Saturday, September 25, 2010

Nassim Taleb: Obama Stimulus Made Economy Worse

U.S. President Barack Obama and his administration weakened the country’s economy by seeking to foster growth instead of paying down the federal debt, said Nassim Nicholas Taleb, author of “The Black Swan.”
“Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.”
Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse.”
Obama this month proposed a package of $180 billion in business tax breaks and infrastructure outlays to boost spending and job growth. That would come on top of the $814 billion stimulus measure enacted last year. The U.S. government’s total outstanding debt is about $13.5 trillion, according to U.S. Treasury Department figures.
Obama, 49, inherited what the National Bureau of Economic Research said this week was the deepest U.S. recession since the Great Depression. Even after the stimulus measure and other government actions, the U.S. unemployment rate is 9.6 percent.
Governments globally need to cut debt and avoid bailing out struggling companies because that’s the only way they can shield their economies from the negative consequences of erroneous budget forecasts, Taleb said.
Errant Forecasts
“Today there is a dependency on people who have never been able to forecast anything,” Taleb said. “What kind of system is insulated from forecasting errors? A system where debts are low and companies are allowed to die young when they are fragile. Companies always end up dying one day anyway.”
Taleb, a native of Lebanon who gave his speech in French to an audience of Quebec business people, said Canada’s fiscal situation makes the country a safer investment than its southern neighbor.
Canada has the lowest ratio of net debt to gross domestic product among the Group of Seven industrialized countries and will keep that distinction until at least 2014, the country’s finance department said in March. Canada’s ratio, 24 percent in 2007, will rise to about 30 percent by 2014. The U.S. ratio, now above 40 percent, will top 80 percent in four years, the department said, citing IMF data.
“I am bullish on Canada,” he told the audience. “I prefer Canada to the U.S. or even Europe.”
Mortgage Interest
Canada’s economy also benefits from the fact that homeowners, unlike their U.S. neighbors, can’t take mortgage interest as a tax deduction, Taleb said. That removes the incentive to take on too much debt, he said.
“The first thing to do if you want to solve the mortgage problem in the U.S. is to stop making these interest payments deductible,” he said. “Has someone dared to talk about this in Washington? No, because the U.S. homebuilders’ lobby is hyperactive and doesn’t want people to talk about this.”
Taleb also criticized banks and securities firms, saying they don’t adequately warn clients of the risks they run when they invest their retirement savings in the stock market.
‘Have Fun’
“People should use financial markets to have fun, but not as a depository of value,” Taleb said. “Investors have been deceived. People were told that markets go up regularly, but if you look at the last 10 years that’s not been the case. The risks are always greater than what people are told.”
Asked by an audience member if returns such as those posted by Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett -- who amassed the world’s third-biggest personal fortune through decades of stock picks and takeovers -- are the product of luck or talent, Taleb said both played a part.
If given a choice between investing with Buffett and billionaire investor George Soros, Taleb also said he would probably pick the latter.
“I am not saying Buffett isn’t as good as Soros,” he said. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”
Soros gained fame in the 1990s when he reportedly made $1 billion correctly betting against the British pound.
Taleb’s 2007 best-seller, “The Black Swan: The Impact of the Highly Improbable,” argues that history is littered with rare, high-impact events. The black-swan theory stems from the ancient misconception that all swans were white.
A former trader, Taleb teaches risk engineering at New York University and advises Universa Investments LP, a Santa Monica, California-based fund that bets on extreme market moves.

Friday, September 24, 2010

Commodities Bubble Revisited!

Bull Ballistic!

The Fed is pumping the stock market this morning.

It's a Dollar Bloodbath!


Daily -- Dollar at 7-month lows!

It's Not Just Gold! Beans Above $11, Corn Above $5



Gold Breaks Through $1300 for First Time

Need I say more?

Zuckerman Unhinged on Housing "Nightmare"

from Mort Zuckerman at US News & World Report

Why has housing been such a core element in the story of American civilization?
Culturally a decent house has been a symbol of middle-class family life. Practically, it has been a secure shelter for the children, along with access to a good free education. Financially it has been regarded as a safe store of value, a shield against the vagaries of the economy, and a long-term retirement asset. Indeed, for decades, a house has been the largest asset on the balance sheet of the average American family. In recent years, it provided boatloads of money to homeowners through recourse to cash-out refinancing, in effect an equity withdrawal from their once rapidly appreciating home values.

These days the American dream of home ownership has turned into a nightmare for millions of families. They wake every day to the reality of a horrible decline in the value of the home that has meant so much to them. The pressure to meet mortgage payments on homes that have lost value has been especially shocking—and unjust—for the millions of unemployed through no fault of their own. For the baby boomer generation, a home is now seen not as the cornerstone of advancement but a ball and chain, restricting their ability and their mobility to move and seek out a job at another location. They just cannot afford to abandon the equity they have in their homes—and they can't sell in this miserable market.
American homeowners have experienced an unprecedented decline in their equity net of mortgage debt. The seemingly never-ending fall in prices has brought an average decline of at least 30 percent. Furthermore, the country is now going through an unprecedented nationwide slide in sales, despite the fact that long-term mortgage interest rates nationwide plummeted recently to a record low of 4.3 percent before rising slightly. The result is that home occupancy costs for home purchases are now down to roughly 15 percent of family income, dramatically lower than the conventional, affordable figure of 25 percent of family income devoted to home occupancy costs. Yet new home sales, pending home sales, and mortgage applications are down to a 13-year low.
[Read more of Mort Zuckerman's columns]
The economics of home ownership could hardly be more disastrously opposite to the expectations of generation after generation. Millions of homes have been foreclosed upon. About 11 million residential properties, or about 23 percent of such properties with mortgages, have mortgage balances that exceed the home's value. Given the total inventory, and the shadow inventory of empty homes, many experts expect prices to fall another 5 to 10 percent. That would bring the decline to 40 percent from peak-to-trough and expose an estimated 40 percent of homeowners to mortgages in excess of the value of their homes.
The growing risk of disappearing equity invites more strategic defaults on mortgages. Homeowners with negative equity are tempted simply to mail in their keys to their friendly lender even if they can afford the mortgage payment. Banks don't want to take the deflated properties onto their books because they will then have to declare a financial loss and still have to worry about maintaining the properties.
Little wonder foreclosure has not been enforced on a quarter of the people who haven't made a single mortgage payment in the last two years. A staggering 8 million home loans are in some state of delinquency, default, or foreclosure. Another 8 million homeowners are estimated to have mortgages representing 95 percent or more of the value of their homes, leaving them with 5 percent or less equity in their homes and thus vulnerable to further price declines. A huge percentage will never be able to catch up on their payment deficits.
The pace of foreclosures was briefly slowed by loan modifications brought on by government programs. Alas, the programs have not been working as hoped. Half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50 percent. The foreclosure pipeline remains completely clogged. As it unclogs, a new wave of homes will come on the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.
A well-balanced housing market has a supply of about five to six months. These days the supply is more than double that, as inventory backlog has surged to about a 12½ months' supply this summer, up from 8.3 months in May. This explains why average sale prices have been declining for so many, many months. The high end of the market, in particular, is under great pressure.
The mortgage market doesn't help. It is virtually on life support from the government, which now guarantees about 95 percent of the mortgage market. The rare conventional lenders are now actually insisting on a substantial down payment and making other more stringent financial requirements. Household formation is also shrinking now, down to an annual rate of about 600,000, compared to net household formation during the bubble years, when it was in excess of a million annually. The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.
This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and then through every recession since. Each time, residential construction preceded the recovery in the larger economy. This time, in the Great Recession, a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings, and current spending. Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over 5 million jobs in residential construction.
That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to the level of 2.4 percent this year. This is significant if you recognize that a 3 percent top-to-bottom decline in real GDP constitutes a serious recession.
Government programs to stimulate housing sales have not helped. There have been eight of them. One, which expired most recently (in the spring), was an $8,000 tax credit for housing contracts. All of these have done little more than distort the pattern of housing demand and actually pulled forward hundreds of thousands of units at the expense of future growth.
There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis, and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.
The sad fact is that housing problems never left the recession of the last several years and it doesn't look as if they are going to leave anytime soon. The ultimate solution remains the same as the solution to the country's broader economic crisis. That is, getting millions of people back to productive work.

BOJ Intervention Proves Worthless, Costly

from Zero Hedge:

The half-life of central bank interventions is getting shorter and shorter. After Shirakawa decided to show the Fed who is boss, only to be met with the biggest beatdown the dollar has experienced since March, tonight the BOJ decided to show Bernanke how it's done. Too bad the idiots at the BOJ have learned nothing from the SNB's Hildebrand, who was last seen cowering in a fetal positions, underneath his desk. After surging by 100 pips post the second intervention in a row, the "wolfpack" is back, and the yen has retraced more than half it losses in under 2 hours. This pathetic attempt to weaken its currency has just cost the BOJ another few trillions yen, while the end result is the same: a Japan whose export economy is about to be crushed, and a central bank president who will now be forced to join the ranks of the unemployed within a month.

Thursday, September 23, 2010

Gonzalo Lira: The Fed's Stealth Monetization of the Debt

Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. This is because of the disparate natures of government, on the one hand, and the central bank, on the other.

Governments spend money. They spend money on social programs to keep the people docile and happy, wars to keep up the illusion of safety and security, and—almost as an afterthought—infrastructure. Ordinarily, they get the money for all of these things from taxes and other fees that the government collects. 
On the other hand, central banks print money. Most of the world’s economies depend on fiat currency—currency that has value because someone says it has value. The person who says it has value is the central bank. They are the custodians of the currency—they take care that it retains its value.

Tons of people say that a fiat currency is unstable, and doomed to fail, and that we will all rue the day that we accepted that abomination into our lives!—and blah-blah-blah, rant-rant-rant.

But in most cases—all cases, actually, regardless of what the tin-foil hat brigade might rant—fiat currency works like a charm. The proof of this is the last 40 years: All of the world’s major currencies have been fiat since at least 1970. The dollar has been fiat since 1973, and by certain definitions, fiat since 1933, or even 1913—and it’s still around. That’s been because of the Federal Reserve (the U.S.’s name for its central bank).

Central bank independence is key for a successful fiat currency. If the government ever got its hands on the central bank’s printing presses, all hell would break loose. Rather than raise taxes and collect fees—which are politically unpopular—the government could (and would) direct the central bank to print all the money needed to carry out the government’s various programs.

This is monetization
What would happen once monetization took place is pretty obvious: So much of the currency would be printed by the government that businesses and ordinary people would lose faith in the currency as a stable medium of exchange. Since fiat money depends on people’s faith in it, this would become a self-reinforcing situation: The currency would fall leading to people losing faith in it, leading to the currency falling even more.

This is the mid-stages of hyperinflation. Eventually, the currency would become worthless, wrecking the economy of the currency. 
It’s happened more times than one would imagine. But the last time it happened in an advanced economy was Germany in 1922, the so-called Weimar episode. Since then—even during total war in WWII—there has not been an incident of hyperinflation in any advanced economy. (Though as I wrote in Was Stagflation in ‘79 Really Hyperinflation?, there have been bouts of high inflation that had all the traits of incipient hyperinflation.)

A collapse in the currency is why the government and the central bank are kept separate from one another—the fear of monetization, and what could happen, keeps the two apart. 
However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. Like one of those stealth fighter jets that are visible to the naked eye of a goat herder, but invisible to the radar and infrared and other sophisticated equipment of the professional military? Same thing: 

It’s what I call stealth monetization
What happened in the Fall of 2008? Essentially, banks found themselves holding debts that would never be repaid—which meant the banks could never pay back the money that they in turn owed to depositors and other creditors. 
The bad debts the banks owned—the so-called“toxic assets”—were bonds made from the real-estate and commercial real-estate mortgages, as well as other collateralized debt obligations. Since the properties underlying these bonds had fallen in price—because their prices had been a speculative bubble to begin with—the bonds made from these bundles of loans would never be fully paid off.

In other words, they were bad loans. Therefore, the banks which had made the loans—the banks which owned these toxic assets—would lose so much money that they would go bankrupt. If they did go broke, the U.S. and world economies would take a massive hit. 
So in order to avert this fate, the Federal Reserve bought these toxic assets from the banks—but the Fed didn’t pay the market value for these toxic assets, which were pennies on the dollar: Instead, the Federal Reserve paid full nominal value for the toxic assets—100¢ on the dollar. The banks the Fed bought these toxic assets from became known as the Too Big To Fail banks—for obvious reasons.

How did the Fed buy these dodgy assets? Simple: In 2008 and ‘09, the Fed “expanded its balance sheet”. That’s fancy-speak for, “The Federal Reserve created about $1.5 trillion out of thin air.” That’s essentially what they did. The Fed just decided, “We’re going to create $1.5 trillion”—and lo and behold, $1.5 trillion came to be.
What did the Fed do with this $1.5 trillion it conjured out of thin air? Why, it used it to buy up all the toxic assets and other dodgy assets from the TBTF banks. 
What did the TBTF banks do with all this cash? Why, they turned around and bought U.S. Treasury bonds. 
U.S. Treasury bonds are called “assets” by sophisticated finance types—in fact, sophisticated finance types call all bonds “assets”. But they’re really just debt—including Treasuries. U.S. Treasury bonds are certificates of debt that the U.S. Federal government issues, in order to finance its shortfall, the deficit. 
The U.S. Federal government has been running monster deficits for a number of years now—but lately, it’s gotten pretty bad. In 2009 as well as 2010, the Federal government shortfall was over $1.4 trillion. This is roughly 10% of total U.S. gross domestic product—both in 2009 and 2010: A staggering sum of money. And it is likely that for 2011, the deficit will be another $1.5 trillion or so.

The Federal government has so much outstanding debt that it is unlikely to ever be able to pay it back.

A lot of people think this. A lot of sensible people think that a day will come when the markets no longer believe in the Federal government’s promise to pay back its debt. A lot of sensible, smart people think that, one day, no one will buy any more Treasuries—

—yet every week, Treasury bonds get sold with numbing regularity. The U.S. Federal government has never put Treasuries up for auction which did not get bid on.

Who are the people who buy these Treasury bonds? The primary dealers—that is, the Too Big To Fail banks.

In other words, the TBTF banks are financing the Federal government’s massive deficits. How are they doing it? With money the Federal Reserve gave them for their toxic assets.

This is one leg of stealth monetization.

Buying up toxic assets following the 2008 Global Financial Crisis was not the only way that the Federal Reserve got money into the hands of the TBTF banks, and thereby the Federal government—the other thing the Fed did was open up “liquidity windows”.

Liquidity windows are simply the mechanism by which the Federal Reserve lends money to the banks. The interest rate the Fed assigns to this money it lends to banks is called the Fed funds rate.

Right now—and for the past several months—the Fed funds rate has been 0.25%. That’s right: One quarter of one per cent. The interest is substantially lower than the inflation rate. This means that the Fed has essentially been giving away free money to the banks. 

What are the Too Big To Fail banks doing with this free money? Why, they are buying Treasury bonds: The TBTF banks are borrowing money from the Fed at absurdly low rates, and then turning around and lending it to the Federal government by way of Treasury bond purchases.

This is the other leg of stealth monetization.

In these two ways, the Federal Reserve has been monetizing the Federal government’s debt. The Fed bought up toxic assets from the TBTF banks, which then went and bought Treasuries. And the Fed is lending money for free to the TBTF banks, which are then buying Treasuries.

Take a step back, and you get the picture: The Too Big To Fail banks are the sewer system by which the Federal Reserve supplies money to the Federal government for all its deficit spending.

This is stealth monetization.

It’s not even particularly stealthy, actually—it’s happening right out in the open. It’s just that nobody is pointing it out—or perhaps because it is an obscure, complicated system, nobody has realized what it actually is.

But it’s monetization, pure and simple. The Fed is printing up all the money the Federal government wants and needs.

To put it more bluntly—and disturbingly—the pedophile is in the room with Dakota Fanning.

One of the pernicious effects of this stealth monetization is the dis-incentive it gives banks to lend money to small- and medium-sized businesses. Everyone—including the Fed—is complaining that the banks aren’t lending to businesses. But I don’t know why they’re complaining—it makes perfect sense. 
See, the TBTF banks get money for free from the Fed, and then they turn around and lend it to the Federal government by way of buying Treasury bonds. Treasury bonds are paying absurdly low yields, because they’ve been bid up so high by all those freshly minted dollars that the Fed printed up. But to the TBTF banks, it doesn’t matter how low the Treasury yields are—it’s still guaranteed profits. Lending money to the Federal government is totally safe.

But a loan to a small- or medium-sized business? It’s a risk—and a risk for only a slightly higher profit. The business might miss a payment, or even go broke. Plus it’s a hassle, to lend to a busines—all that administrivia! The paperwork, the loan applications, the due dilligence—blah-blah-blah-blah!

“Screw it,” say the TBTF banks. “Let’s just buy Treasuries.”

That’s how the American government’s massive deficit is sucking up all the available funds. Why bother lending to the private sector, when the Federal government is paying good interest on the Treasury bonds, and the Fed is lending an endless supply of money for free?

This is why private-sector businesses are not getting any loans, no matter how long the Fed keeps interest rates at rock-bottom levels—the Federal government is hoovering up all that money, leaving the private sector with nothing, not even lint.

Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created—in fact, they just keep on adding even more liquidity: Backstop Benny has announced that QE2 is on the way—that is, further “expansion of the balance sheet”, so as to create more money to give out to more banks—

—so they can buy more Treasuries from the Federal government.

Other banks which are not TBTF are getting squeezed—everyone acknowledges that the banking industry is really hurting. But the TBTF banks are racking up monster profits, with monster bonuses.

That’s because they’re monsters—or more precisely, they are zombies: The American Zombie banks. 
Now this is all good and fine, but is there a simple way to verify that this stealth monetization is indeed what is going on?

Yes—look at the markets:

Over the past few months, we have seen two things occurring simultaneously: Treasury bond prices are rising (and therefore their yields are declining), and the dollar has been falling against all commodities and all other major currencies.

This is a contradiction. This cannot be happening simultaneously for any sustained length of time—unless there is some exterior factor making this contradictory situation happen.

It is a contradiction because, if over a sustained period of time the dollar is losing value against commodities and other major currencies, then it would not make sense for investors to be putting more money into Treasuries and bidding up their prices. Not when their yields are at such absurdly low levels.

Stealth monetization: That’s what’s bidding up Treasuries, even as the markets are losing faith in the dollar.

Poor Dakota Fanning: She’s in the pedophile’s sights—and she has no idea what’s about to happen.

But we do.

Sarah Palin: The Lies of Obamacare Exposed

It’s now six months since President Obama took control of one-sixth of the private sector economy with his health care “reform,” and the first changes to our health care system come into effect today. Despite overwhelming public dislike of the bill, we were told that D.C. knows best, and there was nothing to worry about, and we’d be better off swallowing the pill called Obamacare; so, in defiance of the will of the people, the President and his party rammed through this mother of all unfunded mandates. Nancy Pelosi said Congress had to pass the bill so that Americans could “find out what is in it.” We found out that it’s even worse than we feared.

Remember when the president said, “If you like your doctor, you can keep your doctor”? Not true. In Texas alone a record number of doctors are leaving the Medicare system because of the cuts in reimbursements forced on them by Obamacare! The president of the Texas Medical Association, Dr. Susan Bailey, warns that “the Medicare system is beginning to implode.”

Remember the Obama administration’s promise that Obamacare would cut a typical family’s premium “by up to $2500 a year”? Not true. In fact, fueled by reports that insurers expect premiums to rise by as much as 25 percent as a result of Obamacare, Senate Democrats are contemplating the introduction of price controls.

Remember when the president said in his address to Congress that “no federal dollars will be used to fund abortions”? That turned out to be yet another one of those “You lie!” moments. We found out that Obamacare-mandated high risk insurance pools set up in states like Pennsylvania and New Mexico will fund abortions after all.

Remember the promise that Obamacare would “strengthen small businesses”? Not true either. The net result of Obamacare is that small businesses will face higher health care costs, new Medicare taxes, and higher regulation compliance costs, while the much-hyped health care tax credit for small businesses turns out to be almost impossible to obtain.

Remember the president’s promise that his bill would ensure “everyone [has] some basic security”? False again. Besides the great uncertainty that Obamacare hampers businesses with, companies now find it is actually cheaper to pay the $2000 per employee fine imposed by Obamacare than to keep insuring their workforce. This leaves millions of American workers at risk of losing their employer-provided health insurance.

And remember when the Obama administration said they would not be “rationing care” in the future? That ol’ “death panels” thing I wrote about last year? That was before Obamacare was passed. Once it passed, they admitted there was going to be rationing after all. There has to be. The reality of Obamacare is that it enshrines what the New York Times called “The Power of No” – the government’s power to say no to your request for treatment of the people you love. The fact that the president used a recess appointment to push through the nomination of Dr. Donald Berwick as head of the Centers for Medicare and Medicaid Services tells you all you need to know about this administration’s intentions. After all, Berwick is the man who said, “The decision is not whether we will ration care – the decision is whether we will ration with our eyes open.”

By the way, when the administration was talking about that independent board that has the statutory power to decide which categories of treatment are worthy of funding based on efficiency calculations (that, again, sounded to me like a panel of faceless bureaucrats making life and death decisions about your loved ones – which, again, is what I referred to as a “death panel”), it was another opportunity for Americans to hear the truth about Obamacare’s intentions.

So, yes, those rationing “death panels” are there, and so are the tax increases that the president also promised were “absolutely not” in his bill. (Aren’t you tiring of the untruths coming from this White House and the liberals in Congress?) When the state of Florida filed a challenge to Obamacare on the basis that the mandates in the bill are unconstitutional, the Obama Department of Justice filed a motion to dismiss the suit by citing the Anti-Injunction Act, which blocks courts from interfering with the federal government’s ability to collect taxes. Yes, taxes! Once the bill was passed it was no longer politically inconvenient for the Obama administration to admit that it makes no difference whether the payment is a tax or a penalty because it’s “assessed and collected in the same manner.” The National Taxpayer Advocate has already warned that “Congress must provide sufficient funding” to allow the IRS to collect this new tax. Pretty soon we’ll be paying taxes just to make it possible for the IRS to collect all the additional taxes under Obamacare! Seems as if this is another surprise that the public found out about after the bill was rammed through.

But perhaps the most ridiculous promise of all was the president’s assurance that Obamacare will lead to “bending the curve” on health care spending. Yes, rationing is a part of the new system, and yes, Obamacare does raise taxes. But because the new government managed system is so incredibly complicated and expensive to run, health care spending will actually rise instead of fall. Don’t believe me? Then take a look at the Congressional Budget Office’s admittance that the CBO’s original estimate of the total costs of the bill were off by around $115 billion. Its new estimate is now above $1 trillion, and even that may be way too low. A more realistic figure calculated by the Pacific Research Institute puts the number at $2.5 to $3 trillion over the next 10 years! This is probably what President Obama was referring to when he admitted recently that he had known all along that “at the margins” his proposals were going to drive up costs. Give us a break! Only in this administration would they refer to a $3 trillion spending increase as “marginal.” Next time he comes to us with another one of his harebrained proposals for a budget-busting federal power grab, let’s make sure we remember the president’s admission that he was lying all along when he told us his health care plan was going to cut costs. He is increasing costs. He admits it now. Period.

Higher costs and worse care – is it any wonder why people are overwhelmingly in favor of repealing and replacing Obamacare? Politicians who have vacillated on this issue need to be fired. Candidates who don’t support “repeal and replace” don’t deserve your support. No amount of money spent on Washington’s “government-wide apolitical public information campaign” (otherwise known as “propaganda”) will convince Americans that this awful legislation is anything other than a debt-driven big government train wreck. We need to repeal and replace it, and that can only happen if we elect a new Congress that will make scrapping Obamacare one of its top priorities. We can replace it with pro-private sector, patient-oriented reform that the GOP has proposed.

On March 23, when Obamacare was signed into law, I launched my “Take back the 20” campaign, focusing on 20 congressional districts that John McCain and I carried in 2008 which are or were represented by members of Congress who voted in favor of Obamacare. They need to be held accountable for those votes. They voted for Obamacare. Now we can vote against them. We need to replace them with representatives who will respect the will of the people.

That’s why today I’m launching a new Take Back the 20 website at! provides information about the candidates in these 20 districts who are committed to repealing and replacing Obamacare. It has links to their personal websites and their donation pages. It allows you to read up on them, and then support them in their race to defeat those who gave us this terrible bill.

We have to send Washington a message that it’s not acceptable to disregard the will of the people. We have to tell them enough is enough. No more defying the Constitution. No more driving us off a financial cliff. We must repeal and replace Obamacare with patient-centered, results-driven, free market reform that provides solutions to people of all income levels without bankrupting our country.

It’s time to make a stand! Let’s take back the 20!

- Sarah Palin

Empire In Decline

by Graham Summers at Phoenix Capital Research:

I look around me and I see an Empire in Decline.

The US economy is clearly in a depression… not a recession, not a recovery, but a DEPRESSION. More than 40 million Americans (12%) are on Food stamps. Nearly one in five of us are unemployed of underemployed. Folks go to Wal-Mart at 11PM waiting for their government checks to clear at midnight so they can buy baby formula, milk and other necessities.

Three out of every five Americans are overweight. One in five are obese. Indeed, there are only two areas (one state, Colorado, and Washington DC) where obesity rates are under 20%.

Nearly three in four of us don’t get enough sleep.  Almost one third of us report having trouble falling asleep EVERY night. And almost half of us report that day-time sleepiness interferes with normal activities including work.

Half of marriages end in divorce. One out of ten married couples report sleeping alone. The average American watches 28 hours of TV a week (enough to qualify for a part-time job). Two thirds of us eat dinner while watching TV, preferring the fake, sensationalized lives of others to engaging with our own families.

The TV and media are filled with foul, ungodly images of sex, violence, and hate. The most watched shows of the last decade all feature ordinary folks becoming superstars in lottery-esque competitions (American Idol, Survivor, Who Wants to be a Millionaire, etc) OR crime sagas detailing the most sordid and disgusting elements of society (CSI, Law and Order, etc) OR amoral social dramas in which notions of personal responsibility, fidelity, and common decency are unknown (Desperate Housewives, the Bachelorette, etc).

Today, brain dead, vapid human beings who have contributed nothing to society are idolized and followed as though they invented the wheel.  We’ve actually got two industries devoted to presenting the illusion and reality of celebrity: Hollywood shows the photo-shopped, CGI-enhanced, scripted version, while the paparazzi and weekly glossies reveal the drug-addicted, affair-crazed, family breaking, soul-less emptiness.

Sex or violence are plastered on virtually every flat surface available. Even the check-out lines at the grocery store feature endless images of barely clothed women along with headlines sensationalizing gruesome behavior, right out in the open for children to see. And if the kid can actually read the headlines… God only knows what ideas this stuff is putting into their heads.

Financially, we’re all pretty much bust or going bust (except those on Wall Street).

New home sales in July were a RECORD low. Not record as in for the year, but the lowest since 1963. The talking heads are high fiving because sales improved in August, but failed to note that they were still DOWN 19% from August 2009 levels.

Americans two primary assets for retirement (stocks and their homes) have both been absolute disasters. Home prices are down 30%, stocks haven’t produced gains in over a decade. Every moron on TV talks about the Dow 10,000 like it’s a miracle. But when you adjust the Dow for inflation, (using the BLS’ ridiculous CPI measure) the Dow is SUB-500 in terms of purchasing power.

Our money system is controlled by an elite banking oligarchy fronted by academics who have never run a business, invented anything, or had any interaction with commerce aside from vying for tenure. Our currency is now worth less than 1/20th of what it was a century ago. And we are ALL in debt up to our eyeballs on a personal, corporate, local, state, and federal level.

Heck, even USA TODAY (not exactly the cutting edge in financial research) notes that in order to pay off our current liabilities, every US family would have to pay $31,000 a year… for 75 YEARS!!!

And we’re talking about an economic recovery?

According to David Rosenberg of Gluskin Sheff:

·      Wages & salaries are still down 3.7% from the prior peak;
·      Corporate profits are still down 20% from the peak;
·      Real GDP is still down 1.3% from the peak;
·      Industrial production is still down 7.2% from the peak;
·      Employment is still down 5.5% from the peak;
·      Retail sales are still down 4.5% from the peak;
·      Manufacturing orders are still down 22.1% from the peak;
·      Manufacturing shipments are still down 12.5% from the peak;
·      Exports are still down 9.2% from the peak;
·      Housing starts are still down 63.5% from the peak;
·      New home sales are still down 68.9% from the peak;
·      Existing home sales are still down 41.2% from the peak;
·      Non-residential construction is still down 35.7% from the peak.

The American Psychological Association reports that 73% of Americans cite money as a source of significant stress. Personal bankruptcies have fallen 8% month over month from July to August. However, August 2010 bankruptcies are up 6% from August 2009… so much for the recovery.

And yet, despite all of this, assumedly intelligent people write op-ed articles and appear on TV claiming that things are swell in the US, that we’re actually OK and that the recession is over. Some of these people even have advanced degrees or have won international prizes for economics.

Let’s be honest. Forget recessions, forget even Depressions, the US is an empire in decline.

You can literally see it crumbling right in front of you. Just start looking at how people live, eat, and act on a day to day basis. Look at how our Government runs itself, how it manages our affairs, how it spends our tax Dollars. Look at how our justice system works, who it protects and who it punishes.

It’s all out there, right in the open for you to see. You don’t need an expert degree or some kind of advanced education. It’s OBVIOUS to anyone who bothers looking around.

The fact we don’t admit it doesn’t mean it’s not true.

(Sigh!) Another New High for Gold

Obamacare Gets Uglier the Closer We Look At It


Before Obamacare was passed six months ago today, former President Bill Clinton promised a leftist horde at the Netroots Nation convention: “The minute the president signs the health care reform bill, approval will go up, because Americans are inherently optimistic.” Fast forward to last Sunday, when, after Meet the Press host David Gregory played a clip of Clinton’s promise, the former President responded: “I was wrong.”
It is rare in Washington that a politician admits they were so very, very wrong about such a huge issue, but the evidence that the American people have completely rejected Obamacare is overwhelming. Rasmussen Reports, Gallup and CNN all put opposition to Obamacare somewhere between 56% and 61%. The law is so toxic that hardcore leftists locked in tough election fights like Sens. Barbara Boxer (D-CA) and Michael Bennet (D-CO) ignore the law altogether in the health care section of their campaign websites.
Anyone who has been following the news since Obamacare’s passage already knows why the law is so unpopular: billion dollar employer losses, exploding spending estimates, higher health care costs, fewer doctors, fewer choices, fewer jobs, etc. The following are just some of the specific groups that have been hit hardest by Obamacare:
Employers: The White House likes to trumpet the small business tax credits and bailouts for retiree coverage in the bill, but anyone who actually runs, or has ever run, a business is not impressed. Obamacare’s punitive employer mandates, half a trillion dollars in new taxes, and burdensome regulatory compliance regime are already thwarting our nation’s economic recovery.
Doctors: In order to make a trillion dollar new entitlement look deficit neutral, you have to game the system. Obamacare accomplished this by pretending to cut doctor Medicare reimbursement by 23%. Congress already added to the deficit by delaying these cuts through this December. But a massive pay cut is just the beginning of the pain Obamacare has inflicted on physicians. The law also makes it next to impossible for doctors to establish their own hospitals, burdens them with thousands of hours of new reporting requirements and overburdens emergency rooms. Then there is the massive expansion of Medicaid which reimburses doctors at only 56% the rate in private practice. No wonder studies show that Obamacare will be 300,000 nurses and 100,000 doctors short of what is needed by 2020.
Consumers: Remember President Obama’s promise, “If you like your health care plan, you can keep your health care plan”? Don’t believe it. Do you like your health savings account (HSA) or flexible spending accounts (FSAs)? Well those provide you with too much economic health care freedom for Obamacare to work, so Obamacare regulates both out of existence. Do you like your current employer coverage? Sorry, studies show that Obamacare’s regulations are likely to incentivize employers to dump 35 million Americans out of their current health care plan. And once they are in the new marketplace, other Obamacare regulations and mandates are already sending health insurance premiums through the roof.
States: Medicaid spending already represents on average about 21 percent of the typical state budget. Obamacare will significantly expand that number. Of the 34 million Americans who gain health insurance through Obamacare, over half (18 million) will receive it through the welfare program, Medicaid. This impending state budget crisis was what the Cornhusker Kickback was all about. Obamacare attempted to appease states by bailing them out through 2016. But by 2017, state taxpayers will be on the hook for an ever-expanding share of Medicaid dollars. If state Medicaid spending increases by 41 percent as projected, then by next year Medicaid could end up consuming nearly 30 percent of the average state budget. Already, 44 states report that they have exceeded projected Medicaid enrollment and spending targets for this year, and Obamacare will only make those numbers worse.
Seniors: : The President’s own Medicare Actuary projects that the record-breaking payment reductions due to hit hospitals, home health agencies and nursing homes will make 15 percent of these providers unprofitable and possibly “jeopardize” seniors’ access to care. On top of that, payment cuts to Medicare Advantage plans will hit seniors especially hard. Enrollment in these plans is expected to drop from 14.8 to 7.4 million. By 2017, the average annual per-capita cuts for Medicare Advantage enrollees will be about $3,700 — a 27 percent reduction from today’s levels.
When Obamacare first passed six months ago today, Heritage Foundation President Ed Feulner promised: “Obamacare is today’s Intolerable Act. And just as the colonists banded together to enact change after those acts were passed, so should America respond to Obamacare. This law must be repealed.” In Heritage’s “Solutions for America,” we note that, “The easiest way to address all these grievances: repeal Obamacare.” That is why it is so encouraging to see conservatives in the House embrace the repeal cause in their new document: Pledge to America. And our sister organization, Heritage Action for America has announced bipartisan support for Discharge Petition #11 which would force a vote on repealing Obamacare. The Road to Repeal is well on its way, thankfully.

Obamacare Is Much Worse Than Even Critics Imagined!

Six months ago, President Obama, Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi rammed Obamacare down the throats of an unwilling American public. Half a year removed from the unprecedented legislative chicanery and backroom dealing that characterized the bill's passage, we know much more about the bill than we did then. A few of the revelations:
» Obamacare won't decrease health care costs for the government. According to Medicare's actuary, it will increase costs. The same is likely to happen for privately funded health care.
» As written, Obamacare covers elective abortions, contrary to Obama's promise that it wouldn't. This means that tax dollars will be used to pay for a procedure millions of Americans across the political spectrum view as immoral. Supposedly, the Department of Health and Human Services will bar abortion coverage with new regulations but these will likely be tied up for years in litigation, and in the end may not survive the court challenge.
» Obamacare won't allow employees or most small businesses to keep the coverage they have and like. By Obama's estimates, as many as 69 percent of employees, 80 percent of small businesses, and 64 percent of large businesses will be forced to change coverage, probably to more expensive plans.
» Obamacare will increase insurance premiums -- in some places, it already has. Insurers, suddenly forced to cover clients' children until age 26, have little choice but to raise premiums, and they attribute to Obamacare's mandates a 1 to 9 percent increase. Obama's only method of preventing massive rate increases so far has been to threaten insurers.
» Obamacare will force seasonal employers -- especially the ski and amusement park industries -- to pay huge fines, cut hours, or lay off employees.
» Obamacare forces states to guarantee not only payment but also treatment for indigent Medicaid patients. With many doctors now refusing to take Medicaid (because they lose money doing so), cash-strapped states could be sued and ordered to increase reimbursement rates beyond their means.
» Obamacare imposes a huge nonmedical tax compliance burden on small business. It will require them to mail IRS 1099 tax forms to every vendor from whom they make purchases of more than $600 in a year, with duplicate forms going to the Internal Revenue Service. Like so much else in the 2,500-page bill, our senators and representatives were apparently unaware of this when they passed the measure.
» Obamacare allows the IRS to confiscate part or all of your tax refund if you do not purchase a qualified insurance plan. The bill funds 16,000 new IRS agents to make sure Americans stay in line.
If you wonder why so many American voters are angry, and no longer give Obama the benefit of the doubt on a variety of issues, you need look no further than Obamacare, whose birthday gift to America might just be a GOP congressional majority.

Fed Wants to Pump MORE Inflation!

I've been saying this for weeks!

by Terry Woo at Minyanville:

et ready everybody. Things are about to get a lot more expensive. In yesterday’s FOMC statement, for the first time that I know of, the Fed stated that prices aren’t rising fast enough. The actual words were this, “Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

They must be referring to the CPI but we all know that measure has been artificially engineered for decades. That’s why you can’t look to TIPS as an accurate gauge.

Maybe they haven’t checked the prices of commodities recently. Below are the performances since June 1 (a little more than three months ago).

  • Corn +42%
  • Copper +12.6%
  • Crude +2%
  • Cotton +27%
  • Coffee +38%
  • Gold +6%
  • Silver +14%
  • Dollar -8%

So if you think this isn’t going to feed into your daily purchases at the local grocery store, then I have some oceanfront property to sell you in Arizona.

It’s almost unbelievable. But what’s worse? The committee stands ready to provide additional accommodation if needed to support the economic recovery. Translation: We’re going to buy more bonds. It’s no wonder Treasuries rallied post FOMC. Traders are simply front running the Fed.

As usual the true lone hawk Thomas Hoeing dissented. See my recent comments on hawks and doves at the FOMC.

So what does this mean for your portfolio? The currency debasement trade is still on and very strong and inflation beneficiaries will continue to outperform. Gold mining plays will shine as well as stocks with dollar-denominated liabilities and revenues coming from other countries with more stable currencies. If gold’s not your thing, look to McDonald’s (MCD), YUM Brands (YUM), and Walmart (WMT) as some potential plays.

Lastly, if you're watching spot gold today and wondering why SPDR Gold Shares (GLD) isn't tracking gold as good as it should be, that's just the difference between the Comex close, which is at 1:30 PM EST and the close of the equity markets. Don't let the monkeys tell you that it's contango because GLD doesn't even use gold futures.

Michael Pento: We're Increasing Our Leverage!

There is wide agreement among economists and the financial media that our lackluster economic performance stems from continued "deleveraging" among consumers and businesses. Although it is certainly true that after decades of overly speculative borrowing, individuals and corporations are paying down debt, rebuilding their savings, and generally repairing their respective balance sheets. But these activities cannot be faulted for our economic malaise.
In fact, as a country, we haven't deleveraged at ALL. All the moves made by the private sector have been vastly outpaced by the federal government's efforts to add leverage to the economy. The net result is that we are much more indebted now than we were before the recession began; as a result, we are digging ourselves even faster into debt.
The good news is that households paid down debt for the 9th quarter in a row. In Q2, they deleveraged at a 2.3% annual rate, as their total debt outstanding dropped from $13.52 trillion to $13.45 trillion from Q1. That's still around 92% of GDP, which is way up from the 48% level in 1980, but the direction is positive. Ultimately, the message here could not be clearer: American households have decided - either voluntarily or involuntarily - that it is in their best interest to quit borrowing money and reduce their debt levels in order to reconcile their balance sheets. The bad news is that most economists view this as a pernicious tendency.
To counter the trend, economists have called for government to provide the spending that others have deferred - and the feds have been thrilled to comply. In fact, during Q2, Washington accumulated debt at a 24.4% annualized rate! So, even though households and state and local governments have begun to learn some valuable lessons, DC still managed to increase the overall level of non-financial debt in the US to a record $35.45 trillion. In an era of supposed deleveraging, the rate of debt accumulation has increased from 4.5% to 4.8% annualized over the past quarter.
By focusing solely on the behavior of the private sector, and ignoring the equally important fiscal habits of government, the financial media and mainstream economists have displayed a dangerous blind spot in their thinking. They fail to understand or acknowledge that borrowing done by a household or a government is virtually the same thing. The US government does not have any independent means to generate wealth to pay off debt. It doesn't own factories or mines, and it does not operate a profitable service-sector business. It does not have an independent store of savings in another dimension, from which it can produce goods outside the bounds of economic law.
In the real world, all government stimulus comes from borrowing, spending, or printing, or to put it another way: deferred taxation, capital redistribution, or inflation. That means all US debt is ultimately backed by the tax base of the country. Therefore, whether the consumer or the government that does the borrowing is really unimportant because, in the end, it is the consumer that will receive the bill.
Meanwhile, government interventions are particularly pernicious because they encourage short-sighted behavior in the private market as well. It was reported today that corporations are using the rock-bottom interest rate environment to execute leveraged buybacks of their shares. While this temporarily increases shareholder value, it ultimately leaves the corporations - and the broader economy - even further in debt.
As of Q2 2010, total non-financial debt is rising at a 4.8% annual rate but GDP is growing at only 1.6% annualized. US debt as a percentage of GDP continues to climb, which should put to bed any talk of a deleveraging or deflating economy. Consumers are clearly only part of the equation - and, for now, the smaller part. The US government, in fighting the claimed deleveraging, is sending the total debt level into the stratosphere. As we watch it soar upward, the dollar steadily drifts downward.

Trade Wars: China Vs. Japan

HONG KONG — Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.
Chinese customs officials are halting shipments to Japan of so-called rare earth elements, preventing them from being loaded aboard ships this week at Chinese ports, three industry officials said Thursday.
On Tuesday, Prime Minister Wen Jiabao personally called for Japan’s release of the captain, who was detained after his vessel collided with two Japanese Coast Guard ships about 40 minutes apart as he tried to fish in waters controlled by Japan but long claimed by China. Mr. Wen threatened unspecified further actions if Japan did not comply.
A spokesman for the Chinese commerce ministry declined Thursday morning to discuss the country’s trade policy on rare earths, saying only that Mr. Wen’s comments remained the government’s position. News agencies later reported that Chen Rongkai, another ministry spokesman, had denied that any embargo had been imposed.

"President Obama is the most anti-business president of my lifetime." -- Cypress Semiconductor [CY]CEO T.J. Rodgers

Upward Move, Upwardly Revised New Claims

Futures dropped, but now the market is rallying, once again on poor economic performance. Since when is bad news cause for a rally? Is the Fed pumping the stock market again? Sure looks like it!
from Zero Hedge:
Initial claims not only missed consensus by 15K, jumping by 13K to 465K, but the previous number was of course revised higher from 450K to 453K. And a far bigger revision was in the continuin claims number, where the previous print was pushed higher from 4,485K to 4,537K. The current weekly number of 4,489K missed expectations of 4,473K nonetheless. Once again the BLS' endless "downward" revisions to prior economic data continue to misrepresent the economic at T-0 with impunity. But who cares about truth when patently wrong headlines is all that matters to the binary pirates. The only "good" news: EUC and Extended claims recipients jumped by over 200K in the past week, somewhat countering the prior week's plunge by over half a million as ever more claimants exhaust their full 99 weeks of various Tier benefits.

Stock Futures Lower on Weak Europe Data

from Fox Business:

U.S. markets were looking at a negative open to Thursday trading following a disappointing European economic output report dragged both European and U.S. equities lower.
As of 6:35 a.m. in New York, the Dow Jones Industrial Average futures lost 40 points, or 0.36%, to 10633, the S&P 500 index futures were down 5.8 points to 1124.00 and the Nasdaq 100 futures fell 5.5 points to 1974.00.
The European purchasing managers survey dropped to a reading of 53.8 in September, the firm Markit said Thursday, compared with the reading of 56.2 that was reported in August. While the report still shows some expansion in economic activity - a reading of 50 is neutral - traders expressed concerns that Europe could be next to suffer from the stalled recovery that's hindered the United States.
The major European indices were down between 0.7% and 1% across the continent.

Wednesday, September 22, 2010

Socialism Passed from Father to Son

Another Hyperinflationary Scenario

or nearly twenty years, we haven’t flinched from our prediction that the massive debt build-up of the last generation would precipitate out as a deflationary bust.  That is what we still expect, although we now believe there is likely to be a hyperinflationary phase at some point as the financial system implodes. But the bottom line is that no matter how things play out, America’s standard of living will fall more steeply than at any other time since the Great Depression. As for the deflation-vs.-hyperinflation “debate,” it is useful only to the extent it helps predict how mortgage debtors will fare as this economic cataclysm plays out. We seriously doubt they will be “saved” by the kind of hyperinflation that would put hundred-thousand-dollar bills in Joe Homeowner’s wallet. Imagine how mortgage lenders would react if Joe could peel off three or four of those bills and say, “Okay, pal, we’re square.”  This scenario will seem particularly unlikely to those who believe that these economic hard times have been engineered by Masters of the Universe intent on stealing our property.  Trust us on this:  If there’s a hyperinflation, it is the rentiers who will get screwed most ruinously, not the little guys.
This pile of trash is worth more than the currency in your pocket.
Even so, that doesn’t rule out the prospect of a fleeting, hyperinflationary spike on the way down, since widespread notions concerning the dollar’s true value could change precipitously overnight. We mention this because notions are already beginning to change in ways that leave the dollar increasingly vulnerable to a global run. The exploding caldera of fear that will eventually bring this about bubbled to the surface yesterday when the Fed confirmed yet again that it is absolutely clueless about how to get the economy moving.  The central bankers’ muddled talk of still more “quantitative easing” (QE2) is about as reassuring as the promise of more sanctions against Iran.  Paul Krugman may be the last person in America who still believes that additional heaps of “stimulus” will do the trick. On Wall Street, however, the belief is clearly ascendant that QE2 will only wreck the dollar without providing any lift to the economy. That could explain why stocks fell yesterday while gold and silver soared. Not that the yahoos on Wall Street exhibited perfect knowledge. To the contrary, the broad averages shot up initially, driven by headless-chicken panic, and T-bonds finished the day with anomalously large gains despite the louche tittering about further easing.

Schiff’s Scenario
Peter Schiff has provided the most plausible scenario for a hyperinflation. He foresees a day when confidence in the dollar collapses, as it eventually must, forcing the Fed to become the sole buyer of Treasury debt.  When municipal and corporate bond traders realize on that same day that there is no official support for their markets, private debt will go into a death spiral, forcing the Fed to monetize all bonds. Under the circumstances, the Fed would not become merely domestic debt’s buyer of last resort, but the only buyer. Voila! Hyperinflation.
It should be noted that it is not some certain quantity of money injected into the banking system that will cause hyperinflation; rather, it will be the repudiation of all dollars already in circulation. Holders of physical dollars will panic to exchange them for anything tangible, causing the dollar’s value to fall to zero in mere days. Everything needed to trigger this collapse is already in the pipeline, and it is only the truly benighted, Nobelist Paul Krugman foremost among them, who cannot see the obvious. As for mortgage debt, you will still owe $250,000 on your home the Day After, except that your home will be much more deeply underwater than before – worth perhaps $20,000 instead of $180,000.  Mortgage lenders will have to work with you – work with scores of millions of homeowners who are in the same boat – to bring about a reconciliation.  No one can predict how already-unpayable mortgage debt will ultimately be paid, but it is almost certain to require a radical change in our laws in order to avoid the kind of social upheaval that could jeopardize the very rule of law.

Another Scenario Causing a Hyperinflationary Depression

You see millions of websites devoted to the topic. These would mostly be the self-proclaimed “Gold bugs” who warn us that an impending hyperinflationary event, which would significantly boost prices of all precious metals and necessities such as food, would lead to chaos as the country’s savings would vanish literally over the course of a couple of weeks.  Riots would occur. Commodities would gain in value as Fiat currencies see their end game.  Overall it portrays a very ugly picture indeed (let me pull out that Mayan Calendar).  My definition of hyperinflation revolves around a deep and sharp loss of confidence in a currency. This is different than inflation where it is simply a function of too many dollars in the economic system; however, the line between high levels of inflation and hyperinflation is quite gray primarily dominated (in my view) by “future inflation expectations”. Quick upward movements in this metric would signal to me that the public is less confident in the purchasing power of their currency, a prerequisite to hyperinflation. Another reason that I’ve thought of, though not heard much about, would be a supply-side shock in important material resources.   Regardless, I’ll come out and say upfront that there are so many headwinds, crosswinds, you name it, that predicting whether hyperinflation would occur would be akin to throwing darts. However, this will not stop me from researching the reasons why such an event may occur.
First my stance: Overall I believe that the probability of a hyperinflationary event occurring due to a loss of confidence in the US dollar remains very remote.
The other reason for hyperinflation is more unique and deserves more attention. The Fed, for all intents and purposes, is becoming a growing national security threat in my view. My main reason for such a diatribe is rooted in its quantitative easing strategy in an attempt to avoid deflation. This strategy seems shortsighted in my view from a longer-term perspective. Given the last round of quantitative easing and the low rates that it produced it is now obvious that consumers are not keen on increasing demand for loans. Despite the Fed’s best attempts to restart lending and keep the credit machine growing, the consumer has made its intentions known. They are in the process of de-leveraging and saving. Decades of profligate spending are coming home to roost; the bill now needs repaying.  Retirees must save as their largest asset (home) has taken a beating and doesn’t seem to be bouncing back anytime soon. The consumer is looking to fix its balance sheet, translating to an overall period of secular weakness in the economy.  The fundamental question that I have is whether the Fed, and perhaps more importantly, policymakers see continued debasement of the dollar via quantitative easing as a viable strategy to combat our problems. If they do, quantitative easing will continue and if it continues, I see an increasing probability of the following long-term scenario unfolding.

We continue to experience a deflationary environment over the short and medium term. At first, as it does now, it will seem that pursing a quantitative easing strategy is a more viable strategy as we have strong deflationary forces in the form of deleveraging. However, this is where I see it getting interesting. China is taking the steps necessary to boost its domestic consumption and rebalance its economy. Social safety nets are in the process of being enacted. As a Chinese official, it obviously makes sense to boost the domestic sector given that growth in export demand is not likely to continue as developed economies repair their balance sheets. We also know that presently China accounts for a large portion of demand in commodities. Its population remains mostly rural with poor incomes. What this means is that there is large pent-up demand and the prospects for accelerated and prolonged growth phase are very favorable. The day/month/year that the Chinese consumer begins to loosen its wallet and see credit as a viable tool, leading towards increased demand will bring about the moment of reckoning. For starters, commodities such as oil, copper, gold, silver, platinum and palladium would see a large acceleration in demand.  Agricultural commodities would also increase as Chinese citizens upgrade their diets. Investors would see renewed opportunities in the US manufacturing sector as exports would grow to quench the demand of the massive Chinese consumer. Job growth would stage a comeback as well as wages. Capacity utilization would increase rapidly after years of trimming down excess fat, which would have resulted in a very lean manufacturing base. We would have a major supply side-shock from higher commodity prices, coupled with low industrial capacity as the major contributors to a major increase in inflation. In the end, China’s economic restructuring would be the key that unlocks the hyper inflationary box. While an increase in jobs and higher wages are good things, the effects that they would bring (sharp moves higher in inflationary expectations) would negatively affect the retiring baby boomers and the unemployed. Furthermore, any hint of higher inflation would be met with sharply rising yields as a massive supply of bonds, which were issued  as the US built up massive deficits, would begin to be sold. Overall, we would be in an environment where persistently high yields, coupled with higher commodity and food prices would continuously sap the purchasing power of the US consumer and suppress investment in the domestic economy.  We would be in a depression, but with very high inflation as Chinese demand would ensure that important commodities retain a very high premium, while only decreasing marginally in value should there be a sell-off.  Whether our population begins to panic over the purchasing power of their dollars will determine whether we have a very bad stagflationary or hyper-depressionary event.  That would be the major wildcard.
The top risk to delaying this sequence of events would be a bout of protectionism/trade war with the US, which I do see happening. However, this would only set back this process, not prevent it. As long as our politicians and the federal reserve continue on their quest to debase our currency, the threat of a hyper-depression remains. I personally do not believe this will happen, as there would eventually be enough opposition to quantitative easing to cease it, due to fear that it may result in destroying the savings or our baby boomer population and the financially prudent (the people who are actually important towards having a healthy and sustainable economy).   However, we may very well be in a situation where Fed officials don’t realize what they’re doing until it’s too late.