Posts Tagged ‘recovery’
The Debt Deal con: Is it fooling anyone?
by Brandon Smith of Alt Market
Posted August 4, 2011
ALTERNATIVE ECONOMIC ANALYSIS BRINGS WITH IT A CERTAIN NUMBER of advantages and insights, but also many uncomfortable burdens. Honest financial research is a discipline. It requires us to not only understand the fundamentals, but to question the fundamentals. It requires us to look beyond what we would LIKE to see in the economy, and accept the reality of what is actually there. With this methodology comes the difficulty of knowing the dangers ahead while the mainstream stumbles about well behind the curve. It means constantly having to qualify one’s conclusions, no matter how factual, because the skeptics and opposition base their views on an entirely different set of rules; farcical rules that no longer (or never did) apply to the true state of our country’s fiscal health.
After a while, you begin to expect that a majority of the public will buy into any number of government or Federal Reserve con games and swindles as the process of full spectrum collapse rolls onward. However, this expectation is not always accurate…
A majority of Americans were against the bailouts, TARP, quantitative easing, the “too big to fail” concept, etc. Sometimes a government action is so fraudulent that even those who aren’t educated on the specifics can smell the grift in play. The recent debt ceiling debate and resulting debt deal are fuming with the hot stench of predigested disinformation, so much so that no one seems to be happy with it, even people who a month ago were begging for it. When you have to parade around a hobbled shooting victim in order to get any applause for your legislation, then you may be in trouble…
Though their reasons and motivations vary, everyone, whether on the so called “Left”, or the so called “Right”, is asking “Was anything really accomplished here?” The question is a valid one. To discern the exact nature of the debt deal, we must first cut through the web of misconceptions that surround it. While no American is satisfied with the final plan, many are disenchanted for the wrong reasons. Let’s clear the fog (or light a match), as it were…
Where are the spending cuts?
Were any cuts actually made in this debt plan that has been painted by the MSM as a “historic landmark” in spending reform? If you think yes, then you have been hornswaggled. Only yesterday I came across perhaps the most profoundly inept New York Times Op-Ed piece I have ever seen (and that’s saying something):
http://www.nytimes.com/2011/08/02/opinion/the-tea-partys-war-on-america.html?_r=1
In it, Joe Nocera, a typically impotent mainstream financial hack, proceeds to outline the debt deal snafu in grade school fashion, claiming not only that cuts in spending attributed to the bill will destroy our fragile economy, but that all the blame for this destruction rests squarely on the shoulders of Tea Party Republicans, who are apparently no better than “terrorists”. Yes, that’s right, fiscal conservatives are now terrorists hell bent on our nation’s demise. Gee…we didn’t see that one coming. While I am not particularly happy with the direction the Tea Party has taken since 2010, especially the constant attempts by Neo Conservatives (fake conservatives) to co-opt the movement, the Tea Party is hardly to blame for any destabilization of the economy, if for no other reason than they accomplished nothing in the deal. Nocera’s idiocy is made embarrassingly apparent in his outcries against spending cuts, because NO cuts were actually made.
First, the $2 trillion plus compromise we hear about so often is slated to take place not over the next ten months, but the next ten years! Only $917 billion in cuts are officially mandated by the bill. The final $1.5 trillion will be voted upon at a later date. Only $21 billion in cuts will be applied to discretionary spending in 2012, $42 billion in 2013, and the remaining cuts after 2014. This strategy, by itself, is wholly inadequate in making even the slightest dent in our national debt, being that our government’s spending has grown exponentially with each passing year.
In June of 2009, our national debt stood at $11.5 Trillion. Today, it climbs past $14.5 trillion. That’s an increase of $3 trillion in the span of two years. Now, I don’t know where men like Boehner, Reid, or Obama, learned simple math, but I can tell you their numbers don’t add up. Even if current spending levels stay static (which they won’t), by 2013, we will have to increase the national debt to at least $17.5 trillion, while only cutting $63 billion from the budget. Wow….sounds like progress to me.
Even worse (yes, it gets worse), the spending cuts that were finalized are based not on current spending, but on PROJECTED spending, or what is often called “the baseline”. That means, essentially, that no existing programs or subsidies are specifically facing cuts, only programs and subsidies that have yet to be created! So, Obama could ostensibly forgo an extra $2 million taxpayer subsidized vacation to Hawaii or Manila, and then claim this as a “spending cut”. Imagine it! We could save so much money as a country by not buying all the things we could have bought beyond what we already buy! Huh?
So, no official spending cuts until after elections. No specific programs identified for cutting. No cuts to current deficit spending. Debt ceiling elevated yet again. All that debate and noise, and nothing has changed…
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Where is the recovery? I cannot seem to find it
by Tony Pallotta of Macro Story
Originally posted June 13, 2011
“The only thing worse than being blind is having sight but no vision.” – Helen Keller
POSSIBLY THE ONLY THING WORSE THAN HAVING a serious problem on your hands is when you clearly do not understand the problem. You ignore the data and find an easy scapegoat for why the problem is temporary and will pass. The slowdown in the US economy is not transitory as the Fed chairman states. Hopes for 3-4% GDP growth in the second half of 2011 are simply that, hope.
The earthquake in Japan, the third largest economy, occurred two months before US economic data began slowing sharply. It is easy to say that must be the cause. It is far harder to blame failed policies for that involves being honest with oneself. Accepting failure is everyone’s Achilles’ heel. Something few can overcome.
What is most disturbing about the failed policies of the Federal Reserve and Federal Government are the millions of Americans suffering when they do not have to. With one in seven Americans on food stamps, one in five unemployed or under employed, 28% of mortgages underwater, do leaders truly think we are this naive and that recovery is underway?
In a recent survey 48% of Americans feel we are already in a depression, forget recession. Regardless of what the NBER says or measures of real GDP, something easily manipulated through the deflator, it feels and therefore it is a depression. Food prices are rising. It costs more to fill up our gas tank. Walmart and countless other low cost stores bare witness to the modern day bread line.
If the US government reduced spending by 40% today, right this second, we still could not put a dent in a $12 trillion national debt, closer to $70 trillion when factoring in unfunded liabilities. The government nearly shut down in May as leaders tried to agree on 1% in budget cuts later found to be a pure accounting scheme. All is not well in the US economy and a recovery is not and has not begun. Trillions have been spent since 2008 and we have nothing to show for it.
Ask a child wearing a red shirt what color their shirt is. They will shout red. Ask that same question to an adult and they will hesitate, afraid to answer the most obvious question out of fear they are being set up. As adults we seem to lose the ability to see the obvious. We live in constant fear of being wrong, being judged by others for our inadequacies. Rather than focus on the task at hand we focus on the failure. The safety of going along with the group outweighs the truth we see with our own eyes.
Ask a fund manager with $5 billion in assets under management (AUM) if the economy is recovering and they will say yes. They will say this soft patch is transitory, it is a function of Japan and the revolution in MENA (Middle East and Northern Africa). They will tell you Greece is contained. They will tell you housing is bottoming. They will tell you stocks are cheap.
Do they believe that? Aside from group think I certainly hope not but if the group says that red shirt you are wearing is in fact blue, well dammit, that shirt is blue. No one believes they are a lemming, that they are part of the herd. The word sheeple does not include them. Then why does history always show the majority to be wrong?
As the market rolls over investors are beginning to question the color of that shirt. Perhaps it is red after all. The Federal Reserve has a horrible record at economic forecasting, absolutely horrid yet with each new forecast we are expected to believe “this time it is different.” With each passing day more data tells us they are wrong yet again. As investors we must be diligent in our work, diligent in understanding the issues. We must think for ourselves, beyond the noise, beyond the pressure to conform. Now is the time to have courage in our convictions.
When I listen to Bernanke speak what scares me most is not his forecasts of 3-4% economic growth but his complete lack of comprehension of the problems:
- His apparent belief that this soft patch will pass.
- That QE was successful.
- That with more time structural changes in our economy will fix themselves.
- That the answer to debt is more debt.
- In the words of Helen Keller his sight makes him a very dangerous man.
Bonds forecast, equities confirm. Bonds have spoken. Equities are finally listening.
The Greek “Ultimatum”: Bailout (for the Bankers) and (loss of) Sovereignty
by Tyler Durden
Posted May 29, 2011
SO, AFTER ONE YEAR OF BEATING AROUND THE BUSH, IT IS FINALLY MADE CLEAR THAT, as many were expecting all along, the ultimate goal of the Greek “bailouts” is nothing short of the state’s (partial for now) annexation by Europe. According to an FT breaking news article, “European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens. People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures.”
Thus Greece is faced with the banker win-win choice, of not only abandoning sovereignty, a first in modern “democratic” history, in the pursuit of “Greek” policies that are beneficial for Europe, or not get a bailout, which would only serve to prevent senior bondholder impairments. How could Greek leaders and its population possibly not accept such an attractive option which either leaves the country as another Olli Rehn protectorate, or forces it to not bailout Europe’s overleveraged banker class. In essence Europe is now convinced, just like Hank Paulson was on September 14, 2008, that the downstream effects from letting Greece implode are manageable. But the key development is that the Greek bankruptcy, which from the beginning, and as Peter Tchir’s note below demonstrates, was always simply a Greek choice, was just made that much easier.
From the FT:
People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures. Officials hope that as much as half of the €60bn-€70bn ($86bn-$100bn) in new financing needed by Athens until the end of 2013 could be accounted for without new loans. Under a plan advocated by some, much of that would be covered by the sale of state assets and the change in repayment terms for private debtholders.
Eurozone countries and the International Monetary Fund would then need to lend an additional €30bn-€35bn on top of the €110bn already promised as part of the bail-out programme agreed last year. Officials warned, however, that almost every element of the new package faced significant opposition from at least one of the governments and institutions involved in the current negotiations and a deal could still unravel.
In the latest setback, the Greek government failed on Friday to win cross-party agreement on the new austerity measures, which European Union lenders have insisted is a prerequisite to another bail-out. In addition, the European Central Bank remains opposed to any restructuring of Greek debt that could be considered a “credit event” – a change in terms that could technically be ruled a default. One senior European official involved in the talks, however, said ECB objections could be overcome if the rescheduling was structured properly.
Despite the hurdles, pressure is building to have a deal done within three weeks because of an IMF threat to withhold its portion of June’s €12bn bail-out payment unless Athens can show it can meet all its financing requirements for the next 12 months.
And the latest set of very timely observations from TF Market’s Peter Tchir:
You can lead a Trojan Horse to water but you can’t make him drink
Restructuring in one form or another seems imminent rather than years away
Well, it seems as though this week’s news flow has spurred the mainstream media into action. Everywhere you look there are stories about the Greek credit crisis. It is encouraging to see that more of them now agree with my view that a restructuring would occur sooner rather than later. Only a month ago, almost every article and every piece of official street research made it clear that a restructuring was at least a year off, if not longer. I demonstrated why I thought that opinion was wrong, and although I haven’t been proven correct yet, I am no longer in a tiny minority. Restructuring (reprofiling or default or whatever you want to call it) will not be easy, but I remain convinced that it is the best outcome for Greece and in the long run will be the best outcome for Europe even with the short term pain it will cause.
Bernanke’s QE^X Box
by Gordon T. Long
of Tipping Points
Posted originally April 21, 2011
Chairman Bernanke has placed himself in a box. It is not a box of his choosing, but rather the result of his misguided economic beliefs, use of flawed statistical data, geo-political events occurring during his watch, poor decisions and a penchant for political pandering. Some of these may be requirements for academia success but not for leading global financial markets during turbulent times.
It is time for Professor Bernanke to return to the collegial setting of Princeton University while the world still has time to correct the path he has mistakenly set us on.
I was angry during most of former Chairman Greenspan’s tenure because of his persistent use of liquidity pumping to solve every problem from Y2K to the Peso crisis. Greenspan’s inability to see a bubble two inches from his nose and yet still pontificate about irrational exuberance, rather than taking the punch bowl away from the party, incited me. Bernanke does not affect me that way. He simply disappoints and leaves a taste like eating dry shredded wheat, with the hope of a child, to eventually get the prize at the bottom of the box.
Character flaws show during times of stress. Honesty, integrity, value systems and beliefs are put to test and are highlighted under the public media microscope. I’m sure Chairman Bernanke is a nice guy, loved by his family but he is missing a backbone. On April 27th, 2011, that will become obvious to all.
SIGNAL MEETING
On April 27th, 2011 the Federal Open Market Committee (FOMC) issues its next decision and statement regarding the future of Quantitative Easing (QE) II. Though previously announced to officially end June 30th, 2011 there are serious questions if this is still a viable option.
This particular meeting is the ‘signal’ meeting that the financial community will be looking for to assess risk and strategy. Many (including myself) have already concluded what the outcome will be and are preparing accordingly. On this date Bernanke will hold the first ever press briefing by the Federal Reserve, in addition to releasing forward forecasts which are usually held another 3 weeks. It is going to be an exciting event.
Unfortunately, Chairman Bernanke is going to disappoint!
THE BERNANKE BOX
Let’s summarize the box Bernanke presently finds himself in.
REAL RATES
Interest rates have been artificially suppressed for such a long time that no matter what Bernanke does come June, interest rates will likely begin rising. Therein lies the problem for the Fed. Any further debt monetization by the central bank is now becoming counterproductive. If Bernanke enacts another iteration of Quantitative Easing, the Fed may find itself the only player in the bond market. According to my analysis this is nearly the case already.
The truth is that only a central banker can afford to own bonds that are yielding rates well below inflation, and growing even more so. The lower real interest rates become, the less participation there will be in the bond market from private sources. If you don’t believe me, ask PIMCO, the world’s largest Bond fund who is not only out of US Treasuries but selling short. China has been a net seller of US Treasuries since October. Besides the Fed, who is willing to buy the $1.65 Trillion in fresh new US debt paper?
So if Bernanke extends QEII we have a collapse in the US$ and a complete lockout of auction buyers. If they stop QE II, interest rates go through the roof immediately and the US government with short duration paper has an immediate and serious fiscal funding gap.
Bernanke is in a Box!
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QE is the end of America as we know it
from The Paper Empire
Originally posted March 2, 2011
EACH TIME WE BEGIN TO APPROACH THE END of an announced QE period, the nervous jitters of financial markets start to set in. Will Bernanke continue with QE(n+1) or won’t he? Now it’s true that professional traders live and die by their ability to front run rumor and perception, but for long term investors who fret over such decisions, it demonstrates a fundamental lack of understanding of what QE really is.
To put it succinctly, QE is an economic deal with the Devil. Once it is begun in earnest there can be no turning back. It must be played to its ultimate conclusion.
In Bernanke’s 2009 interview on 60 Minutes, he suffered a momentary lapse into honesty and stated that Quantitative Easing was effectively money printing. So why then the complicated euphemism of Quantitative Easing? Because that is what modern central banking sponsored economics is all about – the intentional obfuscation of otherwise simple economic principles to cause the eyes of normal people to glaze over. Once accomplished, the central bankers (and their financial community brethren) are able to pursue policies that greatly benefit themselves but are devastating to everyone else.
Long term investors who worry about whether QE will continue clearly recognize the fact that everything is now correlated to the Fed’s balance sheet. What they don’t understand is how QE is related to the larger economic cycle and its mission of preventing economic recessions.
Keeping the tent inflated
Sometimes physical analogies are the most helpful in understanding complex relationships. Let’s think of the economy as a large inflated tent. The extent of the tent’s inflation is the health of the economy. Under normal economic conditions the tent is fully inflated. In the course of time, events take place that cause the need for a correction to the economic system. New technology can come along which obsoletes old industries, bad investments and debt must be liquidated etc.
When this happens a free market economy will correct itself. Capital tied up in failed industries will be reallocated and invested in new businesses. New jobs will ultimately be created and people will go back to work. Of course this reorganization takes place over time and this is what a recession is – a healing process for the economy. In our tent we can think of this as a tear that forms in the fabric. While this hole is being repaired, air escapes and the tent begins to sag a little. The extent of the drooping is the extent of the recession. Once fixed, the tent and the economy go back to normal.
QE is a wholly different method of keeping the tent propped up. It does not repair the hole, but rather attempts to keep the tent inflated by pumping more air in than is escaping through the hole. This is the new money being created and pushed into the economy to offset the credit destruction in the banking system. This is a dynamic process that must be maintained.
The catch is that the hole doesn’t just stay a fixed size. The tear begins to lengthen allowing greater amounts of air to escape. The economic tent begins to sag until the volume of air being pumped in is increased to overcome the outflow. This is why QE can never end. To stop now, with such a large hole, would result in a severe and frightening recession. The tent would lose a tremendous amount of air in the time it takes to make such an extensive repair.
This process continues until eventually the hole is so large that the tent collapses around the massive flow of pumping air. This is the ultimate fate of money printing as policy – a currency crisis – the endless flow of new money loses purchasing power faster than it can be created. We are left with an inflationary depression in which savings are decimated and the standard of living of most Americans is dramatically lowered.