FDIC Prepayment Approved

The Board of Directors of the FDIC has approved the three-year prepayment of deposit insurance premiums. According to the FDIC's press release, the prepayment will amount to about $45 billion, to be collected between now and December 30th, 2009. A quote from the press release:

The pre-payment allows the FDIC to strengthen the cash position of the Deposit Insurance Fund (DIF)... While the prepayment will immediately improve the FDIC's liquidity, it will not have an impact on the fund balance.

To translate: the DIF's present balance is more or less zero, and the $45 billion is going to be shovelled out the door very quickly indeed. If the FDIC's bank closures cost around $1 billion per week, we fully expect this prepayment will be burned through in about 45 weeks or so. At that point, the FDIC will have its bank against the wall: it will have no further regular income from assessments until 2013, and 'special assessments' will become quickly onerous to a failing banking system. When that happens, the FDIC will have to either tap its lines of credit, or look for a direct bailout from the Federal Reserve or the U.S. Treasury.

But at any rate, we're pleased to introduce the Cash Burn-Through Meter; you will find it on the left, at the top of the menus. We will start the Meter at $45 billion, and with every week's closures we will subtract that value from the total prepayment. When it reaches zero we will buy a bottle of champagne.

October Credit Card Collapse Report

It has been a while since we provided an update to the story of the great credit-card pay-down. According to Federal Reserve data on US household revolving debt, consumer revolving loan (mostly credit cards) balances have declined 9.17% from year-end 2008 through August. This represents an annual rate of - 14%.

Given the high credit card delinquency rates lenders are suffering (5% at last report), much of this balance decline can probably be chalked up to charge-offs. This implies households are not (contrary to popular opinion) actually paying down their debts to any great degree. In the aggregate, non-defaulting households are actually only gradually reducing their debt level. Since we have direct knowledge that at least some people really are paying down their debts furiously, this means others are getting in deeper.

The tenacity of the credit card balances could offer alternate interpretations. It is possible that household finances are in OK shape, and that people are confident about their prospects for the future. On the other hand, it could be that many, many people are desperate for funds to pay the bills, and thus borrowing (instead of cutting spending) in the face of declining income.

Since we opine that we are in a Depression - one of the defining characteristics of which is declining income, we favour the second interpretation. If true, this bodes very ill for the profligate households, and not so good for the rest of us in the months ahead.

Commercial Credit Collapse

Commercial credit is the money businesses borrow to fund their operations on a short term basis. Large corporations use the commercial paper market and bank loans. Smaller companies use loans from banks and finance companies. In the USA, the availability of commercial credit is contracting violently across the board. In our opinion, this portends an acceleration of the Depression, as employers find it more difficult to fund any sort of expansion - or even maintain their operations.

The commercial paper market has shrunk by 28 percent in the last three months according to this Bloomberg report. The entire market has shrunk by over half since its peak two years ago.

Bank lending is also falling. Since the beginning of the year, commercial and industrial loans of commercial banks have fallen by about 7% according to Federal Reserve Bank data.

Finally, lending by finance companies is also collapsing. According to data from the Federal Reserve Bank, business lending by finance companies had fallen about 6% from the beginning of the year to April. This figure will get substantially worse with the imminent demise of CIT, a large finance company.

Taken as a whole, a picture of severe credit contraction emerges. Both lenders and borrowers are losing en masse the capacity to lend or borrow due to deteriorating finances. Even sound borrowers may have little reason to borrow under the current circumstances and would just pay off loans as they come due. In any case, the result will be continued economic contraction.

U.S. Monetary Policy Does Not Make a Strong Dollar

U.S. Secretary of Treasury Timothy Geithner recently stated that: "Given the dollar’s role in the international financial system and the significant impact of the U.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play... The policies of the United States are designed to lay the conditions for a strong dollar and more stability in the international monetary system."

Say what, Mr. Secretary?

There is a serious disconnect in Mr. Geithner's reasoning in this statement. Although it is true that the U.S. Dollar has been comparatively strong in recent days, we hazard to say that this is probably a temporary state of affairs. As ShadowStats.com shows, the Dollar has experienced a relative peak, but is is, as of July 6th, in a steep decline. Additionally, deflationary trends to the tune of about 2% has apparently developed, rendering every dollar in circulation slightly more powerful as time goes on.

However, we posit the exchange strength of the Dollar is liminal; the currency markets are probably changing their minds about the relative value of the Dollar. More telling, though, is the continuing growth of the M1 Money Supply - physical cash and currency in chequeing accounts. That section of the Money Supply is increasing at a whopping 18% annualised... and shows no sign of slowing.

It is that growth which will, eventually, kill the U.S. Dollar, and destroy the wealth of any holders of Dollar-denominated financial instruments (be they savings bonds or Treasury Bills). The Federal Reserve is desperate to prevent any deflation whatsoever, as deflation makes debts all the more painful to the indebited - think the U.S. Government. So, the Fed is pumping up M1 as fast as the printers can press new currency, in the attempt to stoke inflation and thus lessen the pain for the indebited.

We have faith in the Federal Reserve. They may be bumbling and rather silly, but we believe they'll get this stoking-inflation thing down pat. The question, in our minds, is not if, but when. When will the inflation rate rise to once again destroy purchasing power at a rate the Fed finds agreeable?

When that finally happens, and happen we think it shall, Mr. Geithner's "strong dollar" talk will at last be seen as the hot air it really is. We suspect that many investors in U.S. Government debt will see the handwriting on the wall at some point, but there will be many, many investors who will be horribly damaged by the looming inflation. We also suspect those investors will be none too happy with the United States, nor with Mr. Geithner. Hopefully he has his ranch in Argentina already bought and paid for...

July Credit Card Collapse Report

In last month's report, we expected to see rising charge-offs on bank's credit card receivables as more of their shrinking portfolios were dodgy. Sure enough, when the big banks reported their default rates last month, the results were impressive.

Bank of America - the USA's largest bank - reported a 12.5% default rate in May, up from 10.47% in April. This is a 19% increase in one month! The default rate is also perilously close to the interest earned on all credit card balances (according to the Federal Reserve at last report, 13.54% on all credit card accounts with balances nationally). Effectively, credit cards have become a money-losing operation for the Bank of America. We expect, over the coming months, that credit card defaults will destroy all the capital which the Bank of America allocated to its credit card operation - and then some. Other credit card lenders are suffering the same fate.

Speaking of the Federal Reserve, their most recent report on consumer credit shows a continuing and, to us, unsurprising decline in revolving loans. The drop in April was revised substantially upwards (as we predicted), now equivalent to a 28% annual rate of decline. The May preliminary data shows a moderating of the decline - which we consider to be highly suspicious. We expect next month's revisions to actually show an acceleration - as default induced charge-offs increase, and paydowns by still-solvent borrowers continue. Stay tuned...

Mistaking Economic Depression for Deflation

There is a great debate raging in the blogosphere at present, over whether or not the United States is undergoing deflation. It is a question to which there is no easy answer, as systems like the United States' economy are incredibly complex. We personally feel that the U.S. is undergoing deflationary trends, which will almost certainly turn into significant inflation at some point in the future, but we don't think that deflation proper is underway.

Let us explain what we mean by deflationary trends: certain things are getting cheaper. We've been seeing some great deals on meat and meat 'products' recently, and our local grocery is carrying organically-raised medium eggs for 97 cents a dozen. Some other food products have also gotten cheaper, like the roasted almonds we are partial to, but for the most part our food bills have remained relatively stable.

In short, deflationary trends are scattered drops in price within a broader niche of the economy, but not the entire niche experiencing overall drops in prices. In proper deflation, one could expect all prices within an effected niche to experience reductions, caused by a concurrent rise in the purchasing power of one's currency. Although our perceptions of the situation are indeed limited - as we are but one person - we have not seen evidence of an across-the-board increase in the purchasing power of our U.S. dollars.

What we expect the 'deflation' that commentators see is the effects of the 2007 Depression. Those eggs we mentioned are probably not getting 'cheaper' per se, but rather the company which owns the chickens which lay the eggs are selling said eggs at liquidation prices. We posit the same goes for meat and meat 'product' producers as well.

To put the situation in more general terms, the 2007 Depression is exerting enormous pressure on the entire economy, and certain companies are moving faster than others in order to liquidate excess products. This will create the appearance of honest-to-goodness deflation, when the situation is perhaps more along the lines of a liquidation of certain niches or industries. Muddying the waters, as it were, are the concurrent bursting of various bubbles (such as housing prices, automobile manufacturers, et cetera), the products of which are dropping rapidly in value.

To conclude, the U.S. economy is cratering, pure and simple. The prices which one may expect to find on products one wishes to buy may fall to some degree or other, but we don't expect to see full-on deflation in this Depression. Rather, and as long as the economy catastrophises faster than money creation by the Federal Reserve, we posit that prices will stay relatively the same. The exciting part will come sometime in the future, when the economy completes its face-plant; it will be at that point when the Fed's money-printing will come home to roost.

Incredible Shrinking Home Equity

Among other horrors, the Federal Reserve reported today, first quarter homeowners' equity is down to 41.4% of home value.

As we have stated repeatedly, about one-third of homeowners own their houses free-and-clear. This means that the 58.6% of aggregate house value that covers all mortgages falls to the two-thirds with mortgages. Running through a bit of algebra, we get to the point that homeowners with mortgages only have 12% equity.

In a world of crashing real-estate 12% is not a lot to fall further from the end of March. Given that prices are falling in something like a 20% annual pace, 12% is just a matter of months.

So, we hereby predict, by the end of 2009 - give or take a few months - homeowners with mortgages will be, in the aggregate, underwater - owing more than their houses are worth. Naturally, because of regional variations and the amount of mortgage debt people carry, many homeowners will be very, very underwater, though some won't be at all.

We further predict that most of the homeowners who are very, very underwater will default one way or another, as will quite a few of those who are merely very underwater. Among the many consequences of this will be the holders of the mortgages will lose most of their investment. This will be very bad for banks, especially the government-owned behemoths, Fannie Mae and Freddie Mac.

Bank losses will begin to mushroom to the tune of hundreds of billions, if not trillions. Another stock market crash will likely be part of the picture as the reality of this situation sinks in to the investing public. This all beginning in months, if we have our sums right.

June Credit Card Collapse Report

On June 5, the Federal Reserve released its monthly report on consumer credit. The first quarter drop in revolving credit was revised from 60.4 billion to 66 billion. The preliminary April data shows a 3.4 billion drop. So far this year the rate of decline is 7%, or 21% annualised. We expect as April data is revised, this rate will actually be considerably higher.

If the flow of credit is indeed the "life blood of the economy," as Mr. Obama states, then the USA has arterial sclerosis. Our opinion, of course, is entirely the opposite: the economy can be quite fine without consumer credit. The World got along fine for thousands of years without consumer credit and may again.

The flow of credit is only the life blood of banking profits. American households will of necessity become thrifty in the years ahead or face ruin. Banks will be increasingly cut off from the once fat profits of consumer lending. Their rump loan portfolios will soon turn into capital-annihilating loss generators.

It's a little known fact of lending that you can cover up dodgy portfolios by expanding quickly. Since loans sour as they age, if you keep a loan portfolio new (by always adding more and more accounts), your percentage of delinquent loans will seem low. If your growth stops, or even reverses, your deadbeats can't be hidden so neatly.

The result of that phenomenon as it applies to the current situation is that bank losses on their consumer credit book should begin to really mushroom over the next few months. Don't buy the media announcement of 'unexpected' increases in credit card delinquencies. The banks know its coming, but you read it here first.

12 Percent Behind = Banking System is Toast

The US Mortgage Bankers Association reported a record 12 percent of the Nation's homeowners with mortgages are delinquent or in foreclosure. The article referenced does not give dollar amounts, but we will.

According to the Federal Reserve Bank, at year-end 2008, mortgages on 1-4 family units were 11 trillion dollars. Thus 12% times 11 trillion = 1 trillion, 320 billion.

Problem number one: delinquent mortgages aren't really worth any where near their nominal balances. A lot of them will go into foreclosure.

Problem number two: foreclosed houses aren't worth very much. Sometimes they become a liability to the bank.

Problem number three: there is a terrific glut of housing on the market right now. Throwing millions of foreclosed houses onto the market is like, well, putting gasoline on a fire. House prices will crash, and crash hard. Falling prices will create the bad sort of positive feedback in which more homeowners will 'walk away' before their financial position gets even worse.

Problem number four: commercial mortgages, credit cards, consumer loans, and business loans will be no help to banks. They are likely to perform as badly as home mortgages, or worse.

The real world is giving the US banking system a 'stress test' far worse than the coddlers in Washington could ever dream of. Most banks will fail, and resolving the failures through the FDIC will be a lot for that agency to digest. Even now, it is moving through the worst of the worst somewhat slowly as its resources permit. The sluggishness with which it is moving allows the financial rot to worsen and actually increases the ultimate cost to the taxpayer. (By the way, the slow pace of liquidations is a repeat of the lack of proper bank supervision which led up to the S&L fiasco some years back).

We expect the rot to get worse and worse until some sort of 'banking holiday' is declared to perform mass triage on the system. The sooner the reorganisation happens the better for everyone, but we expect that to be put off for a couple of years yet.

Credit Card Collapse Report

With today's post we are introducing what we expect to be a recurring report on consumer credit in the USA.

On May 7, the Federal Reserve issued its monthly report on consumer credit. Going beyond the massaged, 'seasonally adjusted' figures, there are some impressive numbers. Apparently in the first quarter of 2009, revolving credit balances - mostly credit cards - fell $60.4 billion, approximately 6%.

This means that not only are people not taking on additional credit card debt, they are paying it off at a rapid rate. If this should continue as a trend, and there are at least two reasons to expect that it will, it will have a serious dampening effect on consumer and business spending.

The first reason to expect the credit card paydown to continue is that credit card issuers are cutting credit lines right and left. Even good customers who have always paid on time are finding letters in the mail informing them their lines have been reduced or their accounts closed altogether.

The second reason is the debtors themselves are feeling less inclined to be debtors. When one's income is declining or even just less certain, all debts become onerous.

It should also be mentioned that part of the decline in debt outstanding is due to writeoffs by lending institutions. These writeoffs also erode the lenders' capacity to issue new loans.

Las Vegas, NV: Bellweather of Doom

Our co-writer made a post a while back, laying out a brief case for the collapse of present valuations of American housing stock. He forecasted (and still forecasts) an estimated 87% drop in value for desirable, non-redundant living space, along with almost every mortgaged houseowner ending up 'under water.'

According to the basic number we've seen bandied about, approximately two-thirds of all houseowners have mortgages. We can surmise, without too much imagination required, that if house prices do indeed plummet 87% or so, almost all of these mortgaged houseowners will be 'under water,' and will likely default on their debt. This will of course create an enormous glut on the real estate market, and devastate the debt-addicted banking system of the United States, and indeed the world.

Our co-writer is now partly vindicated, by the original Icon of Sin: Las Vegas, Nevada. In a recent Wall Street Journal article, a study shows that 67.2% of all homes in Las Vegas have "negative equity;" or, in the common tongue, the owners owe more on their mortgage than the house is presently valued. We point out that 67.2% is right around two-thirds of all houses (and thus virtually every owner with a mortgage is 'under water'); Las Vegas is now the bellweather of the United States housing collapse.

It is difficult - if not impossible - to put a time-frame on this collapse, but we are confident that said collapse is both in progress, and cannot be halted in real terms. However, the Federal Reserve's attempts to rekindle inflation will likely succeed, and when that day comes some of these 'under water' houseowners will at least have the succor of having their nominal property values resume an upwards march. That will be a phyrric victory, but we suspect that realisation will take some time to dawn on the average American citizen.

Is the FDIC Inept, Panicked, or Corrupt?

We looked over the latest bank closures by the Federal Deposit Insurance Corporation (FDIC), and we noted with some alarm how costly these closures were. Putting the cost to the FDIC in terms of losses/assets, the four closures (as of 25/04/09) were insolvent to the tune of 26% to 39% of assets! This level of insolvency is horrible, and marks an incredible deterioration of the health of the United States' banking system. Below is a chart of the losses/assets of all bank closures since December 2007 to April 25, 2009(the beginning of the Depression). We used the data from the FDIC's failed bank list to construct the graph.
Needless to say, the closures by the FDIC are not getting better; we suppose the bright side it that they're not getting worse, either.

Let's look at the hard data: Total assets of all FDIC-failed banks, December 2007 to April 25 2009, and including Washington Mutual (WaMu), in millions, is $388,388.03 - that's $388,388,030,000. The cost to the FDIC for these failures was $18,783.20, in millions. That's a losses/assets percentage of 4.84%; not bad, we suppose...

But WaMu didn't cost the FDIC anything, so let's throw out their assets ($307,000 in millions) from the equations. Revised total assets becomes a modest $81,388.08 in millions, while the cost to the FDIC stays $18,783.20. Sitting down, dear Reader? The losses/assets percentage on these numbers is a whopping 23.08%! On average, approximately a full quarter of every failed bank's assets are trash, and if the latest percentages continue to get higher, that number will be getting much, much worse.

The horrifying insolvency of these FDIC-failed banks begs the question in our post's title: is the FDIC inept, panicked, or corrupt? Bear with us as we ponder each in turn.

All jokes about the Government aside, it is quite possible that the FDIC's leadership is indeed inept. Many other policy-makers in the U.S. Government are showing themselves to be very inept, so we can't rule out the FDIC. However, we don't feel the FDIC is necessarily inept in the classic sense; we posit the FDIC is instead following in the footsteps of the Federal Savings and Loan Insurance Corporation. Simply put, the FSLIC sat on its hands at the beginning of the Savings and Loan Crisis, hoping that the situation with the thrifts would solve itself. Instead, the situation deteriorated and the FSLIC itself went insolvent, and its mission was absorbed by the FDIC. We would be hardly surprised of the FDIC is likewise hoping that the banks will heal themselves. Perhaps by sitting on its hands, the FDIC is rendering itself insolvent, and therefore dooming its mission to be absorbed by a bigger Government agency... oh, perhaps the Federal Reserve.

Instead of inept, let us assume that the FDIC is, instead in a panic. The leadership knows that the greater part of the U.S. banking system is horrifyingly insolvent. They also know that the FDIC insurance fund is completely unable to absorb the losses incurred from fast and hard failures of all the insolvent banks in the U.S. (i.e. most of them). So, instead of having a proactive plan for dealing with the major problems within the banking system, the FDIC instead is reactively lurching from one super-insolvent bank to another with no cohesive plan of attack - or, indeed, of how to pay for all the damage. This panic is only allowing the problems in the banking system to fester, thereby creating even bigger problems down the road. Those could come sooner than anyone might imagine...

Finally, let's assume that the FDIC is corrupt. In this situation, the FDIC's actions are planned and carefully implemented. They are starting with the smallest banks in the nation, and slowly forcing mergers into larger ones, selling off the good assets to the bigger banks and holding the bad assets on its books. As the banking crisis continues, the FDIC will work its way up the food chain, successively cleaning out the banks, until the only remaining banks are the nineteen (or so) super-huge money-centre banks. At this point, the best assets in the U.S. will be in the hands of quasi-private banks, while the worst will be on the books of the Federal Government. Simply put, all losses will be paid for by the American Citizenry, while all potential profits will accrue to the super-huge banks.

Frankly, we can see aspects of all three possibilities at work; any and all combinations thereof would not surprise us. The big question in our mind is, which one is dominant?

Approaching the 10% Decline

Although there is no single, consensus definition of what a Depression is, one widely accepted marker is a 10% contraction in the GDP. So far, by official numbers, this is still a ways off in most countries. But it is getting harder to fudge away the increasingly obvious.

March retail sales in the USA were reported yesterday having declined 9.4% year-over-year. This is now the fourth month in a row of sales declines in the vicinity of 9% year-over-year. Granted retail sales aren't the whole economy, but they are a fair proxy for the economy.

We don't expect this crash level of sales declines to continue - although it is possible - but it won't take too much longer for this shrinkage to put the economy into deeply red territory for the year. As we have stated before, we expect the Depression to continue for years. Even if there are a number of "growth quarters" sprinkled here and there (and we do expect them), the contraction should prove relentless.

For some time forward there will be a recovery bias to all reports about the economy. The drivel coming out of the Federal Reserve System is especially illustrative. It is going to take a while for it to sink in that things are bad, getting worse, and not going to recovery quickly.

The Government is Flailing

It looks like an increasing possibility that Mr. Timothy Geithner, U.S. Treasury Secretary, may be the first major sacrifice on the Obama Administration's altar of Grand, Empty Gestures. The more President Obama has to say he fully supports Secretary Geithner, and that a resignation of the latter would not be accepted by the former, the more we wonder what is really going on. To put it simply, me thinks he protests too much.

Admittedly, Secretary Geithner's track record has not been stellar. The last time he announced a "sweeping regulatory change," the stock market promptly went into a nose-dive. The destructive qualities of what the Secretary is planning now is breathtaking: who knows what sort of vague, wishy-washy claptrap he might release? Who knows how badly the stock market may crash this time?

"Fix the markets!" the rabble cries. "Stop the corporate bonuses!"

We don't quite understand why, with all this free money bandied about, anyone is getting upset over such a little thing like bonuses. The amount of money concerned is pitifully small, compared to the trillions which the Government and the Federal Reserve is pouring out.

Still, the Government is putting on such a show over corporate bonuses. The U.S. House of Representatives has approved a 90% tax on that sort of thing, applying to "high-income employees by companies getting big government bailouts." The furor over the AIG bonuses is frothing royally, even as it becomes clear that the Treasury approved these bonuses. The solemn ritual of lip-service to oversight, Government thrift, and responsible bailout-ing continues...

It seems clear to us that both the pointless furor over bonuses, and the ongoing loss of confidence in the Treasury Secretary, is part of a larger problem in the U.S. Government: a complete, utter lack of planning and foresight. It's painfully obvious that the Obama Administration is simply throwing money around in bailout after bailout, on a completely ad hoc basis. For instance, the $9.7 trillion pledged to bailouts (and the like) would have paid off 90% of all mortgages in the United States.

But alas, such a simple, child-like solution is apparently beyond the Government's collective mental capacity. Instead, Uncle Sam stands out on the street-corners like a prostitute, hawking his wares to hedge fund managers and bank CEOs. "Hey, you! Yeah, you. You need money? Here, take as much as you want," he shrieks...

The Federal Reserve as Superhero?

The United States has a very long tradition of superhero worship. The ongoing popularity of superhero movies, such as The Watchmen and Hancock seems to justify what we see. There is, perhaps, nothing that the average American audience likes more than a plain schmoe who's a superhero and a regular guy at the same time.

In the past, we've seem to remember that the Federal Reserve was a plain and relatively straightforward organisation. Even under the much-maligned Sir Alan Greenspan, the Fed was pretty vanilla. No off-balance-sheet loan programs, no toxic mortgage debt... in a word, no mystery whatsoever.

Then Mr. Ben Bernanke came along, and then the crash in October 2008 occurred, and suddenly the Federal Reserve is looking even spookier than Goldman Sachs. Now, far from being a stoic, conservative organ of finance, the Fed has turned itself into a front-line warrior, running around like a berserker of old with monetary axes in each hand. Yet, it still lays claim on being a classic, responsible central bank.

Take, for instance, the recent news that the Fed will buy $300 billion of U.S. long-term bonds, as well as $750 billion of mortgage-backed securities. This, added to about $1.25 trillion of toxic assets with unknown -- probably zero -- value, around $1 trillion of government agency debt, and $2 trillion's worth of mystery, creates a balance sheet that would make a hedge-fund manager blanche.

Perhaps the cultural idiom of hero worship has gone to Mr. Ben Bernanke's head. Maybe he sees himself as the mighty superhero Helicopter Ben, successfully fighting off the minions of the evil genius, Deflation Man. We don't know for certain, since we've never met the man, but he strikes us as just an academic schmoe with delusions of grandeur. Whatever the case, though, Mr. Bernanke is putting what's left of financial stability in the United States at risk with his heroics.

Growth in Household Debt: Paused or Ended?

In the United States, the last 60 years have been marked by the continuous expansion of household debt: mortgages, car loans, student loans, credit cards, and so forth. In the fourth quarter of last year, this party came to an end. In spite of Federal Government and Federal Reserve efforts to expand lending, more loans were paid off than taken on.

We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.

If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.

We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.

So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.

Think the Fed is Out of Ammo? Think Again

The Federal Reserve has been publicly clamouring about how they've used up their "conventional monetary firepower." It seems that the media is rather confused about the situation: they apparently think that interest rates, quantitative easing, and balance sheet debauchery are the only tricks that the Fed has to play with. Oh, how wrong they are. There are "still arrows left in the quiver."

At this point, we'd like to assure you, dear Reader, that if what we write about seems familiar, it is. Mr. Gideon Gono of the Reserve Bank of Zimbabwe has played with most of them... but not all. He didn't use every little trick, because he was trying to contain inflation. The Federal Reserve, on the other hand, is desperate to stoke the flames of buying power destruction.

In May 2003, Federal Reserve Bank of Dallas Vice President Evan Koenig and Senior Economist Jim Dolmas wrote a piece titled Monetary Policy in a Zero-Interest-Rate Economy. Read it, and read it well, dear Reader. This will be the game plan of the Federal Reserve in the future... perhaps even the near future.

We will glide over the more pedestrian methods that Messrs. Koenig and Dolmas list, and instead focus on two of the most powerful tools they discuss: taxing bank deposits, and making currency have an expiry date. If and when the occasion arises, we posit that the two tools will be applied simultaneously. The why is easily demonstrated:

Would you, dear Reader, keep your money in a bank account if your savings and chequing accounts suffer a -1% or -2% monthly tax? No, you'd pull your money right out of those accounts and stuff them in a mattress, the same as every other citizen or business. However, the physical money you get from the bank will have a little stamp on it, saying something like 'legal tender until July 1st, 2011.' You're damned if you keep your money on account at a bank, and you're damned if you sleep on $100 bills at night.

So... the only thing you can do is spend, spend, spend. The Fed will see the velocity of money shoot to the moon, and everything will seem better - for a while. But these policies -- along with all the other ones the piece listed -- are ultimately destructive beyond belief. The economy would be gutted, the U.S. Dollar would become worth more as a heat source than as a currency.

But hey! At least Mr. Ben Bernanke can get his inflation. Unfortunately, he will get far more than he bargained for.

Energy Independence the Hard Way, Part 1

The Year of Our Depression 2008 is quickly grinding towards a smouldering ruin of finality, and already we sense that there is great hope that 2009 will be the turn-around year. Great faith seems to be place in President-elect Barack Obama's multi-hundred-billion-dollar make-work programmes. It seems to us that Mr. Obama is considered the man who can lead this nation to a better future.

Mr. Obama's transition website paints a starry, starry picture of energy independence: 1 million plug-in hybrids purring about by 2015; 10% renewable energy by 2012; 5 million jobs and $150 bullion over ten years. How lovely, but we point out to the President-elect that $150 billion is chump change; the Federal Reserve has 'injected' over $1 trillion, and that hasn't done squat. What can a measly $150 billion do for energy?

We posit a different scenario for energy independence, although it won't be appearing on change.gov anytime soon. In a decade, the government will have spent more money than we have the vocabulary to describe - but all for naught; infrastructure programmes will have been started, and abandoned. In essence, the United States will be so poor, its domestically-produced oil (currently about 25% of supply) will be all that is needed.

Cliffhanger? You bet. Part 2 tomorrow.

The Long, Dark Teatime of the Holidays

As we sit at the keyboard, the rest of the Western world kicks back and takes some time off. The news services grind slower than usual; reporters are having a little eggnog with their vodka. This makes us twitchy: some of the greatest political coups d'etat have occurred when the holiday spirit permeates the air...the long, dark teatime of the year. Take the Federal Reserve Act of 1913... it was passed under the cover of darkness, after the majority of Congress had left for their Yuletide cheer. Who knows? As we type, a financial Kristallnacht could be going on without the slightest publicity...

What news we do see, though, is rather grim: retail traffic is down 24% year-over-year; the commercial real estate industry is whining for its bailout; the National Retail Federation wants a three-day jubilee on sales taxes; local banks are getting some hog slop from TARP; GMAC met with the elves at the Federal Reserve and was magically made a bank.

We wonder about GMAC's new status as a bank holding company. This company is, quite simply, a failed arm of a failed company of a failed industry. Not our idea of a good investment of the people's tax-dollars, and surely even the government must realise this. The details, though, are interesting: General Motors has to reduce its holdings in GMAC from 49% to 10%; Cerberus Capital must reduce from 51% to 33%. The 57% difference goes to an unnamed, independent 'trustee.'

This has deep implications: GMAC is now eligible for its share of TARP-feed... but the Fed's terms effectively cut off GM from the benefits of the gravy train. Cerberus won't get much of the money either, since the lion's share is going... somewhere. Hmmm, we wonder where. Were we the betting sort, we might be feeling lucky and put money on a former investment bank with the initials G.S.

But yet, we're heard that things aren't so bad: Turkey's PM is telling us this whole thing is just in our head. This would be funny, if the situation weren't so tragic. To quote Queen Victoria, we are not amused.

Signs of Nonfunctional Markets

Free markets are supposed to be very efficient. The general law of supply and demand states that if people want something, the market will provide at the proper cost. This 'cost' includes, at the very least: the cost of the raw materials required; the cost of manufacturing; the cost of delivery to market. Profit usually sneaks in there somewhere, but profit itself is a type of cost. It should suffice to say that the cost of a desired item is typically reflective of the cost to make another, similar/identical item.

When the cost of an item goes below its replacement cost, any number of things may be happening: the market for the item may be saturated, and people don't want to buy anymore; the item might have been so utterly hideous that no one would pay money for it. Most pertinent to our article, though, is when people line up to buy the item, but there is none to be had at the market's price.

A good example of this is in the silver and gold markets. Presently, physical bullion commands a fairly respectable premium over the official market price. Those premiums represent a disconnect, and a rather serious one at that. Healthy demand exists for physical bullion -- perhaps even more than ever -- but that is a demand that cannot be filled based on the official market price. In essence, two markets have developed: the official and the real-world. This is a sign of a serious market break-down, one which will likely have some serious, lasting repercussions.

More than just the bullion markets have been effected, though. One can see a similar situation developing in the oil and natural gas market. The Federal Reserve's zero interest rate policy (ZIRP) is another good example of breakdown. No normal human being can borrow money even remotely close to the Fed's target rate of zero... but yet there it is. This is a disconnect of credit: the official market says no interest, the real-world market has other ideas. Further government intervention and manipulation in markets will result in similar breakdowns, especially as the 2007 Depression progresses.