“I submit that our spendthrift government, the Federal Reserve System and the TBTF banks together now comprise the paramount political tendency in America today. This tripartite “Alliance of Convenience,” let’s not call it a conspiracy, fits beautifully into the corporatist mold that seems to be America in the 21st Century – but only viewed by the elites in cities like New York and Washington. Many Americans of all political descriptions oppose this corrupt and unaccountable political formulation. I hope and expect that these differences will become even more pronounced as the election approaches next November.
The difference that separates the United States from the rest of the world is the difference which has always divided us, namely our at least theoretical devotion to individual liberty and free markets. Until we break the Alliance of Convenience between the Congress, the Fed and the large, TBTF banks and force our public officials to embrace core American values regarding transparency, insolvency and accountability, we will not in my view find a way out of the crisis. In may ways, the differences that separate the popular view and the views of our political elite have been turned on their heads compared with a century ago, but this does not mean that the debate and resulting political competition for ideas will be any less intense.”
Monday, April 30, 2012
Saturday, April 28, 2012
Real estate agencies are owed a profit
There are probably tens of thousands of these “favors” doled out to constituents. Receivers gain at the expense of non-receivers. In total, the economy is harmed (less goods and services produced) as a result of these programs. There are so many interventions that it is probably impossible to catalog them all and definitely impossible to determine whether any one person or group is a net beneficiary (i.e., getting more than he loses). It is likely that all are net losers because they are beneficiaries in few programs and non-beneficiaries in most.
Perhaps the best way to understand what happens was provided by David Friedman. He described government as a game similar to musical chairs where 10 people sat in a circle and put a dollar behind them. The 11th person, playing the role of government, picked up the $10 and then walked around the circle until the music stopped. The person he stopped nearest to received $5 and then the game was repeated, again and again.
Perhaps the best way to understand what happens was provided by David Friedman. He described government as a game similar to musical chairs where 10 people sat in a circle and put a dollar behind them. The 11th person, playing the role of government, picked up the $10 and then walked around the circle until the music stopped. The person he stopped nearest to received $5 and then the game was repeated, again and again.
Thursday, April 26, 2012
The top line represents actual unemployment
Below is a graph of unemployment. Included are three lines. The middle line represents the Obama Administration forecast of where unemployment would be without the stimulus. The bottom line is where they forecast unemployment to be if the stimulus bill passed. The top line represents actual unemployment. Many projected that the stimulus would actually make matters worse, although this chart does not prove them correct. While the chart proves nothing, it certainly refutes the claims made by the Administration. However, one must be careful concluding that the stimulus “failed” because there are so many other variables in play. The bottom line is that they got what they requested, and results were not as promised. Supporters conclude that conditions were worse than imagined. Detractors say “we told you so.” Neither side can “prove” anything because one does not know where unemployment might be without the stimulus. Clearly, the only thing that might be said definitively is that the Administration either needs to work on its analytical and forecasting tools or be more cautious with projections in the future. Once again the colorful John Kenneth Galbraith’s observation on economic forecasting is worth noting: “The only function of economic forecasting is to make astrology look respectable.”
Monday, April 23, 2012
Refinance debt
Just ten weeks after the new budget, California is going deeper into the red. For years states have been using various accounting gimmickry to meet legal budget limits. All of this profligacy and coverup is now being revealed in this downturn.
Several points might be relevant here. California is probably not salvageable because the Feds cannot afford to bail them out along with the other states in similar condition. Even now, states and the Federal government seem unable or unwilling (probably the latter) to recognize the magnitude of the economic crisis. The strategy of wallpapering over the cracks caused by the sinking foundation still
Several points might be relevant here. California is probably not salvageable because the Feds cannot afford to bail them out along with the other states in similar condition. Even now, states and the Federal government seem unable or unwilling (probably the latter) to recognize the magnitude of the economic crisis. The strategy of wallpapering over the cracks caused by the sinking foundation still
Sunday, April 22, 2012
Destroying any residual value
Bernanke‘s backdoor tricks to support the growing deficits via stealth Quantitative Easing can no longer be hidden. Things must be really getting desperate over there. They usually wait 3 or 4 days before doing what they deny they are doing. This latest example took all of 30 minutes! Is funding getting so desperate that they couldn’t have waited a day or two?
From Zero Hedge the following quote and story:
“We hope that as Bloomberg and other MSM conduits disseminate this and other relevant stories, that more and more people become familiar with the behind the scenes machinations that the Fed is doing, all in its single-minded pursuit of gobbling ever greater amounts of the securities it prints, all with the hidden agenda of destroying any residual value the US currency may have as any confidence that the dollar may be worth anything is promptly refuted by the most recent wave of dollar bills printed by the Chairman.”
From Zero Hedge the following quote and story:
“We hope that as Bloomberg and other MSM conduits disseminate this and other relevant stories, that more and more people become familiar with the behind the scenes machinations that the Fed is doing, all in its single-minded pursuit of gobbling ever greater amounts of the securities it prints, all with the hidden agenda of destroying any residual value the US currency may have as any confidence that the dollar may be worth anything is promptly refuted by the most recent wave of dollar bills printed by the Chairman.”
Friday, April 20, 2012
The dollar’s important role in the system
imothy Geithner, the current Treasury secretary, has tolerated the greenback’s 12 percent slide from its peak this year in March as measured by the Federal Reserve’s trade- weighted Real Major Currencies Dollar Index. While he said as recently as Oct. 3 that “it is very important to the United States that we continue to have a strong dollar,” the last time the U.S. intervened in markets to support its currency was 1995.
The weaker dollar may boost America’s exports as the economy recovers from the deepest recession since the 1930s. The risk is that it may also drive away America’s largest creditors just as the Treasury relies more than ever on foreign investors to buy the bonds financing Barack Obama’s stimulus spending. The dollar’s share of global currency reserves fell in the second quarter to 62.8 percent, the lowest level in at least a decade, the International Monetary Fund in Washington said on Sept. 30.
The weaker dollar may boost America’s exports as the economy recovers from the deepest recession since the 1930s. The risk is that it may also drive away America’s largest creditors just as the Treasury relies more than ever on foreign investors to buy the bonds financing Barack Obama’s stimulus spending. The dollar’s share of global currency reserves fell in the second quarter to 62.8 percent, the lowest level in at least a decade, the International Monetary Fund in Washington said on Sept. 30.
Thursday, April 19, 2012
Inflation isn’t a risk now
Deflation could be the biggest threat to the economy, but gold — usually an inflation hedge — is reaching new highs. That’s because smart investors aren’t playing the inflation trade, they’re buying currency crisis insurance.
With the amount being spent by the public sector, with the huge amounts of leverage still in the system, there’s a palpable fear that America won’t be able to meet its obligations. Relative to GDP, the amount we’re borrowing to finance deficits makes us look irresponsible.
When such economies hit a wall, investors make a run on the currency, typically moving their assets to a stronger currency, like the dollar.
But this time the problem is the dollar, along with other leading paper currencies, all of which are threatened by profligate fiscal and monetary policies. So some investors want out of the system entirely. Gold, as my colleague Neil Collins noted earlier, is a way to do that.
The gold market is small enough that a decision by a handful of money managers to increase their asset allocation from, say, zero to 5 percent can move the market. All the gold ever mined would fit
With the amount being spent by the public sector, with the huge amounts of leverage still in the system, there’s a palpable fear that America won’t be able to meet its obligations. Relative to GDP, the amount we’re borrowing to finance deficits makes us look irresponsible.
When such economies hit a wall, investors make a run on the currency, typically moving their assets to a stronger currency, like the dollar.
But this time the problem is the dollar, along with other leading paper currencies, all of which are threatened by profligate fiscal and monetary policies. So some investors want out of the system entirely. Gold, as my colleague Neil Collins noted earlier, is a way to do that.
The gold market is small enough that a decision by a handful of money managers to increase their asset allocation from, say, zero to 5 percent can move the market. All the gold ever mined would fit
It was a good transaction
By midday, Goldman Sachs and Wachovia were making rapid progress toward completing a deal. Peter Weinberg, Bob Steel’s main adviser and a former Goldman man, had constructed the outlines of an agreement. Just then, Joseph Neubauer, a Wachovia board member and the C.E.O. of Aramark, who was on hand at Goldman, got a call on his cell phone. It was Paulson. “This is not just about Goldman Sachs,” Paulson said, pressing him to do the deal. “I’m concerned about Wachovia. Aren’t you concerned?”
When Neubauer put down the phone, he looked at his fellow directors. “You’re not going to believe this. That was Hank.”
Warren Buffett was at his home in Omaha when he received a phone call from Byron Trott, a vice-chairman at Goldman Sachs. Buffett, who dislikes most Wall Street bankers, adored Trott, a mild-mannered midwesterner based in Chicago. For the past several weeks Trott had been trying in vain to persuade Buffett to make an investment in Goldman, but he had now come up with a new idea. He disclosed to Buffett that Goldman was in talks to buy Wachovia, with government assistance, and wanted to know whether Buffett might be interested in investing in a combined Goldman-Wachovia.
When Neubauer put down the phone, he looked at his fellow directors. “You’re not going to believe this. That was Hank.”
Warren Buffett was at his home in Omaha when he received a phone call from Byron Trott, a vice-chairman at Goldman Sachs. Buffett, who dislikes most Wall Street bankers, adored Trott, a mild-mannered midwesterner based in Chicago. For the past several weeks Trott had been trying in vain to persuade Buffett to make an investment in Goldman, but he had now come up with a new idea. He disclosed to Buffett that Goldman was in talks to buy Wachovia, with government assistance, and wanted to know whether Buffett might be interested in investing in a combined Goldman-Wachovia.
Stuffing the banking system
An excerpt from a very interesting post by Gregor MacDonald that deals with the Inflation-Deflation scenario happening simultaneously. It includes the notion of an inflationary depression. Full piece here.
Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.
Asset reflation therefore, in equities and especially in gold, should be seen not as exuberance but merely as part of the same chaos in pricing unleashed by The Federal Reserve, starting earlier this decade. As so clearly outlined in the recent data on employment, credit demand, consumer spending, and our (in)ability to save there is little to no prospect for a sustained economic recovery for one simple reason: Americans are now trapped by their debt.
For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.
Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.
Asset reflation therefore, in equities and especially in gold, should be seen not as exuberance but merely as part of the same chaos in pricing unleashed by The Federal Reserve, starting earlier this decade. As so clearly outlined in the recent data on employment, credit demand, consumer spending, and our (in)ability to save there is little to no prospect for a sustained economic recovery for one simple reason: Americans are now trapped by their debt.
For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.
The current economic crisis
As discussed rather simply in Econ 301 – Clunker Economics macroeconomics rests on a false premise. Despite its fundamental flaw, it is a wonderful political tool in two ways. First, it provides the intellectual cover for politicians to do what they want to do — spend more money. Second, it provides political cover in the sense that it can be claimed that “we have taken massive ‘corrective’ actions to cure the problem(s).” The fact that a free-market economy is resilient and self-healing enables the scheme to appear to be valid. In that sense, it is almost a perfect scam. Like witch doctors who claim to heal their patients when the mere passage of time is responsible for the cure or the rooster who thinks his crowing brings the sun up, the government takes credit for something that occurred quite naturally. (They never think that the problem might have been caused by their prior actions.) Unfortunately sometimes the well-intentioned witch doctor kills an otherwise healthy patient. We may be at just such a moment in history regarding the current economic crisis.
So long as people hold onto the expectation that recovery could be brought about by fiscal measures, no national consensus can be built to proceed with the painful disposition of nonperforming assets. It is necessary to learn by firsthand experience that fiscal measures are only makeshift. In this context, the enormous fiscal deficit that will be built up in the US in the coming months may be the political cost for consensus building, which would be a replay of what Japan went through in the 1990s.
So long as people hold onto the expectation that recovery could be brought about by fiscal measures, no national consensus can be built to proceed with the painful disposition of nonperforming assets. It is necessary to learn by firsthand experience that fiscal measures are only makeshift. In this context, the enormous fiscal deficit that will be built up in the US in the coming months may be the political cost for consensus building, which would be a replay of what Japan went through in the 1990s.
Tuesday, April 17, 2012
Macroeconomic performance
By now, the problem should be obvious. As pricing power declines, raw materials costs are rising (highlighted by the 65 prices paid number in the August ISM and 63 in September). This should erode margins which were the source of the earnings beats of the 2nd quarter. As prices fall, total revenue will continue to miss expectations. Credit is contracting at historical rates with commercial real estate and option ARM resets looming. Record foreclosures portend future losses and the shutdown of banks at an escalating rate. Credit will not expand soon increasing the likelihood of further price decreases as consumers increase personal savings rates.
The government reflation experiment has ensured that company costs cannot reach equilibrium with weak final goods markets. This is similar to the Great Depression except that artificial wage inflation has been replaced by artificial commodity inflation to create the disequlibrium. To cut rising costs, the only option is to reduce salaried employees, or shut down completely due to losses in core operations. Rising unemployment will create further weakness in final goods. This portends continued macroeconomic performance below trend for a length of time not seen since the Depression. Asset prices will eventually fall to the market solution, government intervention aimed at avoiding this harsh reality will only delay the inevitable and probably assure a more painful destination in the process.
The government reflation experiment has ensured that company costs cannot reach equilibrium with weak final goods markets. This is similar to the Great Depression except that artificial wage inflation has been replaced by artificial commodity inflation to create the disequlibrium. To cut rising costs, the only option is to reduce salaried employees, or shut down completely due to losses in core operations. Rising unemployment will create further weakness in final goods. This portends continued macroeconomic performance below trend for a length of time not seen since the Depression. Asset prices will eventually fall to the market solution, government intervention aimed at avoiding this harsh reality will only delay the inevitable and probably assure a more painful destination in the process.
Where will the foreigners get the money
The on-going deficits forecast for the US cannot be financed out of domestic savings. The shortfall must be covered via foreign funding or the Federal Reserve monetizing the debt. The Fed has announced that its purchase of Treasuries will stop at $300 billion. That limit was reached last week. If one believes the Fed, they are done (monetizing), and the safety net under Treasury auctions has been removed. Without this backstop, there is risk of a failed Treasury auction, an event that could prove cataclysmic to financial markets in this country and around the world. As discussed by Graham Summers:
A little known fact (and one totally ignored by the mainstream media) is that the Fed accounted for nearly half of all Treasury purchases in the second quarter ($164 billion out of $339 billion). In fact, the Fed bought more Treasuries than the next three largest purchasers combined!!
In simple terms, these numbers indicate that if it were not for the Fed, the US Treasury market would have almost assuredly had numerous failed auctions in the second quarter. It also shows us that foreign holders (China, Japan, etc.) are reducing their purchases of US debt at an incredible rate.
The Treasury is scheduled to sell $78 billion in debt obligations this coming week. This number is large historically, but not large in light of recent and forecasted government spending/taxation. Deficits, including off-balance sheet items, will be about $ 2 Trillion this fiscal year. Additionally, about $2 Trillion of existing debt must be re-financed each year. Debt auctions must average about $80 billion per week, week after week after week ad nauseum or ad failed auction.
The dependence of the US on foreign governments to finance our deficit is the Achilles heel of both the dollar and the Treasury bond markets. Will it be possible for the Fed to stop buying Treasuries? Unlikely. If they stop and failed auctions occur, interest rates rise, damaging the housing and economic recovery. If the Fed continues to monetize (buy Treasuries), the dollar will continue to decline, perhaps precipitously. The Fed (and the US government) is nestled uncomfortably between the classic “rock and a hard place.” Chris Martenson’s take on this subject is summarized below:
The US government continues to have impressive borrowing needs, but the Federal Reserve has claimed to be done with its program of buying US government debt.
At the same time, the truly spectacular inflows of foreign dollars into US Treasury paper cannot logically continue forever, especially given the collapse in export markets. There is even some mystery as to how they could have been as large as they’ve been.
Taken together, it would be logical to suspect that US Treasury paper and new debt issuances would come under some pressure, which we would detect as falling bond/note prices and rising yields.
However, that’s not at all what we are currently seeing, as indicated by the 10-year note yielding a paltry 3.2% and recent auctions have had more than three buyers biding for each bond. The question before us is, can we see anything that might cause this to change?
I would submit that the US lacks sufficient domestic savings and productive capacity to finance its fiscal deficits internally so I propose that there are only two paths forward. Either foreigners continue to finance the US deficits, or the Fed will resort to even more printing to cover the shortfall.
Where will the foreigners get the money? Alternatively, how will they react if the Fed simply prints up the difference?
The dollar/bond market is unsustainable for the long-term, but may last for a while longer. It is highly unlikely that foreign Treasury demand will meet US deficit needs. It is even more unlikely that the Fed will allow the government to start bouncing checks. Hence, the Fed will continue monetizing the debt, either openly or surreptiously. Eventually the unsustainable equilibrium represented by today’s dollar and interest rate structure will adjust to reality. Watch these markets closely because the next phase of the crisis will emanate from one or both.
A little known fact (and one totally ignored by the mainstream media) is that the Fed accounted for nearly half of all Treasury purchases in the second quarter ($164 billion out of $339 billion). In fact, the Fed bought more Treasuries than the next three largest purchasers combined!!
In simple terms, these numbers indicate that if it were not for the Fed, the US Treasury market would have almost assuredly had numerous failed auctions in the second quarter. It also shows us that foreign holders (China, Japan, etc.) are reducing their purchases of US debt at an incredible rate.
The Treasury is scheduled to sell $78 billion in debt obligations this coming week. This number is large historically, but not large in light of recent and forecasted government spending/taxation. Deficits, including off-balance sheet items, will be about $ 2 Trillion this fiscal year. Additionally, about $2 Trillion of existing debt must be re-financed each year. Debt auctions must average about $80 billion per week, week after week after week ad nauseum or ad failed auction.
The dependence of the US on foreign governments to finance our deficit is the Achilles heel of both the dollar and the Treasury bond markets. Will it be possible for the Fed to stop buying Treasuries? Unlikely. If they stop and failed auctions occur, interest rates rise, damaging the housing and economic recovery. If the Fed continues to monetize (buy Treasuries), the dollar will continue to decline, perhaps precipitously. The Fed (and the US government) is nestled uncomfortably between the classic “rock and a hard place.” Chris Martenson’s take on this subject is summarized below:
The US government continues to have impressive borrowing needs, but the Federal Reserve has claimed to be done with its program of buying US government debt.
At the same time, the truly spectacular inflows of foreign dollars into US Treasury paper cannot logically continue forever, especially given the collapse in export markets. There is even some mystery as to how they could have been as large as they’ve been.
Taken together, it would be logical to suspect that US Treasury paper and new debt issuances would come under some pressure, which we would detect as falling bond/note prices and rising yields.
However, that’s not at all what we are currently seeing, as indicated by the 10-year note yielding a paltry 3.2% and recent auctions have had more than three buyers biding for each bond. The question before us is, can we see anything that might cause this to change?
I would submit that the US lacks sufficient domestic savings and productive capacity to finance its fiscal deficits internally so I propose that there are only two paths forward. Either foreigners continue to finance the US deficits, or the Fed will resort to even more printing to cover the shortfall.
Where will the foreigners get the money? Alternatively, how will they react if the Fed simply prints up the difference?
The dollar/bond market is unsustainable for the long-term, but may last for a while longer. It is highly unlikely that foreign Treasury demand will meet US deficit needs. It is even more unlikely that the Fed will allow the government to start bouncing checks. Hence, the Fed will continue monetizing the debt, either openly or surreptiously. Eventually the unsustainable equilibrium represented by today’s dollar and interest rate structure will adjust to reality. Watch these markets closely because the next phase of the crisis will emanate from one or both.
Saturday, April 14, 2012
Judgment regarding inflation or deflation
Mish has been a consistent prognosticator that the economic crisis ends in deflation. In a recent post he quotes David Rosenberg who supports his position:
“We are certainly in a deflationary state,” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto. “Of that, there’s no doubt. I think people still have no clue as to just how weak the economy is,” Mr. Rosenberg said.
There are many in both camps of the inflation-deflation battle. Knowing how this ends is important because of the long-run investment implications. I believe that the government, unequivocably, is attempting to engineer inflation. But knowing what they are aiming at is not enough. Their track record in all areas is quite abysmal, rivaling the Keystone Cops. Final results are often 180 degrees from intended.
I believe it is still too early to make a final judgment regarding inflation or deflation. Calls made now are only predictions. As Rosenberg points out, some prices are declining. That, however, is a symptom of deflation rather than deflation itself. Other prices are increasing (symptom of inflation), financial assets being the most obvious . The Fed is flooding the system with liquidity (inflation), while credit implodes (deflation). In the battle between Fed liquidity injections and market credit contraction, the Fed is currently behind. Whether the final score reflects that or not is still moot.
Apparent deflation at this point is not necessarily inconsistent with future deflation or inflation. An unrecognized adjustment downward in the standard of living is often mistaken for deflation. I think a lowered standard of living for this country is inevitable. My guess is that inflation, some time in the future, is also.
“We are certainly in a deflationary state,” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto. “Of that, there’s no doubt. I think people still have no clue as to just how weak the economy is,” Mr. Rosenberg said.
There are many in both camps of the inflation-deflation battle. Knowing how this ends is important because of the long-run investment implications. I believe that the government, unequivocably, is attempting to engineer inflation. But knowing what they are aiming at is not enough. Their track record in all areas is quite abysmal, rivaling the Keystone Cops. Final results are often 180 degrees from intended.
I believe it is still too early to make a final judgment regarding inflation or deflation. Calls made now are only predictions. As Rosenberg points out, some prices are declining. That, however, is a symptom of deflation rather than deflation itself. Other prices are increasing (symptom of inflation), financial assets being the most obvious . The Fed is flooding the system with liquidity (inflation), while credit implodes (deflation). In the battle between Fed liquidity injections and market credit contraction, the Fed is currently behind. Whether the final score reflects that or not is still moot.
Apparent deflation at this point is not necessarily inconsistent with future deflation or inflation. An unrecognized adjustment downward in the standard of living is often mistaken for deflation. I think a lowered standard of living for this country is inevitable. My guess is that inflation, some time in the future, is also.
If the dollar collapses
Those who have been following this blog know that the US dollar is vulnerable. It may be the most important factor in determining an investment strategy over the next couple of years. This conclusion is based upon the mathematical impossibility of servicing government debt and obligations. Either the government must drastically curtail the welfare state (social security, medicare, etc.) or abandon the dollar. Politically, it is considered impossible to do the former. Hence, the most likely outcome is either a continuing or precipitous drop in the value of the US dollar.
Sprott Asset Management has just issued a report entitled “Safe Haven No More” that is a MUST READ. It discusses why they believe the dollar must go down. It is entirely consistent with my reasoning. In the report, they nicely lay out their thought process, including a detailed look at Federal obligations. This is very valuable information because it is important that investors understand the magnitude of the problem the US government has created. Whether or not you agree with the conclusions, it provides a perspective to judge unfolding economic and political events.
Their calculation of debt excludes virtually all stimulus that has not been reflected in the deficit already. Hence, it understates this problem to the extent of guarantees and funds committed but not yet spent. I agree with virtually everything in the report. However, I do not believe that the expected strategy can save the welfare state. If/when the dollar collapses, the welfare state does not suddenly become sustainable. It is the root cause of where we are and must ultimately be dealt with. The government has promised over $100 trillion (present value) dollars in social programs. The total wealth of the country is only around $50 trillion. If they confiscated every dollar of wealth from every citizen, firm, charity, etc. they would still be 50% short of being able to honor their promises. Such social promises are absurd and totally unfundable. They cannot be remedied by trashing the dollar. Hence, trashing the dollar may buy some time but cannot save an overly bloated welfare state. Either these committments will have to be cut drastically or they will be funded via a Zimbabwe-style inflation.
Sprott Asset Management has just issued a report entitled “Safe Haven No More” that is a MUST READ. It discusses why they believe the dollar must go down. It is entirely consistent with my reasoning. In the report, they nicely lay out their thought process, including a detailed look at Federal obligations. This is very valuable information because it is important that investors understand the magnitude of the problem the US government has created. Whether or not you agree with the conclusions, it provides a perspective to judge unfolding economic and political events.
Their calculation of debt excludes virtually all stimulus that has not been reflected in the deficit already. Hence, it understates this problem to the extent of guarantees and funds committed but not yet spent. I agree with virtually everything in the report. However, I do not believe that the expected strategy can save the welfare state. If/when the dollar collapses, the welfare state does not suddenly become sustainable. It is the root cause of where we are and must ultimately be dealt with. The government has promised over $100 trillion (present value) dollars in social programs. The total wealth of the country is only around $50 trillion. If they confiscated every dollar of wealth from every citizen, firm, charity, etc. they would still be 50% short of being able to honor their promises. Such social promises are absurd and totally unfundable. They cannot be remedied by trashing the dollar. Hence, trashing the dollar may buy some time but cannot save an overly bloated welfare state. Either these committments will have to be cut drastically or they will be funded via a Zimbabwe-style inflation.
Reversing course on momentous issues
For investors, markets are tough to navigate even in good times. But these are not good or normal times. Our economy is arguably in the worst shape it has been in 80 years. The financial system still borders on collapse with no apparent remedies to financial system insolvency. The Federal government is hopelessly insolvent, destined to default on its debts and social commitments. Ditto for many state and local governments. The international currency system is unsustainable, and it is difficult to foresee a resolution of this problem that does not disrupt world economies. On top of these negatives, markets appear to be grossly overvalued when viewed in terms of any fundamental metrics. These factors alone are reason to head for the hills or retreat to your figurative investment bunker (cash, gold and foodstuffs).
But it gets worse, possibly much worse. Like the economy, geopolitical problems might also be akin to the 1930′s. Iran openly defies the United States and the world community by continuing its pursuit of nuclear weapons. Its leader appears half-crazed, driven by an apocalyptic vision. Israel believes its very existence is threatened and probably will act if no one else does. Russia is reasserting itself.
But it gets worse, possibly much worse. Like the economy, geopolitical problems might also be akin to the 1930′s. Iran openly defies the United States and the world community by continuing its pursuit of nuclear weapons. Its leader appears half-crazed, driven by an apocalyptic vision. Israel believes its very existence is threatened and probably will act if no one else does. Russia is reasserting itself.
Friday, April 13, 2012
Market properties that are for sale or rent
A study of more than 1,000 foreclosed properties in nine cities found that banks have higher maintenance standards for properties they own in wealthy, predominantly white, neighborhoods than those in low-income ones.
The report by the National Fair Housing Alliance looked at aspects of maintenance and marketing including curb appeal, structure, signage, indications of water damage, and conditions of paint, siding and gutters. Some key findings:
• REOs in communities of color were 42 percent more likely to have more than 15 maintenance problems than properties in White communities.
• In Phoenix, AZ, 73 percent of REO properties evaluated in Latino neighborhoods were missing a “For Sale” sign, while only 31 percent of homes in predominantly White neighborhoods were missing a “For Sale” sign.
• REO properties in communities of color were 82 percent more likely than REO properties in White communities to have broken or boarded windows.
• In Philadelphia, PA, more than 10 distinct maintenance or marketing problems were documented in 41 percent of homes in African-American communities, while none of the properties in White communities had more than 10 maintenance or marketing problems.
• In Oakland, Richmond, and Concord, CA, REOs in the African-American communities were 3.45 times more likely to be missing a “For Sale” sign than their white counterparts.
These findings suggest a violation of the Fair Housing Act, which requires banks, investors or any other responsible party to maintain and market properties that are for sale or rent without prejudice to the residents of a neighborhood.
The group is planning legal action against two unnamed banks, according to the WSJ.
Here's a look at signs of neglect in a black neighborhood in Capitol Heights, Md:
The report by the National Fair Housing Alliance looked at aspects of maintenance and marketing including curb appeal, structure, signage, indications of water damage, and conditions of paint, siding and gutters. Some key findings:
• REOs in communities of color were 42 percent more likely to have more than 15 maintenance problems than properties in White communities.
• In Phoenix, AZ, 73 percent of REO properties evaluated in Latino neighborhoods were missing a “For Sale” sign, while only 31 percent of homes in predominantly White neighborhoods were missing a “For Sale” sign.
• REO properties in communities of color were 82 percent more likely than REO properties in White communities to have broken or boarded windows.
• In Philadelphia, PA, more than 10 distinct maintenance or marketing problems were documented in 41 percent of homes in African-American communities, while none of the properties in White communities had more than 10 maintenance or marketing problems.
• In Oakland, Richmond, and Concord, CA, REOs in the African-American communities were 3.45 times more likely to be missing a “For Sale” sign than their white counterparts.
These findings suggest a violation of the Fair Housing Act, which requires banks, investors or any other responsible party to maintain and market properties that are for sale or rent without prejudice to the residents of a neighborhood.
The group is planning legal action against two unnamed banks, according to the WSJ.
Here's a look at signs of neglect in a black neighborhood in Capitol Heights, Md:
After making a bill payment
After six months of packing my lunch, temptation-proofing my life and obsessively monitoring my bank account, I finally paid off my credit card balance.
I was so excited to make that last payment that I completely forgot I had auto-debits set up every two weeks. As a result, I accidentally paid twice as much as planned, leading to a negative $75 balance.
On Thursday, Bank of America agreed to credit the balance back to my checking account within a few days.
But this morning I'd been hit with a $0.35 finance charge. Thirty-five cents is basically nothing, but I was stumped.
How could I possibly pay interest on an account with a NEGATIVE balance?
I was so excited to make that last payment that I completely forgot I had auto-debits set up every two weeks. As a result, I accidentally paid twice as much as planned, leading to a negative $75 balance.
On Thursday, Bank of America agreed to credit the balance back to my checking account within a few days.
But this morning I'd been hit with a $0.35 finance charge. Thirty-five cents is basically nothing, but I was stumped.
How could I possibly pay interest on an account with a NEGATIVE balance?
Thursday, April 12, 2012
Economy has been made worse
That we are in an economic mess is well known. That the so-called economic policies applied by Washington will do little to correct the problems (indeed, they will exacerbate the problems and greatly extend the economic misery) is less well-known and less widely accepted.
Here is an excerpt from this morning’s free email from David Rosenberg, in my opinion the best analyst of current economic conditions. (Sign up for his newsletter if you want timely and insightful analysis.) In it he details the results for the Cash-for-Clunkers “success” and additional programs to be provided by Washington:
THE ECONOMY LOOKS SICK OUTSIDE OF GOVERNMENT STIMULUS
Now that Cash-for-Clunkers is over, auto sales are collapsing again. Edmunds.com says the run-rate so far in September is down to 8.8 million units at an annual rate, but we see now that JD Power’s tracking is down to 590,000, which would be little better than a 7.0 million rate or half the pace of August and 24% below the already-depressed levels of a year ago. The November 30th expiry date for the first-time homebuyer subsidy, and this group has been responsible for one-third of housing activity, may also have something to do with the below-consensus sales figures for August that came out last week.
But don’t worry — Uncle Sam is coming back to the rescue. Congress is moving to extend emergency jobless benefits to over one million workers who are about to see their benefits expire by year-end. The House already approved on Tuesday a 15-week extension in states with unemployment rates of 8.5% or higher (oh — that only includes 27 states right now, by the way) and now Congress is looking at extending and expanding the homeownership tax credit. The short-term-ism in fiscal policymaking in terms of still trying to promote consumption and credit remains is fully intact and is actually quite sad because the U.S. boomer population is seriously short of savings needed to fund a boom in the retirement community over the next two decades. A Harvard University report shows that 60% of Americans do not have enough savings to fund their retirement. Why the government wants to resist the natural trend towards higher savings rates is … well, it’s unnatural. When your homeownership rate is over 67% and your consumption-to-GDP ratio is over 70%, you’re no exactly suffering from under-spending.
All Cash for Clunkers did was advance demand for autos. In doing so, it guaranteed that future auto sales will be lower than they otherwise would have been. The micro-economic distortions created by such programs (higher automobile sales at the expense of other consumption, encouraging consumers to go deeper into debt, etc.) are probably more important than the macro effects but are impossible to measure. This program was typical government — good politics but terrible economics. It is just another version of the game of “kick the can down the road and worry about the problems when they show up tomorrow.”
Government spending may succeed in pumping up GDP for the next quarter or two. If so, Wall Street touts will celebrate the news, and politicians will endanger their backs bowing to the masses. But nothing positive has been accomplished except politically. Economically, the condition of the economy has been made worse. GDP goes up because it is defined to include government spending as a component. But GDP is supposed to measure the well-being of a region as defined by economic activity. Economic activity can only improve by the increased production of real goods and/or capital formation, neither of which any government can do. If the private sector shrinks but is offset by an increase in the public sector, we are not better off. We become poorer, not richer via that outcome. It is only the private sector that produces; government only consumes.
Here is an excerpt from this morning’s free email from David Rosenberg, in my opinion the best analyst of current economic conditions. (Sign up for his newsletter if you want timely and insightful analysis.) In it he details the results for the Cash-for-Clunkers “success” and additional programs to be provided by Washington:
THE ECONOMY LOOKS SICK OUTSIDE OF GOVERNMENT STIMULUS
Now that Cash-for-Clunkers is over, auto sales are collapsing again. Edmunds.com says the run-rate so far in September is down to 8.8 million units at an annual rate, but we see now that JD Power’s tracking is down to 590,000, which would be little better than a 7.0 million rate or half the pace of August and 24% below the already-depressed levels of a year ago. The November 30th expiry date for the first-time homebuyer subsidy, and this group has been responsible for one-third of housing activity, may also have something to do with the below-consensus sales figures for August that came out last week.
But don’t worry — Uncle Sam is coming back to the rescue. Congress is moving to extend emergency jobless benefits to over one million workers who are about to see their benefits expire by year-end. The House already approved on Tuesday a 15-week extension in states with unemployment rates of 8.5% or higher (oh — that only includes 27 states right now, by the way) and now Congress is looking at extending and expanding the homeownership tax credit. The short-term-ism in fiscal policymaking in terms of still trying to promote consumption and credit remains is fully intact and is actually quite sad because the U.S. boomer population is seriously short of savings needed to fund a boom in the retirement community over the next two decades. A Harvard University report shows that 60% of Americans do not have enough savings to fund their retirement. Why the government wants to resist the natural trend towards higher savings rates is … well, it’s unnatural. When your homeownership rate is over 67% and your consumption-to-GDP ratio is over 70%, you’re no exactly suffering from under-spending.
All Cash for Clunkers did was advance demand for autos. In doing so, it guaranteed that future auto sales will be lower than they otherwise would have been. The micro-economic distortions created by such programs (higher automobile sales at the expense of other consumption, encouraging consumers to go deeper into debt, etc.) are probably more important than the macro effects but are impossible to measure. This program was typical government — good politics but terrible economics. It is just another version of the game of “kick the can down the road and worry about the problems when they show up tomorrow.”
Government spending may succeed in pumping up GDP for the next quarter or two. If so, Wall Street touts will celebrate the news, and politicians will endanger their backs bowing to the masses. But nothing positive has been accomplished except politically. Economically, the condition of the economy has been made worse. GDP goes up because it is defined to include government spending as a component. But GDP is supposed to measure the well-being of a region as defined by economic activity. Economic activity can only improve by the increased production of real goods and/or capital formation, neither of which any government can do. If the private sector shrinks but is offset by an increase in the public sector, we are not better off. We become poorer, not richer via that outcome. It is only the private sector that produces; government only consumes.
The world went to fiat currency
What if the price of Gold is manipulated? First, some background.
Gold has virtually no industrial demand. Its value derives almost solely from its use as a currency or currency substitute. For over 5,000 or so years it has been the ultimate money because its supply is relatively fixed. It is beyond the ability of politicians to manipulate the supply. In a world of fiat money, where supply is controlled by the government or Central Banks, there is an inevitable political tendency to increase supply (an increase in the money supply is the proper definition of inflation). To contrast the two standards, during the 19th century under a gold standard, the US had virtually no inflation. The value of the dollar as measured in purchasing power remained constant. Since the creation of the Federal Reserve in 1913, inflation has been a way of life. The purchasing power of the dollar since 1913 has declined by 93%.
As “the canary in the coal mine,” free market gold prices are a reasonable measure of the amount of true inflation in the economy. (Measures such as the CPI are inadequate proxies for inflation, and have consistently been manipulated to under report price increases as detailed by John Williams among others.) As such, gold is the ultimate nemesis for fiat currency regimes. For the past several years, gold bugs have maintained that Central Banks have suppressed the price of gold in order to hide the real deterioration in the purchasing power of fiat currencies. The Gold Anti-Trust Action Committee (GATA) has been on a crusade to expose the price suppression of gold and has produced various evidence of such manipulation. Now, new evidence of gold price suppression has been uncovered that is unequivocal. It is in the form of a memo from Chairman of the Fed, Arthur Burns, to President Gerald Ford written June 3, 1975. (Recall that the dollar was redeemable in gold up until August 15, 1971.) Thus, the suppression of gold prices appears to have been going on almost from the time the world went to fiat currency.
This memo was publicized by Tyler Durden and can be viewed here. One of the damning quotes from the memo follows:
I have a secret understanding in writing with the Bundesbank that Germany will not buy gold, either from the market or from another government, at a price above the official price.
What are the implications of such a finding? First, we once again find the government lying to its people. There are innumerable instances where Fed Chairmen have denied manipulation or suppression attempts of the price of gold in any way. Is gold the only market manipulation that occurs? Does anyone believe that the same manipulation does not go on in other markets? After all, President Reagan formed the “Plunge Protection” team after the 1987 market crash for the purpose of “stabilizing” markets. Perhaps a better question might be: “What markets have not been manipulated?” Additionally, is there anything that government tells us that we can believe? Is this currently going on in the Treasury market? Could some of these or similar questions be the reason why the Fed is so adamant against an audit by Congress?
The second implication involves investment considerations. Does this mean, even at a price of $1,000, that gold is grossly undervalued? If so, what should its price be if this manipulation were not ocurring? Further, what might be a realistic outlook for inflation? What implications might this have for all fiat currencies? We know there is great concern regarding the dollar as the international currency. Replacing it with some world currency has been bandied about. Does such talk reflect more than weaknesses associated with the dollar?
These questions are all valid. But valid questions do not necessarily have valid answers. The fact that they can be raised and not seem outrageous should make one cautious. There is enough risk and challenge to investing when markets are honest.
Gold has virtually no industrial demand. Its value derives almost solely from its use as a currency or currency substitute. For over 5,000 or so years it has been the ultimate money because its supply is relatively fixed. It is beyond the ability of politicians to manipulate the supply. In a world of fiat money, where supply is controlled by the government or Central Banks, there is an inevitable political tendency to increase supply (an increase in the money supply is the proper definition of inflation). To contrast the two standards, during the 19th century under a gold standard, the US had virtually no inflation. The value of the dollar as measured in purchasing power remained constant. Since the creation of the Federal Reserve in 1913, inflation has been a way of life. The purchasing power of the dollar since 1913 has declined by 93%.
As “the canary in the coal mine,” free market gold prices are a reasonable measure of the amount of true inflation in the economy. (Measures such as the CPI are inadequate proxies for inflation, and have consistently been manipulated to under report price increases as detailed by John Williams among others.) As such, gold is the ultimate nemesis for fiat currency regimes. For the past several years, gold bugs have maintained that Central Banks have suppressed the price of gold in order to hide the real deterioration in the purchasing power of fiat currencies. The Gold Anti-Trust Action Committee (GATA) has been on a crusade to expose the price suppression of gold and has produced various evidence of such manipulation. Now, new evidence of gold price suppression has been uncovered that is unequivocal. It is in the form of a memo from Chairman of the Fed, Arthur Burns, to President Gerald Ford written June 3, 1975. (Recall that the dollar was redeemable in gold up until August 15, 1971.) Thus, the suppression of gold prices appears to have been going on almost from the time the world went to fiat currency.
This memo was publicized by Tyler Durden and can be viewed here. One of the damning quotes from the memo follows:
I have a secret understanding in writing with the Bundesbank that Germany will not buy gold, either from the market or from another government, at a price above the official price.
What are the implications of such a finding? First, we once again find the government lying to its people. There are innumerable instances where Fed Chairmen have denied manipulation or suppression attempts of the price of gold in any way. Is gold the only market manipulation that occurs? Does anyone believe that the same manipulation does not go on in other markets? After all, President Reagan formed the “Plunge Protection” team after the 1987 market crash for the purpose of “stabilizing” markets. Perhaps a better question might be: “What markets have not been manipulated?” Additionally, is there anything that government tells us that we can believe? Is this currently going on in the Treasury market? Could some of these or similar questions be the reason why the Fed is so adamant against an audit by Congress?
The second implication involves investment considerations. Does this mean, even at a price of $1,000, that gold is grossly undervalued? If so, what should its price be if this manipulation were not ocurring? Further, what might be a realistic outlook for inflation? What implications might this have for all fiat currencies? We know there is great concern regarding the dollar as the international currency. Replacing it with some world currency has been bandied about. Does such talk reflect more than weaknesses associated with the dollar?
These questions are all valid. But valid questions do not necessarily have valid answers. The fact that they can be raised and not seem outrageous should make one cautious. There is enough risk and challenge to investing when markets are honest.
Nothing backs any currency
Is history about to repeat regarding a currency crisis?
Many predict that our current economic mess will ultimately trigger an international currency crisis. While the dollar has been weak for several years, it has not yet”collapsed.” Those who see this end fall into two camps. The first camp believes at some point there will be a rush to abandon the dollar on the part of foreigners triggering a collapse. The second camp believes that a new international currency will be “sprung” on the world that will involve in some manner a severe devaluation of the dollar. Either way, both the dollar and the US economy are harmed.
The last major currency crisis was August 15, 1971 when Richard Nixon closed the gold window. This action was taken with no advance notice and involved a de facto and de jure devaluation of the dollar. Until that point we were under the Bretton Woods accord and on a quasi gold standard. International currencies were pegged to the dollar at fixed rates and the dollar was pegged to gold. Any foreign country had the right to redeem its dollars for US-held gold. Pressured by dollar redemptions for gold, primarily by Charles de Gaulle of France, US was forced to default on its redemption promise as US gold supplies shrunk. From that time forward the world has been on a fiat currency system known as the floating exchange system. Nothing backs any currency. Currencies all “float” in value relative to each other.
Currently there is much open talk of the need for a new currency system. Russia, China and others have expressed dissatisfaction with both US fiscal/monetary policies and with the dollar as the international currency. One may only speculate regarding the private discussions regarding the problem/solution. With certainty, options are being considered. None of these will be good for the dollar or the US. It is likely that whatever change occurs will be without advance warning, at least for us normal citizens.
Some behind-the-scenes information has been made available regarding private discussions that preceded the 1971 announcement. Tyler Durden has some fascinating pieces pertaining to these matters. They are highly recommended for those who enjoy economic history, especially because it may be in the process of repeating or at least rhyming.
Many predict that our current economic mess will ultimately trigger an international currency crisis. While the dollar has been weak for several years, it has not yet”collapsed.” Those who see this end fall into two camps. The first camp believes at some point there will be a rush to abandon the dollar on the part of foreigners triggering a collapse. The second camp believes that a new international currency will be “sprung” on the world that will involve in some manner a severe devaluation of the dollar. Either way, both the dollar and the US economy are harmed.
The last major currency crisis was August 15, 1971 when Richard Nixon closed the gold window. This action was taken with no advance notice and involved a de facto and de jure devaluation of the dollar. Until that point we were under the Bretton Woods accord and on a quasi gold standard. International currencies were pegged to the dollar at fixed rates and the dollar was pegged to gold. Any foreign country had the right to redeem its dollars for US-held gold. Pressured by dollar redemptions for gold, primarily by Charles de Gaulle of France, US was forced to default on its redemption promise as US gold supplies shrunk. From that time forward the world has been on a fiat currency system known as the floating exchange system. Nothing backs any currency. Currencies all “float” in value relative to each other.
Currently there is much open talk of the need for a new currency system. Russia, China and others have expressed dissatisfaction with both US fiscal/monetary policies and with the dollar as the international currency. One may only speculate regarding the private discussions regarding the problem/solution. With certainty, options are being considered. None of these will be good for the dollar or the US. It is likely that whatever change occurs will be without advance warning, at least for us normal citizens.
Some behind-the-scenes information has been made available regarding private discussions that preceded the 1971 announcement. Tyler Durden has some fascinating pieces pertaining to these matters. They are highly recommended for those who enjoy economic history, especially because it may be in the process of repeating or at least rhyming.
The entire economy stock market
“New Normal,” a term coined but not yet copyrighted by the principals at Pimco, is bandied about to describe the prospects for the economy and financial markets. It is undefined and hence irrefutable. It provides a glib way to state the obvious: the future will differ from the past. Its definitional elasticity ensured its widespread acception.
A more appropriate term might be the “New Abnormal.” While this term could be criticized in the same manner, it offers one significant advantage. It more strongly implies lack of continuity with the past. This “advantage” is in the eye of the beholder. If you are the common investor, this message is the one that should be absorbed. If you are part of the sell-side hucksters of Wall Street, you prefer the current euphemism, because it is wonderfully clever. It conveys the obvious – things have changed – in a somewhat soothing way. Optimism (the purpose of the sell-side) is promoted in the sense that “understanding” will be enable you to “manage” the future. It turns lemons into lemonade. It advances the “Lipstick on a Pig” tactic from boiler rooms to the entire economy/stock market . It is pure Marketing genius.
Despite the “genius”, I am not buying this “used car.”
A more appropriate term might be the “New Abnormal.” While this term could be criticized in the same manner, it offers one significant advantage. It more strongly implies lack of continuity with the past. This “advantage” is in the eye of the beholder. If you are the common investor, this message is the one that should be absorbed. If you are part of the sell-side hucksters of Wall Street, you prefer the current euphemism, because it is wonderfully clever. It conveys the obvious – things have changed – in a somewhat soothing way. Optimism (the purpose of the sell-side) is promoted in the sense that “understanding” will be enable you to “manage” the future. It turns lemons into lemonade. It advances the “Lipstick on a Pig” tactic from boiler rooms to the entire economy/stock market . It is pure Marketing genius.
Despite the “genius”, I am not buying this “used car.”
Economic committee with no power
Has a grownup finally shown up?
Paul Volcker dropped a bombshell on Friday. The importance of his pronouncement is less economic than political. It appears to indicate a serious rift between him and the Administration. A post by Larry Doyle provides some details and analysis of the economics. Here is an extract from Doyle’s piece:
Mr. Volcker takes on the White House and Congress with his proposal. We know Volcker is no favorite of Larry Summers. Knowing the explosiveness of his proposal, Volcker is not bashful in addressing the discomfort his proposal would create for the Washington insiders who are in Wall Street’s pocket. The WSJ sheds further light on this point:
Mr. Volcker said he would appear before Congress next week to discuss his views in more detail. A Treasury Department spokesman declined to comment.
Asked after his speech if his comments represent a break with the White House’s proposal, he replied: “Nothing I said today should be a surprise” to the administration.
In the future, this announcement may viewed as the beginning of the end of Obama’s presidency. While other factors will certainly play roles, the importance of this event is easily overlooked. The event’s importance derives as much from the messenger as it does the implications of the message. It is the first shot fired from a highly qualified and credible figure, who also happens to be on the Obama team. First some background on the messenger, and then an explanation as to why Friday might be so important.
Paul Volcker and Warren Buffet were early supporters of Obama. They appeared often during the campaign and were widely represented as his economic advisers. After the election Volcker was appointed to a titular position as Chairman of a new economic committee with no power, seemingly no purpose and little reason to meet. Whether Volcker and Buffet still support Obama is unknown, but both men seem removed from the president. Buffet’s move was probably by choice, while Volker seems to have been exiled.
Paul Volcker is not one to take lightly. He combines brains, gravitas, integrity and courage. He is an icon of Central Banking. He literally walked softly and carried a big stick in the late 1970′s. As Chairman of the Federal Reserve he faced the worst inflation in our country’s history (save possibly the Civil and Revolutionary Wars). Economic experts believed it would take a decade or more to tame inflation. He stopped it overnight, despite the political uproar over the unavoidable recession. Recent administration economic policies are so foreign to Volker’s economic thinking and methods as likely to be abhorrent to him. He knows the oligarchy that is Washington and Wall Street and clearly disapproves. While Volcker’s standing in history is established, to be associated (in an entirely passive role) with the economic debacle that is being imposed on this country cannot set well. As a proud and capable man, the manner in which he was used as a political prop and figurehead is likely to be even more disturbing.
Does Volcker’s apparent break represent a tipping point for the Obama administration? It might in the sense that it was a the-emperor-has-no-clothes moment. On Friday, he confronted the administration, directly challenging their philosphy regarding the regulation of the banking industry. Less appreciated was the indirect challenge to the philosophy of government which goes to the heart of Obama’s declining popularity. Implicit in Volcker’s talk were questions regarding the proper role of government and corruption, the primary motivating forces behind recent protests. The perceived corrupt partnership between Washington and Wall Street is believed by most on Main Street. Volcker seems to provide support this perception. His great reputation and the fact that he is/was an Obama guy only adds to the potential political ramifications.
Will other business and/or political figures follow Volcker’s lead and speak out? While Volcker cannot be hurt at this stage, it will take extreme courage for the next critic. The fear and reality of government retribution is an enormous deterrent, yet Volcker has provided some “cover.” As the damage of the Administration’s policies become more apparent, it is likely that others will follow. Not only on banking regulation but in other areas as well. Once this criticism starts, a snowball effect is likely, and another failed presidency will occur sooner rather than later.
Paul Volcker dropped a bombshell on Friday. The importance of his pronouncement is less economic than political. It appears to indicate a serious rift between him and the Administration. A post by Larry Doyle provides some details and analysis of the economics. Here is an extract from Doyle’s piece:
Mr. Volcker takes on the White House and Congress with his proposal. We know Volcker is no favorite of Larry Summers. Knowing the explosiveness of his proposal, Volcker is not bashful in addressing the discomfort his proposal would create for the Washington insiders who are in Wall Street’s pocket. The WSJ sheds further light on this point:
Mr. Volcker said he would appear before Congress next week to discuss his views in more detail. A Treasury Department spokesman declined to comment.
Asked after his speech if his comments represent a break with the White House’s proposal, he replied: “Nothing I said today should be a surprise” to the administration.
In the future, this announcement may viewed as the beginning of the end of Obama’s presidency. While other factors will certainly play roles, the importance of this event is easily overlooked. The event’s importance derives as much from the messenger as it does the implications of the message. It is the first shot fired from a highly qualified and credible figure, who also happens to be on the Obama team. First some background on the messenger, and then an explanation as to why Friday might be so important.
Paul Volcker and Warren Buffet were early supporters of Obama. They appeared often during the campaign and were widely represented as his economic advisers. After the election Volcker was appointed to a titular position as Chairman of a new economic committee with no power, seemingly no purpose and little reason to meet. Whether Volcker and Buffet still support Obama is unknown, but both men seem removed from the president. Buffet’s move was probably by choice, while Volker seems to have been exiled.
Paul Volcker is not one to take lightly. He combines brains, gravitas, integrity and courage. He is an icon of Central Banking. He literally walked softly and carried a big stick in the late 1970′s. As Chairman of the Federal Reserve he faced the worst inflation in our country’s history (save possibly the Civil and Revolutionary Wars). Economic experts believed it would take a decade or more to tame inflation. He stopped it overnight, despite the political uproar over the unavoidable recession. Recent administration economic policies are so foreign to Volker’s economic thinking and methods as likely to be abhorrent to him. He knows the oligarchy that is Washington and Wall Street and clearly disapproves. While Volcker’s standing in history is established, to be associated (in an entirely passive role) with the economic debacle that is being imposed on this country cannot set well. As a proud and capable man, the manner in which he was used as a political prop and figurehead is likely to be even more disturbing.
Does Volcker’s apparent break represent a tipping point for the Obama administration? It might in the sense that it was a the-emperor-has-no-clothes moment. On Friday, he confronted the administration, directly challenging their philosphy regarding the regulation of the banking industry. Less appreciated was the indirect challenge to the philosophy of government which goes to the heart of Obama’s declining popularity. Implicit in Volcker’s talk were questions regarding the proper role of government and corruption, the primary motivating forces behind recent protests. The perceived corrupt partnership between Washington and Wall Street is believed by most on Main Street. Volcker seems to provide support this perception. His great reputation and the fact that he is/was an Obama guy only adds to the potential political ramifications.
Will other business and/or political figures follow Volcker’s lead and speak out? While Volcker cannot be hurt at this stage, it will take extreme courage for the next critic. The fear and reality of government retribution is an enormous deterrent, yet Volcker has provided some “cover.” As the damage of the Administration’s policies become more apparent, it is likely that others will follow. Not only on banking regulation but in other areas as well. Once this criticism starts, a snowball effect is likely, and another failed presidency will occur sooner rather than later.
It will decrease the inflation
The manner in which the government keeps its books would shame Enron. Ditto for the statistics they report as economic data. Here is the latest example described by John Mauldin. His comments are always insightful.
“Speaking of deflation, let me mention something I find totally outrageous. Normally, I actually take up for the bureaucrats who are stuck with the task of trying to monitor inflation. It is a tough job, and like Monday-morning quarterbacks, everybody thinks you should have done it differently. I can understand the rationale for hedonic measurements, housing rent equivalents, etc., even if I don’t agree with them. You have to set some rules and live with them. But the latest imbroglio is disgraceful.
It seems the US Bureau of Labor Statistics, in the CPI next week, will treat the subsidy received by those 800,000 car buyers who bought a car in the “Cash for Clunkers” program as if the price of a car fell by $4,500. Really? My tax dollars account for nothing?
This does several things. It will decrease the inflation used to adjust the GDP for this quarter. Not the end of the world, but annoying But what really matters is that the CPI is used to calculate Social Security increases and interest paid on TIPS.
If I tried to defraud one of my clients using such accounting legerdemain, I would be shut down, sued, and taken to court (at the minimum) by the host of regulators who look over my shoulder. And I should be! You don’t make such changes in the rules to your own benefit. But that is what the BLS did. This policy should be overruled immediately. There are enough deflationary forces in the world without having to artificially create some more.”
“Speaking of deflation, let me mention something I find totally outrageous. Normally, I actually take up for the bureaucrats who are stuck with the task of trying to monitor inflation. It is a tough job, and like Monday-morning quarterbacks, everybody thinks you should have done it differently. I can understand the rationale for hedonic measurements, housing rent equivalents, etc., even if I don’t agree with them. You have to set some rules and live with them. But the latest imbroglio is disgraceful.
It seems the US Bureau of Labor Statistics, in the CPI next week, will treat the subsidy received by those 800,000 car buyers who bought a car in the “Cash for Clunkers” program as if the price of a car fell by $4,500. Really? My tax dollars account for nothing?
This does several things. It will decrease the inflation used to adjust the GDP for this quarter. Not the end of the world, but annoying But what really matters is that the CPI is used to calculate Social Security increases and interest paid on TIPS.
If I tried to defraud one of my clients using such accounting legerdemain, I would be shut down, sued, and taken to court (at the minimum) by the host of regulators who look over my shoulder. And I should be! You don’t make such changes in the rules to your own benefit. But that is what the BLS did. This policy should be overruled immediately. There are enough deflationary forces in the world without having to artificially create some more.”
The return of rescue funding as sources
The Fed is filling up with toxic assets. This graph from Davos (via Zerohedge) shows the composition of the Fed’s balance sheet. Before the crisis (circa December 2008) the Fed held only Treasuries and a small handful of other assets totalling about $800 billion. Today, the Fed has assets of almost $2 TRILLION!
There are many who argue the Fed has violated their charter by adding non-Treasury assets. The interpretation of statutes may have legal significance but it is irrelevant to markets that are being increasingly dominated by China, Japan, etc. The Fed has become substantially more risky, perhaps as much as some of the banks they have bailed out. Of course, they, in conjunction with the Treasury, have something called a printing press that individual banks do not.
The emergency stimulus bill is a good example
The referenced article is a talk given at the Chicago Fed. It discusses the Monetarist vs. “Output-gappers” views on inflation and deflation. Monetarists are probably represented best by the late Milton Friedman. Output-gappers are best represented by Keynesians such as Paul Krugman.
I favor Friedman as opposed to the output-gap position. Implied in the output-gap position is the “incorrect” definition of of inflation/deflation as rising or declining prices. The Friedman position tends to fail empirically in recent years because of technological improvements and financial innovations. That is, the very definitions of money are blurred and changing. Does one include the “shadow-banking” system or not? Does one adjust for sweep accounts that effectively reduce reserve requirements in the banking system? These are merely two of the examples that muddy the empirics and destroy what had been long- standing correlations.Neither position has an adequate theory of the business cycle. Output-gappers tend to be entirely ad hoc, usually pointing to some external event such as a supply shock. Monetarists always blame recessions on a slowdown in the rate of money creation.
The Fed’s dual mandates of sound money and high levels of employment have placed them in a role as a Central Planning Authority. These mandates, although not necessarily conflicting, become so in a politicized democracy. Every “blip” in the data becomes important and pressures the Fed to do something. It is impossible for them to admit that they have limited control, don’t know when policy actions will affect the economy or how much of an effect they will have. Monetarists such as Friedman argued that these unknowns resulted in Fed remedial actions greatly exacerbating the conditions they intended to solve.
The same commentary can be offered regarding fiscal policy. It too is burdened with unknown lags and effectiveness. Because it is directly a part of the political process, it has enormous front-end lags while the program is endlessly debated, pork inserted, etc. The emergency stimulus bill is a good example. While it passed quickly, only a small amount of the money has been spent. It is estimated that it will not all be spent until the end of 2010 or beyond.
Wednesday, April 11, 2012
Massive monetization
ECB President Jean-Claude Trichet penned an op-ed in today’s Financial Times, “Europe has Mapped its Monetary Exit.” Following the path of Chairman Bernanke, Mr. Trichet explains in some detail the ECB’s plan for exiting its program of “enhanced Credit support.” And further tracing the Fed’s footprints, Mr. Trichet is keen not to spook the markets: “Stressing the importance of the exit strategy should not be confused with its activation: it is premature to declare the financial crisis over. Today is not the time to exit.”
President of the New York Fed, William Dudley, stated clearly in Monday’s interview with CNBC’s Steve Liesman that he believes it is too early for the Fed to begin its monetary stimulus exit. “…The economy isn’t growing very fast and we do have a very high unemployment rate.” Deep structural impairment ensures that there will be no agreeable time for policymakers to reverse course.
Ahead of the Group of 20 meeting, UK Chancellor of the Exchequer Alistair Darling commented today that nations should “abandon measures” when recovery takes hold. If it were only that easy. The Fed has already promised markets an extended period of ultra-loose monetary conditions. And I would expect dollar vulnerability (strong euro) coupled with more general systemic fragilities will keep ECB “exit” policy stalled or, at best, restricted to tiny Greenspan-style baby steps.
President of the New York Fed, William Dudley, stated clearly in Monday’s interview with CNBC’s Steve Liesman that he believes it is too early for the Fed to begin its monetary stimulus exit. “…The economy isn’t growing very fast and we do have a very high unemployment rate.” Deep structural impairment ensures that there will be no agreeable time for policymakers to reverse course.
Ahead of the Group of 20 meeting, UK Chancellor of the Exchequer Alistair Darling commented today that nations should “abandon measures” when recovery takes hold. If it were only that easy. The Fed has already promised markets an extended period of ultra-loose monetary conditions. And I would expect dollar vulnerability (strong euro) coupled with more general systemic fragilities will keep ECB “exit” policy stalled or, at best, restricted to tiny Greenspan-style baby steps.
It cannot solve the economic problem
The FDIC is broke (although not without additional Fed/Congress credit access) so is not closing banks that should be closed. Bank closures are occurring when they collapse under their own weight rather than FDIC guidelines. Thus, losses are bigger and taxpayers pay more as this game of pretend and extend goes on. I believe we are in much worse shape than we are being told and that it is a bigger problem than the government can handle. I also think the government knows this and that facing up to it would destroy the dollar and/or country). Hence the pretend game. Unfortunately the extend strategy will not work because underlying asset collateral continues to decline and will probably do so for the next several years. The pretend cannot go on for that long.
The banking system is insolvent, period! Using honest accounting would reveal that condition and expose the house-of-cards economy created via credit over the past 2 or 3 decades. The problem is probably still economically solvable but politically intractable so the government hopes to paper it over. Enron-type accounting is allowed to enable banks to keep exposure on non-consolidated subsidiary books. Banks are allowed to value assets at whatever they deem them to be worth rather than accounting standards that have been in place for centuries. Condoning this fraud may defer the political problem. It cannot solve the economic problem and likely makes it unsolvable at some point. Market forces will eventually overwhelm the charade, and put our entire economic system at risk of implosion.
The banking system is insolvent, period! Using honest accounting would reveal that condition and expose the house-of-cards economy created via credit over the past 2 or 3 decades. The problem is probably still economically solvable but politically intractable so the government hopes to paper it over. Enron-type accounting is allowed to enable banks to keep exposure on non-consolidated subsidiary books. Banks are allowed to value assets at whatever they deem them to be worth rather than accounting standards that have been in place for centuries. Condoning this fraud may defer the political problem. It cannot solve the economic problem and likely makes it unsolvable at some point. Market forces will eventually overwhelm the charade, and put our entire economic system at risk of implosion.
The government and the Federal Reserve
There is no mathematical possibility of escaping the economic bind we face without reducing the welfare state. The current financial crisis only exacerbates a situation which long ago passed the tipping point. The Federal government’s total liabilities exceed $100 trillion (most of that from the unfunded liabilities of the welfare state: social security, medicare, etc.). With the financial crisis, we now have an additional black hole, our banking system. The condition of the banking system has been covered up, but that is becoming harder and harder to do as banks collapse under their own weight as a result of deteriorating conditions.
To the government and the Federal Reserve the only tool they have ever possessed (or learned to use) was a hammer. Thus, all problems look like nails. They only know how to spend and inflate, exactly the actions that brought us to this point. This approach has never succeeded economically, but it has managed to cover up past crises. Of course that was acceptable for virtually all politicians.The present economic thrust is an attempt to (temporarily) save the welfare state at the expense of destroying the dollar. Unfortunately, that will not prove possible. At some point, probably not too far off, the dollar will collapse. Once the dollar is emasculated our standard of living will dramatically shrink, and future economic growth will approximate that of Old Europe. Under such conditions the carrying costs of the welfare state will be impossible to bear. We will lose both the dollar and the welfare state. In dangerous times such as these, governments are often overthrown with new entities appearing that look nothing like the structure they replace.
There is no way to reasonably estimate the timing of the dollar collapse which will trigger the entire process. A catalyst will probably be the Treasury market where interest rates will start to increase to reflect higher default risk. Regardless, it appears as though we are getting close. The dollar has been very weak, and the anti-fiat currency, gold, appears strong. If (when?) the event occurs, it likely will come very quickly. Too many Central Banks are holding too many dollars and Treasuries. At some point a panic to get out of the dollar is likely. Once the first domino falls, the entire global system is apt to implode swiftly. These are indeed dangerous times.
Government debt is increasing
Inflation is usually misdefined as a period of generally rising prices. Inflation, properly defined, is an expansion of the money supply. The problem is what we mean by “money supply.” Traditional definitions such as M1, M2, etc. have become less useful as a result of technology and financial innovations. Currently traditional measures of money are increasing while private sector debt is contracting and government debt is increasing. On balance, I believe total debt has actually increased, although there appears to be substantial contraction to come in the banking system as a result of overstated assets.
Rising prices is one of the effects produced by the “cheapening” of money. No index is capable of properly measuring these effects. All indices are subject to measurement errors. More importantly, all indices suffer from weighting and inclusion decisions. The Consumer Price Index (CPI) is published by the BLS and assumed to be a proxy for the effects of inflation. It purports to measure the rate of price changes for a typical consumer. It does so imperfectly, even with honest and accurate measurements. Inflation effects are not limited to consumer goods. Often they are felt in financial assets and capital goods (housing, capital investments by business, etc.) long before they show up at the consumer level.
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