What's this thing called Deflation is it bad?

Yes you have probably heard about the dreaded "D-Word" So what is it? Well Deflation is the most feared of economic blights, it refers to sustained falls for goods and services.

Don't we already have falling prices for some products? Yes, For goods such as many types of clothing, Britain has got used to steadily cheaper prices as a result of intense high street competition, and cheap imports from Asia.

Sounds good. What’s the problem?
For individuals, this trend can sound like a money-saving bonanza. A short-lived burst of deflation for just a few months need not be a disaster. The problems start when consumers curb their spending, constantly waiting for cheaper prices to come. In turn, this sucks the lifeblood of demand out of the economy. With spending falling sharply, businesses sell less, are forced to cut wages and lay off staff, leading to less spending and lower demand, and sharper falls in prices. A vicious downward spiral takes hold that can spell deep and prolonged recession.

Are there any other effects?
Unfortunately, yes. A bigger headache still comes from debts. Where prices and incomes are falling in a bout of deflation this means that the real value of people’s debts, relative to falling incomes, rises. People’s debts become an ever bigger burden, stretching the time needed to pay them off. This is known as “debt deflation”. In an economy like Britain’s, where households have the highest debt of any leading economy, it poses a severe danger.

Are we likely to suffer deflation?
There is a significant risk that, as Mervyn King, the Governor of the Bank of England, has admitted, inflation could turn negative for several months. However, a protracted bout of “full-blown” deflation remains a relatively limited threat, given the aggressive action being taken by the Bank and the Chancellor to stave off the danger. It is still a threat that should be taken seriously, however.

How do economies escape deflation?
With great difficulty. Deflation is like quicksand. Once in it, it is very hard to escape the mire, as Japan found after enduring years in such a bogged-down economy. Potential solutions to “reflate” the economy are found in flooding the financial system with ultra-cheap money.

Ben Bernanke the Fed chief wrote a paper a few years ago with regards to his fears regarding to Deflation in the United States what a pity his cock handed handling of the US Federal Reserve has done the complete opposite to combatting deflation, this the guy who would drop money from helicopters to help the economy, be careful what you wish for.

Auto makers Bailout will it happen?

Don't know if you are following the auto industry bailout? You should bear in mind that the government be it Bush or Obama cannot afford to let the industry disappear with millions of jobs at risk. It would have a catastrophic affect on the already battered economy. Trouble is you and I know they need more than $25bn, GM burned through $11bn in 3 months so the automakers bosses know how much they need just to scared to state the figure. By December 8th we will know if they get the money, but be prepared for one automaker to survive, three simply cannot exist, you are watching history as we witness the demise of the once great American car industry, how the mighty have fallen.

Until next time........

Read the book "The Dollar Crisis" Gives a detailed description of how we got into this mess.

What's up with AIG?

It seems everyday you pick up the newspaper or tune into the financial news the name AIG always appears. AIG hit the news big time September 2008 when it came apparent the company could collapse causing panic and fear to an already battered financial system. Treasury secretary Hank Paulson already fire fighting with Lehman Bros decided to bail out the troubled insurer to the tune of $85bn. The bailout covered toxic mortgage-backed securities and a backstop for its credit default swap agreements. We all thought that was the end of AIG's problems then they went cap in hand to the Fed again who provided a further $38 billion supplementary lending facility. AIG is also arguing that the original $85 bn facility is unfairly expensive, compared to the 5 percent plus some warrants charged by the US Treasury for its capital injection into nine large US commercial banks.

The thing with AIG how much more must the tax payer pay into this failing business ? - Willem H. Buiter of the FT argues "AIG’s current modus operandi and business model is obviously not sustainable. Indeed it is not viable even in the short run. What if the US authorities reduce the cost of the existing facilities and dole out a further $200 billion or so to see them through to Thanksgiving? AIG will no doubt be back for another $200bn when the turkeys have been digested, to see them through to Christmas. This is getting very silly indeed.
There are two viable options. The first is to put AIG into receivership immediately. It has quite a lot of viable businesses (anything that did not touch CDS and complex structured products). The currently commercially viable bits could be sold off severally or jointly or re-launched as going concerns. The rest could either be liquididated or taken into public ownership and operated that way until a decision can be made about the private commercial viability of the publicly owned bits when order returns to global financial markets, in a year or two.
The authorities (the State of New York Insurance Department is the regulator of this global insurance giant!) have had at least a couple of months to prepare for a possible bankruptcy protection filing by AIG, so this should not come as a surprise and there should be a contingency plan ready for use.

The size of AIG’s balance sheet ($ 1 trillion at its peak, probably rather less now) looks less awesome now that governments all over the world are guaranteeing private liabilities and funding capital injections worth multiple hundreds of billions and even trillions of dollars at the drop of a hat.

No doubt a lot of CDS contracts written on AIG debt would be activated by a default, but the aftermath of Lehman’s filing for bankruptcy protection demonstrated that the process of unwinding and settleing the CDS claims was remarkably orderly and much less destructive than feared. The Conservator for AIG (or whatever the Administrator of AIG’s insolvency regime is called) should be given a public mandate not to liquidity assets in a hurry, so as not to intensify the vicious spiral of illiquid asset fire-sales, further asset price declines, margin calls, further forced liquidations of assets and further price declines and deepening market illiquidity and funding illiquidity.

The second viable option is to take AIG completely into public ownership. The government already has 79.9 percent of the equity. I believe that any increase in that government ownership share would trigger a technical default on some of the outstanding CDS taken out against an AIG default. It such is the case, so be it. It may seem that, with the government already owning almost 80 percent of the equity, the orginal $85 bn facility is largely the US Federal Reserve making an expensive loan to the US Treasury. That, however, is incorrect.
By keeping AIG technically solvent, the bond holders and other senior unsecured creditors of AIG are kept current on interest and principal. AIG’s debt sells at a steep discount relative to US Treasury bills and bonds, reflecting the market’s perception of its fragile solvency. If the government were to nationalise AIG now, while it is still technically solvent and a going concern, the senior unsecured creditors would all be made whole - AIG’s debt would effectively become US Treasury debt. Saving AIG’s unsecured debt holders and other unsecured creditors would be unfair. It would also be a terrible distortion of future incentives, by encouraging reckless lending to large financial institutions - institutions deemed to large, to interconnected or too politically well-connected to fail. It would be the mother of all moral hazard.
Here we run again into the incomprehensible fact that, almost 15 months after the start of the crisis, the US Federal authorities have not yet created a special resolution regime (SRR) with prompt corrective action (PCA) powers that would allow a duly appointed Administrator or Conservator to take any systemically important institution into Administration/Conservatorship before the normal tests for insolvency (balance sheet insolvency or liquidity insolvency) have been met. The Conservator would replace board and management and suspend the voting rights and other decision rights of the shareholders. No dividends, share repurchases or other transfers of resources to the old shareholders could take place while the Conservatorship is in effect. The Conservator should be able to impose charges (haircuts) on all unsecured debt holders and other unsecured creditors, regardless of seniority. The Conservator would also be able to impose mandatory debt-to-equity conversions on all unsecured creditors and debt holders, with or without first extinguishing the equity of the old shareholders. The Conservator would have full authority to sell assets and to restructure the balance sheet and the activities of the business in any way deemed appropriate and lawful. Finally, the Consevator would have the power to liquidate the company.
No SRR with PCA powers was in place for investment banks. So we were treated to the disgraceful spectacle of Bear Stearns’ last-minute sale to JPMorgan. Bear Stear’ demise took place 7 months into the crisis, so perhaps the authorities had not yet woken up to the fact that an SRR for investment banks might be a good idea. No such excuse was on offer, however, when Lehman Brothers hit the wall in September 2008, more than a year after the start of the crisis. The Treasury, the SEC and the Fed have failed miserably to get the appropriate regulatory framework in place. And we know what an SRR ought to look like: the FDIC has adminstered one for years for the federally insured commercial banks.

When it became obvious that AIG too was too large or too interconnected to fail, the SRR net should have been extended to AIG also. Surely someone in a position of responsibility in Washington must have a little list with the names of the systemically important financial institutions? There has to be an SRR with PCA powers for all these institutions. There is no excuse for the absence of such a regime for all financial institutions except for commercial banks.
In the absence of a proper SRR for AIG, nationalisation of AIG threatens to make all unsecured creditors whole. That would be disastrous for medium and long-term financial stability. I very much hope a way will be found to impose a charge/haircut on all unsecured creditors if AIG gets nationalised completely. I also hope that, if the authorities decide not to nationalise AIG completely at this stage, they will still succeed in making the senior unsecured debt holders and creditors of AIG pay a hefty price for this undeserved financial support."

Put simply it's sink or swim time someone has to make a decision regarding AIG, the tax payer does not possess a bottomless pit of money, the $700bn bailout plan by Mr Paulson has attracted other businesses apart from banks, with the Auto makers expecting help who and what else is next? The Government simply cannot afford to save all companies.

1968 - 2008 40 Years of Change

To my family and friends who live in the United States we here in Europe this United Kingdom celebrate with you the election of president elect Barack Obama and as you usher in a new era of change, hope and leadership let me pray that all, not only Americans will benefit from his government.

I am not going to go all political but what opened my eyes to America and her period of unrest was 1968 the assassinations of Dr King and Bobby Kennedy I was eight years old and have never forgotten the ITN news bulletin of these slayings. Furthermore I had family who lived in the South and when old enough I wanted to see for myself Birmingham Alabama, Atlanta Georgia and gather up for my understanding the historic significance of these places and people.

So fast forward 40 years and we have a black man elected president in America. America a country we were told was so racist and intolerant to people of different colours that they have produced Senators, Congressmen and women, doctors, astronauts, bankers, CEO’s, Pilots, teachers, scientists, celebrated sports stars and actors and now a black president. What do we have to show in the UK and Europe as a whole?

I want to say we are living in such an interesting time filled with technological advances, medicine advances, artificial intelligence, Jets that travel faster than sound, MP3 players Plasma and LCD High Def screens, music downloads, email, internet can we keep up? everything changes so quickly and if you blink you miss it, but we are also living in changing political times, Russia, China and the Middle East are now more dominant have extreme wealth and natural resources. Presiden Elect Obama's work is Geo-political, dealing with a multitude of challenges.

The road ahead is of uncertain terrain, a road that has not been mapped, a road with twists and turns then straights with unfamiliar markings.

My challenge to my family and friends is to keep moving, keep evolving, educate and motivate travel and see the world if you dream it you can achieve it. What happened in America on November 4th 2008 has reverberated around the world President elect Obama takes office January 20th 2009 and I plan to be in DC to witness this historic moment lets wish him the very best and success to the start of his presidency.

We truly are living in exciting and uncertain times.

God bless you all,
Eric