Debt Rattle

I always go back to Roubini; in some ways, he's a touchstone of mine. But I find myself no longer being dragged down into pessimistic gloom by him. Rather, I actually come away from reading his recent stuff and judging him as overly optimistic.

Example: only a one-third chance of a Japan-like L-shaped economy, two-thirds chance of a longish U-shaped (nasty U-shaped, yes, but still U-shaped) recession?? and an implied 0% chance of something even worse? Really?! I'd take those odds, if they were right!

Another example: he raves about Obama's econ team, particularly Summers and Geithner; I'm sure they're as bright as Roubini says, but I have my doubts that they have the vision to get us out of this rather unique mess. They certainly didn't have the vision to anticipate it, much less prevent, or even mitigate, it.

For a more draconian point of view (a la Mike Shedlock), one that I truly hope is wrong, but I truly fear he really may be right (except perhaps on the longevity of the fallout -- nothing's infinite): From Ilargi at the Automatic Earth, The end of credit:

2009 will be the year credit disappears. That, more than any other single factor, is what will determine our economic futures. It will get very ugly, because our economies, even our entire societies, run on credit. There is no replacement.

Governments and central banks are trying to pump your money into the existing banking system, ostensibly with the idea that a credit flow can be (re-) started that way. The idea is so ridiculous that we have to wonder about the intentions behind the policies. To restart credit, they would have to go through any channels BUT the banking system. The reason is simple: the banks are bankrupt, with losses on their books that are many times larger than any sum that has been, will be or even could be handed out to them from the public coffer.

For the man in the street, things won't get better if existing banks are bailed out or nationalized. They get worse, much worse. A government that buys a bank outright, also buys the so-far mostly unrecognized-losses. A government that merely pumps money into a bank will see that money evaporate on the hot plate of yet-to-be-revealed losses.

The loss of credit that will be the prime characteristic of the financial world in 2009 marks a watershed moment in our societies, which will have to scramble to find a new model for survival, for getting things from A to B, and to simply feed their citizens. The credit system that we have lived in for the past decades is gone and will not come back in our lifetimes. The losses, when they are revealed, and they will have to be, no matter how much the ruling classes resist this, are simply too big. What is at risk in the derivatives trade alone is more than all the money on the planet.

Societies and their governments can do some things to mitigate the damage, to minimize the suffering. But none are doing them to date. First, private and small business deposits in banks must be guaranteed. Then, the banks must be folded, along with their losses, which mainly consist of bets gone bad. In order to make this work, governments must set an example of frugality that needs to be adapted by all citizens. The Keynesian overspending that rules the day is a recipe for making the disaster much bigger than it already is. And following Keynes without demanding that the books are opened and losses revealed, is nothing short of criminal behavior.

Then, what needs most attention is what people need most: basic necessities. Water treatment and sewage systems are the most important barrier between a society and widespread disease. They will become, in relative terms, much more expensive for everyone. Forced rationing may have to be applied.

Every level of government needs to look long and hard at where the food for its people comes from. If it is possible to feed everyone of your citizens, action needs to be taken to make sure that self-sufficiency is established. A national government will be mostly useless in these things, you need smaller entities to be efficient. Increasingly empowering lower levels of government has another advantage: it’s much easier for everyone to track where their money is going.

You see, I can write all this, and much more, and know that every word I write is true. But I don't think any of it will be done while there is still time. What I see around me, what governments are doing, is that one-trick pony kind of thing: trying to resurrect the dead with money that doesn't belong to them. Before we can begin a reorganization of our societies, the present political and financial ruling classes will have to fall. And that will only happen after an amount of suffering so overpowering it makes me shudder. Few of those with power, political, economic, will give that up voluntarily, And few of us will volunteer to do with less. Until we run headfirst into the wall, we will deny the existence of the wall.

But first, 2009. No more loans, not for cars and homes, not for business lines and letters of credit, and increasingly not for governments, who'll be attempting to sell their bonds in an ever more overcrowded marketplace. International bond markets will be but a faint shadow of their former selves. And so will trade, in all its aspects. Of course it’s hard to predict exactly what will emerge from the end of credit. What is easy to see is that it will indeed end.