Guest Post: Worse Than 2008

Tyler Durden's picture


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Worse Than 2008

There are clear signs of a liquidity crunch in the asset markets right now, and the question I keep hearing is, Is this 2008 all over again?

No, it’s worse. Much worse.

In 2008 there was a lot more faith and optimism upon which to draw. But both have been squandered to significant degrees by feckless regulators and authorities who failed to properly address any of the root causes of the first crisis even as they slathered layer after layer of thin-air money over many of the symptoms.

Anyone who has paid attention knows that those "magic potions" proved to be anything but. Not only are the root causes still with us (too much debt, vast regional financial imbalances, and high energy prices), but they have actually grown worse the entire time.

As always, we have no idea exactly what is going to happen and when, but we can track the various stresses and strains, noting that more and wider fingers of instability increase the risk of a major event. Heading into 2012, there's enough data to warrant maintaining an extremely cautious stance regarding holding onto one's wealth and increasing one's preparations towards resilience.

Here’s the evidence:

  • Oil prices higher now than in 2009
  • Derivatives up more than $100 trillion since 2009
  • Government debts exploding
  • Weak GDP growth
  • Europe in trouble
  • Small investors leaving the market
  • China hitting a wall

One of the most important things we need to track is simply untrackable, and that is market perception. When faith in a faith-based money system vanishes, the game is pretty much over.

If you have been reading my work (or anyone else's) with a decent macro view, you likely lost your faith in the system a while ago and marvel that it can continue along for another moment, let alone all the years it has been creaking towards its eventual date with reality. But along it creaks, day after day, week after week, and month after month, threatening to wear down the observant and vigilant before finally letting go.

2012 promises to be an interesting year, with more than $10 trillion in funding and rollover financing required to keep the developed world floating along. But where will that funding come from? The lesson from defunct economies is “not internally!” And if China’s recent slowdowns and projections of an even more lackluster 2012 come true, then we might also scratch a few external sources off the list as well. 

Oil Prices

As Gregor recently penned so eloquently for us, high oil prices are like sand in the gearbox of the economy -- they represent the most serious form of friction there is. Rather astutely, Jim Puplava has called oil prices 'the new Fed Funds rate,' meaning that the traditional role of the Federal Reserve in regulating the economy via the price of money has been usurped by oil. 

As oil prices go up, the economy slows down, and vice versa. 

The simple fact is that oil prices remain quite elevated by historical standards, and since the correction in 2008, they have been ratcheting steadily higher each year. They are now at their highest average rate in three years. In round dollar terms, oil is $30/bbl higher than in 2009 and $10/bbl than in 2010.

I won't rehash the data here, but the best explanation for this steady increase is that supplies of cheap oil are dwindling and flow rates of the desired blends are having a hard time keeping up with demand.

The twin deficits to the export market are falling production from existing fields and rising internal demand in the producing countries. The way all that gets balanced is in the usual fashion -- through prices.

All of this would be fine, except for the idea that the world is in a far more fragile condition today than back in 2008 when it suffered the first insults levied by high oil prices.

As the Bank of England's Paul Fisher recently put it:

Financial markets in greater danger than 2008-BoE's Fisher

Dec 19, 2011

Dec 19 (Reuters) - Financial markets are facing a more dangerous situation now than during the financial crisis of 2008, Bank of England policymaker Paul Fisher was quoted as saying on Monday.

Fisher, who is the central bank's executive director of markets and sits on the Monetary Policy Committee, also said governments had fewer options to deal with the current crisis because of their stretched public finances.

Fisher was quoted as saying that in 2008, governments had more leeway and cash available to stimulate their economies and bail out banks. Today that "sovereign backstop is less clear", Fisher said.

"The policy out is going to be more difficult than it was in 2009, given the current position of the sovereigns."


We'll explore these ideas in greater depth below, but I think the bolded parts illuminate why high oil prices are potentially more corrosive now than in 2008. The bottom line is that economic growth is central to nearly every story of recovery, and there are appallingly few analyses coming out of the OECD countries that address how the various debt rescue plans will fare if said economic growth does not materialize. Most just note that 'it will not be good' and leave it at that.


Let's begin with debt. This crisis was rooted in too much debt. Even without the headwinds caused by structurally rising energy prices (we'll get to those in a minute), the credit bubble was destined to someday pop all on its own. After all, there's no way for debt to continually expand faster than income, which is what was happening across the entire OECD, thanks to the ultra-accommodative policies of the world's central banks.


Note that GDP is virtually unchanged since 2008, meaning those $5 trillion did not buy us any incremental GDP; it only managed to bring us back to about even:


That means we have about the same-sized economy to support an additional $5 trillion in federal debt, or roughly a third more than when the crisis started.

It is also true that GDP growth in the US is weaker this year than last year, a trend that does not bode well for the US deficit situation:


It should be noted here that this weak growth is happening even though the US federal deficit for FY 2011 was $1.3 trillion, or more than 10% of GDP. If that's how anemic the economy is with that level of deficit spending, where would it be with less?

Europe in Trouble

The bad news out of Europe continues unabated, including debt and ratings downgrades, sliding economic growth, and exploding red ink.

Much of the hope in Europe rests upon carefully crafted bailouts that rest upon assumed rates of economic recovery and growth in order to pencil out. Without the assumed rates of growth, the plans fall apart, and more rescue funds -- or outright defaults -- lie in the future.

Ireland is an instructive case because it entered its difficulties earlier, and it has already received a bailout and implemented the austerity measures that were meant to balance the equation.


Unfortunately, the plan is now in tatters with the recent revelation that the Irish economy is slumping more than expected under the twin weights of reduced lending and imposed austerity

Ireland's debt rating under threat as economy contracts

Dec 16, 2011

Rating agency Fitch tonight warned it may downgrade Ireland and five other euro zone countries in the absence of a comprehensive solution to the region's debt crisis which it concluded may now be "technically and politically beyond reach".

The agency placed the ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus in credit watch “negative”, which means a downgrade is possible within three months.

The move comes on back of unexpectedly poor economic data for Ireland which showed economy weakened considerably in the third quarter, shrinking at the fastest rate in more than two years.


Here's the data:


GNP is a better measure than GDP in this case because GNP removes repatriated corporate profits that have left the shores. Many companies use Ireland as a tax haven, so the monies that cycle briefly into and then right back out of the Irish system really should not be counted towards their economic progress. 

With economic contraction, the Irish fiscal deficits will once again breach agreed-upon levels, and repaying debts also becomes that much harder. It is a negative spiral that can be quite destructive and difficult to stop.

The bottom line here, which should surprise exactly nobody, is that austerity shrinks an economy and that economic shrinkage and crushing debt loads are incompatible. Ireland has not been fixed, and it seems that the can is once again right in front of the ECB, ready for another good kick down the road.

Ireland's debt yields are instructive here. While it is true that Ireland's debt yields are down quite a lot from their maximum levels (which were over 23% for 2-year paper and 15.5% for their 9-year debt), the current yields of 7.9% and 8.6%, respectively, are utterly unsustainable for an economy that is shrinking. It is only a matter of time before those rates crush the finances of the Irish government.

Do you know why the generally agreed-upon limit for persistent government deficits is 3%? That's because it's the basic rate of GDP growth that history has shown to be sustainable. As long as deficits are growing at the same rate as the economy, then the debt-to-GDP ratio stays constant and everybody is happy. If (or when, I should say) the economy grows more slowly than the rate of interest that is demanded from a government, it is a mathematical certainty that either the deficits will swell or austerity and/or tax hikes must be imposed. There is no other way to balance the books.

On this basis, Ireland is still mired in a math problem.


One theme of the financial crisis is governments loading up on debt in order to get by for a little longer, with the plan seeming to be to face the music later and/or keep one's fingers crossed that the economy will have somehow sorted itself out by then.

Spain, suffering from a truly crushing housing bust that is still playing out (and will for a long time), very high unemployment, and a stalled economy, has also compounded the issues by piling up an astounding amount of new debt over the past year:

Spain regional debt up 22 percent to $176 billion

Dec 16, 2011

MADRID (AP) -- Debt levels for Spain's cash-strapped 17 semiautonomous regions have soared 22 percent over the past year, the country's central bank said Friday.

A near two-year recession after a real estate bubble collapse has left Spain with swollen regional and national deficits, a stalled economy and 21.5 percent unemployment.

Many regions are facing severe cash-flow problems and are having to delay payments to suppliers.

An example of the cutbacks came Thursday, when Spain's Woman's Institute said nearly 100 centers for the victims of domestic violence face closure next year in the central Castilla-la-Mancha region. Centers for drug addicts in Madrid are facing a similar fate.


The good news out of Spain is that its bond yields have fallen considerably since the end of October, when they breached the 6% barrier and seemed ready to launch into truly dangerous, irrecoverable territory. 

Most recently, Spain's 10-year bond yields were 5.13%, down from 6.7% on October 31 but still about 1.5% higher than pre-crisis levels. It's important to note that the current yield may not be indicative of the true market perception of Spanish risk because the ECB has been heavily involved in buying Spanish debt. The true yield should undoubtedly be a lot higher given the grim state of finances there. 

Still, Spain's yield levels are in the best shape out of all the PIIGS. Speaking of which... 


Portugal is still in trouble, and the government has, quite worryingly for the precedent it sets, raided private pension funds to help balance the books. 

Portugal deficit falls, helped by one-off measure

Dec 16, 2011

LISBON, Portugal (AP) -- Portugal's finance minister says his debt-stressed country's budget deficit will likely fall to below 5 percent this year from 9.8 percent in 2010.

But Vitor Gaspar says the sharp drop is largely due to the transfer to the Treasury of euro6 billion ($7.8 billion) in private banks' pension funds.


I am not sure of all the back story and intrigue that must accompany this move, but it seems loaded with implications ranging from the door it opens to other governments seeking relief, to the fact that we know that Portugal is being leaned on heavily by the international banking community and has decided to raid the pensions of...wait for it...four of the largest private banks in Portugal. Maybe there's a bit of spite built into that move?

Portuguese bond yields are down from their crisis highs of 20.4% (2-year) and 14.1% (10-year), but again not enough to count, as they are sitting at 15.6% (2-year) and 13.1% (10-year), levels well above the current rate of GDP growth.


Our poster child for the entire Eurozone mess is, of course, Greece. And quite understandably, a trickle of bank withdrawals has turned into a flood:

Greeks fearing collapse of eurozone bailout pulled record sums from bank

Dec 16, 2011

An unprecedented exodus of capital from Greece – peaking in a record number of withdrawals from banks in recent months – has exacerbated the liquidity crisis now wracking the recession-hit country.

The latest figures released by the Bank of Greece reveal that in September and October alone investors pulled €12.3bn (£10.3bn) from domestic banks, spurred by fears of political uncertainty and economic collapse.

Overall, outflows have reached a record 25% since September 2009 – when household and corporate deposits stood at a peak of €237.5bn, the data showed.

Theodore Pelagidis, an economics professor at the University of Piraeus, said: "This is part of the death spiral of the recession as a result of austerity measures. People realize that contagion has come to banks and they are very afraid of losing their deposits. On average around €4bn-€5bn in capital flees the banking system every month."

The extraordinary figures back up anecdotal evidence that it is not just the super-rich behind the flight of funds.


This data, released by the Bank of Greece, is over a month old, and we'd be especially interested to see what November and December add to the story. At any rate, it is now "game over" for Greece. The market is still pricing in a nearly 100% chance of default even as the bankers and Eurocrats squabble over the prospect of raising the haircut on Greek debt from 20% to 50%. 

Where the Greek crisis highs for debt yields were 151.9% (2-year) and 35.1% (10-year), they are now sitting at 146.6% (2-year) and 34.6% (10-year), which are essentially unchanged.

The Pattern

I keep mentioning that the ECB is interfering heavily in the bond markets of various countries in their attempts to keep things going. Apparently they've tossed in the towel on Greece, as evidenced by the Greek yields above.

However, when we note the ways in which the Spanish, Irish, and Italian debts have come down off their highs, can we make sense of why the ECB focused their efforts there? Sure, that's easy, and the BBC has put together an extraordinarily helpful interactive chart to make it all crystal clear.

The interactive chart can be found here, but I've taken a number of screen shots so that you can more easily follow the story.

To begin with, what the chart is showing by the width of the arrows is how much money is owed to banks of other countries -- the wider the arrow, the greater the amount.

Here's the country that was let go:

Now let's compare that to Ireland, which was rescued (for now):

And here's Portugal, which is apparently in the process of being tossed under the bus, at least judging by how its interest rates are still punishingly (and ruinously) high:

See the pattern? Now let's look at Spain and Italy, both of which have recently enjoyed a nice decline in their yields

Now are the actions and focus of the ECB coming clear? It's not a surprising insight, but these charts help bring things into focus for me, and inform us that falling bond yields are probably more indicative of ECB actions than an improving debt crisis. 

Just for kicks, and to complete the story, here are the charts for the UK and the US, which hopefully make clear why these two countries could never be allowed to fail, for surely the whole world would fail to spin on its axis

The other takeaway from these charts is that everybody owes everybody, a point I've made before, but not as nicely as these charts manage to do. Kudos to whomever thought these up. 

Where Things Are Headed

In Part II: Get Ready for Worldwide Currency Devaluation, we detail the remaining risks posed by the massive amount of outstanding derivatives, small investors fleeing the markets, and China's increasingly visible slowdown. At this point, it's quite clear that there simply won't be enough economic growth to rescue the global economy from the hole it's in. So, how does this end?

It will most likely end in a concerted devaluation of the world's currencies, in an attempt to inflate away the worst of our debt burden. And if that happens, there's one asset in particular that you will want to be holding.

Click here to access Part II of this report (free executive summary, enrollment required for full access).

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achmachat's picture

doom has never been this beautiful.

redpill's picture

They just fired a half-trillion Euro nuclear missile into the face of the European Debt Kraken, and it just ate it up and smiled, hungry for more.  

DoChenRollingBearing's picture

Notice how NO ONE will send their GOLD to any other bank or country to pay down the debt...

Get rid of the electrons and paper!  

Oh regional Indian's picture

I say wake up to gold's potential thud. The thud that will be heard around the world.

Heck, the Dragon Family is out, gloves off, in US court... bruce k wrote about it too. How many tons? Mind boggling numbers, tin-foil hat nirvana and if true a free-gold-killer.

Holy moly....b...dnumb!

Gold will Fold.


This is what I thought a year and a bit ago.


And those circle charts.....beautiful! Just beautiful. Ironic, since it's a grim picture they paint, but beautifully.

Smiddywesson's picture

If there were more gold out there than we know about it, enough to back all the trillions of fiat and debt, there would be no reason to suppress pm prices and no reason for central banks to buy, and no reason to kick the can.  This rumor flies in the face of reality.

Oh regional Indian's picture

Smiddy, it's war of another kind. Of course shit hits the fan from time to time. It would rock the shit out of the system. And it seems legit. These are big boys and they have long histories and memories.


Ag1761's picture

These charts are simply stunning. I was just about coping until I came to the US chart, now there's a set of fat lines.

Also, wonder why the UK is into Ireland for so much? I reckon this is what it cost them to get the IRA to stop.

France is dead.


Ori, why the link to invest in running shoe technology, I didn't get that.

Oh regional Indian's picture

Was a post I wrote, started out about Gold manipulation/doom and ended up being a "This is my plan and you are welcome to partake" thing. Thus.


Ag1761's picture

Seems pretty apt, thanks.

I'd be looking at running shoe technology if I was a US Citizen after reading this


I am really beginning to think that my pile of silver, my 3 acres of arable land and newly acquired bow making skills might just not be enough.

CompassionateFascist's picture

This is in case you live in an urban area when the EBT cards stop working.

iDealMeat's picture

+2    One for the clip.   One for it being in Spanish..    good form.

SWRichmond's picture

OMG thank you, I really needed that!

Vagabond's picture

This article over complicates the issue.  The true root of our problems is a debt based world reserve currency.  Of course there is going to be endless printing and massive new debt creation in the end stage of this ponzi scheme as growth subsides.  You can't grow to infinity.  That's the obvious flaw in all these crazy Keynsian policies.  The emporer has no clothes.

Xkwisetly Paneful's picture

Similar to DEC 2008, US bond yields incl costs and inflation are around 0% or negative.

tarsubil's picture

I think it is you cannot force people to grow to infinity. You cannot manage infinite growth. With freedom comes growth generally. With freedom you can also choose not to take part.

Thisson's picture

Triffin Dilemna, bitchez!

rex-lacrymarum's picture

Here it is argued that the ECB's measures continue to be underestimated:

this is on the LTRO:

but to fully follow the lines of argument one should probably begin with the analysis of the original decision

and the follow-up regarding the ECB's transformation into 'Europe's biggest bad bank':

PS: sorry for spamming, but these provide an interesting look at the debate over the how important the ECB's interventions are.

Turd Ferguson's picture

"One of the most important things we need to track is simply untrackable, and that is market perception. When faith in a faith-based money system vanishes, the game is pretty much over."

I would add that trust and confidence are 100% vital for a functioning global investment scheme. MFing Global has shattered that confidence. The effects of this are just beginning to be felt. The end result will be a mass exodus of paper markets and "runs" on financial institutions of all types.

Yes, it's much worse than 2008. 2012 is going to be a very mean year.

SAT 800's picture

Dude, MF Global was just a company run into the ground by its kindergarten level trading knowledge boss; two weeks from now nobody will even remember the name. What do you know about LTCM, for instance? NOthing. But it was much more significant; for a month.

tmosley's picture

Wow, you have no idea what you are talking about.  

MF Global proved that that a, your broker might just steal from you to cover bad bets, and much more significantly b, contrary to popular opinon, exchanges will NOT make you whole when your broker pulls something like that.  The CME said just a few months ago that they had more than a hundred billion dollars worth of guarantees for just such an eventuality as MF Global, but now we see that they can't or won't even cover just over a billion.

If you know anything about futures exchanges, you will understand that they exist for two purposes.  They provide a centralized price discovery mechanism AND insure that trades are executed such that one bad actor won't become the liability of all involved parties.  Now that we see that the second is no longer in effect, and with the ongoing suspicions regarding price manipulation, there is no longer any point to the continuation of the CME.  

This is the worst thing that has happened in the 150 year history of futures trading.  What kind of agenda are you pushing in your hamfisted attempts to talk down the implications of this event?

Apocalicious's picture

And which of those lessons weren't already largely available to any one who was paying attention? (Lehman, anyone. By and large the same thing, just a little different flavor). IMO, his point is the market WON'T LEARN from this. It has a short attention span, and it will keep making the same mistakes it always makes. And in this case, sh1t is going to get worse before it really hits the fan, at some point down the road.

tmosley's picture

Lehman didn't comingle accounts.  No-one lost their money, nor was anyone left exposed to market fluctuations without the ability to close out positions.  Further, no physical, allocated assets belonging to customers were seized.

Big, BIG difference.

That said, I knew the paper markets were screwed as soon as I learned about QE1, and got out within a few months.  This event should shatter the faith of everyone that is left.  The fact that it hasn't speaks to the immense inertia of the normalcy bias in the mainstream.

Apocalicious's picture

True, but people had collateral frozen for LONG periods of time through the Lehman London brokerage. If you didn't learn to scrutinize your prime broker (their operations, credit profile, business risk, legal structure, riesgo pais) as a source of counter party risk (independent from exchange regulations and gaurantees) then you weren't paying attention. A strong counterparty to a non-deliverable cash-settled OTC contract actually looked less risky to me than a shitty FCM.


And I agree - it should remove the market's blind faith, but I know that normalcy bias (& you forget recency bias - the tendency to project the immediate past into the future) will trump logic and the market won't learn. But, again, this is why inefficiencies in capital markets persist, and most mathematical models based on rational actors fail repeatedly.

Apocalicious's picture

Also, don't rely on the SPIC to bail you out if you invest in Madoff or Stanford. Or the FDIC to bail you out if you have money at Lincoln Savings and Loan. Or the PBGC to bail you out if you worked at Bilidisco. They may, but you can avoid that circumstance altogether by being skeptical and scrutinizing your counterparties - whatever promises someone makes you. There's usually pretty obvious evidence to those who care to look, and plenty of past case studies. History may not repeat, but it sure does rhyme...

JPM Hater001's picture

Taker easy.  He only got an 800 on the SAT.  This was probably over his head.  Let me try and explain it to him...

Market go boom boom.

Ag1761's picture

So far, MF is yet more proof these bastards are above the law. Also, showing the CME has no funds to guarantee the losses on commodities.


Kali's picture

AND JPM just got a pass on the new position limits until May 2012. WTF.  How many bricks have to be thrown at one's head before they get it?

prodigious_idea's picture

I'm pretty sure people who know anything about MF won't forget it in two weeks.  But more to your weak attempt at claiming some deeper knowledge of collossal collapses by citing LTCM: the only thing MF and LTCM have in common is that Corzine was running Goldman during LTCM's short life.  LTCM wasn't about theft and its collapse was significant for more than a month.  Perhaps you could try again at making a real point - and please don't start out using the word "dude".  It really undermines any chance of credibility.

billhilly's picture

Hey, I thought you were taking the day off !?

JPM Hater001's picture

Truth never takes a day off.  The truth works 23/7. (coffee break mandated by the union of course.)

tarsubil's picture

Turd, You along with Peter Schiff and the Cornell Chemist have really helped me prepare and understand. Thanks! Still crossing my fingers and waiting for Jan 2nd.

smiler03's picture

I think you may mean January the turd.

tarsubil's picture

Cue Twilight zone theme. How did you know that?

JPM Hater001's picture

And the winner for the understatement of the year: "you likely lost your faith in the system a while ago and marvel that it can continue along for another moment."

Someone get this man a button and a free cookie.

Smiddywesson's picture

MF Global was an example of a desperate flight crew throwing everything out of the plane to stay in the air just one more minute.  They would never endanger the system unless the system's continued life depended upon it.

It's coming, this year.  Brace yourselves for the final attack on pm prices before the big reset.  All they have to do is let the stock market sell off, and pms will deflate, then they will use everything in their disposal.  If you have any powder left, scale into pms as the year begins and keep on stacking until you run out of money or you run out of time.

RockyRacoon's picture

Season's Greetings to the Mighty Turd!  Thanks for all your work.

billhilly's picture

and to you Rocky.  I've been reciving a couple of "funnies" from you through my friend Do Chen.

ratso's picture

Interesting to note that there is not one, yes NOT ONE, positive remark to found about anything in this version of impending doom.  How tiresome it must be to be the prophet of disaster when there is no disaster actually happening or about to happen.

Europe and the USA will muddle through with some difficult fits and starts.

The end is not near - Merry Christmas.

DogSlime's picture

Where do you buy your denial from?  You use the triple-strength stuff, yes?

Since you note the absence of any "positive" data, why not post some data that refutes the article?

XenoFrog's picture

That's the hard part about seeing the end coming. When you're right, there's no one around to tell, "I told you so."

JPM Hater001's picture

Sorry for the minus one but I have been crafting my "I told you so" letter for about a month now.  It starts like this:

Usually saying I told you so seems petty but since most of you are heading here to wait out the disaster, the pass code is "You told me so."  I will also accept "I am a moron and you were right."  But that one is reserved for my sister.

What do you think?

SAT 800's picture

I like the part about the "best explanation for the higher oil prices is the decreased supply of cheap oil"; I laughed out loud at that one. That's the best explanation if you know absolutely nothing about the oil market, and b.) you desperately need to bolster up your gloom and doom blog.

Cyrano de Bivouac's picture

SAT 800=400 math,400 verbal.

homersimpson's picture

ratso looks like you're just fatso in your own head.. typical troll.

Shut up or put up with your "positive remark".

ratso's picture

Merry Christmas to you too.

Ratscam's picture

a shame to my avatars name ....

gatorengineer's picture

Barry Soweto is that you??????