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Thursday, December 4, 2008

Trillion Dollar Stimulus, Can Only Print That Kind of Money

This kind of money can only be printed on such short notice. With the rest of the world also in crisis mode, there just won't be enough global savings to go around.

Yes the Fed is already printing money. No that isn't immediately inflationary. First, debt destruction and therefore money destruction is massive. Second, the Fed isn't printing fast enough to even keep up with the rate of money destruction, let alone exceed it. Third, the printed money is being hoarded by the major money centre banks. So first, we deflate anyways. Ultimately we could face inflation but only if the amount of money printed far exceeds the amount destroyed.

Almost everything I was concerned about (and therefore raged about here) has come to pass...

Calls for $1 Trillion Stimulus Package Grow as Economy Tumbles: “The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size.

“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.

That number may grow. This week brought news that the economy has been in recession for a year. Tomorrow the government will release November employment data, which economists say will show another 330,000 jobs lost, the most in seven years.

“Every day it looks like the stimulus package needs to be bigger,” said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. “You’re talking $500, $600, $700 billion or even more” for a year.

‘Things Are Evolving’

Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has himself been steadily increasing the amount he thinks is needed.

Earlier in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.

“Congress should think in terms of $900 billion in 2009, with possibly more in 2010,” said James Galbraith, a self-styled liberal economics professor at the University of Texas in Austin who has talked with the Obama transition team about the issue. “I may be higher than they are at this point,” he said, “but things are evolving.”

Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.

‘Liquidity Trap’

New Jersey Governor Jon Corzine said Washington needs to step in because the U.S. is caught in a “liquidity trap,” where repeated interest-rate cuts by the Federal Reserve fail to boost the economy because banks don’t want to lend and skittish consumers and companies don’t want to borrow.

[ TheFinancialNinja: Closer to ZIRP, Liquidity Trap, Lost Decade, Japan v2.0: GLOBAL Liquidity Trap, Fed Admits Quantitative Easing, From INFLATION to Instant DEFLATION, Zero Rate World, The Age of Free Money: We’re Doomed, ZIRP, Zero, Nada, Free Money and a Big Mess, Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats, Japan Stuck, Quantitative Easing in the US, DEFLATION is Here]

“If the government doesn’t operate to fill that gap, we are going to see not only rising unemployment but a shockingly high level of unemployment over the next 12 to 24 months,” Corzine said in Bloomberg Television interview yesterday. He called for a stimulus of “overwhelming force.”

Adam Posen, a former New York Fed official, agreed that’s the lesson to take from Japan’s experience during the 1990s, when it faced a similar situation.

“The stimulus has to come through the fiscal side,” said Posen, who has written about Japan and who’s now deputy director at the Peterson Institute for International Economics in Washington. “A package of 4 percent of GDP, even 5 percent of GDP is not unreasonable over one year.” That would equate to about $500 billion to $700 billion.

Posen said Japan’s economic-recovery packages at times didn’t seem to work because they turned out to be smaller than first announced and were slow in coming.

All About Speed

The Obama team is aware of that problem. “We hear that Japan invested over a trillion dollars in infrastructure and nothing happened,” Vice President-elect Joe Biden told a meeting of state governors on Dec. 2. “Well, it’s all about how rapidly we can get these projects up and running.”

[ TheFinancialNinja: Japan v2.0, The Lost Decade, Stimulus Package: Does it Even Work ]

While some conservative economists agree that a big stimulus package is needed, they argue that it should focus on tax cuts, not on increased government spending on infrastructure.

John Makin, a visiting scholar at the American Enterprise Institute in Washington, has advocated a temporary cut in the payroll taxes that help finance Social Security. So, too, has Stanford University Professor Robert Hall, the chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions.

Love That Pork

“Politicians love pork, but maybe they can be pushed toward something better,” Hall said in an e-mail message.

Because the payroll tax is paid by employees and businesses, reducing it would both give consumers more money to spend and businesses more incentive to retain staff, said Mark Bils of the University of Rochester.

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

Some bond-market investors are also worried about the swelling stimulus and the impact it will have on the budget deficit and ultimately the economy.

“A stimulus of this magnitude helps push government debt as a percentage of GDP closer to dangerous levels, when inflation and interest rates start to rise,” said Thomas Atteberry, who manages $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles.

[ TheFinancialNinja: Federal Receipts and Outlays: The New Scary Chart? ]

‘Enormous Amounts’

Regardless of the risks, that’s where policy makers are heading, said David Rubenstein, co-founder of the Carlyle Group.

“Congress is going to spend enormous amounts of money,” he told reporters in Washington on Dec. 2. “Initially, people were talking about $150 billion, then $300 billion, then $500 billion then $800 billion. Now people are talking about a trillion-dollar stimulus package.””

Wednesday, December 3, 2008

Commodities, Metals Fall further Than During Great Depression

I don’t like the title of this article and how it is written because it is terribly misleading.

Before the great depression, commodities weren’t in nearly the same speculative bubble fueled by cheap credit as they were before their present collapse. They went parabolic this time. Oil went to $147! The CRB Index for commodities went to a record 473! Naturally these drops would be greater ‘than during the Great Depression’.

Just because they have already fallen more than during the Great Depression doesn’t mean they can’t fall further…

Metal prices fall further than during Great Depression : “The price of key industrial metals has fallen further over the last four months than occurred during the worst years of Great Depression between 1929 and 1933, according to research by Barclays Capital.

Kevin Norrish, the bank's commodities strategist, said the average fall in the price of copper, lead, and zinc has been roughly 60pc since the peak in July this year. All three metals were traded on the London Metal Exchange in the inter-war years so it is possible to make a comparison.

Prices for the three metals fell 40pc from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. “Lead and zinc have already lost more than they did in the 1930s,” he said.

Copper was hit hardest during the Depression, despite the electrification drive in the US and the Soviet Union, falling 70pc at one stage before creeping back in the mid-1930s. The reason was an 85pc fall in US construction, then the biggest user of the metal.

Barclays Capital said the broader equity markets are already discounting the sorts of “savage declines” in corporate profits that were last seen in the Slump. It said (trailing) price to earnings ratios are actually lower now than they were the early 1930s, with moves in credit spreads that suggest investors are anticipating depression-era levels of economic contraction.

The credit markets continued to exhibit signs of extreme stress yesterday. The iTraxx Crossover index measuring default risk on low-grade European bonds punched above 950 for the first time. The investment grade index hit 188. The spreads are now flashing the sort of danger signals seen before the collapse of Lehman Brothers in September.

Each episode of the financial crisis over the last eighteen months has been preceded by a big jump in the iTraxx indexes.”

Financial Ninja Favs: NOVEMBER

In case you missed them, here are YOUR favorite Financial Ninja posts for the month of October:

1) Really Scary Fed Charts: NOV, US Bankrupt?
2) Economic Nuclear Winter
3) How to Not Beg for Billions
4) Federal Receipts and Outlays: The New Scary Chart?
5) The Five Stages of Collapse

The most popular posts were about the Fed (again). Posts about general economic and social Armageddon are in the list for the first time such as Economic Nuclear Winter and The Five Stages of Collapse. These leads me to believe that we are getting closer to that final rinse in risky assets and put in that elusive bottom.

November was almost a record month for many reasons in many ways. Unique visitors hit 72k, and pages views exceeded 118k as the world continues to unravel.

Incoming Site Traffic:

1) Dollar Collapse
2) 321Gold
3) Market Ticker Forums
4) Financial Armageddon
5) All American Gold

These are the top 5 blogs referring traffic to The Financial Ninja for the month. All are excellent sources of financial insight and are on my daily must read list. For the first time my deflationary stance has sucked in some traffic from the ‘gold bugs’ over at 321Gold and All American Gold.

Once again: yes, the Fed is now printing money. No it won’t be inflationary. First, debt and therefore money is being destroyed far faster than the Fed is printing. Second, the money being printed is being hoarded. Third, the velocity of money has collapsed.

Baltic Dry, Global Trade Continues to Collapse

From a high of 11793 to a current low of 684, the Baltic Dry Index (BDI) has now dropped 94%.

It would appear that global trade has shuddered rather suddenly to a complete halt.

This is just one example:

ArcelorMittal Breached Charter Agreements, Louis Dreyfus Claims: “ArcelorMittal, the world’s largest steelmaker, was sued by Louis Dreyfus & Cie. SA over claims it breached agreements to ship cargoes at the end of this year.

The steelmaker said it wouldn’t make shipments agreed on under two separate contracts, commodity trader Louis Dreyfus said in lawsuits filed last month in U.S. federal court in New York. Two units of Louis Dreyfus are seeking a total of $4 million in damages, costs and interest.

Steel producers have been slashing output as demand slumps and the global economy weakens. ArcelorMittal said Nov. 5 it was cutting production by more than 30 percent as the worldwide slowdown erodes consumption by builders and carmakers.

ArcelorMittal agreed in a contract dated June 29, 2007, to ship multiple cargoes of 70,000 metric tons through 2009, one of the suits showed. Cia. Siderurgica de Tubarao, a steelmaker in Brazil owned by ArcelorMittal, also agreed in January 2004 to charter vessels until 2009, including 12 shipments of as much as 80,000 tons each this year, Louis Dreyfus said in its filing.

London-based ArcelorMittal spokesman Haroon Hassan directed queries by Bloomberg News to the company’s U.S. office, while Bill Steers, a spokesman in Chicago, didn’t return calls to his phone outside office hours. Louis Dreyfus spokesman Jean-Michel Aspar didn’t immediately return calls to his Geneva office or respond to an e-mail.

China Shipments

ArcelorMittal Brasil SA said on Oct. 31 the shipments for November and December wouldn’t go ahead, according to Louis Dreyfus’s filing to the court.

The Paris-based commodities trader also sought $9.6 million in damages, costs and interest from North China Shipping Ltd. for allegedly reneging on an agreement to ship 176,000 tons of iron ore from Brazil to China, Louis Dreyfus said in another filing to the court. Charlie Hu, head of ship leasing at North China, wasn’t immediately able to comment when contacted by Bloomberg.
A worldwide credit freeze and economic slowdown has cut demand for shipments of raw materials. Rental rates for vessels most commonly used to haul iron ore and coal have plunged 99 percent to $2,316 a day from a record $233,988 on June 5, according to the London-based Baltic Exchange.

The case is Louis Dreyfus v. ArcelorMittal, Case No. 1:08- cv-09972-PKC, United States District Court for the Southern District of New York.”