Free Sign Up
FORGOT
YOUR PASSWORD?
Click Image
Archives of July 2010
Marc Faber: Relax, This Will Hurt A Lot
Tyler Durden, www.zerohedge.com, 07/27/2010
In a credit-addicted economy, you don’t need credit to actually fall for there to be problems. All you need is a slowdown in the growth rate, and you get big problems.
Marc Faber closed out this week’s Agora Financial Symposium with a speech that pretty much recapitulated the view that the end of the world is if not nigh, then surely tremendous dislocations to the existing socio-political and economic landscape are about to take place (with some very dire consequences for the US).
His conclusive remarks pretty much summarize his sentiment best: “We’ve had a trend for most of the past 200 years: GDP of countries like China and India went down while the West surged. That’s now changed. Emerging economies will go up, and your children in the West will have a lower standard of living than you did. Absolutely. We won’t sink to the bottom of the sea. But other countries will grow much faster than us. The world is very competitive, and the odds are stacked against us. Americans, with their inborn arrogance, will not let it go that easily, so there will be lots of tension going forward.”
The Unlimited Power of Suppressing the Interest Rate
Thorsten Polleit, www.mises.org, 07/27/2010
So if the central bank keeps (i) increasing its demand for bonds in response to investors selling their bonds, or (ii) trying to establish a minimum price for bonds that exceeds the market equilibrium price, a strong rise in the money supply — and thus high inflation, or even hyperinflation — will be the inevitable result.
…[A] policy of suppressing long-term interest rates may signal that central banks, trying to cover up the damage done to the economies by the chronic increase in fiat money through a relentless expansion of bank-circulation credit, are about to turn to a policy of very high inflation.
The Great Recession is Just the Beginning
Matt Miller, www.washingtonpost.com, 07/21/2010
As former Intel CEO Andy Grove argued in Bloomberg Business Week recently, it’s not enough to do the product innovation in the United States; we need to do the manufacturing, too. That’s the only way, Grove says, to gain the hands-on experience with products that leads to all subsequent innovations. Surrender the manufacturing and you lose this virtuous cycle…
Here’s a cheery midsummer thought. You know those 15 million unemployed, and that sluggish growth, and the debt hangover and de-leveraging, and those soaring deficits? Well, these woes aren’t our biggest economic problems.
The Dollar’s Predicament:
Doug Noland, www.prudentbear.com, 07/16/2010
Did the dollar rally – and ongoing Treasury market strength – distract the market from the crucial unfolding issue: The U.S. Structural Debt Predicament?
Our financial system has created an unimaginable amount of non-productive debt, with our nation owing much of it to foreign creditors.
According to the Fed’s Z.1 “flow of funds” data, Rest of World (ROW) holdings of U.S. financial assets ended the eighties at about $1.9 TN and closed the nineties at $5.6 TN. By the end of 2009, ROW holdings had ballooned to $15.3 TN. During the past decade, the world’s holdings of our financial assets surged to 108% of U.S. GDP from 60%.
Gigantic and unending U.S. Current Account Deficits were the major force behind the extraordinary foreign accumulation of our (largely debt) securities. This implies structural deficiencies in both the Credit system and real economy. It would also be quite unusual for such a fundamental backdrop to support a strong currency.
Doug Noland’s Credit Bubble Bulletin
www.prudentbear.com, 07/16/2010
[Weekly News Review - Selections]
Fiscal Watch:
July 14 – Associated Press (Martin Crutsinger): “The federal deficit has topped $1 trillion with three months still to go in the budget year, showing the lasting impact of the recession on the government’s finances. …through the first nine months of this budget year, the deficit totals $1 trillion. That’s down 7.6% from the $1.09 trillion deficit run up during the same period a year ago… The June deficit totaled $68.4 billion, the second highest June deficit on record… June is normally a surplus month as the government collects tax payments from corporations and individuals who make quarterly payments.” Real Estate Watch:
July 15 – Bloomberg (Dan Levy): “A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010, according to RealtyTrac Inc. Home seizures climbed 38% from a year earlier and 5% from the first quarter…”
[Money Notes]
Federal Reserve Credit increased $1.3bn last week to $2.316 TN. Fed Credit was up $96.0bn y-t-d (8.0% annualized) and $304bn, or 15.1%, from a year ago.
M2 (narrow) “money” supply sank $33.9bn to $8.589 TN (week of 7/5). Narrow “money” has increased $77bn y-t-d, or 1.7% annualized. Over the past year, M2 grew 1.9%.
Read more»
So Bad It’s Good
Statement 159 Helps Unhealthy Bank Book Healthy Earnings
Eric Fry, www.dailyreckoning.com, 07/15/2010
Straight from the “Only in America” file: Second quarter earnings were so bad…they were great!
Yes, dear readers, it’s true, many of America’s largest financial firms are producing such dismal operating results that their reported earnings might actually benefit.
Are you confused yet?
Here’s how it works: A bizarre accounting rule that came into existence three years ago allows banks to book profits when the value of their own bonds falls. The tortured logic behind this nonsensical “Statement 159″ accounting rule is that a bank could, theoretically, repurchase its bonds at a discount, thereby booking a “profit” between what it could have paid for the bonds and what the bank would have paid to retire its bonds at maturity. (An insightful story from Bloomberg News provides additional detail.)
This quirky little accounting gimmick produces something called a debt- valuation adjustment gain, or “DVA Gain.” The more distressed a bond might be, the greater its drop in value and thus, the greater its “profit.” Obviously, this logic is patently illogical. “Could have” or “would have” has nothing to do with reality. If a bank wishes to book a profit by buying back its bonds on the cheap, then the bank should actually buy back its bonds on the cheap – not receive credit for a transaction it does not conduct.
Read more»
Frightening US Government Spending Data
Hard Knocks From Easy Money
By GEORGE MELLOAN
A Federal Reserve fully attuned to the easy money demands of the Democrats and megabanks clearly has no plan to lift interest rates from their near-zero level. The rationale is: “Why should we? The Consumer Price Index (CPI) is rising at a modest 2% annual rate. Banks are getting healthier. Why risk stalling an economic recovery and sending a nervous stock market into a spin if things are going well?”
There are several answers to this rationale. Aside from the growing doubts among serious economists that the CPI is an accurate measure of inflation, let’s examine the assumption that the Fed is financing an economic recovery. In fact, it is mostly financing a massive expansion of a federal government that’s borrowing an unprecedented $1.5 trillion annually. Easy money keeps the government’s interest cost on this pile of IOUs low. The recovery comes second, and last week’s dismal job growth indicated that it is increasingly feeble.
Super-low interest rates also ensure that the big banks, fated to be wards of the government if the new financial reform becomes law, will have generous margins between their borrowing costs and lending revenues. This will enable them to further pad their balance sheets and correct the mistakes of yesteryear.
Oh, and don’t forget Fannie Mae and Freddie Mac, those two government-sponsored mortgage giants that engineered the 2008 subprime mortgage fiasco and are now on the public dole. The Fed kept them afloat by buying over a trillion dollars of their paper. Now, part of the Treasury’s borrowing from the public covers their continuing large losses. Read more»
The threat to the US dollar is hyperinflation, not deflation
James Turk, kingworldnews.com, 0709/2010
In the early 1930’s, the US dollar money supply as measured by M3 dropped by approximately 30%. This deflation, i.e., drop in the quantity of money, was one of the steepest in history. The purchasing power of the dollar – until 1933 redeemable into gold and thereafter redeemable into silver – rose dramatically because less money was in circulation compared to the quantity of goods and services available in commerce.
Today, the Federal Reserve no longer reports M3, which is unfortunate because it eliminates the possibility of accurate historical comparisons. M3 is estimated by economists by modeling historic trends. However, these models become less reliable as we move further from February 2006, the date the Federal Reserve stopped reporting M3. Eurodollars, a major M3 component, is particularly difficult to model.
In any case, much attention is being given to these private estimates, even though the decline in M3 they are reporting stands in marked contrast to M1 and M2. The Federal Reserve reports that these two money supply measures have grown 7.1% and 1.7% respectively over the past twelve months. Thus, by these two measures, the dollar is inflating, i.e., the quantity of dollars is expanding – particularly so for M1 – relative to the available stock of goods and services being produced in today’s depressed economy.
This inflation is also apparent from market prices. For example, crude oil prices have more than doubled since their post-Lehman crash low. More broadly, the price index of 19 commodities compiled by the Commodity Research Bureau is up 46% during this same period, which makes clear there is no deflation. Read more»
Away…
Note:
Your editor will be away from the office from July 1st through July 12th. Thereafter posts for the balance of July will be more sporadic than the usual considering family and other personal commitments. All the best for a great July 4th and a summer with family and friends! God-willing we can each achieve a sense of peace amidst the gathering storm.