Money Supply, Recessions, and the SP 500

Banks Continue to Write-Off Bad US Debt

The bottom is not in. There will be continuing write-offs as the US falls more deeply into a recession and consumers, without savings and deeply in debt, continue to default on their obligations.

The unwinding is likely to continue into 2009 and will be dealt with by a new presidential Administration and Congress. A further devaluation of the dollar is highly probable despite the 'jawboning' coming out of the G7.

HSBC to reveal $5bn of fresh write-offs
Heather Connon
The Observer,
Sunday May 11 2008

HSBC is expected to announce tomorrow that it is writing off a further $4.6bn (£2.3bn) against mortgages, credit cards and other loans to stricken US consumers, bringing the total over the last 15 months to almost $17bn.

Analysts believe there could be more write-offs to come: James Hutson at Keefe Bruyette & Woods is predicting it will have to write off more than $15bn over the year as the US housing market and economy continue to decline.

That would bring the bank's write-offs over two years to more than $27bn - only marginally less than the $32bn charges taken by US investment bank Merrill Lynch,although most of those related to the complex financial instruments used to parcel up mortgage debts and other loans, which have plunged in value.

Despite the huge write-offs, HSBC's profits are again expected to be ahead of last time, reflecting a strong performance in its Asian business - which accounts for half the group's profits - and some market share gains in the UK.

The bank is also facing criticism over amendments to its directors' pay arrangements from HSBC shareholder Knight Vinke. The amendments were made in response to criticisms of the existing plan made by the activist investment house, but Glen Suarez, Knight Vinke's chief investment officer, said the changes did not address the issues they raised.

He is concerned that HSBC will still rank itself mainly against large Western banks rather than those in emerging markets and that it has reduced the importance of growth in earnings per share as a determinant of executive pay.

Barclays is expected to warn of further write-offs when it issues its trading update next week, although these are thought to be less than a third of the £9bn write-offs made by RBS.

The Case for Hyperinflation - A Special Report

Our own view is that a hyperinflation is about as unlikely as a true deflation (as opposed to a short term liquidity crunch which is rather probable as we experienced briefly in 2002). We believe that both deflation and hyperinflation are possible; this potential is part and parcel of the nature of fiat. Its just that they are both unlikely unless exogenous events cause things in the US monetary system to get out of control. When there is no external standard to compel the extreme outcomes they are quite improbable but they remain within the realm of possibility. It is when a person says that hyperinflation or deflation are 'inevitable and unavoidable' that we tend to diverge in our outlook.

Nevertheless its interesting reading for the weekend. We have a great deal of respect for John Williams, and have been aware of his work for some time. We've been reading similar cases for deflation over the past ten years.

For now we'll remain content with our own forecast of a stagflationary recession that may be protracted, lasting perhaps until 2020, with varying degrees of intensity. The inflation may become so large in total over time that a new currency may have to be issued to replace the existing US dollar. However, there may be political reasons for this to happen well before that, as countries merge into geo-economic spheres of influence.

Enjoy your weekend.

HYPERINFLATION SPECIAL REPORT

Issue Number 41

April 8, 2008

__________


Inflationary Recession Is in Place

Banking Solvency Crisis Has Opened First Phase of Monetary Inflation

Hyperinflationary Depression Remains Likely As Early As 2010

__________


Overview

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.

What lies ahead will be extremely difficult and unhappy times for many. Ralph T. Foster, in his "Fiat Paper Money" (see recommended further reading at the end of this issue), closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor at Harvard and University of California Berkeley, who experienced the Weimar Republic hyperinflation:

"It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."

This Special Report updates and expands upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, exploring: (1) the causes and background of the evolving hyperinflation and great depression; (2) why circumstances will differ from the deflationary Great Depression of the 1930s; (3) implications for politics and the financial markets; (4) considerations for individuals and businesses.

The broad outlook has not changed during the last year. More generally, though, developments in the economy and the financial markets have been in line with projections and have tended to confirm the unfolding disaster. Specifically, the current inflationary recession has gained much broader recognition, while the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding. While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar. That event is important to the shorter-term timing of the pending hyperinflation.

Regular readers may recognize text from last year’s Series, as well as material from various SGS newsletters, but such is the nature of revisions to prior material. Points that may be repeated from earlier newsletters are done so in sequence to help build the arguments explaining the unfolding crisis. Great thanks are extended to the numerous subscribers who offered ideas, questions and materials that have been incorporated in this report......

Hyperinflation - Special Report - John Williams - April 8, 2008

Gold Weekly Chart - The Gold Bull Still Intact