NightBlogger

Eric deCarbonnel writes,
Iceland shows how a nation can experience deflation (stock market down 81% this year) while also experiencing high inflation (soon to be hyperinflation when it allows its currency to float). The US, like Iceland, is heavily dependent on imports (especially for oil), and has accumulated an unpayable amount of debt. Only the dollar role as the world’s reserve currency has saved us so far from Iceland’s fate, but that will soon end. In six months to a year, you will be reading stories like this written by visitors to the US.

photo–Iceland, Jennie R.F.

Icelanders in shock after financial crisis
By eNews 2.0 Staff
15:22, November 18th 2008
Karlheinz Bellmann went to Iceland to find out what had happened to his savings of 110,000 euros (138,000 dollars), missing since the collapse of the country’s Kaupthing Bank. Four days later, on his way back to Germany, the father of four had other matters on his mind: “What can one do to help the people here?” Crying fathers who told him how they had lost their jobs, how their wives had experienced the same fate and how they had lost their homes left a strong impression, just as the cynical reactions among Icelandic bank executives at the bar in the Grand Hotel: “Of course we played Monopoly with the country,” they told me. “And we had fun. Most of the time it went fine.”

Finally, Kaupthing and the other major banks Landsbanki and Glitnir reached the end of the line and the 320,000 inhabitants of the Atlantic island faced national ruin. Prime Minister Geir Haarde has estimated that the aggressive expansion of the banks has resulted in a 19-billion-dollar mountain of debt. That equals two-and-a-half state budgets or twice the gross domestic product. The collapse of the financial sector and large layoffs have since October resulted in complete standstill in the construction industry, the first sign of a long downturn. Massive hoarding of goods at supermarkets and an inflation rate of 16 per cent are clear indications of the dire prospects facing the ancestors of the Vikings.

In return for a 2.1-billion-dollar loan the International Monetary Fund (IMF) has demanded that the currency, the krone, which has been weak for the past year be allowed to float freely. That would further reduce the currency’s value and make imported products for ordinary consumers even more expensive. A kilo of imported sugar will become a luxury product. The government has said that a 20 per cent inflation rate and an unemployment rate of over 10 per cent will now have to be reckoned with. Until October, Iceland’s “normal” unemployment rate was 1 per cent. “Sturdy men broke down in tears in front of me and said that the future for Iceland is like a black hole, and that one has to start back in the Stone Age,” Bellmann said.

Islanders fear that Iceland’s pension funds could be raided. They are practically the only possibility of getting funds without further running-up foreign debts. The anger expressed by ordinary citizens has been limited, so far. More and more people gather each Saturday in front of the parliament in Reykjavik. Some of the 6,000 protesters at a demonstration on Saturday threw rolls of toilet paper at the building where a few months earlier the premier had declared that the Icelandic banks were robust and the country’s finances were healthy.

Now Haarde’s party has made an about turn concerning membership of the European Union, Above all, there seems to be an mood of collective shock. “You have the feeling that the whole country has lost its self-confidence,” publicist Oskar Gudmundsson said. Bellmann expressed it differently: “It seems like on the Titanic, where people continued to dance even though the ship had hit the iceberg.” Staff at Kaupthing in Reykjavik have assured Bellmann that he is likely get back his assets.

As deleveraging occurs and debt is destroyed, prices of commodities and other assets will fall in terms of real money, which is gold and other precious metals. The price of oil, for example, will continue to fall in terms of gold. (Investors need to start thinking of values in terms of ounces of gold instead of dollars, because that is where we are headed) What this means is that, while it is possible that the price of oil could still increase in terms of dollars, the price of gold will increase to an even greater degree. There will be no deflation in terms of dollars Right now, everyone is buying dollars and US treasuries based on the idea of price deflation in terms of dollars. More

Bob Chapman
The Fallen Natures of Men…
A lower interest rate penalizes savers and producers. Low interest rates and major creation of money and credit eventually kill an economy. There is no incentive to save and produce. Our new president will provide what is needed with the help of Congress during this process to create a welfare state, where the state will provide. That is not difficult when control of banking, Wall Street, money and a great part of major corporations are nationalized. Government will distribute and redistribute money and credit as the new one world government is created.

A reflection of dollar creation was that foreign official purchases of US Treasuries fell from $10.1 billion in July to $4.8 billion in August. Even Japan sold $7.5 billion worth. It was 4 years ago we forecast $750 billion in homeowner losses. Now Bloomberg is talking about $855 billion. Where were they four years ago? Subscribers who wanted to sell should have done so 3 to 3-1/2 years ago. The Bloombergs of this world and the rest of the mainline media missed it all. And, that wasn’t coincidence, it was deliberate, the people who run things knew what was coming.

Yes, inflation has temporarily eased from 13-5/8% to 12-1/2%, but wait a few months. It will move back up again. Inflation isn’t going to slow down – how can it with the tremendous flow of liquidity. In the third quarter federal spending grew at 13.8% to help inflation along. Considering all this Mr. Obama has promised us the process of redistributing income. He has said he will propose a tax on worldwide income of American multi-nationals who are hiding their wealth offshore at 35% the world’s second highest. He would institute a windfall profits tax on oil companies and would increase capital gains taxes to 20% next year. There is plenty of reason for the stock and bond markets to react in fear with the VIX at an all-time high of 89.5. The VIX is a contrarian indicator. When it is where it is today it is telling you the markets are headed down. Don’t get fooled by historic averages and declines. This bear market stands alone by itself as some thing very special. The Dow could easily fall over 70% this time from its high of 14,100 into the 3,800 to 4,200 zone. The 8 cartel banks cannot keep on engineering recovery rallies.

It is impossible to keep this balancing act going indefinitely. Home prices still have a long way to go on the downside and the correction will probably overshoot to the downside. This, of course, will add more and more foreclosures. In addition, the industrial sector is collapsing simultaneously. Factory activity has fallen 20% over the past two months, the lowest since 1982, and factory orders are the lowest since 1980. Vehicle sales have collapsed and that sector makes up 13% of America’s payroll. We are looking at prolonged stagnation and the demise of GM, Ford and Chrysler. What else could you expect of the American economy? Free trade, globalization, offshoring and outsourcing have stolen five million American jobs and it still continues to do so. The Fed and our banks along with Wall Street have destroyed our financial system, what else would you expect to happen? Just to show you the affect of all the US slowdown, Japan a big exporter to the US showed a 37.5 down from 45.4 in September, the lowest on record, after contracting for nine straight months. Toyota’s US sales fell 23% and Honda’s 26%. Not to be left out China’s manufacturing index is off to 45.2, the lowest level since its inception in June 2004. Manufacturing accounts for 42% of GDP. It is no wonder China is going to inject $586 billion into its economy. 67,000 Chinese factories have already been shut down in just the first half of the year. It looks like 100,000 will bite the dust by the end of the year.

London’s interest rates already at 3% are headed to 2% by February. That would be the lowest interest rate since 1694. Bank of England governor Mervyn King sees the economy entering waters that haven’t been seen since Charles Dickens. October house prices fell 2.2% mom, the 9th successive decline and off 15.75% yoy. In the last four months Brits saw homeowners with negative equity rise to 335,000 from 250,000. By 2010, one million could be in that boat. The UK has the same problem as the US, Spain and Ireland, plunging home prices and a credit crisis. Even though the pound has fallen 24% versus the dollar, their export orders fell to 43.5, the lowest since September 2001. When you see numbers like that you know imports and exports are freezing up. Now you can see why we again see war on the horizon. The third quarter showed us that disposable income dropped at an 8.7% rate, the steepest on record dating from 1947. Consumer spending fell 3.1%, the first drop since the last quarter of 1991. Durable goods spending fell at the sharpest rate since 1991. Spending on non-durables fell at the sharpest rate since 1950. Wait until the 4th quarter figures are released in late January.

What is really disturbing is that credit default swaps in US Treasuries have risen almost 40% since the Fannie/Freddie bailouts. They are now equal to the debt of Thailand and Mexico. It shows you how out of control the Fed and the Treasury are. The big question is when will the foreigners finally see the light and stop buying dollars? It will happen, but we do not know when and neither does anyone else. The US Treasury says it needs $2 trillion this year, which means another increase in the federal debt ceiling. More

Infowars.net
Economic experts have predicted that rampant inflation caused by government stimulus packages will soon take hold of the economy and force precious commodity prices to all time highs. Johann Santer, MD at Superfund Financial Hong Kong told CNBC [watch video] that he expects to see gold climb from its current position at $710 to a whopping $1500-$2000 an ounce within the next three months. “Should money should be going into cash, paper?” asked CNBC anchor Martin Soong, to which Santer replied in the negative: “Not necessarily, we see that for the time being this remains the right strategy to be in, of course people are quite nervous, but once we start to understand again that it will not really protect us from inflation, which most likely will come in the long run, because of all the stimulus packages, I would assume that we should also start looking at the gold price at the moment and find opportunities there.”

Santer explained that deflation is not going to protect us from what he sees as inevitable heavy inflation in the long run caused by the huge amounts of money being pumped into the market in the name of saving the economy. Santer predicted that we may even see double digit inflation. “We better get prepared right away and start to look at real assets, for example gold could be really attractive at the moment, trading at $710.” Santer added. “At the moment there is a major sell off in everything, people are really looking at cash and treasury bills but in the long run, we will not escape from inflation so we have a medium to long term target of $1500 within the next three months.”

Johann Santer’s prediction mirrors that of numerous other fund managers and top investors such as Jim Rogers, Robin Griffiths and Jurg Kiener who are now predicting that global central banks’ insistence on printing their way out of economic turmoil is setting the stage for a hyperinflationary holocaust, a knock-on effect of which will be gold’s acceleration towards $2,000, as demand for precious metals outstrips supply. More

Bob Chapman
International Forecaster
…All of our government’s statistics are bogus. The bailout was for the most part for money center banks, the big financial conglomerates and transnational corporations. Those funds went to the insiders, not to smaller institutions. They were for the crime syndicate, the corrupt Illuminist mafia. The next step after the election is the monetization of money and credit and horrible hyperinflation. Soon the dollar short covering will be history. Libor has already fallen and is back in its normal place. Credit derivatives and credit default swaps has produced a demand for dollars for settlement payouts. That will soon end as well. Fifteen months ago these derivatives began to fail and that systemic failure is ongoing. It will end in the complete collapse of the dollar.

This is the same barbaric horde that just sent the commodity market down almost 60%. They are now waiting to take it back up again to plunder the public once more. They bashed commodities and gold and silver because the rush for real assets had to be destroyed even though it was temporary. As a result there was a rush into physical gold and silver products, a resultant shortage developed. The elitists saw that and not wanting more physical gold in the publics’ hands the mints in Johannesburg, Canada, the US and Mexico shut down. Do you really think that was coincidence? They do not want gold and silver attractive because they are going to hyper inflate. At least for the next two to three years inflation is going to rage. Money and credit are still expanding at 12-1/2% and inflation is 12-1/2%. What deflationists do not seem to grasp is that the elitists will keep the system running because they do not want a crash until they can get a major war underway, as a distraction; another way of adding wealth, and for getting a tighter grasp on power and to further exercise population control. The question is when will the viability of America debt be questioned?

Will the failure to deliver US treasuries break the market and not nonparticipation? We do not know but it is surely possible. This is why we have not for some time recommended US Treasuries, but instead Swiss franc Treasuries for those who prefer a partial cash position. It is very simple. The more debt the US government creates and the more money and credit the Fed creates the more the value of the dollar depreciates. Worse yet, the collateral being presented for the exchange of Treasuries is essentially worthless. We also believe Treasuries are being created and not being reported in order to satisfy the perceived flight to quality. Remember, these people do not tell the truth about anything and they believe as the Illuminated ones that they can do anything they please. That is why we continue to tell you to be out of US government and debt paper as well as the stock market. The only exceptions are gold, silver and oil and gas stocks. Cash out your retirement plans if you can and move them into gold and silver related assets.

We can promise you two things, hyperinflation and eventual Treasury default. Why do you think on 11/15 major nations are meeting to form a new monetary unit? It will take several months. But it is about to happen. The dollar as a reserve currency and as a store of value is finished and many other currencies will follow. Remember 64.5% of world central bank reserves are in US dollars. No country is going to survive this unscathed. There will be a trigger as there always is. It probably will be an economic event or a string of events that begins the dollar collapse. There are things going on we know nothing about, but which we will soon find out about.

We have another couple of bubbles coming. There is a pension bomb that is in process and the credit card bubble-bomb. Lenders wrote off about $21 billion in bad credit card loans in the first half of 2008, and they haven’t even scratched the surface yet. Companies are laying off millions of workers and it is currently conservatively estimated that by the end of 2009 they’ll lose another $55 billion. Currently losses are 5.5% of debt outstanding and probably will easily exceed 8%.

As lenders rethink their lending rules our credit-hooked nation is rethinking their credit habits. It is about time lenders smartened up and stopped being greedy and it is about time Americans started paying for gas, food and other items with cash. You should only be using credit cards for emergencies and you should pay off your debit every month. In 2005 mortgage extractions were $595 billion, in 2007 they fell to $470 billion and the second quarter of 2008 saw $9.5 billion. At that rate we’ll see a 90% drop from 2005.

Total loans from commercial banks grew by $89 billion yoy to December. Of that $61 billion was credit card debt. That means banks only lent $28 billion to business or to individuals. These numbers show you how stressed consumers are, amid accelerating job loss, low wages and high inflation, home price deflation, the effects of illegal immigration and the losses in equity in stocks, never mind having their retirement accounts clobbered. Credit card debt is up – it has risen more in the recent 10 weeks than it has in the previous 10 months. The increase is annualized at 48.3%. American Express delinquencies on credit payments rose to 4.1% in the third quarter, up from 2.5% yoy, their pool of uncollectible loans to a high of 6.7%. If it weren’t so sad the following would be laughable. The second largest credit card merchant vendor is McDonalds. This is a sign of very serious distress. This level of credit card usage is unsustainable.

All this comes as stock market losses worldwide reduced global wealth by $16 trillion. A good part of which was in retirement accounts. This coming year government will admit to unemployment of more than 9%. That puts U6 at 14% and long-term at 17% using government figures. The duration of current unemployment is nine months or 38 weeks. That will be at least 14 months at the end of 2009. Unless unemployment benefits are expended an additional six months they’ll be lots of people in serious financial trouble. That means less consumption, which will feed recession. Incidentally, that will widen the budget deficit. Unemployed don’t pay taxes and that means less revenue.

We see a 2009 budget deficit of $1.2 trillion plus, as the recession deepens. The only thing keeping the end of 2009 out of depression will be massive injections of money and credit and that will cause the dollar to fall and inflation, gold and silver to rise. With all this in the mix we see would-be newsletter writers, economists and analysts predicting already slow recovery by the end of 2009. In order to be politically acceptable they didn’t recognize recession until a few months ago, a year and one-half behind the curve. This in spite of massive welfare during the year. More

Euan Mearns
The Oil Drum
When my talk to the Royal Society of Chemists was first arranged this summer, oil cost over $130 per barrel, and we wondered where the price would be in October. Since then much has happened. The credit expansion bubble was pricked in part by inflation stemming from high energy prices, and the global banking system is teetering on the brink of collapse, reprieved only by the spread of social ownership throughout the OECD. National governments and their agencies still seem to be sublimely ignorant of the causes of this year’s energy crisis, and there is little sign of action being taken to mitigate the problems that underlay it. Unless these issues are addressed, the energy crisis will shortly re-emerge to dominate events. In fact, this past week, a cold snap in the UK and Europe sent day ahead natural gas prices up by 50% in a day, and these are still up 65% compared with a year ago.

I have been deliberately controversial in the subjects covered in this post because I believe it is high time we had a decent debate about certain aspects of energy policy that we have tended to skirt around for too long. In particular, it is my opinion that UK and EU energy policies that are focussed upon CO2 emissions instead of energy efficiency are dragging us along the path towards Olduvai at an unnecessarily alarming rate. This is a post in pictures. Each slide is numbered below left. If you wish to leave a comment then please refer to the slide numbers. Click on slides for a larger image. I have added notes to clarify certain points. More

Marc Faber Video

Marc Faber: “The governments in this world in the long run have no other option but to print money and that will lead down the road to inflation. We may have a bout of deflation; the more deflation we have the more governments will print money because the whole system collapses in deflation. Not because deflation is bad but because governments have been inflating for the last 25 years.

The only way out of debt is to reduce debt but if you listen to the policy makers, especially in the US, IT’S ALL ABOUT HOW TO REVIVE LENDING, IN OTHER WORDS, MORE DEBT ON TOP OF A HUGE DEBT PYRAMID ALREADY. When actually the policy should be designed to boost productivity, to boost savings, and to boost essentially capital and reduce debts — that is the policy they should take but that is a very painful policy, that’s why they’re not going to take it. They will just put white paint on a crumbling building.

The US has no savings rate at the present time; that’s one of the problems of the US: that under the FED’s policy of easy money which stimulated strong credit growth, you had rising asset prices so people in the US began to save out of capital gains rather then to save out of income and that has led the US in a very precarious financial position….To rebuild health in the US you need a serious recession that will last several years — the patient that got drunk on credit growth, he needs to go into rehabilitation, and to just give him more alcohol, the way the FED and the Treasury propose to do is the wrong medicine.

In the US, the median household in 2007 earned $50,200 compared to $50,600 in the year 2000 — that is not inflation adjusted that is in nominal terms. The typical household in the US has not participated at all in the economic expansion driven by expansion monetary policies by the FED. This expansion has been especially good for Wall Street and money managers and real estate people and so on. Now if we go into recession, the ordinary American will not suffer all that bad. The people that will suffer badly are people that own the assets — the 1% of the population or the 5% of the population — they’re going to get hit but they’ve already been hit. They’ve lost 50% of their money in the last 6 months or so because this recession is unusual in the sense that’s it’s not been driven by inventory accumulation but by decline in asset values, and where as in the year 2000 we only had a decline in the TMT sector, now we have an asset decline of colossal proportions in commodities, in real estate, in stocks and stocks across the world — the world’s index, the market Cap is for all purposes cut in half, down 50%. This is a huge balance sheet destruction….” _________________________________________________________________________________
Faber was born in Zurich and schooled in Geneva, Switzerland. He studied Economics at the University of Zurich and, at the age of 24, obtained a Ph.D. in Economics magna cum laude. Faber resides in Thailand and is best known for the Gloom Boom Doom newsletter.

Jim Rogers on inflation versus deflation

Adam Hamilton
As I mentioned in my original essay on this topic, anything typically financed by debt is likely to see its prices plunge dramatically, like houses and cars, as the ongoing Great Bear bust continues to destroy the gross excesses of debt via higher long rates. Conversely, anything not typically “paid for” with debt including groceries and general living expenses is almost certain to rise….We are staring down a brutal environment of widespread inflation marked by various sectors witnessing falling prices as debt leverage implodes. While general deflation was possible in the early 1930s with a Gold Standard severely limiting monetary growth, it is all but impossible now in the Age of Fiat Paper when central bankers can print unlimited amounts of inherently worthless fiat currency which inevitably leads to steep rises in general price levels. More

Deflation Scare the Perfect Camouflage for Inflationary Money Printing
By: Chris_Galakoutis
It is said the market can sniff out prospective problems and price itself accordingly. If so, then someone needs to get this dog some nasal spray, lickedy-split! The deflation scare currently hovering over the entire market, particularly in the metals and commodities sectors, has been brutal. But the key question today is whether this “scare” will evolve into a genuine deflation threat to the US and the world?

Inflation and deflation are monetary phenomenons. Monetary inflation occurs when the supply of money increases faster than the supply of goods and services. This is different from the concept of price inflation, which, depending on several variables that may impact inputs along a given production chain, can cause an increase in the price level for certain goods and services at any given time. Otherwise said, monetary inflation causes price inflation, but a price rise isn’t always a result of monetary inflation.

With monetary deflation you have the opposite effect, in that it relates to a contraction in the money supply. If the supply of money contracts, while the supply of goods and services either remains constant, increases, or contracts at a slower rate, then that can lead to price deflation. Otherwise said, a contraction in the supply of money will in most cases cause asset prices to fall, but falling asset prices are not always the result of a monetary deflation (the oil price can rise if the supply of oil is falling at a faster rate than a money supply contraction, for instance).

What we have today is falling asset prices in, specifically, real estate and stocks, and a rise in the value of the US dollar. This has led many to wrongfully conclude that we are not only experiencing a deflation scare, but that a depression brought on by a deflationary collapse is imminent.

I don’t see it that way. Stocks and real estate are collapsing because the US was on a debt binge for many years. Given that real estate purchases are mainly financed by debt, and that many have used margin in stock portfolios, as well as, in the cases of hedge funds and others, dangerously high levels of leverage, the deleveraging that was forced upon the market following the collapse of debt instruments tied to bad loans is what is causing the dramatic declines in these asset prices today.

In a fiat money world with governments controlling the money printing presses you can be sure those governments will do everything in their power to fight off depressions. Anyone who continues to doubt this must have been living under a rock the past couple of months.

With much of the world holding the same toxic instruments and in similar, but not as horrific shape as the US, the ability of the US Treasury to tap its foreign creditors and borrow its way, to the tune of trillions, out of this mess has been severely impacted. On the domestic front, the savings rate is approximately zero, and increasing levels of unemployment will cause tax receipts to collapse. The only alternative will be the printing of money.

The US is the world’s greatest debtor. Money printing will bring on monetary inflation, which will wipe out those debts, savings, as well as the US dollar. That is the real scare that markets today, as well as foreign creditors, should be pricing in. It is only a matter of time. To borrow a line from the classic film ‘The Usual Suspects’: The greatest trick the Devil ever pulled was convincing the world he didn’t exist.
______________________
Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT,
USA Website: www.murkymarkets.com
Email: info@murkymarkets.com

Peter Schiff
More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has all but defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.

Despite the myriad of proposals that are coming from Washington and other world capitals, we must understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has been depleted through bad loans, and we can no longer entice foreigners into lending us their available savings. Given that we are already too loaded up on existing debt they we cannot realistically repay, who can blame them for not wanting to lend us more?

As a result, the free market is trying to put an end to our spending spree. Without savings or home equity to fall back on, Americans struggling with rising prices are finally being forced to curtail their spending. This has terrified our leaders and is causing them to dismantle the remaining structure of our free enterprise-based economic system.

The intention of all these daily federal interventions is to keep the credit spigots open so Americans can go even deeper into debt to buy more stuff they can’t actually afford. This should be clear enough to anyone who listens to what our leaders are actually saying. When speaking about the need for an even larger fiscal stimulus package, Barney Frank, chairman of the House Financial Services Committee, said, “We have to prop up consumption.” He has it backwards. The government has been propping up consumption for far too long, and the best thing they can do now is remove the props so spending can be replaced by savings.

The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it. Legitimate credit can only be supplied if there are genuine savings to finance it. Savings can’t be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn. Efforts to fool the market will not work and will ultimately lead to a monetary disaster and runaway inflation.

Were the government to allow market forces to work, Americans would now have to pay cash for their consumption. That would mean no instant credit for new cars, plasma TVs, appliances, consumer electronics, clothing, furniture, etc. Unless buyers actually had the cash in their checking accounts these purchases would have to be deferred. From an economic perspective this is precisely what the doctor ordered. But for an economy based 72 percent on consumer spending, the medicine will go down hard.

Ultimately, a serious reduction in consumer and mortgage credit, combined with an increase in personal savings, would again provide a pool of needed capital for businesses to produce products and provide employment opportunities. However, the danger is that this potential credit could be completely crowded out by massive borrowing by the Federal Government. In addition, prices for such things as houses and college tuition will fall sharply, as the credit artificially propping them up disappears. People would still be able to buy houses and send their kids to college only they would pay much lower prices when they do.

However, if the government keeps creating inflation to artificially sustain consumer borrowing and spending, there will be no savings left to fund anything and prices will be so high that despite massive consumer spending there will be few goods that Americans could actually afford to buy.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

Posted by Karl Denninger
The Fed can halt deflation only in the instant case, and in the four dimensions that actually govern reality that fourth dimension, time, derails attempted printing every time. Why? Because The Fed cannot control what people will demand in order to loan out their capital. It can set a target rate and then defend it by either injecting or withdrawing liquidity, but if it tries to set the rate too far under the actual trading rate (that is, the true cost of borrowing is higher than what the fed funds target is set to) the amount of money necessary to defend that too-low rate rises to infinity! Once The Fed prints the perception is that they will do so again. As such interest rates in the market rise to the actual monetary inflation rate plus a margin for the risk of The Fed doing it a second time. See the problem? The margin is always positive, otherwise nobody would lend at all! More

James Howard Kunstler
This isn’t so funny anymore. Intimations of a July banking collapse rumbled though the Internet this weekend while mainstream news orgs like The New York Times and CNN pulled their puds over swift boats and Amy Winehouse’s performance technique. Something is happening, and you don’t know what it is, do you Mr. Jones…? to quote the master. What’s happening is that American society is sliding into a greater depression than the one Grandma lived through. On the technical side, there has been unending controversy as to whether we’re gripped by inflation or deflation. It’s certainly deceptive. Food and gasoline prices are rising faster than the rivers of Iowa. But the prices of assets, like houses, stocks, jet-skis, GMC Yukons and pre-owned Hummel figurines are cratering as America turns into Yard Sale Nation.

We’re a very different country than we were in 1932. In that earlier crisis of capital, few people had any money but our society still possessed fantastic resources. We had plenty of everything that our land could provide: a treasure trove of mineral ores and the equipment to refine it all, a wealth of oil and gas still in the ground, and all the rigs needed to get at it, manpower galore (and of a highly disciplined, regimented kind), with fine-tuned factories waiting for orders. We had a railroad system that was the envy of the world and millions of family farms (even despite the dust bowl) owned by people who retained age-old skills not yet degraded by agribusiness. We had fully-functional cities with operating waterfronts and ten thousand small towns with local economies, local newspapers, and local culture. More