The Surprise Report That Set Off the Rally, IMF and Fedheads Both Seeing U.S. Recession, Amoss Unpacks Fed’s Newest Liquidity Scheme, and More!
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— The Energy Information Administration’s weekly inventory report this morning shows oil supplies fell 3.2 million barrels over the last week — a far cry from analysts’ estimates of a 2.5 million barrel increase. Within minutes, light sweet crude shot past $111. If it closes above $110.13, we’ll have a new record high today.
Get used to it, says the EIA. Hours before the inventory report, the EIA raised its average oil price forecast for the year from $87 back in January to $101…with or without a recession in the U.S.
— “Consumers are beginning to shrink,” admitted our friend Alan Greenspan on CNBC yesterday, continuing his Rep Rehab tour, “the automobile markets are beginning to contract, production is beginning to ease and we are in the throes of recession.”
Over the weekend, he said he didn’t think the U.S. was in recession yet. But we hesitate to accuse the former Fed chair of misspeaking. In his mind, the “throes” of a recession may well be something different from an actual recession.
— The International Monetary Fund (IMF), for its part, expects a “mild recession” in the U.S. this year. It put a price tag of $945 billion on losses from the credit crisis this morning. That would mean — with only $232 billion in write-downs behind us — we’re barely a quarter of the way there.
“There has been a collective failure,” says the IMF’s director of monetary and capital markets, Jaime Caruana, “to appreciate the extent of leverage in the financial system and the associated risks of disorderly unwinding.”
— Minutes from the Federal Reserve’s Open Market Committee meeting last month released this week reveal the Fedheads are only mildly freaked by their situation. “Many participants,” the minutes say, “thought some contraction in economic activity in the first half of 2008 now appeared likely.” Some fretted about “a prolonged and severe economic downturn.”
If you’re keeping score at home, the FOMC meets again April 29-30. In Chicago, traders have priced in a 100% chance of another 25-basis-point cut, with 44% odds of a 50-point cut.
— Meanwhile, quants behind the scenes are desperately trying to engineer new ways to increase liquidity…without dropping the fed funds rate.
The Fed’s Term Auction Facility (TAF), offering 28-day loans to commercial banks, spat out another $50 billion yesterday, for a total of $310 billion since last December. But they need more, more, more…
“The likeliest option…is for the Treasury to issue more debt than it needs to fund government operations,” surmises Greg Ip at The Wall Street Journal this morning. “The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit, and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasuries in the open market; for legal reasons, it generally cannot buy them directly from Treasury.”
“There are good reasons for legal limits on the Fed directly purchasing Treasuries,” comments our Dan Amoss, appalled at the Fed’s gumption. “Doing so basically means the Fed would print dollars to pay for the federal budget deficit — a move that would quickly lead to a total loss of confidence in paper money. History shows that when central banks start directly monetizing government deficits, confidence in paper money collapses quickly.
“The idea to expand the supply of Treasuries is also bad. This would put more purchasing power into the hands of a wasteful federal government. Since the government doesn’t produce any goods or services to offset its buying power, this idea would also add pressure to consumer prices.
“In short, there are no easy answers to a problem created by easy money and runaway credit growth. Expanding the money supply — no matter how sneakily — will only hurt confidence in the dollar.”
— “The U.S. has no way of avoiding a financial Armageddon,” says our friend the always chipper John Williams, expecting something much more ominous than a mild recession.
“Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations — a solution rarely seen outside of governments overthrown in revolution…”
At the current pace, “Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests and gross mismanagement.
“While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar.”
— “You don’t have to predict it,” Paul Volcker replied yesterday to a question about the coming dollar crisis at the Economic Club of New York. “We’re in it.”
We’ve met the former Fed chairman several times. Once at a Grant’s conference at the Regis Hotel in New York a few years ago. And then again a few months ago when he granted us an interview for I.O.U.S.A. At the time, he warned Ben Bernanke not to let inflationary pressures build in the economy because once they start…they’re very hard to stop. Volcker earned his reputation the hard way fighting the inflation by forcing interest rates to heights this economy would suffocate under.
Yesterday, he said he’s experiencing flashbacks. Citing the rising price for soybeans and oil as two indications we’re “at a point when we have to worry” about inflation, he went on to warn today’s Fed not to favor special interests and “subordinate the fundamental need to maintain a reliable currency” in order to steer clear of recession at all costs.
“The Fed has a particular duty to defend the integrity of the ‘fiat currency’ in its charge,” the WSJ paraphrases Mr. Volcker. “And exchanging dollars for ‘mortgage-backed securities of questionable pedigree’ both raises the specter of moral hazard and potentially undermines the world’s faith in the integrity of the Fed’s balance sheet.”
In other words, look out below.
We told you yesterday our fully updated and revised edition of Demise of the Dollar is on Amazon yesterday. Unfortunately, we gave you the wrong link. Try this one instead. And if you’re in the Philadelphia area, there is a screening of I.O.U.S.A. tonight at 5:00 p.m. at the Philadelphia film festival.
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Tags: , Alan Greenspan, Commodity Boom, credit crisis, dollar, Energy Information Administration, fed, Hugo Chavez, I.O.U.S.A., IMF, inflation, International, liquidity, Oil Price, Oil Supplies, recession, Washington MutualAbout the Author
Addison Wiggin is the editorial director and publisher of The Daily Reckoning, and executive publisher of Agora Financial. He is also one of the executive producers and writers of I.O.U.S.A. a feature length documentary film nominated for the Grand Jury Prize at the 2008 Sundance Film Festival.