Archive for September 2010
How Keynesian Archduke Krugman recommended a housing bubble as a solution to all of America’s post tech bubble problems
by Tyler Durden
Posted originally on Zero Hedge, August 9, 2010
THE YEAR IS 2002, AMERICA HAS JUST WOKEN UP WITH THE WORST POST-DOT.COM hangover ever. Paul Krugman then, just as now, writes worthless op-eds for the NYT. And then, just as now, the Keynesian acolyte recommended excess spending as the solution to all of America problems. Only this one time, at band camp, Krugman went too far. If there is one thing that everyone can agree on, is that the Housing Bubble, is arguably the worst thing to ever happen to America, bringing with it such pestilence and locusts as the credit bubble, the end of free market capitalism, and the inception of American-style crony capitalism. Those who ignored it, even though it was staring them in the face, such as Greenspan and Bernanke, now have their reputation teetering on the edge of oblivion.
So what can we say of those who openly endorsed it as a solution to America’s problems? Enter exhibit A: New York Times, August 2, 2002, “Dubya’s Double Dip?” Name the author: “The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
If you said Krugman, you win. Indeed, the idiocy of Keynesianism knew no bounds then, as it does now. The solution then, as now, to all problems was more bubbles, more spending, more deficits. So we have the implosion tech bubble: And what does Krugman want to create, to fix it? Why, create a housing bubble… Well, at least we know now how that advice played out.
And now what? He wants another trillion in fiscal stimulus… Quadrillion? Sextillion (arguably this cool sounding number is at least two to four years away before the Fed brings it into the daily vernacular)? And just like the housing bubble he suggested then brought America to the biggest depression it has ever seen, so his current suggestion will be the economic cataclysm that wipes out America from the face of the earth.
So we have two simple questions:
i) how does Krugman still have a forum in which to peddle his destructive ways, and
ii) why does ANYONE still listen to this Nobel prize winner, a.k.a. charlatan?
Being stupid is one thing. Being stupid and learning your lesson after seeing your idea crash and burn is another. Pushing for the same policy response time after time, layering misery upon misery, is an altogether third, and most Krugman, thing.
How many more lunatics in charge of the insane asylum do we need before we finally say “enough” to their deranged ramblings and their illusions of reality…
Why QE2 + QE Lite mean the Fed will purchase almost $3 Trillion in Treasurys and set the stage for the Monetary Endgame
by Tyler Durden
Zero Hedge
Posted originally September 25, 2010
RECENTLY THE DEBATE OVER WHEN QE2 WILL OCCUR HAS TAKEN A BACK SEAT over the question of what the implications of the Fed’s latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation. Whether or not the Fed will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty. And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the Fed’s balance sheet, and how the change in composition in Fed assets will impact all marketable asset classes.
We have conducted a rough analysis on how QE2 will reshape the Fed’s balance sheet. We were stunned to realize that over the next 6 months the Fed may be the net buyer of nearly $3 trillion in Treasurys, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.
A Question of Size
One of the main open questions on QE2, is how large the Fed’s next monetization episode will be. This year’s most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke’s next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a Fed that is known for “forceful” action. Others, such as Bank of America’s Priya Misra, have loftier expectations: “We expect the size of QE2 to be at least as much as QE1 in terms of duration demand.” As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities. It is thus safe to assume that the Fed’s QE2 will likely amount to roughly $1.5 trillion in outright security purchases. However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.
A Question of Composition
Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant rebalancing the Fed’s balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio. This is a critical fact, because once it becomes clear that the Fed is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero).
What is very important to note, is that as Bank of America’s Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities: “Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%.”
The fact that declining rates creates a feedback loop on prepayments, which in turn results in more security purchases and even lower rates, is most certainly not lost on the Fed, and is the primary reason for the formulation of QE Lite as it currently exists. Indeed, those who follow the Fed’s balance sheet, are aware that the MBS/Agency book has declined from a peak of $1.3 trillion on June 23, to $1.246 trillion most recently, a decline of $53 billion, which has been accompanied by $25 billion in Bond purchases, resulting in such direct FRBNY market involvements as $10 billion weekly POMOs. These, in turn, are nothing less than a daily pump of liquidity into the Primary Dealers (who exchange bonds boughts at auction for outright cash) by the Fed’s Open Market Desk, which then liquidity is used to the PD community to bid up risk assets.
A Red-Alert Threat to the Regime
by Gary North
Originally posted September 25, 2010
“Show me the money!” Cuba Gooding made this phrase famous in the 1996 movie, Jerry McGuire. The phrase soon got into the language.
“Follow the money!” That came from the movie, All the President’s Men. No one knows who said it. “Deep Throat” didn’t. The screenwriter says that he does not know where he got it. It has entered the language.
“Trust me.” That was Jimmy Carter’s phrase in 1976. It also got into the language. It has been used ever since as satire. It has been the mantra of every Chairman of the Federal Reserve System.
“Don’t ask. Don’t tell.” That was Bill Clinton’s phrase. I think he got it after watching Congress deal with Alan Greenspan.
“Never give a sucker an even break.” That was W. C. Fields’s famous line. This has been the Fed’s operational policy since 1914.
AUDIT THE GOLD
In 2011, Congressman Ron Paul will introduce a bill in the House of Representatives calling for an audit of the gold held by the Federal Reserve System on behalf of the United States government. If he can successfully promote this bill by the phrase, “Show us the gold!” he will inflict enormous damage on the American Establishment. This damage could conceivably spread to the entire international Establishment, which rests on the sovereignty of the central banks over their domestic governments.
Most of those few Americans who have ever heard of the Federal Reserve System operate under the illusion that the government is sovereign over the Fed. On paper, this is true. Operationally, it isn’t. We know this, because no government agency audits the Fed.
You are surely not sovereign over the United States government. The United States government is sovereign over you. The supreme mark of this control is the fact that the Internal Revenue Service can tax you. It requires you to sign your tax forms, on penalty of perjury. You can be sent to jail if you lie about these forms. It can require you to provide evidence that you have filled out your income tax forms accurately. If you refuse to provide this evidence, the IRS will simply assess whatever it wants, and you will be required to prove that its assessment is inaccurate.
If you want to find out who is really in control in any situation, find out who has the legal right to audit the other one.
This is easy to understand with respect to individuals, corporations, and other organizations that are under the thumb of the tax man. This is understood by taxpayers all over the world. They fully understand who is in charge. In a modern society, the agency in charge is the agency that can and does compel other individuals and agencies to supply records relating to their income, capital, and bank accounts.
The Federal Reserve System has never been audited by an agency of the United States government. The Fed hires private auditing firms, rotating them year by year, which undermines continuity, making it more difficult for them to follow the money. The Fed limits those firms with respect to what they are allowed to audit. The Fed then submits these internally audited facts to the United States Treasury.
Each year, the Fed pays the Treasury any excess money beyond the Fed’s operations expenses, if the money came from interest earned from its holdings of U.S. government debt. This has been the law since the early 1940s. In the good old days, the Fed kept all of the money that it earned as interest payments from the Treasury. It paid nothing to the Treasury. That was a sweet deal.
When Congressman Paul persuaded the House of Representatives in 2009 to vote in favor of a general audit of the Fed by the Federal government, the bill was blocked in committee. His original version of the audit bill never came to a final vote in the House as part of the banking reform legislation. The Senate never considered the amendment.
So, it is obvious who is in charge. Congress pretends that it is in charge, but in fact the Federal Reserve System is in charge. Congress accepts the word of the Federal Reserve System with respect to how much it cost the Fed to keep its doors open, and it accepts whatever payment the Fed makes to the Treasury.
It is obvious that if the Internal Revenue Service did not have the power to audit taxpayers, and if taxpayers have the authority to decide how much it cost them to “keep their doors open,” and pay the Treasury only that amount of money that is in excess of their costs of operation, the government would go bankrupt. It is equally obvious that the government does not intend to go bankrupt. The government does not intend to let individuals decide on their own authority how much to pay the government. This is because the government is in charge, and taxpayers are not in charge.
The Federal Reserve System is in charge of Congress; Congress is not in charge of the Federal Reserve. You can say that, on paper, the Congress is in charge. In response, I argue that this paper is rarely used, and with respect to an audit, it has never been used.
Six Reasons Why a Dollar Crisis Is Imminent
by Perry D.
Posted originally on Seeking Alpha
on September 27, 2010
The U.S. dollar is sliding dangerously close to a steep cliff – a possible point of no return at which the currency could collapse and America could join the ranks of the world’s banana republics.
For more than thirty years, the U.S. has resisted the restructuring, austerity and market forces required to restore the health, competitiveness and potential of its economy.
Extending a long-running policy of neglect, denial, short-sightedness, political expediency and corruption, for the past two years, the Federal Reserve has tried to prop up the increasingly uncompetitive and defective U.S. economy with what amounts to unprecedented amounts of money printing – still in effect and slated to expand. The government as a whole has increasingly spent beyond its means, doubled down on debt and pushed the limits of inflation risks as it milks the outdated perception of the dollar as a “safe haven” for all it’s worth.
The bill is coming due and the table is being set for the biggest currency crisis ever. Almost all of the key ingredients are in place for a crisis of confidence that will threaten to overwhelm all efforts to contain it – something beyond the magnitude of currency crises that unraveled Mexico in 1994, Asia in 1997, Russia in 1998, and Argentina in 1999. The similarities are now beyond disturbing.
What are the key factors?
1) Financial excess: Key measures of financial excess – a U.S. budget deficit at 10% of GDP, overall credit amounting to as much as 350% of GDP, a projected $100 trillion more in entitlement obligations than the federal government can currently cover, and more than $1 trillion in state pension underfunding – are now well into the levels that undermined other countries during currency crises and rendered them insolvent, bankrupt or close to it.
2) Diminishing competitiveness: The gift of hindsight now shows that outside of housing and finance, the U.S. economy was hollowing out over the past 30 years. A withering export base and increasingly lopsided growth (as opposed to broad-based, diversified growth across multiple industries) were telltale signs in Mexico, Russia, Thailand and elsewhere that a country would have trouble paying its bills to creditors abroad.
3) Pre-existing economic pain: A high unemployment rate – roughly 10% and as much as 20% under broader measures – will limit the willingness of policymakers to make the tough choices needed to get the country’s house in order. As they’ve already demonstrated, politicians are more likely to continue trying to limit the pain and take the easy way out in the short run – borrowing more and printing more money – instead of taking real steps to demonstrate the country will be able to pay its bills to creditors abroad without devaluing the dollar (in other words, cut back on spending, raise taxes, reform the economy in a way that bolsters export receipts).
4) Heightened political risk: Ahead of the November midterm elections, the U.S. faces a degree of policy uncertainty we haven’t seen since the 1930’s and arguably since the years leading up to the Civil War (maybe even further back, the currency chaos after the Revolutionary War). The two parties are both historically weak and want to take the U.S. economy in radically different directions – Democrats, led by President Obama, toward more government control, greater intervention in the economy and higher taxes and Republicans, increasingly pressured by the Tea Party, toward sharply less government, lower taxes and less intervention in the economy. Unusually critical midterm election this November may set a permanent course or lead to policy paralysis. This is the kind of political uncertainty that formed the backdrop to multiple currency crises, including Mexico’s 1994 crisis, which preceded presidential elections.
5) Rising rates abroad: Real, stronger growth outside the U.S. is prompting central banks in Canada, Australia, Latin America, China and elsewhere to tighten credit, while the Fed loosens, inflates and all but signals it wants to let her rip and weaken the currency. That means growing downward pressure on the U.S. dollar. It was the raising of short-term rates in the U.S. through the late 1990’s that put Mexico, Asia (particularly Thailand) and Russia under pressure to allow their currencies to collapse.
6) Weak and defective financial system: Large numbers of U.S. banks countinue to fail on a monthly basis across the U.S. The federal government recently announced a stealth $30 billion bailout of credit unions highlights lingering problems. It continues to bankroll massive losses at Fannie Mae and Freddie Mac and has effectively nationalized mortgage finance. We still have inadequate disclosure on the true extent of bad loans – a key wildcard that led to loss of confidence in Asian and other financial crises. We still don’t know the full extent of the black hole. Banking guru Meredith Witney expects a new round of top-line pressure on all the big banks over the coming year.
There you have it: Flagging competitiveness, an inflated exchange rate, chronic deficits, ballooning debt ratios, economic stress, heightened political risk and a defective banking sector. These are the ingredients of a currency meltdown.
Against this backdrop, as we’ve seen in past currency crises, speculators eventually take advantage of a status quo they correctly see as unsustainable. They take short positions and/or hedge by buying gold and other protection. Ultimately, central banks can’t resist reality and the pressure of the market.
Two additional factors could soon be in play:
1) Capital flight: From elites, top investment funds and banks. The sharp drop of trading volume on U.S. equity markets, heavy inflows into commodity funds, hedges such as gold and even farmland and outflows into overseas markets funds and ETFs may be early omens. There is also growing evidence of human capital flight from the U.S., as the business climate continues to deteriorate and high-skill individuals seek higher after-tax returns from themselves abroad.
2) Violent conflict: The Chiapas Rebellion in Mexico intensified anxiety of the country’s management in 1994. Current potential flash points include Iran/Israel/The Middle East, North Korea, the South China Sea and China-Japan.
To paraphrase a previous article:
…if Europe – also under pressure to take the easy way out of economic underperformance – joins the U.S. and Japan in the devaluation game, in more earnest than it already has, we’ll be in an all-out race to the bottom to export economic depression and inflation – stagflation – to one another. Hence the growing lack of confidence in all paper currencies and gold’s surging price.
Combined with growing protectionist sentiment and repeated stock market head-fakes, this mess, combined with weakness in the West, Chinese resource hoarding and military buildups, flash points across Asia and the Middle East, is looking more like the early stages and negative feedback loops of the Great Depression, the Weimar Republic and the run up to the Second World War.
Invest (buy gold, silver, other precious metals, farmland-based securities) or divest (out of U.S. currency and dollar-denominated equities and bonds) accordingly.
IMF fears ‘social explosion’ from world jobs crisis
by Ambrose Evans-Pritchard
Originally published 13 Sep 2010
America and Europe face the worst jobs crisis since the 1930s and risk “an explosion of social unrest” unless they tread carefully, the International Monetary Fund has warned.
Duration of unemployment in the US – Source: Bureau of Labor Statistics
“The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment,” said Dominique Strauss-Kahn, the IMF’s chief, at an Oslo jobs summit with the International Labour Federation (ILO). He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. “We are not safe,” he said.
A joint IMF-ILO report said 30m jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. “The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies,” it said.
The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the “employment intensity of growth” as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.
Olivier Blanchard, the IMF’s chief economist, said the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. “Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression,” he said.
Spain has seen the biggest shock, with unemployment near 20pc. Britain’s rate has risen from 5.3pc to 7.8pc over the last two years, a slightly better record than the OECD average. This contrasts with the 1970s and early 1980s when Britain was notoriously worse. UK jobless today totals 2.48m.
Mr Blanchard called for extra monetary stimulus as the first line of defence if “downside risks to growth materialise”, but said authorities should not rule out another fiscal boost, despite debt worries. “If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself,” he said.
“Most advanced countries should not tighten fiscal policies before 2011: tightening sooner could undermine recovery,” said the report, rebuking Britain’s Coalition, Germany’s austerity hawks, and US Republicans. Under French socialist Strauss-Kahn, the IMF has assumed a Keynesian flavour.
The report skirts the contentious issue of whether globalisation lets companies engage in “labour arbitrage”, locating plant in low-wage economies such as China to ship products back to the West. Nor does it grapple with the trade distortions caused by China’s currency policy, except to call on “surplus countries” to play their part in rebalancing. The IMF said there may be a link between rising inequality within Western economies and deflating demand.
Historians say the last time that the wealth gap reached such skewed extremes was in 1928-1929. Some argue that wealth concentration may cause investment to outstrip demand, leading to over-capacity. This can trap the world in a slump.
The US has no chance of Option 1… So that leaves Options 2 or 3
from Phoenix Capital Research
Posted originally on September 21, 2010
THE BIG FINANCIAL MYTH BUSTER OF THE WEEK IS THAT THE ALLEGED DELEVERAGING of the US consumer has in fact been a giant myth. According to the Wall Street Journal, if you account for defaults, US consumers have only pared down their debts by an annual rate of 0.8% since mid-2008.
The Journal writes (emphasis added): “Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion… Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.”
That means consumers managed to shave off only $22 billion in debt… In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.
This is a major deal-changer for the US financial system. For months we’re been hearing tales of consumers are doing the right thing by paying off debts and living more frugally. While this is true for some consumers, the Journal’s article makes it clear that the vast majority of folks are simply spending until they’re officially bust and have their credit lines pulled.
Whether this is because Americans are stuck on a “buy ‘til you’re bust” mania, or if it’s simply because the cost of living in the US today is so high relative to incomes and other expenses that most folks can’t get by without using credit is up for debate. Personally I think it’s a bit of both, with some folks obsessively buying the new iPad while skipping on mortgage payments while others are simply using credit cards to try and get by after being unemployed or underemployed.
Indeed, another story run in the Wall Street Journal supporting the second argument points out that incomes have actually fallen 4.9% since 2000. Add to this the $1.5 trillion drop in household wealth in 2Q10 and it’s clear US consumers are making less and losing even more from their investments. This leaves credit as the one means of maintaining living standards.
Regardless, the primary point is that the US credit bubble has not deleveraged in any meaningful way. The system remains debt saturated to the gills on a personal, corporate, state, and Federal level.
In plain terms, the entire US system is one giant debt bubble. And there are only three ways to deal with a debt problem:
1) Pay it back
2) Default/ restructure
3) Hyper-inflate it away
The US has no chance of #1, which leaves either #2 or #3. Both involve the Dollar taking a sizable hit, which might explain why Gold has begun breaking out while Treasuries are dipping.
Keep your eyes on these two, if they don’t reverse soon then something big is coming down the pike for the Dollar.
