Ran Jak Diary

No, the world crisis is not over

A grave warning comes today from the IMF.

Most worrying is the explicit comparison the IMF makes with the Great Depression - something even bearish commentators have skirted around so far for fear of being alarmist. The IMF lays it on the line:

A recession began in the United States in August 1929. A tightening of monetary policy during the previous year, aimed at stemming stock market speculation, is widely seen as the initial cause. The stock market crashed in October 1929, which prompted a sharp decline in consumption, partly because of increased uncertainty about future income.

The recession intensified and turned into a depression over the course of 1931–32. Pernicious feedback loops between the financial sector and the real economy emerged, leading to entrenched debt deflation and four waves of bank runs and failures between 1930 and 1933. Private consumption and investment contracted sharply.

and today:

Despite the differences in mechanics, the effects on the behavior of financial intermediaries are similar. Funding problems have led to balance sheet contraction (deleveraging), fire sales of assets (adding to downward pressure on prices), increased holdings of liquid assets, and decreased lending (or holdings of risky assets) as a share of total assets. Moreover, with today’s highly interconnected financial system, there has been gridlock because of network effects in a world of multiple trading and large gross positions. The ultimate effects of these financial factors on the real economy are similar in the two episodes.

The IMF explicitly warns that it fears debt deflation - the hallmark, according to US economist Irving Fisher of the Great Depression’s economics:

There is continued pressure on asset prices, lending remains constrained by financial sector deleveraging and widespread lack of confidence in financial intermediaries, financial shocks have affected real activity on a global scale , and inflation is decelerating rapidly and is likely to approach values close to zero in a number of countries. Moreover, declining activity is beginning to create feedback effects that affect the solvency of financial intermediaries, which risks of debt deflation have increased.

Seismologist knew

An Italian scientist predicted a major earthquake around L'Aquila weeks before disaster struck the city on Monday, killing dozens of people, but was reported to authorities for spreading panic among the population. The first tremors in the region were felt in mid-January and continued at regular intervals, creating mounting alarm in the medieval city, about 100 km (60 miles) east of Rome.

Vans with loudspeakers had driven around the town a month ago telling locals to evacuate their houses after seismologist Gioacchino Giuliani predicted a large quake was on the way, prompting the mayor's anger. Giuliani, who based his forecast on concentrations of radon gas around seismically active areas, was reported to police for "spreading alarm" and was forced to remove his findings from the Internet.

The problem is now

Watching the 1975 Milos Forman classic One Flew Over the Cuckoo's Nest was unsettling for the wrong reason. The motion picture remains brilliant, Jack Nicholson's acting is phenomenal, Forman's portraits of the inmates is compassionate and Louise Fletcher's is great. Unsettling is an increasing insidious quality to public discourse and the media today. Political correct language tightening is awful enough. Now, however, we are also instructed that we must be loyal to alliances we distrust and support ideas we oppose - as part of some frightening, fictive responsibility as citizens. All this fitting in takes some of the edge off hateful Nurse Ratched, who you see in the photo.

Obama's hypocrisy

The polls state that 80 percent of all Czech citizens oppose America's proposed missile defense systems. Yet Obama told thousands in Prague today that the systems will indeed be installed in the Czech Republic and Poland. He made the announcement in the same speech in which he claimed that Czech citizens' opinions will now be honored in the corridors of power. Obama's hypocrisy will not be well received.

Balance Sheet

After all the hype, the live coverage, more money protecting politicians than is needed to keep a modest country going - plus all the rest - what did G20 and NATO accomplish?

Not much.

Regulating banks and financial institutions. The banks and money houses have every one of the top US government posts under Obama, and they oppose regulation. Germany under Merkel and France under Sarkozy insist - rightfully - that regulation is the only way to avoid further meltdowns in the future. There is to be regulation, but Germany fears the US will seize the process and water down all significant rules.

Afghanistan. NATO members supported it under Bush and are basically continuing unenthusiastic support under Obama.

Dreadfully indecent

Hype about Obama in Europe can be measured somewhere between biggest pop star ever and, uh, Savior of the World. I'll bet there are some devotees praying to him. Not for him; to him. It's all dreadfully indecent. Still, recent words and actions of America's president are even more disturbing. His response to the world economic crisis does not vary from the way Bush-Paulsen mishandled things. There is more than enough evidence out there to believe that Obama is acting only in the interest of banks and the financial industry. It is a sobering, frightening situation.