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Sunday, November 02, 2008

Sunday Reading -- Linkfest

If you want to put that extra hour you gained from the time change last night to good use, here is some interesting reading for a Sunday. Some of it is quite grim, so I'll open with a joke ...

Joke of the day
Hedge Fund Managers Mowed Down by Porsche...

'What's the difference between a hedge fund manager and a pigeon? A pigeon can still place a deposit on a Porsche.'

National Debt Soars $500B In Under A Month. Never before in U.S. history has the national debt increased as much and as rapidly as it has over the past month. Since September 30, the day the national debt hit the $10-trillion mark for the first time, the government has run up over $500 billion in new debt. That’s more than the federal deficit for the entire 2008 fiscal year, which ended September 30. And it’s the most rapid increase in the national debt ever: over half a trillion dollars in less than a month - 23 days to be exact.

Fear of Deflation Lurks as Global Demand Drops
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

XX Sean's note -- And now for an opposing view ...

The Problem Is The Crash of the Housing Bubble: Not Deflation
In a weak economy prices may be falling. But it is not falling prices that make the economy weak. The bulk of the economics profession, as well as the media, somehow managed to overlook an $8 trillion housing bubble as it was growing. Even as it is now collapsing, they are still missing it.

The economy is taking a big hit for an incredibly simple reason. Homeowners have lost an enormous amount of equity and therefore they are cutting back their consumption. When they cut back their consumption, companies lose business and profits. Some go out of business. This will lead to sharp declines in investment, which we have already been seeing.

There is no need to look to credit crunches or deflation. The problem is quite simply a massive lost of housing wealth, compounded by the recent loss of stock wealth. The only cure will be finding alternative sources of demand. In the short-term, government will have to fill the gap. In the longer term, it will be necessary to get the dollar down so that the country's trade is closer to balance.

Finance Crises Could Hit More Often
No matter how you arrange the data, the message is the same: The modern American financial system is unstable. During the life of the current system, it has been beset by recurrent booms and busts (e.g. the Internet-stock bubble, the housing boom and the subprime mortgage bust) and by events that might have triggered a system-wide shutdown (e.g. the collapse in the late 1990s of the hedge fund Long Term Capital Management).

CDS Pricing in Increasing Treasury Default Risk

The cost of insuring against a US government default has risen by 25 times in little over a year.

Source: Prudent Bear via Naked Capitalism.

How could the US government ever renege on its debts? After all, it supplies the world’s reserve currency, and the Federal Reserve Chairman reminded us a few years ago of the US authorities’ ability to print money in unlimited quantities. Any “default” would at least be through the time-tested mechanism of inflation and currency devaluation, according to this view.

On the other hand a longer-term examination of debt markets reminds us that, throughout human history, regular default is the rule than the exception. And while sovereign defaults on external, foreign-currency debt are most common, Carmen Reinhart and Kenneth Rogoff demonstrated in a paper released earlier this year that defaults on domestic debt have happened far more often than might have been expected, particularly in times of severe economic duress.

20% of U.S. Homeowners Have Mortgage Higher Than House Is Worth
Almost 20 percent of U.S. mortgage borrowers owed more on their loans in the third quarter than their house was worth as foreclosures depressed prices and the economy weakened, according to First American CoreLogic. More than 7.5 million properties already have negative equity and another 2.1 million will follow should home prices decline another 5 percent, Santa Ana, California-based First American, a seller of economic and real estate data, said in a report today.

Two two-trillionaires

The Fed’s balance sheet just surpassed 2 trillion dollars. It has grown by a trillion dollars over the course of the year. Literally. See “total factors supplying reserve balances” at the close of business on October 29. That growth was financed by Treasury bill issuance ($560b from the supplementary financing facility) and a large rise in banks deposits at the Fed ($405b).
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