Wealth Disappears As Rapid Deleveraging Continues

Into the Wild!

Yes, dear reader, we are going where no man ever went before... into the wild.

All around us is virgin territory. No one has ever been here before. But watch out, these virgins are vicious amazons. In this wild place, you can forget living it up. Don’t even think about getting rich. Riches? If you’ve got ‘em... hide ‘em. Luxury? Who needs it anyway? The best you’ll be able to do is survive. And then, maybe, years from now, we can put our financial lives back together again... and get on with things... Never before have we seen so much wealth disappear in such a short time. The latest report from MSCI shows the planet’s losses from the sell-off of equities has now reached more than $30 trillion – or more than twice the GDP of the USA!

And this is just stocks. Reported write-downs, write-offs and credit losses have reached almost a trillion. And losses of housing prices in the US alone – the only country for which we have reliable figures – has reached about $5 trillion.

Nor have we ever seen such a rapid reaction. In the space of a few months, people have gone from believing that nothing could go wrong to thinking that there’s nothing that won’t go wrong. Where once they thought that free-market capitalism would make them rich... they now believe that the government has to save them from getting poor. And where only a year ago they thought the world’s globalized economy would always give them everything they needed “just in time,” they now believe they better keep a few sheckels on hand “just in case.”

And just look at the bonds! A few months ago, investors stretched for yields. Now, it’s safety they reach for. They dump corporate bonds for fear they may be “toxic,” and grab US Treasury debt with both hands. Investors now seem to have an unqualified trust in the full faith and credit of the world’s largest debtor. Yields on 91-day T-bills have fallen to 0.11% – scarcely a tenth of one percent!

Yes, dear reader, the “Great Unwind”... the “Big Bust”... the “Great De-leveraging” – call it what you want; we’ve never seen anything like it.

The Dow rose 151 points yesterday – a limp and pathetic little attempt to buck the downward trend. Gold lost $6.80... leaving it at $735.

China’s stock market had managed an 18% rebound... following the announcement of its half-trillion dollar bailout plan. But yesterday, Chinese stocks were collapsing again.

The latest news from America tells us that housing prices are still going down in 4 out of 5 US cities. Homebuilders’ wives are hiding the shotguns and pouring out the whiskey; their husbands’ confidence has never been lower, according to this morning’s news report.

Big towns... little towns... in the sophisticated cities and out in bumpkin country, the story is the same. The Wall Street Journal tells us that the “fall in crop prices” is putting an end to the boom in the boonies.

US producer prices fell 2.8% in October – the most they’ve ever fallen. And the Big Three automakers say that if they don’t get some help soon, the results will be “catastrophic.”

Meanwhile, over on the Sunny California coast, the whole state is going up in smoke... it’s not only going broke, it’s burning up.

“I have to dust the ash off my car every morning,” reports daughter Maria, recently arrived in LA and hoping to make it big in the motion pictures. “It’s eerie... there’s always a little smoke and soot in the air...”

Not only is the bust unlike anything we’ve ever seen before... so is the planet-wide effort to stop it. All over the globe, the feds are going ‘into the wild’ with extraordinary measures. They’re mobilizing troops to fight the crisis in the boardrooms. They’ll fight it in the stock markets. They’ll fight it at home – with house to house combat to stop foreclosures and defaults. They’ll fight it abroad – the US government is even loaning money to foreign governments! They’ll fight it with loans and giveaways. They’ll fight it with fiscal policy. They’ll fight it with monetary policy. They’ll fight it with every weapon available to them – including the printing press.

And they will lose.

And more thoughts:

*** To give you an idea of the wild measures undertaken by the feds, we look at what is happening at the world’s leading bank – the US Federal Reserve.

The short form of how the Fed operates is this: it holds a certain amount of securities in its vault; this is the cornerstone capital – or monetary base – of the whole banking structure. How does it get this capital? It buys it, creating the money to pay for it as necessary. Naturally, the Fed doesn’t want to create too much money or the inflation rate would get out of control and economists would point their fingers accusingly. But now, people fear dandruff more than inflation. So, the Fed has gone wild.

From the day of its founding in 1913 to September 24, 2008 the Fed’s assets – the aforementioned cornerstone capital for the US financial system – grew to $1 trillion. By November 14, 2008 the amount had grown to over $2 trillion. And in a speech in Texas, the head of the Dallas branch of the Fed said he expected the total to reach $3 trillion by year end. For the moment, this explosion of monetary inflation is hardly noticed. Asset deflation has the headlines. People worry about having too few dollars, not about having too many.

Comes the news this morning that US business chiefs are asking the up-coming Obama administration for another $500 billion ‘stimulus’ program. They’ll get it. And much more. Trillions worth.

Trying to stimulate the economy with easier credit in the early 2000s, Alan Greenspan overdid it. He gave the world the credit it wanted, and created the biggest bubble in human history.

Now that bubble is collapsing and his successor – Ben Bernanke – is confronted with a new problem. Now it is cash that people want – income to pay their debts! Bernanke will give them what they want. And, most likely, he will overdo it too.

*** GWB – you can’t say we didn’t warn you. A top British judge has just announced that he considers the Bush administration’s attack on Iraq as a violation of international law. Years from now, George W. Bush is likely to be charged with war crimes and human rights violations. Normally, this would pose no problem. A former US president could expect the protection of the US government. But as Americans sink into depression they are not likely to feel kindly towards their ex-president. They will blame him for the decline of their incomes... and for the fall of their empire. They are likely to want to cooperate with the world’s new institutions... and throw over their own former commander in chief.

Advice to GWB: Go back to Texas. Don’t ever leave home again.

*** We got a letter from Her Majesty’s government.

“Winter Fuel Payments...don’t miss out!”

Yes, dear reader, this is how societies collapse. People invent problems. Then, they find solutions to the problems. Then, the solutions cause more problems. And finally the cost of all the solutions brings the whole system falling down.

A news report out today tells us that the weekend will be cold. An “arctic blast” is said to be on its way.

Of course, some parts of the city already feel as though they were in a nuclear winter. London’s main industry is finance. And finance has iced up. A headline in yesterday’s paper told us that London is expected to lose 370,000 jobs over the next 2 years.

But thank God for the world improvers:

“Our records show that you may become eligible for a payment this winter,” begins the letter.

Why? Because your editor is enrolled in the Britain’s national health service (a requirement for employment). NHS records must have revealed to the authorities that your editor turned 60 in September. Accordingly, he is eligible for 125 pounds to help him with his heating costs this winter.

Imagine the miserable bureaucrats administering this program. They have computers to program... letters to write... records to keep... internal procedures to devise, administer and respect. They have to hire people... and then support them for the rest of their lives, paying for pensions and holiday, just like any other business. Then, they have to work out internal disputes... make sure the coffee maker is working properly... and organize an annual Christmas party. It probably costs more than 125 pounds to send out each check!

And why should someone over 60 get money and not someone under 30? The older person has had 30 more years to stuff newspaper in the cracks, firewood in his garage and money in his bank account. If he’s cold this winter... it’s his own damn fault.

But if you’re going to give him money to help him keep warm, why not some extra money to help him with his eating needs? He has to eat, doesn’t he? And why doesn’t HM Government just send him a bottle of Chateau Margaux? Maybe 1985. To help him with his drinking needs.

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Wealth Disappears As Rapid Deleveraging Continues

Into The Wild