An argument against a near term collapse

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An argument against a near term collapse

There is plenty of discussion on this site regarding a impending collapse of the economy, also labeled as when "TSHTF". Here, i will attempt to provide some facts that argue against this type of a short term scenario playing out.

Residential mortgages

Plenty of discussion revolves around the impending Alt A and Option ARM resets. These loans will be a problem for the states that are exotic loan heavy but it is important to note that a majority of these loans are originated in CA, AZ, FL, NV. As a result, these losses will be relegated to these states and to the financial institutions that hold these notes off balance sheet or on balance sheet. In addition, the entire market size of ALT A and ARM is roughly 1 trillion dollars. Assuming losses of 200 billion spread out over 5 years as different loans have later recast dates, 200b is peanuts compared to what the FED has bought. In addition, no one really knows how many of these loans have been purchased by the FED and are currently sitting on the FED balance sheet. Moreover, with fed funds at ZERO and card rates at 15-18-22-29% banks are making heaps of money, thereby healing their battered balance sheets. Also, there is also the policy of restructuring, modifying, and not foreclosing for years. Thus, expect losses on these products to be drawn out over a substantial period of time.

ALT A and ARMS will cause further pain in the bubble states but this is where most of the damage will be caused. Also, prime losses will continue to wreak havoc on the balance sheet but the pain will be spread out as long as possible to ensure the short term viability of these institutions.

Commercial real estate loans

The total market size of CRE loans is 3.7 trillion. 800b in CMBS. Assuming a default rate of 10% and a loss rate of 5%, there is a potential for 150b in losses on CRE. 150b is small considering the actions of the FED. Also, expect loan workouts, FED purchases, regulatory lax on capital requirements on these type of loans. Many small and regional banks will end up failing but this will give the big boys and opportunity to gobble up their smaller competitors. Note US Bancorp how they recently purchased CAL National after it failed this week. 150b in losses over the next 5-8 years is substantial but not enough to bring down the house.

Credit cards

 
1. 
Chase - $165.87 bil.
2. 
Bank of America - $150.82 bil.
3. 
Citi - $102.54 bil.
4. 
American Express - $78.16 bil.
5. 
Capital One - $55.46 bil.
6. 
Discover - $48.90 bil.
7.  Wells Fargo - $30.89 bil.

The seven biggest credit card issuers hold around 680billion. How many of these cards will default? If we assume even a 12% LOSS ratio then we have 81 billion in losses. This is of course if we assume that the entire loss is 12%. Again, these losses are not cataclysmic to the banking sector. In addition, realistic losses on these cards stands at 40-50 billion.

CONCLUSION

The losses coming out of these sectors will cause damage to the banking sector balance sheets, but, with accouting rule changes, ultra cheap basically free money from the fed, bailout monies left and right, expect these institutions to be around for the next several years.

 

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Re: An argument against a near term collapse

ALL those arguments are MONEY arguments...... you've left out THE most important element of the collapse, ENERGY.

I know this site is mostly about "economics", but let's not forget why we all met here......  the CRASH COURSE, and the CC is more about exponential everything, and Peak Oil.....

There is also one more aspect of modern life that at least I recognise as a problem, that doesn't get a mention in the CC.......  and that is complexity. The more complex a system is, the fore fragile it becomes. I like the analogy of a modern car......  cut one wire and the whole thing is stationary. It doesn't matter one iota that a modern car is a wonder of mankind's technological prowess, it takes very little to  make one stop.

Today, with everything pretty well governed by computers, a mere blackout  can throw a spanner in the works......  and more complex backup systems are needed to protect them. A terrorist attack totally immobilised the air traffic in the US for days.... Fuel shortages, coming in a town near you in the not too distant future will start causing chaos, and ultimately collapse. Fuel shortages = food shortages = social unrest.

Mike

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Re: An argument against a near term collapse
Damnthematrix wrote:

There is also one more aspect of modern life that at least I recognise as a problem, that doesn't get a mention in the CC.......  and that is complexity. The more complex a system is, the fore fragile it becomes. I like the analogy of a modern car......  cut one wire and the whole thing is stationary. It doesn't matter one iota that a modern car is a wonder of mankind's technological prowess, it takes very little to  make one stop.

This argument doesn't hold up. 

One cell in the human body is far more complex than any machine ever constructed.  And human beings are pretty tough.  They've survived and adapted to almost every situation imaginable and will continue to do so.

LIkewise, a modern car, although far more complex than cars half a century ago, are far more reliable and trouble free.  And a much less complex car can be stopped just as easily by cutting one wire.

I'm not saying we're not vulnerable.  To assume that vulnerability will not be compensated for, however, is unjustified. 

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Re: An argument against a near term collapse

That argument doesn't hold up. ALL cells die, along with, eventually, the body made of them.....

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Re: An argument against a near term collapse
Damnthematrix wrote:

ALL those arguments are MONEY arguments...... you've left out THE most important element of the collapse, ENERGY.

I know this site is mostly about "economics", but let's not forget why we all met here......  the CRASH COURSE, and the CC is more about exponential everything, and Peak Oil.....

There is also one more aspect of modern life that at least I recognise as a problem, that doesn't get a mention in the CC.......  and that is complexity. The more complex a system is, the fore fragile it becomes. I like the analogy of a modern car......  cut one wire and the whole thing is stationary. It doesn't matter one iota that a modern car is a wonder of mankind's technological prowess, it takes very little to  make one stop.

Today, with everything pretty well governed by computers, a mere blackout  can throw a spanner in the works......  and more complex backup systems are needed to protect them. A terrorist attack totally immobilised the air traffic in the US for days.... Fuel shortages, coming in a town near you in the not too distant future will start causing chaos, and ultimately collapse. Fuel shortages = food shortages = social unrest.

Mike

Before we decide that we must slash our wrists over the energy predicament, consider that oil at $80 - $90 / Bbl is likely to lock the world economy in a recession for a good while. If the economy weren't in such a precarious state already this would actually be a good thing. We would be forced out of our "must grow" mode and onto some other, perhaps more sustainable, path. That might be inconvenient or even painful, but not necessarily catastrophic. To be sure, there is rich potential for catastrophe; perhaps aided by dumb economic policy decisions, but it is not chiseled in stone. It may disappoint some if doom is postponed, but I won't be among them.

Stan

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Re: An argument against a near term collapse

Either of two things can happen:

either the price of oil stay at ~$80 and supply drops off very fast,

OR

the price of oil keeps fgoing up, and production drops off less fast.....

You seem concerned about the price way more than the real problem, collapsing production/flow rates. Low production = shortages. Shortages = people not being able to go to work (because what will be available will be confiscated by the army and prioritised for farming).

 

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Re: An argument against a near term collapse

Aussie:

Thanks for taking the time to read the post and respond. I appreciate your input.

That said, i do take peak conventional oil into consideration when making longer term forecasts, such as 5-10 years from now. The above post was geared toward the next 1-3 years as many CM users are of the belief that things could fall apart within a few months. At this point it is safe to say that Lehman's collapse was a defining moment of the current economic shift. Back then, there was still some semblance of regulation, capital requirements, margin requirements, and liquidity based on the capital markets alone. Now, we have central banks watching the credit markets very closely and carefully, making sure that a default doesnt set off counterparty exposure. In addition, we have the federal reserve which has purchased 1.5 trillion in MBS junk which is now off of bank balance sheets. Systemic risk is much lower today than it was before Lehman blew up.

That said, peak oil is a problem that we will be facing within the next few years. However, the phenomenon itself must be viewed from a rational perspective. Things arent just going to stop moving because of oil supply concerns. Remember what happened in 2008 when oil peaked at 145 a barrel. Demand got crushed and supplies filled up all over the world. In the event of another supply crunch oil prices will fly and then crash as world economies will buckle under the inflationary pressure. The "right side" of the supply curve will not be as sharp as the most pessimistic peak oilers believe. Take for example what happened to oil demand after the 70's oil crisis: prices spiked and then demand plunged. Similarly, after the 2008 spike oil demand fell to a 17 million barrel a day in the US for several months. China, which is being cheerleaded as the new world engine will cool thereby curtailing demand more in the years ahead. A chart on the oildrum.com shows how chinese oil demand has grown to 9.5 million BPD whereas in 2008 it was 6.5m BPD. This is a temporary buying frenzy on the part of the chinese. That said, demand for crude will be under pressure for several years as the great debt deflation continues to unfold.

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Re: An argument against a near term collapse

 

bearmarkettrader,

You make a persuasive case that those factors alone that you cited won't cause near term collapse, but what about the other major destabilizing factors such as the government debt/spending. Wont' the factors that you cited at least provide further distress to an economy already buckling under the weight of irresponsible fiscal (mis)management. 

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Re: An argument against a near term collapse

DamtheMatrix knows his stuff:

ALL those arguments are MONEY arguments...... you've left out THE most important element of the collapse, ENERGY.

I know this site is mostly about "economics", but let's not forget why we all met here......  the CRASH COURSE, and the CC is more about exponential everything, and Peak Oil.....

There is also one more aspect of modern life that at least I recognise as a problem, that doesn't get a mention in the CC.......  and that is complexity. The more complex a system is, the fore fragile it becomes. I like the analogy of a modern car......  cut one wire and the whole thing is stationary. It doesn't matter one iota that a modern car is a wonder of mankind's technological prowess, it takes very little to  make one stop.

Today, with everything pretty well governed by computers, a mere blackout  can throw a spanner in the works......  and more complex backup systems are needed to protect them. A terrorist attack totally immobilised the air traffic in the US for days.... Fuel shortages, coming in a town near you in the not too distant future will start causing chaos, and ultimately collapse. Fuel shortages = food shortages = social unrest.

Mike

Oil is now a yoke on all future economic activity.

Your comments on complexity are also true:

Catton has taught us that any species that experiences frenzied growth on an accumulated supply of resources will overshoot the long term carrying capacity of it's environment and eventually experience collapse.

Tainter has shown us that the most directly quantifiable mechanism for that collapse in complex human societies is the diminishing marginal returns of attempts to mitigate the problems faced by that society. Ironically, problems that are made increasingly worse by those very attempts to solve them using a world view that is not appropriate to the actual situation.

Meadows, et al. have demonstrated that our current industrial society, if it remains committed to exploiting our abundant accumulation of non-renewable resources, will experience greatly diminished marginal returns on the amount of capital that must be expended to continue extracting those resources, as well as to mitigating the problems created by the frenzied growth enabled by those resources. Further, because the short term carrying capacity of our environment was so dramatically increased by the abundant accumulation of non-renewable resources the resulting overshoot will severely degrade the long term carrying capacity and the eventual collapse will reduce the population to a much lower level than might otherwise have been sustainable

.
Odum further elucidates that such cycles of frenzied growth on accumulated resources followed by collapse are found at all scales of complex systems, both living and non-living, and are repeated at regular intervals at various time scales in "pulses". In fact, complex systems emerge quite naturally around flows and accumulations of resources and self organize to fully maximize those resources, eventually dying-off when the resources are exhausted, only to begin anew after another accumulation or flow has built up. Such pulses, while they might be viewed as a disaster from a limited perspective, actually seem to increase the eMergy of the whole system as seen from a larger perspective and longer time scales.

Therefore, anyone who thinks our current drama of overshoot and collapse, with the global economy evaporating into a black hole, billions of human lives being rendered redundant, and entire ecosystems wiped off the face of the Earth, is some sort of freakish calamity that must be avoided AT ALL COSTS..., well, they are quite simply dead wrong.

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Re: An argument against a near term collapse

Earthwise:

Wont' the factors that you cited at least provide further distress to an economy already buckling under the weight of irresponsible fiscal (mis)management.

 

The above factors will add further distress to an economy buckling under the stress of too much excess debt. However, the weight of fiscal mismanagement is not as heavy as some believe it to be. In 2009 for example, US interest payments will be less than 400b due to the lowering of yields on bonds. This will allow the scam to continue for quite some time. Also, debt to gdp hasnt crossed 100% and even when it hits 120% of gdp it will still not be enough to dismantle the existing system.

One more thing. I hear lots of talk about the US trade deficit being a huge source of our ills. True, the deficit in trade causes jobs to be lost but for borrowing purposes the US imports roughly 2 trillion dollars worth a year and exports 1.3 trillion a year. Excluding energy imports the trade imbalance is not that bad at all. US imports 12 million barrels a day, price of 70 a barrel (X 365 days a year) and energy constitutes 300 billion of the trade deficit. 2 trillion - 300b for oil= 1.7- 1.3 imports = 400b trade deficit.  Lets not forget that the rest of the economy is supported by domestic factors so US dependence on cheap imports is not as perilous as some argue that it is.

Sporadic market dislocations can occur and likely will but at the end of the day Best Buy, Staples, Target, Raiload co's, AT&T, Verizon, and the majority of the S&P companies are still going to be around.

Dont forget that the US has some of the best and largest amount of food producing land in the world that China and India must covet.

 

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Re: An argument against a near term collapse

Great comments by Sadad al Husseini, former VP of oil exploration and production
for Saudi Aramco. He denies being a peakist or anything similar but then
everything he says supports serious declines ahead! Regards, Michael.

http://www.energybulletin.net/node/50584

Sadad al Husseini, former VP of oil exploration and production for Saudi Aramco
and now an industry consultant, started by saying "I am not a peak oil or flat
oil or plateau oil [person]; I think we just need to be good engineers and try
to see what's going on…It's the short term and the long term—you've got tolook
at both the recent volatility and the longer term direction…

"In the long term, and that's kind of where we probably miss the boat, we are
depleting reserves. The clock is ticking. The replacement rate has not been very
good…If you want to push production beyond say 70 or so million barrels a day,
you have to move into higher cost alternatives.

"Other sources of energy we've talked about this morning…is coal going to
displace oil? The cost of clean coal is going to almost double the cost of
electricity….Is [natural] gas going to displace oil? The top 10 gas reserves
holders have about 77% of the reported gas reserves…How realistic is it to count
on them as a future alternative to oil?...We get a little bit too facile with
our talk about alternatives and switching and so on—there's a problem with every
source of energy.

"…as you go up to say $90 a barrel, you're consuming 4.5% of the global economy
[for oil]. That in itself is a ceiling—you cannot go indefinitely into more
expensive alternatives without destroying [the] economy and therefore destroying
demand. So we do have a ceiling on prices and how much expensive alternative
fuel we can put into the market.

"…in spite of the fact that oil prices were going up, North American production
was going down…We've had a very exciting development in Brazil with the
subsalts, but on the other hand there's Venezuela coming down and the rest of
South America hardly moving. Another example: West African production is
climbing very steadily, but Nigeria is declining; in North Africa, Libya has
increased but flattened out and the others are generally flat. So the
relationship between real high prices and increased production does not hold
when you don't have the resources.

"One of the projects I do with my friends in Morgan Stanley is to track global
projects…Here are 273 non-OPEC projects, country by country, [and assuming] a
6.5% decline rate; at an 8% decline rate you need even more [projects]. Here are
the OPEC projects including Iraq, Iran, Saudi Arabia, at a 3.5% decline rate; at
a 5% decline rate means more intense production [is needed]. Combining OPEC and
non-OPEC and looking at the global replacement rate, which should be around 4.5
million barrels/day per year, assuming conservative decline numbers, you just
don't have enough projects…Even if you have a very moderate increase in demand
of about ½% per year, that shortfall becomes very substantial. I'm not saying
this is the forecast—of course a lot has to be done to avoid this—but this is
the reality as it stands today."

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Re: An argument against a near term collapse

Hi Bearmarket,

there is the greatest possibility that demand out-stripped supply in 2008. The trade markets appear to me as a game of Nintendo, becoming more and more unhinged from reality ...

 The question I like to ask myself daily so as to keep me on the straight and narrow is :-

Can I value money as energy?

I see a dislocation ...

I think that may well be where your wires are getting crossed with Mike?

I found this for you and believe it'll be an interesting read, particularly as it was written by Chris Martenson :-

http://www.peakprosperity.com/martensonreport/united-states-insolvent

[snippet]

" Prepare to be shocked.

The US is insolvent. There is simply no way for our national bills to be paid under current levels of taxation and promised benefits. Our combined federal deficits now total more than 400% of GDP.

That is the conclusion of a recent Treasury/OMB report entitled Financial Report of the United States Government that was quietly slipped out on a Friday (12/15/06), deep in the holiday season, with little fanfare.

Sometimes I wonder why the Treasury Department doesn't just pay somebody to come in at 4:30 am on Christmas morning to release the report. Additionally, I've yet to read a single account of this report in any of the major news media outlets, but that is another matter.

But, hey, I understand. A report this bad requires all the muffling it can get. "

........................

This is both chilling and unstoppable it seems :-

http://www.usdebtclock.org/

.......................

I feel Gail The Actuary absolutely nailed it back in March this year :-

http://www.theoildrum.com/node/5230

[snippet]

" Nearly all of the economic analyses we see today have as their basic premise a view that the current financial crisis is a temporary aberration. We will have a V or U shaped recovery, especially if enough stimulus is applied, and the economy will soon be back to Business as Usual.

I believe this assumption is basically incorrect. The current financial crisis is a direct result of peak oil. There may be oscillations in the economic situation, but generally, we can't expect things to get much better. In fact, there is a very distinct possibility that things may get very much worse in the next few years. "

................

It is speculative to create a thread called 'An Arguement Against A Near Term Collapse'. What would be near term enough to be 'close' in any respect?

Best,

Paul

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Re: An argument against a near term collapse

My gut reason for a near term collapse is, to use Chris' Fenway Park metaphor, that the water is lapping at our feet.... the exponential explosion is rarely felt until it is waaaaaay too late. It's only a matter of seconds before the water is over your head. Have you got the key...?

I have.....

Mike

 

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Re: An argument against a near term collapse

URLhttp://www.youtube.com/watch?v=Pmy5fivI_4U

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Re: An argument against a near term collapse

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Re: An argument against a near term collapse

 

It is speculative to create a thread called 'An Arguement Against A Near Term Collapse'. What would be near term enough to be 'close' in any respect?

By near term i mean within the next two years. Basically by 4th Qtr 2011, based on the above data, it appears farfetched that the US monetary and banking system will "blow up".

With regards to the US being insolvent, it is insolvent from a unfunded liabilities basis but not from a current basis. Recently, social security payments were not increased because of the low CPI numbers. This gives a guide for the future in that the government is going to lowball all the people depending on uncle sam. People are going to get far less than they are expecting to. The British Empire also lost its world currency status a long time ago but they are still around today. They did pretty well for themselves a good 60 years after losing their reserve currency status. Just because the US is reckless with its money today doesnt mean it will be forever. At one point the money printing will stop whether or not the currency collapses. And even if it does they will start with a new currency just like Germany did and look at them today. Besides, US has the nuclear arsenal and they will use it if necessary. Not that I support the use of the bomb just stating the facts. When Rome owed money to Carthage the latter was wiped out as was the liability.

 

 

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Re: An argument against a near term collapse

bearmarkettrader,

Your arguments are well reasoned, persuasive and engender lively discussion which makes for a great thread. Keep it up! I'll be back to challenge your premise (after I do some homework!)

Thanks.

 

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Re: An argument against a near term collapse

Thanks for the compliment! You know, im basically trying to form a balanced mental, rational and emotional approach to the difficult times that are coming. At first glance, looking at all these facts, the emotional side of our brains make us think that its all going down. Perhaps this is caused by the infusion of information. Before, most of us believed that america was wealthy and we were trying to make our own piece out of the large wealth pie. Now, after learning more about the truth, we see that the country isnt nearly as wealthy as was first assumed. But will this place called america just collapse? Will the outstanding debt, impending inflation and energy supply constraints cause this nation to implode into a third world country within a few short years? As one who doesnt have denial as a personality trait this scenario can happen to any nation. However, in modern times its been a long time since this has happened. Assyria, Babylon, Carthage were wiped out quickly. However, Rome, Athens, London, Berlin, yes even Berlin that was bombed to dust is back and stronger then ever.  Even Moscow which was the captial city of the old USSR is still around and things are pretty good even though the USSR suddenly collapsed.

Here is basically where i stand: stocks will get pummeled, the currency will lose alot of its value, the nation as a whole will become much poorer, violence and social unrest will grow, but at the end of the day the US will be a power to be reckoned with for at least another century.

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Re: An argument against a near term collapse

"The four largest U.S. banks by assets -- Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. -- have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, before Lehman's collapse, according to the companies' third-quarter reports. The amount equals 21 percent of the banks' total assets, up from 15 percent."

"In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings"

Read more at: http://www.huffingtonpost.com/2009/11/02/citigroup-bank-of-america_n_341949.html

http://www.huffingtonpost.com/2009/11/02/citigroup-bank-of-america_n_341949.html

Looks like the big boys are sitting pretty with trillions in liquidity.

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Re: An argument against a near term collapse

bearmarkettrader,

I'm not sure whether I agree or disagree with your assertion but since you hung the pinata out there, far be it from me to pass up a chance to take a whack at it.  But first, for the purposes of this dicussion, how should we define "collapse"?  For many of the 9.8% of the unemployed (really 20%) or the foreclosed,  it's already collapsed.  "Near term" has been defined:

By near term i mean within the next two years. Basically by 4th Qtr 2011, based on the above data, it appears farfetched that the US monetary and banking system will "blow up".

 If we find that:

stocks will get pummeled, the currency will lose alot of its value, the nation as a whole will become much poorer, violence and social unrest will grow

should we not view that as a collapse?  (Leaving aside for the moment:)

at the end of the day the US will be a power to be reckoned with for at least another century.

If:

   ~Stocks get pummeled. If the Dow retests the March lows of 6500, and doesn't bounce,                                                                                                 

   ~Currency loses alot of it's value. If the dollar breaks, what, say 70? Is that alot?

   ~The nation as  a whole becomes much poorer.  If house values decline below Case-Shiller index, pensions get further decimated (are there any left?), unemployment goes to 20% or even 25%, foreclosures double, states like California default, cities like Los Angeles and New York default

   ~Violence and social unrest grows

 doesn't that concede the point? Or should we put a significant drop of GDP, failure of the FDIC, loss of dollar reserve currency status, as part the equation?

If the discussion is narrowly limited to just the finance sector, then one could argue it has already collapsed, but was "reanimated" at it's death by the infusion of trillions from the Fed.

As to the notion that the banking system is now stabilized because "the big boys are sitting pretty with trillions in liquidity", where did this liquidity come from? Wasn't it just about a year ago that Paulson, Bush et al bailed them all out? If that's someone elses money that's not exactly sitting pretty.

 

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Re: An argument against a near term collapse

I am normally a pretty optimistic guy, not typically taken in by apocalyptic scenarios, sometimes even displaying a foolhardiness usually found in those much younger than me. When I became concerned about the economic conditions of our country, it took considerable compelling information to move me out of my complacency. As such, it will take a significant amount of compelling info to calm the waters once again. On this thread some disquieting facts about our condition have been put into a context that would seem to diminish the threat posed.

However, there is just so much more out there unfortunately. I've heard of the following problems before but this report brought them up anew.

 http://www.financialsense.com/fsu/editorials/2009/1103.html

Some highlights:

A combination of failed financial regulation, endemic corruption and computerized fraud have synergized to create a very fragile financial system. A system that is so incredibly huge, so incredibly un-transparent and so very unstable, that it currently still teeters on the brink of a greater collapse.

Many comparisons have been made to past crises and prognosticators argue whether we will see deflation or inflation, but its very possible that such arguments are invalid for three main reasons that predominate in markets today more than at any time in the past; these being mass, velocity and interconnectivity. Not only are the size of the debt/derivative/fraud problems so utterly underestimated and so much larger than at any other time in our history, but also modern day computer-driven trading means that should a crash sequence be initiated, subsequent price action declines will manifest very rapidly indeed. Combine this with the fact that global markets are now so interconnected and you have the recipe for the mother of all crashes.

The US is now saddled with a bloated and weakened financial system riddled throughout with a huge mass of unstable and largely unknown debts, awaiting any number of possible activatory triggers. I put it to the reader that the majority of market pundits do not fully comprehend either this current weakness of the system OR this incredible size and interconnectedness of toxic debt and fraudulent shares. Moreover, they underestimate the total speed with which such a system is now capable of collapsing should the appropriate trigger arise.

Derivatives As A Collapse Catalyst
Much has been written about derivatives however Buffet’s original and most fitting 2002 analogy is really all one needs to know – that they are indeed “financial weapons of mass destruction”.

....we have now seen this market balloon into a $592 trillion monster (as at end 2008, down 13.4% from 2007). Some commentators still insist the notional value is in excess of one quadrillion dollars.

So here we sit ten years on, with a whole web of OTCD contracts, conservatively valued at an official $592 trillion, woven intricately throughout a global banking system that is, at best woefully under-funded, and at worst insolvent.

Buffet’s nuclear analogy is totally apt as a failure of a significant counterparty will set off a chain reaction of further counterparty blowups. The will not be a set linearly collapsing dominoes where one brings down another then another in orderly sequence. This will be a exponential fission reaction where one sets off two, then four then eight, then sixteen, etc. Thus, in an already unstable system, well disseminated derivatives will act as the catalyst that speeds up the collapse reaction.

Kinda scary, huh?

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