Warning Signs of the Pending Great Compression

The truly amazing nuggets of wisdom are found in media outlets based outside America's borders. A major U.K. newsgroup cites sources within Citibank projecting two different outcomes resulting from our force-feeding cash and guarantees to the Greedy Beast we created...

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3526645/Citigroup-says-gold-could-rise-above-2000-next-year-as-world-unravels.html

Neither scenario will be acceptable to us, but the Beast cares not for our opinion.

The American Dream was plundered by growth for growth's sake... the ideology of the cancer cell. We created, and still nurture, a society where money is a magnet for more money. Wall Street's best and brightest succeeded in creating a demand for more demand, which supplied the illusion of eternal prosperity long enough to sucker most of us into the game. There was never any mental defense against this attack; accusations of ignorance, stupidity, "they brought it on themselves," or, "they should have read the fine print" kept those apparently more fortunate arrogantly blind to the fact that it could just as well have been you or I who got caught in the financial trap.

Now the whole world is trapped, and there is egg on the wisest faces. Unfathomably large amounts of money and guarantees are being thrown at the problem, and with the exception of inevitable and brief bear market rallies, our and our childrens' money only appears to make the monster hungrier. A happy ending in the immediate future seems quite unlikely.

The new economic reality, born of vainglory and lust for comfort and convenience, marks this generation's greatest gift to our impoverished progeny, who as yet have no idea their futures have been so inexorably mortgaged. We have unleashed a kind of economic slavery upon them and upon ourselves; in effect, we are now indentured to creditors whose faces we will never see. I hope the word ‘captors’ is not a more accurate descriptor, but I fear they will be anything but benevolent.

Follower Paladin offers the following insight:

Greed, and the myth of mandatory growth, are forces too powerful to resist. That doesn't mean that the natural dynamics of economics and the environment (and, by the way, while some consider those two to be separate issues that are at odds with each other, I consider them hard connected -- in other words, they benefit or suffer together) will lose out to human misconduct. Just the opposite. In the end, both will win; they just will win ugly. And, frankly, neither will care what happens to us humans.
--Paladin

This would make for great reality TV if it were happening on somebody else's planet.

No Accountability, No Outrage, No Problem

Paulson, Bernanke, Bush, and every single elected official serving in both the U.S. House of Representatives AND the Senate can kiss my ass.

EVERY SINGLE GODDAMN ONE OF THEM.

This is the end of the financial world as we know it.

Little Green Eggs and Ham

CNN is airing video about aliens this week. If they're really here, you know they're tuning in.

Why Washington Cannot Prevent Depression

The debt crisis, the primary catalyst of the economy’s decline, is far too big for the U.S. government to control.

Here are the facts:

1. Based on the Federal Reserve’s Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.

2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it’s safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.

3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion. A quadrillion is a one followed by every zero ever seen by everyone who ever lived; it's a number we should be using to discuss astrophysics... not economics.

In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion; this is a huge, unwieldy amount, but it is still minuscule in comparison to our cosmic-scale debt accumulation.

The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding (the first three bars in the chart) with the size of the $2.7 trillion in bailout commitments thus far (barely visible in the chart).

Still, most people insist, “If only Washington can avoid the mistakes it made in the 1930s … if only Washington can peremptorily nip this crisis in the bud … if only Washington can be our lender and spender of last resort … Great Depression II will never come to pass.”

What they don’t see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how...

Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it’s close to 350% of GDP.

Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red.

With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do this by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money. Lots and lots and lots and lots and lots of money.

Three weeks ago, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008.

Two weeks ago, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion — to finance the bailouts, to finance the existing deficit and to refund debts coming due. That’s four times the size of the entire deficit. This means you can expect an avalanche of new Treasury bond supplies, crowding out private borrowers and putting severe upward pressure on interest rates. And, needless to say, higher interest rates cannot end the debt crisis; they can only make it worse.

The rushed, puny government bailouts, which only passed muster in the House because of pork-bribes and threats, come too little too late to end this crisis. A depression, sadly, is unavoidable.

Days of Ripple and Crabgrass

Feel like stylin' and profilin' while the poor and downtrodden shed tears of unfathomable poverty and sadness? Your chariot awaits thee in Hong Kong, where luxury has never been cheaper. Taxes, title, import fees and shipping are extra.

Stickin' It to The Man

If you could fall behind on your mortgage knowing that you will not lose your home, will not need to move out, and that the loan will be favorably restructured (at a much lower monthly payment) once you're 90 days delinquent, would you do it? That is exactly what many underwater Fannie and Freddie customers could do under a re-structuring plan that will halt all foreclosure and eviction proceedings between Nov. 26 2008 and Jan. 9, 2009. Most will not qualify, but for those who do it will be a once in a lifetime opportunity to have their cake and eat it too.

There are a few catches. For one thing, your loan has to be owned or guaranteed by Fannie Mae or Freddie Mac, and it has to be worth at least 90% of your home's present value. Additionally, your current mortgage payment must be at least 38% of your income. Your credit will take a hit, but a FICO spokesman said that "one isolated delinquency will do less damage to your score than it has in the past," and that "if it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, that's what I would do."

This is priceless. It's also somewhat disturbing, but I'm getting used to that.

Economist Peter Schiff notes that the scheme rewards more than just default; it rewards seemingly crazy behavior like quitting one's job. Many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

This is a once-in-a-lifetime opportunity. People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford.
--Peter Schiff, President, Euro Pacific Capital

Technically, Schiff is correct, and it's not a crime to default on your mortgage. If you can reduce your principal amount by hundreds of thousands of dollars just by quitting your job for a few months, that's a deal that might actually make sense for some people depending on their situation. It's a pretty perverse incentive for the government to pony-up, but that's the hand that millions of Americans are now being dealt.

The irony here is delicious. Banks are perfectly happy playing around with the fine print of credit-card agreements to better screw their customers. That said, it stands to reason that these same customers would start optimizing their own situation with respect to the banks.

"We Admit It. We Have No Idea What's Going On"

Most of the news this morning reflects yesterday’s -427.47 point Dow bath and the general feeling that the recession is not only here now, but will be deep and lengthy. Overseas stock markets fell sharply Thursday, taking a cue from Wall Street, as investors remained anxious about the grim outlook for the global economy and corporate profits. In the U.S. layoffs are accelerating beyond already bleak expectations and older Americans, once close to retirement, are facing new economic realities and grieving the massive loss of money they scrimped and saved for retirement.

U.S. reports number of people making first-time unemployment claims rose to 542,000 last week - highest level in 16 years - yet at 8:00 a.m. President Bush said he would veto any bill that would extend emergency unemployment benefits. By 10:00 a.m. President Bush said he would sign it.

The Wall Street Journal's Market Watch weighs in on the Fed’s bad outlook in the video that follows; they have no idea what's happening either:
http://www.marketwatch.com/video/asset/analyzing-the-fed-gloomy-outlook/968A3DB2-B46A-487D-8255-D2D82A6645AE

As messed up as everything looks, however, nothing is so out of whack as the scenario painted for us by the Big-3 CEOs who packed their tin begging cups in their designer luggage which they hauled from Detroit to D.C. aboard their private luxury jets. My favorite part of the hearings went something like this...

"Gentlemen, if any of you flew commercial to these proceedings raise your hand.... let the record show no hands were raised."
"Gentlemen, if you are prepared to sell your corporate jet and fly back home commercial, raise your hand... let the record show no hands were raised."
"Couldn't you all have downgraded to first class or jet-pooled or something to get here? It would have at least sent a message that you do get it."

To critics of the Big-3's mode of transportation during these dark times, GM spokesman Tom Wilkinson said, "Making a big to-do about this when issues vital to the jobs of millions of Americans are being discussed in Washington is diverting attention away from a critical debate that will determine the future health of the auto industry and the American economy."

People judge you, especially when you're on the radar. Is there a Patron Saint of Dumbasses?

The Battle of Wits Has Begun

What's the impact to me if investors and others stop buying U.S. debt? I've heard lots of columnists say that as the U.S. debt increases, it's less likely that we can borrow money or at least we'll have to pay a higher interest rate. Is this something I'd notice in service cuts, government layoffs, etc., or would nothing seem to change?
-Matt K. Tacoma, WA

If or when investors lost their appetite for U.S. Treasury debt, you would notice the change.

If investors gradually decided they didn’t like our debt, the Treasury would simply increase the amount of interest paid on newly issued debt. This is how long term interest rates are determined. (The Federal Reserve sets only very short-term interest rates that apply to banks lending to each other. Banks also peg their so-called prime rate to the Fed’s short-term rate.)

Every time the Treasury auctions debt, it takes bids from investors who want to buy it. Whoever bids to accept the lowest interest rate wins the bid. That helps the Treasury keep borrowing costs low. Demand for Treasury debt has its ups and downs. When the dollar is falling, for example, investors usually want a higher rate to make up for the impact of that falling dollar on their investment. Those higher rates push up the cost of other long-term loans like mortgages.

Credit has become much harder to get — but not because of a lack of investor interest in Treasuries. The problem is that banks are afraid to lend because the system is still riddled with private debt — mostly backed by mortgages — that may go bad. Most mortgages will be fine, but they’ve been so scrambled up in complex pools of securities that no one knows exactly who’s holding the bad ones. It’s kind of like someone offering you 10 glasses of water and then telling you one of them is poison — but they can’t tell you which one.

That makes it pretty risky to take a drink.

The good news is that, despite the current financial turmoil, a rapidly slowing economy and huge the levels of U.S. debt, investors around the world are still snap-ping up Treasuries as fast as they’re printed. For the time being, the U.S. Treasury is still seen as the safest place to put your money. That strong demand has helped give the dollar a big boost in value against other foreign currencies. It’s impossible to predict how long that will last. These days, it’s impossible to predict just about anything related to the economy or financial markets.
--John W. Schoen, Senior Producer, msnbc.com

Petit Fours and Metit Fours

Sculptors Nora Liganno and Marshall Reese created this work of carved ice entitled 'Main Street Meltdown' to personify the ravages of disappearing wealth over time. The ice made its debut on 79th anniversary of Black Tuesday, the stock market crash that caused the Great Depression, Wednesday, Oct. 29, 2008 in New York. By Friday, what had not evaporated was mingling with angry Yankee-sweat in street-level gutters and trickling down to the sub-strata that are the New York City sewage and subway systems.

I thought the pic was pitch-perfect with respect to the continuing dull ache of business and financial reports that are due to drip our way in the coming week. The one I'm looking most forward to is The Home Depot's earnings report. I say this because I've been surfing the company's website and noticed they recently got into the electronics and office supply game. The stuff is priced pretty terribly out-of-whack, though, and I'll specifically mention a Canon MF-3240 all-in-one laser printer they'll sell for $495 plus tax and shipping that you can get for $100 and shipped free from Amazon. Same printer, $400 more at The Home Despot!

Home Depot: http://www.homedepot.com/webapp/wcs/stores/servlet/ProductDisplay?storeId=10051&langId=-1&catalogId=10053&productId=100528347&categoryID=503331
Amazon:
http://www.amazon.com/Canon-imageCLASS-Multifunction-Printer-0989B001/dp/B000EILTCQ/ref=pd_bbs_sr_1?ie=UTF8&s=electronics&qid=1226904651&sr=8-1

Yummy! Home Depot forecasts an 8% revenue decline for 2008, further souring previous estimates of 5% and 6.5%, which slightly exceeded market expectations. Maybe selling printers at a 500% retail mark-up saved their bacon, nevermind the slaughtered electronics customers.

Fair, Balanced, and Wrong

Q: What's worse than being wrong?
A: Being hated for speaking the truth.

Watch the boys and girls of Fox News get a year's worth of Peter Schiff shoved up their asses. It might be funny if this was happening on someone else's planet, but I doubt it.

I watched this clip several times; I felt a little worse with each viewing. The third time was enough... I had to stop. By then it was like looking at a reflection of our society with a bunch of hideous monsters playing the parts of all of us, while acting out the script we wrote during our last 30-odd years of bubble-building. The piety and haughtiness I saw in those who offered nothing but contempt for the man who dared express an opinion that differed from Fox-thought left me feeling cold, empty, and ashamed. When I realized that these buffoons were the same people whom we're trusting to get us out of this colossal mess, I felt worse than I ever thought possible to feel and still live.

Using the benefit of hindsight, we can appreciate the stomach-wrenching truth of Schiff's prophetic warnings as the Fox News Force gleefully marginalize and minimize his every (correct) prediction. But when the clip ends, we're jarred awake with the ultimate buzz-kill of our current economic reality and the deafening yet nebulous sucking-sound coming at us from dead ahead.

Technically speaking, the Great Depression lasted 44 months. That is the length of that that the economy was continuously shrinking between 1929 and 1933. Of course, the contraction was so devastating that the entire decade of the 1930's became known as the "depression era", simply because, once we had fallen into that abyss, it took a long time to crawl out, and even then not without setbacks (e.g., the "Roosevelt Recession" in the late 1930's). It will doubtless take us many years to recover from the current depression even after the economy stops contracting. Also one should not underestimate the ingenuity of the Federal Government in finding ways to prolong it.
--Astatula Map

Beyond the Fat Cats

The New York Times' Bob Herbert has a thought or two on the bailout. Number one, it's getting bigger, and fast. Number two, it's only helping the champagne and caviar crowd. I have another thought to add: number three, the part of the bailout shoved down the banks' throats is going toward buying other banks, not going toward loans that would ease the choke-hold of economic implosion.

For now, let's stick with Herbert's lament.

The fat cats who placed the entire economy at risk with their greed and manic irresponsibility are trying to lay claim to every last dime in the national Treasury. Meanwhile, we’re nowhere close to an economic recovery program that will help the people who are hurting most.

Back in September, with the credit markets frozen and the stock markets panicking, the treasury secretary, Henry Paulson, was telling anyone who would listen that his $700 billion bailout package had to be passed with lightning speed — no time to look at it too closely, no time for dissent.

The package was modified, but hurriedly. Now we learn that while all eyes were focused on this enormous new burden for American taxpayers, Mr. Paulson’s department was also engineering — separate and apart from the bailout — what The Washington Post described as “a quiet windfall for U.S. banks. ”

With virtually no public attention, and without the input of Congress, Treasury made a change in an obscure tax provision that benefited banks to the tune of well over $100 billion. Was this good policy? In the absence of proper scrutiny, how is it possible to know?

We’ve also learned that the government bailout of the giant insurer, the American International Group — already more than $100 billion — is apparently insufficient. Tens of billions more are needed.

When the Champagne and caviar crowd is in trouble, there is no conceivable limit to the amount of taxpayer money that can be found, and found quickly.

But when it comes to ordinary citizens in dire situations — those being thrown out of work or forced from their homes by foreclosure or driven into bankruptcy because of illness and a lack of adequate health insurance — well, then we have to start pinching pennies. That’s when it’s time to become fiscally conservative. President Bush even vetoed a bill that would have expanded health insurance coverage for children.

We can find trillions for a foolish war and for pompous, self-righteous high-rollers who wrecked their companies and the economy. But what about the working poor and the young people who are being clobbered in this downturn, battered so badly that they’re all but destitute? Can we find any way to help them?

In an article on Sunday, The Times mentioned a young woman in Philadelphia, Kyuana Everett, who is 21 years old, has a high school diploma and is desperate for work. “I’ve tried everything,” she said, “retail sales, office work, but the employers all say they have too many staff and they’re not hiring now.”

The article noted that Ms. Everett cannot even afford to rent a room for herself. She stays with her grandmother, secretly, in a home for the aged.

This is no ordinary recession. With brokerage houses, banks and a mammoth multinational insurance company depending on the Treasury for resuscitation, and with automakers like General Motors staring bankruptcy in the face, it has the feel of a monster downturn, a recession on steroids.

That kind of downturn buries people at the bottom of the economic ladder. We have an obligation to look out for them as well as for the banks and the A.I.G.’s of the world.

If I could place a message on the desk of the incoming president, it would have just one word: Jobs.

With credit cards maxed out, the stock market in the tank, family savings depleted and home equity evaporating, that weekly or monthly paycheck has never been so important.

Congress and the new administration need to think big — bigger than the stimulus package of $100 billion or so, which is being kicked around. Now is the time for a coast-to-coast “Rebuild America” infrastructure program. Put people to work repairing and rebuilding roads and bridges, decrepit schools and ancient sewer systems. Get the construction industry back on its feet.

And now is the time to get going on candidate Obama’s promise to move the country as close as possible to a system of universal health insurance. Pump the money from that vast project into the economy and get those jobs up and running.

And let’s get some help, quickly, to the families who are suffering most from the housing crisis — the ones trembling and heartbroken in the dark shadow of foreclosure.

The naysayers will claim that all of this is too expensive, that we can’t afford it. Where were they when we invaded Iraq? And how do they feel about the staggering amounts being funneled, with nothing like the proper oversight, to the banks and Wall Street?

Let’s try investing in America and its people for a change, rather than just hurling our billions into the abyss.

Bob Herbert
The New York Times, November 10, 2008 http://www.nytimes.com/2008/11/11/opinion/11herbert.html?_r=1&th&emc=th&oref=slogin

Plunder, American-Style

U.S. Bank Tower--Figueroa, Los Angeles, California

It is said that the American banking system is based on confidence and trust. When banks trust one another, they lend to each other, and then all the banks’ friends get to borrow money to buy the things they want. That’s great, but some time ago, this system got quietly ridiculous. Now all we're doing is buying skyscrapers for banks. Here's how I got there...

When banks trust other banks, they extend credit to each other, manufacturers, wholesalers, retailers, and consumers like you and me. Manufacturers use their credit to buy raw materials then use those materials to manufacture goods. Wholesalers guess what we want to buy, and then borrow the money from banks to make sure they have enough stock to cover what we want. Retailers take the banks' wonderful credit and use it to buy wholesalers' merchandise, then we consumers buy these things with more wonderful credit the bank gave us -- Visa, Master Card, American Express -- and American capitalism skips along its merry way singing tra-la-la. The ugly part, which we seldom ponder, is that banks make money at every single stage in the life of a product. In essence, banks have a chance to make money at least five or six times on the same item before it ever reaches the end consumer.

Let's follow an ordinary refrigerator from manufacturer to consumer. Banks get paid in each of the following points in the young fridge’s life:
1. Manufacturer needs loan for parts, payroll, and overhead before they can make the first refrigerator. Bank makes loan; bank gets repaid later.
2. Wholesaler needs capital to buy refrigerators to sell to retail distributors. Bank makes loan; bank gets repaid later.
3. Distributors need money for big trucks and drivers to ship refrigerators to retail stores. Bank makes loan; bank gets repaid later.
4. Retailers need credit to pay wholesalers and distributors for refrigerators they will keep in stock and put into the stores where end consumers can drool over them. Bank makes loan; bank gets repaid later.
5. You want a new refrigerator. You go shopping, and find that the latest and greatest fridges can all talk to you and all the other gadgets in your house, as well as keep track of what kind and how much food you keep in the fridge, and even go online and order more when you run out. Wondering how the hell you ever lived one freaking day without THAT, you whip out your plastic and take that sucker home. When the retailer swiped your card, the bank made you a loan for the purchase amount and the bank gets paid back for thirty years with a predatory rate of return on your purchase because you only pay the minimum payment on your credit card bill every month.
6. Credit Card-issuing banks charge retailers an override on the purchase price of your new fridge (this is in addition to the interest they collect from cardholders). In addition to the money they make from collecting your interest, therefore, the bank also pockets another 3-4% of the refrigerator’s retail price… which YOU paid for because that amount was already built-in to the retail price of the unit. Now go ahead and add all the invisible and incalculable fees upon fees: transaction fees, account set-up fees, participation fees, late fees, overlimit fees... the list goes on ad-nauseum. Makes you feel real warm and fuzzy inside, does it not?

That, my friends, is why all the tall buildings downtown have bank names on them. The credit crisis must be pretty darn big to throw a monkey wrench into a scam that beautiful. This system, the banking system -- not American car companies, not distressed homeowners in imminent risk of foreclosure -- is where George Bush, Hank Paulson, Ben Bernanke and the US Congress voted to focus the mighty laser of financial assistance in our time of need.

THANK GOD OUR GOVERNMENT TAKES CARE OF US.

Art Imitating Life

Same Credit, Different Day

If you're a financial institution, it has become a little easier to borrow money. But for most of the rest of us, borrowing is tougher than ever.

Two months ago, the freeze-up of the wholesale lending markets used by banks to fund day-to-day operations caused the financial system to break down. That crisis has eased significantly, thanks to government loan guarantees and lots and lots and lots and lots of taxpayers’ money shoved into big bank coffers.

The problems didn’t go away, of course; they just changed ownership. It’s not the banks’ problem anymore; it now rests squarely on the shoulders of American tax-payers. Since bank lending practices now broadly restrict credit to only those who can really afford it, businesses and consumers are hard-pressed to get loans. Since our society is no longer accustomed to paying-as-we-go, the new reality of less free-flowing credit is intensifying the global economy's downward spiral.

About 85 percent of domestic banks told the Fed they had imposed stricter lending standards on large and mid-size commercial borrowers, while 75 percent said they had done so for small businesses. At the same time, 60 percent indicated they had tightened criteria for credit cards, and 65 percent clamped down on other consumer loans. The government doesn’t like it, but they can’t figure out how to force banks to lend in a way that doesn’t stink of socialist or dictatorial policy. You know… reality.

Frustrated, Massachusetts Democrat Barney Frank (chairman of the House Financial Services Committee), warned that the banking industry faced congressional ire if it used bailout money to pay dividends and bonuses or buy out other institutions. I find this interesting because what’s being said behind closed doors does not even remotely resemble what’s being said in public.

The mixed signals and continued economic slide are making an already paranoid and panicky public downright schizophrenic. They want answers. I really think it’s time for honesty here, because folks have just about had it with the crap Washington has been making up. It might actually be time to tell the American people that nobody knows how deep the trouble is, how long it will last, or worse… what might make things feel even the tiniest bit better.

Bankers argue that it's legitimate to use public money to buy securities such as corporate debt, because those markets also were shut by the credit lockdown. And they say allowing strong banks to buy weak ones also serves the public good because it means taxpayer money wouldn't be needed to pay off depositors at failing institutions. They point to JPMorgan Chase's takeover of insolvent Washington Mutual in September, carried out without use of Federal Deposit Insurance Corp. funds. They don’t mention it was done that way because the FDIC was insolvent as well, and could never have covered for the huge amount of toxic debt that choked WaMu’s balance sheets so badly.

Actually, there’s lots of credit available; you only need three things to get it: good credit, proof of income and money for a down payment. That seems sensible to me. That seemed sensible to most banks before they lost their damn minds lending money to anyone with a heartbeat on the foolish notion that property values could never deflate. I’m glad banks returned to more sensible lending practices. They should have thought of it sooner. If they had, we would all be in much better shape. Instead, the mess is staring back at us, its eyes hungry and yellow, nostrils flared and quivering from the smell of fresh and frightened prey.

Numbers for Fun and Profit

The U.S. jobs report comes out today and the numbers are going to suck, but those numbers are a bunch of horseshit anyway. All the gubment’s numbers are made-up crap. This is lovingly referred to as “creative accounting.”

I’m certain creative accounting played a very large part in the saga of the Great Compression, which is my new preferred descriptive moniker for the economic trouble du jour. Do you like it? I just made it up. People have been throwing around the word ‘crisis’ way too easily, people who don’t even know what the word crisis really means. The word crisis does not apply when you can't find your car keys, or your checking account is overdrawn, or you run out of gas on the freeway; it means your ass is falling off. FALLING OFF. In terms of the American economy, this has not yet occurred for most of us. Most of our posteriors still cling to our anteriors. JUST WAIT.


Let’s think about creative accounting for a moment.

Gubment jobless figures do not count people who have just given up and stopped looking, or exhausted their unemployment benefits, or just fallen off the jobless roles because they've been looking for work beyond the amount of time it should take an out-of-work person to find a job (in the gubment's learned opinion, of course). This means that there are many, many more people out of work than the gubment admits. The reason the gubment lies to us about the real unemployment number is two-fold: first, it makes us look more prosperous to the rest of the world, and second, it makes us feel better about ourselves and our leadership. Problem is… the numbers are stinking rotten dirty lies we allow ourselves to be told because the fake numbers help us feel better than the real numbers would. God bless the miracle of creative accounting!

Another example… banks lie to other banks about the numbers on their balance sheets. Banks take their real asset numbers, beat them half to death with a number two lead pipe, then perform reconstructive surgery until the newly transformed numbers appear pretty enough to lie about how well the bank is doing. Bank A knows other Banks B, C and D are lying because Bank A is lying too; it’s all very Zen. The end result is that trust boils off into space resulting in the cessation of interbank lending, and poof… credit contracts, credit evaporates, loan channels freeze up, and people and businesses get cut off from access to the cash they ‘need’ to function. God bless the miracle of creative accounting!

Another example… rating agencies are the self-appointed watchdogs who sell us their opinion on companies overall health so we know which businesses are solid and which are not, which companies to invest in with vigor and which companies to flee from in terror. Rating agencies rated financial firms with the feeling that the good times would never end (or even slow appreciably, for that matter), extending best ratings to companies that were actually illiquid or even insolvent. They did so in the face of death-defying logic and multiple historical examples that should have warned everyone that the bender could not last forever. Reason flew out Wall Street windows left and right, replaced by twisted and perverted yet gorgeous numbers that told us all in no uncertain terms to pour every cent we had into housing and other bullet-proof swap-protected investments. When the ugly truth leaked out, AAA-rated investment vehicles turned to junk overnight. Trillions and trillions and trillions of dollars in wealth boiled off into the atmosphere like it was never even there. God bless the miracle of creative accounting!

Creative accounting flourishes because we allow it and we expect it; hell, we encourage it. American consumers actually prefer being misled when lies make us feel better about ourselves. We are such a narcissistic bunch that it’s no wonder every human civilization that ever lived imploded into sand and sea, leaving behind nothing more than shards of pottery and glass. If the economy is really based on consumer sentiment (our mood, for God's sake), then brothers and sisters it is time to grab the dogs and the guns, load up the truck with carefully chosen items, and head to the hills. Our precious, pouting economy -- bless its heart -- is getting ready to throw one hell of a wicked tantrum.

We made up sweet stories of unprecedented prosperity, of unending gains on investments, of unceasing new riches gained in climbing property values that would rocket us all to riches, of a stock market that would see us through to our golden years when we could finally relax and retire at a standard of living that would have turned the Pharaohs of ancient Egypt olive-green with envy. We fantasized of the benevolent rich, who would graciously allow the money they spent on quilted toilet paper, pedicures, massages, meditation supplies, and single-malt to trickle down to the grateful masses who would leap with joy whenever the rich were living extra well, because it meant that all that money would roll down their asses and rain all over us so those less fortunate could enjoy an extra skewer of gopher with their Sunday supper.

Our grand economy now teeters on straw and quicksand, thanks in large part to the wonders of creative accounting. It's folly; it's nothing but fairy tales we keep repeating until we don't know the difference between truth and fiction. We should have rooted out the garbage long ago but the warm, moist bed of lies felt so good. We've still not stopped. We must stop lying now, and it will be painful. We must stop, or soon we’ll be nothing more than shards of pottery and glass.

And plastic. Lots and lots and lots… of plastic.

Maybe Just a Teensy-Weensy Depression…

Here's an interview with one of the few people who warned the housing bubble would pop with a bang. Nobody listened, of course. But Yale economics professor Robert Schiller's outlook for a speedy recovery is quite grim. Is anybody listening now?

“This is not a run-of-the mill crisis that we’re seeing. The volatility in the past month, with the exception of one time in 1987, has not been seen since the Great Depression. The great Depression started with a big shock October 28 and 29, 1929, and then volatility stayed up for the better part of a decade in the stock market. Now we’ve seen another shock up, and the big question… is this 1987 again, or 1929 again? I’m actually fearful that it’s 1929 again – not in all respects – but in terms of volatility. Because it seems the situation we’re in now is very different from 1987. There’s much more of a fundamental shock to confidence, and much more worry set off among investors.”
-Robert Schiller, Economics Professor, Yale University

A closing comment from Mish:

Nine out of 10 of the world's largest economies are contracting. China is the lone exception, but even in China manufacturing is contracting.

South Korea, the world's 14th largest economy is contracting and Mexico and Australia, 13th and 15th respectively, will soon follow suit although both are in denial at the moment.

How so many people thought that China could decouple from the US and lead world growth higher remains somewhat of a mystery except to note that irrational exuberance always marks the top.
-Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com/2008/11/global-recession-country-by-country.html

If Nothing Changes, Nothing Changes

If ever there was a fair-weather friend it’s the body politic, the what-have-you-done-for-me-lately crowd. The dust will not be settled by tomorrow, but today, the United States elected its first black President. The wedding was fun, but we shall have no honeymoon. In fact, this fair-weather friend might as well be the Devil himself.

Americans have much to process in the next two months. It will not be easy no matter whom you voted for.

If you voted for John McCain, do you think the world will end sooner because we’re now hearing the words “President-Elect Barack Obama? If you voted for Barack Obama, are you really glad he won, given the tremendous pile of debt, blackness and bleakness both men worked so incredibly hard to inherit?

Now comes the real work. Now, too, comes the real pain as we Americans – real and unreal – get down to the business of un-screwing what has been so very well screwed so recently. Be clear, I blame neither party; we are all at fault. The time has come for bold sacrifice, and the price is on all our heads. Our Federal Gubment just spent $1 trillion on sand and stilts with which to prop up the listing, sinking wreck we once referred to as our economy. It won't be enough. It's not nearly enough, because our solution amounts to applying more problem.

STOOPID.

I could bore you with all the little details and list the myriad bombs going off all around us Earthers, but today I’ll just briefly mention the big picture… the world has lost half of its equity market wealth since last October. How much money is that? How much?

$29 TRILLION. Twenty-nine trillion dollars. $29,000,000,000.000.00. 2.9 x 10-to-the-twelfth-power-dollars. Twenty-nine thousand-billion dollars. The negative wealth effect of this unwinding will be devastating and WE HAVE NOT EVEN BEGUN TO FEEL IT. Not really. We have had only the tiniest taste of our terrible financial fate.

(T)he most frightening chart we have seen is one that compares total credit market debt to U.S. GDP. The average of this ratio over the last 100 years has been around 155%. This ratio peaked first heading into the Great Depression at 260% (after then falling back to 130%) but has now risen to an unprecedented 350%! We would imagine that Paulson has a calendar on his wall with a red marker marking off each day with a big red “X” on it. He has January 20th circled with party hats, confetti, and champagne on it. His last day won’t come fast enough.
Over the last 10 days, we have seen Hank Paulson and his international colleagues put away their policy bazookas and reach for the red button to launch ICBMs, but the fundamental flaw in the governmental response is that it is trying to re-lever an already massively overleveraged system in a short-term attempt to halt an unavoidable cycle of asset price deflation.
This policy prescription is like treating the withdrawal symptoms of our global credit addiction with another hit of heroin. Like any addict, one hit is never enough and the only question remains is how long it takes the global economy to ask for just one more…
J. Kyle Bass, Managing Partner
Hayman Advisors
http://ftalphaville.ft.com/blog/2008/10/20/17216/time-for-the-darwinian-flush/

I believe America's present good mood, however fleeting, will help us enjoy the last bear market rally we will see in quite some time. The markets and consumer sentiment will conspire to keep us under the ether’s happy spell at least until the first waves of new credit card debt show up like hungry wolves along about February of 2009. So in the meantime, have some eggnog. Be merry! Be bright! Live today as if tomorrow might never come. This advice is just as good for you and me as it is to America's 44th President, who, through no fault of his own, is about to inherit a 95% un-fixable mess, in exchange for which he gave two prime years of his life to the inbred and wickedly ungrateful breath- hair- and life-stealing campaign trail. Today, he is President-Elect. Tomorrow, President. But before the first term is over, he may wish he had spent his time on something more rewarding than winning an election.

Barack Obama won the election because he had an idea and American voters bought into it. But ideas alone change nothing. Faith without works is dead. If we cannot agree on how to work together on a plan of action designed to weather the stormy winter ahead, the 'winds of change' that brought us here will retroactively morph into the 'farts of fiddle-with.' Let us hope the next chapter of America's big book will be titled Into Action. Real, lasting change, as always, must come from within. Everyone must participate; everyone must sacrifice.

Obama's ideas need more than the sheer force of will; they will quickly become worthless without the people's muscle behind them. We must change, because to do otherwise will bring our once-great nation to its knees. One thing is certain: if we keep doing what we're doing we'll keep getting what we're getting. We stand at the turning point. The work will be difficult. But if we fail to act now, history -- and our progeny -- will judge us most harshly.

VOTE -- It Pisses Off the New World Order-Types

W-43: Bringing Common Sense to the Clean Air Act

We deserve a plaque. It should be ornate. It should be larger than the average commemorative, and should drip with the sycophantic irony of a people who put love of money above all else, effectively dooming their progeny and their only planet to die slow and painful deaths. Let it read simply, "WE DID IT TO OURSELVES."

The White House is working to enact a wide array of very last-minute federal regulations, many of which would weaken government rules aimed at protecting consumers and the environment. They are in a hurry because it looks like there’s going to be a power-shift in the U.S., so they need to finish before President Bush leaves office in January. The new rules would be among the most controversial deregulatory steps of the Bush era and could be difficult for his successor to undo. Some would ease or lift constraints power plants, mines and farms. Ripping the tops off of mountains to extract coal more easily and cheaply, dangerous overfishing, increasing emissions of pollutants that contribute to global warming, and allowing far more carcinogens in our drinking water—these would all be quite all right under the new regs.

Once such rules take effect, they can only be undone through lengthy and tedious new regulatory proceedings. The fallout from these irresponsibly negligent actions would erase years of hard-won environmental gains. But let's face it: the Bush White House never gave a damn about the environment whenever Bambi got in the way of big corporate profits.

"They want these rules to continue to have an impact long after they leave office," said Matthew Madia, "a last-minute assault on the public . . . happening on multiple fronts." Madia is a regulatory expert at OMB Watch, a nonprofit group critical of what it calls the Bush administration's penchant for deregulating in areas where industry wants more freedom.

One rule, being pursued over some opposition within the Environmental Protection Agency, would allow current emissions at a power plant to match the highest levels ever produced by that plant, overturning a rule that more strictly limits such emission increases. According to the EPA's estimate, it would allow millions of tons of additional carbon dioxide into the atmosphere annually, worsening global warming. A related regulation would ease limits on emissions from coal-fired power plants near national parks. A third rule would allow increased emissions from oil refineries, chemical factories and other industrial plants with complex manufacturing operations.

These rules "will force Americans to choke on dirtier air for years to come, unless Congress or the new administration reverses these eleventh-hour abuses," said lawyer John Walke of the Natural Resources Defense Council.

But Scott H. Segal, a Washington lawyer and chief spokesman for the Electric Reliability Coordinating Council, said that "bringing common sense to the Clean Air Act is the best way to enhance energy efficiency and pollution control." He said he is optimistic that the new rule will help keep citizens' lawsuits from obstructing new technologies.

Jonathan Shradar, an EPA spokesman, said that he could not discuss specifics but added that "we strive to protect human health and the environment." Any rule the agency completes, he said, "is more stringent than the previous one."

White House spokesman Tony Fratto said: "This administration has taken extraordinary measures to avoid rushing regulations at the end of the term. And yes, we'd prefer our regulations stand for a very long time -- they're well reasoned and are being considered with the best interests of the nation in mind."

In some cases, Bush's regulations reflect new interpretations of language in federal laws. In other cases, such as several new counterterrorism initiatives, they reflect new executive branch decisions in areas where Congress -- now out of session and focused on the elections -- left the president considerable discretion.

According to the Office of Management and Budget's regulatory calendar, the commercial scallop-fishing industry came in two weeks ago to urge that proposed catch limits be eased, nearly bumping into National Mining Association officials making the case for easing rules meant to keep coal slurry waste out of Appalachian streams. A few days earlier, lawyers for kidney dialysis and biotechnology companies registered their complaints at the OMB about new Medicare reimbursement rules.

Bush's aides are acutely aware of the political risks of completing their regulatory work too late. On the afternoon of Bush's inauguration, Jan. 20, 2001, his chief of staff issued a government-wide memo that blocked the completion or implementation of regulations drafted in the waning days of the Clinton administration that had not yet taken legal effect.

Clinton's appointees wound up paying a heavy price for procrastination. Bush's team was able to withdraw 254 regulations that covered such matters as drug and airline safety, immigration and indoor air pollutants. After further review, many of the proposals were modified to reflect Republican policy ideals or scrapped altogether.

Seeking to avoid falling victim to such partisan tactics, White House Chief of Staff Joshua B. Bolten in May imposed a Nov. 1 government-wide deadline to finish major new regulations, "except in extraordinary circumstances." That gives officials just a few more weeks to meet an effective Nov. 20 deadline for the publication of economically significant rules, which take legal effect only after a 60-day congressional comment period. Less important rules take effect after a 30-day period, creating a second deadline of Dec. 20.

Lee Crockett of the Pew Charitable Trusts' Environment Group said the administration has received 194,000 public comments on the rule and protests from 80 members of Congress as well as 160 conservation groups.

These rules "will force Americans to choke on dirtier air for years to come, unless Congress or the new administration reverses these eleventh-hour abuses," said lawyer John Walke of the Natural Resources Defense Council.

But Scott H. Segal, a Washington lawyer and chief spokesman for the Electric Reliability Coordinating Council, said that "bringing common sense to the Clean Air Act is the best way to enhance energy efficiency and pollution control." He said he is optimistic that the new rule will help keep citizens' lawsuits from obstructing new technologies.

Sure can't let little things like breathing get in the way of progress.

Doin’ a hell of a job, Bushie!

David King versus Goliath Lehman

There were two stories in the news this past week that interested me beyond all others.

The first story concerned the breathtaking new photos taken by the freshly revived Hubble Space Telescope. I marveled at the sheer distance of the energy's journey, and the eons it traveled to reach us so that the particles could be captured at that moment by a bunch of lenses and circuits.
http://www.msnbc.msn.com/id/27455467/

The second story related the discovery of Hebrew text dated from what is reckoned might be the time and place of King David.
http://www.cnn.com/2008/WORLD/meast/10/30/israel.ancient.text/index.html?imw=Y

What of the timing of this discovery? Is it an accident that we 21st century plunderers may be discovering physical evidence of a great battle between Saul and the Israelites versus the Philistines at Socoh in Judah? Could it not be a message that should directly concern us in these troubled times, one that might prepare us for a battle not quite at hand? Goliath challenged David to a fight and most witnesses were terrified, but David was emboldened. David taught us a great lesson when he decreed, “the battle is the Lord’s.” For David it was not an excuse to run from the battle line but a prophetic decree of victory. David knew that God was with him and Goliath would soon fall.

Today, the global economic crisis is the 800 pound Goliath; it threatens to destroy our very civilization. Society could be teetering on the verge of collapse; that which is built upon sand can eventually have no other outcome. In this case, that which is built upon sand was built by dust. The world is dust that got together. We are dust that was put together. To dust all this must someday return.

Something made me aware of impending financial doom, but I never gave a darn about economics. I never gave a darn about frugality. For some reason the economic, social and political plight in which we find ourselves is supposed to matter to me when by all accounts of my personal history it should not matter. Perhaps I am moved to warn others of the dire and dreadful danger we face if we do not change. Perhaps I am just a natural part of the K-wave phenomenon; perhaps I am just a bastard. Perhaps it is more than I imagine.

I cannot just watch and appreciate that which is put on my heart to broadcast passionately and directly. To do otherwise, for me, is to smile and wave at the thing which is about to make a meal of us. I choose to take dead aim at it, instead.