Satyajit Das: Botox Economics – Part 1

By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Botox is commonly used to improve a person’s appearance by removing facial lines and other signs of aging. The effect is temporary and can have significant side effects. The world is currently taking the “botox” cure. A flood of money from central banks and governments — “financial botox” — has temporarily covered up unresolved and deep-seated problems.The surface is glossy and smooth, the interior decayed and rotten

The 2009 ‘recovery’ was based on low or zero interest rate policies (“ZIRP”) of major central banks. Massive government intervention also helped arrest the rate of decline of late 2008/ early 2009. Without government support, it is highly probable that most economies would have been in serious recession. Just as China practised capitalism with Chinese characteristics, developed economies discovered socialism with Western characteristics.

Capital injections, central bank purchases of “toxic” assets and explicit government support for deposits and debt issues helped stabilise the financial system. Changes in accounting rules deferred write-downs of potentially bad assets. Despite these actions, the global financial system remains fragile.

Further losses are likely from consumer loans, including mortgages. In the U.S. mortgage market, one-in-ten householders are at least one payment behind up from one-in-14 a year ago. If foreclosures (now around 5%) are included, then one-in-seven mortgagors are in some form of housing distress.

Recent stability in U.S. house prices may be misleading reflecting the effect of government incentives (the $8,000 first time homebuyer tax credit) and low mortgage rates driven in part by the Fed’s MBS purchases. The value of 20-30 % of properties is less than the loan outstanding. Home sales remain modest with around 25-30% of sales of existing homes being foreclosures. Housing inventories also remain high in historic terms. With more adjustable rate mortgages resetting in 2010 and 2011, the risk of further losses on mortgages cannot be discounted unless economic conditions improve.

Rising vacancy rates, falling rentals and declining values of commercial real estate (“CRE”), primarily office and retail properties, are apparent globally. In London, Nomura, the Japanese investment bank, secured a 20-year lease of a new office development on the River Thames – the 12-storey Watermark Place – for £40 per square foot. This was over 40% lower than the rents of nearly £70 per square foot demanded prior to the GFC. Nomura will also not pay any rent until 2015. Mark Lethbridge, partner at Drivers Jonas who advised Nomura, told the Financial Times: “… I’m unlikely to see [the terms] again in my career.”

Banks are likely to remain capital constrained in the near future reducing availability of credit. Commercial and consumer loan volumes have declined reflecting a lack of supply but also a lack of demand as companies and individuals reduce leverage.

The real economy remains fragile. Government actions, such as fiscal stimulus and special industry support schemes (cash for clunkers; investment incentives, trade credit subsidies), have boosted demand and industrial activity in the short term. The problem remains as government incentives encourage current consumption and investment but ultimately “steal” from future demand.

Employment, a key indicator given the importance of consumption in developed economies, continues to decline albeit at a slower pace. In the U.S., unemployment reached 10%.

In many countries enforced reduction in working hours and taking paid or unpaid leave reduced the rise in unemployment levels significantly. Working hours and personal income have fallen.

Changes in the structure of the labour force also distort the real picture. If workers working part time involuntarily and looking for full time employment are included, the U.S. underemployment figure is in the 16-18% range. Long term and youth employment also remains high.

European economies, especially countries such as Spain, are also experiencing significant unemployment. In some economies, unemployment is a new “export” as guest workers are shipped back to their country of origin or remittances home fell sharply.

In developed countries where an increasing part of the population is nearing retirement age, wealth effects affect consumption behaviours. Low interest rates and reduced dividend levels limit income and expenditure.

In 2009, global trade stabilised after precipitous earlier falls. According to the CPB Netherlands Bureau for Economic Policy Analysis, as of September 2009 world trade was 8.0% above the low of May 2009 but 14% below its peak of April 2008. Trade protectionism threatens recovery in global trade.

Major risks in the financial and real economy remain and may disrupt the hoped for resumption of business as usual.

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  1. DIY Investor

    Nice write-up. I would add on the employment picture that the problem is that the unemployed use up taxpayer funds. Putting people to work shifts them from being an absorber of taxpayer funds to a contributor to taxpayer funds. This is a major shift and needs to be the center of focus. Otherwise, state and local governments will implode further.

  2. i on the ball patriot

    The economic conditions you describe are less signs of the appearance of aging than they are a pinning down and rape of the victim. It is more a wealthy ruling elite pulling of the curtains, and duct tape over the mouth, than it is a “botox” cure.

    Deception is the strongest political force on the planet.

  3. Blurtman

    In this terminal stage, the Power Elites erect one facade and facsimile of reform after another, each one heralded as the “fix” the nation-state or Empire so desperately needs to return to “the good old days” of seemingly unlimited power and prosperity. All are shams, carefully designed and marketed simulacra of actual change.

    These monumental efforts at creating the illusion of reform have an immediate payoff: the Power Elites remain solidly in power, and their share of the nation’s income and wealth actually increases as the majority of citizens sink deeper into various stages of poverty.

    Eventually, of course, the system comes apart at the seams, because facades, illusions and sham reforms have not actually fixed any of the marginal returns or fundamental problems eroding the system/Empire. Eventually the State/Empire collapses.

  4. Doug Terpstra

    Well said—and great link to Charles H. Smith, a thoughtful writer who helps diffuse and defuse exapseration. It’s in my fav’ folder too.

  5. doc holiday

    Financial Botox bingers’ obsession with ‘freeze-frame’ faces is leading worrying new ‘wrinklerexia’ trend

    Image-conscious Briton Bankers were warned of the dangers of ‘Wrinklerexia’ yesterday, after doctors reported that growing numbers of bankers are bingeing on Botox.

    Liz Dale, Director of of the private cosmetic surgery chain, said: ‘Used properly, Botox is a fantstic financial cosmetic surgery treatment giving smoother, tighter and more youthful looking spread sheets and earnings reports. But like with any procedure, it’s highly unadvisable to have more done than is necessary– and as for TARP, most bankers will not only suffer from Wrinklerexia, but probably Spontaneous Human Combustion (SHC).


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