Does Obama-nomics have us headed for another round of deflationary recession, or worse… a depression? There is growing evidence such a catastrophe may be just around the corner.
The Royal Bank of Scotland, among other elite, financial observers, is warning its clients that the global economic recovery is stalling out, both in the US and in Europe, and they must be prepared for a massive flooding of the money supply by the Federal Reserve in what may be a vain effort to fight off a world-wide deflationary recession.
The RBS warning is based on research from a variety of sources that indicates that international trade is dropping precipitously, and that the US and the rest of the developed world are headed for a major economic contraction.
RBS Credit Chief Andrew Roberts is telling investors to “think the unthinkable!”
We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy.
And the contraction will only be worsened by the tax hikes scheduled to take effect at the end of this year as the Bush tax cuts expire as demanded by Democrats. Tax hikes, particularly taxes on capital, are the very last thing an economy tumbling back into recession needs.
Meanwhile, Professor Tim Congdon of International Monetary Research believes that deflation has already taken hold and will only increase as the economy falters, then slips back into a prolonged recession.
The stock of money, M3, began falling last summer, and the pace of the decline is increasing. It fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6%. At the same time, assets of insitutional money market funds fell at a 37% rate, the sharpest drop ever recorded.
It’s frightening. The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly..
Mr Congdon said the Obama regulatory policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown “Friedmanite” monetary stimulus.
Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty.
Wall Street veteran and financial writer Bruce Krasting is also on the lookout for a massive deflationary recession.
Every day the deflation story gets stronger. Almost all of the numbers in the US are pointing in that direction…
I was anticipating a slowdown in the 4th Q. It is now looking more likely that we will fall of a cliff starting July 1st. Extended benefits will be ending. Most states start a new fiscal year and they are all dead dead dead on revenue. Any benefit we got from the census will be in reverse gear. By August 1st approximately 1mm temporary workers will again be out of a job. Housing is falling off a cliff.
Reasons for concern for our fragile economic future are turning up elsewhere as well. From Bloomberg:
The percentage of corporate bonds considered in distress is at the highest in six months, a sign that debt investors expect the economy to slow and defaults to rise.
The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7 percent of the total, the highest share since December, according to Bank of America Merrill Lynch index data…
The 2010 default rate in the U.S. may jump as high as 6 percent by year-end from 1.3 percent currently, according to analysts at Goldman Sachs Group Inc…
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt is poised to widen the most this quarter since 1998, prices of leveraged loans are set to fall, emerging market debt spreads are headed for their first quarterly increase since the final three months of 2008 and asset-backed debt sales are slowing…
Says Tad Rivelle, head of fixed-income investment at Los Angeles-based TCW Group Inc.,
In the current environment, what seems to be uppermost in investors consciousness is, are we headed for a double dip?
One thing is certain. Joe Biden was telling the truth when he acknowledged last Friday that the Obama administration’s “stimulus” policy hasn’t been the success we were told it would be. And if there is another deflationary recession, or worse, Biden’s admission means that this time there will be no more blaming Bush. Obama owns it.
For those interested, Fed Chariman Ben Bernanke profetic “Helicopter” speech is here.