Default

I relayed Jesse's comments on Ecuador's moves to default here on November 28th, and now it's happened. Any big ones coming, do you think?

The seventh seal

Denninger's question:

With the $7 trillion dollars we have committed we could have literally given every homeowner with a mortgage a fifty percent reduction in the principal outstanding.

This would have instantaneously stopped all of the foreclosures by putting all (essentially) homes into positive equity - overnight!

So why wasn't this done?

His answer: the government is trying to cover the staggering bets of the derivatives market. With borrowed money. The Treasury has swallowed the grenade and put its fingers in its ears.

This is the fourth horseman of the financial apocalypse that Michael Panzner predicted, as summarized here on Bearwatch on May 10, 2007.

UPDATE: Jesse comments on another fresh sum - tens of billions - needed to cover AIG's losses. As he says, there is an air of expectancy; but also of unreality, like the announcement of a major war.

Inappropriate gloat

I came to the US fresh out of university, and went to graduate school. Consequently, I was mostly oblivious to the details of 'real life', like taxes, bills and repairs.

Working my way into the system, it all seemed that it couldn't possibly work: too many people with no discernible talent were earning too much, and prices were lower than I thought they should be, particularly fuel prices. I thought the problem was that I wasn't intelligent enough, and just didn't understand.

The one personal satisfaction that I can get from the current mess is that I was right - it doesn't make sense.

WeaselWordWatch update: "Quantitative Easing"

Okay, it's a phrase, not a word. But 4,094 references on Google News in the last 24 hours. And Mish is at it, too, though of course in an ironic way.

On yer bike

Thus Denninger:

Bernanke clearly thinks ... that he can "restart borrowing." ... This is causing the dollar to get slammed - at least for a little while... These sorts of actions ignite wars. Choose between a trade war (about 75% chance) and a shooting war (the other 25%).

The dollar weakness, by the way, won't last. Either sort of war puts every other nation in the world in worse shape than us, which over time leads to the same place - "we're screwed but they're screwed worse."

He's not wrong. Total US debt, foreign and domestic, has recently been calculated as 392% of GDP; but alas for us Brits, UK external (foreign) debt alone is running at 400%. I just don't know what a like-for-like comparison would show.

The TV news here tried to put a merry gloss on sterling's collapse, reporting how it helps exporters like a bicycle firm they visited. A bit desperate: the start of the 'Oxford Automobile and Cycle Agency’, this isn't. You know you're in trouble when they tell you to "smile, smile, smile."

Unstoppable

From an engineering standpoint, I think that this crisis was unavoidable. Once we de-coupled the concept of wealth from production, we generated a positive-feedback loop. The profits from manipulating money were greater than could be made in manufacturing, and so even more money flowed in.

I cannot help but think of Douglas Adams' 'Shoe Event Horizon', where eventually every shop becomes a shoe shop.

The answer is blowing in the wind

I said on Friday, "I think 2008 will be seen in retrospect as the year that the global balance of power underwent a sudden tectonic shift, from West to East." I forgot to add, "...and from North to South, too"; but Michael Panzner is not alone in seeing America's exclusion from the Brazilian summit as a straw in the wind.