Sunday, February 01, 2009

It's Not A "Slow Down", Barack

Today during a press conference, Barack Obama urged states to work together so that we can quickly turn around this economic "slow down". I have bad news for Mr. President-elect: this is not a slow down. This is an economic disaster that will DWARF the Depression of the 1930s in scope and toll.

It's hard to know where to begin, but here are 10 reasons why considering the current economic situation a "slow down" is actually very dangerous and irresponsible:

1. Almost All of the banks of the world are, essentially, bankrupt. They have no capital. Capital has been summarily destroyed over the years by falling interest rates, rampant bond speculation and governmental check-kiting, fraudulent accounting, fraudulent valuation, the elimination of reserve ratios, the creation of money by federal decree (fiat currency), hidden off-book "assets" in the tens of TRILLIONS of dollars, a shadow banking system driven by derivative betting scams that globally reach toward half a QUADRILLION dollars in scope, etc. Were you to go the radical route of declaring a bank "holiday" and forcing the banks of the world to "open" their vaults and hard drives for objective inspection, what you'd find is trillions of pieces of worthless paper. If Assets = Liabilities + Equity---and in a world where many if not most of these institutions are leveraged 30:1, 40:1 and beyond---then the assets currently held by the world's banks are worthless.

2. The environment is collapsing. Oceanic acidity and de-oxygenation are creating enormous "dead zones" in which fish cannot live. The polar ice caps are melting at a rate far more hyper-annuated than first thought, destroying habitat at an alarming rate. Phytoplanktons are disappearing from the world's salt water bodies, thus depriving many of the ocean's species of ample food sources. Disease-carrying insect populations are exploding due to longer and warmer springs and summers around the globe, leading to large outbreaks of Malaria, Dengue Fever and Sleeping Sickness. We have reached the Peak Oil plateau and will begin to see rapid depletion of the world's oil reserves: The age of fossil fuels is coming unceremoniously to a close. More and more countries and facing drought and famine caused in part by a lack of predictable rainfall and in part by a lack of glacial run-off. I could go on of course. The conclusion drawn however is that TRILLIONS of dollars would need to be invested immediately in developing technologies aimed specifically (not secondarily or in by-product) at trying to reverse these ongoing processes. Not only are these dollars we do not have, but under current economic conditions the cries of build more, dig more, mine more, produce more are the cries of the desperate: and desperation cannot tarry with the indulgences of environmentalism. Thus comes the death bind of depleted resources, environmental degradation, a lack of capital to employ in the production of goods that use these depleted and unharvestable resources, and STILL an insatiable thirst and an almost instinctual drive to continue the global plunder.

3. Sovereign default looms on the horizon at a scale never before witnessed. Ecuador will default on its loans 2 weeks from now---unless of course it secures more loans to service the interest on existing loans. Ecuador is but the 1st of many. Pakistan, Iceland, Ukraine---all countries lining up to receive emergency sustenance from the soon-to-be illiquid IMF. The Baltic states, Ireland, Argentina---all countries teetering on the edge of default. The cascade of events precipitated by such defaults will be horrific.

4. The Baltic Dry Index currently stands at a rate of 684, down 14 points from yesterday's close. The index essentially tells us how much it would cost to send certain goods and commodities via ship to different locations around the globe. In MAY of 2008 the Baltic Dry Index reached its high of over 11,700 points. A 90+% drop in just 6 months means ships are not moving goods because the ship-owners cannot make a profit in doing so. As such, much needed bulk commodities (Wheat, Steel, etc.) are not being shipped to market. When reserve stocks run out, so will the production of food. This trend cannot be reversed through the infusion of more debt into the already reeling system. Additionally, within months the cost of oil will once again rise as OPEC manipulates markets to try desperately to maximize gains. When this happens, the Baltic Dry Index should reach 200 or less. At that level, it will COST a shipping company hundreds of thousands of dollars to ship goods. Not a great business model.

5. The housing implosion is surreal in the level of capital destruction that is ongoing and that is not even close to "bottoming":

a. It is impossible to valuate CDOs that hold mortgages because it is impossible to untangle them. No longer do banks hold the loans from which they have profited: they are packed together with hundreds of other "like" assets and sold on the market to greedy investors. (Of course those days are gone, but the detritus remains)

b. Nobody trusts valuations anymore anyhow. The agencies who were supposed to valuate securities accurately did nothing of the kind. The depth of mistrust--and rightly so---is SO deep that, in fact, all of the moves to prop up the system are viewed by the public as ways in which the rich can make themselves richer. Claims to the contrary by Paulson et al are met with anger and amazement: "Do they really think we are that dumb?!?"

c. There is no such thing as mark-to-market anymore: even mark-to-MODEL is dubious as the current model is utterly fraudulent.

6. People aren't going to start borrowing anew, and banks aren't gonna start lending anew, because suspicion runs deep regarding duplicity, off-book debt, etc. The FED can spend TRILLIONS on "purchasing" and guaranteeing anything it so desires, but until the government carries out a full blown CENSORSHIP campaign on the Internet and on Television, trust will not return. Everytime Paulson or Bernanke speak, the market responds with fear. The market knows that these men are dissemblers extraordinaire, and as such the markets respond accordingly. Mr. Obama's team does nothing to engender the kind of trust necessary for individuals and institutions to willingly take chances on the kind of investments that have just recently been exposed as fraudulent and illegal.

7. Foreign countries who have purchased US Bonds are not dumb, and they are NOT going to wait until those bonds reach maturity. As soon as it becomes crystal clear that default may be looming, the run on the US bond market will be, shall we say, entertaining.

8. Confidence in the veracity of our political leadership is at an all-time low. Don't under-estimate this dynamic. Even in this moment of relative beauty---the election of an African American President---our incipient Chief Executive has pulled together a staff of old-school, Keynesian cronies. His ploy may be an appeal to the Center, but it ignores the reality that tens of millions of Americans have come to associate the old school as entirely corrupt and duplicitous. And these suspicions will only be exacerbated by the doomed-to-failure Freidmanite approach to the financial crisis: that of spending TRILLIONS more on stimulus packages that cannot, by their very nature, succeed in an environment of debt-based toxic shock.

9. The Credit Default Swap Cyclops is hiding in the cave, but it has not gone away. The CRIME of derivative trading has created so much debt and so much counter party risk, that one more significant corporate failure could start the dominoes a-tumbling and essentially bring the global economy to a complete and grinding halt.

10. And finally, our obsessive and insane addiction to 5% GDP growth---to growth and expansion in general---makes ANY solution to the current mess a failed proposition before the fact. Spending TRILLIONS to renew growth in a global system that has reached well beyond the limits of healthy growth is crazyness. Our addiction to growth has led us to create a World Bank and International Monetary Fund that place entire nations into debt servitude and allow for the unhindered exploitation of their resources and destruction of their ecosystems. Our addiction to growth has placed the world on the brink of food crises and unemployment crises that will make the Ethiopian famine of the 1980s seem downright pedestrian. Utter crazyness.

No sir, Mr. Obama. This is not a slow down. This is not a contraction. This is not a market correction. This is an economic disaster of epic proportions. This is to the 1930s what an F5 tornado is to an afternoon thundershower. An umbrella will not shield you from this storm sir.


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