Thursday, April 1, 2010

The tipping point at zero

From Financial Sense, comes this article by Jim Willie:
The USEconomy is bifurcated, with price inflation advancing on the cost side while price deflation harms on the asset side, to produce a nasty storm that is unlikely to abate. When high pressure zones clash with low pressure zones, hurricanes and tornadoes occur. Calling the resulting near 0% or low 2% price inflation on a net basis a good sign completely ignores the forces pulling the national economy apart. Economists prefer to view the landscape in aggregate, but they miss the picture composed of two important parts enduring very different forces. The financial sector has grotesquely grown, to an extreme. Global financial assets have more than tripled since 1980, relative to GDP. In just this past decade, the volume of Credit Swap Contracts (asset backed bond insurance) increased five-fold in a span of four years. The base value of equity derivatives (stock index contracts) increased almost five-fold in the same four years. Leverage has also grown. Tremendous flaws exist in the prevailing economic counsel that misguides the nation, into one phase of disaster after another. Crisis is indeed the norm.


The maestros believe that new money or new debt (hard to tell the difference) can be created, and presto change-o, the USEconomy rebounds. The new money production line is disconnected from the tangible economy. The bankers can thus can tap federal liquidity facilities and ignore their borrowing customers. The banking authorities are resisting the solution, for the clear reason that many from their sector would be destroyed and their power eradicated. The US Federal Reserve has overseen vast money printing for years, and a continuous climax in the past two years. A crescendo awaits. A tipping point comes, when all the USGovt deficits, all the USTreasury Bond issuance, all the US bank failures lead to a economic recovery, as profound change comes in international sentiment toward the USDollar. They will exit, since the US markets are not permitted to clear, to liquidate, to enjoy the fresh breeze inherent to capitalism. Financial markets throughout the entire USEconomy are essentially frozen. A huge waiting game has emerged between the expectant beneficiaries of USFed efforts to stimulate inflation and economic participants. In the process, the USEconomy deteriorates further. ...

Read it here.

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