Debwatch on a new ISP
on January 16th, 2009 at 7:56 pm
I have just moved the blog to a new ISP after my previous provider IXWebhosting proved to have intractable problems with malware.
The new hosting is being provided pro bono by Cyanide Web Hosting, which I greatly appreciate.
Some posts may have been lost in the process, but that was preferable to putting up with a site that distributed viruses to all and sundry. So if you have made a post and it hasn’t turned up here, please re-submit.
I have also been away for a couple of days when there was quite a bit of traffic on the blog, and I’m not sure that I’ll be able to respond to all queries that came in during that time. My apologies, but traffic on the blog is getting hard enough to cope with on a day by day basis, let alone when I take a couple of days break from the internet.
That said, I’d like to second a recent subscriber’s observation about the quality of and civility of discussions on the blog. That’s something that reflects the users who have signed on, and I appreciate it too–and learn quite a bit from the discussions myself.
All the best, and welcome aboard Cyanide’s web server.
I have been thinking for a while, how can we fix this problem?
I now don’t believe there is a global fix. Other than time, default, loss and debt reduction. The deflation process will run its course and people will become extremely risk averse.
I do believe there is a fix at the individual level though. Individuals should get out of debt and prepare for ways to survive without income (in case they lose their job). People should build a cash back up. Something very few people have these days.
I also believe that at the community level we should be reducing debt and work hard finding fresh ways to attract new business to “our area”. Council areas where I live in Sydney are anti-business and development. We could also do exactly the same thing at the State and Country level.
The only ways to reduce debt are to produce more (earn more income) and or save more. Those are the two areas we should focus on.
Many of you will say that we could also inflate our way to increase incomes. I don’t believe this will happen because the deflation forces are too powerful this time around.
Things are correcting as they should.
Homes should be 50% less or give me a pay rise of 50% and i will go a buy one.
I have no debt and have converted most of my savings into Gold and Silver.
Good luck everyone – this year is going to be one you remember.
Hello everyone, I’d like to speak to anyone who’s cashed up and would be willing to be interviewed, on or off the record, about this or her observations of the global financial crisis.
I’m a staff journalist on a reputable publication.
Email address is nbarrowclough@fairfax.com.au
Hi all,
I heard second hand today from a General Manager of a major bank. He said they have been employing bankers paying about $75,000 pa. The interesting part of the story is that the guys being employed were earning around $130K in their last job. The surprising part is that they are employing anyone at all.
In December I was told by a reliable source that the only two Banks employing were NAB and St George. I heard this morning that St George started a freeze on employment Monday this week.
I’m calling a big wave of job losses in the first quarter followed by another big wave after the end of the financial year.
thanks ‘al49er’, agree again! I was wondering what your take on the election of Obama in the U.S. is. I for one feel that (possibly cynical I agree) that a black man would not have been elected president if we were not having the ‘GFC’! what do you think? I think a ‘left of centre’ candidate (like in oz) is the ‘go to’ man for the ‘criminals’ (as I call them) that have caused this crisis!I believe that Obama is another R.J Hawke,(intellectual but the common man) call on him when you want wages to fall to bail out the ‘criminals’! I will wait to see if the justice system in the U.S. will eventually bring these guys to justice!!
hi ‘tommyt’ I believe that Obama’s election is incidental not consequential to the GFC.
I did however love and opinion piece today in the ‘Australian’ by Janet Albrechtsen titled “Seduced by the Saint”, wherein she said “What will matter is whether Obama does a good job, not whether he’s black, good-looking and speaks well”.
It needs to be remembered that it was the American Democrats who contributed to the rot by making banks lend to people who couldn’t service their debt.
I would be interested to know if Steve has detected anything in Obama’s rhetoric that would lead him to think he might just initiate the sort of action he believes necessary to even head things in the right direction.
I doubt it.
It is also possibly symbolic that on the day of Obama’s inauguration, key American bank stocks lost 20% of their value.
This spin applied to this, was that it might with hindsight signal a turning point.
I’m not sure where the ‘turning point’ is in
belly up !
Hi Steve,
Without wanting to take anything anyway from your forecasting prowess I think Marc Faber has been bearish for some time now as well (although, maybe his analysis has more of an investment flavour). Still, it’s a small crowd you’re in.
Looking over my second year Macroeconomics textbook from Melbourne Uni and there’re only three brief mentions of Keynes, and no entries for ‘debt’ or ‘credit’ in the index. And it claims to be eclectic! Hhhmmm….
The more I read about dynamic systems, the more shocked I am at their absence from mainstream economic thought.
Congrats on the wonderful site!
“The most prudent course is the most forceful course.” Then he talks about protecting the tax payer, how nice of him:) I wonder if Geithner is much more pro spending than Paulson ever was.
It’s time to lighten up a bit:
The reserve bank of Australia explained:
http://au.youtube.com/watch?v=KSUJIlQ5EiE
It seems like more and more of the ‘mainstream’ commentators are getting on to Steve’s long identified (but rarely acknowledged by others) insights into debt deflation.
Alan Kohler who I think is a good commentator able to describe concepts simply, clearly and with a bit of character, has an excellent article in today’s “Spectator” part of which includes his explanation of ‘debt deflation’
Alan Kohler “The Spectator” 22/1
“Debt deflation occurs when the collateral for a loan decreases in value while the value of the loan remains the same. On an economy-wide basis, it occurs as a result of extreme over-indebtedness associated with an asset bubble.
The world is now in the grip of a massive debt deflation that is destroying wealth on an unprecedented scale.
It’s unprecedented for three reasons: there wasn’t just one bubble, but a series of them; debt has never been this high; and for the past five years or more the debt has been irresponsibly loaned and financed – credit standards have declined and the loans were securitised and turned into “derivatives”.
As a result there is little or no chance that principal and interest in much of the world will be repaid.”
Also interestingly in the same article he quotes a passage from the same “Hoisington”
that was given here on this site by one of Steve’s regular contributors. (apologies I can’t give an immediate creditthan individual without going back through things)
Maybe I’m too much of a conspiracy theorist, but I don’t think it is by any means a long bow to suggest that there are a lot more “people in the business” than we know out there keeping a very close watch on this site WITHOUT a proportionate level of acknowledgement, of the one economist in this entire nation who long ago began laying down , chapter and verse where we were and what was going to happen.
It is always a beggared me how across so many fields in society, particularly relevant peers and of course politicians, fail to look at the evidence, identify the people who have developed the thesis, ACKNOWLEDGE if not loudly proclaim their insights AND THEN AT LEAST INCLUDE THEM (AS HAVING THE SCORE ON THE BOARD) IN SEEKING OUT THE REMEDY.
Maybe when it gets tough enough Steve they will think to do a bit more than give you a few ‘grabs’ here and there.
Maybe, just maybe some bright backbench politician might just develop the smarts to say
“stuff me, this guy might be worth having at the ’round table’, and I will start agitating for that”
Possibly when the proverbial is well and truly covering the fan Steve!
I agree Matt, it’s a hoot!
I do wonder about that al49er!
To give Alan his due, he receives my Debtwatch report, and has sourced some of his graphs on his nightly spot on the ABC News to Debtwatch.
I also wouldn’t mind betting that Alan knows the reaction my name gets from some of his colleagues, and thinks it’s wiser not to acknowledge me directly when making posts like the one you referred to. I am entirely happy with that, if I’ve guessed correctly.
Whether or not that is true Steve I think you are being too kind.
The measure of a man (particularly doing his job) is his ability to objectively weigh up the evidence, give credit where it is due and stand up to others (including colleagues and friends), when comparative scrutiny of their work, philosophy and principles fails to accord with reality and the accuracy achieved by others.
Any other reason for failing to give proper weight and reference to the work of people like yourself because one is locked into the approbation of others, is simply not acceptable and when the reckoning (that point where the evidence as to who was right and who is wrong is unequivocal )occurs that failure should be kept in mind.
on another subject.
I was also wondering whether one of the more ‘technically literate’ (not so much you Steve given your current workload) but maybe another contributor might give a pleb , like myself (and I would expect others) some brief insight into the definition,history and evolution of”derivatives’, including CDO’s, Credit Default Swaps etc.
It just seems that all of these things, including ‘futures’, certain aspects of ‘hedging’, ‘shortselling’,etc. don’t actually do not create anything beyond hollow equity, whilst generating inordinate fees and charges.
Now I’m not expecting an economics lesson, but some perspective about this area, that seems to have created so much of the debt deflation problem, I feel sure would be welcomed by other readers as well as myself.
Steve, I think you are spot on with your theory on Allan Kohler! We were once a country which acknowledged wisdom and ‘smarts’ without arrogance! lately arrogance and the ‘me’ (debt) generation cannot stomach this for I think they sense it as ‘diminishing their self worth.
Fellow bloggers and Steve, a question! If my economic life is now(gfc) to be ‘controlled’ by events beyond my control but more dictated by economics in U.S. and possibly elsewhere e.g China does this mean I am now ‘governed’ in a parliamentary way by Washington? through steve, we have seen that the ‘stimulus package’ announced by our government of $10billion (a fraction of gdp) has proved a flop,as steve pointed out, Is my future dependant now on the Chinese economy?
If economics is the ‘science’ dedicated to resources (assuming our common resources, in oz)will my children have a ‘roadmap’ to an economic cycle they can trust? Once again assuming the arrogance of existing economists(remember Mr Stevens refused to acknowledge other people’s predictions) and world bank ‘spivs’ I have to ask the question, is our government now effctively a ‘shadow government’now that unemployment figures are starting to climb?
Hi everyone,
I may be ignorant on the subject but I was just wondering with the globalization/free trade etc does outsourcing contribute in anyway to this crisis? We are dramatically stopped producing and have become consumers and the way I see it globalization has never been put to test until this crisis.
I have my own views on outsourcing having worked as a consultant for TNT, Quantas etc and seen the difference in quality of work and how consultancy companies come in to do a clean up and work towards getting them to rebuild everything again at 1,500$ a day per person with the addition of many more members. I can only look at it as greed and short sightedness by CEO’s etc. I do feel that outsourcing can work in a limited and controlled way but not like the current trend.
With so much debt and more and more local jobs lost oversees what does this mean for the economy. Or is it balanced out by some other benefits? As I said I may be biased/ignorant so please enlighten me.
tommyt,
I see a real danger in K Rudd following the current US model which is keep piling on the debt until something gives (in the way of an increase in demand). This model is also being followed in the UK.
This is so very dangerous as Govts cannot make up for the declines in GDP with their own spending, yet if they try then massive debts will result down the track.FUNDED BY THE TAXPAYER. This Govts do know so one has to wonder if this massive expenditure has more to do with keeping sentiment on their side. But it will impoverish its citizens.
This crisis originated in the US but now Europe and the UK are being sucked in because of their exposures to those same toxic derivatives that form the black holes on their banks balance sheets. Reaching back to the source and in answering your question ” Is my future dependant now on the Chinese economy?” I believe that to a considerable extent, yes. But dependant even moreso on the US economy.
The reason being is that the structure of world trade and commerce positions China as the worlds manufacturer with the US (followed by Europe and Japan) as the worlds largest consuming nation BY FAR. Collapsing consumer demand in the US (and also in other high consumption nations) translates into collapsing manufacturing. That means China is going through a massive and very swift re-alignment of it’s economy toward a hugely reduced export base. That will lop easily 5-8% off Chinese GDP in 2009. I expect Chinese GDP to be flat to +3% for all of 2009. Worse, there is every indication that the US consumer has ended a nearly 30 year consumption binge and is fully into savings mode. So, from where and when will meaningful economic recovery begin? I don’t expect it this decade.
The world has changed forever with this GFC. Because debt will not, for another generation, play the huge and dangerous role it has played over the last 2 decades pumping up growth while mortgaging the future. The big questions are; who will survive this and what will the future economic landscape look like?
MACCA, this has little to do with subprime, which if it was the only problem then it would all be over by now. Fannie mae and Freddie mac have similar or better lending standards than our banks and they ended up in trouble, because once prices drop by more than 20% even good lenders are in trouble. Subprime was the trigger for banks everywhere to reassess their risk, and as a consequence to limit future lending resulting in a collapse of house prices.
As to the influence of America and China it has always been the way it works and has got worse as trade has been freed. We could have avoided many of the problems by taking action to limit our current account deficit Higher interest rates would have damped down the need for borrowing and reduced the inflow of funds. Then maybe we would have had a bit more manufacturing of our own. Rather we’ve preferred the free lunch. We can’t blame everything on George W but I expect many will try.
‘Macca’ you refered to ‘toxic derivatives’, maybe you could answer my question in the 2nd. part of my 12:38 post of todays date, or possibly ‘ken’ whilst I wait for the old reliables ‘bullturnedbear’ and ‘prudentsaver’ !
Would be very helpful.
Ken,
Your not reading me right. I never mentioned sub prime- they are but one rather small part in this. The “toxic derivatives” I refer to are the mountain of derivatives (of MBS) buried in bank off balance sheet vehicles like SIV’s and conduits et al such as CDS’s and CDO’s etc.
I dont beleive I blamed Gearge W. What I was pointing out was that unless the US economy stabilizes and the US consumer starts spending again, we can all forget about an economic recovery of any merit.In fact the seeds of this catastrophe were sown in 1999 under Clinton when Summers and Rubin (both Bankster elites) succeeded in repealing the Glass-Steagal act of 1932 allowing commercial banks to become casino’s in the investment banking scams that led to the explosion in toxic derivatives.
The Aussie economy never really developed a significant manufacturing sector. What little we had has been comprehensively looted to offshore centres. This has occurred to a much worse extent in the US where they did have a substantial manufacturing base. Again, this speaks to a much rougher road ahead for the US (and hence the world) as manufacturing will not be the engine pulling the US out of this very severe recession.
MACCA, the toxic derivatives are generally a subprime problem. The problem now is all the other debt which is secured by overpriced real estate. This is the problem in the UK.
We had masses of manufacturing. Cars and food were mainly made here. The point is that distortions in our economy have made it uneconomic.
Hi all,
I have been reading this blog regularly since it first started but haven’t posted any questions/comments for over a year. I was wondering if Steve and other contributors more knowledgable than myself would be able give some insight as to how this GFC is going to play out for Mr and Mrs Average over the next few years as deflation takes hold. Whilst it may be possible for a few enlightened individuals (eg. readers of this blog) to heed the advice given and “get out of debt”, it is not possible for the population as a whole to do so (with falling property values it would already be impossible for some to do so). I imagine that those who are lucky enough to keep their jobs may be able to keep their head above water whilst those that find themselves on the rapidly growing unemployment queues for any length of time will ultimately have to default on their debts. Will the need for governments the world over to go into deficit result in market interest rates for business/mortage lending going higher thus further increasing the debt servicing burden on the economy?
al49er,
I’ll try to answer, but I’m a self taught pleb too.
The toxic variety of derivatives(futures have been around for more than a hundred years and are mainstream) are to my mind those exceedingly complex quant produced vehicles that have been “derived” from MBS type paper.
As the securitization process advanced over the years and grew in size/value, and grew and grew some more, the banks invented all sorts of mechanisms (derivatives) to mitigate/share risk for their mortgage paper. In essence these derivatives are contracts insuring one party against another against adverse moves in the value of the underlying security (the MBS or mortgaged back security). But the banks realized that this business in itself was a windfall in fees and commissions. greed blossomed. The derivatives took on a life of their own as the market expoded in trading of derivatives of all colour and exceedingly more complex nature. Because of a) compliant ratings agencies and b) “off balance sheet accounting”, a very large part of the derivative market was growing (exponentially) in unregulated and opaque environments – SIV’s, conduits and hedge funds. Hidden from public view and public accountability. Big bank execs LOVED it , bonusses exploded with profits- all of it fictitious capital.
Banks were freewheeling lending money out to hedge funds and other banks in the mainstream who were trading in these things and buying them up as “safe” investments.The derivative market grew essentially out of control and banks were posting substantial (fictitious) profits on the back of this.
Until the wheels fell off when the US mortgage market imploded. Now , all those derivates went into reverse as the underlying security (MBS) collpased with the US mortgage market. I’m talking about a derivative market here that was valued at over USD 500 TRILLION. YES TRILLION!! Although not all of that is the toxic variety.
These exceedingly complex contracts (derivatives) are now sitting there, festering and toxifying in banks and hedge funds (who borrowed heavily from banks)unable to be sold, the market in them wasted and siezed up.
What are they really worth? Well, the US and many European banks are too scared to confirm that- because if they did they would be immediately INSOLVENT, such is the magnitude of the loss in the derivatives value. Remember, US banks only need to have less than 10% in reserve on their balance sheets. The losses in derivatives they hold vaporizes that ammount.
There you have it. Stalemate. Banks wont lend because they know they are technically insolvent and are living in fact off US Govt transfers of taxpayers money in order to survive each day. They are hollow.
One almight clusterf**k. Welcome to the GFC.
That’s what I asked about MACCA, give us
( ‘the unlearned’) a bit of info on exactly
what these instruments are , how they are valued and who benefits ?
your quote
“mountain of derivatives (of MBS) buried in bank off balance sheet vehicles like SIV’s and conduits et al such as CDS’s and CDO’s etc.”
then we can all gain more benefit from the wider discussion/viewpoints..
Ken,
“Subprime” refers to the mortgages (later securitized) issued to those with little or no chance of repayment. Those “sub prime” mortgages are in themselves not the toxic derivatives refered to here and are only a small portion of the overall problem. Read up on the big world of derivatives and you will see how large and diverse it really is.
The toxic derivatives I refer to I describe in my post above, far far beyond the realm of “sub prime”.
I see the globalization process as the main reason why the manufacturing we did have has been eroded. We embraced globalization warts and all. Well, now we all know the warts.