Markets experienced several shocks on Monday. China raised its banking reserve requirements, Greece was rumored to be close to a default, Moody’s downgraded Ireland’s debt to junk status, and S&P put U.S. government debt on negative watch.
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| Will Greece have to sell the Parthenon to pay its debts? |
The People’s Bank of China increased the amount of money that lenders are required to set aside as reserves, according to the Taipai Times. This effectively restricts the amount of money that Chinese banks can lend, making it harder to get credit. Many analysts believe that China will be the engine that returns the world economy to growth, and the reserve requirement change puts that theory into doubt.
As we’ve been reporting for weeks (months, really), investor confidence in Greece’s ability to avoid debt default has been plummeting, and it reached new depths over the weekend, as reports surfaced that German Chancellor Angela Merkel appeared to be preparing the Germany public for a Greek default, according to the Guardian. This follows Moody’s downgrade on Friday of Ireland’s debt to junk status, according to the Telegraph.
Other shocking news from Europe included the strong showing of the nationalistic “True Finns” party in Finland’s elections on Sunday, according to the Associated Press. The True Finns are strongly opposed to bailouts. This victory throws the EU’s entire bailout program into doubt, since all eurozone countries unanimously have to approve any bailout package.
But the biggest shock on Monday was the threat, by Standard & Poors’ ratings service, to downgrade U.S. debt from its current AAA rating, according to Reuters. According to S&P:
“Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.”For the rest of Monday, analysts and politicians were stumbling over themselves to downplay the change. White House economist Austan Goolsbee called it a “political judgment” that “we don’t agree with.” Other analysts said that it was a good thing, because it serves as a wake-up call to Washington, which will cause all problems to be solved.
I have no way of knowing whether politics was part of the S&P decision, but I do know that every downgrade draws similar statements from politicians. European politicians have been harshly critical of downgrades of Greek, Irish and Portuguese debt, sometimes threatening to create a “European ratings agency” that presumably wouldn’t apply such downgrades to European countries.
A number of television analysts repeatedly expressed surprise on Monday that the dollar currency strengthened against the euro and some other currencies.
A strengthening of the dollar is consistent with the global deflationary spiral. In a deflationary environment, prices stay low (or fall), making currency more valuable. As the world’s reserve currency, the US dollar is much less susceptible to inflationary pressure, and U.S. debt default is not necessarily related to the strength of the dollar. In other words, the U.S. may well be on its way to default, but that doesn’t necessarily affect the strength of the dollar currency, which has almost become an international currency.
There is no solution to the financial crisis. I sometimes use the analogy of a tsunami launched decades ago. You know that it’s coming, and politicians will demand that bucket brigades be set up on the beach, but it can’t be stopped. All you can do, as an individual, is run for higher ground — and that will mean different things to different people, depending on their circumstances. As I’ve said many times, treasure the time you have left, and use it to prepare yourself, your family, your community and your nation.
Inflation versus deflation
I need to review a couple of things.In the 2004-2007 period, a few people (like me) were saying that we’re in the middle of a huge real estate and credit bubble. But mainstream financial analysts, economists and journalists ridiculed that idea, saying, “Housing prices can’t go down — people have to live somewhere,” and “Banks won’t foreclose — it’s not in their interest to do so” and “These housing construction firms know what they’re doing, and they wouldn’t be building houses if it were just a bubble.” But today, it’s become common wisdom that there was a housing bubble in the 2004-2007 period. These “experts” have done a 180-degree U-turn.
A big part of the credit bubble was fraud by bankers who created fraudulent mortgage-backed synthetic securities, and sold them to investors as AAA investments. Today, we know that these securities were based on mathematically impossible assumptions, and that the financial engineers who created them must have known what they were doing. (See “Financial Crisis Inquiry hearings provide ’smoking gun’ evidence of widespread criminal fraud.”)
Analysts and journalists on CNBC and Bloomberg tv ALWAYS lie when they talk about price/earnings ratios (also called valuations). (See “5-Oct-10 News — Goldman Sachs’s Cohen gives price/earnings fantasy” and “24-Aug-10 News — Ariel’s Bobrinskoy gives price/earnings fantasy.”)
Mainstream economists have been consistently wrong at least for 15 years. As I’ve said many times, they didn’t predict and can’t explain the tech bubble of the late 1990s, or the credit and real estate bubble of 2000s. They didn’t predict and can’t explain the financial crisis since 2007. They’ve incorrectly predicted economic growth, rising unemployment, and rising inflation almost every day for three years, and they’ve been wrong almost every time, or at best no more accurate than the flip of a coin. They have no idea whatsoever what the economy will look like next year.
Thus, we have to return to these fundamentals: As I wrote in 2007 (see “Understanding deflation: Why there’s less money in the world today than a month ago.”), there is less and less money in the world every day, thanks to deleveraging, and the collapse of the huge credit bubble.
The reason that debt levels keep going up in most countries is that there’s less money available in the world to pay off debts. The reason that bond yields (interest rates) keep going up is that there’s less money, and by the law of supply and demand, the price of money (as measured by interest rates) keeps going up.
Politicians, analysts and journalists who talk about (hyper)inflation are engaging in exactly the same kind of wishful thinking that they did when they were saying that there’s no real estate bubble. They’re all hoping that hyperinflation will occur, because that will dissolve debts and will boost stock prices. But hyperinflation is impossible with less and less money in the world every day.
Bernanke versus the World
A couple of weeks ago, a member of the Generational Dynamics forum called my attention to a posting by Mark D. Cook, called “Bernanke versus the World”:
“The world clearly has a firm chasm between global perception by other capitalistic economies and Bernanke’s cavalier approach to the U.S. economy. Clearly, Mr. B. has no fear or respect for inflation. … Bernanke feels his role is to ignore inflation and intervene socialistically to create artificially unstable environments. …
Personality is at the core of this power move by Bernanke. … Bernanke has a very stubborn nature. The more he is questioned the more stubborn resolve he possesses. This will always put a person behind the curve. He will not go into a neutral state of tempering the QE2 or his monetary policy quick enough. That would require him to eat crow. His nature prohibits him from acknowledging humility, let alone the remote possibility his approach has long term devastating effects. …
Won’t some entity, A.K.A. Congress, introduce a new word to Bernanke and explain its meaning? That word is inflation. Americans will ponder this as they pay $4.00 for gasoline, guess Bernanke does not buy gasoline but instead has a full tank of ego.”I have to laugh at this silly rant. He ridicules Bernanke for being stubborn, and implies that anyone who doesn’t believe in his inflation religion must be a socialist.
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He believed that a so-called “fiat currency” could never suffer deflation, but this has been disproven by Japan’s experience. He believed that verbal statements by the Fed could control inflation and deflation. (See “Bernanke / Federal Reserve congratulates itself on jawboning policy.”)
He blamed America’s debt on a “global savings glut in other countries.”
And he believed that the Great Depression could have been cured in 1930 by a very simple fix of lowering interest rates, and this has been mostly disproven by his own experience as Fed chairman since 2007.
However, it’s not clear that he’s been “wrong” for the last three years.
He’s been doing what he had to do, and saying what he had to say.
There’s nothing he could have done differently at any point, because of political pressure.
After all I’ve disagreed with Ben Bernanke, it’s majorly ironic that it sometimes seems the only person in the world who agrees with me that we’re not headed for inflation is Ben Bernanke. I was listening to some commentators ridiculing him a while ago. “His problem is that he doesn’t have to drive to work every day — if he did, then he’d know that there’s inflation going on.” That’s what Mark Cook is saying as well. I guess that must be my problem too, since I don’t drive to work every day either.
I’ve frequently wondered whether Bernanke really understands that we’re headed for a crash and deflationary spiral, and just isn’t able to say so, for fear of being blamed for triggering a crash. I guess my personal appraisal of this situation is that if Bernanke is willing to stand up to so much heat from people like Mark Cook, then he must know a lot more about what’s going on than people give him credit for. He may yet rescue his historical reputation.
So it isn’t “Bernanke versus the World” as Cook says. It’s “Bernanke and Xenakis versus the World.”
Whew! What irony!
Big Peace
