House of Debt – by Vasko Kohlmayer

housedebt

The announcement by the Dubai State Corporation that it was unable to pay interest on its debt sent shock-waves through global markets. Stocks and weak currencies dropped as traders and investors feared that this could usher a new episode in the world’s economic travailing.

One reaction in particular offered a revealing insight into just how uncertain things really are. Reported the UK Times:

Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.

This should tell us much about the fragility of the world’s financial system. The debt of the  Dubai’s state-owned corporation is approximately $80 billion. Even though it is a substantial figure, it is not very large in the grand scheme of things. To give a sense of proportion, Dubai’s debt comes roughly to one tenth of President Obama’s stimulus package.

And yet the possibility of default by Dubai World immediately sent investors scrambling to insure themselves against default by whole countries. Their fears even extended to nations such as Russia, a country which in a comparatively good position thanks to its large energy revenues.

This shows how little confidence the international financial community has in the system. The world’s money people fear that even a relatively small event can set off a chain reaction that would bring down nation states. Being part of the action, they are in the position to know what so many on the main street have suspected all along – things are not well. In the words of  noted financial commentator Bill Bonner, they fear that “the ripples stirred up in Dubai” could quickly “turn to Tsunami waves elsewhere.”

Despite what Barack Obama, Ben Bernanke and Timothy Geithner tell us, the problems that brought the global financial system to the brink in 2008 have not been fixed. They have only been papered over with massive amounts of freshly printed cash and cheap money in the form of near-zero interest rates. But too much money and easy credit were at the root of the problem in the first place. The measures that have been taken have only provided a temporary relief. Sooner or later the underlying problems will resurface again. The finance elites sense this, which is why even a relatively small failure makes them so nervous. They know that the seeming return to normalcy is only surface deep.

One can only wonder what governments will do when the crisis returns, since they have already fired the most potent weapons in their arsenal. It is not possible to lower interest rates below zero and given the current levels of government indebtedness, it will also be difficult to come up with more money for a new round of cash injections. A number of governments are on the brink of bankruptcy as it is. Another bout of massive borrowing is simply not a realistic possibility.

The next flare up could well bring on systemic failure. As it is, things do not look good. This year alone nearly 130 US banks have gone out business. This is four times more than the total for 2008. Recently it has been revealed by the Federal Deposit Insurance Corporation (FDIC) that more than 550 financial institutions are on the government’s problem list. What this means is that roughly 7 percent of US banks face the possibility of failure in the short term. Their names have not been released in order to avoid bank runs. Should these troubled banks start falling in large numbers, the effect would quickly snowball and many other banks who still appear relatively sound would be pulled down as well.

Fearing this, banks are reluctant to lend and prefer to sit on their cash to play it safe. The government is unhappy with this situation, because it wants as many loans as possible in order to stimulate economic activity. The Wall Street Journal reports that “government officials have stepped up pressure on banks to make more loans in recent weeks.” FDIC Chairman Sheila Blair echoed this point when she said: “We need to see banks making more loans to their business customers.”

Banks are, of course, correct in being careful. There is still too much debt in the system. What our economy needs at this point is further de-leveraging. Those businesses and enterprises that cannot make their payments need to go bankrupt so that the economy can be purged of the dross and then rise again on a healthier foundation. This, however, is precisely what the government is trying to prevent from taking place. It keeps propping up failed companies that should have been long out of business. Ensuring that they have access to cheap credit is part of that strategy. This approach averts some pain in the short term, but it ultimately only makes a sick system even sicker.

While the government is pressuring banks to make more loans, the FDIC – the very agency that insures depositors when a bank goes bankrupt due to bad loans – is itself in the red. What the FDIC’s predicament shows is that banks should be issuing fewer loans than they are currently making. But this is not the lesson government officials draw from the situation. Instead, they counsel the banks to do the opposite. They apparently do not worry where the FDIC will get its money from should more banks fail. After all, the printing presses of the Federal Reserve can easily resupply the depleted fund. All this money creation, however, exerts immense inflationary pressures on the dollar. This in turn is destabilizing to the world’s monetary regime which rests on the dollar as its foundation.

Rather than encouraging restraint, governments world over are making things worse by their irresponsible spendthrift policies. Those in the financial community know it, which is why they are so jittery these days. They know that even a Dubai size default could set off a chain of events that could eventually bring the whole system down like a house of debt that it is.

  • drungar

    Now we know why there's so much money going into socialist projects like those spear-headed by BHO: there's nothing like a state run economy with benifits to keep workers happy and the trains running on time.

  • keithrage

    How can anyone be confident when Oblunder continues to burden America (and the world) with cap and trade, health care, pork stimulus, multi-trillion deficits, war expenditure and a love of printing?

  • ciccio

    Here is a pretty reliable list of problem banks, I have been following it for months and every single bank that has been closed in that time had been on the list. Fat better a run on them to weed out these festering sores than to let the cancer grow terminal.

    http://www.calculatedriskblog.com/2009/12/unoff

  • neddelux

    It is clear that in the US our leaders have ceased to be concerned for the country and are mired in special intrests and ideology.

  • USMCSniper

    Government spending and private spending have distinctly different motivations. Government spending is controlled by politicians. Instead of economic values, political gains motivate government spending. Instead of being central to government spending, profit and economic efficiency are incidental to government spending.

    Consider what happens in the private economy. When we spend our own money, we want something of value. So almost every time money changes hands, more value is added of our economy. In fact, to get our hands on a dollar in the private economy, each of us has to work and contribute something somebody else needs. The farmer has to grow a crop. The railroad engineer has to take grain to mill. The trucker has to carry cereal to a grocery store. The grocery store clerk has to stock shelves and sell consumer products. And so forth.

    On the other hand, when a conniving politician spends a dollar, the value he wants is influence. To satisfy a politician, government spending has to buy the votes he needs. That is why so much government spending involves entitlements and welfare. This is money given away to buy votes. As important as our votes may be, our votes add little value to our economy. Thus, much of the money government spends is wasted just to buy votes.

  • riverfred

    History teaches us that all great nations that simply flooded their countries with fiat currency went under. Did BHO take any history/economic classes or is his goal to destroy the U.S. and remake it as a marxist country?

    The question is, is how long can the U.S. survive? Any thoughts?

  • 080

    The stock market recovery is something of an illusion. It has been going up in terms of dollars. But measuring things in terms of dollars creates mirages. Here are some random evaluations of the S&P 500s in terms of ounces of gold. Sept. l, 2009: 1.045 oz ; Oct. l 2009 : l.04 oz; Nov. 2, 2009:0.99 oz; Dec. l, 2009: 0.912 oz. In other words the market is down slighly in terms of gold.

  • Wayne

    When the story of the Dubai financial crisis first broke I thought it had the characteristics of another huge shock to the financial system. It broke going into a long weekend with most people focusing their attention elsewhere. But then I thought again … Dubai World borrowing from western banks at interest doesn't make sense. An Islamic country where the citizenry flops down face first on the ground five times a day to point their asses to allah — wouldn't a country like that follow sharia law? Sharia law forbids usary, borrowing funds and paying interest so they'd be risking the wrath of allah or those that assume to speak for allah on this planet.

    I don't doubt that there will be another severe shock to the financial system and these jolts don't happen by accident. There are some that would benefit greatly in advancing there long held political and social objectives by seeing the financial system crash. But Dubai World isn't going to do it, IMO.

  • LindaRivera

    Obama Says U.S. Long-Term Debt Load ‘Unsustainable’
    By Roger Runningen and Hans Nichols

    May 14 (Bloomberg) — President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

    “We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

    Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”…
    http://www.bloomberg.com/apps/news?pid=20601087

    Obama admits the terrible financial destruction wrought against Americans. WHY THEN DOES OBAMA NOT IMMEDIATELY REVERSE THIS TRAGEDY?

    A major investor states America is going to reach Zimbabwe hyperinflation.
    http://economyincrisis.org/articles/show/2942

    Billions of dollars urgently needed for America's defense is instead gifted to Islam. Nuclear Iran and nuclear North Korea both state they intend to destroy America. They are not idle threats. The same venomous hate for the U.S. is shared by other nations and Muslim terrorist organizations. The treasonous response of the U.S. government to America's increasing danger, is to drastically reduce our defenses facilitating America's annihilation.

    See: Aloha, “Star Wars” By: Washington Times Editorial
    Washington Times | Monday, June 29, 2009
    http://www.frontpagemag.com/readArticle.aspx?AR

  • LindaRivera

    U.S. BROKE, but BILLIONS for Muslim FAVORITES

    DRUDGE REPORT
    'WE'RE OUT OF MONEY'
    May 23 2009

    In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: “We are out of money.”

    SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

    OBAMA: Well, we are out of money now. We are operating in deep deficits
    http://www.drudgereport.com/flashocs.htm

    CREEPINGSHARIA.COM
    Obama’s Supplemental Bill Passes, Gives Billions to Enemies?
    By creeping

    Barack Obama’s 2009 Supplemental Appropriations for Iraq, Afghanistan, Pakistan, and Pandemic Flu was revised and “passed by the full committee”. Not sure what the next step is, but based on the summary, it gives billions of U.S. taxpayer dollars to countries and entities that support sharia law and/or harbor, hide and support those who want to destroy the U.S. and our allies.

    Read the summary from David Obey’s office that was quietly released last week with nary a word from any media.

    • $3.6 billion, matching the request, to expand and improve capabilities of the Afghan security forces

    • $400 million, as requested, to build the counterinsurgency capabilities of the Pakistani security forces

    • Afghanistan: $1.52 billion, $86 million above the request

    • West Bank and Gaza: $665 million in bilateral economic, humanitarian, and security assistance for the West Bank and Gaza

    • Jordan: $250 million, $250 million above the request, including $100 million for economic and $150 million for security assistance

    • Egypt: $360 million, $310 million above the request, including $50 million for economic assistance, $50 million for border security, and $260 million for security assistance

    • Pakistan: $1.9 billion, $591 million above the request

    • Iraq: $968 million, $336 million above the request

    • Oversight: $20 million, $13 million above the request, to expand oversight capacity of the State Department, USAID, and the Special Inspector General for Afghanistan to review programs in Afghanistan, Pakistan and Iraq

    • Israel: $555 million of the $2.8 billion 2010 request for security assistance, $555 million above the supplemental request. (Note: that means Obama’s original request did not include any money for Israel in 2009)

    • Lebanon: $74 million

    • International Food Assistance: $500 million, $200 million above the request, for PL 480 international food assistance to alleviate suffering during the global economic crisis

    • Refugee Assistance: $343 million, $50 million above the request, …including humanitarian assistance for Gaza. Funding for the UN Relief and Works Agency programs in the West Bank and Gaza is limited to $119 million (Note: Gaza = Hamas)

    • Disaster Assistance: $200 million to avert famines and provide life-saving assistance during natural disasters and for internally displaced people around the world, including Somalia, Zimbabwe, Ethiopia, the Middle East and South Asia

    • Peacekeeping: $837 million for United Nations peacekeeping operations, including an expanded mission in the Democratic Republic of the Congo and a new mission in Chad and the Central African Republic

    • HIV/AIDS: $100 million, $100 million above the request, for the Global Fund to Fight AIDS, Tuberculosis and Malaria to address a funding shortfall for grants in key countries such as Haiti, The Democratic Republic of the Congo, and Afghanistan. (Note: That means Obama’s original request didn’t include any money for AIDs)

    • Africa: $151 million, $18 million above the request, for economic and security assistance for Kenya, Somalia, Southern Sudan, and Zimbabwe

    • Mexico: $470 million, $404 million above the request, to address growing violence along the United States-Mexico border by supporting the Government of Mexico’s war against organized crime and drug-trafficking

    • Georgia: $242 million to fulfill the United States commitment to the people of Georgia

    • Global Financial Crisis: $300 million, $148 million below the request, to address the global financial crisis in developing countries

    • Nuclear Non-Proliferation: $55 million, $34.5 million below the request, for the National Nuclear Security Administration to safeguard nuclear material in Russia and other sites world-wide

    • Department of Justice: $17 million, matching the request, for counter-terrorism activities and to provide training and assistance for the Iraqi criminal justice system

    Updates:

    Mass media remains silent on this but the International News has now picked up the story

    …and then there is Obama’s $108 billion IMF bailout scheme in addition to the Supplemental

    Related:

    To really add insult to injury, check our previous Creeping Sharia post – Obama asks Congress to allow U.S. funds to terrorist Hamas govt

    The Obama administration has asked Congress to let aid to Palestinians continue if Hamas backers are included in a new unity government, observers say. The proposed change in U.S. law would be necessary because Hamas, which controls the Gaza Strip, is designated as a terrorist organization and therefore cannot receive U.S. aid.
    http://creepingsharia.wordpress.com/2009/05/13/

    Whilst homeless shelters are filled to capacity and desperate jobless and homeless, NEGLECTED Americans are living in tent cities, billions are gifted to highly favored Muslims.

  • navigator

    Two different strategies a government can take:

    (1) Let the free market work, protect citizen's rights (life liberty, property, etc.), protect fair competition, and protect contract law.

    (2) Interfere with the free market, interfere with the free market, interfere with the free market, and then when failures occur, declare that the free market does not work – consequently, citizens must surrender their rights so that they may collectively survive.

    Which strategy do you think is best? Which strategy do you think is currently in work?

  • trodaball

    How could an enemy of the US do any better without firing a shot than Barak The Fraud Obama ? Democrat leadership from the White House, Capitol Hill and the various agencies should all be inprisoned for either knowing and agreeing what's happening to us, or for just being too stupid to be out among the public.