Crash?

Rod: "Then again, it's possible that people's perceptions are much worse than reality."

It's also possible Neil Irwin, the WaPo staff writer, doesn't know what he's talking about.

Irwin: "But the _reality_ is different. According to most broad measures of how the economy is doing, it's not all that grim."

But who exactly is measuring this "reality" and how?

Irwin: "The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively."

Does Irwin know that the government has drastically changed the way it measures unemployment and inflation since 1980? And would anybody be surprised to learn that the new assumptions conveniently (for politicians) lower the unemployment and inflation rates?

John Williams at Shadow Government Statistics actually measures unemployment and inflation using the same methodologies as the ones used in 1980.

Look at the fourth table on the following page.

tinyurl.com/3bhh8b

If the CPI were measured as it was back in 1980, it would be nearly 12%!

This page does not provide a graph allowing us to do a straight 1980 vs. 2008 comparison of the jobless rate, but I believe a more accurate rate (which includes discouraged workers who are dropped from the rolls and not counted as unemployed) is closer to the green line. This figure is close to 10%! And, of course, the self-employed are not counted. Many of these people are "independent contractors" in construction and other industries who've experienced a big drop in orders.

So maybe it's no surprise "consumers" are as gloomy about the economy as they were in 1980.

Who are you going to believe? Government statistics and the naive Mr. Irwin, or your own lyin' eyes?

What fun activities do you have planned during your time off? Digging that bunker in the back yard? Maybe checking out sites for the family monastery? Or will it be the same old "wear a sandwich-board with DOOM written on it" as last year?

It is my sincere prayer that you work out all your "Fear and Loathing on Planet Earth" issues here, otherwise you would be one big downer on the Caribbean cruise.

Kidding aside, have fun!

I don't have time to get into this, but the rate cuts, special cash-infusing measures (Term Auction Facility, etc.), and unprecedented bailout measures (JP Morgan's takeover of Bears Stern) introduced by the Fed have not had much effect on easing the credit crisis other than buying time before a crash occurs. People in the know have been wearing Depends to bed for months now.

Just like the government statistics mentioned above, corporate statements are wildly overstated to the upside and deeply misleading. For example, the Financial Accounting Standards (FAS) essentially allow most money-center banks to hide their losses from the credit derivatives meltdown in a category called "Level 3 assets". Because there are no markets for trading these credit derivatives, which are very complex contracts between two or more parties, a market value for these assets cannot be determined (so-called "mark-to-market"). If there were such a market, they would be DEEPLY discounted because most market participants would worry about the solvency of the counterparties to these contracts AND they would have no idea how they actually work! Since there is no market, these institutions can essentially write their own computer programs to tell us what they are worth (so-called "marked-to-model" valuations). Anyone want to bet they're overly optimistic in their assumptions?

At any rate, these banks are on the hook for staggeringly large amounts of these things. Some banks are leveraged as much as 30-to-1 (debt-to-assets).

Now there's talk of allowing banks to hold these contracts on their books at historic (pre-crash) values (derisively referred to as "mark-to-make-believe). Even the bankers at some of the most impaired banks are howling in protest at this proposal because it will make the situation even less transparent and increase the already high levels of distrust!

Is it any wonder they won't lend to each other no matter how low the Fed drops rates? The game is over. Massive deleveraging is inevitable.

(This "zombification" of banks is the exact same sh*t that occurred in Japan in the 90s, resulting in non-action and a deflationary crisis that lasted over a decade.)

Is it any wonder these banks are now speculating in commodities? Where else are they going to go? (The foreign central banks haven't helped matters in the commodities markets by monetizing in order to maintain their dollar pegs -- but that's another story.)

This has been simplified to facilitate understanding, and I've left a lot unexplained. (And of course those of you who've read a textbook or two written before the drastic economic changes of the past decade will tell me I don't know what I'm taking about. I say bring it on.)

There's also an impending commercial real estate bust. This is going to bring down a number of banks. Would you be surprised to learn that the FDIC is a self-insuring mechanism for banks and that it is massively underfunded?

Rod

This repetitive posting on an impending civilizational crash with repeated references to the small-minded Kunstler (whom I detest) is turning a once interesting and thought-provoking blog into something dull, pedestrian and not worth the time to read. The universe is not going to implode in upon itself anytime soon despite the challenges we may face.

You can poop gold tomorrow if you order off the menu.

http://www.msnbc.msn.com/id/24740175/

Hell, you can have sparkle barf if you slug enough Goldschlager.

I'm just saying.

Gosh, WhollyRoaminCatholic!!! I'm blushing now, really. :)

All this negative sentiment is a great contra-indicator. Last time the put/call ratio was this pessimistic (2003), I had a my best return ever. The sky was falling then too.

My prediction: Record S&P 500 average within on year. Probably sooner.

Keep bashing bears, it will give me more time to accumulate more capital into the markets.

I just finished World Made By Hand, and while it was a good yarn in parts, I'm still laughing at his absurd, overblown scenario.

What I couldn't figure out were the somber website photos that Kunstler had made of himself in costume for the book. That was way weird, and more than a little self-important/absurd if you ask me.

(1) WhollyRoaminCatholic: Very funny about the gold burgers.

(2) Kunstler's long emergency is wicked overblown. Peak oil is going to be more like a long day in tight fitting clothes, or something like that. It won't be comfortable, but that's about it. We'll have plenty of time to adapt.

(3) US and UK decided today to close down that unregulated futures market I mentioned the other day (ICE, baby). I guess they're crazy like me and don't know what they're doing. We'll see in a month or two when the tide goes out whether the speculation party or the peak oil party is the party without a swiwmsuit.

(* That is, whether the current run-up in oil prices is due to speculation or peak oil. I'm in the peak oil party in the long run.)

Steve:

I've been a bear for years, but didn't believe there would be a deflation back in 2003. (Actually, I believed it would be narrowly averted and it was.) But we're now at the end of the line when it comes to overstimulating our economy with cheap and easy credit. The difference between now and 2003 is individuals, corporations and municipalities no longer have the ability to take on more debt even if it were offered to them. (And it is NOT being offered to them! Banks are cancelling lines of credit, raising lending standards, and charging much higher risk premiums. They won't even lend to each other!) Also, an easy money policy from the Fed would result in severe inflation now. (Look what's happening.) Back in 2003, we also had labor arbitrage in China to keep a lid on inflation. No more. Wages and costs are rising in China.

There has never been a time in the past when such a runup in unproductive debt (spent on current consumption instead of future income-generating investments) and margin borrowing hasn't resulted in a depression. Whether it is mild and chronic rather than severe remains to be seen. This is basic economics, folks.

We're probably near the start of the second downward leg in the current bear market, which is usually the steepest. (Look at charts of what happened between 1929-1932 ... if you know how.)

But feel free to continue engaging in magical thinking if you so desire.

Even if the total industrial collapse that he posits (wishes for?) occurred, wouldn't the existence of roads allow for a fair amount of horse and buggy traffic?

Ever watch Mad Max? Or Jericho? I don't know if JHK is thinking along those lines, but maybe traveling alone by roads wouldn't be safe. Mass migration on the other hand may be a different story. Besides, the town at the center of the story is doing somewhat ok--why would people need to leave? JHK isn't writing The Road.