In a nutshell

All the shares of a single stock are valued at the price it last traded at. Sounds a little like how it used to work in the housing market.

"Jim in San Marcos"

Cold turkey would kill the US debt junkie

Reading Jim from San Marcos' latest, it occurs to me that debt default looks like a seriously bad idea - cutting off your nose to spite your face doesn't come into it.

Blowing bubbles

Nobody has made economic depression and its consequences seem so inevitable and at the same time so colourful and even attractive, as Jim in San Marcos.

It's a shame that I was counting on my State pension to eke out retirement income. Looks like many of us will be using Hamburger Helper instead.

Two cheers for deflation

A pattern is emerging.

Jörg Guido Hülsmann, on the Mises site, says deflation does not ruin the economy as a whole, but destroys the parasites who exploit the potential of fiat money. Parasites like (alleged) Ponzi-style fraudster Madoff and his clients, who deserve what they've now got, Mish judges.

Jesse says that "financial capitalism" seeks to use the money system to develop a dictatorial New World Order, and will be defeated when the dollar fails as the world's reserve currency.

Brad Setser wonders whether the dollar has reached its zenith; which implies that it may begin heading for its nadir.

Desperately holding back the inevitable is the US Federal Reserve, says Jim from San Marcos, who (although the Fed is refusing FOI requests) suspects that its $2 trillion in emergency loans is equally divided between support for banks, credit cards and the stockmarket. (I wondered what was being used as the robust cloth on the Dow's trampoline, and covert official support may be the answer.)

As I argued yesterday, the straightest path would be to destroy fraudulent, oppressive debt and those who introduced it into the system. For so many families, the bank is the fattest kid at their kitchen table, and nobody knows who invited him.

For a long time, I've been recasting financial issues as issues of power and freedom. If Jesse is correct, we are reaching a turning point in the battle. I hope we may soon say, as Churchill said of El Alamein, "A bright gleam has caught the helmets of our soldiers and warmed and cheered all our hearts." It would be worth the blood, toil, tears and sweat.

The Great Theft begins

I comment on The Great Depression of 2006:

Once inflation gets going it'll be Alice in Wonderland, I think. Real wages have to come down in relation to earnings in competitor countries, and house prices have to come down with respect to wages.

So whatever the nominal value, I think we in the West shall see a real depreciation in both houses and the stockmarket, plus a real decline in earnings relative to both consumer prices and foreign labour.

Am I wrong?

Crisis

Karl Denninger is sounding absolutely dire warnings about the market (Dow 4,000) and the economy; recently Jim from San Marcos said Dow 2,000 (and I do so hope he's completely wrong). This getting well into the worst fantasies of the Cassandras and we must hope that our apparently ignorant political class wises up fast.

Another prophet foresees market panic

Thus Jim in San Marcos:

This week, look for a serious drop in the DJIA of 4,000 to 6,000 points and the close of the stock market for a week or two. [...] Most people have sensed something is seriously wrong with the markets and are heading for the exits (even the President said so). With the automated computer trading system in place, this could be very fast and furious,--sleep late and wake up broke.

Monday morning at the brokerage houses you’ll hear; “Sell everything; I didn’t sleep a wink the whole weekend.” It will be a group effort.

What will happen to interest rates?

Jim in San Marcos envisages eventual interest rate rises worldwide, to 10-15%. Commenting on the preceding post, Nikolay disagrees and James asks the question. I'm trying to understand the situation, like everyone else, so I'll have a go at thinking aloud:

Nikolay makes the point that people are becoming more concerned about the return OF their money, than the interest ON their money. So money-holders will limit demand for their cash by being picky about who they'll lend it to; control by quality screening, not by price.

Also, if people who habitually live on credit become frightened - and I think they are - then they will start trying to live within their means.

And discretionary expenditure could be reduced and/or redirected, not necessarily towards the cheapest end. I was listening to someone in the UK fashion industry on R4 yesterday, and they said far from everyone turning to Primark, the trend was to buy better quality, less of it, and make it last longer. Note that it's budget airlines like XL (competing on price) that are in danger of going down - they don't have much "fat to survive the winter".

From another angle, as the supply of cash and credit is dwindling, so are prices of houses and many other big-ticket items - look at the deals on cars and computers.

So it's possible to imagine that the contraction in credit may be approximately matched by a contraction in demand for credit, at least for a time. Bankruptcies and house repossessions will burn off a lot of debt, so we'll see a lot of ordinary people cleaned out and possibly more bank failures, especially as (in response to reduced expenditure) unemployment grows.

Thus we could see a recession in which the government tries to stimulate consumer demand by cutting interest rates - and this may not work, because many won't want (or be able to afford) to take on debt at any price; and those who do have cash and are watching prices fall, will hang off, waiting for further falls - as happened in Japan.

But Jim himself has acknowledged that rates may be cut in the short term. What about the longer term?

More unemployment, lower profits etc will shrink the tax base and increase the benefit burden. The budget won't balance without cuts in the public pay sector (= even less tax, even more benefits) or more government borrowing - I don't see how we in the UK could be taxed much more. So there's a danger that while consumer debt leads the way into recession, increased government demand for debt (and increased concern about government creditworthiness) may then lead the way to higher interest rates on State bonds.

When the State has more dependents, it will also find that not everything is going down in price. Food and fuel are must-haves, so benefits will have to be increased to cover the cost of such items. There will be more poor, and they will each need more. And the government will have to borrow more.

Or start devaluing the currency. Then all bets are off.

So here's a scenario: interest rates kept low, or cut; then government borrowing rises, while the economy burrows into a slump; then the real "credit crunch": the moment when the government, like an ad-man under pressure, needs a feelgood episode and, despite having sworn off it for life, reaches for the booze or the white powder, in this case inflation.

More and more, Michael Panzer's dire financial drama seems plausible.

Bonds to crash?

The Fed may lower its funds rate in the short term, but Jim in San Marcos is predicting steep rises in worldwide interest rates and (therefore) a sell0ff in suddenly-very-uncompetitive bonds.

House prices underpinned by shortages, boosted by inflation?

The Centre for Economics and Business Research reckons house prices will steady next year and shoot up for three years after that, thanks to housing shortages and building project cancellations - reports The Grumbler.

"Real estate could become a very good investment and inflation hedge once the government starts seriously printing money," commented Jim from San Marcos (who still has a realtor's licence) after his July 27th post.

Worrying signs

Knowing that debt creates extra money and so boosts inflation, The Mogambo Guru notes that the Chinese now have 1.58 billion credit cards! For some reason, TMG thinks we should look at gold and silver.

Karl Denninger points out that short-selling actually acts as a kind of price support in the market, since ultimately the short seller has to buy the shares he's sold to someone else; and so the new ban on short-selling selected financials has removed the floor beneath them. Jim in San Marcos found he couldn't do any short-selling in that sector for three hours yesterday, and doesn't know whether that means we're looking at free-fall or a sudden rally. Either way, it seems to prove the point that banning short-selling increases volatility, the sensible investor's enemy and the gambler's fatal siren.

If two views make a market, does silencing one leave the other free to become a whimsical dictator?

US lending market: Apocalypse Now?

Some points from Denninger's latest (summary in my words):

It's getting hot. The collapse of IndyMac may take 10% - 20% of the FDIC's balance sheet, and that's assuming a savers' panic doesn't start.

If the government underwrites Fannie Mae and Freddie Mac, the Federal public debt doubles (goes up by $5 trillion), the US' credit rating is compromised (it's starting to happen already) and all debts will cost more in interest - maybe 3% extra. KD's recommendation is that the two monster lenders be put into receivership and wound down over time; this means a steep drop in house prices so that they can be afforded on more sensible terms and conditions.

His advice to you: head for the high ground. Get out of debt, get your savings balance below the FDIC's $100k ceiling, think about buying Treasury bonds. "If the government goes down you will need steel, lead and brass, not money."

BUT...

See Jim from San Marcos on the same matter. And someone copied Denninger's piece whole into a comment at Jim's, to which the latter responded:

"There is a very peculiar situation here from a stock ownership position. These two stocks are being shorted en-mass. I kind of get the feeling that neither one is going to zero. I smell a bear trap here. You can be right but still be dead wrong."

Oil speculation?

Pace Nick Drew's comment on the previous post, Jim in San Marcos reckons there is indeed influential speculation in the oil market.

But Karl Denninger reckons it's just money looking for a home, like the boll weevil, and ultimately deflation caused by credit writedowns should reverse the trend.

The sky is dark, wings are flapping

Some, like Don Boudreaux of Cafe Hayek, call the doomsters Chicken Little. Well, many Chicken Littles make a Chicken Big, and she's coming home to roost. Or maybe the pessimists are all wrong, and everybody will live happily ever after. At least, everyone who matters.

Karl Denninger notes that in both the US and Japan, there are moves to force full disclosure of the banks' poor-grade assets; Jim in San Marcos reprises some observations of what happens when mutual funds (collective investments) are told by worried investors to "switch to cash" or simply pay out.

Look out for a hole in the henhouse roof, and a cloud of feathers.

Twang

Jim in San Marcos borrows and discusses a chart showing homeowners' equity. As residential property prices drop, more borrowers move into negative equity. He says bank-owned properties (REOs) are already pricing-in a fall of 30%+.

"Examine the disappearing equity. It came from no where and is going back to no where."

That's what happens when credit becomes a form of currency, as the bullion moralists keep reminding us.

Why are banks allowed to create so much "fiduciary money"? Who does own the Fed?

A run on non-banks

The Great Depression of 2006: Cash Only

Jim in San Marcos explains that it's probably not the banks we need to worry about, but the financial entitities that are NOT covered by Federal deposit insurance.

And Karl Denninger also details other areas threatened by financial contraction.