Michael Lewis On Charlie Rose

This is a fascinating interview (2nd half about Iceland, Ireland, and Greece).
http://www.charlierose.com/

The Burden of The Citizens

The reality that most have not grasped yet is that the consumer and citizens will "bear the brunt" of this crisis. We will absorb the debt through taxation on all fronts. It's still comical to think that Team Red didn't think that their candidate would raise taxes. Whoever is in office on all levels (federal, state, and local), will be increasing taxes for years to come.

I've made several posts regarding the "outer layers of the onion" like Iceland. Recently, a bill was proposed to have each citizen take on the debt of a failed bank. Here's what resulted:

March 7 (Bloomberg) -- "Icelanders rejected by a massive majority a bill that would saddle each citizen with $16,400 of debt in protest at U.K. and Dutch demands that they cover losses triggered by the failure of a private bank. Ninety-three percent voted against the so-called Icesave bill, according to preliminary results on national broadcaster RUV. Final results will be published today. The bill would have obliged the island to take on $5.3 billion, or 45 percent of last year’s economic output, in loans from the U.K. and the Netherlands to compensate the two countries for depositor losses stemming from the collapse of Landsbanki Islands hf more than a year ago. The island’s political leaders say they’ve already moved on to talks over a new accord…"

You have to like the name of the bill, "Icesave". At least at this point, the people still believe that they can reject the payment. It's inevitable that it will come in some shape or form under disguise.

Ice Cold Inflation

I've made many posts in the past regarding the challenges in Iceland. I continue to like the "layering of an onion" as a great metaphor for the economic contraction that continues to unfold. The "outer layer", being the most exposed, gets impacted first. The impact on the "inner layers" depends on the depth of the contraction.

The chart below indicates how quickly inflation can rear it's ugly head.

Paying The Piper

"In 2010-13, they will be getting hit with the bill from the lavish years, through increased taxes and the loss of millions of jobs. Economies which became excessively consumer-oriented are going to be forced to slim down. Meantime, governments have been reluctant to tighten their belts, and are trying to restore "the old normal", by borrowing money aggressively, and spending it recklessly on poorly-designed stimulus programs. The foreign holders of dollar, sterling, and euro debts, will try to get the taxpayers to foot the bills for the excesses of their banks and the governments. But there is an increasing risk that taxpayers will revolt, and refuse to pay the full amount of those debts. We have already seen a rejection like this already in Iceland, and it seems this sort of drama will soon be played out in Greece, and the other PIGS countries in Europe, and also in many American states. Eventually, the larger economies of the UK and the US may also face the same problems, when debtors begin to reject lending fresh money to over-stretched sovereign borrowers."
Michael Hampton, AKA Dr.Bubb - February 10, 2010

The entire article:
http://financialsense.com/fsu/editorials/hampton/2010/0210.html

Zimbabwe Math

It was announced today that Zimbabwe removed "12 zeros" from their currency. Can you imagine 1 trillion U.S. dollars becoming $1?

HARARE, Zimbabwe (CNN) -- Zimbabwe slashed 12 zeros from its currency as hyperinflation continued to erode its value, the country's central bank announced Monday. "Even in the face of current economic and political challenges confronting the economy, the Zimbabwe dollar ought to and must remain the nation's currency, so as to safeguard our national identity and sovereignty. ... Our national currency is a fundamental economic pillar of our sovereignty," said Gideon Gono, governor of the Reserve Bank of Zimbabwe. "Accordingly, therefore, this monetary policy statement unveils yet another necessary program of revaluing our local currency, through the removal of 12 zeros with immediate effect." The move means that 1 trillion in Zimbabwe dollars now will be equivalent to one Zimbabwe dollar.

You ask, "why do you keep telling me about these irrelevant countries halfway across the world?". Yes, there's a reason. It can happen here in the mighty U.S. of A. Zimbabwe appears to be the most recent example of massive hyperinflation. Most of what I read and believe says that we're in for a major deflationary depression or major inflationary depression. Understanding the front runners might provide some clues and assist with preparation. The deflationary depression results in major declines in everything. This one looks like it's in progress, but the missing piece is that credit continues to expand and at record rates. A deflationary depression should be accompanied by credit contraction. The continued credit expansion and money printing should lead to an inflationary depression where costs skyrocket (Zimbabwe). Neither is good, but they present very different outcomes.

Secondly to the question, as I mentioned in a recent post, these events and microcosms by their fractal nature, can provide clues to the future on a range of scales.

Sierpinski's Triangle

If you understand the shape and form of one of the triangles, then you understand the structure on all scales.This historic unfolding event can be examined and observed on many scales: individuals, cities, counties, states, regions, countries, and continents. The weakest stumble first. Some examples:
-Individual: do you know anyone that just lost their job? I know of two friends in the past 3 weeks.
-City: New York - It was announced that NYC faces a $4 billion deficit with 23,000 jobs to be cut. Four cities in CA and six others are expected to declare bankruptcy this year.
-County: Jefferson County, AL continues to teeter on the verge of bankruptcy.

-State: California - The deficit is heading towards $40 billion. Moody's has warned of a possible downgrade....the kiss of death in the credit world.
-Region: The "auto belt" in the U.S. will be one to watch.
-Country: See my prior post on Iceland. Keep your eye on Mexico. The drug lords appear to be winning.
-Continent: Africa's struggles will rise to a new level in the coming years. S. America might be the 2nd weakest.

Keep your eyes and ears open. What might appear irrelevant could be very educational.

Cold and Hot

I often find microcosms great places to learn and to understand the larger picture. A microcosm, like a fractal, provides a smaller scale of the larger structure. Fractals, being self affine, provide the opportunity to observe and understand a structure on any scale.

Recent developments in Iceland and Zimbabwe provide "microcosm opportunities" that could guide us for the future. Iceland, a country of 300,000, appears to be suffering the financial crisis on an extreme level. The Prime Minister just terminated his entire cabinet. The commerce minister also resigned. Our country appears to believe that the politicians can save us while history will prove that Iceland is leading the "politician exodus". A mob of 7000 people protested in front of the parliament building calling for the government to step down.

Zimbabwe is experiencing 11,200,000% inflation, the highest in the world. No, I didn't accidentally type too many zeros. Can you imagine what a meal costs there now? Basic necessities to live? A loaf of bread costs 1.6 trillion Zimbabwe dollars up from 200,000. Political chaos continues to reign.


Iceland

http://www.cnn.com/2009/WORLD/europe/01/26/iceland.government/



Zimbabwe

http://edition.cnn.com/2008/BUSINESS/08/19/zimbabwe.inflation/index.html

http://www.reuters.com/article/latestCrisis/idUSLQ010015