A drumbeat of disappointing data about consumer behavior, factory sales and weak hiring in recent weeks has prompted economists to ratchet down their 2011 economic forecasts to as little as half what they expected at the beginning of the year.
Saturday, June 25, 2011
Interview with Lee Adler of Wall Street Examiner
Introduction by Ilene
Elliott, of PSW’s Stock World Weekly, and I began a series of interviews with Lee Adler, chief editor and market analyst at the Wall Street Examiner, on May 11, 2011. This is part 2. Lee's Wall Street Examiner is a unique, comprehensive investment newsletter that covers subjects such as the Fed’s open market operations, the impact of the Fed and the US Treasury on the markets, the housing market, and investment strategies. We often cite Lee’s analysis in Stock World Weekly and on Phil’s Stock World--his research provides invaluable information for formulating an overall market outlook.
(Here's part 1 of our interview: The Blinking Idiot & the Banking System)
Lee: Think like a criminal. Look, it’s a matter of knowing what the Fed’s next move is going to be, and knowing the investment implications. You have to stay with the trend until the Fed sends signals that it is going to reverse. We’re at that inflection point. The issue is how much front running will there be? You definitely have to be out of your longs by now. When support fails after having succeeded, succeeded, succeeded, and every other previous retracement has held, then suddenly one doesn’t, it’s a huge signal.
Ilene: If the Fed wants oil and metal to go down, and the dollar to go up, is that saying it wants the stock market to go down as collateral damage? If pattern continues, the stock market will go down with the commodities.
Ilene: What in the Fed’s creation gives it the power to manipulate the stock market? That wasn’t one of its dual mandates (maximum employment and price stability). Isn’t that beyond its scope?
Lee: Of course, but QE2 was a direct manipulation of the stock market.
Ilene: So the Fed knew the money they gave to the Primary Dealers would end up in the stock market. Do they have an agreement with Goldman Sachs, like “hey we’re going to print you this money and we want you to buy stocks?”
Lee: That’s what they get away with. The mainstream views pushing stocks higher as a legitimate policy. People want the stock market higher. But they don’t want to see oil prices over $100 a barrel, and gas prices over $4 a gallon, they don’t want that.
Lee: Well, most of the FOMC members want stock prices higher. They believe the trickle down theory crap. They want to inflate, so it costs less to service our debt. But the kind of inflation we have is devastating. It impoverishes the middle class and makes the middle class unable to pay its debts to the banking system, which is a time bomb in itself.
The banks are not increasing their loss reserves at all. They’re shrinking their reserves so they can show profits when they should be going in the other direction because the ability of the public to service the debt is decreasing.
The Fed gets into these post-hoc crisis management modes where they will make another huge blunder. QE2 was a massive blunder. It did not achieve its desired goal. It got stock prices up but it didn’t get the economy turned around, and it made inflation much worse. They fucked up and the blunder will only be recognized after the fact. Mainstream media won’t get it until after the stock market collapses. By then it’s too late. But the blunder won’t be manifest till stock prices collapse, and then everyone will recognize what a damn idiot Bernanke is.
Lee: William the Gross. Watch what he does, not what he says. The guy is a world class card player. For any public pronouncement he makes, generally, you have to consider the opposite. Think like a criminal. He’s the Godfather. When Gross comes on TV, I hear the Godfather music playing in the background. His track record of public pronouncements isn’t very good, yet he consistently makes more money than anyone else trading the bond market, so obviously you can’t be wrong all the time and make money all the time.
Ilene: So he’s front running?
Lee: If he’s making a pronouncement on CNBC, he probably has another reason for saying what’s he’s saying other than what it appears to be. He’s got a direct pipeline to the Fed. The Fed sends these coded messages. It’s not that hard to figure out by watching the data. The massive spike in bank reserve deposits at the Fed, starting right after the January Fed meeting, means something is happening there.
Ilene: You’ve concluded this game is going to stop in June?
Lee: Well, I always figured it would because commodity prices were getting out of control. The more Bernanke denied it, the more troubling it seemed he knew it was. It’s the old “[he] doth protest too much, methinks.” Every time Bernanke claimed the inflation was transitory, the more clear it became that he knew it was a serious problem. But they didn’t do anything about till recently.
Ilene: So what is going to happen with the stock market? Will it sell off as QE ends? At what point will the Fed start a QE3 to stop the stock market from dropping - would it let stocks drop 10%, 20%...?
Lee: Oh yeah. The Fed’s job one is to preserve the Treasury market. With this enormous mountain of debt which the government is on the hook for, they can’t afford to pay 5% interest, or even 4%. They can’t afford any increase in Treasury yields. So, if necessary, they’re going to force a liquidation of stocks and spark a “flight to safety” panic again, as they did in 2008. Then, they needed to get the yields down, and they were also thinking it would help the housing market.
Ilene: But it didn’t really get to the housing market.
The problem we’re experiencing now is that the system is imploding. It’s a slow motion implosion.
Elliott: When QE2 ends in June, will the pain of that ending be extreme enough cause the Fed to resume some form of QE3?
Lee: Yep. I don’t think it will take long. We’re in bad shape, as bad as Greece. The only way we can pay our bills is if other countries and investors continue to lend us $100 Billion every month, and that could jump to $150 Billion a month in the summer. So we can’t pay our bills unless people lend us more money. That’s not paying bills. That’s creating a bigger problem.
Elliott, writer of PSW’s Stock World Weekly, and I recently began a series of interviews with Lee Adler, chief editor and market analyst at the Wall Street Examiner. (The interview was on May 11, 2011.) The Wall Street Examiner is a unique and very comprehensive investment newsletter. Lee Adler’s work covers subjects such as the Fed’s open market operations, the impact of the Fed and the US Treasury on the markets, the housing market, and investment strategies. We often cite Lee’s analysis in Stock World Weekly and on Phil’s Stock World -- his research into the Fed’s and the Treasury’s activities – the money flows – provides invaluable information for formulating an overall market outlook.
Lee: Yes, the Fed is serious about stopping speculation, and they are not waiting till the end of QE2. Bernanke wants to break the back of this thing. So if you want to trade the long side now, you’re playing with fire. The powers that be have put out the message that they won’t keep tolerating speculation in the oil and commodities markets.
Ilene: Because of the inflation that Bernanke denies exists?
Lee: Yes, the inflation is disastrous. They’ve known all along that inflation is real. You know it when you’ve got this situation in Libya with people getting killed. It started with food riots in Tunisia, but then it morphed into something else. People are starving all over the world because of these commodity prices, and the idea that it is not affecting Americans is crap because 80% of the people are affected by gas prices at these levels. They have to cut back on other spending, and the top 10% can’t carry the ball. If you’re spending an extra $100 – $200 to fill up your car and put groceries on the table, that affects your ability to service your debts, and that affects the banking system. This inability to pay back loans is showing up in mortgage delinquencies and credits card delinquencies.
Ilene: You also have written that the Dollar and commodities have an inverse relationship, why is that?
Lee: Because commodities, such as oil, are traded in Dollars. Commodities are basically a cash substitute at this point. The players don’t want to hold Dollars because the Fed is trashing the Dollar. If you’re a trader outside the U.S., and your native currency is the yen, for example, and you want to buy oil or gold futures, you need to sell Dollars in exchange for the gold or oil futures contracts you’re buying. So your action of buying the commodities in Dollars is in effect creating a short position in the Dollar.
So if commodities collapse and you’re forced to sell your positions, you’ll reverse that short position in the Dollar – trading the commodities back for Dollars. That creates demand for the Dollar. That’s why commodities and the Dollar definitely do have an inverse relationship.
With the margin increases that were implemented in the last month or so, the Fed is beginning to reverse the commodities price run up. This is the precursor to the end of QE2. The Fed is sending warning shots across the bow. After the Jan 26 FOMC meeting, banks’ reserves began to skyrocket. Why did bank reserves suddenly skyrocket? There’s no overt reason. Something was going on behind the scenes. I think banks and Primary Dealers (PDs) got the back channel message that it’s time to start building reserves because they’re really going to end QE in June – they really, really are. I give it six weeks to two months until the whole thing collapses and they have to start printing money again.
Ilene: Why do commodities and the Dollar have a more persistent relationship than the Dollar and the stock market, for which there is an inverse relationship now, but this is not always the case?
Lee: The Dollar/stock market inverse relationship is a correlation due to a common cause – essentially the actions of the Fed. It’s not a cause and effect relationship.
Elliott: Will the Fed defend the Dollar?
Lee: They are starting to, but not officially. They’re doing it behind the scenes. That’s my theory. I’m a tinfoil hat guy…. I didn’t start out this way. I arrived at my tinfoil hat after paying careful attention to the data for 8 or 9 years. After a while I realized it’s kabuki theater.
Elliott: As you say it is kabuki theater, and as Phil says, we don’t care if the markets are rigged, we just need to know HOW the market is rigged so we can place our bets correctly.
Lee: Exactly. All you need to know is what the Fed is doing. That’s my bread and butter. I watch what the Fed is doing every day. I’m so familiar with the data that stuff jumps out and screams at me. The margin increases were not an accident. They were completely out of character, and they followed Bernanke’s press conference where he claimed he couldn’t stop speculation. He’s so manipulative. He says one thing and does another.
Elliott: But being Chairman of the Fed, doesn’t he have to lie? If he came out and said exactly what he’s planning to do, wouldn’t everyone and his dog get on the right side of the trade?
Lee: That’s what he does though – he lies, but in his backchannel way. He tells the favored groups exactly what he’s going to do. You have to read between the lines. The meeting minutes are pure propaganda. That is how they send coded messages to the market.
In the last meeting minutes, or maybe the one before, the Fed said that wage increases were to be eradicated. I went ballistic when I saw that.
Elliott: Especially because they create all this inflation, and it trickles it’s way down. This is trickle down inflation. It’s gotten to the point where the people trying to make a living and ultimately buy things are being told that although prices are going up, we can’t allow you to earn anymore money…
Lee: It’s a moral outrage and a terrible policy. But that’s what they want. Their purpose is to keep the bankers in business. The Fed serves the banking system. That’s why it’s there, to make sure the banking system is profitable.
Ilene: So they are accomplishing their goal.
Lee: For the time being. In the end they cannot fulfill their purpose because the banking system is dead. This is Frankenstein’s monster. This is another one of Bernanke’s economic science experiments, Dr. Bernankenstein. And the result of his policies is bernankicide – the financial genocide of the elderly in America.
Elliott: Then if Dr. Bernanke is Dr. Frankenstein, then what exactly is his monster?
Ilene: The banking system?
Lee: Yes, it’s got these screws coming out of its head, and stitches across its forehead. It’s the walking dead. The banks don’t make any money, the only way they appear to make money is by lying about it.
Ilene: But the people running the banks make money.
Lee: It’s a criminal syndicate for god’s sake.
Friday, June 24, 2011
Thursday, June 23, 2011
Debt Defaults and a U.S. Economic Crisis
The Federal Reserve is likely to sit pat for some months to see how the US economy will be able to perform without the steroids provided by them. Foreign central banks have largely been absent from Treasury auctions. In quarter 1 this year, foreign central banks bought just 16% of the issuances while the Federal Reserve acquired almost 200%, according to Russell Napier. In other words, the Fed’s activities have masked the exodus of foreign central banks including China from these auctions.
If foreign central banks continue to abstain from purchasing US Treasuries, the private sector will have to fund the fiscal deficit, implying quarterly remittances to the US Treasury of some $370bn. The private sector will be able to fund these auctions but at a price. They will demand a higher return on treasury paper and the funding will mean that the free-flow of funds into equity and commodities will come to an end. Many institutions are taking risk off the table.
On our associate’s, WaveTrack International technical work, 10-year US Treasuries should be yielding around 4% later this summer and 6% a year or so later. The repercussions of such a change in the yield structure will have global consequences, not least on stock and commodity markets.
Debt has woven a dangerous spider’s web in Europe. The basic truth is that Greece can never repay its debt; the ECB, the IMF and Euro governments are merely buying time by granting new loans, hoping that the problem goes away. Future stability, however, does not depend on what these institutions and governments do, but on how the electorates will react. In their view, austerity can be accepted only on a one or two year view, not as an ongoing way of life.
This is especially true of Greece whose national pride will find the sale of assets to foreigners wholly unacceptable. The same is true in other debt-laden Euro countries. All, apart from Italy, have seen their economies contract significantly over the past two years with little hope of any imminent improvement. The next major move could emanate from Ireland; the Irish government wants to renegotiate its ECB and other loans.
In fact, nearly all the conventional forward looking indicators (PMIs, OECD leading indicators etc.) are suggesting that global growth is slowing and rolling over. The US ISM data for May was universally awful with every component from New Orders to Imports down significantly. This is a view shared by industry mills we talk to and visit regularly.
The USA does not only have a cyclical problem, but a structural one also. The fundamental issue is that sooner rather than later government will be forced to introduce measures that will allow the country to live within its means. It will take a deep crisis before such policies can be put together and passed by the country’s politicians. For instance, a run on the US dollar sometime next year or early in 2013 might do the trick.
Unemployment amongst teenagers has become a serious structural and social problem for the USA in an economy that is becoming dominated by skilled workers. The number of unemployed teenagers (16-19) now totals almost one in four. However, the number of African-American, not seasonally adjusted U-3 unemployment, including both sexes, in the same age group has risen to a stunning 41%, almost every other teenager.
Once Washington puts its act together, (it will have to or else the crisis will get so deep that US markets will become dysfunctional), America will find a large number of companies which had vacated the shores of the USA for China and other parts of Asia returning to their homeland.
There are two main reasons for this change, what we call reverse globalisation. First, manufacturers want their supply chains located close to the market, not on the other side of the world. And second just as important is the cost differential trend which is narrowing together with the increasing logistical costs. It is not only the wage profile looking 10 years forward, but the other costs, such as land, electricity, taxes together with the indirect supply chain cost increases. There is also the reluctance of the system in China to allow foreign companies to gain access to government contracts.
Within a decade, the USA could supplant China as the manufacturing hub of the world. To repeat, big changes will be needed in Washington for this historic development to occur. The changes will not just be on the fiscal side, but the need to offer businesses the right incentives to produce in the USA rather than abroad, the permitting procedures to allow the development of the country’s resources, including oil (the USA could become self-contained), making government less intrusive in households and businesses and so on.
In short, it is putting back in place the principals that made America the great country it once was. Crises produce opportunities and this one is as big as they have been since the USA entered WW11. What is noteworthy is that should America grab its opportunity, it will become self-contained in energy and of course food. What other major power has those valuable twin assets?
China and the rest of Asia are no exception to this slowing economic trend. In the former, government’s focus on CPI inflation and the housing market together with its concerns on the degree of speculative or hot money circulating within the economy will almost ensure that the tight monetary policy will continue for some months yet. In these circumstances, further hikes in interest rates and Reserve Requirements are likely to be seen before the end of the year.
Chart 1: Shanghai Composite Index
Such a scenario fits the political cycle. Some of the country’s excesses can be cleaned out by end 2011, much to the delight of the incoming leadership, whilst monetary policy remains tight. The chief economist of the State Information Centre, who is well regarded in Beijing, said at a recent conference in Shanghai that “China has a serious inflation”. He concluded his speech by saying that China had to endure some short term pain for the longer term benefit of the economy. Early in 2012, monetary policy will start to be loosened and should continue to do so throughout that year. The economy should recover so allowing the outgoing leadership to depart on a high note. Post 2012, we guess that the incoming leadership will want to put the economy on a firmer long-term footing, meaning more tightening. This may well coincide with the real estate sector seeing major falls in prices and, externally, the global economy starting to suffer from the breakout of its second global credit crisis. Oil prices in the $150-200 will be a disaster for China as one senior government economist said to us. China may well go through two odd years of real recession in 2013-14 years, in our view. The impact of an effective recession in China on the rest of the world will be serious and widespread.
Chart 2: The Demographics of the Middle East
Some of the underlying causes for MENA countries’ youth to rebel against their autocratic governments are common with China. The youth in these countries don’t care about democracy or who governs: they want freedom of expression, for governments to uphold their rights and the right to work. It is why Beijing has become so sensitive to the Jasmine movement and ongoing developments in MENA. Workers’ protests appear to be on the rise. The ability to communicate via computers and mobile phones (Facebook etc.) increasingly makes government powerless to control the flow of information.
As the Financial Times wrote on 20th July, “the perception that local protests might be gaining a broader national coherence is deeply threatening to China’s Communist Party....That is the conclusion of the government itself. A report by the State Council Development Research Centre blamed protests on the marginalisation of about 150M migrant workers...
Graph 1: Global Food Prices
Global food prices have risen by 37% in the past year according to the FAO. It was higher food prices plus the high level of unemployment in MENA countries that sparked so much rioting in the region. China’s government is highly sensitive to rising food prices. They may well rise further over the coming months due to the hog cycle so ensuring that pork prices increase further followed by corn and in due course even wheat. But, China’s agricultural base is deteriorating. Top soil is collapsing to dangerous levels; its fertility is being destroyed by acidification; water is being consumed way beyond sustainable levels; and aquifers are being exhausted. These are structural issues, not short term cyclical ones.
The demographics of the rural areas of China imply that the pool of active workers in the age group 15-30 is fast diminishing. It means that productivity will decline to a rate closer to the Asian Tigers ex. China or down to the 2% a year level from its historic 5% rate. The above remarks also imply that China will be importing more foodstuffs over the coming decade. Unlike the USA, China is becoming increasingly dependent on imports of food and energy.
The above is a more likely scenario to evolve than the benign outlook postulated by so many. The world is not back to the 1990s sustainable growth, but its fragility is being patched up by unsustainable fiscal and monetary excesses. In fact, as Charles Gave wrote recently in GaveKal Five Corners, these policies have had the opposite effect than those intended (the unintended consequences of policy actions!), “Capitalism cannot work without a proper cost of capital. Capitalism needs the process of creative destruction, and if real rates are negative or abnormally low, the destruction part of the process cannot happen, zombie companies are kept on perpetual life support and growth flags.”
This is exactly what is happening nearly everywhere. Politicians won’t bite the bullet (perhaps with the exception of the UK) without a crisis. That crisis is coming, certainly by early 2013 if not sooner, to be followed by years of recession and deflation, a period when the down years will outnumber the up ones. It will be accompanied by a serious deflation of assets, both equities and commodities, perhaps excepting food. This period of austerity is likely to last until around 2018; a generation of debt should by then have been worked off so laying the foundations for a long period of sustainable growth.
Chart 3: Historical Sovereign Default/Restructuring Events
The truth is that the lessons of history have been conveniently forgotten or ignored, as illustrated by Carmen Reinhardt and Kenneth Rogoff in their epic work “Growth in a Time of Debt”. Those lessons are simple: credit crises are followed by years of sub-par growth and sovereign defaults.
Wednesday, June 22, 2011
Submitted by Charles Hugh Smith from Of Two Minds
"Growing Your Way Out of Debt" Is A Fantasy
Add rising interest payments and higher taxes to declining assets and incomes and you don't get "growth," you get insolvency.
The Status Quo consensus is that "kicking the can down the road" a.k.a. "extend and pretend" will work because "Greece, Spain, Ireland et al. are going to "grow their way out of debt." That is a fantasy.
1. There's a funny little feature of debt called interest. The Status Quo solution for Ireland, Greece, Portugal, Spain et al. is A) increase their debt load with more loans and B) roll over their old debt into new loans, without the old lenders taking any "haircut" on the principal.
Both of these "solutions" add more interest costs. That means more of the national income stream must be diverted to pay the lenders their pound of flesh. That means there is less money in the national economy to buy goods and services, which means the economy must shrink to pay the higher interest costs.
This is why unemployment in Spain and Greece has skyrocketed and why 100,000 small businesses have closed in Greece in the past year.
2. A funny little feature of interest is that when people see you're at risk of default, they start charging you more to borrow their money. And it isn't a tiny bit more interest, it's a lot. Think subprime teaser loan at 3% shooting to 8%, or 28% if you're trying to sell new debt on the open market.
For the E.U. to "help" Greece and Ireland by rolling over their already crushing debt loads into new, higher interest loans is like "helping" a sick patient by sticking a knife into their back.
3. Governments over-promise future benefits to win elections in the here and now. This makes sense, of course, because you win the elections and power now and the problem of paying for these excessive benefits is left to future politicos and taxpayers.
But when the phony "growth" (think metasticizing cancer) fueled by rapidly rising debt is finally cut off, then the government has no choice but to raise taxes, and keep raising them, to pay for the extravagant past promises made to citizens.
That means more of the national income is diverted to taxes, only part of which flow through as cash benefits to consumers. Much of the tax revenues flow to cronies, fiefdoms and of course those higher interest payments on the ballooning debt.
4. Cheap abundant credit has a funny little consequence: asset bubbles. When everybody can borrow vast sums of nearly-free money at costs much lower than the outlandish gains being reaped by real estate speculators and punters pouring cash into stocks and commodities, then of course it is a perfectly rational decision to leverage yourself to the max, borrow as much as you can and join the speculative frenzy.
So assets bubble up to frothy levels, and McMansions sprout by the thousands on Irish and Spanish soil. The "demand" is not for shelter; it was all speculative demand for something to flip and churn.
So when the debt bubble pops, so too do all the asset bubbles.
5. Leverage has a funny little feature called collateral and that other peculiar feature, interest. The land and house are the collateral for a mortgage (debt). As the real estate bubble popped, then the value of the collateral plummeted. Now the collateral is worth less than the loan--the borrower is "underwater."
The lender foolishly reckoned this would never happen, and now taking the collateral when the borrower defaults is an unsavory option because the lender will have to absorb a huge loss ("haircut") if they take the property.
So they choose to "extend and pretend," offering the borrower new terms, lower payments, etc., anything to keep the loan value on the books at 100%.
All of this is just artifice, of course; the borrower is insolvent, and so is the lender. As long as the borrower has to pay interest and principal, then there is not enough income left to "grow" anything. As long as the lender keeps the impaired loan on the books at the bogus valuation, then the lender is treading on the thin ice of insolvency.
6. As the national income and asset valuations both decline, the government imposes "austerity" programs which further cut incomes. A funny little feature of government "austerity" is the cuts come from the citizen's side of the expense ledger, not from the crony/fiefdom side.
Here in the U.S., for example, the library hours are slashed and the parks are closed to save $22 million in a $100 billion annual budget (those are the numbers in California) while various favored fiefdoms continue to get their swag. The "pain" of austerity is anything but evenly distributed.
7. People facing financial uncertainty and duress have a funny little habit called saving. As the reality of instability becomes crystal-clear to all, then people rather naturally rally round and circle the wagons, i.e. start saving money to cushion them through the hard times. Trusting in future benefits and bubbles is obviously foolish, and the only avenue of relative safety is cash (or equivalent) in hand.
As people save more of their declining income, there is even less national income left to be spent on goods and services.
8. These forces are self-reinforcing. The worse times get, the more people save. the lower the national income, the more taxes will be raised. The more visible these trends become, the more interest lenders demand as they see the positive feedback loops leading to insolvency.
Once a household or nation is burdened with stupendous debt loads and stagnating earnings, "growing your way out of debt" is impossible. The E.U. may succeed in strong-arming Greece into swallowing even more debt, more austerity and higher interest payments, but that will only speed up the self-reinforcing dynamics of insolvency, and guarantee the losses kicked down the road for a few months will be even more devastating.
The Congressional Budget Office study released Wednesday offers a fresh reminder of what’s at stake in ongoing talks led by Vice President Joe Biden that are aimed at slashing more than $2 trillion from the federal deficit over the coming decade as the price for permitting the government to take on more debt to pay current obligations.
CBO says the nation’s rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax hikes.
“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff – a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” said House Budget Committee Chairman Paul Ryan, R-Wis.
The findings aren’t dramatically new, but the CBO analysis underscores the magnitude of the nation’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.
With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP – the record set in World War II – by 2023.
Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to unexpected challenges like an economic downturn.
But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, CBO warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.
“Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations,” CBO Director Douglas Elmendorf said in a blog post.
by Mort Zuckerman at US News:
The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment.
The most recent statistics are unsettling and dismaying, despite the increase of 54,000 jobs in the May numbers. Nonagricultural full-time employment actually fell by 142,000, on top of the 291,000 decline the preceding month. Half of the new jobs created are in temporary help agencies, as firms resist hiring full-time workers. [Check out a roundup of political cartoons on the economy.]
Today, over 14 million people are unemployed. We now have more idle men and women than at any time since the Great Depression. Nearly seven people in the labor pool compete for every job opening. Hiring announcements have plunged to 10,248 in May, down from 59,648 in April. Hiring is now 17 percent lower than the lowest level in the 2001-02 downturn. One fifth of all men of prime working age are not getting up and going to work. Equally disturbing is that the number of people unemployed for six months or longer grew 361,000 to 6.2 million, increasing their share of the unemployed to 45.1 percent. We face the specter that long-term unemployment is becoming structural and not just cyclical, raising the risk that the jobless will lose their skills and become permanently unemployable.
Don't pay too much attention to the headline unemployment rate of 9.1 percent. It is scary enough, but it is a gloss on the reality. These numbers do not include the millions who have stopped looking for a job or who are working part time but would work full time if a position were available. And they count only those people who have actively applied for a job within the last four weeks.
Include those others and the real number is a nasty 16 percent. The 16 percent includes 8.5 million part-timers who want to work full time (which is double the historical norm) and those who have applied for a job within the last six months, including many of the long-term unemployed. And this 16 percent does not take into account the discouraged workers who have left the labor force. The fact is that the longer duration of six months is the more relevant testing period since the mean duration of unemployment is now 39.7 weeks, an increase from 37.1 weeks in February. [See a slide show of the 10 best cities to find a job.]
The inescapable bottom line is an unprecedented slack in the U.S. labor market. Labor's share of national income has fallen to the lowest level in modern history, down to 57.5 percent in the first quarter as compared to 59.8 percent when the so-called recovery began. This reflects not only the 7 million fewer workers but the fact that wages for part-time workers now average $19,000—less than half the median income.
Just to illustrate how insecure the labor movement is, there is nobody on strike in the United States today, according to David Rosenberg of wealth management firm Gluskin Sheff. Back in the 1970s, it was common in any given month to see as many as 30,000 workers on the picket line, and there were typically 300 work stoppages at any given time. Last year there were a grand total of 11. There are other indirect consequences. The number of people who have applied for permanent disability benefits has soared. Ten years ago, 5 million people were collecting federal disability payments; now 8 million are on the rolls, at a cost to taxpayers of approximately $120 billion a year. The states today owe the federal insurance fund an astonishing $90 billion to cover unemployment benefits.
In past recessions, the economy recovered lost jobs within 13 months, on average, after the trough. Twenty-three months into a recovery, employment typically increases by around 174,000 jobs monthly, compared to 54,000 this time around. In a typical recovery, we would have had several hundred thousand more hires per month than we are seeing now—this despite unprecedented fiscal and monetary stimulus (including the rescue of the automobile industry, whose collapse would likely have lost a million jobs). Businesses do not seem to have the confidence or the incentive to add staff but prefer to continue the deep cost-cutting they undertook from the onset of the recession.
But hang on. Even to come up with the 54,000 new jobs, the Bureau of Labor Statistics assumed that 206,000 jobs were created by newly formed companies that its analysts believe—but can't prove—were, in effect, born in May under the so-called birth/death model, which relies primarily on historical extrapolations. Without this generous assumption in the face of a slowing economy, the United States would have lost jobs in May. Last year the bureau assumed that 192,000 jobs were created through new start-ups in the comparable month, but on review most of them eventually had to be taken out, as start-ups have been distressingly weak given the lack of financing from their traditional sources such as bank loans, home equity loans, and credit card lines. [Read more stories on unemployment.]
Where are we today? We have seemingly added jobs, but it is not because hiring has increased. In February 2009 there were 4.7 million separations—that is, jobs lost—but by March 2011 this had fallen to 3.8 million. In other words, the pace of layoffs has diminished, but that is not the same thing as more hiring. The employment numbers look better than they really are because of the aggressive layoffs in the early part of this recession and the reluctance of American business to rehire workers. In fact, the apparent improvement in job numbers has been made up of one part extra hiring and two parts reduced firing.
Even during past recessions, American firms still hired large numbers of workers as part of the continual cycle of replacing employees. Of the 150 million workers or job seekers in America, about one third turn over in a typical year, leaving their old jobs to take new ones. High labor "churn" is characteristic of our economy, reflecting workers moving to better jobs and higher wages and away from declining sectors. As Stanford business professor Edward Lazear explains so clearly in the Wall Street Journal, the increase in job growth over the past two years is attributable to a decline in the number of layoffs, not from increased hiring. Typically, when the labor market creates 200,000 jobs, it has been because 5 million were hired and 4.8 million were separated, not just because there were 200,000 hires and no job losses. But when an economy has bottomed out, it has already shed much of its excess labor, as illustrated by the decline in layoffs—from approximately 2.5 million in February 2009 to 1.5 million this April. In a healthy labor market like the one that prevailed in 2006 and into 2007, American firms hired about 5.5 million workers per month. This is now down to about 4 million a month. Quite simply, businesses have been very disciplined in their hiring practices. [Read Zuckerman: America's Fading Exceptionalism.]
We are nowhere near the old normal. Throughout this fragile recovery, over 90 percent of the growth in output has come from productivity gains. But typically at this stage of the cycle, labor has already taken over from productivity as the major contributor of growth. That is why we generally saw nonfarm payroll gains exceeding 300,000 per month with relative ease. This time we have recouped only 17 percent of the job losses 23 months after the recession began, as compared to 207 percent of the jobs lost from previous recessions (with the exception of 2001). There is no comfort either in two leading indicators of employment, with no growth in the workweek or in factory overtime.
Clearly, the Great American Job Machine is breaking down, and roadside assistance is not on the horizon. In the second half of this year (and thereafter?), we will be without the monetary and fiscal steroids. Nor does anyone know what will happen to long-term interest rates when the Federal Reserve ends its $600 billion quantitative easing support of the capital markets. Inventory levels are at their highest since September 2006; new order bookings are at the lowest levels since September 2009. Since home equity has long been the largest asset on the balance sheet of the average American family, all homeowners are suffering from housing prices that have, on average, declined 33 percent (compare that to the Great Depression drop of 31 percent).
No wonder the general economic mood is one of alarm. The Conference Board measure of U.S. consumer confidence slumped to 60.8 percent in May, down from 66 percent in April and well below the average of 73 in past recessions, never mind the 100-plus numbers in good times. Never before has confidence been this low in the 23rd month of a recovery. Gluskin Sheff's Rosenberg captured it perfectly: We may well be in the midst of a "modern depression."
Our political leadership in both Congress and the White House will surely bear the political costs of a failure to work out short- and long-term programs to fix the job shortage. The stakes are too high to play political games.
Tuesday, June 21, 2011
Fitch's Colquhoun also reiterated that the rating agency would place the U.S. sovereign rating on watch negative if Congress did not raise the federal government's borrowing ceiling by August 2, and said if the U.S. government misses an August 15 coupon payment, then Fitch would place the rating on restricted default.
But it added it believed it was very likely that the debt ceiling would be raised and default would be avoided.
Fitch had made similar comments earlier this month and Moody's and S&P have issued warnings along the same lines. But Fitch was the first major ratings agency to say U.S. Treasury securities could be downgraded, even for a short period.
U.S. lawmakers working to rein in rising debt said on Monday they will have to make substantial progress this week to ensure the country retains its top-notch credit rating.