As all today’s Slogposts demonstrate, evidence of the coming crash is now overwhelming.

The Slog’s posts of earlier this year on the ‘American Recovery’ aka mirage are gradually being vindicated. Now comes more news about the deficit.

As early as 2010, I posted that a domestic consumption recovery in America would just make the debt worse. The trade figures are proving the point in spades.

Despite the value of the dollar being down 3.3% against a basket of currencies, the trade deficit widened more than forecast in March as American demand for crude oil, computers, automobiles and televisions raised imports to a record.

The gap grew 14% to $51.8 billion, the Commerce Department reported in Washington today. A 5.2% leap in imports, the biggest in more than a year, dwarfed the 2.9% gain in exports.

Not only is the US consumer buying more imported goods, the cost of raw materials is costing US business more as the Buck weakens. Crude oil imports in March increased to $29.2 billion from $23.4 billion the previous month, reflecting higher costs.

The increase in imports was broad-based with demand for foreign-made computers, telecommunications gear, automobiles and parts, televisions, cellular phones and clothing all doing better than ever.

But the guys at Bob Diamond’s Barcap remain unimpressed by such evidence.

“It’s hard to get nervous that imports are rising,” said Dean Maki in the New York office, “It does suggest that consumer demand is strong.”

The kid just doesn’t get it, does he? Which is disturbing given that he’s Bob’s Chief Economist in the Big Apple.

Two weeks ago, Geithner said trade with China was evening out, but it looks like he’s a dummy too: Imports from China climbed 12% in March and the US trade gap with Beijing widened from $28.1 billion to $31.5 billion.

So, the deficit continues to grow, and servicing the overall debt continues to get increasingly onerous. But US Sovereign debt – as we can see around the world today – is only part of the problem. In fact, the problem is insoluble – and yet to read the US business media output, you could be forgiven for thinking it might be just a nutwhack conspiracy theory.

I’m talking again about the astronomical obligations faced by American banks in the face of even a small number of failures. Bloomberg has updated these, and they show that the nine largest U.S. banks have a total of $228.72 trillion of exposure to derivatives….around three times the size of the real global economy that doesn’t involved worthlessly ‘leveraged’ paper. And that’s just nine banks owing


That’s an average of $25.4 trillion each. 2500 times more than the cap of Bank of America. 12,500 times bigger than JP Morgan-Chase.  25,000 times the size of Capital One.

Now over and over, I am told that “all these obligations are hedged”. But frankly, this is the inconsequential thinking pattern of an infantile delinquent: global banking is by definition a closed circle. To every reaction there will be a reaction. No one bank knows how their ‘bettee’ has hedged – or who with: but in the end, one comes back full circle to a bank already hedged one way and unable to hedge the other.  Of course, if the banker is Goldman Sachs, this is standard procedure anyway….but that’s a moral consideration for a banking firm with its own and client accounts: it’s not a financial option for a bank that has already thrown its customers’ money in one direction. The investment system is not the Universe; it is finite, and doomed to imbalance if too much risk is taken.

That the savvy American elite sees the Tsunami coming our way as a result of this is also beyond reasonable doubt.

The level of executive employee share selling among S&P 500 companies is the highest in nearly 10 years. The sheer volume of insider sales (nearly 1,800 by S&P 500 executives over a three-month period according to brokerage Brockhouse Cooper) is hugely indicative of steers stampeding away from a lava flow.

And – perhaps in an eleventh-hour bid to restore some of its image – Goldman Sachs is projecting that the S&P 500 will have fallen 11% by the end of 2012. (Actually, I think that’s a very conservative figure…but that all depends on Bearded Ben the Trillion Dollar Catatonic Man: maybe this year my Bear Note investments will bear something other than losses).

What today’s posts here show is that a French bank’s decision to buy a Greek bank will mean less than full disclosure, and thus unknown exposure. Spanish statistics being untruthful will have an effect on projected bailout costs in Brussels, which will in turn screw up the plans of a Central Bank in Frankfurt. And corrupt loans in Russia coupled with a slowdown in world growth will lead to problems for badly formulated loan books in Scotland.

It’s called contagion. And don’t let any wise-assed Wall Street banker convince you he has this all taped. Paulson didn’t, Applegarth didn’t, Goodwin didn’t, Blankfein doesn’t, Draghi doesn’t, and neither does Moynihan.




  1. I don’t see the direct link between an increased trade deficit and an increased government budget deficit and an increase in sovereign debt.


  2. It all reminds of Rubik’s cube, just when you thought you were getting somewhere, just one more twist and you are back where you started.
    Well, said it before, say it again, war is the US’s way out….


  3. And this, to top off this latest post:
    “UK recovery gathering pace as world economy recovers, says OECD
    Britain’s recovery is gathering pace and the global economy has found its feet, the Organisation for Economic Co-operation & Development has said in its most upbeat assessment of world prospects for more than a year”.
    They think if they keep spouting the same old tosh repeatedly we will start to believe it.
    Well, we don’t.


  4. That derivative figure is way to low.
    Enron type accounting “disappeared” $500Tn
    from the last total ,some time last year.
    The true figure,by now,may well exceed one
    Quadrillion.dollar,according to various commentators..


  5. Bloody hell John, in just one day you’ve upset the Spanish, our American counsins, those pesky Ruskies and I’m sure somewhere along the line you’ve had a pop at Wolfgang and Angie. Will you please leave some corner of the globe where we sloggers can claim political asylum on the not-so-far-off day of judgment. Albania is still bloody awful and I’m told the Maldives are about to sink. Otherwise, keep up the good work. Any chance of Devon declaring UDI?


  6. Look,you have all missed it.All those years ago,1974,when the UK had world beating companies,such as British Leyland(the Allegro,remember),the NCB( wage bill exceeded sales),British Shipbuilders,British Steel,British Telecom,British Airways,all losing money hand over fist,out of the blue came the bankruptcy of the giant of the private sector,Rolls Royce,whose board borrowed the entirety of the dividend,closely rivalled by Burmah Oil,whose collapse on 6 December,1974 was a turning point.Things move on.2012,the UK is a post industrial,multi cultural,cutting edge multi faceted economy,and guess what?Clinton Cards is kaput.This is the beginning of the BULL MARKET.


  7. The size of the exposure to derivatives is neither here nor there. It’s the net position after all the trades are closed that is key. That figure is way way smaller than the total exposure.

    As for the trade deficit: yes, for example, all the iPads sold in the USA are made in China. But who makes the money? Apple, not Foxconn. The amount the Chinese get is trivial. When we lived in a autarky-lite world of trade barriers and capital controls deficits were everything; everything is so interconnected now I’m not sure it’s even meaningful. For example; in the small-ish business I’m in, we formulate products in the UK in our R&D lab. We buy raw materials from SE Asia, Japan & S America which we ship direct to China – there we actually manufacture the product we designed in the UK, and we sell that product in China where it is used to make widgets by other companies whose products are then shipped back into Europe & the USA – where people like me who haven’t “made” anything then buy the stuff. We also use various derivatives to manage risk; buying forwards, hedging, making calls and puts, buying swaps. These basically even out but what they achieve for us is a fixed cost for future business. Our selling prices are fixed and raw material costs float, so we use these tools of the devil to manage risk. Uninformed people who don’t understand this call it funny money. What these tools of the devil really are, when used wisely, is an enabling mechanism which can reduce risk (used unwisely they will bankrupt you). And what our little business really is, is a truly global business with a complex revenue/tax situation where much of the value is not tangible and is not captured in the flow of goods. I fear most people don’t understand this is how business is done these days. All of which makes me think the pessimism exhibited so often in this blog (which i enjoy tremendously, btw) is a little overdone.

    Rather than worry about derivatives, we should simply follow Iceland and not bail out banks. And scrap the Euro.


  8. It’s not that the exposures are hedged in the normal way of looking at that activity, but rather that the number represents a gross exposure. There’s a real problem in that market, but this doesn’t capture it. The $228 trillion number represents the total amount owed by the banks, but also more or less the total amount owed to the banks. Because of that, this gross notional number number is sort of irrelevant. The problem will come when one of the essential links in the chain collapses — and there is more risk of that in a market so huge — but the $228 trillion number in and of itself tells us little because in many ways it’s circular in nature.


  9. Jaime and Gab
    Like the UK, the US is an avid consumer of cheap hitech Asian goods.
    The trade deficit thus produced gives US plc less real money to spend on looking after its citizens ‘in the manner to which they’ve become accustomed’.
    No politician wants to (as a result of this) either charge more in taxes or offer less in the way of benefits.
    So they borrow to keep taxes low and benefits at the same level.
    That increases the budget deficit.
    The higher budget deficit makes currency traders mark down the value of the Dollar, and makes credit suppliers mark up the US borrowing yields.
    The first of those puts up the cost of raw materials. The second puts up the cost of borrowing.
    Result: Unhappiness.
    The only reason this isn’t happening right now is that investors ‘trust’ the UK and the US more than Greece. They are victims of nothing more or less than false brand imagery.
    As the situation worsens here and in the US – and we become infected by EU sovereign debt and eurobank obligations – investors will realise their mistake, and charge us more to borrow as well.
    At this point, the World needs a good idea.
    Mine is global debt forgiveness.


  10. Well for my money its really quite simple. The Financial Services Industry is far too big for the world it lives in. What should be a simple utility has ended up dictating terms to the rest of the global economy. 99.5% of the sector is simply froth with the sole purpose of enriching bankers, The solution is to get us back to Financial Services pre Reagan and Big Bang. Write off these exposures, if they were built they can be taken down without Joe Public losing his shirt. Take out all the casino complexity and fire the con-men.


  11. Mr (soon to be owned by the Chinese) Weetabix, as you rightly say, Apple make the real money from Chinese made iPads – but it doesn’t trickle down to American workers, does it? Following your globalist argument, we should simply accept that stuff be made wherever it can most cheaply be made, and people in declining Western nations can buy it – trouble is, westerners haven’t the disposable income anymore, something to do with mass unemployment, due to western factories closing, unable to compete with slave labour wages. Global capitalism is eating itself.


  12. So what happens when the main provider of all the money (US Federal reserve) gets a big demand for payment (Lien), so big (think Trillions) that there isnt enough money in the world to pay it back and so legally binding theres not a lawyer on the planet capable of deferring, avoiding or stopping it in any way!

    Well shortly we are all going to find out.


  13. Thank goodness someone is calling out the hypocritical financial crimes that the big players commit, conceal, and get away with all the way time… so tired of people seriously believing that the PIIGS’s bad habits are they’res alone, and also responsible for the end of the world.


  14. Derivatives are something to worry about. Ask the farmers who hedged with MF Global where their money went? The amount of outstanding contracts dwarfs the underlying physical assets.


  15. @A G

    “Global capitalism is eating itself.”

    I haven’t yet understood how it was ever expected that countries which couldn’t balance their own systems and books when outside interference was minimal, expected it to be any better once the whole lot was complicated by globalism.

    If something can’t be made to work in simple form why is it expected to do so by complicating it? Rhetorical question. In my view it can’t work on the basis of any model yet tried.


  16. Pingback: John Ward – Crash 2 : The US Recovery Is Not Real, But The Us Debt Is A Double Whammy – 10 May 2012 | Lucas 2012 Infos

  17. “Rather than worry about derivatives, we should simply follow Iceland and not bail out banks. And scrap the Euro.”

    So there is a problem then but it is currently not as bad as stated?

    Following Iceland in declaring bankruptcy, not bailing out the banks and scrapping the Euro are pretty major changes, why would we need to do that if the pessimism exhibted here is nothing more than for amusement?

    My take on it is that the pessimism derives from the realisation that because of the political corruption involved, what was a drama is determindly being made into a life changing crisis for decades to come. In truth the derivatives issue is just a handy chart for comparison purposes, which indicates just how stupid what the politicos are doing really is.


  18. SITC – not sure if it’s any help, but Torrington often looks to me as though it has declared UDI from the rest of Devon … ;)


  19. Jamie and Gabriel, I am not sure either! However, I am going to try to reason it through since I know that John will help all three of us out at some time.

    An increased trade deficit means that Americans are not buying US manufactured goods as much as would benefit the country. Individuals and companies are buying foreign products and either, they are going into personal or corporate debt as a result, or they have less wealth to spend on other US manufactured goods.

    Let’s suppose that half of the trade deficit is an increase in personal and corporate debt, and the other half comes from savings which are not part of a loan from, say, a bank.

    Half this trade deficit has deepened the US’ overall debt because, by purchasing these foreign products, people have increased their personal and corporate debt levels. As a result, the US government will receive less tax from these purchasers because they are either paying an increased interest on the loans used to buy the foreign stuff or because these purchasers have gone bankrupt or will do so sooner as a result of venturing into the world of foreign products.

    Since about 60% of US government income (and therefore expenditure) comes from taxes, a trade deficit, if big enough, will begin to reduce the tax take from 60% downwards. Now, the remaining 40% of US government expenditure comes from its sale of US Treasuries ie its Sovereign debt. This, then, rises to 45% if the tax take falls to 55%.

    So, the US government budgetted for a 60% tax take but gets only 55% with the result that the budget income is decreased by 5% that year. The US budget deficit has gone up. This deficit is removed by increasing the US debt through spending more US bond money than estimated.

    If there was a trade surplus, the personal and corporate tax income to the government would increase, and less of what foreigners lend to the Sovereign state of the USA would have to be spent on its overall state expenditure.

    Reduced tax take also occurs because the American companies making the same sort of goods get less income to be taxed as Corporation tax, dividend tax or personal income tax from pay rises or from more people being employed.

    There! I’ve risked exposing myself as an idiot! However, you can challenge it and improve on it until John comes to our aid.


  20. But the City is the cutting edge of financial jiggery pokery, they make millions with clever financial engineering, its what Scameron thinks we’re good at. Actually they con millions with scams like this and I agree they need to be reined in. Fair enough use derivatives for commercial purposes of the kind seb weetabix describes, but tax the speculative ones by investment banks at 1%. Why doesn’t betting duty apply to them anyway?


  21. “Two weeks ago, Geithner said trade with China was evening out, ” this reminds me of a dreadful nightmare I’ve been having about an evening out in China with Geithner; I keep getting it every night in colour..


  22. I agree that the US Sovereign Debt is insoluble as is the total Global Sovereign Debt of all countries added together.

    Few people say this because the consequences are too awful to behold. Best keep the eyes shaded and the head bowed to the ground whilst walking to Armageddon.

    This price inflation period began in 1894 in almost all countries in Europe. Odd why it was 1894 everywhere but the graphs of price inflation do support this.

    So individuals, companies and countries have had to find ways of coping with price inflation ever since. More recently, compared to the end of the 19th century, currency devaluation has been de rigeur for politicians wanting to be re-elected to power.

    I think that something that began in 1894 cannot, simply cannot, go on for much longer. I suppose the signal that the world’s currency is too devalued to survive any longer is when the US dollar starts to hyperinflate. Then, we’re in big trouble especially the middle classes and their savings!


  23. Torrington it is then! Great Torrington for years was valued for its strategic importance. The town had a significant role in the English Civil War, specifically, the Battle of Torrington in 1646 which marked the end of Royalist resistance in the West Country. Great Torrington today has become well recognised as an important heritage centre for the history of the 17th century. It is a vibrant community and people in the town, proud of their heritage, can often be seen dressed in costume for re-enactments, festivals and celebrations. Sounds like a cracking place for an old cumudgeon to put down some new roots. Do they speak English?


  24. All the fancy topiary didn’t do much for that nasty unexpected consequence to the Lehmann’s collapse – AIG following suit, quickly followed by Geithner & Paulson presumably changing theirs. Moral hazard thrown out of the window as the then definately promoted to ” To big to fail, jail or bail” bankers strutted their stuff in the newly acquired knowledge that due to derivatives nobody could possibly know what sort of Pandora’s box would be opened up if the powers that be didn’t keep their gigantic zombies on a drip feed:


  25. Could be worse, tonight I predict your dream will feature the lovely Angela, in ghastly technicolor.
    Sweet dreams :)


  26. Seb

    Good to know that someone is using derivatives for the very reason that they were designed & have not gone over to the ” Dark side “


  27. No question that financial services are too big, but the desire to get back to pre-Reagan is political and in no way solves anything. The banks more or less went bust in the 1970s, dramatically so in the UK, so Reagan isn’t really the bad guy here unless you’ve already decided long before this that he is. We are a society that lives on debt and deficit spending. That is unsustainable. The debt resides in the banks so they’re always going to blow first regardless of size. The problem is that we spend too much. Governments and people. The outcome will remain bleak as long as that remains so.


  28. John Mark,, wow thank you for such a concise and clear explanation! So often, I read these posts and although I get the gist I dont really understand the nitty gritty. But you have just explained it in words of one syllable that even an old girl like me can comprehend. Well done.


  29. ‘China’s export and import growth slowed in April raising fears about a sharp slowdown in its economy and triggering calls for monetary policy easing.’

    “Global capitalism is eating itself.”- and I could dance a little jig – It’s about time too. Unregulated financial greed coupled with the falacious promises of perpetual growth, peak oil, environmental destruction, the illusion that the western world can sustain a post-industrial working population through debt rather than tax, outsourcing manufacturing to low wage economies and the ravages of four decades of automation, are all about to come home to roost…

    The future is heavy with menace and devoid of hope.


  30. Odd that it started c. 1894? Maybe not, iirc it was about then, or not long afterwards, that a European government – Germany or France – discovered that its ailing cash flow could be teased out for a few handy weeks by issuing notes (IOUs) redeemable in specie, to its suppliers. Until then, money was metal.

    The rest, as they say ………. and so here we are today.


  31. If you believe the BS argument about the derivatives
    netting out,I have some wonderful beachfront property in
    London to sell you.
    Lehman CDS exposure was just $8 billion.
    Because of the cascading counter party failures,
    net became nearly $! Tn.IE net becomes gross when
    a single link in these complex chains, breaks.
    Those are the known unknowns.
    Then we have the unknown unknowns.


  32. rhubarb, I guess that it must be due to a number of different things coming to a price inflation conclusion in that year. I suspect that the European population had just exceeded a trigger level whereby the demand for goods, especially agricultural, exceeded supply. Perhaps the weather was involved too.

    Four years before, Robert Koch had published four postulates about bacteria and their relationship to disease. This indicates that the onward march against epidemics was becoming more sophisticated. In the 1840s, Semmelweiss stopped medical students going from the dissecting room to the labour wards, thereby drastically reducing maternal mortality.

    Perhaps, there were some cultural reasons why an increased population in Europe were bringing about an expectation of a higher standard of living for individuals and families.

    My postulate is that human beings are the ultimate cause of price inflation, and that inflation will never be conquered until a very much smaller global population expects less from life in terms of its standard of living.


  33. @John Mark: Good try :-) But not very accurate methinks. Try this:

    – When Americans buy German cars they have to be paid for with Euros, bought by selling USD. That applies downwards pressure on the USD value followed by higher interest rates to prevent domestic inflation. That is bad news for America Inc’s economy because, recall, this is going on, on a huge scale across the consumer sector from cars to TVs to computers and everything else.
    (The issue of consumer debt level is not really relevant to this).

    – Buying German cars means not a single hour’s work is put in by any American worker to build them (including component suppliers etc). That has implications on domestic employment levels and increases govt welfare/health obligations, therefore domestic consumer spending, employee payroll taxation, corporate profits & taxation.

    – Sadly, govt cannot stop spending, so it has to borrow the difference between income from the above taxations and spending. The consequence of this is a US national debt of $15.6 trillion. And rising.
    Sometime later, I will explain how America Inc benefits from the USD being the global reserve currency and why commodities are traded in USD.


  34. Late Thursday eve – JP Morgan has lost $2bn plus over the past 6 weeks in the casino ‘derivative’ market .It could take weeks if not months for a final tally of loss .

    Looks obvious that the Banks have learned nothing and this ‘high roller’ quick money mentality continues unabated .


  35. This is a great illustration of the point JW is making. The total trade in point here that was meant to hedge JP Morgans own risk is apparently some $200Bn. The loss is claimed to be $2Bn at present but what will it be by the time JPM have unwound their erroneous position, with other traders/hedge funds happy to stick the knife in and profit at JPMs expense. Some estimates on Zerohedge are putting it at upwards of $20Bn. JPM are the biggest bank in the US and supposed to be the best at this, but they have in their own admission messed up. No doubt the fed will find some back door way to bail them out and pass the tab to US taxpayers. Its unacceptable, break them up now!


  36. Bankrupt Taxpayer, I am now in Bellevue’s position where I simply don’t understand what you’re talking about!

    This phrase, the exchange of dollars for euros ” applies downwards pressure on the USD value…” communicates virtually nothing to me. Firstly, how does this happen? What is the mechanism by which this occurs?

    Secondly, the greatest downwards pressure on the value of the USD is money printing or equivalent. The dollar is made less valuable by there being more of them in circulation than was the case, say, ten years ago.

    Since the USD has lost some 98% of its value compared to the time when the Fed came into existence due to Fed interference with money supplied to the people, is it really true that exchanging a large number of USD each year is going to make a difference to its value?

    Then you say that interest rates have to rise to prevent domestic inflation because USDs have been exchanged for other currencies. Price inflation occurs because the demand for goods exceeds their supply even if they are made in the USA. When this happens and the USD is devalued by money printing, inflation rises yet further and needs higher interest rates to slow demand for products.

    I’m afraid your explanation has not worked for me, but undoubtedly it has for most people.


  37. Pingback: JP MORGAN DEMONSTRATES WHY THE FUTURE’S IN THE SLOG | A diary of deception and distortion

  38. @John Mark: It’s quite simple really. When America sells USD to buy EUR to pay for its imported goods, then the USD falls in value on the FX markets. America has been doing this big time for years due to its addiction to imported goods. (fyi: Brazil’s central bank is currently selling large quantities of its own currency for the purpose of pushing down its value to help its exporters). The consequence is higher domestic price inflation thru higher import prices and higher interest rates are then necessary to suppress it. There’s more to it but is it clearer now?

    Yes, FED printing USD also lowers the value of the dollar for the reason you state, but this debate is specifically about consequences of running a trade deficit, not money printing. The pincer movement in action!

    There are numerous causes of *price* inflation. One I’ve described above, another is too much money chasing too few goods. Both are valid.
    There are some other reasons too, eg: government regulation which creates a compliance cost to manufacturing/supply industry which gets passed on through higher prices. The latter was a factor causing inflation in Britain under the last Labour Govt, but few people spotted it…very few economists did.


  39. Pingback: CRASH 2: Why Draghi’s strong words on the euro presage the first big banking collapses. | A diary of deception and distortion

  40. Pingback: John Ward – Crash 2 : Why Draghi’s Stron Words On The Euro Presage The First Big Banking Collapses. The Over Beveraged Banker Staggers in, Stage Right – 1 June 2012 | Lucas 2012 Infos

  41. Pingback: THE FAKE US RECOVERY: Slog doubts vindicated by new jobs data | A diary of deception and distortion

  42. Pingback: John Ward – The Fake US Recovery : Slog Doubts Vindicated By New Jobs Data – 7 July 2012 | Lucas 2012 Infos

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