ECRI declares US recession inescapable

Overnight, the venerable ECRI declared a US recession inescapable. The video is worth your time as much for how it describes the process of the business cycle as it is the declaration:

Houses and Holes
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  1. Not good news.

    So…we’ve had a bout of non-US bad news, and the USD surged, bringing USD-denominated assests down quickly.

    So, now that we’ve got US-bad-news again, I guess we’ll see it swing back the other way?

    Wild swings between US and non-US bad news seem to be the norm right now, and I guess it will happen again next week, too, with more bad US news???

    It’s like over-reacting sheep hustling from one corner of the room to the other. A little pathetic, really.

    My 2c

  2. The USD will be the only “buy”, I reckon. Monetary and fiscal easing are off the table in the US and inflation will certainly recede. In a synchronized contraction, you have to hold the “least-bad” assets, so some cash-rich mega-cap US equities, and Treasuries will be the winners.

    It’s bad news for US manufacturing exports though – USD appreciation will harm their price-competitiveness. It occurs to me that the USD is becoming a quasi gold standard. If all other assets are priced either directly or indirectly in USD, and all investors want to hold USD (for safety and real return) and their demand bids up the exchange rate of the currency, then implicitly the nominal value of all other assets must fall.

    Can this trigger deflation in all other assets and product markets? On the face of it, this is exactly what will happen.

    In 1933, the US abandoned the Gold Standard because gold-hoarding was driving deflation. As soon as the currency was detached from gold, the currency devalued, deflationary pressure abated and recovery commenced.

    If the market now chooses to hoard dollars (and who wouldn’t), even though nominal interest rates are at zero, and other asset prices are falling, will this also propel deflation in product markets? How can the US devalue/reflate if this cycle takes hold? As well, if the Euro ceases to exist or ceases to become commercially negotiable, there will be no alternative liquid market for cash. We will have a completely dollarized, contracting, deflating global economy, at the heart of which will be a fiscally and politically paralyzed US Government.

    Will this happen? I reckon it’s happening as we watch.

    • MontagueCapulet

      I agree that the tendency is for the dollar to rise and everything else to fall as people move to the dollar as a store of value. Debt-deflation is prima facie very deflationary.
      The question is whether the Fed can counteract this deflationary impulse with trillions in swaps to Europe and with further rounds of QE. Supply the dollars the market demands. That may not be politically feasible at the moment, but if the US moves back into (official) recession and the DJIA falls below 8000 I think it will be back on the table.

      • I agree that monetisation/reflation is technically possible, at least within the USD-sphere. But unlimited swaps for European States/Banks would be very risky for the beneficiaries as well as the US.

        The schism in US political and financial institutions is very deep. The problem is evolving into one of growth itself and how to restore it. Maybe growth cannot be restored for many years – until the debt burden of the last 25 years is liquidated.

        This is turning into the deepest crisis for the capitalist system since the 1930’s, and will eventually force radical reform of the laissez-faire approach in financial markets in the US, and to the institutional model in the EU.

  3. “…As well, if the Euro ceases to exist or ceases to become commercially negotiable….”

    ….which is to say, there is a run on the Euro. We are already seeing an incipient run, as European banks experience difficulty in raising fresh Euro loans. At the moment of truth, the market do not want to accept Euro-denominated securities offered by European banks for whom no Euro-issuing lender-of-last resort exists that is also supported by a Euro-taxing Treasury.

    The wheels have already fallen off…from today’s MB reports

    “Overnight deposits are a sign that banks are too distrustful about the solvency of other banks to leave it with them.

And what about EU bank funding; is that still a problem?

    Yes, a bigtime problem. Take a look at this from the Wall Street Journal:

    “An extraordinary dry spell in the market for long-term European bank funding is amplifying pressure on policy makers to devise a solution to the Continent’s banking crisis.

    For the past three months, European banks have been largely unable to sell debt at affordable prices to investors, who are wary of the banks’ vulnerability to risky euro-zone government bonds and other loans.

    At $34 billion, the amount of senior unsecured debt issued by the Continent’s financial institutions this quarter is on track to be the smallest of any quarter in more than a decade, according to data provider Dealogic. Most of those were bite-size deals of less than $500 million apiece. Traditionally, issuing such debt has been among the most popular ways for banks to finance themselves over the long term.”

    Now market observers are worried that the funding freeze is going to continue and perhaps worsen heading into 2012, with potentially serious repercussions for the banking industry. (“Europe’s Banks Face New Funding Squeeze”, Wall Street Journal)

    Or how about this, again from another article in the Wall Street Journal:

    “European bank funding markets are in the deep freeze, with no public senior euro issuance since early July. That is becoming a major problem: Three-quarters of financing for Europe’s economy comes from banks, according to the European Central Bank. Restoring access to long-term funding must be a priority for Europe’s policymakers.

    Bank bond issuance has collapsed as the sovereign crisis has deepened….Fear of sovereign defaults risks a vicious circle where banks unable to borrow then cut back on lending. That crimps growth prospects and increases the risk of sovereign solvency problems.”

  4. I notice this is on Bloomberg, doubt you see this level on commentary on CNBC.

    When the last recession was taking off in late 2007 CNBC continued to be the “good news” channel. I remember some idiot even saying “read my lips, there is no recession out there”.

    • This is actually low quality for Bloomberg – their Asian/European correspondents are so much better than the Americans.

      But still infinitely ahead of CNBC – also that makes nineMSN/Sky look like the Teletubbies….

      • I don’t even watch CNBC anymore — and Sky Business too — except when there are notable people whom I want to hear speak; I always have my TV turned on Bloomberg.

  5. Yes a good expose on the business cycle but I could hardly stand to watch it. The “interviewer” constantly talks over the guest as per CNBC. Why are Americans so rude??

    • How is it that you can extrapolate the actions of one person onto over 300 million people? Thanks for exposing the parochialism.. I can now just ignore your posts altogether.

      • yes I know it’s a generalisation, I just get annoyed with this style of “interviewing” which doesn’t allow a microsecond of silence to allow the viewer to take in what the guest is saying. Apologies to ppl I inadvertently offended, in fact some of my relatives are American 🙂

    • It’s just that this guy is Tom Keene, he’s like Bloomberg’s version of Switzer: they both think they’re more important than the interviewee.

    • I’d say that Americans are a little more chatty than us, probably because we’re more reserved in general. Americans aren’t rude at all: for example, they always reply, “You’re welcome” after you thank them for anything.