The War Between Debt & Recession
By Adrian Ash
December 12, 2007
The Fed, White House, Bank of England & UK
Treasury will do "whatever it takes" to beat recession for ever and
ever...
SO THERE WILL BE no let up in the war between debt and
recession, no truce or pause in the fighting.
The cannon-fodder of Western consumer credit the battle-weary
consumers themselves must push ahead with the Christmas offensive.
Households in both the United States and Britain have been given fresh ammo'
through interest rate cuts. Huddled shoulder to shoulder in the trenches, they
must stand their ground until the job is done.
All boom, no bust! Gordon Brown now the UK prime minister
has promised no less for more than a decade. And this is no time to quit the
field now.
But beating the credit cycle won't be easy, even if it were to
somehow prove possible. Indeed, this war of attrition will take just as long as
the never-ending war against terror.
The commander-in-chief knows he's lost the high ground, but won't
yet admit it. "Some borrowers took out loans they knew they could not
afford," said President Bush last Thursday, before he slipped into the
present tense and tried to wind back the clock.
"To compound the problem, many mortgages are packaged into
securities and sold to investors around the world.
"So when concerns about sub-prime loans begin to mount
began to mount uncertainty spread to the broader financial markets."
But "uncertainty", unlike Bush's speech patterns, was
never a threat. Adjustable-rate home-loans made it clear, right from the get go,
what would happen in 2007 to 2008 and beyond.
They "usually begin with 7% to 9% rates that [then] reset to
between 11% and 13%," as Bloomberg explains. And that was precisely the
problem.
For can you imagine it? An interest rate that moves up, and not
down...?
"What we are talking about is having these loans modified, so they continue
for a longer period of time at the starter rate," said John Reich, director
of the Office of Thrift Supervision, of the Hope
Now initiative early last week.
Will flat rates be enough to keep the big guns pounding the enemy?
After 25 years of ever-cheapening credit, the bond market certainly wants rates
to go down not least after bond yields reached a half-decade high at the
start of this summer.
Piling into short-dated bonds, in fact, Wall Street has already
priced in recession. Three-month bond yields have slumped by more than 200 basis
points since mid-June, the fastest rate of decline since May 2001.
Two-year bond yields have slumped by 219 points inside six months
a 15-year record going from 5.10% to below 3.00% in short order.
2001 marked the shortest and shallowest US recession on record. At
least 1992 got to dent housing and jobs, unwinding debt and forcing households
to save and not borrow.
It must never happen again!
"Uncertainty about the effects of the credit crunch, together
with rising oil and food prices, seems to be affecting feelings about jobs and
the future economic situation," said Fionnaula Earley, chief economist at
Nationwide the UK's biggest mortgage lender on Wednesday this week.
"With that in mind, it is natural that consumers would think
about tightening their belts this Christmas and this is reflected in the weaker
spending index."
But this "natural" response cutting back spending
after a record decade of credit growth can't be permitted. "At least
two cuts" to UK interest rates were now needed, Earley told the Telegraph
"to take the "pressure off [household] finances."
The Bank of England delivered one cut on Thursday, claiming in its
accompanying statement that inflation will slow just because consumer demand
threatens to recede. Put another way, and on the other side of the Pond,
"policymakers appear fully engaged in stanching the financial turmoil and
ensuring that the economy avoids recession," says Mark Zandi of Economy.com
for Moody's.
"The Federal Reserve has aggressively lowered interest rates
in recent weeks and Congress and the administration are working to aid the
hard-pressed mortgage market. More help will be needed, but policymakers appear
ready to provide whatever is necessary."
Can whatever it takes keep recession pinned down for ever and ever?
There's only been one winner so far in this war waged by debt and Gold
Prices look set to keep winning as consumer debt push ahead as the economy
slows.
The global boom in all asset prices that now seems to be tipping
over the top came thanks to one major bear market the bear market in the
value of money.
Government-led and central bank-sanctioned, it has cut the value of
US Dollars by two-thirds versus a Gold
Bullion Investment. It's pushed the British Pound Sterling to new all-time
record lows, and cut even the Euro in half when measured in gold.
Call it liquidity if you must, a flood now washing the ink out of
central bank promises to pay. The bubble also pushed oil, base metal and food
prices sharply higher but even if they somehow slip back as the US economy
slows, the outlook for Gold
Prices might still hold good in 2008.
Dr. Copper the metal with a PhD in forecasting economic growth
or recession has broken down even as Gold
Prices have continued to surge, notes the Bank Credit Analyst.
Comparing the two metals over the last 17 years, "the
Copper-Gold Ratio plunged when central banks fell behind the deflation
curve," the BCA says. The ratio then surged "when rates were
normalized or policymakers were struggling to cool growth."
"The current breakdown in the Copper-Gold Ratio suggests that
more liquidity is needed to reflate the global financial system and keep the
economic expansion on track," the BCA adds. And more liquidity means more
money, of course.
So wheel out the big guns of debt! Last time the US defeated
recession, real interest rates dropped below zero; the Gold
Market doubled in the following three years.
If the Fed cuts again down to 3.5% (Bill Gross's forecast at Pimco)
or right down to 1% (the Greenspan Fed's answer to the 2001 dip), just how far
might gold go even without rising inflation to push it higher?
"Monetary policy in the three main areas [the US, Europe and
Japan] should remain on hold," reckons Jorgen Elmeskov, chief economist at
the Organization for Economic Co-Operation and Development (OECD). Indeed, if
inflation picks up and it just hit 3.0% in Europe, despite the surging
Eurozone currency he thinks it would be "necessary to pay a price in
terms of lower activity in the short-term" to keep the cost of living in
check.
The European Central Bank broke ranks this week, doing just what
the OECD said and keeping Eurozone rates on hold. But the Fed and Bank of
England?
Neither are formally charged with growing the economy, unlike the
ECB. Both are supposed to avoid destroying their currencies and letting
inflation run wild. But as Clive Briault, a managing director of the Financial
Services Authority the UK's investment watchdog said this week,
"there is a very real prospect that conditions will worsen further, raising
some important risks for consumers.
"If their financial plans depend on cheap and abundant credit,
the absence of those conditions is likely to cause significant consumer
stress."
Stress meaning a slowdown, and slowdown might now mean recession.
It cannot be allowed, whatever the costs.
What might that cost be to cash savers without gold?