We did NOT see the bottom, and we are heading MUCH further down people

"there would be"

MMAfia & stevejhx [and others to] - I'm new here. Just came by to check out renting a place in NYC after being in Moscow Russia.

This is a global event for sure. There is little volocity of money at present, and don't expect that to trend up any time soon; so much for GDP's.

So, if this event even gets close to 29, with about a 90% loss, that puts us someplace in the 1500 range. If there is even a chance of that, than why not just cure the cause?

How about we favor the Fed to buy up all of the US debt world-wide, and then pull an "Honest Abe" on it, giving Congress the mandate to issue a "new Greenback." The end game is near, so why not see who really owns the Fed in Court as they file chapter 7 or 11, either way, and get on with putting things back together again. No, it won't be easy or pain free, but nothing really worth doing ever seems to be.

mh23 --

Agree, the key is on how fast they can build their domestic consumer base -- they've been building it for the last 20+ years, I'm guessing they only really have another 10 years before they are ready, depends on how fast they adopt various credit schemes and if they will ever protect the right to property.

Second, I don't think inflation is going to happen, but let's suppose they were wide spread commodity price inflation so that Oil, Copper, etc. doubled in price. It would be compelling - especially if they felt their domestic economy was strong enough - to float their currency thereby making raw commodity prices cheaper. Also, if commodity prices in China were cut in half, this could further boast Chinese consumption as many "essentials" -- food, fuel, etc. -- are currently imported into China. The fear of the Chinese gov't part is that if imported food was cheaper, it would cause widespread unrest in the countryside as the peasants would have an even harder time trying to make a living.

"the forex regime in place since bretton woods is at stake here"

I don't know what you mean. It no longer exists - there is no longer a gold standard and exchange rates are not fixed. What part of Bretton Woods is at stake?

MMA's scenario works if you're a monetarist. If you see inflation as solely an increase in the money supply. If you take a broader view of inflation, and allow that fiscal policy is as important as monetary policy, then his argument falls apart.

Above I ask how the gold standard affected the Great Depression. MMA said that because we were on the gold standard, Hoover's hands were tied. He then said that Roosevelt "debased the currency" by abandoning the gold standard and cutting the price of gold in half.

Yet, as I point out, there was no inflation, but deflation. Proving that the currency was not debased, and that the real currency was not gold but the dollar, whether or not it was "backed by gold" or by pig iron. Gold is nothing but a commodity, albeit one with a libido. It is no more a means of exchange than conch shells.

It is true that there was very little overall inflation in the 19th century, but that is belied by the fact that there were periods of great inflation followed by periods of great deflation. With the gold standard the only way to increase the money supply is by finding more gold. That's pretty medieval.

Ron Paul is wrong, MMA is wrong, Peter Schiff is wrong. The world does not work following the rules of their model. Demand is as important as supply; fiscal policy is as important as monetary policy. The New Great Depression they predict will not occur. Nor will hyperinflation. The Fed is not "creating money" any more than any bank "creates" money by lending against the value of an asset. True money creation is just that - printing it, no monetizing an asset.

so just to understand you, your saying quantitative easing (NY Fed buying assets from primary dealers via crediting account with electronic dollars into reserves in exchange for assets purchased) is NOT printing money?

Technically speaking only currency is "printed"; what the fed does is "create" money electronically.

"The new money is created ex nihilo by a central bank as the start of a process to increase the money supply. It is injected into the private banking system when the accounts of the vendors of the securities purchased by the central bank through the open market operations are credited."

It definitely IS inflationary.

i would agree that it is not inflationary right now though, because te whole in the shadow banking system leftover by the huge destruction of wealth is bigger than the oney being printed to fill the void. money is being kept in reserves, not being lent, being used to absorb future losses and maintain capital ratios, and honestly, with credit deteriorating and unemployment rising, lending should be toned down.

but its not the american way

Yes, as a chronic saver I feel very disenfranchised. Urbandigs are you venturing a price target on NYC real estate? They are definitely supporting it by keeping rates down. The flip side is when the economy recovers and rates creep up, it will hold back the recovery. Or maybe these rates don't matter if banks simply require lower loan to values and higher incomes. Its really tough to know where the marginal non-finance family decides to stay in Manhattan rather than move out....or what the 'right' unlevered cash return on a bought and rented condo is. What does a NYC muni yield?...

In a deflationary spiral obviously the goal is to get the hell out of it first and worry about the consequences later. So IMO the fed is doing the right thing. In the Depression they did the opposite and we see what the consequences were. When deflation ends the fed and Treasury will have to basically undo all of these programs without sending us into yet another recession - it will require a lot of skill and hopefully they will be able to pull it off. But for now they are right to focus on ending deflation ASAP.

UD --

To clarify, you do not think the net result is inflationary, but you do think the Fed's action is an inflationary action to counter the deflationary aspect of the "shadow banking system," correct?

it is if/when it enters the economy, but still the destruction of capital in the system during this deflationary episode is offsetting any furious inflationary impact of printing money.

I think Ray Dalio gets it perfectly right, read this entire discussion as my view on this process is pretty much exactly how he feels about it.

Its a self-reinforcing episode of debt deflation, and we need to go through a deleveraging process that the fed/treasury are hindering right now to help ease the pain. It will end up prolonging this process, so we will see waves for sure, but it will take years before the system is purged of the excess, bad debts are written down, bad models need to die and be restructured, bankruptcies need to occur and they will. There is the corporation and the financial sector on one side, the consumers on another, and the governments mixed in with the two. The consumer deleveraging process will be the painful/long part of this cleansing process; and that is the main reason why this repression cloud will linger for longer than many think. Once the consumer/small-medium-big businesses/entrepreneurs/etc.. are credit worthy again, and balance sheets are repaired, will we see credit growth.

http://online.barrons.com/article/SB123396545910358867.html

"The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.

However, the reason it hasn't actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece -- banks and investment banks and whatever is left of the financial sector -- that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.

If you think that restructuring the banks is going to get lending going again and you don't restructure the other pieces -- the mortgage piece, the corporate piece, the real-estate piece -- you are wrong, because they need financially sound entities to lend to, and that won't happen until there are restructurings."

And on dollar/printing/gold/bonds:

"You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad.

I can easily imagine at some point I'm going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won't go down a whole lot, at first."

jmkeenan - i think the dollar will be the last to fall. I think the currency devaluation part comes later, not now. In debt deflation we should see the dollar swell, and swell it has relative to other currencies. Its all relative. What will us dollar collapse against?

What the fed is doing IS inflationary, but Im saying they dont succeed for a long time because of the nature of this crisis, and what needs to be done to stop a debt based deflationary spiral. They are hindering this process, but doing what we all expect them to do. Certainly the US will not sit around while our economy / banking system collapses around us. But what they are doing is equivalent of wrapping bandages around multiple gunshot wounds. The US economy is on life support, and the fed/treasury are keeping us alive and nursing us back to health. Now, to say it my way, is to see the patient die. But clearly that is not what we want. It will all come out and those that are destined to default/fail, will. It just seems we are not ready to accept the consequences that come with letting this process continue on at the speed at which it was occuring. So, the process will last years, like the 30s. I dont see a lost decade due to the incredible policy response, but I do see years of waves, and I do see unintended consequences from all this, and overegulation. So what are we really getting excited about here with the rally and what form of inflation are we really worrying about?

If we see inflation, I think we will see it in commodities again, food/energy/metals.

Gold bugs are nut jobs. Gold is simply a commodity like any other commodity. If you are smart and worried about inflation, you should get exposure to oil (e.g., integrated oil cos), as the price of oil is much more likely to go up substantially than the price of gold. China is still growing and so is much of the rest of the developing world - they need oil, and lots of it.

hence food/energy

urbandigs, I just wanted to tell you how much I appreciate your posts. They are thoughtful and intelligent, and well worth reading. Thanks.

now keep in mind time & place of Dalio's interview: Feb 2009 when DOW was at 8200 or so on its way down to the low of 6500. I think that is important. Its possible his ending statement on equities would have changed if he saw stocks fall 21% after the interview in 1 months time.

...not to mention that the supply of good is ever increasing (since virtually all of the gold ever mined is still in circulation), whereas the supply of oil decreases when the price falls via consumption and production cuts.

supply of "gold" - sorry

but there are huge investments in alternative energies that in a decade from now could change the strength of that statement ---> "whereas the supply of oil decreases when the price falls via consumption and production cuts"

I do think we will see another spike in oil, but when it happens is the big question. Think of all the project stoppages, investment cutbacks, etc. due to this crisis and the plunge in oil prices. If that continues, it will mean we had a few years of contraction of investment in the energy sector. If US dollar is last to fall OR if global economies do recover faster than expect in a year or two from now, that may come right when supply of oil is depressed to years of under-investment/cutbacks from the initial wave of the deflation cycle (2008-2009). Its an interesting argument.

"quantitative easing (NY Fed buying assets from primary dealers via crediting account with electronic dollars into reserves in exchange for assets purchased) is NOT printing money?"

Not in the strict sense, no. "Printing money," a la Latin America, is merely injecting money into the system without an offsetting entry. That is, the central bank merely deposits money in a bank that then lends that money out. What the Fed is currently doing is somewhat different - it is essentially monetizing an already-existing asset. It's extending credit just like any other bank would do, against collateral of the same value.

It does increase the money supply, but it's not "printing money."

Look at the news out of China this week - it appears that their stimulus (as opposed to ours) is actually working. If that's really the case, China will resume voraciously consuming commodities. So I think that in a couple years, a global economic recovery combined with drastically reduced capital investment by oil cos over the same period will result in oil prices being MUCH higher than they are now. Alternative energy strategies replacing oil is still decades in the future IMO.

http://online.wsj.com/article/SB123934751932407099.html

China, and much of Asia, are in a sense operating from the same playbbok that we did for much of this century by utilizing a domestic manufacturing base to creat a middle class and a robust domestic consumer base. The two caveats are...1) Right now, China's tax code is fare more pro-growth than ours has been since post Wilson, and two, they enjoy a level of coordination between the public and private secor that we do not. As such, I am long the FXI. I sold my FCX at 32 and have been waiting for a pullback, but I may just go long now and forget it for a while, I also like the OIH, although I sold it a few weeks ago when it topped 80 and I did not buy back on the dip. I also like Taiwan, S. Korea and Singapore (see MArc Faber's Bloomberg interview from last week).
The bottom line is that, if we do not reinvigorate our domestic manufacturing base, or some kind of domestic industry that actually creates sokmething rather than moves money around, we are in for trouble in the medium to long term.

"it is essentially monetizing an already-existing asset. It's extending credit just like any other bank would do, against collateral of the same value."

So where are they getting the MONEY to extend this credit? From where?

You see, when I look to answer this question, I look at what the fed is telling me:

http://www.newyorkfed.org/markets/mbs_faq.html

" How will purchases under the agency MBS program be financed?

Purchases will be financed through the creation of additional bank reserves. "

Through the creation of additional bank reserves. AKA, electronic printing of money deposited on account of the primary dealer via the NY Fed OMO.

Urban: I also found the Dalio piece fascinating.
I agree that until we get personal, commercial and financial balance sheets repaired we are in for many rocky years, the current equity rally notwithstanding. It took us years to get into this mess (low to nil savings rate, terribly careless lending standards) and it simply isnt rational that we can just finesse our way out of it.
Oh, and I also agree that inflation, when it shows up, will be in the form of higher commodity prices, and higher interest rates (obviously).
Oh and one more thing: I believe we will have seen most of the ultimate price discovery in NYC real estate by Spring 2010, but that we wil not see a sustained uptrend for several years thereafter.

No, UD.

There is a significant difference between a central bank depositing money with a bank without getting anything back, and a central bank extending credit against collateral. The former gives the central bank an asset - the deposit - without an offsetting liability. The latter gives the central bank an asset - the deposit - against the collateral it owes the bank - its liability.

All banks do that. In this case the "bank reserves" that are being discussed are the collateral instruments. Bank of America has Security A. It deposits Security A with the Fed, increasing its reserves with the Fed. The Fed, in turn, lends money to Bank of America against its reserves.

It does increase the money supply, but it's not "printing money" in the way they do it in Zimbabwe or the Wiemar Republic.

yes but what if this is not a lending facility we are talking about, but in fact the FED buying Security A from Bank of America?

This is what we are talking about. I understand the rest of what you are saying and the fed has introduced 18+ such lending facilities since the start of this crisis.

But we are talking about the FED purchasing the asset, getting the agency MBS or treasury note, and depositing the funds for this purchase into the seller (the primary dealer on account with NY Fed) account. The difference you discuss above I agree with, but I think your statement does not apply if the fed is actually BUYING the security, instead of the fed extending credit for collateral.

Am I confusing myself here? Thanks for all help on this. I am no monetary expert, just a guy trying to understand the mechanisms at work here

bfgross - on same page!

"Oh, and I also agree that inflation, when it shows up, will be in the form of higher commodity prices"

Anybody who has (A) a brain and (B) some spare cash is buying Conoco right now. COP is currently trading at 4.4X expected combined 09 and 10 earnings, significantly lower than XOM or CVX. Also it pays at 4.7% dividend (obviously much higher you can get for your $$$ in any savings account) and it's PPS is approximately equal to its net tangible asset value (much better than XOM, which is well over 2X TNAV). Furthermore, COP has been replacing its reserves at a higher rate than its peers over the last few years. Oh, and Buffett bought $7B worth of COP at much higher prices - so you can out-Buffett Buffett himself.

THIS TO ME IS ONE OF THE BIGGEST NO BRAINERS IN THE ENTIRE MARKET TODAY - BUT NOBODY IS ACTING ON THE OPPORTUNITY. Go figure.

No I think you're right. The difference is the Fed can expand its balance sheet without limit, and private banks cannot.

So yes, it does "create" money by monetizing an asset. The Fed accepts a bank's collateral as a bank reserve, and lends it cash against it. The net effect on the bank is zero - the Fed owes it the collateral, it owes the Fed the money. The Fed's balance sheet increases, however, by "creating" cash. The financial effect of that transaction, however, is vastly different from the Fed merely depositing money in a bank, without the offsetting increase in the bank's reserve. That is truly "printing money."

The latter is what was done in the Wiemar Republic, Argentina, and Zimbabwe; the former is precisely what CAN'T happen under the gold standard, because in it the price of gold is fixed as is its supply in the short-term. That's why the gold standard did not work in the deflationary 1930's, and the inflationary 1970's. Short of hoarding krugerrands a la malraux, the money supply is fixed under the gold standard. It's what caused the great periods of inflation and deflation in the 19th century, when the money supply was suddenly increased either through the issuance of paper money, or more gold was found.

When the Fed says it can quickly rein in the amount of money, it's telling the truth. It can merely return the bank's reserve and demand the cash back, and the net effect is 0. It instantly takes all that cash out of the system. In the Zimbabwe case, on the other hand, if the central bank takes back the cash it will cause a run on the bank because deposits will be insufficient to cover withdrawals.

To clarify, when the Fed withdraws the cash from the system, it returns the collateral to the bank, which returns the cash to it. The bank must reduce lending or find another source of cash to pay the Fed back, but its balance sheet is unaffected: it still has the asset (the security), just the "swap" has been reversed.

The result of this is that the bank has more cash to lend. But truly, it could have performed this same transaction with any other entity - it's similar to a repurchase agreement: I'll give you my asset for cash, and agree to repurchase it at a later date. Just with any other entity, the money supply isn't increased.

In the case of Zimbabwe, however, the money never existed in the form of collateral, so if the central bank takes back the cash, the bank doesn't get anything for it because it didn't "swap" anything to get it. The effect of transactions like this is a) hyperinflation; and b) runs on banks when the policy is reversed, because the banks' liabilities (deposits) must be used to pay back the central bank.

"The Fed accepts a bank's collateral as a bank reserve, and lends it cash against it. The net effect on the bank is zero"

Of course it is not zero. The reason why the Fed is even bailing these institutions out is that the "collateral" is now worth SO much less that there is no market for it. in other words, what these institutions "thought" they had, they never did, and the Fed is making what they "thought" they had a reality. and to achieve this, they are creating money by expanding the money supply.

At the end of the day, when the Fed is being run by Ben, a man who has been quoted an infinite number of times saying:

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

"What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

What can we say, we have Ben Bernanke who himself EXPLICITLY uses the term "printing press (or, todays, its electronic equivalent)? I'm not going to argue against him- he's the one who's talking about printing presses. Who are we to say that's not what he meant when he said that? chalk it off to semantics if you will, but-

Bottom line: Fed is expanding the money supply. I think we can all agree on that.

"When the Fed says it can quickly rein in the amount of money, it's telling the truth. It can merely return the bank's reserve and demand the cash back, and the net effect is 0. It instantly takes all that cash out of the system."

That is "technically" correct. However, in the real world, mixed in the world of domestic and international politics which in this crisis is much more complex than any global crisis before, i think we can also all agree that it is much easier said than done.

In effect, the Fed will have to get the timing perfectly right. Too soon, and they will be accused for causing the problems to fester. Too late, and they will be accused of creating massive inflation.

Perhaps you may be of the group who thinks the Fed will get the timing right.

Call me crazy, but I don't think that they will. why?

well, for starters, due to the political implications distorting economic policies, it will be very difficult.

and then, on top of that, these are the very same (geithner included) pilots (as taleb eloquently puts) that crashed the plane. why should i trust that they will get something that is even much more difficult to execute right this time? these clowns couldn't even get the TARP/TALF programs right after numerous policy changes in the middle of implementation? how can our memories be so short to forget that it was the very same Fed under Greenspan who kept interest rates too low for too long after trying to avert a deep recession from the DotBust that caused the even bigger housing bubble?

sorry- given how these people have performed in the past, they are more likely to fail than succeed.

history has shown that gov't micro-managing the economy never works out in the end. all they do is postpone the problems at the cost of of the future. and they have kept doing this, until we have the situation we have today, where the problems are so huge that it may not be "postpone-able" anymore.

don't worry, they'll try their hardest to postpone it yet again by resorting to the printing press.

just watch out that they might have tapped the printing press one too many times.

"Of course it is not zero."

Yes it is, because there is a liability offsetting the asset. Your argument is that the Fed is lending out more than the collateral is actually worth. That may or may not be true in the long-term, but in the short-term, the Fed is not holding the assets to maturity, so it doesn't matter. It only matters if the banks default, which we have already seen is not going to happen.

"Fed is expanding the money supply. I think we can all agree on that."

Yes it is, but the point is that what the Fed is doing is very different from what Zimbabwe is doing. I think we can agree on that, too.

"i think we can also all agree that it is much easier said than done."

That goes without saying, but it doesn't support your doom-and-gloom forecast. That is the case today, just as it was the case in 1929 under the gold standard. The fact is that we are human, and therefore not perfect. Not Ben, not Greenspan, not Volcker, not steve, not UD, not MMAfia. If we were, life wouldn't be fun.

"history has shown that gov't micro-managing the economy never works out in the end."

Where has history shown this? Anything the government does micromanages the economy: fiscal policy, monetary policy, war, peace, elections, impeachments. All of it. What is a disaster is the Ron Paul theory - espoused by you - that the government only has the right to coin metallic money, and that it shouldn't do anything ever, and banks should be allowed to go bankrupt. It was that very laisse faire (sp?) attitude that made the Depression as bad as it was.

"just watch out that they might have tapped the printing press one too many times."

The government is NOT printing money. Expanding the money supply is NOT printing money. Printing money ALWAYS causes hyperinflation and runs on banks. Expanding the money supply does not.

Sorry.

Also, understand the while any country can have a "printing press" as per Bernanke's own words, only the US Dollar is the world's reserve currency.

For example, to buy oil in the London and US exchanges, the transactions require US Dollars (hence the term and market for petrodollars).

So for other countries, they need to manufacture or provide services exported to the US to earn the US dollars which can then be used on the global markets for commodity transactions. They can't just print more of their local currency to gain leverage in the global markets. They need to get US dollars, and unless they enter a currency swap directly with the US, the only way is to actually "work hard", export to the US, and "earn" the US dollars.

Whereas, the US can simply click on the computer button and, voila! more US dollars which are, guess what? the reserve currency! yay! how fair is this? this is awesome if you are American!

But rest assured, the more the US does this, the more the rest of the world gets annoyed, because at the end of the day, it is an grossly biased setup towards the benefit of the US. Of course, after the US dropped the Atomic bomb in WWII and gained world supremacy status, it enforced this system which we use today. America back then was on an ascending path. Today, that is not the case. Other countries have nukes, and we are in severe debt to the rest of the world. will this system, which benefits Americans continue to hold?

As I said, we won't know what the trigger will be... but the environment is getting prepped more and more with each passing day and each passing bailout and debt-driven stimulus package.

"The government is NOT printing money. Expanding the money supply is NOT printing money. Printing money ALWAYS causes hyperinflation and runs on banks. Expanding the money supply does not."

I don't know what else to say stevejhx, but as I posted earlier, Ben Bernanke himself EXPLICITLY calls it, and I quote:

"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Sorry, but I'll believe what he says over what you claim solely for the reason that he is, in fact, the Fed Chairman today.

"printing press (or, today, its electronic equivalent)"

I don't know how much more explicit or clear one can get. and that's from the Fed Chairman's own mouth.

The fatal flaw in your argument, MMA, is that you're a monetarist, who sees inflation always and only as an increase in the money supply. That is a false definition of inflation, and it is not borne out by empirical fact.

Strict monetarism is pretty much debunked by mainstream economics.

btw, it's laissez faire.

and what I find so interesting is that our founding fathers already knew about the problems we are facing today... it's nothing new. granted, the intricacies are different, but the concept and impact of human greed is always the same.

--------------------------- courtesy kwaves

In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it.

In a fiat monetary system, there is no restrain on the amount of money that can be created. This allows unlimited credit creation. Initially, a rapid growth in the availability of credit is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit. This expansion in credit can be seen in the Debt/GDP ratio.

In most cases, a fiat monetary system comes into existence as a result of excessive public debt. When the government is unable to repay all its debt in gold or silver, the temptation to remove physical backing rather than to default becomes irresistible. This was the case in 18th century France during the Law scheme, as well as in the 70s in the US, when Nixon removed the last link between the dollar and gold which is still in effect today.

Hyper-inflation is the terminal stage of any fiat currency. In hyper-inflation, money loses most of its value practically overnight. Hyper-inflation is often the result of increasing regular inflation to the point where all confidence in money is lost. In a fiat monetary system, the value of money is based on confidence, and once that confidence is gone, money irreversibly becomes worthless, regardless of its scarcity. Gold has replaced every fiat currency for the past 3000 years.

The United States has so far avoided hyper-inflation by shifting between a fiat and gold standard over the past 200 years.

1785-1861 - FIXED Gold standard 76 years
The founding fathers were concerned about the unrestrained control of the money supply. One thing they all agreed upon was the limitation on the issuance of money,
Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector, "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country" Thomas Jefferson, 1791

Many of the founding fathers experienced the damage caused by fiat currency. Most of the revolutionary war was financed by worthless currency called "Continentals".

# The Continental Currency ("Not worth a Continental") that American colonists issued for the Continental Congress to finance the Revolutionary War was replaced by the US Dollar in 1785 when The Continental Congress adopted the dollar as the unit for national currency. At that time, private bank-note companies printed a variety of notes. After adoption of the Constitution in 1789, Congress chartered the First Bank of the United States and authorized it to issue paper bank notes to eliminate confusion and simplify trade. The U.S. Constitution (Section 10) forbids any state from making anything but gold or silver a legal tender. The Federal Monetary System was established in 1792 with the creation of the U.S. Mint in Philadelphia. The first American coins were struck in 1793. The U.S. Coinage Act of 1792, consistent with the Constitution, provided for a U.S. Mint, which stamped silver and gold coins. The importance of this Act cannot be stressed enough. One dollar was defined by statute as a specific weight of gold.
# The Act also invoked the death penalty for anyone found to be debasing money.
# President George Washington mentions the importance of the national currency backed by gold and silver throughout his initial term of office and he contributed his own silver for the initial coins minted.
# The purchase of The US Mint in Philadelphia, was the first money appropriated by Congress for a building to be used for a public purpose. It was purchased for a total of $4,266.67 on July 18, 1792.

1862-1879 - FLOATING fiat currency 7 years

The first use of fiat money (called Greenbacks) in the United States was in 1862, it was used as a tool to pay for the enormous cost of the Civil War. Greenbacks were a debt of the U.S. government, redeemable in gold at a future unspecified date. They were circulated along with Gold certificates, backed by the government’s promise to pay in gold.

1880-1914 - FIXED Gold standard 34 years

The US dollar was hard pegged to gold resulting in domestic price stability and virtually no inflation. The financial needs of WW1 ended this.

1915-1925 - FLOATING Fiat currency 10 years

In order to "pay" for WW1 countries had to print a lot of paper currency which by necessity mandated a delinking from gold because there wasn't enough gold to support the paper.

1926-1931 - FIXED Gold standard, 5 years

The gold exchange standard was established wherein each country pegged its currency to the US dollar and British pound which were then supposed to be backed by the dollar. When the depression began countries tried to cash in their pounds and dollars for gold. That "run" on gold forced the end of the gold exchange standard.

1931-1945 - FLOATING Fiat currency, 14 years

Fiat currencies reign worldwide leading to huge economic imbalances from country to country and was of the major contributing factors to the beginning of WW2.

1945-1968 - FIXED - Gold standard, 26 years

1944 Bretton Woods Accord (similar to gold exchange standard of 1926-1931) Two main currencies again, the US dollar and British pound. A run to convert pounds to gold collapsed the pound and began the end of the Bretton woods accord. It took 3 years while governments tried to salvage the system and also to determine what to do next. Kind of like having one leg on the boat and the other on shore. 1963 - New Federal Reserve notes with no promise to pay in "lawful money" was released. No guarantees, no value. This is also the year of the disappearance of the $1 silver certificate. Once again, a subtle shift in plain view.

1965 - Silver is completely eliminated in all coins save the Kennedy half-dollar, which was reduced to 40 percent silver by President Lyndon Johnson's authorization. The Coinage Act of 1965 signed by Lyndon Johnson, terminates the original legislation signed by George Washington 173 years earlier (carrying the death penalty) enabling the US Treasury to eliminate the silver content of all currency.

1968 - June 24 - President Johnson issued a proclamation that all Federal Reserve Silver Certificates were merely fiat legal tender and could not really be redeemed in silver.

1971 - FLOATING - Fiat currency, 5 months

August of 1971 President Nixon ended the international gold standard and for the first time no currency in the world had a gold backing.

1971-1973 - FIXED - Dollar standard, 2 years

The Smithsonian Agreement was passed pegging world currencies to the dollar rather than gold as a fixed exchange rate.

1973-? - FLOATING - Fiat currency, 30 years

The Basel Accord established the current floating exchange of currency rates we are operating under today.

A good barometer of the size of a currency's leverage is the percentage of total Debt to GDP (Gross Domestic Product). Currently, that percentage (299%) is higher than the level the nation experienced during the depression era 1930's. With budget deficits projected for 2003 and 2004, the US will soon exceed this already inflated level.

I'm just saying, Ben Bernanke himself calls it the printing press or its electronic equivalent.

It is what it is.

Thanks, MM, I'll have to re-read it all, especially the last

Your concerns are not new. They remind me very much of lectures I heard 40 years ago from a relative of mine explaining why everyone should buy gold. As long as I can remember, there have always been people predicting the big collapse of the USD, etc.

BTW, back to RE, I took a long walk today on the East Side and was shocked at the new condos and converted older buildings I see in stages of near-completion or completion and absolutely empty. The thing that is most mind-boggling is to see the huge bus-stop ads for new construction boasting of spacious 3-and-4-bedroom layouts on high floors. It reminds me of hearing in about 2002 that new condos had reconfigured their floor plans to make larger apartments after the response at their sales offices. Why all this demand back then for large apartments at immense prices that has carried forward to today? Makes me suspect that much of the market for new condos in this boom has been a higher-income variation on the suburbs in California where most buyers could purchase with liars' loans, but without those loans there would have been no demand for them.

MMA, kwaves.com is not a reputable source.

Show us a reputable source. Ron Paul?

Re the "printing press" quote, here it is:

"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

"Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys."

Ben agrees with me, not with you, MMA. No one but Ron Paul agrees with you.

Oh - except kwaves.

You geniuses have fun trying to one up each other with your massive brains. I will stick to finding and acquiring dollar bills for 30 cents. We'll see how everyone's made out, respectively, in 5 years;) Peace.

Bsex - kewl! My point is that Helicopter Ben agrees with me - that there is a fundamental difference between buying assets to inject money into an economy, and merely "printing money."

MMA can't concede this because MMA is beholden to an antiquated economic theory - monetarism - which teaches that an expansion of the money supply is necessarily inflationary. This despite the fact that the "devaluation" of gold in 1933 did not lead to inflation, but rather deflation, which would be impossible if the currency in gold-back currency were actually the currency.

It was not.

This is why today's supply-siders are so wrong, and why I stopped watching Kudlow, who now so tenaciously defends failed theories that it becomes annoying. Monetarism and supply-side economics are no more true than Nixon's "trickle down" theories. Phil Gramm is wrong, Alan Greenspan is wrong. Milton Friedman had something to teach in 1980, but not today.

"if the currency in gold-back currency were actually the currency."

Let me rephrase that: "if the currency in gold-backed currency were actually the gold. It was not."

"Ben agrees with me, not with you, MMA. No one but Ron Paul agrees with you."

I beg to differ... there are many others besides Ron Paul who agree with me.

LOL stevejhx, how did i know that we would go down this path from the foreshadowing of previous skirmishes we've had regarding Gold?

=D

at the end of the day, i do appreciate and acknowledge your points, and i find discussing these issues with you interesting and stimulating.

while we both agreed with each other (against many others here back then) that real estate was a bubble waiting to pop, we find ourselves having differing opinions here.

time will tell, stevejhx, and as I've mentioned before, I hope I'm wrong, even though I think I'm right.

"there are many others besides Ron Paul who agree with me."

Not that many.

"I hope I'm wrong, even though I think I'm right."

If you're right - and you may be - it won't be for the reasons you think. Monetarism is dead. In times of very high taxes Friedman had much to teach; just not now.

Even Greenspan found a "flaw" in his theories.

"None of you know what you're talking about.

NOBODY KNOWS WHAT'S GOING TO HAPPEN. How many times do these "experts" have to be proven wrong for you knuckleheads to get it through your brain that there is no Nostradamus...and you certainly aren't one. None of you have a fucking clue what you're talking about. None of you are geniuses.

Just shut the fuck up. UGH."

After all this stimulating discussion, I have to come back to this wise (if salty) quote. Reminds me of Socrates. Good luck to everyone trying to figure this out, but I have to say, I don't think anyone knows what they are talking about.

IMO MMMafia's and SteveJXH's intellectual prowess is being completely wasted on this msg bd - they really should be advising Obama on economic policy. Somebody needs to contact the WH and rectify this.

Unfortunately, thanks anyway, but I'm otherwise busy today translating Italian contracts. Obama's got it just about right, though, IMHO.

akallabeth - nobody forces you to read this, or to use unwelcome profanities.

Steve / Mafia - just some friendly parting advice: a little less proportion of pontificating and a little more proportion of listening to others might result in a net benefit to you guys. GLTY.

BSexposer, Urbandigs asked a question. We are answering it.

It is a complex answer that many don't understand - the difference between "printing money" and "expanding the money supply."

I saw some piece on the 87 crash (wasn't a comparison to today, just happened to be talking abouut 87) and they had some wall street guy say "we're in a depression".

stevejhx - dude, you take yourself WAY too seriously. Try a little humility from time to time. It's a good thing.

so any, back that chart.........

if a chart shows prices of houses going up, someone we might label as indulging in "linear thinking" deduces from that chart that if s/he buys a house its price will go up

how is taking a chart of the '29-'32 bear market, superimposing a chart of the current market over it and deducing from that exercise that this bear market will play itself out exactly as the '29-'32 bear market played out somehow different from the "linear thinking" (my imprecise label)

I say this not to criticize reading charts, constructing charts, or interpreting them, but to ask why, MMafia, you would use the '29-'32 market data as evidence of your prediction that we have a lot further down for this stock market to hit bottom

but you did answer it for me, so sorry to be a nag - I just think it's speculation and that your guess is as good as the next person's - however, I won't engage in a faux discussion in which I state "you're wrong; I'm right" I'll just read your longest post and try to fathom it ;)

When will the giant ponzi scheme that is the US economy finally unravel?

When will America's (a) massive budget deficits financed by the sale of US treasuries to foreigners, (b) sky-high trade deficits and current account deficits, (c) unrestrained money-printing, (d) sinking dollar, (e) ceaseless expenditures on foreign wars, (f) low-levels of personal savings combined with massive consumer debt and (g) profligate spending ways finally bring down the giant ponzi scheme that is the US economy?

When? You geniuses seems to have all the answers? :)

i think its because that was the last time we had debt deflation followed by a credit/housing boom like we are seeing now

UD is correct - the last time we had a boom and bust like this was the Great Depression. The causes are relatively similar. The reaction from the authorities, however, is very different.

That doesn't mean that housing doesn't have to deflate - it does - but it does mean that we're likely to avoid such a calamity.

I agree with McHale, as well - there need to be macro changes. But I was flipping through the channels last night waiting for something decent before The Tudors, and I stopped at FOX of all places and the reporter was discussing their "Tea Parties," and she said: if you want not to raise taxes, tell us what you would cut in spending to balance the budget.

Therein lies the problem.

McHale,

When? GEAB forecasts around the end of 2009, that the unraveling will begin.

As such, I also think that sometime around then, we shall see the REAL crisis come home to roost.

The analysis is consistent with mine, so feel free to read up on it if you are interested. I highly recommend doing so, even if stevejhx might also claim that it is not a reputable source =D

Just because St. John of Patmos wrote the Apocalypse doesn't make it true.

I confess that I've been stunned by the four bad bears chart, with the parallels b/t the 1929-33 and today's downturns running at such similar rates.

stevejhx is absolutely correct, what is different is the reaction from the authorities. that doesn't necessarily reassure me, however.

lowery, the following has been bouncing around the last few days and may be of interest to you. more and more respected academic economists ARE calling this a depression, particularly from a global perspective.

http://www.voxeu.org/index.php?q=node/3421

"akallabeth - nobody forces you to read this, or to use unwelcome profanities."

When did I complain? Over sensitive steve. And the quote is not mine. And no, I didn't feel forced to use it. But justinb is one of the few who has expressed the one constant truth in all this: everyone has been massively wrong on at least one occasion.

But as I said, I find this all interesting. But I think people are taking their positions a little too seriously, with a little to much confidence. Humility in the face of so much incorrectness might be in order.

akallabeth, I hope "everyone has been massively wrong on at least one occasion" is true; then I wouldn't feel such a sap for not selling my apt two years ago and renting.

aboutready,

that is the key point: this is a global crisis, and as such, the political distortions that create inefficient economic decisions will be much more pronounced than before.

voxeu, along with other think tanks like geab and so on appear to share the same analysis and projections, even though they are disparate groups.

although the appetizer crisis we had last year was delivered by the US, the main course will be delivered by the rest of the world.

MMA, I do wish you'd post something with some sort of reference to some sort of knowledgeable authority with some sort of opinion somewhat supporting what you're saying.

akallabeth, i hope to hell i am wrong.

stevejhx, are you talking MM's gold stance, or the sky might be falling opinion? VoxEU is a very well respected site.

stevehjx. howz about this data point to sink your teeth into... the "stress" test is based on 10% unemployment... LMAO. That's not a stress test that's our unemployment by the 2nd half of 09', right bf we hit 12% in 2010 and then I'll re-assess in 2010.... we are testing after the FACT.....

LMAO... 10%, in Keebler we trust!!!!

w67th, actually, the stress test (baseline and more adverse scenarios) presumes LESS THAN 8% unemployment.

http://www.calculatedriskblog.com/2009/04/roubini-and-stress-test-scenarios.html

AND the Keebler elf is letting them test themselves. WTF?

stevejhx, i've posted "publicly" available information before... for instance, i've mentioned the geab.

I don't see where Franck Biancheri has any degree in anything, MMA.

I mean economists. Someone reputable.

And - scarily! - he purports himself to be the "Leader of the New European Generation," yet nobody seems to know who he is.

MMA - this is close to survivalism.

FINALLY! A realistic asking price. I hope the rest of the unrealistic sellers and brokers follow suit so we can start generating some economic activity in the market.

http://www.streeteasy.com/nyc/sale/349734-coop-444-east-86th-street-yorkville-new-york

johngalt1945... FYI, that's not remotely "market." But carry on and enjoy....

aboutready, thanks for the link. The funny(ier) thing is that these same quants who "modeled" the MBS and all, probably are the same dufuses modeling the stress test. FWIW, I think the "walk-away" scenario on a mortgage is non-linear on the downside, i.e. a 1% increase in unemployment does not increase foreclosures by (let's say 2%). There is a point at which it becomes exponential and I believe that would be 9% unemployment. :)

The next set of unemployment numbers and subsequent foreclosures will show this trend...

One other bit of hilarity... apparently a bunch of "re-finances," foreclosures, short sales in California were the result of fraud. So even the "bounce" re-sales number is suspect. Apparently a drug dealer decided it was easier and more profitable to get money out of the BOAs of the world than hustling and getting shot at :)

Hi John, I guess you're the broker for that one. 770K is not horribly out of line, but nothing to write home about either. 18B on a higher floor and in immaculate condition sold for 775K four months ago. And 4 months ago many people were still in denial and things were pretty different. Most really attractive listings right now are asking 2004 prices, and this one needs another 100K chopped off to achieve that. In another thread (the "my neighbor is undercutting me" one) there was some discussion about an apt of roughly the same size as this one (only 1 bathroom, but slightly bigger rooms) in probably horrible condition but 2 blocks closer to the subway, low floor, asking 575K. Considering how many converted Jr4 like this are jockeying for position at 444 East 86th, I personally advice you to either bid 100K below or less, or if broker, to chop more substantially.

Also, John, the other apartment's maintenance is 350 bucks less (that about a 60K value during the life of your mortgage) and that bldg. has a pool and exercise room.

w67th, letting the banks do the modelling is kind of like letting the inmates determine the probation terms.

stevejhx, if you are looking for mainstream or readily recognizable people/publications as "reputable" sources, how about Krugman, the winner of the Nobel prize in economics in 2008 (they decided to award it to the best in international economist for a good reason last year knowing the impending global crisis).

http://krugman.blogs.nytimes.com/2008/10/26/the-mother-of-all-currency-crises/

does a Nobel prize winner last year for Economics count?

or how about the Economist? its intelligence unit currently categorizes the scenario as "alternative" but of course, that is subject to change... in my opinion, around the end of 2009/early 2010.

http://viewswire.eiu.com/index.asp?layout=VWArticleVW3&article_id=914360276

does the Economist Intelligence Unit publication count?

bottom line and message i am delivering here is simple and two-fold:

1. we have not seen THE bottom, and the recent run-up is just a bear market rally- the S&P can even go to 1,000 before the secular trend re-asserts itself

2. the REAL crisis will manifest later in the end of 2009/early 2010 in the form of a currency/forex crisis, and the implications of such an event will be huge and game changing.

again, i want to be wrong, because i don't want to live through that situation. let's hope that i am wrong.

MMAfia.....shit and they call me Dr Doom at work!!!!! Hey I max out my 401K and 457K plans at work into Guaranteed/Stable funds about a 5% return....you think these funds are safe? The other choice would be taking a tax hit, putting my cash into bank CD deposits and hoping the FDIC remains solvent.The FDIC released its eagerly anticipated quarterly report detailing the sad state of affairs that our banks find themselves in. At this point, investors are immune to shockingly bad news, so from that perspective, the report was well received last month. A few highlights for those not interested in reading the press release:

* Commercial and savings institutions insured by the FDIC reported a net loss of $26.2 billion in the fourth quarter of 2008.
* More than two-thirds of all institutions were profitable in the fourth quarter, but their earnings were outweighed by poor performance from a few large banks. Ahem, you know who you are.
* Total deposits increased by $307.9 billion or 3.5%, the largest percentage increase in 10 years. This is actually somewhat positive. It seems that despite all the bad news, we haven't lost confidence in our banks. It does indicate cash hoarding and risk aversion, but is still better than massive withdrawals and purchases of gold and guns.
* Twelve institutions failed during the fourth quarter and one received assistance. During the year, a total of 25 insured institutions failed. The problem list grew from 171 to 252, with total assets increasing from $115.6 billion to $159 billion.
* The Temporary Liquidity Guarantee Program raked in $3.4 billion in fees since its October inception. Of course we can easily blow through this if any of the $225 billion in outstanding FDIC-guaranteed debt defaults or any of the banks that purchased guarantees on the $680 billion in additional deposits fails.
* Most troubling, in my opinion, is that the FDIC blew through $16 billion of its insurance fund and only has $19 billion available. $22 billion has been set aside for estimated losses on failures anticipated in 2009. Call me crazy, but this doesn't seem like nearly enough to cover the potential failures. There are 252 banks on the list with assets of $159 billion and we're just getting warmed up. We're not even out of February and already 14 banks have failed this year compared to twelve institutions in the fourth quarter which cost the FDIC $16 billion. The rate of bank failures is just beginning to pick up steam as the economy has hit a brick wall and default rates will continue to ratchet higher. Next year will be far more expensive than this year so how is $22 billion supposed to cover the rest of the year? That number seems completely unrealistic to me. Although the FDIC board is meeting tomorrow to set deposit insurance rates and to consider adopting enhancements to the risk-based premium system (uh, ya think?), something tells me that they are completely mispricing the cost of the insurance. Mark my words, before the end of the year, the FDIC will be hitting up the Treasury for cash.

BTW I had cut and pasted this but I find it interesting.............

* Commercial and savings institutions insured by the FDIC reported a net loss of $26.2 billion in the fourth quarter of 2008.
* More than two-thirds of all institutions were profitable in the fourth quarter, but their earnings were outweighed by poor performance from a few large banks. Ahem, you know who you are.
* Total deposits increased by $307.9 billion or 3.5%, the largest percentage increase in 10 years. This is actually somewhat positive. It seems that despite all the bad news, we haven't lost confidence in our banks. It does indicate cash hoarding and risk aversion, but is still better than massive withdrawals and purchases of gold and guns.
* Twelve institutions failed during the fourth quarter and one received assistance. During the year, a total of 25 insured institutions failed. The problem list grew from 171 to 252, with total assets increasing from $115.6 billion to $159 billion.
* The Temporary Liquidity Guarantee Program raked in $3.4 billion in fees since its October inception. Of course we can easily blow through this if any of the $225 billion in outstanding FDIC-guaranteed debt defaults or any of the banks that purchased guarantees on the $680 billion in additional deposits fails.
* Most troubling, in my opinion, is that the FDIC blew through $16 billion of its insurance fund and only has $19 billion available. $22 billion has been set aside for estimated losses on failures anticipated in 2009. Call me crazy, but this doesn't seem like nearly enough to cover the potential failures. There are 252 banks on the list with assets of $159 billion and we're just getting warmed up. We're not even out of February and already 14 banks have failed this year compared to twelve institutions in the fourth quarter which cost the FDIC $16 billion. The rate of bank failures is just beginning to pick up steam as the economy has hit a brick wall and default rates will continue to ratchet higher. Next year will be far more expensive than this year so how is $22 billion supposed to cover the rest of the year? That number seems completely unrealistic to me. Although the FDIC board is meeting tomorrow to set deposit insurance rates and to consider adopting enhancements to the risk-based premium system (uh, ya think?), something tells me that they are completely mispricing the cost of the insurance. Mark my words, before the end of the year, the FDIC will be hitting up the Treasury for cash.

MMafia - does this zero hedge piece basically conform to your biggest concern?

http://zerohedge.blogspot.com/2009/04/bail-out-for-dummies-part-1.html

Bail Out For Dummies - Part 1
Posted by Tyler Durden at 10:29 AM
Zero Hedge believes it is a civic duty to represent the total melange of assorted concepts and alphabet soups in the ongoing debacle that is the Bail Out in a comprehensible and easily understandable context as the decisions the administration is making will have generational consequences. Therefore, I am presenting a view of the players, the mechanisms and the core of the Bail Out problem in a way that will be much easier to be comprehended by most interested parties. The conclusion is frightening.

The Players

The Core Of The Problem

As the table below tries to capture, the core of the Bail Out problem is reconciling the balance sheet of the banking and thrift system. The biggest concern is the roughly $8.1 trillion in loans currently on the asset side of the equation, however the other assets, which include $2.8 trillion in securities and $2.5 trillion in other assets should not be ignored. I point out the loans as this is where the vast majority of the "toxic assets" reside. The real question mark is what is the true value of this $8.1 trillion number as the financial system contracts massively. As has been pointed out, banks have taken only about $1.2 trillion in write downs against these assets.

Is that amount of write downs enough?

Not by a long shot if one considers the various guarantee and support programs enacted by the Federal Reserve and the Treasury. In a normal world, the Assets, by definition, should equal the Liabilities plus Shareholder Equity. As nobody knows what the true value of the assets really is, the Bail Out support programs are designed to provide the backing to make it seem like the almost $8 trillion in deposits, the core of bank and thrift liabilities, are not "supported" by toxic assets, or "hot air" to use popular jargon. As presented, the various Bail Out programs now support over 72% of the total liabilities on the balance sheet. The implications of this are staggering: Roubini anticipates the total amount of write downs (in the US) will reach $3.6 trillion, or another $2.4 trillion to go. The revised IMF estimate (which is not the final one by a long shot) estimates $3.1 trillion in total US losses, or another roughly $2 trillion to go. These provisions are optimistic. Why - because through its various implicit and explicit guarantees the administration is saying the total pain could potentially reach $8.8 trillion. The Fed and Treasury are also providing support for up to 20% of the bank system shareholder equity through TARP preferred stock. As the government has the best information about the true sad state of affairs, it is likely that as more and more information about the weakness of the financial system comes to light, more of these support guarantees will become utilized to their full extent. This also means that the asset side of the balance sheet is potentially "inflated" by almost 75% and the net result could be the most dramatic collapse in a banking system's assets in record history as over $8 trillion in "assets" are reevaluated.

The Collateral

The logical follow up is what securities are eligible for all these various support programs. As the table below demonstrates, an increasing amount (in number and absolute dollars) of "liquidity" facilities by the Fed are allowing essentially any asset to be eligible for collateralization. Whereas traditional Fed liquidity conduits had been limited to just the least risky of assets, (AAA rated ABS and CP, and Treasuries) it is becoming the norm that virtually any security, regardless of risk will be "eligible" collateral for Fed backstopped guarantees. The recent transformation in the TALF (with the PPIP) support is just such an indication. Ultimately, as additional Bail Out programs appear, it is likely that they will have no practical collateral threshold whatsoever, as more and more assets of all types are perceived to be dramatically impaired and which need systemic support.

As Zero Hedge pointed out over the past week, the U.S. deficit is increasing at a dramatic and unprecedented pace. The bulk of expenditures are currently going merely to fund the Bail Out program, in essence transferring U.S. sovereign issuance to the Fed's balance sheet which uses the newly minted cash to fund all the incremental and growing support programs. Currently only a small percentage of the guarantees are funded, and as we head to the full funding capacity on all the Bail Out programs ($8.8 trillion), Zero Hedge expects to see as much (not necessarily the full amount) as $7 trillion more of new Treasury issuance as the true "worth" of the assets is realized. All the debate over Agency, CRE, whole loan, etc. write downs are really just a drop in the bucket based on none other than the government's own estimate of just how bad things could really get eventually. In this context the Mark To Market debate is also moot, as is private participation in the PPIP, and the Stress Test: the scale of the problem is simply insurmountable using current mechanisms in place.

As more data emerges, Zero Hedge believe the real risk to the Bailout program is in fact the liability side of the balance sheet. The bottom line is that every dollar printed by the Treasury directly goes to fund (and dilute) a dollar in deposits, bypassing M1-M3. If the $8 trillion pool in total deposits realizes that it is supported by assets which even the government is saying are worth fractions on the dollar, the risk of a wholesale systemic bank run becomes unstoppable even with all the government backstops in place, as the latter will be contingent on continued willing recipients of those rapidly devaluing pieces of paper known as U.S. Treasuries and once that assumption is questioned or outright proven false, all bets are off.

"1. we have not seen THE bottom, and the recent run-up is just a bear market rally- the S&P can even go to 1,000 before the secular trend re-asserts itself"

MMA - I'm not good enough to make such a prediction.

"2. the REAL crisis will manifest later in the end of 2009/early 2010 in the form of a currency/forex crisis, and the implications of such an event will be huge and game changing."

That is not in your opening post. It's a different issue. And yes - there WAS a currency crisis when Krugman wrote that in his blog, in October 2008. That is why the Fed instituted currency swaps with other central banks.

UD, that is a relatively detailed analysis describing the crux of the issue at hand.

The game of smoke and mirrors being played by the gov't and wall street can only last so long. You and I know that there is much more on the way, on top of what has already transpired in terms of credit/asset writedowns (re: commercial re, credit cards, other classes of mortgage loans resetting etc.) Coupled with the increasing job losses (negative feedback loop), the bailout, as the blog post correctly states, will have to increase (utilize more of the $8 trillion).

The can cannot be kicked down the road forever. The game of smoke and mirrors cannot also be played forever.

And that is just the US side of the equation. Add to this the UK's similar (perhaps even worse) problems and you have an ignitable situation ready to go off. Other major players in the world, particularly China and Russia are of course, aware of this, hence they have ALREADY been executing the reduction of US Treasury purchases and political stabs at a new SDR based global currency (it is true that earlier attempts failed, but unlike the 70s, this is much more dire situation as far as the global financial system goes).

So what we have is an environment that is prime for some trigger/accident (impossible to predict what the trigger will be) to cause the destabilization of the global currency environment (much like the Bear Stearns or Lehman collapses acting as triggers in a "prepped" environment). The risk is the collapse of the US dollar (and all USD-denominated assets), but more importantly, it will also induce, out of psychological contagion, a general loss of confidence in paper money altogether.

This is looking more and more like late 2001, early 2002 when general economic business actually did improve for 3-6 months then caved again with a punishing, pervasive bear market mentality sent the indices down every day in the summer toward a late Sep. 2002 bottom.

Market goes higher near-term and slowly sucks people in. More and more encouraged brokers will come on here and taunt regulars about how this is their last chance. Starting summer 2009 and into early 2010 will see the re-emergence of all of the above issues and we will revisit 700 SPX.

The international monetary crisis has been bumped up by GEAB to the end of summer, 2009.

That's ahead of my anticipated schedule, but given that this think tank was correct last year (in feb 2008) when it correctly forecasted the crash at the end of Sep 2008, its analysis and resulting forecast this time around should not be discounted.

Prepare accordingly people. The real crisis is fast approaching.

So now mainstream media CNBC posting similar data and analysis to my OP:

http://www.cnbc.com/id/30682133

Try pulling out a chart of Copper and Silver (Industrial Metal) prices over the past 10 years.
Global Depression? Highly doubt it.
Anyone in cash will get blown away in the upcoming hyperinflation wave over the coming years. Some of you bears need to check out property prices in Hong Kong.

ericho, once they manage to reverse the deflationary trend, i'll be ready to jump in before inflation hits. no hurry. tons of holes to fill here. trillions of holes really.

http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx

Ok folks, time is running out... the main course a.k.a. the REAL crisis is about to be delivered to us.

if we're lucky, we have perhaps until September before IT happens. i hope the smarter readers here have prepared accordingly.

the global financial framework in place since the end of WWII is having its swan song with this last gasp 'rally'.

the takedown will be severe, and those who didn't prepare? well, say goodbye to your real purchasing power and asset valuations.

the shift or metastization from private corporate insolvency to sovereign and governmental global entities is already well in place, and now the symptoms... the very first symptoms are starting to appear in mainstream media outlets... (i.e. UK AAA rating doubt and now, US AAA rating questions - these were once thought to be unquestionable in the general public's view. the fact that we are even talking about it in mainstream media is a tripwire that i've been waiting for and watching).

so now that the tripwire has been activated, there's not much more time. we are months away now.. not years anymore. by the end of summer. it's still not too late to prepare, but time is running out.

you have been warned. take action.

lemmings... NICE NICE...

ericho75 cut off your leg below the knees and put it in the freezer... you'll need it for food after sept 09'....and not the arms.. .cause you'll need them to help you cook your defrosted foot... think my man... think!

w67th, you're a sick puppy but i love you nonetheless. Thinking is vastly underrated.

MMAfia makes me look like Sally Sunshine.

More and more "whiffs" of the main course a.k.a. the real crisis drafts from the kitchen.... Treasury sell off is yet another tripwire that has been activated.

the environment is being prepped.

you see, while it is impossible to pinpoint what form the trigger will be, you must understand that the environment is prepped. it's like a room filled with pure oxygen.

we are at the inflection once again, like we were last year for the stock market, and the year before that with the housing market.

don't be fooled and listen to those who claim things are going to get better now. how many times will you listen to those who have been wrong?

instead, listen to those who have been right and what they have to say. listen to the people who foresaw what happened and warned people accordingly.

we have to deal with the real crisis, the main course, that all the earlier blow ups have lead us to.

prepare accordingly.

prepare accordingly, buy canned goods, join the Mafia

mmafia... I'd like a burrito as the main course...

Can't we buy frozen? I much prefer frozen vegetables.