gary north article - private investment disappearing?

[grapejelly]

http://www.lewrockwell.com/north/north642.html

Gary North makes a persuasive case that bank failures will result in a loss of confidence by the boobs in the financial system. They will pull a lot of money out of bonds and stocks and put it, where else, into treasurys. This will result in a huge inflation as the Fed prints money in order to paper over the banking system's enormous problems, and as private investment falls sharply and therefor government spending increases.

Already happening...a good read and I'd love to discuss what *you* think

[c1ue]

Re: gary north article - private investment disappearing?

It is a consistent train of thought from an author of a book called 'Mises on Misery'.

I've been negative on what's coming down to pipe for some time - including 'hyperinflation' as a significant possibility.

The FDIC is basically an insurance company. They collect premiums from all the bank members and accumulate a float which in turn is used to repay insured deposits in member failed banks.

Unlike most insurance schemes, the FDIC is not a for-profit organization; there is more incentive to be conservative with their float management.

However, like any other insurance scheme, the float's ability to cover obligations is a direct function of the accuracy of the insurance scheme's model.

In the case of banks, while there are always failures for one stupid/greedy reason or another, in our present case it is the entire system which has overindulged in several of the deadly sins in the realm of mortgage finance and securitization - in fact, almost all of them: Greed (for money), Envy (of fellow bank and bankers' profits), Pride (we know what we're doing), Sloth (the avoidance of physical work - pretty much the entire FIRE economy), and Gluttony (need I say more?).

Anger is about to come - but that will be the rest of the population.

Lust has probably been hiding under the first 5 - there but insignificant in this instance.

As for J6P's or Richie Rich's withdrawals affecting the system's balance:

I actually discount this. The reality is that the banks are so leveraged and already borrowing from the Fed, that the departure of the actual deposits probably doesn't even matter anymore.

On the other hand, the issue which does matter is the destruction of the economic model which the US economy has been operating under for several decades.

With banks effectively insolvent and materially crippled so that both personal and business lending is at a standstill, the US economy and its reliance on consumption is set for a big fall.

The printing that goes on will be of benefit to the banks, but more importantly how else will the $700B+ trade deficits be made up for?

Where else will the ever-increasing government spending come from?

For all the MSM talk about how well manufacturers are doing, the May 2008 census.gov trade data is showing another consistent blip on the 3 year export/import graphs: currency deficits are still wide and imports are rising just as much (or really, as little) as exports are.

For every Boeing jet sold instead of Airbus, the price of oil is more than compensating.

[Many Arrows]

Re: gary north article - private investment disappearing?

North's article was so good that I read it 3 times and got new perspectives with each pass.

Not even he probably has a grasp of how quickly the bank failures will burn through the reserves of the FDIC and Fed to get to hyperinflation via monetizatrion.

The Originate-to-Distribute model that came to be throughout the US Banking system created enormous complexities in the accounting for every single loan. The disconnects are increasingly evidenced by 'note holders' being stopped from foreclosing due to failure to possess the mortgage. The rush to originate, aggregate, and distribute produced a Gordian knot for a huge% of the loans. There is not enough accounting horsepower in the FDIC to cure this, meaning that all manner of excesses will be bailed out.

Once the government committed to bailing out the GSE's the die was cast.

If the banks cannot value their assets, how will the government? It won't and will bail out every thing in sight, including new excesses devised by the financiers.

The FDIC will quickly find that bailing out the wild excesses and derivative level debt will be complicated by all manner of exploitation to siphon off even more of the public's money. The Fed's last reserves will be gone in short order.

Hyperinflation will collapse the stock and bond markets, as North predicts. This will bring up the next level of bail-out, that of the Pension Benefit Guarantee Corporation. This will mean more $trillions of government debt substituted for private debt.

Some claim that the FDIC- insured accounts are the last redoubt, the one that the government will stop at nothing to bail-out. However, it will politically impossible to bail out depositors while refusing to bail-out pensioners. Both are federally insured.

The enormity of the bail-outs, now that they have started, is not remotely understood - perhaps not even by North.

At the end of the day, the originate-to-distribute model, off balance sheet entities, and financial derivatives will have proven fatal to the banking system and to the already impossibly overleveraged government that attempted to bail it all out.

Whether by official default or hyperinflation from the bail-outs, cash in the bank is endangered specie.

The store of value function of MONEY is gone from the $US dollar. How long it remains a viable unit of exchange will soon be under horrendous pressure.

[Spartacus]

Re: so why are TIPS and Gold and Silver still so low?

because the markets don't agree with Mr. North

Which is not to say they never will, but at the moment they don't.

North himself loved to make lots of hay out of the predictive power of the markets, "the market is always right", many times pointing to the presidential election futures market, for example.

When the markets disagree with him, he's completely silent on the wisdom of markets.

EDIT: I wrote this post thinking "I'll find that thread where he says the commodity bubble is done", and Metalman beat me to it.

So North's collaboration with Mish is apparently over & North's a severe inflationist again.

[metalman]

Re: so why are TIPS and Gold and Silver still so low?

because the markets don't agree with Mr. North

Which is not to say they never will, but at the moment they don't.

North himself loved to make lots of hay out of the predictive power of the markets, "the market is always right", many times pointing to the presidential election futures market, for example.

When the markets disagree with him, he's completely silent on the wisdom of markets.

why does anyone listen to this right wing crank? didn't he call the collapse of the 'gold bubble' a few months ago? and bearish on silver just as it took off in 2002?

reading him must be an acquired taste, like eating rocks and milk.