Moon of Alabama Brecht quote
November 23, 2004

Economic Armageddon

One seldom sees such a sober US bashing in economic circles: Andy Xie - Asia Should Sell Treasuries Now

The US has been binging beyond its means since 1999.  In 1999 and 2000, the new economy hype sucked the rest of the world into buying US tech assets.  Asian portfolio investors now hold worthless NASDAQ stocks and European MNCs own many US tech companies that have heavy debts but weakening revenues.

After the tech burst, Mr. Greenspan cut interest rates aggressively, causing US treasury yields to fall to around 4% from 6%.  The bond market rally sucked in foreign buyers, who supported US consumption and the dollar.

As treasury yields have bottomed out, the US now wants to devalue the dollar (which would be to the cost of foreigners who hold trillions of dollars of US financial assets) to create jobs to sustain its consumption.  I see the weak dollar policy as simply another way to get foreigners to subsidize US spending.

Xie goes on asking Asia's central banks to sell their treasuries and keep the Dollars in cash. US yields would rally, the Fed would have to raise rates, inflation would raise and the over consumption via borrowing would stop. He continues:

The US should have seen a recession following the tech burst.  However, it shied from this, and has since been juggling to sustain demand growth.  When this juggling act falters, a recession will occur anyway.

Andy Xie's boss, Stephen Roach, also thinks this is inevitable: Economic `Armageddon' predicted

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, ``it struck me how extreme he was - much more, it seemed to me, than in public.''

     Roach sees a 30 percent chance of a slump soon and a 60 percent chance that ``we'll muddle through for a while and delay the eventual armageddon.''

     The chance we'll get through OK: one in 10. Maybe.

Consuming on borrowed Dollars and than to devalue the Dollar to have to pay back less is not a friendly behaviour. Asia should recognize this and follow Xie's advice.

On the hopeful side an economic Armageddon may keep some radical Christian nuts away from causing a physical one in the Middle East. At least they should have trouble to finance it. Now that would be a real positve result.

Posted by b on November 23, 2004 at 16:04 UTC | Permalink


From the island Buttonwood adds to the bashing:
The dollar’s demise

“Bush’s strong-dollar policy is, in practical terms, to maintain a pool of fools to buy it all the way down,” a fund manager was quoted by Bloomberg
The dollar’s status as the world’s reserve currency—its preferred store of value, if you will—is gradually coming to an end. And, ironically, the fact that it has become so popular in recent years will only hasten its demise.
The incentives to flee the Asian [central bank] cartel (to give it its proper name) thus increase the bigger the game becomes. Why take the risk that another central bank will leave you carrying the can? Better to get out early. Because the game is thus so unstable it will come to an end, and probably a messy one. And what will then happen to the dollar? It is hard to imagine its hegemony remaining unchallenged when so many will have lost so much. And doubly so given that America has abused the dollar’s reserve-currency role so egregiously that its finances now look more like those of a banana republic than an economic superpower.

Posted by: b | Nov 23 2004 16:56 utc | 1

Hint From Russia’s CB Boosts Euro to New Heights Against U.S. Dollar

Russia’s Interfax agency also quoted Ulyukaev as saying that Russia will boost its share of Central Bank reserves held in euros at the expenses of the dollar and that euro reserves would be increased by three to five percentage points. The official mentioned the rising importance of the European market for Russia, but the analysts see the weak dollar trend as the main reason.

Posted by: b | Nov 23 2004 17:00 utc | 2

Originally appearing in the FT:

The Dollar Is In Trouble
By Peter Bernstein

The dollar is in trouble, but it has been in trouble before. Perhaps the past holds the solution everyone seeks.

On September 22 1985, the ministers of finance and governors of the central banks of France, Germany, Japan, the UK and the US signed an accord at the Plaza Hotel in New York City. It stated that signatories "were of the view that recent shifts in fundamental economic conditions among their countries, together with policy commitments for the future, have not been reflected fully in exchange markets...In view of the present and prospective changes in the fundamentals, some further orderly appreciation of the main non-dollar currencies against the dollar is desirable. They stand ready to co-operate more closely to encourage this when to do so would be helpful."

Over the next two years, the dollar dropped by 30 per cent and America's deficit on current account began shrinking. By 1991, the current account was just about in balance. A neat job, elegantly executed.

Could we replay the Plaza Accord today? The case would be difficult to make. Aside from enormous differences in the magnitude of the economic problem, the political setting bears no resemblance to 1985. At that time, the ministers and governors who gathered at the Plaza were old pals, used to finding solutions to common problems. The western powers and Japan dominated the world, and everybody else genuflected before them. Today, the picture is far more complex.

On the economic side, the scale of the problem is daunting. The rapidly expanding US current account deficit is now more than 5 per cent of gross domestic product, as against only 2 per cent in 1985. Furthermore, the small surplus of 1991 was also the consequence of a recession in the US that curtailed the flow of imports even as exports kept rising - but the US slipped right back into the red as soon as recovery got under way. Helped by a 25 per cent appreciation in the dollar between 1991 and 2001, the current account deficit has been climbing ever since. In 1985, foreign official assets in the US were a fraction of what they are today; since the end of 2002, growth in official holdings has amounted to more than $450bn. In 1986, the price of oil dropped by 50 per cent; today, the concerns are just the opposite.

In many parts of the world, economic growth is excessively dependent on exports, which depend on a strong dollar. On the US side, the authorities welcome the willingness of exporting nations to finance America's appetite for imports, as it helps finance the federal government's bulging deficit.

But, as Herb Stein, the late economist, put it: "If something can't go on forever, it won't." Private capital inflows into the US are already shrinking. There is a point at which one or central bank or other will cry "Enough already!" and the house of cards will fall in. Indeed, China has already begun diversifying its foreign exchange reserves into other currencies and investments. Protectionist pressures are developing within the US, which - to borrow the Plaza Accord's words - "if not resisted, could lead to mutually destructive retaliation with serious damage to the world economy". At the same time, Americans are creating a setup for foreign nations to blackmail them over unpopular US policies by threatening to cease accumulating dollars, thus prompting the dreaded crisis.

There is, however, a vested interest around the world that firmly opposes "some further orderly appreciation of the main non-dollar currencies against the dollar". Many countries are hooked on exports rather than domestic demand as the engine of growth. Accumulating US government securities in such copious amounts is not exactly comfortable, but appreciation of their currencies against the dollar would be even more uncomfortable, as it would deprive them of their main economic stimulant. The important exception is China, which appears to be laying the groundwork for an eventual appreciation of the renminbi against the dollar.

Nevertheless, as Stein reminds us, the current situation cannot go on forever. The worst solution would be to yield to protectionist pressures in the US, which would immediately invite retaliation abroad. The optimal solution is a replay of the Plaza Accord - an orderly appreciation of the main non-dollar currencies against the dollar, which is a more generalised method of curtailing America's appetite for imports while spurring the development of domestic sources of growth in the rest of the world. Without such an accord, the outlook for an orderly dollar devaluation is dim.

Posted by: Pat | Nov 23 2004 19:18 utc | 3

Bush's Economic Advisor is gone

The appointment of Friedman, who served as co-chairman of Goldman Sachs with former Treasury Secretary Robert Rubin, initially sparked a backlash from conservative Republicans.

They questioned his association with centrist groups such as the Concord Coalition, which was founded to promote deficit-reduction policies.

Republicans who favor "supply-side" policies, such as low taxes and deregulation, had warned that Friedman would be more interested in balancing the budget than supporting Bush's tax-cutting stimulus package.

Friedman spent 28 years with Goldman Sachs. Just before joining the White House, he was a senior principal at the investing firm Marsh & McLennan Capital., does this mean Bush is tossing the deficit reducers overboard? Tim Adams, the person they talk about replacing him is...what? a supply sider?

Posted by: fauxreal | Nov 23 2004 19:39 utc | 4

From John Mauldin's Investor's Insight:

The Chinese Currency Conundrum

There is a growing international call for China to revalue their currency. Much of the speculation about the Chinese revaluing the Renminbi focuses on the large trade deficit they have with the United States. If they buy all the dollars from the various Chinese companies who sell to the US, giving them Chinese currency, it is inflationary and can spark a bubble, which would result in a crash, much like the Asian crisis of 1997-98.

But that's not really the case anymore. China is running a deficit with many of its other trading partners. In fact, it is now running a small negative trading balance as a nation. They are simply recycling our dollars to other countries. Further, they have been using some of their past surplus at least in part to buy euros, as their central bank's holdings of non-US assets has risen by $100 billion in the last four years. This has probably been one of the hidden factors in the euro's rise. (BCA Research)

Given that the Chinese will only act in a manner which will benefit them and at a time which they will determine, what can we guess about the timing of when they will allow their currency to float?

First, they have to allow their currency to float by 2007, assuming they will live up to the document they signed when they entered the World Trade Organization, and I assume they will. But waiting until the last minute does not make sense. They, like all other central banks, like slow and steady.

If the Japanese are truly signaling that they are willing to let the yen rise, which will mean the rest of Asia is likely to follow, I would speculate (and that is all this is) from all the sources I have read, that the Chinese will allow their currency to float in a measured way. They will initially allow the currency to float within a certain range and gradually broaden that range.

They are taking the steps they need to be taking to start such a process. We are beginning to see some verbal movement from their financial leaders as well as practical steps. Take note that this has been done after the election so as to not be seen as meddling in US politics, or worse, to seem like they were bowing to US pressure.

Who Really Controls the Dollar?

Roach is right. The dollar is going to be devalued. Whether it is in a crash or a controlled downward glide path is not in the hands of the US or the Fed. So, let the games begin. We will see if there is a coordinated movement to allow the dollar to drift down, especially in Asia. Such an effort would be a major policy shift for Asian central banks.

The irony is that it is foreign central banks that have far more interest in the value of the dollar, and far more control over it. Secretary Snow can talk all he wants about a strong dollar (and he once again did yesterday). The Fed and the Bush Administration will do nothing. They clearly want and need a lower dollar.

The Things That Go Bump in My Worry Closet

OK, the dollar is going to go lower. As I pointed out a few weeks ago, that is not the end of the world, unless you want to vacation in France. The dollar dropped over 30% and then rose in the 80's and 90's without great upheaval. So far, other than our European trips and products costing more, there has been little adjustment on the part of America. In a growing economy, rising interest rates and a falling dollar is something we can deal with.

Remember the old western movies, where the trusted scout leans over to the captain and says, "It's quiet. It's TOO quiet." This is usually just before a 1,000 Apaches come screaming over the hill. I get this eerie sense that it is too quiet.

I worry about what happens as the dollar drops and we do not have a growing economy. The Index of Leading Economic Indicators has now fallen for five straight months. Usually, but not always, that means a recession. The index fell for five months in 1995, but the conditions then and now were different. Our debt levels were nowhere near as high, interest rates and inflation were still on the demise and budget deficits were shrinking.

Oil, while likely to retreat somewhat in price, is likely to stay uncomfortably high, at least until a world recession reduces demand. It is a drag on the economy. The fact that long term interest rates have not risen much seems to suggest to me that the bond market is telling us things are weaker than we think.

As I noted last week, I do not think earnings will be anywhere close to the forecasts currently made by analysts. In fact, they have not been as good across the board as the numbers might indicate. Bill King writes:

"...the energy sector is contributing much of the increase in S&P 500 earnings y/y and the sector has a much lower PE (~13) than the S&P 500. Ergo, investors are placing a higher multiple on the index due to the energy earnings for which they have little enthusiasm.

"As usual, an examination of the details shows the situation is even more dramatic. The energy production sector and the energy equipment sector produced $5.95B of the $13.03819B increase in earnings for the S&P 500 in Q3 y/y. S&P earnings growth is 11.9% y/y. Ex-energy earnings the growth is 6.45%.

"Inflation impacts S&P earnings. Metals contributed $1.486B and Tobacco $3.120B (inelastic demand, assume little unit growth; it was -$837B Q3 '03, so the change is ~$4B y/y) of the y/y earnings increase. Add these to energy and we get $10.556B. Ex-these sectors, S&P earnings growth becomes 2.26% y/y.

"Let's look at two more inelastic demand sectors - healthcare and pharmaceuticals. Healthcare provider earnings increased 67.7% or $1.68B y/y. Pharmaceutical earnings increased 34.5% or $2.8856. If we add these sectors to the sectors mentioned above, the earnings gain is over $1B more than the total earnings gain in the S&P 500 y/y. The aggregate of all other sectors had lower earnings y/y... Ironically the above mentioned sectors have low PE's because investors don't think the earnings are stable.

"The multiple expansion of an aggregate due to the increased earnings of a much lower PE component is a principal that fueled the blow-off top in the late '60s to the long bull market that commenced in 1949."

Earnings disappointments are typically a trigger for the beginning of a bear market. A retreating stock market and a slowing economy, coupled with rising rates is not good.

I worry that we will enter the next recession too soon - before the Fed has time to "reload" its conventional recession fighting weapons and with the dollar in clear retreat.

Why the Dollar May Rise

Now, after all that, let me tell you why we could see the dollar rise in the near term. Everybody (well, most everybody) and their dog expect to see the dollar fall. That is the way the bets have been made. But when "everybody" is on the same side of the trade, there is no one on the other side, and you can get some violent corrections. While the trend may still be there, we could see a nasty "adjustment" or two. Indeed, if the central banks of the world actually do coordinate a gradual fall in the dollar, expect to see them "reverse" policy from time to time, just to jerk the chains of the speculators and hedge funds. If you play this market, expect volatility and lots of it.

For those who want to invest in foreign currencies, I would point you to Everbank ( in St. Louis. You can buy an FDIC insured CD in almost any currency. Call Chuck Butler at 800-926-4922 and tell him I sent you. (Note: Everbank is a sponsor of my publisher.)

Posted by: Pat | Nov 23 2004 19:52 utc | 5

"Many countries are hooked on exports rather than domestic demand as the engine of growth"
Well, as far as major economies are concerned, I see Japan and China, and the oil-producers. Since oil-producers may prefer a shift to Euros in the long run, and since China fears the coming crash, it leaves Japan. EU like the US is such a big market that internal consumption drives most of the GDP - the difference being that the average American consumes more than the average European, partly thanks to the lack of VAT, I think, so the US growth is usually stronger.
Whatever, I don't see much heavyweights who would be utterly destroyed by a shrinking dollar.

What I wonder is what's Morgan Stanley's angle here. It's like they're playing the soothsayer and want to accelerate the process leading to the crisis.
I also wonder if this whole situation and atmosphere can't lead to some stock market crash-like result, with the main central banks fearing a radical drop of the dollar, and therefore all watch closely, ready to dump huge mass of $$ if things begin to go downhill. Though I don't have that much knowledge of currencies market to see if a Black Friday redux with the dollar is possible.

Posted by: Clueless Joe | Nov 23 2004 19:53 utc | 6

The whole reason for the deficts is to bankrupt the country. The elites do not like a large middle class. It gives the middle class to much power against elite interest.

The way to downsize the middle class is bankrupt the country creating a crisis, thus not being able to fund popular middle class programs like SS, medicare, etc.

We are in the new gilded age.

Posted by: jdp | Nov 23 2004 19:54 utc | 7

jdp, I fear you are right about their intentions.

Posted by: Stoy | Nov 23 2004 21:07 utc | 8

The Dollar may rise -shortterm- as there are always countermovements in a trend. But so far there is more talk about a lower Dollar than commitment of traders on the short side (though this may change any moment). So I expect a further decline for the next some week or so before another short halt or countermovement.

The currency market is handling 1 trillion per day - even for central banks it will be hard to counter a massive short in such a market (see Soros and the Thatchers british pound). The movement might get violent without anyone able to counter it.

Imagine Bin Laden catched tomorrow. This would be Dollar positive for one, maybe two month. If you are an investor and short the DOllar by owning Euros or Gold you don´t have to care - the trend is your friend and within a year you will have healthy profits, if you are a leveraged speculator you may get seriously hurt when your short options run out next month.

Plaza Accord - that model is gone. Reagan increased taxes to show "good will" - otherwise the Plaza Accord would have failed. Bush will not do so.

Stock market - toast in my view (though I have been burned being short several times this year). Google's and all the semiconducters' (SOX index) valuation are a mania joke. Financials (plus those pseudo manufacters who are in fact financials like GM) are endangered.

Companies that will profit from a lower Dollar are those with lots of profitable foreign subsidiaries. P&G may be a case as are some pharmas. They can repatriate foreign profits at a "better" exchange rate. Oil and water are future investments with good dividends at still low P/Es. These will develop better than the indices (which means the could slump some too if the indices break down really bad)

I am long gold, silver, oil, short US treasuries and NASDAQ and I may loose with it - sigh.

Posted by: b | Nov 23 2004 21:22 utc | 9

Re the Russian CB post upthread above.......... I have a good friend that runs a transport logistics company in Moscow. She switched over to Euro invoicing well over a year ago......... when will Vladimir follow likewise with oil?

The "not-velvet" revolution in the Ukraine may facilitate his decision.

Posted by: Cloned Poster | Nov 23 2004 21:53 utc | 10

quit yer sighing B. Isn't it true that nobody gets it all the way right when it comes to staying on the right side of trends? I for one much appreciate whatever advice you give here.

I am an exporter, which helps to bring the dollars in when they are cheap as now. But I still don't like it because it is so unstable that one is a fool to make long-term plans. I prefer to make things and sell em than to hustle for dollars or other currency. Especially since I am likely to do it all wrong. Buy high and sell cheap - ooops.

More on that later maybe. Perhaps the best advice is, get into something that will always be valuable, like water. In a pinch you can even trade it for food. Or have a bath if it suits ya.

Posted by: rapt | Nov 23 2004 21:55 utc | 11

I find the text quoted by pat really interesting - especially the part that says that the market is applying its average multiple to profits that come from sectors with lower p/e ratios; it explains both why the market is increasing (saying "profits are increasing" is technically true) while showing why there is future weakness to be expected (profits are not where they are really valuable).

If you look at the past 3 or 4 waves of increases of the euro vs dollar in the past 3 years, you can expect the euro to climb to 1.45 pretty quickly before stabilising for a while between 1.40 and 1.45. We'll see...

Posted by: Jérôme | Nov 23 2004 21:56 utc | 12


thanks for the explanation

Posted by: slothrop | Nov 23 2004 22:13 utc | 13

i think someone should sell the united states for a knock down price to the chinese tommorrow & we'd all be happy & secure & bush could watch all the sport he wants

Posted by: remembereringgiap | Nov 23 2004 22:21 utc | 14

Well I for one couldn't be bothered having a cheap holiday in Disneyland.

Posted by: Cloned Poster | Nov 23 2004 22:35 utc | 15

you can pick up a little mandarin

Posted by: remembereringgiap | Nov 23 2004 22:56 utc | 16

@cp - your fingerprints here please and could you please smile for that picture?

Sorry but I will have to touch your ass if you really want to get on that plane.

It may be cheap, but are you sure your postings here don´t make you an enemy combatant?

Posted by: b | Nov 23 2004 22:56 utc | 17

Maybe I am B.

Just like Nemo.

Posted by: Cloned Poster | Nov 23 2004 23:04 utc | 18

As for the Chinese Giap........... part time I teach.......... to Accounting & Finance degree students.

99% Chinese........ go figure.

Posted by: Cloned Poster | Nov 23 2004 23:08 utc | 19

Discusable: The dollar standard allows the U.S. to default on its debt

Japan, China and the rest of Asia has over $2 trillion in foreign exchange reserves, most of it in dollars. A 10% decline in the dollar means that the central banks alone will lose $200 billion. In Singapore, a 10% increase in the value of the Singapore dollar would mean capital losses of 10% of GDP for the central bank alone. Add to that the losses made by private investors. The dilemma for the Asians is that they must now choose between either taking these huge losses now (To which the losses suffered by their export industries must be added) or further increasing their exposure to the inevitable dollar decline. The United States might not formally default on its debt, but for the rest of the world the falling dollar produces a similar effect as their U.S. assets loses more and more of its value.

These losses have to be taken anyway. Now they will be smaller than later. My take is - fool me once ... - and there goes the Dollar standard.

Posted by: b | Nov 23 2004 23:11 utc | 20

cloned after your implicit council

i'm reworking my mandarin(high)
doing my timestables very, very quickly

while the new mongol barbarians are in iraq creating terror - i will have full & frank discussion with the new chinese emporers

still steel

Posted by: remembereringgiap | Nov 23 2004 23:26 utc | 21

The takeaway business................

Giap. The Chinese............Long term planning does work.

Posted by: Cloned Poster | Nov 23 2004 23:36 utc | 22

So I think I'll cash in (which I can, I'm 63) on my IRA & 401K, pay the 25% income tax this year, but immediately buy sustainability land and recoup the tax loss in a few years of supplying food and wood energy to an energy (food) starved world; while living from the primary productivity of my acquisition.

Posted by: Juannie | Nov 23 2004 23:45 utc | 23

Krugman sez-

Don't cry for us, Argentina...

Because we are Argentina.

Meanwhile, back at the ranchero...

Bushies saddle up a little insanity and take us all for a ride.

Republican budget writers say they may have found a way to cut the federal deficit even if they borrow hundreds of billions more to overhaul the Social Security system: Don't count all that new borrowing.

Posted by: fauxreal | Nov 24 2004 1:25 utc | 24

I am a simple woman. I am an artist and musician and sometime writer... I have not even the simplest knowledge of the meta-economics of all of this... when I read it my mind goes all white. But I understand connections. I understand the connections between the "currencies" and the "economics"... I understand that the so-called "regular guy" they've put at the titular head of the US government and his minions have made this happen on purpose. It's as plain as a Scriabin mystery chord or a splash of red on a canvas of blues and whites. I don't see numbers. I see colors. I hear chords. No one can give me numbers in contrast with what I see and hear and expect me to "believe". Pick at your numbers. There are some of us who sense the whole of it.

I think it will be time to brush the cobwebs from the pitchforks and torches soon.

Posted by: Kate_Storm | Nov 24 2004 1:45 utc | 25

please go read my post in open thread about Juan Cole...or just go to his site. he's being harrassed by memri.

..and b, can you close my quote on that post? thx.

Posted by: fauxreal | Nov 24 2004 3:10 utc | 26

b is right with the quote about the Asians re-patriating dollars. At current rates any repatriation of Chinese, Japanese currency etc, is being withdrawn through cheaper dollars. They get less Yen back for the conversion.

If they pull out now or even after the first of the year major losses will occur. It could get worse later also. My take is Greenspeak will be forced to raise interest rates and Bushie will be forced to forgo Iran plans and make a quick end to the Iraq situation so the budget deficit will come down. Consumers are hearing the mantra now that we can't continue consuming at the current pace. I heard that at least three times today.

My conspiracy take is I don't trust the elite classes not to f--- the little guy and I can feel the size of my anus growing.

This whole consumer society thing in the US was cooked up during the early 1970s. Read Holly Sklar's book Trilateralism. It is all about playing money games. The fact is though the elites that cook up the ideas are immuned from the fallout. They have theirs and it's all a game with the little guy the pawn. David Rockefeller isn't going to hurt if theres a severe depression to clean the slate. He just sits back and starts playing the game on the other side. A bunch of laws to protect people will be passed, then elites will slowly whittle away at them again over time in the name of the free market which we know is not free. The cycle will continue because people are to stupid to read history.

And after the last election, in the US ignorance is bliss.

Posted by: jdp | Nov 24 2004 3:21 utc | 27

Aye Aye Kate,

Lets recast our fate,

N' Throw out this hate.

Aye Aye Kate,

I'm with you mate.

Posted by: anna missed | Nov 24 2004 3:29 utc | 28

anna missed: It's gonna go down bad. Everybody knows it. I hate the endless prognostications, and endless hopeless hope that the failed system will buck up ONE MORE TIME... I really think it would be more psychologically healthy for people to acknowledge that it's going to go down bad, and to prepare for it. I love words. I love blogs and forums. I just think we're close to a major cleaving point ...another leaping bifurcation that no one wants, but they can't forestall with wishful thinking. I'd have it differently. But down to my bones I don't think there is anything to stop this inevitability. Some have called me a mad Cassandra. I might be.

Posted by: Kate_Storm | Nov 24 2004 4:50 utc | 29

jdp: This whole consumer society thing in the US was cooked up during the early 1970s.

Yes. It is. But it began slowly before the 70s in the late 50s and early 60s. It began the slowly rolling juggernaut phase in the late 70s, JDP.... I've been watching it all for a long time.... Just adjust the onset time...

Posted by: Kate_Storm | Nov 24 2004 4:57 utc | 30

I know very little about economics (or numbers for that matter) but recently I read someplace that more people declared bankruptcy (in the US) last year than graduated from college, and some record number in an ever increasing pattern. Where I live real estate values have increased 300% or more over the past 15 years or so, in spite of having one of the worst unemployment numbers in the country. So I would surmise that with the banking industries love fest orgy with usury (a moral value you know) driving interest rates on easy (credit card) credit to heights that would be the bees knees to any mafia type of old -- very much of the consumer drive has been channeled back into real estate in the form of equity type loans.

So I wonder what happens to all those (Bush) new and old homeowners if the interest rate is jacked up in some significant way to move the Fed dept down. With the housing market ,in some measure, carrying both production, financing, and labor through the Bush economy, could rising interest rates create enough of a disruption to precipitate a major deflation in the real estate market? And what happens when people are faced with negative equity, and how does that effect their ability to secure future credit? And how could an import based, retail, and services economy survive such an evaporation of credit? Shoul real estate held close to current value be dumped?

Anything out there that describes these scenarios?

Posted by: anna missed | Nov 24 2004 6:48 utc | 31

My point Kate is not that americans weren't consuming before the 70s because we were but on a much more pay as you go basis.

There was a concerted effort by the eastern establishment after the 60s and 70s protest to limit democracy. Pro public interest groups had gained to much clout. The establishment made a concerted effort to turn us into mass consumers. A happy consumer is a non-voter and don't make waves. You vote with your wallet and don't go to the polls. If you really look, a correlation can be made between mass consumption, low voter turnout, and the undoing of consumer protections and the dismantling of union power. Elites don't want the average person to voice opinion. they want you to shut up, go to wal-mart, go home and watch a movie.

Posted by: jdp | Nov 24 2004 13:06 utc | 32

@anna missed
Some 50% of the mortgages in the last months were at adjustable rates (ARMs). Their rate will increase immediately when treasury rates go up. People will have to default and quite a bunch of houses will be available on the market, subduing prices. With prices going lower mor peoples mortgage will exceed their home equity. This could become a chain reaction with a very significant drop in house prices and lots of bankruptcies.
This may have effects in the banking sector (expect Freddie and Fannie to somehow go belly up).

If you wnat to stay in your house for the rest of your life and if you can pay your fixed rate mortgage rates without problems stay put. If you plan to move in two years or if you are not sure you can pay your future mortgage rates you may better look into rent a place for a few years and buy a house again when they become cheap.

Posted by: b | Nov 24 2004 14:45 utc | 33

Doesn't the practice of securitizing loans make the potential for financial collapse even worse? Financial institutions make loans, package them for sale to investors and then use the money from the securities' sales to qualify them to make more loans. The incentive is to make as many loans as possible, not to make loans that the institutions are sure will be repaid. Instead of weeding out risky loans as they did just a couple decades ago, they now try to find ways to justify those loans - a paradigm shift from the principles that used to govern loan making. What used to be called the moral risk of making a loan (i.e., the incentive to make only non-risky loans to protect capital) now has much less effect since the risk is transfered to the securities' holders.

Some analysts believe there is another potential pitfall: legal clauses put in securities' contracts to get investors to take securities involving risky loans. These clauses could involve backing risky securities with company stock - a financal variation of Enron's strategy - to get investors to take the loans and get them off the financial intitutions' books, thus freeing them to make more loans. In other words, institutions selling these securities would have to sell company stock to prevent secutities' investor losses if the default rate on the loans contained in a particular security reached a certain level. In effect, wealthy investors - the ones who purchase these securities - would not be at risk for any disastrous losses but the institutions and, by extension the public, would be. Many analysts suspect this is a widespread practice, but no one knows for sure since there is no accounting requirement to disclose the dollar amount of any loans for which a company is potentially liable.

What little I know of this I learned while doing systems contract work at Freddie a few years ago. It scared me then, but I'd be interested to learn more about this from someone here who knows this subject better than I do.

Posted by: lonesomeG | Nov 24 2004 15:41 utc | 34

dollar bearishness seems to be unanimous this Asia
Times article comparing the situation to that of the Twin Towers after being hit by the hijacked jets is just
another drop in the bucket. Still, the comparison may be apt, especially if one believes that someone may have
artfully placed financial explosive devices to bring the
edifice down. But perhaps a contrarian view is called
for: all the evidence points down for the dollar, so for the time being I would bet on an upward move.

Posted by: Hannah K. O'Luthon | Nov 24 2004 16:25 utc | 35

let me add to lonesomeG's question -

didn't this securitization become necessary only after lenders were freed from regulation that required them to maintain certain levels of cash against loan exposure? I seem to recall some discussion about allowing banks to get in on the "highly profitable" business of higher risk loans. Are we still unflolding the S&L crisis here?
(more "deregulation" disaster)

Posted by: Citizen | Nov 24 2004 16:28 utc | 36

Are we still unflolding the S&L crisis here?
I´d say it's a power higher, much more derivates in play now.

But don´t be afraid. The profits will be privatized and the losses socialized as ever.

Posted by: b | Nov 24 2004 16:43 utc | 37

Paul Kasriel of Northern Trust has a nice piece (PDF) proving

The rise in household net worth in recent years has largely resulted from inflating prices of corporate equities in the late 1990s, and residential real estate in the past four years. But this rise in household wealth is llusory. The true measure of an increase in the wealth of a nation is the growth in its capital stock. In recent years, growth in our capital stock has slowed and the composition of the slower growth has moved in favor of McMansions and SUVs, which do little to increase the productive capacity of our economy.

Posted by: b | Nov 24 2004 16:58 utc | 38

MoA turns out to be not only good for surviving the political crash of the last years, it also helps to prepare for the not quite improbable economic crash. Splendid! Whenever I look at this site, I get something from it - is that because it is non-profit? Thanks so much, b and all others.

As to the topic: Most of my economically astute friends at the moment tell me to go for a mix of mostly cash (Euros, Euros, and Euros), a bit of precious metals, bit more water, oil and energy in general, nearly no bonds, and only about 25 percent of stocks, European and Asian mostly. Nothing long that has US written on it. The opinion that the dollar could rebound for a short time span seems to be shared by most. Will that be the time to get the last bits of assets out of the US market? If I withdraw my capital, the US economy will fall! Sorry, Alan, but this is business.

Posted by: teuton | Nov 24 2004 17:17 utc | 39

Although they won’t admit it, I am sure the Bush Administration is allowing the dollar to slide to boost exports. The problem is that they are so righteous that they can’t see that their Crusade to conquer the Middle East is pissing off the rest of the world. A falling dollar on top of a boycott of American goods and services overseas cannnot turn out to be good.

Posted by: Jim S | Nov 24 2004 17:39 utc | 40

Bernhard, Jerome etc......... anyone have figures for FDI into China (by country) over the past ten years?

I see the Chinese have offloaded over a billion USD to buy Rover in the UK.

Posted by: Cloned Poster | Nov 24 2004 18:10 utc | 41

jdp: my point Kate is not that americans weren't consuming before the 70s because we were but on a much more pay as you go basis.

Indeed. But the great and successful selling of credit cards (revoloving debt) began in the 60s. The era of Conspicuous Consumption began in boldface then. I remember when my parents got their first MasterCard, and what an alien thing it was in our house. My parents were born in 1928 and 1920. They are still alive, and I know my father looks out upon the word and sees the now (in his mind) entrenched alien landscape. The banks needed to change many, many years of reinforced beliefs and thinking about debt. (and perhaps also about other things like "time" "value") We have today as evidence that they succeeded beyond their wildest imaginations, and sleep in very expensive comfortable beds.

Posted by: Kate_Storm | Nov 24 2004 23:38 utc | 42

correction of typo: parents born 1928 and 1930, not 1920.

Posted by: Kate_Storm | Nov 24 2004 23:38 utc | 43

Gosh kate, what it must be like for them to watch the American nation go down the shithole.
I bet they have some amazing stories of what America has been...

Posted by: Uncle $cam | Nov 25 2004 0:19 utc | 44

The reason you're hearing this BULLSHIT ABOUT HOW WE CAN'T KEEP CONSUMING is 'cuz they're trying to blame the middle class for being bankrupted by the elites. If you feel guilty, they can impose a NATIONAL SALES TAX - the left can be guaranteed to cheer them on. The Fascists want to replace the graduated progressive income tax w/a national sales tax.

So let's examine this overconsumption bullshit a bit further.

The 3 Essential Purchases for the Middle Class are a House, Medical Care & Education for their children. These are all priced out of reach now. (Where I live houses that a young school teacher & husband bought in '84 now sell for $1M. If you want a house for ~$3-400k, you have a 3 hr. commute....and then we're told we consume too much gas.) So just how is it we consume to much - buy a few indulgences to camouflage the pain? Why that's Immoral. Nobody should be allowed to do that. (As much as I despise tanks, I mean SUV's - i saw a gold one w/license plate "earth" & a Mercedes on w/plate "I bkpk"!!- what's really pathetic is that for many people it's the only feeling of being on top of it, powerful, they have.)

As for credit cards, I think the discussion above missed the essential point. They're above all political. They became ubiquitous in the '80's when Reagan implemented the reactionary Friedman Screw the People & Free the Markets economics. I hate credit cards 'cuz w/out them that economic agenda, which increasingly transferred the income of the middle class to the elites, would never have survived - remember we had a fairly representative govt. then. There would have been immediately political consequences as people experienced at once their shrinking economic capacities. Credit cards allowed middle class consumption to continue to keep the economy humming (provide markets in ec. jargon), while transmuting a political problem into a personal one. I am being screwed became am I overspending? Credit cards by design depoliticized Americans. (Citizens -> Consumers) Sure people bought a few trinkets on them, but studies show the primary reasons for maxed out credit cards are loss of a job, medical crisis & divorce.

Now, that goods can be sold anywhere the middle class market is expendable, and foreigners don't want to buy T-bills, so Americans will be guilt tripped & otherwise forced into creating savings that can be used to bail a treasury deliberately bankrupted by bullshit wars & tax-cuts for the .001%, so the fascists can rationalize eliminating S.S. & Medicare. The Fuckers are blaming us for their 20 yr. war against us, so they can intensify the war even further.

So, please don't sit around feeling fucking guilty about some mythical over-consumption..... GET FURIOUS. Fuck National Sales Tax - Retax the Fucking Bandits - now. World War II was financed by a 94% tax on the Bandits. So should their transparently phony "war on terra" garbage.

One Question for the Economically Literate @Jerome, etc:
Would this be happening if Kerry won the election? (I'm not being rhetorical - just confessing my ignorance.) From a political point of view, if you're a foreign govt. & want to put a brake on the INSANE neocon blood lust it seems to me you'd do everything in yr. power to make it financially impossible for them to invade another country. Is this what's going on. Yes, I know that Bu$hCo royally fucked things up, but politically it seems to me if Kerry came in & was trying to clean up the mess, not making noises about Iran etc. that foreign govts. would be more willing to work w/him. Now that they know they're basically dealing w/Nazi2 Germany, you would plan differently. NO??????


Posted by: jj | Nov 25 2004 5:58 utc | 45

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