August 2010

If it keeps on raining levee’s going to break
If it keeps on raining levee’s going to break
When the levee breaks have no place to stay

Mean old levee taught me to weep and moan
Mean old levee taught me to weep and moan
Got what it takes to make a Mountain Man leave his home

Oh, well; oh, well; oh, well.

Don’t it make you feel bad?
When you’re trying to find your way home you don’t know which way to go?
When you’re going down south and there’s no work to do
And you’re going on to Chicago

Crying won’t help you, praying won’t do you no good
Crying won’t help you, praying won’t do you no good
When the levee breaks, mama, you got to go

All last night sat on the levee and moaned
All last night sat on the levee and moaned
Thinking about my baby and my happy home

Going – going to Chicago
Going to Chicago
Sorry, but I can’t take you

Going down – going down, now
Going down – going down, now
Going down
Going down
Going down
Going down

Going down – going down, now
Going down – going down, now
Going down – going down, now
Going down
Going dow-, dow-, dow-, dow-, down, now

WASHINGTON (AP) — Federal Reserve officials signaled at their August meeting that they would consider going beyond a modest program to purchase government debt if necessary to boost the economy.

Minutes of the Fed’s discussions from the Aug. 10 meeting show the central bank recognized that the economy could need further stimulus beyond the debt purchases. Those are intended to lower interest rates on a range of consumer loans.

The minutes, which were released Tuesday, did not spell out what new steps might be taken. But they do indicate that the officials focused attention on the modest move the Fed did take at the meeting, which would invest the proceeds from its huge mortgage bond portfolio in Treasury securities.

INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said China wants to increase its gold holdings as Beijing is increasingly keen to diversify out of US bonds, but is waiting for the right time.

Speaking to CNBC Asia Tuesday, Faber said he and Robert Friedland, Ivanhoe Mines Chairman, “told the Chinese six years ago that they should invest in gold, not in US dollars, but they haven’t done so”.

“Now they have the intention to accumulate gold and silver,” Faber said, “but because the Reserve Bank of India bought gold at around US$1,050, it will be a loss of face [for China] to pay more than the India Reserve Bank”.

“They want to increase but they don’t know the timing. That’s their dilemma.”

The Chinese know they have to get into resources, that’s why they have large assets in Asia, Africa, Central Asia and Latin America, he said.

China’s ownership of US government debt has dropped to the lowest level in at least a year, US Treasury data showed Monday.

The Chinese government reduced its US Treasury bond holdings to US$843.7 billion in June, the lowest level since at least the same month last year, the Treasury said in a report on international capital flows.

China has repeatedly criticized the United States for its snowballing debt levels, fearing its investment in US government bonds could turn sour if a debt crisis erupts.

Faber said China is dissatisfied with its US holdings on two counts: First, yields are low and will be overtaken by inflation. Second, a weakening US dollar means that over time Beijing will lose money on its dollar holdings.

“The yields are now very low,” Faber said. The return on 10 and 30-year U.S. government bonds is insufficient, he said.

“I think eventually inflation will accelerate,” Faber said. “Whenever food prices go up, and grains have been very strong recently, with the sum delay, you get inflationary pressures.” eventually inflation will accelerate.

Investors should stay clear of 10 and 30-year U.S. government bonds, Faber warned.

Over time, the US dollar will weaken, he said. “This is the policy of the US government, to weaken the dollar in order to cushion the downnturn in the US economy.”

The problem for the Chinese is what to do with their money. “The euro has problems, other curencies have problems, so the choice would be to buy precious metals like gold and silver which they should have done a long time ago,” Faber added.

Faber told CNBC Asia he is bullish on India. “If I look at the long-term potential….there is an emerging middle class and capitalism has now been truly endorsed by everybody,” he said, adding that India also has some “very well run” companies.

Frontier markets offer a lot of potential now that many previously emerging markets such as Taiwan, Singapore and South Korea have developed, Faber said.

“Frontier markets are economies in Central Asia, Africa, Latin America and in Asia.”

In Asia, he cited Myanmar, Cambodia and Mongolia.

“Mongolia has the potential to be the Saudi Arabia of Asia because they only have 2.5 million people. It is a huge land mass and very resource rich.” “They have in the Gobi dessert, copper, gold, coal and much more would be found in future.”

The new democracy is attracting investments from international mining firms as a result of its untapped resource reserves and close proximity to China, Faber said, adding that there are several funds emerging to invest in Mongolia.


As revenues strengthen and social safety net spending eases, the deficit will tend to narrow rapidly on its own. As in the late 1940s and early 1950s, the debt-to-GDP ratio is likely to fall rapidly.

Revenues strengthen from where? Corporate or individual? The data:

It is the individual who pays the substantial contribution to government revenue. With unemployment high and likely to get higher, tax revenues are not going to shrink the deficits anytime soon, if ever once Social Security, Medicare, Medicaid really start to kick in.

Thus the only solution for government is theft via inflation, as if taxes weren’t enough theft already. Of course inflation as a policy choice became entrenched since 1913 and the creation of the Federal Reserve.


The conditions in the 1940s and 1950s have absolutely nothing in common with the conditions now. Think of the baby boomer dynamics, population growth, etc.


We now have a massive wave of boomers headed for retirement with a need to draw down savings. Unfortunately, those savings are nonexistent for a huge chunk of retirees and hugely insufficient for nearly all the rest.

Agreud. This is the fantasy that Social Security actually consists of assets that provide for drawdown. Pah. Social Security consists of nothing but IOU’s in the form of Treasury paper. The money paid in, is immediately paid out and replaced with UST paper.

The Model is Japan NOT 1940

It’s definitely not 1940. Whether it is Japan is not so clear, but, that’s a closer reality than 1940.

We have a model to look at and that model is Japan. Is debt-to-GDP rising or falling in Japan? I think we all know the answer to that. No doubt many will chime in “the US is not Japan” citing Bernanke’s massive reflationary effort.

Japan still has a strong manufacturing base. It creates goods/services that it exports. China has assumed the low end of the market, Japan the higher end. Germany is also a dominant exporter. The US is really stuck in tough competition, this wasn’t the case in 1940.

In spite of that massive effort by Bernanke the US is in deflation.

Well where? Apart from Housing prices, where are prices falling? Certainly the money supply is expanding at a terriffic rate.

Others will claim Japan is a nation of savers. What they really mean is Japan WAS a nation of savers. The savings rate in Japan is now under 1% while the US savings rate is soaring.

Well soaring seems somewhat disingeneous, it is returning towards the historical average. That is good, however decades of falling rates will take time, assuming of course that the savings rate continues, to make any inroads to the current dire situation.

Interestingly, a lack of savings in the US strengthens (not weakens) the deflation case. What cannot be paid back won’t. What isn’t paid back results in a collapse in credit (i.e. deflation).

Agreud – if the government doesn’t intervene. And just who is more likely to default? Joe6pac, or the government? The government will try to inflate their debt away. What about Joe?

Possibly falling due to existing defaults on mortgages etc, but Joe seems to be approaching a safety zone. Unemployment will be the elephant in the corner. Rising unemployment will see increasing defaults.

Sell Short SPY @ $106.40

Whipsaw city. Death by a thousand cuts. Luck got me out with a small loss.

“I will not fear
Fear is the mind killer,
Fear is the little death
That brings total Oblivion
I will permit my fear to pass
Over me and through me
And where it has gone
I will turn the inner eye
Nothing will be there
Only I will remain.”

Buy SPY into the lunch-time blahs. The correction seems to have run its intra-day course and I would expect to see a run up [moderate] into the close.


The Rapid Increase In Public Debt Is Not Likely to End in Disaster

Although public debt issuance is massive at present and will continue to be so, total debt issuance— public plus private—is much smaller than it has been in recent years, and it will remain depressed. Public debt growth may have accelerated to roughly $2 trillion annual rate, but net private debt issuance will likely be minimal or negative for many years as the private sector delevers; private debt growth had been running at about $4 trillion annual rate in recent years but has shifted into reverse, becoming negative (chart 4). Thus, although the federal debt is rising rapidly, the total debt level in the economy is not.

We seem to have a conflict in the data.

Let’s then have a look at potential future loan demand as Levy states that the Private sector will continue to delever.

First up loan demand in the Medium to Large firm category:

We see that loan demand is again increasing.

Small firms:

Again, loan demand picking-up.

And for consumer loans:

Across the board, demand for loans is again rising. This rather contradicts the assertion that consumers and businesses are looking to delever. In a period of cheap money, engendered by Federal Reserve inflation, there will be demand to take advantage.


Note that net credit has been in contraction for 5 quarters!

However the net result is simply not that significant to the Debt/GDP ratio, and this is the critical point.

In spite of huge government deficits, private credit is contracting faster. Given that “excess reserves” just sitting don’t do a damn thing, and given that TMS1 – True Money Supply is barely growing we have a rock solid case for saying deflation is here and now.

Let’s take a look at the data:

Total Loans across Real Estate, Installment, etc has contracted by approximately $500 billion, a not insubstantial sum. However government debt has grown by some $2.5 trillion approximately. Thus the statement is inaccurate.

Rising prices do not constitute inflation, they are at best a symptom of rising inflation.


Nearly every condition one would expect to see in deflation is happening, right now. The few that aren’t are close at hand and likely. If all or nearly all the conditions one would expect to see in deflation are happening (the scorecard is close to unanimous), I suggest that those who say we are not in deflation have the wrong definition of the word.

Evidence? You are using prices aren’t you Mish, particularly house prices. After everything you have just stated. Tsk, tsk.

Bear in mind my definition of inflation is a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market.

Unfortunately, the Fed and the FASB have conspired to prevent mark-to-market accounting.


However, it is relatively easy based on market reaction, credit expansion/contraction, and moves in interest rates to state that deflation started in 2007, continued through 2008, was interrupted in 2009, and we are back in it now, simply by looking at action in treasury yields in conjunction will all of the other indicator mentioned in the article.

Nonsense. Treasury yields are a manipulated price of the Federal Reserve and as such tell us only of the level of intervention into the market [to inflate] and it is substantial.

The reason I use “mark-to-market” accounting of credit in my definition is twofold.

1. From a practical standpoint “mark-to-market” accounting better explains what is happening and why.

And why is that?
Is it because a free market price indicates far more clearly the true situation? I agree, which is why Treasury yields are so misleading.

2. The model is predictive. Note the Levy chart for 2008 and 2009. Asset prices crashed in 2008 and rose in 2009 although total credit fell in both years. Why? The massive bailout of banks by the Fed and Congress hugely lifted the value of credit on the books of banks. In turn, asset prices rose, as did treasury yields, even though the real economy stagnated.

And what do we call that?

One could not have predicted recent events (even in hindsight) simply by looking at the Levy chart. The Levy chart shows 2008 to be an inflationary year and 2009 a deflationary year.

The Levy chart is detailing the contraction in credit that occurred. That does not mean that the trend will continue. In fact the data suggests that it will not.

One could also not have predicted what would happen to treasury yields without an understanding of what collapsing credit would do.

Treasury yields are a signal to government intervention.

Note how useless the CPI and the price of oil were and still are, in predicting treasury yields.

CPI and Oil are indicating the level of inflation building in the economy due to all the government expansion of the money supply.

By the way, I love that Levy chart.

Makes you feel better?

Unfortunately, it is not possible to put together a chart of credit “mark-to-market”. There is no such thing, on purpose. Neither the Fed, nor the banks want anyone to know true marks, and the accounting board has delayed “mark-to-market” accounting as well as rules that would require more off balance sheet transactions to be brought back onto bank balance sheets.

True, such data would be highly illuminating.

However we can easily deduce the trend by a number of variables. Those variables suggest we are indeed bank in deflation after a short interlude in 2009.

While that may be the case, government will simply match the losses with further inflation. The only thing that will stop them is a clear signal that the currency will collapse. As that is a significant distance away, we will have further inflation.

Pretty low-key start to the week. Market seems to be digesting Friday’s gains before moving on [higher]

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