- Essentially, for the first time in history, the debtor is going to try and dictate the terms of resolution to the lender.
Guess how that one is going to turn out?
Posted on 12/28/2008 10:42:49 PM PST by Freedom_Is_Not_Free
To extend my last post above, whereas it used to be “He who has the gold rules”, now it seems to be “He who collects the taxes rules.”
Great discussion.
Thanks for the thread!
Guess how that one is going to turn out?
You are welcome. My hope posting these are to try to stimulate a discussion between the knowledgeable people here I really respect, such as NVDave, Pythonic Cow, ex-Texan, Attention Surplus Disorder, Andy Jackson, Notary Sojac, palmer, nicola tesla, Travis McGee, and politickit. I learn a lot every time these folks kick ideas around, even when they don’t agree. Especially when they don’t agree.
I agree near-wholeheartedly with the article. I also agree that every inflation/deflation argument needs to internally define what the author means by same, and for that, I applaud the article.
The fluff in the economy is simply going to have to be sold down to rational levels. Home prices will have to return to historical levels of affordability; bearing some rational relationship to prevailing rents. No government intervention is going to be able to save pumped home-price levels. Likewise, the number of retail stores is going to have to decline until some point where those stores can operate profitably with an underemployed consumer. Same with cars, big screens, and beanie babies.
While that adjustment is going on, prices will probably fall. I’ll not call that “deflation”, but it will seem like deflation, defined in a “folksy” way.
At some point, prices and unemployment will stabilize and consumer demand will begin to pick up. Personally, I don’t think 2009 will see more than a few months of that type of action at best, meaning, IMO, 2009 will utterly suck in nearly every respect. The doldrums could very easily last through 2010.
Personally, I believe that the stock market goes significantly lower and should hit SPX 600 or even 500. I also think home prices are between half and 2/3rds their way through their decline. Depending on where you start counting, we’ve been the beneficiaries of either 35, 20, 10, or 5 years of extraordinary pumpage to the economy based upon NOTHING but credit expansion, and there are several cases I’ve seen that suggest the stock market could return to 1985 levels. I sure don’t expect the troubles to disappear in the standard 18 months of recession period we’ve historically gone thru. This is minimally 2.5 recessions.
Whatever inflation is to occur will IMO occur based upon the combo or expanding CREDIT in circulation and COMMODITY/raw mat’l. inflation, not the money supply, not the level of bank reserves, not the level of Fed reserves, not how pumped up are the floats in the Macy’s Xmas parade. Commods will probably lead by a tad, and then credit will expand when people see there are profit opportunities. IMO, there seem to be very few profit/growth opptys in the US economy. The situation is destined to be made worse by the voracious appetite for taxes and stifling regulations in Wash DC.
And finally, although it is in some ways the most important element when speaking about a prospective recovery, is the restoration of trust. Trust has been simply shattered, destroyed, humiliated, discredited. In every sector of the economy are lying SOBs who have plundered their companies and clients, for the most part without the slightest consequence. In fact, the greatest rewards have gone to the most egregious liars. Sure, Dick Fuld of Lehman had his company blow up, but that doesn’t mean he isn’t walking away with tens of millions. Hank Paulson, arguably one of the primary authors of the expansion of bank leverage fromn nominally 12:1 to 30:1, walks in 20-odd days with a $500 million tax free payout. He conned Congress into a $700 billion package by threat of catastrophe, and has now admitted that not one penny was spent in the way it was originally intended. And worse, none of it appears to have had any effect other than enabling his banking buddies to enlarge their empires. The Washington Mutual CEO Kerry Killington (or whatever the hell his name is) escapes with $88 million. Raines, nearly $100 MM. Gorelick, $26 MM. Jackson, over $20 MM. I don’t hear many pundits talking about this, but this IMO is a body blow to American entrepreneurship. For myself, one who has owned multiple successful companies, it sure as hell is. We’ve taken innovation, substituted sophisticated fraud, and multiplied the rewards a thousand-fold. Some of these creeps have to be frog marched to prison. If you’ll recall, that was a significant curative after the 2001 NASDAQ/NYSE crashes.
How much reserve currency is needed? The Chinese took a ton of dollars in exchange for their goods so they could build their manufacturing, not because they needed to build their reserves. There was no reason to dump those dollars in the past but their buying spree around the world shows they want to exchange as much of those assets for more diverse ones, particularly resources.
On page 152 of "The Great Crash: 1929" by John Kenneth Galbraith, First Published 1955:
"In good times people are relaxed, trusting, and money is plentiful, But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks. One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: "Every great crisis reveals the excessive speculations of many houses which no one before suspected."
My best guess is there will be a sudden devaluation of the dollar at the time that market chooses. The devaluation will abruptly stop once enough people are shorting the dollar. There might be more than one devaluation, but there won't be many because repetition would increase inflationary expectations.
Then the financial markets will be able to increase lending since today's ridiculously low rates will make more economic sense. There would be rapid increases in materials which would spread to labor (a good time to be a plumber).
I agree that the American era of “borrow and spend” is coming to a close. It isn’t quite finished yet at a national policy level. It is pretty close to finished at a personal/household level, and might be finished this year at a personal/household level.
I agree with you that there is a Treasury/Agency bubble. It is the fastest-inflating bubble I’ve ever seen, and I can find no parallel in history.
The mega-buck question there is this: how long can that bubble be kept inflated? Well, part of what it holding it together is that there is no alternative currency. Part of what is holding it together is that despite all this mental masturbation of “decoupling” that was bandied about in the past three years, no, there is no decoupling: everyone else is wedded to our economy. When we catch a cold, they catch pneumonia.
So there’s some enlightened self-interest abroad to prop us up, which might keep this T-bubble inflated longer than you or I would believe possible.
We agree we are running out of room to prop up the current system. I agree with you on that. I think that an austerity budget is about to be forced down on the politicians as the more likely outcome tho. If they don’t cut spending and reverse the deficits, then I’ll agree with you that there is no hope for the US dollar and the present financial system.
There’s also no hope for anyone else when that happens.
And when we run into this situation in history, we see wars develop. There’s nothing quite like a war to eliminate vast chunks of productive capacity to re-establish relative scarcity of production to help prop up prices again.
That’s true - they’ve been on a buying spree.
But without continued sales of crap to the US consumer, the goose laying the golden eggs is dead... and much of their ideas of future growth and expansion come to a shuddering halt.
I don’t know how much reserve currency is “needed” — that’s a really good question to which I should try and find an answer. I saw an estimate long ago, when the Euro was introduced, but that’s no doubt long been overtaken by events.
As John Maynard Keynes was quoted as saying in "The Politics of Public Fund Investing: How to Modify Wall Street to Fit Main Street" (2006) by Ben Finkelstein:
The market can stay irrational longer than you can stay solvent.
If I had read those words last summer, I would have thought you were absolutely right. But after the last quarter of 2008, I am not so sure that Treasury will act rationally. Or maybe it is acting "rationally" in a cynical sense, but not in the best interests of most people in this country.
Assuming that whoever has profited from the mortgage scams and bailouts currently have their money in US dollars, keeping the dollar's value from crashing would benefit them. But if a major part of the profits already have been moved to investments not directly linked to the USD, that would not be good IMO.
I don't know, you may be right that, in spite of everything, the governments will realize that world commerce depends on a standard currency, assuming that they want commerce to continue. I don't know if rats are jumping off a sinking ship, but since the 700B bailout did not require disclosure, it's hard for us peons to know. Judging by what I have seen, I am not counting on the powers to do what is best for you and me.
All great points, with your best on being about trust. I fear that overseas investors will not begin to trust private US securities for a long time. Not after their sub-prime CDS indigestion. Screwing over the entire world’s bankers with toxic waste is a pretty good way to insure nobody trusts you again.
I should be thanking you as I always enjoy your input.
I’m still convinced a huge cut will come from eliminating Social Security benefits from those who earn sufficient money not to really “need” them. Social Security will go from a retirement benefit to strictly welfare. It might be a progressive scale, where retirees with X income get X benefit up to the amount they are due if their income is non-existent.
All along I have said I won’t see a penny of Social Security, and frankly, I can’t see how they can afford to pay me. I’m 50 and will retire some time after I’m 60. I really believe during the next few years, the politicians will say, “if you have pension or 401(k) income, we can’t afford to pay you... sorry.” Look for AARP to go nuts barking in futility.
How do we have a major conventional war in the nuclear era? Do we write Gentleman’s agreement of Chivalry, or something? Nuclear war would solve a lot of our over-capacity problems, but I suspect that might actually make things worse somehow...
The problem is that all the major monetary authorities - Fed, Europe, London, Tokyo, China - have a stake and a say in the relative value of the dollar to their own currencies. Currency valuation conflicts have the potential to become this decade’s Smoot-Hawley moment, just as much as industry bailouts do.
Perhaps some middle eastern countries such as Pakistan, Iran, India, Israel, ... use some nukes on each other preceded and followed by much more conventional war and death, but none of the big guys China, Russia, France, England or the United States bomb each other.
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