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alstry (35.88)

Denninger OFFICIALLY Awarded Honory Institute of Alstrynomics Degree!!!!!!!

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June 17, 2009 – Comments (7)

Deflation.

From Bloomberg:

Ten-year yields will probably drop to as low as 1.5 percent over the next two years, Mizuho Asset’s Takei said.

The only way that happens is if The United States is gripped by a bone-crushing deflationary spiral.

It can happen.  It probably will happen, despite The Fed's attempts to stop it, because in fact The Fed has done all the wrong things to stop it over the last ten years, and once you try to use bubble economics to get out of another bubble you have sealed your fate.

See, debt deflation cannot be avoided once you blow asset bubbles supported by debt - it simply can't.  That cycle must end and when it does you wind up with the debt service sucking all the oxygen out of room and prohibiting growth.  Once that condition asserts itself asset prices collapse and defaults go parabolic. 

Put simply:

Once you start borrowing to pay current costs and interest - that is, you start "rolling forward" debt such that the amount outstanding increases as a percentage faster than GDP increases and this "rolling forward" shows up in asset prices, you are doomed to a deflationary credit collapse. 

The longer you let it go on (or try to force it to go on) the worse the collapse will be.

This is mathematically certain - it is no more subject to avoidance than is the fact that you cannot "get" energy - you can store it, transform it or use it but each and every transformation will lose some of what you started with.

Likewise, once debt is taken on there are only two alternatives: PAY IT DOWN OR DEFAULT IT.

We have tried to "cheat death" for too long.  Greenspan tried to avoid this deflationary collapse in 2001.  He bought us how long?  Seven years?  Sounds good, right, except that the previous attempt was after 1987, and lasted 13 years, and this latest try required a bubble several times larger than the previous one!

Such is the nature of exponents.

Unfortunately in order to "blow a new bubble" to take the place of housing you'd have to find something that was $10 trillion in size or more. 

There isn't any such thing, which is why all of these "alphabet soup" games aren't working and won't.

We can continue to believe in the tooth fairy, like Obama apparently does:

June 16 (Bloomberg) -- President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam.

Adults know that the dollar coin under your pillow was put there by Mom or Dad, not the Tooth Fairy, that there is no such thing as a Unicorn that craps out pretty colored candies, and that growth cannot return on a durable basis until excessive debt is defaulted, not hidden under the carpet.

Obama warned that if economic growth remains “anemic” and Congress fails to adopt his plans to hold down the cost of health care, work on alternative energy sources and improve the U.S. education system, “then we’re going to continue to have problems.”

We're going to continue to have problems because of the first condition; the other two do not matter if you do not clear the debt so that organic, sustainable economic growth can return.

(By the way clearing the debt means it returns from a lower, sustainable level, which means that there is plenty of pain that comes first.  That too is unavoidable.)

Fiscal discipline that leads to lower budget deficits is important, Obama said, to ensure investors around the world keep buying U.S. government debt.

Obama said a large part of the current budget deficit was inherited from the administration of former President George W. Bush, his predecessor, and that extra spending was needed to address the worst global financial crisis since World War II.

You cannot cure alcoholism with whiskey.

In the Unicorn department we also have this:

Under the proposal, the central bank must get written approval from the Treasury secretary before using the power, according to a copy of the administration’s white paper obtained by Bloomberg News. The document calls for the Fed to conduct a study of its governance structure, including how it handles bank exams and regulates financial firms.

The Fed doesn't follow the law now; what makes anyone believe it will in the future?  Equity stakes in anything that has a duration over six months and is not backed by the full faith and credit of the United States cannot be taken by The Fed under existing black-letter law.

Yet The Fed has set up three LLCs that own such stakes (two for AIG and one for Bear Stearns) and has committed to purchase more than a trillion dollars of Fannie and Freddie paper which has a duration of more than six months and lacks that formal full-faith-and-credit guarantee.  All of these actions are in direct violation of existing black-letter law.

Oh, and Obama says

WASHINGTON (MarketWatch) -- President Barack Obama will propose Wednesday to make the Federal Reserve into a consolidated supervisor of large, systemically vital financial institutions and require higher capital standards and more scrutiny of banks' activities because of the risk to the system if they collapse, according to a senior administration official Tuesday.

Riiiight.  I'll believe The Fed would do anything like this when (and only when) all those 23A exemptions The Fed has issued over the last two years are revoked - and not one minute before.  Otherwise this is just more book-cooking nonsense.

The Fed is a rogue organization and until our government forces it to live within its present authorities there is no reason to believe that any future "handcuffs" would be respected.

Government, despite their so-called "new proposal" has refused to take the steps that are necessary to resolve this crisis and return us to a stable economic base.

The reason for this is simple: Government is both beholden to and stuffed to the gills with those who made the bad decisions, and forcing those people to eat their bad investments is considered politically unacceptable.

We therefore will do this "the hard way", just like we did in the 1930s.

Buckle up - this road might get "a little rough."

http://market-ticker.denninger.net/archives/1127-Ssssshhh....-Its-D-D-D-D-.....html

Yes....Karl....We at the Institute are very aware of this!!!!!!!   But don't tell Pig Watchers.....they are  too busy watching T.V.

7 Comments – Post Your Own

#1) On June 17, 2009 at 12:00 PM, jddubya (< 20) wrote:

LOL - when's the ceremony?  Just a degree? Not a honorary doctorate?

I'll bet denninger will be so thrilled to know that he's the only one in the world with an honorary degree in alstrynomics.

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#2) On June 17, 2009 at 12:05 PM, alstry (35.88) wrote:

CAPS needs to get a spell check....I am still trying to figure out what honory is........

but I am sure Karl gets the point and loves the honory.

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#3) On June 17, 2009 at 12:19 PM, Entrepreneur58 (36.68) wrote:

I keep wondering why people would buy bonds if they expect the economy to have a disasterous collapse with "parabolic defaults".  I suspect we're going to have a very quick currency devaluation ala Argentina in 2002 which would make bonds a very bad bet.

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#4) On June 17, 2009 at 12:41 PM, FreundInvesting (29.49) wrote:

Deflation MUST happen. I can't believe people think we can have inflation when very few can afford inflated goods (what with the continued loss of jobs, pay, and housing prices)...

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#5) On June 17, 2009 at 1:27 PM, Entrepreneur58 (36.68) wrote:

FreundInvesting - "I can't believe people think we can have inflation when very few can afford inflated goods"

When you have too much debt, your standard of living has to decline.  It can decline in 2 ways.  Incomes fall faster than prices, or prices rise faster than incomes.   Those are the only 2 possiblilties for the near future.

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#6) On June 17, 2009 at 1:47 PM, FreundInvesting (29.49) wrote:

Prices can't rise without adequate demand.... simple econ 101

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#7) On June 17, 2009 at 4:03 PM, PedoBear (< 20) wrote:

There was adequate demand for food in Zimbabwe, prices still went through the roof.

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