Federal Reserve and European Central Bank will not save us

[Zeno Swijtink]

Could someone from the Sebastopol Economic Forum explain this to us?

******

Federal Reserve and ECB are in no mood to save us from the consequences of our debt
By Ambrose Evans-Pritchard
Last Updated: 12:58am BST 10/06/2008

Fetch your tin helmets once again. The European Central Bank is opting for a monetary purge. So too is the US Federal Reserve, now ruled from Dallas.

Über-hawks and Cromwellians have gained the upper hand at the great fortress banks. Whether or not they admit it, both are embarked on policies that must lead to retrenchment across the Atlantic world.

The City mood turned wicked as the full import of this policy switch sank in last week. On Wall Street, the Dow's 396-point dive on high volume late Friday had an ugly feel.

"There is now the distinct possibility of a simultaneous sell-off in global bonds, equities and commodities," said Jonathan Wilmot from Credit Suisse.

ECB chief Jean-Claude Trichet has "signalled" a rate rise in July to combat 3.6pc inflation, much to the fury of Paris, Madrid, Rome, Lisbon and Dublin. It is a perilous path for Europe's monetary union.

"I would advise Mr Trichet to be more careful in his comments," said Spain's premier Jose Luis Zapatero. The counter-attack has begun.

Spain's property crash is calamitous. House prices have tumbled 15pc since September, say the developers (APCE). Over 98pc of Spanish mortgages are on floating rates, priced off three-month Euribor. This rate leapt 32 basis points to 5.24pc after Mr Trichet opened his mouth.

The ECB demarche is ominous for the rest of us as well. We may be watching a replay of the Bundesbank's ill-judged rate rise in October 1987, which sent the dollar into a tailspin and triggered the Black Monday crash.

Any tilt to monetary tightening is a dangerous gamble at this delicate juncture. The world is facing an almighty clash between two opposing storm systems.

The West is in the full grip of a debt deflation as years of credit abuse come back to haunt it. The East - loosely speaking - is in the blow-off phase of an inflationary boom. Russia, Ukraine, Vietnam and the Gulf are out of control. China has dithered beyond the point of no return. It is they who have repeated the errors of the 1970s, not the West.

The two camps face radically different problems at this point.

It will take central banking skills of great subtlety to pilot these seas. Slavish adherence to "inflation-targeting" and other such totemism and pseudo-science will ruin us all.

Yes, we face an oil and food price spike. Call that inflation if you want, but note that Europe's M1 money supply has contracted over the last five months. America's M1 has turned deeply negative, while M2 and MZM growth has collapsed.

America is going from bad to worse. A net 861,000 people joined the dole in May, pushing the unemployment rate from 5pc to 5.5pc. US house prices have fallen 14.4pc over the past year (Case-Shiller index). Miami is off 25pc.

The Mortgage Bankers Association says 8.8pc of all US house loans are in default or arrears. Negative equity has engulfed 11m households.

The "AA" rated tranches of 2007 sub-prime mortgage debt are now trading at 12pc of face value (ABX index); the "BBB" grades are down to 5pc. The debacle is reaching the 2004 vintage debt. We moved a step closer to a meltdown in the US municipal bond market last week when the "monoline" insurers Ambac and MBIA lost their "AAA" rating from Standard & Poor's.

Roughly $1,100bn (£559bn) of insured debt must be downgraded in lock-step. This will force pension funds to liquidate holdings. A fire sale looms. UBS says banks could face another $200bn of losses as this unfolds.

Had this happened over the winter - before the Fed rescued the banking system - it might have triggered a systemic crisis. We are in Phase II, the slow grind of economic distress. Or as George Soros puts it: "The end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."

Fed chairman Ben Bernanke knows that the crunch will tame inflation over time. The CPI rate lags the cycle. It rises into the first stage of recessions. Wise bankers look beyond it. But Bernanke is now compelled - against his better judgment - to declare an end to the easing cycle. An interest floor of 2pc has been fixed.

Assailed by critics as an inflationist, he is a lonely soul. His closest ally - Frederic Mishkin - is leaving. Dallas governor Richard Fisher has led a hard money revolt from the hinterland warning of a "debauching of credit". After voting against the last three rate cuts, he now wants rate rises.

As for Europe, growth is stalling. Retail sales fell 2.9pc in April, the steepest drop since EMU began. Manufacturing orders in Germany have fallen for five months. Car sales in Italy dropped 18pc in May.

The ECB policy shift has already had a perverse effect. By sending the dollar into a fresh dive this week, it triggered a $16 surge in the price of oil over two days.

Crude is now moving almost reflexively as a sort of "anti-dollar", a currency on steroids with eight times leverage. No matter that the global economy is slowing hard. Bad is good for oil in the topsy-turvy world of commodity funds.

We are in uncharted waters. The easy trade-off between growth and inflation that so flattered asset prices for a quarter century is over. The monetary lords can no longer shield us from the full consequences of our debts. Nor do they want to.

[MsTerry]

Could someone from the Sebastopol Economic Forum explain this to us?

I'll be glad to oblige, Zeno.
They screwed up, and now the Fed wants you to believe that they are the ONLY ones who are able to save us.
It's called propaganda, or marketing or branding.
More to come, I guarantee it

[Zeno Swijtink]

I'll be glad to oblige, Zeno.
They screwed up, and now the Fed wants you to believe that they are the ONLY ones who are able to save us.
It's called propaganda, or marketing or branding.
More to come, I guarantee it

What's M1, M2, MZM??

[MsTerry]

What's M1, M2, MZM??

https://www.investopedia.com/terms/m...romaturity.asp
Love
MsTerry

[phooph]

I have posted this to the Sebastopol Economic Forum list and will pass along what comes in. Meanwhile I will attempt a brief speculation based on what I understand of the international banking system.

Most of the world now operates on a debt issued currency. The film, Money as Debt explains this fairly well and I recommend you do a search for the 47 minute film on google videos to understand how our banking systems work.

The US dollar was freed from backing by precious metals and became backed by the full faith and credit of the US government. To bolster that, it was established as the world reserve oil currency. Since money is now created by loaning it into circulation it comes with an unissued interest burden. This requires every increasing borrowing to keep ahead of the ever increasing interest accumulation. This causes ever increasing inflation. To keep the currency from becoming worthless, corrections are instituted. What those look like are recessions and depressions. Some way must be found to shrink the money supply to reset the value. This always results in defaults on loans. In this case it is most apparent in the housing credit crisis. Before that it was the .com bust.

There are losers and winners in this system. Those who have accumulated a great deal of liquid assets are able to take advantage of the fire sale that happens. The loosers are those who must sell at a reduced price trying to keep afloat or default on loans. Right now we are seeing houses dumped. This system was created by those who know how to profit by it.

https://www.matrixeconomy.com/static...p_image006.jpg

Ruth
Sebastopol Economic Forum

Could someone from the Sebastopol Economic Forum explain this to us?
**********

Crude is now moving almost reflexively as a sort of "anti-dollar", a currency on steroids with eight times leverage. No matter that the global economy is slowing hard. Bad is good for oil in the topsy-turvy world of commodity funds.

We are in uncharted waters. The easy trade-off between growth and inflation that so flattered asset prices for a quarter century is over. The monetary lords can no longer shield us from the full consequences of our debts. Nor do they want to.

[Lenny]

Does the language of the article produce more drama than the boring economics deserves? Out of the twelve Federal Reserves Dallas, Dallas ain't it for the final shot.
I did read somewhere that it is a "showdown" between US and Europe in this monetary game, and if so, then I'm rooting for US. No wonder it is called The Dismal Science!

[phooph]

Does the language of the article produce more drama than the boring economics deserves?

Isn't that what journalism does? It won't be so boring when it gets truely scarey.

Out of the twelve Federal Reserves Dallas, Dallas ain't it for the final shot.
I did read somewhere that it is a "showdown" between US and Europe in this monetary game, and if so, then I'm rooting for US. No wonder it is called The Dismal Science!

The US and Europe may compete, but they are also deeply entwined.

[phooph]

So far the only response from the Sebastopol Economic Forum list is this:

I won’t directly answer the question, but I recommend a very good book that gives an answer/perspective on this:

The Trillion Dollar Meltdown by Charles Morris.

It came out earlier this year. It talks of the last 25 years of the
incredible credit boom that has taken place and assesses where we are and
what needs to be done. Morris concludes that we either take on a whole new approach to integrity-based regulation of the financial industry (including reversing the supply side, privatization, “free market,” monetarist, right wing philosophies), or we stagnate a la Japan’s almost 20 years now of stagnation due to its inability to reform itself.

- Torrey Byles


[QUOTE=Zeno Swijtink;61138]Could someone from the Sebastopol Economic Forum explain this to us?

******

Federal Reserve and ECB are in no mood to save us from the consequences of our debt
By Ambrose Evans-Pritchard
Last Updated: 12:58am BST 10/06/2008

Fetch your tin helmets once again. The European Central Bank is opting for a monetary purge. So too is the US Federal Reserve, now ruled from Dallas.

Über-hawks and Cromwellians have gained the upper hand at the great fortress banks. Whether or not they admit it, both are embarked on policies that must lead to retrenchment across the Atlantic world.

The City mood turned wicked as the full import of this policy switch sank in last week. On Wall Street, the Dow's 396-point dive on high volume late Friday had an ugly feel.

"There is now the distinct possibility of a simultaneous sell-off in global bonds, equities and commodities," said Jonathan Wilmot from Credit Suisse.