Powers Vow in 2007 as in 1932

[EJ]

Powers Vow to Limit Credit Crisis Damage
October 19, 2007 (Jeannine Aversa - AP Economics Writer)

World's Top Finance Officials Pledge to Limit Economic Fallout From Credit Crisis

Finance officials from the world's top economic powers pledged Friday to do all they can to limit damage to the global economy from a jarring credit crisis as Wall Street took another plunge.

"We remained committed to doing our part in sustaining strong global growth," the finance officials said in a joint statement. While saying the functioning of global financial markets was improving somewhat, they warned that "uneven conditions are likely to persist for some time and will require close monitoring."

"Powers" vow to fix the economy? My but that sounds ominous, in a black and white movie reel from the 1930s kind of way.

We were led to believe that the markets had all the power. Who are these powers who are going to fix the economy? Certainly not the same ones who broke it, we hope. Reminds us of this tidbit from our 1999 research for Ka-Poom Theory.

"Reflation"

Apr. 25, 1932 (Time)

Plans for a third enormous national credit pump lay last week before the House Banking & Currency Committee. In January this committee helped design Reconstruction Finance Corp. to pump $2,000,000,000 of Federal funds through the nation's banks into Industry. In February, with the Glass-Steagall bill, it went to the rescue of the banks themselves by giving them a bigger & better pipe line into the Federal Reserve System. It was now proposed to pump Federal Reserve credit into the commodity markets— wheat, corn, beef, cotton, coffee, sugar. The bill was introduced by Representative Thomas Alan Goldsborough, Maryland Democrat. It required the Federal Reserve "to take all available steps to raise the present deflated wholesale level of commodity prices as speedily as possible to the level existing before the present deflation, and afterward to use all available means to maintain such wholesale commodity level of prices." Just how the Federal Reserve was to accomplish this large order nobody was sure.

George Leslie Harrison, governor of the Federal Reserve Bank of New York and Eugene Meyer, governor of the Federal Reserve Board, appeared before the Committee. Both opposed the Goldsborough bill. Their objections were similar: the Federal Reserve was now doing all it could to support the commodity markets; by itself it could not execute such a legislative mandate. Declared plump Governor Meyer: "I would not want to be peremptorily ordered to run 100 yards in ten seconds flat." The Federal Reserve, according to its chief, was now "holding the line" and "if you can hold the line, you can turn it eventually."

To specify what the Government had already done Mr. Meyer revealed that R. F. C. has helped out of trouble 1,319 banks of which 76% were in towns of 10,000 population or less.* Likewise since Feb. 1, $250,000,000 in currency had been returned to circulation by hoarders.†

But it remained for pipe-smoking Governor Harrison to lay the biggest piece of fiscal news down before the House Committee—namely, that the Federal Reserve was in the market for U. S. securities as never before. Its purchases were part of the Government's new determination to pump credit into the country—a process its friends call "reflation" instead of inflation—under the provisions of the Glass-Steagall bill. Not until its statement was issued later in the week was the full extent of the Federal Reserve's pumpings evident to the country.

The Glass-Steagall bill permits Federal Reserve banks to use Treasury obligations for part of their currency coverage, thereby releasing gold above the 40% minimum requirement. Open market operations in the U. S. securities have always been part of the Federal Reserve's function. Last autumn the Federal Reserve began a credit-pressure move of the kind now undertaken. England's gold crisis halted that move, but since the Glass-Steagall bill's enactment (Feb. 27), the Reserve has been quietly purchasing in the open market Federal securities at the rate of $25,000,000 per week. Last week it was buying them at the rate of $100,000,000 per week. Total purchases: $245,000,000. The U. S. security market fairly boomed, imparting strength down the line to the rest of the bond market.

The result of this new Government credit policy was to increase the funds at the disposal of Reserve member banks for commercial loans in the following manner: Bank A receives from a customer $500,000 in Government securities to sell. It turns them into the Federal Reserve bank which credits Bank A with $500,000. Bank A credits its customer with a $500,000 deposit on which it must pay interest. But it gets no interest on its own $500,000 Reserve deposit. Until it draws its Reserve deposit and puts it to profitable work at the service of commerce or industry, it is losing money.

Last week, as a result of open-market purchases by the Reserve banks, the system's member bank balance increased $69,000,000 to $2,011,000,000. In effect the Federal Reserve was stacking this pile of $69,000,000 (worth approximately $690,000,000 in new credit) in its front window and inviting member banks to come and get it for "reflationary"' purposes rather than to call loans to raise money.

*Last week the Treasury gave R. F. C. the last $150,000,000 of its $500,000,000 allotment. Hereafter to raise money R. F. C. will have to sell its own securities.

† Last week, after subscriptions of $30,000,000 the Treasury ceased selling "baby bonds" to absorb hoarded funds.

In the 1930s they had no idea how bad things were going to get if they waited too long to react to the post-credit bubble debt deflation. Plus the Fed, by even a casual reading of the minutes, was clearly composed of a pack of perfect dimwits.

No such errors this time, but new ones. The key lesson the Fed learned: don't wait until the money supply has imploded and the banking system is crippled before acting. But no two circumstances are alike, and in the fullness of time the current FOMC will likely be seen as just as dimwitted but in a way unique to our times, such is the folly of trying to be a "power" over the markets.

Another lesson learned: a sure fire way to keep us all from "hoarding funds" is to take away the funds–in those days gold–as FDR did in 1933 by executive order, and raise the price by 30%. Presto, 30% monetary inflation. Oops, I mean "reflation," a more polite word invented at the time, and the one we chose to use in our Ka-Poom Theory of post-bubble disinflation/reflation cycles. Today, without gold backing, the Fed is free to simply print more fiat money to create inflation, I mean, reflation. The resulting mass behavior modification is to cause us all at once to think of hoarding old newspapers before government money. Better spend it while we can. So while the jobless claims numbers surprise four out of five economists on the upside by a factor of four, and living paycheck to paycheck is getting nearly impossible, the malls are jammed with shoppers eager to spend their paychecks before they're sent to reflation heaven by the latest round of bonar depreciation.

Our crusty old 2001 recession forecast is looking more every day like it should have been made for the approaching recession. In it we said:

"The fiscal 'surplus' of the past few years will turn out to be due primarily to capital gains tax receipts. As tax payers take capital gains losses against gains in 2001, tax receipts will fall by a greater extent than expected. Tax cuts, blessed by Greenspan last week and enacted to help the economy will create an enormous fiscal deficit for 2001."

Our 2001 recession forecast was about half right. The good news: the important half was correct: "The first stage of the depression is deflationary, the second inflationary."

Those of us who invested in gold and other inflation hedges in 2001 did better than those who listened to the deflationists, legion at the time, and made deflation bets. That holds true today.

Next week, we review our now year old forecast of a post housing bubble recession starting in Q4 2007. We've learned a thing or two since 2000 and expect this forecast to be better than half right. Evidence is that this will be, without a doubt, the most peculiar recession ever, with some sectors of the economy booming while others are crashing, some geographic areas of the US contracting while others are still growing. On a whole, we figure the Alternative Energy and Infrastructure bubbles need to get cranked up and boosting demand in 18 to 24 months to keep the US from running into Japan 1990s style debt deflation cycle.

See also:
Bubbles in Everything... Sort of (subscription) Janszen - 10/19/07
Why oil and gold price increases are not bubbles but rather reflect monetary inflation.

The End of the Debt and Delusion (subscription) Janszen - 10/17/07
This is one of those pieces that EJ occasionally writes to help align readers' thinking more in line with long term historical processes versus consumed by the short term market news discussion in the mainstream business press that is designed to keep investors trading and generating fees for brokers and readership for their financial market publications, web sites, and blogs.

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[Ed]

A thought

Two bubbles!! We’d better let only one deflate at a time!

The two are here (first chart):
“Real Dow & Real Homes & Personal Saving” at
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
(And last chart shows real homes later -- down further.)

The manipulable one is stock prices:
From SAM report, “Move Over, Adam Smith: The Visible Hand of Uncle Sam”, 8/2005, 39 pages, 119 footnotes,
at
http://www.sprott.com/pdf/TheVisibleHand.pdf
“This report examines information indicating that the U.S. government has surreptitiously intervened in the American stock market. ... Given the available information, we do not believe there can be any doubt that the U.S. government has intervened to support the stock market.”
IN PARTICULAR, Heller (1989) (H. Robert Heller, who three months earlier was a Federal Reserve Board Governor!!!), writing a column in The Wall Street Journal, “suggested that the central bank be empowered to stabilize plunging stock markets by purchasing stock index futures contracts.”, WHICH IMPLIES the existence of an intervention MEANS to negate LARGE-scale momentum, which surely allows the existence of an intervention MEANS to do stock market price manipulation in general.

[Jim Nickerson]

Re: Powers Vow in 2007 as in 1932

Our crusty old 2001 recession forecast is looking more every day like it should have been made for the approaching recession. In it we said:

"The fiscal 'surplus' of the past few years will turn out to be due primarily to capital gains tax receipts. As tax payers take capital gains losses against gains in 2001, tax receipts will fall by a greater extent than expected. Tax cuts, blessed by Greenspan last week and enacted to help the economy will create an enormous fiscal deficit for 2001."

Our 2001 recession forecast was about half right. The good news: the important half was correct: "The first stage of the depression is deflationary, the second inflationary."

Those of us who invested in gold and other inflation hedges in 2001 did better than those who listened to the deflationists, legion at the time, and made deflation bets. That holds true today.

Next week, we review our now year old forecast of a post housing bubble recession starting in Q4 2007. We've learned a thing or two since 2000 and expect this forecast to be better than half right. Evidence is that this will be, without a doubt, the most peculiar recession ever, with some sectors of the economy booming while others are crashing, some geographic areas of the US contracting while others are still growing. On a whole, we figure the Alternative Energy and Infrastructure bubbles need to get cranked up and boosting demand in 18 to 24 months to keep the US from running into Japan 1990s style debt deflation cycle.

http://online.barrons.com/article/SB...gazine_columns

From Barron's Alan Abelson, 10/22/07

STEVE ROACH, WHO NOW sports the somewhat weighty title of chairman, Morgan Stanley Asia, doesn't sound off on how the world's turning with anything like the frequency he did for so many years when he was that's firm's No. 1 commentator on markets, the economy and the like. Frankly, we miss his level-headed, original and contrarian take.

So it was with no little pleasure last week, with the market celebrating the 20th anniversary of the Crash of '87 with a swoon, oil prices topping $90 a barrel and the bruised dollar under fresh siege, that we espied an e-mail from Steve bearing the title "A Subprime Outlook for the Global Economy."

As that suggests, he's less than sanguine about the economy, mostly because he sees real trouble ahead as asset-dependent U. S. consumers struggle to negotiate a post-bubble adjustment that's bound to stifle their insatiable yen to consume. And he doesn't buy the widely popular notion that the rest of the world will manage just fine no matter what happens here.

He notes that the bursting of the dot-com bubble seven years ago caused a mild recession but, more importantly, a collapse in business capital spending both in the U.S. and abroad. The subprime-mortgage fiasco, he warns, is only the tip of a much larger iceberg.

The consumer, who has indulged in the greatest spending binge in modern history, now accounts for 72% of our GDP. Steve reckons that's five times the share of capital spending seven years ago. Reason enough to suspect the impact of a sharp contraction in consumer spending could be considerably more pronounced than the damage wrought by the end of the capital- investment boom at the turn of the century.

Of the two forces that spark consumer demand, wealth and income, it's no contest which has provided the impetus for the mighty surge in Jane and John Q.'s spending. Since the mid-1990s, Steve points out, income has taken a back seat: In the past 69 months, Steve reports, private-sector compensation has edged up a mere 17%, after inflation, which "falls nearly $480 billion short of the 28% average increase of the past four business cycle expansions."

More than taking up the slack, however, has been the appreciation in housing assets. But with this source of wealth dramatically running dry with the bursting of the housing bubble, he sees no way that "saving-short, overly-indebted American consumers" can continue to spend with wild abandon. And for an economy like ours, so lopsidedly dependent on such spending, "consumer capitulation spells high and rising recession risk.''

Even a moderate slump in growth could prove strictly bad news for "the earnings optimism still embedded in global equity markets," and obviously for the markets themselves. Recent action of our own juiced-up stock markets, we might interject, strongly hints that such optimism is beginning to wear a tad thin.

No mystery how we got into this bind. Following the end of the equity bubble, scared stiff of deflation, central bankers opened the monetary floodgates and liquidity poured into the global asset markets.

As Steve relates, "Aided and abetted by the explosion of new financial instruments -- especially what is now over $440 trillion of derivatives -- the world embraced a new culture of debt and leverage. Yield-hungry investors, fixated on the retirement imperatives of aging households, acted as if they had nothing to fear. Risk was not a concern in an era of open-ended monetary accommodation..."

Steve plainly has doubts whether Fed chief Ben Bernanke's recent rate cuts can stem "the current rout in still-overvalued credit markets." He worries that the actions were strategically flawed in failing to address the "moral-hazard dilemma that continues to underpin asset-dependent economies."

And he asks, "Is this any way to run a modern-day world economy?" All those who think it is, please raise your hand, and then lie down and wait for the fever to pass.

[bart]

Re: Powers Vow in 2007 as in 1932

Truly interesting on the specifics noted in that Time article from 1932.

I can't imagine even the Time magazine of only 20 years ago going that deep into Fed actions and stats.


Here's another quote from Time from 1933:

"Dollars sank last week to the lowest level since the U.S. quit the gold standard, 63 cents. Because President Roosevelt had not yet seen fit to devalue the dollar, the price is determined by supply and demand in international exchange. And because the U.S. has a favorable trade balance, demand is normally greater than supply.

Whence the dollar flood has eaten away 35 cents of every 100 cents in each U.S. dollar since last April. Continental money-changers, canniest of whom are reputed to be ‘the Greeks,’ delight in selling dollars short, but bankers know that accounted for only a fraction of the drop. Last week from the British Commonwealth Relations Conference in Toronto came confirmation of what Wall Street has long suspected; that U.S. citizens have exported their dollars by the hundreds of millions.

"‘One of our problems,’ droned Viscount Cecil of Chelwood, chairman of Britain’s delegation, ‘is the flood of unwanted money that is pouring into our banks. These funds, deposited in the main by U.S. investors, are subject to withdrawal at 24- hour notice and are of little or no value, though it has not yet been discovered how to get rid of them.’

"Standard Statistics Co., Inc., world’s largest figure factory, estimated that $1,000,000,000 had flown the Atlantic, the bulk of it to London. France, whose tie to gold is none too secure, has received little, but Holland and Switzerland have been drowned in dollars. Unlike exports of gold which is strictly banned (for private citizens) the flight from the dollar has been quietly encouraged by Washington; it pushed down the price without requiring devaluation by Presidential decree."


-- Time magazine, September 25, 1933 edition

[FRED]

Re: Powers Vow in 2007 as in 1932

Truly interesting on the specifics noted in that Time article from 1932.

I can't imagine even the Time magazine of only 20 years ago going that deep into Fed actions and stats.


Here's another quote from Time from 1933:

"Dollars sank last week to the lowest level since the U.S. quit the gold standard, 63 cents. Because President Roosevelt had not yet seen fit to devalue the dollar, the price is determined by supply and demand in international exchange. And because the U.S. has a favorable trade balance, demand is normally greater than supply.

Whence the dollar flood has eaten away 35 cents of every 100 cents in each U.S. dollar since last April. Continental money-changers, canniest of whom are reputed to be ‘the Greeks,’ delight in selling dollars short, but bankers know that accounted for only a fraction of the drop. Last week from the British Commonwealth Relations Conference in Toronto came confirmation of what Wall Street has long suspected; that U.S. citizens have exported their dollars by the hundreds of millions.

"‘One of our problems,’ droned Viscount Cecil of Chelwood, chairman of Britain’s delegation, ‘is the flood of unwanted money that is pouring into our banks. These funds, deposited in the main by U.S. investors, are subject to withdrawal at 24- hour notice and are of little or no value, though it has not yet been discovered how to get rid of them.’

"Standard Statistics Co., Inc., world’s largest figure factory, estimated that $1,000,000,000 had flown the Atlantic, the bulk of it to London. France, whose tie to gold is none too secure, has received little, but Holland and Switzerland have been drowned in dollars. Unlike exports of gold which is strictly banned (for private citizens) the flight from the dollar has been quietly encouraged by Washington; it pushed down the price without requiring devaluation by Presidential decree."


-- Time magazine, September 25, 1933 edition

Great catch. More eerie similarities between the 2003 to 2007 and 1933 to 1937 periods.

[zoog]

Re: Powers Vow in 2007 as in 1932

Great catch. More eerie similarities between the 2003 to 2007 and 1933 to 1937 periods.

This is curious proposal from EJ & Co - comparing the past few years to the middle of the Great Depression - while so many Chicken Little's (and some not so hysterical;)) fret about a soon and future Great Depression II, with the assumption that it will be preceded by a major market collapse.

Was the big collapse back in 2000 and since then we've been muddling through a remarkably mild depression? Or this time have we put the cart before horse and we're having the depression first, then the market crash?:confused::rolleyes:

There have been numerous discussions and warnings on iTulip about how everything in this FIRE economy is inter-related and teetering on the edge of a domino fall. The idea that some areas will suffer while others prosper seems a contradiction, at least on the surface.

Evidence is that this will be, without a doubt, the most peculiar recession ever, with some sectors of the economy booming while others are crashing, some geographic areas of the US contracting while others are still growing.

Most peculiar indeed.

[FRED]

Re: Powers Vow in 2007 as in 1932

This is curious proposal from EJ & Co - comparing the past few years to the middle of the Great Depression - while so many Chicken Little's (and some not so hysterical;)) fret about a soon and future Great Depression II, with the assumption that it will be preceded by a major market collapse.

Nothing new about this. Do a google search on "modern depression" and welcome to our world!

[zoog]

Re: Powers Vow in 2007 as in 1932

Nothing new about this. Do a google search on "modern depression" and welcome to our world!

Ok ok.:rolleyes::p iTulip is information overload, hard for me to remember all these essays.

...[The credit system] has served to compensate the middle class' loss in income but also to provide billions for leverage in the private equity markets. This era’s post bubble bust “poor” are poor only on paper. They have few assets net of liabilities and a lot of debt, but they still have their homes and lots of consumer goods, and in fact continue to pile them on, on the assumption that access to credit will continue as far as the eye can see. (This is in fact what consumer confidence is actually measuring today, expectations of future access to credit.) Today we don’t have soup lines but we do have millions of middle class households who have been breaking up the household financial assets “furniture,” so to speak, by selling the equity in their homes and consuming their credit to maintain the standard of living to which they have become accustomed.

[bart]

Re: Powers Vow in 2007 as in 1932

Great catch. More eerie similarities between the 2003 to 2007 and 1933 to 1937 periods.

Thanks.
Here's another "interesting" (in the sense of the old Chinese curse) chart comparing the two general periods... from the bart chart dark closet department... which is not unlike the dungeon at Finster's Manor. ;)

[jk]

Re: Powers Vow in 2007 as in 1932

This is curious proposal from EJ & Co - comparing the past few years to the middle of the Great Depression - while so many Chicken Little's (and some not so hysterical;)) fret about a soon and future Great Depression II, with the assumption that it will be preceded by a major market collapse.

Was the big collapse back in 2000 and since then we've been muddling through a remarkably mild depression? Or this time have we put the cart before horse and we're having the depression first, then the market crash?:confused::rolleyes:

There have been numerous discussions and warnings on iTulip about how everything in this FIRE economy is inter-related and teetering on the edge of a domino fall. The idea that some areas will suffer while others prosper seems a contradiction, at least on the surface.

Most peculiar indeed.

i guess finster is otherwise occupied, so i'll chime in that these observations rest on the premise of firmly ignoring our shrinking measuring stick, the dollar. first, if you believe john williams' shadowstats, or what bart likes to call "cpi+lies," and subtract THAT from nominal gdp growth you see that we've been in recession for a while. similarly, the stock market never really recovered from its swoon early in the decade. just look at the dow in euros [or in gold], or the dow multiplied by the dollar index.

the "mild depression" you reference has been deferred by our borrowings against our assets, especially our homes. and the debt is coming due. of course asset prices may fall, but debt doesn't go away unless it is repaid or defaulted. ej linked somewhere or other to an article about how people were finding it hard to live from payday to payday, as their checks just didn't go as far. with food and heat and transportation costs all sharply higher, the cost of necessities may be beyond the reach of a growing number of families. [good thing they're not inflationary at the core.] so we may get to see more soup lines yet. just set your digital camera on black-and-white and it will look quite authentic.

[bart]

Re: Powers Vow in 2007 as in 1932

i guess finster is otherwise occupied, so i'll chime in that these observations rest on the premise of firmly ignoring our shrinking measuring stick, the dollar. first, if you believe john williams' shadowstats, or what bart likes to call "cpi+lies," and subtract THAT from nominal gdp growth you see that we've been in recession for a while. similarly, the stock market never really recovered from its swoon early in the decade. just look at the dow in euros [or in gold], or the dow multiplied by the dollar index.
...

I know how big of a shock it is, but it just so happens that I have a chart with GDP adjusted by CPI+lies.

[zoog]

Re: Powers Vow in 2007 as in 1932

Thanks guys. If you beat this stuff into my head enough times, eventually I remember it long enough to put pieces together and reach some level of understanding.

[jk]

Re: Powers Vow in 2007 as in 1932

The idea that some areas will suffer while others prosper seems a contradiction, at least on the surface.

think software engineers versus mortgage brokers from 2000-2005. think detroit versus phoenix over the same period.

[GRG55]

Re: Powers Vow in 2007 as in 1932

think software engineers versus mortgage brokers from 2000-2005. think detroit versus phoenix over the same period.

Think investment bankers over anything 1995-2006...

[GRG55]

Re: Powers Vow in 2007 as in 1932

Nothing new about this. Do a google search on "modern depression" and welcome to our world!

I'm starting to get the impression that either you folks are flirting with the dark side deflationists, or everyone including iTulip, Doug Casey, Mish, Rick Ackerman and Bob Prechter will be able to claim victory by pointing to the part of the country/economy that supports their case... :rolleyes: