Friday, May 20, 2011
Thursday, May 19, 2011
by Mike Krieger:
Printing and Propaganda
As I have been saying for the past several years, the misguided Keynesian witch doctor central planners unfortunately in charge of our economic fate are attempting a grand experiment on us based on completely insane and nonsensical theories that have no chance at success. These clowns claim to have all sorts of “tools” but in reality they have nothing. When faced with a complete credit collapse of proportions never seen before in recorded history there were and are only two “tools.” It’s the two P’s: Printing and Propaganda.
While I have written about both of these “tools” before I am going to focus on the propaganda part today since it is the most applicable to the current state of the financial markets. We all know by now that the centrals planners believe the tail wags the dog. So the economy doesn’t lead to higher stock prices but higher stock prices will lead to a better economy. Insane? Absolutely. Is it their religion? 100%. The other important thing for investors to be aware of now when they are comparing the current state of affairs to what many lived through in the 1970’s is that the central planners have learned some lessons. What we must always remember about central planners is that they will never renege on their core philosophy which is that an elite academic and political class in their wisdom are better stewards than free humans interacting in a marketplace. That said, most people do not share their worldview for obvious reasons (who wants their lives micromanaged) so the trick of the central planners is to micromanage your life while you think you are in charge. As Goethe said “None are more hopelessly enslaved than those who falsely believe they are free.” He didn’t just make up this clever quote, it is a tried a true method of the most successful control systems throughout history.
So even the brainwashed masses out there understand that price controls were tried in the 1970’s and failed. We also know why. Therefore, the last thing the current group of central planners will want to do is announce price controls. That doesn’t mean they don’t attempt them anyway. They have been rigging stocks in the United States consistently for the past two years and most people get this and accept it as a part of the current state of disunion we are in. However, as I wrote last week we have now entered Phase 2. This was represented by the raid on commodities.
A tried and true strategy that TPTB have used in precious metals for years has been to create such tremendous volatility in gold and silver and especially the shares that most investors stay away since they can’t stomach it. This strategy is now seemingly being employed to a much wider spectrum of commodities, hence my warning on trading futures last week. The entire game was perfectly summarized by a quote in the most recent 13D report where it was stated: “Unfortunately, this battle between finding a safe haven and the authorities’ desire to render it ‘unsafe’ is only in its earliest stages. Our manta since 2007 – governments can and will do anything to survive.”
The Bernank Bluff
So part of the propaganda “tool” used by the central planners is the manipulation of financial markets, which seems to increased in emphasis in recent weeks. The other consists of outright lies and disinformation. Put yourself in The Bernank’s shoes for a moment. This guy loves printing more than Hewlett Packard. He is despondent beyond belief that the markets and an increasing amount of financial commentators have criticized his precious QE insanity. Meanwhile, the economic data is starting to roll over and housing looks set to launch into another spiral lower. So what is a Bernank to do? Bluff the heck out of the markets. He knows that the only way he can have cover for his printing party is to smash commodities because the rise in commodities is the biggest point of contention amongst the masses. Unfortunately, most people don’t delve deep enough into how the system works to have the serious moral and philosophical issues with the central planning system as I and many others do. The Bernank knows this. Bread and circus is a tried and true method. Problems emerge when the bread runs out. So the period we are in right now is huge for the Bernank and his merry band of mental patients. They don’t have to make any decision on more printing until June when the current fiasco ends. It is during this window when they think they can have their cake and eat it too. They can print like mad yet at the same time claim they are about to stop and maybe even tighten. Yeah, and the Easter Bunny is sitting next to me trading LinkedIn shares.
In any event, this is The Bernank Bluff and he is milking it for all it is worth while at the same time orchestrating raids on commodity futures. This is just a massive psychological game against the investors class to keep them from the assets that will actually provide protection. Well Bernank you’ve got a month left. Make the most of it because after that you need to act. I can’t wait to see you try to tighten as the economy rolls over.
The Slut Walk
While millions around the world from the Middle East to Europe rush into the street to protest the rape and pillaging of their respective economies by the banksters and their political puppets guess what the good citizens of Boston, the heart and soul of the first American Revolution, are protesting. For the “right to be dirty.” I kid you not. The article is right here http://www.telegraph.co.uk/health/women_shealth/8510743/These-slut-walk-women-are-simply-fighting-for-their-right-to-be-dirty.html. Now let me make one thing crystal clear. I am not trying to be the moral police. I could care less how people treat themselves or behave as long as it doesn’t harm me. The point I am trying to make is that as the biggest theft in American history has just occurred and continues to occur, this is what they are protesting about in Boston. You know what the elites on Wall Street and Washington think when they see this? They smile from ear to ear. What a bunch of sheep. We just stole trillions and they are protesting for the right to be slutty. Look, I think I am a pretty decent observer of cultural trends. Rest assured ladies, sluttiness is in a secular bull market. It is encouraged by the elites. What they fear is not degeneracy but rather self-respect and logic. They want you to behave like animals so they can justify treating you like animals. Has anyone read Aldus Huxley’s books? This is worth reading http://www.huxley.net/bnw-revisited/index.html. You go girl!
Peace and wisdom,
A FIVE-fecta of bad news today hasn't prevented another Pollyanna Party:
- ECRI manufacturing data predicts a GLOBAL economic slowdown
- Housing data disappoints
- Philly Fed disappoints
- Leading Economic Indicators disappoints
- Jobless Claims continue above 400k, moving average continues to rise
I find it interesting that they blame Japan's woes for the Philly drop, but admit that they have no data to back it up. This brings to five the plethora of bad economic news today. I'm amazed that the Dow isn't down 200 points!
Goldman Sachs on today's bad economic data:
1. The Philadelphia Fed's monthly manufacturing survey weakened sharply for the second month in a row. The headline index of "general business activity" fell to 3.9, from 18.5 in April and 43.4 in March. This still suggests factory sector growth, but only barely. Most of the detailed activity indexes also weakened - the new orders index fell to 5.4 from 18.8, the shipments index to 6.5 from 29.1, and the unfilled orders index to -7.8 from 12.9 - with the exception of employment, which rose to 22.1 from 12.3 in April. (We have no information on how much of the drop in the Philly survey over the past two months could have been related to supply chain issues associated with the Japanese earthquake, but this is not a region with an especially high concentration of vehicle manufacturing.) Price pressures eased a little but remain high in historical terms.
2. Existing home sales declined by 0.8% mom in April to an annualized rate of 5.05 million units. Consensus forecasts had expected a moderate increase. Home sales dropped in three of the four Census regions during the month, with the largest declines in the Northeast. The number of homes currently offered for sales was about unchanged after seasonal adjustment, at about 3.7 million units (the months supply of homes increased, but this was likely due to seasonal variation). The median sales price of existing homes increased by about 0.5% mom on a seasonally-adjusted basis-an encouraging turn after several months of weakness. Existing home sales prices are down 5% year-over-year.
3. Rounding out the weaker-than-expected data, the index of leading economic indicators fell by 0.3% mom in April. The consensus had expected a 0.1% inc
Wow, now this is really ugly! I wonder if this is what crushed stocks in the past half hour.
from Zero Hedge:
The Philly Fed, which was expected to rise from the April number of 18.5 to 20, instead collapsed to 3.9! This compares to the March level of over 43. So much for the "Economic Recovery"TM. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 18.5 in April to 3.9, its lowest reading since last October (see Chart). The demand for manufactured goods, as measured by the current new orders index, showed a similar slowing: The index fell 13 points while the shipments index declined 23 points; both remained positive, however, suggesting slight growth last month. For the first time in eight months, firms reported that unfilled orders and delivery times were falling—both indexes were slightly negative this month." And even thought the prices paid dropped from 57.1 to 48.3, this was little solace for survey respondents: "A majority of firms continued to cite input price pressures and a sizable share of firms reported higher prices for their own manufactured goods again this month." Time for Tim Geithner's 2011 NYT OpEd edition, titled appropriately, "Welcome to the Economic Stagflation." And, oh yes, bring on the QE3.
The world is headed for an economic slowdown, according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth.
"It is not country specific, but imagine if you could add up all the activity in factories around the world and see if it was accelerating or decelerating, that is what this indicator is focused on," says Lakshman Achuthan founder and managing director of the research center. "And it has been telling us very clearly, unambiguously, that we have a peak in global industrial growth this summer."
from Zero Hedge:
Another week, another 400+ jobless print, another prior upward revision: the DOL does it like clockwork. In the week ended May 14, initial jobless claims were filed by 409,000 people (to be revised to at least 412,000 next week), which while is a drop from last week's upward revised 438,000 (originally 434,000), better than consensus, yet with the number being well above 400,000, it means that the economy continues to be a net loser of jobs. Lastly, while irrelevant, the 4 week moving average printed at 439,000, highest since November, due to that outsized print from two weeks ago. This number will rise over the next week as well. Continuing claims dropped slightly from an upward (of course) revised 3,792K (first 3,756K) to 3,711K, beating expectations of 3,278K. Looking at the 99 week cliff, it appears an equilibrium has been reached as 49K lost Extended Benefits in the week ended April 30, offset by 53K people added to EUCs.
Wednesday, May 18, 2011
Regarding deficits created during the Reagan presidency:
"The essential distinction is that we had a clean balance sheet then - $1 trillion of national debt. Today we have $14 trillion in national debt. We have used up all the runway, so to speak."
"We have piled our national balance sheet with so much debt that the government is at the very edge of a huge solvency crisis that isn't going to be addressed unless both parties dramatically change their position, and I see no sign of it. So we're going to have a gong show. Year after year after year of these debt ceiling crises, maybe they will be solved for a month or two, and then we will go right to the next."
WASHINGTON, D.C. -- Three in four Americans name some type of economic issue as the "most important problem" facing the country today -- the highest net mentions of the economy in two years.
Economy, Jobs Americans' Top Economic Concerns
General economic concerns (35%) and unemployment (22%) are the specific issues currently at the forefront of Americans' minds. The percentage mentioning the economy in general is up significantly from 26% in April, while unemployment is up just slightly from 19%.
Twelve percent of Americans mention the federal budget deficit or federal debt as the nation's most important problem, down from 17% in April, although still high on a historical basis. The April reading was the highest Gallup found since 1996.
Mentions of gas prices are up to 8% in the May 5-8 Gallup poll, the highest in nearly three years.
Democrats, Republicans, Independents Agree: Economy, Jobs Are Nation's Top Two Problems
Americans across political parties name the economy in general and unemployment as the most important issues facing the United States at this time -- and there is little difference in the percentages mentioning each.
The federal budget deficit is the No. 3 top problem for Republicans (17%) and independents (11%). Fuel prices are the third-most-mentioned problem among Democrats, at 10%.
Dissatisfaction with government is also among the top five problems members of each party name.
While Republican and Democratic lawmakers in Washington are desperately seeking common ground on the federal budget deficit and debt issue -- the United States will reach its borrowing limit Monday -- Americans are worried primarily about the economy and jobs. If Congress fails to raise or delays raising the debt limit, it could cause economic problems for the country, but Americans may not fully understand these consequences and may instead be prioritizing the issues that are affecting their current daily lives.
Although U.S. job creation reached a 2 ½-year high in April, Americans are still highly concerned about unemployment, underscoring the extent to which the recession devastated the job market. Further improvement on the jobs front -- which is closely tied to spending and economic confidence -- may be needed before Americans' priorities on the nation's top issues shift away from the economy.
Tuesday, May 17, 2011
Great analysis from Zero Hedge by Richard Koo at Nomura:
Over the past several days, quite a few readers have been asking us why we are so confident that QE3 (in some format: it does not and likely will not be in the form of the Large Scale Asset Purchases that defined QE1 and 2 - the Fed could easily disclose that it will henceforth sell Treasury puts, a topic discussed previously, or engage any of the other proposals from Vince Reinhart disclosed in June of 2003, or worse yet, do what the BOJ does and buy ETFs, REITs and other outright equities) will eventually be implemented by the Fed. Luckily, instead of engaging in a lengthy explanation of the logical, Nomura's Richard Koo comes to our rescue with his latest research piece. While we disagree with Koo on various interpretations of his about monetary theory (namely that the Fed is not in effect "printing" money and thus creating inflation - this is semantics and leads to a paradoxical binary outcome, whereby if there Fed was successful in boosting the economy, the economy would indeed be flooded with the nearly $2 trillion in excess reserves held with reserve banks. And good luck trying to contain this surge by changing the IOER - if the Fed indeed pushed the IOER to the required 5%+ level it would immediately destroy money markets, leading to the same liquidity freeze that marked the post-Lehman days, confirming the "Catch 22" nature of Quantitative Easing that we have observed since its beginning) we do agree with his analysis of what would happen to the economy if either stocks or commodities are in a bubble (and judging by the violent opinions out there, most investors believe that either one or the other has indeed reached bubble territory), should QE2 end cold turkey: "Viewed objectively, the central banks are trying to push up asset prices using quantitative easing and the portfolio rebalancing effect. The resultant rise in asset prices based on this effect represented a potential bubble—or at least a liquidity-driven event—from the start. The question is whether the real economy can keep pace with asset prices formed in those liquidity-driven markets. If it cannot, higher asset prices will be considered a bubble and will collapse at some point. The resulting situation could be much more severe than if quantitative easing had never been implemented to begin with." Bingo. "In other words, if stock and commodity prices are in fact in a bubble and if those bubbles were to collapse, the balance sheets of the financial institutions and hedge funds making investments with the expectation of higher asset prices could suffer heavy damage, exacerbating the balance sheet recession in the broader economy. an increase in DCF values, either." And there you have it: Bernanke's all in gamble that QE2 would have been sufficient to restore the virtuous circle of the economy has failed with less than 2 months to go under the QE2 regime. As such, and with fiscal stimulus a dead end, the Fed has two choices: watch as the economy collapses in flames to a state far worse than its pre-QE1 outset, or do more of the same. That's all there is. The rest is irrelevant. And since the Fed will choose the latter option, the market would be wise to start pricing in precisely the same reaction as what happened following the Jackson Hole speech...although to the nth degree.
And some other key observations from Koo:
Government borrowing has supported money supply growthAnd the conclusion:
The question, then, is how to explain the modest growth in the money supply at a time when private-sector credit has steadily contracted. A look at Japan’s experience shows that the answer lies in increased bank lending to the government. As long as the government continues to borrow, banks can continue lending (by buying government bonds) even if the private sector is deleveraging in an attempt to clean up its balance sheet.
If the government spends the proceeds of those debt issues, the people on the receiving end of that spending will deposit money with a bank somewhere, leading to an increase in the money supply.
In effect, the money supplies of both the US and the UK are being supported by government borrowing. If the two governments chose to embark on fiscal consolidation, their money supplies would contract.
Portfolio rebalancing effect was primary objective of QE2
So what are the actual problems inherent in QE2? Mr. Bernanke has stated from the beginning that QE2 would not lead to an increase in the US money supply.
If so, why did the Fed carry out QE2? The simple answer is that it believed QE2 would result in a portfolio rebalancing effect. The portfolio rebalancing effect can be described as follows. When the Fed buys a specific asset (in this case, longer-term Treasury securities), the price of that asset rises. That prompts private investors to re-direct their funds to other assets, which leads to a corresponding increase in the price of those assets.
Private-sector sentiment may improve as asset prices rise, and if that prompts businesses and households to spend more money, the economy may improve. In effect, the Fed hopes that quantitative easing will lift the economy via the wealth effect. Inasmuch as the balance sheet recession was triggered by a drop in asset prices, monetary policy that serves to support asset prices may also help pull the economy out of the balance sheet recession.
Reasons for divergence of liquidity supply and money supply
The decline in private-sector credit in the US and the UK is attributable to both the unwillingness of banks to lend and the unwillingness of the private sector to borrow. The two factors are rooted in balance sheet problems and are indications that both countries remain in balance sheet recessions.
When a bubble collapses, the value of assets drops, leaving only the corresponding liabilities on the balance sheets of businesses and households. To fix their “underwater” balance sheets, companies and individuals do whatever they can to pay down debt and avoid borrowing new money even though interest rates have fallen to zero. Banks, for their part, are not interested in lending to overly indebted companies or individuals, and often have their own balance sheet problems. With no borrowers or lenders, the deposit-growth process described above stops functioning altogether.
US banks now appear slightly more willing to lend money, although that is not the case in the UK. In neither country, however, are there any signs of greater willingness to borrow among businesses and households.
Unable to buy more government bonds or private-sector debt, investors have few places to turn
In the hope of producing a portfolio rebalancing effect, Chairman Bernanke declared that the Fed would purchase $600bn in longer-term Treasury securities between November 2010 and June 2011. This was roughly equivalent to all expected Treasury debt issuance during this period.
From a macroeconomic standpoint, these purchases of government debt meant that—in aggregate—private-sector financial institutions would be unable to increase their purchases of US Treasury securities, because all of the growth in Treasury issuance would be absorbed by the Fed.
The fact that US businesses and households were rushing to repair balance sheets by deleveraging meant that—again, viewed in aggregate—private investors would be unable to increase their purchases of private-sector debt.
With the private sector no longer borrowing and all new issues of government debt being absorbed by the Fed, US institutions found themselves with few investment options.
So funds found their way to equities and commodities
The only remaining destinations for these funds were equities, commodities, and real estate. Real estate had just been through a bubble and remained characterized by heavy uncertainty. In commercial real estate, for example, banks—at the request of US authorities—are engaging in a policy of “pretend and extend” and offering loans to borrowers whose debt they would never roll over under ordinary circumstances. That means that current prices do not accurately reflect true market prices. Housing prices, meanwhile, resumed falling late in 2010.
UK house prices have been falling since mid-2010, and the Halifax House Price Index dropped 1.4% in April 2011 alone (the decline was 3.7% on a y-y basis).
The only remaining options for private-sector investors have been stocks and commodities. That, in my opinion, is why both markets have surged since the announcement of QE2.
QE2 was Bernanke’s big gamble
When the situation is viewed in this light, we come to the realization that Mr. Bernanke’s QE2 was in fact a major gamble. It was a gamble in the sense that the Fed tried to raise share prices with QE2. If the wealth effect resulting from those higher prices led to improvements in the economy, the higher asset prices would ultimately be supported by higher real demand, thereby demonstrating that prices were not in a bubble.
However, I cannot help but feel that the portfolio rebalancing argument was putting the cart before the horse, in the sense that it is ordinarily a stronger real economy that leads to higher asset prices, and not the other way around.
It might be possible to sustain the portfolio rebalancing effect for some time if conditions were such that investors were totally oblivious to DCF values. But with market participants paying close attention to DCF values, any delay in the economic recovery will naturally bring about a correction in market prices, thereby causing the portfolio rebalancing effect to disappear.
by Chriss Street at BigGovernment.com:
Adam Smith, 18th Century English economist, pioneered the concept of the “invisible hand” to describe how capitalism through self-interest, competition, and supply and demand, more effectively allocated resources than the “dead hand” of the state; it levied punitive taxes, adopted restrictive regulations, and enforced monopolies to favor their crony allies. Smith described how English entrepreneurs flourished after their King’s feudal dominance of the economy was liberated by adopting the laissez-faire economics that allowed transactions between private parties to be free from the state’s coercion. Smith described how new wealth was rapidly created and compounded over time form the productivity gains of the Industrial Revolution that leveraged the value of workers and led to higher wages.
The Spence report illuminates that from 1988 to 2008, America’s productivity dominance collapsed by 70%; shrinking from 2.5% gain per year to only .7% per year. This crash in American leadership was the result of 98% of the 27.3 million new jobs created during the period coming from the lower productivity, and thus lower wage, “consumption” sector of the economy. Higher productivity, and thus higher wage, “goods-producing” sector grew by only 620,000 jobs. The root cause of this substitution for lower productivity jobs was a 23% growth in government, to 22.5 million workers, and a 63% growth in government dominated healthcare, to 16.3 million workers. Productivity for the American goods-producing sector continued to grow by a healthy 2.3% per year, but productivity of government workers sunk by 4% and productivity of healthcare workers plummeted by 9%.
In 1988 the average value added for American workers was $75,000. Over the last twenty years, America’s revolution in information-technologies helped drive up the valued added of a goods-producing American worker to $115,200 per year. But the productivity value of government and healthcare worker tumbled to $72,000 per worker; dragging down the average value added of American workers to only $90,750. That $24,450 loss of productivity explains allot about why the American middle class wages have been shrinking in the United States.
Adam Smith identifies the “entrepreneur” as the invisible hand that shifted economic resources out of lower and into higher productivity activities for and greater reward. If the invisible hand is expected to be busy shifting resources from lower to higher productivity; why has America shifted resources from higher to lower productivity jobs?
Welcome to the wonderful world of the “dead hand” of government. Over the last two decades the U.S. government has vastly increased punitive taxes, restrictive regulations, and enforced monopolies in favor of their crony allies. This result has been a loss of 7.5 million goods-producing jobs in the last twenty years. That trend accelerated over the last ten years with the closure of 57,000 factories and the loss of 5.5 million higher paid goods-producing jobs.
Entrepreneurs are not stupid! They did their arithmetic and figured out that the outrageous costs of paying twice China’s corporate tax rate, complying with punishing regulations, and competing against cronies like General Electric over-whelmed the productivity advantage of hiring an American workers. Entrepreneurs also recognized that even though they did not benefit from the 13.7% compound growth of government spending; the Congressional drumbeat to raise taxes on millionaires to pay for trillions of dollars of deficits, are “code words” for taxing entrepreneurs.
The bottom line is the “dead hand” of government has diminished the productivity of American workers by changing the structure of our economy to favor of the lower wage consumption sector, at the expense of the higher wage goods-producing sector. This government coercion has resulted in the invisible hand of entrepreneurs closing U.S. factories, moving goods-production off-shore, and impoverishing middle class wages. Entrepreneurs will not build new American factories and bring back higher paying middle class jobs until our government cuts taxes, deregulates industry, and stops favoring crony allies.
Will they be talking "double dip" again soon?
also from the WSJ:
By Dave KansasLots of slowdown signals in the market this morning, boosted by the brutal housing data and the weak industrial production news.
In the stock market, the headline averages aren’t moving a great deal — The Dow Jones Industrial Average is off 0.4% — but a clear divergence between cyclical stocks and defensive stocks is clear, with cyclicals stocks down and defensive shares holding or gaining ground.
The Treasury market is echoing that divergence, with the benchmark 10-year bond up about 1/4, and its yield, which moves in the opposite direction, down at 3.115%. Bonds tend to rally on whiffs of economic sluggishness.
By Mark Gongloff at WSJ:The morning’s lousy economic data have nudged a couple of obscure but noteworthy needles on the dashboard just a little bit lower.
First, the fed-funds futures market, where two guys trade bets back and forth on what the Fed’s policy rate will be next year, has cut the chances of a May 2012 rate hike to less than 50%, from a sure thing earlier this year, Howard Packowitz reports. The market is starting to whittle away at the odds of a July rate hike, too, down to 82% from 100% as recently as Friday. Note, however, that this illiquid market is volatile.
Second, Macroeconomic Advisers have trimmed their forecast for second-quarter GDP to 3.2%, down from 3.3%. I’m a little surprised they didn’t cut their outlook more than that, but they’ve got the model, so there you have it. The forecast keeps nudging ever closer to that 3-handle on GDP that many people see as the dividing line between trend and below-trend growth.
from Zero Hedge:
Since the triple dip in housing was recently circumvented courtesy of QE2, and was "transitory" in theory today's subpar housing starts and permits data is the beginning of the quadruple dip. And subpar it was: starts came at 523K on expectations of 569K, down from revised 585K previously. Permits were also ugly, missing expectations by a comparable account, printing at 551K, with consensus of 590K(and the previous revised this time lower from 594K to 574K). In starts, annualized single-family units dropped from 415k to 394k, with declines in Northeast and South, and increases in the Midwest and West. The actual, non-annualized number of starts was 46.8k, with 36.2k in single family units. Completions increased modestly from 532k to 554k. And the most interesting number was the number of houses under construction, which hit a fresh all time low on an annual, seasonally adjusted basis, or 418k.
Today, stocks look poised to turn bullish again. Amazing that stocks are rallying, given than the economic news today was universally bad. This is a key inflection point!
Imagine a country that spends and prints trillions to patch up any problem.
Now imagine another country where there is no central Treasury, meaning that bail-outs are less easy, and which has a central bank that has mopped up liquidity over the past year, rather than engage in quantitative easing.
Why does it surprise anyone that the latter, the eurozone, has a stronger currency than the former, the US? Because of peripheral countries’ debt refinancing issues? And the potential for contagion? These are real and serious issues, but in our assessment, they should be primarily priced into the spreads of eurozone bonds, not the euro itself.
Think of it this way: in the US, Federal Reserve chairman Ben Bernanke has testified that going off the gold standard during the Great Depression helped the US recover faster than other countries. Fast-forward to today: we believe Bernanke embraces a weaker currency as a monetary policy tool to help address the current state of the US economy. What many overlook is that someone must be on the other side of that trade: today it is the eurozone, which is experiencing a strong currency, despite the many challenges in the 17-nation bloc.
A year ago, the euro appeared to be the only asset traded as a hedge against, or to profit from, all things wrong in the eurozone. This was partly driven by liquidity, because it is easier to sell the euro than to short debt of peripheral eurozone countries; and as the trade worked, others piled in. As the euro approached lows of $1.18 against the dollar, the trade was no longer a “safe” one-way bet and traders had to look elsewhere. As a result, the euro is now substantially stronger, yet peripheral bond debt is much weaker.
The one language policymakers understand is that of the bond market. A “wonderful dialogue” has been playing out, encouraging policymakers to engage in real reform. Often minority governments have made extremely tough decisions. Ultimately, it us up to each country to implement their respective reforms; political realities will cause many to fall short of promises, resulting in more bond market “encouragement”. Policymakers hate this dialogue, of course, but must respect it.
Any country may default on its debt. The problem is that it may be impossible to receive another loan, at least at palatable financing costs. Any country considering a default must be willing and able to absorb the consequences, which is an overnight eradication of the primary deficit.
That’s why it is in Greece’s interest to postpone any debt restructuring until more reform has been implemented.
The risk/reward consideration of a default is likely to be more favourable a few years from now. The banking system has already had time to prepare for a Greek default, among others, unloading securities to the European Central Bank. Politics may cause an earlier default, but Greece would be shooting itself in the foot, as an important incentive for further reform through the carrot and stick approach of the European Union and International Monetary Fund is taken away. Moreover, why refuse the easy money?
Debt reduction in principle is certainly possible. Belgium in the 1990s had a debt to gross domestic product ratio of about 130 per cent and has since taken it down to about 98 per cent. The Belgium caretaker government appears easily capable of continuing the country’s prudent fiscal path.
Portugal’s main challenge is that it is a small country with a weak government, but it is capable of living up to its commitments.
Spain is a major country that has had a housing bust – nothing new in modern history. Given Spain’s low total debt to GDP and an assertive approach to overhauling its banking system, we sometimes compare Spain to Finland. In the early 1990s, Finland had a housing bust, as trade with the Soviet Union ended, followed by a banking system implosion and soaring unemployment. Both Finland then and Spain now have low debt-to-GDP ratios. It may be easier to implement reform in Finland (and Finland had a free-floating currency), but Spain has a real economy and ample resources.
Ireland is trickier, because a default may be an attractive political consideration. However, we would be more concerned about fallout to sterling, given the exposure of the British banking system, than the euro.
In the US, the day investors come to accept the reality that inflation, rather than fiscal discipline, is the path of least political resistance may be the day the bond market won’t be as forgiving. Unlike the eurozone, where consumers stopped spending and started saving a decade ago, the highly indebted US consumer may not be able to stomach higher interest rates. The large US current account deficit also makes the dollar more vulnerable to a misbehaving bond market than the eurozone.
In the medium term, we are far more concerned about risks to the US dollar than those posed by the Greek drama to the euro.
Axel Merk is president and chief investment officer of Merk Investments
Monday, May 16, 2011
Economic Club of Chicago Remarks as Prepared for Delivery by Paul Ryan
May 16, 2011
Thank you so much, Anne, for the kind introduction.
I want to thank you all for inviting me to speak. It was especially gracious of you to host me, even though I’m a Packers fan and I assume most of you are Bears fans.
But that doesn’t mean we can’t work together. As chairman of the House Budget Committee, I stand ready to do whatever it takes to help you re-sign Jay Cutler.
I’m here to talk about the economy today – about the need to get four quarters of strong, consistent performance.
That wasn’t another Jay Cutler joke, I swear. It could be, but it’s not.
I’ll come to the point. Despite talk of a recovery, the economy is badly underperforming. Growth last quarter came in at just 1.8 percent. We’re not even creating enough jobs to employ new workers entering the job market, let alone the six million workers who lost their jobs during the recession.
The rising cost of living is becoming a serious problem for many Americans. The Fed’s aggressive expansion of the money supply is clearly contributing to major increases in the cost of food and energy.
An even bigger threat comes from the rapidly growing cost of health care, a problem made worse by the health care law enacted last year.
Most troubling of all, the unsustainable trajectory of government spending is accelerating the nation toward a ruinous debt crisis.
This crisis has been decades in the making. Republican administrations, including the last one, have failed to control spending. Democratic administrations, including the present one, have not been honest about the cost of the tax burden required to fund their expansive vision of government. And Congresses controlled by both parties have failed to confront our growing entitlement crisis. There is plenty of blame to go around.
Years of ignoring the drivers of our debt have left our nation’s finances in dismal shape. In the coming years, our debt is projected to grow to more than three times the size of our entire economy.
This trajectory is catastrophic. By the end of the decade, we will be spending 20 percent of our tax revenue simply paying interest on the debt – and that’s according to optimistic projections. If ratings agencies such as S&P move from downgrading our outlook to downgrading our credit, then interest rates will rise even higher, and debt service will cost trillions more.
This course is not sustainable. That isn’t an opinion; it’s a mathematical certainty. If we continue down our current path, we are walking right into the most preventable crisis in our nation’s history.
So the question is, how do we avoid it?
The answer is simple. We have to make responsible choices today, so that our children don’t have to make painful choices tomorrow.
If you look at what’s driving our debt, the explosive growth in spending is the result of health care costs spiraling out of control.
By the time my children are raising families of their own, literally every dollar we raise in revenue will be paying for three major entitlement programs.
Some of this is demographic – every day, ten thousand baby boomers retire and start collecting Medicare and Social Security.
But a lot of it is simply due to the fact that health care costs are rising faster than the economy is growing. Revenues simply cannot keep up.
It’s basic math – we cannot solve our fiscal or economic challenges unless we get health care costs under control.
The budget passed by the House last month takes credible steps to controlling health care costs. It aims to do two things: to put our budget on a path to balance, and to put our economy on a path to prosperity.
I am here today to stress the point that these goals go hand in hand. Stable government finances are essential to a growing economy, and economic growth is essential to balancing the budget.
The name of our budget is The Path to Prosperity.
See, right now, we’re finally having a debate in Washington about how to address our fiscal problems. But we’re still not having the debate we need to have.
To an alarming degree, the budget debate has degenerated into a game of green-eyeshade arithmetic, with many in Washington – including the President – demanding that we trade ephemeral spending restraints for large, permanent tax increases.
This sets up a debate in which we are really just arguing over who to hurt and how best to manage the decline of our nation. It is a framework that accepts ever-higher taxes and bureaucratically rationed health care as givens.
I call it the “shared scarcity” mentality. The missing ingredient is economic growth.
Shared scarcity represents a deeply pessimistic vision for the future of this country – one in which we all pay more and we all get less. I believe it would leave us with a nation that is less prosperous and less free.
To begin with, chasing ever-higher spending with ever-higher tax rates will decrease the number of makers in society and increase the number of takers. Able-bodied Americans will be discouraged from working and lulled into lives of complacency and dependency.
Worse – when it becomes obvious that taxing the rich doesn’t generate nearly enough revenue to cover Washington’s empty promises – austerity will be the only course left. A debt-fueled economic crisis will force massive tax increases on everyone and indiscriminate cuts on current beneficiaries – without giving them time to prepare or adjust. And, given the expansive growth of government, many of these critical decisions will fall to bureaucrats we didn’t elect.
Shared scarcity impedes economic growth, results in harsh austerity, and ends with lost freedom.
In a recent speech he gave in response to our budget, President Obama outlined a deficit-reduction approach that, in my view, defines shared scarcity. The President’s plan begins with trillions of dollars in higher taxes, and it relies on a plan to control costs in Medicare that would give a board of 15 unelected bureaucrats in Washington the power to deeply ration care. This would disrupt the lives of those currently in retirement and lead to waiting lists for today’s seniors.
Now in criticizing the President’s policies, I should make clear that I am not disputing for a moment that he inherited a difficult fiscal situation when he took office. He did.
Millions of American families had just seen their dreams destroyed by misguided policies and irresponsible leadership that caused a financial disaster. The crisis squandered the nation’s savings and crippled its economy.
The emergency actions taken by the government in the fall of 2008 did help to arrest the ensuing panic. But subsequent interventions – such as the President’s stimulus law and the Fed’s unprecedented monetary easing – have done much more harm than good, in my judgment.
In the aftermath of the crisis, we needed government to repair the free-market foundations of the American economy, as it did under Reagan in the early 1980s, by restraining spending… keeping taxes low… enforcing reasonable, predictable regulations… and protecting the value of the dollar.
Instead, leaders in Washington embarked on an unprecedented spending spree… enacted a deeply flawed overhaul of financial rules… passed a new health care law that raised taxes by $800 billion… and encouraged a sharp departure from a rules-based monetary policy, which created even more economic uncertainty.
In the 2010 election, the voters sent a message: This isn’t working. Washington needs to try something else.
We know what that something else must be, because we know what has always made growth possible in America. We need to answer that call for new economic leadership by getting back to the four foundations of economic growth:
First, we have to stop spending money we don’t have, and ultimately that means getting health care costs under control.
Second, we have to restore common sense to the regulatory environment, so that regulations are fair, transparent, and do not inflict undue uncertainty on America’s employers.
Third, we have to keep taxes low and end the year-by-year approach to tax rates, so that job creators have incentives to invest in America; and
Fourth, we have to refocus the Federal Reserve on price stability, instead of using monetary stimulus to bail out Washington’s failures, because businesses and families need sound money.
Let me deal with each in order.
The first foundation, real spending discipline: it’s pretty simple. You can’t get real, sustainable growth by continuing to pile on the debt. More debt means more uncertainty, and more uncertainty means fewer jobs.
The rating agency S&P just downgraded the outlook on U.S. debt from “stable” to “negative.” That sends a signal to job creators. If S&P is telling them that America is a bad investment, they’re not going to expand and create jobs in America – not at the rate we need them to.
Mounting debt also threatens our poorest and most vulnerable citizens, because those who depend most on government would be hit hardest by a fiscal crisis. We have to repair our safety net programs so that they are there for those who need them most. This starts by building on the successful, bipartisan welfare reforms of the mid-1990s.
Our reforms save the social safety net by giving more power to governors to create strong, flexible programs that better serve the needs of their populations. Most important, they make these programs solvent.
As we strengthen welfare for those who need it, we propose to end it for those who don’t. We end wasteful corporate welfare for those such as Fannie Mae and Freddie Mac, big agribusinesses, and others that have gotten a free ride from the taxpayer for too long.
All of these steps are necessary to getting spending under control. But they are not enough. We cannot avert a debt crisis unless we directly address the rising cost of health care.
Getting health care costs under control is critical, both for solving our fiscal mess and for promoting growth. One reason that many people aren’t getting raises is that rising health care costs are eating into their paychecks.
The second foundation addresses the growing scourge of crony capitalism, in which Washington bureaucrats abuse the regulatory process to pick winners and losers in the private economy.
Congressional Republicans continue to advance reforms that stop regulatory bureaucrats from strangling job growth and innovation with red tape. We’ve advanced legislation to stop the EPA from imposing job-destroying energy caps on American businesses.
We’ve advanced legislation to revisit the flawed Dodd-Frank law, which actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms do not enjoy.
But most important, we propose to repeal the new health care law and its burdensome maze of new regulations. It’s bad enough that the law imposes an unconstitutional mandate on every American; it also imposes new regulations on businesses, which are stifling job creation.
Let me share with you a figure that serves as a devastating indictment of the new health care law: So far, over 1,000 businesses and organizations have been granted waivers from the law’s onerous mandates. These waivers may prevent job losses now, but they do not guarantee relief in the future, nor do they help those firms that lack the connections to lobby for waivers.
This is no way to create jobs in America. True, bipartisan health care reform starts by repealing this partisan law.
The third foundation recognizes that we cannot get our economy back on track if Washington tries to tax its way out of this mess.
The economics profession has been really clear about this – higher marginal tax rates create a drag on economic growth.
As the University of Chicago’s John Cochrane recently wrote: “No country ever solved a debt problem by raising tax rates. Countries that solved debt problems grew, so that reasonable tax rates times much higher income produced lots of tax revenue. Countries that did not grow inflated or defaulted.”
Higher taxes are not the answer.
Finally, the fourth foundation calls for rules-based monetary policy to protect working families and seniors from the threat of high inflation.
The Fed’s recent departures from rules-based monetary policy have increased economic uncertainty and endangered the central bank’s independence.
Advocates of these aggressive interventions cite the “maximum employment” aspect of the Fed’s dual mandate – its other mandate being price stability.
Congress should end the Fed’s dual mandate and task the central bank instead with the single goal of long-run price stability. The Fed should also explicitly publish and follow a monetary rule as its means to achieve this goal.
These are our four foundations of economic growth. And the House-passed budget starts the long, arduous, and necessary process of restoring these foundations and building a prosperous future.
We lift the crushing burden debt by cutting spending and reforming those government programs that drive the debt. We reduce the deficit by over a third in the first year of our budget, putting an end to the era of trillion-dollar deficits. The House-passed budget doesn’t just put the budget on a path to balance – it actually pays off the debt over time.
We can’t achieve this goal by simply rubber-stamping increases in the national debt limit without reducing spending in Washington.
Speaker Boehner made this clear in a recent speech at the Economic Club of New York: If the debt ceiling has to be raised, then we’ve got to cut spending. The House-passed budget contained $6.2 trillion in spending cuts. For every dollar the President wants to raise the debt ceiling, we can show him plenty of ways to cut far more than a dollar of spending. Given the magnitude of our debt burden, the size of the spending cuts should exceed the size of the President’s debt limit increase.
The House-passed budget also gets health care spending under control by empowering Americans to fight back against skyrocketing costs. Our budget makes no changes for those in or near retirement, and offers future generations a strengthened Medicare program they can count on, with guaranteed coverage options, less help for the wealthy, and more help for the poor and the sick.
There is widespread, bipartisan agreement that the open-ended, fee-for-service structure of Medicare is a key driver of health-care cost inflation. As my friend Jim Capretta, a noted health-care policy expert, likes to say, Medicare is not the train being pulled along by the engine of rising costs. Medicare is the engine – and the rest of us are getting taken for a ride.
The disagreement isn’t really about the problem. It’s about the solution to controlling costs in Medicare. And if I could sum up that disagreement in a couple of sentences, I would say this: Our plan is to give seniors the power to deny business to inefficient providers. Their plan is to give government the power to deny care to seniors.
We also disagree about how best to deliver the tax reform that Americans have long demanded from Washington.
Here’s a quick story about tax policy. Twenty-five years ago, GE CEO Jack Welch introduced himself to this very club by saying, “I represent a company that doesn’t pay taxes.”
I guess some things never change.
We have to broaden the tax base, so corporations cannot game the system. The House-passed budget calls for scaling back or eliminating loopholes and carve-outs in the tax code that are distorting economic incentives.
We do this, not to raise taxes, but to create space for lower tax rates and a level playing field for innovation and investment. America’s corporate tax rate is the highest in the developed world. Our businesses need a tax system that is more competitive.
A simpler, fairer tax code is needed for the individual side, too. Individuals, families, and employers spend over six billion hours and over $160 billion per year figuring out how to pay their taxes. It’s time to clear out the tangle of credits and deductions and lower tax rates to promote growth.
The House-passed budget does that by making the tax code simpler… flatter… fairer… more globally competitive… and less burdensome for working families and small businesses.
By contrast, the President says he wants to eliminate deductions, but he also wants to raise rates. That includes raising the top rate to 44.8 percent. That would amount to a $1.5 trillion tax increase on families and job creators.
The President says that only the richest people in America would be affected by his plan… Class warfare may be clever politics, but it is terrible economics. Redistributing wealth never creates more of it.
Further, the math is clear – the government cannot close its enormous fiscal gap simply by taxing the rich. This gap grows by trillions of dollars each year, representing tens of trillions in unfunded promises to future generations that the government has no plan to keep.
There’s a civic side to this as well. Sowing social unrest and class envy makes America weaker, not stronger. Playing one group against another only distracts us from the true sources of inequity in this country – corporate welfare that enriches the powerful, and empty promises that betray the powerless.
Those committed to the mindset of “shared scarcity” are telling future generations, sorry, you’re just going to have to make do with less. Your taxes will go up, because Washington can’t get government spending down.
They are telling future generations, you know, there’s just not much we can do about health care costs. Government spending on health care is going to keep going up and up and up… and when we can’t borrow or tax another dollar, we’ll have to give a board of unelected bureaucrats the power to tell you what kind of treatments you can and can’t receive.
If we succumb to this view that our problems are bigger than we are – if we surrender more control over our economy to the governing class – then we are choosing shared scarcity over renewed prosperity, and managed decline over economic growth.
That’s the real class warfare that threatens us – a class of governing elites picking winners and losers, and determining our destinies for us.
We face a choice between two futures. We can continue to go down the path toward shared scarcity, or we can choose the path of renewed prosperity.
The question before us is simple: Which path will our generation choose?
In 1979, my mentor, Jack Kemp, captured the essence of why we must choose the path to prosperity:
“We can’t progress as a society by using government to diminish one another. The only way we can all have more is by producing more, not by bickering over how to share less. Economic growth must come first… for when it does many social problems tend to take care of themselves, and the problems that remain become manageable.”
You know, there’s a question I get a lot from people at town halls. When you go around the country showing people a chart that shows that our debt is on track to cripple our economy, people start to ask you whether any plan, even a plan like the House-passed budget, can save America from a diminished future.
They say, Congressman Ryan, I know you have to sound optimistic in public. But in private, do you really think there’s anything we can do to save this country from fiscal ruin? Or should we just be bracing for the worst?
It’s a difficult question. It’s one that gives me pause. Frankly, it’s one that keeps me up at night.
But the honest answer is the one I’m about to give to you: Nobody ever got rich betting against the United States of America, and I’m not about to start.
Time and again, just when it looked like the era of American exceptionalism was coming to a close… we got back up. We brushed ourselves off. And we got back to work – rebuilding our country, advancing our society, and moving the boundaries of opportunity ever forward.
We can do it again. America was knocked down by a recession. We are threatened by a rising tide of debt. But we are not knocked out. We are America. And it is time to prove the doubters wrong once more – to show them that this exceptional nation is once again up to the challenge.
from Zero Hedge:
And the US stagflation continues. The just released Empire Manufacturing index has plunged nearly by half from 21.7 to 11.9 in May. The general business conditions index fell ten points to 11.9. The new orders index declined fi ve points to 17.2, and the shipments index slipped three points to 25.8. The inventories index climbed to 10.8, its highest level in a year. The prices paid index rose to 69.9, its highest level since mid-2008, and the second highest ever, while the prices received index held firm at 28.0. And more on the stagflation as defined by the ongoing surge in Prices Paid: "The prices paid index rose sharply, indicating that price increases accelerated over the month. The index advanced twelve points to 69.9, its highest level since mid- 2008, with roughly 70 percent of respondents reporting price increases, and none reporting price declines. This /Price Paid/ index has moved up a cumulative fifty points over the past six months." Downward GDP revisions are a-coming.