Deflationary Spiral in the Economy Underscores Deleveraging Effects
71Deflationary Spiral Will Spur Massive Federal Spending in 2009
We've seen a massive amount of capital injections and bailouts by the federal government to support the financial system. My own personal feeling is that we're likely to see this number top $10 Trillion by mid-2009 if official unemployment reaches or exceeds the 10% mark (that is the official national U-3 unemployment rate which is currently at about 6.5%.
The reason for all the spending? Double digit unemployment (which we will see by mid-2009) will creat a multiplicative, cascading effect in the economy resulting in even higher foreclosure and loan default rates which will in turn invoke further deterioration in the general economy which will in turn put more downward pressure on banks and consumer spending. This could create a self-reinforcing negative feedback loop that will be further exacerbated by additional loss of consumer confidence resulting in further price destabilization (i.e. deflation) and spiraling decline in consumer demand. The government hopes that this 'pre-emptive' move of massive capital injections into the financial system will prevent such a negative feeback loop from occuring.
Hopefully, this will work and they won't overdo it......otherwise bulldog Volcker may be called in to chase inflation away, which could mean higher interest rates later on in 2010 or so.....remember, when Volcker headed the Federal Reserve he increased interest rates dramatically to quelch the 13.5% inflation rate (the peak in 1981) down to 3.2% (by 1983). He did it by dramatic and rapid interest rate increases. Very painful for the economy, but it worked.
A recent prediction by a JP Morgan analyst says that the Federal Reserve will cut interest rates to zero percent by the end of January 2009 in an attempt to mitigate the deflationary spiral caused by massive deleveraging wealth destruction. Deleveraging essentially amount to alot of the hedge funds, big investors, banks etc. are selling assets of all types oil, gold, bonds, stocks etc. to raise cash. This is causing asset prices to deflate - with a rapidity not seen in decades.
Update Mar. 10, 2009: The prediction by the JP Morgan analyst has come true, the Federal Reserve has cut rates to essentially zero percent. More surprisingly, the Bank of England has also dramatically cut interest rates to 0.5%, the lowest ever in it's 300+ year history. Signs of deflation abound, the latest of which is from China where consumer prices fell 1.6%.
Update April 5, 2009: UK Telegraph article reporting on serious deflation in Switzerland. See article below. The situation is being described as "extraordinarily serious".
Examples of Deflation in World Economy
- Aug. 11, 2009 Tech Ticker: "Deflationary Depression" in Our Future
Bob Prechter thinks Krugman and Bernanke are premature in declaring victory over the credit crunch. Prechter, who famously predicted the 1987 stock market crash, tells Tech Ticker "the march towards depression" is pretty much intact. - April 22, 2009: BBC NEWS - Inflation measure turns negative
The Retail Prices Index was negative in March for the first time since 1960 while the official measure eased to 2.9%. - Swiss slide into deflation signals the next chapter of this global crisis - Telegraph
April 5, 2009: Watch Switzerland closely. It is tipping into deflation, the first Western country to succumb to Japan's disease. - China’s Consumer Prices Fall 1.6%, Signaling Deflation Threat
March 10 (Bloomberg) -- China’s consumer prices fell for the first time since 2002 after commodity costs declined, stoking concern that deflation will undermine efforts to revive the world’s third-biggest economy. - Deflationary Depression Returns To Haunt America
David Rosenberg, North American Economist at Merrill Lynch is talking about a "Depression-Style Jobs Report" - Chrysler turns the screw on part makers- seeks 3% cuts in parts prices
Financial Times Article Feb. 1, 2009: Chrysler has stepped up pressure on beleaguered North American automotive parts makers by demanding price cuts as part of its drive to meet the conditions for receiving $4bn in US government loans. - U.S. Consumer Prices Probably Had First Annual Drop Since 1954
Jan. 16 (Bloomberg) -- The cost of living in the U.S. probably fell in December as the recession deepened, capping the first annual decline in a half century, economists said ahead of a government report today. - Bailout Cost Now Exceeds All American Wars
The total value of the bailouts undertaken by the federal government in 2008 now exceeds the combined cost of every major war the United States has ever engaged in, according to the Congressional Research Service. - Vacancies in Retail and Office Space Soaring!
Monday The New York Times reported that there is chaos in all parts of commercial real estate and everywhere in the country. - Jan. 2, 2009 CNBC: Semiconductor Sales Plunged 9.8% in November 2008
Semiconductor sales plunged nearly 10 percent in November from a year ago, and for 2009 JPMorgan analyst Christopher Danely now expects a 20 percent decline, instead of a 17 percent drop, with a price decline of 9 percent. - Hotel Industry Braces for Slowdown - WSJ.com
Hotels across the country are grappling with a deep recession, posting the first year-over-year decline in room rates in five years in October and facing a tougher climate in 2009. Stacey Delo reports on where deals can be found. - As Recession Deepens, So Does Milk Surplus
The long economic boom, fueled by easy credit that allowed people to spend money they did not have, led to a huge oversupply of cars, houses and shopping malls, as recent months have made clear. Now, there is an oversupply of MILK. AND LOTS OF IT! - Oil's Hidden Message - Rapid Recap - CNBC.com
The price action in crude oil is trying to tell you something. But what? - Oil futures tumble 10% to end below $37 a barrel
Crude tumbled below $37 a barrel Thursday to their lowest level in at least four years, underscoring the market's preoccupation with a sharp slowdown in oil demand.Year to date, oil prices have fallen 59%... - Southern California's median home price drops below $300,000 - Los Angeles Times
Foreclosures continued to drag home prices to new lows in November, as the Southern California median sales price slid to $285,000, its first drop below $300,000 since 2003. - Consumer Price Drop Largest Since 1932
WASHINGTON (MarketWatch) -- U.S. consumer prices fell in November at the fastest rate since 1932, the darkest days of the Great Depression, the Labor Department reported Tuesday, as prices for energy, commodities and airline fares plunged.... - Our Updated Take on Gold Prices - Yahoo! Finance
I never thought I'd see the day that gold markets went into backwardation (spot prices higher than futures prices). However, the seemingly unthinkable has indeed occurred..... - Interest rate on US T-bills turns negative
Nervous investors paid for the privilege of owning US government debt, pushing interest rates on three-month Treasury bills to negative levels for the first time in postwar history. The implied yield for three-month bills briefly traded at -0.01% - Deflation virus is moving the policy test beyond the 1930s extremes - Telegraph
Debt deflation is tightening its grip over the entire global system. Interest rates are creeping towards zero in Japan, America, and now across most of Europe. - As the World Economy Sinks, So Does Global Shipping
World shipping is a barometer of the state of the world economy. "Daily rental rates for the largest Capesize category of carriers have plunged from $234,000 just two months ago to $2,320, a fall of a staggering 99 percent." Shipping has plunged! - Calls for $1 Trillion Stimulus Package Grow as Economy Tumbles
“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Ken Rogoff, a former chief economist at the International Monetary Fund. - National gas price falls below $1.80 a gallon in AAA survey - Dec. 4, 2008
Gas prices in the U.S. have fallen for the 78th day in a row, and remains above $2 a gallon in only 3 states, according to a daily survey of gas station credit card swipes released Thursday. - Central Banks Vs. Deflationary Spiral
Article from Financial Sense University that has a basic and concise pictorial diagram of the deflationary spiral that we are now experiencing. Also included is some very in-depth analysis. - Bank of England set to cut rates to 300-year low - Telegraph
The Bank of England is expected to cut interest rates to two per cent - equal to their lowest level in more than 300 years. - Metal prices fall further than during Great Depression - Telegraph
The price of key industrial metals has fallen further over the last four months than occurred during the worst years of Great Depression between 1929 and 1933, according to research by Barclays Capital. - 2009 Recession Will Be Severe: 'There Is a Global Deflationary Risk,' Roubini Says
Central bankers around the world are pulling out all the stops in order to combat a severe economic downturn that threatens to get even worse. "There is a global deflationary risk," says Nouriel Roubini, economics professor at NYU Stern School..." - Oil Plunges to Below $44/Barrel
Crude oil has plunged yet again. - Analyst Predicts Fed Will Cut Rates to Zero Percent by 2009
Bloomberg News Article: The U.S. Federal Reserve will probably cut interest rates to zero percent over the next two months to staunch deflation, according to JPMorgan Chase & Co. - Shipping rates hit zero as trade sinks - UK Telegraph
Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October. - China’s Consumer Prices Fall 1.6%, Signaling Deflation Threat
March 10 (Bloomberg) -- China’s consumer prices fell for the first time since 2002 after commodity costs declined, stoking concern that deflation will undermine efforts to revive the world’s third-biggest economy. - Deflationary Depression Returns To Haunt America
David Rosenberg, North American Economist at Merrill Lynch is talking about a "Depression-Style Jobs Report"
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