Peter predicts that the dollar will plunge because America’s phony economy is coming to an end. He predicts that oil and food will go higher, and that Democrats will sweep the elections in November. He says that the fundamentals have never been worse. America is already in a recession, the government numbers just don’t show it.
Peter says that 2008 was the worst year “ever” for stocks, but he thinks that they will be headed a lot lower in 2009, 2010, and 2011. Everything that Obama has promised is going to be destructive to the entire U.S. economy. As to Bernanke being a “student of the Great Depression,” Peter says, “if he were my student, I would have flunked him.”
Peter as usual gives his incisive and critical view of the policies which the US government and FedRes are implementing. Interesting perspective on the 1st Great Depression which you don’t hear often. The New Deal, Hoover, Roosevelt… what really happened ! Was it because the government did not do anything? Or was it because they interfered too much with the corrective process that was supposed to weed out insolvent and bad companies?
Listen to Peter yourself.
- China’s central bank has announced a pilot program for the settlement of overseas trade in Chinese Yuan instead of the US dollar. In Yuan-settlement test to start :
The People’s Bank of China will expand financial cooperation with overseas economies and “properly deal with the global financial crisis,” the central bank said.
“We’ll actively join international efforts to tackle the global financial crisis while safeguarding national interests,” the central bank said.
China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China’s two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.
Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations. (ASEAN)
Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said. The dollar’s exchange rate has become more volatile since the global financial crisis began.
- This is a sign that the Chinese government is increasingly concerned about the health of the USD. The amount of debts in the US economy at all levels mean that a US default is highly likely in the near future.
- Many countries are taking steps quietly to protect themselves when the USD collapses. International trade is an area which will be affected drastically as trade settlement worldwide is mainly in USD. So this move will allow trade between China and its trading partners to proceed smoothly when the USD collapses. It is also obvious that the scheme can be expanded to any countries.
- Trade settlement in Yuan (RenMinBi) ? Why not ? With the FedRes engaging in massive Quantitative Easing (just another term for electronically printing money out of thin air), do we believe the USD has great intrinsic value? Backed by the full faith and credit of the US government which is bankrupt?
- Paul Krugman, Nobel prize winner 2008, has an Op-Ed in New York Times, in which he says :
The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.
- Yes, it is the beginning of Great Depression 2.0. So far all the monetary policies : interest rate reductions, increase money supply have not been able to stem the tide. The financial tsunami has struck and world economy has plunged.
- Krugman says :
Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.
- Monetary policies are not working so :
The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.
- Obama undoubtedly wants a huge (US$ 1 T??) fiscal stimulus. Will this work? I am not sure. US economy may need a lot more than US$1 T . Will Congress pass such a stimulus plan?
In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years.
More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.
- By the time the Bill is passed it will be too little too late. America still has to face the reality : How are we going to pay for this ?? We are already US$55 T in debt .
- America will simply hyper-inflate away all their debts. USD will collapse. US Bonds will be unwanted.
- 10 yr US Treasury yield has retraced from a low of 2.08% in Dec 18-19 to 2.51% yesterday. The MACD is clearly pointing to higher yields ahead. 30 yr Bond yield has also retraced from a low of 2.53% to 3.04%. (When bond price goes up the yield goes down. Inverse relationship.)
- Is the treasury rally over? It remains to be seen. I would tend to agree that it is over. The rally from 4.0% yield to 2.08% in 6 weeks is best described as irrational and herd instinct behavior.
- In Bond Bubble Bursting?, Captain Hook has this to say :
The Fed has revealed the level of panic they are in behind the scenes by cutting rates to zero and promising unbounded quantitative easing. Here, it should be noted that based on remarks from the Fed Policy Statement Tuesday, quantitative easing is now set to go beyond the bailout style monetiziations of financials that have primarily characterized re-inflation efforts under the gaze of Bernanke and Paulson so far to include just about anybody who needs ‘social assistance’, which apparently includes all degrees of bad investors / speculators these days. Make a bad investment. No worries if you’re an American apparently as ‘the check is in the mail’.
Of course it’s foreign debt holders the Fed was most vehemently attempting to appease / persuade with it’s comments yesterday basically assuring them monetization efforts will be extended to all levels of obligations, not the least of which being Treasuries considering their importance to mortgage rates. This of course means the Fed was talking to the Chinese considering recent comments of concern, which were apparently well founded set against yesterday’s developments. One does need wonder if foreigners will remain sanguine this time around if Americans devalue the dollar ($) by a half once again however.
Be that as it may, it’s clear the Fed is very worried about the threat of deflation, or should I say economic exhaustion, and they should be. In remembering our comments from the other day on the subject it’s important to remember that true deflation has not gripped macro-conditions yet. What’s more, and to allay fears the Fed has shot all it’s bullets with these last policy measures, gold is counting higher in fives once again, as can bee seen here on the daily, implying an inflation is alive and well. That is to say it should be recognized the Fed intends to devalue the $ in the race to zero by any means, which implies the printing presses will remain on overdrive indefinitely.
And if this fails, and the system appears ready to crumble, well, then it will be time to play the gold revaluation card at some point. Of course we may not need to worry about seeing this, which must be viewed as unlikely at the moment considering other policy measures, if the backwardation / COMEX delivery issue comes to full bloom later this month, with force majeure possible. Gold might need to back off now because the $ is short-term oversold, but this is constructive because it will be ‘ready to rumble’ again by month’s end this way, ready to punch through the 200-day moving average (MA). In this respect the set-up is looking constructive in my opinion.
- The FedRes panicking? The Chinese worried? Gold revaluation? USD devaluation? No surprises here. The debate over inflation and deflation is still riling everybody. My feeling is that though we are undoubtedly facing deflation now, the danger by end 2009 will by hyper-inflation.
- Has the FedRes done enough to stem the deflation tide at the moment? It does not look like it. The Velocity of Money, the multiplier that measures how fast money circulates in the economy is now below 1.0 . This is a danger sign. See chart below. Note how precipitous the decline has been. A leap off the cliff !
- What this means is : for every dollar that is pumped into the economy the economic boost is less than a dollar ie US$ 1 multiply by M1 money Multiplier (MULT). This is down right scary and should be viewed as time to panic ! The FedRes has really got us into this big mess.
- Karl Denninger has an excellent piece : Uh Oh….. Monetary Flat Spin in which he states :
The important part of this graph is what it denotes. Bernanke has lost control of “N” (or velocity), which is the actual knob that he is trying to diddle when borrowing rates are changed (and in fact its the market that sets that, despite his protests.)
The problem with an M1 multiplier below one is that the effect of printing money is of course multiplied by the velocity. That is, if you print up $10 into the economy the impact it has on economic activity depends on how many times that $10 circulates in a given amount of time. The more it circulates the higher the impact and the more your efforts do for the economy.
The bad news is that when the multiplier is less than one the more money you spew into the economy the worse the impact, as you get less for each additional dollar.
- What is more alarming according to Karl is that, the FedRes is very close to the point where any amount of stimulus via debt will result in no growth. This seems counter intuitive right?
- Imagine a country owes $10 T and has to pay interest of 4%/year ie $400B. Now this country is broke so it has to borrow money just to service its interest payments. So any amount of borrowing to stimulate its economy will add to its debt and interest payment. There comes a point in time when any stimulus via debt will result in no return in growth! And subsequently becomes negative.
- This is essentially what Karl has highlighted and what the chart below shows :
- Here is what Karl says :
M1′s multiplier going below 1 strongly implies (but does not yet prove) that we have reached that “zero hour”. Why? Because all money is in fact debt; this is inherent in all modern monetary systems.
This is because the underlying problem in the economy isn’t the lack of debt (money) in the system. It is that there is too much debt of all sorts, and since money is in fact a form of debt, you can’t fix the problem by playing helicopter drop!
As I have said for more than a year the only way out is to force the bad debt out into the open and default it. Yes, this will produce bankruptcies – lots of them, including some for “inconvenient” people like Paulson’s buddies on Wall Street.
But until and unless that happens adding more debt to the system depresses the multiplier effect of that debt on circulation further, and harms, rather than helps the situation.
- I won’t pretend to understand the mechanics of this fully. So if anyone of you can explain it better I appreciate the help. Feel free to correct me if I have explained it incorrectly.
- All I can say is : it does not look good for the US economy.