Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
It's Time for the Irish People to Rise
by: Cullen Roche November 12, 2010
Ireland is teetering on the edge as their budget woes appear insurmountable and bond yields and credit spreads blowout to new highs. It looks increasingly likely that Ireland will have to tap into the EFSF. Angela Merkel, however, is not prepared for taxpayers to take all of the losses:
GERMAN CHANCELLOR Angela Merkel is refusing to back down from her push to force private investors to share the burden of the euro debt crisis, which helped send Irish borrowing costs to record levels.
Speaking in Seoul, where she is attending the G20 summit, Dr Merkel acknowledged her demands have upset the markets but insisted it was unfair for taxpayers to be saddled alone with the cost of sovereign rescues. “Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Dr Merkel said.
“We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”
It’s a sad state of affairs when a foreign central bank and German Chancellor decide the fate of the Irish people, but this is the mess that single currency systems create. Quite honestly, it’s shameful that Irish politicians would even allow such a thing to occur. They have ceded their monetary sovereignty and destroyed their ability to protect their people. The ultimate role of any state should be to protect its citizenry at all costs. That is not the case in Europe and it is nothing short of inhumane.
As I’ve repeatedly stated, there is a moral hazard here that is beyond absurd. Setting the precedent that foreign governments will bailout struggling periphery nations is not sound policy. Where does it end? Does Greece tap into the fund? Then Spain? Then Portugal? Then Italy? At what point do the Germans realize that they are largely funding the deficit spending of all of these other nations? Do the core nations become permanent funding sources for the periphery and what will certainly be consistent and prolonged economic problems in the coming years? Surely something will give at some point.
The problem in Europe remains one of unity. They are not fully united and personally I find it incredibly difficult to ever envision a Europe in which Germans are happy consistently paying for Greeks to work fewer hours. They continue to kick the can in Europe. True structural change needs to take place. The periphery nations are not growing their way out of their budget woes. Austerity is failing with flying colors.
David McWilliams of The Post wrote an appropriate article earlier this year:
If a country decides to give up its currency and get into bed with another currency, it would seem ludicrous to entertain this move without being sure that the union was suitable. As we all know, there is a difference between fancying someone and making the thing last … In general, for a currency union to work, there should also be a single fiscal policy … This is how the currency unions in the US, Canada and Australia work … Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn’t join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity – particularly among our senior mandarins – prevented us from having a debate.
Are we expected to remain in this loveless marriage? As we saw in the past decades, divorces are now part of life. Ireland is, today, in a bad marriage – with no divorce. Like those Catholic fundamentalists who suggested that divorce would threaten the fabric of our society, the euro fundamentalists who run policy in Ireland suggest that, to leave the euro, would undermine the fabric of our economy. Like all fundamentalists, the thing they hate most is a sceptic. Lets hear it for the sceptics.
There is a famous statue of James Larkin on O’Connell Street in Dublin. Inscribed on it are the famous words he once spoke:
Ní uasal aon uasal ach sinne bheith íseal: Éirímis.
In English it reads:
The great appear great because we are on our knees: Let us rise.
The Irish people are on their knees. And for now, bankers and politicians are keeping them there. Let’s hope they rise.
http://seekingalpha.com/article/236479-it-s-time-for-the-irish-people-to-rise?source=email_the_macro_view
The Dollar: Every Man for Himself
by: Axel Merk November 11, 2010
The Federal Reserve’s (Fed’s) strategy of firing up its printing press may have the debasement of the U.S. dollar as its goal (see Fed Targets Weaker Dollar), but it’s important to note that the Fed does not act in a vacuum. In our humble opinion, Fed Chair Bernanke is wrong both on substance and politics – a potentially explosive mix.
On substance, the Fed recently stated in the Federal Open Market Committee (FOMC) Minutes that businesses were holding back investments because of fiscal and regulatory uncertainties. In the FOMC’s own analysis, the economic recovery should strengthen in 2011, even without additional stimulus. Additionally, commonly followed metrics used to measure the market’s inflation expectations are, and have been, approximately 2%. Even if inflation expectations were to drop lower, the lone dissenting voice on the Fed, Thomas Hoenig, rightfully argues a little deflation may not be any worse than a little inflation. In our view, printing upwards of US$600 billion in fresh money may be the wrong prescription for the current situation.
We believe a key impediment to the U.S. economy is that policy makers are fighting market forces. Consumers would like to de-leverage further; however, de-leveraging may imply lower home prices, more foreclosures and bankruptcies; while such dynamics are sorely needed for a more sustainable recovery, promoting what may be the healthiest economically may be political suicide. Consumers that downsize may actually live in a house they can afford; such consumers will once again have disposable income, be able to save and possibly be able to afford a bigger home down the road. If, in contrast, a consumer is subsidized to stay in a home he or she cannot afford, that consumer will continue to be a slave to their mortgage, unable to have money to pay for unexpected repairs, such as a new roof; or have disposable income to spur growth in the economy. Indeed, some argue that the economic boom that followed the Great Depression was a result of weak businesses failing.
When enough money is thrown at an ailing industry, it may be possible to prop it up. However, such efforts will likely require a lot more money than policy makers anticipate. It appears Bernanke has already come to this realization – purchasing $1.3 trillion in mortgage-backed securities (MBS) didn’t have the desired effect, hence QE2. The real Achilles' heel for policy makers is a lack of control over where the money printed actually flows. Both fiscal and monetary stimuli may not flow to where the money is needed, but to where the greatest monetary sensitivity is. Intuitively, commodities, precious metals and currencies with a high correlation to commodities, such as the Australian or Canadian dollar may benefit the most. But let’s look at the political dimension, which gives a more complex picture.
We have no doubt Bernanke means well; he has devoted his life to studying the Great Depression and does not want to repeat the mistakes of those days. However, we should pause right here and take note that this may be a rather condescending attitude: those guys in the 1930s did not know what they were talking about; today, we are so much smarter. Without arguing the merits of all the policies of the 1930s, we would like to call for modesty: with the benefit of hindsight we can easily point to the errors of the past. It’s also easy to think we are smarter than the Reichsbank in Germany during World War I: Germany’s central bank a century ago was convinced that printing money to finance the Great War was ‘exogenous’ to the domestic economy and thus not inflationary; the hyperinflation that followed proved them wrong. Historians looking back at the current policies may be just as baffled by the absurdity of printing money to restore the wealth destroyed by capital misallocation. The point is that history repeats itself because we are human.
In our opinion, Fed Chair Bernanke, throughout his tenure, has completely underestimated the political dimensions of his policies. Under his leadership, the Fed decided to buy MBS, thereby engaging in fiscal policies via credit easing, traditionally the realm of government. These policies step directly on the turf of Congress. As such, the Fed has opened itself up for increased scrutiny since the onset of the financial crisis: it’s simply not the Fed’s role to make up for what the FOMC may perceive to be shortcomings of Congress. The same is happening through the renewed quantitative easing (QE2), as the Fed is responding to what it calls “fiscal and regulatory uncertainty” by printing money; the Fed is now printing money to finance the U.S. budget deficit. These steps only increase the political scrutiny of the Fed; that’s a negative because the more political pressure the Fed is under, the less effective Fed policy may be (the more independent a central bank, the more effective policies are at creating price stabile environments). In a world of fiat money, it’s all about trust; however, the political meddling may accelerate the erosion of trust in the Fed and the U.S. dollar.
What scares us is that this may be exactly what Bernanke wants. In his Jackson Hole speech in late August, which set the stage for QE2, Bernanke mentioned that in an environment where inflation expectations are too low, it would not necessarily be bad if the market lost confidence in the Fed, as that would help increase inflation expectations. The remark may have been meant as a joke, but this is no laughing matter.
The political dynamics do not stop at the U.S. border. German finance minister Schäuble, referring to the announcement of QE2, said: “It doesn’t add up when the Americans accuse the Chinese of currency manipulation and then … artificially lower the value of the dollar.” Brazil’s president-elect Rousseff minced no words, warning: “The last time there was a competitive devaluation of currencies it ended up … in the Second World War.”
Of course, it should be noted that every country will pursue policies it perceives to be in its own national interest. If China decides to have a quasi-peg of its currency to the dollar, they must not complain when they import an inflationary U.S. monetary policy. But does acting in one’s interest suggest one should ignore global ramifications of one’s policies? The 1930s turned into the Great Depression because protectionism flared up and ultimately hurt everyone; every country finds it easier to time blame foreigners for their problems than fixing domestic issues. Policy makers in the 1930s were just like the policy makers of today: they were acting with the best of intentions, pursuing what they deemed to be in their national interest. The trouble then and now is that a unilateral devaluation of the dollar, such as going off the gold standard during the Great Depression, or engaging in QE2, may unleash a toxic set of dynamics. If and when protectionism flares up, countries with a current account deficit, notably the U.S., may suffer the most. That’s because those who have been flexible enough to adjust and open up their markets to today’s trade based world are likely to be the ones punished the most.
What should investors do? What should governments do?
As far as investors are concerned, there’s an old saying: don’t fight the Fed. The Fed has a larger credit line than you do. If the Fed wants to debase the dollar, then consider doing what central banks do: diversify to a basket of currencies. We have long argued that there may be no longer be such a thing as a safe asset and investors may want to take a diversified approach to something as mundane as cash. In our opinion, gold is the ultimate hard currency, as it cannot be easily inflated (gold production cannot be easily ramped up); as such, it’s no surprise that the price of gold has been a prime beneficiary since the announcement of QE2.
What about governments? It’s understandable many are furious: QE2 may unleash the greatest carry trade of all times: the Fed can print the money, but cannot control where it flows. Emerging markets in particular are concerned that the Fed’s actions will cause asset bubbles in their domestic markets. It makes for good politics to their domestic constituents to complain about the U.S., but ultimately policy makers around the world must take care of their own backyards. Their choice is to fight or to embrace the instability that may be unleashed by the Fed’s actions.
Brazil has chosen to fight, introducing measures to protect its domestic economy. Brazil’s actions are not too surprising, as many of their exports are highly sensitive to the value of the Brazilian real. When Brazil exports its commodities, a stronger Brazilian real makes its exports less competitive. Having said that, over the years, Brazil’s economy has shifted from exporting raw materials to exporting manufactured and semi-manufactured goods, many of which are less sensitive to currency price movements.
At the other end of the spectrum are Sweden, Australia and New Zealand. These countries have publicly rebuked currency intervention. New Zealand indicated it may be too small to stem the markets, but also suggested that one is naïve to think currency intervention won’t lead to unintended consequences that may hurt the domestic economy. Sweden decries to fix one’s problems by manipulating one’s currency. Australia, a country with one of the more volatile currencies, has embraced a floating exchange rate, arguing that the floating Australian dollar in recent decades has been a substantial help in keeping inflation low.
At the risk of oversimplifying, more advanced economies have an easier time absorbing stronger currencies, as exporters in these countries may have greater pricing power. Very few exporters from the eurozone compete on price; the one area where there’s little pricing power, the European brewing industry, has seen massive consolidation in recent years (your favorite Bavarian beer is owned by a Belgium firm these days that also owns Anheuser Bush). Similarly, we believe China has pricing power and should not be afraid of allowing its currency to appreciate. It’s simply untenable for China to import U.S. monetary policy; using administrative measures to control inflation is far less effective than introducing higher real interest rates in conjunction with a stronger currency. At the other extreme, Vietnam exports low value goods and competes predominantly on price. As such, it’s not surprising that Vietnam has instigated multiple currency devaluations in a desperate attempt to boost exports; desperate because the U.S. consumer is simply not kicking into the type of spending mood that Vietnamese exporters would like to see.
In our view, governments should not fight the Fed. The world is increasingly looking like a zoo of agitated animals, and the U.S. is the 800-pound gorilla in the room. What do you do with an 800-pound gorilla in the room? Do you feed it to keep it calm? That’s what China and Japan have been trying to do by buying U.S. bonds. But what if that gorilla is going through a mid-life crisis, is impossible to control and refuses to take medication for various ailments? Maybe those other animals in the room should remember what survival in the wild is about, the days before a zookeeper could tame everyone. The wild is rather Darwinian. Policy makers need to not only recognize, but embrace that they are on their own.
QE2 is akin to the Fed placing a gun to China’s head, telling them to revalue their currency. And indeed, what the world needs is to reduce its dependence on the U.S. dollar. This doesn’t mean they need to dump their dollar holdings, but it means the best way to strengthen their own economies is to make their own currencies more relevant. Not through currency intervention, but through building a stronger domestic market. We are not suggesting giving consumers in China credit cards to “re-balance” the global economy. There have always been imbalances in the world, and there will always be imbalances. What we need are valves to allow imbalances to defuse potential bubbles. Free-floating currencies are one of the most effective valves to facilitate such flows.
One can of course argue that QE2 is clear market manipulation, that there’s nothing free about it, except for the free money it creates. We don’t disagree, but putting trade barriers into place is not the right answer. To get a more stable world, one of the best things that could happen would be to have substantial development of domestic fixed income markets in emerging markets. This may sound like an abstract concept, but in order to achieve a reduced dependence on the U.S., governments elsewhere must facilitate the creation and deployment of capital in their own domestic countries. While we criticize U.S. policies, the flip side of the current account deficit is the capital account surplus: foreigners like investing in the U.S.; they like it so much that the U.S. has gotten hooked on the Kool-Aid, having foreigners finance massive U.S. budget and trade deficits. If foreign governments now put capital controls in place to reduce the inflow of hot money, the world will continue to see emerging markets as places where capital may not be safe.
Of course, emerging markets may want to deter hot money that results from QE2. However, governments around the world would do themselves a favor by addressing the root causes rather than the symptoms. The more advanced an economy is, the easier it should be for them to embrace change. Countries like China and South Korea have pricing power; the same applies to the eurozone. What’s wrong with Japan is not a strong yen, but the fact that Japan’s business environment has not fostered businesses that invent products consumers actually like, such as the iPad (AAPL).
Is it realistic that governments will stay calm and lay out a framework that suits QE2? The upcoming G20 meeting may provide a sign as to whether cooler heads will prevail. Unfortunately, cooler heads may simply suggest a boiling frog syndrome where we see inaction. In that context, policy makers venting their anger may lead to disruptions, but could ultimately provide for healthier discourse and facilitate accelerated reform.
Disclosure: None
http://seekingalpha.com/article/236396-the-dollar-every-man-for-himself?source=email_the_macro_view
Dagong: US Solvency on the Brink of Collapse
By Rocky Vega
11/11/10 Stockholm, Sweden – Founded in 1994, Beijing-based Dagong Global Credit Rating Co. is making headlines once again… this time for downgrading US debt from its already world’s lowest, if not most credible, assessment of double-A, to a lower by one level A+ with negative outlook.
The lowered rating is mainly due to round two of Fed quantitative easing. Among other problems, Dagong highlights “serious defects in the US economy,” including lowered “national solvency,” and “long-term recession.” In this process, the China-based credit rating agency is of course also describing, in a backhanded way, how its own home nation’s biggest foreign reserve holding, US bonds, is deeply flawed.
From The Telegraph:
“The Dagong Global Credit Rating Company analysis is highly critical of American attempts to borrow their way out of debt. It criticises competitive currency devaluation and predicts a “long-term recession”. Dagong Global Credit says: ‘In order to rescue the national crisis, the US government resorted to the extreme economic policy of depreciating the U.S. dollar at all costs and this fully exposes the deep-rooted problem in the development and the management model of national economy.
“’It would be difficult for the U.S. to find the correct path to revive the US economy should the US government fail to understand the source of the credit crunch and the development law of a modern credit economy, and stick to the mindset of traditional economic management model, which indicates that the US economic and social development will enter a long-term recession phase.’
“The analysis concludes: ‘The potential overall crisis in the world resulting from the US dollar depreciation will increase the uncertainty of the U.S. economic recovery. Under the circumstances that none of the economic factors influencing the U.S. economy has turned better explicitly it is possible that the US will continue to expand the use of its loose monetary policy, damaging the interests the creditors. Therefore, given the current situation, the United States may face much unpredictable risks in solvency in the coming one to two years. Accordingly, Dagong assigns negative outlook on both local and foreign currency sovereign credit ratings of the United States.’”
Dagong’s first report was already insulting for being pretty much true… but, what is this? It was one thing to make the point and bring international attention to the US’ papered over debt debacle However, it’s quite another to bring up a different, lowered version of the US credit rating every single time the feds make a catastrophic and world financial system-jeopardizing blunder (thank you, QE2). Continually downgrading US debt doesn’t seem fair at all, something like punching below the belt. This new strategy is almost certain to get embarrassing quickly.
To drive home this point, just take a look at what is perhaps the report’s most biting quote — which came to our attention by way of The Reformed Broker:
“Though it is likely for the current loose monetary policy to postpone the occurrence of difficulties, yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst.”
Again, thank you Fed. Thank you for your QE2 poison. And, thank you Dagong, for pointing it out. Way to pick on the fat kid. You can read Dagong’s full report in all its colorful detail in a PDF here entitled, “Surveillance Report for Sovereign Credit Rating: The United States of America.”
Best,
Rocky Vega,
The Daily Reckoning
Read more: Dagong: US Solvency on the Brink of Collapse http://dailyreckoning.com/dagong-us-solvency-on-the-brink-of-collapse/#ixzz1586RSixN
Why Some Think a Gold Standard Wouldn’t Work
By The Mogambo Guru
11/11/10 Tampa, Florida – There is a lot of wailing and gnashing of teeth from Moron Keynesian Trash (MKT) about the brave Robert Zoellick, president of the World Bank, saying that what the world needs is a modified gold standard for currencies, which it does, in spades.
The Financial Times, long a champion for Keynesian stupidity despite constant inflation in prices, had an editorial from one of these MKT, who opines, “Could a gold standard help international currency co-ordination? In theory it could, if the state were willing to accept the restrictions on national monetary policy and the currency account adjustments that a gold standard entails.”
Did they say, “Willing to accept restrictions on national monetary policy”? Hahaha! What kind of crack is that? Is this guy actually saying that the only reasons that a gold standard would not work is because governments want no restrictions on creating and spending a lot of money, consequences be damned? Hahaha! Who knew?
Not content with that, the editorial goes on, “But if such political will can be found, there are better anchors than gold; until then, gold will not work.” That’s it! No explanation, no rationale, theory, no examples of “better anchors than gold,” no nothing! Just some preening know-nothing stating, “gold will not work”! Hahaha!
Jon Nadler at Kitco.com writes that “A case was made for a new anchor or ‘basket’ of currencies plus gold, and it was contained in a Financial Times piece written by World Bank President Robert Zoellick. His ideas were met with skepticism by gold market experts such as UBS analyst Edel Tully, who correctly stated that ‘Any reserve currency needs a supply that can grow as rapidly as global trade. Gold supply falls significantly short of that basic requirement.’“
Did he say, “correctly stated”? Wrong! Well, my first instinct is to laugh at such arrogance, since I never heard or read such a thing in my life, which I do thusly: Hahaha!
For one thing, any amount of gold will work perfectly, and for another thing, the world is awash in dollars and other countries printing their own money to absorb all those dollars flowing out into the world, an irresponsible and stupid result of not having a gold standard, and which has caused a lot of inflation, bubbles and economic misery.
And as for a “gold market expert” knowing anything about economics, which he obviously doesn’t, I will just dismiss him with a casual wave of my hand.
On the other hand (the one that is not waving) Charles Kadlec of the Economic Advisory Board of the American Principles Project, writing in The Wall Street Journal, correctly says that “guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability.”
In fact, he goes on that “From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%,” which happily produced not only low unemployment, but that “low unemployment and high growth coincided with low inflation” along with low interest rates, as exemplified by AAA-rated corporate bonds averaging less than 4%, and which “never rose above 6%.”
And speaking of debt, I was intrigued with the title of the essay by James West, at midasletter.com, which was, “Buying $600 Billion in Debt with Debt,” which I had hoped was an instruction manual on how to make a lot of money, fast, using no money of my own, and (hopefully) without doing any work or taking any risk.
It was, alas, not a guidebook to instant and undeserved riches, but a criticism of the idiocy of the Federal Reserve and another stupid Quantitative Easing (QE2) plan of theirs to create a couple of trillion dollars or so in the next year, to buy a couple of trillion dollars or so of Treasury debt in the next year, so that the despicable Obama administration can deficit-spend a couple trillion dollars or so in the next year.
James West, writes, “Here is the glaring hole in the United States Federal Reserve’s approach to what it calls stimulus, and what history will one day categorize as fraud: You can’t use your own debt to purchase more debt when you can’t repay the original debt. The crime is compounded when you know you’re never going to repay the debt. It amounts to treason to intentionally destroy the integrity of the nation’s money.”
And how do they intend to get away with it? Easy! He explains, “The Federal Reserve’s ability to ‘purchase’ US Treasury Bills is completely dependent on the fact that there is no overseer above the Board of Governors of the US Federal Reserve to call an end to such self-destructive, immoral, and just plain criminal behavior.”
In short, Congress can stop them, but doesn’t!
In The Financial Times, Martin Feldstein writes, “The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy.”
The reason is that “Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices.” Inflation! There it is!
Even worse, The Wall Street Journal reports their “Number of the Week” is $10.2 trillion, which is, “How much the governments of the economically advanced nations will need to borrow in 2011.”
As for just us idiotic Americans who have elected the guys who allowed the Federal Reserve to destroy the dollar by monstrous over-issuance, the International Monetary Fund estimates that “The US will need to find about $4.2 trillion, 9% more than 2010 and equal to 28% of the country’s projected economic output in 2011.”
The good news is that buying gold, silver and oil now to fabulously capitalize on the horrific inflation in consumer prices that all of this quantitative easing madness will cause makes buying them such a no-brainer that “Whee! This investing stuff is easy!”
The Mogambo Guru
for The Daily Reckoning
Read more: Why Some Think a Gold Standard Wouldn't Work http://dailyreckoning.com/why-some-think-a-gold-standard-wouldnt-work/#ixzz1585uZP5M
Government Spending: A Lesson in How to Go Bankrupt
By Bill Bonner
11/11/10 Paris, France – As an institution matures, more people get a good grip on it. And take advantage of it. Typically, it is corrupted by its own custodians. Instead of serving its original purpose, it serves to enrich its managers and employees.
The wage slaves become the masters. The zombies take over. USA Today has the report:
The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office, a USA TODAY analysis finds.
FEDERAL WORKERS: Earning double their private counterparts
Federal salaries have grown robustly in recent years, according to a USA TODAY analysis of Office of Personnel Management data. Key findings:
Government-wide raises. Top-paid staff have increased in every department and agency. The Defense Department had nine civilians earning $170,000 or more in 2005, 214 when Obama took office and 994 in June.
Long-time workers thrive. The biggest pay hikes have gone to employees who have been with the government for 15 to 24 years. Since 2005, average salaries for this group climbed 25% compared with a 9% inflation rate.
Physicians rewarded. Medical doctors at veterans hospitals, prisons and elsewhere earn an average of $179,500, up from $111,000 in 2005.
Federal workers earning $150,000 or more make up 3.9% of the workforce, up from 0.4% in 2005.
Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis.
Some government employees provide good and useful service. Most probably work hard at jobs that aren’t worth doing.
In either case, if bailed-out bank chiefs get to pay themselves million-dollar bonuses, the feds should keep their money too. They all stole it fair and square.
Of course, paying people a lot of money to do things that aren’t worth doing is not exactly good business. That’s how you go broke. So it shouldn’t be a surprise that the US is headed for bankruptcy. Last month the US government posted a $140 billion deficit. The newspapers reported it as good news, because it was down from $176 billion the year before. But this is like saying that the airplane managed to slow to only 300 miles an hour before it crashed.
Bloomberg has more details:
While the economic recovery that started in June last year has helped generate more revenue for the Treasury, the Congressional Budget Office estimates the deficit this fiscal year will exceed $1 trillion for a third time. Cutting the budget shortfall may prove challenging with a newly elected Republican majority in the House of Representatives and President Barack Obama, a Democrat, in the White House.
The CBO said Aug. 19 that the budget shortfall this fiscal year will be almost $1.1 trillion. The deficit will amount to 7 percent of the nation’s gross domestic product, the nonpartisan agency’s semi-annual budget report projected.
Let’s see. A trillion here. A trillion there. It starts to add up. And pretty soon, your political system is corrupted by it. You can’t correct the situation. Too many zombies on the payroll. And the zombies vote.
So, what happens when you spend more than you can afford? First, your credit rating goes down. Then you go broke.
And here, we turn to The Telegraph, in London:
“Leading Chinese credit rating agency downgrades USA government bonds.”
Many of the world’s leading economies have condemned America’s money printing. Brazil, Germany, China – all think the US is headed in the wrong direction. Here’s more of the report in the Telegraph:
If China, now the second biggest economy in the world, stops buying US government bonds this could have a very negative effect on the global recovery. The Dagong Global Credit Rating Company analysis is highly critical of American attempts to borrow their way out of debt. It criticises competitive currency devaluation and predicts a “long-term recession”.
Dagong Global Credit says: “In order to rescue the national crisis, the US government resorted to the extreme economic policy of depreciating the US dollar at all costs and this fully exposes the deep-rooted problem in the development and the management model of national economy.
“It would be difficult for the US to find the correct path to revive the US economy should the US government fail to understand the source of the credit crunch and the development law of a modern credit economy, and stick to the mindset of traditional economic management model, which indicates that the US economic and social development will enter a long-term recession phase.”
The analysis concludes: “The potential overall crisis in the world resulting from the US dollar depreciation will increase the uncertainty of the US economic recovery. Under the circumstances that none of the economic factors influencing the US economy has turned better explicitly it is possible that the US will continue to expand the use of its loose monetary policy, damaging the interests the creditors.”
We can’t quite understand the language of some of Dagong’s report. But what the Chinese don’t know about mismanaging an economy is probably not worth knowing. They did some amazingly stupid things during their pre-capitalist days. Backyard steel making, Great Leaps forward, price controls – they know what kind of mischief you can get up to with central planning. And they see the US headed for trouble. So do we…
Bill Bonner
for The Daily Reckoning
Read more: Government Spending: A Lesson in How to Go Bankrupt http://dailyreckoning.com/government-spending-a-lesson-in-how-to-go-bankrupt/#ixzz1584upXYR
I agree.
My take on being diversified is the right frame of mind, a retreat, water, food, arms, PM and a big hole to bury the rest.
Sooner or later given the state of the union ETF's will only be worth more than FRN's due to the fact they decompose better in septic tanks.
-- IMHO --
John Taylor: "The Collapse Of Europe Has Begun, The Euro Will Trade Like The Lira In A Few Months"
By Tyler Durden
Created 11/11/2010 - 09:39
Fasten Your Seatbelt
November 11, 2010
By John R. Taylor, Jr.
Chief Investment Officer, FX Concepts
Now that Ben Bernanke has re-introduced quantitative easing (QE2) to a mostly incredulous world and, across the ocean, the Eurozone has begun unraveling again, our thoughts should turn to the parlous state of the world and the risks ahead. These are amazing times and seem to grow more so every day. Policy errors are popping up everywhere and are likely to multiply dramatically as the political problems are serious, answers hard to find, and the decision makers are not up to the task. Bernanke has proven that he is more a college professor and less a trader, which will cost the world dearly. Sometime between June and August Bernanke lost his stomach for the "exit strategy," probably influenced by his predecessor's summer announcement that the US economy had `hit an invisible wall." While it can be argued that QE1 has been a success due to the liquidity crisis, it did not expand the Fed's balance sheet and came when the economy was still
reeling. This new edition dramatically expands the balance sheet, actually funding the entire projected government deficit over the next few months. Although the world believes that QE2 is there to push the dollar sharply lower, Bernanke argued that his goal was something else. On the day after the Fed's move, he wrote in a Washington Post editorial piece that QE2 would push up the equity market, bonds, and other risky securities thereby stimulating consumption and economic activity. Even Greenspan did not publicly proclaim his "put," but now Bernanke has made it the centerpiece of US strategy. Equities are already overpriced, with profit margins at all-time highs and PE ratios far above average. Speculation is now more American than apple pie – but this is a very risky time to practice it. As one highly respected analyst noted about Bernanke's article, "these are undoubtedly among the most ignorant remarks ever made by a central banker."
As we and many others have noted that QE has shown little or no positive impact on actual economic activity, so the Fed has taken a big gamble, and if it fails as we expect it will have nowhere else to go. With the Republican victory tainted by the Tea Party "starve the beast" mentality, austerity has come to Washington. This next year will be a terrible one for the world's biggest economy, so we would go against Bernanke on the equity side, but buy government bonds along with him.
The Eurozone has begun its collapse a little later than we thought. My compliments to the political prowess of the euro-leaders for holding things together for so long, but this is an impossible situation and the crisis is on its way. Jean-Claude Trichet caught the spirit of the situation today in Seoul when he said that "it is absolutely necessary to change the governance of Europe" and called for moving "as far as possible in the direction of an economic and budgetary quasi-federation." I only disagree with part of one word, `quasi,` as Europe must move to a full economic federation if the euro is to survive. With 16 countries using the euro and Estonia on the way, the odds of moving there is currently lower than infinitesimal. Things will change after the approaching horrible economic and political catastrophes that will wrack some of these economies and societies. Unfortunately nothing will happen before the current situation gets
unbearable – this is the way of democratic politics. As all the leaders are still working toward the same goals, and no one has stepped forward express the inchoate fears of the European populace, this should take years. By the start of next year the Eurozone will enter a recession that will test the current leadership. The euro, which has been perceived as if it were a German mark, has already topped and will decline until it is priced like an Italian lira in the next few months. With Europe and the US in recession next year, commodity prices will drop again and global growth will suffer despite the outperformance of domestic Asian economies. With the policy stresses, and the risk of significant errors in judgment, international strife becomes more likely as well.
Ben Bernanke Estonia Eurozone Quantitative Easing Recession Trichet
------------ --------- --------- --------- --------- --------- -
Source URL: http://www.zerohedg e.com/article/ john-taylor- collapse- europe-has- begun-euro- will-trade- lira-few- months
Ben Bernanke: The Chauncey Gardiner of Central Banking
By Frederick Sheehan
11/10/10 North Weymouth, Massachusetts – “[H]igher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes.” -Federal Reserve Chairman Ben S. Bernanke, Washington Post, November 4, 2010
In Ben Bernanke’s Washington Post elucidation of Fed policy, “What the Fed Did and Why: Supporting the Recovery and Sustaining Price Stability,” the Fed chairman cut-and-pasted misleading paragraphs from earlier misleading speeches. He did not discuss the two most important aspects of his money experiment. Bernanke did not address, first, the real economy or, second, the rest of the world. It will be the first of these lapses that will be discussed below.
On November 3, 2010, the Federal Open Market Committee’s [FOMC] decided to buy $600 billion in bonds. The exchange works as follows: $600 billion of cash will be dispensed to the banking system by the Fed and $600 billion of U.S. Treasury bonds will be extracted. The Fed will also reinvest over $400 billion of maturing mortgage securities it bought earlier and buy Treasuries. The total purchases of over $1 trillion will satisfy, to some degree, the Federal Reserve’s unstated but sine qua non obligation to fund the Treasury Department’s deficit.
This package is known as QE2: quantitative easing, second round. The first round was initiated in March of 2009. On March 18, 2009, the Fed announced it would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities.
To herald the New Era in central banking, Chairman Bernanke appeared on “60 Minutes.” His March 15, 2009, TV appearance was introduced with fanfare: “You’ve never seen an interview with Ben Bernanke… By tradition, Federal Reserve Chairmen do not do interviews. That is, until now.”
On the show, Chairman Bernanke forecast that “green shoots [will] appear in different markets.”
INTERVIEWER: “Do you see green shoots?”
Chairman BERNANKE: “I do. I do see green shoots.”
Do you see green shoots?,” became the question on CNBC that every guest was asked. Most saw green shoots, some were looking for them, and others thought the question was childish, and probably did not receive another invitation to this carnival.
Before embarking on QE2, one might suppose the FOMC studied the aftermath to QE1. In this regard, the central bankers were handed a treat. Bernanke’s Domino Theory in the November 4, 2010, Washington Post is quoted above. The catalyst for recovery is “higher stock prices.” The stock market has risen 75% since March 9, 2009. Bernanke could not have asked for a more boisterous number to plug into his equation.
The result? Incomes have fallen. Employment is hard to find. In the Washington Post, the Fed chairman justified QE2 (as he had QE1) by stating the Fed’s mandate “to promote a high level of employment.” The official and understated unemployment rate was 8.1% when Bernanke was interviewed in March 2009. The official rate has risen to 9.6%. The “U-6? level of unemployment has risen from 15.6% to 17.0% since March 2009. This number, calculated and released monthly by the Bureau of Labor Statistics, includes the unemployed plus those who are “discouraged” – people who have not looked for a job in the past four weeks because they think there are none – plus, those working part time because they cannot find a full-time job. The number of unemployed who have been without a job for 27 weeks or longer rose from 3.2 million in March 2009 to 6.2 million in October 2010.
Nevertheless, Bernanke’s central-planning unit will fix higher stock prices: Please note, in his Domino Theory, “higher stock prices” are not conditional. Bernanke’s assumption should not be taken unconditionally to the market, since Bernanke’s plan will fail, but it may produce a Garden of Eden before we drown in a Valley of Tears. An example of Bernanke’s checkered record in market rigging is the Fed’s failure to boost the housing market. The Fed has bought over $1 trillion of mortgage securities. According to the National Association of Realtors, the average existing home sales price in March 2009 was $170,000. This rose to $183,000 in June 2010, but has now fallen to $172,000. This much can be said of the Fed’s mortgage effort: without it, house prices would be much lower.
Another noteworthy feature of the Post article is Bernanke’s narrow understanding of an economy. He described it as a “virtuous circle that will ‘further support economic expansion.’” (Further expansion is false, but so was the entire article.) The virtuous circle will “lower mortgage rates” and “lower corporate bond rates” and prod “higher stock prices,” according to Bernanke. This will “spur spending.”
He did not mention that personal consumption did rise in September 2010 (by 0.1%). Alas, this was achieved the old-fashioned way: Americans spent more than they earned. The chairman shows no signs of understanding there are many paths by which “increased spending will lead to higher incomes” and that he is navigating the worst one. (For the lower 99.9% of the American people that is, not for the Federal Reserve chairman.)
That is the entire American economy according to the Fed chairman, the former college economist, who calls himself a macroeconomist. What “macro” means to the professor is uncertain, but the dictionary defines a macroeconomist as one who studies the economy “as a whole.”
It is surprising the P.R. division at the Fed did not tell the horticultural expert he should at least mention “Main Street,” or the “real economy,” two terms used to distinguish the rest of America from Wall Street and Washington. (Wall Street and Washington being one in the same.) In the Post, Bernanke’s only solution to economic doldrums is to manipulate asset prices. He has spent the past 18 months distorting stock, bond, commodity, and currency markets. This is from a man who never spent a day off a university campus until he went to Washington. (From the “60 Minutes” interview: “I’ve never been on Wall Street.”)
Jobs and higher incomes are produced from profits. Bernanke never used the word “business” in his Post piece. He never mentioned “banks” or “banking” or “credit.” Saving the banking system was (apparently) his crutch for pouring money into banks and regenerating their criminal culture. He is, after all, running the central bank, but his financial system, and his economy, has been reduced to stocks and bonds.
Nevertheless, taking the world as it is and not as Simple Ben would have it, business and bank loans are part of the economy and QE1 had little influence on either. In his one, glancing reference to the job-creating world, the Fed chairman asserted: “Lower corporate bond rates [courtesy of the Fed's manipulations - editor's note] will encourage investment.”
Really? In its latest poll, the National Federation of Independent Business (NFIB), which represents small businesses, found that 52% of its members do not want a loan. That is a record high. Only 3% of NFIB members said getting a loan was a problem. Stephen Schwartzman, co-founder of Blackstone, the ubiquitous private-equity buyout firm, sees no point to QE2: “It’s not an enormous incentive to do something different with your businesses because rates are down a few basis points. Money is already quite cheap.” It is so cheap that Wall Street has leveraged itself to an estimated record $144 billion payout in 2010 bonuses, according to MSN News.
Again, taking the world as it is and not as it should be, we are stuck with Simple Ben. He has announced QE2, restating the same ambitions as when he launched QE1. Albert Einstein has been quoted by several critics in reference to QE2: “The definition of insanity is doing the same thing over and over again and expecting different results.” Bernanke’s inability to do anything other than what he has done before resembles a fictional character with a narrow view of the world.
Chauncey Gardiner (actually, Chance the gardener), was the mentally incapacitated gardener played by Peter Sellers in the screen version of Jerzy Kozinski’s sagacious novel Being There. Chauncey, a man whose life was limited to gardening and watching TV, became, through a series of misapprehensions, the top adviser to officials in Washington, including the President:
President “Bobby”: Mr. Gardener, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President “Bobby”: In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President “Bobby”: Spring and summer.
Chance the Gardener: Yes.
President “Bobby”: Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President “Bobby”: Hmm. Well, Mr. Gardiner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time.
[Benjamin Rand applauds]
President “Bobby”: I admire your good, solid sense. That’s precisely what we lack on Capitol Hill.
President Bobby adopted Chance’s optimistic advice in an address before the Financial Institute of America. His speech was the talk of the town. Television, even in that distant past (Being There was written in 1970), was on the spot, with its unfailing ability to trivialize any topic.
The host of “This Evening,” a fictional, national TV news show with 40 million viewers, asked Chauncey Gardiner to appear after the Vice President cancelled.
Chauncey was asked for his opinion of the President’s address, in which President Bobby “compared the economy of this country to a garden and indicated that after a period of decline a time of growth would naturally follow.” Chauncey replied: “I do agree with the President: everything in it will grow strong in due course. And there is still plenty of room in it for new trees and new flowers of all kinds.”
At the end of Chauncey’s appearance, the host embraced him center stage. The audience’s “applause mounted to uproar.”
After his “green shoots” prophecy, Chairman Bernanke closed his “60 Minutes” performance. He offered Americans a sunlit future: “I think we will see recession coming to an end, probably this year [2009]. We’ll see recovery beginning next year, and it will pick up steam, over time.”
In the wake of this rousing prediction from the Chauncey Gardner of Central Banking, Wall Street TV performers have talked the stock market up 75%. We are seeing new vistas of instability.
Regards,
Frederick Sheehan,
for The Daily Reckoning
Read more: Ben Bernanke: The Chauncey Gardiner of Central Banking http://dailyreckoning.com/ben-bernanke-the-chauncey-gardiner-of-central-banking/#ixzz152UVKw4U
Prepare for Mass Inflation
By The Mogambo Guru
11/10/10 Tampa, Florida – The thing that has sent me into Mogambo Panic Mode (MPM) over the terrifying inflationary implications is the latest outrage from the Federal Reserve, reported at Bloomberg.com as, “The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.”
It turns out that the announced $600 billion, in six measly months, as perfectly horrific as it is, is not the whole story, as we later find out when Bloomberg later in the article reports, “Including Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850 billion to $900 billion of securities through June, or about $110 billion per month, the New York Fed said in accompanying statement.”
$110 billion per month! Per month! Per freaking month! Gaaahhhh!
Economicpolicyjournal.com has some dire analysis, and says, “The key is to realize that supermoney can have a multiple impact on the money supply. In 2008, just before the financial crisis broke out, the multiplier impact on M2 was 10. Got that 10? Although, I don’t necessarily expect it to go that high at this point (there are all those excess reserves). A multiplier impact of 2 or 3 is certainly not out of the question. That would put the M2 money supply increase in the range of $1.6 trillion to $2.7 trillion. In other words, an annualized money growth rate of over 20%. And this is conservative.”
By this time I am so freaked out that I am feverishly double-locked in the Mogambo Bunker Of Absolute Fear (MBOAF) and am now curled up in a fetal position on the floor, whimpering, petrified at the horror of such inflation in the money supply, because inflation in prices always results from an increase in the money supply. And such a whopping increase in the money supply means a whopping inflation.
In all the noise and racket, I almost missed it when they went on, “If the multiplier is higher and money starts to flow out of excess reserves, you could see M2 grow at record high rates, possibly 30% to 40% on an annualized basis. In other words, the amount of new money hitting the system could be [a] huge amount.”
I was going to use this as an opportunity to call out on the Mogambo Secure Line To The Cruel Outside World (MSLTTCOW) to tell you to drop everything and run out to buy gold, silver and oil stocks as a defense against such ruinous inflation, but it was done for me when they wrote, “Folks, the dollar is now securely on the road to major devaluation. Price inflation at the consumer level by the end of 2011 will be well into double digits. Way, way into double digits. Prepare yourself now. Start with some gold and silver.”
In case you were wondering, the purpose of the QE program is to create the money that the government needs to borrow this year. Otherwise, the Treasury has to try and sell $2 trillion in bonds to the few people who have saved some cash money, but it is ludicrous to think that these few people could possibly come up with $2 trillion! Hahaha!
And then more next year, and the year after, and the year after! Hahaha! Insane!
And if you think that this will not end Very, Very Badly (VVB), then I am pretty sure that I am on safe ground to say that you don’t know squat about economics. I say this without fear of contradiction for two important reasons.
Firstly, I say that I do not fear being contradicted because nobody knows where I am, and even if they did know where I was, they would not have the guts to say anything to me because of the lessons learned from TV, which proved conclusively that “facing down” an armed lunatic is a Bad, Bad Idea (BBI) unless it is in the last 10 minutes of the TV show, and even then it is often “iffy.”
And I also say this without fear of contradiction because there is not one example in the last 4,500 years – 4,500 years! – where any of the thousands and thousands of corrupt, dirtbag governments that borrowed themselves into such overwhelming bankruptcy and/or created so much new fiat money to spend that had ever, ever, ever, either magically or miraculously, succeeded in preventing total disaster by (unbelievably) creating, borrowing and spending more money!
And this goes “doubly-especially” when the government is borrowing another staggering chunk of money that equals a mammoth 14% of GDP, which they do by having the Federal Reserve print up a lot of new money for them to borrow, which (all other things being equal) increases the money supply by 14%! Gaaahhh!
If you are within a few blocks of me, then you no doubt noticed that I am Screaming My Guts Out (SMGO) in outrage and hysterical fear because of such monetary and fiscal insanity, which will cause a devastating inflation in prices that it will probably wipe this country off the economic map, which is a metaphor, or more probably wiping us literally off the map, since this is always when a lot of wars break out.
To even suggest otherwise is Sheer Freaking Lunacy (SFL), and if you do, then you will be shunned by decent people and end up in the gutter, career-wise, writing about economics for The New York Times or be a laughable egghead university professor at Princeton (“Them that can, do, and those that can’t, teach, or end up as chairmen of the Federal Reserve where they can prove that they can’t, but they thought they could because they were willingly gullible halfwits who could not see the utter stupidity of their preposterously simplistic neo-Keynesian econometric crapola of equations and computer models, which is such an absurd idea that it makes me guffaw in a Loud Mogambo Laugh Of Scorn (LMLOS) for Ben Bernanke, Paul Krugman and all the lowlifes who agree with either of them about anything.)”
And so I say, unless they also urge you to buy gold, silver and oil, in which case it shows that they are intelligent in ways other than economics, or it shows that they are just lazy, because buying gold, silver and oil when the Federal Reserve is creating So Damned Freaking Much (SDFM) money is so easy that you gotta say, “Whee! This investing stuff is easy!”
The Mogambo Guru
for The Daily Reckoning
Read more: Prepare for Mass Inflation http://dailyreckoning.com/prepare-for-mass-inflation/#ixzz152TzqKdB
Economic Irony: Creating Bubbles to Maintain Stability
By Bill Bonner
11/10/10 Paris, France – “Global Backlash Grows,” says The Wall Street Journal.
This is the backlash against Ben Bernanke’s crackpot money-printing scheme.
The foreigners don’t like it. Because the US is flooding the world with “hot money.” This fast cash chases oil, commodities, collectibles, farmland – just about everything.
It creates bubbles. It distorts markets. And it will certainly lead to busts and bankruptcies…and maybe to hyperinflation, too.
So, sit back and enjoy the show, dear reader. It’s the greatest show on earth. Yes, it will most likely lead to embarrassment and poverty in the US. Yes, the US dollar will cease being the world’s reserve currency. And yes, America’s leading economists – many of whom have won Nobel prizes – will be shown to be hapless goofballs.
But this is all good news to us. Under the leadership of modern US economists, Americans have been getting poorer for the last 10 years.
Why? How could that be?
With the encouragement of the Fed and Congress, Americans consumed more than they produced. “Go out and buy an SUV,” said a Federal Reserve governor. “Buy a new house,” said Fannie Mae. “Spend, spend, spend,” said mainstream economists.
Result: Americans have less real, net wealth than they had when this millennium began.
Now, finally, the average yahoo is wising up. He’s lost this job. And he knows he’s been played for a fool. But he’s learning. He’s defaulting on his mortgage…and he’s paying down his debt.
Consumer credit keeps contracting…it went down by $2.1 billion in September.
But the feds have kept at it. They tempted him with lower interest rates: the Fed brought its key rate down to zero; it can’t go lower.
The Fed also bought up worthless mortgage loans so he could borrow more cheaply and took over Fannie and Freddie so they could continue suckering people into a lifetime of mortgage payments. The latest word is that losses from Fannie and Freddie could reach to $363 billion through 2013, according to the Federal Housing Finance Agency.
But with Tea Partiers in the House…and the Fed hard up against the “zero bound,” what else could they do?
The Fed could print money! No need to ask Congress to pass spending legislation now. Forget what it says in the Constitution. The Fed can print money. And it can use the money how it sees fit – even funding an “off the records” stimulus program if it wants to.
Each dollar is, in effect, a liability of the US government…engaging the full faith and credit of the government and its taxpayers. But what law was voted on? What act of Congress authorized spending billions of dollars?
How came it to be that the taxpayers are on the hook for $600 billion more in financial responsibilities with no vote of their elected representatives? No point in even asking the question….
This is, after all, late, degenerate state-guided capitalism. If Congress can make citizens buy something they don’t want – such as health insurance – surely the Fed, which is a privately-owned bank, can write checks from the taxpayers’ checkbooks. Heck, nothing is too absurd.
So, the Fed goes boldly where no sensible person would want to go. It is trying – trying! – to create bubbles…asset bubbles, to make people feel like they have more money. If people feel richer, the feds reason, they’ll spend more money. Presto, we’ll be richer.
Are we beginning to rant and rave? Are we “losing it”? Is there a doctor in the house?
Regards,
Bill Bonner
for The Daily Reckoning
Read more: Economic Irony: Creating Bubbles to Maintain Stability http://dailyreckoning.com/economic-irony-creating-bubbles-to-maintain-stability/#ixzz152Tb0VZN
How to Protect Yourself From the Crash of 2011
by: Marc Lichtenfeld November 10, 2010
There’s going to be a massive stock and bond market selloff in the first half of 2011.
Not only that, the selloff could cause a worldwide financial disaster, global market crashes and the destruction of wealth that will make the popping of the dotcom and housing bubbles feel like a mild inconvenience.
Why?
Because, quite simply, America is playing a dangerous game of “chicken” with its national debt. And the ramifications are extraordinary. I’m going to explain the situation and give you three ways to protect yourself from this mess before it’s too late…
Debt Doomsday: Coming in May 2011
America’s debt ceiling currently stands at $14.3 trillion. This is the level that, by law, the government’s debt is not allowed to exceed.
Trouble is, the government’s present debt has swelled to $13.7 trillion.
This means that at the current rate, we’re on course to smash through that $14.3 trillion ceiling around May 2011 (although it might happen a month or two later, depending on what budget cuts are enacted in the next few months and how quickly they’re implemented).
So what will the government do about this? Same thing it’s done almost every year since 1962: Raise the debt ceiling so America can pay its bills.
Congress really has no choice in the matter either. If the ceiling isn’t raised, we’ve got a problem. A very big one.
A Fistful of Dominos
Without Congressional approval for additional debt, the U.S government cannot pay its bills – most notably, interest payments on treasury bonds, bills and notes.
If America defaults on those payments, or even misses them by just one day, the domino effect would be brutal…
Domino #1: The country would lose its AAA credit rating and those bonds, bills and notes would no longer enjoy their status as the safest investments on the planet.
Domino #2: In turn, a lower credit rating would mean that the United States would pay higher interest on its bonds in order to attract investors. Result?
Domino #3: A tidal wave of selling through fixed income markets, driving interest rates higher still.
Domino #4: Social Security would be hit hard, as its funds are invested in Treasuries. Suddenly, Social Security would have far less resources than just a day or two earlier.
Domino #5: If money is pouring out of so-called “safe” investments, you can bet that in that kind of environment, the demand for riskier investments would be next to nil. Stocks and financial markets around the globe would plummet.
So why is this year’s Congressional raising of the debt limit different than every other?
To Raise or Not to Raise?
Simple: This year, some members of Congress have said they won’t vote to raise the debt ceiling. And they may be serious this time.
Earlier this year, 38 Republican Senators voted against raising the ceiling. However, they did so, knowing full well that they’d be outvoted and that the limit would be raised despite their “objections.” That way, they could return to their Congressional districts, claiming some semblance of fiscal responsibility.
Their vote didn’t matter so much back then… but with the Republicans having wrestled control of the House of Representatives last week, it sure does now.
It throws up an interesting dilemma. The Republicans – and particularly the Tea Party candidates who ran on a platform of cutting spending and the deficit – will have a very difficult choice to make. Either go back on their word and vote for an increase in the debt ceiling, or vote against it and run the risk of financial calamity.
It’s still early, but some Senators are already threatening to vote “no.”
Senator-elect Rand Paul of Kentucky has indicated that he won’t vote in favor of raising the debt ceiling.
South Carolina Senator Jim DeMint said he won’t vote to raise the limit unless it’s combined with some plan to balance the budget, return to 2008 spending levels and repeal President Obama’s healthcare plan.
When asked if he’d vote against a debt ceiling increase, even if it leads to a government shutdown, Utah Senator-elect Mike Lee answered, “It’s an inconvenience. It would be frustrating to many people and it’s not a great thing, yet at the same time, it’s not something we can rule out.”
And Republican National Committee Chairman Michael Steele told CNN, “We’re not going to compromise on raising more debt or the debt ceiling.”
This may be a dangerous political strategy…
History Repeating? Not Likely…
In 1995, the Republicans threatened President Clinton with shutting down the government if he didn’t agree to their budget. Clinton vowed that he’d never agree to it, even if his approval rating fell to 5%.
He won, too. The government did in fact shut down and the Republicans were the focal point of America’s anger. President Clinton’s approval numbers actually went up.
Flash forward to today. President Obama is likely aware of this history. And while he may be willing to negotiate on spending cuts, he will not repeal healthcare reform, which is the hallmark of his Presidency.
For Obama, though, the situation in 2011 will be much worse than it was for Clinton in 1995. I’m talking about a meltdown in the stock and bond markets.
Bill Busting… Washington Style
Bruce Bartlett, a former advisor to President Reagan and deputy assistant secretary for economic policy at the Treasury Department under President George H.W. Bush, recently stated, “You introduce even the tiniest little bit of doubt into the minds of ultra-conservative investors and that’s potentially disastrous. It hurts our ability to raise money without a risk premium.”
Representative John Boehner, the new Speaker of the House, appears to be more realistic than his colleagues in the Senate. He’s indicated that he’d vote for raising the debt ceiling as long as it accompanies spending reductions.
The bottom line, though, is this: The Senate likely doesn’t have the votes to defeat a bill to raise the debt ceiling, while the House does.
And in the end, it doesn’t matter. The bill doesn’t have to be defeated. A filibuster accomplishes the same thing. Don’t forget, this bill must be passed by the date we hit the ceiling, otherwise the government goes into default. It’s not something that can be put off until later.
So, in fact, a filibuster is even more powerful than a “no” vote. And the mere threat of a filibuster could spook investors badly enough to sell first and ask questions later.
You need to go about protecting yourself as soon as possible…
Protect Yourself From America’s Debt Showdown
There are a few investments that will likely do well in the chaotic environment I just described…
Gold: The resilient yellow metal should soar as the U.S. dollar sinks and investors flee to safety. If you don’t want to own the metal itself, you can buy the SPDR Gold Shares Trust (NYSE: GLD) ETF, which serves as a close proxy to the price of gold bullion.
Short Treasuries (Option 1): Consider the ProShares Short 20+ Year Treasury (NYSE: TBF), which aims for a 100% inverse correlation to the Barclays 20+ Year U.S. Treasury Bond Index.
Short Treasuries (Option 2): If you’re a more aggressive investor, take a look at the ProShares UltraShort 20+ Year Treasury (NYSE: TBT). It seeks to obtain results that are double the inverse daily performance of the Barclays 20+ Year U.S. Treasury Bond Index. So if the index falls 10%, the ETF should gain about 20%.
Remember: From most crises comes opportunity. Investors who are agile and aware of the potential debt ceiling landmine can grab profits by getting into the right investments at the right time.
Additionally, the ensuing volatility may create buying opportunities for some of your favorite stocks, so be sure to put together a watchlist of stocks you’re interested in owning at lower prices.
Disclaimer: The Oxford Club LLC/Investment U and Stansberry & Associates Investment Research are separate companies, and entirely distinct. Their only common thread is a shared parent company, Agora Inc. Agora Inc. was named in the suit by the SEC and was exonerated by the court, and thus dropped from the case. Stansberry & Associates was found civilly liable for a matter that dealt with one writer's report on a company. The action was not a criminal matter.
Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.
http://seekingalpha.com/article/236123-how-to-protect-yourself-from-the-crash-of-2011?source=email_the_macro_view
Better than a 10 x 10 would be a rope and lamp post.
Bad News for Emerging Markets
By Bill Bonner
11/08/10 Baltimore, Maryland – Hey… What’s wrong with the foreigners? They don’t seem to appreciate America’s magic tricks.
“US feels backlash over Fed initiative” says Friday’s Financial Times.
It may be our dollar…but it’s THEIR problem. The Fed’s new money doesn’t really do anything for the US economy. The banks take it. They hold it. If it goes anywhere at all it goes into the hedge funds and the banks’ own trading departments. Then, what are they going to do with it? US businesses don’t want to borrow. Consumers are reluctant to spend. Who wants to build a new shopping mall? Who wants to hire a new employee? The Fed is printing money like there was no tomorrow…who’s going to invest for the long term…when even tomorrow is in doubt?
The speculators borrow dollars at the lowest rates in three generations. What do they do with them? They invest them where they see growth – in the emerging markets.
Bloomberg explains:
Emerging-Market Stocks Advance on “Super-Goldilocks”
Nov. 5 (Bloomberg) – Emerging-market stocks climbed for a seventh day as Citigroup Inc. predicted a “super-Goldilocks” economy will send shares to record highs next year and investor Mark Mobius said the rally faces no risks any time soon.
The MSCI Emerging Markets Index will jump 30 percent to an all-time high in 2011, Citigroup strategist Geoffrey Dennis wrote in a Nov. 4 report. The Federal Reserve’s bond-purchase plan will fuel a global stock rally and emerging markets are the “bright spot,” Mobius, who oversees about $34 billion at Templeton Asset Management Ltd., said in an interview.
The MSCI emerging-markets index increased 0.5 percent to 1,156.32 at 8:50 a.m. in New York, bringing its gain this week to 4.6 percent. The 21-country benchmark gauge has advanced 17 percent this year, extending a record 75 percent rally in 2009.
This is not exactly good news. Consumer prices in these emerging economies go up…their currencies go up…their stock and other asset prices go up.
This has several effects that the emerging economies don’t like. It creates bubble-like conditions, raising their costs and making their products less competitive. Plus, it risks causing sell-offs and crashes when the foreign money leaves suddenly or over-capacity becomes a problem.
“China, Brazil and Germany criticized the Fed’s action,” reports the FT, “and a string of East Asian central banks said they were preparing measures to defend their economies…”
Then…in this morning’s Financial Times:
“Zoellick [head of the World Bank] seeks gold standard debate.”
It’s coming, dear reader…
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/bad-news-for-emerging-markets/
Is Foreclosure Crisis Overblown?
by: Edward Harrison November 09, 2010
Here are Andrew Ross Sorkin and Joe Nocera of the New York Times having a video debate about the foreclosure crisis. Nocera thinks this is a key economic issue. Sorkin thinks the issue is overblown.
My take: For political reasons, the Obama Administration would like to deep six this issue because it could harm the technical recovery from becoming a real recovery by 2012, when the President is up for re-election. The only way this issue gets traction is via Republicans, the states or the courts.
But, as for the merits of the debate, clearly there was an epidemic of fraud perpetrated during the housing bubble. Many so-called homeowners – who are really renters with a mortgage because they have no equity – were complicit in this fraud at loan origination. Do we use the government’s resources to uncover these fraudsters and prosecute them? Probably not, as there are thousands of these cases for governments with limited resources to track down.
Instead, the government’s resources should be directed at uncovering fraud within banks. From a purely practical perspective, this makes sense because there are a much more limited number of targets. But from a societal perspective it does as well. Banking is a cartel established by government. The government extends banking licenses. Government regulates banking activities. And government sanctions those that engage in unsafe and unsound practices. This is not a free market, folks. It’s not like I could set up a bank tomorrow and start making loans. My operation would be shut down immediately and I would be thrown in jail.
What do we as society get out of this arrangement? Supposedly, it stops criminals and fraudsters from setting up shop and ripping people off and creating Ponzi schemes for their personal profit, leaving their customers and institutions bankrupt. As a result, government has required those fortunate few who get banking licenses to adhere to a strict set of rules. That’s what a bank’s fiduciary duty is all about: trust, faith, confidence – all of that.
A fiduciary duty is a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties, most commonly a fiduciary and a principal. One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment. In a fiduciary relation one person, in a position of vulnerability, justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests…
A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust.
-Wikipedia
The failure to uphold fiduciary duties of even a few larger institutions will put the entire banking system in doubt. What we witnessed in 2008 and early 2009 was a loss of trust, faith, confidence. It was a classic solvency crisis masquerading as a liquidity crisis – with doubt about which specific institutions had engaged in reckless behaviour putting a cloud over every bank in the entire system and causing liquidity to dry up economy-wide. When banks engage in unsafe and unsound business practices, they put the entire economy at risk in a way that you see in no other sector of the economy. This is why regulators in the US are supposed to take prompt corrective action in closing insolvent institutions and those institutions with unsafe and unsound business practices.
Regulators failed in doing this – and are continuing to fail, at least as far as the largest institutions are concerned. Again, all available evidence suggests practices were often not just ‘sloppy’ but fraudulent from mortgage origination to packaging of mortgage-backed securities to foreclosure. The entire process is riddled with fraud from liar’s loans to securitizations worthy of putbacks to fabricated documents to robo-signers. How government deals with this has nothing to do with the homeowner, frankly. First and foremost, it is about protecting the integrity of our financial system. To the degree homeowners feel they have been defrauded, courts should grant them every right to appeal foreclosure.
What should be done regarding the banks is a staffing up of fraud departments in regulatory agencies. This has to be followed by an in-depth investigation into all of these fraud issues. Institutions engaging in unsafe and unsound practices will have to be taken into receivership and fraudsters will be have to be prosecuted. That is certainly what we saw after the S&L crisis.
But, you know and I know this is never going to happen now unless it is forced upon us by the courts or another crisis.
http://seekingalpha.com/article/235668-is-foreclosure-crisis-overblown?source=email_the_macro_view
Continued good stuff basserdan...
right on schedule ladies:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=10929195
any questions?
November 8 2010: We'll Need The Courage Of Our Forefathers
Detroit Publishing Co. Out to lunch 1900
"Breaker boy, Woodward coal mines, Kingston, Pennsylvania"
Ilargi: To order the interactive video presentation (only $12.50!! ) of Stoneleigh's lecture "A Century of Challenges" , PLEASE CLICK HERE or click the button in the right hand column just below the banner. The 920 people who purchased the video so far can't all be wrong?!
----------------------------------------------------------
Ilargi: Which reminds me, we would to hear your thoughts and comments on the video. Please write to theautomaticearth •at• gmail •dot• com.
--------------------------------------------------------------------------------
Ilargi: First of all, please allow me to share the following very intriguing graph, from a 61-page PDF by Gordon T. Long. For the whole thing, click the title (which I made up myself, it's not Mr. Long's). In the article he explains that the timeframes he depicts may well turn out to be too long.
--------------------------------------------------------------------------------
The New Economic Cycle
by Gordon T. Long
--------------------------------------------------------------------------------
Ilargi: I thought I had figured out what to write about today, because I saw a long line of articles the past few days that all basically have the same theme: US banks that are doing so bad, nationalization must once again be seriously considered. But then I read Professor Morgan Kelly's great, and greatly alarming, article in the Irish Times today:
If you thought the Irish bank bailout was bad, wait until the mortgage defaults hit home
Sad news just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover. [..]
With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life. [..]
Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers.
Ilargi: Yeah, the European problems will yet come back to bite us all. Ireland is gone as an independent nation in all but ceremonial terms. Greece is not far behind, with Portugal snapping at its heels. Think the US dollar is going to plunge? Think again.
Still, that didn't make as today's theme either, even though I know we have many Irish readers, and Stoneleigh received a great welcome there this summer; we’ll get to talk about Ireland - and Europe- again soon.
It's just that I read an article Ashvin Pandurangi, our by now greatly valued roving reporter, sent me, entitled "Plutocracy Now". Ashvin writes about that first notion I was pondering: the nationalization of US banks, though for him it’s not about Bank of America, but the Fed. He concludes it can't be done, not even an audit will be achieved. And I think that goes for Wall Street banks as well. We can't nationalize the banks, because they have long since "bankalized the nation".
Not that I don't find the efforts and arguments interesting. I just don't think the authors necessarily place sufficient emphasis on the amount and level of political clout and power the financial industry has accumulated over the past few decades. Or indeed the past 100 years for that matter. Seeing them celebrate the birth of the Fed, and do so on Jekyll Island to boot, it makes me think the US is surely as far gone as Ireland is; it's just that fewer people seem to realize it, but that's not too comforting, is it?
Ashvin Pandurangi closes with a very insightful statement, one that every American should take to heart, and many Europeans too:
The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.
Here are some of the articles I was reading:
James K. Galbraith at Common Dreams:
Obama's Problem Simply Defined: It Was The Banks
[..] .. one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.
Team Obama did none of these things. Instead they announced "stress tests," plainly designed so as to obscure the banks' true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was "to get credit flowing again."
The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading.
Will Henley at Global Financial Strategy:
Battered Obama took part in a 'cover up', says ex-regulator Bill Black
In a last campaign pitch to voters, US President Barack Obama justified his response to the Great Recession by contrasting it to "S&L", a 1980s and early 1990s crisis which saw nearly 800 savings and loans institutions go bust amid a disastrous commercial real estate bubble.
Yet for Bill Black - a former Federal Home Loan Bank Board litigation director who as deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement contributed to a major 1993 report on S&L - it's an analogy which sticks in the throat.
"It's a terrible comparison," says Black. In his reasoning, Obama noted that while George Bush Senior's efforts to stabilise the financial system cost two and a half per cent of gross domestic product (or $125m), his own administration's actions have cost as little as one per cent.
"In the savings and loans crisis, for 2.5 per cent of GDP we actually resolved the problem," Black guffaws. "In this case, they have resolved none of the problems."[..]
While stopping short of asking for a Stalinist purge of executives, he is adamant that it was a mistake for the regulators to not launch more investigations. Without such action, he says there is a danger that white collar criminals may turn into recidivists.
"If they have already destroyed their institutions then they are likely to continue as crooks."
Ellen Brown at Truthout:
ForeclosureGate Could Force Bank Nationalization
For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren't too big to reorganize as federal institutions serving the public interest.[..]
For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.
Jonathan Weil for Bloomberg:
Bank of America Edges Closer to Tipping Point
You wouldn’t know there’s anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.
Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough.
Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.
And again, pitbulls William K. Black and L. Randall Wray in the Huffington Post:
Let's Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud
Out of [..] millions of fraudulent mortgages, Bank of America claims to have modified 700,000; of these, 85,000 are under HAMP. Still, the Treasury says that the bank has another 375,000 mortgages that already meet HAMP terms.[..]
Treasury could be wrong about the mortgages; Bank of America may be refusing to modify mortgages for homeowners who appear to qualify for the HAMP terms because it knows the data Treasury relied upon is false. Their unusually low rate of HAMP modifications could be the result of the extraordinarily high rate of mortgage fraud at Countrywide.
Bank of America has admitted that HAMP's "implicit" purpose is to help the banks that made the fraudulent loans -- not the borrowers. That goal was the same goal underlying the decision to extort FASB to gimmick the accounting rules -- delaying loss recognition.
Bank of America expects to receive billions of dollars for its participation in HAMP. The top three banks (JPMorgan Chase and Wells Fargo being the others) will share $17 billion because HAMP pays servicers, investors and lenders for restructuring. These top 3 banks service $5.4 trillion in mortgages, or half of all outstanding home mortgage loans. Yet, as Phyllis Caldwell, Treasury's housing rescue chief has testified, there is no proof that these banks have any legal title to the loans they are modifying and foreclosing.
Ilargi: It’ll take a whole lot more than attempts at regulation or legislation. The only "representatives of the people" [sic] who have any say are those in the bankers' pockets. The nation has been bankalized, something we've only figured out after it was too late. That means the road to taking over the banks is closed; we’ll be pumping money into them for quite a while to come.
Here's Ashvin:
--------------------------------------------------------------------------------
Ashvin Pandurangi:
Plutocracy Now
Every so often, Americans should stop everything they're doing for a moment, and reflect upon the nature of their country. Specifically, upon what has traditionally been this country's defining characteristic. Was it our capitalist economy? No, there are many capitalistic countries around the world and capitalism was not first formulated by Americans.
What about our emphasis on personal freedom? Well, once again, many countries preach the virtues of freedom and many groups of people have fought for freedom well before America was formed. Surely it has been our diverse populace and our tolerance of all races, genders, sexual preferences... yeah, right. Personally, I would answer that it was our written Constitution and the democratic values embodied within it.
No other country had ever codified the structures and processes of their governing institutions to such an extent in one single document. Many people focus on the Bill of Rights when speaking about the Constitution, but the first four Articles are just as important.
They synthesized political ideas that were developed over hundreds of years by some of the most insightful thinkers, such as separation of federal powers, checks and balances, vertical division of powers (federalism), an independent judiciary and, of course, representative democracy. The latter emphasizes the notion that any policies enacted by the federal government must be authorized by the people, through their elected representatives who are held accountable to constituents every few years.
So what's the state of our Constitutional democracy today? Simple, it doesn't exist. International corruption surveys typically rank the U.S. higher (less corrupt) than most other countries, but this simply proves how bad these surveys are at capturing the essence of real, hardcore corruption.
We could write stacks of books on the prevalence of money in politics and the swarms of lobbyists who descend on Washington every single week, and many people have, but it's simpler to just focus on the most egregious example of corruption. The most powerful, influential economic policy-making institution in the country, the Federal Reserve ("Fed"), is an unelected body that is completely unaccountable to the people. Well, let's back up and start with the fact that this institution's very existence is most likely unconstitutional. Here's why:
Article I, Section 8 of the Constitution states that Congress has the power to "coin money" and "regulate the value thereof". The Supreme Court has long held that Congress can delegate its legislative powers to Executive agencies as long as it provides an "intelligible principle" to guide the agencies' action.
We don't even have to reach the question of whether the Federal Reserve Act sets out an "intelligible principle", however, because existing precedent states that Congress cannot delegate its powers to private institutions. Schecter Poultry (held "a delegation of its legislative authority to trade or industrial associations...would be utterly inconsistent with the constitutional prerogatives and duties of Congress). In that case, the Supreme Court struck down parts of FDR's National Industrial Recovery Act which authorized these private organizations to draft "codes of fair competition" and submit them to the President for approval.
The Fed, by it's own admission, is an independent entity within the government "having both public purposes, and private aspects". By "private aspects", they mean the entire operation is wholly-owned by private member banks, who are paid dividends of 6% each year on their stock. Furthermore, the Fed's decisions "do not have to be ratified by the President or anyone else in the executive or legislative branch of government" and the Fed "does not receive funding appropriated by Congress".
In 1982, the Ninth Circuit Court of Appeals confirmed this view when it held that "federal reserve banks are not federal instrumentalities... but are independent, privately owned and locally controlled corporations". [The Legality of the Federal Reserve System, 5]. Yet, the Fed has exclusive control over the government's ability to create money and regulate its value through the targeting of interest rates and open market operations (when the Fed buys an asset, it typically prints the purchase money out of thin air). How Congress can delegate its Constitutional powers to this independent, privately owned and unaccountable institution is beyond me.
Still, the Constitutional issue is just the tip of the iceberg when it comes to this twisted institution's embodiment of all things undemocratic. When Congress (and the people it represents) makes a valid delegation of its powers to an executive agency, it almost always retains a level of control through its powers of appropriations, impeachment and oversight. For some not-so-strange reason, the Fed isn't appropriated any funds by Congress, and so it cannot be financially "starved" like any other agency.
The members of the Fed's Board of Governors also cannot be impeached by Congress, which is especially twisted, since the President of the United States can be impeached for "high crimes and misdameanors". [The Legality of the Federal Reserve System, 8]. What about oversight? Well, a Congressional committee holds "hearings" every once in awhile to ask the Chairman a few irrelevant questions, but if this process is what passes for "oversight", then we have truly gone off the deep end.
Speaking of committees and oversight, when Fed Chairman Ben Bernanke testified under oath to Congress in July, he said in no uncertain words, "the Federal Reserve will not monetize the [federal] debt". [1]. Fast forward to the day after mid-term elections, in which the American people clearly voted for LESS spending/printing, and the Fed announces its plan to monetize $900 billion in treasury bonds. [1].
The Chairman has proven his previous testimony before Congress to be a blatant lie, but instead of condemning the Fed's recent actions, the federal government has welcomed it with open arms. That's quite some oversight we have there. Perhaps the best way to oversee the Fed's actions would be to actually figure out what in Lloyd Blankfein's name it's been doing.
In this country, that's easier said than done. The Government Accountability Office is not allowed to audit the Fed's transactions for or with foreign governments, central banks, nonprivate international organizations or those made under the direction of the Federal Open Market Committee ("FOMC"). It just so happens that these are the types of transactions which are most influential on global and domestic financial markets, especially the open market operations.
These operations are conducted by the FOMC, who is comprised of the Board of Governors (7 members appointed by President and confirmed by Senate) and five representatives from the regional Fed Banks. Although the President appoints the Board of Governors, he must choose from a list of candidates provided by private institutions, and the other five representatives are also typically nominated by private member banks. Talk about an organization with conflicts of interest, lack of transparency and lack of accountability all tightly woven into its very fabric!
In the last two years, the almighty Fed has printed trillions of dollars in our name to buy worthless mortgage assets from "too big to fail" banks. It has lent these banks our hard-earned money at about 0% interest, so they could lend our own money back to us at 3%+. These banks also used our free money to ramp equity and commodity markets, which mostly benefitted the top 1% of our population who owns 43% of financial wealth [2], and conveniently, also owns the Fed.
The latter has kept interest rates at next to nothing to punish savers and encourage speculation, making everything less affordable for average Americans who have seen their wages stay the same, decrease or disappear. What's left standing is the perniciously powerful, highly secretive and entirely unaccountable Fed, who now epitomizes the state of American democracy.
We have all become subject to the misguided and/or malicious whims of a few wealthy individuals operating the levers of economic policy, with no adequate means of challenging their power. Our most treasured contribution to political society has been reduced to a bunch of meaningless articles and amendments, containing equally meaningless words. We the people, in our pursuit of "a more perfect union", have fallen into an age-old trap.
Our economic policies, currency and laws are all manufactured by our very own private dictator, who amasses a fortune from our collective exploitation and destruction. Then, this despot continues to operate like nothing ever happened. We can scream "ABOLISH THE FED" all day, non-stop to every single politician at the top of our lungs, but it will never happen.
The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.
http://theautomaticearth.blogspot.com/
Housing Bubble and Currency Controls in Poland
In response to my article on currency controls and QE feuding in many countries (See South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke's QE Policy), reader Robert has some personal observation on happenings in Poland.
Robert writes ...
Hi Mish,
I'm a long time reader of your blog - congratulations on doing such a good work for so long!
I've just read your recent post on international reactions to QE2 and the threat of worldwide capital controls. I have something to add here from my country.
In Poland, there has been a bubble in real estate since 2006-2007 that never really popped. Condo prices in downtown Warsaw (capital of Poland) are comparable to prices in Berlin and Vienna, and of course incomes and standard of living are way way lower.
Real estate prices have fallen 10-15% from the peak alright, but incidentally our currency has recently strengthened, so the net result from the international perspective is nearly zero. Real estate prices has been fueled, as is typical for the whole region of central-eastern Europe and Baltic States, by cheap capital denominated in CHF (Swiss Francs) and EUR (earlier in the decade USD), coordinated mainly by Austrian and Italian banks and originating in Switzerland and ECB.
With this situation, there is a growing pressure, at least a year running, from our central bank and partly from the finance ministry to curb the inflow of cheap money and seemingly - although it is never openly admitted - to try and prick the real estate bubble, the bubble that has indeed reached a ridiculous size and is pushing more and more families into debt servitude.
There has been a series of banking regulations ("recommendations") issued by Komisja Nadzoru Finansowego (Commision of Financial Supervision) that targets inflows of cheap money. The curbing is effected mainly by reining in the mortgage market, that has been - again, as is typical for the whole region - the main venue of external capital inflow. Recently there have been two important regulations issued on that matter. Recommendation SII(effective January 2011) mandates that banks should have no more than 50% mortgage portfolios denominated in foreign currencies and effectively mandates (at least for the not very wealthy customers) that mortgages be issued for no more than 25 years. Recommendation T (effective September 2010) mandates that LTV for forex mortgages should never exceed 80% and that banks must consider harsh changes in the interbank market rates when qualifying customers for such loans.
It has been also recently discussed that possibly somewhere in 2011 a regulation will be passed that completely cuts people off from foreign currency mortgages unless they actually have assets (other than real estate itself) that can balance the Forex risk or Forex earnings.
Such regulation would effectively almost totally cut off cheap external mortgage financing.
There has also recently been a change in language of Polish banking regulators. It is now quite openly said that the practice of selling very long term, adjustable rate mortgages denominated in foreign currency should be literally "brutally and completely curbed" (words of the chairman of NBP, our central bank).
This is a process that is slowly but regularly unfolding and will surely take some more time; cheap EUR mortgages are still widely available and will be at least until the end of 2010. But it seems that the process of curbing capital inflows is gaining pace rapidly in Poland and it should bear very concrete fruits in 2011 and 2012,
especially taking into account recent acceleration in Fed lunacy that could (and I expect it will) spur counter reactions in my country analogous to what is happening in Korea or Brazil. There are no reactions as of yet, but I expect them soon.
It should perhaps be added that Polish banking regulator bodies and central bank are quite independent from the government and it seems that this independence is factual, not merely statutory; there have been many episodes in the last decade that NBP was in harsh conflict with the govt.
greets,
Robert
Poland Stats: 62% of Mortgages, 23.9% of Corporate Loans made in Foreign Currencies
In a followup question I asked Robert what percentage of mortgages in Poland were in foreign currencies. Here is Robert's response ...
Hello Mish
This is straight from the central bank's data: 158203.4 M PLN foreign currency (56.64 billion USD, 62.03% total), 96837.7 M PLN domestic currency (34.67 billion USD, 37.97% total). All USD values calculated according to current Forex ask rate.
That was household mortgages. On the other hand, statistics of corporate credit show the exactly opposite behavior: 157110.5 M PLN domestic currency (56.25 billion USD, 76.1% total), 49335.7 M PLN foreign currency (17.66 billion USD, 23.9% total).
Forex corporate credit is quite steadily declining (in nominal terms) since february 2009, as well as domestic currency corporate credit. What is perhaps more alarming (especially that real estate prices are slowly but steadily declining) is that household mortgage credit is relentlessly growing as if no financial crisis occurred at all and the good times roll; domestic currency mortgages are up 29.3% nominally yoy, foreign currency mortgages up 12.3%.
The recent deceleration in growth of Forex household mortgages and acceleration in domestic currency mortgages is attributable entirely to a special government financial program ("Rodzina na Swoim", "Family on its own") that lets you get a domestic currency mortgage with extra payment from government that amounts to 0.25-0.5 of interest paid, so effectively the interest on such mortgages for the final customer is 0.5-0.75 of "normal" market rate; that might finally amount to 2.7-4% - such rates are comparable to what one can get for forex mortgages (in spite of rates in Poland being in theory a healthy 2.5-3.5 percentage points above Switzerland, ECB or USA), so it is understandable that there is a lot of demand for domestic currency mortgages currently.
What should be stressed is that this special payment program is phased out in 2011 (our government has recently a very hard time explaining to the public opinion and independent economists why the deficit and debt grows so quickly; there are indeed many austerity pressures); as of January 2011 it will be offered only to people buying new development real estate and some time in 2011 H2 (don't remember exactly when) the program expires entirely.
It is widely and correctly expected that if this happens and the supply of foreign currency credit is not curbed, people will again widely take on mainly EUR, and to a lesser amount CHF and USD denominated mortgages. This scenario is apparently explicitly targeted by the banking regulators, as I wrote in the earlier mail.
It should be added that nearly all mortgages in Poland are ARMs with interest invariably calculated as WIBOR (polish interbank market rate)+margin or LIBOR/EURIBOR+margin. The margin typically is, depending on LTV and customer's creditworthiness (which actually IS checked quite thoroughly), 1.1-2 percentage points for PLN and EUR mortgages and 2-3.5 percentage points for CHF and USD mortgages.
3-month WIBOR (interbank rate for PLN deposits) is currently at 3.85%, the yield curve is normal and not very steep (both for interbank rates and govt bonds). Polish central bank, as most central banks do currently, targets short term rates which is understandable from their viewpoint as it allows almost full control over both commercial credit and mortgage rates - as I said earlier, almost all mortgages are ARMs indexed to short-term interbank rates. Interest rate swaps for foreign currencies are nearly unavailable to "mere mortals" in Poland and domestic currency IRSes are simply non-existent (no demand I guess, everyone is happy with plain ARMs).
Wow, I just described like a half of Polish financial market. Cheers,
Robert
Thanks Robert! I always appreciate emails like yours so readers in the US can find out what is really happening in Europe.
Mortgages denominated in foreign currencies are a disaster waiting to happen, not only for the debtors but to the banks that made the loans.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
What’s Holding Americans Back?
By Gerald Celente
11/05/10 Rhinebeck, New York — What had happened to that rebellious Yankee spirit and the American mind? Could it have been the food that overstuffed and immobilized them?
The Pop-Tarts® and Egg McMuffins® washed down with Coke® for breakfast? The Baconator® Triple, The Whoppers®, The Big Macs®, the $5 Foot-Long Subs, the bucket-of-chicken and 32oz. Big Gulp®? Too many trips to the All-You-Can-Eat-Buffet or The Never Ending Pasta Bowl®? Or was it the Slurpees, tubs of ice cream, or boxes of donuts grabbed at the convenience store?
Could it have been the factory-farmed, battery-raised, hormone implanted, antibiotic-laced, pesticide sprayed, genetically modified beef, fish, chicken, eggs, dairy, vegetables, grains that were used in the highly processed, synthetic, ultra pasteurized, artificially sweetened, colored and flavored “product” passed off as food?
What drove a nation with a relatively well-off and well-educated population to inflict such suicidal behavior upon itself? It was easy to point to the poor for buying cheap and eating stupid. But what excused the smartest of the smart and the richest of the rich from buying cheap and eating stupid?
A case in point: celebrated for “powering his way through the day with a punishing Diet Coke regimen,” even Obama’s chief economic advisor – the always “brilliant” Larry Summers (who brilliantly jumped the sinking ship of state when his “brilliant” economic strategy to rescue America failed brilliantly) – was too stupid to eat smart.
A look around the cabinet, survey of Capital Hill, AMA, ABA, PTA or pow wow of American Indian chiefs proved he was not alone. America had become one big “Mike & Molly” sitcom. Yet, even though just about everybody knew better, just about everybody made the same excuse for abusing the body and deadening the mind: it was cheap and/or it was convenient.
Sure, money was tight and time was precious, but plenty of people were still going to the malls and spending big on hi-tech, high-end running shoes, taking vacations, eating out and buying new cars. Even low-end shoppers at Dollar Stores – while saving a buck – were filling their carts with junk snacks, junk soft drinks and junk “Made in China” bric-a-brac.
Or was it something in the polluted air and fluoride-treated water that deadened individual pride, courage, passion and self respect? Could it have been the quadzillions of tons of chemical mix poisoning the planet that made everyone susceptible?
Or could it have been the medicine chests full of Lipitor®, Oxycontin®, Xanax®, Celebrex®, Paxil® … or the Ritalin® force-fed to kids and gobbled down like M&Ms® that deadened heir minds or whacked them out? Whether prescribed indiscriminately as quick fix, symptom-relief solutions by legal “pushers” (a.k.a. doctors) or unwittingly washed down with a glass of municipally doctored “pharma-water,” voluntarily or involuntarily, a large segment of the populace was doing drugs.
Drugs Found in Drinking Water
A vast array of pharmaceuticals — including antibiotics, anti-convulsants, mood stabilizers and sex hormones — have been found in the drinking water supplies of at least 41 million Americans, an Associated Press investigation shows. (AP, 10 March 2008)
Or was it the “food for thought”? Could it have been the mind-numbing news served 24/7 by networks, cable and radio? All those know-it-alls — anchors, big mouths, blow-hards, clowns, pundits, experts, strategists, think tank wankers — telling audiences what to think, how to think and what to believe?
Food, pharmaceuticals, movies, music, TV, literature, art, fashion — down the line, across the board, from top to bottom, every sector was monopolized by the unholy trinity of Big Government, Big Business and Big Media.
The “American Century” — an age of opportunity characterized by the entrepreneur — had passed into history. America had been corporatized, homogenized, dumbed down and chained to the chains … and by the chains … restaurant chains, retail chains, movie chains, funeral home chains, auto-parts chains. They had cornered the market on everything they could get their hands on: tires, eye glasses, mufflers, dental care, banks, brokerages, drug stores, hardware, pet supplies.
Even in the mad rush of the monopolistic, oligopolistic, mega-maniacals to control the market place, there was room for the individual entrepreneur to flourish. In certain sectors, particularly retail and food, the quality conscious “Davids” — providing gourmet/unique products, tasteful ambience, impeccable service — could operate among the Goliaths.
If you were chained to a chain, you were chained. Working for a chain or patronizing a chain, there would be no real freedom until the chains were boycotted and finally broken. It would take a mass awakening; a quality revolution across the socioeconomic spectrum to bring down the gluttonous Goliaths.
Yet, in 2010, it was still neither welcome nor “politically correct” (itself an oxymoron since nothing “political” is “correct”) to tell Americans to look in the mirror to see what they had become; overweight, overstressed, overmedicated, under-motivated, slovenly dressed. A trip to Wal-Mart spoke a thousand words. The American psyche was reflected in the American physique.
Of all the Renaissance-related trends forecast by Gerald Celente and The Trends Research Institute, few could play a more powerful role in the creation of a new society than the upcoming Agrarian Revolution. From titillating the taste buds and nourishing the body, to providing the satisfaction of getting fit by working the land and living with — and from — nature, the trend would revivify Americans.
Besides providing millions of jobs and new entrepreneurial opportunities (especially for the young unemployed and the many unemployables) the Agrarian Revolution was a unique feature of the “American Renaissance.”
“Renaissance”! The word conjures up an image of the artistic and cultural ferment that began in 14th and 15th century Italy and subsequently spread across Europe. When asked what to do with his excesses of wealth, Cosimo de Medici’s answer was “create beauty.”
The “American Renaissance” that begins in the 21st century will not be initiated by excess wealth, but rather by pressing need. And it will have different distinguishing features, among them: the rebirth of food. For, finally, both the man in the street and the man in the ghetto would realize the life and death consequences of eating well; that, yes, “you are what you eat.”
Already in 2010, the seeds of change could be seen in the farmers’ markets, “buy local” movements, urban gardens and roof gardens that were sprouting up around the nation. Backyards and lawns that once grew nothing but grass were now growing food.
Regards,
Gerald Celente
for The Daily Reckoning
http://dailyreckoning.com/what%e2%80%99s-holding-americans-back/
Coal: Dawn of the Black Gold Rush
by: World Market Pulse November 08, 2010
Coal is a complex natural resource that is primarily used to fuel power or cement plants, two commodities that are expected to see increases in demand as global populations and per-capita income in developing nations increase. Increased demand for coal is already being seen in China, which accounts for nearly half of global coal demand, and is being used for power generation and metallurgical coal to produce steel. Now with an increase in demand in neighboring India, the two Asian neighbors can consume a lot of coal together, to fulfill their economic dreams of industrialization and growth.
Coal India IPO Success: India's largest coal producing company Coal India (CIL), which had launched the country's largest IPO, saw tremendous response from investors; backed by released money blocked in the IPO. CIL had received bids for $54 billion worth of equity shares as against issue size of $3.5 billion. The market cap of CIL stood at Rs 2.16 lakh crore, which brought the stock to 4th rank on market cap basis after Reliance Industries (RS), ONGC and SBI. Coal India attracted bids worth at least $48.7 billion, exceeding the gross domestic product of neighboring Sri Lanka, as energy demand in an accelerating economy and a surging stock market helped draw record inflows.
Russian Markets: Brunswick Rail, Russia's largest private railcar leasing firm, has revealed that all of its stock is leased out and wagon rental rates for coal and other materials are up six-fold since January 2009 as a shortage roils the market. Brunswick Rail, founded in 2004, currently leases gondola wagons for coal and other raw materials for $30-$35 per day, compared with $5 per day in January 2009 and $20 per day a year ago.
Australia Coal: Coal is Australia's second biggest export earner after iron ore and rapid growth in China and India have kept global coal markets tight. The rising demand from Asian giants India and China have forced BHP Billiton (BHP), Rio Tinto (RTP), and other mining companies to expand operations to keep up with the huge demand, in turn overstretching the capacity of Australia's Newcastle port by almost 10 million MT on an annual basis as it battles with bad weather and congestion. Meanwhile, Australia's thermal coal prices-- a benchmark for Asia-- rose over $1 PMT during the last week as continuing concern about wet weather in both Indonesia and Australia, as well as Chinese buying interest, boosted prices.
China Coal: According to Thomson Reuters report, with a chilly winter ahead and the Asian Games in November, utilities in China have kicked off stockpiling to meet expected higher power demand, pushing domestic prices to the highest since January. The prospect of more demand from the world's top coal consumer is helping boost Australian and other global coal values, but traders said that so far there haven't been many deals because of constrained supply, and as the Chinese balk at paying high prices.
Coal: Global Price Brief: Coal stockpiles at U.S. power plants rose just 0.6 percent this week but remained 20.5 percent smaller than a year ago, while Coal shipments from Australia's Newcastle port, the world's largest coal export terminal, rose 14 percent in the past week, despite a brief closure on Sunday due to protests at the port. Australia's thermal coal prices, a benchmark for Asia, closed at $94.89 per MT last week, slipping from $97.07 a week earlier. China's benchmark thermal coal prices at Qinhuangdao port stayed flat at about $114 PMT, but dropping stock levels were lifting expectations that buyers may start importing coal again.
Coal ETFs Options:
Although a recent drop in the natural gas prices has had some short term impact on the prices of coal exchange traded funds, an increased demand from Power hungry India-- the world's second largest populous nation-- is set to trigger a rally in the coal ETFs in the coming weeks. Some of the options for investing in Coal ETFs include:
1: Market Vectors Coal ETF (NYSEArca: KOL): The Index provides exposure to publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. As such, the Fund is subject to the risks of investing in this sector.
KOL Top Ten Holdings
1. Peabody Energy Corporation (BTU): 7.81%
2. China Shenhua Energy Company Limited (01088): 7.74%
3. Alpha Natural Resources Inc (New) (ANR): 7.59%
4. China Coal Energy Co. Ltd. (01898): 7.50%
5. Consol Energy, Inc. (CNX): 6.72%
6. Yanzhou Coal Mining Company Limited (01171): 5.73%
7. Joy Global, Inc. (JOYG): 4.51%
8. Bucyrus International, Inc. A (BUCY): 4.43%
9. Arch Coal, Inc. (ACI): 4.29%
10. PT Bumi Resources TBK: 4.26%
Expense Ratio: 0.62%
2: PowerShares Global Coal Portfolio (NASDAQ: PKOL): The Index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the exploration for, and mining of coal, as well as other related activities in the coal industry.
PKOL Top Ten Holdings
1. Peabody Energy Corporation (BTU): 8.78%
2. Cameco (CCJ): 7.93%
3. China Shenhua Energy Company Limited (01088): 7.42%
4. Consol Energy, Inc. (CNX): 6.54%
5. Inner Mongolia Yitai Coal Company Limited (900948): 6.27%
6. Coal & Allied Industries Limited (CNA): 4.32%
7. Alpha Natural Resources Inc (New) (ANR): 4.06%
8. Adaro Energy Tbk: 4.02%
9. PT Indo Tambangraya Megah: 4.01%
10. China Coal Energy Co. Ltd. (01898): 3.92%
Expense Ratio: 0.75%
Disclosure: No Positions
http://seekingalpha.com/article/235452-coal-dawn-of-the-black-gold-rush?source=email_the_macro_view
An Economic Certainty: Gold to Rise as Fiat Currencies Fall
By The Mogambo Guru
11/05/10 Tampa, Florida – I was casually eating a burrito while having lunch at my desk, and was surprised to see some guy, writing on a “Feedback” blog of TheDailyBell.com, taking exception to David Morgan of The Morgan Report saying that “On a longer term basis silver and gold are going far higher in paper terms in any currency you wish to name.”
Idly, I was chewing a rather tasty bite of burrito and thinking to myself, “This is undoubtedly true!” as precious metals are nowadays priced in fiat currencies, and it has certainly been true for every paper currency that has ever, ever existed, including a list of 600-odd fiat currencies compiled by Addison Wiggin of Agora Financial in a research project a few years ago, undertaken to list all known fiat currencies, past and present, and their fate.
He gave up, he says, after listing all those fiat currencies beginning with the letter A and half of those beginning with the letter B. This tiny section of the alphabet contained 600 fiat currencies, most all of which are gone, gone forever, disappeared long, ago, thus undoubtedly taking a lot of wealth with them.
The total worthlessness of fiat currencies does not tell you about what is known in professional economics as The Great Wiping Out (TGWO), a scientific term first discovered, you may be surprised to know, when a new parent was caught with a baby that desperately needed changing, but was without any fresh diapers, and who decided to just “wipe out” the used-diaper in the host’s bathroom enough to get home, with the disastrous result that there was stinking baby-poop all over everything, including my pants and my shoes, and I think I got some in my mouth but I don’t want to think about it because it is so disgusting and I have been repressing even thinking about it until now, thanks for asking, damn it, and everything was ruined, and I never got promoted before I got fired, which I think was because of what happened in that poor bathroom, but my boss said no, but that I was being fired for being lazy and incompetent, but we both knew the truth.
Nowadays, The Great Wiping Out (TGWO) is a scientific term of absolute precision used by professional economists like me, after being cleverly invented by me in the previous paragraph, to describe the horrific enormity of the total amount of wealth lost by an economy as a result of another fiat currency literally biting the dust due to its over-creation, and making a big, big stinking mess that has serious, catastrophic long-term ramifications.
The beauty of TGWO is that it is easy to calculate, as it is the sum total of everything, as in “Every Freaking Thing (EFT)” leading to the phenomenon known as Total Freaking Loss (TFL).
The amazing thing was that this reader laughably does not mention TGWO, perhaps because I just made it up, or perhaps because it has nothing to do with anything.
Instead, he said, “Nobody, not Mr. Morgan, not you [the reader], nor I, nor economists [even ‘Austrians’], central bankers, investment ‘gurus’, tea leaf readers etc. etc., can reliably, consistently predict future economic events!”
At this, I jump to my feet and shout, with a tone of haughty victory in my voice, “Wrong, moron! I can predict some futures! Nothing is more reliably, more predictably, or more uniquely guaranteed than that silver and gold will go up in price over the long-term when priced in a fiat currency that is being created to excess!”
In response to my compelling argument, you can almost hear the desperation in his voice as he weakly persists, “The unacknowledged fact is that the economic future is unknowable,” which is so outrageous, in light of what I had just said, that I again jump up, this time onto my chair, adding a certain dramatic flair to my outburst, and again I scornfully say, “Wrong, dork-face! And the fact that every person owning gold and silver over the entire last decade made lots and lots of money as their prices went predictably up, while you, with your stupid investments in common equities and ridiculous belief in the stability of the buying power of a fiat currency, made nothing as the major indices have not gone up in 10 years! Nothing!
“And,” I mercilessly continued, “after adjusting your zero gains for the inflation in prices over the last decade, even using the mild inflation statistics of the Bureau of Labor Statistics, you have lost 27%! Hahaha! Moron!”
Of course, if he had read anything about the Austrian business cycle theory by merely going to mises.org once or twice in his whole life, he would know that wild, constant expansions of a fiat currency always lead to ruinous inflation in prices, which leads to social instability and upheavals when people get tired of deprivation because their pitiful little bit of money cannot buy enough food or heat because their prices are rising so high and so quickly.
And, then, if he had, he would know that Mr. Morgan was right, and that “On a longer term basis, silver and gold are going far higher in paper terms in any currency you wish to name.”
And it is that kind of certainty, especially in terms of the dollar that the Federal Reserve is destroying with more multi-trillion dollar creations of money, that makes buying gold, silver and oil such compelling investments so that you thank your lucky stars that “Whee! This investing stuff is easy!”
The Mogambo Guru
for The Daily Reckoning
http://dailyreckoning.com/an-economic-certainty-gold-to-rise-as-fiat-currencies-fall/
Dollar Collapse: Are We There Yet?
by: Dave Lewis November 08, 2010
With the US$ sinking and Gold setting new highs every few days those, like me, who have been waiting for the final collapse of the current $ based international financial system have one question on our minds- "are we there yet?"
"Not yet. But we're getting very close."
This past week the US electorate, in a fit of justified pique over Democratic failure to fix the broken (at least from the perspective of the majority of US citizens) economy, put Republicans back in charge of the House of Representatives. Big Finance must have viewed election results with glee. Gridlock, as we Americans lovingly refer to government divided and thus incapable of passing radical legislation, means the Volcker Rules (or other meaningful financial reforms) have an even slimmer chance of becoming law.
Coincidentally, the Federal Reserve announced plans to buy, during the next 9 months, $600B of long dated US Treasuries- a policy they refer to as "quantitative easing". I prefer "monetizing debt" to avoid confusion.
While Big Finance in the US celebrated the return of Gridlock and the gift from the Fed, our foreign financiers most likely took a less sanguine view of the policy changes. US banks will soon be free to take even bigger risks while the Fed actively drives the value of the
US$- the ultimate "asset" our financiers are promised- ever lower.
The wonderfully apt, in this case, phrase, "thick face," no doubt crossed many Chinese minds as they pondered US Treasury Secretary Geithner's proposed current account targets to "accelerate global rebalancing" in the context of US debt monetization and ever more impotent regulation of the big banks who have led the world to the current impasse.
To wit- Cui Tiankai, a deputy foreign minister and one of China's lead negotiators at the G20, said on Friday, "We believe a discussion about a current account target misses the whole point," he added, in the first official comment by a senior Chinese official on the subject.
"If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing."
It seems to me a sign of the times that Mr. Geithner didn't respond to current concerns over the declining $ as Nixon's Treasury Secretary, John Connally once did, i.e. the US$ "is our currency, but your problem." The swagger of US policy makers evident in decades past is now shrouded in sophisticated euphemism- but the effects will be similar.
"But, are we there yet?"
"Not yet."
There is, in my view, one last road sign before we reach our destination. When the US Bond Market begins to "fight the Fed"- a strategy normally as wise as spitting into the wind- we will begin the end stage of our journey to a new system of international finance. When US Bond prices fall despite Fed intervention (better yet, when bond prices fall on news of increased intervention) the excrement will be about to hit the fan in international finance.
We must, however, be getting close. I noticed the Fed established the Office of Financial Stability and Research this past Thursday. Talk about closing the barn door after the horses have all escaped.
http://seekingalpha.com/article/235396-dollar-collapse-are-we-there-yet?source=email_the_macro_view
The Absurdity of Central Planning
By Bill Bonner
11/05/10 Delray Beach, Florida – That’s the great beauty of a real economy! It rarely takes you where you want to go…especially if you’re an activist central planner or an interventionist finance minister. But no matter how much you struggle with it…no matter how badly you manipulate it…no matter how much you try to stitch it up with rules and regulations…
…it ALWAYS takes you where you deserve to go.
Look at what happened back in ’71. Nixon’s move to take the US entirely off the gold standard was hardly noticed. Because he announced something even stupider that day. He told the world that henceforth prices and wages would be controlled by the feds. No kidding. His wage-price controls were designed to put a brake on inflation.
Did they work?
Ha…ha…do you have to ask? If you could control inflation by executive decree…well, it would be a lot different world than the one we live in. You can’t do that. And when you try to do that, you don’t get a world of stable prices, growth and prosperity. What you get is what they got in the Soviet Union, when they controlled the price of everything. They got a lot of nothing…
…nothing on the shelves…and nothing worth buying.
We remember visiting Poland in 1977. It was a delightful place for a driving holiday because there were no cars on the roads. People didn’t have cars. And the trucks were usually off the roads too. They were broken down…usually alongside the road with their hoods up.
There were no hotels either. And no restaurants worthy of the name. You just had to make do.
You’d go into a shop. It was drab. Empty. There were usually two or three dozy clerks…but nothing to sell. Just a few cans. What was in the cans? It was hard to tell. But since that was all there was, you bought it and ate whatever dreadful thing was inside.
Later, in the ’80s, we took a trip to the Soviet Union. On the plane with us, on a flight from Moscow to Minsk was a woman with a toilet seat in her lap. It turned out that she had been raised in Tennessee and had a twang to her English.
“What are you doing with a toilet seat,” we wanted to know.
“Oh… I just bought it in Moscow,” she explained. “There aren’t any toilet seats for sale in Minsk.”
“But isn’t that an expensive way to get a toilet seat? I mean, this is a three-hour flight.”
“No… The flight is priced in rubles. And the ruble isn’t worth anything. It actually cost me more to buy the toilet seat than the roundtrip ticket.”
See what central planning produces? Absurdities. Monstrosities. Imbecilities. Coming soon…to your neighborhood.
Enjoy your weekend,
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/the-absurdity-of-central-planning/
Tent Cities Popping Up Across America
American Tent Cities Foreclosed and homeless
The financial crisis the U.S. is facing is resulting in tent cities popping up across the nation.Tent cities have sprung up outside Los Angeles in the US as people lose their homes in the mortgage crisis.Subprime meltdown threatens American dream in Southern California.Homeless "tent city" grows amid ongoing subprime lending crisis that threatens middle-class.to many who never thought they would find themselves homeless, but had nowhere else to go after being unable to find work as the economy crumbled.As the recession worsens, tent cities are sadly beginning to pop up across America. This one is in Sacramento, California.
Tent City, U.S.A.
In the wake of the housing crash, "tent cities" have been springing up in several places in California. The story is not that new. However, it has not received much mainstream press. Therefore, many are unaware this is even happening.
The quality of some of the videos is not that good. Two of the better ones are from international writers. By the way, if you have not yet seen any of these, you may be in for a shock. Let's take a look.
Huge Tent City Forming Outside Sacramento
Economic Recovery, Economy-US, In the Loop, Mortgage & Credit Crisis, Politics-US, US news
9 March 2009 :: J.E. Robertson
An array of reports show some 1,200 people living in a growing tent city outside the California capital Sacramento, as more and more people are left homeless by the housing crisis. The UKs Daily Mail on Friday detailed the community, noting echoes of the Depression era. There are an estimated 2,000 people living in such communities around Sacramento, with foreclosure and jobless rates skyrocketing.
Smaller tent cities had been reported in Los Angeles and New Orleans over the last year, but a new photo essay, published by MSBNC, highlights both the magnitude of the Sacramento tent city and its comparison to Depression-era tent cities that emerged as homelessness became a pervasive national crisis.
The news is jolting to many who are worried that the spreading foreclosure crisis and collapse in real estate values, in combination with a faltering job market, could push families with underwater mortgages into homelessness. California is one of the wealthiest states and one of the worlds largest economies, and pressure for serious efforts to combat the economic crisis is mounting.
Police officers with box cutters showed up where St. Pete's tent city residents had moved and set up. The cops slashed their tents to the ground as residents watched in shock. Now one homeless group is moving to label St. Petersburg as the 'meanest city in the nation.' Video by Tina May.
http://geraldcelentechannel.blogspot.com/
3 Ways to Get Rid of a $13.728 Trillion Deficit
by: Mark Riddix November 04, 2010
Here is the conundrum. Americans want lower taxes, the same level of government services (Social Security, Medicare), and an elimination of the national debt. We are continually told by all politicians that this is possible and that they can magically fix these problems. Both parties are disingenuous and will tell you that one solution will fix all of our budgetary woes. The Democratic solution is to raise taxes and have no cuts to federal spending. The Republican answer is to lower tax rates and cut federal spending. Both of these so called “solutions” are no solution whatsoever. Basically we want to have our cake and eat it too!
Look at the results of the last few presidents. It has not mattered if the President was a Republican or a Democrat. They all added to the deficit. The irony is that Republican presidents have actually reigned over the largest deficit increases. Ronald Reagan led the biggest percentage increase in the national debt and Bill Clinton presided over the smallest increase in the national debt. Every president talks about decreasing the national debt but they all end up adding to it.
Presidents Years Starting Debt Ending Debt Percentage Increase
Ronald Reagan 1981-1989 $908 billion $2.6 trillion +186%
George H.W. Bush 1989-1993 $2.6 trillion $4.2 trillion + 62%
Bill Clinton 1993-2001 $4.2 trillion $5.7 trillion + 36%
George W. Bush 2001-2009 $5.7 trillion $10.6 trillion + 86%
Barack Obama 2009 - $10.6 trillion ?
If we are finally serious about eliminating our $13.728 trillion deficit, here are 3 things that we can do.
1. Increase tax receipts.
Taxes may not be popular but the only way to start paying down the debt is through increased tax receipts. I am not going to suggest the form of taxation that is needed to pay down the debt but the federal government has to increase its tax revenue. It can be through a consumption tax, income tax or valued added tax. The government could seek to collect some form of taxes from the 47% of Americans that do not pay any taxes. Whether it is corporations or individuals, someone is going to have to pay taxes.
2. Cut federal spending.
Entitlement programs will have to be cut. No one wants to see cuts in national defense, medicare, or social security but something has to be done. Either the age to be eligible for Social Security benefits has to be raised or the amount of money paid into it has to be increased. Also, the defense budget has to be cut. We spend more money on defense than any other country. The 2011 defense budget proposal is for $708 billion dollars and many lawmakers believe that is too low. We are fast approaching a $1 trillion dollar defense budget.
3. Increase GDP.
Many supply side economists like Larry Kudlow argue that the United States economy needs to focus on growing its GDP. I agree with this concept but not as the lone solution. Increasing our gross domestic product will help lower it from its current high percentage to GDP. The national debt currently represents approximately 20% of our 14.6 billion dollar annual GDP. GDP increased 2% last quarter. Any recovery in global economies should help boost United States GDP growth and a return to the days of GDP growth in the high single digits would be optimal.
Final Thoughts
Basically, I am saying that all options have to be on the table if we are serious about reducing the national debt. It is going to take a long term commitment and sacrifice to reduce the debt. In my opinion it will take a hybrid approach to get the national debt under control. In the short term, we can start by balancing the budget and not adding one cent more to the long term deficit. Next, the focus should turn to reducing the issuance of public debt (Treasury bonds, T-bills, notes). The day is coming when all debt instruments will be redeemed and have to be paid by the government. The final strategy would be increase the federal revenue stream so that the debt can be brought down to more manageable levels. This does not solve all of the budgetary woes but it is a good place to start.
http://seekingalpha.com/article/234769-3-ways-to-get-rid-of-a-13-728-trillion-deficit?source=email_the_macro_view
Department of 'Huh?': When the Economy Started to Falter Edition
by: Brad DeLong November 05, 2010
Methinks David Leonhardt is in danger of becoming a Very Serious Person. For he writes:
Was That a Plea From Bernanke?: Imagine if [Bernanke] had given a speech earlier this year, as the economy started to falter...
If you simply look at the graph of employment and of the population growth-driven trend, you see that the economy could not "start to falter" "earlier this year" because the economy has been faltering nonstop since late 2007. There is a temporary blip in employment from temporary census hiring. That is it. Otherwise the economy had faltered, was faltering, is faltering, and in all likelihood will continue to falter.
It is not that there was a normal "recovery" that then, unexpectedly, turned into a jobless recovery. It is that there never was a "normal" recovery in the first place.
And I, at least, could never see the logic behind forecasting models that were predicting a "normal" recovery. The Recovery Act federal stimulus was timed to start to ebb in the summer of 2000. State-level fiscal contraction was in train.
The problem was--as my daughter said at the time--that Bernanke and company were placing excessive weight on the second derivative. "Getting worse more slowly" is not the same thing as "better," and nobody should ever fit a quadratic to any time series and trust the forecast without a good warrant for doing so.
Resist the call of the Dark Side, David!
http://seekingalpha.com/article/235013-department-of-huh-when-the-economy-started-to-falter-edition?source=email_the_macro_view
How QE Works
by: Felix Salmon November 05, 2010
Gawker’s John Cook asks me a question about how the Fed’s quantitative easing is supposed to work:
So the Fed is going to by $600 billion in U.S. Treasuries. It will presumably buy these Treasuries from private investors and institutions who had already purchased them–in other words, it won’t be handing $600 billion to the U.S. Treasury in exchange for bonds.
The purchases will be in increments of $1 million. Now, the kind of people who own $1 million and more in U.S. Treasuries tend to be people with a lot of money. And that money was kind of sitting there, and for some reason or another they decided to put it into treasuries, right?
So now along comes the Fed and says to those private investors and institutions, “Hey, I’d be happy to convert those treasuries into cash for you!” And they negotiate over price or there’s an auction or whatever, and the investors get their cash and the Fed gets its treasuries.
And so then these private institutions and investors are sitting there with a pile of cash. So why wouldn’t they just buy treasuries with it, which is what they had previously decided would be the wisest thing to do with that money?
The idea is to get those people to spend that cash in stimulative ways, right? But shouldn’t we assume that people who are sitting on large quantities of treasuries are sitting on them for a reason, and would likely continue to sit on them, even if they suddenly came into some cash?
John has a few of the details wrong, but at heart he’s absolutely right. The way that QE works is that the Fed will publish a schedule of how many Treasury bonds it intends to buy and when. It will then go out and buy those bonds from “the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system.”
In English, what that means is that the New York Fed has a direct line to the biggest banks in the world (Goldman Sachs (GS), Morgan Stanley (MS), Deutsche Bank (DB), etc — 18 in all). And it gets all those banks to compete with each other, either directly or on behalf of their clients, for who will sell the Fed the Treasury bonds it wants at the lowest price. The winners of the auction get the Fed’s newly-printed cash*, and give up Treasury bonds that they own in return.
The people selling Treasury bonds to the Fed, then, are big banks, who are told in advance exactly how many Treasury bonds the Fed wants to buy. As a result, they’re likely to buy Treasuries ahead of the auction, with the intent of selling them to the Fed at a profit. This is pretty much what John said would be going on, only they buy the bonds before the auction, rather than afterwards. Once the banks have made that profit, it’ll get paid out in bonuses to the people on the bank’s Treasury desk, with the rest going to their shareholders. We’re not exactly helping the unemployed here.
More generally, the Fed isn’t going to be buying any more bonds than the Treasury is issuing — so it’s not going to be lifting a lot of holders of Treasury bonds out of their long-term investments. But insofar as the Fed is forced to offer such high prices that investors simply can’t say no, those investors are probably just going to take the proceeds and invest them in agency debt instead from Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). That debt is just as safe as Treasuries, and it even yields more than Treasuries, to boot.
What’s emphatically not going to happen is that the people who used to own Treasury bonds will take the Fed’s billions and suddenly turn around and spend them buying croissants at their local family-owned bakery. We’re talking about monetary policy here, not fiscal policy: the aim here is to bid up the price of Treasury bonds, which means that the yield on Treasuries will fall, and that those lower interest rates will somehow feed through into greater economic activity. The aim is not to take $600 billion and spend it on stuff in the real economy. That would be a second stimulus, and the chances of a second stimulus right now are hovering around zero.
Which is why Brad DeLong puts the value of buying $600 billion in Treasury bonds at about $7 billion in total, rather than anything near the headline $600 billion figure. The Fed is playing around with interest rates here — that’s its job. It’s not trying to directly stimulate demand.
* I should also take this opportunity to answer a question from CJR’s Dean Starkman, who asks where the money is coming from. The answer is that in a fiat-money system such as ours, the central bank can simply print as much money as it likes. If it wanted, it could literally go down to the local printing press, print out a bunch of $100 bills, put them in armored trucks, and send them over to JP Morgan (JPM) or whoever sold them those Treasury bonds.** But that would be silly. So instead it simply increases the amount registered as on deposit at JP Morgan’s bank account at the New York Fed.
If JP Morgan had $100 billion in that bank account before, and then sells the Fed another $50 billion of Treasury bonds, then the Fed will just credit that $50 billion to JP Morgan, and the new balance in JPM’s account is $150 billion. Central banks can do that, which is why they’re so powerful. The amount of money in the system has just increased by $50 billion, and the Fed hopes that somehow that increase will feed through into higher inflation. Whether it will or not, however, depends on the degree to which JP Morgan can take that $50 billion and lend it out into the real economy. So far, banks have been bad at boosting their lending. And there’s not a lot of evidence that they’re getting any better.
**Update: Alea tells me I’m wrong on this: it’s the Mint which prints paper money, not the Fed, and all paper money is backed by Treasury-bond collateral.
http://seekingalpha.com/article/235002-how-qe-works?source=email_the_macro_view
From Stagnation to Stagflation
By John Butler
11/04/10 London, England – With economic growth as measured by real final demand so weak, any increase in inflation which is not associated with a higher rate of real growth will represent a transition from the economic stagnation of the past few years to an even more unsatisfactory state of affairs, a dreaded “stagflation”, which came to plague the US and, to a lesser extent, global economy in the late 1970s. But wait, some might object, US CPI reached double-digits in the late 1970s/early 1980s, surely this is not a fair comparison? To which we reply: Good point. Let’s make certain that we are comparing like with like and adjust for changes that have been made to the CPI calculation methodology in the interim, as these have been substantial.
A respected independent economist, Mr. John Williams, maintains an excellent website publishing what he has termed “Shadow Government Statistics”, which show how the economy is performing today, using statistical methodologies from the 1970s for GDP, CPI and so on. These statistics allow for a proper comparison of contemporary and past US economic data. The results are illuminating, to say the least. Whereas the official, current rate of CPI is at a “59-year low” 1.1% y/y, when applying the same statistical methodology that prevailed in the 1970s–comparing like with like–in fact US CPI is currently 8% y/y! 8%! And there is a substantial food and import price inflation shock about to arrive!
TIPS may not be pricing in 8% y/y inflation or higher, but why should they? They don’t pay the old CPI as a coupon, they pay the current CPI. As such, TIPS implied inflation rates simply can’t tell us that we are perhaps already deep into an economic stagflation comparable to the late 1970s!
For those skeptical that this is a legitimate line of inquiry, consider some ominous parallels between current financial market developments and those of the late 1970s:
• The dollar is weak nearly across the board;
• The gold price has soared to records;
• The prices of commodities generally are now also rising rapidly;
• The stock market is rising;
• Yet all of the above are occurring alongside generally weakening US leading economic indicators
The evidence strongly suggests that US CPI is not 1.1% y/y but rather somewhat higher. But if US CPI is in fact somewhat higher then this implies that the real rate of GDP growth is commensurately lower, as real growth = nominal growth – price inflation. Yet with official GDP growth as weak as it is, then that would imply that, in fact, true real GDP growth is outright negative. Impossible? Well, consider some other interesting economic facts:
• The economy is not adding jobs and, in fact, employment remains far below the peak reached in 2007;
• State sales tax revenue growth is negative, implying negative real retail sales growth;
• The Conference Board consumer survey of inflation expectations is around 5%
Isn’t it far, far easier to understand the behavior of financial markets and the broader range of economic data hiding behind the headline figures, by assuming that CPI is somewhat higher, and real GDP growth somewhat lower, than official figures suggest? We leave it to the reader to decide.
If the real state of economic affairs in indeed as bad as Mr. Williams’ data imply, then we are, in fact, already deep into a stagflation which is only going to get worse. The financial market implications are significant.
First of all, it is likely to become increasingly evident that current US bond yields are far too low to compensate investors for the increasingly rapid loss of purchasing power. As such, either yields are going to have to rise or, to the extent that the Fed stands in the way, the dollar decline.
Second, corporate profits are going to suffer in a severe squeeze between sharply rising input prices on the one hand and poor real final demand on the other. This is likely to weigh on equity markets although equities are likely to outperform bonds as corporations, in particular those producing/providing relatively non-discretionary goods and services, are able to pass on some costs to consumers.
Third, within equities, financial shares are likely to underperform, possibly dramatically. The more severe the stagflation becomes, the more likely that, eventually, interest rates are going to rise. While goods-producing firms able to export might benefit in time from a weaker dollar and lower relative wage costs, financials do not benefit directly from such developments. Rather, their valuations are a direct function of the level of interest rates. A glance at the relative performance of US financials during Fed Chairman Volcker’s 1979-82 assault on inflation, via higher interest rates, is instructive in this regard.
Fourth, commodities are likely to remain the best performing asset class. Gold and other precious metals may, or may not, lead the way, as their prices are already elevated relative to those for other commodities. Crucial here will be the perceived risk of the US financial system. If confidence in the financial system deteriorates substantially, precious metals are likely to be the best performers. If financial conditions are relatively stable, a more balanced and widespread outperformance of commodities becomes more likely.
Needless to say, this is not a benign investment environment. Those living on fixed incomes are going to see their purchasing power substantially eroded over time. Those who think that stocks are cheap due to highly misleading comparisons with the unsustainable asset bubbles of the past are going to be disappointed. Adding to the misery for stock market investors will be the “green-tape” associated with new environmental and natural resource regulations; a more aggressive regulatory regime generally; tremendous political and hence tax policy uncertainty; and an astonishingly widespread culture of corporate fraud, which has no doubt been substantially facilitated by the complete lack of even basic enforcement of US contract and securities laws before, during and following the financial crisis of 2008.
While the above comments are rather specific to the US, certain other developed economies, including parts of the euro-area, the UK and Japan, have issues which are in many cases similar and in some cases even worse. And while emerging markets are likely to continue to outperform on trend, at least in relative terms, investors should be cautious regardless of where they are looking for value around the world.
For those readers who have been following the Amphora Report, no doubt this edition represents another rather depressing installment. We are long on criticism and rather short on proposed solutions. From time to time we do try to offer reasons for hope and, this time around, we close with a few.
First, we note that alternative, non-Keynesian economic thinking is beginning to find its way into the mainstream press. Regular readers of the Wall Street Journal (US), Financial Times (UK) and Daily Telegraph (UK) have probably already noticed this. Policymakers are more likely to listen to these sorts of media sources than those of the blogosphere, however pertinent, sophisticated and credible the latter.
Second, economic policymakers in a growing number of countries, in particular in Europe but also in certain emerging markets, are beginning to take proactive measures to place their economies on a more sustainable path, even if this places them in direct confrontation with the US. Germany is an important case in point, as are France, Brazil and India. We would even place the UK in this group.
Third, some influential business leaders in the US are now speaking out against plans for additional stimulus, arguing instead that more fundamental economic restructuring is now necessary, however painful it might be in the near-term. This is a welcome contrast to the near universal acceptance of the business community back in 2008-09 that, without substantial fiscal and monetary stimulus, the US would somehow become an economic wasteland overnight.
Fourth, while we are not partisan in our politics, we welcome the growing political activism in the US, Europe and elsewhere. In all cases, there is much more citizen engagement and fundamental debate taking place around all manner of economic issues. While in certain cases demonstrations are turning violent, it is important to understand that this is an unfortunate symptom of supposedly representative political systems not living up to the spirit of their specific constitutions or of their democratic traditions generally. Long may the activism continue.
These are all important developments. The first step toward curing an addiction–in this case artificial, unsustainable and ultimately counterproductive economic stimulus–is to recognize it for what it is. As the media, policymakers, businessmen and all citizens wake up, the odds grow that we might just manage to avoid an even worse fate than that which already awaits us as the consequence of colossal past policy mistakes.
No, there is no easy way out. There is no free lunch. Indeed, that lunch is going to get much more expensive before long.
Regards,
John Butler,
for The Daily Reckoning
http://dailyreckoning.com/from-stagnation-to-stagflation/
Why Printing Money Won't Correct the Correction
By Bill Bonner
11/04/10 Delray Beach, Florida – Well, dear reader, you know the story as well as we do.
"US Stocks Rise as Fed Announces Additional Treasury Purchases," says Bloomberg.
US stocks advanced, with banks helping benchmark indexes erase losses, after the Federal Reserve announced an additional $600 billion of Treasury purchases through June in a bid to boost growth in the world's largest economy.
The S&P 500 climbed 0.4 percent to 1,198.03 as of 3:16 p.m. in New York. The measure had fallen as much as 0.8 percent. The Dow Jones Industrial Average added 26.64 points, or 0.2 percent, to 11,215.36.
"Nothing in here tells me that we should be selling stocks," said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. "The latest economic figures have been good. We have the Fed and the elections behind us. So there's less uncertainty."
The S&P 500 surged 17 percent since July 2 through yesterday as odds increased that Republicans would take control of the House. The GOP, while falling short of winning the Senate, narrowed the chamber's Democratic majority yesterday in an election shaped by voter anxiety over jobs and the economy.
Republicans gained at least 60 House seats across the country, capitalizing on concern that government spending has increased over the last two years and delivering a rebuke to the domestic agenda of President Barack Obama.
The S&P 500 may rally as much as 16 percent in the next six months because the election will stymie legislative initiatives in Congress, billionaire investor Kenneth Fisher said.
What? Does he just make this stuff up? Maybe stocks will go up. Maybe they'll go down.
We don't know. And we don't care. Stocks aren't cheap. And the country is still at the beginning of a major adjustment…a Great Correction that will probably depress business profits for many years.
Besides, the stock market never has completed its historic rendezvous with the garbage pile. Yes, every investment asset class goes from the trash heap to the penthouse – and then back. By our calculations, US stocks are on the downside of that slope. We'll wait 'til they reach the dump – that is, when they're at giveaway cheap prices – before we get excited about them again. We want to pick them out of the trash at pennies on the dollar.
Of course, we could wait a long time. From trough to peak typically takes 16 to 20 years. If you take the peak as of January 2000…when the NASDAQ hit its high…we have another 6 or so years to wait. But if the peak was the peak in the Dow of 2008…heck, we could wait until 2028 until we finally hit bottom.
And don't forget. Japan waited 20 years between its glory days of 1989 and its low of 2009. We could do the same. But so what? We can wait….
But let's talk about happier things. This year the voters – God bless 'em – threw out more bums than usual. The Republicans gained 60 house seats.
That means Congress is gridlocked. Obama doesn't seem to understand what is happening. And Ben Bernanke is cranking up the presses.
The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that's a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.
Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.
How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don't know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don't know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.
The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world's richest and most prosperous citizens. Followed by the Argentines; they've got 25% inflation right now.
Nope; it isn't going to work. And even if it seems to be working…it will actually be making people worse off.
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/why-printing-money-wont-correct-the-correction/
Profiting As the Fed Creates More Money
By The Mogambo Guru
11/04/10 Tampa, Florida – The latest news to depress me is that incomes were reported down 0.1%, and the latest news about spending is that spending is up 0.2%.
The reason that it was extraordinarily depressing for me is that I was trying, in vain, to explain to the drooling half-witted pinhead idiot seated next to me at the bar that I think that “spending” is actually waaAAAaaay down, because, while total spending is up, it is mostly because prices have risen so much that people buy fewer things overall, but pay more per item that they do still buy, which they do because of the rapid decline of their standards of living caused by the loss of buying power of the dollar as a result of the Federal Reserve creating so many more of them.
Until now, the inflation in prices was disguised by the slimy trickery of the government’s/Fed’s distortion of reality by their hedonically-adjusting downwards actual price increases to account for “quality” improvements and other un-quantifiable tangible and intangible benefits.
I told him, as a way of impressing him so that he would not think I was not as stupid as I look or sound, that I was entrepreneurially-inspired by such government arrogance that this was when I first threw a packet of vitamin C tablets into the file marked “Mogambo’s Wonderful Investment Portfolio (MWIP).”
In doing so, I completely changed my whole marketing thrust. Previously, I had gone with the slogan, “Profit by the stupidities of the Federal Reserve creating excess money, and the deficit-spending madness of the federal government, by buying gold, silver and oil stocks today, using the wisdom of the Mogambo’s Wonderful Investment Portfolio (MWIP), which is to buy gold, silver and oil, ya moron!”
The fabulous new marketing slogan that I came up with was, “Be wealthier and be healthier! Invest with Mogambo’s Wonderful Investment Portfolio (MWIP) and be both!” which still recommends that investors buy gold, silver and oil to make them wealthier – guaranteed! – by profiting from the stupidity of the Federal Reserve creating too much money, but now with a recommendation to take vitamin C to make them healthier, too!
Finally, this drunken barfly turns to me and says, “Huh? You talkin’ to me?” which lets me instantly know that he is an idiot, because I have been talking to him for over ten minutes about how the evil Federal Reserve is destroying us by creating so much new money, so freaking much new money, so terrifyingly much new money so that the government can borrow and spend that it creates terrible inflation in prices! “Yikes!” I said.
Well, actually I only claim that I said, “Yikes!” but I was pretty smashed by this time, and what I really said was a lot of obscene cursing at the Federal Reserve for creating so much new money and loud burst of Mogambo Bellow Of Outrage (MBOO) at that arrogant socialist Obama monster for borrowing all that money to spend on socialist dreams and schemes that are doomed to failure.
Indeed, it started out as a long and loud disparagement of the Federal Reserve, but was soon replaced with hushed and obscene-yet-gratuitously-lewd comments about a bunch of hot young ladies seated over there by the pool table, who think they are so hot, and who had previously laughed at me and said, “Go away, grandpa! We’re looking for hot, handsome hunky men, and you are blocking the view! Hahaha!”
Well, as punishment for their insults, I decided to let them suffer by not telling them, as I ordinarily would, to buy gold, silver and oil, and that We’re Freaking Doomed (WFD) because the Federal Reserve, under the horrible Alan Greenspan from 1987-2006, created so much money and distorted the economy into a giant, bloated, disgusting, government-centric economic monstrosity, where the government is sucking the life out of the economy through over-taxation and over-regulation, and then spitting it (if that is the correct orifice) back into the economy via huge budgets and deficit-spending oceans of new money created by the Federal Reserve and that, tragically, even Greenspan’s horrifying monetary excesses pale to seeming insignificance compared to the unbelievable infamy of the new chairman of the Federal Reserve, Ben Bernanke, and all his unbelievable inflationary intent, because inflation is, of course, the One Big Freaking Thing (OBFT) that you do NOT want to happen, and this insane monster is trying to make it happen! Gaaahhh!
So, I laugh in scorn while I am screaming in outrage, which is harder to do than it looks, as I think to myself, “Let the young ladies have their fun, blissfully ignorant about how having the Federal Reserve monstrously creating $2 trillion, or maybe $4 trillion, or more in a year, year after year, all in a lousy $14 trillion economy, so as to allow the federal government to borrow it and spend it, is what we professional economists call Absolutely Freaking Insane (AFI)!”
I’m not sure I could impress upon these nubile little temptresses that this is a stunningly huge clot of new spending-money that is appearing, literally, out of nowhere, to join other money coming out of nowhere, such The Wall Street Journal reporting that a lot of people are defaulting (i.e. haven’t made a payment in 16 months or more) on their mortgages, but are managing to still live in the house without paying a dime, giving them a “free” place to live, which is (you gotta admit!) a pretty sweet deal for them!
The moral and ethical ramifications aside, and the banker’s desire to keep the house occupied so as to prevent vandalism and looting of an empty dwelling, this brings up, as it does, the moral and ethical ramifications of these defaulting squatters perhaps routinely vandalizing surrounding vacant dwellings so as to make a few bucks selling the appliances and wiring, thus actually increasing the desire of petrified bankers to let these defaulting deadbeats stay in the houses – and maybe even pay them! – un-molested.
And then (pause), as there always is (pause), there is the subject of (pause) money.
And the money that I am talking about is, of course, “How come the rest of us, who do not have a mortgage to default upon, can’t get in on some of this ‘free housing’ gravy? It’s justice denied and unequal protection of the laws, I tells ya!”
And what about the people who rent their homes and apartments? Don’t they equally deserve to live someplace for free, too, since all it takes to be able to do so is creditors and landlords to voluntarily not throw them out?
And what about Lefty and Pinhead, the two thieving, lying, cheating, filthy, worthless, lazy, dropout, alcoholic, drug-addicted mental defectives and personal friends of mine who currently live in a storm culvert, and who get to smoke all the cigarettes they want, drink all the booze they want, eat all the crappy fast-food they want, any time they want, and who don’t have to always worry about remembering to pull up their stupid zippers after they take a whiz? Shouldn’t they get some of that “free housing” gravy, too?
And gravy it is, too! “Defaulters living in the homes” is calculated to be “a subsidy worth about $2.6 billion a month,” which is a lot of money that would otherwise flow to creditors, who would otherwise pay tax on the money, but who are now looking at tax-deductible losses which, in the case of the USA, means more deficit-spending to continue bailing out Fannie Mae and Freddie Mac, the two gigantic, laughably incompetent, loss-producing, loser organizations which together own almost all the mortgages in the Whole Freaking Country (WFC) so that, as the loathsome and disgraceful Christopher Dodd of Connecticut once said, home ownership would not be limited “only to those who can afford it.”
So Fannie and Freddie operate with a $2.6 billion monthly deficit, a loss which is paid by the federal government deficit-spending another $2.6 billion a month, which it borrows when the money is created by the Federal Reserve, which increases the money supply, which makes prices go up.
That’s the theory, and it has always held, sort of like the theory of gravitation, the practical application of which is to simply make the sensible decision to invest following a regimen of frantically buying gold, silver and oil to capitalize on the inflationary horror about to befall us, which is So Freaking Obvious (SFO) and so easy that you shout huzzahs of thankful happiness to the beautiful blue skies and shout, “Whee! This investing stuff is easy!”
The Mogambo Guru
for The Daily Reckoning
http://dailyreckoning.com/profiting-as-the-fed-creates-more-money/
Bill Gross: Fed Actions Could Lead to a 20% Weaker Dollar
By Rocky Vega
11/03/10 Stockholm, Sweden – The jitters continue as we near the Federal Reserve’s announcement of its new stimulation policy… which is likely to pump another half billion or so into the nation’s zombie economy through Treasury bond purchases. Perpetually influential Bill Gross, co-CIO & founder of PIMCO, which manages over $1 trillion in assets, is anticipating that Bernanke’s upcoming moves could lead to a precipitous 20 percent drop in the dollar’s value.
According to Moneycontrol.com:
“‘I think a 20% decline in the dollar is possible,’ Gross said, adding the pace of the currency’s decline was also an important consideration for investors. ‘When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory — that is a debasement of the dollar in terms of the supply of dollars on a global basis,’ Gross told Reuters in an interview at his PIMCO headquarters.
“The Fed will probably begin a new round of monetary easing this week by announcing a plan to buy at least USD 500 billion of long-term securities, what investors and traders refer to as QE II, according to a Reuters poll of primary dealers.
“‘QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices,’ Gross added. To a certain extent, that is what the Treasury Department and Fed ‘in combination’ want, said Gross, who runs the USD 252 billion Total Return Fund and oversees more than USD 1.1 trillion as co-chief investment officer.”
The Fed is of course aware fully aware of the adverse consequences of its actions and seems to welcome them, with no remorse given the damage it will inflict upon the nest eggs of diligent savers. In light of the weak dollar policy, Gross’ main suggestion is to look into investing abroad, where at least some ongoing growth stories can still be found.
You can read the details of his perspective by visiting Moneycontrol.com’s coverage of how Fed easing may mean 20% dollar drop.
Best,
Rocky Vega,
The Daily Reckoning
http://dailyreckoning.com/bill-gross-fed-actions-could-lead-to-a-20-weaker-dollar/
When the Price of Silver Doubles in a Month
By The Mogambo Guru
11/03/10 Tampa, Florida – Bill Bonner here at The Daily Reckoning writes, “In England, the government of David Cameron has announced the biggest cutbacks since WWII. He’s going to lighten the UK government expense load by 81 billion pounds over the next 5 years. Nearly half a million government employees are to be given the heave-ho.”
In an odd sort of symmetry, it is sort of like that around here, too. Rumors fly like sparks that the company is losing money, and to save money, a lot of people are going to be fired, particularly me, along with a few other lazy incompetents who actually deserve to get fired, if you ask me, because they are so stupid that when I ask them a simple question like, “Are you buying gold, silver and oil in fearful response to the Federal Reserve creating so much money that the wholesale debasement of the purchasing power of the dollar, popularly perceived as inflation in prices, is going to cause the gigantic inflation in consumer prices that was actually predicted earlier in the same sentence, spooky and Nostradamus-like, thus proving everything I said?”
Well, as you probably guessed, none of them has ever, ever purchased any gold or silver, despite my constantly advising them to do, and insulting their intelligence when they don’t, which should make the choice clear as a bell, even for them.
So, as I told my boss recently, I agree: Those people must be fired immediately, as the company needs people, like me, with the ability to see “the big picture,” even when we gifted visionaries would prefer seeing pictures of naked people behaving shamelessly, but I am willing to make that sacrifice if it meant keeping my job for a little while longer, whereupon I will peacefully resign my job.
You could hear the suspicion in her voice as she asks, “How much longer?” I replied, “It won’t be long until the foul Federal Reserve has committed the monetary sin of creating another few trillions of dollars, which means prices will rise, which means gold and silver will rise so high in terms of dollars that I will, one wonderful, wonderful day, come in to work late, barge into your office without knocking, probably whistling a happy tune and disrupting the whole place, and tell you to take your stupid job and shove it!”
Tonelessly, again she asked with a bored undertone to her voice, “How long will that take?”
Feeling myself being squeezed into a making a precise prediction, I evasively said, “Well, James Turk of GoldMoney.com says that silver could double in price sometime this month! Within 28 days! Days!”
She looks at me with a cold stare, and in a whispered monotone, asks, “So, are you saying that you will be gone in 18 days?”
Suddenly, my instinct for survival kicks in, and I lash out like a cornered rat. I yell, “Not soon enough to suit either one of us, I’m sure! But soon!”
Then, with a sudden flash of brilliance born of desperation and a complete lack of imagination, I abruptly shouted, “And now, Zorro away!”
With that surprising Zorro-thing coming out of left field, I took advantage of her slack-jawed surprise by abruptly leaping to my feet and then reaching over her desk to scrawl a big “Z” across her blotter with my pen.
Then, throwing open the door with a mighty theatrical flourish, I bounded, bounded, bounded out of her office, shouting, “Zorro says buy silver, silver, silver, you morons!”
My seemingly strange, desperation-driven theatrics in response to the threat of financial annihilation due to cutbacks and my being given the “heave-ho” must seem extreme to the British, who are handling things with stoicism and their fabled “stiff upper lip,” as Bill Bonner makes clear with a really funny metaphor. He says, “So far, the British public is taking the news like a donkey informed about original sin.” Hahaha! Very clever! And illustrative!
It was sort of like my boss getting the news about Zorro recommending silver!
However resolutely staunch the British remain in the face of misery, she recovered pretty quickly, but I was out of the office all afternoon and missed her calls as I was taking a little “personal time” to buy more gold, silver and oil because, while it is difficult to pin down exactly when cataclysmic inflation and economic destruction will happen because the foul Federal Reserve is creating too much new money, the good idea to buy gold, silver and oil to capitalize on such absurd monetary insanity is so easy that I say, as I always do, “Whee! This investing stuff is easy!”
The Mogambo Guru
for The Daily Reckoning
http://dailyreckoning.com/when-the-price-of-silver-doubles-in-a-month/
No Cutting Back: The Bernanke Money Printing Story
By Bill Bonner
11/03/10 Delray Beach, Florida – We had a brush with democracy yesterday. Very unpleasant. Elizabeth went to vote. Her husband accompanied her.
“Do you really think your vote will make a difference?” we asked as we headed for the polling station.
“No, but if everyone took your point of view we couldn’t have a democracy at all.”
“Wouldn’t that be a good thing?”
“I’m not going to get into a big discussion with you. I’m doing what I think I should as a good citizen. That’s all there is to it.”
The polling station was manned by women. Old women. About 8 of them. There was one old man at the door. There were more attendants than voters when we went in at about 1PM. It was quiet. Still. Of course, this was Florida. But the geriatrics made us think that the whole thing was about to go into terminal care. American democracy, that is.
There was no excitement. No energy. It was as if the election didn’t really matter. As if the results had already been decided. Voters came in. They did what they saw as their civic duty – each one of them hoping to cast the decisive vote and turn the nation into the country he wanted it to be. One wanted prayer in the schools. Another wanted more free pills and drugs. Another wanted to cut spending and close the borders to new immigrants. In California, they want to legalize pot. “Yes we cannabis!” In Oklahoma, they want to forbid state courts from making reference to Islamic Sharia law.
“I just voted for the Tea Party candidates…” Elizabeth reported. “And as for all the other initiatives…sometimes I couldn’t understand what they were really up to. When in doubt, I voted no.”
Elizabeth does not seem to like that “hopey, changey thing” given to us by the Obama Administration. Whether she will like it when the Tea Party takes back America, we don’t know…and we probably will never find out.
And so Election Day passed. And no one got what he wanted. As the private interests, special claims and personal prejudices got put together, crossbred and propagated, one with another, they gave birth to a grotesque and ungainly monster – with a thousand heads…and countless thorny tails…a vast, incompetent, extravagant, ugly, lumbering government with something for everyone and no way to pay for it all.
The voters got what none would have voted for – a gargantua with $200 trillion worth of unfunded liabilities.
Congress is gridlocked. Obama is paralyzed. One party wants to cut social spending– rolling back Obama’s health care initiatives, in particular. The other party won’t let them. It wants to cut military spending, instead. Taxes are automatically going up next year. Everyone says it will be bad for the economy. Yet the two parties can’t agree on how to stop the increases. One wants higher taxes on the rich. The other wants lower taxes for everyone. Here at The Daily Reckoning, we are usually in favor of gridlock in Washington. But not when a tax increase is on the way!
If this were Greece or Ireland the government would be forced to cut back. The politicians would have no choice. The markets would speak. They would have to listen. For where else would they get more money to squander?
But now…with quantitative easing ready…there is no need to face the music. The band has gone as silent as a polling station. If bond buyers will not finance America’s trip to bankruptcy, the Fed will provide as much brand, spanking new money as necessary.
Ben Bernanke is supposed to make the announcement later today. In a stroke, he will undermine the foundations of representative democracy all together. The peoples’ representatives are supposed to decide how much money to raise in taxes. They are supposed to decide what the nation can afford and how it should spend its money. Now, Mr. Ben Bernanke pays the fiddler and calls the tune. Who can say the nation can’t afford more health care? Another war? Free cannabis for everyone? Ben Bernanke can create the money – out of nothing!
He’ll probably announce a big enough number so as not to disappoint the markets. But he won’t be too specific as to when or how…he’ll need to leave the speculators guessing…and leave himself some room to maneuver.
What the heck, the markets absorbed $1.7 trillion of this QE in the last go ’round. It didn’t do any harm, did it? On the evidence, it didn’t do much good either. The money went into the banks and didn’t come out. They could probably take another $1 trillion or so without getting completely saturated. Who knows? If the Fed wanted, it could finance the entire US federal budget deficit…or eliminate the need for taxes completely.
Now, if the economy improves…Bernanke will claim credit. If it doesn’t, well…at least he tried!
And so, investors played it cool yesterday, waiting to see what would happen at the polls and at the Fed. Gold rose $6. Stocks rose 64 points on the Dow.
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/no-cutting-back-the-bernanke-money-printing-story/
9 Reasons Why Quantitative Easing Is Bad for the U.S. Economy
by: Michael T. Snyder November 04, 2010
Buckle up and hold on - a new round of quantitative easing is here and things could start getting very ugly in the financial world over the coming months. The truth is that many economists fear that an out of control Federal Reserve is "crossing the Rubicon" by announcing another wave of quantitative easing. Have we now reached a point where the Federal Reserve is simply going to fire up the printing presses and shower massive wads of cash into the financial system whenever the U.S. economy is not growing fast enough? If so, what does the mean for inflation, the stability of the world financial system and the future of the U.S. dollar? The Fed says that the plan is to purchase $600 billion of U.S. Treasury securities by the middle of 2011.
In addition, the Federal Reserve has announced that it will be "reinvesting" an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities over the same time period. So that is a total injection of about $900 billion. Perhaps the Fed thought that number would sound a little less ominous than $1 trillion. In any event, the Federal Reserve seems convinced that quantitative easing is going to work this time. So should we believe the Federal Reserve?
The truth is that the Federal Reserve has tried this before. In November 2008, the Federal Reserve announced a $600 billion quantitative easing program. Four months later the Fed felt that even more cash was necessary, so they upped the total to $1.8 trillion.
So did quantitative easing work then?
No, not really. It may have helped stabilize the economy in the short-term, but unemployment is still staggeringly high. Monthly U.S. home sales continue to come in at close to record low levels. Businesses are borrowing less money. Individuals are borrowing less money. Stores are closing left and right.
The Fed is desperate to crank the debt spiral that our economic system is now based upon back up again. The Fed thinks that somehow if it can just pump enough nearly free liquidity into the banking system, the banks will turn around and lend it out at a markup and that this will get the debt spiral cranking again.
The sad truth is that the Federal Reserve is not trying to build an economic recovery on solid financial principles. Rather, what the Federal Reserve envisions is an "economic recovery" based on new debt creation.
So will $900 billion be enough to get the debt spiral cranked up again?
No.
If 1.8 trillion dollars didn't work before, why does the Federal Reserve think that 900 billion dollars is going to work now? This new round of quantitative easing will create more inflation and will cause speculative asset bubbles, but it is not going to fix what is wrong with the economy. The damage is just too vast as Charles Hugh Smith recently explained....
Anyone who believes a meager one or two trillion dollars in pump-priming can overcome $15-$20 trillion in overpriced assets and $10 trillion in uncollectible debt may well be disappointed.
In fact, economists over at Goldman Sachs estimate that it would take a staggering $4 trillion in quantitative easing to get the economy rolling again.
Of course that may eventually be what happens. The Fed may be starting at $900 billion just to get the door open. With these kinds of bureaucrats, once you give them an inch they usually end up taking a mile.
So why should we be concerned about quantitative easing? The following are 9 reasons why quantitative easing is bad for the U.S. economy....
#1 Quantitative Easing Will Damage The Value Of The U.S. Dollar
Each time you add a new dollar to the system, it decreases the value of each existing dollar by just a little bit. Now the Federal Reserve is pumping 900 billion dollars into the system and that is going to have a significant impact. Bill Gross, the manager of the largest mutual fund in the entire world, said on Monday that he believes that more quantitative easing could result in a decline of the U.S. dollar of up to 20 percent....
I think a 20 percent decline in the dollar is possible.
#2 Inflation Is Going To Hit Already Struggling U.S. Consumers Really Hard
Already, investors have been fleeing from the U.S. dollar and other paper currencies and have been flocking to commodities, precious metals and oil. That means that the price of food is going to go up. The price of gasoline is also going to go up. American families are going to find their budgets stretched even more in the months ahead.
#3 Once An Inflationary Spiral Gets Going It Is Really Hard To Stop
The Federal Reserve is playing a very dangerous game by flirting with inflation. Once an inflationary spiral gets going, it is really difficult to stop. Just ask anyone who lived through the Weimar Republic or anyone who lives in Zimbabwe today. If the Federal Reserve is now going to be dumping hundreds of billions of fresh dollars into the system whenever the economy gets into trouble it is inevitable that we will see rampant inflation at some point.
#4 Inflation Is A Hidden Tax On Every American
Tens of millions of Americans have worked incredibly hard to save up a little bit of money. These Americans are counting on that money to pay for a home, or to pay for retirement or to pay for the education of their children. Well, inflation is like a hidden tax on all of those savings. In fact, inflation is a hidden tax on every single dollar that all of us own. We have been taxed more than enough - we certainly don't need the Federal Reserve imposing another hidden tax on all of us.
#5 The Solution To The Housing Bubble Is Not Another Housing Bubble
Today, approximately a third of all U.S. real estate is estimated to have negative equity. The Federal Reserve apparently believes that by flooding the system with gigantic sacks of cash banks will start making home loans like crazy again and home prices will rise substantially once again - thus wiping out most of that negative equity.
But the solution to the housing bubble is not another housing bubble. The kinds of crazy home loans that were made back in the middle of the decade should never be made again. Market forces should be allowed to bring the housing market to a new equilibrium where ordinary Americans can actually afford to purchase homes. But that is not how our system works anymore. Today, everything has to be manipulated.
#6 More Quantitative Easing Threatens To Destabilize The Global Financial System
We have already entered a time of increasing global financial instability, and the Federal Reserve is not going to help things by introducing hundreds of billions of new dollars into the game. Over the past two decades, bubble after bubble has caused tremendous economic problems, and now all of this new money could give rise to new bubbles. Already, we see financial institutions and investors pumping up carry trade bubbles, engaging in currency speculation and driving up commodity prices to ridiculous levels.
#7 Quantitative Easing Is An Aggressive Move In A World Already On The Verge Of A Currency War
Quantitative easing will likely help U.S. exporters by causing the value of the U.S. dollar to sink. However, this gain by U.S. exporters will come at the expense of foreigners. It is essentially a "zero sum" game. So all of those exporting countries that are already upset with us will become even more furious as the U.S. dollar declines. Could we witness the first all-out "global currency war" in 2011?
#8 Quantitative Easing Threatens The Status Of The Dollar As The World Reserve Currency
As the Federal Reserve continues to play games with the U.S. dollar, quite a few nations around the globe will start evaluating whether or not they want to continue to trade with the U.S. dollar and use it as a reserve currency.
In fact, a recent article on The Market Oracle website explained how this is already happening....
In September, China supported a Russian proposal to start direct trading using the yuan and the ruble rather than pricing their trade or taking payment in U.S. dollars or other foreign currencies. China then negotiated a similar deal with Brazil. And on the eve of the IMF meetings in Washington on Friday, Premier Wen stopped off in Istanbul to reach agreement with Turkish Prime Minister Erdogan to use their own currencies in a planned tripling Turkish-Chinese trade to $50 billion over the next five years, effectively excluding the dollar.
#9 It Is Going To Become More Expensive For The U.S. Government To Borrow Money
Right now, the U.S. government has been able to borrow money at ridiculously low interest rates. But as the Federal Reserve keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world is going to start refusing to participate in the ongoing Ponzi scheme.
Peter Schiff, the CEO of Euro Pacific Capital, says that one of the big reasons for more quantitative easing is because the U.S. government is already starting to have difficulty finding enough people to borrow from....
At the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem.
But the truth is that foreigners are not stupid. They can see the shell game that is being played. As Bill Gross noted on Monday, U.S. government debt will soon become a lot less attractive to foreign investors....
QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices.
As foreigners begin to balk at all of this nonsense, the U.S. government will either have to start paying higher interest rates on government debt in order to attract enough investors, or the Federal Reserve will just have to drop all pretense and permanently start buying up most of the debt. Either way, once faith has been lost in U.S. Treasuries the financial world will never, ever be the same.
Most Americans have absolutely no idea how fragile the world financial system is right now. Once the rest of the world loses faith in the U.S. dollar and in U.S. Treasuries this entire thing could completely unravel very quickly.
The Federal Reserve is playing a very dangerous game. They are openly threatening the delicate balance of the world financial system.
http://seekingalpha.com/article/234666-9-reasons-why-quantitative-easing-is-bad-for-the-u-s-economy?source=email_the_macro_view
Private Sector Debt Burden About to Get More Burdensome
By Bill Bonner
11/02/10 Baltimore, Maryland – Guess what happened yesterday?
Nothing. The Dow rose 6 points. Gold fell $7.
Investors are holding their breath. Why? Because Ben Bernanke is scheduled to make history on Wednesday. Everyone sits on the edge of his chair and wants to know what kind of history he'll make.
"Some Enchanted Easing," is how The Financial Times describes it.
The FT thinks the latest quarterly growth figures – 2% – are simply too low for the nation to live with.
"US recovery remains sluggish," was their headline. "Case for fresh quantitative easing cemented."
The problem with 2% growth is that it is not enough to lift employment rates. The economy needs to create about 50,000 jobs per month just to keep up with population growth. That's about what you can do at 2% GDP growth.
But when you're at nearly 10% unemployment, you need to do better than that. It's not enough to stay even. Otherwise, you have to live with the drag caused by millions of people without work. These jobless people need to be housed, and fed, and medicated. So you end up with an economy that actually gets poorer.
Yes, that's part of the problem. The way the economy is rigged up, the private sector has to support a big public section…one that gets heavier every day. If growth is sluggish, the whole economy slips, even with positive GDP numbers. Without powerful growth the feds don't collect much in taxes…and run huge deficits. This increases the debt burden on the few people who are carrying all the load – people working in the private sector at non-zombie, wealth-producing activities.
And here's a shocker… The debt level per private sector worker – the people who have to pay the bills – will nearly double between 2007 and 2015. Yes, a new study done by a former IMF economist found that government debt levels are soaring – in the "rich" nations. They are soaring at a particularly fast rate in the USA, which will go from the 11th heaviest debt per private sector employee in 2007 to the third heaviest by 2015.
What's going on? The Baby Boomers are retiring. They're making a big transition from being a source of financing to becoming a source of spending. Instead of paying the bills, in other words, they're becoming the people for whom the bills are paid.
And that will leave the typical private sector worker in 2015 with $68,500 as his share of the government debt. We're not talking fiscal gap here. This is debt…interest bearing debt.
It doesn't include, for example, state level pension liabilities…which now tote to over $5 trillion alone. Nor does it include all the other unfunded liabilities and promises of state, local and federal governments – which, according to Laurence Kotlikoff – come to more than $200 trillion.
Without robust "growth"…those liabilities too are going to come crashing down on the heads of the feds…and everyone else.
Which brings us back to poor Ben Bernanke. His seat must be so hot it scorches his derriere.
"Fed poised for biggest decisions in decades," says another FT headline.
"Given the committee's objectives, there would appear, all else being equal to be a case for further action," Ben Bernanke said himself a few weeks ago.
And so, he's going to go for it. How much? Probably open-ended. How soon? Probably right away. How effective? Whew…you're asking too much, dear reader.
But what the heck, we'll take the bait. How effective will the Fed's new money-printing be?
It will be a total failure. A disaster.
Bill Bonner
for The Daily Reckoning
http://dailyreckoning.com/private-sector-debt-burden-about-to-get-more-burdensome/
The PIIGS Crisis Is Back: Here Are 4 Key Things To Think About
Posted Nov 02, 2010 09:02am EDT by Joe Weisenthal in Recession
Provided by the Business Insider:
A few things to think about this morning...
* Shockingly, despite the fact that we're on the verge of a new PIIGS crisis, the euro is totally unmoved. It's been moored to this $1.39-$1.40 range forever, in sharp contravention to the stomach-churning declines it experienced during the first PIIGS crisis. What's going on? Is it that, despite the structural issues facing the eurozone, the ECB doesn't have a good mechanism for weakening its currency?
* It's obvious that the best economic decision the UK ever made was not joining the euro. Its ability to print/weaken its own currency has been huge, and it's the prime reason that it's not in as bad shape as Ireland.
* Austerity has proven to be a huge flop in Ireland and Greece. That's clear now. Despite budget cutting the deficit situation hasn't done any worse. We said back in August that this would be a huge story this autumn, and we were correct.
* It's not clear that a rescue will be so easy this time around. This isn't just about yields blowing out to unsustainable highs. There are fears now that the governments on the periphery, especially in Ireland and Greece will run out of cash. These countries will need new bailouts, beyond just ECB interention to get through.
http://finance.yahoo.com/tech-ticker/article/535559/The-PIIGS-Crisis-Is-Back%3A-Here-Are-4-Key-Things-To-Think-About
Have We Become a Nation of Zombie Households?
by: Annaly Salvos October 31, 2010
Thursday's third quarter GDP release provides a ton of fodder for the data dorks among us. There will be more to follow on this in the October monthly commentary, but today we'll look at just one of the stand-out drivers of GDP in Q3: private residential investment. The chart below (click to enlarge) shows its astounding rebound, which added a full 0.53% to the 3.5% GDP number.
The percentage change becomes less impressive when viewed in the context of the dollar level of activity, but it also starts to look like the beginning stages of a typical recovery in housing. Compare the current reading to the previous bust in the late 1980s and subsequent boom that began in 1991. Are we in store for a similar road back to "normal"?
How comparable are the two situations, the early 1990s and the late 2000s? What happened in 1991 to help put in a bottom? First, mortgage rates came down from over 10% in 1990 to 7% by 1993. Second, household debt as a percentage of GDP was 60% in 1990. The ratio of household liabilities to disposable personal income was 85%. The respective levels of these metrics are now 95% and 130%, each at or very near all-time records of indebtedness.
The tailwinds for the housing market were substantial in the early part of the previous decade: interest rates were coming down and borrowers had room to expand their debt loads. The official response during this crisis has been an attempt to artificially engineer the same tailwinds that existed naturally before. The Federal Reserve has purchased around $977 billion of agency MBS in an attempt to bring mortgage rates lower (despite already historically low rates). Tax credits have been created and expanded to incent already heavily-indebted households to take on more debt. So far, it's worked! (click to enlarge)
We'll close with a great quote from James Aitken, of Aitken Advisors, that sums up the situation perfectly:
The primary difference between Japan and the United States at this point of their respective monetary malaises is that whereas Japan created a nation of zombie corporations, the United States is creating a nation of zombie households.
http://seekingalpha.com/article/233493-have-we-become-a-nation-of-zombie-households?source=email_the_macro_view
Why the Great Recession Continues
by: Howard Richman November 01, 2010
A depression continues until real GDP surpasses pre-depression levels and keeps rising. The United States did not climb out of the Great Depression until 1939, though it almost climbed out in 1937 as shown in the graph below:
Similarly, the United States is still locked in the Great Recession and will not be out of it until it surpasses the level Real GDP reached in the fourth quarter of 2007, as shown in the graph below:
The preliminary results for Real GDP for the third quarter of 2010, just released on October 29, show why the American economy is staying in the Great Recession. The growth in real GDP was just 2.0% due to the growing trade deficit subtracting a full 2.0% from GDP growth. The components of GDP growth were the following:
Component Contribution to Growth
Consumption 1.8%
Fixed Investment 0.1%
Government Purchases 0.6%
Inventories 1.4%
Foreign Trade -2.0%
Total 2.0%
As can be seen from the table, consumption spending contributed 1.8% to GDP growth and inventories, perhaps due to businesses stocking up on commodities, contributed 1.4% to growth, while the trade deficit subtracted 2.0% from U.S. economic growth. If not for the growing trade deficit, U.S. economic growth would have been 4.0%.
The results for the second quarter were quite similar. Total growth in GDP was 1.7% with the growing trade deficit subtracting 3.4% from economic growth. If not for the growing trade deficit, U.S. economic growth would have been 5.1%, and President Obama would have had the "recovery summer" that he needed in order to preserve his party's majorities in the House and Senate.
The current Congress's decision to tolerate growing trade deficits has kept the United States in a depression since the fourth quarter of 2007. If polls are correct, the electorate is about to throw enough incumbents out of office to greatly change the congressional makeup in 2011. Hopefully, the new Congress will pass a scaled tariff to balance trade and get us out of this depression. If not, then they will deserve to be thrown out of office in 2012.
But it would be wrong to just blame Congress. The President has the authority to impose tariffs without even being required to consult with Congress. And the Federal Reserve is busy producing inflation to reduce American savings, when it should be advising Congress and the President to reduce the foreign savings that pour into this country with our trade deficits. The scaled tariff would increase American exports and reduce American imports. But they prefer budget deficits and inflation. Our economic leadership is overflowing with incompetence.
Disclosure: No positions
http://seekingalpha.com/article/233741-why-the-great-recession-continues?source=email_the_macro_view
The Calm Before the Storm: Are We Approaching a Turning Point for the U.S. Economy?
by: Michael T. Snyder November 01, 2010
An eerie calm has descended upon world financial markets as they await perhaps the two most important financial events of the year this week. On Tuesday, investors will be eagerly awaiting the results of one of the most anticipated midterm elections in U.S. history. On Wednesday, the Federal Reserve is expected to end months of speculation by formally announcing the details of a new round of quantitative easing. If either the election or the meeting of the Federal Reserve open market committee delivers a highly unexpected result, it could have a dramatic impact on world financial markets. In fact, many are looking at this week as a potential turning point for the U.S. economy. The decisions that are made or not made this week could set us down a road from which the U.S. economy may never recover.
At this point, it looks like the Republicans will take control of the U.S. House of Representatives and will pick up a number of U.S. Senate seats as well.
There are many in the financial world who already consider Barack Obama to be the most "anti-business" president in U.S. history, so a defeat for the Democrats on Tuesday would be greatly welcomed by many on Wall Street. Barack Obama's decline in popularity since he was elected has been absolutely stunning. According to Gallup, Barack Obama had an average approval rating of just 44.7% during the seventh quarter of his presidency, which was a brand new low. In fact, Obama's average approval rating has fallen during every single quarter since he took office. Things have gotten so bad for Obama that one new poll has found that 47% of Democrats now think that Barack Obama should be challenged for the 2012 Democratic presidential nomination.
However, if the Democrats were able to do surprisingly well on Tuesday, it would not only shock the political pundits, but it would also likely put world financial markets in a very bad mood.
If the Republicans do very well on Tuesday, it will likely mean that there will be no more extensions for those receiving long-term unemployment benefits. Some state governments are already anticipating this and are making preparations. For example, armed security guards are now being posted at all 36 full-service unemployment offices in the state of Indiana. It is estimated that approximately 2 million Americans will lose their unemployment insurance benefits during this upcoming holiday season if Congress does not authorize another emergency extension of benefits by the end of November. If the Republicans do very well on Tuesday, it would make it much more likely that the extension will not happen.
But if millions of unemployed Americans suddenly find themselves without any unemployment checks, that is only going to cause anger and frustration to grow.
Either way, the unfortunate truth is that this election is not going to change much.
Over the past five elections, incumbents have been re-elected to the U.S. House of Representatives at an average rate of 96 percent.
This time will be a little different of course, but not that much different. The sad truth is that we are still likely to see about 80 percent of the exact same faces going back to the U.S. Congress for the next session.
However, even if the American people could somehow vote out every single member of Congress, it would still not do much to fundamentally change our economic situation because the U.S. Congress does not run the economy ,and neither does the President.
Of course both of those institutions can influence the U.S. economy, but it is actually the Federal Reserve that runs the economy.
The Federal Reserve controls the money supply. The Federal Reserve controls our interest rates. If the U.S. government wants more money it has to go get it from the Federal Reserve. It is the Federal Reserve that is tasked with the mandate of keeping unemployment low while also keeping inflation at a "reasonable" level.
But these days, Federal Reserve officials don't really seem to be that concerned about the dangers of inflation. In fact, several top Federal Reserve officials have come out in recent weeks and have made public statements not only advocating more quantitative easing, but also suggesting that inflation is not a danger because it is actually "too low" right now.
In fact, there have been some rumblings that many officials at the Fed would actually welcome more inflation because they think that it would somehow stimulate the economy. In fact, a Federal Reserve paper that was released in September actually floated the idea that a spike in oil prices would be quite good for the U.S. economy.
And these are the people running our economy?
Are we all caught in an episode of The Twilight Zone?
Well, as far as rising oil prices are concerned, the Fed will almost surely get its wish. As I have written about previously, the price of oil is almost certainly heading to 100 dollars a barrel.
But if the price of oil shoots up, isn't that going to cause significant inflationary pressure on the prices of thousands of other goods and services?
Of course.
Unfortunately, very few of our leaders seem too concerned about inflation or about protecting the value of the U.S. dollar these days. In fact, now even the IMF is publicly proclaiming that the U.S. dollar is "overvalued".
What a mess.
But there is another aspect of a new round of "quantitative easing" that the American people really wouldn't like if they could actually figure out what is going on.
You see, the truth is that "quantitative easing" is not only just a way to stimulate the economy, it is also a way to give backdoor bailouts to the big banks without having to go through the U.S. Congress.
In a previous article, I described how this works....
1) The big U.S. banks have massive quantities of junk mortgage-backed securities that are worth little to nothing that they desperately want to get rid of.
2) They convince the Federal Reserve (which the big banks are part-owners of) to buy up these "toxic assets" at significantly above market price.
3) The Federal Reserve creates massive amounts of money out of thin air to buy up all of these troubled assets. The public is told that all of this "quantitative easing" is necessary to stimulate the U.S. economy.
4) The big banks are re-capitalized and have gotten massive amounts of bad mortgage securities off their hands, the Federal Reserve has found a way to pump hundreds of billions (if not trillions) of dollars into the economy, and most of the American people are none the wiser.
Now how do you think the American people would feel about "quantitative easing" if they really understood all this?
But unfortunately, most Americans will be watching the election results on Tuesday night without having even a basic understanding of how our economy is really run.
Already, there are a ton of signs that the U.S. economy is heading in a very bad direction, and dumping a handful of Congress critters out of office might feel good, but it isn't going to do much to really change our economic problems.
The American people desperately need to be educated about how our financial system really works. But unfortunately, most Americans will likely not wake up until the whole house of cards comes crashing down.
http://seekingalpha.com/article/233749-the-calm-before-the-storm-are-we-approaching-a-turning-point-for-the-u-s-economy?source=email_the_macro_view
U.S. Economy: Be Careful What You Wish For
by: John Mauldin October 31, 2010
It's Softer Than It Looks
The GDP number came in at a rather soft 2% growth, up slightly from last quarter's 1.7%. From the standpoint of creating new jobs, 2% just doesn't cut it. We need about 100,000-125,000 new jobs a month just to keep up with population growth, and a 2% GDP will not give us half that, as we saw last quarter. Most economists say you need about 3.5% GDP growth to get solid job reports.
And the prospect for getting that robust a number any time soon is not looking good, as the soft number mentioned above looks even softer when you delve into the details. 70% of the total growth in GDP came from growth in inventories, up by over 40% from the second quarter. Now normally a build in inventories is a positive, as it shows confidence on the part of businesses. But business confidence surveys have not been all that good, which suggests that businesses may be cautious, as this cycle does not seem to resemble past cycles.
(Well, except for Apple (AAPL). Everyone's going to get an iPad for Christmas. You haven't got one? It is so way cool. My new favorite toy and fast becoming an indispensable business tool.)
How likely are we to see that same type of growth in inventories in the last quarter? Not very, I think.
Sidebar: For the non-geek reader, when inventories are increasing, that is a "plus" for GDP. When those inventories are sold, that reduces GDP. That may seem backwards, but that is just the way the math works. So if inventories are sold in the 4th quarter (think Christmas sales), that will be a drag on the GDP numbers.
In every previous post-recession cycle, GDP growth would typically be around 5% at this time. But this is not a business-cycle recession; it's a deleveraging, credit-crisis recession. Thankfully, those do not show up all that often, but sadly one has come home to roost in much of the developed world this decade. The aftermath of credit-crisis recession is a slow growth period of 6-8 years, punctuated by more volatility and more frequent recessions.
What economists call the "final sales" portion of GDP has just been growing at less than 1% over the last 18 months. That is a lukewarm number, to say the least. That is not the stuff of a strong GDP.
And export growth is slowing, which rather surprises me, as the dollar has been weaker. If imports rise and exports do not rise as much, as has been the case, that is a drag on GDP. State and local governments reduced GDP by 0.2%, and this12 % of the economy is likely to be under continued pressure, not adding to GDP for quite some time.
It would not surprise me to see GDP growth be closer to 1% in the 4th quarter, unless we start to see evidence of more inventory building. That is not good for jobs, personal income, tax collections needed to cover deficits at all levels, or consumer confidence. My worry is, what if we get some kind of shock to our economic body when growth is so anemic?
Not Finer for the "99er"
I had dinner last Sunday night with David Rosenberg. He is beginning to look at the possible effects from what he calls the "99ers" going off extended unemployment benefits. I knew this was coming but had not really looked into the fine print. He wrote me later:
"The looming expiry of the emergency unemployment benefits in the U.S. poses a very large risk to aggregate personal income over the next few quarters. Currently, combined with state programs, someone who loses their job is entitled to 99 weeks of unemployment benefits (a "99er"). However, the extended benefits are set to expire on November 30th, and our back-of-the-envelope calculations shows nearly a million 99ers will be cut off in December alone, with the remainder (about 3 to 4 million) falling off the rolls by April.
"Given that the average weekly unemployment cheque is about $300/week, this amounts to nearly $80 billion (annualized) loss of aggregate income over the next few quarters. This means that personal income could fall by 1.0% QoQ annualized for each of the next three quarters, starting in Q4. The 2% QoQ real GDP estimates pencilled in for Q4 2010 to Q2 2011, will look far too optimistic if such a loss of income does occur. Given that material downside risk to growth going forward, we intend to do more detective work on this file."
Government checks of one form or another are about 20% of total personal income in the US. Will the lame-duck Congress extend those benefits? Will they extend the Bush tax cuts? I just (literally) got off the phone with Suze Orman. She said she thinks they should raise the limit to $500,000 or $1 million. That higher number would be a reasonable compromise, in my humble opinion. Will the Republican Congress and Senate agree when they come back?
I don't want to get into the small-business person making $300,000 and living in a very volatile business climate where they feel the need to save rather than invest and create new jobs. These guys need all the working capital they can get. And let's be clear, this year's "profits" becomes next year's working capital when you are a small business owner. Your credit line at the bank just isn't cutting it anymore.
Be Careful What You Wish For
Everyone by now is predicting the Republicans to take the House and pick up anywhere from 6-8 Senate seats. We'll see. This is going to be a very interesting election, as there is a whole new dynamic in place.
Let's look down the road. I think we will at best be in a Muddle Through Economy for the next two years. Unemployment is going to be above 8%, best-case, in 2012. If the Bush tax cuts are not extended, in my opinion it is almost a lock that we go into recession next year, unemployment goes to 12%, and underemployment gets even worse. That is not a good climate for Obama and the Democrats in 2012. It is especially bad when you look at the number of Democratic Senate seats up for re-election that are in conservative states. The Republicans could take a serious majority in the Senate.
And then what? Right now Republicans are running on promises that they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes.
There are only the two options. Yes, you can reform medical care, and I think much of Obamacare should certainly be repealed, but that does not get us anywhere close to dealing with the real issue, and that's a fact. There are tens of trillions of unfunded liabilities in our future, which must be dealt with.
Let me be very clear on this. I am not really worried about the supposed $75 trillion in unfunded Medicare liabilities in our future. That is an impossible number. If something can't happen it won't happen. Long before we get to that apocalypse, we find a bond market that simply refuses to fund US debt at anywhere near an affordable cost. Crisis and chaos will ensue.
People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.
- Jean Monnet
The simple reality is that if We the People of the US want Medicare, in even a reformed and more efficient manner, we must find a way to pay for it. It will not be cheap. Raising income taxes on the "rich" is not enough. You have to go back and raise income taxes on the middle class, too. Oh, wait, that will be a drag on the economy and consumer spending. And in any event it will not be enough.
The only real way to pay for those benefits will be a value-added tax, or VAT. And while it could be introduced gradually, let there be no mistake that it will be a drag on economic growth. Government spending does not have a multiplier effect on the economy. It is, at best, neutral. What creates growth is private investment, increases in productivity, and increases in population. That's it. Tax increases have a negative multiplier.
A significant VAT along with our current income taxes will give us an economy that looks more like the slow-growth, high-unemployment world of Europe. Can we figure out how to deal with that? Sure. But it is not growth-neutral.
Republicans in 2013 will be like the dog that caught the car. What do you do with it? The last time they (embarrassingly, we) really screwed it up. The defining political question of this decade will not be Iraq or Afghanistan, or the environment or any of a host of other problems. The single most important question will be what do you do with Medicare? Cut it or fund it? Reform it for sure, but reform is not enough to pay for the cost increases that will come from an increasingly aging Boomer generation.
There is no free lunch. At some point, you cannot run on "no cuts in Medicare" and "no new taxes" and be honest. At least not this decade. Maybe when we have cured cancer and Alzheimer's and heart disease and the common cold at some future point, medical costs will go down, but in the meantime we have to deal with reality.
You may be able to fool the voters, but you will not be able to fool the bond market. Not dealing with reality will create a very vicious response. Ask Greece.
And that is the national conversation we must have with ourselves. There is a cost to government. There is a cost to extended Medicare benefits. (I am blithely assuming we deal with all the "easy" stuff like Social Security, and make real cuts in other areas.)
And for my international readers, this is an issue that the entire developed world must deal with. We all have our problems created from years of very poor choices, overleveraging, and deficits. It will not be easy. I must admit to smiling when I see the protests in France over raising the retirement age from 60 to 62. Really? Amazing.
And while France causes me to smile and shake my head, the refusal on the part of the US leadership to give more than lip service to solutions that might disrupt their slim majority of voters is maddening.
This election next week will change very little in real terms, the things that matter, like whether the US economy can grow or will face a very real crisis and a true depression. That potential is in our future, and it is coming at us faster than you think.
http://seekingalpha.com/article/233536-u-s-economy-be-careful-what-you-wish-for?source=email_the_macro_view