The Doom Gloom Report

[Nictoe]

ZERO INTEREST - INFINITE DEBT

March 12, 2009

BILL BUCKLER

The economically imploding world is entering into the land of the surreal.

Central banks worldwide have reached (or are nearing) zero target rates of official interest. There is next to no room left to manoeuvre to try to reignite any new credit expansion. The alternative now sought by governments of all descriptions is to replace the borrowing the public is not doing with their own. Budget deficits are exploding all over the world.

A Mindless Spectre Is Stalking The World:

It is a spectre launched by Lord Keynes in 1936 when he warned that if the public lowered their consumption and increased their saving, there would be "insufficient demand". According to Keynes, such a serious situation had to be promptly addressed by deficit spending and lower interest rates to increase demand through credit expansion. What he never understood was the role of savings as the real economic means with which to increase the capital tools of production and therefore, later consumption.

In all his writings, Keynes stated that savings could be replaced by credit expansion and government budget deficits as the means with which to keep demand up, factories humming and consumption at a height that ensured "full employment". What Keynes never understood is the fact that any given structure of capital tools and infrastructure has a requirement for an ongoing stream of savings simply to maintain it. Such a structure requires an even greater stream of savings to improve and/or to expand it.

Today, with lowering interest rates no longer an option, governments are making a desperate play for the second Keynesian alternative - deficit spending. But deficit spending only consumes the capital!

Global Advance Warning - Another Downturn Straight Ahead:

Stock markets act to discount future economic conditions into present-day prices. Stock markets around the world are now flashing red. The MSCI World Index had three consecutive weeks of decline to the end of February. As of the end of February, the benchmark had fallen 22 percent since the year began. In 2008, the index fell 43 percent! The global deflationary effects of these huge falls are enormous and are spilling into the world's real economies with startling speed. Corporations everywhere are cutting their dividends, wanting to hold on to the cash themselves. As a consequence, insurance companies, pension plans etc. can now look forward to a cut in their incomes from dividends. When the ownership of capital - which is what owning shares means - no longer pays a useful dividend, then the capital is worthless.

If the ownership of monetary savings no longer pays a useful rate of interest, then the money is worthless.

The World's Factories Are Falling Silent:

Former US Fed Chairman Paul Volcker has called attention to the unprecedented slowdown in the world's factories. He stated that the present slowdown in world factory production was happening faster than in 1930! The Privateer has called attention to this situation over several past issues. Factory output is collapsing at the fastest pace ever. Here is the global roundup. The annualised figures for February are as follows: Taiwan - 43 percent, Ukraine - 34 percent, Japan - 30 percent, Singapore - 29 percent, Hungary - 23 percent, Sweden - 20 percent, Korea - 19 percent, Turkey - 18 percent, Russia - 16 percent, Spain - 15 percent, Poland - 15 percent, Brazil - 15 percent, Italy - 14 percent, China - 12 percent, Germany - 12 percent, France - 11 percent, US - 10 percent and Britain - 9 percent. This is a catastrophe.

When "Just In Time" Runs Out Of Time:

Prior to the Japanese inventing "just in time" manufacturing in the mid-1950s, most factories held much larger in-house inventories of the necessary components for what they made. These inventories made it possible for factories to keep working in the event of a temporary disruption in their supplies. This is not so today, for the good economic reason that holding large inventories costs money. In today's world, most factories only hold an inventory of between three to five days of production - or even less.

This leads directly to the danger that the massive global slowdown in manufacturing will have the effect of ripping the links in the global production chain apart. A shutdown in one place can disable many other factories all around the world. If the main producer of one simple item common to many production processes suddenly closes its doors, the remaining producers do not have the capacity to fill the output gap. Real physical factory shutdowns follow as a matter of course in many other places until the item can be produced elsewhere. This is a real physical situation - and an unavoidable one.

Commercial Finance Too Has Gone "Just In Time":

Again back in the mid 1950s, most businesses held sufficient money in liquid or near cash form to meet all their expected payments for between forty to one hundred days into the future. That gave them an immense inherent financial resilience if some of their customers were late in making payments. Today, the "just in time" theory has taken over here too. Most businesses only hold in house what amounts to "cash in the till". Most borrow VERY short term, weekly or even daily. Most modern businesses are reliant on payment from customers to make their loan payments, even their short-term loan payments.

This is why the global credit crunch is so dangerous for business. It has progressed from a credit slowdown - to a credit contraction - to a global credit money deflation. This process has hit business HARD. Around the world today, there are numberless businesses which can no longer gain access to previously easily available "just in time" financing. Holding little if any cash with which to meet normal payments, most of these businesses have a forward time horizon of a week. Deprive them of short-term commercial credit and they have no other choice than to close their doors when all those who have supplied them with goods cannot wait any longer for payment. This has broken the "supply chain" just as the inventory situation has, but this time for financial reasons. Today, both of these two economic events are hitting home over the world. One affects physically real goods. The other event is financial but just as real in economic terms. Combined, these two features explain the crash in global output.

Before June This Year - There Will Be REAL Scarcity:

You can't get any if there ain't none! The global factory slowdown already reported here will have real and physical consequences - soon. There will suddenly be gaps on the shelves of stores which were normally filled with retail goods of certain kinds. When the store manager is asked why this has happened, he will likely answer that the supplier suddenly went out of business. Don't be surprised if that store has closed its doors when you come by the next time. The great deflation is hitting the ground.

The US Budget - Deficits With A Vengeance:

The proposed Obama federal budget is so extreme in its financial structure as to defy description. The Privateer is used to that, though. Revenues for 2009 are projected at $US 2.19 TRILLION, down 13 percent from a year ago due to the recession. With the bank bailouts and the $US 787 Billion economic recovery program, 2009 expenditures are estimated at $US 3.94 TRILLION - up 33 percent over 2008.

Note that the Bush bailouts contribute to the huge $US 3.94 TRILLION spending estimate.

US Budget Deficits As Far As The Eye Can See:

Revenues $US 2.19 TRILLION - expenditures $US 3.94 TRILLION. That leaves a gap or budget deficit of $US 1.75 TRILLION! And THAT leaves a US federal budget in which 44 percent of its expenditures must be borrowed. That is a 32 percent expenditure increase over the 2008 level, one of the biggest year to year increases in the past 50 years! It represents 27.7 percent of GDP, a serious hike from the 21 percent level reached in 2008. Borrowings are projected to be 79.9 percent higher than federal revenues, a situation well known to banana republics. Any fiscal sanity has gone completely out of the window.

Obama's First Budget:

The 2010 proposal that President Obama has sent to Congress is for a $US 3.55 TRILLION budget for the fiscal year which begins October 1 this year. The projected deficit for this 2010 budget is $US 1.17 TRILLION! With the current fiscal year now half over, the US is planning to borrow and spend $US 3.52 TRILLION over the next year and a half! President Obama's first full year budget also seeks standby authority for $US 750 Billion for bailing out US financial firms while planning for a health care system overhaul and almost $US 1 TRILLION in higher taxes from 2.6 million of the richest Americans.

It is worthwhile to understand here who are deemed to be the "rich" inside the United States. In Obama's case, it is any single person earning $US 200,000 in a year and any family earning $US 250,000!
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[theLIBERTARIAN]

I hope the predictions are wrong.

As per:

[Biscuit]

But in the last 8 years, the deficit was only running about $416 billion.

In just two months, Obama has us at a staggering $1.5 trillion.

No, dont expect a 'boom' anytime soon.

[theLIBERTARIAN]

In the last quarter Bush pumped the debt up $10 trillion - off the books. But you are right, Obama is jumping up the debt. I saw this:


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[GOODave]

[theLIBERTARIAN]

I saw this:

[Nictoe]

AIG: Money Vortex

MICHAEL BERRY
March 20, 2009

When will this endless money vortex end? AIG received another $30 billion equity infusion from the TARP program to stay alive. The government owns slightly less than 80% of what once was the world’s largest insurer. Any further ownership and the taxpayer will be on the hook for the millions of individual insurance policies. The government has now either injected or loaned somewhere between $163 billion and $180 billion to the insurer. This is the full extent of the taxpayer’s exposure.

This AM the company announced a fourth quarter loss of $61.7 billion. The full year 2008 loss is now mounting at $99.3 billion ($.1 trillion!). AIG’s CEO, Edward Liddy, says that severe illiquidity was the problem in September. This AM he suggested on Bloomberg TV that the company now only needs enough equity to support the debt. He believes that with this injection the company can survive. Mr. Liddy was very direct in placing blame for the problems of the company squarely of the shoulders of former CEO Hank Greenberg. He believes that the company’s credit default swap business ($65 trillion notional value) and the compensation structure, both instigated under former CEO Greenberg, are to blame for the woes. The $30 million infusion will allow Moody’s to leave the all-important AIG credit rating untouched. This was a key outcome not only for the company but for the entire global banking system.

I have been castigated from some readers for being too bearish – "all doom and gloom," was one reader’s comments to me last week. Others think I am too optimistic. Nevertheless, I have to call it the way I see it. The government could not let AIG go bankrupt. The Lehman bankruptcy was a crime perpetrated by then NY Fed Chief Timothy Geithner perhaps with support of Treasury Secretary Paulson. What worries me most is the continual decline of the Philadelphia Bank (equity) index. It has fallen 83% in 13 months despite repeated rescue attempts that have become known as "bailouts." This cannot be a good harbinger of the policies that both the Republicans and the Democrats have enacted to save our faltering financial system.

Some have suggested that instead of being so gloomy I should suggest corrective measures. Unfortunately I do not know of any such measures. Apparently neither do the solons in Washington. Mom and pop are increasingly on the hook for the rescue of the financial system. Our leaders tried "ring fencing" toxic assets. This strategy didn’t work because assets continued to turn toxic quicker than the fence could be expanded. We talked about the idea of a bad bank. Treasury just couldn’t figure out how to do that. Recently the idea of bank nationalization has been floated a la Sweden. Fed Chief Bernanke rejected that alternative out of hand last week. So I suppose the bleeding will simply continue until it stops.

But there are courses of action. I have written for two years, December 2007, to raise cash and hold gold exposure. This is what I continue to suggest as a positive step under the current very tough circumstances.
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[camulos]

[theLIBERTARIAN]

Now that the government owns AIG, what can they do? I wonder if they could sell it? Go bankrupt? What??? Bush should never have had the government buy it in the first place.

I guess they could stop giving AIG money, and IMO they should quit. But would it be legal? Would the government have to BK too?
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[camulos]

[theLIBERTARIAN]

My point was that now that the government owns AIG, can they say they don't want to take care of AIG's obligations? Let's say that I have lots of money and owe some people - can I say "I refuse to pay you"? Bush made a huge mistake in buying AIG and making their obligations, our obligations.
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[camulos]

[theLIBERTARIAN]

They have talked about selling off the assets of AIG. The life insurance part is very profitable. But who is going to buy all of the CDS obligations? It is a messed up situation.
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[Nictoe]

They had the daughter of AIG's founder on TV last nite. She was utterly pissed about the bonuses and the way its was mismanaged.
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[camulos]

They bought where others couldn't afford. They made either a VERY BAD investment, or a VERY GOOD investment...

The CDS should remain 'company property' to deal with. Share-holders after the fact have put in money, in purchasing the shares.

Or let them BK or belly-up, and everyone take the loss.

Sell the LI contracts to those companies who can actually afford them.

Just another day at the office.

The US isn't going to collapse just because a business goes under.

Circuit City died after 70 years. It cost a few (on the grand scale) jobs, but we are still the USA.

It can happen without killing us.

How many businesses died during the Great Depression? And look at what's happened since...

The problem I see in the whole thing is the government nosing around the private sector.