Here is an article on Prudent Bear http://www.prudentbear.com/index.php?option=com_content&view=article&id=4766&Itemid=57 arguing that the U.S. is already in recession. The table presented on the U.S. employment reports is especially revealing. The author removes the monthly adjustments produced by the Bureau of Labor Statistics model which attempts to estimate the jobs that have been created but are not represented in the normal payroll survey. The model + survey reports total job growth of 700,000 since February, but merely looking at the payroll survey, there was a loss of 360,000 jobs instead. There is therefore a lot riding on whether this model is correct.

Maybe the government knows what it is doing in all this econometric modeling. But we've just learned that Wall Street and the rating agencies have been operating with flawed models, so I don't have great confidence in the BLS model. Unfortunately, this suggests that the most significant economic release every month may be terribly flawed and overstating job growth.

The recession may be upon us but not yet visible to the government.

It is a fact that oil production has declined by 1.1 million barrels between 2006 and 2007, from 85.5 million barrels in 2006 to 84.5 million barrels in 2007.That is a decline of -1.2%. Of late growth has been able to run at one to two points above oil production growth, through efficiency and the development of other sources of energy. But with an outright decline in oil production adding one or two points puts you near or in recession year after year.

Once the decline begins it typically accelerates. We are moving into an amazing headwind and lowering rates will not eliminate the reality of peak everything.

That the financial community will try to maintain growth with ever lower rates is a pretty good bet, but if the weakness is based upon fundamentals associated with energy production it cannot have its effect. The result would certainly be stagflation as you state. What we will have is what we feared in the 1970's, only this time it is real.

Peak Oil.

to me why all the optimisim over the half-percent cut by the Fed?

True, it has the ability to inject some much-needed cash into the economy, but at a high price--inflation. I recall well how the economy went into the dumps during the late 70s when double-digit inflation reigned supreme.

Yes, the holders of subprime mortgages who found that shoddy lending practices weren't a good way to make money long-term got hammered, but massive inflation will hurt more--think about the holders of 5% 30-year fixed-rate mortgages who are watching their return shrink into negative territory.

What am I missing here? A federal band-aid over a festering sore still seems to me like a festering sore.

Seems almost a distraction to ignore the worldwide problem with
government debt.

But one can see how it might happen with all those taxpayers
not having jobs any longer.

Welcome to the new Weimar Republic.

But you can't burn electrons....

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

Charles Darwin

as in,BIG trouble? Fears of dollar collapse as Saudis take fright

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit -- expected to reach $850bn this year, or 6.5pc of GDP.

Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.

"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.

"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.

Is it like Cheney's view of debt: it doesn't even matter? Who cares anyway when we are the most powerful nation on earth, ever?

I mean, like, when does reality hit?

Telegraph

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

more

I did inhale.

This is starting to look more and more like the crises which gripped the pound sterling during the 1960s and 1970s until the UK won a reprieve with North Sea oil. The Bank of England needed to tighten to keep a grip on inflation but couldn't because it would crater the already faltering British economy. In the end they decided that they wouldn't keep the pound sterling as a major trading currency and just let it float to its new natural level. Of course, the British economy tanked for twenty years until they could recover with the help of the North Sea energy bounty. Bernanke's just hoping he can keep inflation at bay long enough so that the party in power (the Republicans in the White House) don't reap a double helping of whoop-ass in the 2008 election.

Counterpunch

By Mike Whitney

excerpt:

"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value. By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets".

Bove is right. The people and businesses that cannot repay their debts should be allowed to fail. Further weakening the dollar only adds to our collective risk by feeding inflation and increasing the likelihood of capital flight from American markets. If that happens; we’re toast.

Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.

Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6 per cent in the most recent quarter.” (WSJ)

That’s 18.4 per cent a year, and yet Bernanke is still considering cutting interest rates and further fueling inflation.

I did inhale.