This Depression is just beginning

Discussion in 'Economics' started by ByLoSellHi, Aug 4, 2009.


    This Depression is just beginning
    August 03, 2009

    Skip the Happy Talk

    This Depression is just beginning

    By Mike Whitney
    August 03, 2009

    "Information Clearing House" --
    Too bad Pulitzers aren't handed out for blog-entries. This year's award would go to Zero Hedge for its "The 'Money on the Sidelines' Fallacy" post. This short entry shows why the economy will continue its downward slide and why the US consumer will not get off the mat and resume spending as he has in the past. The fact is the Net Wealth of US Households has "declined from a peak of $22 trillion to just under $12 trillion in early March."


    The problem is compounded by the fact that Total US Household debt, as of first quarter 2009, amounts to roughly $13 trillion, and has stayed within that range for the last 3 and a half years.

    Zero Hedge:

    "From the end of 2007 through Q1 of 2009, household equity has declined by 94%. Is it surprising that today's GDP number would have been a complete debacle if the consumer had been left alone to prop the U.S. economy, on whom 70% of the economy is reliant? Obama pulled a Hail Mary with the stimulus: without it there would be no debate America is in a depression right now." (

    What does all this mean?

    It means the consumer is down-for-the-count. His credit lines have been cut, his home equity eviscerated, and his checking account swimming in red ink. That spells trouble for an economy that's 70% dependent on consumer spending for growth....which brings us to another interesting point. The uptick in GDP last quarter was almost entirely the result of the surge in government spending; ie "fiscal and monetary stimulus". How long can that go on? How long will China keep slurping up US Treasuries rather than let their currency rise? Here's a clip from the Wall Street Journal on Friday:

    "Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.

    A fuse was lit this week when traders noted China's apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country's actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.

    This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile."

    Uncle Sam is goosing the bond market just like he is the stock market. (more on that later) Take a look at Treasury's latest bit of chicanery which appeared in the back pages of the Wall Street Journal in June:

    "The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.

    When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.

    But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners." ("Is foreign Demand as solid as it looks, Min zeng)


    So, someone doesn't want you and me to know that foreign demand has gone to the dogs. That's not encouraging. So, they move the shells around the table and "Presto"---central banks and foreign investors can't get enough of those fetid T-Bills. What a racket.

    This is what happens when monetary policy is handed over to bank-vermin and Ponzi-scam artists. Anything goes!

    The Zero Hedge article shows that homeowners used the equity in their homes to fuel the soaring stock market.

    Zero Hedge: "Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

    Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer who net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more."


    You read that right! Only $400 billion of that fantastic 6 month "green shoots" stock market rally came from money market accounts. The rest ($2.3 trillion) was laundered through the banks and other financial institutions to create the appearance of recovery and to raise equity for underwater banks rather than forcing them into receivership (which is where they belong) Bernanke probably knew that congress wouldn't approve another TARP-type bailout for dodgy mortgage-backed assets, so he settled on this shifty plan instead. The only problem is, the banks are still broke, business investment is at historic lows, consumers are on the ropes, the unemployment lines are swelling, the homeless shelters are bulging, the pawn shops are bustling, tent cities are sprouting up everywhere, and according to MarketWatch, Corporate insiders have recently been selling their companies' shares at a greater pace than at any time since the top of the bull market in the fall of 2007."

    Face it; the economy is in the crapper and Bernanke's trickery hasn't done a lick of good.

    It's been two years since the crisis began and nothing... NOTHING has been done to fix the banking system or force the banks to write-down their shi**y assets to market. But the losses are real and no amount of Congressionally approved accounting hanky-panky (like suspending mark-to-market) will change a bloody thing.

    So, how bad will it get?

    Well, it depends on whether the FDIC decides to continue to allow financial institutions like Corus and Guaranty Banks to operate with "negative Tier 1 ratio" hoping that all the green shoots happy talk can turn insolvent institutions into thriving mega-banks. "Abrakadabra".

    Karl Denninger explains this latest hoax in a recent entry on his site Market Ticker:

    "So what's going on here?

    Simple: An enormous number of banks are holding loans at or close to "par" that really aren't. They're holding mortgages at massively-inflated values, even on defaulted properties, and this is why you are not seeing more foreclosure sales - that is, why inventory is being held back. If they sell it the accountants will force recognition of the loss, which will render them instantly insolvent, but so long as they "extend and pretend" they are marking these loans way, way above recovery value. The upshot of this is that these firms' balance sheet claims on asset values are massively inflated, regulators know it, and they're intentionally ignoring it."

    Bingo! It's all 100% fakery conducted right under the nose of the Fed, the Treasury and the FDIC.

    How many hundreds of banks are being kept on life-support because the FDIC is down to its last few farthings and doesn't want to ignite a panic?

    Stay tuned.

    The banking system is insolvent and the fact that the politically-connected big banks talked their their friends at the Fed into pumping liquidity into equities so they could access the capital markets, doesn't change matters for the hundreds of local and regional banks that will be caught in next year's downdraft. Prepare for massive consolidation with G-Sax and JPM left to pick up former competitors for pennies on the dollar.


    Keep in mind that Wall Street veterans knew from the very beginning that Bernanke's quantitative easing (QE) was a load of malarkey intended to justify keeping toxic asset prices artificially high while pumping trillions into the stock market. Here's former hedge fund manager Andy Kessler's analysis way back in May:

    "On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

    A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. .....It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers." (Andy Kessler "Was it a Sucker's Rally" Wall Street Journal)

    What a swindle.

    Bernanke's had a good go-of-it, juicing the market through the backdoor and concealing--as much as possible--who is still buying US Treasuries. (who knows; maybe it's the Fed buying its own paper offshore?!?) But what good will it do? The US consumer is broke; the tank is on empty. Household equity has declined by 94%, jobs are scarce, personal savings are rising, and families are cutting back and hunkering down. It will take a decade or more before household debt is whittled-away to a point where people can consume at pre-crisis levels. Another stock market bubble won't change a damn thing. This Depression is just beginning.
  3. Arnie



    Federal Reserve Chairman Ben Bernanke assured readers of this page (“The Fed’s Exit Strategy,” July 21) that he has the tools to prevent the huge reserves he’s pumped into the banks from generating an inflation that would abort an economic recovery.

    But does the Fed have the guts to use those tools? Will it risk censure from Congress and the Obama administration if it tightens money at the crucial juncture when inflationary omens accompany a reviving economy? Mr. Bernanke signaled the probable choice by writing that “economic conditions are not likely to warrant tighter monetary policy for an extended period.”

    The Fed’s past record of judging when and how to use its tools for regulating the money supply is not impressive, particularly in times of economic distress. Its financing of large federal deficits in the mid-1970s sent inflation up to an annual rate approaching 15% before Jimmy Carter repented in October 1979 and installed Paul Volcker at the Fed with orders to kill the monster.

    More recently, the Fed’s continued easing of interest rates during the 2003 economic recovery created the credit bubble that collapsed last year with such devastation.

    The Fed’s difficulties in getting money policy right stretch back to its creation in 1913. In 1930 it starved the banks, creating a string of failures that worsened the effects of the 1929 stock market crash. In 1937, it starved them again, contributing to a prolongation of the Depression that had been manufactured in Washington by the clumsy taxation and interventionist policies of Herbert Hoover and FDR.

    To be sure, the Fed has had its good years. It financed the 20-year period of low-inflation growth and prosperity that began in 1983 when the Reagan tax cuts became fully effective.

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    But because of its often self-contradictory double mandate to promote both monetary stability and full employment—plus the rap it has taken from economists like Mr. Bernanke for stinginess in the 1930s—it often overreacts to recessions with excessive generosity. With its federal-funds interest rate target at near zero, the spigots are now wide open. And as Mr. Bernanke promises, they will likely remain that way for an “extended period.”

    Quite apart from the question of the Fed’s will, there is another large issue. Mr. Bernanke’s assurances to the contrary, there can be doubts about whether his tools are really adequate to deal with the powerful inflationary pressures the politicians are in the midst of creating in the form of a mountainous and rising federal deficit.

    Mr. Bernanke showed that he is well aware of that danger when, in his semiannual report to Congress on July 21, he pleaded with that body to bring the deficit under control. The federal budget deficit is projected at an incredible $1.8 trillion for the fiscal year ending Sept. 30, almost half of proposed federal spending. The Treasury’s financing needs will be even higher than that when you count in the various “investments” the government has made in auto, housing and other dubious ventures.

    But the day after he issued that plea, President Barack Obama was pleading with the American people to support his nationalized health plan. This plan would yet add hundreds of billions more to the deficit.

    The Fed has been financing a significant part of the government’s profligacy, and it is riding a runaway horse. Even if it has the means to cope with present financing needs, will it be able to do so when, and if, the economy actually recovers and it has to finance both a recovery and a spending-crazed government?

    Martin Hutchinson, a former merchant banker who blogs as “Prudent Bear,” wrote in May that the German Weimar Republic was monetizing 50% of government expenditure when it brought on the ruinous hyperinflation that destroyed the mark in the early 1920s. The Fed in May 2009 had monetized 15% of federal expenditures over the preceding six months—well short of the rate that destroyed the German economy, but not negligible.

    The Treasury (and Congress) has been depending on the Fed’s massive buying of Treasury bonds to keep the government’s financing costs within reasonable bounds—as weakening international demand puts downward pressure on bond prices and upward pressure on the interest rate the Treasury must pay. The yield on the 10-year Treasury bond is below where it was a few weeks ago but well above early this year when investors world-wide were seeking the safety of U.S. Treasurys. Even massive Fed support hasn’t been enough to prevent slippage in bond prices this year.

    The Fed has more than doubled the size of its balance sheet in the last year to over $2 trillion. As of July 30, it held $695 billion in Treasurys, up $216 billion from a year earlier. In addition, it has added nearly half a trillion of mortgage-backed securities it purchased to keep Fannie Mae and Freddie Mac, now wards of the government, afloat.

    Adjusted reserve balances of member banks exploded in late 2008, soaring to $950 billion from $100 billion in four months as the Fed has pumped liquidity into the banking system. They peaked at nearly $1 trillion in May. The reserves provide banks with a shield against runs but they also are high-octane fuel for bank lending, which means they can touch off another credit bubble, and the accompanying inflation, when credit demand picks up again.

    In his Journal op-ed, Mr. Bernanke listed ways he can keep this monster in check. The Fed can pay interest on the bank reserves it holds. This would lessen the incentive of banks to find private borrowers and keep some reserves out of the credit stream, damping inflation potential. But the net effect would be to add still more liquidity to the system, which would run counter to the longer-term goal of mopping up liquidity.

    He said that the Fed could also sell securities to the banks with an agreement to repurchase them, but these “reverse repos” would only mop up liquidity temporarily.

    The standard way for the Fed to soak up liquidity, mentioned last on Mr. Bernanke’s list, is to sell Treasurys to the banks. That would draw down bank reserves and reduce their inflationary potential. Under the Basel I international banking rules, Treasurys are zero-risk investments and don’t have to be matched at 8% of their value with additional capital, as does private lending.

    With the huge volume of Treasury financing coming down the road, the Fed will have plenty of bonds to sell (it already has, in fact). But the Fed buys Treasurys primarily by creating new money, or in other words by inflating the money supply. Will it have the nerve or even the capacity to “sterilize” inflation by reselling the bonds to soak up bank liquidity? Again, there are those political pressures. Will the Fed’s admittedly bright money managers be able to strike a balance between warding off inflation and leaving the banks with sufficient liquidity to finance an economic recovery?

    As to that huge volume of mortgage-backed securities the Fed is now holding, what is to be done with them? They are “toxic,” which is why the Fed bought them as a means of keeping Fannie and Freddie solvent. They are “guaranteed” by Fannie and Freddie, which means they now are guaranteed by the U.S. Treasury. So they are yet another liability to add to all the other liabilities being piled on the Treasury. The Fed already has financed them once; will it have to finance them again when they come up for redemption?

    In short, there are very good reasons to doubt that the Fed can cope with the political problems of avoiding inflation. The technical problems don’t look very easy either.

    Mr. Melloan is a former deputy editor of the Journal editorial page. His book, “The Great Money Binge,” will be published in November by Simon & Schuster.
  4. China is essentially doing the exact same thing, except they're not trying to be covert about it. Giving a trillion to the banks and telling them to lend it "or else". Of course they lend it and where does it go? Into the stock market.
  5. The problem is that you can only crash and shakeout investors, especially of the long and older kind, who do want to retire some day, before they say "f**k this noise," in a more polite way, of course, but nonetheless take their ball home instead of playing anymore.

    There are not nearly enough traders to replace their capital.

    This trend will be exacerbated by the fact that their are 3 boomers retiring or set to retire now for every one 'prime earner' or 'beginning their career' type.

    Wait and watch. There's a historically unprecedented trust 'gap' that's developed between the investing public and Wall Street. Even the largest rally in history that took place since March happened on relatively light volume, and largely sans retail investors - it's all recycled, quantitative easing money given to the banks and trading desks of financial firms.

    Once the banks have to start writing down their losses in earnest again, the party is officially over.

    Nothing corrupt can last forever. Equity markets are about to be tossed aside by the even the sheeple, as the democratization of information has let even the disconnected in on the biggest open secrets of Wall Street graft and corruption, and government nepotism and incest.
  6. That wont happen. The us is a fictitious economy. I believe the recession is easing already.
  7. What if we all agree on a 5 year temp tax at $3.6 per day for all men, women and children in the US? Will that solve the problem?

    304,000,000 x 5 x 365 x 3.60 = $1,997,280,000,000

    If we stick with 90% of the taxes paid by 10% of the top earners the bottom 50% will hardly pay anything.

    This will be easier to pay than a car loan.
  8. Daal


    Define depression
  9. BLSH,

    Do u really understand what ur saying?

    U had better b wrong my friend. For all of our sakes. No capital markets would mean a barter economy in a time when many can't change the oil in their car, much less grow, raise, or make anything to barter.

    What happens then? A lot of criticism goes toward big Ben and the others for what they have been doing. But those who r cheerleading the demise had better think of one thing.

    Power abhors a vacuum
  10. Oddly enough, there's no standard, recognized definition.

    I'd call it as 20%+ official unemployment, an equity market correction of 30% or more, personal incomes trending down over a protracted period, marked distrust of equity markets, massive government intervention in financial and banking institutions to keep capital from fleeing, and a savings mentality overpowering and triumphing over an investment mentality - all leading to shrinking GDP and a desire for capital preservation rather than risk chasing yield.
    #10     Aug 4, 2009