When Japan’s so-called “Lost Decade” began with a bang in the early 1990s, she was an “OL” – an office lady – working in one of Japan’s mightiest corporations and she kept her job, despite the downturn.

She was one of the lucky ones. Her employer was a mainstay electronics producer and a key exporter, meaning the company’s business remained reasonably healthy.

This time around, she’s a housewife and mother. And she’s worried. Her husband, Masao, works at a local manufacturer that’s cut back production to only four days a week. He’s taken a part-time job, schlepping boxes overnight at the local convenience store, to make up for the reduced pay. Their son, Daiki, is headed for college – and for an uncertain future.

“I don’t know if I have the strength to go through this again,” she said. “This time, it’s worse,” noting that Japan never really recovered from its “Lost Decade.”

Anatomy of a Lost Decade

Having spent a substantial amount of time in Japan over the past 20 years, I agree and I’m struck with a tremendously foreboding sense of déjà vu that I just can’t shake no matter how hard I try.

What happened in Japan is being replayed in the United States – in exquisite detail, and with a bit of agony, too. Since 2001, I’ve been warning anyone who would listen that the Japanese experience was only a precursor to what we could experience here.

Naturally, that’s been a controversial view, particularly since it’s virtually unthinkable for an entire generation of politicians and financiers who thought they “knew better” and that it could never happen to us.

But lately, it’s not so unthinkable. In fact, if I were to take the names out of the Japanese experience, the story could easily be the one that’s unfolding now.
In the late 1980s, Japanese companies ran the planet. A strong currency, solid work ethic and close government connections created an unstoppable growth machine – referred to by the U.S. media as the “Japanese juggernaut,” or the “Japanese Superman.”

In the interest of additional growth and financial modernization, Japan deregulated its financial markets and began lowering interest rates. Not surprisingly, the Nikkei 225 stock index more than tripled in less than five years, companies blossomed and the use of debt skyrocketed.

Sound familiar?

Then all hell broke loose.

At the same time, real estate values began to waver, the government figured out that the entire Japanese financial system was a house of cards leveraged against collateral that didn’t exist and that wasn’t properly valued in the first place. And the Nikkei has collapsed to where it stands today – at one-fifth the value it had attained in 1989.

Once-stalwart companies began defaulting on loans and many went out of business entirely. Individuals couldn’t repay their debts. Real estate values fell dramatically and today remain as much as 50% below their 1989 peak. People simply turned over the keys to their homes to the banks or, like the family immediately behind our house in Kyoto, simply disappeared in the middle of the night, never to be seen again.

Unemployment rose to an unthinkable 5.5%. Suicides soared. And homeless camps, which Japan had never seen before in the post-war era, go-go years, dotted the banks of the rivers that wind their way through major cities like Tokyo and Osaka. In our neighborhood, the Kyoto city government built a brand new bathroom building for the children’s playground only to watch as a troop of six homeless men moved in – and refused to leave for the next four years. We also watched ubiquitous, blue-tarped “houses” appear under each bridge spanning the scenic Kamo River.

They disappeared when Japan’s economy improved in the late 1990s, or early this decade. They’re back now.

Making matters far worse, at the same time all of this was happening, deflation set in with a vengeance and brought matters full circle. Lower prices meant lower margins. Lower margins meant lower production and the need for lower production, in turn, created the need for smaller work forces.

Fast forward to today.

A Painful Replay

This same downward spiral that played out in Japan in the early 1990s seems to have taken hold here in the United States. Economists called this “excess” capacity and said that a short period of readjustment would be followed by new growth. But instead, they’ve gotten just more misery punctuated by a few fits and starts of economic recovery. And the resultant record job cuts hardly point to an imminent turnaround.

Even so, many people here in the United States remain in denial. They simply cannot accept that what happened in Japan appears to be replaying itself out here. They reason that our government is taking more aggressive action than the Japanese government did, that our corporations are better managed, that somehow they’ll pull through based on demand and, my personal favorite, that our bubble simply wasn’t the same as Japan’s.

They’re right … it’s worse.

According to a report in the Global Mail, in 1989 the Japanese economy needed a mere three yen of credit to make one yen of national income. Here in the United States, we’ve needed $8 dollars of credit for every $1 dollar of national income. And we may need more. In Japan, the “bubble” grew for only a few relatively intense years from 1985-1991. Here in the United States, it’s been allowed to fester for 30 years.

When the Japan’s bubble broke, it was a creditor nation, which means, overall, there was more money flowing into Japan than out. At the time, Japan had $1 billion surplus on any given day.

When the U.S. financial crisis started, this country was running a $2 trillion deficit, meaning we’ve spent that much more than we earn as a nation. Now, factoring in the stimulus plans and all sorts of bailouts, we’re arguably approaching $14 trillion.

In 1990, the Japanese were saving 17% of their income. At the moment, Americans have practically no savings to fall back upon and our savings rate has, in fact, gone negative several times in recent years (however, some reports indicate that U.S. savings rates have risen in recent months).

But what really makes me stop and think twice is this: At the time Japan’s bubble burst, the island nation still had extensive trade with its partners, and consumers around the world were spending. So there was a cushion. This time around, spending has ground to a halt and there literally is no safety buffer.
Just last week, in fact, Money Morning reported that Japan’s exports were cut nearly in half last month as the global downturn crushed demand for the country’s electronics and automobiles, a development that increases the odds that the Japanese yen could be poised for a tumble.

That, more than any reason is why the U.S. government – right or wrong – has stepped in to become the risk taker of last resort.

While that may actually be a good thing from the standpoint of intent, it hasn’t been great from an execution standpoint.

In as much as the U.S. stimulus programs being enacted by central bankers around the world will eventually take hold, that suggests that investors should continue to invest – albeit super selectively – throughout this mess in a couple of areas:

• Bond markets are especially overbought and I can’t think of more spectacular profit potential particularly at the long end of the spectrum. The U.S. government may borrow as much as $3 trillion dollars in 2009 alone, and it’s likely rising rates are not far behind.
• The Japanese yen itself seems ripe for a fall, so shorting both the Japanese markets and the yen itself may wind up being an outstanding choice, especially once the reality of falling global demand sets in.
• And, of course, infrastructure. Despite the fact that the world is pulling in its horns, the infrastructure we use is not getting any younger particularly with regard to electricity. Even if expansion plans are put on hold, existing grids will require repair and constant upkeep. The last thing any government will let happen is a complete collapse of the power grid, because it would mean the end of civilization as we know it, thanks to the social chaos that would ensue.

Source: Although Experts Said it Could Never Happen, U.S. Crisis Looking Like a Repeat of Japan’s “Lost Decade”

This from Sovereign Society:

The odds are growing that one or more sovereign borrowers in East and Central Europe will default in 2009 unless the financial hemorrhaging stops. Local banks in these markets have been battered, currencies have declined sharply, liquidity is running dry and stock markets have collapsed.

With global markets once again reeling from the next chapter of disastrous bank-related earnings and the prospects of full government nationalization on the horizon in several countries, another blow to investor confidence might be around the corner: a sovereign government default.

According to the Financial Times, global bond issuance in 2009 will reach an all-time high of more than US$3 trillion dollars – three times greater than last year. In the United States, the Treasury will auction almost US$2 trillion dollars to fund monster fiscal spending packages and bailouts; in Europe issuance is expected to reach more than US$1 trillion dollars.

Euro-zone Failed Auctions

Several European countries in the euro-zone have struggled to meet bond auctions, including the world’s second-largest fixed-income market – Germany.

Since October, Germany has failed to meet its bond auction targets on four separate occasions, either reducing or scrapping government bond auctions altogether amid poor investor demand.

Investors are growing nervous because of the unprecedented funding requirements for European fiscal spending in 2009 as the financial system yearns for a wave of fresh capital amid bank equity deflation. The United Kingdom has announced the first initiative to collateralize all toxic bank assets with implicit state guarantees – a first at this stage of the credit crisis.

Elsewhere in Europe, countries like Austria, Spain, Belgium, Italy, Holland and Ireland are struggling as interest rate spreads versus German bonds continue to soar. Rising spreads mean investors are growing more risk-averse and demand higher interest rate compensation compared to Germany – the regional safe-haven market.

The euro-zone is now awash in bond supply as countries race to sell debt to finance fiscal spending packages and increasingly, bank bailouts that will probably result in government nationalization of the battered financial services sector.

HSBC Credit Swaps Cheaper than Most European Governments

The cost of credit protection measured vis-à-vis credit default swaps (CDS), which protect lenders from an issuer defaulting, have soared over the last several weeks for the United Kingdom, Italy, Spain, Greece and Ireland among others.

It now costs more to protect against a default in several European nations than it does to insure against HSBC – the world’s biggest bank. That’s a major 360-degree shift in investor sentiment because 12 months ago, the tables were turned in favour of sovereign governments.

Earlier in January, the rating agencies downgraded Greek and Spanish debt and other countries, including Italy, Belgium, Ireland and the United Kingdom might be next. A credit downgrade implies rising funding costs for government borrowers as the market places a higher interest rate premium on sovereign debt.

While funding gaps lurk for countries sporting bloated debt-to-GDP ratios, others in the emerging markets are in worse fiscal shape with the IMF already bailing-out three countries over the last six months.

Debt-to-GDP Ratios Surge in Eastern Europe

While the financial panic gripping the industrialized nations has been frightening, particularly for Western governments, the scope of the disaster is now beginning to threaten the ability of some countries to service their debt burdens in the emerging markets. That’s because many countries in East and Central Europe have amassed a mountain of short-term debt obligations, threatening debt servicing as local currencies plunge.

In many ways, the current funding crisis among weaker emerging European borrowers is similar to what occurred during the Asian economic crisis starting in 1997. Most nations in the region also accumulated massive short-term debts denominated in dollars.

Many currencies in the emerging markets have crashed since last July, raising their cumulative debt-servicing costs and limiting their ability to raise fresh capital from global investors. This is especially the case in the Baltics and the Balkans.

In 2008, Ecuador and the Seychelles defaulted on their debt.

Since last fall the IMF or International Monetary Fund has bailed-out Iceland, Hungary and Ukraine. More countries might be next in the emerging markets and quite possibly, even in the euro-zone.

According to Deutsche Bank, combined current account deficits and debt of Eastern and Central European countries is around 18% of GDP or gross domestic product compared with only 8% in Asia and Latin America. Some countries are now in the danger-zone with explosively high debt ratios, including Estonia, Latvia and Lithuania.

Credit Spreads Point to Danger, Possibly Default

In the euro-zone, Ireland, Greece, Portugal and Spain maintain the highest credit spreads over German bonds in late January ranging from 3.39% for Greece to 1.73% for Spain.
Indeed, investors have demanded higher interest rates to compensate them for rapidly rising deficits in these and other euro-zone countries.

Yet the credit spreads in Europe are kids’ stuff compared to recent developments in the emerging markets.

Ukraine, which has already received IMF aid, must rollover approximately US$30 billion dollars of funding this year while Hungary requires US$15 billion dollars. The spreads on Ukrainian dollar-denominated debt compared to benchmark U.S. Treasury bonds is now 24.4% – only second to Ecuador’s 32.7%, which has technically defaulted in 2008. Other countries with soaring borrowing premiums include Argentina and Venezuela.

Avoid Emerging Market Debt

Not all emerging market sovereign borrowers are threatened by default. Some countries, like Brazil, probably hold better risk-adjusted returns than most industrialized countries over the next 12 months. Brazilian credit spreads have risen as well since last year but remain at a respectable 3.31% above Treasury bonds and are still rated investment-grade.
Yet for most emerging market bond issuers, the cost of raising capital is certainly on an uptrend in an environment of shrinking trade surpluses, rising deficits and a full-fledged recession in key export markets.

Investors should avoid emerging market debt as risk of default spreads and raises funding costs for even some of the safest credits. Spill-over is already breaching the haul of several leading issuers.

The J.P. Morgan Emerging Markets Bond Index now yields 9.42% or 682 basis points (6.82%) more than Treasury bonds. That yield spread peaked last October at 12.21% at the height of the panic. Yet it would seem plausible that spreads will rise again as one or more sovereign borrowers in this asset class default. Many of the highest indebted borrowers, including Ukraine, have amassed huge amounts of short-term debt that must be refinanced.

The best time to buy emerging markets is amid a full-blown panic. Though we’re not at the point of maximum pessimism yet, investors will eventually feast on double-digit yield spreads as defaults increase in 2009.

Combined with crashing or weak currencies, this is not the time to be a hero in emerging market debt as default risk heightens.

Source: The Next Shoe to Drop Might be a Sovereign Borrower

This from Sovereign Society:

Several segments of the credit markets have come back to life in December after crushing losses recorded in September and October. Though it’s too early to celebrate a broad-based credit revival, the largest issuers of investment grade debt surged this month as yields plunged. Mortgage-backed bonds, or agency debt, have also rallied sharply in December on the heels of government guarantees and the Fed’s plan to spend $500 billion dollars to shore up the sector.

With the United States and other governments amassing a truckload of debt to finance state sponsored bailouts of financial services and fiscal spending plans, it is conceivable that investors will increasingly swap low-yielding T-bonds for high quality corporate debt in 2009.

Since hitting a post-crisis peak of 4.88% in October, three-month LIBOR (London Interbank Offered Rate) has plunged to 1.52% on December 19. On December 1, LIBOR stood at 2.22%. A lower LIBOR rate is the first indicator to finally emerge from stress amid the credit crisis. Banks are still largely hoarding cash but several large institutions have started to lend in overnight markets this month for the first time since late 2007.

The Growing Yield Dilemma

The Federal Reserve’s latest interest rate cut to effectively 0% on December 16 has laid the foundations for more trouble at money-market funds where yields for 30-day and 90-day Treasury bills continues to fetch just 0.01% – the lowest in more than six decades. Earlier in December, 30-day bills actually turned negative for the first time since 1940. That means investors are paying the government to park cash.

Money market funds are now sitting on potential losses as management fees erode the yield generated by Treasury bills and other short-term paper. Though other debt securities yield more than T-bills, investors might be embracing more credit risk as fund companies look to boost yield.

A better alternative to money market funds include one-year term deposits (CDs), short-term investment grade bonds and even intermediate-term corporate debt. Term deposits should be held only at the nation’s biggest banks, including J.P. Morgan Chase, Wells Fargo and Bank of America.

Yield Hungry? Here’s a Free Lunch

The Fed’s latest moves to spur lending in a massively credit-inflicted bear market since 2007 is forcing many investors to turn to distressed corporate investment-grade bonds. The effective yield on the benchmark Dow Jones Corporate Bond Index is 7.23%, down from a record high of 8.88% just a few months ago and down from 8.06% on November 30. A lower yield means corporate bond prices are rising in value.

In September, investment grade bonds were hammered following the collapse of Lehman Brothers Holdings and posted their single worst month of performance since February 1981. Many bonds plunged more than 15% in September alone.

More than half of the investment grade bond sector is comprised of financial services debt or bonds issued by some of the largest banks in the United States and Europe. With the Fed’s implicit guarantee on the largest issuers of such debt, investors can now tap into bank issued bonds trading at a 5.16% premium to expensive Treasury bonds.

For a portion of an investor’s liquidity, corporate high quality debt is literally a “free lunch.” The largest issuers of corporate paper have started to return to the market since November, including IBM and other large cap companies. In Europe, some banks without government guarantees have managed to raise sizable offerings – a positive development.

Corporate Debt: The New Safe-Haven?

Since October, governments in the United States and Europe have swapped government paper for toxic mortgage-backed assets previously held at banks. Despite these efforts, most banks are still laced with all sorts of other clogged credits like leverage loans, auction rate securities and repo credits.

The credit crisis has not disappeared because of aggressive government and central bank action; rather, swaths of credit risk has been transferred from bank balance sheets to government balance sheets, effectively polluting central bank coffers with largely illiquid and near worthless paper. Since August, the Fed’s balance sheet has mushroomed from $850 billion dollars to more than $1.5 trillion dollars – and still rising.

Indeed, credit default swap rates since October have risen sharply on government paper while swap rates have decreased for the highest quality companies. This suggests investors are starting to place a risk premium on government issued bonds.

Are we at the cusp of a major transition in the credit markets whereby investors might increasingly purchase investment grade debt as a hedge against rising yields on government bonds? After all, outside of the financial sector many industries harbour their highest net cash levels in more than a decade. For some companies, especially the food and beverages and fast-food companies, cash flow is largely generated internally and, in most cases, these companies don’t need to raise cash to finance operations. I would argue that companies like Kraft Foods (NYSE:KFT), General Mills (NYSE:GIS) and McDonald’s (NYSE:MCD) are a better long-term credit risk than most sovereign borrowers.

Failed Auctions Rising

To confirm the above theory that perhaps investors are starting to embrace riskier bonds like investment grade debt because of bulging government deficits, consider the trend in Europe since October whereby several governments have scrapped bond auctions.

Over the last sixty days, Germany, the Netherlands, Italy, Spain, Austria and the United Kingdom have either scrapped bond auctions or reduced their planned offerings because of tepid investor interest. These governments, including Germany, the largest and most liquid, are paying higher yields to draw institutional buyers. This could mark the beginning of a bear market for government bonds at some point later in 2009, once credit markets stabilize and risk taking is resumed.

In the United States, demand for Treasury’s remains strong because of fears of deflation. The current environment – a disaster for just about every asset class except T-bonds – has supported the dollar to an extent. Foreigners are chasing Treasury securities as they scramble for safe havens. Yet even Treasury is not immune to the deluge of supply coming our way in 2009.

Over the next 12 months Treasury estimates it will have to raise about $1.5 trillion dollars to fund gargantuan fiscal spending plans, bailouts, and possible tax cuts. Treasury will re-introduce one-year, three-year and five-year T-bonds in 2009 to finance part of this spending spree. At some point, investors will force long-term rates higher. The Fed will try to influence the long end of the yield curve but will ultimately be unsuccessful. The Fed can only control short-term lending rates.

Investment grade bonds shouldn’t supplement T-bills. The risk spectrum is normally quite significant in a normal economic environment. Yet these are anything but normal economic times. It is possible that as 2009 progresses and, assuming credit markets continue to grudgingly normalize, the new safe haven in bonds will be high quality investment grade bonds at the expense of super low-yielding Treasury debt.

Source: Is Investment Grade Corporate Debt Safer Than Government Bonds?

“Dollar and yen were largely firmer in thin U.S. holiday trading, as risk aversion crept back up,” wrote currency analysts at Brown Brothers Harriman. “Optimism on China’s stimulus plan gave way to a more sober global economic outlook.”

News trickling in from elsewhere wasn’t particularly heartening. Across the pond, the British Retail Consortium’s monthly barometer reported sales that fell 2.2% on a same-store basis in October, as compared with the same month of 2007. That marked the first drop in total sales since April 2005.

And across the bigger pond, China reported that exports grew 19.2% in October from a year earlier. Doesn’t sound bad, but it was taken as a negative, since that was down from a 21.5% increase in September.

Inflation in China is also easing. The country’s consumer price index rose 4% in October, year over year, decelerating from a 4.6% rise in September. Inflation is down from its high of 8.7% in February, a sign of the slowing economy there.

Source: Dollar whacks euro -  China stats show slowing economy

If you’re wondering what I’m talking about, today is Tax Freedom Day — the day when the average worker in Britain has earned enough to pay their tax bill.Apparently it’s fallen one day earlier than in 2007. However, it’s a full seven days later than it was when New Labour first came to power. We now spend, on average, one week more than we did simply working for the Government.

That’s why I admire Robin Tracey. Because for Robin, EVERY day is Tax Freedom Day!

I’ll explain what I mean by that below. First, though, let’s dive into today’s Big News…

Bradford and Bingley shares suspended

Bradford and Bingley (B&B) had its shares suspended by the FSA this morning, following a 30% fall. The mortgage lender, which is heavily exposed to the Buy-To-Let market, is expected to miss forecast profits by £100 million. Chief executive Steven Crawshaw has stepped down. B&B is expected to do a rights issue.

But amidst all the hullabaloo, Texas Pacific Group is buying what, to our eyes, looks like an eye-wateringly expensive 20% stake.

Do they know something the rest of us don’t? Theo Casey takes a closer look, and also makes the case for looking beyond simple value investing…

Has the tide turned for interest rates?

“Nobody can convince me that we’re able to boost economic growth with a lax monetary policy.”

The words of Klaus Liebscher there, one of the European Central Bank’s (ECB) monetary policy gurus.

Hear hear!

Liebscher went on to say that eurozone inflation is “very high” and that the ECB’s price stability mandate is “more than urgent” (what “more than urgent” means I’m not sure — perhaps this is a mistranslation…)

The bond market has the scent of a rate rise in its nostrils. Not that long ago, the market was pricing in a rate cut by the end of the year. Now the opposite position holds sway. Bond fans expect rates will rise.

Does this mean policy makers are finally taking inflation seriously? Well, the ECB has been hawkish for some time now. But what about closer to home? What’s happening on Threadneedle Street? Let’s take a look…

My oh my! We have a bit of a tussle on our hands, folks! A bone of contention has arisen between the Bank of England and the Treasury. Mervyn King, the Bank’s Governor, wants to promote Professor Charles Bean to the post of Deputy Governor when Rachel Lomax steps down.

But the Treasury is unhappy with the proposal. The other Deputy Governor is Sir John Gieve, whom the Treasury has criticised for not being ‘City-savvy’ enough.It fears promoting an academic to be the other Deputy will unbalance the Monetary Policy Committee. Cynics have suggested that the Treasury wants a City-friendly face simply because that’s more likely to lead to a policy the Government finds agreeable.

Though no-one’s said so (yet), I suspect they’re also uncomfortable with the idea of someone called Mr Bean wielding so much power over economic affairs…

Tension between a central bank and a government is a good thing. We neither want nor need monetary policy makers who kow-tow to politicians. King seems so far to be putting up a fight — perhaps he’s stung that I said he’s not as hard as ECB boss Jean-Claude Trichet…

It’s too early to say whether we’re now on a hawkish path. There’s a strong case to be made that rates should indeed go up — but whether that case has been heeded is another matter.

China on the cheap

Manraaj Singh had a quiet one last week. He was here, but spent most of his time holed up in his emerging markets den.

Today, we’re beginning to see the fruits of Manraaj’s labour. Two stocks which he believes typify why right now is a great time to be getting into China.

These aren’t formal recommendations, just interesting case-studies. But they make very interesting reading.

Find out why one of these stocks looks even better value than one of Warren Buffett’s new favourites!

Make every day Tax Freedom Day

OK, now I’ll satisfy your curiosity. Robin Tracey has a hobby which makes him hundreds of thousands of pounds a year. And he doesn’t pay a penny of tax on that money.

How? Because Robin makes his money from spread betting. And spread betting is tax free!

Spread betting is, of course, also risky. But Robin takes it all in his stride — because he’s been using his strategy for over a decade now, and knows that it works.

Recently he’s begun sharing his strategy with others, and the results have been phenomenal. One member of the public who’s copied Robin’s moves calls it a “near guaranteed income strategy”.

So if you’ve a bit of money to play with, and fancy putting it to work without the Government taking a bite out of the profits, why not check out Robin’s strategy?

Find out how, with only a few minutes a month, you could generate a tax-free second income from the comfort of your own home

Until tomorrow

Ben Traynor

Source: What If You Could Make EVERY Day Tax Freedom Day?

One of them is detecting tremors from the change in the holdings of U.S. government debt by foreign central banks, as indicated by their accounts at the Fed. These guys bought up, last week alone, a mighty, mighty $22 billion’s worth!

If you are one of the people who write me and ask things like, “Do you realize you are an idiot?” (Answer: yes) and, “Why are interest rates so low that only a freaking idiot would be buying bonds that yielded less than the rate of inflation?”, then this, perhaps, is part of the answer you are looking for; foreign central banks are (for one) buying, buying, buying government bonds and increasing their ownership of your future tax dollars, and providing a lot of buying power to the bond markets, which makes bond prices go up and the yields go down, down, down.

For example, from Bloomberg.com we learn that the bond market is bad all over the place, and “Every industry group except energy and utilities posted negative returns this year. Bonds of finance companies lost 20 percent; media bonds, 10.2 percent; and real estate securities, 9.9 percent. High-yield, high-risk bonds are off to their worst start ever. Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes.”

And one of the sensitive Mogambo Economic Tremor Detectors (METD) shows that the apparent slowdown in Total Fed Credit for the past few months has now been revealed as a mirage, and Federal Reserve Credit has now ballooned another $6.1 billion last week, handily taking the total to a new, all-time record of $876.6 billion.

Even more staggeringly, the Treasury Gross Public Debt expanded by over $150 billion in March! Hell, it was up $60 billion last week alone!

And not content to just destroy the currency, they are up even weirder stuff, and to show you the kind of weird things that you will see a lot of from now on, Jon Nadler at Kitco.com writes, “And now, for something completely different: The birth of the ‘BPT.’ The Bubble Protection Team. If anyone had (valid) doubts that the ‘Plunge Protection Team’ either existed at all, or was noticeable in certain markets, welcome to the new reality of a revamped Fed.”

He says that according to the New York Times, “The plan of Treasury Secretary Paulson to overhaul the financial system includes a crucial proposal: it would officially transform the Federal Reserve into a ‘market stability regulator’ rather than merely a banker’s bank. The Fed is no longer just a regulatory agency presiding over a narrow group of businesses called banks. Rather, its mission increasingly is to maintain macro confidence – confidence that the entire financial system is functioning well as part of the whole economy.”

Wow! The Fed deliberately created so much money and credit, for so long, totally distorting the economy of the United States and the world into a grotesque, twisted, cancerous monstrosity so that the entire financial system is choking to death on the poison of un-payable debt loads, and now this same Federal Reserve is going to get MORE powers to create MORE weird distortions and more inflation in the money supply and more inflation in consumer prices like food? Yow! We are freaking doomed!

The weird stuff at the Fed, the weird stuff at the Treasury, and the weird Bear Stearns fiasco becomes a little more suspicious, if that was even possible, after reading, “Wall Street’s Latest Illusion” in Barron’s. Andrew Bary explains, “some Wall Street titans have been able to book gains from the declining value of their own debt.”

If you are like me, you immediately stopped stuffing a yummy burrito into your mouth and intelligently asked, “Huh? Buh a baffa a uhki n aoo uh o eh? A ee nuh grah?” Junior Mogambo Rangers (JMRs) around the world, of course, immediately knew that I was saying “Huh? Book a profit on a decline in your own debt? What is this crap?”

Obviously repelled by the way I am spewing little bits of burrito and saliva all over everything while I speak, Mr. Bary explains, “When a company’s credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value.” Hahahaha!

So Bear Stearns, bankrupt as it is, would had to have booked a taxable profit on the collapse of their debt, on which taxes may be due? Hahaha! No wonder everybody wanted them to be bailed out!

And with free slop available to anybody who asks for it, from the AP we learn that the hogs are wallowing in the Fed slop, as they are borrowing like crazy from “the Federal Reserve’s unprecedented emergency lending program.”

The Federal Reserve admits that “that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.”

Junior Mogambo Ranger (JMR) Paul H. noted that the Fed is going crazy in the Mortgage Backed Securities arena, too, and “Over $51 billion with over $24 billion in MBS alone for the past 2 days”, which he figures “Over a work week (5 days)” would come to “about $128 billion per week. That would make it somewhere in the neighborhood of $6,400 billion per year, if I am nice and give them a 2 week vacation! Yikes, that’s $6 trillion per year !!!”

JMR’s around the world note the use of three exclamation points, which seems just about right for such excesses!! Hell, I just used two of them to comment on his comment, which ought to show you how bad things are!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.