Wednesday Night #1389

It appears most likely that humanity is destined to repeat the folly of their forefathers, leading us into a very difficult six to eight year period of financial depression. If the model holds true for a war at the end of that destructive period, the question arises as to whether Man’s current level of technological knowledge, the proliferation of nuclear weaponry and the phantom of Hiroshima and Nagasaki will, this time, leave the world’s population much impoverished if not totally annihilated.

The world is in the trough of a long cycle, currently entering into a period of debt depression. We are on the slippery slope down, following the debt explosion. Banks have been involved in bad banking process in the midst of political corruption. Without the complicity of the government, the banking and securities market could not have succeeded in engaging in the dubious practices that have led to the current situation.
Canada has thus far escaped the inevitable depression because of more rigid banking and investment rules, but will certainly become involved along with the rest of the world as the cycle takes its inevitable six to eight year course.
It would appear that every second generation believes itself to be intellectually superior to its grandparents and repeats the same errors, leading to similar results. Historically, about every sixty years, high risk loans are granted, sold and resold leading to a banking crisis. Insurance companies insuring the repayment of dubious loans are, as in a child’s game of musical chairs, similarly involved. A large part of the crisis is in granting credit for the purchase of homes to otherwise unlikely candidates in the hope that increasing housing prices will cover the repayment cost, in retrospect, a risky hypothesis.
An additional element in the current crisis is the level of personal debt including credit card debt that did not exist three quarters of a century ago. The trigger of the current crisis was the failure of the U.S. government to bail out Lehman, setting off a whole series of events constituting a prelude to the current cycle. It did act responsibly in the Bear Stearns crisis, but the slide had already been set in motion.
Europe is in no better shape. On November third, fourth and fifth, Icelandic Banks will be required to pay out interest on bond sthey have acquired in the swapping process. A swap is the process of acquiring and reselling debt which is usually insured by an insurance company, in a process that is or should be illegal by all rules of responsible insurance. The concept of buying insurance on instruments that one doesn’t really own seemed like a no-lose proposition at the time, but obviously not for the insurer. In the instance of the Icelandic banks, the creditors are European, and it will have to be the European central banks that must come to the rescue. Most swaps, however, are not insured and the risk there, obviously greater.
The entire world is or will be involved in the current cycle. Abu Dhabi is currently bailing out Dubai. The financial well-being of China is dependent on selling products abroad. China, however, is already overproducing and a depression elsewhere in the world cannot help but affect that country.
The sixty-year cycle historically begins with debt depression, the point at which we currently find ourselves. If the cycle holds true for the present situation, we are about to move into a six to eight year period not unlike the 1870’s and 1930’s, a time of great destruction, depression, inflation, culminating in a war, the depression of 1873 culminating in World War I (also known as the war to end all wars) and the great depression of 1929 leading up to World War II, being the template. Wars historically have triggered innovative thinking leading to greater productivity, hence renewed prosperity. .

P R O L O G U E

Belated Happy Thanksgiving to one and all and warm wishes to our Jewish friends as they celebrate Sukkot.

We hope that in counting your blessings you remembered to thank She Who Must Be Obeyed that the Canadian election campaign does not last for 18 months – 2 years, at least not officially. It just seems that long. Whatever the outcome of Tuesday’s election, we can also count our blessings that Canada has Elizabeth May (and a substantial number of attractive, intelligent women candidates in all parties) and not Sarah Palin, which says something about the intelligence of the electorate and the quality of the candidates in this country.  It has been a fascinating process observing the almost-daily rise and fall of political fortunes.
By Wednesday Night, we will know the outcome and about whom and what we will be complaining for the next while. Leaving us free to watch – or not (we can always wait for the SNL version) – the third and final presidential debate while we wonder why Obama has produced an elaboration of his economic plan and John McCain sees no need to do the same. [Ah, but this was written on Monday; on Tuesday we discover that McCain Unveils New Economic Proposals . Oh.]
The drama of the U.S. election pales before the drama of the financial crisis which has grown from an American bailout problem (Do not miss SNL on the bailout)  to a global issue which, as Stratfor points out  led to a  weekend  that began with meetings among the finance ministers of the G-7, followed by a meeting of finance ministers from the G-20, the group of industrial and emerging powers that together constitute 90 percent of the world’s economy; plus meetings with the International Monetary Fund (IMF) and World Bank, concluding  on Sunday with a summit of the eurozone countries, where, miracle of miracles, they opted for the UK model (de Gaulle must be spinning in his grave).
This observation is the perfect segue to our guest this Wednesday, Dr. Rodrigue Tremblay and his wife Carole, and to bring to your attention his most recent article Anatomy of the American Financial Crisis: How It is Turning into a Worldwide Crisis wherein he says in conclusion: “we may ask if it is possible to avoid a repetition of the U.S. Great Depression of the 1930s or the more recent Japan’s protracted recession of the 1990s, both the result of a similar severe banking crisis? The answer is yes, if the vicious cycle of asset price decline, banking credit crunch and money supply contraction can be avoided, or, at the very least, stopped and reversed. —In economics, as in medicine, it is never too late to do the right thing.”
Another segue: doing the right thing in economics … we are sure that there will be argument from some Wednesday Nighters, but we are absolutely delighted that Paul Krugman has been awarded the Nobel Prize for Economics. We wanted to post congratulations on the NYT site, but the comments had closed – there were SO many.  We didn’t spot a single negative. Several suggested Krugman as the next Secretary of the Treasury –  we think we prefer him in the role of Loyal Opposition.