Perspectives on the global economic meltdown

Suraj · Post by **Suraj** » 16 Jun 2009 06:25

The average business cycle is about 5-7 years long. Mild recessions within such a period are expected. The difference is this case is not merely a matter of it being a recession, but the nature of the crisis, where the financial system is effectively insolvent.

vsudhir · Post by **vsudhir** » 16 Jun 2009 06:43

CalvinH,

Continuing with what JS and Suraj are saying, there are the regular, garden-variety cyclical recessions and then there are the far more dicey (for both conomists and the economy) balance-sheet recessions - think the great depression, Japan in the 90s and the G7 today.

When asset bubbles burst, asset values plunge but the debts racheted up to bid up and buy those ass-ets remain as high as before. The debt-servicing burden then becomes truly crushing. Balance sheets are in trouble with many businesses essentially insolvent. The balance sheet recession is different from a regular recession in that interest-burden minimization replaces profit maximization as the driving objective for businesses and therefore monetary policy loses effectiveness.

Witness the fervent attempts by the fed and other G6 central banks to no avail. The BoJ first brought rates down to zero and even then, there was barely any surge in borrowing from businesses simply because demand for debt wasn't there.

A similar cycle might well repeat in yamerika, I fear. Household assets have plunged (read home values) whereas the debt taken using those assets as collateral during the faux good times remain back-breakingly high. Unless the balance sheet s repair and some sembelence of balance is restored (i.e. equity going up for businesses and savings rising for households), there is no appetite for any sort of debt at whatever monetary interest rate offered.

The banks are in the thick of it as consumers can go bankrupt and leave them with the bad loans. The capital of banks is roughly the difference between what others owe them and they owe on their deposits and that is in negative territory today - essentially they are insolvent.

I wouldn't give much credence to the equity rallies and the general feel-good spin the talking heads in media, banking and gubmint are putting up. There is little evidence on the ground on any new driver of employment->wages->demand->home values->asset prices in general->etc to rise.

Strictly IMVHO onlee. Bade's disclaimer applies totally to moi here: No guru, just an observer.

And so on and so forth.

Singha · Post by **Singha** » 16 Jun 2009 10:15

http://www.nytimes.com/2009/06/16/your- ... ml?_r=1&hp

can you feel any sympathy for this type of credit card delinquent?

look at the guy - costly jeans, shoes, probably owns 'essentials' like a ipod, a mac,
a 3-series bmw and claims he is bankrupt.

John Snow · Post by **John Snow** » 16 Jun 2009 11:17

Thats American Way of Life .
Borrow today,
Enjoy till tomorrow
Let PRC slaves bail out
American life

A long, long time ago...
I can still remember
How that music used to make me smile.
And I knew if I had my chance on street
That I could make those finance people dance
And, maybe, they wouldd be happy for a while.

But february made me shiver
With every paper failed to deliver.
Bad news on the doorstep;
I couldn�t take one more step.

I cant remember if I cried
When I read about this scam world wide,
But something touched me deep inside
The day the Credit died.

So bye-bye, miss american pie.
Drove my chevy to the levee,
But the levee was dry.
And them good old boys were drinkin� whiskey and rye
Singin�, "this would l be the day that I die.
"this would be the day that I die."

Modified the original lyrics to rap to the current c_rap

Raja Bose · Post by **Raja Bose** » 16 Jun 2009 12:41

Singha wrote:http://www.nytimes.com/2009/06/16/your- ... ml?_r=1&hp

can you feel any sympathy for this type of credit card delinquent?

look at the guy - costly jeans, shoes, probably owns 'essentials' like a ipod, a mac,
a 3-series bmw and claims he is bankrupt.

In a country where the homeless own a MacBook what do you expect??

Dont worry our ITvity abduls (mall variety) are not far behind given some of the lavish spending they indulge in.

vsudhir · Post by **vsudhir** » 16 Jun 2009 22:01

The Yekaterinburg Turning Point: De-Dollarization and the Ending of America’s Financial-Military Hegemony

Michael Hudson who's been more right than wrong in the past - about the future, who can say?

The SCO countries include former Soviet and CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO. The two overlapping groups, formally aligned in 2007, will be joined on Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and China).

The attendees have assured American diplomats that dismantling the US financial and military empire is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the United States, NATO or the US dollar as a vehicle for future trade among these countries. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. That is what a multipolar world means, after all. For starters, indeed, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia.

Keen observers of America (if not effective managers of their own economies to date), these countries are claiming that what triggered the global financial crisis is that the United States makes too little and spends too much. Especially upsetting is the military expenditure the U.S. makes with the money that foreign central banks recycle, highlighted by the stepped-up US military aid to Georgia announced just this week, or the US buildup in the oil-rich Near East and Central Asia.
{Anyone else notice the uncanny parallels with unkil financing TSP buildup on our western border for long now}

The sticking point with all these countries is the United States ability to print unlimited amounts of dollars. The excess spending by US citizens for imports in excess of exports, US investor buy-outs of foreign companies and real estate, and dollars the Pentagon spends abroad all end up in foreign central banks. These governments face a hard choice: Either they recycle these dollars back to the United States by purchasing US Treasury bills, or they let the “free market” force up their currency relative to the dollar – thereby pricing their exports out of world markets, creating domestic unemployment and business insolvency. “Free markets” American-style hook them into a system that forces them to accept dollars without limit. And now they want out.

Ok. so what it mean 'wanting out'?

Translation: We have reached our limit in subsidizing the United States’ military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth. “The artificially maintained unipolar system,” Mr. Medvedev continued, is based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks.”

This means creating a new alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want,” Mr. Medvedev concluded his St. Petersburg speech this week, “what we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate.”
For starters, the SCO and BRIC countries intend to trade in their own currencies so as to get the benefit of mutual credit that the United States until now has monopolized for itself. In recent months China has struck bilateral trade deals with Brazil and Malaysia to denominate their trade in renminbi rather than the dollar, sterling or euros.

Foreign countries see the United States as a lawless nation, not only financially but also militarily. How else to characterize a nation that holds out a set of laws for other countries but ignores them itself? Laws about aggressive war, debt repayment, and treatment of prisoners seem to be proclaimed only for other countries.

The US is now the world’s largest debtor nation, yet has avoided the pain of “structural adjustments” imposed on other debtor nations. US interest-rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programs that the Washington Consensus has forced on other countries via the IMF and other vehicles. The US tells debtor economies to sell off their public utilities and natural resources, raise their interest rates and increase taxes while gutting their social safety nets to squeeze out money to pay creditors.

Is it mere coinci-dense or karmic chakras in spin that the very same personalities personally involved in dishing out IMF stamped pain-prescriptions during the Asian contagion of '97 (Yup, thats Sri T Geithner, Sri L Summers and Sri P Krugman for the uninitiated) are also at the (figurative) wheel cheering ever burgeoning deficits in the USofA - no pain-prescriptions like slicing out medicare and clamping down on mil-spending anywhere on the horizon for the american exception, you see.

It is no mystery to other countries how the United States remains above the law. Foreigners see a financial system under-girded by American aircraft carriers and military bases encircling the globe. The IMF, World Bank, World Trade Organization and other Washington surrogates are now seen as vestiges of a lost American Empire no longer able to rule by economic strength, left only with military domination. They see that this hegemony can’t continue without adequate revenues and are attempting to hasten what Chalmers Johnson has called “the sorrows of empire” in his book by that name – the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others nor have the money for unlimited military expenditures and adventures.

{Masterful articulation. Course one neededn't agree 100% and I don't but you get the essence of truth in the drift onlee}

US officials asked to attend the Yekaterinburg meeting in an observer status. They were told “No.” It is a word that Americans will hear much more in the future. Yekaterinburg may become known not only as the death place of the czars but of the American empire as well. It is, after all, where U-2 spy-plane pilot Gary Powers was shot down in 1960.

Read it all.

SwamyG · Post by **SwamyG** » 16 Jun 2009 22:04

^^^^^
But India was not very gung-ho about it. And did not Russia come out and say they were not going to pursue this now? Russia and China have large dollar reserves, why would they disturb their apple cart now? I can understand them hedging; are they expecting dollar to go down anytime soon?

vsudhir · Post by **vsudhir** » 16 Jun 2009 22:07

When it rains, it pours. Now award winning journo Chris Hedges pours on the khan parade.

The American empire is bankrupt

“We will have to finance our own military spending,” Hudson warned, “and the only way to do this will be to sharply cut back wage rates. The class war is back in business. Wall Street understands that. This is why it had Bush and Obama give it $10 trillion in a huge rip-off so it can have enough money to survive.”

The desperate effort to borrow our way out of financial collapse has promoted a level of state intervention unseen since World War II. It has also led us into uncharted territory.

“We have in effect had to declare war to get us out of the hole created by our economic system,” Lanchester wrote in the London Review of Books. “There is no model or precedent for this, and no way to argue that it’s all right really, because under such-and-such a model of capitalism ... there is no such model. It isn’t supposed to work like this, and there is no road-map for what’s happened.”

The cost of daily living, from buying food to getting medical care, will become difficult for all but a few as the dollar plunges. States and cities will see their pension funds drained and finally shut down. The government will be forced to sell off infrastructure, including roads and transport, to private corporations. We will be increasingly charged by privatized utilities—think Enron—for what was once regulated and subsidized. Commercial and private real estate will be worth less than half its current value. The negative equity that already plagues 25 percent of American homes will expand to include nearly all property owners. It will be difficult to borrow and impossible to sell real estate unless we accept massive losses. There will be block after block of empty stores and boarded-up houses. Foreclosures will be epidemic. There will be long lines at soup kitchens and many, many homeless. Our corporate-controlled media, already banal and trivial, will work overtime to anesthetize us with useless gossip, spectacles, sex, gratuitous violence, fear and tawdry junk politics. America will be composed of a large dispossessed underclass and a tiny empowered oligarchy that will run a ruthless and brutal system of neo-feudalism from secure compounds. Those who resist will be silenced, many by force. We will pay a terrible price, and we will pay this price soon, for the gross malfeasance of our power elite.

Ok, a tad alarmist in writing style but in message content, who knows?

vsudhir · Post by **vsudhir** » 16 Jun 2009 22:12

SwamyG wrote:^^^^^
But India was not very gung-ho about it. And did not Russia come out and say they were not going to pursue this now? Russia and China have large dollar reserves, why would they disturb their apple cart now? I can understand them hedging; are they expecting dollar to go down anytime soon?

Well, like someone pointed out, this is well and truly uncharted territory. Nobody knows what to expect anymore - except to expect the unexpected, to recycle a cliche.

As many feared, war looms ever larger on the horizon. Empires don't go quietly into the night.

SwamyG · Post by **SwamyG** » 16 Jun 2009 22:22

In March when the Stock markets (kind of)bottomed out and started rising, I was happy and getting comfortable. But what I am hearing and seeing is starting to unsettle me. I can't explain, call it "unreasonable fear" or "unfounded fear" or "unsubstantiated thoughts" - but something tells me we are going to be doing good till this fall/winter. 2010/2011 is looking rather bad. I am seriously considering buying property in Hyderabad, when the dollar is high.

vsudhir · Post by **vsudhir** » 16 Jun 2009 22:32

I am seriously considering buying property in Hyderabad, when the dollar is high.

Et tu Brute?

Good. We should have another hyd meet soon...lotsa beer and biryani for company

SwamyG · Post by **SwamyG** » 16 Jun 2009 22:42

Did they just set the ball rolling?

BRIC leaders pass currencies debate to finmins, c.banks

YEKATERINBURG, June 16 (Reuters) - The leaders of Brazil, Russia, India and China have asked their finance ministries and central banks to work on proposals regarding new reserve currencies, a Russian delegation source told Reuters on Tuesday.

The request did not feature in the joint communique issued after the first BRIC summit. The source said finance ministries and central banks have also been asked to outline proposals on a wider use of BRIC domestic currencies in domestic trade. (Reporting by Gleb Bryanski, editing by Guy Faulconbridge)
***********

Me have connections in Bangalore & Hyderabad. Right now sitting in the land of 50+2 states.

vsudhir · Post by **vsudhir** » 17 Jun 2009 00:34

U.S. Rejects California Aid Request

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.
...
The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.
...
The state entered the downturn burdened with an inflexible budgeting apparatus, constrained by a state ballot initiative approved by voters in 1978 that severely limited property taxes in California. The signature example of "ballot box budgeting" left the Golden State inordinately reliant on the personal income tax, which accounts for half of revenue to Sacramento.

California's budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.

"Those revenue projections turned out to be wildly optimistic, but nobody was predicting the October collapse of the financial markets," said Michael Cohen, deputy analyst in the Legislative Analyst's Office.

vishnua · Post by **vishnua** » 17 Jun 2009 00:49

pandyan wrote:time to move 25+% money in 401K to infl.protected secs?

If you have the option of moving into Fixed interest then do it. MOI did this back in April 08. It is only 3% and change but it is better than losing the "principle"

Anujan · Post by **Anujan** » 17 Jun 2009 01:17

Everybody's favorite rabble rouser' Michael Moore is making a new documentary. Here is a teaser trailer

CalvinH · Post by **CalvinH** » 17 Jun 2009 02:01

thanks to all for your views on the question. I am an observer too and understand the cycles in brick and mortar or knowledge driven economy. My fear was that since the US govt is investing everything in fighting the symptoms rather than the malaise what would happen if the malaise returns with some other symptoms. For ex I think falling house prices was a solution not a problem and was actually restoring the balance, and if by investing heavily govt is able to arrest that then all the investment will lead to some other bubble too in short time. Am I correct when I take a simplistic view that current situation was direct fallout of efforts to arrest symptoms of similar situation in 2001(lowering of interest rates for ex).

Nandu · Post by **Nandu** » 17 Jun 2009 04:06

vishnua wrote:
pandyan wrote:time to move 25+% money in 401K to infl.protected secs?

If you have the option of moving into Fixed interest then do it. MOI did this back in April 08. It is only 3% and change but it is better than losing the "principle"

That advice presumes low or no inflation. (Mind you, my 401(k) has been in cash 100% for a while. Dodged most of the current crash).

vsudhir · Post by **vsudhir** » 17 Jun 2009 15:43

British Airways Asks Staff To Work For Free

British Airways is asking thousands of its staff to work for free for up to four weeks, spokeswoman Kirsten Millard said Tuesday.

In an e-mail to all its staff, the airline offered workers between one and four weeks of unpaid leave -- but with the option to work during this period. British Airways employs just more than 40,000 people in the United Kingdom.

Last month, the company posted a record annual loss of £400 million ($656 million).

Its chief executive declared at the time there were "absolutely no signs of recovery" in the industry.

"I'm 30 years in this business and I've never seen anything like this. This is by far the biggest crisis the industry has ever faced," said Willie Walsh, British Airways' chief executive.

A spokesman for one of Britain's biggest unions said its workers could not afford to work for free for a month.

A 11-month job a year is better than none at all. Let all those who currently have reasonable jobs praise the Lord his small mercies. In any case, IIRC BA pays its staff higher than avg wage for the industry.

meanwhile sure enough, the defenders of class interests show up on schedule.
Union anger at BA plan

vsudhir · Post by **vsudhir** » 17 Jun 2009 15:48

The saintly MBA

New York Times, 29 May 2009: “Nearly 20 per cent of the graduating class (of Harvard Business School) have signed ‘The MBA Oath’, a voluntary student-led pledge that the goal of a business manager is to “serve the greater good.” It promises that Harvard MBAs will act responsibly, ethically and refrain from advancing their “own narrow ambitions” at the expense of others.”

Funny how that works, eh? No further kament onlee.

vsudhir · Post by **vsudhir** » 17 Jun 2009 15:57

Neat set of graphs depicting a chilly comparison between economic indicators of the GD I and now.

Link

It’s a Depression alright
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.
That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Scary, IMO.

vsudhir · Post by **vsudhir** » 17 Jun 2009 16:07

The beginnings of a trade war?

In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms.

link

vsudhir · Post by **vsudhir** » 17 Jun 2009 18:17

Banking Problems In Southern Europe Send The Whole World Running For Cover

So the world seems to work like this. Latvia gets battoned down for a few months via a few billion in loans from the IMF and the EU Commission. As a result, the Baltics now become yesterday's story - till they aren't again, of course. And we move on, as I more or less feared, and its time to begin to focus on Southern Europe again (while Eastern Europe deteriorates sufficiently to make it back into the headlines). I think people can only keep so many things in their head at any one time.

Basically the whole EU system seems to be in denial on what is happening at the moment. The markets have been focused on the East, but they are now starting to wake up to the fact that the South is still here, and when this "matures" we will have a full blown financial crisis, that is for sure. At that poiunt the Spanish and Greek governments will effectively lose control of the situation, just as they have done in Latvia and Hungary.

This is one of the reasons I am following Latvia closely. Basically what is happening in the East is a sort of "dry run" for what is going to have to have to happen in the South. The whole package, from "fiscal austerity" as a tool to attack recessions, to "internal devaluation" via price and wage deflation is about to be applied in the South as a path towards restoring export competitiveness and economic growth.

There has been a lot of talk, of late, about the contagion danger from Latvia, but few seem to consider the possibility that - given the way the EU itself is putting its credibility on the line in the Latvian case - if finally Latvia folds (and devalues, as I feel it must), then the contagion problem could leap straight to the South from the East. Obviously Romania is looking very vulnerable to anything that happens virtually anywhere, but Spain looks a lot more vulnerable to me at this point than either Poland or the Czech Republic, due to the massive external financing requirement.

vsudhir · Post by **vsudhir** » 17 Jun 2009 21:01

Deflation it will be looks like.

Ten-year yields will probably drop to as low as 1.5 percent over the next two years, Mizuho Asset’s Takei said.

from bloomberg

10 yr bond yields falling like that indicates looming deflation only. Denninger sums it up pretty good.

See, debt deflation cannot be avoided once you blow asset bubbles supported by debt - it simply can't. That cycle must end and when it does you wind up with the debt service sucking all the oxygen out of room and prohibiting growth. Once that condition asserts itself asset prices collapse and defaults go parabolic.

We have tried to "cheat death" for too long. Greenspan tried to avoid this deflationary collapse in 2001. He bought us how long? Seven years? Sounds good, right, except that the previous attempt was after 1987, and lasted 13 years, and this latest try required a bubble several times larger than the previous one!

Such is the nature of exponents.

Unfortunately in order to "blow a new bubble" to take the place of housing you'd have to find something that was $10 trillion in size or more.

There isn't any such thing, which is why all of these "alphabet soup" games aren't working and won't.

Link

vsudhir · Post by **vsudhir** » 18 Jun 2009 17:05

Deleted.

pic changed onlee.

ramana · Post by **ramana** » 18 Jun 2009 19:41

The boom was fake but they made the debt real.

vsudhir · Post by **vsudhir** » 18 Jun 2009 20:17

The accompanying conomist cover story

Link

Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis.

Will they default, inflate or manage their way out?

Conomist puts it gently onlee. Dont wanna scare readers into panic now, eh? Sovereign default has happened before but remains unlikely this time as a far more convenient candidate presents itself - inflate away debt. Sadly, globalization, USD reserve currency status and the eurozone makes this option rather difficult, not to mention hideously risky and complex to implement.

UKstan might default but not before trying away very hard to inflate its woes away. Its no coincidence that they were the first in this crisis to take to quantitative easing, an approach the federal Reserve eagerly latched onto with, as we now see, with questionable results at best, so far. Oh, and Long live the Mervyn King, and all that.

But in the long run today’s fiscal laxity is unsustainable. Governments’ thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation.

Investors have been fretting on both counts. Worries about default have been focused on weaker countries in the euro area, particularly Greece, Ireland, Italy, Portugal and Spain, where the single currency removes the option of unilateral inflation (see our special report). Ireland’s debt was downgraded for a second time on June 8th. Fears of inflation have concentrated on America, where yields on ten-year Treasuries reached nearly 4% on June 10th; in December the figure was not much above 2%. Much of this rise stems from confidence about economic recovery rather than fiscal alarm. {questionable assertion, at best. This is the officvial spin, faithfully parroted by the em-bed-dead anglo-saxonian media. Sceptics abound and suckering folks this time round with visions of the new dawn will be a tad harder than last time, IMO}

Yet eye-popping deficits and the uncharted nature of today’s monetary policy, with the Federal Reserve (like the Bank of England) printing money to buy government bonds, are prompting concerns that America’s debt might eventually be inflated away.

{Why the doubt? Like Buiter points out, the G7 have a ready-made tool available to signal seriousness in fighting inflation - the inflation indexed bond. Its burial screams loudly the admin's intention to inflate away their debt regardless of Sri Geithner's verbal protestations to the country. No wonder he got laughed at in Beijing playing this line.}

Justified or not, such worries will themselves wreak damage. The economic recovery could be stillborn if interest rates rise too far too fast. And today’s policy remedies could become increasingly ineffective. Printing more money to buy government debt, for instance, might send long-term bond yields higher rather than lower.

Read it all.

vsudhir · Post by **vsudhir** » 18 Jun 2009 20:37

Pakistaniyat also hit by the slowdown

(06-17) 09:06 PDT BERLIN, Germany (AP) --

It's past midnight in downtown Berlin, and the prostitutes pace in front of the Hackescher Markt's stores. Signs of a slow economy are everywhere -- a sportswear store offers 40 percent markdowns, and bars advertise discounted drinks.

Like so many other businesses, Europe's largest legalized prostitution industry is having to adapt to the economic downturn. Customers are fewer or more frugal, competition has increased, and more clubs and brothels are offering discounts to drum up business.

Since late 2008, the number of English and American tourists has dropped and the street dynamic has changed, according to one prostitute in her mid-20s who requested anonymity because she did not want her family to know her profession. She still gets customers, she said, but they no longer pay for the extras.

"We have to be a lot more aggressive now," said the woman, wearing pink jeans and a black corset, who has worked the area for three years. "The customers used to come straight to you. Now they don't ask you as much."

Nevertheless, she said, the prostitutes in the area have been sticking to a set minimum price -- about euro80 ($110) for sex.

"If he doesn't pay our prices then he can't go home with me," she said, putting her hands on her hips. "That simple."

vsudhir · Post by **vsudhir** » 18 Jun 2009 20:46

Excellent piece by Ambrose Evans Pritchard. AEP is often an alarmist but I like the sense of history he brings to conomic discussions.

Europe swings Right as depression deepens

The establisment Left had been crushed across most of Europe, just as it was in the early 1930s.

We have seen the ultimate crisis of capitalism -- what Marxist-historian Eric Hobsbawm calls the "dramatic equivalent of the collapse of the Soviet Union" -- yet socialists have completely failed to reap any gain from the seeming vindication of their views.

It is not clear why a chunk of the blue-collar working base has swung almost overnight from Left to Right, but clearly we are seeing the delayed detonation of two political time-bombs: rising unemployment and the growth of immigrant enclaves that resist assimilation.

Note that Right-wing incumbents in France (Sarkozy) and Italy (Berlusconi), survived the European elections unscathed.

Left-wing incumbents in Germany, Austria, the Netherlands, Spain, Portugal, Hungary, Poland, Denmark, and of course Britain were either slaughtered, or badly mauled.

It'll get uglier before it gets any better, IMHO.

In Germany and Austria, the Social Democrats suffered their worst defeats since World War Two. I don't say that with pleasure. A vibrant labour-SPD movement is vital for German political stability. It was the peeling away of Socialist support during the Bruning deflation of the Depression years -- so like today's Weber-Trichet deflation -- that led to the catastrophic election of July 1932, when the Nazis and Communists took half the Reichstag seats.

This will not happen again, thankfully, because there is no Bolshevik threat luring business into a Faustian pact with Fascists. But the picture is not benign either. Unemployment in Germany may reach 5m by the end of 2010, according to the five 'wise men' , even if recovery comes on schedule.

So, we may lose three or four governments in Europe in coming days or weeks -- or even worse, they may survive. The drama is unfolding as I feared. Half way through the depression, we are facing the exactly the sort of political disintegration that occurs in times of profound economic rupture.

Remember, the dangerous phase in the Great Depression was Stage II, after the collapse of Austria's Credit-Anstalt in mid-1931 set off a disastrous chain-reaction that Autumn (until then, most people thought they faced no more than a bad recession, like today).

Don't count on the political fabric of Europe holding together if our green shoots shrivel and die in the credit drought of the long hot rainless summer that lies ahead.

Read it all.

vsudhir · Post by **vsudhir** » 19 Jun 2009 06:28

If AEP was alarmist, then what are these folks over at Automated Earth, one wonders....

Deflation is inevitable due to Ponzi dynamics (see From the Top of the Great Pyramid)
The collapse of credit will crash the money supply as credit is the vast majority of the effective money supply
Cash will be king for a long time
Printing one's way out of deflation is impossible as printing cannot keep pace with credit destruction (the net effect is contraction)
Debt will become a millstone around people's necks and bankruptcy will no longer be possible at some point

In the future the consequences of unpayable debt could include indentured servitude, debtor's prison or being drummed into the military

Early withdrawls from pension plans will be prevented and almost all pension plans will eventually default

We will see a systemic banking crisis that will result in bank runs and the loss of savings

Prices will fall across the board as purchasing power collapses

Real estate prices are likely to fall by at least 90% on average (with local variation)

The essentials will see relative price support as a much larger percentage of a much smaller money supply chases them

We are headed eventually for a bond market dislocation where nominal interest rates will shoot up into the double digits

Real interest rates will be even higher (the nominal rate minus negative inflation)

This will cause a tsunami of debt default which is highly deflationary

Government spending (all levels) will be slashed, with loss of entitlements and inability to maintain infrastructure

Finance rules will be changed at will and changes applied retroactively (eg short selling will be banned, loans will be called in at some point)

Centralized services (water, electricity, gas, education, garbage pick-up, snow-removal etc) will become unreliable and of much lower quality, or may be eliminated entirely

Suburbia is a trap due to its dependence on these services and cheap energy for transport

People with essentially no purchasing power will be living in a pay-as-you-go world

Modern healthcare will be largely unavailable and informal care will generally be very basic

Universities will go out of business as no one will be able to afford to attend

Cash hoarding will continue to reduce the velocity of money, amplifying the effect of deflation

The US dollar will continue to rise for quite a while on a flight to safety and as dollar-denominated debt deflates

Eventually the dollar will collapse, but that time is not now (and a falling dollar does not mean an expanding money supply, ie inflation)

Deflation and depression are mutually reinforcing in a positive feedback spiral, so both are likely to be protracted

There should be no lasting market bottom until at least the middle of the next decade, and even then the depression won't be over

Much capital will be revealed as having been converted to waste during the cheap energy/cheap credit years

Export markets will collapse with global trade and exporting countries will be hit very hard

Herding behaviour is the foundation of markets

The flip side of the manic optimism we saw in the bubble years will be persistent pessimism, risk aversion, anger, scapegoating, recrimination, violence and the election of dangerous populist extremists

A sense of common humanity will be lost as foreigners and those who are different are demonized

There will be war in the labour markets as unempoyment skyrockets and wages and benefits are slashed

We are headed for resource wars, which will result in much resource and infrastructure destruction

Energy prices are first affected by demand collapse, then supply collapse, so that prices first fall and then rise enormously

Ordinary people are unlikely to be able to afford oil products AT ALL within 5 years

Hard limits to capital and energy will greatly reduce socioeconomic complexity (see Tainter)

Political structures exist to concentrate wealth at the centre at the expense of the periphery, and this happens at all scales simultaneously

Taxation will rise substantially as the domestic population is squeezed in order for the elite to partially make up for the loss of the ability to pick the pockets of the whole world through globalization

Repressive political structures will arise, with much greater use of police state methods and a drastic reduction of freedom

The rule of law will replaced by the politics of the personal and an economy of favours (ie endemic corruption)

link

Whew, more than moi boor heart could take onlee. Heck, mad max world come true seems like.

Singha · Post by **Singha** » 19 Jun 2009 09:31

Centralized services (water, electricity, gas, education, garbage pick-up, snow-removal etc) will become unreliable and of much lower quality, or may be eliminated entirely

Suburbia is a trap due to its dependence on these services and cheap energy for transport

People with essentially no purchasing power will be living in a pay-as-you-go world

Modern healthcare will be largely unavailable and informal care will generally be very basic

Universities will go out of business as no one will be able to afford to attend

excellent utilities, cheap and good univs, employer paid healthcare, cheap cars and fuel, lots of land in suburbia to build big houses....I though these were precisely the selling points why one would abandon sdre desh and go settle in tfta lands?

RamaY · Post by **RamaY** » 19 Jun 2009 23:36

October 28, 2008 What happens when a country goes bust

...

There is no bankruptcy court for nations. Defaulting sovereigns pay the ultimate price; they are sent to Coventry, shunned by commercial banks until, somehow, they can purge their debt. The only recourse is to the International Monetary Fund, which can provide emergency loans. Currently, the IMF has a pot of money, some $200 billion from contributing states, which is almost certainly inadequate to the scale of the potential demand that might emerge in the months to come. Iceland has already secured $2 billion, Ukraine has been promised upwards of $16 billion and Hungary is expecting double-digit billions. We have commitments for about 15 per cent of the kitty and the dominoes are tumbling.

For Argentina, the months that followed its "bankruptcy" were horrendous. The country went into a brutal downward spiral of inflation, currency collapse and the rationing of cash by the banks. In a nation that is a big agricultural exporter, children went hungry and and the economy imploded, shrinking by 13 per cent in a year. Unable to borrow to pay its bills, the state was forced to cut public sector wages, slash the state pension and unemployment soared to 20 per cent. Unable to pay for goods with cash, many Argentinians resorted to barter.

A sovereign default forces a nation into self-reliance mode and, if the Government lacks the will to reform its economy, it will tempted to print money to pay wages and pensions. When the choice is between paying Citigroup and paying pensioners, the political choice is obvious. However, it is no solution as the result is hyperinflation and more chaos.

The default on Argentina's commercial loans was bad enough but what followed a year later was the default on an $800 million loan from the World Bank, which left it precluded from further help by international agencies. It became embroiled in lengthy negotations with the IMF and debtors clubs. The country had borrowed too much in foreign currencies and it made matters worse for itself by pegging the value of its currency to the dollar. Argentina became uncompetitive and slipped into recession. When the currency peg was finally severed, the peso collapsed and the country was unable to repay its debts.

IMF loans come with tough medicine and it is this that makes the institution unpopular and its intervention greatly feared. Ukraine is now debating the passage of a law that is a precondition to the IMF bailout and, from what is reported, the country will be forced into an austere regime of budget cuts, tax increases and measures designed to get Ukraine's inflation under control. Iceland has just raised interest rates by 6 per cent — a harsh monetary tightening aimed at shoring up its currency but which will bring further misery to its people.

I really hope this happens to Londonistan

AkshayM · Post by **AkshayM** » 19 Jun 2009 23:49

What does inflating away debt really mean? I.e. printing away and paying for debt? What are the repercussions? (hyper)Inflation?

ramana · Post by **ramana** » 19 Jun 2009 23:56

Dont be fooled by Doom and Gloom folks. In the 80s they were all constantly moaning while the economy took off. So those following the D&G guys were left behind. So lesson is look at all the pictures and not just at scary ones. new oppotrunities were created as the D&G guys were convincing mainstream all was lost.

There is now talk of ending the recession earleir than expected. Could be psy-ops but could be true.

From reading all these pages, IMHO I think monitoring the ten year rate is the key indicator. All others are its laggers. Next watch PRC as it tries to stay on top.

Anyway what happend to the BRIC currency basket scheme?

John Snow · Post by **John Snow** » 20 Jun 2009 07:07

Actually Pound Sterling is going strong in currency market after initial dip to $1.30 now its hovering around $1.55 the usual rate. Meanwhile SA Rand is steeply appreciating against (US)Dollar.

The American economy will be propped up, you need hyper active consuming nation especially PRC, This I had already mentioned comes in the way of relatively devaluation of the exporting countries to US. Till such time other markets are groomed.

shyam · Post by **shyam** » 20 Jun 2009 12:04

Ramana-ji, do not discard D&G so easily

Two pensioners fight during a protest rally, organized by trade unions in Riga on 18 June, 2009. Thousands of Latvians rallied in the Baltic state's capital as trade unions stepped up their battle against an austerity drive in an EU member nation trying to stave off bankruptcy. Some 5,000 people hit the streets after the Latvian Free Confederation of Trade Unions called for a protest against public spending cuts to meet the terms of an international bailout that is keeping Latvia afloat. The measures, passed by parliament on June 16, and due to come into force from July 1, include a controversial 10-percent cut in pensions. 'They might as well gather all the pensioners and shoot them. Then there'd be no problem and the budget would have the money,' said Nina, a demonstrator in her sixties who declined to give her last name. Other measures include a 20-percent cut in public-sector pay -- including salaries for government members -- and a reduction of around a quarter in the minimum wage.

darshan · Post by **darshan** » 20 Jun 2009 20:48

CIA Seeks Laid-Off Bankers in Recruitment Drive

I wonder why.

svinayak · Post by **svinayak** » 20 Jun 2009 21:51

darshan wrote:CIA Seeks Laid-Off Bankers in Recruitment Drive

I wonder why.

For the analytical mind

shynee · Post by **shynee** » 21 Jun 2009 04:55

China’s savings problem and the consumption constraint

After the 1987 Crash in the US, many expected the Japanese markets also to crash. But they didn’t. After faltering briefly, the Ministry of Finance ordered the Big Four brokerages to support the market, and support it they did. Within a few months the Nikkei was testing new highs, leading a Ministry of Finance official to boast that manipulating the stock market was easier than controlling foreign exchange. Check Edward Chancellor’s Devil Take the Hindmost for an illuminating take on the Japanese bubble economy of the 1980s.

The comparisons with China are, and of course are meant to be, a little worrying. This is not to say that China must repeat Japan’s spectacular 1990 crash and subsequent lost decade (or two). It is simply to point out that none of what we are seeing in China is particularly new and far from being a source of great strength, the intense manipulation of monetary and fiscal policies and the financial markets can actually make the necessary adjustment for China much more difficult. Just as Japan failed to come to terms with the sudden collapse of the US trade deficit and tried to export and monetize its way out, China may be doing something very similar.

But one way or the other if the US is raising its savings rate and so forcing more rapid growth in US GDP than in consumption, China is likely to see its consumption growth constrain its GDP growth. This suggests to me that once the effects of the (I think) unsustainable credit bubble being inflated by policymakers here run their course, we are in for a longish period of much slower GDP growth.

shyam · Post by **shyam** » 21 Jun 2009 05:38

I think the key difference between agents influenced crashes in 1987, 1929 etc. and current one is the presence of new uncontrollable media - internet. After earlier crashes, the Govt. was able to cover up the fundamental problem and let things move as if nothing had happened. But in the current crisis, all uncomfortable details are publicly available through blogs, websites and comments for entire world to see. I think this will make it very difficult for people in power to coverup the exposure.

Chinmayanand · Post by **Chinmayanand** » 22 Jun 2009 00:05

What Japan needs is more bankruptcies, not fewer