2009 Economic Slowdown Worse Than Great Depression

from the Market Oracle:
Capital flows have also suddenly reversed causing turmoil in the currency markets. January's TIC data indicates that net capital outflows for the US were negative $148 billion in January. Capital is now fleeing the country. Financial protectionism has triggered the repatriation of foreign investment causing a sharp drop in the purchase of US sovereign debt. This is from Brad Setser, economist for the CFR:

"The obvious implication of the recent downturn in total reserve holdings — and the $180 billion fall in q4 wasn't driven by currency moves — is that the pace of growth in the world's dollar reserves has slowed dramatically...

The obvious implication: most of the 2009 US fiscal deficit WILL NEED TO BE FINANCED DOMESTICALLY. The Fed's custodial data indicates central banks are still buying Treasuries, though at a somewhat slower pace than in late 2008. But their demand hasn't kept up with issuance. (Foreign Central banks aren't going to finance much of the 2009 US fiscal deficit; Their reserves aren't growing anymore", Brad Setser, Council on Foreign Relations)

The United States does not have the reserves to finance it own massive deficits which will soar to $1.9 trillion by the end of 2009. The Fed will have to increase its purchases of US Treasuries and monetize the debt. Foreign holders of Treasuries and dollar-backed assets ($5 trillion overseas) will be watching carefully as Bernanke revs up the printing presses to fight the recession and meet government obligations. China, Russia, Venezuela and Iran have already called for a change in the world's reserve currency. It won't happen overnight, but the momentum is steadily growing.

The S&P 500 has soared 23 percent in the last four weeks, but the current bear market rally is misleading. The prospects for a quick recovery are remote at best. The fundamentals are all weak. Corporate profits are down, GDP is negative 6 percent, housing is in a shambles, and the banking system broken. The Fed has increased the money supply by 22 percent, but economic activity is at a standstill. The velocity at which money is spent is the slowest since 1987. Nothing is moving. The banks are hoarding, credit has dried up, and consumers are saving for the first time in 2 decades. The banks' credit-conduit cannot function properly until bad assets are removed from their balance sheets. But the magnitude of the losses make it impossible for the government to purchase them outright without bankrupting the country. According to the Times Online, the IMF has increased its estimates of how much toxic mortgage-backed paper the banks are holding:

"Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund (IMF) are set to suggest.

Here is the full article.