Posted on 10/31/2007 5:50:09 AM PDT by Brilliant
Is there no rainbows in these writers lives? 26.2% was a fluke and unsustainable but 12.3% is a very robust number...
The Fed’s “Cure” Worsens the Disease
However, as a “temporary cure” on August 17, 2007, The Fed decreased the discount rate (whereby banks can borrow directly from The Fed) by ½%. The result was that borrowings(!) by banks (so they could do more lending) jumped from a daily average of $6 million to $1.3 billion in the two weeks ended August 29, 2007. A staggering 21,600% increase.
The key point is The Fed administered a cure (enabling even more debt) which, in the long run, worsens the “excessive lending disease.”
The Fed’s discount rate cut (i.e. enabling more borrowed liquidity) “cure” is simply creating more of what got us into this terrible situation in the first place, which was excessive borrowed liquidity. Coupled with non-transparency (e.g. hiding M3 – Where is the transparency, Ben?) and excessive monetary printing, the liquidity increases and easy credit have led to, among other things, the moral hazard of lenders lending recklessly to borrowers who should not be borrowing to begin with.
Even so, its “Solution” of allowing even larger injections of “borrowed liquidity” as opposed to “earned liquidity” (which is healthy liquidity achieved through savings out of earnings) temporarily calmed the markets. Yet it is increased “borrowed liquidity” which worsens mid and long-term systemic risks.
For this crucial “borrowed vs. earned” liquidity distinction we are indebted to Dr. Kurt Richebacher (R.I.P.) whose sensible pre scri ptions have been utterly disregarded by the U.S. Federal Reserve and which pre scri ptions, had they been followed, would have resulted in our not being in today’s liquidity and derivatives crises. [May the straight-speaking, realistic and erudite Dr. Richebacher rest in peace. He passed away in early August, 2007.]
Dr. Richebacher explains why credit (i.e. debt) financing, or “borrowed liquidity” as he calls it, is so pernicious:
“Available liquidity is, of course, most important. Nevertheless, we find it most important to distinguish, first of all, between two different sources of liquidity: borrowed and earned liquidity. Present excess liquidity in the United States and several other countries is of a peculiar kind. It does not come, as would be normal, from unspent current income – in other words, from saving. In the absence of any new savings, all the liquidity creation occurring in the United States is borrowed liquidity. Generally, borrowing against rising asset prices is in diametric contrast to earned liquidity from savings out of current income. By definition, this is liquidity from credit inflation. One thing is certain about borrowed liquidity: it depends on rising asset prices. Once asset prices stop rising (see current U.S. housing prices) this liquidity suddenly evaporates. Moreover, ever larger credit injections are needed to keep asset inflation - - like any other inflation - - rising. Nevertheless, there inevitably comes a point in which asset prices, for one reason or another, refuse to rise further and then the big selling without buyers begins. Never before in history has there been an exception from this disastrous end of asset inflation.”
ARM resets and consequent defaults and foreclosures are far from over. Indeed, ARM resets will continue at a $40 billion/month pace until well into 2008.
By correctly anticipating the foregoing, Deepcaster was able to recommend that its subscribers take profit on two “short” positions in August, 2007 and again in October, 2007.
In sum, the August freeze-up will likely be the first of several credit market freeze-ups due to defaulting borrowers and reckless lenders, magnified by the leverage of $20 trillion plus of OTC Derivatives and grossly excessive “borrowed liquidity.”
Ominously, also, on the very day of the September Fed rates decreases were announced, the Treasury International Capital Flows (“TIC”) data for July, 2007 was released.
The bad news was that foreign capital flows into the United States hit their lowest levels since December, 2006, when one considers only the data for long-term securities. When short-term and long-term securities are considered together, the Treasury Inflows jumped to over $100 billion - - more than enough to cover the $60 plus billion trade gap for July.
The key point is that while foreigners are still willing to support the United States’ overspending and over-indebtedness they are moving to shorter dated securities. Thereby, the data is not so subtly telling us that the days of foreigners carelessly financing the U.S. debt are limited. Acute analyst Dan Norcini concluded from the economic and TIC data that “…the Fed will burn the Dollar down, rather than let the U.S. Equity Market collapse.” Apparently so.
Thus it is important to conduct a reality check on how these Fed policies affect American workers. Surely they are a primary cause of wage levels continuing to deteriorate. Real median income of full-time year-round workers fell from $44,600 in 2002 to $42,250 in 2006 (for males) and from $33,800 in 2002 to $32,500 in 2006 (for females).
Williams' excellent analysis raises a further question which Williams does not address, but which Deepcaster shall address. When the resulting (and nearly inevitable) crash appears near, what "cover" or "incident" might the government and/or Fed leaders then in power, create via their “communications policy” to deflect the public’s justifiable rage away from the numbers manufacturers and manipulators themselves, who caused the crisis in the first place?
Ever noticed how these diatribe mouthpiece reports just schill for the gov? Everyone uses energy and eats everyday....those numbers are very rarely ever mentioned in such articles.
About 25 years ago, the constant refrain from the “other side” in the business community was how the US economy was going to collapse, and very soon, due to the trade deficit, outsourcing, etc... I actually believed that for a time. It cost me, at least a bit.
No longer. I won’t believe the doomers ever again.
The US economy is the strongest in the world, over time. People and businesses put their money and their labor where the return is highest, and accomplish whatever it takes to succeed in the business, because they get the rewards of their labors here. If we lowered our level of socialism and taxation and lawsuits, our growth would more than double. We would outgrow even Red China. We have been fighting this economic war with one arm and one leg tied behind our back, and half our people disinterested due to those factors.
And, by the way, China’s economy may be growing strongly right now, but over the last 3 years, we’ve ADDED more to our economy than China’s total annual output.
Ummm yeah...
Huge housing bust - dollar at record lows - Canadian Dollar is worth 1.05 - oil nearing $100 - gas at $3.00 - everything is on track.
Yep.
Specuvestors and illegal aliens are the hardest hit...
A sure sign the Apocalypse is upon us.
“I may just TIVO the MSM evening news programs to watch their spin on this number.”
Expect dead air.
The # with food & energy was lower at .8% vs 1.8%. So that doesn’t help your statement.
Exports are booming!
I can buy gasoline TODAY for $2.59 a gallon.
That is NOT unreasonable, and in fact is below what it would cost if inflation was factored in the past 30 years.
Much of the high cost of crude oil is due to speculators who believe military action involving Iran will cut off supply.
Fortunately, most US oil importers have contracted (for a set amount of time) to buy oil at a LOWER price than is currently being touted.
Also, Exxon has its OWN supply of wells, as do many US drillers.
Thus we are being spared 'skyrocketing' gasoline prices.
I just saved a ton of money by switching my car insurance to Geico.
My investment return Jan 1, 2007 to Oct 30 has been 32.5%. If this is a horrible economy, I’m ready for a good economy.
I just drove less.
Rush was uncharacteristically sharp tongued toward the oil markets the other day. He didn’t quite finish his sentence directed against speculators, but he considered the recent oil rises a direct result of speculation.
I think he wanted to say someone was playing with the free market, but he quite get there....
Manipulations in the free market should be viewed as just that. They are not free market capitalism, and free market capitalists shouldn’t defend them.
Paul Krugman says we’re in a recession.
Economy/Credit/Housing Ping List
If you want on or off this list let me know.
Russia has been stirring the pot at every opportunity.
I'm not relying on what massaged government numbers on a monthly basis is reported as....I'm relying on what the actual cost has risen in yearly average kWhr ((0.113-0.085)/0.085)*100= 32% annual increase as an example. Another gas: 10/06 $2.20, now, $2.85 per gal. ((2.85-2.20)/2.20)*100=29%. Monthly groceries 10/06: $325/mo. $400 / mo for 10/07. ((400-325)/325)*100=23% increase.
Those are my expenses in NC.
see? the economy is already feeling Hillary’s Plan working. Remember ‘92 when Billy’s Plan hadn’t been implemented yet? He hadn’t even been elected yet and he was claiming his plan worked?
Speculation and a dollar sliding to the bottom is the reason for the continued rise in a barrel of oil, not to mention fueled because of our trade deficits, continued government deficit spending, sub-prime fiasco, etc. The snowball has started for runaway inflation and the Feds will most likely drop 25 basis points today which will just speed up the inevitable.
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