U.S. Economic Death Spiral Into the Second Great Depression

By: D_Sherman_Okst

Our economic death spiral into the Second Great Depression

Wracked up by both parties over many decades our debt has evolved into a yearly deficit that can no longer be serviced with tax revenue and borrowing.

To avoid default Ben Bernanke chose to monetize the un-payable portion of our deficit. Each month about 100 billion dollars are created out of thin air to cover our government’s bills.

This has set forth an unstoppable, self reinforcing, negative-feedback-loop whereby:

1. Debt monetization (printing money out of thin air to cover the portion of governments spending not satisfied by tax revenue and borrowing) reduces the value of the dollar.
2. The debt monetization triggers dollars to flow out of bonds and into commodities.
3. This increases demand, commodity prices rise.
4. As commodities make their way into the supply chains businesses and consumers realize higher prices.
5. Since globalization has caused wages to stagnate at 1970 levels, and with 23% unemployment, businesses try to eat increases, this in turn reduces hiring, causes layoffs and kills expansion.
6. Consumers reduce their purchases, case in point: Wal-Mart is losing market share to the Dollar Store - that right there spells retail health (read: it’s terminal).
7. Nations whose citizens spend 32%-52% of their entire budget on food are especially affected.
8. In those nations where citizens spend 32%-52% of total their income on food; food riots erupt, social unrest breaks out, governments topple.
9. Geographically speaking, many of these nations are in the Middle East where about a third of the world's oil supply comes from - so oil production is adversely affected, the price of oil increases. Drastically increases. The empire must then send in troops and warships to protect oil assets from being wiped off the map.
10. Oil is an integral part of everything from farming to manufacturing to transportation, therfore the prices of all goods and services rise.
11. This of course creates more stress on our economy, which drives tax revenues down, whic creates a greater deficit, which causes idtiot Ben to lean on the print button and monetize even more debt.
12. Like an infinite loop in some errant computer code we go back to #1 above and iterate back through this unstoppable, self reinforcing, negatively-insane-Ben Bernanke-code that we call a negative self reinforcing feedback loop.

Bernanke's Crimes Against Humanity

Exporting Higher Food Prices to Poor Nations:

The price of grain and many other foor comodities are set in US Dollars. Creating more dollars reduces the dollars purchasing power. Creating more dollars makes investors flee securities and rush to hard assets, like grain, corn, soy, oil, cotton, coffee, sugar and so on.

In Tunisia on December 17, 2010 a 26-year-old man who tried to supported his family by selling fruits and vegetables doused himself in paint thinner and set himself on fire in front of a local municipal office.

Police had confiscated his produce cart, the cart he needed to earn a living in order to feed his family. With rising prices he coldn't afford a permit. They also beat him when he objected. Local officials then refused listen to him.

His desperation highlighted the public's frustration over living standards and increasingly higher food prices which accounted for 32.4% of their entire earnings.

A month later the ruler of Tunisia was gone, its government collapsed.

Now it is Libya’s turn.

In Lybia 37.2% of a families budget goes to food.

Many other oil producing nations have citizens who face the same income to food budget ratios. Map of many of the countries that are experiencing protests.

Organic bond sales have been anemic. Money is flowing out of securities and into commodities. Bernanke’s plan to have Quantitative Easing reduce interest rates has so far been a failure because of these outflows. That was Bernanke's first mistake.

Rising commodity prices, which for the most part peg global food prices was his second misstake.

Actually, if you count: Bear Stearns, the housing bubble, subprime contageon, unemployment contageon and recesion contageon they are respectively Bernanke's 6th and 7th blunders. Add to that the fact that he is following the steps that Greenspan used to explain how Great Depression One was created and it soon becomes apparant that Ben Bernanke is, without a doubt, the worlds biggest economic imbicile and shouldn't be allowed to balance a checkbook - let alone run the world's (now thanks to him and Greenspan) third largest economy.

Bernanke couldn't find cause and effect in a dictionary. He is an economic moron, and a master of global disaster. The only bigger fools are our leaders who:

1. Haven't fired him.
2. Still listen to him.

Now we have 2008 redux. Commodity prices and oil prices are headed up. Will they crash or will the dollar crash? If commodity prices and oil prices crash again this time I’ll be surprised if money flows into securities again. The dollar is no longer looked at as secure now that Bernanke is monetizing the debt.

The gig is up, the game is almost over.

When High Frequency Algorithmic Trading (insider trading) became responsible for 70% of stock trades I tossed the term “stock market” out of my vocabulary and replaced it with “rigged casino.”

When Bernanke began monetizing insane amounts of money the term “Bond Vigilantes” got tossed into that same trash heap. “Bond Vigilantes” are like ants with Bernanke counterfeiting over a trillion a year.

There are no more Bond Vigilantes.

Ben Bernanke IS the bond market and so far he hasn't even stepped in enough to keep yields down, but he'll have to.

It is not the smartest or the fittest that survive, it is those who notice change first.

Ben Bernanke cannot stop Quantitative Easing. Stopping the monetization of debt means that the United States of America defaults on its obligations. That’s right, the government stops sending out Social Security payments, government workers stop getting checks, companies who do business with the government stop getting paid, Medicare stops - well, you get the picture.

The other fallacy is that we can make cuts and balance this mess. When 23% of the deficit is debt service and 57% goes to keeping grandma eating. With those two facts in mind, we quickly realize that the deficit can’t be cut. Not without default and total restructuring.

Debt is monetized when the Fed creates money with a computer and credits the Treasury Department for the Bonds it “purchased”. The treasury takes this “money” and pays the government's bills so it can stay open. So those thinking there is no velocity may want to think that through again.

With 23% unemployment and with 43 million Americans on Food Stamps and a 1.5 trillion dollar deficit the Fed can not let interest rates rise. Rising interest rates would create massive deficit pain and inflict more debt servicing nightmares. There will be no Paul Volckler's this time. Bernanke will – en-masse – drive bond prices back up and rates back down by creating massive fake demand for bonds at auction when interest rates get too out of hand.

When he does that the value of our dollar will really tank, investors will step up their continued flight to safety by purchasing commodities and commodity prices will increase even more. Higher oil prices will likely cause investors to flee the stock market, but with thin volume and 70% HFAT who knows what the rigged casino will do. They’ve made a sincere joke of the market, which for people in retirement with funds chained to the rigged house — well this is nothing but a sorrowful situation.

Saudi’s king is buying time on his remaining years – he’s 87 - by handing money out. Like the fine ZeroHedge piece said:

“Unfortunately for Saudi, Bahrain tried this and failed. Also, once you start down this path, there is no turning back, as people demand more and more.”

China is faced with its Jasmine protest.

Bernanke, the other central banks, our leaders and the leaders of the rest of the world still have time to exit this endless loop. Just about every country is broke and needs to re-value their dollar and let the people, the local and state and federal governments get out of debt.

The concern I have is that other countries may exit the loop by announcing a new world reserve currency, which may be composed of one or several [other] currencies - all but ours - or with ours being a fraction of the total reserve.

"If" (please read: When) the United States loses the reserve currency its printing and current debt levels will equate to an ugly and very weak exchange rate. In short, food priced in some other currency will leave us looking like Libya.

You can go back through thousands of years of economic history and realize one fact: No country has ever printed their way to prosperity, all who have tried have wound up in hyperinflation, war or demise. How a guy can teach himself calculis, get into Harvard, become a professor at Princeton and NOT understand that - well it totally defies logic. The idiot was asked about the one time in our history that we had no debt. (Please don't think we balanced the budget during the Clinton years - for you can't debt (apply IOU's in the Social Security Trust Fund) as income.) Andrew Jackson balanced the budget and wiped away our debt by using non debt based money. Bernanke was asked about this during a recent hearing and he scoffed at it - his merit? Because it happened before the Civil War.

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What If The China Bubble Bursts

By: Dian_L_Chu

Russ Winter writes: “If the situation does not improve, we’ll definitely want to quit (production).  The sun is setting on the Christmas product industry (in China) right now.”   — Owner of arts and craft factory in Shanto.

Here is another in a series of at-the-brink, sun-is-setting articles in the China Daily and other Chinese publications. All the familiar hallmarks: rising labor costs, inputs goods inflation, transportation disruption and other Mad Max conditions. The lights could actually go out and factories could be permanently shuttered all over China’s export sector after the Chinese New Year [Labor Shortage as Migrants Quit City].

International Economy offered a publication from thirty “experts” on the question: “If the Chinese bubble bursts.” In most cases these were treated as possibilities not predictions. In my case, these are predictions. I offer some of their pertinent comments, as well as point out the weaker offerings.

First, it’s amazing to me how  important and indeed well-educated economists fail to understand the true nature of serial bubble economics. While often acknowledging the on-steroids nature of what transpires, they then seem to frequently fall back on standard economic cycle theory, including promoting the role of government to play traditional Keynesian interventions “to smooth over the abuses and massive imbalances.”

Their theories are widely accepted even though the evidence is accumulating that Government will be hapless once major fiscal crises erupt in certain “too-big-to-fail governments.”

Case in point: Writer Steve Hanke (page 25) points out China’s “problem” of 64 million empty housing units and admits that the property bubble is a whopper. Supplying the big number himself, he goes on with counterintuitive and non-factual comments that the excess is contained to four first-tier cities and involved only 3% of total floor space constructed in 2009.

Let’s see if I have this straight: 97% of the floor space that led to 64 million vacant units is outside those four large cities, but those other localities are not suffering bubbles?

According to Morgan Stanley, GMO calculations, the nationwide average of property value divided by disposable income per urban household was 8.2x at the end of 2009. It was 9 times that in Tokyo at the peak of their property bubble. Other measures, such as price to rent, demonstrate that Hanke’s comments are complete nonsense. 

He goes on to state that their “government” is in a strong fiscal condition to absorb the hit banks will take (8% of total bank assets in his view), and that “banks won’t be allowed to go to the wall.” This is the same argument made globally. Hanke completely failed to mention that debt taken on by local and state government for bubble projects. Analysis by key omission: If this is a professor of economics at a major university, no wonder modern economics has become such a joke.

Sasha Gong (pg. 18) explains how land has been perceived in China, and controlled and owned by local government. Control over local government speculation has been meet with resistance. In 2009, land sales accounted for 1.6-1.9 trillion RMB, or more than half of their revenue.  A reduction of land sales would greatly hamper China’s “growth.”

Source: NBER

Bernard Connolly (pg. 14) says if there were a bailout financed monetarily, the RMB would be weakened sharply. This would trap the one-way traders betting on RMB appreciation. Chi Lo (pg. 22) mentioned that China has bars to capital flight. Administering this is quite another story.

An “anonymous senior Japanese official” (pg. 12) describes the local government’s role. So-called “loan platforms” were established as funding vehicles to obtain commercial loans. When Beijing mobilized a massive 4 trillion Yuan pump priming in 2008, it ordered local governments to bear one-third of the cost themselves, triggering a stampede. As of June 2010, there are 8,221 platforms and their outstanding loan balance was 7.7 trillion Yuan, of which 20% to 25% are deemed “problematic” by the China Banking Regulatory Commission. 

The situation China faces was described well by Tadashi Nakamae (pg. 10), who suggests that a bubble in Chinese productive capacity is even more dangerous than its asset bubble. He defined the classic boom-bust process:  ”When capital investment is booming, say, when steel factories are being built, this itself creates extra demand for steel that cannot be sustained, especially once the factories become operational and become units of supply rather than demand.”

Source: Vitaliy Katsenelson

And now the kicker: “Expansion of investment is supported by exports. Once exports start deteriorating, economic growth halts.”

Nakamae then points out one of the policy responses by China to this mess: “China will be looking to scrap some of its excess capacity. They are unlikely to force domestic companies to make big sacrifices. Foreign companies on the other hand are easier targets.”

This Bloomberg article describes how QE2 in the US has fueled dead-end corporate investment outside the US, including China.

Nakamae nails it for the  banks: “The problem with regional governments using bank lending rather than tax revenues to finance public works projects is that those do not create a return on investment. Servicing the debt is all but impossible.”

Paul Alapat (pg. 16) suggested that ” the immediate impact of a collapse in economic activity in China is likely to be a jump in U.S. Treasury yields both due to repatriation of Chinese holdings and a rise in risk premia. Global supply chains, particularly those for electronics and a variety of consumer goods will be jeopardized.”

Hongyi Lai (pg. 17) suggests that under this scenario, “globally, as Chinese urban consumers tighten their belts, Chinese imports will shrink, especially commodities mostly related to construction such as iron and steel, timber, and certain energy inputs. Imports of non-essential consumer items such as personal luxury goods and high-end home appliances will decline. In addition, China’s purchase of overseas financial products and investments abroad may also decline”.

Analyst Maya Bhandari (pg. 10) chimes in by pointing out that China is nearly twice as powerful a global growth locomotive as the US. Unlike the other analysts, she states she sees “very little domestic demand growth” even now. Further, China has addressed overheating and inflation by top-down ordering of banks to cease lending. “This is symptomatic of a market economy operating under a communist political structure,” says Bhandari.

Gary Hufbauer (pg. 15) offers up the obvious, and what is essentially my conclusion: ” Manufacturing supply chains across Southeast Asia and commodity producers from Australia to Brazil would all take a drubbing.”
As a bust develops, many of these economists expect China to try and devalue the RMB to support their old mercantilist export model.  This would be met with fresh howls from the US, and might be easier said than done.

What China really needs is a large commodity and input goods price correction, and they needed it yesterday.  Without it, a RMB devaluation would be even more inflationary for China. Within China, there are those declaring the export, over-investment cycle is exhausted. Writing that China’s growth model has “exhausted its potential,” an influential former PBOC member warns the country faces a sudden economic slowdown. Yo Yongding lists rising social tensions, pollution, lack of social services and an over reliance on exports and investments as key threats.

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Be Ready For Another Food Vs. Fuel Fight

by John Pocock

Last week, corn futures prices approached levels not seen since June and July 2008, when nearby futures settled above $7.50/bu. With corn prices again approaching record highs, attacks on corn ethanol are soon to follow, as they did in 2008, when critics argued corn should be reserved to meet food demand, rather than fuel demands.

This year, corn growers should be ready for attacks against their industry with facts such as those recently posted online by Bob Stallman, President, American Farm Bureau. In the article “The Ethanol Question,” Stallman states, “Instead of pointing fingers at ethanol for increased corn prices, we need to look at what’s really driving demand – energy prices, weather-related issues and a growing global middle class.”

Indeed, one could better argue that it is our nation’s poor management of our access to global oil supplies – not the rise of corn ethanol as an industry – that is really driving the high price of energy, and therefore food. For more on information on the recent rise in oil prices, read the an article from Delta Farm Press and/or the Heritage Foundation.

When considering recent corn price spikes, also take a look at oil prices. During summer 2008, when corn prices were higher than they are now, oil prices were about $140/barrel. Currently, oil prices are rocketing past $100/barrel.

Stallman rightly states that the price for corn has always been based on its energy value, whether for food and feed, or for fuel. In his recent online article, Stallman cites statistics from 1996, prior to ethanol’s emergence as a market force, to show that corn prices will spike at high levels whether or not it’s being used for ethanol, based on stocks-to-use ratios and the laws of supply and demand.

When the incentives are in place, U.S. farmers always come through to produce more than enough to supply the needs, Stallman argues. “In short, we have expanded [corn] production in order to provide for not only more feed and industrial use of corn, but for nearly 10% of our nation’s automobile fuel supplies, as well,” he states.

What Stallman neglects to state is that whenever farmers produce more corn than the world demands, prices always go back down, often to levels that can be unprofitable to produce. Take away the right incentive (prices needed to make a profit) and corn production for both food and fuel will diminish.

For more information on ethanol facts, visit NCGA and/or the Corn & Soybean Digest.

Whether you agree or disagree about the need to defend corn growers in the food vs. fuel debate, I’d be happy to consider your opinion on the topic. When writing, please let me know your name, where you farm or work, what your comment is and whether or not I have permission to use your comment in a future Corn E-Digest newsletter. You can contact me (John Pocock) at: john.pocock@penton.com.

You're also welcome to write to me if you have concerns or questions about this newsletter or if you have ideas on topics you’d like to see me write about for future issues. I look forward to hearing from you.

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USDA Expands Efforts to Develop Crop Insurance for Biofuels Producers

by USDA

Agriculture Secretary Tom Vilsack has announced that USDA will soon seek proposals to study the feasibility of providing crop insurance to producers of biofuel feedstocks, including corn stover, straw and woody biomass. These feasibility studies, funded by the Risk Management Agency (RMA) will join research efforts already underway for energy cane, switchgrass and camelina.

"Providing additional risk-management tools for American farmers to produce advanced biofuels crops is an important step toward developing a thriving biofuels industry and reducing our dependence on foreign oil," says Vilsack. "Renewable energy development contributes to the Obama Administration's effort to 'win the future' by supporting America's farmers as they grow and harvest materials that can be converted into renewable energy. This effort creates new jobs and opportunities for those who live in rural America."

The Energy Independence and Security Act of 2007 established a mandate that the American economy use 36 billion gallons of renewable transportation fuel per year in its transportation fuel supply by 2022. Of that, 20 billion gallons are targeted to come from sources such as switchgrass, energy cane, woody biomass and other non-food feedstocks.

Two contracts will be funded by USDA. Those interested in applying should refer to the solicitations which will be available on FedBizOpps or on RMA's website.

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Predicting Corn Consumption and Prices for 2011

by University of Illinois

With corn production down and corn consumption up, the market is poised to see record-high prices per bushel in the 2010-2011 marketing year, according to a marketing and outlook brief prepared by University of Illinois Agricultural Economists Darrel Good and Scott Irwin. "Alternative 2011 Corn Production Consumption and Price Scenarios" is available in its entirety on the farmdoc website.

"We looked at the current situation in which we're expecting very tight year-ending stocks and developed three supply, consumption and price scenarios for the 2011-2012 marketing year," Good says. "The yield alternatives include a trend yield, an average yield resulting from good weather and an average yield resulting from poor weather. We followed those scenarios through a balance sheet and into a price projection under each of those three scenarios, just to underscore how important crop size is to next year's average price."

In one scenario, Good and Irwin calculated a trend yield based on actual U.S. yields since 1960 at 158 bu. for 2011. This was applied to an expected 92 million acres planted.

"This is a speculation based on where the market is centering on its expectation about acreage response this year," Good says.

In the second scenario, they looked at the historic yields since 1960 and converting those yields into 2011 equivalents, that is, they added the trend back into the actual yields and then calculated the average yield for the 10 lowest-yielding years since 1960.

"That calculates to be 147 bu./acre, in terms of 2011 technology," Good says.

"Then we looked at the 10 highest-yielding years and calculated the average, which was 169 bu. in today's technology. With those calculations, we asked, what if we have those three alternative-yield scenarios? What does that imply for the balance sheet and the price of corn next year?"

The summary concludes in the trend yield scenario that the market would not be able to begin to rebuild inventories next year, the year-ending stocks would remain at 675 million bushels and corn prices would average relatively high, near $5.75/bu. This is compared with the expectation of $5.40 for the current year.

"Under the good-weather scenario, we would see a big crop of over 14 billion bushels." Good explaines that this scenario would suggest there would be room to expand consumption and build the year-ending stocks to 8% or 9% of consumption.

"We believe that would result in a season's average price slightly under $5/bu., with our projection at $4.75 as next year's average price," he says.

Under the poor-weather scenario, Irwin and Good see two outcomes.

"First, consumption would have to be restricted considerably, primarily in the livestock sector," Good says. "The year-ending stocks would be reduced to an absolute minimum level – we think about 5% of annual use, or about 625 million bushels."

Good says that with high livestock prices, average corn prices would be very high during the 2011-2012 marketing year – about $7 for the year, recognizing that at points during the year prices could be substantially higher.

He notes that trend yield can be calculated differently, using different time periods.

"Most people use a shorter time period than we do and get a trend yield that's maybe 3 bu. higher than the 158 we use," Good says. "Still, the three scenarios would unfold very similarly to what we've outlined here."

"The most troublesome scenario for 2011 would be a short crop that resulted in extremely high prices," Good adds. "That is the scenario that might require some policy adjustments that policy makers should be thinking about now."

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Brazil rains risk to both corn sowing and soybeans

by Agrimoney.com

It isn't just Brazil's record soybean harvest which is threatened by heavy rains, but follow-on corn too, for which sowings are running at half the pace of last year, a leading analyst said.

Brazil's soybean harvest has been delayed such that in Mato Grosso, which produces nearly 30% of the national crop, only 28% had been harvested as of the end of last month, compared with more than half a year before.

"In February, it usually rains. But some places are getting twice normal levels," Michael Cordonnier, at Soybean and Corn Advisor, told Agrimoney.com.

"Farmers are reporting that they can harvest only a few hours per day and when they can harvest, they are being forced to harvest soybeans at a very high moisture content, some as high as 30% moisture."

In some areas growers were reporting "shrivelled and mouldy soybeans, and in some extreme cases, losses as high as 30%."

Corn impact 

The rains have taken the shine off Brazilian hopes for soybean production in 2010-11, which Dr Cordonnier pegged at 70.5m tonnes – still an all-time high, but below many other forecasts.

And they have raised questions too over corn, which many farmers plant directly behind soybeans for a second, or so-called "safrinha", crop – responsible for some 40% of Brazil's total production of the grain.

The window for sowings has already closed in Mato Grosso with less than half sowings completed, and a further week or so before farmers are likely to give up.

"It might be 60% or more like 55%, by now, but it should be 95%," Dr Cordonnier said, adding that heavy rains were slowing progress in Parana too, although this state has a later planting window.

"This matters in that some 40% of Brazilian corn is grown as a double crop, and 40% of that is growth in Mato Grosso and 40% in Parana."

Indeed, the setbacks could feed through into higher prices. "With a tight balance sheet, he world cannot afford any disappointment in any crop - corn soybeans, wheat – anywhere," he said.

'Losing his mind' 

His comments were backed by consultant Kory Melby who said that a 28,000-hectare farm visited in Mato Grosso had completed 30% of the harvest, compared with 70% a year ago.

"Too much rain - the [manager] was losing his mind yesterday. They are already 9,000 hectares behind and can't go."

The farm was intending to plant safrinha corn until March 5, Mr Melby said, adding that "others will plant later, but usually burns up".

Research from the Foundation do Rio Verde had found that corn planted after February 25  lost 4 bushels an acre in yield per day.

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