Crisis Porn: SocGen Says ‘prepare for ‘global collapse’
As long as I am here in Europe, I might as well give you some flavor of what has become known as Recession Porn: The most dire forecasts expecting the most egregious outcomes.
Today’s “Crisis Porn” comes to us via Société Générale by way of the UK’s Telegraph, and its Pretty grim:
“In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
Note that the report is a “worst case scenario.” That’s your recession porn for the day . . .
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Source:
Société Générale tells clients how to prepare for ‘global collapse’
Ambrose Evans-Pritchard
Telegraph, 6:12PM GMT 18 Nov 2009
http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html
November 19th, 2009 at 9:23 am
If there world financial bodies have any “end game” in mind, it’s that — after enormous amounts of debt-spending around the globe — they centralize the debts into the CB’s and then write off each other’s debts, CB-to-CB.
If they’re smart enough to plan that far ahead, then they must also contemplate how revealing this plan “too soon” would make everyone jump too strongly into every other asset class other than fiat currency. The fear of a reversal in the carry trades IS the faith in the fiat.
(Note to self: if that’s what you’re thinking, why do you still hold a bunch of puts?)
November 19th, 2009 at 9:24 am
>> other than fiat currency
and low-interest debt.
November 19th, 2009 at 9:40 am
Total debt of 350% of total income for a family with 50K household income would be the equvalent of 175K of debt for house,cars, student loans etc. Not a crisis or certain default as long as the 50K keeps coming.
So the US needs to ensure that its GDP does not dive off a clif (good job Obama), and then get going on taxing the rich and start paying some of all that public debt (you know the 40K on the car loans) (now get your a$$ in gear Obama). The majority of the debt is corporate and private so the consumers need the old bancrupcy laws back so they get equivalent use of bancrupcy to what corporations have (now get you’re a$$ in gear Obama). Then we can start deleveraging by letting consumers and cooporations with “killer” debt get rid of it via bancrupcy (and teach creditors the lesson of not borrowing to anything with a pulse or a PO Box).
November 19th, 2009 at 9:46 am
@DeDude:
Yikes. $50K household income for a family (i.e., at least 3 persons) is below median income in all but 3 states. Draw up a monthly budget for that family and see if you don’t change your position. (BTW, make sure to deduct taxes from the $50k to get to actual take-home.)
November 19th, 2009 at 9:53 am
Ambrose Evans-Pritchard is the Shyla Stylez of recession porn.
November 19th, 2009 at 10:05 am
There is an interesting question raised by that excerpt. The assumption of the US policy makers in this crisis has been that moving private debt to the government (ie, to taxpayers) stabilizes it or makes it more secure.
Has any economist ever done any study about whether this is generally true?
The assumption is that private parties are more likely to default than the government, which has the coercive power to enforce taxation… but that power, of course, depends on political will and that political will comes, ultimately, from the same private parties who were thought to be willing to default.And governments do default in some circumstances. Is that really a lesser risk than private default?
Of course, the other possibility is that this was done will full knowledge and intent and the unsaid purpose was to inflate the debt away.
November 19th, 2009 at 10:22 am
Crisis Porn has reached epidemic proportions. However, the enterprise’s need- that’s The Planet’s need - to survive makes a cataclysmic event unlikely. Here’s what The Bottom’s headlines will look like:
Dow drops 1015 points- most ever-as global contraction begins.
You don’t need no money, no ticket, no luggage. Just get on board!
Bulls thrive under those conditions.
(wink)
November 19th, 2009 at 10:28 am
Is it even reasonable to think that this debt, or a reasonable percentage of it, can in fact be inflated away?
November 19th, 2009 at 10:30 am
@DeDude:
Assuming 50 k$ income and 175 k$ debt. Further assuming 4% interest rate on this debt, which is an optimistic assumption, interest payments of 7 k$ a year are required, i.e., 14% of the income for interest payments alone. With an interest rate of 8%, interest payment alone amounts to 28% of the household income, w/o having payed of any of the debt itself. Since a certain amount of debt usually has to be paid of as well, I doubt this is a sustainable amount of debt.
rc
November 19th, 2009 at 10:37 am
Call it recession porn or whatever, but nothing has really changed in the past couple of years. The biggest banks are still hiding the true value of crap on their books, the Fed and Treasury are still treating the symptoms instead of the disease, the banks are still running Congress, the Administration is still clueless, and nobody that counts is listening to Volcker.
So, where exactly does this recession porn go wrong?
November 19th, 2009 at 10:42 am
Mmmmm. Recession porn.. Tastes like chicken.
Remember kids, just cause its a worst case scenero doesn’t necesarily mean that it’s the most statiscally improbable outcome.
November 19th, 2009 at 10:44 am
“Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.”
assuming this is a deflationary spiral we are talking about- i would think the USD would strengthen in such a scenario
November 19th, 2009 at 10:44 am
“Farm commodities would hold up well, led by sugar.”
Man I hope so, anything else would get nasty.
Well there are only two ways out of an excessive debt situation (my definition is debt in amounts that can never be paid off), which is where we have been for a while:
DEPRESSION (deleveraging as in 1929): Tough choice after all Bernanke said he could prevent such a thing just give him enough helicopters.
INFLATION: Several countries have gone this route, and generally the governments don’t survive, especially as a democracy. This preps the country for a rough leader, much like Hitler.
But didn’t Cheney say that Reagan had proved debts don’t matter. And Greenspan clearly said in his book (AGE OF TURBULENCE) that debts don’t matter. Since these guys said this then clearly it must be true. I’m not worried. The people that made this pile of crap/debt are very smart and they live well. Must be they are blessed, so how can they fail. Impossible.
November 19th, 2009 at 10:44 am
Overall debt is still far too high in almost all rich economies
Doesn’t this beg for a new definition of “rich economy”? Something like, “Better Credit with Asia economy.”
Looking over the economic charts of the last 40 years… those who deride Carter, better get damn well used to him. Carter was doing exactly this necessary deleveraging and actually facing up to the pain involved. Only this time it will take decades, not years, to rectify. Reagan behaved like Richie Rich shopping in a candy store while high on crack in comparison to Carter.
November 19th, 2009 at 10:48 am
@rc:
I’m gonna go with the 8%, given that this family has probably been sold an interest-only mortgage so that they can enjoy a middle-class life. For a while.
November 19th, 2009 at 10:49 am
Another calculation: Total debt of the US (i.e., private + government) is about 50 T$. Let’s assume 75% is owed by net debtors, so 37.5 T$ is owed by net debtors to creditors. Assuming an optimistic interest rate of 4% on this debt, required total interest payment amounts to 1.5 T$ a year. Assuming that all the additionally generated income from GDP growth goes to the net debtors, an US GDP of about 14 T$ would have to grow about 10% a year, nominally, to pay off only the interest using this income. If only half of the additionally generated income goes to net debtors, nominal GDP would have to grow about 20% a year, or this and an interest rate of 8%, nominal GDP would have to grow 40% a year so that the net debtors can pay the interest on their debt from income growth.
rc
November 19th, 2009 at 10:55 am
rootless, so far we have had no income growth. the current average is less than it was a decade ago. and it has been falling all of this decade.
November 19th, 2009 at 10:57 am
These guys don’t understand accounting at all.
What is the asset base that supports this debt load?
National Income account states that Private Savings = Government spending
We easily survived much higher levels of government debt in the 50s – hugely higher levels. Levels so much higher than these levels that I have no idea what Soc Gen is talking about.
And the 50’s were pretty damn good. My mom said that they used to hire teenage kids to show up in the park across her street and they would have games for them to play a few times a week.
We have bankers telling the government what to do with money.
Thomas Jefferson a few hundred years ago:
“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless.”
Government spending = currency issuance in a fiat currency environment. And we have bankers telling us we cannot issue more currency to fight the worst economic crisis in our lifetime.
November 19th, 2009 at 11:17 am
I am living in the real life example of what deDude laid out. We in now way have enough income to pay everything, but we can service all of our debt pretty easily. I put down less than 20% on my home 7 years ago, but I was promised when my equity reached that point, I would no longer pay PMI. That is our real killer. over $100 per month. So, does that point come after my home appreciates some, and I pay down some?
BTW, all our debt is being serviced at interest rate levels less than 8%, and the mortgage at right around 6%. My wife joined the ranks of the unemployed 2 weeks after I joined the workforce again.
It’s a difficult time, but we have money, cash that is. Not credit. Green money.
November 19th, 2009 at 12:18 pm
@ash: Thank you for sharing that. There are A LOT of people in similar positions right now.
Are you getting ahead or just able to tread water right now?
November 19th, 2009 at 1:09 pm
Mike S,
Following WWII much of the rest of the world’s productive capacity had been destroyed.
The US economy was able to grow dramatically (allowing us to service our debt) because we effectively rebuilt the rest of the world’s infrastructure.
What are we going to build/sell now, and who are we going to sell it to?
November 19th, 2009 at 1:12 pm
The question is not so much if 50K is the actual median. You can do the same with a houshold income of 100K and total debt of 350K. Yes the more you make the easier it is to carry 350% debt (and that’s one reason why we should pay back the national debt with progressive income taxes). You will easily find both scenarios in any community you look around, and people are pressed, but far from doomed with a 350% debt ratio. Uncomfortable, yes – unsustainable, no.
I am not advocating that all this debt should be repayed. Only 80% is public debt, 270% is corporate and private debt, and a good chunk of that should be solved in bancrupcy. That will reduce the total debt and teach creditors to do a better job of due diligence before giving out a loan.
The part of total debt that is public debt is still small, but raising. However, that does not change the overall picture with regards to ability to pay, it just means that we eventually have to let the undertaxed rich of this country get back to the good old days of the 50’ies and 60’ies where they payed 90% or at least 70% of the last earned dollar in taxes. Responsibility is a bitty, but they will have to learn it.
November 19th, 2009 at 1:52 pm
@DeDude:
What’s your fetish with taxing the rich? Do you realize that close to 50% of the population pays ZERO Federal income tax. It’s very easy for half the population demand that the other half pay for everything…
I do agree that taxes need to be reformed greatly… I would say to eliminate income taxes and long-term capital gains taxes. To balance this, higher taxes should be levied on real estate and on land ownership. Interest rate deductions for corporations and for mortgages should be phased out and then eliminated. These would have several effects:
1) No income tax would mean everyone can keep what they earn
2) No capital gains tax means savings that is invested would not be penalized
3) Higher taxers on real estate and land would be VERY progressive… The rich own A LOT more than the middle class or poor, so they would be dinged there. Also, it’s easy to escape income tax by living outside the country or a high tax state or city (NYC, as en example), but it’s hard to escape a tax on the penthouse in Midtown.
4) Eliminating tax deductibility of interest would balance out the bias of raising debt vs. equity in the corporate world and the bias of home ownership vs. renting.
In general, I would like to minimize taxation on investment and productive capital, tax the unproductive shit (like real estate), and minimize penalizing the hard work done by the working poor and middle class. Of course, since the rich love their giant houses, this plan, alas, will never happen…
HCF
November 19th, 2009 at 1:53 pm
@DeDude:
Well, I suppose it depends on what the actual interest rate is one has to pay on one’s debt, and how much of one’s income can be diverted for interest+repayment. 6% or 8% interest rate could make the difference whether the debt level was sustainable or not.
But this whole argument that the total debt of 350% of GDP (or private debt of 300% of GDP) was sustainable is based on the assumption the debt was equally distributed. To evaluate to what degree this mountain of debt was sustainable one would actually take into consideration that there are net debtors and net creditors, and that only a fraction of society owes the largest fraction of this debt to the other fraction of society. One would have to compare the debt distribution and required payments on this debt among the net debtors with the income distribution among the net debtors.
rc
November 19th, 2009 at 1:54 pm
> Interest rate deductions for corporations and for mortgages…
I meant to say “interest deductions” and not “interest rate deductions”…
Also “higher taxes,” not “higher taxers” under 3)
It’s too bad you can’t get a preview before posting!
HCF
November 19th, 2009 at 2:16 pm
I meant to raise this point on another thread the other day.
The ball that’s hidden and overlooked in many of these discussions about taxation is the treatment of “closely held wealth.”
Here’s some light reading from the 2009 Scandinavian Journal of Economics re: our friends the Swedes, who are also reporting a 30-year trend toward wealth accretion at the top:
http://www2.hhs.se/site/homepages/JespersPDFs/PUBLISHEDsjoe_1558.pdf
And we all know the Swedes are homogeneous commie pinkos, so just think how things are developing here in the U.S.
We’re talking the tax treatment of trusts and inter-generational transfers of wealth within families. People who don’t file the EZ form on April 15.
November 19th, 2009 at 3:16 pm
The most fun part was having all of this job turbulance, as I call it, happen 45 days after having our second child.
Man, there is no end to the bitterness I have, but I keep chugging away at the new job, and I keep riding my bike, and Bama keeps winning. I feel pretty good overall, but I know that when her unemployment ends (whenever that is), she better have some good gainful way of being employed over and above the cost of childcare (talk about inflation!?!?!)
November 19th, 2009 at 3:27 pm
Gotta love the guys… Debt is good when it bails their _____ out and debt is very good when it is the taxpayer doing the backing the bailouts. Now that SocGen has been bailed out by the us now they complain that the debt is to high.
What was their opinion of this debt when they had their grubby hands in my pocket? Maybe they should give all of the TARP and AIG money back. NOW WITH INTEREST.
November 19th, 2009 at 6:28 pm
HCF; all that BS about 50% paying zero of the federal income tax has been called out here numerous times including just a few days ago when someone pointed out that the relevant issue is the totality of taxes (federal, state, payrole, sales, real estate, registration, etc, etc,). So lets lift this above Rush and Fox level and cut out the stupid arguments. Sufficient to say that you cant collect a lot of hair cutting it from the head of a bald guy, so yes the rich are the ones to tax. We need to tax high incomes whether from capital gains or real work with at least 70% on income above 200K. I am sure that ashpelham2 will give the poor folks who whine that they “cannot live on that”, some good advice.
I have no problem with taxing specific assets such as real estate and land, but leave that to local government. The problem with to high tax on agricultural and forest land is that it basically ends up increasing the price of agricultural products and wood. Those businesses already have a hard time competing with imports from other countries so you would either kill them or be forced to erect huge trade barriers. If the rich are willing to move out of the country to escape taxes, I am sure they would be willing to move from their Manhattan penthouses. And it is a lot easier to block tax escapees who try to take income earned here around the tax system than those who move away from high real estate taxes.
November 19th, 2009 at 6:43 pm
Rootless;
I agree, there are certain individuals and businesses that are in serious trouble and others that are just fine. I am just saying that from an overall perspective the amount of debt is not alarming. However, if I were holding any Citi debt I would be alarmed. The problem is that when the deleveraging is all done a lot of regular hard-working people who had saved for their retirement will find themselves with a lot smaller nestegg than what the experts had promised them. The outrageous part is that if those folks want to get rid of their own personal debt the way the companies use to get rid corporate debt (and destroy regular peoples savings), then they will discover that the GOP (Great cOrporate Protector) has made sure that only corporations can do that little trick. So as usual peple like ashpelham2 get screwed two ways and the rich get away with it.
November 19th, 2009 at 11:04 pm
Happy to say the wife is starting a new job tomorrow after being laid off months back (lets say there was snow on the ground), and my tiny 1 man business did better than last year, so managing to pop back into shape after all. Keep your head up ashpelham2 – can turn around as quickly as it turned on you, always.
November 19th, 2009 at 11:22 pm
Great news, lalaland.
November 20th, 2009 at 8:47 pm
hey din’t you post htis Fermon guy’s notes earlier on Oct 18th?
under “worst case debt scenario”?
http://www.ritholtz.com/blog/2009/10/sg-worst-case-debt-scenario/comment-page-1/#comment-236138
November 21st, 2009 at 2:35 am
At least some banks are forecasting the future and are acting accordingly. It is certainly possible. One area that has been significantly overlooked are the collateralized loans for LBO deals. Josh Kosman just wrote a great book called “The Buyout of America,” that documents the threat of LBO loans coming due and if there is anything that truly sink the banks again in a fatal way, that is it. But maybe the government will bail them out again. oh well.
November 22nd, 2009 at 7:51 pm
BTW. Barry, where did you get 350% of GDP??????????? I am sure it is W R O N G. it is more like 60-65%. hardly un manageable. on the other hand we should all be watching JAPAN to learn.