Worse Than 2008
by Chris Martenson
by Chris Martenson: Big
There are clear
signs of a liquidity crunch in the asset markets right now, and
the question I keep hearing is, Is this 2008 all over again?
No, it’s worse. Much
In 2008 there
was a lot more faith and optimism upon which to draw. But both have
been squandered to significant degrees by feckless regulators and
authorities who failed to properly address any of the root causes
of the first crisis even as they slathered layer after layer of
thin-air money over many of the symptoms.
has paid attention knows that those "magic potions" proved to be
anything but. Not only are the root causes still with us (too much
debt, vast regional financial imbalances, and high energy prices),
but they have actually grown worse the entire time.
we have no idea exactly what is going to happen and when, but we
can track the various stresses and strains, noting that more and
wider fingers of instability increase the risk of a major event. Heading
into 2012, there's enough data to warrant maintaining an extremely
cautious stance regarding holding onto one's wealth and increasing
one's preparations towards resilience.
- Oil prices
higher now than in 2009
up more than $100 trillion since 2009
- Weak GDP
- Europe in
- Small investors
leaving the market
- China hitting
One of the
most important things we need to track is simply untrackable, and
that is market perception. When faith in a faith-based money
system vanishes, the game is pretty much over.
If you have
been reading my work (or anyone else's) with a decent macro view,
you likely lost your faith in the system a while ago and marvel
that it can continue along for another moment, let alone all the
years it has been creaking towards its eventual date with reality.
But along it creaks, day after day, week after week, and month after
month, threatening to wear down the observant and vigilant before
finally letting go.
to be an interesting year, with more than $10 trillion in funding
and rollover financing required to keep the developed world floating
along. But where will that funding come from? The lesson
from defunct economies is “not internally!” And if China’s recent
slowdowns and projections of an even more lackluster 2012 come true,
then we might also scratch a few external sources off the list as
recently penned so eloquently for us, high oil prices are like
sand in the gearbox of the economy they represent the most serious
form of friction there is. Rather astutely, Jim Puplava has
called oil prices 'the new Fed Funds rate,' meaning that the traditional
role of the Federal Reserve in regulating the economy via the price
of money has been usurped by oil.
As oil prices
go up, the economy slows down, and vice versa.
fact is that oil prices remain quite elevated by historical standards,
and since the correction in 2008, they have been ratcheting steadily
higher each year. They are now at their highest average rate
in three years. In round dollar terms, oil is $30/bbl higher
than in 2009 and $10/bbl than in 2010.
I won't rehash
the data here, but the best explanation for this steady increase
is that supplies of cheap oil are dwindling and flow rates of the
desired blends are having a hard time keeping up with demand.
The twin deficits
to the export market are falling production from existing fields
and rising internal demand in the producing countries. The
way all that gets balanced is in the usual fashion through prices.
All of this
would be fine, except for the idea that the world is in a far more
fragile condition today than back in 2008 when it suffered the first
insults levied by high oil prices.
As the Bank
of England's Paul Fisher recently put it:
markets in greater danger than 2008-BoE's Fisher
Dec 19, 2011
Dec 19 (Reuters)
- Financial markets are facing a more dangerous situation now
than during the financial crisis of 2008, Bank of England policymaker
Paul Fisher was quoted as saying on Monday.
is the central bank's executive director of markets and sits on
the Monetary Policy Committee, also said governments had fewer
options to deal with the current crisis because of their stretched
quoted as saying that in 2008, governments had more leeway
and cash available to stimulate their economies and bail out banks. Today
that "sovereign backstop is less clear", Fisher said.
out is going to be more difficult than it was in 2009,
given the current position of the sovereigns."
these ideas in greater depth below, but I think the bolded parts
illuminate why high oil prices are potentially more corrosive now
than in 2008. The bottom line is that economic growth is central
to nearly every story of recovery, and there are appallingly few
analyses coming out of the OECD countries that address how the various
debt rescue plans will fare if said economic growth does not materialize. Most
just note that 'it will not be good' and leave it at that.
with debt. This crisis was rooted in too much debt. Even
without the headwinds caused by structurally rising energy prices
(we'll get to those in a minute), the credit bubble was destined
to someday pop all on its own. After all, there's no way for
debt to continually expand faster than income, which is what was
happening across the entire OECD, thanks to the ultra-accommodative
policies of the world's central banks.
Note that GDP
is virtually unchanged since 2008, meaning that $5 trillion did
not buy us any incremental GDP; it only managed to bring us back
to about even:
we have about the same-sized economy to support an additional $5
trillion in federal debt, or roughly a third more than when the
It is also
true that GDP growth in the US is weaker this year than last year,
a trend that does not bode well for the US deficit situation:
It should be
noted here that this weak growth is happening even though the US
federal deficit for FY 2011 was $1.3 trillion, or more than 10%
of GDP. If that's how anemic the economy is with that level
of deficit spending, where would it be with less?
The bad news
out of Europe continues unabated, including debt and ratings downgrades,
sliding economic growth, and exploding red ink.
Much of the
hope in Europe rests upon carefully crafted bailouts that rest upon
assumed rates of economic recovery and growth in order to pencil
out. Without the assumed rates of growth, the plans fall apart,
and more rescue funds or outright defaults lie in the future.
an instructive case because it entered its difficulties earlier,
and it has already received a bailout and implemented the austerity
measures that were meant to balance the equation.
the plan is now in tatters with the recent revelation that the Irish
economy is slumping more than expected under the twin weights of
reduced lending and imposed austerity
debt rating under threat as economy contracts
Dec 16, 2011
Fitch tonight warned it may downgrade Ireland and five other
euro zone countries in the absence of a comprehensive solution
to the region's debt crisis which it concluded may now be "technically
and politically beyond reach".
placed the ratings of Belgium, Spain, Slovenia, Italy, Ireland
and Cyprus in credit watch “negative”, which means a downgrade
is possible within three months.
comes on back of unexpectedly poor economic data for Ireland which
showed economy weakened considerably in the third quarter, shrinking
at the fastest rate in more than two years.
GNP is a better
measure than GDP in this case because GNP removes repatriated corporate
profits that have left the shores. Many companies use Ireland
as a tax haven, so the monies that cycle briefly into and then right
back out of the Irish system really should not be counted towards
their economic progress.
contraction, the Irish fiscal deficits will once again breach agreed-upon
levels, and repaying debts also becomes that much harder. It
is a negative spiral that can be quite destructive and difficult
line here, which should surprise exactly nobody, is that austerity
shrinks an economy and that economic shrinkage and crushing debt
loads are incompatible. Ireland has not been fixed, and it
seems that the can is once again right in front of the ECB, ready
for another good kick down the road.
yields are instructive here. While it is true that Ireland's
debt yields are down quite a lot from their maximum levels (which
were over 23% for 2-year paper and 15.5% for their 9-year debt),
the current yields of 7.9% and 8.6%, respectively, are utterly unsustainable
for an economy that is shrinking. It is only a matter of time
before those rates crush the finances of the Irish government.
Do you know
why the generally agreed-upon limit for persistent government deficits
is 3%? That's because it's the basic rate of GDP growth that
history has shown to be sustainable. As long as deficits are growing
at the same rate as the economy, then the debt-to-GDP ratio stays
constant and everybody is happy. If (or when, I should
say) the economy grows more slowly than the rate of interest that
is demanded from a government, it is a mathematical certainty that
either the deficits will swell or austerity and/or tax hikes must
be imposed. There is no other way to balance the books.
On this basis,
Ireland is still mired in a math problem.
One theme of
the financial crisis is governments loading up on debt in order
to get by for a little longer, with the plan seeming to be to face
the music later and/or keep one's fingers crossed that the economy
will have somehow sorted itself out by then.
from a truly crushing housing bust that is still playing out (and
will for a long time), very high unemployment, and a stalled economy,
has also compounded the issues by piling up an astounding amount
of new debt over the past year:
debt up 22 percent to $176 billion
Dec 16, 2011
Debt levels for Spain's cash-strapped 17 semiautonomous
regions have soared 22 percent over the past year, the
country's central bank said Friday.
A near two-year
recession after a real estate bubble collapse has left Spain
with swollen regional and national deficits, a stalled economy
and 21.5 percent unemployment.
are facing severe cash-flow problems and are having to
delay payments to suppliers.
of the cutbacks came Thursday, when Spain's Woman's Institute
said nearly 100 centers for the victims of domestic violence face
closure next year in the central Castilla-la-Mancha region. Centers
for drug addicts in Madrid are facing a similar fate.
The good news
out of Spain is that its bond yields have fallen considerably since
the end of October, when they breached the 6% barrier and seemed
ready to launch into truly dangerous, irrecoverable territory.
Spain's 10-year bond yields were 5.13%, down from 6.7% on October
31 but still about 1.5% higher than pre-crisis levels. It's
important to note that the current yield may not be indicative of
the true market perception of Spanish risk because the ECB has been
heavily involved in buying Spanish debt. The true yield should
undoubtedly be a lot higher given the grim state of finances there.
yield levels are in the best shape out of all the PIIGS. Speaking
still in trouble, and the government has, quite worryingly for the
precedent it sets, raided private pension funds to help balance
deficit falls, helped by one-off measure
Dec 16, 2011
(AP) Portugal's finance minister says his debt-stressed country's
budget deficit will likely fall to below 5 percent this year from
9.8 percent in 2010.
Gaspar says the sharp drop is largely due to the transfer to the
Treasury of euro6 billion ($7.8 billion) in private banks' pension
I am not sure
of all the back story and intrigue that must accompany this move,
but it seems loaded with implications ranging from the door it opens
to other governments seeking relief, to the fact that we know that
Portugal is being leaned on heavily by the international banking
community and has decided to raid the pensions of...wait for it...four
of the largest private banks in Portugal. Maybe there's a bit
of spite built into that move?
bond yields are down from their crisis highs of 20.4% (2-year) and
14.1% (10-year), but again not enough to count, as they are sitting
at 15.6% (2-year) and 13.1% (10-year), levels well above the current
rate of GDP growth.
child for the entire Eurozone mess is, of course, Greece. And quite
understandably, a trickle of bank withdrawals has turned into a
collapse of eurozone bailout pulled record sums from bank
Dec 16, 2011
exodus of capital from Greece –
peaking in a record number of withdrawals from banks in recent
months – has exacerbated the liquidity crisis
now wracking the recession-hit country.
figures released by the Bank of Greece reveal that in September
and October alone investors pulled €12.3bn (£10.3bn) from domestic
banks, spurred by fears of political uncertainty and economic
outflows have reached a record 25% since September 2009 – when
household and corporate deposits stood at a peak of €237.5bn,
the data showed.
Pelagidis, an economics professor at the University of Piraeus,
said: "This is part of the death spiral of the recession as a
result of austerity measures. People realize that contagion has
come to banks and they are very afraid of losing their deposits.
On average around €4bn-€5bn in capital flees the banking system
figures back up anecdotal evidence that it is not just the super-rich
behind the flight of funds.
released by the Bank of Greece, is over a month old, and we'd be
especially interested to see what November and December add to the
story. At any rate, it is now "game over" for Greece. The market
is still pricing in a nearly 100% chance of default even as the
bankers and Eurocrats squabble over the prospect of raising the
haircut on Greek debt from 20% to 50%.
Where the Greek
crisis highs for debt yields were 151.9% (2-year) and 35.1% (10-year),
they are now sitting at 146.6% (2-year) and 34.6% (10-year), which
are essentially unchanged.
I keep mentioning
that the ECB is interfering heavily in the bond markets of various
countries in their attempts to keep things going. Apparently
they've tossed in the towel on Greece, as evidenced by the Greek
we note the ways in which the Spanish, Irish, and Italian debts
have come down off their highs, can we make sense of why the ECB
focused their efforts there? Sure, that's easy, and the BBC
has put together an extraordinarily helpful interactive chart to
make it all crystal clear.
chart can be found here,
but I've taken a number of screen shots so that you can more easily
follow the story.
To begin with,
what the chart is showing by the width of the arrows is how much
money is owed to banks of other countries the wider the arrow,
the greater the amount.
country that was let go:
Now let's compare
that to Ireland, which was rescued (for now):
Portugal, which is apparently in the process of being tossed under
the bus, at least judging by how its interest rates are still punishingly
(and ruinously) high:
See the pattern? Now
let's look at Spain and Italy, both of which have recently enjoyed
a nice decline in their yields
Now are the
actions and focus of the ECB coming clear? It's not a surprising
insight, but these charts help bring things into focus for me, and
inform us that falling bond yields are probably more indicative
of ECB actions than an improving debt crisis.
Just for kicks,
and to complete the story, here are the charts for the UK and the
US, which hopefully make clear why these two countries could never
be allowed to fail, for surely the whole world would fail to spin
on its axis
The other takeaway
from these charts is that everybody owes everybody, a point I've
made before, but not as nicely as these charts manage to do. Kudos
to whomever thought these up.
Things Are Headed
II: Get Ready for Worldwide Currency Devaluation, we detail
the remaining risks posed by the massive amount of outstanding derivatives,
small investors fleeing the markets, and China's increasingly visible
slowdown. At this point, it's quite clear that there simply won't
be enough economic growth to rescue the global economy from the
hole it's in. So, how does this end?
It will most
likely end in a concerted devaluation of the world's currencies,
in an attempt to inflate away the worst of our debt burden. And
if that happens, there's one asset in particular that you will want
to be holding.
here to access Part II of this report (free executive summary,
enrollment required for full access).
Best of Chris Martenson
© 2011 Chris