Plenty of high quality content in the comments section from the last post. As I have said, the best reward for writing this site is the great feedback and discussion that comes from the readers.
On the Inflation vs. Deflation debate, Anon poster (pick a name, we are all friends here) had some good scores for the deflation call:
New credit? Dude, you are making the assumption that these theoretical borrowers will be *eligible* for credit. Why would anybody lend money to a person who has defaulted? You might argue a government override here, but the scandal of wasted tax dollars would be too much for even this profligate nation to bear. Credit deflation is on the rise. Please point out where you see the contrary to this?
What makes you think the debt load that the US is carrying is too big? One need merely look at what happened in Japan to refute such an idea. Japan tried their damndest to devalue the Yen and, 18 years later, they are *still* failing at it. Obviously, somebody loves Yen even though Japan would appear to have insurmountable problems. Jah?
Furthermore, we are THE nuclear hegemon. As such, we can bear debt levels beyond your wildest imaginings. And we will.
To which I chimed in:
people were not "eligible" for credit the last time either, so that should not stop anything this time.
And Anon had this to add:
Credit busts are followed by tighter lending. Persons once eligible to borrow beyond their means can't do that now. If you follow CR, you know this. The days of lettuce pickers buying mansions are over and I haven't seen a single news article to the contrary. Hell, the government has been promising to "fix" all kinds of mortgages for these borrowers. So, there you have the one entity that wants to hand out money and even they are failing. The numbers of "rescued" mortgages from Uncle Sam are trivial.
It takes years for failed creditors to clean-up their credit records. In the meantime, deflation as described by Mr. Practical is a lock.
The points by Anon and the essay by Mr. Practical are extremely persuasive. At this point in time I think deflation is ongoing. Where I differ is that I think the government will get desperate soon (maybe by years end) and use some creative money dropping to get spending going. It is not hard to imagine a "government override" as Anon suggested where banks will be given cash and forced to lend it out, even having lending standards removed backed by a government guarantee. In effect the entire mortgage mess had already been taken on by the government, so the path to forced credit issuance is not that far.
Loyal reader Kevin has my line of thought:
To get the hyperinflation Bernake is going about it all wrong as the problem is too much debt by the public in a system that is based on consumption. Until the money he is printing gets into the hands of the public who would spend it along with paying off debts more then likely I don't see it. That would take a helicopter drop on the consumers themselves.
Giving it to the insolvent banks if there is no desire to borrow isn't going to cut it.
The banks are now using the taxpayer largesses to ramp up the stock market but in order for the public to access that money they have to sell into the banks ramp job. Driving commodities to the moon on dollar debasement hyperinflation fears will put out it's own fire once a certain price is hit and their is no money or increasing wages in the consumers hands just like when gas was over $4, the consumer cocoons and shuts off spending for all but the necessities which are eating up what disposable income they have.
I see the currency ramp in oil prices doing the same thing that happened the last time with similar results on this time unemployment is much higher.
The new "conundrum" for the FED is how to get consumers spending while they are broke. Sadly I think they will come to some plan of action to attack this.
Navigation! Full Stop!
While the run the stock market has been on is clearly a fixed job, there are several other blatant manipulations going on that demand some answers. Add to this missing gold in Canada and the ludicrous situation regarding the seized bearer bonds in Italy and I think that everything should be at a full stop until these issues get some answers.
FED Fixed Bond Auctions
I spent a ton of time last week writing about the bond auctions. Of course they went well, as I knew they would. It seems the FED may have had to try extra hard to makes sure though, as Zero Hedge shows:
As the data indicate on the day of the $19 billion in 10 Yr UST, the Fed was concurrently bidding on almost $11 billion (of which $3.5 billion was accepted) of what most likely were 10 years: more than 50% of the full Treasury auction. Furthermore, the day before, the Fed purchased $7.5 billion in 3.5 - 5 years after submitting nearly $30 billion in bid requests. This is the same day that $30 billion in 3 years Treasuries were auctioned off at 1.96%. Has the Federal Reserve been keep the clearing price conveniently low by purchasing comparable Treasuries on or near the days of critical auctions? Open market purchases seem to indicate that is in fact the case.
In summary - last week's bond market exhibited unprecedented volatility: spreads between USTs and agencies fluctuated drastically, prices were all over the place, the Fed was concurrently conducting OM purchases as the Treasury was auctioning off bonds in the primary market... cats and dogs living together, etc... And keep in mind total activity this past week was under $100 billion. There is still well over $1 trillion in bonds to be auctioned off this year alone. If anyone is foolish enough to predict just what will happen with the long bond, the 2s10s, T-bills, etc. by year end, please speak up.
Well, I will take one stab: the irony is that while Zero Hedge is in the near-term deflationist camp (at least in principle), the supply of bonds will likely be the technical factor that determines price levels over the next 6 months, more so than economic outlook. As such, we expect volatility to persist, and the curve, especially the long dated stuff, to widen, even as household net worth continues plummeting (or as a result of). Inflationists, will, of course, read into this as an inflationary sign and buy every barrel of oil they can find while screaming bloody inflation as CNBC reverberates it to the moon and back since it jives with exactly what the Administration is hoping: that Joe Sixpack goes out and maxes his credit card just like in the good old days. But the last is not and will not be happening... So the conundrum continues. (The only thing certain is death, taxes, and that JP Morgan will forever be gunning those pesky 5k SPY blocks.)
See the link for full details.
Missing Canadian Gold
The Canadian Mint makes some of the most wonderful gold and silver coins. The maple leafs are stamped .9999 Argent which is of course better than .999 pure! Anyways, it appears some of the metals may have been misplaced. Another new blog I have been reading is Market Skeptics who has a great rundown on this story:
Conclusion: Since I first reported on the case of Canada’s missing gold, things have become more serious:
1) Before it was “Several million dollars”, now it is “tens of millions of dollars”
2) Before it was an audit, now it is a criminal investigation.
3) Before it was just Canada’s mint, now “other depositories (vaults) have had an army of auditors descend on them in the last two weeks”
4) Before it was a simple accounting ‘discrepancy’, now the Royal Canadian Mint fears a 'run' on its gold
Is this the beginning of another Gold Rush/Panic? I will closely be following these developments.
If interested, here is a good run down on the real issue with the monster short position in the metals, there simply is not enough real stuff to make the paper contracts anything more than thought experiments:
The paper gold marketer is afraid to look in the vault
Bearer Bonds Situation
This truly bizarre tale needs more attention as soon as possible. Zero Hedge has some thought here:
An Open Letter to the Secretary of the Department of the United States Treasury
Karl Denninger has a great write up on what this MAY mean:
The Saga of the Bearer Bonds
I will keep hitting this story as long as possible until we get some answers, though how effective it will be is doubtful.
More links for this story:
New Evidence Points to Japan (State sponsorship??)
Asia News Story
Must See Video
A man using silver to pay for things at a store:
Seriously, end the night thinking about the fact that $15 worth of stuff at the store can be paid for using 10-13 pre 1965 dimes that are 90% silver.
Still think paper dollars are so great?
Have a good night.