Gordon Long Describes the Economic Death Spiral

The Economic Death Spiral Has Been Triggered
For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended.  It is now in the process of reversing and becoming a vicious downward economic spiral.
   
One of the strategies is the Asian Mercantile Strategy.  The other is the US Dollar Reserve Currency Strategy.

These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end.

One of the two global strategies enabled the Asian Tigers to emerge and grow to the extent that they are now the manufacturing and potentially future economic engine of the world.

The other allowed the US to live far beyond its means with massive fiscal deficits, chronic trade imbalances and more recently, current account imbalances. The US during this period has gone from being the richest country on the face of the globe to the biggest debtor nation in the world.

First we need to explore each strategy, how they worked symbiotically, what has changed and then why the virtuous cycle is now accelerating into a vicious downward spiral.

ASIAN MERCANTILE STRATEGY

The Asian Mercantile Strategy started with the emergence of Japan in the early 1980s, expanded with the Asian Tigers in the 90s and then strategically dominated with China in the first decade of this century.

Initially, Japan's products were poor quality and limited to cheap consumer products. Japan as a nation had neither the raw materials, capital markets, nor domestic consumption market to compete with the giant size of the USA. 

To compensate for its disadvantages, Japan strategically targeted its manufacturing resources for the US market.  By doing this, the resource poor island nation took the first step in becoming an export economy - an economy centered on growth through exports versus an economy like the US, where an excessive 70% of GDP is dependent on domestic consumption.

The strategy began to work as Japan took full advantage of its labor differential that was critical in the low end consumer product segment, which it initially targeted. Gradually, as capital availability expanded, Japan broadened its manufacturing scope, moving into higher levels of consumption products requiring higher levels of quality and achieving brand recognition.

Success soon became a problem as the Yen began to strengthen. To combat this the Japanese implemented the second critical component of what became the Asian Mercantile Strategy template. It began to manipulate its currency by aggressively intervening in the forex market to keep the yen weak.

Further success forced Japan to move to a more aggressive forex strategy to maintain a currency advantage. It was strategically decided that Japan's large and growing foreign reserves were to be re-invested back into the US.  By buying US Agency and US Treasury debt instruments it kept the dollar strong relative to the Yen. The more successful Japan became, the more critical this strategy became.  In the 80s Japan dominated global expansion as it brought US automotive and consumer electronics' manufacturing to its knees.

By the early 90s the Japanese labor advantage was quickly being lost to the Asian Tigers because the Yen versus the Asian Tiger currencies was too strong.  The Asian Tigers were following the Japanese model. The Asian Crisis in 1997 re-enforced to all Asian players the importance of holding large US dollar denominated reserves. This further accelerated and reinforced the strategy of purchasing US Treasury and Agency debt.

With China's acceptance into the World Trade Organization (WTO),  China emerged on the scene in full force. Armed with the lessons of the last twenty years, China took the Asian Mercantile Strategy to another level in its ongoing evolution.

The results were one of the largest and fastest transfers of industrial power ever to occur in history.  In ten years, China assumed the role of the world's undisputed industrial powerhouse in the world.

The virtuous cycle further accelerated as Asia became more dominant because its reserves, reinvested back in the US, began to have a larger and larger impact. The more Asia bought US Treasury and Agency debt, the lower US interest rates were forced, allowing Americans to finance more and more consumption. The more Asia bought US securities, the stronger the US dollar was against Asian currencies, and therefore the cheaper Asian products were relative to US manufactured products. It was a self reinforcing Virtuous Cycle.

The result was  a staggering 46,000 factories transferred from the US to Asia over the same 10 year period.  The transfer  set the stage for chronic unemployment and public funding problems,  but it was temporarily hidden by equally massive increases in debt spending.
The low interest rate driven housing bubble, being of historic proportions, made Americans feel richer than they were. They took on excess debt in various forms such as Home Equity Loans (HELOCs) at unprecedented levels. The acceleration of debt  materially impacted both the GDP and employment  of the nation through Real Estate, Construction and Mortgage Finance job growth further hiding underlying problems.

US DOLLAR RESERVE CURRENCY STRATEGY

Since President Richard Nixon took the US off the Gold Standard in 1971, the US has adopted what I refer to as the US Dollar Reserve Strategy.  After the Second World War, at the Bretton Woods Conference, the US dollar was accepted as the world's reserve currency and as such was pegged to Gold at a fixed rate of $35/oz. due to massive Vietnam  war costs and President Johnson  Great Society, the US could no longer honor its agreement.  In 1971, when France demanded conversion payment in Gold, the US refused. At this point the US become a fiat currency,  not backed by anything other than the full  faith and credit of Washington politicos. 

What were other countries to do in retaliation? What quickly became evident was there was little they could do. The fact was that international trade was conducted in US dollars as a matter of necessity due to the dominance of US export trade;  and as such, nations were forced to have US dollars to transact international trade.

Additionally, the US established agreements with oil producing Middle East countries that oil could only be sold in US dollars. Since energy is a dominant import cost for most nations, this secured the strategic position and requirement that the US dollar would be maintained as the preeminent reserve currency by trading nations.

What this strategy meant to the US was that it could now print money, and effectively export the potential inflationary consequences of its actions. The 1970s were initially marked by dramatic increases in US inflation as the strategy took hold and was implemented. By the time of President Reagan's presidency, the strategy was working thanks to some herculean efforts by Chairman Volker at the Federal Reserve. This well executed strategy is what I refer to as the US Reserve Currency Strategy.

The strategy allowed Regan to implement 'Reaganomics' and his new Supply Side economic policies which launched the longest bull market in US history.  Further enhanced by an extremely loose monetary policy under Greenspan, relaxed reserve requirements under Clinton, and tax cuts under George Bush II, the US moved quickly from being the world's richest country to being the world's largest debtor. 

Historic debt growth was built up without the disease of inflation infecting the US economy. This is explained by inflation that was effectively exported whenever increasing levels of US dollars were printed by the US Treasury.

Any threat to this strategy was rapidly challenged by US military power. As an example, when Saddam Hussein, President of Iraq, decided to sell Iraq oil denominated in Euros, he was invaded by US forces three months later and removed from power. When Libyan leader Muammar Gaddafi wanted gold in exchange for Libyan oil, he almost immediately found himself the target of US planned military intervention.

Presently, oil is still sold only in US dollars, but more and more trade deals are being negotiated between China and its trading partners. This is a serious threat to the US and the US Dollar Reserve Strategy.
THE SYMBIOTIC RELATIONSHIP

One of the reasons the US Reserve Strategy has worked for as long as it has, is because there was an incentive by other countries to sterilize the US dollars they received.  This, in the case of Asia, was because of the Asian Mercantile Strategy they were executing. By sterilizing US dollars, they held down their currency's exchange rate, which helped their exports though creating potential domestic inflation. Until recently, these inflation pressures have been manageable.

In the case of Europe, the Euro was only coming into existence in the late 90s, but then quickly moved from well below par to nearly 1.50 to the US dollar, causing competitive problems for European export trade for many peripheral countries (PIIGS).

The Asian Export Strategy and the US Reserve Dollar Strategy were symbiotic for a number of reasons:

1.    Though the Asian Export Strategy was an Export Trade Imbalance game and  the US Dollar Reserve Strategy a Volume Trade game,  both were centered on global trade. The US won by increased global trading and the growing requirement for the US dollars it required - dollars that could be increased to pay for the military industrial complex without increasing taxation and used as reserves for global banking growth. Asia won by getting an ever increasing share of a growing volume of trade.

2.    The US as a 70% consumption economy needed cheap financing to sustain its insatiable consumption. Asia needed consumption to absorb its growing exports.

3.    The US needed a strong dollar to attract financing for its debt. Asia saw US debt as a store for its growing reserves that additionally reduced financing costs for its export products. In a way Asia was offering a form of vendor financing or 'lay away' financing.

4.    US corporations saw 'off-shoring', 'outsourcing' and 'rightsizing' as major productivity improvements. The Asian Mercantile Strategy offered American corporations an opportunity to significantly increase profitability while Asia needed every increasing and larger market segments to penetrate. US corporations brought know-how, branding and capital to the Asian economies who desperately needed these strengths to employ unskilled populations, increase standards of living and reduce the always present and potential social unrest. 

5.    The US economy which had shifted from an industrial economy to a services economy was quickly becoming a financial economy with 44% of the stock market being financials. The financial economy needed increasing capital inflows to sustain itself.

WHAT HAS CHANGED

So what could possible stop this ideal symbiotic relationship from continuing to feed on itself?

A number of factors, all of which are now coming together to end this Virtuous Cycle.
DEBT SATURATION

I recently authored a paper entitled  Debt Saturation & Money Illusion , that if you have not read, I encourage you to read since it would take up too much space here.  It makes the case that the global economy has reached the point where annual debt costs are now outstripping the global economy's ability to support the exponentially increasing burden.

Additionally, stimulus spending by governments has now reached the point where it is actually counterproductive.

The above chart shows that even using government numbers for inflation (which are disgracefully inadequate and understated) the real rates in the old industrialized economies are negative. By contrast, rates in emerging economies are positive.

This means central banks are effectively paying banks to take money, yet commercial banks cannot find sufficient investments to actually absorb the money.  Like pushing on a string, the global economy simply cannot absorb debt at the levels required to sustain required growth rates which must exceed inflation rates.

The level of nonperforming bank assets is growing at such a rate that global banks have serious concerns with their existing loans and potentially their own solvency.

Growth in Non Performing Bank Loan Levels is shown below.

MALINVESTMENT
I found a recent article entitled: Technology firms struggle to cover interest payments in the Korean Times to be very instructive. Despite Asian economies growing rapidly and now dominating the global electronics industry, the study by the Korean Times found alarmingly that:

a.    One in three firms traded on the Kosdaq stock exchange failed to earn sufficient money to cover their interest payments in 2010.

b.    280 out of 876 Kosdaq-listed corporations, or 32 percent, could not reach the benchmark reading of one in the interest coverage ratio. The interest coverage ratio, otherwise dubbed times interest earned (TIE), refers to the measure of a firm’s ability to honor its debt payments.

This is classic mal-investment in the truest sense of the Austrian School of Economcis.

Corporations now have balance sheets so leveraged with debt that their business models are barely able to cover debt payments even when interest rates are at historic lows. What does this suggest for possible debt default and forced unwinding going forward?

Private Equity corporations with leveraged takeovers and buyouts dominated the US financial landscape for years. These takeovers left corporate balance sheets severely damaged and barely able to pay the debt burdens they were forced to assume.

Additionally, we have learned since the days of Enron, there are significant amounts of debt held off balance sheets today in Special Purpose Entities (SPEs). There is no investor transparency to these obligations. This debt and other forms of 'contingent liability' reporting presently allow corporations to assume ever larger amounts of debt without impacting their corporate credit ratings. Everything works fine until growth slows.

Corporations over the last decade are acting more as highly leveraged hedge funds with the consequential exposure of margin or collateral calls. This is a highly risky and unstable situation in the longer term.

CONSUMPTION IMBALANCES

Another factor causing the unwind is a tapped out US consumer.  This has been forecast for over a decade as an eventuality, but the US consumer continued to surprise everyone with their willingness to consume and take on debt.  However, since the 2008 financial crisis things have changed. The US real disposable income has fallen and US consumer debt loads are now impacting their ability to consume.

Consumption growth rates in the US have slowed.  The Asian economies have consumption rates below forty percent. The consumption growth rates of these Asian economies, though growing,  are increasing from a much smaller absolute size. This imbalance is placing further pressures on the symbiotic relationship.

A VIRTUOUS RISING CYCLE BECOMES A VICIOUS DOWNWARD SPIRAL
Slowly, the cycle is reversing. What was once a virtuous cycle is now a potentially vicious downward spiral.

The death knell for the cycle will be:

1.    A deteriorating  US dollar,

2.    Rising US interest rates,

3.    Sustained and chronic US unemployment,

4.    Asian inflation, especially in food where 60% of Asian disposable income is spent.

5.    Pressures on Asian currency pegs

6.    Collapsing values of US Reserve holdings.

BERNANKE'S BOX

I recently published another paper entitled BERNANKE'S QE^x BOX! where I argued what Chairman Ben Bernanke was likely to do at his critical April 27th FOMC 'Signal' meeting.  I was proven right as he delivered precisely on cue. It was not a difficult call.

The reason I was so sure is because the real problem was clear. It is about what the Basel BIS (Bank of International Settlements) Bankers are more than aware of.

As I point out in Debt Saturation & Money Illusion, the Shadow Banking liabilities have fallen by $5 Trillion since the financial crisis, which is a crushing blow to global liquidity and in fact global financial banking solvency.

An analysis of data by Fathom Consulting for the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, showed their assets swelled from around $4 trillion at the start of 2006 to just short of $9 trillion by the end of February this year.  The increase in the size of G4 central bank balance sheets since mid-07 has ALSO been around $5 trillion to end February 2011, or 8 percent of global GDP.

It is my view that the Basel BIS Bankers have orchestrated their balance sheet growth to offset the contracting Shadow Banking System liabilities. For those that are not aware, Federal Reserve Chairman Ben Bernanke, Bank of England Governor Mervyn King,  ECB President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa all sit as Board Members and meet regularly.

FED'S DUAL TRIPLE MANDATE

To do this the central bankers have increased their balance sheets to their political limits which can be seen in the following Federal Reserve chart from Zeal.

In the case of the US Federal Reserve, this has meant such significant changes that effectively the Fed's dual mandate has now expanded to three.  Besides the official  mandates of Full Employment and Price Stability, a third has been added: Asset Appreciation.
   
This is clearly evident when we overlay the above balance sheet growth with US equity market appreciation, as represented by the S&P 500 in the chart below.

The top of the red Treasury series (chart above) represents the total Treasuries, MBSs, and agencies the Fed purchased in its quantitative-easing campaigns.  That red line above is then transferred to the second chart below as total QE.  Superimposed on top of it is the US stock markets as represented by the SPX (blue).  The strong correlation between the Fed’s monetization and the post-panic stock-market recovery is remarkable, perhaps even scary.

The Federal Reserve is no longer the "Lender of Last Resort"

The Federal Reserve is now the "Buyer of First Resort"

INHERENT LIMITER: INFLATION

There can be little doubt, despite Federal Reserve rhetoric, that Quantitative Easing , ZIRP (Zero Interest Rate Policy) and negative real interest rates have caused  a surge in global inflation rates.

Recently Oil was at a 31 Month high and up 22 percent Year-on-Year. Corn was up 90 percent,  Wheat and  Soybeans up 45 percent and Rice at yet another high.

This inflation has been acutely felt throughout Asia which has to combat this in parallel with trying to keep their currencies competitive as part of their Asian Mercantile strategy.

Across Asia, interest rates and bank reserve requirements have been increased, and in some instance capital control restrictions implemented.  Pressures are such that many, including China, are now at the point of surrendering sacrosanct currency appreciation.

The problem is food inflation. Food must be imported and a stronger currency would help avoid consumer sensitive food inflation, at the expense of assisting with its own export strategy.

Sixty percent of disposable income in Asia, according to the Asian Development Bank (ADB) in a major report entitled: Global Food & Price Inflation & Developing Asia, is spent on food.  Food is presently expected to average 10 percent inflation in 2011. This has created tremendous pressures on the population and potential social unrest for Asian governments.

64 Million people have already been moved into the category of poverty, which the ADB classifies as  below $1.25/day. With 3.5 Billion consumers, it is expected that 190 Million will be pushed into poverty if food inflation continues. Food prices were up 30% in February's report, so the 10 percent Asian food inflation is no doubt seriously too low.

GLOBAL SLOWDOWN -  Q1 GDP SIGNALS

The efforts to fight inflation are now impacting the 7.8% Asian growth rate, which is now demonstrating the expected signs of slowing.

US Gross domestic product was recently reported as rising only 1.8 percent from January through March, after a 3.1 percent pace in the last three months of 2010. Taking out inventory builds this number as only 0.8 percent.

Britain reported 0.5 percent growth and is now on the edge of a double dip.

The Federal Reserve and most economists are all revising 2011 GDP growth lower, as a steady stream of negative news hits the markets.
If GDP numbers were adjusted for true inflation, rather than the suspect government CPI distortions, real GDP would be negative. Considering government deficit spending is now 20-25 percent of the US economy, can there be any question that we have effectively very negative economic growth?

The Basel BIS Bankers are acutely aware of this. 

QE^X WILL HAPPEN - 'The Risk-Off that Refreshes'

So what is to be done?
I believe a decision has been taken to temporarily remove some of the pressures off increasing money supply before resuming expansion of money and credit later in Q3 or Q4. There is little choice.
Make no mistake about it however, central bank money printing must continue and at an accelerated rate.  I suspect it will emerge not as QE III, but in another form to address the massive and growing problems with non-performing assets, foreclosures and REOs occurring at Fannie, Freddie and the FHA.
Don't get fooled. Watch the balance sheets of the central banks. They will by necessity continue to grow to stop the vicious spiral from accelerating.
CONCLUSIONS

The Basel BIS Bankers fully understand the underpinnings of the shift from a Virtuous Cycle to a Vicious Spiral presently underway.

They are doing everything within their power to offset it. Policies of "extend and pretend" and "kick the can down the road" are all just attempts at buying time.

Unfortunately time is working against them, as existing debt only increases as interest owed is relentlessly and cumulatively added.

The Basel BIS Bankers have no real answers. The eventuality of a fiat currency crisis is ordained and has been since the early warnings in 2007 of the Financial Crisis. The roadmap has been clear to all that actually wanted to look.

Currency Wars a Result of Misguided Economic Policies

by Gordon Long:

The critical issues in America stem from minimally a blatantly ineffective public policy, but overridingly a failed and destructive Economic Policy. These policy errors are directly responsible for the opening salvos of the Currency War clouds now looming overhead.

 

Don’t be fooled for a minute. The issue of Yuan devaluation is a political distraction from the real issue – a failure of US policy leadership. In my opinion the US Fiscal and Monetary policies are misguided. They are wrong! I wrote a 66 page thesis paper entitled “Extend & Pretend” in the fall of 2009 detailing why the proposed Keynesian policy direction was flawed and why it would fail. I additionally authored a full series of articles from January through August in a broadly published series entitled “Extend & Pretend” detailing the predicted failures as they unfolded. Don’t let anyone tell you that what has happened was not fully predictable!

 

Now after the charade of Extend & Pretend has run out of momentum and more money printing is again required through Quantitative Easing (we predicted QE II was inevitable in March), the responsible US politicos have cleverly ignited the markets with QE II money printing euphoria in the run-up to the mid-term elections. Craftily they are taking political camouflage behind an “undervalued Yuan” as the culprit for US problems. Remember, patriotism is the last bastion of scoundrels.

 

An unusual Wall Street Op-Ed piece appeared Wednesday October 13^th, written by Yiping Huang, a Professor of Economics - China Center for Economic Research at the prestigious Peking University. He called for common sense from Americans and the G20 regarding the potential for destructive currency wars.

“The upcoming Group of 20 summit in Seoul could become a battlefield of this new conflict. But it doesn't have to be. Rather than focus on currency manipulation, all sides would be better served to zero in on structural reforms. The effects of that would be far more beneficial in the long run than unilateral U.S. currency action, and more sustainable. …  it would be much better for the G-20 to focus on a comprehensive package centered on structural reforms in all countries. Exchange rates should be an important part of that package. For instance, to reduce the U.S. current-account deficits, Americans have to save more. But simply devaluing the dollar would not be sufficient for that purpose. Likewise, China's current-account surpluses were caused by a broad set of domestic economic distortions, from state-allocated credit to artificially low interest rates. Correcting China's external imbalances requires eliminating all of these distortions.”

I have been arguing that the US must address its structural problems for a long time now. Read my articles: 1) INNOVATION: America has a Structural Problem, 2) INNOVATION: What Made America Great is now Killing Her! and 3)  America - Innovate or Die! for the facts that are being continually secreted from you.

We have a Public Policy failure that does not recognize we have a major US structural and secular problem.

The solutions should be central to US mid-term party campaign election platforms. They aren’t!

We all need to appreciate that from a Chinese perspective, with the world’s largest holdings of US$ reserves, a US led currency war based on dollar debasement is an American act of default to its foreign creditors no matter how you camouflage it. As JP Morgan was reported to have said regarding sovereign defaults on US loans: "this is why we have the US navy – to stop that from happening". So far the Chinese have been more diplomatic, but their patience is wearing thin.

With 25 currency interventions in a one week period, matters are quickly getting out of control. Stephen King, the managing director of economics at HSBC writes:

"The rich Western world has over-consumed in recent years. It has too many debts. But rather than dealing with those debts – living a life of austerity, accepting a period of relative stagnation – the West wants to shift the burden of adjustment on to its creditors, even when those creditors are relatively poor nations with low per capita incomes. And that rankles not just with the Chinese but also with many other countries in Asia and in other parts of the emerging world. During the Asian crisis in 1997-98, Western nations, under the auspices of the IMF, insisted that Asian nations, having borrowed too much, should now tighten their belts. But the US doesn't seem to think it should abide by the same rules. Far better to use the exchange rate to pass the burden on to someone else than to swallow the bitter pill of austerity. No wonder the Chinese are not willing to play ball."

The Chinese reject the conventional thinking.

1- They could point to the yen's extraordinary rise over the last 40 years – from JPY360 against the dollar at the beginning of the 1970s to approaching JPY80 today – and note that, despite this huge appreciation, Japan's current account surplus has got bigger, not smaller.
2- They could argue that America's prescription for China's economic rebalancing – a stronger currency and a boost to domestic demand – was precisely the policy followed by the Japanese in the late-1980s, leading to the biggest financial bubble in living memory and the 20-year hangover that followed.
3- They could argue that the demand for a renminbi revaluation is, in truth, a policy of American default.
4- During the Asian crisis in 1997-98, Western nations, under the auspices of the IMF, insisted that Asian nations, having borrowed too much, should now tighten their belts. But the US doesn't seem to think it should abide by the same rules.

5- They could argue that Chinese manufacturing margins are so razor thin that significant change in exchange rates would wipe them out and force layoffs of millions of Chinese. Labor rates are already climbing in China and further squeezing margins.

6- A revaluation of the Yuan would only push manufacturing to Vietnam, Cambodia, Thailand, Bangladesh and other lower paying nations without improving the developing economies trade deficits.

If we truly wanted to head off this Currency War then it is a matter of doing what we did in 1985 with the Plaza Accord. We need another 2010 Plaza Accord version. But here is the rub. This Plaza Accord is not about the US and G5 as it was in 1985. It is about an Asian Plaza Accord under the support and auspices of the G-20. It is about the Asia export led and mercantilist leadership agreeing amongst themselves. The chances of this happening, the west seeing the requirement for it or the west relinquishing its powers in any measurable fashion, are not possible as part of the political gamesmanship presently being played with our lives.

 

Why all this has been allowed to knowingly unfold leads me into a discussion where all ‘government fearing people’ fear to tread. Though I love the country I call home, I am coming to question our government. Frankly, I am losing my trust in its true motives.

 

I personally now support neither party since they have become the two heads of the same monster which does not operate ‘for the people by the people’.  I don’t believe I’m alone as I sense real anger across America; and the political polls clearly show confidence falling for our political leadership. Americans want their country back!

 

Almost three-quarters of Americans — 72 percent — have a negative view of the federal government, according to a USA Today/Gallup poll released Wednesday. It is the highest level of dissatisfaction since the Watergate scandal that led to President Richard Nixon’s resignation in 1974.

“The federal government has an image problem,” said Frank Newport, editor-in-chief of Gallup. “It’s like the cable company; they may perform a necessary function but people are dissatisfied with the service.” Newport said when you ask people what they think of the government, “‘Bleah’ comes out of their mouth.” Congress is so polarized that it is hard-pressed to accomplish even the things that the public says are important. When respondents in the Gallup survey were asked what the government should do, more than a third placed top priority on economic and budgetary concerns: 

·         Fifteen percent said the government should “create jobs.”

·         Six percent said “improve the economy.” 

·         Another 6 percent said “balance the budget.”

·         But 4 percent said the government should “expand health care coverage.”

·         And 4 percent said “cut taxes.”

All told, 35 percent mentioned those specific problems. Yet Congress failed to pass even one of 13 regular appropriations bills before recessing last month for the midterm campaign, while lawmakers have made little progress in addressing the deficit.

A PUBLIC POLICY SCORE CARD - WHAT HAVE OUR POLITICAL LEADERS ACHIEVED?

 

Let’s recap where we are because the happy face media doesn’t want to tell you. The media is reluctant to inform you because it hurts consumer consumption and therefore advertising revenues. It simply isn’t smart business to publicly state the reality of the situation, and by the way, the media gets sued for any possible unsubstantiated negative comments that might stop a stock(s) from rising.

Six corporations now collectively control US media and absolutely dominate news and entertainment.

 

“When you control what Americans watch, hear and read you gain a great deal of control over what they think. They don’t call it ‘programming’ for nothing” (1).

 

Americans now watch on average 153 hours of television a month. You would think with this level of information consumption we would be informed – somewhat?

 

I’m sure you are all familiar with the facts in the chart above.  No?  Is it because no one tells you? Still skeptical? How many of the following major facts are you familiar with and you hear your political candidates discussing? Tick them off as you read them.

THE FACTS – JUST THE FACTS! – Of the 35 facts below, how many will you hear during the campaign?

 

1- The United States has lost approximately 42,400 factories since 2001.  About 75 percent of those factories employed over 500 people when they were still in operation. Source: The American Prospect

2- The United States has lost a total of about 5.5 million manufacturing jobs since October 2000. Source: The American Prospect

3- The United States has lost a whopping 32 percent of its manufacturing jobs since the year 2000.

4- As of the end of 2009, less than 12 million Americans worked in manufacturing. The last time less than 12 million Americans were employed in manufacturing was in 1941.

5- In 1959, manufacturing represented 28 percent of U.S. economic output. In 2008, it represented 11.5 percent. Source: The American Prospect

6- Ten years ago, the United States was ranked number one in average wealth per adult. In 2010, the United States has fallen to seventh.

7- The United States once had the highest proportion of young adults with post-secondary degrees in the world. Today, the U.S. has fallen to 12th.

8- American 15-year-olds do not even rank in the top half of all advanced nations when it comes to math or science literacy.

9- In America today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services. Source: Economy In Crisis
10- In 2001, the United States ranked fourth in the world in per capita broadband Internet use. Today it ranks 15th. Source: MACLEANS.CA
11- In 2008, 1.2 billion cell phones were sold worldwide. So how many of them were manufactured inside the United States? Zero. Source: The American Prospect

12- The television manufacturing industry began in the United States. So how many televisions are manufactured in the United States today? According to Princeton University economist Alan S. Blinder, the grand total is zero.

13- Printed circuit boards are used in tens of thousands of different products. Asia now produces 84 percent of them worldwide.

14- Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975. Source: Businessweek

15- According to a new study conducted by Thompson Reuters, China could become the global leader in patent filings by next year.

16- Back in 1980, the United States imported approximately 37 percent of the oil that we use. Now we import nearly 60 percent of the oil that we use.
17- The U.S. trade deficit is running about 40 or 50 billion dollars a month in 2010. That means that by the end of the year approximately one half trillion dollars (or more) will have left the United States for good.
18- Between 2000 and 2009, America's trade deficit with China increased nearly 300 percent.
19- According to a new study conducted by the Economic Policy Institute, if the U.S. trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.
20- If our trade deficit with China increases at its current rate, the U.S. economy will lose over half a million jobs this year alone. Source: Economic Policy Institute [PDF]
21- As of the end of July, the trade deficit with China had risen 18 percent compared to the same time period a year ago. Source: Economic Policy Institute [PDF]
22- The United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States. Source: The Economic Collapse
23- One prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040. Source: MarketWatch

24- In the 2009 "prosperity index" published by the Legatum Institute, the United States was ranked as just the ninth most prosperous country in the world. That was down five places from 2008.

25- The economy of India is projected to become larger than the U.S. economy by the year 2050.

26- From 1999 to 2008, employment at the foreign affiliates of US parent companies increased an astounding thirty percent to 10.1 million. During that exact same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.  Source: Tax Analysts [PDF]

 

       International Job Growth = 30% to  10.1 = 233K Jobs

Domestic Job Cuts =  8% decline from 21.1M = 184K Cuts

Net Growth =  233K – 184K = 49K

Net Percentage Growth = 49 / (10.1M + 21.1M) = 0.16% Employment Growth.

 

Multinationals show paltry hiring growth and are moving the existing work force steadily offshore.

 

27- The Census Bureau says 43.6 million Americans are now living in poverty, which is the highest number of poor Americans in the 51 years that records have been kept. Source: Washington Post

28- Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford's new "global" manufacturing strategy. Source: Economy In Crisis

29- Dell Inc. has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.  Dell has announced that it will be closing its last large U.S. manufacturing facility in Winston-Salem, North Carolina. Approximately 900 jobs will be lost.

30- Median household income in the U.S. declined from $51,726 in 2008 to $50,221 in 2009. That was the second yearly decline in a row.

31-The United States has the third worst poverty rate among the advanced nations tracked by the Organization for Economic Cooperation and Development.
32- Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 95 percent of its purchasing power.
33- U.S. government spending as a percentage of GDP is now up to approximately 36 percent.
34- The Congressional Budget Office is projecting that U.S. government public debt will hit 716 percent of GDP by the year 2080.

35- Do you know what our biggest export is today? Waste paper.  Yes, trash is the number one thing that we ship out to the rest of the world as we voraciously blow our money on whatever the rest of the world wants to sell to us.

 

Has anyone been telling you this and have any of your politicians raised this in the current election campaigning?

 

 

Forgetting for the moment that failed US public policy is at the root of the financial crisis, the above chart shows that even the US’ recovery has been noticeably and significantly worse than other developed nations.  The US policy approach to the solution to the financial crisis has been the least effective according to these figures just released by the Organization for Economic Co-operation and Development (OECD).

 

THE GUILTY PARTIES ARE FLEEING LIKE RATS FROM A SINKING SHIP

We have witnessed defections in the last month of three of the top four architects of Obama’s economic policy team. Plus the hidden fifth, Rahm Emanuel announced his departure October 1^st. Rumors are now swirling that Tim Geithner will leave after the election and rumors grow that Michael Bloomberg is going to be the next Treasury Secretary (for a presidential run in 2012 or 2016, another recent rumor). They all know their policies failed, the public knows it, the media does but is afraid to say it and President Obama knows his administration is facing being a lame duck Presidency for the remaining two years of his term because of it.

 

Recovery Is Stuck in Neutral  WSJ   - “The economic recovery is largely stuck in neutral, reports on manufacturing, construction and spending show, and the president of the Federal Reserve Bank of New York gave the clearest signal yet that the Fed was preparing new actions aimed at boosting growth. In a speech Friday (Oct 1^st) before the Society of American Business Editors and Writers, New York Fed President William Dudley indicated that the Fed, confronted with "unacceptable" conditions of high unemployment and low inflation, is likely to take new action to support the economy.  Mr. Dudley said $500 billion in additional asset purchases would provide stimulus equivalent to a reduction of 0.5 to 0.75 percentage point in the federal funds rate, the Fed's typical lever for stimulating the economy - The current situation is wholly unsatisfactory” and “both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable,” Federal Reserve Bank of New York President William Dudley said in a prepared text.

MY PREDICTIONS                     DOCUMENT                   RESULTS

Fiscal:

Stimulus II will be required         Extend & Pretend           Post Labor Day Announcements

 - Thesis Paper -               -                                                                                            - $50B Infrastructure Initiative (Highways, airports and railroads)

                                                                                    - $200B Capital Investment Write-Offs

                                                                                    - $30B Small Business Fund

                                                                                    - $100B R & D Tax Credit

                                                                                    - $14B FHA Homeownership Guarantees

Monetary:

QE II will be required                 Guide to Road Ahead      September 21st FOMC Minutes

                                                Research Article            

 

Shadow Banking Collapse           Slide Presentation          Shadow Bank Liabilities Plunge $2.T Y-to-Date  ZH

                                                                                   

The chart above was updated in the fall of 2009 in my thesis paper: Extend & Pretend. It was pointed out that the public policy decisions taken by the administration would be the deciding factor on where the market headed after a 2008 market sell-off counter rally was completed; a subsequent consolidation down leg took place and the effects of the policies were evident. We are now entering the latter period. It doesn’t look pretty.        

 

FLAWED POLICY THINKING

Housing Prices – Let prices fall and allow the system to clear.

     - We keep trying to hold housing prices up to protect bad banking decisions and reward bad homeownership decisions

     - Why isn’t lower housing prices and more affordable housing good for Americans?

 

Commercial Real Estate (CRE) is Out of Time – Let prices fall and allow the system to clear.

     - Extend & Pretend accounting games have run out of time.

     - Occupancy rates of offices, hotels and retail shows us massive overbuilding took place and must now be re-priced. Instead 

       we are trying to hold them up artificially.

     - Why are cheaper rents not good for America?

 

Too Big To Fail – Let major players fail and let M & A and the bankruptcy process work.

     - The Frank-Dodd Legislation is a complete legislature failure.

     - Regulators are now in control and in turn effectively controlled by

        the lobbyists and major private player interests.

     - Less than 9 Congressmen / Senators claimed to have read the full

       ~2400 page Frank-Dodd Bill.

  

Obamacare- A Hidden Tax Code in disguise

     - Few elected officials claim to have read the full approximate bill ~2000

       pages.

The obvious cause of these failed public policy approaches are the following:

1- A Washington Political System of lobbyist, electioneering costs, legislative/regulatory complexity and lack of accountability is no longer serving the public.

2- The concept of a “Federal Reserve”  and US Money Centered Banking is unstable long term under a fiat currency regime.

3- The media is no longer effectively serving the democratic system. It must be broken up.

Stop interfering and let capitalism work its proven magic!

 

We are locked into Crony Capitalism, Socializing Losses, Political Pandering

and never ending Campaigning versus Governing

 

The following chart shows that money has become a commodity. It can’t command any return for holding it (interest coupon) similar to any commodity where there is excess supply. The unique structure of notes and bonds are generating paper capital gains due to falling rates. Remember, these gains are not realized until the ‘paper’ is actually sold or expires and the issuer is capable of paying the surrender value.

 

 

“When Money Becomes a Commodity, Commodities become Money”

 

 

Soon Someone Is Going To Get Crushed By The Quantitative Easing Trade  Business Insider 

 

“Goldman observed today that QE is priced into the bond market, and well, duh! Your grandmother knows QE is coming, and that more and more of every currency is being manufactured right now. That doesn't mean it can't go on for awhile, but it does mean that there's nobody not aware of this trade. When will it end? Not clear, but come November 2-3, if people are still long the QE trade, and the Fed actually does deliver, we could be due for a huge sell-the news event. Combine that with whatever happens during the election, and it certainly seems like a heck of a lot is building up to that day.”

 

CAVEAT EMPTOR!