Archive for October 30, 2008

When your only tool is a hammer…

October 30, 2008 Leave a comment

Debt crisis expert Juan Enriquez details 10 non-partisan financial commandments for the President elect @ Pop!Tech ’08. Vodpod videos no longer available.

So here’s what we are thinking:

McCain has Joe the Plumber.

Pop!Tech has Juan the Debt Crisis Expert.

Each guy, more or less, shows up on cue and does whatever they are supposed to do.

Joe the Plumber arrives at your house lugging in his huge, heavy tools bag; slogs his way to your bathroom; and sets about fixing the nasty leak under your sink.

Everything’s fine, right?

You hired a plumber, and he plumbs with his plumbing thingies and finally gets all the plumbing…uh, plumbing…again. (We are not so clear on the technical aspects of this work, but we are pretty sure plumb stuff is somehow the point of the exercise.)

If, however, when Joe arrives you ask him to diagnose that odd lump growing on your back instead of fixing your sink, he probably will not have the tools in his bag to do the job – the guy’s got a wrench, and plunger, and one of those roto-rooter snakey whosits, so unless your medical complaint is constipation, he is not going to be of much help.

Which brings us to Juan the Debt Crisis Expert. He too, has a bag of tools which he uses to diagnose and fix problems.

Mr. Enriquez has an impressive resume, according to the Wiki:

Juan Enriquez was the founding director of the Life Sciences Project at Harvard Business School and a fellow at Harvard’s Center for International Affairs. His work has been published in Harvard Business Review, Foreign Policy, Science, and the New York Times. He is the author of As the Future Catches You and The Untied States of America. He works in business, science, and domestic/international politics.

Juan Enriquez is recognized as one of the world’s leading authorities on the economic and political impacts of life sciences. He is currently Chairman and CEO of Biotechonomy LLC, a life sciences research and investment firm.

The above list is definitely not exhaustive, and goes on to include such varied interests and experiences as the human genome project and peace negotiations with Mexican revolutionaries.

Juan’s tool bag, however, has nothing in it to fix our leaky sink.

And, more the pity, since, in all probability, he would charge us less than Joe the Plumber, and could hold an interesting conversation about Mexican revolutionaries, or, urban planning in Mexico, or, home-based human DNA sequencing as the next new profit opportunity for business – he has an MBAwhile we write out his check.

He also has these really neat slides like this one:

Which, as you can see, shows the stunning upward trendline for home prices between 1890 and 2008. If you have read some of the other things we wrote on this blog, the staggering increase in the price of a home shown here is no surprise.

Stated directly, if you own a home, as we do, you may see most of the market value in that home disappear in the very near future – already 20 percent of mortgages are underwater with just most recent minor pullback in home prices.

Our own home was purchased in 1991, when the home mortgage price just peeked above the long-term trend line – meaning, we will be among those who will likely find zero, or even negative appreciation once home market prices correct.

1991 was seventeen years ago. If you bought after us your problem is worse.

He also has this really interesting slide showing the nominal value of credit default swaps held by various financial institutions. We aren’t really sure what credit default swaps are – we have read a lot about them, and have had people patiently try to explain them to us, but the entire subject causes us no more good than helping us to nap more comfortably.

If you want to know about credit default swaps, you can begin here. But, we warn in advance, the entire discussion may cause an aneurysm.

What was so interesting about the slide is the nominal market value of the swaps: $54.6 trillion – which, as Juan the Debt Crisis Expert, points out is somewhat greater than the total output of the entire planet, and easily dwarfs the total output of the United States, as measured in GDP.

That is a pretty big number.

Okay fine. Somebody, or group of somebodies, controls more wealth than could be created by all the living members of our global community working for one year, and consuming, during that period, only air, water, and sunlight.

With that amount of wealth, one could only imagine what the owners might want to do with it. We wondered if it is possible for it to be put to work profitably, but, as Juan the Debt Crisis Expert informed us, it is more than twice the value of all the stocks on the New York Stock Exchange, several times the total output of the U.S. economy, and could easily payoff the national debt.

In fact, the owners of these odd things could purchase all of those combined, and still have some spare change left over to purchase most of the swanky parts of Latin America.

But, this is not a blog entry about credit default swaps, it is about the tools in Juan the Debt Crisis Expert’s, tool bag. He is proposing to fix our nasty little financial crisis, which appears, at least in part, the related to the absurdly large value of these credit default swaps.

We say, “appears,” because, in fact, these swaps are actually only pieces of paper – legal documents – which have no more than notional value until some of the somebodies actually tries to cash one in. And, this is the actual problem which threatens civilization as we know it: when they do try to cash one in and recover the value, there is no one to purchase it – giving the credit default swap an actual market value of zero.

But, to acknowledge this wealth as, “only pieces of paper,” is not the same as saying it is only paper wealth. To merely label it such overlooks its real significance for us: that it is a very particular form of wealth: frozen, immobilized, capital; and, as such, no longer capital at all – superfluous!

Money which cannot be exchanged for any good on demand – which is no longer accepted immediately in exchange for any good available for sale – is no longer money – no matter how lifelike the picture of the dead president on its face. Similarly, capital which cannot be placed back into circulation to create more capital is no longer capital.

This relatively sudden emergence of a mass of immobile capital is explained by Juan the Debt Crisis Expert this way:

  • There is too much debt, public, corporate and personal,
  • We have been living beyond our means for decades

Like Joe the Plumber, Juan the Debt Crisis Expert examined the nation’s toilet – sometimes referred to as Wall Street – and pronounced finally that it no longer flushes the future hopes and dreams of billions of Mankind’s children into the septic tanks of America’s debt manufacturers because the pipes are clogged with too much current effluence of their parents.

Juan the Debt Crisis Expert therefore advises, “We need to get serious about saving, cutting, working.” We must begin again to reintroduce that filthy expletive AUSTERITY back into the public discourse.

Which, no doubt, is a concept that appeals to you: it raises a sense of purpose in your heart, elevates your public spirit, and fills you with some morally uplifting hope for November 4th, when the nation will go to the polls and place its optimism for the future in the hands of a charismatic leader able to inspire a new American greatness.

Which is no surprise, since you were born into slavery; were bred explicitly to the task of enslaving yourself; cannot imagine yourself in any other circumstance than being a slave; and, have no greater hope for your children than they excel in hiring out their body parts to the highest bidder in the market, thus ensuring their slavery is a little less onerous than has been your lot in life.

All your life, you have worked and saved, only to watch your 401(k) get looted by short sellers and crooked Wall Street ponzi scam artists in the mutual funds industry.

All your life, you have seen government services cut, education of your children sacrificed, and millions of families like your own left without the most minimal European requirements of a social safety net.

All your life, and in every administration back to your earliest memory of a presidential address to the nation, some Republican or Democrat asshole has sat at a big desk, stared into a camera and solemnly declared the need for more sacrifice from people like you, even as they dumped another hundred billion into the laps of banks and businesses, who then advanced that same to you as a higher borrowing limit on your credit cards!

It took about 200,000 years of human evolution to produce someone as naive and gullible as the American voter – but, believe us, for folks like Warren Buffet and Bill Gates, the guys at Goldman Sachs, and the pimps at PIMCO it was well worth the wait.


As Bertrand Russell pointed out in the depths of the Great Depression, “borrowing made it appear as if the future was nourishing the present. But that, of course, would have been impossible; a man cannot eat a loaf of bread that does not yet exist.”

To live beyond your means can only mean you are living beyond your capacity to produce the things you consume. And, that is impossible. It is much the same as saying when a sub-prime mortgage goes to foreclosure, the home purchased with it no longer exists – it is somehow whisked away into the future.

So there must be something seriously wrong with the tools in Juan the Debt Crisis Expert’s bag. The measuring devices, oscillators, and black box imaging widgets seem to provide readings and results that are incompatible with basic common sense.

So far as we know, there has not been one report of a home suddenly disappearing when it was foreclosed, and the family occupying it expelled into the street. Nor, have we heard a single report of automobiles, Ipods, or 42 inch, wide-screen, high-definition, plasma televisions winking out of existence merely because their owner could no longer make payment.

We checked throughout the internet – trolling one after another site to confirm our conclusion – and, to our non-surprise, Iceland is still just about where it has always been – with its tiny population of inbred citizens – despite having gone functionally bankrupt in October.

We want to just make a leap, a risky game in any circumstance, but particularly in this case, since no society in human history has ever seen 62 trillion dollars of wealth disappear overnight, and suggest the so-called credit default swap crisis might be resolved without working harder, by doing one little thing.

And, it might also similarly resolve the problem of public, corporate and personal debt.

Just admit it has zero value, and will never be repaid: wipe it off the books; abrogate it officially.

You want to cut something Juan, cut that.

Oh, by the way: it’s going to happen anyway.

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US has breached the point where it can service its debt

October 30, 2008 Leave a comment

From Jesse’s Café Américain:

We have seen estimates that next year the US will have to finance a $2 Trillion annual deficit. They may be able to push it further into the next Administration than that by the forbearance of the world, but not by much. We’d expect a significant drop in Treasuries by 2011 at the latest.

It should be obvious to anyone that we are approaching the apogee of the Treasury bubble, with the credit bubble having broken already.

When the Treasury says they are facing unprecedented challenges in financing the US public debt next year that is an understatement.

Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default. This can be resolved in several ways, including continued subsidies from foreign sources in the form of virtual debt forgiveness, devaluation of the dollar, raising of taxes, and higher interest rates on debt.

The problem now is that the US has breached the point where it can service its debt out of real cash flows, and turning this around will require a severe devaluation of the US dollar.

Devaluation and selective default are the only foreseeable systemic alternatives. There are other exogenous paths of a more political nature such as consolidation and war that may color the default a slightly different color, but a selective default it remains.

This is the fundamental situation. Everything else is speculation and commentary.

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