Massive Deflation Sighting in the US As Noted in the Asia Times

David Goldman says in the Asia Times that "It’s Still the Worst Deflation in US History." He shows a chart (below) of US commercial lending to prove his point.

Asia Times
It’s Still the Worst Deflation in US History
November 18th, 2009
By David Goldman

This morning’s news that housing starts “unexpectedly” dropped by 11 percent month on month is consistent with my grim view of the American economy. The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t.

The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in.

Here’s year on year growth in commercial and industrial loans from weekly reporting banks in the US:



A 20% decline year on year does not look like a recovery. In fact, it looks like nothing we have seen since the Great Depression. C&I loan growth lags the end of recessions, to be sure, but this extreme level of credit reduction suggests profound trouble....

Yes commercial lending is slack and gone negative. And yes, it does signal severe economic distress in the productive economy. But is that deflation?

No, it is a sign of a very slow GDP growth and deleveraging in the aftermath of a credit bubble, with a GDP that I think is still negative in real terms. The US economy is still very bad, and David is probably less gloomy about that than Le Proprietaire.

One could assume that by 'deflation' David means 'a recession/depression' or 'a lousy economy.' But that is not deflation, as the economists learned in the economic stagflation of the 1970's. Words count, and this is an important distinction, because one reacts to situations as diverse as inflation or deflation, hyperinflation or stagflation, differently.

Is this a deflation which we see now in the US, even if it is not the 'worst in history?' Is there a steadily strengthening US dollar ,and low money supply growth relative to demand, or GDP relative to money suppy as indicated by an abnormally high velocity of money?

Only in the mind and imagination of someone who already believes in a deflationary outcome with all their mind and heart.

Can deflation happen? Yes. That is inherent in a fiat currency.

If the Fed raised the overnight interest rates to 20% tomorrow, we would have a deflation 'lickity split' because that would be an extreme policy action which relative to the underlying demand for money and economic conditions, is purposeful and dramatic towards a specific end. And this is the Fed's 'hole card,' the means by which they think they can control inflation in the future once the US economy has recovered (if it does sustainably I would add, and not just another asset bubble).

Inherent in David's conclusion is that money supply can only grow through bank lending. This is economic illiteracy. The Weimar inflation, for example, was not caused by excessive lending by German commercial banks in a vibrant economy. It was caused by the monetization of existing debts, the war reparations debt, without a corresponding growth in productive GDP.



So, absent a conscious policy decision by the Fed to strangle the US economy premature to recovery, deflation becomes a likely outcome if the Federal Reserve runs out of debt obligations, both public and private, which it is willing and able to monetize. That is the only 'hard stop' in the game on that side of the equation, and good luck with that.



Deflation would hurt those who owe debts in dollars, and be a boon to those who are the creditors. The American people are the debtors, and they control the growth of their money supply, at least for now.



The obvious pivot point, one key vector, in all this is one simple question: "Can the US economy become self-sustaining again, productive in its own right without having to export inflation by printing currency and living on credit?"

A second, but important question is can China and the rest of the mercantilist world adjust gracefully to a rebalancing in the distribution of demand, while maintaining sustainable growth of their own, despite their fears of a rising middle class?

We say yes, but only with a serious effort at fiscal and economic rebalancing. Cutting spending alone is not enough. That is the route to self-destruction, economic anorexia, if nothing else changes. Liquidationism alone is inherent in the neo-Calvinist roots in the US that emphasize the justice of non-redemptive suffering. They have sinned, so they must suffer, and the more the better.

There are three things the US must do: reform, reform, reform. Everything else is a palliative, to buy time at best while you seek to make the necessary systemic changes.

What does it matter, the details of the outcome, as long as the economy is in a slump?

If you want to suffer, go into a serious and protracted stagflation in the US holding dollars as the bulk of your wealth, and that will give you a taste of hell.

What is the most likely outcome? Would you care to buy a vowel? I would suggest that you buy an "I" and then see if there is an "S."

Deflation and straight inflation are relatively easy to hedge. Stagflation is the most difficult outcome to manage from an investment perspective. We'll talk more about this later if that appears to be the case.

Stagflation will be the unintended consequence that will catch the most people unprepared. This is the outcome most feared by the Fed, because it renders their monetary policies ineffective. The Fed can create money until the dollar goes to zero, but it cannot manage fiscal and industrial policy, and confer productive vitality which is essential to a sustainable recovery.

You cannot say that Bernanke did not warn you about what he will do. Deflation: Making Sure "It" Doesn't Happen Here

But we cannot stress enough that the outcomes are not predetermined, except in the minds of true believers. Therefore flexibility and clear-headed watchfulness are important now, more than ever.

The Last Bubble

The purpose of monetary and fiscal stimulus in economics is similar to the use of anesthesia and antiseptics during an important surgical procedure to correct some systemic difficulty, some disease, some serious problem in a patient. They enable the procedure, help the patient get through it without excessive pain and death from infection or systemic shock.

To apply stimulus and the other monetization programs which the Treasury and the Fed and the Congress and the system of global trade settlements are now doing without enacting sigificant and serious systemic reform to correct the underlying problems, the disease itself, is like taking a patient with a life threatening condition, applying large amounts of anesthetic and antibiotics and antiseptics to keep them stable and quiet, but then refusing to perform the operation to correct the life threatening condition.

Because in this case the disease that is infecting the patient and consuming their life has bribed the physicians and hospital administrators and nurses to leave it alone. It wants to maintain the status quo as long as is possible.

The pulse of patient, their blood flow, is the dollar. And the dollar is laboring under serious difficulties. The disease is consuming it, and the Fed is adding clear plasma to replace it, but is unable to add vitality, the white and red blood cells. They cannot create life, only sustain its appearance.

The liquidationists, by the way, would simply take the patient off all medications, and see how well he can fight the disease while running on a treadmill, hoping his body can cure and correct itself on its own. If the patient is not too sick, this has worked in the past. But if the problem is systemic, if the disease is advanced, then the patient is likely to go critical and sustain a stroke, and a major loss of functionality, even death. Benign neglect might work, it might not. Sometimes the cure is worse than the disease when applied without a perceptive diagnosis.

The Obama Administration (the doctors) and the Congress of both parties (the hospital administrators) and banks (the hospital owners) and the mercantilist trade system most notably China and Japan (the medical suppliers) are failing to deal with the problems of the US economy at hand, merely applying the anesthetic and antiseptics, for which they are being paid handsomely as the hospital bills run higher and higher.

This may be the last bubble, the one that takes the patient to a hospice for long term care in a zombie like condition, or worse, to the morgue. It is the last bubble, malpractice of the highest order, the mother of all policy errors. Nothing is inevitable here except selective default most likely through inflation.

The banks must be restrained, and the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

Associated Press
Third-Quarter U.S. Growth Revised Lower
November 24, 2009

WASHINGTON (AP) — The economy grew at a 2.8 percent pace last quarter, as the recovery got off to a slower start than first thought.

The government’s new reading on gross domestic product was not as energetic as the 3.5 percent growth rate for the July-September period estimated just a month ago.

The main factors behind the downgrade: consumers did not spend as much, commercial construction was weaker and the nation’s trade deficit was more of a drag on growth. Businesses also trimmed more of their stockpiles, another restraining factor.

The new reading on G.D.P., which measures the value of all goods and services produced in the United States — from machinery to manicures — was slightly weaker than the 2.9 percent growth rate economists surveyed by Thomson Reuters had expected.

Still, the good news is that the economy finally started to grow again, after a record four losing quarters. The bad news is that the rebound, now and in the months ahead, probably will be lethargic.

The worst recession since the 1930s is very likely over, but the economy’s return to good health will take time, Fed officials and economists say...

The US Dollar Is In a Secular Bear Market and Will Remain in One Until...

Contrarians might take some cheer from dollar bearishness, but one needs to be aware that not everything that is fundamental and recognizable is overdone and wrong.

Markets do overrun their trends, especially on the short term and by amateur speculators, setting up very nice opportunities for the professional market makers. The attractiveness of being a 'contrarian' is that when you are right you can set yourself up as superior to those who were wrong, distinguishing yourself from the mere mortals, and feel the euphoria of God's favored hand.

But being a contrarian requires a superior sense of what is real, and what is out of synch with reality. In general few amateurs possess this level of judgement and perspective, and end up just looking silly and eccentric after a few correct calls, taking the opposite position because it is the opposite, proclaiming night to be day, and the moon to be cheese.

Oh they deny it, and keep changing their forecasts, and burying their mistakes, fooling no one really but themselves, constructing ever more intricate theories about why they are right and will be ultimately vindicated in their 'beliefs.' But on the whole they lose money and take a terrific financial beating for being obstinately. Every seasoned trader learns this lesson, at least once, and bears its scars. They become superior traders when they are able to take a position again and hold it, despite the market head fakes, because they are right and they know it.

Markets do fluctuate. This is why it is so important to determine whether a move in a market is a purely 'technical move,' ie a bounce or dip to skin the overleveraged speculators who have piled on to a momentum move, and a genuine and sustainable change in direction underpinned by some fundamental reason.

And this news piece provides an important clue as to when a change in the dollar bear market may begin to occur.

“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates.”

The rise in rates will be relative to other currencies and commodities in valuation, but the forecast here is substantially correct. The dollar is in a bear market and will remain there for the foreseeable future. Again, with bounces and dips to tempt the punters in to be fleeced and skinned.


Dollar Slump Persisting as Top Analysts See No Bottom
By Bo Nielsen

Nov. 23 (Bloomberg) -- The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Federal Reserve begins to raise interest rates, which policy makers say is an “extended period” away.

Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 6.4 percent versus the euro. About $12 trillion of fiscal and monetary stimulus, the world’s lowest borrowing costs and a record $4 trillion of government bond sales between 2009 and 2010 will weigh on the currency, they said. So will the nation’s 10.2 percent unemployment rate and signs that the economic recovery may falter, they said.

“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,” said Callum Henderson, the Singapore-based global head of foreign-exchange strategy for Standard Chartered.

The best forecaster of the dollar against the euro in the six quarters ended June 30 in Bloomberg’s ranking of 46 firms last month predicts the greenback will weaken 5.3 percent to $1.58 per euro in 2010, from $1.4970 today.

“It’ll take time to drain the oversupply of dollars from the market,” Henderson said. “The dollar will remain weak until the Fed’s rates rise above the competitors’....”

Has the American Model of Capitalism Failed?

This video is well worth watching to provoke thought and provide a perspective which you may not obtain from the mainstream media, particularly in the States

Naomi Klein, Howard DeSoto, and Joe Stiglitz on Economic Power and the Financial Crisis in the US

Has the American system failed? What is the American system of markets?

Is the US becoming a 'banana republic' and if so how has this happened?

What are the roots of the financial crisis?

Howard DeSoto is interesting, but takes a decent macro concept and then flogs it to death without taking it to the next step towards relevancy. Naomi Klein is more of a popularizer but makes some interesting points and explains them exceptionally well. Stiglitz is his usual brilliant self, and one must only regret that he and Volcker have no voice or real place in the Obama Administration.

But at the end of the day, one still suspects that all this talks around the basis for this financial crisis, which is a determined, if loosely organized campaign to undermine of the rule of law and to 'fix the game' in a way that has numerous historical examples.

It is best epitomized by the well-funded campaign led by Sandy Weill to capture the regulatory and political process in the US, and to overturn Glass-Steagall and the restraints on markets and leverage and oversight for the Wall Street banks. It was more sophisticated in its own way than Bernie Madoff's ponzi scheme and certainly on a grander scale than Enron, but is of the same general species of financial fraud.

As the book title says, It Takes a Pillage...

Dimon Touted as Replacement for Geithner

This news story is what is known in American parlance as a 'trial balloon.' It is a little leak to the press to assess the public and media reaction to a proposed change.

The game plan appears to be one of creating change you can believe in by replacing Bernanke and Geithner with Larry Summers, currently Obama's chief economic advisor and financial Rasputin, and Jamie Dimon, the CEO of J. P. Morgan bank. Lloyd Blankfein apparently is not available for the job, having found his vocation in doing God's work.

At least that is the plan that is being put 'on the table' by an influential group of financiers, or so we have been informed. Senator Chris Dodd, often the message bearer for Wall Street, mentioned last week that Mr. Bernanke's confirmation as Fed chief was not a certainty.

Jamie Dimon learned the business from Sandy Weil, one of the chief architects of the efforts of the Wall Street banks' campaign to overturn Glass-Steagall. He is also very smooth and politique, as opposed to Mr. Geithner who is in quite a bit of political trouble and not handling it with the gravitas mixed with detached joie de vivre expected in elite circles.

As Treasury Secretary perhaps Jamie can help out his old firm with their 130 million ounce naked short in silver. Oops, the US Treasury is out of silver too.

We are discounting rumours that President Obama is considering an executive pardon for Bernie Madoff, with the condition that he agree to serve as Treasury Secretary. "Take those T bills and put them where the mooncakes don't shine, Hu Jintao."

Reuters
Dimon seen as successor to Geithner
By Ajay Kamalakaran in Bangalore
On 4:52 am EST, Monday November 23, 2009

(Reuters) - Several U.S. policy makers consider J P Morgan Chase & Company Chief Executive Jamie Dimon as a potential successor to U.S. Treasury Secretary Timothy Geithner, the New York Post said, citing sources.

Dimon "would love to serve his country," the paper quoted people familiar with his thinking as saying.

JPMorgan could not be immediately reached for comment by Reuters outside regular U.S. business hours.

Geithner endured a grilling last week before the U.S. Congress over his role in the rescue of American International Group Inc in 2008, when he was president of the New York Federal Reserve Bank.

US Commercial Banks: the Turkeys Are Stuffed

The increase in the monetary base created by the Fed's monetization of debt is striking, not seen since the early stages of the Great Depression.



Banks are not lending despite the massive quantitative easing. They are fat with reserves, paying huge bonuses again, and obviously doing something with their money other than providing funds for the commercial activity of the nation.



Excess Reserves are an accounting function. The banks themselves do not reduce their reserves significantly through lending in the aggregate, but seek to minimize the opportunity cost of reserves. But it is symptomatic in the sense that the lack of reserves is most definitely NOT an issue with lending.

No one can deny with any credibility that if the Federal Reserve reduced their payment on reserves to zero, or even a negative, that lending activity would not increase. And yet they do not. Why?

Because the first priority of the Fed is the health of the banking system itself, and not the national economy and the availability of credit to non-banking institutions. They are seeking to drive commercial entities out of secure savings to risk investment again, but providing a safe harbor for the banks while they are doing it, while attempting to maintain the appearance of financial system solvency.

The critical, unspoken factor is that the US banking system is not yet healthy, is not sound, is not well capitalized despite the record expansion in the monetary base and its specific direction to the banks themselves. They have simply not taken the writedown necessary to make themselves financially sound, because they do not wish to take the hit to earnings, salaries, stock options and bonuses.



Ben Bernanke's gambit is as much financial fraud as it is a monetarist exerperiment in cynicism with regard to the management of a nation's money.

Gold and the SP 500 Charts

The SP is looking a little 'heavy' going into a holiday short weekend in the States. This is where the bulls need to hold the trend.



Here is where we find out if the Fed and Treasury effort to reflate the financial asset sector will 'stick' or not. Their approach to the bailouts was a political policy error of the first order, almost shockingly naive to see from an Administration headed by skilled politicians. One has to think that Timmy will be a fall guy at some point, with Larry Summers tossing him under a bus.



Watch the lower trend line because if it gets broken and confirmed we could go down for a 50% retracement of this rally, and perhaps further to set a new low. As it is, a 5% corrective in a short holiday week looks likely.



Gold is performing an 'in your face' breakout and holding its gains into an option expiry next week which is wildly bullish. The target on the weekly is 1240ish, and one has to wonder if there will be enough of a pullback to allow the bears to cover their shorts before they are taken out on stretchers. It will take a severe correction in stocks to do it I suspect. But let's see.

Short Term T Bills Go Negative

Too many dollars chasing too few opportunities because of mispriced risk, so they are piling into short Term Treasuries again.

Grab something solid and hold on tight. Could be rough seas ahead.

Three Month T Bill Rates Go Negative On Concern Risk Rally Overdone
By Cordell Eddings

Nov. 19 (Bloomberg) -- Treasury three-month bill rates turned negative for the first time since financial markets froze last year on concern that the rally in higher-yielding assets has outpaced the prospects for economic growth.

Investors were willing to pay the government to hold their money as stocks slid amid speculation the eight-month, 68 percent rally that drove the valuation of the MSCI World Index to the most expensive level in seven years already reflects forecasts for a 25 percent rebound in corporate earnings next year. Federal Reserve Bank of St. Louis President James Bullard yesterday said experience indicates policy makers may not start to increase interest rates until early 2012.

“As long as the economy is stuck in a rut and there are not viable fixed-income alternatives, they will buy Treasuries,” said George Goncalves, chief fixed-income rates strategist at Cantor Fitzgerald LP, one of 18 primary dealers that trade directly with the Fed.

Rates turned negative on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at primary dealer Jefferies & Co. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.

The two-year note yield fell five basis points to 0.70 percent at 4:24 p.m. in New York, according to BGCantor Market Data. The 1 percent security due October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 18/32. The yield touched 0.6759, the lowest since Dec. 19. It fell to an all-time low of 0.6044 percent on Dec. 17.

Don’t Dismiss

“Investors are preparing early for year-end and trying to ensure liquidity,” said Sobeck. “The move in the two-year resulted from the bid for collateral.”

Banks typically buy the safest maturities at the end of the year to improve the quality of assets on their balance-sheets.

Two-year yields rose yesterday following the comments from Bullard, who will be a voting member of the Federal Open Market Committee next year.

“The fact that he introduced the idea should not be dismissed as the ranting of a madman,” according to a report by senior economist Tom Porcelli and interest-rate strategist Christian Cooper at primary dealer RBC Capital Markets in New York. “Even the most bearish analysts weren’t talking about 2012 as a possibility. But the idea has just received credibility.”

Bullard’s comments followed a Nov. 16 speech by Fed Chairman Ben S. Bernanke in which he indicated that the central bank’s extended period of low borrowing costs may be even longer amid economic “headwinds.”

New Asset Bubbles

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.

“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

The central bank lowered its target rate to a range of zero to 0.25 percent in December and purchased $300 billion of Treasuries this year as part of its effort to lower consumer borrowing costs and support the housing market, the collapse of which triggered the worst slump since the Great Depression....

GAZ and UNG: A Classical Gas

An intriguing divergence for two funds that are purported to have a .99 correlation and are tracking essentially the same thing.

Right now, for example, UNG is down .67% for the day and GAZ is up .61%.

UNG is considerably more 'liquid' as they say on the Street. Does that make it a more efficient price discovery mechanism?

Or more amenable for gaming the retail markets?