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Anglo Disease: Dollar Dump & Boom-n-Bust

by Jerome a Paris Tue Oct 30th, 2007 at 10:33:58 AM EST

History’s warning about the price of money

As one of the great monetary economists of the last century, Jacques Rueff, pointed out in the late 1960s, people react to the “growing insolvency” of a reserve currency, such as the dollar, by acquiring “gold, land, houses, corporate shares, paintings and other works of art having an intrinsic value because of their scarcity”. Sounds familiar? Indeed, this is the story of our present decade, one in which alternatives to the dollar as a store of value have soared even while the CPI has remained subdued.

This phenomenon is well-known in developing countries, where asset booms combined with low CPI inflation have preceded monetary and financial crises.

Wolfgang Munchau

Perhaps the biggest structural problem of the UK is an over-reliance on personal debt and a built-in tendency towards speculative housing bubbles. Britain has owed much of its 15-year spell of good economic growth to an unprecedented credit and housing binge that has lasted abnormally long. (...) housing cycles are very long – long enough even for rational people to form irrational expectations. The boom was driven by cheap money and abundant credit and it was sustained by an irrational belief that prices would rise for ever in real terms. The downturn is driven by the same process in reverse: expensive money, a credit squeeze and an equally irrational belief about how far prices can drop.

In both countries, asset price inflation reflect a debasement of currency by increasing financial speculation while the underlying economy stagnates. The boom will be followed by a bust, in the form of inflation, followed and or repressed by significantly higher interest rates but these two articles suggest that the two countries may take different paths to get there: a currency crash in one case, as foreign investors move out of the dollar, triggering higher interest rates (and a recession) even before inflation is visible in the CPI numbers; and a housing market crash in the other, as market psychology changes bring out more stringent lending standards, and speculative buying collapses. Abusing the benefts of a reserve currency only works so long as such abuses remain tolerable internally (government incompetence) and externally (warmongering) and there is no alternative; relying on importing foreign billionaires and on parasiting the real economy of the rest of the continent can only take place once. All of this is coming to an end now.

[editor's note, by Migeru] Previous "Anglo Disease" content:

If someone can dig up the previous diaries on the Anglo Disease (in a not very old Migeru diary) and add them below the fold of this story, or as a reply to this comment, that would be much appreciated, as such tasks are unpleasantly long on dialup. Thanks!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 30th, 2007 at 10:37:21 AM EST

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Oct 30th, 2007 at 10:44:12 AM EST
[ Parent ]
And I have now posted this story, in an extended version, over at dKos:

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 30th, 2007 at 11:34:39 AM EST
[ Parent ]
When too many people are trying to make much money, it is no surprise that too much money is made.
by das monde on Tue Oct 30th, 2007 at 09:51:21 PM EST
[ Parent ]

Fears over next victim of squeeze

Investor worries are mounting that the next big casualties from the credit squeeze might be the specialist companies that act as guarantors for bond issuers.

These companies, which write insurance to boost the credit ratings of various kinds of bonds, have seen their share prices pummelled and the cost of protecting their debt against default soar. Over the past week, sector leaders such as MBIA, Ambac, XL Capital Assurance, Radian and MGIC have all been hit hard.

In recent years, these companies, known as monolines, have moved away from their role of guaranteeing, or wrapping, bonds issued by US municipalities towards writing business related to structured asset-backed finance deals, such as mortgage-backed bonds and collateralised debt obligations.

Following the turmoil in structured credit markets, this business has turned sour, which could affect the cost of borrowing for the local US authorities who rely on their guarantees.

"Our conclusion is that MBIA and the rest of the financial guarantors are facing a prolonged period of stress," said Rob Haines, an analyst at CreditSights, a research house.


The cost of protecting $10m of MBIA's debt against default in the credit default swap market has soared from about $22,000 annually for a five-year contract back in February to more than $231,000 last week, said data provider CMA Datavision.

These monolines are rated AAA. That their default swaps jumped from 0.2% per annum to 2.3% per annum (multiplied by 10!) suggests that the market no longer believes that their ratings are worth anything.

The amounts covered by their guarantees are in the hundreds of billions of dollars - each.

These monolines have been serious competitors to banks in recent years as they could offer lower overall borrowing costs by, essentially, taking the risks, slicing them, repackaging them, and them reselling them in various tranches, the biggest one would get the AAA-rated gaurantee. This was cheaper thanks to the "dynamic" bond market and its appetite for the various underlying structured products. Oops.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 30th, 2007 at 11:45:55 AM EST
Precisely about AMBAC, the lastest post on Mish' is very interesting:

by Pierre on Tue Oct 30th, 2007 at 01:43:02 PM EST
[ Parent ]
Today in the London's free newspaper Metro the following cheery news greeted morning commuters from the front page...

Britons' debts increasing by £373m a day | Metro.co.uk

Consumer debt rose by £1.35billion last month and total debts, including mortgages, went up by £11.2billion to £1.38trillion.


The squeeze has led to more people reaching for their credit cards, with reports some are using their plastic to cover mortgage payments.


The Council of Mortgage Lenders said it expected the number of home repossessions to rise by half next year from 30,000 to 45,000.

The number of borrowers in arrears of at least three months would also increase to 170,000 next year compared with about 145,000 this year, the CML said.


Meanwhile, Bank figures show the number of mortgage approvals hit a two-year low of 102,000, with experts warning that the credit squeeze could get even tighter.

Rising interest costs for secured debt is pushing people to using unsecured debt such as overdrafts, credit cards and personal loans to pay their mortgages. And the repossession, arrears and new mortgage figures are ugly.

But the money quote is this one:

Charities say they expect thousands of calls in the new year from homeowners left destitute after splashing out over the festive period.
How about not friggin' splashing out over the festive period?

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Oct 30th, 2007 at 11:56:09 AM EST
How about not friggin' splashing out over the festive period?

What? I don't know how you can possibly advocate infringements of human rights like that.

More seriously, the Christmas splurge - like the two (or four) weeks in foreign climes - is now part of the British definition of decency. Not being able to indulge marks you as one of the poor.

by Colman (colman at eurotrib.com) on Tue Oct 30th, 2007 at 12:18:53 PM EST
[ Parent ]
Not being able to indulge marks you as one of the poor.

And all the indignity that implies, coming from the culture that gave us the word "chav".

Proverbs 11:2 Pride cometh before the fall.

Money is a sign of Poverty - Culture Saying

by RogueTrooper on Tue Oct 30th, 2007 at 01:16:09 PM EST
[ Parent ]
As a non-expert it seems to me that the "rational" US policy, once the rest of the world stops financing US debt, is to hyper-inflate the currency so dollar denominated foreign debt disappears as a problem.

The pre-conditions for this is that a short-termist and selfish electorate (not to mention political and economic elites), will not tolerate simultaneous higher taxes and reduced expenditure.

The public might be happy to stop corporate welfare, but will not accept major cuts in domestic social expenditure. Elites would probably favour the reverse policy. Most Americans also seem to be comfortable with wasting vast sums on a bloated military budget, skewed more to useless high tech projects that only benefit the military-industrial complex than to spending on the sort of relatively low tech but numerous forces which might actually be of use.

If a sovereign government is unable to raise the funds to pay interest on its debt, by taxation or further borrowing, there is only one recourse left. The printing press.

Everyone in such a country is likely to get poorer, but elite groups have more opportunity to diversify assets so as to maintain or increase their relative advantage over the rest of the population.

I find it difficult to know if the UK is in a similar position. However I am sure the Brown-Cameron National government can appeal to the Dunkirk spirit and relive the triumphs of the MacDonald-Baldwin National government of the 1930s. Of course the modern generation may not remember the Second World War or be willing to put up with enhanced austerity. The modern idea of savage cuts in public expenditure bringing about the end of civilisation, is a slight reduction in the projected percentage rate of growth in public expenditure. What the reaction would be to across the board reductions in actual amounts of expenditure is unpredictable. Perhaps Gordon also needs to invest in some new printing presses.

by Gary J on Tue Oct 30th, 2007 at 11:59:35 AM EST
the printing presses are indeed working overtime. It's interesting to watch the race between the U.S. devaluing the currency vs. China trying to unload it for something of stable value. Of course, it is very difficult to say whether the U.S. administration does such things consciously or events simply follow from their seemingly unrelated policies. (I cannot decide as to their level of incompetence - only as to their nature as class warriors.)

One item regarding the diary itself - my redundant comment - inflation for the majority of us in the U.S. was rising (primarily driven by oil prices) ahead of the housing market downturn. As the downturn began, inflation has accelerated, it's true.  But, excepting the possibility of Weimar-style hyper-inflation, an 'unacceptably' high rate of inflation predated the current problem.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Tue Oct 30th, 2007 at 01:02:16 PM EST
[ Parent ]
Of course, for perfidious Albion, if things get too sticky they will just dump the pound and join the euro.

In a heartbeat, if you maybe thinking otherwise.

Money is a sign of Poverty - Culture Saying

by RogueTrooper on Tue Oct 30th, 2007 at 01:18:22 PM EST
Although there is a slowdown, even a slight reverse, in the housing markets, I'm not convinced yet that there will be a crash. There is still too much pressure of demand in the market place to allow prices to fall too far. Nor will that change unless there are widespread redundancies for which the evidence is not yet emergent.

however, there will be a welcome cleansing factor that speculators, who have been hoovering up property in the tax-abusive "buy-to-let" get-rich-quick scheme, are finding that rents are not covering the increases in their mortgages and the properties are coming back onto the market, for the overall benefit of everybody.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Oct 30th, 2007 at 01:40:50 PM EST
I think a lot depends on what you term a crash.

As you note in your diary, houses are at 8 times average annual wage. Now, historically the long run average is about 4 times. So we might assess that the appropriate level given the demand pressure is about, say 6 times...

That means prices may well be destined to halve in the short term as the correction from a bubble invariably overshoots the "natural level."

That isn't actually technically a crash, but may well kind of feel like one...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Oct 30th, 2007 at 07:35:31 PM EST
[ Parent ]
Munchau starts his piece thus:

When I first came to live in London about 25 years ago, Germany was widely considered a more advanced economy than the UK. In the mid-1990s these perceptions began to reverse. During the course of the next decade, I would expect to see yet another reversal - in favour of Germany.

No, I am not going to leap to a defence of the Rhineland model. I remain sceptical about Germany's long-term economic performance. The country relies too heavily on manufacturing exports. It lacks a modern service economy and is committed to an antiquated financial sector.

So, anyone able to enlighten me what "a modern service economy" is?

As for "an antiquated financial sector" I'm somewhat suspicious of that too...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Oct 30th, 2007 at 07:38:09 PM EST
a modern service economy

Estate Agents, hairdressers, financial advisers, betting shops, mobile phone shops.....

an antiquated financial sector

Banks where the manager actually knows you; Banks without a queue of people outside frantic to withdraw their money; shares held for longer than two weeks....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 30th, 2007 at 07:51:22 PM EST
[ Parent ]
where your client doesn't speak English

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 31st, 2007 at 05:07:51 AM EST
[ Parent ]
According to the article, the german financial service is antiquated because it doesn't allow for the housing bubble that's tearing apart the UK. The author's insane. The FT is a madhouse.
And the "Rhineland model" is really bad, because anything that produces record trade surplus can't possibly be right. We've been told that the USUK model is the best, they're solidly in the red, therefore being in the red is the right thing to do.

A 'centrist' is someone who's neither on the left, nor on the left.
by nicta (nico@altiva․fr) on Wed Oct 31st, 2007 at 06:54:00 AM EST
[ Parent ]
More debasement... The Federal Reserve has cut interest rates again, to 4.5%

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Oct 31st, 2007 at 06:48:35 PM EST
There's a nice punt for a carry trade, there then: Borrow dollars & buy Norwegian assets.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Oct 31st, 2007 at 08:22:56 PM EST
[ Parent ]
I am following your "borrow dollars" advice on a limited scale: I am only paying the minimum payments on my (modest, and getting modester) US credit card debt. As long as the USD loses in the vicinity of 1.5% per month w.r.t. the GBP I break even...

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Oct 31st, 2007 at 08:27:56 PM EST
[ Parent ]

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