-Caveat Lector-
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From: [EMAIL PROTECTED]
Date: September 13, 2007 11:02:08 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED],
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Subject: "Soup Kitchen USA"
US Heads for Recession as Foreign Investors Dump US Dollar Holdings
Sep 11, 2007 - 09:28 PM
By: Mike_Whitney
http://www.marketoracle.co.uk/Article2098.html
"Credit booms do not end in inflation as most people believe.
Credit booms ARE inflation that end in deflation. This credit boom
is not any different. ” --Mike Shedlock , “Mish's Global Economic
Trend Analysis”
The days of the dollar as the world's “reserve currency” may be
drawing to a close. In August, foreign central banks and
governments dumped a whopping 3.8% of their holdings of US debt.
Rising unemployment and the ongoing housing slump have triggered
fears of a recession sending wary foreign investors running for the
exits. China, Japan and Taiwan have been leading the selloff which
has caused the steepest decline since 1992.
To some extent, the losses have been concealed by the up-tick in
Treasuries sales to US investors who've been fleeing the money
markets in droves. Investors have been trying to avoid the fallout
from money funds that have been contaminated by mortgage-backed
assets. Naturally, they bought US government bonds which are
considered a safe bet. But that doesn't change the fact that the
dollar's foundation is steadily eroding and that foreign support
for the dollar is vanishing. US bonds are no longer a “safe haven”.
The dollar slumped to a 15 year low against 6 of its most actively
traded peers and set the stage for an early morning market rout on
Wall Street.
Foreign investment and currency deregulation has been a real boon
for the stock market which thrives of a steady flow of cheap
capital. It's also been good for ravenous consumers who like to
borrow boatloads of low interest cash for their toys, SUVs and
McMansions.
Of course, when things seem too good to last---they usually don't.
The economy is contracting; credit is getting tighter, and the
stock market is flailing about aimlessly.
Worse still, the world is quickly losing confidence in American
leadership on everything from human rights to global warming. The
US appears to be tragically out-of-step with its epoch. The world
is looking for innovative solutions to species-threatening problems
while the Bush Administration insists on following an agenda more
suitable to medieval warlords in the Dark Ages. The social and
economic consequences are becoming obvious. Its been a disaster.
As Capital flight accelerates; interest rates in the US will rise,
unemployment will mushroom, and the dollar will fall. It can't be
avoided. American markets and consumers will be compelled to curb
their gluttonous appetite for cheap foreign credit. The free lunch
is over.
Overseas investors own more than $4.4 trillion in US debt in the
form of bonds and securities. Even if they sell only 25% of that
sum, the US would feel the pinch of hyper-inflation. For the last
decade foreigners have been eager to by our Treasuries and
equities---gobbling up America's enormous $800 billion current
account deficit and keeping demand for the dollar artificially
high. But just like the subprime mortgage holder whose “teaser
rate” has suddenly expired; the US now faces the painful adjustment
of higher payments and less discretionary income for indulgences.
Maybe the charade could have carried on a bit longer if not for the
belligerent Bush foreign policy that has alienated friends and foes
alike.
But, then, maybe not. After all, the Fed's loose monetary policies
added to Bush's extravagant spending---$3 trillion added to the
National Debt in just 6 years--- doomed the country from the
beginning. Deficit spending has been the central organizing
principle from day 1. Now comes the hangover.
Bernanke is expected to drop the Fed funds rate on September 18.
The move will provide more “easy credit-crack” for the addicts on
Wall Street -- but it could also trigger a run on the dollar.
That's what keeps the Fed-chief up at night.
The Bush Team was warned repeatedly ---by the BIS, the World Bank,
the IMF and the European Central Bank ECB--- that their policies
were “unsustainable” and would end in an economic meltdown. But
they brushed aside the warnings with the same casual indifference
as they did the critics of the war in Iraq.
Why would they care if the country suffered? Their friends would
still get their massive, unfunded tax cuts. Their private armies
and “no bid” contractors would still get their payola. The
Democrats would still cave in on the enormous “off budget” war
spending. And, they'd still be able to print as much counterfeit
money as they chose until every last copper-farthing was drained
from the public till.
No worries. Besides the media would mop up the mess they'd made
with their usual “happy talk”. As the economic calamity unfolds, we
can expect to see the usual parade of lacquer-haired phonies on the
Business Channel singing the praises of “free markets” and the
poisonous culture of overspending and consumerism.
The problems we're now facing should have been easy to spot for
anyone willing to look beyond the empty rhetoric of the TV
Pollyannas or their cheerleading co-conspirators at the White
House. Instead, we were anesthetized by Greenspan's low-interest
snake oil and Bush's “tax-slashing” mumbo-jumbo thinking that
they‘d found a new path to prosperity.
It was a hoax. And the seven years of sleepwalking has cost us
dearly. Unemployment is up, consumer spending is down, the housing
market has slipped into recession, and the stock market is lurching
back and forth like an overloaded washing machine. All of this
could have been foreseen by anyone with minimal critical thinking
skills and a healthy dose of skepticism of government.
Consider this: US GDP is 70% consumer spending. That means that
wages have to increase beyond the rate of inflation OR THE ECONOMY
CAN'T GROW. It's just that simple. So how is it that 50% of the
American people still believe Bush's supply side baloney that
cutting taxes for the uber-rich strengthens the economy? How does
that increase wages or build a healthy middle class? If we want a
strong economy wages have to keep pace with productivity so that
workers can buy the goods they produce.
Greenspan knows that. So does Bush. But they chose to hide it
behind an “easy credit” smokescreen so they could weaken the
dollar, off-shore thousands of industries, out-source 3 million
manufacturing jobs, fund an illegal war, and maintain the lethal
flow of the $800 billion current account deficit into American
equities and Treasuries. In truth, there hasn't been any growth in
the economy since Bush took office in 2000. What we've seen is an
ever-expanding bubble of personal and corporate debt amplified by a
“structured finance” system that magically transforms liabilities
(subprime loans) into securities and increases their value through
leveraging.
That's it. No growth --- just a galaxy of chain-letter debt-
instruments with odd-sounding names (CDOs, MBSs, CDSs, etc)
stacked precariously on top of each other. That's what we call
"wealth" in America.
It's all smoke and mirrors. The financial system has decoupled from
the productive elements of the economy and is now beginning to show
disturbing signs of instability. That's why the big blow-off in the
bond market. The halcyon days of supplying our armies, funding our
markets and building our subprime “ownership society” empire on the
backs of foreign creditors is over. The stock market is headed for
the landfill and housing is leading the way. Economic fundamentals
can only be ignored for so long.
GREENSPAN'S BLOODY FINGERPRINTS
The problems began when Greenspan dropped interest rates to 1% in
2003 for more than a year pumping trillions of low interest credit
into the economy. This created the appearance of prosperity but it
also inflated a massive equity bubble in housing which is now in
its death throes. The Fed “rubber stamped” many of the “creative
financing” scams which lowered lending standards and turned the
subprime fiasco into a $1.5 trillion doomsday machine.
The devastation in real estate is almost too vast to comprehend.
The mortgage bubble is roughly $5.5 trillion, and yet, prices have
just begun to fall. It's a long way to the bottom and there's bound
to be plenty of bloodshed ahead. Two million homeowners will lose
their homes. 151 mortgage lenders have already gone belly up. Many
of the hedge funds —which are loaded with billions of dollars in
“mortgage-backed” securities-- are struggling to stay alive.
Perhaps the most shocking projection was made by Yale University
Professor, Robert Schiller, who believes that home prices could
decline as much as 50% in some of the “hotter markets”. (Schiller's
book “Irrational Exuberance” predicted the dot.com bust before it
took place) If other factors come into play ---like a stock market
crash and a subsequent period of deflation--- we could see housing
prices descend 90% as they did between 1928 and 1933.
It's possible.
Typically, housing bubbles deflate very slowly, over a period of 5
to 10 years. Not this time. Credit problems in the broader market
are speeding up the pace of the decline. The subprime sarcoma has
spread to all loan categories and filtered into the banking system.
This is forcing the banks to hoard reserves to cover their
potential losses (from CDOs and mortgage-backed bonds “gone bad”).
Now, even credit worthy applicants are being turned away on new
mortgages. At the same time, “nearly half of borrowers with
adjustable rate mortgages were not able to refinance their loans.
That's a major concern for policymakers as an estimated 2.5 million
mortgages given to borrowers with weak credit will reset at higher
rates by the end of next year.” (Associated Press)
Think about that. It's no longer just a matter of 40% of loan-types
disappearing overnight (Subprime, Alt-A, piggyback, negative
amortization, interest only etc). Even people with good credit are
being rejected because the banks are hoarding capital. That
suggests the banks are in dire straights and hiding losses that are
kept off their balance sheets (more on that later).
So, it's harder to get a mortgage. And, if you already have one you
may not be able to roll it over. This will greatly accelerate the
rate of the housing crash. (In fact, the LA Business Journal
reported on Sunday that home sales plunged 50% in one month. We can
expect to see similar numbers in all the hot spots.)
DOLLAR WOES
The troubles facing the dollar are as grave as those in housing.
The stock market and the teetering hedge funds are counting on an
interest rate cut, but they've ignored the effects it will have on
the greenback. If Bernanke lowers rates---as everyone expects---
the bottom could drop out of the dollar. We're already seeing gold
soar to new highs (above $700 per Ounce) That's an indication of
dollar-weakness and a potential sell-off of US Treasuries. If
Bernanke lowers rates, the greenback will nosedive.
Author Gary Dorsch explains the potential hazards in his recent
article, “ Hopes for an Easier Fed Policy Boost the Euro and Copper”:
“Interest rate differentials have played a key role in determining
exchange rates. Since the ECB (European Central Bank) began its
rate hike campaign in December 2005, the US dollar's interest rate
advantage over the Euro has narrowed from 240 basis points to as
low as 70 basis points today. Thus, the Fed can only afford a small
rate cut to bail out Wall Street bankers who hold toxic sub-prime
debt and avoid tipping the dollar into a free-fall. But that might
not be enough to prevent a housing led recession in the months ahead.”
After years of abuse under Greenspan --an $800 billion current
account deficit, a $9 billion per month war, and a 13% yearly
increase in the money supply--- the poor dollar has run out of
wiggle-room. If the Fed slashes rates, the mighty greenback will be
a dead duck.
COMMERCIAL PAPER: WHAT YOU DON'T KNOW CAN HURT YOU
Commercial paper is something that is rarely understood outside of
the investor class. It is, however, a critical factor in keeping
the markets operating smoothly. “Commercial paper is highly-rated
short-term notes that offer investors a safe haven investment with
a yield slightly above certificates of deposit or government debt.
Banks use the money to purchase longer-term investments such as
corporate receivables, auto loans credit card debt, or
mortgagees.” (Wall Street Journal 9-5-07)
Commercial paper has been vanishing at an alarming rate in the last
month. $240 billion has been drained in just the last 3 weeks.
(There is $2.2 trillion of commercial paper in circulation in the
US) Because CP is “short term”, hundreds of billions of dollars
need to roll over (be refinanced) regularly. CP is at the very
heart of the credit crisis which has spread through the financial
markets and it could result in a massive catastrophe. The large
investment banks are in a panic --- and that is probably an
understatement. Consider this article in the UK Telegraph which
provides an eye-popping summary of what is going on behind the
scenes. ( http://www.telegraph.co.uk/money/main.jhtml?xml=/money/
2007/09/09/cndebt109.xml )
U.K. Telegraph, “Banks Face 10-Day Debt Time Bomb”:
“Britain's biggest banks could be forced to cough up as much as
£70bn over the next 10 days, as the credit crisis that has seized
the global financial system sparks a fresh wave of chaos.
“ Almost 20 per cent of the short-term money market loans issued by
European banks are due to mature between September 11 and September
19. Senior bankers fear that they will have to refinance almost
all of these debts with funds from their own coffers, putting a
further strain on bank balance sheets.
Tens of billions of pounds of these commercial paper loans have
already built up in the financial system, because fear-ridden
investors no longer want to buy them. Roughly £23bn of these loans
expire on September 17 alone.
Fears of this impending call on bank credit lines are the true
reason that lending between banks has ground to a halt, according
to senior money market sources.
Banks have been stockpiling cash in preparation for this "double
rollover" week, which sees quarterly loans expire alongside shorter
term debts -- exacerbating a problem that lies at the heart of the
credit crisis.” (UK Telegraph)
Fortunately, the British still have a few newspapers —like the
Telegraph-- that still report the news. That is not the case in the
US.
There's roughly $1.3 trillion in “asset-backed” commercial paper
filtering through American markets. These are the notes that are
connected to mortgage-backed securities (MBSs) that no one wants
and which have NO MARKET VALUE. They are referred to as “toxic
waste”. (No one is buying anything remotely connected to real
estate CDOs)
Hundreds of billions of dollars of CP has been issued through SIVs
(structured investment vehicles) and “conduits” which are
affiliates (subsidiaries) of the large banks. The banks have kept
these operations hidden from the public, but now they are in the
spotlight because they cannot meet their obligations and are stuck
with billions of CP that they cannot refinance. (The reader may
recall that Enron kept similar “off balance sheets” operations
secret from the public before they declared bankruptcy)
The banks are now forced to assume responsibility for the
commercial paper held by their affiliates, which means that they
need sufficient capitalization to cover the losses.
Sound confusing? Don't give up, yet!
The bottom line is this: The banks are responsible for hundreds of
billions of dollars in commercial paper that probably won't be
refinanced. IT IS BEGINNING TO LOOK LIKE THEY DON'T HAVE THE
RESERVES TO COVER THEIR LOSSES.
That's why we continue to believe that the banks are in trouble
(http://www.marketoracle.co.uk/Article2060.html)
According to the Wall Street Journal: “So do the banks and their
shareholders have nothing to worry about? Not quite….Negligible
losses in August were enough to force the banks to run to the
authorities for help. Regulators may decide that the best way to
prevent a recurrence is to require banks to hold more capital. They
might even limit some types of transactions. Such moves might be
good for the economy, but would reduce the bank's returns on
equity.” (“Banks Seem Fine—For Now”, WSJ, 9-8-07)
Read carefully and I think you will agree with me that the WSJ is
“tipping its hand” and suggesting that the banks needed “more
capital” even after “negligible losses.” The predicament is much
more serious now.
Bank troubles are never minor. That's why there has been so much
effort put into covering up the real source of the problem. When
people lose their confidence in the banks, they lose their
confidence in the system. That ends up inciting social turmoil.
Don't think they're not aware of that at the White House.
THE LIKELIHOOD OF A HARD LANDING
Notwithstanding the imminent shakeup at the major investment banks,
the path ahead is poorly lit and full of potholes. The reckless
“spendthrift” policies of the last 7 years have edged us ever-
closer to the inevitable day of reckoning. Professor Nouriel
Roubini summed it up best in a recent blog-entry, “The Coming US
Hard Landing”:
“ The forthcoming easing of monetary policy by the Fed will not
rescue the economy and financial markets from a hard landing as it
will be too little too late. The Fed underestimated the severity of
the housing recession, its spillovers to other sectors, and the
contagion of the sub-prime carnage to other mortgage markets and to
the overall financial markets. Fed easing will not work for several
reasons: the Fed will cut rate too slowly as it is still worried
about inflation and about the moral hazard of perceptions of
rescuing reckless investors and lenders; we have a glut of housing,
autos and consumer durables and the demand for these goods becomes
interest rate insensitive once you have a glut that requires years
to work out;
SERIOUS CREDIT PROBLEMS AND INSOLVENCIES CANNOT BE RESOLVED BY
MONETARY POLICY ALONE; and the liquidity injections by the Fed are
being stashed in excess reserves by the banks, not relent to the
parts of the financial markets where the liquidity crunch is most
severe and worsening. The Fed provided liquidity to banking
institutions but it cannot provide direct liquidity to hedge funds,
investment banks, other highly leveraged institutions and parts of
the credit markets – such as asset backed commercial paper – where
the crunch is severe. Thus, the liquidity crunch in most credit
markets remains severe, even in the usually most liquid interbank
markets.” (Nouriel Roubini's Blog)
SOUP KITCHEN USA
There are no quick-fixes or “silver bullets” as Bush likes to say.
It'll take years to dig our way out of this mess.
In the meantime, there's little to look forward to except the
steady weakening of the dollar, the persistent decline in housing,
increasing unemployment, and the looming police-state apparatus
that's supposed to keep us in line until the soup kitchens open.
See what's new at AOL.com and Make AOL Your Homepage.
www.ctrl.org
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