Doug Noland’s Credit Bubble Bulletin

Selected Notes

January 17 – Bloomberg (Leslie Patton and Lauren Coleman-Lochner): “Supermarkets that had been adding Starbucks Corp. cafes and olive bars to draw wealthy shoppers are now catering to a different audience: food-stamp recipients. Stores are moving their opening hours, adding products and revamping merchandise assortments as persistent joblessness pushes more shoppers to government support in buying groceries. Distributions from the federal Supplemental Nutrition Assistance Program rose 11% to a record $71.8 billion in fiscal 2011…”

January 19 – Bloomberg (Charles R. Babcock and Frank Bass): “Almost 15,000 federal retirees, including former leaders of Congress, a university president and a banker, are receiving six-figure pensions from a system that faces a $674.2 billion shortfall. About one of every 125 retired federal civilian workers collects more than $100,000 in benefits annually… ‘We don’t want to bash federal employees,’ said Jim Kessler, vice president for policy at Third Way… ‘Still, when you have today’s economy, public sector jobs look better and better. And there are some pensions that make you question the system as a whole.’”

M2 (narrow) “money” supply jumped $22.3bn to a record $9.756 TN. “Narrow money” has expanded 10.7% from a year ago…   Read more»

Thoughts on the Crisis of Capitalism

“I am convinced that a capitalistic system must have a monetary anchor to be sustainable…It is the pricing mechanism within the  financial sphere that has become so badly out of whack to the point of  posing dire risk to global Capitalism.”

“Policymakers have repeatedly responded to dysfunction and inevitable booms-turned-bust with unprecedented market intervention…What began as tinkering has regressed to the point of policymakers attempting to take virtual command over the pricing of finance. Capitalism now hangs in the balance.”

George Soros’ “The Crisis of Global Capitalism…” was published back in late-1998, following a dreadful period of global instability. Such concerns for the most part dissipated over the years with the resuscitation of global market and economic booms. The market value of global debt, equities and commodities skyrocketed. Bigger booms and busts followed and, not surprisingly, global Capitalism is today under only more intense fire.

Strangely enough, there remains a fine line between a “crisis of global Capitalism” and utter euphoria in the financial markets. The ECB’s $620bn first round Long-Term Refinancing Operation (LTRO) – along with expectations for an even more grandiose 3-year lending facility (LTRO II) next month – has the markets abuzz. Crisis resolved? The unleashing of another global reflationary backdrop on which to capitalize?   Read more»

Auditing the FED’s Gold

I have posted a video of something I thought I would never see: all five of the Republican candidates for the U.S. Senate verbally demanding an audit of the Federal Reserve System. You can see it here.

Bernanke is facing what no Federal Reserve chairman has ever faced: public awareness of the Federal Reserve System. From late December 1913, when an almost deserted Senate voted for the Federal Reserve Act, until 2008, when the recession confirmed Ron Paul’s warning in late 2007, there was almost no public awareness or even a vague understanding of the Federal Reserve System. The genie is now out of the bottle, where it had been corked since 1913. Ron Paul has uncorked it.   Read more»

“Audit the FED,” Say All Texas Republican Candidates for the Senate

Here is a video of something that I thought I would never see. All five Republican candidates for the U.S. Senate in Texas have come out in favor of a government audit the Federal Reserve System.

That someone in the audience even asked the question would have been unthinkable four years ago.

Ron Paul\’s Spirit Visits the Texas Republican Senatorial Debate

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How Deflationary Forces Will Be Turned into Inflation

The ongoing financial and economic crisis has not only stoked fears that it will end in inflation — as central banks will print up ever-greater amounts of money — but it has also given rise to a diametrically opposed concern: namely, that of deflation.

For instance, in December 2011 Christine Lagarde, head of the International Monetary Fund (IMF), warned that the world might risk sliding into a 1930s-style slump, such as the Great Depression. This episode was characterized by worldwide defaulting banks, a shrinking of the money supply (or, deflation), which in turn led to falling prices across the board, sharply falling production and drastically rising unemployment.

In today’s fiat-money regime — which contrasts with the gold-exchange-standard that was in place in many countries at that time — the possibility of deflation appears fairly small indeed.[1] This becomes obvious if one takes a look at the workings of today’s fiat-money system, a system in which the money supply can actually be increased at any point in time in any amount deemed politically desirable.   Read more»

Central Banks Curb Their Appetite for Treasuries

Anxious investors are buying, so is the Federal Reserve. But many of the world’s central banks are doing the opposite – offloading US Treasury bonds, and at a record pace.

A closely watched gauge of foreign appetite for US sovereign debt – the Treasury International Capital or Tic flow report, which includes private and official flows – on Wednesday showed solid demand for Treasuries in November.   Read more»

Currency Love Triangle

The ongoing financial crisis in Europe is the biggest financial story in the world today and is covered daily. The stories are filled with doom and gloom and predictions of imminent collapse of the currency and the monetary union. Our view is the euro sovereign bonds are in distress and European banks are mostly insolvent but that does not mean the currency will fail. The bonds, banks and currency are three different things and the failure of the first two does not mean failure of the third. The reasons for this are based on the fact that the U.S., China and Germany are united in their desire for a strong euro. The U.S. and China both need a strong euro so Europeans can buy more of their exported goods to maintain growth. China’s leverage comes from the fact that it can prop up the European bond market with fresh purchases. The U.S. leverage comes from the fact that it provides the dollar liquidity Europe needs via central bank swap lines. Germany has a demonstrated capacity, dating to the 1970’s and earlier, to remain an export powerhouse even with a strong currency and a strong euro all but eliminates intra-European competition. In this sense, the euro is the biggest loser in the currency wars.

The Chinese growth story is so taken for granted that markets and analysts have difficulty imagining anything else. In fact, Chinese growth is on the brink of collapse – something the world and the markets have not fully priced in.     Read more»

Man vs. Machine, a Jobless Recovery

In no other U.S. recovery since World War II have companies been simultaneously faster to boost spending on machines and software, while slower to add people to run them.

Part of this is the old story of substituting capital for labor. But a combination of temporary tax breaks that allowed companies in 2011 to write off 100% of investments in the first year and historically low short- and long-term interest rates [Ed: The unintended consequences of the Fed’s easy money policies…] have pushed that process into overdrive.

Hiring, meanwhile, is too slow to bring the unemployment rate down rapidly. Employers have added workers at a monthly rate of 142,000 for the past six months, half the pace needed to significantly reduce unemployment, which is now at 8.5%.   Read more»

Why Zombie Banks Hate to Write Off Bad Loans

There’s a simple explanation for why the world’s zombie banks remain so reluctant to write off worthless assets and tap the equity markets for fresh capital. They don’t want to end up like UniCredit SpA. (UCG)

This month has been a nightmare for the Italian bank’s shareholders. Since embarking last week on a 7.5 billion euro ($9.7 billion) stock sale at a steep discount to its Jan. 3 closing price, UniCredit shares have fallen 39 percent to 2.56 euros. It seems no good deed goes unpunished when it comes to lenders besieged by Europe’s debt crisis. A little bit of candor about the true state of a company’s finances can hurt a lot.   Read more»

The Fed’s Housing Politics

The central bank compromises its independence with rank electioneering.

These columns have defended the independence of the Federal Reserve from attacks on the right and left, but after last week the central bank is on its own. It’s impossible to defend the Fed’s rank electioneering as it lobbies for more political and taxpayer intervention in the housing market—just in time for the election campaign.

This extraordinary political intrusion came in the form of a 26-page paper that the Fed sent to Capitol Hill last Wednesday, without invitation, graciously offering what Chairman Ben Bernanke called a “framework” for “thinking about certain issues and tradeoffs.” He was underselling his document. The paper is a clear attempt to provide intellectual cover for politicians to spend more taxpayer money to support housing prices.   Read more»