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Vicious Circles & US CreditJim Willie
CB Unfortunately, we have constructed centrifuges, hit dead ends, stuffed bloated credit pigs, installed blood transfusions from Asia, and now spin our gears in growing futility. Vicious circles of credit have aided the process. The Fed is killing the USDollar with a torrent of tainted money, misreading inflation's effects as a deflation threat. We are entering an economic trap, one characterized by excess liquidity in the non-productive financial sectors, and shrinking liquidity in the productive mfg sectors. Illusions of wealth exist in these financial sectors. The reality of wealth loss is painfully evident in the mfg & service sectors. Charlatans call this corporate deconstruction an economic recovery. The contrasting forces are amplified by our credit engines, working in concert with the Federal Reserve. We are on a course, doing exactly what the Austrian Economists warn for the final phase of Keynesian Monetarism: accelerate the fiat money supply in desperate futility, earning no growth for the work expended on printing presses. The Perfect Storm vortex is gaining strength in powerful fashion. Mortgage finance, corporate debt, and Treasury Bonds are the objects of vicious circles at work. One in particular stands out. Our twin towers of federal deficits and trade gaps are financed by the recycling of an enormous Asian export trade surplus. Nothing of this magnitude has ever been seen in human history. The process reclaims our economic hemorrhage of capital. We have mortgaged our nation's wealth to Asia. The exported debt highlights the devastation of the US Economy caused by the overvalued USDollar spanning two decades. We have dispatched our manufacturing base to Asia over my entire adult lifetime, in pursuit of lower labor costs, replacing it by an enormous debt overload. The global trade system has surely benefited in a narrow view, but huge debt imbalances have resulted that threaten our financial system. Or has there been much of any benefit at all? We have paid our bulbous federal and trade debts with funny money for years, with near impunity until the year 2000. The United States has essentially exported monetary inflation to Asia, which wrought upon them the Asian Meltdown in 1997. We exported a bubble, which found its way around the globe onto our financial markets three years later, resulting in a stock market crash. By providing monetary insurance for international accidents, our nation has guaranteed that the damage from a busted bubble would be larger in our economic sphere. The Sword of Damacles is our long abused currency, the USDollar. The great stock bust has not been permitted its natural course in resolution, as a credit bubble of larger magnitude has formed. The Federal Reserve, in fearing an organic spread to other financial sectors, has reduced interest rates. Two years after the initial officially ordained rate cuts, we now see rates well below the actual level of price growth across the economic spectrum, and even below the deceitful govt reported Consumer Price Index. The CPI is a mere device used to keep govt pensions, military pensions, and Social Security cost of living adjustments down. The Fed-forced rate cuts have now amplified systemic risk in the process. Lower rates have inflated, then magnified mortgage backed bonds and the real estate sector. Their rationale is surely to attempt to create wealth stored in housing, tapped by home equity loans, which thus sustain consumer spending. If the housing sector goes into decline, the 2nd stage of the New Paradigm Recession will hatch. The Fed wields a double-barreled destructive shotgun, monetizing govt debt with vacant money off the printing press, and encouraging citizens to securitize home equity at artificially low rates, at the same time offering a pathetic negative yield to shorterm savers. The suppressed interest rate policy endangers our currency. Finance sectors have come to dominate the economy, a dire signal, since all productive arenas have been pushed to the wayside, in favor of the credit bubble which has supplanted the stock bubble. Gresham might argue that sectors funded by bad money crowd out other sectors from credit sources. With the encouragement of our banking leaders, vicious circles have become deeply rooted in the credit markets. A dual credit system now exists, the banking sector regulated by the Federal Reserve, and the mortgage finance industry, funded by the Govt Sponsored Enterprises, unregulated and an order of magnitude past out of control. Our credit engines have evolved into momentum-driven processes that will not cease in generating funding until crises arise. Both our leaders and our citizens have learned a falsehood, and have embraced it to the point of putting our financial system at great risk. They believe that the greater the funding liquidity, the less at risk the system is to seizure and broken bubbles. However, we have as a result created even more dangerous bubbles in mortgage finance and real estate, which cannot defy nature for much longer. Our entire country has lost its way, believing that funding liquidity is somehow different from credit, that ample liquidity is good while excess credit is bad. It is all debt, debt of a different name, debt with a stamp of legitimacy. In pursuit of this insane amount of debt, we have enjoined foreigners to feed our voracious appetite for credit. They buy whatever we print. Two major consequences have resulted from the Asian purchase of our debt, which we willingly issue and sell to them. First, our mfg base has largely disappeared, slowly complemented by slow erosion of our service sectors. Second, the strangle of our nation's debts has slowed the US Economy to such an extent that we are fast entering a unique Liquidity Trap. The entire US Economy now heads toward a dead-end alley, the inevitable conclusion of a system whose foundation is built upon growing debt. Keynesian Monetarism succumbs to the limitations of human management, as it shows no restraint in credit creation. Our federal debts rise in good times, and rise faster in bad times. Interest rates have dropped, on both the dictatorial short end and the market-driven but intervened long end. World production capacity has increased, and world capital equipment has expanded, to the point where lower rates cannot persuade borrowers to go deeper into debt. These twin excesses comprise the backbone of our price deflation scourge, not to be remedied one iota by still greater Fed increases to the money supply. Our economic corner is unique, quite different from Japan. Instead, our growing grotesque trap is characterized by escalating debts at all levels, and a trade gap unresponsive to a falling USDollar. We share a panicky acceleration of money supply. Under our noses, a dichotomy has emerged to puff up new financial sector aberrations while the productive sectors retreat. The US Economy suffers from an excess of liquidity in non-productive areas, accelerating almost without bounds in financial sectors, like residential real estate and the automobile sector. The demands for credit financing are so great that a minor subsidence in the credit flow will have tremendous detrimental consequences. In contrast to the financial sectors, business activity is on the wane at all levels in productive areas, as money velocity has strikingly slowed. The stall has already occurred in car sales, as GMAC and Ford Finance have encountered annoying 20-30% delinquency rates. But no fear! A central cog to the engine powering our financial system is the Govt Sponsored Enterprises led by Fanny Mae. The GSE component accounts for 25% of the rise in MZM money supply, an astonishing figure. Agencies act as a centrifuge to create tainted money, recycle it, and to attract money like a giant magnet attracting an investment home for Asian savings. Interest rates are marching without obstacle toward zero, even as our productive economy slows dangerously. We are drawing capital from around the world into our credit bubble, with vicious circles feverishly turning dynamic forces. Numerous feedback loops (besides the USDollar) are evident, based upon mortgage finance and corporate credit, culminating in a giant credit conveyor belt distributing North America Treasury debt and Agency debt to Asia. Real estate is fed by the massive Structured Finance pool of mortgage funding, which grinds interest rates downward in the wake of recycled refinance payoffs. The process has been driven to behemoth proportions in unchecked fashion, with a recent sharp rise in foreign participation. The interest rate swap arena operates to offload the risk from massive corporate debt, borrowing at the lower shorterm rate to finance longer termed debt. The process drives corporate debt into a corner, in a wholly domestic game. American corporations have eagerly walked into a corner, in pursuit of next quarter's earnings statement. Spanning intercontinental economics, treating the colossal trade imbalances, and enabling US federal debt irresponsibility is the recycling of Asian trade surpluses back into the US credit markets. Our Asian partners build our finished products and finance our debts, and will soon own our heart, soul, and broken spirit. They have little recourse or alternative, since the sums of money are obscenely large. MORTGAGE FINANCE OUT
OF CONTROL : McCarthy's article on the GSE system provides an excellent and frightening description of Fanny and Freddy's centrifugal force in mortgage finance provision, complete with its powerful feedback loops. His article is titled "Which Japanese (or Chinese) Owns Your House?" dated March 26th of 2003. The refinance payoffs of prematurely retired mortgages, owing to their sheer size, assist in thrusting interest rates ever lower as proceeds are secured in Treasury Notes, the very source of mortgage finance capital. One might easily conclude that the GSE agency engine is a strong secondary whirlwind force in the vortex sending our nation's interest rates toward zero. The GSE's might reveal the initial cracks in the mortgage finance foundation. Denials that we resemble Japan in our unintended but inexorable march to zero rates seem to be patriotic at best and thickheaded at worst. We may be headed to zero faster than Japan, thanks to our creative financial engineering and inventive structured finance. Below is an outline of main points made by Edmund McCarthy, president and CEO of Financial Risk Management Advisors Company about Fanny Mae. His review of the GSE's (Fanny Mae, Freddy Mac, Sally Mae, and Fed Housing Loan Board) are to the point, and implicitly critical. He admits his disadvantage of not being permitted to penetrate the system's opaque nature. The following points all pertain to GSE's and paint an ominous picture:
Avoiding the harsh light of inspection, GSE books are beyond reproach. Consisting of countless contracts varying in size and type, its loan portfolios can be audited only in aggregate for their loan quality, income ratios, delinquencies, and defaults. Little visibility on balance sheets and individual packaged items is afforded to property appraisals (often dictated), income verification (raised bar at 50%), and loan-to-value ratios (approaching zero, especially with cashouts). Anecdotal evidence of systemic abuse is monumental and often absurdly amusing. It seems this system has truly run amok, absent any semblance of regulation or scrutiny. The StLouis Federal Reserve Governor Poole made a public statement, warning of potential economic fallout from the insufficient capital foundation of Fanny Mae itself. The warnings were heeded for a week, and have been since forgotten. Poole has been criticized for his failure to understand this new breed Structured Finance. Perhaps he understands all too well. The essence of the funding centrifuge lies in the ready availability of mortgage funds, and the repeated recycling of refinance (REFI) money back into Treasury Notes, the backbone of mortgage finance in the first place. As mortgage rates drop, from the economic stall, homeowners are induced to replace their mortgage contracts with lower rate commitments. It behooves them to do so. Risk has been offloaded to Fanny Mae, which has never seen a loan portfolio it didn't like. Risk has become unduly and unwisely concentrated in Fanny Mae, making it the weakest link. Fanny Mae routinely recycles proceeds from premature repayment of mortgages back into the Treasury Bond market, which fosters even lower rates in the very maturity that funds mortgages in the first place. These agencies, especially Fanny Mae, may continue in their money laundering operation, with insufficient capital foundation and fraudulent bookkeeping, right up until fractures come into view. In March CEO Raines discovered an accounting trick that even Cisco or IBM would be proud of. They value their monstrous hedgebook to "expected future value" instead of "mark to market value," thus lifting earnings via assumptions and improving their balance sheet. The ever-vigilant SEC will likely find nothing improper. Hapless investors, illiterate and math challenged, have bid up the FNM share price a full 30% since that wondrous amelioration to shareholder value. In time, the system will and must show stress and cracks. The pressure on an insufficient capital foundation is just too great. We are running headlong toward a mortgage finance crisis. It must not cease in churning out capital, and might be required to accelerate. Real estate can be described as a "hard asset impostor" since its price is determined primarily by means of mortgage fund availability, and at low service costs (i.e. interest rate). Since residential real estate now plays such a vital role in preventing the US Economy from falling into a more painful recession, an argument can be made that housing now holds hostage the govt finance machinery and the Federal Reserve itself. However, finance needs have grown so large, that a brand new systemic risk has entered the picture. StLouis Governor Poole did not mince words when he stated his belief that Fanny Mae lacked a sufficient capital foundation, which might endanger the economy to the risk of meltdown. Yet foreigners pour money into the system, unaware of the guarantees, unaware of the lack of regulatory supervision, unaware of the risk to investment if and when interest rates turn higher. Perhaps rates will continue toward zero, avoiding the likely economic meltdown from higher rates. Are we left with two alternatives: extreme stagnation or meltdown? I believe yes, and stagnation will prevail, but only until the declining USDollar upsets the calm.
Heavy federal borrowing
and rising commodity costs will force interest rates higher,
but rates must overcome the tide of debt default, bankruptcy,
and product liquidation.
The signals are written on every façade on Wall Street:
rising commodity prices, rising energy costs, falling USDollar,
rising producer prices, mindboggling rise in money supply, rising
employment costs, rising health care costs, rising state &
local taxes. Rising costs must sooner or later breed rising interest
rates in order to reflect the risk of lending. The longer our
meddling yet incompetent govt interferes with the laws of economic
nature, the worse the aftermath will be on economic recession,
debt destruction, asset price deflation, and price inflation
. As seen vividly in Japan, healthy companies under the same
roof as other firms deeply infected by debt will experience massive
asset destruction. Japanese conglomerate vampirism will be seen
at a more local level in our nation. A widely quoted monetary
adage is Gresham's Law: On a large scale, rate swap contracts can and will impair balance sheets held by a great many corporations. When shorterm rates rise, corporate earnings will erode further. The combination of rising production costs (from materials, energy, labor, health) and rising substituted interest charges (from rate swaps) will deliver crippling blows to firms across our economy. Once more proceeding willy nilly, desperately hoping for the best, we walk into swap traps that will not resolve themselves until maximum damage is incurred. Martin Weiss of "The Safe Money Report" warns about the next wave of bankruptcies by overburdened bigname firms. The swap will be an instrument of death for many of them. The attraction to lower swapped interest rates is a double-edged sword, aiding the earnings and improving the balance sheet in the short horizon, but ultimately putting its participants at great risk when rates turn upward. Rate swapping will continue, until the vicious circle pushes many firms near the credit cliff's edge.
Japan is losing this competitive currency game to China, which has incredibly low labor costs. The Chinese yuan is pegged to the dollar, and thus is impervious in US markets to competitive currency devaluations. As the USDollar is driven down by its deteriorating fundamentals and overburdened worldwide supply, American firms gain an edge over foreign competitors, all except Chinese firms. The Japanese yen has gained 10% versus the US currency in the last twelve months. As a result, import prices within the US Economy have risen 7% in that period. Japan is being absolutely gutted. Seeing the trend clearly, successful Japanese firms are rapidly investing in China's nascent mfg industries. The Chinese yuan, the HongKong dollar, and the Malaysian ringgit are each officially pegged to the USDollar. They rise and fall in concert with the USDollar, untouched by the shifting sands of competitive pricing in imported products. Other currencies in the region, the Singapore dollar, the Taiwan dollar, the Thai bhat, and the Indonesian rupiah are managed to a loose fixed exchange rate versus the USDollar. They have risen slightly against the ailing US currency. In a practical sense, most of Asia acts like a single financial entity. In a local sense, each Asian economy is now held hostage by its lowly valued currency. If the medium of exchange for any one Asian export nation rises appreciably, that economy will slowly collapse. If Asian currencies rise together, their economies will drag but endure the storm, at the expense of higher imported product prices in the United States. In time, this competitive currency raceway will transform into a bidding war for gold. The nation which boasts the highest domestically valued price of gold will gain the export advantage abroad. What a remarkable transition !!! The magnitude of Asian trade surpluses with the USA is larger than anything ever seen in the human history of commerce, with China's total for the year 2002 at $105 billion and Japan's total at $70 billion. An excess of $200B of Asian surplus eventually finds its way into their central banks, in order to circumvent the conversion process by individual companies and banks. The govt-led banks take it off their hands. A mass conversion would have a detrimental effect on the local currency values that their entire economies depend upon. No end appears in sight for outsized surpluses, since the Bank of Japan and Beijing leaders will not forfeit their price advantages. The Japanese yen has gained some minor ground in USDollar terms, but nothing like what Europe has endured. Unlike German and other European firms, which have suffered pullbacks in export trade, Asian manufacturing of products packaged for sale in the vast US markets march on. Asian Central Banks must invest much of the $200 billion per year offloaded from exporting firms in such a way as to receive a return on their investment; they have few alternatives beyond the US credit market. The search for investment opportunities takes them full circle back to their export customers. It is ironic that the gigantic trade imbalance creates a gaping hole in debt that only the beneficiaries of that imbalance can fill with obscenely large surpluses. They can invest in US airline debt, or US high-tech debt, or US telecom debt, or German telecom debt, or Mexican telecom debt, or Brazilian govt debt, or twice over the world's mining industry, or perhaps a sizeable slice of Swiss pharmaceuticals, or even attempt a hostile takeover of General Electric itself. We are talking about very big money here. The bidding effect would sharply drive up the price of any pursued securities outside the large US credit markets, to the point of rendering the investment impractical and unwise. The alternatives outside USTBonds and GSE agency debt are limited, which helps to perpetuate America's trade imbalance. Call it what you will, but we are seeing a tragic bloodletting take place as the USA passively drains its financial vitality. A massive transfusion has been installed, whereby Asia is gradually purchasing debt collateralized by our entire economy. For those who regard such a comment as hyperbole, take note that Asians now own US Treasury debt and GSE agency debt equal to more than 20% of the annual US GDP. That figure is rising rapidly. The trade gap alone grows at $1M per minute. The Finance Asia journal offers a revealing synopsis of Richard Duncan's new book The Dollar Crisis, where great detail is provided on Asia's procession toward ownership of American debt. One must wonder if receivership of American assets in bankruptcy might be next. US leaders cannot allow Asian currencies to rise any more than Asian govt officials, since the painful consequences are so dreadful on each side of the Pacific Ocean. Releasing the floodgates allows for imported product prices to rise within the United States. Damage would be done to households, which would pay up for finished retail products. Damage would be done to corporations, which would pay up for components used in production processes. Retail spending would slow, while corporate profit margins would shrink. Damage would be done to the credit markets, where rising systemic prices within the economy would necessarily have to be reflected in bond yields and interest rates alike. The US Economy would essentially realize a 20-year delayed reaction to exported monetary inflation over a two-decade period, in the form of returning imported price inflation. The damage to Asian economies would be most pronounced in Japan, where they are already teetering with mild recession and persistent price deflation. The jobless rate would rise after their export business slows. Marginal companies would fail, or else be absorbed on life support under a keiretsu umbrella. In other Asian nations such as South Korea, a similar story could be told, with lower risk of failures, only the certain pain of contraction. In stark contrast, China and other pegged economies would be unscathed since their exported products would not change in price in American stores and supply chains. The Islamic financial counter-measures to our military exploits only accentuate the draining of financial capital from the US Economy. The Middle East recycling connection is slowly being severed. The Petro-euro vicious circle was addressed in the previous segment to this series. OPEC money is seeking out EuroBonds. The Arab Bourgeois running the Saudi Arabian country club are in their own trouble. Al Qaeda has set its sights on this lazy, lecherous, self-serving bunch. The Saudi Royal Family surely has done much to build industry within their desert kingdom. However, one might make a credible argument that they have passed down a non-working standard in the nation's lifestyle. I have known only a few Arab men in my days. They all make the same claim. They have never met a Saudi man who has ever worked a single day in his life. Saudis tend to be multi-millionaires or poverty stricken. Most common workers come from Pakistan or the Philippines or Egypt, while most professional workers come from the developed Western nations. King Faisal is challenged to conduct a treacherous balancing act. He must speak with hostility toward the United States, and even sell investments held in dollar denominations, in order to placate Islamic Fundamentalists who dot their sacred homeland. He must keep good relations with US leaders also. Sometime in the next two years, I fully anticipate US Troops to be "invited" to protect the Royal Family from an Islamic Revolution that could easily widen into a civil war. Unlike Iraq, the Saudis are well entrenched, with much to lose. It seems the Fundamentalists and the Americans are honing in on the world's richest oil fields. If the USGovt and Corporate America wanted to take full advantage of the foreign foolhardiness, they would issue bonds specifically linked to the bankrupt Social Security and Medicare trust funds, and to the unmanageable corporate pension fund obligations. Such an event would clearly mark the top in the credit market frenzy. Perhaps our leaders should wait until the trade gap is much larger, when the prospect of earning gains to bond principal on TBonds and GSE bonds is regarded as diminished. The equivalent occurred in the stock market, as scores of hopelessly unprofitable dotcoms and indebted telecoms entered IPO's, eagerly lapped up by the deaf dumb and blind. Expect the same with the end game for bonds.
The origins of a Strong Dollar Policy lie in reducing the cost of our imports, after it was clear that Asian offshore mfg could circumvent our higher labor expense in the 1970 decade. Later, the need to attract foreign investment to purchase our expanding govt debt in the 1980 decade required a strong currency. We buried ourselves with debt while we buried the Soviet Union in the Arms Race. Finally, what better means to attract foreign capital to our stock bull market in the 1990's than to continue the uptrend in the USDollar far beyond all reason? That 6-year stock rally was founded upon declining actual earnings, fraudulent bookkeeping, a Y2K surge in capital equipment purchase, gold subsidies of TBonds, and an open spigot of Fed monetary inflation, which combined to generate a 45% USDollar bull run over the 1990 decade. Clinton's Trez Secretary Robert Rubin directed the Gold Carry Trade, depleting our gold, purchasing TBonds, and ushering along a powerful USDollar bull market. He is known as the nation's premier currency trader of futures contracts, lobbying for the Strong Dollar Policy, covering his tracks well on illicit gold sales. The result to our nation's economy is now idle mfg plant, lost jobs, foreign import product dependence, crippling debt levels, and foreign ownership of our federal debt. I would call the Strong Dollar Policy a complete and total disaster, a failure of historical order, a crippling catastrophe, and betrayal of the American workers. Did the policy's chief architect Robert Rubin profit personally by a billion dollars? Probably. Did his Wall Street friends? No doubt. Let me not mince words, when I label this policy as financial treason. What strange times we live in. Financial destruction of America by Rubin and Greenspan earns heroic praise and knighthood, but voicing objection to occupation of Arab oil fields, to the grant of Halliburton contracts without bids, and to desecration of Iraqi museums is called unpatriotic !!! In order to support the unsupportable USDollar, to defend the indefensible, to continue the unsustainable, the majority of our national gold treasure has been dumped on the world market. A large portion of our gold supply has been dumped at prices below the current $350-370 per oz range, on behalf of the Federal Reserve and the European Central Banks. A large portion of that supply has been purchased by Asians, most notably China. A credible argument can be made that we have shipped our national wealth apparatus (mfg plant, jobs, money) to Asia and China in a failed attempt to reinforce our financial system, a system built on paper-based securities and ballooning debt, undermined by the Federal Reserve's hidden tax on the USDollar through massive monetary inflation. And banker clowns claim we have a deflation problem! Our monetary expansion has not slowed since Greenspan came to the helm, and now has produced the cursed price deflation from worldwide overproduction. And the remedy is more liquidity? Hell no! The solution begins with system-wide bankruptcies and an additional 30-40% markdown in the bloated USDollar. I do not expect solutions to be made in a way to rectify the problem, since early attention has been directed toward trade and labor restrictions. CNN voiced solutions like limiting foreigners from our labor market and guaranteeing state and federal contracts to be met by domestic workers. The next step will be more trade tariffs, repeating the 1930 errors. A threat of tariffs against Chinese imports might be coming, only to trigger their yuan currency upgrade. Political pressures are too much to avoid the mistake of tariffs. Few fingers so far are pointed at the disastrous strong USDollar. Almost no political reward is offered for an appropriate solution, since too much pain is meted out. We must bring our mfg base back to the United States. We must lower our wages and our cost of living. We must reduce the corporate tax burden. We must educate our masses more effectively, so as to compete with highly skilled immigrants. We must remove the Federal Reserve (Dept of Inflation) from power. We must reduce the size of government. At a time when less govt is of paramount importance, we will see more govt. I see few if any bright lights on any of these horizons. STUBBORN GRASP OF
A LIQUIDITY TRAP : Our financial engines suffer from either too much available liquidity (credit) in mortgage finance, or too little demand for credit in productive sectors. Causal factors are many, although surely not obvious. The non-productive sector led by finance directs a flood of basic funding supply toward standing assets. Housing prices are rising with no inherent rise in real value, only dropping rates and a flood of available mortgage funding. Such is the nature of a bubble, as bad money is chasing out good money once again. The pool of real capital is diminishing. In the real economy, low interest rates keep activity at a slow pace, which is very misunderstood. Since twice as much interest income is earned versus interest payments paid out, low rates beget even lower rates in the current environment. Lower mortgage service costs are half the magnitude of income earned by savers from shrinking bond yields. Try telling mortgage holders hoping to refinance, corporations wanting to recycle debt, stock brokerage houses & investors expecting growth, or politicians seeking votes. Universal opposition is encountered. The victims are retirees, dependent upon interest income. Their voices are not heard in our debt-dominated political arenas. Sadly, the liquidity trap is not well understood any more than inflation. The Greenspan Gambit, forcing longterm interest rates down through intervention after numerous cuts in Fed Funds rates on the short end, will go down in history as a colossal bet. Without authorization, and certainly operating completely outside Constitutional Law, the Federal Reserve has placed a bet on the survival of the US Economy. THE DEPT OF INFLATION CHAIRMAN HAS GAMBLED THAT OUR ECONOMY WILL REVIVE, THAT OUR CORPORATE PROFITABILITY WILL RECOVER, THAT OUR CORPORATE DEBT WILL BE INFLATED AWAY, THAT OUR CAPITAL BASE EXCESS WILL BE ABSORBED BY GROWING DEMAND, THAT OUR HOUSEHOLD BALANCE SHEETS WILL BE REMEDIED, THAT OUR FISCAL HEALTH WILL BE RESTORED IN THE MANY GOVT HIERARCHIES BEFORE OUR INTEREST RATES FALL PERILOUSLY TOWARD THE TRAP OF ZERO !!! What a gamble indeed. Our economy endures a Kondratiev Winter in late innings of the Keynesian Monetarist Debt Implosion game. Nowhere is Greenspan's gamble more evident than in the real estate sector. Commercial real estate is in the toilet, with property values down sharply and vacancies at historic highs. Residential housing is the raging bull that will not die. So far, only job insecurity and job loss threaten housing. Longterm rates will rise again to properly factor the growing risk of default and delinquency, and to reflect widespread price inflation in a vast array of sectors. At that time we will see the 2nd Stage of the New Paradigm Recession. Fanny Mae and the GSE agencies stand as valiant defenders of housing, but with great exposure to risk. Housing is being desperately inflated by the Federal Reserve, in a bizarre attempt to provide a collateralized source of money to uphold consumer demand. Can deflating product prices from overproduction be offset by further inflating the last and largest bastion of assets? Temporarily yes, effectively no. Analogies are difficult. Imagine in a tiny village an orchard of giant orange trees whose branches have grown too much without pruning for two decades, fed by real and artificial sunlight, natural and hydroponic watering, plus miracle-grow supplements. Tree branches have extended in sprawls to such lengths that many bend to the ground from their own weight, in grotesque fashion. The abundance of fruit produce has overloaded supply, bogging down fruit stands selling on the roadsides. The farmer becomes confused, observing in dismay fallen prices. He is unable to perceive that supply is excessive, having learned that growth is good. His bank has cheered him on, lending money as business grows, and worker payrolls expand. He seeks out counsel from the brain trust at the farm board. The experts tell him that orange demand is lacking and must be encouraged in order to firm his orange prices. The solution is handed down: doubled water supply from more water hoses, round-the-clock sunshine, more fertilizer, all of which will stimulate demand. The end result curiously turns out to be a rise in the principal value of mortgage bonds that back such bloated farm groves, and rising property values for the homes of their farm workers. Such is the utter insanity of Greenspan and the US Federal Reserve. Culling some branches, laying off workers, reducing production, scaling back the nutrient systems, these are unacceptable. PERFECT STORM CLOUDS
GATHER : Our economic advisors and observers are befuddled by inflation, embarrassed by their inability to distinguish among inflation, deflation, disinflation, reflation, stagflation, declining asset values, liquidity, credit, monetization, and money supply. Liquidity is a political euphemism for credit, intended to keep the public in the dark. They insist on thinking in aggregate terms, when we now see price deflation and price inflation simultaneously in separate sectors. The credit engines are stalled in the deflating sectors where production suffers from overcapacity, and are working feverishly in the inflating sectors where unproductive enlargement of asset-based bubbles continues. Real estate is now the malignant bubble in the economy, yet it is seen as a savior from a recession. How short-sighted. BAD INFLATION IS COMING,
NOT REFLATION : THE FED CAUGHT IN
A BOX : Interference by the USGovt in the free market processes has reached a degree never seen before in history. How long can our cadre of inept wizards defy natural forces seeking equilibrium? Who knows? And the public, in either desperation or ignorance (probably both), seems to urge them on. No economic recovery has ever occurred side by side with a falling currency. The Fed and Dept Treasury are attempting to pull off such a high-wire act. Bookmakers should give them 100:1 odds against. We will emerge from the Liquidity Trap. The outcome will likely resemble Argentine shock waves more than Japan's stagnation. A smooth economic recovery is absolutely out of the question, a mere fable for politicians and brokerage houses to sell. I believe the best way to play the Perfect Storm is with Canadian Junior miners, and my favorite is still Cardero Resource Corp (CDU.V). Rising silver deposits through discovery, rising silver metal prices, and rising Canadian Dollar currency will produce a HAT TRICK. Cardero may soon announce a gigantic silver deposit. Silver supplies are on the wane, severely inhibited by chronically suppressed price. New applications are on the rise, such as replacing the banned arsenic oxide pressure treatment of lumber products. Favorable views on Cardero are now being disseminated by some of the most prominent names in the precious metals investment community, such as Bob Bishop. ### Jim Willie
CB Jim Willie CB is a pseudonym used since 1998 on Silicon Investor. JW works as a statistical analyst for a private consulting firm engaged in marketing research. He holds a Ph.D. in Statistics, with a career stretching over 22 years. He aspires to one day join the financial editor world. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. 321gold Inc
Miami USA |
