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Inflation or deflation? We live in interesting times

by Jerome a Paris Sat Mar 8th, 2008 at 01:01:48 PM EST


The western financial system is caught in a trap. On the one hand, there is an urgent need for clearing prices to be established for impaired assets to restore confidence; on the other hand, if this is done in a mark-to-market world, there is a risk that some banks will run out of capital.

(Gillian Tett, Financial Times)


The global economy is facing twin shocks. Natural resource markets are delivering a supply shock of 1970s dimensions, while the financial system is delivering a shock comparable to the bank and thrift crises of the 1988-1993 period.

(Tim Bonds, Barclays Capital, in the Financial Times)

One of the most extraordinary things today is that we are facing two simultaneous crises at the same time. To some extent, they are linked, as the growth in China or elsewehre that pushes commodity prices up by making obvious the resource constraints we are beginning to face was to a large extent fuelled by the financial capitalism-driven globalisation. But they are now having completely opposed consequences, as far as inflation is concerned, with emerging markets demand continuing to push prices up, while the credit crunch is savagely cutting into economic activity and causing across the board asset price drops.

What we are really seeing is a quite brutal change in the relative values of goods and assets. For years, we had debt-bubble-fuelled increase in asset prices (mostly real estate and financial assets) and stagnation in goods prices, caused by the downwards pressure from China and the wage stagnation engineered by financial capitalism's requirements.

Now that process is partly going into reverse. Oil and commodity prices are feeding into goods price inflation, while the credit crunch signals the end of the the dizzying valuations of assets. One category is inflating, and another is deflating. And wages and pensions (ie living standards for most people) are caught in the middle.


But, making things even more complicated, the dollar, ie the unit of money that is supposedly neutrally providing the information on these relative valuations, is itself caught in the middle. The debt bubble was really a massive devaluation of the dollar versus financial assets. It was also a devaluation of wages, which was made tolerable to the general population by the parallel devaluation of consumer goods. Now, both the commodity price increases and the credit crunch are a reversal of that whole process, but as it is inflicting pain on rich Americans, ie the politically powerful, they are not about to let that happen if they can avoid it, and they are trying very hard to ensure that their assets do not lose their relative value. The way for them to do that is to continue to weaken the dollar, in the expectation that they can manage inflation better than others, and that their asset values will keep up with the price of goods and wages, thus entrenching the current (favorable) wealth sharing arrangements.

But the twist for them is twofold: first there are now other players in the asset game, with different priorities (oil producers want to protect the purchasing power of oil as well as that of financial assets; the Chinese want to protect their growth prospects and thus the stability of the system. Second is the fact that there is another anchor of value available today, the euro, which is untainted by either bubbly policies or lax central bank. Attempts to devalue the dollar will be visible immediately in its exchange rate against a credible alternative for all monetary functions (as opposed to, for instance, gold, which is a viable store of value in inflationary times, but is not practical for trade or accounting).

Beyond the battering to American pride of no longer being the dominant economy around, a fall of the dollar has political consequences in that the economy of the US is, right now, heavily dependent on borrowing from abroad to keep running. It could suddenly become dependent on what the lenders in stronger economies elsewhere want.

Which brings us back to our first crisis - the consequences of global growth, and the fact that the lenders are a combination of, on one side, the owners of the commodities that have fuelled the global boom, and on the other hand, the producers of the cheap goods that kept that Western population sated - and also the largest new consumers of those commodities. What both groups share are huge financial claims on the US economy - expressed in dollars. But they are also large consumers of goods - expressed in euros, and of oil and commodities.

Right now, the financial markets, mostly based in New York and London, areoblivious to these complexities, and are in full panic mode, with very unpredictable consequences for everybody:


The markets have become ``utterly unhinged,'' William O'Donnell, a UBS AG government bond strategist in Stamford, Connecticut, wrote in a note to clients today. A lack of liquidity has ``led to stunning air-pockets in price levels.''

(...)

``Everything is telling you the financial system is broken,'' Simon, whose Newport Beach, California-based unit of Allianz SE manages the world's largest bond fund, said in a telephone interview today. ``Everybody's in de-levering mode.''

(Bloomberg)


Basically the gears of capitalism are pretty much grinding to a halt," said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan. "What started as a little subprime problem has kind of morphed into a bigger problem for the bigger economy."

(Reuters)


Any optimism that the market might escape further violent swings has become increasingly rare. BNP Paribas said: "While deleveraging has taken an accelerated path since the beginning of the year, we believe that this is only the beginning of a trend which will look to unwind the excesses of the last few years."

In recent days new horrors surfaced from the hedge fund world. As credit spread have risen, highly-geared funds have come under increasing pressure from uneasy investors who want their money back, and brokers terrified on counterparty risk.

Willem Sels at Dresdner Kleinwort said: "Price changes, multiplied by leverage, leads to redemption risk and margin risk, which ultimately also leads to unwind risk. This creates a technical sell-off as the unwinds happen in a bearish market."

(FT Alphaville Blog)

For the oil producers and the emerging economies, the financial crisis is not a major issue, because they have not been exposed much to the supposedly sophisticated bits of the financial world, having parked most of their money in so-far-safe US Treasuries, and they have not lost their shirts there. But they do worry about attempts to inflate away the crisis.

And they are in a strong position to impose their views, as therelative importance of the two crises has yet to sink in:


The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $1,000bn.

(...)

The broad story [in commodity markets] is of depletion. Most of the easily obtainable resource deposits have already been exploited and most usable agricultural land is already in production. Natural resource discoveries, where they continue to occur, tend to be of a lower quality and are more costly to extract. Meanwhile, the dwindling supply of unutilised land faces competing demands from biodiversity, biofuels and food production.

Predictably, the scale of response to each of these crises is in inverse proportion to their respective magnitude. In the US, the credit crunch has elicited an instantaneous fiscal package to the tune of $168bn, or 1.2 per cent of nominal GDP. In contrast, the latest annual budget appropriation for renewable energy spending is just $1.72bn - 0.01 per cent of GDP.

(Tim Bonds, Barclays Capital, in the Financial Times)

In effect, the current credit crunch, while likely to be horribly painful and hugely destructive, is not the biggest crisis we face!

The growing scarcity of oil and commodities, and the increasingly strained fight for these between the big economies of the planet, is driving a parallel, and even more momentous reallocation of resources and value.

Both the money printing policies of the Fed to fight the deflation in the financial world, and the inflationary effect of commodity scarcity threaten to squeeze the middle classes.

The only good news, so to speak, is that there is a common solution to both problems, and it is one we can choose. That solution is to focus economic policy towards energy efficiency and moving away from oil. This will have the simultaneous advantage of weaning the economy off an increasingly rare resource, to provide a timely keynesian economic boost to the economy, and to re-industrialise the same economy. A massive energy efficiency programme for homes will help slow down the real estate collaspse while providing jobs to a sector (construction) in full retreat right now ; massive investment in reneawable energies, the grid, and public transportation will help put in place the infrastructure needed for the coming decades and create non-offshoreable jobs.

Display:
We're going to need to be more precise in the near term by what we mean by inflation and deflation.

We've spent the past several years in a massive asset bubble, while consumer goods and wages stagnated. This was described as "no inflation" even though we had massive asset price inflation - it simply means that relative value of assets increased.

Now we are going through the reverse process, as asset values deflate against more traditional goods - the situation of wages is unclear right now. For the time being, that relative loss of value is happening through absolute loss of value, but it could also conceivably happen through higher inflation of the non-asset type goods.

Thus you could have both inflation, as traditionally defined (increasing CPI), and deflation (as asset bubbles deflate and asset prices stagnate or continue to drop). The Fed's willingness to inject money in the system suggests that they are willing to go the second route, to have the relative price adjustment happen via increasing goods prices rather than plummeting asset prices. It's not likely to be fast enough, but it could take a life of its own - and again, a lot will depend on what wages and pensions do in that context.

The extra twist is that a lot of goods are expressed in dollars, the currency where most of that asset inflation has happened, and which needs to see the most relative readjustment of prices...

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 8th, 2008 at 01:03:16 PM EST
My understanding was that real wages were trending negative again in the states, which makes sense given the uncertainty and the emergence of contraction in demand for labor that we've seen for the last two months.

Bernanke's behavior is worrying me a great deal.  It's, at least to me, pretty clear that he's going to take rates down again at the next FOMC meeting.  The Fed has gone from looking asleep at the switch to looking absolutely panicked.  That can't be helping.  And rates are already pretty damned low.

He seems to be hoping that, by injecting massive amounts of liquidity in, people can refi their way out of foreclosure.  What's to say he doesn't simply create another bubble in gold, oil, euros, etc?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 8th, 2008 at 02:41:37 PM EST
[ Parent ]
It really does not matter any longer what Fed rates are, or how much "liquidity" they pump in IMHO.

This is because: firstly, Banks increasingly do not have the regulatory capital available to support new lending; and; secondly, even if they have the capacity to lend they increasingly do not have confidence that their counterparties will be in any position to repay the principal, never mind the interest.

The only solution perhaps - and the Fed does have extraordinary powers do do so - is for the Fed to lend directly to borrowers at minimal rates.

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 8th, 2008 at 03:04:18 PM EST
[ Parent ]
The only solution perhaps - and the Fed does have extraordinary powers do do so - is for the Fed to lend directly to borrowers at minimal rates.

In other words, make the banking sector redundant.

Except that it will not happen because the Fed is working for the banks and no one else. And the Fed is bailing the banks out by buying their rotten assets through the TAF.

Krugman has a pretty good post on the situation.

Quoteth Krugman quoting others:

Waldman calls the Fed "Wall Street's genial pawnbroker", and one of Yves Smith's commenters goes one better and calls the Fed the "pawnbroker of last resort." Ouch!

The Fed, Wall Street's pawnbroker of last resort.

by Francois in Paris on Sat Mar 8th, 2008 at 06:12:49 PM EST
[ Parent ]
Francois in Paris:
And the Fed is bailing the banks out by buying their rotten assets through the TAF.

I don't think so: pledging assets isn't selling them.

The fake Rolex isn't the pawn-broker's just yet....

It's more like the Japanese zombie banking situation. The banks are technically alive but they won't be lending much until they rebuild their balance sheets. The Fed's action does nothing much to solve that medium/long term problem, it just keeps the life support switched on.

In the meantime, it looks like a further deterioration in the Banks' balance sheets is on the way once the economy really starts to dive, and defaults start to rise.

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 8th, 2008 at 07:20:40 PM EST
[ Parent ]
I agree that TAF is just "accepting" the assets (mostly mortgage-backed securities) as "collateral" but I'm convinced it will end up as a straight-out purchase and liquidation.

The Fed will allow the banks to walk away from their TAF loans.

by Francois in Paris on Sat Mar 8th, 2008 at 07:40:22 PM EST
[ Parent ]
Well, I'm not disagreeing with that, and it is then functionally the same outcome as if the Fed did lend directly to Joe Sixpack, because the Fed are going to end up holding the keys to the house Joe Sixpack walked away from, or is going to....

That gives rise to a whole chunk of political risk already rehearsed in the UK with the now nationalised Northern Rock.

The UK Treasury is shitting themselves about the fall out when people start defaulting on all the 100 to 125% mortgages Northern Rock were so free with, and which are all now coming to the end of fixed price deals and reverting to totally unaffordable rates.

Oh dear.

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 8th, 2008 at 07:48:59 PM EST
[ Parent ]
Don't worry.

...and it is then functionally the same outcome as if the Fed did lend directly to Joe Sixpack, because the Fed are going to end up holding the keys to the house Joe Sixpack walked away from, or is going to....

Not completely functionally equivalent. Northern Rock will look like a highly virtuous operation, run in the public interest. But in the US, the banks will keep humming happily, having off-loaded their crap on a perfectly willing Fed, and the public will pick up the tabs under the form of monetary inflation.

And "everybody who matter" will applaud loudly, marveling at how astute the Fed is at avoiding the Japanese zombie bank situation.

Anyway, what will be broken in the process? The general trust in the US financial system? There isn't much left to be broken, I'm afraid.

Unless we have an FDR^2 in the White House next year, someone willing to pull the gun on the financial sector and repossess the shop, modern capitalism will work as it always does : privatize the profits, socialize the losses.

by Francois in Paris on Sat Mar 8th, 2008 at 08:18:25 PM EST
[ Parent ]
Francois in Paris:

But in the US, the banks will keep humming happily, having off-loaded their crap on a perfectly willing Fed, and the public will pick up the tabs under the form of monetary inflation.

And "everybody who matter" will applaud loudly, marveling at how astute the Fed is at avoiding the Japanese zombie bank situation.

Now this has been the subject of much debate here at ET.

There's a big difference between the absence of deflation and the presence of inflation.

The Fed picking up the crap merely means the banks don't default. It may keep them liquid, but it still does nothing for their balance sheet, and thence their ability to lend.

And it is their ability to lend that causes asset price inflation, but not, IMHO retail price inflation.

The Fed bailing out banks is neutral in monetary terms - it does nothing to put new money into circulation, which would be inflationary.

The only inflationary US factors I can see are the rising costs of imported raw materials and consumer goods, and if there is not much money around as wages to buy these things then higher prices will not be sustainable and profits are going to get squeezed.

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 8th, 2008 at 08:59:34 PM EST
[ Parent ]
It will be inflationary if the Fed is deliberately complacent on the valuation of the collaterals offered by the banks to the TAF.

The scenario is:

  • Banks borrow at the TAF and the TAF accepts banks' rotten assets at a grossly inflated value, slightly below facial value to "be tough" on the banks but way above what a market would bear if there was a market left in the first place to negotiate those turds.
  • The Fed lets the banks walk on their TAF loans and keep the rotten assets. The banks have effectively sold their rotten assets at an inflated value. Money for nothing and piles of cash to inject in the economy.
  • Thanks to the banks' miraculously revirginated balance sheets, clear of rotten assets and loaded with hard cold cash, both liquidity and trust in the banks (liquidity squared) are restored. Inflation kicks in.
  • The Fed holds the rotten assets for long enough for inflation to do its magic.
  • After enough inflation for the rotten assets to regain their facial value, the Fed sells without having to post any apparent loss. Face is saved.
  • The Fed and the banks are celebrated by the talking heads for having made the "tough sacrifices and daring interventions" that were required. Capitalism is saved, except of course for those walloped by inflation, everybody else but the banks.

It's the only "acceptable" way the Fed has to inject cash (and inflation) in the system as the open market operations are broken and may even be deflationary at this point. It's absolutely immoral - favoritism and cronyism of the worst kind - but this is what financial capitalism is about.

The other approach, as we both agree, is 1) to force the financial sector to liquidate its rotten assets and wipe out the leverage - meaning for nearly all actors in the financial sector to go under, fold and lose their shirts and their underpants - 2) inject liquidity directly in the economy by taking over the failed actors and restructuring debts and deposits in the productive sector so the real economy is not hurt (too badly).

But this is not going to happen.

by Francois in Paris on Sun Mar 9th, 2008 at 07:00:59 PM EST
[ Parent ]
and it very much looks like the Fed has chosen the inflationary route out of the current crisis. quite frankly, i can't see them doing anything different, as any other route would amount to a massive admission of failure, whereas inflation can and will be blamed on many other factors (oil, China, etc...)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Mar 9th, 2008 at 07:09:46 PM EST
[ Parent ]
I repeat this

By the way, it's quite possible for the Fed to bear large losses (on behalf of the banks) without anyone noticing. They can print money for free, but that does show up as increased liability on their balance sheet. Luckily, the Fed earns a spread from the interest bearing securities it holds against the no interest currency with which it finances purchases.

So long as the losses it bears are smaller than this spread, losses can be hidden in reduced profit rather than showing up as embarrassing balance sheet holes.

That amounts to tens of billions in loss-bearing capacity per year. By timing the recognition of losses, the Fed can finance very large losses over a period of years without politically awkward balance sheet issues.

quote from waldman which is also elsewhere in the Comments to this Diary, because it is a correct representation of what lies behind the smoke and mirrors of Central Banking.

However, it does not address inflation, which is the issue here, and presupposes that no-one will notice the "bail-out".

Francois in Paris:

It will be inflationary if the Fed is deliberately complacent on the valuation of the collaterals offered by the banks to the TAF.

The scenario is:

  • Banks borrow at the TAF and the TAF accepts banks' rotten assets at a grossly inflated value, slightly below facial value to "be tough" on the banks but way above what a market would bear if there was a market left in the first place to negotiate those turds.

I think you are confusing the Capital the banks hold with the credit swirling around the system which the Banks created and implicitly guaranteed, backing that guarantee with their capital.

Whether the Fed takes collateral or not, and what the quality is of the collateral they do take, does not affect the amount of credit in circulation, merely the risk the Fed is taking in its dealings with the relevant banks.

Francois in Paris:

The Fed lets the banks walk on their TAF loans and keep the rotten assets. The banks have effectively sold their rotten assets at an inflated value. Money for nothing and piles of cash to inject in the economy.

Hang on a minute, I think your logic fails at this point: are you saying that the Fed pawnbroker would quietly let the Banks walk away, leaving the Fed with the fake Rolex?

I don't think that would be possible, because it could not remain hidden, I suspect, and if it is done transparently then politicians, in the US or more likely overseas, would have a field day.

I give you that if it were possible, it would indeed repair the banks' balance sheets, which would allow them to create new loans=credit=money and perhaps then refinance distressed borrowers enough to stabilise asset prices.

But that doesn't reinflate the bubble - merely stop it deflating, and it does nothing for retail price inflation because none of the money will get out into circulation anyway.

Francois in Paris:

It's the only "acceptable" way the Fed has to inject cash (and inflation) in the system as the open market operations are broken and may even be deflationary at this point.

I don't think so. The best the Fed can do is to avoid deflation by providing "quasi equity" through pumping in liquidity for as long as it takes banks to rebuild their balance sheets.

The Japanese have been trying - and failing - to bring back, - a conventional rate of inflation for years using monetary means and are still failing.

Francois in Paris:

The other approach, as we both agree, is

  1. to force the financial sector to liquidate its rotten assets and wipe out the leverage - meaning for nearly all actors in the financial sector to go under, fold and lose their shirts and their underpants -

  2. inject liquidity directly in the economy by taking over the failed actors and restructuring debts and deposits in the productive sector so the real economy is not hurt (too badly).

    But this is not going to happen.

Well I believe that there is another way to do this which is a "debt/equity" swap on a fairly cosmic scale by "unitising" the flows of land/property rentals and energy which actually constitute value rather than a claim over value issued ex nihilo by a credit institution aka bank.

This essentially takes us to Keynes' International Clearing Union concept.

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

by ChrisCook (cojockathotmaildotcom) on Sun Mar 9th, 2008 at 08:06:15 PM EST
[ Parent ]
Hang on a minute, I think your logic fails at this point: are you saying that the Fed pawnbroker would quietly let the Banks walk away, leaving the Fed with the fake Rolex?

Yes, I think that the system has become that corrupt. Otherwise, the Fed needs to nationalize the banks and that cannot be done. It would be socialism and it would hurt friends.

I don't think that would be possible, because it could not remain hidden, I suspect, and if it is done transparently then politicians, in the US or more likely overseas, would have a field day.

You mean a field day like they already had one on the bullshit about Iraqi aluminum tubes and biological labs on trailers? Yeah. It worked really well.

You've seen Mozilo, O'Neal and Prince in front of the House Oversight committee on Friday, right? It's not really that they are disconnected from reality. They are very well connected into reality. They simply don't give a shit. Nothing the government can do unless it takes radical steps to lock them up, seize their assets and, more importantly, given the hold of the ruling class on mass media, to muzzle them. Can't happen. The government would have to turn upside down the two major tenets of Murika, property rights and freedom of speech (for those who own a lot of property and the loudspeakers).

And silly furiners, well, they are already voting with their feet if you look at the dollar/euro exchange rate. Anyway, no one cares about silly dirty furiners in Murika. They are nasty Yank-haters and if they bark, US politicians will blame them for hurting the US economy.

But that doesn't reinflate the bubble - merely stop it deflating, and it does nothing for retail price inflation because none of the money will get out into circulation anyway.

The money will get out in circulation because it won't go to the housing bubble but somewhere else. You can count on them to find an other way to push US consumers deeper into debt. The housing bubble will be the Fed problem, which will tide it up by throwing free money to support existing loans with very low rates and by holding rotten loans outside of the market.

I don't think so. The best the Fed can do is to avoid deflation by providing "quasi equity" through pumping in liquidity for as long as it takes banks to rebuild their balance sheets.

It's not about the economy. Ultimately, I'd say it's not even about the financial sector. It's about saving the ruling class at everybody's else expense. All the rest can be blamed for the commoners on nasty furiners: China, petro-monarchies, Europeans, etc. They don't give a shit if the economy tanks and everybody else is impoverished as long they can hold and reinforce their relative position. It can actually help them by making their targets weaker for their predation. If there is a shock, great! Just another opportunity to push for more "reforms".

Chris, I think your problem is that you seriously underestimate how degenerate and shameless modern capitalism has become. You are still trying to look at it as if it was run in everybody's interest. You are 25 years late.

~~~~~~

Actually, something about the House hearing shocked and depressed me quite seriously. AFAIK, it was focusing on fuzzy notions of fairness about the CEOs pay.

But (AFAIK) no one pointed out the absolute obvious : a corporation doesn't go from record profits to abysmal losses overnight. For that to happen requires grossly rigged accounting, either out of staggering incompetence or outright fraud, or both. In that case, the answer is clear and deliberate fraud and it doesn't matter if it is wrapped in GAAP, anointed by audit firms and backed fantasy mark-to-market valuations on markets where no one gives a shit about what they are buying and selling. It was clearly not borne by any reality, very much like the famous opinion letters used by Enron to justify its accounting acrobatics. It was just mutual back-scratching in a giant Ponzi scheme.

Put plainly, fraud.

So no one pointed out that the CEOs outlandish pay days were "justified" by completely unsubstantial and fraudulent accounting and were never earned in the first place.

by Francois in Paris on Sun Mar 9th, 2008 at 09:25:12 PM EST
[ Parent ]
Francois in Paris:
Chris, I think your problem is that you seriously underestimate how degenerate and shameless modern capitalism has become. You are still trying to look at it as if it was run in everybody's interest. You are 25 years late.

I was a Director of the IPE (now ICEFutures) and blew the whistle in 2000/2001 on how the investment banks were (and still are) milking the oil (and energy) markets, and got shafted because of it.

So yes, I do understand how shameless modern capitalism has become more clearly than most, both in terms of inside knowledge and personal experience.

You are assuming that the rest of the world will look on blithely, watch the Fed pumping in gazillions of dollars to bail out banks' balance sheets, and do nothing about it.

It simply won't happen. The dollar would disappear up it's own backside.

The Japanese had to work things out over time, and the same discipline will IMHO be forced upon the US.

Credit intermediation is finished in the US and Wall Street is going to have to find an alternative.

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

by ChrisCook (cojockathotmaildotcom) on Mon Mar 10th, 2008 at 06:30:42 AM EST
[ Parent ]
Chris, I think you are not cynical enough.

You are assuming that the rest of the world will look on blithely, watch the Fed pumping in gazillions of dollars to bail out banks' balance sheets, and do nothing about it.

Those fuckers would sell their country into slavery if they could and it'd help them to make a buck. So blowing up their own currency, they won't care a wit. They won't be the ones suffering.

by Francois in Paris on Mon Mar 10th, 2008 at 12:46:00 PM EST
[ Parent ]
Well, there's cynical, and there's CYNICAL...

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Mar 10th, 2008 at 01:26:51 PM EST
[ Parent ]
My God! I'm finally beginning to understand this shit!
---Holy shit!

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Sun Mar 9th, 2008 at 08:10:21 AM EST
[ Parent ]
See this post from Interfluidity which I quoted below in the thread.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Mar 9th, 2008 at 06:43:16 AM EST
[ Parent ]
It's, at least to me, pretty clear that he's going to take rates down again at the next FOMC meeting.  The Fed has gone from looking asleep at the switch to looking absolutely panicked.  That can't be helping.  And rates are already pretty damned low.

He seems to be hoping that, by injecting massive amounts of liquidity in, people can refi their way out of foreclosure.  What's to say he doesn't simply create another bubble in gold, oil, euros, etc?

The Fed has given up on open-market operations. They've tried it and it's not working.

Pushing the rates down on T-bills has no effect because the financial sector is not arbitraging anymore between low-rate/low-risk T-bills and high-rate/high-risk private securities. The financial sector doesn't want private securities at any rate. Period.

The real action is now on the Temporary Auction Facility. The Fed is buying rotten assets at face value, buying private securities no one wants and that banks can't sell.

Completely opaque. It has been going on for at least 2 months:
http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html?nclick_check=1

See also Krugman.

by Francois in Paris on Sat Mar 8th, 2008 at 06:23:26 PM EST
[ Parent ]
In the UK we have seen wage stagnation / erosion relative to inflation for many years outweighed by property inflation that has underpinned consumer debt.

We are now in a position where consumer debt will unlikely be allowed to grow, in fact shock horror it will have to be repaid. And unfortunately energy and food prices are rising and the falling pound will make all imports more expensive.

So between the rock and the hard place wages will have to rise and that will underpin an inflationary spiral that will eventually wipe out debts and pensions.

Before that, property will fall 35%+ before getting sucked up into hyperspace.

by Euan Mearns on Sat Mar 8th, 2008 at 07:16:00 PM EST
[ Parent ]
You're assuming - and this is the "Anglo Disease" assumption hard-wired into virtually every economist and newspaper in the land   - that rising wages must lead to rising prices, as opposed - (perhaps) to falling profits, and a rebalancing of Labour vs Capital.

The fact is that profits are as much a "cause" of inflation as are wages. But that is, to coin a phrase, an Inconvenient Truth.

Maybe returns to rentiers are overdue a correction, eh?

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 8th, 2008 at 07:28:02 PM EST
[ Parent ]
Those that sell vital goods like oil don't like seeing their value caught in the current readjustment - and, conveniently, have a handy untainted currency at hand.

There have been almost no bubbles in the eurozone markets - certainly not in Germany, a very manageable one in France, and more easily justifable ones in Spain and Ireland (which have enjoyed real economic growth as thye played catch up with the rest of Europe - they were building infrastructure, not empty McMansions in that cycle - and are anyway realtively small). The break-up of Europe is something that may seem imminent to readers of English language news, as most of that comes from London, where people are completely blinded by their hatred of Brussels and their profound ignorance of what's happening on the continent (thanks to Murdoch's nonstop propaganda) - but it's not going to happen.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 8th, 2008 at 01:04:07 PM EST
http://www.dailykos.com/storyonly/2008/3/8/132624/2151/651/472264

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 8th, 2008 at 01:31:25 PM EST
  What good is five dollar corn with thousand dollar a ton ammonia?

http://strandedwind.org/node/115

  This is a fine time to be on the right side of the ELP (Economize, Localize, Produce) line. If you make something or do something for someone who does you should be fine. The vast majority of our economy in the United States is not fine.

Don't look too closely at the numbers below - I hate the layout and I find some of the percentage swings to be a little sketchy, but even here in corn country we've got close to 60% of the population in the service sector.

http://www.paloaltoiowa.com/workforce.htm

 We have a chance here as we stand at a juncture where wind, rain, and sun make something useful with a little effort on our part. I shudder to think what is going to happen to all of those people in the so called "financial services sector".

 

by SacredCowTipper (sct@strandedwind.org) on Sat Mar 8th, 2008 at 04:17:00 PM EST
Criminal defense work is gonna be great, just may have to take my fee in chickens, or .22 shells, or maybe gold pieces.  

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson
by NearlyNormal on Sat Mar 8th, 2008 at 05:49:48 PM EST
[ Parent ]
The ramp up in consumption of key natural resources is not great enough to account for the huge rise in prices. In addition supply has been stable to increasing as well.

So, while there is a long-term issue with raw materials there is something else happening at the moment. The talking heads blame it on "speculation", which like all good economic terms they don't bother to define. Who is speculating? What are they speculating in and how are they speculating?

It's one thing to run up the price of gold, the amount bought because it is shiny far exceeds the amount needed for industrial purposes, so many buyers (or "speculators") can quickly cause a bubble, but the situation with oil and gas isn't the same. I can hoard gold, I can't hoard oil.

The countries that have been parking their excess funds in US Treasuries are going to start behaving differently as well. They can't dump their holdings, they have too much, so they will have to take steps to see that dollar deflation doesn't go too far. I would guess this means further bailouts of US financial firms, but I'm not sure.

All I can say, is that those who have a 5-10 year investment horizon and who have a strong stomach can probably make a killing if they buy sound, but oversold financial firms. Citibank, for example, is down by over 50% for the year. If anyone thinks they are going to fold, they don't understand how things work. The US was willing to send in the Marines to prevent them from losing their investments in developing countries, why should the pols be any less willing to help this time?

The thing about panics, is that no one can see the flip side, while everyone is running for the door. Either "don't panic" and stand pat, or be bold and invest for the longer term.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sat Mar 8th, 2008 at 05:00:43 PM EST
I agree, generally, the Marines are a bit busy right now, though.  But, yes, I think there will be a successful effort to keep certain things afloat no matter what.

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson
by NearlyNormal on Sat Mar 8th, 2008 at 05:52:04 PM EST
[ Parent ]

The ramp up in consumption of key natural resources is not great enough to account for the huge rise in prices. In addition supply has been stable to increasing as well.

This is actually false. The ramp up in demand has been enough to slowly eliminate any spare capacity. In normal times, with some spare capacity, prices will only increase to the production cost of the remaining marginal production - but when you get in a situation when demand can temporarily outstrip supply, the price will be driven by the cost of destroying demand - a much level price level, as oil is so convenient that it needs to be a lot more expensive to be given up (think about what kind of price level will push someone to give up their car for your commute and walk 10mn to wait for a bus, change to another, and walk to their office).

With a tight market, prices are very volatile. Speculators can accelerate an underlying trend, but cannot cause it on their own - or not for very long. We're now in the 6th year of steady oil prices increases - that's not driven by speculators.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 8th, 2008 at 06:26:03 PM EST
[ Parent ]
I agree that oil is priced way too high, but so is the dollar.  I think we will see a pullback on oil prices now even as the dollar sinks to 1.70 vs the euro (my opinion).  

the two year treasury yield fell to 1.45% on Friday.
Everyone is trying to prop up the dollar and the banking system in America.  Maybe they will succeed, but I am skeptical. No one but foreign governments are willing to supply cash or buy debt in the states.  The problem is the lack of transparency with the various debt packages. No one is willing to buy any debt except the best quality  debt because no one knows what the real risk involved in those packages are. The banking issues will become increasingly dire and be more of a catalyst for real economic problems than the inflation of natural resources.

Jerome definitely has a great solution for the woes facing America.  But the truth is I don't see it happening until its too late. The times are gonna have to get real bad before Americans become that progressive again and its no guarantee they will go left.  I think the times will get real tough every where. If the great depression went world wide in the 30's with so little worldwide trade what will happen now? All the economies are so inter-linked. So far it has been an orderly slow decline because everyone is trying to keep the US propped up. But it can't go on for ever. along with Jerome's suggestion, basic changes in the banking system  need to be put in place, but its probably already too late.

"Looking for my Lo and Behold" The Band

by the misunderestimated on Sat Mar 8th, 2008 at 06:56:17 PM EST
[ Parent ]
the misunderestimated:
Jerome definitely has a great solution for the woes facing America.

As I understand it, that is a conventional banking solution leaving the existing institutions eg Central Banks in place. No deficit-based solution is IMHO mathematically sustainable in the long term.

Credit intermediaries aka Banks are - like all intermediaries - obsolescent in the age of the Internet and the direct "peer to peer" connection that is the consequence.

That's the truth of it IMHO.

Keynes' proposal at Bretton Woods for an International Clearing Union and a "Bancor" style value unit is the only long term solution.

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 8th, 2008 at 07:39:02 PM EST
[ Parent ]
FDR did it. whether it was really a total success we'll never really know. In my opinion it was a success primarily because it gave hope and confidence in a world that was reeling. pay for it with taxes.   Like I said its not really politically feasible in the States, at least not yet.

and most importantly the buying and selling of debt has to be regulated.  FDR regulated the banks, created inusrance for the banks, etc.. which calmed every thing down.  This now has to be updated to the modern financial system where there is too little transparency in the buying and selling of debt. The panic has been controlled so far, but it could get out of control soon.

Esperanza exists, its called English.  The Bancor system is a great idea which I support. I guess for now the Euro is all we have.

"Looking for my Lo and Behold" The Band

by the misunderestimated on Sat Mar 8th, 2008 at 08:43:06 PM EST
[ Parent ]
my proposal was not about banking, but about a government-led effort to invest in energy-smart infrastructure (energy savings, renewables, network, public transport, etc...).

I said nothing about banking, but you know I disagree with you both on the way banking works right now (at least in the "old-fashioned" parts of the system) and more generally about the usefulness of intermediaries.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 9th, 2008 at 08:25:12 AM EST
[ Parent ]
I don't think we actually differ much at all.

It's "old fashioned" banking servicing Public (leaving aside differing views as to whether "Public" need be "State") investment that I advocate.

But I don't think that it is necessary - in fact it is downright inefficient - to have banks as intermediaries in the sense of middlemen.

Middlemen intermediaries are obsolescent - this is Migeru's Telluric / tectonic paradigm shift: credit unions are already being "napsterised" ( www.zopa.com etc) - Banks will be next.

I see Banks in the future as service provider intermediaries:

(a) managing the creation of bilateral credit and default pools funded by provisions (not a million miles away from "Trust Banking" eg Japan, TSB as was);

(b) bringing together investors with investment (not a million miles away from investment banking).

As I understand it, the latter is pretty much what you do.

What I am bringing to the table is simply the thought that the conventional deficit-based Financial Capital split between "Equity" and "Debt" may be reconfigured into new "asset-based" forms of Financial Capital that may work more effectively, and equitably.

The same banking disciplines will still apply: it's the "enterprise model" that changes.


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

by ChrisCook (cojockathotmaildotcom) on Sun Mar 9th, 2008 at 08:55:50 AM EST
[ Parent ]
Uh... I sure as Hell hope that is an inflation protected real interest bond? Otherwise it seems like buying those things is utter madness.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sun Mar 9th, 2008 at 05:01:46 PM EST
[ Parent ]
All I can say, is that those who have a 5-10 year investment horizon and who have a strong stomach can probably make a killing if they buy sound, but oversold financial firms.

Consider the additional investment you have to put in sleeping pills over 5-10 years. ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sun Mar 9th, 2008 at 05:02:41 PM EST
[ Parent ]
rdf:
It's one thing to run up the price of gold, the amount bought because it is shiny far exceeds the amount needed for industrial purposes, so many buyers (or "speculators") can quickly cause a bubble, but the situation with oil and gas isn't the same. I can hoard gold, I can't hoard oil.
Chris Cook claims (private communication) that the oil market is actually rather shallow compared with world oil consumption. That is, the amount of oil publicly traded (both spot and futures) is relatively small and so it can be moved a lot by speculators.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Migeru (migeru at eurotrib dot com) on Sat Mar 15th, 2008 at 06:41:14 PM EST
[ Parent ]
Just caught this on nakedcapitalism,
Covert Nationalization of the Banking System
http://www.nakedcapitalism.com/2008/03/covert-nationalization-of-banking.html
We had warned a couple of months ago that a colleague with serious connections into the Treasury and Fed told us they were working on plans for a quasi-nationalization of the banking system. Their view was that while banks would technically be solvent, they'd have enough bad credits that they would be unable to extend new loans.

Steve Waldman, in a terrific post at Interfluidity, concludes that nationalization is underway, via the expansion of the Term Auction Facility and Fed's new 28 day repo program.

SNIP

One much discussed story of the current crisis is the role of sovereign wealth funds in helping to capitalize struggling banks. Will they, won't they, should we worry? Sovereign wealth funds have invested about $24B in struggling US financials. Meanwhile, the Fed is quietly providing eight times that on much easier terms.

SNIP

If we view TAF and the new 28-day, broad-collateral repos as equity, what fraction of bank capitalization would they represent? I haven't been able to find current numbers on aggregate bank capitalization in the US. In June of 2006, the accounting net worth of U.S. Commercial Banks, Thrift Institutions and Credit Unions was 1.25 trillion dollars. Putting together remarks by Fed Vice Chairman Donald Kohn and data on bank equity to total assets from the St. Louis Fed yields a more recent estimate of about 1.6 trillion. The average price to book among the top ten US banks is about 1.3. So, a reasonable estimate for the current market value of bank equity is 2 trillion dollars. The $200B in "equity" the Fed will have supplied by the end of March will leave the Federal Reserve owning roughly 9.1% of the total bank equity. Obviously, the Fed isn't investing in the entire bank sector uniformly. Some banks will be very substantially "owned" by the central bank, whereas others will remain entirely private sector entities. As Dean Baker points out, the Fed is giving us no information by which to tell which is which.

What we are witnessing is an incremental, partial nationalization of the US banking system. Northern Rock in the UK is peanuts compared to what the New York Fed is up to.

I think the key here is this paragraph:

In James Hamilton's wonderful coinage, the Fed is conducting monetary policy on the asset side of the balance sheet. This is an innovation of the Bernanke Fed. Conventionally, monetary policy is about managing the quantity of the central bank's core liability, currency outstanding. When the Fed wants to loosen, it expands its liabilities by issuing cash in exchange for securities. When it wants to tighten, it redeems cash for securities, reducing Fed liabilities. The asset side is conventionally an afterthought, "government securities". But the Bernanke Fed has branched out. It has sought to lend against a wide-range of assets, actively seeking to replace securities about which the market seems spooked with safe-haven Treasuries on bank balance sheets without creating new cash. By doing this, the Fed hopes to square the circle of helping banks through their "liquidity crisis" without provoking a broad inflation. (Emphasis mine.)

There is a lot to digest, and a lot of links very worth following. It will be especially interesting to see how much of this makes it into the financial news media and the general news media.

There's is also a juicy line confirming what Chris Cook has been asserting - the U.S. banking system is basically brain dead, and the Fed now has it on life suppoort

by NBBooks on Sat Mar 8th, 2008 at 11:50:17 PM EST
And its title is quite explicit:


Repurchase agreements and covert nationalization

"Monetary policy on the asset side of the balance sheet" is a bit too anodyne a description of what's going on here though. The Fed has gotten into an entirely new line of business, and on a massive scale. Prior to the introduction of TAF, direct loans from the Fed to banks, including the discount window lending and repos, amounted to less than $40B, the majority of which were repos collateralized by Treasury securities. By the end of this month, the Federal Reserve will have more than $200B of exposure in its new role as Wall Street's genial pawnbroker. Assuming the liability side of the Fed's balance sheet is held roughly constant, more than a fifth of the Fed's balance sheet will be direct loans to banks, almost certainly against collateral not backed by the full faith and credit of the US government (and beyond that we just don't know). This raises a whole host of issues.

(...)

Which brings us to the more postmodern issue of what credit risk even means to a lender with unlimited cash and an overt unwillingness to let those it lends to default. In a way, I agree with Baum. Until the current crisis is long past, I think it unlikely that any large bank will default and stiff the Fed with toxic collateral. Why not? Because for that to happen, the Fed would have to pull the trigger itself, by demanding payment on loans rather than offering to roll them over. Since TAF started last fall, on net, the Fed has not only rolled over its loans to the banking system, but has periodically increased banks' line of credit as well. In an echo of the housing bubble, there's no such thing as a bad loan as long as borrowers can always refinance to cover the last one.

(...)

I do not, by the way, object to nationalizing failing banks. There are (unfortunately) banks that are "too big to fail", whose abrupt disappearance could cause widespread disruption and harm. These should be nationalized when they fall to the brink. But they should be nationalized overtly, their equity written to zero, and their executives shamed. That sounds harsh. It is harsh. One hates to see bad things happen to nice people, and these are mostly nice people. But running institutions with trillion-dollar balance sheets is a serious business. Accountability matters. These people were not stupid. They knew, in Chuck Prince's now infamous words, that "when the music stops... things will be complicated.", and they kept dancing anyway.

But accountability has gone out of style.

That last sentence is the most important one, of course.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 9th, 2008 at 06:41:09 AM EST
[ Parent ]
in his column today:


The Fed's latest plan to break this vicious circle is -- as the financial Web site interfluidity.com cruelly but accurately describes it -- to turn itself into Wall Street's pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.

Some observers worry that the Fed is taking over the banks' financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down -- there are $11 trillion in U.S. mortgages outstanding -- it's a drop in the bucket.

The only way the Fed's action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.

But slap-in-the-face only works if the market's problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that's hard to believe.




In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Mar 10th, 2008 at 05:18:39 AM EST
[ Parent ]
Great stuff NBB. Blogs are a wonderful thing!

There are a couple of interesting points here.

Firstly, by extending what is essentially indefinite credit on the basis of collateral they have no intention of calling in, the Fed is covertly taking Equity in these banks, in respect of which it is taking a rate of interest. Essentially a form of preferred equity, but totally opaque.

ie the Federal Reserve is injecting quasi equity into failing banks while calling it debt.

As Waldman

put it in a comment.

By the way, it's quite possible for the Fed to bear large losses (on behalf of the banks) without anyone noticing. They can print money for free, but that does show up as increased liability on their balance sheet. Luckily, the Fed earns a spread from the interest bearing securities it holds against the no interest currency with which it finances purchases.

So long as the losses it bears are smaller than this spread, losses can be hidden in reduced profit rather than showing up as embarrassing balance sheet holes.

That amounts to tens of billions in loss-bearing capacity per year. By timing the recognition of losses, the Fed can finance very large losses over a period of years without politically awkward balance sheet issues.

This is the "financial pornography" of Central Bank money creation and seignorage, which Tim Congdon trespassed into in the FT a while ago.

The Bank of England has quietly used this power in the past, for instance in the First World War when the banking system had given massive loans (which would have wiped most banks out, and by extension, the rest) to Germany and Austro Hungary, which the BoE discreetly took on to its books and wrote off.

The basic fact is that the Fed is doing opaquely by the back door - and on a massive scale - what the BoE/Treasury have done by the front door re Northern Rock.

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

by ChrisCook (cojockathotmaildotcom) on Sun Mar 9th, 2008 at 07:03:52 AM EST
[ Parent ]
One may wonder, what Fed is really representing. Is he solving the problems everyone assumes he is solving? Is he accountable to the government, or a close ring of big bankers? Could the inflation/deflation paradox be created by design, to obscure unsustainable transactions for as long as doable?

Taking looks from other angle: who profits from the notoriously swelling US national debt? As governments customarily go in debt to wage wars, who may take in the interest rate of the Iraq war? Do we comprehend the stupendous costs and even more stupendous interest growth? Could soon all banks (and peoples?..) become owned... not really by a government, but by a financial band?

by das monde on Tue Mar 11th, 2008 at 03:47:45 AM EST
[ Parent ]

Banks face "systemic margin call," $325 billion hit: JPM

NEW YORK (Reuters) - Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), said in a report late on Friday.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. (TMA.N: Quote, Profile, Research) after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."

Now that's scary.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 9th, 2008 at 06:42:30 AM EST
WTF is a "systemic" margin call?

Margin calls are bad: the forced sell-offs they induce are a key mechanism behind market crashes.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Migeru (migeru at eurotrib dot com) on Sat Mar 15th, 2008 at 06:17:44 PM EST
[ Parent ]
Jerome, are you sure that the Spanish housing boom is less of a bubble than the US one? My impression was that the fundamentals were a bit better but that the boom was even larger. The US had good grounds for a housing boom at the turn of the century - significant population growth (adding the population of France 1990-2010) plus a serious housing slump in the first half of the nineties. A number of metro areas have also run out of land within the traditional suburban area meaning higher than historic housing costs either in the form of prices or longer commutes from exurban developments.
by MarekNYC on Sun Mar 9th, 2008 at 01:51:11 PM EST
It's unquestionably been a huge boom, but it's also been based on very real economic growth, massive population expansion (including a huge immigration influx), and social changes, such as a large generation of young people moving away from home.

Spanish banks seem to have been smart enough to avoid the subprime crisis, and to have diversified their bubbly assets into other, maybe more real assets (foreign banks, foreign companies); ditto Spanish companies which have been on a rampage throughout Europe.

So, I really don't know. We'll find out soon enough, I suppose.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 9th, 2008 at 02:48:36 PM EST
[ Parent ]
I agree with you on the other sound reasons for the boom, but the economic growth component was largely, well, the housing boom. I realise I should come up with references, but my (not fully reliable) memory is that I read that it explained over half of the growth over the recent past.

Which is massive. There are a LOT of empty houses, that promoters expected to sell to well-off Englishmen. Let's see if that happens...

Also, while in the recent past there may have been a lot of youngsters moving away from home (mostly because they kept delaying the move, because prices were so high and because the rental market is very small in Spain), it's unlikely to be strong in the future: Spaniards have very few children. In the short run, it means less need for this extra room, in the longer run it would mean, of course, fewer people. So a lot will depend on immigration.

On the other hand, as you say Spanish banks have been WAY shrewder than Wall Street and bought over much of fast-growing Latin American industries, so the aggregate wealth may not be all that bad. As for distribution issues (which will be very real), I guess yesterday's election is a comforting element.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon Mar 10th, 2008 at 04:36:43 AM EST
[ Parent ]


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