Depression in the USA - Deflation verus Inflation

[Lizard]

Although Soro's actually said that last Sunday and was talking about the previous bail-out plan, not the most recent developments. At the same time, Soros also said this:

"The policy direction now is much more productive than it was a week ago," Soros said.

Financial markets, which plummeted last week amidst uncertainty about whether the meltdown would lead to a deep global recession, should rebound as a result, Soros said.

Associated Press

[tricha]

Although Soro's actually said that last Sunday and was talking about the previous bail-out plan, not the most recent developments. At the same time, Soros also said this:


Associated Press

Its now 2009 and nothing has changed me to alter the Thread title.

I'm still calling it a depression for the USA, it's coming, I guess the US will call it in about 9 months time.
What happens to the rest of the world ? where does it leave the ASX

I've just changed my portfilo around, gone to 50% cash on this suckers rally and the rest mostly cash cows. My tolerence for high risk is gone. Reporting season out soon and I do not expect any good news.

Can anyone out there find some good news that says otherwise ?

P.S U will have to excuse me, the news off BBC business got a bit mixed, basically shows the overall big picture, worldwide.
And sorry for the doom and gloom, but is is as I personally see it unfolding.

Index data delayed 30 min. DJIA8599.2-143.28 NASDAQ1571.59-45.42 NIKKEI8,836.80-39.62 RUSSELL481.30-20.71 NYSE5703.69-133.45 USD82.48+0.84 Crude Oil40.36-1.34Charts...




US job losses hit record in 2008
More US workers lost jobs in 2008 than in any year since World War II, with employers axing 2.6 million posts.
Why is unemployment rising?
Obama urges action on economy
US deficit 'to hit $1 trillion'

Indian IT scandal boss arrested

The founder of scandal-hit Indian software company Satyam is arrested two days after he admitted falsifying the firm's accounts.


Spanish industrial output plunges

Production in Spanish factories fell by 15.1% in November, the biggest fall on record, as the downturn gathers pace.

[Dr_Who]

Aussie is looking very ugly.

Down 4.5%!

[macduffy]

It's okay, tricha and doc.

We don't hold you personally responsible!

[Dr_Who]

Hey McDucky, you crack me up ..LOL.. this place would be boring without you.

You know the difference between Africa and America?

In Africa the leaders and the wealthy dont hide the fact that they are stealing from the country. In America they use the combination of Bernankie and complex financial instruments to steal from mum, dad and the nation.

[tricha]

It's okay, tricha and doc.

We don't hold you personally responsible!

Thanks Macduffy

This is written by a dedicated gold bug, unfortunately if you are a realist like me .............................

Another Great Depression

I don’t like to start any new year on a gloomy note. I am by nature an optimist, but I am also a realist who readily faces facts. Right now those facts are not very pretty and suggest to me that the world has entered into another Great Depression. Here are some shockers about the US economy that are worth pondering.
The National Bureau of Economic Research reckons that the present recession began in December 2007. In only one month since then has the US economy not lost jobs, but worryingly, the job losses are occurring with increasing momentum suggesting that the economy is spiraling downward.
Last week the US government announced that the unemployment rate rose this past December to 7.2% from 6.8% the month before. The US economy lost 2.6 million jobs in 2008, of which 1.9 million were lost in the past four months. Of these, 524,000 were lost in December alone.
Importantly, there are clear indications that employment will drop further. Companies have been cutting back on hours worked, which reached a record low in December of 33.3 hours per week. This measure is a leading indicator because companies first cut back on hours worked before they cut jobs. Also, layoffs are growing. The Wall Street Journal reports: “The new year has brought no letup on layoffs, as employers have already announced more than 30,000 cuts.”
The monthly unemployment report is prepared by the Bureau of Labor Statistics <http://www.bls.gov/news.release/empsit.nr0.htm>. It reveals that the number of unemployed has climbed over the past year by 3.6 million to 11.1 million, but the real numbers are much worse when looking through the government sugar-coating in these reports. As The Wall Street Journal explains it: “While the official unemployment rate is 7.2%, a different figure that includes discouraged workers who have dropped out of the labor force and those working part-time because they can't find full-time work hit 13.5% in December. That was nearly a full percentage point higher than in the previous month and up from 8.7% at the end of 2007.”
While a 13.5% unemployment rate is shocking, the truth is even worse because the WSJ is still relying upon government reports. To get the unadorned picture, we need to turn to private economists, and I reply upon the work of John Williams of Shadow Government Statistics <http://www.shadowstats.com/>, who presents in his latest report the true picture of the dire unemployment situation: “During the Clinton Administration, ‘discouraged workers’ those had given up looking for a job because there were no jobs to be had were redefined so as to be counted only if they had been ‘discouraged’ for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, as estimated by the SGS-Alternate Unemployment Measure, rose to 17.5% in December from 16.6% in November.”
Unemployment is the key measure that signals whether or not a depression has begun, and by the SGS measures we are rapidly approaching the 25% unemployment rate usually mentioned as the most important signpost marking the depths of the Great Depression. That high rate of unemployment cut a wide-swath of misery through the American population.
Given the current 17.5% rate of unemployment, it would appear that I am not far off the mark to suggest that we have entered another Great Depression, and I am not alone in my thinking. Others who are more attuned to the economic situation see it the same way as I do.
For example, the following quote is from an OpEd piece by Nobel Laureate Paul Krugman that was published in The New York Times on January 5th: “The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.”

I agree, which is unusual because I don’t often agree with Mr. Krugman. But not only do I think his observation about another Great Depression is accurate, but I also agree with another key point of the analysis in his article.

Namely, Mr. Krugman observes: “In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades. Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply...It turns out, however, that preventing depressions isn’t that easy after all.”
Not only is it not “easy”, it is impossible, and the reason is simple. Ludwig von Mises explained this phenomenon in 1912 in his seminal work, “The Theory of Money and Credit”.
Basically, banks make too many loans creating a ‘boom’ that is built upon an unsustainable and shaky foundation of credit. Eventually, the bankers and their borrowers realize that these extensions of credit and the mountain of borrowing that resulted from it was imprudent, and they then seek to improve the dire state of their overleveraged balance sheets. The ‘bust’ occurs because the loans made during good times inevitably lead to bad investment decisions that appear sound only within the illusory prosperity of the boom.
In short, prosperity comes from hard work and savings, not borrowed money and consumption. Unfortunately, hard work and savings have been in short supply, and economies around the world are now feeling the consequences.
For decades the global economy in general and the US economy in particular have enjoyed the boom. They are now in the throws of the bust, and this where Mr. Krugman and I part company. He believes that this current bust can be avoided by more of the same – government spending.
He says: “Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy – large-scale deficit spending by the government – is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.”
This wrong-headed thinking is what put the US economy – and indeed, the global economy – in this mess in the first place. Therefore, the cure cannot possibly come from government spending, all of which is going to come from debt – some $2 trillion of it that is estimated the government will borrow this current fiscal year.
If Mr. Obama follows this advice – and he has clearly indicated that he will – the US government will have gone ‘to the well’ once too often. It is foolhardy to think that the federal government’s resources and borrowing capacity are unlimited. They are not, and more to the point, they have already been exceeded. It’s just that too few people today recognize this reality, which is what always happens in bubbles. People accept certain conventional wisdoms without question or even any cursory analysis. For example, consider the following.

1. Circa 2000 – It doesn’t matter that Internet stocks are trading at multiples of revenue because ‘these companies are going to change the way we do business’.
2. Circa 2005 – It doesn’t matter that people are borrowing 125% of the home purchase price because ‘the price of homes always goes up’.
3. Circa 2009 – US government ‘T-bills and T-bonds are risk free’, so the federal government can borrow unlimited amounts of money. This example of bubble-mentality thinking not only ignores the defaults by countless governments, it also ignores the history of US sovereign defaults (gold in 1933 and silver in 1967) as well as the continuing debasement of the sorry US dollar from inflation.

It is questionable whether Keynesian dogma ever worked, but regardless, one thing is clear. Increased borrowing and spending by an overleveraged government in an overleveraged country that is already the world’s largest debtor will not make the economy strong or lead to an economic revival. It will lead to a collapse of the currency, just like it has done in dozens of countries throughout the world. By pursuing defunct Keynesian dogma the new administration is ringing the bell that signals the death knell of the dollar.
In short, the biggest bubble of them all – that the US dollar is ‘money’ – is about to pop. The US dollar is on the path to the fiat currency graveyard, and will soon get there.
Not only does the US have problems, but like the 1930s, they are global. While it had been hoped that China would be the shock-absorber of the world, both its exports and imports are falling from year-ago levels as its manufacturing activity stalls. Germany is also faltering, as is much of Europe. There is another similarity to the 1930s.
Most people mark the beginning of the Great Depression with the stock market crash in October 1929. I think it actually began over a year later with the collapse of the Bank of the United States in December 1930, a commercial bank based in New York City. Its failure turned an economic downturn into a full-fledged panic that rocked the American banking system to its core, which in turn sent ripple effects throughout the world, just like the collapse of Lehman has done.
Is there some good news for 2009? There are two things that should bring some cheer.
First, the plummeting price of crude oil to $40 a barrel has put some $200 billion back into the pockets of Americans. That may help economic activity somewhat or at the very least, help repair household balance sheets.

Second, gold is likely to have another good year as the world increasingly wakes up to today’s realities. As they do, they will also come to understand that gold is money, which is a good thing to hold any time, but particularly during economic and monetary turmoil.

by James Turk

[kazza]

Great post tricha I totally agree with everything you said. especially the Quote:

"In short, prosperity comes from hard work and savings, not borrowed money and consumption"

I prefer to be optimistic also but as you say you can't just ignore the facts. What is the big deal about a collapse in the US dollar? it might mean they have to start consuming within their means which has to be a good thing.

There are definite similarities with what is happening now and the start of the great depression - Worldwide stock market crash, Banking failures, Ever increasing unemployment. Except this time there is a property crash in the mix also.

Society is a lot different now than back then though so IF America is in a depression how are they going to get out of it this time? it took a world war last time!!

as you say borrowing and throwing more debt on the flames isn't going to work. The fact is they (and us) are going to have to take it on the chin, do our penance for the next 1-2-5? years as a consequence of living beyond our means for too long and learn from our mistakes (yeah right).

[MrDevine]

Kazza, what we forget is the America has a LOT of bombs –*this gives you a few chips when it comes to changing the game, which is what I think they will do, or are doing now.

The US has changed the money system before, when Nixon made the US dollar the reserve currency when he took it off the gold standard (Bretton Woods II, btw who setup Bretton Woods I – the US), they'll change it again.

One fault in that post from Tricha, is that it's another gold bug story. Every gold bug out there is keen for gold to go sky high, but guess what? Its priced in US dollars. Until you can exchange gold again, its a moot point what price it is, as the US dollar will be inflated in correlation.

I sincerely hope we're not headed to the Second Great Depression, as you mentioned, the first one caused another world war. I think what differs to this recession is the unprecedented amount of money injected into the system by the world banks. an low low interest rates, It will soon make no sense to have cash on call as you'll be losing money doing nothing. Do not under estimate America, they will be back. The country wasn't built on pessimism.

Also, everybody keeps talking about the 'Japan' problem, last time I looked it seemed the Japanese have some of the most interesting architecture in the world, pay good salaries, produce great cars and can buy up to the minute consumer goods, what's the problem there?

Mr D.

Mr D.

[tricha]

"In short, prosperity comes from hard work and savings, not borrowed money and consumption"

I prefer to be optimistic also but as you say you can't just ignore the facts. What is the big deal about a collapse in the US dollar? it might mean they have to start consuming within their means which has to be a good thing.

There are definite similarities with what is happening now and the start of the great depression - Worldwide stock market crash, Banking failures, Ever increasing unemployment. Except this time there is a property crash in the mix also.

Society is a lot different now than back then though so IF America is in a depression how are they going to get out of it this time? it took a world war last time!!

as you say borrowing and throwing more debt on the flames isn't going to work. The fact is they (and us) are going to have to take it on the chin, do our penance for the next 1-2-5? years as a consequence of living beyond our means for too long and learn from our mistakes (yeah right).

U R onto it Kazza, a realist. The big question is how one is to protect themselves in 2009 in the ASX.

Mr Devine - give us one bit of good world news, just one. ???, The ASB business report is shocking today, just shocking.



Credit markets suggest shares can fall even further






David Uren, Economics correspondent | January 19, 2009

Article from: The Australian
SHARE prices still have a long way to fall, if credit markets are any guide.
Although credit markets have improved slightly over the past eight weeks, they remain in the worst shape since the last downward lurch of the Great Depression in 1937.
Since bonds rank ahead of equities in default, equities should be underperforming the debt markets. In the event of default, there is likely to be nothing left for shareholders.
However, share markets have been playing catch-up ever since the credit crisis erupted in the second half of 2007.
For the first nine months or so, share investors tried to pretend the chaos in credit markets had nothing to do with them. The S&P/ASX 200 was only a fraction below 6000 as recently as mid-May, barely 3 per cent down from its level in August 2007 on the eve of the credit crisis. Equities have tumbled since, but over the past two months investors have been scouring for value.
Although the banks are still untouchable, stocks such as CSL and Crown have rallied, as the market as a whole seemed to find a floor. More bad news was expected but many felt it was priced in.
This mood was broken last Thursday as the drumbeat of world recession hit a new decibel level, sending markets tumbling around the world.
Credit analysts believe equities markets are underestimating the risk of widespread default. Moreover, equity markets cannot stage a recovery until financial markets resume normal functioning.
Some neat research by UBS interest rate strategist Matthew Johnson compares credit market spreads and share prices since the 1920s.
A good measure of the risk premium in debt markets is the spread between Moody's Aaa rated bonds and Baa rated bonds, for which there is data going back to 1919.
As the chart shows, the risk premium in debt markets has closely tracked the (inflation adjusted) Standard & Poor's 500 index over the past 80 years.
Johnson notes credit spreads have never widened so far and so fast as over the past 18 months, although they were ultimately wider during the Depression. He believes the current cycle most closely resembles that of 1937.
If the relationship still holds, it suggests either that credit markets are about to stage a remarkable recovery or that share markets have only fallen about half the depth they have yet to plumb. Could the improvement in credit markets in recent months be the early seeds of that recovery?

The spread between interbank lending rates (Libor) and Treasury bills narrowed to under 100 basis points last week for the first time since before the Lehman Brothers collapse (though it didn't stay there long, rising to 107 basis points on Friday).

In the immediate aftermath of the collapse it reached a peak of 463 basis points.

The cost of insuring against bonds defaulting has also fallen.

The Itraxx measure of the pricing of credit default swaps for the 25 top Australian companies hit a high of 390 points last October but dropped as low as 283 points by January 7, although it has started to rise again, reaching 313 points late last week.

There has been an increase in the deal flow, accompanying the easing in market tension.

The US commercial paper market, which is the main source of working capital for US business, has risen from a low of $US1.5 trillion last October to $US1.8 trillion now.

In both the US and Europe, there have been a number of corporate debt issues by sub-investment grade companies, which was unthinkable late last year.

Aberdeen Asset Management credit analyst Stuart Gray says investors are accepting non-guaranteed issues from major corporates, such as WalMart, at around 170 basis points above the swap rate, which is not a large premium over the going rate for guaranteed bank bonds in the US, which is about 50 basis points above swap.

The Australian banks have been making the most of the thaw in the markets, and the government guarantee, pushing out $38 billion in guaranteed long-term funding.

Showing fine chutzpah, ANZ has obtained a government guarantee for a medium term euro-note program with a maximum value of $US50 billion. Although markets would complain of indigestion long before this limit was reached, it sits as a contingent liability on the Government's balance sheet, not far short of the size of its total commonwealth bond issuance.

The Australian bank issues have been popular among global investors, as they are getting government guaranteed paper with a yield 200 basis points or more above the commonwealth bond rate.

Deutsche Bank fixed-income strategist David Plank says markets have stopped pricing in a "financial Armageddon", with credit default swaps last year indicating a disaster far worse than the Depression. However, it is still a long way from the pre-crisis world.

The problem for both credit and equity markets is that the global recession will give banks a whole new set of headaches. The banks' desire to conserve capital while exercising extreme caution with their lending will intensify as existing debts to the corporate world and householders go bad.

A negative feedback loop between the economic downturn and the weakened world banking system will keep credit markets in a state of distress during 2009.

Plank says that global credit markets are still priced for a very severe global recession, if not something close to depression.

"Credit analysts look at equities as at best fair value but not cheap. Over the next six months or so, we will continue to see an interaction between a share market that tries to convince itself that it is pricing in all the bad news and the continued flow of bad data."

[mark100]

I sincerely hope we're not headed to the Second Great Depression, as you mentioned, the first one caused another world war.

The depression wasn't the main reason for WWII. The controls placed on Germany following WWI was the main trigger.