COLLECTIVE MADNESS


“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."
Showing posts with label financial bubble. Show all posts
Showing posts with label financial bubble. Show all posts

Monday, November 02, 2009

Where will revenue come from with increasing unemployment, increased consumer saving and government deficits?



I wish I had more confidence in the Obama Administration's ability to handle the financial mess but his obsession in picking this time to try and recreate and expand the US health care system is deeply concerning.

Obama should have no greater focus than fixing the economic engine of a mighty big ship.

Instead we have a race to fulfill an agenda to redistribute wealth to a political constituency, regardless of cost, and at a time when composite wealth is diminishing.

Obama seems tone death to the ugly rumbles coming up from the economic tectonic plates.

The filing for bankruptcy by CIT will clearly be bad for employment at the thousands of small firms served by CIT will have to trim spending, employment, and business expansion. The loss of the two billion plus TARP funds lent to CIT will be insignificant to the losses in those same firms served by CIT. This is no time for weak companies to be looking for alternative sources of funding.

Rising unemployment means less taxes and less private sector spending, greater consumer caution and increased savings and of course, greater federal deficits. The increased savings would be desirable if the savings were being recycled to domestic investment, but the fear in the banking sector is not allowing that to happen.

Obama and almost no one around him has ever run a business or worked for one. Biden has been in congress since he had first growth hair. When they talk about saving jobs they talk about an industry they understand and that is government. Obama talks about saving government jobs, municipal workers and teachers, important but not revenue producers from the private sector.

Unemployment numbers for this week will be telling. On Sunday, Timmy Boy Geithner, Treasury Secretary, said, "unemployment is worse than almost everybody expected, but growth is back a little more quickly."

Reassuring isn't it?

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Mother of all carry trades faces an inevitable bust
By Nouriel Roubini
Published: November 1 2009
From the Financial Times:

...while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
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