Tuesday, June 09, 2009

Deflation likely to continue.

As bad as deflation is, it is still miles less horrible than a hyperinflation spiral.

Counter Punch
June 9, 2009
Hanging By a Thread
Is Hyper-Inflation Around the Corner?
By MIKE WHITNEY

The Republicans are convinced that hyperinflation is just around the corner, but don't believe it...

...there's little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed's liquidity is sitting idle in bank vaults instead of churning through the system. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can't get it; while the people who qualify, don't want it. It's just more proof that the slowdown is spreading.

That doesn't mean that the dollar won't tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing and continues to monetize the debt, there's a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there's going to be a run on the dollar...

...Which brings us back to the original question; how bad is the economy?

The answer is, really bad! As Dean Baker points out,

"The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.

“Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.

“If there is evidence of a recovery in this story it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers' purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers' purchasing power through a second channel.”

...Consumers have reached their saturation point and they are not budging. It's the end of an era.

The unemployment picture is getting bleaker and bleaker. Last week's report from the Bureau of Labor Statistics concealed the real magnitude of the job losses by using the discredited "Birth-Death" model which exaggerates the number of people reentering the workforce. Here's what former Merrill Lynch chief economist David Rosenberg had to say about Friday's BLS report:

"The headline nonfarm payroll figure came in above expectations at -345,000 in May - the consensus was looking for something closer to -525,000. The markets are treating this as yet another in the line-up of 'green shoots' because the decline was less severe than it was in April (-504,000), March (-652,000), February (-681,000) and January (-741,000). However, let's not forget that the fairy tale Birth-Death model from the Bureau of Labor Statistics (BLS) added 220,000 to the headline - so adjusting for that, we would have actually seen a 565,000 headline job decline."

The BLS figures have been denounced by every econo-blogger on the Internet...


Including yours truly!

...The figures are another example of the government's determination to airbrush any unpleasant news about the recession. Here's a better summary of the unemployment numbers from Edward Harrison at credit writedowns:

“The Business Birth-Death Model added 220,000 jobs to the headline seasonally-adjusted number. Without this number, we are looking at a loss of 565,000 jobs....The number of jobs lost in the last 12 months increased from 5.34 million in April to 5.51 million in May....Other indicators suggest that the shadow supply of discouraged workers not counted in the numbers will now return to the labor force, pushing up the unemployment number. For example, the U-6 unemployment number was a gargantuan 16.4 per cent, the highest ever."


And when you add underemployed or discouraged workers whose benefits have run out back into the equation, you get something in the neighborhood of 18-20% unemployment, depression era levels.

...Businesses are shedding jobs at record pace, and slashing hours at the same time. The average workweek slipped to 33.1 hours (down 2 hours from April) a new low. It goes without saying, that unemployment is highly deflationary because jobless people have to cut out all unnecessary spending. Beyond the 500,000 layoffs per month; wages and benefits are also under pressure, making a rebound in consumer spending even less probable...

...From a worker’s point of view, things have never been worse. Demand is falling, employers are slashing inventory and handing out pink slips, and entire industries are being boarded up and shut down or shipped overseas. Economists Barry Eichengreen and Kevin O'Rourke make the case that, in many respects, conditions are deteriorating faster now than they did in the 1930s. Here's what they found:

1--World industrial production continues to track closely the 1930s fall, with no clear signs of 'green shoots'.

2--World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.

3--The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around. (A Tale of Two Depressions" Barry Eichengreen and Kevin O'Rourke.

Their conclusion: "Today's crisis is at least as bad as the Great Depression."


And the end is not yet in sight, class.

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