Friday, January 18, 2008

The End of Finances?

So, we have a frightened government and power structure now running around like chickens with their collective heads cut off. We have the far right screaming that "A $3 Trillion Bankruptcy Will Start to Emerge" while the far left shouts "From Sound to Slush: The Stimulus and the Meltdown". Heck, we even have Business Week crying about the "$850 Billion Home Equity Crisis Dead Ahead". While the numbers vary wildly, one thing is consistent - everyone expects even larger losses than those already reported by Wall Street.

What's the reaction on Pennsylvania Avenue to this? Talk of "Bush Considers $800 Tax Rebate For Every Filer" dominates the news while rumors abound that Helicopter Ben and the Federal Reserve will throw caution to the winds and cut the prime rate by a full 100 basis points (a full 1%) either soon or at the next regular meeting at the end of January.

Why are they frightened? Ambac just lost their rating. What does this mean? There is a good chance, not certainty, but good chance that the next 180 days may see financial Armageddon for the entire planet. Right now the insurers for all this debt have been uncovered as bankrupt themselves. Ambac is just the leading edge of this second wave of the financial mess. If you don't understand what this means, then you need to try to educate yourself. But think of it this way - the insurers have certain ratings and they transfer their rating to a financial instrument in exchange for an insurance fee. In normal times when these financial instruments are properly valued and rated, they are properly insured and usually don't default anyway. But now everything is contracting. The insurers are broke and their ratings are being downgraded, which means every single dollar of debt they insured is going to drop in ratings as well, causing a cascading failure of revaluations across the board. So even the $3 trillion headline above is wrong. This could run into the tens or hundreds of trillions of do

In other words, we may be looking at the entire global dollar based fractional reserve banking system resetting to zero. To make matters worse, we are facing the early wave of effects from climate change plus the planetary cries from resource depletion. Like many others I thought we had a bit more time but the collapse of the insurers is going to shake the entire financial foundation. Note that the government may try, as a last ditch effort, to use its own "credit" as backing for the insurers. If this occurs, expect government debt to skyrocket, perhaps as high as 20% for the base rate and all other rates being somewhere above that. Such an attempt would collapse within weeks to months at best and perhaps days at worst. Such an action would be an admission of financial collapse.

We are talking about the potential end of the dollar as a currency. A dollar may shortly be as interesting as a Confederate note - historically interesting but worthless. And into that gaping chasm, the entire human race is running, while at the same time running out of core resources.

The Chinese are said to have a curse, "May you live in interesting times!" It certainly appears that these are going to be interesting times.


goritsas said...

I'm totally stumped that no one, not the LameSM, not a UK broadsheet, not anyone I know personally, has said anything about the Bush payoff. The amount itself is trivial in reality, I know. The act is of such momentous importance I just cannot believe no one anywhere is saying the obvious, the U.S. isn’t just already in a recession, it’s going to be in a depression. We’re only few weeks or a handful of months before former citizens of the republic are either wandering the streets looking for something, anything, or are staying in one of those KBR / DHS residential blocks.

Mass layoffs seem inevitable. If the estimated 40% of the economy that was dependent on the housing bubble is gone, as seems rather more likely than not at this juncture, city financial centres are going to become empty. Strip malls are going to be stripped of anything of value and left derelict. Gigantic indoor shopping malls are going to become ghost towns their car parks overgrown with weeds and even possibly torn up to be used as gardens.

I cannot see how this is going to end other than badly. Nor do I see the rest of the OECD escaping from the fallout. To be sure, some will do better than others. The UK and Ireland and Spain and Italy are going to suffer as bad as the U.S. Germany, France and the Benelux countries may be spared some of the worst of it, but maybe not. Geeze, I guess humans aren’t smarter than yeast, as it turns out.

Do you think a pre-emptive nuclear strike might be in order?

PSA said...

Being from France myself, I thought for a long while that we could be spared most of the fallouts from the financial crisis (but obviously not from the energy crisis), due to a banking system that I though was cold-blooded, even during bullish times (i.e. late 90s) and due to the fact that bank deposits are insured, I thought we would not see any bank run here in France.

However, SocGen and others proved me wrong on the first point, and the fact that reinsurers could go bankrupt as well proved me wrong on the second point.

There is no safe haven from the coming crisis, which is developing extremely fast : only a few months ago oil cost $75/bbl, last year at the same time it was around $49/bbl, and only a few weeks ago things looked a little smoother...

See a pattern here?

I don't see Russia or China as safe places either. No one is going to replace the US and the new hegemonic superpower, and no block is going to replace the West as the richest region. Everyone, though, is going to take the beating.