The Next Leg Of Deflation Has Begun

From Bloomberg: Volcker Says ‘Basic Structure’ of Economy to Impede U.S. Growth

“We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export,” [said Former Federal Reserve Chairman Paul Volcker] “It’s involved with the financial crisis but in a way it’s more difficult than the financial crisis because it reflects the basic structure of the economy.”
...
“It’s likely that economic growth is going to be pretty sluggish for a while.”

Recession, Depression, Deflation, Inflation, Collapse or Recovery ...

Still the Worst Deflation in U.S. History -- Seeking Alpha

Deflation Is Here to Stay -- Seeking Alpha

PIMCO Warns of Coming Deflation -- Seeking Alpha

Volcker: There's No Growth Other Than What The Fed's Pouring Into The Economy

Proof of an Economic Train Wreck?

Total carloads and intermodal rail freight data are plotted in the two charts below as 4 week moving averages. The improvement we're seeing needs to be viewed in the context of a trending increases in freight that occurs throughout the year through to October. The data certainly lacks the characteristics of a V shaped rebound. At this stage L shaped looks like a better letter to describe the economic path.

Complete Story »

2009 Christmas Card from the U.S. Financial Markets

The Bloomberg U.S. Financial Conditions Index provides a daily measure of the relative strength/weakness of the U.S. money, bond and equity markets, and is considered a useful gauge of bank lending conditions and the overall availability of credit. A little more than a year ago in the wake of Lehman's collapse, the financial markets were gripped by fear and panic, and credit risk soared to historic levels (see CD post here on the TED spread). The Bloomberg U.S. Financial Conditions Index plunged from -2.51 in mid-September to -11.3 by October, for an unprecedented five-fold increase in financial market risk within one month (see inverted chart above). U.S. stock prices plunged by more than 25% during that same period, and financial panic started spreading worldwide.

By this time last year, the Bloomberg Index had improved slightly from the October lows, but was still signaling significant trouble in the U.S. money and capital markets, and there was certainly nothing to provide much hope last holiday season. As Scott Grannis reminds us, the world was preparing to celebrate last Christmas and New Year’s in a period of “Great Fear and Trembling."

What a difference a year makes. As we celebrate Christmas and New Year's this year, the U.S. economy and financial markets have staged a remarkable turnaround and the economy has entered a period of gradual, but unmistakable recovery. The inverted Bloomberg Index in the graph above tells the story graphically, and is the "2009 Christmas Card from the U.S. Financial Markets."

The Consequences Of "The Big Lie"

When challenged, simply black it out.

Yes, that's an actual FOIA response.  I guess I should go long Sharpie markers?

Don't even get me started on the financial reform bill.

Yield curve steepest since 1980; hard times ahead in 2010 – Financial Sense

Yield Curve As Of December 10 2009


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Historical Yield Curve


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Chart Symbols
$IRX - The 3 month treasury - Brown
$FVX - The 5 year treasury - Blue
$TNX - The 10 year treasury - Orange
$TYX - The 30 year treasury - Green

A 2 year treasury symbol is not available.

The above chart shows the dramatic steepening in the yield curve since January 2009. This steepening is reflective of several things: An economy presumed to be improving but not at a very good rate, the Fed holding down short-term rates, and the huge pending supply of treasuries to finance the budget.

Judging from action in the 5-year treasury, it appears as if there is a long 3-to-5 year, short 30-year trade in play.

Even with that steep yield curve, banks are not lending judging by the plunge in consumer credit and small business loans.

Total Consumer Credit


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Total Bank Credit


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Total bank credit is starting to rebound but from depths never before seen.

US$ Weekly Chart


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Technicals: US Bear Market to Last until 2018

Oil Drops Below $70. End Demand Remains Very Weak

Goldman Sachs: The Little Hoovers Are Multiplying, State Budgets Set To Be Major Economic Drag

RBC: Beware A Double Dip, And A Disorderly Collapse Of The US Dollar In The Second Half Of 2010

Deutsche Bank: Beware Sovereign Defaults And The End Of The Dollar Carry Trade In 2010

Goldman Sachs Joins The First-Half-Up, Second-Half-Down Club

DEFLATION: Oil Now On Its Longest Losing Streak In Eight Years

John Williams, who runs the popular counter government data manipulation site Shadowstats, has thrown down the gauntlet to deflationists, and in an extensive report concludes that the probability of a hyperinflationary episode in America over the next year has reached critical levels. While the debate between deflationists and (hyper)inflationists has been a long and painful one, numerous events set off in motion by the Bernanke Fed (as a direct legacy of the Greenspan multi-decade period of cheap and boundless credit) may have well cast America as the unwilling protagonist in the sequel of the failed monetary policy economic experiment better known as Zimbabwe.

Williams does not mince his words:

The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment. The current U.S. financial markets, financial system and economy remain highly unstable and vulnerable to unexpected shocks. The Federal Reserve is dedicated to preventing deflation, to debasing the U.S. dollar. The results of those efforts are being seen in tentative selling pressures against the U.S. currency and in the rallying price of gold.

Read the whole thing at Zero Hedge

2010: "The Year of Severe Economic Contraction" - by Mike Whitney - 2009-12-15

New Home Sales: Why They're TankingDavid McSwain submits:

The chart below shows the “Distressing Gap” between new and existing home sales according to Calculated Risk.

Complete Story »

Pessimism and the Financial Crisis: How Much Is Too Much?World Bank Crisis Talk submits:

Of the myriad lessons we can take away from the financial crisis, the need for grounded, fact-based realism, rather than unquestioning, economic dogma, is on the top of my list. If policymakers and economic actors had listened to the Talebs, Roubinis and Shillers of the world early on, America's economic bubble may have deflated before it popped (or at least stopped inflating). Instead, the "musical chairs theory of markets" took hold, and when the music stopped, the entire economic edifice collapsed (and continues to do so).

Complete Story

Another Reason Why America's Glory Days Are OverThe chart below is another fine example of why our country is financially broken and will continue to be broken. Those who actually make something and contribute to the GDP are paid the least. Those who do not contribute to the GDP, and instead only consume GDP, make the most.

Complete Story

Five Charts to Rule Them All: Global Financial Crisis Unwind Continues

The economic reckoning:

Teaching Macro, after the Great Recession
Menzie Chinn, Econbrowser, December 17, 2009
Or, How to adapt the intermediate macro syllabus to an altered world.http://www.econbrowser.com/archives/2009/12/teaching_macro.html

 Teaching Macro, after the Great Recession

"The Great Moderation: What Caused It and Is It Over?"
Mark Thoma, Economist's View, December 17, 2009
The paper below says that, contrary to what you might think, the Great Moderation is not over.

[url="http://economistsview.typepad.com/economistsview/2009/12/the-great-moderation-what-caused-it-and-is-it-over.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View+%28EconomistsView%29%29"]http://economistsview.typepad.com/economis...mistsView%29%29[/url]

"The Great Moderation: What Caused It and Is It Over?"

The Great Depression Redux
Mikka Pineda, Forbes, December 17, 2009
2009 could spiral into 1937 if we cave in to our fears.

[url="http://www.forbes.com/2009/12/16/great-depression-economy-finance-opinions-columnists-mikka-pineda.html?feed=rss_opinions"]http://www.forbes.com/2009/12/16/great-dep...ed=rss_opinions[/url]

The Great Depression Redux

Crude inflation
Free Exchange, Economist.com, December 16, 2009
How should the Fed react to this situation? It should keep easing.

http://www.economist.com/blogs/freeexchange/2009/12/crude_inflation

Crude inflation

THE MESS IS NOT OVER: EuroZone

Harvard’s Feldstein Says U.S. Economy Still Mired in Recession

Restrained consumer spending suggests “2010 is going to be a very weak year,” said [Harvard University economics professor and former NBER president Martin Feldstein ] “Thrift in the long run is a very good thing, but increasing thrift as you come out of a recession is going to be a drag."
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Regarding the residential property market ... Feldstein said the Obama administration’s effort to revive the housing market is a failure and home prices will continue to decline.

“It was just not well enough designed,” Feldstein said. “They ended up failing.” That suggests the housing slump will “continue to push down house prices,” he said.

“We saw a little pause in home-price declines in the summer but I think that was because of the first-time home buyers program,” Feldstein said. “We’re not going to get that boost.”

Oil Prices Falling Again

Along with everything else, oil is selling off.

Rosenberg: Deflation Is Reality, The Consensus View Is GarbageDavid Rosenberg has put out a somewhat humble special report about the difficulty of forecasting, and what he sees everyone else forecasting for the coming year. It's titled, provocatively, "Year Ahead, Can You Handle The Truth?"