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The Remorseless Algebra of a Deflationary Death Spiral
Friday, 06 June 2008 03:27
by Mike Whitney

Look around. The evidence of a withering economy is everywhere. In "good times" consumers shun the canned meat aisle altogether, but no more. Today, Spam sales are soaring; grocery stores can't keep it on the shelves. Everyone is looking for cheaper ways to feed their families. The Labor Dept. assures us that core-inflation is only 4 per cent, but everybody knows it's load of malarkey. Food prices are going through the roof. White bread is up 13 percent, bacon is up 7 percent and peanut butter is up 9 percent. Inflation is rampant and there's no end in sight. The dollar is closing in on the peso and working people are struggling just to get by. The bottom line is that more and more people in "the richest country on earth" are now surviving on processed pig-meat. That says it all.

In Santa Barbara parking lots are being converted into hostels so that families that lost their homes in the subprime fiasco can sleep in their cars and not be hassled by the cops. The same is true in LA where tent cities have sprung up around the railroad yards to accommodate the growing number of people who've lost their jobs or can't afford to rent a room on service-industry wages. It's tragic. Everywhere people are feeling the pinch; that's why 9 out of 10 Americans now believe the country is now headed in the wrong direction and that's why consumer confidence is at its lowest ebb since the Great Depression. This is the great triumph of Reagan's free trade "trickle down" Voodoo economics; whole families living out of their cars waiting for the pawn shop to open.

Known and very popular cialis coupon which gives all the chance to receive a discount for a preparation which has to be available and exactly cialis coupons has been found in the distant room of this big house about which wood-grouses in the houses tell.

The economy is on life-support. The rest of the world would be doing us all a favor if they decided to chuck the dollar and boycott US financial products altogether. That would put an end to Wall Street's chicanery once and for all. Foreign investors should be demanding restitution and impounding American assets to compensate for the trillions of dollars they lost in the subprime/securitization swindle. Litigate, litigate, litigate; that's the only way to make the guilty parties pay for their crimes. Either that or set up a gallows on Wall Street and get down to business.

The pundits on the business channel are telling us that the "worst is over"; that the Force 5 hurricane in the financial markets has weakened to a squall. Don't believe it. The corporate bond market is still frozen, housing is in free fall, and the banking system is buckling from the overload of bad investments. The FDIC is even trying to lure former employees out of retirement to deal with the tsunami of bank failures set to touch down later in 2008. Corporate defaults are on the rise and and commercial real estate is crashing.

"Commercial property prices in the US in February saw their sharpest decline since records began nearly 15 years ago as sources of finance for deals has dried up, according to data from Standard & Poor’s out yesterday. Sales of commercial properties were down 71 per cent in the first quarter compared with a year earlier." (Financial Times) Commercial real estate is following the same downward trajectory as residential housing. They're both headed for the bottom of the fish-tank. Any slump in CRE will send unemployment skyrocketing while adding to the solvency problems facing the banks.

We're not out of the woods by a long shot, and won't be for years to come. According to Bloomberg News, soaring raw material costs have caused a sharp rise in costs to producers that they won't be able to pass on to cash-strapped consumers. That means that corporate profits will fall and stock values will plunge.

Last week, Oppenheimer analyst Meredith Whitney announced that:

"The real harrowing days of the credit crisis are still ahead of us and will prove more widespread in effect than anything yet seen. Just as strained liquidity pushed so many small and mid-sized specialty finance companies to the brink, we believe it will do the same to the US consumer. We believe losses will only accelerate further and far worse than the most draconian estimates."

Whitney has been one of the few consistently accurate analysts of the current market meltdown.

The fate of the larger investment banks is just as uncertain as the smaller "depository" banks. Carlyle Group Chairman David Rubenstein summed it up like this last week, "US and European banks and financial institutions have enormous losses from from bad loans they haven't yet recognized and may have a harder time wooing sovereign fund rescuers. Based on information I see, it will take at least a year before all losses are realized, and some financial institutions may fail. Many financial institutions aren't going to be able to survive as independent institutions."

That means there will be greater consolidation and more formidable banking monopolies, all of which is bad for the consumer.

The banks and financial institutions have never been in worse shape. They've already written down $344 billion since the credit crisis began last August and they'll write down another $200 billion next year. By the time the crisis is over, they will have racked up an estimated $1 trillion in losses. That represents a $3 trillion contraction in loans to consumers and businesses. Also, these estimates don't take into account the losses of revenue from the slowdown in consumer spending, shrinking GDP, and massive business failures; all of which will wreak further havoc on the financial sector.

The amount of stress on the banking system is unprecedented. The Fed is loaning out money hand-over-fist just to keep the scaffolding in place. Take a look at what is going on at the Fed's so-called "auction facilities" where the Fed is providing loans and US Treasuries for "unsellable" mortgage-backed junk and other toxic bonds. The numbers are staggering.

According to the Seattle Times:

"The Federal Reserve's emergency loans to banks climbed to the highest level on record even as Wall Street investment companies scaled back their borrowing....Banks stepped up their borrowing, according to the Fed report. They averaged $15.95 billion in daily borrowing for the week ending May 28, compared with $13.5 billion for the previous week, and the total was a record. The previous high of $14.4 billion came in the week ending May 14...In the broadest use of the central bank's lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans....The Fed also announced Thursday it will make a fresh batch of short-term cash loans available to banks as part of an effort to ease stressed credit markets...The Fed said it will conduct three auctions in June; each will offer $75 billion in short-term cash loans. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers." ("Banks step up Fed loans, investment firms scale back", Seattle Times)

Another $225 billion?!?

The Fed is trashing its balance sheet--to the tune of $225 billion--when the money could be used to provide free college tuition and universal health care. What a waste. Instead, the money is being used to throw a lifeline to dodgy speculators would were trying to snooker foreign investors with garbage securities. At the same time, the Fed's emergency facilities have done nothing to restore trust between the individual banks who are more reluctant to lend to each other than ever. The ongoing scandal surrounding Libor (the interest rate that banks charge each other and which determines the rates on $3 trillion of financial products including mortgages) strongly suggests that the banks are lying about the true rate they are paying so the public doesn't find out how battered they really are.

Bloomberg News: "Banks routinely misstated borrowing costs to the British Bankers' Association to avoid the perception they faced difficulty raising funds as credit markets seized up."

Consumer spending is sluggish too, since lending standards have tightened and home equity continues to vanish. Subprime problems have migrated from Wall Street to Main Street as credit trends appear to be getting worse. Consumers are maxed-out on their credit cards, student loans, mortgages and car loans. The lack of personal savings is not the result of a profligate lifestyle (as the right wing media likes to opine) but 30 years of stagnant wages and class warfare waged via big business and the federal tax code. None of the baby boomers are counting on Social Security to pay the bills when they retire but, still, that doesn't justify the money being ripped-off from their paychecks every week and slipped into the general fund where it is used to pave roads and purchase cluster-bombs. Social security is nothing but a flat tax for paupers. (The rich get a free-ride after the first $87,000 income) These are some of the factors that are bearing down on an American economy like a Daisy Cutter. 2009 is looking is looking more and more like a chapter out of Revelation.

An article is this week's The Economist summarizes the malaise in housing in particularly apocalyptic terms:

"America's house prices are falling even faster than during the Great Depression. As house prices in America continue their rapid descent, market-watchers are having to cast back ever further for gloomy comparisons. The latest S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year to the first quarter, the worst since the index began 20 years ago. Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression. And things are even worse than they look. In the deflationary 1930s house prices declined less in real terms. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year." ("The Economist")

The country is undergoing a collapsing real estate market that surpasses the Great Depression and former Fed-chief Alan Greenspan's book is still on the New York Times Best Seller list. How's that for irony?

From luxury town homes to tent cities in Southern California. Patrick123 YouTube

Regrettably, there's no sign of a bottom yet in housing. Some markets have already dropped by 30% costing the states (like California and Florida) billions in tax revenue and triggering a steep increase in foreclosures.

In California, sales are not only down by roughly 50 per cent, but 40 per cent of new sales are sales of foreclosed homes. The pool of potential buyers has dried up. Now the vultures are circling and picking up homes for $.50 on the dollar. The losses are enormous. If the downward trend continues, (as many now expect) and housing prices drop 30 per cent nationwide; the market will shed $6.5 trillion in aggregate value and lower household spending by $300 billion. That means GDP will shrink at least another full percentage point.

The crisis in the financial markets won't be resolved until housing prices stabilize, that's why the Fed and Congress are scrambling to put together a plan (Hope Now) that will slow the rate of foreclosures. Trillions of dollars in complex bonds and mortgage-backed securities will continue to be downgraded until investors see that it is safe to "dip their toes in the water" again and reinvest in a (currently) moribund market. So far, Congress has made little headway in keeping homeowners from defaulting on their mortgages. Credit Suisse predicts that foreclosures will be somewhere north of 6.5 million homeowners over the next few years. It is the equivalent of Hurricane Katrina sweeping from one side of the country to the other.

The next administration — whether it's McCain or Obama — will be forced to restore the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks. The RTC would create a government-owned management company that would buy distressed MBS from banks and liquidate them via auction. The state would pay less than full-value for the bonds (The Fed currently pays 85 per cent face-value on MBS) and then take a loss on their liquidation. "According to Joseph Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the real reason behind the need of this company was to allow the US government to subsidize the banking sector in a way that wasn't very transparent and therefore avoid the possible resistance."

There it is; a taxpayer-funded bailout of Biblical proportions looming on the horizon, possibly as soon as 2009. Ultimately, it is the only sure-fire way to stabilize the crumbling banking system and put a floor under housing prices. The effects on the dollar, however, will be catastrophic. Don't expect the greenback to survive as the world's "reserve currency". Those days are about over.

The troubles in the financial markets will be with us for some time. The massive expansion of credit has created numerous equity bubbles that are unwinding at an unpredictable pace. Author James Howard Kunstler calls the present process "the remorseless algebra of a deflationary death spiral". That's about as close to a perfect description as imaginable. There's bound to be considerable disagreement about the origins of the bubble and who is to blame. Was it the Fed's "low interest " policy following the dot.com bust in 2000, or the lack of government regulation in the securitzation process, or was it just the natural corollary of a political system which invariably bows and scrapes to Wall Street?

The real origin of the problem is ideological. It's rooted in the prevailing "trickle down" orthodoxy which opposes any increases in wages or benefits for working people. Henry Ford realized what today's captains of industry and finance refuse to accept; that if workers aren't adequately paid for their labor — and wages do not keep pace with production — then the economy cannot grow because consumers do not have the money to buy the things they make. It's just that simple. Greenspan and his ilk believed that they could prosecute the class war and make up the difference by relaxing lending standards, changing bankruptcy laws, and by creating a nearly endless array of exotic financial products that expanded credit. But shifting wealth from one class to another has its costs. By crushing the worker the Friedmanites have killed the golden goose. The world's most prosperous consumer society is in terminal distress and no amount of "free market" gibberish will keep it from crashing.
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Comments (10)add comment

Mike Forman said:

Toilet Paper Change
Change the picture on the bills to Greenspans. Old Ben didn't do this.
June 06, 2008
Votes: +0

Robert Ainsworth said:

"W" to blame for everything?
My heartfelt thanks go to Comrade Whitney for showing us how G.W. Bush
and Alan Greenspan are singularly to blame for all the problems we find in our "great society".

I did not vote for "W" and I have been a despiser of "The Maestro" since 1998.
Nevertheless, the root of these problems go back to the mid-1960s and the ever increasing
demands placed upon the United States Government by the vanguard of the American proletariat -
- the Democratic Party.
It was THEY who set up the ever-increasing madness of "Entitlements" without any regard to the demographic limits of how they can be funded.
With their willing accomplices in the media (Walter Cronkite, et al.) they foisted upon the American people
a set of TOTALLY UNREALISTIC EXPECTATIONS, the hurricane force winds of which are soon to make landfall.

Mr. Bush is a poster boy for that rare combination of ignorance, arrogance, incompetence, and obtuseness.
But the script was written long ago by LBJ and his ilk; the Republicans simply sold out the conservative cause to
restore the republic, and for at least a generation or more they will be remembered as the biggest whores of all.

Robert Ainsworth

June 06, 2008
Votes: +0

gibsy said:

June 07, 2008
Votes: +0

David W. Young said:

The Proletariat Consumers are hardly innocent in this episode.
Americans since about 1970 have wanted to have more than what their incomes have been able to provide without borrowing massively. There is plenty of blame to go around in this mess. I do not recall any official, Fed Chair or President, holding a gun to American consumers' heads and forcing them to take on record amounts of debt in order to spend and enjoy now, immediately without any thought of saving for a rainy day. One reason American wages have not kept up with even inflation, forget the CPI, is that there are Billions of less-privileged masses who are willing to complain less, work for less, and demand less in days off and benefits than the 300-pound American. What incentives where there for American businesses to keep giving hefty annual wage increases to American workers when less-demanding workers overseas were just a phone call away. Americans have forgotten their roots: A Day's Work for A Day's Pay. But I am afraid the lowering of the American standard of living starting today and for many years to come will get Americans back on track. So let's not spend too much more wasted time pointing to higher ups in the totem pole to blame for a mess that that guy or gal in the mirror right in front of you contributed greatly too. NO ONE FORCED YOU TO SPEND BEYOND YOUR MEANS AND LEVERAGE YOURSELF TO THE HILT TO LIVE LARGE NOW AND NEVER REALLY HOPE TO PAY ALL OF THE DEBT BACK IN THE FUTURE. The foot soldier wins every battle, not the Generals. So quit blaming other unless you are blameless.
June 07, 2008
Votes: +0

dml said:

Deeper Roots
Greenspan and Bush played their parts, although the emphasis here is surely on the former, and overall they play only a small part in the mess.

The problem is far older and runs deeper than these two rather unimpressive individuals. Fiat currency comes to collect in the end. Always. Its just a question of when, and how much its going to hurt.

Governments (and certainly private banks) cannot be trusted to print money in any form. It must be tied to something limited, to restrict greed and enforce honesty which cannot be relied on from people by default.

Electronic credit just the latest form of paper money, which is just an empty promise to pay, being multiplied ad infinitum. The end of the dollar will perhaps prompt remaining currencies to reconsider this situation, before they meet the same fate.

The world needs to learn about economics again. The kind which builds on value, not the kind given to us by banks and their academic seed.

Just look at how the academic institutions were infiltrated earlier in the century by bankers with faulty ideas, forming the bias of modern economics. Now only one flavour of economics is taught - the disastrous kind on which we built this house of cards. A re-evaluation is long overdue. But it will be a miracle if that damage can be undone any time soon.

Bring back gold before everyone ends up in the poor house.
June 08, 2008
Votes: +0

J. Irwin said:

Concerned Taxpayer
I do not want the banks responsible for this mess bailed out at the taxpayers expense. My concern is that the our beloved politicians, yes both Republicans and Democrats, will be bought by the banks. Then the politicians will try to pass legislation that allegedly is to benefit the subprime borrowers. In point of fact most of the subprime borrowers have negative equity in their homes and put little or nothing down. In other words they have nothing to lose in case of foreclosure. That is why many are simply walking away from their homes now. The real beneficiaries of the legislation will be banks. It it the banks that are hurt in a foreclosure, not the subprime borrower. However, I am not expecting this legislation ...... until after the election in November. Am I getting cynical in my old age?
June 08, 2008
Votes: +0

Doug in Indiana said:

Blame the Culprits
People everywhere always live within some system that determines their economic moves. Soldiers go to their deaths or dismemberment in battles that are blatantly futile. There is admittedly plenty of blame to go around in this mess. However, every President and most Fed Chairmen have stoked the inflationary fires unceasingly for a century now. Why would anyone blame Americans who respond logically to the financial conditions created by their political and financial masters? If you can get a mortgage at a rate that causes less fiscal distress than watching savings/investments evaporate through the effects of inflation coupled with artificially low rates of return, why would one go the painful route? In 1970 I declined to take a large mortgage to buy a house because I thought the prices were ridiculous, and they were. My less prudent neighbors bought the big houses at inflated prices. A few years later it was obvious that they had read it right. Are we saying that it might have saved the American economy, had there been enough such suckers as prudent as I? But the boomer real demand wasn’t the only thing driving those prices. It was mainly the availability, for those times, of colossal quantities of newly created phony credit money for mortgages. The American worker did not provide this; rather it was his political and economic masters in Washington and New York.

Americans have indeed forgotten their roots: Now it’s A Day's Work for Half A Day's Pay. The decline of the American standard of living has been under way for at least 30 years, not ‘starting today and for many years to come’, though that is probably the even worse future after the current crisis of insolvency. So let's spend lots more productive time pointing to the higher ups in the totem pole, some of them dead for many years, but many still carrying on in true grifter fashion with the help of Fed Chairs.


Baloney mixed with bull pfaffle. The average Joe does not know why things are as they are. He can only respond. Most B.A. grads in economics can’t give a coherent explanation. What were the financial Generals and Fed Chairs thinking as they pumped the credit bubbles, if anything? Maybe "We’ll sell the bafflegab above, as a saleable rationalization perhaps.". And since they are skimming theirs off the top, most of them will never face the foot soldiers’ personal financial crises. The average American is not a complete oaf. He can read prices and other economic signs almost as well as can some of the Generals who are living very high off their efforts. Blame is appropriate for those who have engaged in wrong behavior. We might take the average American to task for stupidly trusting that the financial / economic signs were normal and natural. But the ‘blame’ clearly belongs elsewhere. Those who constructed the fiat house of cards and those who now run it for their own enrichment are greatly to blame. It is good to see the Generals now facing some serious solvency problems of their own, richly deserved. But we certainly should avoid blaming the victims, however dull or unaware. These Generals and Presidents should have kept us out of this financial war on the average Joe, same as the Presidents should have kept us out of all those imperial wars. By the way, at Nuremberg they executed the leaders, not the remainder of the population who waved the flags in the massed ranks, and not only because many of those were already gone.

June 09, 2008
Votes: +0

charles kuchar said:

depression in the 30's was caused by farm drought. looks like this financial turmoil will be stirred up by farm problems. half the crop isn't in yet and it doesn't appear to be able to be planted. farm catastrophe for sure.
June 09, 2008
Votes: +0

djon said:

l4d not for looser , let`s do it together connect
March 10, 2010
Votes: +0

djon said:

forget to tell you

help everyone
March 10, 2010
Votes: +0

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