drsteph wrote.... Even the 1922-1923 hyperinflation took a little while to occur. From 1920-21 there was increasing overall inflation which occured. Initially it wasn't entirely unwelcomed either. It was only in the last few months of the hyperinflation, october to december 1992 that everything turned to hell. Probably was best to have been a farmer at that point as almost everyone was ruined. ..................................................................................................... Excellent observation... One who owns fortaleza becomes the winner...indeed...and doable....and maybe some already accomplished this ...knowing how fickle valuations can become... Prospective fiat currency damages do have different types of solutions....For many .... things in the world seem to rise and fall...as the events do not affect them very much... It was not long ago....that over 70% of Americans were agrarian and more independent....now the number is less than 1%... Many developing countries are still in agrarian albeit self sufficient... but poor in fiat currency mode...
. February 20, 2008 SouthAmerica: Reply to Eusdaiki Let me put some thoughts on paper, and see if I can start connecting the dots. 1) The Financial Times article said: âUS banks borrow $50bn via new Fed facility.â The use of the Fedâs Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. âThe TAF ... allows the banks to borrow money against all sort of dodgy collateral,â says Christopher Wood, analyst at CLSA. âThe banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for Americaâs banking system.â What common sense tells you regarding this government bailout of the major US banks? That the banks are dumping garbage into the federal governmentâs lap instead of writing off their books that garbage as they probably should have done. The banks that are taking these loans in exchange of garbage collaterals - their earnings should be adjusted down to reflect the write offs of these bad investments, and the price of their stock also should be adjusted accordingly. That means the banks have at least another US$ 50 billion dollars that they already know that it is garbage, and they have not written off from their balance sheets. **** 2) Here is an important point to keep in mind: Wall Street has created a super-bubble (Derivatives market) in the credit default swap market that the market value amount of the contracts outstanding of about $ 50 trillion US dollars far exceeds the $ 6 trillion of the corporate bonds whose defaults the swaps were created to protect against. Now going back to what the above NYT article said: *** NYT: âTo the uninitiated trying to understand this complex market, its size might initially seem a comfort, as if there were far more insurance covering the bonds than could ever be needed. But because each contract must be settled between buyer and seller if a default occurs, this imbalance can present a problem. Typically, settling the agreements has required the delivery of defaulted bonds if the insurance buyer wants to be fully covered. If the insurance contracts exceed the bonds that are available for delivery, problems arise. For example, when Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the companyâs debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond. That is why the valuation of these contracts is of such concern to some participants. As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.â *** As the economy starts descending into a major recession and many corporations starts going bankrupt â the above example of Delphi start multiplying like rabbits inside of the US economy. Then some people are going to say that the Derivatives Market was able to survive the last major recession in 2001, and I would say, but the only problem is that the credit default swap market has grown 10 fold since the last recession, and if we have a major recession today, that market it will be tested for the first time â the $ 50 trillion US dollars question. During the last recession in 2001 that market was in the range of $ 2 to $ 3 trillion dollars value compared with the almost $ 50 trillion US dollars in 2008. I want also to remind the reader that the $ 50 trillion US dollars credit default swap market represents just a little slice of the Derivatives market. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007). You can check the Bank for International Settlements detail, in their semi-annual OTC derivatives market activity http://www.bis.org/publ/otc_hy0711.htm If you want to have a better understanding of the pieces that makes the Derivatives market then you can check the enclosed information regarding Derivatives: http://en.wikipedia.org/wiki/Derivative_(finance)#_note-afgh If the US economy starts imploding, and many companies start going bankrupt, the unemployment rate starts going up very fast, the Federal Reserve would keep lowering the Fed Funds rate, and the US dollar would continue its declining trend. The subprime mess continues getting worse, real estate values keep declining, the credit problems spread to the other areas of the economy, foreclosures keep reaching new records with all the economic ramifications attached to this real estate meltdown. After the major banks start writing off losses coming from all kind of sides from subprime investments, to credit card operations, and major losses related to all kinds of derivatives operations â it would not take long for the US government to act as the last resort and a number of major banks would be nationalized after they lose all their capital and become insolvent. The US government probably has to merge the carcass of a bunch of US banks and try to salvage what they can. This clean up process by the US government would cost trillions of US dollars in taxpayers money. But as this banking meltdown is occurring the stock market also is declining very fast as PANIC sets in and people realize the magnitude of the implosion that is under way. I hate to think about would be happening to the value of the US dollar as this financial meltdown is going on. At that point when foreigners realize that they need to get out of US assets as soon as possible the herd get spooked and everybody starts running for the exits and we have the biggest international monetary crisis that the world have ever seen. Most Americans donât realize but over 70 percent of the US dollar currency ever created by the US government is flying around the world, and complete isolated from any US government intervention. In another words, today the United States is no longer masters of their own currency. **** 3) I donât want to get carried away with my thoughts over here, but there are many other things that I could list here to make the case that the first Great Depression of the 21st century is around the corner. Remember what I have described above would have a major negative impact on banks, insurance companies, pension funds, hedge funds, private equity companies, mutual funds, and so onâ¦. Things happen very fast today, as never before. Keep in mind about how fast the Soviet Union imploded and went out of business â today an implosion would happen even faster than before because of new technologies. (The Soviet Union imploded before the age of the internet, and today the implosion of a superpower would happen at the speed of light.) I just heard last Saturday on Bloomberg radio that since October 2007 and up to last Friday global equities on the global stock markets have lost $ 8 trillion dollars in value, and that is just the beginning of that trend. Today, Lou Dobbs mentioned on his program that by year-end more than 15 million people would be living in houses in the United States where their outstanding mortgages are much higher than the value of their properties, and many people are going to walk away from these properties leaving the banks and mortgage companies to clean this massive mess. In the meantime the price of oil keeps going up and causing even further distress to an already bad situation. It is not hard to connect the dots since all these variables that I mentioned above are going on at the same time, and they start feeding on each other creating the Perfect Storm and you have a gigantic implosion of the entire system. Yes, this new great depression it will affect most countries from around the world, and countries will be affected according to their participation in the global economy. People who say that it is impossible for us to have another great economic depression like in the 1930âs â these people are delusional and their minds are living in La La Land. .
. February 20, 2008 SouthAmerica: Reply to gkishot You asked me: âwhat is your point? Is it that investors should stay out of US equities?â As I said: that would be the first great depression of the 21st century. We never had an implosion in the history of the world like the one that is coming very soon to the United States. Never before the world have been so interconnected as it is today, and the currency of one country had such an impact in global financial markets â the US dollar. The people who will benefit the most is the people who are prepared for a depression and they have cash on hand â they will be able to pick up the pieces at bargain prices after the global financial meltdown. Some countries will be in better shape than others financially, but I have no idea what is going to happen to the international financial system â it will be the biggest international financial crisis the world ever saw. I have no idea what kind of system it will rise from the ashes of the current international monetary system based on the US dollar. As we go through this US economic meltdown, the global economy also it will shake like in a major earthquake and we will have a massive global stock market equities meltdown. Remember everything and all the systems start feeding from each other that is why it will be a global event that will affect the economy of most countries. I suggest that you start reading about how people survived the last great depression, and what people did to make money during the hard times â they still had millionaires during the depression and many of them managed to make money during the depression. .
Thanks for the reply S.A. You summarized your ideas quiet nicely on that one. I agree with you on most points, and I see how stage is getting set for a "perfect storm" However, I don't think that the stock market will go down in nominal value during this meltdown. During hyperinflation periods stock markets don't crash down, they crash up. They go through the roof, but simply because they're denominated in worthless paper that's losing value at a rate exponentially higher than that of the stocks [since stocks do have fundamentals, unlike fiat currencies that are based on debt] I see how the Credit default swaps could create a massive problem as it increases the impact of bankruptcies exponentially. However the current situation seems to me like a patient with liver failure, lung cancer, and a cholesterol clogged heart... it's hard to tell what the catalyst will be... Another one of those probable catalysts:There's another 40 trillion dollar debt that's going to expire shortly, from the baby boomers pensions...
. February 20, 2008 SouthAmerica: Reply to qkishot You asked me: âDo you think it will be followed by the great world war of the 21st century?â *** I quoted before on this thread some information from an article that I wrote in January of 2003, but here is the info again: I am quoting from one of my articles (the original article was 9 pages long) published in January 2003: "Getting Ready for War" â¦Few years ago many economists claimed that they had tamed the economic cycle, and that deep recessions and depressions were things of the past. When I read articles about that, I thought they were completely wrong. The truth is the world is overdue for a new economic depression. Historically we had a depression in the world once every 55 to 60 years. The last world depression was over 60 years ago. A Russian economist, Nikolai Kondratieff, published a study in 1926 showing that a very long-term economic cycle existed. His major premise was that capitalist economies had a pattern of long wave cycles of boom and bust. The bust cycle repeated itself approximately every 60 years. If you had read Kondratieff's paper in 1926, you would have known that an economic depression was around the corner. Kondratieff identified four distinct phases the economy goes through during each cycle: 1) Inflationary growth, 2) Stagflation, 3) Deflationary growth, and finally 4) Depression-falling prices, falling stock prices, falling profits, debt collapse. As the stock market is collapsing, a number of corporate scandals emerge such as Enron, WorldCom, Global Crossing, Adelphia Communications, Arthur Anderson and many others. As the debt load reaches new highs in the economy, the result is a record-breaking number of personal and corporate bankruptcies, as is the case in the US today. â¦In the past, a major war was the way out of an economic depression. Maybe that solution will be used by the US one more time to restart its economy - a major war contributes to ending the depression phase, and leads the economy to the first phase of the cycle once again. The big war has to be started somewhere even in Iraq. **** As you can see a lot of things that has been happening in the US financial markets in the last few years - the pieces of the puzzle are fitting together quite well and accordingly to Kondratieffâs very long-term economic cycle theory. Regarding the fact that: ââ¦In the past, a major war was the way out of an economic depressionâ â Maybe this time around we might be able to come up with a better solution than that. Here are two alternatives that comes to mind: 1) If John McCain gets elected president of the United States in November of 2008, then there is a high probability that we are going to get the World War III type of solution â since he is a warmonger and militarism is his specialty. If you like the Bush administration and think that they are doing a good job then John McCain is you man â and we should start planning for a draft to fight a big war. I just wonder who is going to finance such a war for the United States. 2) If Al Gore gets elected president of the United States in November of 2008, then we might have a more intelligent type of solution â first, he would wage a war against Global Warming, and second, a revolution to solve the problems that are coming due very soon related to the baby boomers. The war against Global Warming it will require restructuring the entire US economy creating great opportunities for everyone â in the areas of infrastructure to mass transit, and so on⦠.
. February 21, 2008 SouthAmerica: We still only in February and we have over 8 months to go for the 2008 election - a lot of things can happen until then. The Democratic Party Convention is in August of 2008 - and it will be an interesting event. If Barack Obama is the Democratic Party candidate - a lot of Hillary's supporters are not going to vote for Obama in November of 2008. I would be more surprised to see Hillary Clinton as the VP on an Obama ticket than Al Gore becoming the democratic Party candidate. I am sure that at this point neither one, Hillary or Obama, would settle to the other one's VP. But if we have a brokered convention I can see a Democratic ticket Al Gore with Barack Obama as the VP. In that case Hillary Clinton would become the leader of the Senate as part of the deal that would be acceptable to all parties involved. It is not over until the fat lady sings. By the way, that kind of settlement would be great for Barack Obama, since he would be Al Gore's vp for 8 years, and that would be a great experience for him and would prepare him to be the favorite for the presidential race of 2016. .
. February 21, 2008 SouthAmerica: Last night when I was reading the Financial Times the column of one of my favorite economists and someone that I respect his opinions â Mr. Martin Wolf â I could not believe the title of his column âAmericaâs economy risks the mother of all meltdowns.â He mentioned on his article another first-rate economist - Nouriel Roubini, professor at New York University's Stern School of Business. When two outstanding economists such as Martin Wolf, and Nouriel Roubini are thinking in the same wavelength, and they confirm the substance of my articles that makes me feel really good since I am in good company. Here is a copy of Mr. Wolfâs article. ********* âAmerica's economy risks the mother of all meltdownsâ By Martin Wolf Published: February 20 2008 Financial Times - UK "I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy." Alan Greenspan, The Age of Turbulence. That used to be Mr Greenspan's view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor. Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe." Prof Roubini is even fonder of lists than I am. Here are his 12 - yes, 12 - steps to financial disaster. Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted. Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit. Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit. Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue. Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank. Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions. Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt. Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks. Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices. Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency. Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices". These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown. Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late. Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis. The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce. The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable. *A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com ; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008 Source: http://www.ft.com/cms/s/0/1dc47bb6-df56-11dc-91d4-0000779fd2ac.html?nclick_check=1 .