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Sunday, September 27, 2009

Is Deflation Really Coming?

Items of Interest:

Ambrose Evans-Pritchard / Telegraph.co.uk:
Money figures show there's trouble ahead -- Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise...

Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.

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Mr. Practical / Minyanville:
The Lowdown on Deflation -- Deflation is the contraction (reduction) of money and credit. It occurs when the economic system is carrying too much debt to be supported by the level of income generated by economic activity. It occurs because too much debt has been incurred to create unproductive assets that don’t generate income. Deflation is a corrective process, it’s simply the market (you and I) not being able to service debt, so we must forfeit...
related:
Mr. Practical / Minyanville:
Government's Money-Manipulating Wizardry -- There's great debate about inflation versus deflation...

In order to clarify my position, I want to describe to you some mechanics of Federal Reserve operations, the wizardry behind the curtain...

The first red flag is this then: A government, which has no capital of its own, which produces nothing on its own, cannot lend money unless it borrows that capital from another or takes that capital in the form of taxes (but taxpayers must have capital to pay taxes)...
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Greg Feirman / SeekingAlpha.com:
The Inflation/Deflation Forces Battles On -- There is a great debate raging between students of monetary economics. On the one hand, there are the deflationists who point to the massive deleveraging in the housing, mortgage, credit and stock markets. The fall in prices in these asset markets, at least through March 2009, was devastating and destroyed trillions of dollars of wealth and credit.

On the other hand, there are the inflationists who focus on Fed policies and the money supply...

This has been a very thorny debate, with good arguments and respected voices on both sides. But little ground has been given and little progress made as participants of both camps seem unimpressed by the arguments of the other side...
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Peter Coy / Business Week:
"This Time Is Different": Reinhart and Rogoff worry about future financial crises
-- When you've studied "eight centuries of financial folly," as international economists Carmen Reinhart and Kenneth Rogoff have, patterns begin to emerge. The most striking pattern they've found is that people never learn. We gullible humans make the same mistake time after time, which is believing that the laws of financial physics have been repealed for us.

Thus, Americans proclaim confidently that there's no chance the U.S. will get caught in Japanese-style stagnation. Sure, deflation became entrenched in Japan starting after the stock-market crash that began in 1990. But this time is different, right?

Don't be so sure. Reinhart says Americans seem to be unwittingly repeating the mistakes of the Japanese, including propping up "zombie" banks that aren't healthy enough to make new loans and get the economy growing again. Americans kid themselves, she says, by saying, "These are not zombie loans. They're just non-performing."

Summarizes Reinhart: "We're speaking Japanese without knowing it." (I love that quote.) ...
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David Goldman / Inner Workings:
All New! Dave’s (additional) 10 Reasons Why the Recession Will Last Forever -- There just isn’t any way to square the circle within the US as such: households have lost too much wealth at the cusp of a gigantic retirement wave, so that demand for savings is virtually limitless. That’s one reason why bond yields remain so low (another is that the cheap dollar makes them attractive to foreign investors). Americans are locked into a vicious cycle: as their wealth collapses, they must save more; that reduces sales and output, and leads to unemployment; unemployment causes more home foreclosures and keeps the housing market weak; wealth continues to fall; returns to prospective retirement assets decline, forcing households to save more; and so on, ad infinitum, or at least as far as the eye can see.

The only way to break out is globally, and Obama is getting colder rather than hotter.

Thursday, September 17, 2009

Blood Sucking Parasite Watch

Items of interest:

More evidence the world’s creatures are just waiting to feast on you.

Rare tongue-eating parasiteDiscoveryOn.com:
Rare tongue-eating parasite found -- A rare parasite which burrows into host fish before eating and replacing their tongues with itself has been found off the Jersey [English Channel] coast.

Fishermen near the Minquiers - islands under the jurisdiction of Jersey - found the isopod, a type of louse, inside a weaver fish.

Marine researcher Paul Chambers, from the Société Jersiaise, was one of the fishing party and identified the find.

He said he was surprised to find the isopod away from the Mediterranean sea.

Isopods are normally about 2cm (1in) long and live in fish, surviving on the animal's blood, in warm waters...

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Goldman Sachs updates:

Goldman Sachs: A Vampire On The Jugular of AmericaTheDailyBail:
Ron Paul: The Fed Works In Collusion With Goldman Sachs (MSNBC Ratigan Video)

MissTrade:
Ron Paul: “Goldman Sachs Has A Lot Of Influence In Our Treasury And A Lot Of Influence In Our Federal Reserve

Reuters:
US Rep Frank bars Goldman Sachs lobbyist-aide

The Big Picture:
Is Goldman Sachs Trustworthy? -- ... given their history of saying and selling one thing and then doing another, can anyone trust what comes from them?

Should hedge funds be setting their Outlook to auto-delete anything from GS.com research department? How can you tell what is a real research report versus disinformation or some bizarre Psy-ops strategy?

All of this raises the more basic question: Can their clients trust what GS generates, when they don’t know if they are a) trading the opposite side of the report for their own accounts; or b) HFT front running ?

The question isn’t whether Goldman Sachs is Taibbi’sgreat vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

It is much more simple than that — the more relevant question is “Can Goldman Sachs be trusted by their own clients ?” ...

Laugh Lines / NY Times:
Jay Leno Monologue | Aired Wednesday night on NBC --
And a year after the economy collapsed, Goldman Sachs executives gave each other over $11 billion in bonuses. See, what gets me, whenever these Wall Street guys get these huge bonuses they always spend it on something useless, like Senator Chris Dodd. Buy a boat! Get a car...
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Thursday, September 10, 2009

Today's Troubled Times — September 10, 2009

Items of Interest:

American Banking News:
Proposed Debit Card Regulations Could Cause 1,000 Banks and 2,000 Credit Unions to Fail -- Proposed legislation by Rep. Carolyn Maloney (D-NY) would require notice be given to customers at the ATM or point-of-sale terminal when a purchase is about to trigger an overdraft – and would give consumers at the transaction point a choice of whether to accept or reject the overdraft service and the associated fee. "According to Michael Moebs, an economic advisor for many banks and credit unions, Rep. Maloney’s legislation would effectively kill overdraft services, which could cause up to 1,000 banks and 2,000 credit unions to fold within the next two years," American Banking News reported. Why? Because 45% of banks collect more in overdraft fees than they make in profits...

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Bloomberg:
U.S. Foreclosure Filings Top 300,000 for Sixth Straight Month -- oreclosure filings in the U.S. exceeded 300,000 for the sixth straight month as job losses that boosted the unemployment rate to a 26-year high left many homeowners unable to keep up with their mortgage payments.

A total of 358,471 properties received a default or auction notice or were seized last month, according to data provider RealtyTrac Inc. That’s up 18 percent from a year earlier, and down 0.5 percent from July, the Irvine, California-based company said in a statement. One in 357 households received a filing...
discussion:
Minyanville: Why the Foreclosure Crisis Won't End
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MarketWatch:
As boomers pull out funds, will they pull down markets? -- CBO says financial markets won't suffer as millions retire, but some disagree

Many wise men have predicted the stock and bond markets will go into a free fall for decades once baby boomers start withdrawing money from their retirement accounts, but a new report this week by the Congressional Budget Office suggests that won't happen when boomers retire...
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NY Times:
Tavern on the Green Files for Chapter 11 -- Nearly four months before Tavern on the Green, the landmark restaurant in Central Park, is to yield its license to another operator, the landmark restaurant in Central Park has filed for Chapter 11 bankruptcy protection.

In a statement, the current license holder, Jennifer Oz LeRoy, chief executive of Tavern, said that the filing was “our only alternative given the current situation.” She said the decision was the result of “two factors — the extreme financial distress brought on by the current financial crisis and the City of New York’s decision not to renew our license.”
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NY Times:
In Maine, Tensions Over Ailing Lobster Industry -- MATINICUS, Me. — This tiny island, 22 miles out at sea, is generally so quiet that it is hard to imagine the chaos that descended one midsummer day.

Early that morning, one veteran lobsterman shot and seriously wounded another on the Matinicus wharf, the peak of a dispute over whether the gunman’s son-in-law — a mainlander — could fish in the waters surrounding the island. The feud had been escalating for months, a symptom of the economic crisis battering lobstermen up and down Maine’s coast...

Saturday, September 5, 2009

The Crisis Cluster

Some light end of summer reading.

Cecchetti, Kohler & Upper / Bank for International Settlements:
Financial Crises and Economic Activity [36 page .pdf]-- Abstract:

This paper studies the length, depth and output costs of a sample of 40 systemic banking crises in 35 countries since 1980 to assess the likely real impact of the current crisis. Most, but not all, systemic banking crises in our sample coincide with a sharp contraction in output from which it takes several years to recover. The current financial crisis is unlike any others in terms of initial conditions, industrial and institutional structures, levels of development, degrees of openness, policy frameworks and external conditions. Simply averaging outcomes of past crises to get a reading on the current one is therefore likely to be misleading regardless of the sample or subsample. With this in mind we go on to study the determinants of the output losses from past crises.

Our findings suggest that the costs are higher when the banking crisis is accompanied by a currency crisis or when growth is low immediately before the onset of the crisis. Furthermore, when it is accompanied by a sovereign debt default, a systemic banking crisis is less costly. The final part of the paper takes a longer-term view and study the impact of crises on potential output several years down the road. We find that many systemic banking crises have had lasting negative effects on the level of GDP. And even in those cases in which trend growth was higher after the crisis than it had been before, making up for the output loss resulting from the crisis itself took years.

August 2009 marks the second anniversary of the start of the first global financial crisis of the 21st century. World output has experienced its sharpest drop since the Great Depression of the 1930s, with most economies contracting in late 2008 and early 2009. The severity of the crisis has surprised nearly everyone....

Our objective here is not to explain the causes of the current crisis. Instead we study the consequences...

Cluster analysis
Cluster analysis allows us to assign sets of observations to subsets that are similar, given a set of characteristics. Apart from the choice of the characteristics, however, the technique allows the investigator to remain agnostic. It groups observations into clusters by minimising differences within clusters and maximising differences across clusters. Cluster analysis is widely used in quantitative social research to analyse datasets with a large number of variables. For example, it allows firms to group clients that may be receptive to particular ways of marketing, and it helps authorities sort through immigration files in their hunt for terrorists.

The results of the cluster analysis are represented in a dendrogramme (Graph 7)...

Crisis cluster graph - click to enlargeOne of the most striking conclusions we draw from this way of looking at the data is that
current events are unique. While some of the countries suffering from the current crisis cluster fairly close together – the United Kingdom and the United States appear close – they are very dissimilar from all other episodes.19 In fact, the cluster analysis joins the current crises only after almost all previous crises have joined. The implication is that the current crisis is less similar to all of the crises in our database than, say, the Japanese financial crisis of the 1990s is to the crisis experienced by Ecuador in 1998 or than it is to the crisis that occurred in Bulgaria during the transition!

The uniqueness of the current crisis is an important, if discouraging, result...

Econometric analysis
Can we predict the length and depth of the current crisis given historical experiences? The analysis in the previous sections suggests that crises are very dissimilar and that the current financial crisis is especially different from those that have come before it. As a result, it is difficult to use (unconditional) average past experience to draw conclusions about how deep and long the current contraction of the real economy is likely to be...

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia