Saturday, November 28, 2009

First Time Unemployment Claims Were NOT the Real Figure

from John Mauldin:

The headlines said that initial claims dropped to 466,000 here in the US, finally falling below 500,000. This was greeted with proclamations of recovery. First, let me say that 466,000 people filing for unemployment is still way too high. That is a lot of people losing their jobs, and when we first crossed over 450,000 a few years ago that level was seen as a sign of recession.

Second, the headline number was a seasonally adjusted number. The actual number was 543,926. What is happening is that we are coming off of wickedly high numbers in 2008 and a seasonal number that was much lower in the preceding years. It is another part of the Statistical Recovery. And this trend is likely to keep on for the rest of the quarter. My friend John Vogel, who analyzes the unemployment numbers for me each week, shows pretty convincingly that the average for this current quarter will be over 500,000 per week on a non-seasonally adjusted basis. This is less than a 10% drop from last year for the same quarter. Job losses are continuing to mount, and we are on our way to an 11%-plus unemployment number by next summer. Statistical Recovery, indeed.

Friday, November 27, 2009

"The best way to destroy the capitalist system is to debauch the currency."

"The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
-- John Maynard Keynes, Economist, Fabian Socialist

Admittedly, an amazing confession from the man who justified just such a confiscation!

"Successful investing is anticipating the anticipations of others." Doug Kass

Wild Markets

This reminds me of the Martin Luther King holiday in 2007, when stocks dropped over 500 points due to a rogue trader's shenanigans at Societe Generale.Stocks recovered and close higher the next day.

Gold - drops $50, then recovers $30



Dollar -- rebound on Dubai turmoil


Stocks -- shrugging off Dubai imbroglio



Oil -- hit hard by turmoil

Thursday, November 26, 2009

Turmoil in Markets

tweet from Arlan:

Euro equity mkts see biggest 1-day losses in 7 months; Japans mkts following tonight; $$ nearly erased Wed. big losses on Dubai fears.

To say nothing, especially when speaking, is half the art of diplomacy. Will Durant

Dubai Debt Default Spooks Investors, Sends Stock Futures Tumbling


from FT:

Global stock markets endured heavy selling on Thursday as investors were spooked by the spectre of a default by Dubai and after a febrile foreign exchange market saw the yen surge to a 14-year high against the dollar.
The turmoil caused a flight to less risky assets. Gold, which had challenged $1,200 in Asian trading, fell back from its highs and money flowed into havens such as German government bonds.

Daily chart -- look at that 12-day engulfing pattern

Wednesday, November 25, 2009

Yen Rockets to Multi-Year Highs on Japan Finance Minister's Remarks

from Reuters:

The yen rallied to a 10-month high against the greenback as investors bet interest rates in the United States will remain low. The dollar also slumped to a 15-month low against a basket of six currencies.
Recent dollar weakness is becoming a dilemma for Japan's new government, which has only been in power for two months, as it threatens exporters' earnings and could slow an economic recovery.
Investors are increasingly on edge, and that has sent the Nikkei stock average to a four-month low and pushed 10-year Japanese government bond futures to a seven-week high.
"The dollar has weakened again," Noda told Reuters. "We are not considering intervention right now."
The dollar last traded at 87.43 yen. The greenback skidded to 87.21 yen on trading platform EBS on Wednesday, the lowest since January.


Japanese Finance Minister Hirohisa Fujii played down the significance of the yen's 10-month high against a sliding dollar on Wednesday, saying it was due to dollar weakness, Kyodo news reported.

Picture Perfect Parallels


Natural Gas Through the Roof


Theme and Variations on New Gold High


The theme remains the same -- a new high for the price of gold. The only variation is the ever-higher price! Liquidity is poor because of the up-coming Thanksgiving holiday and because I just rolled to a new contract.

More Dollar Dumping As Greenback Reaches New 2009 Low


Tuesday, November 24, 2009

"Life is not about making money - money is about making a life..." Atlantic Capital Investments

"As for the future, your task is not to foresee it, but to enable it." ~ Antoine de Saint-Exupery

"It is no measure of health to be well-adjusted to a sick society." ~ Jiddu Krishnamurti

Who Is Prospering In Troubled Times?

from City Journal:

The economy is struggling, the unemployment rate is high, and many Americans are struggling to pay the bills, but one class of Americans is doing quite well: government workers. Their pay levels are soaring, they enjoy unmatched benefits, and they remain largely immune from layoffs, except for some overly publicized cutbacks around the margins. To make matters worse, government employees—thanks largely to the power of their unions—have carved out special protections that exempt them from many of the rules that other working Americans must live by. California has been on the cutting edge of this dangerous trend, which has essentially turned government employees into a special class of citizens.
When I recently appeared on Glenn Beck’s TV show to discuss California’s dreadful fiscal situation, I mentioned that in Orange County, where I had been a columnist for the Orange County Register, the average pay and benefits package for firefighters was $175,000 per year. After the show, I heard from viewers who couldn’t believe the figure, but it’s true. Firefighters, like all public-safety officials in California, also receive a gold-plated retirement plan: a defined-benefit annual pension that offers 90 percent or more of the worker’s final year’s pay, guaranteed for the rest of his life (and the life of his spouse).
Government employees use various scams to boost their already generous benefits, which include fully paid health care and cost-of-living adjustments. The Sacramento Bee coined the term “chief’s disease,” for example, to refer to the 82 percent (in 2002) of chief’s-level employees at the California Highway Patrol who discovered a disabling injury about one year before retiring. That provides an extra year off work, with pay, and shields 50 percent of their final retirement pay from taxes. Most of these disabilities stem from back pain, knee pain, irritable bowel syndrome, and the like—not from taking bullets from bad guys. The disability numbers soared after CHP disbanded its fraud unit.
As I document in my new book, Plunder!, government employees of all stripes have manipulated the system to spike their pensions. Because California bases pensions for employees on their final year’s salary, some workers move to other jurisdictions for just that final year to increase their pay and thus the pension. Even government employees convicted of on-the-job crimes continue to collect benefits. Municipalities have adopted Defined Retirement Option Plans, or DROPs, in which the employee earns his salary and his full defined-benefit retirement pay at the same time, with the retirement pay going into an account payable upon actual retirement. And as average Americans work longer to sustain themselves, public employees can retire in their early fifties with their plush benefits.
The old deal seemed fair: public employees would earn lower salaries than Americans working in the private sector, but would receive a somewhat better retirement and more days off. Now, public employees get higher average pay, far higher benefits, and many more days off and other fringe benefits. They have also obtained greatly reduced work schedules, thus limiting public services even as pay and benefits shoot ever higher. The new deal is starting to raise eyebrows, thanks to efforts by groups such as the California Foundation for Fiscal Responsibility, which publishes the $100,000 Club, a list of thousands of California government retirees with six-figure, taxpayer-guaranteed incomes. But even in these tough times, public employees continue to press city councils for retroactive pension increases, which amount to gifts of public funds for past services. Officials fear the clout that these unions, especially police and fire unions, wield on Election Day.
The story doesn’t end with the imbalance in pay and benefits. Government workers also enjoy absurd protections. The Los Angeles Times did a recent series about the city’s public school district, which doesn’t even try to fire incompetent teachers and is seldom able to get rid of those credibly accused of misconduct or abuse. Misbehaving teachers are sometimes kept from teaching, but they may spend years, even a decade, getting paid while they fight attempts to fire them. A state law referred to as the Peace Officers Bill of Rights, along with excessive privacy restrictions, likewise makes it nearly impossible to fire police officers who abuse their authority.
The media have finally started to take notice, largely because of some impossible-to-ignore financial excesses, particularly the tens of billions of dollars in “unfunded liabilities”—that is, future debt—run up by politicians more interested in pleasing union officials than in looking after the public’s finances. News reports have also focused on scandals at CalPERS, the California Public Employees’ Retirement System, which has faced record losses after making risky leveraged investments in bizarre real-estate deals. (The government pension system encourages such risky behavior: with defined-benefit systems, union members stand to gain if the investments go well, while taxpayers shoulder the burden if they don’t.) Meanwhile, the Los Angeles Times reported on a politically connected insider who received $53 million in finder’s fees from CalPERS, raising questions of pay-to-play deals.
But the real scandal is a two-tier society where government workers enjoy benefits far in excess of those for whom they supposedly work. It’s past time to start cleaning up the mess by reforming retirement systems and limiting the public unions’ power. If we don’t, California’s financial problems will become insurmountable.
Steven Greenhut is the author of Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives And Bankrupting The Nation. He is the director of the Pacific Research Institute’s Journalism Center in Sacramento and was a longtime columnist for the Orange County Register in Santa Ana.

Strong Trends for 11/24/09

Today's trends include:

Cotton - bullish

Stocks - bullish

Gold - bullish

Nominal GDP Still Lower

from Econompic Data blog:

And while real GDP is the real production of the economy, nominal GDP is important for a debt burdened economy as debt is in nominal terms. Since the recession started in December 2007 nominal GDP is cumulatively negative (over 7 quarters), something that has not happened since WWII.



Some recovery.

And from Market Talk:
The downward revision in 3Q GDP isn’t a surprise, but it also shows that anyone expecting a rapid recovery may need to think again.
The government said GDP rose 2.8% in 3Q, down from its initial 3.5% estimate, reflecting a wider trade deficit and lower consumer spending. The growth measure fell 0.7% in 2Q.
Nearly 3% growth is a welcome change from a declining figure, but the Economist’s Free Exchange blog reminds that the economy needs multiple quarters of even more rapid growth to reduce the unemployment rate.
In the two years following the 1982 recession, the economy grew at a more than 5% annual rate, but unemployment still hovered above 7%.
“The key takeaway is that cyclical unemployment is very high, and growth rates are not high enough, at present, to bring unemployment down,” blog says. “That both the Fed and the federal government are sitting on the sidelines is quite troubling.”
Princeton economist Paul Krugman is even more pessimistic about the downward revision.
This is really quite grim. At this growth rate it’s far from clear that we’re doing anything to reduce the output gap — the gap between what the economy could produce and what it’s actually producing. Correspondingly, there’s no reason now for even a bit of optimism on unemployment.
If growth continued at a 3.5% annual pace, Krugman says the US wouldn’t see full employment for another decade. “Given the latest number, the date at which we can expect to see a return to full employment is…never.”
There’s also no guarantee that the economy will keep growing at this pace. He argues the effects of government stimulus have peaked and will turn into a “net drag” in 2H10. And he doesn’t think the inventory bounce in 3Q is sustainable.
“Basically, we may be in a technical recovery, but we’re not recovering,” Krugman writes.

Crude Oil Drops Below Recent Trading Range, Bollinger Bands


Weak demand concerns have finally pushed the price of crude oil below recent trading ranges. If prices don't rebound above both the EMA and Bollinger Band over the next few days, it could be a sign of a price decline.

Mixed Signals: Consumer Confidence Higher, Mortgage Mess Deepens, GDP Revised Lower


Stocks dipped at the open, but have now recovered.

WSJ:
The U.S. economy's recovery wasn't as strong as earlier believed, the government said Tuesday, revising its third-quarter numbers to show a wider trade deficit and lower consumer spending than previously estimated.
In a separate report, U.S. consumer confidence improved in November, recovering somewhat from a sharp drop in October to beat economists expectations, according to a report Tuesday. However, other elements of the report showed that U.S. consumers continue to be especially anxious about a sluggish U.S. economy.
Gross domestic product rose at a 2.8% annual rate July through September after falling by 0.7% in the second quarter...

from Daily Finance:
There have been a number of attempts to come up with a figure about how many U.S. home mortgages are under water -- in other words, the value of the home loan is more than the value of the house.
All estimates are bound to be wrong because no one has had the time or money to appraise every house in America and match it with the value of its mortgage plus any second mortgages. But The Wall Street Journal has asked First American CoreLogic, a real estate research company, to give it a try. The report, which is available free online, says that that 23% of mortgages were under water at the end of the third quarter.
The data makes two salient points: 1) Negative equity and near negative equity mortgages account for nearly 28% of all residential properties with a mortgage nationwide, and 2) The rise in negative equity is closely tied to increases in pre-foreclosure activity.
A number of economists have voiced concerns that falling housing prices actually offer people a perverse incentive to turn their keys in to the bank and desert their homes. A homeowner who believes that his house will never be worth more than its mortgage foresees the day that he will sell his most important asset and have to write his lender a check for the difference between the value of his home and its mortgage.
The news about under water real estate is nearly as bad for banks as it is for homeowners. Default rates and foreclosures will almost certainly continue to rise. Banks will end up owning more and more properties that they are ill suited to sell. Many of those homes will be auctioned off at a fraction of what their values were two or three years ago.
And the housing death spiral will continue to circle downward.
Douglas A. McIntyre is an editor at 24/7 Wall St.

Even worse is the news that of home purchases this year, 9% also have mortgages that are under water. What a sour gift to new homeowners! 

Monday, November 23, 2009

Become An Adult

“I’ve read good books on the adult-child theory in trading. We start out as the child, and traders often never go beyond that point. Our thinking must become adult in trading, and that is from understanding and knowing what is correct. As a child, we often don’t need a reason but just the rule. As an adult, to be effective in trading, it is important to know why and not just the rule.” – Phantom of the Pits

Striking Commodity Reversal


Even gold reversed by $10, but the trend is still higher. This chart for crude oil is symbolic for the day. Arlan Suderman suggested that fund flows reversed on the eve of the Thanksgiving holiday. Risk is being removed. The grains not only reversed, but closed marginally/modestly lower. Only stocks remain firmly bullish.

Overcoming Frustration While Trading

from Dr. Brett:
A while back, I wrote on the topic of steps to take to break patterns of frustration in trading and suggested resources for traders who find that frustration is interfering with their trading.

Much of what is viewed as a loss of discipline is actually the result of impulsive decision-making under conditions of frustration.

What that means is that you can best work on mastering frustration when you are actually in a frustrated state. It is difficult to prepare for making decisions in the heat of battle when you're in a cool and collected state.

This is where guided imagery is particularly helpful. By mentally rehearsing frustrating scenarios (such as missing a trade or getting stopped out) and including in the rehearsal a mental walk-through of what you want to be doing to handle the frustration, you can prepare yourself for adverse scenarios. This is very helpful in avoiding impulsivity, as you gravitate toward the positive coping that you've been rehearsing each day.

There are a range of brief therapy techniques that are effective in combating frustration. Check out this earlier post on short-term change methods, as well as Chapter 7 of The Daily Trading Coach, which describes behavioral techniques for overcoming stress.

In my next post on the topic, I'll address frustration from a different angle.

John Hussman Accuses Fed of Unconstitutional Abuse of Power

from Mish Shedlock:
John Hussman is always a good read. A week after it came out, I am catching up on reading reading "Should Come as No Shock to Anyone".

Hussman is about as level-headed as they come, so it was interesting to see him accuse the Fed and Geithner of "Unconstitutional Abuse of Power". Here is the pertinent snip:

There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed's position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed's actions, and can't make long-term loans with these funds anyway.

Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government.

This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

Needless to say, I emphatically support recent Congressional proposals to vastly rein in the power (both statutory and newly usurped) of the Federal Reserve. Starting with the Bear Stearns deal, the Fed under Ben Bernanke has made a sharp and distinct departure from its historical role, in violation of its charter. As I noted when the bondholders of Bear Stearns were rescued, “The troubling aspect of the Fed's action was not that it lent to a non-bank entity. That ability is clearly authorized by Section 13(3) of the Federal Reserve Act. The problem is that it made its “loans” as “non-recourse” funding – meaning that it would not stand to be repaid if the collateral itself was to fail.” This is still what the Fed seems determined to accomplish.

In my view, deeper loan losses are ahead, and if we deal with the next round the same way that we dealt with the last, we will ultimately succeed in debasing the U.S. dollar. There's little inflationary pressure at present, and chances are that fresh credit concerns will create enough demand for government liabilities to forestall inflationary pressures for several years more. But we cannot reimburse the losses of irresponsible lenders with trillions freshly issued government liabilities without those liabilities ultimately eroding in value. The probable real, after inflation return on stocks and bonds over the coming decade is likely to be very unsatisfactory.
I certainly agree and that is why we need the Fed audited in Ron Paul fashion, not some watered down proposal that makes allowances for and covers up the Fed's unconstitutional abuse of power.

Shifting Emotional Gears As a Trader

from Dr. Brett-
A worthwhile blog post written by Richard Friesen describes what happens to traders when their brains downshift into flight or fight responses. In the post, he suggests a breathing and visualization exercise to achieve control of both body and mind. As I noted a while back, an effective way to prevent yourself from going on tilt in your thinking and trading is to exercise physical self-control.

Still another way to exercise self-control after a difficult trading period is to strictly control your trading size and the risk taken per trade. Large increases in position sizing magnifies the variability of profit/loss swings, which in turn magnify our emotional responses. The drama created by the increased risk creates potential trauma emotionally; once we're scarred from negative experiences, we end up trading scared.

A little while ago, I hit a high water mark in my yearly P/L and then took a full-sized position in a longer-term trade idea. Now, of course, we can increase the risk of trading not only through position sizing, but also through holding periods: the longer we hold a position, the greater the variability in returns. After all, the market moves up and down more in a week than in a day; more in a day than in a 20-minute period.

By trading full size over a much larger time frame (my average bread and butter intraday trade lasts less than 30 minutes; this one was a hold for several days), I increased my risk significantly. I felt justified in doing so, because I was confident in the trade idea.

Was I emotionally prepared, however, for a possible 20 point ES futures swing against me? Not at all. Instead of thoroughly thinking through that scenario and making sure I could live with it, I allowed my confidence to blind me to the possibility of being wrong.

And wrong I was. I took my largest loss of the year in a couple of days, erasing the gains of the prior two weeks.

Worse still, the experience left me frustrated and wanting to get back to my high water mark. The next day, eager to get back into the market, I forced myself to sit and watch. When I returned to the market, I limited myself to a single trading setup (a variation of my trusty transition pattern) and my short-term (intraday, under one hour holding time) framework. My trading size was kept moderate, so that potential losses would be entirely manageable.

Within a week, I recouped the loss and returned to my high water mark. I did so by chipping away at the drawdown, focusing only on my highest probability trades. The key was turning the frustration of the bad trade into a doubling-down of my determination to trade well. To accomplish that doubling-down, however, I needed to shift gears emotionally. Hitting the sidelines for a day and lowering my risk per trade were central to that effort. Had I tried to trade while I was hot, using size to recoup my losses all at once, I surely would have dug myself a deep hole.

Even though I've traded since the late 1970s, and even though I'm a psychologist who works with traders and all too familiar with trading pitfalls, I make the same mistakes--and am subject to the same biases and faulty decision making--as everyone else. No psychological techniques eliminate bias and bad trading. The best we can do is learn to shift gears, control risk, stay emotionally intelligent, and play to our strengths. That's what builds a trading job into a long term career.

Just Say "No" to Tyranny!

from Rasmussen polls:
Just 38% of voters now favor the health care plan proposed by President Obama and congressional Democrats. That’s the lowest level of support measured for the plan in nearly two dozen tracking polls conducted since June.
The latest Rasmussen Reports national telephone survey finds that 56% now oppose the plan.
Half the survey was conducted before the Senate voted late Saturday to begin debate on its version of the legislation. Support for the plan was slightly lower in the half of the survey conducted after the Senate vote.
Prior to this, support for the plan had never fallen below 41%. Last week, support for the plan was at 47%. Two weeks ago, the effort was supported by 45% of voters.
Intensity remains stronger among those who oppose the push to change the nation’s health care system: 21% Strongly Favor the plan while 43% are Strongly Opposed...
Only 16% now believe passage of the plan will lead to lower health care costs. Nearly four times as many (60%) believe the plan will increase health care costs. Most (54%) also believe passage of the plan will hurt the quality of care.
As has been the case for months, Democrats favor the plan while Republicans and voters not affiliated with either major party are opposed. The latest numbers show support from 73% of those in the president’s party. The plan is opposed by 83% of Republicans and 70% of unaffiliated voters.

Too BIg to Fail Becoming Too Big to Bail Out!

from CNBC, appears to be a reprint from NYT:
The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

US Capitol Building with cash
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.
The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.
The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.
The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”
The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.
“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.
On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.
Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.
The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.
Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.
The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.
Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.
But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.
The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.
To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.
Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.
This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.
“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.
“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”
This story originally appeared in the The New York Times


Everything Through the Roof -- Except the Dollar

Stocks, gold, commodities are all skyrocketing this morning. Only the lowly Dollar is sinking! There is no use in even posting them, since they are all moving parabolically higher or lower. This is a theme that our politicians and the Fed had better awaken to, or we will court disaster. Unfortunately, history, if it repeats itself, indicates that both the Fed and the politicians will deny any accountability for the bubbles, spending, and consequences of both, until the economic blood runs in the streets!


One chart should suffice. Gold is up nearly $25/ounce overnight!

Sunday, November 22, 2009

Grains Grind Higher


lead by soybeans

Gold Gaps to New High Above $1063


and yes, the Dollar tanks again! Surprise!

This combination is the most reliable trend in the world right now!

Does Weaker Data Point Toward Recovery... or Disappointment?

from Mish's blog:
After spending $trillions one would have hoped to see something more than an expected GDP revision of 2.8%. Looking ahead MarketWatch is asking Do weaker data show recovery is stalling?

Last week, a "reality check" rippled through the markets following weak data on housing starts and industrial production, said Nigel Gault and Brian Bethune, U.S. economists for IHS Global Insight. They expect further "mixed and somewhat ambiguous" reports in the coming week, but, on whole, they say "the evidence is still positive and continues to point to a nascent recovery" that will need "strong policy support" for some time.

Housing

Even four years after the peak, the state of the housing market remains central to the medium-term outlook.

Construction, sales and prices picked up over recent months after hitting generational lows, boosted in part by federal policies and in part by improvement in some of the fundamentals. But the weakening in the October data ahead of the anticipated expiration of the federal home-buying subsidy has put the strength of those fundamentals to the test.

The home-buyer tax credit, of course, has now been extended and even expanded. But buyers and builders didn't know that in October.

Last week, we found out that builders cut back on permits and starts on single-family homes in October, in anticipation that the tax credit would expire on Nov. 30.

GDP revisions

The other big story for the week could be the revision to third-quarter growth figures. Last month, the Commerce Department said real gross domestic product grew at a 3.5% annualized rate, the first gain in a year. On Tuesday, that figure is likely to be revised to about 2.8%.

The largest source of revisions will come from nonresidential construction spending and net exports. Spending on nonresidential structures was weaker than first thought, while imports were stronger than believed, suggesting that more of the gains from increased sales in the third quarter accrued to foreign producers, rather than domestic companies. Inventories will be revised lower.

"Despite the likely downward revision, we still believe that the third quarter will prove to be the first quarter of recovery and that it demonstrates a decisive turn in the economy," wrote economists for Barclays Capital.

Economists see the economy growing at a pace just above its long-term trend. They expect GDP to grow 2.5% in the fourth quarter, 3% in the first quarter of 2010 and 3.5% in the second quarter. That's a far cry from the 6% growth seen in typical V-shaped recoveries, but it's better than a poke in the eye with a sharp stick.

Of course, those are just forecasts. No one really knows for sure how the economy will do over the next 12 to 18 months.
MarketWatch asked the right question but the economists quoted came to the wrong conclusion.

100% of this so-called "Nascent Recovery" is due to government stimulus, housing credits, cash for-clunkers, and other wasteful spending.

Extending the home tax credit was exactly the wrong thing to do. It adds to the deficit and does little but push demand forward and/or give money to people who were going to buy a home anyway.

When it comes to 3.5% GDP in the second quarter of 2010, I will take the under. Of course I can easily be wrong depending on how much deeper in the hole Congress is willing to go.

One thing I am sure of is this: A recovery so fragile that it is 100% dependent on "strong policy support" that adds to the national debt, does little more than push demand forward, and does next to nothing for new job creation or family formation is not a "recovery" of any kind, it's a mirage.

Hunger Rises to Historic High

from Feedstuffs.com:
- Hunger in America at highest level in history of USDA report.

- Sources note that the report covered 2008, suggesting that situation is even worse this year.

- Adults tend to sacrifice nutritional needs to make sure their children have access to food.

IT'S not a holiday story one wants to report, but more people in the U.S., including children, are going hungry than ever before in history, according to the U.S. Department of Agriculture's "Household Food Security" report issued last week. 
The annual report revealed that 17 million American households -- 14.6% of households -- were "food insecure" in 2008, the highest level observed since the report was first undertaken in 1995, USDA's Economic Research Service (ERS) said.

The numbers represent 49 million Americans, including nearly 17 million children. 
Furthermore, fully one-third of the affected households -- 6.7 million, or 5.7%, of American households -- were in the highest-possible state of food insecurity -- meaning that at least some household members experienced decreased food intake and disrupted eating patterns during the year -- also the highest level in the history of the report, ERS said.

Children are normally shielded from food insecurity, ERS noted, but nevertheless, children in 506,000 households, or 1.3%, experienced the highest-possible state of food insecurity in 2008, ERS said. 
The fundamental reason for food insecurity in the U.S. is poverty, which is marked by a lack of resources to address basic needs such as food, shelter and health care, said Agriculture Secretary Tom Vilsack.

He noted that the Obama Administration has taken aggressive steps to address poverty through the American Recovery & Reinvestment Act of 2009, focusing on job creation and training, income support and unemployment insurance and affordable housing.

A Copper-Colored Disconnect


from WSJ:

Copper's continuous rally in the face of swelling inventories -- a sign of weak consumption -- has perplexed many in the market.
Copper stockpiles at London Metal Exchange warehouses are at their highest level since April. In China, the world's biggest consumer of the metal, copper stocks have risen sixfold at the Shanghai Futures Exchange this year. And at Comex, the metals division of CME Group, stocks are their highest level since August 2004.
Yet, copper soared 5% last week...

I wonder if this disconnect is occurring in sympathy with gold, or if it is a flee to hard assets because of worries about the debt bubble.It appears to be an "anything but fiat" money trade!

Positive Proof Global Warming Is a Scam

from Mish's Global Economic Trend Analysis blog;

It's now official. Much of the hype about global warming is nothing but a complete scam.

Thanks to hackers (or an insider) who broke into The University of East Anglia's Climatic Research Unit (CRU) and downloaded 156 megaybytes of data including extremely damaging emails, we now know that data supporting the global warming thesis was completely fabricated.

Inquiring minds are reading Hacked: Hadley CRU FOI2009 Files on The Reference Frame by LuboŇ° Motl, a physicist from the Czech Republic.

The University of East Anglia's Climatic Research Unit (CRU), usually working together with the Hadley center (recall HadCRUT3 global temperatures), has been hacked.

So far, the most interesting file I found in the "documents" directory is pdj_grant_since1990.xls (Google preview, click) which shows that since 1990, Phil Jones has collected staggering 13.7 million British pounds ($22.6 million) in grants.

Phil Jones, the main criminal according to this correspondence, has personally confirmed that the website was hacked and that the documents are authentic. See Briefing Room.

He says that he "can't remember" what he meant by "hiding the decline." Well, let me teach him some English. First, dictionaries say that hide means

1. to conceal from sight; prevent from being seen or discovered: Where did she hide her jewels?
2. to obstruct the view of; cover up: The sun was hidden by the clouds.
3. to conceal from knowledge or exposure; keep secret: to hide one's feelings.
4. to conceal oneself; lie concealed: He hid in the closet.
5. British. a place of concealment for hunting or observing wildlife; hunting blind.
6. hide out, to go into or remain in hiding: After breaking out of jail, he hid out in a deserted farmhouse.
Here Are A Few Choice Emails

From: Phil Jones
To: ray bradley ,mann@virginia.edu, mhughes@ltrr.arizona.edu
Subject: Diagram for WMO Statement
Date: Tue, 16 Nov 1999 13:31:15 +0000
Cc: k.briffa@uea.ac.uk,t.osborn@uea.ac.uk

Dear Ray, Mike and Malcolm,
Once Tim's got a diagram here we'll send that either later today or first thing tomorrow. I've just completed Mike's Nature trick of adding in the real temps to each series for the last 20 years (ie from 1981 onwards) amd from 1961 for Keith's to hide the decline. Mike's series got the annual land and marine values while the other two got April-Sept for NH land N of 20N. The latter two are real for 1999, while the estimate for 1999 for NH combined is +0.44C wrt 61-90. The Global estimate for 1999 with data through Oct is +0.35C cf. 0.57 for 1998. Thanks for the comments, Ray.

Cheers
Phil

Prof. Phil Jones
Climatic Research Unit Telephone +44 (0) 1603 592090
School of Environmental Sciences Fax +44 (0) 1603 507784
University of East Anglia
Norwich Email p.jones@uea.ac.uk
NR4 7TJ
UK

===================================

From: Gary Funkhouser
To: k.briffa@uea.ac.uk
Subject: kyrgyzstan and siberian data
Date: Thu, 19 Sep 1996 15:37:09 -0700

Keith,

Thanks for your consideration. Once I get a draft of the central and southern siberian data and talk to Stepan and Eugene I'll send it to you.

I really wish I could be more positive about the Kyrgyzstan material, but I swear I pulled every trick out of my sleeve trying to milk something out of that. It was pretty funny though - I told Malcolm what you said about my possibly being too Graybill-like in evaluating the response functions - he laughed and said that's what he thought at first also. The data's tempting but there's too much variation even within stands. I don't think it'd be productive to try and juggle the chronology statistics any more than I already have - they just are what they are (that does sound Graybillian). I think I'll have to look for an option where I can let this little story go as it is.

Not having seen the sites I can only speculate, but I'd be optimistic if someone could get back there and spend more time collecting samples, particularly at the upper elevations.

Yeah, I doubt I'll be over your way anytime soon. Too bad, I'd like to get together with you and Ed for a beer or two. Probably someday though.

Cheers, Gary
Gary Funkhouser
Lab. of Tree-Ring Research
The University of Arizona
Tucson, Arizona 85721 USA
phone: (520) 621-2946
fax: (520) 621-8229
e-mail: gary@ltrr.arizona.edu
================================================

There is much more in that first link on The Reference Frame, including ways to download all the data yourself. Thanks LuboŇ°!

Hadley CRU says leaked data is real

When this story broke, many assumed it was a fake. Nope.
Hadley CRU says leaked data is real
The director of Britain's leading Climate Research Unit, Phil Jones, has told Investigate magazine's TGIF Edition tonight that his organization has been hacked, and the data flying all over the internet appears to be genuine.

In an exclusive interview, Jones told TGIF, "It was a hacker. We were aware of this about three or four days ago that someone had hacked into our system and taken and copied loads of data files and emails."

"Have you alerted police?"

"Not yet. We were not aware of what had been taken."

Jones says he was first tipped off to the security breach by colleagues at the website RealClimate.
Alert The Police?

Yes, someone ought to alert the police and have Phil Jones and everyone else involved in this fraud arrested.

Market Ticker On The Scam

Carl Denninger was also commenting on the scam on Friday in "Global Warming" SCAM - Hack/Leak FLASH.
.....
Yes, I have the file. So do a few million other people.

There's enough evidence in there, in my opinion, of outrageously fraudulent conduct to make this the scandal of the 20th and 21st century.

Sorry folks, there's no science here - this is, from what I see, a massive and outrageous fraud, and now that the documents have been confirmed as authentic, it is time to pull the curtain down on this crap and start locking up all of the proponents - starting with AL GORE.

Here are some interesting "meta statistics" on the documents, and the number of times the words referenced appear:
  • Fraud: 79
  • Falsify: 6
  • Inflate: 14
  • Conceal: 5
  • Hide: 19
Just for starters.

If you think that's bad, you might like this - from the file "ipcc-tar-master.rtf":

47 out of 91 models listed in Chapter 9 assume that carbon dioxide in the atmosphere is increasing at the rate of 1% a year when the measured rate of increase, for the past 33 years, has been 0.4% a year. The assumption of false figures in models in order to boost future projections is fraudulent. What other figures are falsely exaggerated in the same way?

And then there's this...

From: Phil Jones p.jones@uea.ac.uk
To: "Michael E. Mann" mann@meteo.psu.edu
Subject: IPCC & FOI
Date: Thu May 29 11:04:11 2008

Mike,

Can you delete any emails you may have had with Keith re AR4? Keith will do likewise. He's not in at the moment - minor family crisis.

Can you also email Gene and get him to do the same? I don't have his new email address.

We will be getting Caspar to do likewise.

I see that CA claim they discovered the 1945 problem in the Nature paper!!
Cheers
Phil
Rules Of The Game

Here is an interesting snip on Rules of the Game posted in What's Up With That?
I downloaded the zip file, unpacked it, browsed a bit. I opened a .pdf file entitled “RulesOfTheGame.pdf”. Very interesting document. Most compelling is that I broke open the metadata for this file. The file date stamp is Oct. 3, 2006, the metadata says it was created Oct 14, 2005 using QuarkExpress v.6.1 (released in 2004). All properties and metadata for this file definitely appear genuine to me.

Interesting that this document describes methods of convincing the public of the “crisis”.

Excerpt:

a new way of thinking

Once we’ve eliminated the myths, there is room for some new ideas. These principles relate to some of the key ideas emerging from behaviour change modeling for sustainable development:

5. Climate change must be ‘front of mind’ before persuasion works
Currently, telling the public to take notice of climate change is as successful as selling tampons to men. People don’t realise (or remember) that climate change relates to them.

6. Use both peripheral and central processing Attracting direct attention to an issue can change attitudes, but peripheral messages can be just as effective: a tabloid snapshot of Gwyneth Paltrow at a bus stop can help change attitudes to public transport.

7. Link climate change mitigation to positive desires/aspirations Traditional marketing associates products with the aspirations of their target audience. Linking climate change mitigation to home improvement, self-improvement, green spaces or national pride are all worth investigating.

8. Use transmitters and social learning People learn through social interaction, and some people are better teachers and trendsetters than others. Targeting these people will ensure that messages seem more trustworthy and are transmitted more effectively.

9. Beware the impacts of cognitive dissonance Confronting someone with the difference between their attitude and their actions on climate change will make them more likely to change their attitude than their actions.
How To Avoid Taxes On Grants
Mike Abbott (17:06:59):

Here’s a quote from one of the emails:

“Also, it is important for us if you can transfer the ADVANCE money on the personal accounts which we gave you earlier and the sum for one occasion transfer (for example, during one day) will not be more than 10,000 USD. Only in this case we can avoid big taxes and use money for our work as much as possible.”
Reducing "Blips"
Ric Werme (19:43:43):

This sounds like a “get rid of the MWP,” I hope it’s just a what if
speculation/exploration that might lead to research directions.

tux:mail> cat 1254108338.txt
From: Tom Wigley
To: Phil Jones
Subject: 1940s
Date: Sun, 27 Sep 2009 23:25:38 -0600
Cc: Ben Santer

Phil,

Here are some speculations on correcting SSTs to partly explain the 1940s warming blip.

If you look at the attached plot you will see that the land also shows the 1940s blip (as I’m sure you know).

So, if we could reduce the ocean blip by, say, 0.15 degC, then this would be significant for the global mean — but we’d still have to explain the land blip.

I’ve chosen 0.15 here deliberately. This still leaves an ocean blip, and i think one needs to have some form of ocean blip to explain the land blip (via either some common forcing, or ocean forcing land, or vice versa, or all of these). When you look at other blips, the land blips are 1.5 to 2 times (roughly) the ocean blips — higher sensitivity plus thermal inertia effects. My 0.15 adjustment leaves things
consistent with this, so you can see where I am coming from.
I downloaded the document and found some interesting stuff

Wang Fabrications
From: "D.J. Keenan"
To: "Steve McIntyre"
Cc: "Phil Jones" Subject: Wang fabrications
Date: Tue, 19 Jun 2007 20:45:15 +0100
X-Mailer: Microsoft Outlook Express 6.00.2900.3138
X-UEA-Spam-Score: 0.0
X-UEA-Spam-Level: /
X-UEA-Spam-Flag: NO

Steve,

I thought that I should summarize what has happened with the Wang case.

First, I concluded that the claims made about Chinese stations by Jones et al. [Nature, 1990] and Wang et al. [GRL, 1990] were very probably fabricated. (You very likely came to the same conclusion.)

Second, some investigation showed that Phil Jones was wholly blameless and that responsibility almost certainly lay with Wang.

Third, I contacted Wang, told him that I had caught him, and asked him to retract his fabricated claims. My e-mails were addressed to him only, and I told no one about them. In Wang's reply, though, Jones, Karl, Zeng, etc. were Cc'd.

Fourth, I explained to Wang that I would publicly accuse him of fraud if he did not retract. Wang seemed to not take me seriously. So I drafted what would be the text of a formal accusation and sent it to him. Wang replied that if I wanted to make the accusation, that was up to me.

Fifth, I put a draft on my web site--
http://www.informath.org/apprise/a5620.htm
--and e-mailed a few people, asking if they had any recommendations for improvement.

I intend to send the final version to Wang's university, and to demand a formal investigation into fraud. I will also notify the media. Separately, I have had a preliminary discussion with the FBI--because Wang likely used government funds to commit his fraud; it seems that it might be possible to prosecute Wang under the same statute as was used in the Eric Poehlman case. The simplicity of the case makes this easier--no scientific knowledge is required to understand things.

I saw that you have now e-mailed Phil (Cc'd above), asking Phil to publish a retraction of Wang's claims: http://www.climateaudit.org/?p=1741#comment-115879
There could be a couple problems with that. One problem is that it would be difficult for Phil to publish anything without the agreement of Wang and the other co-authors (Nature would simply say "no").

Another problem is that your e-mail says that you presume Phil was "unaware of the incorrectness" of Wang's work. I do not see how that could be true. Although the evidence that Phil was innocent in 1990 seems entirely conclusive, there is also the paper of Yan et al. [Advances in Atmospheric Sciences, 18: 309 (2001)], which is cited on my web page. Phil is a co-author of that paper.

Phil, this proves that you knew there were serious problems with Wang's claims back in 2001; yet some of your work since then has continued to rely on those claims, most notably in the latest report from the IPCC. It would be nice to hear the explanation for this. Phil?

Kind wishes, Doug
That is just an accusation but it looks pretty damning.

This whole thing with tree rings is pretty fascinating. There was a reference in the emails to this site: Ross McKitrick: Defects in key climate data are uncovered
Only by playing with data can scientists come up with the infamous ‘hockey stick’ graph of global warming

Beginning in 2003, I worked with Stephen McIntyre to replicate a famous result in paleoclimatology known as the Hockey Stick graph. Developed by a U.S. climatologist named Michael Mann, it was a statistical compilation of tree ring data supposedly proving that air temperatures had been stable for 900 years, then soared off the charts in the 20th century. Prior to the publication of the Hockey Stick, scientists had held that the medieval-era was warmer than the present, making the scale of 20th century global warming seem relatively unimportant. The dramatic revision to this view occasioned by the Hockey Stick’s publication made it the poster child of the global warming movement. It was featured prominently in a 2001 report of the U.N. Intergovernmental Panel on Climate Change (IPCC), as well as government websites and countless review reports.

Steve and I showed that the mathematics behind the Mann Hockey Stick were badly flawed, such that its shape was determined by suspect bristlecone tree ring data. Controversies quickly piled up: Two expert panels involving the U.S. National Academy of Sciences were asked to investigate, the U.S. Congress held a hearing, and the media followed the story around the world.

The expert reports upheld all of our criticisms of the Mann Hockey Stick, both of the mathematics and of its reliance on flawed bristlecone pine data. ...

Thus the key ingredient in most of the studies that have been invoked to support the Hockey Stick, namely the Briffa Yamal series, depends on the influence of a woefully thin subsample of trees and the exclusion of readily-available data for the same area. Whatever is going on here, it is not science.

I have been probing the arguments for global warming for well over a decade. In collaboration with a lot of excellent coauthors I have consistently found that when the layers get peeled back, what lies at the core is either flawed, misleading or simply non-existent.

Ross McKitrick is a professor of environmental economics at the University of Guelph, and coauthor of Taken By Storm: The Troubled Science, Policy and Politics of Global Warming.
That article is a fascinating read in and of itself, implicating U.S. climatologist Michael Mann.

By the way, I am questioning if this was really the work of hackers. It could just as easily be an inside job of some disgruntled worker deciding to expose the CRU.

It's a good thing Cap-And-Trade "Three-Card Monte" Dead For 2009.

Now let's kill it permanently. Global warming is a hoax. At least the data presented is a hoax. If there is a problem then the free market will find a solution. The idea that a bunch of politicians with an agenda can do anything about it is ludicrous.

The earth has gone through cooling and warming cycles for millions of years. Attempting to measure one small period and then thinking one can find the true cause of that change (assuming it even exists), goes beyond hubris.

It would just be just as correct to say ...

Beware The Ice Age Cometh

Because given enough time I am sure it will.

The Deflation Black Hole

Black Hole Madness

The black hole is not deflation. The black hole is fighting it like Japan did, or as the US is doing now. For the $trillions spent fighting this mess, all we have to show for it is a lousy bump in GDP at an annualized rate of 2.5%. Now, Fisher suggests (and rightfully so), that's all there is.

Meanwhile all the consumer debt and housing debt is still intact. Moreover, another turn down in commercial real estate and residential real estate is coming. To top it off unemployment is 10.2% and rising, likely headed far North of 11%.

Given that the US is essentially following the same idiotic path as Japan, there is every reason to believe the problem manifests itself in a similar fashion.

Here is the full article.

Economic Iceberg Coming in Deficits

President Barack Obama took office promising to lead from the center and solve big problems. He has exerted enormous political energy attempting to reform the nation's health-care system. But the biggest economic problem facing the nation is not health care. It's the deficit. Recently, the White House signaled that it will get serious about reducing the deficit next year—after it locks into place massive new health-care entitlements. This is a recipe for disaster, as it will create a new appetite for increased spending and yet another powerful interest group to oppose deficit-reduction measures.
Our fiscal situation has deteriorated rapidly in just the past few years. The federal government ran a 2009 deficit of $1.4 trillion—the highest since World War II—as spending reached nearly 25% of GDP and total revenues fell below 15% of GDP. Shortfalls like these have not been seen in more than 50 years.
Going forward, there is no relief in sight, as spending far outpaces revenues and the federal budget is projected to be in enormous deficit every year. Our national debt is projected to stand at $17.1 trillion 10 years from now, or over $50,000 per American. By 2019, according to the Congressional Budget Office's (CBO) analysis of the president's budget, the budget deficit will still be roughly $1 trillion, even though the economic situation will have improved and revenues will be above historical norms.
The planned deficits will have destructive consequences for both fairness and economic growth. They will force upon our children and grandchildren the bill for our overconsumption. Federal deficits will crowd out domestic investment in physical capital, human capital, and technologies that increase potential GDP and the standard of living. Financing deficits could crowd out exports and harm our international competitiveness, as we can already see happening with the large borrowing we are doing from competitors like China.
At what point, some financial analysts ask, do rating agencies downgrade the United States? When do lenders price additional risk to federal borrowing, leading to a damaging spike in interest rates? How quickly will international investors flee the dollar for a new reserve currency? And how will the resulting higher interest rates, diminished dollar, higher inflation, and economic distress manifest itself? Given the president's recent reception in China—friendly but fruitless—these answers may come sooner than any of us would like.
Mr. Obama and his advisers say they understand these concerns, but the administration's policy choices are the equivalent of steering the economy toward an iceberg. Perhaps the most vivid example of sending the wrong message to international capital markets are the health-care reform bills—one that passed the House earlier this month and another under consideration in the Senate. Whatever their good intentions, they have too many flaws to be defensible.
First and foremost, neither bends the health-cost curve downward. The CBO found that the House bill fails to reduce the pace of health-care spending growth. An audit of the bill by Richard Foster, chief actuary for the Centers for Medicare and Medicaid Services, found that the pace of national health-care spending will increase by 2.1% over 10 years, or by about $750 billion. Senate Majority Leader Harry Reid's bill grows just as fast as the House version. In this way, the bills betray the basic promise of health-care reform: providing quality care at lower cost.
Second, each bill sets up a new entitlement program that grows at 8% annually as far as the eye can see—faster than the economy will grow, faster than tax revenues will grow, and just as fast as the already-broken Medicare and Medicaid programs. They also create a second new entitlement program, a federally run, long-term-care insurance plan.
Finally, the bills are fiscally dishonest, using every budget gimmick and trick in the book: Leave out inconvenient spending, back-load spending to disguise the true scale, front-load tax revenues, let inflation push up tax revenues, promise spending cuts to doctors and hospitals that have no record of materializing, and so on.
If there really are savings to be found in Medicare, those savings should be directed toward deficit reduction and preserving Medicare, not to financing huge new entitlement programs. Getting long-term budgets under control is hard enough today. The job will be nearly impossible with a slew of new entitlements in place.
In short, any combination of what is moving through Congress is economically dangerous and invites the rapid acceleration of a debt crisis. It is a dramatic statement to financial markets that the federal government does not understand that it must get its fiscal house in order.
What to do? The best option would be for the president to halt Congress's rush to fiscal suicide, and refocus on slowing the dangerous growth in Social Security, Medicare and Medicaid. He should call on Congress to pass a comprehensive reform of our income and payroll tax systems that would generate revenue sufficient to fund its spending desires in a pro-growth and fair fashion.
Reducing entitlement spending and closing tax loopholes to create a fairer tax system with more balanced revenues is politically difficult and requires sacrifice. But we will avert a potentially devastating credit crisis, increase national savings, drive productivity and wage growth, and enhance our international competitiveness.
The time to worry about the deficit is not next year, but now. There is no time to waste.
Mr. Holtz-Eakin is former director of the Congressional Budget Office and a fellow at the Manhattan Institute. This is adapted from testimony he gave before the Senate Committee on the Budget on Nov. 10.