(snip)"By the way, if you think deflation can't happen here, well, you're wrong. I've talked about the why and where several times but Mish has recently published a long article on this as well. Check it out - its a good read. Nothing in there that I disagree with, and in fact its pretty much what I've been preaching on for a while, but its nice to see other people can actually add up the numbers (specifically the Level 2 and 3 "assets") and come to a reasonable conclusion on the odds of being able to "bail it out."
The math ain't that hard folks; even though the numbers are large, a calculator can handle it.
So can you.
The Euro hit $1.601 against the dollar yesterday as the ECB started making noises about raising interest rates:
"The euro traded within a cent of the record against the dollar after European Central Bank officials said they'll increase interest rates from a six-year high if inflation doesn't slow."
Well that's gonna leave a mark (on Ben); that "massage" was delivered with a baseball bat.
To the nose.
At full power.
See, now Bernanke has a nasty situation on his hands. He can continue to add liquidity and drive rates down further or hold them where they are, and we get $150 or even $200 oil while the Euro winds up towards 2.0:1
Or we can say "price inflation wins over the pigmen" and drain the swamp, exposing all the idiots who have been swimming with no suit.
The problem with doing #1 is that the economic outlook for the US goes straight in the tank if price inflation doesn't quit ramping, and he knows it. Ben also knows that the CPI print last month was artificially depressed, but people's wallets can't be fudged. You can say inflation is controlled but that doesn't make it so, and as gas prices head north of $4 and diesel heads north of $4.50 the calls for his head will increase dramatically in volume.
In short Ben no longer has any cover among the rest of the Central Bankers - the "thesis" that many "hyperinflationistas" and "metalheads" have had that we'd engage in "competitive devaluation" of our currencies has now been shown to be complete and utter horsecrap.
Instead reality is that both the Europeans and Chinese are decreasing liquidity and forcing interest rates (and in the case of China, reserve requirements!) higher, even if it means they might hurt their equity markets, because the price inflation genie is more feared.
With good reason, by the way. Been to the grocery store lately?
Ben is now stuck with the reality that the other Central Bankers and governments are going to save their own butts and leave him hanging by the rope. They have (correctly) deduced that it was his (and Greenspan's) lack of regulation that caused this mess and there's no reason why they should "eat" the consequences. "Sold ra roo Bendover!"
What's worse? 2 million wealthy Americans who get smacked in the stock market and 50 million more who take some damage in their 401ks (which can be avoided if you have a brain and read my Ticker on the long-term timing signal - quick - its still over at right near the top) or 300 million Americans who find out that hamburger is now $8/lb, cheese is $6, milk is $6/gallon, eggs are $3/dozen and gasoline is pushing $5?
Hmmmm.... one leads to irritated investors and people who thought they had a big 401k now relying on Social Security.
The other leads directly to the potential for pitchforks and torches - "They Only Come Out At Night" (yes, I like Edgar Winter ) stuff.
I wonder which is the better choice?
And before you nod in agreement with "our economy is fundamentally strong" from Bush (or Paulson), or worse, listen to the Democrats pontificate on how they're going to tax our way to prosperity (and then spend double what they tax), let me remind you that both Democrats and Republicans alike saw "ethanol" as a viable solution to our energy mess.
In just five years since Ethanol became a religious altar at which both political parties worship world food prices have increased by nearly 100%, with 83% of the increase coming in the last three years. Rice has gone from $100 a ton to $1,000 in five years, and potash, a critical fertilizer for enhancing yield, just quadrupled in price - literally.
What's worse is that now animal feed (made from those same grains) has gotten ridiculously expensive and as a consequence there's a lot of "early slaughter" going on. This has kept beef reasonable - for now - but cows take longer to grow up than to slaughter, and when the stuffing of the kill pens is complete I suspect you're going to see a very interesting price reaction in the beef markets.
Recessions, I note, are not evil things. They are in fact necessary as they cull the deadwood from our economy. The bad ideas literally go bankrupt in a recession and the good remains.
By attempting to deny this we blew a hideous housing bubble, we looked the other way while fraud and manipulation of our markets - across the board - became the rule rather than the exception, and we killed the middle class family's ability to prosper. Our "investment banks" are stuffed full of used toilet paper marked as "worth" billions, which they dutifully claim as part of their "capital", never mind that nobody will give them a dime on the dollar for it. Our community and commercial banks are in even worse shape with hundreds of billions of HELOC debt on their books (marked at "100%" of course) with a good part of it - perhaps as much as half - being utterly uncollectable. Downey is just one example - a 1300% (!) increase in delinquency rates in just one year.
That, obviously won't go on for long - either it stops or they go bust. Period.
At the same time the PPI is up 7% but we pretend that "Core" consumer inflation is 2%. Why? Simple - Social Security payments are indexed to CPI. If the government reports true inflation numbers they have to add to Granny's check. Instead they bend Granny over the table and take turns at her - a 5% annual deficiency in her purchasing power, due to the negative impact of compounding, cuts her purchasing power in half in about 10 years.
The politicians, of course, hope she dies (or at least becomes too infirm to act) before she figures it out and grabs for the pitchfork and torch.
Is there a way out other than into the Belly of The Beast, who will "process" us first?
Maybe.
If we act soon.
We can as Americans demand that The Fed and Congress drain the swamp.
No more lying.
No more SIVs, Level 3, or "held for sale" assets marked at cost of acquisition instead of what the market says they're worth. Even if it hurts.
No "excess" liquidity.
Drain the $200 billion in slosh down to a more-normal $50 billion, and where interest rates go as a consequence, they go (yes, they will go higher - significantly higher.)
Pay down that debt which can be paid down, and default that which cannot.
Sell off the seized collateral for whatever it brings, no matter how good - or bad - that might be.
America's obsession with 30-second sound bites means that these last paragraphs will be read by only hundreds, instead of millions.
Had we bothered to pay attention in math class in Elementary School, say much less High School, we would realize that this sort of intentional understatement of inflation, along with all the crooked inflating of assets and "earnings" simply siphons money out of our wallets, and we would rise up and stop it.
We would not sit here and listen blithely to Barack Obama and Hillary Clinton this evening pontificating about everything that is broken in the world except what's really broken - the fact that he, just like all the other politicians, are the reason we're in this mess and staring down Lucifer's maw. Both their speeches this evening were great pablum but neither stood at the podium and said "No more lying, no more fraud, everyone who pulls this sort of stunt goes to prison under my administration whether it be the CPI that is manipulated or a bank CEO lying under oath on The Hill. Our nation's businesses and our government will report only the truth without trick or scheme, and those who fail to do so will be held accountable to the fullest extent of the law."
But we are, collectively, more obsessed with American Idol, and therefore sit in the pot while the water temperature slowly rises, inexorably boiling us to death.
Let me know when (if?) you (and your neighbors) wake up and reach for the (verbal, at least) pitchfork.
Today, I hear America snoring."(snip)




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