Monday, February 2, 2009

We’re heading for a long, deep depression

We're heading for a long, deep depression

"After every period of feast comes an inevitable period of famine. The period in which market conditions appear to be back to normal may, in fact, only be the period during which the pendulum, driven into aggressive motion by the actions of governments and central bankers, swings back through the middle of its arc."

Posted by damien @ 01:07 PM (873 views)
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3 thoughts on “We’re heading for a long, deep depression

  • Yes, it IS different this time. The leverage / balance sheet expansion he writes about was built up by investment and later commercial banks and was phenomenal and unprecedented. The whole financial universe has been transformed by Wall Street over the last 20 years. With savings low and commercial bank credit limited the investment banks, which started trading on their own account in significant amounts, needed to create conditions in which they could acquire massive investment funds. They learned that the bigger those funds were the more they could move / rig markets in their favour and inflate profitable bubbles. Hence leverage and its accomplice, shadow banking and OTC credit derivatives. They sucked in and transformed money markets and commercial paper markets as funders of speculative trading activities (in the old days these just smoothed and cleared transactions). They sucked in the expanding pension and mutual funds, both as funders / lenders and as buyers of CDOs and other securities. Once the ball was rolling the profits were high – a magnet for even more investor funding.

    This is different from other banking crises not only because of the scale of the debt bubble but also because of the impossibilty of identifying that scale or its location, because so much is in OTC derivatives that cannot be priced. When the sub-prime crisis started to show that all this could be a mountain of junk the money markets and pension funds ran for the exits. The banks could no longer roll over the debts they used for trading in CDOs and arbitraging on interest rates on them. Now there is a colossal amount of deleveraging required against a background of recession and negative economy feedback. Treasuries and central banks are vainly trying to take the place of the spooked investors and are risking sovereign creditworthiness to do so. A deep depression is a real possibilty.

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  • Though not previously taken very seriously, I’m on record for some time now (here and elsewhere) for saying that 20% of UK GDP is a product of excess, and not sustainable.

    Enough crowing – the need now is for solutions.

    Government must keep people working. High unemployment levels raises benefit claims, which in turn overburdens those still in work with taxation, and gives succor to the black economy.

    If the Govt has the guts to insist that everyone who is unemployed and claiming benefts must report daily for work and be given constructive tasks, for remuneration at minimum wage; then we will have the foundation for a new order, and the beginnings of a way out of this mess.

    Only a beginning, but a vital first step..

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  • Not sure about outright depression, but stagnation or “treading water” is the best-case scenario. The govt is already committed to raising taxes in 2010 to pay for the bailout, thus choking off any possible recovery. No repeat boom for a long time to come.

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