Shoes Dropping

      The fall of Britain's Northern Rock bank may be the first dropped shoe in a chorus line of big banks tap-dancing into oblivion. The British government's move yesterday to nationalize the insolvent mortgage lender's remaining operations leaves shareholders holding an empty bag. Their only resort now will be to call their lawyers. What we may be witnessing, in a movement that will surely spread to the US, is a changing of the guard at the top of the financial food-chain between bankers and lawyers.
      Shoes may have begun to drop in the US last week with Citigroup halting redemptions for its $500-million CSO mini hedge fund -- half a billion dollars being something less than walking-around-money in the Hamptons these days. Halting redemptions means that investors in the fund cannot withdraw their money -- the same as going to the bank and being told your account is frozen. Hedge funds can play rough with their investors because they are unregulated. The reason they remain unregulated is the presumption that anybody rich enough to "play" in a hedge fund can afford to lose (or be swindled) with no protection on the sidelines from government busybodies. What's more, the hedge fund managers do not have to make any of their operations open to public view, so that neither the investors nor any regulating authority knows what they are actually doing.
     What the big banks who run many hedge funds are doing is going broke. They are pretending to be solvent by borrowing money from the Federal Reserve, the nation's alleged superbank. But borrowed money is not capital, i.e. surplus wealth wholly owned. Borrowed money is an obligation, a liability, a negative on the balance sheet. You can't have an entire financial system based on nothing more than a giant daisy-chain of liabilities. Somewhere there has to be a "reserve" of assets, items of value owned by somebody.
      Through most of modern times, assets have been denoted by cash money. A given bank will hold in "reserve" say $10 billion in money that is not owed to anybody, allowing them to do things like pay depositors who show up at the window needing money for groceries. Up until a few decades ago, nations held an ultimate reserve of actual gold in a vault (Fort Knox, Kentucky, in the case of the USA) and the physical possession of this gold was said to "back up" the value of the certificates that circulated as a "medium-of-exchange" or currency.
      But that system was considered too awkward and "reserves" were then denoted in just currencies themselves, or certificates that represented the existence of currencies held elsewhere, or pixels on a screen representing the movement of alleged piles of currency from one place to another, or the intention to move a notional pile of currency to a theoretical destination, and then that became an algorithm purporting to represent the future arrival of a notional pile of money at theoretical destination to-be-named-later, and so on.... And after another while, the nature of money became so detached from anything real, so abstract, that its very existence became hypothetical. Even this "worked" for a while, in terms of the managers of this money being able to "cream" substantial amounts of this hypothetical money off the top of their notional operations and translate that hypothetical cream into Tribeca lofts, Gulfstream jets, and other real luxuries.
     The rest of the economic food chain -- and the social order that represented it -- got stripped of remaining asset value (and social value) until they had nothing left to trade with except debt, in one form or another, and this phase of the game turned out to have a short lifetime when the the only debts remaining to be monetized were the contracts on houses occupied by people with no hope of ever meeting their obligations -- and then the whole sorry racket started to go up in a vapor.
     This is roughly where we are, and where the banks stand today. They are pretending to have money and desperately cadging loans from all comers to keep appearances up, but the loans can't come in fast enough. The appearance of confidence is crucial (as it is, of course, in any "con" game) to keep the investors (depositors) at bay. If a bunch of investors (depositors) all got nervous about the solvency of a given bank, they might try to slip in there during business hours and withdraw or redeem their "money" and perhaps translate it into items of value like gold coins, bottles of vodka, or cases of 9 millimeter pistol ammunition. And if enough of this bunch showed up at the same time, we would see a phenomenon called a "run" on a bank. And after that started at one bank, the thing Franklin Roosevelt called "fear itself" could easily spread to depositors in other banks pretending to be okay... and that would be the magic moment that the USA discovered it was no longer a rich nation.
     That would be a very rude awakening. The whole world would know about it in about thirty seconds, and the rest of the world would be in a lot of trouble, too, since so much of its notional wealth is represented by piles of US dollars (or certificates denoting them). Then what you could see is a run by other nations (investor-depositors) on the United States of America as a whole, or an awkward global receivership process, in which all remaining assets were stripped -- including maybe even some of those Tribeca lofts and Gulfstream jets.
     Of course, the rest of the world would have a hard time getting any of this stuff out, or fencing it off at a discount. Rather, they'd probably just eat their losses and quarantine themselves off from the world's new financial-and-economic leper. They'd stop sending us Toyota Highlanders, plastic salad shooters, and, oh yes, oil. We'd be left with a lot of empty big box stores, vacant highways, and houses inconveniently deployed too far from any place of utility. One thing we'd have plenty of, though, is home-grown pissed-off people. Some of them may even be lawyers.

 

Note: my novel about America's post-oil future, World Made By Hand, is now shipping to booksellers everywhere.  Get one. You'll like it.

Comments

[Tangurena]

I think that the "nationalization" of Northern Rock was done to nationalize the losses and that after the taxpayers of UK end up bailing it out, then it will quickly and quietly be re-privatized back to the existing shareholders for a nominal sum. Public costs and privatized profits.

[Subkommander Dred]

Jim;
On the mark, as usual. However, I would like hear more stories about the Big Fund Boyz and other Wall Street types being repeatedly sexually assaulted on the granite countertops of their Tribeca Lofts/ Hampton Estates by legions of pissed off (bankrupt) investors. As for stocking up on ammo, good call on the 9mm pistol cartridges. They are cheap, easily exchangable (both as cold currency or hot lead, depending on the occasion) and the weapons for such easy to find and use, particularly in a country as gun crazy (or maybe just outright crazy) as ours. I predict the next investment bubble will be in body armor.

SubKommander Dred

[zerotsm]

"...withdraw or redeem their "money" and perhaps translate it into items of value like gold coins, bottles of vodka, or cases of 9 millimeter pistol ammunition."

This is one of Jim's best quotes.

[Matt Savinar]

Jim, you wrote:

"One thing we'd have plenty of, though, is home-grown pissed-off people. Some of them may even be lawyers."

That's for sure! I'm not looking to sign up as a foot-solider in the army of marauding ass-fucking lumpen proles storming into the Hamptons, BUT I'd be glad to offer my services as an attorney pro-bono if said marauding hoard needs any assitance organizing the endeavor.

The Army has their JAG, their finance corp, etc. I figure the Ass-fucking Lumpenprole Corps (ALC) will need something roughly equivalent and I'm glad to help out, albeit I DON'T want to be on the front lines of said ALC. What I would like is a picture of the look on the face of one of the Big Boyz at them moment ALC busts down the door.

BTW, I've added your new book to my AMazon Store:

http://tinyurl.com/3b8yfl

[barefootbookseller]

I liked it. A lot. (World Without End) I had it back ordered from Ingram, expecting it in March. When it came Friday, I figured Jim must have put a rush on things to get it out before the crash ;-) It's pure Kunstler, and an excellent novel to boot.

[bruiserbob]

come on Jim, why such a short post? i was really enjoying reading and it just ended too soon. Honest, this is great stuff, how about adding a few more paragraphs?

also,
I asked my banker rep what percentage reserves they had. "The federal government has strong regulations on our reserve requirements, so it is heavily regulated for the industry in an attempts to prevent any depression era declines again".

boy do i feel better now....

[barefootbookseller]

Darnit, World Without End is Follett, I meant to say "World Made By Hand." Sorry.

[Johnny Rico]

"This is one of Jim's best quotes."

Thanks for letting us know. Where's the rest of the list available?

Maybe you can teach Savinar to spell. He's gonna need that if he wants to go to law school.

[Matt Savinar]

Rico,

So it looks like want to volunteer as a training dummy for the ALC?

[Johnny Rico]

Weren't you asking for Jim's email last week? Did he not give it to you?

But feel free to drop by next Monday first thing to let everyone know how you're doing, sport.

JD, says 'Hi,' too. They're talking about you over at POD.

[Yeoman_Lawyer]

In your reference to gold, would you propose (if it were currently feasible) a return to the gold standard?

Not being all that adept at economic theory, I've never understood why the country abandoned the gold standard. It would seem to have all sorts of advantages, as then you money is directly tied to something that can actually be traded, other that the money itself. And gold has tended to hold its value, in real terms, if you look at what an ounce of gold will purchase over time.

It might slow things down somehow, but not much.

[montysano]

"I've never understood why the country abandoned the gold standard....It might slow things down somehow, but not much."

The Wall Street Boyz would disagree vehemently: it slows things down far too much. Freed from the gold standard, and further empowered by the deregulation of the Reagan years, they were able to find creative methods of finance, so that today, everything of any value is leveraged multiple times. Those kind of shenanigans wouldn't have been permitted in the world of the gold standard.

[Holmes, I presume]

JR, how far are you into W&P?

I'm about half way through WMBH. I refuse to comment for now. (Alas, it's not going to be the glowing review that I had hoped to pen.) Maybe later... after The Nudginator grants me permission to speak. On second thought, it would probably be best to recuse myself from this particular discussion.

Anyway, I'd rather talk about banks.

[Johnny Rico]

Matt,

I’m just messing with you. I love you, baby. Any Chimp who can drive and go on TOD once a week just to say “bitch-slap” is cool in my book. Wow. “Bitch-slap.” That’s sooo 1998. How rad.

You still selling those peak-oil coffee mugs? I’ll bet Jim’s psyched to hear that you’re making a dime off his book now, too. What about those survival packs with the canned goods for your fallout bunker or whatever? How long do those last? They got any booze in em? I thought I saw a photo of you somewhere with like a whole pallet of cardboard boxes filled with survival gear in your apartment.

What about salad-shooters? Can I get a salad-shooter with the LATOC logo stamped on it? Can I buy them in bulk? I wanna sell them at NASCAR races to lumpen proles. That’s from Orwell, right? 1984. You are sooo literary. Bet you didn’t know ol’ Eric Blair was so into peak-oil.

What are you gonna do when Dick Cheney’s out of office? Oh, that’s right. He’ll never be out of office. He’s going to manufacture a terrorizer attack and then declare a state of emergency and martial law.

Come back now, ya hear?

[Johnny Rico]

Holmes,

I've read 40 pages, another 10 today. Half the first 10 pages is in French with translations in footnotes. I need to go back and take notes from the beginning. I haven't read any in 4 or 5 days. So I'm seriously off-track. But that's OK, the Iraq war didn't get off to that great a start, either.

Keep on my case about it. I think I'm going to need to start a blog tracking progress. In fact I'm going to do that right now.

Keep on my case about it.

[jp]

more on Northern Rock from Monbiot last October..
http://www.monbiot.com/archives/2007/10/23/libertarians-are-the-true-social-parasites/

[Senior Distiller]

Jim, thanks for mentioning gold.You may have noticed that the price of gold is inching its way toward $1000/oz. This is because the "barbarous relic" is again becoming a safe haven from fiat currencies. Gold is the antidollar. In a hyperinflationary scenario, there will be a mad rush to convert cash to assets, and gold will resume its ancient role as the only real store of value.

My point is that buying gold and silver bullion coins (not the numismatic type) is something each of us can do to protect what's left of our wealth. If you had bought a 1-ounce gold eagle coin in the summer of 2005, you would have paid around $440 (assuming you got a fair price). If you took that same coin to a dealer right now, he would give you $920 for it. This is not a gold bubble; it is the dollar dying.

[Johnny Rico]

What is the "industrial" value of gold? I've heard this quoted before.

Can you eat gold? Or put it in your gas tank?

[Ed]

"I've never understood why the country abandoned the gold standard"

I personally think the bean standard is better, but the case can certainly be made for 9mm rounds and shotgun shells. You can easily buy large quantities of reloaded 9mm rounds from Cabella's by the way.

Right now, the US uses 25% of world oil production just for "happy motoring." The rest of the world aspires to achieve 1st world consumption standards which will require something on the order of 4 times the current level of resources. Ok, well thats not going to happen because this planet simply doesn't not have the resources to do that. And then we have population growth that will, at current levels of consumption only on a per capita basis, require 2 planets to sustain in less than 50 years.

Beans and ammo. Your best investment.

[Charlie Rose]

Johnny,

I love your distaste for Savinar. Keep it up.

[montysano]

Johnny,

Your distaste for Savinar is adding nothing to the discussion. Please stop.

[Matt Savinar]

Johnny,

Thanks for the kind words! My apologies for asking IF you want to sign up as a practice dummy for the ALC. From the tenor of your posts, it sounds like you're already signed up and have been getting lots of experience!

Something I'll add to my store, just for you, JohhnyCakes:

http://tinyurl.com/2neumw

[Johnny Rico]

Montysanto,

What exactly is Matt Savinar adding to the discussion - besides an obsession with ass-fucking?

Maybe if you could explain that to me I could better understand what conversation you are talking about.

You do understand what ALC means, my dear montysanto, don't you?

And I'm pretty sure the conversation you are talking about is the one where you and Jim and Matt hold hands and talk about ass-fucking.

You or Matt can chime in anytime when you want to actually discuss banks. Don't let me stop you.

I'll probably say some things about banks later when I'm in the mood, is that okay with you?

[Johnny Rico]

Montysanto,

what did you think about Matt's cute little picture. Wasn't that a great way to add to the conversation? I just wish it had a LATOC logo on it.

[Nudge]

Jim, lovely post. I'm awaiting the appearance of your book at the local bookshop. Should be here by the beginning of March.

To those who would want to read stories of just comeuppance (aka karma in action) among the corrupt NAR house sellers (aka Realtwhores tm) and the fool buyers (aka FBs) and serial refinancers, just surf over to Ben Jones' excellent blog:
http://thehousingbubbleblog.com/index.html

Plenty o' that there. Every week there are plenty of “boo hoo, poor me” stories of drooling idiots who purchased their homes in the 70s & 80s and who kept extracting money from the home-equity piggy bank every time they wanted to live beyond their actual means, and who are now crying out for debt relief as they owe so much more than the properties are actually worth. Feh, cry me a river and go drown in it, please .. folks like that are a fine example of how nature throws up a whole lot of lead balloons in an attempt to try our a variety of designs. Most fail miserably, but for every thousand or so who spend foolishly there are perhaps one or two who know how to save and live frugally.

The salvation of our society, if such is to happen, will only be by the action of them who know how to manage their own finances properly ~ which seems to be a vanishingly small portion of the population at this time.