A moment of sanity

At times of crisis, unlicensed preachers and wild-eyed prophets roam the streets, gathering their crowds. But their rule never lasts.

My grandfather used to say, things are never as good as you hope or as bad as you fear. As I reported some while ago, members of the Chicago Stock Exchange in 1934 papered their club room with what they thought were now worthless stock certificates, but within five years were steaming them off the walls again.

The Thirties crash hit debtors, unwary investors (especially those trading with borrowed money) and insolvent banks. The lessons from this are easy to learn.

Unreal

Richard Daughty (the Mogambo Guru) refers to articles by Nouriel Roubini and Sharon Kayser, giving us debt -threat vistas of $1 trillion and $1,000 trillion respectively. Then he returns to Terry Pratchett's Discworld dwarves' favourite song ("Gold, gold, gold, gold...").

Two problems: one is, I can't visualise anything with many zeroes, so it's not real for me. More importantly, if there's a major meteor-strike financial bust (i.e. deflation), I'd have thought cash in hand is what everyone will want.

Unless a crazed government opts for hyperinflation. In which case, I'd rather have pallets of canned baked beans, boxes of ammunition and many brave, loyal friends. You can't eat gold.

But as with all truly terrible imaginings, the mind bounces off this like a tennis ball from a granite boulder, and we turn back to normal life with determined optimism.

The Fed and King Canute

Michael Panzner directs us to John Hussman, who explains that the Federal Reserve's power to manage the financial system is very limited - the funds it provides are dwarfed by the amount out in the economy.

... the problem with the U.S. financial system ... is not liquidity, but the solvency of mortgage loans and securitized debt. The Fed's actions are not likely to have material impact on this.

This, plus Larry Lindsey's comments noted in my previous post, adds weight to Karl Denninger's continuing theme of inevitable deflation.

Larry Lindsey: extraordinary rendition

Ed Steer (Financial Sense) relates his October experience of an unusually frank speech, and answers to questions, by President Bush's former economic adviser. According to Steer (I paraphrase), Lindsey's views include:

- The Fed knew home loans were getting dumb, but didn't want to spoil the party
- Banks are going to have to revalue their property holdings realistically
- Hedge funds will have to take what comes, and probably will
- America has offloaded zillions in toxic-waste loan packages to other countries, and ha, ha !
- House prices will plummet
- Don't trust the government CPI figures
- Gold dumping is coming from European central banks, not the US
- America could handle a 20-30% dollar devaluation

... loads of beef in that burger, where's the fluffy bun?

The end of usury

In the inflation/deflation debate, Karl Denninger comes down firmly - and to me, persuasively - on the latter side.

He points out - as do others, including proponents of Islamic sharia banking - that however much money is created through credit, more must be created to cover the interest charged. Usury endlessly blows up the balloon, which must eventually pop, before the cycle begins again.

Lenders do want their money back, and so generally take security for the loans they grant. At some point - and Denninger believes it's now very close - lenders will become unwilling to lend further, and/or borrowers will retrench or become unable to service their debts. In short, borrowers will have to pay up or be ruined, together with the more reckless lenders.

Can the government print extra money to solve this? Not according to Denninger, who says that the effect of bad money will be to drive out private lenders (who would demand very high interest rates for lending in an inflationary environment). Since the government itself runs partly on borrowed money, it's not an option.

Like me, Denninger thought the bust came in 2000, but the refusal to face reality means that we now face a much bigger bust.

Conclusion: cash will be king; get out of debt now.

Ted Spread

Large Ted spread = bear market?

Michael Panzner shows a couple of ominous graphs:

One is the "TED spread" - the difference between interest rates charged by banks to each other, and short-term (and safe) Treasury bonds. A wider margin indicates that the market is charging more because it considers lending to be more risky, and the current TED spread is approaching 1987 levels.

The other shows the ratio of amount loaned out, to amounts of cash on deposit. Lenders are now very stretched.

The Angriest Guy In Economics

Supposedly "the angriest guy in economics" is Richard Daughty, aka The Mogambo Guru - but he gives his rants a comedy twist.

Karl Denninger, on the other hand, is very emphatic that our economic woes are no laughing matter. Here he calls for all the "off-book" items to be included in lenders' accounts, and if that bankrupts them, so be it: a cleansing of the financial system, condign punishment for the perpetrators and a warning to others. This is similar to Marc Faber's position: he says the crisis should be allowed to "burn through and take out some of the players". Gritty.

And concrete. Denninger supplies a photo of a customer-empty store at 6 p.m. on a Sunday evening, to underscore his point.

Now that's something we can put to the test - look at the shops in your area and work out how crowded you'd normally expect them to be at the beginning of December.