Still Pretending

     The maneuvers that the big banks are making nowadays, along with their enablers at the Federal Reserve and elsewhere in Washington, really amount to little more than the old Polish blanket joke -- in which (excuse my concision) the proverbial Polack wants to make his blanket longer, so he scissors twelve inches off the top and sews it onto the bottom. Only in this case, the banks are shearing x-billions of losses off the top of their blankets and re-attaching x-billions of new debt onto the bottom. This new debt, of course, goes to cover the old losses and only represents further losses-to-be-reported-later, since the banks are basically insolvent. Borrowing more money when you're broke doesn't make you less insolvent.

      The banks can probably keep this gag running a little longer, but not without consequences. My guess is that it spins out of control in March sometime when some more hedge funds blow up and at least one big bank, perhaps Citi, rolls belly up like a harpooned whale. The game is really over, and all the playerz know it. The consequence of continuing to pretend the meta-fiasco of Ponzi endgame is fixable will be an even more shattering depression than the one we're already in for.

     We are a much poorer nation than we thought we were and the reality is just too hard to face. Nobody from the most august banker (Treasury Secretary Hank Paulson) to the lowliest wanker (the WalMart inventory clerk who "bought" a house outside Phoenix with a no-money-down, payment-option, adjustable rate mortgage) can believe that this is happening. The candidates for president are pretty much assuming that vast financial resources will exist to be deployed against a range of problems. Everybody is going to be hugely disappointed.

    When you introduce perversities into an economic system, they invariably end up expressing themselves as distortions. The economy that evolved the past two decades, driven by the perverse securitization of wishes and frauds, will now express itself in a stark cratering of American living standards. Incomes and jobs will vanish, massive quantities of stuff will collect dust on the WalMart shelves, the fragile infrastructures of daily life will go to shit, and there will be political hell to pay. Every attempt to avoid a straight-up workout of our massive losses, will represent another layer of perversity and more consequent destructive distortions.

     I feel sorry for the next president. Even as he takes his oath of office, the nation will be flying apart like a seized-up engine. Since the fiasco in finance is happening in lock-step with Peak Oil (and very likely because of it at a fundamental level) we can expect one of the distortions to take the form of oil shortages. These shortages will come not just from demand bottlenecks in a stressed-out world oil allocation system, but because exporting nations will start demanding payment in Euros or something besides the depreciating currency that reflects our disintegration, and we'll have a problem coming up with payments that amount to at least fifty percent more than we're used to shelling out.

     Once the US gets into serious difficulties with our oil supplies. every other sector of the economy wobbles, including especially the food-growing sector, which cannot function without copious amounts of diesel fuel and hydrocarbon-based soil "inputs." Americans will go hungry, and not just the "underclasses."

     Along in this process somewhere, there is huge potential for armed conflict with other nations. If the unraveling gets traction while George W. Bush remains in charge, the US may answer bellicosity from oil-exporting nations, or energy-hungry rivals, with truculence of our own. Things can get out of control very fast in such a situation. Nations that were happily selling us salad shooters six months earlier may be targeting our naval vessels with a different sort of shooter, say a Sunburn missile. In any case, we will be acting with a bankrupt, exhausted, and over-extended military, and the best case outcome would leave us merely isolated and marooned geopolitically on our own continent, with dwindling energy and mineral resources and an angry, demoralized population.

      This time around we have more to fear than fear itself. The banking executives, government officials, and candidates for president are not doing the nation a service by concealing and ignoring our losses. Finance, as the driver of an economy, is finished, but the deployment of capital is still an indispensable arm of a real economy. Sooner or later we'll get back to money that stands for something and banks that function as credible repositories of wealth. But we haven't even started down the path to that place, and the longer we pretend that we don't have to go there, the worse the journey will be.

Comments

[Holmes, I presume]

[From Brittanica]
“Latin proscriptio, plural proscriptiones in ancient Rome, a posted notice listing Roman citizens who had been declared outlaws and whose goods were confiscated. Rewards were offered to anyone killing or betraying the proscribed, and severe penalties were inflicted on anyone harbouring them. Their properties were confiscated, and their sons and grandsons were forever barred from public office and from…”

FDR must have admired the ancient Romans -- the civilization that just keeps on giving.

[Uncle Remus]

F**k Nader. Blah blah blah blah. Everybody knows we are being screwed. No news flashes there.

Nobody talks about these issues or other more pressing issues, RALPH, because it's like talking to f**king Howdy goddamn Doody.

Look at the walking mental basket cases around you Ralph. Or should we call you Don.

F**k me naked. Ralph, you can't save these dumb asses from themselves.

Greed that is the f**king problem Ralph. Rank and file blue color, white collar, no collar greed. Everybody wants the big car, big house, big whatever and they all want to skip all the difficult stuff in the middle and get right to the rewards.

Ralph, shut the f**k up, sit down and let the dumb SOB's finish digging their own graves. The sooner we end this three ring circus, the better.

F**k.

[LaughingAsRomeWasBurningDown]

Some say a comet will fall from the sky.
Followed by meteor showers and tidal waves.
Followed by fault lines that cannot sit still.
Followed by millions of dumbfounded dipshits.
And some say the end is near.
Some say we'll see armageddon soon.
Certainly hope we will...
I sure could use a vacation from this...

...Stupid shit, silly shit, stupid shit...

One great big festering neon distraction,
I've a suggestion to keep you all occupied.

Learn to swim. Learn to swim. Learn to swim.

Mom's gonna fix it all soon.
Mom's comin' round to put it back the way it ought to be...

-- Tool

[scott]

i think palladium will be higher than gold by the end of the year

http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&rd=1&item=270214301520&ssPageName=STRK:MEWA:IT&ih=017

[williedigital]

JHK and minions, you're a prime example of why slippery slope doomsday scenarios can't be used to explain macro-economics. The very nature of world economies is their interdependence and "circularity".

The only reason that demand for oil is skyrocketing in China and elsewhere is that the incomes in these countries is rising--primarily due to the fact that they are selling a bunch of crap to Americans. If our economy really goes down, then we will no longer be buying crap and the new factories and businesses in China will wither--as will their demand for oil.

Likewise, your point about the Phoenixian only serves to illustrate what a crock this whole financial meltdown scenario is. Sure, he doesn't "Really" own the house, but the house is sitting there, built, and will be utilized by someone at some time. The menial worker will be kicked out and the "high end renter" will smell a deal and move in. The "value" of the house doesn't evaporate to zilch. The only time that real estate really loses all it's value in the US is when an entire economic structure breaks down (as has happened with the manufacturing structure in the steel belt). It doesn't happen overnight.

[Mr. Purple]

FARfetched wrote:

"Perhaps the solution is to just write off all debts and start from scratch."

This is something that the French monarchy did at least once (I don't have exact dates at hand, but I can do a little digging, if requested.) Part of the reason they got away with it long enough to be executed by their own subjects is that the French military was a powerful deterrent to any pushy bill collectors. I'd imagine having a nuclear arsenal of thousands of warheads is roughly as effective.

Don't believe me? Two words: North Korea. China is terrified of instability, and an armed lunatic (North Korea, in this case) is a great source of instability. Thus, North Korea gets protected and coddled (comparatively speaking) because the Chinese know that instability is what gets the emperor (the Communist Party, in this case) overthrown.

My hypothesis: if the U.S.A. were to pull back to its own borders and start REALLY acting like a crazy drunken cowboy, not just in the weak-ass way we do now, but 19th century style, then China would be QUITE UNDERSTANDING if payments stop - just as long as we stay on our own turf. (Just make sure that the footage of the Big Money Boyz(TM) getting "consumer feedback" on the granite counter tops makes it to a download site known of and accessible to China's intelligence services.)

[Farmgal]

I am wondering how it is going to go in terms of the overextended American homeowners. Heard some talk of "assistance" to those who owe more on their homes than they are currently worth- but whose fault it that really?

I have a friend who bought a house about 10-11 years ago- at a good price-before the prices really ran up in that area. She was able to get it at a reduced rate in fact for "income eligible" people- it was subsidized to allow for inclusion of affordable units- but is the same house as the others in the development. She has used her home equity line of credit as a way to subsidize vacations- to Hawaii, Europe, etc- she currently owes more than $100 grand on the equity loan- PLUS- she still owes most of what she paid for the house on the original mortage. I don't get it- seems like a bad idea to me- although I have to admit a twinge of jealousy that she has been to Hawaii and Europe and I sure haven't-although my home and land is paid for which means I sleep well at night...... But- as much as I care for this friend of many years-is that whom we are supposed to be rescuing??

[Dr.Doom]

Farmgal, perhaps some words of wisdom from Mark Twain are in order here for you:
"Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did. So, throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover."

Mark Twain

Or as we say in Hawaii: "Wot, you thik you're goin' live forever, auntie?"

[bigmike7]

farfetched wrote: "On the up side of this catastrophe you are predicting, we might finally be able to bring our exploding white tailed deer populations under control here in the Eastern US."
Check this out regarding edible insects:
http://www.chron.com/disp/story.mpl/ap/world/5565682.html
I understand giant African land snails are an excellent protein source and easy to raise.

[LaughingAsRomeWasBurningDown]

The motley fool says housing prices are near bottom. I would agree that houses are bigger now, but this paragraph of his article has me laughing a bit:

Second, today's homes feature sturdier construction materials, more expensive siding, outdoor additions like in-ground pools, more complex wiring to support an increasing number of electronic devices, sophisticated heating and cooling systems, and larger kitchens (which translate to increased cabinetry). Simply, these are better homes -- and "better" here means more expensive to build.

Sturdier construction materials? The planks they used as subflooring in my father's 1955-era house look better than the 2x4's in my previous house (built in mid 90's).

Maybe some of you can make more out of the economic analysis than I can, might be worth reading:

http://www.fool.com/investing/general/2008/02/25/why-housing-prices-are-nearing-bottom.aspx

[Uncle Remus]

Laughing, I read that Fool article, an it is just that.

The ratio of housing cost to buyer income, in real terms, not "pixelated", smoke and mirrors terms.

Of course the ratios of cost to profit are going to "look" right. Until you dig down at look at actual pay and benefits of the employees of the various contractors and businesses involved

Real income, as it turns out, isn't so much anymore.

You have to ask yourself, how much house can you really afford and would you really live in that neighborhood?

The Fool is being a shill.

[Uncle Remus]

The ratio of housing cost to buyer income, in real terms, not "pixelated", smoke and mirrors terms, is what is needed.

[FARfetched]

Oh look… MBIA kept its "top" credit rating!

http://news.yahoo.com/s/nm/20080225/bs_nm/mbia_dc_2

*snicker* Looks like *snort* there's not *sputter* a problem after all. *BWAAAA HA HA HA haaaa* :-)

The "financial" crisis will not be over until the underlying labor crisis is addressed.

[baileyalexander]

The Italians have a phrase re the blanket, more adroitly said, je pense: "la corpeta e troppo corti"

Applies to all financial cons, small and large, on all continents.

JK, what do you say, 'va tutto bene', think you mean to say, 'va tutti bene'...

indeed...bay

[jp]

http://www.saladshooter.com/

I was just curious, that's all. They don't have any in WMBH

[scott]

me too..

http://www.rense.com/general59/theSunburniransawesome.htm

[Rudi]

Interesting point on palladium, scott. I wonder if you can sell those palladium coins at normal coin stores. What's the most standard coin type you know of for palladium?

[scott]

http://www.ajpm.com/htbin/platinum.cgi

[Uncle Remus]

Scott,

What makes you think that about palladium?

[scott]

http://www.foet.org/ongoing/leadership-hydrogen-economy.html

"The materials used in fuel cells differ by type. The electrode–bipolar plates are usually made of metal, nickel or carbon nanotubes, and are coated with a catalyst (like platinum, nano iron powders or palladium) for higher efficiency. Carbon paper separates them from the electrolyte. The electrolyte could be ceramic or a membrane."

http://en.wikipedia.org/wiki/Fuel_cell

It is/will be one of those types of assets that shortsighted government policy makers inadvertantly target for appreciation.

[Nudge]

Lost Horizon, many thanks for the link to the Dmitri Orlov article re Closing the Collapse Gap. Very nice. That says it even better than his other more well-known one about Soviet collapse.

Uncle Remus & Scott, wouldn't a vast takeoff in the construction of fuel cells be somewhat dependent on the creation of a vast infrastructure to provide the hydrogen to be used in those devices? And if so, what's going to power the creation of all that hydrogen? Just curious. Hydrogen is expensive to manufacture (1.4 units energy in for every 1.0 units out), expensive to compress & refrigerate down to liquid state, and difficult to store. Oil, on the other hand, can be stored in unpressurized containers indefinitely at room temperature (or at any temperature found on the surface of the earth, really) and handled safely by them dwelling on the extreme left side of the bell curve.

[scott]

I.m not expecting a vast takeoff in hydrogen infrastructure, just enough to drive PGM's up to bubble levels.

Rhodium is already there and is probably the most efficient catalyst
http://www.kitco.com/charts/popup/rh1825lnb.html

Platinum is probably second best and is well on it's way http://www.kitco.com/charts/popup/pt1825nyb.html

gonna have to find a substitute... http://www.kitco.com/charts/popup/pd1825nyb.html

[greenbeans]

Jim, great essay.

Scott, aren't PGM's at high levels already because of demand for catalysts for ICE vehicles, especially by the new Indian and Chinese vehicle manufacturers and because of supply constrained by power shortages affecting mine production in South Africa?

bigmike7, dog vomit slime mold, its what's for dinner.

http://featuresblogs.chicagotribune.com/chicago_gardener/2007/06/dog-vomit-slime.html

[Lost Horizon]

One thing not mentioned about Hydrogen is how godamn 'slippery' a gas it is. It's number one in the atomic chart because it is essentially just one proton and one electron. It's the 'smallest' element.

When you try to contain it, in some sort of vessel, it is very difficult to seal in because of it's unique property of slipping thru seals. Even the tiniest crack and it's outta there. To complicate matters, just pressurize it, it slips thru seals even better. And then, add the quality that it is Very corrosive to seal material. In fact, when you measure acidity on the PH scale, you're measuring the relative activity of hydrogen ions, the more in the mix, the more acidic (basicially, it's more complex than this)

See: http://en.wikipedia.org/wiki/PH

Anyway, a pressurized tank of hydrogen in a car on the turnpike going 65mph is NOT a vehicle I want to be in.

Any body here wanta be a Crash Test Dummie in a hydrogen powered hotrod?

Can I watch?

[scott]

Is China and India using catalytic converters?