Random walk of shame.

[GOD]

Well,

It seems all the great aspirations and BS that many an economist spouted during the last economic boom is finally coming home to haunt them.

The thing is, that the last long run "boom" was more about reducing interest rates and thereby inflating the value of capital assets (esp. personal housing wealth) which then led to a long running consumer buying boom. Meanwhile large deficits mounted as we pumped the developing world with our demand for essentially junk.

Anyway, getting back to basic finance principles. The fact is that if you take risk out of the investing equation then people will simply lever their risk exposure buy buying more. That’s why there is a "random walk" in financial markets... all prices are betting on future outcomes and the market becomes the equilibrium of these. So, the government kept the boom going (Soaking up unemployment through huge take ups of public sector employees) reducing interest rates and everything else rather than let the market adjust to the underlying realities. A bit like not allowing a forest to burn... eventually all the deadwood builds and you have the mother of all firestorms.

Well, that’s were we are today.

If we'd had the usual 5-7 year recession cycle then the last recession would have been in the minds of most of the workforce, but because the last real recession was in the early 90s a whole generation of people haven't prepared for one. They are truly exposed to the elements.

Here's some basic monetary economics. YouTube - Federal Reserve, Inflation, and the Dollar Crisis in 60 secs

Here's some more insight, ok, its skewed towards soaking in investors to trade in commodities, but it does provide some sound economic fundamentals (although there are holes in it).
YouTube - The Ultimate American Dollar Collapse

And lastly for good measure...
YouTube - The inevitable collapse of the dollar

But the underlying and most serious issue is that the US is diminishing as the worlds trade currency if favor of the Euro.

When foreign governements start saying to the US that any lending to the US will not be in US dollars is when the US will really go into freefall. Its is the credit cruch of all time... $1.5trillion deficit to be funded... just whats happened to the banks, could happen to the US treasury.

[GOD]

Slightly off topic...

Here is an excellent stand up comedy routine on economics... anybody having done any undergraduate econ studies will find this very dry and funny...

YouTube - Principles of economics, translated

[GOD]

Here's the reason for the 1930's great depression...

YouTube - Milton Friedman: The Purpose of the Federal Reserve

And here's the modern 2008 attempt to counteract the same problem.

Bank of England announces 50-billion-pound home loan package

and buying out failing bank(s)

Northern Rock - Wikipedia, the free encyclopedia

[GOD]

Well,

last August 2007 I really did begin to sense an inevitable collapse, simply because house prices had started just jumping by huge amounts while company profits were beginning to slide. In November 2007 I even said quite blatantly to some people I know,” put your money away I really think there's going to be a big downturn".

And so, here we are.

President Bush is willing to bet the nations money to bail out stockholders. This is wrong. What is needed is a really decisive recession, it will be nasty and it will be tough, but a massive shock to the consumer mind needed to change this mentality of creating deficits to fund junk from low cost countries.

Recessions are needed every 7-10 years to remind everyone to live within their means, what has happened is that by staving off a recession for so long (by spin and fudging the numbers/hiding the facts) we now have a far greater correction to deal with... If Bush gets his way then this recession will stretch out much longer and could be a 5 year hangover.

Anyway, let the bargains arrive........................

[GOD]

Well, the British Labour government is now in the process of wasting another £40b (That’s about $75b USD) on a rapidly failing bank. (Bradford and Bingley).

Britain’s house price surge was fuelled on artificially lowered interest rates that were based on artificially lowered inflation rates (The Government has constantly LIED about inflation) furthermore the Labour Government further added fuel to the pier by allowing unrestricted labour inflows from newly Europeanised countries such as Poland and other Eastern block countries... greater demand to inflate house prices.

What is worse about all this, is that it was done at a time when rapidly industrialising countries in Asia were bringing out consumer goods at far cheaper prices than the west could produce at (esp China). If anything the West should have been constrained in growth in the face of heightened competition.

Anyway, we've assumed huge deficits (Quite possibly £100b in 2008 for Britain, twice that is maintainable) which our trading partners can quite conceivably swap to acquire national assets (such as utilities) which as oligopolies have shown no remorse with their price spikes.

What complete and utter nonsense and mis management of epic proportions.

But what would you expect of Labour? Labour just is about PR and there's no substance to anything they do, they have failed on crime, housing, immigration, health and everything else.

Everything that has happened was completely predictable.

The next 10 years are going to be tough, I feel sorry for anyone with an 80% mortgage, if you lose your job then you are completely stuffed.

The government if it had a pair would get aggressive with lenders on foreclosures and so forth, if they enter the market with the peoples money then they also need to constrain the lenders (essentially shareholders) who need to share the economic costs.

Lastly, get ready for inflation everyone, the government will allow inflation to restore nominal asset prices at the expense of cash holders and another hiding of the reduction in purchasing power.

What a rant...

[GOD]

Here's Ron Paul (US) stating what I've been saying.

YouTube - You're Going To Guarantee A Depression!!! Ron Paul

Interesting to see that Ron Paul is an Austrian School of economists advocate.

Here's another link to how the "credit crunch" occurs

YouTube - US Economy Collapsing

And if you want to read the Modern Money Mechanics, a 40page.pdf here it is.

http://landru.i-link-2.net/monques/MMM.pdf

[GOD]

I'd wondered what the total exposure to derivatives exists and has built up..

It’s 1.14 thousand trillion. 1,1400,000,000,000,000

Interesting to hear that the total assets on this planet is 1/10th of that.

Obviously, as derivatives unwind, entities lose, but most of these as they deflate require calls on capital until such time the investor defaults. If the exposure is greater than the liquid asset base (not very difficult) then it creates major problems... as we are seeing.

The biggest problem with derivatives is their risk; they can change so quickly as they are leveraged so high. And even if you're on the winning side of a derivative and the market is collapsing then the risk you were covering is not if the other side to the contract defaults. So, even good players will get taken out.

Personally, this derivatives market needs to be better understood, and proper regulation put in place. Even short selling exemplifies the casino attitude and short term nature of the markets..

Seriously, the propping up of banks isn't a 1930s type scenario, it’s actually about trying to contain the firestorm of unwinding contracts, greater variability = even greater variability. That is what leverage does, sure it’s just a case of passing funds around, but how fast can this all spin before the train really comes off the tracks and there's absolute carnage? What good is derivative cover when the other party defaults; you are exposed to the storm... This is far greater than the 1930s.

What is constant with economics and history, is that no matter what regulators do.. Investors have an appetite for risk and there will always be seismic step changes, these happen in greater magnitude when recessions do not happen on a regular basis and entities therefore get lulled into carrying less reserve cover.

If the US and EU throw endless money at this then can only be hyper inflation.

YouTube - 700 Billion, is not enough. They want MORE!!

[GOD]

It appears that the UK government will be taking a 70 percent in HBOS and a 50 percent stake in RBS.

That’s in addition to the other 2 banks it has nationalised.

What really worries me is the complete lack of due diligence in these massive acquisition plays. While the government provides £500 billion it does not know the exposure to all these derivatives and write downs. Also, in the interim if some of these entities are really going down then money will definitely start being pushed out and the exposure to various liabilities will still remain.

I don't think £500 billion is enough to underwrite the market if it’s suffered extensive write down on all these financial instruments.

And yes, I do know a thing or two about it all. I've seen very thinly capitalised conduit companies set up to transact securitisations and so forth. When a sequence in the chain defaults the whole thing decouples.