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 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 24-Sep-2008
Bickering Congressmen may delay the $800 B financial Bailout of The World (BOTW)

Web Log - September, 2008

Bickering Congressmen may delay the $800 B financial Bailout of The World (BOTW)

And we have some expert advice on preserving your savings.

Democrats and Republicans voiced standard ideological objections to the proposed Bailout of the World, and some of them were very nasty.

The Democrats complained that the bailout helps the banks, but doesn't help the man on the street, the average homeowner being foreclosed.

Sen Jim Bunning, (R) Kentucky
Sen Jim Bunning, (R) Kentucky

The Republicans complained that the bailout gives too much power to the Federal government, and to one person (Treasury Secretary Henry Paulson).

Perhaps most vicious was was Republic senator Jim Bunning, who said, "This massive bailout is not a solution; it is a financial socialism, and it's un-American." Whew!

I admit to being fairly bemused, watching the Washington circus, because the proposed $700 billion BOTW won't make any difference at all to what's coming.

There are $6 trillion in money market funds, and the fear is that people will panic and draw their money out. The size of the real estate bubble is over $5 trillion.

And there are $62 trillion in credit default swaps. CDSs played a prominent role in the previous rescue efforts -- for Bear Stearns, Fannie Mae, Freddie Mac, AIG -- and now there's pressure to regulate them.

A web site reader pointed out to me that, according to the latest figures from the Bank of International Settlements (BIS), there are not just $750 trillion in credit derivatives in portfolios around the world, as I'd said, but there are now $1,000 trillion. It's nice to know that the credit bubble is still expanding somewhere, but that's $1 quadrillion.

When I was a kid, my friends and I were more comfortable dealing with numbers than with girls, and so we got involved in various number discussions. We learned the names of the large numbers -- hundreds, thousands, millions, billions, trillions, quadrillions, quintillions, sextillions, all the way up to vigintillions. (This is the American system - the European system is a little different.)

We knew that many of these numbers were essentially imaginary. We figured that there might be a million or billion of something. But unless you count atoms and molecules, there was certainly nothing in the trillions (this was the 1950s) or anything higher.

So today we have $1 quadrillion in credit derivatives, and that makes my brain explode.

We've been debating this subject in the new Generational Dynamics forum..

One person suggested that these credit derivatives are imaginary, but they're not. They are very real, and they're like tens of trillions of time bombs that will be going off whenever there's a sufficiently big "credit event." Maybe those credit derivatives are sufficiently interlocked so that the explosion of one time bomb will cause a vast chain reaction. Maybe those credit derivatives are so correlated that there's one particular kind of credit event that will cause 10% of them to explode at the same time.

The thing is, nobody has any idea. There are no measures, no sensors, no devices that tell us the nature of this $1 quadrillion in credit derivatives. They're like a huge ocean that's calm on the outside, but may explode and drown everyone at any time.

So Congress is debating the BOTW -- for $700 billion. $700 billion is 0.07% of $1 quadrillion. It's like tossing a bucket of water into the ocean. It makes no difference at all.

It's worth remembering that the world has been here before, from the point of view of Generational Dynamics. If you go back through history, there are many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.

These massive generational crashes occur every 70-80 years. Each one occurs when the survivors of the previous one are all gone, and so they're spaced by the approximate length of a human lifetime. We're overdue for the next one.

A web site reader sent me the following:

"Now I'm getting frantic e-mails and IMs from people. They are panicking.

One just asked about how on Fox they are talking about "Credit Swaps" and asked me if I knew anything about that! It's hit the mainstream!

These are people around my age who are reasonably intelligent professionals. They have IQs of maybe around 120 and have a few hundred thousand in net worth.

They have all left themselves wide open to losses. They have absolutely no idea what is going on. So they have come to me because they don't trust anything they hear from the financial industry and figure I can answer their questions (they admit that). Once I answer them, they just go do whatever I tell them to do. There's no hesitation.

They are telling me how much is in their accounts, exactly what it is, and then asking me what to do with it. I have been warning every one of these people for years and am finding out that they never listened to or absorbed one thing I said! I guess only when two lunkheads like Bernanke and Paulson go on TV and say that the financial system is within days of collapse does it register that oh my God, that's what I've been saying all along.


I wrote back to ask him what advice he gave, so I could repost it, and he sent me the following. This top-notch financial advice from an expert:

"Question number one was from a guy who had a $500,000 CD with JP Morgan and owned 5 Comex gold contracts outright. He asked me if there was any possibility he could lose the funds in his CD if JP Morgan went under and if there was any way he could lose his gold contracts. Of course, you know the answer to the first question. On the gold contracts, I told him that he would not lose them in the event of a default, but that it might take a long time to sort everything out. I told him to do one of two things. Preferably, to get the warehouse receipts endorsed to his name and then go pick them up from his broker or have them Fed Ex the receipts out to him. Or at a minimum to make sure that there is a statement from the broker specifying the receipt numbers and serial numbers of all bars owned, not simply a line item stating "5 Comex Gold" as Refco used to do.

Question number two was from a guy who had $250,000 in a Deferred Compensation account. You might know that many people have these types of accounts and that there are only certain options available to them. I told him that "what you would want to do is look at the money market funds offered and then pick a "treasury only" money market fund if they have that option. Otherwise, look at the prospectus for each fund offered and pick the one with the least amount of junk paper in it. That would probably be the one that pays the least interest. The other thing you might be able to do is get into a short term US government bond fund with maturities in the 2-5 year range or something like that."

Question number three was from someone who asked if they should go to the bank and take out their cash and how to do it. I advised them to call the bank and speak to someone who they are familiar with about what they would like to do. I mentioned that any withdrawal over $10,000 will likely trigger a SAR (Suspicious Activity Report) and that will be on file in Federal government database in Detroit for something like 7 years. I advised them to speak with the rep at the bank to confirm that. I warned them not to go to various branches and try to withdraw amounts less than $10,000 in order to avoid an SAR as that is called "Structuring" and is a federal crime. I told them that the bank would not likely have the amount of cash on hand that they were looking to withdraw or may not be wanting to give it up due to liquidity concerns, but that perhaps the bank could order the cash and have it available for pickup the next day. They aborted the conversation before I was able to explain that Federal Reserve notes are partially backed by junk now that the Fed has exchanged their good collateral out through the TSLF, and that t-bills are probably the better option. Although, at this late date I am not really sure whether there would be enough time to establish a treasury direct account and I do not really know whether having a bank hold treasury bills is 100% safe. I think so but am just not sure as I never considered that option."

As usual, it's impossible to predict the exact timing of the coming crisis, but it seems very close now.

Once the full crisis is on, the attitude of the nation will change dramatically. The Congressmen will stop bickering, and they'll be only to happy to give plenty of power to someone -- the Secretary of the Treasury or the Fed Chairman or the next President -- anyone they think can end the crisis and stop the awful pain. (24-Sep-2008) Permanent Link
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