by Axel Merk

This post is one in a series from respected guest commentators while Chris is away on vacation with his family & working on his new book. Chris returns next week; enjoy the fresh perspective in the meantime.

Will U.S. policymakers cause another financial catastrophe and destroy the U.S. dollar by focusing on their own short-sighted political interests?  Or will economic reason prevail?  While we wish for the latter, we fear the former is much more likely.  Unless real reform of Fannie Mae and its smaller cousin Freddie Mac (together the Government Sponsored Entities, or GSEs) is implemented, the consequences for all of us may be dire.  Investors may want to take this into consideration when making investment decisions.  Future implications may put downward pressure on the U.S. dollar; investments into more fiscally-stable and prudent countries displaying sound monetary policy may become ever more attractive.

by machinehead

This post is one in a series from respected guest commentators while Chris is at work on his new book. Many of you will recognize today’s author from his insightful comments that appear frequently across PeakProsperity.com. Enjoy!

Since early April, the yield on 10-year Treasury notes has dwindled from 4.0% to below 2.5% on August 24th.  Meanwhile, the 12-month change in the Cleveland Fed’s median CPI has hovered feebly between 0.5% and 0.6% since March.  These abnormally low interest and inflation rates are fanning fears of renewed GDP contraction, a plunge into price deflation, or both.  Boardrooms and blogs are humming with rumors of a ‘QE II’ (Quantitative Easing II) program to counter a chilly deflationary dip.

One reason fears are so acute is that the Federal Reserve’s main policy tool, the overnight interest rate on Fed Funds, is flatlined at zero.  Moreover, via ‘extraordinary measures’ beginning in September 2008, the Federal Reserve added some $1.4 trillion of securities, including $1.1 trillion of MBS (mortgage-backed securities), to its balance sheet in a stimulus bid.  Yet despite these heroic efforts, economic leading indicators have turned weak this summer, as sinking Treasury yields add to the disquiet.

by Richard Heinberg

This post is one in a series from respected guest commentators while Chris is on vacation with his family and at work on his new book. The original article has been amended by the author in response to input from the CM community.

Economies are the systems by which humans create and distribute wealth. Economics is a set of philosophies, ideas, equations, and assumptions that describe how all of this does, or should, work.

The first economists were ancient Greek and Indian philosophers, among them Aristotle (382-322 BC)—who discussed the “art” of wealth acquisition and questioned whether property should best be owned privately or by government acting on behalf of the people. Little of real substance was added to the discussion during the next two thousand years.

by Ilargi of The Automatic Earth

This post is one in a series from respected guest commentators while Chris is at work on his new book. Please welcome them to the PeakProsperity.com community and enjoy the fresh perspective.

From a purely political point of view, it’s a simple story.  Existing homeowners are a far more powerful force at the voting booth than potential owners, homebuyers, are.  It’s therefore very much in the interest of the incumbent government to keep home prices as high as it can.  Let them slide too much and you will pay for that at the next election.  For potential buyers, you can devise plans that lower interest rates and down payments, but that’s all.  More affordability simply through lower prices is not on the political table.

Still, in the “listening conference” on US housing policies – Fannie Mae and Freddie Mac in particular – that started this week, it’s not voters who have the biggest say.  That is reserved for the financial industry, and how could it not be?  Not that the Obama administration has to hear the truth from the bankers anymore:  Washington has long since realized that truth.  Which is that without Fannie and Freddie and the 80% stake the US took in them in 2008, as well as the unlimited financial guarantee issued by Tim Geithner at the end of 2009, it’s not just the housing industry that would instantly collapse.  The banking industry would, like a shadow, rapidly follow in its footsteps.

by Charles Hugh Smith

This post is one in a series from respected guest commentators while Chris is at work on his new book. Please welcome them to the PeakProsperity.com community and enjoy the fresh perspective.

At some point, economic recessions trigger social recessions.  Individual expectations and behaviors slowly gather the momentum to change cultural values, social relations, and the way entire generations think about key issues such as opportunity, security, prosperity, government, family, and the relative importance of money in life.

Those of us who know people who experienced the Great Depression have some glimmerings of how social recessions change people’s attitudes and values.  Two examples come to mind:  My grandmother had small savings accounts in multiple banks; clearly, she didn’t trust the idea of having one’s nest egg in one bank.  And my uncle said that just having a job with a steady paycheck after World War II seemed like heaven.  (He’d served in the 8th Air Force in Europe, surviving a 50% casualty rate for B-17 crews.)

But we don’t need to turn back the clock 65 years to view a social recession; there is a real-time one playing out in the world’s second largest economy:  Japan.

While the stock markets were largely held to a very narrow, tight, and boring range all day today, once again we see a high volume, down finish to the day.

As I mentioned before, this is not a good sign, especially on a Friday at the end of a bummer of week.  This behavior, along with a high volume coming into bond ETFs (and a remarkably firm gold price), makes me think that there’s still a nasty surprise or two somewhere directly ahead.

While the good news is that the S&P 500 managed to finish slightly higher than the lows of the day, given the horrific market internals we saw yesterday (a TRIN over 6), I was fully expecting a more robust bounce today.  We didn’t get it.

Confirming and continuing yesterday’s newly formed intermarket correlations, gold and the dollar are both up this morning, while an overnight stock futures rally fizzled this morning, pointing to another down day for stocks.  The much-anticipated 3 a.m. futures rally never materialized.

The odd cross-current here is that the Asian stock markets fell less than a percent last night, while the European bourses are either flat or green.  Normally, if the US markets go down by -2.5% (as they did yesterday), you can expect Tokyo to follow along by sending the NIKKEI down even more, and for Europe to swoon in sympathy.  This didn’t happen.

In the media, this provided some welcome fodder for calming news stories:

I’m opening this thread up to discuss today’s market actions. There are plenty of cross-currents out there right now, and things are tricky to read, especially if one is trading.

The supposed reason for this downdraft is disappointment in the Fed’s actions…too cautious and stingy for a market that had priced in some more thin-air money.  Maybe a lot more.  Here are two quotes that capture this sentiment: