The economic collapse - what will happen?

[Godwynn]

i'm afraid you're right.

What is the opinion of Juncker and Trichet over in Europe?

 

[DNK]

I'm surprised at the lukewarm intesrest in this on OT, I think we are witnessing an event bigger in magnitude than Sept 11, yet very few posts about it... look at my sig, people

Not to be dismissive of what happened, but 9/11 always was overplayed. The differences are probably:
1. 9/11 was singular and "simple" (really, quite a complex web of ideology, history, and geopolitics, but... BIN LADEN HATES FREEDOM!), while this is systemic and confusing even for experts.
2. It's confusing even for experts. Most posters on this forum can't vote yet and certainly don't understand f-all about economics. Even those with some uni-level economics education are

Is that the last roll of the dice?

Well, I figure the Fed's got three more rolls to go... and I was also expecting a 1% drop. .5% seems like they want to keep wiggle room in case the .5 doesn't work out, then they can move more aggressively.

On reality. Most of the "economic growth" since at least the early 1990s, was based on unsustainable debt. All that will unwind now. Have I been wrong on past calls here?

I would say mid-80s myself. I'm not sure how much growth was based on that debt, as I figure a lot of the money went overseas. I think a lot of that debt was housing-based, so it's a fairly important factor here, although how it will play into the general economy remains to be seen. Perhaps, in this regard, the most dangerous possibility would be a major reversal in willingness to buy houses and finance with excessive debt. How quick that reversal comes is what I'm not sure about, since people still are probably convinced that they're entitled to a big house by whatever relative yardstick they're using (the "American Dream", which oddly has nothing to do with freedom, representative government, or anything connected to that).

I just don't see this sort of a trend "unwinding" in a heartbeat unless the economy takes a very serious fall first, effectively collapsing discretionary spending between debt payments, lost retirement funds (what's 50% of 0? anyway, right?), and a falling economy. I'm not sure a long-term debt trend can "pop" like that without an excessively poor labor situation and a major recession (both very possible, although I doubt the severity). It will, no doubt, be a positive feedback loop (debt is fun like that), but how powerful it is, I'm not sure.

 

[RedRalph]

Well, I figure the Fed's got three more rolls to go... and I was also expecting a 1% drop. .5% seems like they want to keep wiggle room in case the .5 doesn't work out, then they can move more aggressively.

and what are those rolls? More rate cuts? Thsi one certaintly didnt have any immediate impact (well it did, but it was more or less immediately reversed on the stock markets at the very least)

 

[Integral]

and what are those rolls? More rate cuts? Thsi one certaintly didnt have any immediate impact (well it did, but it was more or less immediately reversed on the stock markets at the very least)

Rate cuts are one of the Fed's least effective weapons right now, but they do have the liquidity-inducing TAF, TSLF, and the $700 billion TARP (with the Treasury) to play around with. The trade-off is that by using these tools, the Fed is putting mortgage-backed waste and other toxic assets on its balance sheet.

Bernanke might be running out of ammo, but he still has a few tricks left, probably.

EDIT: for acronyms
TAF: Term Auction Facility ($150 billion, mostly used up)
TSLF: Term Securities Lending Facility ($200 billion, mostly used up)
TARP: Troubled Asset Relief Program ($700 billion)

Both of the first two plans are basically facilities in which the Fed gives banks Treasury securities and accepts mortgage-backed securities in return. The TARP, which was passed last week, gives cash and Treasuries in return for equity. I think. I haven't looked at the actual legislation yet.

 

[innonimatu]

The DJIA only tumbled 300 points before closing... I guess the collapse is postponed either for tomorrow morning or for next monday, I'll give up on anticipating the day.

Rate cuts are one of the Fed's least effective weapons right now, but they do have the liquidity-inducing TAF, TSLF, and the $700 billion TARP (with the Treasury) to play around with. The trade-off is that by using these tools, the Fed is putting mortgage-backed waste and other toxic assets on its balance sheet.

The Fed has already used up all its balance sheet. That latest acronym is already using on "new money" from the treasury.

Both of the first two plans are basically facilities in which the Fed gives banks Treasury securities and accepts mortgage-backed securities in return. The TARP, which was passed last week, gives cash and Treasuries in return for equity. I think. I haven't looked at the actual legislation yet.

The end result is still the same: bank balance sheets stink. Their balance sheets are impaired no matter what, unless the Fed actually gave them the money (not just borrowed against some kind of collateral). The important point is: can all that collateral be wiped out during that loans by the Fed, in such a way that banks never have to take any of it it back? No, because the loans are short-term, and banks have to pay it all back, collateral is only taken if banks default on the loan, and news about that would lead to loss on any credit whatsoever, bank runs, bankruptcy! Who is going to loan to a financial institution (and keep in mind that CDs are loans by costumers to the institution) that has just defaulted on billions of debt?
With the current scheme the bad paper still belongs to the banks, until they go bankrupt! All these schemes can achieve no more that to "zombify" the banks - they'll not go bankrupt, but neyther will they be able to restart interbank lending or any other financial activity like that of past years.

The "solution" to the problem is actually offering money to the banks, but how is any government going to do that while the common citizens (the source of that money) are forced to pay interest for any money the banks borrow them? Political suicide! To give away money to the banks governments would have to either do it stealthy and slowly, or nationalize the banks. The US is going for the first option, Europe (where there are no qualms about nationalizations) for the second.

Then there's the problem of where governments are going to get the money for that anyway. Especially on Europe, where they deliberately tied their own hands while creating the euro. Anyway, there will be political consequences.

 

[Theige]

On reality. Most of the "economic growth" since at least the early 1990s, was based on unsustainable debt. All that will unwind now. Have I been wrong on past calls here?

So it had nothing to do with technology, increased productivity, freer trade and over 20 million new jobs?

The Debt as a % of GDP was dropping until the 01-02 recession. Since 2001 the Debt as a % of GDP has been increasing.

 

[kronic]

I'm pretty much convinced that we'll see the nationalisation of all big banks in the world. It's only a matter of time and it's the only way for banks to survive. This is certainly not a small crisis like the dotcom bubble.

 

[BasketCase]

Alrighty--without even bothering to read the thread first, lemme tell ya what's gonna go down. Err, strike that--while writing this, I caught a glimpse of that ridiculous "breakup of America" scenario that Neomega wrote, so now I know it's a very good idea NOT to read this thread.


Okay. Down to figurative business.

This economic panic didn't get started because of a bunch of greedy CEO's or whatever. Investment is always risky, even at the best of times, and what happened is a whole lot of people (not just in the corporate world, but HOMEOWNERS as well!) made a bunch of risky investments that all went sour at the same time. This shouldn't be a surprise. In fact, statistically, it is virtually certain to happen now and then.

The reason we still have a problem now is twofold. First off, people have gone from over-investing to NO investing. Banks are unwilling to lend money to each other or to anybody else, and that in itself is causing problems. Makes it harder for people to buy a car or a house, making the auto and housing markets sink. Makes it harder for a company to get a loan in order to make payroll. The second reason, very simply, is that investors are scared stiff. They're trying to dump investments before they sink further, and the selling in itself is causing them to sink further, and investors are holding onto their cash until they're SURE the market has hit bottom.

Read that last sentence again. Now, lemme say this real clear: ANY INVESTOR WHO THINKS LIKE THAT IS A GODDAMN IDIOT. When you try to dump your investments during a downturn, you end up selling low, and that's not what you want to do. Right now you don't want to sell. It's pretty much too late. The market is already down. This is a time to get ready to BUY. I've got a big chunk of loose cash at the ready, and pretty soon I'm going to be BUYING stuff. It's impossible to predict the bottom perfectly, and any investor who waits to be absolutely sure we're past the bottom is going to lose money because he will miss the bottom and end up buying high.

You can't work investments by looking for a sure thing because this is ECONOMICS and there is no sure thing in economics. The only sure thing about economics is that there's no such thing as a sure thing in economics--and that's a sure thing.

Oh, and the other rule of investing: once you're into a good mutual fund, you STICK WITH IT for the long term. You don't dump it if it takes a short term dip--you ride those out. You dump a fund when its management goes bad and its performance goes sour over the LONG term.

 

[Neomega]

The poor will suffer first, and in the middle class there will be more and more growing armed conflicts between law enforcement and evictees.

didnt see that one coming:

Illinois sheriff: No foreclosure evictions on my watch
http://www.cnn.com/2008/US/10/08/chicago.evictions/index.html

 

[DNK]

So it had nothing to do with technology, increased productivity, freer trade and over 20 million new jobs?

The Debt as a % of GDP was dropping until the 01-02 recession. Since 2001 the Debt as a % of GDP has been increasing.

Household debt, not government debt.
http://www.comstockfunds.com/files/NLPP00000\177.pdf

Spoiler :

Exploded over the past 20+ years. People now hold more debt than the entire annual GDP.

And stats from NYT:
http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html

Spoiler :

Not sure how this has all impacted economic growth, and I agree technology and other innovations have increased growth, but all the same this debt explosion has affected the economy for some time now. We'll need a proper economist to comment on it, though

It might be that the housing debt situation continues on at its current pace and plateaus as it did after the 40s and 50s. Or it collapses, slowly probably. I doubt it can keep growing though, especially not with real wages stalling. And not if savings are to rise back to where they were before, which really was an appropriate level. $400/yr is not. Reversing these trends is going to require equivalent deductions from consumer spending (to an extent) and a drag on the economy as a whole compared to the run up period, since it is so heavily dependent on that spending.

 

[Ramius75]

didnt see that one coming:

Illinois sheriff: No foreclosure evictions on my watch
http://www.cnn.com/2008/US/10/08/chicago.evictions/index.html

well, thats cool. but it isnt affecting the overall picture... i think we should be seeing more retrenchment in the near future...

 

[mrt144]

looking at that debt chart it's interesting that

a. mortgages exploded
b. installments grew only slightly since 1970
c. home equity remained relatively constant until 2000.
d. credit card debt is growing at a constant but seemingly linear rate

 

[DNK]

looking at that debt chart it's interesting that

a. mortgages exploded
b. installments grew only slightly since 1970
c. home equity remained relatively constant until 2000.
d. credit card debt is growing at a constant but seemingly linear rate

When you compare the NYT graph to that of housing prices, you see a fairly close resemblance: jump in the 80s, stagnation in the 90s, explosion around 1998. Homeownership, however, isn't historically all that high, which means that most of this is coming from people buying up rather than new entrants (there's maybe a 3-4% jump in homeownership between 1980 and 2000, with another 4-5% between 2000 and 2005). Certainly new demographics have added to the problem recently, but this is a societal issue, not a "minority" issue (subprime loans specifically, I won't comment on). Basically, a lot of average people putting more and more money into their mortgages than before, and all the while operating at higher and higher debt ratios. Average real wages have changed between 1984 and 2008, but it's about 50 cents worth, although they jumped along with housing in the 1998-2007 period.

Credit cards are keeping low, but it's important to note that every debt index they put up there ballooned after the last recession. Makes you wonder if that recession ever really ended, or if it was only put off until later by debt... really makes you wonder. And then it makes you wonder how throwing more (now government) debt onto the pile is going to change things. And it also makes you question the growth in the mid to late 80s - was it really inherent economic growth or debt spending spurring on the economy, spending which basically stagnated during the early 90s.

What's worrying is that because of all this debt, the actual, underlying economy is not nearly as resilient as it was way back, since without expanding debt, a higher level of debt requires more expenditure on that debt rather than consumption. It's made worse if much of the ownership of debt paper moves abroad, as is happening now. That will create further GDP losses as a portion of the interest payments start to go to foreign holders outside the US economic system (we can only hope they put it back in).

I'd like to see some financial flows in and out of the US over time, compared to foreign holdings of domestic assets and debt. And I'd like to see how this changes in the years to come.

 

[mrt144]

Keynes for the win! The Federal Reserve has saved us with cheap money!

 

[DNK]

Well, when demand for something is high, supply will inevitably follow, especially if it nets you about 15% per annum.

I really blame it on culture more than anything. Bigger, better, more doesn't work, nor does a constant "arms race" of status purchases - it is inherently unstable and unsustainable. I'm not aware of the actual policies put into place during Reagan, mid-late Clinton, and Bush II that would have expanded household debt the way it happened, and it could simply have been a culture that was nurtured during these periods (certainly, Bush at least has added to the mess, in spirit at any rate). That would be something the pros would need to answer.

I'm less incensed by the idea of the government doing a few key bailouts and "temporary" asset buys than I am about them needing to tack on hundreds of billions of dollars in deficit spending at the same time (I include the earlier stim checks in that). It doesn't address the underlying problems, and the government isn't going to boost the economy/revenues nearly enough for it to make sense. I understand they're worried about a crash, but they're just pushing it forward again and further burdening themselves.

I'm worried about government debt, because it will also have a chilling effect on spending. Just that much more money going to finance debt rather than actively growing the economy. And so much of it now is being bought overseas. I never did understand why having a heavily indebted government was a good thing, though, and I know there are arguments for it (what is it? more ability to manipulate currency value or something like that?).

The long-term budget of the government already was in terrible condition. This whole process, especially if a significant portion of the $700bn gets "lost", is going to advance the timeframe and reduce our options down the line. Deficits weren't likely to go away anytime soon, and that was before all this. Now revenues are probably going to drop, and expenditures on debt payments will also be increasing significantly, increasing deficit spending more. Now may not be the time to solve these problems, but it also needs to be taken into consideration when discussing our options to make sure we don't dump unnecessary fuel onto that slow-burning fire.

 

[classical_hero]

I'm surprised at the lukewarm intesrest in this on OT, I think we are witnessing an event bigger in magnitude than Sept 11, yet very few posts about it... look at my sig, people

So it is now no longer a bear market, but a wolfman market

FED, BoE and ECB cut key interest rates by 0.5 %.

Australia cut ours by 1% and iut did very little.

Household debt, not government debt.
http://www.comstockfunds.com/files/NLPP00000\177.pdf

Exploded over the past 20+ years. People now hold more debt than the entire annual GDP.

And stats from NYT:
http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html

Not sure how this has all impacted economic growth, and I agree technology and other innovations have increased growth, but all the same this debt explosion has affected the economy for some time now. We'll need a proper economist to comment on it, though

It might be that the housing debt situation continues on at its current pace and plateaus as it did after the 40s and 50s. Or it collapses, slowly probably. I doubt it can keep growing though, especially not with real wages stalling. And not if savings are to rise back to where they were before, which really was an appropriate level. $400/yr is not. Reversing these trends is going to require equivalent deductions from consumer spending (to an extent) and a drag on the economy as a whole compared to the run up period, since it is so heavily dependent on that spending.

That is insane.

 

[DNK]

That is insane.

Quit nay-saying and go shopping

 

[kronic]

Hungary may be the next country on the road to Reykjavik:

Hungary markets slide on liquidity crunch

By Sandor Peto

BUDAPEST (Reuters) - Hungary's currency and bonds fell sharply on Thursday as concerns grew over the country's financing and banking system amid the global financial crisis and as the government said it would redraft the 2009 budget.

Liquidity dried up and trading froze in the government bond market, which sent the forint into falls and late rumours, subsequently denied, that the government planned to nationalise its biggest commercial bank, OTP aggravated losses.

Shares in OTP, central Europe's biggest independent bank, plunged over 14 percent in late trade on market talk that the government was planning to nationalise it. Both OTP and the government firmly denied the rumour.

"This is absolutely nonsense," OTP Chairman and CEO Sandor Csanyi told Reuters, adding that OTP had all the financing it needed until the end of 2009.

The forint fell nearly four percent to seven-month lows at 262.00 versus the euro.

Ten-year government bond yields jumped to around 9.95 percent from the 9.07 percent average yield set at an auction earlier on Thursday where Hungary cut its offer by 10 billion forints (31.5 million pounds) to 30 billion.

Hungary's markets are fragile as the country's high state debt levels and the reliance of its banking system on foreign financing keep it among the most vulnerable economies in the eastern part of the European Union, analysts said.

Citigroup analyst Eszter Gargyan said in a note that the Hungarian banking sector -- in which foreign banks have dominant stakes -- may face serious stress in meeting short-term obligations if access to external funds and foreign currency markets ceases.

Hungary also has one of the slowest growing economies in the region and Finance Minister Janos Veres said on Thursday an economic slowdown at its main export partners will force the government to cut its 3 percent growth forecast in the 2009 budget and redraft the budget.

MARKET EYES CENTRAL BANK

Debt agency AKK allowed government bond traders to widen yield quote spreads to 50 basis points from 30 basis points, but analysts said the measure may not improve liquidity in the secondary bond market.

Asset swap yields, which earlier stayed well below the bond yield curve, also rose.

"I suppose that the central bank will not allow these markets not to work and will intervene, if needed," said Zsolt Kondrat, analyst at MKB Bank. "We don't know yet whether it will be needed, let's see how markets open tomorrow."

K&H Bank's Gyorgy Barcza said: "Yields are unlikely to go further up as there is no trading... the central bank could help liquidity."

Earlier this week the central bank said it was ready to act if absolutely warranted to uphold confidence in the banking system and ensure the safe operation of financial markets.

(Additional reporting by Balazs Koranyi and Gergely Szakacs)

http://uk.biz.yahoo.com/09102008/325/hungary-markets-slide-liquidity-crunch.html

Basically, the bond market just collapsed. Look at government debt and Hungary's capital account and draw your conclusions.

 

[innonimatu]

Hungary may be the next country on the road to Reykjavik:

http://uk.biz.yahoo.com/09102008/325/hungary-markets-slide-liquidity-crunch.html

Basically, the bond market just collapsed. Look at government debt and Hungary's capital account and draw your conclusions.

I've been expecting eastern Europe (and especially the baltic countries) to get hit by a debt and currency crisis for a few years now. They've been even more reckless in building up debt and borrowing from abroad, all upon very fragile institutions.

I still expect the baltic to go down first. They actually lost by refusing to address the problem earlier. Just a few months ago other EU countries would try to bail them out, especially as their banks own most of those in eastern Europe, but they now have more pressing concerns.
The Irish at least manager to get the germans stuck with one of their worse banks!

 

[Godwynn]

I've been expecting eastern Europe (and especially the baltic countries) to get hit by a debt and currency crisis for a few years now. They've been even more reckless in building up debt and borrowing from abroad, all upon very fragile institutions.

I still expect the baltic to go down first. They actually lost by refusing to address the problem earlier. Just a few months ago other EU countries would try to bail them out, especially as their banks own most of those in eastern Europe, but they now have more pressing concerns.
The Irish at least manager to get the germans stuck with one of their worse banks!

Are you an economist by profession?