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Deflation still winning the day

user profile picture Chris Martenson Nov 11, 2008
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As fast as the Federal Reserve and US government have shoveled money into the Wall Street machinery, it has been disappearing even faster.

The evidence is contained in the falling prices of:

  • Houses
  • Stocks
  • Most bonds
  • Commodities
  • A rising dollar

The problem with deflation is that it is a certified bummer.  Falling asset prices mean a negative "wealth effect," which depresses both additional borrowing and spending by consumers.  Less consumer spending means falling revenues and falling profits, and then falling employment.

Fewer workers means less spending, which just creates the conditions for fewer workers.  And so it goes.

Right now we should probably admit to ourselves that entrusting the bailout to a deep-cover Wall Street insider was a bad idea.  At the very least, we should admit that the steps taken so far are not working.

I mean, just look at these articles:

GM’s Skid Quickens as Crunch Raises Bankruptcy Threat
Only federal aid can prevent a collapse of the biggest U.S. automaker, analysts including Buckingham Research Group’s Joseph Amaturo said before the shares tumbled today for a fifth straight day. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.

"Strategic bankruptcy is not an option for GM,” said Mark Oline, a credit analyst with Fitch Inc. in Chicago. "This is an issue of operating or not operating.”

The prospect of a forced liquidation raises the stakes for GM’s quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year’s end. GM had $16.2 billion on hand as of Sept. 30, down from $21 billion at the end of June, and needs $11 billion to pay its monthly bills.

"A bankruptcy wouldn’t address our immediate liquidity concerns,” said Renee Rashid-Merem, a spokeswoman for Detroit- based GM. "It’s not an option for GM because it creates more problems than it solves.”

Postal Service Looks To Cut 40,000 Jobs In First Layoff In History
SHREVEPORT, LA (KSLA) – "We lost 2 billion dollars and like any other business we have to stay afloat." And to keep from sinking, the United States Postal Service is considering cutting thousands of jobs nationwide. Lavelle Pepper with the post office in Shreveport says they too are feeling the affects of the same disease hitting the country… a struggling economy. "We employ about 685,000 people. If we do layoffs it would include clerks, carriers, mail handlers across all crafts."

Pepper says the postal service is looking to eliminate 40,000 jobs nationwide.

Mall Owner Is Warning of Default
Ailing mall owner General Growth Properties Inc. warned Monday in a government filing that its failure to refinance or extend $1 billion in debt due this month could trigger default on billions of dollars in debt and its ability to continue operations would be in "substantial doubt."

And so on and so forth.

The government bailouts are now being applied to the banking industry, the financial services industry, the insurance industry , the auto industry, and probably soon the mall industry.

But all the bailouts can do is keep an ailing company afloat for a while longer; it cannot fix the problem, which is that the vaunted US consumer has finally run out of steam.

Her’s a very interesting post by djhester1940 in a very interesting forum thread (link) on this site asking for anecdotes from the retail side of things:

Last night I was speaking to a neighbor who is a mechanic for a large Ford dealer here in San Antonio. He told me that the normal sales volume for new cars was around 200 cars per month and somewhere in the neighborhood of 400 used cars per month. Last month, October, they sold a total of five cars. To me this sounds serious.

Hmmmm…from 600 cars to 5 cars.  Yes, I would say that qualifies as "serious".

I am collecting other anecdotes from the retail space, which are all confirming the most aggressive slow-down in activity in anybody’s experience.

If you have any anecdotes to share, please post them over in the forum.  I find tremendous value in the "on the ground" data, because I am sure it paints a more useful picture than the high-level official data.

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