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Monday, March 09, 2009 11:20 AM

Deflationary Depression Returns To Haunt America

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David Rosenberg, North American Economist at Merrill Lynch is talking about a "Depression-Style Jobs Report"

We cannot rule out the loss of 1 million jobs in March

Judging by the leading indicators – 600,000+ jobless claims, Challenger layoffs up an eye-popping 158% from a year ago, the 78,000 plunge in temporary employment, the record-low workweek – suggest that we will have to endure an 800,000 employment slide when the March data roll out, and a 1 million loss cannot be ruled out. We may have to redefine yet again what a ‘new normal’ is at that point. The bottom line is that a recovery in domestic economic activity is, at best, a late-2009 story, but at this stage, even that could be a fairy tale.

One in seven individuals unemployed or underemployed

Suffice it to say that the unemployment rate that is most inclusive in terms of accounting for all forms of “underemployment” such as this shift toward part-time and away from full-time work is the U-6 measure, which soared from 13.9% in January to 14.8% in February, a record high for this particular series. So, we have a situation where not only 1 in 11 homeowners with a mortgage are now either delinquent or in the foreclosure process, but we also have 1 in 7 individuals who are either unemployed or underemployed. We’re not sure how to classify
such a macroeconomic backdrop, but it certainly is not a garden-variety recession.

How we get any sustained inflation is totally beyond us

In addition to credit contraction, asset deflation, profit compression and employment destruction, we are also in a vicious inventory reduction phase in the manufacturing sector. If our forecast is correct, this would then suggest that the capacity utilization rate in manufacturing will make a new all-time low of 66.6% from 68% in January. The employment data also tell us that there is a very high probability that wages and salaries deflated -0.3% in February as well. How we end up getting any sustained inflation pressure, or backup in bond yields for that matter, as the economy moves further and further away from any semblance of “full employment” in either the labor or product market, is totally beyond us.

Putting the reflation-deflation debate into perspective

Yes, the Fed’s balance sheet and the balance sheet of the federal government are expanding at record rates. But these reflationary efforts should be seen as a partial antidote, not a panacea, to the deflationary effects brought on from the unprecedented contraction in the largest balance sheet on the planet: The $55 trillion US household balance sheet. Based on what house prices and equity valuation have been doing this quarter, we are likely in for a total loss of household net worth approximating $7 trillion this quarter alone, which would bring the cumulative decline in consumer wealth to $20 trillion. This wealth loss exceeds the combined expansion of the Fed’s and government balance sheet by a factor of ten. That should put the reflation-deflation debate into perspective.
Future Inflation Gauge Flashes Deflationary Depression
click on chart for sharper image

Image courtesy of Jas Jain

Tent City Haunts America

The Mail Online is reporting The credit crunch tent city has returned to haunt America. Here are a few of the images. Please click on the link for more images and text.

Rich and poor: The tents and other makeshift homes have sprung up in the shadow of Sacramento's skyscrapers

In a state more known for its fantastic wealth and the glitz and glamour of Hollywood, the images have shocked many Americans. Conditions are primitive, with no water supply or proper sanitation. Many residents have to walk up to three miles to buy bottled water from petrol stations or convenience stores.

Ben Cardwell, carries supplies to his tent at a homeless settlement

Joan Burke, who campaigns on behalf of the homeless, said the images of Americans living in tents would shock many. 'It should be an eye- opener for everybody,' she said. 'But we shouldn't just be shocked, we should take action to change things, because it's unacceptable. 'It is unacceptable that in this day and age we have gone back to a situation like we had during the Great Depression.'

Authorities in Sacramento, where Governor Arnold Schwarzenegger has his office, admit the sight of families living in such poverty is not pretty. But faced with their own budget crisis and a £30billion deficit, they have had little choice but to consider making the tent city a permanent fixture. The city's mayor Kevin Johnson said: 'I can't say tent cities are the answer to the homeless population in Sacramento, but I think it's one of the many things that should be considered and looked at.'

But with no new home builds and as many as 80,000 people losing their job every month, there is little chance of employment. Governor Schwarzenegger last month approved a budget to address the state's deficit, ending a three-month stalemate among lawmakers. As well as increasing taxes, he has imposed drastic cuts in education, healthcare and services that will affect everyone living in the state.
Great Depression Cooking - Pasta with Peas

91 year old cook and great grandmother, Clara, recounts her childhood during the Great Depression as she prepares meals from the era. Learn how to make simple yet delicious dishes while listening to stories from the Depression.

"Welcome to my kitchen. I'm Clara. I'm 91 years old."

Here's a comment from phillygalto that makes perfect sense "Clara is fabulous! What a sweetheart. People better be prepared for what is to come."

Mike "Mish" Shedlock
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