Alert
ALERT - March 23, 2009
JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
A L E R T
March 23, 2009
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Fed’s Effort at Dollar Debasement Had Some Immediate "Success"
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PLEASE NOTE: Developments of the last week have started to firm-up possible timing and likely triggers for a major U.S. dollar crisis and the onset of a U.S. inflation cycle that should climax in a hyperinflation. Such will be more fully addressed in the upcoming newsletter, which, as result, has been pushed back a week to this coming weekend. Any intervening Flash Update or Alert will follow, as indicated by systemic or economic developments.
– Best wishes to all, John Williams
Outlook Darkens for U.S. Inflation and U.S. Dollar. With a still-intensifying U.S. economic downturn, with the Fed moving as rapidly as it can to debase the U.S. currency, and with the outlook for the U.S. fiscal condition spiraling out of control, the outlook and timing for a massive U.S. dollar sell-off and eventual U.S. hyperinflation have taken turns for the worse.
Debt Monetization and Dollar Debasement Accelerate. The Federal Open Market Committee pushed ahead last Wednesday (March 18th) with Fed Chairman Bernanke’s program to debase the U.S. dollar, ostensibly to prevent consumer deflation by creating inflation. One reason likely behind the timing of the FOMC move was the apparent ongoing deterioration in the systemic solvency crisis, as suggested by the still-continuing lack of meaningful weekly growth in the major components of the broad money supply M3 (see Alert of March 9th).
That unfolding solvency crisis also pushed Treasury Secretary Geithner to release detail of the latest banking bailout package, today (March 23rd), where the government and private sector will invest together to relieve troubled banks of bad assets. The Treasury and the private sector will leverage the needed funds from the remnants of the initial bailout package, using lending by the Fed and the FDIC, further expanding monetary and fiscal risks. The package does not appear to have too much new. The Fed’s Term Auction Facility (TAF), which was designed at least to mask so-called toxic assets on bank balance sheets, may be expanded in an effort to provide cash for the "bailout," but it could be worth noting that the TAF auctions have fallen short of potential, with only $117 billion of an available $150 billion borrowed in the latest auction.
Getting back to the Fed, the FOMC announced that the U.S. central bank would expand its debt monetization by more than $1 trillion of government and quasi-government debt in the months ahead, including $300 billion of longer-term U.S. Treasury securities. The reintroduced precedent of buying Treasury notes and bonds formally has opened the door for rapid monetization of unwanted new Treasury issuance as well as of any Treasuries dumped into the markets by disgruntled foreign central banks and other investors.
The announced Fed purchases also included $750 billion of agency-backed (Fannie Mae and Freddie Mac) mortgage-backed securities and up to $100 billion of agency debt. Despite broad market presumptions to the contrary, the U.S. government’s latest annual financial statements — as signed off on by the U.S. Treasury and the GAO — indicate (post-conservatorships) that "Their [Fannie Mae and Freddie Mac] debt is not guaranteed by the Federal Government." Such protestations likely are moot, as the U.S. government has little choice but to back or buy those securities; it just does not want to book them on its already severely-impaired balance sheet.
In response to the FOMC action, the markets immediately stripped the global purchasing power of the U.S. dollar by 4% to 5% and more, as measured against major currencies, the price of gold and key commercial commodity prices, such as in dollar-denominated oil prices. Eventual follow-through should be reflected in strong broad money growth and in higher U.S. consumer inflation — Mr. Bernanke’s ultimate target.
With growing global grumbling over the lack of U.S. fiscal and monetary restraint, Reuters reported (March 18th) that "A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies." Any such move, and/or any rebasing of dollar-denominated commodity prices, such as oil, in something other than the U.S. dollar, would tend to be highly negative for the greenback and highly inflationary for the United States.
CBO Budget Deficit Projections Explode. Reflecting President Obama’s budget and a worsening economic outlook, the Congressional Budget Office (CBO) has projected fiscal-year deficits for 2009, 2010 and 2011 at $1.8 trillion, $1.4 trillion and $1.0 trillion, respectively. These numbers, however, remain overly optimistic, particularly for 2010 and 2011. I still look at fiscal 2009 topping $2.0 trillion, with commensurate new Treasury funding required. Circumstances are not likely to get any better in 2010 or 2011. With funding of same a near-impossibility in the open markets, again, the Fed’s latest actions effectively confirmed its status as lender of last resort to the U.S. Treasury.
The CBO revised its forecast for 2009 to an average annual real (inflation-adjusted) GDP contraction of 3.0%, from an earlier 2.2% estimated downturn. Yet, the CBO estimated a return to near-normal 2.9% GDP growth in 2010, and booming growth of 4.0% in 2011, mirroring the overly optimistic tone of earlier Administration economic assumptions. As an aside, the CBO forecast of a 3.0% GDP decline in 2009 would be the deepest economic contraction seen in a regular U.S. business cycle since the 3.4% decline estimated for 1938, which was the trough of the second dip of the Great Depression. A greater 11.0% contraction in 1946 reflected the shutdown of war production and was not a regular business cycle.
Week Ahead: New Orders for Durable Goods. Look for the regularly volatile durable goods orders (due for release on Thursday, March 25th) to show continued deterioration in year-to-year activity.
GDP. Market expectations are for some further downward revision in the "final" estimate of real (inflation-adjusted) fourth-quarter GDP growth, at 6.6%, versus a prior 6.2% annualized contraction, per Briefing.com. Whatever transpires is not likely to be much more that statistical noise.
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