John Robb's Weblog

Hoarding

A word to the wise: Hoard/hide cash (not in a safety deposit box since those are vulnerable). Cut consumption to the bone. Get ready.

The Japanese Lens

An interesting assumption error that's likely in the Fed's models of response derives from their use of Japanese model of failure. In that model, the response didn't have to factor in worries about the average Japanese worker. They had substantial savings that allowed them to weather a significant financial storm. This crisis is different since the debt overhang extends all the way down. As a result, the worry should be about the collapse of the American citizen -- who is, the demand engine of the global economy.

If that's true, where is the big bailout(s) geared to keep people in homes and get them back to solvency? Write offs are inevitable in the consumer sector.

Another cool thing about this tightly coupled global economic network, is that it falls spectacularly fast. Information about problems/fears travels so quickly, that everyone ends up cutting back/hoarding faster than responses can be formulated. That's what's happening now in global trade. The Baltic dry index, a good indicator of global shipping activity, is down 90%!

Where is the Financially Viable American?

The global crisis continues to pick up steam and where/when it will end is anybody's guess. It's hard to imagine it ending well.

It didn't have to happen. The crucial step, from what I can determine, is that we intentionally gutted the core feature of the global system's post WW2 stability:

That the incomes of Americans rose with improvements in productivity.

That logic held between WW2 and 1974. After that, incomes were decoupled from productivity improvements. Incomes didn't grow at all while the extra wealth generated by productivity improvements were concentrated in the capital markets.

On a societal level, the lifestyles of the newly enriched elite served to pull the vast majority of Americans into debt (as they attempted to keep up with static incomes -- if incomes had kept up with productivity improvements, most debt accumulated would have shrunk quickly as a portion of income over time). Further, on a financial level, all of this newly concentrated wealth inevitably sought the returns of gambling over the long and slow process of investment.

So now we are at an impasse. We gutted the sole potential source of stability of the global economic system. The American.

"Normal Debt Levels"

One way to view the crisis is as deleveraging of everything. Essentially, that means a reduction in debt down to historical norms. Interestingly, historical norms put sustainable levels of debt at about ~160 percent of GDP. We are currently at 370%. To get down to historical levels, we need to destroy -- pay-off, write off, or reduce -- upwards of $30 Trillion in debt (and that is in the US alone).

No OODA, just Ad Hoc

My observation has been that the Fed/Treasury doesn't even have what could be termed a OODA loop (not even a broken one). It appears to merely big guns shot from the hip at anything that goes boom.

Here's more support for this view.

Lahde

From the hedge fund manager who made the biggest return in history betting on the financial collapse (in his resignation letter). He credits his success on finding willing "fools" for his bets:

I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Are investment bankers = global guerrillas?

Yes.

Trigger for the consumer/housing collapse?

Collin Campbell. 2006.

All in bets

The Euro zone nations and the US are now all in with the financial system. Unfortunately, they didn't severe the bad connectivity of the system before they did it. If it sinks again, not sure what else they can do....

Brad Setser points out the Fed, by giving the EU central banks the dollars it needs for the bailout, is now backing most of the global financial system (through both direct cash infusions and lending):

Think of it this way: all the concerns traditionally raised about Fanny and Freddy — privately owned companies borrowing in the market on the back of a government guarantee rather than than the strength of their own balance sheets — now apply to the “private” financial system.

The Fed isn't just the only lender in the global financial marketplace, it's the only investor that matters.

The Foreclosure Tsunami

Mercury News: gutting neighborhoods with alacrity. Coming to a community near you soon...

The people I've known in the past that have suffered from a deeply underwater mortgage never seemed to recover. It was devastating both financially and psychologically.

With 250,000 foreclosures a month (at the current rate), the damage is going to be incalculable. I suspect that it will result in the wholesale deleveraging of the American consumer. I also suspect that deleveraging of the American consumer is going to make he similar process underway in the financial/corporate markets look tame. It has the potential to absolutely devastate the American economy (2/3rds of the American economy is from consumer spending, it is also the engine that powers the world's mercantilist/exporting economies). Strangely, nobody appears to be working on a way to slow down this process since all eyes are focused upwards, on the collapse of the international financial system.

Really makes you think we finally killed the goose that laid the golden eggs: the American middle class.