The Deflation Time Bomb

Is there anyone who still does not understand that talk of ‘inflation’ by officialdom is just a red herring intended to distract us from the far more dangerous dragon of deflation?

— Mike Shedlock, Mish’s Global Economic Trend Analysis

We are to about see how much George Bush really believes the “supply side” mumbo-jumbo he’s been spouting for the last seven years. Last week’s Labor Department report confirmed that unemployment is on the rise (5%) and that corrective action will be required to avoid a long and painful recession. There’s a good chance that the Chameleon in Chief will jettison his “trickle down” doctrine for more conventional Keynesian remedies like slashing interest rates, government programs, and tax relief to middle and low-income people. On Monday Bush announced that his team of economic advisors was patching together an “Economic Stimulus Package” that will be unveiled later this month in the State of the Union Speech. The goal is to rev up sagging consumer spending and slow down business contraction. Ironically, the UK Telegraph dubbed the stimulus plan Bush’s “New Deal.” It’s a shocking about-face for a president that has been clobbering the middle class since he took office and who balks at even providing temporary shelter for disaster victims. Now Bush is going to have to give away the farm just to keep the economy from crashing. Good luck. Clearly, the prospect of a system-wide meltdown in banking, real estate and equities has become a “Road to Damascus” moment for lame-duck George.

The up-tick in unemployment is just the final part of an otherwise bleak economic picture. Manufacturing is hurting too. Last Wednesday, the December ISM Manufacturing Index plunged to 47.7, its lowest level in five years. The news put the stock market into a 200-plus nosedive and sent gold soaring over $800 per ounce. Since then, the news has gotten progressively worse. The market fell another 200-plus points on the Labor Dept’s report on Friday, followed by 238 point jolt on Tuesday on rumors of (potential) bankruptcy at mortgage lending giant, Countrywide Financial, and a 2.6% plunge in pending housing sales from the National Association of Realtors. By the time ATT announced its fears of “reduced consumer spending” the market was already barrel rolling towards earth in a sheet of flames.

The Dow Jones is now 10% off its yearly high, the official sign of a correction. More important, equities blew through their support levels indicating a basic change in the market’s trajectory. It’s a primary bear market now and any rebound will be temporary. There’s still a lot of fat to be trimmed before overvalued stocks return to the mean. No wonder Bush is nervous.

The constant rate cuts and geopolitical jitters have sent gold skyrocketing. Since August 2007, gold has gone from $650 per ounce to $887, a whopping $237 in just 5 months. If that is not an indictment of the Federal Reserve and their “loosey-goosey” monetary policy; then what is? According to the Wall Street Journal “gold and oil have run almost in perfect tandem. The price of gold has risen 239% since 2001, while the price of oil has risen 267%. That means if the dollar had remained as ‘good as gold’ since 2001, oil today would be selling at about $30 a barrel, not $99.” (WSJ, 1/4/08)

That’s right; the price of gas today is attributable to war, tax cuts and the relentless expansion of credit by the Federal Reserve — NOT OIL SHORTAGES!

Escalating energy prices are increasing the cost of food production, which creates a self-reinforcing inflationary cycle. Additional rate cuts will only weaken the dollar further and put an even greater burden on maxed-out consumers.

Before he left on his “Victory Tour” of the Middle East, Bush said:

“When Congress comes back, I look forward to working with them, to deal with the economic realities of the moment and to assure the American people that we will do everything we can to make sure we remain a prosperous country.”

The economic realities that Bush will be facing are the anticipated “hard landing” from a nationwide housing slump coupled with a credit crunch that is strangling the banking and financial industries. The country is lurching recklessly into a deflationary death-spiral while Bush makes a pointless junket to the scene of his biggest foreign policy flop. What a joke. When he returns, Bush will find that he is constrained in his “stimulus” plan due to massive fiscal deficits, which are the result of the enormous tax cuts and gluttonous military budget.

“This isn’t like 2000 when the US was running a large fiscal surplus of $300 billion or 2.5% GDP,” said economist Nouriel Roubini. “Now that all the fiscal stimulus bullets have been spent on the most reckless and unsustainable tax cuts in history — the administration is left with very little room (to maneuver) in bad times . . . We are now stuck in a situation where the room for any meaningful fiscal stimulus . . . is gone. . . . We did indeed waste all our macro policy bullets in 2001-2004 in “the best recovery that money can buy” and now we are left with relatively limited room for monetary and fiscal policy stimulus. This is one of the main reasons why the recession of 2008 will be more severe and protracted than the mild 2001 recession.” (Nouriel Roubini, Global EconoMonitor)

Still, there will be a stimulus package — however meager — and there’ll also be more rate cuts by the Fed. That means that gold and oil will continue to soar and the dollar will continue to get hammered. Bernanke’s options are limited, as are Bush’s. The system is grinding to a halt and the Fed chief will have to use the tools at his disposal to try to stimulate economic activity. It won’t be easy. Presently, he faces a number of challenges. Home prices are falling, retail spending is off, commercial real estate is in a sharp downturn, and many of the major investment banks are capital impaired from their poor investments in mortgage-backed bonds. If the Fed’s “low interest” smelling salts don’t revive the comatose American consumer — and get the cash registers at Target and Billy McHales ringing again — the world will face a global slowdown. That’s why the Fed Funds rate will probably get hacked by 50 basis points by month’s end and Comrade Bush’s economic team will concoct a fiscal bailout plan worthy of Fidel Castro.

Are We There Yet?

A growing number of market analysts believe we’re already in recession. David Rosenberg of Merrill Lynch put it like this: “According to our analysis, this [recession] isn’t even a forecast any more but is a present day reality.”

Rosenberg argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession. Mr. Rosenberg points to a whole batch of negative data to support his analysis, including the four key barometers used by the National Bureau of Economic Research (NEBR) — employment, real personal income, industrial production, and real sales activity in retail and manufacturing.” (UK Telegraph)

Whether one chooses to call it a recession or not is irrelevant. When the two behemoth asset-classes — real estate and securities — begin to cave in, there’s bound to be some ugly fallout. Housing stayed strong during the bust. Not this time. No way. The whole system is keeling over and it could take the bond market along with it. As the two gigantic equity bubbles lose gas, consumer spending will stall, business activity will slow, more workers will get laid off, and prices will tumble. Equities and commodities will be hit hard (even gold) and housing prices will dive to new lows as the pool of potential buyers grows smaller and smaller.

These problems will be further aggravated by the lack of personal savings and the huge debt-load which will push increasing numbers of homeowners, credit card customers, even student loan recipients into default. By 2009, bankruptcy will be the fastest growing fad in American pop culture.

Housing Doom

Many experts are now predicting that home prices will dip 30% by the end of 2008. That means that nearly 20 million homeowners will be “upside-down”, that is, they will owe more on their mortgage than the current value of the house. (Imagine owing $400,000 on a home that is currently worth $325,000!) 40% of all homeowners in the US will be upside-down by the end of next year. This is a grave systemic problem that will have widespread implications. Experts already know that when mortgage holders have “negative equity” they are much more inclined to put their keys in the mailbox and skip town. Hence, the name for this increasingly common practice — “jingle mail.” Secretary of the Treasury Henry Paulson is desperately trying to put together a national “rate freeze” to avoid, what could be, the most devastating surge of foreclosures the world has ever seen. Paulson’s rate freeze does not offer “New Hope” as promised but, rather, a lifetime of servitude paying off an asset of ever-decreasing value. Underwater homeowners are better off taking the hit to their credit and letting the bank repo the house. Let the bank worry about it. They created this mess.

The housing bubble is deflating faster than anyone had anticipated. Overall sales have slipped more than 40% from their peak in 2005 whereas, prices have gone down a mere 6.5%. Prices, which are a lagging indicator, have a lot further to drop before they touch bottom. Robert Schiller, Professor of Economics at Yale University and author of Irrational Exuberance, “predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.” (Times Online, UK)

Schiller’s on the right track, but his estimates are way too conservative. After all, in 2002, the median price of a single-family home in Los Angeles was $270,000. But, by 2006, the cost of that same house had doubled, to $540,000 — “pushed by unbridled speculation fueled by unparalleled access to mortgage capital.” (LA Times) The problem was cheap credit that was readily available to anyone who could fog a mirror. All that has changed. The banks have tightened up their lending standards, and jumbo loans (loans over $417,000) are nearly impossible to get. So, why doesn’t Schiller believe that prices will return to 2002 levels? They will. And they’ll go even lower; much lower. In fact, real estate is quickly becoming the leper at the birthday party; everyone is staying away. That means that prices will fall — and more rapidly than anyone imagined. The word is out on housing and it’s not good. The blood is in the water. Get out before the pool of mortgage applicants dries up entirely.

Banking Tsunami

The US banking industry has never faced greater challenges than it does today. Many of America’s largest and most prestigious investment banks are seriously under-capitalized and buried beneath hundreds of billions of dollars in complex, structured investments that are being downgraded on a weekly basis. On top of that, many of the banks main sources of revenue have vanished as investor interest in sophisticated mortgage-backed bonds and derivatives has disappeared altogether. For example, the sales of collateralized debt obligations (CDOs) “plunged 85% to $15.69 billion in the fourth quarter.” Also, “The value of Alt-A mortgages . . . issued in the third quarter fell 64% to $39.3 billion from the second quarter’s record high of $109.5 billion . . . S&P said the dramatic drop is the result of ‘unprecedented credit and liquidity disruptions’ for both borrowers and lenders” (Dow Jones) These are steep declines and represent a serious loss of revenue from the banks’ bottom line.

Many of the banks are simply in “survival mode” trying to conceal the magnitude of their losses from their shareholders while attempting to attract capital from overseas investors to shore up their sagging collateral. (via Sovereign Wealth Funds)

The banks are now struggling to fulfill their function as the main conduit for providing credit to consumers and businesses. They have curtailed their lending as their capital base has steadily eroded through persistent downgrading. The Federal Reserve has tried to resolve this issue by opening a Temporary Auction Facility (TAF), which allows the banks to secretly borrow billions from the Fed without the embarrassment of disclosing the transaction to the public. The banks are also free to use Mortgage-backed securities (MBS) and commercial paper (CP) as collateral for securing the Fed repos. It’s a sweetheart deal and more than 100 financial institutions have already taken advantage of the Fed’s largesse.

This is a bad sign. It indicates that the banks are seriously overextended, “capital impaired” and need a handout from the Central Bank to keep from defaulting. It means that the vaults are stuffed with worthless mortgage-backed slop that they are deliberately hiding from their shareholders and depositors. If there were adequate regulation then the banks would never have been allowed to dabble in such risky debt instruments as subprime loans and toxic CDOs. The whole catastrophe could have been avoided. Instead, hundreds of billions of dollars will be wiped out, a number of banks will fail, and public confidence in their institutions will be shattered.

This week, the Federal Reserve announced that it “will increase the size of two scheduled auctions of emergency loans by 50 percent to $30 billion as part of a global attempt by central bankers to restore faith in the money markets.” (AP) In other words, the Fed will provide an even bigger begging bowl to prop up the banks to maintain the appearance of solvency. It is an utter sham.

Inflation vs. Deflation

The size and scale of the approaching recession is impossible to forecast. The real estate and stock markets will undoubtedly see trillions of dollars in losses, but what about the estimated $300 trillion dollars of derivatives, credit default swaps and other abstruse counterparty options? Will the global economy freeze up when that ocean of cyber-capital suddenly evaporates? Will that virtual wealth simply vanish into the ether when the underlying assets (CDOs, MBSs, ABCP) are downgraded to pennies on the dollar, or when the number of home foreclosures catapults into the millions, or when the dollar slips to a fraction of its current value? No one really knows.

But Atlanta Fed President Dennis Lockhart summarized what we can expect in a speech he gave last week titled “The Economy in 2008.” He said:

“A sober assessment of risks must take account of the possibility of protracted financial market instability together with weakening housing prices, volatile and high energy prices, continued dollar depreciation, and elevated inflation.”


What the upcoming recession “will look like” has been the topic of a fierce debate on the Internet. Everyone seems to agree that this is not a typical economic downturn resulting from overproduction, under-consumption or malinvestment. Rather, it is the crashing of humongous equity bubbles that were generated by the Fed’s abusive expansion of credit and the unprecedented proliferation of opaque structured-debt instruments. Many believe that the unwinding of these bubbles will trigger a round of hyperinflation which is already evident in soaring food, energy and health care costs. These prices are bound to increase substantially as the Fed continues to cut rates and further undermine the dollar.

But the real issue (it seems to me) is the unfathomable loss of market capitalization, the growing insolvency of maxed-out consumers, and the inability of the banks to freely extend credit to responsible loan applicants. These three things are likely to drag down all asset-classes, slow business activity to a crawl, and compel consumers to hoard rather than spend. The dollar will strengthen in a deflationary environment (if that is any consolation?).

Paul L. Kasriel, Sr. V.P. and Director of Economic Research at The Northern Trust Company answers some typical questions about deflation in a recent interview with economic guru Mike Shedlock (Mish):

Mish: Would you say that consumer debt in the US as opposed to the lack of consumer debt in Japan increases the deflationary pressures on the US economy?

Kasriel: Yes, absolutely. The latest figures that I have show that banks’ exposure to the mortgage market is at 62% of their total earnings assets, an all time high. If a prolonged housing bust ensues, banks could be in big trouble.

Mish: What if Bernanke cuts interest rates to 1 percent?

Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?

Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the Great Depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

Mish: How does inflation start and end?

Kasriel: Inflation starts with expansion of money and credit. Inflation ends when the central bank is no longer able or willing to extend credit and/or when consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense.

Mish: So when does it all end?

Kasriel: That is extremely difficult to project. If the current housing recession were to turn into a housing depression, leading to massive mortgage defaults, it could end. Alternatively, if there were a run on the dollar in the foreign exchange market, price inflation could spike up and the Fed would have no choice but to raise interest rates aggressively. Given the record leverage in the U.S. economy, the rise in interest rates would prompt large scale bankruptcies. These are the two “checkmate” scenarios that come to mind. (read the whole interview here)

Summary: When banks don’t lend and consumers don’t borrow; the economy crashes. End of story. The whole system is predicated on the prudent use of credit. That system is now in terminal distress. Everyone to the bunkers.

Perhaps the whole “inflation-deflation” debate is academic. The real issue is the length and severity of the impending recession. That’s what we really want to know. And how many people will needlessly suffer.

Mike Whitney lives in Washington state. He can be reached at: Read other articles by Mike.

24 comments on this article so far ...

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  1. Gary Corseri said on January 11th, 2008 at 1:28pm #

    One wants to dismiss Mike Whitney as some kind of alarmist, but one had better not.

    I’ve been reading Whitney for some years on the Web, and I think he’s the best Web economist we’ve got. Save Krugman for your subway ride, read the Financial Times for show at the office–but save Whitney for serious contemplation–and, just now, lamenting!

    Here’s the consequence of the Reagan Revolution of deregulation and Greenspan’s pumped-up monetary policies of the 90’s: banks extending dubious credit lines to ill-informed home-buyers, then bundling and packiging their bad loans in collateral debt obligations sold to hedge funds and other investors under such opaque and complicated wrapping it will take years to determine who’s got what. Meantime, that sinking feeling in the pit of your stomach starts to feel like hunger and panic as you realize the land of the free ain’t so free and you just lost your home in the home of the brave.

    But things get worse: we’ve got a political-socio system that can’t or won’t deal with economic realities. We’ve been palming off our credit problems to the Chinese and Japanese and they’ve got their own problems and are getting a bit antsy about ours. President Bozo is off in lala land dreaming of his legacy while his tax cuts and military adventurism will continue to bleed us for decades to come. As this young century grinds on, we’d better try to establish a bit of level-headedness into the world system if we don’t want the whole enterprise to grind into mush.

    Whitney has sounded the tocsin before–and he’s been right-on. Unlike most politicians and pundits, he doesn’t offer easy answers or saccharine solutions. If we know something about what lies down the road, we can check the brakes, put on the high beams and better prepare. Sentinels like Whitney are worth their weight in gold–even at today’s prices!

  2. Donald Hawkins said on January 11th, 2008 at 4:21pm #

    You know that whole keeping up with the Joneses theory? I knew it was just that a theory.

  3. Renegade said on January 12th, 2008 at 1:28am #

    Excerpt from today’s edition of The World Socialist Web Site:

    “The implications of the financial crisis for ordinary Americans was suggested by the announcement by Moody’s on Thursday that it would reduce the United States government’s credit rating within the next ten years unless deficits in such entitlement programs of Medicare and Medicaid were sharply reduced. This statement could be described as an injunction from Wall Street to the two big business parties and their presidential candidates to impose drastic cuts in benefits.

    “It underscores that the American ruling elite will respond to the economic crisis by seeking to place the burden of its economic problems—fueled by the speculative mania of Wall Street investors—upon the backs of working people.”

    Here’s the complete article

    US Federal Reserve chairman warns of recession danger, promises more rate cuts
    By Andre Damon and Joe Kay
    12 January 2008

  4. Doug Page said on January 12th, 2008 at 6:11am #

    Mike seems “right on” to me, but even Mike ignores Henry Ford’s 1920s lesson to Americans: “you have to pay your employees enough so that they can afford to buy new Fords.” Nobody talks about this, not even Mike. It simply makes no difference that consumers will not borrow and banks will not lend, if the consumer has no job. Or has a very low paying survival job. American consumers are already maxed out on credit. So what difference does it make that they cannot or will not borrow even more? The real question is: How can we organize so that we can demand that we be paid adequately? Somehow money must be placed in the hands of us citizens so that we can buy. (Even this ignores the problem that the planet is finite and can stand not more “progress” and consumption.) Politicians, bought and paid for by the richest 1% are unlikely to place money in our hands unless we compel it somehow. Could we all possibly join together in a new organization? Something like “We the People?” It may be that capitalism in its present form cannot be salvaged.
    Doug Page, Tucson, AZ ten.knilhtraenull@2egapguod

  5. Donald Hawkins said on January 12th, 2008 at 9:41am #

    Hell let’s go for it. Just on the off chance that climate change is as serious as most of the World’s scientists say what should happen to slow this problem down. The IPCC said by 2015 we need to keep CO 2 levels at today’s level. 386PPM right now the most in 650,000 years and the changes to this Planet we are now seeing. James Hansen just said that passing 350 PPM in CO 2 is not good as positive feedback is kicking in and this is moving way to fast. It’s not to late to slow this down but will take hard choices very hard choices. It is George Monbiot’s opinion that we need to cut the use of fossil fuels by just 100%. Is he right probably. Can it be done, yes that is where the very hard choices comes in. Mike just say that the economy is in trouble and to get the market and the economy back to a norm is not going to be easy. The people who run the show Worldwide will want to bring the economy back anyway they can and the hell with this little problem called climate change that many of the smartest minds on this Planet say is the number one problem we face. Can we change the thinking on the economy to go after climate change 100%. I don’t know? Let’s just say this summer should be an eye opener to say the least. The ice up North will probably melt to record levels again and drought Worldwide again big problem. Flooding in many parts of this Planet not fun and crops again bad shape that I might add is highly inflationary. Then we will all see those surprises that James Lovelock talked about when asked what is the biggest problem with climate change. I am like Lovelock it is not anymore the numbers or models it is what I see with my own eyes or read about the changes that can be seen. We have the technology right now to do this will it be used in the way that is needed to slow this down again I don’t know. This is a tuff one as the whole system is based on moving forward you know more cars more food more money more oil more gas more credit, Oops. It looks to me that to do this some people will make money but very little just break even would be good many will make nothing but that’s Ok in my book not because I hate rich people but if we don’t do this what happens. More of the same only it get’s worst every year until that moving forward part is academic. To me right now what I hear like well in the year 2028 China will have to replace all it’s old airlines, what. In the year 2028 if we don’t go for it I don’t think airlines will have much to do with it. My point to just throw these years around like we used to is well academic. Many people are facing this problem but the other side to the best I can tell are either listening to there own stuff or just don’t care. It can be done but change yes you could certainly say that.

  6. Deadbeat said on January 12th, 2008 at 11:43am #

    That’s right; the price of gas today is attributable to war, tax cuts and the relentless expansion of credit by the Federal Reserve — NOT OIL SHORTAGES!

    Finally Whitney provides an economic perspective that exposes the TRUTH about the current energy situation and disprove the rhetoric offered by the “left” that the war on Iraq was for oil. In previous articles he did advance the “war for oil”. It is nice to see that he’s come around.

    As I’ve stated here on DV, Hugo Chavez stated that he has enough oil for the next 200 years and has more reserves than Saudi Arabia. It is an extremely revealing how many on the “left” want to advance their particular policy agenda rather than adhere to ideology and principle to provide cogent analysis.

    Because Whitney analyzes the course of event from a rational economic perspective he cannot deny the irrefutable facts and deserves kudos for not trying to spin those facts into rhetoric.

    Clearly the war on Iraq was about the Zioncon agenda of using the U.S. military to advance Israeli hegemony. This has caused the huge deficit spending. According the War Resister League nearly 80% of the debt is due to currently and past military expenditures. Also because “entitlement” are put “on budget” it conceals the real underlying U.S. “operating” budget of huge deficit spending caused by military spending.
    Because of this arrangement, politician who talk about “balancing the budget” attempt to do this by cutting social spending and shift “entitlement” money into the operating budget. What MUST be called for is the REDUCTION of military spending.

    However now that the interest of military spending is intertwined with Zionism and the Israel Lobby, the demobilization of the anti-war movement by the left is helping to advance the current economic crisis.

    Rather than have analysis that honestly explain the the conditions of the political economy, the rhetoric we are getting from the left are diversionary and dishonest.

    Environmentalist shift the the focus of the problem to blame individual consumption and not look at military consumption and demand a cut to military spending. How ironic that paleo-conservative have been demanding cuts to military spending since the end of the Cold War.

    We have “Marxist” refusing to provide radical analysis of the influence of Zionism upon U.S. foreign policy and the overall political economy. Their failure to analyze the Lobby has led to a misdirected analysis of “U.S. Imperialism”. A proper analysis could lead to a mobilization for a boycott of Israel that would then incorporate an advocacy of the reduction of military spending. Had the left mounted a continuous challenge to the Lobby it could have confronted the anti-Arab racism which is the major thrust behind the “War on Terror”.

    Gary Corseri says…
    But things get worse: we’ve got a political-socio system that can’t or won’t deal with economic realities.

    That has been the thrust of my arguments here on DV. If the left cannot honestly articulate the socio-political situation and offer solution arising from proper analysis then there is no force to push the politicians. This was the heart of Nader’s criticism of the “left” who abandoned principles in 2004 . The “left” cowardice, its demobilization of the anti-war movement due to is unwillingness to confront Zionism, has abandon being the counterweight it needs to be to change and confront the current socio-political-economic order.

  7. Deadbeat said on January 12th, 2008 at 12:09pm #

    The way out of this mess is a combination of fiscal and monetary policies. Cutting interest rates and the decline of the dollar is not as bad and people think due to dollar hegemony.

    Fiscally, the U.S. needs to get out of Iraq and cut military spending. Military spending does not provide broad economic stimulus. Taxes must be raised on the rich and corporations. This will get the News media upset because the market will take a hit and the people who bring us the news are invested in the markets. However raising taxes on the rich and corporation will enable the government to finance and redistribute wealth without having to borrow funds.

    In addition the government needs to cut working class taxes and make the Income Tax more progressive on incomes over 200,000/yr and raise the Inheritance tax. Nader offered an excellent plan to eliminate Income taxes on everyone making less than 100,000/yr and for the government to charge a transaction tax on stock trades. That will curtail day-trading activity and promote investments.

    For the states there needs to be a restoration of Revenue Sharing.

    Re-install, Glass-Steagall and vigorously enforce Sherman Anti-Trust Laws. In other words, a complete undoing the Reagan counter-revolution/rollbacks that will get money and services directly onto the hand of the working class. Essentially a bottom-up economic stimulus. Clearly this will be resisted by the rich and most especially those that want to maintain the huge military expenditures.

    I also disagree with the traditional explanation of inflation. Inflation is not a bad thing. With growth there there will be inflation. Inflation should be kept at modest level. High level of inflation is attributed to the maldistribution of wealth and power. When you have oligopolies and live in a plutocratic society then all aspects of wages and prices are controlled by the few.

    The current crop of politicians cannot reverse the current trend therefore a grassroots movement is necessary to provide the power needed to alter this course.

  8. AJ Nasreddin said on January 12th, 2008 at 12:36pm #

    Two things I don’t get about people:

    1. How can you take all that coal and oil out of the ground – all that carbon that took millions, if not billions, of years to put there and not effect the climate. It seems like simple math.

    2. How can the government expect to keep printing dollars – and I mean they are printing millions, if not billions, of dollars and they still expect the dollar to have any value at all. It seems like simple math.

    My favorite economic news comes from:

    My favorite economists this month is:

    Check it out. These guys say we’re headed for dollar collapse.

  9. Donald Hawkins said on January 12th, 2008 at 2:19pm #

    Now in the coming years for a few people to use credit or the World economy’s as there own little piggy bank with this little problem called climate change thrown in is not going to work out well. Every situation has it’s own set of rules and regulations. With climate change to look at it as inconvenient, well in just a few years inconvenient doesn’t begin to explain it I just listened to John Edwards talk and if that is just not talk he understands the problem. Edwards said more than once that to slow a warming Planet will be as tuff or tuffer than World War Two. He’s right. To me policy makers the private sector all have to get on the same page. Somehow that will probably be the hardest part working together. It will happen hopefully before it’s to late.

  10. Deadbeat said on January 12th, 2008 at 2:51pm #

    To me policy makers the private sector all have to get on the same page. Somehow that will probably be the hardest part working together. It will happen hopefully before it’s to late.

    It’s not going to happen. It’ll be elites trying to convince other elites without mass participation. The only way to resolve this problem is through mass education and movement.

    The first place I’d start with is the reduction of military spending as that would free up money for the kind of societal restructuring that is needed.

  11. Donald Hawkins said on January 12th, 2008 at 3:05pm #

    Something I don’t get. We have maybe eight years to get very serious about climate change. Not talk action, change. A lot of us see injustice in many ways in this system to late we need to use the system we have now the best way to slow this down. We are out of time. Don’t think so just watch the next two summers. To fight this problem everything changes no way around that.

  12. Donald Hawkins said on January 12th, 2008 at 3:59pm #

    They want you to believe that climate change is to complex for a mere mortal to understand. The markets same thing. To do the science the research took years of hard work and some figuring by some very smart people. The data from this last summer was pretty much it. We are in big trouble and out of time. The markets the economy unless we take action now on climate change GDP what GDP. Oh yes they there it is again whoever they are could bring this back maybe one more time with BAU that is business as usually and then only down hill from there and they most of them know this. I think many think that technology will save us they would be right but not with business as usually. They want oil, gas, coal more cars that only get 29 MPG and on and on sorry it doesn’t work that way and that is the part that they can’t seem to get there heads around. So they believe there own stuff and want us to do the same. Sorry I unplugged a few years ago and although it is harder not to live in that dream World I think I’ll stay this way but remember it is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work… when you go to church… when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.

  13. Deadbeat said on January 12th, 2008 at 5:17pm #

    Something I don’t get. We have maybe eight years to get very serious about climate change.

    There force of capitalism, militarism, and exploitation really do not care about this timetable. They have the money to weather the weather. You have to convince the masses, especially the U.S. masses. However they are more focus on they day-to-day needs. Right now the masses want change but there is no programmatic plan being offered. Right now there is only “chicken little” rhetoric and what is need is a programmatic plan that can lead the masses in your direction.

    A plan to reduce military spending will resonate. Military consumption of oil and energy is extremely wasteful not only to the environment but to the economic needs of the nation. What you need is to weave your concern into the concerns of the masses. This is how you will build support. The environment is too important an issue to leave solely to the elites.

  14. Donald Hawkins said on January 12th, 2008 at 6:58pm #

    What you need is to weave your concern into the concerns of the masses. It’s the young people who will live in a very tuff World and it used to be the young who if I remember right helped to stop the war. Somehow to get that 5 million in front of the Capital. It’s the young who are idealistic that is just the way it goes and rightly so. Don’t get me wrong many of the people I see who are trying to get the word out are not young but somehow managed to hold on to that feeling. Not easy in today’s world. It is starting to change but time this time is what we don’t have

  15. Polack in Idaho said on January 12th, 2008 at 8:33pm #

    There is actually a rather simple (although far from easy) solution to the problems of food shortage, poverty, climate change, and global recession, but it would require a major effort of will and a tremendous change of attitude. US can close half of foreign military bases, eliminate spending on futuristic senseless weapons, etc., and invest freed cash and assets into building de-salinization plants, exploiting tropical sun power, on African coast (perhaps other powers would pitch in as well). With a modicum of irrigation, starting from the edges of Sahara desert, it would be possible to generate a self-sustaining expansion of plant cover – that will become able, at some point, to hold ground water, and generate rains. Once the self-propelling expansion of plants begins in earnest, carbon dioxide level will start dropping – nothing absorbs carbon as efficiently as young trees. It would be up to African states to decide how this reclaimed green territory, but maybe they will be able to work out some arrangement – and if not, carbon will be sequestered anyway. The whole thing would require heads of states and leading politicians to espouse some mature and level-headed thinking – but who knows, if things get much worse, maybe – just maybe – they will be forced to acknowledge reality, at least to an extent sufficient to do something sensible, for a change… They will not be able to rule by their smoke and mirrors MUCH longer – the reality has a way of asserting itself.

  16. Scott Lamont said on January 13th, 2008 at 12:46am #

    One thing that I don’t quite agree with Mike on is that there is no oil shortage. Every indication is that we are at a plateau in daily oil production and have been since 2004, which may represent peak oil having ALREADY occurred. The Saudis keep saying they are going to raise production, then keep missing their targets, and they are the main ‘swing’ producer. I don’t know what Hugo Chavez is smoking, but they sure as hell don’t have 200+ years of oil in the ground that can be meaningfully recovered. There are real constraints in energy production and distribution that will drive costs relentlessly higher, and of course the poor will get it in the chops. Note that I didn’t say we are out of oil, or gas, or anything else, just that we can’t match supply and demand anymore. That oil is $100 per barrel or close to does have a lot to do with the crash in the dollar’s value, as Mike has said – which is yet another reason that producing countries may drop the dollar as the trade currency, to shore up the value of what they are being paid. That would likely result in a run on the dollar on the markets. Then the real fun will begin. However, everyone is looking at the peak cost of oil in terms of purchasing power (the crisis in 1973 would translate into roughly $103 per barrel in 2007 dollars), when for impact on the ordinary person, it has to be seen in proportion to what they earn and MUST spend in things like housing and food. With new efficiencies in energy use, we spend as little as a quarter of what we did on energy in a household compared to the last energy crisis (I did the math for our house, and we were at about 55% of what we would have spent in the mid 70’s). When energy costs go up, borrowing is cut off, food gets expensive, and jobs disappear, that is when we will relive the crisis, and it won’t really be about what the cost per barrel is. The sad thing is, that may be what is required to curb carbon output enough so that we can change our energy and economic system to something sustainable. I agree that the cost is being foisted on those of the working class by those who have benefited tremendously from the system as it has existed, but the only way I can see people getting angry enough to force politicians to do something not concocted by K Street is for exactly this sort of crisis to wake them out of complacency. And I have faith that ordinary people will come together and create real solutions. I hope we all buckle our seat belts for this ride.

  17. Donald Hawkins said on January 13th, 2008 at 10:04am # Go to this web site one of the best on China. Take a look at the picutres. In China probably two years water, food big problem. How is China different than the States 1.3 billion people. Here in the States crops will start to be a problem about the same amount of years two.

  18. Paul Becke said on January 17th, 2008 at 4:01pm #

    It’s them Commies what’s done it! I knew it wouldn’t be the likes of that nice Mr Milton Friedman and that nice Mr Pinochet and that nice Mr Greenspan what would cause all the economic ruin!

  19. Jerry T. said on January 17th, 2008 at 4:12pm #

    Medicare and Social Security funds better be on the lookout for massive cuts, too.

  20. Brian said on January 18th, 2008 at 11:23am #

    please read this: Gold will not go down.. the dollar index will collapse down to around .5200 .. how can gold go down if the dollar continues to weaken? also tax cuts have nothing to do with the price of oil at 99.00 It is the Wars and the outrages spending in washington District of Corruption…. the only Man running for President who has answers to these bad times is RON PAUL! please look into him!

  21. Danny Bruno said on January 18th, 2008 at 2:03pm #

    The price of real Estate has already declined by 30% or more is some areas Southern California. The Investment Bankers are unwilling to acknowledge the level of exposure.
    Real Estate should decline some 50% from either its 2005 high or its 2002 high I am not sure which. Either way there is still a long way to go.
    The same mistake wwere made in Japan, and to this day still exists in almost twenty years later Japanhas yet to recover.
    Banks refused to acknowledge their losses!
    I would venture to say, we are on the same path, a planned collapse is in the making to restructure the entire World Financial Markets!
    Gold prices will continue their upward trend but will drop once investors realize you cannot eat Gold.
    Food and Water are a much better bet!
    This problem is simply too large to be managed successfully!

  22. Dave P. said on January 22nd, 2008 at 6:12pm #

    This is why we need Ron Paul in the White House. He is the only one speaking about the printing of dollars, etc. No wonder the media, and GOP have been trying to shut him up!!! I can`t wait to see the debates on MSNBC on Thursday!

  23. charleydan said on August 9th, 2008 at 8:02pm #

    It amazes me that everyone wants to blame someone and seems to hold on to facts that please their agenda.

    The left wants to claim their 7 billion a year Human Services programs and the shortage of oil, and global warming.

    The right wants to claim their military at 6 billion a year and even now some of those on the right are voting big government and global hoax.

    Shortage of oil is only because free enterprise is not allowed. Iran has cut there oil production in hopes of removing the dollar and putting the Euro in place for oil exchange. Chavez seized the oil companies and despises the USA and has cut that production. Amercican oil is under moratorium, government restricted, and the list goes on.

    Global warming the hoax like so many scares before that is not human but nature caused. The latest global warming on trial in Britain and lost in there school system for teaching. Wake up and look at the otherside of the issue.

    The worst factor of all is Greenspan tinker with inflation for years and gave everybody the feeling that there is no reconciling. We all know that life always brings one back to reality.

    So if America does not cut expenditures and leave free enterprise adjust everything in its time. You can play and pay day always comes in a greater judgement.

    Good way to live it up and let your kids pay the consequences. And we call ourselves adults.

  24. Steve C said on October 7th, 2008 at 12:31am #

    “Perhaps the whole “inflation-deflation” debate is academic. The real issue is the length and severity of the impending recession.”

    The inflation-deflation debate is not academic. It is essential that the current conditions be recognized as severe, explosive deflation. When this is recognized, the proper solution becomes clear: massive inflationary stimulus. With global evaporation of countless trillions of dollars of money, and a reversal of the usual money-creation process, it is essential that the Federal Reserve print and issue vast amounts of currency. The multi-trillion dollar budget deficits that are essential at this time for fiscal stimulus are probably politically impossible.

    This situation is completely beyond McCain, who goes into conniptions over a few billion dollars. Intentionally going along with massive deficits will be a challenge for Obama