What's a Trillion?

A one, with twelve noughts after it.

1,000,000,000,000.

According to Wikipedia humans have been around for about 40,000 years. Not long really. The last neanderthal man was still grunting around 30,000 years ago, so 40,000 years seems generous.

Some simple maths. 40,000 years * 365 days * 24 hours * 60 minutes = 210,240,000,000.

Thats about one fifth of one trillion.

To get this in perspective, if Adam (Eve's bloke) had opened a non interest paying account at the beginning of humanity and saved a pound a minute, he'd have a fifth of a trillion quid now. But he'd have to keep saving saving for another twenty thousand years to able to buy the toxic debt we all just insured for "Sir" Freds RBS.

If Adam had been particularly thrifty, and saved a fiver a minute, he'd have a whole trillion now. About two thirds of current debt in the UK.

Lets have another perspective on a trillion

It would take a jet plane flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out one trillion dollar bills.

One more (further contributions gratefully received).

According to geologists the planet we live on, Earth, (Bankers and politicians live on another planet) formed about 4.54 billion years ago. If God him/herself had started saving a dollar a day on the first day of the planet, that would be $1.66 trillion now. So not really enough to pay off UK indebtedness. And a bit less than the projected difference between US government spending and revenues, for the next fiscal year.

Happy Days :-)

Dates for your diary: Arse kicking in the Church.

In the future you may well be asking, "What were you doing on 8th March, 16 April, 26 December 2009?".

I won't say why exactly here, now, on 24 February 2009, but here is what I predict.

On or about those dates something which the US "perceives" as external (so it could be external and also be part of itself is does not acknowledge) will fundamentally undermine the US belief in its value system (i.e. money, "success"; there will be a great sense of having invested in something which turns out to let it down (false gods, articles of faith - money, free market); it could also be that the ideology of winner takes all is best for all is severely shown for what it is in a societal context - the hidden unloved and uncared for people of the US will be undeniably (to sane people) visible and their pain and distress becomes part of the national psyche. And these are not just down and outs, but middle class people whose regular savings and pensions have been so slaughtered that they have lost financial stability and security.

One way or another, there will be an almost shocking realisation around money and values in the US.

These are things which are already going on underneath the surface, like depth charges....but some event or speech around the dates mentioned should pin point a sea change. Its the moment when even money falls away and the problem becomes so fundamental a society questions its entire value structures, the validity of those values, and where they came from.

I know these are not specific predictions and this might sound like more of the same but these dates (plus or minus a day or two) will deal once and for death blows; not recoverable from without transformation and without the prop of what was the former foundation.

By the end of the year the US and Western belief system in capitalism, and free market fundamentalism, will know its been truly Tango'd.

A few years ago there was a glorious comedy TV series in the UK called "Father Ted" about the life of some priests on an Irish island. In one episode a priest loses a bet and his forfeit was to "Kick Bishop Brennen up the Arse". Afraid to do so, he was counselled by the other priests that the Bishop would be so taken aback and in shock that he wouldn't even believe it had happened. Well, it was partly true, the Bishop was sent into a catatonic stupor for days. But eventually the (accidental) disclosure of of a ten meter high photo of the arse kicking event brought the Bishop around to the reality of what had happened.

We are collectively having a Bishop Brennen moment right now. The politicians and bankers are trying to lull us into disbelief. But the ten meter high photo is developing, fast. And we are waking up to the fact that our arses have indeed been kicked by the bankers. Indeed the whole church of capitalism has been kicked up the arse by its priests.

And perhaps its time. Avarice, the love of money, is the root of much evil. In the absence of the love of much else (and I mean devoting time and money to that), it has made us the slave of money, rather than money the servant.

As a good friend of mine once said, what's a value 'til it costs you something?

Lets all ask what our values are worth, and just what the terrible hardship is we fear that we aren't joyfully able say "yes" to that for a more sane world.

The Safety Systems Were Deliberately Dismantled

We have learned from communism that government without business is tyranny. It seems we are learning that business without government is piracy.

Here’s something to consider.

PHASE 1

After the Great Depression two major lessons were learned about money, markets and banking. Legislation was introduced accordingly.

1. The Glass Steagall Act 1933 separated investment banking (taking risks with your money for bankers gain) from traditional banking (looking after your money, processing payments and conservative Mr Mainwaring type lending). This division meant that any losses taken by bankers taking risks would not affect the basic banking that you and I and everyone else depend on.

2. The “uptick rule” was introduced in 1938 after a review of the effects of short selling and effectively stopped it.

Sensible stuff.

PHASE 2

Following intense lobbying by the banking sector, the Glass Steagall Act was actually repealed in 1999 by the Gramm-Leach-Bliley Act.

As a direct result of this major banks became legitimised in their involvement in, amongst other things:

Mortgage Backed Securities (viz sub-prime);
Special Investment Vehicles (SIVs) (off balance sheet stuff); and our friends,
Collateralised Debt Obligations (CDOs) (See Synthetic Money post below).

In addition, the uptick rule was eliminated by the SEC in July 2007.

Hmm.

PHASE 3

The US Commodity Futures Modernization Act 2000 (nice sounding title) was hurriedly tacked on at the last minute to a must-pass 11,000 page budget bill on December 15, 2000 (the last day before the Christmas holiday when the politicians went home). Its sponsor was one Senator Gramm (same Gramm as above).

Of note also was that this was in the short period following George W Bush's election while then President Clinton was sill serving out his final days as President and as outgoing president was in no position to veto anything. Like the period we have just had between Bush and Obama.

The timing and procedure adopted by Gramm meant the bill by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes.

As no-one had time read the 250 page bill (11,000 were in the budget bill) they just went on what Gramm said it was.

Gramm characterised the Act as follows: to ensure that neither the SEC nor the Commodity Futures Trading Commission got into the business of regulating newfangled financial products called swaps—and would thus:

"protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Splendid, they said. Now can we all go home for Christmas? And they did.

What they had signed up to was extraordinary. The “protection for financial institutions” (poor lambs) was provided by actually barring, yes barring, regulators from regulating, amongst other things, the credit default swaps (CDS) market and banking involvement in derivatives generally.

The regulation of banks' involvement in CDSs and derivatives was actually made illegal.

Pause for breath needed?

As a result, what became a $62 Trillion market (four times the size of the US stock market) was unregulated. No one was allowed to make sure hedge funds and banks had the assets to cover the losses they guaranteed.

Well, reeling as I am sure you are, there’s just a wee bit more. It's a side show now, but it seemed important at the time.

The same Act exempted most over-the-counter energy trades and trading on electronic energy commodity markets from government regulation. This was at the behest of lobbyists working with Gramm from a company which no-one had really heard of then, Enron.

Gramm's wife, coincidentally, was on the board of directors of Enron when it collapsed.

The “Enron loophole” which deregulated energy trading was sought to be closed in Senate Bill S.2058 in 2008, in large part because unregulated speculation had led to rocketing oil prices (remember $148 a barrel last year?).

President Bush vetoed it. Thankfully he was overridden by the House and Senate.

And finally.

In 2004, at the request of the major Wall Street investment banks, including Goldman Sachs, then headed by Hank Paulson , the SEC agreed unanimously to release the major investment houses from the net capital rule.

This was the end of the requirement that the US investment banks’ brokerages hold reserve capital.

The effect of this was to take the limit off leverage.

The SEC decision came following on from the complete dilution of restrictions regulating the capital requirements of the foreign operations of US investment banks in the European Union.

EU regulators said they would accede to US pressure and not scrutinize foreign firms' reserve holdings if, and only if, the SEC agreed to do so instead. The problem, however, was that the 1999 Gramm-Leach-Bliley Act (yes) had put the parent holding company of each of the big American investment houses beyond SEC oversight.

In order for the agreement between the EU and the US to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC. This was accepted. (I am weeping)

As part of the deal repealing the net capital rule, the SEC agreed to the establishment of a risk management office that would monitor signs of future problems.

This office was later dismantled after discussions with Hank Paulson.

It took until late September 2008 for the SEC to agree to end the 2004 program of voluntary regulation.

My sincere hope is that these events will rekindle the debate about the roles of capital and labour (money and people), about individual freedom (personal and corporate) and the inevitable social contract with the communities those individuals and corporations live in, and about law making and ideals. There never has been such a thing as a "free" market. That was a quite conscious rebranding of capitalism that took place in the late seventies, and it was a polarised and lop sided reaction to the then opposing philosphy of communism.

In the name of the free market, and indeed ironically of democracy, our society effectively killed off debate about what was individual and social good. Since then the prevailing philosophy has been that all society needs is individuals pursuing their economic goals, regardless of moral, ethic or conscience, and that everything will take care of itself.

This is the time for hope for something new to be able to collectively flower.



(With thanks to research on Wikipedia)

Myth - Shares prices beat gilts over very long term

The Financial Times used to have two banners on the top left and right of its front page. One read "Friend to the Investor", the other read, "Foe to the Speculator". Hard to believe these days.

Let me set my stall out: I am not against capitalism but I am allergic to untruths propogated by its anti-anythingelseaswell proponents. New companies with successful innovative products and services will always rocket in value, and long may that be the case. But with mature companies its a different story.

Taking figures since 1900 to the present day, hot off the press research by the London Business School for Credit Suisse has shown that, without dividends being reinvested, over long periods share prices do no better than Government gilts and sometimes worse. If, and only if, divis are re-invested in the same shares do shares do better as investments, but importantly this is not because of gains in the share price.

Moral of the story: in this period of share price "correction", expect to lose the share price gains that have been made in the last decade or so (Japan is now where it was 25 years ago, FTSE 100 down 28% on 10 years ago), and look at the dividend. Expect good solid companies which pay regular strong divis to do well.

An outbreak of common sense investment clarity in our speculative fog. Reckitt and Benckiser comes to mind.

Short video at:
http://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html?_i_referralObject=1029042602&fromSearch=n

Apologies, Integrity and Restitution

Sorry may well be the hardest word.

But coming from a man whose leadership, acts and omissions led directly or indirectly to his own enrichment but led to the company he ran impoverishing many thousands around him and destabilising the society he lives in, it isn’t enough.

If I say “sorry” to you it is about feelings. Yours of hurt and anger, and mine of conscience and culpability. Saying sorry is good, and our society would be a good deal better if there were more of it. But it addresses feelings. It doesn’t change facts. And it isn’t a get out of jail free card.

To have integrity an apology must not just come from the mouth of a man, it must come from the whole of him, with a genuine sense of contrition and a willingness to offer whatever restitution he can. However much that will not undo the consequences of his failings.

A legal, rather than moral, obligation to make restitution can be triggered by two different types of causative event:

1. Wrongs
2. Unjust Enrichment

We have yet to see integrity from the bankers who keep offering apologies.

Until we do, we may feel justified in declining to accept their apologies and reserving our rights.

Telling it the Way it Is: Reasons to Be Cheerful

Am I being pessimistic about the way things will go economically? Well, maybe. But it seems to me the very structure of our financial system (see Synthetic Money below) has put us in what engineers call a negative feedback loop. I may be wrong, but if I am I’m in very good company, and company which is going to be spending your money soon.

Feb 10, Timothy Geithner, US Treasury Secretary. “The financial system is working against recovery, and that’s the dangerous dynamic we need to change,.. “Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged.”

Feb 10, Tom McKillop, ex-RBS Chairman. "Securitisation was perceived as a stabilising influence in financial systems, distributing risk and making the whole system more stable. It didn't turn out that way, it turned out to be the absolute opposite of what was expected."

Feb 10, Ed Balls, UK, formerly a chief economic adviser to the Treasury. "The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years as it will turn out." "I think this is a financial crisis more extreme and more serious than that of the 1930s."

And last week Gordon Brown, the UK Prime Minister said that the world was in a full-blown economic "depression", but his office quickly declared that comment a slip of the tongue.

There's no technically agreed definition of a depression, but two rules of thumb widely mooted are a 10% decline in real GDP or three years of recession. Its not like the "R" word where there is a definition and one can be declared. So don't worry, there won't be a Depression, not politically.

But a drop of 10% GDP from our already very high standards is hardly a reason to get depressed. Nor is three years of belt tightening the end of the world. Its probably the only way we were ever going to get CO2 emissions down and address ecologically damaging consumption growth, get house prices to a level that support life rather than drain our resources, and address the ideology that growth for growths sake is inherently good (the philosophy of a cancer cell). And maybe we'll even address the issue that GDP has become as a much a measure of consumption as production - heck, if we borrow and spend it all then UK GDP temporarily rises and its trebles all round, despite the mounting debt mountain. Shurely shome mishtake.

And so lets take all the "bad" news as a sign that our collective common sense and conscience is finally asserting itself. And the world will genuinely be a better place.

Governments are Scared. Really Scared.

The post below this one gives the background to why Governments are borrowing zillions to spend. They’re trying to stop economies declining too much, or too fast because the assumptions made about default rates on loans now underpin a huge amount what we call capital in banks, and potential liabilities for insurers. Governments are trying to slow down defaults on these shaky loans which, through the mechanism described, have become the capital base (and therefore lending base) of the banks.

In short, the basis of capitalism itself, capital, has been undermined by what has been set up in esoteric financial structures.

If individuals and companies default on paying loans at the rate currently predicted, Governments may not be able to fill the hole of all the AAA rated stuff becoming junk fast enough. Regulators will have to shut the banks down or nationalise them – or restructure the banking system entirely (good/bad bank). But because the banks are now so interconnected (see it like STDs passing around an unprotected sex orgy) this would simply have to be a world wide agreed solution – no country could go it alone.

Thats why govts are panicking and printing money and exchanging liquid government gilts/Treasury Bills for the banks worthless stuff. (As an aside, in the US the Federal reserve is refusing to say even to Congress what they, the Fed, have taken from whom in exchange for how much – what we do know is that operation, unvoted on by lawmakers, and with no public disclosure, has cost $8Trillion, more than four times TARP plus the current Obama stimulus package combined – freedom of information court cases pending (Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan). (If you are not a conspiracy theorist check out the history of the Fed on youtube).

We really do not want RBS nationalised because all these crap loans and synthetic instruments liabilities would then have to be guaranteed by us the taxpayer….the liabilities are potentially astronomical – no-one knows or can know what these liabilities are.

Which is why the banks now wont lend except to sure-fire real world good quality borrowers….they’ll need the money themselves… But if they don’t lend, companies will inevitably default on existing loans. Companies commonly borrow money on a “rolling” basis. Its like having a mortgage which you renew each year – you pay it back and a “new” loan for the same amount is made to you on newly renegotiated terms. You need the mortgage each year to live in your house.

But as these rolling agreements come up for renegotiating the banks are not relending. And there’s nowhere else to borrow. So the company simply can’t pay the loan back, and its bust. Even if they can re-borrow, it’s on high interest rates which makes them less profitable, and more likely to default. And try getting insurance on the loan! More expensive loans, and frightened lenders. There is no stopping this. This is why even the politicians are saying that the govt spending won’t fix the recession, but it will be a lot worse if they don’t. Its true. But the costs of preventing the worst will be paid for decades, and even then , we simply don’t know how bad it will be.

What we do know is that the “money” which was “created” to pay bonuses now isn’t there, that the capital the banks and regulators thought they had to lend on isn’t there, that lending shrinks by a double digit multiple of a banks capital base, and that the rate at which borrowers are likely to default is going through the roof, which further downgrades the “assets” when the credit rating agencies examine the books. Companies are losing a lot of money and are looking likely to default on the loans they have (triggering a synthetic market multiplier), and unemployment is soaring leading to further mortgage defaults.

That’s why with consumers and companies stopping spending, Obama/Brown et al have to focus on Govt spending to keep companies profitable (so they wont default and banks can lend to them), and keep people in jobs (so they wont default on their mortgages).

But Govt is losing the battle.

Its why ON TOP of Obamas stimulus package, he’s going to need even more money to fill the AAA rated holes which are already appearing at a frightening rate in banks as credit downgrades hit their capital base of wobbly loans. Everyones hanging on to their cash, not surprisingly, and Govt is all that’s left to fill the gap of spending, but the consensus is its too late and it just can’t be enough.

How will this end?

Well, this is the dramatic beginning to the end of the Anglo Saxon economic hegemony in the world. Even if the worst of a depression is avoided, the interest on debts the UK/US will be paying to China, other States (oil producers mainly), and a wealthy elite of bondholders, will be with us for a long, long time. We already spend more money paying interest in the UK than we do on Defence spending. This constitutes a massive drag on our capacity to recover from recession (lots of interest to pay every year), like Japan. We are moving closer to a position of third world countries who cannot generate enough revenue to ever pay off their debts and the interest wipes out a good deal of the profits they make from their work. If this seems exaggerated, this is from an LSE professor in the FT last week.

“I have spent a good part of my career as a professional economist working on developing countries and emerging markets - in South America, in Central and Eastern Europe and the former Soviet Union and in Asia…. as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits, [this produces] figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics.”

The UK, of course, is right up there.

That’s where we’re at with borrowing to pay for ameliorating the effects of this banking bonanza hangover.

We’re not going to be third world, but you get the drift.

So a chunk of what we took for granted will go in terms of easy consuming lifestyle of goods, services and energy, as we live under the yoke of either increased taxes (to pay for govt interest payments) or devalued currency (through printing money to pay for govt interest payments). That’s the only way to pay our increased public debt interest (well, we could borrow more….).

It’ll take 2-3 more years to work through, and then there will be no upswing like a V, it’ll be like an L. Once the soufflé is flat it’ll just stay like that because of the amount of interest payments on debt and the strict rules on new lending that will be imposed.

So we’ll just live within our cash means. Less financing deals, less equity release, less credit card ease, less money to borrow to buy houses. So less easy money. Just what you’ve got in cash and savings. You want something, you’ll have to save for it. And it’ll be less easy to create surplus to save.

Not the end of the world. And life will always be fine for those at the Ritz. And not everyones in the same boat.

There’s a book called “The Second Great Depression” which predicted the downfall rather well. The writer was American and was asked what it would be like after it all fell down in the States. After a thought he said it would be like living in England; you mainly work for what you need, not what you want, and have cost free pleasures like walking. Sobering to get a perspective on our country.

Research shows that feelings of wealth are subjective (we compare to others) and as long as we’re fed, sheltered and safe, it ain’t money that makes us happy. Maybe something else can come through when all the clamour dies down.

In the meantime I recommend massaging and being massaged by partners and friends, home baking, making music together, lovely walks, sharing meals with friends and loved ones, a good book, and old fashioned fun and laughter.

Your neurochemistry can’t help but induce happiness if you smile. :-)