National preoccupation with SpillCam is a useful distraction from a slow-motion blowout in financial markets. The leak in the money well will not harm the environment, but much like the deep-water layers of oil in the Gulf, a slippery mess is uncontained.
The stock market is all over the place, but not the credit markets: US Treasurys are holding panic prices easily, the 10-year in a new range 3.09% to 3.30%, still trending down. We borrowed another $80 billion this week without a ripple.
Retail sales in May fell 1.2%, creating head-shaking confusion about the real state of recovery. Several measures of inventory rebuilding say that cycle has ended, and may have overshot to excess. Too soon for double-dip: serious stock-market people (there are a few) are optimistic about big-company earnings, and the red-hot emerging/China conveyor. In a sign of adaptation to trouble, the NFIB small-biz survey improved in overall optimism, and in sales and earnings, although the reading is about the same as the worst of the last two recessions.
The insight of John Maynard Keynes, 80 years ago: if private-sector demand flags in a recession, then government must borrow and spend to intercept a downward spiral to deflation. Everyone understands that prescription should have been taken in the ‘30s, as well as its companion: to stop a bank run, central banks must provide replacement liquidity, infinite if necessary. As in all recessions since the ‘30s, from the outset of this predicament in August 2007 governments and central banks throughout the West took those measures, and then with increasing vigor.
There will be no permanent marker at the grave of Keynesian Stimulus, nor even a precise date of death. The approach will work again someday, so long as the government involved has not already frittered away its borrowing capacity, nor acted so slowly that asset-deflation has decapitalized its banking system, nor is it entangled in the aftermath of a currency delusion.
The US is oh-for-two, Europe oh-for-three. RIP Keynesianism. The ongoing borrowing and spending, and liquidity hose… just buying time. But done. Over.
MoneyCam, first in the US: mortgages intermittently touched new-record bottom, as low as 4.75% with no points. In the most striking sign that something odd is going on, new mortgage applications are in a five-week free-fall, even refinance ones. The short, Memorial Day week might have distorted, but applications were 30% below the same week last year.
There is only one explanation for no response to record-low rates: four years of housing deflation, and too many potential buyers think, “What good does 4.75%, or 3.00%, or 2.00% do me if I can’t sell this thing for what I paid?”
MoneyCam in Europe: a full-scale bank run is underway, banks running on banks, just like 2007 except that Euro banks are wrecks at the start of this one. The ECB is providing cash to replace the run, but it just piles up in the accounts of banks at the ECB, banks unwilling to lend to each other.
The second, confirming trace on-screen: the trillion dollar euro-bailout has all of the collective security of a flock of sheep (gratis Winston). A 3-year German Bond trades 0.59% today, and Spain 3.32% (US 1.22%). A German 10-year is 2.57% (US 3.22%), and Portugal pays 5.23%. Germany is the one nation on earth that should be expanding its Keynesian deficit, to help the rest of Europe, to become an importer, and instead offers Gotterdammerung to the whole continent.
The one bright spot, the one policy path for the US and the rest (after the euro blows): the UK. It has done everything right: instantly devalued in 2007, injected capital into its banks in ‘08, and forced them to lend, which induced modest real estate recovery. Now two brave kids, Cameron and Clegg, will cut government spending because no conceivable tax can fill the budget hole. The UK 10-year is holding, 3.46%.
I do hope the kid over here is paying attention.
by: Lou Barnes
