Collapse of the Economy in 24 hours. . .

[Guest]

Re: Collapse of the Economy in 24 hours. . .

Wow. Lots of runaway doom on this thread. I think we're going to see a large stock market boom late this spring instead which could run for four or five more years and quadruple. The bank recapitalisation everyone is insisting is locked-up money and "the banks won't lend" will start to leak and ignite a fuel-air bomb in the equities. I must be totally out to lunch to conclude this, but that's what I stick to - 30K DOW within 5 years kicking off soon.

I don't think I've read a thread at iTulip quite so black with unrelenting doom before. Everyone is in agreement.

[junkacc]

Re: Collapse of the Economy in 24 hours. . .

Wow. Lots of runaway doom on this thread. I think we're going to see a large stock market boom late this spring instead which could run for four or five more years and quadruple. The bank recapitalisation everyone is insisting is locked-up money and "the banks won't lend" will start to leak and ignite a fuel-air bomb in the equities. I must be totally out to lunch to conclude this, but that's what I stick to - 30K DOW within 5 years kicking off soon.

I don't think I've read a thread at iTulip quite so black with unrelenting doom before. Everyone is in agreement.

Another asset bubble to replace the one just popped would be interesting but the fundamentals aren't there. The government buying stocks could make corporate finances better and could even restart the corporate bond market but what could corporations possibly make with all that money that people will buy? Neither the production or demand is there.

Unless:

There is something that re-ignites the greed factor. A "vaporware" industry that emerges like the dotcom era. Alt-Energy?

OR

Government buys so much stock, companies becomes state owned enterprises, doing nothing and making nothing. Corporations will be nothing more than government agencies handing out money to employees. State owned banks and state owned enterprises. Sound familiar anyone?

[LazyBoy]

Re: Collapse of the Economy in 24 hours. . .

Net result? Debt moved from private account to public account, debtors saved, creditors saved, country one step closer to bankruptcy.

This is how our system works.

I've been wondering...
Is any country better positioned and/or handling this better than the US?
I mean in terms of the debt that will be spread over their populations.

Least debt/person.
Ability for population to discharge debt.

In terms of what country survives the best are these key items or
just minor ones?

LB

[Quincy K]

Re: Collapse of the Economy in 24 hours. . .

EJ-

since you have been pretty much spot on, can you give us your best and worst case scenarios for M and N and the duration?

This is not fear mongering. It is, unfortunately, the truth.

During that week when Paulson and Bernanke in their ham handed way proposed the emergency bailout to Congress, before I wrote No Time for Utopian Anti-Interventionism, I talked to Dr. Peter Warburton (see Inside the Whirlpool: Interview with Dr. Peter Warburton), Martin Mayer and other experts. The conclusion: the patent, the US banking system, had gone into cardiac arrest and died while Congress bickered for two weeks about whether or how to apply a defibrillator.

It has never recovered.

The global economy has been collapsing ever since.

Now we watch Congress bicker about lame acts of fiscal stimulus to try to revive demand. But the fact is it's too late to do much but watch in horror.

A smoother transition from the FIRE Economy to a New Economy could have been managed, but for one of the more dysfunctional aspects of what I call the Inexorable Logic of the US Political Economy: the political system and the financial system have an impedance mismatch; one turns slowly and the other very, very quickly.

So, unfortunately, we shall have a Great Depression II following the collapse of FIRE Economy V2.0 worse than the Great Depression I that followed the collapse of FIRE Economy V1.0 in the 1930s. I'd hoped for better, but here we are.

We may not have liked the old government and private credit-based money system any more than anyone else -- believed it was corrupt and produced gross inequalities and risks -- but it was the system we were using.

The Titanic is an excellent metaphor, with a twist.

Some of the passengers complained that the propulsion system was poorly conceived and should be replaced. Some, in fact, asserted it should be destroyed.

What these passengers forget is that they, too, are passengers on the same boat with everyone else, and that if the system crashed they are doing down with everyone else. In fact, for anyone with any special flotation devices I guarantee that before this is over you will be sharing them with the survivors whether you like it or not. This is another aspect of the Inexorable Logic of the US Political Economy that I have warned about for years.

I don't take any pleasure in communicating this vision of the future, but after 10 years of running this site, I see no reason why, if a logical theory has predicted a sequence of events A, B, C, D, E, F, G, H, I, J, K and L, over those 10 years that events M and N will not follow the same chain of logic over the next few.

[goadam1]

Re: Collapse of the Economy in 24 hours. . .

There is nothing like 100% doom to make me think something positive is coming.

[don]

Re: Collapse of the Economy in 24 hours. . .

When I hear talk of pain endured to date or yet-to-come, I wonder if people fully understand the power of greed, that is, how much pain a small cadre of bankers are prepared to inflict on the world in order to consolidate power and maximize profit. We ain't seen nothing yet. The Fed was established in 1913 in one part to facilitate the onset of WWI for profit. The Bolshevik revolution similarly was about bankers' power. Hundreds of millions of people died all in the pursuit of greed by a few.

Those pushing for the bail-out are not about to concede the conceptual error of their ways and yield to the greater good. I really try to avoid all the Illuminati stuff, but there is an argument to be made that banking is the locus of human evil. I still think most Americans believe that we are somehow immune to the predations of third-world exploitation (the city on a hill crowd). Yes many of the financial elites call America home. But banking is a rootless global enterprise. Tomorrow's elite could just as easily headquarter in Beijing. Like locusts, when they are done with America they will move on. We will be shocked at the rapidity of their departure.

I think you are absolutely right. If conditions warrant it, capital flight of the Big Boys will be swift and breathtaking. It's happened repeatedly in history in every social upheaval since the bourgeois revolutions. We appear nowhere near that condition at present but as we've seen, things can change quickly. One thing we can count on are incredible scams in the bailouts to come, starting with the 'bad bank', already touted as a joint government/private purchase of toxic assets. You can guess what that means :mad:

[Chris Coles]

Re: Collapse of the Economy in 24 hours. . .

But banking is a rootless global enterprise. Tomorrow's elite could just as easily headquarter in Beijing. Like locusts, when they are done with America they will move on. We will be shocked at the rapidity of their departure.

You have hit the proverbial nail right on the head.... EJ has for some time related to the possibility of an "event" that might trigger a crisis. Might that event be simply that another nation will create a financial environment that draws the FIRE moths towards a new flame?

[goadam1]

Re: Collapse of the Economy in 24 hours. . .

What would drive the next bubble? The last bubble made a bunch of fat people with a closet full of crap in a house that is too big and too expensive. As soon as demand picks up we will have demand and monetary inflation. Maybe on a planet of over 6 billion people we have reached a tipping point of maximum growth. The next successful system will have to incorporate a financial system that does not depend on unrealistic amounts of growth. In fact, many business would be fine if you didn't need ridiculous amount of year over year growth to justify the debts, payouts and valuations demanded from them.

I would prefer to walk away from the mental disease that our dying system resembles. If I could.

Oh my the water is cold.

[LazyBoy]

Re: Collapse of the Economy in 24 hours. . .

Maybe on a planet of over 6 billion people we have reached a tipping point of maximum growth. The next successful system will have to incorporate a financial system that does not depend on unrealistic amounts of growth. In fact, many business would be fine if you didn't need ridiculous amount of year over year growth to justify the debts, payouts and valuations demanded from them.

I agree that this is what's needed.
But it may not be the next system.
And whether or not it is the "next successful system" depends on who's defining success.

[jtabeb]

Re: Collapse of the Economy in 24 hours. . .

You have hit the proverbial nail right on the head.... EJ has for some time related to the possibility of an "event" that might trigger a crisis. Might that event be simply that another nation will create a financial environment that draws the FIRE moths towards a new flame?

There is a REASON why the FIRE flame burns brightest in the country with the strongest military. That will HAVE to fade before the locusts depart. (It's happening fast, BTW)

[ASH]

Re: Collapse of the Economy in 24 hours. . .

When you say "I guarantee that before this is over you will be sharing them (the life preservers) with the survivors whether you like it or not", are you suggesting that there is no way to protect one's wealth from being doled out to others through government action. Won't investing in gold or inflation hedges work?

This question seems closely related to the What to do about possible capital controls? thread, although a distinction could be drawn between capital flight beyond the national borders and preservation of purchasing power within the national borders.

If you own a small freehold, then I think it unlikely you will have to "share" the benefits derived therefrom. That is because it is administratively difficult to tax wealth (such as fresh eggs) which go directly to your belly without ever being bought or sold, and it is impractical to confiscate and redistribute individual residences and small farms because they are already "subdivided" as far as is useful. Land can definitely be made subject to higher property taxes -- and if the state has a particular reason to take your land, it can -- but there's likely no percentage in pushing small owners off their property. One-to-one redistribution doesn't alleviate the social strain; one-to-many does. Thus, I'd be more worried as a large land-owner or commercial farmer than I would as a small land-owner.

If you plan to store your wealth (in the form of, say, physical PM) I think it should be possible to preserve your wealth until a new economic system emerges. However, it will be very difficult to access and use your wealth during the transition, without being obliged to "share". My take is that transactions are the key issue. You can enjoy the fruits of your land without buying or selling anything (for the most part), but the moment you try to sell your land for currency or spend that currency to purchase something, you'll be hit with redistribution from the prepared to the ill-prepared. The same will be true for gold buried in your back yard, or securities, etc... except that you can't "enjoy" gold or stock certificates without selling them for currency and purchasing something else. In other words, with the exception of wealth that you can enjoy directly without any transactions, you will have to share your flotation devices during the transition if you choose to use them.

So, in my view, if "wealth" means the ability to buy nice consumer goods, then it will be hard to protect one's wealth from redistribution during the transition. If "wealth" means fresh tomatoes in season, and a comfortable home, then I think small home-owners have a decent shot of enjoying their wealth through the transition. Lastly, there are vehicles which are likely to preserve wealth through the transition, but only if one doesn't attempt to actually deploy that wealth until the new economy emerges.

[ocelotl]

Re: Collapse of the Economy in 24 hours. . .

All what I'm reading along this post is looking exactly like things evolved here in México before bank and industry nationalizations in 1980-2.

- Mexican government did nationalize mexican banks by decree on september 1st 1982, amid the crisis that sent oil price to a minimum not seen since early 70's.

- In order to "protect" and "impulse" mexican economy, Mexican government nationalized failing industries left and right since the early 1970's until there was no money left to acquire more, in 1982.

- Mexican Minimum wage reached an historical maximum in real terms in 1982 after a government decreed increase. That increase was erased by inflation in the following year.

- Overindebtness of Mexican Government (external debt went to nearly the level of yearly GDP) led to a closing of credits, and from 1982 to 1986, there was no more money from abroad apart of exports and direct investment.

This all is just the beginning, a full restructuration of the way business is made lies ahead in economic history. Wage inflation is not going to equal price inflation this time due to a simple reason: If the output of the economy is not increasing, both in goods, services and capital, there is no way that people affluency increases without increasing indebtness. Any attempt to try the contrary will be futile.

[KGW]

Re: Collapse of the Economy in 24 hours. . .

A comment I found today on an article on "Seeking Alpha:"

"Here is a reality for you, the government and the banks are the only ones that have investors lending to them now. Once the lenders/investors figure out that there is no underlying economy to pay back the debts, they will stop lending completely. Once the government runs out of tricks to keep propping us up, then what? Try millions without food and nothing left to feed them. "

Banks have been behaving like the two ladies of legend /Who earned a precarious living by taking in each others washing/
Politicians loved it, they kept taking bits of the washing as taxes!! Now no longer Oh Woe !

Funny! Sort of...

[raja]

Re: Collapse of the Economy in 24 hours. . .

If you own a small freehold, then I think it unlikely you will have to "share" the benefits derived therefrom. That is because it is administratively difficult to tax wealth (such as fresh eggs) which go directly to your belly without ever being bought or sold, and it is impractical to confiscate and redistribute individual residences and small farms because they are already "subdivided" as far as is useful. Land can definitely be made subject to higher property taxes -- and if the state has a particular reason to take your land, it can -- but there's likely no percentage in pushing small owners off their property. One-to-one redistribution doesn't alleviate the social strain; one-to-many does. Thus, I'd be more worried as a large land-owner or commercial farmer than I would as a small land-owner.

What do you think about owning rental property?

As you say, there's "no percentage in pushing small owners off their property" . . . and I doubt that the gov't will flat-out confiscate private property from people. Taxes on individual houses owned as rental property should have the same taxes as owner-lived-in homes.

Tax on the rental income could be high, but when the society comes out the other side, there still remains the land and house, and rental income will be in the new currency and of reasonable value.

I do live on a small farm, but cash is necessary: to pay property tax, electric bills, transportation, etc. I'd like to find a way to preserve my retirement money so that I can continue to pay those expenses.

I, too, had thought that gold might be better held until after the transition . . . but what will it be worth when the new system is in place? Will people still want to buy gold? Why?

[ASH]

Re: Collapse of the Economy in 24 hours. . .

What do you think about owning rental property?

As you say, there's "no percentage in pushing small owners off their property" . . . and I doubt that the gov't will flat-out confiscate private property from people. Taxes on individual houses owned as rental property should have the same taxes as owner-lived-in homes.

Tax on the rental income could be high, but when the society comes out the other side, there still remains the land and house, and rental income will be in the new currency and of reasonable value.

I do live on a small farm, but cash is necessary: to pay property tax, electric bills, transportation, etc. I'd like to find a way to preserve my retirement money so that I can continue to pay those expenses.

I, too, had thought that gold might be better held until after the transition . . . but what will it be worth when the new system is in place? Will people still want to buy gold? Why?

I strongly agree that the ideal combination of assets right now is a small farm plus a source of passive income that doesn't deplete your capital. Of course, farming is pretty hard physical work, so in retirement the question of supplying adequate labor to make the farm productive could be an issue. I imagine that in a scenario in which the farm's productivity becomes vital, younger relatives might also be out of work, and come home to help out.

What to do about passive income? Recognizing that there is no perfect solution, I think there is more to recommend residential rental property than not. One risk that comes to mind is whether the market for rental property will be strong enough to keep the rental unit occupied while generating adequate income. I presume that what you will be able to charge will be dependent upon local wages, so high unemployment and wages which fail to keep pace with inflation will adversely affect real returns. Another risk to consider is whether you as a "rentier" -- however humble -- might not wind up on the wrong side of societal currents. I can't say I'd go out and buy a property to rent right now, but if one already owns a rental property free and clear, I'd certainly hang on to it.

But it's not like I have a better idea for inflation-adjusted passive income that preserves capital. In fact, the only idea I have in this regard is to see if shares in energy-related master-limited partnerships are to be had these days at a discount. My understanding is that the typical MLP is something like a pipeline that derives income from transporting oil or gas, and pays quarterly distributions out of that income. The income may very well be subject to the vagaries of the energy market, but I have greater faith that the pipeline will always be in use than I have faith that I'd be able to keep a tenant in a rental property. I also like the tie-in to energy, since I think that raises the likelihood that income will keep pace with inflation.

Gold. Hmmm... Although I talk about how it might be best from a wealth-preservation standpoint to hold onto gold through to the other side of the crisis, I have never personally intended to "buy and hold" much PM. The thing is, at my age, I don't have that much wealth to preserve. I plan to hold onto some PM as an insurance policy, but I think of the majority of my holdings as a trading position. The game plan was to trade out of it when PM prices were high (but before we're hit with punishing taxes or other regulatory disincentives to trade in PM), and buy into things like energy stocks when they're relatively cheap. Not sure the timing is going to work out to give me those opportunities, but that was my thinking. If the world ends or I miss the timing, then hell -- Plan B.

Lastly, I reiterate that my sophistication and experience as an investor is low. I'm happy to offer an opinion, but probably there are others with better ideas about how to manage retirement money. (And perhaps someone with knowledge could speak up and say whether MLPs are actually a good idea or not.)