Hyperinflationary Depression in the US 2010 - John William, Shadow Government Statistics

We don't necessarily agree with John Williams' analysis here. But its not sufficient to merely disagree. One has to listen to the argument, the key points and mechanisms, and then show WHY they might be invalid and where they might be less probable than something else.

John may be right. We have an enormous respect for him. His site is worth looking at, and his arguments are worth a listen. But we think he makes the error of assuming that the trends will be as they are today, and one can just extend them into the future, without limit, and not account for 'step changes' and likely exogenous events. This is an all too common error with model based predictors.

As a thumbnail sketch of our disagreement, we think that deflation and hyperinflation can only occur deterministically with reference to an external standard. With the lapse of the gold standard, there is none. Therefore its more likely to be the end result of policy decision(s).

Before the US lapses into a hyperinflationary depression the G8 will have an enormous incentive to essentially bail the US out by inflating their own currencies in sympathy and allowing the US to essentially and selectively default on its sovereign debt, in order to save the world financial system. In many ways Bear Stearns is a microcosm of the United States Treasury.

Doing nothing increases the probability that there will be a war, a significant world war, which will tend to wipe the slate clean, at least for the victor (if there is one) in terms of debt obligations. Not only is the US too big to fail, its too big a warpower for anyone to be easily able to collect what's owed to them.

That's what we think, but all things being equal, John does have his points in order, and his hypothesis is probable, more so than deflation, which is also a possibility. Volcker said deflation has an extraordinarily slim chance of occurring in the US. We tend to view it as an overt policy decision. Net debtors do not willingly choose deflation; they are compelled to it by some external force or constraint.

The best argument for the deflation alternative is that our monetary system is dependent on bank loans for the expansion of debt, and debt is money. However, we think the Fed is going to give us a lesson in monetizing debt, and there is plenty of it to go around. Common sense is a fine tool, but more detailed knowledge and rigorous thinking is essential.

John Williams is interviewed by Jim Puplava - MP3 Audio download: A Hyperinflationary Depression in the US 2010

Shadow Government Statistics Homepage

An Accounting View of the Financial Credit Crisis

Here's a joke to cheer up GE shareholders on this difficult morning.
(Hat tip to Sean, the Irish gnome in Zurich)

There are two sides to a bank's balance sheet - the left side and the right side.

The problem is that, on the left side, there is nothing right,
and on the right side, there is nothing left!

And some weekend reading for Jeff Immelt.

As a reminder, US financial companies start reporting their quarterly results next week.

PigMan of the Week Award

Thanks go to Lloyd Blankfein of Goldman Sachs for giving the markets some weasel-worded false encouragement Thursday morning that the credit crisis is "almost over." It helped to trigger a sucker's rally.

And "if we are in a recession, its a mild one." We'll put that one down in the books. In fact, we wish someone would take a look at your trading book.

Lloyd, who received about $70 million of compensation last year by some estimates, also said that shareholder votes on executive pay would "constrain the board and hurt the investment bank's ability to attract the best employees."

Lloyd, you get the "PigMan of the Week Award."

Reuters
Goldman CEO says "say on pay" a bad idea
Thursday April 10, 2:24 pm ET
By Joseph A. Giannone

NEW YORK (Reuters) - Goldman Sachs Group Inc (NYSE:GS - News) Chief Executive Lloyd Blankfein, who received about $70 million of compensation last year by some counts, said on Thursday that shareholder votes on executive pay would constrain the board and hurt the investment bank's ability to attract the best employees.

So-called "say on pay" initiatives, which allow shareholders to provide a nonbinding approval or rejection of a board's proposed pay package for senior executives, have become a hot topic among shareholder groups, pensions and other large investors focused on corporate governance issues.

In a spirited annual meeting held in a downtown Manhattan, a number of Goldman shareholders urged the board and investors to adopt an advisory vote as a tool to keep a lid on excessive pay. Advocates also argued the proposal would give shareholders a greater voice on an important matter, without binding directors.

Blankfein, in an extended response, expressed his concern that "say on pay" would limit directors in exercising their judgment.

Say on pay would "create a feedback loop. It would create a cloud, a constraint, a limitation on decisions that have been at the heart of what a board has done," Blankfein said.

The board, he said, needs to have the flexibility to weigh compensation packages and the market environment. He also expressed concern that decisions by board member could be judged by uninformed investors.

"Our compensation has been very well-correlated to performance," he said.

Goldman's shareholders apparently agreed, as the say on pay proposal was rejected, receiving approval by 43 percent of shares voted and 30 percent of shares outstanding.

Some speakers argued Goldman's compensation was enormously high. According to the proxy statement, Goldman's top five senior executives received roughly $250 million last year in salary, cash bonuses, stock awards and other compensation, excluding stock options.

For context, that haul was greater than JPMorgan Chase & Co's initial fire-sale takeover bid of $236 million for Bear Stearns Cos Inc.

"Nothing Fundamentally Broken on Wall Street" - Bernanke

If this is ANYTHING like the assurance that Benny gave us last year about the minimal impact of the subprime mortgage situation we'd have to conclude that the markets are probably screwed up beyond all recognition, and that a major Depression lasting twelve years and a day is on our doorstep.

THE FED
Nothing fundamentally broken on Wall Street: Bernanke
By Greg Robb, MarketWatch
Last update: 1:58 p.m. EDT April 10, 2008

WASHINGTON (MarketWatch) -- There is nothing fundamentally broken on Wall Street that a little regulation and incentives for participants to be slightly more honest couldn't fix, said Federal Reserve Chairman Ben Bernanke said Thursday. (You could have said the same thing about Ma Barker and her boys - Jesse)

Bernanke's comments put him at odds with former Fed chairman Paul Volker, who said in a speech earlier this week that the financial turmoil that began last summer showed that the "new Wall Street" hadn't passed the market test. (Our money is on Volcker. Ben is Bush-Paulson's schmendrick. Volcker is always and everywhere a no BS econo-asskicker. - Jesse)

At issue is the move by Wall Street over the past twenty years to an "originate to distribute" business model, where commercial and investment banks create new complex forms of securities and sell them to investors looking for high yield. This replaced the old "originate and hold" model. (Bring back Glass-Steagall. Bring it back today. - Jesse)

In a speech to the World Affairs Council in Richmond, Bernanke said that it is clear the originate-to distribute model "broke down at a number of key points." (No shit, Shalom. - Jesse)

But he quickly added that "these problems notwithstanding, the originate-to-distribute model has proved effective in the past and with adequate repairs could be so again in the future." (Our unquestioned nominee for Meshugener of the Year - Jesse)

This model "seems likely to remain an important component of our system of credit provision," he said. (The Wall Street three card monty system feeding bad debt to the world. These guys are like herpes. - Jesse)

The Bush administration and the Fed have poured billions of dollars into financial markets since August seeking to restore the flow of credit to consumers. (Its all about confidence, children. You can't buy back a good reputation - Jesse)

The Fed is concerned that a lack of credit is creating a vicious downward growth spiral. (That's what happens when a Ponzi scheme collapses, propeller head - Jesse)

"Healthy, well-functioning financial markets are essential to sustainable growth," Bernanke said.(Hence our almost-certain-to-be-severe recession - Jesse)

The turmoil has led some to raise fundamental questions about Wall Street. (Would y'all like that Necktie party with or without tar and feathers on a rail? - Jesse)

In a speech in New York on Tuesday, Volker said that in his view, simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the marketplace."

But Bernanke argued against any need for radical reform. (What would it take to require some serious reform? The dollar worth .20 euros and the Dow Industrial at parity with gold? - Jesse)

He trumpeted a recent road-map released by the President's Working Group on Financial Markets, chaired by Treasury Secretary Hank Paulson and which includes the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The PWG plan called for several steps to strengthen federal oversight of the mortgage and credit markets and a complete overhaul of the market for mortgage derivatives. (Their track record has been so outstanding, right Elliot? - Jesse)

The plan also said that credit-rating agencies must differentiate between ratings for derivatives and corporate bonds. (Grading on a curve? Let them eat CAPM model and only exchange traded products to be held by government regulated entities like banks - Jesse)

In addition, international financial market reform will be spearheaded by the Financial Stability Forum, set to release their recommendations this weekend.

Bernanke stressed that the financial crisis was not over. But he said it was not too early to draw some conclusions about the turmoil on public policy.

"We do not have the luxury of waiting for markets to stabilize before we think about the future," Bernanke said. (And we're not sure we have the luxury of waiting for you to quit being a spineless putz - Jesse)

He dismissed suggestions that markets should be left to sort the crisis out without government interference.

Bernanke, a student of the Great Depression, said that, although there are similarities between the current credit crunch and the 1930s, the U.S. "will not experience" anything like the Depression, which lasted for 12 years. (We are so fucked - Jesse)

Greg Robb is a senior reporter for MarketWatch in Washington.