Will the recession lead to a Depression?

SOLUTIONS TO THE NEXT FINANCIAL TSUNAMI COMING OUR WAY, ROUND TWO

2011-05-02T14:30:00.000-07:00

Individual And State Solutions To The Next Financial Tsunami Coming Our Way, Round Two, (Double Dip / Depression)

THE CONFIDENCE GAME is at end.
At this moment, I cannot give a precise time-line as to how long the FED and the global central banks can prolong the confidence game, spinning the public and sovereign creditors that all is well.
When confidence in banks evaporates for reasons I mentioned on my earlier to blog posts, the consequences will be ugly and there will be massive social upheavals across the globe.
The first indication that the game is up is when US treasuries are increasingly purchased by the FED to make up for the shortfalls by foreign creditors and to finance the ballooning US deficits.
All of a sudden, some entities (china) may start to get real nervous and unload the treasuries, and the FED steps in to shore up treasuries. Then, the tipping point is reached and Hell breaks loose!!
But, contrary to IMF and other renowned economists who are betting on China’s and Asia’s so-called economic strengths, I take the view that when US treasuries collapse, faith in all fiat monies will likewise evaporate and there will be massive capital flight to commodities, especially gold, silver and oil.
When confidence in dollar assets vaporises, China will be caught right in the middle. The third and final phase of the Global Financial Tsunami will devastate Asian economies and with it, the greatest depression in history will ensue.

THE PROBLEM
The major global banks are all under-capitalised and this was all too apparent when Lehman Bros. collapsed. Banks were borrowing so much and so recklessly to play at the global casino that when the bets went sour, they were staring at a black-hole in the $trillions. In fact the banks are all insolvent.
The problem was compounded when the central bankers (all are corrupt without exception) and regulators turned a blind eye to how bankers defined what constituted “capital” so as to circumvent the need to maintain the capital ratio.

from the image above, you can see that next year, fifteen major developed-country governments, including the U.S., Japan, the UK, Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the IMF That's up 7% from this year, and equals 27% of their combined annual economic output.
So "major-developed"countries will have to borrow more than a quarter of GDP just to survive another 12 months.

What has not received much global media attention is that the US Government has been steadily reducing the maturity of its treasury portfolio to keep fiscal deficits down. Whether interest rates rise or it becomes a problem for the US Treasury to re-fund the ever expanding roll-over pools, both suggest a Maturity Wall is dead ahead. It will occur no later than 2012, but will likely be triggered with the next financial default scare.
This would drive interest expense to $780 billion by September 2011.
Note that if historical averages hold, Treasury would take in roughly $1.2 trillion in personal income taxes. Interest expense would rise to consume approximately 2/3rds of that amount. Let's further consider that interest expense would be about 80% of the entire budget deficit of fiscal 2012.”

LAST WARNING! THREE-PRONGED COLLAPSE ... STOCKS, BONDS AND REAL ESTATE

Prong #1: The Stock Market Will Plunge Like there's No Tomorrow

The stock market has a bit more upside in it, and that when the crisis hits, stocks will be viewed as — believe it or not — a safe place to be invested.
The Dow Jones might even go as high as 13,000. But listen carefully: If stocks rally any further, as history dictates, it will be the biggest trap since the Dow peaked in 1999
Keep in mind, markets makers love to trap the majority of investors, and it always happens when least expected. New highs in the Dow will get most investors thinking stocks are headed to the moon,
Plus, a falling U.S. dollar is devaluing asset prices for foreign investors ( Chinese with massive dollar holdings) heavily invested in dollar-denominated assets like U.S. stocks. Stocks in the U.S will not ignore these fundamental forces forever. So while the broad markets may rally one more time, even reaching as high as 13,000 on the Dow, I urge you not to get trapped. Because How much lower could the Dow fall? Virtually no level below 6000 would shock me other than below 3000.

Prong #2: U.S. Government Bond Markets Will Fall

U.S. government bonds are poised for a major slide. There's no other choice here. Why? Because a slowing U.S. economy will make the dollar even weaker than it already is. Washington is the most indebted government on the face of the planet, with over $44 trillion in outstanding IOUs. That alone has been sending the value of the U.S. dollar into the gutter. Slowing economic growth will only make it worse.
The reasoning behind this is simple: Anyone who wants to lend money to the U.S. will demand higher rates of return to compensate for the risks. That's only natural. After all, would you buy bonds (lend money) to a company that's hugely indebted and whose sales are slumping? If you did, you'd want 10%, 11%, even 15% on your money.
It won't be long before investors in U.S. government bonds want the same. (except for the FED, who just print the money they need to purchase the bonds) And the only way the normal market investors can get what they want is from a collapsing bond market, with prices falling and interest rates soaring.

Prong #3: U.S. and European Real Estate Markets Will Take One Final Nosedive before Rebounding

Property prices in the U.S and top European countries are still overvalued. So another nosedive in real estate is definite, especially with stocks and bonds also collapsing. But mark my words: Sometime after 2013, after the dust settles, real estate will be one heck of a buy if you have the capital reserves, a mortgage at that time will be expensive, high interest rates in double figures, with a large deposit, Why? Because there are three things that most analysts don't understand about real estate
Land is in limited supply. And good locations are in even more limited supply. Waterfront property is the best example.
Construction and replacement costs are rising rapidly. Six years ago, If you built a new home $50 per square foot of air-conditioned living space. Today, the exact same construction would cost nearly twice that because of rising prices for everything from concrete to paint.
Overseas investors with money are ready, willing, and able to buy property in the U.S. As the dollar continues to fall, these investors will switch from stocks to gold and real estate.

In short, in 2/3 year time, I expect foreign investors with a long term view to start pushing up U.S. real estate prices, especially in areas like Florida, Arizona, Las Vegas, New York, and California. And in the UK, places like London riverside properties and other prime areas in the UK and Europe

A big part of the capital flooding into real estate will come from Asia. Remember how the Japanese rushed into the U.S. real estate rush in the late 1980s? Well, this time, get ready for a huge influx of money from China and India.

IN THE MEAN TIME ...

During the Three-Pronged Collapse, You Will Want To Be Invested in Gold!
Gold is already starting to soar. When the crisis hits, and the three prongs collapse, gold will soar like a rocket. I expect it to go well above $2000-3000 an ounce, and then, even higher (when JP Morgan and its friends goes bust, and manipulations of gold and silver prices ends) . Remember, unlike stocks or bonds, gold has no debts, no earnings, no board of directors, no funny accounting statements, and no obligations to anyone but itself. Gold is the purest investment in the world. While paper money can be printed or devalued at will, the same cannot be said for gold. Gold is the only real money.

Ponzinomics = the Fed and The Treasury special relationship, The Treasury prints bonds which it exchanges for the "money" the Fed prints.As long as everybody believes in the illusion that it will work; it will. though, there hasn’t been in the entire history of finance a successful example where a nation printed its way out of debt.

The UK is in deep trouble and might even have to declare bankruptcy before this depression ends. Eastern Europe is in even worse shape. Meanwhile, the IMF won’t be able to help much without some type of re-capitalization, probably from the USA. That means all of Europe is in trouble. But we cannot forget Russia either. As bad as things are in America, as long as the dollar remains the universal currency, things won’t get as bad as in Europe. I still believe the dollar has not made its lows yet, but it won’t face the kind of butchering as the Euro and Pound.

What’s the future of the Euro. I’m sure many of you will disagree, but I have always felt it won’t last due to the problems with destruction of individual sovereignty of each member. The global depression has magnified these effects. I would be surprised if the Euro was still around with all current members after 2020. If either Germany or France defects, it won’t last

TIME LINE FOR THE NEXT FINANCIAL TSUNAMI

There will be a financial tsunami (round two) the likes of which the world has never
seen, (double dip/depression) will most likely take place sometime IN 3RD QUARTER OF 2011 AT THE EARLIEST, AND AT THE LATEST, 2012, there will be massive bank runs. Like the Northern Rock case in UK. I expect that the FED and Bank of England along with other central banks will pre-empt such a run by undertaking some methods, below are a list of possibilities, so look out for it.

1) Disallow cash withdrawals from banks beyond a certain amount, say £500 per day;
2) Disallow cash transactions up to a certain amount, say £5,000 for certain transactions;
3) Transactions (investments) for metals (gold and silver) will be restricted;
4) Worst-case scenario – the confiscation of gold AS HAPPENED IN WORLD WAR II.
5) Imposition of capital controls etc.;
6) Legislations that will compel most daily commercial transactions to be conducted through Debit and or Credit Cards;
7) Legislations to make it a criminal offence for any contraventions of the above.

SOLUTION: FOR THE INDIVIDUAL

Maintain a bank balance sufficient to enable you to comply with the above potential impositions.
Start diversifying your assets away from dollar/pound/assets. Have foreign currencies in sufficient quantities in those jurisdictions where the above anticipated impositions are least likely to be implemented.

Gold is the purest investment in the world. While paper money can be printed or devalued at will, the same cannot be said for gold. Gold is the only real money .
With that in mind, here are three steps to consider ...
First , minimize your exposure to the stock market. With the exceptions of the gold and natural resource stocks recommended in my Real Wealth Report , get out of all other stocks now. Don't even try to make it to next year to defer taxes on profits you might have. It's not worth the risk. I figure it's better to pay Uncle Sam his take than risk losing hard-earned gains.

Second, continue to keep the bulk of your money in safe, liquid, short-term investments such as money markets. You can get 5% a year ... even a tad higher in some cases.
But by all means, stay out of long-term bonds, whether issued by the U.S. government, or private corporations.

Third, if you don't own any gold, I think you're making a huge mistake!!!
The best way to own large amounts of gold with little capital is, in my opinion through ETFs and Options,

Exchange traded funds (ETFs) and Exchange traded notes (ETNs). i believe one of the best ways to prepare for hyperinflation is by investing into ETFs and ETNs. ETFs and ETNs trade like stocks on a stock exchange but are used to track the price of a single commodity, a basket of commodities, or an index of stocks. The difference between an ETF and an ETN is: an ETF represents ownership in underlying assets; whereas an ETN is a debt note issued by a bank.
An ETN is more risky than an ETF because of counterparty risks. If the financial firm issuing the ETN goes bankrupt, they may not be able to pay out the money they owe you. When investing in an ETN, it would be a good idea to keep an eye on the bank that issued it. If the bank runs into any trouble, you might want to immediately sell. With an ETF, the biggest risk is their accounting is wrong and they don't own the amount of a commodity they are supposed to own. We consider this to be a very small risk and believe it is safer to own an ETF than to attempt to store a commodity on your own.

Now let's go over the ETFs and ETNs we feel everybody should consider in order to diversify your portfolio with hedges against inflation and potentially make a fortune. Two gold ETFs example

The first ETF example is SPDR Gold Shares (GLD) i feel to be the safest investment with the least amount of risk. GLD is an ETF seeking performance corresponding to the price of gold bullion. Simply put, it follows the price of gold. We believe gold prices are going higher as the dollar collapses, and the best way to play gold is by buying GLD. Investing into GLD means you are investing into gold. (Gold tends to rise as the dollar falls and purchasing a gold ETF may help you hedge).

The second gold ETF example Market Vectors Gold Miners (GDX). GDX seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally invests in all of the securities which comprise the AMEX Gold Miners index in proportion to their weighting in the index. The index is comprised of publicly traded companies involved primarily in mining for gold and silver.

Here are some other ETFs that i feel will prosper in an inflationary environment:

iShares Silver Trust (SLV)
United States Oil (USO)
Market Vectors Agribusiness (MOO)
UltraShort 20+ Year Treasury ProShares (TBT)
UltraShort Real Estate Proshares (SRS)

As a recap, GLD, SLV, are the safest investments to capitalize on the upcoming hyperinflationary crisis. If you believe strongly like me and many others around the world that gold prices will rise substantially higher and you are a more aggressive and risk tolerant investor.
please note that i am not investment/financial advisor and I am not giving you investment advise. I am simply making suggestions to be used as a starting point for you to do your own research and make your own investment decisions.

OPTIONS/FUTURES

Instead of being required to put up huge minimums, you can harness the power of the world’s six largest currencies and commodities for as little as $100!

Your risk is strictly limited: You always know — to the penny — the maximum risk you’re taking with each trade:

When you buy Currency/ commodities Options, it is guaranteed that you can never lose more than the small premium and brokerage commission you paid for the right to buy or sell the currency/commodities! You get leverage of up to 200-to-1 — Enough to multiply your money many times over on every trade: You pay a small premium to control a vast amount of a currency/commodities, example some currency options that are trading for as little as $100 or $200, that will you have the potential to control;
Ten thousand Swiss francs worth about $8,400
Ten thousand Canadian dollars worth about $9,500
Ten thousand Australian dollars worth about $8,600
One million Japanese yen worth about $8,500, or
Ten thousand British pounds worth about $20,500!

And lastly to buy physical gold and silver, one way to get your hands on cheap gold and silver is to buy unwanted gold and silver jewellery from people, from the likes of Ebay and Amazon.

Also it might be a good time to go green and become a self sustaining eco warrior, because when commodities prices rocket, it will be very helpful to have your own land, producing vegetables and fruits that can sustain you and your family, city dwellers might want to start a cooperative with other city dwellers in starting micro farms and allotments on the outskirts of the city to grow basic food products which will hopefully act as a protection during any hyper-inflations that might be on the way.

SOLUTION: FOR THE STATE

When the big financial institutions in Europe and USA such as Lehman Brothers, Bear Sterns, Fannie Mae and Freddie Mac, Icelandic banks, Northern Rock, RBS were rescued (bought) by tax payers of the given country, those institutions now need become state investment banks, investing and providing credit/monies back to the real people who bailed them out, the tax payers/citizens. It would truly become a philosopher's stone in Banking reviving history if that happened.

Using the UK as an example, The bailed out banks in the UK, the likes of Northern Rock and RBS, have a huge portfolio of properties on their books that are now owned by the tax payers, the government should take advantage of this to meet national needs, where new housing developments have ceased and population is still growing, the government (major share holder) should reintroduce those houses as ‘council houses’ and those who receive housing benefit, which millions do receive in the UK, is only allowed to be used to pay for these houses and not private rentals, so the money and the stock of houses on their books will in theory go back to the people of the nation, as the bailed out banks are now state owned banks, and all portfolio of properties on their books that they have now become ‘Council Houses’. When citizens basic needs are covered, like food, shelter, warmth as described by Abraham Maslow in his hierarchy of needs, most often displayed as a pyramid.(see image below) Populations can be managed, the luck of basic needs for populace will create social uprisings like in the Middle East today. The government role should be to provide each and very citizen of its country the basic needs, The private sector can take care of rest of the levels in the hierarchy of needs,

The bailed out banks like Northern Rock and RBS, should become a national investment bank that only lends to UK house holds, UK companies with British directors residing in the UK.

UK gets rid's of the current credit score systems and lends on merit and plans and individuals aptitude and skills of delivering the projects, acting like a business angel rather then a shylock.

loans can have many types of stipulations on it, i.e any hiring of staff must go though the job centre etc, ensuring jobs go to British unemployed, that way its less strain on the benefit system/ tax payer.

loans made available at grass roots at every neighbourhood. so the public views of the handling of the crisis can be seen that not only did the government bail out that banks that were to big to fail and not having anything to show for it but huge cuts in services to the tax payers, the new loans its issues can be seen taking effect by the tax payers/citizens, new loans helping the people at all levels, will bring improvement to their neighbourhoods through spending the monies directly within the community. Most people take out loans with a long term view unlike the providers of the credit, who are always looking at short term profits, these new state banks will give a new dynamics to the banking system, a scenario where the provider and taker of credit have some common grounds, which they are in it for the long term and their goal is one of national improvement and facilitation of national citizens.

The governments of the world is so ordered that each soul gets every chance for its full development, and reap the fruits of all its activities.

Economist Dude.

How Interest and Gambling took down the Western Financial System

2010-07-22T03:33:00.000-07:00

Year three into the Great Financial Crisis of our time, we have had the first official bailout of an entire country, Greece and more countries lining up for bailouts in Europe, known as the PIIGS and more countries like UK, France are in the same boat. big financial institutions in Europe and USA such as Lehman Brothers, Bear Sterns, Icelandic banks, Northern Rock, RBS ,These bailouts (rescuing too big to fail entities) and defaults that are occurring in European countries and US cities are simply early WARNING signals what may end up being the largest financial bubble ever to burst. A bubble that today amounts to more than $650 trillion DERIVATIVES market.

What this means is that trillions of dollars which are now counted as assets on the balance sheets of banks worldwide are actually liabilities, A 650 trillion dollars worth of liability!!

The derivatives market is the sleeping giant of all asset bubbles. As we go dig deeper into the financial underworld, you'll find that this sleeping giant may just be the puppet master of finance and government and in turn it dictates the way of life for us all.

The derivatives market is made up of roughly 100 mega financial institutions and acts as a mechanism for balancing risk for investors and their greed for profits no matter what.
Derivatives are the world's largest market, dwarfing the size of the bond market and world's real economy. Of the $650 trillion derivatives market almost $500 trillion derivatives are interest rate based derivatives, So interest rate derivatives are the world's largest market

As Wikipedia notes:
The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows.

you can surmise that when one speaks of “derivatives,” they are usually referring to futures, forwards, options and swaps.

What’s a derivative?

As their name implies, derivatives are “derived” from underlying assets (homes, debt, etc). A lot of smart people have tried to explain what these things are, but miss the forest for the trees. A derivative is NOT an asset. It’s, in reality, nothing, just an imaginary security of no value that banks trade as a kind of “gentleman’s bet” on the value of future risk or securities.
Let’s say you and I want to bet on whether our neighbour Joe will default on his mortgage. Is the bet an asset? Does it have any real value? Both counts register a definite “no.” That’s the equivalent of a derivative.

You might not hear the word “derivatives,” in the media often, but such words like futures, forwards, options and swaps are always thrown around, and they are actually all part of the same financial instrument, called “derivatives”

And it has been used as a tool to make *some* incredibly rich and leave everyone else less rich. Through derivatives investment banks have sold up to 30 times every mortgage in America.

At some point, and I cannot tell you when exactly but some time very soon my guess is within 2-5 years, this ticking time bomb that is the derivatives market will implode again, why I say again, try to remember back in 2007, At that time we were told in the media that it was all about Subprime mortgages. Then in 2008, we were told it was the investment banks, specifically Lehman Brothers’ failure and AIG’s credit default swaps. In 2009, we were told it was poor accounting standards and bad bets made by Wall Street. And here we are in 2010, and we’re still being told it was simply bad bets (derivatives) made by Wall Street.

The International Bank Of Settlements ( BIS) estimates that there were "only" $36 trillion in credit default swaps as of June 2009. Credit default swaps were largely responsible for bringing down Bear Stearns, AIG, WaMu and other giant corporations.
And what did governments around the world do, they bailed them out with the tax of hard working people,

Remember TARP in USA, the money given to the banks and others to remove their “Toxic Assets” Well, the toxins still remain. They exist in the form of Financial Derivatives, Credit Default Swaps, or CDS, and Collateralized Debt Obligations, or CDO's

And just where has all this bailout money paid to financial institutions gone? There’s no way of telling because the Fed’s not saying. And am pretty sure you can ask many businesses and individuals that the availability of credit is still is non existent since the bailouts, hopefully at the later stages of this blog I will show you where I believe that money has gone and how it was used by the receivers of bailouts, for now ill say this; a trillion here or a trillion there is basically an attempt to plug the holes in the debt deleveraging dam. A dam which that is facing a 1000 year flood. Or as Warren buffet calling derivatives as *financial weapons of mass destruction* and *time bombs*!!!!

Why Are Derivatives Dangerous

Derivatives are under taken in order to hedge against the risk of defaults, and banks frequently lay credit risk off by entering “credit default swaps” with other banks or insurance companies. These swaps essentially act as insurance policies for eliminating all risk associated with investment, guaranteeing all trades that are done, so in that way derivatives can help make the economy to function by reducing risk for investors, investors are many types, individuals, groups, organisations, multinationals, governments etc, but if derivatives are left unchecked, they can introduce “systematic risk”. Only a handful of firms represent a massive portion of the total derivatives traded in the world meaning that if one of them went bankrupt, it could lead to a chain effect that can cause all of the others to fail, wiping out the entire financial system!!!!

The failure of Lehman Brothers nearly caused this to happen during the Credit Crisis and would have succeeded had it not been for the extraordinary intervention by the Federal Reserve, Treasury, FDIC, and other government agencies.

You might be still asking yourself, after reading this far that the word Derivatives.
You’ve probably heard this term before, or have some vague understanding of what it means.

But the actual reality of derivatives and what they mean for the financial markets remains a topic no one in the mainstream media (or the regulators for that matter) wants to touch.
Why?

Well lets make a comparison, of the $500 trillion in interest rate derivatives, that now exists in 2010 and "only" $36 trillion in credit default swaps as of June 2009.
When only a small number of these credit default swaps went bad in 2009, the destruction of wealth and havoc that these CDS caused was immense, they were largely responsible for bringing down Bear Stearns, AIG, WaMu and other mammoth corporations.

The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan. While the CDS market is dominated by American banks, the interest rate derivatives market is more international.

Here are some facts for you to digest

- A whopping 97 percent of all U.S. bank-held derivatives are concentrated in the hands of just FIVE institutions — JPMorgan Chase, Goldman Sachs, Bank of America, Citibank and Wells Fargo.
- JPMorgan alone holds $79.9 trillion in derivatives — more than the grand total held by Bank of America and Citibank combined.
-Over 96 percent of all U.S. bank-held derivatives are traded over the counter, outside of any regulated exchange — a wild zone where neither central authority nor national responsibility play a significant role.
- Although some banks have made some progress in reducing their credit exposure, Citibank is still risking over double its capital … JPMorgan is still risking nearly three times its capital … and Goldman Sachs is still risking over NINE times its capital — all on the bet that their counterparties will not default.
- The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion.
- 97% of these ($196 trillion) sit on FIVE banks’ balance sheets
- If even 1% of this $203 trillion is “at risk” … you’re talking about a loss of $2 TRILLION at because of the bets made in the derivatives market, does the American government take on the $2 TRILLION loss if 1% of the derivatives goes bad,

Now to understand the meaning of such numbers as stated above in the context of the real world, first we need to some quick maths;

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.
The notional value of the derivative market is roughly $1+ QUADRILLION as of 2010
to put it into perspective.
$1+ Quadrillion is roughly:

40 TIMES THE WORLD’S STOCK MARKET.
10 TIMES the value of EVERY STOCK AND EVERY BOND ON THE PLANET.

That’s 23 TIMES WORLD GDP!!!!!

It is completely crazy to claim these derivatives are assets and are shown as assets on balance sheets of so many banks and institutions and investment funds around the world!!

Given how mortgage backed securities turned out (and those securities WERE regulated, unlike derivatives), I believe that most, if not ALL major banks in US and Europe that hold derivatives on their balance sheets are insolvent or would be recognized as such if you marked the assets on their balance sheets at anything resembling market values.
If you look at the chart below it shows what some of the world largest banks in the world and how much derivatives are sitting on their balance sheets as assets
Total equity at the five banks is $737 billion. So if you assume that only 1% of derivatives are “at risk” (odds are it’s more) and 10% of that at risk money is lost, you’ve wiped out nearly 1/3 of the banks’ equity.
If 2% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out $400 billion or nearly HALF of the banks’ equity.
If 4% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out ALL OF THEIR EQUITY and they go to ZERO.
These numbers do not include the any BALANCE sheet risks, mortgage backed securities, or any of the other junk floating around. Suffice to say that derivatives are HUGE time bomb waiting to go off and what could trigger them? Interest rates. Of the $200+ trillion in derivatives on US banks’ balance sheets, 85% are based on interest rates.

So all those past efforts of financial bail out and rescues amount to diddily-squat in the face of TRILLIONS and TRILLIONS in potential losses in the derivatives market.
Sure, the banks may not publicly state how much of their derivatives are “at risk” but when you’re talking about $200+ TRILLION (an amount equal to four times GLOBAL GDP) it doesn’t really matter how much is “at risk.” As I said before, if even 4% of this is “at risk” and 10% of that 4% goes bad, you’re talking $800 billion in equity wiped out (that’s the entire equity of the five largest commercial banks). These banks are so highly leveraged and exposed that these financial institutions have little capacity to provide true insurance.

So What are the banks doing about it

I’ll tell you what exactly the banks are doing with those hard earned tax payers money through bailouts and rescue amounting to a few trillions of dollars around the world. Lets use Goldman Sachs as a example case of what banks strategies are in fighting this crisis that is facing them and in turn all of us…(us doesn’t not include the 0.01 % of the population)

Goldman received $13 billion in tax payers money and where did some of that money go to? Well if you see the table below to see goldmans recent positions in trading

To see Goldman now betting AGAINST AIG after receiving $13 billion in tax payer money to insure the former didn’t go under along with the latter is outrageous (if not infuriating) to say the least

Looking at Goldman’s positions, it’s no rocket science that Wall Street’s “finest” do NOT believe the financial crisis is over (why are they betting against the banks if they do?). It’s also clear that Goldman’s analysts have noted that both Wells Fargo and PNC both have massive exposure to the derivatives market, the fact that Goldman ALSO has massive derivative exposure is beyond ironic

To be blunt, it’s clear that Goldman (like me) believes the financial crisis is nowhere near over: four of its top ten largest shorts are financial companies. It’s also worth noting that Goldman is betting against gold and the euro. Given Goldman’s incredible access to and close relationship with the regulators and federal government, I see this as further proof that we may be seeing another bubble crisis triggered by interest rate hikes in the near future

For this reason, I cannot take ANY of the Fed’s mumblings about raising interest rates seriously AT ALL, well not any time soon Remember, most if not ALL of the bailout money has gone to US banks in order to help them raise capital. So why would the Fed make a move that could potentially destroy these firms’ equity (essentially undoing all of its previous efforts)?

However, at this point, the Fed may not have a choice but give money to banks to bet with and carry out their wishes on rates decisions Because there is no other way out then to go back to the gambling house with more money in hope to make back what you lost last time!! if you know any gamblers then you know what usually follows.

At some point, higher interest rates will force the financial sector to short securities to dynamically hedge the massive interest rate exposure that has been created. What securities will be sold and from where will buyers be found with the necessary $100s ($ trillion plus?) of billions of liquidity?

As interest rates begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of countries, institutions including cities, states and other governmental and quasi-governmental entities, major insurance companies, top investment houses, commercial banks and universities etc depending on which side of the trade (bet) the fall

purchasing large amounts of protection against sharply higher interest rates from the U.S. financial sector makes about as much sense as the failed strategy of contracting with Russian banks for protection against a collapse in the ruble. Sure, one can play this game, but we are all left to hope that the circumstances never develop where there is a need to collect on these policies.

Put is this way, If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. Their is not enough assets in the world that can be liquidised to pay the for liabilities..

Nomi Prins explains why banks don't care about the failures at all:

“ the word 'losses' is not part of their jargon behind closed doors. The name of the game in town is milking the system, using every trick possible to make *some* incredibly rich and leave everyone else holding the bag”. According to her knowledge, investment banks have sold up to 30 times every mortgage in America.

Chuck Collins in a Buzzflash interview.

“Alas it is only when this process is taking place that we can forecast a full-fledged systemic crisis. But at the very heart of this worldwide financial Greek tragedy, lies the very root of the current crisis is not MONEY ITSELF... It’s CHARGING INTEREST, stupid! “

As a matter of fact the we the people living in the west are largely silent as our nations are systematically destroyed. When profits are privatized and losses socialized, we are definitely dealing with an undeniable component of where the rich and powerful gain more power and wealth through the expense of the less rich ( not just the poor). So the real crime lies in the 'Radical Redistribution' of wealth.

The early stages of this crisis has so far only sparked unrest across Europe. What is coming is very serious, so serious that it will be remembered as a 'double-whammy' of the worst economic crisis in living memory, the express.uk declared as it revealed top contingency plans to address possible civil disorder and riots. Not only are the IMF' safes empty, it also asserts that world economy is getting so unpredictable that it could lead to WAR.

So what does this mean: that taxpayers have put their trust into an entity which is completely failing its purposes? Furthermore how to trust, again, our monetary scientists at the International Bank Of Settlements - BIS -( the central bank for all central banks) who didn't see the global collapse coming (YEAH RIGHT!!!!) but are planning to implement A GLOBAL CURRENCY, one of logical hypothesis that i have come across thats sound and fits nicely in the puzzle behind all the craziness and DESIGN, a project that can only be made possible if some MAJOR international currencies goes burst. The global economic crisis isn't about money - it's about power and in order to reset the CHESS BOARD, an unprecedented financial event needs to be created, so masses would endorse the Big Brother of all CURRENCY. It's undoubtedly, a collapse by design. Most appalling is that the powers-that-be have become able to predict the IRRATIONAL MANNER in which consumers will make economic decisions.

People will have to decide what pill they what want to take, like from the movie ‘the matrix’ a scene in which Keanu Reeves is offered two pills by Laurence Fishburne, red or blue. WHILE majority are sticking their heads in the sand, (ignorance is bliss) Many are taking the courage to choose the right pill, Many people are slowly waking up to the real world, coming back to their senses, realizing that stock market speculations were not under the scrutiny of WATCHDOGS our protectors, firewall against bugs in the system, the caretakers of the peoples wealth but by the market makers themselves through lobbing ( modern day corruption). I believe that a violent Revolution will start soon. People around world are not going to accept seeing their taxes raised as they are losing their jobs, homes and retirement savings as they unwittingly fund the merger of state and corporations - which is called fascism.

And of course humans wouldn't be victimized if taxation and usury (interest) didn't exist in the first place because it really is the power to destroy.

I guess there was a reason why God said stay away from gambling and interest, if only we listened!!!

Please revisit my blog in the near future for potential solutions and out comes that we the people will face from this disaster that started many years ago and is about to burst and change our entire way of life, there will be tough choices that everyone will have to undertake for the protection and sustenance of themselves and their families, i will do my best to try and shed some light to choices that will be available to everyone the best as i can in my future articles.

EconomistDude

Will the recession lead to a depression?

2009-09-23T03:43:00.000-07:00

All statistics and past and present information indicate that the recession has a long way to go. A whole decade or two. From recession to depression….it can happen….why…….

Borrowing money now to fix the current state of economy (short term goal as everything else in politics will only make further future debts even higher then they should be especially the way the western international banks charge interests, rates never stay low…for long periods unless we become a nation that conforms to the Islamic way of banking where interest are not allowed hence their economies have low interest for life….which I highly doubt the big banks in the our part of the world will ever allow that.
This huge debt burden will be passed down to a future generation who are yet to finish the primarily school. We have to think how is this future generation is going to make all this money up and if the state of the economy at that period will allow or facilitate them to do just that, they will have make very large contribution in tax from their wages, assuming that highly paid private sector jobs will be available to them in this country in huge numbers, which I will explain a later stage.
The new generation that we will be relying on or passing on the debt burden will be fewer in numbers in terms of total working population, as we no the current lifestyle in the UK has been for a while is to have one or two kids some leaving it to their 40s to have kids and when they do they are not having kids like so called baby bloomers who are currently going into the retirement stage….which as you should of guessed by now that their pensions are paid by the present working population through tax and national insurance contribution for the state pension, and private company pension is paid by the present earnings of the present pension fund that is invested in stocks and shares, hence when money is whipped off the stock market where all these company have locked the employees pensions, you create what is a pension black hole!!.
On top of that as the baby bloomers are now expected to live longer which will means the total payout will be much higher then any forecast made by the NHS or any government health agency/ treasury, as they will have to payout for longer time period on the other hand medical treatment cost or NHS costs will sky rocket as older people get they tend to have more medical treatment needs and the fact the current population trend suggest that there will be 3 pensioners per one adult working assuming that in the future all adults will be employed and pay their tax and is enough to pay for public services and the NHS bill. I guess someone somewhere has been working on a balance…between pension costs and medical costs. ie I have no doubts that the smoking band and other such policy is probably worked out with above two ratios in mind. For each one has such I high costs related to it, probably cost levels are as high current debt levels…which very alarming.

the next major factor that can push us further into a depression is our position as a property/ mortgage lead economy and its consequences for the nation. Many have cashed their pensions or transferred most of the saving to property at the height of the property boom, hoping that it will be a nice little nest egg for them to spend from when retired, thinking that the property price will keep going up at a fast rate, however like all things, it is much dependent on the state of economy, prices can co go down to any value they were in the past, depending on the state of the economy a recession like this with such high debt levels going back to levels of the1950 depression debt levels. A house once thought to be security can now be a huge burden on the taker of the mortgage, interest rates will never stay low as they are at some point they will rise and with the rise those that are still employed and paying the mortgage will suddenly find themselves paying much higher mortgage payments which will either leave them with very little of amount of disposable income, intern affecting other parts of the economy such as retail sales etc….or losing their houses all together. This will affect millions. Like the millions already affected in the property market in the so called stabilisation of the property market we have seen in last two years 2008-2009, those that are still hanging or depending on the property market as a livelihood are in for a big surprise and soon add further numbers on unemployment counter.

The other major factor intertwined with the above two factors I already mentioned is in the job creation areas. We need more private sector jobs to be created then public sector jobs and theses jobs need replace many of the jobs that we have lost and may never get those types of jobs again. Public sector jobs is funded by tax collected from the private sectors, many jobs in the past 5 years were created by government or local governments which are not sustainable, and we see the affects of that phiscally in the economy in the next few years as especially after the general election. This massive stimulus package has been great for the economy but only in the short term by keeping jobs for bit longer, but because they were short term solutions based politics, and not addressing the real problems, like the sensational news that we have now without much depth of analysis then it reasonable to believe we have bought year of good statistics for the price of ten years of bad statistics, if only politicians stop to think about themselves and really put the country first. As the stimulus package runs out and the economy will face the same problems it had before the stimulus package, unless new wave of stimulus is available and if we can afford to have them and not because on a whim of politician who wants to keep their seats. More we borrow more we have to pay back, the further in red we go and the only out is to pay it all back starting from now, hence the jobs creation is the only vital thing that will enable us out of this financial meltdown. We need really seriously look into this the creation of jobs and business development especially as we are now in a global world, we cannot afford to think locally, nationally without taking into context that we are competeting globally for business and jobs. Radical rethinking must be applied if we are going to be competitive in a world platform where technology is rapidly increasing reducing the barriers of protectionism and driving competition to extent that those that embrace the technology through people intellect and technology infrastructure and lowering costs maybe win the hearts of big multinationals, conglomerates…(meaning jobs)
Just looking in the past history of UK, from the close down of coal mines and heavy industrial business that once thrived in the UK and employed many people and to its demise which probably lead to increase of a manufacturing sector rising and in the late eighties as we all now to well that came crashing down due international competition from overseas who were producing faster and cheaper, this however lead to rethinking of the UK job market, where UK then found it self becoming a service sector economy where most people were employed in what is now as tertiary and quaternary economy, people working in offices and retail which lead to us becoming a nation of shopper holics and shopping over our means leading as to a position we now as a nation, a mortgage lead/ debt based economy. Where the rise in our property value is actually our so called wealth and not the actual property. The affects of this model we adopted we are now feeling the wrath of it and will always feel it as it as become a business cycle of boom and bust, majority of society will always get busted and lose everything, as they say in gambling, ‘the house always wins’.

In the UK we have enjoyed what could described as a world leader in finance and banking, where many countries have relish the UK model and expertise that could found here, many of the world biggest companies had many advantages of locating to the UK for that reason which intend gave the UK great boost especially in job creation we had in city of London. However with the recent crisis due to the financial institutions of UK and America…this may have been hampered….will the growing economies of India and china want a financial model like us or any other countries want model their systems on our systems…with that in mind we have to look at the pace of technology and its effects to national economies. There’s is a huge potential that we may be facing yet another crisis of jobs that we are losing now may never come back to the UK due to this digital technological revolution, as internet and software now play a integral part in companies operations and a source of economies of scale to be reached many of the jobs that once was not feasible to be outsourced overseas can be done so, from back office jobs, customer services, accountants, law to teaching jobs. Majority of theses can now be outsourced overseas for much lower costs, ie accountants and law jobs that require much of their time going through paper and analysing documents can be sent digitally to anywhere in the world and sent back for to countries they originated from to be signed of by one main accountant, lawyer etc.

Going back to my earlier point of a lost generation. the future does look bleak unless we have radical rethinking about education, job creation and attracting business to the UK, we need more then a Peter Mandelson to save our economy, maybe we should put all the top university economics and business professors together in one room to find solutions for the future of UK.

In my opinion the recession (depression) will last 8 –12 years with unemployment reaching 6– 7 million around 2012-2014. the lost generation that I refer is a generation who are will be unemployed for long periods time first of them will be educated and not find jobs and the later will be a fall out from schools that are under funded and whose parents will be unemployed growing up with poverty which will lead a social breakdown in communities and crime rates soaring all over the country. In cities This cause the neglect of housing estates as founding are cut back from redevelopment, the problem will be expiated as recent city redevelopments during the boom in housing market where space was of great value, many extra dwelling were created very close proximity to each other at the expense of social areas, where you get an area clustered in many people it only takes a few grieved teenagers and drug related activities taken up by a few to wreck an entire neighbourhood. Making some areas no go zone, as depicted in many of the late 80s movies.

For my opinion on the solutions on the above scenarios and a way out of this cataclysmic mess please watch this space and more writings from the ‘Economist Dude’

Next blog topic ‘what the rise of China and India means for western world’ coming soon.