Default, deflation and other financial curse words
In the US, producer prices fell in February, more than expected. Core inflation was barely positive. That is not just a US trend. In Europe, price increases have fallen to the lowest level in 11 years. Japan is experiencing the biggest price drops in many years.
This sounds like a D-word to us鈥isinflation, almost deflation.
One report tells us that greater than 5% of Fannie Mae mortgages are 90 days in arrears 鈥� or more. Another report says it鈥檚 10%.
This too sounds like a D-word. Default.
But wait鈥�
鈥�Fed signals optimism over US economy,鈥� is the lead headline in today鈥檚 Financial Times.
The markets responded, pushing the Dow up 47 points to a new high for this bounce鈥hough still midway between its all-time high and its low of March 2009.
Oil rose a dollar too. So did gold. The euro edged up too鈥�
Reading more closely, we don鈥檛 see much reason for the Fed鈥檚 optimism. And apparently, neither does the Fed. It is leaving its monetary stimulus program in place for an 鈥渆xtended period.鈥� It says inflation is likely to remain subdued 鈥渇or some time.鈥�
The Great Correction (our term) destroyed nearly 8.4 million jobs (the 贵罢鈥檚 count) and wiped out $14 trillion in household wealth. And now Americans are struggling to find firm footing in an economy with fewer job openings, less credit available, and an uncertain growth outlook.
What鈥檚 going on? There鈥檚 a word for it. Another D-word鈥everal of them. There鈥檚 Depression. Deflation. And De-leveraging, for example.
Our old friend Porter Stansberry writes to tell us that we鈥檙e wrong about household de-leveraging. The drop in credit we reported yesterday was caused by defaults鈥ot by voluntary reductions in debt, he says.
He鈥檚 right. Most of the decline in household credit, so far, comes from defaults. And maybe it is just wishful thinking on our part鈥� hoping that Americans would willingly and eagerly improve their balance sheets. The savings rate is up鈥ut it鈥檚 not yet clear whether this marks the beginning of a major trend or not.
But whatever the cause 鈥� be it voluntary de-leveraging or involuntary de-leveraging 鈥� we think there鈥檚 more of it ahead.
Here鈥檚 a statistic: 21% of Iraq and Afghanistan veterans are jobless. They鈥檙e mostly men. And mostly unprepared for the modern job market. After all, who wants to hire someone who knows how to drive a tank or patrol a gas station?
Ultimately, an economy gets rich by making and acquiring things people want.
Ah鈥e look back nostalgically at the Bubble Epoch. It was so easy to make fun of people back then. They thought they could get rich by buying things they couldn鈥檛 afford with money they didn鈥檛 have. Now, we鈥檙e in a new era鈥� of sorts. Now, it鈥檚 the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.
Who really wants to guard a gas station in Baghdad? Nobody we know. Who鈥檚 got the money to fund the fed鈥檚 $1.8 trillion deficit? Nobody.
And think of the poor fellow who draws that sorry duty in Iraq. When he comes back to the US, what does he have on his r茅sum茅? He鈥檚 good at guarding a gas station against terrorists? Not many job offers for that skill set.
So, one in five of these fellows is unemployed. And the feds try to do something about it by spending more money they don鈥檛 have on more things nobody really wants.
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