The Almighty G7

Posted at 7:54 PM (CST) by & filed under General Editorial.

Dear Friends,

According to news reports, the G7 on one weekend of mutual understanding will restructure the entire world monetary system and make the present consequences of more than one quadrillion one thousand one hundred forty-four trillion dollars of notional value rotten garbage go away.

A few of the characteristics of the problem that will be solved in two days of deliberation of the G7, but they mistakenly think they are still the Sun of the World around which all other countries orbit quietly and obediently. That alone has to give you some insight into the problem.

Behind the curtain of silence the subprime loan problem, better described as a global meltdown of credit and default derivatives, continues. The reason for this condition is an attempt to value that for which there is no value. It is spreading globally as a product of the limitless manufacturing PRIMARILY (above 75%) by USA financial entities.

Keep in mind that over the counter derivatives created between 1999 and 2007 generally have the following characteristics:

  1. Without regulation.
  2. Without listing on public exchanges.
  3. Without standards.
  4. Therefore not in the least bit transparent.
  5. Therefore without an open market of the bid/ask type.
  6. Dealt in by private treaty negotiations.
  7. Without a clearinghouse
  8. Unfunded without financial guarantee of any kind.
  9. Functioning as contracts of specific performance.
  10. Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement.
  11. Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
  12. Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value.
  13. Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it.

The US dollar has improved based on the well crafted Urban Myth that Euroland has more problems than the USA. That like all great lies of history becomes true by experts, saying it loud and often. This method of the transition of nonsense into manufacturer truth is known as Spin. It was one of the most important imports from Germany in 1945. Some think this method of spin exceeded the imports of Dr. Von Braun.

The first plan crafted for the dollar recovery was experts assuring everyone that Euroland, as the source of this problem, clearly would have to have more problems than the USA, with a finger clearly pointing at UBS.

Next many interventions took place with fanfare galore. I love the picture of the Congressional personality high fiving on the passage of the bailout bill.

Since then the Secretary of the US treasury has announced investments in bankrupt banks four times, each time as a new intervention cure of problem.

The best of all might be the collapse of FASB this weekend as the overseers of fair accounting making values where there is none.

FASB to release fair value guidance this weekend
Friday October 10 2008

NEW YORK, Oct 10 (Reuters) – The Financial Accounting Standards Board, which sets U.S. accounting rules, is likely to release formal guidance on mark-to-market accounting this weekend, it said at a meeting on Friday.

The board’s guidance is intended to formalize clarifications issued by FASB and the U.S. Securities and Exchange Commission last month, which told companies they could rely on internal estimates, rather than fire-sale prices, to value assets trading in illiquid markets.

At a special meeting on Friday to consider the reforms, the FASB directed its staff to rework and clarify certain parts of its proposal, but stuck to the general concepts issued earlier.

FASB members said at the meeting they wanted to make sure companies were not completely disregarding market transactions in illiquid markets, but rather using them as one of many inputs.

More…

THE ABILITY TO GIVE VALUES TO VALUELESS INSTRUMENTS, CLEARLY KNOWN TO THE BANKS TO BE WORTHLESS IS NOT GOING TO MAKE INTER-BANK LENDING RECOVER.

Jim’s Formula:
September 1, 2006

  1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
  2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella – Goldilocks situations.
  3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
  4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.
  5. Lower profits leads to lower Federal Tax revenues.
  6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
  7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
  8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
  9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
  10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
  11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
  12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.

Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

I heard all this “slow business” as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.

Spin it, intervene in it, witness the media glee. Regardless of it all, gold will trade at $1200 and $1650, the dollar at .72, .62 and .52.

Regards, Jim