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Trillions and Trillions

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By EWMI - Posted on 20 August 2007

by Albert Persohn
Last year I wrote two articles on the coming collapse of the US and many world economies. The first one “Big Debt and Beads of Sweat” was a general look at debt and its implications for the future. The second “They’re Not Chickens And They Won’t Be Roosting” addressed the failure of the USD internationally. We shall now look a little further into this timely topic.Last year I wrote two articles on the coming collapse of the US and many world economies. The first one “Big Debt and Beads of Sweat” was a general look at debt and its implications for the future. The second “They’re Not Chickens And They Won’t Be Roosting” addressed the failure of the USD internationally. We shall now look a little further into this timely topic.Opening Comments: Christians need to understand the impact of coming economic changes on their lives. I strongly urge my friends to study the Weimar Republic Hyper Inflation and the market crashes of 1929 and 1989. My reason for releasing this article on Planet Preterist is not to criticize our Western civilization but to help us understand its demise. We need to be sensitive to the possibility that the West is falling in a contrived not an organic manner.

Interesting Times

Coalescing at this moment are several factors. We are seeing the damage wrought by excessive easy credit since the tech bust in 2000. Consumers are facing very high inflation and energy prices. (We list inflation and energy prices separately because the latter are frequently removed from inflation calculations). Ethanol inebriation is lining the pockets of big business while driving food prices upward. For the first time in the mechanized age the world has out eaten its grain production. This grain saving deficit has been with us for three years and may be largely due to biofuel production. The third and perhaps largest coalescing entity is the major war that has been in planning for the last half century.

A market correction was urgently needed after the tech bubble burst in 2000. Contributing to the size of the tech bubble was a vast amount of money spent on Y2K augmentation. The reality of the magnitude of the needed downturn was obscured by the events of September 11. At that time crude oil was about $20 dollars a barrel, today it’s nudging $78. Rather than allow a significant market adjustment central banks all over the world dropped interest rates encouraging a “Monty Pythonesque” kind of borrowing. A defacto couple employed as a fry cook in a diner and a second understudy for the role of a tree in “Munchkins On Ice” could borrow $450,000 for a townhouse. Easy additional credit allowed them to furnish the house based on a supposed increase in the value of said property. Large numbers of loans like this were issued with no insurance. They have become known as “Sub Prime” mortgages. Not all mortgages are sub prime; many do not represent such high risk.

It is estimated that 5 trillion dollars was released into the American economy as a result of this escapade into easy credit. $250,000,000,000 of this began to circulate in the day-to-day business world. Think carefully about this. A quarter of a trillion debt-based dollars are pumped into an economy that urgently requires a downward correction. This is money that would otherwise not have been there. A party ensued. This additional liquidity went a long way to deflecting the attention of the average citizen from pondering the cost of the Iraq war. This war cost will soon hit one trillion dollars, it will double that before it is over.

Sub Prime

Hmmm, what’s in a name? Tell me, dear reader; does the name “Sub Prime” fill you with confidence? Apply it to other aspects of life: Sub Prime tuna? Sub Prime seat belts? Sub Prime holiday? Sub Prime hotel accommodation? Sub Prime halftime show?

Who in their right mind would sell anything sub prime? Who would be stupid enough to buy it?

In simple terms mortgage lenders bundle their mortgages together in packages. These are sold to well-cashed funds. Many of these funds are unregulated hedge funds. These bundled together mortgages are sold as CDO’s (Collateralized Debt Obligations). Mortgage and hedge funds group CDO’s into tranches (Tiers or Classes). They pay returns on profit made by debt repayments to these funds.

The ratings agencies contribute to this cycle by applying an AAA rating to funds comprised of a group of A rated funds. It is assumed that an AAA fund may suffer the failure of one or two of its components but the rest will remain strong. This may prove to be a less than wise approach.

All of this works nicely while people continue to pay their debts. We must learn that lending institutions have their own “f” word. All businesses relying on liquidity in the mortgage market hesitate to use it. Only desperadoes and low-lifes can utter it. Never must it migrate from the gutter to the boardroom and never must the common man include it in his vocabulary. Today, the beast has escaped. Foreclosure is everywhere.

Significant anxiety in the mortgage market was visible in early 2006 when I wrote “Big Debt and Beads of Sweat”. In 2007 interest rates on many Sub Prime mortgages began to reset upwards. Several major funds have begun to feel the heat. Bear Stearns recent trouble was a small foretaste of the things to come. Two of their bottom end funds have collapsed. The lowest fund is now worth nothing, zero, nada, zip, ziltch. The second lowest is worth about nine cents on the dollar. We are now regularly reading of funds that are either collapsing or suspending redemptions on their lower grade products. Almost every time you open a financial publication today you read about increasing foreclosures and distressed funds. The imminent danger to you and I is that many of these funds will use their prime investment money to support sub prime related CDO’s.

The spin doctors are telling us that sub prime troubles will not affect other funds, Alt-A Mortgage funds are secure, this situation will not enter the broader economy and that corporate credit will not be limited. They are lying and they know it.

The GDP Shibboleth

... then they would say to him, “Then say, ‘Shibboleth’!” And he would say, “Sibboleth,” for he could not pronounce it right. Then they would take him and kill him at the fords of the Jordan. Judges 12:6

GDP is one the Shibboleths of the day. Let’s assume you and your neighbor find yourselves locked in a legal dispute in 2008. Your family GDP in 2007 was $200,000 dollars. (GDP being loosely defined as the total of all trade carried out by your family in that period). Your 2008 conflict with your neighbor costs you $120,000 dollars in legal fees. The legal fees produced nothing yet added to your GDP. Using the government’s model your 2008 GDP would actually be $320,000. In all your GDP would increase but your family will fall behind. A case in point is the boost in GPD attributed to Alaska in the wake of the Exxon Valdez cleanup. GDP went up but the state fell behind.

War is the biggest GDP booster of all. The horrendous cost is carried by the taxpayer and accounted as increased Gross Domestic Product. That money, all debt driven, also filtered into the US Economy. (The same on a different scale is happening in the UK among many others.) We are not suggesting that war is the only engine of growth in the US. In July 2007 residential construction was responsible for 5% of GDP.

In summary easy credit in the last few years coupled with war spending has dosed up the US economy with excess liquidity. We have been told that our various economies are strong based on GPD which in turn is largely energized by war.

The “One T Turnaround”

During the Reagan era a group of contractors believed they could build the Star Wars defense system. I recall watching a science show on the topic when a spokesman stated that the project could succeed if the President would provide a “T Dollar”. That’s what he called it. He wanted a trillion dollars ($1,000,000,000,000). How could that happen? Who would ever have that much money in one place I thought? That was then, this is now. Our manufacturer in chief, China is sitting on more than that today (1.2T$).

Recently US officials asked the Chinese to buy more treasury bonds to prop up the ailing mortgage industry. As the Chinese buy government and private bonds, US money is returned which can then be loaned to buy more stuff from the Chinese who will buy more bonds etc.

Bathing The Chinese?

Something big is coming. There are two ways to control the impact of the trillions of dollars held by the Chinese, Japanese, South Koreans, Taiwanese and Indians. One is to let it all continue as it is. The USD will continue to slide while the other currencies appreciate together. This will gradually shut down trade and force western countries addicted to easy credit and cheap goods to revitalize manufacturing. This process is not underway today as we are still buying cheap imports by the truckload. There is no stomach for this as Free Trade is still the order of the day.

The second approach is to collapse the USD and drive the planet into crisis. The rapid collapse of the USD would cause the Chinese to take a bath. It is not only foreign trading partners who would take a loss, the homeland would enter Weimar times. Savings would be wiped out. The result of this would require the issuing of a new currency. This would set the stage for a North American style-trading block. Considering this, the open borders policy with Mexico is no mystery.

Portents Of The Demise Of The USD

The Saudis, according to former “Economic Hitman” John Perkins have agreed they would only sell oil in US Dollars. This gave them protection and access to key petrochemical technology. Other countries are not so forthcoming. Iraq under Saddam refused this and Iran has recently begun its multi currency bourse. While this does not benefit Americans and those nations tied solely to the US Dollar it is a windfall for any giant corporation or bank doing multicurrency trading. It is strangely ironic that Western businesses built on the back of a strong dollar can now benefit dramatically from its decline. Perkins astutely comments that we have moved from the gold standard to the oil standard. While the Saudis commitment to trading oil in the USD only remains, Iran and other Gulf states are now accepting other currencies.

The USD is devaluing rapidly. Last year the east coast was awash with British tourists buying up the bargains. (By bargains we mean cheap stuff imported from China.) In early July it was suggested that the Canadian dollar would actually achieve parity with the USD and other currencies are showing similar trends.

But, But, But The Stock Market

Allow me to quote Richard Daugherty here: “Investors are borrowing record sums of money to finance trades on the New York Stock Exchange.” …. How much money? The Journal continues, “So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at the NYSE in May, up from nearly $318 billion in April.”

The stock market does appear to be flying high and all is not what it seems.

Following is a quote from economist Robert J Samuelson in an article on the Great Depression “There had been warnings. Many commentators complained before the crash that the market was driven by speculation. A lot of stock was bought on credit. Between the end of 1927 and October 1929, loans to brokers rose 92 percent. At the start of October, loans equaled nearly a fifth of the value of all stocks.

A real estate boom not unlike our own occurred prior to the great depression. It centered on Florida while the current bubble is global. The current bubble is driving a great deal of cash toward the stock market. Put simply the above mentioned five trillion dollars eventually ends up in the hands of the traders. It is further curious that the German stock market went wild through most of the Weimar hyperinflation period. Pay attention to the parallels!

What To Look For?

Some have attempted to recalculate today’s numbers against 1990 criteria. John Williams from Shadow Stats is one example. He is not alone. There seems to be a general feeling among ‘recalculators’ that we are in a global recession today. They are suggesting that the US M3 money supply is growing at about 12%. The M3 supply in Australia is reported to be growing at a whopping 14%. The point here is that the M3 money supply may not be the best indicator of inflation but it should not be ignored. For more than a year there has been no US M3 money supply data published. It would seem that the downward trend has a long way to go. The US economy will lead the way.

Specific events to watch for are:

* The failure of many funds, hedge funds will collapse drawing others with them.
We are hearing guarded comments that it may be common practice for many big funds to be paying CDO redemptions and other obligations from more traditional reserves. By traditional we mean superannuation and long-term savings. We dread the possibility.
* Bank Failures
* Watch for a continued drop in housing prices. Excess inventories caused by over construction and increasing foreclosures will bloat the size of the glut and produce deflation in this market.
* Retail businesses tied to the housing industry will slow down taking others with them
* Businesses serving the lower end of the luxury market will be impacted.
* The trillions of dollars held by China etc will be used to buy up local resources, businesses and mining rights. If the USD plummets rapidly Chinese money will be used in panic buys. We are already seeing farms in the Midwest going to Asian owners at fantastic prices.
* Price inflation followed by deflation in key markets leading to an admission that most Western countries have been in recession for about 2 years
* Depression
* War

The Question Is

Do you wish you had never read this article?

http://www.cepr.net/documents/publications/meltdown_2007_08.pdf

http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf

knoxtn_pret's picture

Albert Persohn is correctly reading the "tea leaves"....as a market trader, I have studied the works of W.D. Gann, who died in the mid '50s....one of Gann's teachings is that history repeats itself based on the book of Eccles in the bible....there is nothing new under the sun....that which was will be again...cycle and geometric analysis show that we are heading for a market correction....my charts show mid to late September (2007) as the start and late October (2007) as the acceleration of a major decline....but as I always tell folks who ask what I think the market is going to do, I tell them my forecast and $5-$6 may get you a latte at Starbucks....thee market is a cruel mistress!...Jim Nicolosi, Knoxville, TN

Jim Nicolosi
Knoxville, TN

Living in the Light of the Glorius Parousia

EWMI's picture

G'Day Jim

It is interesting to note that the Asian, Middleastern and European press has been far more open about the impact of hedge funds and related issues than the American, Canadian, British and Australian media has been. The other noteable issue is that this phenomenon has been global. Americans seem to be alone in thinking that whatever is happening is just to them. Since the beginning of the end of the Yen carry trade people from all over the world have been coming clean on reckless lending and insolvency of major institutions.

It is my hope that my observations and conclustions are wrong wrong wrong!

Al Persohn

knoxtn_pret's picture

Al,

My trading partner is an Indian fellow who lives in Atlanta, GA...he came across some info that the Bear Stearns (American firm) debacle is not over and that they are letting the info out slowly...as a trader, I do not focus on the "why", only the "what"....the "why' only confirms the "what"...great article on your part....warm regards....Jim Nicolosi, Knoxville, TN

Jim Nicolosi
Knoxville, TN

Living in the Light of the Glorius Parousia

EWMI's picture

Thanks for your kind words Jim. I am less than comfortable with the notion that we have not heard all from Bear Stearns.

Virgil's picture

Jim,

Predictions like this are misguided in my opinion. The market is affected by a thousand and one factors which none of us, including you, can accurately model and predict. Instead I personally discover that those predictions are more rooted in wishful thinking than facts, but again...I could be wrong.

The U.S. Economy is booming and going forward strong. We'll much sooner see it hitting 20,000 points instead of seeing a market crash.

knoxtn_pret's picture

Virgil....Gann spoke of the balancing of time, the squaring of price and time, biblical cycles in the market and the repeatability of history....Gann wrote a book in 1929 entitled "Tunnel thru the Air"...in it, he wrote that the period of 1940-1944 would be a very difficult time for America....then he wrote this incredible statement that American Navy would move its fleet to the Pacific where they would be attacked by air by the Japanese....mind you, this was written in 1929....you may be right and I may be completely wrong....but the market seems to be following the 20 yr cycle from 1982 to 1987....you may want to look at it for yourself...remember that the book of Eccles says that which was will be again...or should I not rely on the bible in this instance?...warm regards...Jim Nicolosi, Knoxville, TN

Jim Nicolosi
Knoxville, TN

Living in the Light of the Glorius Parousia

Islamaphobe's picture

Virgil,

On the economics, I agree with you. But I have never been an economic determinist, whether of the left or the right. I strongly believe that it is the world's spiritual underpinning that determines what happens over long periods of time. I am of the opinion that the emphasis upon reason, humane morality, and freedom of thought that Christianity brought with it ultimately overcame the resistance to the development of economic freedom--one could even say capitalism (Marx's term)--that slowed the pace of human progress for so many centuries. I am also of the opinion, for what it is worth, that the combination of the prevalence of a very secular worldview in the power centers of the West and the Islamic imperative to conquer the world is pushing the world toward a major political crisis that will have profound economic reverberations.

John S. Evans

tom-g's picture

Dr. Evans,

You must feel very proud of your part in "pushing the world toward a major political crisis that will have profound economic reverberations" after spending 42 years economically influencing our future national leaders.

Tom

Ed's picture

Tom,
The bible speaks of landmarks. Let this post of yours be the landmark that proves once and for all that everything that I have said previously about you is true.

ed

ed

Papa is especially fond of us

tom-g's picture

I thank you Ed for those kind words.

I don't recall just what everything you have said about me is, but if you've said them then they are obviously true and a biblical landmark.

So, thanks again for those kind words,

Tom

chrisliv's picture

Well,

It is nice that, as Preterists, we are not beating an Armageddon drum, like Dispensationalists have been doing so well since the 1970s.

But it's nice to also see articles by Albert, since not all Preterists have put on the Rosey Colored glasses, either.

Ever since gold coin and currency became unavailable to typical Americans in the 1930s, and the Bretton Woods gold-backed guarantee to foreign banks was withdrawn in the 1970s, the USD is tied to nothing but paper, habit, and Saudi Arabian-led preference for dollar-denominated oil transactions.

One day the US-protected dictatorship in Saudia Arabia will fall to Arab leaders who will not cooperate with Washington DC in propping up the USD. This is already beginning with Russia, Iran and Venezuela, and for good reason.

China holds billions in US debt, and could slowly or suddenly dump its Dollar denominated assets to inflict a lot of pain on the USD.

So, if Wash. DC employees continues to kill Arabs, prop-up States that oppress Arabs, place US ballistic missiles on Russia's border, threaten the only OPEC member in Latin American, or demand that China revalue the Yuan, then even the tendency to inflate the money supply by firing up the printing presses will not save the USD or American jobs.

We all know that Wash DC is populated by people who love to spend other peoples money. And when they don't have enough through extortion, they print up more, and sell the debt, which even the foreign buyers know can never be paid in its full value.

One day there may be cargo loads of $100 bills being shuffled around.

Or, maybe another World War will absolve some Global Debt along with a lot of Humanity.

Either way, another Great Depression seems obvious, and will undoubtedly humble the USD and Wash DC, which is the largest exporter of standing armies and weapons of mass destruction around the globe.

So, there are some things to look forward to, even if many Americans have to loose their high standard of consumption, e.g. Americans make up 5% of the world population yet consume 25% of the worlds oil resources.

The whole will not, forever, be held hostage by the US nuclear arsenal and Foreign Aid to totalitarian dictators, like Musharraf, Mubarak, the house of Faud, or an Israeli PM.

Intuitively, yet carefully, societies around the globe are looking for ways to insulated themselves from Wash DC. That will certainly hurt American jobs more and more. And all the jetting around the globe by the "Tea Lady" will not stop it.

Peace to you all,
C. Livingstone

chrisliv's picture

Also,

I just notice a couple of pretty good articles at Asia Times Online, which I'll include some clips below.

Peace to you all,
C. Livingstone

-------------------------------------------------
Aug 24, 2007
As US sinks, Asia unable to swim
By Walter T Molano

http://www.atimes.com/atimes/Asian_Economy/IH24Dk01.html

The US economy is down by the bow, and the prognosis does not look good. The final outcome is inevitable, and no one (outside the United States) is really surprised. However, how does Asia avoid contagion?

At the current moment, the US represents almost half of global demand - which is disproportionate with its percentage of the global population. Unwilling and unable to help itself, the US is beyond repair. Asia tried to help out as much as it could, mainly by providing ample financing. However, Asia now has to live with the grim realities that lie ahead.

From a non-Asian perspective, this is a perfect opportunity for the region to catapult ahead. Young, well educated and vibrant, Asia is poised to take the poll position of the global economy. The easiest way to do so would be for China to allow full convertibility of its currency, the yuan. With the stroke of a pen, the US dollar would collapse and the United States would become completely irrelevant...

-------------------------------------------------
Aug 24, 2007 Page 1 of 5
Central bank impotence and market liquidity
By Henry C K Liu

(This is a long article, but a few paragraphs are revealing.)

http://www.atimes.com/atimes/Global_Economy/IH24Dj02.html

After months of adamant official denial of any potential threat of the subprime mortgage meltdown spreading to the global financial system, the US Federal Reserve (Fed) last Friday, a mere 10 days after declaring market fundamentals as strong and inflation as its main concern, took radical steps to try to halt financial market contagion worldwide that had become undeniable.

The Wall Street Journal (WSJ) reports that the emergency measures - lowering the discount rate - were hastily taken to promote what the Fed publicly referred to as "the restoration of orderly conditions in financial markets". The telling words were "restoration of orderly conditions" in a market that had failed to function orderly. The Fed let the market know that it has shifted to panic mode...

Islamaphobe's picture

Al, in my judgment you are hooked on lunatic fringe economics. But then what would I know?

For what it's worth, it is my belief that if the world economy undergoes a massive crisis in the years ahead, it will be brought about by political and spiritual factors, above all the problems associated with Islam, not the excessive use of credit. Those problems are going to become more serious. It is true, however, that because of the extensive international financial linkages that have been built up over the decades, a credit meltdown could be caused by the political/spiritual crisis. Mutual economic and financial interdependence presupposes peace and stability, and we are not going to have it.

John S. Evans

EWMI's picture

Hello John,

How do you see Islam related issues having a greater affect than excessive credit?

Islamaphobe's picture

That's easy, but you won't agree with me. I have no problem with the use of credit per se, and few "orthodox" economists do. They believe, like I do, that our economic growth and prosperity is based on the use of credit. But the successful use of credit internationally depends on the existence of peace, stability, and agreement on "the rules of the game." The mullahs of Iran and Islamist leaders elsewhere are committed to the destruction of the existing world order. Their model for economic operation is a state in which the government functions according to the rules of Islam, and that means, essentially, having a fascistic type of economy run by the mullahs and their ilk. Similar systems now exist in Cuba, Venezuela, and Russia, and elsewhere (like Syria) though their leaders do not have the added advantage of religious fervor working for them. China's government also has thugs in control, but they have to depend more on the market economic model because they need economic growth and job creation and don't have oil riches. Iran, Venezuela, Russia, Cuba, and Syria have perfected instruments of suppression that allow their governments to remain in control even in the absence of a high rate of real economic growth, though I must say that Russia and Venezuela may not yet have perfected the suppression necessary to retain power should the world oil market go through a downturn.

In the West we have a bunch of nations without a great deal of spiritual strength and lacking in the will to stand up for principles. We in the United States fight with one hand tied behind our backs, and our enemies see that they have a good chance of winning by waiting us out. The mullahs know that we are probably not going to drive them out, and they will almost certainly be a nuclear power before long unless Israel acts against them, which, I suspect, is becoming increasingly unlikely. They see that we have done very little to protect Christians in the Middle East because we are so anxious to curry favor with the the Muslim "moderates" that supposedly exist somewhere. The problem is that Islam is NOT a moderate religion and is not going to be dealt with effectively until our political leaders and media and intellelctual elites face up to the consequences of that fact.

Anyway, Al, it's not very difficult to predict that our present course is leading to disaster on the political and spiritual fronts, and that will bring great economic problems as a consequence.

John S. Evans

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