``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

[phirang]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Who says they have to be printed?

Once upon a time, I recall one of EJ's posts pointing out that all the US $ needed to create the next Poom/Bubble have already been printed and are largely in the hands of offshore entities. The repatriation of all those $ was the point.

Could it be that Paulson's Super SIV is the mechanism, or at least the catalyst for that?

Perhaps destabilizing the Russian capital markets via Georgian aggression helped precipitate the necessary flight of capital and turned Putin into a lil' KGB puppy...

[marvenger]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

I guess it all depends if the Us can maintain its dollar reserve status. This is beyond my crystal ball abilities. I used to think it was better having the dollar as the reserve currency than the currency of any other nation, but now I'm not so sure, and I'm sure millions of others are thinking the same thing. There doesn't seem to be any standouts yet so maybe the dollar will just continue its slow death for a while yet.

[gugion]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Hi EJ,

I'd like to quickly thank you for your dedication and hard work to educating those like myself about how we got here and what's the likely future of our economic and financial system. You have been more accurate than I could ever imagine and I still don't know how you do it. I'm 24 and I've been following Itulip for the last 3 years and I would be completely lost without your website and your incredible readers.

Regarding the aforementioned post, I'm a little confused about the panic that went on this week. The "Ituliper" in me wants to say, this is it, this is the financial panic that was in the works and I should expect it, however the contrarian in me is wondering if I should believe CNBC, Cramer, and all those political "strategists" in believing that had the government not stepped in this time, Bernanke would be right and Great Depression version 2.0 would be upon on us. I'm wondering if you believe this would have occured had the government not stepped in and said they would buy up some of these toxic securities.

Thanks again for all you've done.

-G-

[LargoWinch]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Who says they have to be printed?

Once upon a time, I recall one of EJ's posts pointing out that all the US $ needed to create the next Poom/Bubble have already been printed and are largely in the hands of offshore entities. The repatriation of all those $ was the point.

Could it be that Paulson's Super SIV is the mechanism, or at least the catalyst for that?

I am saying that this bailout will be in addition to what is already sitting in offshore, SWF etc. accounts.

Unless the US gov. has standby offshore entities for themselves. But why would they do that?

[rj1]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Many people have commented that securitised debt is very cheap now- probably below its realisable value when the securities
get redeemed (remember there is real security, and real debt repayments backing up these securities.) If they are truly
cheap, then this may prove a good trade, at least in the short run.

One problem, if securitized debt is very cheap now and are below their real value as you state, than why aren't some savvy investors/hedge fund investors out there buying them?

[phirang]

Re: "were literally maybe days away from a complete meltdown of our financial system"

One problem, if securitized debt is very cheap now and are below their real value as you state, than why aren't some savvy investors/hedge fund investors out there buying them?

With the new backstop in place, they will be buying htem in a year or so.

[ASH]

Re: "were literally maybe days away from a complete meltdown of our financial system"

The "Ituliper" in me wants to say, this is it, this is the financial panic that was in the works and I should expect it, however the contrarian in me is wondering if I should believe CNBC, Cramer, and all those political "strategists" in believing that had the government not stepped in this time, Bernanke would be right and Great Depression version 2.0 would be upon on us. I'm wondering if you believe this would have occured had the government not stepped in and said they would buy up some of these toxic securities.

Obviously, I'm not EJ, but I wanted to say that this isn't a disaster/no disaster situation in my view. This can still be "it" -- and the talking heads can be more-or-less correct about what they're trying to avoid -- if we recognize that we are exchanging one type of disaster for another.

As I understand it, ka-poom theory is partially a theory about the behavior of officials like Bernanke and Paulson. If faced with the choice between a deflationary depression or massive inflation, they are going to follow policies which are biased toward the inflationary outcome. (There are other issues, such as how demand for a nation's currency in a time of crisis depends upon whether it is a creditor or debtor,etc., but I think this policy distinction is at the crux of your question.)

Without massive intervention, American financial institutions would continue to fail, and the credit markets would remain frozen. Banks inflate the money supply by lending against their reserves, and if the toxic securities stayed on their books, it would curtail their ability to lend -- and force more to fold. Those with a lot of debt outstanding could be forced to fold if losses from these securities wipe out their capital base. In the case of more bank failures, I think there is a real chance that a chain reaction transmitted through the derivatives market could take down almost the entire financial system. Anyway, disinflation (and possibly deflation) resulting from wholesale destruction in the credit markets combined with institutional failures would look a bit like Great Depression II. This is the outcome that Paulson's plan is designed to avoid. In particular, the only way we can avoid finding out first hand if the derivatives chain reaction theory is right or not is to have the government prevent the collapse of any of the main players. Your only option is to bail the system out before someone lights that match, because afterwards, a cleanup simply won't be possible.

If the government plan works (which isn't obvious to me), America's credit creation machinery might survive more-or-less intact, but the value of our currency will not. Ultimately the rescue plan amounts to issuing more treasuries to recapitalize the banks, preventing their failure and jump-starting the credit creation machinery. The price is a direct increase of the money supply leading to inflation, and debasement of the dollar to the point where it cannot function as the world's reserve currency. However, the loss of reserve status might be more gradual than if our financial institutions were allowed to default on loans from foreigners (i.e. because these institutions are failing), since that would trigger the same thing almost overnight.

I don't feel I have a good understanding how dollar repatriation would play out in both scenarios. When things go south in the States and it looks like holding dollar-denominated assets is a poor plan, one would expect foreigners to sell out of their stocks and bonds (presuming that they have a better alternative). I would think that might be the case in either scenario. After all, if the US is headed into a deflationary depression, it will become apparent that (a) the US isn't productive enough to pay its creditors, and (b) American businesses will not be turning much of a profit, so you'd expect foreigners to sell out of both bonds and stocks. As I mentioned, if there are significant loan defaults because our financial institutions are failing, (a) would become immediately obvious, and the dollar would become undesirable much more quickly. On the other hand, if we follow inflationary policies, it should dawn upon foreigners that we are devaluing our currency, and they will also have reason to sell out of dollar-denominated assets. Seems to me we're talking about getting flooded with dollars in either case, but the big difference is the pace, and whether there's an intact financial system that can use those dollars to generate credit. Without the bailout, if the financial system still has bad securities on its books and no way to generate credit, then I think we get the combination of a weak currency for foreign exchange but credit-starved conditions at home. With the bailout, we get a weak currency for foreign exchange, and inflation at home.

Anyway, that's how I understand things. Not sure you should give it any credence. Find someone with a lot more posts than I, because the old guard seem to actually understand what's going on, whereas I just like to think out loud while I try to understand stuff.

[The Outback Oracle]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Can someone set me straight with a one liner or a reference to a thread as I am sure this must have been dealt with before.
The dollars held by SWF's etc are not piles of notes sitting in their central bank vault? As I understand most sit in either Treasuries or trash issued by Fannie and Freddie?
So, if as per ASH's thread, the dollars are 'sold' they will have to come out of Treasuries, and go where ever. Who would buy the damned things now? And especially who would buy the damned things if unloading by the major players starts.
The US has played a great trick with the USD being a Reserve currency. These notes are out there...and cannot be exchanged for anything really except US assets.
So re repatriation, as outlined by ASH, the only way is for dollars to come out of Treasuries etc and to be used to buy US assets. HAhahahaha yeah and the Congress is going to love that on a large scale!!!
So either the holders of USD just accept they are holding trash and there is nothing they can do about it.....they just MIGHT stop taking it as payment. It still means the USD becomes worthless but over a slightly longer time. Altrernately the US lets them buy US assets...mines...Banks...farms...Real estate...at liquidation prices. As I pointed out elsewhere that is the Australian model and for the politicians has postponed the evil day for nigh on 40 years!
With this latter alternative however you get flooded with dollars again...but do you if they are withdrawn from treasuries to purchase the assets?
Sorry if this seems to have gone round and round...but so is my head!

[GRG55]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Can someone set me straight with a one liner or a reference to a thread as I am sure this must have been dealt with before.
The dollars held by SWF's etc are not piles of notes sitting in their central bank vault? As I understand most sit in either Treasuries or trash issued by Fannie and Freddie?
So, if as per ASH's thread, the dollars are 'sold' they will have to come out of Treasuries, and go where ever. Who would buy the damned things now? And especially who would buy the damned things if unloading by the major players starts.
The US has played a great trick with the USD being a Reserve currency. These notes are out there...and cannot be exchanged for anything really except US assets.
So re repatriation, as outlined by ASH, the only way is for dollars to come out of Treasuries etc and to be used to buy US assets. HAhahahaha yeah and the Congress is going to love that on a large scale!!!
So either the holders of USD just accept they are holding trash and there is nothing they can do about it.....they just MIGHT stop taking it as payment. It still means the USD becomes worthless but over a slightly longer time. Altrernately the US lets them buy US assets...mines...Banks...farms...Real estate...at liquidation prices. As I pointed out elsewhere that is the Australian model and for the politicians has postponed the evil day for nigh on 40 years!
With this latter alternative however you get flooded with dollars again...but do you if they are withdrawn from treasuries to purchase the assets?
Sorry if this seems to have gone round and round...but so is my head!

So what is the one "asset" currently in abundance, allegedly able to be acquired at "below market price", and in the hands of "motivated sellers"? I see a match made in heaven [for the USA, that is]...

See what happens after you've been reading Sapiens for many months...you start posting like him...

[Guest]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Exclusive: Foreign Banks May Get Help

By MIKE ALLEN | 9/21/08 7:24 AM EDT

In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night.

The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.

Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos that coverage of foreign-based banks is "a distinction without a difference to the American people."

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said.

Cont. ... http://www.politico.com/news/stories/0908/13690.html

[Verrocchio]

Re: "were literally maybe days away from a complete meltdown of our financial system"

moral degeneracy that began with Clinton's blow job

Good points, Many Arrows. A minor quibble, though: The bj by itself was unremarkable and began nothing. The starting point for moral degeneracy can be traced to earlier events, but I think it indeed fair to mention this as the moral degeneracy symbolized by Clinton's blow job.

[j4f2h0]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Yes and by the same token by no means are we done with oil declines, and the precious metals declines have been and would then contnue being leveraged to further oil declines. I'm thinking those "loading up" on silver particularly here, may not have given enough deliberation to where we currently are in this trajectory. According to the commenter below, oil can easily drop from here to $75, and if it does silver goes careening to $8 or even $6 as it's been leveraging the moves in oil spectacularly on the way down. I''m keeping my eye grimly on next April / May for a possible cessation of this bear in commodities if only due to it's then exceeding the average historical time for such a move. Author below goes on to note that this correction, which is only partly completed, follows one of the top six commodity bull markets, in the past 200 years. Larger the bull, larger the correction. We are not done yet.

" If we have just gone through one of the biggest commodity bull markets since the 1790's, and we follow the trajectory of what occurred at the previous tops around 1812, 1864, 1920, 1948 and 1980, the commodity sector is at an extremely exposed juncture. Drops coming off blowoff tops at the end of bull runs which were in excess of 500% when sampled across 200 years, averaged 48 percent, and took about 5 months to play out. If we go through a drop of that size the price of crude can easily decline well below $80. That would match the bottom price in the steep correction in August of 2007. That means the market would retrace the whole rise from August of 2007 up to the top on July 11th of this year. There is a lot of evidence that this would play out in a six month period after this summer's top. The velocity of the decline would be twice that of this last blowoff leg in the oil price's rise. "

what difference would it really make if silver dropped to 8 bucks an ounce? Dealers would then have a 150 percent premium and it would sell for around what it is today 18-19 dollars an ounce! Good luck on waiting to pounce on 8 dollar silver lukester!

[Guest]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

what difference would it really make if silver dropped to 8 bucks an ounce? Dealers would then have a 150 percent premium and it would sell for around what it is today 18-19 dollars an ounce! Good luck on waiting to pounce on 8 dollar silver lukester!

j4f2h0 - No you misunderstand me. Lots of people here like to "talk up" or "talk down" investments they are either long or short of. It's a natural human inclination to cheer-lead what they have committed to. I am doing the opposite. I'm holding 15K ounces of silver bullion and have gotten absolutely mauled by this "correction" in silver. I am NOT talking my book - I am saying that I expect to get mauled further, until the bones are poking through.

Now you capisce?

Your reply encourages me. I am not going to be "disappointed that I did not get my vulture's chance to scoop up silver on the cheap". I will instead be hanging out on the line to wind-dry, like a piece of meat.

[Mega]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Ah............The British rub their hands with glee!
Mike

[j4f2h0]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

j4f2h0 - No you misunderstand me. Lots of people here like to "talk up" or "talk down" investments they are either long or short of. It's a natural human inclination to cheer-lead what they have committed to. I am doing the opposite. I'm holding 15K ounces of silver bullion and have gotten absolutely mauled by this "correction" in silver. I am NOT talking my book - I am saying that I expect to get mauled further, until the bones are poking through.

Now you capisce?

Your reply encourages me. I am not going to be "disappointed that I did not get my vulture's chance to scoop up silver on the cheap". I will instead be hanging out on the line to wind-dry, like a piece of meat.

I understand fully and i agree to an extent that this will not be the big way too obvious turn around. I too have been mauled blindsided by this correction, it doesn't bother me much i just watch the premiums and grab what i can at the lowest price i can. At this point, a dealers inventory is determining what price they are selling silver, more than the spot price in the market!