Not too long ago, I decided to compose a blog about the elephant in the lounge room called Peak Oil. This was in response to some gentle prodding from a poet/historian/friend in Armidale, who encouraged me to blog about the political issues that I considered important, rather than just whinge about them in emails.
After such persistent goading from my friend, Dan Byrnes, I created the elephant in the lounge room blog entry, which was my first rather clumsy attempt at satire. I have since decided that it was a mistake to put it in the (now humble) PGTS blog, which is mostly a HOWTO blog, with programming tips and hints about open source software, email, spamming and spam prevention, security, data-processing and computing. For the time being I will leave the post there. But from now on I will make this blogspot my Elephant blog. And I will henceforth put any opinions about elephants in lounge rooms or for that matter in any room in this (not so humble) blogspot.
World events have recently caused us all to focus on another elephant called Peak Debt. And this blog post is mostly about the shenanigans surrounding the Debt Crunch. It's hard to believe that we have arrived at this point in our history, arguably the most serious economic catastrophe since the Great Depression. And as it unfolds, the current crisis could prove to more serious than the Depression of the previous century, because this time we have to contend with some major environmental challenges as well as economic difficulties.
I can't help reflecting on how we got here.
On September the 11th, 2001, the world was transfixed with horror and fascination as the Twin Towers of the World Trade Centre collapsed. In the week preceding this disaster, the stock market had shown signs of volatility. The tech-heavy NASDAQ appeared to have peaked and there may have been short selling by groups associated with those who planned and financed the attack.
When the market re-opened on Monday the 17th of September, the indices went into a steep dive. The Dow-Jones dipped sharply and continued heading for the basement for the next four days. By Friday it appeared to bottom out. However, over the next six months, the Enron and the Worldcom scandals gave the Dow Jones Index a good old-fashioned American sock on the jaw each time it struggled to get off the canvas.
During this time, the Bush administration showed as much creativity in their accounting as George Bush himself had displayed during his not so illustrious career in the corporate sector. Consumers and Investors were urged to do their patriotic duty and go out and "Spend For America". And to make it easier for them, Alan Greenspan, head of the Federal Reserve, helped keep interest rates at dangerously low levels. Dubious practices such as securitization, were encouraged. This new econo-babble had been coined in the previous decade to describe the shonky mechanism of shifting debt so that it no longer appeared in the "liabilities" column of a spreadsheet. In the noughties this questionable accounting practice became one of the most popular instruments employed by financial institutes to make their books look good.
To distract the general populace from such disgraceful behaviour, the Bush administration embarked on the Iraq campaign. In so doing they failed to address the real problem of militant Islamist organisations in Afghanistan and Pakistan (a problem originally created by the USA), and proceeded to empty out the Federal Reserve's coffers in a poorly planned, ill-advised, half-baked military adventure, that became very expensive. The cost was probably inflated considerably by the dodgy business associates and cronies of the administration, who benefited from lucrative contracts that were neither managed nor scrutinised.
Levels of household debt in America (and Australia) started to soar. The US was effectively broke, largely due to the incompetence and the shonky business practices of the Federal government. The debt burden was shifted to the American consumer, who willingly took up the challenge. The level of household debt measured as a ratio of GDP soared to dizzying heights, hitherto unimagined. According to most analysts it exceeded 100 percent of GDP in 2005, and has continued rising at an alarming rate ever since.
In Australia we did our share. Household debt rose to an unprecedented level. Property values increased at almost the same rate. In many Australian cities, property was doubling in value every three years. The incredible increases were fueled by low interest rates and pressure from immigration. Thanks largely to another accounting sleight of hand, public investment in education had been replaced by private investment, by loading students up with high levels of debt. Additional funds were obtained from full-fee paying students. Unlike America, Australia had the prospect of a genuine resource boom. Much of the short-fall in labour was filled by skilled migration from overseas, which when combined with state government housing policies and low interest rates fermented into a heady but toxic brew that helped push property values to their current stratospheric levels.
Despite the record rises in assets values, official figures were concocted that showed that inflation was at an all time low. This remarkable bit of creative accounting was employed on either side of the Pacific.
In America, the problems were much worse. There was no booming resource sector and not much left of the former mighty US manufacturing industry. Apart from movies (mostly remakes) some very fine animated features for children, DU munitions and software, manufacturing in the USA had withered on the vine. Infrastructure was deteriorating as assets were being "sweated". This was more econo-babble for "no maintenance", no "research and development" and no accountability. In the noughties, the new growth economies were China and India, both of whom continue spending on education, research, high-tech manufacturing and infrastructure in general. The cost savings from cheap imported manufactured goods and services from China and India were seen as an opportunity to leverage the economies of Australia and the USA with ever increasing amounts of debt.
The next human to set foot on the moon may well be Chinese. Provided, or course that the Chinese economy doesn't also have a meltdown of its own due to environment stresses.
In 2006, Alan Greenspan, mounted on his white charger, rode off into the sunset and was hailed, mostly by friends of the Bush administration, as the greatest Chairman of the Fed ever. He left behind an economy that was crippled by an unbearable burden of debt. In fact by then it had already become apparent that the US was approaching Peak Debt.
Around about this time a new specimen of econo-babble crept into the lexicon. This was the word sub-prime. A cute little euphemism employed by bankers to describe a debt that was somewhat less than than optimal. Later on of course, these little sub-prime mis-adventures would be referred to as toxic debt.
So when does debt become toxic? When there is too much of it, obviously. But more to the point it is very toxic when it has been disguised and moved out of the side of the ledger that is usually reserved for liabilities, and dressed up as an asset.
Late in the winter of 2007 (about mid-August which would be summer for Wall Street), we had the first sub-prime panic. The stock market went into free-fall and we heard for the first time about the credit-crunch. That's more econo-babble for "no more credit, because investors don't believe the bullshit figures they've been quoted." As a result we saw the first of many liquidity injections by the Fed.
Not being an economist, I have never really understood what a liquidity injection actually is. It seems to involve large figures with at least ten digits in them, and having been administered, the stock market temporarily halts its giddy downward rush. Much as I despise hypodermics, I sometimes think I could do with one of those liquidity injections myself. But it seems the Fed will only administer them to folks who have nine figure salaries.
As part of the whole package, interest rates were lowered further.
Since then it is hard to keep track of the panics and subsequent liquidity injections. Here are some of the ones that I can remember:
- In September 2007, there was a run on the UK Northern Bank. Some months later, the bank was nationalised.
- In January 2008, possibly as a result of the bad news from the UK, the Dow Jones went into what seemed to be death-dive, or so it appeared at first to the pale-faced investors clinging with white knuckles to the rail in the front seat of the roller coaster. The index lost almost 800 points in just four days trading.
- In March 2008, there was a hiatus followed by general hysteria on the stock market floors in Wall Street. Investors ran screaming for the exits with their hair on fire. The Fed responded with massive liquidity injections. The crisis eventually ended with Bear Stearns becoming part of the JP Morgan family. The transaction was concluded unceremoniously at the business end of a shotgun held not all that steadily in the trembling hands of the chairman of the Fed.
- In August 2008, two more towers were threatening to collapse. This was a fiscal collapse rather than the more life-threatening physical variety. When the two mortgage giants, Fannie and Freddy failed to respond to liquidity injections, the Fed bought them out in early September, since they couldn't find a willing (or unwilling) purchaser anywhere else.
- In mid-September 2008, Lehman Bros qualified for entry in the Guinness book of records as the largest bankruptcy filing ever. Certainly it is the largest in the history of the United States. The size of their assets was stated at 600 billion dollars. However since a lot of those assets were sub-prime the true value was probably considerably less.
- At the same time that Lehman was going down the toilet, AIG (American International Group), was threatening to do the same. By this time the Board of the Fed were probably in as great a state as panic as Wall Street investors. They offered a massive credit-line to AIG in exchange for equity. An offer that was quickly accepted.
Which brings us more or less to the present day. Rumours abound of other US financial institutions on the brink of collapse. The current chairman of the Fed, Ben Bernanke, and the Treasury secretary Hank Paulson, have warned of serious consequences if Congress doesn't immediately give them 800 billion dollars to combat toxic debt. Among these serious consequences are:
- Credit flows will freeze. As a result the ordinary American consumer will not have access to credit.
- The collapse of asset values. As a result the savings of average Americans will be eroded.
These calls have been echoed by many bankers, CEOs, politicians and media magnates.
The so called toxic debt has come about because assets are overvalued. Stocks, shares and assets in general were already over-priced when the World Trade Centre calamity triggered a massive slide in their value back in 2001. Rather than allow the market to attain a natural level of equilibrium, the Fed and a crew of Wall Street carpet-baggers connived to artificially inflate the market. This was achieved with derivatives, futures trading, margin lending, sub-prime loans, securitization, collateralization and phony patriotism (surely the last refuge of scoundrels everywhere). The artificial over-inflation of the market continued until about 2007, when the cracks began to appear.
Some of those econo-babble terms in the above sentence might seem a little obscure, so I will now try to explain what they mean. To be quite frank, I don't really understand all the details of these complicated so-called investment instruments. But I'll let you in on a little secret. Even the people who invented then don't understand them. They are all bullshit, cleverly designed to part suckers from their earnings before they have even earned them.
What Bernanke, Paulson et al want to do is prevent the market from operating as a genuine market. The serious consequences that they warn about, and revaluation of assets and possibly the temporary freezing of credit lines would be unfortunate consequences of a necessary and long overdue market correction. The average American consumer already has access to too much credit. And assets are in many cases more than one hundred percent over-valued. Since the banks have included those same inflated assets on their books and have loaned out amounts up to 125% of their (over-valued) book value, they now have a big big problem.
Since the modern economy is so complex, I still haven't been able to figure exactly what a liquidity injection is. I do know that it involves huge sums of money and I have a strong suspicion that it is very similar to PRINTING MORE MONEY. Now as I admitted, I am a systems analyst, not an economist. I am not officially qualified to comment on economies. But I do know one thing. As far as strategies for tackling economic problems go, and also in the less specific but long sad history of bad of ideas, the idea of PRINTING MORE MONEY is probably the saddest, baddest, thoroughly discredited, most dangerous and rotten idea ever.
At present, the US federal deficit is running at half a trillion dollars per year, In other words roughly half of what Bernanke and Paulson are now asking from congress. The total public debt in the US is currently estimated at ten trillion dollars.
So things are not looking good in the public sector either. Things haven't looked good in the public sector since Bush came to power.
Apart from the fact that the US Federal government don't have 800 billion dollars, even if they did, it would be the height of folly to give it to the very people who caused the problem in the first place. And in any case 800 billion, or the slightly more modest 700 billion now being discussed, would not be enough! The financial sector has already lost huge sums of money. This may turn out to be several trillions. It was all under the table and accomplished with shonky complex accounting that if not fraudulent was certainly unethical.
When some honest accountants finally get a peek at the books hidden in the bottom drawer, we will probably discover that the current financial crash is the biggest in the entire history of economics. Bigger even than the Depression last century. If these Wall Street dickheads got their grubby hands on almost a trillion dollars of taxpayers money next week, they would piss it away in a couple of weeks. Even if they managed to keep the over-inflated market pumped up for another month or two, which they probably won't, the end result would be inflation, possibly even hyper-inflation.
The excessive stupidity and greed of the Wall Street bankers and the people running the federal agencies leads me to speculate that many of them don't actually know how many zeros there are in a trillion!. During his time in office, Bush has only ever had two remedies for the economy, and these were:
- Reduce Taxes.
- Increase Spending.
Thanks to the fear and general paranoia in the USA after the 9/11 attack there was (at first) no serious challenge to this deeply flawed, contradictory policy, which if anything serves as a clear demonstration of his (Bush's) supreme stupidity and profound ignorance of basic arithmetic.
Bush has now started to lobby congress strenuously to cough up more dough, for the Bernanke/Paulson 700 billion Wall Street cash fertilisation project.
Recently in the 7:30 report, a financial expert from Wall Street was interviewed. I have forgotten his name. But he said that the money (700 Billion) was necessary and it would be "invested in America's future not wasted on health and education". As he said this, he stared directly at the camera with soft puppy-like earnest eyes, that neither wavered nor blinked!
It seems that support for "the plan" is melting away, as fearful politicians check their opinion polls. The news from the grass roots is not good.
In the latest developments, the President of the United States has been repudiated by his own party. When negotiations failed he was heard to exclaim, "This sucker is going down!". The only truthful words to have passed his lying, crooked lips in the eight years that he has held the office.
Thanks to this incompetence and greed, we have now reached Peak Debt in the American economy. They simply can not sustain any further increase in debt. There is nothing left for Americans to do but to take their medicine. And it will be very unpleasant tasting medicine indeed!
In Australia, we also have a problem with debt and over-valued assets. We also have an ex-Treasurer, Peter Costello, bobbing up on our television screens reminding us how good things were when he was Treasurer. Someone should remind him that when the principle component of "growth" is debt then things weren't really all that good. And the record levels of household debt were attained on his (Costello's) watch.
References (further reading):
- A New Kind of Bank Run Tests Old Safeguards, by Floyd Norris, The New York Times, August 2007.
- The Economic State Of The Union -- 2008", by Charles McMillion. January, 2008.
- Peak Debt!, by Ronald M. Laszewski, July 2008. There is a brief discussion of the paper here.
