Depression in the USA - Deflation verus Inflation

[trader10]

Hi Tricha,

Gerry would be watching gold very closely.....probably he's doing it right now...... ahhhh we miss that old fella.... great thinker.....

16th of December..... 1year 2 months and 1 day.....

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As I see, Japan's GDP being calculated for the last 3 months of 2008....might have an effect on our markets but temporary only..... Since we are in the second month of the year, results could be slightly better....even thou unemployment figures are stacking allover the world.....

Interesting to see what manouvers US and Japan will bring next......another couple of big packages perhaps ? Hillary Clinton had a speach in Japan this afternoon..... I wonder if she will visit China also..... IMHO China is the key to make things moving this year....

cheers

[tricha]

Hi Tricha,

Gerry would be watching gold very closely.....probably he's doing it right now...... ahhhh we miss that old fella.... great thinker.....

16th of December..... 1year 2 months and 1 day.....

WOW, sucks, all his forcasts come to frution and he is not here to have his day in the sun.

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IMHO China is the key to make things moving this year....

cheers

Thats it in a nut shell Trader10, can China be king ????????

[trader10]

Dear Tricha,

..."can China be king ???????? "......

Well, I bet many are hoping they will and many are not.....

IMHO I think they will be not the king but they should become the rooks, bishops or knights this year before they become the queen...... it's a long way to the top and they have a lot of work to do in their own backyard IMHO.....

But, no doubt about it.....they are the movers of this point in time and the whole world needs them to keep on moving..... If they can achieve this state many others will follow them....the rest of the BRIC and other countries like us here .....OZ land......

Interestingly in the last few weeks we've seen their hunger once again.....slightly via PEM, RIO, GBG and OZL....

I really hope they do get it right..... the latest Chinese stimulus - 4 trillion yuan (USD$586 billion)...should be the first of a few IMO....
Their massive infrastructure spending will be a bonus to countries like AUS.....

China will be a very minority of the countries that will achieve growth on 2009..... and I really do hope they do keep things going.....

cheers

[tricha]

London Metal Exchange Warehouse Stocks

( February 23 )

MetalTonnes in StorageChange from
previous dayAluminum3147300+28375 Copper545600+17350 Nickel93024+714 Lead56425+775 Zinc354925+475
U want the big picture, its full on demand destruction and does the bottom theme sound like a repeat of history.

http://news.bbc.co.uk/2/hi/in_depth/7900122.stm

Audio slideshow: The road to Hooverville


The Wall Street Crash of October 1929 was a trigger that quickly plunged the United States from economic prosperity to the depths of the Great Depression.
Millions of Americans lost their jobs and homes, and many were forced to live in shanty towns, nicknamed Hoovervilles after the country's president Herbert Hoover.
Through this collection of archive photographs, Professor David Reynolds, presenter of Radio 4's landmark series America, Empire of Liberty looks at what happened when the United States went from boom to bust.

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Click 'show captions' for photograph information. Music: Hot Foot Stomp, composed by Tony Kinsey / Speakeasy, composed by Richard Myhill / Happy Ending, composed by James Dooley / Lonnie's Jug Blues composed by Richard Etheridge. Photographs courtesy Getty Images / AFP / AP. Slideshow by Paul Kerley. Publication date 23 February 2009.

[tricha]

Hmm, its not looking good.


Is the US heading for a depression?



By Steve Schifferes
Economics reporter, BBC News





The sharp contraction of the US economy accelerated in the last three months of 2008, with official figures showing GDP shrinking at an annualised rate of 3.8%.
With forecasters already predicting the worst US recession since World War II, how big a danger is there that the US economy will slip into a depression similar to the 1930s?
The latest figures paint a gloomy picture of the US economy.
Consumer spending, which makes up two-thirds of the economy, fell for the second quarter in a row, by 3.5%.
For all the talk of this being a consumer-led downturn, the credit crunch is hitting businesses even harder


Paul Ashworth, Capital Economics



US enters recession


This drop was led by a 22% drop in spending on durable goods like automobiles and washing machines.
The decline in motor vehicle production was so great that it alone contributed 2% to the fall in GDP.
Businesses hit
Businesses as well as consumers have been hit hard by the slowdown.
Exports, which had helped boost GDP earlier in the year, fell sharply, by 19.7%, as foreign markets for US products were hit by their own recessions. US recession is a continuing disaster, President Obama says


Investment fared even worse.
Residential investment fell 23.6% as the glut of foreclosed properties reduced new home sales. Business investment was down 19.1%, led by a 27.8% drop in purchases of equipment and software.
Business inventories of unsold goods mounted. If the inventory build up - which is likely to be temporary - is excluded, GDP fell at an annualised rate of 5.1%.
"For all the talk of this being a consumer-led downturn, the credit crunch is hitting businesses even harder," said Paul Ashworth of Capital Economics.
Consumers save
The economic uncertainty does seem to be changing consumer behaviour. People are saving more in preparation for the coming downturn.
The personal savings rate rose to 2.9%, more than double the 1.2% rate in the previous quarter. Mr Ashworth predicts the savings rate will double again, to 5%.
Consumers are being hit by a triple whammy: rising unemployment, which could rise from 7% to 10% of the workforce by the end of the year; restricted access to credit; and falling asset values.
The fall in stock markets and house prices has reduced household wealth by 20%, from the middle of 2007. This alone has reduced consumption by around 1%, some economists estimate.
It may make sense for consumers to save instead of spend, but in an economy as reliant on consumer spending as the US, this does add to recessionary pressures.
How long?
The key question in whether this will turn from a recession to a depression is how long the slowdown will last. FDR pledged a New Deal to combat the recession


In the 1930s, output declined for four years, with GDP cut by half while unemployment soared to one-quarter of the workforce.
Despite the New Deal, output did not recover to its 1929 level until World War II when there was a massive boost in government spending.
At the moment, most economic forecasters are predicting that the US slowdown will last around two years, with the economy returning to weak growth by 2010.
The National Bureau of Economic Research says the current economic slowdown actually began at the end of 2007 and is likely to be the longest post-war recession.
The non-partisan Congressional Budget Office (CBO) estimates a drop in real GDP for 2009 of 2.2%, followed by a rise of 1.5% in 2010, while the IMF predicts a fall of 1.6% this year, following by a recovery of 1.6% in 2010.
But economic forecasts have changed frequently in the past year. It is unclear what will happen after 2010, said the IMF's chief economist Oliver Blanchard.
Government rescue?
The only thing currently boosting the US economy is Federal government spending, which rose 5.8% in the quarter. The government may have to help the millions who have lost their homes


But even if Mr Obama gets rapid approval for his $800bn stimulus plan - which has passed the House of Representatives and is currently being considered by the Senate - it will take some time for the money to be felt in the economy.
Only $170bn will be spent before 1 October 2009, representing just over 1% of US GDP, according to the Congressional Budget Office.
The bulk of spending (including tax cuts) would occur in 2010 ($354bn) and 2011 ($174bn).
Individual states may not be able to rapidly increase spending on infrastructure projects which make up a large part of the stimulus package.
It is also unclear how many jobs will be created: President Obama aims to create 3.5 million new jobs, but others say the stimulus package could create between 1.2 and 3.6 million more jobs.
Financial squeeze Big US banking groups may need a bigger bail-out.


The other big uncertainty is whether the financial sector can be restored to health and at what cost.
There is now $2.2 trillion of toxic bank debt worldwide, the IMF says, $500bn more than it estimated a few months ago.
The collapse of financial markets in the autumn had a dramatic effect on consumer and business confidence.
There are plenty of reasons why growth might be even less than forecast, the IMF's Olivier Blanchard said, not least if banks have so many bad debts, they will further drag down the real economy.
The Obama administration still has $350bn left of the $700bn bailout for banks approved in October last year. It may need to ask for more. If it gets the money it needs and if the money is spent promptly and wisely, the US might just escape with a relatively mild recession. But given the extraordinary events of the past six months, most economists are still hedging their bets.

[macduffy]

"If it gets the money it needs and if the money is spent promptly and wisely, the US might just escape with a relatively mild recession."

QUOTE FROM PREVIOUS ARTICLE.

Bit of an "each-way bet " article, IMO. I'd have thought that the US was well past the stage of hoping that the economy may escape with a " relatively mild recession ", however that may be defined.

[ELYOB]

The Depression was a series of recessions ..... so we are in recession [1+......+(n-1)!]

so, D = [1+.......+(n-1)!]
____________

t -1

[tricha]

The Depression was a series of recessions ..... so we are in recession [1+......+(n-1)!]

so, D = [1+.......+(n-1)!]
____________

t -1

An interesting articule on where to place ones bets. And by reading it

Rule #1 Cash is King

Rule # 2 No debt


The Daily Reckoning Presents: As Bill wants to point out, what the United States is facing right now is not a recession, it's a depression. So, we better figure out how to profit in the face of it. Chris Mayer explores...

Great Depression Survival Guide, Part II
by Chris Mayer

"Although most Americans think of the 1930s as a decade of economic stagnation, the period was far from being one of unalloyed decline." - Robert Sobel, The Age of Giant Corporations

Robert Sobel's book is our chief guide for the second leg of the Great Depression Survival Guide. As his book's title lets on, it was the larger companies that did the best.

To illustrate this point, let's start with the auto industry. In 1929, the auto industry sold more cars than it ever sold before - 5.3 million units. But the wrecking ball called the Great Depression hit the auto industry especially hard. By 1932, only 1.3 million units were sold.

As you might imagine, plenty of automakers never made it out of the Great Depression. Moon, Kissell, Elcar, Marmon and others all disappeared. What they all had in common was that they were small. Some were specialty carmakers, serving a small niche that got a lot smaller - too small to make a business out of it. Novelties - like Franklin's air-cooled engines - were desirable when times were good, but no one wanted to pay for them when times turned bad.

But the Big Three - GM, Ford and Chrysler - survived. In fact, the falling away of the competition helped that. It allowed them to fill in and consolidate markets. So we have our first takeaway.

The survivors often had large-scale operations and were leaders in their industries. Smaller companies had a harder time dealing with the Great Depression, as Sobel shows in his book. But the sales and profits of the largest companies increased during the 1930s.

What else did the Great Depression survivors have in common? Here are more of my thoughts based on Sobel's research...

The survivors were self-financing. They didn't need their bankers as a source of funds. In fact, most of large Corporate America didn't need their bankers for loans. The flush times of the 1920s led to the near disappearance of corporate bank debt by 1929. Banks had to go elsewhere to find borrowers. They began to finance real estate heavily and broker loans for the purchase of stocks and bonds. Ultimately, the banks got in trouble with these bets, but most of larger industrial America stood on its own bottom.

Take the Gulf Oil Co., for instance. In 1929, the company produced 90 million barrels of oil. It was like granite as far as financial strength goes. In the 1930s, Gulf was able to expand operations, gain a foothold in the rich Kuwaiti oil fields, increase its advertising budget, pursue undersea exploration and refinance what debt it had at attractive rates. "Most of this would have been impossible were it not for the firm's strong position on the eve of the Depression," writes Sobel.

The winners also often had great leaders. GM had Alfred Sloan as its president through 1937. Sloan was a brilliant strategist and organizer. The harsh environment of the 1930s rewarded tight ships and the accumulation of small advantages. These were things at which Sloan excelled.

In fact, Sobel goes on to say that GM actually benefited in a number of ways from the Great Depression. "A management aware of possibilities and [with] adequate financing could hold its own and even flourish during the Depression," Sobel writes.

Sobel finds other examples in other industries, everything from American Can in the tin industry to the New York Yankees in baseball. "Good leadership and finances could expand and dominate in the 1930s," Sloan concludes. Hence, we reaffirm once again the value of a good operator, a point I stress in these pages.

Industries that were hard to get into did best. Another other important point here is that Sobel finds industries with high capital costs that kept competitors out did better than those with low barriers to entry.

This one also makes intuitive sense. In a depression, money is tight. And if it takes bucket loads of money to crack into an industry, it's not likely to happen. The chemical industry held up well in part because to get in the business required heavy capital spending on equipment and research and marketing. Companies like DuPont, Monsanto and Union Carbide held onto market-leading positions simply because there was no threat of new entrants.

Oil refineries, too, were another example. Sobel estimates that one barrel of gasoline capacity required $240 of capital. By the end of the '30s, it would cost you $320 to add one barrel of capacity. On a per worker basis, the refinery industry was about 10 times more capital- intensive than the typical American manufacturer. Those high costs discouraged new competitors and kept prices for gasoline up. It's no surprise, then, that price of gasoline did not go down in the 1930s.

Productivity gains helped. Since money was tight and business was slow, you had to be innovative to squeeze out profits. You had to husband your resources carefully, like a caravan mindful of its water supply as it crosses the Sinai Desert.

In the oil business for example, oilmen got much better at finding oil. Necessity is the mother of invention, after all.

Crude prices fell in the 1930s, from $1.27 a barrel in 1929 to only 67 cents a barrel by '33. So the oil biz had to rely on new technologies to improve results. And it did. For instance, in 1929, about a third of all drilling resulted in a dry hole.

By 1937, that figure was down to 22%.

That's just one example among many in the oil industry, and other industries as well. In general, Sobel finds that output per man - productivity - increased 20% in the 1930s.

Expanding markets also helped. Despite what you might think, demand for everything didn't topple over in the 1930s. Demand for gasoline, for instance, declined only in 1932. From then on, the number of cars and trucks on the road went up every year. And so did the demand for gasoline. That helped the oil companies. Oil also got some help from other industries. The rise of aviation in 1930s required fuel. The oil companies made that fuel. And the demand for highways required asphalt, also made by the oil companies.

Some industries today will also see expanding markets for their goods. It seems obvious, but the point was often overlooked at the time - and so, too, it is overlooked today: There is some base-line level of consumption for things like energy, food and water - even in depressions. This base-line consumption is bound to rise, if for no other reason than population rises over time. You can't say the same thing for decorative balls sold at Target for $4.99 a pop, or for fancy $30 candleholders at Pier 1. If you want to be sure your money sees the other side of this thing, stick with the necessities.

"The principal preoccupation of almost everybody in the 1930s was getting by," the great A.J. Liebling wrote in May 1963.

It's a good point to remember as you think about investing today. "Almost everybody" is key, though. For the companies that shared the characteristics highlighted above - such as the large-scale leaders with good financing and top managers in expanding markets - the 1930s was a time of opportunity.

Regards,


Chris Mayer
for The Daily Reckoning Australia

Editor's Note: Chris is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital & Crisis - formerly the Fleet Street Letter

[tricha]

US prints money to stave off deflation
Clancy Yeates

March 20, 2009
THE US has resorted to printing money in a desperate attempt to resuscitate its economy and ward off growing concerns over its foreign debt.
Yesterday the US Federal Reserve said it would buy $US300 billion ($453 billion) worth of bonds issued by another branch of government: the Treasury.
The unprecedented move follows similar efforts in Britain and Japan and is an attempt to encourage inflation to prevent a bigger threat: deflation, or a sustained fall in prices.
The central bank will also buy $US750 billion in mortgage-backed securities from troubled lenders, taking total purchases of toxic assets to $US1.25 trillion.
Amid what could be the steepest US economic decline in 50 years, economists said the Fed was also attempting to reassure the the world's biggest saving nations, which fund the US budget deficit, by buying Treasury bonds.
Figures this week showed that growth in Beijing's US bond purchases slowed to $US12.2 billion in January, from $US14.3 billion in December.
A senior economist at Westpac, James Shugg, said the Fed's move was the digital equivalent of printing money. "They're creating money to purchase assets off banks and the quasi-housing authorities in the US," he said.
In February, the global supply of US dollars was $US8275.5 billion, so yesterday's new measures increase the total supply of greenbacks by nearly 13 per cent.
Economists say the new cash will encourage price rises as economic conditions improve, unleashing inflation. But by the Fed's admission, this is better than the alternative: deflation.
"The committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the long term," the central bank said.
An investment manager at Supervised Investments, Phil Carden, said the move to create money "out of thin air" was "hugely inflationary".
"It's a direct and blatant attempt to ignite inflation because they're scared of deflation," he said.
He said it was the lesser of two evils, as deflation was a bigger menace to the US than inflation. If asset prices started to fall across the economy, it would threaten the country's ability to pay back $US11 trillion in national debt, he said.

[MrDevine]

Tricha, whats better – FALLING asset prices while debt stays the same, or RISING asset prices while the debts stay the same? A deflationary spiral will help nobody.

The Great Depression occurred through deflation and falling asset prices, and we had World War II, would you like to see that again? I gather Ben Bernanke is not stupid, and will certainly want to avoid Zimbabwe style inflation rates –*they'll print dollars, and then nuke them just as quick (you would believe) when things start to improve a little.

Its not perfect, far from it, it'll be messy and there will be more blowups – but why does everybody jump out of a window during a NORMAL part of the business cycle? What goes up, will come down and it'll go back up again!

I just don't buy the rhetoric that you're posting here, mostly driven with Gold in mind, that they world as we know it is going to end, well it has ended – and new opportunities are right in front of you.

And on Gold – if they're printing money of course the value of gold is going to go up as in line with inflation, can't see how its a store of value, when its priced in dollars?