I’m writing to inform you that this blog will no longer be updated and will be transfered to: www.subprimeinsight.com

Same people, same thoughts, just a different brand. Apparently some people can’t read disclaimers so we’re moving to a more lax environment.

“So for the millionth time, I will spell it out: The easings have everything to do with crisis and nothing to do with growth. Of course they are inflationary. But the crisis has to be averted. I would also argue, unlike the people on the Fed, that we are in a “deflationary” spiral not an inflationary one, because a deflationary spiral is what happens when your most important asset, your home, declines in value.”

Source: Bloggingstocks

Read the post.  

Dawn Bennett recommends some common sense economic solutions: Like a sound currency.

Watch the video by clicking the link on the left.

 Actual Article

The Short View

The US is not worried about inflation. It’s worried that it does not have enough tools to stave off deflation.

Watch the Video.

Summary:

Kleintop sees a turnaround in the market in as soon as 6 weeks. He compares today’s problems to 1998 when we had LTCM (Long Term Capital Management) blow up and the Asian currency crisis.  He says this is a “mid-cycle” slow down. Any thoughts?

Notable Quotes:

Wilbur Ross:

“Half of all new property listings in California are now foreclosures.”

Bloomberg Anchor:

“Wow, that’s scary.”

Wilbur Ross:

“People were using there home as an ATMs but they were really using it as a borrowing type ATM to consolidate debt… but now that’s gone.”

Bloomberg Anchor: “Can Fed Cuts help?”

Wilbur Ross: It helps in lowering borrowing costs for banks and lowering the resetting interest rates on mortgages. It does not help in liquidity. Liquidity is a physiological phenomenon. For years, every lender was lending to everyone. Now, every lender is lending to no one. Even able borrowers.

Watch the Video.

Here is the chart of the federal funds rate again:

First, a look at the 1990s. After the S&L Crisis (Savings and Loans Crisis) interest rates went up, but not to previous historical levels. We can thank Greenspan for that. Throughout the 90s we saw sustained low interest rates that failed to curb unproductive economic development. By not doing so he created what is known as an “asset bubble.” This bubble was concentrated around the Technology Industry. Here is what an asset bubble looks like and the subsequent collapse, or “bubble burst:”

I am not claiming that the Dow or S&P 500 will lose that much value. This is just for illustrative purposes.

Instead of letting the financial system weed out inefficient firms afterwards by lifting interest rates after the dot-com bubble burst, the Fed instead chose more inflation. This time it came in the form of Real Estate. During the period of 1.00% interest rates, the Real Estate industry began to push all forms of exotic mortgages to unknowing borrowers that could not pay back their debt. Add the “Income Effect,” where home owners view their income increasing due to rising home prices, and you get a perfect excuse to spend more money than what you are making. In fact, for the past decade real GDP has grown by 2.9% annualized while consumer spending has grown at 3.6%. The extra spending started around a little before 2001 and has since then added an extra $3 trillion to the economy that was never earned. So every time you hear Wall Street mention this being a “consumer led” recession, don’t believe it. In truth, Wall Street has been prospering on the backs of the American consumer. The collapse of the “income effect” is due to Wall Streets massive speculation on Mortgage Backed Securities. The coming crisis is what happens when years, I repeat: years ,of growth in the financial sector are lost.

And now we have the outcome of two massive bubbles, created in part by the Fed, coming down at once with a multitude of other problems. To hear Jim Cramer’s take on this, refer to my previous post and listen to his 45 minute speech, touching partly on the defunct fed, the failures of capitalism, and the two asset bubbles.

The question shouldn’t be whether or not we are going into a recession, but rather: How much of that 3 trillion are we going to lose? For generations, Americans spent more for a couple of years then paid back their debt. In recent history the cycle has broken. I’m betting on the cycle returning in the recent future.