The Consequences Will Appear in Six to Nine Months

Marketwatch.com's Rex Nutting reports on consumer spending:

"The U.S. has slipped into a rare consumer-led recession this year. It looks increasingly likely that real consumer spending will decline for the first quarter in 17 years during the third quarter, and the fourth quarter isn't likely to be any better. The only thing that kept spending up in the first half of the year was the infusion of about $100 billion into consumer's bank accounts courtesy of Uncle Sam."

"Retail sales represent about half of all consumer spending (the remainder is mostly services such as utility bills) and about a third of total final sales in the economy.

For September, economists surveyed by MarketWatch expect retail sales to fall 0.8%, which would be the third straight decline. Excluding the huge drop in auto sales to a 16-year low, sales probably fell 0.2%."

"Same-store sales were extremely weak, with retailers reporting very soft demand for discretionary goods. "Consumer credit is hard to co me by these days, so anything that can't be bought with what's in the wallet, simply isn't bought," wrote Ellen Beeson Zentner, senior economist for Bank of Tokyo-Mitsubishi."

"Consumer demand likely softened noticeably further in September, as the chaos in financial markets and deterioration in employment and income prospects have spooked households," wrote Stephen Stanley, chief economist for RBS Greenwich Capital."

"Stanley looks for a "whopping" 2.5% annualized decline in real spending in the third quarter. "The outlook for the fourth quarter could be even worse, despite the astonishing declines in energy prices in recent weeks."

"Stanley predicts consumer spending will fall again in the first quarter of the year, the first consecutive three-quarter drop in the post-World War II era."

"The good news will come on inflation. The consumer price index is expected to rise 0.2%. The core CPI is also expected to rise 0.2%."

"Inflation has almost fallen off the Fed's radar. "There is a broad consensus among market participants that price pressures will fade abruptly going forward, with some even reviving fears of deflation," Greenwich Capital's Stanley wrote. However, he's "certainly not concerned" about deflation in prices for goods and services. "Asset prices are clearly a different matter."


China View reports on comments from Chinese Official:

"Deputy Governor of the People's Bank of China Yi Gang called for international cooperation here on Saturday to restore global financial stability."

"Our current priority is to enhance international cooperation to prevent further deterioration and spillover of the crisis and restore global economic and financial stability," Yi said.

"The deepening and widening of the U.S. financial crisis have triggered a major global slowdown and escalating uncertainty, Yi Gang said in a statement at the 18th meeting of the International Monetary and Financial Committee (IMFC) held here Saturday."

"While the advanced economies have slowed significantly since the U.S. sub-prime crisis, the emerging market economies have maintained robust growth but the deteriorating external environment is putting the resilience of their macroeconomic policies to the test, he said."

"Yi also noted that as the impact of the crisis on the real economy is much worse than expected and the recovery more protracted and difficult, the risks of deflation in some countries as a result of the credit crunch have increased significantly."

"It is imperative that the major advanced economies coordinate rapid implementation of bailout packages to avoid deflation and facilitate the global recovery," said Yi.

"However, we should be aware that the injection of liquidity from these emergency measures could be a potential source of inflation in the medium and long term," the deputy governor said.

Prof Rodrique Tremblay on GlobalResearch.ca:

"The U.S. economy may be approaching what can be called a classic situation, wherein the Fed is lowering interest rates while lending through its discount window and printing money on a high scale, however the liquid money supply figures, in real terms, are not increasing, but are rather “liquidity trap” falling. Thus, there is no immediate inflation, but the money supply is contracting as banks reduce their lending and make a rush to T-bills (their yields nearly fell to zero). The short-term result is a net deflationary effect for the overall economy and on the stock market (although the long term bond market sees inflation ahead, and long term rates are rising). —The result is stock market crashes in repetition."

"In fact, this is precisely what has happened over the last few weeks, not only in the United States, but also in the U.K and in other European countries. This is a very dangerous development for the real economy, because money data in real terms are a leading indicator of the future course of the economy. Six or nine months down the road, the consequences of the credit crunch will appear in production and employment declines, because the credit crunch has the effect of placing a serious squeeze on most companies. Since the credit contraction really began in June (2008), the early part of 2009 is bound to show severe economic weakness."

"On Friday, September 19 (2008), the Bush administration announced its solution to the growing banking crisis. It made public the $700 billion Paulson plan (US Emergency Economic Stabilisation Act, EESA) that primarily focused on creating a government market for some of the bad mortgage-backed securities on the banks' books. —But this was only half of the problem. The other half of the problem was the need to stop the money supply from declining, by restoring bank credit lending and allowing companies to have access to working capital financing. The goal here is to prevent banking problems from morphing into a general contraction of consumption and capital investment plans, thus slowing down production and raising unemployement in the coming months."

"For this to happen, however, banks must be allowed to find badly needed new capital. But in a time of crisis, with stock markets declining, it is doubtful that much private capital can be found. The recent association of Warren Buffett with Goldman Sachs may be more of an exception than a rule."

"When private capital is not available, the government has no other choice but to inject equity (by buying the banks' preferred shares) into the national banking system, while taking steps to safeguard the public interest by obtaining common share warrants that can be resold profitably later, when the situation stabilizes."

"In conclusion, we may ask if it is possible to avoid a repetition of the U.S. Great Depression of the 1930s or the more recent Japan's protracted recession of the 1990s, both the result of a similar severe banking crisis? The answer is yes, if the vicious cycle of asset price decline, banking credit crunch and money supply contraction can be avoided, or, at the very least, stopped and reversed. —In economics, as in medicine, it is never too late to do the right thing."