Saturday, September 27, 2008 2 comments ++[ CLICK TO COMMENT ]++

Articles For The Last Weekend Of September

By some accounts this has been the worst September in economics and finance in American history. Who knows how correct that description is but here are some articles I found interesting for the last weekend of September:

  • Jim Grant on the bailout: I ran across the linked Jim Grant article from a Controlled Greed post. The key concern he raises is the future of the US$. I personally don't think it is as dire as it seems (but it depends on the details.) I think the US$ will only start to face problems if the US governemnt prints money rather than borrowing it. Forigners might demand slightly higher rates but it isn't anything big. Right now, I'm bullish on the US$ due to my belief that there will be capital flight into it (away from risky assets and markets, such as emerging markets.)
  • Excessive leverage is the problem: Fortune has a basic article talking about the excessive debt that American financial firms took on in the last decade. A chart that is referenced shows American loan to deposit ratio at 3.5, whereas most of the key countries in the world are closer to 1.
  • How a 377-employee division brought down a 116,000-employee company we know as AIG: It's amazing, really. Superb job from the New York Times on this story. Anyone with interest in AIG should check it out. I never would have thought that such a large insurer would collapse. To think that a formerly AAA-rated insurer had to be nationalized is hard to believe.A lot of it is due to management incompetence. You simply cannot justify how such a large firm with valuable assets would end up like that. Some people think Maurice Greenberg, the prior CEO, would have run things better but I am not so sure. Credit derivatives were booming under his watch a few few years ago...Oh, a trivia bit I learned this week, not that it has any positive impact on my life at all: Guess where AIG started off? Believe it or not, China! I always thought that AIG was started in America but it actually saw its beginning in China (started by an American.)
  • American consumer likely tapped out: I don't know who coined it but there is a famous saying that one should not count out the American consumer. A lot of people who bet against the American economy a few years ago turned out to be completely wrong. But I have a feeling that this may be it. I think you are finally going to see contraction in consumer spending. This has happened to a minor degree in the last year but you are going to see it continue. This is going to send out ripples across the investing world. I suspect there are going to be serious issues in some of the emerging markets soon. As Marc Faber insightfully pointed out last week, America produces very little of anything anymore (it's mostly a consumer) so an economic slowdown will have less of an impact than on production-oriented countries. I would be very wary of wandering into China, Vietnam, Phillipines, or other similar nations right now. I think one should start researching now but I'm not sure if investing now is the best thing.
  • The New Yorker's James Surowiecki on the current crisis: He's a great financial writer for non-financial readers.
  • Bailout, the musical: You know the financial crisis is getting serious when artistic/literary publications like The New Yorker start parodying it in a musical. Really good musical written by Ben Greenman... LOL fun stuff :)

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2 Response to Articles For The Last Weekend Of September

September 27, 2008 at 10:52 PM

"I think the US$ will only start to face problems if the US governemnt prints money rather than borrowing it"

Actually, the printing press is already reving up: entering-the-endgame-for-monetary-policy/

The issue of the value of the Dollar is a little more nuanced:

The dollar will only lose value in a credit crunch if the speeed of the Fed's curreny printing operation is not keeping up with speed of the credit imploding.

The corollary is: in order to stop a spiraling credit impolsion (I'd call losing Bear Stearns, Phoney/Fraudie, LEH, AIG, WM, and WB (next week) is "spiraling"), the Fed may have to hyperinflate.

David Merkel's piece is a sneak preview to how Bernenke's Fed will deal w/ the credit crunch if the politicians continue to dicker around.

So in the end it doesn't really matter how angry ordinary Americans feel about the so-called $700B Wall Street Bailout.

Either Americans will have to pay by higher taxes, or they will pay by losing their perchasing power through hyperinflation.

I still think owning a little bit of gold is wise.

September 28, 2008 at 3:25 PM

That article is somewhat misleading; it doesn't show full picture so you can't conclude that money is being printed. The first comment response in your referenced post alludes to that. Namely, the FedRes has--and this applies for most of the actions in the last year--have simply swapped assets. Someone following the FedRes would know a lot more about the mechanics but I believe they have basically swapped their Treasury holdings for various bank assets.

The FedRes actions so far have not resulted in what one typically thinks of as money printing (i.e. print money out of thin air and buy bank assets.)

Although not very recent (Apr 08 only) Mike Shedlock has an article where he points out that money has not been printed recently. The same analysis likely applies to Fed actions since that article to now. Mike uses Austrian Economics but others with differing views, such as GaveKal, who rely on Fisher's economics--I'm just going by their free forum postings--have said similar stuff.

You can sort of see that money wasn't printed in the last year by looking at inflation measures, commodity prices, and so forth. Even gold, although doing very well in the last few years, has come under pressure. Gold only started rallying after the bailout announcement but I think gold bulls mistakenly believe it will be inflationary, whereas I don't think it will be. We would be facing a 1970's right about now if they were actually printing money. So far no signs of anything remotely close to the 70's.

(Having said all that, money IS being printed and you are right in saying that if deflation is higher than the printing rate, then it won't be inflationary. That's true. However, in this case, they are not printing much at all. I don't think it's accurate consider the central bank actions anything like "money printing".)

For what it's worth, I approve of the FedRes actions so far. If they actually printed money, it might seem good on the surface but would end up in a massive inflationary bust in the future.

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