Guest Post: The Economic Death Spiral Has Been Triggered

Submitted by Gordon T. Long

The Economic Death Spiral Has Been Triggered

For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended.  It is now in the process of reversing and becoming a vicious downward economic spiral.
   
One of the strategies is the Asian Mercantile Strategy.  The other is the US Dollar Reserve Currency Strategy.

These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end.

One of the two global strategies enabled the Asian Tigers to emerge and grow to the extent that they are now the manufacturing and potentially future economic engine of the world.

The other allowed the US to live far beyond its means with massive fiscal deficits, chronic trade imbalances and more recently, current account imbalances. The US during this period has gone from being the richest country on the face of the globe to the biggest debtor nation in the world.

First we need to explore each strategy, how they worked symbiotically, what has changed and then why the virtuous cycle is now accelerating into a vicious downward spiral.

ASIAN MERCANTILE STRATEGY

The Asian Mercantile Strategy started with the emergence of Japan in the early 1980s, expanded with the Asian Tigers in the 90s and then strategically dominated with China in the first decade of this century.

Initially, Japan's products were poor quality and limited to cheap consumer products. Japan as a nation had neither the raw materials, capital markets, nor domestic consumption market to compete with the giant size of the USA. 

To compensate for its disadvantages, Japan strategically targeted its manufacturing resources for the US market.  By doing this, the resource poor island nation took the first step in becoming an export economy - an economy centered on growth through exports versus an economy like the US, where an excessive 70% of GDP is dependent on domestic consumption.

The strategy began to work as Japan took full advantage of its labor differential that was critical in the low end consumer product segment, which it initially targeted. Gradually, as capital availability expanded, Japan broadened its manufacturing scope, moving into higher levels of consumption products requiring higher levels of quality and achieving brand recognition.

Success soon became a problem as the Yen began to strengthen. To combat this the Japanese implemented the second critical component of what became the Asian Mercantile Strategy template. It began to manipulate its currency by aggressively intervening in the forex market to keep the yen weak.

Further success forced Japan to move to a more aggressive forex strategy to maintain a currency advantage. It was strategically decided that Japan's large and growing foreign reserves were to be re-invested back into the US.  By buying US Agency and US Treasury debt instruments it kept the dollar strong relative to the Yen. The more successful Japan became, the more critical this strategy became.  In the 80s Japan dominated global expansion as it brought US automotive and consumer electronics' manufacturing to its knees.

By the early 90s the Japanese labor advantage was quickly being lost to the Asian Tigers because the Yen versus the Asian Tiger currencies was too strong.  The Asian Tigers were following the Japanese model. The Asian Crisis in 1997 re-enforced to all Asian players the importance of holding large US dollar denominated reserves. This further accelerated and reinforced the strategy of purchasing US Treasury and Agency debt.

With China's acceptance into the World Trade Organization (WTO),  China emerged on the scene in full force. Armed with the lessons of the last twenty years, China took the Asian Mercantile Strategy to another level in its ongoing evolution.

The results were one of the largest and fastest transfers of industrial power ever to occur in history.  In ten years, China assumed the role of the world's undisputed industrial powerhouse in the world.

The virtuous cycle further accelerated as Asia became more dominant because its reserves, reinvested back in the US, began to have a larger and larger impact. The more Asia bought US Treasury and Agency debt, the lower US interest rates were forced, allowing Americans to finance more and more consumption. The more Asia bought US securities, the stronger the US dollar was against Asian currencies, and therefore the cheaper Asian products were relative to US manufactured products. It was a self reinforcing Virtuous Cycle.

The result was  a staggering 46,000 factories transferred from the US to Asia over the same 10 year period.  The transfer  set the stage for chronic unemployment and public funding problems,  but it was temporarily hidden by equally massive increases in debt spending.

The low interest rate driven housing bubble, being of historic proportions, made Americans feel richer than they were. They took on excess debt in various forms such as Home Equity Loans (HELOCs) at unprecedented levels. The acceleration of debt  materially impacted both the GDP and employment  of the nation through Real Estate, Construction and Mortgage Finance job growth further hiding underlying problems.

US DOLLAR RESERVE CURRENCY STRATEGY

Since President Richard Nixon took the US off the Gold Standard in 1971, the US has adopted what I refer to as the US Dollar Reserve Strategy.  After the Second World War, at the Bretton Woods Conference, the US dollar was accepted as the world's reserve currency and as such was pegged to Gold at a fixed rate of $35/oz. due to massive Vietnam  war costs and President Johnson  Great Society, the US could no longer honor its agreement.  In 1971, when France demanded conversion payment in Gold, the US refused. At this point the US become a fiat currency,  not backed by anything other than the full  faith and credit of Washington politicos. 

What were other countries to do in retaliation? What quickly became evident was there was little they could do. The fact was that international trade was conducted in US dollars as a matter of necessity due to the dominance of US export trade;  and as such, nations were forced to have US dollars to transact international trade.

Additionally, the US established agreements with oil producing Middle East countries that oil could only be sold in US dollars. Since energy is a dominant import cost for most nations, this secured the strategic position and requirement that the US dollar would be maintained as the preeminent reserve currency by trading nations.

What this strategy meant to the US was that it could now print money, and effectively export the potential inflationary consequences of its actions. The 1970s were initially marked by dramatic increases in US inflation as the strategy took hold and was implemented. By the time of President Reagan's presidency, the strategy was working thanks to some herculean efforts by Chairman Volker at the Federal Reserve. This well executed strategy is what I refer to as the US Reserve Currency Strategy.

The strategy allowed Regan to implement 'Reaganomics' and his new Supply Side economic policies which launched the longest bull market in US history.  Further enhanced by an extremely loose monetary policy under Greenspan, relaxed reserve requirements under Clinton, and tax cuts under George Bush II, the US moved quickly from being the world's richest country to being the world's largest debtor. 

Historic debt growth was built up without the disease of inflation infecting the US economy. This is explained by inflation that was effectively exported whenever increasing levels of US dollars were printed by the US Treasury.

Any threat to this strategy was rapidly challenged by US military power. As an example, when Saddam Hussein, President of Iraq, decided to sell Iraq oil denominated in Euros, he was invaded by US forces three months later and removed from power. When Libyan leader Muammar Gaddafi wanted gold in exchange for Libyan oil, he almost immediately found himself the target of US planned military intervention.

Presently, oil is still sold only in US dollars, but more and more trade deals are being negotiated between China and its trading partners. This is a serious threat to the US and the US Dollar Reserve Strategy.

THE SYMBIOTIC RELATIONSHIP

One of the reasons the US Reserve Strategy has worked for as long as it has, is because there was an incentive by other countries to sterilize the US dollars they received.  This, in the case of Asia, was because of the Asian Mercantile Strategy they were executing. By sterilizing US dollars, they held down their currency's exchange rate, which helped their exports though creating potential domestic inflation. Until recently, these inflation pressures have been manageable.

In the case of Europe, the Euro was only coming into existence in the late 90s, but then quickly moved from well below par to nearly 1.50 to the US dollar, causing competitive problems for European export trade for many peripheral countries (PIIGS).

The Asian Export Strategy and the US Reserve Dollar Strategy were symbiotic for a number of reasons:

1.    Though the Asian Export Strategy was an Export Trade Imbalance game and  the US Dollar Reserve Strategy a Volume Trade game,  both were centered on global trade. The US won by increased global trading and the growing requirement for the US dollars it required - dollars that could be increased to pay for the military industrial complex without increasing taxation and used as reserves for global banking growth. Asia won by getting an ever increasing share of a growing volume of trade.

2.    The US as a 70% consumption economy needed cheap financing to sustain its insatiable consumption. Asia needed consumption to absorb its growing exports.

3.    The US needed a strong dollar to attract financing for its debt. Asia saw US debt as a store for its growing reserves that additionally reduced financing costs for its export products. In a way Asia was offering a form of vendor financing or 'lay away' financing.

4.    US corporations saw 'off-shoring', 'outsourcing' and 'rightsizing' as major productivity improvements. The Asian Mercantile Strategy offered American corporations an opportunity to significantly increase profitability while Asia needed every increasing and larger market segments to penetrate. US corporations brought know-how, branding and capital to the Asian economies who desperately needed these strengths to employ unskilled populations, increase standards of living and reduce the always present and potential social unrest. 

5.    The US economy which had shifted from an industrial economy to a services economy was quickly becoming a financial economy with 44% of the stock market being financials. The financial economy needed increasing capital inflows to sustain itself.

WHAT HAS CHANGED

So what could possible stop this ideal symbiotic relationship from continuing to feed on itself?

A number of factors, all of which are now coming together to end this Virtuous Cycle.

DEBT SATURATION

I recently authored a paper entitled  Debt Saturation & Money Illusion , that if you have not read, I encourage you to read since it would take up too much space here.  It makes the case that the global economy has reached the point where annual debt costs are now outstripping the global economy's ability to support the exponentially increasing burden.

Additionally, stimulus spending by governments has now reached the point where it is actually counterproductive.

The above chart shows that even using government numbers for inflation (which are disgracefully inadequate and understated) the real rates in the old industrialized economies are negative. By contrast, rates in emerging economies are positive.

This means central banks are effectively paying banks to take money, yet commercial banks cannot find sufficient investments to actually absorb the money.  Like pushing on a string, the global economy simply cannot absorb debt at the levels required to sustain required growth rates which must exceed inflation rates.

The level of nonperforming bank assets is growing at such a rate that global banks have serious concerns with their existing loans and potentially their own solvency.

Growth in Non Performing Bank Loan Levels is shown below.

MALINVESTMENT

I found a recent article entitled: Technology firms struggle to cover interest payments in the Korean Times to be very instructive. Despite Asian economies growing rapidly and now dominating the global electronics industry, the study by the Korean Times found alarmingly that:

a.    One in three firms traded on the Kosdaq stock exchange failed to earn sufficient money to cover their interest payments in 2010.

b.    280 out of 876 Kosdaq-listed corporations, or 32 percent, could not reach the benchmark reading of one in the interest coverage ratio. The interest coverage ratio, otherwise dubbed times interest earned (TIE), refers to the measure of a firm’s ability to honor its debt payments.

This is classic mal-investment in the truest sense of the Austrian School of Economcis.

Corporations now have balance sheets so leveraged with debt that their business models are barely able to cover debt payments even when interest rates are at historic lows. What does this suggest for possible debt default and forced unwinding going forward?

Private Equity corporations with leveraged takeovers and buyouts dominated the US financial landscape for years. These takeovers left corporate balance sheets severely damaged and barely able to pay the debt burdens they were forced to assume.

Additionally, we have learned since the days of Enron, there are significant amounts of debt held off balance sheets today in Special Purpose Entities (SPEs). There is no investor transparency to these obligations. This debt and other forms of 'contingent liability' reporting presently allow corporations to assume ever larger amounts of debt without impacting their corporate credit ratings. Everything works fine until growth slows.

Corporations over the last decade are acting more as highly leveraged hedge funds with the consequential exposure of margin or collateral calls. This is a highly risky and unstable situation in the longer term.

CONSUMPTION IMBALANCES

Another factor causing the unwind is a tapped out US consumer.  This has been forecast for over a decade as an eventuality, but the US consumer continued to surprise everyone with their willingness to consume and take on debt.  However, since the 2008 financial crisis things have changed. The US real disposable income has fallen and US consumer debt loads are now impacting their ability to consume.

Consumption growth rates in the US have slowed.  The Asian economies have consumption rates below forty percent. The consumption growth rates of these Asian economies, though growing,  are increasing from a much smaller absolute size. This imbalance is placing further pressures on the symbiotic relationship.

A VIRTUOUS RISING CYCLE BECOMES A VICIOUS DOWNWARD SPIRAL

Slowly, the cycle is reversing. What was once a virtuous cycle is now a potentially vicious downward spiral.

The death knell for the cycle will be:

1.    A deteriorating  US dollar,

2.    Rising US interest rates,

3.    Sustained and chronic US unemployment,

4.    Asian inflation, especially in food where 60% of Asian disposable income is spent.

5.    Pressures on Asian currency pegs

6.    Collapsing values of US Reserve holdings.

BERNANKE'S BOX

I recently published another paper entitled BERNANKE'S QE^x BOX! where I argued what Chairman Ben Bernanke was likely to do at his critical April 27th FOMC 'Signal' meeting.  I was proven right as he delivered precisely on cue. It was not a difficult call.

The reason I was so sure is because the real problem was clear. It is about what the Basel BIS (Bank of International Settlements) Bankers are more than aware of.

As I point out in Debt Saturation & Money Illusion, the Shadow Banking liabilities have fallen by $5 Trillion since the financial crisis, which is a crushing blow to global liquidity and in fact global financial banking solvency.

An analysis of data by Fathom Consulting for the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, showed their assets swelled from around $4 trillion at the start of 2006 to just short of $9 trillion by the end of February this year.  The increase in the size of G4 central bank balance sheets since mid-07 has ALSO been around $5 trillion to end February 2011, or 8 percent of global GDP.

It is my view that the Basel BIS Bankers have orchestrated their balance sheet growth to offset the contracting Shadow Banking System liabilities. For those that are not aware, Federal Reserve Chairman Ben Bernanke, Bank of England Governor Mervyn King,  ECB President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa all sit as Board Members and meet regularly.

FED'S DUAL TRIPLE MANDATE

To do this the central bankers have increased their balance sheets to their political limits which can be seen in the following Federal Reserve chart from Zeal.

In the case of the US Federal Reserve, this has meant such significant changes that effectively the Fed's dual mandate has now expanded to three.  Besides the official  mandates of Full Employment and Price Stability, a third has been added: Asset Appreciation.
   
This is clearly evident when we overlay the above balance sheet growth with US equity market appreciation, as represented by the S&P 500 in the chart below.

The top of the red Treasury series (chart above) represents the total Treasuries, MBSs, and agencies the Fed purchased in its quantitative-easing campaigns.  That red line above is then transferred to the second chart below as total QE.  Superimposed on top of it is the US stock markets as represented by the SPX (blue).  The strong correlation between the Fed’s monetization and the post-panic stock-market recovery is remarkable, perhaps even scary.

The Federal Reserve is no longer the "Lender of Last Resort"

The Federal Reserve is now the "Buyer of First Resort"

INHERENT LIMITER: INFLATION

There can be little doubt, despite Federal Reserve rhetoric, that Quantitative Easing , ZIRP (Zero Interest Rate Policy) and negative real interest rates have caused  a surge in global inflation rates.

Recently Oil was at a 31 Month high and up 22 percent Year-on-Year. Corn was up 90 percent,  Wheat and  Soybeans up 45 percent and Rice at yet another high.

This inflation has been acutely felt throughout Asia which has to combat this in parallel with trying to keep their currencies competitive as part of their Asian Mercantile strategy.

Across Asia, interest rates and bank reserve requirements have been increased, and in some instance capital control restrictions implemented.  Pressures are such that many, including China, are now at the point of surrendering sacrosanct currency appreciation.

The problem is food inflation. Food must be imported and a stronger currency would help avoid consumer sensitive food inflation, at the expense of assisting with its own export strategy.

Sixty percent of disposable income in Asia, according to the Asian Development Bank (ADB) in a major report entitled: Global Food & Price Inflation & Developing Asia, is spent on food.  Food is presently expected to average 10 percent inflation in 2011. This has created tremendous pressures on the population and potential social unrest for Asian governments.

64 Million people have already been moved into the category of poverty, which the ADB classifies as  below $1.25/day. With 3.5 Billion consumers, it is expected that 190 Million will be pushed into poverty if food inflation continues. Food prices were up 30% in February's report, so the 10 percent Asian food inflation is no doubt seriously too low.

GLOBAL SLOWDOWN -  Q1 GDP SIGNALS

The efforts to fight inflation are now impacting the 7.8% Asian growth rate, which is now demonstrating the expected signs of slowing.

US Gross domestic product was recently reported as rising only 1.8 percent from January through March, after a 3.1 percent pace in the last three months of 2010. Taking out inventory builds this number as only 0.8 percent.

Britain reported 0.5 percent growth and is now on the edge of a double dip.
 
The Federal Reserve and most economists are all revising 2011 GDP growth lower, as a steady stream of negative news hits the markets.

If GDP numbers were adjusted for true inflation, rather than the suspect government CPI distortions, real GDP would be negative. Considering government deficit spending is now 20-25 percent of the US economy, can there be any question that we have effectively very negative economic growth?

The Basel BIS Bankers are acutely aware of this. 

QE^X WILL HAPPEN - 'The Risk-Off that Refreshes'

So what is to be done?

I believe a decision has been taken to temporarily remove some of the pressures off increasing money supply before resuming expansion of money and credit later in Q3 or Q4. There is little choice.

Make no mistake about it however, central bank money printing must continue and at an accelerated rate.  I suspect it will emerge not as QE III, but in another form to address the massive and growing problems with non-performing assets, foreclosures and REOs occurring at Fannie, Freddie and the FHA.

Don't get fooled. Watch the balance sheets of the central banks. They will by necessity continue to grow to stop the vicious spiral from accelerating.

CONCLUSIONS

The Basel BIS Bankers fully understand the underpinnings of the shift from a Virtuous Cycle to a Vicious Spiral presently underway.

They are doing everything within their power to offset it. Policies of "extend and pretend" and "kick the can down the road" are all just attempts at buying time.

Unfortunately time is working against them, as existing debt only increases as interest owed is relentlessly and cumulatively added.

The Basel BIS Bankers have no real answers. The eventuality of a fiat currency crisis is ordained and has been since the early warnings in 2007 of the Financial Crisis. The roadmap has been clear to all that actually wanted to look.

Comments

[jaro_g]

hello boiltherich,

thx 4 your extensive answer, there aremany things to think abt :-). well, i had already food inventory back in 2008, most of it is after its 'validity period' now and i have decided not to concentrate on the 'end of the world' scenario any longer. 

anyway, i think its better to repay all debts now because after the food prices rises a lot, there will prolly be no money available for other things (like mortgage) and the banks/creditors will take over all that unpaid real estaten/ houses easily ...

thx + best wishes from munich, germany

jaro :-)

[boiltherich]

Any time handsome.  I would not worry about banks taking over the houses when people stop paying, already here in the US they are not kicking people out of homes any longer, there are just too many of them.  In a real crash it will be nearly everyone in arrears and the banks/governments will be forced to change the terms of debt. 

Of course you in the EU have some differences in your dealings with banks and credit issues, like in my other nation Ireland, mortgages there are variable rate, as in Spain, an increase in the interest rate can, will devastate householders.  Also, unlike the USA there is no option to discharge mortgage debt in bankruptcy proceedings.  Once you sign that mortgage obligation that is it, written in blood, though there are now early proposals to allow that to change. 

Ireland is not my first choice of places to live at the moment in spite of my Irish passport, too cold and wet, can't drive on the left very well, and detest the food.  I am sure they would rather I stay here anyway, catholics have a huge problem with gay men you know.  But, in the event of a real collapse it might be useful to have a neutral island nation's passport, especially one with a temperate climate with plenty of good agricultural land. 

[SOLnow]

I have another suggestion for those of you who, like me, have grown tired of the corpratocracy which has consumed our country.  Hire a Public Adjuster for any property related damage you experience.  Yes, they are going to take a fee for the service, but there sole purpose in life is to  maximize your insurance claim to the absolute highest possible settlement on your behalf.  The more you get, the more they get. Insurance companies hate them.

Insurance companies, and in many cases the banks that own them, are in the business of making money, not paying claims.  Delay, Deny, Defend is their policy.  When they do pay, their first thought is their bottom line, not yours.  Most people have no idea what their property insurance policy says and take the insurance company's interpretation as law.  Don't make this mistake.  Get professional help.  If you don't know what a Public Adjuster is, find out.  Encourage everyone you know to hire one.  In this case, it really is your money they are keeping and its perfectly legal to force them to pay every single dime they owe you.  There is a reason Buffet wants to double Wells' insurance revenue in the next ten years.

[Quixotic_Not]

Great advice, too bad the banksters hire the judges when it goes to litigation...

[SOLnow]

Dup post

[Midwest Prepper]

Duh! Why don't we just print $14 Trillion and pay off the debt and start over!

[I am Jobe]

Why not start more wars? Now there is a novel concept which cannot go wrong can it?

[marcusfenix]

so we all know that the end is nigh at this point, but my question is how much longer can the PTB's keep the titanic above water? will this whole mess jump limp along for another decade? a few more years? or are we just months away from the mall zombies going into a mass panic because of a final paper and plastic collapse? the how's and why's and if's have been answered, it's the when that I am wondering about now.

[I am Jobe]

I guess we need more wars to ensure we demolish and rebuild and let the cycles continue to screw the commoner.

Marc Faber: Prepare For Another War

http://www.benzinga.com/trading-ideas/short-ideas/11/05/1114866/marc-fab...

[ebworthen]

Yup.

Reference history.

What do nations do when a debt supercycle or massive speculative bubble pops and internal unrest and outright civil disobedience or war threatens?  Why, start a very large conflict to stoke nationalism and "turn plows into swords".

I sure hope all our drones and cruise missles and subs don't need parts from China.

[Grand Supercycle]

DOW shows a probable head and shoulders pattern contained within a (confirmed) massive megaphone top.

Target is approx 1,300

No, it's not a typo.

http://stockmarket618.wordpress.com/2010/07/07/wed-july-7-2/

[ebworthen]

Did you mean to link here?

http://stockmarket618.wordpress.com/2011/05/28/sat-may-28/

(the one you posted above is from July of last Summer)

Nice big picture chart, thank you.

The incredible FED Liquidity bubble looks stretched.

[boiltherich]

My training was mostly in fundamentals of finance not technical analysis.  So I have a question about the first chart in your link, the head and shoulders pattern, where the left shoulder started to form, I am assuming that means significantly deviated upward from the trend line, was 1994, from that point to the decline prior to the head formation was 2002, then you have the head and now the formation of the right shoulder which will be followed by the decline back to trend or below right?  Will the right shoulder be as wide, that is take about the same time?  If the left shoulder took six years will not the right shoulder as well? 

What I am really asking, does the chart that projects a value of 1,300 also project a timeline?  A minimum or maximum period whereby head and shoulders stops being head and shoulders and becomes a different pattern?  I suppose I should investigate tech analysis a bit deeper on my own, but one thing I learned from a great professor in college was the flexibility of charts and graphs, the ease of manipulation, that left me skeptical about technical analysis.  I want to be convinced and taught, but have not found a willing teacher.  Most at ZH either assume you know tech stuff or are not worth talking to. 

[Petrolia]

Another great educational piece.

Been snooping here for ages.

Now signed up.

Not that I'll ever enlighten you guys like you have enlightened me.

[iPood]

Bravo Gordon Long! Brilliant analysis.

[MrPoopypants]

We all know this already - so what? Like another poster noted, this is just entertainment, a bit of doomer porn to satisfy our psychological desires. Reminds me of the Peak Oil forums several years ago.

In this article, as others, Bernanke is portrayed always as being a tragically hapless fool forced by circumstance into bad problems and worse solutions. But if we know these things, and Chris Martenson and the rest of them, then wouldn't Ben and the BIS? Wasn't currency collapse intrinsic to the system's design from the beginning? Is there not, then, a new design to follow?

Even in the midst of panic, riots, bank holidays and fearful mayhem - so what? Will not the sun be shining, the birds chirping, and peaceful babies sleeping? They pay no mind to our transient, ephemeral concerns. And if we suffer, we suffer. Why suffer now for it - unless it is your pleasure?

Who of you by worrying can add a single hour to your life? Gold, silver, guns, food - does any of it annul the inevitable? Lay up for yourselves treasure in Heaven instead. And if real crisis arrives in this life, it will not be material or financial things, but spiritual resources that sustain you. Therefore seek Him who gives His Spirit freely - it is the bargain of a lifetime.

[ebworthen]

Render unto Caesar, eh?

Christian pacifism made things smoother for Constantine, and Hitler and Stalin too.

[Quixotic_Not]

*BINGO*

Which is exactly why Ron Paul fails to bring about any serious change.

If you love wealth more than liberty, the tranquility of servitude better than the animating contest of freedom, depart from us in peace.

We ask not your counsel nor your arms.

Crouch down and lick the hand that feeds you.

May your chains rest lightly upon you and may posterity forget that you were our countrymen. ~ Samuel Adams

[3ringmike]

great idea. why didn't i think of that? i'll start a church. problem solved. see you in heaven!

[bigdad06]

When the dollar collapses it will be a disaster, especially for Americans! Get prepared now! http://www.youtube.com/watch?v=hHba-EvSXtk

[procopious]

@boiltherich:thx very much for your careful explanation. Cld you help with this: they now will "own the house which they list as a liability".  I'm having difficulty understanding why the house they own after foreclosure is a liability  

[boiltherich]

Banks are funny creatures aren't they, when you hand them a cash deposit they bookit as a liability not an asset.  If I win the Powerball tomorrow and take the $100,000,000.00 check to my little credit union and try to deposit it I would be refused because they do not have enough assets to cover the new liability my deposit places upon them, they are not big enough.  That is because any deposit you make with a bank is subject to removal at any moment, on demand.  Remember these haveto be simplistic explanations of what happens or it would be a book.  In reality if you do have $100,000,000.00 in the bank and tried to withdraw it you would be "asked" to do it over a period of time, daily limits, etc.  If you wanted to electronically transfer all at one time the fed would literally have to step in to facilitate the transaction because depending on the bank you could sink an institution by doing this, viola WaMu. 

A house is pretty much the same thing, the structure is not their property, the mortgage is.  The house does not generate income the loan does.  If you default and the bank is "forced" to exercise the right to act on their lien what they have is not an asset, it could potentially generate some income at sale in the future but they do not know how much or even if that will happen.  Until then it is a liability and booked at the value of the principal balance of the mortgage.  For practical purposes the house will ALWAYS be a money loser at liquidation for two reasons, one is that the principal balance is never the total balance because by the time they foreclose and possess the house there are late fees, arrears, legal fees, a host of other costs that sale will not cover.  And because if the house could have been liquidated at sale for the full amount or more of the balance of principal owed the resident would have done so and got a payoff date.  I would have to be dead or insane to give my house back to the bank in lieu of the deed if I could have sold it, but the market value was lower than the principal balance, it will always be that way.  If I were dead enough or insane enough to give to my bank a house with positive equity the law and my relatives are going to step in and quash the deal because as next of kin they have a right to protect potential inheritance against the acts of a person not of sound mind.  That is why you can't legally sign a contract when you are for example drunk.  It would not be enforceable. 

In my example which you asked about the bank did not own the house, they merely facilitated the deal, the house was bought from party A the seller by party B (you or me).  The bank did pay off the seller for you or me in return for our promise to pay 360 payments at principal plus a handsome interest rate to the bank, but ownership of the real estate passed from seller A to buyer B.  Only default gives the bank the right to foreclose and take possession, to become the "owner" (REO) but it still is not an asset.  That is because until it is sold (and law requires it be sold, they cannot decide to keep it as an investment or to rent it out or whatever) and the proceeds netted against the unpaid principal (and fees) it is a potential huge liability, as well as the fact that the netting process is going to produce a loss, it will always produce a loss as explained above.  Accounting standards with the force of the law require that they be booked in this way.  To a bank a house can never be an asset they can own, or a potential investment to be held till the value rises to a profitable point, they have no discretion of disposal. 

This is where my frustration come in, I made the financially rational choice of walking away, strategic default.  My house value had dropped from about 200+ thousand when built to 131k when I bought it, to about 69k a year later, yet the mortgage was over 131k and the bank was expecting a total of payments of $360,000, like I said on a house not worth 70 k?  Right, so I am sorry for my, and the banks bad luck but financial reality is I am just not giving the bank 514% of the value of the house.  Chase is used to throwing their weight around, they do not take requests they give orders.  They used their big stick (foreclosure and ruined credit) to demand payment, they would not negotiate, they would not accept short sale, they would not honor the workout agreement I thought I had with them, so fuck'em.  I walked, but then they knew I meant business, I called their bluff, they did foreclose, and threatened to sell the house but when the auction came they postponed, and again the next month, now I am told they cancelled the foreclosure.  They get to put their books and accounting entries per the status of my mortgage back the way they were even though we all know I have no intention of repossessing that house, or paying a dime.  They will just keep packing on late charges and arrears to my delinquent account.  But recall that late charges are an asset because it assumes when I get back on my feet I will make good. 

[I did it by Occident]

That is assumming of course that there are prisons and a justice system left after this whole thing is through. 

[brand shoes]

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