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The roof is on fire February 7, 2009

Posted by olvidadorio in Economics.

Folks, this economy is going to pot. And it’s just amazing to watch it unfold. It is so striking that this is a necessary and inevetable occurrence of (finally) a dose of economic, even physical reality in the guise of market forces. These have been determined by our overspending, overblown infrastructuring overblown consumption and askew distribution of value in our world economy (i.e. US long-long standing trade deficit & export surplus in Germany, China — the US consumer has been getting a free lunch for decades!). And all these bailouts, stimulus packages and what not are doing is a) pay off those who still are clinging to power (specifically monetary power) and b) increase the pressure for downward adaption of our entire system.

Everything has to grind to a halt, because the current value-system (economically speaking) has not been consolidated. House prices are still too high. People aren’t selling. The banks are insolvent, even by watered-down bank standards. They hold some assets that are worth nothing and others that are rapidly becoming worth a lot less. Hence there is no trust in the current level of prices for securities. There is no transparency — and the government is doing a lot to keep people in the haze about the actual situation. The problem is that in a fractional reserve system banks are technically broke, by definition. If however the economy endures a long period of doubt, this can not be good. Therefore, the states around the world have decided to guarantee for all the banks’ failures. Well guess what — this actually puts nations such as the United States of America in extremely uncomfortable jeopardy of going bankrupt, i.e. that there will not be enough trust (or capital for that matter!) on the market to buy Treasury bills. Of course they can “solve” this by just printing money (this is essentially what happens when the Federal Reserve acts as Lender of last Resort) — that’s another boondoggle though. Because – as every high-school student should be able to figure out, printing lots of money, in a situation in which there is little trust in the financial standing of the state (i.e. low low bond prices, overall depression) leads to devaluation of the currency – inflation. In that manner, the whole economy pays off what started as a bank problem. Pay-off can not be avoided! We will not be able to bubble ourselves out of this (as was done with housing- and .com bubbles).

There might have been some steps that could have been taken, wiser than bailout the economic criminals and pretend it never happened, however, without public outrage, leave alone understanding of these matters, such policy decisions are hardly politically possible. There’s just too much power involved.

Those familiar with my twitter-persona might be aware of (and ignored) the fact that I like to send around links to texts by my favorit crisis-Commentator, Karl Denninger. Here‘s a post of his explaining the necessity of recession and the problem of depression in good terms. His take on politics and economics is rather conservative, yet highly critical.

Was tun wenn’s brennt?

We are now in a downward spiral: less confidence means less investment, less sales, downscaling of production, less employment, less consumption, less sales, less confidence, less investment etc. Until there is some kind of bottoming out. Some kind of relieving downpour, it’ll go on for a while, simply because our economic structure and our values are lopsided.

So what’s to be done? I don’t know. Just sit it out, I guess. I haven’t (yet) found a good oportunity lying in this crisis.

There are grave dangers. I am pretty sure that there will be very many very disgruntled people. This might constitute a problem at least as much as it could constitute a chance. Disgruntled folks who are going without the purchasing power that they used to have, while living in — and coming from — a consumerist culture can produce social unrest, grave rise in crime (read up about Argentina – a laboratory for what we’ll be going through) and overall poverty. It’s scaling down that is so tough, that will make people want to reach out to some kind of straw of hope. A difficult situation. Will there be demagogue leaders popping up? Sure thing, especially in the US. Will there be a lot more hate-related violence, i.e. against foreigners, or other minorities? Might very well be.

On a practical note, here’s an idea: While you still can, you might want to take out a loan at a fixed interest-rate. Could come in handy. After a time of inflation, in five to seven years, that loan won’t be worth as much anyway. Here’s the recipe to get royally screwed: have a few savings, at best invested in stocks or funds, not too much, and not be in debt. You’re so toast. And you know what folks — what I just described is the AAA-sweet-spot definition of this cute, antiquated term: middle class.

But to return to constructive ideas. Some of mine:

  • Enjoy the moment, it won’t last! Go on vacation, do some things you might not afford later on.
  • Get your money out of the markets, they’re gonna go down. Buy stuff that’s useful to you or others around you instead. Perhaps pad some friendships.
  • Move. The US, Great Britain, Russia — to name a few that come to mind — would be less preferred destinations than just a while ago. But wherever you move, think about setting yourself up in a good neighborhood. Not the shady quarter.
  • Understand the crisis. Oportunities will be opening up as soon as the downpour into real life starts. It might actually be interesting.

I have no clear idea what would actually happen if the US went under financially. There is a possibility though, that it will happen. It is important to remember that the social and physical infrastructure would still largely in place, with the exception of a few major achilles heels: energy prices, the huge US military spread across the globe, a population very accustomed to consuming more than it produces..

A disclaimer at the end: Economic matters are at a level of complexity that I do not pretend (or rather: do not wish to pretend) to actually fully comprehend. I have some notions which may not be totally off mark, they are however mainly informed by what I have snatched up here or there. One also has to know that I sometimes delight in being pessimistic. This does not make what I say false, only the slant and some conclusions may be off mark.



1. b. - February 8, 2009

“do some things you might not afford later on.”
like buying faulty camcorders…

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