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

Sources: OECD, European Commission, CBO


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.

Better be wise by the misfortunes of others than by your own. - Aesop

Fossil Fuel Will Continue to Power Economy

By Institute for Energy Research  Wednesday, December 23, 2009
Washington, DC – Yesterday, the Energy Information Administration (EIA) — the independent statistical analysis arm of the US Energy Department — issued its Annual Energy Outlook, an evaluation of the United States energy consumption and production for the next 25 years.
“Today’s announcement only validates the well known fact that fossil fuels will continue to power America for decades to come,” said Mary J. Hutzler, former EIA deputy administrator and a distinguished senior fellow at the Institute for Energy Research (IER).
“This forecast clearly shows the continued and increased role fossil fuels will play in powering our economy. Specifically, EIA finds that demand for liquid fuels will be up nearly 10 percent, natural gas by almost 7 percent and coal will increase by 12 percent above 2008 levels – in 2035. Fossil fuels remain dominant and necessary for economic growth and this analysis reinforces that.”
The EIA analysis — which IER has summarized HERE — also shows an increase in the use of renewable energies, namely biomass and wind power. However, it is important to note that wind energy flat-lines in 2013, which also happens to be the year that many of the generous government-mandated subsidies are eliminated to the industry — demonstrating that wind energy is not economically feasible without massive taxpayer support.
In terms of the non-carbon dioxide emitting fuels, EIA is forecasting an increase of 11 percent for nuclear energy, and 81 percent for all forms of renewable energy (hydropower, biomass, wind, solar, and geothermal). Despite these sizeable increases, carbon-free energy can only lower the fossil fuel share of consumption by 6 percentage points from its current 84 percent share.
Overall, according to EIA, energy consumption in the United States is expected to increase by 14 percent by 2035.
“While renewable energy sources are projected to nominally increase, the Administration and lawmakers on Capitol Hill must acknowledge that markets ultimately decide which energy sources are more efficient. And despite the massive taxpayer handouts for unreliable and intermittent ‘green’ energy forms, according to this analysis, fossil fuels will remain the most powerful, reliable and affordable energy forms for years to come,” concluded Hutzler.

Commodities, Stock in Lock Step

from WSJ:
As stocks retreated and recovered in the past 15 months, commodities investments moved in step with the U.S. market.
That wasn't supposed to happen.
Investing in commodities long has been pushed as a useful way to cushion portfolio risk. "We haven't seen the independence [in commodities returns] that you'd hope for in a diversified portfolio," says Jay Feuerstein, chief executive of Chicago commodity-trading adviser 2100 Xenon Group.
Last year, commodities such as oil, corn, copper and grain crumbled as the stock market tanked. This year, they have climbed in tandem with stocks. And the performance of commodities mutual funds has striking parallels to the broad U.S. stock market.
Funds that track the benchmark Standard & Poor's 500-stock-index have risen 26% this year, while commodities funds are up about 22%, according to fund-tracker Lipper Inc. In the past three years, the S&P funds have posted an average annualized decline of 6.6%; commodities funds fell 7.3% on average.
The only spots among commodities to provide diversification have been gold and silver. Gold funds returned 10.6% on average in the three-year period.
"Everyone thought that if you invest in long-only commodities, you'd get diversification, but that's not the case," said Nadia Papagiannis, alternative-investments strategist at investment researcher Morningstar Inc. "We found out last year that they were very highly correlated [to stocks]."
Based on the theory that stocks and commodities are poles apart, the fund industry churned out new commodities funds. More than half of the commodities mutual funds and exchange-traded funds on the market have been introduced since the start of 2008, and investors have socked increasingly large amounts of cash into them.
Of the 85 commodities mutual funds, ETFs and exchange-traded notes, 42 came to market last year, and five were launched this year through Oct. 31, according to research firm Strategic Insight. Through Oct. 31, more than 7% of inflows into stock funds and ETFs—$27.5 billion—went to commodities funds, says Strategic Insight.
The unusually severe nature of the 2008-early 2009 financial crisis is the cause of the stock-commodities convergence. The credit crunch caused a near-unprecedented liquidity squeeze. In other words, investors were too scared to buy anything.
As such, commodity values fell in near-lockstep with stock prices.
From Sept. 1 to Dec. 31, 2008, as the S&P 500 plunged 30%, oil fell 66%, corn dropped 28% and copper was down 62%.
Gold held up as a diversifier. While the precious metal's price fell 17% in October 2008—the same as the S&P 500—it was up in September, November and December, and finished the September-to-December period up 6.6%.
Given gold's recent performance, Ms. Papagiannis says holding the commodity itself is a good diversifier. Several funds own physical gold—as opposed to futures contracts—the largest of which is SPDR Gold Trust ETF. Since silver has also performed as a diversifier, similar to gold, another alternative is an ETF that holds physical silver, like iShares Silver Trust.
Mr. Feuerstein, the Chicago trading adviser, suggests a different reason for investing in commodities: Because they are likely to go up. "Don't think in terms of diversification, but think of it as just a great opportunity," he says.
The downside, Mr. Feuerstein noted, is that if a market-moving event sends stocks plunging, commodities will follow. Just like before.

New Home Sales Plunge in November

This is especially surprising given the tax credit stimulus that expired at the end of the month. What does this augur for December and 2010?  

By Matt Egan FOXBusiness

Hopes for a strong recovery in the housing market were dealt a blow on Wednesday when the government said new home sales unexpectedly tumbled in November, taking their steepest decline since the darkest days of the recession amid uncertainty over the extension of a federal tax credit.
The Commerce Department said sales of new homes slumped 11.3% to an annualized pace of 355,000 units last month, surprising analysts who had predicted a rise of 6.2%. Further, the government lowered its estimate for October by 30,000 units to 400,000.
Supplies of new homes jumped from 7.2 months’ worth to 7.9 months.
It seems prospective home buyers were spooked by ambiguity over the extension of the federal tax credit for first-time home buyers, which happened after many contracts would have been signed.
November’s performance was a “hangover from the tax-credit-induced binge in the July thru October period," Peter Boockvar, market strategist at Miller Tabak, wrote in a note.
The surprise drop in new home sales was led by the South, which suffered a 21.1% decline. Sales in the West fell 9.2% and dropped 3.3% in the Northeast. On the other hand, new home sales in the Midwest soared 21.4%.
Meanwhile, prices continued to fall on an annual basis, with the median sales price of a new home in November sinking 1.9% to $217,400. However, prices were up 3.8% from October.
“With the artificial lift from the tax credit, it’s become very tough gauging true demand,” Boockvar wrote. He predicted it will become easier to ascertain demand over the summer when the tax credit expires and the Federal Reserve’s buying of mortgage-backed securities is finished.

Small Business Bankruptcies Rising

from LA Times:
The Obama administration's new plan to give a boost to small businesses reflects continued trouble in that sector, which is facing new failures even as much of the nation's economy is stabilizing.

As credit lines have shrunk and consumers have cut back on spending, thousands of small businesses have closed their doors over the last year. The plight of struggling firms has been aggravated by the reluctance of banks to lend money, said Brian Headd, an economist at the Small Business Administration's office of advocacy.

"While bankruptcies are up, overall, small-business closures are up even more," Headd said.

"Most traders use either fundamental or technical reasons for trading. I like to use what I call "tactical" reasons, which include aspects outside of purely technical or fundamental aspects." - Phantom of the Pits

"Holding a loser too long is the biggest cause of the big drawdown." - Art Simpson

Losers Determine Your Success!

Art Simpson: "...understand how simple it can be to not care because of your rules and just do it -- DO IT! ...it only matters what you do with your losers that determines your success.

Phantom of the Pits: "...Keep emotion out of it. If you do the right thing in trading, never be a weeper."

GDP Revised Lower

from MyWay News:

WASHINGTON (AP) - The economy grew at a 2.2 percent pace in the third quarter, as the recovery got off to a weaker start than previously thought. However, all signs suggest the economy will end the year on stronger footing.
The Commerce Department's new reading on gross domestic product for the July-to-September quarter was slower than the 2.8 percent growth rate estimated just a month ago. Economists were predicting that figure wouldn't be revised in the government's final estimate on third-quarter GDP.

Democrats -- the Party of Big Business!

from Canada Free Press:

By David A. Nace  Monday, December 21, 2009
Ever since FDR was elected president in 1932, the Republican Party had been vilified by liberals and the news media as the party of large corporations and the defender of greedy capitalists.  That claim is not supported by the facts.  In the last decade, large corporations in many industries have contributed far more money to the Democratic Party and democratic candidates than to Republicans.
As the housing finance crisis illustrates, Wall Street investment firms, large banks and even government sponsored agencies like Fannie Mae and Freddy Mac made large contributions to the Democratic Party and democratic candidates especially Chris Dodd, Barney Frank and Barrack Obama to prevent tightening of borrower credit standards and the regulation of new financial instruments like derivatives.  The Federal government’s promotion of home ownership without regard to credit worthiness drove up house prices and ultimately cost small investors one third of their personal savings, including millions of 401k retirement accounts.
In the health care debate, large insurers and hospital groups have spent millions of dollars on Democratic supporters and spent additional millions running radio and TV ads to promote government healthcare.  Clearly these firms believe that Nationalized Health Care will help their bottom line instead of resulting in savings for the taxpayer.
In the energy policy debate, large utilities and other industries have already reserved a large portion of the carbon credits without cost.  These same industries provided significant campaign contributions to the Democratic legislators writing the bill.

Small businesses still believe in self reliance, free enterprise and limited government

One of the few benefactors of Cap and Trade legislation will be the Wall Street firms that will trade the carbon credits that are not already reserved.  These firms have made significant contributions to Democratic candidates or are actually managed by politically influential Democrats such as Al Gore.  Cap and Trade legislation will drastically increase the energy costs for the average American, however it will drastically increase the profitability of certain large firms that are politically well connected.  By promoting government intervention into the natural supply and demand for energy, Wall Street firms will be able to achieve excessive profits at the expense of average taxpayers just as they did in the housing finance industry.
Large corporations have found that the party of free enterprise and limited government no longer serves their interests.  They have found that the policies of the Democratic Party which allow government, not the marketplace, to determine the economic success of a firm are much more profitable.  However, that may explain why millions of jobs have left this country for China and India and 70% of all jobs created in the last 10 years have been created in small businesses. 
Small businesses still believe in self reliance, free enterprise and limited government.  Perversely, it is the owners and employees of small businesses that pay the vast majority of the taxes collected in this country, and then those taxes are used to fund programs that thwart self reliance and free enterprise.

Obama Delivers Lump of Coal to America

The United States Senate reached an agreement on health care reform legislation this weekend, and they couldn’t have done it without a bit of Chicago grit.

At least, that’s what South Carolina Republican Lindsey Graham thinks.

But it’s no compliment.

Graham, a long-time friend and adviser to President Obama’s election opponent John McCain, said the bill, which passed the Senate late Saturday night was only reached because of “seedy Chicago politics” which have been established by the new president from Chicago.

And tidings of comfort and joy from Harry Reid too. The Senate Majority Leader has decided that the last few days before Christmas are the opportune moment for a narrow majority of Democrats to stuff ObamaCare through the Senate to meet an arbitrary White House deadline. Barring some extraordinary reversal, it now seems as if they have the 60 votes they need to jump off this cliff, with one-seventh of the economy in tow.
Mr. Obama promised a new era of transparent good government, yet on Saturday morning Mr. Reid threw out the 2,100-page bill that the world's greatest deliberative body spent just 17 days debating and replaced it with a new "manager's amendment" that was stapled together in covert partisan negotiations. Democrats are barely even bothering to pretend to care what's in it, not that any Senator had the chance to digest it in the 38 hours before the first cloture vote at 1 a.m. this morning. After procedural motions that allow for no amendments, the final vote could come at 9 p.m. on December 24.

Dollar and Gold - Joined at the Hip

USD

Gold

Both the Dollar and gold continue to move in tandem with each other. Gold is still plunging, dropping through support around $1100/oz. today. And the Dollar continues to rise primarily because Europe is looking even worse.

"The mystery of government is not how Washington works but how to make it stop." P. J. O'Rourke

Residential Housing Delinquencies Still Rising Rapidly

No signs of abating there! Commercial mortages are still getting worse, also!

From John Mauldin's latest newsletter:
"Frank Veneroso noticed something unusual in the latest Federal Reserve Flow of Funds report. They changed their methodology for analyzing housing prices to a model more like the Case-Shiller index, which most believe to be more accurate. That meant they deducted another $2 trillion from household net worth than in the previous quarter. They just caught up with reality, so no big news there. But there is some big news if you look closely.
"About one-third of the homes in the US have no mortgages. Typically, these are nicer homes, as the "rich" have paid off their homes. So you can estimate that to be somewhere between 35-40% of the total value of US homes. Writes Frank:
"So now the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."
"The biggest single factor in foreclosures is negative equity coupled with unemployment. That makes sense, because if you could sell your house and get some equity, you would.
"As I have written in past letters, we are going to see a significant increase in mortgage resets in 2010, which will result in even more foreclosures. There is a lot more pain to come. This is not an environment that is typical of past recessions. There is a lot of deleveraging to be done, both as banks write off bad debts on homes and as consumers walk away from mortgages badly underwater."