As 'Street' Thrives, U.S. In Depression

Daily Telegraph January 11, 2010

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By Ambrose Evans-Pritchard Published: 6:35PM GMT 10 Jan 2010

Comments 24 | Comment on this article

History repeating itself? President Obama has been accused by some economists of making the same mistakes policymakers in the US made in the Great Depression, which followed the Wall Street crash of 1929, pictured Photo: AP

The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.

Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.

Related Articles American jobs market may be bottoming out Japanese manufacturing confidence slumps to record low Slide in house prices is the worst since the Great Depression UK economy contracted more than feared last quarter Economy shrinks at 1930s rates

The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck's Grapes of Wrath.

Judges are finding ways to block evictions. One magistrate in Minnesota halted a case calling the creditor "harsh, repugnant, shocking and repulsive". We are not far from a de facto moratorium in some areas.

This is how it ended between 1932 and 1934, when half the US states declared moratoria or "Farm Holidays". Such flexibility innoculated Ame

By Ambrose Evans-Pritchard Published: 6:35PM GMT 10 Jan 2010

Comments 24 | Comment on this article

Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.

This is how it ended between 1932 and 1934, when half the US states declared moratoria or "Farm Holidays". Such flexibility innoculated America's democracy against the appeal of Red Unions and Coughlin Fascists. The home siezures are occurring despite frantic efforts by the Obama administration to delay the process.

This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.

US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. "If the 2008 and 2009 loans go bad, then we're back where we were before – in a nightmare."

David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.

Fed hawks are playing with fire by talking up about exit strategies, not for the first time. This is what they did in June 2008. We know what happened three months later. For the record, manufacturing capacity use at 67.2pc, and "auto-buying intentions" are the lowest ever.

The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.

Professor Tim Congdon from International Monetary Research said the Fed is baking deflation into the pie later this year, and perhaps a double-dip recession. Europe is even worse.

This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73.

How anybody can see imminent inflation in the dying embers of core PCE, just 0.1pc in November, is beyond me.

Mr Rosenberg is asked by clients why Wall Street does not seem to agree with his grim analysis.

His answer is that this is the same Mr Market that bought stocks in October 1987 when they were 25pc overvalued on Shiller "10-year normalized earnings basis" – exactly as they are today – and bought them at even more overvalued prices in 2007, long after the property crash had begun, Bear Stearns funds had imploded, and credit had its August heart attack. The stock market has become a lagging indicator. Tear up the textbooks.

Comments: 26

So, no end to QE yet then! The banksters will continue to pile into the stock market with this free new money...footsie at 10k by the end of the year?

If America today is another Roman Empire in decline...soon the legions will be returning home to see what can be salvaged. Now thats a real revolution. Someday Americans may question deploying a million military personnel overseas...to protect what? Apple? Disney? Florida oranges? Hollywood? Hollywood should make a blockbuster movie to celebrate the occasion: The Reunification of America: The homecoming.

It would appear changing captains of SS Britain is now totally irrelevant. No leader can walk on water unless they are on some ego-trip on drugs. We are currently stuck on an iceberg that Gorsky Bronsky told us was a save haven. RBS is now a government department that cost more than the NHS...if thats possible. And still he smiles like a cheshire cat! Meanwhile the mice are laughing in the cayman islands....with all our money.

Phew at least we are in the EURO so we don't need to worry about all this. No, wait a minute. We aren't thanks to Ambrose' enthusiasm for America! Woo hoo another shot in the foot eh?

And yet the FTSE powers on this morning, buoyed by the latest state-sponsored, debt-fuelled binge in China, believing this is a harbinger of a return to the times of milk and honey... It's just another debt bubble. Strange times in our 'free market system'; state funded stockmarket recovery. Ten thousand families a day losing their homes in the USA is a truly frightening number. Statistics in the UK suggest 6% of people have had to use credit cards in order to pay mortgages or rent. And yet the push to return to debt-based consumerism continues, and high real estate prices are still apparently a good thing... What a truly 'bankrupt ideology'. More fool those who buy - or should I say borrow - into it.

"Europe is even worse" claims Ambrose from his vantage point. At least the euro has erected some barrier against the speculators that thrive like flies in this environment. The single most important question is what happens if most of the regional banks in North America go upside-down and commercial real estate follows suit. Has our new pure instant raw form of capitalism (blessed by offshore hedge funds acting as predators)delivered its final blow of unintended consequences that 10 percent own everything and 90 percent just make do with stale crumbs from their overflowing table?

The Great Recession (that started in 1929) finished with the World War 2 (in 1939). We do not know where this recession will lead us. If you want to know how serious the current crisis is (and how far we are from REAL recovery) READ: "The largest heist in history" - http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html No joke by any standard, and not for fainthearted.

At least America's got Ron Paul. Combine this with the Euro Zone's problems and we do live in interesting times.

What was the manufacturing capacity use in Zimbabwe when they tried to print their way out of trouble, 5% ? There may be deflation for those who do not eat or use no energy. Economists and politicians are similar, half say black and half say white ergo 50% are wrong all the time. In fact the answer is probably grey, so I suspect the stupidity of humans will endure.

The US dollar is in grave danger of losing its status as the global reserve currency. The first requirement of such a reserve currency is stability. The US certainly hasn't got that. The US economic system is rotten to the core. The jibe of a US Treasury Secretary, John Connally that "It's our currency, but it's your problem" was never more apt. The extraordinary defence of the dollar's global reserve status by the CEO of Google (DT 9 Jan "Google boss warns UK over debt mountain") only serves to highlight the pressures the US is feeling to abandon the dollar's reserve currency status. Apparently Guido Romero 6.09am is blissfully unaware that the Gulf states are already making moves away from the dollar, and there have been some ominous statements about the dollar coming from China. Connally's remark only highlights the indifference with which America views its beggar they neighbour dollar decline. It only takes oil and commodity contracts to be negotiated in a currency or currencies other than the dollar for the bubble of the dollar's magical reserve status to burst. The Emperor has no clothes!

Unfortunately the news in the US will never get past the surface and report things like hidden unemployment and option ARM contracts, especially broadcast media. But plenty of time for Oprah's move to cable.

If, as I believe, AEP paints a truer picture than the MSM then there will be severe social and political consequences flowing from this that we have still to comprehend. My guess, for what its worth, is that there will be a huge anti incumbent vote in November (that's conventional wisdom) but it will be followed by increasingly radical and protectionist policies in 2011-12 with as yet unfathomable consequences on the 2012 Presidential electiion. As the Chinese curse goes: may you live in interesting times!

Ambrose, what has happened to you? For months you have been harping on about how strong the USA is and how it will come out of this depression early. For months I have disagreed with you. The statistics are appalling from the USA. Govt and private debt is truely astonomical. The banks are hiding massive home/property loan losses by not foreclosing. The banks are basically insolvent. The Obamie forecasts of GDP growth of over 4% average for the next four years are a joke. When interest rates rise it will hammer the debt repyaments on the debt. Unemployment is huge. One major reason why the unemployment level is not even worse is that the 'stastics' show a falling number of total people available for work in the USA. This has been at least 100K short for the over 6 months. It is known that the US workforce is growing by 100K a month and yet the number of people available for work is reportred as falling! The stockmarket will eventually crash. The world situation is slowly getting worse and worse and I just wait for China to implode.

to Chelyabinsk I am not at all sure that pricing oil or anything in a basket of currencies can be a solution. The US$ is the reserve currency of all sovereign currencies in a floating exchange rate fiat monetary system. Thus, for as long as inflation can be induced into the monetary system, then the floating exchange rate concept works. If inflation should abate or, God forbid, reverse, all currencies implode regardless of whether it is the Dollar or the Euro or the Yen. The thing is that inflation cannot be infinite because it is constrained by the finiteness (can you say that?) of the underlying economy. Ergo, it is constrained by the ability of underlying economic actors to service debt. At a time when the credit markets are contracting globally (not withstanding the suspension of mark to market rules in favor of a chosen few in an attempt at waiting the crisis out) global currencies are at risk. This is borne out by the trend of the last few years as evident in the charts on page 3 at this link: http://www.stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3585763

Irish American's tithing even 1%? That's a new factoid for this I-A grandchild of the depression. Or should I have read the statement to be about I-A cops? But otherwise another sobering column by AEP. This feels much like the 14 months of the credit crunch when no one in the media or on the streets seemed to comprehend the gravity of the situation. They act like something was fixed last year and the storm has passed. Maybe something was "fixed", but not in the sense of corrected. I've been waiting for well over a decade for Americans to wake up, and wondering what it would take to do that. I'm starting to wonder if my sleepwalking countrymen are just brain dead.

------------------------------------ Ambrose- Another excellent article and I quote my British mother when I say "Spot On." It seems you British know more about America's problems then we Americans do. However, I might know why my fellow Americans seem so blind to the obvious political & economic realities stated in your excellent column. It seems Americans like "vegetating" while the Elites chosen US Government officials, media moguls and pundits lead us down the garden path and pick our pockets. You see Americans "were" so obsessed with self gratification and acquiring more toys they couldn't think outside of the "media generated box" they live in and do not understand the simple concept of logic based thought. This lack of critical thinking, call it Blind Ignorance, is the American way to avoid truths that hurt and if believed won't allow "their political side" to win. It's much easier for them to believe political & Wall Street lies, phony government statistics, propaganda in TV commercials, media whores, and bully pulpit prolife preachers, radical Neoconservatives or the neighbors email as it just takes a few minutes to grasp a deceitful point of view... and then promote it. It's troublesome to look for truths, read, study, ask questions and "think." Logic based thought processes are foreign to these people as they've been dumb down by the Elite controlled US media. Unfortunately all Americans, the British and rest of the World have paid a heck of a price for those Americans too lazy to do their homework... that helped elect Bush... "Twice" and who lay blame for the poor performance of the American Economy on Obama's 11 month stint in office. They won't acknowledge that during 8 years of Bush's Neoconservative Republican reign Americans sacrificed many Freedoms and their Democracy as the Bush Administration brought America "Corporatism" and the World a "derivative" generated Depression. For those Americans whom continue to remain blindly ignorant of all truths it should be noted Corporatism started in America when Bush allowed the Neoconservative & Elites, "Goldman Sachs," banks, investment banks and other corporations to run the US Government. The current Bush created Depression has changed the economies dynamics as retail purchases continue their decline... along with jobs, house prices, wages, benefits and Americans trust in their government. It seems 17.4% of Americans have been left on the side of the road holding the empty bag. It should be noted that Wall Street and its "derivatives" are nothing more than gambling. Wall Street is a giant Casino with government sanctioned gaming and commodity trading that recapitalizes the big banks at the expense of average Americans. It's rigged so the house (Goldman Sachs, JP Morgan, Citigroup, Wells Fargo etc.) always wins. The scary thing is... both the American and European economies are based upon this same phony gaming scheme. That extorts money from citizens of the World via gross lies about markets, stocks, derivatives, bank profits & capital, business growth & profits and World GDP's. Wall Street and the Worlds big banks should be allowed to fail... as failure is a learning experience that won't soon be forgotten. The executives at Goldman Sachs, JP Morgan, Citigroup, Wells Fargo and other World Banks should be allowed to join Americans lucky enough to have Medicaid, the unemployed at food banks, soup kitchens, food stamp lines and shelters for the homeless. Let former Wall Street Executives join their fellow unemployed Americans as they shop for the new health insurance with empty pockets and broken souls. Solutions; Obama during his campaign “promised” Americans single payer health insurance... where is it? Where are the work programs? Obama needs to clean house starting with corporatists such as Geithner, Summers, Robert Rubin, son Jamie Rubin & his hires, Bernanke and many other individuals. Paul Volker should be brought in to clean up this mess as his track record is impeccable and clearly indicates where his loyalties lie. Obama should bring in people that have no ties to Wall Street Casino's or the "big" banks. Obama needs to stand tall and prosecute Bush & Cheney Administration for war crimes, lies, questionable military contracts, miss appropriated and misplaced funds. The clock is ticking and Obama must act soon as Americans are growing restless. This World Depression will end when the American rebellion starts. When "real" Americans have the gonads to do what's right. To "think" and fight for freedoms politically as their forefathers did. To take control of "their" Government from the Neoconservatives and Elites who trashed the American Constitution, Bill of Rights, Democracy and while doing so... destroyed the economy of the World. Some true patriots will remember this line... "We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America." So I ask... "Where have all the real Americans gone?" John Wayne... the "Duke"... where are you when America needs you? -----------------------------------

When economies are based upon consumption, giving the reins to appetite is dangerous, risky, even iniquitous. Ambrose, you are right, it is time to tear up the old text books.

I am relieved to hear the US economic recovery is strongly underway!

Another data point is not just the unemployment level but the 26 week data - data on those who have been unemployed for 26 weeks or more. It's showing a real "hockey stick" effect. The average length of unemployment has now reached 24 weeks and the rate of exhaustion of regular unemployment payments has reached 45%. That's when an unemployed worker makes the transition to emergency unemployment payments. In December, the unemployment Bill reached $14.7bn, which is just over the total salary bill for the Federal Government. But in a sense, this is just setting the scene. Unemployment is still rising because companies are cutting back on borrowing and investment. Unemployment is rising sharply among less skilled workers because construction and building are in a slump. And as the year wears on, the Banks will be hit by a wave of Commercial Real Estate loan defaults - one reason they are cutting back on lending. This will affect the small and regional Banks the worst. Meanwhile, interest rate cuts are having the paradoxical effect of pushing money into the Bond Market and to a lesser extent into the Stock Market. Also China is busily creating a new asset bubble in minerals and commodities, with increased imports. In the Thirties, the Depression tended to spiral around the World as one country suffered a crisis, then another, then another. After Dubai, the next place to look for trouble may be China. They also have a real estate bubble, but it is not the kind we are familiar with. In China people are simply buying houses and apartments as inflation hedges. They don't need to live in them, necessarily, because they believe they will eventually be worth more than cash. I guess time will tell.

AEP is beginning to make Jeremiah sound like an optimist. Will the American depression kick in before or after the run on the pound, the collapse of the Euro and the Japanese default?

For confirmation just visit Karl Denninger at http://market-ticker.denninger.net/archives/1835-A-Macro-Level-Look-At-The-Economy.html

The data coming out of the US is truly alarming. AEP is to be commended for his research and frank admission of the truth about the US economy. The social and political consequences for the US are likely to be profound. The question is what effect is this likely to have on the global economy if the dollar nosedives? The problem is that commodities especially oil are priced in dollars. A significant weakening in the dollar would cause global inflation to rocket. Crisis meetings of the G20 are likely to be held to price commodities in a basket of currencies, in a move away from the dollar. It seems that the period of the phoney war of goverments buying their own debt, as in the UK, is over. The blitzkreig of cuts is about to begin. The challenge for politicians will be to hold together the social order.

I wonder if RealtyTrac's numbers are that accurate. There are a lot more repossessions at Credit Unions they don't take into account. http://www.repofinder.com tracks a lo of the smaller banks and credit union's numbers too. Any way you slice it America is in a world of hurt.

It's so refreshing that the Community Organizer in Chief can have us all share the pain. All except Geitner and his buds of course.

So Ambrose. Not disagreeing at all with eloquence. Just wondering where you get your (estimated) M3 numbers. A 5% decline is shiveringly scary. And why is LIBOR-OIS not flaring?

2010 is an election year. Both political parties support the policy of saddling the prudent and the savers and the taxpayers with the losses incurred by the greed of profligate speculators. "Homeowners" who are underwater speculated on continuously rising home prices. Wall Street banks speculated with 40:1 to 80:1 leverage and while the going was good with rising asset markets made a killing which they kept knowing when their bets soured their bought and paid for politicians would transfer those losses to the prudent and taxpayers. Now ostensibly to "save" homeowners and to prevent the next "Great Depression" taxpayers will wind up taking principal losses on mortgages so that these homeowners can keep their homes with lowered mortgage principal and as a result keep home prices elevated. While the prudent who had saved real money from income can't afford to buy high priced homes nor gain any return with ZIRP. So the next time everyone will leverage and speculate and expect to be bailed out once again. Until the system blows up for sure. If money printing and deficits were the panacea Zimbabwe would be the richest country on the planet.