Tuesday, December 8, 2009

The Crisis is Steadily Moving Towards Denouement

First of all, apologies for the lack of posts recently. I have simply not had the time to post.

Are others seeing that there is a slow and steady unwinding of the economic situation? There now appear to be signs of substantial cracks the edifice of the illusion economy. A review of the news sees several apparently unrelated stories, but nevertheless they cumulatively represent the underlying flaws in the attempts to hold back the underlying reality of the world economy.

First of all, there is the ongoing saga of Dubai, the exemplar of the worst excesses of property speculation:

Fresh fears about Dubai's ability to resolve its huge debt mountain returned to global stock markets today as shares across America, London and Europe tumbled.

In America, the leading Dow Jones industrial index fell 111.63 points to 10,278.48 at 3.40pm in New York.

Earlier today, Abdulrahman al-Saleh, Dubai's finance minister, admitted that six months may not be enough to restructure Dubai World, the state-owned conglomerate which owns Nakheel, the property developer.

It later emerged that Nakheel made first half losses of $3.65 billion, according to Bloomberg, after taking a huge writedown on the value of its land and developments. Two weeks ago, the Dubai Government asked creditors to grant Dubai World a six-month standstill on its repayments of nearly $60 billion of debt. Dubai World then announced plans to restructure $26 billion of its liabilities.

Likewise, there are the ongoing problems of Greece, perhaps an outrider for the larger Western economies. Greece presents another crack in the edifice of confidence in government debt:
The agency placed the country on credit watch negative, meaning it is likely to lose its A- rating within months. The country already has the lowest credit rating in the eurozone, but has come under greater scrutiny amid fears that its newly-elected government may avoid imposing significant cuts on the public finances


Following the recent crisis in Dubai, investors have become doubly sensitive to the risks of sovereign debt crises, with others warning that the UK is similarly exposed.

S&P also revised its outlook on Portugal’s sovereign-credit rating to “negative” from “stable”, blaming a deterioration in public finances.

As I have previously argued, if the UK falls, the US will soon follow. In the meantime, President Obama is reacting to a swathe of bad news with yet more 'stimulus' spending, at a time when the creditors to the US are already very nervous:

WASHINGTON – President Barack Obama called for a major new burst of federal spending Tuesday, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment.

Despite Republican criticism concerning record federal deficits, Obama said the U.S. must continue to "spend our way out of this recession" as long as so many people are out of work. More than 7 million Americans have lost their jobs since the recession began two years ago, and the jobless rate stands at 10 percent, a statistic Obama called "staggering."

Congressional approval would be required for the new spending, the amount unspecified but sure to be at least tens of billions of dollars.

This new stimulus comes on top of the news that the fiscal situation in the US is already in an absolutely appalling state:

In October and November, the government spent $292 billion more than it took in, the nonpartisan Congressional Budget Office said.

That was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.

The federal budget has been battered by the worst economic downturn since the Great Depression of the 1930s, as tax revenues have plunged and spending on safety-net programs like unemployment insurance have skyrocketed.

What we are seeing is the ongoing unwinding of the many bubbles, and that the forecasts and announcements of the end of the crisis are indeed premature (which has long been my argument). Even Bernanke is admitting that there are ongoing and deep problems, and the $US continues to decline:
The dollar resumed its slide against the yen, euro and other currencies after climbing in recent days amid hopes the US might stage a quicker-than-expected rebound.

On Monday, however, Fed Chairman Ben Bernanke said the world's largest economy was facing "formidable headwinds" — including a weak job market, cautious consumers and tight credit — that would limit the pace of recovery.

Obama expressed shock at the relentless rise in unemployment, but around the world a dire situation continues to deteriorate. This is just one example from the Times:

London traders were also unnerved by new data on industrial production, revealing flat output in October, signalling that Britain, which is still in recession, has made a weak start to the fourth quarter. The CBI also published its industrial trends survey, which showed factories expect output to fall in the coming months.

The weak data was released ahead of the Pre-Budget Report tomorrow when the Chancellor is widely expected to reduce his forecast for Britain's economic growth this year from a decline of 3.5 per cent to 4.75 per cent.

Meanwhile, European markets were unsettled by Fitch’s decision to cut Greece’s sovereign debt rating to BBB+ from A- with a negative outlook - the first time in 10 years a major ratings agency has put Greece, the eurozone's weakest economy, below an A grade. Fitch cited fiscal deterioration as the reason.

Also weighing on European stock markets was worse-than-expected German industrial production data. German industrial output fell 1.8 per cent in October, largely as a result of weaker production of machinery and cars, against expectations of 1.1 per cent growth.

As ever, the nervousness about the situation continues to be seen in the price of gold:
GOLD soared through US$1,200 (S$1,657) as investors and speculators feared renewed US dollar weakness following President Barack Obama's decision to substantially boost the war effort in Afghanistan.

Other factors that have boosted the demand are worries about quantitative easing, that is, money printing in the US and UK, punitively low interest rates for savers seeking a home, fears of renewed inflation and persistent turmoil in the Middle East.

Uncertainty in Dubai with expectations of bailouts and a general rise in oil and other commodity prices are other reasons.

There are some curiosities in the news, such as the ongoing rise in house prices in the UK. One just has to ask why house prices might be rising in a sinking economy to know that this is yet another illusion. After all, with unemployment rising, where is the money coming from? One article suggests that it is a lack of supply of houses for sale as the driver, but it is certain that the rise in prices does not reflect the real economy.

Essentially, any review of the news shows that the attempts to reflate economies with printed money and massive government borrowing are simply not working. The cash for clunkers, the massive spending on 'make work' projects are a dead end. Printing money with no economic foundation will simply not work.

The one thing that might work, the reforming of the economic structure of the troubled economies, is the one thing that is never considered. In the early days of the blog, I wrote some examples of how the UK economy might be reformed. I am not sure that the UK will be able to even afford to support the reformed economy that I proposed. It is too late. Instead of using credit to manage the transition to a more lean and competitive economy, credit has been used to try to hide the reality of the economic situation. The same might be said of other economies, such as the US.

I keep on asking how long can this continue? How long before the illusions shatter? I am amazed that it has lasted this long.

Note 1:

In an early post during the bailouts, I mentioned that all of the money given to support the UK banks was not to protect little old ladies' savings, but to support overseas creditors. This is what I had to say in a post titled 'The UK and the Silent Bank Run' (written March 2009, but I think I argued this point at the outset of the bailouts, but can not find the article):
If we think of the numbers that we are looking at, it becomes self-evident why the endless bailouts by the government are falling into a black hole. The government is having to bail out the banks to repay these overseas investors such that, as fast as the money is pumped in, it is pumped straight back out to meet the demands of overseas depositors. With the banks sitting on mountains of toxic debt, with no market left for the sales of these toxic assets, there is nowhere to turn except to the government.

It is as I have long suspected. I have always been of the view that this is not really just about bailing out little old ladies with their savings held by RBS, but also about bailing out all of the overseas investors who stand to lose so much money.
This is an article in the Telegraph:

British taxpayers stand behind more than £167bn of toxic assets in the US, Ireland, the Middle East and beyond, it has emerged as the Treasury disclosed details of what Royal Bank of Scotland has dumped in the state insurance scheme for bad debts.

Most of the £281.9bn of assets RBS has placed under taxpayer protection are based outside the UK, with loans secured against everything from negative equity properties in Dublin to hedge fund assets in Caribbean tax havens and container ships docked in ports around the world.

I suspect that this is just the tip of a very large iceberg, and the same will be found for the US. What we have witnessed is the salvation of the banks to protect overseas creditors. These were the same creditors who flooded the economies of countries like the UK and US with money, which in turn created the asset price bubbles and credit bubbles. In the case of the banking industry, it is heads I win, tails I win. It was never about protecting the small domestic depositors, but bailing out overseas investors.

Note 2:

A slightly rushed article as I am still pressed for time. However, I hope it provides some evidence that we are a long way from any real or sustainable recovery.


  1. Mark, so good to have you back!

    Yes, the Dubai thing is fascinating, but there was some finance chap on R4 tonight telling us that everything in Dubai would be back to normal in a few months. In the Guardian today there was an article telling us that we have to spend our way out of recession.

    When you hear this stuff do you ever think you're going mad?

  2. Welcome back Cynicus!

    The risk of a contagious loss of confidence passing from Dubai to weaker European economies is a big worry.

    All that seems to stand between the UK and a credit rating downgrade is a bulwark of highly taxable citizens! That can't hold indefinitely.

    So far this has been a highly selective downturn. We all know people whose fortunes have been obliterated by it, but if you've kept your job it hasn't been too bad. I suspect this allows for bizarre phenomena such as house price rises.

    The next phase, with a quantum leap in mortgage rates and taxes could be horrendous and comprehensive, magnified in its effects by all the personal debt out there...

    I suspect the mainstream media and the politicians are still joined in a project to simulate confidence, in an effort to engender confidence in the real world. It's a risky strategy whose moment passed long ago and which will anger a lot of people if/when it fails.

    It's a real pity. I think a lot of good things could be secured if remaining wealth was used wisely instead of being thrown onto the fire.

  3. I would be very interested to read your view as to what the end result of all this will be, in terms of the economic and social landscape in the UK

  4. A possible answer to the question of why the house prices are going up despite everything:-


    The UK has been playing the same game as the US for several years, using real estate to keep the debt bubble inflated, and the second it started to go down, the panic started and they are now desperately trying their best to reinflate it again for fear of losing everything.

    Dubai wasn't the only country building its houses on unstable sand to prop up their economy.

  5. Not in any way related to this blog post, but I thought CE might be interested in:

  6. The other aspect is which bust financial entities the bust banks are propping up other than Premier League Clubs (lots of votes to lose there). One pair of candidates is the Tchenquiz brothers, Robert and Vincent, who I suspect are in deep trouble. Vincent is currently involved in a major raid and ripoff of the incomes and savings of the very elderly and vulnerable that has surfaced in the media recently. It seems that they have borrowed on the basis of mortality figures that are falling short.

  7. I wish the shit would hurry up and hit the fan, this economic incompetence and corruption is getting tiresome. Then I could get a productive job rather than waiting to cash in my bullion investments after the economic reset.
    But then I'm not stupid or well connected enough to lend to governments.

  8. The crisis is steadily moving toward denouement......and our survey said....

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    collaborator (but subordinate to); That such a market has to operate as such: there should be no
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    permissions to emit auctioned sensibly by those who sanction them
    (i.e. governments) into the market;
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    by an international institution with a constitution to match;
    • That, perhaps, it might be regarded to as having wider benefits than
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    Hat tip. Majority Rights.com/

    Full story


  9. great to have you back indeed.

  10. You ask how long can this continue ? Well, be patient because it will last a while yet.

    The QE and the borrowing for public spending will keep the ship sailing until the General Election. It will then be at least 3 months before the new Government gets to see the 'numbers' and then the cuts in public spending will start. Clearly there will be a time lag before these start being implemented, so I reckon another 3 months minimum before the true impact begins to dawn on people.

    If there are not drastic cuts in public spending then the markets will react accordingly, which will in turn trigger an even bigger crash.

    So i think we are looking at 12 months to go before we even get to the beginning of the end game.

    Given these things then take a fair old while to feed through the economy, the bottom may well be three years away.

  11. A financial crisis is like an earthquake - you know its going to happen, by analysis of the underlying conditions, but you don't know when. Just as one day the San Andreas fault will obliterate large bits of California, the current debt overhang will flatten us. We just can't say when. Everything will be calm for years, decades even, and then suddenly all hell will break loose.

    The conditions exist now for a perfect financial storm. We are waiting for the trigger.

  12. Good to have you back. I was getting withdrawal systems. You can only listen to so much hogwash in the news before a voice of reason becomes vital.

    I remain convinced that it is a stealthy invasion of Left-wing principles, sadly perpetrated even by the other side of the argument now, which have led is to this impasse.

    Deregulation, cost-cutting and the renewal of a competitive economy are the only route back to sanity. It doesn't matter how long the people in power refuse to believe this because in due course the truth will no longer be possible to ignore.

  13. It is nice to see a new post.

    Some comments:

    On Greece, see the excellent analysis of Bill Mitchell:

    The current situation in Greece exposes the stupidity of the Euro monetary system. The Greek government is running a rising budget deficit in response to the economic crisis that it faces. Much of the budget change is being driven by the automatic stabilisers. Meanwhile the financial markets are playing their usual (unproductive) tricks and making matters worse. Sitting in the middle is the undemocratic ECB which is insisting on fiscal consolidation. Pity the poor Greeks who are increasingly without work. The solution is not straightforward but I would abandon the Euro and restore currency sovereignty.

    A Greek Tragedy.

    Essentially, any review of the news shows that the attempts to reflate economies with printed money and massive government borrowing are simply not working.

    An alternative analysis is that government intervention has rescued the world from a depression as deep as the Great Depression, but is not big enough to create a strong recovery when we have a financial system allowed to funnel money into asset bubbles. Zombie banks and poor reglation and trade policies must be fixed.

    See Steve Keen, Debtwatch No. 40 November 2009: Have we Iceberg?

  14. Mr. Welldodgy

    Agreed. But you call a 'bottom', which means you are seeing the economy fluctuating in historical terms. I have shifted my labelling of this crisis from another 'great depression' to 'The Great Regression', because that to me describes more appropriately the form of this change.
    I met a professor called Mackenzie Wark back at an Open Source Computing conference back in London in 2005... We talked for a while and at the end of our conversation as we were about to go our separate ways, he said something to me which I have always thought rather curious and prophetic, as it was kind of out of context conversationally - he said 'The end is just beginning' - which is something you might except as 'a bit nutty' were it not for the fact that is a very gifted and intelligent bloke.

    The Great Regression has begun. It will look different to the Great Depression because it is not the great depression.

  15. Great post!

    The Great Unwind will continue at it's own pace. Consider the hubris of those who believe they can stop a hurricane or an earthquake with policy. No, you need a solid foundation, good preparation and a willingness to dash if necessary. But you will not stop it.....

    Here are som Black Swans that NOBODY has talked about:

    "7 Black Swans A Swimming"



    - TomOfTheNorth


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