Financial Crisis

[Gambles]

Thanks for taking the time to answer.

Glad I cleared that up by myself.

Actually onetwo, I should perhaps have also copied this (but actually it's sometimes better to do what you've done and figure the processes for yourself because that's always the best way to understand it) but here's a piece I put together in February -

The rate hike that never was…. by Paul Gambles & Stephen Tierney

The US Federal last month gained significant media mileage by hiking a virtually unused interest rate while keeping other rates at record lows. But to understand why there is something more sinister to this fiduciary sleight of hand than a simple desire to gain column inches, and to see how it could have a very real negative impact on export-dependent economies such as Thailand, one first needs to take a closer look at how the banking system works.

The modern banking system exploits fractional-reserve banking, meaning it only keeps a fraction of deposits in liquid reserves to maximise shareholder profits and depositor rates of interest. The remainder is lent out or otherwise put to work at higher interest rates than are paid to depositors. The difference, or spread, is how banking institutions make profits.

Fractional banking has dramatically increased credit supply over the past century. A fractional system that requires 10% of deposits to be held as reserves allows banks to initially lend $90 against every $100 of deposits held. The $90, once lent, goes into recipient bank accounts from where 90% can be lent out again. By the time 10 lending transactions have taken place the original $100 has created money in circulation of almost 7x the initial deposit.

This money multiplier has a major impact on economic growth rates, inflation, indebtedness and ultimately employment, prosperity and economic sustainability. Minimum reserve requirements set by central banks therefore have the combined effects of ensuring banks hold adequate reserves while also determining the magnitude of the money multiplier:

moneymultiplier.xls

Banks generally hold reserves slightly above the statutory minimum requirement to cover daily cash flows and write-downs. But excessive withdrawals can result in a bank holding insufficient reserves while others consequently hold too much excess. Central banks typically oversee this by arranging ‘emergency’ funding, typically just overnight, while the bank implements actions to adjust its obligations and assets, such as raising additional funds by borrowing from money markets or calling in loans.

A systemic loss of confidence in 2008 caused banks to increase the rate at which they lent to each other. Following the Lehman Brothers’ collapse that September, interbank lending virtually stopped overnight.

Government responses to the crisis largely consisted of increasing guaranteed deposit amounts and ensuring that adequate liquidity was put in place.

In America, where the scale of problems was greatest, three main liquidity boosts were implemented: the Troubled Asset Relief Programme (TARP) injected a staggering $600 billion into the banking/finance sector within a matter of months; the Term Asset-backed securities Loan Facility (TALF) which allowed distressed assets, including defaulting residential mortgage backed securities, to be transferred from bank balance sheets to the Fed’s; and cutting the cost of emergency funding from 1.25% in October 2008 to 0.5% from December 2008 to this February.

The need to allay fears of banking system failure created an additional $435 billion of money supply, raising concerns of hyperinflation if the money made its way to Main Street.

To counter this concern, the Federal Reserve Act 1913 was amended to allow the Fed to pay banks interest on excess reserves deposited with it, allowing banks to profit from the Fed on funds that they had actually borrowed from it – the equivalent of your bank lending you money at 0.5% provided you deposited it back with them at 1.5%.

Effectively all American banks were in this situation in autumn 2008.

This unpublicised policy has two significant catches. Stimulus funds paid for by the US taxpayer were supposed to stimulate the economy, but instead of being circulated in the real economy where they could boost consumption and restore confidence – and you cannot have a recovery without confidence — banks were paid more interest to keep the funds in their vaults.

Imagine what a real surge in US consumption could mean for economies such as Thailand where exports account for about 65% of gross domestic product and 80% to 90% of locally produced electronic and electrical goods are sold abroad.

It gets better.

To allow unfettered remuneration to be paid, banks repaid these borrowings as quickly as possible, with TARP debt falling from $612 billion to $317 billion.

Simultaneously, borrowings through the traditional discount window plunged from a peak of $44 billion in 2008 to $14 billion currently. The Feb 18 interest rate hike 0.5% to 0.75% applies only to borrowings through that discount window, making it meaningless in real terms.

It has been suggested that the hike implies the worst economic conditions are over and that the Fed is prudently increasing rates to ward off inflation. But the impact of this move potentially goes beyond mere PR and financial spin.

Creating false hope in a global financial system that is largely based on sentiment is a dangerous game, and the policy of paying banks interest on excess reserves is so radical and untested that no one can be certain of how this policy is impacting the US economy now or what the future effect of reversing it would be.

Strange things are afoot in the ‘the land of the free (money)’ and things are definitely not what they seem. Has anyone seen the emperor’s, sorry Ben Bernanke’s new suit?

[Gambles]

Its ok to be rational and think about your investments but the masses that are trying to protect their measly savings are walking with their savings into gold or something else. Understand that the masses generally have no idea about whats a good or bad investment and have little education in these matters.

These people are the ones that will provide the tipping point on lets say the EURO by buying grams or silver or gold instead of holding a sinking currency.

Financial advisers are one thing but when the grass roots people think they are loosing they will run into something they understand and gold has always been that safe haven for them.

I think a lower price entry point to gold would be a producing mine

Any ideas on this

Gold miners look interesting value right now but they're a ahem mine field - in my experience, this is a highly specialised and very under-researched area well exploited by Evy Hambro and the team at BlackRock

Gold on a structural basis makes sense to $ 2000 - sentiment could then drive it on anywhere from there - but the further above $ 2000 it goes, the more we're getting into nosebleed territory when it all goes wrong......

[12DrinkMore]

I am rather surprised that this hasnt already been posted.

http://af.reuters.co...E65A0RX20100611

The 1) Errr... we might default combined with so 2) we have decided to join the austerity challenge seems quite interesting.

I see that the rating agencies are right in there issuing their warnings.

So now, out of the four currencies in the SDR, the rating agencies have warned three of the respective owners that they should reign in the spending or ELSE.

Hmm, I guess this is good news for the Tim, he'll be able to sell even more UST's.

Wasn't Merkel going to start up another damned Euro-Committee to look at the effect of the rating companies? So far they have been vocal on all the countries with deficit spending, saying reign in the deficits or we'll cut your rating. But back over the Atlantic or Pacific, I suppose for the Japs, Tim is off continuing his wild spending Obamah-Binge, and nobody says anything.

[Gambles]

But nowhere do I see a mechanism that would create hyperinflation. In countries where it has occurred there has been huge external debt in foreign currencies, with nobody wanting to hold the sovereign currency. This is what would be interesting if, for example, there was a decision to put Greece back onto the Drachma. Something which is, IMO, not easy. There is a bit of banter about it, but, in the second it looks serious, there would not be a single Euro left in the banks, because everyone would know that a return to the Drachma would mean a currency devaluation and inflation in terms of Drachmas. The Greeks would have to introduce strict price and currency controls to prevent prices racing upwards.

But back to the USD. Unless Bernanke does something incredible, like dropping a million into everybody's bank account, the Austerity Challenge 2010 seems to be taking hold. Debt is being paid off, cut backs are being made, and new productive jobs are not being created. All this means that there is less cash being spent on stuff and is more deflationary than hyperinflationary. The hyperinflationists seem to base their argument on the huge amount of QE, which they assume will, at some point tonight, find its way into the average Joe's pocket and all the Joe's and Jane's will collectively go out on a spending binge. But I believe most of that QE has been spent buying up Tim's UST's, which are propping up the banks' balance sheets, so it can't be relent anyway, leaving Ben with a load of rubbish on his balance sheet, which presumably he will want to sell of at some point, and that is also a chunk of deflation in the background, although I expect Ben will pick the moment and sell into any signs of another bubble, effectively subduing it, another reason why I can't see hyperinflation coming along tonight.

Spot on - for now

He is about as spot on as the people that where spot on in 2007 by being fully invested in Bear Sterns and Lehman Bros while owning a few condo's is Florida. Everything is fine until it blows up.

it will happen but look at the output gap and the velocity of money - track those and you'll spot the warning signs

Not on the horizon yet - but the horizon could change pretty quickly - but it ain't there yet....

[churchill]

Its ok to be rational and think about your investments but the masses that are trying to protect their measly savings are walking with their savings into gold or something else. Understand that the masses generally have no idea about whats a good or bad investment and have little education in these matters.

These people are the ones that will provide the tipping point on lets say the EURO by buying grams or silver or gold instead of holding a sinking currency.

Financial advisers are one thing but when the grass roots people think they are loosing they will run into something they understand and gold has always been that safe haven for them.

I think a lower price entry point to gold would be a producing mine

Any ideas on this

Gold miners look interesting value right now but they're a ahem mine field - in my experience, this is a highly specialised and very under-researched area well exploited by Evy Hambro and the team at BlackRock

Gold on a structural basis makes sense to $ 2000 - sentiment could then drive it on anywhere from there - but the further above $ 2000 it goes, the more we're getting into nosebleed territory when it all goes wrong......

"Evy Hambro" - A new manager ? What track record ?

and re gold / silver stocks check out these charts

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID540918&cmd=show

"but the further above $ 2000 it goes, the more we're getting into nosebleed territory when it all goes wrong......"

How can one value gold - Why is $2000 too expensive - Why not $10,000 / It is supply and demand - Why is a good wine expensive and what is it's value ?

More and more people are looking at gold as an alternative to paper currencies - So perhaps we are looking at a bubble / inflation but I think it is going to go higher than $2000 unless politicians get their acts together very soon /

Edited June 13, 2010 by churchill

[Abrak]

it will happen but look at the output gap and the velocity of money - track those and you'll spot the warning signs

Not on the horizon yet - but the horizon could change pretty quickly - but it ain't there yet....

Gee I hate the 'output gap' - it is the root of all evil in economics I believe.

Half the equation is totally theoretical - namely 'potential output'. That figure is based on 1) a level of unemployment that isnt essentially inflationary - say 5% in the US and 2) potential growth of that figure.

Personally, I believe the level of unemployment in the US is structural rather than cyclical and as real GDP was historically grossly overstated by things like mortgage equity withdrawals, the 'potential' GDP figure has been grossly overstated. In other words, in 2003-2006 there was an output gap on the upside largely fueled by the export of inflation to China and there is no output gap whatsoever.

I also an output gap and a current account deficit hard to reconcile.

[Gambles]

Can a rational investor justify buy 10 year Jbonds at 1.3% yield, and if so, why?

it all rather depends on your inflation assumptions but currently 1.3% + deflation = a reasonable real yield

whereas US 10 year interest plus the inflation that may or may not come through there????

[Gambles]

it will happen but look at the output gap and the velocity of money - track those and you'll spot the warning signs

Not on the horizon yet - but the horizon could change pretty quickly - but it ain't there yet....

Gee I hate the 'output gap' - it is the root of all evil in economics I believe.

Half the equation is totally theoretical - namely 'potential output'. That figure is based on 1) a level of unemployment that isnt essentially inflationary - say 5% in the US and 2) potential growth of that figure.

Personally, I believe the level of unemployment in the US is structural rather than cyclical and as real GDP was historically grossly overstated by things like mortgage equity withdrawals, the 'potential' GDP figure has been grossly overstated. In other words, in 2003-2006 there was an output gap on the upside largely fueled by the export of inflation to China and there is no output gap whatsoever.

I also an output gap and a current account deficit hard to reconcile.

I hear what you're saying and I agree to the extent that I'd personally place always greater store in velocity of money X money supply than in output gaps for those reasons but it's clear to me that

the debt burden is clearly exercising a deflationary influence right now and it seems likely that there will be a snap reversal at some points and that there will be lead indicators such as capacity and money flow as well as employment X hourly wage rates

[Abrak]

Can a rational investor justify buy 10 year Jbonds at 1.3% yield, and if so, why?

it all rather depends on your inflation assumptions but currently 1.3% + deflation = a reasonable real yield

whereas US 10 year interest plus the inflation that may or may not come through there????

Yes but there is to an extent a logical disconnect here (and I realize to a degree you have missed out growth rates and differential deficits.)

So, I agree lets minimize the argument to the inflation differential.

If you justify Japanese bond valuations with deflation (as in your post) the underlying problem is that I do not know of a single country ever in history that has succeeded in paying back a 200% Debt/GDP problem with underlying price deflation. Of course you could simply bump up US inflation in nominal terms to make JBonds look attractive verses treasuries but it would be depend on negative real rates (which would imply their absolute price is illogical.)

I know with enough economic growth and a fiscal surplus, everything can be made to add up. It is possible to justify the price, but the underlying assumptions necessary to justify it are based on an ever increasing risk of default. Say 2% price deflation, 4% fiscal deficit, 1% real growth over 10 years. Your debt/GDP ratio would be maybe around 300%.

That is why I see Japan risking a coyote moment.

[Gambles]

Can a rational investor justify buy 10 year Jbonds at 1.3% yield, and if so, why?

it all rather depends on your inflation assumptions but currently 1.3% + deflation = a reasonable real yield

whereas US 10 year interest plus the inflation that may or may not come through there????

Yes but there is to an extent a logical disconnect here (and I realize to a degree you have missed out growth rates and differential deficits.)

So, I agree lets minimize the argument to the inflation differential.

If you justify Japanese bond valuations with deflation (as in your post) the underlying problem is that I do not know of a single country ever in history that has succeeded in paying back a 200% Debt/GDP problem with underlying price deflation. Of course you could simply bump up US inflation in nominal terms to make JBonds look attractive verses treasuries but it would be depend on negative real rates (which would imply their absolute price is illogical.)

I know with enough economic growth and a fiscal surplus, everything can be made to add up. It is possible to justify the price, but the underlying assumptions necessary to justify it are based on an ever increasing risk of default. Say 2% price deflation, 4% fiscal deficit, 1% real growth over 10 years. Your debt/GDP ratio would be maybe around 300%.

That is why I see Japan risking a coyote moment.

Longer term (and how much longer than 20 years do they need?) it's a dysfunctional economy but today this isn't really a long term issue; the sovereigns are good until they're not - there was no money shorting Greece for the last 2 years - it's all about timing which is notoriously difficult and while I'm not saying that you're wrong, I am saying that there are justifications for many investors to hold JGBs today (we haven't got any mind you but I know some hedgies who think that they can profit from JGBs) and there are an awful lot of people in Japan would question why hold any western sovereign debt? (which almost becomes a default reason to many people to hold/buy JGBs....)

[sokal]

The first stage for hyperinflation (currency collapse) is a shortage of the said currency. You are making the case for hyperinflation (currency collapse) without even realizing it. Like you just pointed out, we have a shortage of the said currency.

I am missing a major paradigm change.

If there is a shortage of currency, then surely prices will fall as there will no currency able to chase stuff to buy?

Although Ben has issued zillions of eUSD's,

a. very few have found their way into the pockets of Joe Public.

b. Joe's expectations have been set to "Deflation" and "Austerity" mode, hence he is paying down debt and not buying more stuff on credit.

So I still do not see where we are going to get a huge dose of inflation tonight.

The reason the fed is printing money is to try and stop prices from falling. Why didnt the price of bonds fall ? because Ben printed and bought 300 billion dollars worth of them last year. (That is how much he said he bought.)

A) and Because Ben bought bonds last year, interest rates did not rise. Because interest rates did not rise, Joe is spending artificially less on interest.

Things work until they don`t.

[teletiger]

Here we go again. We don't need your stinkin' money. Err...uno momento por favor.

Google Translate

http://www.reuters.com/article/idUSTRE65D2NS20100614?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+reuters/businessNews+(News+/+US+/+Business+News)

"Spain sees credit squeeze but denies EU rescue bid"

Frankfurter Allgemeine Zeitung Reports EU, IMF Prepare To Bail Out Spain; Europe Denies | zero hedge

Regards.

[lannarebirth]

Euro currently showing positive divergances in IT time frame while Gold showing negative.

Most hard hit stuff probably bounces into 4x op ex. If it doesn't, then the sell off could be severe.

Those option writers rule the makets. They're always gonna get theirs.

[12DrinkMore]

@Sokal, Sorry, I realise that I am struggling with a few economic concepts here, but your answer did not seem to address the points I made.

But anyway, on with the crisis,

So now

Moody’s Downgrades Greece to Ba1 From A3, Stable Outlook - Bloomberg.com

The Greeks have been relegated by Moody’s four levels to Ba1 from A3. The outlook is stable, Moody’s said. Oh! Well stable sounds good to me. Does that mean no more relegation? But I wonder if tomorrow the Portuguese will be downgraded. Hmmm, my old Gran always said charity begins at home, so how about looking a little more closely at the trillions of USG debt? Apparently this is now up there on some sort of invincible pedestal.

This is a no-brainer, at least in IMO

Just stop it, no debate. I cannot insure my habitual drunkard neighbour against demolishing his car. The realm of the Almighty Finance Industry has sprung far out of the bounds of reality and reasonableness, the powers urgently need to bring in a sense of "Get Real", and cut the Finance Industry down to levels where the average Joe can understand why some git receives a USD 10,000,000 bonus. Which they do not. So it should not happen.

And here they come, as expected, with reasons why the bailouts occurred and it would have been so much worse,

AIG Rescue Spared European Banks From $16 Billion Capital Raise - Bloomberg.com

Yeah, great, they might have avoided a shovel of shit then, but now we have a whole shed full of it and no end in sight. And that is what pisses me off. The fall out, the toxic crap, has not gone away, it has merely got bigger (anybody see smaller numbers mentioned?) but transferred from the guilty bastards to the rest of us through the political feckers, who take a rake on the way.

But now here's an interesting statement

Europe’s Banks Face Second Funding Squeeze on Sovereign Crisis - Bloomberg.com

Markets ’Doing Their Job’

“If you’re not a quality borrower, you’re not going to get funding from the market until you reduce your loan-to-deposit ratio and shrink your balance sheet,” said Simon Maughan, an analyst at MF Global Ltd. in London. “The credit and bond markets are doing their job. Unless you reform, you’ll be stuck on government support for the foreseeable future.”

Once again, this only seems to apply to everybody else apart from the "solid as a rock" USD. And stuck on government support surely means more QE on the way. What a utterly dismal mess this is.

“The banks are entering increasingly turbulent waters now,” Gabay said. “For too long policy makers in Europe were looking the other way, hoping we could sail through the financial crisis. Now their chickens have come home to roost.”

When do these bloody chickens bugger off back to the Great US of A and go to roost there?

It appears to me that every US based press agency, every US based rating agency and Tim are working hard to ensure that the global flow of cash heads straight into UST's.

Maybe I should send my cash over to Tim too?

[flying]

Zobama:...Umm can I get just another 50B to get a few votes in Nov?

"Because the urgency is high these provisions must be passed as quickly as possible".

" I know you share my sense of urgency as we continue our efforts to jumpstart job creation and restore fiscal discipline in Washington".

http://www.istockanalyst.com/article/viewarticle/articleid/4209383

The letter/request..

Letter from the President to Speaker Pelosi, Senator Reid, Senator McConnell and Representative Boehner | The White House

Truth is 50B will not make a dent.. N.Y alone is asking for 9.2B

He is like the boy with his finger in the dyke

Edited June 14, 2010 by flying

[sokal]

When do these bloody chickens bugger off back to the Great US of A and go to roost there?

It appears to me that every US based press agency, every US based rating agency and Tim are working hard to ensure that the global flow of cash heads straight into UST's.

Maybe I should send my cash over to Tim too?

Why would you invest in something that has been in a 30 year bull market ? Why would you invest in the most obvious bubble asset in the world right now ?

[BlackJack]

crisis what crisis

OK so someone tell me how a country thats broke can lend another country thats broke

answer smoke and mirrors

[BlackJack]

The first stage for hyperinflation (currency collapse) is a shortage of the said currency. You are making the case for hyperinflation (currency collapse) without even realizing it. Like you just pointed out, we have a shortage of the said currency.

I am missing a major paradigm change.

If there is a shortage of currency, then surely prices will fall as there will no currency able to chase stuff to buy?

Although Ben has issued zillions of eUSD's,

a. very few have found their way into the pockets of Joe Public.

b. Joe's expectations have been set to "Deflation" and "Austerity" mode, hence he is paying down debt and not buying more stuff on credit.

So I still do not see where we are going to get a huge dose of inflation tonight.

Inflation can be viewed as increasing the amount of dollars by printing more or just raising the level on the banks computer and then taking away from those dollars ie raise tax to pay for the bail outs ect. Therefore the dollars buy less and less. The trillions owed by the USA and other countries have to be paid back and the taxpayers will foot the bill through increasing taxes and other costs. THis is inflation as the dollar and other currencies value are being eroded.

[Abrak]

Anyone worked out how you will the Austerity Challenge yet?

It does seem....quite tricky....

Fitch downgraded Spain's credit status one notch from the maximum AAA to AA+.

Fitch feared Spain's economic growth will suffer as the country moved to slash its mounting debt.

"We want to point out that Fitch deliberately waited for Spain to pass their 15 billion euro ($18.5-billion) austerity plan before making their announcement which implies that they do not believe the nation will be able to cut their deficit and still meet their growth targets"

So Fitch downgrades Spain's debt because reduced public spending is reducing growth. Presumably without the austerity package they would have downgraded Spain's debt because it is increasing rapidly. So with a Debt/GDP problem you either increase the nominator or decrease the denominator.

Talking of sovereign debt problems has anyone seen the report recently published by BIS. It projects sovereign as a % of GDP going forward until 2040 for the major economies. The lowest comes in at 250% of GDP and the highest Japan at 600% closely followed by the UK. It also forecasts by 2040 interest payments on Government Debt in the UK will be equivalent to 25% of GDP.

So guess which country has the lowest debt to GDP. The surprize winner is Italy.

The numbers are helped quite a lot if you move the retirement age to 80.

[12DrinkMore]

Anyone worked out how you will the Austerity Challenge yet?

Well, I don't think "we" will win, or "they" will win, only losers.

So, to save you all looking for the paper, here it is

http://www.bis.org/p....pdf?noframes=1

And for a scary glance into the future go to page 10 for some nice graphs showing how wonderful an exponential curve is.

In the summary they have stated the obvious.

Our examination of the future of public debt leads us to several important conclusions. First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures that show the implications of the financial crisis and recession for fiscal balances. As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing, and should be a central part of today's long-term fiscal planning.

and these guys reckon they have found the answer

The national debt stock of the UK is rising sharply as a result of the economic crisis, and equilibrium output is falling, with the capital stock contracting. Both problems could be alleviated by the rapid introduction (but slow implementation) of a policy to extend working lives. The paper analyses a delayed extension of working lives in the UK. Increasing working lives will in equilibrium raise consumption and tax revenues and reduce pension spending. These gains by the government can be used to improve services, cut taxes or pay off debts.

http://www.niesr.ac.uk/pdf/EWLfin.pdf

But, to be honest, can you trust anybody who reckons to have fixed the problem but finds it essential to express themselves in an alien language?

It is common to associate the severity of borrowing constraints with the coefficient on changes in current income (dlnRPDI) in the equilibrium correction equation for consumption, where d is the change operator and ln is natural log. We may write our equation for dlnC as

dlnCt = λ(lnCt-1 – b0 - lnPIt-1) +b1dlnRPDIt+b2dlnNWt+b3dlnHWt

where the long run relationship between lnC and lnPI depends upon the equilibrium savings rate, and this relationship forms the long run attractor in an equilibrium correction relationship. We should note that permanent income, PI, is a forward looking variable.

Blimey, these guys have an input into government policy?

But to extend the working age is an absolute non-starter because,

1. Most oldies, obviously with a few exceptions like those around here, have decided that they can't learn new stuff, and so they would have to keep on with the old outdated stuff.

2. There are a vast number of unemployed in the under 25 group.

3. Err, and this is the key point, where on earth are all these jobs going to come from? With the Uk's working population of about 30,000,000 and nominally with their noses to the grind wheel for 45 years, there will be 600,000 heading for retirement each year. If the age of retirement is moved out to say 70, then another 3,000,000 jobs will be needed.

I can see that there will be job creation in areas such as public transport and work places will have to be kitted out to cope with all the wheelchairs, incontinence and zimmerman frame parks. Plus the sofa industry will take a boost to provide somewhere for the "mid day naps".

There is one single thing that is axiomatic to any sort of recovery, and that is employment, real jobs and not pseudo-jobs. It is only through jobs and creating wealth that all this debt can be paid off.

So is austerity going to fix it? Well, no is the easy answer to that question. It is being forced upon us by threats from the rating agencies, who are all acting in the same of Uncle Sam.

To bring down the government debt first of all you have to stop increasing it, which in the case of the UK means the LibCons have to reign in, I dunno, where are we now, 12% or something of the GDP. Now, in my simple mind, taking the UK gov spending at 50% of the GDP, a triumphant achievement of Brown, who was trying to make it 100%. So the LibCons have to cut government spending by 24% just to stop the debt getting bigger. And they would have to do better than that to start repaying the debt. Well, that is not going to happen.

But at least the peeps are being fed something they can relate to. Nobody understood QE, and ZIRP, unless they had a decent colour laser printer at home or could hack into the banks and add a zero to their bank balance. So I suppose the can is a bit further down the road, the peeps have been told that the Leaderz are in control and doing something, the World Fartball is on the TV, we're all doing our bit by paying more taxes on the beer, and so we'll have the Austerity Year 2010, tighten your belts and save the UK.

Well, yes, whatever.

We are also being reliably informed that although Brown's forecast of GDP growth based on increased gov. spending was 2.6% (something like that) the new lower revised figures, presumably arrived at by a building full of academics who converse in that alien language

"The gross stock of financial wealth will depend on the saving rate and on the number of years individuals expect to be retired

3. Given that there is an optimal wealth to income ratio, WR, in an economy growing at g the saving rate will be g*WR higher to sustain the equilibrium ratio, and consumption will be lower than permanent income."

I suspect that these guys are in a completely different universe, and housed in a big building with no windows. As they are unable to converse with normal humans, two people are employed as the interface, the INPUT guy and the OUTPUT guy.

That young lad Osborne (wonder if he wears shorts at home, like Angus Young?) drops off his request "give me the GDP forecast for 2010", this then gets processed in the alien language until they come out with the RESULT wrapped in

"Non-human wealth may rise when, for instance, house prices rise and this may increase consumption in the short term even though real output may not have risen. We presume that consumption is determined by forward looking behaviour in the long term, but short term adjustment depends upon a number of factors. As Barrell and Davis (2007) show, changes in financial (dlnNW) and especially housing wealth (dlnHW) will affect consumption, with the impact of changes in housing wealth having five times the impact of changes in financial wealth in the short run"

The OUTPUT guy takes all of this, scratches his head, "Bugger Me!" hits a number generator and writes 1.4% on a bit pf paper, to be picked up by Osborne later.

Which brings me to wonder how they can still carry on emitting positive growth in the face of the Austerity Challenge, I have to assume that they missed out a negative sign and got the decimal point in the wrong place. -14% sounds much more achievable.

There is no way the debts can be paid off with a bit of extra taxation, a dose of austerity with a background of jobless oldies and youngies, that is pretty much the way it is. So we have to look for a more radical solution to this.

As the government and the banking system are working together closely to move all the wealth from the country to the banks, one solution is to reclaim it all, nationalise the banks and combine the balance sheets. We cannot keep accelerating up the exponentially growing debt pile. It is a ridiculous notion. Surely there is not a single being who believes this can and will be paid back?

Edited June 15, 2010 by 12DrinkMore

[12DrinkMore]

Why would you invest in something that has been in a 30 year bull market ? Why would you invest in the most obvious bubble asset in the world right now ?

Because, as our Maggie used to say

There Is No Alternative

[midas]

Gerald Celente looks to be well on track regarding his USA tax riots prediction

in 2012 May even happen before then.

Congressional Candidate Calls On Americans To "Gather Their Armies" Against Taxes And The President

Read more: Congressional Candidate Calls On Americans To "Gather Their Armies" Against Taxes And The President

and wait until they see what will be demanded from them after January 2011 !

[12DrinkMore]

Inflation can be viewed as increasing the amount of dollars by printing more or just raising the level on the banks computer and then taking away from those dollars ie raise tax to pay for the bail outs ect. Therefore the dollars buy less and less. The trillions owed by the USA and other countries have to be paid back and the taxpayers will foot the bill through increasing taxes and other costs. THis is inflation as the dollar and other currencies value are being eroded.

Yes, I appreciate that the US has had a policy of long term slow USD devaluation, coupled with the aim of a 2% inflation rate, a nasty stealth tax. Although both these things are completely entwined in each other, I think they are two distinct processes.

However, I was posting about hyperinflation, and couldn't get to grips with Sokal's

"The first stage for hyperinflation (currency collapse) is a shortage of the said currency"

[teletiger]

Auf wiedersehen pet.

Angela Merkel's government threatened with collapse

Angela Merkel's government threatened with collapse | World news | The Guardian

Regards.

[Abrak]

Longer term (and how much longer than 20 years do they need?) it's a dysfunctional economy but today this isn't really a long term issue; the sovereigns are good until they're not - there was no money shorting Greece for the last 2 years - it's all about timing which is notoriously difficult and while I'm not saying that you're wrong, I am saying that there are justifications for many investors to hold JGBs today (we haven't got any mind you but I know some hedgies who think that they can profit from JGBs) and there are an awful lot of people in Japan would question why hold any western sovereign debt? (which almost becomes a default reason to many people to hold/buy JGBs....)

First of all you are right in many respects - shorting Japanese bonds and related trades has probably lost hedge funds more money than any other trade over the last ten years. It is known as the widow maker.

But the dynamics now really have changed.

1) The austerity challenge is going to be disaster because spending is reduced GDP and possibly prices are going to fall back. The sovereign debt issue is not going to go away fast. The UK is going to announce GBP 34bn of tax increases and spending cuts and the they are going to have to do it again in each of the next 5 years to make numbers add up.

2) Given the underlying issues of slow growth, a large fiscal deficit, the highest debt/GDP ratio In the world and by far the lowest long term interest rates, it is rather surprising the credit default swap isn't higher than the current 10 year interest rate.

3) The widow maker has been a consequence of the Japanese savings ratenthat used to be 18% 20 years ago and is now 3% and falling. Given the fiscal deficit, Japan is soon going to have to turn to foreign funds to finance it's bond issuance. It is not a central reserve currency and I simply don't see where the demand would come from sub 3% or so.

4) At 1.3% the returns are totally asymmetrical on the trade. Also the fundamentals are too - the longer you live with low rates the more you depend on them.

5) current rates are sort of justified by the deflation argument. debt/PQ can be solved by growth but it has no growth prospects, the current concept is that your way out of the

Problem is deflation but you cannot as fast as you deflate your spending, your revenues, prices and Gdp will deflate even further. The lesson of the austerity challenge will be there is no winner and that inflation is the only long term underlying solution.

The reason that I whinged about output gap analysis is because the underlying assumption is that historic average growth rates some how reflect potential growth. Say Spain didn't really grow at 4% a year over 10 years it was just a debt bubble growth. They didn't really have 2% fiscal deficit it was that the artificial boom inflated revenues and reduced expenditures. Which why these fiscal deficits have turned structural. Still nobody has started to deleveragee more yet. Actually this is the easy year of the austerity challenge because growth is recovering. Next year it will be more interesting when growth disappears.

[Gambles]

Gold miners look interesting value right now but they're a ahem mine field - in my experience, this is a highly specialised and very under-researched area well exploited by Evy Hambro and the team at BlackRock

Gold on a structural basis makes sense to $ 2000 - sentiment could then drive it on anywhere from there - but the further above $ 2000 it goes, the more we're getting into nosebleed territory when it all goes wrong......

"Evy Hambro" - A new manager ? What track record ?

and re gold / silver stocks check out these charts

http://stockcharts.c...540918&cmd=show

"but the further above $ 2000 it goes, the more we're getting into nosebleed territory when it all goes wrong......"

How can one value gold - Why is $2000 too expensive - Why not $10,000 / It is supply and demand - Why is a good wine expensive and what is it's value ?

More and more people are looking at gold as an alternative to paper currencies - So perhaps we are looking at a bubble / inflation but I think it is going to go higher than $2000 unless politicians get their acts together very soon /

Sorry, Churchill, not sure that I answered this ?

Evy Hambro runs Gold/Gold & General @ BlackRock which I think you know is our staple approach to the sector - last month underperformed (+6% as opposed to +12%) the FTSE gold miners which left him about 1% adrift of that index over the 12 months (which owes its main gains to currency moves) but still handsomely ahead 5 years (annualising at 29% as opposed to 23%)

Why would gold price stop at any point? Equilibrium - there'll come a point when sweapping a few oz of gold for a big handful of equities or a new house looks like a good deal and at that point the party;s over

historic average of gold to DJIA is around 1:5

It will almost certainly go much lower before it then mean reverts - between 2-3:1 would make sense - if you see conditions beneficial to gold in a deflationary environment where do you pick he DJIA - probably 6-7,000 is a consensus figure so that means $2-3,500 is the end game

However a real blow off rally could easily see 1:1 breached for the first time but that's probably a DJIA <5000 and gold >5000 picture which isn't likley to last long - at that level you have very little incentive to carry on holding gold

IMHO

[flying]

However a real blow off rally could easily see 1:1 breached for the first time but that's probably a DJIA <5000 and gold >5000 picture which isn't likley to last long - at that level you have very little incentive to carry on holding gold

IMHO

I have said more than once that would be a sell for me...1/1 parity with the DOW

[Gambles]

Moody’s Downgrades Greece to Ba1 From A3, Stable Outlook - Bloomberg.com

The Greeks have been relegated by Moody's four levels to Ba1 from A3. The outlook is stable, Moody's said. Oh! Well stable sounds good to me. Does that mean no more relegation? But I wonder if tomorrow the Portuguese will be downgraded. Hmmm, my old Gran always said charity begins at home, so how about looking a little more closely at the trillions of USG debt? Apparently this is now up there on some sort of invincible pedestal.

Greece is a drop in the Ocean

So is Ireland

But defaults come in clusters

Spain and Portugal will (IMHO) either default or be rescued

Italy will follow (Italy has for historic reasons the best record of not defaulting of the major Continental economies)

That's a huge problem - bigger than Ireland, Spain, Greece and Portugal combined

bigger than France or Germany in terms of liabilities

That could easily push all of the EU into default/quasi default

History would imply that this is almost inevitable - the die may be cast. Naam will be reaching for his keyboard to except his Fatherland from this but I firmly believe that once the old D-M bloc start to wobble, Germany's fate is also sealed. Inter-connectedness will be the rock that the heart of the EU perishes on and Franco-German relations could well get a little bit testy again

This is a no-brainer, at least in IMO

Emergency Bans on Naked CDS Trades Considered by EU (Update3) - Bloomberg.com

Just stop it, no debate. I cannot insure my habitual drunkard neighbour against demolishing his car. The realm of the Almighty Finance Industry has sprung far out of the bounds of reality and reasonableness, the powers urgently need to bring in a sense of "Get Real", and cut the Finance Industry down to levels where the average Joe can understand why some git receives a USD 10,000,000 bonus. Which they do not. So it should not happen.

Actually it's more complex than that

Shorters are sellers and every market needs buyers and sellers - yes they;'re sellers with a difference but spuriously banning shorting is changing the rules of the game half way through and that damages the integrity of the capital markets (if they still have any). The seminal paper on this, IMHO, remains the first few chapters of Machlup - called something like "On the Formation of Capital Markets ...etc etc " - written the best part of a hundred years ago (obviously read the English translation which came around 20 years later). The copy that I have these days was dowanloaded from the net - can't remember if I paid, might even have been free on an academic or Austrian website

And here they come, as expected, with reasons why the bailouts occurred and it would have been so much worse,

AIG Rescue Spared European Banks From $16 Billion Capital Raise - Bloomberg.com

Yeah, great, they might have avoided a shovel of shit then, but now we have a whole shed full of it and no end in sight. And that is what pisses me off. The fall out, the toxic crap, has not gone away, it has merely got bigger (anybody see smaller numbers mentioned?) but transferred from the guilty bastards to the rest of us through the political feckers, who take a rake on the way.

But now here's an interesting statement

Europe’s Banks Face Second Funding Squeeze on Sovereign Crisis - Bloomberg.com

Major global banks face a huge capital squeeze

Don't be surprised to see China taking stakes....possibly on Chinese terms (and still overpaying at that)

Too big to fail should have failed

Now it's become too big to fix

[Gambles]

Anyone worked out how you will the Austerity Challenge yet?

It does seem....quite tricky....

Fitch downgraded Spain's credit status one notch from the maximum AAA to AA+.

Fitch feared Spain's economic growth will suffer as the country moved to slash its mounting debt.

"We want to point out that Fitch deliberately waited for Spain to pass their 15 billion euro ($18.5-billion) austerity plan before making their announcement which implies that they do not believe the nation will be able to cut their deficit and still meet their growth targets"

So Fitch downgrades Spain's debt because reduced public spending is reducing growth. Presumably without the austerity package they would have downgraded Spain's debt because it is increasing rapidly. So with a Debt/GDP problem you either increase the nominator or decrease the denominator.

Talking of sovereign debt problems has anyone seen the report recently published by BIS. It projects sovereign as a % of GDP going forward until 2040 for the major economies. The lowest comes in at 250% of GDP and the highest Japan at 600% closely followed by the UK. It also forecasts by 2040 interest payments on Government Debt in the UK will be equivalent to 25% of GDP.

So guess which country has the lowest debt to GDP. The surprize winner is Italy.

The numbers are helped quite a lot if you move the retirement age to 80.

Actually Italy has exceptionally high sovereign debt to GDP

but a low deficit

but guess where I expect the next big announcement about 'fiddled figures' to come from?

The EU's fate substantially depends on whether the deafult contagion can stop and Italy is the key battleground which will determine the outcome of this war

[Gambles]

Longer term (and how much longer than 20 years do they need?) it's a dysfunctional economy but today this isn't really a long term issue; the sovereigns are good until they're not - there was no money shorting Greece for the last 2 years - it's all about timing which is notoriously difficult and while I'm not saying that you're wrong, I am saying that there are justifications for many investors to hold JGBs today (we haven't got any mind you but I know some hedgies who think that they can profit from JGBs) and there are an awful lot of people in Japan would question why hold any western sovereign debt? (which almost becomes a default reason to many people to hold/buy JGBs....)

First of all you are right in many respects - shorting Japanese bonds and related trades has probably lost hedge funds more money than any other trade over the last ten years. It is known as the widow maker.

But the dynamics now really have changed.

1) The austerity challenge is going to be disaster because spending is reduced GDP and possibly prices are going to fall back. The sovereign debt issue is not going to go away fast. The UK is going to announce GBP 34bn of tax increases and spending cuts and the they are going to have to do it again in each of the next 5 years to make numbers add up.

2) Given the underlying issues of slow growth, a large fiscal deficit, the highest debt/GDP ratio In the world and by far the lowest long term interest rates, it is rather surprising the credit default swap isn't higher than the current 10 year interest rate.

3) The widow maker has been a consequence of the Japanese savings ratenthat used to be 18% 20 years ago and is now 3% and falling. Given the fiscal deficit, Japan is soon going to have to turn to foreign funds to finance it's bond issuance. It is not a central reserve currency and I simply don't see where the demand would come from sub 3% or so.

4) At 1.3% the returns are totally asymmetrical on the trade. Also the fundamentals are too - the longer you live with low rates the more you depend on them.

5) current rates are sort of justified by the deflation argument. debt/PQ can be solved by growth but it has no growth prospects, the current concept is that your way out of the

Problem is deflation but you cannot as fast as you deflate your spending, your revenues, prices and Gdp will deflate even further. The lesson of the austerity challenge will be there is no winner and that inflation is the only long term underlying solution.

The reason that I whinged about output gap analysis is because the underlying assumption is that historic average growth rates some how reflect potential growth. Say Spain didn't really grow at 4% a year over 10 years it was just a debt bubble growth. They didn't really have 2% fiscal deficit it was that the artificial boom inflated revenues and reduced expenditures. Which why these fiscal deficits have turned structural. Still nobody has started to deleveragee more yet. Actually this is the easy year of the austerity challenge because growth is recovering. Next year it will be more interesting when growth disappears.

Totally agree with 1,2, 5 and your conclusion

Not quite 100% convinced that Japan is quite as bad as you see it but am not a million miles from your PoV

Just that Japanese accounting makes their debt burden seem even higher than it really is relative to western accounting which makes ours seem lower than it really is