Another bad day for the US economy: Volcker, Rogers…

Posted: April 8th, 2008 by: h2

Sigh… you know, when the guys who used to look sort of bad start to talk like this about the new people in charge, you know the situation is getting pretty damned serious…

“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,” [Paul] Volcker [Fed chairman from 1979 to 1987] said in a speech to the Economic Club of New York.
Volcker said the modern financial system has “failed the test” of the marketplace. When asked whether he predicts a “dollar crisis,” he said, “you don’t have to predict it, you’re in it.”

What else is there to really say? Today was a bad day for the US and global economy in general. To put it mildly.

On the bright side, Washington Mutual got bailed out by a group of investors, cheating death, but only at the cost of screwing over their current stockholders, by diluting WaMu shares by about 30%, but personally, I don’t care what happens to any investors at all, investment never had any business in the hands of beginners, and opening up that pit just guaranteed the outcome we see today.

“While diluting returns to existing shareholders, the capital raise would significantly strengthen WaMu’s capital ratios and could prevent further downgrades on its debt to below investment grade”.
“When a firm has to double its shares outstanding and yet still be under credit-quality pressure, it’s not a particularly comforting move”

But that’s only the beginning of the bad news today.

I almost wasn’t going to write anything more, because in a sense, I don’t know what to say at this point. First thing this morning I wake to this from theAutomaticEarth

$945 billion in losses. That’s today’s number from the IMF. They’ve all known this for a long time, rest assured. They’re just feeding it to you piecemeal, so you’ll keep on borrowing and spending as long as possible. Meanwhile, this means less than 25% of the total has been accounted for so far, and booked as writedowns and losses.

I’m willing to bet that as the derivatives start falling like Jericho, $1 trillion is just a beginning. Even if we accept the notion that only 2% of the total outstanding poses actual risk, that still would mean, considering an estimated $700 trillion derivatives “market”, losses of $14 trillion. Don’t believe it? Keep watching.
Experts and analysts, for a long time to come, will keep insisting that central banks can save the markets by pumping in cash and credit. They cannot. Nor can they cause inflation. George Soros was right yesterday when he said: “I think we have come to the end of the road”.

Now I don’t yet have a strong sense of how right Ilargi is overall, but I’m starting to worry that he’s more right than he is wrong. And that’s really the problem with the current situation, in pretty much every way. It doesn’t matter if we are say 10% wrong on this economic stuff, or on the climate change stuff, or on the peak oil stuff, 90% is still plenty serious.

This is followed by another broadside by Jim Rogers, formerly of the Quantum fund, and the ex partner of George Soros. The problem with what these guys are saying is that it’s simply too clear. They haven’t always been right, nobody ever is, but they have been right far more often than they have been wrong.

* Although the United States faces perhaps its most daunting economic challenges in at least a generation, “in America, most people do not understand that there is a problem.”
* Because of these weak-dollar efforts – as well as the billion-dollar bailouts – “America is now the largest debtor the world has ever seen.”
* Although the central bank seems intent on engineering a U.S. economic rebound by creating an ultra-weak dollar, no country in history has ever emerged from a serious financial crisis by “debasing its currency.”
“You know, I’ve read the Federal Reserve Act,” he said. “Nowhere does it say [the central bank is] supposed to bail out investment banks! Nowhere does it say you should bail out Wall Street. Their mandate was to have a sound currency, and then it was later expanded to have employment – to help employment. But nowhere does it say: ‘Bail out investment banks.’”
Keith Fitz-Gerald (Q): There’s a confluence of money flowing into and around China. Do you believe that the U.S., with all its current problems, will get left out?

Jim Rogers: Absolutely.

The U.S. dollar is a terribly flawed currency. I’m trying to get all of my money out of U.S. dollars. I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!

The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months. U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar.

Look, I mean, who even needs to read the left at all any more? The guys in the system, at the top, are getting as pissed off about this as any leftist I’ve ever seen, and they understand it from the inside.

The rightward movement of the political spectrum, and corporate influence over the US political system, has moved the political sphere so solidly into the camp of Capital interests, banking, corporations, etc, that it’s almost impossible to begin to see where one entity ends and another begins.

And, what’s worse, they are now essentially writing the laws to govern their own behavior. You have to contemplate that statement for a while to see how serious this situation is. We have folk sayings about this situation, a wolf guarding the flock, etc, but unfortunately nobody around here has been a shepherd in recent times so that is not understood any longer.

It’s unclear where change is going to come from. One positive sign is that Hillary Clinton’s bid for 8 more years of Clinton compromise and sellouts isn’t going to happen. Now this isn’t to say that Obama will be much better, and of course, if McCain gets elected, you might as well give up on the USA permanently. Forget it, he’s not going to be able to handle the situation, it’s out of his league.

But with a business bought congress firmly in place, with some pleasant exceptions here and there, it’s going to be very tough to start fixing this situation, too tough is my guess, and the US is going to go down, like the people who should know are telling us.

Will it go down fast? I don’t know, it’s really hard to estimate this stuff, it’s a new situation, and it’s hard to know when the global support systems will start to crack and fail.

But one sure sign is when the market, especially global players, stop buying US debt

We could have seen this coming, after last week’s U.S. Treasury auction failure, in which notably absent among the bidders were the major foreign banks. That auction failed, sending U.S. Treasury rates higher and causing a major reversal in the bond market. Now bidders have failed to show in the auction rate securities and the banks have failed to step in and make a market for these securities. The Port Authority of New York and New Jersey saw interest rates on its bonds rise from 4.3% to 20% as a result of the failed auction.

It’s kind of like watching a building fall down in very slow motion at this point. Will it get caught by something? Will it go into virtual free fall? I’m going to keep watching it for now, I can’t really get a sense of this, it’s a huge picture, but I am going to put some trust in people who have worked around this economic stuff seriously for a long time, and what they are saying is just not very promising.

Let’s take a look at one outcome of the world not buying this debt: we won’t be able to buy oil if this keeps up.

Forget about Peak Oil, this will simply be a case of not having the cash to buy it.

Why do you think the USA invaded Iraq the moment Iraq threatened to switch to the Euro for Oil, and why it wants to attack Iran, which is going to a basket of currencies, not including the dollar? And Russia threatens to sell in crude in Rubles? And Venezuela wants to sell oil in Euros? This is the direct consequence of the grotesquely corrupt and incompentent policies of the last 20 years of so called ‘leadership’ in this country.

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