2008 Review in Pictures and 2009 Forecast - Eric Janszen

[c1ue]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

the paradox i see is that the u.s. dollar will be strong as long as the u.s. economy sucks, provided that the rest of the world is in the same bad shape. the demise of the dollar will result from any recovery here, or the rise of a strong regional economy elsewhere in the world - presumably in asia.

While of course anything is possible given the present uncertainty levels, I personally still do not see how the sudden start can happen. An 'animal forces' snap back, yes, but not a fundamental change, because several things aren't going to change in the next 2 quarters - or perhaps much much longer:

1) US economy continues its downward path

2) US continues to run significant (but likely smaller) currency account deficits

3) As a consequence to 1) and 2), the need for ROW CBs to sterilize incoming dollar flows drops

4) US federal fiscal deficit worsens considerably

The variables are as follows:

a) China/East Asia does worse than the US, stays the same, or does better

b) EU does worse than the US, stays the same, or does better

c) Oil producing nations do worse than the US, stay the same, or do better

(UK is going down no matter what)

Of the multiple possibilities outlined above, under which scenario does the US dollar stay strong due to relative economic status?

Note that while all nations consume something and produce something, the US outconsumes everyone by a significant margin:

http://www.worldwatch.org/node/1783

Table 1–1. Consumer Spending and Population, by Region, 2000
Region	Share of World Private Consumption Expenditures	Share of World Population
	( percent )
United States and Canada	31.5	5.2
Western Europe	28.7	6.4
East Asia and Pacific	21.4	32.9
Latin America and the Caribbean	6.7	8.5
Eastern Europe and Central Asia	3.3	7.9
South Asia	2.0	22.4
Australia and New Zealand	1.5	0.4
Middle East and North Africa	1.4	4.1
Sub-Saharan Africa	1.2	10.9

The US consumes 6x its relative population share vs. 4.5x for Europe vs. 0.65x for Asia vs. 0.34x for Middle East/North Africa.

If I use the Middle East/North Africa as a rough proxy for the oil producing nations, it is clear from a consumption and production standpoint that they don't matter - especially with oil prices low.

Clearly the 'burden' of consumption lies with the US and Europe.

What about the production side?

http://www.visualizingeconomics.com/...-of-world-gdp/

percent-world-gdp-1500.jpg

So US produces 22% of world GDP, but consumes 31.5%
Europe produces 21% of world GDP, but consumes 28.7%
Asia, just counting China Japan, produces 19%, but consumes 21.4% for the whole region. Likely overall production is in the low to mid 20s%.

No matter how you slice it, the US produces too little relative to consumption, Europe as well but less so, and Asia is the means by which US/EU overconsumption has occurred.

In the scenario above - clearly the risks are not with the Asian economies. Sure, lots of easy money being made via outsourcing and what not is going to disappear, but this production will find a way to meet internal demand needs because said internal demand is much less elastic and starting from a lower base.

From this viewpoint it is Europe and the US who are both at risk: 30% and 27% drops in order for consumption to match production.

But Europe's population share vs. consumption is lower: 4.5x vs. the US' 6x. Exclude the nuclear kill zone called the UK, and likely the overall numbers are even lower.

Why does this matter? Because population represents some minimum need: food, housing, etc. More population means less elasticity of demand. To me this says that consumption in Europe will hold up better than the US relatively speaking.

So how again is a sudden start to occur? Where will the excess production come from to subsidize the US and European overconsumption? How much will consumption fall in the US and Europe? esp. relative to production falls?

The Chicago economists and their media minions gloss over this, but the fact remains that China and India have survived on relatively nothing well within recent memory. They can do so again.

On the other hand, for the US and Europe, even a return to parity (i.e. production = consumption) means catastrophic falls in standards of living. Thus the US cannot even get by just with a stable production vs. consumption ratio, the US MUST have subsidies in order to continue its ways.

How can the US and Europe compel the rest of the world to continue to do so? The bargain in the past was consumption subsidy in return for income to build infrastructure.

Now that income is not forthcoming, why should the consumption subsidy continue? How, even, can the consumption subsidy continue?

Rome was able to survive by transporting wheat from Egypt to Italy, but it was military force which occupied Egypt and provided the slaves for labor.

The US has been using the fiat dollar and its savings to effect the same. The savings are largely gone, and the fiat dollar is wobbling mightly.

Can the US militarily force a continuation of consumption subsidies?

I think not.

So whatever happens in the next few months, don't forget the big picture.

Edit: Japan is an example where a nation has chosen to subsidize US overconsumption in return for military protection against Russia and China. But Japan is now losing more from its economic protectorate role than it saved by not having to build up a military of its own nor forge alliances with one or more of its large immediate neighbors.

[The Outback Oracle]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

This CAD is a real chicken and egg story. I ascribe blame the other way and it has to do with my arguments on interest rates around this forum. We have too high a propensity to consume and too low a propensity to save. Given that the real savings rate after tax and inflation has been negative, almost continuously, for 50 damned years I guess that is not much of a surprise. Hence as nations we have spent more than we've earned therefore we need to borrow or sell the country off. Now I do see the other side where too much money coming in, means too high an exchange rate, means more imports and less exports. It is a self-reinforcing cycle if you like.
The last time we ran a Current Accout Surplus was also in the early 70's.
Aus is like you as well. We have great trumpeting in the MSM when our Balance of Trade gets into surplus. It is a meaningless number as, like you, our services bill, our interest bill and repatriation of dividends is now monstrous leading to massive CAD's.
Our real question for the future is will the Japanese and the Chinese continue to fund the deficits? Also how long before we run out of assets we can sell given that our food chain is gone, our industry of any size is all overseas owned and our mining industry is 80% foreign owned. $80 Billion a year soon cleans up a lot of assets.
I posed the question in another thread on this subject. If the Japanese and Chinese are now not running such massive Surpluses, will they still be able to send money to the Antipodes?
I suspect we are about to find out and I think the answer might not please those who rule us.
On the other hand, as of a few months ago, the Chinese were buying every piece of resource they could get their hands on here. So maybe. Yet, my first hand experience of what is happening in China suggests they are going to be very busy with thier own immediate problems over the next 2 years.
One other comment, I suggest we are maybe 12 to 18 months behind the US in this cycle. The US (and Europe) go down, this eventually washes, as of November, onto the shores of China. The wave will (imo) then spread from China to Aus and NZ. The worst is yet to come, I'd think, beginning maybe 2nd quarter 2009.
Remember I'm just an ignorant small businessman (with a bit of Tertiary Economic education 40 damned years ago) with an intense interest in things Economic.

[rchdenton]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

If the Japanese and Chinese are now not running such massive Surpluses, will they still be able to send money to the Antipodes?
I suspect we are about to find out and I think the answer might not please those who rule us.
On the other hand, as of a few months ago, the Chinese were buying every piece of resource they could get their hands on here. So maybe. Yet, my first hand experience of what is happening in China suggests they are going to be very busy with thier own immediate problems over the next 2 years.
One other comment, I suggest we are maybe 12 to 18 months behind the US in this cycle. The US (and Europe) go down, this eventually washes, as of November, onto the shores of China. The wave will (imo) then spread from China to Aus and NZ. The worst is yet to come, I'd think, beginning maybe 2nd quarter 2009.
Remember I'm just an ignorant small businessman (with a bit of Tertiary Economic education 40 damned years ago) with an intense interest in things Economic.

Hmm. Yes, quite agree with you there. I guess I'm hoping to play it both ways - sell assets when they are buying (done) and buy when they are selling (if I can afford to). So your thoughts on timing are very relevant. I expect next winter here to be very unhappy.

[Chris Coles]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Sorry Chris, the US merchant banks and others in the US just took (unscrupulous and sometimes criminal) advantage of dumb overseas lenders..

No, in a very real sense, you are missing my point. In a correctly regulated financial system, the regulators would leave the rest of the world with a sound foundation of ethics and law to permit the view of respectability you get when you deal with the likes of IBM. Few of us indeed, anywhere, saw this coming, (or even more correctly, wanted to see this coming).

If you pick up the phone and ring IBM you know from a very long term reputation, built up over many decades, of the quality of the company you are dealing with. You know two things with IBM, it will cost an arm and a leg and you get first class service and reliable product. A solid reputation.

In the financial world, there were no indicators to the majority that those US merchant banks were a bunch of crooks. Everybody, from the White House down, gave a visible 'nod' to a similar reputation for those merchant banks. If an IBM says the software will work it does. Period. If a similarly financial business, given the same credentials by the highest level individuals in the US nation say the same about a US merchant bank, then everybody dealing with those banks had every reason to believe their opinion was sound and the product would work.

Instead, what you had was a complete abrogation of responsibility by the regulatory authorities leading to a complete abrogation of any ethical business standards right across the board. The whole idea of the top tier of individuals running financial institutions was always, (in the now long distant past), total honesty, respectability, constant vigilance, never any suggestion of a stain on the reputation or be thrown out on your ear.

My opinion stands. The buck stops with the regulators.

[rchdenton]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Instead, what you had was a complete abrogation of responsibility by the regulatory authorities leading to a complete abrogation of any ethical business standards right across the board. The whole idea of the top tier of individuals running financial institutions was always, (in the now long distant past), total honesty, respectability, constant vigilance, never any suggestion of a stain on the reputation or be thrown out on your ear.

My opinion stands. The buck stops with the regulators.

Quite agree with Chris. The regulators were hopeless.

You might like this link. I think it rather suggests that the problem was far from invisible to other central bankers.

http://news.bbc.co.uk/2/hi/middle_east/7764657.stm

Lebanon 'immune' to financial crisis


According to the country's chief banker all of this is because while the world was shocked when in September the banking giants began to wobble, Lebanon was prepared.
"I saw the crisis coming and I told the commercial banks in 2007 to get out of all international investments related to the international markets", says Riad Salameh, the governor of Lebanon's Central Bank.

There is a tradition of conservative regulation at the Central Bank in Lebanon, which kept the banks safe.
Banks weren't allowed to take on too much debt and they had to have at least 30% of their assets in cash.
They were not allowed to speculate in risky packages of bundled up debts.







As I said earlier - it takes two parties to make a bad debt - a debtor and a creditor. The mistakes of the debtor nation are being exposed, but we have not heard of the mistakes of the creditor nations.



Crying foul is all well and good but if a reserve bank makes a bad investment it should be held to account. I think the people of China and Japan will want an explanation from their governments.

[jk]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Presumably we have got to the point where we have to pay off principal and interest or sell some more of NZ.

I still don't understand why the Japanese keep lending us more dosh to pay the interest. Is the idea of capitalising interest a banker's way of gaining ownership? Keep lending until you've got them by the balls?

capitalized interest represents GROWTH in the loan portfolio, while the ever increasing "income" of the interest payments represents GROWTH in earnings. it's all in the accounting. the reality becomes ever more untenable, but the financial reports look great. [same game as that played with pay option mortgages with capitalization of underpayments.]

[GRG55]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

you're right. i got mixed up.

Well it's not often that happens, jk. :eek:

But it's not the central point of your post, so I apologize for the distraction.

[The Outback Oracle]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Sounds good till Mr & Mrs Okinawa want a bit of extra to get them through the recession!;)

[rchdenton]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

capitalized interest represents GROWTH in the loan portfolio, while the ever increasing "income" of the interest payments represents GROWTH in earnings. it's all in the accounting. the reality becomes ever more untenable, but the financial reports look great. [same game as that played with pay option mortgages with capitalization of underpayments.]

Of course! How silly of me to question their good sense.

Presumably the realisation of the untenable nature of the situation leads to the sort of currency dislocation that EJ tantalisingly refers to. If it hasn't already.

[jk]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Of course! How silly of me to question their good sense.

Presumably the realisation of the untenable nature of the situation leads to the sort of currency dislocation that EJ tantalisingly refers to. If it hasn't already.

in the pay option mortgage case, it leads to a sudden default and foreclosure, i.e. the seizure of the collateral. so, in the case of new zealand....

[GRG55]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

...Crying foul is all well and good but if a reserve bank makes a bad investment it should be held to account. I think the people of China and Japan will want an explanation from their governments.

And just like the good people of the USA, who would like an explanation for this unfolding catastrophe from their government [good luck :rolleyes:], I doubt the people of China or Japan have particularly high expectations in that regard. I don't sense that the reserve banks are accountable to rank and file citizens in any of these cases.

Fed Refuses to Disclose Recipients of $2 Trillion

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC...

[rchdenton]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

And just like the good people of the USA, who would like an explanation for this unfolding catastrophe from their government [good luck :rolleyes:], I doubt the people of China or Japan have particularly high expectations in that regard. I don't sense that the reserve banks are accountable to rank and file citizens in any of these cases.

Yes, transparency is a requirement for confidence is it not?

I suppose my point was the s and fan collision will probably be worse at the periphery than at the centre. It usually is. Presumably that will be the next major focus of attention as the process rolls on.

[jk]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

I suppose my point was the s and fan collision will probably be worse at the periphery than at the centre. It usually is. Presumably that will be the next major focus of attention as the process rolls on.

i think a major underlying process is that the "centre" is no longer so clearly located, i.e. is in the process of shifting. so it's not clear to me that the "periphery" will do worse than the u.s., which is losing its status as centre.
i think the u.s. will remain a major power in every sense, but not THE major power, in a multi-nodal world.

[D-Mack]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Yes, transparency is a requirement for confidence is it not?

I suppose my point was the s and fan collision will probably be worse at the periphery than at the centre. It usually is. Presumably that will be the next major focus of attention as the process rolls on.

They are really worried about independence, even working with Hanky P. is too much for them.

Fed's Bullard says must preserve Fed independence
Sat Jan 3, 2009 7:32pm EST


SAN FRANCISCO (Reuters) - Close collaboration between the U.S. Treasury and the Federal Reserve to fight the country's economic crisis has been crucial but raises questions over Fed independence, a top Fed policy-maker said on Saturday.

"We are blurring the institutional arrangements a little," said St Louis Federal Reserve President James Bullard.

"I am concerned about independence. Fed independence is very important," he told reporters on the sidelines of the annual American Economics Association meeting.

Economist Martin Feldstein told CNBC the economy could be in worse shape in a year, while former under secretary for international affairs John Taylor warned the explosive growth of the Federal Reserve's balance sheet since September was "unbelievable" and could lead to the Fed losing independence.

http://www.cnbc.com/id/28504322

[rchdenton]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

i think a major underlying process is that the "centre" is no longer so clearly located, i.e. is in the process of shifting. so it's not clear to me that the "periphery" will do worse than the u.s., which is losing its status as centre.
i think the u.s. will remain a major power in every sense, but not THE major power, in a multi-nodal world.

Clearly there will be changes to the economic power structures of the world as a result of the current process. I guess I'm expecting a more responsible United States of America to emerge. Still top dog but a little chastened and a little less inclined to try to force its way in the world. A more cooperative USA, more trade focussed. In the same way Europe has become more cooperative and more trade focussed.

I am aware there are more unpleasant possible outcomes, but then I live in a small country with a "she'll be right" attitude, which suits me as I am basically optimistic. You live in a country which, dare I say it, is prone to Paranoia. This can be a good thing as it certainly is a spur to action (rather than talk and no action, which I think is another US national trait). I'm not trying to be rude and offensive here, its just that it is important to be aware of the tendencies of those around you as you will be affected by them.

Which brings me to my reason why I think the US will continue to be top dog. Adaptability. Darwin's key to survival. (Note: NOT survival of the fittest - which was Herbert Spencer's justification for social inequality, nothing to do with Darwin except it purported to apply Darwin's observations to human society using a subtle deception). One hallmark of US society is its ability to adapt rapidly. Basically you make changes, not always the right ones but you do act.

Back to my original comment, your merchant bankers adapted to over eager lenders by inventing a "new" banking model, originate and distribute. The fact that this allows infinite credit creation because it lacks a reserve requirement was conveniently overlooked. The lenders are equally culpable - if they had not made mistakes in assessing risk they would not have lent the money to the merchant banks. In many ways they are a more fundamental layer of causation than the more obvious culprits.

That the cdo etc markets were unstable was widely known before the event; Warren Buffet famously warned about financial weapons of mass destruction; the Lebanese central bank, used to dealing with difficulty, told its banks to sell them and increase their reserves to 30% (see link I posted earlier in this thread); our own NZ Reserve Bank thought it all very dodgy (personal conversation after the event). I find it hard to believe the central bankers of the key players really did not see this coming - this is their world.