Free Learner

No bottom in sight

The happy-happy spin on all things economic never ceases to amaze me.  Check this out:

April 22 (Bloomberg) -- U.S. home prices rose 0.7 percent in February from January, the first consecutive monthly gain in two years, a sign that low interest rates may be moderating declines in real estate values.

Interest rates will save us?  What bunk!  What actually happened was that Fannie Mae, Freddie Mac, Citigroup and other major players agreed to a moratorium on foreclosures during the first quarter.  It wasn't a strict moratorium, more like a patchwork of delays and emergency refinancing deals and who knows what, but it did reduce foreclosures in the early part of the year.  Fewer foreclosures = fewer fire sales = higher average prices.  0.7% higher in February, to be precise.

Hallelujah! screams the media.  Foreclosures are down!  Prices are recovering!

Uh-huh.  And look at what RealtyTrac has to say now:

March had the greatest foreclosure activity RealtyTrac has seen since it started keeping track in 2005, and "we think, in fact, the foreclosure moratoria that we'd seen, and some of the legislative delays, actually contributed to the March numbers being as high as they are," says RealtyTrac's Rick Sharga, who describes the efforts as "like trying to dam up a waterfall with bubblegum."

Journalist Mike Whitney cites even worse data from RealtyTrac:

“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory"....

If regulators were deployed to the banks that are keeping foreclosed homes off the market, they would probably find that the banks are actually servicing the mortgages on a monthly basis to conceal the extent of their losses. They’d also find that the banks are trying to keep housing prices artificially high to avoid heftier losses that would put them out of business. One thing is certain, 600,000 “disappeared” homes means that housing prices have a lot further to fall and that an even larger segment of the banking system is underwater.

It means that any time the housing market raises its head and makes a stab at recovery, onto the market will flood some more foreclosure sales.  Meanwhile, foreclosures caused by sudden unemployment will continue for another year or more, unabated.  And then, there's the "option ARM" foreclosure wave.  A slew of option ARMs began resetting in March, meaning that many homeowners saw their mortgage payments skyrocket last month.  90 days later, many of those homes will be in foreclosure.

But hey, if you're feeling down, turn on CNBC and bask in the sunny rhetoric about "green shoots of prosperity" and "recovery beginning later this year" and how we've "turned the corner" and "seen the bottom".

As far as the stock market goes, we're at about April 1930, that first rally after the crash:

US stock markets have a long way to fall.  The Dow will probably fall for another couple of years, to something below 4,000.  (It's important to consider inflation adjusted numbers, because if we have runaway inflation the Dow could hit 50,000, but by that time bread may cost $35 a loaf.)

But hey, I could be wrong.  Bernanke thinks we're seeing the first little seedlings / green shoots / [insert spring metaphor] of recovery, and he has a PhD in economics.  We have to respect the sagacity of professional economists at a time like this, especially those with impeccable Ivy League credentials.

"[T]here are indications that the severest phase of the recession is over..."

            -- Harvard Economic Society, January 18, 1930

"... the outlook continues favorable..."

            -- Harvard Economic Society, March 29, 1930

"... the outlook is favorable..."

            -- Harvard Economic Society, April 19, 1930

"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."

            -- Harvard Economic Society, May 17, 1930

"... irregular and conflicting movements of business should soon give way to a sustained recovery..."

            -- Harvard Economic Society, June 28, 1930

"... the present depression has about spent its force..."

            -- Harvard Economic Society, August 30, 1930

"We are now near the end of the declining phase of the depression."

            -- Harvard Economic Society, November 15, 1930

[These quotes & the next few, in italics, are from the Chart of Pompous Prognosticators.]

Mr. Geithner is equally upbeat.  Surely the Secretary of the Treasury knows what's what, eh?  We can take some comfort in optimism when it comes from the Treasury Secretary himself!

"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."

            -- Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929

"There is nothing in the situation to be disturbed about."

            -- Secretary of the Treasury Andrew Mellon, February 1930

If nothing else, we can look to the President.  The Executive of the nation is plugged into everything, and if he says recovery is on its way, the country can breathe a sigh of relief.

"While the crash only took place six months ago, I am convinced we have now passed through the worst....  There has been no significant bank or industrial failure. That danger, too, is safely behind us."

            -- Herbert Hoover, President of the United States, May 1, 1930

"The depression is over."

            -- Herbert Hoover, President of the United States, June 1930 

I'll end with some of Jim Kunstler's observations of last week:

It's a curious symptom of the consensus trance zombifying the American public and its auditors in the media that something like a "recovery" is now deemed to be underway. And, as events compel me to repeat in this space, it begs the question: recovery to what?

To Wall Street booking stupendous profits by laundering "risk" out of bad loans with new issues of tranche-o-matic securitized paper? This I doubt, since there isn't a pension fund left from San Jose to Bratislava that would touch this stuff with a stick, even if it could be turned out in collector's editions of boxed sets.

Does it mean that American "consumers" (so-called) are awaited momentarily in the flat-screen TV sales parlors with their credit cards fanned-out like poker hands, ready for "action?" Not too likely with massive non-performance out in cardholder-land, and half the nation's electronics inventory wending its way onto Craig's List.

Are we expecting more asteroid belts of new suburbs carved in the loamy outlands of Dallas and Minneapolis, complete with new highway strips of Big Box shopping and Chuck E. Cheeses? Go to banking's intensive care unit and inquire (if you can) among the flat-lining production home-builders and the real estate investment trusts on life support when they expect to rev up the heavy equipment.

The idea that we're about to resume the insane behavior that induced the current epochal malaise of economy is so absurd it will only be heard in the faculty dining halls of the Ivy League....

So many forces are arrayed against a return to the previous "normal" that we will be lucky, in another eighteen months, to still find ourselves speaking English and celebrating Christmas.

What a trillion means

The US Treasury and the Fed have given away or promised a total of almost $13 Trillion in roughly the last year and half, almost entirely for the benefit of banks.

That's a lot of money to give to the banks, the ones who put us in this sorry economic situation in the first place.

Today I read that the poorest half of the world, the poorest 50% of all human beings on Earth, have a combined income of less than $800 billion per year.

I guess that gives us some idea of the level of banker theft.  For not much more money than the infamous $700 billion bailout, the US could have doubled the income of half the world.  For considerably less than the cost of all bank bailouts to date, we could have multiplied the incomes of the poorest half by 10.

Dante didn't envision a circle of hell awful enough for these banking elites.

Bankers and pitchforks

Yesterday's Clusterfuck Nation post is highly recommended.  Kunstler can write!  Here's an excerpt:

One mistake that the banking elite and their lawyer paladins made the past decade was their show of conspicuous acquisition -- of houses especially -- in easy-to-get-to places where anyone can see them, for instance an angry mob in Fairfield County, Connecticut, or Easthampton, New York. Unlike the beleaguered elites of South Africa (where I visited recently), who live behind layers of fortification, the executives of Citibank, Goldman Sachs, J.P. Morgan, and a long list of hedge funds, will be found cringing in their wine-lockers behind a measly layer of privet hedge when the tattooed minions of Glen Beck come a'calling.

He's always good for a laugh, every Monday.

On being prepared... mentally

The one thing that seems to get left out of "survivalist" or preparedness plans, on the blogs and sites I come across, is the mental health component.  I think, perhaps, that even the worst doom and gloomer suffers from a bit of romanticism.

"Suppose the power goes out," says the Doom and Gloomer.  "Wouldn't that be fantastic?  We could haul in some wood and snuggle in front of the fireplace.  No TV, no video games, no Internet-- it'd be just like camping!  We could cook all that wholesome oatmeal in the dutch oven and read to one another all evening.  Even use our fireplace popcorn popper!  Good times!!"

Yeah, I suffer from that too.  You try to be balanced, you know?  You say "Well, okay, jobs are disappearing like beers at a frat party, but we'll all be closer to our families."  Or: "Well, I may never eat clementines again, but I'll be developing a relationship with my local farmers."  Or: "If there's no TV for a week it will bring my family together."

It's mostly true, too.  But then again, last night my family was brought together -- all of us having a grand old time and laughing our butts off for 2 hours -- by The Simpsons Hit and Run video game, in which you not infrequently mow down cartoon pedestrians as you mishandle your vehicle.  (In my defense, that's not the point of the game and we try hard to stay on the road!  And if you hit someone, they just yell at you as they roll out of your way.)  To be honest, I just can't see Candyland or Chutes & Ladders (other games which all 4 of us can play) as being anywhere near that much fun.  When it comes to old-fashioned values, The Simpsons Hit and Run game fails miserably on all counts, but that much laughing together has to be good for us.  So I suppose I try to look on the bright side, but I also try not to romanticize things like a Depression, peak oil, power outages, or having to stay inside the house for 3 solid weeks because of H5N1.  The fact is, I kind of like the 21st century.  I can't help it -- that's what I'm used to.

My own (minor!) "crisis" experience, when I went without power for 4 days in August of 2003, was far from romantic or refreshing.  I huddled near the radio, clinging to our local radio station like a lifeline, praying the batteries wouldn't quit, because by the time I'd gotten to the grocery store (45 minutes into the blackout) they were totally sold out of batteries.  And ice.  And bottled water.  And any kind of meat you'd typically grill.

Let me tell you, if you're an Internet junkie -- and we know who we are -- you need radios.  I mean, you need a hand-crank back-up radio, a regular radio or two, alkaline batteries, and possibly rechargeable batteries and a solar battery charger, plus headphones or ear buds to save those batteries.  Maybe even a shortwave radio.  My MP3 player has FM radio and I can charge it in a few minutes off the car battery, without starting the car; if you have one, consider getting the car charger.  You might even consider one of those radios that picks up TV, even though supposedly they are always about to halt old-fashioned TV network broadcasting.  If you are the kind of person who checks the internet more than a couple of times a day, you need INFO and you need it YESTERDAY, and thank god the local station put on BBC at 10pm so I could go to sleep feeling connected to the rest of the world.

Secondly, you need light.  Flashlights don't cut it, not even close.  A single night of reading by flashlight is enough to depress you and make your children crazed and creeped out.  I would aim for at least one small room that you can keep pretty well illuminated.  There are bright LED lanterns that are totally kid-safe, including some that are solar.  There's the old-fashioned kerosene lantern, the antique oil lamp (which we used in 2003-- thank you Grandma for giving it to me!), and there are 100-hour candles if you can manage those safely with the kids in your family.  (The 100-hour candles are round, squat, and hard to tip over.)  Hand-crank flashlights are a good back-up and kids think they're fun, and I'm glad that we own a couple.  But they do get tiresome, so I think recharge batteries with an AC and/or solar recharger are a good bet.  By the way, Costco sells a recharge battery set that has the "spacers" that convert an AA battery to fit a C or D slot.  This means that with one set of AA batteries and one AA recharger, you can put batteries into almost any flashlight.  Lastly, head-lamp style flashlights which strap onto your head may look ridiculous, but hey-- it's a no-hands flashlight.  Could be very useful.  Kids find them amusing.

So again, from my experience, a couple of flashlights somewhere in the house doesn't cut it.  It's not a matter of "Can I get to the bathroom without breaking an ankle?"  It's a matter of "Can I get through 4 days without power while not becoming depressed /creeped out by darkness every evening?"  Some kind of little battery / solar nightlight, or light sticks, are a good idea if you have kids in the house, as they can panic when waking up in pitch darkness.

And then, of course, you need entertainment.  If you can work out some way of listening to an audiobook, that's fairly entertaining and can be done on batteries.  Obviously someone can read aloud.  You can also put aside some "beach reads" for the adults & some previously unseen books for the kids -- I'll bet your local library has cheap paperback novels -- for emergency escapism.  I've also put aside sudoku, crosswords, cards, games, puzzles, etc.  Keep in mind that during crude oil disruptions schools will be closed, so whether you homeschool or not, in such a scenario you'd be (or someone would be) with your kids all day, and possibly without power.  (We take coal to our power plants largely by diesel truck-- brilliant, eh?)

And, for those who are stockpiling beans, barley, wheat, rice, and other wholesome Amish fare -- may I suggest Doritos and candy?  (Okay... organic non-GMO tortilla chips and fair trade cocoa powder?)  Don't forget junk foods as a treat.  Even if you very rarely eat junk food, your family may need something to cheer them up, make things a little easier.  Canned soups (Costco has good deals on Progresso), chewing gum, chocolate, potato chips, and so forth may compensate for other inconveniences and keep everyone in a cheerier state of mind.  (Whiskey or half a case of Charles Shaw doesn't hurt either, for extended disasters... for adults, I mean!)

So that's my two cents on crisis preparation, on the sanity front:

Connection, light, entertainment, and treats.

On printing money

"[T]his idea to increase the money supply by printing money is the Single Stupidest Idea (SSI) in the whole history of economics for the last 4,500 years, and the reason that no nation does it is because it shows a serious mental defect in that nation’s leaders, its universities, its news media, and the people themselves because it is truly, truly stupid because it is truly, truly catastrophically ruinous every time anyone has tried it."

                    --The Mogambo Guru

Monopoly money

The American dollar is monopoly money in two senses: first, because it's just a piece of paper, same as the Parker Brothers variety; and second, because the private banking cartel known as the Federal Reserve has a monopoly over our currency.  We aren't allowed to print our own local currencies and use those.  We have to use the one and only currency which is legally allowed, the Federal Reserve Note.

Kings and democratic governments both impose their monopoly currency on the populace by insisting that taxes be paid in it.  This, it turns out, is the secret to fiat currencies.  If you demand that taxes be paid in that currency, everyone will use it.  If you, furthermore, threaten jail time (or in some cases, death) for those using any other currency, that usually cements the deal.

There used to be another way.  During the European heyday known as the Middle Ages, when commerce and specialization were re-established after the Dark Ages, many local currencies were used.  Check out this fantastic article:

There used to be lots of different kinds of money. Local currencies, which helped regions reinvest in their own activities, and centralized currencies, for long distance transactions. Local currencies were earned into existence. A farmer would grow a bunch of grain, bring it to the grain store, and get receipts for how much grain he had deposited. The receipts could be used as money—even by people who didn’t need grain at that particular moment. Everyone knew what it was worth.

In other words, these local monies represented production.  Production is the only way to increase true wealth.  In the US in 2009, the majority of what we consider to be "wealth" is not wealth, it's just paper.  You say you have $10,000 in the bank?  Kudos, in 5 or 10 years that'll buy you a washing machine, if you're lucky.  You own shares in GE?  Well, keep your fingers crossed.  In bankruptcy proceedings you will get precisely $0 for your common stock, but hey, maybe they'll stick it out.  You have $50,000 in equity in your house?  Check on that again in 2 years, and good luck.  We are approaching the point where 401k's may be partly nationalized (for instance, by passing laws mandating that all 401k accounts purchase Treasuries); where Social Security payments will be denied to many; where life insurance policies may or may not be paid out.  There are no certainties now, in the world of paper "wealth".

I'm therefore getting rather medieval about what I consider "savings" or "investments".  I don't want any more 401k shares, thanks, or even that many Federal Reserve Notes.  Real wealth is... well, real.  It's sacks of wheat, bolts of flannel, tilled land, tools, silver coins, wool blankets, cast iron pots.  Those things are true, physical wealth.  (If you were rich in the Middle Ages, you stored your wealth for the future in the form of gold and precious stones, often in the form of jewelry.)  Any form of "wealth" which involves receiving a monthly or quarterly statement should be viewed as quite dubious over the next decade, and possibly non-existent if it's denominated in Federal Reserve Notes.  We're coming up on the worst global economic shut-down since the 14th century and hyperinflation.

Back to that article (boldface is mine):

Local currencies favored local transactions, and worked against the interests of large corporations working from far away. In order to secure their own position as well as that of their chartered monopolies [the first corporations], monarchs began to make local currencies illegal, and force locals to instead use “coin of the realm.” These centralized currencies worked the opposite way. They were not earned into existence, they were lent into existence by a central bank. This meant any money issued to a person or business had to be paid back to the central bank, with interest.

Paid back with interest-- and that interest money comes from... well, some other loan.  The interest on older loans is paid using money from new loans.  Continue until there is no one left who is willing or able to borrow more money, and the whole system collapses.  Debt-based money is the ultimate Ponzi scheme.

All Ponzi schemes come to an end, as did the Venetians' in the 14th century, and as will the American version of the past 96 years.  It is unfortunate for the rest of the world that they pegged themselves to our currency for so long, and still use it for international trade and as an ostensible store of wealth.  They've tied the US Ponzi dollar around their necks like a giant rock.

We can abandon the Ponzi Fed note any time we like: individually, by using barter or transacting in gold or silver, and by saving our wealth in some other form.  We could abandon Fed notes as a country, as well, whenever the Congress and the President make it so.  I don't hold out any hope of the government cutting out the banks and issuing a new currency, but it is possible in theory.

A last word from the same article (emphasis is in the original):

President Obama may be smarter than most of us, but he’s still attempting to rescue the very institutions that robbed us in the first place. He’s not a socialist, as conservatives may be arguing, but he is a corporatist. Using future tax dollars to fund government job programs is one thing. Using future tax dollars to give banks more money to lend out at interest is robbing from the poor to pay the rich to rob from the poor.

A little thing called "debt monetization"

So let me break down this term debt monetization.

Say you're the US government.  You plan to spend a lot more money, this fiscal year, than you're going to take in.  Like, maybe an extra couple trillion, maybe three.  You expect other people to lend this to you at extremely little interest.

Turns out, though, the economy sucks.  Like-- globally, the economy sucks.  The Chinese don't have that much fricking money to throw down the drain (since we all know the US government cannot ever pay this money back).

They haven't got the money, see?  But we need to take on debt to pay our bills.  So, what to do?

Turns out we have a helpful cabal of private banks (some of them foreign) who have the sole and unique ability to print US dollars out of thin air.  And this little cabal can decide, whenever they want, to print up enough money to provide the needed loans to the US government.  The cabal will fund the needed debts.  Since they're inventing money out of nowhere, people call it "monetization" of the debt.

The trouble is, oodles of brand new dollars floating into the world make the existing dollars worth less.  Today, for instance, the Fed announced they were going to invent $300 billion and use it to buy debt, i.e. Treasuries.  We all knew it was coming, but that doesn't change the fact that it's unprecedented for them to openly do this.  Here is today's stunning dollar chart:

This is the biggest plunge since the year 2000.  I've never seen anything like it.  The gold price went from 1 ounce = 885 dollars to 1 ounce = 940 dollars.  The gold didn't change in value, the dollar did.

In other news, global production is collapsing:

It is like someone flipped the switch off and world production came to a standstill. Production has fallen in every country from 9 to 43 percent. That certainly will catch the world’s attention. On February 1st we declared a depression and this is one of the reasons why. The global economy is headed to a shutdown and that should bring free trade and globalization to a halt.

...The result of banks not lending or issuing letters of credit has led to a global credit contraction. The lack of credit is forcing businesses everywhere to shut down.

It won’t be long before inventory is depleted. In fact, it should start to become evident in the second quarter. Supply has put a sign up – out of business. This absence of goods, although deflationary, will drive prices higher for remaining goods. Food prices are still rising as well. It would be a very good idea to buy what you can now.  [International Forecaster 3/19/09]

International trade is also collapsing, with exports from Asian producers plunging at breathtaking speeds.  As for US trade:

Over the past five months since the credit crunch intensified, real exports have plunged at a 49% annual rate, while real imports have fallen at a 30% pace.

The pace of the decline is unprecedented in modern times, economists say. "We doubt even during the Great Depression that trade collapsed with such ferocity," said David Greenlaw, an economist for Morgan Stanley.

Unemployment is rising faster than expected-- as an aside, this phrase "faster than expected" is becoming a joke.  It goes without saying that whatever disastrous thing it is you're talking about, it's "happening faster than expected."

And only a month after finally passing a budget, California is $8 billion more in the hole.  It's the legislators' fault, because they were using absurd Pollyanna economic figures.  In fact, they are still predicting an increase in personal income tax revenues next year.  Ha ha ha!!  They should do stand-up.

The Greater Depression is now

[The images I am including here are by the excellent photographer Harvey Finkle, who will likely take some of the iconic photos of this next Great Depression which is just beginning.]

Roughly 1 in 5 children in the United States lives below the poverty line.  In 2009, the poverty line for a family of four is $22,050.

Rising unemployment could push an additional 7.5 million to 10.3 million United States residents below the federal poverty line over the next two or three years....

[E]conomists say the total is sure to rise over the coming years, and if the... estimates hold true, the number of poor people could approach 47 million.  (New York Times 11/24/08)

From Seattle to Athens, Georgia, homeless advocacy groups and city agencies are reporting the most visible rise in homeless encampments in a generation.

Nearly 61 percent of local and state homeless coalitions say they've experienced a rise in homelessness since the foreclosure crisis began in 2007 (source).

The relatively tony city of Santa Barbara has given over a parking lot to people who sleep in cars and vans.

The city of Fresno is trying to manage several proliferating tent cities, including an encampment where people have made shelters out of scrap wood.

In Portland and Seattle, homeless advocacy groups have paired with nonprofits or faith-based groups to manage tent cities as outdoor shelters.

Other cities where tent cities have either appeared or expanded include include Chattanooga (Tenn.), San Diego, and Columbus, Ohio. (source)

 

And meanwhile, in America as across the planet, it’s economic devastation, near and far. Here in northern California I walk into a local plumbing store, a large place used by building contractors. There’s one other man in the store, buying a $5 plastic fitting....

Throw in the idled lumber yards, construction stores, paint suppliers, and building crews. Count in the car lots that are going out of business because the banks won’t finance car loans. Go to the lost auto assembly jobs. It tots up to job losses across America just in December and January of 1,175,000. And that’s an underestimate. Every president since Reagan, particularly Clinton, has jimmied the unemployment criteria to produce an undercount. The actual number for the two months is nearer one and three quarter million. The actual total unemployment rate, according to statistician John Williams, by pre-Reagan criteria, rose to 18 per cent in January. (source)

The worst unemployment rate seen during the first Great Depression was 25%, and we are at 18%.  Moreover, we have millions of homeless Americans and tens of millions who go without food in order to pay bills.  In my own state, a 93-year-old WWII vet froze to death in his home after the electric company shut off his power for non-payment (which is illegal, but they had their ways of getting around the letter of the law).  We're in bad shape, and I'm afraid we've only just entered a Depression which will last for years to come.

A glimpse into the abyss

The other day I posted that the US banking system had nearly imploded last September.  Here is a transcript of what Rep. Kanjorski (D-PA) actually said:

On Thursday [September 18, 2008] at about 11 o'clock in the morning, the Federal Reserve noticed a tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars was being drawn out in the matter of an hour or two.

The Treasury opened its window to help.  They pumped $105 billion dollars into the system and quickly realized that they could not stem the tide.  We were having an electronic run on the banks.  They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.  And that's what actually happened.  If they had not done that, their estimation was that by two o'clock that afternoon, five and a half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would happen if that happened.  It would have been the end of our economic system and our political system as we know it.

Video is here.

This happened because of a general loss of confidence in money market accounts after a major money market fund was unable to return its investors' money in full.  Historically, money market accounts have been considered extremely safe.  That is, people thought so until September 16:

The credit crisis has taken a new and dangerous turn: Shares of a large money market mutual fund have "broken the buck" -- fallen below the standard $1 a share -- because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.

The Reserve Primary Fund in New York, which had $65 billion in assets at the end of August, said it cut its share price to 97 cents....

The Reserve Primary Fund’s situation apparently was exacerbated as big investors have fled in the last two days, forcing the fund to sell other securities. Assets have dived by more than 60% since Sunday, Bloomberg News reported.

The fund, apparently seeking to dissuade other investors from leaving while it sorts out the situation with its Lehman IOUs, today said it would take up to seven days to meet investors’ redemption requests. Normally, money funds redeem investors’ shares immediately on request.

Notice that the US government, astonishingly, can simply shut down any category of banking transactions that it cares to.  They can halt money market transactions, and guess what?  They can halt savings and checking account transactions, as well.

We won't have runs on the bank in the way they did in the 1930s.  The new, modern run on the bank will involve hassles, limits on withdrawals, delays on withdrawals, the inability to withdraw money in cash (e.g. receiving only cashier's checks which must then be taken to some other bank), and so on.  The top 5 or 6 banks are widely acknowledged to be insolvent, and FDIC cannot bail them out, but nobody seems particularly worried.  They'll just limit how much we can take out in a given day or week.

So, if you're lucky enough to have a fair bit of savings and you'd like to retain your access to your own money, you may want to start looking around the house for a good place to stash it.  Society as we know it really can fall apart in an instant.

Down we go

Yesterday I heard an estimate that hyperinflation and dollar collapse would happen in 9 to 12 months.  This is the earliest estimate of dollar collapse that I've heard, and it may be too precipitous, but I don't think we're looking at more than a couple of years.  The safest policy would probably be to have your food, clothing, blankets, batteries, etc. in place within 6 months.

Jim Sinclair gave a great interview on GoldSeek radio in which he talked about the two kinds of inflation: "bubble" inflation and hyperinflation.  When most of us think of inflation, we're thinking of the "bubble" variety, which is far more common.  Maybe it's the dot com bubble, or the housing bubble, or the derivatives bubble-- but what happens is that wayyyy too much credit is given out, and because of all the cheap, easy credit, prices can just keep rising and people will keep on buying.  This kind of inflation is followed by the bursting of the bubble, tightening of credit, and (because there's no more easy money to be had) an obligatory fall in prices.

Hyperinflation results not from the "good times" of easy money and speculative bubbles, but from the bad times.  It typically begins during economic depression, and it is caused by two things: government money printing, and consequent loss of confidence in the currency.  Hyperinflation is a completely different animal.

In Michael Hudson's article The Financial Recovery Plan from Hell, he states that $9 trillion has already been given to Wall Street, and $2 trillion more has been promised, just this past Tuesday.  Some of this money may be, ostensibly, in the form of loans.  But these loans are "non-recourse" loans, meaning the only thing the banks lose if they don't give the money back is the collateral they put up.  But what was that collateral?  Oh, that's right... it was utterly worthless toxic paper.  Yeah, this money is never coming back.  We've printed $9 trillion and we will print $2 trillion more, and trillions more after that, all to be given to the banking system.

Meanwhile, the government is also going to need many trillions printed.  The US fiscal year begins October 1.  So far in fiscal year 2009, which began last October, we're a trillion dollars short.  That's a bigger shortfall than we had for the entire 2008 fiscal year, and we're only 4 months in.  A common estimate of the government shortfall for the 2009 year is $2.5 trillion, but it's looking to me like it might be $3 trillion. 

Normally, the way we get this money is by selling Treasuries to OPEC nations, China, Japan, etc.  However, we've bankrupted the OPEC nations by smashing the oil price, so they aren't buying.  China is no longer buying.  Japan is imploding and I can't imagine that they can continue buying, either.  One recent sale of Treasuries initially found no buyers, until some anonymous "indirect" bid came in to save the day and buy them up.  I highly suspect this anonymous buyer was a Cayman Islands bank account belonging to our own government.

The Fed has announced that they will be printing up money out of thin air, and using it to buy Treasuries.  This is a fancy way of making it seem like we're "borrowing" money in some usual, legitimate way, when it fact, we're just printing new dollars and using them to pay bills.  The technical term for printing money like this, which would be called "counterfeiting" if it was done by anyone but the Fed, is "quantitative easing."

Printing up money becomes a downward spiral.  People won't want to buy Treasuries because they know the value of the dollar is going to fall because of all the printing, which means that we will have to print more in order to buy our own Treasuries, which will make Treasuries less attractive....  And at the end of this downward spiral, the value of the dollar is a big fat zero.  I talked about what happens as a currency is being destroyed in Fire and ice.

Meanwhile, as we await the suddenly rising prices which signal the start of currency collapse, there's the regular old depression going on.  The real unemployment rate is 18%.  The state of California cannot make payments to counties, and now counties are threatening to refuse to pass along fees and taxes to the state.  We're losing well over half a million jobs per month.  The next wave of the housing crisis (the option ARM foreclosures) begins next month.  Commercial real estate prices are collapsing.  International shipping is declining because banks will no longer facilitate payments between vendors and buyers.  The cost of shipping a container along any of the typical trade routes (say, China to Los Angeles) has fallen by 94% (!!!) because of a lack of demand.  The major ports in southern California have seen traffic slow considerably.  If shipping continues to falter, it has to mean shortages of all kinds of things in the US, since we don't make anything here.  (A good idea for the stimulus bill would have been the creation of shoe factories.)

I haven't seen very much news of protests in the US, although in Europe there have been all kinds of protests, demonstrations, riots, violence, etc. related to the global financial meltdown.  For instance, the Icelandic parliament was trapped inside their capitol building for 2 days while crowds burned bonfires and banged pots outside.  We've had nothing so colorful over on our side of the pond, but I have sensed an increase in anger out here on the Internet, judging by blog posts and comments.  This angry guy keeps popping up on financial blogs that I visit (warning: lots and lots of profanity).  Even mainstream news articles now mention "populist anger" when discussing the bailouts.  I can't imagine that protests can be far off.