The Great Stagnation of 2011

[The economic news is not very encouraging these days. Everywhere I've looked, and I've looked at 10 different indicators (surveys, polls and indexes), things appear to be either down or stagnant. Let me be more explicit.] Words: 1058

So says Econophile, Jeff Harding, (www.dailycapitalist.com)  in excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com  (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.  Harding goes on to say:

1/2. Philadelphia Fed Survey and the Empire State Manufacturing Survey

Both the Empire State Fed and the Philadelphia Fed manufacturing surveys reported substantial drops in economic activity:

The Philadelphia dropped 7.7% (the first drop since September) and NY dropped 7.8% (the first drop since November). The weakness was in new orders and inventory accumulation, things that you don’t want to see decline. Separately, the inventory-to-sales ratio increased 0.8%, a small but negative indicator.

3. Index of Industrial Production

The index of industrial production as announced by the Fed was flat in May, up 0.1%, but the year-over-year trend was still declining:

[While] all production is aimed at consumer consumption, looking at consumption alone is not as good an indicator of real organic economic growth as is the production side of the economy…[because] production usually leads consumption out of an economic slump, not the other way around. The Fed’s and the Administration’s attempts at monetary and fiscal stimulus haven’t worked because of their misplaced emphasis on consumption. They don’t examine the issue of why people aren’t consuming…The keys to new economic growth are savings, debt reduction, and the liquidation of malinvested projects. People aren’t going to spend until they feel they are economically secure and there aren’t a lot of reasons right now for them to feel secure – and the data shows it.

4. Retail Sales

Retail sales for May came out slightly negative (-0.2%), but that is a bit misleading. Here is the chart:

The trend has been flat-to-negative since January, 2011. For several reasons economists like to strip out auto sales, a big ticket item that may skew the data. Doing that, excluding autos, retail sales were up 0.3%. Again the data is confusing because the excluding auto data still includes gasoline sales which were up 22.3% YoY. Gains were seen in health care, building materials, miscellaneous retailers, and non-store (Internet) retailers.

5. Producer Price Index

The PPI and CPI reports also came in last week. Starting at the producer level, the PPI increase moderated to a 0.2% gain (core, excluding energy and food, up 0.2%) but the year-over-year trend was still up 7.0% in May (excluding  energy and food, up 2.1%). The PPI has been declining since January, 2011, but the rate of increase is still high:

6. Consumer Price Index

The May CPI also was up 0.2%, slightly less than in April, but still a strong upward trend as shown in this YoY chart (up 3.2% YoY):

Excluding energy and food, it was up 0.3% for the month, and 1.5% YoY. Apparel, shelter, new vehicles, and recreation were all up, but energy and gasoline were down along with airline fares, tobacco, and personal care. This price inflation may seem mild to the casual observer, but it is the trendline that is important.

7. The Misery Index

 The Misery Index was created back in the 1970s and is described thusly:

It is simply the unemployment rate added to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people out of work implies a deterioration in economic performance and a rise in the misery index.

The Index is now at 12.16. To put this in perspective, it was at its highest, 20.76 during the Carter Administration, and hasn’t been this high since 1983 (it declined after Reagan was elected). Its lowest points were 3.53 during the Eisenhower Administration (1953) and again during the Clinton years, 6.05 in 1998. This has resulted in a decline in consumer confidence.

8. Economic Confidence Index

The Gallup Economic Confidence Index declined 9 points in the past two weeks (ending June 12):

9. The Reuters/Univ. of Michigan consumer sentiment poll reflected a similar decline.

10. Small Business Optimism Index

The National Federation of Independent Business’ (NFIB) Small Business Optimism Index declined again, for the third straight month:

“Corporate profits may be at a record high, but businesses on Main Street are still scraping by,” said NFIB chief economist Bill Dunkelberg [going on to say] “For the third month running, several key economic indicators continued their downward tumble.

Driving the economic uncertainty [is the fact that] one in four owners still report weak sales as their top business problem (followed by taxes and regulations and red tape [while] only 3 percent cite financing).

The most important thing among these data was the lack of capital spending: Capital spending remains historically low in spite of very low interest rates and all sorts of expensing incentives. Fifty percent of firms reported making capital expenditures over the past six months, and the percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 20 percent, a recession level reading.”

What does all this mean? It means that the foundry of job creation for one-half of the new jobs created in America, small businesses, are stalling out again because of all the factors discussed above. Also, I wouldn’t expect a lot of job growth from the multinationals as not even a declining dollar can offset the cooling-off of demand from money-stimulated countries like China, India, and Brazil.

Conclusion

Consumers aren’t going to save our economy from stagnation [which] will continue along with inflation…[and their is still] a likelihood of QE3.

*http://dailycapitalist.com/2011/06/20/the-great-stagnation-of-2011/

Related Articles:

1. Slip Sliding Away: Signs Point to Ongoing Economic Decline in U.S.
2. Current Economic Recovery is a Sham! Here’s Why
3. What Decline? U.S Economy Holding Up Exceptionally Well!
4. Get Ready: Economic Hell is Coming!

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.” says Warren Buffett. Words: 982

In the following edited excerpts from the original article* Cam Hui (www.questfunds.com) puts forth the case for both inflation and deflation by the likes of Richard Russell, Warren Buffett and Van Hoisington:

The Case for Deflation

1. De-leveraging
There are many analysts making the case for a Japanese 1990s style prolonged period of deflation. One of the more prominent spokesmen of this view is Hoisington Investment Management. Simply put, Hoisington believes that we are in a de-leveraging cycle, and de-leveraging means deflation. Their case for deflation can be summarized in the following way:

- US debt to GDP has gone sky high, indicating that borrowing capacity is stretched. Much of that borrowing went to pump up asset prices. Even though asset prices have fallen, the debt remains. The endgame is obvious: we need time to pay off all of the excess debt and that process is highly deflationary.

- Credit creation is falling dramatically. The economy cannot recover unless banks are willing to lend to businesses and households. Otherwise, where does growth come from?

- Monetary policy is pushing on a string. Inflation is considered to be a monetary phenomenon. When Helicopter Ben prints too much money, theory suggests that too much money chasing too few goods and services ignites inflation. Hoisington argues that increasing the money supply will not result in inflation because banks aren’t lending. All of the newly printed dollars are winding up in bank reserves and doesn’t get pushed into the real economy. Therefore inflation will stay tame until banks begin to lend again and start a new credit cycle.

- Fiscal stimulus won’t work either. One of the major problems on the expenditure side is that the government sector is smaller than the private sector. Moreover, increasing government spending would mean either the government must either raise taxes or borrow funds in the financial markets that would have otherwise gone to the private sector, which is counterproductive.

- The American consumer’s balance sheet is extremely weak and over-levered. It will be a while before the consumer can resume his profligate ways, assuming a new frugality doesn’t take hold. If the consumer doesn’t spend, then where will growth come from?

To the above points, I would also add the following:
- US capacity utilization is falling and capacity utilization leads core CPI by about a year, according to Albert Edwards of SocGen.

- The Eurozone won’t be a source of global growth near-term. Europe is undergoing its own de-leveraging cycle as widespread defaults from Eastern European loans become a reality.

(See the Hoisington case at http://www.investorsinsight.com:80/blogs/john_mauldins_outside_the_box/archive/2009/01/19/thegreat-
experiment.aspx)

2. Too Much Debt
- Debt to GDP has gone sky high…Credit creation is falling dramatically…Consumer balance sheets are very weak, making them unlikely to spend. Capacity utilization is falling and capacity utilization leads CPI by about a year. Source: Societe Generale

The Case for Inflation

1. Massive Fiscal and Monetary Stimulus
In a New York Times op-ed (see http://www.nytimes.com/2009/08/19/opinion/19buffett.html _r=2&scp=2&sq=buffett&st=cse) Warren Buffett warned that:

- “enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.” Buffett was saying, in so many words, that all of the money being printed today is unlikely to ignite inflation because of the lack of lending. However, Americans will have to eventually pay the price for all this government spending and monetary stimulus.

- once we start to see signs of a recovery, “slowing [the stimulus] down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”

- the price to be paid would likely be an uncontrolled decline in the US Dollar: “Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

2. Falling US Dollar
The United States is in the enviable position of being the issuer of a major reserve currency. For central bank reserve managers, the only other realistic reserve currencies are the euro and perhaps the Yen. All other currencies are too illiquid to be serious contenders for major reserve status.

Given the profound troubles that Europe faces with its banking system and the continuing problems in Japan, the US Dollar is unlikely to fall significantly against either the euro or the Yen. Pressures on the US Dollar would show up as rising commodity prices – which translates to inflation.

3. Higher Interest Rates
Long-time analyst Richard Russell, publisher of the Dow Theory Letters since 1958, put the dilemma more succinctly:

- The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let’s say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.

*http://www.qwestfunds.com/publications/newsletters_pdf/newsletter_november_2009.pdf (Qwest Investment Management Corp. is an investment firm which specializes in identifying, structuring and managing investment products focused in the natural resource sector.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France. It warns of “unstable dynamics”, posh talk for a debt spiral. Words: 620

In further edited excerpts from the original article* Ambrose Evans-Pritchard (www.telegraph.co.uk) goes on to say:

Belt-tightening is the oppressive fact of 2010-2012 for half the world:
- Hungary, Ukraine, the Baltics and the Balkans are already under the knife.
- Latvia’s economy may contract by 30pc from peak to trough as it carries out an “internal devaluation”, ie wage cuts, to hold its euro peg.
- The eurozone’s fiscal squeeze is well advanced in Ireland.
- Brussels has told Greece to cut by 10pc of GDP in three years, Spain by 8pc, Portugal by 6pc.
- Britain must slash soon, or face a gilts strike.
- American states face a shortfall of $156bn in fiscal 2010.

While belt-tightening is indeed required cutting too fast would tip the West back into slump and kill tax revenues, solving nothing – a risk that austerity priests rarely acknowledge. Pacing is everything.

The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus (i.e QE) to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract:
- Bank loans in the US have fallen at a 14pc rate this year, caused in part by Basel III rules pushing banks to raise capital ratios.- The M3 money supply has fallen at a 5.6pc rate since September, 2009.
- The Fed’s Monetary Multiplier dropped to an all-time low of 0.809 in late February, 2010.
- The contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while M3 fell by a further €55bn. – Japan’s GDP deflator has dropped to a record low of -3pc.

These are epic warning signals, with echoes of 1931 yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.

Fed chairman Ben Bernanke told us in his 2002 speech “Deflation: Making Sure It Doesn’t Happen Here” that:
1) Japan’s slide into deflation was “entirely unexpected”, and that it would be “imprudent” to rule out such a risk in America;
2) “Sustained deflation can be highly destructive to a modern economy and should be strongly resisted”;
3) that a “determined government” has the means to stop deflation, if necessary by use of the “printing press”.

Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1pc in January. They plummet from here.

So why has Bernanke begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt?

Don’t go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow – otherwise we will all sink into deflationary quicksand.

*http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7338857/Dont-go-wobbly-on-us-now-Ben-Bernanke.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
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Optimists expect mild inflation in a decent recovery. Pessimists fear the feds may have waited too long; they think they see higher rates of inflation coming. Here on the back page we see no recovery…nor any inflation. At least, not yet. Instead, we are blind. We see nothing. As for what is coming…a slow motion depression wouldn’t surprise us. Neither would the collapse of the public debt market. Words: 594

In further edited excerpts from the original article* Bill Bonner (www.dailyreckoning.com) goes on to say:

There is always a wide gap between the Fed’s reach into the economy and their grasp of what they are really doing. When the Fed increased reserves in the banking system, the idea was simple enough. More reserves would allow the banks to lend more. In turn, more credit would allow consumers to spend more. Ergo, the recession would soon be over.

The more reserves the Fed pumped into the banking system, however, the more reserves the bankers didn’t lend out. In 24 months, excess reserves (beyond what was needed for loans) expanded 500 times from the level they had been for the previous 30 years.

If the banks chose to lend these reserves they could multiply them into another $10 trillion to add to the money supply. Instead, lending to households and business is in a steep decline. Nothing like it has happened since WWII. Total credit outstanding is falling too. The banks are barely even lending to the US government from which they got the money in the first place. Why?

The “Unintended Consequences” of Quantitative Easing
Bankers competed for yield with the deepest pockets in the monetary universe – the central bank itself. When the Feds bought Treasury bills they drove yields down to such skimpy levels that the incentive for risky private loans was nearly lost all together. Better to leave the money on deposit at the Fed.

No Loans, No Multiplier. No Multiplier, No Recovery.
Instead, the Feds take a dollar’s worth of supposedly “idle” resources out of the private economy (actually, savings that people hoped to spend or invest later); squander it on bribes, bailouts or boondoggles; and get 90 cents worth of ‘recovery.’ Then, when a real recovery doesn’t come, they spend two dollars.

Where this will end up? With the multiplier out of action, consumer price inflation – and a recovery – seem far away and the Feds are helpless. What? What about more government spending or dropping hundred-dollar bills from airplanes? But those tools have self-mutilating effects too. They jeopardize governments’ access to deficit financing.

Inflation and Rising Interest Rates are Coming
Sooner or later, lenders will worry about inflation and the risk of default. They’ll demand higher interest rates. Treasury bond yields will rise, in real terms, even in a deflationary world. These higher rates affect public finances like a cold draft on a pneumonia patient. As governments pay more to borrow, their condition deteriorates. The odds of default increase.

The slow motion depression continues, if we are lucky…and nothing goes wrong.

*http://www.dailyreckoning.com.au/mild-inflation-in-decent-recovery/2009/12/07/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.