Some of this is going to depend on the shape of the real economy obviously.

As for the excess credit supplied by all of that stuff, there is a general consensus that the shadow banking system operating in those realms and has been decimated. Part of why the economy is flat on its back has nothing to do with commercial banks and more to do with the deleveraging in shadow banking. The fed has stepped in to fill that void, not to fill a void left by commercial banks.

So, I think you are dead on regarding the importance of credit supplied as a result of derivative markets.

did you happen to see anything of the standard chartered note on inventories the other day? ft alphaville covered it a bit. expecting worse than q1 in q2 — and i have to say this corroborates well with the gathering decline in consumption, which david rosenberg noted has deepened from january to april, as well as accelerating reductions in loans and leases — but more upbeat about h2.

there’s been a few anecdotes about order quality as well — that “real” cash orders aren’t really coming in, lots of highly predicated sales and therefore lots of cancellations, making the orders picture (glum as may be) look better than it is. that of course means inventory reductions could surprise negatively. can you provide color on this? is that typical of the turns?

again — really fine blogging. thanks.

Thanks for this and for many informative and thoughtful posts. I want to take this opportunity to ask for your thoughts on a question or two that have been bothering me.

Speaking of inventories, we have today a huge overhang in housing inventory. Also, in the past, housing construction jobs have been a key element in a recovery and a target of government stimulus and contra-cyclical monetary policy. I would be interested in your thoughts as to how these sectors nuance your guardedly optimistic view of the GDP statistics. Housing inventory is not, if I am not mistaken, included in the inventory statistics you discuss.

Secondly, and forgive me for going off topic here although it is a question about economic statistics, I would be interested in any insight you might be able the share about how the secondary market in mortgage backed securities, synthetics, derivatives and swaps impact the money supply and how this is or is not measured. One of my pet theories is that expansion of the money supply through these instruments was not included in the statistics which are used to guide the economy.

You will get that my theme is how well our economic statistics describe our reality.

Thanks very much.

Focusing on financial recovery and GDP data I think obscures the real issue which is that we most likely are back to is the same question we asked in the 1960′s… Which is… How does a post industrial nation continue to grow when it is too expensive to create anything, and produces limited enhanced productivity gains?? Originally the answer was that globalized consumption / asset based pyramiding approach would work until its industrial peers caught up, but this approach appears to have run its course now. Meaning, private and public debts are already higher than they were in the GD so additional sustainable growth thru debt enhancement is unlikely.

The only current option left right now is to do mass currency devaluation to allow further expansion by debt devaluing which is a logical short term approach. I think that even the FED would agree, however, that this is a temporary measure only meant to just buy more time… The long term risks of this approach are no doubt many…