[FoRK] September 2007 Update of The Second Great Depression

Eugen Leitl <eugen at leitl.org> on Sat Sep 8 04:26:18 PDT 2007

Somebody pass the popcorn. This is going to be good.

According to http://reddit.com/info/2n3io/comments

Subscription Source: http://www.shadowstats.com/cgi-bin/sgs/article/id=917

Money Supply Growth Explodes

Fed Liquefaction Pushes August M3 Growth Towards 14%

This afternoon's money supply release showed seasonally-adjusted M2 for the
week-ended August 27th up by $64.9 billion to $7.400 trillion. M2 now has
risen by $111.1 billion for the last two weeks, rising at an annualized
fortnight growth rate of 48.2%.

Depending on the large time deposit numbers due for release on Friday
(tomorrow) afternoon, annual M3 growth for August could jump to 14.0%, up
from July's 13.0%, and up from my early August estimate of 13.6% made last

Despite the Fed coming close to its formal 5.25% fed funds target in the last
couple of days, the liquidity crisis continues, and the financial markets
remain extremely unstable and dangerous. Once again, watch the dollar!

Additional detail will follow this weekend.

September 2007 Update of The Second Great Depression

10:32 AM PDT, September 1, 2007, updated at 10:50 AM PDT, September 1, 2007

Bush and Bernanke, August 31.  Their Speeches on Mortgages/Foreclosures

   President Bush:  “It is not the government’s job to bail out speculators
or those who made the decision to buy a home they knew they could never
afford.” Bernanke:  “It is not the responsibility of the Federal Reserve--nor
would it be appropriate--to protect lenders and investors from the
consequences of their financial decisions.” So, although their joint speeches
emphasized the seriousness of the situation, they indicated that their direct
involvement will be minimal.  Bush gave proposals that could help perhaps 5%
of those heading toward foreclosure.  Bernanke said that the emphasis of the
Fed would be to limit the economic fallout outside the problematic mortgage
markets.  In fact, he emphasized that, since 56% of mortgages are now
securitized (sold as securities rather than held by banks as were traditional
mortgages), there is only a 14% response in mortgage rates to any change in
the Fed’s overnight funds rate.  This is approximately half the response that
the Fed used to get.  Although the stock market reacted positively to “the
government finally getting involved,” once investors’ reflect on what was
actually said, the positive response will slowly drain away.  The bottom line
is that the only thing the government can do to cancel out the massive
consumer (and government) debt, is to monetize it, with all the inherent
risks of destroying our currency, angering those countries who loaned us
money, and ruining those with fixed incomes.  There is no good solution to
this problem!  Our economy must dramatically slow so we can get out of debt,
begin saving, and start living consistent with our incomes.

   In my last update, I noted that “the recent action on world markets in
response to the credit crunch driven by mortgage debt and hedge fund concerns
seems like the beginning of something big.”  Well, recent happenings related
to China are equally big.  Inflation is sweeping China, and this is now being
reflected in the prices of their exports.  Prices have risen 3 months in a
row.  Historically, China’s prices have generally helped cancel out any
internal US inflation.  The increase in China’s prices will now exacerbate US
inflation concerns.  This will be made worse by the recent quality and health
issues related to China’s products, such as toothpaste, tires, toys, sea
food, dog food, etc.  The recall costs and potential liabilities related to
these incidents will necessitate US companies greatly expanding US quality
checks (by American personnel) in the Chinese companies, at great costs. They
will not be able to rely on Chinese assurances that these issues have been
resolved.  Wall-Mart has even announced that, due to pressure from their
customers, they will be buying more of their products from countries other
than China, including from the US.  All of this will drive price inflation.
I address this in my book, on page 64.  What will be China’s response as we
reduce the importation of their products?  Will they buy less Treasury bonds
from us, or sell some of their existing ones?  Either action can be
troublesome for our debt-driven economy.
Recent Housing Numbers

   New Home Sales:  Versus a year ago, June sales were down 10%, the average
price was down 6%, and the median price was down 2% (including inflation).
The average home price drop being greater than the median home price drop
probably reflects the increased number of low-cost homes being sold.   This
increase is perhaps due to the reduction of Jumbo mortgages.  Existing Home
Sales:  Sales slowed for the fifth straight month and prices fell for a
record 12th straight month.  Prices dropped a record 3.2% in the second
Credit Cards:

   Per CNNMoney.com, August 28, credit card defaults are climbing.  Although
the consumer has yet to cut down on their spending, the credit card default
issue could be just another indicator that the consumer is getting very close
to his/her spending limit.
Foreclosures and Unemployment

   Most estimates are that between one and three million people will lose
their homes over the next year, largely due to ARMs being reset.  Over 40,000
people related to the mortgage/credit industry have already lost their jobs,
and more will follow.  And as the building industry eventually gives in and
slows its home building, great numbers of related people will also lose their
jobs.   It is difficult to imagine that other than a severe economic downturn
will be the result.
The Next Six Months:

     The S&P 500 will be below 1350 by the end of the year. Housing prices
will drop an additional 5% to 10% by the end of the year.  Also, by year end,
our government will be in turmoil, with President Bush refusing to implement
directives voted on by congress regards Iraq.  This will cause a lack of
confidence in the US, and the dollar will drop even further versus other
currencies.  Product quality and cost issues with China will cause a drop-off
of their exports to the US, and China will limit purchases of Treasury Bonds
in response. I had earlier predicted that gas prices would spike to $4.00 per
gallon due to storms, old refineries, and extremely low levels of summer
blend gasoline.  However, despite forecasts from the experts, hurricanes
continue to stay away from the Gulf.  So I was wrong on that one.
As always, all of the above is only my opinion.  Please, do NOT use this
blindly to drive your investment or life choices.  Intelligent people can,
and do, disagree!
Warren Brussee

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