Ben Bernanke seemingly calmed the masses with power laden, majestic metaphors but it was a bluff. The Chairman’s candid chat was to convince everyone that there was indeed a mighty wizard behind the curtain, so powerful that proving his existence was entirely unnecessary. In reality it was a calculated effort to assuage enough angst so that he wouldn’t be forced to show how weak his hand really was; a poker bluff. There is little recourse left available to the Reserve at this point and high-stakes press conference bluff is worth a try. The disclosure was candid and offered even more insight as to just how precarious this situation is. Lowering interest rates may temporarily soothe the savage credit crisis but what about those who’re really holding the long-term cards?
Foreign owners of trillions in US Treasury debt are not the happiest of financial campers these days. They’re relative investment has lost money each time we issued more credit and they now have to step in to shore up the private banks with hard capital just to keep the Federal bank in business? Eventually this deal’s not going to hold that much appeal compared to more fiscally responsible bonds issued in many other countries.
It occurs to me that there is so little real money (GDP produced) to back things up that the most legitimate thing we can now offer is a foreign IOU. It also sheds light on why all the “real” bail out assistance has come from Asia and the Middle East – they have relatively hard currencies. Our creditworthiness is diminishing for good cause, mismanagement. We’d all have stellar credit if we could print all the money we needed or pay our IOUs with someone else’s IOUs. The billions “deposited” into the banking system, in the coordinated “infusion” of capital from European banks, turns out to be nothing but more credit. I guess it was legitimate because the Europeans are letting us loan them electric dollars, so that we can then deposit their electric dollars into our banking system and pretend it’s real. No cash - just another electronic ledger entry. Sounds more like a Dave Barry parody than the most sophisticated central banking.
Keeping the system together now has more to do with convincing our US Treasury holding, hard-currency foreign backers that we can keep the population producing enough so that they’ll continue to receive their next dividend check. Ben was reassuring us to reassure them as they face yet another decrease to their investment if it doesn’t sell. We’re painted into the same corner every other fiat banking system has worked its way into, printing fiat to cover excess credit. Aren’t we clever?
Even now as we enter a deflationary spiral, most are swimming in denial and rationalizing the gravity of the falls. The next leg to drop is even uglier than the one we are now pretending can be reattached with Federal Reserve Super Glue. Who thinks we’re in anything resembling a normal economic slowdown? The Feds are compelled to desperately create more credit, accept anything as collateral; pretend their own loans (made via foreign banks) are actually real capital and bluster about their vigilance and readiness; all because there is no more real money available, only more credit. We’ve gone all the way from backing our currency with something precious; to backing it someone else’s IOUs. What an embarrassing position for the once noble, once lone economic giant.
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This article has 21 comments:
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boomer
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1 Comment
Jan 11 03:32 PMIt's going to hurt to pay these bills, but they are going to need to be paid one way or another.
If the country's budget was mine, there are 2 options, cut costs, (beauracracy, payments, wants, then cut needs), or make more $$. Where does a country make money? tarriff incoming goods, or tax and take from it' citizens.
it's sad to think about what is a good investment these days and for the future...
real estate? gold, oil,
We'll survive, but it may hurt.
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Mr. Brown
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2 Comments
Jan 11 04:32 PMConsensus, perhaps?
Paul Krugman had the same observations a few months ago. It's not a 'liquidity crisis', we are in a 'solvency crixis'. We're broke.
OUCH.
>>>>>&g...
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Mr. Brown
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2 Comments
Jan 11 04:35 PMA consensus, perhaps?
Paul Krugman made similar observations in the New York TImes a few months ago. It's not a 'liquidity crisis', we are experiencing a 'solvency crisis'. We are broke.
Maybe sending our industry overseas wasn't such a good idea after all ...
OUCH.
>>>>>&g...
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Francis
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8 Comments
Jan 11 06:54 PMI look around, and everyone is overspent, overworked, over leveraged, and just plain tapped out. I throw away a mailbox full of 'free money' offers every day. I see cars for sale at 0% interest, with no payments for 12 months... Retailers are having sale after sale...
But everyone is broke. And my heating bills and fuel bills are just going through the roof, the price of food jumps every week, and we're supposed to believe inflation is low...
It's nuts. Why are we being lied to? Politics?
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Kunst
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782 Comments
Jan 11 06:57 PMBernanke is not going to let deflation happen. His whole career has been about that issue, starting with his Ph.D. thesis on the great depression. The Fed/US government have ways to do whatever they want with the money supply. For example, the Fed is taking just about any "collateral" from banks on repurchase agreements. What do you bet that the Fed winds up holding a lot of the bad credit out there but pay banks face value? That sure creates money.
The Great Depression and Japan since 1990 show how ugly deflation can be and how hard it is to fight it once it gets started. Bernanke is not going to let that happen, regardless of the cost in terms of inflation. Ultimately, the Fed/US government can create as much money as they want. $9+ trillion of national debt ($400B a year of interest) -- does anyone really think we're going to pay that off? Actually, we will. We will write $9T of checks and the debt is paid off. Similar solution for Social Security, government pension obligations, etc.
The end result will be mega (less than hyper, I think) inflation. The dollar will drop to maybe 10% of its current value (that's what the ruble did after the USSR fell). Prices will go up x10, wages and Social Security more like x5 if that. Fixed-interest savings and fixed-payout pensions get killed. The dollar will lose its reserve status and we'll have to pay future bills in real money. Actually, the main currency of the future is going to be oil.
***********
Anybody who thinks we are going to pay off all this debt by reducing our living standards (save = spend less than you make) is living in an opium dream. If that were going to happen, we wouldn't have gotten here to begin with.
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Francis
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8 Comments
Jan 11 07:58 PMThe solution you paint seems more painful than the condition of stagflation we're facing.
A dollar worth 1/10 of it's value today means all American assets bought up by China/Oil money. And 10x price increases with a 5x wage increase is really a 50% reduction in standard of living...
How can you say we're not going to lower our standard of living and say that peoples purchasing power will be halved?.
I almost think a depression would be better. It might be 10 years of pain, but at the end, America would still be America, and not the property of the rest of the world...
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Kunst
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782 Comments
Jan 11 09:38 PMAmerica will serve as a great morality tale for centuries to come. A hardworking inventive people from all the lands of the earth. Tremendous dynamism and ingenuity. Then something happened. Life was too easy. It's the ant and the grasshopper, the tortoise and the hare. Arrogance, hubris, whatever you want to call it. We believed our own press, that we were better than everyone else, when we were actually coasting on a post-World War II prosperity bubble that took decades to deflate.
The financial version of the problem is our national debt. The richest country in history, yet we always bought more than we paid for and borrowed the rest. No problem, we were rich. But gradually the weight shifts and eventually the teeter-totter flips. Barry Goldwater, in 1964, proposed balancing the budget and paying off 5% of the national debt per year. That hasn't been heard since. We haven't had a true balanced budget since Eisenhower in the 1950s.
Another aspect that people don't want to hear is our military spending. We spend roughly a trillion dollars a year, with all the deferred and hidden costs included, on "defense". We've been doing that, in current dollars, for the last 60 years. Do you think $60 trillion dollars makes a difference? As Eisenhower said, ultimately this is all waste.
We are a nation that's been spending down the trust fund, and it's getting low. Like the teeter-totter, the shift from one side to the other, from above water to under, seems to happen in just a moment when it's actually the result of a long accumulative process.
On the standard of living issue, the problem is that we have not been willing to VOLUNTARILY reduce our standard of living to a sustainable level, which has led to tons of debt. The federal debt is just the tip of the iceberg. The rest of the world has been happy to lend to us because that represents jobs and productive capacity in their countries instead of ours.
The 50% reduction in our standard of living is going to be INVOLUNTARY. We obviously won't do it ourselves. At some point, the rest of the world is going to cap our credit limit, to our rude surprise. We are 5% of the world's population but consume 25% of the world's oil, paid for with IOUs. This isn't going to keep working much longer.
Yes, it's a sad situation, but it has been long in the making and really can't be avoided. It's like a heroin addiction -- no problem as long as you can get more, but quitting is a bitch. The best hope is that we pull our head out of the clouds (have it yanked out, really), get rid of the idea that we are God's chosen children, and get to work. It didn't have to be this way, but it is.
Final sad question: What does this say about our democracy? We got here because politicians learned that the American people didn't want to hear the truth or suffer any inconvenience. Barry Goldwater was defeated, and so will be any politician who says that we need to cut back, spend less, invest more in productive capacity (e.g., education and infrastructure) instead of toys and fun. We run a perpetual budget deficit (that is worse than official numbers say) but listen to the politicians talk about more tax cuts.
It didn't have to be this way, but it is. American is still strong and ingenious and will probably rise out of the ashes. But there is no easy way forward.
BTW, I expect us to gyp the foreigners one more time by inflating the money supply so much that their dollars are diluted and can't buy up all of America. He who lends to an irresponsible borrower is also a fool.
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Francis
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8 Comments
Jan 12 10:18 AMuncomfortable analysis, but I agree in principle with most of what you say; we have gotten soft, and we don't work hard, and the rest of the world is passing us by the abilities of their people. I work in high-tech, and see fewer and fewer American kids in science, math, etc.
Democracy is still the least bad form of government, but when people get soft and lazy, (as we have), they try to suck off the teat of their fellow citizen and implement more and more socialist programs that slowly erode their vibrancy. You're right about Goldwater, and the electorate in general.
Sad times. Makes me want to get my fiddle while the fires burn...
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Kunst
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782 Comments
Jan 12 12:52 PMI'm a high-tech vet too, software development, 1965-2005. I lived in Arizona when Goldwater ran for president. Good man, not so sure about his policies. I don't think either party has the answer. Republicans don't care and Democrats are weak-minded.
It's not exactly true that we don't work hard. The average American works 200-300 hours (more than a month) more per year than a few decades ago. Many people are working more than one job, as if two $11/hr jobs were going to solve the problem. Most women now work, undoing a luxury we could afford in earlier days.
Part of the problem is unavoidable and would probably have happened to any country in our situation. It's human nature to want comfort and ease for minimum effort. We enjoyed a unique advantage after World War II, when our economy was a powerhouse and the rest of the world was in ruins or underdeveloped. Unfortunately, we didn't understood that this couldn't last, that the rest of the world would eventually catch up.
That said, we seem to have stayed blind an awfully long time, including even now in most cases. Some people think we should (have) shut out the competition. That might have slowed the process some (while slowing growth of the world's overall standard of living, including ours), but it wouldn't change the overall situation. Wages have to equalize eventually.
The problem is that most young Americans haven't seen any real need to the kind of educational hard work that is most critical, because they saw a world in which that wasn't necessary, so why bother? By and large, that goes back to my generation, the boomers, because America has been a land of prosperity, not hardship, since that time. The previous generations, who saw the depression and war, had a different perspective, but that can't be passed down.
I foresee difficult times for America ahead. A lot will depend on how we handle it, how we deal with reality. Will we blame foreigners instead of looking at ourselves? Will we try to maintain our economic advantage militarily? Will we fracture internally, squabbling over diminished resources? Or will we come together, see reality clearly, get away from our "toy" culture, and start working together toward practical solutions? The most important thing is to stop deluding ourselves, because no useful result will come from that.
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chickenpp
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1 Comment
Jan 12 12:55 PMHow they fix social security.
Have the gen y's take the hit and cut benefits for them. If they don't know by now to start saving for retirement then they will. Since they are the lowest represented group at the polls, politicians don't need to worry about not being re-elected.
How they fix the deficit.
Since 70% of GDP is consumption, move to a consumption tax. Some people say this is a regressive tax, but if there is no tax on food then the only thing being taxed is their ipods and beer.
We will never run out of oil, it will just be so expensive there will be cheaper alternatives. What the government should do instead of talking of taxing big oil for obscene profits, require them to invest a percentage in alternative sources. We should also be nervous of the oligopoly in the oil industry. Less competition is never a good thing.
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ballsschweaty
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99 Comments
Jan 12 02:24 PMOil prices at $200+ barrel would be wonderful for the economy and our country. Diesel hybrids capable of 80 miles per gallon is available right now. We just need the economic incentive to bring these to market.
As bad debt is destroyed, capital will flow out of misallocated sectores and into underinvested areas such as energy, infrastructure and manufacturing. This is the beauty of our capitalistic system. It is flexible and dynamic.
Don't bet against America. It's a bad bet that has never, ever paid off in the long run and in unlikely to do so in the next 100 years.
People who are pessimists like all of you are just LOSERS.
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Kunst
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782 Comments
Jan 12 02:38 PMActually, there is another wrinkle to this that is more ominous. It takes money to extract oil, right? Actually, it takes oil to extract oil. The easiest oil to get was used first. The oil we're using now is getting harder and harder to extract and process. We will never extract all the oil that exists. Before that, we will reach a point where it takes more oil to get the new oil than the energy it yields. When that happens, oil is done. Every new barrel will be a net loss, no matter what its monetary value.
Now granted, oil and energy aren't quite the same. To some degree, we can use other kinds of energy to produce new oil. But mostly the oil industry runs on oil, so electricity from coal or nuclear isn't going to help much.
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Kunst
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782 Comments
Jan 12 02:40 PMDream on.
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RPY
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1 Comment
Jan 12 05:03 PM-
tom Andersen
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19 Comments
Jan 12 06:43 PM-
ballsschweaty
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99 Comments
Jan 13 12:51 AMLosers choose to be victims. It's easier to sit around and do nothing while blaming others for your problems.
LOSERS will always be LOSERS.
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Deacon Elurby
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3 Comments
Jan 13 09:38 AMPlease consider this: Alan Greenspan was criminally culpable for publicly stating, in 2006, that potential home-buyers take out ARMS (Note: Fed Chairmen are to be extremely careful about what they say, as one word is enough to catapult stock prices up or down; and foreknowledge by anyone of what the Federal Reserve is to report can make an insider lots of money). Why would he have advised house-hunters to secure the most risky means to obtaining a mortgage?—because he was purposely setting up America to take a financial hit (read my essay, “Open Letter to Walter Williams,” which explains what international bankers have been planning for decades). // In August (it may have been September), 2007, Leslie Stahl interviewed Greenspan about his new book and the unfolding subprime mess, about which he took – surprise! surprise! - no responsibility. Most curious was his reply to her question about his having visited the White House on a regular basis during Bill Clinton’s second term. When asked why he didn’t think that those regular visitations weren’t a conflict of interest, Greenspan replied: “We are one government.” Well, as you know, the Federal (sic) Reserve is a private shareholders’ company, serving bankers’/shareholders’ interests—not America’s! // Of course, you know that that private means to controlling America’s financial/economic house, through fractional banking, is unconstitutional!, because Congress - we, the people! - is constitutionally mandated to print gold- and silver-backed currency—not the greed-driven bankers’ fiat currency. // Over the decades, would that America’s newspapers – Left and Right – had simply searched and reported to their readership the truth, then…
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RATHER FISH
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4 Comments
Jan 13 01:08 PMperiod. Send US $ over seas to build economies to build up their
military. ALL this goblygook come down to STOP TAKING FROM PETER TO PAY PAUL.
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Captain Wrongway Peachfuzz
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2 Comments
Jan 13 11:03 PM-
Kunst
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782 Comments
Jan 14 09:37 PM-
Francis
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8 Comments
Jan 15 01:41 PMI almost start to wonder if it was incompetence or something more sinister. But however you slice it, we're in a huge mess right now, and there is no easy let down.
One wonders what drove Greenspan as he helped create the mother of all housing bubbles, and what he was thinking... With apologies to the original
"Sometimes nothing can be a real cool hand"
Alan Greenspan. (from Cool Hand Luke)
He's certainly smiling today, and seems to be immune to any repercussions from this massive fallout...