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The Deflation Time Bomb
Summarized and/or edited by Dick McManus
We are to about see how much George Bush really believes the "supply side" mumbo-jumbo he's been spouting for the last seven years. Last week's Labor Department report confirmed that unemployment is on the rise (5%) and that corrective action will be required to avoid a long and painful recession.
Clearly, the prospect of a system-wide meltdown in banking, real estate and equities has become a "Road to Damascus" moment for lame-duck George (Bush).
That's right; the price of gas today is attributable to war, tax cuts and the relentless expansion of credit by the Federal Reserve.
Escalating energy prices are increasing the cost of food production, which creates a self-reinforcing inflationary cycle. Additional rate cuts will only weaken the dollar further and put an even greater burden on maxed-out consumers.
The economic realities that Bush will be facing are the anticipated "hard landing" from a nationwide housing slump coupled with a credit crunch that is strangling the banking and financial industries. The country is lurching recklessly into a deflationary death-spiral.
"This isn't like 2000 when the US was running a large fiscal surplus of $300 billion or 2.5% GDP," said economist Nouriel Roubini. "Now that all the fiscal stimulus bullets have been spent on the most reckless and unsustainable tax cuts in history — the administration is left with very little room (to maneuver) in bad times . . . We are now stuck in a situation where the room for any meaningful fiscal stimulus . . . is gone. . . . We did indeed waste all our macro policy bullets in 2001-2004 in "the best recovery that money can buy" and now we are left with relatively limited room for monetary and fiscal policy stimulus. This is one of the main reasons why the recession of 2008 will be more severe and protracted than the mild 2001 recession." (Nouriel Roubini, Global EconoMonitor)
The system is grinding to a halt and the Fed chief will have to use the tools at his disposal to try to stimulate economic activity. It won't be easy. Presently, he faces a number of challenges. Home prices are falling, retail spending is off, commercial real estate is in a sharp downturn, and many of the major investment banks are capital impaired from their poor investments in mortgage-backed bonds. If the Fed's "low interest" smelling salts don't revive the comatose American consumer — and get the cash registers at Target and Billy McHales ringing again — the world will face a global slowdown.
A growing number of market analysts believe we're already in recession. David Rosenberg of Merrill Lynch put it like this: "According to our analysis, this [recession] isn't even a forecast any more but is a present day reality."
The whole system is keeling over and it could take the bond market along with it. As consumer spending will stall, business activity will slow, more workers will get laid off, and prices will tumble. Equities and commodities will be hit hard (even gold) and housing prices will dive to new lows as the pool of potential buyers grows smaller and smaller.
These problems will be further aggravated by the lack of personal savings and the huge debt-load which will push increasing numbers of homeowners, credit card customers, even student loan recipients into default. By 2009, bankruptcy will greatly increase.
Many experts are now predicting that home prices will dip 30% by the end of 2008. That means that nearly 20 million homeowners will be "upside-down", that is, they will owe more on their mortgage than the current value of the house.
So what does "deflation" mean?
The housing bubble is deflating faster than anyone had anticipated. Overall sales have slipped more than 40% from their peak in 2005 whereas, prices have gone down a mere 6.5%. Prices, which are a lagging indicator, have a lot further to drop before they touch bottom. Robert Schiller, Professor of Economics at Yale University and author of Irrational Exuberance, "predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.
Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: "American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars' worth of losses." (Times Online, UK)
Secretary of the Treasury Henry Paulson is desperately trying to put together a national "rate freeze" to avoid, what could be, the most devastating surge of foreclosures the world has ever seen. Paulson's rate freeze does not offer "New Hope" as promised but, rather, a lifetime of servitude paying off an asset of ever-decreasing value. Underwater homeowners are better off taking the hit to their credit and letting the bank repo the house. Let the bank worry about it. They created this mess.
Many of the banks are simply in "survival mode" trying to conceal the magnitude of their losses from their shareholders while attempting to attract capital from overseas investors to shore up their sagging collateral. (via Sovereign Wealth Funds)
The banks are now struggling to fulfill their function as the main conduit for providing credit to consumers and businesses. They have curtailed their lending as their capital base has steadily eroded. The Federal Reserve has tried to resolve this issue by opening a Temporary Auction Facility (TAF), which allows the banks to secretly borrow billions from the Fed without the embarrassment of disclosing the transaction to the public.
This is a bad sign. It indicates that the banks are seriously overextended, "capital impaired" and need a handout from the Central Bank to keep from defaulting. It means that the vaults are stuffed with worthless mortgage-backed slop that they are deliberately hiding from their shareholders and depositors. If there were adequate regulation then the banks would never have been allowed to dabble in such risky debt instruments as subprime loans.
Many believe that the unwinding of these bubbles will trigger a round of hyperinflation which is already evident in soaring food, energy and health care costs. These prices are bound to increase substantially as the Fed continues to cut rates and further undermine the dollar.
But the real issue (it seems to me) is the unfathomable loss of market capitalization, the growing insolvency of maxed-out consumers, and the inability of the banks to freely extend credit to responsible loan applicants. These three things are likely to drag down all asset-classes, slow business activity to a crawl, and compel consumers to hoard rather than spend. The dollar will strengthen in a deflationary environment (if that is any consolation?).
The real issue is the length and severity of the impending recession.
Comment by Dick McManus: And on top of this we have to deal with an ever decreasing supply of cheap oil and natural gas and global climate change. The failure to be honest with the Amerian people about the need to conserve energy, the need for massive investment in sustainable energy infrastructure, and to educate about the need to reduce our population, will cause the FEAR factor to reach the boiling point.
So join our Running on Empty caucus: see link below
-----
Escalating energy prices are increasing the cost of food production, which creates a self-reinforcing inflationary cycle. Additional rate cuts will only weaken the dollar further and put an even greater burden on maxed-out consumers.
The economic realities that Bush will be facing are the anticipated "hard landing" from a nationwide housing slump coupled with a credit crunch that is strangling the banking and financial industries. The country is lurching recklessly into a deflationary death-spiral.
"This isn't like 2000 when the US was running a large fiscal surplus of $300 billion or 2.5% GDP," said economist Nouriel Roubini. "Now that all the fiscal stimulus bullets have been spent on the most reckless and unsustainable tax cuts in history — the administration is left with very little room (to maneuver) in bad times . . . We are now stuck in a situation where the room for any meaningful fiscal stimulus . . . is gone. . . . We did indeed waste all our macro policy bullets in 2001-2004 in "the best recovery that money can buy" and now we are left with relatively limited room for monetary and fiscal policy stimulus. This is one of the main reasons why the recession of 2008 will be more severe and protracted than the mild 2001 recession." (Nouriel Roubini, Global EconoMonitor)
The system is grinding to a halt and the Fed chief will have to use the tools at his disposal to try to stimulate economic activity. It won't be easy. Presently, he faces a number of challenges. Home prices are falling, retail spending is off, commercial real estate is in a sharp downturn, and many of the major investment banks are capital impaired from their poor investments in mortgage-backed bonds. If the Fed's "low interest" smelling salts don't revive the comatose American consumer — and get the cash registers at Target and Billy McHales ringing again — the world will face a global slowdown.
A growing number of market analysts believe we're already in recession. David Rosenberg of Merrill Lynch put it like this: "According to our analysis, this [recession] isn't even a forecast any more but is a present day reality."
The whole system is keeling over and it could take the bond market along with it. As consumer spending will stall, business activity will slow, more workers will get laid off, and prices will tumble. Equities and commodities will be hit hard (even gold) and housing prices will dive to new lows as the pool of potential buyers grows smaller and smaller.
These problems will be further aggravated by the lack of personal savings and the huge debt-load which will push increasing numbers of homeowners, credit card customers, even student loan recipients into default. By 2009, bankruptcy will greatly increase.
Many experts are now predicting that home prices will dip 30% by the end of 2008. That means that nearly 20 million homeowners will be "upside-down"
So what does "deflation" mean?
The housing bubble is deflating faster than anyone had anticipated. Overall sales have slipped more than 40% from their peak in 2005 whereas, prices have gone down a mere 6.5%. Prices, which are a lagging indicator, have a lot further to drop before they touch bottom. Robert Schiller, Professor of Economics at Yale University and author of Irrational Exuberance, "predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.
Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: "American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars' worth of losses." (Times Online, UK)
Secretary of the Treasury Henry Paulson is desperately trying to put together a national "rate freeze" to avoid, what could be, the most devastating surge of foreclosures the world has ever seen. Paulson's rate freeze does not offer "New Hope" as promised but, rather, a lifetime of servitude paying off an asset of ever-decreasing value. Underwater homeowners are better off taking the hit to their credit and letting the bank repo the house. Let the bank worry about it. They created this mess.
Many of the banks are simply in "survival mode" trying to conceal the magnitude of their losses from their shareholders while attempting to attract capital from overseas investors to shore up their sagging collateral. (via Sovereign Wealth Funds)
The banks are now struggling to fulfill their function as the main conduit for providing credit to consumers and businesses. They have curtailed their lending as their capital base has steadily eroded. The Federal Reserve has tried to resolve this issue by opening a Temporary Auction Facility (TAF), which allows the banks to secretly borrow billions from the Fed without the embarrassment of disclosing the transaction to the public.
This is a bad sign. It indicates that the banks are seriously overextended, "capital impaired" and need a handout from the Central Bank to keep from defaulting. It means that the vaults are stuffed with worthless mortgage-backed slop that they are deliberately hiding from their shareholders and depositors. If there were adequate regulation then the banks would never have been allowed to dabble in such risky debt instruments as subprime loans.
Many believe that the unwinding of these bubbles will trigger a round of hyperinflation which is already evident in soaring food, energy and health care costs. These prices are bound to increase substantially as the Fed continues to cut rates and further undermine the dollar.
But the real issue (it seems to me) is the unfathomable loss of market capitalization, the growing insolvency of maxed-out consumers, and the inability of the banks to freely extend credit to responsible loan applicants. These three things are likely to drag down all asset-classes, slow business activity to a crawl, and compel consumers to hoard rather than spend. The dollar will strengthen in a deflationary environment (if that is any consolation?
The real issue is the length and severity of the impending recession.
Comment by Dick McManus: And on top of this we have to deal with an ever decreasing supply of cheap oil and natural gas and global climate change. The failure to be honest with the Amerian people about the need to conserve energy, the need for massive investment in sustainable energy infrastructure, and to educate about the need to reduce our population, will cause the FEAR factor to reach the boiling point.
So join our Running on Empty caucus: see link below
-----
Indicators of a coming economic depression.
Financial Hypocrisy Jan 09, 2008
I don't understand this stuff, but maybe you do.http://seattle. indymedia. org/en/2008/ 01/263907. shtml
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