Category: Economics

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point. If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.”A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a “monetary Stalingrad” in the East. Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany’s Peer Steinbrück. Not our problem, he said. We’ll see about that. Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut. Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.”This is the largest run on a currency in history,” said Mr Jen.
Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
Ambrose Evans-Pritchard Failure to save East Europe will lead to worldwide meltdown

Industrial economies are still at the mercy of peak oil. This basic fact of life means that we can’t expect the regular cyclical growth in productive activity that formed the baseline parameters for modern capital finance – meaning that we can’t run on revolving credit anymore because growth simply isn’t there to create real surplus wealth to pay down debt. The past 20 years we’ve seen the institutions of capital finance pretend to create growth where there is no growth by expanding financial casino games of chance and extracting profits, commissions, and bonuses from the management of these games – mortgage backed securities, collateralized debt obligations, credit default swaps, and all the rest of the tricks dreamed up as America’s industrial economy was shipped off to the Third World. But that set of rackets had a limited life span and they ran into a wall in October 2008. Since then it’s all come down to a shell game: hide the giant pea of defaulted debt under a giant walnut shell.
The sad truth of the matter is that we face the need to fundamentally restructure the way we live and what we do in North America, and probably along the lines of much more modest expectations, and with very different practical arrangements in everything from the very nature of work to household configurations, transportation, farming, capital formation, and the shape-and-scale of our settlements. This is not just a matter of re-tuning what we have now. It means letting go of much of it, especially our investments in suburbia and motoring – something that the American public still isn’t ready to face. They may never be ready to face this and that is why we may never make a successful transition to whatever the next economy is. Rather, we will undertake a campaign to sustain the unsustainable and sink into poverty and disorder as we fight over the table scraps of the old economy… and when the smoke clears nothing new will have been built.
James Howard Kunstler Forecast 2010

James Featherby is calling for Christian responses to the Credit Crunch
The structure of the banking and financial markets are complex, and the transactions within it equally so. This often calls for nuanced judgement calls to be made between a variety of issues and the balancing of one set of competing duties against another. It is difficult to discern the moral issues involved. It can be even more difficult to weigh the competing issues once they have been identified.
The whole gamut of human weakness has contributed to the credit crunch. This includes much that is morally culpable, but also much that is not. Simple lack of knowledge and foresight has been a major factor.
Filling the values gap is not the only answer on offer, and many will not see it as the solution. We will need to compete with the other remedies on offer. I would suggest that we need to do three things:
• First, rediscover God’s values in the areas of economics, business, personal finance and consumption.
• Second, rediscover our confidence in these values as being best for us, our neighbours and our children.
• Third, find the right ‘voice’ to communicate these values – a voice that offers life and not condemnation.
The credit crunch has delivered a profound shock to the foundations upon which the Western economic model was built. But will our financial institutions and governments simply weather the storm, make few minor regulatory adjustments and carry on as before? Can we take this perhaps once in a generation opportunity to consider the values that drive the system and reflect on what values should be driving the system?
James Featherby has produced the pithy twenty-page The White Swan Formula (PDF 2.9 MB)

F?rst, let us not rush past the moment in which we now stand. We will not learn lessons unless we engage fully with the consequences of our mistakes. A key part of that is a proper engagement with the pain caused by our shortcomings.
For too long, for example, the f?nancial community has denied responsibility for the effects of the capital that it raises and allocates. So let us pause and recognise the personal and f?nancial pain, close at hand and further af?eld, caused by this crisis.
Second, we must determine to understand and apply these values ourselves.
Unless we personally seek to serve, rather than be served, we will simply be hypocrites, and our arguments will remain hollow. Each of us needs to believe that these values work in practice for us individually, as well as for others, and then act accordingly. We need, quite literally, to put our money where our mouth is.
Third, we can join the debate and make our contribution. Everywhere the question is being asked ‘What sort of economy do we want?’ Let us engage in the discussion. We must not be satisf?ed with conventional wisdom that says change cannot happen. It is better to blow the trumpet beforehand than reach for the whistle afterwards. Let us be for something, not just against something. One can never tell when the tipping point of opinion will be reached, and without the last straw the camel’s back remains intact.
The discussion is needed on multiple levels… Let us also look long and hard at solutions to the current crisis that simply try to return things to how they were, at least for those of us in the West, by borrowing more and saddling the next generation with the burden of paying the price that we decided not to bear ourselves.

Yup, but will talk about values do it? Or will it require processes of public judgment and public repentance which is, I think, what is meant by ‘engage fully with the consequences of our mistakes’ and ‘proper engagement with the pain caused by our shortcomings’?

Karl Denniger at Market Ticker – The fact of the matter is that you have been lied to for the last decade about our economic state, and if we do not divert from the road we are on our economy, our monetary system and our government WILL COLLAPSE.

The correct action to take in 2000 was to force the bad credit from the system and accept the impact on GDP. It would have caused about a 10% contraction in GDP at that time – a mild Depression (or a really nasty recession, depending on how you count it.) Now, having instead blown another credit bubble, we essentially doubled the debt in the system over the last ten years, while GDP grew by about 40%. The result of this was a horrible stock market crash, 6.7 million jobs lost (and underreported), personal income tax receipts are down 21%, corporate tax receipts are down 58%, the deficit is tracking at $1.8 trillion this year alone (and $9 trillion more predicted over the next decade), government is now spending nearly 200% of taxes taken in, 13% of mortgages are either delinquent or in foreclosure, more than 20% of all FHA loans are delinquent or in foreclosure, home prices have fallen by half in many places and are not done declining and the rest of the world is wondering if we’re going to try to hyperinflate and destroy our currency. If we try to double our debt once again over the next ten years we won’t make it there. The available free cash flow cannot support the interest payments now, and won’t be able to if we add more debt to the system.

For a clear and patient explanation of the results of this widening gulf between slow-growing GDP and rapidly-growing compound debt interest see Chris Martenson’s Crash Course (chapter transcripts beneath each video)

The mission (of Bernanke and Geither) is clear: to convince the world of two things at the same time… both impossible and mutually exclusive! The Chinese vigilantes must believe that the feds wonâ??t undermine the dollar… and the rest of the world must believe that they will! Inflation is necessary for recovery and growth in the US… or so everyone believes.
It was French economist Jacques Rueff who revealed the scam more than half a century ago. The whole idea of Keynesian stimulus, he explained, was to cause inflation… which would reduce the real price of labour. In a modern democracy, politics prevents wages from falling. But in a correction, if wages donâ??t fall people donâ??t get jobs. Keynesâ?? didnâ??t mention it, but the only reason his stimulus works is because it pulls the wool over the eyes of the working classes â?? reducing their wages by inflation so employers can afford to hire them again. Ergo, no inflation… no recovery in the job market. No recovery in the job market… no recovery in the economy.
But inflation will cost the Chinese plenty. And theyâ??ve let it be known they wonâ??t sit still for it. Geithner promised a â??durable recovery led by private demand.â?? In other words, it wonâ??t be government spending that pulls the US out of its slump, he told the Chinese.
Stimulus will not produce genuine prosperity. You canâ??t cure a credit-caused crisis by offering more credit; it just wonâ??t work. But rather than let the system correct itself, the feds are determined to â??do something!â?? What can they do? They can only destroy the dollar â?? or try to â?? thereby destroying the value of Chinaâ??s $1.5 trillion treasure.
Now, why private demand is going to weaken, not increaseâ?¦ As the boom of the post-war period continued, consumer spending played a larger and larger role in the economy. It averaged 64% of the GDP during most of the period, but increased to 70% in 2007. Likewise, debt service as a percentage of disposable personal income rose too â?? from less than 5% in the â??50s and â??60s to over 14% now. If, as we suspect, the trend towards more and more consumer debt has finally peaked out; consumption should have peaked out too. We should now see the percentage of the economy devoted to consumption go down… year after year… until it reaches the â??normalâ?? level. Private debt too should go down, until it is at a more â??normalâ?? level.
We calculated that, during the last 7 years of the Bubble Epoque, consumers added $1.4 trillion in debt per year. That was the spending that made the old mare go. But now what? They are now adding no debt â?? zero. In fact, they are paying off debt. This alone removed $1.4 trillion in private demand from the economy. The only thing that would cause consumer spending to go would be a substantial increase in real wages. This would allow Americans to buy more â?? while simultaneously paying down debt. But it will be a long time before real wages increase at all… let alone substantially.
Bill Bonner Daily Reckoning

Events have already forced Irish Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap… Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc. “Something has to give,” said Professor Colm McCarthy, the report’s author. “We’re borrowing €400m (£345m) a week at a penalty interest.”
No doubt Ireland has been the victim of a savagely tight monetary policy given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a “penalty interest” on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us. My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
Ambrose Evans-Pritchard

So at last some theology. About time this blog posted some theology, I know.

Covenant, Hope and Human Future – Theological Economics

Ah well, it took me away from shouting at the television, for a while at least. To read it in Scribd, click Mode (top left of screen), View Mode then Book Mode. You can download and leave comments. The Related Documents are not mine. For more by me, see here

Everyone’s situation is different, but overal this looks like an especially treacherous bear market, made doubly difficult by the actions of the Treasury and the Fed in bankrolling malinvestment, imbalances and corrupted price discovery. When in doubt, get out. Don’t get hooked by greed. This rally ‘could’ have some legs if it becomes a determined effort to reflate the credit bubble supported by the power of the Treasury and the Fed, as we saw in 2003-6, which was a reckless and disgraceful abuse of the Fed’s economic responsibilities. We doubt they can do it again, but never underestimate the power of greed and fear over memory and prudence….
Today reminds me of the briefly sunny period in 1930-1 when most economists and public officials agreed that the Depression was already over and the economy was back on track. President Hoover dismissed a delegation of businessmen who came to Washington with ideas on stabilizing the economy with “Too late gentlemen, the slump is over.” There are few things from my childhood that I remember more vividly than grandmother’s comments regarding this false recovery. “If we knew what was coming, we would have killed ourselves.” This from as strong a person as I have ever encountered, with a faith that would break rocks. The Great Depression left an indelible mark, or more accurately scar, on her entire family, and my father’s as well. And I never heard the name “Franklin Roosevelt” from her lips without it being preceded by “God bless” followed by “he saved my family.” Not all of her children unfortunately. She said she cried so much and so often that she was never able to cry again. And she did not, even at the end.
Jesse’s Café Américain

Whatever governments do for the banks, credit will be a lot harder to obtain for businesses…we have now entered the period of an unprecedented convergence of the four planetary issues – financial instability, climate change, unemployment and the financial consequences of an aging society – that was described in the 2001 book, The Future of Money. To avoid a domino effect of massive layoffs and bankruptcies, the most urgent action for businesses to take is the initiative of creating a Business-to-Business (B2B) mutual credit system at whatever scale makes sense to them. The WIR system is a successful precedent of this strategy implemented in Switzerland since 1934. The degradation of the environment due to short-term financial priorities can similarly be addressed with pragmatic money innovations. Short-term thinking is shown not to be due to human nature, but to the prevailing money system. It is also possible to reverse this process, by using a currency designed specifically for multinational trade and contracts which would make long-term thinking a spontaneous process, focusing the attention on long-term sustainable solutions without the need for regulations or taxation.
Bernard Lietaer