Sovereign debt is the new sub-prime.

April 28^th 2010

Just attended a Lecture at the London School of Economics the topic was the Greece Fiscal Crisis.

What’s happening in Greece? As the country teeters on the brink of default speculators and markets see Greece as to much of a risk. Greece at the moment cannot borrow money so need a bailout from the EU and the IMF, however the Germans are at the centre of the crisis in refusing to bail out Greece unless it reforms its markets and sticks to strict budgetary controls. Time is running out and the Greece government needs to show that it make the difficult choices. Devaluation is not a choice as Greece cannot print Euros, what the country needs is a huge external stimulus, but exports only account for 20% of GDP. The worry for the Euro zone is that like a virus this crisis is spreading already today Spain and Portugal were served notice as they found it expensive to borrow money as credit ratings take a beating, the concern now is the “No bail out” clause will be challenged as Greece waits for a handout but with Portugal and Spain to follow I see a managed dis-mantling of the euro zone. The Greeks have to be honest and take membership of the EU seriously that means balanced budgets, reforming the work force, slashing the sky high salaries and generally becoming more competitive, added into the mix is what role did Goldman Sachs play in 2001 in helping the Greeks meeting EU budget criteria for entry in the EU. Now you have possible IMF intervention and we all know about the IMF don’t we?

Sovereign debt is the new sub-prime so with the down grading and fiscal crisis in Greece expect this crisis to spread. The credit crunch back in 2007 has spread –from households, to banks to countries. Entire regions are at risk.

Now turning to Jamaica and the refusal of the Golding administration to hand over Mr Coke. The International press have now started to report on this matter not only US papers but the highly respected British Economist Magazine. In a nutshell it does not matter what Bruce Golding does now as he has lost all credibility in Washington. He is not alone but politicians from both parties have tarnished the reputation of the country, our reputation and credibility are in tatters and it will take some time to repair probably long after Golding and the rabble that call themselves members of parliament are long out of office.

Peace.

E-Money

Debt, debt and more debt

If like me you are fed up with the bits of useless information and excuses that permeate from Wall Street well you are in the right place. I won’t waffle on how life is hard and the derivatives sold are complex and that whatever happens I expect a bonus. The truth is this near collapse in our financial system is all about debt, Government debt, company debt and personal debt. We have all taken on huge amounts of obligations as easy credit was thrown around with no regard to when it would be paid back for after all let the good times role. We could always max out the credit cards and at some stage look at re-financing the house because it always goes up in value and the bank and finance houses are falling over themselves to lend, even if I don’t have a job I could always get one of those liar loans no job no income loans, interest rate may be a bit higher but some how I will get by. Then in summer 2007 the roof caved in the credit crunch began and the rest we know is history.

But let’s look at the fact in the United Kingdom we are more indebted than our American cousins mainly because we were fed the line that house prices never fall they always rise. So with no deposit some of us bought 110% mortgages because the lenders factored in that the house would rise in value, never mind if you can’t pay back the mortgage. So the fallout in credit lending in the UK shows we are in debt to the tune of £1.46 billion pounds that’s £32k owed by every adult in the UK no wonder that so many of us are filing for bankruptcy and IVA’s it’s a real worry and we should all be concerned for as unemployment rises so do the debts.

Our governments are bailing out the banks and allowing them to reward failure by paying out record bonuses, but the real problems we are seeing is sovereign debt by governments are not being paid as in the case of Greece the country is bankrupt it has lost its AAA credit rating and has asked the rest of Europe to bail it out. If you looked at the crisis as it unfolded we saw that Iceland had in fact become the first nation to be hit by bad debts and the subprime fallout but Iceland had been sold billions of dollars of worthless CDO’s by Wall Street banks, Greece on the other hand was advised by Goldman Sachs and others how to defer big state deficits for later years to satisfy EU rules, it was business as usual whilst the debts built up in the investment vehicle set up by the banks. However the advisors mis-read the markets and as the World’s economy soured so did the investment, the Euro came under pressure and Greece was forced to admit its debt but also had no money to govern and run the state. Civil disobedience is now the norm in Athens as millions of people see pay frozen, pensions not keeping pace with day to day life, also urgent government programs are now cancelled as the government is forced to austere plans for survival. Greece is not alone rumour has it that Spain and Portugal are next. But have we thought just how our governments would survive once credit ratings are reduced from AAA to junk? The US and UK would be in dire straits with no one to borrow from as the Chinese dump US and UK holdings it would be chaos. The US government has already drawn up plans how to deal with civil disobedience in the streets as they face up to grim reality it could be coming to a main street in America real soon.

The English Premier Soccer league the richest in the world? But how many of the teams are on borrowed time. Chelsea have announced that the hunt for a new home has been postponed as the recession hits fans and revenues. Portsmouth Football is in the process of being wound up for unpaid tax bills and perhaps the biggest name in world football Manchester United is £715 million pounds in debt. I find this hard to stomach with so many people trying to make a decent wage and a footballer can pick up £100k per a week for kicking a ball and yet they want more despite clubs being mortgaged to the hilt. Portsmouth has shown that not even the mighty premier league can continue paying huge salaries based on some flawed business model.

Figures for 2007-2008 show the total debt of premier league clubs as being £3.4bn – 56 % of the total across Europe. I believe the clubs are at a crossroads and simply cannot continue banking on TV and Champions League money, you cannot pay over 50 per cent of your turnover on player salaries something has to give and as in Portsmouth’s case its survival in the premier league. They have been docked nine points for going into administration and surely must start the 2010 season in the Coca –Cola Championship. The other clubs you have been warned.

And by the way did I say the Banks are still not lending!!!

Commercial Real Estate REALLY Is The Next Big Crisis

Banks are feeling quite cosy at the moment, record profits, bumper bonuses and it seems that the “Volcker Rule” may be some time off before sweeping regulation takes affect. The spoiler now and it’s a real threat is the $1.4 trillion dollars of commercial real estate loans that have to be refinanced now in 2010 -2014. The scary thing is that nearly half of these loans are “underwater” in other words the properties are worth less than the borrowers owe. But we have had major hiccup in 2010 and that was the Dubai property debt debacle what is probably going to be worse is that as the due dates for these loans near to be re-written banks should brace for major delinquencies and billions of dollars in losses.

This week we learned that Simon Property Group (One of the largest US shopping mall owners) has just offered $10 billion to buy rival General Growth Properties good news you think, wrong GGP are bankrupt last April they were forced to submit the biggest ever commercial real estate bankruptcy in American history a staggering $27.3 billion dollars. The cause of GGP seeking chapter 11, Mortgages they simply could not get the financing and missed a deadline to pay $900 million on some Vegas retail properties. So the proposed offer by the Simon Group really equates to a fire sale of assets and might bring in other players seeking to gain from GGP’s situation.

So the 192 page US congressional oversight panels’ February report makes grim reading the commercial real estate losses will pose a risk to financial stability. The largest losses are forecast for 2011 and being conservative could be between $200 billion - $300 billion. The worry is that 161 banks have failed in the US since 2009 so these types of losses could lead to more bank failures particularly among the mid sized and smaller banks, but the larger well known banks are not immune. Go back to early 2009 and Secretary Tim Geithner’s stress tests, you know the 19 major banks had to prove they had enough capital in the event of another financial crisis. Well the tests only looked as far forward as the end of 2010. So 2011 will be unknown territory, and it could be carnage. Check this scenario apartment blocks with families renting could be evicted if the property owners don’t pay mortgages on time or miss payments. And the lender of last resort The Federal Reserve simply won’t be able to bail out the banks next time around they simply won’t have the money. It’s a grim picture but it could happen the commercial real estate crunch would touch the lives of every American with the US economy still showing weakness and banks reluctant to lend there’s no easy answer or solution to the problems ahead. This financial crisis did not only impact the residential housing market it’s impacted our entire commercial system for years to come.

Things to think about:

$750 billion to $2.2 trillion in cheap financing will come due within the next three years in the US commercial market.

Analysts are warning that the commercial real estate sector in the US seems to be in ‘free fall’.

Values are down about 40% from a year ago, recent market studies show.Real estate deals aren’t happening because banks aren’t making commercial real estate loans because they’re under pressure from regulators to reduce their loan exposure.

During the boom, everything doubled in value when it shouldn’t have, and all of that was facilitated by credit, not by an increase in real value,’

The real worry is the fallout could be Global.

Check these links:

http://www.youtube.com/watch?v=kq3rH1ZJnrc

http://www.youtube.com/watch?v=BSA7xVNVJa4&feature=related

http://www.youtube.com/watch?v=o4IfeXLl2TU&feature=related

http://www.youtube.com/watch?v=3NMgckkZMQs&feature=related

The demise of the dollar

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
- Ludwig Von Mises. 1949

UK Financial markets woke up to the news on October 6th that Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading. Moving instead to a basket of currencies including the Japanese Yen, Chinese Yuan, the euro, gold and a new unified currency planned for nations in the Gulf Co-operation council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Nine years into this new century we are witnessing the erosion of financial power that is the United States as the balance of power shifts to the East. For those of us fast asleep and not paying attention this shift of power began sometime ago but built up momentum under the Bush administration. So what does this mean? Oil will no longer be priced in US dollars within nine years. Also I expect more tension between Beijing and Washington over influence and oil in the Middle East. China has warned of a economic war with the US as they battle for power in the region. They (the Chinese) consume more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to the Chinese banking sources, may well be gold. To have some idea of the wealth in the Middle East the countries signed up hold an estimated $2.1 trillion in dollar reserves. Such is America’s economic weakness brought on by the banking crisis and recession they have recognised the shift in economic power. The current US deficit stands at $1.6 trillion and is expected to hit $9 trillion in the next decade. Where as China’s economy will grow at 10% per year compared to America’s 2% China will soon be the world’s largest economy, and largest creditor nation a position enjoyed by a pre-eminent America in the 1950’s. So how will we get this basket of currencies to pay for oil? China will become the largest consumer of oil, which will help push trading in it and other commodities towards a “basket of currencies”.

America on the other hand is the world’s largest debtor and can no longer look at the dollar being the world’s only reserve currency. To put it into context China has helped bailout some of America’s and Europe’s banks and the West should avoid spats and arguments as the Chinese hold some $3 Trillion dollars in foreign assets whilst not wanting to see the collapse of the dollar they themselves have to tread very carefully as they unload some of these holdings. Europe and US are calling for China to devalue the Yuan and this is something they (China) will not rush into.

Bear in mind as I mentioned Beijing needs to reduce its dollar holdings, but if it does so too quickly it will bring about the very devaluation it fears. This explains why Chinese officials appear to want this transition to take place gradually over the next decade.


As investors took note of the dollar’s weakness they rushed to the safe haven of gold. As I write we have seen two days of record gold prices, Gold futures hit a new peak of $1,049.70 an ounce Wednesday, while the spot price of gold also hit a record high of $1,048 an ounce.
The days of paper money are numbered take heed and move into gold, silver where you can. Australia has signaled a move away from low interest rates with the central bank raising rates by 0.25%. The US and Europe will probably hold low rates for a further 6 months but investors and the markets concerned about the US’s crippling debt pile and potential inflation worries expect the gold price to edge higher over the coming months.

House of cards still falling

Looking back at the current causes of this financial meltdown (as we need to look back to understand the problems) could our regulatory agencies have acted quicker in ascertaining the problems of the financial system?
One criticism of Ben Bernanke and the Federal Reserve is that they reacted too late, however in Bernanke’s defence the problems really were in house and the antiquated systems the Fed and others were using. Example being that most people when paid normally paid their mortgage first and on time, however as the financial sector unravelled mortgage payments were late and in many cases as we now know payments were not made as many of the borrowers could not pay. The Fed however did not have the systems in place to gather this crucial information in a timely manner and as Meredith Whitney analyst, who recently started Meredith Whitney Advisory Group LLC stated “If you’re leading regulatory reform, you have to have the technology as well, and they have not embraced technology,” Whitney said. The U.S. regulatory structure still relies on a “pencil-ledger system.”
You can see Meredith Whitney on “No Visibility Ahead – Predicting what next” on Bloomberg TV

US Dollar under pressure:
Look for more weakness in the US dollar on growing fears America's Triple-A credit status could be threatened if the US fails to address its budget deficit.
The dollar's fall came despite Mr Geithner promising he wants to bring down the US's budget deficit to a "sustainable level over the medium term."
Responding to claims by PIMCO co-chief investment officer Bill Gross that the US would lose its cherished Triple-A credit status over the next 3-4 years, if not sooner, Mr Geithner said the US would not let its debt get out of hand.
Concern over the status of the US's finances also hit government-issued Treasuries, with the 10-year note suffering its biggest weekly loss since January, pushing yields above 3.4pc for the first time since last November.
Equity investors failed to get excited about the prospect of upcoming regulatory reforms for the banking sector, aimed at preventing further financial crises.

Gold should reach £2,000 an ounce -

but not just yet We will not reach $5,000 an ounce without some sort of mania. But in the last decade both dotcom and housing, and, to a lesser extent, base metals, uranium and oil, have all shown how easily manias can happen. Manias need a convincing underlying argument - ‘internet is a new era’, ‘there’s a shortage of housing’, ‘the growth of China’s middle-class’. And gold's status as a store of value, whether we see inflation or continued deflation, make it an extremely likely candidate in this post-credit-bubble environment. What’s more, a great deal of myth and legend follows gold which can only add fuel to the eventual fire. This rally in gold since mid-April has largely been a result of dollar weakness, not increased buying. If you look at the price of gold measured in other currencies - picking the pound and the euro at random, as shown below - you can see it has barely rallied against them at all. If this move were anything more than fluctuating currencies, you would see gold rising against all currencies on higher volume. So don’t get too excited just yet. The dollar meanwhile is at an inflection point, as are stock markets. It’s as though they can’t decide which way to turn. If stock markets turn down, money will move out of equities, back to cash and the dollar could rally. If they turn up, the dollar could plummet. Anyone interested in technical analysis, and in particular Elliot Waves, will note that the dollar has traced a 5-wave up and 3-wave down pattern. We are at an obvious point for it to turn up. If it does, gold will most likely pull back. Gold miners are making more moneyOn the other hand, the action in gold stocks, which often lead the metal, has been very bullish and very exciting. I said back in November that gold shares, as opposed to gold itself, would be the best performing asset class of the next few years. This next chart shows the HUI, the index of US-listed gold stocks, over the last three years. There was a lot of resistance between the 300 and 375 levels and the HUI has broken decisively through. Even without a higher gold price, gold miners are making more money. The cost of labour, energy and equipment are down, which brings their production costs down. If the dollar is strong that further increases their margin. Costs are in local currencies such as the South African rand, the Mexican peso or even the Canadian dollar, while profits are in US dollars. Even explorers will eventually do well as a greater value will be placed on unmined ore bodies. Another 25% and the HUI will be challenging the all-time highs made in March last year around 500. But I would expect some consolidation first, perhaps between 350 and 400. In summary, a likely scenario over the next month or three, is for the dollar to rally. That will mean a mild, but healthy pullback for gold, gold stocks and the general stock indices. We can then look for a seasonal summer low in gold some time in the late-June to August timeframe. Then we can look for if not ‘The Big One’, ‘A Big One’. But, being well positioned on the long side, I’ll be only too delighted to be wrong and to see Gold’s Big Move come sooner.

R.H. Donnelley, Yellow Pages Publisher, Files for Bankruptcy:
By Dawn McCarty
May 29 (Bloomberg) -- R.H. Donnelley Corp., the publisher of more than 600 print directories, sought bankruptcy protection from creditors after missing a $55 million interest payment on its senior unsecured notes due April 15.
The company, based in Cary, North Carolina, had assets of $11.9 billion and debt of $12.4 billion as of Dec. 31, according to Chapter 11 documents filed last night in U.S. Bankruptcy Court in Wilmington, Delaware. Nineteen affiliates also sought court protection.
R.H. Donnelley, whose publications included telephone Yellow Pages, said May 14 that its lenders and bondholders had agreed to forbear until May 28 and wouldn’t take any action on the company’s missed payment. The company had revenue of $602 million in the March quarter, resulting in $164 million operating income and a $401 million net loss.
The company blamed the filing in part on “a significant decline in advertising sales due to the recent economic downturn and increased competition in the local business advertising industry” in 2008, according to court papers.
In March, the publisher hired Lazard Ltd. for advice on restructuring or refinancing debt while the recession cut into its revenue. The company has seen sales fall as small businesses moved their print ads online or cut back on spending amid the economic slowdown.

Moody’s Investors Service downgraded R.H. Donnelley’s probability of default rating on May 18 to Ca/LD from Ca, signaling a limited default after the lapse of the 30-day grace period. The company has a Caa2 corporate family rating, eight steps below investment grade.
‘Best Alternative’
Moody’s also said in February that a “complete debt restructuring represents the best alternative of addressing its currently challenged capital structure.”
Standard & Poor’s said in February that R.H. Donnelley would face “challenges” in refinancing $1.2 billion of debt that matures in 2010.
The company and its units’ 30 largest creditors without collateral backing their claims are owed about $6 billion, according to court documents. The biggest unsecured creditors are The Bank of New York, as agent for holders of certain R.H. Donnelley’s senior notes, with a claim of $3.6 billion; U.S. Bank NA, as agent for holders of certain senior notes, with a claim of $2.4 billion; and Google Inc., with a claim of $2.4 million.
R.H. Donnelley through its units publish more than 600 print directories, with a combined circulation of about 80 million, and provide advertising services to about 600,000 businesses in 28 states and the District of Columbia, according to court papers.
The case is In re. R.H. Donnelley Corp., 09-11833, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporter on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net.
Last Updated: May 29, 2009 00:02 EDT

Economics at West Indies College

It was during my time at West Indies College in the late 1970’s I fell in love with economics, especially macroeconomics. My tutor was Miss Edna Parchment (affectionately known as Miss P.)

She had a way with the subject that I connected with straight away and one book that she recommended changed my viewpoint on the subject, Economics by P. Samuelson.

How many of us really pay attention to the financial and economic news around us? This current economic crisis is being played out right in front of us; it’s like being at the front seat of a boxing fight. What makes this crisis so different from others is that we have no “play book” to refer to we are in unchartered waters. Who could believe last September we witnessed the near collapse of the world’s banking system, Lehman Brothers, the fall out of AIG and the trillions of dollars being pumped into the system to keep our way of life alive. It was my grounding in Miss P’s classes that I could understand and comment as to the events around me. We have a duty to understand finances and not just bury our heads and hope for the best. Many people have lost fortunes and through desperation have killed themselves rather than face up to financial ruin.

Jamaica in the 1970’s and 1980’s had a rollercoaster of a ride with Balance of payments deficits, currency devaluations, IMF agreements added to this a brain drain as some of the best minds took refuge abroad. Put simply that period of time was my economics lessons the real world Jamaica style.

President Obama advised the American people whilst in California he would be making some tough economic choices, however he encouraged them to attend town hall meetings, engage him through the internet and challenge his policies, we should therefore not be surprised when unpopular choices are made if we have not at least raised concern to these choices.

I don’t have a gift where I can see the future but at some stage paper money (Fiat Money) will basically have little value as inflation erodes the value of our currencies be it Dollars, Pounds, Yen, or Euro. Try and move some cash into precious metals such as Gold, and silver for these my friends cannot be replicated by man, they can’t be printed like Dollars and pounds. Look back in history and remember where we have an expansion of the money supply we have inflation. However what is being stored up for the future will probably be like no other inflationary period we have witnessed. The UK government through the Bank of England are prepared to print £150 billion pounds of which £75 billion is about to go into circulation via the banks. The US has also been using the printing press creating in excess of $1,500 billion dollars as of Jan 2009. So you see once the Gold Standard was abolished in 1971 paper money creation has to kept under tight control, its not if but when will this almighty inflationary bubble burst.

Because the banks are not lending the idea by central banks is to create enough money for banks to recapitalize and any excess to loan to the wider economic community, however as I mentioned before the banks are in denial some are in very bad shape. Fix the banks and you go some way in fixing the problems in the economy.

Growing up as a teenager in Jamaica in the late 1970’s taught me a valuable lesson. I was a student at the then called West Indies College and having come from England saw things different. Having grown up in a society where I was spoilt for choice as to what I could eat, access to technology and a very good transportation system lets say I was not ready for life in the Caribbean or as the Western world called it the 3rd world. Jamaica was going through a painful time both politically and economically but what grabbed me most was the resourcefulness and ingenuity of Jamaicans, led by the popular phase “Tun your hand mek fashion” So you may be saying Eric get to the point, ok the point is in today’s terrible economic downturn more and more Americans are discovering the inner resourcefulness within. It’s called the Do It Yourself (DIY) economy; cars are kept longer and not being replaced in fact the car parts industry has been reporting record sales as more and more owners now repair their own cars. Michelle Obama has started “the grow your own food” trend, and we hear of countless other stories as we face the harsh realties of this recession. One area Jamaica needs to look at is Honey production, with entire bee colonies being wiped out in America and around the world this has never been a better time to become in the industry. The US FDA dumped 200 million tons of tainted honey from China into the pacific ocean so you can see the potential for the honey export market.

With the gains in the financial sector being lost due to Bank of America’s $25 billion dollar provision for bad debt we need to understand just how fragile the banks are. The IMF just reported in its Global Financial Stability report that banks globally have lost in excess of $4,100billion dollars they are urging governments to take “bolder steps” to shore up institutions – including nationalizing them where necessary. This could be a problem for President Obama who has come under a bit of pressure lately for the bailout policy he is overseeing. Business journalism is a tough area but we should do more to understand the financial markets and trends.

One sector in denial is the banking sector; yes Bank of America made a provision for $25billion but why? Well unemployment is still rising and people will default on mortgages, car loans and credit cards. What they won’t admit is that the whole sector is being held together by TARP and tax payers’ money the banks in reality are insolvent we won’t be seeing any major recovery for years. They need trillions of dollars of Recapitalization money and are still sitting on trillions of dollars of “Toxic assets” however if Tim Geithner gets his way soon the banks will be dumping them on the poor tax payer in return for more government and private money. The only loser is the tax payer hoping that these bad assets will one day make some kind of profit.

The UK has its budget tomorrow April 22nd and already Chancellor Darling has a provision for £50 billion pounds due to government involvement in 5 failed banking institutions. The worry is that this will rise to £200 billion by 2011 a staggering 13.7% of UK GDP it just goes to show how heavily leveraged the UK is with debt. The debt covers consumer, company and government debt; sorry my friends’ things seem to be getting worse.

Stay in touch
EMoney………

Banks don't have enough capital

Interesting article recently on Bloomberg TV, our banks don't have enough capital despite receiving more than $350billion dollars since September 2008. Now you have heard of the "Stress tests" secretary Geithner and the treasury are conducting? Well hold on to your seats the US Govt are preparing to inject a further $1 trillion dollars into the banks based on the results of the stress tests. The stress tests through complex models (TCE) simulate the banks in dire financial situations it looks the banks balance sheets, amount of deposits, cash, liabilities and ascertains if it can survive.

So why won't the Obama administration let a bank fail? Well the authorities have learnt a valuable lesson from the Lehman Bros collapse and although unpopular President Obama will do whatever it takes to get the economy on track hence the $180 billion bailout of AIG, you know that company like a guest who came to dinner and won't leave, put simply they are to big to fail, the collapse of AIG would be felt around the world. Trust me they are looking at ways to fix AIG but it will take time and cost the taxpayer billions of dollars. The area of AIG that has given all the problems lie in AIG FP (Financial Products) a giant hedge fund that exploited regulatory guidlines and ran up billions of dollars of debt. So back to the banks the major concern will be more writedowns in the coming months,with the most problematic being Citi out of all the major financial institutions.

Goldman Sach's role in the AIG saga will be a talking point in the days and weeks ahead, just exactly did Hank Paulson and Tim Geithner know about AIG's problems? And why are Goldman Sachs alumni in all the plum jobs they were just to cosy with AIG. Whatever was done in the dark, must come out in the day, just like the Merrill Lynch bonus saga, this AIG soap has some way to go, expect some major casualties.

In the UK Barclays bank will have to swallow pride and take government money. Whilst trying to be independent they have already sold 1/3 of the bank to Arab investors for £8bn pounds, and need a major cash infusion. So assets like iShare will be sold to buy them sometime, but if they think they can dump on the British tax payer £80bilion of toxic assets and not take government cash well they really are living in a fantasy world. I have never liked Barclays bank and whilst the times were good they pillaged customers and strutted around like Lord of the manor arrogance and pomp, now the shoe is on the other foot and its the poor tax payer who have to bail out these fools, banking will never be the same again.

The Time For Talking Is Over

The time has come to rethink how economics is taught our schools and universities. The reason for such thought is we are witnessing economic crises never witnessed before. All previous economic theories and thought are being discredited by this global phenomenon.

More realistically, economics today is where astronomy was in the 16th century, when Copernicus and Galileo had proved the heliocentric model, but religious orthodoxy and academic vested interests fought ruthlessly to defend the principle that the sun must revolve around the Earth.

Consider the following passage:
“Most economic theorists have been going down the wrong track. When economic models fail, they are seldom thrown away. Rather they are ‘fixed' - amended, qualified, particularized, expanded and complicated. So it comes as no surprise that behind this almighty collapse of our financial systems we learn of a complex mathematical algorithm called the Gaussian copula model this model developed by David X Li from China helped to price up collaterised debt obligations (CDO’s) and other asset backed mortgage securities.

So to introduce you to the complex quantitive world of investment banking just read a few snippets from people whose job it is to package and sell these derivatives.

The model Mr. Li devised helped estimate what return investors in certain credit derivatives should demand, how much they have at risk and what strategies they should employ to minimize that risk. Big investors started using the model to make trades that entailed giant bets with little or none of their money tied up. Now, hundreds of billions of dollars ride on variations of the model every day."David Li deserves recognition," says Darrell Duffie, a Stanford University professor who consults for banks. He "brought that innovation into the markets [and] it has facilitated dramatic growth of the credit-derivatives markets."The problem: The scale's calibration isn't foolproof. "The most dangerous part," Mr. Li himself says of the model, "is when people believe everything coming out of it." Investors who put too much trust in it or don't understand all its subtleties may think they've eliminated their risks when they haven't.

The key word being “risk” gone are days when due diligence and pain staking analysis was required per complex deals you just have to take a look at the deals of BoA taking over Merrill Lynch colossal losses and write downs followed in England by Royal Bank of Scotland (RBS) and the ill fated takeover of ABN Amro, not only did RBS lose money on this deal it led to the collapse of the bank only being saved by government intervention. RBS’s executives were ousted by the government who at a treasury committee meeting (Feb 10th 2009) admitted to the ABN Amro deal being worthless. Risk taking, poor due diligence added to this lax regulatory controls and you have a recipe for disaster.

But we already know what caused this meltdown in our financial systems and now the wider economy and this blog will now focus on solutions the time for talking is over as President Obama stated Tuesday February 10th in Fort Myers. The road to recovery will be long and some unpleasant decisions will have to be made. The markets reacted coolly to secretary Geithner’s bank bailout plan, in reality it did lack transparency and direction this over time will be tweaked, my concern is how to value these toxic assets, and just how much money will be needed. $350bn does not seem enough with banks already reporting $1.2 trillion in non performing assets. I don’t know if the bad bank option will work as stated before we are in uncharted waters but a way must be found to get the banks lending, foreclosures stopped, and the creation of jobs. President Obama’s stimulus package is not a magic wand but a blueprint for the future; it will change and will need to be flexible to meet the demands of this crisis. What we need now is solutions and the drive and courage to face the unknown, 2009 will throw up challenges, surprises and casualties we need to be ready, alert and flexible to meet the future.

Obama sworn in and takes aim at ailing economy

So here I am in a cold Atlanta marking the swearing in of President Barack Obama a historical day that I will cherish forever. Where else could I be if not in Washington DC but the home of the civil rights movement led and driven by Dr King and hundreds like him finally a dream has come true a black president leading the most powerful nation on earth. The challenges for President Obama and his administration are huge but Americans have the knack of resilience and will overtime bounce back. Expect large intervention by the Washington administration to kick start this ailing economy but things are about to change it will take time; President Obama has made the economy the central theme and won’t tolerate failure.

Now back to the Banks who have brought us back to square one just when they are sapping the bailout cash, Bank Of America (BoA) announces last Friday Jan 16th a $15.1 billion write down of Merrill Lynch assets, say what !! Yes $15.1 billion when will Merrill Lynch stop seeping losses? Two things to bear in mind the take over by ML was a shotgun wedding plotted by secretary Paulson, the Federal Reserve, Ken Lewis boss of BoA and John Thain of ML. Once Lehman Bros had gone into bankruptcy a hasty arrangement by the above led to no due-diligence of ML’s books a transaction that should have taken months took days. ML’s executives must have known about the toxic monster sitting off balance sheet but blame must also go BoA and its execs. What angers me about this whole mess is that in mid-December 2008 Ken Lewis told Ben Bernanke the Fed chief that BoA was struggling to digest ML’s “monstrous losses” so guess what you guessed it Paulson and Bernanke cooked up the massive bailout of $138 billion last Friday. The bank was handed $118 billion in guarantees to underwrite toxic assets of ML plus a $20billion cash injection. Added to all this Citigroup announce a $8billion write down before splitting the business into two “Bad bank, Good bank” Citi will now keep its core healthy business in a new entity “Citicorp” and all non core toxic assets will be moved to “Citi Holdings” Citi need cash and off loaded Smith Barney its brokerage arm to rival Morgan Stanley.

My prediction is this how much longer will government pour tax payers money into these banks? At some point enough will be enough just as we are seeing in the UK with Royal Bank of Scotland (RBS) announcing they will probably post losses of 20 billion pounds some $41billion dollars. As the shares fell to 10.3pence on the news of the colossal losses. On closing my prediction before June 2009 will see at least 3 banks nationalized in the UK and the US. The British government already has a 70% percent stake in RBS; government at some point will draw the line into pumping more taxpayer’s money into these banks. The Obama administration will make some swift and dramatic announcements on Jan 21st that will affect us all and the markets whatever happens things will get worse before they get better.

The Fed Resorts To Shock Tactics

So here we have it near zero interest rates in the United States for the first time ever, the Federal Reserve reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October. So why such an aggressive cut? The reason banks simply are not lending despite the stimulus package credit is not flowing from the banks into the economy. The banks are busy shoring up balance sheets and have dropped the ball, so the Government “the lender of last resort” has an even more aggressive plan they plan to flood the economy with billions of dollars by doing so the banks will be awash with cash and will in turn start lending again. This experiment is not without risks. There is the potential for very high inflation down the line if the Fed is successful. But, does the Fed have a choice? It seems that it is looking at deflation or depression on the one hand or stagflation on the other. Take your choice.

This method of flooding the economy with money (or simply turning on the printing presses) is known as Quantitative Easing. Quantitative easing was a tool of monetary policy that the Bank of Japan used to fight deflation in the early 2000s.

The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. More recently, the BOJ has also been flooding commercial banks with excess liquidity to promote private lending, leaving commercial banks with large stocks of excess reserves, and therefore little risk of a liquidity shortage.
The BOJ accomplished this by buying much more government bonds than would be required to set the

interest rate to zero. It also bought asset-backed securities, equities and extended the terms of its commercial paper purchasing operation.

But this policy of excess money supply leads to inflation right? Yes we just have to take a look at Zimbabwe and notice how they have got it horribly wrong and now have rampant hyper-inflation and a worthless currency they simply lost control and did not have the expertise in controlling money supply.

Printing money is effective because it has the effect of putting more high-powered money into circulation. The aim is to increase bank reserves enough so as to increase lending that results from those reserves.And Fed Chairman Ben Bernanke knows this. He is a student of the Great Depression and deflation, a well-regarded economic historian. Bernanke earned the moniker “Helicopter Ben” a few years back as a result of some comments he made in 2002 at the National Economists Club regarding quantitative easing to avoid deflation before he became the Fed Chairman. Here is what he said as quoted on the Federal Reserve’s website:

“As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”

So what happens now? Well the Dollar will weaken it will buy less, President Elect Obama for his stimulus package will spend Trillions not billions as he and the Fed will do what ever is necessary to kick start the US economy. The concern right now is to get these banks lending, also to contain the deflationary spiral. Consumers need to start spending and whilst the markets like the rate cut we have now entered unchartered waters. I like the plan, well at least the Americans have a plan, we here in Euro land just talk a good a lot and show very little action.

Mr. Bernanke the whole world hopes your gamble comes off…

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

Not worth the paper it's printed on

Wow I am back 6 months later and a lot I wrote about has come true, but who would have guessed this financial economic mess would be this bloody? Bear Stearns, Merrill Lynch, Lehman Bros, Wamu,Wachovia, HBOS, Bradford and Bingley all gone and a footnote in history. Billions of dollars written down and sadly now a $700bn bailout for Wall Street led by the clueless Hank Paulson.

I am not going to dwell on the causes of this crisis but will add that when this broke in August 2007 the lie by the media was that poor broke bad credit people were the cause. Nothing could be farther from the truth what about the guy who has two more properties and just carried on borrowing and stacking up debt on overvalued mortgaged to the hilt property? A economy built on debt cheap money, greed and more greed. The sooner we move away from Fiat currency and into Gold and Silver the better many of us will become.

Let's look at Fiat Currency what is it?

The terms fiat currency and fiat money relate to types of currency or money whose usefulness results, not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government's order (fiat) that it must be accepted as a means of payment. The Central Banks can create inflation and other economic imbalances as the money they create has no backing ie Gold or Silver. Put in a nutshell the dis-advantage of Fiat money is that the Central bank can print as much as it likes this is a blessing and a curse as it normally leads to inflation or hyper-inflation (take a look at Zimbabwe) Where as with Gold it cannot be duplicated and is in limited supply.

So where do we go from here? The Dow like the most people's houses in America and Britain is still overvalued. There is a bigger fall to come and any banking bailout can only delay the inevitable. The underlying problem is that America's housing buble burst, making the mortgages beneath it untenable and sending the US economy into a tailspin. Buying off the banks does not address the issue; it merely removes $700bn that could have been spent on a proper stimulus package.

The dark truth about the US economy is that it doesn't benefit most people. That growth you always hear about means nothing to most of the population for whom wages have not risen since the 1970's

How many of you have read " The Dollar Crisis"? If you really want to get a true understanding of what is happening you must read this book. As McCain and Obama battle out the election campaign whoever wins will have very little room to move what great plans they both had for the Country will have to be scaled back simply put this generation and generation to come have been mortgaged to the hilt it will take years to un-ravel this almight mess.

I am going to check out my pension portfolio and seriously look at adding Gold and Silver.

Bear Stearns, Bernanke and the Economy

Dear All, it’s been a while since my last input but I did forecast this meltdown didn’t I as we bounce around from one crisis to the next. This crisis since August 2007 still has some way to go already some experts predict we are at the bottom of crisis but I say no way we still have a way to go investors are spooked and fortunes lost. Banks simply are not lending to each other fear of the unknown is the main factor right now plus the Federal Reserve stoking inflation flooding the market with liquidity is one thing but what the Fed is not providing is capital and boy do some of these banks need capital as the Sovereign Wealth Funds sit back and survey the inflation problem the Federal Reserve is creating. Yes the markets love the rate cut and rallied but this is a false dawn. Last week we heard Bear Stearns was in trouble and the Fed injected $200bn of liquidity the markets responded well and we were told all is well at Bear Stearns, well the rest is history, today the market again rallied but this is short term all the Federal Reserve has done is stick a band aid on a huge wound which won’t stop bleeding it’s simple folks it’s all short term what about the long term who is going to take all these assets bought by the Fed? Simple the tax payer but this is only part of the story the total the Fed can hold on it’s balance sheet is $800bn, it has already pumped into the system $400bn so what about the next crisis? The Fed has limits and can only do so much right now inflation is not its major concern but they are storing up problems for the long term.

Has JP Morgan Chase stolen Bear Stearns? Did the Federal Reserve force Bear Stearns to accept JPMorgan’s all share offer of $2 per share at a rock bottom price. Whatever the reason JP Morgan Chase have them selves the bargain of the century. The deal will cost JP Morgan in total around $6bn this is made up of severance pay and retention to waves of litigation and asset writedowns. But my concern is that Bear Stearns wanted a $30bn loan from the Federal Reserve over 9 months but as the Fed were in control of the situation they forced the merger of Bear Stearns with JP Morgan this has opened up investigations by the SEC that some funds shorted Bear Stearns and circulated the rumour of liquidity problems, Bears could not sustain the run on the bank over 3 days and went hand in cap to the Fed.

Things were already bad at Bear Stearns they were heavily exposed to the troubled US mortgage market and unlike many of its peers; it had no deposit business to offset its losses. The bank also was a heavy lender to hedge funds, some of which have collapsed in recent weeks after losing money on mortgage-related investments. Senior managers made mistakes and should have sought capital injections earlier but whilst dealing with the Chinese for capital inflows talks took longer than expected.

So what now for the US economy do we have another bank on the verge of collapse?

My concern now turns to the currency markets with the dollar at all time lows against major currencies and these sovereign wealth funds sitting on huge dollar reserves it is only a matter of time before they start dumping the dollar stating enough is enough as they themselves import inflationary pressures. Bush’s fiscal tax stimulus won’t take affect till the summer and even then consumers will probably pay down on debt and not spend as expected, Bernanke risks higher inflation and a weakened dollar however at the back of his mind must be zero interest rates will America follow the path taken by Japan and enter an era of deflation?

Federal Reserve Fueling Inflation

Its official The Federal Reserve under Ben Bernanke has made it clear the priority is to "support growth" by cutting interest rates as needed at the expense of rising inflation in the US economy. So the Fed has weakened the US dollar, printed more dollars to fund the Iraq war which has led to an increase of the money supply added to this Bush's fiscal tax cut, and a President out of step with reality as the consumer is hit with high energy prices and rising food costs. The Dollar this week has taken a pounding due to the dismal economic news coming out of the economy, the dollar against the Euro has for the first time breached €1.50 to the greenback also the Yen is at a three year high. The weakened dollar may help the trade deficit but it is storing up problems for a pro-longed down turn in the US economy as inflation takes hold.

My major concern as aired before is that the US is headed for a period of Stagflation this was backed up by a report in the FT dated Feb 20th. Also the "Market Oracle" has this to say,

"The Bernanke Fed's aggressive rate cuts have doing more harm than good for the US economy, by leaving the US consumer with slumping home prices on the one hand, and soaring food and energy prices on the other hand, otherwise known as the “Stagflation” trap. According to Bill Gross, chief investment officer at Pimco, the Fed's rate cuts of 2.25% since September have not brought mortgage rates lower, with the Fannie Mae 30-year mortgage rate stuck at 5-3/4 percent. “Here is the startling point, the markets that the Fed is trying to affect haven't changed,” he said. Gross thinks the housing downturn is still in its early stages, and expects a 20% decline in total. “A 20% decline in housing prices is confidence destabilizing, its credit imploding,” he added. And how long can US Treasury yields stay under the exploding rate of inflation, or negative rates of interest?

Commodities investment guru Jim Rogers said on Feb 25th, “the Fed is printing money and are trying to prevent the recession, they are putting on Band Aids,” he told an investor conference in Dublin, Ireland. Rogers added, “as long as the US central bank and the federal government keep making mistakes, you will have a longer period of slowdown, and it will be perhaps, one of the worst recessions we have had in a long time in America,” Rodgers predicted.

Put simply the printing of money then having that money injected into the money supply will cause inflation, but with falling house prices, a weak currency and consumer confidence at a all time low we need to be prepared for this recession, Stagflation and then possibly deflation to be around for some time. Reckless economic policies by the Bush administration is at the core of this major crisis. As Bernanke lowers interest rates the credit markets tighten lending it has a knock on affect to all corners of the economy. If you are smart enough to see what's going on you will sense that the inflation rate as published by both the US and UK central banks is a lot higher to what's being said. We can feel it in our pockets every time we shop at Tesco's or Sainsbury, transport costs have also risen is UK inflation really 2.1% I think not.

UK Banks have announced they have written off over £6.8bn in individual household debt as families struggle to meet repayments also mortgage loans approved in January 2008 totalled 74,000 the second lowest since 1999.

As Gold edges to $1,000 oz it shows investors are truly worried about the world economy and inflation, Oil was up this week as high as $107 a barrel, Platinum, Wheat, Soybeans,and Iron Ore .

I am worried that neither Hilary, Barack or Senator McCain have a clear plan for the US economy, as many will be looking for a leader to announce clear and concise plans of how to get back on track.

I expect the BOE and ECB to keep interest rates on hold as inflation this side of the Atlantic is a major concern.

US Debt and Inflation

January 2009 America will inaugurate its 44th President. The pressures of being the leader of the world's superpower is a huge one but consider this. George Bush would have left behind a legacy of debt and deficits that will constrain his successor. Those planned tax cuts and social programmes will be nothing more than dreams for it will take more than 8 years to undo the damage heaped on the United States economy by spendthrift Bush. In 2001 he inherited a surplus that could have helped pay down the $5 trillion federal debt. So Bush's $3.1 Trillion dollar budget will see military spending increase by 5% at the cost of medicaid, social security,medicare and a host of social programs. As the graph to the left depicts America under Bush has surely lived beyond her means. So as America moves into Recession and probably Stagflation just who is to blame? Without a doubt the economic policy makers in the Bush Administration the policy of spend and print has wreaked havoc on the economy. You can also add to this a weak dollar that the administration has allowed to weaken over the years. On the lips of the Central bank is the worry of inflation and god forbid Deflation and not growth both Greenspan and Bernanke are guilty of being yes men putting political idea logy before commonsense economics and the folly will continue for the foreseeable future.

Some weeks ago I warned about the impending dangers of Inflation, as the Central banks flood the markets with liquidity the real danger is that the Pound and Dollar in your pocket is worth less. Inflation erodes wealth your purchasing power is diminished as prices increase and your wages remain stagnant.

Why is inflation a problem?
Not for the reasons most people think. It may be tempting to say, "because everything is more expensive," but that is not it. Deflation can actually be just as damaging as inflation. The problem with inflation is one of redistribution: inflation makes some people worse off, but it makes others better off. This redistribution is due to three effects:

Price effects. As the average level of prices increase, some prices increase faster than others, so some people are more affected than others. The increase in gasoline prices in the summer of 2000 hurt truckers a lot, but barely affected people who live close to work and drive economy cars. College tuition has risen almost twice as fast as average prices over the past 20 years, which hurts you a lot, but may have little impact on a married couple with no children.
Income effects. Prices for goods and services mean incomes for someone else. So as some prices increase faster than others, some incomes increase faster than others. Oil companies posted record profits in the summer of 2000.

Wealth effects. Inflation redistributes income between borrowers and lenders. Suppose you borrow $100,000 for a 30-year mortgage at 7% interest, giving you a monthly house payment of about $665. During the next 30 years, as prices rise, that $665 buys less and less. So as a borrower, the real value of your house payment declines. Thus a borrower may gain from high inflation. The lender however, receives $665 per month, so the lender loses. If inflation is high enough the $239,400 the lender receives in loan and interest repayment over the next 30 years ($665 x 12 months x 30 years) will be worth LESS in real terms than the $100,000 the borrower receives today. Inflation hurts lenders but benefits borrowers, especially if it is unexpected. So the Wall Street banker is much more worried about inflation than Joe Average with a mortgage and a car payment. The costs of inflation go beyond redistribution, and have negative implications for the economy as a whole. If inflation is low, the effects may be small. But in periods of high inflation, known as hyperinflation, the negative effects will cripple an economy. What are the macro implications for inflation?

Uncertainty. Future prices are unknown, making it difficult to plan investment and consumption decisions. This means that some production will not be undertaken because firms are not certain about profitability.

Shorter time horizons. Due to uncertainty over prices, firms and consumers are less willing to commit to long-term plans, like a 30-year mortgage, or building a new housing development over 10 years. Again, production falls due to uncertainty.

Diverting resources from production. When inflation gets to be very high, firms and consumers spend more time and resources trying to avoid inflation, and less time on productive activities. For example, in Germany in 1923, prices doubled every week. Workers would be paid several times a day, and would immediately rush out and spend their wages. People had to bring wheelbarrows full of money to buy one loaf of bread. All of this results in time and resources being devoted to inflation-related activities instead of the production of goods and services. So inflation not only redistributes income, it also reduces the growth of real GDP which has negative implications for employment and standard of living for everyone.

The Bank of England has set in place a target of 2.1% for UK inflation and will act accordingly o make sure the UK economy stays within these parameters, the ECB also pays attention to inflation and will do what it takes to keep in check the inflation rate. The Federal Reserve on the other hand has deep and widening problems with the US economy and are using interest rates and fiscal stimulus to lessen the blow of the recession in the US. Other counties who have vast holdings of Dollar reserves are also worried about inflation and will dispose of the US currency to lessen the impact.

The Dollar versus Gold? There's no contest
I have been very bullish on Gold for several months and if you check my past blogs you would have seen the price of a ounce of Gold steadily rising, now approaching $1,000 per ounce what is really behind this increase. Well several factors the scarcity of the precious metal, China and India's insatiable appetite for Gold (demand) the world losing confidence in all the currencies issued by central banks but particularly in the dollar. America's huge trade deficit with the world and attitude to do nothing about it. As this decline continues the demand for Gold will increase as more and more Chinese and Indians will hoard gold as a store value of wealth as well as a hedge and safe haven against inflation. The Americans have abandoned the notion of safe money and are suffering from years of easy credit and living beyond one's means, Gordon Brown on the other hand must be kicking himself after disposing of half the UK's gold reserves at about the a third of the present price. There's also the supply problems in South Africa so where next for Gold? How about $1,000 per ounce by year's end you heard it here first.

On closing I keep getting asked what should I do where do I invest? Well I would advise you to seek advice from a qualified financial advisor but I will add the following:

Eliminate your debts- the ones that charge the highest interest
Live within your means
Adopt the discipline of saving - The US and UK are suffering a savings crisis.
Invest wisely
Own the home you live in (if you can)
Think long term

Until next time-stay in touch