Greenspan just won’t shut up. Thank goodness. This is because he is getting a tad senile and is actually blurting out the truth occasionally in between his usual blather and lying. Again, he admits that he and his fellow members of the Wizard’s Guild are practicing magic. Then claims, he can’t see ahead at all. Japan is going into a major depression….again. And the AIG bonus boys are quitting out of naked fear. And to top it all, our dear warmonger in chief was ordered by AIPAC to DOUBLE war spending in Afghanistan and Iraq and to fight EVEN MORE. So we are going to spend over $4 billion a month, chasing angry mountaineers who hate foreign devil invaders. We all know how this story will end. History laughs at us.
Europe, the US and Japan are all on exactly the same track! All are seeing huge drops in growth rates to the negative. One of the side problems with ‘free trade’ is, all go up and down together, all at the same speed. The ‘major emerging markets’ are still seeing more growth than the older economies. But the rate echoes each other nearly exactly.
As I said often from 2005-2008, Japan was not in a depression. True, the workers were being hammered mercilessly. But the economy was not in a depression. Now, it is. No surprise here. If the US goes down, so do all other nations. We also have the continuing problem of the world’s #1 and #2 economies in distress while still being #1 and #2. This is not good.
The Government said today that retail price inflation in February ground to a complete standstill, while retail sales collapsed at the fastest pace in seven years, falling 5.8 per cent, above the 3 per cent decline predicted by the market. Japan, with its big exporting sector and high exposure to global consumerism, has been fiercely affected by the downturn. GDP has begun to fall at a pace that defied forecasts, and earlier this week it was revealed that exports in February nearly halved as the world stopped buying Japanese.
The strong yen is a total disaster for Japan. The Japanese carry trade is dead, too, since all of Japan’s trade rivals are all falling into the same ZIRP hole Japan is in. Japan’s ZIRP system has been so stable, it barely moved even slightly for over 10 years! It is the fulcrum of all world monetary systems due to its stubborn singularity that has become a major ‘dead zone’ in finances.
Always, we must look at ahistorical anomalies very closely. Never, has any bank run a zero system before. And virtually none have run it for years and years and years! Since this is the only time in all history, this is happening, we must attend to it with a great deal of alarm. It isn’t right. It should be impossible.
Japan’s gross public debt is now the highest on earth, compared to a percentage of the GDP. Italy and Iceland, to nearly or totally bankrupt nations, barely come close to Japan in this area. The US has a huge economy and thus, is less than half of Japan’s numbers. But then, when this was calculated, Japan was in a ‘depression’ and thus, has a very low GDP. The US has been in a hyper-consumerist mode and thus, has a high GDP that is 70% consumer spending.
All we have to have, to get numbers like Japan, is a declining GDP for 12 years…a distinct possibility. Everything is relative, literally. Now that we looked at Japan, the Black Hole in global finance and trade, let’s look at AIG, yet again:
As if ANYONE can fix this $200 billion derivatives mess! Of course, no one can. This is a magical thing that was created by greedy gnomes and killing it is inevitable. But since this will also kill all the bonuses, all the fake funny money and derail the entire financial systems set up by a bunch of criminals…well, there is nothing we can do but do it. Throwing money at these gnomes is a waste of time and good paper. Spare the trees and get rid of the gnomes.
Then, we can go to China and learn about how to run banks. Seriously, the Chinese have issued several speeches about this and we will discuss this later. Yesterday, I did a little video about wizards:
Greenspan is a wizard who retired and now flies around the planet, annoying and terrorizing everyone. He is very intent on making out that he was a helpless babe in the Bretton Woods and had no idea, what was going on or why things happened. Yet, he is a proud wizard and likes to preen so we get alternate whining and boasting which is very annoying. And people pay this guy to do this on stage. It is like watching Hamlet only it is Yorick talking to Hamlet’s skull.
The extraordinary risk-management discipline that developed out of the writings of the University of Chicago’s Harry Markowitz in the 1950s produced insights that won several Nobel prizes in economics. It was widely embraced not only by academia but also by a large majority of financial professionals and global regulators.
A Markowitz Efficient Portfolio is one where no added diversification can lower the portfolio’s risk for a given return expectation (alternately, no additional expected return can be gained without increasing the risk of the portfolio). The Markowitz Efficient Frontier is the set of all portfolios that will give the highest expected return for each given level of risk. These concepts of efficiency were essential to the development of the Capital Asset Pricing Model.
In finance, the Capital Asset Pricing Model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversifiable risk. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known assystemic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
If Professor Markowitz is embraced by a large majority of financial pros, this is NOT a good endorsement! Indeed, this is a major problem. Obviously, people who used this guy’s formulas and systems to control events, look at the present mess!
They followed this guy for the last 40 years and where are we now? In the toilet! The entire system has been utterly and totally destroyed. The bothers me all the time. Nearly everyone is devoted to using these formulas that require plugging in numbers to arrive at answers. Only, the numbers used are COOKED.
Just like Greenspan used false inflation numbers when figuring out what was going on. The best formulas on earth are failures if fake numbers are inserted, screwing up the answers.
But in August 2007, the risk-management structure cracked. HAHAHA! Is this the best he can do? August, 2007, was when the Japanese carry trade began to violently unwind. All the sophisticated mathematics and computer wizardry HAHAHA, at least he admits to all these guys being wizards!— essentially rested on one central premise: that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms’ capital and risk positions. HAHAHA! Far from monitoring any capital, these guys all thought the Japanese easy ZIRP lending would last forever and they could dip into it when they needed ‘capital’.
For generations, that premise appeared incontestable but, in the summer of 2007, it failed. It is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk-management techniques and risk-product design were too much for even the most sophisticated market players to handle prudently….
The chief risk-management technique was the Derivatives Beast. They impudently decided, all risk was ‘spread’ and thus, wouldn’t take down all of them if something stopped dead in its tracks. Two things did stop very suddenly: the people taking on endless loans to speculate in real estate or fund shopping sprees, suddenly became unable to pay even the bare interest on their loans. And the Japanese ZIRP carry trade ended with a loud snap!
What, in my experience, supervision and examination can do is set and enforce capital and collateral requirements and other rules that are preventative and do not require anticipating an uncertain future. It can, and has, put limits or prohibitions on certain types of bank lending, for example, in commercial real estate. But it is incumbent on advocates of new regulations that they improve the ability of financial institutions to direct a nation’s savings into the most productive capital investments – those that enhance living standards. Much regulation fails that test and is often costly and counterproductive. Regulation should enhance the effectiveness of competitive markets, not impede them. Competition, not protectionism, is the source of capitalism’s great success over the generations….
It is obvious, Greenspan hasn’t the faintest idea, what capitalism is all about. He thinks, the system is set up to ‘enhance living standards.’ How enabling housing bubbles does this baffles me. All this means is, people must take on immense debts in order to buy a home! The very rich, though, loved this inflation. They loved seeing their modern art collection shoot up in value via auctions, for example.
But going to art auctions, buying yachts, buying mansions, buying sex is NOT capitalist activities. They are CONSUMPTION which is utterly different. The huge mess we are in today is due to the entire US losing track of what capital really is. But the Communist Chinese know exactly what it is which is why they have oodles of this and we have virtually none left, here.
History also demonstrates that underpriced risk – the hallmark of bubbles – can persist for years. I feared “irrational exuberance” in 1996, but the dotcom bubble proceeded to inflate for another four years. Similarly, I opined in a federal open market committee meeting in 2002 that “it’s hard to escape the conclusion that … our extraordinary housing boom … financed by very large increases in mortgage debt, cannot continue indefinitely into the future”. The housing bubble did continue to inflate into 2006.
So, in 2002, he was worried about a housing bubble? Um, he dropped rates to 1% AFTER this observation. This caused housing to shoot through the roof. So why on earth did he do it? OH! After 9/11, the US foolishly decided to go to war with both Afghanistan and Iraq. And needed cheap loans to do this since Bush cut taxes.
It has rarely been a problem of judging when risk is historically underpriced. Credit spreads are reliable guides. Anticipating the onset of crisis, however, appears out of our forecasting reach. Financial crises are defined by a sharp discontinuity of asset prices. But that requires that the crisis be largely unanticipated by market participants. In this case, the hedge funds running off to the Bank of Japan were totally unprepared for the end of the Japanese carry trade. For, were it otherwise, financial arbitrage would have diverted it. I predicted this before it happened but I am not on MSNBC shouting about these sorts of obvious things we can see from afar. Earlier this decade, for example, it was widely expected that the next crisis would be triggered by the large and persistent US current-account deficit precipitating a collapse of the US dollar. I also got this right: our trade rivals would NEVER allow the dollar to die. They love their huge trade surpluses with the US way too much. The dollar accordingly came under heavy selling pressure. Accidentally, since the Japanese did NOT want the carry trade to end, not even slightly. The rise in the euro-dollar exchange rate from, say, 1.10 in the spring of 2003 to 1.30 at the end of 2004 appears to have arbitraged away the presumed dollar trigger of the “next” crisis. Instead, arguably, it was the excess securitisation of US subprime mortgages that unexpectedly set off the current solvency crisis.
We sold too much US debt to China. China ceased buying all of this junk. And is now very outraged by our struggle to slip out from under our obligations. This is exactly why the US can’t just slay the entire Derivatives Beast. We owe too much to China and Japan.
Once a bubble emerges out of an exceptionally positive economic environment, an inbred –the gnome brain at work here—propensity of human nature fosters speculative fever that builds on itself, seeking new unexplored, leveraged areas of profit. Mortgage-backed securities were sliced into collateralised debt obligations and then into CDOs squared. Speculative fever creates new avenues of excess until the house of cards collapses. What causes it finally to fall? Reality. HAHAHAHA. In other words, Libra demanded the books be balanced.
An event shocks markets when it contradicts conventional wisdom of how the financial world is supposed to work. Of course, he will not admit that there is no ‘wisdom’ except in Libra, the need for honesty and accounting correctly and balancing the books. He means, ‘All the goofy magic theories and formulas of the wizards.’ The uncertainty leads to a dramatic disengagement–a fancy way of saying, ‘RUN AWAY!!!’— by the financial community that almost always requires sales and, hence, lower prices of goods and assets. We can model the euphoria and the fear stage of the business cycle. Their parameters are quite different. We have never successfully modelled the transition from euphoria to fear.
‘Fear’ always shows up six months before total panic. In the present case, it showed up at the end of February, 2007. Starting in Asia, markets plunged briefly. People over here ran around, screaming for 48 hours. Then, all settled down and they tried desperately to increase the buy-out deals which shot upwards as all of them tried to clear the financial hurdles before the crash.
In other words, they KNEW there would be a crash and were anxious to make as many deals as possible before it hit. This caused markets to hit new highs even as bankruptcies were rising and it was obvious, any housing-based bonds were doomed.
I do not question that central banks can defuse any bubble. Even 100 years ago, sane people knew that the ONLY solution to bubbles was to prevent them from ever forming. This gave birth to business statistics. But it has been my experience that unless monetary policy crushes economic activity and, for example, breaks the back of rising profits or rents, policy actions to abort bubbles will fail. I know of no instance where incremental monetary policy has defused a bubble.
Did Greenspan even try to ‘defuse’ any bubbles? Of course, he did raise rates leading up to the Dot Com collapse. But the reason it didn’t work like a charm, at first, was due to the Japanese carry trade which took off at the exact same time. How amazing is this coincidence? HAHAHA.
Restoring the US banking system is a key requirement of global rebalancing. The US Treasury’s purchase of $250bn (€185bn, £173bn) of preferred stock of US commercial banks under the troubled asset relief programme (subsequent to the Lehman Brothers default) was measurably successful in reducing the risk of US bank insolvency. But, starting in mid-January 2009, without further investments from the US Treasury, the improvement has stalled. The restoration of normal bank lending by banks will require a very large capital infusion from private or public sources. Analysis of the US consolidated bank balance sheet suggests a potential loss of at least $1,000bn out of the more than $12,000bn of US commercial bank assets at original book value.
So, all we need is another trillion dollars and the mess created by these creeps will end? And while keeping the Derivatives Beast alive at the same time? This is the definition of ‘impossible.’
Through the end of 2008, approximately $500bn had been written off, leaving an additional $500bn yet to be recognised. Meaning, we lost a lot of loot and now have to loose a lot more loot. Unlike the AIG bonus babies, we are expected to bite the bullet and not get angry. But funding the latter $500bn will not be enough to foster normal lending if investors in the liabilities of banks require, as I suspect, an additional 3-4 percentage points of cushion in their equity capital-to-asset ratios. The overall need appears to be north of $850bn. Some is being replenished by increased bank cash flow. A turnround of global equity prices could deliver a far larger part of those needs. Still, a deep hole must be filled, probably with sovereign US Treasury credits. This deep hole was dug but the experts, the devotees of Markowitz’s imaginary universe where magic spells control human events that are running on a totally different track. Namely, lust and desire control events, not some numbers. It is too soon to evaluate the US Treasury’s most recent public-private initiatives. Hopefully, they will succeed in removing much of the heavy burden of illiquid bank assets.
The ‘heavy burden’ is being removed from the illiquid banks by transferring them to the illiquid taxpayers! And illiquid banks are also bankrupt banks! This is the definition of bankruptcy. The fear of bankruptcy should motivate bankers to be very, very careful. Instead, this was lifted from them so they ran riot.
Below are two graphs from the Bank for International Settlements:
You may recall the headline of last year’s BIS Annual Report: “The unsustainable has run its
course.” This reflected the view that the turmoil that started in July 2007 is not only an
idiosyncratic failure in the functioning of financial markets.
It is also, and perhaps more
fundamentally, a crisis rooted in the preceding credit boom that had fuelled financial
excesses and was accompanied by large, sustained deviations of key macroeconomic
variables from longer-term fundamentals.
The illusion of “growth without savings” in a
number of advanced economies, combined with accommodative monetary conditions – with
interest rates that stayed too low for too long – and unfettered financial innovation led to the
build-up of excessive debt in the global economy. The build-up is illustrated in Graph 1 on
the previous page by the large widening of the US current account deficit (left-hand panel),
the surge in foreign exchange reserves (centre panel) and the rise of US debt backed by
mortgages (right-hand panel).
As shown in Graph 2 above, the outcome of these developments in the US credit markets
has been a build-up of debt in both the household sector and the financial sector.
This is an inditement of Greenspan! ‘Illusion of growth without savings’ and keeping rates too low, can be laid at the feet of this particular wizard! Look at these charts! Goverment spending, as a percentage of GDP, was flat. True, household debts rose rapidly. But none rose as fast as ‘financial’ debts! This is, in other words, the gnomes running JP Morgan and Goldman Sachs and all of the hedge funds, ‘making money’ out of thin air, via the Bank of Japan! The second graph clearly shows that this was the majority of the growth in debt.
I remember debating the business of the US not saving money [ie: creating capital]. I said, ‘No banking system can run without true capital via savings.’ But the lure of making more and more debt based on less and less capital was too easy so everyone did this, to the n-th degree.
President Obama this morning announced a newAfghanistan-Pakistan strategy that will require significantly higher levels of U.S. funding and thousands more military and civilian personnel to reverse what he called an “increasingly perilous” situation… “I do not ask for this support lightly,” Obama said in a White House speech before regional ambassadors, aid officials and his senior national security team. “These are challenging times, and resources are stretched. But the American people must understand that this is a down payment on our own future.”
Bin Laden’s plan to have us go bankrupt is running on greased rails! The US is in very serious financial difficulties and what is Obama’s priorities? Ask Rahm Emanuel and his Israeli bosses!
Among the resources required, he said, are an additional 4,000 troops, beyond the 17,000 he authorized last month, that will bring total U.S. deployments to more than 60,000. U.S. military expenses for Afghan operations this year, White House aides said, will increase about 60 percent from the current toll of $2 billion a month. The newly announced forces, from the Army’s 82nd Airborne Division, will serve as trainers and advisers to an Afghan army expected to double to 134,000 by 2011.
Over $40 billion a year for just Afghanistan! And don’t forget Iraq: it, also, will be around $40 billion a year, too. Between themselves, they have drained over a trillion dollars from the US. ALL of this is in the form of debts owed to the Chinese and Japanese rivals. This is beyond suicidal. It is simply stupid.
Note how warmonger Obama is MORE THAN DOUBLING the misspending so we can ‘win’ what? NO ONE ever wins ANYTHING in Afghanistan. This is the one point on the entire planet with a long and illustrious history of destroying empires by driving them into bankruptcy.
The Pyrenees, Caucasus Mountains, the Scottish Highlands, and Switzerland are classic examples of similar mountainous regions that spawn nothing but trouble and are best left alone to their own devices. Ask the Romans about that!
Obama called on Congress to pass legislation to provide $1.5 billion a year for five years in economic assistance to Pakistan, along with a bill creating “opportunity zones” for exports. Additional development aid is also planned for Afghanistan, and Obama said he would launch a “dramatic increase,” expected to number in the hundreds, of U.S. civilian officials on the ground there. The United States also plans to provide additional equipment, including transport helicopters, to the Pakistani military.
So, warmongering fool, Obama, is going to send in an army of civilians? HAHAHA. How about sending all the AIG bonus babies there? They are whining about how miserable they are, with no million dollar looting opportunities! Well, the Pentagon is the #1 looting opportunity on earth. Look at the numbers! The army of civilian AIG derivatives guys could weasel out at least 8% of this $4 billion a month baby!
They could even leverage it 10 to 1 in the illegal drug markets. After all, this is Afghanistan’s #1 money maker and it makes a lot of money. The AIG workers could pack diplomatic pouches with heroin and then peddle it in Central Park, in NYC. See? Easy as pie.
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