Posted by MataHarley on 26 March, 2009 at 9:50 pm. 40 comments already!


Canda’s Globe and Mail has one real slash-your-wrists outlook today with their article by John Ibbitson titled Speaking of doom, what if Obama only makes it worse?

I confess… watching the sheer illogic of what is going on in the beltway of late, this headline seems to fit that chill that runs thru my body when I think of the future. And apparently, I’m not alone.

We could be entering a future that none of us wants to face, a future in which we will be much poorer, a future in which we realize that everything Barack Obama tried only made things worse.

Most economists are debating whether the United States has led the world into a V-shaped recession, marked by sharp economic decline and an equally quick recovery, or a U-shaped recession, which takes a while to get under way but lasts a long time and takes a long time to climb out of.

But a minority of economists and economic analysts believe what’s happening is L-shaped. We are witnessing a global economic contraction resulting from years of artificial growth fuelled by personal, corporate and governmental debt. When we reach bottom, they say, we will stay there. Globalism will collapse, and deflation and depression will stalk the land.

If that doesn’t chill your heart, Ibbitson then goes on to discuss an early post on the Baseline Scenario blog, run by co-authors eter Boone, Simon Johnson and James Kwak.

Peter Boone is chair of Effective Intervention, a UK-based charity, and an Associate at the Centre for Economic Performance, London School of Economics.

Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a co-founder of The Baseline Scenario.

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

The Baseline Scenario trio believes this is a “balance sheet recession”, and summarized:

“A ‘lost decade’ for the world economy is quite possible,” wrote Peter Boone, Simon Johnson and James Kwak in a much-discussed online analysis earlier this year on the website Baseline Scenario. “There will be some episodes of incipient recovery, as there were in Japan during the 1990s, but this will prove very hard to sustain.”

If so, the market recoveries and encouraging reports of the past few days are nothing but a dead-cat bounce: temporary phenomena masking an ongoing decline.

At a Japan Society symposium in Toronto yesterday, several economists and analysts revealed they had reached the same conclusion.

Canadians must face “the very real possibility that not only could the systemic global credit crisis and the spreading U.S. balance-sheet recession lead to a lost decade or worse for the global economy,” predicted veteran analyst William Macdonald in his written submission, “it could also lead to the breakdown of the globalization project itself.”

The Korea Times had an article about their balance sheet recession back in December of 2008, describing it as:

A balance sheet is composed of three major categories ― assets on the left-hand side and debts and capital (exactly owner’s equity such as cash or real estates) on the right-hand side.

The sums of both sides should be equivalent by definition. Hence, if asset prices go down, capital also decreases because the amount of debt has nothing to do with asset prices. As a result, the proportion of debt expands.

“When asset prices are declining, people are usually cutting back spending, scared by the possibility that they would default on debts because of the shrinking capital. Things are similar for companies,” Song said.

“If this is the case, people or firms do not spend money even if the central bank pours liquidity into the market. They just try to shore up their balance sheets by trimming debt,” he said.

The Baseline Scenario trio described the same self-devouring vortex..

Even the healthiest corporations fear bankruptcy, as demand plummets. In response, executives apply all revenue to corporate debt, in an effort to right the balance sheet. Fearful consumers do the same thing, creating a vortex of falling demand, declining revenue, curtailed investment, bankruptcies and rising unemployment.

Japan has been dealing with this type of recession since the 90s, but have muddled thru because of their exported goods. But as Baseline Scenario points out, if the globe is in a recession, who will you export to?

Martin Weiss, of Weiss Ratings issued a white paper last fall recommending against what Bush has started, and what Obama has accelerated to the Nth degree since assuming power. At that time, he said the original bailout of $700 bil was too little and too late to end the debt crisis, and too much and too soon for the US bond market.

They were considering only the banks that had failed, and not considering the enormity of those that were inevitably about to fail…. it was but an illusion to think the $700 bil was anything but a drop in the bucket.

His policy suggestions to Congress?

III. Policy Recommendations to Congress

1. Congress should limit and reduce the funds allocated to any bailout as much as possible, focusing primarily on our recommendation #4 below.

2. If Congress is determined to provide substantial sums to a new government agency to buy up bad private-sector debts, we recommend that the new agency pay strictly fair market value for those debts, including a substantial discount that reflects their poor liquidity.

3. Congress should clearly disclose to the public that there are significant risks in the financial system that the government is not able to address.

4. Rather than protecting imprudent institutions and speculators, Congress should protect prudent individuals and savers by strengthening existing safety nets, including the FDIC for bank deposits, SIPC for brokerage accounts and state guarantee associations that cover insurance policies.

To investors and savers, he suggested they continue to invest prudently, seeking the safest havens for their money (ie T-notes, and money market funds that invest in short term Treasury securities). Weiss’ paper also said that local and state government debt should take priority, based on their importance to services and homeland security.

There was no way, according to Weiss, the the government could absorb massive government bailouts without significant trauma to the economy.

In its Fiscal Year 2009 Mid-Session Review, Budget of the U.S. Government, the Office of Management and Budget (OMB) projects the 2009 federal deficit will rise to $482 billion. At the same time, the OMB seeks to minimize this record deficit by stating it will be only 3.3% of estimated GDP, which is lower than the recent peak of 3.6% of GDP.26

However, the OMB made this projection before the recently announced or proposed bailouts. Considering those that have come to light in the last fortnight alone, the potential bill for the government’s largesse can be calculated as follows:

Fannie Mae and Freddie Mac – $200 billion
AIG Insurance Corp. – 85 billion
Financial market bailout proposal – 700 billion
Total ……. $975 billion

This bill, approaching $1 trillion, is so extreme, it is undeniable that:

1. It could double or triple the federal deficit in a very short period of time.

2. Such a dramatic increase in the deficit would drive up the cost of borrowing not only for the U.S. Treasury, but also for other bonds and for millions of Americans seeking a mortgage or other credit, since Treasury yields are the benchmarks against which most borrowing is based.

3. To the degree that the Federal Reserve purchases U.S. government
securities for its own account to help support bond prices, it would devalue the U.S. dollar, risking a dollar collapse and the flight of much-needed foreign capital from the U.S.

4. Ultimately, either of these outcomes — sharply higher U.S. interest rates or a U.S. dollar collapse — could seriously aggravate the very debt crisis that the bailout plan seeks to address.

I’m no economist… but this guy has just described the pit in my belly since we embarked on this path. It was a bad start under Bush, but the degree of acceleration under Obama is breathtaking.

But Weiss offered the “glass half full” theory by saying:

“An economic depression, although traumatic, is not the end of the world,” Mr. Weiss concludes. “Moreover, if managed wisely, it can deliver fundamental benefits: a cleansing of excess debts, a reduction in the cost of living, and a firmer foundation for subsequent growth.”

There it is… those words. “Managed wisely. Which brings me back to Ibbitson’s Globe and Mail article, and some extremely sobering thoughts.

U.S. financial analyst Martin Weiss, in a white paper he released last week, believes that a second Great Depression is already under way. If his and similar analyses are correct, then the Obama administration is doing everything wrong. Throwing billions at trying to remove and resell the toxic assets that banks accumulated is a waste of time, because those assets are worthless and should be written off.

Worse, according to some, Mr. Obama’s $3.6-trillion budget, with its emphasis on health care, education and energy reform, wastes money that is needed to combat the coming depression. It robs the economy of future growth by piling on debt. And it depletes the President’s political capital.

Obama clearly does not share Weiss’ analysis that a depression can be cleansing, and instead spends furiously trying to stave off that which may prove impossible to stop.

In which case we will end up with that “L” shaped depression. Quite apt when you remember it’s the popular street expression with the “L” against the forehead for “loser”.

So where does Martin Weiss stand today, over six months and trillions of dollars later and the promise of even more spending on the horizon?

He hasn’t changed his opinion one iota. In fact, he’s returned from a press conference with the National Press Club, and round-robin meetings with the pirates in Congress. He penned this Mar 23, 2009 article for Money and Markets, “Dangerous Unintended Consequences”.

Also, here’s the link to his Mar 19, 2009 white paper:

Why Banking Bailouts, Buyouts, and Nationalizations
Can Only Prolong America’s Second Great Depression
And Weaken Any Subsequent Recovery

I am making these recommendations because I am optimistic we can get through this crisis. Our social and physical infrastructure, our knowledge base, our democratic form of government are strong enough to do so. As a nation, we’ve been through worse before, and we survived then. With all our wealth and knowledge, we can certainly do it again today.

But my optimism comes with no guarantees. Ultimately, we’re going to have to make a choice: The right choice is to make shared sacrifices, let deflation do its work, and start regenerating the economic forces that have made the United States such a great country. The wrong choice is to take the easy way out, try to save most big corporations, print money without bounds, debase our dollar, and ultimately allow inflation to destroy our society.

Now, the question is… will Obama/Pelosi/Reid listen? Or continue their spending spree and power grab.

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