Biggest outlay in US history

If you are thinking that the current economic crisis is a flash in the pan, or something that will be over anytime soon, you may want to look at these figures compiled by Jim Bianco. He measured the inflation adjusted cost of various historical spending by the US government.

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

World War Two cost an inflation adjusted $3.6 trillion.

And how much has the current bailout cost? Depending on where you read, it is anywhere between $4.615 trillion, $7.76 trillion and $8.5 trillion.

The bailouts this year have cost more than the above listed events combined.

And a full trillion dollars more than the Second World War.

And just to cheer you up a little bit more, here is a graph comparing the current trend of the S&P 500, with various other bear markets, such as the Dot Com bubble and the Great Depression.

mega-bear-quartet-large

Yes, the future is not looking rosy.

And just to depress you further. Peter Schiff was on Bloomberg again, and he was again reasoning that all of this bailout money will create more problems than it solves. When 4.6 trillion is pumped into the system, it takes time for its effect to be felt. 2009 could see “hyperinflation” he argues, along with gold doubling in price, and the dollar plummeting in value.

Selling your soul at Moody's

Rating agency Moody’s employee emails:

Employees at Moody’s Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or “sold our soul to the devil for revenue,” according to e-mails obtained by U.S. House investigators.

I love this one:

An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

If you’re not sure about the role Moody’s and Standard and Poors played in the debacle, Barry has a good brief rundown:

The proximate cause of the Housing crisis were 1) Ultra-low rates; and 2) Abdication of traditional lending standards, thanks to 3) originators ability to resell mortgages for securitization purposes, and hence, 4) not have to worry about loan defaults.

The credit crisis was caused by 1) the above securitized mortgage paper, that was 2) rated triple AAA by Moody’s and Standard & Poors 3) Which was then “insured” by credit default swaps (CDS) — the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act.

That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.

He has more here, including IM conversations between staff at Standard and Poors.

Rahul Dilip Shah: btw: that deal is ridiculous

Shannon Mooney: I know right … model def does not capture half of the risk

Rahul Dilip Shah: we should not be rating it

Shannon Mooney: we rate every deal

Shannon Mooney: it could be structured by cows and we would rate it

Bank bailout in Ireland

Well while I was in Georgia the entire banking industry went into meltdown. And in Ireland the FF government has made the odd decision to guarantee all bank deposits in all banks. A €400bn bailout for the banks. We are in the tank for almost twice our own GDP.

Rightly, the EU is looking at this issue, as it may break trade rules. And how has the market responded? Credit default swaps on Irish debt, or the likelihood that Ireland will default on her bonds issues surged to record levels, 60 points.

From my initial reading, this is a bad deal for us and a lifesaver for banks who only last week we were told were entirely stable.

HP cut 25,000 jobs

No word yet on whether the job cuts include Irish staff.

Hewlett Packard, which acquired Electronic Data Systems for nearly $14 billion this summer, plans to trim its company-wide workforce by nearly 8 percent as part of that acquisition.

Palo Alto, Calif.-based HP will announce restructuring plans for the EDS division to “streamline costs, invest in growth and drive shareholder value,” it said in a statement.

The company said 7.5 percent of the combined workforce, or 24,600 jobs, will be cut as part of the restructuring. Half of those cuts will be in the United States.

BizJournal.

Afghan poppies

The movement of a turbine into Afghanistan makes for fascinating reading. The Economist concludes:

Electricity is the basis of any long-term economic development, which in turn is essential to winning hearts and minds. Without power there can be no factories to draw young men away from the Taliban; and without refrigeration there is little hope of developing, storing and exporting crops other than opium poppies.

But Anthony posed a question yesterday which I thought was interesting.

Why not buy the opium from the Aghan farmers, and then destroy it? In other words, pay more than the going market rate for the opium and then do what you want with it. It would kill the opium supply to the rest of the world, pacify Afghan farmers by avoiding destroying their crops, and boost the Afghan economy?

Africa and Coca-Cola

AFRICANS buy 36 billion bottles of Coke a year. Because the price is set so low—around 20-30 American cents, less than the price of the average newspaper—and because sales are so minutely analysed by Coca-Cola, the Coke bottle may be one of the continent’s best trackers of stability and prosperity.

In other words, Coca-Cola sells sugar water to Africans for 20 cents and still manages to make a profit. Imagine how much profit is made from selling it in Europe for up to €2.00 a bottle.

Interestingly:

Coca-Cola says it is the largest private-sector employer in Africa. Its system of distribution, which moves the sugary drink from bottling plants deep into slums and the bush a few crates at a time, may employ around 1m Africans. A study at the University of South Carolina suggested that 1% of South Africa’s economy was tied up, one way or another, in the distribution and sale of Coke.

Economic and property doom in Ireland

The Sunday papers were awash with property articles today. I guess I am in a similar position to fellow blogger Una Mullaly in that I am of a similar age (or slightly older) and never bought a property. Although this was also partly because I could never afford one.

Una’s piece is the most read on the Turbine today, and with some merit.

Now the added bonus of being right, and not succumbing to societal pressure of getting on the property ladder, sweetens the deal. Renting was previously a life usually ascribed to flakes, reality deniers, the broke, bold and immature. But it’s pretty sweet listening to all this doom-and-gloom stuff about mortgages going ballistic while the price of a house ticks down by the minute like some sick stopwatch in reverse. No worries for me. Smug? Absolutely.

Indeed. But I still have several relatives in negative equity and mortgage repayments rising – and it ain’t pretty.

And if you thought things were really bad, well you may not want to read the following. Things are going to get a lot worse. Take for example the cycle of market emotions:

Cycle of Market Emotions

Personally, I feel that throughout 2007 with all the talk of “soft landings” and all that nonsense, we were in full scale denial mode. Property prices kept falling from January 2007 to today, but we kept on denying it.

The turning point was the ESRI report last month. We finally entered fear mode. Fear is now widespread, and is evidenced by the Sunday paper coverage. And as I said earlier, we are only at the beginning. We still have desperation, panic, capitulation, despondency and depression to go. I put that as far away as 2010.

I am not fooled by government talk that we will see some sort of magical economic upswing in late 2009. I just don’t buy it. From where will this upswing come? What exactly has Ireland got to offer? And the people who might comment and say “Don’t talk down the economy” can fuck right off. Reality is reality is reality. You can either deal with it or ignore it.

Let’s move to the Sunday Business Post and see if it can offer any cheer.

Nope.

First to David McWilliams, often called a permabear. McWilliams laments Cowen’s plans for cutbacks. He asks questions of idea that Ireland today is totally different from the 1980s.

All week, this mantra was hammered home on the airwaves by the economists who work for the banks and stockbrokers. Let’s run with the idea that Ireland today is totally different from Ireland 20 years ago. It’s not hard to agree with this assertion. The question that arises then is: if 21st century Ireland is so different, why does the solution being trotted out now by the Department of Finance sound like 1980s thinking?

Examine what has been proposed as the panacea. Everyone is talking about cutting government spending as if the root cause of today’s dilemma were 1980s-style government incontinence. But that’s not the root of the problem at all and therefore can’t be the only solution.

The root cause of today’s problems is a collapsing property market, coincident with a rapid deterioration in Ireland’s competitiveness. A credit binge disguised the underlying weakness. In fact, we lived in a Botox economy where other people’s money made us look richer in the same way as Botox makes a middle-aged person look younger. Now that the Botox economy has been laid bare, we can’t hide the blemishes or wrinkles any more. The root cause of our present difficulties is too much credit; the root cause in the 1980s was too little credit. Therefore, the solutions have to be totally different.

He continues:

Today, the situation is different. The absolute number on the government’s deficit is a passive residual not an active catalyst. The budget deficit figure is the end of the road rather than the beginning. In the boom, the credit profligacy determined the government deficit. In the 1980s, the government profligacy determined the credit deficit.

In short, cause and effect today are precisely the opposite of what they were in the 1980s.Yet the government’s response has been to wheel out 1980s solutions to 21st-century problems. Obviously, government spending has to be cut as credit-driven revenues dry up.

But McWilliams suggests a novel idea:

This is where the state can start getting inventive. Why not unlock some of our personal wealth by making it tax efficient for a rich investor to put money into a real company with a cash-based business plan? We need a scheme, targeted at real businesses.

If you travel around the country you will find hundreds of small companies, starved of cash. Yet collectively, these small businesses are our national ‘get out’ cards. These companies need fresh capital. There is lots of capital about. The only problem is that it isn’t finding these opportunities. If the state made it tax-efficient for wealthy investors to back these small guys with big ideas, we could begin the process of gradually clawing our way out of this swamp.

Inventive and cost effective. But such a plan would involve visionary leaders. Ahem.

Now if you are not frightened enough, let’s move on to Financial Times correspondent Wolfgang Munchau, also writing in the Business Post. Hold onto your hats, this is not pretty.

For the world economy, this is surely one of the deepest crises in living memory. For Ireland, it is close to the perfect storm.

Consider for a second the sheer number of economic shocks the world has been subject to over the past year: a crash in the property market, the effective annihilation of securitised credit, broader financial instability that is likely to continue over several years, large shifts in global exchange rates, a sudden slowdown in US economic growth, plus an explosion in oil and commodity prices, followed by rising inflation.

A small open economy at Europe’s outer fringe, with a high reliance on property and financial services for its growth but without the full arsenal of independent macroeconomic policy tools, is going to be harder hit than traditional industrial economies.

In such an environment, you can safely throw away any long-term economic forecast. The Economic and Social Research Institute (ESRI) is almost certainly right in its forecast that Ireland will suffer a recession this year. But I doubt there will be a recovery in 2009. The ESRI’s optimism is based on what forecasting models always do: after a shock, they always assume that the world goes back to normal. Unfortunately, this is not that kind of shock.

To me, the ESRI always give low-ball estimates. So whenever they make forecasts I mark it down as a lot worse than what they are saying. He goes on on to dispel one of the myths of the Irish property boom, that house prices always rise:

There is one fact about the property market that is extremely difficult to relate to people during house price booms (and for a long time after that): house prices, after inflation, do not rise in the long run. This is true virtually everywhere. In the US, real prices have been up a touch over zero since the early 1900s. In Germany, real property prices have stayed flat since the 1970s. In Britain, they have gone up by a little, for largely pathological reasons to do with the country’s urban and rural planning laws. In most countries in the world, real property prices are mean-reverting. What goes up, comes down.

He continues:

We will know in a few years whether this assertion is true, but I am fairly confident in predicting that the Irish property crash is going to be severe. The main differences between the Irish and US property markets is that the fall in Irish house prices has started a little later, and will be a lot worse. The economic impact on Ireland will also be immeasurably harder. unlike the US, Ireland has no domestic currency, no independent monetary policy that can do the heavy lifting of adjustment.

For that reason alone, I do not believe that the Irish economic downturn will be short-lived. Since inflation is not very high in the eurozone, and only a touch higher in Ireland, most of the real adjustment will come in the form of falling nominal asset prices, as well as falling wages and rising unemployment.

Even under the ESRI’s forecasts, Ireland’s budget deficit will overshoot the Maastricht Treaty’s 3 per cent barrier next year. That overshoot is due entirely to automatic stabilisers – essentially due to a fall in tax revenues. However, if this recession turns into something longer, as I expect, you could easily see a budgetary overshoot of some 5 per cent or more. Given Ireland’s relatively sound debt position and the sharpness of the downturn, we should all accept a temporary rise in the deficit. But the EU will probably not accept a fiscal stimulus on top of those automatic stabilisers.

As for the recent rise in unemployment, things are going to get much worse I fear. Unemployment hit 5.7% according to CSO figures released last week. That means 217,400 people out of work.

Now double it. 10% in 2009, or half a million people out of work. How bad would that be for the economy? Fundamentals are sound my ass.

Doom and gloom yes. Reality yes. If we face reality we can start to deal with it.

Will Fianna Fail and Mr Cowen have the vision and competence to see us through the bad times? I sincerely doubt it.