The cause and the solution

You want just one quotation this morning that encapsulates the insanity?

Here's a hint:  It's not Warren Buffett saying,  “In my adult lifetime, I don’t think I’ve ever seen people as fearful.”

No, as a bank panic spreads worldwide, it's a White House economic adviser who has the temerity to remark (anonymously, of course), “We are both the cause of the problem and the solution. The world still expects US leadership."

See, here's the problem folks like you and I face.  We snicker and sneer at the notion that the people who caused the problem have the wisdom and foresight to solve it.  But that puts you and me in the the "reality-based community," whereas this crowd believes they "create their own reality," a reality evidently encompassing the delusion that the United States is still the sole superpower, both military and economic.

You want another representative quote?  Take Rep. Brad Sherman (D-California), a bailout critic.  During debate over the bailout bill that passed the House Friday, he said of the previous bill that had failed, "Many of us were told in private conversations that if we voted against this bill on Monday that the sky would fall, the market would drop 2000-3000 points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no."

Is Sherman engaging in hyperbole here?  I daresay that's not the point.  The mere possibility he's not engaging in hyperbole should send a chill down our spines.

Meanwhile, a meme I've seen periodically over the last few days is this:  The Fed and the Treasury are deliberately pursuing a strategy similar to that of Japan's in 1989-90.  There's just one problem with this, as pointed out by Ambrose Evans-Pritchard in the London Telegraph.  "Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump," he writes. "America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds."

The consequences of a similar response in the United States would be hyperinflationary.  But not right away, of course.  "The risk of a dollar collapse is one for the distant future," writes Pritchard.  "Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets 'delevers' with a vengeance."

Call it The Great Deleveraging.  All the hedge-fund fast money that poured into commodities is pouring out now as the redemption orders pile up fast and furious.  It's why gold-mining stocks dropped 15% last Thursday, and fertilizer stocks as much as 40%.  More super-shocks are still to come.

The Daily Reckoning