It's worse than the Great Depression

[Illuminatus Primus]

So the real problem began with the end of the energy adjustments that Carter and the Democrats tried to champion and the fall of energy prices combined with massive financial deregulation under the rubric of free market fundamentalism. "Reaganites," indeed.

[Admiral Valdemar]

So the real problem began with the end of the energy adjustments that Carter and the Democrats tried to champion and the fall of energy prices combined with massive financial deregulation under the rubric of free market fundamentalism. "Reaganites," indeed.

In a nutshell. It is all down to our wealth being squandered and our timing of this margin call couldn't be worse. Any other time I'd be more optimistic of a turnaround in a few years. Given our past actions and present climate, it seems we're doomed to repeat the same mistakes, and make whole new ones. Some have wondered where the market will correct to, be it the year 2000 (we've actually seen all the market gains of this century removed already), the early nineties, the late or early eighties or the time of the baby boomers.

[Ekiqa]

So the real problem began with the end of the energy adjustments that Carter and the Democrats tried to champion and the fall of energy prices combined with massive financial deregulation under the rubric of free market fundamentalism. "Reaganites," indeed.

And we all know who to blame.

Milton Friedman and his Chicago School of Economics.

[J]

Why we're more screwed has just been covered, but I'd like to expand on the following a bit.

I think we've already established that derivatives, although present in the '20s, are far more widely used today which has led to the problems in finding out who has bad debts on their books by virtue of the whole system being needlessly complex: the world's ultimate shell game. Currently, the global derivatives market is over one quadrillion dollars in the latest analyses of the problem. This is far and beyond the US' GDP and that of the world's, something that has only really taken off without any controls since the early nineties.

Now it's not quite as bad as it seems since those various derivatives and structured finance products do cancel out to some extent, and there's precedent for that in the "netting out" session carried out on the CDS contracts written on Lehman's when it went the way of the dodo. The value of those contracts was $400B or thereabouts, but after the netting out session only $6B or so needed to change hands among the various holders of those contracts.

If we use this as a model for the global derivatives market, then in theory around $15 trillion needs to be paid up if those contracts are triggered or get called, assuming no counterparty failures and so forth. This is still greater than the entire GDP of the US, so it's pretty safe to say there will be counterparty failures and even more kablooies as there's going to be a lot of parties who won't be able to pay up.

We have absolutely no idea how all those derivatives will "net out" if they're set off, we might have a 1.5% pay off rate as with the Lehman's CDSs or might be 5% or 50%, no one has a clue and we can't know until after the fact. We might get a few trillion poofed which is bad, but survivable, or it might be $500 trillion which would be a mass default & reset event. No one knows what'll happen, I don't know, Buffet doesn't know, Nouriel Roubini doesn't know, and even Janet Tavakoli (she wrote the book on derivatives & structured finance) doesn't know.

[Phantasee]

or it might be $500 trillion which would be a mass default & reset event.

What does this mean, and what would it look like?

[J]

or it might be $500 trillion which would be a mass default & reset event.

What does this mean, and what would it look like?

Everybody dies and cockroaches rule the world.


No, not really. It's basically Chapter 11 Bankruptcy for the whole world. In Chapter 11 a company defaults on its debts and/or gets them forgiven while they restructure, reorganize, and draw up and implement a (hopefully) profitable business plan. While this is going on they'll find it hard to impossible to get loans, and doing business in general is going to be harder and possibly more costly since nobody really trusts them. They might find it hard to buy supplies, get contracts for jobs, get their orders processed & delivered, and so on.

Now imagine this on a nation state scale. Instead of a company we're dealing with countries, and a lot of them. In short, we all end up like Iceland. No countries lend money to each other, no country wants to sell stuff to each other, no country trusts what each others' currencies are worth and as a result everything becomes a lot more expensive. Trade may even come to a complete halt in some cases. Some countries might starve, others might not get oil, and down that path is war & Shep's orgasmic dreams.

[Admiral Valdemar]

Everybody dies and cockroaches rule the world.


No, not really. It's basically Chapter 11 Bankruptcy for the whole world. In Chapter 11 a company defaults on its debts and/or gets them forgiven while they restructure, reorganize, and draw up and implement a (hopefully) profitable business plan. While this is going on they'll find it hard to impossible to get loans, and doing business in general is going to be harder and possibly more costly since nobody really trusts them. They might find it hard to buy supplies, get contracts for jobs, get their orders processed & delivered, and so on.

Now imagine this on a nation state scale. Instead of a company we're dealing with countries, and a lot of them. In short, we all end up like Iceland. No countries lend money to each other, no country wants to sell stuff to each other, no country trusts what each others' currencies are worth and as a result everything becomes a lot more expensive. Trade may even come to a complete halt in some cases. Some countries might starve, others might not get oil, and down that path is war & Shep's orgasmic dreams.

Basically, all the worst parts of the Bible.

[Ryan Thunder]

words

Maybe its just in my head, or maybe its the smiling avatar, but for some reason I can't help but get the feeling that you almost enjoy talking about the sky falling...

Oh, and it pisses me off to no end that I can get fucked over by something entirely virtual. Good grief. What is the world coming to, when organizations representing the will of hundreds of millions of people are hamstrung by a few blots of ink on a sheet of paper somewhere...

[Samuel]

words

Maybe its just in my head, or maybe its the smiling avatar, but for some reason I can't help but get the feeling that you almost enjoy talking about the sky falling...

Oh, and it pisses me off to no end that I can get fucked over by something entirely virtual. Good grief. What is the world coming to, when organizations representing the will of hundreds of millions of people are hamstrung by a few blots of ink on a sheet of paper somewhere...

Don't worry- some members have plans to deal with worse case scenarios. Some even include you!

Duchess has plans that involve martial law, labor battalions and splitting the atom. And since this occurs ahead of the timeline, we won't even have mass famine! Probably.

It probably won't get that bad. Now go out there and support the economy damn it!

[J]

Maybe its just in my head, or maybe its the smiling avatar, but for some reason I can't help but get the feeling that you almost enjoy talking about the sky falling...

It's all in your head. My husband will very likely be out of a job within the next 3-4 years, and almost certainly within 5 years. And we'll be having kids in the middle of all this. On top of that our country will be running massive deficits again so we'll likely have higher taxes and less services in our future. No, I don't enjoy it, despite what my sometimes sarcastic tone my imply, it's my way of keeping my sanity in these times.

[Big Phil]

Maybe its just in my head, or maybe its the smiling avatar, but for some reason I can't help but get the feeling that you almost enjoy talking about the sky falling...

It's all in your head. My husband will very likely be out of a job within the next 3-4 years, and almost certainly within 5 years. And we'll be having kids in the middle of all this. On top of that our country will be running massive deficits again so we'll likely have higher taxes and less services in our future. No, I don't enjoy it, despite what my sometimes sarcastic tone my imply, it's my way of keeping my sanity in these times.

What, that rewarding career as airport security has no job security?

Sarcasm aside, anyone who's not at least mildly concerned is a fool. And the folks talking about how they'll be fine because they're rich/educated/living on the cheap/growing their own food/have a "necessary" job are just kidding themselves. While I don't expect to lose my job, I'm realistic enough to know it's an unpleasant possibility.

[Uraniun235]

Oh, and it pisses me off to no end that I can get fucked over by something entirely virtual. Good grief. What is the world coming to, when organizations representing the will of hundreds of millions of people are hamstrung by a few blots of ink on a sheet of paper somewhere...

the real proof that we are (or aren't) in a civilized world is that no one is circulating lists of addresses of the very people who basically gambled away the world economy

[aerius]

What, that rewarding career as airport security has no job security?

As good as my union is we're going to have layoffs and I don't have that much seniority, which means I'm going to be one of the earlier ones to go. I don't know if you've priced out airline tickets recently, but the price for flights is going up fast, depending on the route it's up around 40-100% in the last year & half or so. That and the recession means a hell of a lot less people will be flying so I'm going to be out of a job.

Sarcasm aside, anyone who's not at least mildly concerned is a fool. And the folks talking about how they'll be fine because they're rich/educated/living on the cheap/growing their own food/have a "necessary" job are just kidding themselves. While I don't expect to lose my job, I'm realistic enough to know it's an unpleasant possibility.

Yup. Even Warren Buffett might be on the hook for something like $40 billion if things go south, that's not going to put him in the poorhouse but it'll sure change the way he does business. I guess if you're Amish & living in an independant farm community you probably won't notice much or any change, everyone else should be somewhat concerned.

[Samuel]

Actually the Amish are being affected too- haven't you noticed all the ads for Amish home heaters?

[Broomstick]

The Amish actually rely surprisingly much on the outside world. For example, they seldom produce their own cloth anymore but rather purchase it (they are very fond of permanent press, which makes sense with large families and little automation of chores). They purchase shoes, cookware, tools, etc.

Yes, I'm living on the cheap and last summer grew some of my own food. I realize that doesn't guarantee anything, but it's what I can do to marginally increase my prospects. I'm also trying to stay as healthy as possible so I am capable of doing whatever work comes my way whether mental or manual. What else can one do?

[Phantasee]

What, that rewarding career as airport security has no job security?

As good as my union is we're going to have layoffs and I don't have that much seniority, which means I'm going to be one of the earlier ones to go. I don't know if you've priced out airline tickets recently, but the price for flights is going up fast, depending on the route it's up around 40-100% in the last year & half or so. That and the recession means a hell of a lot less people will be flying so I'm going to be out of a job.

I would think your experience would give you an advantage in pursuing some sort of security gig, I'm thinking government security force of some sort. If there's one thing that gets a spending increase in uncertain times, it's security.

[His Divine Shadow]

Everybody dies and cockroaches rule the world.


No, not really. It's basically Chapter 11 Bankruptcy for the whole world. In Chapter 11 a company defaults on its debts and/or gets them forgiven while they restructure, reorganize, and draw up and implement a (hopefully) profitable business plan. While this is going on they'll find it hard to impossible to get loans, and doing business in general is going to be harder and possibly more costly since nobody really trusts them. They might find it hard to buy supplies, get contracts for jobs, get their orders processed & delivered, and so on.

Now imagine this on a nation state scale. Instead of a company we're dealing with countries, and a lot of them. In short, we all end up like Iceland. No countries lend money to each other, no country wants to sell stuff to each other, no country trusts what each others' currencies are worth and as a result everything becomes a lot more expensive. Trade may even come to a complete halt in some cases. Some countries might starve, others might not get oil, and down that path is war & Shep's orgasmic dreams.

Basically, all the worst parts of the Bible.

You make it sound like we'd better start stocking ammunition and guns.

Although I do that anyway, because it's cheaper to buy bulk.

[The Original Nex]

Are we really predicting the mass bankruptcy of world economies? Are you projecting this as a likely scenario or a worst case?

[Big Phil]

J/Aerius, Valdemar, and Duchess of Zeon, have been predicting catastrophic scenarios for the last couple of years. Frankly, the people predicting the end of civilization have too much vested in being right about their predictions for me to take them seriously, but predictions of severe recessions or a global depression are very real, and that's what you should be listening to.

[Ryan Thunder]

J/Aerius, Valdemar, and Duchess of Zeon, have been predicting catastrophic scenarios for the last couple of years. Frankly, the people predicting the end of civilization have too much vested in being right about their predictions for me to take them seriously[...]

Well, even if they're right, at least they won't be able to say "I told you so."

[DaveJB]

Folks from the UK might want to tune into BBC2 at 7PM tonight - there's a programme on the American national debt, and how it could develop into a clusterfuck of truly epic proportions.

[J]

And an update

AP link

Volcker sees crisis leading to global regulation

By EILEEN AJ CONNELLY – 3 hours ago

NEW YORK (AP) — "Even the experts don't quite know what's going on."

Speaking to a number of those experts Friday, Paul Volcker, a top economic adviser to President Barack Obama, cited not only the lack of understanding of the global financial meltdown but the "shocking" speed with which it had spread across the world.

"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."

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.

Volcker didn't offer specifics on how long he thinks the recession will last or what will help start a recovery. But he predicted there will be some lasting lessons from the experience.

"I don't believe it will be forgotten ... and we will revert to the kind of financial system we had before the crisis," he said.

While he assured his audience of his confidence that capitalism will survive, Volcker said stronger regulations are needed to protect the world economy from such future shocks.

And he said he is concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown.

"It is evident in the United States, and not just in the United States, the central bank is taking on a role that is way beyond what a central bank should be taking," he said.

Volcker stressed the importance of international cooperation in creating a new regulatory framework, particularly for major banks that operate across national boundaries — the reverse of what's happened in recent years.

"The more international agreement we have on where we want to get to, the better off we'll be," Volcker said.

And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.

He scoffed at the notion that those entities must be free to innovate — stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.

So there we have it from the big man. Any questions?

[erik_t]

bla bla Volcker

Yes, you damned simpleton, please explain how an instantaneous rate of change conclusively indicates trends months or years from now. Does the danger of extrapolation mean nothing to you?

I'm not saying it is or isn't going to be worse than the Great Depression, because I don't have sufficient data. Neither does anyone else. Unless your definition of "worse" means "a faster fall over this specific interval specified a posteriori", then you're just jump-starting the Panic Brigade again.

OMG ONE HIGHLY VOLATILE MEASURE DROPPED INSTANTANEOUSLY BELOW ANOTHER HIGHLY VOLATILE MEASURE, THEREFORE WE ARE DOOMED IN THE LONG TERM! Christ.

[Ryan Thunder]

Oh, and it pisses me off to no end that I can get fucked over by something entirely virtual. Good grief. What is the world coming to, when organizations representing the will of hundreds of millions of people are hamstrung by a few blots of ink on a sheet of paper somewhere...

the real proof that we are (or aren't) in a civilized world is that no one is circulating lists of addresses of the very people who basically gambled away the world economy

No. The proof is that I'm probably going to get fucked over by numbers on a page that I have no control over. And nobody's going to say "fuck that" and fix them so they work.

[J]

I'm not saying it is or isn't going to be worse than the Great Depression, because I don't have sufficient data. Neither does anyone else. Unless your definition of "worse" means "a faster fall over this specific interval specified a posteriori", then you're just jump-starting the Panic Brigade again.

You don't, because you clearly haven't bothered to read the thread nor educate yourself on the subject, but to say that no one else has enough data with which to draw a conclusion is a lie. There is plenty of data which all says this will be another Great Depression unless we shape up and get serious with fixing things right now.

Debt loads are well above GD levels by any measure, revenues are dropping off a cliff (see the various CBO reports), the Empire & Philly Fed manufacturing surveys are both showing depression prints, the FRB Beige Book business surveys are also getting close to depression prints in all sectors, and there's a wave of Alt-A & pay-option ARM mortgages due for resets in the next couple years that's twice the size of the subprime mortgage pile which kicked off this whole mess. Unless you believe in Easter bunnies which poop out golden eggs, every single piece of data screams depression, and worse than the last one since we have a greater debt overhang & more fragile, interconnected world economy. None of the data shows any sign of reversing the downtrend, furthermore, there is nothing at all in future projections to spark a reversal.

There's a solution, it still result in a short sharp depression but at least we'll have a fair chance of starting a recovery in around 2 years. The chances of it being implemented? About the same as GM's chances of avoiding bankruptcy without government bailouts. Continuing the current course of action guarantees a Greater Depression as the debtloads become unsupportable and defaults, resulting in a cascade failure of the entire economy. That's the $52 trillion problem, which is what the debtload is after the latest round of bailouts.