American Melt Down?

Oct. 2 (Bloomberg) -- The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, signaling that more bank failures and losses could slow an economic recovery. … 26 firms {are} with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 -- a level of distress almost five times the national average. … The number of distressed banks is larger, with the FDIC counting 416 companies on its confidential list of “problem” lenders at mid-year.

Ninety-five banks have failed this year at the fastest pace in almost two decades, depleting the FDIC’s insurance fund. … The cost of this year’s failures to the FDIC equals 25 percent of the banks’ assets,* according to agency data. Applying the same ratio to the $14.1 billion of assets held by the 26 lenders on SNL’s list means the FDIC could face additional losses of $3.5 billion. {Plus cost of any of the 416 “problem banks.”}

FROM: http://www.bloomberg.com/apps/news?pid=20601087&sid=aXZinRhF5tlA

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* From this you can infer that FDIC is recovering 75% of book value of the assets the failed banks had. Considering that >20% of their loan assets were non-performing, that is so good that I suspect some cooking of the books is occurring. Perhaps Fanny May is buying bad assets at falsely elevated prices (to help the FDIC out)? If so, this is more "pushing problem into the future." - Over paying for assets does not make them good.

Billy T makes no other comments as the facts speak for themselves.

 

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I follow the world news like you do and a lot of it is about the dollar today (I know to look because my Gold jumps when the world shuns the dollar).

It was interesting to hear how Europe responded to the US saying we support the strong dollar. Their response was "sure you do, that is why you are being so responsible with your spending". They went on to imply that the US better be interested in a strong dollar. Most know that a weak dollar helps the US by lowering the price of exports and raising the price of imports. But the Europeans are saying that the rest of the world has been over invested in the dollar for a long time and now it is finally questioning the ability of the US to stop the dollar slide. There are limited ways to boost the dollar in this environment and none of them are good.

 

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The People’s Daily states the unspeakable (for westerners) truth (in bold text below):

“…The Group of Seven rich nations {at just concluded Istanbul meeting} have again pushed developing China to appreciate its currency, the RMB Yuan, so as to promote a so-called "more balanced growth." In so doing, the rich nations have obviously intended to shirk their due responsibilities in the wide-spreading global financial turmoil: As it is known to all that the current crisis has been a result of developed countries' lax financial regulation, excessive consumption and their lasting monopoly on the international financial system.{that last is obvious reference to the dollar & US} …

For the past two decades, the developed countries have transferred their low value-added manufacturing industries to the developing nations including China, which helped the developing world build a trade surplus. Moreover, the trade barriers they have imposed on their high-tech products have also contributed to a slow import growth in the developing countries. {That last refers to advanced computers, jets, etc. which cannot get US’s export permits.}

… a stronger Yuan will not necessarily lead to a balanced trade in the Western nations because the vacuum left by China will be filled up quickly by other major manufacturing economies.* In short, a dramatic appreciation of the Yuan is by no means a miraculous cure for the present economic woes of the Western nations. ..."

From: http://english.peopledaily.com.cn/90001/90778/98506/6777007.html

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* India, Thailand, Malaysia, Viet Nam, Indonesia, to name some of the large ones with lower, low-skill, labor costs than China and not to mention any in Africa.

 

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Indian work habits are improving but in attitudes towards quality control and doing mistake free work the average Indian worker is probably still is less precise than the average Chinese worker and therefore the average Chinese worker is probably worth a little more money.

If the Yuan was a floating currency and the dollar dropped 50% against the Yuan, in the short term prior to plants leaving China and relocating to India there would be some decline in American purchases of Chinese products. If a radio that Walmart sells for $60 earned the Chinese $20 with Walmart and the distributors and Brand owners taking the other $40 then the price of the radio would have to rise to $80 after the dollar fall against the Yuan. Most Americans would still buy the radio at $80 if they were going to buy it at $60 because it would still be the lowest cost product of it's type. But some Americans would decide a new radio is not in their budget if the price is $80 rather than $60.

Contrary to what outdated economics textbooks say, in the short term (prior to Chinese plants relocating to India) the US trade deficit with China will expand when the radio's price jumps from $60 t0 $80 with the Chinese share increasing from $20 to $40 (ignoring that the contracts are probably priced in dollars). The economics textbooks theorized that American companies would start making radios if the Chinese doubled their prices. The Chinese Yuan would have go up by a multiple of about 15 times before the USA starts taking it's manufacturing jobs back from China. Doubling the value of the Yuan will just double the cost of American purchases from China and will increase the trade deficit.

Of course if the Yuan doubles in value China will be able to afford to buy more from the USA so expect the price of pasta, meat and toilet paper to rise in the USA if a double Yuan allows the Chinese to eat more and eat more expensive foods, and use more paper products. But the sale of more agricultural goods to China would a minor event compared to the rise in cost of manufactured goods sold to Americans. A rise in the Yuan will create a rise in the US trade deficit rather than the fall in the US trade deficit predicted by the economic textbooks that I had twenty years ago.



A fall in the dollar against all currencies would help the USA compete against Europe and Japan in some higher tech areas in which china does not participate.

The second tier nations like Taiwan and Korea have not yet finished taking their share of high tech market share away from the more established European, Japanese and American producers. Third tier nations like Brazil, Malaysia and Poland will probably invade 2nd tier nations like Korea's market niches. Fourth tier nations will invade third tier markets and fifth tier nations will invade fourth tier markets. I know I am over simplifying to make a point and then in reality a nation like India or any nation can be simultaneously producing the highest tech products using the highest tech techniques and producing the lowest tech products using the lowest tech techniques.

The unique problems that the USA has are 1: that business people all over the world who should know better but don't still continue to view the USA and it's dollar as the ultimate in financial safety and stability and 2: that Americans still believe in American exceptionalism and don't understand that Americans will never be able to compete if the dollar is too high. Obama and most of his piers and the people at Goldman Sachs and all of their piers at Wall Street don't know that sending American kids to college does not mean that they will be able to out compete Indian college graduates willing to work for much less money. Obama and Wall Street do not even understand the problem. Most of the good jobs left in the USA are only here because business leaders were too lazy and incompetent to take advantage of the opportunities that outsourcing to developing nations presents. Granted you can't outsource high tech jobs to a place without college grads and decent phone lines but developing nations are increasing their supply of college grads and decent phone lines rapidly.

I don't think America's leaders understand what they are dealing with because they are blinded by the egotistical false idea of American exceptionalism.

 

--------------------------on Saving Rate ----------------
"... After bottoming out below 0% in 2005, personal savings jumped above 6% in May. This is a seismic shift: a 6% savings rate annualizes out to $681 billion. That's $681 billion that was recently being spent and is now suddenly being dumped into savings accounts. While that's created a nightmare for discretionary-based companies like Best Buy and Home Depot. ..."

FROM: http://www.fool.com/investing/general/2009/10/07/a-brutal-truth-facing-consumers.aspx

That sort of puts the multi-year stimulus in proper perspective as replacement demand.

--------------------------on the dollar ----------------
“… The weaker dollar may boost America’s exports as the economy recovers from the deepest recession since the 1930s. The risk is that it may also drive away America’s largest creditors just as the Treasury relies more than ever on foreign investors to buy the bonds … The dollar’s share of global currency reserves fell in the second quarter to 62.8 percent, the lowest level in at least a decade, the International Monetary Fund in Washington said on Sept. 30

The dollar’s 15 percent decline against the euro and 11 percent depreciation versus the yen since early March are increasing concern among world leaders. The decline means it’s becoming relatively more expensive to live in the U.S. The difference in per-capita income with Canada has shrunk 87 percent since October 2008. At the same time, Americans are getting poorer. - Per capita net wealth tumbled to $172,749 in August from a peak of $212,599 in September 2007 - A United Nations Human Development Report released Oct. 5 showed America’s quality of life dropped to No. 13 in a 2007 global ranking from No. 5 in 2000.

While the dollar dropped in global currency reserves, holdings of Euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.

FROM: http://www.bloomberg.com/apps/news?pid=20601109&sid=aNsHa7QfIvGU

Billy T’s comment: Stay tuned, more to come.

 

I don't think the new savers will keep this up. We have seen spikes in savings during other recessions and the spikes in savings did not last long. People will get bored with the recession when it becomes old news. When the people get bored with the recession the people will forget to be scared and will once again start buying all the things that the advertisers tell them to buy. If spending money that the people don't have is required to live the the life style that is expected of successful people then people will spend money that they don't have just as soon as their desire to see themselves as successful once again becomes greater than their fear of failure.

 

I agree with the psychology you are basing this post on, but there is no blood in a stone. i.e. Joe's credit cards are maxed out. Unlike California, he can not print and pay with IOUs. Joe really is not saving - he is paying down debt so his TV will not be reposesed etc.

Reducing credit card interest charges is the only interest rate attractive to him now, certainly not his bank's saving account.

 

Joe may be maxed out but Jill and Paul still have jobs and plenty of unused credit.

I agree with you if you feel that just based on Economics 101 America should melt down. Actually based on Economics 101 America should have melted down 15 years ago or further back and the hollow American economy situation justs gets worse every year that America does not melt down.

I am not very good at market timing but I don't this was the beginning of the next great depression. I think there will be one or two more business cycles before the next great depression starts and I think that great depression might not be more than another major recession outside of the USA which should be at the center of the crisis because the long term over-inflated dollar is the underlying cause of the crisis.

I think the bursting of housing and financial bubbles in this major recession may prove to be a godsend by having America face it's problems in stages rather than face it all at once. Unfortunately it looks like Wall Street is taking off again on it's way to reinflate some bubbles.

 

I agree with this, but probably not with your intent. Yes Jill and Paul have "unused credit" and little intention of using it! That is why, despite the FED's best efforts, the banks are not lending significantly still. - Jill and Paul have no loan applicactions at the bank, unless they are taking advantage of the "first time home owner" grants.

It is not much like a bubble inflating if Dow etc. is expressed in Euros or gold, instead of dollars. I.e. a large part of what is going on is that it takes more of the less valuable dollars to buy anything foreigners are also buying. (Even the cost of your local hair cut will be going up to, but more slowly. Deflation is due to the barber etc not wanting to risk losing business in these tough times, so he is trimming his real profits as well as your hair.) For example:

"... Investors outside the U.S. are purchasing companies in the Standard & Poor’s 500 Index at the cheapest valuations on record,* their buying power boosted by a seven-month decline in the dollar. ..."

Quote from: http://www.bloomberg.com/apps/news?pid=20601087&sid=aT1nPG0YoeYo

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* Note that ~50% of the S&P 500 earning comes from foreign sales. Then when these profits are converted back into dollars they increase very significantly - a major reason why US corporations are doing so well is that the dollar is not! And also why they are not re-hiring Joe.

 

Sure, as American inflation rises Colgate should rise and as the Dollar falls any US corporation selling products in other currencies should rise in dollar value. Those effects would not be bubble inflation.

Gold is doing well so no there is no reinflation of a Dow bubble as measured in gold. The Dow bubble is reinflating when measured in Euros or Canadian dollars which while rising against the dollar are not rising as fast as the Dow is.

The best way to measure Dow bubbles might be in PE ratios but you would have to make adjustments for the unattractiveness of current interest rates and the relative quantity of quality companies to invest in for those who insist in being invested in the stock of nominally American corporations. As PE ratios in the 1990s and then again after the tech bubble crash Stock Brokers and media financial pundits often said that we are in a new era and old ideas about what normal PE ratios should be no longer apply. These people never managed to explain why old norms for PE ratios no longer applied but I came up with scarcity of quality investment opportunities as one possible explanation and overabundance of money seeking investment in relation to money seeking to buy products as another way of looking at the situation. As the American rich got a larger share of American profits and the American workers got decreasing shares of American profits (due to new pressure from international cheaper labor) the rich who invest money had more money to invest while the workers who create corporate earnings by buying stuff had less money to by stuff therefore average PE ratios should go up.

So what to measure the Dow in when checking for bubble inflation, Gold which itself is in a irrational bubble, PE ratios which may not mean what they used to mean, the Euro which like the dollar is an overinflated currency, oil which is quite volatile or perhaps the Dow bubble status should be measured in wheat.

 

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Photo worth 10,000 words.

 

As predicted, 100 banks have failed. My current data projects that the 2009 total will exceed that of the 1992 "saving and loan" collapse (and on average the banks are larger) For full details, See: http://www.sciforums.com/showpost.php?p=2395023&postcount=165

I have not heard more on the FDIC's plan to force heathy banks to pay in advance the FDIC fee but my worst fears are becoming more likely. Namely some bank (or jointly the 3 biggest banks who are being asked for 10 billion dollars not yet due.) will get that ruled an illegal abuse of power (collecting inadvance all that is due thru end of 2012.) Then FDIC would be forced to ask Congress for money when Congress is home for the Christmas recess. More people would not be able to do their normal Chrismas shopping with no access to their bank accounts.

Also a problem coming at about the same time is that the Congress will need to raise the US debt limit. That is always done, but only after a lot of political grandstanding and delay. Christmas period looks to be "interesting" this year. (Recall the Chinese curse.)

 

"Things that can't last forever won't".

I guess the American people were as guilty as their leaders in refusing to see reality but rather choosing to live now and pay later under the assumption that America and Americans and themselves were so special that surely somebody would want to pay for our services in the future. Americans just are not that special. We are replaceable.

I think the dollar really needs to collapse or the infatuation with free trade must be abandoned prior to the reversing of the trend towards ever decreasing real production in the USA. Doing each others taxes and babysitting each others children and cooking each other dinner won't get us any Saudi oil.

 

'Twas ever so, in any society, and ever will be so...

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Mod Billy T has removed repeated copy of photo to save space (both in thread and archives) as this post is adjacent to kmguru's photo

 

Thread is "American melt down" and usually that is taken to mean economic problems in America, but this post interperts that to mean a global economic problem caused by US policy. Sort like me calling the coming depression, GWB's depression, it is "America's melt down."

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Liu Mingkang, teller of the truth that the emperor has no clothes.

IMHO, the Chinese chairman of China's Banking Regulation Commision, Liu Mingkang has publicly and correctly identified the major cause of the global crisis and the coming depression in US and EU. He did this no doubt to deflect critism from China's policy of fixing the Yuan at 6.83 to the dollar, but his reasons do not detract from the truth of his point:

"... “The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.” {Note Brazil had to impose a 2% tax on funds entering or leaving Brazil as the carry trade flood of dollars into Brazil was destroying the capacity of Brazilian factories to export. I.e. Brazil is responsibly controlling inflation with basic interest rate of 8.75% and US government effectively lends money at less than 2.75% for two years. Thus with a 6% very safe margin, a huge "carry trade" has flooded Brazil with hot money funds, making the Brazilian Real super strong as many want it to invest in Brazil.}

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis. {Recall that Greenspan set very low interest rates and fueled the real estate bubble with cheap loans. Investors took on ever greater risks in search of a few percent better return on the money they were lending, etc.}

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., said today that low interest rates in the U.S. have spurred a carry trade with some currencies, notably the Australian dollar after recent interest rate increases by that nation’s central bank.

“The carry trades will further drive down the dollar’s value and fuel commodity prices,” Zhao said. “The dollar’s depreciation has also caused excessive liquidity in the global market.” ..."
{It certainly has in Brazil - Dollar has dropped 33% in value vs. Brazilian Real in only 2009. This is a "positive feedback" system, driving the dollar lower. - The larger the carry trade, the faster the dollar falls. To say the US supports a "strong dollar" is as hypocritical as it gets. As Lincoln said: "You can fool all of the people, some of the time, ... but..."}

Quoted text from, but with Billy T inserts in blue http://www.bloomberg.com/apps/news?pid=20601087&sid=aPggdjyUi.30&pos=3

Summary: US under GWB and Greenspan made the the current crisis and Obama and Keynes are making it worse in an effort to delay GWB's unavoidable depression in US & EU, which is coming before Halloween 2014, IMHO, despite Obama's efforts.

If American imported less, the trade deficit would go away but it is easier to blame China for its Yuan pegged to the dollar than to stop borrowing to live beyond your means. The only way to get Americans to import less is to make the dollar weaker. - Say officially that "US is for a strong dollar" but do everything possible to make it grow weaker. - Set interest rate near zero, run dollar printing presses 24/7 at record setting output of new dollars. (More than 1 TRILLION/ PER YEAR!)

 

This situation predates Bush Jr. . China and Japan's and everybody else's previous and current attempts to hold the value of their currencies buy buying assets in the only nation (the USA) that would not object to having it's currency driven up in value is the realcause of the world's economic problems.

Now the dollar carry trade makes it difficult for business as usual to continue. What is the USA supposed to do; raise interest rates during the worst recession in 60+ years just so so nations that want to suppress the value of their currencies can continue to suppress the value of their currencies?

I prefer for the USA to face it's problems in stages and not go straight into a depression at this time even if an eventual depression in the USA is unavoidable. If low interest rates can get the USA out of a recession before the rising cost of all foreign products puts the USA back into a recession that would in my opinion be a good thing.

I first noticed the dollar carry when it was unwinding in the fall of 2008 prior to these rock bottom interest rates. It looked to me like their might have been a coordinated effort to defend the dollar in August and September of 2008 that may have included naked shorting of Gold by JP Morgan. This attempt to defend the dollar may have triggered the wave of hedge fund redemptions that started with hedge funds focused on commodities and emerging markets but which eventually spread to the tanking of the stock market in general.

You can see in charts that during 2008 and 2009 the Dollar and Yen as the carry trade currencies move in one direction together while the Euro moves in the other direction.

I think the winding and unwinding of Dollar and Yen Carry Trades will be the main driving force behind mass moves in the financial markets for the next 2 years. I expect more attempts at manipulating markets in an attempt to prop up the dollar. Nobody wants a sudden and dramatic collapse of the dollar but between the low interest rates/Carry trade and the trade deficit it won't be easy to defend the dollar. The flight to the safety of the dollar reflex in older financial decision makers is the only low cost force that can be used to prop up the dollar but this force can only be activated by creating mini panics in the dollar's alternatives like gold, oil and the Euro.

Japan and China and the Saudi's, Koreans and Europeans can keep buying US assets to prop up the dollar but this will cost them a lot of wealth in the long run. How should they chose among themselves which nations should take these losses? It used to be that the nations that most wanted to depress their own currency had to buy the US assets; but how will they feel about continuing this behavior as it becomes increasingly clear that they are buying overpriced assets?

I am like a broken record on the dollar and probably will be for a long time. I need a new metaphor because younger people never experienced scratched vinyl records that boringly and irritatingly repeat the same section of a song over and over.

 

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Bank of Japan Governor Masaaki Shirakawa, The second “TRUTH TELLER.”

See post 217 for first “TRUTH TELLER.” - Their truths are not popular in USA* He said:

“… “There are also risks involved in continued low rates,” Shirakawa said today at a Paris Europlace Financial Forum in Tokyo. Having borrowing costs near zero may strain government finances if it spurs speculation that the dollar will continue to slide, he said, while warning that easy policy by officials globally may have repercussions in the long term. “Monetary easing in advanced economies has stimulated capital inflows to emerging economies,” Shirakawa said. If emerging nations continue to recover at a faster pace than advanced ones, they “might overheat and experience financial turmoil, triggering a recession,” he said.

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aQz3J1NVh0wI&pos=4

*The more typical US position is reflected here:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUfFcvYQthng
I.e. not one word about global problems caused by US’s near zero interest rates nor the excessive US’s imports, or fiscal deficits due to US living beyond its means for more than a decade. Only “blame on the victims” who are trying to prevent destruction of their domestic manufactures by buying up dollars to slow (or in China's case reverse) the super evaluation of their local currency or use other means to protect themselves from the flood of cheap, hot money, dollars entering and distorting their local economies.

“Other means” include Australia and Norway raising interest rates (mainly "bubble" / inflation prevention) and Brazil placing a 2% tax on foreign funds either entering or leaving Brazil. Some countries are also adopting or strengthen tariffs to protect their domestic manufactures. All this “protectionism” is forced on them by the US policy of prolonged low interest rates. Some of it is retaliation for open US protectionism trying to save US jobs. For example, US placed high new tariff on Chinese tires and two days later China retaliated with a new tariff on US chickens. Most scholars agree that Protectionism was one of the major causes of the great depression – It will have the same effect again.

The Chinese POV (US is cause of the economic problems, not China protecting its industries with fixed 6.83 Yuan to the dollar) is here:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5RZmvRKUkK0&pos=4

 

"... The Mortgage Bankers Association (MBA) reported today that mortgage delinquencies hit a record high in the third quarter:
"The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding …”
The MBA data does NOT include mortgages that have entered the foreclosure process, and those are rising as well. In the third quarter 4.47% of all mortgages were in some stage of the foreclosure process,* up from 4.30% in the second quarter and 2.97% a year ago. The graph below (from http://www.calculatedriskblog.com/) shows the percentage of all prime loans that are in trouble (both fixed and ARMs). …”

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From: http://www.zacks.com/stock/news/27475/Mortgage Delinquencies: Record High
Red is foreclosure & blue is "late payments". Each bar is for 3 months. The % scale top is 12% with steps of 2%. Left most bar is for 1Q05. (Hard to read so I tell)

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*Thus the fraction of mortgages that are paying late or already in foreclosure in 3Q09 is: 9.64 + 4.47 = 14.11% or significantly higher than the official unemployment rate but less than the more general under or un-employed rate of 17.5%; however the graph shows only 10%, so simply adding may be wrong by some double counting? Or perhaps, as the text states only "prime loans" are included in the graph and the extra 4.11% in the numerical data includes the subprime loans too?

In any case, the curve slope in bar chart above shows problem is still growing worse ever more rapidly but ignore that - "The economy is recovering."

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Also I do not think that either graph or the numerical data includes the "under-water agreed walk aways." I.e. Banks recognize that the home buyer can not pay the mortgage and does not want the cost and delay of foreclosure to further increasing their losses so agrees that owner can just sign the title over to the bank and walk. There is considerable risk to the bank, that if it does not agree to let the debt be cancelled by transfer of title: The house may be "TRASHED" (Not by the owner, of course. His out of town brother, etc. backs his story that he was not even in town when house was trashed., etc.* I.e. a loss of 15K on the deal is more attractive to the bank than having 50K of broken sinks, copper wires stripped from the walls, etc. to repair.)

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* They were on a camping / fishing trip that weekend and even have the park entry fee reciept to prove it.