the dying days of the Bush administration, Goldman was one of nine top banks ordered by the US Treasury to accept bailout money whether they needed it or not. Robert Borosage, president of the left-leaning Campaign for America's Future, says Goldman has been crucially bolstered by the US government's implicit message that it is too big to fail: "These guys are going back to their old games with a new sense of empowerment thanks to the Federal Reserve ultimately back-stopping them."

Within Goldman, there is disbelief at the avalanche of hatred. A spokesman describes many of the attacks on Goldman as "unjustified and hideously distorted". The bank points out that it pays a US tax rate of 31% on its earnings - so the public get a third of its profits. Its success, argues the firm, helps stimulate economic activity. "The government and other banks want us to engage fully and provide liquidity into the markets," says Goldman's spokesman. "It seems perverse to criticise firms that have done what they're asked to do for doing what they've been asked to do."

As far as remuneration is concerned, Goldman does not consider itself a typical Wall Street employer. It recruits bright people at a young age - and it does not rely on Ivy League or Oxbridge graduates. On average, Goldman staff become partners by the age of 35 and they are quietly encouraged to leave a decade later. Many go into public office, a fact which further enrages critics, who view the succession of senior US government roles held by former Goldman staff as evidence of the bank's powerful tentacles.

Goldman sources cite another sector popular among its former employees - or "alumni", as it calls them - as evidence of the need for top-dollar bonuses. Many hedge funds and private equity firms have been established by alumni, so it is not so much the prospect of poaching by competitors that worries the bank but the allure for its employees of going it alone.

Goldman insiders feel that, perversely, the bank has been discriminated against by encouraging its staff to enter public service. It wanted to buy Bear Stearns and Washington Mutual but lost out both times to JP Morgan - partly, sources allege, because of nervousness in the Bush administration about the appearance of a deal with a bank that used to employ both the then treasury secretary Henry Paulson and President Bush's chief of staff, Josh Bolten. Just this week, Goldman acolytes wondered whether fear of a backlash prevented the Obama administration from working with Goldman on a mooted joint rescue of the struggling lender CIT Group.

Reacting to Rolling Stone's evisceration of the company, one Goldman executive jokingly pointed out this week that real vampire squid were harmless to humans. Nevertheless, the bank is caught at the trickiest of moments: its earnings have recovered, but at a grassroots level much of Europe and the US remains in recessionary misery.

The fury and disbelief at Goldman's seemingly untouchable fortunes was captured this week by Elijah Cummings, a Democratic congressman for inner-city Baltimore. At a Congressional hearing on the financial crisis, he explained: "People in my district, you know what they ask me? They say, 'Cummings, is that money that folks are getting on Wall Street, those millions and billions, is that our money? Because our money went somewhere. What about us? What about us, who can't send our kids to college in September? What about us, who don't have a house? What about us?'"

Goldman Sachs bites Uncle Sam's hand
The investment bank is fat and happy again, but you wouldn't know it from its squabbling with the Treasury over the warrants in the TARP deal.

I've always thought that the guys running Goldman Sachs were really smart, not only about making money, but also about projecting a classy image to the world outside of Wall Street. Clearly, I overestimated them. If there was ever a firm with the motivation -- and the money -- to be gracious to the U.S. taxpayers who kept it alive when the financial markets were imploding, it's Goldman. It had a chance to look good and do good for taxpayers and itself and Wall Street for a relative pittance -- and has blown it. Horribly.

As you have probably noticed, Goldman is getting attacked for posting record profits and setting aside a record amount for employee compensation about three seconds after it repaid its $10 billion of loans from the Troubled Asset Relief Program. Repaying those loans freed Goldman from pay restrictions on its top honchos, who seem headed for record or near-record bonuses unless things go badly for the firm in the second half of the year. What you probably don't know is that Goldman, flush with cash and profits, is squabbling with the Treasury about how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal. Talk about tacky.

Had Goldman retained something it was once reputed to have -- a sense of short-term sacrifice in return for long-term profit -- it would have agreed to pay the government generously for the warrants. It could have announced that on Tuesday, along with its profits, and looked like a decent, concerned corporate citizen instead of Greedhead Central. The warrants are very valuable, especially with the recent sharp run-up in Goldman's stock price. The warrants carry the right (but not the obligation) to buy 12.2 million Goldman shares at $122.90 each. Goldman's closing price of $156.84 yesterday put the warrants "in the money" by a bit over $400 million. (That's the $33.94 difference between $156.84 and $122.90, multiplied by 12.2 million.)

Given that the warrants still have more than nine years to run, they're clearly worth more than $400 million, because its owner has years of upside. However, because there's no existing market for such long Goldman warrants, their value is in the eye of the beholder (and the pricing modeler). Alas, no one would tell me what the government is asking for the warrants or what Goldman is offering for them. "We are in discussions with the Treasury on the buyback of the warrant," said Goldman spokesman Lucas VanPraag. "The purchase price has yet to be determined.... We believe that taxpayers should get a decent return, and we hope that our discussions with the Treasury will do just that." The Treasury declined comment.

My estimate -- okay, my SWAG (for scientific wild-assed guess) -- is that the Treasury is asking for $1 billion to $1.5 billion and Goldman is offering $500 million or so. Under the law, Goldman, like other early TARP repayers, has the right to force the Treasury to sell back the warrants after a lengthy set of price arbitrations. When I say that taxpayers kept Goldman alive, I'm not talking about the $10 billion of TARP money or the $12.9 billion of AIG bailout money that Goldman got. The $10 billion was nice, but not necessarily essential to Goldman's survival, and Goldman says it was holding enough assets and collateral to get all or almost all of the $12.9 billion had the government not bailed out AIG.

Rather, I'm talking about the way that U.S. and foreign governments -- in other words, taxpayers -- saved the world's financial system, saving Goldman in the process. Had many of the world's biggest institutions collapsed, which would have happened without taxpayer aid, Goldman would have been wiped out because the firms that owed it money wouldn't have been able to meet their obligations. I'm also talking about the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company.

By giving Goldman access to vast amounts of money it was making available to bank companies, the Fed ended panicky demands from Goldman customers that the firm immediately return the cash and securities it was holding for them. That was the equivalent of a run on the bank, which no institution can survive. Stopping it saved Goldman.

Now this is how Goldman shows its gratitude. It could have shelled out a few extra bucks and done the right thing for taxpayers (and ultimately for itself) by exercising good business judgment and looking generous. Instead, it's behaving in a way that brings to mind one of my favorite Biblical verses, Deuteronomy 32:15: "So Jeshurun waxed fat and kicked...and spurned the Rock of his salvation." In these ultra-political days, filled with economic pain for so many Americans, that's not only the wrong way to act, it's foolish. A word I never thought I'd associate with Goldman. 

Goldman Sachs Unbound
The money machine that is Goldman Sachs is humming again just a few quarters after the firm's existence was briefly in doubt following Lehman Brothers' collapse. Goldman last week reported $3.4 billion in net income for the second quarter, its strongest showing ever. Stripping out a one-time preferred dividend related to the firm's repayment of its $10 billion government TARP investment, Goldman earned $5.71 a share, up from $4.58 in the second quarter of 2008.

Late Friday afternoon, Goldman was around 157, up 10% on the week. Barron's was bullish on Goldman and Morgan Stanley in a March 16 cover story, arguing that both firms had ample capital and were benefiting from weakened rivals. Goldman isn't the bargain it was then when the stock traded under 100, but it could rise to $175 to $200 in the next year if the firm can continue to post quarterly profits of $4 to $5 a share, analysts say.
Amazingly, Goldman said that the outsized trading profits that powered its results didn't stem from large proprietary trading positions in the sharply improving credit and stock markets.

On the firm's conference call, Chief Financial Officer David Viniar insisted that Goldman earned the vast bulk of its trading profits from simply making markets for customers at a time when many former rivals are gone or have scaled back their trading operations. "Virtually none was based purely on spreads tightening and inventory mark-ups," Viniar said. Given Goldman's limited financial disclosure, Viniar's statement can't be verified.

Known for its excessive pay packages in good times, Goldman is back to its old ways despite criticism from Washington that it's unseemly for the firm to dole out so much money so soon after a financial crisis produced a vast federal backstop that guaranteed the firm's survival. Goldman is on course to pay each of its 29,400 employees a stunning average of $770,000 in 2009 based on money set aside so far this year. The $770,000 figure does include items like payroll taxes and health benefits, but the vast bulk is in cash and equity compensation. During 2007, its most profitable year, Goldman's compensation was about $720,000 per employee before falling about 50% last year.

No major companies appear even close to Goldman in average compensation. A highly profitable JPMorgan Chase, which competes against Goldman in areas like trading and investment banking while running a huge commercial banking operation, is on course to pay its 220,000 employees an average of $130,000 this year. Shareholders haven't always been well served by Wall Street's generous pay policies that have set aside 50% of profits for employees. While staffs at Lehman Brothers and Bear Stearns did wonderfully for many years, the firms ended being undercapitalized in a crisis and shareholders ultimately got a pittance or were wiped out.

In the first half of 2009, Goldman set aside about 49% of pretax profits in compensation. It's a good bet, however, that Goldman will set aside a lower percentage of profits for compensation in the second half of 2009 because the absolute pay levels are so high. That was true in 2007, when Goldman paid out 44% of profits in compensation after cutting the ratio in the final quarter. Goldman says it doesn't adhere to any fixed ratio of pay to profits. The firm's approach is to pay competitively to keep its best people -- including traders, investment bankers and quantitative types. Yet given the depressed state of Wall Street, it seems a stretch that Goldman needs to set aside so much for employees.

One alternative would be for Goldman to pay employees less -- say 40% of profits -- and retain more of its earnings for shareholders. That way, the chances of Goldman needing any government backstop would become more remote. If more profits were retained, Goldman's shareholder equity would expand more rapidly and that could boost the stock, although more employees might leave. This idea probably won't sit well with Goldman and the rest of the Street. Don't expect compliant boards of directors to act for change.

Some believe Goldman now is overcapitalized, and it's under pressure from some analysts to repurchase stock. Goldman's Viniar resisted such suggestions on the conference call, saying the firm needs to husband capital in a still-difficult economic and financial climate. Roger Freeman, the brokerage analyst at Barclays Capital, says investors are wrestling with several issues in evaluating Goldman: "Do we get multiple expansion from here and if so, when? Can Goldman trade for meaningfully north of 1.5 times book and can it consistently earn a return of equity of 20% or better?"

Goldman now trades for 1.5 times its second-quarter book value of $106 a share after earning a 23% return on equity in the period. Freeman believes Goldman is starting to "bump up" against a price/book ceiling and that it will be tough for the firm to regularly top a 20% ROE with a much greater equity capital base. He thinks the stock may track book-value growth. That would make it more like Berkshire Hathaway. If book rises to $120 to $125 a share in a year, the stock could hit $180 to $190, assuming a price/book multiple of 1.5 times. Love them or hate them, the smartest guys on Wall Street are back -- and raking in the dough. Goldman's pay looks excessive, but there's still a lot now for shareholders. That's probably good news for the stock.

Bankers, Lawmakers Assail Pace of Obama’s Mortgage Programs
The Obama administration may be “just going through the motions” in dealing with the deficiencies of U.S. anti-foreclosure programs, leaving a record number of struggling homeowners with few options for relief, Senate Banking Committee Chairman Christopher Dodd said. “I’ve had a lot of frustrations in trying to come up with plans that work,” Dodd, a Connecticut Democrat, said during a break in a hearing on the programs today in Washington. “I’m concerned that we’re just going through the motions. I don’t get the sense of urgency.”

A Bank of America Corp. executive told Dodd’s committee that the administration stokes “confusion and delay” among lenders when it announces anti-foreclosure plans before completing the program details, while Senator Richard Shelby of Alabama complained that the programs have fallen short of goals. “Existing modification programs have not been very effective,” Shelby, the ranking Republican on the Senate Banking Committee, said. “Sustainable policies must be based on economic realities and facts, not wishful thinking.”

The administration has “encountered a few difficulties” in starting the Making Home Affordable refinancing program for troubled borrowers, said William Apgar, an adviser at the Housing and Urban Development Department. The program, intended to help as many as 4 million people, has so far extended modification offers to about 325,000, he told the committee. More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, Irvine, California-based RealtyTrac Inc. said today in a statement. That’s a 15 percent increase from a year earlier.

“Many consumers have had trouble reaching their servicers and receiving a timely response from servicers after they have submitted applications for modification,” Apgar said. Others have complained that lenders have given them inaccurate or misleading information. Allen Jones, a default-management policy executive at Bank of America, said part of the problem is that the administration keeps announcing programs without providing the rules for how borrowers and lenders should proceed. That practice “creates immediate demand with insufficient lead time for operational readiness,” Jones said in his testimony to the committee. “This can lead to negative customer experience and, ultimately, public backlash against the programs,” Allen said.

Borrowers are still awaiting the final details of a plan announced in April that would let homeowners rework home-equity debt. Other elements of a broader plan announced in February have been slow to reach the public.
Senator Jim Bunning, a Kentucky Republican, asked “when are you going to stop the bleeding?” As many as half of the at-risk mortgages have second liens, Apgar said, adding that a home-equity loan can increase the likelihood of default because it may raise a borrowers’ monthly mortgage payments beyond affordable levels.

“The issuance by Treasury of its brief and limited guidelines for the second-lien and short-sale programs months before their comprehensive rules have been finalized or even drafted has led to a great deal of confusion and delay in the industry and with the public,” Allen said in his testimony. Herb Allison, the Treasury Department’s assistant secretary overseeing the $700 billion U.S. Troubled Asset Relief Program for financial companies, said while the administration has made substantial progress, he realizes that much more needs to be done to help forestall record foreclosure filings.

The Making Home Affordable program requires banks that received federal aid from the Treasury’s Troubled Asset Relief Program, or TARP, as well as mortgage-finance companies Fannie Mae, Freddie Mac to lower the monthly payments for borrowers at “imminent risk” of default. Banks can lengthen repayment terms, lower interest rates to as low as 2 percent and forbear outstanding principal, among other methods. Charlotte, North Carolina-based Bank of America, the biggest U.S. bank by assets, took $45 billion in U.S. aid through TARP amid last year’s financial crisis.

Allen said the Treasury could improve the effectiveness of the program by giving loan servicers advance notice of new rules, allowing the industry to review program changes before they take place and completing details before making announcements. Bank of America has almost doubled its team of home retention specialists in the past year to 7,400 people, Allen said. About 80,000 Bank of America borrowers have been offered modifications or are in the three-month trial period under Obama’s Home Affordable initiative, he said.

Apgar said administration officials are also still drafting the final details of its framework, announced April 28, to simplify the process of closing short sales and deeds-in-lieu. Those provide alternatives to foreclosure that are less expensive to lenders and less damaging to the credit of borrowers, who still lose their home. He also said HUD officials are having trouble implementing new laws designed to improve participation in the Hope for Homeowners program, which was designed to help as many as 400,000 borrowers refinance into more affordable loans insured by the Federal Housing Administration. Just 50 loans have closed through that program, HUD Secretary Shaun Donovan said last month.

The program provides low-cost federal backing for the refinanced loans in exchange for principal writedowns. It also authorizes HUD to pay second-lien holders to extinguish the loan, which is proving difficult to calculate, Apgar said. Banks controlling modification decisions as servicers have stood in the way of the Hope for Homeowners program because other types of aid don’t require them to suffer losses on their home-equity loans, said Curtis Glovier, a managing director at Fortress Investment Group, a New York-based asset manager. “Investors are willing to do our part by making a significant sacrifice in reducing mortgage principal,” Glovier plans to tell the committee today, speaking on behalf of a mortgage-investor group.

A Costly Bank Failure Friday
Four banks failed on Friday, soaking the FDIC’s deposit fund for more than $1 billion. The biggest losses came from Southern California, as regulators finally ended what had become a slow-motion sink beneath the waves for two banks. The total number of bank failures for the year now stands at 57.  Analysts recognized Vineyard National Bank’s troubles as early as January 2008, when its parent holding company announced losses of $41.3 million for the previous quarter.

By July of that year, the California-based bank had signed a consent decree with the Office of the Comptroller of the Currency requiring it to stop gorging on brokered deposits and to raise capital from more other sources. Instead, its capital shrunk while its non-performing loans grew. This past April, the Nasdaq and the New York Stock Exchange delisted Vineyard National Bancorp, the holding company. Speculation then centered not on whether the bank would fail but why it hadn’t already. Regulators finally pulled the plug on Friday evening entering into an agreement with California Bank & Trust of San Diego to take on Vineyard’s deposits. The FDIC estimates the total cost to its insurance fund at $579 million.

Temecula Valley Bank followed a similar path. It reported in January that in the last quarter of 2008 its non-performing assets has grown nearly fivefold to $148 million. On February 12, it signed a Cease and Desist Order with the FDIC requiring it to raise more capital. Then a deal with a private equity group to inject $210 million into the bank’s holding company fell apart. After the bank missed numerous deadlines, regulators on Friday brokered their own deal with First-Citizens Bank and Trust Company of Raleigh, North Carolina to take on the bank’s deposits. Total cost to the FDIC—$304 million.

The two other banks to fail yesterday were in South Dakota and Georgia. BankFirst of Sioux Falls was the first bank to fail in South Dakota since 1992. The FDIC entered into an agreement with Alerus Financial of Grand Forks, North Dakota to assume the deposits. In Georgia, banks have been falling like ripe peaches. The FDIC shuttered First Piedmont Bank of Winder, making it the tenth Georgia bank to fail this year. First American Bank and Trust Company of Athens, Georgia will assume the deposits.

Feds may soon seize Corus Bankshares: report
Corus Bankshares Inc. might be taken over in the next few weeks by regulators, who are getting ready to auction the struggling condo lender or assets of it, according to a report. The government could seize the bank in the next several weeks, the Federal Deposit Insurance Corp. has indicated, according to a Bloomberg News report Friday citing unidentified "people briefed on the matter."

Corus has warned investors it might fail. Corus and Bank of America Corp., its financial adviser, have not been able to find a buyer that will do a deal without government help, Bloomberg said. Colony Capital LLC and real estate developer Related Cos. are among the investors that have shown interest in the bank's assets, Bloomberg reported last month. The Wall Street Journal reported this week that private-equity firm Starwood Capital Group is bidding on Corus assets, citing unidentified sources.

Young Hit Worst by British Joblessness
As overall unemployment in Britain reaches 7.6%, the rate among adults ages 18 to 24 is 20% and set to grow. Fears are growing of another lost generation

Unemployment has soared by a record 281,000 in three months to total 2.38 million, the highest since before New Labour came to power. Some 7.6 per cent of the workforce is jobless, the highest rate since January 1997, and up by three-quarters-of-a-million on this time last year. The increase over the last quarter was the steepest since the severe recession of 1981. About 1.6 million people are claiming unemployment benefits. Economists called the data "truly horrible". The West Midlands has become the first British region in the current recession to see its unemployment rate reach double figures: 10.3 per cent.

Young people are bearing the brunt of the pain. Gordon Brown made his political reputation in the 1980s and 1990s railing against the waste of human talent during the Conservatives' rule, yet today one in five 18-to-24 year olds is jobless; 726,000 youngsters are looking for work. That toll will jump dramatically as more school leavers and graduates sign on this summer. Concern about the economic and social costs of supporting a lost generation of "neets" – those not in employment, education or training schemes – continues to grow. Poignantly, those now leaving school aged 16 and trying to find work or in further education to avoid unemployment will have started primary school in 1997.

There is also increasing evidence that workers are turning to temporary and part-time work, as well as putting up with minimal pay rises, to avoid the dole. Renewed efforts by the authorities to push workers to accept any kind of job rather than claim benefits, and increasingly stringent eligibility criteria, have accelerated this trend. Thus the number of the unemployed claiming jobseeker's allowance rose by only 23,800 in June, much less than expected – down from rises of 30,800 in May and a record 136,600 in February.

Almost one million people have accepted part-time jobs while looking for full-time work, up 255,000 on last year, and 413,000 are temping while looking for a permanent position, up 58,000 on 2008. "Self employment", which may be disguising underemployment among the "freelancing" professional and managerial classes, is up 55,000. Philip Shaw, UK Economist at Investec commented: "We suspect that the claimant count numbers are being biased down by individuals moving off the count onto government schemes such as the New Deal. While they would still effectively be jobless, on this measure they would no longer be classified as unemployed. Are people really finding jobs? Employment and hours worked fell sharply in the three months to May, so we think not."

Kevin Green, chief executive of the Recruitment and Employment Confederation, added: "Temporary work should remain a crucial lifeline for those wanting to get back into employment. Flexible working [is] vital in these recessionary times, especially with increasing numbers of jobseekers including recent graduates, wanting to get a foothold in the jobs market." At all levels there seems to be little resistance to employers' offers to save jobs in return for pay restraint. The ONS say that annual headline average earnings growth is running at a muted at 2.3 per cent, and only 0.8 per cent in manufacturing.

Over the past year the worst losses have been in manufacturing – 212,000 jobs gone. About 196,000 posts in hotels and restaurants and 187,000 in financial services have disappeared. Most economists believe that unemployment will continue climbing to 3m, or beyond, well into next year. That will happen even if the economy starts to recover, as employers are usually able to respond to rises in demand without having to hire new staff. Today's numbers would also have been worse but for a boost to public sector employment of around 55,000, partially offsetting the loss of 683,000 private sector jobs. Given the pressures on the public finances, that benign trend may soon also begin to reverse.

Major cities such as Newcastle, Swansea, Plymouth, Newport and Ipswich face heavy job losses over the next decade because of the imminent squeeze on public spending, a think-tank will warn today. One in four jobs in Britain's cities is now in public service, cushioning urban populations from the effects of the recession. But the Centre for Cities says such places will become particularly vulnerable to the inevitable spending cuts from 2011. Dermot Finch, its director, said: "The current size of their public sector workforce is untenable." The Inland Revenue's National Insurance Contributions Office is based in Newcastle and the head office of the Driver and Vehicle Licensing Agency is in Swansea. Plymouth has high employment in the naval dockyards. Public sector posts have grown rapidly in Ipswich in recent years, while Newport has a relatively low number of jobs in private industry.

Meanwhile, the shadow Business Secretary Kenneth Clarke warned yesterday that Gordon Brown's "lack of candour" on public spending would cause a lack of confidence in the British economy on the financial markets. He accused Mr Brown of "trying to hide the scale of the crisis" by delaying a government-wide spending review, and said he should "tell it straight". The former Chancellor told the Institution of Civil Engineers: "The risk, if we do not have a sensible debate on public spending, is that no action will be taken to get public borrowing on to a credible downward course. Interest rates will be driven up and stifle the recovery before it can become established."

Mr Clarke said a comprehensive spending review was needed more desperately than ever, even though the Government appears to have postponed the one due until after the general election. Accusing Mr Brown of being in "denial", he said: "We need frankness in our political dialogue. It is going to be very tough."

Steve and Shelley Carter, both 36, live in Stone, Staffordshire, with their two children. Steve works in Toyota's human resources department at the manufacturing plant in Burnaston, Derbyshire, where all members of staff have taken a 10 per cent cut in hours and pay since the beginning of April. This is a loss of 16 hours' pay each month. "Everyone from senior management downwards has taken a reduction in hours to protect jobs. There's also no pay increases this year, and overtime has been cut.

There are some people within our team who have had to find other part-time work. Each week, staff aren't paid for four hours (half a shift), but rather than coming in just to do half a shift, every employee takes a full day off once a fortnight. My wife was made redundant in the past 12 months from the corporate events company she worked for. We had to tighten our belts and be careful, especially with two young children. Fortunately, she's back in a full-time marketing position, but there was a period of real uncertainty for us.

It forced us to look at our household income to see where we could make savings. There are benefits – I'm able to pick my children up from school, and there's DIY around the house. And it's a longer weekend. It's a challenge, as we've all got commitments. But it's working towards long-term job security. In the next few months I'll be back to full-time hours, as the recently introduced scrapping scheme has led to an increase in volume. So people are making the most of their day off, knowing that soon they won't have it."


Anonymous said...

The Day Begins

Cold hearted orb that rules the night
Removes the colours from our sight
Red is gray and yellow, white
But we decide which is right
And which is an illusion

Pinprick holes in a colourless sky
Let insipid figures of light pass by
The mighty light of ten thousand suns
Challenges infinity and is soon gone
Night time, to some a brief interlude
To others the fear of solitude

Brave Helios, wake up your steeds
Bring the warmth the countryside needs

Anonymous said...

Larry Summers cites Google search as progress

The number of people searching for the term “economic depression” on Google is down to normal levels, Summers said.

Searches for the term were up four-fold when the recession deepened in the earlier part of the year, and the recent shift goes to show consumer confidence is higher, Summers told the Peterson Institute for International Economics.

jal said...

While waiting here is something to read.
They are the black swan of the bankers and the politicians.
They hold “the pool of wisdom.” (Pass and future)
They are more powerful that “the woman behind the throne.”
They are more powerful than the bankers.
Their organizations are in the open but can operated clandestine and swiftly.
They are only 3 phone calls away from any decision maker.
They can cause a bank run.
They can “starve the beast”.
They can make the members of parliament “quake in their boots”
They are immune to the tools of crowd control. Tear gas, batons, and physical force.
They have the ability to write modifications to any bill passed by governments and get it passed.
They are stirring and waking up from their nap.
They are learning to communicate with computers by the thousands.
They are getting informed on how they have been conned and used by the bankers and the politicians.
They are unbeatable, when they decide to act/work as one.
They will be obeyed, when they speak.
They are growing stronger by the day.
“They’ve been there, done that.”
“They can do the walk and they can do the talk.”
“They’ve seen it all and done it all.”



You might be able to do “selective hearing” with your wife.
You might be able to ignore your mother.
BUT, when gran calls you had better be listening if you do not want the black swan swooping down upon your house.

Arnold said...

Looks like Ilargi's housing call is going up in smoke. Housing starts are not making, nor will they make, a new bottom. Your 90% price decline in real estate will not pan out Ilargi. Are you going to stubbornly hold on to your erroneous theory or admit you were wrong and recalibrate your thesis?

Anonymous said...

Larry Summers is a vampire blood funnel squid, an ugly one at that.

He has no socially redeeming value.

I was just out in my garden at night dropping slugs into a coffee can full of kerosene to drown them.

If Larry would fit in the can, I'd drop him in there too, in a heartbeat with no remorse.

Raiders of the Lost Squid

Ilargi said...

"our 90% price decline in real estate will not pan out Ilargi."

Yes it will. I never said it would be last week. The economic collapse is just getting started, Arnold. These are the good days still.

Arnold said...

So we have you on record. What are your projections for the rate of change in unemployment?

Ilargi said...

"Arnold said...
So we have you on record. "

I've been on record for a long time saying that. Nothing new there. Actually, to be precise, I have always stared that the price decrease will be 80% or more, whereas Stoneleigh has consistently used the 90% number.

"What are your projections for the rate of change in unemployment?"

When the government can no longer keep the economy artificially alive with taxpayer money, and pressure increases to finally expose losses, unemployment will rise fast. This fall is a dangerous point; it's increasingly hard to see how they could do it for more than a year. And that's assuming they would want to.

Erin Winthrope said...

@ Arnold,

We're tumbling down the cliff right now.

You can't see it because the DOW is still above 8000 and because your government says all is well. Don't worry, and sleep easy, they've got your best interests in mind.

Arnold, you need to explain where the money is going to come from to restart securitization. In the absence of that, the unraveling will continue to gather speed. Loans can't be refinanced without securitization. No refinancing = default = bankruptcy = unemployment = further credit contraction = no refinancing = default get the picture I hope.

How about it Arnold, where will we find the money?

The pension funds? Nope, they're too busy covering up the losses they've already sustained.

The university endowments? Nope, they've got the same problem.

Sovereign Wealth funds? Nope, they've got the same problem.

The Federal Reserve with its printing press? Nope, printing the amount needed to restart securitization would spike interest rates and create more loan defaults. That's no solution. That makes the pile of shit taller.

China? Nope, they need to start hoarding cash to brace themselves for a cascading series of loan defaults within their own economy.

In short Arnold, the money is gone. Only the faith of suckers remains, and those suckers get awfully cold feet when the DOW heads south for the winter.

Anonymous said...


You sure are walking through life with one hell of a chip on your shoulder - having to be right and prove others wrong at all costs.

Did you ever graduate from nursery school?

VK said...

Housing starts rising is actually a very bad thing for the US economy. Why on earth are they building excess housing supply when there's so much inventory? The official figures of inventory also don't factor in bank owned properties which have just been lying outside the market as banks have been unwilling to mark down their assets.

Any supply of homes in the US economy is actually a bad thing, will lead to price declines.

From the Japan Credit bubble of 1990, home prices declined 70%+ from their peak over a period of 18 years, so a 80-90% decline is in line with reality! And the stock market was down from around 40,000 to a low of 7,500 so far, that's around an 80% decline. (Taiwan Stocks and the NASDAQ are examples of share markets that have not recovered post bubble)

Japan's credit bubble burst was much less painful because of it's high savings rate, at 18-20%. This created a buffer with which to weather the storm. Also when Japan entered its crunch, it had a healthy global economy to export all it's goods to.

It's a telling sign that Japan's economic contraction that is currently happening is much deeper then any following the bubble bursting era. As Japan's buffer has been much reduced while exports have been carved in half.

ps - Regarding yesterday's comment on 'pee power'. That is NET energy negative. It requires a lot of energy to keep the human body alive and the amount of energy we get from pee is much less compared to what has to be put in, given that we use energy to think (sometimes), breathe, heart pumps blood etc. So not much energy is going into the pee.

APC said...

From yesterdays "AIG's European Derivatives May Take Decades to Expire"

"For counterparties to voluntarily terminate those contracts makes no sense," Havens said in an interview. "There’s no question that asset values have soured on a global basis. With the faith and credit of the U.S. government backing those guarantees, why would they give that up?"

Doesn't this seem obvious to everyone? Seems to me that had not SocGen been beneficiary of AIG bailout number 1, then they'd no longer be a around. Am I wrong on this? And does Ilargi and Stoneleigh still think these banks have a future?

Anonymous said...

llargi, I'm with arnold on this one, there is simply no reason to expect deflation to continue unchecked.

Have you ever performed the calculation of how much money can be printed by fiscal authorities (either for spending in the economy or debt monetisation), for each 5% increase in bank reserve requirements, which are now effectively 0?

A rough calculation leads me to believe the entire US deficit of 11 trillion could be monetised for only a doubling of the price level, if bank reserve requirements are raised to 20% over the same period.

Even that assumes that the money multiplier whatever it may be (and it does exist since M3 >> M1) remains at historical levels, when in reality we'd expect attitude changes and demographics to reduce the effective multiplier over time.

Deflation can and will be stopped, but only once all the normal tricks have been used up.

Caith said...

I watched some P90X on youtube and it looked terrifying. Do they have beginners mode, or do they just tell you to do 25 each of 18 different kinds of press-up on day one?

Persephone said...

Ilarigi said, "I don't like false claims of recoveries and green shoots. Not only are there plenty of those around as it is, they are dangerous things. Decisions are being based on them, both by governments and by individuals. And false claims lead to false decisions."

So true!!
I realize the "green shoots" are about a confidence game. The banks may be insolvent or the government may be insolvent - they can continue in the zombie state based on public "perception".

How one would prepare for a deflationary cycle is much different than how one would prepare for a hyperinflationary cycle.

I'll throw this tidbit out. I have had the opportunity to spend the weekend with someone in international high finance.I was told China is in the process of decoupling from the dollar. I asked if this was just saber rattling or if it was actually happening.I was told it is already in motion. I'll let more knowledgeable people explain what that is going to intricately mean to the U.S.

VK said...

@ Scepticus

It's simply not that easy to reinflate. If it was, no country in the world would have ever experienced deflation and house prices would always rise.

For example, regarding house prices, In 1736 the average house price was 2.6 Million euros adjusted for inflation in Amsterdam, in 1960 it bottomed out at 350,000 euros. That's an 85%+ decline that lasted for 224 years with many fluctuations in between. Amsterdam house price data goes back all the way to 1650 and the recent peak I believe finally took it past the old peak, some 272 years later!

So if your ancestors invested in dutch property in 1736, they would be breaking even just about now (or were?)

Ian said...


An open letter to Paul Volcker [the author is Professor Antal E. Fekete]

In 1975 you conducted a seminar on the international monetary system and invited me to contribute a paper on gold which I did ... It looked as if the gold problem has been solved for once and all.

But as I feared, and as the intervening 35 years have proved, rather than moving towards equilibrium we have been constantly moving ever farther away from it ... All you do is shuffle various forms of irredeemable debt. When the world wakes up to this prestidigitation, the international monetary system will not be able to survive the shock-waves. The chaos that will engulf the world is appalling.

The full letter can also be accessed and read here:

Anonymous said...

After reading the doom 'n gloomer blogs and some of the more meaty financial ones I like to surf by mainstream media outlets like the WSJ to see what we "should" be thinking about this crisis.

Here's a sampling of what the WSJ wants us to think:

U.S. Earnings Uptick Boosts Confidence

Housing Starts Jumped in June

Tata Consultancy's Net Up 22%

Mattel Posts 82% Jump

BP Heralds Gulf of Mexico Prospects

British Airways to Raise Liquidity

So, big heaps of green shoots... we've turned the corner...on just about everything...including peak oil!

Hombre said...

Ilargi... I laugh at the CR comment. You are right on about housing starts.

Calculated Risk should be renamed WISHFUL THINKING!

Out here in the real world it is obvious that housing starts are severly minimized and there is no recovery in sight!

Part of my work takes me around this town of 65k and we are no diffent than most places throughout the states. Housing is almost completey stifled!

VK said...

@ Persephone

I realize the "green shoots" are about a confidence game.

This is the response given to an inventory led recession, the ones that the US has experienced over the past 50-60 years. When it comes to credit driven recessions, the policy response should be to make things worse - clear the bad debt immediately, to liquidate.

What has happened since the 80's, with the advent of borrow and spend under Reagan and Thatcherism, was the idea that monetary policy could heal the system quickly. Indeed any 'crisis' was healed by the following process.

1) Borrow and spend
2) Loosen monetary policy
3) Reduce savings and encourage consumption
4) Propaganda warfare

What we see from the Government is essentially the same response as to that of a normal inventory led recession, the garden variety type.

In a credit driven recession, the opposite must be done, people must be told it's bad and to liquidate their debts as we've reached what's known as a Minsky Moment, where people and countries have taken on so much debt that they simply have no ability to service that debt. Increasing debt in this environment is exactly the wrong medicine.

Is it too much to ask that someone in the White House can differentiate between the two. The D-process of Deflation, Deleveraging and Depression must be allowed to unfold, any delay or trying to kick the can down the road simply will not work as the system is being crushed under a weight of bad assets and too many liabilities.

The MSM if they are really interested in healing the system, should be advocating a policy of letting the bad banks fail and while the economy would contract sharply and violently, the Government should've used it's trillions to set up safety nets for the populace, to reduce the impact of the crunch. What we now face is Europe, the US, China blowing all their money on saving a dead system and hardly leaving any money aside for the populace. The ironic thing is that they are following the guidelines from the past recessions to save the patient, what they don't realize (or neglect) is that this time the same medicine will kill the patient.

One recessions medicine (debt), is another depression's poison (debt).

el gallinazo said...

I am really sad that Taibbi used the metaphor of Gollum Sucks as a vampire squid. As a long time resident of the Caribbean who has spent quite a bit of my life under water (no - I don't hold a mortgage), I have found squid to be the most beautiful and interesting of coastal creatures. Despite being invertebrates, they are far more intelligent than fish.

Vampire squid live at the ocean depths in the dark. They are rather small and weak because the low levels of oxygen in the water favors a very slow metabolism. They do have a "funnel" of sorts, usually called a cloak, created by a skin covering of the posterior parts of their tentacles. There is no indication that they partake in vampirism as do some bats, leeches, or Transylvanian aristocracy. What Taibbi refers to as their "blood funnel" is more commonly called their cloak, and is actually an adaptation to extract more oxygen from the water. Food is rare at those depths, and it is unlikely that they would allow any morsel to go to waste. With the exception of our Transylvanian cousins, vampiric creatures are parasites smaller and weaker than their prey, and incapable of ingesting them as a true carnivore. It's not even clear how they were given that name, though it is an Anglicized version of the scientific name as "Vampire squid from hell." Admittedly they are not as beautiful as coastal Caribbean squid .....they are downright freaken ugly.

There is an excellent 4.5 minute youtube video on them at:

So now, thanks to Taibbi, we will have 30 somethings believing in true vampire squid along with Fred Flintstone's pet dinosaur, Dino.

Anonymous said...

"Deflation can and will be stopped, but only once all the normal tricks have been used up."

The country is broke dude, in case that slipped by you in the night. The last pools of electrons posing as 'money' in the utterly bankrupt financial system are pension and endowment funds. Everything else is simply Foam at the Mouth.

They are not enough to 'stop deflation'.

The government can not 'print' enough 'money' OR will enough 'money' into existence through the bankrupt fractional reserve fiat system.

Not gonna happen.

We lie about everything now in the U.S.

One of the really Big Fat Ones is fractional reserve banking.

We have a negative reserve banking system at the moment.

We have a negative reserve banking system at the moment because there are NO RESERVES in the banks because they lent at such astronomical leverage levels. 20 to 1, 40 to 1, 80 to 1.

At those leverage levels, only a small fraction of the loans had to go bad to WIPEOUT ALL RESERVES, and they did.

What a surprise, I'm shocked.

The Majority of U.S. banks have SO MUCH TOXIC GARBAGE in their vaults, it's a wonder they haven't expired from Toxic Shock Syndrome.

U.S. banks are LYING about the value of not only the MFF, 'mark to f*cking fantasy' assets, but more importantly, they're lying about their RESERVES. The two are joined at the hip.

The U.S banking system's so called "reserves" are SO WORTHLESS that in point of fact, that is the sad reason that we have in truth NEGATIVE RESERVES in our banks at present and hence a NEGATIVE RESERVE BANKING system.

Increasing the 'reserve' requirements is a delusional and psychotic demand. The banks have less than nothing in reserves now, who's gonna give them something valuable enough to be worth even 10% of their sorry ass loan portfolios, the Fecking Tooth Fairy?

Get real dude.

The only real value in the not to distant future will be fuel and food.

And Gruppenführer Paulson spilled the beans the other day that the lame ass Bush Baby Junta was 'worried' about maintaining the food supply if the banking system failed.

That probably escaped your attention to.

el gallinazo said...

A 9:00

Good analysis both in terms of content and color commentary.

Stoneleigh feels that USD currency and short term treasuries should be good and even increase in buying power over the next several years. What's your take?

Bukko Boomeranger said...

El Gall: So does that mean the next time I'm in Marin County, California, I'm going to stuck in traffic behind Volvos with bumper stickers saying "Save the vampire squid"?

el gallinazo said...


I appreciate the umlaut in Gruppenführer Paulson.

el gallinazo said...


Why not? One of my close friends here is a Rolfer and has a "Save the Psoas" bumper sticker.

Anonymous said...

Like Daddy always told me. "You can believe anything you want to believe, just know why you believe it."

Greenpa said...

El Gal- zowie- bless you for the vid of the vampire squid; by far the best one I've seen.

Reluctantly, I'll have to admit they are ugly- but also incredibly fascinating.

There is, alas, no stopping a rampaging English major when they grab ahold of a single biological factoid, and run with it.

bluebird said...

Caith said "I watched some P90X on youtube and it looked terrifying. Do they have beginners mode, or do they just tell you to do 25 each of 18 different kinds of press-up on day one?"

The P90X DVDs are very explicit in that they say to do what you can, whether it's day one, or day ninety. You'll get stronger as time goes on, don't worry what you can't do. The DVDs also show different ways of doing the routines which makes some routines easier to do, or they show how to do the routines more difficult.

I've been doing the DVDs for 4 months, and I have much stronger arms now, but there are still some routines that I am unable to do, so I substitute something that I can do. Oh, and I'm sixty, and I am finally strong enough to do a military style push-up, instead of a girlie push-up. :)

P.S. I got the set of DVDs on Ebay for $56.

Greenpa said...

Anon 9 AM: "We lie about everything now in the U.S."

This really isn't true.

We have ALWAYS lied about everything, in the US. And everywhere else, really.

If you define lying as telling half-truths, as well as untruths. It's a core aspect of herd management.

I sometimes think the grade school and high school history and civics curricula are specifically designed to produce disillusioned, cynical voters.

We are taught lots of bright shiny stuff; which, once out of school, we pretty quickly find out is just flat not true- and I know tons of people who react by withdrawing from all communal decision making.

Convenient for the manipulators, yes?

Anonymous said...

"Stoneleigh feels that USD currency and short term treasuries should be good and even increase in buying power over the next several years."

USD currency and short term treasuries will be the last wisps of what passes off as a pulse as we descend into the 9th Circle of Core Body Politik temperature.

USD currency and short term treasuries will be the Führerbunker for the remaining Chic Set.

Perhaps a more aesthetic visual for the last stand would be the house at Obersalzberg in Berchtesgaden.

The Eagle's Nest has a nice homey sound to it as the last resting place of the late great American dollar.

In fact, here's an ad on Google I found for the ultimate Doomstead.

Eagles Nest Homes
Fountain Hills EZ Gated Community 244 acre plus lots. Tour today!

Lounging on the veranda nibbling on barbecued Gerbils and generic beer.

~~Be There or Be Square~~

Stoneleigh said...


Housing starts are not making, nor will they make, a new bottom. Your 90% price decline in real estate will not pan out Ilargi.

Housing is not even close to a bottom, ergo it has much further to fall. I think it'll be down 90% on average within 5 years. Watch this space.

el gallinazo said...


"Reluctantly, I'll have to admit they are ugly-"

I don't know. Watching the video a second time, I found those big baby blues rather appealing.

Stoneleigh said...


Deflation can and will be stopped, but only once all the normal tricks have been used up.

Deflation will end when the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. Deflation carries the force of a tsunami or a cat 5 hurricane once it builds up momentum. Central authorities will not be able to prevent it, or even slow it down at that point. This rally is making things look better temporarily, as we said it would, but we are still very much closer to the beginning of this depression than the end of it. Once the rally is over, the fear will be back and things will look very different through a filter of fear than they do now through a filter of cautiously optimistic complacency.

Stoneleigh said...


I watched some P90X on youtube and it looked terrifying. Do they have beginners mode, or do they just tell you to do 25 each of 18 different kinds of press-up on day one?

You start with what you can do, but over time that will increase more than you might have thought possible. Don't worry if you can't compete with the trainers, ex-marines, dancers and circus performers on the DVDs. I can't either. Just compete with yourself and you will make progress.

When I started, I had never done a push-up before in my life and one was hard. Now I can do 12 sets of 25 over an hour, interspersed with other exercises. I still can't do them one-handed, but that doesn't matter.

I was unbelievably stiff the first week - so much so that I could hardly get into my car, especially after doing plyometrics for the first time. I could have given up, but I didn't. It depends how much you want it and I wanted it a lot. I'm still very much a work in progress, but I feel vastly better than I once did.

jal said...

"And Gruppenführer Paulson spilled the beans the other day that the lame ass Bush Baby Junta was 'worried' about maintaining the food supply if the banking system failed."

Stop and think about why Paulson was concern.

It reveals that he is aware, as are the other decision makers, that nothing moves without credit. Crops rot in their fields. They would not even be harvested. Oil would stay in their barrels.

We are a credit society.
Not having credit is more devastation than not having oil.


el gallinazo said...

KD has a very good two part video response on his site this morning. I agree with everything he says except:

He indicates that if we allow the toxic waste to fester marked to fantasy in the big banks, they could probably pay it down over a decade or two resulting in little or no growth to the economy. My feeling is that he is wrong in this. Regardless of what the fascist corporatist state attempts to do under Obama or a successor, I don't think that a Japanese style lost decade or two is possible any longer. I think deflation will be far more implosive this time. The Japanese had huge savings, sovereign reserves, and a healthy export market to cushion their deflation. We do not.

KD is a very bright guy, but he doesn't seem to get **just how big and deep** the hole is into which the world is falling. Karl may be the real Dr. Doom Lite of the moment. Roubini is too busy with his groupies.


Perhaps one personal solution would be to relocate to an area where farmers have never had credit and are not totally dependent on synthetic fertilizers or Monsanto seeds. i am looking into this though it is complex.

Hombre said...


Great point about credit, it's basic, and often left out of the discussion.

Farmers around here have to have $$ fluidity or the crops stop!

It's pathetic to me that decisions by big corrupt bankers (well fed and self secure) could, and maybe will, decide the fate of millions worldwide. And I do mean life or death!

rapier said...

While the stock market is still within it's trading range of 870 to 960 many now feel that it has broken out to the upside. If true then standard conventional measures imply a move to 1200 on the S&P. Setting aside that target there is a very strong probability that this is going to be the outcome. A continued uptrend off the March low. In other words a cyclical bull market.

If that happens don't waste a lot of energy trying to figure out why or railing against it. The markets are what they are. They don't have anything to do with the economy or maybe it is better to think of them as a separate economy.

Even if it doesn't happen do not assume a new low will follow fast upon. Sure it could but maybe it won't. Maybe new disastrous plunges lie just ahead. Or maybe after this bull cycle late this year or in 10,11 or 12. Or maybe the low is in for a generation or more.

As time passes without a disastrous social and asset deflation it's certain that the dollar will deflate and so inflate some asset prices, perhaps stocks. The economic future for many in the first world is almost certainly bad on a relative basis and probably on an absolute basis. It just might be horrible in ways we don't quite grasp or at least expect..

jal said...

Ed_Gorey said...
How about it Arnold, where will we find the money?

The pension funds? Nope, they're too busy covering up the losses they've already sustained.

The university endowments? Nope, they've got the same problem.

Sovereign Wealth funds? Nope, they've got the same problem.

The Federal Reserve with its printing press? Nope, printing the amount needed to restart securitization would spike interest rates and create more loan defaults. That's no solution. That makes the pile of shit taller.

China? Nope, they need to start hoarding cash to brace themselves for a cascading series of loan defaults within their own economy.

In short Arnold, the money is gone.
It is worst than that …

Think about it.

Remember, we are a credit society.

Your bank statement says that you have money in your account.
However, the bank cannot give it to you because they need credit to give it to you.

The only money that exist is the amount that you have in your pocket.
el gallinazo said...
Perhaps one personal solution would be to relocate to an area where farmers have never had credit and are not totally dependent on synthetic fertilizers or Monsanto seeds. i am looking into this though it is complex.
Ya! It’s a tough problem. The time line makes it even worst.
Who can stand having their friends and relatives think that you are a “total nut case” because you are acting now when everything/everyone is cheering that we are now out of the woods.
rapier said...
Maybe new disastrous plunges lie just ahead. Or maybe after this bull cycle late this year or in 10,11 or 12. Or maybe the low is in for a generation or more.
Don’t forget to include the gran and the great-gran black swans into the future calculation.

Ian said...

VK said:

What has happened since the 80's, with the advent of borrow and spend under Reagan and Thatcherism, was the idea that monetary policy could heal the system quickly. Indeed any 'crisis' was healed by the following process.

1) Borrow and spend
2) Loosen monetary policy
3) Reduce savings and encourage consumption
4) Propaganda warfare

What we see from the Government is essentially the same response as to that of a normal inventory led recession, the garden variety type.

I think that the reality of everyday life for the average person, based on what I've learned reading on TAE and elsewhere plus all-important observation in the many places that I travel to and spend time is that:

☻ Wages and salaries are falling along with jobs and job opportunities
☻ Income from dividends and interest has fallen fast
☻ Asset values are falling (homes, other major items owned)
☻ Corporate profits are falling everywhere, for both large and small businesses
☻ Having lost in the stock market as well as on homes, older people are reluctant to incur costs, make commitments, spend money on non-essentials, take chances. They worry about their job, pension entitlements and their pension funds or 401K plans and the willingness, let alone the ability, of governments to provide the health care in their old age for which they contributed during their working lives
☻ Younger people find a hostile educational and job market.
☻ Taxes - personal, property - are rising (central and local government incomes are falling plus there's a lower tax base, more expenditure and more borrowing to be financed and maybe repaid one day). So far, these two kinds of 'government' believe that they can either maintain or even increase expenditure and/or keep borrowing and pay it all back another day. Meanwhile, military spending and wars continue unabated.
☻ Costs are rising (fuel of all kinds, travel, public transportation, filing fees, health costs, education, credit card charges, food and drink - pretty much every category of day to day expenditure). Yes some categories are clearly falling but if I am not mistaken I see most of my regular expenses rising and income under pressure.
☻ Because of consolidated media ownership, dumbed down content and reduction or removal of 'public service' commitments, people are aware that there is little serious public debate and that the public is under-informed. They recognize that with hundreds of TV and radio stations and media sources, there is little real information and even less informed debate that reaches them unless they deliberately go out and look for it, something many of us are ill equipped for or lack the time to do.

What will happen with housing is that as there is less and less money to pay the essentials of living (and one's savings get used up) this will be the main item to be squeezed leading to continual downward pressure on property values and rents. It'll be the only thing that if you push on it, it might leave a dent. So I completely agree that the only direction for housing to go is downwards, unless there is a shortage of supply. With immigrants leaving and people moving in with parents and in-laws I can't see demand rising; also speculators only speculate when they see profits tomorrow and those are very hard to see right now.

We don't need to fully understand all the theories and words used to describe much of this, in order to be aware of and almost reach out and touch the actual effect. In the end what matters is personal happiness and self-respect as well as that of those around you, safety, putting food on the table, feeling good about oneself and what you see in the local and wider community. Despite the 'statistics', as I have commented here before all these everyday things have become worse since the advent of the Reagan / Thatcher era and policies. Of course I am generalizing and there are going to be exceptions. But in principle and looking overall does anyone disagree?

redboat said...

Dkos is a less a reality based blog than a political community based blog now. Fine.
But I don't look for Ilargi or Stoneleigh there.
I want unadulterated TAE analysis here without a front page rebuttal of random Dkos pot shots.
Yours is a blog that attracts those looking for the writing and compilation and have less time for comment sport.
The fact of the matter is that no one has a handle on all the possible permutations of the crisis but we can all respect that TAE holds firm to its own projections even if they peer into the darkest under folds of our destination near term.
I would suggest though that there's room to start folding into this blog possible alternatives to the extreme temperatures and pressures of the singularity presented so far as the differentials of the equations take on a life of their own.
Meridith Whitney's a case in point on Goldman Sachs.
Odd developments in the new reality of a warped market may be nauseating but quite informing.

Ian said...

What Economy?


There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy.”

Of course this writer of this article no doubt had nothing to do with the policies from the Reagan and Thatcher era that perhaps started it all :-)

jal said...

Well said Ian!!!
It's worth a beer!

re: community garden

I sacrificed 5 potato hills to get 5 lbs of new potatoes. Yum,yum!
I traded one meal for herbs and new carrots.
Also, I gladly gave away two meals to good neighbors.
I did some common work in exchange for about one can of peas. There were only 5 pods that had a grub.
It seems to be very low. Must be because of all the diversified and companion planting.
The rabbits are still devastating the peas and are being tolerated by the gardeners. No one is ready for rabbit stew. Next year might change their minds.

jal said...

"Well said Ian!!!
refers to your summary

Anonymous said...

El G said:

"Perhaps one personal solution would be to relocate to an area where farmers have never had credit and are not totally dependent on synthetic fertilizers or Monsanto seeds. i am looking into this though it is complex."

Please keep us posted.

EBrown said...

CIT goes down tomorrow?

I predict bankruptcy filing tomorrow. JPM and GS then step in to take on the "heroic" role of providing DIP financing, or at least that's how they will be portrayed by many. Reality will be JPM and GS picking through CIT's portfolio, plucking out the profitable businesses and cutting loose any that are marginal. They will use CIT's bankrupcty as a gigantic filter to find really strong, profitable businesses.

ca said...

Stoneleigh --

I believe that you previously wrote that anyone interested in purchasing real estate should do so before it reaches the absolute bottom (down 90%).

Once the collapse in prices is complete, won't prices flatline for several years?
Also, do you expect farm land to fall as far?

Hombre said...


Great comment above and your elaboration of the situation fits what is happening around here as well.

When I look out the window past my "Peak world" garden I see an empty house next door. The couple were overextended, could not keep up with payments, bills, moved out and ended in divorce... it goes on. Sadly the place has been empty for just about a year now!

The critters got my beans in late May, but the tomatoes, melons, cucumbers, etc. all doing well. Me too. The earth is good, humans though are more squirrely than the squirrels themselves.

EBrown said...

I liked that local currency post you linked to over at TOD yesterday. It was fascinating.

It seems that the impetus for creation of local currencies is provided by upheaval in financial markets. I like the idea of local currencies that rely on trust rather than state decree to maintain their legal tenderness. The major drawback of lack of exchangability across greater distances is easily overcome by making certain they're convertible into other forms of money easily and readily.

el gallinazo said...


I am envious. Usually vultures don't get the choices pieces.


I have been sending out a travelogue to my friends when I have been traveling in Latin America. I would certainly add anyone on TAE to the email group who has an interest. I expect to be in Southern Mexico by the very end of August if I can only get my ass in gear.

EBrown said...

El Gallinazo,
I'm not on the e-mail list but am interested in joining to follow your travels. My e-mail is edmund dot brown at gmail dot com.


Nassim said...


I found the graph of house prices on Amsterdam's Herengrach fascinating. I was living at number 89, if I remember rightly, in the period 1980-82. It was a company flat. That at the beginning of the previous house-price crash which I well remember.

A Dutch friend and colleague of mine got married and they bought a house on the outskirts at the wrong time - he thought he had it made. The financial pressures led to them splitting up two years later - they did not have kids fortunately.

A glance at the graph suggests that a return to the 1950's house prices (in real terms) is on the cards over the next few years. Sigh.

Nassim said...

Sorry, I meant 1979-81.

Anonymous said...

Deflation will end when the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. Deflation carries the force of a tsunami or a cat 5 hurricane once it builds up momentum. Central authorities will not be able to prevent it, or even slow it down at that point. This rally is making things look better temporarily, as we said it would, but we are still very much closer to the beginning of this depression than the end of it. Once the rally is over, the fear will be back and things will look very different through a filter of fear than they do now through a filter of cautiously optimistic complacency.

You are a broken record Stoneliegh.

Scepticus is bringing ideas to the table. You just keep bringing up your same old tired mantra.

Negativity breeds negativity.

Stoneleigh said...


I believe that you previously wrote that anyone interested in purchasing real estate should do so before it reaches the absolute bottom (down 90%).

Once the collapse in prices is complete, won't prices flatline for several years?
Also, do you expect farm land to fall as far?

Prices are likely to stay low on average for a long time. As VK noted, in Amsterdam in took nearly 300 years for prices to recover in real terms, and in Rome it took closer to 1500 years after the fall of empire. We will never see real prices like today's again, nor will out children and grandchildren Even so, purchasing power will be so limited, due to the loss of access to credit, that property ownership will be out of reach for most.

I do expect significant local variations, depending on factors such as transport connections and employment prospects. Land travel will get much more difficult as roads deteriorate, especially here in the land of freeze/thaw, so river, rail and sea connections are likely to be important again, as they used to be.

Farm values are likely to depend on similar factors, as it will be necessary to transport produce and have access to people who can afford it. Both of those things are going to be challenging. On top of that will be the failure of the agri-business model and the difficulty of securing fuel for farming equipment. I can see farming going back to being much smaller scale, much more labour intensive and very much more local. I do expect farm prices to fall as far as everything else, and probably further in places.

Nassim said...

You are a broken record Stoneliegh

What exactly do you want? Do you want her to change her opinion to match that of the MSM?

Stoneleigh said...

Anon @12:26,

You are a broken record Stoneliegh.

Scepticus is bringing ideas to the table. You just keep bringing up your same old tired mantra.

Negativity breeds negativity.

I prefer to call it being consistent. I am being realistic based on my view of the future, which does not change with the whim of the herd. I recognize that my view looks much less realistic to others when it contradicts a mood of prevailing optimism than when it is in tune with a mood of prevailing pessimism, but it remains my view. I would be doing the readership a disservice to feed their denial and offer empty comfort. It is better to confront reality and deal with it than to ignore it and hope it goes away.

snuffy said...

I hope Arnold has the stones to stick around a few more months and continue his dialog....It will start to ring hollow soon.Then he will leave.

I am going to use that comment by Paulson like a baseball bat on some chumps I know.The reality of where we are at in the usa is grim beyond words...I am starting to think O-man is trying to keep the status quo simply to prevent general collapse.I hope to use whatever time left working to get a little more bee gear,more seed,get my backup power shipshape.

Its nice to be looked as as a prudent fellow ,rather than a nutcake by my friends[ha!]I get a lot more RFI's[request for information]on gardening,shooting,food storage,and economics these days.I work hard at keeping the "I told you so's" to a minimum.

A lot of people are wondering where we go from here.....they don't care for my answer[down]usually,but, events continue to shown the correctness of my position.I am taking one of our gentle host advisement close to heart seriously,however.
Much of my life I have tended to keep any but family and 2-3 friends"outside". I have started to get serious about expanding my network of acquaintance/friends to use in the event of things getting weird...

I am starting to see a "network" as the type of "social saftynet" that I think was the norm before it was warped into what passes for society these days.
This re-tribalization will accelerate I think...and produce social norms we cannot dream of now...

Time to get productive...before Mrs.snuffy cracks the whip...


Anonymous said...

All across the land a diverging economic dichotomy is emerging:
Stimulus at the Federal level, and myriads of increasingly camouflaged tax and fee increases at the local level. For instance, states are now tacking on exorbitant late car registration penalties if a party does not register their car on time. These local municipalities have had to hire off-duty police officers at very hefty cost to monitor and mollify the outrage of the poor citizen sacked with a fee they were previously unaware of. The aforementioned example is just one sliver of the larger schism that exists between Federal intention and local municipality reality. It’s almost comical in a morose sort of way, like watching two team members playing tug o’ war with an increasingly frayed rope. Local municipalities have undermined and marginalized the soils of Federal largesse that any theoretical germinating green shoots could potentially provide. Additionally, these local harvesters do not distinguish who pays the fees and hidden increases based on ability to pay so the ever-increasing segment of the population on the edge of the financial abyss is squeezed even tighter.

Well, bail out the states, some will assert. Ok, but what about next year And what does it look like when the crutch is taken away. Will the patient ever really be able to walk again?

When stepping far, far back from the easel and taking an honest look at the diverging national canvas the objective artist will appraise the totality and intent of federal and local palettes with two words: incoherent and disharmony.

All the great artists possess the ability to personally detach from their creation of the moment and give the work the objective look over devoid of hope and prayer. Think Michelangelo destroying his initial Sistine Chapel efforts.

It takes courage and high degree of competence to detach from “investment” and wipe a failed start or a muddy mess off the canvass. Competence in the sense that a good eye will judge the status of a work in the initial abstract stages when it is far easier to make adjustments and correct. Bot this type of penetrating vision is rare, to see beyond the temporary rustling of leaves and illusion of light into the local color of a dull and rapidly fading green

Evidently, we only see what we are capable of seeing, or what we are willing to see.

Which gives one pause after reading the spinning atop the comforting flagpole of “it’s always been this way" posts of the last few days and the infantile castigations calling for less negativity.


Hombre said...

Deadlocked Honduras crisis talks to resume Sunday

Honduras today... who will it be tomorrow... next month... next year?

Greenpa said...

Stoneleigh: "I prefer to call it being consistent"

Awright, Lady. I wanna know where the hell you got your even keel. Nepal? Some esoteric meditation regime?


Personally, when I run into a troll these days, I just go "oh ICK" - with my entire body and soul- shed a little pity for such sad creatures- and move on. How you can make calm, sweet, and logical responses to them, over and over, is a mystery to me.

el gallinazo said...


You shamed me into it. Just scored my new P90X on ebay for $63 including postage. Now I have to buy the traveling bands, like Credence Clearwater.

As a science teacher I learned that the more different angles you pitch something from, the more likely it will stick, which is basically just cleaning up an old, rather crude aphorism.

I am listening now (as I pack up my worldly goods into Rubbermaid bins) to a download from Guns&Butters Feb 25 09 show With Webster Tarpley titled "Obama's Banking Panic." Nothing really that a veteran TAEer doesn't know, but still quite interesting. It is vampire day. He does a wonderful analogy at 21' of what one should do if you walk down the street and see Count Dracula sucking the blood out of an innocent victim, the Count, of course, being the Wall Street investment banks. I'll give you a hint - it involves wooden stakes. He compares O-man to Hoover - not FDR. Perhaps we should refer to him as O-nan as he is spilling the nation's seed on the investment bankers.

KPFA uses a low bit rate, so the whole hour is only a 10 MB download.

el gallinazo said...


I am collecting the e-addresses here for my future travels.

Anonymous said...

Deflation will be beaten, the real question is, at what price.

Printing up $10 trillion is no problem, however I agree it will not ignite inflation. It will serve however to ensure that what we get is a looong dran out deflation, like japan had.

The premise that there is going to be hyperdeflation over the next 5 years pre-supposes far too much.

The playbook is like this:

1. deflation in private sector
2. gov takes private debt onto public balance sheet, ensuring no or little overall deleveraging in economy as a whole.
3. 2 above means that private sector can save (since as I explained, with out a borrower, there cannot be any saving.
4. Gov is in a big hole with huge debt. So, monetise it over time, raising bank reserve requirements along the way.

Step 4 works like this:

A: gov sells debt to bail out private sector and households
B: gov prints new money and repays debt
C: new money goes out into the economy and ends up in a bank.
D: due to new reserve laws, banks are scrambling for cash, so hoard the new cash, sopping up all that new money.

By the end of this process you have a debt free private sector (after a long period of saving) and a debt free public sector. The price paid is a long period of stagnation while the above is going on, and thereafter curtailed growth potential due to th limits on leverage imposed by a 20% reserve requirement.

But that's not a collapse, and the CBs will enact the above before allowing hyper deflation, or even significant deflation.

Alternatively, they can just push repo rates negative.

el gallinazo said...

Yeah, Stoneleigh, don't be such a broken record. Sometimes when I was teaching high school physics I would write F=ma2 (squared) on the blackboard, just so the kiddies wouldn't get bored.

Edward Lowe said...

Alas, I am late to the party...

Stoneleigh and ilargi have maintained a very consistent view of things since well-before this crisis was apparent to most. It has been very interesting to stay tuned for much of the period that they have been writing on these issues here and at The Oil Drum before.

One thing that may add to people's confusion is that the TAE General Theory of Deflation as it is expressed here is based on a macro-level analysis. However, on a personal or local level things can appear very differently and even run counter to the larger macro-level trends. For example, while employment levels are declining on an aggregate level, many people are finding work on a personal level, some industries are expanding even as others are in decline. Some banking outfits have positioned themselves for incredible profits while many others are being swallowed up by the loss of debt service payments and credit write offs and are being shuttered by the FDIC.

Economic transitions are not often experienced the same by everyone in the system, even though on the aggregate level, conditions continue to deteriorate till they reach some minimum level of functioning. All the while, the ground shifts beneath our feet as relationships and activities that thrived under the old regime, fail or are abandoned, and new relationships and activities come to replace them. Obviously, this can be really disorienting to many or most, and lead to many periods of active attempts to reclaim the patterns of the past, at least on a symbolic or rhetorical level.

Ilargi said...

Right. Squid....

Swarms of carnivorous giant flying squid terrorise southern Californian coast

Divers spooked by tales of assaults as swarms of aggressive jumbo flying squid invade the shallows off San Diego

Humboldt squid, which can weigh up to 45kg (100lb) have entered shallow waters off San Diego, California. Photograph: Visuals Unlimited/Corbis

Jumbo flying squid have invaded the shallow waters off San Diego, California, spooking scuba divers and beachgoers after washing up dead on the beaches.

The carnivorous cephalopods, which weigh up to 45kg (100lb), came up from the depths last week, with swarms of them roughing up unsuspecting divers. Some reported tentacles enveloping their masks and yanking at their cameras and gear.

Stories of close encounters with the squid have chased many divers out of the water and created a whirlwind of excitement among those torn between their personal safety and the once-in-a-lifetime chance to swim with the deep-sea giants.

The so-called Humboldt squid, named after the current in the eastern Pacific, have been known to attack humans and are nicknamed "red devils" for their rust-red colouring and mean streak. Divers wanting to observe the creatures often bait the water, use a metal viewing cage or wear chainmail to avoid being lashed by the creature's tentacles.

The squid, which is most commonly found in deep water from California to the bottom of south America, hunts in schools of up to 1,200 individuals, can swim up to 15 mph and can skim over the water to escape predators.

"I wouldn't go into the water with them for the same reason I wouldn't walk into a pride of lions on the Serengeti," said Mike Bear, a local diver. "For all I know, I'm missing the experience of a lifetime."

The squid are too deep to bother swimmers and surfers, but many experienced divers say they are staying out of the surf until the sea creatures move on.

Roger Uzun, a veteran scuba diver and amateur underwater videographer, swam with a swarm of the creatures for about 20 minutes and said they appeared more curious than aggressive. The animals taste with their tentacles, he said, and seemed to be touching him and his wet suit to determine if he was edible.

el gallinazo said...


"Awright, Lady. I wanna know where the hell you got your even keel. Nepal? Some esoteric meditation regime?"

Naw, she is in the western tradition. St. Stoneleigh of the Immaculate (economic) Conception.


I know exactly what you mean. Two years ago my movie group was seriously talking of pitching in to buy me a year's supply of Prozac. Now they are coming for advice. Small reward for the upcoming disaster.

Anonymous said...

I am not asking Stoneleigh to change her views at the whim of the herd. But when someone like Scepticus engages in alternative analysis, rather than seriously engaging in return, Stoneleigh replies with the same, boring, stubborn response seemingly not having even read, or understood, what is being said. I think that illustrates what many of the so called 'trolls' have been trying to stress over the last few weeks.

Many of us doomers have long ago realized that you are not going to change the mind of anyone about the future. Many of us, including myself, have been waving the warning flags longer than many of the regular commenters here have been alive.

The point is, is that you can claim to want to do a public service by warning people, but what really is your warning? That the future is going to be hell on earth, and there is nothing that you can do about it? The solution you provide is to buy a farm and build a solar array and grow your own food? OK. That is also the point. Since we can't do anything about the crisis, then our only option is to save our own asses and those of our friends and family. So why the insistence that you are providing a public service? If you think that you are changing minds, I say you are new to this game, and will eventually figure out that you are preaching to the choir here and that your message of doom only serves to entrench the people you are trying to 'convert' much deeper into their perspective.

Because I am challenging you, Stoneleigh, does not mean that I am an optimist about the future. But you seem to want to have it both ways- we are doomed and nothing will stop it / you are trying to warn as many people as possible so that they can 'be saved' (except you forget that your analysis says you can't be saved-DOH!)

I don't get it.

Thanks to Scepticus for entering the discussion here. It is a breath of fresh air.

el gallinazo said...

A 2:21

Define doomed.

gregfb said...

Hope springs eternal in the human breast. Hope is considered a virtue by many but is actually very dangerous because it causes one to view everything through that filter of someone else taking responsibility to fix things. I prefer the grounded approach. Open ones eyes. Use ones capacities of discernment. We have a brain and the mind for a reason.
It seems that human beings have to a great extent lost the willingness or ability to think for themselves. We sit back and expect someone else to take care of us. Hope does nothing. It creates nothing. Only by taking personal responsibility for oneself can anything of any creative value happen in ones life.
Hoping that life as we have known it will resume is a fairy tale.

Anonymous said...

My feeling is generally that expressed by anon above. As to whether I'm a breath of fresh air, I don't know, but I like to think I have my own unique aroma.

"However, on a personal or local level things can appear very differently and even run counter to the larger macro-level trends"

Yup. Four things:

money, energy, employment/wage arbitrage, and demographics.

Of these, money is the least important and therefore the easiest to fix.

The banking system is really nothing more than an accounting system, and the printing press the quill. Accordingly money supply is of less concern to me than the other three.

The fixation on money and debt is I think part of the debt meme that has soaked into popular conciousness, and the perpetual deflation theme is just one of the many new myths arising about money.

Anonymous said...

@el gal 2:29:

Try this first

Starcade said...

Taking the larger question into account:

Yes, "reality" is in the eye of the beholder, and -- not only that -- but then those who want their "reality" to dominate use peer pressure to impose it on everyone else.

Stoneleigh said...

Anon @2:21,

I am not asking Stoneleigh to change her views at the whim of the herd. But when someone like Scepticus engages in alternative analysis, rather than seriously engaging in return, Stoneleigh replies with the same, boring, stubborn response seemingly not having even read, or understood, what is being said. I think that illustrates what many of the so called 'trolls' have been trying to stress over the last few weeks.

These issues have come up so often that dealing with them in the same depth every time isn't really possible. That's what the primers are for. My position on deflation - why it's inevitable and why we can't print our way out of it - is explained in considerable depth in several long essays. If I have some time later today (after finishing the report I'm working on for my day job), I may have time to expand on some specifics.

The point is, is that you can claim to want to do a public service by warning people, but what really is your warning? That the future is going to be hell on earth, and there is nothing that you can do about it? The solution you provide is to buy a farm and build a solar array and grow your own food? OK. That is also the point. Since we can't do anything about the crisis, then our only option is to save our own asses and those of our friends and family. So why the insistence that you are providing a public service?

There is nothing anyone can do to prevent deflation, but that does not mean there is there is nothing anyone can do in their own lives and localities. Our primer on this is called How to Build a Lifeboat. It contains general advice on prioritizing actions and building associations with others (which will be hugely important). We cannot save the world any more than anyone else can, but we are trying to help as many people as we can.

While people will still experience many unpleasant consequences of social collapse, they can help themselves and others so that suffering will be reduced compared to what it would otherwise have been. What more would you have us do? Is trying to reduce suffering, albeit for the relatively small number we can reach, not a reasonable goal of public service? Just because a neat solution to all our problems is not available, should we do nothing at all to prepare our families for a life-changing time?

We are not preaching fatalism here. We are simply saying that grandiose plans will not work and that therefore people will have to look after themselves to a much greater extent than previously. To that end they need to prepare, and we are trying to help them to take informed action on their own behalf. This is the opposite of telling them there is nothing they can do, as you seem to suggest we are saying.

Anonymous said...

"The fixation on money and debt is I think part of the debt meme that has soaked into popular conciousness, and the perpetual deflation theme is just one of the many new myths arising about money."

Reminds me of:

In the abundance of water, the fool is thirsty.

Ilargi said...


Nice dreams, but unfortunately, conjecture.

Printing up $10 trillion is no problem,
What is that statement based on? That a government can just print money at will is a fallacy. But hey, let's see you prove it, if you want to go that way.

"• 1. deflation in private sector"
Deflation cannot be limited to separate sectors.

"• 2. gov takes private debt onto public balance sheet, ensuring no or little overall deleveraging in economy as a whole."
My private debt as well? The government will buy my debt, and then on top of that give me money to spend in order to prevent me from deleveraging?

"• 3. 2 above means that private sector can save (since as I explained, with out a borrower, there cannot be any saving."
Wait, that’s not all: the government buys my debt, and gives me money to spend AND save?

4 "• A: gov sells debt to bail out private sector and households"
Sells to whom? Private sector and households?

"• B: gov prints new money and repays debt"
If that were so easy, why isn't it happening? Why are governments selling debt first if they could just print it all? Do you know something they don't?

"• D: due to new reserve laws, banks are scrambling for cash, so hoard the new cash, sopping up all that new money."
Banks are already scrambling for cash like mad with no reserve requirements. New reserve laws would just kill them off.

"Buying all the debt", which you seem to suggest is relatively easy, would bankrupt the nation. Why would a government want to go that route? So far, the US government has done nothing of the sort. The toxic assets that were on the banks' books one year ago are still largely there, even after trillions were thrown at those banks. Nothing has changed in that regard, other than the -interpretation of- the accounting rules that have allowed the assets to be kept hidden.

We're in the exact same position, just $10-$14 trillion poorer. Which you don't appear to see as a problem, since in your view it can all be printed with no adverse effects.

In reality, however, every single American citizen is over $50,000 deeper in the hole, with nothing to show for it but rapidly worsening numbers in unemployment and housing, while the recipients of the money that has now become the people's debt are back to large bonuses.

Stoneleigh said...


How about reading the primers on deflation. It would be much easier to have a conversation if you took the subject matter a bit more seriously, rather than simply saying that the money supply is nothing to worry about without any evidence.

Deflation is no myth. I have heard all the arguments regarding printing and have responded to them many times.

el gallinazo said...

Arghh!!! Belay my Tarpley interview recommendation. Second half sounds like he's been watching too many Jetson reruns. Doesn't have a clue concerning peak resources. I won't recommend anything in the future until I have reached the bitter end (a nautical term :-)

Anonymous said...

Stoneleigh, I've been reading and discussing deflation for a long long time, based on the output of prominent commentators such as Mish, Steve Keen and Hugh Hendry. I have money under Hendry's management, so I do for the moment, take a deflationist view. I expect a further round of deleveragnig and CPI falls in the near term.

Like I said, I'm not a hyperinflationist like schiff - who maintains that simply printing money into bank reserves will result in inflation. That is simply denying the obvious about inflation, and I agree with your position as far as that is concerned. The hyperinflationists have recently started changing tack and pointing to a 'loss of faith' in fiat. I don't but that argument either.

The two escape routes I have outlined, bank reserve requirement changes, and/or negative nominal rates are completely different to those employed by run of the mill inflationistas.

Anonymous said...

We are not preaching fatalism here.

This may be the first funny thing I have ever heard Stoneleigh say.

You are not preaching fatalism here- OH MY GOD- Stop it! You're killing me!

Anonymous said...

"Nice dreams, but unfortunately, conjecture."

Everythnig we're discussing is conjecture, since we're talking about the future.

"Printing up $10 trillion is no problem,
What is that statement based on? "

In general creditors will care about maintainance of the value of the currency. I have pointed out how most/all of the public deficit can be monetised without devaluing the currency, at the expense of credit availability in the future.

This curtailment would not however be an issue of future demand for credit is very low.

"Deflation cannot be limited to separate sectors."

Semantics. I should have said 'deleveraging'.

"My private debt as well? The government will buy my debt, and then on top of that give me money to spend in order to prevent me from deleveraging?"

No, by being the borrower of last resort, the government gives the economy as a whole the ability to save. If you have too much debt you'll go BK. Those who are given the opportunity to save may avoid this fate. Likewise businesses can rebuild balance sheets this way.

"Wait, that’s not all: the government buys my debt, and gives me money to spend AND save?"

No, you give your savings to the government, which then spends it. Remember: 'savings sre spendings'.

"Sells to whom? Private sector and households?"

Private sector savers trynig to rebuild the balance sheets.

"If that were so easy, why isn't it happening?"

Because raising bank reserve requirements is a nuclear option. It requires an open admission that future growth is likely to almost non existant. However, the general mood among politicians, the public and invstors will be much more amenable to this idea after a long stagnation or when faced with imminent deflationary collapse.

""Buying all the debt", which you seem to suggest is relatively easy, would bankrupt the nation. "

I have pointed out that the debt would in fact be monetised, not bought. If you think the above then you have missed my whole point. The money spent buying the debt is simply spent back into the economy, for example to fund healthcare, welfare, green projects, tax cuts etc.

"So far, the US government has done nothing of the sort. "

Very early days yet. Like I said, the low value cards of QE, confidence games and hope must be played first.

"We're in the exact same position, just $10-$14 trillion poorer. "

The fact that that money has been lost to the supply doesn't stop it being restored by any of the means I have outlined. What laves us poorer is the fact that future credit availability will be reduced, and wage arbitrage can no longer be fended off with debt.

el gallinazo said...

@A 3:21

"You are not preaching fatalism here- OH MY GOD- Stop it! You're killing me!"

This blog should be so lucky!

VK said...

Just as a side note, the UK lost 281,000 jobs over 3 months in Q1 this year. Given that it has a fifth of the population of the US. That translates into roughly 470,000 jobs lost per month in the US.

Anonymous said...

Italics are mine:

"Newsletter: US Embassies Are Advised to Buy Enough Local Currency for 1 Year

"Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

His apocalyptic projections don't end there:

"Another FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it)."

This is one more rumor adding to my suspicions something big is going to happen.

VK said...

What laves us poorer is the fact that future credit availability will be reduced, and wage arbitrage can no longer be fended off with debt.

Exactly, wage arbitrage can not be fended of anymore with debt. If as you say the US can somehow maintain some semblance of normalcy in the money supply then this becomes a huge Issue.

The population of India and China combined is 2.4 billion, around 8 times larger then the US. If we assume that half the population in America is full of intelligent, wise, productive people then we get around 153 million of them. If we assume that only 10% of the populations of India and China are as smart as Americans, that amounts to 240 million people. Nearly 100 million more smarter people in a scenario heavily favouring intelligence in America.

Who are willing to do the same jobs that Americans do in their current 'knowledge' economy for a tenth of the wage! If I was a businessmen why would I do business in America, if I could hire employees for a tenth of the cost and in economies where the people will work much harder for less.

Wages must decline in that case by 75-80% in America due to wage arbitrage in order to stay competitive. The US economy can not remain competitive by selling houses to each other, shifting all their manufacturing jobs overseas and then selling Chinese trinkets to each other by Walmart and Target which then hire 100,000 people for work by paying crappy salaries relative to costs and no health care. (Did I mention the Chinese and Indians would be willing to work without healthcare?)

If wages were to decline by around 75-80% just in order to compete with global wage arbitrage, what would happen to the median house price, falls by 80%+ as well as well as GDP and tax revenue. The American empire was built on war, luck and hard work with innovation. They've exported that work ethic overseas, everyone want's to be like America, in fact they want to be richer, much, much richer.

They will compete for those resources that the US currently gets at a HUGE discount courtesy of the greenback being the world's reserve currency. Oil, minerals, metals as well as global capital will still be up for grabs even if the system survives intact and the US standard of living will decline sharply as a result of the increasing competition.

Do people really believe that the Chinese can't build and run world class Universities and scientific facilities to conduct research?

Do people really believe that ideas, innovations can not come from China/ India?

Do people really believe that Indians can not control world finance and do complex things like securitization ;-)

They already are by the way, just take a walk in Silicon Valley and Wall Street.

Starcade said...

Let's all remember that Arnold is shilling for somebody here -- his views are clearly not that of actual reality. His reality is _certainly_ in the eye of its beholder.

Ed_Gorey: I get the impression that Arnold is of the "infinite balance sheet" mode. Fact is, they'll have to print, but it won't work infinitely. That's the problem, and why we are screwed.

Anon 0400: No he didn't.

Anon 0900: The only place you're wrong is that the only real value will be instruments of murder. Fuel and food are the only real value in a system which can retain law -- and I think we will slip through that.

Bigelow said...

I was reading Jim Willie who quoted Harry Shultz's estimate of U.S. risk probabilities as
deflation 35%
sudden currency devaluation 50%
stagflation 15%

Have a nice day

VK said...


From Tyler Durden in the comments section of this article,

If you think you own a security - think again. The DTCC is the Registered Owner - holder - of your stock or bond. The DTCC is the legal property-holder, share-holder, stock-holder, owner and purchaser. This means that your lawful Rights in that stock or bond (by default) are confined to that of a successor or heir of DTCC subsidiary Cede & Company

For more on the DTCC

Basically the DTCC is owned by a group of banks and it is out to make a profit.

So every stock and bond you think you own is actually owned by the 'big boys'. Can someone please say Conflict of Interest!

Anonymous said...

"deflation 35%
sudden currency devaluation 50%
stagflation 15%"

The central bank playbook is:

1. cut rates
2. cut rates more
3. attempt to credibly threaten inflation
4. devalue currency
5. start again from 1, with rates at 0%

Currency devaluation will certainly offset cash hoarding but is unlikely to do much for housing prices however it does boot export competitiveness. Ultimately however other nations can and will respond in kind.

Then there is the fiscal option, where the printing press can also be applied. This latter option will inevitably cause the government share of the economy to expand, but would maintain some level of veolocity.

Long term, borrowers are going to be calling the shots for simple money supply and demand reasons. If the government is the only significant borrower in the economy, it follows logically that they'll be running most of it, and will get away with it because as the only major borrower they'll be the recipent of the lions share of private savings, and at the very low rates implied by lack of competition.

Anonymous said...

"..Printing up $10 trillion is no problem.."

How much do you have invested in long term treasuries?

What a childish statement. Printing $10 trillion would kill the bond market in a flash and the dollar soon after as something that could buy even day old fish on the export market.

Do you understand anything?

If governments could print every nation in recent history would have done it to save their asses.

Gee, no one has? WTF?

Hell, if I could fire up the inkjet and get away with passing off the results, I'd be rich! Hurray for Me!

And when word got out and the whole neighborhood started doing the same, we'd all be rich! Hurray for US!

And when that word got out, the State would fire up the presses and print state script to pay their massive bone crushing deficits, and all the states would be rich!

Hurray-Hurray-Hurray, Septictankus You Saved Us!

Oh Thank you oxoxoxo

~~your brother's bookie~~

VK said...

Last week we looked at the precarious position of Japan, the second largest economy (or third if you think of Europe as a whole). It was a sobering letter. When you realize the extent to which Japan has funded Asian expansion, what is happening there cannot be good for the world.

But Europe's banks have been much more aggressive in funding emerging-market expansion than US or Japanese banks. Western European banks have lent $4.5 trillion to various emerging-market countries, businesses, and consumers. Many Eastern European businesses borrowed in low-interest-rate euros. New homeowners in Hungary and the rest of Eastern Europe borrowed in Swiss francs and euros, and as their currencies have collapsed they now find they owe more on their homes than they're worth.

And here's the problem. Europe's banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let's look at some charts. Remove sharp objects or pour another adult beverage.

Look at the pretty skyscrapers of leverage!

Anonymous said...

VK US wages will not fall that low. Firstly, the social capital in western economies as represented by transport + comms infrastructure, public institutions like judiciary and police plus the vast store of technical knowledge and the education system places a floor under wages.

While our social capital has been degraded culturally and by corruption, the level sof corruption to be found in BRIC are still much higher, and the accumulation of the above social capital is much lower.

Secondly, western currencies are going to devalue while the yuan, real, rupee etc will gain strength which will eliminate some of the wage arb.

However that wage arb won't apply to services and goods which must produced domestically, so we should find there is a point of relative wage stability some good way down from where we are now but not 80% down.

You're forgetting that if westerners stop buying goods from BRIC then they'll have to find someone to consume them. If they don't succeed at this then they'll just go down with us. But to build a consumer economy they'll need to put in place the social capital of education, welfare provision, healthcare etc we all take for granted.

el gallinazo said...


"So every stock and bond you think you own is actually owned by the 'big boys'."

I don't see how treasuries bought through could be included in this statement.

Anonymous said...

Anon above you've chosen to ignore my point about how printing can be prevented from devaluing the currency. Why?

The reason it's not been done before is that a 20% reserve ratio places unwelcome constraints on credit that can't then be undone without inflation.

I've pointed out a plausible way to avoid a complete deflationary collapse, and I still maintain it'll be followed before the latter is allowed to happen.

Having said that an experiment with -ve nominal rates may seem preferable to TPTB before trying the above. Even before these two are tried, I'm sure they'll try a simple devaluation first, since that is next in the CB handbook.

You seem to think I'm paiting a 'everything will turn out fine' picture. Not true. I'm simply highlighting the implausability of a 'we all starve to death in the dark' hyperdeflationary collapse.

Anonymous said...

"they'll need to put in place the social capital of education, welfare provision, healthcare etc we all take for granted."

The US tests behind many countries in math and science, ask the buzzardman. The US doesn't even graduate a simple majority of native citizens from it's own elite engineering schools.

The US welfare provisions are for corporations like Goldman that payed a whopping $10 million in tax last year. Corporate and military/prison/industrial welfare eclipses social welfare by hwhole magnitudes.

And healthcare, hahaha, there are so many people without insurance now and so many more are going to lose it in the next year or so, the healthcare system will flatline itself. Ever use an emergency room without insurance? I friend was charged $1800 for a dislocated thumb that took 15 minutes to treat. US 'healthcare is a Sicko® joke.

Ilargi said...


Let’s stay real, shall we? You're promoting some sort of complete overhaul of the political, not just the economic system, along the lines of the government has our best interests in mind, everyone alive today is a winner and all our children lose. In other words, it all has to be paid for, just not by those who have incurred the debt.

That of course isn't a solution to anything, it just pushes problems forward. Which has a striking similarity to current policy, and so might even be considered in parts by the people who rely on delay to keep their seats. They would refuse it, though, since it would cost them those seats because it can’t be done within the present political system. By the way, it also fits pefectly with our climate and energy policies and/or the lack thereof.

But it's completely unrealistic, and frankly a simple dime-a-dozen run-of-the-mill idea. If you let all boundaries go, the sky's obviously the limit; anyone can think up something like that. Stoneleigh and I, on the other hand, are trying to keep at least one toe dipped in reality, rather than attempting to prove that pigs can fly.

Just as no government can print its way out of just any amount of debt, none can monetize just any amount of it. Well, perhaps except for Zimbabwe.

Hombre said...

Looks like the flu might be the "culprit! ;-) What next?

London :AFP

Swine flu could tip world into deflation: study

"LONDON (AFP) – The global swine flu pandemic could tip the world into deflation, stalling economies just as they struggle to recover from the financial crisis, a British study said Friday.

Recovery could be delayed by a couple of years in a country like Britain, the worst hit in Europe and is quickly spreading around the world, said the study."

Hombre said...

flu link...

VK said...

OMG! This is a must read article for all ye geeks and nerds out there!

Last December I passed a paper along to Razib showing that high-school age adolescents with higher IQs and extremely low IQs were less likely to have had first intercourse than those with average to below average intelligence. (i.e. for males with IQs under 70, 63.3% were still virgins, for those with IQs between 70-90 only 50.2% were virgin, 58.6% were virgins with IQs between 90-110, and 70.3% with IQs over 110 were virgins)

In fact, a more detailed study from 2000 is devoted strictly to this topic, and finds the same thing: Smart Teens Don't Have Sex (or Kiss Much Either).

The article goes on to say,

Depending on the specific age and gender, an adolescent with an IQ of 100 was 1.5 to 5 times more likely to have had intercourse than a teen with a score of 120 or 130. Each additional point of IQ increased the odds of virginity by 2.7% for males and 1.7% for females. But higher IQ had a similar relationship across the entire range of romantic/sexual interactions, decreasing the odds that teens had ever kissed or even held hands with a member of the opposite sex at each age.

On a stickier note,

Perhaps more revealing, HS, also showed that intelligence correlates with less sex within marriage for the same age range. While still consistent with pregnancy fears and competing interests, lower sex drive seems like a better fit. In fact another revealing finding from the Counterpoint survey was that while 95% of US men and 70% of women masturbate, this number is only 68% of men and 20% of women at MIT!

So in conclusion the article states

But lower sex drive and anxiety about sex's consequences can't be the whole story either. Half Sigma also showed that the smartest men in the GSS (approx. IQ >120) were also more likely to visit a prostitute. (Hardly indicative of cautiousness) This may suggest intelligent men are less able to find willing sex partners. Are smart men less attractive to women? Perhaps in some ways. For instance HS found that smart men were less likely to be athletic, and this paper shows, unathletic men and women have fewer sex partners. Athletic men, with more willing sexual partners are also less likely to visit a prostitute. Athletic activity gives men more masculine bodies, which are more attractive to women. A more masculine physique correlates with (PDF) an increased number of sex partners.

So intelligent people have lower libidos and less masculine physiques. What hormone is responsible for both sex drive and masculine builds? That's right: testosterone.

And two new papers suggest that testosterone may depress IQ. One team found that salivary testosterone levels were lower for preadolescent boys with IQs above 130 and below 70. (the same two groups most likely to be virgins in adolescence)

My conclusion, average people get above average sex. Grim stuff! *chuckle*

VK said...

oops the link is here

K.M. said...

The statement CR made this past week which caught my attention was, " I expect the current recession will be more like the '90 and '01 recessions, than the '81 recession," from his thread titled "Weekly unemployment claims declined sharply." I do remember Stoneleigh saying what a euphoria could accompany this sucker's rally before its over. Sounds like he's caught it. Of course, where he lives, in southern California, some parts are seeing a turn around in housing. I read about one which brought 100k over asking price recently with 100 bids, like the good ol' days. The regional nature of housing prices can be such a different picture than the U.S. averages show.

Since the price of farmland has come up today, if anyone's interested, I wrote a piece for Seeking Alpha a week ago trying to dispute Jim Rogers on why I think the agland real estate (in the U.S.) is a bubble ready to pop. here

Anonymous said...

There is hardly a bank in the US that has ANY reserve ratio and your suggesting raising it to %20?

hahaha, with what assets?

Crumbling transport infrastructure as your 'pawnshop' collateral?

Food production set to tank from Peak Oil?

Oh, I know, commercial real estate, half abandoned strip malls in the Middle of NoWhere subburbicus? or import dock facilities (sea/land) that will never import anything again?

Show me the Beef Spartacus.

Tells us all here at TAE acres where the 20% 'reserves' would come from.

We are running a zero to negative reserve system banking system as we speak.

20% 'reserves' is the death sentence of banks in Ahmerica, except of course Goldman, they're 'special.

Anonymous said...

Ilargi wrote -

But it's completely unrealistic, and frankly a simple dime-a-dozen run-of-the-mill idea. If you let all boundaries go, the sky's obviously the limit; anyone can think up something like that. Stoneleigh and I, on the other hand, are trying to keep at least one toe dipped in reality, rather than attempting to prove that pigs can fly.

What a load of road apples. The guy presented an interesting thesis and your response is a childish rant.

You and Stoneleigh started TAE with some interesting ideas. It's now become dogma. Your minds and your breadth of intellect are as closed and shallow as the powers-that-be you continually rant against.

And you wonder why TAE is an also-ran in the financial blogosphere?

You are not prophets. You are not psychics. You are doing what all of us in this space do: projecting your best guess as to what lies before us.

Well here's a riff for ya, Herr Luna: your best guess is no better than his...or mine for that matter. We will likely all get it a bit wrong. Open your mind and expand it enough to discuss. Deigning and ranting are boring to read and juvenile to do.

Arnold said...

Karl Denninger offers some good ideas for resolving the credit crisis and stabilizing the economy. Discuss

Anonymous said...

"Let’s stay real, shall we? You're promoting some sort of complete overhaul of the political, not just the economic system, along the lines of the government has our best interests in mind, everyone alive today is a winner and all our children lose."

You just described the bretton woods agreement there, as well as the departure from the gold standard and the move to floating currencies only 40 years ago.

But an event of similar magnitude couldn't happen again now could it?

I'll answer my own question - of course it can, and it will.

And in your scenario, what of the children then?

"In other words, it all has to be paid for, just not by those who have incurred the debt."

That's how capitalism deals with failure unfortunately. As I have pointed out borrowers provide a service to savers which is essential to maintain a modern industrial society and when things go awry both will get hurt. That's life - it's not a risk free investment.

Life should be about give and take, and those who save to lend at interest without contributing to keeping the economy afloat are taking more than they give. Hence I don't have a moral issue with sharing the pain.

"That of course isn't a solution to anything, it just pushes problems forward."

That I do agree with. Even if my scenario were to be enacted in whole or part there still remains the issue of what to do when the gap left by deleveraging has been filled with fresh fiat. It would extend the transition sufficiently to have a chance of leaping the gap however.

"They would refuse it, though, since it would cost them those seats because it can’t be done within the present political system."

Then the system will change. There is a massive centralisation of power coming along as you know probably including bank nationalisation.

"But it's completely unrealistic, and frankly a simple dime-a-dozen run-of-the-mill idea."

It is however considerably rarer that the idea of an inevitable deflationary collapse.

"If you let all boundaries go, the sky's obviously the limit; anyone can think up something like that."

We eliminated boundaries all through the 20th century which encompassed the abandonment of gold, then the abdandonment of fixed exchange rates, then the abandonment of bank reserve requirements.

Accordingly, I'm expecting some more boundaries to go by the wayside in the medium term future, one of which may be the 0% bound on interest rates.

"Just as no government can print its way out of just any amount of debt, none can monetize just any amount of it."

I've advanced a theoretical explaination of how the deficit could all be monetised. I doubt they'd go that far, but they can certainly create some breathing room and stave off government insolvency quite easily, and when faced with forclosure, government will chose solvency.

Anonymous said...

@anon 5:46 PM

I wholeheartedly agree.

VK said...

@ Scepticus

Firstly, the social capital in western economies as represented by transport + comms infrastructure, public institutions like judiciary and police plus the vast store of technical knowledge and the education system places a floor under wages.

So the Chinese can not build good transportation networks? Indians can not improve their judiciary and public institutions? The bar has been set pretty low recently by the contempt America has for it's laws aka the Patriot Act.

Technical knowledge is easily transferable, Americans don't have a monopoly on superior intelligence and ideas. People used to say 'Made in Japan' implies inferior quality just a few decades ago. Today every TV is made in Asia, the US auto sector has been wiped of the map by the Asians. Taiwan is so strategically important for silicon chips that the US would go to war with China over it.

You're forgetting that if westerners stop buying goods from BRIC then they'll have to find someone to consume them. If they don't succeed at this then they'll just go down with us. But to build a consumer economy they'll need to put in place the social capital of education, welfare provision, healthcare etc we all take for granted.

The Westerners ability to buy goods from Asia is based on their surpluses. As we enter the decline phase, those surpluses that allow Westerners to consume 32 times as much resources in a day as the Average African will simply not be there. Already China is making huge incursions all over Africa, building political capital here by building roads and stadiums, in Sudan, in Angola and DRC.

India has just entered the war for resources as well, they are investing heavily in South Africa and in Telecoms and minerals etc.

In South America China has signed deals with Brazil, Argentina, Venenzuela for trade and resources.
So far what has happened is that the West was the biggest dick in town, now that China and India have woken up from their 3 century slumber they are pushing hard for access to those surpluses and they have no qualms about how they get them.

If the BRIC were to allocate the surpluses to themselves, they would and they are pushing for that. If they were to obtain the surplus, this would mean a massive contraction in the West. Buying power would shift to those countries with political access to the world's resources and those with the manufacturing base.

Japan and South Korea are much more advanced in terms of internet and cellular technology then America. So to suggest Asia can not surpass the West is quite simplistic given the facts on the ground.

Asia has a burgeoning population of well educated, highly skilled, competitive people. Also as their currencies appreciate, their buying power also increases, hence more allocation of resources goes there way!

Ilargi said...

"What a load of road apples. The guy presented an interesting thesis and your response is a childish rant. "

Scepticus plan is childish, however well it's meant. And I don't think you understand much of it, or my response.

We can't please everyone, and god knows we're not trying. As for being an also-ran, there's a fast growing number of people, against the tide of green shoots, recovery and optimism, which by all accounts should cost us a lot of readers, who disagree.

VK said...

There is no avoiding the fact that our economy will contract to sustainable consumption.

That contraction was ~10% in 2000. It is more like 30% now. If we don't take the medicine now we're asking for a collapse instead.

So if the US government carries on doing the wrong things as it has done for the past 2 years then the US will collapse.

So will the US government do the right thing for once in this crisis?

That's the black swan bet that your life depends on Arnold. Will they do the right thing, if they don't by the way it's game over.

Your life is the hands of 300 or so rich and powerful men in Washington and New York who might have never met you or care about you.

Do you trust them with your life? That's a choice that you have to make.

Anonymous said...

"Scepticus plan is childish,"

Rubbish. Elements of what I am outlining have certainly been considered by central bankers, especially negative nominal rates. However understandably they want to try anythnig else first.

If you actually took some time to investigate the papers that these guys such as bernanke and svensson write and present to each other at conferences, you'll see what I mean.

You've made the mistake of mis-interpreting what I have written as a word for word prediction, when in fact what I have laid out are factual and effective defences against ongoing deflation and national insolvency.

I've made no reference to timing, and have not actually made a call about what will actually come to pass, rather I have demonstrated that deflation is not as inevitable and as mighty as you claim.

My position is no more nor less theoretical than your own, and it either way depends on political factors beyond prediction.

The only prediction I have made is that TPTB will do what it takes to prevent national insolvency/collapse, and that is one prediction I am very comfortable with. Lassaiz-faire is ancient history and was always a myth in any case.

Ilargi said...

Well, that's enough for now, Scepticus. If you can't or won't see the flaws in your "plan", and why it therefore is as impossible to implement as selling all our debt to the Chinese, it'll just become a circular conversation that endlessly gets back to where it starts.

Anonymous said...

VK it takes decades and centuries to transform dirt poor rural populations with little or no roads, healthcare, policing and education into a consumer society.

Your post seems to assume we'll continue to compete with them to produce the same kind of stuff we've been gorging on the last 50 years, which of course we won't be. There is little market for much of that stuff now. The question to ask is - what will people want in 20 years, and who'll be making it, and where?

I accept what you're saying about surpluses, in particular oil. We certainly need to be able to export enough genuinely useful goods to import enough oil. Yes - we'll all be taking a major haircut in our energy usage, and that means that we're poorer no matter what.

I don't buy the 80% down, phase change we become them and they become us argument though. Not in the next 30 years. Peak oil will make us all poorer, but that's a somewhat separate issue to the wage arb.

Anonymous said...

If you can't or won't see the flaws in your "plan"

Wow! You are showing your true colors, Ilargi.

Thanks again to Scepticus for providing an open-minded analysis.

Anonymous said...

"Scepticus plan is childish"

Show us where the 'reserves' are hot shot.

You still haven't addresses where all the 'value' is that will back the bank loans.

Gold? The Chinese are buying it up at a furious pace. Duhmerica can't afford that.

Crappy real estate, be it residential or commercial? Rapidly devalued, never to return. Not there.

Are you going to pull it out your butt? Cause there are very few places for 'value' and collateral to hide these days.

Your 'plan' smells like a bicycle seat.

Where's the reserves sport?

Anonymous said...

"Where's the reserves sport?"

Again you've missed the whole point. Right now there are zero or negative reserves, as you say.

Raise reserve rules 5%, then monetise gov debt into the economy, where it will soon land at a bank looking for reserves, where it will stay, and not circulate thereby causing no inflation.

Rinse repeat as required up until the point the deleveraging gap is filled.

No value has been created, nothing, since it is an accounting trick. The debt is gone, but a very heavy price has been paid : the amount of credit that can be advanced by a 20% reserve banking system versus that which can be advanced by a 0% reserve banking system is a lot smaller. How much smaller? What will have declined further during this period - banks ability to advance credit, or the demand for it? If the latter, then what damage has actually been done?

The scenario I have outlined makes people feel very queesy since it calls into question everything they think money is.

However it is perfectly compatible with a phase change in consumer and biz demand for credit, and opportunities for growth.

If you google carefully, you'll see I'm not the only one to have floated the idea of bank reserve modifications of this nature.

VK said...

VK it takes decades and centuries to transform dirt poor rural populations with little or no roads, healthcare, policing and education into a consumer society.

It doesn't take that long, for example Singapore, Dubai, Taiwan, Japan, South Korea, Hong Kong, parts of China and India etc have all experienced rapid development.

My post did assume a lot of things, specifically the views that you are espousing of how the financial system and the solvency of the US can be preserved.

In reality and over the course of much reading I have become much more convinced that global collapse will occur well before the middle of this century, less then 40 years from now!

I don't see how we can evade the limits to growth, as I posted yesterday on the CSIRO paper, we are well on track on the 'standard run' of the LtG collapse scenario. It's not just a question of oil really, it's about a number of things including and not limited to

1) Peak Net energy
2) Climate Breakdown
3) Species Extinction
4) Land Degradation
5) Top soil erosion
6) Overpopulation
7) Excessive consumption
8) Water shortages and water pollution
9) Resource depletion
10) Waste disposal and toxins in the environment

etc, etc, etc.

cs said...

Three choices: pay, come clean and say you can't, or change the rules.

The debt is owed *to* somebody. If it was you, would you accept it being 'cleared'?

Anonymous said...

VK those countries you mentioned are mostly developed countries who are already close-ish to wage parity with the US and will be even closer to parity once the dollar loses reserve status.

The interesting comparison is between the western economies and india, china, and brazil and I think for those cases my points about their average level of development per-capita stand up well. Of those 3 india is well advanced democratically and has the best demographic profile so definitely there will be a lot of competition there. The chinese will be a very grey society in 20 years with a huge male-female imbalance to boot. The Brazilians fertility is not looking so hot any more.

All the issues you put in your list are going to make us poorer because we'll have to do a lot less of them, but I don't think that BRIC will benefit from our loss on a 1:1 basis.

Ilargi said...

"Wow! You are showing your true colors, Ilargi."

I show my true colors here 7 days a week.

Ian said...

Excellent response @ 5:52, VK.

I think the Asians will pay lip service to the status quo that we in the west have enjoyed and still take for granted today, while quietly working on replacing our consumers with theirs. They are building their infrastructure and offering consumer loans, while acquiring the knowledge that they did not already acquire from us by attending our universities and buying for example our car companies and the like at knock down prices.

Blair's push for the sale of Austin Rover to two different Chinese companies comes to mind. At a stroke they acquired world class manufacturing technology, designs and the ability to produce finished products that met the myriad of international safety and emissions laws. SAIC acquired the Rover 25 and 75 rights, plus the Powertrain engine production for just £67 million. Another Chinese company Nanjing Automobile Corporation acquired for just £53 million all the machines to make the cars. The two Chinese companies since merged. Included in the price were almost all the brands that read like a catalog of names of the former British car industry. Blair took the UK into wars that the public did not want and that the country cannot afford yet today he is proposed for president of Europe. Yet it's said that he won't take the job unless he has real power.

The UK's leader Gordon Brown has almost no sight in one eye and sees poorly with the other. Apparently e-mails to him need to be sent in 36 point size. So this western leader, "the man who saved the world" has no direct access to written reports, newspapers, the internet.

With political leadership like this, it's hard - perhaps impossible - for the west to succeed. As to Scepticus's comments of decades and centuries being need to transform these countries, look at China in 1980 when they had just bicycles. Sticking to automobiles, look at post-war South Korea and the awful Korean cars that first appeared not so long ago. If you know anything about cars, you'll see the astonishing rate of development there as they moved upmarket.

The Asians are competing for scarce resources. What better way to acquire them than to gradually allow the exchange rates of their currencies to drift upwards? Yes their manufactured goods will become more expensive, but to us not to them. And with their populations relative to ours, that won't matter.

In the face of all this, where will that leave countries like the US and those in Europe, mired in debt with structural unemployment and no longer producing any manufactured goods of note except in a few sectors?

Look at the high cost structure of Airbus and the huge problems facing Boeing as well as the chinese employee stealing all their designs and knowledge.

The lack of leadership and the other weaknesses are exactly what it will take for national insolvency/collapse to happen unless of course TPTB want to start another war. But the last few wars never really worked out, did they?

It's rebuilding the real economy not tinkering with financial ratios that's in the end going to produce a solution. We can't all be 'serving' each other and working in the 'knowledge' industry. We need wealth creation and as VK pointed out earlier in this thread in Asia there are more people of higher intelligence than in the west. We also need to recognize the need for jobs for the less skilled and motivated among us. In the face of all these problems that we've created or allowed to happen and the kind of leaders we have today, what do we know anyway?

Getting out of recession implies returning to the standard of living that so many take for granted.

It may only take collapse of UBS + Credit Suisse (together leveraged at just under 70% according to the latest John Mauldin article) or a major earthquake in California to push things over the edge.

Best to behold the reality, be informed and make + encourage others to make preparations as I&S are doing here every day.

Anonymous said...

"It's rebuilding the real economy not tinkering with financial ratios that's in the end going to produce a solution. "

I agree. Fixing the real economy can only be achieved with significant negative nominal rates, embodied either as an actual negative offered rate for savings, or by the equity market taking over from the bond market as the big hairy beast of capital markets.

However this is not going to happen any time soon.

Tinkering with ratios should work long enough to prepare our political economy for the final stage of capitalism, in which interest rates can move freely in order to clear the markets for savnig and lending, and keep employment at tolerably high levels regardless of actual economic growth.

Stoneleigh said...


It wouldn't surprise me at all to see negative nominal interest rates, but I don't see that as a solution. With the scale of credit collapse we are looking at, real interest rates will still be quite high (ie a negative nominal rate minus a larger negative inflation rate). That means that Fed would still be pushing on a string, and people's cash would still be appreciating whether or not they held it in a bank. The incentive to hoard cash would be somewhat reduced, given that some people wouldn't understand the difference between real rates and nominal rates, but I don't think hoarding would be prevented at all. I don't think it would do anywhere near as much to boost the velocity of money as you seem to think. After all, when other assets markets are truly tanking, as they will once the rally is over, people may well be prepared to pay a 'user fee' to hold treasuries. A flight to safety could easily be strong enough to overcome the disincentive.

As for raising reserve requirements, this would be highly deflationary as it would act to increase credit contraction enormously. Of course higher reserve requirements would be a good idea in principle, but it would do nothing to solve our present predicament. Reserve requirements have been shepherded down to virtually nothing as part of the credit hyperexpansion, and we will see that trend reverse eventually (for those banks left standing, which will be few). Every attempt to restore prudence will aggravate deflation in the short term though.

There is simply no way out of the deflationary scenario. When a ponzi scheme has been created, it will eventually implode no matter what anyone does. That doesn't mean there is nothing useful we can do in our own lives at all, but it does mean that grand schemes of government are destined to fail. We will be looking after ourselves, our families and our communities. The sooner we start building the necessary relationships of trust, the better off we will be.

Greyzone said...

Skepticus writes as though halting deflation is a foregone conclusion. If it were, why not stop it already?

One key thing that Skepticus fails to address is that all current holders of US debt would have to agree to be "wiped out" by the actions of the US for the scenario that Skepticus describes to come true. Will China allow that? Will Saudi Arabia? Will Japan? Will Russia?

What is the probability that all of our creditors would agree to such a "solution"? Such an action by the United States might even be seen as an act of war against the rest of the world.

And if you think the US can simply lord over the entire planet militarily, then I would suggest that you study the military scenario a bit more deeply.

Skepticus focuses on bank reserves when he should really ask who holds our debt and what options are open to them should we choose to monetize? Among those options would be the threat of simply cutting off US imports in order to make sure that US citizens immediately understand the degree to which they are beholden to foreigners. What could the US do then? Continue to monetize and see riots in the streets due to lack of goods and food?

So to Skepticus I ask, how does your scenario benefit the creditors and why would they passively accept being wiped out by such a position. Unless you can explain that convincingly, your scenario is just wishful thinking.

Stoneleigh said...

Anon @5:46,

You and Stoneleigh started TAE with some interesting ideas. It's now become dogma. Your minds and your breadth of intellect are as closed and shallow as the powers-that-be you continually rant against.

The ideas have not changed because our predicament has not changed. We are still trying to warn people as we have always done. Are the ideas less interesting than they used to be? They certainly conflict with received wisdom at the moment, which some people interpret as us being impervious to evidence. Actually it's us not swinging with the herd in its endless tug-of-war between fear and greed, panic and complacency

And you wonder why TAE is an also-ran in the financial blogosphere?

If we are also-rans it would be because we don't pick out investment suggestions for people. We tell people to get out of the markets and stay on the sidelines in cash unless they're aggressive speculators. That doesn't make commissions for anyone and it doesn't provide an outlet for predatory greed. Rather than being structured as an investment site, we are a public service trying to help ordinary people to hang on to what they have, in order to minimize suffering as much as we can.

You are not prophets. You are not psychics. You are doing what all of us in this space do: projecting your best guess as to what lies before us.

We have never claimed to be prophets. We are simply sharing what we know as a result of years and years of reading and analysis. Feel free to disregard our worldview if you think it too dogmatic. There are many sites that will offer contrasting views, along with specific investment advice. Bear in mind that every one of those sites is trying to sell financial services of some kind.

We do make our arguments again and again, but that is because the same questions come up multiple times and the answers have not change despite the fluctuations of the market and the counter-productive government interventions.

Jim R said...
This comment has been removed by the author.
Jim R said...

I have a prediction to make, based on that chart of housing starts:

From its peak in spring of '05, starts will fall no farther than another 29% from the current level. Or no more than 13% from the January low.

( note the vertical axis )

Anonymous said...

Take a country take is dead broke.

Then look at the individual citizens of that dead broke country.

Like a badly beaten prize fighter with blood coming out of his ears, a majority of US citizens have debt coming out theirs.

Not a pretty picture.

They will not and can not take on one more iota of debt. Look what shape they're in, who would lend to them with any expectation of being payed back?

Foreigners, fa getabout it.

The only ones to lend to such poor prospect in the real world would be loan sharks at 30% interest, compounded weekly.

There is no economy. It collapsed a while back, the body just hasn't hit the floor.

There is no industrial base, our leaders took bribes to sell most of it to China.

The FIRE 'economy' self immolated like a buddhist monk soaked in gasoline. It's gone, woof, in a flash of light and a puff of smoke.

So what's left, a nation where we take in each other's laundry and give each other back rubs?

And this is the same crowd that will put it's collective shoulder to the wheel and borrow it's way back to 'prosperity'?

What ever happened to producing useful products to recover to even a modest balanced lifestyle?

We don't need no Stinkin' services economy, we need to actually produce useful stuff, and the means to do that are gone and foreigners are NOT going to finance their own competition by lending us more of their hard earned savings to go down the Black Debt Hole.

Pretty simple equation.

Read it and weep.

Jim said...

All this infighting between Illargi and Sceptius (and others) when they're basically on the same page (particularily when compared to the vast populace of "sheeple"). Of course when trying to see the future noone can be "right" - we "call 'em as we see 'em" and hopfully try to keep open minds and resynthesize our "facts" and experiences as the future becomes the present.

I'm no financial expert, but the thing is, I don't think anyone is. Why would anyone want to be? I feel the "system" is so complex, so incrementally jerry-rigged, that it's lost sight of itself. Just look at the numbers - they're always in conflict - noone really knows what they are. Yes, often through purposeful obsfucation, but just from the sheer enormity and complexity. What human can really comprehend a trillion?? I don't care who you are: Greenspan, Bernanke, Paulson, Obama, Bush, and amy other global counterpart. Noone on this blog, myself included.

At the end of the day, after all the jargon, all the charts, statistics, reports, etc. one needs to step back and look at it all from the big big picture. It's all insane - it makes no sense. Fractional reserve banking, central banks, interest rates (+ or -), fiat currency, and of course all the specific mumbo jumbo - CDS, CDO, etc.

The simple fact is we have used all these smoke and mirrors tactics to live beyond our means. We are living in the future and it is time to get back to the present. And we must destroy the "tools" that got us here. Valuing currencies against one another is not productive and all curriencies should be abolished. Return to a gold standard. Of course that would be limiting "growth" and "productivity", but we have come too far too fast and should have been on a slower, more stable trajectory all along. If the gold standard is corruptable, then abolish it and go to a pure barter system. Is it inefficient - you bet it is! But I would rather have complete honesty and integrity at the expense of efficiency any day of the week. Efficiency can be incrementally improved, but once honesty and integrity are thrown out....well, you can see the results for yourself.

I've always been againt debt, but now I see savings as just as much a problem. We're trying to guarantee certainty to the future in either case, and that always turns out to be a losing proposition. We need to live in the present, take care of basic needs, and once that has been achieved in ironclad, then we can slowly build on that base with honesty and integrity. Money is worthless!! It's what it represents (or what it's supposed to represent) that counts.

I know this is highly idealistic, but systems based on fraud, greed and deception always fail in the end. When will "we" ever learn?!?

Anonymous said...

Indian astrologers are predicting violence and turmoil across the world as a result of this week's total solar eclipse, which the superstitious and religious view as a sign of potential doom.


Anonymous said...

"What human can really comprehend a trillion??"

1,000 dollar bill laid flat then stack one on top of another and it would be 69 miles high.

Comprehend that.

Anonymous said...

From LATOC Comments, posted by Megadoom :

"Serious Denninger doom! Deflationary catastrophie!!!

« on: July 04, 2009, 11:21:03 AM »

I am quickly running out of possible scenarios to prevent a severe deflationary depression from taking place. By "severe" I mean 20%+ U3 unemployment, GDP contraction of at least 25%, and a possible loss of federal funding capacity leading to the immediate destruction of Medicare, Medicaid and Social Security, a 50% reduction of defense spending and near-complete-elimination of all other Federal Programs due to a "sudden stop" in the ability to fund Treasury issuance. Yes, it could get that bad, and it could happen a lot faster than you think."

" Denninger lays out 25 "dead shoots" in the rest of the article too."
Anyone know what this bit of farfel is about? Too much bent elbow by Denninger or by Megadoom perhaps?

Stoneleigh said...

Readers might have to wait until tomorrow morning for today's post. Ilargi is fast asleep :)

Jim said...

@Anon 11:38

Yes, we all intellectually get what a trillion is - a thousand billion, a million million, etc., and we've seen the illustrative examples - the stack of $1,000 bills 69 miles high (when was the last time you were 69 miles high - hell, 7 miles is "up there" for most of us), the pallets and warehouses of $100 bills, the "if you got $x every second/minute/hour since before Jesus or whatever" (can't remember exact figures), etc. (in fact when was the last time you had a $1,000 bill? - more approprately would be stack of $100 bills 690 miles high), but anyway....

We intellectually get it, but don't "get get" it as in truly and firmly get of at the core of our being. It reminds me of the recent Bill Moyers interview with Wendell Potter (PR manager for a health insurance company) where he was like "sure I knew there were 47 million uninsured, but they were just numbers to me. It wasn't until be went to some health fair first hand and saw the people being treated in near third-world conditions that he "got it" and in a profound way.

If Obama or anyone in DC/Wall St *really really* "got it", they would me terrified.

Anonymous said...


Just for kicks. What is your opinion on what is going to happen in China?

Anonymous said...

Ohmagod the farfel looks to be catching!:)

Earnest Lux said...

@Anon 11:35 pm

It's already started - Jakarta bombings.


Bukko Boomeranger said...

Jim said: (in fact when was the last time you had a $1,000 bill?)

Jim -- when my wife and I were in Europe in September 2008, we got some 500-euro notes from our Zurich gnome because we wanted to pay cash for hotel bills, rental cars, etc. Stick it to The Man, don't use his dirty plastic, etc. They were worth something approaching $US 1,000.

Wow, were those suckers ever useless! Nobody knew what to do with them. One of the 500-euro note's nicknames is "the bin Laden" because like the bearded terrorist, they're often talked about but seldom seen. I couldn't even break 'em down at several currency exchanges. We had to go to a Burgundian restaurant in the Marais and buy a bottle of 1995 Echezeaux Grand Cru on our final night in Paris just to get rid of one of the damned pink things. We were worried that we'd go hungry (except we had credit cards) even though we had thousands of dollar-equivalents of cash in our wallets. Wound up posting a couple of them back to Zurich.

Moral of the story? $1,000 bills are a bad idea if they're not in Zimbabwean currency.

Anonymous said...

This isn't hard. Ask yourself:

Could the deflationists be right? if they are right, have you taken the steps necessary to protect your family?

Could the hyperinflationists be right? If they are right, have you taken the steps necessary to protect your family?

It's a fairly safe bet that one of these camps will be right sometime in the next three months to five years. Why not prepare generally (most of the preparations are the same under either scenario), have enough cash to last you one year to 24 months, and then put the rest in silver?

Bukko Boomeranger said...

On a serious note to Scepticus, let me ask: "What makes you think that TPTB are interested in doing what's best for the sheeple of America, Scep?

Yes, the system you proposed MIGHT be better for humanity. So might pure libertarian capitalism, or Marx's pure communism, or any number of utopian systems. If people worked hard, and played fair, and were all Rodney King ("Why can't we all just get along?") then it would be great.

However, I'm with Ilargi on the political reality of the situation. Things won't happen just because they're a good idea. People with power, especially skeeving pollies and bankmaggots, have to make them happen. And why should they?

The lust for power is like a mental illness. Do you have mass power, Scep? Probably not, because you sound like a good bloke. But the people who seek to have the power to control other people are often maniacs. They're going to do what's best for themselves, not other people.

Look at it this way -- if you could be like a god, and have other people groveling at your feet by rigging the system so you had billions of dollars of purchasing power and 99.9% of the rest of the people had nothing, would you do it? Probably not, because you seem like a nice chap. But being a nice chap might be why you're not Skank Paulson.

GET MORE DEEPLY CYNICAL, MATE! They don't CARE about what's good for you, or the whole of American society. They're multi-national locusts, the two-legged equivalents to the planet-gobbling aliens in the "Independence Day" movie. They're not going to do what's right for us, just what's right for them. That's the political reality of why I think your system won't work. Others have pointed out the economic reasons why they think it's hopeless.

Anyway, good onya for provoking some stimulating debate, and being good-natured about it.

Anonymous said...


Thanks for being so patient with all your answers, I know that I appreciate your honest attempts at explaining things in understandable terms to people who do not understand where their fundamental misunderstanding occurs. It has taken me a long time to grasp many of these things and I find myself always learning something new from your attempts to rephrase your ideas. Please do not become so exasperated that you stop. I know that I for one continue to rely heavily on your advice.

For a new analogy, I was thinking that maybe the idea of the fires that occur in California might also be a good visual. I was thinking of the different reports about people with at risk homes that have taken "all the right steps" to try to fireproof their homes but still see them burn in an unstoppable inferno. This type of disaster doesn't care about your previous lifestyle, your income level, your job security, or your moral values. It is a wholly random distribution that boils down to one person's good fortune and one person's bad fortune. It seems to be fundamental human nature to be unable to grasp the fact that bad things do happen to good people and that means that it can also happen to you.

I think the fire analogy works on other levels because the fires are becoming so severe, so common, and so costly. The point for sceptius and others is really this: it doesn't matter if how many added firefighters, extra planes, trucks, money etc. you muster up to fight these fires in the grand scheme of things because there is nothing that can be done to keep these fires from starting to begin with. Yes, the government may be able to eventually put out the fire, but this has exhausted time, energy, and resources that cannot go into other areas and cannot ever really be recovered. These steps are largely an illusion to try to assure the public that the government is doing something. Maybe the steps help to a certain degree, but it doesn't and cannot alleviate the underlying risk.

So, you are left with some bad options. As a state, do you do nothing? The answer is most definitely no and the state continues to try to fight the fires. If you are a home owner, do you rebuild? For many the answer seems to be yes and it also seems to be human nature to want to rebuild in the same spot in order to demonstrate that we will not be cowed by nature. Does this mean that the government of CA or its residents are inherently evil? Some might say yes, but I don't thinks so.

The main problem is that what is "right" for the individual homeowner may not be what is "best" in the larger scheme of things for the nation. The questions we are asking amount to - will the insurance company pay off on insurance claims and we are finding they are slow and unwilling to do so.

In short, I&S are trying to get you to see that even if your plans work out for you in the short term, the longer term trends imply that we have to start making vastly different life decisions and to start rethinking our approach to all kinds of life decisions. Exactly what these changes are is unclear, but we are starting to see some general outlines. What I&S are trying to do is get you to change your mind, and not just about deflation, but about your daily habits, routines, thoughts, interpersonal interactions, and attitudes towards your place in the world. And no, it isn't fun, but I'd always rather try to anticipate and embrace necessary changes than be victimized by having them forced upon me.

Thanks for all the help I&S. Keep up the great work.

Linda S.

Anonymous said...

Ditto Linda @1.34 a.m.

Thank you I and S for all of your much valued thoughts and advice. Upwards and onwards!


Anonymous said...

Stoneleigh wrote -

The ideas have not changed because our predicament has not changed.

The predictions are set in stone. Yeah, I got that. I think we all do.

Scepticus brings up some possible scenarios that the US Federal Reserve may use to combat deflation. Ilargi shot him down with YABOCNC (yet-another-bout-of-chlidish-name-calling).

This is what makes TAE so little readable, apart from Ilargi's news clipping service. The discussion here is shallow and much of the comment posters are mind-numbed rah-rah TAE cheerleaders.

Boooooring. Nothing new here. Move along, move along.

Obviously Sceptious, Arnold, m'self, and others are looking for more. We want a discussion of alternative scenarios so we can form our own synthesis and "best guesses". We understand your "set-in-stone" dogma. We've read your "primers". We "get" your point of view. We just don't buy it lock, stock, 'n barrel - no matter how much Ilargi reviles dissenters with his childish rants. And you, as thinkers, and TAE as a blog are all the poorer for it.

But by all means keep trying to force feed everyone your set-in-stone predictions. You have and will get some of it wrong, which diminishes the credibility of the bits you got right. And your rigidity and narrow thinking is losing you valuable feedback from folks that have actually done their homework and will get some things right you and Ilargi will get wrong.

What is left are the cheerleaders.

Good luck with that!

Anonymous said...

To the person who asked why creditors would accept being wiped out by my proposed scenario, my question to you is, have you actually read and understood my posts?

I think not, because right near the beginning I explained that the act of raising bank reserves to 20% maintains the value of the dollar at no less than half it's current levels even after the entire deficit is monetised.

If you prefer a scenario in which half the deficit is monetised, and the dollar stays as is , then go with that.

I've taken the time to very clearly set ou the mechanics of one of the weapons in the fed arsenal. Please do me the favour of reading and understanding them properly before asking silly questions.

Anonymous said...

Above I failed to point out that which seems obvious to me - if the debt is repaid in dollars which have the same purchasing power in the economy after the monetisation as before, then the creditors have not been harmed at all.

Anonymous said...

"On a serious note to Scepticus, let me ask: "What makes you think that TPTB are interested in doing what's best for the sheeple of America, Scep?"

I'm not american, so I may not be best placed to answer that, but I'll have a go anyway.

Firstly, the way I see things in the US is that you have what I'd characterise as a benign, faintly fascist dictatorship. Its benign in the sense that it tries to avoid torturing, murdering and violently supressing its own citizens (but only as a general principal, and only within its borders).

Its benign in the sense it realises it can't actually run a command economy - the world, and especially america - is just too complex to revisit communism, and a 24/7 police state is bad for business and very expensive. hence American Idol etc, and also the reason for the healthcare reform etc - pacification.

Hyper inflation or hyper deflation will bankrupt the government so they will avoid both by any means necessary. What would be best for the people is negative nominal rates, but that would be bad for fat rich goons like buffet and Lord blankcheck.

However, a situation may be reached in which the alternatives to negative rates
would actually hurt the elite more, and at that point they stand a chance of being instituted.

Also you can look to other nations to lead the way on this, especially if they are more desperate than the US and less endemically corrupt. Good candidates to look to would be Japan and Sweden.

Compound F said...

Rather than being structured as an investment site, we are a public service trying to help ordinary people to hang on to what they have, in order to minimize suffering as much as we can.

Even those of us without any money at all appreciate (you cannot imagine how valuable sound reasoning is to someone without money; it certainly clarifies my thinking on options and contingencies where I do have any clout) what you do. I have arguments to make to others; and I am personally invested in decisions made. Although I'm more of an expendable "uncle" figure, my DNA is involved in what my family considers the parameters of discussion. You help me help them. I am massively grateful for your analysis. You put it out there, then I decide. As Ilargi said some time ago, "We don't shoot a lot of blanks." While I'm no expert (talk to me about stress physiology), I agree. said...

@stoneleigh: "It wouldn't surprise me at all to see negative nominal interest rates, but I don't see that as a solution."

It would be a solution if you posit that interest rates be allowed to follow the market wherever required, +ve or -ve to ensure that the market supply of savings is always cleared.

The 0% bound represents an arbitrage in favour of savers, and as you should know an entrenched arbitrage will prevent markets clearing. It is an uncleared market for savings which leads to deflation.

Once interest rates reach the right level, savers will find borrowers and this will ensure we get back to a situation in which all savings are lent out rather than accumulating in bank reserves. When all savings are always recirculated, deflation will never be a danger - since it arises due to the market distortion created by the 0% bound.

"With the scale of credit collapse we are looking at, real interest rates will still be quite high (ie a negative nominal rate minus a larger negative inflation rate). "

Incorrect. With nominal rates sufficiently negative the market will clear and all money will continue to circulate in the economy as per usual.

When a bank makes a loan at say -1%, it creates 100% of the principal out of thin air but only requires that 99% is repaid. That 1% goes straight into the economy and ensures inflation.

With respect, I don't think you've properly worked through the implications of negative savings rates.
"I don't think it would do anywhere near as much to boost the velocity of money as you seem to think. "

A -3% rate would make people like buffet and soros, as well as high net worth individuals think very carefully about what to do with their money, since -3% compounded over 20 years would take most of their wealth away.

"As for raising reserve requirements, this would be highly deflationary as it would act to increase credit contraction enormously. "

I agree it is deflationary in principle, but by the time that was enacted, if demand for credit is in the toilet anyway it won't add to deflationary pressures. That is, you can monetise debt and raise the reserve ratio to the extent that demand for credit can be relied upon not to return, without doing further damage to the economy.

The key is that it requires admission of a long term secular low growth or no growth future, and people in the administration and at the helm of the economy won't admit this in public - yet.

Ilargi said...

New post up

Anonymous said...


@ El G

Please sign me up for your travel journal.


Anonymous said...

Do you cop these images from Shorpy?

Anonymous said...

Why is anyone calling a bottom on anything? I don't see it. I see more caution, more openly expressed.

There is still so much denial I can't believe it.

People, I'm 65 and if you don't need something to keep up health, don't spend.Never mind keeping up appearances. Probably 85 percent of population has enough clothes for at least a year.

I see many others who act as if it will be back to normal in a bit;
Our normal wasn't a sustainable normal. It's not coming back. Less is coming.

grandma pkk