Great Depression Online Archive Issue:

Burger Deflation

Great Depression Online
Long Beach, CA
April 27, 2010

Inside This Issue You Will Discover…

*** More Bank Failures
*** More Deflation
*** Burger Deflation
*** And More

More Bank Failures

Seven Illinois banks disappeared from the face of the earth last Friday.  It’s no surprise why.  Their total combined assets were over $6.3 billion yet their total combined liabilities were much greater…they were insolvent.

The FDIC came in, took over, and distributed the deposits to other, more financially sound, banks.  The total drain on the FDIC for backfilling the missing deposits was over $973 million.

“There were 140 bank failures in the U.S. last year,” reported AP, “the highest annual tally since 1992 at the height of the savings and loan crisis.  They cost the insurance fund more than $30 billion.  Twenty-five banks failed in 2008 and only three succumbed in 2007.

~~~~~~Private Insider’s Report~~~~~~

Chaos and panic are always created when new financial rules replace old, established ones.  Those who understand this have the combination to the New Vault and can easily open it, reach in, and get their generous share of the new wealth. Unfortunately, those who don’t understand this will desperately cling to the Old Rules and stoically go down with the sinking ship like a brave old sea captain.

New Rules here

~~~~~~~~~~~~~~~~~~~~~~~~~

“The number of bank failures likely will peak this year and will be slightly higher than in 2009, FDIC Chairman Sheila Bair said recently.

“As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund.  It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.”

The FDIC is backed by the government.  So when the FDIC can’t fund its obligations, the government picks up the tab.  Where does the government get the money to cover the FDIC deficit?

It borrows it, largely from foreigners.

More Deflation

Banks going bust are just a reminder that we’re still in a depression.  Things have been so delightful lately we almost forgot.  The stock market’s had an epic rally, oil’s run back up over $85 per barrel, thus proving the economy’s hopping and humming along.  Heck, the New York sandwich board guy – after 25 months – has even found a new job.

But now that things are supposedly getting better, the Federal Reserve must look for ways to unload the more than $1 trillion worth of mortgage-backed securities it bought up since the credit crisis began.  Buying mortgage-backed securities and treasuries, in central bank parlance, is known as quantitative easing.  It’s where the central bank creates money from thin air and lends it for practically free to banks and the government.

With the economy being righted and recovering, the Federal Reserve must withdraw the funny money from the financial system before inflation sparks and flares.  “Speculation about sales Friday morning knocked prices of longer-term Treasury bonds down, and helped push the 10-year note’s yield up from $3.770% to 3.813%,” noted the Wall Street Journal.

But what if the economy really isn’t on the up and up?  What if the recovery was all funny money induced flimflam?  If that’s true, then inflation isn’t the concern after all; rather the concern’s deflation.

Dr. Doom, Nouriel Roubini, seems to think so…

Burger Deflation

‘“The federal funds rate is going to stay at zero until at least the first quarter if not the second quarter of next year,’ Roubini told Bloomberg.

“That’s because given the anemic economic recovery, deflation remains a bigger risk than inflation, he says.

‘“The Fed is (likely) going to eat its own words and resume quantitative easing directly or indirectly,’ Roubini said.”

Who knows?  Perhaps he’s right.  Perhaps the economy needs more funny money to keep its head above water. 

Here at the GDO we’ve been waiting for a stock market sell off practically since the rally began.  In fact, we’re confident it should happen any day now.  Of course, like bank failures and mortgage defaults, a stock market sell off is deflationary.  So are corporate bankruptcies. 

For example, just last Thursday Magic Brands filed for Chapter 11 bankruptcy.  If you’re not familiar with Magic Brands, they’re the parent company of Fuddruckers…the 1950s themed burger joint.  From what we gather 24 corporate-owned Fuddruckers will be closing by the end of the month.

Luckily, our initial shock upon discovering this was quickly alleviated; a quick Google search and we confirmed our local Fudds is not one of the 24…it’ll remain open at least for now.

Good grief.

If the depression keeps up, even getting a good burger will soon be hard to come by.

Regardless, the inflation vs. deflation battle is far from over.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  The Great Depression and history have shown us clearly enough that when economic rules shift, they are merciless. Those who know, prosper… those who don’t, get crushed. That’s just the way life is.  Don’t get crushed.

 

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