Hpc? Probably. Financial Meltdown? Probably Not.

[Guest mattsta1964]

Fiat money is our best chance. In fact it's our only chance, even die hard monetarists like Milton Friedman never advocated a return to the gold standard.

The key to a successful and enduring fiat system is if there's enough significant countries with truly independent and professional central banks. If it ever looked like the world was moving towards populist politicians who might legislate the major independent central banks out of existence, then I'd agree that truly desperate times lay ahead. But even though the outlook for the next five years looks gloomy, it doesn't look sufficiently terrible that I see that as a real possibility.

Be interesting to see what happens in the unlikely event that Ron Paul becomes Prez then!

America might get a quazi honest banking system.......if they don't assassinate him first

[Guest muttley]

It's all over the net - google it. Try shadow stats. Google the 18% figure I just quoted too.

I tried google and couldn't find anything to support your claim of real inflation at 13 to 15 %. The shadowstats site has a graph of "Experimental CPI" at somewhere between 3 and 4%.

Could you provide a link to your claim please?

[azogar]

bump

[silver surfer]

The only way a fiat currency can survive is if money supply is capped absolutely at below 2% per annum. Do you trust any government/banker to do that?

That's simply nonsense! I'd love to know where this particular fantasy comes from.

You say "capped absolutely at below 2% per annum", so if money supply (and I'll humour you here by not questioning what you mean by "money supply") got to just 2.1% for just one year you'd claim our entire monetary system was doomed?

[Injin]

That's simply nonsense! I'd love to know where this particular fantasy comes from.

You say "capped absolutely at below 2% per annum", so if money supply (and I'll humour you here by not questioning what you mean by "money supply") got to just 2.1% for just one year you'd claim our entire monetary system was doomed?

Fiat currency benefits a few thousand people in london.

Everyone else loses.

They lose the ability to not pay for wars, they lose the ability to save. They lose the ability to put a brake, an effective brake on the state in it's mad dreams of dominance. They lose the ability to live in peace. They lose the ability to be left alone. Every non reactive law is predicated upon the existence of fiat currency.

The whole of western society is centred around two things -

1) Violence. Specifially statist's attacking everyone else constantly to make them "behave".

2) Fiat currency. Sepcifically, statists telling everyone else what they will find valuable or else.

Freedom from 2 is freedom from 1.

[Guest Anders]

I'm sure it is. But so are alien abduction stories. What it isn't all over is any kind of half-way reputable economic publication.

Alien abduction stories my ****.

SS I can't be bothered holding your hand any more, do your own due dilligence. From what I've seen of your various responses you seem pretty clueless generally. Good luck.

Edited December 2, 2007 by Anders

[Guest Anders]

I tried google and couldn't find anything to support your claim of real inflation at 13 to 15 %. The shadowstats site has a graph of "Experimental CPI" at somewhere between 3 and 4%.

Could you provide a link to your claim please?

See my reply to SS - go do your homework, choose to believe the govt liars if you like ref their 2 and 3 per cents or whateever their latest ******** is. Have you considered that if the money supply is inncreasing year in year out then inflation will increase too? Why was M3 stopped? Obviously to hide the in the teens money supply. What do you see regarding energy prices, petrol, food, train fares, council taxes, house insurance, meals out, fast food, cinema tickets, beer, car insurance and 1001 other things? Train fares alone just went up 14% for those commuting into London. Any of this anecdotal evidence sound like anywhere near the govts CPI basket ********?

SS please don't butt in and tell us that you can get wine at 40% off in Threshers and that 42in TVs are coming down in price.

Inflation is well into the teens, 13-15% minimum and will increase exponentially as we move further into this derivatives implosion.

[batthink]

Bump.

As an independent minded lurker my interpretation of the thread is that SS has won this little argument. It would seem that the Financial Armageddonista do simply make up exaggerated numbers to suit their argument. SS's more reasoned analysis has definitely won me over - then again I probably feel more secure afterr getting some Gold ETFS in the recent price dip.

[Guest Anders]

I tried google and couldn't find anything to support your claim of real inflation at 13 to 15 %. The shadowstats site has a graph of "Experimental CPI" at somewhere between 3 and 4%.

Could you provide a link to your claim please?

This article was written a while ago, they said multiply the govt's figures by 4

So 4 x 3% = 12%

Waaaay low.

Revealed: the real rate of inflation

By Edmund Conway, Economics Editor

Last Updated: 1:50am GMT 05/12/2006

Discover your own inflation rate

Audio: Edmund Conway on what the figures reveal

Your view: Is the cost of living spiralling out of control?

The cost of living for many British households is up to four times the Government's published rate of inflation, The Daily Telegraph can reveal.

Millions of families are experiencing inflation far beyond the official rate of 2.4 per cent, new research suggests.

Mervyn King, Governor of the Bank of England

The Government was last night accused of neglecting hard-up families as the research shatters the illusion that the Consumer Price Index - used by the Bank of England to set interest rates - represents the true cost of living as experienced by many households.

Pensioners are the hardest hit, with inflation rates of almost nine per cent, as record gas and electricity bills take a massive slice out of their budgets.

The revelation comes only days after the Government said there were no plans this year for extra cash for pensioners' winter fuel payments.

Both middle class and struggling families are also shown to be experiencing inflation well above the national average, as the increased costs of household bills, education and petrol erode their earnings.

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The shadow chancellor, George Osborne, said: "This is a stark illustration of how real living standards are falling, particularly for pensioners and the most vulnerable in society.

"Millions of people are struggling as the cost of living is rising faster than their incomes. What a legacy for Gordon Brown after 10 years in Downing Street."

The research, produced for The Daily Telegraph by Capital Economics, reveals the enormous difference between the CPI and the inflation rates experienced by many families.

According to the study, pensioners' costs rose by 8.9 per cent in the 12 months to October.

Hard-up families, getting by on £20,000 a year, saw their costs increase by 4.6 per cent — almost twice the national average and well above the annual rate of wage increases, 3.9 per cent.

Meanwhile, the increasingly large number of young Britons living at home with their parents — and not paying mortgages or bills — experienced deflation of 2.1 per cent, since many of the items they spend their money on, such as clothes and electrical goods, are falling in price.

The figures are calculated using the Office for National Statistics' own inflation data, but made more representative by creating individual "shopping baskets" of goods and services for different types of households.

The massive difference between the CPI and the price rises faced by many families will be particularly upsetting for wage earners in the public sector — including teachers and nurses — since Mr Brown, the Chancellor, has asked public sector bodies to base their salary increases on the CPI.

It may also concern the Bank of England, which last month raised interest rates to five per cent amid fears that those facing big cost increases will demand higher wage rises from their employers.

The CPI has come under repeated fire from politicians and consumer groups since the Chancellor introduced it in 2003 to replace the Retail Price Index as the Monetary Policy Committee's inflation target.

Although the Bank of England has frequently said that the CPI is an acceptable economic measure for the purpose of setting interest rates, it does not include many major costs for households — most notably council tax and mortgage payments, which were an important part of RPI.

But even when these are included, the households considered in the study are still shown to be experiencing a far greater rate of inflation than RPI, which currently stands at 3.7 per cent.

Pensioners could be facing the equivalent RPI inflation of nine per cent.

The figures indicate that middle class families, with a combined income of £100,000 and outgoings on school and university fees, are seeing their cost of living increase at an annual rate of 5.8 per cent, while families struggling financially are facing inflation of 5.2 per cent.

Young professionals and those living at home are seeing costs increase at a slower rate than RPI.

A spokesman for the Office for National Statistics said: "The CPI and RPI are specifically not intended to measure what people often refer to as 'the cost of living'."

[batthink]

See my reply to SS - go do your homework, choose to believe the govt liars if you like ref their 2 and 3 per cents or whateever their latest ******** is. Have you considered that if the money supply is inncreasing year in year out then inflation will increase too? Why was M3 stopped? Obviously to hide the in the teens money supply. What do you see regarding energy prices, petrol, food, train fares, council taxes, house insurance, meals out, fast food, cinema tickets, beer, car insurance and 1001 other things? Train fares alone just went up 14% for those commuting into London. Any of this anecdotal evidence sound like anywhere near the govts CPI basket ********?

SS please don't butt in and tell us that you can get wine at 40% off in Threshers and that 42in TVs are coming down in price.

Inflation is well into the teens, 13-15% minimum and will increase exponentially as we move further into this derivatives implosion.

I can get a pint of beer for less £2 in my local, and I live in north London - cinema ticket £3.50, food shopping no noticeable change in past year. Don't have a car, but bought a really good value bike from decathlon, much cheaper than 5+ years ago. There is plenty of anecdotal evidence to support the opposite view as yours. Thats why anecdotal evidence is ******.

[Bloo Loo]

A spokesman for the Office for National Statistics said: "The CPI and RPI are specifically not intended to measure what people often refer to as 'the cost of living'."

That, mr spunksman for the ONS, is NOT how its reported to the people. Its reported as THE Inflation rate, which people think of as the rising cost of living.

[Guest Anders]

Bump.

As an independent minded lurker my interpretation of the thread is that SS has won this little argument. It would seem that the Financial Armageddonista do simply make up exaggerated numbers to suit their argument. SS's more reasoned analysis has definitely won me over - then again I probably feel more secure afterr getting some Gold ETFS in the recent price dip.

Big mistake to play the paper game right now!!!

LOL, and you will have to pay taxes on any paper profits, not so bullion, so you are scuppered before you even start with ETFs. Add in broker fees and the potential for ETF and Broker default (see latest E-Trade scares, they took a hit of 11 cents on the dollar, LOL, rumours of a run worldwide at one point 2-3 weeks ago) and your investment is perhaps not as clever as you think.

[Guest vicmac64]

I'm sure it is. But so are alien abduction stories. What it isn't all over is any kind of half-way reputable economic publication.

Silver Surfer - wake up and smell the coffee - I don't know what you don't understand about simple mathematics and common sense or maybe you have Vested Interests like a job that depends on this charade continuing - in any case even the birds in the trees now know something is wrong - very wrong with our economy.

[Guest Anders]

I can get a pint of beer for less £2 in my local, and I live in north London - cinema ticket £3.50, food shopping no noticeable change in past year. Don't have a car, but bought a really good value bike from decathlon, much cheaper than 5+ years ago. There is plenty of anecdotal evidence to support the opposite view as yours. Thats why anecdotal evidence is ******.

We are talking about price increases generally, which the layman would understand as inflation. The govt is putting real inflation now at circa 3%. That is absurd. Ask 1000 ppl if they think 3% is a reasonable estimate and by far the majority would say NO. You are talking the SS ******** about bikes and certain items coming down in price and/or being better value than in years past. That is certainly true in consumer elctronics and certain sectors of retail - clothes perhaps, PCs of course etc etc. But some cheap goods do not compensate for an OVERALL gouging of the public by price increases that are often in the 10s of per cents increase year in and year out. Running a car is now too expensive for many people - cars are cheaper than ever but insurance is more costly than ever, road tax and congestion charges, petrol and depreciation, fines and maintenance all add up to the fact that car ownership is part of the inflationary increase package. Beer here in my local is about £1.30 for a good bitter, £3 for Stella, the cinema is £8 - big deal. I wouldn't live in North London if you paid me, ROFL.

[Justice]

Most important how would you define Financial Meltdown? are we talking about a country? group of countries or everyone.

it will all come down to everyone but my guess is the $ will be the first to go as a worlds reserve currency

May pay to keep a little bit of spare food just incase.

[silver surfer]

it will all come down to everyone but my guess is the $ will be the first to go as a worlds reserve currency

May pay to keep a little bit of spare food just incase.

Why would a transition of the world's reserve currency from the dollar to another currency constitute a "financial meltdown"? We went from the pound to the dollar in a fairly orderly fashion without packs of rabid dogs roaming our cities, why will this time be any different?

[Guest Anders]

Why would a transition of the world's reserve currency from the dollar to another currency constitute a "financial meltdown"? We went from the pound to the dollar in a fairly orderly fashion without packs of rabid dogs roaming our cities, why will this time be any different?

This chap Roubini has it all sussed...

Liquidity and Credit Crunch in Financial Markets is Back to Summer Peaks, Only Much Worse and More Dangerous Nouriel Roubini | Nov 25, 2007

There is now increasing evidence that the liquidity and credit crunch in international financial markets is back to its summer peaks of August and, in most dimensions, even worse than in the summer; financial markets are now in a “virtual panic mode” according to a market participant (as reported by the FT). This worsening of the financial markets turmoil has occurred in spite of the hundreds of billions of dollars and euros that have been injected in the financial system by the Fed, the ECB and other central banks and in spite of the 75bps cut in the Fed Funds rate by the Fed. This massive easing of liquidity – both its quantity and price - has miserably failed to stem a severe liquidity crunch that is now back to the summer peaks, as evidenced for example in the interbank markets – both in US and Europe - by the sharp widening of Libor rates - at a variety of maturities – relative to equivalent maturity government yields and/or policy rate; such sharp rise of spreads to summer levels signals a worsening of the liquidity crunch.

Indeed the ECB is now announcing another massive injection of liquidity. This injection of liquidity will miserably fail like the previous ones as the ECB is not getting it that a reduction in its policy rate is now necessary and urgent. As the Fed Funds cut by the Fed suggest, such policy rate cut may not prevent a worsening of the liquidity conditions; but the lack of a cut in the ECB policy rates makes such a liquidity crunch in Europe – and the risks of a serious contagion from the US hard landing - even worse than the alternative.

Last August the soft-landing consensus claimed that the episode of financial turmoil would be temporary (like previous ones in 2004, 2005, 2006) and that Fed easing would restore calm to the financial markets and prevent an economic hard landing.

This author instead argue then that the turmoil and volatility in financial market would not be a temporary phenomenon but that it would rather persist and lead to a significant repricing of risk; that the liquidity and credit crunch that started in the summer would get worse rather than better over time; that such crunch reflected credit and solvency problems in the economy, not just illiquidity; that monetary policy would be ineffective in easing these liquidity and credit problems; that we would experience a Minsky Moment and the unraveling of the Minsky Credit Cycle; that the turmoil reflected deep seated unmeasurable uncertaintly rather than priceable risk; that losses from this seizure of credit and markets would be massive; that this was the first crisis of financial globalization and securitization; and that the real consequences of this liquidity and credit crunch would increase the likelihood of a US recession that was already likely without such a financial turmoil.

These bearish forecasts have indeed proven right as financial conditions are now worse than in the summer and as the likelihood of a generalized credit crunch, a US recession and the spillover of such a hard landing to the rest of the world are increasing by the day (see Larry Summers on the FT today for another prominent scholar now suggesting that a US recession is very likely).

The worsening of the liquidity and credit crunch relative to the summer peaks is evident from a wide variety of signals and markets: in interbank markets spreads of Libor relative to government yields are sharply up again over a range of maturities, especially the 3 month one. In derivatives markets there has been a sharp reduction in liquidity and in trading activity as counterparty risk is rising. Money market funds are also experiencing liquidity problems partly driven by credit problems. Several of such funds were exposed to toxic radioactive RMBSs and CDOs and have experienced losses that reduced their NAV below par. Thus, those backed by backed have received a bailout by their sponsoring bank; but those without the backup of a bank are now scrambling to find lines of liquidity from banks that are becoming scarce and expensive.

More generally the risk of liquidity runs against non-banks institutions that have short term liquid liabilities and longer term and illiquid assets is rising. These institutions include: hedge funds subject to redemptions; non-bank investment banks whose liquidity and credit problems are rising; SIVs and conduits that are now unraveling fast as the ABCP paper backing their illiquid asset is rolled off (while the Super-SIV plan is another half-baked shell game that is bound to fail); money market funds experiencing NAV losses; covered bond markets are so illiquid that European banks have decided – dramatically – to stop trading in this large $2 trillion market. Soon enough even some medium sized banks that are rotten and sharply exposed to mortgages may experience runs, even if these banks may – unlike the former non-bank financial institutions – have access to the Fed lender of last resort support. Since financial disintermediation and securitization has brought much of financial intermediation outside of the banking system we now face the mess of possible runs against a wide range of financial institutions that do not have access to the central banks’ lender of last resort support.

Since the summer both liquidity and credit problems have worsened. We now know that the losses related to mortgage and their securitized products (RMBSs, CDOs) will be in the hundreds of billion dollars range ($300 to 500 billion) and that such losses are spreading from subprime to near prime and prime mortgages. These losses do not include those deriving from the coming meltdown of the commercial real estate lending where the issuance of new CMBSs has altogether dried up and where the CMBX indices signal extreme levels of expected defaults. Such losses don’t either include the mounting default rates from credit cards and auto loans that will surge further once the US fully enters into a recession. They do not include the losses that the GSEs – Fannie and Freddie - are starting to experience and that will mushroom in the near future; we have the paradox of the GSEs that were supposed to guarantee or repackages half of US mortgages now being in significant financial trouble; thus, their ability to reliquify the RMBS and mortgage markets is severely impaired. They do not include the coming train wreck of a downgrade of the monoliners that insured many of these toxic mortgage products. And such likely downgrade of monoliners would lead to losses expected to be in the $200 billion range, including the shock that such a downgrade will produce for the muni bond markets. And such losses now go as far as even the CPDOs market - that were supposed to be default-free - and where instead we are now observing the first defaults with 90% losses for investors. Now losses and defaults of highly leveraged institutions are popping out all over the world (Australia, Asia, France, Germany, UK, even in remote Norvegian villages) and across a spectrum of financial institutions, the latest being insurance and reinsurance (Swiss Re) companies.

There are now signals of extreme illiquidity, risk aversion, credit worries and flight to safety in the US and Europe based on a wide ranges of indicators: swap spreads at all maturities (2, 5, 10 years), VIX and other measures of volatility and investors’ risk aversion, Libor spreads versus government bonds, Libor spreads relative to Fed Funds and other policy rates, TED spreads, Dollar and Euro Libor versus OIS spread, 3month Euribor versus ECB rate, Itraxx and CDX spreads, ABX and CMBX spreads, US 10yr Treasury yields below 4% and sharp fall of equivalent yields in Europe; sharp fall in short dated Treasury yields in the US, Europe and now even in Asia (Korea, China). Many or most of these indicators are now back to their extreme summer levels and some even worse.

The seizure of liquidity and credit has spread to the most remote corners of the financial system: subprime, nearprime and prime mortgages, commercial real estate, consumer loans, securitized products, derivatives markets, leveraged loans, LBO market (where increasing numbers of deals are postponed, restructured or cancelled), SIVs and conduits, interbank markets, derivative markets, covered bonds markets, CDOs and CLOs; CPDOs; even the IPO market; and the list goes on and on and becomes longer by the day.

The reasons why the massive liquidity injections and policy rate cuts by central banks have miserably failed are clear and were discussed at length in August by this author in previous note: we are facing a credit/insolvency problem in addition to a liquidity crunch and central banks’ monetary policy is impotent in dealing to credit problems: Fed easing will not prevent millions of US households from defaulting on their mortgages and will not prevent home prices falling 20% or more given the biggest housing recession in US history; it did not and will not prevent dozens of mortgage lenders and home builders from going bankrupt; it will not prevent a surge in corporate defaults once the economy experiences a hard landing. Monetary policy can lead with pure liquidity runs; but when such liquidity runs are related to the risk of insolvency monetary policy is mostly impotent. And most of the current problems in the real economy and in the financial markets have to do with insolvency, not just illiquidity.

Monetary policy is also impotent with dealing with a financial system that has become opaque and less transparent and where investors are panicking because of the lack of information. The distinction made here last summer between priceable risk and unmeasurable uncertainty is fundamental: investors don’t know and cannot price the size of the likely losses as these losses are increasing by the day; and they do not know who is holding the toxic waste (the Where is Waldo? problem). Thus, lack of confidence and trust and rising counterparty risk breeds risk aversion that liquidity easing cannot solve: those – only banks - who are lucky enough to get access to the central banks’ liquidity have their own liquidity and credit problems; and they thus hoard such liquidity rather than relending it to the parts of the financial markets – SIVs, investment banks, money market funds, hedge funds, etc. - that do not have access to the central bank lender of last resort support.

Monetary policy is impotent in dealing with the problems that a mostly unsupervised and unregulated financial system – as regulators were asleep at the wheel blinded by free market voodoo religious fundamentalism – have created. Specifically, the massive disintermediation of financial activity from the banking system to the capital markets has reduced the willingness and ability of sleepy supervisors to control a credit bubble that is now going bust. And this disintermediation, largely via a securitization food chain, has sharply reduced market discipline as everyone in this chain – mortgage brokers, mortgage originators, investment banks, credit rating agencies - was making money out of fees and transferring the credit risk to someone else in a game of musical chairs.

Equity markets, for a while, decoupled from credit markets after the Fed eased policy rates twice. Such temporary decoupling was driven by a Bernanke Put or the equity investors’ belief that the Fed would and could rescue them. But not that the onslaught of worse and worse financial, credit and economic news is surging the equity markets look toppy and most of the market gains of 2007 have already been lost. This onslaught of bad news is sure to continue and – at some point – dominate the Bernanke Put. Thus, once the evidence of an economic hard landing is clear even to stock markets investors – it is certainly clear to bond markets and to credit markets by now – you can expect a sharp fall in stock prices, a process that has already started in financials’s stocks, discretionary consumer stocks, retail stocks and housing related stocks. As I have analyzed in previou work a typical US recession the S&P 500 falls by an average of 28%;; also today equity valuations are high based on cyclically adjusted P/E ratios that correct for the fact that the sharp growth of earnings – and share of profits in GDP - is unsustainable on both a cyclical and structural basis.

We are thus now observing a severe worsening of conditions in financial markets with a generalized liquidity and credit crunch that will have serious effects on real economies. With a US economy already headed towards an inevitable recession this crunch makes financial conditions much tighter for consumers, home borrowers, financial institutions and the corporate sector, thus shrinking the real demand for homes, consumer durables, investment goods for firms, and overall capital spending. A beginning of a credit crunch is also evident in an already weakened European economy; and given the greater reliance of European firms – relative to the US ones – on bank financing the growing credit crunch in Europe is hurting the corporate sector.

The credit boom and easy liquidity of the 2001-2006 period led to a massive releveraging of households, financial institutions and parts of the corporate sector in a credit boom that became a credit bubble and where we observed a Minsky credit cycle where asset prices went into bubble territory given the credit leverage. Now, capital losses, credit crunch and reintermediation is leading to the unraveling of this credit house of cards. Using analytical models developed by research scholars - such as Adrian and Shin - Goldman Sachs estimated that losses in the $400 billion range ($200 b among financial institutions) will lead to a deleveraging of credit of the order of $2 trillion. The overall deleveraging could be higher than that as a variety of institutions (financial and others including households and corporate firms) that will experience a hit to their balance sheet and net worth will have to start deleveraging their balance sheets. Indeed, the latest data suggest that corporate earnings have already fallen 8.5% in Q3 207 relative to the third quarter of 2006.

Such academic and analytical research also suggests that illiquidity that forces fire sales of assets – of the sort we are starting to see in financial markets - has contagious effects from one financial institution to the other causing a chain of losses that can become systemic and exacerbate liquidity and capital losses (while implementation of FASB 157 will not prevent the past fudge of marking to model rather than marking to market such illiquid and impaired assets). So a contagious unraveling of the Minsky Credit Cycle is now underway.

And now a perverse cycle of financial conditions and credit crunch worsening leading to a worsening of the real economy and, in turn, a worsening of the real economy increasing the financial losses and worsening the liquidity and credit crunch is creating a vicious circle that has significantly increased the likelihood of a now effectively inevitable US recession and of a global economic slowdown. Bernanke and Mishkin know a lot about the “credit channel” and “financial accelerator” effects as they have extensively written about these in their former academic life. This vicious circle is leading to fall in asset prices, fall in net worth, deleveraging, tightening of the quantity and price of credit and fall in durable and non durable spending by households and financial and corporate firms that, in turn, will worsen the financial conditions.

And indeed a saving-less and debt-burdened consumer is now on the ropes and at a tipping point as it is buffeted by a variety of headwinds: the beginning of the holiday season was weak as U.S. consumers spent on average 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier; add to this the most recent gloom in the auto sales, in consumption of durables and the worst housing recession ever . The combination of a severe and worsening liquidity and credit crunch, oil prices close to $100, a worsening housing recession and its wealth effects on consumption, a weakening labor market and a consumer that is buffeted by severe negative shocks means that a US recession is by now inevitable and that the rest of the world will not decouple from the US hard landing.

As the New York Times reported my views today in a lead article on the risks of a US recession:

The most bearish indulge frighteningly gloomy tones. “The evidence is now building that an ugly recession is inevitable,” declared Nouriel Roubini, an economist who was among the first to warn of the dangers of a real estate downturn, writing last week on his blog, the Global EconoMonitor. “When the United States sneezes the rest of the world gets the cold. And since the United States will not just sneeze, but is risking a serious case of protracted and severe pneumonia, the rest of the world should start to worry about a serious viral contagion.”

And indeed Larry Summers made similar warnings in his FT column today:

“Three months ago it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability.

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

Several streams of data indicate how much more serious the situation is than was clear a few months ago.”

[silver surfer]

Silver Surfer - wake up and smell the coffee - I don't know what you don't understand about simple mathematics and common sense or maybe you have Vested Interests like a job that depends on this charade continuing - in any case even the birds in the trees now know something is wrong - very wrong with our economy.

There is something wrong with our economy. But it's not the apocolyptical scenario that you predict.

What's wrong with our economy is that since 1973 there's only been very slow productivity growth. Aim off for three factors, the number of women added to the workforce, the increase in average working hours, and the fact that the majority of the meagre increases have accrued only to the top 20% of earners, and there's been virtual stasis in our standard of living.

Our default expectation is that every generation will be richer than the previous one. For this generation and for the next one that happy state of affairs is no longer true. We aren't getting richer, in fact many of us are slowly getting poorer with each passing year.

The problem with our economy isn't some exciting conspiracy or thrilling prospect of financial meltdown. The problem is very real, very important, but very boring. Western economies are bumping along with almost no real growth in productivity or living standards. And with the imminent burden of millions of retiring baby boomers we face the very real prospect of a continuing decline in middle and working class wealth.

Squirelling away cans of beans may grant you some emotional satisfaction, and it may make for some entertaining nonsense on internet forums, but how will it help when the real risk is that you, your friends, and your family will all simply be a little bit poorer in twenty years than you are today? That's what's really wrong with the economy.

[Guest muttley]

This article was written a while ago, they said multiply the govt's figures by 4

So 4 x 3% = 12%

Waaaay low.

Revealed: the real rate of inflation

By Edmund Conway, Economics Editor

Last Updated: 1:50am GMT 05/12/2006

Discover your own inflation rate

Audio: Edmund Conway on what the figures reveal

Your view: Is the cost of living spiralling out of control?

The cost of living for many British households is up to four times the Government's published rate of inflation, The Daily Telegraph can reveal.

Thanks for the article. It doesn't support your claim of 13-15% inflation though. It simply states that the inflation rate for some people is much greater than the average. The worst hit are pensioners with a personal inflation rate of 8.9%. From the article:-

According to the study, pensioners' costs rose by 8.9 per cent in the 12 months to October.

Hard-up families, getting by on £20,000 a year, saw their costs increase by 4.6 per cent — almost twice the national average and well above the annual rate of wage increases, 3.9 per cent.

Meanwhile, the increasingly large number of young Britons living at home with their parents — and not paying mortgages or bills — experienced deflation of 2.1 per cent, since many of the items they spend their money on, such as clothes and electrical goods, are falling in price.

[Luminist]

I always think that actuality lies between two extremes of opinion. As far as the rate of general inflation is concerned, the government CPI figure is one extreme and is probably only typical for a few thousand households in the country. The other extreme is the rate of increase of the M4 money supply which the Austrian economists say is the direct cause of price increases though the full effect may only be manifested in the neighbourhood of the monetary injection.

The rule that I now personally use to estimate the real rate of inflation is I take the simple average of the latest CPI and M4 expansion rate. Currently this is about (2.5+14.0)/2 or about 8%. This feels about right

Best,

L

[Guest Anders]

There is something wrong with our economy. But it's not the apocolyptical scenario that you predict.

What's wrong with our economy is that since 1973 there's only been very slow productivity growth. Aim off for three factors, the number of women added to the workforce, the increase in average working hours, and the fact that the majority of the meagre increases have accrued only to the top 20% of earners, and there's been virtual stasis in our standard of living.

Our default expectation is that every generation will be richer than the previous one. For this generation and for the next one that happy state of affairs is no longer true. We aren't getting richer, in fact many of us are slowly getting poorer with each passing year.

The problem with our economy isn't some exciting conspiracy or thrilling prospect of financial meltdown. The problem is very real, very important, but very boring. Western economies are bumping along with almost no real growth in productivity or living standards. And with the imminent burden of millions of retiring baby boomers we face the very real prospect of a continuing decline in middle and working class wealth.

Squirelling away cans of beans may grant you some emotional satisfaction, and it may make for some entertaining nonsense on internet forums, but how will it help when the real risk is that you, your friends, and your family will all simply be a little bit poorer in twenty years than you are today? That's what's really wrong with the economy.

SS

You would do well to listen to Roubini - below

BTW this is his bio:

Nouriel Roubini

From Wikipedia, the free encyclopedia

Nouriel Roubini born on March 29, 1958 in Istanbul, Turkey, is a professor of economics at New York University. He is also the chairman of Roubini Global Economics.

He served in various roles at the Treasury Department, including Senior Advisor to the Under Secretary for International Affairs and Director of the Office of Policy Development and Review (July 1999 - June 2000). Previously, he was a Senior Economist for International Affairs on the Staff of the President's Council of Economic Advisors (July 1998 - July 1999).

Roubini spent one year at the Hebrew University of Jerusalem before receiving his B.A. summa cum laude in Economics from the Bocconi University (Milan, Italy) in 1982. He received his Ph.D from Harvard University in 1988.

Professor Roubini is the author of several books, including: Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies, Political Cycles and the Macroeconomy, and International Financial Crises and the New International Financial Architecture.Contents [hide]

1 Research

2 Academic Positions

3 Current Appointments

4 External links

[edit]

Research

Professor Roubini's research interests include:

international macroeconomics and finance

macroeconomics and fiscal policy

political economy

growth theory

European monetary issues.

[edit]

Academic Positions

Currently, Professor Roubini is a Professor at the Stern School of Business at New York University. He has also held teaching positions at Yale University.

[edit]

Current Appointments

Research Fellow, National Bureau of Economic Research

Research Fellow, Centre for Economic Policy Research, London, UK

Member, Bretton Woods Committee

Member, Council on Foreign Relations Roundtable on the International Economy

Member, Academic Advisory Committee, Fiscal Affairs Department, International Monetary Fund

Stand by for “generalised systemic financial meltdown”

“Gold is for optimists. I’m diversifying into canned goods.”

So said one reader on Felix Salmon’s Market Movers blog, in response to a post on crisis blogging.

The trouble with being the leading harbinger of doom is that, rather like crack, you’re going to need to keep pushing the limits to keep achieving the same highs. So Salmon notes that the über-bears, no longer satisfied with dire predictions of a US recession, have now moved onto heralding a full-blown financial crisis. Only an all-out, systemic meltdown will do.

The bear in question, Nouriel Roubini, has long been positioned firmly on the gloomy side of the outlook scale - but the past week’s batch of predictions has been ominous even by his own dark standards. In fact, they’re nigh on apolcalyptic.

After all, back in March, Roubini was clear - the US landing would be hard, or at best, a growth recession.

Enjoy that sentiment. That’s the good old days.

In July Roubini wrote that the “financial fallout of the worst housing recession in decades is only just beginning.” In August, he noted that in his opinion the market turmoil was “much worst” than the liquidity crisis following LTCM. By September, he had a confession to make: he’d been far too optimistic on housing. And last month, he approvingly relayed a comment from a “senior professional in one of the largest financial institutions in the world”, in whose opinion a “miracle is needed to avoid recession.”

The trouble is that Roubini has a habit of being right - uncannily so in his predictions on US housing.

And so to the latest batch of fun. On housing, the message is largely unchanged - this housing recession will be “worse than any in US history” and the “financial bloodbath” has only just started.

But here’s the catch. Roubini argues that the inevitability, or at least high likelihood, of a US recession is now becoming more widely accepted. He notes the Economist cover story, and that leading Wall Street analysts previously in the soft landing camp have shifted their stance. The debate, says Roubini, has now shifted from ‘if recession’, to ‘how deep, protracted and severe’ such a recession will be.

So for all the bears out there, crack pipes to the ready, here is your latest hit:

I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

Or in other words, a “generalized systemic financial meltdown.”

[Sheer Heart Attack]

A very interesting set of responses - thank you.

The point about fiat currencies is interesting, but could it not be one massive red herring? Aren't all currencies now fiat? If so, the vested interests and central banks merely have to prop up the illusion of worth in the money. After all, it's not as if the dollar, pound, euro etc are fiat currencies and every other currency is asset-backed or gold-backed.

I find the clamour of people calling for an interest rate cut interesting. To my recollection, it was standard practise to raise interest rates when inflationary pressures were building. There is general derision of the inflation rates as stated by Gordon and his henchmen. In addition to that, banks are not legally obliged to follow the movements of interest rates and all indications are that they won't.

When I first started posting on the site, I did feel influenced by the predictions of cgnao. I still think there is some value to his posts. However, looking for a wider range of views has stopped my panic somewhat and I'm going to try to continue on as normal. It's going to be bad for the next 2-3 years but not the end of the world as we know it.

[silver surfer]

This chap Roubini has it all sussed...

Anders, you haven't answered my question. I asked why an orderly transition from the dollar to some other reserve currency, would presage a "financial meltdown"? What you've given are reasons why the credit squeeze is nasty and could well lead to recession. Two different things.

I agree a recession is in prospect, I think UK house prices are going to fall, no quarrel there. But the world is not heading for "financial meltdown". I appreciate how unsatisfactory and boring this conclusion may be, but that doesn't make it any less true. It seems to be that many on this forum are simply looking for something rather more conspiratorial and exciting than the simple economic truth can provide!

[batthink]

We are talking about price increases generally, which the layman would understand as inflation. The govt is putting real inflation now at circa 3%. That is absurd. Ask 1000 ppl if they think 3% is a reasonable estimate and by far the majority would say NO. You are talking the SS ******** about bikes and certain items coming down in price and/or being better value than in years past. That is certainly true in consumer elctronics and certain sectors of retail - clothes perhaps, PCs of course etc etc. But some cheap goods do not compensate for an OVERALL gouging of the public by price increases that are often in the 10s of per cents increase year in and year out. Running a car is now too expensive for many people - cars are cheaper than ever but insurance is more costly than ever, road tax and congestion charges, petrol and depreciation, fines and maintenance all add up to the fact that car ownership is part of the inflationary increase package. Beer here in my local is about £1.30 for a good bitter, £3 for Stella, the cinema is £8 - big deal. I wouldn't live in North London if you paid me, ROFL.

Running a car is too expensive? - well not for everyone I know. Pensioners, factory workers... ie low earners, all still happily running their cars and some even have two.

You would not live in north London if someone paid you - well to me that seems financially stupid.

Writing "OVERALL gouging" does not mean your correct, you fail to back up your claim that inflation is 15% - you have provided no supporting evidence/data that inflation is 15%. Just the rantings and raving of other paranoid Armageddonists.

"If you ask 1000 people" : cool its like family fortunes for finance... but taking the democratic approach the majoritiy of people on this thread actually disagree with you.

[stormymonday_2011]

Making predictions about the economic future beyond the very near term is a complete mugs game. While some of the figures about the current credit crisis can be calculated with a reasonable degree of accuracy the way the decisions of the human actors in business, finance, the central banks and government will play out is much harder to call. The best case scenario is that the credit bubble will be unwound in a more or less controlled fashion. This will not be a pain free process and would almost certainly be accompanied by falling prices in assets such as houses, higher taxes, lower growth and higher unemployment. However, most individuals and most economies would emerge reasonably unscathed. The danger - and in my mind it is the number ONE danger - is that the large financial institutions such as the investment banks have such a vested interest in maintaining the current debt generation system that they will do almost anything to avoid seeing it dismantled even if it is done in an orderly fashion. As they have an undue amount of influence with the Central Banks and governments (far more say than ordinary voters or manufacturing business) then it is highly likely that their views will prevail. This has already been seen with the Federal reserves decision to slash interest rates and it seem highly likely that the BOE will be strong armed into following this course in due course. Attempting to re-inflate an economy once it has slid into recession is not necessarily an unwise response to a credit crisis, the difficulty lies in the manner which it is likely to be done. Pouring cash into the banking system and lowering interest rates is really just propping up the status quo ante it is not tackling the structural and regulatory problems which caused the situation in the first place. In particular, it does not address the ability of some market participants to generate amounts of credit that is never going to be absorbed by productive expansion in the economy. As a consequence there is a trend for assets bubbles (dot.com shares, property etc ) to blow up and collapse one after another. If we continue to merely treat the symptoms of the crisis and not its cause then the apocalyptic scenario of a full blown systematic collapse followed by a deep and long lasting economic Depression is a real possibility. A solution requires real vision and leadership at the top of governments, business and finance. Sadly, this is the one commodity we do not possess.