Economic update -- ignoring the value of Sustainability
The Fed is desperately trying to keep the house of cards (aka the derivatives market) from collapsing. Unique to this time in economic history, a great portion of the credit market exists in the complex and shadowy world of over-the-counter (OTC) derivatives writing. Shadowy in that even the best auditors and analysts have a difficult time discerning the facts from the banks' financial statements.
Although the exchange-traded proportion of the derivatives market is huge and precarious on its own, it pales in comparison to the top-heavy, high-center-of-gravity OTC market utilized by and between the banks and other firms in the financial sector. Their instrument of choice: credit default swaps.
The collapse of the credit market in the US and globally appears to be staring us in the face like our moment with the Grim Reaper.
This time around it won't be the banks' retail depositers running to their local branch in an effort to withdraw. This time it will be the Wall Street titans breaching their derivative contracts in such magnitude that the whole global market just siezes to a complete stop and awaits government intervention.
Yesterday, the government intervened after it became clear to all the titans involved that JP Morgan commercial bank is the most vulnerable to collapsing and bringing down the whole system. The intertwined vulnerability that JP Morgan has with the investment bank, Bear Stearns, made it imperative that JP Morgan absorb (and transfer the worst of the portfolio to the Fed) before the derivative defaults were disclosed publicly. The mainstream media is misdirecting the public's attention by focusing on Bear Stearns. The Fed did not just force the shareholders to accept 2 cents on the dollar from what Bear Stearns was worth just a few months ago. No, they are attempting to protect asset values GLOBALLY by protecting JP Morgan!!
The unprecedented – possibly even illegal – Fed intervention in the financial sector, and the lack of congressional action to stop the Fed, only demonstrates the dire emergency that Wall Street is experiencing. The problem with all Ponzi schemes is that they are unsustainable and rely first on the CONFIDENCE of the suckers. And like all confidence gamers, the confidence artist knows that there is a capacity that will be eventually reached. The goal of the con artist is to maintain the confidence of the suckers all the way until the game runs out of capacity. We are at that unsustainable moment.
Is an economic depression next? Are we back to the early 1930's America? I don't think so. I think we are more like early 1920's Germany. First, we will experience a high inflation blow off so that the government and Wall Street can inflate away their monsterous debts. Then...
Technorati Tags: 
implies a bleak future. I think that more cards have to fall before we can read these events in quite that manner. Politics is the management of perception, perceptions that are often not in line with reality.
The current series of Presidential Primaries, with the focus on the Clinton - Obama contest has also managed to change the perception of the issues to politics, rather than policy, to the questions of race and gender rather than economics or ecology. Along the way, the Republican have benefitted. No longer are they being referred to as the Party of Tom DeLay and Jack Abramoff, of the Bush's Folly and the politics of the Rapture. (*)
I think that there is a lot that Greens could be doing, should be doing, if only our candidates had the ability (money) to attract advisors and staff that could be working out these economic issues and translating them into Green Policies.
* Note: When the Southern Baptist Convention revised it's position on Global Warming last week, I heard one evangelical say that even if Global Warming is real, the droughts and floods that are predicted are just the precursors of the Apocalypse. (forgot which new channel).
"Anytime you have an opportunity to make things better and you don't, then you are wasting your time on this Earth" Roberto Clemente
The funny thing is that I am the Green that over the years has refuted those that alleged that peak oil was a bad thing and going to send humanity back to the stone age. I have asserted consistently over the last decade that the Marxian prognosis and the peak oil prognosis were overly pessimistic and inaccurate. My forecast has been mostly optimistic for the last decade and the empirical data has since validated that sentiment.
Most of the so-called economists are historians and reporters mostly. They tell us what has happened in the past or what is happening in the present. However, if an economist is a scientist, then their models should have predictive power beyond random chance. The further out you make your prediction, the more you stick your neck out. :)
I stand with my prediction. First, high inflation, then deflation. Will it be as bad as the Weimar economy? I doubt it. However, it will be bad enough.
Now, the future does NOT have to be bleak. As I mentioned earlier on this blog, the post-Keynesian solution is the proper distribution of wealth and income. Tax policy can address that immediately (and I continue to advocate that the Green Party formalize our economic proposals around that tax policy). The probability that our current government will do so is very low when their supply-side theory instructs them to do the opposite.
Thanks for the feedback, Wes.
PS Wheat at over $12 per bushel? The farmers must be going nuts.
The situation in Germany, and today's United States is different enough so that I don't see the similarity...However...
I did remember a post you made on 1/2/08, and I can't help but see the similarities between the 30 years leading up to 1929 and the "supply side" economics era that began in 1980.
In the early 1900's, auto makers were becoming titans, mill owners "owned" entire towns, railroad owners were tycoons, and sweatshops ruled the day in major cities. (Wealth accumulated in the hands of the few.)
At the same time the middle and lower economic classes saw this accumulation of wealth, and wanted part of the "American Dream". They bought stock on margin, and some amassed great wealth...on paper. And finally you had the poorest Americans who were caught up in the illegal liquor industry, which created an entire underground economy, that was devastating to their population.
Today, the wealthiest become politically powerful and the rich become obscenely wealthy. The middle and lower-middle class spend money they don't have on items they don't need. And finally the poor are caught up in the illegal drug industry which is having a devastating effect on their population.
What is most troubling to me is that we are still in the beginning of this economic upheaval. The usual tools used to "tweak" the system have been failing, and some economists are looking at solutions that haven't been considered since the 1930's.
Is it possible that supply-side economics never "trickled" down? Is it possible that the conservative icon, Reagan, had his head shoved firmly up his rectum? Is it possible that it is finally time to pay the piper???
I am not saying that America is headed toward a full blown depression, but I am concerned that we are in for a correction that will be "mind blowing" to those whose wealth is primarily on paper. I do feel that we are in for some very trying times, especially for those who carry debt that go beyond the traditional standards.
Steve, I have respect for your opinions and viewpoints, so...PLEASE...give me some contradictions to this comment...otherwise...I'll see you on the bread line...
The similarity between the US in the 1920s and now is primarily the debt-induced bubble and collapse of real estate values. The difference is that in the 1920s the federal government was running budget surpluses and paying off the WWI debt. Although the Keynesian idea of running large temporary deficits had not yet entered the minds of policymakers, there was great capacity to do so once Keynes published his General Theory. Now, the "crowding out effect" has put a capacity limit to the amount of new debt that the federal government can create...unless they are okay with creating high inflation.
The similarity to 1920s Germany is the desire to unload the massive amount of debt that the government has accumulated. Add to that the record-breaking debt that the private household sector has accumulated and the record-breaking foreign debt. The trick is to hold fixed interest rate debt and ramp up inflation to reduce the REAL value of the debt. (The other position that benefits from high inflation is the lender of adjustable rate debt instruments since the interest rate rises with inflation like a boat on a rising tide...at least until the the boat is sunk with default.)
Most wealth as we define it on balance sheets is "on paper." We all understand that the banking system is a legal Ponzi scheme that survives only due to the confidence (and a little FDIC insurance) of depositors. If just 15% of the deposits were demanded, the banks would fail. However, it is no different when we talk about paper wealth. When we look at the total value of the nation's real estate, for example, we know that it is only worth that due to the fact that homeowners and investors have confidence in the illiquidity of their wealth. If just a small percentage, say 15%, lose confidence and want to "get liquid", they will create a "run" on real estate equity. The same thing for financial assets.
If you check out the Funds Flow report at the Federal Reserve website, you will see that most of the net worth of the nation is from real estate and financial assets. Durable goods category is relatively small. You can find it here http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf
And you can also find the business assets value (sans goodwill) to see that the stock valuations are always a multiple of the real assets value held by those firms. The point is that what is affectionately termed "appreciation" is nothing but financial asset inflation.
So much more to say on the subject...