Here's something I meant to post more about but forgot to. There's something funny about Helicopter's latest forex swap announcement, and many are scratching their heads over it. Here's one example:

http://blogs.ft.com/maverecon/2009/0...e-brisee-deur/

The FOMC statement was worded strangely -- even more so than their typical obfuscatory wont. The original swap lines were set up to provide dollar liquidity to foreign markets. There was a mad scramble for dollars with the deleveraging and the Fed printed up a few hundred billion (electronically) for that purpose.

However, they worded the latest statement in terms of provided foreign currency liquidity to US banks. And nobody much sees any evidence of a squeeze in euros, pounds, yen, or Swiss francs here. Originally, I read it as just an increase in the existing swap lines myself, but now I don't know.

Yeppers, the more and more I'm getting on ol' Ron Paul's bandwagon to do one heck of an audit of the Fed. I mean going up their colon with a scope type of thing.

It's possible this is some sort of backdoor bailout of somebody who made some very bad bets in foreign currencies, but who knows.

-Richard

That is one of many things that do not change under this scenario.

Is there some reason to think the banks won't simply raise their interest rates to compensate exactly for the amount that eventually must be returned?

Scenario A: You wish to borrow $50,000 for 10 years. The market rate of interest for someone with your your credit quality is 10%. The bank will require you to make monthly payments of $660.75. At this rate of payment, the loan is paid in full after 10 years. (There will be an outstanding balance of $0.79 due to rounding error; the correct payment should be a fraction of a penny higher than $660.75.)

Scenario B: The bank is now required to put a fraction of your payment into escrow, to be returned to you later. We could consider a payment equal to the previous one, or a higher payment. Let's think about an equal payment. So you make payments of $660.75, but 20% of this payment is placed into escrow. The bank continues to charge 10% interest, but also pays you 10% interest on the escrow. So now, payments of $528.60 are credited each month, and after 10 years, the loan still has an outstanding balance of $27,071.01. However, $132.15 is placed into escrow each month, and with interest, the escrow has grown to $27,070.31. At this point (unless there is some rule against it), the bank can send you a nice letter stating, "Congratulations! The balance in your escrow account is now sufficient to pay off the remaining balance on your loan. No further payments from you are required."

Then, we have replaced a $50,000 loan with 120 monthly payments of $660.75 with, well, a $50,000 loan with 120 monthly payments of $660.75. I suppose you could also outlaw the netting out I described in my Scenario B, which would in effect require the former borrow, once the loan is paid off, to lend money to the former lender for a while. I'm not sure what that does.

If you don't do anything to change the basic economics of the transaction, about all you're going to accomplish is increase the number of pages in the loan contract.

I wouldn't. But, why do you want to do this? If you want the people who are borrowing money at high interest rates to stop borrowing, it will accomplish that. If you want to allow them to borrow money at lower cost, it won't accomplish that.

Publius' audit idea reminded me of something I ran into early in my career. I worked for...well, let's just say it was a *very* big company. Apparently, each department manager was responsible for all of the engineering equipment ever purchased for use in his department, and had to sign a document accepting the responsibility. We apparently had lots of equipment on the books. I remember seeing lists printed on big stacks of that extra-wide fanfold computer paper they used to use back in the stone age.

Of course, nobody knew where lots of that stuff was, but when a manager retired, or was promoted, his replacement was given the big list and told he had to accept responsibility for the items. Every time there was a management change, the new manager simply signed the list, even though nobody knew where piles of stuff had disappeared to.

Then, one day a guy got promoted and insisted on an inventory before he accepted responsibility for the equipment.

Hilarity ensued.

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I may have many faults, but being wrong ain't one of them. -- Jimmy Hoffa

Sunspots!

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I know. But recall, there is more to the rebate idea than numbers. there is also psychology. If the borrower knows that they are going to receive a substantial rebate then they may be less inclined to default. This would, in theory, act to reduce defaults and thus reduce the rate necessary to cover those defaults. Thus, the over-all interest rate, with profit and rebate built in, could be lower and more accessible to less wealthy borrowers. I'm not saying it's a good idea... I was just fleshing out a possible structure for a vehicle based on peteshimmon's idea. Some credit card companies already have cash-back schemes.

Regulation.

I know. That's why you would want to change the basic economics of the transaction. I see no reason why you chose the numbers for your example except to show how it's possible to have a break-even scenario. I expect there are formulae available where the bank makes a profit by either having a larger share of the profit, by not paying interest on the funds held in escrow, by confiscating the funds held in escrow in the case of default, and by having a variation of the vehicle where the bank invests the money that would be held in escrow and keeping some or all of the profit made on the amount, not to mention money made on various fees.

Yes.

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"What you think you thought you saw you did not see." Agent J, MiB - Manhatten Bureau

Here's a couple of blogs on Uncle's mess. The numbers are just astounding. This goes beyond "unsustainable". What we've been doing is unsustainable. What we're doing now is "ruinous" or whatever you can come up with stronger than that.

http://economicedge.blogspot.com/200...kes-march.html

He's discussing the numbers in the last monthly Treasury statement which I linked to above somewhere. Outlays were 2.5 times receipts in March. Year on year, tax receipts are down 28% in March. However, corporate taxes are down an amazing 90% (individual income tax is down 27% -- that shows you the relative weight of corporate vs. individual taxes. The 90% drop in corp. amounted to only 1% less of the total). That shows you how fast business is falling off the cliff.

We are watching the fiscal destruction of the United States. I am not exaggerating.

Here's another one making the case the Fed is already having to print to float Uncle debt:

http://www.financialsense.com/Market/wrapup.htm

The new supply is simply too great for the market to bear.

-Richard

What he was doing there is just using the standard amortization relations. No matter how you slice things, it boils down to some simple relations. Just for fun, I'll show you how this works. We borrow a sum A at some interest rate 'r' per compounding/payment period. We will make a payment 'p' at the end of each period.

At the end of period 1, our balance is:

A*(1 + r) - p. That is, they charged us r*A interest, and we paid them p. Obviously, p must be > rA or the balance increases (this is "negative amortization" and some of those ridiculous mortages did allow this...for a while, after which the payment was jacked up to get back on schedule).

At the end of period two, we have:

A*(1 + r)^2 - [p(1+r) + p]

At the end of period 3, we have:

A*(1 + r)^3 - p[ (1+r)^2 + (1 + r) + 1]

At the end of the Nth period we have:

A*(1 + r)^N - p[ Sum (1 + r)^i ], i = 0, N - 1.

The term on the right is a simple geometric series with ratio a = (1 + r).
The sum of a series of ratio a, from i = 0 to N - 1 is (1 - a^N)/(1 - a).
[If a < 1, the limit as N goes to infinity is simply 1/(1-a), the infinite series converges -- if a > 1, the series diverges ]. Plugging that in, we have:

A*(1 + r)^N - p/r * [(1 + r)^N - 1]

And that is your basic loan formula. Solve the above for 'p' and you have the periodic payment required to pay off the loan in N payments.

Now, note the two terms. We can think of it as one balance that diminished with time, or we can think of it as two balances. The term on the left represents the original amount 'A' steadily accruing interest, while the term on the right represents a series of periodic payments accruing interest at the same rate.

So, you can think of loan payments as a seperate account that accrues interest interest. We those two are equal, the loan is paid off. And, if you like, you can split that payment p into two chunks, one going with the account and the other accruing seperately (p = p1 + p2). No matter how you think of it, after N payments, those terms are equal and the loan is paid off (amortized).

That's what Lechery did in his example. He just split off a portion of the payment.

And, any payment greater than p will simply pay the loan off sooner. Anything less than that but greater than rA will pay it off after a longer time.

That's the basic relation. Any schemes you come up are just playing around with that, either varying the effective 'r' or 'N'.

-Richard

We derived the above in terms of a loan. That is a *liability* that was accruing interest against a period payment. The same formula would apply to an asset accruing interest against which we withdrew a periodic payment. And that is known as an annuity. The 'p' calculation is how much money you can withdraw from an account over N periods. 'A' is the thus the *present value* of a time series of payments at interest rate 'r'.

Let's solve that for A:

A = p/r *[(1 + r)^N - 1]/(1 + r)^N

= p/r * [1 - 1/(1 + r)^N]

The limit as N --> infinity is *finite*. An infinite series of future payments has a finite present value, equal to simply:

A = p/r --> p = rA. That is equivalent to a loan where the payment is just equal to the interest and the loan never amortizes.

-Richard

Since I got started with that, I'll wrap it up for those who are interested. The above simple formulae are about all you need to know about finance. You can figure out just about anything by applying those. And they are.

Straight interest accrual:

A(N) = (1 + r)^N

Periodic payment accrual:

A(N) = p/r * [(1 + r)^N - 1]

(this is where interest accrues before you make the payment for a period -- you can solve for the version where interest accrues after the payment; there's a name for that which escapes me)

Now, we make the substition r --> r/n, and N = nt. That is, we convert r to an interest rate per time, with n the number of compounding periods per time. For example, we might express r in percent per year, and then n would be the number of compounding periods per year. Doing that, we have:

A(t) = (1 + r/n)^(nt)

A(t) = np/r *[( 1 + r/n)^(nt) - 1 ]

Now, let's go to continuous compounding, which means n --> infinity. The limit of (1 + r/n)^n, as n -- > infinity is simply e^r, which can verified by applying L'Hospital's Rule. That always struck me as cute.

So, we have this for the continuous version:

A(t) = e^rt

A(t) = p/r*(e^rt - 1)

You may wonder what happened to the n in front on the second one. It drops out nicely, and you can see that as the solution to the simple differential equation dA/dt = rA + p, where p is a continous flow of money, not chunks of discrete payments.

Also, there really is no difference, actually. We can fit either curves, the continous or the discrete, to any series of data points. The only difference will be 'r'. It will be the lowest for the exponentials. Whether you're saying you're charging 10% interest per year compounded monthly, or slightly more than that compounded annually, or slightly less componded continuously, you have the same thing. And the same thing with a loan.

And that was a point I made somewhere above about little 'r' vs big 'R'. All that matters is how much have at the end vs the start. You can fit whatever curve you like to it in between those "measurement points".

For example, suppose we double our money in 10 years. We have A(0) = 1, and A(10) = 2. 1 + R = 2, which means R = 1. We've made a 100% return over 10 years. In terms of simple interest that's just 10% per year.

However, compounded annually (n = 1), that's

(1 + r)^10 = 2 , r = 2^(1/10) - 1 ~ 7.2%

Continuously compounded, we have:

e^10r = 2, r = ln2/10 ~ 6.9%

So which is it? It's whatever we want it to be. Me, I prefer the exponentials (although that does make your 'p' handling a bit tricky -- it's no problem but you've got be careful)

-Richard

-Richard

Can't seem to get past this one:Are other countries with negative economies simply collateral damage of the U.S. meltdown, and are they hemorrhaging as badly?
I have heard that Spain is faring well because of their banking system/laws.

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From what I can understand overall, Canada seems to be doing fairly well as well, partly due to the banking laws and such. But the US is our biggest trading partner, so when it hiccups, we shudder.

Still, overall, a lot of places out here in the East seem to be saying "Things are bad, but not as bad as it could be" and "We're still doing fairly well" (including the car dealerships).

Oh and thanks for the answer to my earlier question about cancelling. Things are still a bit fuzzy to me, but I think I have a better understanding now of what's going on.

Maybe the fiscal system needs to be destroyed. But everything else, hard assets and such, should survive. Well, unless farmers can't get what they need to grow food so they don't and we all starve.

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"What you think you thought you saw you did not see." Agent J, MiB - Manhatten Bureau

Spain had a big real estate bubble itself, IIRC. From what I've read, I would say they're hurting pretty bad too.

The whole world just went debt crazy is about what it boils down to. Everybody was engaged in the stupidity, and buying the stupidity of everyone else.

-Richard

And I'm going to puke about this "banks making a profit" crap. Goldman Sachs reported a profit of $1.8B this quarter. Whoo hoo. They got over
$10B "back door bailout" from the Fed/taxpayers through AIG, plus their front door bailouts through the TARP. Their profit is entirely due to the bailouts.

That is to say, that profit is either 1) additional debt incurred by Uncle/taxpayers, or 2) printed out of thin air by Helicopter.

And there was some article a couple days ago in the NY Times that China was slowing down its purchases of new US debt. That's exactly what the smart thing to do would be, actually. Say you're going to continue to buy, while figuring out how to get rid of it on the sly.


-Richard

And here's one I was expecting:

http://www.reuters.com/article/marke...090414?sp=true

The number of people who can't pay their taxes is rising rapidly (this includes estimated taxes every quarter by the self-employed and business owners and others who aren't under withholding -- I know all about that. ). Tax receipts to Uncle are down about 28% overall, and it's only going to get worse.


-Richard

And here's another good one about some crooked shenanigans going on with state pension funds:

http://www.nytimes.com/2009/04/14/ny...e.html?_r=2&hp''

Private equity and hedge funds have been making "improper payments" (bribes) to get their paws into state pension funds.


-Richard

Here's a short paper showing this downturn is at least as bad as the Great Depression, if not worse. This looks at the world economy, not just the US. They've got several graphs there comparing this one to c. 1929, and you can see.

http://www.voxeu.org/index.php?q=node/3421

World industrial production, world stocks, and trade volume are all falling faster than during GD I. US figures are not as bad as GD I, but the world aggregates are worse.

-Richard

Deflation continues in the PPI after two months of slight upturn. The BLS released the March numbers this morning:

http://www.bls.gov/news.release/ppi.toc.htm

Click on the links to get to the text and tables.

The CPI will be out tomorrow, and we'll see if that is still deflating as well.

This all part of the argument. The deflationists argue that deflation will continue, all the monetary explosion notwithstanding, as demand destruction thanks to the debt collapse is just too strong.

-Richard

Here's an interesting one:

http://online.wsj.com/article/SB1239...ml#mod=testMod

Helicopter is thinking about holding regular *press conferences*, taking questions from reporters. Apparently, his 60 minutes interview and other public speeches where he took questions were dry runs to see how things played out.

Something that also caught my eye is the Fed is conducting "remedial" sessions for Congress on how the Fed works. Well, for their *staff*, not the critters themselves. They're probably too stu---uh, busy. It's just like I said ages ago here, most of Congress doesn't have a clue what the Fed is and how it executes monetary policy. They don't even know what "monetary theory/policy" is, really.

-Richard

Deja vu:

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Scuttlebutt is that the advance figures for GDP for Q1 '09 will be -5% annualized.

If you recall, the BEA's advance report for Q4 '08 was -3.8%, which was later revised downward to -6.2%, and then further to -6.3% in the final numbers.

Final numbers don't come out until nearly the end of the next quarter, which will be June for the Q1 '09 data.

And recall there is no official definition of "depression", but a common metric is -10% GDP ("great" depression would be -20%, I think). Again, I'm predicting they'll soon be calling this a "mild depression".

-Richard

And the CPI turned negative again for March, dropping 0.1%:

http://www.bls.gov/news.release/cpi.nr0.htm

Unadjusted year-on-year change in March was -0.4%. That's the first year on year decline since 1955, IIRC.

Look at the breakdown of the subcategories. You'll see energy and transportation were the ones with huge decreases while everything else increased. Interestingly, the hike in tobacco taxes accounted for 60% of the increase in the all items less food and energy subcategory, which inreased 0.2% in March.

And keep in mind they call the BLS the Bureau of Lies and Statistics.

-Richard

Brutal!---my favorite tobacco product jumped from $4.59 to $9.70

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My brand of ciggies went from $33.00 to $41.00 a carton. Just an minor increase.

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"The universe is driven by the complex interaction between three ingredients: matter, energy, and enlightened self-interest." - G'Kar

First, the private real estate market collapsed and now the commercial market seems to be following?

From here:

General Growth Properties Inc., the nation's second-largest mall operator, filed for Chapter 11 bankruptcy protection early today after it failed to persuade a majority of its debt holders to give it more time to refinance billions of dollars in debt racked up during the housing boom.

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I may have many faults, but being wrong ain't one of them. -- Jimmy Hoffa

You know, I'm wondering when the price of tobacco products will get so high that a black market/criminality develops, just as with drugs now. Actually, there are significant thefts of cigarettes now. Several years ago they passed an increase in federal taxes that caused one of the first significant increases in prices. A buddy of mine runs a local store, and after that, somebody broke in one night and stole all the cigarettes. They cleaned him out, cartons as well as the individual packs for sale behind the counter.

There was a rash of such robberies that made the local news, and after that, the major stores started putting the cigarettes in locked cages.

Anyway, my buddy fears this latest large price increase will cause another spike. Same thing happened with the spike in gas prices. There was a rash of "drive aways".

At some point, they're going to make the price so high that it will profitable for the criminal element to come in and take over the market.

-Richard

It´s happening down here as we speak. Taxes over cigarettes are so high that smuggling is thriving across the borders, fueling the organized crime. Ah, the illusion that you can fight social problems armed with a pen...

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What brings us together is stronger than what pulls us apart

Whatever the black market was before, this most recent hike signals a most significant after, that's for sure!
Not quite the same, but look at Washington state's kerfuffle over dishwashing detergent:

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Here is another amazing story of what was going on behind the scenes in Washington with the panic to pass the TARP/bailout:

http://briefingroom.thehill.com/2009...ing-from-bank/

A NC senator, after hearing the secret briefings from Paulson and other executive officials, *called his wife and told her to start withdrawing as much money as she could every day*.

This is how they passed the TARP in the face of intense public opposition (but most who voted for the TARP were returned to office )-- absolute fearmongering. They scared Congress to death. And they were scared out of their wits themselves.

We've heard hints that "martial law" was mentioned/threatened if Congress didn't act, and this latest story goes right along with that. Remember Rep. Jakorski's comments about a huge money market run that would've shut down the system "in hours". And then there was the run in Britain that some official let out of the bag there weeks later.

-Richard

Yes! General Growth has been on a death watch for some time now. The inevitable finally happened. They managed to get some extensions on bonds coming due a couple times now, but the jig came to an end.

This is a major event and will start the implosion of commerical real estate (which has been predicted for some time, of course).

-Richard