Archive for Ray

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The chickens will come home to roost

The world’s governments have poured good money after bad. There can’t be much left.

I have written repeatedly on how these actions have distorted the markets, how they are making things worse in an attempt to stop failed enterprises from failing.

It’s hard to say how much money has been thrown away by the US Government alone. I would guess several trillion dollars. The US Government finds itself in the predicted horns of dilemma: they can devalue the dollar and potentially destroy those who would buy their debt. Or, they can finally let the crash happen, and watch several large sections of the economy implode, along with several government backed institutions like Fannie, Freddie, and several government pension funds, and the Fed.

I have always argued that the second option was always the best, because it would happen anyway, and the sooner done, the sooner it could be dealt with. Of course it would have been a lot easier to deal with before when the government hadn’t committed over 12 trillion (yes, trillion) dollars to making things worse. That’s roughly a year’s GDP. I think they’ll be lucky to get half of it back.

A little creative destruction right now would be a nice change from the status quo. At least after an implosion, all the poison would have been worked out the system.

Anyway, the financial crisis never went away. It was simply papered over with ridiculous amounts of printed money and reckless monetisation of bad debt. The semi-socialist states of Europe could not ever sustain their spending levels, and the USA has put itself on the hook for stupid amounts of money over the last year. When the rest of the world craters and the US loses buyers for its debt, we’ll be back to disaster as usual.

I don’t know when that will be, but I think the powers that be are running out of tricks, and places to hide bad debt. I would not be surprised by a ripple of sovereign debt defaults around the world. The ripples may take a long time to reach the USA, but they will come.

26Nov2009 | Ray | Comments Off | Continued
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When is it okay to borrow?

I think this is a pretty simple question, and the pragmatic answer isn’t that difficult either. However, it seems to get lost in the noise when people are talking about large entities such as companies or governments, and things like fractional reserve banking are included.

The general answer is “when you’ll be better off for having borrowed the money”. I know that sounds inane. Let’s expand a little.

Click to continue reading “When is it okay to borrow?”

18Mar2009 | Ray | Comments Off | Continued
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Why the stimulus bill isn’t

I am mildly annoyed every time I hear someone say "stimulus bill" with a straight face.

In order to get to the bottom of all of this, there are a few realities we need to consider:

Click to continue reading “Why the stimulus bill isn’t”

14Mar2009 | Ray | Comments Off | Continued
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A good critique of Obama’s plans and their effect on housing.

Mike Morgan is an old timer in real estate, and one of those people that has been screaming about the impending implosion in the housing market for years.

He has a rather outraged take on what will happen, and it is worth reading. You can find it at http://realestateandhousing2.blogspot.com/2009/02/obama-deal-with-family-b-and-c.html .

18Feb2009 | Ray | Comments Off | Continued
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8 Trillion Dollars and Counting

I oppose bailouts as a solution to a deflationary crash, because my theory is that the government will not be able to inject enough money to matter, and will then suffocate itself with debt in the process.

I never thought they would be this aggressively stupid

Click to continue reading “8 Trillion Dollars and Counting”

26Nov2008 | Ray | Comments Off | Continued
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How Government Backstops are Destabilising the Financial System

I have already explained the root cause of why we are in a financial crisis. I have explained why talking heads talking about this being a liquidity problem are speaking bunk. Now, I am going to explain why the current actions of governments around the world are making things far worse.

The last few weeks have been filled with government announcements that they will guarantee one form of debt, or another. They think they are helping, but in fact they are doing two things:

  • They are destroying otherwise healthy parts of the world financial system.
  • They are putting other governments in a position where they have no choice but to do the same thing.

Generally, big governments are considered a good credit risk. For example, people generally assume that if they lend to the US Government, they will be paid back. So, imagine an otherwise normally functioning market in today’s panicky times, in which various forms are debt are bought and sold. The government announces that they will be guaranteeing a particular form of debt.

At that point, rational market participators sit back and consider their options. They can continue trading in the debt they are used to, but these are tricky times, and the government guaranteed debt is safer.

So, they very quickly move their money in the guaranteed debt. Besides meaning that a government is now on the hook for much more debt than they thought, this also means that otherwise healthy debt is suddenly difficult to sell.

The government backstop stole buyers away from similar debt. At that point the market for that other debt is distressed, and previously healthy entities start teetering. In desperation, governments announce they will backstop the newly distressed market. This then causes money to be sucked out of some other market, and that market becomes distressed.

In the end, everything is distressed, and the government is backstopping everything.

But, governments don’t have infinite resources. At some point they either refuse to guarantee something, or they default on their own debt. And then, a much larger problem that they have created unravelles in a way out of anyone’s control.

(For one example of what I am talking about, have a look at what Mr Practical has to say at Minyanville.)

6Nov2008 | Ray | Comments Off | Continued
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Liquidity, and the Game of Hot Potato

Please nip over at some point and have a look at my post about the root cause of the financial crisis. It will make this post make more sense.

I have already pointed out that the root of the problem is that many companies are functionally bankrupt because they are holding debt that has no value. They do not want to admit they are bankrupt. The powers that be are so afraid of a system collapse that they are not willing to force companies to come clean. I personally think that they are making a system collapse much likelier with their current actions. More on that in another post.

The current claim is that “the markets are frozen up and need more liquidity”. This is a load of bunk. What is actually going on is that a lot of people without enough money are trying to pretend they have money, and the Federal Reserve Bank (”The Fed”) is trying to help them do it. The Fed is doing this by making huge short term loans.

Here’s how it is done:

The Fed dumps a ton of money into the market, as loans. Companies take those loans, and try to pass the money around as fast as possible, to prove to any doubters that they aren’t bankrupt, and then give the money back to the Fed.

It’s a bit like a man with $1 that owes five people $20 each. He can borrow $9 for a day, and then rush around showing the $10 he now has to those people, and tell them that he has almost made back the money he needs to pay them back, and he’ll pay them back next week for sure.

If he’s lucky, he might be able to make a little money from that $10 and add it to what he has after he gives the $9 back.

Will it work?

Sure. For a while.

3Nov2008 | Ray | Comments Off | Continued
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The Aerion Business Jet

I’m tired of Doom and Gloom posts, and thought it was time to post something that makes me happy.

Click to continue reading “The Aerion Business Jet”

27Oct2008 | Ray | Comments Off | Continued
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The Root of the Problem, Counterfeit Debt

In other posts, I have written long expositions of why we are in a financial crisis. I have decided to write several short posts on the subject as well.

The root of the problem is counterfeit money. I’m sure that’s a statement worthy of a double take for most people, but it is true.

In today’s world, there is not very much difference between debt/credit and money. If you write a check to someone saying your bank owes them $100, that’s pretty similar to giving them a $100 bill. Businesses buy and sell debt like they buy or sell anything else.

Now, a relatively easy way to make money is to convince someone that some debt is good, and sell them the debt. If you know the debt is bad, this is really a form of counterfeiting. For those interested, here’s another take on the problem.

An everyday example of counterfeiting debt is writing a bad check.

Now there are three forms of debt we care about:

  • Debt that will be paid back, or good debt.
  • Debt that is good debt now, but will go bad later.
  • Debt that is bad now.

And they directly correspond to:

  • Money.
  • Counterfeit money that will magically become worthless in the future.
  • Counterfeit money that people realise is counterfeit, and won’t accept.

The housing boom, mortgage backed securities, credit default swaps, etc. was all about making counterfeit money, whether it be intentional or unintentional. Mostly, it was in some grey area really close to "intentional". Now, those same institutions dealing in this counterfeit money have been caught by their own creation.

That was the root of the problem.

The problem now is that lots of institutions are now holding counterfeit money that has turned bad, and they do not want to admit that they are bankrupt. Similarly, they are afraid to do business with other institutions, because they suspect those institutions have the same problem. They like to claim that they can’t sell their debt at the correct price, and that their "assets are illiquid". That is not true, if they were willing to sell those assets for what they were worth, they would sell like hotcakes.

Any bailout attempt that does not force businesses to come clean about how much counterfeit money they hold is doomed to failure. Markets will be frozen until trust is restored, and trust will be restored when institutions are forced to come clean, and not a second sooner.

Authorities are trying to paper over the problem by providing "liquidity"; that is, lending money for short periods to those in trouble. This is a fool’s errand, as I will cover in another post.

26Oct2008 | Ray | Comments Off | Continued
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The Moment of Truth Approaches

Please note: the case for why I believe the following is laid out thoroughly here , here , and then here .

Well, I think the financial crisis is about ready to really get started.

So far, every government response to the crisis has been to make it worse, along with taking on debt. Taking on debt during extreme deflation is a slow way to commit suicide.

The US Government will probably need to sell around 3 Trillion dollars of treasuries this fiscal year, because of all the debt the government has taken on trying to fix this.

That’s far more than has ever been attempted before, and they’re going to be trying to do it in a panicky environment where people don’t have cash to spare to buy treasuries.

When everyone figures out the numbers, all hell will break loose.

Europe is in a worse place than the USA. The chances are that the moment of truth will start in Europe, and drag down the USA with it.

If you are in stocks, get out NOW.

If you are thinking of buying something big or expensive, DON’T.

Don’t listen to anyone who claims that we have found the bottom for at least another year. In a year, I’ll probably say the same thing.

I don’t see any place to hide. Deflation kills everything but cash. Every government in the world is frantically doing its best to destroy cash, too, and their actions force other governments to join them in a race to the bottom or perish first.

The only way to fix this would be to force massive defaulting of debt. There is no way politicians are going to walk out onto the stage and announce procedures that will overnight kill 20% of companies out there and force millions into foreclosure, and guarantee 30% unemployment. The alternative is worse for all of us, but there is no upside for a politician for being known as the person who forced a hard crash to forestall a bigger crash that he claims was around the corner, and that he can’t prove will happen.

Wow. This is happening a lot quicker than I thought it would.

22Oct2008 | Ray | Comments Off | Continued
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