Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The US Recession Is Not Over, But The Party Is

Economics / Recession 2008 - 2010 Oct 31, 2009 - 08:17 AM GMT

By: Andrew_Butter

Economics

Best Financial Markets Analysis Article“Technically” it’s over, perhaps, but that 3.5% annualized was entirely due to the government borrowing money and giving it to people to spend on things that will not generate long-term economic value:

Cash for Clunkers (1%) + $8,000 New Homebuyers (1%) + Government Spending (0.5%) + This and That (1%) = 3.5%.


To achieve that superb magic trick the government took on how much debt? I’m not going to bother with trying to unpick the deliberately obscure numbers, but if it was more than 1:1 I’d be very surprised.

And how did they get the debt? Well since no one wants to lend them any money these days, certainly not at the ridiculously low interest rates they pay, (and it’s not inflation risk potential buyers are worried about, it’s the trashing of the dollar and sovereign risk), they had to find someone else to lend them money.

Of course that was easy, the banks showed up at the Fed discount window with a load of toxic assets that no one has a clue what they are worth, and the Fed said:

 “OK I’ll lend you, lets see…how about 90% of face against that “security” (LTV = 90)? And just for you, since you have been so good, and you are obviously such a good credit risk, and since we used to party together down on the AIG shindigs to Las Vegas, now those were something hey!! Tell you what; I’ll let you borrow at 0% or thereabouts”.

Then the banks all trotted down to the Treasury and bought a load of Treasuries at 3.5%, and then they gave themselves huge bonuses for being so smart. Some of them were even smarter and put it in the stock market or speculated on oil.

And then the Treasury took the money and paid for a load of cars from the companies that they (effectively) own, plus the “housing stimulus” (which makes sense because unless there is a 50% bounce in house prices all those toxic assets that they bought are going to be worth zilch).

And look at that, the “Wizards of Washington” created gold out of TSE (treated sewage effluent); Alan Greenspan would have been proud, the “free market” works!!

Halleluiah!

Well I don’t know what you call it (racketeering and crony capitalism are words that come to my mind), but one thing it is not, is a strategy for achieving sustainable economic growth.

Lessons from my dad

I can trace my roots back in Burks Peerage to the Scottish nobles who kicked all the peasants off the land in the great “clearances” which explains why so many Americans have got some Scottish ancestry. And then the nobles had a big party; that lasted a few generations.

Similar theory to shipping all those jobs and manufacturing capability from America to the “New World” (cheaper peasants means more profit), and using the “savings” so the elite could “party”.

By the time I was born, the money was starting to run out, so what did they do? Well they borrowed, so they could “keep up appearances”.

That lasted for a generation or two; sadly my ancestors were apparently quite enthusiastic partiers, so pretty soon they had to go with one of two strategies, Plan A was to marry money (basically unlocking the brand value), or Plan B was to work for a living, which sadly was the strategy that my dad had to go with, having lost his estates when his half-mad uncle married the nurse (she was about 26, he was 83).

Anyway, lessons learned, my dad was a bit peculiar about borrowing money, and when he arrived in Abu Dhabi just before the oil boom he had all sorts of weird ideas; so when that money started flowing in he set up the Abu Dhabi Investment Authority which was like a big piggy bank (easy to put money in but extremely hard to get it out of, for example for parties).

Anyway, he had this really-really weird idea, something to do with “you never borrow money to have a party”, when you borrow that should be to invest in something that on its own can generate money to pay the loan back. That was a weird idea, my dad was a real party pooper, one of those guys that goes to a party, has one drink, and then goes home to bed (my mother used to despair (I’m personally more of my mother’s constitution)), but it might explain why ADIA is now one of the largest SWF in the world.

Fortunately America has lots of Nobel-prize winning economists who can prove beyond any reasonable doubt that my dad was a complete lunatic, which is something that I always suspected.

Or can they?

Perhaps what just happened was no different from a very indebted aristocrat with a great “brand”, desperately borrowing money from wherever they can find it, so they can “keep up appearances”.  And they sure have “appearances” to keep up, not least some pretty expensive wars to finance.

That all started in 1998 when they allowed the “shadow banks” to write $20 trillion worth of securitized debt (over the next ten years) to keep the party going .Now that game is over (and the debt is defaulting), they are borrowing on the promise that they will be able to tax the long suffering American peasants to service it, in the future.

The reaction to the “news” of the huge “bounce” in the American economy was that great bounce in the stock market, but it only took a day or so for the penny to drop.

I suspect that there may be quite a few pennies to drop over the next few years.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mo
10 Nov 09, 10:55
Dubai real estate

Hi Andrew,

I posted a question for you a few days back, but it wasn't posted for some reason.

I basically wanted to know your view on Dubai real estate given your experience in the region. What are the furture prospects of Dubai economy in general and the real estate market in partcular post the 50% crash. Is doing going to recover? Do you think the goverment will come up with a plan to increase demand and get rid of this excess supply?


Andrew Butter
11 Nov 09, 04:55
Dubai Real Estate Answer

Ref comment on Article14676

I'm writing an article on Dubai Real Estate which will probably get out in week or so, I also wrote something in my article on "The Seven Immutable Laws of Bubbles".

1: Yes Dubai will recover to the trend line it had pre-2004, the business case for Dubai makes sense, however that business case depends on trade and until world trade picks up Dubai will be in the doldrums.

2: The government won't do anything about real estate,(a) it can't (b) that's not it's style.

3: Their priority at the moment is dealing with the $80 billion of short-term debt that they (and their GSE's) took on over the past five years that needs rolling over.

4: The property market appears to be following a typical bubble/bust dynamic, prices are low; good time to buy if you have a reason to be in Dubai, if you can find anything decent, there is a lot of rubbish around because everything was developed in such a hurry.

5: A good way to do that is to buy notes from people who bought but the building got canceled.

5: A good bet now that I see is to buy Dubai Government debt, Abu Dhabi will never let them default, so that's a steal, better prospects against default than a AAA US Treasury, denominated in dollars, and fetching up to 12%.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules