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Daily Digest - Jan 26

Monday, January 26, 2009, 7:08 AM
  • Country Default Risk Continues to Rise
  • Nationalization Gets a New, Serious Look
  • Summers Says Economy Entering a ‘Difficult' Time
  • Office of the Special Inspector General Troubled Asset Relief Program (SIGTARP)/Congressman Bachus (Letter)
  • Lending Less (Table of the biggest recipients of U.S. capital saw loan volumes decline in Q4)
  • Roach: Worst is Ahead for the US (Video)
  • Another Lay-off Shock: Caterpillar (CAT) To Cut 20,000
  • Report: Birth Rates Fall In Tough Economy
  • Six Errors on the Path to the Financial Crisis
  • Gold Bubble Could Be Quite A Bubble, If It Takes Off (Hat Tip Jeff Borsuk)
  • Wasting Time At Davos
  • Governors seek concessions from public workers
  • No New News: Banks Won't Lend Money 
  • Did Americans think the US economy had bottomed in 1933? 
  • Tax law changes and banking
  • The "Wells Fargo Ruling"
  • (Letter) From FAF (Financial Accounting Foundation) to Barney Frank
  • SEC Altering the Rules
  • (Fast Track) FASB Amends Fair Value Measurements
  • (Fast Track) SEC Begins Mark-to-Market Study
  • (Fast Track) FASB Speeds up Fair Value Advice
  • (Financial
    Opinionators Say) By Relaxing "Mark-to-Market" Rules, Has the U.S.
    Switched Off its Financial Crisis Early Warning System?
  • (Recent News) Does Fair Value Accounting + Credit Default Swaps = Global Deflation?
  • Time to Unravel the Knot of Credit-Default Swaps  

Economy 

Country Default Risk Continues to Rise 

Below we highlight CDS prices for sovereign debt. These prices measure the cost of protection against default for 38 countries around the world. Specifically, the CDS prices represent the cost per year to insure $10,000 worth of sovereign debt for five years. 

As shown, Argentina and Venezuela have the highest default risk, followed by Iceland, Kazakhstan, Russia, and Egypt. While the UK and US have relatively low default risk compared to most other countries, their CDS prices are getting worrisomely high. At the start of 2008, it cost about $8 to insure $10,000 of UK and US debt. It now costs $135 to insure UK debt and $75 to insure US debt. Japan has the lowest default risk of all of the countries highlighted, followed by Germany and France. (2 Good Charts) 

Nationalization Gets a New, Serious Look 

WASHINGTON - Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation's banking system?

Speaker Nancy Pelosi has alluded to internal debate over whether large banks should be nationalized, while aides to President Obama have avoided the word and are looking into alternatives.

Privately, most members of the Obama economic team concede that the rapid deterioration of the country's biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government's role expands from a few bailouts to control over a vast portion of the financial sector of the world's largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on "This Week" on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

Summers Says Economy Entering a ‘Difficult' Time 

Jan. 25 (Bloomberg) -- The U.S. economy faces "very difficult" months ahead, requiring quick passage of a stimulus package and a retooled bank rescue plan aimed at reviving lending, said Lawrence Summers, director of the White House's National Economic Council. 

"The next few months are, no question, going to be very, very difficult and it may be longer than that," said Summers, appearing on NBC's "Meet the Press."

Timothy Geithner, the Treasury secretary nominee, will announce Obama's strategy for stabilizing financial firms soon after the Senate confirms him, Summers said. The administration's stimulus proposal is "properly sized" at $825 billion, and Obama is "prepared to do what's necessary" to revive the economy, he said.

Gross domestic product probably contracted at a 5.5 percent annual rate from October through December, the biggest drop since 1982, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures due Jan. 30.

Summers said Obama plans to overhaul the $700 billion Troubled Asset Relief Program enacted in October. Obama's bank rescue plan, using the remaining $350 billion in TARP, will be "very different" than it was under George W. Bush's administration, Summers said.

Under Bush, TARP focused on providing fresh capital to financial institutions.

"The priority is to get credit flowing again," Summers said. "It's going to emphasize transparency, it's going to emphasize accountability."

Office of the Special Inspector General Troubled Asset Relief Program (SIGTARP)/Congressman Bachus (Letter)

Lending Less (Table of the biggest recipients of U.S. capital saw loan volumes decline in Q4)

Roach: Worst is Ahead for the US (Video)

Another Lay-off Shock: Caterpillar (CAT) To Cut 20,000 

Caterpillar (CAT) said it had a good year in 2008 and even a reasonable fourth quarter. But, its prospects for this year are so bad that it will dump 20,000 people, an astonishing number. 

CAT admitted that it could not even call the depth of the recession. The company said "Global economic conditions and key commodity prices have continued to decline significantly. Financial markets remain under stress, and our expectations for 2009 have deteriorated. Uncertainty around the depth and duration of this recession makes it very difficult to forecast sales and revenues."

If lay-offs of this magnitude continue, unemployment will be 9% going into the second quarter. 

Report: Birth Rates Fall In Tough Economy 

The recession is leaving some doctor's offices empty. More women are putting motherhood on hold and recent reports show contraceptive sales are through the roof. 

Many prospective parents are changing their plans when it comes to pregnancy. Planned Parenthood has seen an increase in patients, but they say economic effect is more because of lost jobs and health care.. 

Six Errors on the Path to the Financial Crisis 

What's a nice economy like ours doing in a place like this? As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn't we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul? 

The answers, I believe, are yes and no. Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable - yes, avoidable - human errors. Recognizing and understanding these errors will help us fix the system so that it doesn't malfunction so badly again. And we can do so without ending capitalism as we know it.

My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.

WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn't have grown as big or been as fragile.

A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.

Why wasn't this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.

The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.

FIDDLING ON FORECLOSURES The government's continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago - and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.

Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is. 

Gold Bubble Could Be Quite A Bubble, If It Takes Off (Hat Tip Jeff Borsuk) 

The thought in this post may be obvious (I wrote something similar about a year ago when I was a complete gold newbie), but it struck me as fresh and relevant today. 

Here's a quote from LeMetropoleCafe: "If Gold can continue this week's outperformance of all other asset classes, investment demand for Gold should continue to accelerate."

What happened when there was an Internet bubble? It was ultimately extinguished by the supply of Internet Stocks (in the form of IPOs) exceeding the demand for stock. Then the bubble popped.

What happened when there was a real-estate bubble? Home builders ramped up home building and the bubble was ultimately extinguished by the supply of houses exceeding the demand for houses.

Now, let's consider gold as a potential bubble. Suppose "investment demand for gold continues to accelerate". There is a limited amount of gold in the world. Wikipedia reports that there has been roughly 158,000 tonnes of gold over all history. At $1000 / oz and 33.1 grams / troy oz that is 4.8 billion oz and 4.8 trillion dollars.

By comparison, Global GDP is around 48 trillion dollar / year. US household financial assets (as of a year ago) were roughly the same size.

The supply of gold (mine production) is increasing at the rate of around 110 million oz / year or 2.3% of all gold ever mined per year. Again at $1000 /oz that is 110 billion dollars / year or roughly .2% of global GDP.

Wasting Time At Davos 

David Paterson, the governor of New York State, will be attending the World Economic Forum in Davos this week, along with aides and several state troopers, sparking rumors that Switzerland is a hot bed of extremists who might cause Paterson physical harm. The press is unhappy that he will be there, instead of staying home, where he could be working to find solutions to the severe economic crisis in New York State. 

It is noteworthy that so many CEOs of failing companies and heads of faltering governments are showing up in Davos to exchange pleasantries and listen to lectures which are unlikely to offer even modest clues about how the recession might be halted or reversed. Why should a group of economists or business titans travel to Davos to hear commentary about why the economy is broken when there are so many intelligent and conflicting opinions in their home countries?

So, it is alarming that Michael Dell, the founder and CEO of Dell (DELL) will be at Davos. He cannot lay off people fast enough back in his hometown of Austin. The chairman of Lloyd's will be there. Lord Levene can say he was away from London when the UK nationalized his company due to massive losses. John Thain, who was the head of Merrill Lynch and was fired from its parent, Bank of America (BAC), is scheduled to attend. After Merrill reported a $15 billion loss no one expected, he may decide to cancel. BAC will certainly not cover the cost of his travel..

A very large number of government officials will also attend. This list includes the heads of Germany, Japan, and the premier of The People's Republic of China.

Governors seek concessions from public workers 

COLUMBUS, Ohio (AP) - Governors across the nation are seeking significant concessions from public employee unions in hopes of helping to balance their teetering budgets during the economic downturn. 

From Maryland to California, Ohio to Hawaii, governors have asked or ordered state workers to accept furloughs, salary reductions, truncated workweeks or benefit cuts. They say the concessions are a better alternative to further job losses in the face of record-breaking unemployment.

Unions argue their members shouldn't be singled out and are even more vital in hard times - securing neighborhoods and prisons, educating children and providing social services to growing numbers of citizens.

In hard-hit Ohio, Democratic Gov. Ted Strickland has been a friend of the unions. But as the state's budget woes have intensified, he is asking unionized state employees to consider a 5 percent pay cut, a 35-hour workweek and the elimination of paid personal days and holidays, to save the state hundreds of millions of dollars.

No New News: Banks Won't Lend Money 

Despite getting cash from the government, banks aren't lending more money. It makes a good headline, but it does not have any shock value. Why would anyone be surprised? 

According to The Wall Street Journal, "Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008."

The banks put forward the compelling argument that in a recession there is too much credit risk. What they do not admit so readily is that they may need the cash to offset more losses from the pools of toxic assets, consumer credit, and LBO loans that they hold.

The federal government has three courses it can take to rectify the problem: 1) to force banks which get federal funding to loan out a portion of the money and risk defaults on those loans, 2) allow financial firms to hoard the cash because they will need it to stay in business, or 3) a combination of the two which would substantially increase bank aid from the government giving the largest institutions in the industry such huge injections of capital that they could afford to take loan risks and protect their balance sheets.

It is beginning to look like the $350 billion balance of TARP funds will not be nearly enough.  

Did Americans think the US economy had bottomed in 1933? 

Marshall Auerback here. Now that Barack Obama has been inaugurated, we should actually look back to 1933 to get a sense of perspective. How did Americans see the economy at the Inauguration of Franklin Roosevelt? The short answer is that Americans were actually anticipating worse to come in 1933, but Roosevelt delivered on his promises? I do not expect the same from Obama. 

On Inauguration Day, 1933 (then March 4), there were machine-gun nests at the corners of the great government buildings in Washington, for the only time since the Civil War. All banks in 32 states had been closed sine die. Six other states had closed almost all their banks. In the other 10 states and D.C., withdrawals were limited to 5 per cent of deposits, and in Texas to $10 a day. The New York Stock Exchange and Chicago commodity exchanges had also been closed indefinitely. The financial system had effectively collapsed, and was threatening to take the life savings of millions of people and what was left of the world's financial system with it.

In a fever of activity, Roosevelt guaranteed bank deposits, made the federal government a temporary non-voting preferred shareholder in thousands of suddenly undercapitalised banks - more than half the banks in the country - refinanced millions of residential and farm mortgages, tolerated cartels and collective bargaining to raise prices and wages, increased the money supply, effectively departed the gold standard, repealed Prohibition of alcoholic beverages (wrenching one of America's largest industries out of the hands of the underworld), and legislated reduced working hours and improved working conditions for the whole work force. In the next two years, in what became known as the Second New Deal, he set up the Securities and Exchange Commission, created the Social Security system, and broadened the powers of the Federal Reserve to equal those of other national central banks.

What FDR did, however, was inculcate hope and I don't think the same can be said for Obama. In fact, I would go further. I don't think that Obama has the moral strength to institute the equivalent of the SEC that FDR did and then use the act to hit hard where it is deserved. His limpwristed reaction to Thain's thievery (yes, that is what it is, no matter how "legal") and his appointment of Wall Street's friend, Timothy Geithner, tells me otherwise.

Obama spent too much time between Nov 8th and Jan 20th pretending that he was going to be like Lincoln and FDR when indeed he was far different. He actually fooled me at the beginning.

We will get the equity rally (led, in my opinion by commodities) (take a look at crude after having been lower on the day) but the smash up in the Treasury market and more Thain-type problems that are not dealt with forcefully will render his time in office to look much like the late 1970's sooner than later.

As for China, I disagree with Albert Edwards at SocGen. You can't rely on a strategy of export led growth in this kind of environment. This is in fact what China did in 1992-94 and it destroyed the Southeast Asian economies in the process (making them vastly uncompetitive and running large current account deficits which went as high as 9% of GDP). What he is in fact suggesting is a return to Bretton Woods II and I think we all agree that this is the last thing required. You want to get rid of these imbalances.

And I still believe that one has to distinguish between a coastal export driven economy, which comprises about 140m people, and what is happening in the interior, which is very different. It will ultimately be self-defeating (which is probably Susan's point, when she argues that surplus nations, such as the US in the 1930s, get really screwed in this kind of environment. I think China has to turn massively toward infrastructure projects. 

The "Wells Fargo Ruling" 

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention. 

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin. 

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said.

The Treasury itself did not estimate how much the tax change would cost, DeSouza said.

A Tax Law 'Shock'

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout. 

(Letter) From FAF (Financial Accounting Foundation) to Barney Frank

SEC Altering the Rules

(Fast Track) FASB Amends Fair Value Measurements 

The Financial Accounting Standards Board has provided new flexibility to allow banks and other financial institutions to re-price their assets during the credit crisis by amending its standard on fair value measurements. 

The FASB Staff Position clarifies the application of FASB Statement No. 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive.

At a meeting on Friday, FASB considered the proposed amendment, which it had put out for comment on Oct. 2 on an accelerated schedule (see FASB Speeds up Fair Value Advice). FASB received over 100 comment letters in just a week's time and on Friday the board made some modifications to the proposed staff position and planned to quickly issue it.

"The staff analyzed all the comment letters and the recommendations of the board," said spokesperson Christine Klimek. "The board was in favor of the staff's recommendations and the FSP will reflect that."

Among the suggestions received by the board, the staff had recommended ways to make the illustrative model clearer, she noted.

(Fast Track) SEC Begins Mark-to-Market Study 

The Securities and Exchange Commission said it has started work on a study of mark-to-market accounting authorized by the financial rescue bill that was approved last week.

The study is to be completed by Jan. 2, 2009, within the 90-day limit mandated by the bill, and will focus on the effects of mark-to-market accounting standards on a financial institution's balance sheet; the impacts of such accounting on bank failures in 2008 and on the quality of financial information available to investors; the process used by the Financial Accounting Standards Board in developing accounting standards; the advisability and feasibility of modifications to such standards; and alternative accounting standards to those provided in FASB Statement Number 157 on fair value measurement.

(Fast Track) FASB Speeds up Fair Value Advice 

The Financial Accounting Standards Board has decided to shorten the comment period on its proposed guidance for determining the fair value of assets in inactive markets, even as Congress may allow banks to temporarily suspend mark-to-market accounting. 

At its Oct. 1 board meeting, FASB Chairman Robert Herz (pictured) announced that the rules of procedure governing the length of comment periods have been temporarily modified to allow a window of time within which FASB can act to provide needed guidance in the interest of investors and the capital markets.

(Financial Opinionators Say) By Relaxing "Mark-to-Market" Rules, Has the U.S. Switched Off its Financial Crisis Early Warning System? 

By relaxing the U.S. financial system's mark-to-market accounting standards, the U.S. government is effectively deactivating the financial "early warning system" that let investors know that a global credit crisis was brewing - and kept it from turning into a total global meltdown, professional investors warn. 

As part of the just-passed U.S. bailout bill, the government has reiterated the Securities and Exchange Commission's authority to relax the mark-to-market standards. If the SEC actually follows through on that directive, many professional investors worry that we won't catch on to the next leg of the ongoing credit crisis until it's way too late.

While politicians point to mark-to-market rules as the cause of the billions in write-downs and losses suffered by financial firms in recent quarters, in fact, it was mark-to-market accounting that first exposed the underlying problems in the complex markets for mortgage-backed securities (MBS) and credit-default swaps (CDS).

"Mark-to-market is reality-based accounting," said Money Morning Contributing Editor Shah Gilani in a phone interview yesterday (Tuesday). "Anything else requires a looking glass and a ticket to Wonderland."

"To me, mark-to-market accounting is the clarion sound of beagles barking, letting transparency hunters know down which dark hole the fox is hiding," said Gilani, a former hedge-fund manager who recently penned a five-part investigative series on the U.S. credit crisis - including an alternate bailout plan that he says would've cost taxpayers very little.

What FASB 157 did introduce was an asset hierarchy based on the market available for the assets. Assets are assigned to one of three categories based upon how liquid the assets actually are and, in turn, how easy they are to value, or price:

Level 1 assets are fully liquid, and easy to price.
Level 2 assets can be priced with the benefit of "comparable assets."
And Level 3 assets are completely illiquid and nearly impossible to price. 

(Financial Opiniators Say) "Mark-to-market" accounting fight goes down to the wire 

With the House vote looming on the financial-system bailout plan, proponents of "mark-to-market" accounting rules are trying to beat back efforts in Congress to suspend the rules as part of the bailout. 

The head of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board, on Thursday warned against "political interference" with accounting rules -- although it's clear this issue already has become seriously politicized.

"We believe that once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standard-setting and the credibility of U.S. financial reporting will be dangerously compromised," wrote Robert Denham in a letter to House Financial Services Committee Chairman Barney Frank (D-Mass.) 

(Recent News) Does Fair Value Accounting + Credit Default Swaps = Global Deflation? 

Over the past several weeks we have been engaged in the debate over the nomination of Tim Geithner as Treasury Secretary. See our friend John Crudele's comment in the NY Post in that regard, "The Other Job Geithner Gets May be Troubling." 

We can't decide in whom we are more disappointed, Geithner for clearly trying to evade his duties as a citizens and pay his paltry amount of taxes, or the members of the United States Senate who seem to be a completely confused and ill-informed rabble. We'll be coming back to the issue of national governance soon.

But today we wanted to return to the issue of fair value accounting and whether this last remnant of bubble-think is not driving us into the proverbial Thresher (SSN-593) scenario, straight down into the deepest trench of an economic correction that is well-beyond crush depth. Over the past several months, we have come to the conclusion that we must make a correction in the FVA rule. We see two issues:

Time to Unravel the Knot of Credit-Default Swaps   

WITH a new administration in Washington, let us hope that there will be an interest in defining the origins of the financial crisis, its abettors and, most important, its resolution.

Any honest assessment must include the role that credit-default swaps have played in this mess: it's the elephant in the room, the $30 trillion market that people do not want to talk about.

Credit-default swaps are insurancelike contracts that Wall Street created in the early 1990s. They allow bondholders to protect themselves against losses if a company or a debt issuer defaults.

There is a viable and legitimate use for C.D.S.'s, especially when they allow bondholders and corporations to limit their risks. But in recent years, these contracts became a haven for speculators who were doing nothing more than betting on whether a debt issuer would survive.

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36 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 26

Last week I met, by chance, a tax attorney. She has purchased a home in France, in the country and is prepared for 12 months (Food/Money).

The conversation was brief but what struck me was that I had missed a big part of this crisis. I'm sure everyone familiar with my posts knows my views on why we are here: The USA is insolvent and it's book (GDP, unemployment, off balance debt) have a lot in common with Enron's. But even I can't ignore the impact the derivatives will have on everything. And, I thought I was pretty up on all of it. While I understood Tranches and CMO's it became clear that I didn't get the tax aspect of it.

She explained it in an email and sent a lot of links. I'll begin posting these today.

Her email:

*************************************************************************

It was great to meet you and share values-talk.  Here’s the article on the “Wells Fargo ruling” re: Wachovia  that I told you about; (Link Above "Wells Fargo Ruling")

And here’s what I’ve written about  the mark-to-market change of accounting to fair value crapola:


This is one of the astounding things that happened when no one was looking.  The Treasury Department and SEC were in cahoots to change the accounting rules.  Historically, companies have been required to value their assets at market value (i.e. "mark-to-market").  But the problem has been that the subprime mortgage market  was impossible to value because it's like shooting at a moving target - as the value of houses fall, how do you value all of the collateralized mortgage obligations (CMO's) that all of the banks and investment houses and insurance companies around the world own.  They have been able to make-up values as they please because there have been no real way to value them so most of them were carrying them on their books at 80-90 cents on the dollar.  But when the US allowed Lehman Brothers to go bankrupt it was a total disaster because the bankruptcy laws require that a bankruptcy trustee be appointed and the assets have to be valued in the "real world." That meant that the assets on Lehman Brothers books had to be auctioned off in the real world.  

The day that happened, the assets were purchased at 8.2 cents on the dollar!!!!!!!!!!!!!!!  That meant that any institution in the whole wide world that was carrying similar type of assets had to change their books to reflect 8.2 cents on the dollar rather than the fake imaginary amounts that they had valued them at.  It was an absolute disaster for many reasons.  Firstly, all of those companies suddenly tanked on their book value and could never get credit for anything.  Worse than that was what happened to the fake "insurance" companies all over the world that had sold fake "insurance" contracts promising to cover any losses that these companies might ever have if these type of assets went south.  These "insurance" contracts (i.e. credit default swaps) enabled  insurance companies to collect huge premiums by promising to cover any losses for CMO’s but under a secret insert set into the law back in 2002 at midnight, they were deregulated from having to actually have cash reserves funds to cover these contracts.  So when Lehman Brothers went bankrupt and these type of assets were finally real-world valued at 8.2 cents on the dollar, it meant that companies like (you guessed it -  AIG!!!!!!!) had to cover the other 91.8 cents!!!!!  

So guess where the missing 91.8 cents to the dollar came from (you’ve got it - your future and our current tax dollars).  That's why all of the financial gurus of the world went bizerko when the US government let Lehman go bankrupt and that's why the US government had to bail out AIG and still has to - because of all of the house-of-card toppling that the credit default swaps caused.

So to create yet another round of smoke-and-mirror fakery, the SEC and the Treasury decided  to change time-honored accounting methods for companies.  Instead of carrying assets at mark-to-market (which has historically been required)  they decided to give companies the ability (overseen by their “in their pocket-accountants”) to totally make up any numbers that they wanted based on what their best guess would be as to what these assets might be worth someday in the future when the "mature" and call it "fair value" accounting!!!!!??>>!!!

That way these companies could pretend that they had assets that actually had value and continue to get credit and survive.  Total utter bullshit!!!!  And FASB - the Financial Accounting Standards Board tried to warn Barney Frank that it was a "politicization of accounting standards" and not to allow it.  Normally, a change like this requires 90-120 days of comments from the public but in this case guess what the time-line was.   7 days!!!!!!!!!

Cute, huh!!!!!

***********************************************************

 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 26

25-jan-v1.jpg

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Daily Digest - Jan 26

Holy Cow, Davos, I'll be here all day!

Vanityfox451's picture
Vanityfox451
Status: Diamond Member (Offline)
Joined: Dec 28 2008
Posts: 1636
Re: Daily Digest - Jan 26

My God Davos!!!

I was wracking my brains with your reply to me yesterday when you wrote :-

" Looks like it will be a tight race indeed. Reminds me of how Enron was insolvent, once people realized that the lights went out. "

I knew I should've replied to it but got hopelessly side-tracked. A drop of over 90% in values!!!!!!!!!!!!!! I think this financial mess is more than just under water but Deap under water and Paulsons been paddling in the shallow end scratching his d***. I've never felt so vilified that I've done the right thing but, oh my God what a lot of wasted lives from this...

Paul

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Re: Daily Digest - Jan 26

I'm glad there's finally a gold bubble article kickin' around here -- interesting but short. It's something that's been on my mind recently.

I'd really like to see a lot of people weigh in on this, but for starters I had a couple of observations/questions.

Could there ever be a decoupling of coinage from bullion in terms of price. Now I know non-numismatic coins are considered bullion, but what about the idea of gold coinage of all persuasions rising more in value or retaining value after a general gold bubble because they are already "money"? This would presumably need some kind of simultaneous paper/fiat currency crisis to push people and economies into PM coinage.

Also, what about 90/40 junk silver being the best/ultimate long-term safe store for our current crisis because of its greater availability to a greater swath of regular folk, its pre-existing recognition as "money," and its more liquid (smaller) denominations? Is this why dealers are getting 30+% over spot or has this been going on for quite some time or happened in the past? I'm fairly new to monitoring the price of sliver on a daily basis.

Your thoughts on this would be greatly appreciated.

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Daily Digest - Jan 26 Nationalization of Banks

Two questions:  

(1)  IF the banks are nationalized, who will be running them, setting policy, carrying out their policies, etc.  and how will this be reported to the taxpayers who "own" them at that point?

(2)  What reason(s) do we have to believe that if the banks are under control of the congress (which is well known for funny deals) the banks will be run any more honestly and ethically than they have been ?

 Well, maybe a third question:  (3)  How will this affect the privately owned Fed Res Bank?

 Thank you. 

 

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Re: Summers' "brilliant" comments on MTP

"Timothy Geithner, the Treasury secretary nominee, will announce Obama's strategy for stabilizing financial firms soon after the Senate confirms him, Summers said. The administration's stimulus proposal is "properly sized" at $825 billion, and Obama is "prepared to do what's necessary" to revive the economy, he said."

Isn't this just code for "we're prepared to to ANYTHING to try to get everything back like it was>" ? ? And, don't we all know that is never going to happen?  What's the deal with these guys?  Are we going to have to let them literally do anything they want?   Or do we really have any choice? 

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Re: Daily Digest - Jan 26

Hello VanityFox451/Paul and MainCoonCat:

We are due for an ice storm, so I'm trying to beef up on the posts and get a bit ahead, it might be a bit lean if we loose internet, we have 2 generators but we live 3,000' up in the mountains. Take care 

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Re: Daily Digest - Jan 26

 

 

http://market-ticker.denninger.net/archives/747-Bernanke-Game-Over.html

Quote:

Bloomberg is allegedly reporting that Bernanke is "contemplating"
buying the long end of the Treasury Curve due to "bond market
instability.".........

......The market determines all interest rates.  Yes, even the "Fed Funds" rate; if you think The Fed leads
the market, you need to go study some charts.  The Fed does not set
rates, it is compelled to follow the market, because if it tries to
force rates to where they do not want to go it can obtain that result
in exactly two ways:

  1. It must provide or draw an infinite amount of money into or out of the system in order to drive and maintain it outside of equilibrium OR
  2. It must crowd out
    all private parties from a particular area of investment, thereby
    allowing The Fed to effectively "take over" from private parties.

The
second is non-intuitive - you need to contemplate how the markets (for
anything) work for a few minutes before it makes sense.

Consider
a situation where The Fed "wants" the GSE funding cost to be, say, 2%. 
The market wants it to be 4%, because the market perceives more risk
than The Fed would like to have it admit.

The Fed can cause the GSE paper to trade at 2%, but if it does so it will be the only buyer of said paper, because nobody else will buy at a 2% coupon.

The
same thing is about to happen here.  If Bernanke actually attempts to
suppress the Treasury Market's interest rates, that is, "support the
long end of the curve's price", then he will wind up having to buy all,
or essentially all, of the supply.  People who own Treasuries will
sell to him, surmising that he is overpaying, and gleefully taking what
is an "extra" profit from his hands.

If you're wondering why the
commercial and consumer lending market has gone straight to hell, this
is the reason.  Bernanke has interfered with the private credit market
in virtually every area, and in each place where he has "supported" the
price of debt instruments (suppressing yields) he has wound up as
effectively the only buyer in short order.

This is bad when we're
talking about the private credit markets but if it shifts to Treasuries
then the game is literally over immediately, because at that point you
have just created a circle jerk.

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Re: Daily Digest - Jan 26

Gold Bubble Could Be Quite A Bubble, If It Takes Off (Hat Tip Jeff Borsuk)

Now, this is serious: can't you see the bubble forming ?

I suggest you sell all your physical gold and silver and gather as much paper you can handle: dollars, euros, treasury bonds and even stocks -  these are 100% guaranteed to preserve your wealth for the years to come.

The gold price at wikipedia gives a hint:

http://en.wikipedia.org/wiki/File:Gold_Price_(1968-2008).gif

A bubble needs a downfall equal or greater than the rise and I cannot see one during the last 40 years.

Maybe a new continent will be discovered a new Cortez will find mountains of gold for the taking - that was the last time when gold was actually inflated.

-=dchrys=-

 

 

 

 

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Six Errors on the Path to the Financial Crisis

"Has American-style capitalism failed us so badly that it needs a radical overhaul? 

The answers, I believe, are yes and no. Our capitalist system did not
condemn us to this fate. Instead, it was largely a series of avoidable
- yes, avoidable - human errors."

Someone else who doesn't understand the exponential function......

The crisis could heave been avoided, for now, but it could never have been totally averted under this Matrix....  Debt, growing exponentially, and the requirement for more cash, growing exponentially even faster, is the key problem nobody except Chris Martenson and some of his followers on this site seem to understand.

Mike 

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Re: Summers' "brilliant" comments on MTP

Like I keep saying here....  you guys just need to stop servicing your debts.  Even if only half of Americans did this, the Matrix would be on its knees within a week.

 Mike

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Re: Daily Digest - Jan 26

I have a better idea......  Abandon the Matrix.

Stop servicing your debts.

Stop paying taxes.

Start a Transition Town.

WTSHTF, 'wealth' will be meaningless.  'Wealth', then, will be what you know, whether you know how to fix something that's broken or not, whether you know how to grow food or not, whether you know how to do plumbing or wiring or not, whether you know what to do to survive the collapse.

If you don't know, I suggest you start finding out...

Mike 

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Re: Daily Digest - Jan 26

"Now, let's consider gold as a potential bubble. Suppose "investment
demand for gold continues to accelerate". There is a limited amount of
gold in the world. Wikipedia reports that there has been roughly
158,000 tonnes of gold over all history. At $1000 / oz and 33.1 grams /
troy oz that is 4.8 billion oz and 4.8 trillion dollars."

Aren't those maths wrong?

I make the 158,000 tonnes of gold (at $1000/ounce) worth $477,000,000,000.  If a trillion is 1000 billion, then all the gold is 'only' worth 0.477 trillion.....

Am I wrong?

Mike 

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Re: CDS prices for sovereign debt

Davos:

Thanks for providing the update on CDS's.  This is a vital vehicle of information others should follow closely...I do.  Others should take note and continue to monitor w/r/t USA and/or World insolvency and currency issues.

 

Nichoman

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Re: Daily Digest - Jan 26

Hello NichoMan:

Anytime, it was literally handed to me in an email and explained really, really well, happy to pass it along, take care 

PS When I watched the documentary on Enron, "The Smartest Guys in the Room" it dawned on me how imortant accounting is and the type of flaws that were pointed out in Mark to Market. I thought there was nothing worse until Barbara (the tax attorney) explained Fair Market accounting.

Amazing how these rules manipulate our books.... 

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Re: Daily Digest - Jan 26

Wow, Davos, yet another phenomenal Daily Digest.  This one is unusually hefty!  They're always a pleasure to read.

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Re: Daily Digest - Jan 26

you might wonder why AIG took such large unhedged positions in credit default swaps. afterall they are an insurance company, hedging risk is the sole purpose of the orginazation. but they couldn't have thought that they would roll every number but craps for decades. i researched this a few months ago (so my numbers may be off) and found that they had $1 for every $120 in cds's. even lehman and bear stearns wouldn't dare to lever that high.

a friend pointed out to me that the perfect hedge for a cds is to sell the stock and bond of the failing company short, selling the stock short creates the perfect hedge ,as the stock goes down it creates cash to pay off the cds contract. interesting to note is that this creates a viscious downward spiral and amplifies the downward pressure.

therefore, when lehman failed and the sec banned short selling on 799 stocks, they changed the rules of the game!  the government HAD to bail out lehman, the government took away their hedging strategy.

whether or not they still can short stock for a hedge is a little unclear to me right now. the short ban is over but what are the rules?

 

steve

 

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Gold Bubble. Coordinated gold confiscation?


Thanks again Davos.

"I'm expecting that the demonization of gold and gold mining as an ecological disaster and a waste of precious resources will precede such a move. I expect that hearing that kind of buzz on the mainstream news media will be a warning sign that the jig may be up."

The only value the main stream news media provides is in softening us up for the big lies we would otherwise never swallow.

 

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Re: Daily Digest - Jan 26

Hello Jrf29, sorry if it is too verbose....I might be without Internet the next few days so they may be skimpy...

CryMoney it is a pleasure to contribute to this fine community, I'm not a big fan of gold mining but I feel gold and silver will be the only things that make it, like Buffett says, if Martians watched us mine gold they'd think we are nuts, take care 

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Re: Daily Digest - Jan 26

Hello Davos,

As I posted yesterday, China is miffed at Geithner regarding his recent accusations of manipulating the Yuan.

Asia Times today points out another remarkable blog in the headlines:

Geithner blows up the world.

...There is a sufficient base of viable assets to keep the banks in positive cash flow if financed at zero interest by the Fed, and effectively zero capital cover (since the banks really don't have any capital).

All this presumes that the major creditors of the US, notably China, will continue to support the Treasury market in a huge way. A cynic might think that Geithner's statement is designed to unleash a wave of speculation that China will revalue, leading to enormous capital inflows into yuan and Chinese government intervention, which would balloon Chinese reserves, and increase Chinese purchases of Treasuries. No-one in this business, though, is that subtle or that smart.

It appears simply that Obama is playing to his labor constituency. Resorting to protectionism could have cataclysmic consequences in the midst of a 1930s-style contraction of world trade. If China were to shift even a fraction of its reserves into gold, the consequences for the dollar would be frightening....

Certainly these are ramblings, just ramblings. What I don't like about it is the increasing frequency of these.

BTW how is Chris coming ahead with the European version for the Crash Course? I am looking for more information about the manipulation of GDP and inflation figures in Euro countries.

Tom in Colo, Growth is not an option!

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to be stuck inside 2009 with the 1977 blues again?

to be stuck inside 2009 with the 1977 blues again?

Timing of Stricter Standards Worries Automakers

By NICK BUNKLEY
Published: January 26, 2009

DETROIT — Automakers said Monday that they were working toward
President Obama’s goal of reducing fuel consumption, but rapid
installation of stricter emissions standards could force them to
drastically cut production of larger, more profitable vehicles in a
time of severe financial duress.

<http://www.nytimes.com/2009/01/27/business/27fuel.html>

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Re: Daily Digest - Jan 26

Mike I got 4.77E12 or 4.8 Trillion.

 

E

 

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Re: Daily Digest - Jan 26

Mike,

The numbers are a bit 'odd':  But  throwing one more wrench at this monkey will get you back to something closer to the original post

From here you get  32150.75 oz per tonne.  So 158,000 tonnes of gold is equal to:

     158,000 tonnes * 32150.75 oz/tonne =  5079818500 oz of gold = 5.0798185 Billion oz of gold

 At $1000/oz - this amounts to approximately $5 Trillion which comes close to the $4.8 Trillion cited in the original link which 'itself' referenced a Wiki article 

Quote:

In 2001, global mine production amounted to 2,604 tonnes, or 67% of
total gold demand in that year. At the end of 2006, it was estimated
that all the gold ever mined totaled 158,000 tonnes.[18] This can be represented by a cube with an edge length of just 20.2 meters.

This site had a couple of interesting graphs: The first shows annual production (a little above 2500 tonnes/year)

The second graph provides the cummulative amount: (which pretty much agrees with the 158,000 tonne number cited above:

 

Note the 'peaking' of the production graph - now, what would this mean if every country in the world were to return to the 'gold' standard (aside from the fact that $1000/oz is not nearly high enough to cover the current world economy as measured in US dollars).

 

 

 

 

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Re: Daily Digest - Jan 26

well I did all the sums in metric (the ONLY way to go...!!)

158,000 tonnes = 158,000,000 kg (see how metric's simple..)

33.1g = 0.0331kg (1 oz)

So divide 158,000,000/.0331 =  4,773,413,897 oz rounded to 4,800,000,000 oz

at $1000 a pop, that's $4,800,000,000,000 which is indeed $4.8 trillion (I know where I went wrong now, I divided by grams instead of kilograms - you have to have the same units above and below the divider)

But to me it brings up another point.  IF all the world's gold is worth less than five trillion bucks, how can gold ever be used as a measure of wealth when all the world's assets must be worth at least three orders of magnitude more than that?

PLUS, as the gold production peaks, the value of gold MUST go up.  No?  What then?  More deflation? 

Mike.  Curious. 

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Re: Daily Digest - Jan 26

Yep - very curious too.

To the first part (reconciling the 'value' of gold against the overall economic activity) is a simple matter of establishing a new unit of measure to replace the US dollar (heh - simple like making us think in metric units vs english units)

To the second part - gold production, like the production of any commodity, will ultimately reach a limiting rate followed by a decline, so using it as the basis for all currencies will still become problematic as long as the population continues to increase.

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Re: Daily Digest - Jan 26

Davos,

It was really nice that you ran into who you did and even nicer to read that email. I'm curious if you invited her to the site and if so what her reaction to it was. What was her reasoning for leaving the States for France or is she from there?

Thanks for your work!

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Re: Daily Digest - Jan 26

Just watched Roach's video, and earlier today I had watched this:

(Paul Craig Roberts, assistant Treasury Secretary under Reagan)

From Roach we hear the same old bottom line: "Recovery, in the end."

From Roberts we hear "This is gonna be bad." He goes on to detail why, referring to our dependence on imports of everything to make the American machine run, whereas, during the Great Depression 1 (GD1), all imports could have stopped and most people wouldn't have noticed.

I find myself uniquely frustrated by this pair of presentations for reasons that may have some of you frustrated:

What does Roach mean when he says "recovery?" And what is it that's going to contribute to that "recovery?"

Is it going to be initiated by the as-we-speak continued deterioration in the average level of education of the average American?

Is it going to be initiated by the additional 3000 people that lost their jobs in the last hour, people who are now unemployment liabilities as opposed to being taxpayers?

Is it going to be initiated by the total loss of current and, as far as the mind's eye can see, future tax revenues by what was the largest market sector (banking and brokerage) prior to the meltdown?

Is it going to be initiated by the world's workers whom have been internet-informed as to how they've been exploited as near slave-labor by the U.S. for decades; people who are now demonstrating and demanding better treatment from their governments  and are going to get it in the form of more fiscal stimuli? (China is all we need to consider here)

Is it going to be initiated by the redistribution of energy consumption (a more equitable per-capita usage) that will inevitably result from an internet-informed world of workers and their beholding governments, a process which is well under way?

Is it going to be initiated by the continuing decrease in the average hourly wage of the average American worker--which is also partially a result of an internet-informed world and a demand for fair treatment?

Is it going to be initiated by the decreased tax revenues that result from those lower average American wages?

Is it going to be initiated by the increased debt servicing burden that, when considered as a numerator in the ratio where tax revenues is the denominator, looks a lot like Godzilla h*&$^%g Bambi?

Is it going to be initiated by creating more public infrastructure and other black hole projects that haven't been introduced to the concept of self-liquidating debt or ROI--or at least the modern world?  (Mexico has better public tranporation!)

Is it going to be inititated by installling a Treasury Secretary that finds TurboTax to be beyond his comprehension (in the best case scenario), and that has inspired at least one person to never pay another cent of taxes in the U.S. unless he runs for public office?

Is it going to be initiated by the increased oil prices that the inevitable decreased production, increased depletion, and hording is going to bring about?

Is it going to initiated by the daily increase in medical costs the U.S. is incurring--every moment of every day--due to the reality of our demographics?

Is it going to be intiated by the higher borrowing costs that are inevitably on the way due to the destruction of capital worldwide and the consequent need to keep or repatriate capital to meet the need of one's people--or perish as a government (see: Iceland)?

On the other hand...

Then, we've got Paul Craig Roberts, who starts off strong, listing the additonal problems we face now as compared to during GD1, but then veers off track into the cuckoo's nest as he declares George Bush et al knocked down the Twin Towers, thus leaving every good deed he's done since he was a Weebelos and every honest word spoken since birth as redeeming to his character as trying to stitch one's head back on after meeting Al Qaeda in a video tape would be helpful to one's appearance...

Thus:

If I hear another "expert" genericize "recovery" as if it were mandated by his or her God, I think I'm just going to have to leave the planet--in search of the rumored paradisical planet, "Sin Expertistas."  Warning: Expertise, consumed in too high of doses, or when combined with crack cocaine, can cause explosive head syndrome or republican conversion. 

Question for you Mr. Roach? Why would there be a recovery?

Comment for you Mr. Roach:  "I do not think that word means what you think it means."

Mr Roberts and the like:

Could we get just one person who has some sense of reality to use a wee bit of common sense to rein in his inner conspir-idiot when attempting to make arguments that people are supposed to believe?

Arhg!

America:  fruits, nuts, and flakes; a cereal or a country? 

Lately, everytime someone who represents our government or any other entity where people are overpaid to destroy the common workers' wealth, I hear my inner Jack Nicholson as I face the TV and have to fight off the urge to say:  "Go somewhere else and sell crazy, we're all full up here."

http://www.entertonement.com/clips/36739/Sell-crazy-someplace-else-we're-all-stocked-up-here

Thanks. I needed that... Have I mentioned lately how kind you all are for allowing me to loose the Denninger in me occasionally?

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Re: Daily Digest - Jan 26

Paul Craig Roberts fails to integrate peak oil into the discussion. 

The integration of many important factors into a cohearant view is what attracted me to this website.  Once one grasps all the various elements covered so concisely in the Crash Course, it is really amazing to listen to otherwise sharp individuals prognosticate while leaving out crucial elements.

Davos, I hope you are isolated by weather for a bit.  You deserve a break.   Thanks for your outstanding posts.

 

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Re: Daily Digest - Jan 26

"What was her reasoning for leaving the States for France or is she from there?"

 It's no contest mate.....

1) no guns

2) no guns

3) great wine, real cheap

4)If she went to the South, I trust she stayed out of large town.....  world's best living.  Community, markets, great wine, great climate

5) did I say no guns?

Ah well, nuff said.

Mike (I'm from there..... but I'm stayin' in Aurstralia..!) 

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Re: Daily Digest - Jan 26

"What was her reasoning for leaving the States for France or is she from there?"

I wonder if people who ask such questions have ever spent any time (other than with the military) in another country.

Happiness is where you find it.  I found mine somewhere else.  ;^)

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Re: Daily Digest - Jan 26

Hello BN37:

Yes, it was super to have met Barbara. I thought I was well read and up on this, but when she asked me about the tax changes it became apparent that I just had a rough image and even that was shrouded by fog. 

I told her about this site, primarily for the videos for her family. I hope she visits and voices her knowledge. The last bank wedding the grooms were changed at the alter as a result of the new tax laws giving the new groom a big enough dowry.

I'm not clear on exactly why France, I got the impression that she felt the French might handle things a bit differently than the US. To elaborate on that: This past summer we had a client who had family in from Rome. The Mom (from Rome) couldn't wait to get her teen son home, she said he was getting spoiled and would go through withdrawal. She thought we were nuts with all the [email protected] we have.

Take care 

 

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Re: Daily Digest - Jan 26

<blockquote>But to me it brings up another point.  IF all the world's gold is worth less than five trillion bucks, how can gold ever be used as a measure of wealth when all the world's assets must be worth at least three orders of magnitude more than that?

PLUS, as the gold production peaks, the value of gold MUST go up.  No?  What then?  More deflation? </blockquote>

Land, Oil , homes, buildings, manufactured goods, raw materials and other resources are also tangable assets that can be used to exchange for goods and services. If the global was forced back into a good standard, the amount of gold in circulation only needs to match the required money supply. Currencies back by gold would need to adjust to the gold available for circulation, not the entire Global GDP.

If the global referred to the gold standard, the price per ounce would be significantly higher. Back in the 1980s the price of gold rose to $800/ounce. Adjusted for inflation (pre-toxic paper era of 2004-2008) it would be about $2000 an ounce. A post US default economy would probably put the price per ounce in the $10K range. Assuming the dollar stablilizes and doesn't  reach for hyper-inflation. Although its extremely probable that the US is head for hyper-inflation. Yes we are in a deflationary period, but sooner or later, investors will flee the dollar and other currencies too. The US will likely experience Trillion dollar deficits for many years, and the supply of debt will exceed the supply of global savings. I also suspect that exporters will try to ween themselves off american consumption. They have to, because the existing system is unsustainable and falling to pieces.

The original author of a gold bubble doesn't understand the crisis well enough. Its possible that gold prices will dip, as industrial and consumer demand collapses. But there are a lot of investors holding paper (currency, bonds, etc) that are overvalued. Any significant investor trend to move out of paper and into hard assets (such as PMs) would quickly overwhelm demand distruction. I also recommend that you look at demand for PM bullion which is very high. Investors are consuming all of the bullion being produced at mints (all over the globe). In many situations there is a backlog of orders at the mints because strong demand of bullion. The PM marker prices reflect demand of Paper PMs, not physical PM demand.


FWIW: I think the global economy and most of the industrial world would collapse (aka Fall of Rome) before a new era of the gold standard arises. Countries like the US have too much debt and insufficient gold reserves to make a transition witht defaulting on existing debt obligations. The reason why the US left the gold standard in th early 1970's is because US gold reserves could not meet debt obligations. That was over 35 years ago, and the debt has soared since then.

I doubt that moving out of paper and into PMs will save people from hardships. When currencies collapse business that make goods and offer services will go out of business. You simply will not be able to obtain many goodw and services that are depend on globalizatio and mass consumption to remain in business. A better option than dumping all your capital into PMs would be to build yourself a self-sufficient livestyle were you are not dependant on globalization and modern industrialization for your survival.

 

 

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Re: Daily Digest - Jan 26

No need to get your panties in a wad. I was just asking a question. You put a negative spin to my question that I never intended. I actually have been to Europe and Africa, not in the military.

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Re: Daily Digest - Jan 26
BN37 wrote:

No need to get your panties in a wad. I was just asking a question. You put a negative spin to my question that I never intended. I actually have been to Europe and Africa, not in the military.

My  apologies, BN37, hopefully not too late.  I made an erroneous judgement of your comment, which in retrospect was uncalled for on my part.  

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Re: Daily Digest - Jan 26

We're fine. I've read other posts of yours and it did seems out of sorts.

 

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