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  • Six Questions for Eric Janszen on the Economic Collapse

    Six Questions for Eric Janszen on the Economic Collapse

    By Rafil Kroll-Zaidi

    Angel investor and iTulip.com founder Eric Janszen contributed to this month’s Forum, “How to Save Capitalism: Fundamental fixes for a collapsing system,” and wrote “The Next Bubble: Priming the markets for tomorrow’s big crash” in the February 2008 Harper’s. Rafil Kroll-Zaidi interviewed Janszen via email; answers have been edited for length and clarity.

    1. Is the Dow still inflated?

    It is. My Dow target since 2006 has been around 5,000. Here’s why: The impact on the stock market of the 2003–2007 monetary and fiscal reflation was similar to that of the 1933–1937 reflation–except that this most recent reflation was enhanced by real estate asset-price inflation. Sure, by 1937, the stock market had nominally recovered 80 percent of what it lost between 1929 to 1933. But in real, inflation-adjusted terms, it recovered only 50 percent of what it lost.

    Today, all of the pricing power that was temporarily injected into the economy with the credit expansion is running in reverse, with across-the-board debt deflation. Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.

    2. What can we expect from federal intervention?

    The government has been trying to manage the debt deflation for over a year, to no avail. The markets are “pricing in” the structural problems of the banking system and financial markets–problems, as I said, that cannot be addressed with ad-hoc and marginal national policies. The entire global financial and monetary system has to be overhauled. This will require immediate and unprecedented cooperation among governments and institutions. But America lacks the global political leadership needed to drive the process.

    Time is short. The financial-markets crisis is now spilling over into the real economy. Soon unemployment and other hardships will limit the ability of governments to sell a global bailout package. This is how the first great era of globalism degenerated into political chaos in the 1930s.

    The nationalization of the U.S. banking system is a bold step. The markets are pleased, as has been the pattern for government interventions in years past: when interventions are promised, the markets crash up; when the interventions are not delivered, the markets crash down. When the interventions vastly exceed expectations, as with the agreement among governments in the U.S., the U.K., and Europe to purchase shares in leading banks–nationalization in all but name–the stock markets react with manic enthusiasm.

    Certainly short-term risks to investors have declined. The markets correctly understand that a functioning credit system is a prerequisite for a modern economy. But getting the credit system working again is like restarting a heart-attack victim’s heart. The underlying cause still has to be addressed, and that takes years, and other organs may fail while the patient is out.

    Photo by Victor Cruz

    3. It seems like the whole finance economy was Long-Term Capital Management writ large: basically no one, not even regulators, appreciated just how precarious it all was. How do we create a stable regulatory structure?

    The decline in regulation is a symptom of FIRE economy interests (Finance, Insurance, and Real Estate) taking control of the political machinery to increase profitability. But the profitability of the credit industry was a side effect of interest rates falling (after the Volcker Fed raised them to 20 percent). The incursion of the credit industry into every aspect of American life–college tuition, health care–was the result. But it’s worse than that. Manufacturing was financialized. Take the auto industry–a finance manager at one of the Big Three automakers told me, “We used to be a car company that sold financing on the side. Now we are a bank that makes cars.” Look at GM stock in recent days. It’s gotten hammered worse than during the Great Depression, not only because of a coming loss in production profitability but also because of the loss in profits from credit operations that had become such a large part of their operating profits. The regulators have to start over.

    4. There have been warnings about how precarious it is for the $63 trillion credit-derivatives market to be bigger than the “world economy.” What are people talking about when they bring up this figure? [MORE . . .]

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  • #2
    Re: Six Questions for Eric Janszen on the Economic Collapse

    Great interview. Two things:

    1 - Didn't the Fed LET Lehman go under because Lehman was the main derivatives seller and counterparty to European banks? i.e. didn't they let them go under so that the Europeans would wake up and realize that they need to help put out the fire of FIRE? From that perspective I always thought it was a smart move since little acknowledgment had been forthcoming until then that these problems are not contained to the U.S. One day later three European banks to be bailed out, but more importantly the ECB was shaken awake. Even though it was a risk to system, I had guessed that they judged the risk acceptable in the face of the return of Europeans getting involved on a much grander scale. And I think the second aim was to send a message about moral hazard.

    2 - As someone new here, please excuse my ignorance or wishful thinking as I was caught with my pants down unlike iTulip subscribers.... Are you proposing that solely physical gold will flourish in the environment to come? Do you not think that commodities equities will reach stratospheric valuations within that scenario even if the broader market goes down? Viewed from a dollar tanking, perhaps inflationary recession, grab for hard assets point of view should we not see a similar push for these equities as in the late seventies? As Zulauf and Coxe say in that environment investors do not seek mining equities for profits, they seek them for what the value of the assets in the ground will be worth in the future.
    Last edited by ST; 10-18-08, 12:32 PM.
    --ST (aka steveaustin2006)

    Comment


    • #3
      Re: Six Questions for Eric Janszen on the Economic Collapse

      remember the discussions of the exponential growth of money?

      Are these latest moves the end game, or do they set the stage to extend the exponential growth by a couple more years?

      Comment


      • #4
        Re: Six Questions for Eric Janszen on the Economic Collapse

        Originally posted by FRED View Post


        Soon
        the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.
        Eric (or Fred), here you say "soon the dollar will resume its decline ...". Any sense of how soon is "soon"? Weeks? Months? Years?

        Comment


        • #5
          Re: Six Questions for Eric Janszen on the Economic Collapse

          My ($63 trillion dollar) question is: Will, or can the unwind of this $63 trillion dollar derivatives pile actively work to put a continuing bid under the US dollar. If the answer to that is yes, and the unwind of 63 trillion is of a scale which requires years rather than months, you have a clear and directly actionable suggestion right there: "get out of USD short positions" because $63 trillion USD takes a very, very long time to close out. That bid under the USD would whittle dollar short trades down to nothing before it concluded.

          Thoughts?

          Originally posted by FRED View Post
          There have been warnings about how precarious it is for the $63 trillion credit-derivatives market to be bigger than the “world economy.” What are people talking about when they bring up this figure? [MORE . . .]

          Comment


          • #6
            Re: Six Questions for Eric Janszen on the Economic Collapse

            Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

            Comment


            • #7
              Re: Six Questions for Eric Janszen on the Economic Collapse

              Well we might keep our feet on the ground and remember what it costs to mine the stuff. The absolute cheapest gold mines are at about $450 an ounce, and the average for silver mining is around $16-$17 an ounce. You might knock a dollar or two off that in a severe recession. Plus you have peak cheap oil scheduled to arrive regardless of practically anything (with considerable pricing force) in the next five years jacking all your fuel costs.

              It may seem like a radical notion to some, but it is likely important to not overly "financialize" gold, silver, petroleum or any commodities base costs going into the 2020's. There's a lot of fiat money involved, but that sure as heck isn't going to be the major story going forward - due to what oil is going to do. Petroleum price will put a floor under the entire mining complex, and the entire commodities complex too. Give it five years max and the commodities complex should be percolating to the tune of $300++ oil, at the least.

              That is the set of "trycicle wheels" or "kiddie wheels" strapped onto any commodities or PM position today. We have an appointment with a very large and unpleasant energy squeeze dead ahead. Anyone getting severely mangled in commodities today should keep that appointment in mind, because five years is not a very long time to wait for payola. Bottom line is the next decade should be inflationary, due to events which will have a fair bit less to do with central bankers and mere money than our more financially minded wonks and propeller heads are willing to acknowledge.

              Originally posted by aps1087 View Post
              Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

              Comment


              • #8
                Re: Six Questions for Eric Janszen on the Economic Collapse

                Originally posted by aps1087 View Post
                Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.
                I agree: this is why physical gold is a small part of my portfolio. The better value is in the MINERS, who are getting crushed because of massive DEFLATION.

                Comment


                • #9
                  Re: Six Questions for Eric Janszen on the Economic Collapse

                  Originally posted by Lukester View Post
                  Well we might keep our feet on the ground and remember what it costs to mine the stuff.
                  I understand that, but I do not think it is entirely unreasonable to believe that mining costs come down along w/ the price of oil. Your thesis for the increase in the price of oil is understandable, but could the strength of the USD outpace any decrease in supply or possible increase in demand for oil? Whatever the reason for this USD strengthening (synthetic short, deleveraging, flight to "quality"), it could continue for far longer and be much deeper than many are expecting. If people are not positioned properly, they could be wiped out in this deflation, and have nothing left to invest in the coming inflation. Alternatively, they could be correctly positioned now for a coming deflation, and not be able to get out of the USD in time. For these reasons, I am in a 50/50 cash/gold position. It is just too unpredictable at this time.

                  Comment


                  • #10
                    Re: Six Questions for Eric Janszen on the Economic Collapse

                    Originally posted by FRED View Post
                    If a significant geopolitical shift away from financial support of the U.S. takes place–due to, say, military conflict between U.S. creditors, or perhaps due to rising economic and financial crisis at home–the source of those inflows may quickly dry up.

                    Given the view I take from EJ's previous comments that the great unwind in USD support is soon upon us, I'm curious about the military conflict reference made in the article. EJ, are you implying that you believe some US creditors are on the verge of duking it out within the next six months? If so, which ones? :confused:

                    Comment


                    • #11
                      Re: Six Questions for Eric Janszen on the Economic Collapse

                      Originally posted by bda_guy View Post
                      Given the view I take from EJ's previous comments that the great unwind in USD support is soon upon us, I'm curious about the military conflict reference made in the article. EJ, are you implying that you believe some US creditors are on the verge of duking it out within the next six months? If so, which ones? :confused:
                      my impression is that it is one of many 'accidents waiting to happen'. russia and china ain't pals, for example, but the usa owes them both money.

                      Comment


                      • #12
                        Re: Six Questions for Eric Janszen on the Economic Collapse

                        Originally posted by bda_guy View Post
                        Given the view I take from EJ's previous comments that the great unwind in USD support is soon upon us, I'm curious about the military conflict reference made in the article. EJ, are you implying that you believe some US creditors are on the verge of duking it out within the next six months? If so, which ones? :confused:
                        Israel taking out Iran's nuclear facilities would do the trick short term, but I believe that the greatest threat is about 4-5 years over the horizon, the Greenland Ice Sheet. If that suddenly melted, (as other ice sheets have suddenly melted, within months), you would have utter chaos world wide. Thus the greatest threat is not financial, nor immediate military action, but environmental. In the 1930's, no one had any worries about any form of environmental effects. But right now, things are happening so fast, it beggers belief.

                        This recently turned up on Slashdot. One thing that immediately springs to mind is what if the methane catches Fire? This is millions of tons of gaseous Methane spread over thousands of square miles. Perhaps now we have a credible mechanism to warm the planet quite literally overnight. - Very very scary!

                        | Strong Methane Emissions On the Siberian Shelf |
                        | from the carbon-dioxide-times-twenty dept. |
                        | posted by kdawson on Tuesday September 30, @00:05 (Earth) |
                        | http://news.slashdot.org/article.pl?sid=08/09/30/022246 |
                        +--------------------------------------------------------------------+
                        rrohbeck writes "The Independent reports brand-new results of [0]high concentrations of methane 100x normal above the sea surface over the Siberian continental shelf. A [1]large number of methane plumes have been discovered bubbling up from the sea floor. This is probably due to [2]methane clathrate, buried under the sea floor before the last ice age, breaking up as higher water temperatures melt the permafrost that had contained it."

                        Discuss this story at:
                        http://news.slashdot.org/comments.pl?sid=08/09/30/022246
                        Links:
                        0. http://www.independent.co.uk/environment/climate-change/exclusive-the-methane-time-bomb-938932.html
                        1. http://www.independent.co.uk/news/science/hundreds-of-methane-plumes-discovered-941456.html
                        2. http://en.wikipedia.org/wiki/Methane_clathrate#Methane_clathrates_and_climate_c hange

                        Comment


                        • #13
                          Re: Six Questions for Eric Janszen on the Economic Collapse

                          Originally posted by metalman View Post
                          my impression is that it is one of many 'accidents waiting to happen'. russia and china ain't pals, for example, but the usa owes them both money.
                          Digressing on the point of "accidents", my favorite throw-out that I've heard as a black swan event would be a major earthquake under Tokyo causing economic damage into the hundreds of billions. In an instant, Japan would need to sell foreign (ie. mainly USD) investments to raise Yen-denominated funds for rebuilding efforts. Once you get a major creditor like that reversing US capital flows from in to out, it's a slippery slope for the USD and plays into the themes discussed on Itulip.

                          Having said that, the chances of this happening are not very high. There are other political/economic/environmental issues more likely to be the trigger.

                          Comment


                          • #14
                            Re: Six Questions for Eric Janszen on the Economic Collapse

                            Originally posted by Chris Coles View Post
                            Israel taking out Iran's nuclear facilities would do the trick short term, but I believe that the greatest threat is about 4-5 years over the horizon, the Greenland Ice Sheet. If that suddenly melted, (as other ice sheets have suddenly melted, within months), you would have utter chaos world wide. Thus the greatest threat is not financial, nor immediate military action, but environmental. In the 1930's, no one had any worries about any form of environmental effects. But right now, things are happening so fast, it beggers belief.

                            This recently turned up on Slashdot. One thing that immediately springs to mind is what if the methane catches Fire? This is millions of tons of gaseous Methane spread over thousands of square miles. Perhaps now we have a credible mechanism to warm the planet quite literally overnight. - Very very scary!

                            | Strong Methane Emissions On the Siberian Shelf |
                            | from the carbon-dioxide-times-twenty dept. |
                            | posted by kdawson on Tuesday September 30, @00:05 (Earth) |
                            | http://news.slashdot.org/article.pl?sid=08/09/30/022246 |
                            +--------------------------------------------------------------------+
                            rrohbeck writes "The Independent reports brand-new results of [0]high concentrations of methane 100x normal above the sea surface over the Siberian continental shelf. A [1]large number of methane plumes have been discovered bubbling up from the sea floor. This is probably due to [2]methane clathrate, buried under the sea floor before the last ice age, breaking up as higher water temperatures melt the permafrost that had contained it."

                            Discuss this story at:
                            http://news.slashdot.org/comments.pl?sid=08/09/30/022246
                            Links:
                            0. http://www.independent.co.uk/environment/climate-change/exclusive-the-methane-time-bomb-938932.html
                            1. http://www.independent.co.uk/news/science/hundreds-of-methane-plumes-discovered-941456.html
                            2. http://en.wikipedia.org/wiki/Methane_clathrate#Methane_clathrates_and_climate_c hange

                            The glaciers on Greenland are receding rapidly, but I wouldn't be too concerned of a sudden melt. A greater concern would be something like a sudden disintegration of portions of the Ross in Antarctica like what happened to Larsen B a few years ago (an ice shelf the size of Rhode Island that turned into a giant slushy in a matter of days).

                            Wouldn't be too concerned about the methane from the seabed catching fire; bigger concern of reinforcing positive feedback global warming mechanism. The same thing is happening with the melting of permafrost.

                            Comment


                            • #15
                              Re: Six Questions for Eric Janszen on the Economic Collapse

                              Originally posted by bda_guy View Post
                              Digressing on the point of "accidents", my favorite throw-out that I've heard as a black swan event would be a major earthquake under Tokyo causing economic damage into the hundreds of billions. In an instant, Japan would need to sell foreign (ie. mainly USD) investments to raise Yen-denominated funds for rebuilding efforts. Once you get a major creditor like that reversing US capital flows from in to out, it's a slippery slope for the USD and plays into the themes discussed on Itulip.

                              Having said that, the chances of this happening are not very high. There are other political/economic/environmental issues more likely to be the trigger.
                              My favorite "black swan event" scenario is the Cumbre Vieja mega tsunami that some day will destroy the eastern seaboard of the US, the southwest of England, the Caribbean, and Brazil.

                              http://www.rense.com/general56/tsu.htm

                              Comment

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