The Looming US Depression

BE CAREFUL what you wish for. The entire US Treasury market is betting the Fed will cut rates in September. Goldman Sachs expects rates to finish the year at 4.5%, fully 75-points lower from here. The head of Ford just demanded a cut in interest rates too, and now Bill Gross of Pimco, head of the world's biggest bond fund, says Washington should step in to save US home-buyers – "write some checks, bail 'em out" – before their teaser mortgage deals run out, pushing up to two million families into foreclosure. But what's the hurry? The US Dollar is already more worthless than at any time in its history according to the international currency market. The trade-weighted US Dollar closed July 2007 at its lowest monthly value ever against the world's other major currencies. It took a 12% drop in world stock markets to force enough short-covering to cause a bounce in the greenback. Flooding Wall Street and Main with freshly printed bills – whether through sharply lower interest rates...or through direct intervention by the "Reconstruction Mortgage Corporation" that Bill Gross is calling for – will only remind the world why it was so bearish on the Dollar before the start of this month. Come Sept. 2007, the only difference will be that we can add the chasm of negative US real-estate equity to the yawning Twin Deficits. And with America's troublesome triplets choking its throat, the only hope for the Dollar would be a swift death. Long-term support on the Dollar's Trade-Weighted Index had sat around 80 since the mid-90s low. But not any more. "Someone would certainly be blamed for the ultimate collapse when it came," as J.K.Galbraith wrote in The Great Crash, 1929. "There was no question whatever as to who would be blamed should the boom be deliberately deflated. For nearly a decade the Federal Reserve authorities had been denying their responsibility for the deflation of 1920-1." It took re-arming for World War II to finally kill the Depression, but Milton Friedman still blamed the Fed for causing the slump nearly thirty years later. Ben Bernanke has gone on to build his entire career on saying "sorry" for the interest-rate hikes that apparently caused the modern world's worst-ever recession. Indeed, the long shadow of the Great Depression today blocks out most recollections of just how bad things became during the inflationary bust of the 1970s. Investors fleeing into the safe, welcoming arms of US Treasury debt would do well to remember what happened when gains in the Consumer Price Index overtook bond yields between 1973 and 1980. (They might want to recall what happened to Spot Gold Prices when the same thing happened between 2003 and 2005, too.) But the current Fed chairman has played no small part in ensuring that flared pants and double-digit inflation have been replaced by the 1930s deflation as the big ghoul from history most feared by policymakers, central bank wonks and investors worldwide. "During the major contraction phase of the Depression, between 1929 and 1933," as Bernanke said in a speech of 2004, "real output in the United States fell nearly 30%. During the same period, according to retrospective studies, the unemployment rate rose from about 3% to nearly 25%, and many of those lucky enough to have a job were able to work only part-time." By comparison, the 1973-75 recession – "perhaps the most severe US recession of the World War II era," according to Dr.Ben – real output fell 3.4% and the unemployment rate merely doubled from 4% to 9%. "Other features of the 1929-33 decline included a sharp deflation," he went on. "Prices fell at a rate of nearly 10% per year during the early 1930s – as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households." Fast forward to late summer 2007, and Bill Gross has bought into the Bernanke Fed's worst-case scenario, adding the full weight of his $692 billion in bonds under management for good measure. "Market forecasters currently project over two million [housing] defaults before this current cycle is complete," says Gross in his latest comments. "The resultant impact on housing prices is likely to be close to minus 10%, an asset deflation in the US never seen since the Great Depression. "The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions..." In short, the very crisis for which Ben Bernanke has been waiting to prevent all these years is beyond his meager talents. Bill Gross reckons that even a 200-300 basis-point cut in the Fed Funds rate would still leave the vast bulk of re-setting homebuyers facing monthly mortgage repayments they simply can't bear. "Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to do," he advises George W.Bush, claiming that Depression-era fiscal meddling will somehow avoid weakening the Dollar. That will only happen, however, for as long as the rest of the world keeps debasing its money at the same rate as Washington. And that, in turn, will only protect US investors for as long as fixed-income fund managers can pretend that bond-interest coupons aren't being eaten alive by inflation. The Bank of England summoned up £314 million from nowhere on Monday, making a short-term loan to cover a gap in Barclay's cashflow. Four of Wall Street's finest borrowed $500 million each from the Federal Reserve on Wednesday. The European Central Bank injected €40 billion in three-month loans on Thursday (around $54.2 billion). The offer was snapped up by German and Italian banks unable to get short-term funds in the market. On the other side of the trade, meantime, the cost of natural resources continues to push higher, even as Treasury bonds surge. Wheat futures just hit a new record high, after India – the world's second-biggest consumer of the grain – invited bids to help it buy an "unspecified" quantity of wheat to help expand government stockpiles. Global inventories, says the US Dept. of Agriculture, will fall to a quarter-century low by next June. Soybean prices are also rising, as China's domestic output is likely to fall after a prolonged drought – potentially losing 17% from last year and causing imports of 31.4 million tons in the 12 months beginning Oct. Copper imports into China, meanwhile, doubled in the year to July, said the Beijing customs office last Wednesday. The only US data report that showed a double that day was the number of foreclosure notices sent out in July to late-paying US homeowners. Investors fearing a sharp cut in US interest rates, even as the cost of living continues to rise sharply, may want to consider an allocation to Physical Gold Bullion. During the negative real interest rates of the late 1970s, Investment Gold more than quadrupled to its all-time high of $850 per ounce. Its greatest gains during the current bull market so far came when US interest rates again dipped below the rate of inflation between 2003 and 2005. To Buy Gold Online Today – as near to live "spot" market prices as private investors can get – be sure to visit BullionVault now... Adrian Ash, 28 Aug '07

Who will pay the price for the Credit Crunch

Curb the greedy global financiers Will Hutton One of the most inequitable and amoral acts in modern times is happening in front of our eyes and there is hardly a murmur of protest. The multibillion-dollar bail-out of global finance after one of the most reckless periods of lending and deal-making since the late 1920s is extraordinarily one-sided. Little people's taxes are underwriting the mistakes of big people, who in the process have made riches beyond the dreams of avarice. Globalisation, it is now clear, is run in the interests of a global financial class that has Western governments in its thrall. This class does not give a fig for the interests of savers, clients or wider workforces. The rules of the game are set up solely to benefit the financiers, whether in London, New York or Hong Kong. The nonsense at the heart of the crisis -- lending 100% mortgages to borrowers with no income, employment or assets, packaging up the resulting debt and selling it to banks around the globe while taking a handsome fee on every transaction -- can be launched with impunity. Financial regulation, we are told, hinders the efficiency of financial markets. But now that it has become obvious that the mainly American borrowers have neither the capacity nor intent to repay any of the mortgages in an era of higher interest rates and stagnating house prices, there is justified panic at the wider consequence of the global system holding trillions of dollars of valueless debt. The past few days have seen some recovery in the financial markets and some hopes for a return to normality, but what does normal mean? The system that has delivered hundreds of billions of dollars of written-off loans with a global impact can hardly carry on as if nothing has happened. The banks at the epicentre of the crisis should go bust and heads should roll. The hedge funds that bought the debt, traded it and sold it on to banks globally should also be allowed to go bust and be subjected to much closer surveillance and regulation. Interpol should make arrests in New York, London, Tokyo, Beijing, Frankfurt and Paris, starting with all the executives in the credit-rating agencies who blithely ranked the debt as creditworthy in exchange for fat fees and freebies from the very banks who were making the absurd loans. Governments should bring suits against the executives involved, the repositories of vast personal wealth, to help repair the hole in private and public balance sheets. Instead, most central banks and governments across the West are straining every muscle to limit the fall-out, assure banks and hedge funds that there is limitless public money on tap and that governments' first aim is to get back to "normal". The explanation is obvious. The Western financial system is too important to be allowed to implode; credit is any economic system's life-blood and if the supply lines get gummed up because of a collapse of confidence and severely punctured balance sheets, everybody suffers. Quite right, but at least we can be careful in future about the terms on which supportive cash and potential bail-outs are made, as well as drawing larger conclusions about the nature of the implicit contract between finance and society. Unbelievably, the European Central Bank has made hundreds of billions of euros available to all comers within the European financial system at no penalty for the privilege, while the Federal Reserve Bank in the United States has lowered the interest rate at which it supports distressed banks. It is as though Europe and the US had announced an amnesty to the world's criminal gangs after they had gone on a killing spree because they feared the killing would get worse. The Bank of England alone has held the line, insisting that anybody turning to it for cash as a last resort will have to pay at a rate of interest that will hurt the borrower. Good for the bank, except its stance is undermined because outside the eurozone it cannot insist the European Central Bank follows its stance. It is also undermined by a British government that on these matters is the most craven in the West. For as the German and French governments along with senior American Democrats argue, the whole affair raises fundamental questions. It cannot be right that finance insists on freedoms and lack of regulation to indulge in anti-social recklessness in order to make personal mega-fortunes, but when things go wrong to ask for government bail-outs with no questions asked. Thus German Chancellor Angela Merkel and French President Nicolas Sarkozy have called for more transparency and regulation of hedge funds; thus in Brussels and Washington, there are to be investigations into what the executives at the credit-rating agencies have been up to. But from the British government there has not been a peep, not a hint that the contract between finance and society needs to be reassessed both at home and abroad. That would be -- heaven forfend -- "anti-business". But the West's economies and societies cannot be constructed as if their sole raison d'être is to ensure that there is a steady flow of deals for investment banks, private equity houses and hedge funds, along with an abundant flow of credit, and the moment there is any interruption governments bail them out. Finance is hardly poor. In Richistan, his revelatory book about today's mega-rich, Robert Frank shows how closely enmeshed instantaneous wealth and the financial markets have become. British leader Gordon Brown runs a government that is essentially conservative over business opposed by an opposition yet more conservative, with the Lib Dems terrified to rock the conservative consensus. Over the past few years, there has been a fire sale of British assets to foreigners, together with ever-closer entanglement with the American debt markets to sustain the bonuses of the financial community. It would not surprise me if, before the story is over, at least a couple of household British financial names have to be offered a lifeline. Somebody, somewhere must start blowing the whistle. The Americans at least take capitalism so seriously they challenge, monitor and regulate it. No such culture exists in degenerate Britain. We need a party which will speak for an interest other than self-interested, amoral plutocrats. None exists. -- Guardian Unlimited © Guardian Newspapers Limited 2007

Emissions Impossible

ENVIRONMENT EU carbon-trading slammed Wed, 13 Jun 2007 Businesses in the European Union will not be forced to reduce their carbon emissions by as much as previously thought because of "short-sighted" plans for the EU's carbon trading system, environmental group WWF said on Wednesday. The group criticised the second phase of the EU's Emissions Trading Scheme (ETS), designed to reduce the EU's greenhouse gas emissions, for allowing companies to "buy massive amounts of credits from projects outside the EU," under a system set up by the Kyoto Protocol. In its report titled "Emission Impossible", the WWF argues that "this reliance on cheap imported credits means that European industry may not have to reduce its own emissions at all" during the second phase of the carbon-trading mechanism, which is set to run from 2008 to 2012. Under the ETS, companies are issued carbon credits which effectively set a cap on how much they are allowed to pollute. Companies may then either reduce their own emissions and sell any extra credits to other, bigger polluters, or purchase extra credits, thereby raising their cap. The first phase, which has been running since 2005, was widely criticised because it has been argued that governments handed out too many carbon credits, allowing industry to pollute more freely than it should have been allowed to. The WWF report studied nine EU member states — Britain, Germany, Poland, Ireland, France, Spain, the Netherlands, Portugal and Italy — and estimated that during the second phase of the ETS, between 88 and 100 percent of those countries' carbon emissions could be effectively offset by purchasing additional credits from outside the EU. "The European Commission's decision to allow companies to buy huge volumes of project credits means that heavy industry — including the power sector — could potentially buy its way out of cutting its own emissions," said Dr. Keith Allot, the head of WWF-UK's Climate Change Programme. "There is a real danger that this will lock the EU in to high carbon investments and soaring emissions for many years to come — wrecking the EU's emission reduction targets for 2020 and 2030 and making a mockery of Europe's standing as a world leader in tackling climate change." "If the ETS is to fulfil its potential, we must ensure it leads to real carbon emission reductions within Europe."

The Myths and Pitfalls of Emissions Trading

This is a new blog that will attempt to unravel and demystify the world of emissions trading. The environment has become a seriously hot topic and there is no doubt that the next election will be fought using "carbon footprints" as a weapon. The market for emission trading is at present completely deregulated haphazard and fraught with disinformation. A number of brokers are making enormous profits from this situation and the world will need to bring these to a central clearing house to enable worldwide monitoring and rating to ensure that all this trading is in fact reducing emissions. I fear that this is not the case at present and more and more "credits" are created to augment income rather than reduce output. This step requires the political will of all countries, but some need to take the lead so I hope this will be usefull in bringing together articles and statistics that will help highlight the ongoing activities that are taking place and will need to happen to achieve this desired outcome. Please consider the environment before printing this Blog