Why the economy will collapse

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Why the economy is going to collapse

Dr. Sachin Nandha, PartnerDecember 2010

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- Founder & Director of WeComeOne Money Ltd.

Sachin Nandha

As an integral investor, we work with talented management teams to develop businesses that have potential for significant growth. These businesses gravitate towards areas that benefit society such as education, research, alternative energy and healthcare. Our philosophy is to invest and support people who start, grow, change and buy businesses; delivering significant power to the people we work with through our knowledge, experience and global network of relationships.

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How did we get here?• 2000 – the .com bubble pops• 2001 – Twin towers attacked• 2002 – cheap “funny” money• 2006 – debt packaged as AAA rated bonds• 2007 – interest rates rise resulting defaults• 2008 – real estate bubble pops; propped up by bailouts• 2009 – economy further propped up by “stimulus”; equity markets flourish, banks make record profits• 2010 – ?

What does it mean?.com bailed out by “funny” money fuelling real estate bubble; real estate bubble bailed out by government debt; and government debt bailed out by ?

Dysfunctional Capitalism

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September 11th 2001

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The FEDAlan Greenspan“Despite the tragic events of September 11th, the foundation of our free society remains sound & I am confident that we will recover and prosper as we have in the past.”

Unlimited support from the FEDSpeculators and banks take risksBecome too big to fail

If speculators win; they make profits; if they lose the FED will bail them out

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Capitalism in name only Fear vs. Greed

Capitalism requires there to be a “natural” balance between fear and greed for it to function

Alan Greenspan’s ideas eroded this balance because speculators could risk without fear resulting in excessive greed

Excessive lendingBanks lend carelessly US citizens borrow trillions to consumePresident Bush launched initiative for every US citizen to own a home

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Vernon L. Smith

Nobel Laureate Chapman University

“If you can buy a home with almost nothing put down, you do well if house prices continue to go up; if it goes down borrowers have an incentive to walk away from it, and let the bank have it!”

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Interest rates vs. House Prices

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House as a cash machine

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House as a cash machine

People took out 2nd mortgages called Home Equity Loans

NINA loans: No income No assets

Legislation encouraged lenders to lend to people with modest incomes

Advent of Government Sponsored Enterprises (GSE) – Fannie Mae & Freddie Mac (in USA)

Governments guarantee all bank deposits

= a home equity bubble

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House prices to earnings ratio

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Any moral hazard?

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Banks create debt security bonds

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Banks create debt security bonds1: Banks lend carelessly, supported and encouraged by government legislation

2: Begin to package these debts as security bonds (CDO’s)

3: Trade them to other banks, GSE’s, and other countries

4: Credit agency gives them a AAA rating

5: Credit agency is paid by the issuers of these security bonds (moral hazard)Government issues license to credit agency

Credit Agency

Wall Street pays

Credit Agency issues AAA rating to bonds

Moral h

azard

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Indifference, denial & panic

Ben Bernanke, in 2006 said “I don’t buy the premise we’ve had a nationwide decrease in house prices.” - Dismissal & Denial?

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The collapse

In July 2007, the Bank of England raised interest rates to 5.75%By December, 2008 the interest rate had dropped to 2%By 5th March 2009, interest rate was at 0.5%•By 2007, debt consolation had peaked. People could no longer get re-mortgages to pay off existing debts

•In the USA defaults and foreclosures were taking place at record levels

•Mortgage backed securities sold all over the world, which were rated AAA, suddenly became worthless, no one knew their RISK

•FEAR took hold of the market, and banks stopped lending to one another out of distrust – CREDIT CRUNCH

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Credit CrunchReasons for the scarcity of credit

1. Anticipated decline in over inflated collateral against loans already handed out (fall in house prices, as they were created by a bubble)

2. Well run businesses suffer as they can no longer get short term loans to bridge commitments – make people redundant

3. Bank of England required all banks to re-capitalise, meaning that they must have a higher percentage in cash reserves

4. CDO’s – collateral debt obligations fall in value, billions of pounds were written off as US housing market fell in value

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Government to the rescue

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Government to the rescue in the USA

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Today – proper capitalism?

Government takes on all the risk and debt

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Government intervention – proper capitalism?

Purist claim that government intervention is the cause of financial bubbles; these people claim that any speculator, no matter how big, should have been allowed to fail. Really?

•Government puts in 700 billion dollars to buy up bad debt

•Government also forces banks to take bail out fund even if NOT required, so the market cannot clearly distinguish which banks are in trouble.

•Governments all over the world are forced to prop up their banks because US and Britain started to do so

•Bail out money Wasted in 3 ways: (according to Peter G. Peterson Foundation)

1. Did not have clearly defined objectives2. Did not have an upfront criteria for who should get the

money3. Few conditions were put on the money; hence banks did

whatever they felt was right

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Government intervention – proper capitalism?

17th Feb 2009 Obama launches Stimulus package (Re-investment Act) = $787 billion; total approaching $1 trillion

•USA and Britain diverge in strategy

•Britain takes austerity route – Conservative ideology

•US takes stimulus route – Democrat ideology

Which will work?

Dysfunctional capitalism?

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We need to learn that we can’t keep creating artificial prosperity through propping up “bubbles”.

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Government fuelled

recovery

Housing bubble

.com bubble

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Is the worst really over?

“The biggest financial storm is on its way!”Marc Faber

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Is the worst really over?

“Why the biggest financial storm is on its way!”Marc Faber

Falling £££

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Things look good right?

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Why the economy will collapseWhat happens if a country goes bust?

If interest rates rise by 1%, US taxpayers will pay extra $100 billion in servicing debt

President GW Bush racked up more debt in his 8 years than all the US presidents combined

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Why the economy will collapseWhat happens if a country goes bust?

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Signs of the coming fallLiberty is eroded to “control” the “global

crisis”?1. Centralisation of power

2. Austerity measures are implemented to reduce national debt levels

3. Unemployment rises

4. Public debt does not reduce

5. WAR!

6. Creation of necessary illusions – Noam Chomsky

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What investors should doSTOP speculating!!!

1. Take charge of your money!

2. Invest directly into Cash & Profits

3. Invest in boutique investment firms (not hedge funds, pensions, etc.)

4. Concentrate on healthcare, education, water, waste management – the things that people “actually need!”

5. Think LONGTERM

6. Get out of equity markets!

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What investors should doSTOP speculating!!!

Cross your fingers & pray