Inflation: The Case Against It

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Bank Failure Friday Update: 3 Bank Failures and 2 Credit Union Failures (see bottom of post)

As faithful readers already know, Garth Turner is the author of After the Crash, web blogger at Greater Fool and one of the early Canadian soothsayers who acurately predicted the downturn in Canadian Real Estate.

He steadfastly stood up against critics and warned Canadians about the real estate crash and how it would spread to Canada.

So I asked Garth. What does he think about my concerns of inpending inflation worries?

"Not a credible position", he told me matter-of-factly.

"We are trying to escape the jaws of deflation. There will be no threatening inflation and no rate increses in 2010."

Garth elaborated yesterday on his blog. He thinks the market reaction to Bernanke's decision to dump another $1 Trillion dollars is the manic over-reaction of bullionist's who don't understand the process.

While we may teeter on the cusp of Depression, Garth says that Governments will spend whatever it takes to stave it off, borrowing massive wealth from the future disregarding how the Boomers and their kids in the process. Interest rates will continue to race to zero and stay there.

"GDP will likely be rising marginally a year from now, but that does not mean ugly days will be passing. Far from it. Recession in the real economy – where we work, buy houses and shop – will last for several years. Real estate prices will be lower at Christmas than they are now, will stabilize in 2010, and then flatline for years after that. Jobs will start to reappear by next Spring, but they will come back in dozens after being lost in hundreds and thousands."

"Most significantly, however, is the certainty that what governments are doing to stave off depression will only cause another problem of equal size in the future. And, no, I am not talking about hyper-inflation in a year or two because of the new American trillions. Instead, we are guaranteeing a future of higher taxes, debt-shackled governments, a far less competitive North America and the end of the US empire."

Turner summarizes the bullionist's position as opportunists who are betting that the US Federal Reserve (and other central banks, like the Bank of Canada and the European Central Bank) will buy up government securities and create a honking big pot of money to scare off the deflation demons. The bullionist's, Garth says, are convinced we are just months away from the collapse of paper money as crazed central banks overdose on creating cash.

"Under their scenario, hard assets inflate wildly as paper money deflates. The US dollar collapses, causing the likely demise of major banks. In this world, smart wealth rushes into the only global currency alternative – bullion – sending it skyward, as the rest of us use hundred-dollar bills to buy bread and watch as our life savings are destroyed in a matter of months. Others see real estate, oil, two-by-fours and chickens soaring in value. As that happens, debt fixed in dollars fades as fast as your RRSP, which means mortgages slip away into nothingness, at the same time as interest rates hit 20% or 40% or higher."

And then Garth Turner dismisses the argument. He says, "this is exactly why it ain’t gonna happen. No depression. No hyper-inflation. Both are toxic to human society and would inflict irreparable damage. There is not a sane government in the world (sorry. Zimbabwe) which will allow either to take place. If we tip either way, it will be totally by accident."

Impressive argument. But it begs the question... would any sane goverment have allowed the current crisis situation we find ourselves in, to have taken place to begin with?

Yet it happened and all government can do is react.

As we wait on the FDIC to give us our Bank Failure Friday fix, I invite you to check another oracle who predicted not only the 2006 subprime mortgage disaster in the United States, but also predicted the 2008 stock market crash.

His name is Peter Schiff and he started making the real estate predictions in 2002. Check out this compilation of his interviews on the major American business networks. Co-panelists openly laugh at him, audibly scoffing and gasping at his claims about pending real estate and stock market crashes.

He holds a viewpoint on inflation that is diametrically opposed to that of Garth Turner.

Schiff is adament that rapid inflation will happen and it won't be by accident, leaving govement nothing to do but react.

His views tomorrow.

Bank Failure Friday

Bank Failure #18: FirstCity Bank, Stockbridge, Georgia

From the FDIC: The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of FirstCity Bank, Stockbridge, Georgia. The bank was closed today by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver.

The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $100 million. FirstCity Bank is the eighteenth FDIC-insured institution to fail this year. The last bank to fail in Georgia was Freedom Bank of Georgia, Commerce, on March 6, 2009.

Bank Failure #19: Teambank, National Association, Paola, Kansas

From the FDIC:Teambank, National Association, Paola, Kansas, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Great Southern Bank, Springfield, Missouri, to assume all of the deposits of Teambank.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $98 million. Great Southern Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Teambank is the twentieth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Kansas was The Columbian Bank and Trust Company, Topeka, on August 22, 2008.

Bank Failure #20: Colorado National Bank, Colorado Springs, Colorado

From the FDIC: Colorado National Bank, Colorado Springs, Colorado, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Herring Bank, Amarillo, Texas, to assume all of the deposits of Colorado National.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $9 million. Herring Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Colorado National is the nineteenth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Colorado was BestBank, Boulder, on July 23, 1998.

Credit Unions

In addition to the three bank failures, two large Corporate Credit Unions were seized today by the National Credit Union Administration (NCUA): U.S. Central and WesCorp. These two credit unions had a combined $57 billion in assets. The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.

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Email: village_whisperer@live.ca