Didn’t Bernanke also recently lean on BoA CEO Ken Lewis to commit securities fraud by not declaring losses at Merrill Lynch prior to its takeover by BoA? We appreciate that Gentle Ben is just doing his job and all. But does he really think we’re going to trust him following the Merrill-BoA episode?

We don’t believe a word Bernanke says about the economy… or about banks. As NYU economics professor Nouriel Roubini put it recently, the stress tests (or “fudge tests” as he calls them) aren’t worth the paper they’re written on. They’re meaningless, because they have been reverse engineered to create positive results. Here’s Roubini on the subject:

If you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in U.S. government baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

Nassim Nicholas Taleb, a scholar of risk and chance at Polytechnic Institute of New York University, author of The Black Swan:

The Impact of the Highly Improbable: “This stress test is the equivalent of testing the Brooklyn Bridge by running a single heavy truck on it.”

The U.S. recession is now in its 15th month, and many economists now expect the downturn to last until 2010 – if not longer. In fact, some economists now say the U.S. malaise could easily evolve into the virulent “L-shaped” downturn that Hutchinson predicted – a development that would guarantee both the maximum pain and the slowest recovery, experts say.

“I said in December that the recession could be ‘bloody-L shaped.’ With the huge deficits, that now looks the most likely outcome – and believe me when I say that it will be very bloody,” Hutchinson said this week. “The economy will bottom quite soon, but every time it tries to emerge the drags of the federal deficit, the huge bank bailouts and the huge money creation will drag it back.”

Noted Hutchinson: “It won’t get all that much deeper – it’s not 1929-33 – but my estimated emergence date is about 2013. The economy will remain essentially flat till then, although wobbles may make [it look like a “W-shaped” recovery] –until you realize there are more than two bends in the ‘W’.”

Nouriel Roubini, the professor with York University’s Stern School of Business who predicted the current financial and economic crises, wrote in the March 1 edition of The New York Times that the recession could last a total of 36 months. The U.S. slump – instead of following a typical “U” shaped rebound – “may turn into a more virulent L-shaped near depression,” he wrote.

Reports Keep Getting Worse

U.S. gross domestic product (GDP) contracted at a 6.2% annual pace in the fourth quarter of 2008, the U.S. Commerce Department reported Feb. 27. That’s the biggest drop since 1982, and was far more than analysts had anticipated, Money Morning reported.

The government had earlier estimated the drop in fourth-quarter GDP at 3.8%.  The subsequent revision of 2.4 percentage points was almost five times as large as the average adjustment. Global trade, which contributed a 0.1% gain in the advance report, actually subtracted half a percentage point from growth last quarter, indicative of the truly worldwide nature of the current financial crisis.

“Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third,” the Commerce Department said. “The largest contributors were a downturn in exports and a much larger decrease in equipment and software.”

The U.S. economy lost 651,000 jobs in February, the fourth month in a row where job losses were right around the 600,000 mark. The unemployment rate rocketed to 8.1%, its highest level in more than 25 years. The U.S. economy has now shed 4.4 million jobs since the recession began in December 2007, with more than half coming in the last four months.

Thanks to a seemingly unending stream of bad news or disappointing economic reports, the Standard & Poor’s 500 Index has sold off sharply and trades at or near 12-year lows.

“This is what falling off a cliff looks like,” Lawrence Mishel, president of the Economic Policy Institute, told MarketWatch.com. [For a complete analysis of the February employment report, check out this story, which appears elsewhere in today’s issue of Money Morning].

Optimism in Short Supply

Because the U.S. economic landscape is so dour right now, economists say there could easily be another two to four years of malaise.

“I find it quite easy to imagine two consecutive years of contraction,” Harvard University financial historian Niall Ferguson, a financial historian at Harvard University, said in one of 11 assessments by economists that appeared in The Times. “I don’t rule out two more lean years after that,” he said. Bloomberg News summarized the assessments in an article last week.

Although the burst of the housing bubble, the U.S. financial system morass, global trade problems and soaring joblessness are all key contributors, the drop-off in consumer spending is the key culprit, since it accounts for 70% of the country’s economic activity.

Because U.S. consumers are in such bad shape financially – and are obviously both angry and scared – any “whiffs of growth [this year] are likely to herald a false dawn,” Morgan Stanley Asia (MS) Chairman Stephen Roach told The Times, noting that he doesn’t expect to see the economy begin to actually expand again until late 2010 or early 2011.

And when the recovery does begin, it will likely be weak – if not downright anemic.

For one thing, history shows that – after a severe banking crises – an economic system typically takes as long as four years to return to its prior personal income peak, says University of Maryland Economist Carmen Reinhart, an economist at the University of Maryland.

George Cooper, author of “The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy,” said that while the recession – as technically defined – could be over by the end of 2010, “the broader credit cycle will likely remain a significant drag on economic activity well into the next decade.”

Some Bright Spots?

There are some optimists – including former U.S. Federal Reserve insiders Alan Blinder and William Poole. Both Blinder, the former central bank vice chairman, and Poole, the former president of the St. Louis Fed, are both on record predicting an upturn in the economy late this year.

Blinder, a Princeton University economics professor, said that “housing must hit bottom at some point,” Bloomberg reported.
When that happens, house-hunters could come out in droves, said Eric E. Schmidt, the chairman and chief executive officer of search giant Google Inc. (GOOG).

“Americans love a bargain,” so the economy will get a boost from consumers jumping in to take advantage of once-in-a-lifetime buying opportunities, Schmidt said.

James Grant, editor of Grant’s Interest Rate Observer, agrees that falling housing prices will jump-start growth. But he’s just not willing to predict when that will happen.

“Today’s low prices, painful though they may be, are the market’s own shovel-ready stimulus,” Grant wrote in his Times Op-Ed piece. “Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again — just don’t ask when.”

Source: As Economic Reports Worsen, Experts Predict a Longer Downturn

- Of course a depression is what they used to call a recession. Then came the Great Depression. After that, economists and politicians stopped using the word for fear of jinxing the economy. Now, a depression means a severe and protracted recession.

- Bush may be right about the chances of the US slumping into a depression. Part of the problem is that it’s not only the US that’s suffering a bout of economic woes. Japan’s economy, the world’s second largest, has just officially entered its first recession since 2001. Third-quarter growth fell 0.1% after a second-quarter drop of 0.9%. The euro area is also in recession. A 0.2% drop in growth there in the third-quarter followed a similar second-quarter fall.

- Lucky the leaders of the G20 nations are on the case. The pols from the  world’s 20 largest economies have promised to work together to achieve “needed reforms” in the world’s financial systems. US stock futures reacted poorly to the G20 pledge. Economists at UBS probably summed it up best, calling the G20 statement “a bland recitation of past policy initiatives, coupled with comments that were blindingly obvious.”

- We wish the G20 good luck in their endeavors. Unfortunately, however, we don’t hold much hope that their efforts will avert further pain. The G20, just like the Bush administration, is focused on reinflation measures, without addressing the underlying cancer eating away at the global economy: 40 years of monetary policy indulgence. As Doug Noland writes at PrudentBear.com,

There is little prospect that the direction of global policymaking will engender the return of stability anytime soon.  As [Judy] Shelton adeptly notes [in an op-ed piece in the WSJ], “In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits.” …

The global abandonment of any semblance of monetary or fiscal discipline is a hallmark of this extraordinary period of bursting Bubbles.  Stable “money” may be the key – but it’s also nowhere to be seen.

- Meanwhile, bankruptcies continue to rise back in good ol’ US of A. The NYT reports that the number of personal bankruptcy filings “jumped nearly 8% in October from September, after marching steadily upward for the last two years … Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005.” This means an average of 4,936 Americans filed for bankruptcy each business day last month.”

- And it’s not just America’s citizens who are facing bankruptcy; whole states are facing going under. The NYT also has a report on the massive deficits eating away at some of the country’s biggest state governments.

Two short months ago lawmakers in California struggled to close a $15 billion hole in the state budget. It was among the biggest deficits in state history. Now the state faces an additional $11 billion shortfall and may be unable to pay its bills this spring.

The astonishing decline in revenues is without modern precedent here, but California is hardly alone. A majority of states — many with budgets already full of deep cuts and dependent on raiding rainy-day funds or tax increases — are scrambling to find ways to get through the rest of the year without hacking apart vital services or raising taxes …

In Michigan, to reduce overtime costs, fewer streets will be salted this winter. In Ohio, where the unemployment rate is above 7 percent, the state may need a federal loan for the first time in 26 years to cover unemployment costs. In Nevada, which is almost totally dependent on sales taxes and gambling revenues, a health administrator said the state may be unable to pay claims in a few months.

- Such problems are just the tip of the iceberg, according to perma-bear NYU economics professor NourielRoubini . There are at least 20 reasons why Bush may actually be talking sense when he says the US faces a depression greater than the Great Depression. Here’s a quick rundown, courtesy of NakedCapitalism.com:

· The US consumer is shopped-out having spent for the last few years well above its means.

· The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.

· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

· Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.

· The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%….

· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 billion in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.

· The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.

· The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

· Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.

· Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.

· The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts

· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators…Massive job losses and concerns about job losses will further dampen current and expected income and further contract consumption.

· Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage….another general tax rebate would be as ineffective as the first one in boosting consumption.

· The 1990-91 and 2001 recessions were not global; this time around the IMF is forecasting a global recession for 2009.

· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.

· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.

· With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth…

· Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut…

· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling…. together with less availability of credit are severely dampening the ability of households to borrow and spend.

· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.

- But W. didn’t stop there. Apart from wanting governments to be “smarter” (who doesn’t?), he called for called for leaders to recognize that “government intervention is not a cure-all” for economic problems. So what was Fannie and Freddie all about? Or Hank Paulson’s Troubled Assets Relief Program. Or the bailout of AIG? If government is not a cure-all, then why has Bush orchestrated the biggest government intervention in the free markets in history? Is he really that unaware of what he’s saying? Isn’t he the one who thinks the problem started because Wall Street “got drunk.” Surely, he meant this was a bad thing that needed to be prevented in the future. Should the practice of issuing “liar loans” and “ninja loans” have been allowed to thrive unregulated? Should this be allowed to continue in the future?

- The irony of Bush’s stance didn’t escape his audience. Grant Aldonas, a former senior trade official in the Bush administration now with the Center for Strategic and International Studies, said, “The disabling of capitalism has already begun and he’s the one who started it,” Aldonas said. “It rings hollow for an awful lot of people, not only in the marketplace but for world leaders abroad. . . . They are the ones who are going to have the leverage at the table.”

- As Bush shares his economic wisdom with the world, the economy he presided over for the last eight years is in the midst of the deepest and most dangerous funk since the Great Depression. “The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself,” former Goldman Sachs chairman John Whitehead, told Reuters Global Finance Summit this week. Whitehead is no perma-bull. He’s a former Wall Street player and Reagan administration insider. But he is deeply pessimistic about the future of the US economy. This from Reuters:

Whitehead warned the country’s financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans.

“I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America,” said Whitehead, who served as chairman of the Lower Manhattan Development Corp after the World Trade Center was destroyed during the September 11, 2001 attacks.

Whitehead, who helped make Goldman a top-tier Wall Street firm and led its international expansion, left in 1984 to become a deputy secretary of state under Ronald Reagan.

He warned that the country’s record deficit is poised to balloon as the public calls on government for more support.

“Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds,” he said. “Eventually U.S. government bonds would no longer be the triple-A credit that they’ve always been.”

There are at least ten “trillion dollar problems,” facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.

“The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs — all very costly and all done by the government,” he said.

Large deficits can weaken the country’s credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take “several years” for the current problems to be resolved.

Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.

“I just want to get people thinking about this, and to realize this is a road to disaster,” said Whitehead. “I’ve always been a positive person and optimistic, but I don’t see a solution here.”

- This is perhaps a worst-case scenario. But it is on well worth considering. The problem right now is that even the best-case scenario is dire. The Paris-based Organization for Economic Cooperation and Development (OECD) says global economic output will shrink 1.4% this quarter for the 30 nations that make up its membership – and keep contracting until the middle of next year. According to the Los Angeles Times:

That would mean the developed world has entered a slump expected to last at least three quarters; two consecutive quarters is a common definition of recession. For all of 2009, these economies are expected to contract 0.3%.

Additionally, the U.S. economy is forecast to fall 2.8% in the fourth quarter, after a 0.3% drop in the third quarter, and then shrink 0.9% in 2009. Japan’s economy is expected to shrink by 0.1% next year and the Euro area by 0.5%.

That would be the first time since 1974-75, when they were suffering from the Arab oil embargo and a severe bear market for stocks, that the U.S., Europe and Japan had fallen into recession around the same time.

- According to NYU economics professor an economist du jour Nouriel Roubini, the US economic slump will be more severe:

The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

Roubini also contends that the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is rising. He also warns that “even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.”

- The rate of job losses in America is certainly playing ball with the deep recession theories. Today’s job loss shocker: Sun Microsystems announcement that it will slash 5,000 to 6,000 jobs, some  15% to 18% of its workforce

- It’s also the kind of recession where big companies take big hits to their balance sheets. Bloomberg reports that Freddie Mac’s [NYSE:FRE] third-quarter net loss “widened to $25.3 billion, or $19.44 a share, after writing down tax assets and providing for bad mortgages and securities.”

This from The Daily Reckoning Australia

Now to the big subject of the day: Inflation. You’d think evidence of even bigger deficits in the U.S. is clearly inflationary. But not everyone thinks so. The new prophet of doom, Dr. Nouriel Roubini, says at least four factors are setting up what he calls “Stag Deflation” (as opposed to the stagflation of the 1970s, where you had no growth and rising prices).

Roubini’s four forces of Stag Deflation are: a slack in goods markets, a “recoupling” of the rest of the world with the U.S. recession, a slack in labor markets, and a sharp fall in commodity prices. These factors would, “reduce inflationary forces and lead to deflationary forces in the global economy,” he writes in an article in Forbes.

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“Aggregate demand is now collapsing in the U.S. and advanced economies, and sharply decelerating in emerging markets,” he writes. “There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia (Chinese real investment is now close to 50% of gross domestic product) has created an excess supply of goods that will remain unsold as global aggregate demand falls.”

You’ll have to bear with us a moment, dear reader, as we work out what this means. First, though, is Roubini right? Well, he’s certainly right that there’s a big fall in aggregate demand in the U.S. It’s obviously passing through to manufacturers and commodity producers (China and Australia). But won’t monetary and fiscal policy designed to combat deflation…you know…cause inflation?

Roubini takes that point head on. He says the liquidity measures taken on by the Fed to get credit flowing and recapitalise U.S. banks are not all inflationary. He says once liquidity is restored to the credit markets (banks begin lending, money market funds starts buying commercial paper again) the central bank can simply “mop up” excess liquidity before it seeps into the real economy to cause inflationary damage.

And what about the tendency of governments to fight debt deflation with inflation? Not a worry either, says Roubini. He says that most of the household debt in the U.S. is short-term variable rate debt that’s resistant to being “inflated away” by cranking up the printing presses. Is he right?

Well it all comes down to how much money the Fed and the Treasury are going to need before the recapitalisation of the American financial sector is over and how they plan to raise that money. The banks will probably need more capital than anyone’s expecting. And there are other landmines down the road.

In short, the Treasury and Fed will need more money. Roubini assumes the Fed can simply remove the lending backstops it’s provided once the market returns to normal. But what if it doesn’t and the Fed can’t? What happens next?

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Governments get money three ways, taxing, borrowing, or printing it. You can rule out an increase in taxes large enough to fund the Fed’s needs. It won’t happen with an economy already contracting. Even if Obama raises taxes, it won’t be enough to meet the Fed’s immediate needs. That leaves borrowing and printing.

On September 17th, the U.S. Treasury announced a Supplementary Financing Program. It initiated the program at the request of the Federal Reserve. The Fed needed the Treasury to go out and sell more bonds so the Fed would have money to fund its various lending backstops. The Fed was nearly broke.

Since then, thanks largely to the huge flight to Treasuries sparked by deleveraging and the collapse of the dollar/yen carry trades, the Supplementary Financing Account set up by the Treasury has fed the Fed nearly $560 billion. Some of that may have gone to AIG (NYSE:AIG). Some of it to Fannie (NYSE:FNM) and Freddie (NYSE:FRE). Some may go to Chrysler, Ford (NYSE:F), and GM (NYSE:GM). Who knows?

But the main point, from Roubini’s perspective, is that as long as the Fed can finance its lending with new borrowing from the Treasury, it’s not inflationary. The only thing that would make this armada of liquidity measures and loan guarantees and bailouts truly inflationary is if the Treasury couldn’t go out and sell new bonds to gullible foreign investors. As long as the Treasury can sell more bonds, the Fed can make more loans without sparking inflation.

But if we’re right and the bond bubble began bursting in late October, well then the Treasury’s line of credit with global savers is nearing an end. Global creditors will be reluctant to finance American deficits. In order to borrow, the Treasury is going to have pay much higher rates of interest to reflect the credit risk the U.S. government has become.

Trouble is, the U.S. can’t afford to borrow at higher interest rates right now. So that leaves the option Roubini thinks is least likely: printing money. The fancy term for it would be “monetizing the debt.”

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That means the Fed would buy public debt issued by the U.S. Treasury with freshly printed money. And THAT, we reckon, is super inflationary. Any time you start rolling out new greenbacks to pay for new bonds which you give to corporations in exchange for their garbage securities, you’re going to damage the confidence people have in the currency (the U.S. dollar).

But then, Roubini has been right about an awful lot lately. It’s possible the Fed will not be forced to monetize the debt. It’s possible that a global contraction is truly deflationary. We don’t really know. But we’re not nearly as sanguine as Roubini that you can expand the monetary base as quickly as the Fed has and be confident it can all be mopped up later without causing inflation. Try getting motor oil out of an engine and back into the bottle.

Source: Falling Commodities and Inflation in the Wings

Things have changed dramatically since then. The biggest economic fear for the foreseeable future is now deflation.

This from VOA News:

Economist Nouriel Roubini of New York University said that rapid decline in oil prices indicate that deflation is more of a problem than inflation.

“I think deflation is going to be the story, or what I refer to as ’stag-deflation,’ a period of economic recession and deflation,” said Nouriel Roubini. “And why do I say that?  We’re now seeing the beginning of a slacking goods market with aggregate demand falling relative to supply.”

Roubini says the commodity prices that were at very high levels six months ago have fallen dramatically as demand suddenly fell as companies and consumers conserved cash.  Oil prices are down more than 50 percent from their record highs in July.

Meanwhile, The Daily Reckoning’s Bill Bonner says we should prepare for “deflation now, inflation tomorrow.”

The US government is ready to pull out all the stops to reflate the economy. Eventually, this will bring inflation back with a vengeance, and take down the dollar.

– Saudi Arabia, meanwhile, has announced it will pour $2.3 billion in loans to low-income borrowers.

– There are also signs of trouble in boom town Dubai. The WSJ reports that real-estate brokers there say they are seeing signs of “price weakness” there. We can only presume this is real-estate broker speak for “Nobody’s buying.”

– Over the weekend, “Dr. Doom,” aka New York University economics professor Nouriel Roubini, told The Times that the world economy was “at a breaking point” and that global stock markets are now “essentially in free fall” and “are reaching the point of sheer panic.” On Thursday, Roubini predicted hundreds of hedge funds would go bust and stock markets would soon be forced to shut down in order to stem the panic selling. On Friday, NYSE circuit breakers triggered a temporary halt on futures trading after futures droped 550 points. It was the first time the NYSE had to halt trading since 1997.

– U.S. stock futures are in the ditch again today. MarketWatch reports that “S&P 500 futures fell 34.3 points to 831.70 and Nasdaq 100 futures fell 43 points to 1,148.50. Dow industrial futures dropped 246 points.”

– Newsweek is calling it a “full-blown crisis.”

Last week seemed to be the nail in the coffin of “decoupling,” a theory that said increasingly savvy and solvent emerging markets would no longer march in economic tandem with more-developed nations. As the global financial crisis deepened, South Korea announced a $130 billion bailout for credit-starved banks and companies, Ukraine canceled elections amid a growing national crisis over frozen credit markets and a plummeting currency, and Pakistan asked the International Monetary Fund to arrange emergency financing amid the country’s worsening economic meltdown. All this came after a torrent of ratings and outlook downgrades by agencies like Fitch and Moody’s on former shooting stars such as India, Vietnam, Hungary and Argentina.

So much for emerging markets saving the world from recession.

– Bloomberg reports today that “equity indexes in India, China and the Philippines tumbled more than 6 percent, while Indonesia’s rupiah fell 4.4 percent versus the dollar, leading developing nations’ currencies lower.”

– Oil prices are at 17-month lows. A barrel of oil is now selling for below $62 a barrel in Asia, despite OPEC’s announced cut in supply.

– Gold is also down in Asian trader this morning as investors seek cash. Bloomberg reports that “gold for immediate delivery fell as much as 1.5 percent to $723.78 an ounce, and was at $725.28 at 3:22 p.m. in Singapore.”

– What worries us here at ContrarianProfits more than the rout in stock and commodities prices is the steadily growing belief that government intervention is the way to ‘fix’ the financial markets. The common wisdom, according to a great essay by Larry White picked up by the Cafe Hayek blog, is now as follows: “No. 1: Banking and financial markets are inherently unstable. No. 2: Government intervention into banking and financial markets can only stabilize (never destabilize).” In fact, says White, the opposite is true. “Over the broad sweep of history, banking systems with few legal restrictions have been more stable than systems with more intervention.“

– The broader Standard & Poor’s 500 index did even worse. The S&P 500 was the worst performer among the major indexes. It shed a whopping 6.1% and hit its lowest level since April 2003. The fear and loathing on the Street is palpable.

– Today, U.S. stock futures slipped thanks to what normally chirpy MarketWatch calls “the brutal economy that companies are navigating.” S&P 500 futures edged 2 points lower to 900.80 and Nasdaq 100 futures fell 7.25 points to 1,240.70. Dow industrial futures rose 5 points.

– Agora Financial’s Chris Mayer, one of the smartest contrarian investors we know, is quoted on Addison Wiggan’s 5 Min. Forecast blog as saying: “What we are going through now is a history-making crash. There is a reason it caught so many people by surprise — it hasn’t happened before, not quite in this way.”

– Addison also quotes Bill Bonner. Bill has been calling this crash for years in The Daily Reckoning. His “trade of the decade” — sells stocks, buy gold outlook — now looks like a very wise move. Bill says we about to be hit with a protracted bear market combined and a deep recession.

“When Mr. Market goes into a sulk, he takes a long time to come out of it. Real bear markets last 10… 15… 20 years. Judging by the meltdown in the financial sector and the rapid losses we’ve seen over the last three weeks… we have a real bear market on our hands…

“With no more easy credit available to them, consumers are doing what they have to do — they’re cutting back. How much? For how long? No one knows the answers to those questions, but our guess is this: more and longer than you thought.”

– We didn’t expect permabear Nouriel Roubini to be calling a bottom. But we didn’t expect such a bleak prognosis either. Roubini spoke yesterday morning on CNBC. Henry Blodget on Clusterstock summarizes Roubini’s breakdown of the coming financial Armageddon:

# The worst is yet to come.
# The next few weeks and months are going to have lots of negative surprises on the economy
# The flow of market news is going to be much worse than expected–just like last week when every piece of news was awful
# Earnings are going to surprise on the downside. There’s going to be a sharp fall in earnings, not just financial sector, but everywhere.
# Even in financial system, where we avoided a systemic global financial meltdown by an epsilon, there will be significant risk downward. Emerging markets going into a crisis. Having a blow up of the CDS market. Having hundreds of hedge funds closing down.
# So I significant downside risk for the financial markets and economy. I think the worst is yet to come.

– Blodget says yesterday’s wipeout in the stock market was a good thing, because it means the market is behaving rationally.

Trading down on profit warnings is a pretty rational and even normal response to economic news. The reason that’s good news is that it means we’re not just experiencing mysterious problems in credit markets or some new financial innovation no one ever heard of exploding all over the markets.

– Argentina, where the ContrarianProfits offices are based, is royally screwed by the looks of things. The hugely unpopular president President Cristina Fernandez de Kirchner has announced she will seize pension funds. Cristina, ever the populist, claims the move is to “protect” people’s money. The reality is she plans to use the funds’ $29 billion to meet the country’s spiraling financing needs. The Argentine stock exchange, the Merval, plunged as much as 18% on the news.

– Addison Wiggan’s take on it in The 5 is dead on.

Beset with debt and overcome by its bond obligations, the Argentine government nationalized $30 billion in private pension funds yesterday.

Fifty-five percent of those pensions are government debt holdings… and now that Argentine leaders have seized them, they can essentially write them off. The rest of the holdings they’ll use to finance debt payments and keep the government running.

Argentina is the second largest economy in South America. It is one of the world’s top five exporters of beef, soy, corn and wheat. It still can’t afford to keep the lights on. Argentine citizens are being asked to suspend reality and trust the government is good for the money when they’re ready to retire.

Hmmmn… puts us in mind of that ’70s-era Rainbow rock ‘n’ roll tune “Can’t happen here, can’t happen here. All that you fear, they’re telling you, can’t happen here.”

He warned investors on Bloomberg TV that the US now faces a meltdown in financials that Hank Paulson’s bailout bill won’t fix. Roubini says the bill is merely a way of “privatizing gains and socializing losses.”

He also warned investors that stock prices could fall another 20% and trigger a period of severe deflation.

Watch Roubini discuss the financial crisis on Bloomberg TV.