Restructure debt, or lose prosperity and liberty

Karl Denninger draws our attention to an interview with David Stockman on CNBC (see below). Key points:

• Combining middle-class earners with government employees (aside from teachers), we see that millions of jobs have previously been lost and there is now no net gain in half the 130 million American jobs market. Stockman terms this the "new normal".
• Numbers are increasing among part-time earners, but their annual pay averages $20,000 instead of the middle class' $50,000. As Stockman says, you can't support a family on that.

This is industrialization in reverse gear. America - and even more so the UK - now faces a great question: are we prepared to watch our industry eaten away? Last month, it was reported as a sort of victory that Britain made a deal with China to export pigs to them. Though agricultural production is important - God speed the plow - I don't see a bright future for the whole nation as pig farmers.

In a digitized world and globalized economy, our problems are evident and important to our competitors. Back in September China's "Beijing Review" crisply summarized America's woes and their causes:

Increasing financial pressures forced middle class Americans to rely on debt to continue their current lifestyles. Meanwhile, thriving financial innovations on Wall Street have encouraged their lifestyle of high debt and high consumption. The median debt-to-income ratio of the middle class families climbed to 1.19 in 2004 from 0.45 in 1983. So basically, credit-supported over-consumption of the middle class laid the groundwork for U.S. economic prosperity over the past three decades.

The over-consumption can be corrected by cutting back - something that is certainly a matter of concern to Beijing - but though the spending song is over, the debt melody lingers on. Private and public debts are absorbing the resources that should go into trade and industry. Lowering interest rates further is scarcely possible, and as Michael Panzer reports in "Ready for some crowding out?", the need (especially in Japan and the USA) to roll-over huge amounts of debt in the near future may see a bond market revolt and higher interest rates, instead. Commercial finance may well become both harder to obtain and significantly more expensive.

Meanwhile, the burden of debt now lies not in interest rates but in the capital repayments. As average incomes fall (owing to the shift from higher-paying to lower-paid jobs), the liabilities will grow heavier in proportion. Some of this ballast may have to be ejected from the balloon if we are not to crash to earth.

Normally, one would say that letting debtors off the hook is a moral hazard, but I think the scale of the emergency takes us beyond that consideration. In any case, default is already happening piecemeal in the residential mortgage market, and would be far more extensive if lenders constrained by capital adequacy requirements were not reluctant to foreclose. Beneath the tide of "jingle mail" is a savage undertow of tolerated delinquencies (*). Similarly, the banking sector would be pretty much dead if the government had not also been willing to defer foreclosure.

The challenge is to tackle the debt monster openly and through policy, not inaction and denial. Cutting welfare won't do it fast enough and generates many other problems. If we can't restructure our debts by agreement with creditors, we have to accept the "new normal": high unemployment, a reduced and distressed middle class and, perhaps, political instability barely restrained by greater authoritarianism.


(*) See today's post (with many graphs) by Michael David White, who thinks housing in America is only halfway through its correction.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Serbian Jazz is hot!

Even Johnny Depp comes to Serbia - admittedly more for the film, but the brass sound seems to be "in."



My favourite so far is this one:


BOBAN MARKOVIC-RROMANO BIJAV-LA BELLEVILLOISE
Uploaded by aceituna11. - Watch more music videos, in HD!

Governments should provide secure inflation-proof savings vehicles

Logically, speculators and investors should be residing in two different groups, but the two kinds of sheep keep wandering out of their respective pens. And there are wolves outside the pens.

John Lounsbury, reviewing ‘What Investors Really Want,’ by Meir Statman.

This is the difficulty we face now. If you are a savvy speculator and willing to accept a high degree of risk, you may (with luck) do well in today's volatile markets.

But if you are an ordinary investor (like most people), you are looking for something that will at least preserve the value of your savings and reward you with modest real growth for not spending them.

Unfortunately for investors, our governments' attempts to shore up an essentially bankrupt banking system and profligate welfare system involve lower-than-inflation interest rates, and at least one product that is guaranteed to overmatch inflation has been withdrawn - see what happened to NS&I Index-Linked Savings Certificates in July.

Sadly, one suspects that even if such products continue to be available, inflation will be defined in a way that does not fully reflect increases in the cost of living for ordinary people. In fact, definition tweaking is already happening, as in the case of "hedonic adjustment" in the American CPI Index. This means, for example, that a new computer that costs the same as your old one but has double the memory, has effectively halved in price - even if the extra computing speed has absolutely no practical benefit for you (we don't all live in the fantasy world of role-playing games).

I'm quite happy to let the speculators play high-stakes poker with each other, as long as the rest of us can humbly and patiently build security through thrift. It should be a lasting shame to governments that they are denying us ways to do this.

"The hungry sheep look up, and are not fed."

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

A 13th century account of the Big Bang

At the briefest instant following creation all the matter of the universe was concentrated in a very small place, no larger than a grain of mustard.

The matter at this time was very thin, so intangible, that it did not have real substance. It did have, however, a potential to gain substance and form and to become tangible matter.

From the initial concentration of this intangible substance in its minute location, the substance expanded, expanding the universe as it did so.

As the expansion progressed, a change in the substance occurred. This initially thin noncorporeal substance took on the tangible aspects of matter as we know it.

From this initial act of creation, from this etherieally thin pseudosubstance, everything that has existed, or will ever exist, was, is, and will be formed.

Rabbi Moshe ben Nahman (aka "Ramban" or "Nahmanides"), 1194 - 1270; Commentary on the Torah

Wikipedia article here, looked up in reference to a reader's query in the Dail Mail today.

Will Wikileaks break a US bank?

Which American bank is going to be blown apart by promised revelations from Wikileaks?

Britain's Daily Mail newspaper today reported US speculation that it might be Citigroup, but that doesn't appear in the online edition so maybe it was just a wild guess. Tyler Durden hears that the hard drive of a Bank of America executive casts a shadow over Merrill Lynch and/or Countrywide.

Slightly creepy though Julian Assange may be, it seems he's doing what our journalists over here used to do, before they started to see themselves as part of the New Aristocracy. When the horse-puckey hits the turbo, maybe we could see another Enron-type scandal complete with jailings and business foldups.

But I think there will be other repercussions. One will be, presumably, a drive to "clean up the act" - more regulations to try to bring the rogues under control.

Another will be how discussions are (or aren't) recorded in future. I'm sure that thanks to Assange's latest stunt, many diplomats will now be encoding their gossip prior to transmission.

But the most significant will be how observation will be evaded and rules circumvented.

This has already happened in politics: it's one of the curious features of Tony Blair's decade-long "sofa government" that decisions were often made without civil servants present to take minutes: no name, no pack drill, as they used to say in the Army.

We can expect the same in commercial circles. Again, some smart guys have been doing this all along: Jordan Belfort's book "The Wolf of Wall Street" describes how, in order to carry on share-ramping without the inconvenience of explaining their office telephone transcripts to SEC investigators, his boys would simply tell the client they'd call back, then go out and fire up their personal cellphones for an intimate, no-repercussions sales spiel.

The Sicilian Mafia showed them all the way. Bernardo Provenzano ran the Outfit from a shack, avoiding all electronic communication and typing little notes ("pizzini") on his Olivetti instead.

It's kind of a Darwinian co-evolution of predator and prey. We can expect continued crookery, with heightened secrecy. And a surge in sales of two-colour typewriter ribbons.

DISCLOSURE: No positions. Not even in typewriter ribbons.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

The blind leading the blind ...

I have wondered for some time whether the investment community were a bunch of con artists, or deluded.

I believe that I have my answer.

In the November issue of the US edition of Playboy is an article titled 'How to Destroy a Bank'.

In it, the author interviews several investment bankers. All of them lost a great deal of money in the recent collapse; are convinced that they can make it back with 'hard work'; and see financial Doomsday as impossible.

In other words, they are idiots.

Has gold ended its bull run?

The price of gold has soared in the last decade. Can it continue?

Two views make a market, as the saying goes. in "Gold's Run is Over -- I'd Much Rather Own This Stock", Tim Begany writes:

"Gold is the worst investment around. Anyone buying it now is doing so at their own risk, near the end of a bull run that's apt to end badly.

A major clue gold's time is up: institutions and hedge funds are starting to get out.

In October, for example, these big players reduced their long gold futures by -9%. Meanwhile, small investors added +5% to their long gold positions. It's a familiar pattern in which large investors exit the market of an overheated asset in a timely fashion, leaving the little guy to drive the final run-up to the big pop.

I give gold up to another year, maybe two, before it peaks. From there, it's all downhill."

Tim prefers shares in an ex-bankrupt company - Owens-Corning (NYSE: OC) - that makes insulation for buildings.

Bargain-hunting among distressed firms can be rewarding. The financial journalist George Goodman (aka "Adam Smith") once interviewed a fund manager who'd bought stock in the Santa Fe railroad, then bankrupt. The manager explained that the land, buildings and rolling stock had substantial value that was not yet reflected in the share price. This was decades before Warren Buffett and George Soros (an ex-railway porter) discovered their recent interest in choo-choos - maybe for similar reasons. (But it's worth noting that Soros recently sold his holdings in Canadian Pacific - cold feet?)

And it's true that the ratio of the Dow to gold has dropped below the long-term average since the closure of the "gold window" in 1971:

- though the ratio hasn't fallen to its 1980 low. It's also true that gold has outpaced inflation in a way not seen since the end of the 1970s:

So why do the gold bugs still have a voice?

I'd say it's because, as in 1980, these are not "normal" times. JK Galbraith said "The only function of economic forecasting is to make astrology look respectable" and all their cyclical predictions are junk when an asteroid is spotted coming in our direction. That asteroid is a combination of the vast debts of Western nations, the dependence of much of their populations on wealth transfers within those economies, and globalized trade.

Can we deflect it with rockets of bailout and default? The bailouts appear to be devaluing our currencies and may end with high inflation in necessary commodities; sovereign debt defaults would affect not only international relations but the mutual and pension funds on which many of us hope to live in retirement. If the biggest banks are allowed to fail and their shares go to zero, what will that do to Everyman's portfolio?

Gold is a speculation unlike most others: it's a vote of no confidence. As such, it's a systemic indicator, not an ordinary item of trade. At this level of the debate, graphs are meaningless. Among the bears, opinion is divided between people like Peter Schiff who think we can make something out of this crisis, and those like Michael Panzner who believe that when a civilization falls, even the richest citizen can lose all. For example, the biggest-ever hoard of Anglo-Saxon gold was discovered last year, not far from where I live. It's thought to be from the Kingdom of Mercia in the 7th or 8th century. The people who put it there never came back.

We should turn our minds from playing with money to repairing the framework of our nations, and preserving our liberty and democracy.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.