Sovereign Defaults Coming in Second Stage of the Financial Crisis.

The first stage of the deflationary debt unwind resulted in massive consumer and corporate defaults, particularly in the financial sector. This sector being one and the same as the governments that it controls, the state has thrown all the resources that it had and did not have (pulled them out of thin air) in order to save its Banking sponsors. While it has given the Banks the respite and saved many of them for now from going belly up, it did not solve a thing. The bad debts have simply been transfered to the Central Banks’ balance sheets that are expected to be later transferred to the taxpayers of each and every country. Whatever was not transfered was hidden by suspension of the mark-to-market accounting rules. Thus, the deflation that is not seen has not gone a way, but has been simply hidden.

Mother of all carry trades will lead to inevitable deflationary bust.

For now the privately owned US Federal Reserve’s efforts to reflate the financial markets are sending a flood of liquidity into speculative asset bubble blowing by the speculators. Nearly every asset class is seeing its price being bid up with cheaply borrowed US dollars. At some point an asset bubble always bursts when an event or a perception driven change of heart causes investors to unwind their speculative positions. As the article below explains, when this happens we’ll witness a huge deflationary bust which may wipe out many speculators. Will it wipe out the Central Banks is another good question that only time will be able to answer.

The Lowdown on Deflation.

Deflation is the contraction (reduction) of money and credit. It occurs when the economic system is carrying too much debt to be supported by the level of income generated by economic activity. It occurs because too much debt has been incurred to create unproductive assets that don’t generate income. Deflation is a corrective process, it’s simply the market (you and I) not being able to service debt, so we must forfeit.

World Bank Sees Deflation Risk From Excess Capacity.

A failure to address excess capacity in the global economy may cause a “deflationary spiral” that would prolong the financial crisis and result in more company bailouts.

EU Finances Are Looking Grim. Deflation will not be denied.

As the clowns in European fiancial elite circles are still trying to figure out whether or not they are in deflation, the big D is now solidly in charge of the region. As private credit is collapsing the Euro-zone governments and Central Banks are desperately trying to reinflate by pumping up the public debt and using the proceeds for spending. Yet the reflation is finding itself oddly overpowered by the deflationary wind blowing against it. Sooner or later this public debt bubble, and a huge one, will reach its maximum size and start letting the hot air out. When that happens, there will be nobody to guarantee the sovereign debts. The longer the deflation is delayed, the stronger it will be.

Swiss supply prices drop highlights deflation risk.

Swiss supply prices posted their steepest decline in 23 years in June, highlighting once again the risk of a deflationary spiral of falling prices and declining demand in the Alpine economy.
The steep price drop will also keep the Swiss National Bank on its toes in its fight against deflation, which include interventions to stem a rise in the Swiss franc, economists said.

Europe digs its economic grave while the ECB answers to no one.

You cannot have an economic growth without natural population growth. We can’t seriously believe that by importing millions upon millions of culturally and economically incongruous third world laborers and their families European economy can somehow continue to grow. Those folks are not big spenders, and more often then not, they subtract from an economy more than they add due to their overwhelming propensity to depend on public assistance.

Why the private FED and US Government cannot print their way out of deflation.

$20 Trillion dollars, as we now know how to estimate, will take about 20 years to print if the BEP prints $100 bills only at neck breaking pace.

The Fed’s Real leash (Credit is not Currency, part II).

The dollar holders of the world have voted that they want to draw about $1 in cash for every $40 in their checking accounts. So if the fed creates credits more than about 40 times faster than it can run its physical printing presses, at some point, some one is going to walk into a bank, try to make a withdrawal . . . and be denied, due to lack of currency on hand.

Credit is Not Currency.

There is Nothing the Fed can do to prevent the full depth of the coming credit contraction. The credit they create will be rejected, along with every other kind, devalued to near nothing, as ALL parties are (rightly) considered unable to pay. They can’t even inflate their way out of it (at least, not anytime soon) – they can run their printing presses day and night, but until that currency supply approaches the shrinking credit supply, it will have no effect to speak of.