Sharon Astyk’s called 2008 pretty well and, with a couple of quibbles, I agree with her 2009 predictions. Sadly.

I think that she might be underestimating a few things:

• The ability of the US government to pull rabbits out of the hat. When you control the money presses and regulate the financial markets, you can do quite a bit. For a while longer.
• The interest of foreign governments in keeping us afloat until they can untangle themselves from dollar investments.
• The ability of banks and industry to manipulate government policy to their liking in the name of “crisis”.
• The “new coach” mentality changing consumer sentiment. How long Obama has before people lose hope is the big question here.

The WSJ hits the Bush/Obama bailout mentality hard in their editorial “Barack Obama-san.” Politics aside, it’s a sobering review of what has happened to the Japansese economy after real estate and stock market bubbles burst and the government responded with multiple bailouts.

Here’s the chart that compares Japansese and US government debt as percentages of their respective GDPs:

This is a troubling reminder. Not a road to go down, right?

But we’ve already gone down that road. And I’m not talking about AIG or TARP.

You see, this editorial focuses on government debt. But the total national debt that includes individuals and businesses has already bloated!

A recent Morgan Stanley presentation highlights the spike of total debt in the US (on slide 6). Since the turn of the century alone, it has spiked from roughly 250% to 300% of GDP!

The lesson to be learned is more than the ineffectivity of public stimulus, which the WSJ rightly highlights. It is that, regardless of the source or destination of largess, its tantilizing short term benefits are dwarfed by its subtle, long term poison.

Just like binge eating, the pounds remain after the pleasure, and make it that much harder to cut back in the future.

Janszen at iTulip.com is always on target. His latest post, focusing on the latest rate cut insanity and the Fed’s likely next steps is no exception and a a powerful must-read.

Early in the article, he focuses on the potential short-term benefit to consumers being huge discounts. But he also lays out some prophetic advice:

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation. 

But elsewhere he suggests that consumers would better save their limited funds to prepare for the coming disaster than to spend them. But isn’t that contrary? Besides the obvious need for cash on hand to pay the increasing bills, isn’t the cash going to be worth less once the temporary, bankruptcy-driven deflation passes and the monetary policy-driven inflation kicks in?

Stunningly easy money continues to be shoveled into the markets. The negative effects are apparent to those who are paying attention, as highlighted in this Bloomberg article:

“The dollar will go to new lows as the U.S. attacks its currency (out emphasis),” said John Taylor, chairman of New York-based FX Concepts Inc., which manages about $14.5 billion of currencies.

As we discussed earlier, the dollar appears to be in decline again. Whether it will turn into a full-fledged “run” on the dollar at this time remains to be seen. But the surge of the last few months brought on by year-end settlements appears to have run its course and is evaporating as we watch. The Fed’s actions and Bush / Obama pronouncements are pouring fuel on the fire.

The immediate outcomes? Commodity prices, which are declining significantly in “real” or even “Euro” or “Yen” terms, are likely to be flat to increasing for Dollar-based consumers. The tailwinds that bring an economy out of recession will be weak or non-existant. Stagflation is likely.

Disruptive events notwithstanding, this is going to be a terrible time to be in the dollar. Occasional 4% surges in the Dow are meaningless when countered by coincident 4% increases in EURUSD (better than $1.40 as of now)!

Investing in currencies looks like a good course of action, but understanding the details of how to do that wisely is important. (Any experienced suggestions are appreciated!)

Two things I ask of you;
  deny them not to me before I die:
Remove far from me falsehood and lying;
  give me neither poverty nor riches;
  feed me with the food that is needful for me,
lest I be full and deny you
  and say, “Who is the LORD?”
or lest I be poor and steal
  and profane the name of my God.

– Proverbs 30:7-9

The government may have announced that they’re insuring money market investments, but what happens when the yield turns negative?

Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

While commentators seem to try to hedge their bets by obfuscating, the Euro continues its surge relative to the dollar. It strikes me that this is a fundamental rebound. Then again, I’m a neophyte.

Here’s a DailyFX chart that illustrates the dramatic “V” rebound.

Have we seen the end of dollar-buying to liquidate positions in the US prior to the end of the year and prior to the Obama administration’s debut?

Also note that a significant portion of the surge in oil prices is actually tied to the exchange rate. This should begin to re-introduce inflationary pressures on the economy and counter the deflation — both real and predicted — of the past several months.

This may not be a final blow to the dollar, but it should serve as a wake-up-call that we should not expect deflation to win out in the long term, especially for imported or energy-sensitive commodities.

The question is: when will inflationary pressures of dollar printing and borrowing begin to outweigh the downward pressures introduced in real estate and retail from bankruptcies and liquidations? And what impact will negative real interest rates in the U.S. have on the dollar and the economy? Is there a window of opportunity in the next weeks or months for individuals to improve their positions before the storm actually hits in full force?

It looks like the Senate did the right thing. Now it depends on the President to do the right thing (for a change) and let the bankruptcy reorganize the companies in the courts instead of hooking up the taxpayer IVs and letting the politicians get their fingers in:

The Senate rejected the bailout 52-35 on a procedural vote — well short of the 60 required — after the talks fell apart.

“I dread looking at Wall Street,” said Senate Majority Leader Harry Reid in anticipation of Friday’s stock market reaction. “It’s not going to be a pleasant sight.”

Gee, Harry, not a pleasant sight? I suspect it won’t look any worse than many of the days over the past few months. Besides, since when have you been concerned about Wall Street? I thought you were all about “the working people”?

Stock futures are down, foreign markets are down about 3%, the dollar’s regaining a little versus the Euro, and oil is retreating further. Hard to tell if it’s based on the news. Perhaps if the President announces a plan we’ll see the reaction in a lower dollar, higher oil and gold. It’s not going to be a pleasant sight…

Sharon at Casaubon’s Book blogged about how increased interest in personal gardening and farming is impacting the seed market:

Yesterday afternoon, my Fedco Seed Catalog arrived – always my personal favorite.  And on page 6, what should I see but this, in founder CR Lawn’s description of their situation:

And now seed prices.  I’ve ben 30 years in this business and these are the highest increases to us I’ve ever seen.  The ethanol boom diverting land to corn production has ahd a tremendous impocat on farm commodity prices, including vegetable seeds.  Wholesale prices for pea and bean seed are up 30-50%, for corn and squash, 20% or more.  Even so, wholesalers could not find growers for all crops so several varieties are missing from our catalog.  Horrible growing weather this summer has exacerbated the shortage.

The dramatic recovery of the dollar versus the Euro — and indeed generally against the foreign currency basket — might finally be fading.

Not only has the Euro surged higher in the past few days, but DailyFX analysts claim to have called the floor at $1.26 USDEUR with a projection of $1.60.

The exchange rate bounced several times at the1.25 level over the past seven weeks. Now it appears to be making a sustained, dramatic rally. How to defend against it?

This already means dramatically higher oil and gold prices. It’s likely to further impact everything from trade to ability to raise debt and defend against foreign acquisitions.