Sunday, December 21, 2008

Weekend at Bernie's

If 2007 was when the sub-prime meltdown caused the US economy to crap its pants, and 2008 was when it turned into explosive diarrhoea, 2009 could be the year the US shits out its intestines. The fuck-ups are snowballing and there's a long way to go yet before it hits bottom.

It was years between the dot com bubble popping and Enron pustule bursting. These days, it's difficult to walk down Wall Street without seeing the latest pin-striped giant dominoes falling. Bear Sterns, Lehmans, AIG, Fannie, Freddie, Citigroup, Chrysler, General Motors. It's keeping graphic artists busy coming up ways to get one's head around these ginormous numbers flying about. Slate has a nice onion of debt.

And that's just the federal bailout costs so far. There's the Fonzie of Ponzi Bernie Madoff, the man who jumped the $50 billion dollar shark. The story makes engrossing reading. Here's the latest in the NYT, the Financial Times has in-depth coverage, or you could try any of the 56,364 stories (and counting) on Google News. That's roughly $1 million of disappeared money per story. Madoff is now in danger of getting killed by Yiddish ninjas, as there's so many people who want to throw Star of Davids at him. I'd hate to be his food taster.

The institutional and personal losses from all this have spread well beyond US borders. While Iceland went under the waves months ago, Britain and the EU are sloping down into recessions. Russia's currency reserves are taking a hammering and is sickening quickly as the price of oil stays resolutely below what was budgeted for.

While China's growth is slowing and its manufacturing sector is facing less overseas demand, its massive foreign currency reserves leave it healthier than most. If you haven't already read it, I highly recommend this Q&A in the Atlantic with Gao Xiqing, who is responsible for managing one tenth of China's dollar holdings, some $200 billion (Hat Tip TVHE):
The simple truth today is that your economy is built on the global economy. And it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money.

Talk to the Chinese! Talk to the Middle Easterners! And pull your troops back! Take the troops back, demobilize many of the troops, so that you can save some money rather than spending $2 billion every day on them. And then tell your people that you need to save, and come out with a long-term, sustainable financial policy.

It is a sign of the strange times that we live in that this IMF-like advice is being given to the US by a Chinese representative. But he's spot on. The "balance of financial terror," a variation on Mutually Assured Destruction but using financial instead of nuclear instruments, will only handle so much strain. And there will be more strain. The dramatic! sensational! new policy of Quantitative Easing, otherwise known as printing money, runs the very real risk of causing a run on the dollar. And if that happens, well, that's the intestinal enema we should all be worried about.