bank run blog

The loose monetary policy and quantitative easing of Ben Bernanke’s Federal Reserve does have hugely inflationary implications for the future, and some serious economists have plausibly argued that we may yet see hyperinflation in the US. But for now the country remains in a deflationary depression, even though few in the mainstream media care to acknowledge it.

In the accompanying video from Yahoo Finance, Henry Blodget talks with analyst John Mauldin, president of Millennium Wave Advisors, who warns that unprecedented asset deflation is still underway, with both institutional and individual deleveraging to continue for the foreseeable future :



A new quarterly report from the IMF would seem to bolster the thesis that developed debtor nations, like the US, will experience deflation as the downturn matures. According to the AFP :

“The IMF unveiled a darker outlook for the US economy Wednesday than just three months earlier, forecasting a deeper recession in 2009 and no growth at all in 2010.

The International Monetary Fund sharply downgraded its outlook for the world’s biggest economy, predicting a decline in output of 2.8 percent for all of 2009 and zero growth for 2010.

The latest figures in the IMF’s semiannual World Economic Outlook report were cut from the IMF’s January update by 1.2 percentage points for 2009 and 1.6 points for 2010.

The forecasts are far more pessimistic than those from the US Federal Reserve, White House, congressional experts and many private economists.

‘Despite large cuts in policy interest rates, credit is exceptionally costly or hard to get for many households and firms, reflecting severe strains in financial institutions,’ the IMF report said.

‘In addition, households are being hit by large financial and housing wealth losses.’”

Yahoo Finance Tech Ticker : Forget About Inflation… It’s Deflation You Should Worry About

Agence France-Presse : IMF sees no US growth through 2010

It’s Sunday, but the Chinese never take a day off from needling the former great power. MarketWatch and other outlets are reporting China seeks oversight of reserve currency issuers :

“Chinese Premier Wen Jiabao called for more surveillance of countries that issue major reserve currencies, according to published reports Saturday.

Wen did not specify the United States in his remarks at the Boao Forum for Asia in China’s Hainan Province. But Chinese officials have recently expressed their concern about their country’s investments in dollar-denominated assets.

‘We should advance reform of the international financial system, increase the representation and voice of emerging markets and developing countries, strengthen surveillance of the macro-economic policies of major reserve currency issuing economies, and develop a more diversified international monetary system,’ Wen said, according to China’s official Xinhua news agency.

Wen told the conference that China’s economy was faring “better than expected.” China said last week that its economy grew at an annual rate of 6.1% in the first quarter, a slowdown from 6.8% in the fourth quarter of 2008.

Wen said China would seek to expand currency swap agreements that are seen as a step toward eventually making the yuan more of a global reserve asset.

‘We should give full play to bilateral currency swap agreements and will study expanding currency swaps in scale and to more countries,’ Wen was quoted as saying.”

MarketWatch : China seeks oversight of reserve currency issuers

While economists and politicians fret over whether China and Russia will ever lead a movement to replace the US dollar as the world’s reserve currency, American citizens have already done so as they grapple with the effects of the Depression that was bought for them with their own 401ks. USA Today is reporting :

“A small but growing number of cash-strapped communities are printing their own money.
Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

The systems generally work like this: Businesses and individuals form a network to print currency.
Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.”

The concept, never entirely abandoned in small town America, has enjoyed a resurgence over the past year. According to the Daily Telegraph :

“Some of the currencies have been around for years but the recent economic downturn has encouraged others to follow suit. According to some estimates, there are now more than 75 local currency systems across the country.”

USA Today : Communities print their own currency to keep cash flowing

Daily Telegraph : Struggling US towns print their own currency

With the United States enduring an obvious decline in fortunes and influence among nations at gatherings like this week’s G20 and NATO summits, a group of prosperous countries is again lobbying to replace the US dollar as the world’s de facto reserve currency. China and Russia have been the most vociferous proponents of change, but several European nations are tacitly on board. According to the New York Times :

“Barely 24 hours after announcing that Russia and the United States would cooperate on a variety of long-simmering issues, President Dmitri A. Medvedev of Russia reproposed a Russian idea that the United States had thought it had batted away: starting a new basket of strong regional currencies to replace the dollar as the world’s reserve currency.

In a speech before leaders here at the Group of 20 summit meeting, Mr. Medvedev said that the countries most responsible for the global economic crisis (read: the United States) are not taking their fair share of the burden for ‘macroeconomic policies’ needed to fix the problem.”

Developing countries will embrace the transition as a stabilizing measure, according to Indian economics professor Ashima Goyal, writing in the Economic Times :

“The world is not yet ready for an international reserve currency , but is ready to begin the process of shifting to such a currency. Otherwise, it would remain too vulnerable to the hegemonic nation. Post-World War II, periods of large US macroeconomic balances have frequently caused problems for other countries.

The latter’s willingness to hold dollars encourages the US to live beyond its means by just printing dollars, ending in unsustainable situations where the world has to rescue the US.”

There is little doubt that China is willing to move forward on its own, and has indeed already made significant moves signaling a quiet repudiation of dollar hegemony. The Los Angeles Times reports :

“In a series of what might be called baby steps, Chinese officials recently have moved to globalize the yuan and promote its influence overseas, with Shanghai designated as command central.

Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the dollar — the currency that dominates international trade and finance, including foreign exchange reserves.”

New York Times : Medvedev Resurrects Idea of Replacing Dollar as Reserve Currency

Economic Times : Is world ready for a global currency?

Los Angeles Times : China positioning its currency for a run at world supremacy

While the monetary policies being adopted by the Treasury and the Fed in their attempt to create a long, soft landing for the banks will eventually have huge inflationary implications for the US economy, that reckoning is many quarters in the future.

The present reality is a deflationary depression, which, after everyone gets bored with calling “the worst since the Great Depression” will eventually be seen by objective measures to be worse, and more persistent. This morning Reuters can’t make up its mind, reporting Fears of deflation, inflation coexist uncomfortably :

“Global investors have been pummelled so hard by steep losses in financial markets that some have developed a split personality: one that agonizes about deflation even as the other frets over future inflation.

The two threats appear contradictory, but may yet prove to be related. Most immediately, prices on everything from real estate and stocks to gasoline and consumer goods are plummeting, creating the very real danger of a deflationary spiral.

At the same time, there is a strong risk that the Federal Reserve’s effort to rescue the economy by pumping cash into the financial system will lead to resurgent inflation down the line, especially if the central bank waits too long to withdraw the vast emergency lending programs deployed to fight the crisis.”

Those who myopically focus on a few price hikes and see inflation have failed to consider the macroeconomic fundamentals, and must also be ignoring the copious supply of anecdotal data accumulating daily.

Everyone knows that US housing prices have collapsed and there has been an unprecedented wave of foreclosures. In a healthy economy a larger pool of available renters would mean a robust rental market, so how’s that working out? BusinessWeek reports Rents Drop Nationwide as Vacancies Spike :

“BusinessWeek.com worked with Axiometrics to come up with a list of 25 large metros where rent declines accelerated most at the end of 2008. In Salt Lake City, where the economy had been holding up better than most cities, effective rents (including landlord concessions) fell 2.3% in the fourth quarter compared with the previous quarter. By comparison, rents were climbing 3.3% in the fourth quarter of 2007.

The New York metro area, including New York City and its New York and northern New Jersey suburbs, saw a 3.7% drop-off in effective rents in the fourth quarter (compared with a 0.5% increase in the fourth quarter of 2007), according to Axiometrics, which surveys landlords across the nation once a month.

The situation has changed dramatically in the expensive Manhattan market, where tenants are suddenly in control. The layoffs on Wall Street have forced landlords to cut rents; offer one, two, or even three months’ free rent; and pay the broker fee that the tenant would otherwise pay (often 12% of the annual rent).”

Even as mainstream media outlets avoid serious discussion of deflation, they surreptitiously prepare their audiences for the effects of a prolonged deflationary depression with pieces like this editorial from the Seattle Post Intelligencer, headlined, The economy: The era of less or this article from the Denver Post, Frugality now “in vogue” .

Reuters : Fears of deflation, inflation coexist uncomfortably

BusinessWeek : Rents Drop Nationwide as Vacancies Spike

Seattle Post Intelligencer : The economy: The era of less

Denver Post : Frugality now “in vogue”