Best of Bill Buckler, August 20, 2008 -
Commodities have tumbled 18 percent since their peak on July 3 on concerns a slowing global economy will reduce demand for raw materials.
The US Dollar has climbed 5 percent on the speculation that falling commodity prices will boost the world's largest economy. US credit markets have remained under stress even after the Fed cut its target rate seven times since last September from 5.25 percent to 2.00 percent. Since last December, says Bloomberg, the Fed has also cycled $US 2.58 TRILLION through US money markets. Gold has taken a pounding, especially in $US terms, as desperate cash seekers are selling their life vests to cope with a relentless deflation.
Distracting Attention Away From The Epicentre:
The epicentre is the US financial system. The issue is deflation in the US. Merrill Lynch has written down $US 46 Billion in asset values and sold $US 30.6 Billion in CDOs at 22 cents on the Dollar. Morgan Stanley has taken $US 14.4 Billion in write-downs on its mortgage related portfolio since the third quarter of 2007. Fannie Mae has slumped to a quarterly loss of $US 2.3 Billion and revealed that it set aside $US 5.3 Billion to cover credit losses over the three months to June. Freddie Mac, by its own admission, has a negative net worth! The latest reported net market value of its assets is negative $US 5.6 Billion. Shares of Fannie Mae have lost 86 percent over the past 12 months while shares of Freddie Mac have surrendered 91 percent. These plunging asset values are virulent deflation.
This is systemic, across the flagships of US finance. An avalanche of US bankruptcies is in the wings.
Deflation - Debt - And The US Debacle Ahead:
The internal American debt implosion is beginning to bite very hard. In the process, it is also deflating the American credit money system and piling even deeper losses on top of American lenders both big and small. Almost one-third of US homeowners who bought in the last five years now owe more on their mortgages than their properties are worth. Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners' negative equity. For those who bought at the 2006 peak of the US housing market, 45 percent are now underwater. If American household consumer debts of $US 2.6 TRILLION are added to American mortgage debts, the total reaches $US 14 TRILLION. To that can be added the act of Congress to increase the US national debt limit to $US 10.615 TRILLION and the $US 2.2 TRILLION in State and local US government debts. These debts, at all levels, are now being threatened by the deflating US credit money system. The size of the debts are not diminishing at all. But the ability to roll them over certainly is as lenders raise (or initiate) stricter credit standards.
A (Short) Digression On Deflation:
In any genuine monetary deflation, all prices fall. Where an inflation is an increase in the quantity of both money and credit, a deflation is the opposite. It is a situation where the quantity of money and credit contracts. Obviously, a contraction in the quantity of money and credit will leave the prices of some economic goods above their market clearing levels. That means that they will remain unsold until buyers are enticed by lower prices. Meanwhile, US home equity
credit lines are being cut.
JP Morgan Chase & Co., the second biggest US bank by market value after Bank of America Corp, has notified 150,000 customers about changes in their home equity lines of credit since March. In some cases, the credit lines have been reduced. In other cases they have been suspended. The changes affect about 15 percent of JP Morgan's home equity credit customers. Bank of America and Washington Mutual Inc. are among the other lenders that have frozen home equity credit lines this year. These credit lines are being cut as a result of economic goods failing to meet the real market clearing level. About 2.8 percent of all US homes for sale were vacant as of June 30, according to Census Bureau statistics. That's up 50 percent from three years ago, and is near historic highs. Here lies the heart of the debacle ahead.
A huge proportion of US home mortgage holders are looking at huge losses if they sell. But these people have a much easier way of getting out of the problem. They can simply hand the house keys - and the assured losses - back to their mortgage and home equity lenders. If and when this is done, the house and the loan standing against it which exceeds its value arrive on the balance sheet of the lender. Once that happens (and it is happening), these lenders had better have a big chunk of capital behind them or a direct line of credit with either Fannie or Freddie or even with the Fed. If they don't, they will not survive.
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