The Great Crash of 2008 turning into the Global Depression of 2009

Several major U.S. firms have declared bankruptcy or begun liquidation, and it's expected that the list of casualties will mount as the final results of 2008 come in.

The Wall Street Journal quoted Mary Delk, a director in the retail practice at consulting Firm Deloitte LLP, confirmed, "This will go down as one of the worst holiday sales seasons on record."

Earlier this week, the top economist at the International Monetary Fund, Olivier Blanchard, warned that continued declines in consumer spending will set off a global depression.

Blanchard told the French newspaper Le Monde, "Consumer and business confidence indexes have never fallen so far since they began. …. It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression."

A third of G8 banks bankrupt, closed or merged in 2009?

Financial analyst Ralph Silva of TowerGroup told CNBC that he expects no less than one third of banks to fail in 2009 and that anything up to a thousand could collapse if they don’t merge.

“In 2009 we’re gonna see one third of the banks in the G8 countries disappear, either being merged, forced or not forced, or completely disappearing,” said Silva.

The analyst predicted that rather than letting banks fail, governments will force them to merge, which would lead to “very few banks owning quite a bit more.”

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World Faces "Total" Financial Meltdown

The governor of the Bank of Spain issued a bleak assessment of the economic crisis, warning that the world faced a "total" financial meltdown unseen since the Great Depression.

"The lack of confidence is total," Miguel Angel Fernandez Ordonez , also a governing council member of the European Central Bank, said in an interview with Spain's El Pais daily.

"This is the worst financial crisis since the Great Depression" of 1929, he added.

[AFP]

The Neo-Alchemy of the Federal Reserve

Ron Paul writes: The updated, total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months.

This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation. Just as alchemists of the past frequently poisoned themselves with the lead or mercury they were trying to turn to gold, today’s bankers are poisoning the economy with accelerated fiat money creation.

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World Bank predicts global gloom

The World Bank has forecast a significant decline in global economic growth in 2009 for both developed and emerging countries. The Bank said a deep global recession could not be ruled out.

The World Bank has also warned that some emerging economies are likely to face serious challenges, including bank failures and currency crises, even if global bail-out plans start restoring confidence in financial markets.

Even the fast-growing emerging giants, India and China, are likely to suffer from the slowdown.

[BBC]

$8.5 trillion of our tax dollars to be used to "rescue" the U.S. financial system

700 billion for the Wall Street bail-out. Another 200 billion there, and then on another given day 800 billion more committed. If you’re like me, you may be finding it hard to keep track of how many billions or trillions the government is spending to “rescue” us.

According to Bloomberg News, over the past 15 months, the US government has pledged anywhere from $7.7 trillion to 8.5 trillion (and counting!) to rescue the financial system! To say the least, “The commitment dwarfs the Treasury Department’s $700 billion Troubled Asset Relief Program.”

Most of the money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not even need congressional approval.

So much for transparency and oversight. So-called regulators continue to commit far more money than Congress agreed to, while refusing to disclose loan recipients or reveal the collateral they are taking in return.

The San Francisco Chronicle writes “Given the unprecedented size and complexity of these programs and the fact that many have never been tried before, it's impossible to predict how much they will cost taxpayers. The final cost won't be known for many years.”

How much is a Trillion Dollars?

Politicians and the media avoid startling us by explaining what “7 or 8 Trillion Dollars” denotes, and so we turn to the occasional blogger, myself included, who attempt to provide a handle on what these colossal figures represent. For example:

• If you had 7.4 trillion pennies, you would have $74,000,000,000, an amount sufficient to buy the New York Times Co. 86 times over.
• 7.4 trillion pennies would stack up 4,671,717 miles high. That's enough to go to the moon and back ten times.
• Just 1 Trillion dollars equals all the assets of all American banks.
• $ 7.7 Trillion is conservatively nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures.
• This amount could instead pay off more than half the country’s mortgages.
• Oh yes, and to come up with this $8.5 Trillion, each American citizen is involuntarily kicking in $27,851!
• 
  

OK, so you get the picture? Here’s another angle you shoppers might relate to.

Spending $1,000 per second, it would take almost three decades to spend 1 trillion dollars! (–And obviously 1 Trillion is only a fraction of $8.5 trillion being offered on our behalf.)

Applying a “trillion” to Time,

1 second multiplied by a Trillion = 31,700 years!

Might that be an indicator how long it may take the children of our children’s offspring to begin to pay off the National Debt?!

See also

U.S. in danger of defaulting on national debt in 2009?

Richard C. Cook, a former U.S. federal government analyst warns:

To try to fix the crisis through bailing out the system, we are now seeing in the U.S. and Europe levels of government borrowing that have not been experienced since World War II. The purpose is to recapitalize a financial system that has destroyed itself through its own greed and folly.

But all this does is defer the bill to future generations who have to pay the enormous compounded interest charges this borrowing entails.

Interest on the national debt in the 2009 federal budget is over $500 billion. (Last year's was $430 billion)

The situation is so bad that many people believe the U.S. may even be in danger of defaulting on its gigantic national debt sometime in 2009.

Former Goldman Sachs chairman prediction: “Worse than the Great Depression”

According to former Goldman Sachs chairman John Whitehead, the current downturn will be worse than the Great Depression. As reported by Reuters:

The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, says former Goldman Sachs chairman John Whitehead.

"I think it would be worse than the Depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."

Economist: “U.S. will soon face a second Great Depression”

By most accounts the US economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a “mini-depression,” and that designation might be optimistic. The Russian economist, Mikhail Khazin predicts that the “U.S. will soon face a second ‘Great Depression.’”

Khazin points out, as have others such as University of Maryland economist Herman Daly, that consumer debt expansion is the fuel that kept the U.S. economy alive. The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible.

Consumers are overburdened with debt. This fact takes monetary policy out of the picture. Americans can no longer afford to borrow more in order to consume more.

[Excerpt of an article by Paul Craig Roberts, former Secretary of the U.S. Treasury]

read more

The financial outlook as we enter 2009

US retail sales are ominously the worst in 35 years.

1.2 million U.S. jobs were lost in 2008, and unemployment has soared to 6.5%. And with most economic indicators signaling even more difficult times ahead, job losses will likely deepen and continue through 2009.

Top auto industry executives and the president of the United Auto Workers are asking for additional federal aid for the struggling U.S. carmakers.

General Motors warned Friday that it has only a minimum amount of cash to operate its business through the end of the year, and even with planned restructuring will fall short of cash in the first two quarters of 2009.

Despite receiving a portion of a $25 billion industry bailout from the federal government, Ford said it would cut its R&D budget and eliminate about 10 percent of its white-collar work force.

Collapse of US auto sales points to deep recession

Sales fell by a staggering 31.9 percent last month over the previous year in a further sign the U.S. economy has entered a deep and protracted downturn, threatening the jobs of millions of working people.

At the current rate, automakers expect to sell their lowest number of cars and trucks since 1983. General Motors—which is seeking a government bailout to avert bankruptcy and expedite a merger with number-three US automaker Chrysler—suffered a 45 percent decline in sales.

Adjusted for increases in the US population, last month was the worst since World War II, GM sales analyst Michael DiGiovanni told reporters. “This is clearly a severe recession,” he said.

One or more of Detroit’s Big Three automakers are not expected to survive the crisis. In the 1970s, US carmakers controlled more than 80 percent of the US market, with GM selling more than half the cars. GM, which employed 350,000 unionized workers in 1970, now has fewer than 70,000 blue-collar workers.

As a result of falling demand from steelmakers—a key supplier for all manufacturers—production at 17 of the nation’s 29 blast furnaces is being shut down. “We’re dealing with a situation that could develop into another Great Depression, if not handled properly,” Daniel DiMicco, chief executive of Charlotte, North Carolina-based steelmaker Nucor Corp., told the Wall Street Journal.

U.S. Federal Government Debt vs. Rest of World

Above is a dramatic look at the U.S. federal government debt.

This chart takes the present value of all US Federal Government debt obligations, including unfunded Social Security and Medicare obligations, which at end of 2007 totaled $62.6 Trillion (upper red bar on chart)
[Data source -http://fms.treas.gov/fr/07frusg/07frusg.pdf]

- - And compares that $62.6 Trillion in debt to U.S. GDP, plus to the rest of World's government debt of about $18 trillion (and rest of world's GDP).

Restated: U.S. government debt of $62.6 trillion is 3 1/2 times larger than the sum of the debts of all governments in the world ($18 trillion).

--Yet, the U.S. economy (GDP) is 68% smaller than the rest of the world. (Compare the black bars on this chart)

Resource

Call this a Crisis? We haven't seen nothing yet!

David M. Walker, former U.S. Comptroller General, one man who knows the inside economic picture far better than most, wrote the following in Fortune magazine:

Let's take a look at the potential catastrophe that awaits us once we survive our current crisis.

The entitlements due from Social Security and Medicare present us with a frightening abyss as 78 million Americans come of age. The costs of these current programs, along with other health-care costs, could bankrupt our country. Even if the economy were to grow at the level of 3.2% a year, as it did in the 1990s, they wouldn't come close to addressing our federal financial problem.

The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.

China suggests U.S. dollar should be banished from international trade

The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, the official newspaper of China's ruling Communist Party says.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A few days later, Russian Prime Minister Vladimir Putin proposed that Russia and China ditch the dollar and gradually switch over to national currency payments in their bilateral trade, expected to total $50 billion in 2008. Chinese Prime Minister Wen Jiabao described strengthening bilateral relations as "strategic."

Dollar to be replaced by Chinese currency as the world's "reserve currency"?

The Bush administration and the EU have called for an economic summit to be held by the 20 largest economies sometime after the presidential elections, to create another Bretton Woods wherein control of the global economic system was delivered to those same nations. It's likely, however, that the outcome will turn out considerably different than anticipated.

Already, under China's leadership, 12 Asian nations have agreed to set up an 80-billion-dollar fund to protect their economies from currency-runs, capital flight or other financial disruptions. China has the world's largest reserves at $1.9 trillion followed by Japan at more than $1 trillion. Clearly the two richest nations will set the agenda and play a central role in deciding how best to deal with the global recession.

Thailand's Deputy Prime Minister, Olarn Chaipravat, told Bloomberg News: "The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world."

The 56 Trillion Dollar U.S. Deficit

The former U.S. Comptroller General, David Walker, interviewed by Bill Maher, highlights some astounding numbers that add to the scope of the financial crisis:

The U.S. deficit is actually more like 56 Trillion dollars!

The share of this debt works out to $480,000 for each U.S. household!

Watch the 6 Minute Video

IMF: World on brink of financial collapse

The global financial system is on the brink of a systemic meltdown despite interventions by the US and Europe to stabilize markets, the head of the International Monetary Fund says.

Even with unprecedented actions in major economies, including co-ordinated central bank rate cuts, IMF Managing Director Dominique Strauss-Kahn said those measures had so far failed to calm the situation.

He said the financial crisis had deepened and was now affecting many more parts of the global financial system, including emerging markets, which until now had been shielded from the crisis.

Strauss-Kahn said conditions were likely to remain very difficult, restraining global growth prospects, while credit conditions are set to get tougher and constrain the ability of banks and companies to access funding.

[Reuters]

IMF: “Most dangerous shock in mature financial markets since the 1930s”

The International Monetary Fund, in a World Economic Outlook released today, predicted the United States - the epicenter of the financial meltdown - will continue to lose traction, adding, "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s." (AP)

Economic equivalent to cardiac arrest

On Wall Street, the panic drove the Dow Jones Industrial Average slipping below the key psychological level of 10,000 for the first time since 2004. The mild euphoria that greeted the passage of the $700 billion bail-out of Wall Street(*) on Friday evaporated as traders digested the more bad news from Europe.

The UK stock market has suffered its worst one-day fall in history as the banking crisis intensified. The FTSE's tumble was mirrored across Europe, as markets in France, Germany, Italy and Spain all recorded heavy falls.

Here's how Nouriel Roubini sees it: "It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly...The Commercial paper market is shut down...Corporations have no access to long or short term credit markets. Brokers are increasingly not dealing with each other. The interbank market is seizing up."

(*) BTW, has anyone even attempted to explain how Secretary of the Treasury Henry Paulson expects to recapitalize the banks--which are loaded up with $2.4 trillion in mortgage-related investments—with the relatively paltry $700 billion from the so-called rescue plan?

Bailout raises the U.S. national debt to $11.315 trillion

Last July, President Bush signed legislation that raised the debt ceiling to $10.615 trillion.

Today he signed the financial bailout legislation passed by the Senate last night that raises the debt ceiling to $11.315 trillion.

Under the Bush Administration, the gross national debt as a percentage of the gross domestic product has hit a 50-year high. The following chart illustrates the trend nicely.



Bush did three things to skyrocket the debt from $5.7 trillion to $10 trillion:
1. He lowered taxes on the rich (by far the biggest item).
2. He invaded Iraq and Afghan-Pakistan.
3. He did not regulate an out-of-control Wall Street.

[ZFacts.com]

Bank Bailouts underway in Europe

Monday's stock market plummet posted the first post-$1 trillion day ever, another ominous record set.

In Europe, Dutch-Belgian banking giant Fortis NV has been partially nationalized with a 11.2 billion euros ($16.4 billion) rescue from the governments of Belgium, the Netherlands and Luxembourg, after investor confidence in the bank disappeared. The Belgian government also announced morning a €6.4 billion ($9.2 billion) plan to rescue faltering bank Dexia, which ran up huge losses in its U.S. operations.

The British government nationalized mortgage lender Bradford & Bingley, taking over the bank's 50 billion pound ($91 billion) mortgage and loan books, the second bank nationalized by the British government. In a similar move, the Icelandic government bought a 75 percent stake in Glitnir, the country's third largest bank, for 600 million euros ($878 million). In Germany, the country's second biggest commercial property lender, Hypo Real Estate Holding AG, secured a multibillion euro line of credit from several banks.

The Irish government said it would guarantee all deposits in Irish banks following a massive drop in the value of Irish bank stocks.

Meanwhile, the Bank of Japan has pumped 20 trillion yen ($192.3 billion) into money markets, amid an effort among the world's central banks to calm worries about a global financial crisis.

Record Dow plunge as bailout bill defeated

In a stunning vote that shocked the capital and worldwide markets, Congress defeated a $700 billion emergency rescue for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it.

The Dow Jones industrials plunged nearly 800 points, the most ever for a single day. The 777-point decline for the day surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.

[AP]

Ron Paul on the bailout package

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. ... It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder.

Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters."

The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

[From an article by Republican member of Congress Ron Paul, LewRockwell]

WaMu becomes biggest bank to fail in US history

As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

WaMu, founded in 1889, is the largest bank to fail by far in the country's history.

[AP]

$1,000,000,000,000: The astonishing cost of US government's desperate bid to rid the economy of toxic debt

Business insiders fear the total cost of the bail-out could rise to as much as $1 trillion or $1,000,000,000,000.The plan would give the government broad powers to buy the bad debt of any US financial institutions for the next two years.

The move is part of the largest financial bail-out since the Great Depression and the sum involved is equivalent to almost one third of the British economy.

It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion! [What tax payers owed when the debt was "only" 9 Trillion]

[Excerpt of an article by Kate Foster, The Scotsman]

"Days away from a complete meltdown of our financial system"

On Friday morning, Senator Christopher Dodd, the head of the Senate Banking Committee, interviewed on ABC's “Good Morning America.”, revealed that just hours earlier at an emergency meeting convened by Secretary of the Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers were told that "We’re literally maybe days away from a complete meltdown of our financial system.” Dodd added somberly, that in his three decades of serving in public office, he had "never heard language like this.”

The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar.

No one has any idea of the magnitude of the deleveraging ahead or the size of the debts that will have to be written down. That's because 30 years of deregulation has allowed a parallel financial system to arise in which over $500 trillion dollars in derivatives are traded without any government supervision or accounting. These counterparty transactions are interwoven throughout the entire "regulated" system in a way that poses a clear and present danger to the broader economy.

The Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified.

[Excerpt of a commentary by Mike Whitney]

As rotten foundations crumble

From pubs in London to bars in New York, everyone is asking the same question: Why is this financial crisis different? The answer is simple albeit not sexy. The rot has set in.

The world's investment banks are basically houses built on pillars of money. Sometimes those pillars are cash, often bonds; these days pillars are made up of derivatives, swaps, options and other frighteningly complex instruments.

But these pillars are the strength that supports not only the bank itself, but also its debts and liabilities. What has happened is that the rot has got into the pillars and no-one noticed. If they were wooden it would be worms. The very financial instruments that make up the core of the banks are questionable.

No-one can say for certain how much these instruments are worth, if anything. No-one knows if counterparties to deals are financially secure and will be around tomorrow. The very structure became doubtful.

[CNN]

Fear grips the market

The Federal Reserve gave a two-year, $85 billion loan to American International Group Inc. (AIG) in exchange for a nearly 80 percent stake in the insurer. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries in 130 countries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

However, Wall Street stumbled again even after the government bail out.
"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the market reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank.

[AP]

The slow-motion run on retail banks

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms.

Lehman Brothers: tectonic shifts under the foundations of the U.S. financial system

Three of the top five U.S. investment banks have now fallen victim to the credit crunch.

The demise of Lehman Brothers, the fire sale of Merrill Lynch - the next potential domino in the chain - and news that insurer AIG is asking the Federal Reserve for emergency funding, has sent shock waves around the world.

These really are seismic events. As one commentator put it: “Tectonic plates are shifting under the foundations of the U.S. financial system,” and we’re all likely to feel the ground shake.

Foreigners, not the US Mortgage Market, drove the Fannie - Freddie Bailout

In an interview with The Washington Times, Council on Foreign Relations Geo-Economics Fellow Brad Setser said of the federal bailout of the Fannie-and-Freddie debt: “I suspect this is the first case where foreign central banks [ie China, Japan, Europe, the Middle East and Russia] exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests.”

The problem is that the U.S. government has established what could be a costly and ill-advised precedent - the bailout. First it was The Bear Stearns Cos., now it’s Fannie Mae and Freddie Mac, and tomorrow it could be Lehman Brothers Holdings Inc.

FreedomWorks, a conservative non-profit organization that’s based in Washington, characterized the Fannie Mae/Freddie Mac bailout as a deal by politicians that’s nothing more than a transfer of “possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.”

[Excerpt of an article by William Patalon III, Money Morning]

Lehman Brothers, 4th largest US investment bank losses hit world stocks

World stocks have slipped after Lehman Brothers, the fourth largest US investment bank, reported a massive third-quarter loss of about $4 billion. Lehman had already reported losses of $2.4 billion in the second quarter.

The investment bank has already taken $7 billion in credit-related write-downs and losses since the start of the global credit crisis.

No plans for an injection of fresh capital into the bank have been released after a Korean firm backed out of investing.

[Aljazeera.net]

US Treasury adopts orphans Fannie Mae and Freddie Mac

The U.S. government announced plans to place the two mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship” (aka as bankruptcy), the most sweeping government intervention into the financial markets in American history. If these two companies are nationalized, it will add $5.3 trillion dollars to the nation's balance sheet. (And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns' failure)

When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. The central banks of China, Japan and Korea are major holders of these securities. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure.

The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending.

The best that this weekend’s bailout can do is to postpone the losses on bad mortgage debts. But this is a far cry from actually restoring the ability of debtors to pay. It is pure hypocrisy for Wall Street’s Hank Paulson to claim that all this is being done to “help home owners.” They are vehicles off whom to make money, not the beneficiaries. They are at the bottom of an increasingly carnivorous and extractive financial food chain.

[Excerpt of interview with Michael Hudson, former Wall Street economist]

$200 billion Interest alone on the enormous U.S. debt

The U.S. government is like anyone with a nearly maxed out credit card: the more debt the country accrues, the more it must pay in interest, which makes it harder to run down the original debt.

And the picture gets worse when the rates go up. That could happen to Uncle Sam if those who buy U.S. debt grow concerned about the country's ability to pay what it owes, or because inflation starts to erode the value of bond yields.

The end result: "Taxpayers have to pay more and more on the national credit card," says Robert Bixby, executive director of a deficit watchdog group, adding that the country paid $200 billion in debt interest last year alone.

Washington is also charging the cost of the wars in Iraq and Afghanistan to its national credit card. So far, the government has spent between $700 billion and $800 billion since 2001.

So exactly how much is a Trillion Dollars?

Dr. Nouriel Roubini of the New York University's Stern School of Business, suggests that the losses of the American financial system will grow to more than $1 trillion.

So exactly how much is a trillion dollars?

That's one million times $1 million. Or one thousand times $1 billion.

An amount that is equal to all the assets of all American banks.

Read more

The American Economy: Give or take a trillion dollars

We've been reading a lot in the press where a “trillion dollars” or so is tossed around:

The Bush administration revealed America's budget deficit will climb to a record high of more than half-a-Trillion dollars.

As of February ’08, the meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value.

In order to bail out Fanny Mae and Freddy Mac, Congress increased the national debt by a whopping $800 billion sending it over the $10 trillion mark for the first time in history!

The U.S. annual gross domestic product is about $15 trillion.

Since the passage of NAFTA and the creation of the World Trade Organization in 1994, America’s massive trade deficits has surpassed $5 trillion.

Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets.

There are roughly $6 trillion in US dollar-backed assets around the world which could be quickly dumped if foreign holders of US dollars start selling their paper on the open market.

The non-partisan Government Accountability Office that says the U.S. government faces a $53 Trillion shortfall to cover the costs of promised benefits in its entitlement programs: Medicare, Medicaid and Social Security.

Meanwhile, the U.S.’s national debt is expanding by about $1.4 billion a day -- or nearly $1 million a minute.

British economy in bad shape, at “60-year low”

The UK is facing the worst economic conditions for 60 years and the current crisis will be "more profound and long-lasting" than expected, British finance minister Alistair Darling warned Saturday.

Darling's comments are the Government's grimmest assessment yet of the situation, and come after a Bank of England policymaker warned that unemployment could hit two million by Christmas, the UK's Press Association reported.

Darling said that the economic conditions faced by the UK and the rest of the world "are arguably the worst they've been in 60 years," adding: "I think it's going to be more profound and long-lasting than people thought."

[CNN]

Foreign spigot being turned off to the U.S.

Fannie and Freddie have always borrowed at preferential rates. Mortgages are borrowed and bundled, which transformed mortgages into investments for banks, corporations and governments all over the world.

International investment is the foundation on which our home ownership was built. Well over US $1 trillion of our mortgages have been sold to foreign investors this way in the recent past. Over the past few years America has been borrowing over 50% of the world's internationally available savings.

Today we learn that the Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by China’s fourth largest commercial bank is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities. Asian investors in particular have become net sellers of agency debt, said analysts.

This weekend, the Group of Twenty developed and advanced developing countries will be holding a preparatory meeting in Brazil. Although the crisis at Fannie Mae and Freddie Mac is not on the agenda, there is speculation that Treasury officials could informally encourage big holders of agency debt and mortgage-backed securities not to scale back their investments.

Treasury may have to bail out FDIC

The Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. The borrowing could be needed to cover reimbursing depositors immediately after the failure of a bank.

"I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses," Chairman Sheila Bair said in an interview with the Wall Street Journal.

In a bid to replenish the $45.2 billion fund, Bair had said that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The last time the FDIC borrowed funds from the Treasury was at nearly the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered.

The fact that the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.

[Reuters]

Freddie and Fannie Failure World Catastrophe, Yu Says

U.S. mortgage finance companies Fannie Mae’s shares closed on Friday at $5, down from almost $70 a year ago. Freddie Mac fell to $2.61, which is down from about $65.

A failure of Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. “If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said. “If it is not the end of the world, it is the end of the current international financial system.''

“The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing.

China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets. The Chinese government probably holds the bulk of that amount.

[Bloomberg.com]

A Tectonic Shift in the Global Economy

As of today, there should be no remaining doubts as to the tectonic shift in the global economy -- the world's largest and most profitable bank is Chinese.

While banks in North America and Europe are still counting massive credit crunch losses, Industrial and Commercial Bank of China (ICBC) has surged ahead of its international competitors thanks to a booming domestic economy that has dramatically boosted profits. ICBC’s half yearly earnings jumped an astonishing 57% to US$9.4-billion, up from US$5.9-billion last year. Lending, investment banking and wealth management all saw significant increases as the Chinese economy continued to outpace much of the rest of the world.

The results catapult ICBC ahead of international global powerhouse HSBC PLC -- the most profitable bank in the world last year -- where earnings fell 29% in the first six months of 2008.

The rise of ICBC is matched by China's other leading banks. (Among them China Citic Bank Corp, China Merchants Bank, and China Construction Bank)

The fortunes of the Chinese banking industry, which has been relatively insulated from the global credit crunch, contrasts sharply with slashed profits at banks on Wall Street and [Canada’s] Bay Street and across Europe.

"China may still grow significantly faster than developed economies for at least another one or two decades," said JP Morgan's Hong Kong-based bank analyst Samuel Chen in a recent report.

[Excerpt of an article by Duncan Mavin, The Financial Post]

Large U.S. Bank Collapse Seen Ahead

The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

[Reuters]

The perfect storm leading to a global recession

Recent developments suggest that all G7 economies are already in recession or close to tipping into one.

When they reach it, there will be a sharp slowdown in Brazil, Russia, India, and China and other emerging markets.

Elsewhere, Japan is contracting, too.

This G7 recession will lead to a sharp growth slowdown in emerging markets and likely tip the overall global economy into a recession

[Excerpt of an article by Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University]