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2011 December 04 Sunday
How To Prepare For Economic Apocalypse?

Mina Kimes and Reihan Salam take a look at A Harold and Kumar Recession and discuss (with a humorous note) whether working and saving make sense if economic apocalypse is approaching.

Humor aside, I think they offer up a false choice: a continuation of business as usual in which savings and investment makes sense versus an approaching apocalypse that justifies living in the present because the approaching financial disaster will destroy accumulations of wealth. Even if financial götterdämmerung approaches I want to take a more triumphant approach with my own life. But seriously, if you think the economy is going to collapse then spend your money to buy stuff that will be valuable after the collapse. Save up to buy a ranch or a hand pump for your back yard or photovoltaics for your house or a buried treasury of dried foods in an underground room. There are plenty of ways to prepare for assorted disasters (economic or otherwise) when the economy is still functioning.

Chris Martenson thinks resource limitations are going bring an end economic growth and he outlines why in a talk entitled Unfixable: Welcome to the new abnormal. Martenson advocates preparing for the approaching economic hard times. I agree.

I think business as usual is viewable only in our rear view mirrors. The technological advances needed to adjust to Peak Oil aren't coming fast enough. I can't tell you how long Peak Oil and other problems will cause hard times and declining living standards. But at least the next 10 years look bleak and probably much longer.

Before world oil production goes into terminal decline Europe's handling of the euro zone solvency crisis could bring about a pretty bad depression if the dominoes fall thru the entire dollar-denominated banking system. After all, OWS and the Tea Partiers oppose bank bail-outs. So if the populists get their way what prevents an economic depression from coming sooner than necessary?

This is the worst-case scenario from Europe, and it just might come true: Italy defaults on its debts. Every major Italian bank collapses. Recession grips the eurozone. Sovereign defaults and bank failures ripple across the Continent. Saddled with bad loans to nations and lenders in Europe, American banks hemorrhage cash. Credit freezes in the United States. Multinational companies, unable to raise money, curb U.S. investment and hiring. Wall Street demands, but fails to get, new bailouts. The entire developed world plummets into recession and, quite possibly, depression

Tim Duy says the Fed should be ready to prevent falling European economic dominoes from bringing down the US financial system. I agree. But plenty of Tea Party and Occupy Wall Street populists both oppose bank bail-outs. So time to have another depression in order to refresh everyone's memory?

The Fed is responsible for protecting the US financial sector, and needs to do so, when possible, even if the threat is eminating from overseas. US banks may not be in need of dollar liquidity, but their foreign counterparties might be - and failure to provide it would more rapidly turn a European problem into a US problem.

I ask the people who are angry about the huge loans the Fed lent out to financial institutions during the 2008-2009 crisis: Want the Fed to hold back next time? Let those banks fail?

By Randall Parker    2011 December 04 06:20 PM Entry Permalink | Comments (6)
2009 May 24 Sunday
The Optimism Of Our Economic Leaders

When high government officials tell you that we are about to turn the corner with the economy keep in mind their past performance. On April 20, 2007 then Treasury Secretary Hank Paulson said that the housing market problems had reached their worst.

"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.

People want to believe that those in power are in control, understand what is going on, and the big bosses know what they are doing. Most people want to have faith in their leaders. But reality shows this faith is unjustified.

After seeing that quote I went looking for more. Here's a history of quotes from Fed chairman Ben Bernanke and Hank Paulson.

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"

April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

February 29th, 2008 – Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

I also quite like Federal Reserve governor Frederic Mishkin on April 20, 2007. Stabilization of housing demand! Bottoming out!

"We do see some stabilization of demand in the housing market ... there is some indication that the market could be bottoming out."

In May 2008 Hank Paulson foresaw an economic recovery in the second half of 2008 as the financial crisis was supposedly behind us!

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.

Paulson said that both the ability to obtain loans and investor confidence are gradually improving, raising hopes that the financial market crisis which hit last August was beginning to recede.

"We are seeing signs of progress as capital markets and credit markets stabilize," Paulson said. "The markets are considerably calmer now than they were in March."

We need more comparisons of what leaders predict versus what actually happens.

More happy days from Paulson.

Update: On April 11, 2007 Chicago Fed President Michael Moskow had no idea what was in store.

"So far this year inflation has been somewhat elevated, highlighting the risk that inflation could stay stubbornly high.

"For the balance of 2007, economic growth likely will average modestly below potential. But I expect that growth will be picking up gradually over the coming quarters and return to near potential by 2008."

Near potential by 2008. Okay, but he just didn't know what that potential was: the potential for economic disaster.

The Fed member quotes at that link all focused on the fear of inflation. We are of course in the grip of deflation 2 years later. The reason financial experts do not seem so wrong most of the time is that most of the time the economy doesn't deviate that far from long term trends. So their incorrect guesses end up being wrong by smaller amounts. But these are all guesses.

You might think that Paulson couldn't have foreseen the disaster in the spring of 2007. Well, obviously he couldn't. But once problems became much worse in May 2008 Paulson painted a rosy picture for the latter part of 2008. We all know how that turned out.

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.

Coming to the end of the housing bubble Paulson in May 2008 foresaw the resumption of the housing bubble.

"In my judgment, we are closer to the end of the market turmoil than the beginning," he said. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector."

Treasury Secretaries should not try predicting the course of the US economy. They don't know how.

Update II: But also beware of pessimists like Paul Krugman who predict more recessions than actually happen.

Update III: Another piece of current optimistic conventional wisdom: inflation is not a threat. Simon Johnson thinks the optimistic view about inflation might be unjustified. My take: the US government is on a spending binge that must be destroying wealth. Dollars spent by a government in a hurry are unlikely to promote much wealth-creating activity. So US productive capacity is probably being harmed. This makes inflation more likely since it reduces the ability to make goods for all the dollars that are being generated by the Fed. Says Johnson:

In all these respects, the United States showed itself to be much more like a middle-income emerging market than the prevailing orthodoxy thought possible. Our financial sector became supersized, took on too much risk, received the mother of all bailouts, and we still struggle to recover from the ensuing instability. What if our inflation dynamics have also changed to become more like those of Argentina, Russia or Ukraine?

By Randall Parker    2009 May 24 10:25 PM Entry Permalink | Comments (9)
2009 March 22 Sunday
Latvia Looking At Economic Depression

In Latvia economists need to watch what they say or wind up in jail. Hey, didn't the secret police get phased out with the withdrawal of the Russian colonial power?

VENTSPILS, LATVIA - Last November, Dmitrijs Smirnovs, a young economics professor in this coastal university town, published an essay in a leading Latvian newspaper warning that the country was heading for a financial collapse to rival Iceland's.

Soon after, the secret police showed up at his home. They held Mr. Smirnovs for two days. The charge: spreading unrest and destabilizing Latvia's financial and banking system.

"I said we are bankrupt. I wrote that people should not have their money in banks, and they should not keep their money in Latvian lats," Smirnovs recalls, sitting in his cold office, the heat turned off, he says, to save money. "That was enough to have me detained. They are still investigating me."

Was Smirnovs exaggerating? No, Latvia is heading into a depression.

Latvia's economy grew at a double-digit pace for years since it joined the EU in 2004. But it fell 10.5 percent year-on-year in the last quarter of 2008. The gross domestic product is expected to decrease another 12 percent this year. Unemployment could reach 15 percent. Housing prices, once a boon, are down 25 percent, according to Global Property Guide.

Total economic contraction will exceed 20%. That's a depression, not a recession.

Harvard economist and former IMF chief economist Ken Rogoff offers some comments on just how big the economic problem has become (skip ahead to time 1:55 where his comments start).

Rogoff's comments support the views that put Smirnovs into police custody for a couple of days. Rogoff says some countries can not afford to guarantee away their bad bank debts because the debts are too large.

"In a lot of European countries the banking liabilities, what they owe, are three and five times national incomes. They can't guarantee them. So many of the policy makers are like deer caught in the headlights. They don't know what to do."

People who think Barack Obama and little Timmy Geithner know what to do should rethink their beliefs. These people are in over their heads. Their response has been too small scale in Rogoff's view. He also expects policy makers to embrace inflation as a solution.

"To fix the banking system would be a couple of trillion dollars... The trouble is if you don't put enough money, if you're not decisive enough, you've done nothing...That's what's been happening frankly. ...I personally believe we are going to end up deciding to inflate it away".

Rogoff underscores the immensity of what has happened.

"What's scary about this is that the financial system has imploded and you can't get going again without fixing it."

Rogoff faults US policy makers for their feelings of exceptionalism:

"They thought 'We're the United States, we're special, we can do this, we can borrow lots of money'." ... Its just incredible that with house prices doubling in 5 years just off the charts of things we've ever seen that you'd have the head of the Federal Reserve, the US Treasury Secretary, our leaders going and say 'this is fine, this is financial globalization, its just that we're doing a good job.' Its hard not to get angry".

Rogoff thinks it will take 4 years (the end of 2011) to get back to the level of incomes we had before this crisis started. Before then he thinks unemployment in the United States could reach 11% or even 12%. He also thinks housing could go down 2 more years till it hits bottom.

People are unprepared for deepening recession.

A MetLife study released last week found that 50% of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

Peggy Noonan says people are feeling a lot of fear.

Gun sales continue up. The FBI’s criminal background check system showed a 23% increase in February over the previous year, a 29% increase in January, a 24% increase in December and a 42% increase in November, when a record 1.5 million background checks were performed. Yes, people fear Obama will take away the guns he thinks they cling to, but a likely equal contributor to what The Wall Street Journal’s MarketWatch called a “gun-buying binge” is captured in the slogan on one firearms maker’s Web site: “Smith & Wesson stands for protection.” People are scared.

Also, people have lost faith in our leaders. No kidding.

I spoke to a Manhattan-based psychiatrist who said there is an uptick in the number of his patients reporting depression and anxiety. He believes part of the reason is that we’re in a new place, that “When people move into a new home they increasingly recognize the importance of their previous environment.” Our new home is postprosperity America; the old one was the abundance; we miss it. But he also detected a political dimension to his patients’ anguish. He felt that many see our leaders as “selfish and dishonest,” that “our institutions have been revealed as incompetent and undependable.” People feel “unled, overwhelmed,” the situation “seemingly unsalvageable.” The net result? He thinks what he is seeing, within and without his practice, is a “psychological pandemic of fear” as to the future of things—of our country, and even of mankind.

I find myself pining for life in a simpler paradise.

By Randall Parker    2009 March 22 11:42 AM Entry Permalink | Comments (4)
2009 March 04 Wednesday
Jim Rogers: Stop Bailing Out The Bankrupt

Maria Bartiromo interviews Quantum Fund co-founder Jim Rogers about the economic crisis and Rogers says Obama's policies are making the economic crisis worse.


What do you think of the government's response to the economic crisis?


Terrible. They're making it worse. It's pretty embarrassing for President Obama, who doesn't seem to have a clue what's going on—which would make sense from his background. And he has hired people who are part of the problem. [Treasury Secretary Tim] Geithner was head of the New York Fed, which was supposedly in charge of Wall Street and the banks more than anybody else. And as you remember, [Obama's chief economic adviser, Larry] Summers helped bail out Long-Term Capital Management years ago. These are people who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans.

So what should they be doing?

What would I like to see happen? I'd like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn't go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: "Well, too bad for you. We don't care if you did it right or not, we're going to bail out the 100,000 or 200,000 who did it wrong." I mean, this is outrageous economics, and it's terrible morality.

If the stock and bond holders of these financial companies lost all their investments then the market would become a lot more demanding on financial institutions to avoid risks and reveal what risks they are taking. This is why Citibank and other big financial institutions need to fail. We need those lessons.

What sorts of institutions are we propping up? When we taxpayers were forced to bail out AIG ($163 billion and rising) we were bailing out a massive hedge fund.

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division, this was a hedge fund basically that was attached to a large and stable insurance company.”

In his response to Bernanke's comments Mish Shedlock says we need to let the big financial institutions fail in order to speed the recovery.

By attempting to bail out Fannie Mae, Freddie Mac, AIG, Citigroup, Bank of America, and Merrill Lynch, the Fed is making irresponsible bets, taking huge losses, and has no regulatory oversight. There is a huge gap in the system, and that gap is the Fed itself.


There is no need to prevent another Lehman. Instead, there is precisely a need for more Lehmans. The sooner we stop trying to prop up failed institutions, the sooner the economy recovers.

The Japanese government made the mistake of keeping weak financial institutions alive in zombie condition in the 1990s. That contributed to a decade-long economic stagnation in Japan. Hope that doesn't happen in America. But a lot of forces are lining up to hold down growth in the future. First off, lending is becoming even more politicized than it already was. Second, the baby boomers are retiring and the US demographic picture for the working age is deteriorating. The new generation is going to be less cognitively able than generations that went ahead of them. That means slower economic growth and even declining living standards.

My fear is that we will enter an era like the 1970s when wage and price controls and other interference by government in the market contributed to deep recessions. At the same time, oil price will go way up again and that will drain America of money to pay for the oil imports. Living standards look set to drop.

Of course, even if the private sector learned its lesson from the financial crisis it might not matter for the next disaster anyway. Why? The Obama administration is going to use government-controlled Fannie Mae and Freddie Mac to fund reckless lenders handing out new massive amounts of money to undeserving borrowers.

In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.

So us net taxpayers (those who pay more in taxes than they get in benefits) will be forced to subsidize bad credit risks to buy houses. The more questionable borrowers who, in the old America, would not have gotten loans are championed as victims of capitalism who deserve big possessions even though they don't earn the dough. These credit risks are people who the old America would have accurately seen as not fit to borrow large sums. But the parasites who run our country want to redistribute the wealth from the most productive to the less productive. They do not want to believe that they'll destroy wealth in the process. But that is what they are doing.

Steve Sailer comments that while Obama's father wanted political control of businesses in Kenya the son Barack is achieving increased political control over the private sector in a far wealthier (at least for now) country. That political control undermines the positions of wiser managers in sound financial institutions. If the unsound institutions were allowed to fail then the surviving institutions would expand to supply financial services to the old customers of failed institutions. So the wiser managers would expand their reach while the bad managers would lose their positions of power. But government bail-outs prevent much of the purging of bad decision makers.

We need to prevent financial catastrophes. How? Megan Mcardle modestly proposes a return to partnerships in banking as a way to reduce the desire to take risks.

Pretty much everyone agrees that two of our biggest problems are, first, excess risk-taking by banks, and second, the existance of institutions that are too big to fail. So why not force banks to operate the way they used to: as partnerships? I don't think that anyone believed they were creating the kind of massive systemic exposure we ended up with, and in fact the heads of the banks tended to have their personal fortunes tied up in the bank's operations. But the lower level employees, the ones who actually knew what was going on in their trading books, didn't. If the banks had been partnerships, I'm willing to bet that a lot fewer of them would have been tempted to lever up quite so far.

They also wouldn't have been able to get too big to fail; the rationale behind going public, other than sheer greed, was the ability to raise more capital. We'd have a lot of little banks, no one of them big enough to take the whole system down with it.

This idea has merit. But a realistic view of human interests is kept out of policy deliberations since realism would constrain policy makers from doing what they want to do.

By Randall Parker    2009 March 04 10:24 PM Entry Permalink | Comments (9)
2009 February 25 Wednesday
Nouriel Roubini Calls For Temporary Bank Nationalization

The Obama Administration is trying to avoid large bank failures and nationalizations. Nouriel Roubini says accept the inevitability of the bank failures and take them over temporarily to then re-privatize sound banks.

The man has instant impact on public debate. An idea he floated only last week -- that our "zombie banks" be temporarily nationalized -- aired first on, where he writes a weekly column. It has evolved, in the space of just a few days, from radical solution to almost received wisdom.

Last Sunday on ABC, George Stephanopoulos asked Lindsey Graham, the conservative Republican senator, what he thought about all this talk of bank nationalization. Mr. Graham said that he wouldn't take the idea off the table. And on Wednesday, Alan Greenspan told the Financial Times that "it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring."

The US Federal Deposit Insurance Corporation is too small to take over Citibank and Bank of America. Their potential losses are too large. The nationalization would need to be done some other way or the FDIC would need a large cash injection.

Roubini says debt losses will keep piling up and will take down more banks.

"Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.

"Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step."

A trillion here. A trillion there. This is starting to add up to real money. Your living standard is dropping.

The faster we get bad debt off of bank balance sheets the faster the recovery will begin. Nationalization wipes out the shareholders. But if nationalization is inevitable then we are better off doing it sooner rather than later.

Fed chairman Ben Bernanke says we do not have zombie banks. But the markets do not believe him.

On Capitol Hill today, Republican Senator Bob Corker has quizzed Ben Bernanke about the nationalisation speculation.

BOB CORKER: But it seems to me that this has been creating this sort of dead man walking, sort of zombie-like banking scenario, and while I have been not using these words out around, it seems to me that what you have explained is a creeping, a creeping nationalism of our banks.

BEN BERNANKE: I think zombie was not an appropriate description for any of the banks, I think they all have substantial franchise value, they're all lending, they're all active, they have substantial international franchises, so I don't think that's an accurate description.

These banks have franchise value. Sure, they have big customer bases. But that doesn't mean they are solvent. A lot of market participants think Citi and other big banks are already insolvent. The pessimists have been more accurate than the government so far. We can't see what is on their balance sheets. So we can only guess.

By Randall Parker    2009 February 25 12:03 AM Entry Permalink | Comments (4)
2009 February 21 Saturday
Fast Economic Decline Ominous

Former Federal Reserve chairman Paul Volcker says the economy might be deteriorating even faster than it did during the Great Depression.

In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."

He noted that industrial production is falling in countries across the globe faster than in the U.S., one result of the decline caused by the breakdown of unbridled financial markets that operated on a global scale.

"It's broken down in the face of almost all expectation and prediction," he noted.

Some people argue this financial crisis was an unforeseeable "Black Swan" but Volcker is having none of that.

Volcker is also one of the few economic thinkers out there who is not enchanted by the idea of this being a "Black Swan," or a once-in-100-years event: "The financial world follows a normal distribution pattern. If you think that you're a financial engineer, you're not a very good financial analyst."

The "Black Swan" interpretation is appealing to those (e.g. bank CEOs, financial regulators, politicians) who want to be absolved of responsibility. "Wasn't my fault that some extremely unlikely event happened".

I agree with Volcker that complex financial instruments that are touted as innovations are not adding any value.

Mr Volcker, a former chairman of the Federal Reserve famed for breaking the back of inflation in the early 1980s, mocked the argument that "financial innovation," a code word for risky securities, brought any great benefits to society. For most people, he said, the advent of the ATM machine was more crucial than any asset-backed bond.

"There is little correlation between sophistication of a banking system and productivity growth," he said.

Japanese exports are cratering and production is way down.

What's more, according to the cabinet office in Japan, overseas orders fell a whopping 26.8% in December and 16.7% for the fourth quarter of 2008. While a manufacturing survey conducted by the cabinet office indicated core orders would rise 4.1% in the first quarter of 2009, we think this forecast may prove to be too optimistic. We would not be surprised to see core orders decline in each quarter of 2009. Japanese industrial production fell 9.6%. Exports fell 35.1%.

Also, according to the VDMA machine makers association, German plant and machinery orders fell a massive 40% in December from the same period a year ago, with export orders declining 30%. While mining-machinery orders are expected to increase in 2009, we believe the outlook could become more pessimistic with a further decline in commodity prices.

Industrial production in the Euro zone is down 12%.

European industrial production dropped the most on record in December, pointing to a deepening economic slump in the fourth quarter.

Output in the euro region fell 12 percent from the year- earlier month after an 8.4 percent decline in November, the European Union’s statistics office in Luxembourg said today.

Taiwan is tanking.

According to Barry Eichengreen, an economist at the University of California at Berkeley, the 40 percent decline in Taiwan's industrial production at the end of last year was the "canary in the coal mine" of Team Asia's formidable export machine. At about the same time, Japan's exports fell 35 percent, Korea's 17 percent, and China's fourth-quarter gross domestic product was essentially flat -- no economic growth at all.

If the current decline continues the annualized rates look scary.

A sharp drawback of global demand - especially from the U.S. - is dragging Japanese GDP down quickly.GDP fell largely on exports, which account for an average of 17% of overall domestic production (GDP) in the last three years. In the fourth quarter of 2008, real exports fell 13.9% since Q3, which is a massive 45% annualized decline. Anemic global demand is killing Japan.

An article in the Wall Street Journal asks "If Japan's economy collapses". That the WSJ is entertaining that possibility shows just how far things have deteriorated.

If Japan's economy collapses, supply chains across the globe will be affected and numerous economies will face severe disruptions, most notably China's. China is currently Japan's largest import provider, and the Japanese slowdown is creating tremendous pressure on Chinese factories. Just last week, the Chinese government announced that 20 million rural migrants had lost their jobs.

Closer to home, Japan may also start running out of surplus cash, which it has used to purchase U.S. securities for years. For the first time in a generation, Tokyo is running trade deficits -- five months in a row so far.

George Soros says the financial system collapsed and is on life support. That is an insightful way to characterize it. Most of our banks have failed but have been rescued by the US and other governments.

"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."

Where's the bottom? We are in deep trouble if the current rate of decline continues into the summer.

The government policy response has been enormous. Obama's intervention makes FDR's spending look like piker small stuff.

The 1930s began with federal outlays representing just 3.4 percent of the nation's economy as measured by the gross domestic product. Roosevelt's efforts to fight the Depression with government spending caused outlays to rise to 10.3 percent of GDP by 1939 and to 12 percent by 1941 on the eve of U.S. involvement in World War II.

By contrast, government spending was 21 percent of GDP last year. Obama's economic recovery policies are expected to bring it up to 30 percent or more.

"The New Deal by today's standards involved a minuscule amount of spending," said Allan J. Lichtman, a professor of political history at American University. He said Obama is more of a "big spender" than was Roosevelt.

Paul Krugman points to a Federal Reserve report that foresees a very long slow recovery.

But my eye was caught by the following chilling passage (yes, things are so bad that the summarized musings of central bankers can keep you up at night): “All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”

6 years till normality? I was hoping we'd have a recovery before Peak Oil hit. Looking unlikely though.

By Randall Parker    2009 February 21 08:01 PM Entry Permalink | Comments (19)
2009 January 05 Monday
Profiting From The Rapture And Sustainable Disaster Survival

Thread drift on Megan McArdle's blog led me to post this as a logical response to what other posters were saying: The Rapture is a profit opportunity for those left behind.

To profit from the Rapture make sure you are not a believer. Otherwise you'll go up with the Rapture and your inheritors will reap all the profit.

I see some Rapture investment angles:

1) Do not own homes in fundamentalist neighborhoods because housing prices will drop when all those believer homes come on the market in estate sales.

2) Believer mortgages are similarly a bad investment bet.

3) Get into cash before the Rapture so you can buy up businesses and housing of departed believers that will sell for cheap in estate sales.

As for how to profit from societal collapse: I think the people who are focusing in guns and canned food are not thinking sustainably. Look, if utilities are going to collapse you ought to be thinking about a country home with solar panels and near a creek with a dam for hydroelectric power.

Think about how to sustain flows when the flows have stopped for everyone else. Now, I'm not saying pairs of 50 cals and lots of ammo aren't useful. You've got to be ready to repel direct assaults on the greenhouses you are going to sustainably grow food once TSHTF. But dogs are more sustainable for routine guard duty since you can trap rabbits and other small game to feed them and the dogs can reproduce.

Dogs are more sustainable. Dogs, solar panels, and small scale hydroelectric are what you need.

This is practical advice. If you want more disaster fare then also read Jason Bradford on survival in Mendocino County once nuclear war cuts off Middle Eastern oil. Mind you, his premise is flawed since a cut-off of Middle Eastern oil will not stop the flow of trucks to refill grocery stores in Ukiah or Willets. The amount of energy cut needed to strangle US agriculture and food distribution would need to be a lot larger than that. Precisely because we waste so much we have a large buffer of cuttable energy usage before we'd see collapse of essential infrastructure.

But disasters are good fun as numerous disaster movies demonstrate.

By Randall Parker    2009 January 05 10:21 PM Entry Permalink | Comments (2)
2008 December 06 Saturday
Financial Consolidation Causes Bigger Financial Disasters?

What caused the world economic crisis? Kurt Cobb points to an argument that fewer and bigger financial companies make for fewer and bigger financial mistakes.

For former Wall Street hedge fund manager and self-styled student of uncertainty Nassim Nicholas Taleb an important cause of the current financial meltdown is best described by ecological science. The system has become overoptimized. The consolidation of finance into the hands of fewer and fewer large players--banks, insurance companies, investment banks, and giant hedge funds--has made it less vulnerable to frequent crises, but more likely to produce a severe crisis when there is a breakdown in the system.

What used to be country-specific or regional crises, now become worldwide crises. In the past we've had the Mexican crisis, the Asian crisis, the Argentinian meltdown and most recently the utterly devastating hyperinflation in Zimbabwe. But none of these became global crises.

"It's vastly more optimal to have one large bank than 10 small banks. It's more efficient," Taleb told The News Hour with Jim Lehrer recently. "[But,] when one bank, [a] large bank makes a mistake, OK, it's 10 times worse than a small bank making a mistake." The moral of the story: A world with a lot of small banks is far more resilient than one with a few large banks. That's the kind of result one would expect in biological communities, and it turns out to be true, not surprisingly, in human communities as well.

Not sure I buy this argument. The Savings and Loan crisis of the late 1970s and 1980s featured a large number of S&Ls all making the same mistake.

But globalization does bring more economies into sync with each other and has caused the financial mistakes that led to our current financial crisis to occur on a global scale rather than just a national scale.

By Randall Parker    2008 December 06 05:05 PM Entry Permalink | Comments (3)
2008 October 14 Tuesday
Iceland Short On Foreign Currency And Bankruptcy Looms

Iceland is worst hit of any nation by the financial crisis. Unless Iceland can line up some big loans from other governments it might go bankrupt.

Central bank guidelines give priority to essential imports like food, medicines and oil, in effect leaving importers of other goods starved of foreign currency.

Based on central bank figures, it can supply enough foreign currency to local firms to cover imports for just less than nine months.

Icelanders are buying store shelves empty. Since the threat of imports cut-off is very real I hesitate to label this panic-buying. These buyers are being rational, not panicky.

Iceland's rugged, treeless terrain, a barren stretch of volcanic rock, geysers and moss, means the country imports most food, other than meat, fish and dairy products.

Magnusson said last week that one of Iceland's largest supermarket chains was unable to get any foreign currency to make purchases abroad and another retailer's electronic payment didn't go through. Iceland will begin to see shortages of ``regular goods'' by the end of the week if nothing changes, he said.

Imagine yourself living in a country where the stores can no longer buy abroad and most goods come from abroad. The fishermen will still eat. They'll also be able to buy up distressed assets. But winter will be cold and hungry for so many people who are losing their jobs.

Iceland is now the ex-richest country per capita in the world. Easy come, easy go.

Separately on Sunday, industry minister Oessur Skarphedinsson said that Iceland, until days ago the richest country per capita in the world, must request aid from the International Monetary Fund.

The banking losses are so much bigger than the real economy of Iceland that the Icelandic government can't replace the losses in a bailout. The nationalized banks put limits on how much people can withdraw from their deposits.

The ramifications of Iceland's misery are probably more serious than people realize. The country's bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.

The 3 privatized banks went wild taking on assets and caused a disaster.

How did things get so bad so fast? Blame the Icelandic banking system's heavy reliance on external financing. With the privatization of the banking sector, completed in 2000, Iceland's banks used substantial wholesale funding to finance their entry into the local mortgage market and acquire foreign financial firms, mainly in Britain and Scandinavia. The banks, in large part, were simply following the international ambitions of a new generation of Icelandic entrepreneurs who forged global empires in industries from retailing to food production to pharmaceuticals. By the end of 2006, the total assets of the three main banks were $150 billion, eight times the country's GDP.

Iceland's banking bubble started, built up, and popped in a very short period of time.

Fishing sustained the rugged and remote island of Iceland for centuries. But just a half-dozen years ago, Icelanders discovered that vast fortunes could be made in high finance. They took to the new business with all the zeal and fearlessness of their seagoing past, lending abroad with speculative fervor. The banks quickly swelled to a size that dwarfed the economy of some 300,000 Icelanders back home.

Within a few years, Iceland's three big banks -- Kaupthing Bank hf, Landsbanki Islands hf and Glitnir became highly leveraged, like other now-troubled banks. The banks' assets reached €100 billion, about 10 times the country's gross domestic product last year, and their foreign depositors have come to far outnumber the island's population.

Governments should place limits on the size of liabilities that banks can build up as compared to the size of deposits.

By Randall Parker    2008 October 14 10:45 PM Entry Permalink | Comments (13)
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