Financial topics

[John]

-- Interbank lending interest rates falling sharply

This is what the bailout planners have been hoping for:

> http://www.citywire.co.uk/personal/-/ne ... ?ID=317560

> Bank lending rates fall on government rescue packages

> By Tony Bonsignore | 12:52:33 | 14 October 2008

> UK inter-bank lending rates have continued to fall in the wake of
> the government bank rescue packages being put together in Europe
> and the United States.

> The US dollar overnight bank lending rate, as measured by the
> London Inter-Bank Offered Rate (LIBOR), fell to 2.181% today -
> down from 2.468% yesterday.

> The overnight dollar LIBOR rate had peaked at 5.375% last
> Wednesday, amid increasing fears over bank solvency, before
> dropping sharply back on Thursday in the wake of last week’s
> co-ordinated government moves.

> Meanwhile the three-month US dollar LIBOR rate also fell today,
> from 4.7525% to 4.635% - its third consecutive daily fall.
> However, three month dollar lending rates remain higher than they
> were a week ago.

> Sterling LIBOR rates also fell, from 5.6% to 5.425% for overnight
> loans, and from 6.26875% to 6.24875% for three months loans.

> All eyes are now in the US, and today’s announcement of a
> UK-style government rescue package for the country’s biggest
> banks. The US government hopes the plan will finally reassure
> banks that they can start lending safely to each other again.

And why not? If I were a bank, you could loan me money, knowing that
I can't default because I'm backed by the US government.

It's not interbank lending any more. It's lending from one
government bank-agency to another government bank-agency.

Hell, how do I get into the banking business, anyway? I have some
Brooklyn Bridge bonds that I'd like to securitize and sell to you.
I'll promise to pay you 20% interest. And just because I'm selling
you the Brooklyn Bridge, you don't have to worry about me defaulting,
because I'd be backed by the Full Faith and Credit of the Government
of the United States of America. It sounds like a good deal to me,
win-win all around!

Sincerely,

John

[John]

-- Market Summary, Tuesday morning, October 14, 2008

Asian and European markets were sharply higher.

Wall Street opened sharply higher, and was up 400 points at one time.

But in the last half hour, the Wall Street indexes turned around, and
are now flat or negative, with the Nasdaq down over 2%.

At the very least, what this means is that the panic buying spree
that followed the latest worldwide insanity bailout is over, and
stoned, drunken investors are beginning to sober up and look at the
reality.

One sobering reality is that last week's bloodbath lowered P/E
indexes from astronomically high down to historically high.

But yesterday's drunken orgy pushed P/E index back up to
astronomically high. This means that their computer software is,
once again, telling them to "Sell! Sell! Sell!"

The other sobering reality is that the market is still 34% down from
its high, and there is still a lot of deleveraging and forced selling
going on.

The pundits this morning are still grinning like idiots, as if they'd
just gotten laid, telling us how and why to get back into the market.

The Dow fell 25% in the three weeks ending Friday, and spiked 11%
yesterday. This is EXACTLY the kind of market behavior that
surrounded the 1929 crash. Based on e-mail conversations I've had
with people, if you pull away the grinning idiot masks from a lot of
people, then you'll find frightened faces expressing concern that the
market is very close to a major catastrophe, perhaps as early as this
week.

Of course, I won't name a date, because I know that it depends on
chaotic factors (in the sense of Chaos Theory) that can't be
predicted. However, I'll put it this way: I used to say that the
probability of a generational panic and crash had risen to 3% per
week. That 3% is now up to around 25% per week.

At the very least, expect the wild volatility to continue until
"something memorable" happens.

Sincerely,

John

[isaac]

John,

Do you still think that we will experience deflation (our money can buy more), or has that changed now that the government is committed to printing as much money as neccessary to cover any and all bad debt? My small mind thinks that would tend to devalue the currency and lead to inflation, and perhaps in a big and ugly way.

Isaac

[John]

Dear Isaac,

> Do you still think that we will experience deflation (our money
> can buy more), or has that changed now that the government is
> committed to printing as much money as neccessary to cover any and
> all bad debt? My small mind thinks that would tend to devalue the
> currency and lead to inflation, and perhaps in a big and ugly
> way.

Thank you for your support, now and in the past.

I don't see anything that's changed in the last 48 hours that would
make any difference at all to the deflationary spiral. All that's
happened is that the obligations have moved from banks to the various
governments. Quantities haven't changed, as far as I can tell.

Sincerely,

John

[isaac]

So in theory, holding cash should be better than holding gold? I mean the green money kind of cash that is hidden in a very safe place that isn't a bank.

[John]

Rick Santelli on CNBC is saying that the bailout isn't working to
free up the credit markets.

He makes the point that interest rates for GSE bonds (bonds offered
by Freddie Mac and Fannie Mae) continue to be much higher than
interest rates for US government Treasury bills. Here are his words:

> Some of us are disappointed in the thaw, and I'll tell you why.
> If the government is basically underwriting the GSE's, and they've
> ramped up all of their coverage, like FDIC, tell me why it is
> that the 3 and 6 month bill for the auction today garnered a yield
> of .5 and 1.10 respectively?

> Yet, when Freddie went to the market with 3 and 6 month bills,
> their 3 month bill was at 1.95, and their 6 month was at 2.70.

> This is living proof that, for whatever reason, we're not seeing
> this money that's been thrown into the banking system do exactly
> what it is we want it to do. And somebody at Treasury or Fed, or
> the banking regulators, have to go pound some heads, because the
> T-bill rate should be coming up, and the GSE rate should be coming
> down, and it's NOT HAPPENING.

If interest rates don't start falling in the next day or two, then a
lot of people will conclude that the bailout is failing.

I wonder what they're going to try next?

Sincerely,

John

[anenglishman]

If interest rates don't start falling in the next day or two, then a
lot of people will conclude that the bailout is failing.

I wonder what they're going to try next?

Sincerely,

John

They could try Govenor Perdue of Georgias solution to the water crisis here in Georgia and pray.

Because unless Messrs. Bush, Bernanke and Paulson have some magic fairy dust in their back pockets, that might be the only option left open to them.

[JimZ]

John,

To echo Isaacs question, I am also wondering about inflation versus deflation. If the overall money supply (including the credit instruments that banks created) is falling dramatically (that would be Trillions with a "T") and the Federal Reserve is cranking up the printing presses printing Billions bordering on Trillions - then what is the net effect on the dollar? I could give a reason for it to go either way, based on my understanding - and obviously the answer is either up or down, and not both. A part of me says the dollar will stay strong and become stronger due to an overall deflation even with the printing of even more play money. Another part of me says that massive printing of more dollars has to debase the currency.

Your thoughts, please?

[John]

The following are some thoughts on this question. The numbers are
from memory.

If I've got any of these mechanisms wrong, someone please tell me.

What are the sources of money (US dollars)? I believe that there are
three principal ones:

1. Money created from the printing presses -- that is, currency --
   bills and coins. I believe that this amounts to $1.5 trillion (as I
   recall).
2. Money created by issuing Treasury bills and bonds. This is US
   government debt, and it amounts to about $5 trillion (as I recall).
3. Money created in the private sector, by loans, securitization,
   and so forth. This varies in quality, depending on who issued the
   debt. There's tens or hundreds of trillions of dollars of this
   stuff, and a lot of it is worthless crap, but it's still being held
   by banks.

Money in the first category is completely controlled by the
government, but it really doesn't apply to the kinds of things we're
talking about. No one is talking about printing 7000 million
hundred-dollar bills to bail out the banks.

People sometimes say that we'd be better off if there were a "gold
standard." What would that mean? It would mean that the amount of
currency in category #1 would be limited to the amount of gold in
Fort Knox. But in fact, category is pretty stable anyway, which is
why I say that a gold standard is completely irrelevant.

In the Weimar Republic in 1921 and Zimbabwe today, there are no
categories #2 or #3. There are no Zimbabwe dollar credit cards. You
can't walk into a bar in Harare and say, "Gimme a beer, and put it on
my tab." All there is is paper currency, and that's why
hyperinflation is possible. But that's not true of US dollars,
because of categories #2 and #3.

The government can "print money" by expanding category #2. This
can't be limited by a "gold standard," but it is limited by the
number of people willing to purchase the treasuries. So, there IS
an effective limit, just as if there were a gold standard.

The credit bubble was caused by the immense creation of money in
category #3. There is no government control over this at all.

The deflationary spiral is caused by the immense destruction of money
in category #3.

The latest bailout transfers the stuff in the third category into the
second category. However, to be fair, it isn't a complete transfer
-- it's limited to the $700 billion, and even that has restrictions.

So the latest bailout has almost no effect except to make it more
likely that the US government will go bankrupt.

However, even if the US government goes bankrupt, it doesn't mean
that the dollar will collapse. It means that the obligations in
category #2 won't get paid, and the money in category #3 will still
be destroyed.

So, the current bailout should not have any effect at all on the
deflationary spiral. It only means that the US government will go
bankrupt more quickly than it would have otherwise.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[isaac]

So if a dollar collapse is not what happens when the US defaults on its loans, what does happen? If the dollar is only backed by faith in the US government and the US government defaults, wouldn't that make people reluctant to take US dollars? No one wants Iceland's currency right now for example and the result is that they can not import. It seems if we can't import than prices on goods go up because there are less of them available.

Isaac