Blog

Daily Digest - Mar 31

Tuesday, March 31, 2009, 10:50 AM
  • Funnies
  • Russia backs return to Gold Standard to solve financial crisis
  • Russia, China cooperate on new currency proposals:
  • OCC 4th Quarter Derivatives Report...
  • Closer Than I Thought?
  • Jim Rogers (Video US Dollar)
  • AIG Employee Bonuses a ‘Missed Opportunity' (Video)
  • The Quiet Coup
  • No Time For T-Bonds (H/T Suzie)
  • US bank bailout fund down to $135 bln
  • GM CEO resigns at Obama's behest (H/T Turbo)
  • Prospect of Barack Obama show causes UK to clear its decks
  • Newsweek Cover Story on Krugman
  • Washington's banks under stress 
  • Welcome to America, the World's Scariest Emerging Market (H/T Dragline)
  • TARP Spending to Date (Chart)

Economy 

Funnies

Russia backs return to Gold Standard to solve financial crisis 

Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.
Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal. 

Russia, China cooperate on new currency proposals: 

Russia and China are coordinating proposals on a new global currency that could replace the US dollar as a reserve currency to prevent a repeat of the global economic crisis, the Kremlin said on Monday.
"We have received proposals from our colleagues in China, detailed proposals," President Dmitry Medvedev's top economic adviser Arkady Dvorkovich said. "Our positions are very similar.
"We have similar positions on the development of the international financial architecture," he told reporters.

OCC 4th Quarter Derivatives Report...

The 4th quarter Derivatives report is out and it has some eye opening facts and charts. I can't reproduce the charts, but they are viewable in .pdf here.

The charts show you how much exposure is out there and in what type of derivative. The amount and composition held by the top 5 banks is very interesting.

What is most interesting is the exposure to interest rate derivatives and who the largest holders are. Goldman is far more exposed and LEVERAGED than most people realize. And note in the charts how Goldman is showing huge exposure for Q4, but not for previous quarters (graph 5A). What happened? Did they not report their holdings to the OCC before?

Also check out table 1 and 2. The world's largest derivative holder is still JPMorgan with more than $87 TRILLION in derivatives!! Goldman has $30+Trillion! What kind of leverage do they have? I do not know, you would have to parse out and net their positions, but I'd be willing to bet that their exposure is many, many times their net worth.

Martin Weiss did a good short piece on this issue:

Alarming News: Bank Losses Spreading!

by Martin D. Weiss, Ph.D. 03-30-09

For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates.

In a moment, I'll explain what this means for your savings and your stocks.

But first, here's the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category. 

Closer Than I Thought? 

I am often lumped together with the "deflationistas" by those who have not (taken the time to) read my books (e.g., Financial Armageddon and When Giants Fall) or my posts on the subject of the two 'flations at www.financialarmageddon.com and www.economicroadmap.com. 

But the truth is that I have always expected the Great Unraveling to be a multi-phase process, with deflation coming first and then inflation (unlike some other well-known prognisticators who haven't quite gotten the progression right). In fact, here is an excerpt from the table of contents for my March 2007 bestseller:

PART TWO: RISKS

5. Economic Malaise
6. Systemic Crisis
7. Depression
8. Hyperinflation

As to when the changeover might occur, I have often indicated that I would keep an eye on the financial markets, news reports, and the actions taken by our government (and others) for guidance.

More recently, in a post entitled "The Next Phase," I suggested that we might begin to see the the supply of money being created by authorities overwhelm the wealth being destroyed by defaults and deleveraging by the end of this year.

As it happens, the relative lack of concern about inflation among policymakers and mainstream economists is leading the contrarian in me to wonder whether the turning point is even closer than that.

That premonitory sense seemed even more pronounced when I read the following Financial Times commentary by Edward Chancellor, "Inflation Looms Over Deflation Risk." 

Jim Rogers (Video US Dollar) 

AIG Employee Bonuses a ‘Missed Opportunity' (Video)

The Quiet Coup

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there's a deeper and more disturbing similarity: elite business interests-financiers, in the case of the U.S.-played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. 

No Time For T-Bonds (H/T Suzie) 

Count on Wall Street to figure out a way to make a quick buck in a down market. The big banks and brokerage houses that deal directly with the Federal Reserve were avid buyers of Treasury securities in auctions last week, but they were even more avid sellers of those bonds to the central bank. 

"What appears to be happening is the 16 primary dealers that were responsible for helping underwrite the auctions are now long with the hope of quickly selling the bonds at a higher price to the Fed before the next supply infusion comes in a few weeks," said Josh Stiles, senior bond strategist at IDEAglobal.

The operation was the second of its new program that commenced on Wednesday, and is part of the Fed's plan to purchase $300.0 billion in Treasuries over the next six months. (See "The Buyer Of Last Resort.") With short-term rates having been effectively pushed to zero, the central bank has decided to purchase government bonds as a way of pushing down interest rates and spurring economic activity. 

US bank bailout fund down to $135 bln 

US Treasury Secretary Timothy Geithner said Sunday that $135 billion remained from a $700 billion dollar fund approved by Congress to shore up the financial sector reeling from crisis. 

GM CEO resigns at Obama's behest (H/T Turbo) 

The Obama administration asked Rick Wagoner, the chairman and CEO of General Motors, to step down and he agreed, a White House official said. 

On Monday, President Barack Obama is to unveil his plans for the auto industry, including a response to a request for additional funds by GM and Chrysler. The plan is based on recommendations from the Presidential Task Force on the Auto Industry, headed by the Treasury Department. 

Prospect of Barack Obama show causes UK to clear its decks

Britain will get its first chance to see Barack Obama this week when a White House cavalcade - complete with armoured limousines, helicopters, 200 US secret service staff and a six-doctor medical team - sweeps into the UK.

Obama will fly into London for his first visit to the UK as president of the United States on Tuesday to take part in the G20 summit in the capital's Docklands area. He will not be travelling light.

More than 500 officials and staff will accompany the president on his tour this week - along with a mass of high-tech security equipment, including the $300,000 presidential limousine, known as The Beast. Fitted with night-vision camera, reinforced steel plating, tear- gas cannon and oxygen tanks, the vehicle is the ultimate in heavy armoured transport.

Newsweek Cover Story on Krugman

Evan Thomas writes in Newsweek: Obama's Nobel Headache. An excerpt:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he's wrong, and you sense he's being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in "Lords of Finance," his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, "The Best and the Brightest." Krugman may be exaggerating the decay of the financial system or the devotion of Obama's team to preserving it. But what if he's right, or part right? What if President Obama is squandering his only chance to step in and nationalize-well, maybe not nationalize, that loaded word-but restructure the banks before they collapse altogether? (emphasis added)

Krugman is making the establishment nervous! Probably because they all missed the housing bubble - and Krugman called it correctly.

Washington's banks under stress

Ailing financial giants such as Citigroup, Bank of America and AIG have drawn most of the attention as the worst banking crisis since the Great Depression grinds on.
But several of Washington's community banks also are clearly straining under the weight of the crisis, a Seattle Times analysis shows.
At least a dozen of the 52 Washington-based banks examined are carrying heavy loads of past-due loans, defaults and foreclosed properties relative to their financial resources. Many of these banks have set aside relatively little cash to cover problem loans, the analysis shows.
And even the relatively healthy banks are under more pressure than they were a year ago.
Among the symptoms of serious trouble at local banks, according to year-end data from financial reports filed with federal regulators:

• More than a third of Bremerton-based Westsound Bank's assets aren't generating any revenue.

(More)

Welcome to America, the World's Scariest Emerging Market (H/T Dragline)

Back in the spring of 1998, when Boris Yeltsin was still at Russia's helm, I led a group of global investors to Moscow to find out firsthand where the Russian economy was headed. My long career with the International Monetary Fund and on Wall Street had taken me to "emerging markets" throughout Asia, Eastern Europe and Latin America, and I thought I'd seen it all. Yet I still recall the shock I felt at a meeting in Russia's dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia's economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia's economic czar at the time.
At the time, I could not imagine that anything remotely similar could happen in the United States. Indeed, I shared the American conceit that most emerging-market nations had poorly developed institutions and would do well to emulate Washington and Wall Street. These days, though, I'm hardly so confident. Many economists and analysts are worrying that the United States might go the way of Japan, which suffered a "lost decade" after its own real estate market fell apart in the early 1990s. But I'm more concerned that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we're trying to fix it.

TARP Spending to Date (Chart)

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

19 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Mar 30

imf-advice-wide.jpg

 

So there are no copyright issues I'll be posting only a paragraph or 3 and we links will open new window.

Take care

Ruhh's picture
Ruhh
Status: Gold Member (Offline)
Joined: Nov 12 2008
Posts: 259
China and Argentina in $10 Billion currency deal

Looks like the Chinese are finding all kinds of ways around using the USD

http://news.bbc.co.uk/2/hi/business/7973541.stm

I still don't get why the dollar remains so strong especailly when all this type of news is floating out there even in the MSM?

dps's picture
dps
Status: Martenson Brigade Member (Offline)
Joined: Jun 27 2008
Posts: 442
Re: Daily Digest - Mar 31

Gasoline price low point around the 1st of January, 2009 at $1.32.9, rounded up, call it $1.33.
Today, 3/31/09, paying $1.86.9, rounded up, call it $1.87 at the same gas station.
1.87 - 1.33 = 0.54 increase in exactly 3 months.
0.54 / 1.33 = 40.6% rise in price.

coyote-smiles's picture
coyote-smiles
Status: Member (Offline)
Joined: Apr 24 2008
Posts: 11
Re: Daily Digest - Mar 31

The last link (TARP spending-to-date chart) doesn't work for me.  Just FYI.

 

Great info otherwise, though, as always.  Thanks.  :)

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: Daily Digest - Mar 31

Recession puts major strain on Social Security "Trust Fund"

Quote:

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.

 bold emphasis mine

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/30/AR2009033003291.html

Everything is all coming to a head very quickly.

One1776's picture
One1776
Status: Bronze Member (Offline)
Joined: Jan 24 2009
Posts: 52
Re: Daily Digest - Mar 31 -

This is a great article from the Ludwig von Mises Institute (Austrian School of economics and libertarian political and social theory.)

 Open Letter from One Non-Economist to Another

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Daily Digest - Mar 31

Joemanc,

Thanks for the tip on this Post article pertaining to social security. I found it fascinatingly a-matter-of-fact and nonsensical.

Beginning with the paragraph you cite, it seems amazing the admission that social security was going to start running out of money in a decade but now that’s shifted to next year! My favorite part though is that the primary lament isn’t the crisis that represents but that Uncle Sam simply can’t take the "surplus" and do what it wants with it. Boo hoo!

The next paragraph’s a real winner too, so here it is in full:

"While the new numbers will not affect payments to current Social Security recipients, experts say, the disappearing surplus could have considerable implications for the government's already grim financial situation."

First off, you gotta love the caveat "experts say." Would this journalist have written, "Up is down, experts say." If there’s no longer going to be a surplus and the US government is insolvent how is this not going to affect payments to current recipients? Through more borrowing obviously, which simply dilutes the worth of future payments. So it patently will affect payments.

The next paragraph indicates that this is indeed the plan:

"The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors."

Why not the phrase "will be forced" instead of "could be forced" when describing a situation that’s a forgone conclusion? Also, does China now about this? Hey, China and company, we need another 3/4 of a trillion!

The article then goes on to say that the CBO claims that as early as 2017 the "borrowed" trust fund funds may have to be begun to be paid back. Now since these things are always soft-peddled the date’s probably more like next year! The article then says that Uncle Sam may have to raise taxes to achieve this.

That just blew my mind. The reason this newly acute problem exists in the first place is because of widespread unemployment and long-term flat wages. The idea that raising taxes on an already beleaguered citizenry is a solution I find to be an astounding proposal.

My mind’s blown.

You’re absolutely right: "Everything is all coming to a head very quickly."

reistr's picture
reistr
Status: Bronze Member (Offline)
Joined: Jul 15 2008
Posts: 50
Re: China and Argentina in $10 Billion currency deal
Ruhh wrote:

Looks like the Chinese are finding all kinds of ways around using the USD

http://news.bbc.co.uk/2/hi/business/7973541.stm

I've been puzzled by the Chinese actions regarding the dollar for a while. Now I'm pretty sure that I understand what they are doing...

I believe they are playing both ways. On one hand their actions, pushing to drop the dollar as the reserve currency, puts a LOT of pressure on the US to be fiscally responsible, or at the very least not to take their position for granted. If that works then the Chinese will have their holdings in dollars safe and will back off the alternate currency plans.

On the other hand if the US continues to print like mad and the dollar suffers, the Chinese will have an opportunity to dislodge the US as the Empire - I have a very strong feeling that they are positioning their pieces for an "economic checkmate". The whole world knows that China would love a shot at the throne, and the economic collapse of the US would allow just that.

Either way there is a benefit for China... The big question is how many billions they would be willing to "pay" in order to lower the US position as the top dog (and keep the risk of open confrontation to a minimum).

 

reistr's picture
reistr
Status: Bronze Member (Offline)
Joined: Jul 15 2008
Posts: 50
Re: Daily Digest - Mar 31
joemanc wrote:

Recession puts major strain on Social Security "Trust Fund"

...

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/30/AR2009033003291.html

Everything is all coming to a head very quickly.

Thanks! Great to see this article on mainstream.

We all knew this was going to happen, but this financial crisis is certainly accelerating things, eh? I guess the US government will have to deal with this sooner than they expected...

mainecooncat wrote:

 
So it patently will affect payments... The article then goes on to say that the CBO claims that as early as 2017 the "borrowed" trust fund funds may have to be begun to be paid back. Now since these things are always soft-peddled the date’s probably more like next year! The article then says that Uncle Sam may have to raise taxes to achieve this.

Good points, and we all know that by 2017 the government will NOT be paying back those borrowed funds. They can't balance a budget even while "borrowing" those funds, so can anybody imagine they paying it back? Basically by 2017 they will have to start cutting Social Security payments - I guess that classifies as affecting recipients...

 

Subprime JD's picture
Subprime JD
Status: Platinum Member (Offline)
Joined: Feb 17 2009
Posts: 562
Re: Daily Digest - Mar 31

The amount of propaganda that is coming out of the government, wall street and the mainstream is utterly revolting. The past 2 weeks have been terrible as all the major media sites are screaming "THE MARKET HAS BOTTOMED". All this talk about "green shoots" and "signs of recovery" is actually having a visible effect on the dumbed down consumer populace. Ive been talking lately with people on the street and i keep hearing the same government lines: people need to spend, we need to resume growth, the economy is getting better, the banks need to lend, the government needs to take the bad assets off the balance sheets so that the credit markets can unfreeze, etc etc.

Its absolutely shameful that the government is acting in this manner. I feel as if i am in 1943 nazi Germany, where the germans are getting destroyed out in Russia yet the Nazi government continued to proclaim that all was well on the Eastern front and how Germany would be victorious. Little did the German sheeple know that destruction would be brought upon them within the year. Even in the end the government and wall street will do anything possible to maintain optimism and fail to warn the people of the catastrophic consequences that America will reap as a result of her overspending in all areas of life. Households, corporations, banks, pension funds, government, all are immensly in debt and utterly broke at this point yet the arrogance at the top and bottom levels is nevertheless absurd. This will end badly and maybe then the American sheeple will wake up and prepare for the coming storm.

 

They sow the wind and reap the whirlwind

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Daily Digest - Mar 31

Just read The Quiet Coup article....fantastic perspective on this mess. Thanks Davos!

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Daily Digest - Mar 30
Davos wrote:

So there are no copyright issues I'll be posting only a paragraph or 3 and we links will open new window.

Take care

Davos,

Honestly, that's startling news. IMHO, your skill at picking how much to excerpt from each article is one of the most valuable parts of the daily digest. If you are forced to limit your excerpts for fear of copyright issues, that would (in my never-humble opinion) represent a serious downgrade to the quality of the digest.

Is this a real problem or just a perceived one??? I don't know a whole lot about fair use, but I would think that quoting other work that's published freely on the Internet with an appropriate link to the original source would be pretty safe. Has there been an issue or something?

Concerned,

Erik

 

Denny Johnson's picture
Denny Johnson
Status: Gold Member (Offline)
Joined: Aug 13 2008
Posts: 348
Re: Daily Digest - Mar 30
ErikTownsend wrote:

Davos,.............your skill at picking how much to excerpt from each article is one of the most valuable parts of the daily digest.

X2............case in point, your excerpt for The Quiet Coup was a great tease for a great article.

Thanks

bobb dobbs's picture
bobb dobbs
Status: Bronze Member (Offline)
Joined: Apr 22 2008
Posts: 31
Re: Daily Digest - Mar 31

re: The Quiet Coup

This informative article adds some needed balance to the near worshipful tone regarding the IMF used in Simon Johnson's article:

The Oligarchs' Escape Plan

By Michael Hudson 

http://www.counterpunch.org/hudson02172009.html

"The new twist is a variant on the IMF "stabilization" plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to "support the currency." Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF."

 

Hudson's article outlines how the IMF uses loans to extract wealth from targeted countries. He uses current Eastern Europe operations to demonstrate how it is done. Then contrasts and compares the methods underway in the USA that are designed to achieve the same result: enrich the oligarchy, enslave the rest of us.

Anyone cheering plans to give more power to the IMF should do their due diligence and become informed about its past activities.

Google 'structural adjustment' for a good start.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Mar 30

Hello Erik:

Not perceived, I began posting a lot of articles in their entirety because I was trying to save the reader time, I myself have the patience of a gnat, the web is super but waiting for windows or tabs to load can be a PIA. 

Anyway, long story short, the author of an article I that linked to on his blog but posted his entire article - he complained. Took a lot of time from Chris and Amanda and I pulled the post. 

Lately I have been hesitant to select what I think is the best because there have been super articles with a lot of meat in them. Like trying to differentiate fillet mignon from duck.

I have posted just the snippets if I think that they are important or if it has only one important piece to the article.

I just wanted readers to know that I wasn't slacking and that there was more since they might have become accustomed to seeing the entire article and not clicking on the link. 

Take care 

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
reistr's picture
reistr
Status: Bronze Member (Offline)
Joined: Jul 15 2008
Posts: 50
Re: Daily Digest - Mar 31
JAG wrote:

Just read The Quiet Coup article....fantastic perspective on this mess. Thanks Davos!

One of the best articles I've read in a long time. I hope Obama reads it... Thanks!

hightor's picture
hightor
Status: Bronze Member (Offline)
Joined: Aug 12 2008
Posts: 26
Re: Daily Digest - Mar 31

I agree that the IMF should never be regarded as more "gifted" than any other economic/political outfit, but their perspective on financial collapses is useful experience to draw on, and I really think the Quiet Coup is a terrific article. It pretty calmly, logically, and rationally lays out the problem, as if written to our so-far clueless leaders, and totally convincingly describes why and how we are headed for the *&^%STORM THAT WAITS AROUND THE CORNER!!

I have sent it to many friends, along with further urgings to take The Crash Course.

Soulmaster's picture
Soulmaster
Status: Bronze Member (Offline)
Joined: Sep 16 2008
Posts: 27
Re: Daily Digest - Mar 31

Many people talk about the AIG bonuses which in my opinion is not the big picture, they are not comparatively material, but anyway on the subject of ridiculous spending I wonder how much Obama's entourage cost (limos, salaries, weapons, etc.) for his trip to G20...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments