A Glimpse Into the Abyss

I must confess a certain fondness for the apocalyptic sort of financial writer, provided they don’t lose anchoring with reality and fall into the tinfoil hat category. Nouriel Roubini is the case example of an economist who favors a baroque, melodramatic style, and despite sounding more than a tad unhinged at points, he has proven to be the most accurate seer of our unfolding financial mess.

Another writer who almost seems to relish describing how bad things can get is Ambrose Evans-Pritchard of the Telegraph. Pritchard has been proven correct, despite catcalls on this blog, in his assessment that the oil price runup was overdone and his early recognition that deflation, the product of deleveraging, and not inflation, was the pressing economic risk.

Evans-Pritchard put up two articles this week, the first “Germany takes hot seat as Europe falls into the abyss” and “Russia and Brazil crumble as commodity prices crash.” Both are suitably bone chilling, First, excerpts from the EU piece:

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.

The US commercial paper market is closed… The interbank lending market has seized up….. Healthy companies cannot roll over debt….

As the unflappable Warren Buffett puts it, the credit freeze is “sucking blood” out of the economy. “In my adult lifetime, I don’t think I’ve ever seen people as fearful,” he said.

We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough….

Yves here. That turn of phrase is not off target. Paul Krugman has said that interventions in large liquid markets are too small to force a change in valuation by virtue of the sheer weight of buying. They instead serve as a slap in the face, to (hopefully) make investors realize that they are caught in a funk. But Krugman also acknowledged that in this case, the markets may not be irrational.

The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.

The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.

It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.

Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.

The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.

Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.

Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.

In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.

Her comments echo word for word the “we’re alright Jack” attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism….

As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.

“The US government has a technology, called a printing press,” said Fed chief Ben Bernanke in November 2002. (His helicopter speech).

In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards. As Bernanke put it, the Fed can “expand the menu of assets that it buys.”

There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.
Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.

But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance.

This is a key point missed in many analyses.

This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.

The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.

The Fed can now hope to pursue monetary stimulus “a l’outrance” without being slapped down by the currency, debt, and commodity markets. Take comfort where you can.

And now to key bits from the commodities article:

Oil, grains, and industrial metals all crumbled as the week began despite the passage of the Paulson bail-out plan in Washington and dramatic moves by European governments to shore up their banking systems, compounding the steepest commodity crash in over half a century.

The big exception yesterday was gold, which surged $34 to $864 an ounce on safe-haven buying as the markets came face to face with the unsettling reality that the euro is no healthier than the dollar, and perhaps sicker…

Hans Redeker, currency chief at BNP Paribas, said investors fear that no one is in charge of Europe’s monetary union. “Who is Mr Europe? What is his telephone number? There is no such thing. We have a cancer eating at the system because even healthy companies cannot roll over their debts, yet the politicians still don’t understand the risk,” he said.

The sudden shift in commodity sentiment has led to a massive withdrawal of funds from frontier markets, triggering stock market routs across Latin America, Asia, and Eastern Europe. The MSCI index of emerging markets fell 11pc yesterday in its worst day ever.

Russia suspended trading after Moscow’s Micex index crashed 19pc in its biggest one-day drop since the 1998 default…Brazil shut the Sao Paulo exchange after the Bovespa index crashed 15pc in panic trading…Mexico’s Bolsa was off 7pc; India’s Sensex was off 6pc.

The Goldman Sachs Commodity Index has tumbled a third since May. Chartists say it is now perched precariously on its seven-year line, threatening to challenge the “supercycle” thesis that became so fashionable at the top of the bubble.

“The boom was fuelled by massive speculation,” said Charles Dumas, chief strategist at Lombard Street Research.

“Commodity derivatives in the spring had a face of $10 trillion, so it doesn’t take many bulls to sell and send prices crashing. Remember all those clever bankers saying this was the new investment medium, ‘uncorrelated’ with either assets? Well, it’s correlated now – downwards,” he said.

The Australian dollar, the beacon of commodity sentiment, went into near-meltdown yesterday, dropping 9.7pc against the yen in the largest one-day drop on record as Japanese investors dumped their Uridashi bonds and scrambled to close bets on high-yield economies – known as the carry trade…..
Albert Edwards, global strategist at Société Generale, said China depends on exports to US and Europe for its lifeblood, and could face banking problems of its own.

“I think China is going into recession as well. This is going to catch investors off-guard.”

Yves here, Note most forecasters call for China’s growth to slow from its recent pace of 12% to 8%. The idea that it could have a contraction is on just about no one’s radar right now.

Stephen Jen, currency chief at Morgan Stanley, said the “glowing reputation” enjoyed by emerging markets during the global boom was a deception caused by the easy-money largesse of the credit bubble. Strip that away, and the picture looks very different.

“They are very vulnerable to a U-turn in capital flows,” he said….
There are fears that Russia could slip into a downward spiral if oil drops to $50 a barrel, which is now the lower end of Merrill Lynch’s forecast.

Moscow has become addicted to the oil bonanza, ratcheting up spending so quickly that it may now need prices to stay above $90 to fund spending plans. Veteran analysts say they have seen this movie before.

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  1. Anonymous

    Again, read this quote –
    ‘…[Merkel] is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.’

    Are you seriously recomending the writing of someone who basically says that those demanding an accounting of, and claims against, those that created the abyss we are staring into are crossing a line into caricature, or worse?

    Because that attitude will find an immense amount of support in certain Wall Street / City addresses – the Lehman bonus/bankruptcy shuffle comes to mind – reportedly 2.5 billion reasons to favor the idea that those collecting those bonuses are entitled to them, instead of having that money distributed to the creditors. This isn’t socializing the losses – this is simply take the money and run.

    His writing is enjoyable in much the same Kunstler’s is, and there is value in both. But to not recognize their deep biases can overwhelm their analysis is to somewhat miss the point.

    I consider Evans-Pritchard as a decent source for insight into a particular brand of thinking in the UK, again in similar fashion to Kunstler in the U.S. – but both are better read as a contrast, illuminating situations which other people refuse to see.

  2. eh

    It could at least have signalled an end to monetary tightening.

    Maybe. Or perhaps also consistently understating inflation, or downright lying about it, as the US government does, is ‘not how an ally ought to behave’. Given the rise in commodity prices throughout the early part of this year — and were US based hedge funds inordinately responsible for that? — it is hard to argue there was little or no reason to be concerned about inflation, e.g. vis-a-vis an economic slowdown. And how about the dishonest behavior some banks? Delaying acknowledging the extent of their balance sheet problems until that was just no longer possible, which made it all that much harder for central banks to see the extent of the problem. Etc etc.

    In any event, the dollar is barreling higher in the face of the current interest rate discrepancy. And it’s not apparent low rates have really materially helped the US. Although as anyone with savings can tell you they have really kicked responsible savers in the teeth.

  3. a

    Does anyone remember the squirrel at the beginning of Ice Age 2? He tries to stop water from bursting out of the wall of ice, first with his fingers, then with his toes, and finally with his mouth, until the pressure of the water blows him away like a balloon.

    That’s the Fed.

  4. Douglas

    “Pritchard has been proven correct, despite catcalls on this blog, in his assessment that the oil price runup was overdone and his early recognition that deflation, the product of deleveraging, and not inflation, was the pressing economic risk.”

    “Deflation” is when the dollar goes up in value against a basket of goods and services.

    “Deflation is the opposite of inflation. Therefore, under the usual contemporary definition of inflation, ‘deflation’ means a decrease in the general price level.”


    Is there any one thing anyone out there is purchasing that is going down in price? Is your dollar going further?

    Where is this “early recognition” manifesting itself?

    What housing and stocks are going through – isn’t that just a bear market, an asset class that is getting marked down that might have been overpriced to begin with?

  5. Yves Smith

    Anon of 4:17 AM,

    I think you are misconstruing E-P’s point. That section of the piece is about Euro dynamics that he regards as dysfunctional. There is NO mention of Wall Street or City miscreants.

    He is referring to the fact, that he harps on in the piece, that Merkel does not want German taxpayers helping to bail out, say, Italian banks. This is basically a demand that countries/national regulators eat their bad cooking.

    The problem is that while that is a VERY valid point of view in non-crisis times, it will likely conflict with the EU promise (promise, mind you, no plan) that they wouldn’t le any big banks fail. And after seeing what havoc the Lehman bankruptcy caused, everyone should understand that a collapse of that scale must be forestalled if at all possible (note that may not mean a bailout of the whole entity; it could take the AIG form of a very punitive loan, or a sale of key units so the amount liquidated would be less traumatic).

    Wolfgang Munchau pointed out in a FT piece we posted yesterday that the banks that failed so far and needed cross border solutions happened to have pragmatic countries involved. Germany has signaled that it may not play ball if, say, UBS, which is way too large to be handled by any one country, falls over. That’s his beef.

    I’ll grant you the way he worded it could easily be misconstrued.

  6. Yves Smith


    Look at commodities. They are falling across the board, save gold, because the cognoscenti expect massive efforts to reverse the deflation, which will debase currencies. Even the runup in grains has been reversed to a degree (that isn’t apparent in the stores because many producers held off price increases as long as they could, so the timing does not reflect the realities on a producer level). I don’t follow the ags closely, but I think only a couple are within hailing distance of their highs (maybe soyabeans?)

    Interest rates are collapsing. Another deflationary sign.. People I know are accepting much less to get work, both for full time work and professionals may be holding their nominal rates but not charging all their hours, another deflationary sign. You will see more in the way of falling wages.

    And you omit the fall in housing prices. Rentals initially strengthen as people who might otherwise buy sit on the sidelines, but in Manhattan, and I expect other markets, rental prices will fall (they have in every housing downturn here, even mild comparatively mild ones like the early 2000s).

  7. Anonymous

    Yves, you’re doing yourself a disservice.

    Re: “Yves here, Note most forecasters call for China’s growth to slow from its recent pace of 12% to 8%. The idea that it could have a contraction is on just about no one’s radar right now.”

    Its been on the radar here courtesy of yourself, regularly until, in terms of immediate urgency and importance, the banking/credit crisis has taken over. Its just on the back burner as despite the imprtance of China’s economic health, its not as immediate as the financial crises.

    I am a China watcher and remember the last post on China, maybe 4-6 weeks ago, referring to a proposed economic stimulus package (c. 200bn???? from memory).

    You’re usually ahead of the eight ball!

  8. aw70

    Ireland and Greece have had to rescue all their banks.

    The inaccuracy of this statement alone should give anyone pause who thinks this man is a reliable source of information.

    Ireland and Greece merely announced that, in the event of a bank collapsing, they would guarantee the deposits. While it is debatable whether this was a prudent move, or even one that is remotely fulfillable, one thing is certain: this is not equal to banks in these countries actually collapsing.

    To me, Mr. E-P is too alarmist by several notches, which, given the current dire situation that I am well aware of, is quite an accomplishment. And we all know what should be done to people who shout “fire!” in a crowded theater (and a crowded theater full of frightened, disoriented people, at that).

    Just my two cents…


  9. David Habakkuk

    Yves Smith,

    You quote Ambrose Evans-Pritchard’s comment that the risk of a dollar collapse is ‘one for the distant future’, and describe this as a ‘key point missed in many analyses.’

    However, responding to Matt Dubuque in an earlier thread, you remarked that:

    ‘Actually, an object of policy at this point would be to trash the dollar. That is a consequence of reflating. In 1934, the example Bernanke takes to heart, the dollar fell by 40% and the US began to show some growth again.’

    The precise force of the suggestion that an object of policy ‘would be’ to push the dollar right down is not quite clear to me. Is the suggestion that one has reason to believe that this is actually Bernanke’s covert objective at the present time? That it is a contingency plan he has? That as events develop it is what he is likely to want to do? Or what precisely?

    Obviously one is dealing with an evidential problem here, in that if Bernanke is thinking of pushing the dollar very far down, he might very well not say this, given that he could very well not want to see devaluation happen immediately and chaotically. But it may be perfectly legitimate to infer from his writings on the lessons of the Depression that this is what he thinks.

    If this is so, then the policies of those foreign central bankers who as Brad Setser has demonstrated have not only been maintaining but increasing their holdings of dollars would seem to be based on a failure to grasp the covert agendas of the Fed. In which case, if they wised up, one might see some very sudden and dramatic changes — because obviously, it is those who made for the exit first who would lose least from the devaluation.

    And in this case, the behaviour of those who at the moment appear to regard the dollar as a ‘safe haven’ could look rather like that of people in an cinema on fire, who think they are heading for a safe exit but actually head towards the flames.

    If then Bernanke does have a covert ‘devaluationist’ agenda, then what we may be dealing with is a situation where exchange rates are shaped by such complex and contradictory pressures that any prediction about how things will develop beyond the very immediate future is impossible. Putting the point another way, what is the distant future now? Five years? A year? Three months?

    Last but hardly least: if the dollar did devaluate by 40 per cent or thereabouts, how significant an effect would that be likely to have on U.S. inflation? Would it in any way derail the now widespread expectation that deflation is more likely than inflation?

  10. Anonymous

    ‘He is referring to the fact, that he harps on in the piece, that Merkel does not want German taxpayers helping to bail out, say, Italian banks. This is basically a demand that countries/national regulators eat their bad cooking.’

    I do understand that removing the context from a larger quote leads to certain difficulties, but Merkel and the broader German political culture are not only discussing the EU, as implied in the article.

    They are taking much more direct aim at Wall Street / the City, which is disturbing if you happen to reside in those capitals of capitalism. The EU is a strange beast, and it may expire in the coming changes which are unavoidable, if perhaps not predictable, but one thing the EU isn’t is a supporter of unbridled capitalism that allows a few executives to enrich themselves at the expense of everyone else, regardless of longer term costs.

    And not to harp on a point too badly, especially at a blog which provides so much intelligently presented information, but UBS falling apart concerns Germany or the ECB about as much as Lehman did – that is, it is a problem, but not primarily theirs. At least in the sense of their primary duty being to those in the eurozone.

    There is a real problem in using the term ‘Europe’ to describe what is happening currently – neither the UK nor Switzerland basically have more to do with the euro than any other major currency. This habit is especially bad when describing ‘Europe’s’ problems in Iceland, or Poland, or Russia.

    This problem won’t go away, but the British press are not a help in approaching it – because at least when they describe Europe’s problems, they means those outside of the UK’s borders. Which means when an American reporter aggregates reporting about Europe and the UK, the story then talks about ‘Europe’s problems,’ without recognizing that even in British eyes, this is utterly incorrect.

    Which is why Münchau’s article, even more dire than Evans-Pritchard’s in as number of ways, at least has a basis in a reality recognizable to an American living in Germany.

    There are undercurrents going on in Europe which may not be clear to an American – but London and Frankfurt are now fighting for primacy, embodying very different philosophies, and most of the cards are in Frankfurt’s hands (the Bundesbank was certainly successful in the past, and having a manufacturing economy beats having nothing but repackaged debt to sell). Unless the approaching hurricane blows the entire game away, which is no longer a mere fantasy.

  11. Anonymous

    "I must confess a certain fondness for the apocalyptic sort of financial writer, provided they don't lose anchoring with reality and fall into the tinfoil hat category." — Yves Smith

    Here is the common, deliberately ambiguous "halfway house" stance of the closeted D&Ger (Doom & Gloomer) who has to maintain public respectability. Me, I've got Roubini's autograph on my tinfoil hat, and wear it proudly even in the shower (tinfoil don't rust).

    Deflationists, like the poor, will always be with us. During the spectacular, 7-fold runup in oil prices (and many other commodities) since 2001, they complacently claimed that "the core PCE is under 2%; there's no inflation." But now that the overdone price runup is disinflating, they're all howling "deflation." Spot the asymmetrical "logic," which of course supports the conventional wisdom of always and everywhere continuing to inflate the pyramid.

    War is inflationary, period. Show me a deflationary war. Weimar Ben has gone flipping berserko. And I fear that late at night, in his pajamas behind closed doors, Bernanke lights voodoo candles and puts on tapes of Roubini, warning of banks going "belly up." [Ben, lying face up, arches his back accordingly, as if Roubini were his yoga guide.]

    Mark my words: they are going to blow up Bretton Woods II. The dollar cannot continue to function as a reserve currency without a sharp increase in yields on dollar instruments … and maybe not even then.

    The deflationist rabble barks, but the golden caravan rolls on!

    — Juan Falcone

  12. Scott

    FDR’s 40% gold revaluation (dollar devaluation) isn’t available to Bernanke (or more to the point, the Treasury, which has the remit for the dollar). The only way to acheive it is closing BW2. But who is going to share in the 40% appreciation? The euro? The dollar will retain value as a consequence of the scramble for liquidity. But if the US medium term fiscal position is untenable , then we can only see US Treasuries as a Ponzi scheme.

  13. Richard Smith

    Anonymous of 6:22,

    Agree with you about the meaning of Merkel’s comments. If they are targeted at anyone it would be at the UK’s very Anglo Saxon unbridled banks – who would have benefitted from the EU support Brown was trawling for at the w/e and are now going cap in hand to the UK Treasury (ignore the denials now coming out – Bloomberg and Peston can’t have hallucinated the same story).

    Nice exposition of the semantics of ‘Europe’ BTW. Still trips me up sometimes when I read even top class commentary (…”what do these guys mean by Europe, again”…)

  14. Anonymous

    With all the banking problems, is it a bad thing if I think the most trustworthy people right now are the Swiss?

  15. Richard Kline

    Let us see if we can agree on on fundamental as of today: the shadow bank-a-like system is in full and likely unstoppable deleveraging. The dead canary signal on that is the collapse of emerging markets which have _really_ ratcheted up this week. Shadow bucks are just that, mostly dollars or swaps into dollars. As that unwinds, money pours back into dollars. —_As_ that unwinds, but then . . . .

    I cannot see any scenario where an achieved delever is ‘good for the dollar’ into the mid-term. And that’s without considering the Egads volume of debt Ben and Hank look about to issue in the name of the US. The point where we are really, really going to need support from overseas for the dollar is just the point they will be needing all their resources to repair their own blowout damage and madder than Hell at the US. No one is looking toward that day at the moment, and that’s understandable. When all is flame and smoke, nobody looks past the murk.

    And Anon above, your call that London and Frankfort are presently having a jaw about What Is to Be Done is a good one, and the concise summary on this, yes. And Frankfort holds most of the cards as you say, at least until the chips start to melt if things go that far at which point the players’ hands don’t matter much. The sad part of that, though, is that Merkel isn’t an activist. If she were taking the lead on the shape of the intervention, no one could really stand in her way; instead, she’s dragging her feet and letting others try to set the agenda. London is going to lose at the end of the day, that seems certain, but that day will be prolonged by the regrettable lack of leadership from Merkel, which if one has followed her career is par for her handicap of mediocrity. Sarko’s an activist, but his head is filled with American junk ideas which are the very _last_ thing of use at present. Brown has absolutely no credit anywhere with anyone. And Berlusconi . . . . let’s not even go there. Oh well, we fight a firestorm with the leadership we’ve got . . . .

  16. Matt Dubuque

    The surge in the dollar being attributed to an unwind in the carry trade is overstated.

    If that were true, you would see much more of an inverse relationship between the path of the dollar and the path of the yen.

    Instead, you are seeing a fair amount of correlation.

    Matt Dubuque

  17. James Kwak

    “Shock and awe” may be necessary given that policymakers always seem to be a step behind in this crisis; in only 2 weeks the Paulson plan went from overwhelming force to a pop gun. The problem is that policymakers have been steeped in a culture of incremental change – 25 bp changes, not upsetting markets, etc. – for decades and have difficulty adapting. Simon John discusses this further on our blog at http://baselinescenario.com/2008/10/06/incrementalism/.

  18. Charles Butler

    Here we go again…

    “It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.”

    Correct me if I’m wrong, Yves, but was your take on the Fed cut not that it was the wrong medicine for the disease, or some such?

    Please advise as to your current position.

  19. David Habakkuk

    Richard Kline:

    Do you have any view as to how long this ‘unstoppable deleveraging’ of the shadow banking system is going to take? Or is that an impossible question?

  20. Anonymous

    “I must confess a certain fondness for the apocalyptic sort of financial writer” Gee, Yves, that is a surprise to us …

    I enjoy reading Ambrose Evans-Pritchard of the Telegraph, for my daily fix of fear and loathing. But Ambrose is so wrong on so many things. Ireland and Greece had to save all their banks? Greece, for one, has not had to pay a cent, unlike Britain or the US. Greek banks are overcapitalized, with 80% of their liabilities the deposits of small savers in a country with about 10% savings rate. They have extended to other Balkan countries where savings rates are also high.
    Ambrose is anti-Euro and has the British-tabloid attitude toward the Club Med countries. He brings up Greece’s current account deficit, being clueless about the effect of shipping and tourism and construction financed from abroad.
    Even I can venture a prediction, although all of Europe will go through a recession, the suffering in Britain will exceed that in Spain, Italy, or Greece.

  21. Anonymous

    The ECB has been filling up on all sorts of tat from "Granite" A&L etc etc. for over a year now via Ireland.

    Angie shouldn't want to interfere in UK govt's or others interference (would they really like it?) and who would like to take the blame if it went CDO- shaped?

    The markets on the other hand seem to be getting quickly out of the way the mooted (and precipitous) UK plan (which looks cheaper than US)


    and any marks (not the D ones) that are set to fall though onto it….

  22. mxq


    I think Mish has a much better description of inflation/deflation than Wikipedia.

    Commodities “inflation” was the result of real world demand, grossly exacerbated by the “securitization” of them into an asset class. As hedgefunds and IB’s exit that trade en masse, this last outpost of inflation will subside.

    That said, we’ve got asset deflation on an epic scale.

    All of this money that the fed is pumping into the system is a fraction of the losses that are being taken and/or hidden on and off balance sheets around the world. In addition, the money that the fed is indeed pumping into the system is supposed to be multiplied (by credit), but its not, b/c banks aren’t lending b/c they are saving powder for the cds payout nightmare, among other things.

  23. doc holiday

    FYI: Governments, not bankers, are to blame


    American commentator John Hussman says the TARP package now approved by Congress wastes taxpayers money without addressing the fundamental solvency problems.

    “The government is taking on financially non-viable securities and warrants on common equity, while failing to improve the capital position of these financial companies at all (unless it overpays),” he says.

    The US government should have gone the same route as Buffett – “provide capital in return for a financially viable security that is senior to common shareholder equity, have it accrue a relatively high rate of interest, and allow it to be repaid early (Buffett’s preferred is callable by Goldman) as soon as the financial institution can secure cheaper financing.”

  24. Anonymous

    I wouldn’t get to excited about short term trends, it’s the long term that counts.

    Mish likes to think the outstanding debt sucks up all the cash infusions so it is deflationary. For that to happen you need liquidation where debt falls off the books. That’s not happening. Debt is being hidden and moved around. Until we get liquidation the trillions being injected cause price inflation which is just beginning.

    Banks are not allowed to fail and deposits are guaranteed because the ensuing meltdown would/will be unbearable.

  25. michael

    Thanks Yves.
    I would add Peter Schiff, although he is a little more in the decoupling and a little less in the deflation camp than events. However medium term he might be right.

  26. Anonymous

    A question: as I understand it, the real estate bubble (and next the commodities bubble) was caused or fueled by the extreme low interest rates set by Mr. Greenspan.
    So if we now know what problems this has caused, why are people still calling for the same low interest rates? Are we not going to simply fuel the next bubble with extreme low rates?

  27. Anonymous

    I think it was Juan who said the next bubble is cash.

    I say gold. silver and miners.

    Treasury is in the housing business, insurance business and now entering the derivatives business.

  28. Richard Kline

    So Dave Habakkuk, how long will it take? Until it’s done. It’ll be done when we have a clear view of which large financial firms are in fact _solvent_. There is money out there, and it makes itself bigger by being lent out: the problem is, to whom? The authorities refuse to do triage and so make plain who’s got it and who not, so this will be drawn out. And leverage allowed a great many firms to take a toxic dose of risk.

    We won’t have anything that looks like normalcy for at least a year, to me, but that’s wildly optimistic; say relatively solvent economies in a year. Took five years in the US, 29-34. There is Yves’ separate post on a summary perspective of ‘modern crises’ of the last fifty years. That gives some real background data on ‘how long.’ I doubt the US gets its system up and running for three years minimum, and if we kill our currency its reset to Year Zero, and count over. Not to be pessimistic or anything . . . . .

    I’ve never operated in a barter economy before. Maybe I’ll buy a dory and go crabbing.

  29. Sergei

    Hi Yves,

    In China, the economy does not have to contract, ie. have negative growth, for the country to experience recession. Due to large annual growth in labour force, a growth rate below 6% would lead to large increase in unemployment and can be classified as a recession.

    China’s trend growth rate is probably around 9%, ie. a growth rate consistent with little inflation. A growth rate significantly below that rate will feel like a recession to a lot of people in China.

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