Wikinvest Wire

Telegraphing doom and gloom

Friday, July 11, 2008

Boy, if you think the media in the U.S. is a bit too gloomy, have a look at what's appearing over in the U.K. in the Daily Telegraph. Ever the doubter, Ambrose Evans-Pritchard is downright cheery (at least in the headline) as compared to Edmund Conway who blares:

Slide in house prices worst since the Great Depression
By Edmund Conway

Britain is now in the midst of the worst housing slide since the Great Depression, economists declared after house price inflation dropped to the lowest level since comparable records began.

Figures from Halifax, the UK's biggest mortgage lender, showed house prices have fallen by 8.7pc in the year to June, confirming that the property crunch is more severe than the last housing crash in the early 1990s. Hours before, the Bank of England voted to leave rates unchanged at 5pc.

The Halifax figures - which showed prices dropped 2pc last month, following a 2.5pc slide in May - indicate that the scale of the crash now rivals the falls in UK home values in the 1930s. In the three months to June, house prices were 6.1pc lower than the comparable period last year - described by Halifax as the "annual change".

House prices have never fallen by more than 10pc over a year in recorded history, except in 1931, when Britain left the gold standard.
Alex Vitillo, of Fathom Consulting, said that the downturn was already more severe than the early 1990s, where, according to figures from Nationwide, prices dropped by around 20pc over a number of years.

He said: "As the UK housing market downturn gathers pace, it is common for analysts to argue that this downturn will not be as bad as the early 1990s vintage. It looks like it will be worse, perhaps far worse.
And here's Ambrose, talking about a "crunch" in the headline which quickly turns into "lifeblood" that is quickly "draining away" and "debt deflation":
Monetarists warn of crunch across Atlantic economies
By Ambrose Evans-Pritchard

The lifeblood of countries' economies is draining away - with grim consequences for us all.

The money supply data from the US, Britain, and now Europe, has begun to flash warning signals of a potential crunch. Monetarists are increasingly worried that the entire economic system of the North Atlantic could tip into debt deflation over the next two years if the authorities misjudge the risk.
Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc.

"The money supply is crumbling in the US. There was a very sharp lending contraction in the second quarter lending. If the Federal Reserve is forced to raise rates now to defend the dollar, it would be checkmate for the US economy," he said.

Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. "Credit liquidation has begun," he said.

The Fed's awful predicament does indeed have echoes of the early 1930s when the bank felt constrained to tighten into the Slump in order to halt bullion loss under the Gold Standard. Investors - notably foreigners - dictated a perverse policy. Over 4,000 US banks collapsed. This time a de facto "Oil Standard" is boxing in Ben Bernanke. Benign neglect of the dollar has started to backfire. It is pushing up crude, with multiple leverage.
There is certainly a lot of "flation" out there - how much of it is de-flation and how much of it is in-flation will probably be known before the year is out.

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Anonymous said...

Hi Tim,
You haven't had a poll in a while. How about a Fannie-Freddie poll?

Chuck Fouts said...

Ambrose accurately called the credit crunch a couple of weeks prior to the market drop last July. Here is another article, , from a couple of fellows at Societe Generale which also details a deflation scenario. Hopefully this isn't a scenario that will occur but it is a possibility. Outside of paying off your debts, how would you prepare for deflation, Tim?

russ said...

In-flation or de-flation doesn't matter all that much. Either way, my purchasing power goes down.

I guess we'll have mostly deflation to start with, but it'll mostly inflation after that if for no other reason than the federal deficit will require inflation. We'll get the double-whammy of inflation and increased tax rates. Maybe a triple whammy adding in falling wages for the bottom 4 quintiles.

Tim said...

I like equal parts cash, gold, and ammo ;>

Ivo Cerckel said...

Was the mess not made on August 15, 1971,
when Richard Nixon,
without consulting members of the international monetary system
or even with his own state department,
unilaterally cancelled the Bretton Woods system,
unilaterally departed from the Gold Exchange Standard,
by closing the gold window,
making the dollar inconvertible to gold directly,
except on the open market?

Currently the US treasury claims to have 11 billion in gold valued at $42 an ounce since 1973 after having been repriced to $38 an ounce in 1971.

The US dollar would be freely floating, while being fixed at $42 an ounce of gold.

Since Aristotle, the Principle of Non-Contradiction says that it is impossible to be and not to be at the same time and in the same respect.
Contrary to what many authors argue, this principle is a law of thought, not a law of reality.
Thought is submitted to the Principle.
Reality is not.

International Charlemagne Prize of Aachen for 2002
Acceptance speech
by Dr. Willem F. Duisenberg, President of the European Central Bank,
Aachen, 9 May 2002.
The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to Gold, but also its link to the nation-state.
It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of Gold five hundred years ago — that it was made for men and that it had its value by them — applies very well to the euro.

Should the Fed not also sever the link between the dollar and gold?

Would that not be the first step towards solving the monetary mess?

Ivo Cerckel said...

Oil and gas are being traded on this planet for gold and the oil producers have only the real value of gold, not the present US dollar-denominated value of gold in mind.

The dollar-regime should let the price of gold freely float
so as to no longer being able to decide the value of the wealth produced by the owners of oil and gas.

The dollar-regime should accept that all individuals can consolidate the fruits of their wealth production in the Freegold wealth consolidator.

That's why gold pricing should be de-linked (100% severed) from currency, so as to achieve freely floating gold prices.

The US dollar unit is NOT a wealth consolidator because it cannot be converted into gold/wealth.

If the said regime is not prepared to voluntarily let the price of gold freely float, it will be forced to do so by the increasing imbalances.

For the moment, the regime can still unilaterally impose the exchange rate of the US dollar.

The US dollar is a worthless piece of paper with no intrinsic value whatsoever.
However, the fact that this piece of paper is still being used as the intermediary numéraire for oil-trade settlement, as the intermediary basic “standard” by which values are measured for oil-trade settlement, gives this dollar-paper the backing of oil (an indispensable valuable).
Once oil will see no more reason to support/back the dollar, oil will “openly” shift towards GOLD and back it (through demand for gold) so as to create the new market for physical gold in association with the gold-friendly euro-numéraire.

At the moment that oil will back gold and gold-friendly euro, the US dollar will be reduced to its intrinsic value.

At that moment US treasury gold will be too highly priced at 42 dollar an ounce.

At that moment, the system will explode.

Hence, the dollar-regime would be wiser to let the price of gold freely float NOW.

Ivo Cerckel said...

But Ambrose Evans-Pritchard also supports the dollar regime.

In an article under the title “Oil price shock means China is at risk of blowing up”,
he argues in the 7 July 2008 electronic edition of The Daily Telegraph that the pendulum will now swing back from China to America and that the mercantilists will have to re-invent themselves, it being clear that Beijing’s mercantilist policy of holding down the yuan to boost exports share has now hit the buffers, says Evans-Pritchard.

(The mercantilist theory, which formed the foundation of economic thought from about 1500 to 1800, says however, that countries should export more than they import and, if successful, would receive the value of their trade surpluses in the form of GOLD from the country or countries that ran deficits (1).)

QUOTE from Evans-Pritchard:
The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.
The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.
No surprise that Shanghai’s bourse is down 56pc since October, one of the world’s most spectacular bear markets in half a century.

Now we know who are the culprits for the high price of oil.
Those culprits then have to be punished through the War on Terror.

The oil hunger of India and China is a crucial element of the present decade.

The USA is put in the position to arrogate (to) itself the right to unilaterally determine
geopolitics because the dollar-regime allows the USA to, as former president of the French republic, Valéry Giscard d’Estaing, recently re-explained, live with gigantic budget deficits which are covered by the annual incoming of capital from countries buying dollars, [dollars which the USA can create at will out of thin air]. (3)

Others will be called upon to pay the bill.

Thank You, Mr Evans-Pritchard, for having made this explicit.



Daniels and Radebaugh, “International Business”, Addison Wesley, 1995, 7th ed., p. 168

Oil price shock means China is at risk of blowing up
By Ambrose Evans-Pritchard
Last Updated: 12:33am BST 07/07/2008

« La crise l’a prouvé : on ne peut plus laisser la mondialisation livrée à elle-même »
Enjeux Les Echos n° 247 du 01 Juin 2008 • page 050]

Ivo Cerckel said...

There also seems to be a good old-fashioned bank-run going on in the USA:

IndyMac seized as financial troubles spread
Reuters, Sat Jul 12, 2008 2:06am EDT
By John Poirier and Rachelle Younglai
WASHINGTON (Reuters) - U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history.

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