RBS: Prepare for 'Monster' Money Printing

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RBS: Prepare for 'Monster' Money Printing

It seems incredible today, in the post-Keynesian era, that Frank Roosevelt was elected in 1932 on a platform of 'balancing the budget,' a goal to which his predecessor Herbert Hoover (who is practically synonymous with Depression I in the US) was equally committed. Who would want to balance the budget in a deflationary depression? 

The G20, for one, which adopted a goal of halving budget deficits by 2013. They account for about two-thirds of global GDP, so we're talking about a decisive economic majority of the planet. Yet in the US, leading economic indicators such as the one published by ECRI indicate that growth is likely to stagnate in the second half of 2010.

When the zeal for austerity collides head-on with a fresh slackening of growth, what then? Ambrose Evans-Pritchard reports that RBS has come to the same conclusion I did: 'Weimar Ben' Bernanke will print like there's no tomorrow. That is, monetary policy (QE: quantitative easing) will do the heavy lifting as fiscal policy turns contractionary.

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text [his notorious 2002 'printing press' speech] very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE).

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure and said this is the option "which I personally prefer".

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

 

Those who have studied Depression I are astonished that governments would slam the fiscal brakes on a weak global recovery. The only reason they are committing such a dire act is self-preservation -- when they are in financial trouble, everything is on the table, though the mountains fall to the sea.

There's a lesson here. As the French say, Sauve qui peut -- save yourself if you can. Because when governments panic, their ungainly burden of human ballast gets tossed overboard without a second thought. To the COG bunkers! 

 

 

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Re: RBS: Prepare for 'Monster' Money Printing

Nobel Prize winner Joseph Stiglitz picks up the Hoover riff in an interview with Britain's Independent:

Fiscal stimulus is out of fashion now. World leaders embarked on that strategy – injecting money to re-energise the economy – after the banking crash three years ago. [Fiscal stimulus] was widely perceived not to have worked because the money governments pumped into the banks was not passed on to ailing businesses or individuals in trouble with their mortgages.

"The problem was that, in the US, the stimulus wasn't big enough," he says. "Too much of it was in tax cuts. And when they gave money to the banks they gave it to the wrong banks and, as a result, credit has not been restored – we can expect a couple of million or more homes to be repossessed this year than last year – and the economy has not been restarted." Instead of producing a consensus that the government should have done more, it has created disillusion that the government can do anything, Stiglitz says.

The result is that, following the attacks by the financial markets on Greece and then Spain, everybody is now in a mood of retrenchment. "It's not just pre-Keynesian, it's Hooverite," he says. By which he means governments are not just refusing to stimulate, they are making cuts, as Herbert Hoover did in the US in 1929 – when he turned the Wall Street Crash into the Great Depression. "

Hoover had this idea that, whenever you go into recession, deficits grow, so he decided to go for cuts – which is what the foolish financial markets that got us into this trouble in the first place now want."

"The old story is still true: you cut expenditures and the economy goes down. We have lots of experiments which show this, thanks to Herbert Hoover and the IMF," he adds. The IMF imposed that mistaken policy in Korea, Thailand, Indonesia, Argentina and hosts of other developing countries in the 1980s and 1990s. "So we know what will happen: economies will get weaker, investment will get stymied and it's a downward vicious spiral. How far down we don't know – it could be a Japanese malaise. Japan did an experiment just like this in 1997; just as it was recovering, it raised VAT and went into another recession."

"Cutbacks in Germany, Britain and France will mean all of Europe will suffer. The cuts will all feed back negatively. And if everyone follows this policy, their budget deficits will get worse, so they will have to make more cuts and raise taxes more. It's a vicious downward spiral. We're now looking at a long, hard, slow recovery with the possibility of a double dip if everybody cuts back at the same time. The best scenario is long and hard ... and the worst is much worse. If any one of these countries is forced into default, the banking system is so highly leveraged that it could cause real problems. This is really risky, really scary."

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

While I often disagree with Stiglitz (e.g., his swipe at tax cuts above), his proposals at least reflect some innovative thinking, in place of the destructive 'bail out the losers' logic of the corpgov TARP plan:

So what should we be doing? "The lesson is not that you cut back spending, but that you redirect it. You cut out the war in Afghanistan. You cut a couple of hundred billion dollars of wasteful military expenditure. You cut out oil subsidies. There's a long list of things we can cut. But you increase spending in other areas, such as research and development, infrastructure, education" – areas where government can get a good return on the investment of public money.

Right on, Joe! The Bush-O'Bomba perma-wars in Iraq/Af/Pak are a total deadweight loss to the U.S. economy. Job #1 is taking the spending cuts straight out of the thick hides of the unproductive losers at the Pentagon and the NATO clown posse.

Stiglitz has one more practical solution to offer. Governments should set up their own banks to restart lending to businesses and save struggling homeowners from repossession. "If the banks aren't lending, let's create a new lending facility to do that job," he says. "In the US, we gave $700bn to the banks; if we had used a fraction of that to create a new bank, we could have financed all the lending that was needed."

Indeed, it could be done for far less. "Take $100bn, lever that at 10 to 1 [by attracting funds from the private sector] and that's a trillion-dollar new lending capacity – more than the real economy needs."

I'm no fan of government banks. But bailing out brain-dead losers such as JPM, B of A, Citi, AIG, and GM constituted probably the largest corporate malinvestment in history. Even a government bank was and is to be preferred to these shameful rent-seeking suck-ups, which should have been carted off to history's dustbin, as the masses lining the funeral route swayed joyfully to the sweet strains of Another One Bites the Dust.

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Re: RBS: Prepare for 'Monster' Money Printing

Illustrating the 'stopped watch is right twice a day' phenomenon, even the NYT's resident ideologue -- the 'economist' Kurgman [sic]  -- invokes the Hoover trope:

Over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy. The revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. 

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

http://www.nytimes.com/2010/06/28/opinion/28krugman.html?ref=opinion

 

After the 1990-91 recession, the president of the day was derisively tagged as 'George Herbert Hoover Bush.' 

Poppy, meet B'roke Hoover O'Bumbler, augur of the Austerians. Hoover, Bush I, O'Bummer -- one-termers all. Undecided

 

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Re: RBS: Prepare for 'Monster' Money Printing

Maybe I'm over-simplifying my thinking of the issue, but why wasn't TARP used to reduce home mortgage balances?  Even the most obtuse economist could see that we were reaching debt saturation. If the money had actually made its way out into the broader economy, wouldn't the clearing of personal debt have helped both the banks and the economy in general? 

So we ended up with the worst of both worlds...banks sitting on their bailout money while the economy withers and dies...only to say that stimulus hasn't worked and now we need to cut government spending and raise taxes.  It seems to be playing out to extract the maximum amount of pain on the taxpayer..

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Re: RBS: Prepare for 'Monster' Money Printing

You make a valid point, we have been here before via the Great Depression 1.  We are following the same path "hoping" for a different outcome or maybe a depression is desired as many will prosper at the expense of others.  Businesses and banks will consolidate and the big will become bigger as competition is eliminated. 

Michael Hudson summed up the move to austerity by stating that "Europe is committing fiscal suicide."  I think that a Great Depression 2 will be national suicide for the U.S. too, that will lead to the end of the nation states as we know them.  Again, I suspect this is the desired course being set by the international banking cartel.

Hudson goes on to say "A balanced budget in an economic downturn means shrinkage for the private sector. Coming as the Western economies move into a debt deflation, the policy means shrinking markets for goods and services – all to support banking claims on the “real” economy.

On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. “Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes.” The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.

The idea is to create an artificial financial crisis, to come in and “save” it by imposing on Europe and North America a “Greek-style” cutbacks in social security and pensions. For the United States, state and local pensions in particular are to be cut back by “emergency” measures to “free” government budgets.

When politicians let the financial sector run the show, their natural preference is to turn the economy into a grab bag. And they usually come out ahead. That’s what the words “foreclosure,” “forfeiture” and “liquidate” mean – along with “sound money,” “business confidence” and the usual consequences, “debt deflation” and “debt peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies), disposable personal income are to be cut back to keep the debt overhead from being written down.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the “real” economy: industry as well as labor.

The underlying reality is indeed that pensions cannot be paid – at least, not paid out of financial gains. For the past fifty years the Western economies have indulged the fantasy of paying retirees out of purely financial gains (M-M’ as Marxists would put it), not out of an expanding economy (M-C-M’, employing labor to produce more output).

The explanation, of course, is that today’s economic planning is not being done by elected representatives. Planning authority has been relinquished to the hands of “independent” central banks, which in turn act as the lobbyists for commercial banks selling their product – debt. From the central bank’s vantage point, the “economic problem” is how to keep commercial banks and other financial institutions solvent in a post-bubble economy. How can they get paid for debts that are beyond the ability of many people to pay, in an environment of rising defaults?

The answer is that creditors can get paid only at the economy’s expense. The remaining economic surplus must go to them, not to capital investment, employment or social spending. 

This is the problem with the financial view. It is short-term – and predatory. Given a choice between operating the banks to promote the economy, or running the economy to benefit the banks, bankers always will choose the latter alternative. And so will the politicians they support.

Governments need huge sums to bail out the banks from their bad loans. But they cannot borrow more, because of the debt squeeze. So the bad-debt loss must be passed onto labor and industry. The cover story is that government bailouts will permit the banks to start lending again, to reflate the Bubble Economy’s Ponzi-borrowing. But there is already too much negative equity and there is no leeway left to restart the bubble. Economies are all “loaned up.” Real estate rents, corporate cash flow and public taxing power cannot support further borrowing – no matter how wealth the government gives to banks. Asset prices have plunged into negative equity territory. Debt deflation is shrinking markets, corporate profits and cash flow. The Miracle of Compound Interest dynamic has culminated in defaults, reflecting the inability of debtors to sustain the exponential rise in carrying charges that “financial solvency” requires. 

If the financial sector can be rescued only by cutting back social spending on Social Security, health care and education, bolstered by more privatization sell-offs, is it worth the price? To sacrifice the economy in this way would violate most peoples’ social values of equity and fairness rooted deep in Enlightenment philosophy.

That is the political problem: How can bankers persuade voters to approve this under a democratic system? It is necessary to orchestrate and manage their perceptions. Their poverty must be portrayed as desirable – as a step toward future prosperity.

A half-century of failed IMF austerity plans imposed on hapless Third World debtors should have dispelled forever the idea that the way to prosperity is via austerity. The ground has been paved for this attitude by a generation of purging the academic curriculum of knowledge that there ever was an alternative economic philosophy to that sponsored by the rentier Counter-Enlightenment. Classical value and price theory reflected John Locke’s labor theory of property: A person’s wealth should be what he or she creates with their own labor and enterprise, not by insider dealing or special privilege.

This is why I say that Europe is dying. If its trajectory is not changed, the EU must succumb to a financial coup d’êtat rolling back the past three centuries of Enlightenment social philosophy. The question is whether a break-up is now the only way to recover its social democratic ideals from the banks that have taken over its central planning organs.

Someone is going to lose big time...the question is will it be the people or the banks?

Larry

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Re: RBS: Prepare for 'Monster' Money Printing

Dr. John Hussman weighs in on the significance of the falling ECRI leading economic indicator. Don't read any farther, if you are prone to nightmares:

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession.

While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988. But as I've long noted, recession evidence is best taken as a syndrome of multiple conditions, including the behavior of the yield curve, credit spreads, stock prices, and employment growth.

Given that the WLI growth rate leads the PMI by about 13 weeks, I substituted the WLI growth rate for the PMI criterion in condition 4 of our recession warning composite. As you can see, the results are nearly identical, and not surprisingly, are slightly more timely than using the PMI. The blue line indicates recession warning signals from the composite of indicators, while the red blocks indicate official U.S. recessions as identified by the National Bureau of Economic Research.

"The blue spike at the right of the graph indicates that the U.S. economy is most probably either in, or immediately entering a second phase of contraction."

http://hussmanfunds.com/wmc/wmc100628.htm

 

Monster raving ugly, comrades! The question is, what's Weimar Ben gonna do about it? (Since pretzeldent B'roke O'Bumbler and the 535 KongressKlowns won't even hear about this until maybe next year.)

In my view, this harrowing predicament is the raison d'etre of Ben's earthly existence. Eight lonely years ago, at great risk to his credibility and career prospects, Ben bravely marshalled his phalanxes of printing presses and helicopters at the Fed's 2002 summer confab in Jackson Hole, earning grudging admiration even from the myopic Greenspan, who muttered 'Who IS that masked man?' Now Airman Ben is ready to fly, on the most urgent rescue mission of his life.

Cool Afterburners on, starfleet commanders! Cool

 

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Re: RBS: Prepare for 'Monster' Money Printing
DrKrbyLuv wrote:

Michael Hudson summed up the move to austerity by stating that "Europe is committing fiscal suicide."  I think that a Great Depression 2 will be national suicide for the U.S. too, that will lead to the end of the nation states as we know them.  Again, I suspect this is the desired course being set by the international banking cartel.

Europe is dying. If its trajectory is not changed, the EU must succumb to a financial coup d’êtat rolling back the past three centuries of Enlightenment social philosophy. The question is whether a break-up is now the only way to recover its social democratic ideals from the banks that have taken over its central planning organs.

Someone is going to lose big time...the question is will it be the people or the banks?

Larry

Michael Hudson is a brilliant socialist economist, who has written eloquently in the past about how growth in the leveraged FIRE [Finance, Insurance & Real Estate] sector ultimately outstrips the growth of the underlying productive economy, creating claims which cannot be paid. He provided the macro theory and equations to support his thesis.

Recently Hudson's writings have had more of a discursive, rhetorical character, in the Hyde Park ranter vein, which I find disappointing. If economics aspires to being a science, it must at least offer a bettter-than-chance forecast of the next event.

As Hudson states, the fiscal authorities have gone on an austerity binge. But how will central banks respond? All of them, I believe, ultimately will ease -- but at different rates.

Ben Bernanke's writings suggest that he will 'throw the kitchen sink' at any hint of deflationary recession. Whereas the conservative ECB, influenced by German cultural memories of hyperinflation, may engage in quantitative easing only with a time lag. This could produce an inversion of what happened in Depression I.

The UK depegged pound sterling from gold in 1931, side-stepping the worst of the Depression. But the US dollar wasn't devalued against gold until 2-3 fateful years later, after a dire 20% further drop in the price level. Ben Bernanke won't repeat this mistake, but conceivably the hard-headed ECB might.

Thus in this inverted analogue of 1931-1934, the U.S. sidesteps the worst of the 'double-dip' recession, while Europe slides into the dark night of deflationary collapse and default. Maybe this is what Michael Hudson is alluding to, but I wish he would focus more on macroeconomics and less on class war rhetoric.

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Re: RBS: Prepare for 'Monster' Money Printing
crazyhorse wrote:

Maybe I'm over-simplifying my thinking of the issue, but why wasn't TARP used to reduce home mortgage balances?  Even the most obtuse economist could see that we were reaching debt saturation. If the money had actually made its way out into the broader economy, wouldn't the clearing of personal debt have helped both the banks and the economy in general? 

So we ended up with the worst of both worlds...banks sitting on their bailout money while the economy withers and dies...only to say that stimulus hasn't worked and now we need to cut government spending and raise taxes.  It seems to be playing out to extract the maximum amount of pain on the taxpayer..

Bailing out big banks, as the best logical approach to the crisis that unfolded a couple of years ago, was motivated by the same forces that shaped the new health care bill.  The cheapest, most practical approach would have been a universal coverage scheme. The most prudent approach to the banking crisis would have been to let big banks fail and redirect the bail out funds towards the creation of a citizen owned national bank. Socialist,  yes, but intelligent socialism. The Obama Bush agenda is a form of socialism for the uber wealthy, while the average citizen absorbs all the downside risk  AND is refused credit, by those very same banks, at the same time. Lovely!

If Obama obviously embodied the weird eco- political system that he is, if he had a corporate/cordyceps fungus sprouting from his head, while he spit out clipped pseudo reassuring nonsense on television, it would be easier to understand.  As it is now, we tend to just shake our heads and wonder why the easiest cheapest and most humane routes out of a clusterf*** seem to evade politicians.

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Re: RBS: Prepare for 'Monster' Money Printing

What printing?

Uncle Ben isn't  dropping cash from his Helicopter, he is dropping applications for bank loans. Sure the Fed is supplying banks with digital cash via their Open Market Operations, but the banks are just plowing this money into the financial markets. What happens to all this new Fed liquidity when the financial market's puke? It goes poof and the only thing left of it is the afterimage of a number on a computer screen. 

As citizens of this country, I think we better hope that there is an actual printing press that is printing real physical dollars, because you couldn't run a city's economy, let alone a country's economy on the current supply of physical cash in the system.

The digital credit economy has fallen and can't get up.

 

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Re: RBS: Prepare for 'Monster' Money Printing
JAG wrote:

What printing?

Uncle Ben isn't  dropping cash from his Helicopter, he is dropping applications for bank loans. Sure the Fed is supplying banks with digital cash via their Open Market Operations, but the banks are just plowing this money into the financial markets. What happens to all this new Fed liquidity when the financial market's puke? It goes poof and the only thing left of it is the afterimage of a number on a computer screen. 

As citizens of this country, I think we better hope that there is an actual printing press that is printing real physical dollars, because you couldn't run a city's economy, let alone a country's economy on the current supply of physical cash in the system.

The digital credit economy has fallen and can't get up.

 

Jag, it looks like the new "stimulus" plan will be war with Iran, a major expansion of the wars in the Middle East. It's stupid, ruinous, and bound to benefit the strongest segment of economy the most, the military industrial complex, the worst blood sucking leech out there.

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Re: RBS: Prepare for 'Monster' Money Printing
JAG wrote:

What printing?

The digital credit economy has fallen and can't get up.

To be specific, I'm referring to 'Total factors supplying reserve funds,' the bottom line of the first table in the Fed's weekly H.4.1 report. This is the total amount of assets on the Fed's balance sheet, which directly influences the monetary base.

http://federalreserve.gov/releases/h41/Current/

Currently at $2.387 trillion -- up a robust 16.3% from 12 months ago -- it was less than one trillion before the crisis started. Promises to shed the $1.25 trillion of securities that the Fed hoovered up during the financial crisis have quietly gone by the wayside.

What RBS is saying, in the first post, is that Bernanke may well expand the Fed's balance sheet by another one or two trillion. It may not work -- obviously, the 16.3% expansion in past 12 months hasn't halted the stagnation in the M3 money supply.

Nevertheless, since buying securities with 'thin air money' is one of the most powerful and lucrative tools at the Fed's disposal, the FOMC will be inclined to try it if the economy wilts again. When your only tool is a hammer, everything looks like a nail.

Deity (or Deities, if you're a pantheist) help us all! Surprised

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Re: RBS: Prepare for 'Monster' Money Printing
machinehead wrote:

Ben Bernanke's writings suggest that he will 'throw the kitchen sink' at any hint of deflationary recession. Whereas the conservative ECB, influenced by German cultural memories of hyperinflation, may engage in quantitative easing only with a time lag. This could produce an inversion of what happened in Depression I.

The UK depegged pound sterling from gold in 1931, side-stepping the worst of the Depression. But the US dollar wasn't devalued against gold until 2-3 fateful years later, after a dire 20% further drop in the price level. Ben Bernanke won't repeat this mistake, but conceivably the hard-headed ECB might.

Thus in this inverted analogue of 1931-1934, the U.S. sidesteps the worst of the 'double-dip' recession, while Europe slides into the dark night of deflationary collapse and default. Maybe this is what Michael Hudson is alluding to, but I wish he would focus more on macroeconomics and less on class war rhetoric.

The problem I see with this is the simple fact that this time it is different. Bernanke's QE 2.0 (should he choose to do it, which seems very likely) won't get the US economy much more than austerity will get for Europe IMO. As the entire global economy is saturated with debt, there really aren't any marginal profits to be made off of loans or productive investments even when you're getting free money from the Fed. The only thing banks can do with this liquidity is use it to gamble in a casino paper economy, and how long can that shell game last between 3 or 4 counterparties while entire countries are going broke? I really don't see anyone "sidestepping" a depression this time around, regardless of the path they choose to get there. Both fiscal and monetary policy really become useless tools for "recovery" in a debt-based economy and a world with finite resources.

PS - I also really respect Michael Hudson and his intelligent economic views but I think he may be missing the scope of the global economy's predicament this time around.

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Re: RBS: Prepare for 'Monster' Money Printing

Today I placed an order for Canadian dollars over the phone from a TBTF bank.  The lady said "WOW, it's really strange....there's been A LOT of orders today for Canadian money".  I thought that it was a bit odd the way she said it.  Made me wonder if people were starting to make a stealthy run on sopping up CAD's.

Seems like I read that in 1933 right after being sworn in FDR devalued the dollar, confiscated gold, and limited outflows of gold (or other capital?) outside the country literally overnight?

What does everyone think of the possibility Obama would come on tv one night & announce a similar sweeping plan (not necessarily gold confiscation, but massive gold taxation)?

I don't see how Bernanke/Obama are going to hold off on money printing before the elections.  Massive deflation will be in full force come November. 

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Re: RBS: Prepare for 'Monster' Money Printing
ashvinp wrote:
machinehead wrote:

Ben Bernanke's writings suggest that he will 'throw the kitchen sink' at any hint of deflationary recession. Whereas the conservative ECB, influenced by German cultural memories of hyperinflation, may engage in quantitative easing only with a time lag. This could produce an inversion of what happened in Depression I.

The UK depegged pound sterling from gold in 1931, side-stepping the worst of the Depression. But the US dollar wasn't devalued against gold until 2-3 fateful years later, after a dire 20% further drop in the price level. Ben Bernanke won't repeat this mistake, but conceivably the hard-headed ECB might.

Thus in this inverted analogue of 1931-1934, the U.S. sidesteps the worst of the 'double-dip' recession, while Europe slides into the dark night of deflationary collapse and default. Maybe this is what Michael Hudson is alluding to, but I wish he would focus more on macroeconomics and less on class war rhetoric.

The problem I see with this is the simple fact that this time it is different. Bernanke's QE 2.0 (should he choose to do it, which seems very likely) won't get the US economy much more than austerity will get for Europe IMO. As the entire global economy is saturated with debt, there really aren't any marginal profits to be made off of loans or productive investments even when you're getting free money from the Fed. The only thing banks can do with this liquidity is use it to gamble in a casino paper economy, and how long can that shell game last between 3 or 4 counterparties while entire countries are going broke? I really don't see anyone "sidestepping" a depression this time around, regardless of the path they choose to get there. Both fiscal and monetary policy really become useless tools for "recovery" in a debt-based economy and a world with finite resources.

PS - I also really respect Michael Hudson and his intelligent economic views but I think he may be missing the scope of the global economy's predicament this time around.

The global economy was a pretty dismal show for everyone during the 1930s, with depressed growth, trade, capital flows, immigration, etc. But one of the lasting themes of the 1930s which we still hear about today is 'competitive devaluation.' In a shrinking global pie, relative gains versus others can make a substantial difference in the perceived pain of deflation, unemployment, and depressed GDP.

For instance -- by hanging on to the gold peg until 1933, after peers such as Britain had suspended gold convertibility in 1931, the US made its dollar the strongest currency on the planet from 1931-1934. The results: 10% annual deflation, 89% stock market decline, 25% unemployment. Other nations, taking a more devaluationist, inflationist approach (or protecting their banks from failure, as Canada did) did not suffer nearly as much. It was a no-growth decade, but not a deflationary catastrophe. Germans learned a different lesson in the 1920s -- to fear hyperinflation, which the U.S. never experienced.

These cultural predispositions could lead to opposite results in a fresh global depression. Although the US dollar currently is enjoying 'safe haven' strength, Bernanke's instinct will be to pre-emptively depreciate it to ward off deflation at all costs. Meanwhile, the ECB, viscerally loathing such a deliberate dilution of the euro's value, may make the mistake of 'holding the line' even as the continent's governments leap lemming-like off the cliff of fiscal austerity. 

The bizarre result is that the US [avoiding its worst fear of deflation] may set itself up for serious devaluation and inflation afterward, while Europe [avoiding Germany's worst fear of hyperinflation] plunges into the icy waters of deflation. Both parties will be equally surprised and dismayed by the unintended consequences.

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ashvinp
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Re: RBS: Prepare for 'Monster' Money Printing
machinehead wrote:
ashvinp wrote:
machinehead wrote:

Ben Bernanke's writings suggest that he will 'throw the kitchen sink' at any hint of deflationary recession. Whereas the conservative ECB, influenced by German cultural memories of hyperinflation, may engage in quantitative easing only with a time lag. This could produce an inversion of what happened in Depression I.

The UK depegged pound sterling from gold in 1931, side-stepping the worst of the Depression. But the US dollar wasn't devalued against gold until 2-3 fateful years later, after a dire 20% further drop in the price level. Ben Bernanke won't repeat this mistake, but conceivably the hard-headed ECB might.

Thus in this inverted analogue of 1931-1934, the U.S. sidesteps the worst of the 'double-dip' recession, while Europe slides into the dark night of deflationary collapse and default. Maybe this is what Michael Hudson is alluding to, but I wish he would focus more on macroeconomics and less on class war rhetoric.

The problem I see with this is the simple fact that this time it is different. Bernanke's QE 2.0 (should he choose to do it, which seems very likely) won't get the US economy much more than austerity will get for Europe IMO. As the entire global economy is saturated with debt, there really aren't any marginal profits to be made off of loans or productive investments even when you're getting free money from the Fed. The only thing banks can do with this liquidity is use it to gamble in a casino paper economy, and how long can that shell game last between 3 or 4 counterparties while entire countries are going broke? I really don't see anyone "sidestepping" a depression this time around, regardless of the path they choose to get there. Both fiscal and monetary policy really become useless tools for "recovery" in a debt-based economy and a world with finite resources.

PS - I also really respect Michael Hudson and his intelligent economic views but I think he may be missing the scope of the global economy's predicament this time around.

The global economy was a pretty dismal show for everyone during the 1930s, with depressed growth, trade, capital flows, immigration, etc. But one of the lasting themes of the 1930s which we still hear about today is 'competitive devaluation.' In a shrinking global pie, relative gains versus others can make a substantial difference in the perceived pain of deflation, unemployment, and depressed GDP.

For instance -- by hanging on to the gold peg until 1933, after peers such as Britain had suspended gold convertibility in 1931, the US made its dollar the strongest currency on the planet from 1931-1934. The results: 10% annual deflation, 89% stock market decline, 25% unemployment. Other nations, taking a more devaluationist, inflationist approach (or protecting their banks from failure, as Canada did) did not suffer nearly as much. It was a no-growth decade, but not a deflationary catastrophe. Germans learned a different lesson in the 1920s -- to fear hyperinflation, which the U.S. never experienced.

These cultural predispositions could lead to opposite results in a fresh global depression. Although the US dollar currently is enjoying 'safe haven' strength, Bernanke's instinct will be to pre-emptively depreciate it to ward off deflation at all costs. Meanwhile, the ECB, viscerally loathing such a deliberate dilution of the euro's value, may make the mistake of 'holding the line' even as the continent's governments leap lemming-like off the cliff of fiscal austerity. 

The bizarre result is that the US [avoiding its worst fear of deflation] may set itself up for serious devaluation and inflation afterward, while Europe [avoiding Germany's worst fear of hyperinflation] plunges into the icy waters of deflation. Both parties will be equally surprised and dismayed by the unintended consequences.

I completely understand the logic of what you're suggesting, but can we really be sure the analogy to GD1 will hold up this time around? Countries in the global economy are certainly more dependent on the economic health of other countries now for both exports and imports, especially developed countries such as the US. What will comeptitive devaluation mean for the US economy when we don't manufacture much of anything anymore, and demand for anything we do produce will drop off of a cliff? How will the appreciation of other currencies relative to the dollar affect the American consumer's demand for imported products? You could argue that this will stimulate domestic demand leading to inflation, but private debt to GDP in 2007 was more than twice as much as it was before GD1 and of course public debt in developed countries is about to reach a tipping point or has already. This debt saturation puts an additional constraint on governments and central banks' ability to create inflation, since it is near impossible to encourage consumers and small businesses to continue borrowing, spending and investing instead of hoarding what little cash they have left, while also retaining a credible commitment to pay back external creditors.

As I think you stated earlier, our government has certainly attempted to devalue the currency and create inflation (bailouts, stimulus, $2 trillion in QE, etc.) but to little or no avail. Obama, Geitner and company like to blame this on China and the problems in Europe, but I think it's more fundamental than that. To me it seems that the deck remains heavily stacked against any meaningful inflation, at least until peak cheap oil and ensuing shortages of goods becomes an issue.

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JAG
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The Private Sector Debt and Bernanke

The problem that I see with the Greenspan/Bernanke monster, is that they don’t consider private debt to be a factor in the boom-depression cycle. In his 1995 paper, The Macroeconomics Of The Great Depression: A Comparative Approach, Bernanke states the following:

 

The idea of debt-deflation goes back to Irving Fisher (1933). Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties.13 His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed.


Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects.

So millions of Americans defaulting on their Greenspan induced debt-gorge of the last 20 years has no effect on the economy because its only a “redistribution” of money within the system (i.e. the banks get all the money)? Could somebody please tattoo “Its the Debt, Stupid!” on Bernanke’s forehead?

 

Any moron (to borrow from Davos) can see that the Great Depression was caused by the unwinding of the enormous pile of speculative debt taken on by the private sector in the “Roaring Twenties”. The private debt to GDP ratio hit over 230% in the 1930’s, in 2009 it approached 300%. The de-leveraging that is taking place in the private sector right now surpasses that which occurred in the Great Depression in both magnitude and rate. 

 

And the current private sector de-leveraging has all the hallmarks of a process that has a long way to go. Considering that the massive expansion in base money supply by the fed/gov took 7 years to overcome the debt-deflation in the private sector during the GD, its very likely that we have decades of QE ahead of us. The Fed more than doubled the money supply in 2008-2009, and they still can’t keep up with the debt-deflation occurring in the private sector. 

 

I don’t think this time is different. Bernanke’s theory is flawed because he has overlooked the 800 pound gorilla in the room; the private sector debt.

 

Best...Jeff

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Re: RBS: Prepare for 'Monster' Money Printing

10-YR T-NOTE YIELD FALLS BELOW 3 PERCENT

The yield on the 10-year security slid as much as 7 basis points to 2.95 percent, the lowest since April 2009.

“If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, the head of fundamental strategy at Deutsche Bank AG in London.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aSNYSfcM9DA4&pos=1

Oogly-foogly. Me no like. Frown

Fifteen-year conventional mortgages (as quoted by Bloomberg) are at 4.10%. If this drop in T-note yields is sustained, conceivably 15-yr mortgage rates could dip into the high 3's.

Not 'free money,' but if you expect an inflationary future, a locked-in fixed rate will at least keep the interest component low (shame about the property taxes).

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Re: RBS: Prepare for 'Monster' Money Printing
machinehead wrote:

Oogly-foogly. Me no like. Frown

Man, your posts really make me smile and laugh.  It's quite a knack you have combining this stuff with silliness and I appreciate it more than you will ever know.  Laughing  Thank you!

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Re: RBS: Prepare for 'Monster' Money Printing

What banks and governments have been doing for the past eighteen months is a dumbshow meant to distract the public from the fact that the world financial system has been effectively destroyed. There isn't enough money left in the known reaches of the universe to pay off the outstanding claims. In fact, not even close. Everything that proceeds from this fiasco will be in service of impoverishing most of the population and, incidentally, probably bringing down governments and, with them, convenient social usufructs such as due process of law and civil order. What remains - what you're watching right now on CNN or Fox - is just a representation of the former structures of civilized life, what Joe Bageant refers to as "the hologram," a kind of 3-D picture you can see around, that looks like reality, but is actually immaterial, a collective hallucination. It's comfortable living in a hologram - until you discover that you're in one.

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Re: RBS: Prepare for 'Monster' Money Printing

Kevin Warsh -- an outlier on the Federal Reserve Board, since he's a lawyer rather than an economist, faces off against Weimar Ben:

The Federal Reserve would risk its credibility if it bought more assets to stimulate the economy, board member Kevin Warsh said in a speech on Monday.

Buying more assets – to add to the $1,600bn of Treasury and mortgage-backed bonds it has bought since 2008 – is one measure the Fed could take if it thought the economic recovery had stalled. Mr Warsh’s comments suggest he would oppose such a move.

Mr Warsh said asset sales by the Fed “will not take place in the near term”. But he said the Fed should consider gradual asset sales and that they could be kept separate from any decision to raise the Fed funds rate from its current range of 0-0.25 per cent.

That puts Mr Warsh at odds with the Fed’s chairman, Ben Bernanke, and the majority of the FOMC who think that asset sales should only begin after the Fed has raised interest rates for the first time.

Mr Warsh said that “any sale of assets need not signal that policy rates are soon moving higher”. He said that in recent months the Fed had been able to close many of the special lending facilities it had created during the financial crisis even as rates had been kept low.

http://www.ft.com/cms/s/0/6b6b6318-830d-11df-8b15-00144feabdc0.html

The battle lines are drawn. Warsh and other regional bank board members want to unload that steaming trillion-dollar heap of mortgage securities before Fannie and Freddie's guarantees expire. Whereas Weimar Ben Bernanke will urge two-fisted buying without limit if dread deflation rears its ugly head.

Pull up a chair, have some popcorn, crack a cold one. This is gonna be a doozy. Money mouth

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xraymike79
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Re: RBS: Prepare for 'Monster' Money Printing

http://www.financialsensenewshour.co...010-0619-2.mp3

Robert Prechter of Elliot Wave argues as to why we will be heading deeper and deeper into deflation in the coming years. He says that cash will become king again. He also states why the fear talk about governments devaluing currencies and hyper inflation do not make any sense. Check out what he says about gold and silver.

The G20 meeting in Toronto called for crushing the little people of the world (in order to save the banks).
The Eurozone is already cutting back. Canada, China, and Australia have yet to do what has been called for.  Consumers are tapped out in spite of the low interest rates. There is no way out. All forces are toward debt contraction. Crises develope slowly and then seem to come out of the blue.

The government will not act in a new way until we hit "the bottom".

Article on the UK spending cuts: Britain Unveils Emergency Budget - NYTimes.com
Talk of a depression in Britain: George Osborne's Budget To Ensure A Depression - Forbes.com

--------------------

DMX said:

What banks and governments have been doing for the past eighteen months is a dumbshow meant to distract the public from the fact that the world financial system has been effectively destroyed. There isn't enough money left in the known reaches of the universe to pay off the outstanding claims. In fact, not even close. Everything that proceeds from this fiasco will be in service of impoverishing most of the population and, incidentally, probably bringing down governments and, with them, convenient social usufructs such as due process of law and civil order. What remains - what you're watching right now on CNN or Fox - is just a representation of the former structures of civilized life, what Joe Bageant refers to as "the hologram," a kind of 3-D picture you can see around, that looks like reality, but is actually immaterial, a collective hallucination. It's comfortable living in a hologram - until you discover that you're in one.

....your link did not work. Can you repost it?

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machinehead
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Re: RBS: Prepare for 'Monster' Money Printing
xraymike79 wrote:

....your link did not work. Can you repost it?

DMX's quote is from James Kunstler's weekly column. Kunstler is a funny, talented writer, though still passionately fighting the Civil War on the yankee side. Laughing

http://kunstler.com/blog/2010/06/say-what.html

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JAG
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Posts: 2492
An Economic Depression Is Here

From Mish:

An Economic Depression Is Here

Understanding The Problem

Before you can fix anything, you have to understand what the problem is and what caused it.

What causes depressions is an unsustainable runup in credit and debt that precedes it, NOT a failure to go deeper in debt. 

Anyone who understands 5th grade math should be able to figure that out. Unfortunately, Nobel prize winning economists can't.

Congress, the Fed to Blame

In this case, a spendthrift Congress coupled with loose monetary policy at the Fed, effectively encouraged housing and other speculation. The depression we are in now is a result of massively failed policy. The same policy cannot possibly be the cure.

Give Congress the boot and vote in those against bank bailouts, Fannie Mae bailouts, excessive military spending the US simply cannot afford, and other free-lunch policies.

(I think he stole that from my Private Sector Debt post, LOL)

And for all those posts about fearing skyrocketing interest rates that I read here over the last year, I give you this chart (from the same article)

Ouch. Markets are a b*tch.

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plato1965
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Posts: 615
Re: RBS: Prepare for 'Monster' Money Printing

 

 Don't think this has been posted yet... prolly needs to go in the daily digest.

 Ambrose on the economic "lettered clowns"(tm)

 http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006729/time-to-shut-down-the-us-federal-reserve/

agitating prop's picture
agitating prop
Status: Platinum Member (Offline)
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Posts: 863
Re: RBS: Prepare for 'Monster' Money Printing
xraymike79 wrote:

http://www.financialsensenewshour.co...010-0619-2.mp3

Robert Prechter of Elliot Wave argues as to why we will be heading deeper and deeper into deflation in the coming years. He says that cash will become king again. He also states why the fear talk about governments devaluing currencies and hyper inflation do not make any sense. Check out what he says about gold and silver.

The G20 meeting in Toronto called for crushing the little people of the world (in order to save the banks).
The Eurozone is already cutting back. Canada, China, and Australia have yet to do what has been called for.  Consumers are tapped out in spite of the low interest rates. There is no way out. All forces are toward debt contraction. Crises develope slowly and then seem to come out of the blue.

The government will not act in a new way until we hit "the bottom".

Article on the UK spending cuts: Britain Unveils Emergency Budget - NYTimes.com
Talk of a depression in Britain: George Osborne's Budget To Ensure A Depression - Forbes.com

--------------------

DMX said:

What banks and governments have been doing for the past eighteen months is a dumbshow meant to distract the public from the fact that the world financial system has been effectively destroyed. There isn't enough money left in the known reaches of the universe to pay off the outstanding claims. In fact, not even close. Everything that proceeds from this fiasco will be in service of impoverishing most of the population and, incidentally, probably bringing down governments and, with them, convenient social usufructs such as due process of law and civil order. What remains - what you're watching right now on CNN or Fox - is just a representation of the former structures of civilized life, what Joe Bageant refers to as "the hologram," a kind of 3-D picture you can see around, that looks like reality, but is actually immaterial, a collective hallucination. It's comfortable living in a hologram - until you discover that you're in one.

....your link did not work. Can you repost it?

Prechter is a wavie, a chart guy.  Technical analysis relies too heavily on extrapolating what should happen in the future, based on past paradigms that bear only superficial resemblance to the here and now.  That, together with the wild cards that make up real life, away from flow charts, place limitations on Prechter's usefullness. His long term track record isn't great.

machinehead's picture
machinehead
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Posts: 1077
Re: RBS: Prepare for 'Monster' Money Printing
agitating prop wrote:

Prechter is a wavie, a chart guy.  Technical analysis relies too heavily on extrapolating what should happen in the future, based on past paradigms that bear only superficial resemblance to the here and now.  That, together with the wild cards that make up real life, away from flow charts, place limitations on Prechter's usefullness. His long term track record isn't great.

As far as Bob is concerned, the recent plunge in Treasury yields represents divine confirmation of his deflationist prophecy.

Spontaneous torchlit rallies and bond raves have broken out among the Prechterites, propelling them into altered states of consciousness.

"Limbo, Limbo! How low can yields go? Zero, Zero!"

 

xraymike79's picture
xraymike79
Status: Diamond Member (Offline)
Joined: Aug 24 2008
Posts: 2040
Re: RBS: Prepare for 'Monster' Money Printing
machinehead wrote:
agitating prop wrote:

Prechter is a wavie, a chart guy.  Technical analysis relies too heavily on extrapolating what should happen in the future, based on past paradigms that bear only superficial resemblance to the here and now.  That, together with the wild cards that make up real life, away from flow charts, place limitations on Prechter's usefullness. His long term track record isn't great.

As far as Bob is concerned, the recent plunge in Treasury yields represents divine confirmation of his deflationist prophecy.

Spontaneous torchlit rallies and bond raves have broken out among the Prechterites, propelling them into altered states of consciousness.

"Limbo, Limbo! How low can yields go? Zero, Zero!"

 

 

What I find interesting about Prechter is his theory of social moods - socionomics, not the technical analysis. The scenario of a deflationary period followed then by inflation is what I believe will happen. He does take into account wildcards in his commentary - war, terrorism, etc. There is no one person I agree with in total, not even CM.

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