Rosenberg: “We are certainly in a deflationary state”

Fueled by overcapacity, shrinking credit, reduced corporate spending and falling consumer demand, Deflation is taking root in global economies.

Consumer prices fell at their fastest clip ever last month in Japan, which has been fighting a losing war against deflation for much of the past two decades. Germany, Europe's biggest economy, has now suffered through four consecutive months of sliding prices, and the rest of the region that uses the euro is not faring much better.

That deflation should be such a threat may run counter to market fears that inflation will quickly follow the massive, and costly, global effort to fight the financial crisis. But many observers see deflation as the greater threat.

“We are certainly in a deflationary state,” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto. “Of that, there's no doubt. I think people still have no clue as to just how weak the economy is,” Mr. Rosenberg said.

Remove the “impressive medication” administered by governments, and most economies are at a virtual standstill.

The U.S. economy faces a decade of stagnation, he said. “That's a perfectly plausible scenario.”

If and when it does hit, “deflation will last until we see the next secular trend of expanding household balance sheets, and that is some time away,” Mr. Rosenberg said.

I concur with Rosenberg except on his apparent definition of deflation. He seems focused on prices which is only one of many symptoms of deflation.

One confusing aspect in the article is that on one hand he says “We are certainly in a deflationary state” on the other he says If and when it does hit...

There is no if.

The odds that deflation hits are 100% given that we are in deflation now and have been for some time. Moreover, a "decade of stagnation" with the US hopping in and out of recession/deflation is not just a possibility but rather a likelihood.

From a practical standpoint, the debate about deflation should be over. On December 11, 2008 in Humpty Dumpty On Inflation I listed a perfect scorecard of 16 items one would expect to see in deflation and all were happening.

The only debate comes from those using impractical measures of inflation and deflation. As a prime example, please consider Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate.

Moreover, it should have been clear we were in deflation as early as March 17, 2008. Three factors made it clear: a collapse in treasury yields, a collapse in asset prices, a collapse in credit marked to market. See Now Presenting: Deflation! for additional details.

Yesterday inquiring minds were reading Bill Gross Bets On Deflation. However, when it comes to Bill Gross, a reasonable person must always be concerned how much he is talking his book, hoping to unload it.

Some Learn Nothing From History

Some people never learn a thing from history. One such person is Arthur Heinmaa, managing partner with Toron Capital Markets in Toronto, who told the Globe "To prevent a deflationary outcome, policy makers have to stop worrying about how they'll rein in future deficits and start persuading the public that they'll do whatever it takes to keep the pumps primed and cash savings nearly worthless."

Stop the insanity please! The lesson of Japan is that Japan went from being a creditor nation to a government with debt 150% of GDP by foolishly attempting to defeat deflation.

Here's a clue for everyone. Making cash worthless is insane. It will do nothing but exacerbate the problems of the unemployed and those on fixed incomes.

Rosenberg further discusses deflation in Wednesday's Breakfast with Dave.

The bond bulls can only hang their hat today on the knowledge that the world is still awash with deflationary pressures — as Euroland reported that the region’s CPI deflated 0.3% YoY in September from -0.2% in August and the fourth month now in negative terrain. So, we have Euroland at -0.3%, the U.S.A. at -1.5%, Canada at -0.8%, Japan at -2.3%, and even China at -1.2% — even in the face of this year’s commodity price rebound. That tells you something. Imagine where these deflation figures line up when economic activity begins to slow down next year. This puts fixed-income product in a very positive light, we might add, because real yields in most jurisdictions, whether in the government or corporate sector, appear very attractive.

Does This Make Any Sense?

Since June 10, the yield on the U.S. 10-year Treasury note has plunged 70 basis points and at the same time the S&P 500 has rallied 14%. The bond market is telling us that we still live in a deflationary world, yet the equity market is at this juncture pricing in over $80 of operating earnings, which would be double from the current four-quarter pace.

The real question is, if we in fact do have this sustained reflation trade going on, which is actually necessary to justify the earnings expectations embedded in equity valuation, why it is that the yield on the 10-year Treasury note isn't north of 5.0% already? Instead, it is 3.3%. And history shows that when bonds and stocks do diverge, as was the case in the summer of 1987, the fall of 1994, the summer of 1998, the winter of 2000 and the summer of 2007, it is the former that proved to be prescient.

Bank Credit Still Contracting

The monetary base has surged at a 51% annual rate over the past thirteen weeks, and that has churned out less than 3.0% growth in M1 and -4.0% in M2 over that period. This is classic ‘pushing on a string’ monetary policy. The Fed hasn't really fixed anything per se — the Fed, along with the FHA and other government agencies, have basically supplanted the banking system with taxpayer-funded credit. Bank lending to the private sector plunged some $40 billion in the week ending September 16 and to put this in a certain context, the decline over the past three months has exceeded 16% at an annual rate, which is unprecedented. And, the contraction in credit is very broad based — down 5.3% for consumer loans; -9.4% for real estate credit; and -20.4% for business (C+I) loans.

The banks are still sitting on over $1 trillion in cash assets, and they are putting the proceeds to work in the government bond market, snapping up over $20 billion of Treasuries and Agencies so far this month — 22% at an annual rate over the past thirteen weeks. This may be one reason — from a flow-of-funds basis — as to why the yield curve is flattening right now. This and the nagging notion among some very important bond investors, such as Pimco, who see the U.S. economy as we do … deflationary.

Pied Pipers of Debt

Rolfe Winkler is writing about Krugman and the pied pipers of debt.

Investors are celebrating an incipient “recovery,” but the interventions that were responsible for it are sowing the seeds of a more violent contraction down the road. The problem, quite simply, is debt. We’ve accumulated record amounts, yet many economists tell us we need more.

Leading the charge is Paul Krugman. He exhorts us to borrow our way back to prosperity, but he doesn’t acknowledge that his brand of Keynesian economics ignores the consequences of debt.

Krugman dismisses deficit “hysteria,” arguing that we can grow our way out of debt. “We did it during the Clinton administration,” he told me when he visited Reuters last week.

But we didn’t. While Clinton balanced the federal budget, Americans plowed through their savings. We kept growing because, in the aggregate, we were still accumulating debt.

Today, private debt is a suffocating 300 percent of GDP, making more public debt that much harder to pay down.

As Krugman warned in 2003: “My prediction is that politicians will eventually be tempted to resolve the (fiscal) crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.”

Still More Paul Krugman, Then and How

Please consider Paul Krugman: "Deficits Saved The World"

Dateline August 27, 2009
Paul Krugman: "Deficits Saved The World"

Dateline November 3, 2004
Paul Krugman: "[The Budget Deficit] is comparable to the worst we've ever seen in this country. It's bigge[r] than Argentina in 2001."

Whether or not budget deficits are irresponsible seems to depend on whether a Democrat or a Republican is in the White House. Such is the "Conscience of a Liberal".

Meanwhile, the treasury market and bank lending are both flashing huge warning signals. Are you paying attention?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reflections on the Unexpected Negative Surprise in Chicago Purchasing Index PMI

With each passing day the number of people that think the bottom is in, earnings will keep improving, and even a correction is unthinkable keeps rising. Here are a pair of interesting headlines moments apart on Bloomberg.

U.S. Stocks Climb to Extend Biggest Quarterly Rally Since 1998

Bloomberg is reporting U.S. Stocks Climb to Extend Biggest Quarterly Rally Since 1998

U.S. stocks rose, extending the market’s biggest quarterly rally in a decade, as the government said the economy shrank less than estimated in April through June and earnings at Nike Inc. beat estimates. Oil and metals gained as the dollar slumped, while Treasuries retreated.

“A lot of people would be looking for a pullback, but we’re going to see improving fundamentals in the base economy, and with that higher earnings,” said William Dwyer, chief investment officer at MTB Investment Advisors, which manages $13 billion in Baltimore.

Today’s gains came after the U.S. Commerce Department said the world’s largest economy shrank at a 0.7 percent annual rate from April through June, less than the previous estimate of 1 percent and the median economist projection of 1.2 percent. Gross domestic product contracted at a 6.4 percent pace in the first three months of 2009.

The performance of the U.S. economy is probably more sluggish than reflected in stock markets, risking a correction in equities, Nobel Prize-winning economist Michael Spence said.

U.S. stock-market investors have “over processed” the stabilization of growth in the world’s largest economy, Spence said in an interview in Kuala Lumpur yesterday. The U.S. economy isn’t likely to experience a “double-dip” slowdown even as that remains a risk, said the professor emeritus of management in the Graduate School of Business at Stanford University.

I would be curious as to what William Dwyer, chief investment officer at MTB Investment Advisors was saying in 2008. Regardless, the idea that stock can keep rising forever even as the fundamentals of the economy are horrible, and the only game in town is government spending is rather remarkable.

As for the double-dip, I think one is coming. The not so robust alternative is flatline stagnation and extremely slow growth for 5 years or more.

Just moments after the above headline appeared, we saw this:

U.S. Stocks Drop as Purchasing Managers Index Trails Estimates

Please consider U.S. Stocks Drop as Purchasing Managers Index Trails Estimates

U.S. stocks retreated after a measure of business activity unexpectedly shrank in September, overshadowing an earlier report that showed the recession abated more than estimated in the second quarter.

The Standard & Poor’s 500 Index lost 0.7 percent to 9,678.27 at 9:47 a.m. in New York after the Institute for Supply Management’s gauge of business activity slipped to 46.1 in September, lower than the reading of 52 estimated by economists in a Bloomberg survey.

Business activity declines in Chicago area

Market Watch has more details on the PMI in Business activity declines in Chicago area.

More companies in the Chicago area reported business worsened in September, according to the Chicago-NAPM. The Chicago purchasing managers index fell to 46.1% in September from 50.0% in August, the trade group said. Economists were expecting an increase to 52%. The new orders index backtracked to 46.3% from 52.5% in August. The employment index was essentially unchanged at 38.8%. Readings under 50% indicate more firms said business was worsening than said it was improving.

Today a close friend, "HB", pinged me with this thought: "Today's unexpected negative surprise Chicago PMI which is back in contraction, reminds me of 2002. This is how the 2002 waterfall decline began. The trigger was exactly the same, a disappointing PMI."

Fundamentally and technically the market is prime for a huge correction. Sentiment is extreme and the viewpoint expressed by William Dwyer above is consensus. However, it is important to keep in mind that as long as the corporate bond market stays healthy, stocks will likely have a bid. How much longer that remains is anyone's guess.

That said, some cracks are starting to appear. As I pointed out yesterday in Bill Gross Bets On Deflation, the yield curve is flattening substantially and the treasury market is increasingly skeptical of the reflation effort taking hold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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BofA, Wells Fargo, JPM, Citigroup FDIC Fees May Top $10 Billion

The FDIC is struggling mightily to stay solvent. Given that there are bank failures every Friday, it's no easy feat for the FDIC to stay ahead of the game.

Please consider Bank of America, Major Banks’ FDIC Premiums May Top $10 Billion.

The Federal Deposit Insurance Corp.’s plan to rebuild its reserves may cost Bank of America Corp. and three of the largest U.S. banks more than $10 billion.

Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under an FDIC proposal that banks prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in June 30 U.S. deposits.

“This seems like a very hefty amount,” said Tim Yeager, a finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis. “The FDIC’s projections of future losses are pretty severe, and they are trying everything they can to avoid tapping the Treasury.”

U.S. bank premiums range from 12 cents per $100 in deposits for the safest lenders to 45 cents for banks the U.S. considers risky, said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America. The FDIC yesterday proposed asking banks to pay premiums for the fourth quarter and next three years on Dec. 30. The fees will raise $45 billion.

Based on the current assessment and each bank’s deposits, Wells Fargo & Co.’s fee may be $3.2 billion based on its $814 billion in deposits, JPMorgan Chase & Co. may pay $2.4 billion and Citigroup Inc. $1.2 billion. The estimates exclude the FDIC’s plan to boost the assessment rate by 3 cents per $100 in deposits in 2011 or the agency’s assumption that bank deposits will increase by 5 percent annually.

FDIC Is Bankrupt

Last month I wrote As of Friday August 14, 2009, FDIC is Bankrupt.

Although that is a realistically correct headline (Please see You Know The Banking System Is Unsound When.... for a justification), I did overlook things FDIC did to temporarily stay in the game.

Prepaid fees is yet another attempt to keep the game going. How much longer this can last is anyone's guess. Those prepaid fees are going to hurt bank earnings 100% guaranteed. The fees may even push some struggling banks into bankruptcy.

Emails from a Bank Owner regarding FDIC

In regards to my post on FDIC bankruptcy I received Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks.

ABO, who as been in the business 30 years, writes:

This will certainly mark the end of the banking model using wholesale funding and aggressive deposits to fund commercial real estate projects. In other words this is going to come down hard on the FIRE economy.

I have been in banking for over 30 years and from my perspective this is much worse than anything I have seen. God help us if cap and trade passes!

Newfound Praise For Shelia Bair

At times, I have been extremely hard on Shelia Bair. She has said many things that I strongly disagree with. However, I have to commend her for two things.

1) Shelia Bair stood up to Geithner regarding the PPIP and banks being allowed to bid on their own assets. Clearly she recognized banks bidding on their own assets at taxpayer risk was outright fraud. Of course, I think the whole PPIP proposal was (and still is) fraud, but in retrospect I have to wonder if her stance caused this ridiculous program to go on the back burner. If so, Bair deserves a salute. Note that PPIP is still not up and running.

2) Shelia Bair is now refusing to borrow money from the treasury (taxpayers) to shore up FDIC. Instead, she has been raising fees and now is proposing pre-paid fees. In other words, she strives to make the riskiest banks pony up for their mistakes, as opposed to dumping the risk on taxpayers.

The easy way out for Shelia would have been to simply take money from the Treasury. However, she is taking a much tougher stance, at least for now. I reserve the right to change my opinion down the road based on future actions.

Perhaps, like many of the rest of us she simply cannot stand Geithner. However, regardless of motivation, she is now doing the right thing by making risky banks pay for the risk they undertook.

Is the system fair?

Is the system fair? Of course not. Citigroup and Bank of America received debt guarantees from the Treasury making their debt appear to be less risky, and their FDIC insurance payments less than they should be. Wells Fargo was the beneficiary of huge tax breaks.

However, those items are not Bair's doing, so she should not take the blame.

The scorecard of Geithner and Paulson is a big fat zero. Yet, this is now the second thing major thing Bair has gotten correct. This is the best we can realistically expect.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mish Mailbag: Anecdotes from Kentucky and St. Louis

Joshua from Kentucky thinks things are not going as well as they seem. Joshua writes:

Mish,

I wanted to write you in regards to what I see in the economic landscape here in Kentucky. I live in Hodgenville, KY (birthplace of Abraham Lincoln) and work in Elizabethtown which is 40 miles south of Louisville and about 10 miles from Fort Knox.

For about 2 years, up until December of 2007, I delivered pizza for Papa Johns here in the area and got to see many interesting sites. One feature that always caught my attention, as it did when I lived near Frankfort and Lexington, was all the “cookie cutter” neighborhoods that were springing up. I wondered then who was buying these cheaply built houses 2 feet from their neighbors and why. I soon found out shortly after I started reading your blog that it was everyone and because someone would give them the money.

I have returned to delivering pizza as a second income to increase the speed in which I can pay off my $9000 in debt I owe and become truly “free”! I have noticed an ENORMOUS change in the landscape since I am once again driving around. There are hundreds if not thousands of houses for sale in this city.

I am amazed at the number of houses are for sale in this the worst housing market in years if not generations. I went to one newly constructed neighborhood (built within the last 10 years) and ONE THIRD of the houses were up for sale and more than a couple looked empty. I do not know how many of these are short sales and foreclosures, but Fort Knox is supposed to be massively expanding and yet there is a glutton of housing, not to mention all the retail space!

To top it off, I only see about half the town as another store covers the rest, so I can only imagine the true state of housing here is much worse. These are not “poor” neighborhoods and even the upper end for this area have many for sale. I sold my house back in the summer of 2007 and went back to renting because I saw this coming, and man am I glad!! Kentucky seems to lag the rest of the country in nearly everything and this seems to be no exception despite what our worthless politicians say (minus Rand Paul). Thanks for your blog. I really enjoy it.

Thank you
Joshua

Appearances Can Deceive

I am on the road for the third consecutive week. Tonight I am typing from a hotel in St. Louis at a Sheraton Inn. I thought the place was reasonably crowded, at least for a Tuesday night.

However, being the inquisitive type, I asked the restaurant manager how things were and if things were getting any better. Based on the traffic I saw, I expected to hear that things were getting better or at least stabilizing.

Instead, I was told things are deteriorating, that there are fewer customers at both the restaurant and the bar (he was manager of both). He also said that customers are spending less per person, and even business types staying at the hotel are insisting on carrying their own bags so as to not have to pay the doorman for hauling their luggage.

Finally, the restaurant manager is also a part-time manager at the riverboat casino. He said the casino is doing just fine. High-roller traffic is way down, however the average Joe who cannot afford to lose, is gambling his paycheck away hoping to strike it rich.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Field Trip to Keatley's Place

I am working on an On Assignment post for later this week, but photographer John Keatley has an OA post up right now.

In it, he details his portrait of writer/director Josh Hornbeck. It's a nice walk-thru on building depth and character with light -- in a small room with light walls. Lord knows we see enough of those. At least the guy was not assigned to be shot working at a computer.

Had a chance to meet and have lunch with John in Seattle last week, where he showed me two of his city's great attractions -- fresh seafood and The Gum Wall.

One was yummy. The other, um, not so much.

-30-

Bill Gross Bets On Deflation

PIMCO's Bill Gross has a switch of heart. He has gone from hating treasuries to liking them. Please consider Pimco’s Gross Buys Treasuries Amid Deflation Concern.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he’s been buying longer maturity Treasuries in recent weeks as protection against deflation.

“There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.”

Gross had said during the midst of the credit crunch that Treasuries offered little value as investors seeking a refuge from turmoil in global financial markets drove yields to record lows in December. He boosted the $177.5 billion Total Return Fund’s investment in government-related bonds to 44 percent of assets, the most since August 2004, from 25 percent in July, according data released earlier this month on Pimco’s Web site. The fund cut mortgage debt to 38 percent from 47 percent.

Yield Curve Flattening



click on chart for sharper image

I am very familiar with the yield curve flattening. The above chart is one I run constantly, in real time, on my computer. The curve represents weekly closes. The flattening from the actual peak is even greater. The intraday high in the 10-Year Treasury Note is just over 4%.

What's The CPI?

Properly adjusted for housing, I have the real CPI as of July at -6.2%. That number is arrived at by substituting the Case-Shiller CPI for Owners Equivalent Rent (OER) in the CPI. Please see What's the Real CPI? for details.

Inquiring minds might also be interested in Real Treasury Yields Highest In History. If real treasury yields are high, it should be no wonder that Bill Gross in interested in them.

Rents Falling Everywhere

Given that the official measure of CPI is based on rents not housing prices, please consider the following collection of links courtesy of Lanser on Real Estate: Really? Rents fall almost everywhere.

• Manhattan:Apartment Rents Drop as Employers Cut Jobs
• Houston: Renters are snagging deals in a slowing local market
• Tuscon: On your mark, get set, go! Apartment firm makes game of it.
• Nashville: Apartment rates squeezed by lower demand
• Nationwide: Renters look for thirfty comfort, not style
• Tokyo: Apartment rents under pressure
• Middle East: 17% fall in rents seen in Qatar this year
• Orange County: O.C. renters get twice the freebies

Look for downward pressure on the official CPI because of falling rents.

As I have said before, the treasury market is increasingly skeptical of the reflation effort taking hold. Bill Gross is clearly in agreement.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economic Madness Is Repeatedly Endless

Demand for goods and services in Japan are plunging. Please consider Japan’s Deflation Deepens as Prices Fall Record 2.4%.

Japan’s consumer prices fell the most in at least 38 years in August, heightening the risk that prolonged deflation may hamper the country’s recovery from its deepest postwar recession.

Prices excluding fresh food slid 2.4 percent from a year earlier, topping July’s 2.2 percent decline, the statistics bureau said today in Tokyo. The drop, the sharpest since the survey began in 1971, matched economists’ estimates.

“We’ll soon start to see that there isn’t enough domestic demand to push up wages,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “As households’ spending power falls, there’s concern that this deflation will lead to further deflation -- in other words, that we’ll enter into a deflationary spiral.”

Much of the drop in prices reflects last year’s peak in oil costs. Crude reached an unprecedented $147.27 a barrel last July, and has dropped more than 50 percent since then.

The oil effect “will diminish over the next few months, quite quickly,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. Even so, Jerram expects prices will keep falling for at least another three years as the country enters a period of “persistent deflation.”

Economic Madness Over Pork Prices

In what amounts to economic madness, Japan to Buy Domestic Pork to Boost Prices After Demand Drops.

Japan, the world’s largest pork importer, will purchase about 70,000 swine carcasses from local herds to boost prices after an economic slump cut consumption and sent stockpiles of the meat to the highest level in 20 years.

The government will spend 292.9 million yen ($3.3 million) on the purchasing program, the Ministry of Agriculture, Forestry and Fisheries said in a statement today.

Pork wholesale prices plunged 26 percent from a year earlier to 380 yen a kilogram on average this month in Tokyo, according to government data. Consumers are eating less meat as the recession cut wages and boosted unemployment. Japan’s price- support measure may benefit exporters such as the U.S., Canada and Denmark as the domestic premium over imports may widen.

Japan’s pork imports dropped 14 percent from a year earlier to 61,981 tons in July, according to data from the Finance Ministry. Purchases declined as Japanese demand shifted to cheaper food products such as chicken amid deflation, Fujii said in an interview today. In the year ended March 31, Japan imported 815,063 tons of pork, up 8 percent from a year earlier.

Mad Facts

• The Japanese Government is buying 70,000 swine carcasses even though stockpiles are the highest in 20 years.
• Japan is the world's largest pork importer, stockpiling supplies.
• Japanese consumers are switching to chicken because it is cheaper.
• Japan's "remedy" is an attempt to force pork prices higher.

Does this make any sense at any level?

Japan Ponders Currency Intervention

Currency intervention, like pork intervention, like gold manipulation cannot possibly work. Yet Japan never learns.

Please consider Fujii Denies Support for Strong Yen in Reversal of Rhetoric.

Japanese Finance Minister Hirohisa Fujii said the government may act to stabilize the foreign-exchange market and denied that he supported a stronger yen, a day after the currency surged to an eight-month high.

“If the currency market moves abnormally, we may take necessary steps in the national interest,” Fujii said at a news conference in Tokyo today.

Deputy Prime Minister Naoto Kan said today that currency markets should be “as stable as possible” and he’s “carefully” monitoring the effect of yen moves on the economy.

Eiji Hirano, a former Bank of Japan executive director, said Fujii intends to retain the option of selling the yen should it gain excessively.

Japan hasn’t stepped into the foreign-exchange market since the first quarter of 2004, when the central bank at the behest of the Finance Ministry sold a record 14.8 trillion yen ($165 billion) to weaken the currency.

Currency Intervention And Other Conspiracies

Inquiring minds will want to consider Currency Intervention And Other Conspiracies for a flashback look at August 11, 2008.

At the time there was widely held belief in US dollar intervention, Euro intervention, and gold intervention (there is always belief in gold and silver intervention). I disagreed that intervention was the cause of the dollar rally and so did Marc Faber.

Here is a snip from the article about Yen manipulation.

Yen vs. Japan's Intervention 2003-2004



click on chart for sharper image

If ever there was proof of the absurdity of currency interventions there it is. Ironically the Yen started plunging shortly after Japan stopped trying to force down the value of the Yen.

So now we are supposed to believe the dollar rallied because of a so called "massive" one time 10 billion Euro trade when Japan produced negative results after spending $300 billion over the course of 7 months!?

Here we go again!

Economic Madness Is Repeatedly Endless.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gold Manipulation Smoking Gun?

Numerous people have asked me to comment on the Zero Hedge article Exclusive Smoking Gun: The Fed On Gold Manipulation.

The "Smoking Gun" is a now declassified document about gold, sent to president Gerald Ford on June 3, 1975 by Arthur Burns, chairman of the Fed from 1970 to 1978.

The document concerns the "broad question as to whether central banks and governments should be free to buy gold, from one another or from the private market, at market related prices"

Market prices at the time were $160-$175 and the official price was $42.22 per ounce.

Arthur Burns states "It is an open secret among central bankers that, at a later date, the French and some others may well want to stabilize the market price within some range".

Arthur Burns also states "The Federal Reserve has sought to avoid taking a rigid position", while going "some distance to try and conciliate the French view". Yet... "If we do ever acceded to French views on gold, we should at least use our bargaining leverage to some major political advantage".

Finally Burns states "All in all I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks to purchase gold at market-related prices."

Shocking Revelation?

Burns sought an agreement whereby central bankers and governments would not buy gold at market prices. Because gold prices never traded at $42.22 again, essentially that was an agreement to not buy gold.

After Nixon closed the gold window, why is it such a revelation that events like this happened? Did any governments cheat?

The most interesting thing in the document was Burns' willingness to bargain for "political advantage". However, the idea that governments are lying manipulators willing to sell their soul for the right political advantage can hardly be a considered a startling revelation.

Smoking Gun or Historical Footnote?

The importance of this document is only in the historical sense in that it helps shows us how the move toward an irredeemable fiat currency evolved around that time.

The document has no direct bearing on what is happening today, although it remains true that gold is the enemy of the welfare warfare state and its central banks.

The so-called "smoking gun" of 1975 is much to do about nothing. It is nothing more than a historical footnote with little current relevance.

Misplaced Fears

If governments today are still acting to suppress the price of gold by the same methods, let's have more of them because they clearly aren't working.

Given that the price of gold is roughly $1,000 an ounce, it goes to show that governments are not bigger than the market, and that such manipulation (even if it does still exist) can never work in the long run.

The fear should not be of government to government agreements that can never work in practice, but rather a fear that governments may tax gold sales profits at some phenomenal rate, thereby effectively confiscating gold a second time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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FYI: DIY RPCube PDQ

Do you have one of those new RadioPopper JrX "Studio" model receivers? Tired of waiting for the upcoming RPCube, so you can remotely control Nikon flash power levels?

There is a lively discussion on how to roll your own (pretty easily and cheaply) happening in the Strobist Flickr group discussion board.

All you need is an SC-17 or a multi-flash sync cord (or generic equivalents of either) and a stereo miniplug. (And just one $10.50 multi-flash cord will make two "cubes".)

(Photo: azreloaded)

Anemic Job Creation During The "Schumpeterian Depression"

The Wall Street Journal is discussing some interesting trends in business creation and small business hiring. Please consider Sharp Drop in Start-Ups Bodes Ill for Jobs, Growth Outlook.

New companies will be crucial to the strength of any economic recovery. Businesses in their first 90 days of life accounted for 14% of hiring in the U.S. between 1993 and 2008, according to the Bureau of Labor Statistics.

But this recession is taking a particularly heavy toll on business creation, as sources of small-business funding dry up and would-be entrepreneurs become more risk-averse. When entrepreneurs do launch businesses, they are hiring fewer employees on average. The trends threaten to damp growth in jobs and economic output for years.

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts -- including new businesses and units of existing businesses -- fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.

This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.

To be sure, as in past recessions, some laid-off workers are starting businesses to stay afloat, or testing long-held dreams. The Kauffman Foundation, a nonprofit research group that promotes entrepreneurship, says more Americans started businesses last year than in 2007. Kauffman cites research by University of California, Santa Cruz, economist Robert Fairlie, who analyzes different BLS data.

Mr. Fairlie, says statistics suggest more businesses are being created more out of "necessity" than "opportunity." That "does not bode as well for economic growth," he says.

The number of new businesses with relatively low income potential -- such as baby-sitting and house-cleaning services -- grew last year. But compared with 2007, there were fewer new businesses with high income potential -- like law firms, medical offices and manufacturing outfits.

Trends In Business Hiring



Chart courtesy of the WSJ with data from the BLS. I added the arrow in hot pink.

Birth/Death Numbers Revisited

Inquiring minds are asking "What Birth/Death numbers for 2007 and 2008 did the BLS report?"

Jobs Flashback January 4, 2008

Unemployment Soars as Private Sector Jobs Contract



Average Birth Death Adjustment for 2007 is 94,000 jobs per month due to presumed net business job creation.

Jobs Flashback January 9, 2009

Jobs Contract 12th Straight Month; Unemployment Rate Soars to 7.2%



Average Birth Death Adjustment for 2008 is 57,000 jobs per month due to presumed net business job creation.

That does reflect a dip, but remember that birth/death adjustments are net figures. The article did not provide a chart of businesses that went out of business in during the recession.

In the third quarter of 2008 the the 187,000 businesses launched were the fewest in a quarter since 1995 and the number of jobs per startup had collapsed, yet the BLS still had positive net numbers for the year.

Presumably the net number of business startup jobs rose during the entire recession even though the number of startups and the number of jobs created per startup were both declining,

I do not buy it. Can we see the data on business deaths please?

Jobs Flashback September 4, 2009
Jobs Contract 20th Straight Month; Unemployment Rate Hits 9.7%



Anyone believe that preposterous set of numbers?

So far in 2009, The Birth Death adjustment is adding 84,000 jobs per month due to presumed net business job creation.

Thoughts on the Schumpeterian Depression

My friend "BC" writes:

During Schumpeterian Depressions, large, cash-rich firms dominate and push increasing scale and standardization, whereas small firms suffer from a lack of capital and a reluctance by banks to lend.

This trend should persist well into the next decade, as deflationary depressions and the associated demographic cycle reduces business start-up activities, and this time around Venture Capital activity.

Also, younger workers of a peak demographic cohort lack the capital and longevity in the occupational structure to have made sufficient contacts and gotten access to capital and equipment in order to reach the necessary critical mass of experience, reputation, and problem solving one demonstrates sometime in their mid- to late 20s to early to mid-30s.

Thus, we are not likely to see a new wave of incremental innovation and new capital formation and business start ups until no earlier than the mid-to-late '10s to early '20s. In the meantime, mass cross-industry consolidation, R&D moving inside large firms, spin-offs, firings, wealth consumption, and shifting composition of household spending led by Boomers in late life will combine to slow growth for years to come.

Moreover it is questionable as to whether China and India can buck the larger demographic and Schumpeterian-curve trends, as they have come to rely so heavily upon US supranational firms' Foreign Direct Investment in plants, equipment, trade credits, and intellectual property. The growth of US and Japanese firms' FDI will likely continue to decelerate with "trade" for years to come.

For more on Schumpeterian Depressions, please see Creative Destruction.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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G-20 Summit - We've Seen This Movie Before

Now that the G-20 economic summit is over, inquiring minds have a few questions on their minds:

1) Will the Group of 20 will be more effective because it includes important new players like India and Brazil, or will it simply be more unwieldy?

2) Will we wait and see what cooperation there really is before praising global cooperation?

3) Is there a credibility gap?

4) Haven't we seen this movie before?

To answers these questions let's look at a series of articles about the summit. Please consider Leaders of G-20 Vow to Reshape Global Economy

“We have achieved a level of tangible, global economic cooperation that we’ve never seen before,” President Obama said shortly after the summit meeting of 20 leading economies concluded here. “Our financial system will be far different and more secure than the one that failed so dramatically last year.”

The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

The ideas are not new, and there is no enforcement mechanism to penalize countries if they stick to their old habits. But for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

For all the unanswered questions, the final communiqué covered an extraordinary number of complex financial issues. The leaders agreed, for example, to devise policies by the end of 2010 for closing troubled financial institutions that were considered “too big to fail.” They also agreed on the need to regulate financial derivatives, endorsing the approach proposed by the Obama administration in its bill to overhaul the regulatory system.

They also renewed their vow to give China and other Asian nations a bigger share of the vote at the International Monetary Fund and the World Bank. Asian countries have long complained that their stakes no longer reflect their financial contributions.

In another nod to developing countries, the leaders agreed to revive talks to reach a new global trade agreement by the end of 2010 that would, among other things, reduce barriers to agricultural exports. The goal may be optimistic: the Obama administration has shown no enthusiasm for new trade deals, and many Democrats want to see more protections rather than fewer.

The big question is whether the Group of 20 will be more effective because it includes important new players like India and Brazil, or whether it will simply be more unwieldy.

Obama's Premature Praise

President Obama is not waiting to see cooperation before praising it. Moreover, there is no enforcement mechanism, just numerous agreements to cooperate. Furthermore, history of round after round of trade summits have shown that agreements to cooperate and actual cooperation are two different things.

Indeed, actions are already speaking louder than words as Obama Risks Global Trade War With Misguided Tariffs.

That quickly addresses question #2 while leaving questions #1, #3, and #4 intact. So let's continue our quest for answers.

Consensus Building Lesson

Please consider G-20 Plans to End ‘Financial Balance of Terror’ After Summit.

President Barack Obama and fellow Group of 20 leaders are trying to end what Obama adviser Lawrence Summers has called the “financial balance of terror.”

G-20 leaders pledged to correct the lopsided flows of trade and investment blamed for contributing to the crisis: U.S. consumers borrowed money to finance purchases of Asian-made cars and flat-screen TVs. Asian exporters, meanwhile, invested their surplus cash in U.S. Treasury notes, pushing down borrowing costs and further fueling the credit binge.

Some economists cast doubt on the pledges by the G-20, since no sanctions will be used to enforce them and a similar push in 2006 by the IMF petered out.

The risk is that the larger group will find it more difficult to make decisions, said Tim Adams, who served as the U.S. Treasury’s top international official in the administration of George W. Bush.

“The bigger the grouping, the harder it is to get consensus,” said Adams, managing director of the Lindsey Group, a Washington-based economic advisory firm. “You can’t have the agenda taken over by the favorite hobby horses of each country.”

The bigger the group, the harder it is to get consensus. It's tough to argue against that logic, which answers question #1.

Inquiring minds are hoping to get all their questions answered so we must press on.

U.S., China Have a ‘Credibility’ Gap

Please consider U.S., China Have a ‘Credibility’ Gap on G-20’s Economic Pledge.

A push from U.S. President Barack Obama and Chinese leader Hu Jintao to shrink trade and investment imbalances is probably years away from being fulfilled, according to comments from their own officials.

“That’s not a simple thing to achieve, you don’t get that by writing a communique,” David Nelson, acting U.S. assistant secretary of State for Economic, Energy and Business Affairs, said in an interview. Ma Xin, an official at China’s government planning agency, warned that his nation’s “low” consumer spending is a problem that has “accumulated over many years and it is a structural problem.”

“Whatever the communique says, it’s up against a very, very difficult change for China to make, and they’re not convinced they have to make it,” said Derek Scissors, Asia economic policy fellow at the Heritage Foundation in Washington, said in a telephone interview. On the U.S. side, its record budget deficit means “we don’t have any credibility,” he said.

That nicely address the credibility issue. There is no credibility. Only one question remains.

An Old-Time Classic Rerun

If this move seems like an old-time classic it's for one reason only: It is an old-time classic.

For proof, inquiring minds are digging into select entries from the historical record of a League of Nations 1930 Chronology.

February 17-March 24, 1930
First International Conference on Concerted Economic Action:
In an attempt to reduce high tariff barriers and promote international trade, the League of Nations hosted a tariff conference in Geneva.

May 2, 1930
Dunning Tariff in Canada:
The Canadian government imposed the most drastic tariff revision since 1907, significantly raising duties on American goods while providing preferential treatment to British goods. The Canadians resented the high tariff rates the American government placed on Canadian goods, reflected in the Smoot-Hawley Tariff legislation.

May 13-June 7, 1930
International Conference for the Unification of Laws on Bills of Exchange, Promissory Notes, and Checks:
To promote international trade, the League of Nations sponsored a conference in Geneva to unify international laws dealing with bills of exchange, promissory notes, and checks.

June 17, 1930
Smoot-Hawley Tariff Act:
Despite the protests of economists, President Herbert Hoover signed the Smoot-Hawley Tariff which increased duties on raw materials from 50 to 100 percent over the 1922 schedules. American protectionism sparked widespread reprisals and retaliation against American goods around the world which further flared economic dislocations and deepened the global depression. By December 1931, 25 countries had retaliated against American tariff policy.

Inquiring minds are also digging into the historical record of a League of Nations 1931 Chronology.

February 23-March 19, 1931
Second International Conference on the Unification of Laws on Bills of Exchange, Promissory Notes, and Checks:
The League of Nations sponsored a second conference on the unification of laws pertaining to bills of exchange, promissory notes, and checks in Geneva in an attempt to restore international trade.

March 17, 1931
Collapse of the Tariff Truce Convention:
In light of the continuing global depression, efforts to reduce tariff barriers to promote international trade collapsed.

May 11, 1931
Kredit Anstalt Failure:
The global recession struck the European banking system when Kredit-Anstalt in Austria failed, threatening the economic and political stability of Central Europe. The banking crisis reflected the economic depression in Germany where more than six million workers were unemployed and contributed to the rise of Communism and National Socialism.

June 16, 1931
British Emergency Loan to Austria:
The Bank of England authorized the advance of 150 million schillings to the Austrian National Bank in an attempt to stem the bank panic in Europe, even though these funds were desperately needed in Britain. This banking crisis threatened to bankrupt governments, banks, and corporations around the world and the specters of Fascism and Communism mounted.

June 18, 1931
Hoover Debt Moratorium Proposal:
President Herbert Hoover of the United States proposed a debt payment moratorium of one year on all intergovernmental debt. American experts believed that an important factor in the world banking crisis was the difficult problem of transferring reparations and war debt payments between currencies. French political opposition undermined the effectiveness of the moratorium proposal.

July 6, 1931
Debt Moratorium:
After finally gaining French support, President Hoover announced that all of the important creditor governments had accepted the intergovernmental debt moratorium. The delay in action on the debt moratorium contributed to the closing of all German banks by mid-July.

September 17, 1931
German Creditor Agreement:
With the German government's inability to pay its reparations obligations, Germany's creditors accepted a "stand-still" agreement, which temporarily avoided a default.

September 21, 1931
British Withdrawal from the Gold Standard:
The Bank of England went off the gold standard despite a total of 50 million pounds in credit from the Federal Reserve Bank of New York and the Bank of France. The pound sterling fell from $4.86 to $3.49 as a result of the devaluation. Since many nations tied their national currencies to the British pound, the subsequent devaluation (especially in comparison to nations who remained on the gold standard) resulted in an export subsidy and temporarily stimulated trade. However, the overall result was that most countries eventually abandoned the gold standard, currencies devalued, and overall trade contracted exacerbating the global depression.

December 22, 1931
Dutch Tariff/Quota Increase:
In spite of a long history of free trade, the Dutch government increased the nation's tariff schedule and set up import quotas to help the nation's agricultural and dairy sectors, which had been hit hard by the Depression.

Although some scenes have yet to repeat, it's safe to say we've seen this movie before, including small details such as Tears Over Milk.

Because of the credibility gap as well as recent precedence in numerous failed trade talks, it's difficult to believe this summit will be any more effective than the ones in 1930 and 1931.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Boot Camp 2, Assignment 4: Results

Greetings from the final assignment of Boot Camp 2, in which you were asked to examine a transportation theme in the assignment, "What Moves You."

Some really nice stuff came in on this one, and I left notes on about two dozen pictures among the entries. Now comes the hard part -- getting them down to the finalists -- and one winner.
__________


But First, a Brief Commercial Message

No, not one of those pre-roll video things Vanity Fair forces you to sit through before you watch an Annie BTS. No, this commercial was shot by our own Ken Brown, for the Blackhawk (Car) Museum near San Francisco. Ken's the guy that did that amazing gull wing pic a ways back:



Pretty neat concept -- and shot on a 5D Mk II.


And Now, the Finalists

Add an extra "n" to lighting and things start to get even more interesting. Reader Carl Williams not only had the nerve to risk getting fried, but knew when to say when on the lighting.

Dark car, dark sky -- it's a low key pic, left that way. I might have popped a little light on the ground behind the car (a ways back) to separate the tires and sides a little.

But when the weather gets like this, I am probably at home hiding in the basement anyway. So what do I know.


This one, by M. W. Scott, is just delicious. It's an antique Polish scooter, with both paint and lighting to die for. Really nice composition, and the light details the bike's shape and texture beautifully.

One SB-80, through a shower curtain, proving that a modicum of creativity will let you do a lot with a little.


Saw a few of these, and BookGuy's was my favorite. It's understated, he let the car lights handle the road, nice sharp face -- a lot going on in a graphically arresting photo.

There are actually two light sources hitting the face. Two Sto-Fen'd SB-600's -- one on the far left dash and another in the passenger's seat. And those dual light sources give it a nice, 3-D shape.


Alex Pounds left significant areas of this photo unlit -- which to me makes the photo from a lighting perspective. Little snoot above the hands to augment the ambient window light coming from camera right, and even a flash under the sheets to paint a little detail from there.

I might have kissed a little more up into the face, but that could also have killed the draw of her overall body attitude, too. Wouldn't know till I saw it.

But in the end, this photo was not about lighting technique. It let the interpretation of the theme shine instead. Very nice, Alex.

(As an aside, you sure as heck won't catch me necked under a sheet with a Yongnuo YN460. After seeing this video, I would not put my nuggies anywhere near one of those demon-possessed things.)


This one is subtle, and I like it.

R.J. Bledsoe used a ground-mounted Vivitar 285 behind the biker to ape a little low, late light. This was essentially a dynamic landscape, but it fit the theme in its own way and stove out in the bunch.

I like that R. J. left the tones low and did not let the light call attention to itself. It is so easy to keep going and make the photo about the light, but adding more lighting pizzazz is not always the path to a better photo.


A little less subtle is this surfer photo by Haristobald, whom you may remember from this very cool swimming pool video.

The flash is actually on the board, in several layers of plastic bags. It made for a beautiful image when that light mixed with the sunset and waves. Please take a moment to check out his set from the shoot, in which he includes a setup shot.


Even less subtle is this shot by Darren Chang, who details cars in Malaysia. He shot two photos -- one with the hood down and one hood up -- and erased the former to the latter using layers in Photoshop.

I tried the same thing with my Scion XA and it's power source, but the two chipmunks under the hood did not photograph so well. (They are pretty dark and greased up by now.)

Seriously, how much money could you make shooting cars for hot rodders and tuners this way?

My 8-year-old described it in one word: Want.


And the Winner Is . . .

I loved every single one of these finalists -- beautiful photos, all. But only one walks home with the starving student light kit, a Speedlight Prokit 6 Reflector kit, the Strobist Gel/LumiQuest FXtra combo kit, a set of Strobist DVDs, the Trade Secret cards.

There was one photo that I kept going back to: This one.

Reflections on "The Last Bear Standing"

Bill Bonner is one of my favorite columnists. On Friday he was discussing The Last Bear.

As they say on Wall Street, a rally ends when the last bear gives up. An old friend had been a source of inspiration for tech bears for many years. He suddenly saw the light and gave up in 1999. Shares he had formerly scorned – often dotcoms with no revenue and no business plans – were suddenly added to his own portfolio. This also heralded a big change – the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then, Stephen Roach became vaguely bullish in 2007, after a long period of doubt and misgivings.

Now it is Jim Grant who has changed his mind. A generation of investors has gotten used to Grant’s ‘doom is nigh’ warnings. Now, he says, it’s a boom that is nigh.

What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His WSJ article shillyshallies around; rehearses the history of previous recessions and comes to rest in front of a flickering match: “The deeper the slump, the zippier the recovery.”

But facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stock market rally, the once half empty glass has become half full. We predicted it ourselves. But we’ll let Robert Prechter say, ‘I told you so.’ Even before the rally began, Prechter foretold its story:

“Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”

As to Mr. Obama’s popularity, Prechter was wrong. But 4 out of 5 ain’t bad.

What will happen next, we don’t know. But if we turn bullish on this economy and urge you to buy stocks, it will surely be time to sell them.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

From Deflation to Inflation

With the above in mind I note with interest Martin Weiss, a prominent deflationist has changed his stance. Please consider From Deflation to Inflation.

Step by step, with little fanfare and great complacency, we are witnessing a fundamental, global shift that’s rapidly transforming the investment scene:

The forces of deflation are temporarily receding; and in the meantime, the forces of inflation threaten to roar back with a vengeance.

They are everywhere. They could be overwhelming. They must NOT be ignored …

Inflationary Forces

Weiss lists four Inflationary Forces

• Inflationary Force #1: Never-Ending, Out-of-Control U.S. Federal Deficits
• Inflationary Force #2: New Lows in the U.S. Dollar
• Inflationary Force #3: U.S. Household Wealth Now Expanding Again
• Inflationary Force #4: Exploding U.S. Money Supply

I suspect we will do through periods of inflation-deflation for a decade, with painfully slow growth followed by recessionary and deflationary relapases. Those expecting the CPI to go soaring anytime soon are likely very mistaken.

Deflation will end with a whimper, not a bang.

What Weiss is doing is extrapolating the recent past into the foreseeable future. He is overlooking the fact that the number of dollar bears is now extreme. Only 3% are bullish on the dollar. I am in that group, not perpetually, just right now.

The same goes for expanding household wealth. Yes there was a huge stock market bounce, but as I have pointed out there was a similarly huge bounce in early 1930.

In regards to exploding money supply, Weiss is late to the party. This happened some time ago. More recently the rate of many measures is falling. But also note that in the early 1930's money supply soared and it did not help.

Yes this was a spectacular rally by any measure. Enough so as to change Weiss' mind. How many more dollar bulls and stock market bears are left in the house?

Not many. Even Rosenberg is discussing decoupling. Sheesh.

The next wave down could be a doozy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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My Rich Uncle

With consumers and businesses not only cutting back but actually reducing debt, A Rich Uncle Is Picking Up the Borrowing Slack.

The United States government is borrowing money like never before. The national debt rose by more than a third over a one-year period, far more than it ever did at any time since World War II.

Rather than crowding out the private sector, Uncle Sam is now standing in for it. Much of the government borrowing went to investments in financial institutions needed to keep them alive. Other hundreds of billions went to a variety of programs aimed at stimulating the private economy, including programs that effectively had the government pick up part of the cost for some home buyers and some auto buyers.

Summary Statistics From The Article

• Total domestic debt — the amounts owed by individuals, governments and businesses — climbed just 3.7 percent from the second quarter of 2008 through the second quarter of this year. That is the smallest increase since the Fed started these calculations in the early 1950s.


• Over the 12-month period, nonfinancial businesses increased their debt by just 1.3 percent. Since that number is well below the interest rate most of those companies pay, it indicates that they paid back more in old loans than they took out in new ones.


• Over the year, total household debt fell by 1.7 percent, and mortgage debt — the largest component of household debt — fell a bit more, at a 1.8 percent pace. This is the 10th recession since the Fed began collecting the numbers, but the first in which the amount of home mortgage debt fell.

Annual Growth Rate of Debt



click on chart for sharper image

Inflationists will no doubt quickly point out that total debt is still growing. However, government bailouts, health care schemes, lending money to corporations to keep them alive, are low-velocity debt that subtract rather than add to real economic growth.

Moreover, Domestic debt declined in the second quarter, falling 0.3 percent to $50.8 trillion.

The article states "Until this recession, the idea that American individuals would ever cut their overall debt levels seemed as likely as an August snowfall in Miami."

Yes, that was exactly the prevailing view. However, those who saw the buildup of consumer and corporate debt as unsustainable correctly reasoned that private spending would sink, unemployment would rise, bank lending would contract, and treasury yields would plunge.

Those focused on the CPI or money supply failed to see this set of outcomes.

Following the Footsteps of Japan

The US is following the Footsteps of Japan, including the growth of government debt. It is now undeniable.

It is also undeniable that building bridges to nowhere did nothing to overcome Japanese deflation, presuming of course one takes a practical look at what deflation really is.

For further discussion as to a practical way of thinking about deflation in a fiat regime, please see Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Offers 2 Cents on the "Audit the Fed" Dollar

With momentum swinging mightily towards Ron Paul's Audit the Fed bill, the Fed is acting to stem the tide.

Please consider Fed Weighs Naming Borrowers

The Federal Reserve, under pressure from Congress to be more transparent, is "giving serious consideration" to releasing the names of firms that receive loans from the central bank, a top Fed official said Friday.

At a House hearing, Fed General Counsel Scott Alvarez struck a conciliatory tone when a top lawmaker indicated that he wanted more information revealed about the Fed's loans.

Asked if the Fed would work with Congress on establishing provisions for disclosure, Mr. Alvarez said, "We'd be happy to work with you on it."

The hearing addressed the implications of a bill from Rep. Ron Paul (R., Texas) that would open more of the central bank's operations to audits by the Government Accountability Office, the investigative arm of Congress.

The Fed's monetary-policy operations -- such as interest-rate decisions and loans to banks through its discount window -- are blocked by law from GAO review. The GAO audits most other central-bank operations, such as bank supervision and consumer regulation.

Top Fed officials strongly oppose repealing the GAO exclusions. They say audits directed by lawmakers would undermine markets' belief in the Fed's independence and raise concerns that monetary policy could be influenced by political considerations. "These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation," Mr. Alvarez said.

Still, several lawmakers pushed back against the Fed's suggestion that GAO reviews of monetary policy would hinder the Fed's effectiveness. "How many audits does the GAO perform?" Mr. Paul asked. "In any agencies of government, in the State Department, in the [Defense Department], nobody's ever charged the GAO for altering policy."

Testimony on HR 1207

Inquiring minds are reading Thomas E. Woods, Jr. Testimony in Support of HR 1207, The Federal Reserve Transparency Act of 2009 before the House Financial Services Committee, September 25, 2009.

I am speaking this morning in support of HR 1207, the Federal Reserve Transparency Act. As the Committee knows, this bill would require a full audit of the Federal Reserve by the Government Accountability Office (GAO).

On November 10, 2008, Bloomberg News ran the following headline: “Fed Defies Transparency Aim in Refusal to Disclose.” The story pointed out that the Fed was refusing to identify the recipients of trillions of dollars in emergency loans or the dubious assets the central bank was accepting as collateral. When the initial $700 billion congressional bailout was being debated last September, Fed chairman Ben Bernanke and then-Secretary of the Treasury Hank Paulson couldn’t emphasize their commitment to transparency strongly enough. But “two months later, as the Fed [lent] far more than that in separate rescue programs that didn’t require approval by Congress, Americans [had] no idea where their money [was] going or what securities the banks [were] pledging in return.”

There is no good reason for Americans not to know the recipients of the Fed’s emergency lending facilities. There is no good reason for them to be kept in the dark about the Fed’s arrangements with foreign central banks. These things affect the quality of the money that our system obliges the American public to accept.

Perhaps the most frequent of the claims is that a genuine audit would jeopardize the alleged independence of the Fed. Congress could come to influence or even dictate monetary policy.

This is a red herring. The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress. It seeks nothing more than to open the Fed’s books to public scrutiny. Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.

Moreover, try to imagine a Fed chairman doggedly seeking to maintain the value of the dollar even if it meant refusing to monetize a massive deficit to fight a war or “stimulate” a depressed economy. It is not possible.

If there is any truth to the idea of Fed independence, it lay in precisely this: the Fed may reward favored friends and constituencies with trillions of dollars in various kinds of assistance, while keeping the public completely in the dark. If that is the independence we’re talking about, no self-respecting American would hesitate for a moment to challenge it.

Opponents of HR 1207 have sometimes tried to claim that the Fed is already adequately audited. If this were true, why is the Fed in panic mode over this bill? It is the broad areas these audits exclude that the American public is increasingly interested in investigating, and these are the gaps that HR 1207 seeks to fill.

My point is simply this: if our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance? How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?

Let me also make clear that supporters of this legislation are strongly opposed to a watered-down version of the bill – which, incidentally, would only increase public suspicion that someone is hiding something.

If the Federal Reserve Transparency Act passes and the audit takes place, the American people will have achieved a great victory. If the legislation fails, more and more Americans will begin to wonder what the Fed could be so anxious to keep hidden, and the pressure for transparency will simply intensify. A recent poll finds 75 percent of Americans already in favor of auditing the Fed. The writing is on the wall.

At the same time, as we hear this objection repeated time and again, we might wonder just how independent the Fed really is, what with its chairman up for reappointment by the president every four years. Have these critics never heard of the political business cycle? Fed chairmen have been known to ingratiate themselves into the president’s favor close to election time by means of loose monetary policy and the false (and temporary) prosperity it brings about. Let us not insult Americans’ intelligence by pretending this phenomenon does not exist.

The Fed enjoys a government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense.

The Fed's willingness to talk suggests they finally realize momentum is strong enough that something will change. Nonetheless all the Fed is offering is talk, perhaps hoping that talk will make the problem go away.

It won't. Talk is cheap. We don't need idle chatter, we need passage of HR 1207, which calls for a complete audit of the Federal Reserve and removes many significant barriers towards transparency of our monetary system.

Speak Out - Audit the Fed, Then End It!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate

Last week I was in an inflation vs. deflation debate on Financial Sense with Daniel Amerman. The debate was moderated by Jim Puplava. It is a credit to Jim that he is willing to entertain both sides of an argument even though he himself is an inflationist.

Amerman took the inflation side, and of course I took the deflation side.

One of the main rules of any debate is to agree on definitions. In this case, there was no agreement.

I believe inflation is an increase in money supply and credit while Amerman considers inflation to be a purchasing power phenomenon. This lead to different opinions as to whether or not we are in deflation.

Furthermore, as with any audio discussion, there was an inability to point to charts or written material to make a case.

Let's now explore some of the issues that came up in the debate starting with Amerman's post Puncturing Deflation Myths

Japan & “Where’s The Beef”?

As discussed in Part One, someone who had attended one of my inflation solutions workshops asked me to debate deflation theory with him. I said “fine” but with one condition: before I would debate theory, he needed to first provide a real word example of this problem actually having happened. Could he answer this simple, real world question:

Name an example of a modern, major nation where the domestic purchasing power (as measured by CPI) of its purely symbolic & independent currency uncontrollably grew in value at a rapid rate over a sustained period, despite the best efforts of the nation to stop this rapid deflation?

The problem with this line of reasoning is agreement on the definition. One could just as easily define inflation as the number of meteors visible to the naked eye at nightime and conclude inflation is a cyclical phenomena that peaks every August in conjunction with the annual Perseids Meteor Shower.

Amerman did not "puncture deflation myths" because there is no agreement that his definition is the correct one.

Interestingly, he does post this chart that shows, even by his definition that Japan had 5 years of negative CPI inflation.



By his own chart, Japan spent a fair amount of time with a negative CPI yet Amerman dismisses the results because the CPI was not plunging "uncontrollably".

Six Fallacies

Amerman goes on debunking 6 fallacies of his own making as if they represented some sort of deflationist viewpoint.

• Fallacy One. The belief that a “dollar” is a “dollar” and that the deflationary history of gold standard currencies applies to symbolic currencies (an “apples to oranges” fallacy).
• Fallacy Two. The belief that the US Great Depression proves the case for unstoppable monetary deflation during depressions, when it in fact proves that a sufficiently determined government can immediately break monetary deflation at will, even in the midst of depression.
• Fallacy Three. The belief that inflation and deflation take wealth from all of us equally, when what they actually do is redistribute the wealth among us.
• Fallacy Four. The widespread belief that Japan experienced powerful price deflation that the government was powerless to fight. It didn’t.
• Fallacy Five. The fundamental mistake of thinking that “deflation” is “deflation”, which leads to confusing price deflation with asset deflation, and means missing the real lessons and dangers of what happened in Japan, which is the persistent asset deflation that has defeated all government interventions (another “apples to oranges” fallacy).
• Fallacy Six. The dangerous belief that deflation protects you from inflation.

Those are not six fallacies. Those represent a strawman that does not exist.

In regards to Fallacy Six Amerman says "Collapsing credit availability and the resulting collapsing money supply leading to an unstoppable and rapidly rising value for a symbolic currency (price deflation) is a popular theory – but it has never happened in the real world."

If that is such a popular theory then let's see who said it. I sure didn't!

These "deflationists say" kind of arguments need a quote to show they really do exist. I would like to see a "Weiss said" or a "Prechter said" or a "Mish said" so as we can see who, if anyone is holding such views.

Yes, I am aware that Weiss has recently changed his tune from deflation to inflation. After this length of time, it is more likely to be a contrary indicator as opposed to anything else.

What Does and Should the CPI Reflect?

In regards to the CPI, I pointed out during the debate that the CPI was currently way overstated because it did not include housing prices. Amerman objected because homes are assets.

Yes they are. However, motorcycles, autos, frozen pizzas, and even tomatoes are assets. Land is also an asset, and so are stocks and bonds. Of those, only land, stocks, and bonds are not consumables.

Autos and motorcycles are in the CPI, so should houses. A house not maintained (heated, painted, air conditioned, etc), will quickly deteriorate with one or more of the following: dry rot, mold, mildew, termites, etc. A house not maintained will quickly be "consumed".

One might argue that homes are a very long term asset, but so is a bag of rice or a can of tomatoes or a that might last 20 years on a shelf. Clearly, longevity is a poor measure of what belongs in the CPI.

Indeed, one of the biggest mistakes the Greenspan Fed made was ignoring rapidly rising home prices and its effect on the economy. Had the Fed properly included home prices in the CPI, it would not have left interest rates as low and as long as he did, unless of course his action was to purposely create a bubble.

What's the Real CPI?

Inquiring minds are thus wondering What's the Real CPI?

OER, Owner's Equivalent Rent (rental prices) is the largest component in the CPI, weighing in at 24.433%.

Watch what happens when the Case-Shiller Housing Index is substituted for Owner's Equivalent Rent (OER) in the CPI.

Case Shiller CPI vs. CPI-U



click on chart for sharper image

The above chart is courtesy of my friend "TC".

CS-CPI fell at the fastest pace on record to measure at -6.2% year over year (YOY). Meanwhile the government’s CPI-U declined at the fastest rate since the 1950s at a -1.3% YOY pace.

Since the housing market peak in June 2006 OER is up +7.6%, while the Case-Shiller index is down -32.6%, an amazing 4020 basis point divergence!

CS-CPI Year over year has now fallen for 8 consecutive months and 11 of the past 15. High Year over year comparison data points for the next several months will likely result in CPI deflation coming in at -7% to -8% in the coming months.

Closer Look At "Uncontrollable"

The above chart certainly looks like an uncontrollable plunge in the CPI. Moreover, in Japan, the Japanese central bank tried for a decade to get prices to go up and stay up. The Bank of Japan failed.

Clearly, neither the Bank of Japan, nor the Fed is in "control" of anything. Yet, as I have pointed out on many occasions, Belief In Wizards Runs Deep.

The most amazing thing about this persistent belief in wizards is Bernanke's Deflation Preventing Scorecard is a perfect zero!

Indeed Bernanke tried all 12 things he said in his famous helicopter speech on preventing deflation, yet deflation by any practical measure arrived anyway.

Is Bernanke a Wizard?

Bernanke is not a wizard and neither is Greenspan. The difference is Greenspan had the wind of consumption blowing briskly at his back. Bernanke is on the backside of Peak Credit with a breeze of frugality blowing briskly in his face.

Attitudes make all the difference in the world.

Money Supply Argument

Others have attempted to make the case that Japan never went into deflation on the basis of money supply. For those in the strict monetarist camp, the only thing that matters is a growing money supply.

Some interesting things appear when using that line of reasoning. Please consider the following chart.

Rate of Change In Monetary Base


Using rate of change in base money supply as a measure of inflation and deflation would have one conclude that Japan went into deflation between 2005 and 2007 even though the stock market was soaring as shown in the following chart.

Nikkei Stock Index



Humpty Dumpty On Inflation

I believe a definition should be practical.

Assuming we can all agree that the US was in deflation in the 1930's, then let's discuss the conditions at the time as well as what happened to cause those conditions.

Please consider Humpty Dumpty on Inflation

Practical Definitions Of Inflation And Deflation

Most know my definitions by now but here they are again for convenience.

• Inflation is a net increase in money supply and credit.
• Deflation is a net decrease in money supply and credit.

In both cases credit must be marked to market to make any practical sense out of what is happening. Those who focus solely on money supply cannot easily explain stock markets that have fallen in half (this does not happen in disinflation), TIPs yields, a global race to ZIRP, or many other events that are happening.

Humpty Dumpty Defines Inflation

Unfortunately there are many definitions of inflation and deflation strewn about. Some play the role of Humpty Dumpty changing meanings at whim, switching from commodity prices, to consumer prices, to expansion of base money or M3 or whatever measure of money seems to be expanding at the fastest rate.

Some do the inflationista two-step to avoid admitting that we are indeed in deflation, choosing instead to call it "disinflation"


In short: "We are going to have a period of deflation that we will instead call disinflation."

'When I use a word,' Humpty Dumpty said, in a rather scornful tone,' it means just what I choose it to mean, neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

In Humpty Dumpty I posted the following chart:

Base Money % Change From A Year Ago



That chart would look much worse now at the right end.

The important take-away however, is the similarity between the spike in money supply in the great depression and the current spike.

As noted in the above Japanese money supply chart, Japan went through spikes as well as collapses in money supply. The second huge collapse came as Japan temporarily came OUT of deflation. (Of course Japan is back in deflation again after a brief sit on the sidelines.)

Be Mindful of the Fed

One reasonable indicator of deflation is what the Fed and Central Banks are doing to fight it. The reason the Fed is fighting deflation with an alphabet soup of lending facilities and other programs is simple: The US is in deflation.

At some point the Fed will, just as Japan did, reduce the money supply. If and when that happens it will mark the Fed's belief that deflation is no longer a threat.

Ironically, those who consider inflation as a strict expansion/contraction of money kind of thing might conclude the US is going into deflation just as it is coming out of deflation.

A Practical Look At "Flation"

Here is a table of conditions from the Humpty Dumpty article as to what one might expect to see during periods of inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so I left those blank.



click on chart for sharper image

That chart is from December 11,2008 thus some may disagree with where a few of the marks are.

Still others might suggest that treasury yields are now rising and the bottom in treasury yields is in. Certainly at 0% the short end of the curve has bottomed, and perhaps the long end has too.

However, as a practical matter, the 10-year treasury yield at 3.37% is amazingly low, especially in light of the fact that hard-core inflationists expected yields to do be soaring to 10% based on misconceptions about the CPI and/or money supply.

Symptoms vs. Definition

Bear in mind the above table is a table of symptoms one would expect to see in deflation. A practical test of a good definition inflation and deflation is whether or not one would have predicted those symptoms based on their definition.

Those following money supply or the CPI certainly could not have reasonably expected a simultaneous massacre in both the stock market and treasury yields in conjunction with rising corporate bond yields.

Those who could see and understand what a collapse in credit would do, had no such problems. Amerman and other try and skirt this issue by distinguishing between monetary deflation and asset deflation.

The fact of the matter is, in a credit based economy, deflation will always manifest itself as "asset deflation". Yet, not all "asset deflations" constitute deflation. A good example of this is the stagflationary conditions of the 70's where stock prices fell but interest rates soared. Clearly, those times were not a period of deflation.

Those focusing on credit do not have to go through hoops explaining such things away, and as noted above, only those who considered credit in their analysis of the situation got both assets and interest rates correct, ahead of the pack.

Definitions that rely on one symptom, when there is a plethora of symptoms related to deflation are more than suspect, they are out and out faulty.

Mish Treasury Calls

So as to show I am not perpetually bullish on treasuries, here are a few links describing my positions and how they have changed.

Sunday, January 20, 2008: Time To Short Treasuries?

Kass Says Sell Bonds Short.

Kass: The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras. From my perch, the only issue is the timing of this trade.

Mish: Timing is indeed everything and perhaps there is a temporary selloff. But the primary trend is for lower yields. Perhaps much lower yields. There is no bubble in bonds. Not yet.

There is no bubble in treasuries if you look closely at the fundamental issues. Those who want to see how low treasury yields can get and stay there, need to look at Japan. Yields in the US are going to go far lower and stay lower longer than nearly everyone thinks.

Thursday, June 26, 2008: Is The Inflation Scare Over Yet?

Those focused on the CPI failed to see any chance of the Fed Fund's Rate at 2.00 again. On the other hand, those focused on the destruction of credit from an Austrian economic perspective got this correct. That is just one reason why it makes more sense to watch the credit markets than the CPI. The second is the CPI is so distorted it is useless.

In my opinion, it is very likely new all time lows in the 10-year treasury yield and 30-year long bond are coming up.

Tuesday, January 06, 2009: Reflections On 2008, Themes For 2009

It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.

I am now bullish on treasuries again. It will not be for forever.

Comparison To April 1930

In regards to the current reflation effort,
One must make allowances for "short-term noise". There was a huge stock market rally in 1930 as well. Please consider the following charts from Strenuously Overbought But ...?

S&P Weekly Chart December 2005 - Present



Dow Weekly 1928 - Spring 1930



The preceding two charts are courtesy of John Hussman as noted in the article.

Simply put, 6 months is hardly a reasonable timeframe in which to declare "Goodbye Deflation, We Hardly Knew You"

Looking Ahead

Looking ahead, as I noted Thursday morning, it should be clear we are Following the Footsteps of Japan.

Japanese GDE from the 1989 peak to Present
US GDP 1999 peak to Present

Offset is 10 Years



See above link for further discussion.

Yet, as noted above, the situation is dynamic, and can change at any time. To stay ahead of the game, one needs to monitor credit conditions not just the CPI or money supply.

I cast my lot with Australian Economist Steve Keen as noted in Global Debt Bubble, Causes and Solutions.

Discussion of Unfunded Liabilities

One of the topics of discussion in the debate was on unfunded liabilities such as Medicare, Medicaid, and Social Security.

Jim Puplava, Daniel Amerman, and I all think this is a problem. Indeed I do not know of anyone, deflationist or inflationist who does not see it as a future problem.

The real question is the timing of the problem. I would argue, as I believe Prechter would, that the far bigger problem NOW, is the ongoing destruction of debt on the balance sheets of banks, and the consumer defaults, bankruptcies, and foreclosures that will continue unabated along with rising unemployment.

Only after the repudiation of consumer and commercial debt (especially commercial real estate debt) should one expect significant market ramifications of those unfunded liabilities.

Can Government Inflate the Debt Away?

Amerman suggested that government would inflate those unfunded liabilities away by further cheapening the US dollar so that it is only worth a nickel. Such arguments show a lack of understanding about the ongoing dynamics of the situation.

The reality is is it impossible to inflate those liabilities away. The reason is simple. As the value of the dollar sinks, the amount of liabilites rise. Unfunded liabilities are a current "estimate" as to what future costs will be, not a fixed price that can magically be inflated away.

Moreover, such arguments ignore things like interest on the national debt.

Finally there is another dynamic at play: demographics. At some point, after enough boomers die, boomers will no longer be the largest demographic group. When that occurs and after we have a new Congress more concerned about their generation than the baby boomers, we could see huge shift in attitudes towards defaults, as well as shifts in priorities as to what gets funded or not.

Whether that attitude shift occurs is debatable, but what is not debatable is the situation is not only dynamic, but dynamic on multiple fronts.

Do the Symptoms Match the Definition of the Disease?

When it comes to inflation and deflation, if the symptoms fit the disease and the definition predicts the symptoms in advance, the definition is reasonable. If not, then something is wrong.

I am sticking with my definition as noted in Fiat World Mathematical Model.

Amerman's definition falls flat, he did not debunk deflation myths anymore than a definition basted on meteors would. Moreover, most economists would agree that Japan went through a period of deflation. Finally, based on an analysis of conditions one would expect to see in deflation, the US is in a period of deflation now.

There is no other reasonable conclusion, unless one is Humpty Dumpty. The debate now is not whether we are in deflation or not, but rather how long it lasts and why.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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