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Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge

Tyler Durden's picture




 

One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV... and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.

From Reuters: "Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world's second-largest economy is hitting its appetite for commodities. China is the world's biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade. "There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren't buying because they have a lot of coal and traders are also afraid of getting burnt. It's very bearish now," said a trader. The defaults in thermal coal over the past week has come after a fall in prices over the past 1 1/2 months, with key coal prices indices in Australia, South Africa and Europe all having fallen around $10 a tonne since early April." And this is the country that over the weekend was rumored to be bailing out the world again? We wonder: will China also bail out FaceBook longs, or will it merely focus on preventing a collapse in its own various commodity bubbles which are starting to pop one after another?

More from Reuters:

At least six defaulted thermal coal cargoes were being re-offered at a discount, traders said, including contracts for shipments from the United States, Colombia and South Africa.

 

"Many of them signed for the spot cargoes in early April and prices have fallen around $10 a tonne since then. Say if the Chinese traders were buying a cape-sized shipment, they'd be suffering a loss of nearly $1.5 million alone," said a trader at an international firm who has been offered defaulted cargoes.

 

"That doesn't even take into account the losses on freight rates. So rather than being bankrupted by these deals, they would rather dishonour the contract to survive."

 

China's premier called for additional efforts to support growth on Sunday, signalling Beijing's willingness to take action to bolster its sagging economy.

And if the Chinese commodity appetite is over, that means very bad news for commodity exporters the world over:

Reflecting greater caution, BHP Billiton, the world's biggest miner, has put the brakes on an $80 billion plan to grow the company's iron ore, copper and energy operations.

 

Slumping commodity prices and escalating costs have squeezed cash flows, pushing BHP to join rival Rio Tinto reconsidering the pace of their long-term expansion in countries such as Australia and Canada.

For another perspective of just how stuffed to the gills with commodity inventory is we again go to Reuters, which gives us the following scary summary:

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.

 

At Qingdao Port, home to one of China's largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-storey building, spill over into an area signposted "grains storage" and almost to the street.

 

Further south, some bonded warehouses in Shanghai are using carparks to store swollen copper stockpiles - another unusual phenomenon that bodes ill for global metal prices and raises questions about China's ability to sustain its economic growth as the rest of the world falters.

 

Commodity markets are used to seeing China's inventories swell in the first quarter, when manufacturing slows down due to the Lunar New Year holidays, and then gradually decline during the second quarter when industrial activity picks up.

 

This year, however, is different.

 

Copper stocks in Shanghai's bonded storage, the biggest in China, are now double the 300,000 metric tons (330,693 tons) average of the past four years and iron ore stocks are about a third more than their 74 million metric tons average.

This time may be differernt indeed:

Four years ago, however, the global financial crisis triggered by the collapse of Lehman Brothers broadsided the economy: factories shut down suddenly, millions of workers got laid off, ports ground to a halt. The situation only perked up after the government introduced a $600 billion stimulus scheme.

Probably the biggest difference is that back then Europe wasn't broke and the US debt/GDP was well below 100%. Both of those are no longer the case.

And to think we were wondering just last week if the biggest construction bubble in history was sustainable.

 

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Mon, 05/21/2012 - 10:17 | 2447370 GeneMarchbanks
GeneMarchbanks's picture

Australia is not a bubble, now just repeat...

Mon, 05/21/2012 - 10:22 | 2447396 idea_hamster
idea_hamster's picture

Rats -- so my jar of copper pennies just took ANOTHER hit to its value?!  Man, I can't catch a break!

Mon, 05/21/2012 - 10:24 | 2447409 Harlequin001
Harlequin001's picture

Send a gunboat. It worked last time.

Mon, 05/21/2012 - 10:25 | 2447417 hedgeless_horseman
hedgeless_horseman's picture

 

 

Same shit happening in Houston with brand new oil and gas rigs...

 

Anybody up for some impulse shopping?

Mon, 05/21/2012 - 10:28 | 2447437 Harlequin001
Harlequin001's picture

Whatever the price it will be a damned site cheaper very soon in terms of gold...

Mon, 05/21/2012 - 10:35 | 2447469 The Big Ching-aso
The Big Ching-aso's picture

 

 

I gotta feeling the trajectory of lead is gonna go flat, with hi-velocity, but I'm probably making a hollow-point here.

Mon, 05/21/2012 - 11:17 | 2447624 Abitdodgie
Abitdodgie's picture

Good news for silver ,it is mostly a by-product from mines , well if you are not producing, then silver should start to get in tighter supply.

Mon, 05/21/2012 - 11:47 | 2447771 Harlequin001
Harlequin001's picture

But it only costs $5 to mine it...

Mon, 05/21/2012 - 13:41 | 2448156 ArgentoFisico
ArgentoFisico's picture

Average silver cash costs at primary mines were $8.28 per ounce in 2011.

http://www.mineweb.com/mineweb/view/mineweb/en/page32?oid=151629&sn=Detail&pid=102055

Mon, 05/21/2012 - 14:28 | 2448330 Michael
Michael's picture

There is nothing in the known universe that can stop the epic Chinese housing bubble from popping. Tuff Shit.

Mon, 05/21/2012 - 12:14 | 2447899 urbanelf
urbanelf's picture

But how will I kill all the werewolves?

Mon, 05/21/2012 - 11:51 | 2447794 Harlequin001
Harlequin001's picture

Well Big Ching, the problem is that you might end up with more lead than you know what to do with...

literally, and possibly mixed in with a bit of plutonium...

But that's good for you, or so I'm told...

Mon, 05/21/2012 - 11:31 | 2447684 Element
Element's picture

2 for the price of 1 is coming back.

Mon, 05/21/2012 - 11:35 | 2447704 SWRichmond
SWRichmond's picture

Commodity price collapse is a prelude to QE3, the people will demand it, the central banks will be off the hook, it won't have (publicly at least) been their idea.  I feel sorry for anyone who didn't see this coming.

Relax, strong hands, popcorn.

Mon, 05/21/2012 - 11:45 | 2447758 Element
Element's picture

BTFD!

Mon, 05/21/2012 - 13:19 | 2448087 chumbawamba
chumbawamba's picture

Exactly.  This is a 2008 redux.  Back then, all commodities, especially base metals, got taken behind the woodshed.  Scrappers this side of the Pacific were saying they'd never experienced anything like it.  Buyers simply reneged on their contracts (all done verbally as per custom).  The industry got slaughtered.  It was a particular stressful time for Chumba.  Prices for scrap metas didn't recover until about mid-2009.

Now it's rinse and repeat.  Scrap prices have been tanking lately, and we're probably close to a swooning plunge, though it'll probably happen in the Fall as these things usually happen in that appropriately named period of time.

Pretty soon the Bernankenstein will have to act.  Watch gold and silver.

I am Chumbawamba.

Wed, 05/23/2012 - 12:26 | 2455230 caconhma
caconhma's picture

"Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge"

May be this is exactly what Chinese are deliberately doing: driving commodity prices down! Here Chinese, American, and EU interests are in line.

However, based on the G8 statement about the US intention to release oil from strategic reserves, there is no free/spare oil to go around.

Consequently, this commodies created plunge will not be long living event.

One thing more. To make  yuan a world reserve currency, Chinese will have to tie it to the gold.

Mon, 05/21/2012 - 10:46 | 2447501 onelight
onelight's picture

Good point.

Time was...only a couple years back...there was an army of US guys selling all our factory and machinery offshore, stripping the infrastructure of American manufacturing and to a lesser extent, drilling, although natty gas kept that going. 

In the decade prior, it was all being e-Bay'd, all the high school shop class machinery, as Americans thought white collar employment, as engrossed in intangibles as it so often is, was better than using and being proud of, the work of one's own hands

... as described in Shopcraft as Soulcraft -- http://matthewbcrawford.com/

Now who will buy? Maybe we should value what we have a little more...it took a lot of work to get it..

Mon, 05/21/2012 - 11:27 | 2447666 Snidley Whipsnae
Snidley Whipsnae's picture

Since there are few pure silver play mines this could be interesting for silver prices... depending on a continued strong demand for solar collectors, etc.

Where is all the 'pent up demand' blab usually heard at this point in global slow downs?

I'm seeing lots of worn out, noisy, squeeky, clunky autos on the roads these days. Soon they will be parked on the side of the road if they are not maintained.

Ya can't make, or repair, cars without commodities...

 

Mon, 05/21/2012 - 10:19 | 2447377 Magnum
Magnum's picture

I used to be in this business, and it happened all the time.  Price could go way up after shipment departed, and the seller would shop the container around to other buyers, screwing over the guy who wanted it in the first place.  

Mon, 05/21/2012 - 10:32 | 2447414 LawsofPhysics
LawsofPhysics's picture

You are correct.  In the real world where people actually have to produce a real product, input commodities have to be delivered.  There are far too many paper-pushing fucking idiots involved stealing wealth.  These people produce nothing and add no real value.

End this fucking sham and make margins on all commodities 100% already.  Fuck the paper-pushers, once again they will cry, scream, and stomp thier feet like little children if they can't keep stealing wealth from the people who actually add real value to the system.  They will threaten financial ruin for us all.  Fine, fucking bring it, time to cut out all the useless fucks from this corrupt ball of shit.

Long black markets, personal armies, and all things physical.

Mon, 05/21/2012 - 10:45 | 2447499 CrimsonAvenger
CrimsonAvenger's picture

That was beautiful.

Mon, 05/21/2012 - 11:02 | 2447552 Seize Mars
Seize Mars's picture

Correct.

Mon, 05/21/2012 - 11:11 | 2447593 catacl1sm
catacl1sm's picture

Some would argue that paper-pushing 'speculators' do indeed push prices higher during good times, but also provide a softer floor in lean times. I'm just saying.

Mon, 05/21/2012 - 11:25 | 2447660 The Big Ching-aso
The Big Ching-aso's picture

 

 

Well, it's all a matter of balance.  Rite now speculation is phucking up R bank balance really good.

Mon, 05/21/2012 - 13:09 | 2448053 hannah
hannah's picture

@catacl1sm   we wouldnt have such massive swings up and down every 5 or 10 years if we didnt have a 'paper' economy. the bogus paper markets magnify the up and down periods.

 

does your 'softer floor' mean that taxpayers bailout the tbtf banks behind the loses...?

Mon, 05/21/2012 - 10:30 | 2447444 Theta_Burn
Theta_Burn's picture

In this case the "buyer" is screwing the seller, the shipper, and most likely the bank... how do you say "cash in advance" in Chinese?

My father yrs ago was also in this buisness, with UAE and Kuwait the prime customers (1rst gulf war destroyed the Co.) usually a bill of lading, with funds already exchanged was the norm.

 

Mon, 05/21/2012 - 12:00 | 2447830 Magnum
Magnum's picture

Bill of Lading is generated after the shipment departs, you may be referring to Letter of Credit which is irrevocable.  

Business now is you have longstanding relationships, the customer says send me this coal, or whatever it is, at an agreed price.  Everything is great until some big price shock happens, things get dicey for a short time then everything goes back to normal.

What happens is that usually a seller has a few different buyers.  One buyer wants a load of coal and says $XX per ton.  Next thing you know, the price goes way down and the buyer says SHIT I can't pay that--give me a discow or I refuse to take it!!  Or, they just disappear, in that case the seller has what is referred to as a "floater", and the seller surely gets screwed because at this point he calls his most honest customer at destination who agrees to work it on consignment, this ruins the market price temporarily.

On the other hand, sometimes price goes WAY UP after the price is agreed.  Almost always the seller follows through and ships and takes the agreed price.  Sometimes the seller makes up a story and says well, really, that cargo never loaded for blah blah reason.  The seller then calls up his other customer and gets a higher price.  These are the things that damage relationships but they happen.

Mon, 05/21/2012 - 14:23 | 2448308 chinaguy
chinaguy's picture

bill of lading generally generated 2-3 days before the ship departs - at least w/ COSCO... just make sure your stuff is not in the front of the loading cue

Mon, 05/21/2012 - 15:12 | 2448487 Magnum
Magnum's picture

No that is not how it works.  We were operating in high volume and had in-house freight forwarders.  We were doing hundreds of shipments per month, barely making late gate at the port for every vessel.  Fast pace, you could get an order at 10:00 AM and have it in port by 3:30 PM and sailing the next day.  BL generated within 7 days of sailing, sometimes faster, never before sailing unless we were shipping to like Bangladesh or some crazy place with no history, and then it was very tedious, time-consuming, letter of credit stuff.

Mon, 05/21/2012 - 12:17 | 2447909 indygo55
indygo55's picture

"How do you say cash in advance in Chinese?"

 

Uh,  CIA?

 

Mon, 05/21/2012 - 13:01 | 2447486 slewie the pi-rat
slewie the pi-rat's picture

yeah, magnum, i wouldn't worry;  the "story" that they will be BK if they don't do this is just an invitation to settle, imo

there is a glut, here;  and it may be that in china's "resource aquisitions for the future" they have created a monster of sta-puff dimensionalities

the japanese are gonna love this fuking movie!

Mon, 05/21/2012 - 13:09 | 2448050 Magnum
Magnum's picture

This all brings back great memories and I feel like I should be back in the saddle again.  What the seller really wants for poetic justice, and I have seen this before (rarely), but you find some other market to sell the shipment.  Let's say you find some company in Venezuela or Singapore, they agree to buy it all at the asking price.  NEXT the original buyer in China who said last week he needs a big discow is SCREAMING and BEGGING to get it back at the original price.  This does happen...

Mon, 05/21/2012 - 14:10 | 2448260 AustriAnnie
AustriAnnie's picture

"the seller would shop the container around to other buyers, screwing over the guy who wanted it in the first place"

China is known for placing very high value on business relationships and holding to contracts.  I wonder how bad it must be for them to risk their reputations by defaulting.  From what I hear from Chinese friends, many would prefer to take a hit financially than to lose face by reneging on a contract. 

Mon, 05/21/2012 - 14:26 | 2448318 twh99
twh99's picture

Obviously you have never dealt with Chinese companies before.  They will screw you blue if you let them.

Mon, 05/21/2012 - 14:40 | 2448352 AustriAnnie
AustriAnnie's picture

Like I said, I"m going by what I've heard from people doing business there.

Though, I assume there is a double standard.  They probably will screw over a westerner, but not their own.

Mon, 05/21/2012 - 15:09 | 2448479 Magnum
Magnum's picture

AustriAnnie that is true but there are exceptions.  Prices crash...  Someone has a shipment coming and the price has dropped 60% since loading,,,, things change.  Overall the Chinese traders we dealt with were as you describe.  Excellent business people to work with.

Mon, 05/21/2012 - 14:22 | 2448301 chinaguy
chinaguy's picture

You are a fucking idiot if you ship ANYTHING to China w/o payment upon shipping docs before the damn thing loads & ships.

Mon, 05/21/2012 - 15:06 | 2448466 Magnum
Magnum's picture

You must not be in the business!  We were doing over US$200M per year trade with Asia and none of it, not a penny, was pay in advance.  Most was pay 30 days after shipment.  Some 7 days after shipment.  Others we sent docs via bank so the customer had to pickup the documents at his bank, and make payment at same time, before ship arrived.  Indonesians were notorious for bad pay so they had the strictest terms in Asia, but still it was pay after ship departs.  Within N America nothing was shipped to MEXICO without pay in advance.  I'll grant you that.

So jump up and down and scream all you want about fucking idiots.  I am no longer in that business but the company I worked for is doing more business now than ever.

Mon, 05/21/2012 - 10:23 | 2447406 The Swedish Chef
The Swedish Chef's picture

People shpuld buy more IGadgets to log on to Facebook. A world of trouble would have been avoided if people just heeded this simple instruction.

Mon, 05/21/2012 - 11:12 | 2447601 catacl1sm
catacl1sm's picture

I've already heard people decrying the addition of ads to FB's mobile platforms. What did they expect?

Mon, 05/21/2012 - 13:04 | 2448042 The Swedish Chef
The Swedish Chef's picture

What they expect? Everything for free. Or perhaps that they could live shielded for ever from the insight that on Facebook, the user is the product. 

Mon, 05/21/2012 - 10:23 | 2447408 markar
markar's picture

Oh the thunder down under!

Mon, 05/21/2012 - 10:24 | 2447411 midgetrannyporn
midgetrannyporn's picture

China, the billionaire's bestest friend.

Mon, 05/21/2012 - 10:24 | 2447412 Cognitive Dissonance
Cognitive Dissonance's picture

The check is in the mail. Promise.

Mon, 05/21/2012 - 10:25 | 2447415 Stackers
Stackers's picture

What ? You mean China isnt building a bridge to nowhere every week and another world's largest shopping mall with 3 open stores in it anymore ? What they really need is another ghost city out in the middle of the most remote and driest desert on the planet. That'll do it.

Mon, 05/21/2012 - 10:53 | 2447522 The Swedish Chef
The Swedish Chef's picture

Yes, they are. It´s the second weekly bridge to nowhere that has been cancelled.

Mon, 05/21/2012 - 13:39 | 2448149 Not Too Important
Not Too Important's picture

Well, at least California is doing their share with the multi-billion dollar Bullet Train To Nowhere.

C'mon, boys and girls, ask Engineer Jerry if you can blow the whistle!

While his sister who works for the Squid sells the bonds. All In The Family! Now, who's the Meathead???

Mon, 05/21/2012 - 10:25 | 2447418 CreativeDestructor
CreativeDestructor's picture

Anyone interested in understanding what's going on with china and more read Www.mpettis.com
Guy is an economics and concise writing genius.

Mon, 05/21/2012 - 10:25 | 2447419 CreativeDestructor
CreativeDestructor's picture

Anyone interested in understanding what's going on with china and more read Www.mpettis.com
Guy is an economics and concise writing genius.

Mon, 05/21/2012 - 10:26 | 2447426 falak pema
falak pema's picture

the trader's nightmare, you sign a deal on documented credit/collect basis; you ship it out and the buyer defaults! Now you have to hen peck the bank who will raise a whole bunch of exceptions on the documentary credit that the defaulted buyer  has to waive for you to collect money direct from bank. Its worse if you are on document collect basis and not on LC credit! 

Mon, 05/21/2012 - 10:38 | 2447480 fnordfnordfnord
fnordfnordfnord's picture

That is the saddest story I've ever heard. Brought tears to my eyes. Those poor poor traders.

Mon, 05/21/2012 - 10:45 | 2447498 falak pema
falak pema's picture

some of them are honest; I was selling scrap for recycling. It made the local municipalities very happy as export markets paid a premium to local. All "green", non toxic scrap like plastic bottles. Honest stuff. Ever read The Count of Monte Cristo? Those ships went out and you prayed they came back with the merchandise. If they didn't you lost big! Wipe those tears now, its part of life taking risks. 

Mon, 05/21/2012 - 10:54 | 2447523 LawsofPhysics
LawsofPhysics's picture

Precisely why it is always in your best interest to prosecute the fucking fraud, no matter what profession you are in.  I strongly urge the honest traders to come forward and call out the fucking rats in the system.  In the absence of trust, game fucking over. I think we all know how this ends.

Mon, 05/21/2012 - 10:28 | 2447432 HoofHearted
HoofHearted's picture

Notice that there is no discussion of precious metals being sent back or defaulted upon. Now why would that be? And why is the Bernank getting into a helicopter???

Mon, 05/21/2012 - 10:27 | 2447434 Cursive
Cursive's picture

So, is it accepted fact that deflation is real?

Mon, 05/21/2012 - 10:47 | 2447504 LawsofPhysics
LawsofPhysics's picture

LOL!!!  The television will inform the sheeple as to what is real or not.  Now go be productive and make your owners rich.

Mon, 05/21/2012 - 11:10 | 2447578 akak
akak's picture

It is an accepted fact that deflation under a fiat currency regime is merely the fantasy of brain-dead flat-earthers and Karl Denninger --- but I repeat myself.

If you truly believe that we are experiencing "deflation", I invite you to come and pay my constantly-rising living and business expenses for one year, and then tell me whether the dollar is getting "stronger" or not.

Mon, 05/21/2012 - 11:15 | 2447612 catacl1sm
catacl1sm's picture

And you come sell my house for me... for at least what I paid for it. Biflation, bitchez.

Mon, 05/21/2012 - 11:28 | 2447663 akak
akak's picture

The collapse of an asset bubble does NOT equate to deflation!

Or are you really going to try to claim that the paper valuations of houses (or of any other asset) actually constitutes part of the money supply?

In any event, the valuations (which are NOT actual wealth) of houses nationwide have fallen significantly less than the average cost of living has risen in the past 12 years --- so put that in your absurd deflationary pipe and smoke it.

Mon, 05/21/2012 - 12:07 | 2447751 Element
Element's picture

Why do people always interchange or else conflate debt-deflation with price-deflation?

That seems to be most of the confusion and disagreement with so many of these 'flation pissing-contests.

Mon, 05/21/2012 - 20:51 | 2449348 akak
akak's picture

There is only ONE real definition of deflation: a decline in the total supply of money (and I would add: generally if not inevitably leading to a general decline in prices).

You may legitimately discuss falling debt levels (but where are they falling, anyway?) and the interaction of such with the general economy and monetary system, but to call that phenomenon "deflation" is being sloppy at best.

Tue, 05/22/2012 - 12:54 | 2451328 Element
Element's picture

Sorry, it has a clearly defined and understood meaning. Over-commitment and failure to plan budgets and rate variations as per subprime and high-risk leverage on speculations being typical precursors to the resulting fall in asset PRICE and malaise.  The Debt delation comes as a relative paper loss on assets as collateral for debt against an asset that subsequently, can be neither re-financed nor buyers found for them, at the earlier price level.

--

Definition of 'Debt Deflation'
A situation in which the collateral used to secure a loan (or another form of debt) decreases in value. This can be detrimental because it may lead to a restructuring of the loan agreement or the loan itself. Also known as "worst deflation" and "collateral deflation". A mortgage, which is a form of secured debt, presents a good example. Let's say you purchased a home by taking out a mortgage. That same home would be secured as collateral for the loan, meaning that if you defaulted on payments to the bank, the home would be repossessed by the bank. If the potential selling price of the home decreased in value while you were still making payments to the bank, you would be in the middle of a debt deflation scenario.

http://www.investopedia.com/terms/d/debtdeflation.asp

--

Over-indebtedness is the whole problem, which was Fisher's thesis. i.e. it's the identifiable precursor to a decline in the total supply of money, and to asset price plunges.

Ray Dalio instead proposed a "D-Process" in order to treat the symptoms of over-indebtedness as an inter-related dynamic process, rather than a specifically defined and clearly controversial characteristic or defining trend.

http://www.creditwritedowns.com/2012/05/ray-dalio-deleveraging.html

That may seem a 'sloppy' treatment to you, but deliberately, as the alternative, that to debate endlessly about the symptoms and expression of the over-indebtedness can be overly-specific, prescriptive and more-or-less incorrect or missing the point. 

The syptoms will persist until the over-indebtedness doesn't.

It's also not set in stone, for example Australia is clearly over-indebted in the private sphere, but assets will soon be propped again, with Federal spending to fund another round of mortgage subsidies to tempt 'aspirationals' to buy houses, at what are longer-term unaffordable prices.

But that's the what Keynes prescribed for a Govt to do, to cut and save in good times, then spend deficits to buffer recessions, and especially to do so where there's a debt-deflationary tendency of falling asset prices.

But it only works >IF< you essentially eliminated public-debt via running budget surpluses during good times, otherwise the public finances would soon end up ... over-indebted ... also!

So the whole country then becomes suseptable to "the D-Process".  Once that occurs there is no known way to get out, except Fisher suggested that such a deflationary death-spiral could be fended-off by dropping rates and reinflating the currency. 

Plus Keynes said you also had to be in a position to spend, via going into debt on returnable productive national investments ... and to not just debase by printing inflation.

What the "D-Process" logic amounts to is that those prescriptions from the wash-up of the last Great depression era, which are what have been used this time around, also won't work.  It's because the underlaying problem has always been the over-indebtedness, and not the treating of the expressed chronic symptoms of it. 

Thus the unaffordble debt always results in renewed decline in the velocity of money -- It's just too late, there's no way around it at that point ... but to talk hopey bullshit and print and print.

Which means the zombie banks must go to eliminate private over-indebtedness, and Sovereigns must also default to eliminate the recovery impairing public debt.

That can only occur when the people have lost everything, and lose-it.  The end-game will actually come from the gutter of main street.  Extend-and-Pretend ends when no one can pay their bills anymore (including Govt) so no one gets paid.

Economists, Politics and MSM want us to BELIEVE in the Japanese option, except it can't be stabilised, as it would only be viable if the US and Europe could maintain full-employment, from real production backed by strong trade demand. 

Once the 'D-Process' [Debt-Process] becomes established you can string it out a few years but the debt's interest, the loss of buying power on savings from debasement plus ZIRP, and spiral unemployment with falling money velocity and declining demand, still sinks you.  Nothing can halt it but the eliminating of a huge chunk of the private and also public debt, via a widespread and persistent defaulting on counterparties. 

Everything must and will converge towards that outcome.  That is what a 'D-Process' is, a process of convergence on a set of conditions that allows radical debt-destruction sequences and events to occur.  The more TPTB resist it, the more catastrophic the collapse will be, and they have pulled out every extend-and-pretend trick in the playbook to hold on for this long.  We're in the second Great-Recession of this D-Process, but I think it'll take a third one to really finish off the banks.  A lot of them will fail very soon but a horrifying crescendo of bank failures will come just before the end. 

The last time this bank failure crecendo happened the US economy was already in a rapid upswing, thus a surprisingly strong growth spurt may recommence (from a very low base) just before thousands of banks collapse, in a mega systemic debt-destruction heap.  I take that to mean that most people simply lost patience with debt and stopped paying back the banks in 1932 and 1933, and instead put everything into family, work and business, to meet their own needs.  And that is what Greece is going to have to do now. 

Private default and Govt Sovereign default will rise and spread from here.

Mon, 05/21/2012 - 12:07 | 2447873 tmosley
tmosley's picture

Those who live in terror of deflation burn in the fires of hyperinflation.

Mon, 05/21/2012 - 12:41 | 2447980 God Bless The V...
God Bless The Virtuous's picture

Spot on Cursive,

Deflation is so misunderstood and more importantly "easily manipulated" by the powers that be, we are still having the debate about inflation!

Japan is said to be in a never-ending "Recession", this is factually incorrect.

Japan has and is still mired in a "Depression" that is "Deflationary" in nature.

W.T.F. do the lame street media think you are going to get with evermore QE? Steve Liseman and Paul Krugman this is directed directly at you!

Bernanke is willing to risk the break out of true "Wage & Price Spiral" inflation to the upside to try and foolishly prevent deflation and "Depression" to the down side. This quagmire is truly of his own making.

True enough we have inflation in food stuffs and oil that at the consumer level is most painful. We are mired in negative real interest rates and the scumbags want and demand more QE because our once "Free Market System" and the stock market in particular is down a miserly 5 / 10 percent?

American's demand a "STRONG DOLLAR" policy, NOW!

More QE now would do," NOT A FUCKING THING" for the standard of living for all the working men / women "Running to Stand still", and this is supposed to help how?

Gasoline at 8 / 10 a gallon?

How the fuck are the people with a job, lucky enough to even have one, going to "DEMAND" a raise to keep up with "Bubble Blowin Ben" and his demonic QE?

This is the missing piece Bernanke is willing to sell his soul for, the wage part of the equation. But we are not in an expansion here, deflationary deleveraging will take decades to play through!

If Greenspan had the moxie in 2000 to let the chips fall where they may, we would be through the other side or close to it! I do give some room for monetary intervention for Sept.11, but having Bush go out and extoll the American people "To go help the economy and go shopping" was the exact thing we didn't need.

Remember "COCOONING", that at least would have slowed the 50 plus year debt fueled binge we are now being told to "Spend even more money we never had" to help the economy!

First rule of a massive debt fueled binge over the past 50 years, STOP AND ADMIT THIS IS THE PROBLEM! Debasing the world's reserve currency to become competitive in a deflationary global market is the stuff of third world countries!

Bill Clinton and the advent of "Windows 95" let the genie out of the deflation bottle and we as a country have been shooting ourselves in the foot ever since.

Clinton abhors the U.S. at "The Commanding heights",(as do all progressives), we should have a more "FAIR" system ala Soros and the U.N. of a "Global One world Government",(EXCUSE ME WHILE I FUCKING WRETCH), America is the only country to actually be at the Commanding Heights. Tell me Slick Willy, just where the fuck are we supposed to go if the U.S. falls under Obama?

Windows 95 forever changed productivity, you can argue about the for better or worse all you want, but productivity is what it is!

Bubble blowin' Ben still is not on the same page, this is not a normal "Boom and Bust" inventory led recession! We need time that he and the scumbag economist's like Krugman, liseman and their ilk demand we not go backward and more QE as the risk markets catch the sniffles!

Hey boy's, your moronic moves will seal the fate of the oncoming depression, we haven't even touched on the O.W.S. and the union led fascist movement demanding the end of "CAPATALISM", hey America, you fucked up in 2008 and now we have a true communist administration at all levels, you only have one chance to right this injustice in November, out with the communists,out with Bernanke / Geithner,

is there still time enough?

May the good lord watch over this fragile little experiment on freedom we call America

Jerry

Mon, 05/21/2012 - 14:02 | 2448233 silverserfer
silverserfer's picture

Tea bagger rants belong on the yahoo forum fuck off.

Mon, 05/21/2012 - 10:28 | 2447435 emersonreturn
emersonreturn's picture

...bodes ill for global metal prices...

 

 

what impact should this have on gold?

Mon, 05/21/2012 - 10:33 | 2447453 Sudden Debt
Sudden Debt's picture

Depends on how big the shipments are and how big of a smoke screen that will be created.

Mon, 05/21/2012 - 10:34 | 2447457 Tinky
Tinky's picture

...bodes ill for global metal prices...

 

Presumably that is related to industrial metals, and gold should not be adversely affected.

Mon, 05/21/2012 - 10:38 | 2447478 GMadScientist
GMadScientist's picture

I would expect a slight dip from forced selling due to collateral calls (think hedge fund unwind), but nothing that won't just as likely be reversed by monetary shenanigans in the near term so enjoy the $1400/toz firesale when it comes.

Mon, 05/21/2012 - 10:35 | 2447465 GMadScientist
GMadScientist's picture

Like students piling up things they can't afford amongst the impulse items at the check-out counter until their funds and desires balance.

"Hmmm...don't need two avocados...can live without bread...fine...just skittles and beer."

 

 

Mon, 05/21/2012 - 10:54 | 2447527 Bahamas
Bahamas's picture

Depends on where you live. I have an avocado tree in my yard, but Guinnes sells for four bucks a can.

Mon, 05/21/2012 - 11:32 | 2447688 GMadScientist
GMadScientist's picture

You know you can brew your own too, right? (though probably not much more economically than the Irish)

Depends on what you want too. I'm not growing avocados. ;)

Mon, 05/21/2012 - 20:56 | 2449357 StychoKiller
StychoKiller's picture

Hmm, I wonder if the Belgians ever tried fermenting avocadoes...

Mon, 05/21/2012 - 10:36 | 2447472 LawsofPhysics
LawsofPhysics's picture

Just more proof that the entire world is waking up and getting physical  at all costs.  Fuck the paper pushers,  the world is trying to deverage and dump all fiat in exchange for anything fucking real.

This will further deteriorate the paper world and trust among all trading partners.

Just remember, when goods and services stop crossing borders, troops will.

Mon, 05/21/2012 - 11:37 | 2447716 MarsInScorpio
MarsInScorpio's picture

Educate me: Who is crossing the borders of whom?

-30-

Mon, 05/21/2012 - 20:23 | 2449291 prole
prole's picture

Frederic Bastiat will cross the borders of time and space and give you a stern lecture

Mon, 05/21/2012 - 10:36 | 2447473 EmileLargo
EmileLargo's picture

The Dollar will rocket if this keeps going.

Mon, 05/21/2012 - 10:46 | 2447490 Dermasolarapate...
Dermasolarapaterraphatrima's picture

"Pop pop, Fizz, Fizz, oh what a relief it is..."

I read American buyers are defaulting on payments ot Chinese sellers esp textiles refusing to pay for the high cotton prices...it's a big circle of spreading defaults.

Mon, 05/21/2012 - 10:44 | 2447494 bigwavedave
bigwavedave's picture

chinks. untrustworthy fuckers. wont honour a deal that goes against them. not ever

Mon, 05/21/2012 - 10:47 | 2447509 Joe The Plumber
Joe The Plumber's picture

They " renegotiated" the guaranteed oil contracts in 2009. Of course they screwed goldman so I have mixed feelings lol

Mon, 05/21/2012 - 11:01 | 2447546 Tortuga
Tortuga's picture

But, but, MSNBC says China is going to be the largest economy in 2020 and the USA will be in their place, a 3rd world nation without the rule of law, forcing women to get abortions, destroying our currency, taxing our middle class into serfdom at the point of a gun, running the government and the economy with political "pull" rather than sound business practices, awarding all govt "investment" to cronies. How can China be acting so, so, progressive?

Mon, 05/21/2012 - 11:28 | 2447671 Abitdodgie
Abitdodgie's picture

By 2020 how about the end of the year?

Mon, 05/21/2012 - 10:45 | 2447500 Joe The Plumber
Joe The Plumber's picture

China always buys at the peak

Remember the Goldman and I believe JPM guaranteed oil contracts the chinese bought around 130? Buwahahaha

Chinese think dollar bad. Buy commodities. Watch commodities go down and dollar rise.

Mon, 05/21/2012 - 10:47 | 2447507 JustObserving
JustObserving's picture

Deflation cannot be tolerated much longer.  Debts and liabilities in the West are just too high to be serviced in a deflationary environment. Collapse of the Euro will be hastened and US debt will grow faster.

Bernanke will have to announce more QE if deflationary forces get stronger.

Mon, 05/21/2012 - 10:56 | 2447536 Arnold Ziffel
Arnold Ziffel's picture

Australian housing prices plunging as sales plunge.....their economy is mostly based on house construction and exports of iron and coal.

Mon, 05/21/2012 - 11:17 | 2447625 catacl1sm
catacl1sm's picture

Has their bubble burst yet? I haven't heard anything along those lines, so far.

Mon, 05/21/2012 - 12:00 | 2447835 Element
Element's picture

Yeah, demand is going away completely, because China and India's 3 billion energy-poor people decided to move to the moon.

Thus we're fucked ... splitters! ... cheap bastards!

Mon, 05/21/2012 - 10:59 | 2447544 q99x2
q99x2's picture

Max Keiser says they hang bankers that commit fraud in China. The bubble might have been from mis-allocation rather than fraud. It may have different bursting properties--more like fireworks than a waterfall.

Mon, 05/21/2012 - 11:18 | 2447630 catacl1sm
catacl1sm's picture

They do, but it depends on whether it's state-sponsered fraud or personal gain fraud. State-sponsered fraud is fine, the other, not so much.

Mon, 05/21/2012 - 11:19 | 2447638 catacl1sm
catacl1sm's picture

Oh wait, the same is true here in the good ole US of A.

Mon, 05/21/2012 - 20:32 | 2449304 prole
prole's picture

"I did not steal that 1.5 Billion dol-- oops, I mean have sex with tha-- er, did not purposefully drown Mary Jo, era, did not pay 4,000 taxpayer dollars per hour for my high class call g-- rr Vince Foster really did commit suicide!*"

* Average Democrat at deposition

Mon, 05/21/2012 - 11:04 | 2447568 shovelhead
shovelhead's picture

No big deal.

A few aircraft carriers and some planes on deck will soak up the excess iron and copper in China.

Dumping Bernanke Bux will continue so China can make Africa safe from Yankee Imperialism.

African tin-pot dictators that used to be American owned are now Chinese owned because a dollar just can't buy what it used to.

Strange how the Chinese aren't refusing gold shipment though. Silly barbarians are probably sewing it into clothes.

Mon, 05/21/2012 - 11:20 | 2447643 catacl1sm
catacl1sm's picture

and they need to keep their gold ATM's full.

Mon, 05/21/2012 - 11:07 | 2447579 alfred b.
alfred b.'s picture

 

  Commodities plunging??

It's simple:  everyone's waiting for the bernanke to put the 'ka' back in ka-ching!

 

Mon, 05/21/2012 - 13:33 | 2448133 Not Too Important
Not Too Important's picture

We have to support Warren's coal trains NOW!

Mon, 05/21/2012 - 11:18 | 2447629 walcott
walcott's picture

If this sin't isn't that is a buy signal I don't know what else could be!

Mon, 05/21/2012 - 11:33 | 2447656 jonjon831983
jonjon831983's picture

Remember the COSCO.

 

Maybe it is almost time to start looking at the BDI again...

 

 

Also a piece from history.

"China’s Pig Farmers Amass Copper, Nickel, Sucden Says (Update1)

By Glenys Sim - September 17, 2009 02:46 EDT"

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1B_ZBQfii8Q

Mon, 05/21/2012 - 11:26 | 2447662 Element
Element's picture

 

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.

 

This is what happens when you swap real and useful stuff for mouse clicks ... why the fuck would they not build a (strategic) stockpile like crazy? ... after all, they are effectively getting it for nix.

 

And with this delusion we do eat.

Mon, 05/21/2012 - 11:27 | 2447667 bebopgun
bebopgun's picture

This is not a new phenomenon in China. Whenever the market turns lower, Chinese buyers back out. The funny thing is Western sellers never seem to learn.

Mon, 05/21/2012 - 12:04 | 2447779 Element
Element's picture

But that does not mean there is not a big problem if inventories are overflowing, whilst demand is turning down but production and export is massively expanding.

Big stockpiles can lead to price-stability and confidence in supply and input prices.

They also lead to massive gluts and devastating commodity price collapse with oversupply and/or recession (as Tyler has been warning about in Nat-Gas).

Mon, 05/21/2012 - 11:54 | 2447811 MarsInScorpio
MarsInScorpio's picture

Today's question: When do non-ZH readers finally stop lying to themselves and admit this is not the end of The Great Recession, but rather the continuing saga of The Second Great Depression?

 

Look at the First. You had downs, and ups, and downs, and ups - double-dips and triple dips; exactly the same things we are experiencing now.

 

But there seems to have been a more fundamental honesty about it all - they were in a Depression, and by calling it such - that is, by honestly admitting the problem so they could honestly try to solve the problem - they at least made some progress and avoided the takeover of the government via the unions by the Communists, or the takeover of the government through the military by the corporate and banking fascists.

 

But not us - noooooo - we have wordsmiths to rearrange reality with a spin-spin here, and a spin-spin there, here a spin, there a spin, everywhere a spin-spin . . .

 

We are in THE SECOND GREAT DEPRESSION. Stop lying about it.

 

And once you do stop lying, you understand why Europe is collapsing, why the China mystique is all a fabrication, why massive sovereign default is just around the corner, and why you better have gold or silver in your safe.

-30-

Mon, 05/21/2012 - 14:00 | 2448229 MeelionDollerBogus
MeelionDollerBogus's picture

time to get ready for a lot of volatility!

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