With a backdrop of Central Bankers Cutting Rates At Record Pace China Urges U.S. to Counter Crisis, Prepares for ‘Worst Case’.

Chinese officials urged the U.S. to do everything possible to restore calm to financial markets and said they are preparing for a “worst-case scenario” as the global crisis deepens.

The global financial turmoil is dominating the fifth Strategic Economic Dialogue, a biannual summit initiated by Paulson, diverting attention from U.S. claims that China’s currency is undervalued. Both sides called for continued cooperation as Paulson prepares to make way for the administration of President-elect Barack Obama, who has already branded China a currency manipulator.

Zhou told U.S. officials that, while China remained confident of maintaining growth in the world’s fourth-biggest economy, it needed to prepare for the worst, central bank official Jin Qi said.

Ruble Requires 20% Decline to Lift Economy

Things are a complete mess in Russia and Troika, Goldman claim Ruble Requires 20% Decline to Lift Economy.

Russia should abandon its defense of the ruble to kick-start economic growth by devaluing the currency by at least 20 percent, according to Troika Dialog, the country’s oldest investment bank, and Goldman Sachs Group Inc.

“The sooner they do it, the more chance that the economy will start to recover,” Evgeny Gavrilenkov, Troika’s chief economist, said in an interview in Moscow yesterday. “The exchange rate prevents growth.”

Russia’s oil-led economy is deteriorating as crude trades below $50 a barrel. Manufacturing contracted more in November than during the 1998 financial collapse in the world’s worst financial crisis since the Great Depression. Russia has drained a quarter of its international reserves since August to arrest the ruble’s 16 percent slide against the dollar, and probably doubled spending last week, according to analyst estimates.

I agree that defending currencies is misguided at best. However, the market can better set the price for the Rouble than can any central bank planners.

Treasury Considers Encouraging Banks to Offer Mortgages at Rates as Low as 4.5%

Not having learned anything from decades of communist Russia central planning failures (or for that matter from the housing debacle that started here a few years back and spread globally), the U.S. Eyes Plan to Lift Home Sales.

The Treasury Department is considering a plan to revitalize the U.S. home market that would push down interest rates for loans to purchase a home, according to people familiar with the matter.

The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.

Hello! Doesn’t anyone remember the bubble that resulted the last time this was tried just five years ago? Can the cure be the same as the disease?

USA Today Declares Deflation “A Problem”

The USA Today proves it hasn’t a clue with its report Deflation: Bargains abound, which could be a problem.

Everything is on sale. And that’s not a good thing.

Consumer prices in October fell at the fastest pace in more than 60 years, sucked down by the rapidly deteriorating economy. The prices of oil, food, cars, clothing and electronics have all plunged. Home prices continue to swoon and so do stock prices.

As the early reports from the holiday shopping season suggest, the nationwide fire sale might seem like a boon for consumers. But it’s increasing the risk that the economy could become mired in a dangerous deflationary spiral — a widespread, sustained reduction in prices. That’s something that hasn’t happened here since the Great Depression.

Economists say it’s too early to tell whether deflation has set in — and many say the government’s aggressive responses to the credit crunch likely will prevent sustained deflation.

Others aren’t so sure. Nouriel Roubini of New York University predicts that what he calls “stag-deflation” — a recession combined with deflationary forces — will be a big concern in the coming months, here and abroad.

When it came to predicting where things are headed, Roubini was among the best. I am disheartened by the fact that he is recommending the same silly nonsense as nearly everyone else as the cure.

Before going further, it is imperative to understand that the USA Today does not itself understand what deflation and inflation are. This is because the Fed has everyone discussing prices rather than money and credit. Falling prices are a possible result (not a cause of deflation). Deflation itself is best thought of as a net contraction of money and credit.

The fact of the matter is falling prices are a good thing. Imagine the effects if we were in this same recession with rising prices!

Note that an inflationary recession (stagflation) is what the vast majority were predicting and they were dead wrong. I am still waiting for “towels” from some who declared deflation a zero chance outcome. Those stagflation theorists have now crawled back under their discredited rocks, nowhere to be found.

Prices Need To Drop

Home prices need to drop to affordable levels, and they will regardless of how much money Congress wastes trying to stop prices from falling. Likewise falling gasoline prices are a good thing. And paying down debt is a great thing.

Falling prices will allow debt to be paid back at a faster rate than rising prices. In a world of global wage arbitrage and wage pressures everywhere one looks, it is preposterous to think of falling prices as anything other than a blessing.

The only reason banks do not like deflation is they have lent out more money than they have, all bet on rising asset prices.

Deflation Is Never A Problem

Deflation never has and never will be a problem. It is the natural state of affairs and what one should expect as a result of rising productivity in the absence of wasteful spending practices by government.

If deflation is not the problem, what is?

The problem is fractional reserve lending that allows banks to leverage lending 12-1 and broker dealers like the now defunct Bear Stearns and Lehman 40-1. It does not take much to cause a run on the bank when leverage is 40-1. Fannie Mae is leveraged many times more than that.

Without that excessive leverage, no one would be in trouble over falling prices. Actually everyone would benefit. The cure is not to defeat deflation, the cure is to embrace deflation and stop fractional reserve lending and the serially bubble blowing activities of the Fed.

I support abolishing the Fed and the elimination of fractional reserve lending. Those are the only long term cures to the problems we face. To understand the nature of the problem and the cure I recommend everyone read

Two of those books are available online for free

What Has Government Done to Our Money?

Economics in One Lesson

Mike “Mish” Shedlock
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