I've Been Mished

I've Been Mished: "

I recently discovered that famed financial commentator, Mike “Mish”
Shedlock published a piece in which he quoted an article I published and
proceeded to tear my views (at least what he claims my views were) to pieces.

The actual article I wrote that Mish refers to is:

http://www.zerohedge.com/article/time-prepare-hyper-inflation-it-explodes

The first line of the piece notes that it’s a continuation of several
other pieces I’d written before. Mish doesn’t bother referring to them
anywhere. He simply starts off by quoting the following:

The similarities between the US today and Weimar
pre-hyperinflation are striking. As in Weimar, US fiscal authorities are
not taking any steps to rein in their loose money policies. Similarly,
the US Fed, like Germany’s financial elites believes that currency
depreciation is a good thing.

Thus we have a rather frightening set-up for hyperinflation in
the US: the largest emerging market players are moving away from using
the US Dollar at the same time that US monetary authorities are engaging
in disastrous policies similar to those employed by the men who brought
hyperinflation to Weimar Germany.

I firmly believe the US will see serious (‘70s style inflation)
if not hyperinflation within the next 2-3 years. It could come sooner
depending on how the Fed’s policies play out.

The purpose of these paragraphs was to say that the financial elite
in the US are maintaining similar views to their counterparts in Weimar
Germany. I DO NOT say the US is just like Weimar (though I say I
believe we will experience similar hyperinflation at some point). I DO
say that the financial elites in both countries engaged in similar
practices. That’s a key difference.

Mish however, takes my quote to mean that Weimar and the US are
identical in every way. He then lists four key differences between the
two. His differences are:

1) Germany lost World War I

2) The Treaty of Versailles imposed repayment conditions on Germany that could not be met

3) To enforce the treaty, France occupied parts of Germany

4) Germany printed money so fast people burnt stacks of money for heat

On the surface these do indeed look like major differences (the US didn’t lose WWI, ISN’T forced by the Treaty of Versailles to make debt payments, isn’t being occupied by France, and has yet to print enough money that people burn bills for fuel).

However, these are only differences if one takes everything literally.

The US, like Weimar, is a massively indebted nation. And the US, like
Weimar, is being forced to continue to issue debt and repay it (though
in the US’s case it’s Wall Street and their lackeys in Washington
pushing for this). Like Weimar, the US CANNOT repay its current debt
obligations. And we’re also being taken down this road against our will
(this time by Congress which ignores the fact most Americans don’t want
us to issue more debt, similar to Weimar’s financial elite who continued
down their path of loose money policies).

And finally the US Federal Reserve is printing money… like Weimar. Is
it the exact same amount? No. Are people burning bills for fuel? No.
But did I claim that the US was doing this? NO.

Again, the primary differences Mish lists between Weimar and the US
are only differences if you take everything from a literal standpoint.
And I wish to reiterate that Mish didn’t correctly get the primary
points I was making in the sections he quotes. Of course that didn’t
stop him from saying it was all “nonsense.”

Mish then takes issue with my suggestion that a common currency in Asia could potentially be a viable alternative to the US Dollar as the reserve currency of the world.

Mish quotes the following from my article:

Indeed, it was just revealed that ASEAN+3 countries (Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines,
Singapore, Thailand, Vietnam, China, Japan, and South Korea) are
researching the prospect of a “common currency” similar to the Euro.

The significance of this development cannot be overstated.

Once again, Mish ignores other parts of the article in which I state
that common currencies in general are flawed. He also ignores the fact
that I never actually say a common currency from Asia is guaranteed. I
DO say the following:

What I mean is that should a common currency be
introduced in Asia, it would probably work for about 10-15 years. By
then we’re well into the 2020s if not the 2030s at which point it is
quite possible China will indeed be in a place to provide a world
reserve currency on its own.

I wish to stress that even if Asia doesn’t implement a common
currency and the US Dollar remains the world’s reserve currency (I put
the odds of this at 20%), we are still facing a debt default in the US
which will result in the US Dollar dropping dramatically in value and
ushering in serious if not hyper-inflation.

The inclusion of “should” clearly illustrates that I am NOT saying a
common currency is guaranteed in Asia but instead could be a potential
option IF the respective Governments pursue it. Mish misses that point.
But again, it didn’t stop him from calling my piece “nonsense.”

The rest of Mish’s piece consists of the same literal interpretation
of everything I say. In the end, while trying to discredit my ideas
while presenting himself as vastly more astute than me (to readers who
likely didn’t even bother reading my article or the ones preceding it),
all he really does is indicate that:

1) He doesn’t actually bother to understand what an author is saying before attacking his or her views

2) He has no issue calling others’ work nonsense without bothering
to speak with the author or read additional material the author has put
out

Regarding the latter point, I actual have spoken to Mish several
times on the phone in the last few years. The most recent call was in
July 2009. At that time I called to discuss the inflation/ deflation
debate with him. Our debate consisted of Mish yelling for 15 minutes
straight about how inflation didn’t exist and that anyone who believed
it did was an idiot. I had to ask him to stop yelling several times so I
could actually say something.

This is why Mish’s piece wasn’t totally a surprise for me. I’d
already experienced his “no room for contrary views,” take on economics
personally. And it’s not surprising that a man whose notion of a
friendly discussion involves screaming over others would publish an
article attacking someone else’s ideas without bothering to even figure
out what the person is really trying to say.

By the way, the time when Mish told me inflation didn’t exist and
that I had to be insane to claim it was a reality was July 2009… when
Gold was at $900 per ounce, Oil was at $70 per barrel, Wheat was under
$600, and Copper was under $2.50.

However, I’m not going to personally attack Mish’s views or his writing because there are FOUR key differences between us:

1) I believe that writing a piece attacking someone’s ideas offers little if any value to readers or investors

2) I don’t actually read him much so I’m not familiar with his
views... so even if I wanted to attack him, I wouldn't feel comfortable
doing so

3) Before attacking the ideas of someone who I’ve actually spoken
to over the phone (several times), I would first write him a personal
email asking him to clarify his points so I had a better grasp of what
he was saying

4) I don’t consider views that are contrary to my own as “nonsense.”

Obviously none of these hindered Mish.

Graham Summers

"

Mark Mobius Echoes Carl Icahn: "There Is Definitely Going To Be Another Financial Crisis"

Mark Mobius Echoes Carl Icahn: "There Is Definitely Going To Be Another Financial Crisis": "

In an almost verbatim repeat of Carl Icahn's words of caution which we noted yesterday, Templeton's legendary chairman Mark Mobius said that "another financial crisis is inevitable because the causes of the
previous one haven’t been resolved" during a luncheon (menu included herb crusted chicken breast with cheese and tomato sauce, mashed potato and green vegetables, seasonal salad) at the Foreign Correspondents’ Club of Japan in Tokyo. Bloomberg reports: 'There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes." Unlike Icahn, Mobius stopped short of calling for a return to Glass-Stegall and a repeal of the abominable Gramm-Leach-Bliley which unleashed the era of zero margin derivatives and financial system neutron bombs. On the other hand, it is nice of Messrs Icahn and Mobius to speak up now, two years after the ongoing systemic instability transferred $3.5 trillion in capital from current and future taxpayer generations to the present financial elite. We do, however, forgive them because in their better late than never contrition, they join the likes of Zero Hedge who since January of 2009 have warned, over and over, that nothing in the structure of capital markets has changed, and that the market could any day open not only bidless, but broken beyond even Brian Sack-ian band aid repair.

Mobius, as seems to be the conventional wisdom these days, focuses on the $600 trillion or so in OTC derivatives as the next source of systemic jeopardy:

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46 percent between Lehman’s downfall and the market bottom on March 9, 2009.

He also blasted the lunacy of Too Big To Fail, where the Fed and the FDIC took an already unstable system, and made it even more brittle, by concentrating more deposits and more assets with a record low number of banks:

The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg.

Separately, higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures, staff at the International Monetary Fund warned in a report on May 27.

“Are the banks bigger than they were before? They’re bigger,” Mobius said. “Too big to fail.”

However, as long as Wall Street muppet Tim Geithner is in charge of the Treasury nothing will change.

Lastly, Mobius had some origianal words of investment advice, something that one could previously find at the Ira Sohn conference, before it became a media-fest free-for-all, book talking exercise in upcoming asset manager obscurity.

The money manager had earlier said at the same event that Africa has an “incredible” investment potential and that he has stakes in Nigerian banks.

“These banks are doing very well and are much better regulated than they were in the past,” Mobius said, without disclosing which lenders he holds.

Banks account for five of the eight stocks in the MSCI Nigeria (MXNI) Index. Guaranty Trust Bank Plc, the country’s No. 2 lender by market value, surged 31 percent in the six months through May 27, according to data compiled by Bloomberg. Shares of Access Bank Nigeria Plc recorded the second-biggest decline on the gauge in the period, the data show.

Is Africa the next bubble? And is it Africa's banks or their gold and other precious metals? Either way, how long before the IMF decides to offer openly dictatorial regimes in Central and Western Africa, only for NATO to decide one day 2-3 years from now that the time for humanitarian intervention has come, and it is the sanctified duty of the enlightened west to rid said countries of their gold, er oil, er diamons, sorry, evil dictators who will have been for many years the happy recipients of World Bank and IMF 'infrastructure' capital...

"

Hyperinflation Nonsense in Multiple Places

Hyperinflation Nonsense in Multiple Places: "Every time the US dollar ticks lower, commodity prices tick higher, or the CPI rises two tenths of a percent, hyperinflationists come out of the woodwork with nonsensical predictions and silly comparisons to Zimbabwe or Weimar Germany.

Given that the US dollar recently fell to the lower end of its trading range, hyperinflationists once again came forth with their message of impending doom.

Silly Comparisons to Weimar Germany

Please consider The Time to Prepare for Hyper-Inflation is BEFORE It EXPLODES
by Graham Summers.

The similarities between the US today and Weimar pre-hyperinflation are striking. As in Weimar, US fiscal authorities are not taking any steps to rein in their loose money policies. Similarly, the US Fed, like Germany’s financial elites believes that currency depreciation is a good thing.

Thus we have a rather frightening set-up for hyperinflation in the US: the largest emerging market players are moving away from using the US Dollar at the same time that US monetary authorities are engaging in disastrous policies similar to those employed by the men who brought hyperinflation to Weimar Germany.

I firmly believe the US will see serious (‘70s style inflation) if not hyperinflation within the next 2-3 years. It could come sooner depending on how the Fed’s policies play out.

Similarities? What Similarities

• Germany lost World War I
• The Treaty of Versailles imposed repayment conditions on Germany that could not be met
• To enforce the treaty, France occupied parts of Germany
• Germany printed money so fast people burnt stacks of money for heat

What part of that remotely resembles anything that is happening in the US today?

Reserve Currency and Trade Nonsense

The rest of Summers' post focuses on global trade and a move by some countries to replace the US dollar as the world's reserve currency.

Indeed, it was just revealed that ASEAN+3 countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Japan, and South Korea) are researching the prospect of a “common currency” similar to the Euro.

The significance of this development cannot be overstated.

The article to which Summers' refers is ASEAN+3 RESEARCH GROUP

Significance of Asean Currency Proposal Wildly Overstated

Summers says the significance of the development cannot be overstated. Of course it can and Summers proves it.

Just because someone writes a paper does not make it credible.

The ASEAN currency proposal was written by three professors in Malaysia. Their proposal is not under serious discussion by any country that matters, if indeed by any country at all.

Given the enormous problems with the Euro related to currency unions without fiscal unions, why would any country in their right mind barge into such an arrangement now or any time soon?

Even if a few minor countries would agree to do such a thing, it is preposterous to believe Japan and China would agree to a common currency.

Every now and again an Asian currency union of some sort surfaces. Every time they are trumped up as if it is going to happen soon. They won't because the proposals are nothing but silly hype and wet dreams.

By the way, there might very well be a currency trading index of Asian currencies similar to the US dollar index, but that will have no effect on anything, just as the US dollar index does not cause anything to happen.

Real but Meaningless

Summers notes that China, Russia, Brazil, India, and now South Africa are moving to trade more in their own currencies (not the US Dollar), saying 'All of these items are real and documented.'

Yes they are real. They are also essentially meaningless. It makes perfect sense for countries that trade with each other to do so in their respective currencies. Even though oil is priced in dollars, oil trades in Euros right now. Oil trades in Yen now. Currencies are fungible. So if a few minor countries want to trade in Yuan now, it will not matter one iota in the grand scheme of things.

Meaningless facts, academic papers by Malaysian professors, and silly comparisons to Weimar Germany do not constitute a rational thesis for hyperinflation.

Confident Predictions

In Signs Hyperinflation Is Arriving Gonzalo Lira foresees an 'imminent currency collapse' and 'confidently predicts'

• By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%.
• By July of 2011, annualized CPI will be no less than 8% annualized.
• By October of 2011, annualized CPI will have crossed 10%.
• By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%.

CPI Check

Inquiring minds are looking at the May 13, CPI Release from the BLS.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.

By October of 2011 we will all be able to look at that set of predictions and have a good laugh.

A Good Laugh Now

I you want a good laugh now, Lira writes ....

2012 will be the bad year: I predict that hyperinflation’s tipping point will be no later than the first quarter of 2012. From there, it will accelerate. By the end of 2012, I would not be surprised if the CPI for the year averaged 30%.

By that point, the rest of the economy—unemployment, GDP, all the rest of it—will be in the toilet. By that point, the rest of the economy will no longer matter: The collapsing dollar will make 2012 the really really bad year of our Global Depression—which is actually kind of funny.

It’s funny because, as you know, I am a conservative Catholic: I of course put absolutely no stock in the ridiculous notion that “The Mayans predicted our civilization’s collapse in 2012!”—that’s all rubbish, as far as I’m concerned.

It’s just one of those cosmic jokes that 2012 will turn out to be the year the dollar collapses, and the larger world economies go down the tubes.

As cosmic jokes go, all I’ve got to say is this:

Good one, God.

That's supposed to be credible hyperinflation analysis?

John Williams on the Weak Dollar

Please consider The Energy Report interview John Williams: Weak Dollar Behind Inflationary Oil Prices. Here are a few select quotes from Williams (JW), the Energy Report (TER), and my responses to them.

JW: Let's say the U.S. wants to sell debt to Japan, but Japan doesn't like the way the U.S. is running fiscal operations. It can say, 'We don't trust the U.S. dollar. We'll lend you money, but we'll lend it in yen.' Then, the U.S. has a real problem because it no longer has the ability to print the currency needed to pay off the debt. And if you're looking at U.S. debt denominated in yen, most likely you would have a very different and much lower rating.

Mish Response: Williams makes a fundamental mistake regarding trade. Several of them in fact. The US does not go about wanting to sell debt to Japan or China. Rather Japan and China buy US debt as a mathematical consequence of trade imbalances.

Moreover, Japan and China are more dependent on the US for their export model than the other way around. The odds China or Japan would not take US dollars is virtually zero. Both economies would crash without exports to the US. China's unemployment would soar and so would political unrest.

I keep stating, and it keeps falling on deaf ears, that as long as the US runs a trade deficit, it is a mathematical certainty that some country is accumulating US dollars or US dollar denominated assets.

Rather than repeat myself again I will simply point to several article regarding trade.

• Should China Dump Dollars for Commodities? What about the 'Nuclear Option' of Dumping Treasuries? Can Global Trade Collapse?
• China Secretly Buying US Treasuries Via UK Accounts? Trade Deficit Math; 'Hot Money' Math
• US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?

JW: It is possible lenders would not buy the Treasuries unless denominated in a strong and stable currency. As the USD loses its value and becomes less attractive, people will increasingly dump dollar-denominated assets and move into currencies they consider safer. And you'll see other things; OPEC might decide it no longer wants to have oil denominated in U.S. dollars. There's been some talk about moving it to some kind of basket of currencies—something other than the U.S. dollar, possibly including gold. This would be devastating to the U.S. consumer. You'd get a double whammy from an inflation standpoint on oil prices in the U.S. because the dollar would be shrinking in value against that basket of currencies.

Mish Response: Once again we see the silly statements regarding the pricing of oil in Euros or some other currency from someone who does not understand that currencies are fungible.

It does not matter one iota what oil is priced in unless one tried to do it in Yap Island stones or some other highly illiquid currency. Oil already trades in Euros and Yen just as gold does. One does not need dollars to buy oil any more than one needs dollars to buy gold. Currencies are fungible. I remain amazed at the number of people who trip over this simple construct.

JW: If, hypothetically, you're pricing oil in yen, there's no reason for anybody to hold the USD. The dollar would sell off more rapidly against the yen and oil inflation would be even higher in a dollar-denominated environment.

Mish Response: As stated above pricing currency is irrelevant. Moreover, whether or not there is a 'need' to hold dollars is irrelevant. Countries will accumulate US dollars and US dollar assets as a mathematical function of trade.

That said, there is a need to hold dollar, real and perceived. China needs to hold a certain amount of dollars to prepare for repatriation of hot money inflows speculating on a rise in the Renminbi. Moreover, neither Japan nor China wants their currency to rise out of fear it would hurt exports and lower employment. China is particularly worried about a slowing economy and is overheating now as a consequence.

TER: You've mentioned that hyperinflation will happen as soon as 2014. If that is true, wouldn't OPEC want to shift off dollar pricing as quickly as possible?

JW: From a purely financial standpoint, that would make sense. Other factors are at play, though, including political, military and unstable times in both North Africa and the Middle East. Those who are able to get out of dollars, I think, will do so rapidly and as smoothly as possible.

They will sell their dollar-denominated assets. They will convert dollars to other currencies. They will buy gold. Generally, they will dump whatever they hold in dollars and sell the dollar-denominated assets they don't want. There's a market for them; it's just a matter of pricing. As the pressure mounts to get out of the USD, the pricing of dollar-denominated assets will fall, which in turn would intensify that selling. The dollar selling will intensify domestic U.S. inflation, which is one factor that picks up and feeds off itself and will help to trigger the hyperinflation.

Mish Response: The setup is ridiculous given that oil pricing unit is irrelevant. The series of answers by Williams shows how one very poor idea involving oil priced in something other than US dollars cascades step-by-step into a preposterous overall thesis.

Moreover Williams' responses also depict the typical one-sided US dollar centric focus of most hyperinflationists.

Predictions

1. Lira sees hyperinflation starting now, and it will be in full swing in 2012 with the CPI up at least 15% and as much as 30% or more.
2. Williams says 'hyperinflation will happen as soon as 2014'
3. Summers sees 'serious (‘70s style inflation) if not hyperinflation within the next 2-3 years.'

Myopia

Hyperinflationists have myopia. They only see (or only focus on) problems in the US. They ignore overheating in China, enormous problems in the UK, and huge structural issues in the EU.

The US may have more problems than elsewhere (or not), but that does not imply the dollar might collapse to zero against the currencies of other countries.

Intermediate-term, I actually expect the dollar to rise, but should it sink, it will not be a sign of impending hyperinflation.

Massive Inflation in China

Those looking for a huge inflation problem can find it in China. Credit growth in China is rampant. Please consider Ponzi Financing Involving Copper Trade Gone Wild In China

China is building cities no one lives in, malls that are vacant, trains and airports no one uses yet Williams thinks the Yuan is better than the dollar. Why? For that matter why is the Euro or the British Pound?

The entire global banking system is insolvent.

US Total Credit Market Debt Owed



US M1 Money Supply



For all the massive amount of printing the Fed has done, note that total credit market is roughly 27 times the size of M1 and roughly 6 times the size of M2 (not shown).

Can that credit be paid back? The answer is no and it will act as an economic drag for a long time.

So another trillion in printing is going to cause hyperinflation? When the total credit market is $50 trillion? Please be serious.

Total Consumer Credit



Total Loans and Leases of Commercial Banks



Bernanke is trying like mad to get banks to lend and consumers to borrow. Instead consumers continue to pay down or default on debt.

Hyperinflation is a Political Event

Let's go back to the beginning, with a definition of the word: Hyperinflation is a complete loss of faith in currency. Typically a political event, not a monetary event is the cause.

Jeff Harding at the Daily Capitalist asks Why Does Hyperinflation Occur?

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

In the 20th Century there were quite a number of hyperinflationary events. I used the Wikipedia list of modern hyperinflations (Since WWI) and researched the political circumstances of each country. The circumstances can be put into three rough categories: post-war disruption, post-Soviet collapse, and socialist-populist regimes.



For example we all know what happened in Germany during after WWI when politicians, mostly socialists, blamed all their problems on reparations and continued to print so much money that it resulted in the famous cash-in-a-wheelbarrow photos. They literally had no clue what they were doing.

The post-Soviet empire collapse is easier to understand as former communist/socialist regimes fought for power and struggled with economic policy. Many of these countries have reformed or were forced to reform their monetary and fiscal policies.

Many of the socialist-Marxist regimes were Latin American populist governments who employed “revolutionary” anti-capitalist nostrums for economic policy. Chile (Allende) and Argentina are good examples. Argentina has had years of high inflation to hyperinflation since 1980. In Africa most countries were a mixture of strongmen with socialist-Marxist policies. I am not suggesting that these were pure socialist governments, but rather the typical situation where the government seizes or controls large parts of industry and issues regulations controlling much economic activity.

These hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. I understand that the circumstances of each country were different and that it is perhaps unfair to say, lump Israel in with Argentina. But each country faced political factors that created instability or a national crisis; the government spent heavily to gain popular support, and resorted to the printing presses to pay for their spending.

Zimbabwe vs. Weimar

In Zimbabwe, the Mugabe government initiated a 'land reform' program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe's attempt to to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.

His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.

In Weimar Germany, printing for war reparations kicked off hyperinflation. Wikipedia provides a good accounting in Inflation in the Weimar Republic.

It is certainly not impossible for there to be a complete loss of faith in the US dollar, however there odds are extremely remote.

Can The Fed Cause Hyperinflation?

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is 'Hyperinflation Would End The Game'

• Hyperinflation by definition would destroy the currency and thus the banks
• Hyperinflation would destroy the wealthy and all their corporate bond holding
• Hyperinflation would destroy the Fed
• Hyperinflation would destroy the wealthy political class

To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend. I discussed those ideas above and in far more depth in Fiat World Mathematical Model.

Note that the Fed has no power to give money away. Nor would they do so if they could.

Unlike the Fed, Congress could give money away.

I do not know if giving everyone in the US $60,000 would do it or not, but giving everyone $60,000 a month indefinitely would sure do it.

How likely is that?

The answer is 0%.

Hyperinflation? No Way

Please consider Hyperinflation? No Way by Mike Whitney.

The Federal Reserve is not going to push the economy into Zimbabwean hyperinflation. That's pure bunkum. The Fed's plan is to weaken the dollar to boost exports and to force China to let its currency appreciate to its fair-market value. By purchasing $600 billion in US Treasuries (QE2), the Fed effectively reduces the supply of risk-free assets, which sends investors into riskier assets like stocks and commodities. Is there an element of class warfare in the policy?

You bet there is. It's a direct subsidy to the investment class while workers are left to face higher prices on everything from gasoline to corn flakes. It's a royal screw job. But while Ben Bernanke may be a prevaricating class warrior and a charlatan, he's not insane. He's not going to shower the nation with increasingly-worthless greenbacks like they were confetti.

It's ridiculous to wail about 'money supply' when velocity is zilch. It's pointless to crybaby over 'bank reserves' when people are broke. It's crazy to yelp about 'printing presses' when lending is down, credit is contracting and the economy is mired in the most vicious slump in 80 years.

The hullabaloo about inflation is vastly overdone. China's not going to dump its $3 trillion stockpile of mainly USD and US Treasuries. Who started that cockamamie story? China's doing everything it can just to keep its currency cheap just so to keep its people working. Are they suddenly going to do an about-face and commit economic harikari just to strike a blow against Uncle Sam? No way.

Gold

The US has the largest gold reserves of any country.

It is pretty silly to think the dollar will go to zero when all it would take to stop hyperinflation would be convertibility at some high rate.

Charles Hugh Smith vs. FOFOA

I have made the point numerous times that the Fed will not cause its own destruction, nor will Congress.

Charles Hugh Smith states the thesis eloquently in The Mechanics of Hyperinflation: Bankers vs. Politicos

If we take it as axiomatic that hyper-inflation is a political process, then we have to conclude that hyper-inflation serves some powerful interests who would support the policies that would bring it to fruition.

My problem with the 'hyper-inflation is inevitable' school of thought is that I cannot identify what powerful interests would gain from the destruction of the currency and all financial wealth. A hyper-inflationary wipeout certainly wouldn't benefit the Financial Power Elites who hold the vast majority of the financial wealth. Yet it is this very Elite which wields the preponderance of political power.

Thus you end up with this untenable conclusion: the politically powerful Financial Elite will consciously choose to self-destruct. I don't buy that as a likely scenario. If inflation started destroying their wealth, then they would instantly influence political policy to reverse course to preserve their wealth.

In an incredibly long-winded rant FOFOA counters Smith in Deflation or Hyperinflation?

How will 'the Elite' profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Ackerman Convinced by Nonsense

Amazingly, that assertion by FOFOA was enough to convince Rick Ackerman, a hard core deflationist to change his mind and go straight from the deflation camp to the hyperinflation camp.

This prompted Gary North (an inflationist) to blast Ackerman in Rick Ackerman Defects to the Hyperinflationist Camp After 30 Years

Gary North writes ...

Incredible! Three decades of bad assumptions, yet all that it took to persuade his self-defining outlook him was an article on anonymous blog. All of a sudden, hyperinflation is 'entirely consistent with human nature.'

Out of the deep freeze and into the fire.

But what of non-hyperinflationary Charles Hugh Smith, who three weeks earlier had been a model for him? Gone!

Yes, Gary it is incredible because FOFOA's theory is not born out in practice.

Did the elite benefit in Weimar? Zimbabwe? Argentina? Anywhere?

If the elite benefited from purposeful hyperinflation we would have some history suggesting just that. So where is it?

Supposedly the Fed is going to cause this event, to (in FOFOA's words) 'outrun the rest of us in the race to spend, winning the competition to retain standard of living'.

Excuse me for asking but what lifestyle is Bernanke in a race to maintain? Janet Yellen? Anyone on the Fed?

In that respect, FOFOA's explanation is downright humorous.

Stack of Things Missed by Hyperinflationists

1. Trade math
2. Reserve currency math
3. Credit dwarfs currency and changes in credit and the value of credit are far more important than the changes we have seen in money supply.
   
4. Failure to understand pricing currency of oil is meaningless
5. Misconceptions about excess reserves (Please see Fictional Reserve Lending for a discussion).
   
6. Not understanding limits and restrictions on the Fed
7. Not understanding limits and restrictions on Congress
8. Failure to understand peak oil will not cause hyperinflation. Heck, peak oil will not even cause inflation.
9. Inflation in China, does not constitute inflation in the US.
10. Unfunded liabilities do not constitute debt
11. Myopia - The US is not the only country with massive structural problems. Let's stop pretending otherwise
12. Failure to understand the Fed will not destroy itself and the banks by allowing hyperinflation

Not every hyperinflationist goes wrong on every point above. However, they all go wrong on point 12.

Point 12 alone is sufficient to debunk hyperinflation arguments.

In regards to point 8, it is important to understand inflation is a monetary phenomenon. Any rise in the price of oil will be offset by a drop in prices elsewhere, if money supply is constant. Right now, money supply is not constant, but it is rising far more rapidly in China than in the US.

In regards to point number 10, many hyperinflationists, Williams included makes the mistake of treating unfunded liability projections as debt. Social Security can be fixed for a decade or more simply by hiking the retirement age. Medicare is far more problematic, but Paul Ryan and others in Congress have solutions that can easily stave off a major catastrophe for a long time.

Unfunded liabilities are a huge problem, but let's not jump the gun with preposterous conclusions they will cause hyperinflation any time soon.

Theory vs. Practice

Please note that banks do not want hyperinflation or even massive inflation. The reason is simple: Banks will not want to be paid back with cheaper dollars, especially worthless dollars, and Congress is beholden to itself and the banks.

Hyperinflation could theoretically come from massive sustained political will to bail out the little guy at the expense of the banks, the wealthy, and the political class. However, unlike Mugabe and Zimbabwe, neither the banks nor the Fed nor the political class wants to bail out the poor at the expense of the wealthy.

Indeed, Bernanke's, Paulson's, and Geithner's actions to date have done the exact opposite!

We have bailed out the banks at the expense of the ordinary taxpayer (keeping the little guy in debt).

This is what it comes down to: In theory, Congress can easily cause hyperinflation. In practice, they won't, and neither will the Fed. As Yogi Berra once quipped 'In theory there is no difference between theory and practice. In practice, there is.'

Deflationists Won the Bet

I bet a 'crying towel' with a person commenting under the name 'Heli-Ben' as to whether deflation or hyperinflation would occur first.

The bet is over and I demand my towel. Deflation happened.

My definition of deflation is a decrease in money supply and credit with credit marked-to-market. That clearly happened. So did a decrease in credit straight up. In fact, consumer credit is still declining as shown in the charts above.

The Case-Shiller housing adjusted CPI (my preferred measure of the CPI) went brutally negative at one point. Even the standard CPI went negative for a while as shown in the following chart.



Prices did not stay negative long, but there is an unmistakable dip, the first dip since the Great Depression.

Whether the measure is credit, credit marked-to-market, or prices we had deflation.

More tellingly, we had deflation based on numerous conditions that one would expect to see in deflation: falling asset prices, falling treasury yields, rising junk bond yields, a rising US dollar, falling commodity prices, reduced speculation, etc.

The question now is whether or not we will see deflation again, and if so how quickly.

Inflation vs. Deflation

The Us is certainly in a period of inflation now by my model. Home prices are making new lows and credit is in a funk, but most conditions appear inflationary at the moment.

Indeed if you believe the US will be in periods of inflation more often that deflation you may very well be correct, especially if your measure is the CPI. However, credit is a better measure than prices.

Consumer prices in Japan barely fell over the course of a 25 year period. Yet is is silly to argue that Japan never went in deflation. The conditions associated with deflation were frequent and persistent: falling consumer demand, the wiping out of excess leverage, a rising saving rate, and falling asset prices plagued Japan for decades.

My thesis has been the US would slip in and out of deflation for a number of years, just as Japan did.

I see no good reason to change that call. I expect another plunge in credit marked-to-market and another plunge in commodities. I expect another surge higher in the US dollar.

Yet, I have no faith in the grand super-cycle deflation theory where literally everything crashes.
I see no reason to predict the S&P 500 will drop to 200, or gold to $250.

Japan did not collapse yet, but it could. Moreover, Japan's debt at 200% of GDP shows just how out of hand things might get before the market imposes its will. Japan is a far better candidate for massive inflation than the US at the moment.

All it would take to sink Japan is a collapse in exports and a rise in interest rates to 3%. At 3% or so, interest on the national debt would consume 100% of Japan's revenue.

With that backdrop, the myopic focus on the US seems silly.

Unlike super-deflationist Robert Prechter, I expect gold to hold its value over the mid-term (another swoon is always possible) as the Fed fights massive deflationary forces of excess leverage, excess debt, boomer demographics, global wage arbitrage, cutbacks in state and local governments, and most importantly - consumer attitudes towards debt.

In the final analysis, it's all about attitudes. The Fed cannot force consumers or businesses to borrow or banks to lend (and it wouldn't for reasons stated, even if it could). In a fiat credit-based system, that is what matters.

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

Mike 'Mish' Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

"

How Much Government Spending is Costing You Per Day

How Much Government Spending is Costing You Per Day: "

Look at what happened on Friday. The Dow dropped 93 points. Oil stayed below $100. But gold added $16 to close well above $1,500.

Fluke? Or trend?

Hey, you’re asking the wrong person. What do we know? No one knows.

But what we do know is that the Great Correction is continuing to do its work. All the recent reports tell us that the economy is weak…and weakening. Housing starts, manufacturing output, consumer confidence – all are pointing to a long, hot, sultry, sluggish summer.

So far, the big sell-off has not even begun. But it could start any day. Maybe Friday’s numbers reflected the new trend. Maybe not.

But just so we get to say ‘I told you so’ here is what we expect:

1) Stocks will be weak…maybe a big sell-off in the summer months. Investors will begin to realize that the economy is not as healthy as they thought. And the effects of QE2 will wear off.

2) The Great Correction, combined with the feds’ battle against it, will continue. Economic reports will be mixed and confusing as a result. But no clear, real recovery will begin.

3) The Fed will announce new measures – QE3. These could come anytime, but will most likely follow a new crisis. For example, a default by Greece…or a sharp break in the stock market.

Analysts say the punky figures are not confined to the US. The entire world is slowing down. Emerging markets are being forced to try to control inflation. Europe is worried about what happens when Greece defaults – which is coming soon. And the US is suffering from the worst housing slump in its history. Prices are already down 33%…more than one out of four homeowners is already underwater…and prices are falling at the rate of about 1% per month.

This latest bit of information is worth a pause. The total value of US housing stock is about $20 trillion. So, a 1% loss equals $200 billion. That’s $9 billion every working day.

Now, say there are about 100 million wage earners. This puts the losses per day at about $90 per day per wage earner. The typical worker takes home about $2,500 per month – by our calculations, barely more than he loses in housing prices.

And here’s another fact to toss in front of you this morning. In 1980, US federal, state and local debt per person declined at the rate of $2 per working day. As recently as 2000, debt declined again – at the rate of $4 per day.

But never have we seen anything like this. Government debt per working person is now increasing at $115 per working day. And that doesn’t include the build-up in social welfare obligations.

Add housing losses to government debt, and the typical working person’s balance sheet is deteriorating at the rate of $205 every working day.

The poor lumpen! He rolls out of bed this morning. By Friday evening he’s $1,025 poorer! How long can that go on?

And here’s another thing. Seniors are supposed to be protected from inflation by COLA (cost of living) adjustments to their Social Security payments. But the feds compute the CPI as they choose. And they make their adjustments when it pleases them. The result is a big lag between the supposedly inflation-proof Social Security payments and the actual costs of living that old people face. According to a study done by a senior group, the post-65 population has suffered a real loss of purchasing power of 32% over the last decade.

This is a serious situation. The average household is desperately trying to hold onto its standard of living. It has not had a real, substantial hourly wage gain in 40 years. Prices are now rising faster than income – both for people who are working and for people who are retired.

And those people who own a house are losing wealth, collectively, at the rate of about $200 billion a year.

In a way, of course, this is good news. The whole point of the Great Correction is to wipe out bad debt, eliminate bad investments, and reduce living standards to a level people can afford. The feds may be protecting investors and bailing out banks – but at least they’re letting the poor lumpen households get what is coming to them!

Notice that gold seems to have ended its correction. Way too early and with far too little losses to suit us.

Gold is doing its job. It’s acting as a monetary reserve – something you can hold onto when other forms of money go bad. As the Great Correction does its work, the financial authorities get to work too. They’ve already pumped so much paper money into the system – most of it still in reserves – that it will be hard to avoid a substantial increase in prices (that is, a drop in the value of the paper money). But the feds probably won’t give up. QE2 ends next month. As the Great Correction continues, and the economy slumps in the summer, the cries for the Fed to ‘do something’ will grow louder. But what can the Fed do? Interest rates are already at zero. And the federal government is already running the biggest program of counter-cyclical stimulus spending in history – with about $4.5 trillion of total deficits over the last 36 months.

What’s left to do? Only more ‘unconventional’ methods – such as QE3.

If it comes, QE3 will mean even more paper money and credit in the system…and the potential for even higher rates of inflation.

The Wall Street Journal reports that the Chinese have become the world’s largest gold buyers. Central banks, generally, have become buyers again. The smart money has been buying gold for 10 years.

The smart money knows it needs real reserves – not just phony paper money. If the Fed won’t back the dollar with real reserves, smart households know they have to stock up some reserves of their own.

Bill Bonner

for The Daily Reckoning

How Much Government Spending is Costing You Per Day originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

"

DEBUNKING REINHART AND ROGOFF

DEBUNKING REINHART AND ROGOFF: "

Few market commentaries have been as widely cited as the Reinhart and Rogoff analysis regarding the fiscal situation on the United States and its imminent debt crisis. In “This Time Is Different”, Reinhart and Rogoff make a multitude of illogical comparisons when discussing the US financial situation. In this must read paper, Yeva Nersisyan & L. Randall Wray bust one of the most popularly cited myths of recent years (the paper is an oldie, but a goodie):

wp_603

Source: Levy Institute

"

The "Game Over" Redux

The "Game Over" Redux: "

Back in November, we posted a piece by Knight Research titled 'The Game Is Over' in which the firm's strategist Mark Lapolla presented his thesis why he believes that 'the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over.' And while the article came out just as the barrage of $750 billion in daily POMOs courtesy of QE2 was starting and hence masked the true state of reality, now that QE2 is finishing, it is only appropriate to bring Mark back up front, as the imminent and very violent convergence of the rosy myth that is the stock market, and of the underlying miserable reality, is about to wake up all those who have been dozing under the Pied Printer of Eccleslin's soothing tune, and Lapolla's thesis is about to see its first validation. In essence, while we have heard much from those who claim that the end game will come as a result of hyperinflation, Lapolla is convinced in the opposite: namely that the end will be not a bang but a hyperdeflationary whimper. In order to refresh readers with his thoughts, recently Lapolla conducted an interview with the master questioner Kate Welling in which the Knight strategist laid out his uber-bearish case in more gruesome detail than most can stomach. Below we present the key points from his interview, as well as the full thing subsequently.

In a nutshell, and this won't come as a surprise to anyone, Lapolla believes that 'the game is over because there is no collateral... When consumer debt is rooted 75%-plus in residential real estate and residential real estate is impaired, easy Federal Reserve monetary policy simply cannot make it to Main Street. The transmission mechanism is broken. There is no conduit. '

Lapolla's observations on the secular shift in the employment structure:

What's going on here is very simple. John Maynard Keynes wrote a letter entitled, "Economic Possibilities for our Grandchildren "in 1930, in which he coined the term "technological unemployment." He said it's a term nobody has heard of, but you are going to be hearing a lot about it. Of course, he was writing about the use of technology to supplant labor in the factory... Any way you slice it, nominal wages, real wages, hourly wages, the duration of unemployment — all of these measures imply that we have a growing structural fracture in the labor markets.

On the irrelevance of week to week and month to month micro fluctuations in the jobs numbers:

Right now, the full employment gap is running about 11 million jobs. That's a shocking gap and, although this is very difficult to quantify, we have a sinking suspicion that — while a number of the jobs that are being created right now might in fact be "good jobs" - they're being filled by over-qualified labor no longer able to wait for jobs at compensation levels similar to what they had before. Now, in the very long run, this might work itself out, but in the short run it doesn't do anything to change the outlook for the consumer. What it does is suggest that people are going to have to shift down the way they live and the way they expect to live — perhaps even further than they already have. Thus, the propensity to save in this country has to continue to rise — which (although not in the short term) is very bullish long term — whether that's captured in the aggregate data or not. So as you've gathered, we are very different from consensus, first and foremost, when it comes to the secular structure of labor and credit in the U.S.

On the previously discussed topic of Squatter's Rent (discussed extensively here):

There are roughly six to seven million folks who are no longer paying on the mortgages on their homes, so if we do some really simple arithmetic, it suggests in the aggregate as much as $100 billion of annualized consumer income is being freed up to find its way into consumer spending elsewhere in the economy, instead of going towards the satisfaction of housing debt..., the real question is if, or when, does the foreclosure mechanism begin to kick back into gear and then accelerate? At this juncture, there really isn't a tremendous amount of evidence that it's going to accelerate. Let me give you a tangible example. We know someone who has lost his job and is in a home with a $1.45 million mortgage. The house is on the market at $1.3 million, which we guess is the degree to which the home has been written down on the books of the mortgage holder. The property taxes on the home are about $20,000 a year, so he has been expecting an eviction notice or a foreclosure proceeding for almost 18 months. Yet his property taxes have been mysteriously paid every year. What is going on is clear: If the bank or whomever holds that mortgage note were to foreclose, the house's liquidation value is prob¬ably about $900,000. So they would have to take a further $400,000 writedown on that mortgage. Which makes paying $20,000 a year in property taxes, look like a relative bargain.

On Europe's state of suspended animation:

Europe right now is still kicking the deflationary can down the street; trying to postpone and prolong the inevitable. Meanwhile, they're trying to cover their tracks with verbiage claiming they're pursing mandated fiscal and monetary austerity policies and monetary policy. But the ECB's bump up in rates of 25 basis points isn't material. And all of this is intensifying the deflationary pressures on the periphery countries. So Europe is in a state of suspended animation, where the deflationary pressures are spilling out but even the sort of modest financial restructuring the United States is trying is still being resisted. It's clearly not a stable situation.

On the 'China' question:

I think the China situation, how¬ever, is profoundly obvious and profoundly simple. The idea that the free world is placing its hope in a repressive, communist regime employing command and control economic management while violating trade protections and human rights everywhere is absolutely astounding, amazing. I would suggest that, in itself, should be a sufficient warning flag. But let's be a lot more specific. I actually see the situation in China as very analogous to the U.S. in 1929 and Japan in the 1980s....I'll just tick off eight similarities between China circa 2011 and the U.S. before the Depression. 1) Massive disparity of wealth, income, and education. 2) Rapid industrialization and displacement of labor. 3) Opaque and misleading economic and financial data. 4) Massive build-up of leverage across the "rising" class. 5) Bubbles in both residential real estate and fixed asset/infrastructure development. 6) Accelerating and uncontrolled growth in disintermediated credit. 7) Expected transference of economic growth to domestic demand. And, finally, an accelerating price/wage spiral. Nonetheless, to China's credit, they have a booming economy which has drawn the attention, admiration and certainly the economic aspirations of the world. The irony is, despite its hubris, China appears to have lost control — and has done so by doing everything it could to avoid that. Essentially, in its own zeal to placate its masses with rapid growth, China has created a tide of inflation that threatens it with wide-spread social unrest. But if it crushes speculation and clamps down on credit, it risks a deflationary collapse that would also threaten social harmony. The upshot is that China no longer controls its own destiny. The free markets do. As an aside, I would suggest that in the not-too distant future, when this all unravels, there will be downside as well as upside for the U.S., particularly as it relates to what we were talking about before, the way the U.S. has benefited from the value of intellectual property versus scale.

On China's Lewis Point (discussed extensively here):

If there was one thing that pushed us over the edge to publish it last November, it was our belief, now confirmed, that China and an increasing number of other emerging markets are caught in a price/wage spirals that they're not going to be able to control through monetary, fiscal or legislative policy. These are an inevitable result, not only of the credit boom, but of the manufacturing engine they're living by. This is the great differentiator between the U.S. and China. The reason a systemic inflation cannot happen here for a long time and why it is happening in China is simply this: When labor is in the business of manufacturing goods (as opposed intellectual property or services), labor has a call on rising finished goods prices. When commodities prices begin to increase and manufacturers attempt to raise finished goods prices, wage rates must go up or labor's value is necessarily diminished. This is the dynamic traditional U.S. manufacturing businesses faced decades ago, and now, in China, it has reached epic proportions. We've seen 20% to 30% wage increases by the government on the low end and by contract manufacturers such as Foxconn (FXCNF), which does the Apple (AAPL) iPhone, on the high end. It has raised wage rates, almost 30%. China bulls believe this wage inflation is good for workers and so ultimately is going to help China accelerate consumer demand as an engine of their growth. Nonetheless, it hasn't and won't, for a couple of reasons. 1) Savings rates actually are rising in the major city centers. 2) China's consumer confidence numbers and research on the ground in China both show that labor has never been less secure than they are now, which seems paradoxical. One would think that China's new¬found international power, along with higher incomes, would make Chinese workers feel all is right with the world. The problem is that the cost of living is growing even faster. Without getting too technical, China has probably crossed over what's called, in academic theory, the Lewis Point, where the movement of labor from agriculture into manufacturing reaches a peak and begins to taper off as manufacturing labor begins to reconsider whether life in fact wasn't better back on the farm.

On the link between inflation and money:

Increased money supply is not a causal factor for inflation. It's like suggesting that a bartender is a causal factor for alcoholism. In reality, reserves, whether they exist in the system's books or not, are always available. Credit creation cannot really be controlled. If you and I want to create a loan between ourselves, we can do it. If a bank wants to create a loan, it can do it. The only thing that can mitigate that ability is regulation of the banks. However, if we consider the off-balance-sheet and shadow banking mechanisms, there really is no way to control that credit creation. The only way the Federal Reserve can influence credit creation is by raising or lowering short-term rates. With that said, we're at the outer bound, at zero, and what we're finding is that demand for money is not increasing as the cost of money goes to zero — which is not unlike what we saw in Japan. What is happening, however, as ever when the cost of money stays this low, is that speculators are inclined to speculate because the cost of speculation on leverage is negligible.

The reason why, in Lapolla's opinion, the Fed has failed in generating systemic inflation (and why the Fed will keep coming back, and doing the same wrong things over and over until everything finally breaks)

The reason [we don't have systemic inflation] is that the labor markets are fractured. So, at the end of the day, what we're having now is an asset inflation again, an echo. We're not seeing the seeds or leading edge of wage/price inflation, the true driver of damaging systemic inflation. Asset inflation resolves itself in one way, and one way only, and that's through asset deflation. So we have ongoing asset deflation in the residential real estate market. We have ongoing asset deflation in the commercial real estate market and we will ultimately have asset deflation across China and Asia.

On what would happen to the global economy if the dollar were to collapse versus the euro and commodities:

Global deflation and depression are what would happen.

On what self-cannibalizing HFT algorithms means for volume and for the markets in general.

Doesn't it necessarily imply that there must be real inefficiencies in pricing on the table, for long-term investors, if everyone is totally focused on the short term? So, suggesting that "the game is over" has implications across the board. It has implications in terms of the way asset allocators think about investing, the way their money managers think about deploying capital, and ultimately about the way corporate managers think about deploying shareholder capital. We in effect are in this very awkward "teenage" stage where we've just had this fracturing shock, the credit crash, the exposing of all the financial hubris and misallocation of capital. We haven't even moved to credibly addressing those issues in Europe and we're still holding onto the notion that the emerging markets — which are just getting their first taste of capitalism on the back of reckless credit expansion and speculation — can somehow become the engine that overwhelms the massive deleveraging of the developed world. It's a preposterous notion. I'm not being fatalistic. This is the way history moves. In 30 years, it will be clear to people, looking back, that this is the final chapter of the old story in which finance, financiers, leverage and short-term trading ruled the world.

On what the 'sequel' is:

We're moving towards something that, by definition, is going to have to address the real structural issues — in the U.S., fractured labor markets, still-excessive credit and unsupportable levels of debt tied to homes, a rising propensity to save, bleak expectations for wages and investment returns. From our vantage point, it's only a question of timing. But it's entirely possible that there won't be an asymmetrically positive outcome for the globe. "Growth" is not a fait accompli. In fact, there can and probably should be periods, lengthy periods, of virtually no growth; of consolidation and pruning. So we would reject the notion that growth necessarily has to happen. Very marginal, just population-type, growth could in fact be the order of the day, and that implies a re-pricing of risk capital across the board.

Lastly, his investment advice:

Those who are bit more speculative, we're encouraging to pick a spot where they will buy the U.S. long bond, if not zeros on the U.S. long bond, as rates start to move closer to 5%. It's likely to have very high, equity-type returns, in short bursts.

Full interview with Kate Welling:

2011 05 Game Over _China_

h/t Michael

"

Investing in Areas With Rapid Growth Potential

Investing in Areas With Rapid Growth Potential: "

Dow up 80…oil still below $100…gold still below $1,500….

Oil has a long way to get back to its 2008 high. But it’s still 3 times what it was in 2005 and 5 times its price in 2001.

In the battle between inflation and deflation, it’s not clear to us who’s winning. Prices are rising, but in the context of a general deflationary funk. Try as they might, the feds just can’t shake the Great Correction. It leaves them struggling to loosen monetary policy to free-up the economy…and succeeding only in tightening the noose around the consumer’s neck. Here’s the AP report:

NEW YORK (AP) – High gas prices are driving a wider wedge between the wealthy and everybody else.

The rich are back to pre-recession splurging: Saks Fifth Avenue and Nordstrom customers are treating themselves to luxury items like $5,000 Hermes handbags and $700 Jimmy Choo shoes, and purchasing at full price.

“The average shopper isn’t in the game, except for necessities,” said Faith Hope Consolo, chairman of retail leasing and marketing at Prudential Douglas Elliman. At the same time, among the rich, “Luxury products are selling like bread.”

J.C. Penney, Wal-Mart and home-improvement retailer Lowe’s Cos. all said they’re noticing their customers are consolidating shopping trips to save money on gas as the average price hovers at $4 a gallon.

More than a half-dozen corporate earnings reports this week show that for the affluent, rising prices are merely a nuisance. For others, they can mean scrimping to put food on the table.

Of course, this has the obvious nasty feedback loop. The middle and lower classes have less to spend. The economy sinks along with them.

But we’re not going to worry about them. We warned them!

Instead, let’s turn to another subject.

Yesterday, The Daily Reckoning set off a bombshell…or at least a stink bomb. We wondered aloud if real growth rates in the developed countries – particularly in England and America – hadn’t returned to their pre-Industrial Revolution rates. Is it possible that real growth regresses to the very low levels of the middle ages or before?

Why would that happen?

It’s not a matter of Fed policy. Or of tax rates. Or even of debt. It’s deeper than that. More basic. More important.

Each time humans make a breakthrough, their rate of growth speeds up. They then take advantage of it. They fill up the economic niche it opens for them…as fully as their new technology allows. And then what? Growth then goes back to ‘normal.’ But what’s normal? Apparently, normal is very low or negligible rates of growth; that’s what we had before the Industrial Revolution began.

Which, of course, only gives rise to a whole group of questions.

First, is it true? Is human history a long spell of stagnation or low levels of growth…punctuated by sudden bursts of above-trend growth?

If it is true, is it also true that the developed economies have reached the limit of the ‘cheap energy’ dividend…which began with the large-scale exploitation of coal in the 18th century, followed by the wide use of oil in the 19th and 20th centuries?

And if that is true, what next? Are there no new sources of cheap energy?

What about nuclear?

Well…a possibility…but recently nuclear power was dealt a huge setback. It’s not cheap, not when you add in all the safety features… and the cost of the occasional emergency. Many nations are now re-examining their energy policies to decide whether nuclear has any role to play at all.

What about conservation…energy saving measures…going green?

Well, yes…you can stretch your energy. You can probably even increase your standard of living, by using it more efficiently. But you don’t get above-trend economic growth gains by reducing the inputs of energy. You appear to get rapid growth only from big breakthroughs that make new energy available…and put it to work for you.

So, what can you expect? The critical component of growth has suddenly become three times as expensive as it was five years ago. The economy can probably continue to ‘grow’…but how much? Without a new breakthrough, what can it expect? About the same level of growth as before the new technology came on line – negligible growth, in other words.

And if that is true, how will investors make any money?

Answer: they won’t.

Hmmm… This is getting interesting.

‘Bill, let me get this straight… You’re saying that the kind of growth the US saw in the 18th, 19th and 20th centuries was just an anomaly…right?’

Well, that’s the implication.

‘You’re saying that when the world gets its fill of a new technology – even if it is something as big as oil – that it grows up to the limit that that technology makes available…and then it comes to a halt.’

Yes, that is what this analysis suggests. Let’s say you look back at when the bow and arrow was invented. It probably enabled primitive hunters to get more game. They could support more people. So, the human population grew. But once the bow and arrow was widespread, the population probably stopped growing. We had squeezed all the juice we could out of that innovation.

‘And you’re saying that the investment returns of the past couple hundred years actually may reflect this anomaly…and that investors may never again realize anything like it.’

Well, yes. Not in the advanced, mature economies.

‘Then, it sounds like I should just forget about investing all together.’

Nope. First, there are huge parts of the world that are not ‘built-out’ yet. Where energy use is still very low. These areas can still make rapid progress as they catch up. They’re like tribes that hadn’t taken up the bow and arrow. When they got it, they could make progress.

You ought to be able to participate in their progress, too, simply by buying companies that are operating in these growth areas. And they’re not just foreign companies… US, European and Japanese companies are all taking advantage of growth in the developing world.

Second, there is still the opportunity for making money the old fashioned way…by compounding earnings, not capital gains. We’re so used to stocks and real estate going up that is it hard to imagine a world with stagnant prices. But that is what we could be facing. Slow rates of growth should mean very slow or negative price appreciation in America’s capital stock. Dividends will become more important. And people who get wealthy will probably do it as they did for centuries before the Industrial Revolution – either by saving and compounding small gains over many years, or by taking it away from someone else.

Regards,

Bill Bonner

for The Daily Reckoning

Investing in Areas With Rapid Growth Potential originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

"

ECRI Says Global Slowdown Will Hit This Summer

ECRI Says Global Slowdown Will Hit This Summer: "Inquiring minds are watching a video with Lakshman Achuthan at the ECRI who says 'Global Slowdown to Hit by Summer, Even for U.S.'

The world is headed for an economic slowdown, according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth.

'It is not country specific, but imagine if you could add up all the activity in factories around the world and see if it was accelerating or decelerating, that is what this indicator is focused on,' says Lakshman Achuthan founder and managing director of the research center. 'And it has been telling us very clearly, unambiguously, that we have a peak in global industrial growth this summer.'

I commend Achuthan for a good interview and for insisting last year that a double-dip recession was not in the cards.

Many of you know that I got into a spat with the ECRI a while back. The issue was not that on the merits of the ECRI's indicators, but rather their claim the indicators never missed a recession call and never predicted a false recession.

Inquiring minds may wish to consider ECRI's Lakshman Achuthan Still Blowing Smoke

However, the ECRI and I now see things alike.

On Monday May 16 I wrote Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected.

That is consistent with what Achuthan said to Aaron task yesterday in that Tech Ticker interview.

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

Mike 'Mish' Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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20 Startling Facts About the US Housing Market

20 Startling Facts About the US Housing Market: "

The Economic Collapse has put together a stupendous list of 20 startling facts about the US housing market:

1. According to Zillow, 28.4% of all single-family homes with a mortgage in the United States are now underwater.

2. Zillow has announced that the average price of a home in the U.S. is about 8% lower than it was a year ago;

3. U.S. home prices have now fallen a whopping 33% from where they were at during the peak of the housing bubble.4. During the first quarter of 2011, home values declined at the fastest rate since late 2008.

5. According to Zillow, more than 55% of all single-family homes with a mortgage in Atlanta have negative equity and more than 68% of all single-family homes with a mortgage in Phoenix have negative equity.

6. U.S. home values have fallen an astounding 6.3 trillion dollars since the housing crisis first began.

7. In February, U.S. housing starts experienced their largest decline in 27 years.

8. New home sales in the United States are now down 80% from the peak in July 2005.

9. Historically, the percentage of residential mortgages in foreclosure in the United States has tended to hover between 1 and 1.5 percent. Today, it is up around 4.5 percent.

10. According to RealtyTrac, foreclosure filings in the United States are projected to increase by another 20 percent in 2011.

11. It is estimated that 25% of all mortgages in Miami-Dade County are “in serious distress and headed for either foreclosure or short sale“.

12. Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months. Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.

13. Sales of foreclosed homes now represent an all-time record 23.7% of the market.

14. 4.5 million home loans are now either in some stage of foreclosure or are at least 90 days delinquent.

15. According to the Mortgage Bankers Association, at least 8 million Americans are currently at least one month behind on their mortgage payments.

16. In September 2008, 33% of Americans knew someone who had been foreclosed upon or who was facing the threat of foreclosure. Today that number has risen to 48 percent.

17. During the first quarter of 2011, less new homes were sold in the U.S. than in any three month period ever recorded.

18According to a recent census report, 13% of all homes in the United States are currently sitting empty.

19. In 1996, 89% of Americans believed that it was better to own a home than to rent one. Today that number has fallen to 63 percent.

20. According to Zillow, the United States has been in a “housing recession” for 57 straight months without an end in sight.

Source: The Economic Collapse: :”Don’t Buy A House In 2011 Before You Read These 20 Wacky Statistics About The U.S. Real Estate Crisis“

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To story so far

To story so far: "

Over lunch yesterday with a friend we discussed the direction of the American economy. I am naturally bearish and he is naturally bullish. So this lead to an interesting lunch. He asked me to articulate my thoughts and here they are:

I believe that the American economy faces heavy headwinds and that “business as usual” is just not on the cards. Moreover, the American economy’s make up, imposes some real limits to future growth.

Over the past two decades, personal consumption as a percentage of GDP has trended upwards. Looking back to the 80s and 90s personal consumption hovered around 60%. In 2010 it reached 70% – it is much higher in the U.S. than in the rest of the OECD. Secondly, more than half of all adult Americans have FICO score of less than 600, prohibiting them from obtaining a mortgage. Third, in some of America’s largest cities 8% of all homes are in default, where the home owners are channeling all expenditure away from mortgage payment to consumption.

What does this mean?

First, there is little scope for personal consumption to rise organically since it is already such a large percentage of GDP. Second, over the next two years many Americans that today “consume” their mortgage payments will begin to pay rent – reducing their ability to consume. The housing overhang will last for another 24 to 36 months, and it is unclear how it will clear since so many Americans are no longer credit worthy. Between 2002 and 2007 Americans have accessed their “home ATM” to meet their standard of living expectations. While 8% of mortgages are in foreclosure, about 25% are “underwater” where the value of the outstanding mortgage either equal or exceeds the value of the home. The home ATM source of disposable income for consumption has disappeared for good. Therefore, business as usual for the consumer is just not on the cards

The other part of the equation is government spending, which is set to fall. Federal, State and local governments account for about 25% of total GDP; whereas the Federal government is only now beginning to look at expenditure reduction, state and local governments have already facing to large budget deficits, and they are cutting. BTW state governments account for about 2/3^rd of all government expenses. It is also important to note that several state have resorted to increase in taxes, further reducing disposable income.

Finally, and despite what the GOP is preaching, there is no way to balance the Federal budget without some revenue generation strategies. The GOP may oppose increase in income tax, but the reality is that sales taxes are almost certain to be needed to bridge the gap, moreover, it is a more ”egalitarian” form of taxation. This will further reducing available income for consumption. Yes Americans are inventive, but it remains that a federal government that has a deficit equal to 10% of the GDP will have to take action soon, rather than later.

I am reluctant to get into the argument for growth in the private sector, but one aspect resonate across many sectors, while net profits continue to improve top line revenues remain sluggish. American corporations have become master at the art of cutting costs, but there’s a limit to this strategy (although Q1/2011 performance has been spectacular). Most American companies have indicated a reluctance to increase employment, until they see an upward sign in sales activities.

For all these reasons, headwinds for the American economy remain heavy. Moreover, one crisis (either in America or elsewhere) could cause systemic tension to explode.

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