11/10/09 Montevideo, Uruguay – Financiers have the world’s financial system in a “doom loop,” says the Bank of England. We’ve thought so ourselves. The bankers take money from the government and use it to speculate, not to lend. “Excess” reserves are at a record high as consumer credit continues to decline.
Most people find it both galling and absurd to see the bankers getting $10 million bonuses while there is 10% unemployment. Here at The Daily Reckoning, it’s just a matter of curiosity. You’d think there would be more wage competition to drive down bankers’ compensation. Why doesn’t Goldman go to an unemployment line and make an offer…
“Any of you guys want to earn a $9 million bonus?”
Surely there would be a few takers. And Goldman would save $1 million.
Of course, we’re joking. Banking is not a trade you can pick up just like that. Borrowing from the Fed at 1%…lending back to the Treasury at 4%…hey, it must take a few days of training to be able to turn around money like that.
On the other hand, there are periods when speculating for a big bank is a breeze. Over the last 7 months, for example, there was almost no way fed-financed traders could lose money. They borrowed dollars – the new carry-trade funding currency – at next to zero interest. It didn’t matter what they did with it…they could trade it for Brazilian reals…or buy stocks in Singapore…or buy gold. Almost everything went up against the dollar.
Institutional investors – such as those managing money for banks – are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too.
So, they’re in a “doom loop,” where they continue to bid up asset prices – even at the beginning of a depression.
Meanwhile, over in the real economy…the deflation continues. David Rosenberg:
“It is like a magic show – the US economy is somehow out of recession with both employment and consumer credit outstanding still in full-fledged contraction mode.
“In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment – an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totaled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply-demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors.”
Let’s see. We’ve tried several ways to gauge how long it will take to de-leverage the private sector (which is another way of figuring how long this depression will last). At 6% a year – assuming private sector has about 2 times as much debt as it should have – it will take about 7 years to get down to a more comfortable level?
Did we do the math right? Well, who knows? But every time we do it, we come up with about the same answer – 7 to 10 years, more or less.
But it’s not that simple. Because as the private sector de-leverages the feds try to prevent it…while they leverage up the public sector. This is bound to stretch the whole thing out…and bound to lead to some serious bust-ups.
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Ugh. What a great article, Bill. I’m enjoying “The New Empire of Debt” right now. Excellent writing style, sensational content.
Thanks for all you do.
Every single indicator is now showing sustainable world growth. Yet here you sit with that smugness of “how long will this depression last?” question. First of all, if you think this is a depression, you should get out of finance. Second, there was a severe recession that ended around May. Get over it.
The banks will be subsidized for many years, both directly with huge cash injections from taxpayers and indirectly with very low base rates, the effect of this is to cream profits from savers by paying them very low interest rates, yet on the lending side personal loans are approaching 10% rates, this gives the banks a nice tidy 8-9% profit margin, no wonder the UK banks are seeing record profit before provisions!
The effect of this subsidy is less money in the real economy and less desire to borrow and spend, not a good sign for future growth in the UK.
Also on the cards is huge tax rises in the next 2 years, it seems that in the UK tax raising is now the new house flipping, we even have a mini TV program within Newsnight, where members of the public get to present new tax raising ideas to a panel of experts in a ‘Dragons Den’ format, I am thinking of applying to the show to suggest we make the UK a tax free haven like Dubai in a swiping ‘beggar thy neighbor’ move to the rest of the EU country’s, that would give them something to debate in Brussels.
It seems to me when you have a tax rate in the UK where roughly 50% of GDP goes to the government the last thing you need is to raise tax yet higher.
It will be interesting and educational to follow how cities, counties, states deal with the precipitous drop in incoming tax revenue…
The “top” is still drinking cream in their coffee, but the bottom is using “non-fat” when they can afford that luxury.
You can’t have a “jobless” recovery……we need to CREATE more than 350,000 jobs just to keep up with demographics; we are loosing upwards of 200,000 jobs monthly…….means we must create taking a lesser figure, at least 500,000 jobs to stay EVEN.
So, where is the recovery????
Harry said
Every single indicator is now showing sustainable world growth.
”””””””””
You better get on the horn to the Fed’s Yellen and Fisher, they are in opposition to your view.
The more I read Harry’s comments the more I believe he obviously suffers from severe autism & cognitive dissonance, or both. But day after day it becomes more of a Grand comical moment, so keep it going Harry please.