2 years after market low retail investors are finally optimistic about stock market.

Is not it a wonderful sign that retail investors who bailed out of the stock market when it hit a multi-year low in March of 2009 and who kept selling all the way to Dow 12200 just reached in February, are now are now ready to buy stocks again hoping they will continue to go up when after the market run up of almost 100% in the past 2 years. “Last opportunity to get into stocks before the new bull market takes off and takes them to new all time highs” – you better believe it. Another Financial industry/MSM/Government mafia propaganda piece trying to convince average citizens to buy stocks so the institutions can finally offload their holdings. They could not so far, and therefore the world’s central banks kept pumping up the stock market hoping that individuals finally succumb and come to the rescue of the brokers once again.

March 8, 2011. Associated Press.
2 years after market low, the little guy is back.

As a historic bull market reaches its second birthday, everyday investors are piling back into stocks, finally ready for more risk and hoping the rally has further to go.

The Standard & Poor’s 500 index has almost doubled since March 9, 2009, when it hit a 12-year low after the financial crisis. And the Dow Jones industrials are back above 12,000, about 2,000 points shy of their all-time high.

Little-guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds, according to the Investment Company Institute. They withdrew $96.7 billion in 2010.

“It didn’t feel right to be back in until now,” says Richard Dukas, who heads a public relations firm in New York City. “I still don’t want to put all my money in the market, but I believe we’ve come through the worst of it.”

After the 2008 financial meltdown, Dukas and his wife converted their 401(k) retirement accounts into cash. They had been burned during the bubble in technology stocks a decade ago, and Dukas says he has been “extremely skittish” ever since.

Now Dukas, 48, says 85 percent of his portfolio is back in mutual funds, although he maintains a small cushion of cash.

More job security, strengthening retirement account balances and improvement in the overall U.S. economy are some of the factors that have brought everyday investors back to the market. A snapshot of what’s happened:

_ The outlook of investors as measured by stock newsletters and market surveys has been extremely bullish for two or three months, says Mark Arbeter, chief technical strategist for S&P Equity Research.

_ Many workers have enjoyed seeing their 401(k) balances return to where they stood at the market’s peak because they kept contributing during the down years. Many who have maintained their 401(k) accounts for a decade or longer still have some ground to make up because of their larger starting balances.

_ Americans who still have jobs are as secure as they’ve been in 14 years. That’s because the number of planned layoffs has fallen to a low, according to outplacement firm Challenger, Gray & Christmas.

The combination has boosted confidence and brought investors back to a rising market. The Dow closed Tuesday’s trading at 12,214, up 87 percent from the 2009 low. It’s still 14 percent below its all-time high in October 2007.

While the economy is improving, it will take a lot longer to erase the abject fear that average investors have felt about owning stocks the last two years, says Jason Trennert, chief investment strategist for Strategas Research Partners in New York.

One reason to set aside their reservations: They can’t find a better place to stash their money. The bull market in bonds has ended, money-market accounts are returning 1 percent or less, and the average two-year CD earns no more than 1.5 percent.

As a result, many investors returning to the market are tiptoeing back in. They’re buying what Trennert calls “stocks that look like bonds” – dividend-paying blue chips that they hope will hedge their risk by guaranteeing at least a dividend payout.

For example, while stocks like Johnson & Johnson and Procter & Gamble haven’t gone up much since 2009, their yields – 3.5 percent and 3.1 percent, respectively – mean investors can still pocket something.

“What swayed me is being frustrated having my money parked where it’s earning almost nothing,” says Debra Condren, a New York business consultant, who has been easing back into the market over the last four months. She still has only 30 percent of her investments in stocks, compared with 80 to 85 percent before the crash.

Besides reinvesting gradually, Condren says she’s much more vigilant about her stocks. She says she won’t hesitate to sell if she doesn’t like what she sees in the market or senses a shift based on world events.

Among professional money managers, the shift back into stocks has been more dramatic. A February survey by Bank of America-Merrill Lynch of 270 top investment managers found them more bullish about stocks than at any time in the past decade.

But history shows experts may not have better insight about what’s next. Plus, individual investors notoriously follow the crowd. So is it a worrisome sign that they’re flocking back?

“Investors have the tendency to make the wrong decisions behaviorally,” says Christopher Geczy, academic director of the Wealth Management Initiative at the University of Pennsylvania’s Wharton School.

When they pile in or out of stocks, he says, it often signals that the market is about to turn in the opposite direction. For instance, investors pumped nearly $91 billion into stock funds in 2007, just as the market was reaching its all-time peak.

Yet analysts point to signs that the run could keep going for quite a while, as long as the economy cooperates. Corporations are still sitting on billions of dollars in cash that they may ultimately put to work in the market.

The S&P 500 has an average gain of 17 percent in the third year of a presidential cycle. But the market also tends to grow much more slowly in the third year of a bull run.

Stock prices are still not high by historic standards. The S&P 500 index now trades at 15.6 times the operating earnings of its stocks over the past year, well under the historical average of 19.3.

There are plenty of investors still looking for an opportunity to get back in. Kenneth Kracmer, who owns a marketing firm in Dallas, is restless after cutting his stock allocation by half, to 30 percent.

But he worries about unemployment, state governments in financial distress and a market he sees as artificially high in view of all the challenging economic news.

Other investors are clearly on edge, too. Before Tuesday, the market had fallen nearly 3 percent in two and a half weeks because of concerns about unrest in the Middle East.

“I want to play it smart until there’s a little bit of economic certainty,” Kracmer says. “I don’t want to get in just before another drop.”

IMF Says Japanese Banks’ Bond Holdings Risk Financial Stability.

IMF would not come out saying that Japan’s bond are going to tumble if it did not have a reason to. Would it? The deflationary spiral is soon going to become a whirlpool that sucks that land of the rising sun into the Pacific ocean. The only question remains of when it will happen and what repercussions will the financial collapse in Japan have on the rest of the world financial system.

Bloomberg. October 6, 2010.

IMF Says Japanese Banks’ Bond Holdings Risk Financial Stability

Japanese banks’ holdings of government bonds pose a risk to financial stability should the securities tumble in price, the International Monetary Fund said.

“Banks’ ever-larger holdings of government bonds and the increasing interest-rate risk arising from their extension into longer-dated maturities create a potential risk to financial stability if there were a sudden increase in government bond yields,” the IMF said in its semiannual World Economic Outlook report released yesterday in Washington.

Japanese banks held 294 trillion yen ($3.5 trillion) in government debt as of December, or 43 percent of the total outstanding, Finance Ministry data show. Expanded monetary easing by the Bank of Japan, which this week cut its key overnight lending rate for the first time since 2008 and pledged to buy more government bonds, has helped pushed benchmark 10- year yields to a seven-year low.

“A near-term disruption in the government bond market remains unlikely, but the factors currently supporting the Japanese bond market are expected to gradually erode,” the fund said.

The fund forecast Japan’s gross domestic product to increase 2.8 percent this year and 1.5 percent in 2011, while consumer prices will continue to slide throughout that period. The 2010 growth forecast was 0.4 percentage point higher than the IMF’s prediction in July, while the estimate for 2011 was lowered by 0.3 percentage point.

The fund reiterated that Japan needs to work to pare its debt load and that the burden is constraining the government’s ability to use fiscal policy to stimulate a slowing economy.

“In Japan, decisive fiscal consolidation is unavoidable, given the high level of public debt and anticipated fiscal needs related to the aging population,” the report said. “Japan’s economic prospects remain weak, given lackluster domestic demand and a lack of fiscal room to further boost the economy.”

On foreclosures fraud, QE and coming new spiral of deflationary forces.

From zerohedge.com comments section. Seemingly very spot on commentary:

My comment below is direct to the both of you and to any others who are looking forward to some kind of dollar debasement via QE X.0:

There isn’t anyone at the (nominal) helm who didn’t understood from the very git-go that the only possible way out was a resumption of organic credit growth. All the fraud, lies, deceit, corruption and violation of centuries old jurisprudence were justified (at least in their minds) by national security concerns.

The power-elite have always know that there was a black whole comprised of many different elements, one of which being title insurance, related to challenges in re-securitizing the ponzi. More importantly, they knew that they had at most two years in which to blow another bubble, anywhere/any kind, to get the herd moving once again in a speculative fashion.

If they had succeeded, there ain’t a person alive (except for chronic complainers who are never happy) who would be bothering about “ancient” history while desperately trying to get in on the new party happenings.

QE was never meant to actually monetize anything. It was only part of a coordinated attempt, combined with control of mass media, expert triggering of key emotional drivers (eg optimism), appeals to authority/leadership, you name it, the whole gamut, aimed at manipulating overall general market psychology.

Their two years is now up – they have failed. What we are seeing now is the roll-over. Events are going to start accelerating faster as we appear to be a tad late with our appointment with destiny.

Just to re-iterate:

  • No one is going to get a free house. Live for free? Sure; it many take years, but eventually all of these mortgages will be rolled back to the point where clean title can be (re)established. Effect of the slow down in the r/e marketplace & overall economy – disasterous.
  • QE – Ain’t gonna happen. The American people are now awake and are not going to stand around with puds in hand while the dollar and their remaining (if any) collective savings are evaporated. There’s a lot of moaning about passive sheep, but humans are volatile creatures – look out when the mob begins moving in force.
  • There will be no more bailouts, there will be no real QE (other than small scale targeted manipulation eg POMO). Rather, we are going to enter a new period of staggered defaults, first on unfunded mandates, then onto entitlements, and then eventually debt instruments.

This ride is only just starting. Please note that today, right now, are the good old days.

Australia’s housing bubble pop.

It looks like there are jitters beginning to be felt through Australia’s house bubble. How do we know? Because when “housing bubble fears grow” it already burst. It is too late now. Whoever sells first wins.

Consider this article:

Herald Sun, September 13, 2010.

Housing bubble fears grow
AUSTRALIA’S banks have significantly ramped up their exposure to the housing market in a move with hazardous implications should the boom turn to bust.

Research shows home lending has raced ahead of business lending, helping to drive a property boom that has seen Melbourne house prices surge 73 per cent since 2005.

The study by London-based research firm CreditSights says house prices have doubled across all mainland capitals since 2002, and that home lending now comprehensively dominates Australia’s credit system.

The findings come as a separate study, by global consultants Datamonitor, reveals a “price correction” is the likely consequence of dwindling housing affordability.

“Given that house price growth has outstripped wage growth significantly over the last decades, this would have to entail either a significant fall in property prices or a sustained period of stagnant property prices,” Datamonitor says.

Its exhaustive study of Australia’s mortgage market also says fixed-rate home loans are out of favour with borrowers, who are possibly disillusioned “after years of having fixed their rates at the worst of times”.

The CreditSights report was written by Singapore-based senior analyst David Marshall, who previously covered Asian banks for global ratings agency Fitch.

Mr Marshall says growth in the Australian housing market over the past year in particular, with prices surging 24 per cent in Melbourne, has become “a little too positive”.

He says home loans account for 58 per cent of total lending – a substantial increase on the 43 per cent figure recorded at the end of 1999.

Total home lending, including investor loans, now significantly outstrips business lending and personal loans.

While business lending has largely plateaued since the onset of the global financial crisis, home lending has continued to climb.

Mr Marshall says positive factors supporting house prices “remain in place”, including broad economic growth and low unemployment, but he warns strong loan growth has not been underpinned by savings growth.

As a result, the banks are turning to offshore lenders for cash at twice the rate they were a decade ago and need to raise $130 billion to $140 billion in foreign markets over the next year.

Mr Marshall has reportedly said the Australian banks’ cash needs could lead to higher borrowing costs that they would have to pass on to customers, “which could lead to house prices slowing”. “There is a problem here and it’s hard to say where it will all end,” he said.

The Commonwealth Bank last week announced executives would soon travel overseas to meet investors to dispel growing fears Australia is in the throes of a house price bubble.

Critics of the Australian housing market frequently based their analyses on superficial or incomplete research, the bank said.

The Datamonitor report says that while an “eventual correction of prices” is likely in the housing market, the short-term outlook is more upbeat and only a small number of people expect prices to fall over the next year.

Financial Crisis is an ‘Inside Job’.

Having now experienced a confirmed Hindenburg Omen in the last week that portends a stock market decline, we may again try to turn our attention to the Financial Crisis that began in 2007.  Inside Job is a documentary by Charles Ferguson that unequivocally reveals to us that the GFC was not an accident. Those who benefited from it foremost were all in on it and new full well what they were doing and what it would lead to:

Is Canada’s housing market bubble beginning to deflate?

Now we are reading a welcome news from Canada. The supply of houses on the market is beginning to increase which if it were to continue on this path would signify that Canadian housing bubble is being pricked as we speak and should provide a spectacular deflation in the months and years to come.

This is how it started in USA back in 2005. First supply of houses rose while the prices continued to inch upward. But then the supply really began to accumulate as more and more fools started to put their properties on the market sensing that it was time to get out. We know what happened next.

And now in Canada we are beginning to see the same kind of trends. They, of course, still continue talking about how real estate prices never go down, and that the rising valuations are based on fundamentals and that Canadian economy is strong and getting stronger. But we now know that this is precisely the bubble talk you hear at the top of many speculative markets throughout history.

The Globe and Mail. March 15, 2010.

Influx of listings set to cool resale housing market.

After a historic runup in prices, the Canadian resale housing market is set to cool down as a wave of new listings hits the market, providing badly needed inventory for hungry buyers.

The number of homes on the market nationally increased for the third consecutive month in February on a seasonally adjusted basis, according to the Canadian Real Estate Association. The industry group said Monday there were 4.7 months of inventory available in Canada in February, up from 4.5 months in January.

That trend has put buyers and sellers in an equilibrium not seen since before the market downturn began about two years ago. The ratio of new listings to sales, an indicator used by analysts to gauge the health of the resale housing market, left the “favourable to sellers” range to the “balanced market” range in February, according to National Bank Financial.

It’s a sign of stability for a sector that has seen wild price appreciations as buyers competed ferociously for the few homes on the market.

“Further expected supply increases will continue to take the steam out of housing markets as the year progresses,” said Gregory Klump, chief economist at the Canadian Real Estate Association. “There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising.”

More listings help prevent bidding wars and could slow house-price gains this year. The association expects prices nationally to decline slightly next year.

Still, some major markets such as Toronto and Vancouver will be slower to add listings this year, industry officials said.

“You still see a supply shortage in the big centres because the people who need to sell and move up just don’t see anything they want to buy,” said Phil Soper, president of Royal LePage. “But we’re ahead of the curve on new listings in February, and March will be absolutely critical if that trend is to continue.”

The Monday following Ontario’s March Break is traditionally the busiest listing day in Canada, as the weather turns favourable and parents who will need to relocate their children realize the school year is coming to an end.

“That’s the day everyone puts on their game face and gets chopping,” Mr. Soper said. “It happens every year – it’s like the summer blockbuster season.”

The busy spring will have consequences, however. Many of the homes will be put on the market earlier than in other years as owners look to cash in on the hot market. The flurry of activity is expected to dampen sales in the last half of 2010.

“I think we’ll see a sharp up-tick in sales, followed by a massive pullback,” said TD Bank economist Millan Mulraine. “We’re taking sales from the end of the year and moving them up. Then you should see a market that is more in line with fundamentals.”

In the meantime, the number of home sales continued on a tear in February with a 44 per cent year-over-year gain from recessionary lows a year ago, CREA figures showed.

The average price of all homes sold on the Multiple Listings Service in February was $335,655, up 18.2 per cent from a year ago. The relentlessly strong price gains since last year’s lows have fuelled worry about the formation of an asset bubble.

Finance Minister Jim Flaherty is watching the country’s mortgage market carefully but does not believe there is a housing bubble, he said in an interview with Bloomberg.

Anything that helps prices stabilize would be a welcome development for policy makers, who are taking steps to make it more difficult to qualify for a mortgage in a bid to cool off the market.

While more listings are expected this year, buyers are expected to be out in full force for the foreseeable future.

Buyers are expected to rush into the market in the coming months to avoid changes to mortgage application rules in April, anticipated higher interest rates by midsummer and the introduction of harmonized sales taxes in Ontario and British Columbia in July.

Currency composition of FX reserves of world’s central banks.

Here you can find a useful graph of the currency composition of FX reserves for the 114 reporting countries’ central banks.

The Marginal Productivity of Debt.

March 30, 2009

The Marginal Productivity of Debt
by Antal E. Fekete

Why Obama’s Stimulus Package Is Doomed to Failure

Paper mill on the Potomac

The paper mill on the Potomac is furiously spewing up new money. According to the manager of the mill, as indeed according to the Quantity Theory of Money, this should stop prices from falling and the economy from contracting.

In this article I present an argument why this conclusion is not valid. On the contrary, I shall show that new money created on the strength of a flood of new debt, is tantamount to pouring gasoline on the fire, making prices fall and the economy contract even more. The Obama administration has missed its historic opportunity to stop the deflation and depression inherited from the Bush administration because it entrusted the same people with the task of damage-control who had caused the disaster in the first place: the Keynesian and Friedmanite money doctors in the Fed and the Treasury.

Watching the wrong ratio

The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place.

Conversely, a serious fall in that ratio is a danger sign that the quality of debt is deteriorating, and contracting additional debt has no economic justification. The volume of debt is rising faster than national income, and capital supporting production is eroding fast. If, as in the worst-case scenario, the ratio falls into negative territory, the message is that the economy is on a collision course and crash in imminent. Not only does more debt add nothing to the GDP, in fact, it causes economic contraction, including greater unemployment. The country is eating the seed corn with the result that accumulated capital may be gone before you know it. Immediate action is absolutely necessary to stop the hemorrhage, or the patient will bleed to death.

Keynesians are watching the wrong ratio, that of debt-to-GDP. No wonder they constantly go astray as they miss one danger signal after another. They are sailing in the dark with the aid of the wrong navigational equipment. They are administering the wrong medicine. Their ambulance is unable to diagnose internal hemorrhage that must be stopped lest the patient be dead upon arrival.

Melchior Palyi’s early warning

In the 1950’s when the dollar was still redeemable in the sense that foreign governments and central banks could convert their short-term dollar balances into gold at the fixed statutory rate of $35 per ounce, the marginal productivity of debt was 3 or higher, meaning that the addition of $1 in new debt caused the GDP to increase by at least $3. By August, 1971, when Nixon defaulted on the international gold obligations of the United States (following in the footsteps of F.D. Roosevelt who had defaulted on its domestic gold obligations 35 years earlier) the marginal productivity of debt has fallen below the crucial level 1. When marginal productivity fell below $1 but was still positive, it meant that total debt (always ‘net’) was rising faster than GDP. For example, if the marginal productivity of debt was ½, then $2 in debt had to be incurred in order to increase the nation’s output of goods and services by $1. An increase in total debt by $1 could no longer reproduce its cost in the form of an equivalent increase in the GDP. Debt lost whatever economic justification it may have once had.

The decline in the marginal productivity of debt has continued without interruption thereafter. Nobody took action, in fact, the Keynesian managers of the monetary system and the economy stone-walled this information, keeping the public in the dark. Nor did Keynesian and Friedmanite economists at the universities pay attention to the danger sign. Cheerleaders kept chanting: “Gimme more credit!”

I learned about the importance of the marginal productivity of debt from the privately circulated Bulletin of Hungarian-born Chicago economist Melchior Palyi in 1969. (There were altogether 640 issues of the Bulletin; they are available in the University of Chicago Library). Palyi warned that the tendency of this most important indicator was down and something should be done about it before the debt-behemoth devoured the economy. Palyi died a few years later and did not live to see the devastation that he so astutely predicted.

Others have come to the same conclusion in other ways. Peter Warburton in his bookDebt and Delusion: Central Bank Follies ThatThreaten Economic Disaster (see references below) envisages the same outcome, although without the benefit of the concept of the marginal productivity of debt.

The watershed year of 2006

As long debt was constrained by the centripetal force of gold in the system, tenuous though this constraint may have been, deterioration in the quality of debt was relatively slow. Quality caved in, and quantity took a flight to the stratosphere, when the centripetal force was cut and gold, the only ultimate extinguisher of debtthere is, was exiled from the monetary system. Still, it took 35 years before the capital of society was eroded and consumed through a steadily deteriorating marginal productivity of debt.

The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped to zero and went negative for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe. Indeed, in February, 2007, the risk of debt default as measured by the skyrocketing cost of CDS (credit default swaps) exploded and, as the saying goes, the rest is history.

Negative marginal productivity

Why is a negative marginal productivity of debt a sign of an imminent economic catastrophe? Because it indicates that any further increase in indebtedness would necessarily cause economic contraction. Capital is gone; further production is no longer supported by the prerequisite quantity and quality of tools and equipment. The economy is literally devouring itself through debt. The message, namely that unbridled breeding of debt through the serial cutting of the rate of interest to zero was destroying society’s capital, has been ignored. The budding financial crisis was explained away through ad hocreasoning, such as blaming it on loose credit standards, subprime mortgages, and the like. Nothing was done to stop the real cause of the disaster, the fast-breeder of debt. On the contrary, debt-breeding was further accelerated through bailouts and stimulus packages.

In view of the fact that the marginal productivity of debt is now negative we can see that the damage-control measures of the Obama administration, which are financed through creating unprecedented amounts of new debt, are counter-productive. Nay, they are the direct cause of further economic contraction of an already prostrate economy, including unemployment.

The head of the European Union and Czech prime minister Mirek Topolanek has publicly characterized president Obama’s plan to spend nearly $2 trillion to push the U.S. economy out of recession as “road to hell”. There is absolutely no reason to castigate Mr. Topolanek for this characterization. True, it would have been more polite and diplomatic if he had couched his comments in words to the effect that “the Obama plan was made in blissful ignorance of the marginal productivity of debt which was now negative and falling. In consequence more spending on stimulus packages would only stimulate deflation and economic contraction.”

Hyper-inflation or hyper-deflation?

Most critics the Obama plan suggest that the punishment for the bailouts and stimulus-packages will be a serious loss of purchasing power of the dollar and, ultimately, hyperinflation, as evidenced by the Quantity Theory of Money. However, the quantity theory is a linear model that may be valid as a first approximation, but fails in most cases as the real world is highly non-linear. My own theory, relying on the concept of marginal productivity of debt, predicts that it is not hyperinflation but a vicious deflation which is in store. Here is the argument.

While prices of primary products such as crude oil and foodstuffs may initially rise, there is no purchasing power in the hands of the consumers, nor can they borrow as they used to in order to pay the higher prices much as though they would have liked to do. The newly created money has gone into bailing out banks, and much of it was diverted to continue paying bloated bonuses to bankers. Very little, if any of it has “trickled down” to the ordinary consumers who are squeezed relentlessly on their debts contracted in the past.

It follows that price rises are unsustainable, as the consumer is unable to pay them. As a consequence the retail and wholesale merchants are also squeezed. They have to retrench. Pressure from vanishing demand is passed on further to the producers who have to retrench as well. All of them are experiencing an ebb in their operating cash flow. They lay off more people, aggravating the crisis further as cash in the hand of the consumers is diminished even more through increased unemployment. The vicious spiral is on.

But what is happening to the unprecedented tide of new money flooding the economy? Well, it is used to pay off debt by the people who are desperately scrambling to get out of debt. Businessmen in general are lethargic; every cut in the rate of interest hits them by eroding the value of their previous investments. In my other writings I have explained how falling interest rates make the liquidation value of debt rise, which becomes a negative item in the profit/loss statement eating into capital that has to be replenished as a consequence. Worse still, there is no way businessmen can be induced to make new investments as long as further reductions in the rate of interest are in the cards. They are aware that their investments would go up in smoke as the rate of interest fell further in the wake of “quantitative easing”.

Self-fulfilling speculation on falling interest rates

The only enterprise prospering in this deflationary environment is bond speculation. Speculators use new money, made available by the Fed, to expand their activities further in bidding up bond prices. They pre-empt the Fed: buy the bonds first before the Fed has a chance; then turn around and dump them in the lap of the Fed. This activity is risk-free. Speculators are told in advance that the Fed is going to move its operations from the short to the long end of the yield curve. It will buy $300 billion worth of long dated Treasury issues during the next six months, and probably much more after that. Speculation on falling interest rates becomes self-fulfilling, thanks to the insane idea of open market operations of the Fed making bond speculation risk-free. Deflation is made self-sustaining. (For another view of risk-free bond speculation, see the article by Carl Gutierrez’ in Forbes mentioned in the References below.)

Note also the crescendo of the dumping of equities and the desperate attempt to redeem toxic assets by private parties, sending the demand for cash sky high. The dollar, at least the Federal Reserve note variety of it, will be increasingly scarce. Rather than falling through the floor as under the hyper-inflationary scenario, the purchasing power of the dollar will soar. You say that Ben Bernanke and his printing presses will take care of that? Well, just consider this. The market will separate vintage Federal Reserve notes from the new issues with Bernanke’s signature on them. In a classic application of Gresham’s Law people will hoard the first, bestowing a premium on it relative to the second variety, which will fall by the wayside.

Bernanke can create money but cannot make it flow uphill

Already some tip sheets openly advise people to hoard Federal Reserve notes in amounts up to twenty-four months of estimated household expenditure, while cleaning out all deposit accounts. Depositors are urged to forget about the $250,000 limit on deposit insurance, which is rendered literally worthless as the resources of the F.D.I.C. have been hijacked by Geithner and diverted to guaranteeing the investments of private parties that were foolish enough to buy into toxic debt at the behest of the Obama administration.

Karl Denninger envisages unemployment in excess of 20%, with cities going “feral” as showcased by downtown Detroit (see References below).

What has all this got to do with the marginal productivity of debt? Well, once it is negative, any further addition of new debt will make the economy shrink more, increasing unemployment and squeezing prices. Bernanke can create all the money he wants and more, but he cannot make it flow uphill.

Bernanke is risking something worse than a depression

The newly created money will follow the laws of gravity and flow downhill to the bond market where the fun is. Risk-free bond speculation will further reinforce the deflationary spiral until final exhaustion occurs: the economy will collapse as a pricked balloon. Instead of hyperinflation and the destruction of the dollar, you’ve got deflation and the destruction of the economy.

Denninger says that the “death spiral” will lead to fire sales of assets in a mad liquidation dash and, ultimately, to the collapse of both the monetary and political system in the United States as tax revenues evaporate. He opines that probably not one member of Congress understands the seriousness of the situation. Bernanke is risking something much worse than a Depression. He is literally risking the end of America as a political, economic, and military power.

Indeed, the financial and economic collapse of the last two years must be seen as part of the progressive disintegration of Western civilization that started with government sabotage of the gold standard early in the twentieth century. Ben Bernanke, who should have been fired by the new president on the day after Inauguration for his part in causing irreparable damage to the American republic may, in the end, have the honor to administer the coup de grâce to our civilization.


No Time for T-Bonds by Carl Gutierrez, March 28, 2009, www.forbes.com

Bernanke Inserts Gun in Mouth, by Carl Denninger, March 20, 2009, http://market-ticker.denninger.net

Debt and Delusion: Central Bank Follies That Threaten Economic Disaster, by Peter Warburton, first published in 1999; WorldMetaView Press (2005)

Antal E. Fekete
Professor, Intermountain Institute of Science and Applied Mathematics, Missoula, MT 59806, U.S.A.

A sure sign of deflation: 9 bailed-out banks report declines in new lending.

As the pool of credit worthy borrowers and worthy inestment projects dwindles in a deflationary environment so the lending declines. It is no surprise that in still democratic USA, unlike the communist China, the Government cant just mandate its banks to lend. It can provide interest free credit lines, it can embark on a massive Qunatitative Easing and public relations campaings, but if banks are scared to lend and the borrowers are not interested in borrowing nothing will get the lending machine going. At least, not until the bad debts are liquidated through defaults, which are, of course, deflationary. And so the lending contracts. In fact, total private credit outstanding in US economy contracted by some $2 Trillion dollars in 2009 as the latest report from the Fed shows (Flow of Funds Accounts in the United States. Z.1 Release. Flows tables. Section F4. Credit Market Borrowing, All Sectors, by Instrument.  March 11, 2010).

Considers this fresh news on major banks lending patterns:

Associated Press. March 15th, 2010.

9 bailed-out banks report declines in new lending.
WASHINGTON (AP) — The Treasury Department said Monday that new lending plummeted in January at the nine largest banks that have yet to repay their taxpayer bailouts.

Treasury’s monthly survey of bank lending shows overall new loan origination dropped 35 percent from December’s level. Treasury says the drop “may be partially explained by large increases” in late 2009.

The survey also shows that average loan balances at the nine banks were 2 percent higher than in December — bringing them to their highest level since September.

The nine banks are: Citigroup Inc., Comerica Inc., Fifth Third Bancorp, Hartford Financial Services Group Inc., KeyCorp, Marshall & Ilsley Corp., PNC Financial Services Group Inc., Regions Financial Corp. and Suntrust Banks Inc.

Increasing lending to consumers and small businesses was one of Congress’ stated goals when it passed the $700 billion financial bailout in October 2008.

Treasury said this is the last time it will publish a summary analysis of the bank survey because “aggregate month to month changes are no longer meaningful.”

The nine banks surveyed in January held 17 percent of industry assets at the end of 2009. When the survey was first conducted in November 2008, it included the 22 largest banks holding bailout money. Those banks held 61 percent of industry assets.

U.S. is in deflation as a nation. Shooting at the Pentagon. Revolt is brewing.

Now that the social contract has been torn up and stamped upon by the rich and the powerful elites of the USA, now that the trillions have been stolen from the millions in broad day light with smiles on their faces, now that tens of millions of jobs have been shipped off shore and tens of millions of immigrants have been allowed to pour into America (even now in this difficult economic time) and take jobs that many US Citizens so desperately need, now that the mere dissent and opposition to the government policies is suppressed and government statistics are shamelessly falsified, the USA as a nation is deflating not only economically, but also socially and politically.

We the People are damn f###ing tired of this disgraceful spectacle that the political establishment and their global puppet masters are force feeding us.

May be that is why People of the USA are losing their patience (finally) and beginning to fly planes into privately owned tax collection agencies such as IRS and go on shooting sprees near buildings of other anti-American organizations. And oh by the way, the Epic Beard Man is so popular, because he represents revolt and resistance to the government forced policies of tolerating crime and violence for the sake of diversity and multiculturalism.

Consider the shooting at the Pentagon.

WASHINGTON (Reuters) – Two Pentagon security officers were wounded on Thursday evening when a gunman shot at them in the giant office building’s main entrance to the Metro commuter rail system, Pentagon officials said.


The gunman was also shot and all three were taken to hospital, the officials said, adding that none of the wounds was life-threatening.

All entrances to the five-sided headquarters of the Defense Department in Virginia, just across the Potomac River from Washington, were closed shortly after the incident.

“Metro is locked down until further notice,” Pentagon police said in a message over the building’s intercom.

Officials said an investigation was just starting and it was unclear why the alleged gunman opened fire at the Pentagon security officers.

Some witnesses reported hearing gunshots being fired in the Metro station and people screaming.

This is not the kind of things you see in a country where the Government has the consent of the governed.

This is the kind of things that take place in a nation where revolt is brewing. As the Second Great Depression intensifies and more collapses and defaults come, the nation will likely see American citizens start to riot. First against their local authorities, then state, then Federal. The government power structure will try to contain the revolt, will try to resort to intimidation and violence, but the course of history cannot be changed once embarked upon. And the house of cards which is today’s modern world economy is crumbling and stopped dead in its tracks as the levels of indebtedness have reached epic proportions and are collapsing on themselves.

Be strong, be resolute, do not be afraid. The truth is on our side. We shall prevail. 99% of us will not live under the yoke of 1% financial terrorist elites.