Thursday, October 23, 2008

A credible, horrible warning

In a fearsome, plain-speaking guide to the long-standing debt problem, Karl Denninger explains why he believes we are now in dire crisis. If the insolvent continue to be bailed out with money that the government itself must borrow from elsewhere, the American government's own credit will be destroyed. And non-Americans are in an even worse plight, in fact may trigger the explosion:

We may be days away from an international credit incident originating outside of the United States. Foreign nations, banks, and businesses have "levered up", or taken more risk, than we have. They too have chosen to lie.

This will hammer the stockmarket:

You have already seen nearly half of your money disappear.
You could see another half disappear - within days.

This is an implication of the graph I did on Sunday (see below), looking at the Dow adjusted for CPI inflation since 1928. A return to 4,500 points would seem to be reversion to the long-term norm - but to have it happen all at once, from its peak last October, is a scary prospect.


UPDATE

Tyler concurs, with respect to the UK economy, because of our dependence on income from financial services and associated services:

"Brown's boom was built on a group of industries that are now facing an Almighty bust..."

9 comments:

Ostrich Head said...

Sorry, I'm as paranoid as the next person, but I can't help thinking this is tin-foil hat time.

"This is very bad, because nobody will loan money to someone forever when they have no reasonable belief that they will ever be paid back."

A bit naive?

The guy spends his time slagging off Ben B, but who is more qualified to make the right decision, him or a blogger?

Hey - let's hope I'm right anyway. Sounds a bit like an end-of-the-world preacher to me - when it doesn't happen he'll say well that'll be the other 30 per cent, right?

Anonymous said...

Ostrich head said: "but who is more qualified to make the right decision ..?"

Looking at Denninger's and Benankes respective records, I fancy Denninger.

CityUnslicker said...

but money is flooding to the 'safe-haven' of the US. This may seem odd, but it is the way it is. Of course the marekts are going to fall more until we are further into the recession.

but not for Denninger's analysis. He is too technical at the moment, when the issues are political

Sackerson said...

CU, I think this flight to the dollar could be the Helm's Deep phase, not the final resolution.

Anonymous said...

why isn't this a log chart?

Sackerson said...

Hi, Anon: (a) I'm still learning the art of charting, and (b) the line doesn't particularly look to me as though there is a general pronounced upward trend; it looks as if it bounces between 10 and 30, with the last few years as a grotesque aberration.

Old Prof said...

I haved worked with an experimental psychologist, who himself was working with economists, trying to analyse the stock markets. They found out that the trends are diven by emotion, not fact. You thus have a positive-feedback loop, whether in a bull or bear market.

On a related issue, I am suspect that our current problems must lead to hyperinflation. After all, the current problem was caused by the financial institutions priting too much money to begin with.

Sackerson said...

Agree on both counts, OP, though on the first it's not PURELY emotion. I hesitate to say this, not being a mathematician, but I would say emotion determines the degree of deviation from the mean; and I think we are now seeing a move back tpwards (and eventually below) the mean.

fajensen said...

Sorry, I'm as paranoid as the next person, but I can't help thinking this is tin-foil hat time.

Hmm - Pakistan, Turkey, Egypt - maybe Iran too - bust and unable to feed their own population but plenty ready to blame their neighbours and go nick their stuff

From every mosque they must already be preaching about the fall of those who followed the false western values of borrowed money and consumption.

Just one of those countries going bananas ought to put a crimp in the "globalisation";

I think Pakistan and Egypt will fall soon; eventually Turkey and Iran creating a huge tribal area right across the middle east.