Thursday, December 31, 2009
Good Year for Commodities
By Stuart Wallace and Chanyaporn Chanjaroen
Dec. 31 (Bloomberg) -- Commodities headed for their best year since at least 1970, led by a doubling in copper, sugar and lead prices, as Chinese demand compensated for the steepest slump in the global economy since World War II.
The S&P GSCI Index of 24 raw materials rose 51 percent, its best annual gain according to data on Bloomberg going back to 1971, as of 8:57 a.m. in New York. That outpaced the 28 percent gain in the MSCI World Index of stocks in 23 developed nations and 3.5 percent decline in Treasuries, according to Bank of America Merrill Lynch indexes. The S&P GSCI Total Return Index climbed 14 percent this year.
China, the biggest consumer of commodities such as copper and iron ore, expanded 9 percent this year, according to the median estimate of economists surveyed by Bloomberg. The nation imported record amounts of both raw materials this year, making up for weaker demand from countries such as the U.S., whose economy is forecast to contract 2.5 percent, and the euro zone, with a projected 4.1 percent drop. Commodities drew record investment of $60 billion this year, Barclays Capital estimates.
“If you look at the theoretical or global portfolio of assets that are out there, the percentage of commodities allocation is tiny, less than 1 percent,” said Kevin Norrish, a commodities analyst at Barclays Capital in London. “If you look at what investors think that they should have, clearly that would suggest there’s a lot of potential for growth.”
The Reuters/Jefferies CRB Index of 19 commodities has advanced 24 percent this year, heading for the biggest jump since 1973.
Lead Surges
Lead was the best performer among the main industrial metals traded on the London Metal Exchange this year, advancing 142 percent. The metal rose 387 percent this decade, making it the winner according to calculations by Bloomberg on Dec. 30 for 36 exchange-traded raw materials. Copper added 140 percent this year and 290 percent over the decade.
Lead for delivery in three months recently added $4, or 0.2 percent, to $2,415 a metric ton on the LME. Copper gained 0.6 percent to $7,375 a ton, paring a climb to the highest price in almost 16 months.
A report due tomorrow will probably signal the fastest expansion in Chinese manufacturing since April 2008, based on the median forecast in a Bloomberg survey of economists. The nation’s central bank will maintain a “moderately loose” monetary policy because 2010 will be a crucial year for strengthening the recovery, Governor Zhou Xiaochuan said today.
Among precious metals, gold rose 25 percent and headed for its ninth consecutive annual gain, the longest winning streak since at least 1949. The metal strengthened as a weaker dollar spurred investor demand for a hedge against the currency. The U.S. Dollar Index, a gauge against six counterparts, declined 4.6 percent this year.
Platinum, Oil
Gold for immediate delivery was 1 percent higher at $1,104.23 an ounce. Platinum added 57 percent and palladium jumped 116 percent in 2009 as investors anticipated improving consumption of the metals used in autocatalysts.
Crude oil advanced 78 percent this year and 210 percent for the decade. The Organization of Petroleum Exporting Countries, accounting for 40 percent of global oil supply, reduced output in response to the worldwide economic slump.
The fuel for February delivery gained 0.2 percent to $79.41 a barrel on the New York Mercantile Exchange.
U.S. crude-oil inventories dropped 1.54 million barrels to 326 million barrels in the week to Dec. 25, Energy Department data showed yesterday. Distillate fuel and gasoline supplies also declined.
Raw sugar traded in New York gained 129 percent on expectations that harvests in Brazil and India, the biggest producers, would be damaged by excess rain or drought. Sugar was the decade’s second-best performer, rising 341 percent. Wheat retreated 10 percent and corn added 2.3 percent this year.
--With assistance from Patrick McKiernan and Dingmin Zhang in New York. Editors: Dan Weeks, Tony Barrett.
Grains Close Higher On Last Trading Day Most Years
Natural Gas Builds Send Prices Lower Two Weeks in a Row
Happy New Year!
Climate Crisis -- More About Enriching Elitists Than Weather
from IBD Editorials:
Climatologists are learning from economists. No, not how to more accurately forecast the future. Climatologists could certainly benefit from improving their forecasts, but they aren't likely to learn how from economists.
What climatologists are learning from economists is how to increase their importance by promoting a theory that gives politicians more power. Economists have shown that this can be accomplished with the flimsiest of evidence.
Economists began gaining in importance after World War II when they started rallying around a 1930s theory developed by John Maynard Keynes. The theory explained how politicians could prevent, or reverse, economic downturns by running budget deficits, and prevent, or halt, inflation by running budget surpluses.
Claiming budget deficits during World War II ended the Great Depression, economists convinced politicians to establish the Council of Economic Advisers in 1946 to give economic advice to the president.
By the 1960s there were claims of a Keynesian consensus of informed economists, with these economists knowing how to fine-tune the economy, effectively eliminating the business cycle, with advice on when and how to adjust government budgets to stimulate or dampen economic activity.
The result was better for economists than it was for the economy. The pronouncements of economists became more newsworthy, and government jobs for economists multiplied as the economy moved into the stagflation — economic stagnation with increasing unemployment and rising inflation — that characterized economic performance in the 1970s.
Stagflation had been predicted by Milton Friedman in the 1960s, even though the Keynesian model implied it was impossible. As a result of improved theories and accumulating evidence, the pretense of a Keynesian consensus among economists began to unravel. But the political popularity of Keynesian policy was not seriously threatened by its failures because that popularity was never based on solid evidence.
Rather, politicians embraced Keynesianism because it gave them a justification for expanding current benefits while postponing the costs with deficit spending. Of course, they conveniently forgot the part about reducing spending and running budget surpluses when the economy is strong.
Climatologists are now emulating economists' approach to political success. After an attempt to create a global cooling scare in the 1970s failed, mainly because weather trends have a tendency to reverse themselves, some climatologists reversed themselves as well with predictions of global warming.
And this time they had a theory indicating that the warming was the man-made result of carbon dioxide emissions, and that if nothing was done it would soon be too late to avoid a global catastrophe.
The Communist Red Underbelly of Obamacare
from Canada Free Press:
If you felt a frisson of fear on news that the Senate had passed Obamacare the day before Christmas, then you now know what it was and is like to live in a dictatorship. The voice of the People was ignored in a demonstration of raw political power.
There was a time when Americans took Communism seriously. It challenged us in the form of the Soviet Union and we witnessed its takeover of China.
In Europe, uprisings against Soviet rule were crushed in East Germany in 1953, Hungary in 1956, Czechoslovakia in 1968, and Poland in the 1980s gave proof that only oppression can sustain this failed economic and political system. President Reagan gave voice to it when he called the Soviet Union an “evil empire.”
The McCarthy hearings in the 1950s proved a setback for efforts to learn how thoroughly infiltrated the U.S. government had become by Communists, not because Sen. Joseph McCarthy was wrong, but because he proved a poor spokesperson for the cause. He was easily criticized for his bombast, but the declassification of the Venona papers, secret communications between Soviet spymasters and their agents, revealed he may well have underestimated the threat.
Later, the Russian Federation declassified former Soviet spy agency records that further confirmed that many Americans, dedicated Communists, were working to undermine our government.
The price America paid in part for the Great Depression of the 1930s was the undermining of faith in the Capitalist system among many Americans.
Unions arose, not just in response to worker grievances, but also because their leaders were frequently sympathetic to Communism. The FDR and subsequent administrations introduced Social Security and Medicare, tapping into the fears of those who had experienced the Depression with programs that vastly expanded the federal government, characterizing them as the ultimate “safety net.” Then Congress plundered the trusts that were supposed to fund both programs. Both programs are insolvent.
A recent study by Paul Hollander, a professor emeritus of sociology at the University of Massachusetts at Amherst and an associate at the Davis Center for Russian and Eurasian Studies at Harvard University, was published by Cato Institute’s Center for Global Liberty & Prosperity. It is titled, “Reflections on Communism: Twenty Years after the Fall of the Berlin Wall.”
The celebration of the fall of the Berlin Wall earlier this year was attended by many world leaders with the notable exception of President Barack Obama. For a man who has visited more foreign nations in his first year in office than any previous President, the decision to avoid this significant anniversary was taken as one more signal of his true political and economic agenda.
We know that he was greatly influenced by Marxists or people who viewed Communism sympathetically, not the least of which were his grandparents who introduced him to a mentor, Frank Marshall Davis, a member of the Communist Party USA.
Obama wrote that he was drawn to Marxists among his teachers in college. He began his political career in the home of former Weatherman Bill Ayers. These days he is praised by Communists in Cuba and Venezuela. He sided with a Leftist former president of Honduras who tried to illegally alter its constitution. The Hondurans had the courage to cast him out.
The specter of Communist subversion of the U.S. Constitution is staring us in the eye with the so-called healthcare “reform” of Medicare; it includes all manner of provisions that are unconstitutional and would expand federal government control over one-sixth of the nation’s economy. The bribery and thuggish pressures and threats against Democrat Senators and Representatives to pass the bill reveal a political leadership more devoted to ideology than the will of the People.
Specifically, President Obama’s drive for a single payer system is the direct result of the influence of Dr. Quentin Young, a retired physician with a long history of commitment to Communism. In 1995, Dr. Quentin was among those who met in the Hyde Park home of Bill Ayers and Bernadine Dohrn to launch Obama’s political career.
As Prof. Hollander points out in his study, “Not only individual intellectuals but entire professional associations have expressed favorable attitudes toward communist systems” citing the Latin American Studies Association that has “repeatedly taken positions supportive of Castro’s Cuba and Sandinista Nicaragua.” In 1990, the Organization of American Historians defeated a motion that expressed regret that the organization “never protested the forced betrayal of the historian’s responsibility to truth imposed upon Soviet and East European historians by their political leaders.”
The recent United Nations’ Climate Change Conference refused to take notice of the revelations that the data on which the “global warming” theory is based was falsified by a handful of meteorologists and climatologists in an effort to impose a global governing system. The interim first Secretary General of the UN was Alger Hiss, an American and secret Soviet agent
It did not escape notice that Venezuela’s communist dictator, Hugo Chavez, received a rousing ovation when he spoke at the conference or that President Obama continues to repeat the lies surrounding the discredited “global warming” fraud.
Virtually the entire agenda of American environmental organizations has been focused on an attack on private property rights and denying Americans access to their vast reserves of energy in the form of coal, oil, and natural gas, thus undermining U.S. growth and prosperity.
Unlike Prof. Hollander who escaped Hungary following the crushing of the 1956 revolution by Soviet forces, “Western intellectuals who remain attracted to communist ideals never had the disillusioning experience of living in an actual communist or socialist society.”
Among them we must number much of the nation’s media that has been a party to political and environmental deceptions, and the Hollywood community that has produced many films to influence public opinion about the earlier efforts to address Communist activities and later Green issues with a very Red agenda.
The Medicare “reform” expands “socialism” in America, but it is an example of naked Communism at work. It is a bill put together behind closed doors and so extensive its control of the lives of Americans literally determines who lives and who dies. It will wreck the best healthcare system in the world albeit one that has its flaws.
It is authoritarianism at work, the kind we associate with regimes in Russia, China, North Korea, Cuba, Venezuela, and everywhere else Communism has been imposed on captive nations.
Healthcare “reform” is not about uninsured Americans. It is not “socialism.” It is Communism, effectively putting the entire nation’s healthcare system under state control. It must be defeated just as past generations of Americans knew the threat of Communism and devoted the nation’s treasure and even their lives to defeat it.
Wednesday, December 30, 2009
Father of Banking Crisis Offers More Bloated Government
by David Reilly at Bloomberg:
Dec. 30 (Bloomberg) -- To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.
Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.
I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)
The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.
If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.
Nuggets Gleaned
Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:
-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.
-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.
-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.
More Bailouts
-- The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy -- there are more bailouts to come.
-- The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.
-- Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.
-- This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”
Managing Bonuses
-- The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.
-- The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.
-- Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.
-- Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.
Consumer Protection
-- The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.
-- Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.
Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.
Yield Curve Interpretation
from Crossing Wall Street:
Now that the Federal Reserve has lifted its tightening bias, I wanted to take a look at the impact of lower interest rates on the stock market.
Since 1962, there have been 11,250 days when stocks and bonds have traded on the same day. The yield on the 90-day Treasury rose on 4,845 days, fell on 4,925 days and stayed the same on 1480 days.
On all the days when the T-Bill yield rose, the S&P 500 lost a combined 61.9%. Annualized, that works out to a rate of -4.9% (just capital gains, not dividends).
On the days when the T-Bill yield fell, the S&P gained a combined 1,739.1%, or 16.1% a year.
Interestingly, the market did the best when rates stayed the same. The S&P gained 182.3%, or 19.4% a year.
With long-term rates (10-year T-Bond), the impact is much more dramatic.
The 10-year yield rose on 4,885 days for a combined S&P loss of 98.8%, or -20.5% a year. That's basically a bear market.
The yield stayed the same on 1529 days for a combined S&P gain of 89.4%, or 11.1% a year.
But here’s the kicker: When the 10-year yield fell (4,836 days), and long-term bonds rallied, the S&P 500 gained an amazing 86,631%, or 42.5% a year.
Probably the most fascinating stat is that all of the stock market’s net capital gains have come when the 10-year yield is 65 or more basis points above the 90-day yield (that happens about 70% of the time). The yield curve hasn’t been that positive in 15 months.
Anything less than 65 basis points, including a negative yield curve, works out to a net equity return of a Blutarsky. Zero Point Zero.
Yield Curve Provides Ominous Signs
The yield curve has been the subject of an increasing amount of chatter in recent weeks, as long-term interest rates rise and short-term rates remain low. Some stories have suggested that the curve is at record highs, but based on the official definition from the NY Fed, while the yield curve spread is extremely high, it is not quite at a record.
According to literature from the NY Fed's website, the yield curve is defined as, "the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill." On a historical basis it has been "a valuable forecasting tool...in predicting recessions two to six quarters ahead."
Using the Fed's definition of the yield curve, the chart below shows the historical spread between the yields on the 3-month and 10-year US Treasury (in basis points). As shown in the chart below, the current level of the yield curve is nearly two standard deviations above its historical average. The only other time that the spread got this wide was back in August 1982.
According to literature from the NY Fed's website, the yield curve is defined as, "the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill." On a historical basis it has been "a valuable forecasting tool...in predicting recessions two to six quarters ahead."
Using the Fed's definition of the yield curve, the chart below shows the historical spread between the yields on the 3-month and 10-year US Treasury (in basis points). As shown in the chart below, the current level of the yield curve is nearly two standard deviations above its historical average. The only other time that the spread got this wide was back in August 1982.
CFTC Cleaning Its House of Free Market Thinkers -- Higher Prices to Come
The Commodity Futures Trading Commission is deeply involved in a debate over the regulation of speculative trading on energy and other markets. Jeffrey Harris, chief economist for CFTC, who last year claimed he could find no direct link between speculation and high energy prices, is leaving the agency to return to academia, according to a Dow Jones report.
CFTC is about to unveil a major proposal to impose new trading limits on crude oil and other energy futures products, Harris departure timing comes at a critical time. CFTC Chair Gary Gensler has been quoted saying it is the CFTC's duty to protect the American public from excessive speculation and he is pushing for a consideration of new limits, even though the agency's economic team never reportedly found evidence of a causal link between excessive speculation and the 2008 price run-up.
There was a concern that Harris' original conclusion might be politically motivated since CFTC was run by a Republican appointee at the time; however an investigation by the inspector general found no evidence of political meddling. The Dow Jones report notes that Harris has been under considerable pressure as the agency has looked into speculation issues.
Gensler's move to limit speculation - which is what many surmise will come with the latest proposal - would be a reversal for CFTC. Expect the proposal to come out early in 2010, which is later than the original fall timeframe first announced.
Tuesday, December 29, 2009
Bank Credit Card Losses Still Rising
US credit card debts written off as uncollectable rose in November, following two consecutive months of decline, though early-stage delinquencies dropped for the month, Moody's Investors Service said Tuesday.
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SXC Credit card charge-offs rose one-half percentage point in November. |
Credit card charge-offs rose by about one-half percentage point in November to 10.56 percent, and is likely to continue to rise to a peak of between 12 percent and 13 percent in mid-2010, Moody's said in a statement.
Delinquencies, which measure the proportion of accounts for which a monthly payment is more than 30 days late, also increased to 6.2 percent in November, though early-stage delinquencies fell to 1.6 percent for the month, Moody's said.
Treasuries Rise on Fed Demand
EPA Moves to Regulate Ever More Natural Substances
The Environmental Protection Agency (EPA) has taken an unprecedented step under the mobile source section of the Clean Air Act and issued an "endangerment" finding for a number of greenhouse gases including CO2, paving the way for regulations that will for the first time declare a naturally occurring substance in the air is an indirect danger to human health.
EPA is about to regulate another natural substance—perchlorate! If EPA regulates perchlorate, as some environmental groups desire, agriculture may pay an extraordinary price.
Perchlorate is a salt. It is both naturally occurring and man-made. It falls within the family of goitrogens that affect thyroid functions including nitrate and thiocynate that can interfere with how the body processes iodine.
Perchlorate has been manufactured since only the early 1900s but recently it has been turning up in a number of curious places with no identifiable man-made source.
Discovered on Mars It was discovered by NASA on Mars during their most recent visit to the red planet. Scientists exploring the polar ice caps have taken core ice samples and through their analysis have confirmed that perchlorate was present in precipitation more than 2000 years ago.
The U.S. Geological Survey, the federal agency charged with providing reliable scientific information to describe and understand the Earth, has indicated there are several mechanisms that cause natural perchlorate formation but they still don't have a clear understanding of what those are.
Farmers who know anything about perchlorate will recognize it as an ingredient in organic fertilizers derived from Chilean nitrates. For those of you in California, perchlorate is probably well known as a ground water contaminant stemming from its use as an oxidizer in solid rocket motors and ballistic missiles.
Historically, however, farmers haven't had much reason to be concerned about perchlorate regulations because any health issues presented only at very high concentrations (above 14,000 parts per billion, ppb) and most contaminated areas were relegated to former military sites. The low levels of perchlorate that occur naturally between 4 and 12 ppb were not the subject of any regulatory scrutiny, so no concern for farmers - until now.
In 2005, after an exhaustive review, the National Academy of Sciences and the EPA concurred on a safe drinking water equivalent for perchlorate of 24.5 ppb.
Under pressure Environmentalists, however, have been pressuring the EPA for years to declare that perchlorate is unsafe at any level. In August of 2009, EPA signaled its intent to regulate perchlorate at very low levels—well within the range of natural occurrence.
With this one step taken by EPA, the agriculture community no longer has the luxury of ignoring what EPA is proposing with respect to perchlorate.
A regulation that declares low levels of perchlorate a health hazard would have two immediate impacts for agriculture. First, declaring low levels of perchlorate as unsafe would unleash food scares associated with a variety of commodities.
Naturally occurring perchlorate is so pervasive that it is found in nearly everything including water, milk, fruits and green leafy vegetables. Even in the short run, commodity costs would escalate sharply, and market perceptions of possible health concerns would have significant adverse consequences for agricultural planting decisions, borrowing capacity and market values.
Economic damage The economic damage from these unwarranted food scares would cost farming jobs, close agricultural businesses, shutter family farms and move jobs to foreign countries.
Second, a regulation that declares low levels of perchlorate a health risk will portend similar treatment of other goitrogens like nitrate and thiocynate. The human body always has a certain amount of unavoidable exposure to these compounds. Common vegetables in our diet such as soybeans, corn, cabbage, broccoli, and spinach are rich, natural sources of nitrate and thiocynate and scientists, physicians and the FDA continue to insist they are critical for maintaining good health. EPA regulations won't change those facts, but what they will do is negatively impact the perceived safety of our products and the viability of our markets in such a dramatic way that for some in the industry, it will be difficult to recover.
EPA Administrator Lisa Jackson has committed to make a decision whether to regulate perchlorate some time in 2010. Just as with climate change, many people are asking how we got to the point that federal agency is considering regulating something that by all indications is formed through an almost universal atmospheric process. The agriculture community should monitor these developments closely.
Given the natural occurrence of perchlorate, nitrate and thiocynate at low levels in a number of foods, agricultural and dairy products, EPA has an obligation to make regulatory decisions that rigorously adhere to the best available science. This Administration has committed to that basic standard. It's critical the public not be misled into a state of alarm by a distorted political agenda.
Saving Is Good for Our Economy
from John Tamny:
In his essential book The Wealth of Nations, Adam Smith observed that "Capitals are increased by parsimony, and diminished by prodigality and misconduct." Or, put more simply, self-interested savers are an economy's ultimate benefactor.
More modernly, Joseph Schumpeter noted that there are no entrepreneurs without capital. Innovative concepts are just that until they're matched with funds offered by the parsimonious who, by virtue of their willingness to delay consumption, have the means to provide the financing necessary to turn an idea into a product.
So while basic logic should put the frugal at the top of the economic pyramid, one would be hard-pressed to find their supporters in the mainstream media. This is particularly true during the holiday season, when any hint of moderation on the part of consumers is considered a signal that the economy is in dire straits.
Recently USA Today reported that "More than half of U.S. residents who wanted to travel during the holidays have significantly cut back their plans or canceled trips altogether because of the fragile economy." Supposedly this decline will "undermine the travel business, even as the economy shows tepid signs of recovery."
At first glance this might make sense, given that airlines need to fill their planes in order to be profitable. More to the point, it's accepted wisdom that consumption accounts for 70% of GDP.
Yet this makes little sense. First (ignoring what a worthless measure GDP is), the mainstream media and the economists they look to for insights have it all wrong. For one, there's no consumption without production first, so in truth the U.S. economy (and any national economy for that matter) is solely made up of production, with consumption merely the result of the former.
Second, one reason the economy is recovering is, paradoxically, illustrated by the timid travelers who've chosen to stay home this holiday season due to fear about the economy. Americans who are staying put are stimulating the economy without even knowing it.
USA Today observed that the silver lining in a drop-off in travel is less in the way of highway congestion and airport delays. But the unmentioned and more important silver lining has to do with the impact of saving. To the extent that Americans are keeping money in the bank over visiting friends and relatives, their saved money adds to the base of available capital that will be lent to others.
For those still in thrall to consumption, the act of putting off travel in its most basic sense means that individuals will transfer their spending power to others with near-term consumptive needs. In that sense, no act of consumption ever detracts from demand. The act of saving is merely a shift of demand.
Even better for an economy still trying to find its legs is the greater reality that consumers are once again very worried. As a result, the majority of funds saved by worried individuals will be lent to businesses eager to grow, and with their growth will come the creation of new jobs, not to mention innovations that will make us happier and more productive.
Most economists place consumption at the center of all economic activity, but it seems in doing so that they ignore what truly drives economic advances. Consumption is always going to occur--it is one reason we work--but we truly stimulate the economy when we save.
Indeed, if consumption were our sole objective in working, not only would we have no assets, we would live unhealthy lives full of deprivation. From pharmaceutical advances that improve our health to technological advances, such as the computer, that make us more productive, to gains in transportation that allow us to travel the world, all are with us today thanks to the willingness of individuals to delay consumption. In much the same way, careful spending habits in the present will drive tomorrow's innovations.
Life-enhancing ideas are once again just that without savings. If we live paycheck to paycheck under the mistaken assumption that we're stimulating the economy, we're doing just the opposite. And when big-ticket items such as cars, housing and vacations are considered, for the average American they require extended saving over multiple paychecks to become a purchased reality.
It's too often the case that economists whose minds have been polluted by Keynes seek to devise ways to stimulate consumption during periods of economic hardship. Their thinking is wrongheaded, and it elongates recessions for limited funds being consumed rather than offered to entrepreneurs.
Happily, and as evidenced by the gun-shy nature of U.S. consumers at present, the average American is not fooled by self-assured academics. As individuals we generally know that it's best to conserve funds during periods of economic uncertainty.
But what's not widely known is how our frugality is the economy's booster shot. Savings are behind nearly all economic advances, so rather than worrying about how our individual spending is harming the economy, we should rest easy with certain knowledge that our thrift is authoring its recovery.
John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a senior economic adviser to Toreador Research and Trading. He writes a weekly column for Forbes.
Cap and Trade to Convert 14.5% of Cropland Into Forest
Agriculture Secretary Tom Vilsack has ordered his staff to revise a computerized forecasting model that showed that climate legislation supported by President Obama would make planting trees more lucrative than producing food.
The latest Agriculture Department economic-impact study of the climate bill, which passed the House this summer, found that the legislation would profit farmers in the long term. But those profits would come mostly from higher crop prices as a result of the legislation's incentives to plant more forests and thus reduce the amount of land devoted to food-producing agriculture.
According to the economic model used by the department and the Environmental Protection Agency, the legislation would give landowners incentives to convert up to 59 million acres of farmland into forests over the next 40 years. The reason: Trees clean the air of heat-trapping gases better than farming does.
Mr. Vilsack, in a little-noticed statement issued with the report earlier this month, said the department's forecasts "have caused considerable concern" among farmers and ranchers.
"If landowners plant trees to the extent the model suggests, this would be disruptive to agriculture in some regions of the country," he said.
He said the Forest and Agricultural Sector Optimization Model (FASOM), created by researchers at Texas A&M University, does not take into account other provisions in the House-passed bill, which would boost farmers' income while they continue to produce food. Those omissions, he said, cause the model to overestimate the potential for increased forest planting.
Mr. Vilsack said he has directed his chief economist to work with the EPA to "undertake a review of the assumptions in the FASOM model, to update the model and to develop options on how best to avoid unintended consequences for agriculture that might result from climate change legislation."
The legislation would give free emissions credits, known as offsets, to farmers and landowners who plant forests and adopt low-carbon farm and ranching practices. Farmers and ranchers could sell the credits to help major emitters of greenhouse gases comply with the legislation. That revenue would help the farmers deal with an expected rise in fuel and fertilizer costs.
But the economic forecast predicts that nearly 80 percent of the offsets would be earned through the planting of trees, mostly in the Midwest, the South and the Plains states.
The American Farm Bureau Federation and some farm-state Republican lawmakers have complained that the offsets program would push landowners to plant trees and terminate their leases with farmers.
The model projects that reduced farm production will cause food prices to rise by 4.5 percent by 2050 compared with a scenario in which no legislation is passed, the department found.
A department spokesman declined to comment about how quickly the review would take place or whether Mr. Vilsack would revise the department's economic-impact projections.
The Senate has not taken action on climate legislation, although the Senate Environment and Public Works Committee passed a bill similar to the House's last month. That measure did not include agriculture provisions.
Sen. Blanche Lincoln, Arkansas Democrat and chairman of the Agriculture, Nutrition and Forestry Committee, has said she will hold hearings on climate provisions but has not indicated when those will take place.
The ranking Republican on the committee, Sen. Saxby Chambliss of Georgia, and his counterpart on the House Agriculture Committee, ranking Republican Rep. Frank D. Lucas of Oklahoma, wrote to Mr. Vilsack and EPA Administrator Lisa P. Jackson earlier this month to ask for new economic analyses of the House and Senate bills.
"EPA's analysis was often cited during debate in the House of Representatives and the study had a great impact on the final vote. If there was a flaw in the analysis, then it would be prudent to correct the model and perform a more current and complete analysis on both [bills]," they wrote.
In a statement, the EPA said: "EPA looks forward to working with USDA and the designer of this particular computer model to continue improving the analytical tools that all of [us] use to predict the ways that different climate policies would affect agriculture."
Allison Specht, an economist at the American Farm Bureau Federation, said other studies have largely confirmed the results of the EPA and Agriculture Department analysis.
"That's one of the realities of cap-and-trade legislation. The biggest bang for your buck for carbon credits is planting trees," she said.
Monday, December 28, 2009
No Church-Going for This White House!
I guess the Obama's can't find a Marxist Church to attend.
The truth is, however, that Obama hasn't attended Church since taking office. He prefers to spend Sundays on the golf course rather than in the pews. What does that say about him? It tells us a great deal about his character and arrogance. And what does it say about how "tapped-in" to divine inspiration he is for leading our nation? I would be more comforted knowing he seeks inspiration on his knees rather than on the putting green! I would feel a lot better knowing that a President was seeking divine help, rather than one that thinks he IS divine help!
Sunday, December 27, 2009
Why They Revealed the Freddie/Fannie Unlimited Bailout on Christmas Eve
from the Market Ticker:
On Christmas Eve one would think you could have a nice evening with your family. Little did I know what Timmy Geithner had up his sleeve:
But then Wednesday came around and, well, new homes? They're just not selling.
Now let's remember that most people turn over their home about every seven years (that's the average "holding time"), so an awful lot of Fannie and Freddie's paper - quite possibly as much as half - is contaminated.
Still feeling good about a housing recovery?
If you're wondering how bad this is in the so-called "prime" loans the Mortgage Bankers Association lays it all out:
6.84% of prime loans are now delinquent (at least one payment behind but NOT in foreclosure) and 3.20% are in foreclosure. This means that almost 1 in 10 PRIME LOANS are either late or in foreclosure.
FHA loans are running close to 20% between delinquent and foreclosure-in-process. That's one in FIVE.
And of subprime loans, 41% are either delinquent or in foreclosure. Forty one percent!
A mortgage that is at least two payments late almost never "cures" - that is, once you miss a second payment you're virtually assured to eventually be foreclosed. (Some one-payment misses are legitimate errors or very temporary cash-flow disruptions.)
So let's ask a few questions here:
The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.I see. But I thought housing was getting better? That's what I heard on CNBS Tuesday when existing home sales came in "above expectations."
But then Wednesday came around and, well, new homes? They're just not selling.
Purchases dropped 11 percent to an annual pace of 355,000, lower than the lowest estimate of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. The median sales price decreased 1.9 percent from November 2008.
Wait a second. How come the disparity?
Two reasons, really. The first, which the pumpers cite, is that "the tax credit was maybe going to expire." Uh huh.
No, folks, that's not the reason. The reason sales fell is that they're still falling everywhere. What's happening in the "existing home" sales numbers is that foreclosure sharks are taking a bite here and there, in many cases generating double counts in the "existing home sale" category, never mind the alleged data source in the first place. But even the NAR acknowledges that 33% of existing home sales were foreclosures, not actual organic "meeting of the minds" transactions! Take those out and existing home sales didn't rise 7.4%, they instead did their best imitation of a cliff-dive, with organic sales being a mere 4.38 million units (annualized), which is a mid-to-late 1990s print (and then again around the 1978 time frame!)
The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”
No, really?
Mark Hanson has been on this since the beginning: if you haven't read his stuff, here's a nice treatise of why we are nowhere near recovery in the housing market. Read it and weep - Timmy has.
By the way, if you're wondering what sort of trash Fannie and Freddie are holding, here's what Mark says about their "underwriting quality" during the boom years:
Got that? A DTI - that is, debt-to-income - of one hundred percent - was quite possible, along with limited documentation as well!Many lenders, especially the big banks, had in-house DU and LP underwriting ‘trainers’ that would go around to the various mortgage branches and teach underwriters how to ‘trip’ the systems in order to achieve automated loan approvals when a declination was certain, or simply get fewer approval conditions on a loan that was borderline. Getting a loan approval out of DU/LP on a borrower with a 100% DTI — with limited documentation required on the automated findings — was not uncommon.
Now let's remember that most people turn over their home about every seven years (that's the average "holding time"), so an awful lot of Fannie and Freddie's paper - quite possibly as much as half - is contaminated.
Still feeling good about a housing recovery?
If you're wondering how bad this is in the so-called "prime" loans the Mortgage Bankers Association lays it all out:
6.84% of prime loans are now delinquent (at least one payment behind but NOT in foreclosure) and 3.20% are in foreclosure. This means that almost 1 in 10 PRIME LOANS are either late or in foreclosure.
FHA loans are running close to 20% between delinquent and foreclosure-in-process. That's one in FIVE.
And of subprime loans, 41% are either delinquent or in foreclosure. Forty one percent!
A mortgage that is at least two payments late almost never "cures" - that is, once you miss a second payment you're virtually assured to eventually be foreclosed. (Some one-payment misses are legitimate errors or very temporary cash-flow disruptions.)
So let's ask a few questions here:
- What's the bond market going to think about a literal $5 trillion guarantee (for three years anyway) on MBS? Might some people have known about this in advance, with that being the reason for the bleed in the long end of the bond curve this last week or so? One wonders - of course nobody would ever trade on inside information, right?
- Why wait until the market closed on Christmas Eve for this? Oh, that's to stop a sell-off in bonds, right? Yeah, we're playing "American Idol is on, and you're too stupid to remember this for three days." Got it. We'll see how that works out.
The government announced Thursday that it had approved Wall Street-style, multimillion-dollar compensation packages for top executives at Fannie Mae and Freddie Mac, the two mortgage companies that have become little more than arms of the federal government.
The two top executives at the companies, which have received $121 billion in federal aid since they were seized last year, could be paid up to $6 million each for their services this year. In total, the top 12 executives at the two firms are in line to receive up to $42 million in 2009 alone.
Cost the taxpayer an unlimited amount due to shoddy underwriting and lax (or absent) risk controls and not only do you get bailed out, you also get paid $6 million a year.
One final question: Does this force consolidation of Fannie and Freddie onto The Government's balance sheet? I'd think so - what say you CBO?
Where's my pitchfork?
The U.S. Debt Ponzi Scheme!
from Sprott Asset Management's "Markets at a Glance":
In our May/June Markets at a Glance, "The Solution…is the Problem", we discussed how much debt the US government would need to issue in order to balance the budget for fiscal 2009. We calculated they would need to sell $2.041 trillion in new debt - or almost three times the new debt that was issued in fiscal 2008. As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst.
Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.
In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009.1 So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was "Foreign and International Buyers", who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year.2 This increase appears to be a direct result of the Federal Reserve’s Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009. While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the State and Local governments and US Savings Bonds groups will be net sellers of US Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.
So who was the third large buyer? Drum roll please,... it was "Other Investors". After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualize this rate of purchase, they are on pace to buy $680 billion of US treasuries this year - or more than seven times what they purchased in 2008. This is undoubtedly the group that made the US deficit possible this year. But who are they? The Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors. Hmmm. Do you think anyone in that group had almost $700 billion to invest in the US Treasury market in fiscal 2009? We didn’t either. To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009.3 Within this grouping, the GSE’s were small buyers of a mere $5 billion this year;4 Broker and Dealers were sellers of almost $80 billion;5 Commercial Banking were buyers of approximately $80 billion;6 Corporate and Non-corporate Businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion.7 So who really picked up the tab? To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.8
So to summarize, the majority buyers of Treasury securities in 2009 were:
1. Foreign and International buyers who purchased $697.5 billion.
2. The Federal Reserve who bought $286 billion.
3. The Household Sector who bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.
These three buying groups represent the lion’s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.
We must admit that we were surprised to discover that "Households" had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree? For our more discerning readers, this enormous "Household" investment was made outside of Money Market Funds, Mutual Funds, ETF’s, Life Insurance Companies, Pension and Retirement funds and Closed-End Funds, which are all separate reporting categories.9 This leaves a very important question - who makes up this Household Sector?
Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide, "For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector." (Emphasis ours)10 So to answer the question - who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.
Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.
Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings of US government debt and boosted cash to the highest levels since 2008.11 Earlier this year he referred to the US as a "ponzi style economy" and recomended that investors front run Uncle Sam and other world governments into government debt instruments of all forms.12 The fact that he is now selling US treasuries is a foreboding sign.
Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that "The world does not have so much money to buy more US Treasuries." He went on to say, "The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible."13 Judging from these statements, it seems clear that the US cannot expect foreigners to continue to support their debt growth in this new economic environment. As US consumers buy fewer foreign goods, there are less US dollars available for foreigners to purchase future Treasury securities. Foreigners are the largest source of external capital that can be clearly identified in US Treasury data. If their support wanes in 2010, the US will require significant domestic support to fund future debt issuances. Mr. Gross’s recent comments suggest that their domestic support may already be weakening.
As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.
In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009.1 So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was "Foreign and International Buyers", who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year.2 This increase appears to be a direct result of the Federal Reserve’s Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009. While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the State and Local governments and US Savings Bonds groups will be net sellers of US Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.
So who was the third large buyer? Drum roll please,... it was "Other Investors". After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualize this rate of purchase, they are on pace to buy $680 billion of US treasuries this year - or more than seven times what they purchased in 2008. This is undoubtedly the group that made the US deficit possible this year. But who are they? The Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors. Hmmm. Do you think anyone in that group had almost $700 billion to invest in the US Treasury market in fiscal 2009? We didn’t either. To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009.3 Within this grouping, the GSE’s were small buyers of a mere $5 billion this year;4 Broker and Dealers were sellers of almost $80 billion;5 Commercial Banking were buyers of approximately $80 billion;6 Corporate and Non-corporate Businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion.7 So who really picked up the tab? To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.8
So to summarize, the majority buyers of Treasury securities in 2009 were:
1. Foreign and International buyers who purchased $697.5 billion.
2. The Federal Reserve who bought $286 billion.
3. The Household Sector who bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.
These three buying groups represent the lion’s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.
We must admit that we were surprised to discover that "Households" had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree? For our more discerning readers, this enormous "Household" investment was made outside of Money Market Funds, Mutual Funds, ETF’s, Life Insurance Companies, Pension and Retirement funds and Closed-End Funds, which are all separate reporting categories.9 This leaves a very important question - who makes up this Household Sector?
Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide, "For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector." (Emphasis ours)10 So to answer the question - who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.
Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.
Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings of US government debt and boosted cash to the highest levels since 2008.11 Earlier this year he referred to the US as a "ponzi style economy" and recomended that investors front run Uncle Sam and other world governments into government debt instruments of all forms.12 The fact that he is now selling US treasuries is a foreboding sign.
Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that "The world does not have so much money to buy more US Treasuries." He went on to say, "The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible."13 Judging from these statements, it seems clear that the US cannot expect foreigners to continue to support their debt growth in this new economic environment. As US consumers buy fewer foreign goods, there are less US dollars available for foreigners to purchase future Treasury securities. Foreigners are the largest source of external capital that can be clearly identified in US Treasury data. If their support wanes in 2010, the US will require significant domestic support to fund future debt issuances. Mr. Gross’s recent comments suggest that their domestic support may already be weakening.
As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
1 Department of the Treasury (December 2009) Treasury Bulletin. Ownership of Federal Securities p48. Table OFS -2 –
Estimated Ownership of U.S. Treasury Securities.. Retrieved on December 20, 2009 from: http://fms.treas.gov/bulletin/b2009_4.pdf
2 Federal Reserve Statistical Releases H.41. Release September 25, 2008 and Release September 24, 2009.
Retrieved on December 20, 2009 from: http://www.federalreserve.gov/releases/z1/Current/
3 Federal Reserve Statistical Release Z.1 Flow of Funds Accounts of the United States
(December 10, 2009)
Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009. Table L.209 Treasury Securities pg.89.
Board of Governors of the Federal Reserve System. Retrieved on December 20, 2009 from: http://www.federalreserve.gov/releases/z1/Current/
4 Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009.
Table L.209
Treasury Securities pg.89, Line 29.
5 Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009.
Table L.209
Treasury Securities pg.89, Line 31.
6 Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009.
Table L.209
Treasury Securities pg.89, Line 13.
7 Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009.
Table L.209
Treasury Securities pg.89, Line 8 and 9.
8 Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009.
Table L.209
Treasury Securities pg.89. Line 12 Monetary Authority had a Treasury Securities balance of $769.2 billion and Line 5 the
Household Sector held a balance of $801.6 billion
9 Flow of Funds Accounts of the United States Flows and Outstandings Third Quarter 2009.
Table L.209
Treasury Securities pg.89, Lines 25, 26, 28, 21, 22, 23, 24, 27..
10 Guide to the Flow of Funds Accounts, Volume 1, page 170. Retrieved on December 20, 2009 from: http://www.federalreserve.gov/releases/z1/fofguide.pdf
11 Goodman, Wes. (December 17, 2009). Pimco’s Gross Boosts Cash to Most Since Lehman Failed.
Business Week Retrieved on December 20, 2009 from: http://www.businessweek.com/investor/content/dec2009/pi20091217_105749.htm
12 Gross, Bill (January 2009). Andrew Mellon vs. Bailout Nation. Investment Outlook. Retrieved on December 20, 2009 from: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/IO+Gross+Jan+09
+Andrew+Mellon+vs+Bailout+Nation.htm
13 Xin, Zhou and Jason Subler (December 18, 2009). Harder to buy US Treasuries. Shanghai Dialy.
Retrieved on December 22, 2009 from: http://www.shanghaidaily.com/sp/article/2009/200912/20091218/article_423054.htm
One BIg Scam: Who's Buying All Those Treasuries?
Sprott Asset Management has "pulled forward" something I intended to cover in my "year end review" Ticker but since he's put it out there I think I need to cover it now:
As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst.
Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.
In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009.
....
To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.8
If you believe that you're more gullible than I.
Here's why.
The 2009/3Q Z1 shows an alleged annualized inbound (purchase) flow rate for "households" of $742.9 billion. This was exceeded only by the 1Q 2009 number of 1066.5, which in the context of the stock market meltdown makes perfect sense. Likewise, in 2008 Q2/Q3 when the market was falling apart flow rates into Treasuries by households were very heavy as well.
Before you write this off and say "oh but people still are scared and thus not willing to invest in the stock market" you better look below at the Money Market Mutual Fund holdings! In Q1, Q3 and Q4 of last year this segment saw massive buying of Treasuries. Not so this year - Money Market funds have been NET SELLERS all year long, and in Q4 the rate of selling has dramatically increased, mostly as a consequence of broker/dealer sales.
This, of course, is perfectly consistent with the stock market rising - money flows out of Money Market funds and into equities, thus causing Money Markets to be net sellers.
So how is it that "Households" allegedly are (individually, via Treasury Direct?) buying Treasuries at a $700+ billion annualized rate when the other categories under which "households" transact in the markets - via money market accounts, mutual funds and similar instruments - are showing either small increases or significant net sales?
There are other oddities in the Z1 as well related to net borrowing and lending - one of the more important being the fact that GSEs suddenly became negative net borrowers to the tune of more than a half-trillion dollars in the second and third quarter! Wait - they're paying down outstanding lending commitments? I thought The Fed was absorbing all their net new issue and Treasury was backstopping their operating costs? Hmmmm...... is someone trying to de-lever due to knowledge of "fun times" to come in 2010? Perhaps Timmy knows too, eh?
The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.
Hint: Treasury believes those losses are going to be massive, and so do the GSEs, judging not by statements but by their behavior.
Commercial banks are neither lending OR borrowing, and after what looked to be a let-up in their divestment in the 2nd Quarter it has picked up bigtime once again in their third. Again: What do they know that we're not being told about their losses?
I have previously opined (in October) that it is more than a bit unlikely that "Caribbean Banking Centers" have the GDP (or sovereign wealth) to support more than $200 billion in Treasury Security acquisitions:
Who is the real holder of all the Treasuries in "Caribbean Banking Centers"? You don't actually expect me to believe that little islands like Antigua and Grand Cayman have the sovereign wealth to support holding nearly two hundred billion dollars of Treasuries, do you? Is that a vehicle by which back-door monetization can (and has) taken place? Germany, with a real economy and government, by contrast holds a mere $55 billion dollars, and even Russia (and Hong Kong!) have only $121 billion.
Yeah.
Now we have more than $500 billion in further discrepancies that make absolutely no sense, especially when one looks at the rest of the patterns in the Fed's most-recent Z1 release.
This, of course, begs the obvious question:
Who really "bought" that Treasury debt - and did it really "subscribe"?
Or is the truth that there were in fact no buyers for upwards of half of the total Treasury issue in the last year and it was instead monetized - one third openly via Federal Reserve "open market" purchase, and the other two-thirds via "covert" or "stealth" means, complete with bucketing the alleged "buyers" into categories in The Fed's and Treasury's data releases?
The Real Purpose of Healthcare Reform
from the Market Ticker:
There are two interesting articles in the WSJ relating to the "Health Reform" bill, one by Karl Rove and the second coming from The Heritage Foundation, a conservative think tank.
Let's first talk about Karl Rove:
For good or bad, you will get both rationing and a tax-funded medical system in The United States. Private override insurance may remain available and you may be able to continue to buy health care for cash, but neither is assured - neither can be done (for the most part) in Canada, as just one example.
I do not believe this outcome will be an accident - indeed, I believe it is the intention of the Obama Administration and The Democrats all along.
Those who are ascribing some sort of partisan "liberalism" motive - that is, a desire to take over 20% of the economy - are wrong. The real desire is to collapse health care spending to around 9-10% of GDP.
Since neither party is willing to have an honest debate and discussion with Americans relating to the amount of care we can afford to provide people, including but not limited to care as we age, for those who are unable to pay for it on their own, and since both parties have been co-opted by the medical device and pharmaceutical industry who have clamored for "more and more" of GDP (while delivering relatively small incremental "benefits" in the form of extending life, albeit at a questionable level of quality), this is what we're going to get.
Mark this Ticker and come back to it in three or five years - I'd make a fairly large wager that this is exactly what we will not only get but what is the true intent behind this "bill."
Let's first talk about Karl Rove:
Taxes start going up now, Medicare cuts begin after next fall's election, and spending for subsidies commences in five years. The price tag is not the first decade's announced $871 billion cost: It is $2.4 trillion. That's the cost of the tax credits in insurance exchanges, and the additional Medicaid costs the reform generates, over the first 10 years it's fully up and running, according to Congressional Budget Office numbers compiled by Republicans on the Senate Finance Committee.
Take the partisanship out and what you have is the above, basically. On this Mr. Rove is exactly correct.
The tax increases come now, Medicare cuts come after the next election but in point of fact the spending will come never.
I'll explain after I provide some of the second article:
The purpose of this compulsory contract, coupled with the arbitrary price ratios and controls, is to require many people to buy artificially high-priced policies to subsidize coverage for others as well as an industry saddled with other government costs and regulations. Congress lawfully could enact a general tax to pay for these subsidies or it could create a tax credit for those who buy health insurance, but that would require Congress to "pay for" or budget for the subsidies in a conventional manner. The sponsors of the current bills are attempting, through the personal mandate, to keep the transfers entirely off budget or--through the gimmick of unconstitutional taxes or penalties they dub "shared responsibility payments"--make these transfers appear to be revenue-enhancing.
This "personal responsibility" provision of the legislation, more accurately known as the "individual mandate" because it commands all individuals to enter into a contractual relationship with a private insurance company, takes congressional power and control to a striking new level. Its defenders have struggled to justify the mandate by analogizing it to existing federal laws and court decisions, but their efforts do not withstand serious scrutiny. An individual mandate to enter into a contract with or buy a particular product from a private party, with tax penalties to enforce it, is unprecedented-- not just in scope but in kind--and unconstitutional as a matter of first principles and under any reasonable reading of judicial precedents.
Congress has a responsibility, pursuant to the oath of all Senators and Representatives, to determine the constitutionality of its own actions independently of how the Supreme Court has previously ruled or may rule in the future. But it is very unlikely that the Court would extend current constitutional doctrines, or devise new ones, to uphold this new and unprecedented claim of federal power.
Got that second part?
Good, because here's my prediction.
Congress will somehow manage to put these two bills together and come up with something that both Houses of Congress will pass, and Obama will sign it.
The lawsuits will come immediately thereafter.
They will succeed, because there is simply no justification anywhere in The Constitution, nor can one be manufactured, to force someone under pain of federal fine and/or imprisonment to purchase something from a private party simply as a consequence of being alive.
This is so blatantly unconstitutional that nobody in The House or Senate can seriously expect it to stand. Therefore, we must conclude that it is not intended to stand - both House and Senate fully expect that mandate to be struck.
When, not if, it is you will discover the what I have said all along is the truth purpose of this so-called "reform" - a single-payer system.
Here's how it will happen.
- Congress will pass and Obama will sign something containing this "individual mandate."
- This will generate immediate lawsuits which will begin their way through the system, headed for the United States Supreme Court. That process will take several years. Note that the so-called "benefits" of this reform will also take several years to show up. This is not an accident.
- Meanwhile, the taxes begin immediately. This is exactly what happened in the 1930s by the way - taxes were raised right into the maw of an economic recession, and helped turn it into a Depression. Such it will be this time as well.
- Young, healthy people will pay the "fines" under protest and refuse to buy coverage (it's cheaper than complying with a $15,000/year mandate to pay the $750/year fine!) and join said lawsuits in Step #2. This will in turn begin to force private companies out of the system (remember, there are also price controls in there!) as adverse selection will not be eliminated as promised.
- At some point the courts will strike the individual mandate. Free to not pay the fine or buy insurance and prevented from raising rates adverse selection will collapse the remaining private health insurers.
- Permanently higher taxes (since it is constitutional to tax!)
- NO private health insurers left in the market.
- The "standards and practices" remaining and impossible to remove (note the super-majority requirements in the bill - intentionally put there to prevent the removal of those standards and practices!)
For good or bad, you will get both rationing and a tax-funded medical system in The United States. Private override insurance may remain available and you may be able to continue to buy health care for cash, but neither is assured - neither can be done (for the most part) in Canada, as just one example.
I do not believe this outcome will be an accident - indeed, I believe it is the intention of the Obama Administration and The Democrats all along.
Those who are ascribing some sort of partisan "liberalism" motive - that is, a desire to take over 20% of the economy - are wrong. The real desire is to collapse health care spending to around 9-10% of GDP.
Since neither party is willing to have an honest debate and discussion with Americans relating to the amount of care we can afford to provide people, including but not limited to care as we age, for those who are unable to pay for it on their own, and since both parties have been co-opted by the medical device and pharmaceutical industry who have clamored for "more and more" of GDP (while delivering relatively small incremental "benefits" in the form of extending life, albeit at a questionable level of quality), this is what we're going to get.
Mark this Ticker and come back to it in three or five years - I'd make a fairly large wager that this is exactly what we will not only get but what is the true intent behind this "bill."
More Mortgage Outrage!
from WSJ:
The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.
The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.
Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.
"The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note."
Treasury officials couldn't be reached for comment Friday.
So far, Treasury has provided $60 billion of capital to Fannie and $51 billion to Freddie. Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse in New York, said he didn't believe Fannie and Freddie would need more than $200 billion apiece from the Treasury. But he and other analysts have said the market would find a larger commitment from the Treasury reassuring.
In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.
The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.
Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies.
The Treasury reiterated administration plans for a "preliminary report" on the government's future role in the mortgage market around the time the federal budget proposal is released in February.
The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies.
The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.
Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority.
The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.
For the CEOs, annual compensation consists of a base salary of $900,000, deferred base salary of $3.1 million and incentive pay of as much as $2 million.
When Mr. Haldeman was hired by Freddie in July, the company set his base pay at $900,000 and said his additional "incentive" pay would depend on a decision by the regulator.
At Fannie, Mr. Williams was chief operating officer until he was promoted in April to CEO. As COO, his base salary was $676,000. He also had annual deferred pay of $2.3 million and a long-term incentive award of as much as $1.5 million.
Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer.
At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.
The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie.
He also criticized the administration for approving the compensation without settling on a plan to remove taxpayer supports: "To be doing that with no plan in place is just unconscionable."
The FHFA said that Fannie and Freddie "must attract and retain the talent needed" for their vital role in the mortgage market.
Thursday, December 24, 2009
U.S. Debt Near the Tipping Point
If governments continue to pile on more and more debt, when will they reach the tipping point?
The Greeks appear to be close to the tipping point, and it is only a matter of time before other European countries, and eventually even the United States, begin their fiscal death spiral.
The Greek government's unwillingness to make the hard choices necessary to put its fiscal house in order in the past few weeks has caused investors to demand a 2.5 percent premium on its government-issued eurobonds over those issued by the German government.
First, a little background. Eurozone governments have a contractual obligation not to incur annual deficits of more than 3 percent, yet the deficit forecast for 2010 for all major Eurozone economies is far in excess of that number. Greece (12.2 percent), Ireland (14.7 percent) and the U.K. (at 12.9 percent) are even in double digits.
As can be seen in the accompanying table, the average Eurozone deficit is projected to be 6.9 percent, more than double the agreed-upon limit.
Greece has reached a crisis stage and, as noted, its debt is now selling at a deep discount compared to other EU countries.
Ireland has a bigger deficit, but its total net government debt is only 38 percent, as contrasted with Greece's 95 percent. But the Irish, unlike the Greeks, are instituting a credible plan to cut government spending and get their economy back on the growth track.
Country Debt and Deficit Forecasts
| Country | 2010 Budget Deficit Forecast (as % of GDP) | 2010 Government Net Debt Forecast (as % of GDP) |
| France | -8.2 | -60.7 |
| Germany | -5.0 | -54.7 |
| Greece | 12.2 | -94.6 |
| Ireland | 14.7 | -38.0 |
| Italy | -5.3 | 100.8 |
| U.K. | 12.9 | -59.0 |
| Eurozone | -6.9 | -57.9 |
| U.S. | -9.6 | -65.2 |
| Japan | -8.2 | 104.6 |
The fundamental problem with most of the world's largest economies is that they have allowed government spending to grow faster than economic growth, which can only lead to long-run economic disaster.
Many governments are proposing tax increases, but they cannot tax their way out of this problem because most of their tax rates are already above their long-run revenue-maximizing rate.
Further tax increases will only result in even slower economic growth and an increase in the underground economy, making the fiscal situation worse rather than better.
The responsible choice is a radical cut in government spending growth, with the alternative being economic stagnation or worse, likely coupled with a high rate of inflation.
Japan has tried to spend itself into prosperity by issuing more and more debt. Up until now, it has avoided inflation but has suffered a decade of economic stagnation, with a falling share of world gross domestic product, and the situation can only get worse.
The Obama administration and the Congress are in a headlong rush to push the country over the fiscal tipping point. The fiscal tipping point is the point where the interest that premium bond buyers are demanding to compensate them for the risk of default and/or accelerating inflation causes the total interest cost to be so high that the government is borrowing just to pay the interest.
This is equivalent to a family being so far in debt that it is borrowing just to pay the interest on its mortgage, credit cards, etc.
The proposed healthcare plan and the environmental cap-and-trade scheme will add trillions of dollars to the U.S. debt over the next few years and, in all likelihood, soon will drive the total debt burden to well over 100 percent of GDP.
Even if the administration were to tax the "rich" at 100 percent of their incomes, there would still not be enough money to pay for all of these spending schemes.
The following should be known to most members of Congress. The size of the U.S. government is already well over the welfare and economic growth-maximizing rate.
Taxes on upper-income Americans are well above the revenue-maximizing rate. Thus, for those in the political class to further increase the size of government and government debt as a percentage of GDP is grossly irresponsible. It is almost as if they had a death wish for the country.
Humans are quite good at adapting to climate change. Our species has already lived through hundreds of climate cycles. What they are not good at is adapting to the fiscal and monetary falsehoods of politicians. Yet, the politicians would prefer to fly around the world talking about climate change rather than putting their fiscal house in order.
Bond buyers are not stupid. They can see what is happening. If the administration and Congress do not soon reverse course, the cost of servicing the debt will quickly drive the U.S. to the fiscal tipping point.
Once the tipping point is reached, government will shrink one way or another, because there will be no way to fund the previous bloated state.
Who will be most hurt? Those most dependent on government.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
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