Inflation vs. Deflation debate

[Neil Rucker]

Once World Governments decide not to use the US dollar as a world currency, thats when the game is up. At that point inflation will happen. We as citizens might still not have any dollars ourselves but goods and other bills will skyrocket. Services (labor) might stay some what flat but the cost of doing business will have to increase. Since America has been in my mind deindustrialized we will still rely on other countries for a lot of our goods. Goods we will have to buy with a weaker dollar that less and less people will want. I don't see any other way of getting around this at this time, except for getting yourself perpared.

[Jason]

Once World Governments decide not to use the US dollar as a world currency, thats when the game is up. At that point inflation will happen. We as citizens might still not have any dollars ourselves but goods and other bills will skyrocket. Services (labor) might stay some what flat but the cost of doing business will have to increase. Since America has been in my mind deindustrialized we will still rely on other countries for a lot of our goods. Goods we will have to buy with a weaker dollar that less and less people will want. I don't see any other way of getting around this at this time, except for getting yourself perpared.

True but demand destruction is the result.....so they have to choose whether they want to support a strong dollar or if they want demand to dry up with all of the resulting implications....

Also have to weed out the artificial from the real which is much easier said than done. Matt did a great job in the Rolling Stone article portraying how they manipulate the market....in everything from stocks to treasuries.

[Jason]

This article by MISH may shed further light on the subject -

http://globaleconomicanalysis.blogspot. ... asure.html

[pjbrownie]

So, is the Fed going to raise interest rates when and if the money supply starts trickling back into the economy in order to avoid inflation (we had to raise rates to 20% to stop a double year 13% increase in the money supply in the 70's, so what will they have to do to disengage a 120% increase?). Or, will they inflate the currency?

If they are the money-suckers Jason argues they are, they'll raise the interest rate. Problem is, I think the rate they'll have to raise it to will collapse our economy.

[JMarsigli]

So, is the Fed going to raise interest rates when and if the money supply starts trickling back into the economy in order to avoid inflation (we had to raise rates to 20% to stop a double year 13% increase in the money supply in the 70's, so what will they have to do to disengage a 120% increase?). Or, will they inflate the currency?

If they are the money-suckers Jason argues they are, they'll raise the interest rate. Problem is, I think the rate they'll have to raise it to will collapse our economy.

My opinion is they'll use their less talked about tool to tighten first and raise bank capital ratios. This could destroy the smaller institutions, meaning more business for the big guys. This will also let them keep the rate curve extremely steep so the big banks can continue earning their way out of this mess. This makes more sense from my POV, which is TPTB will try to benefit the large institutions.

Don't forget they're trying their hardest to reflate asset prices. A lot of this extra money might find a home somewhere hidden (from 225 Fed PhD's), just like it did in the housing bubble. I read Obama pushed through a deal where you could donate your "use or lose" vacation hours into your own 401k. Why? Asset price reflation. This would pull money out of company profits and put it into stocks and bonds. If the Fed and congress are successful as intended, housing will again sop up a lot of the extra money being printed. This also benefits TPTB because it keeps housing prices high and presses the middle class.

A lot of debt will be wiped out in the private or household sector and will be replaced with public debt. If you look at the situation this way then you might think we'll only return to 2007 inflated levels rather than hyperinflation. That'll come down the road a ways, but there are plenty of countering forces (think higher taxes). Once again, this plays into TPTB's hands as we are saddled in debt and will start begging for table scrap handouts like we're packs of starving dogs.

[Jason]

So, is the Fed going to raise interest rates when and if the money supply starts trickling back into the economy in order to avoid inflation (we had to raise rates to 20% to stop a double year 13% increase in the money supply in the 70's, so what will they have to do to disengage a 120% increase?). Or, will they inflate the currency?

If they are the money-suckers Jason argues they are, they'll raise the interest rate. Problem is, I think the rate they'll have to raise it to will collapse our economy.

My opinion is they'll use their less talked about tool to tighten first and raise bank capital ratios. This could destroy the smaller institutions, meaning more business for the big guys. This will also let them keep the rate curve extremely steep so the big banks can continue earning their way out of this mess. This makes more sense from my POV, which is TPTB will try to benefit the large institutions.

Don't forget they're trying their hardest to reflate asset prices. A lot of this extra money might find a home somewhere hidden (from 225 Fed PhD's), just like it did in the housing bubble. I read Obama pushed through a deal where you could donate your "use or lose" vacation hours into your own 401k. Why? Asset price reflation. This would pull money out of company profits and put it into stocks and bonds. If the Fed and congress are successful as intended, housing will again sop up a lot of the extra money being printed. This also benefits TPTB because it keeps housing prices high and presses the middle class.

A lot of debt will be wiped out in the private or household sector and will be replaced with public debt. If you look at the situation this way then you might think we'll only return to 2007 inflated levels rather than hyperinflation. That'll come down the road a ways, but there are plenty of countering forces (think higher taxes). Once again, this plays into TPTB's hands as we are saddled in debt and will start begging for table scrap handouts like we're packs of starving dogs.

"collapse economy" means rapid transfer of assets...

Karl rants about how stupid it all is - http://market-ticker.denninger.net/arch ... -GSEs.html

...but if your goal is to obtain final ownership of all assets (final lien holder).....its not so stupid!

Agree on the big banking perspective. I've argued that a roll up strategy is being implemented for some time now. The Fed needed the support of the banking system to get to where they are today. Now they need to cut out all the little guys and bring the control of money completely in-house (such that you can't buy or sell without their permission).

Once again, this plays into TPTB's hands as we are saddled in debt and will start begging for table scrap handouts like we're packs of starving dogs.

- Amen!

Not only as individuals but as cities, counties, and states. Give up all sovereignty with a giant roll-up strategy in place there as well. California is the canary in the coal mine to keep your eye on.

While I agree with the intended strategies I think the results will not follow as planned. I see disintegration as selfishness rules the day and the fight over the scraps gets ugly. City vs city, county vs county, state vs state, etc. Also violence will rear its ugly head as an unaccustomed middle class finds itself on the receiving end of economic fallout.

Case in point - http://www.calculatedriskblog.com/2009/ ... lings.html

...and - http://declineandfallofwesterncivilizat ... icane.html

Some relevant examples from MISH today - http://globaleconomicanalysis.blogspot. ... -over.html

In case you haven't noticed - gun & ammo sales are skyrocketing....though slowing a tad as of late last quarter and early this quarter - http://www.federalobserver.com/2009/11/ ... ps-in-u-s/

These guys won't go away quietly - http://yophat.blogspot.com/2009/11/arm- ... ement.html

As Constance so eloquently puts it -

No matter what happens, from now on, it's going to be happening FAST and it promises to be both intense and interesting.

- http://cumbey.blogspot.com/2009/11/euro ... ified.html

[JMarsigli]

...but if your goal is to obtain final ownership of all assets (final lien holder).....its not so stupid!

Agree on the big banking perspective. I've argued that a roll up strategy is being implemented for some time now. The Fed needed the support of the banking system to get to where they are today. Now they need to cut out all the little guys and bring the control of money completely in-house (such that you can't buy or sell without their permission).

Once again, this plays into TPTB's hands as we are saddled in debt and will start begging for table scrap handouts like we're packs of starving dogs.

- Amen!

Not only as individuals but as cities, counties, and states. Give up all sovereignty with a giant roll-up strategy in place there as well. California is the canary in the coal mine to keep your eye on.

While I agree with the intended strategies I think the results will not follow as planned. I see disintegration as selfishness rules the day and the fight over the scraps gets ugly. City vs city, county vs county, state vs state, etc. Also violence will rear its ugly head as an unaccustomed middle class finds itself on the receiving end of economic fallout.

Yes, California and China, my two favorite canaries right now.

I don't think this one will be the straw that breaks the camels back. I think it's setting the stage for the next fall in 5,7,12 years. It's not the earthquake before the tsunami. But then again, I dropped my crystal ball and it shattered.

I've read your roll up idea and have thought about it before and after. The stumbling blocks I have with this idea are 1) I don't think Americans are willing to give up all our sovereignty just yet. I think it'll take an IMF or World Bank type institution to complete the work. We still have very strong pro-dollar political and business forces working in sovereignty's favor. The Fed can buy up all the assets, but are we really going to let them transfer a really good chunk to an NWO organization? (Well, Obama did send the IMF, what, $500 billion?) 2) If the Fed needed the banks to cooperate then who is controlling the Fed? I thought all eyes point to the banks. Why would the banks do all the dirty work knowing there's a plan to subvert them in the end? Or do you picture them more of a ruling class under the all-owning Fed?

[JMarsigli]

While I'm at it I am going to make a prediction. It may seem pretty obvious to many here, but the main stream would laugh it off. The MBS held at the Fed aren't going away. They'll provide too much revenue to the Treasury. D.C. will eventually get their dirty hands on it and this will become the popular chant:

"Not only should we not sell the MBS but the Fed should buy more! Why should the banks earn all that interest when they got us into such big problems. We have a budget shortfall and need to raise revenue. Instead of raising taxes on individuals and businesses, we can simply buy MBS. It'll provide hundreds of billions in additional revenue.

"Selling MBS will flood the market and raise mortgage rates. It's not fair to the poor who would be hit the hardest. Why should they have to pay 8, 9, 10 percent to a big bank when the Fed can keep rates at 6? It's a win-win situation. We raise revenue while helping out the small businessmen, the taxi-drivers, firemen, and grocery clerks. But if we don't vote this in within 3 seconds then America will fail."

I know it come as much of a surprise to most here. But what good is a conspiracy or any other theory is it is not at all predictive?

[SwissMrs&Pitchfire]

Juneau is great but too big for my taste (pop 30,000). But it is a very short ride to isolation! I've got a cousin there and Dr. Jones (has/had) a daughter there. There are three wards, the University, Eaglecrest Ski area, State Capital etc... Really cool town. Some of our closest neighbors (vacation house) live and work there. There are a handful of accounting jobs there listed.

[Jason]

Juneau is great but too big for my taste (pop 30,000). But it is a very short ride to isolation! I've got a cousin there and Dr. Jones (has/had) a daughter there. There are three wards, the University, Eaglecrest Ski area, State Capital etc... Really cool town. Some of our closest neighbors (vacation house) live and work there. There are a handful of accounting jobs there listed.

LOL I applied for at least 60 jobs up there over the past year. Reality though is my wife likes sunlight and probably wouldn't make it through the winter.....and I have a good job in the oil and gas industry here in Utah now....so it would be a tough sell!

[SwissMrs&Pitchfire]

I can certainly understand that. We had an awesome year for sun. I would love to do the snowbird thing. Then you could be up here in the summer and not lack for light! But in reality we aren't very cold in Southeast, just dark (though we're about 400 miles South of Anchorage, which is much better than Fairbanks let alone the slope).

So do you think that we'll go the super-note route when we default on our debt or the IMF receivership route?

[Jason]

I can certainly understand that. We had an awesome year for sun. I would love to do the snowbird thing. Then you could be up here in the summer and not lack for light! But in reality we aren't very cold in Southeast, just dark (though we're about 400 miles South of Anchorage, which is much better than Fairbanks let alone the slope).

So do you think that we'll go the super-note route when we default on our debt or the IMF receivership route?

Well that is certainly a good question!

I lean towards IMF receivership. I have a hard time seeing decades of effort to enslave the people with debt suddenly tossed to the winds of inflation - and with the understanding that the goal is one world government. Interest payments on national debt over third of the annual budget now. Deflation is really starting to kick in and everyone is scrambling for money - from politicians to single moms.

That said, the US has been the foundation for the UN, IMF, etc etc since the organizations were founded (ironic isn't it). A couple of the big boys (Soros, Brzezinski - who is also Obama's mentor) have mentioned transitioning the Fed into a global financial structure. Probably one of the big steps in the process that in all likelihood would occur at the end of 2010.

Little piece on IMF receivership (never do discuss the terms of the financing) - http://fistfulofeuros.net/afoe/economic ... eivership/

Argument here is that it has already happened -
http://www.yahwehskingdom.com/pdf/thecomingdefault.pdf

(AP) The International Monetary Fund said Tuesday U.S. financial institutions could suffer $2.7 trillion in losses from the global credit crisis, part of a worldwide total expected to top $4 trillion.

The $2.7 trillion estimate for the United States was nearly double the IMF's projection from just six months ago. The agency for the first time estimated losses for other regions of the world, saying the global total could surpass $4 trillion.

The IMF also warned that governments must take decisive policy actions to contain the fallout. The agency said governments have made progress getting extra money into the banking system, but more needs to be done to deal with toxic assets on banks' books and shutting down insolvent financial institutions.

of course even though we are hurting for money.....Obama wrote a check...well an IOU anyways...

Discussions among the nations that serve on the steering committees of the IMF and World Bank are scheduled for Saturday and Sunday. Those talks will seek to flesh out the commitments made at a G20 leaders summit in London last month. At that meeting, President Obama and the other leaders pledged to boost financial support for the IMF and other international lending institutions by $1.1 trillion.

Emerging economic powers like China and Brazil are demanding a bigger voice in how the IMF and World Bank are run in return for their increased support.

Besides debates over rearranging the governing structure of the lending institutions, the weekend talks are expected to focus on reforms that should be made in how the IMF, the world's global policeman, performs its duties.

The 185-nation lending institution came under severe criticism a decade ago, during the 1997-98 Asian currency crisis, for the types of stringent reforms it imposed on countries seeking IMF loans.

http://www.cbsnews.com/stories/2009/04/ ... 9108.shtml

The United States is at a crossroads with regard to its $10.6 trillion mortgage finance system following the effective government takeover of mortgage giants Fannie Mae and Freddie Mac.

Exercising powers recently bestowed upon him by Congress, the U.S. Treasury Secretary on September 7 acquired securities issued by the two largest housing government-sponsored enterprises (GSEs)—the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

At the same time, the newly established regulator—the Federal Housing Finance Agency (FHFA)—placed the GSEs under regulatory management (conservatorship), and replaced their existing managers.

Third, Treasury intervened to promote confidence in the GSEs' MBS and debt, because of significant holdings by banks and foreign investors. Domestic banks hold around $1.1 trillion of GSE securities with foreign holders accounting for another $1.1 trillion, including large central bank holdings.

In practice, to achieve these ends and minimize potential costs to the U.S. taxpayer, the Treasury and FHFA undertook to inject sufficient senior preferred equity capital into the GSEs to ensure GSE solvency, while placing them into conservatorship, rather than receivership. This avoided giving an explicit Treasury guarantee to existing GSE debt while giving the FHFA control over the GSEs' major financial decisions. Receivership would have entailed winding up the GSEs and accelerating various debt covenants. Hence the authorities achieved control and severely diluted preferred and common equity-holders without making the GSEs insolvent.

Although they had the opportunity, the U.S. authorities did not place the GSEs in receivership. This left open the question of their ultimate future for the next administration and Congress. Nevertheless, Treasury placed two "poison pills" in their agreement to ensure that the GSEs could not continue indefinitely in their former state.

"The danger with making them fully publicly owned enterprises is that . . .the the U.S. housing market becomes dependent on taxpayers taking a concentrated financial risk during a housing slump"

First, the GSEs agreed to wind down their portfolio holdings by 10 per cent a year beginning in 2010, effectively running down the investment risk they pose. Second, Treasury will be able to charge a market-based fee for the capital guarantee provided by the taxpayer, potentially eliminating the implicit subsidy the GSEs receive. These provisions almost certainly mean that the next administration will need to address the fundamental future of the GSEs once the housing market has stabilized.

http://www.imf.org/external/pubs/ft/sur ... 00308A.htm

Notice fewer loans starting in 2010....so you have the option arm wave kicking in, jobs continuing to fall off a cliff, unemployment payments running out, banks being forced to liquidate their portfolios, government housing support falling off cliff (GSEs, FHA - covered in the raise taxes post, etc), tax revenue falling off a cliff strangling state and local governments, CRE decline hitting full swing, anything else I missed?

[SwissMrs&Pitchfire]

No, I think that's a good summation, and I agree.

As far as I'm concerned everything points that way. My only question is timing. When? That depends on "them" more than anything (within the small window of leeway they have anymore) I think. But what else is left to put in place?

[Jason]

No, I think that's a good summation, and I agree.

As far as I'm concerned everything points that way. My only question is timing. When? That depends on "them" more than anything (within the small window of leeway they have anymore) I think. But what else is left to put in place?

I left off the umpteen trillion dollars (of current debt) that needs to be rolled over in the next year or two.

Great point though in that everything is timing and methodology...

Healthcare bill is big step....force another payment (tax) down people's throats just when they can't afford....and a reason to toss them in jail (if a reason needs to be fabricated). The new finance bill just introduced (1100+ pages) will be another step. Need a real crisis though to move things fast.

A couple banks go down every week...and should pick up after Christmas bypasses us this year. That will put the kabosh on the retailers. Rising interest rates would really speed things up....we are at a historical low still so won't take much of a bump to send the currently tightroped majority over the edge....and that shouldn't be a problem with the huge rollover needs driving the demand for money up. Drastic increases in charges by the FDIC to maintain the insurance fund should speed up the banking implosion. Probably be a big drop in employment after Christmas too.

Probably around April or May California should implode in sporadic outbreaks of social unrest as payments are completely cut for everything but vital necessities. Provide a nice trial (already had a training opportunity in New Orleans) for social disorder and impose martial law. If it gets big enough would provide an opportunity to test US NorthCom and bring in the UN troops or outside peacekeepers (probably just Canadians early on as most see them as an extension of US & UK).

If the finance bill passes and forces the banks to dump all the real estate they are sitting on.....that would implode residential and CRE overnight. The Fed would expand their balance sheet further taking ownership which then when the Fed can't roll over the current debt....would be taken on by IMF. 2010 is probably the year for blood in the streets. 2011 for transition to one world government. 2012 for all heck to break loose??? Just some thoughts....

Predictions from the Russians -
http://www.youtube.com/watch?v=Jxi-DB3P ... r_embedded

Only week or two from seeing how close he is....

[Jason]

A bit lengthy but I've tried to pull the highlights yet not leave out any cars in the analysis train...

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales.

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let’s look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we’re in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called “Beyond California” (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.o ... pendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (http://www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

Yesterday I was with an associate, and I hesitated in asking them how their business was doing, because I knew things had been tough at the beginning of the year. But I did ask, and they said sales were up over the last months and business was looking better. Surprised, I asked them what made the difference. “Ah,” they said, “less competition. Our competitors have gone out of business.”

Best Buy and other electronic retailers had to benefit from Circuit City disappearing. That is Schumpeter’s creative destruction at work. Not very good for total employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter? First off, things are not as bad as they were in the past year. We are in fact getting close to an economic bottom, at least for now. Second, the 3.5% number is a preliminary estimate. A study by Goldman Sachs suggests that the number will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses are performing. If you look at small-business indexes and compare them to historical GDP numbers, you get the smaller number mentioned above. And since at least 2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax cuts), the economy on its own was flat. That begs the question, what happens when the stimulus runs out?

And the answer is that we won’t know for some time, as the stimulus is just getting ramped up. “According to CBO estimates, only 21% of [the stimulus] spending will occur in 2009; another 38% will come in 2010, and 22% in 2011. After that, its effect will dissipate quickly.” (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the states are taking away.

“Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

“The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on “shovel ready” infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market.”

All this is, of course, going to put continued pressure on employment. As I noted last week, the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey, not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts.

In August, I did an interview with CNBC from Leen’s Fishing Lodge in Maine. The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started.

That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month, let alone adding the needed 250,000.

Look at the chart below. It shows the establishment survey employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year. And that was during the internet boom.

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

I love it when someone does the really heavy lifting for me, and my friend Mike Shedlock of Sitka Pacific Capital Management has done a wonderful job of taking that speculation of mine and putting it into a spreadsheet that helps us get a real handle on what unemployment is likely to look like for the next ten years. I am going to make use of his basic analysis and then modify some of his assumptions in the spreadsheet he provided me, in order to think about different scenarios.

For those interested, you can read Mish’s very full (and quite detailed) analysis at his blog site http://globaleconomicanalysis.blogspot. ... rough.html).

When I called the last two recessions about a year before they happened, it was not all that hard. We had inverted yield curves, falling leading indicators, and a lot of other data that pretty much pointed to a recession. Believing that we had a housing bubble and a looming credit crisis also helped my conviction in calling the last recession.

I think we are in for a double-dip recession in 2011, yet I readily admit there will be little if any statistical evidence in advance this time. This is more of an instinct call. I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

Taxing small businesses, and that is what the tax increase amounts to, is a very bad idea in a weak economy. Small businesses are where the job growth comes from. Taking money from productive businesses and giving it to government is a fundamentally flawed concept.

Now, if they decide to postpone the tax increase, or phase it in slowly, then maybe we avoid the double dip. But right now it doesn’t look like that will be the case. So, let’s quickly see what a double-dip scenario might look like. Let’s be optimistic and assume we only lose another 1.2 million jobs in the next recession, since we have already lost so many in this one (8 million and counting). And then the economy comes roaring back in 2012 with 1.5 million jobs and continues to grow rather smartly for the rest of the decade. No further recession. We absorb the tax increases and move on with our economic lives.

Unemployment under such a scenario would rise to just under 13% and stay above 10% for 8 years. Take a look at the chart and graph.

Think 13% is too dire? This week David Rosenberg said unemployment would rise to between 12-13%. The former Merrill Lynch economist was one of the few mainstream economists who called the recession and the credit crisis. The so-called “Blue Chip” economists told us at the beginning of 2008 that unemployment would peak out at 6%. While Rosie is not optimistic of late, he has a rather solid record of being right.

We are at 10.2% unemployment today. The economy lost jobs for 21 months after the end of the last recession. That would easily take us into 2011. Another million lost jobs will take us well over 11% and close to 12% (remember, you have to add in the increasing population), even without my double-dip scenario.

The letter is getting long and it’s getting late, so let me close with a few thoughts.

First, 12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Second, Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5-trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive. As I’ve noted for the last several weeks in this letter, government spending does not increase GDP over time. It is a temporary nonproductive stimulus. It takes private investment to create jobs and increase productivity.

http://www.ritholtz.com/blog/2009/11/if ... -recovery/

[SwissMrs&Pitchfire]

I don't get why Alex Jones movies and the experts in them see the historical context and analogies, but fail to appreciate their significance. The examples of Rome and Germany trying to establish world control establish a paradigm that does not translate to the U.S in this age. The U.S. is not a vehicle for the change they seek, but rather an obstacle to it, and yet the financial assumptions are that China, Japan, Saudi Arabia, and the Europeans will simultaneously try to dump the dollar. They won't because they know that it would not work, nor would they do it simultaneously (look at OPEC's attempts at coordination) someone always jumps the gun so they won't be left in the cold. They are all afraid of being left without a chair when the music stops.

They have a much better plan. In their plan they become the only ones with dollars and we beg them for them and trade them for them until they have stuff and we have dollars to service debt that then becomes worthless.

I still believe the model where dollars are weak overseas and strong domestically. We need them, they don't. They want to get stuff for them and we're willing. They will not however be very willing to give us stuff for the dollars back (they are trying to get out of their dollar positions cleanly).

When their coordination succeeds to all parties satisfaction it will be game on. I wonder why Barak is bowing to Japan and China today?

[Jason]

I don't get why Alex Jones movies and the experts in them see the historical context and analogies, but fail to appreciate their significance. The examples of Rome and Germany trying to establish world control establish a paradigm that does not translate to the U.S in this age. The U.S. is not a vehicle for the change they seek, but rather an obstacle to it, and yet the financial assumptions are that China, Japan, Saudi Arabia, and the Europeans will simultaneously try to dump the dollar. They won't because they know that it would not work, nor would they do it simultaneously (look at OPEC's attempts at coordination) someone always jumps the gun so they won't be left in the cold. They are all afraid of being left without a chair when the music stops.

They have a much better plan. In their plan they become the only ones with dollars and we beg them for them and trade them for them until they have stuff and we have dollars to service debt that then becomes worthless.

I still believe the model where dollars are weak overseas and strong domestically. We need them, they don't. They want to get stuff for them and we're willing. They will not however be very willing to give us stuff for the dollars back (they are trying to get out of their dollar positions cleanly).

When their coordination succeeds to all parties satisfaction it will be game on. I wonder why Barak is bowing to Japan and China today?

Well said! Notice in Russian forecast above the prediction about the dividing up of the US. I agree with you and think that has been a goal for sometime. Buying debt buys ownership over the assets. They would be well within their rights to claim ownership of those assets. We have nobody to blame but ourselves.

[Jason]

Additional evidence in favor of the deflationary spiral...

In today’s Wall Street Journal, there is an article titled “Returning Workers Face Steep Pay Cuts.” The article cites research by Kenneth Couch of the University of Connecticut that returning workers are taking on average a 40% pay cut from their old jobs. This is first and foremost a personal tragedy for those affected. The question we must ask as economists is why?

Econometricians will still be picking over the data a decade from now. (And of course, they will be looking at revised data, rather than the data we are viewing today. But that is a subject for another post.) One factor that must not be overlooked is that capital has been destroyed in the prior boom. The so-called bust or crisis is the revelation of those losses. Capital is heterogeneous. The capital embodied in all those unoccupied homes in Las Vegas cannot be deployed to build goods and employ workers in the manufacturing sector.

Many analysts, myself included, argue that economic recovery will involve a switch to a lower consumption path. In the process, proportionately more resources will be devoted to production of goods for rest of the world. New savings will be needed to finance that transition. But much accumulated savings have been lost due to capital misallocation. In order to be competitive in the global economy, the U.S. must become a country of lower wages. And we are witnessing that painful adjustment in real time.

The reflationists (whether monetary or fiscal) conflate cause and effect. Falling wages rates are the consequence of prior bad policies and decisions. They are not the cause of current problems. Moreover, fiscal and monetary stimulus cannot restore the lost capital. Printing money or redistributing income does not create real wealth.

Falling real wages and declining living standards put flesh on the skeleton of macroeconomic policy debates. They are the real-world consequences of bad macroeconomic policy: easy money, politically directed investment and regulatory capture. All those bad policies are being continued or enhanced. Only further misery will flow from them.

http://thinkmarkets.wordpress.com/2009/ ... age-rates/

When the Federal Housing Authority (FHA) was set up during the depression era, it was designed to help the poorest segment of the population gain admittance to the housing market. Today, with the economy in its fragile state, that agency of last resort has become the lender of first resort. Close to 30% of all homes sold this year have been purchased with FHA loans.

This rise in popularity of FHA loans has come about only within the last 3 years. As a result, Time Magazine tells us, the FHA’s current reserve funds have fallen to a mere $3.6 billion, even though its portfolio of loans has risen to $685 billion.

This disparity in numbers means that the reserves of the FHA, which are supposed to stand at a 2% ratio, have dropped below that designated bottom. Today, the FHA reserves are at .53%. As a result, according to a spokesperson, the FHA is considering a number of changes to the current loan program.

One of those changes may include an increase in the MIP (monthly insurance premium). The other change, which is even more controversial, is raising the minimum payment from 3 ½% to 5% or more.

A small group of FHA policy critics have suggested that the minimum down payment should be raised to 10%. Should this occur, it would defeat the main purpose of the FHA, which was to help poor people to purchase homes. As my fellow realtors would likely attest, such a change in rates would effectively eliminate at least 80% of today’s home buyers.

A looming problem is that FHA loans from 2006 and 2007, which were often backed by down payments made by sellers, rather than the buyers, are more than 2x as likely to default as those where the buyer is fully responsible.

An additional worry is the downward trend in investors buying up mortgage backed securities. In June of this year, investors purchased $260 billion of them. However, as of September, that number had moved down to $132 billion. If that rate of drop continues, there will be a deficiency in the market at around the same time the $8,000 mortgage tax credit expires at the end of April.

Despite this gloomy scenario, the FHA still has $31 billion in overall reserves, according to CNNMoney.com, and Shaun Donovan, Housing Secretary, says the FHA would cover all claims. After all, it is backed by the U.S. Government; and that Government support is precisely what is needed to keep the housing market in motion until the economy gets back on its feet again.

http://www.huliq.com/1/88774/fha-loans- ... guidelines

http://www.youtube.com/watch?v=UpgZx-9FLbE

[Jason]

http://www.occ.gov/ftp/release/2009-114a.pdf

Bottom pg 5 Credit derivatives....notice chart pg 6 credit default swaps - excerpt below

The notional amount of derivatives contracts held by U. S. commercial banks in the second quarter increased by $1.5 trillion, or nearly 1%, to $203.5 trillion. Derivative notionals are 12% higher than a year ago.

The five banks with the most derivatives activity hold 97% of all derivatives, while the largest 25 banks account
for nearly 100% of all contracts. [See Tables 3, 5 and Graph 4.]

pg 12 & 13 have nice charts on top five banks...notice how GS came out of nowhere

pg 15 had very nice chart

pg 18 notice the maturity is shrinking rapidly

pg 22 table 1 notice the numbers are in millions

http://www.occ.gov/ftp/release/2009-118a.pdf

pg 8 short sales and foreclosures

pg 14 performance stats (1,093,791 mortgages - 90 or more days delinquent), notice steady increase in seriously delinquent and number of foreclosures in process - those trends hold solid through the various categories of mortgages

pg 18 breakdown by risk category - still climbing

pg 27 level of modifications

pg 29 Notice despite loan modifications....still defaulting (20-30% 60 days overdue within 3 months or 90 days)...meaning modification didn't result in payments on the loan

pg 37 & 38 Notice increase in prime foreclosures both initiated and in process

[Chip45]

All this talk and analysis about deflation, hyperinflation, currency collapse - will it happen, how, when, how much ... yadda, yadda, yadda. I've been reading this stuff for well over a year now. I've had it ... now here's a thought ... how about lets follow the counsel from the ONE that knows what is gonna happen and when - yep, you guessed it - the Lord ! What did He say for us to do? Let's see, buy gold or silver? Hmmmm - get out of debt, store life sustaining essentials, get strong spiritually, emotionally, physically. At least get your financail houses in order. The debt message was not (I conclude) solely for individuals but also comapnies and governments/nations - get the debt well under control. So what can each of do, individually, with so many plausible doom & gloom scenarios pressing upon us? What we've been told to do and then ... "if ye are prepared ye shall not fear".

[Jason]

All this talk and analysis about deflation, hyperinflation, currency collapse - will it happen, how, when, how much ... yadda, yadda, yadda. I've been reading this stuff for well over a year now. I've had it ... now here's a thought ... how about lets follow the counsel from the ONE that knows what is gonna happen and when - yep, you guessed it - the Lord ! What did He say for us to do? Let's see, buy gold or silver? Hmmmm - get out of debt, store life sustaining essentials, get strong spiritually, emotionally, physically. At least get your financail houses in order. The debt message was not (I conclude) solely for individuals but also comapnies and governments/nations - get the debt well under control. So what can each of do, individually, with so many plausible doom & gloom scenarios pressing upon us? What we've been told to do and then ... "if ye are prepared ye shall not fear".

Yes that is the basis for individual preparation. Still fun to track it and try to guess what's going to happen next.....

[SwissMrs&Pitchfire]

That's what we've been reiterating the whole time!

Mish has a great post on unemployment up fwiw. Some real gems in the comments as well.

[Jason]

That's what we've been reiterating the whole time!

Mish has a great post on unemployment up fwiw. Some real gems in the comments as well.

Yeah that was good post. Big Picture expounded on it further with pretty good analysis. I think I posted that earlier on this thread...yep above.

Here's some tidbits from today's post...

“Commercial real estate prices have fallen 33% this year and 45% from their peak. Greater than 55% of commercial mortgages are underwater. Some analysts say that as many as 2/3 of the loans may be underwater.

As many as 65 percent of commercial mortgages maturing over the next few years will not be able to qualify for refinancing because of the drop in the value of the underlying property.”

The MIT Real Estate Center said that commercial property prices has dropped almost 42% over the past 2 years.
• As a result of that drop, about fifty-five percent the $1.4 trillion commercial mortgages that will mature in the next five years are underwater.
• The delinquency rate for commercial mortgages climbed to 5% in October. A year ago the delinquency rate was just 0.77%.
• About half of all commercial mortgages sit on the balance sheets of smaller banks. So the massive number of bank failures this year is significantly attributable to losses from commercial real estate.
• Late last month, one of the largest commercial real estate finance companies in the world filed for bankruptcy.

Those quotes are taken from another site he links to in his post...
http://www.ritholtz.com/blog/

Here are some further excerpts with link below -

As a result of this regulatory favortism, 60 percent of commercial mortgages were securitized. The remaining 40% tend to be the riskiest and most unique mortgages that couldn't be packaged with other loans. So any bank holding lots of whole loans is probably holding the riskiest loans.

Two key determinates of commercial real estate prices, vacancy rates and rental income, tend to track the broader economy. If jobs are vanishing, it means that there is a lower demand from businesses for commercial space and less consumer retail spending. Until new jobs are created and consumers start spending more, the trajectory for commercial real estate prices is straight down.

Commercial real estate borrowers are even more likely than home-owners to "just walk away" when they discover they are underwater on their mortgages. After all, the mortgage is usually in the name of a business rather than an individual and the business doesn't have the same financial or emotional attachment to the mortgage. What's more, commercial mortgages are typically structured with balloon payments at the end of their term, meaning that few owners have much equity in their properties.

There have been virtually no new CMBS issues this year. This is a sign of how little investor interest there is in commercial real estate. All those institutional investors who piled into the commercial real estate space during the boom have fled.

But the lack of a market in CMBS is more than a signal of how much investors hate commercial real estate. In a very mechanical way, it means there is much less money available for commercial loans. Remember how the Basel I capital requirements acted to inflate the market when securitization took off. In the absence of securitization, they act in exactly the opposite way--forcing a contraction. Where a well-capitalized bank with $4 billion in reserves could invest in $250 billion worth of CMBS, it can only hold $50 billion in individual commercial loans. In short, the lack of a CMBS market automatically reduces the credit available for commercial mortgages by 80%.

Fortune magazine recently reported that banks should have booked losses on around $110 billion of defaulted commercial real estate and construction loans but so far they have accounted for only about a third of those cases.

Fortunately, this time around we have an advantage. We know how a contained credit problem can morph into a monster that destroys financial institutions and cripples the economy. Living through the housing bust may make us better able to cope with the commercial real estate bust. At least, it's pretty to think so.

http://www.businessinsider.com/the-guid ... a-bubble-1

[mattctr]

Markets are up and the dollar is down = not anything new.

However, gold and silver have been exciting to follow, especially the past few months, and today is yet another banner day: http://www.kitco.com/market/

Ron, Rand, Peter, Geralde, and the other PM advocates must be feeling pretty good on a day like this...

[Jason]

Ricardo Caballero says that when there is a sudden failure of the financial system, governments should not let "fuzzy moral hazard reasoning" stop them from providing "massive" amounts of "credible public insurance and guarantees to financial transactions and balance sheets." He argues that "it is neither credible nor desirable to refuse to assist the private sector":

Sudden financial arrest, by Ricardo Caballero, Vox EU: “Sudden cardiac arrest (SCA) is a condition in which the heart suddenly and unexpectedly stops beating. When this happens, blood stops flowing to the brain and other vital organs…. SCA usually causes death if it’s not treated within minutes….” – US National Institute of Health

There are striking and terrifying similarities between the sudden failure of a heart and that of a financial system. In the medical literature, the former is referred to as a sudden cardiac arrest (SCA). By analogy, I refer to its financial counterpart as a sudden financial arrest (SFA).

When an economy enters an episode of SFA, panic takes over, trust breaks down, and investors and creditors withdraw from their normal financial transactions. These reactions trigger a chain of events and perverse feedback-loops that quickly disintegrate the balance sheets of financial institutions, eventually dragging down even those institutions that followed a relatively healthy financial lifestyle prior to the crisis. In this article I draw on the parallels between SCA and SFA to characterize the latter and to argue that a pragmatic policy framework to address SFA requires a much larger component of systemic insurance than most policymakers and politicians currently support.

http://economistsview.typepad.com/econo ... rrest.html

Remittances are transfers of money by foreigners to their home countries. According to Wikipedia, these cross-border payments constitute "the second largest financial inflow to many developing countries, exceeding international aid." In 2008, for example, Mexico's central bank reported that money sent to that country from Mexican immigrants in the U.S. totaled $25 billion.

However, that sum was down 3.6 percent from the year before, which was the first drop since officials began tracking the money in 1995. But things have not improved. Since then, the ongoing downturns in housing and other industries where immigrants -- legal or otherwise -- have long comprised a sizeable share of the workforce have spurred a noticeable drop in remittances.

In fact, based on the following New York Times report, "Money Trickles North as Mexicans Help Relatives," it appears that some of the funds that used to flow southward may well be moving in the opposite direction:

http://www.financialarmageddon.com/2009 ... rmageddon)