Thursday, November 01, 2007

Empire of Lies II: Japan and Credit Crunch "Solutions"

I finally caved in to greed and accepted an ad
(see below). But rather than run a wimpy little Google Nonsense link (oops, I meant Adsense) or a cravenly sissy little banner ad, I went with an in-your-face ad from a global powerhouse, a real Player in every sense of the word:

OK, so it wasn't a real ad, it was a parody of a company which just wrote off $8 billion in assets and fired its CEO with a $161 million handshake. Life is tough, huh? Heck, if ML would give me six months, I'd lose twice as much for only a $16 million paycheck.

Alas, parodying these princes of the Empire of Lies is impossible; they are self-parodying in the extreme. Where else but the Empire of Lies does a CEO (of Countrywide) pillage his company to the tune of $1 billion as it loses 2/3 of its value, and the shareholders don't run him out of town? Where else but the Empire of Lies does a CEO oversee a vast destruction of wealth and then waltz out with options worth $161 million?

Here's the basic idea behind all the current bail-outs: paper over bad debts with new even larger debt. That's it in a nutshell. There are many stories out there about the failure of the M-LEC Superfund to attract investor interest; here is a good one submitted by astute reader Jeff R.: Research Roundup: M-LEC Superfund.

Believe it or not, someone has been running a 17-year experiment in whether this "cover up bad debt with a mountain of larger bad debt" actually works. The someone is Japan. Japan has famously avoided writing off the full measure of bad debt acquired in its stock and property bubble of the late 1980s. Yes, it has written off some, but nothing persuades me that a full, open accounting of all bad debt both semi-public and private, has been done.

As I have reported before ( Japan's Runaway Debt Train -- 2001), Japan has attempted to jump-start its way out of a debt-induced deflationary death spiral by borrowing a stupendous 40% of its public spending, driving its national debt up to 150% of GDP, a staggering level of public debt.

Alas, nothing has worked: not super-low interest rates, not papering over old bad debt with new bad debt, not "borrowing and spending our way to prosperity". Japan remains an economy perched precariously on the precipice of a deflationary death spiral.

Yet this "solution"--lower interest rates, government deficit spending, and the papering over of horrendous bad debt losses with ever more generous new loans--is precisely what the Fed, the Treasury and the global Players are pushing as the "solution" to the U.S. credit fiasco.

Yes, Japan continues to have a large economy, and it continues to field a number of very profitable global corporate brands; but the macro-economy is mired in a malaise which is reflected in ballooning deficits and an interest rate of .5%--a near-zero rate the Bank of Japan is too terrified to raise even a quarter-point. How robust do they think Japan's economy is?

For more detail on Japan's fiscal and debt woes, please see:

Tale of Two Debts/Deficits: Japan and the U.S. (October 9, 2006)

How insane is the Japanese fiscal profligacy? Fully 42% the government expenditures are financed with government bonds--i.e., borrowed from buyers of the bonds. This is deficit spending on massive scale.

What We Can Learn from Japan's 15-Year Decline in Real Estate (October 31, 2006)

Now we learn that the U.S. Federal Reserve is baling out British banks--yes, U.K. banks-- to the tune of $30 billion: (thanks to Harun I. for the link):Federal Reserve Starting Hyperinflationary Bailout of British Banks:

On Oct. 12, the U.S. Federal Reserve Board of Governors agreed to extend Federal Reserve contingency lines of credit to two British banks—$10 billion to the Royal Bank of Scotland (RBS), and $20 billion to Barclays, two of Britain's Big 4 banks. The Federal Reserve would open these $30 billion facilities to the two banks, should the banks, in turn, need them to extend credit to their clients "in need of short-term liquidity to finance their holdings of securities and certain other assets," the Federal Reserve said in a letter to the banks.

Frequent contributor Harun I. summed the situation up thusly:

An economist on Lou Dobbs declared that his studies showed that middle-class people were no worse off than in years past and if fact in some instances they are better off. This claptrap reminds me of the couple in California who wrote a paper justifying the purchase of their $900K+ home at the top of the market. They even "proved" that the house was undervalued. All the statistics were correct but they were absolutely wrong and are probably in the throes of regretting it.

Credit contagion infects your wallet
The mortgage mess has already spread to car loans and credit cards. If consumers run scared and stop borrowing, the economy is in big trouble (Jim Jubak, MSN)

Jubak is absolutely correct in his assertions that the credit card and auto loan apparatus are coming under pressure. But he misses the point. What ever happened to purchasing with one's wages. We would not be here if wages were keeping up costs. Now the government must come up with all sorts of ill-fated and ill-advised bailouts for everyone. Banks, mortgage lenders, brokers, baby boomers who abandoned saving because they decided their home was the best piggy bank/annuity/ATM ever, must all be bailed out or the economy suffers implosion.

Globalization as conceived and executed has had terrible consequences. Didn't these the geniuses who pushed this realize that wage arbitrage would follow? Didn't they realize that the normalization of 1st world wages to that of the rest of the world would have to be accompanied by lower asset prices. I have no hard proof but it seems clear that at least empirically the thinking was that we could have our cake and eat it, too. That is, we could have normalization of wages and asset prices would soar or stay the same because credit expansion coupled with the "Always low prices" of goods produced in foreign sweatshops would save the day and keep alive "growth".

We have said that no state or individual has ever borrowed its way to prosperity but that implies that all borrowing is flawed. Self liquidating debt is a means of borrowing to prosperity because it produces goods and wealth. Going into debt to consume rather than produce has limits and I can't see how anyone bright enough to study economics missed this. (emphasis added--CHS)

The impoverishment of America will be televised. And though it may offend sensibilities, Osama is not very smart or wise nor is he up on his history. Had he been, he would have know that he should have waited and preserved the lives of his followers. Empires destroy themselves only to be replaced by another.

So it will be with the Empire of Debt and Lies, a.k.a. the U.S. economy.

Thank you, James T., ($10) for your second generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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