28-Feb-11 News - Peripheral stock markets continue to plunge

[John]

28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center

Turkish businessmen experience xenophobia in Morocco

** 28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center
** http://www.generationaldynamics.com/cgi ... 28#e110228

Contents:
"Peripheral stock markets continue to plunge, pressuring the center"
"Additional notes"
Turkish businessmen experience xenophobia in Morocco
Food prices surge in India while food rots in storage
Foreign reporters at rally assaulted by China government thugs
Kids targeted by iPhone and iPad scams
Ten things Americans waste the most money on

[vincecate]

In 2007, the Bank of International Settlements was reporting that there were over one quadrillion dollars nominal value (that's quadrillion with a "Q") of synthetic credit derivatives in portfolios around the world. That figure included about $60 trillion in credit default swaps, and about $500 trillion in interest rate swaps.

These synthetic securities are not often thought of as "money," but they were at the heart of the credit bubble, since they were used as collateral or in trade for purchases of stock and other assets. During the credit bubble, these were the reason that there was more money in the world each day than there was the day before.

That's when the credit crunch began, and the "deleveraging" process began in financial institutions around the world. Today, the above figures have been approximately cut in half, meaning that there's about $500 trillion less in the world today.

John, first let me say that as always I look forward to reading your articles and appreciate all the work you do. I agree with most everything you are saying, but of course those are not the parts I post about. In today's pieces I fully agree that the US has been sucking resources out of the rest of the world. I think they do this by printing up pieces of paper with pictures of dead men on them and, amazingly, trading these for real things from the rest of the world.

Next comes the "but".

I think it is more accurate to so say "notional value" than "nominal value" when talking about those $500 trillion type numbers. Let me illustrate "notional value". Lets say I buy a call option on SLV, currently at $32.50, with a strike price of $44 in Jan 2013 for $2.50. Imagine I am wrong (it won't happen but for this hypothetical ) and SLV does not change and my option expires worthless. The "notional value" is $32.50. But nobody created $32.50 and nobody lost $32.50. Even my $2.50 is not lost. The guy on the other side of my trade would have it in his pocket.

Derivatives are a very powerful way for Wall Street to scam money off of people who don't understand or who manage money and have been bribed. As Buffet said, they are "Weapons of mass financial destruction". As you say in today's article, it is just amazing that they have not locked up a bunch of people. I am sure some managers of pension funds took bribes and then invested pension money in something where Wall Street firms won big and employees got big bonuses. I am sure there are all kinds of people who should be locked up for fraud. But derivatives do not make new money or destroy money. For every loser there is a matching winner. Derivatives are not the heart of the problem.

The heart of this, and past banking crisis, comes down to two things. First, the creation of money by the central bank and how they muck with the amounts and interest rates. The other key problem is how banks loan money out for years against demand deposits that customers can take out at any time. Since the definition of money counts demand deposits and cash, when a bank takes in cash as a demand deposit and loans it out for 20 years what we count as "money" goes up. First we just had the cash but after the cash goes through the bank we count what is listed as in the demand deposit account and also the cash that the guy who got the loan now has. So in this sense "banks create money". This method runs into trouble if too many of the banks customers demand their money at the same time. It happens again and again throughout banking history. The only sane banking would be for the bank to first sell 20 year bonds to raise money and then put the money out in 20 year loans. If the law required that money for long term loans came from sales of similar duration bonds, banks would not have any power to "make money" and the money supply would be much more stable. The deflation risk comes from bank made money going away. Using demand deposits for long term loans is just not sane, but we don't have a sane financial system.

[Guest]

Vince, everything that come out of this QE game is a liability. The Fed is actually doing the reverse of what people think it is doing. If they are buying the assets of banks, the banks still owe the money to their customers and bond holders. If they are creating new deposits, they have acquired the assets represented by the bonds and the money is still a liability of the banks. All this is doing is allowing the banks to pretend they have money to spend. The bald man with the grey beard is an idiot.

As far as most countries outside the US? Europe would have already totally imploded if not for the Fed feeding funds. China? Everyones new super man is printing money like the Fed on steroids. It is the biggest bubble in history and it is driving demand for commodities around the world. What happens when China is forced to quit building twice as much capacity as they could possibly absorb? Do you actually think the people in China have been sleeping under the open skies all these years? You think they can pay Chinese $5000 to $10,000 a year and move them into what equates to middle class housing in the US? Even when the US was a paragon of strength, it couldn't have pulled off what it appears most people seem to believe China is doing. 60% of the Chinese economy is going to suddenly cease.

As far as what John wrote? I won't write what goes through my mind as to what should be done to the heads of the US banks. It would fall under the term, cruel and unusual punishment and would involve objects like machetes, spears, tall buildings and long ropes. Maybe a little fire as well. They never even changed the rules and act as if this problem simply fell out of the air. Nihilism is exactly what it is, making up the rules as they go along and throwing out all the good sense developed from the past. They even dug up Bernanke, with his nonsense about what caused the Great Depression. Of course, what caused the Great Depression is exactly what Bennie is doing.

[vincecate]

Vince, everything that come out of this QE game is a liability. The Fed is actually doing the reverse of what people think it is doing. If they are buying the assets of banks, the banks still owe the money to their customers and bond holders. If they are creating new deposits, they have acquired the assets represented by the bonds and the money is still a liability of the banks. All this is doing is allowing the banks to pretend they have money to spend. The bald man with the grey beard is an idiot.

The Fed bought up "toxic assets" for silly high prices with money they created out of thin air to prop up the banks. The banks were paid with "real money", as real as any US money anyway. Sure the Fed bought a liability, but it was a bad one the banks were very happy to get rid of. The Fed does not really worry about "making profits" because if you can charge interest on money you make out of thin air, profits are easy to come by. You can do all kinds of foolish things and still come out on top. Also, the Fed has to give its profits to the Treasury anyway, so profits don't help the Fed.

I think Bernanke is a tragic figure, just like other central bankers who fell into the hyperinflation trap. Not exactly an idiot, but history may record him as such.

[Frank Baynes]

This is a great article.

My only criticism would be that your view of the baby boomer does not seem very realistic. (Incidently, with all due respect, it would be interesting to know whether you are a baby boomer.)

The baby boomers have in effect used their parents, their own, and their children's resources. The mirage of a lifestyle that the baby boomers are used to and feel entitled to (which is based on decades of taking more out of society than they contribute) can only exist and continue, if the ponzi scheme is maintained.

The main perpetrators of the financial fraud we have seen and continue to see are baby boomers. AIG, Madoff, etc.; there are no generation xers pulling the strings here.

[jdcpapa]

This is a great article.

The baby boomers have in effect used their parents, their own, and their children's resources. The mirage of a lifestyle that the baby boomers are used to and feel entitled to (which is based on decades of taking more out of society than they contribute) can only exist and continue, if the ponzi scheme is maintained.

The main perpetrators of the financial fraud we have seen and continue to see are baby boomers. AIG, Madoff, etc.; there are no generation xers pulling the strings here.

Frank, I am a "baby boomer" and I am a testament to the fact that your generalization is completely false. In fact, I do not know where you get the support for your claim, but I would appreciate it if you would post it.

[Frank Baynes]

Frank, I am a "baby boomer" and I am a testament to the fact that your generalization is completely false. In fact, I do not know where you get the support for your claim, but I would appreciate it if you would post it.

Sure, and by the way, I am not accusing you personally, but I am just citing the fact. There are many financially responsible baby boomers, but I am looking at this from a generational point of view. As you can easily see below (or frankly if you look at numbers anywhere else), the financially responsible (i.e. with their wallet and their vote responsible) baby boomers have not been the norm.

I am a baby boomer, too. I am born in 1951 and have been watching this nightmare accumulate wide-awake since the 1980s. I have been saying what I am saying now for decades, and still nobody wants to hear it. It is our generation that has it upside down, and we ill pay for it ourselves, along with all other generations. Our generation's day of reckoning is coming and it will not go according to plan, i.e. that it will be our children's and grandchildren's problem. It will shortly be our own problem and it will manifest itself in a sudden fall in our own generation's standard of living, precipitated by the fact that we will have close to no retirement income. Certainly not from the government, but most likely not from private retirement money sources either.

As a reader of the Generational Dynamics blog, you will easily see what I mean.

Alright, enough theory, now some numbers:

For illustration purposes, Baby Boomers = born between 1945 and 1960, start playing a significant role in consumption and society around 1970 and start phasing out around 2010. The following numbers are in 2010 dollars, i.e. AFTER taking inflation into account:

Federal debt per citizen (excluding off-balance sheet debt, i.e. excluding unfunded liabilities) in 2010 dollars:
1970 $10,610
2010 $46,994
An increase of public REAL indebtedness by more than 450%.
Also, note that before 1970 peace-time deficits were very rare. Since 1970, there have been only about 4 balanced budgets, all during the internet boom.

Credit market household debt per citizen in 2010 dollars:
1970 $12,262
2010 $43,925
An increase of private REAL indebtedness by about 360%.

Numbers are from the St Louis Fed, Census, and the Fed Board.

I have not even included unfunded liabilities because they are completely off the charts. The benefits that we gave to ourselves without coming up with the funding. But let's leave that out, it is bad enough with just the comprehensible part of the numbers.

Who benefited from that? Who spend more than he/she was earning? Who will pay that back?

Mathematically, it could never work, but the ride was fun. However, everybody else will pay, and us, too. What we got from our parents was a solid foundation and a quite healthy financial situation. What we leave to our children is pure disaster. Shame on us. And even now we don't want to change our ways. We want our self-approved ponzi packages, and do not care about any other generation and how they can possibly finance this, even more so after we leave them with so much debt already. Debt that was created by the part of our consumption that we actually did not pay for and put on the "credit card".

For a quick read, I refer you to these charts: http://www.scribd.com/doc/45835558/Econ ... April-2010.

So from a generational point of view:

- post-war generation (our parents): saved more than they consumed, left us savings and low level of indebtedness
- baby boomers (us, the ponzi generation): consumed more than we saved, ran indebtedness up fourfold (not counting "entitlements")!
- generation x and thereafter: forced to save more than they consume, left wondering why they cannot have the same standard of living as their parents, must pay parents debt back and muddle through the prolonged economic crisis created by their parents with their big spending ways

I know it's hard to accept, but the facts are the facts. That's why I say, "The baby boomers have in effect used their parents, their own, and their children's resources."

[Frank Baynes]

PS: I do not expect any sudden agreement, but I would indeed appreciate your feedback.

Thanks,

-Frank

[JR]

I'm a mid-boomer (1955), and while I will more-or-less cheerfully admit the shortcomings of our generation, I'd like to observe that I've been paying into Social Security and Medicare for a long time and it seems possible that I'll get (conceivably) nothing out of it. It ain't me and my cohort that spent it. If I were to point a finger at a generation of wastrels, it would be at that generation whose big RVs proudly sported bumper stickers in the 1980's reading, "I'm spending my children's inheritance." The GI-Bill generation, the VHA generation, the people who thought a freakish abundance would last forever and that the world owed them a living, and who resented giving anything back.

[Frank Baynes]

It ain't me and my cohort that spent it.

While this is how it looks like from an individual standpoint, the overall numbers reveal the true picture, including the the implications individual level.

If our cohort (1945-1960 or so) had not increased indebtedness by at least 4 times, the standard of living for every single one of us would have been that much lower. And "that much" means a lot, lot lower.

By definition: debt change = consumption - income

I.e. if we consume more than we earn, we increase debt. It's the only way to increase debt and that's exactly what we did for the four decades where we counted (for) most. In other words, you only need (more) debt when you consumer more than you earn.

We all took it and lied to ourselves about where it came from, but the other side of the coin is now upon us.