"the worst financial crisis since the 1930s.”

Is the opening line in the new book from George Soros which was released yesterday.

I know that things are going to get bad, I can see that every day from my desk at work.



What do you think though? Do you think it could actually get that bad? Or is Mr Soros just trying to sell us his book?

Heres todays comment from ABN Amro

Economic comment
Funny money by Dominic White

Independent, lacking in concentration, self-obsessed, confident and impatient. Apparently, these are all character traits displayed by 'generation Y' (those born between 1980-1994). I can see them in myself. For example, it took me seven hours to write today's Overnight Report. I just couldn't focus after the BBC website described Cristiano Ronaldo as the best
soccer player in the world. I had been convinced that it was me (they either have the two of us confused or haven't seen me play). My impatience has also started to show through.
Following the spectacular implosion in markets last August, I've been told countless times that the 'credit crunch' would reap death and destruction on the global economy. But it's been nine months now and I'm still waiting. Quite frankly, I'm getting a bit bored.
I sense some disbelief. Surely the US recession and slowdown in other parts of the global economy suggest the credit crunch has taken hold? Perhaps. But something doesn't add up.
There's plenty of evidence suggesting banks in the US, euro area and UK have curtailed the supply of credit to the household and corporate sector. For example, bank lending surveys (such as the Fed's Senior Loan Officers' survey) have indicated a tightening of lending standards in most major economies. This has occurred both in price (the interest rate charged) and quantity (the overall availability of loans) terms. A generalized rise in credit spreads seems to corroborate this. Yet, other evidence is less conclusive. In particular, money supply data - where evidence of the credit crunch should be most clearly apparent - suggest the flow of lending to firms and individuals hasn't dried up.
For example, yesterday's UK money supply data showed a jump in consumer credit and corporate-sector lending remaining relatively firm. In the euro area, corporate sector loans have remained particularly buoyant over the last six months. And even in the US, credit growth to the non-financial sector remained robust through to the end of 2007 (see charts on
page 2). So why is this the case? To be honest, I'm not sure. But I can offer some possibilities. For instance, firms might be drawing down on existing lines of credit rather than securing new finance. Alternatively, there could be some substitution going on. Bank borrowing might be partly compensating for the freeze in securitized finance. Of course, it
could also just be a product of lags. Like monetary policy, an exogenous change in the supply of credit will filter through to the real economy with 'long and variable lags'. On this argument, we might not yet have felt the maximum impact of tighter credit conditions on activity.
Still, it's generally accepted that a shift in monetary policy takes between 6-12 months to influence economic activity. Tighter credit conditions are likely to work over a similar
timescale. Consequently, I'd suggest the impact should be more obvious by now. One final
possibility is that the potential implications have been exaggerated. Sure, credit is less
obtainable to highly-leveraged financial institutions and the most indebted firms and individuals. But the creditworthy still appear to have access to finance. In this sense, the weakness in activity that we've seen so far could be a product of heightened uncertainty, broader financial fragilities (such as the fall in equity markets) and the rise in oil prices, rather than simply tighter credit conditions per se. Indeed, there are good reasons why
tighter lending standards might not necessarily restrain growth, particularly in the euro area.
In aggregate, the corporate and household sectors continued to run financial surpluses through to the end of last year. This suggests the availability of credit might not be acting as a binding constraint on activity.

While it will never be as bad as the Great Depression in scope and magnitude, it could well be the worst finance disaster since the 1930's.

Sure, he has a point and it could get far worse yet

This time though, instead of the focus being on banking panics, it's more about finance company panics.

I suspect a lot of people will be getting scared and pulling their funds out of them regardless of their accounting and integrity and this will start causing defaults and eventual insolvency.

I think we will see more of these finance companies collapse and it all depends on what this causes and whether it will escalate into the businesses and mortgages which have debt or investments in them.

Interesting to watch, I also predict another bubble developing as it shifts out of housing and into commodities.

Keynes spoke of a liquidity preference, but with fiat currency and constant monetary injections, devaluing the dollar to attempt to stimulate demand, it may turn into a commodity preference.

When it comes to selling a book, one must wonder whether Soros needs the money.

I think he is just a major economic enthusiast, spending most of this life analyzing the financial markets and wanting to write his perspective on the phenomena.

Maybe leave another reminder of his influence behind...

I would say it will be an interesting read.

I don't see the issue as existing here and now but about 12-18 months down the track as the current trauma starts to really filter through to other parts of the system.

Increased interest costs means that there will be less consumer spending. A drop in consumer spend will have an impact because if a sizeable chunk of the population start to curtail their spending and as businesses try to stay afloat, people will start losing their jobs. Perhaps we can take some comfort in the fact that home ownership rates have dropped to 67% recently. At least that means that one third of us are renters and will still be able to afford to go shopping regardless of what interest rates are doing.

Yes some of this fallout is predictable and even traceable with enough investigation of banks and finance companies their subsidiaries, assets and customers et al. But there is also this large veil that exists about who will be pulled down and what magnitude the end result will be.

For instance, who has debt with who and are any of these connected entities in financial trouble because of lost confidence, lending restrictions and defaults? If another major goes into receivership, who will be effected?

In our case, one area to think about is what portion of our trade imbalance constitutes NZ companies holding debt with business partners, suppliers and wholesalers or parent companies in overseas markets which also have their own debt tied into the turbulence.

As an example they may request outstanding debt be paid back that our companies hold with them (which up until now was ok to hold) to assist with their financial woes, which will then in turn, cause strain here in our market.

It's just electronic money...

farms can still produce the same amount of food
factories can still produce the same amount of goods
there is the same amount of labour

We have to avoid crying because our fingernails are chipped.

It's a little more complicated than that Vads, because money is the main method for exchange between labour, food and goods and its value determines the amount of activity that can occur.

So if there is a sudden alteration in moneys value or in its availability or the amount people are willing to spend, then demand for food, products and labour will decline as a natural outcome of that.

This particular aspect is connected to sub prime debt and loss of confidence in the money market and finance companies and banks because of it.

Once there is a disruption in the supply and velocity of money, it’s a difficult situation, especially when central banks are struggling to restore confidence.

I know, but it's an issue of paradigm perception rather than reality - ever since money became a self-licking icecream when we went off the gold standard, it's all perception.

Think about it from a scientific perspective: the same amount of resources etc (which are what money is, resources/labour/energy) are around; whats changed? Perceptions?

Now if some virus killed all the metallurgists or all the coal in the world dissolved... Id understand

I've quoted with the salient points each of you has made. Vadz you're being obtuse you know as well as I do that a decline in economic activity has real and meaningful consequences.

Nobody's claiming that the consequences aren't real Peat. Only that the causal factors leading to these consequences aren't grounded in reality - only in a particular paradigm.

Emperors New Clothes. Sure people may respond to the Emperor's new look... the results are real... but why do they matter?

you academics are speaking in riddles...

debt must be paid back (or reflated away) . thats the bottom line. people get rich on the way up but the unemployment queues will grow massively on the way down.
Is it perception or reality when 80,000 jobs were lost in the month of March in the USA.

perception peat

they weren't real jobs

grim reading this whole state of affairs... isn't it funny when the markets go bad the capitalist big wigs are not above taking a state hand out or leg up but when things are fine in their land its all about 'let the market decide' and fuck the little guy

a lot of little guys are getting and going to be hurt over this, crushed like ants as history marches forwards

Yes there is room to criticize here and it is true that there is a particular paradigm operating here, i.e. a belief that the value of electronic or paper (fiat) money is real and thus has consequential effects.

Some of you are sounding an awful lot like Austrian Economists here, so I must ask, would there be a change in the perception if the currency was say? backed by the gold standard instead?

For this is exactly the argument put forth by Austrian economists who reject fiat currency on all fronts.

EG:

1) It’s valueless and the only reason it can work in this present form is because the central bank authority has a monopoly on authorizing what is legal tender and whether it can be backed by anything, or in this case, nothing at all.

2) It can control the interest rate and amount of money in circulation and thus cause contractions or artificial booms in spending, creating false signals to businessman that there is savings to back up demand for new investments et al, thus leading to excess inventories and capacity (malinvestment as Mises calls it) in the market and inevitably economic collapse when the realization that it was all false dawns.

3) It creates bad lending practices by banks and then bails them out when they do, which Austrians believe is a moral hazard and rewarding bad business decisions.

4) It punishes thrift and the inclination to save by interfering with moneys value and the exchange rate via monetary policy.

5) It gives credibility to the Fractional Reserve Banking system which Austrians regard as a criminal system and theft of people’s savings, also a major contributing force of how excess liquidity and sub prime debt can occur in the first place.

Hence why Austrians argue for the abolishment of the central bank and a return to the gold standard, or in the case of some Austrians, a bi-metal currency which competes on the market and which the people will decide what their currency is backed by via their preferences.

Thus, it could be argued that this present paradigm is based on a rather bizarre belief in value, namely fiat currency determined by an authority which tells you it has intrinsic value and promotes false jobs, investment et al.

But one could also argue here about gold’s inherent value too? I suppose it has other uses though than simply being a precious metal based on its aesthetics and scarcity, but I always found aspects like precious metals to be just as abstract in some aspects.

Or have I missed something here and its not so much about fiat as it is gold, just what we define as valuable and worthy of exchange?

ANZ Lift their bad debt provisions to just under $1b

http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10502535


And another run on a finance company forces it to close its doors in order to maintain liquidity

http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10502486

BNZ said that the housing market is %30 overvalued and expects it to compensate by this amount over the coming months/year.

Also the amount of finance companies which are now in trouble, seems to be increasing every week, I read about them in my daily email out at ASB Bank and have noticed the listings increasing.

not sure why you say they werent real Bob. that is the Non-Farms Payroll (delta) figure released on Fri night. I dont have unemployment figures on hand but they increased correspondingly.

But yeh thats exactly what I'm saying about how the little men (and the medium sized men trying to become big of course , but they deserve it more) will be the ones who bear most of the brunt.

Rival you're right that the gold standard is abstract enough to be seen as another fiat but it has a higher 'perception' of value for various reasons including historical longevity but perhaps more importantly and from a pure economics perspective, it has scarcity eg one cant 'magically' create more of it.
Note that the USA especially but probably very few nations could actually re-adopt a gold standard.

sorry peat the first part of my post was an attempt at humour

Currency should be based on energy.

A new theory of currency?

Explain

I must say, I am fairly skeptical of returning to a Gold Standard. I admit that I am not that knowledgeable on specie currency though, but I have briefly spoken to an Austrian Economist online recently, who is presently doing his thesis in economics on Gold , it seems from his brief descriptions, more elaborate than I initially considered.

Allegedly I have heard that the famous Austrian Economist: Murray N. Rothbard makes a compelling case for its return in his book: "What Has Government Done to Our Money? Case for the 100 Percent Gold Dollar"

However from skim reading (note not completing yet) Milton Friedman's and Anna Jacobson Schwartz "Monetary History of the United States, 1867-1960" which is vast in its content and a monumental scholarly accomplishment may I add, it indicates a few periods of where Gold has caused inflation in history, when its supply increased due to mining or gold rush frenzies, much to the contrary of claims made by Austrians, which often assert it will stabilize the economy and prevent the worst potential of the boom bust cycle.

It should also be noted that during WWI, most the nations went off the gold standard in order to fund the war, which was not possible to continue with currency limited by redeemable gold.

Many countries failed to get back onto the prewar parity afterwards too and a new standard called the Gold Exchange Standard was adopted, which worked differently. i.e. Not all currencies had to be backed by it, only the US currency and the UK's pound with sterling silver. This same gold exchange standard was a contributing factor to how The Great Depression occurred from my understanding too.

It should also be noted that one of the main reasons America went off the gold standard in the later Bretton Woods system agreed upon, was to once again enable it fiscal maneuverability for funding the cold war.

History indicates that it seems to be abandoned by political elites when its convenient to do so. Not sure its any silver bullet to be honest.

Money is at heart, a conversion of goods and services - all goods and services are based on energy by definition (extraction or performance)

a gold standard wont have any benefit if its dropped whenever its inconvenient. lol. wars are always inflationary as the govt/monarch etc needs money to fund the battle.

vadinho. according to einstein my kg of lead has a lot of energy contained within it.
remember e = m (c*c). swap you it for a kg of gold seeing as they both have the same potential energy output

Why not?

However it's not as simple as that... what about the energy required to extract that gold vs. extract that lead?

When you think about it, energy is the real gold standard

(My problem is I'm not an economist - I'm a historian/military studier - and in history what matters, what causes problems, are real issues - no food, no water, no machinery etc... money is merely an abstract today)

more uses for gold than lead

You need a working model of how energy can be harnessed into a method of exchange, if it is to be taken seriously.

EG:

1) How will it be stored into a unit of exchange?
2) Will some energy be more expensive or valuable than other energy?
3) How will you prevent inflation? If there is too much energy?


Note: It will require some kind of price mechanism in order to serve as a signal for different kinds of energies scarcity.

Also take into consideration Keynes “liquidity preference” theory of money in economics.

For a run down: “Money” Keynes argued, held three special advantages when compared to assets (especially during times of uncertainty), such as: zero elasticity of production, elasticity of substitution equal or nearly equal to zero and low (or negligible) carrying-costs.

As he said in his General Theory, money is in the estimation of the public, par excellence 'liquid'.

Your energy currency must be better or at least equal to money’s advantages, for economists and the public, to prefer it and take it seriously as a method of exchange.



While water, machinery and food are important, so is the method of exchange between them and for calculating their scarcity or abundance via prices.

As an example: Two military rivals exist of equal power.

Military Power A (uses barter to exchange food, water and machinery)

Military Power B (uses fiat currency as a method of exchange between its food, water and machinery)

Conclusion: Military Power B has greater efficiency with managing its resources, and as a result will out perform Military Power A.

It’s all about efficiency/practicality et al

well Rival you can develop the model and get the Nobel Prize I'm just the ideas man.

Rival: Military Power A has sophisticated banking system etc but has crop failure and massively polluted water
... you get where I'm going

Hey, I was simply giving you some pointers on aspects/obstacles you need to take into consideration or overcome with your energy currency theory...

I have enough bullshit to deal with at the moment writting an arguement for a macroeconomic proposal for accelerating climate change mitigation technology/methodology using military economics (Read Neo-Classical Keynesian Synthesis).

You do it, me = too busy.

Re the housing market, I hate to say I told you so... Actually. Know I don't. I told you so.

Doh. "No"

I dont really think its a case of 'I told you so' here in NZ yet. Prices havent fallen much (yet). There are of course strong indications that the market is turning with a dry up in liquidity eg sales taking longer , but theres a bit of water to flow under the bridge before 'I told you so's' can be done.
(Not that I dont think it will happen)

30% retrenchment yet to be seen?

maybe but in some areas I have no doubt this is true

http://www.newyorkfed.org/mortgagemaps/
QUOTE
If you've wanted to see precisely how widespread the subprime debacle has become, I came across an online tool today that can give you a pretty good idea. And it really is precise: you can see the picture on a national level, or drill down to data for states, counties, and even ZIP codes.

At each of these levels, the tool will report on a dozen categories of data regarding subprime conditions, from the share of subprime mortgages "90+ days delinquent" to the share of late payments in the past 12 months to the share that comprise "low/no doc" loans.