What just happened?

[EJ]

What just happened?

As Paul Volcker pointed out over the weekend, the global financial system has disintegrated and no one has any idea how to fix it. Lots of good ideas about how to fix the banking system, but as we've explained, even if any of these things are done -- and we are not holding our breath -- it's the endogenous credit system that's the real problem, the one that used to magically allow consumers to lend new money into existence by taking out a car loan or charging dinner on their Visa card, the one that depended on the now defunct securitized debt market.

Most reasonably aware North Americans have, like me, watched this mess develop for over 20 years. Credit was substituted for savings. Two incomes were substituted for one. Other people's savings were substituted for our own.

These past 20 years have been like a long bus ride into the middle of a desert without food or water, with the driver all along telling us that, no, we are not heading into a desert but traveling along a long stretch of beach that leads to an ocean with palm trees and swimming pools, we just can't see the water yet.

All along the way the skeptics look out the window and say, "We're going the wrong way," and, "Shouldn't we turn around or at least stop to pick up drinking water in case you're wrong?"

"Stop being so negative," yells the driver over his shoulder. "You don't understand neo-classical geography."

Meanwhile, the rest of the passengers in the bus sit watching Survivor on portable DVD players or reading about Britney Spears's hairstylist in The National Enquirer.

One day the bus runs out of gas. The driver gets out, looks around and says, "How about that. Here we are in the middle of the desert without food or water. Who could have known?"

He pulls out a cell phone and shortly a helicopter rescues him and his friends, leaving everyone else behind to fend for themselves.

The End

Postscript: Our leaders have driven our economy to the place economies eventually wind up that run on credit, discourage savings, and sold off productive capacity needed to generate new savings. Our readers have not listened to them but have saved their own food and water, metaphorically speaking, by staying out of debt and increasing their savings, even if this was not what everyone else was doing. Good for you. On the other hand, readers who are expecting a Mad Max world need to get a grip and re-read Are You a Doomer? Law abiding citizens do not turn into criminals overnight. Your town will not be run by warlords. There will be no wandering hoards of looters or ox-drawn Rolls Royces. That's Y2K stuff. Try to keep it in perspective, folks. Everything is going to get really, really slow for a while.

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[BadJuju]

I am going to give up on putting on the tactical gear all together! :mad: He he, thanks for the post, EJ.

[Jay]

EJ, I hear you and feel you are right, but wouldn't hyperinflation be a doomer scenario? One that you have suggested now might happen, albeit a small chance. My take was that the doomer rhetoric picked up recently due to these hyperinflation articles. If you think it might be true, even if only a small chance, it would be unwise in my book to not at least think about what that world might look like, and I don't think it would be pretty.

[don]

For the first time today I heard the Q word used to estimate the amount of derivatives out in Deep Space. That's Quadrillion. I'm not even sure how much that's suppose to be. There are actually dueling Quadrillion Definitions out there. Sounds like a god damn waltz in a costume drama. The Quadrillion. The number preceding the magic word was 1.6. Of course the other magic word is Derivatives. Much too revealing, those four little syllables. It would unerringly point a finger at guess who :eek: Not the poor dumb slobs that got roped into granite counter tops ;)

[BrianL]

... That's Quadrillion. I'm not even sure how much that's suppose to be. There are actually dueling Quadrillion Definitions out there. ..

That isn't unique to quadrillion. Billion and up, labels for numbers diverge. In some regions, 1 billion is 1,000,000,000. Elsewhere 1 billion means 1,000,000,000,000.

See http://en.wikipedia.org/wiki/Long_an...les#Comparison for more detail.

(I'm not downplaying the size of quadrillion or talking about how accurate it is in this case, just trying to clarify the definition point)

[phirang]

nominal size is irrelevant. NETTING is what counts.

[kartius919]

Netting, funny. How much has that netted the US? AIG is a derivatives sinkhole and the taxpayers are keeping all the sheisters solvent.

[dbarberic]

A glimmer of hope; just like Obama's speech.

Or... is it deeper.....

[GRG55]

...On the other hand, readers who are expecting a Mad Max world need to get a grip and re-read Are You a Doomer? Law abiding citizens do not turn into criminals overnight. Your town will not be run by warloards. There will be no wandering hoards of looters or ox-drawn Rolls Royces. That's Y2K stuff. Try to keep it in perspective, folks. Everything is going to get really, really slow for a while.

No Mad Max?
Really??? :mad:


For Sale: Partially finished bunker. Motivated seller. Includes free snow shovel and armoured Hummer. Will consider trade for McMansion in the suburbs...

[we_are_toast]

No Mad Max?
Really??? :mad:


For Sale: Partially finished bunker. Motivated seller. Includes free snow shovel and armoured Hummer. Will consider trade for McMansion in the suburbs...

If you want, I can mount my BB gun to the hood of my 1970 rusted out C10 chevy pickup and drive it around your place a couple of times if it would make you feel better?

[tastymannatees]

EJ, I hear you and feel you are right, but wouldn't hyperinflation be a doomer scenario? One that you have suggested now might happen, albeit a small chance. My take was that the doomer rhetoric picked up recently due to these hyperinflation articles. If you think it might be true, even if only a small chance, it would be unwise in my book to not at least think about what that world might look like, and I don't think it would be pretty.

Crime does go up during economic downturns, so on scale of one to ten how bad does it get over the current risk.? I live 5 and ten miles from two high crime cities, in good times we get some overflow in the suburbs. My street had 5 burglaries last summer, the break ins occurred at night while people were asleep and were robbed at gunpoint...

When you are desperate the middle class looks pretty rich and is easy pickings for those with nothing to lose...

I think the advice should be it'll be generally OK but be prepared for any contingency

Law abiding citizens do not turn into criminals overnight

What if they are not Law abiding citizens to begin with?

[jk]

Everything is going to get really, really slow for a while.

the last year or two have certainly been action packed. but real bear markets aren't v-shaped. they end in boredom and light volume as everyone loses interest and the averages scrape along support.

[Jay]

the last year or two have certainly been action packed. but real bear markets aren't v-shaped. they end in boredom and light volume as everyone loses interest and the averages scrape along support.

Sure jk, but what level is support at this time around?

[jk]

Sure jk, but what level is support at this time around?

when all these discussions are boring, and no longer elicit a frisson of anxiety and ecstasy, when you don't bother to check the markets for a week or two because you just forget to, we'll be there.

[FRED]

when all these discussions are boring, and no longer elicit a frisson of anxiety and ecstasy, when you don't bother to check the markets for a week or two because you just forget to, we'll be there.

Quite right! Apply the Japanese experience to the DJIA.

It's 2026. The DOW is trading at 2700, 81% below its peak.

Zzzzzzzzzzzzzzzz.

[Lukester]

Fred - I've now got this comment archived. I think it may come back to haunt you in 12-18 months. There is a stock market explosion - or moonshot, however we want to call it - up ahead not too far away, which iTulip will then have to re-incorporate into their thesis, and that may be a bit awkward given the unequivocal prognosis below to the contrary. USD set to bust out on the upside soon now is my view and can rise into the mid-90's this time. Stock market after the completion of this meltdown can be like dry tinder doused in gasoline (when torched, it goes up, a lot).

Quite right! Apply the Japanese experience to the DJIA.

It's 2026. The DOW is trading at 2700, 81% below its peak.

Zzzzzzzzzzzzzzzz.

[a warren]

Luke, Is this explosion going to be nominal or real?

Fred - I've now got this comment archived. I think it may come back to haunt you in 12-18 months. There is a stock market explosion - or moonshot, however you will then want to call it - up ahead not too far away, which iTulip will have to laboriously re-incorporate into their thesis IMO quite soon.

[jtabeb]

For Sale: Partially finished bunker. Motivated seller. Includes free snow shovel and armoured Hummer. Will consider trade for McMansion in the suburbs...

Sold!! For a fist-full of Ben Franklins! (or will trade for a large cash of firearms and ammunition, 20 year supply)

[jtabeb]

Fred - I've now got this comment archived. I think it may come back to haunt you in 12-18 months. There is a stock market explosion - or moonshot, however we want to call it - up ahead not too far away, which iTulip will then have to re-incorporate into their thesis, and that may be a bit awkward given the unequivocal prognosis below to the contrary. USD set to bust out on the upside soon now is my view and can rise into the mid-90's this time. Stock market after the completion of this meltdown can be like dry tinder doused in gasoline (when torched, it goes up, a lot).

I don't think he means in real terms, do you luke? I look to the history and have to ask has there ever been a deflationary collapse on a FIAT currency?

Von Mises predicted a crack-up boom, I really can't see how it turns out otherwise.

What am I missing?

[orion]

Lukester,

Could you expand more on your call.

How high and long is this moon shot?

What convinces people to be so optimistic? I guess it's not an inflation thing as you say dollar goes up.

You seem to imply this crisis ends quickly.

Stock market after the completion of this meltdown can be like dry tinder doused in gasoline (when torched, it goes up, a lot).