US public debt increases by over $1 trillion in 3 months

Food shortages next?

London Banker explores the implications of the drying-up of letters of credit. Stock that larder extra well until you've heard the problem has been fixed.

Was I right?

I said in comments to one of my Monday pieces, "Up to a certain limit, one can purchase index-linked certificates to preserve one's savings, but I'm trying to guess what rich people will do to get out of cash if currencies everywhere inflate - buy Van Goghs?"

And now Reuters reports that Sotheby's is still selling contemporary art at high prices.

The rich are getting their servants to load the packing-crates into the train while still telling us that we'll win the war. Perhaps they'll flee to Argentina.

You can hear the recession

In recent years, the Bonfire Night (November 5th) celebrations began weeks early - rockets and bangers aplenty every night - in fact, evenings and mornings as well. And after the big event on the day, more for days and weeks after. It didn't seem to matter (even in our "artisan" area) that a single banger could cost £5 or more; every year was like Operation Shock and Awe.

Not this year. A pop or two in the days immediately before and after, something mild on the night. No more 70s Beirut.

Anybody else spot straws in the wind?

Is the right way possible?

The state is always and everywhere a danger, even when it has no monopoly on money and no printing press that can create money tickets at will. But a state with the ability to make its own money is a grave and relentless threat to prosperity and freedom. It leaves the future entirely to the discretion of the money managers. Every day we live under the threat that the United States could be the next Weimar Republic or even another Zimbabwe. All that stands between us and that day is the wisdom and prudence of the Fed.

Llewellyn H. Rockwell, Jnr - talk given on 1 November 2008

Now, how do we mice bell the cats?

And if a foreign nation that trades with you uses currency inflation to support its domestic employment and its exports to you, are you prepared to see a slump in your own economy in order to maintain the integrity of your currency? Can virtue be rewarded, or is it (as seems to happen in this world) severely punished?

Gordon Brown and the New World Order

"...we can together seize this moment of change in our world to create a truly global society..."

Does he know what he is saying? How would one vote out, or flee, a world government?

As Huckleberry Finn says,"I reckon I got to light out for the Territory ahead of the rest, because Aunt Sally she's going to adopt me and sivilize me, and I can't stand it."

Any suggestions as to good places left to flee to?

"I've got a little list"

It was apparent five or six years ago that credit card debt, mortgage borrowing and house prices were rising too fast.

Howard Flight, in today's Daily Mail.

As they break cover to make themselves appear wise now, you may care to amuse yourself by compiling a list of those who knew at the time, and didn't say.

All in the same boat

Mish notes that because it's a global crash, everyone is printing money and the relative value of the dollar has not plummeted as many expected:

... Looking ahead, it is quite possible that if all pegs were removed and the Renmimbi allowed to freely float, that the Renmimbi, not the US dollar would crash. Certainly the pound could crash (I think that is likely), and the EU might even break up.

FDIC underfunded

Two more US banks have just failed, bringing the total this year to 19:

The FDIC estimates that through 2013 there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank. The FDIC is raising insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $45.2 billion, below the minimum target level set by Congress and the lowest level since 2003.

The current target (the "Designated Reserve Ratio") is 1.25% of deposits and is discussed here. According to Mish on July 23, insured deposits in the US banking system totalled $4.24 trillion, which if unchanged now would mean the FDIC current funds represent 1.066% of the sum insured, s0 the FDIC needs to raise another c. $8 billion in premiums from banks.

The question remains, whether merely 1.25% is sufficient for present and foreseeable circumstances. Dr Marc Faber is now talking about eventual US inflation and State bankruptcy - after a near-term rally.

Like I said

I've said more than once, including in my latest letter to the Spectator, the notion that the East is going to suffer from the slump as badly as the West needs some qualification. It's what happens after the slump that will be decisive, and the East has the gear and skilled people to lead the way out, as the Telegraph reports:

Arcelor, being three times larger than its nearest rival, Japan's Nippon Steel, and sharing 10 pc of the industry's global sales, wields huge power to determine what happens to prices and production. In the medium to longer term, Mr Mittal expects the industry to bounce back sharply as the pace of industrialisation in China and India picks up again.

In China, billionaire Shagang steel magnate Shen Wenrong has also planned for the coming downturn. In fact he's not even cutting his prices, since (I surmise) his game plan is that his over-leveraged competitors are going to go bust and customers will have to come to him anyway.

This is smart, counter-intuitive strategy for dealing with a recession. Those who try to survive by cutting margins will get skinny and become more vulnerable to delayed delivery by cash-strapped suppliers, bad-debt customers, and shark bigger-business customers that deliberately pay late to force your business under and then buy your goods from the official receiver at a 90% discount.

In a really post-industrial economy, we in the UK and USA will discover the disadvantages of being run by money-grows-on-trees lawyers, box-it-all-up-and-get-it-on-the-train-before-the-war-ends bankers and hang-onto-office-by-your-bitten-fingernails politicians.

My plan? Pay off debts, hoard some emergency cash (and maybe gold), and if I have to invest, put it in something that's secure and inflation-proofed.

A brilliant idea - Kiva microfinance

Let's think about people to whom $25 would make - is making - a difference. Rory Sutherland's column in The Spectator this week is about Kiva, a project that lends small sums to individuals and groups around the world, mostly to set up or develop little businesses.

They repay from their increased production, you get to re-lend to more people. Really, it's a way that the poor but proud can help each other, using your finance to grease the wheels.

Having read Sutherland, I've just joined, and I really feel good about it. Why don't you?

Coming your way

Marc Faber: There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.

I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy.

Swissinfo: Do you share that view?

M.F.: One hundred per cent.

(Source)

A glimpse from the rich man's coach

Here is a letter to the NYT from the insouciant Don Boudreaux. Unfortunately the comments to this piece on Cafe Hayek are closed - I wonder why? So I'll have to note here that it stirred a memory...

‘Now, you know,’ said Mr. Bounderby, taking some sherry, ‘we have never had any difficulty with you, and you have never been one of the unreasonable ones. You don’t expect to be set up in a coach and six, and to be fed on turtle soup and venison, with a gold spoon, as a good many of ’em do!’

Hard Times, by Charles Dickens

And another, from Shaw's Pygmalion:

I ask you, what am I? I'm one of the undeserving poor: that's what I am. Think of what that means to a man. It means that he's up agen middle class morality all the time. If there's anything going, and I put in for a bit of it, it's always the same story: 'You're undeserving; so you can't have it.' But my needs is as great as the most deserving widow's that ever got money out of six different charities in one week for the death of the same husband. I don't need less than a deserving man: I need more. I don't eat less hearty than him; and I drink a lot more. I want a bit of amusement, cause I'm a thinking man. I want cheerfulness and a song and a band when I feel low. Well, they charge me just the same for everything as they charge the deserving. What is middle class morality? Just an excuse for never giving me anything.

The American Declaration of Independence states "all men are created equal", and of course it was obvious even then that they are not so, whether by birth, upbringing, education or natural talent. Not, in those senses; but the bold defiance of Nature and Society represented by the libertarian revolution of America, and of revolutionary France, is that they have, they should be given, equal dignity, as of right.

And unless a tenured economics professor who boasts of not voting, in a colony that rebelled on the principle of "no taxation without representation", wishes to see the poor squashed while the rich loot the country without fear of retribution, he will need to develop his thesis somewhat.

I do not see how a country can be composed exclusively of the well-off, nor can I imagine how, given all their disadvantages, the poor may rise up as one and join the middle class. There will always be inequality, so our debate should be about setting a minimum standard for the poorest, while motivating them to better themselves if they possibly can. That's certainly a circle that will take some squaring, and a benefit-trap-riddled Britain can scarcely present itself as a model answer.

But I don't see how air conditioning and two cars (what? all poor families?) quite make up for the miseries of ill-health, disability and a shorter lifespan. And it's not entirely down to consciously-made bad choices, in quite the way Mr Boudreaux implies. The ideal-world notion of rational choice has to take into acount real-world limited intelligence, inadequate information, poorer education and in many cases disharmonious emotional constitutions produced by poor parenting, lousy neighbours, failing schools and fear of crime and destitution.

Dives should not look down upon Lazarus.

A fuss about banks

British banks are being criticised for not passing the 1.5% rate cut on to their customers, but retaining some or all of the difference. Presumably they are trying to rebuild their reserves, for running down which they have been much more justifiably criticised. Or do we wish them to remain insolvent, which, as Rick Santelli has admitted, they are?

As my wife said, what do we expect the banks to do: take in washing? Look after your pets in holiday time? Run daycare for the elderly in their conveniently-located, brightly-lit premises?

Inflation-adjusted Dow

( htp: The Mogambo Guru)

As I said in my recent letter to the Spectator, "a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible."

Just asking

A propos the (I would say) criminal systematic financial looting of past years:

1. Is there any limit in scope or number to the pardon/s of a retiring US President?

2. Can an incoming President challenge or reverse any such pardon?

P.S. If Thomas J. DiLorenzo is right, perhaps the pardons should be made retrospective right back to 1781, just to be on the safe side.

Pro-am economics

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?

Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?

It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

James K. Galbraith, 31 October 2008 (htp: Jesse)

And I thought I ought to start reading academic textbooks on economics. It seems that the difference between an amateur and a professional is that the latter gets paid.

Dow 4,900 - sometime?

I'm still working on looking at the Dow in real (CPI-adjusted) terms. Meanwhile, note that in two previous cycles, the Dow dropped to a third of its former peak: from 15 to 5, from 30 to 10 (see red dots).

If history repeats itself, then in real terms the Dow would again lose two-thirds of its value, from 66 to 22, which considering last autumn's peak would imply an ultimate low (if it happened all at once, tomorrow) of about 4,900 points.

But in the previous cases, the process took years to complete, and I would expect it to be a long affair this time, too. The Dow may not hit this 4,900 low in nominal terms.

Continuing this theme, may I draw your attention to the letter I emailed to The Spectator today?

Public service, public broadcasting, public nuisance

12 months' earnings in pounds sterling (official for the PM, reported for the others):

Yet another letter to the Spectator

Sir:

Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.

A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.

But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.

Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.

In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.