Non-Partisan (I hope) "We're Screwed" thread

[101A]

The New Year is upon us, and with it a new administration; hope, change, etc.....

However, also with us is a $1.2 TRILLION budget shortfall, BEFORE the new, massive, stimulus package is passed.

If $500B is bad, and helped get us into this mess, wtf is this gonna do to us?

What are the long-term ramifications? Is that debt largely irrelevant?

Are we simply fucked 20 ways to Christmas?

Expert and B.S. opinions accepted; try not to blame - WE ALL got us into this mess, IMO.

[nkdlunch]

don't worry. everything Obama touches turns to gold

[Winehole23]

Monetarism gone haywire.

Credit bubble. The biggest evar. Too little real wealth supporting too much debt. Too many sideways bets in the risk pool. Private risk transferred wholesale to the USG in shady all you can eat Fed pawnshops. National default and painful credit contraction, in the picture.

A new treasurys bubble, again the biggest evar, will loom even larger once, God willing, deflation is safely behind us and the securities start to reach maturity. In the meantime, if the world loses confidence in us completely, the US Treasury will face a redemption tsunami.

How will we ever pay?

[ChumpDumper]

Everyone is spending now. The trick in the future will be to know when to stop.

[balli]

I'm too lazy to bold the key points. But if you're inclined, it's a decent read.
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?pagewanted=all

The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

[Winehole23]

Everyone is spending now. The trick in the future will be to know when to stop.They won't know. It'll be an educated guess at best.

The timing is crucial. If they don't get it somewhere close to right, the results are either recession or hyperinflation.

[SnakeBoy]

Everyone is spending now.

Wishfull thinking IMO. I think (hope) that there has been a change in the mindset of americans and they will be more financially responsible instead of leveraging their futures just to have fun buying "stuff" they don't need. The country will be better for it in the long run. That is, if the government (both parties) doesn't bankrupt the country trying to get us to continue to shop till you drop.




U.S. Stocks Drop on Retail Forecasts; Wal-Mart, Limited Slump

By Lynn Thomasson

Jan. 8 (Bloomberg) -- U.S. stocks slid for a second day after retailers from Wal-Mart Stores Inc. to Limited Brands Inc. said profit will trail forecasts as the recession limited holiday spending and sent continuing jobless claims to a 26-year high.

Wal-Mart tumbled as much as 9.4 percent, the most in a year. Limited and Gap Inc. slid more than 5 percent as weakening earnings outlooks at the clothing chains spurred concern that President-elect Barack Obama’s $775 billion spending plan won’t prevent the economy from shrinking this year.Benchmark indexes pared losses as Tesoro Corp. led energy shares higher and banks rebounded on Citigroup Inc.’s agreement with three U.S. senators to help millions of homeowners keep their houses.

The Standard & Poor’s 500 Index fell 0.4 percent to 902.8 at 3:17 p.m. in New York and is little changed in 2009. The Dow Jones Industrial Average declined 89.12 points, or 1 percent, to 8,680.58. After falling more than 50 percent from its November record, the VIX, which measures the cost of using options as insurance against declines in the S&P 500, was little changed after climbing 13 percent yesterday.

“Things look really, really bleak right now,” said Tom Wirth, senior investment officer at Chemung Canal Trust Co. in Elmira, New York, which manages $1.4 billion. “We knew the fourth quarter was absolutely horrid and now we’re getting confirmation of that. Between now and mid-spring, I think we’re going to see the market in flux and not making much progress.”

Earnings Slump

Stocks fell on three of four days this week as the recession forced the biggest U.S. companies to acknowledge that forecasts made last year were too optimistic. The five-quarter slump in profits at S&P 500 companies is projected to last two full years before a rebound in the second half of 2009, according to analyst estimates compiled by Bloomberg.

The S&P 500 has slumped 39 percent since the start of 2008 amid more than $1 trillion in credit losses and writedowns at financial firms worldwide and the first simultaneous recessions in the U.S., Europe and Japan since World War II.

Wal-Mart, whose shares climbed 18 percent last year for the best gain in the Dow, slid as much as $5.23 to $50.31 today. The retailer cut its fourth-quarter earnings forecast and said January revenue may be little changed after customers balked at discounts on flat-panel televisions, $7.50 jeans and microwave ovens for $43.
‘Disillusioning’

“Over the last 10 years, Wal-Mart has become a kind of hero, or Teflon, stock and to see it get beat up like everyone is disillusioning to investors,” said Jonathan Vyorst, senior vice president at New York-based Paradigm Capital Management Inc., which oversees about $1.3 billion.

Macy’s and Gap also lowered their earnings forecasts as the worst holiday-shopping season in 40 years squeezed retail profit margins. Macy’s fell as much as 57 cents to $10.74, while Gap lost 71 cents to $12.85.

Limited slumped 7 percent to $9.95. December sales fell 10 percent and the retailer slashed its fourth-quarter profit projection to as little as 55 cents a share from a previous range of 85 cents to $1.

Wal-Mart led a group of consumer-staples companies including tobacco producers, food companies and makers of household goods in the S&P 500 to a fourth daily slump, falling 1.5 percent collectively. The group was last year’s best performing industry in the index with an 18 percent drop.

S&P 500 retailers will likely say profits decreased 32 percent in the fourth-quarter and 20 percent in the current quarter, according to analysts polled by Bloomberg.

Profit Estimates

Earnings at S&P 500 companies have fallen for five straight quarters, matching the longest streaks of declines on record, and the slump is forecast to continue. According to estimates compiled by Bloomberg, profits probably decreased 12 percent last quarter and will drop 11 percent in the first quarter and 6.2 percent in the following three months before rebounding in the second half of the year.

Sun Microsystems Inc. sank 9.4 percent to $4.61, the most since Nov. 24. The server maker was added to Goldman Sachs’s Americas “sell” list. The brokerage also lowered its share- price projection and 2009 earnings estimate, citing a “more challenging” first half of 2009 ahead.

Concern that global stock losses will deepen remains elevated. The VIX, as the Chicago Board Option Exchange Volatility Index is known, yesterday had its biggest intraday gain since Dec. 1 and climbed as much as 2.8 percent today.

Sears Rallies

Sears Holdings Corp. surged 23 percent to $49.99 for the biggest gain since 2004. The largest U.S. department-store chain said it expects fourth-quarter earnings per share, excluding items, of $2.44 to $3.09, above the consensus estimate of $1.92.

Thinkorswim Group Inc. rallied 49 percent to $8.39. TD Ameritrade Holding Corp., the No. 3 U.S. online brokerage by assets, agreed to acquire the online brokerage and investor education company in a cash and stock deal valued at about $606 million. The offer values Thinkorswim at $8.71 a share, 54 percent higher than yesterday’s close.

Stocks opened lower after the total number of people receiving unemployment benefits rose to 4.6 million, the most since 1982, the Labor Department said, even as initial jobless claims unexpectedly fell by 24,000 to 467,000 in the week that ended Jan. 3. A report tomorrow will show the U.S. lost jobs for a 12th straight month in December, economists forecast.

The jobless-claims report came before Obama delivered a speech on the economic outlook in a bid to build support for his stimulus plan. Obama warned that the U.S. risks sinking deeper into an economic crisis without an infusion of government spending and urged Congress to act quickly on a stimulus package.

‘Potential and Promise’

In a speech directed at lawmakers and the public, Obama drew a portrait of a nation where family income is falling, the unemployment rate is rising and a “generation of potential and promise” may be lost without federal action.

The Bank of England cut its benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession. The bank rate was reduced a half-point to 1.5 percent.

The S&P 500 yesterday slid the most since Dec. 1, erasing most of its 2009 gain, as a private report showed employers cut more jobs than estimated in December and companies from Alcoa Inc. to Intel Corp. spurred concern the profit outlook is worsening. The gauge has rebounded more than 20 percent since Nov. 20 on optimism the recession will end this year after the Federal Reserve cut interest rates to as low as zero and Obama proposed the largest infrastructure investment since the 1950s.

The difference between what the U.S. government and banks pay to borrow for three months, the so-called TED Spread, is still about three times higher than before credit markets started freezing in August 2007, according to data compiled by Bloomberg.

[Winehole23]

Wishfull thinking IMO.The change in mindset will be real if it isn't already, but I think ChumpDumper meant everybody as in all the governments, treasuries and central banks spending like there's no tomorrow.

Let that sink in for a minute....



Obama says to expect the pattern to continue for " years to come."


IMO the attempt to shirk fate by paying out the ass, will fail, and we'll only be that much poorer for it.

And if we somehow cheat fate and avoid a depression, we'll have only kicked the can down the road a bit, and primed the system for an even more spectacular failure later on.

[DarrinS]

I think one huge problem is that millions of people lost 1/3 or more of their 401k in a 3 or 4 month period, and then many of them pulled all of their money out of stock funds and put it in a less risky fund. It's a crisis of confidence. When will people think it's safe to go "all in" again?

[DarkReign]

Are we simply fucked 20 ways to Christmas?

Totally.

IMO, there is no advice. You are either rich now and will remain so no matter what, or youre not rich and frankly, never will be. Ever. You'll be lucky to even keep your current standard of living working an extra job that probably doesnt exist.

Some of this will sound repeated because...well, it is. I am far away from having even medium-level understanding of economics and everything that goes into the all encompassing phrase "US economy". So, take it for what its worth and know that I am being vague on purpose (my mistakes would haunt my message).

Our government has been bought and paid for by the banking industry. Our way of life, our constitution, our entire way of life has been quite literally indebted to money-makers.

These people who create wealth from nothing except the trade of paper. They make nothing, they produce nothing, their importance overblown and their influence disproportionate. We as a society envy the "wall street banker" or the "stock broker" or whatever profession deals in wealth, the management of it and the toys that go along with such an occupation.

We as a society, envy it so much, our own government decided they want to play the game, too. Only difference is, as we all know, governments dont lose. Governments are no more an entity than a corporation is. Yet our laws allow them to be treated as entities (wasnt so for a looooong time). Therefore our government, whose sole source of income is us, makes bets with our money (via third party, of course) and successfully loaded the dice so they come up 7s every time.

But one has to ask, where are the "winnings" coming from? Right?

When our government federally insures areas of private business (banking establishments which include most loans of any sort) and then encourages its only source of income (us) to invest in these special businesses full-well knowing that our investment (our debt to them) is considered an asset which is then traded amongst themselves at profit, what happens when the business model is broken (at best) or criminal (at worst)?

Who pays? Where does the money come from?

Seeing as our government no longer prints its own money, are you telling me that in order to cover the bet, our government must ask to loan itself money to prop up the same businesses which defrauded US?!

Come the fuck again?

Yet, again, where does this money come from? Since its based on nothing in reality, there is only one conclusion that can be drawn. Its value is directly correlated to the American People. That is, our money is only as valuable as our ability to pay it back (at interest) is.

Tell me you an read that with a straight face.

So our entire debt is really only owed to ourselves (a majority of it anyway, there are foreign investors that hold large amounts of debt that definitly need to be paid). Only, I dont really remember allowing our entire country to be put in the hands of people who produce and contribute nothing to our country. They contribute corporate taxes (a lot of $$), but pray tell, what is it they are selling that allows such profit to begin with?

Our assets. Our investments. Our mortgages. Our car loans.

And who are the ones who set the price for these paper stacks? Why, the very same industry! Isnt that fucking convenient?

Example:

I sell widgets for a living to other widget distributors. Widgets buy things. I get to tell people how many widgets they can have and what they can used to buy and at what rate I expect to be paid back with x number of widgets as interest. You, the buyer of widgets, then buy large investments with those widgets (house, car, college education, etc). Well, since I also sell widgets to other widget distributors, your debt is my asset. You did promise to pay back the widgets I gave you at profit, right? Well, that promise note is worth x number of widgets to other widget distributors. Who in turn use your widget-promise to buy other widget-promises from other people. This is so damn profitable for us widget distributors, there is actually a marketplace for this practiced nationwide!

/example

Something about that entire scenario is wrong. These same people make/produce/contribute nothing to our society. The only power they have is the ability to lend federally insured money. Federally Insured (ie Joe Taxpayer Insurance). Yet, they have the power to discriminate who gets what and how much? Who gives them this power?

Why, the Federal Government of course! The government is so confident in their ability to distribute widgets, theyve put all their eggs in the same basket! Isnt that grand?

They get to trade in the currency of a national promise to ourselves then have the audacity to say "Not my fault, its your bad. You guys dont pay your bills." Fuck you. If you had held onto your promise notes and stood by the promises you made to people, it would be YOU and YOU ALONE failing instead of everyone at the same time.

An interdependant system devoid of any risk or responsibility, save the lonely poor bastards who didnt have enough widgets in the beginning.

Our government sold us out, plain and simple. Purposely or irresponsibly, they sold us out. The people in government are far too concerned with re-election to worry about things like fiscal responsibility. I mean, who is going to get re-elected with talk of impending doom, right? Bad news works for the networks, not for government work.

So instead of being our "elected leadership" they decided to become our "elected yes-men". There was a time when failed leadership didnt just leave office in disgrace, they were executed to intimidate the next bastard about the price of incompetency.

As far as I am concerned, our entire government is guilty of treason. Which if I am not mistaken, is the last federal crime punishable by death in this country.

We are watching a coup before our very eyes and I dont see near enough anger in others eyes as mine. "Ho-hum, whens the next episode of Dancing with the Stars on?"

Bleeding us fucking dry and I see no angry mob at the gates of our state capitals. A shame really, I dont think there is any shred of revolutionary blood left in this country's People. Too fat, lazy and comfortable with our GPS chipped children and 600 channels of television. Fucking zombies, the lot of us.

This is one of my more incoherent posts ever. My apologies.

[Winehole23]

I think one huge problem is that millions of people lost 1/3 or more of their 401k in a 3 or 4 month period, and then many of them pulled all of their money out of stock funds and put it in a less risky fund. It's a crisis of confidence. When will people think it's safe to go "all in" again?When will animal spirits return?

Village wisdom is end of 09 at the earliest.

[Winehole23]

This is one of my more incoherent posts ever. My apologies.Vehement, yes. Incoherent, no. Your brief for outrage seems pretty lucid to me, DR.

[SnakeBoy]

but I think ChumpDumper meant everybody as in all the governments, treasuries and central banks spending like there's no tomorrow.


Ah, well if that is what he was referring to then I still think it is wishful thinking. I agree with kick the can down the road a bit analysis. A depression is inevitable and required IMO.

The problem is that we've abandoned manufacturing and production in favor of the belief that the ability of americans to consume is unlimited. The global economy is built upon that premise as well. This shows that this premise is as flawed as the premise that housing prices can only increase.

http://yellowroad.wallstreetexaminer.com/blogs/files/2008/07/save_personal.gif

[SnakeBoy]

On an interesting side note. We are entering a depression while at the same time there is a brutal oppressive idealogy growing that most in the world seem unwilling to confront. What's that saying about history?

[Winehole23]

Ah, well if that is what he was referring to then I still think it is wishful thinking. I agree with kick the can down the road a bit analysis. A depression is inevitable and required IMO.

The problem is that we've abandoned manufacturing and production in favor of the belief that the ability of americans to consume is unlimited. The global economy is built upon that premise as well. This shows that this premise is as flawed as the premise that housing prices can only increase.

http://yellowroad.wallstreetexaminer.com/blogs/files/2008/07/save_personal.gifThe consumer will soon be tapped out, but this doesn't mean that banks and government will have nothing to spend.

Where do you think money comes from?

[SnakeBoy]

Where do you think money comes from?

Not sure what your getting at. I assume your saying the fed will simply print more. Since the value money is backed by the economy now and consumer spending is around 3/4 gdp that becomes a problem.

Here's a nice pre meltdown article on how screwed we are.

http://www.dailyreckoning.com/rpt/USConsumerSpending.html

[DarkReign]

These people who create wealth from nothing except the trade of paper. They make nothing, they produce nothing, their importance overblown and their influence disproportionate.

http://www.dailyreckoning.com/rpt/RCH3.JPG

I am not usually one to quote myself, but reading SnakeBoy's link, I found this neat little graph.

What is it they are trading, exactly? Value?

Something as intangible as value?!

[SnakeBoy]

but reading SnakeBoy's link

If you liked that one, here's todays entry on the daily reckoning. Tomorrow, how to save yourself.


Poor Adolf Merckle. The tycoon must have been down to his last billion or so. He was "broken" by the credit crunch, says the Financial Times. He wrote a farewell note and stepped in front of the 7:38 Express on its way to Munich.

As far as we know, the worldwide meltdown has claimed as much as $30 trillion dollars, according to one figure we saw, but relatively few lives. That makes it a comedy…not a tragedy.

Too bad for Herr Merckle. He didn't appreciate the humor of it.

Yesterday was a bad day for investors. They are all expecting a recovery. Instead, the patient got sicker…the Dow fell 245 points. Oil slipped down nearly $6. And gold? Et tu AU? Yes, gold fell too - down $24.

So, here is a good place to take up our guesswork about what is going on in the world's markets and what we should expect.

It all seemed too simple, a few days ago. It was. Too simple, that is.

The world's markets have begun a major correction. The world's governments - led by the United States - are determined to stop it. They want people to spend like there was no tomorrow. But people are acting like every day is tomorrow. Instead of spending, they are beginning to save.

Then comes news that vacancies in malls are at a 10-year high. Malls are places where consumers buy stuff. The days of stuff-lust are over. Ergo, less retail space is needed.

But if they buy less stuff, fewer people are needed to sell stuff…to make stuff…to move stuff…to count stuff and so forth.

"Pink slips pile higher," reports the Associated Press. Employers cut nearly 700,000 jobs in December. The total for last year, when the final counts are made, is expected to be about 2.4 million. But the job losses have barely begun. It was only at the end of 2008 that most businesses realized they were in trouble. The real job losses will come this year.

The unemployment rate in November was about 6.7%. In December, it was said to be around 7%. If you put into the number all the people who have given up looking for work, the figure would go to about 12%. But even that will seem like full employment after the tsunami of job cuts hits this year.

Since so many Americans live without substantial reserves - savings - the pressure on Misters Obama and Bernanke to 'do something' will increase. What can they do? Spend money.

"US deficit set for post-war record," reports the Financial Times. Reports today tell us that Obama says deficits will go "over $1 trillion." One estimate put it at $1.2 trillion for '09. We've seen others at $1.5 and even $2 trillion.

What they are trying to do is two things: replace private spending with public spending…and cause consumer prices to rise.

But replacing private spending with public spending, alone, is a task that would have staggered Hercules. In the past, the U.S. consumer could be counted on as the planet's chump of last resort. He didn't have any money. Still, when an economy slumped, he nevertheless kept spending - buying on credit. Gradually, the whole world economy came to rely on him. But now he's stopped borrowing; in the last 12 months net consumer lending has collapsed. With neither more income nor more credit he has had to stop buying. And without buying from the U.S. consumer, the world economy is dying in a ditch.

Of course, U.S. rescue teams are on the scene. But if the U.S. government is going to save American households, it practically has to save every gadget maker in China…every call center in India…every rubber plantation in Malaysia…all the wine makers in Bordeaux - all the industries and jobs that relied on U.S. consumers. Otherwise, prices fall.

Even the United States can't afford a bailout of this magnitude. Trillion-dollar deficits won't be enough. Martin Wolf, in the FT, quotes a report from Levy Economics - "even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years."

With rising unemployment the pressure to 'do something' grows. And the feds redouble their efforts. And this is where we find the basic logic our forecast:

In the fight against the global financial illness, the feds can't cure the patient. All they can do is to deliver larger and larger doses of their quack medicine - until the patient dies.

*** A few days ago, this seemed so obvious, we worried that it was too obvious. Mr. Market doesn't reward people for doing the too-obvious thing. He sets them up. Then he destroys them. He always seems to find a way.

The Barron's survey told us that Wall Street's strategists all believe stocks will go up in '09. The only question is how much. The bulls think they'll go up and keep going up. The bears think they'll go up…and then go back down again.

And currently, there's more money on the sidelines - waiting - than there is in the game. U.S. money market funds now exceed the amount in equity funds, for the first time in 15 years. According to the dominant view, this money is just itching to get back in the game and score a major victory. Battered in '08…it wants to get even in '09. This attitude, we hasten to point out, is not what you find at the end of a bear market…it's what you find at the beginning of one. People still think that they will make money in stocks - it's just a matter of time! And how much!

Will Mr. Market give these people what they expect? Or what they deserve?

We don't know, but we see two possibilities:

The first is that there is no significant rally. Instead of going up, a torrent of bad financial news washes stocks further downstream in the first quarter. There, they will stay for the next 5, 10, or 15 years…until they give up all hope of ever making any money in the stock market.

The second possibility is that stocks do rally…strongly enough that that money now on the sidelines comes back in - just in time to get wiped out by the next major leg downwards.

*** If we were in an earlier phase of the imperial cycle - such as we were in 1920 - we would ride out the bust…liquidate the mistakes…and bounce back stronger than ever.

But this is 2009…not 1920. The empire is now old and tired. It has been burdened with so many fixes, rules, privileges and safety nets it cannot compete in many key industries. It is also heavily in debt…and running a trade deficit and a public deficit that sink it further into debt each day.

At this stage, Americans do not boldly face the future…they want protection from it. And so the feds flex every flabby muscle trying to hold it back. Of course, no one can stop the future. Birds gotta fly. Fish gotta swim. And the future's gotta happen.

All the feds can do is to make it happen in a different way. Almost certainly a worse way. More tomorrow…as we keep thinking…

*** We also promised, yesterday, to tell you how you could escape… Americans already have a huge burden of private debt. Now, their government is adding an even huger new burden of public debt. How are you going to get out of this stalag of debt? What will happen to it? What effect will it have on your investments?

Hmmm….our answers will have to wait another 24 hours…we're out of time for today.

*** This year marks the 50th anniversary of Cuba's revolution. How things change! As a note in the Financial Times reminds us, a half century ago a young lawyer took charge in Havana while an old general ruled in Washington. Now a young lawyer takes charge in Washington while an old general tries to hold on in Havana.

Until tomorrow,

Bill Bonner
The Daily Reckoning

[SnakeBoy]

I'm suprised so few have commented on this topic. Maybe it's too depressing to talk about or maybe people just want to be optimistic.

Here's a couple of fun graphs to compare.

First personal savings from 1930...

http://farm4.static.flickr.com/3320/3181634822_e83b33fd41_o.jpg

And the size of the US financial industry...

http://farm4.static.flickr.com/3329/3180800031_716621ea22_o.jpg