Tag Archives: credit

IMF Says Japanese Banks’ Bond Holdings Risk Financial Stability.

IMF would not come out saying that Japan’s bond are going to tumble if it did not have a reason to. Would it? The deflationary spiral is soon going to become a whirlpool that sucks that land of the rising sun into the Pacific ocean. The only question remains of when it will happen and what repercussions will the financial collapse in Japan have on the rest of the world financial system.

On foreclosures fraud, QE and coming new spiral of deflationary forces.

There isn’t anyone at the (nominal) helm who didn’t understood from the very git-go that the only possible way out was a resumption of organic credit growth. All the fraud, lies, deceit, corruption and violation of centuries old jurisprudence were justified (at least in their minds) by national security concerns.

The power-elite have always know that there was a black whole comprised of many different elements, one of which being title insurance, related to challenges in re-securitizing the ponzi. More importantly, they knew that they had at most two years in which to blow another bubble, anywhere/any kind, to get the herd moving once again in a speculative fashion.

Financial Crisis is an ‘Inside Job’.

Having now experienced a confirmed Hindenburg Omen in the last week that portends a stock market decline, we may again try to turn our attention to the Financial Crisis that began in 2007. Inside Job is a documentary by Charles Ferguson that unequivocally reveals to us that the GFC was not an accident. Those who benefited from it foremost were all in on it and new full well what they were doing and what it would lead to.

Is Canada’s housing market bubble beginning to deflate?

Now we are reading a welcome news from Canada. The supply of houses on the market is beginning to increase which if it were to continue on this path would signify that Canadian housing bubble is being pricked as we speak and should provide a spectacular deflation in the months and years to come.

This is how it started in USA back in 2005. First supply of houses rose while the prices continued to inch upward. But then the supply really began to accumulate as more and more fools started to put their properties on the market sensing that it was time to get out. We know what happened next.

And now in Canada we are beginning to see the same kind of trends. They, of course, still continue talking about how real estate prices never go down, and that the rising valuations are based on fundamentals and that Canadian economy is strong and getting stronger. But we now know that this is precisely the bubble talk you hear at the top of many speculative markets throughout history.

The Marginal Productivity of Debt.

The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place.

A sure sign of deflation: 9 bailed-out banks report declines in new lending.

As the pool of credit worthy borrowers and worthy inestment projects dwindles in a deflationary environment so the lending declines. It is no surprise that in still democratic USA, unlike the communist China, the Government cant just mandate its banks to lend. It can provide interest free credit lines, it can embark on a massive Qunatitative Easing and public relations campaings, but if banks are scared to lend and the borrowers are not interested in borrowing nothing will get the lending machine going. At least, not until the bad debts are liquidated through defaults, which are, of course, deflationary. And so the lending contracts.

Conquer the crash: Bernanke defeats deflation.

At last, the news reports are now fully brimming with optimism and proclaiming victory after victory on the economic front. Despite the fact that the private (and total) credit in the US economy has been and is still contracting at unprecedented multitrillion dollar annual rate, which is deflation by definition in credit based monetary system, the Bloomberg news declares nevertheless that the honorable manager of the privately owned Federal Reserve, Ben Bernanke, has already defeated deflation. Oh say, can you see …

Q3 2009 private sector credit collapsed at – $1.81 Trillion annual rate.

The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1481.2 billion of the credit available — and leaving LESS than nothing for the private sector as a whole.

Overall total credit in the economy shrank at an unprecedented annual rate of -$275.6 billion.

Private sector credit fell at an astonishing – $1.8098 Trillion.

Sovereign Defaults Coming in Second Stage of the Financial Crisis.

The first stage of the deflationary debt unwind resulted in massive consumer and corporate defaults, particularly in the financial sector. This sector being one and the same as the governments that it controls, the state has thrown all the resources that it had and did not have (pulled them out of thin air) in order to save its Banking sponsors. While it has given the Banks the respite and saved many of them for now from going belly up, it did not solve a thing. The bad debts have simply been transfered to the Central Banks’ balance sheets that are expected to be later transferred to the taxpayers of each and every country. Whatever was not transfered was hidden by suspension of the mark-to-market accounting rules. Thus, the deflation that is not seen has not gone a way, but has been simply hidden.

Dubai default is DEFLATION.

When a debtor reneges on its loan repayment obligations or asks to postpone them this is deflation by definition. The debts that cannot be repayed are defaulted on and so the total debt outstanding in the economy deflates. And what about prices? The prices on real estate in Dubai are down as much as 50% since the beginning of the world financial crisis. So when debt deflation takes hold assets lose value and cause even more defaults. We say that we are in a deflationary spiral then. When it stops is a big question, but given world wide government intervention in free markets this almost assures that the so much needed adjustment will take a long and painful haul. Yet the prices will get to their natural level in spite of all government actions to support them.

One can hope that the Dubai default situation will give a much needed kick to accelerate the process of deflation and wipe out the speculators and their central bank friends.

Here goes Dubai.