Roubini's Testimony and the Financial Avalanche

I read Nouriel Roubini’s Jan 26th written testimony over breakfast this morning. He’s a Professor, highly respected by people in the financial world who are unhappy with what has been going on.

I found his account kind of overwhelming. Not only because of the way he describes the effects of the reverse leverage driven financial breakdown that is underway, but also because of what he doesn’t talk about.

Let me list this latter under three headings.

-- First the international dimension.

What Roubini describes is NOT a US domestic crisis but a systemic crisis of world wide reach and consequence. This follows from the way the US has used the combination of financial and military power in pursuit of world empire since the end of World War II through controlling sources and reserves of natural resources like oil.

--Second, the tense employed.

Most of what Roubini assumes to be upcoming looming potential further disasters HAS ALREADY HAPPENED. When the global credit cycle turned last July and August the chain reaction commenced. So, the avalanche has only come one third of the way down the mountain up to now. It is still an avalanche, and that is a FACT. What does it look like from your kitchen table? Pretty? Ugly? Scary? Amazing? Don’t you hear the rumbling?

--Third, what is to be DONE, and who is going to do it?

He writes of international commissions studying the reform of the financial institutions and the G-7 keeping an eye on things. HELLO! Is that credible or what?

Take these three points briefly in reverse order. What follows will combine points two and three, and then briefly, something on point one.

Which is of more concern, the people who live here, or what is called “the financial system?” Is it better to keep a catalogue of upcoming benchmarks of how bad things are getting, house foreclosures, credit card defaults, auto loan defaults, bankruptcy of local governments, no money for schools, increasing unemployment, inflation, poverty, vagrancy, or to start thinking about what to do and how to do it?

It is not going to be enough to stop foreclosures etc. and Roubini says that. Those kind of AFTER THE FACT, don’t fix it till the New York Times has been given permission to say ‘its broke,’ measures won’t work.

The wage and salary bill of the country is around $7 trillion out of the $13 trillion or so Domestic Product. These are the numbers the government puts out, for what they are worth. National Income Statistics from the BEA:
Look for Salary, Interest etc. .

This is the official story of credit market debt for households and financial institutions:
Look for Total, Financial Debt and Household Debt

This is the most recent report on trading in Financial Derivatives published by the Basle Switzerland based bank for International Settlements. It documents what happened after the credit cycle reversed last August.
see pages 68-69 for growth and location of daily foreign currency trading..

You will note that about half the wage and salary bill of the country is traded EVERY DAY around the world. This report provides a profile of the avalanche.

If you deposit your money in a bank. Just close your eyes for a moment and imagine the adventures of your last wage or salary deposit: the exciting places it has been to, which you will never get to, the income it has generated, which you never will, thanks to the marvels of the internet, optical fibres, modern computer chips and 24/7/365 trading around the world. If you keep your cash with you, close your eyes and imagine all the fun and adventures its missing sitting in your wallet or purse. Flip through and take a look at the numbers. There’ll be another report due in April. It will be interesting to see how the growth of this stuff in the fourth quarter of last year compares to the growth in the third quarter.

Debt Secured Against Wages

Any way it doesn’t take much to compare the growth of derivatives trading with the growth of total, financial and household debt, and the growth of wage and salary and non-wage and salary incomes. If you’ve got the patience and the reading glasses ready you can do it for yourself, and see what the government is saying about what is going on. The “discrepancy” I think you will find if you’ve got the patience and your eyes are young enough is the fuel for the avalanche. Financial speculation has been promoted on the back of increasing indebtedness secured against the wage and salary income of the population.

It is in the darn NUMBERS. Right there.

Who decided that was the way the country should go? Was there a vote on it? Was it ever put before the population? Folks, you have a choice, join with us in destroying your standard of living and becoming debt slaves so we can play insane games with computer programs generating money for ourselves like they do on Second Life? And then use that money to buy you all out of house and home? Did you get a chance to vote on that? Of course you didn’t. There’s a lot of people who did buy into it on the basis of one or other get rich by going into debt scheme, or don’t worry about making ends meet, just put it on the credit card you’ll never have to pay. It is easy to think these are personal type issues and not worry so much about what is going on with a country which is promoting such stuff.

The issue is how to protect wage and salary income, while getting out of the way of the avalanche. Since it seems things have to happen before people realize they have been going on behind the scenes, underground wherever it is the unseen and unheard comes to fruition before the fullness of its time, there’s going to be a lot more pain and the view from the kitchen table is going to be transformed. It is a political issue, not a technical issue.

That is the domestic political issue viewed from a certain standpoint provided by the government’s own reporting, and some other things. It will take asking how this all came about, who was responsible, who was asleep at the switch. It will take defending people, their children and their lives. It will take the form of investment in new kinds of technology and businesses to create jobs and favor wage and salary income against rentier and speculative financial income. It will take overhauling the tax codes.

Hostage to Foreign Interests

It is also an international political issue. Tax cuts for the rich have freed up funds to be invested in foreign equity and related positions where the depreciating dollar has increased the value of those investments so that the rich among the top 1% in the US income distribution ladder have benefited from gifts of free money increased by the inverse of the depreciation of the dollar. Foreign investment in US government, government agency, and other debt has made up for the US “savings” which have been pushed over seas for higher yields. Foreign investment here decreases in value as dollars invested outside the US increase. Investments in US debt have turned out to be toxic and also worthless in the sense that there is no real market for them. The world oil trade is denominated in dollars, and the military and its world wide basing arrangements protect the dollar-oil link.

There are seeds of not so distant future conflict in all that. What set of agreements can produce global monetary accord, equitable access to and distribution of resources including fuels, potential solutions to global warming and environmental disaster and military security arrangements which protect everyone? At what point, if any, will US overseas investment become hostage to depreciated foreign investment in the US?

These two links discuss this issue. I’ve done the Pimco one before, but it remains useful. The other is older, but on the same subject.
How US Pays for World-wide military deployments and Pimco ‘Exorbitant Privilege’ .

The Problem

It can be looked at as the following kind of problem. The worse the crisis becomes for U.S. financial institutions and the dollar the more vulnerable will US military deployments relative to resource base definitions of national security become. The more the US straightens out its internal messes the less need will there be for overseas deployments to secure resources. Or, is the US prepared to fight with the rest of the world to defend the indefensible and preserve the unpreservable. What interests does a country have that are preservable and should be defended as well as defensible? Can that be done against the interests of a country’s own population, as well as the rest of the world.

All that is probably down the road a bit, but it is down the road, and like the rest, it is not going to go away if it is left out of the discussion, even if it is a nice day outside with a blue sky and a bit of sunshine, geese pairing off and somewhere a lonely daffodil getting ready to poke its head out to see what’s going on with the world this year.