Archive for April 2011
by Monty Guild
Posted originally April 29 2011
A MESS BY ALL ACCOUNTS – AND SEEMINGLY GETTING MESSIER. As we have been saying for some time, U.S. economic growth is stuck in the slow lane. Very slow lane. There are few signs of any significant lane changing ahead. We have seen a serious slide in the American standard of living over the past three years, since the beginning of the recession. The slide can be measured in many ways. Food stamps recipients have increased by 48 percent and the cost of the program ballooned by 80 percent Medicaid recipients are up 17 percent and program costs are up 36 percent. Welfare recipients are up 18 percent, and program costs up 24 percent. That isn’t the kind of growth that’s good for any economy!
Looking ahead, we expect the standard of living decline to continue for up to another seventeen years. Our economy and society are substantially changed, but the change to date is moderate compared to the magnitude of change ahead. In 2018, the U.S. will be a much poorer country than it was in 2008.
We envision the average family spending a higher percentage of income on food and shelter. People will retire at 75 years of age… not 65. Many may not be able to retire. Many retirees will have to re-enter the work force as their savings and pensions are diminished in buying power. The streets will be filled with more poor and homeless. The dollar will continue its decline. Gold and other commodities will continue to rise in price. All of these are symptoms of a decline in the public’s standard of living. Unfortunately, we expect it to last for quite a while.
If it is any solace, the U.S. does not stand alone in the economic muck. Japan has been going through the doldrums for almost twenty years now and that sorry state of affairs will likely continue for another decade. Europe’s standard of living is moving in lockstep with the U.S. We give the Europeans, like the U.S., a poor seventeen year prognosis. To us, it looks like the developed world is ‘un-developing.” By 2020, expect to see a more humble developed world, viewing itself differently, playing a lesser leadership role, and having a vastly different view of the use of debt to create prosperity in society.
Labor in the Big Picture
The U.S. has big problems on this front. The country needs to employ more than 2 million new workforce entrants every year. Plus, there are millions who lost jobs in the last three years who still need to be rehired. How does the U.S. deal with challenges like this in a situation of slowing economic growth? The reality is a very difficult employment outlook for current and future U.S.-born workers, especially those with minimal education and skills, and for immigrants with inadequate English fluency.
Conversely, the jobscape looks brighter for the educated and skilled, especially individuals in the fields of computer science, electronic engineering, mathematics, geology, energy science, and oil field engineering. The job market also appears better for individuals in some low-paying retail jobs and other service industries who demonstrate good attitudes and a willingness to work.
The U.S. employment picture is changing and it has become necessary for the labor force to have higher skill and education levels in order to compete. The U.S. still has a comparative advantage over other countries in areas involving technology and skilled labor. The construction jobs that kept so many laborers working for the past two decades are gone. We don’t see them returning for many years. Moreover, there is little unfilled demand for factory workers at high salaries and government employees who receive secure pay and rising benefits.
“We Don’t Control Emerging Markets”
by John Rubino
April 27, 2011
“Keeping inflation low and boosting the economy are good for the dollar over the medium-term.”
Well, duh. But talking about controlling inflation while interest rates are at record low levels and commodities are soaring is pointless. Eventually energy and food prices will work their way through to restaurant menus and store shelves (see McDonalds and Huggies) and then inflation won’t be low — even by the government’s deceptive accounting. That won’t be good for the dollar.
“There’s not much the Fed can do about gas prices per se. After all the Fed can’t create more oil. We don’t control emerging markets. What we can do is try to keep higher gas prices from passing into other prices, creating a broader inflation. Our view is that gas prices will not continue to rise at the recent pace.”
The Fed might not control emerging markets but it does affect them. We’re exporting our inflation to them by supporting US consumer borrowing and keeping interest rates low, which creates a torrent of hot money flowing into Brazil, China and India. That’s why they’re overheating.
Put another way, they’re paying the price for our lack of self-control. China is raising rates and Brazil is at 12% already, which means they’re looking at a combination of slower growth and continued high prices. This is a huge problem for countries where many workers spend most of their paychecks on food and energy.
“The inflationary expectations we’re concerned about are long-term. Our anticipation is that oil prices will stabilize or come down. If firms aren’t passing on higher costs into broader prices, broader inflation, then we’ll feel more comfortable watching and waiting to see how it evolves… Long-term expectations are still stable. We’re confident they’ll stay down.”
Letting inflation run and hoping it doesn’t persist is extraordinarily dangerous, because by the time people figure out that it is going to persist you won’t be able to quickly change their minds. They’ll be dumping their bonds and buying real assets like gold and silver and farmland, sending the dollar down and interest rates up. Then you’ll have to spend years convincing them that they’re wrong by raising short-term rates and engineering a recession. And that’s the optimistic scenario. A recession with home prices already falling and systemic debt at record levels would risk a return to the mid-1930s, when a brief recovery turned into the Great Depression.
“We’re completing purchases by July. It probably won’t have significant impact on markets or the economy because the market already knows that. It’s not the pace of ongoing purchase that matters, but the size of the portfolio we hold. We’ll continue to reinvest, so our portfolio size will remain constant. Any changes to portfolio size would depend on pace of economic recovery.”
What he’s saying is that the Fed will continue to buy up Treasuries and other kinds of debt with the proceeds of its maturing bonds. This is a massive amount of money, hundreds of billions a year, so in effect QE 2 won’t really end.
“All I can say is, recovery is moderate, but I do think the pace will pick up over time. Over the long run, the US will return to being the most productive and dynamic economy in the world. It hasn’t lost any of its basic characteristics.”
Unfortunately the US has lost one of its most basic characteristics: a solid balance sheet. We’re effectively bankrupt, and the resulting loss of flexibility and access to capital will fundamentally change this country in the future. A few pockets of innovation won’t be able to bail out an insolvent majority.
“We’re using new tools, but nothing we’re doing is fundamentally different from what we normally do. We’re monitoring inflation as well as recovery. The problem is the same one central banks always face — which is tightening at the right time of a recovery. But we have a lot of experience with how to do this, and we’ll tighten as conditions warrant.”
Let’s consider that experience…the junk bond bubble of the 1980s, the tech bubble of the 1990s, the housing bubble, and now this, whatever it is. Not reassuring.
Why Bernanke’s next move doesn’t matter
from Phoenix Capital Research
April 27, 2011
THE FINANCIAL WORLD IS SITTING ON THE EDGE of its seat today to see just what Ben Bernanke has to say about inflation. It’s odd that a man with just a horrific track record, not to mention the fact his policies have resulted in tens of thousands of people starving or being killed in riots, should be the focus of the entire financial system.
After all, why should we listen to a pathological liar and idiot, not to mention a man void of morals or compassion? Regardless or Bernanke’s personal qualities, the fact is that it doesn’t matter what he does next. Whether or not he issues QE 3, raises interest rates, references inflation differently, or what have you is irrelevant. We will see some kind of Crisis in the near future because of his policies.
If he raises interest rates, the debt market and derivative implodes. If he launches QE 3, the Dollar collapses and trade wars erupt. If he doesn’t launch QE 3, the stock market collapses.
The idea of “success” is completely off the table at this point. It’s now simply a matter of which Crisis we will see. Even if Bernanke does become hawkish and defends the Dollar, the US’s debt load is beyond sustainable levels and will result in a debt default.
Again, there is no positive outcome from the current financial situation. The only good thing that will come out of the destruction will be the Fed being dismantled and Bernanke no longer in control (though this may take years before it’s complete). One thing that is now certain however, is that the US Dollar will be collapsing in the future. It might take two months (Bernanke indicates QE 3 is coming) or two years (Bernanke becomes more hawkish), but it will happen.
by Martin D. Weiss Ph.D
Posted originally April 25, 2011
NEARLY A YEAR AGO, I PUBLICLY CHALLENGED S&P, MOODY’S AND FITCH to downgrade the long-term debt of the United States government — to help protect investors and prod Washington to fix its finances. In a moment, I’ll show you why their failure to respond is ripping off investors, how it’s exposing millions to a financial atom bomb, and what you can do for immediate fallout protection.
But first, this question: Did S&P finally respond to my challenge last week when it “downgraded” U.S. debt to “negative”? To the casual observer, that might appear to be the case. But in reality, their action — much like recent steps by Washington to “fix” the deficit — was little more than smoke and mirrors. Here are the facts:
• S&P did NOT change, even by one tiny notch, its “AAA” rating for U.S. government debt. It merely changed its future “outlook” for the rating.
• S&P did NOT have the courage to do what’s right for investors and for the country today. It merely said it might do something a couple of years from now.
• Worst of all, S&P has done nothing to change its practices that have caused so much pain for investors in recent years. As before, it’s typically quick to upgrade its best-paying clients, but often delays meaningful downgrades until it’s far too late.
It’s the greatest financial scandal of our time, and the U.S. Government’s Triple-A rating is the most scandalous of all.
• In proportion to the size of its economy, the U.S. government has bigger deficits, more debt, plus bigger future liabilities to Medicare and Social Security than many countries receiving far lower ratings from S&P, Moody’s and Fitch.
• Compared to lower rated countries, the U.S. also has a greater reliance on foreign financing, a weaker currency, and far smaller international reserves.
• The U.S. government is exposed to trillions of dollars in contingent liabilities from its intervention on behalf of financial institutions during the 2008-2009 debt crisis.
• The U.S. Federal Reserve, as part of its response to the financial crisis, may be exposed to significant credit risk.
• The U.S. economy is heavily indebted at all levels, despite recent deleveraging.
• U.S. states and municipalities are experiencing severe economic distress and may require intervention from the federal government.
• The U.S government’s finances could be [will be!] adversely impacted by a rise in interest rates.
• The U.S. dollar may not continue to enjoy reserve currency status and may continue to decline.
• Improper payments by the federal government continue to increase despite the Improper Payments Information Act of 2002.
• The U.S. government had failed its official audit by the Government Accountability Office (GAO) for 14 years in a row, with 31 material weaknesses found in 24 government departments and agencies.
This is no secret. Nor am I citing original facts. They are the same facts that have been written about extensively by Jim Grant, editor of the Interest Rate Observer, brought to light by the U.S. Government Accountability Office and widely publicized by its former chief, David Walker. They are similar to the points made in recent warnings by the International Monetary Fund, the Congressional Budget Office, the European Central Bank, the president’s deficit commission, and even the Big Three Rating agencies themselves.
Published April 20, 2011
WASHINGTON (AP) — The United States has never defaulted on its debt and Democrats and Republicans say they don’t want it to happen now. But with partisan acrimony running at fever pitch, and Democrats and Republicans so far apart on how to tame the deficit, the unthinkable is suddenly being pondered.
The government now borrows about 42 cents of every dollar it spends. Imagine that one day soon, the borrowing slams up against the current debt limit ceiling of $14.3 trillion and Congress fails to raise it. The damage would ripple across the entire economy, eventually affecting nearly every American, and rocking global markets in the process.
A default would come if the government actually failed to fulfill a financial obligation, including repaying a loan or interest on that loan. The government borrows mostly by selling bonds to individuals and governments, with a promise to pay back the amount of the bond in a certain time period and agreeing to pay regular interest on that bond in the meantime.
Among the first directly affected would likely be money-market funds holding government securities, banks that buy bonds directly from the Federal Reserve and resell them to consumers, including pension and mutual funds; and the foreign investor community, which holds nearly half of all Treasury securities. If the U.S. starts missing interest or principal payments, borrowers would demand higher and higher rates on new bonds, as they did with Greece, Portugal and other heavily indebted nations. Who wants to keep loaning money to a deadbeat nation that can’t pay its bills?
At some point, the government would have to slash spending in other areas to make room for any further sales of Treasury bills and bonds. That could squeeze payments to federal contractors, and eventually even affect Social Security and other government benefit payments, as well as federal workers’ paychecks.
A default would likely trigger another financial panic like the one in 2008 and plunge an economy still reeling from high joblessness and a battered housing market back into recession. Federal Reserve Chairman Ben Bernanke calls failure to raise the debt limit “a recovery-ending event.” U.S. stock markets would likely tank — devastating roughly half of U.S. households that own stocks, either individually or through 401(k) type retirement programs.
Eventually, the cost of most credit would rise — from business and consumer loans to home mortgages, auto financing and credit cards. Continued stalemate could also further depress the value of the dollar and challenge the greenback’s status as the world’s prime “reserve currency.”
China and other countries that now hold about 50 percent of all U.S. Treasury securities could start dumping them, further pushing up interest rates and swelling the national debt. It would be a vicious cycle of higher and higher interest rates and more and more debt.