Global Financial collapse

[sikeston34m]

I get the impression that many times in the past, the Government's answer to financial problems was just print more money!

What are the over all effects of this?

This appears to give the Government the ability to "bail itself out".

But.........at who's expense? What does this do long term?

[JERRY2KONE]

Originally Posted by sikeston34m

I get the impression that many times in the past, the Government's answer to financial problems was just print more money!

What are the over all effects of this?

This appears to give the Government the ability to "bail itself out".

But.........at who's expense? What does this do long term?

Exactly, and it has to stop at some point, but we are the ones who are going to pay the penalty with lost jobs, higer taxes, rediculous cost of living increases, lower income rates, reduced social services, and a weak dollar.

[Finnster]

Hi Jerry,

So what I am looking at is the underlying macroecon, as well as perceptions that are driving the market right now, as well as historical seasonal market trends. Its also important to keep in mind that it usually pays to be contrarian in your investment strategy.

I think the market (at least the areas I'm looking at) are heavily discounted from general anxiety as well as risk of recession. I think the former (as alluded to previously) is an overreaction to the S&P downgrade, the stupid debt ceiling fight, continued weakness in job numbers, as well as a general lack of response from DC as everyone is out on vacation in Aug. Fear of the 2008 collapse is also fresh in everyone's mind, as well a general misunderstanding of economic fundamentals, especially coming from conservative circles imo.

So basically the econ is very weak, everyone knows that, but I don't think we are anywhere near 2008. GDP of 4Q08 fell 10%. We are still growing, albiet at a snails pace. Also, companies are much stronger than they were pre-crisis, and everyone has been deleverging their debt for 3 yrs. There still is a massive amount of private and public debt, but balance sheets are stronger. Basically many companies are lean, mean and sitting on hoards of cash.

As far as the public debt goes, its ugly, BUT...

The actual yearly cost of the debt is quite low in terms of GDP. This is due to the safety and strength of US treasuries and the tremendous appetite for debt by risk-adverse investors more than willing to buy debt. The prescriptions of "the gov't debt crowding out the private sector" made by some politicians are nonsense and not backed by facts (like historical low rates.) S&Ps downgrade was scoffed at. So while the numbers are staggering, its main effect will be the fear it induces rather than actual yearly cost to the economy (at least in the short/medium term.) What worries me more is the fear-induced paralysis on the policy front to address the fundamental employment and household debt problem.

The dollar may be dropping, but on a macro level that may not be a bad thing. What it means is that our exports become more attractive and competitive and should spur manufacturing growth here as well as slow down imports and improve the trade balance. This is why the Japanese, Swiss, Chinese and even Germans are upset, and are taking measures to fight the rise in their currencies. It also means the real value of our debts also go down, which can be helpful when the big problem with the econ is driven by all the household debt.

This is the major point that is missed/dismissed by the gold std/tight money folks. The major complaints versus the weaker dollar is the negative effect it will have on purchasing power of internationally traded goods, like oil. We are trying to get over an overconsumption binge, so orienting national monetary policy to accomodate that seems like a bad decision IMO. There will be higher energy costs as a result as one effect, but this is system is fairly adaptable (ie purchasing smaller cars) as well as other behavioral adaptations. I think this will be more than made up for by increased exports, and the jobs that come with it, that it shouldn't be the cause for serious alarm that some may suggest.

Also, one would think there is a serious inflation problem right now if one listened to certain news outlets. There has a been a segment of doom and gloomers that have been predicting "hyper-inflation" anyday now. They've been saying this since 2008, and they've been wrong all this time for very predictible and textbook reasons. The core inflation rate is still at near historical lows, the rises in oil and food (non-core) are very much being effected by supply and demand functions, and more so we cannot have large inflation cycle without rising wages. Wages are flat (and fell slightly in June) and home values are flat or falling. Basically you have to have the money in hand to be able to buy the goods at the inflated rate for prices to rise. The consumer is strapped and not spending, and producers/retailers are having to sell at reduced prices to be able to attract scare consumer dollars. This is a recipe for deflation rather than inflation (and is closer to the observed facts in 2009-2011.)
Also, currency values are relative, so to pull away from the $ requires you to move money somewhere else. What is this currency that will rise? The Euro? Hah! bigger mess. Renminbi? China fights to control its undervalue. That leaves what? The Yen and Franc? Rising, but hardly able to replace $ as global currency (esp as Japan is in the same situation we are in re: high debt, bad demographix and slow gdp growth.)

Comparisons of the US economy to Zimbabwe or the Weimar Republic are just off base to their fundamentals, and are more contructions of political hyperbole than accurate comparisons. Same goes for the Greece comparison as well.

Lastly, the end of quarter and end of year tends to result in a rally. Summer seasons are traditionally slow/weak for investors. Map the market this year to 2010 and its deja-vu all over again. Strong Jan-April, correction to over-confidence in May to a slow summer with talks of Euro debt crisis and double-dip, then market running on a 8mos bull run Sept 1 once everyone realized we're not all gonna die. Not saying it's fated, but I think there is a strong case the pessimism is overplayed.

The pols will be coming back to DC next week. Along with them will come job plans and the looming debt deal for Nov. Some of the talk is stupid to be sure, (as you've noted) but the effect will be to give the market news and direction to respond to. I have a small amt of optimism that Obama may be starting to pull his head out of his ass and start focusing on domestic econ issues and the neccesity of a real jobs plan. Up till now his strategy has been to fertilize the "green shoots" with loads of bullshit and little else, and just delegate the rest of the work to Biden and congressional leaders. Also, tea party popularity took a considerable hit with the self-destructive crusade to default in the fight over the debt ceiling. Their influence may be waning a bit, and their contractionary fiscal policies should get more push back. The political realm will be the most volitle for sure, and needs to be watched carefully by investors. One point of note is that the GOP did appoint tax hardliners to the SuperCommittee, but not tea party heros like Sen. Demint. The Dems nominated fairly centrist members and proven deal makers. Given this August, I see some daylight for something somewhat sensible actually getting done, if no more than to save their own asses.

So.... what does this all mean? The rules of my 401k require that I hold all funds for at least 30 days. Given all the above, am I willing to bet that they will have greater value in the short term? I think that it is a pretty strong possibility.
I'm a fairly active trader and sold almost everything in July (following the end 2Q rally from June) and before the debt fight finished. I had done a similar thing in April when things looked over-optimistic and peaky after the 8mos run, and bought back in in late May/early June when doom clouded the skies again. (Plus made sure got out in time this year, got caught holding the bag when the BP oil rig blew up last April and ended up getting stuck in things longer than I wanted.)

Basically I think it pays to listen to and read economists who know what they are talking about and have a solid track record, have some faith in govt leaders that they may actually have an idea to what they are doing, pay attention to market trends and emerging data, and be open minded to explainations and possiblities of the current situation. Turning off ideologes and propagandists, like much of Fox news or any Murdoch-run news also helps. ;) A lot of the criticism I hear is based on ideology, conspiracy theory, political opportunism, wishful thinking and mistake-proven econ theory. What I hear little off is criticism based on solid econ theories that result in reliable predictions, as well as a general lack of critical evidence and facts that weave into theories and diagnoses. Should be a flag for anyone paying attention. I certainly don't want to bet my money on the advice and opinion of perennial losers.

Here is some centrist food for thought:

-http://www.frumforum.com/time-to-dow...ditorial-colum
-http://www.frumforum.com/if-the-cons...ut-the-economy
http://www.frumforum.com/were-our-enemies-right
-How liberal Keynesian economists predicted the stimulus was too weak and ill-constructed to do the job. Jan 8, 2009
-Timid Obama aiming too low, Mar 8, 2009

As long as this post is, its just a brief overview. People can argue the politics of it all they want, but I'm not willing to risk my money on it.

[JERRY2KONE]

You missed one very big thing in your sumation. The US Gov is the biggest employer in the USA, plus they hold contracts with some of the largets private companies across the nation. With the projected budget cuts we are about to see one of the biggest layoffs in our history to reach the balanced budget that Obama wants to see before he leaves office. When these cuts go into effect there will be another 1 million people dumped into the unemployment ranks, along with another 1million people laid off by Gov contractors. With all of these layoffs the US Gov will also lose revenue and have to raise taxes on those who are left still working. These budget cuts are going to hit so deeply that things can only get worse than they already are. Meaning a plunge in the overall value of the US $. Now I am not some economic genious or stock market whore, but this all looks bad to me for our country, and I really do not see any way to avoid it either. Raising the countries debt ceiling year after year has got to stop. Our Gov is writing check that we no longer have the assets to back them up. The next step will be selling off huge amounts of our country to foeign countries.

[Finnster]

Originally Posted by JERRY2KONE

You missed one very big thing in your sumation. The US Gov is the biggest employer in the USA, plus they hold contracts with some of the largets private companies across the nation. With the projected budget cuts we are about to see one of the biggest layoffs in our history to reach the balanced budget that Obama wants to see before he leaves office. When these cuts go into effect there will be another 1 million people dumped into the unemployment ranks, along with another 1million people laid off by Gov contractors. With all of these layoffs the US Gov will also lose revenue and have to raise taxes on those who are left still working. These budget cuts are going to hit so deeply that things can only get worse than they already are. Meaning a plunge in the overall value of the US $. Now I am not some economic genious or stock market whore, but this all looks bad to me for our country, and I really do not see any way to avoid it either. Raising the countries debt ceiling year after year has got to stop. Our Gov is writing check that we no longer have the assets to back them up. The next step will be selling off huge amounts of our country to foeign countries.

I do agree that gov't cutting jobs has had a real effect. The July jobs # (+18,000 net) showed much better #'s for private sector, but huge job cuts in the public sector dragged the #'s down for the low net #. I agree with you a lost job is a lost job. I don't think its wise policy either that so many of these job losses come from police, fire and teachers.

I would say tho, this is being driven much more by the right than the left. It was the Tea Party's balanced budget amendment that was a big player in the debt fight. Obama has been actually pretty right leaning when its come to govt jobs (despite whats said on the campaign trail.) He's frozen fed salaries for the next few years. He's directed strong agency budget cuts for next year. There is no doubt this will have an impact on families employed by the govt. Some of my family have jobs in the Fed, and being told not to expect raises for years can have a very profound impact.

There is no way in hell the budget is going to be balanced by 2016. Obama also says a lot of lofty shit that never comes true. Gitmo is still open, and we're still in Afghan and Iraq last time I checked. ;)
There may be ways to do it, but its politically and economicly suicidal. No reason to do it either. Debt needs to be put under control, but no reason it needs to be balanced now.

The budget deals that have been struck on the Fed level have tended to be geared toward the future rather than today however from what I've seen. Just gotta get the econ going before tomorrow ends up turning into today....

[Finnster]

Originally Posted by sikeston34m

I get the impression that many times in the past, the Government's answer to financial problems was just print more money!

What are the over all effects of this?

This appears to give the Government the ability to "bail itself out".

But.........at who's expense? What does this do long term?

Somebody needs to forward this to the European Central Bank (ECB), as their inaction is threatening to destroy the Euro and send the region (if not world) into a depression. Hey, but they are fighting the spectre of inflation .

I don't know how many have continued to follow this, but it has all been quite facinating (altho scary and sad.)


The inherent weakness of the structure of the Euro is about to come apart. Greece almost totally F'd things up the other week, and managed to have their govt collapse over their bailout deal, and in the end were lucky to get back to where they started with the bailout terms (albiet with a new PM.)

However, they managed to freak the market out by clarifying European ineptitude, Italy's bond rates have been skyrocketing, and now their govt collapsed. Even with a new PM and austerty package, bond markets were not calmed, and now France's bond rates are moving up.

Basically no one is big enough to bail out Italy, but the ECB has to come in and be lender of last resort to ITL to stop the panic and contagion. They have to do Quantitaive Easing drive down rates for Italy by buying their bonds and guaranteeing lowered rates. Italy can afford their debt if it remains at reasonable rates. Fear of European inaction has pushed them up to a level that will create a self-fullling crisis.

The Germans are opposed in intervening as they are the main creditor nation and fear inflation, yet if they don't, German, French, US and many other banks and debt holders will suffer massive writedowns and potential insolvency if Italy defaults. Then the cards will just fall one by one until the whole Eurozone collapses and we see a depression. Its amazing to watch. Germany may do itself in because of far more trivial worries.

No one is safe anywhere. Oz, USA, Asia...

When politicians start talking about "end the Fed" and gold standard and not printing money, this is what it looks like in the present economic situation. Bad idea.

[sikeston34m]

Originally Posted by Finnster

When politicians start talking about "end the Fed" and gold standard and not printing money, this is what it looks like in the present economic situation. Bad idea.

What is the source of inflation? Where does inflation come from?

The Government creates inflation through their so-called "Quantitative Easements".

It's strange how if I print money, I get locked up because it's a crime, but it's ok for the Government to print money out of thin air?

NO!! It's not ok to do that.

The more money they print out of thin air, the more they de-value the dollar. They are stealing from us, the tax payers, without even reaching into our pockets.

They print money, then "loan" it to us as low interest rate loans in order to bale out the housing industry. And we pay the government back for what? Because they have a printer?

But that's still not enough to feed the insatiable hunger of too much government!

As far as the bail outs go, they never should have been done.

It's time for some evolution to take it's course Gentlemen.

If you have wealth, put it somewhere solid or you're going to lose.

I do support the "END THE FED" movement. What they are doing is illegal.

It is unconstitutional and is something our founding fathers sought to prevent.

THAT is why they came up with the Gold Standard in the first place.

You can't get out of debt by printing more money, spending more money, or borrowing more money.

The ONLY way to turn debt around, is live within your means, cut spending, and then pay the debt off!

[JERRY2KONE]

This is very true. If you have financial problems and seek out any financial planner to help ease your pains they will sit you down and tell you just that. First you have to re-evaluate your way of life and total expenditures. Cutting your overall spending is the first step in any financial planning. The second step is to pay off yor debt one by one until you are fee from it in order to stop the bleeding. The third step is to setup contingency plans for future growth and retirement savings. Once all of this is done you can begin to look at the long term plan and make arrangements for safety and security with emergency funds and financial control from within. Doin this as an individual is hard enough. Imagine trying to do this as a nation? There is no short cut for any of this. Its difficult, dirty, and seems impossible to defeat.

All of the financial problems of our global community are driven by greed. Even from the simplest homefront we desire the latest technologies and strive to keep up with the rest of the world. This will never end, because its in our nature to be competitive and do what ever it takes to be better than the other guy. The biggest problem is that too many people have found ways to shortcut and avoid the hard work aspect of this scinario(or so they think). The only way this can be successful is to rip off others stealing their hard earned dollars, but it all has a trickle down effect that wil effect all of us. It has gotten to the point that nothing is safe anymore. The only way to protect your nest egg is to hold it as close as possible and hope that no one will steal it from you or trick you out of it. The worst is still yet to come before the results of this greed is fully seen and understood. The worlds economy will continue to dose dive until we all hit bottom. Just remember one thing. "What does a drowning man do"? He will do whatever it takes not to drown including grabbing anyone within reach and taking them with.

[JERRY2KONE]

After writing my last post I could not stop thinking about how all of this keeps going up and down as the Gov's around the world try to calm its people telling them that everything is going to be alright, Really? So how? So let me ask this. Is there anyone of you who truly believes that this is all going to be OK? I mean really, what is it that you think is going to change to make all of this get better? I fail to see any political party, or person for that matter that has anything in mind except how to make more money for themselves. Not a one of them cares about the people regardless of what they say to your face through TV or in person. Please just one person share with us with all of the political tap dancing, side stepping, so called wisdom, and lies what aspect of our govermental systems is moving in the right direction that shows even a glimmer of hope for the financial well being of the general population. I dare anyone to come up with and share an idea that is going to permanently resolve the global financial problems. There is only one way in my mind that this is going to go, and that is deep, and biblical depression and recession. We are in for a real Earth shaking experience worldwide and no one is safe from the effects or the outcome of it all. All of the bailouts, spending cuts, and realigning in the world is not going to save us from whats coming. Humanity has tapped all of its financial resources to the point of self destruction through the enormous debt that it has created, and there is no way out of it. There is no magical currency printer that can make enough fake money to avoid the inevitable. Dig in and get ready for the fall out. The riots and demonstrations we have seen up to now are merely a glimps of what we are capable of. People are begining to get desperate just trying to get by. Soon it will become more serious as they try only to survive. This is not going to be centered on just the USA, Africa, Greece, Port of Prince, or any other nation economy. This is becoming a worldwide issue that is going to take down every economic organization around the globe.

[Finnster]

As far inflation goes, inflation can come from printing money. But there is a bigger story.

The question here is what is the root problem, and what are the consequences of different actions? Is there at least a "least bad" option?

The financial crises and the gov't & central bank's responses we've had on the two sides of the Atlantic have been a very interesting experiment of the two different schools of thought on how to deal with a credit crisis and recession.

The USA had followed a school of thought that has favored interventionist philosophies by the gov't and central bank. On the gov't side, by tax cuts and spending increases to try and grow out of the recession and lower unemployment. On the central bank side, willinginess to expand the money supply to maintain liquidity to keep credit markets functioning and borrowing costs low, as well as ease unemployment. The Fed has a dual mandate of price stability and low employment.
Recessions are seen as a malfunction/short circuiting of the market, and intervention can restore order and more quickly restore growth.

The EU has taken a non-interventionist model, following the "Austrian model" of economics, primarily driven by the Germans. (FWIW, Ron Paul is a self-desribed Austrian.) An overriding idea that recessions are neccessary destructive acts, and intervention distrupts this process and leaves the work "undone." Maintaining market confidence and heathly balance sheets are seen as the priority. This translates to tax increases, spending cuts, wage cuts and public layoff policies. Ie "Austerity Packages." This self-inflicted pain is expected to be rewarded with market confidence due to their demonstrated dicipline.
The ECB only has price stability as a mandate. It is not charged to regard employment consequences in its policy decisions.


So, how have the two different systems faired? We both had a large housing bubble that burst, and are now dealing with large private sector and public debt. Both are well delevoped economies of similar scale. The EU is a little bigger, but is not as integrated as the US. Both systems are suffering from intense political quabbling and indecision.

By all measures, the US as a whole is much better off than the EU (everything is relative here.) Overall unemployment is lower. GDP growth is higher (we are weakly growing (+3% for Q4,) and EU is facing likely recession.) US credit markets are functioning better. While we have weak wage growth, many parts of the EU are seeing wages fall.

Regarding the current crisis: US borrowing costs are far lower than everywhere in the EU that's not Germany, and even then still less than Germany. Where is their "Virtue" being rewarded?
10 year bonds for the US are ~2.0%, Ger ~2.25%, ITA boomed to over 7% (+5.5% over benchmark German bonds.) Look at the rates over the last year. ITA spiked, and so has France , and so has Spain.

This spike is what is screwing ITA, FRA, SPA, etc. Some EU states have better balance sheets than the US, but bond markets freaked out over perceptions of risk. The US rates are low as we can never, ever default, as we have the Fed who can always print money to pay investors, and are willing to do so. There are consequences for inflation, but that is not the pressing concern. In fact, inflation has been well below historical avg, despite the FED tripling their balance sheet in since 2008. Ask Ron Paul to explain that.
=> Printing does not always lead to inflation! Its context that matters!

Italy can afford its debt, but because Germany (the EU's main creditor) has been reluctant to intervene, and the ECB has a hands off policy, AND because Italy is on the Euro (a defacto gold std), they do carry a risk premium of default. In dealing with Greece, the EU looks incompetant. Risk premiums push up bonds everywhere. Higher rates make default more likely, so rates go up higher. Now rates are above which Italy can afford, looks insolvent and is threatening default. Nothing has really changed fundamentally in their economies, just their (in)actions have changed perceptions. ===> Self-fulfilling crisis.

Worrying about potential future elevated inflation while your currency is on the verge of collapse is like having your house on fire but refusing to turn on the sprinklers because you don't want the drapes to get wet. Considering the heart of the crisis is to much debt, higher inflation is actually not a bad thing (whole other long-ass post tho.)


Luckily the ECB is pulling its head out of its ass and buying up Italian and Spanish bonds today. They have to be lender of last resort or game over for the Euro. They don't even have to buy a lot of debt, they just need to show they willing to act, and the perception of risk (and bond rates) will begin to fall. Italy is solvent as long as Germany doesn't F it up for them.