Getting the week going with some optimistic forecasts.
“Global economy faces deep slowdown and deflation threat, BIS warns“:
The global economy may be heading for a far deeper crisis than is expected and a bout of deflation in the world’s biggest economies is now a possibility, according to one of the world’s most highly regarded economic institutions.
. . .
It [Bank for International Settlements report] warned that the sub-prime crisis in financial markets was merely a reflection of growing debt burdens in the developed world, which could soon contribute to a deep slowdown.
“The difficulties in the sub-prime market were a trigger for, rather than a cause of, all the disruptive events that have followed,” it said. “Moreover… the magnitude of the problems yet to be faced could be much greater than many now perceive.”
People (including high-ranking officials in the U.S. government have been suggesting that the worst of the financial mess is over. It’s not. To that point, Lawrence Summers: “It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August.”
Futures Magazine has an interesting interview with economist Walter “John” Williams. Mr. Williams explains how government economic statistics, particularly the CPI, are misleading. If the government was using the formula it used in the early 80s, our economic picture would look much different:
[I]f you look at the number, net of these various methodological changes that primarily were made to boost the economic reporting or depress the CPI, you would find the inflation rate today, instead of being 3.9% year-to-year as of April, would be 7.3% if you look at the methodologies as of 1990; 11.5% if you look at the methodologies as of 1980. The unemployment rate, the way it used to be measured, would be up around 13% and the GDP would show we are in a recession.
Double-digit inflation and unemployment rates would certainly get people’s attention.
This is also eye-popping:
Back in the 1980s, the big 10 accounting firms decided to set up a system so that the Federal government would report its financial activity the same way as businesses, with accrual accounting. Starting in 2000, the Treasury, under law, started publishing these generally accepted accounting principles statements on the U.S. Government signed by the U.S. Treasury Secretary and audited by the government Accounting Office (GAO). If you put in the year-to-year change in unfunded liabilities for Social Security and Medicare, the average deficit over the last four years has been about $4 trillion. To put $4 trillion into perspective, if the government were to seize all personal income and corporate profits, there would still be a deficit.
That is frightening because it means it is beyond containment. People in Washington know this, the Fed knows this and David Walker, who recently resigned as head of the GAO started to talk about it. Politicians won’t address it because they don’t have a solution. The 10-year note, certainly a 30-year bond, will have problems within 10 years on whether or not they are going to be paid off or what they are going to be paid off in. There are obligations that the government has no way of covering. When governments are in that sort of a situation, rather than renege on debt, the common solution is to rev up the printing press and you end up with a hyper inflation so you get paid off in worthless dollars. I think that is where it is headed.
Fun times ahead.
UPDATE: If that wasn’t enough to dampen your spirits, take a dose of Mish.