Sunday, December 23, 2007


As central banks continue to splash their cash over the system, so far to little effect, Ambrose Evans-Pritchard argues things are rapidly spiralling out of their control.

Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.

America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.

This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.

In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough.

When a credit system implodes, it can feed on itself with lightning speed.

"The central banks are trying to dissociate financial problems from the real economy. They are pushing the world nearer and nearer to the edge of depression. We hope they will eventually be dragged kicking and screaming to do enough, but time is running out," he said.(Bernard Connolly, global strategist at Banque AIG).

Glance at the more or less healthy stock markets in New York, London, and Frankfurt, and you might never know that this debate is raging. Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts spirits.

Glance at the debt markets and you hear a different tale. Not a single junk bond has been issued in Europe since August. Every attempt failed.

"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.(Emphasis mine)

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to reveal their losses. At some point, enough of the dirty linen will be on the line to let markets discern the shape of the debacle. We are not there yet.

Anyone care to withdraw?

Be very suspicious of any unofficial bank holidays!


End Notes

(1)"Crisis may make 1929 look a 'walk in the park'", Telegraph (;jsessionid=WE0YGBUXCR2NVQFIQMGCFGGAVCBQUIV0?xml=/money/2007/12/23/cccrisis123.xml&page=2)

Sunday, December 16, 2007



That the U.S. economy is headed in the direction of stagflation is pretty clear from the November, 2007 statistics. According to, Real Consumer Price Inflation is running in excess of 11% a year and, as we commented above, the money supply figure (M3) is increasing at 15% per year, or a doubling time of about 5 years. Moreover, GDP growth is a negative number. It would appear that The Cartel-charted-course (which we describe in our June Letter) toward a hyperinflationary Recession/Depression as a catalyst for a painful transition into the apparent “End Game”, is on track.

To be sure, this course involving an explosion of the money supply (“money from helicopters” to use the phrase associated with Chairman Bernanke) and the massive and increasing use of derivatives to intervene in a wide variety of markets is fraught with danger. Deepcaster, Warren Buffet and Jim Sinclair have all pointed out the dangers. Indeed, Sinclair has aptly described the financial system as sitting on a “$20 trillion trembling mountain of derivatives…think Weimar Republic.” Unfortunately Jim Sinclair and Warren Buffett are correct.

In sum, with The Cartel’s increasing use of derivatives comes an increasing risk of a financial meltdown. We had such a harbinger of one in August with the credit market freeze up of August, 2007 but The Cartel was able to rescue its major International Bank and Wall Street clients from this one.

So far The Cartel has staved off a systemic meltdown. But, alas, it may well not always be so.

Steve, your common sense commentator.