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.

Japan sees long deflation in US, bets on falling Treasury yields.

“The recovery is very weak and the U.S. is running the risk of deflation…” say the Japanese investors as they are piling into US Treasuries while expecting the yields to drop sharply. They may be the only ones in current economic environment that have extensive experience investing in deflationary times and so it may be worth wile heeding their advice:

“Demand for Treasuries is very good because of the idle money in the banking system…”

“The medium term risk toward inflation is being caused by potential policy missteps by policy makers in regards to monetary and fiscal policy and the weakening dollar…”

“Any economics textbook would tell you that the massive stimulus from the central government will eventually cause inflation, but the Japanese know it doesn’t have to turn out that way…”

“The U.S. economy has faced a double whammy: the recession and credit contraction. The U.S. will face a triple whammy with deflation. That’s good for the Treasury market.”

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.

FDIC wisdom from 2005 – U.S. Home Prices: Does Bust Always Follow Boom?

This analytical research piece from FDIC from February 10, 2005 makes quite interesting and amusing read now in September of 2009. The main premise of this article is that booms are not always followed by a bust. We now know it is nonsense. What goes up must come down, especially if it is not based on fundamentals. The laws of physics have already proven the quasi educated Federal clowns to be wrong, but that is not stopping them from trying to blow another bubble, or rather reflate the one that just burst in pretty much every asset class.

Does the world have the courage to deal with its debts?

Quite a sensible article from an MSM source, Telegraph of UK, that aptly discusses the real state of things on the Central Banks’ front of deflationary fighting and suggests several solutions out of this global economic crisis. I, however, do not agree with the proposed solution ouf of indebtedness problem that we the people should pay down the debts as the author puts it “very slowly, by sweat and toil”. This contradicts the very natural economic self-interest of the majority of hundreds of millions of people that were either duped into borrowing by financial wizards or had to do it as they saw no other way of being able to afford things as the wages stagnated for decades. No, I propose to default on all the debts, walk away and let the owners of this world financial system have it. I in essense call for a debt revolt, stick it to them and let them be crushed under their own debts.

How did the US economy get itself into deflation and why we are going through a deflationary crash.

One important aspect of this mechanism that is seldom mentioned is that the modern debt inflation implies that debt is never payed back and that every year it increases by at least the amount of interest. That means that millions of borrowers simply borrow more to pay off previous principal + interest as dutiful debt slaves they are. That is why debt levels are roughly doubling every decade or so. But what happens when debt growth stops? It is not just that nobody is taking on more debt, the actual principal is being destroyed either via defaults or pay downs. That is, if level of debt is staying constant that means that the principal is actually shrinking by the rate of interest, roughly speaking. This is very deflationary in and of itself. And this is what the privately owned Federal Reserve statistics are showing with regards to most privately held debt in USA. More precisely the consumer and other private debt outstanding is actually shrinking since the beginning of 2009 according the reports that are regularly published by this privately owned Federal Reserve and can be verified on its own website.

The Power Of The FED And Deflation.

This article from GoldSeek makes good points and explains quite clearly why US is going to stay in deflation much longer than most people and so called “economists” think, and why the privately owned FED is unable to reinflate the debt bubble.

Who’s afraid of deflation?

A swelling dollar can clearly be good news for shoppers as well as for those who are sitting on cash. Deflation is often a result of economic progress — productivity improvements that increase spending power.

Cash is king … in deflation.

Any one with cash on hand has an upper hand when buying assets in this deflationary economic environment. Banks accept lower bids from cash buyers/investors on the repossessed properties that they are trying to liquidate and forego higher bids from buyers that need to get a mortgage approval before a real estate transaction can close. It is quite clear that banks are trying to dump the rapidly depreciating real estate assets as quickly as they can while fueling deflationary spiral in the process. Appraisers too don’t give out general estimates anymore and soberly undervalue properties. Banks and appraisers know that house prices are on an unstoppable slide downhill and are hedging their bets by correctly discounting present house values to their future prices. Deflation is here no matter what privately owned U.S. Federal Reserve and U.S. Government want us to believe.