our financial crisis

Advice from personal finance experts

2012-05-08T00:16:00.000-07:00

As the world begins recovering from the worst financial crisis in 70 years, an odd couple of winners have emerged: stocks and gold. So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet on calamity, are up 19%. The reason: Low interest rates and heavy government stimulus have poured cheap money into financial markets, helping both the economy and stocks. But the creation of all that money, together with the Federal Reserve’s maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility later.
Dangerous Side Effects of Ultra-Easy Money (pinecarr)
In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum – the euphoric illusions of V-shaped recoveries, the “Group-of-20” have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe’s annual economic output. The G-20’s largesse has been used to fund capital
injections into banks, soaking-up toxic assets, guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap liquidity.
Gold Market Reaching The Breaking Point (pinecarr)
On October 29, 2008, the TOCOM added a ‘physically backed commodity ETF’ as a possible physical for EFP (Exchange of Futures for Physicals) transactions at the exchange. An exchange for physicals (EFP) transaction is when a client gives an IOU for a physical commodity to a broker and that broker opens a short position on the futures exchange in that commodity. Normally, Exchange for physicals is the legitimate process used by producers to sell futures against their future production. However, if the IOU portion of the EFP is not from a commodity producer (ie: borrowed a GLD Ishares), then you have a problem.]
China and Brazil trade in yuan (saxplayer00o1)
China and Brazil have started to trade in yuan, Kazakhstan Today agency reports citing the Russian information resource NEWSru. According to NEWSru, China and Brazil established international payments in national currency of the Peoples Republic of China. Geli Corporation has already received from San Paolo a few million yuans. According to Vice President of the Brazilian branch of Bank of China, all formalities required by the local bodies of control have been met
Ravitch Says States Face Total Deficits of $500 Billion in 2011 (saxplayer00o1)
Oct. 28 (Bloomberg) — New York Lieutenant Governor Richard Ravitch predicted states across the U.S. would face deficits totaling as much as $500 billion in 2011 after the federal government stops paying them economic stimulus grants. Ravitch, 76, a real estate developer and former chairman of New York’s Metropolitan Transportation Authority, said the looming nationwide fiscal crisis would first become apparent as states’ credit ratings falter, making it more expensive to borrow money
Moody’s May Downgrade Mortgage Bonds With New Outlook (saxplayer00o1)
The company will boost its loss projections for prime- jumbo, Alt-A, option adjustable-rate and subprime mortgages backing bonds issued between 2005 and 2008 after seeing higher losses per foreclosure than expected, Moody’s said today in a statement
Common Currency Weighs on Airbus (saxplayer00o1)
Since 2001, when Air France agreed to buy ten of the world’s biggest passenger jets, the euro has strengthened by more than 60% against the dollar. That means Airbus, which translates all its finances into euros, is pocketing significantly less revenue per plane than it initially expected. And since Airbus books most of its costs in euros, the currency swings go straight to its bottom line. “This situation is critical for a company like EADS, which has costs in euros and sales in dollars,” EADS Chief Executive Louis Gallois recently told a French parliamentary committee. EADS estimates that a 10-cent drop in the dollar against the euro wipes €1 billion off earnings.
Why The Foreclosure Crisis Is Unsalvagable (M.W.)
States that have been devastated by unemployment are seeing dramatic increases of foreclosures that are much harder to salvage because those people have no income and no federal loan program will help. The demographics of the foreclosure crisis are changing and affecting people who were blue collar and entry to midlevel white collar. If you’re unemployed, you don’t qualify for a loan modification. The first wave {of foreclosures] was caused by bad loan products, while the second will be driven by unemployment. Right now, we’re at the beginning of wave two.
U.S. Home Vacancies Rise to 18.8 Million on Defaults (Vinny A.)
About 18.8 million homes stood empty in the U.S. during the third quarter as banks seized properties from delinquent borrowers and new home sales fell in September. The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.4 million a year earlier and 18.7 million in the second quarter, the U.S. Census Bureau said in a report today. The record high was in the first quarter, when 18.95 million homes were vacant. The homeownership rate, meaning households that own their own residence, stood at 67.6 percent.
Malpass Says U.S. Economy Will Slow, Enter ‘Gloomy Period’ (Vinny A.)
Economic growth in the U.S. will slow after the rebound in the third quarter and enter “a very gloomy period” of high unemployment, said economist David Malpass, president of Encima Global in New York. “We are moving into this very gloomy new normal” of 2 percent growth and a “very high unemployment rate,” Malpass said today in an interview on Bloomberg Radio. As a result, “Washington will reach around and thrust around desperately” for new programs to boost growth.
Long Live The Gold Basis (Claire H.)
According to some reports independent auditors, at the insistence of parties holding expired forward purchase contracts to deliver gold, are descending on ETF’s and check their vault’s contents against their books. The noose is tightening around the neck of fraudulent banksters caught in the short squeeze.
The Right Way To Break Up With Your Credit Card (M.W.)
It’s a frequent question for American consumers these days. Half of all account holders say they’ve been hit either with a higher rate or a lower limit in recent months. While consumers are customarily given the choice to decline the new terms and close the account, doing so flies in the face of all standard advice from personal finance experts because closing credit cards usually has a negative impact on credit scores. So which bad choice is right for consumers? The answer is perhaps even more maddening than the question: “It depends” and “there’s no surefire way to know ahead of time.” But there are some clear guidelines that can help and strategies for minimizing the negative impact once you do so.

Financial leverage

2012-05-06T02:20:00.000-07:00

Despite the rally today, up well over 100 Dow points as I write this, caution is in order as discussed in this link from Paul Kedrosky to Bill Gross.
Bill Gross: One of Our U.S. GDPs Has Gone Missing
[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform. …Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.

Power and money from the citizens

2012-05-05T10:26:00.000-07:00

The piece below by Peter Boettke summarizes what I think about current economics. The Keynesian model or paradigm is wrong and always has been. Two primary reasons it was adopted were 1) the crisis of the 1930s was misunderstood but demanded “action” of some kind and 2) it gave the politicians a license to steal power and money from the citizens. If economics were a physical science where data could refute false hypotheses, it is doubtful that the paradigm would still exist today. Because it isn’t, reason number two became paramount. Most economists initially objected to the theory, gradually agreeing with it over time. After all, it also provided lucrative rewards for them in terms of higher paying jobs in government and eventually a route to tenure after it dominated university economics departments.
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics” book is especially insightful because it is a collection of great economists (authors include Jacob
Viner, Frank Knight, Garet Garrett, Jacques Rueff, Benjamin Anderson, Frederick Hayek, Ludwig von Mises, and others) contemporaneously passing judgment on the then “New Economics.” Most of the essays were written in the 1930s or early 1940s and accurately saw the inconsistencies in Keynesian theory and its ultimate unworkablility. The passage of time has only proved their critiques correct.
As the world suffers through another desperate period, unnecessarily imposed by crank economics, one wonders if the dullard economists of today will finally recognize where the blame lies. If this recognition were finally to come, there is no guarantee that normalcy would return. The political establishment is so entrenched and dependent upon these false ideas that it is difficult to see how the situation will change. Indeed, it is this fact that has probably enabled it to last so long in the first place.
The Legacy of Lord Keynes
Greg Mankiw argues in the NYT that John Maynard Keynes is the most important “defunct economist” to learn from for 2008. Tyler Cowen proposes to do a book club reading on his blog for Keynes’s General Theory. In the comments section Barkley Rosser predictably (irony intended) suggests that chapter 12 is the key to unlocking the mystery of our current mess. On could just as easily point to Keynes’s 1937 article summarizing his core ideas on our being “engulfed in the dark forces of time and ignorance.”
Now I am all for reading and debating economics, and so I don’t have an objection to another public forum discussing Keynes’s contribution. But I also think that the emphasis on Keynes demonstrates a collective delusion among economists. Even Milton Friedman can be quoted as emphasizing Keynes’s brilliance.
But what of Knight’s judgment that “what is new isn’t true, and what is true isn’t new”, or of Hayek’s judgment that Keynes’s idle resources argument assumes a post-scarcity world, or of Mises’s judgment that Keynesian economic policy assumes the miracle that stones can be turned into bread?
The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations. We have Keynesian theory, the development of Keynesian inspired data collection, the “testing” of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy. This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy. All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.
Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one) Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt’s The Failure of the “New Economics”, graduate to W. H. Hutt’s The Keynesian Episode, and then read closely Buchanan and Wagner’s Democracy in Deficit and then Higgs’s Crisis and Leviathan and War, Depression, and Cold War.
Sincerely, you want to know what is going on in 2008 — it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940. We are living through the consequences of Keynes’s ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.
Hayek warned us about the “tiger by the tail” problem of inflation and Buchanan warned us about the destruction of the “old-time fiscal religion” due to Keynesianism. Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for “growth accounting” in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through. I am sure stating this sentiment this way will qualify me as a “wing-nut” in Brad De Long’s classifications, but instead of admitting my “wing-nutness” I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt. Somehow I doubt that will take place in our current intellectual and policy context.
So by all means join Tyler in his book club and re-read The General Theory, it is a very important book to read thoroughly and critically understand. But I would suggest that you read Keynes alongside the books I suggested above and with the Hayekian and Buchananite perspective on the legacy of Lord Keynes with respect to monetary and fiscal policy.
Keynes isn’t the intellectual solution to our current woes, his ideas are one of the primary reason we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036. Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place. Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.

Private negotiations with the banks

2012-05-03T01:51:00.001-07:00

Whether you approve of his style or not, Karl Denninger cuts through the BS and says it like it is. The corruption and self-dealing in these bailouts is disgraceful. One must wonder whether there is any integrity left in government or our financial system. You and I and all other taxpayers are bailing these crooks out instead of sending them to jail.
More Arrogation Of Power?

Bloomberg has an interesting story up on the AIG derivative “payoff” mess I’ve repeatedly written about:
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.
….

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

Where did the NY Fed get this authority? Remember, this wasn’t the NY Fed’s money – it was ours. Where was it appropriated by Congress? This was not part of TARP – AIG was separate.
All appropriation bills must originate in The House.
This one didn’t originate at all. It was simply arrogated by The Federal Reserve and the NY Fed.
Section 13(3) of The Federal Reserve Act allows The Fed to lend to anyone under “unusual and exigent circumstances.” But this was not a loan. It was a pass-through payment to Goldman Sachs and other banks for credit-default swaps that were in fact functionally worthless, as AIG was functionally bankrupt. Why was it done?
One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.
So what?
And which of those banks were at risk of failure? Goldman? Merrill? Deutche Bank or Soc Gen?
This deal was even worse than it first appeared. The Fed also took a bunch of assets (which, it appears, is flatly illegal) and set them forward in an “off balance sheet” thing called Maiden Lane. How are they doing?
According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.
Remember, Bernanke has repeatedly told us that The Federal Reserve was highly unlikely to lose any money on any of their programs.
In reality it looks like the loss – so far – has been 75%.
If that’s “unlikely” I’d like to know what “likely” is.
More to the point, this appears to be an unauthorized appropriation of funds in fact by The Federal Reserve and NY Fed in which not only United States asset losses but those of FOREIGN INTERESTS were effectively transferred to the US Taxpayer without Congressional review or approval.
“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”
The Fed created this mess. “Loose money” along with willful blindness to reasonable regulatory requirements and in fact black-letter statutory requirements under the law to apply “prompt corrective action”, along with wanton and reckless refusal to supervise and impose controls on firms levered 20 or even 30:1, especially given that Henry Paulson lobbied the SEC to remove the investment bank leverage limits in 2004, were the actual and proximate cause of all the failures.
Fannie, Freddie, AIG, Bear Stearns and Lehman - all were levered at more than the former 14:1 limit when they blew up by at least two and in three cases more than five times. Every one of these failures is directly traceable to excessive leverage, a policy enabled by and lobbied for by Hank Paulson before he was appointed as Treasury Secretary.
That The NY Fed refused to step in and prohibit firms under its regulatory authority from engaging in counterparty transactions with AIG until and unless AIG had first proved it was sufficiently capitalized to honor all of it’s commitments, is a gross dereliction of regulatory duty.
The argument that The Fed was “powerless” to regulate AIG itself is immaterial – The Fed absolutely had the ability to regulate those firms under it jurisdiction in their trading with AIG.
In allowing systemic leverage to be concentrated and ramped up to 20, 30, even 80:1 or more against actual capital as was the case with Bear Stearns, Lehman and AIG, The Fed was explicitly involved in both setting the table and assembling the financial nuclear device that went off on Bear’s, Lehman’s and AIG’s balance sheets.
Then you have Friedman:
Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.
That’s nice.
“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”
If that’s true then Goldman double-dipped and owes the taxpayer the full amount paid it through AIG.
If that’s false then one wonders whether SarBox, which is supposed to prohibit false statements by company executives, has any meaning at all.
The NY Fed and Federal Reserve must be compelled to open their books – not only on this sordid mess, but on all of their activities.
If these institutions are going to be transacting with the public’s checkbook the public has a right to know exactly what they’re doing, never mind that the black letter of The Constitution requires that all appropriations – that is, public spending – originate not in some smoky room at the NY Fed but rather in The Halls of Congress.
The Constitution is not “Articles of Suggestion.”

Best financial analyst

2012-05-02T04:47:00.000-07:00

Some commentary by David Rosenberg, probably the best financial analyst posting on a regular basis.
• Oh yes — this is surely a sign that the credit crunch is behind us. Regulators closed seven more regional banks last Friday, bringing the tally for the year to 106. There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks — but there is limited downside risk because Uncle Sam has deemed them all to be ‘too big to fail’. Those who were investors in American United Bank, well, we are sorry to have to tell you that you were involved in an institution that was small enough to close down.
• We realize that this did not make it anywhere in the weekend press (outside of a microscopic piece in the IBD) but the ECRI leading economic indicator actually fell (by 0.2 of a point) for the second week in a row (and the smoothed annualized growth rate declined 1.6% —- now what is that all about?).

The stock market goes up

2012-05-01T03:16:00.001-07:00

Peter Schiff adamantly recommends getting out of the dollar. His presentation, if correct, will be devastating for this country and wipe out the wealth of the middle class. All of what he says is correct, although his timing may be off. Furthermore, there is the possibility that our government might change course, although I, like Schiff, feel that unlikely. His recommendation to own “real stuff” is correct. If the stock market goes up, I doubt whether it will keep pace with inflation. The best performing stock market in the world in recent years has been Zimbabwe, but it did not keep pace with their inflation.
So, what to do? If as some believe that the dollar will decline by 50% from here over the next 10 years, then having your funds outside the dollar (in other currencies) would presumably produce a 7% average return per year. Investing in foreign stocks would provide that 7% plus the returns (or losses) obtained in foreign stock markets. Precious metals, as money substitutes, should do well. So should natural resources and other hard assets like land. Foreign resource stocks might do especially well.
None of this is meant to be investment advice. If what Schiff (and I) fear comes true, some of the above might be reasonable investments/hedges. On the other hand, all of the above comments would be 180 degrees wrong if we were to end up in deflation instead of inflation.
Schiff was very emotional, practically begging people to get out of the dollar. I suspect the economy and markets over the next year or two will justify his emotion. Whether his scenario results or not, is the more difficult issue.

The paramount political tendency

2012-04-30T12:14:00.001-07:00

“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.”

Real estate agencies are owed a profit

2012-04-28T00:25:00.001-07:00

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.

Below is a post from Mish that deals with one of the interventions. Both parties engage in the practice. Only control in Congress determines which one leads in such practices.
Hogwash
24 Senators and 63 House Representatives have completely lost their minds over pork bellies. Apparently the free market does not work, hog farmers are not making enough money, and the government owes farmers a profit no matter how much stuff they grow or raise.
Please consider USDA Must Buy Pork ‘Immediately,’ Hog Executive Says.
The U.S. Department of Agriculture must make funds available immediately to buy pork to keep hog farmers in business, the head of the second-biggest U.S. producer told a House of Representatives subcommittee.
Government pork purchases worth $100 million have won the backing of a bipartisan group of 87 lawmakers to support prices for farmers, who have lost money since 2007. Hog futures have dropped about 25 percent in Chicago since April 23, when swine flu began making headlines, depressing consumer demand and curbing exports to major markets including China and Russia.
Lawmakers need “to encourage and work with the Secretary of Agriculture to immediately make available” funds for government pork purchases, said Rod Brenneman, the chief executive officer of Seaboard Foods LLC, a unit of Merriam, Kansas-based Seaboard Corp. He testified before a House Agriculture Committee panel that oversees the livestock industry.
Lawmakers led by Senators Al Franken, Democrat of Minnesota, and Richard Burr, Republican of North Carolina, asked Agriculture Secretary Tom Vilsack to increase U.S. spending on pork in letters earlier this month.
The group of 24 senators and 63 representatives asked Vilsack to buy more pork in the year that began Oct. 1 through government food programs. The U.S. Department of Agriculture bought $165 million of the meat a year earlier, including $30 million announced on Sept. 3, according to Justin DeJong, a USDA spokesman.
The USDA may have less to spend on pork this year because of fiscal restraints, Vilsack said in an interview last week. He said the department is reviewing its plans for this year with an eye toward maximizing available funds for pork producers.
“We have to be sure we husband our resources and use them wisely,” he said last week.No One Owes Farmers A Profit
It is absurd to think the government or anyone else owes farmers a profit anymore than computer consulting corporations or real estate agencies are owed a profit.
Yes farmers have a rough life. But everyone unemployed or underemployed has a rough life now. Farmers are raising too many hogs and prices are low. The solution is to raise fewer hogs, either voluntarily or involuntarily via bankruptcy.
When government steps in and offers price supports it keeps weak producers alive when they should go out of business, it encourages more production of unwanted goods, those goods stockpile up and then finally the US government dumps the excesses on foreign markets at whatever price it can get. The latter is an enormous source of aggravation for struggling emerging market countries.

The top line represents actual unemployment

2012-04-26T02:31:00.000-07:00

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.”

Refinance debt

2012-04-23T02:48:00.001-07:00

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

appears to be their only solution. Why not? It always worked in the past. But the past is no longer. We are in the “new abnormal,” a condition unlike the past 30 years. Arguably that period might be labelled the “old abnormal” because of the credit explosion that created an unsustainable boom. The “new abnormal” will see the reversal of this process with a de-leveraging period that could last for a decade or more. As this occurs, spending will drop well below norms as savings is increased. Unemployment will continue at high rates. This process will be painful and long. The “new abnormal” will be characterized by a lower standard of living than people expect or want. It will produce lower tax revenues, too low to sustain overbloated governments structured for the continuation of the previous Alice-in-Wonderland economy. Governments will fight adjusting to this situation, playing for time and tweaking here and there to get through. But this period will not end shortly and some governments might.
For years California has been considered the bellweather of change in the United States. Unfortunately, in their spending and budget crisis, they are probably still the lead cow. Look for similar “bankruptcies” to follow in other states shortly and perhaps the Federal government as well.
This article from Bloomberg provides details.
California Budget Is Already in the Red 10 Weeks After Passage
Oct. 10 (Bloomberg) — California Governor Arnold Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said.
Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.
“The culprit here appears to be estimated quarterly personal income tax statements,” H.D. Palmer, the governor’s budget spokesman, said yesterday. “The numbers are cause for concern, but the issue now for us is to determine if this is a one-time event or whether it has more long-term implications.”
The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing. Even with those actions, state budget officials predict an additional $38 billion in deficits in the next three fiscal years combined, including $7.4 billion in the year starting July 1.
Schwarzenegger must present a budget for the coming fiscal year in January. The state’s Franchise Tax Board will deliver new data to the governor in November.
Debt Sales
The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects, and as a surge in fixed-rate municipal issuance sent benchmark rates up by the most in almost four months.
California, already the largest borrower in the municipal market, may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided.
“If the market is inhospitable, we won’t go,” Lockyer said in an interview yesterday. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”
Additional bond sales by California would follow an offering of $4.1 billion of general obligation bonds this week.
Scaled-Back Offering
The state was forced to scale back the size of the deal by almost $400 million as benchmark yields surged. The yields climbed after gains in the tax-exempt market last week pushed them to a 42-year low.
California’s sale follows a two-month rally in municipal bond prices, fueled by a record flow of money into mutual funds that outweighed lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.
U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves.
California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.
Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April.

Destroying any residual value

2012-04-22T00:48:00.001-07:00

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.”

The dollar’s important role in the system

2012-04-20T02:01:00.001-07:00

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.

“Since the dollar has been weak and weakening for years, Geithner was using a code phrase, a carry-over from the Bush administration,” said David Malpass, president of research firm Encima Global in New York. “It means that the U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,” said Malpass, the former chief economist at Bear Stearns Cos. and deputy assistant Treasury secretary from 1986 to 1989.
Poorer Americans
The dollar’s 15 percent decline against the euro and 11 percent depreciation versus the yen since early March are increasing concern among world leaders. At the same time, Americans are getting poorer.
Per capita net wealth tumbled to $172,749 in August from a peak of $212,599 in September 2007, government figures show. A United Nations Human Development Report released Oct. 5 showed America’s quality of life dropped to No. 13 in a 2007 global ranking from No. 5 in 2000.
European Central Bank President Jean-Claude Trichet said today in Venice that a strong dollar is “important,” repeating remarks made in Brussels on Sept. 28. Toyoo Gyohten, an adviser to Japan’s new finance minister, said the same day there is “no better alternative to the dollar.” Bank Rossii First Deputy Chairman Alexei Ulyukayev said Sept. 29 that Russia will keep buying Treasuries because there’s no realistic alternative.
The dollar fell as much as 0.7 percent against the euro today, before trading at $1.4736 as of 2.35 p.m. in London, from $1.4691 yesterday.
‘Special Burdens’
“We recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence,” Geithner told reporters after attending a meeting of counterparts and central bankers from the Group of Seven in Istanbul on Oct. 3.
The comments came after policy makers from China to Russia called for an alternative to the world’s main currency in foreign-exchange reserves.
“Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets,” China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks.
Bentsen, Rubin, Summers
When Ronald Reagan was elected president in 1980 his platform called for a “strong NATO,” “strong leadership,” “a strong peace,” and a strong currency. “A sound monetary policy will be restored — one designed to instill confidence in the American dollar abroad, as well as bring down the rate of inflation at home,” according to a 1980 brochure from Reagan’s campaign.
The preference for a strong dollar was brought back under Lloyd Bentsen, Bill Clinton’s Treasury secretary, in 1994 and the phrase was used regularly by his successors, Robert Rubin, a former Goldman, Sachs & Co. co-chairman, and Lawrence Summers, who is now the director of Obama’s National Economic Council.
Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained an average of 4.93 percent a year between 1996 and 1999 when Clinton was in office.
Rubin Mantra
“By not varying the statement, an issue never arose about whether a comment involved a subtle change or not in the policy toward the dollar,” former Fed Chairman Alan Greenspan told his colleagues on the Federal Open Market Committee in 2001, according to a transcript of the meeting. “It was boring, it was dull, it was repetitive, it was nonintellectual, and it worked like a charm.”
Rubin, a former senior counselor at New York-based Citigroup Inc., wasn’t immediately available to comment. A spokesman for Summers referred questions to the Treasury.
During the presidency of George W. Bush, the Dollar Index declined 20 percent.
The government has used the phrase for so long that “I don’t think it has much meaning left for the markets,” said Vassili Serebriakov, a currency strategist at Wells Fargo Bank in New York. “Once you have this policy in place I don’t think there’s any possible choice but for the Treasury to stick to what it’s been saying all this time.”
More Expensive
The decline means it’s becoming relatively more expensive to live in the U.S. The difference in per-capita income with Canada has shrunk 87 percent since October 2008.
A McDonald’s Corp. Big Mac sandwich cost $3.57 in the U.S. in 2009, unchanged from 2008, according to The Economist magazine’s Big Mac Index. That compares with a 13 percent decline in the euro region to $4.62 from $5.34, and a 19 percent drop in the U.K. to $3.69.
One benefit to a depreciating dollar is that it helped shrink America’s trade deficit to $32 billion in July from the record $67.6 billion in August 2006, data compiled by the Commerce Department show.
Exports rose 5.7 percent to $127.6 billion in July from the low this year of $120.6 billion in April, the most recent data show, led by sales of capital goods including cars, civilian aircraft and computers, as well as stronger demand for industrial supplies and consumer goods.
Theory ‘Problem’
“The Washington theory is that dollar weakness will benefit the U.S. by inflating our way out of debt and causing more exports,” Encima’s Malpass said in a Sept. 25 note to clients. “The problem with this theory is that it assumes capital stays put while the dollar devalues.”
While the dollar dropped in global currency reserves, holdings of euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.
The share of reserves in dollars declined even after the Fed and the government lent, spent or guaranteed $11.6 trillion to shore up the economy and the financial system. The Fed has increased the size of its balance sheet to $2.144 trillion from $906 billion in September 2008.
Treasury officials rely on foreign investors to buy the record amount of debt needed to finance the more than $1 trillion budget deficit. The gap will grow to $1.6 trillion in fiscal 2010 before narrowing to $1.4 trillion the following year, according to the Congressional Budget Office.
Treasury Sales
The U.S. sold $1.517 trillion of notes and bonds this year, compared with $585 billion at the same point in 2008. London- based Barclays Plc forecast total 2009 issuance at $2.1 trillion, and $2.5 trillion in 2010.
Dollar bears say net purchases of long-term U.S. securities by foreign investors fell below the trade deficit by $46 billion in the first half of the year, one of the only three occasions since 1994 there was a shortfall, according to Treasury Department data.
China has slowed purchases, increasing its holdings 10 percent to $800.5 billion through July after a 52 percent rise in 2008 and 20 percent in 2007, according to the Treasury Department. Foreign ownership overall has risen 11.4 percent to $3.43 trillion, after gaining 31 percent in 2008.
Chinese Premier Wen Jiabao said in March that the Asian nation was “worried” about the safety of its investment in U.S. debt, as a weakening dollar eroded the value of its record $2.1 trillion of foreign-exchange reserves.
Dollar Index
The Dollar Index, which was as low as 75.896 today, is still above the lows in March 2008, when it fell to a record 70.698. The decline isn’t as steep as in the late 1980s, when it tumbled 48 percent to 85.33 in January 1988 from 164.72 in March 1985.
There’s no sign slower purchases of U.S. debt are leading to higher borrowing costs. The yield on the benchmark 10-year Treasury, which helps determine everything from mortgage rates to auto loan payments, has averaged 3.17 percent this year, compared with 5.6 percent since 1989.
“The dollar will fall against the euro into the year end as investors reallocate funds in search of higher yields,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, the most accurate forecaster of 2007. “This is only capital export though, not capital flight. There is no evidence whatsoever that the weak dollar will lead to capital flight.”
No Inflation
There is no inflation in the U.S. that would deter foreign investors from Treasuries. Consumer prices fell 1.5 percent in August from a year earlier, and have dropped for six straight months, the Labor Department in Washington said Aug. 16.
“Inflation is still declining in the U.S. so it’s wrong to say that the dollar is losing its purchasing power,” Redeker said. “The U.S. is a domestically driven economy. It has huge output gaps and these are going to keep inflation subdued for at least two years.”
G-7 finance chiefs stopped short of singling out the dollar for criticism in a statement after talks on Oct. 3, saying that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.” That’s the same language they used in April, when the Dollar Index rose to 86.871.
“It’s hardly a decisive statement by the officials but at the same time it shows that they prefer the dollar steadies in the current range and they could learn to live with it,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “I’m sure Geithner wouldn’t mind the dollar becoming a little more competitive but he doesn’t want to threaten the dollar’s status as the reserve currency, so by definition he has to play a delicate balancing act.”

Inflation isn’t a risk now

2012-04-19T23:15:00.003-07:00

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
aboard an oil tanker; its total weight of 125,000 tons amounts to a few hours’ output for the U.S. steel industry.
But economists tell us that inflation isn’t a risk now. Are they wrong? No and yes.
The conventional way economists view inflation is to look at things like “output gaps.” When the economy falls below a level of output it previously achieved, it is said to have unemployed resources. If you think of inflation as workers demanding and getting higher wages, which leads to higher prices for the goods and services they produce, then inflation isn’t a threat.
So economists tell us more borrowing and money printing won’t be inflationary as long as people are unemployed.
One problem: Their models ignore the fact that peak output was artificially inflated by a credit binge. Borrowing more to sustain an unsustainable level of spending borders on insanity, yet that’s precisely what such economic models tell us we need to do.
There’s an extra variable these models don’t account for — the Chinese and all major lenders to the United States. They don’t much care if our employment rate is below desirable levels. At a certain point, they may recognize that the United States is acting like a banana republic and choose to stop lending.
When that happens, we might see a “sudden stop” event: Capital inflows to the private and public sector cease as everyone races to get out of dollars.
Eric Sprott, CEO of Sprott Asset Management has $4.5 billion under management, $2 billion of which is invested in physical bullion — silver and gold — stored at banks in Canada. Another large chunk is invested in gold stocks.
He views gold as an insurance policy against both inflation and deflation. Central bank quantitative easing policies mean “we’re printing paper currency like crazy,” so he doubts the long-run value of fiat currencies.
On the flip side, if central banks pull back, you could enter a deflationary spiral, essentially a banking collapse, in which case “your deposits wouldn’t be returned to you. Better to have physical gold in your control.”
Most economists and investors still labor under the illusion that there’s a way out of debt that doesn’t involve a drastic reduction in the paper value of wealth. Smart investors aren’t so sure and want at least a portion of their assets out of the financial system.
A dollar crisis isn’t necessarily coming tomorrow, so there’s no guarantee gold’s price will keep going higher. Still, gold is a decent insurance policy against economic Armageddon.

It was a good transaction

2012-04-19T23:12:00.003-07:00

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.

At first, Buffett wasn’t sure he was hearing Trott correctly. Government assistance? In a Goldman deal?
“Byron, it’s a waste of time,” he said in his folksy way after considering the new configuration. “By tonight the government will realize they can’t provide capital to a deal that’s being done by the former firm of the Treasury secretary with the company of a former vice-chairman of Goldman Sachs and former deputy Treasury secretary. There is no way. They’ll all wake up and realize, even if it was the best deal in the world, they can’t do it.”
John Mack had received some promising news that afternoon: Mitsubishi looked like it would actually pull through and make a sizable investment in Morgan Stanley. A conference call had been arranged for Mack to speak with Mitsubishi’s chief executive, Nobuo Kuroyanagi, that evening.
Just as they were going over the details, however, Paulson called.
“John, you have to do something,” Paulson said sternly.
“What do you mean I have to do something?” he asked, his voice rising with impatience, explaining that he had just learned that the Japanese were inclined to do the deal. “You’ve been so supportive—you said we can get through this.”
“I know,” Paulson said, “but you’ve got to find a partner.”
“I have the Japanese! Mitsubishi is going to come in,” he repeated, as if Paulson hadn’t heard him the first time around.
“Come on. You and I know the Japanese. They’re not going to do that. They’ll never move that quickly,” Paulson said, suggesting that Mack focus more on the deal with the Chinese or JPMorgan.
“No, I do know them. And I know I don’t agree with you,” Mack answered angrily. He explained that Mitsubishi had used Morgan Stanley as an adviser during its hostile bid for a part of Union Bank in California earlier in the year. “Japanese rarely do a hostile,” Mack reminded him. “They hired us, they followed through and got it done, so they’ll come through for us.”
Paulson was still skeptical. “They won’t do it,” he said with a sigh.
“You and I disagree,” Mack sputtered.
Calling Kevin Warsh out of a meeting at the Fed to come to the phone, Gary Cohn outlined the preliminary Goldman-Wachovia terms for him. They had agreed to a deal at market—Friday’s closing price of $18.75—and considering that Wachovia’s stock had jumped 29 percent that day on the back of the tarp news, Cohn thought it was a generous concession.
But then he wound up for his big pitch: to complete the deal, he said, Goldman would need the government to guarantee, or ring-fence, Wachovia’s entire portfolio of pay-option arm mortgages—all $122 billion worth.
Warsh stopped Cohn in midsentence. “We’re just not prepared to do that,” he said. “We can’t look as if we’re just writing a blank check.” He suggested that if they structured it so that Goldman would take a first loss—in the same way that JPMorgan had agreed to accept the first $1 billion of losses at Bear Stearns before the Federal Reserve would step in and guarantee the next $29 billion—the government might well consider acting as a backstop.
At Treasury, Jim Wilkinson, Paulson’s chief of staff, was by now practically sleepwalking down the halls. Paulson had just updated him on the Goldman-Wachovia talks and asked him for his counsel. Should the government provide assistance? Wilkinson, in his stupor, said he thought that it sounded like a reasonable idea.
But a half-hour later, after a cup of coffee and further reflection, Wilkinson changed his mind. He realized that such a deal would be a public-relations nightmare at the worst possible time, just as they were trying to pass tarp. Paulson would lose all credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.
Wilkinson ran back into Paulson’s office. “Hank, if you do this, you’ll get killed,” Wilkinson said frantically. “It would be fucking crazy.”
Ben Bernanke was being piped in over the speakerphone in Geithner’s conference room, where Warsh was reviewing the new terms of the Goldman-Wachovia agreement. Cohn and Steel had come back to him with a slight revision to the previous proposal, allowing for Goldman Sachs to take the first $1 billion of losses, per Warsh’s suggestion. Cohn and Steel said they were committed to completing the deal that afternoon if the government would agree to provide assistance. The boards of both companies had been put on standby.
The general view in the room seemed to be that it was a good transaction, but Geithner was quick to point out its drawbacks. “Does it make Goldman look weaker than they are?” he asked—a question Blankfein had raised earlier in the day. Geithner also wondered whether the Fed should be the one lending the money. Since Wachovia’s regulator was the F.D.I.C., perhaps it ought to be the one to bear that burden.
Terry Checki from the New York Fed couldn’t believe the gall of Goldman’s request. “They’re still driving these negotiations as though they have leverage,” he said. But he opposed the merger for a different reason: he was concerned that neither side had enough time to make a thoughtful decision, referring to the situation as “the shotgun-wedding syndrome.”
Then the New York Fed’s Bill Dudley, a former Goldman man himself, who thought the deal was unattractive for the government, raised the same objection that Buffett had raised just hours earlier: it would prove a public-relations disaster for the government.
“What are we doing here?” Dudley asked. “Look at all of the connections you’ve got: Treasury and Steel and me. Goldman is everywhere. We have to be careful.”
After Geithner and Bernanke called Paulson, all three agreed: they just couldn’t support the deal.
When Warsh delivered the news to Steel and Cohn, both men were flabbergasted. They had spent the last 24 hours trying to formulate an agreement at the behest of the government and were now being told it could not be carried out.
How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Illustration by Brad Holland.
“I’m sorry. I understand—I’m just as frustrated as you are. We just don’t have the money; we don’t have the authorization,” Warsh explained.
Steel, feeling particularly slighted, told Warsh that he felt as if he were running from one bride to another, trying to find the right marriage to save his firm. First Morgan Stanley, and now Goldman Sachs.
Cohn, realizing that the conversation was about to get testy, said, “I think I should step out.”
“No, you should listen to this,” Steel insisted, raising his voice for the first time. “You should sit here and listen to every goddamn word of this.”
Anxiously talking into the speakerphone in the center of the table, Steel became even more irate. “What do you want me to do? Tell me what to do? You can’t make this work, you don’t like this, you don’t like that. Do you want to do the Midtown deal?” he said, referring to Morgan Stanley. “Do you want me to call Citi? I’ve got to protect my shareholders. That’s my job. Just tell me what the fuck you want me to do because I’m tired of running in circles.”
Paulson had gotten word that the Goldman-Wachovia deal was off, which put even more pressure on him to find a solution for Morgan Stanley. To him, JPMorgan was the obvious answer. While Dimon may have been resisting Paulson’s overtures—Paulson had broached the subject with him several times already over the past day—Paulson felt he now needed to apply some serious pressure.
“Jamie,” Paulson said when he reached him, conferencing in Geithner and Bernanke, “I need you to really think about buying Morgan Stanley. It’s a great company with great assets.”
Dimon, who had been anticipating that the government might try to foist the deal on him, was adamant.
“You’ve got to stop. This is not doable,” he said intently. “It’s not possible. I would do anything for you and for this country, but not if it’s going to jeopardize JPMorgan.
“Even if you gave it to me, I couldn’t do it,” Dimon continued, explaining that he thought the deal would cost the bank $50 billion and countless jobs.
“I don’t want to do it, and John doesn’t want to do it,” Dimon told him.
“Well, I might need you to do it,” Paulson persisted.
A few moments of silence passed until Dimon relented, but only slightly. “We’ll consider it, but it’s going to be tough,” he said.
At about 3:30 p.m., John Mack’s assistant announced that Secretary Paulson was on the line. “Hi, John. I’m on with Ben Bernanke and Tim Geithner. We want to talk to you,” Paulson said.
“Well,” Mack said, “since you’re all on the line, can I put my general counsel on?”
Paulson agreed, and Mack hit the speakerphone button after the television was muted.
“Markets can’t open Monday without a resolution of Morgan Stanley,” Paulson told him in the sternest way he knew. “You need to find a solution—we want you to do a deal.”
Mack just listened, dumbstruck.
Bernanke, who was usually remote and silent in such situations, cleared his throat and added, “You don’t see what we see. We’re trying to keep the system safe. We really need you to do a deal.”
“We’ve spent a lot of time working on this and we think you need to call Jamie,” Geithner insisted.
“Tim, I called Jamie,” Mack replied, clearly exasperated. “He doesn’t want the bank.”
“No, he’ll buy it,” Geithner said.
“Yes. For a dollar!” Mack exclaimed. “That makes no sense.”
“We want you to do this,” Geithner persisted.
“Let me ask you a question: Do you think this is good public policy?” Mack asked, clearly furious. “There are 35,000 jobs that have been lost in this city between A.I.G., Lehman, Bear Stearns, and just layoffs. And you’re telling me that the right thing to do is to take 45,000 to 50,000 people, put them in play, and have 20,000 jobs disappear? I don’t see how that’s good public policy.”
For a moment, there was silence on the phone.
“It’s about soundness,” Geithner said impassively.
“Well, look, I have the utmost respect for the three of you and what you’re doing,” Mack said. “You are patriots, and no one in our country can thank you enough for that. But I won’t do it. I just won’t do it. I won’t do it to the 45,000 people that work here.”
The Morgan Stanley bankers were still waiting to find out if the Mitsubishi deal was a go. The Fed, they had learned, was going to grant them bank-holding-company status (and likely Goldman, too), but Geithner was still insisting the firm needed a big investment by Monday as a show of confidence in the company. Mitsubishi had sent over a proposal, a “letter of intent,” to buy up to 20 percent of the firm for as much as $9 billion. But all they were getting was a letter; it wouldn’t be an ironclad contract, as they couldn’t get a full deal turned around quickly enough. But they were just hoping investors in the market would take the Japanese at their word and have more faith in them than Paulson or Geithner did.
Upstairs, Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator trying to nail down the letter of intent. His assistant interrupted him, whispering, “Tim Geithner is on the phone—he has to talk to you.”
Cupping the receiver, Mack said, “Tell him I can’t speak now. I’ll call him back.”
Five minutes later, Paulson called. “I can’t. I’m on with the Japanese. I’ll call him when I’m off,” he told his assistant.
Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.
Mack was minutes away from reaching an agreement. He looked at Ji-Yeun Lee, who was standing in his office helping with the deal, and told her, “Cover your ears.”
“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”
‘Thank God. We’re out!” Jamie Dimon exclaimed as he ran across JPMorgan’s executive floor into his colleague Jimmy Lee’s office, where the management team had camped out waiting for their next orders, watching the Ryder Cup and the New York Giants game, chowing down on steaks from the Palm.
“Mack just called,” Dimon said, breathing a sigh of relief. “They got $9 billion from the Japanese!”

Stuffing the banking system

2012-04-19T23:02:00.002-07:00

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.

The current economic crisis

2012-04-19T22:53:00.000-07:00

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.

Macroeconomic performance

2012-04-17T05:30:00.001-07:00

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.

Where will the foreigners get the money

2012-04-17T05:20:00.002-07:00

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.

Judgment regarding inflation or deflation

2012-04-14T04:02:00.000-07:00

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.

If the dollar collapses

2012-04-14T03:57:00.002-07:00

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.

Reversing course on momentous issues

2012-04-14T03:52:00.001-07:00

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.
North Korea is still a disoriented nuclear power that behaves like a child demanding attention. Chavez is creating problems in South America. And the US appears to be in another Vietnam-type quagmire with Afghanistan.
If this weren’t enough, we may be witnessing another rather astonishing collapse of a President, a condition anathema to financial markets.
From the standpoint of policy analysis, one would expect Obama’s (arguably incorrect) programs to fail. Yet failed programs, while necessary for a failed Presidency, are not sufficient. At this point, it is premature to even make the claim that his programs have failed. Yet, as time passes, the evidence tilts the scales in this direction. But a Presidency cannot fail unless public opinion turns negative. Trends in recent polls suggest that is happening, but polls can be fickle. Probably a better indicator is the reaction of supporters. Some of President Obama’s strongest supporters were in the media, so many in fact that the opposition claimed media bias. These complaints have continued into his Presidency, accompanied by charges that the press has treated his administration with kid gloves, slanting or not even reporting negative news. Political assessments from media supporters appear to be recently turning. One of many examples is the article below from Rich Moran, citing well-known liberal columnist Richard Cohen of the NY Times. Whether this marks the beginning of the end for the Obama Presidency is moot, at least at this point in time.
These are truly dangerous times for both markets and the country. There is no historical precedent for markets performing well under these conditions. Be very cautious and expect to see things that you have never seen before or even imagined could happen.
Richard Cohen waiting for Obama to realize he’s president
Richard Cohen, writing in the Washington Post, has finally noticed the same thing we here at AT have noted many times previously; Barack Obama is not leading as chief executive but is still stuck in campaign mode – as if he is still running for the office:
The trouble with Obama is that he gets into the moment and means what he says for that moment only. He meant what he said when he called Afghanistan a “war of necessity” — and now is not necessarily so sure. He meant what he said about the public option in his health-care plan — and then again maybe not. He would not prosecute CIA agents for getting rough with detainees — and then again maybe he would.
Most tellingly, he gave Congress an August deadline for passage of health-care legislation — “Now, if there are no deadlines, nothing gets done in this town . . . ” — and then let it pass. It seemed not to occur to Obama that a deadline comes with a consequence — meet it or else.
Obama lost credibility with his deadline-that-never-was, and now he threatens to lose some more with his posturing toward Iran. He has gotten into a demeaning dialogue with Ahmadinejad, an accomplished liar. (The next day, the Iranian used a news conference to counter Obama and, days later, Iran tested some intermediate-range missiles.) Obama is our version of a Supreme Leader, not given to making idle threats, setting idle deadlines, reversing course on momentous issues, creating a TV crisis where none existed or, unbelievably, pitching Chicago for the 2016 Olympics. Obama’s the president. Time he understood that.
It is gratifying that Cohen finally noticed this. Cohen might have added this is what we get when America elects someone with zero experience doing anything except running for higher office. If all someone has done of note is run a campaign, you are likely to get a president who sees the job as nothing more than an extension of his previous efforts to get elected.
I think it should be obvious that the fallacy “Presidents always grow into the job” should be debunked once and for all. Presidents bring to the job the skill set, the moral compass, the abilities they have shown previously in their lives. They don’t suddenly learn to become a “leader.” If they have not demonstrated that capability by the time they are Obama’s age, they never will.
Now if we can only get the American people to understand that, we will never make the mistake of electing someone who’s only qualification for the job was that he could raise a lot of money and make pretty sounding speeches.

Market properties that are for sale or rent

2012-04-13T23:36:00.000-07:00

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:

After making a bill payment

2012-04-13T23:25:00.000-07:00

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?

First, I called the bank's customer service line and was given a headache-inducing spiel about billing cycles and balances, APRs and blah, blah, blah. I hung up after 15 minutes more perplexed than ever.
So I turned to CardHub.com CEO Odysseas Papadimitriou, whose encyclopedic-like knowledge of the credit industry must include a chapter on 'WTF Bank fees.'
What he told me will change the way I pay down debt forever.
"Credit card companies charge interest every day,"not just once a month when it shows up on our bill. "They look at your balance at the end of each day and they multiply that balance with your APR, divided by 365 days to make it a daily APR. That's the interest you get for that day."
The reason customers rarely understand this is because all we see on our bill statement is one big finance charge, he added. But it's actually a cumulative tally of each day's interest charges. The average daily rate's often included in billing statements, but even then consumers might not know what it means.
Example: Let's say you're working on paying of your credit card, like I was. Your annual APR is 20%, which in your credit lender's books, would make your daily interest rate about .0005% on whatever balance you're carrying.
After making a bill payment, you've still got $100 left on your balance. On Day 1, the bank will start tacking that daily interest charge to your balance, bringing it to $100.05 in their books – even though you'll still see an even $100.
And get this: On Day 2, you'll get charged that same daily interest on your new $100.05 balance, not just the $100. That interest will continue to compound each day until you've paid down your balance.
The Exception
There's an exception here and it applies to customers who pay their balance in full each moth. They enjoy something of a grace period when it comes to finance charges and don't accrue daily interest, Papadimitriou says. In that case, your strategy – and mine going forward – should be to keep your funds in your checking or savings account as long as possible before paying off a credit balance, so that money will still earn interest.
As soon as you let a balance carry over on another billing cycle, you'll lose the grace period privilege and have to earn it back by paying your balance in full two months in a row.
The moral of the story
"If you're incurring finances charges – meaning you're carrying a revolving balance – then it's important that you don't wait until the due date to pay your bill," Papadimitriou said. "Pay as quickly as possible because each day that passes you're paying interest on your balance."

Economy has been made worse

2012-04-12T23:10:00.001-07:00

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.

The world went to fiat currency

2012-04-12T23:08:00.002-07:00

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.