Archive for December 20th, 2009
At the same time the Fed and Wall Street are trying to cover-up, as they did 2-1/2 years ago what became a credit crisis. Last time they ramped up the stock market and they are attempting to do the same thing again. It is a masking of two underlying problems. They are doing what they did before, pushing up the value of shares, of companies that are on the edge of serious problems. In this process they have virtually nationalized banks and given them the funds to re-leverage in the market and take it again to today’s heights. The market has again become divorced from economic reality. They are again about to find out printing money and taxing is not going to solve the problem. On the way to the printing press and along the path of monetization the government has forgotten that they are in serious financial conditions and in the coming year will not be able to fund their deficit. The revenues are not to be had and foreigners are more and more reluctant to shoulder America’s debt. That means another credit crisis and further monetization of debt. Very simply, the US government is bankrupt. They can either default or lay the burden on future generations. The immediate answer is for government to cut spending on such trivialities, such as Medicaid, Medicare and Social Security. Allow the citizens to live in penury and poverty. These are the people who helped build America into what it is and they are to be cast aside as the Fed rescues its owners, the bankers, who deliberately caused the problem in the first place.
The deficit for fiscal 2010 should be close to $2 trillion, up from $1.4 trillion in 2009. The projection for the next ten years is at least $10 trillion. That means an increase of 150% to be serviced by 60% increase in tax revenue in a world where current receipts are off 30%. Even in better times recently tax revenues only increased by 12% during the biggest real estate and stock booms ever. We are about to find out that the muddle through theory does not work. Just for good measure we will add that unfunded liabilities increased by $9 trillion last year alone. That is ten years of deficits in just one year. Who in their right mine is going to fund and support such profligacy?
Sent to me by Tom (with thanks)— VERY INTERESTING
Reader Walter passed along this distressing sighting from Chris Floyd’s blog. American civil liberties were gutted last week, and the media failed to take note of it.
The development? If the president or one of his subordinates declares someone to be an “enemy combatant” (the 21st century version of “enemy of the state”) he is denied any protection of the law. So any trouble-maker (which means anyone) can be whisked away, incarcerated, tortured, “disappeared,” you name it. Floyd’s commentary:
KEY PROJECTIONS FOR 2010 AND BEYOND
Keeping in mind the above assumptions and circumstances following are the key projections that are likely to come across the path of Global Economy.
The size of Governments and the cost of maintaining them are going to increase substantially worldwide.
The experiment of trying to solve the problem of debt by taking on more debt is going to fail.
The Governments are going to engage in protectionism policies to protect their own economies.
The Cost of Borrowings of Governments are going to go up as their respective fiscal situation worsens.
The Governments will use every trick to squeeze out maximum tax revenue from businesses able to make profit or employees earning high incomes.
The Governments worldwide will be forced to curb the risky trading practices of the banks and financial institutions after the next credit crunch and market crash. Strict rules too will be laid down for derivative trading to curb speculation.
The banks will revert back to making money by lending to businesses and consumers under strict rules. They will be stopped from using public savings to trade in exotic and risky financial products.
There is going to be a sovereign default of debt of a country, the rescue of which will not be managed. This will trigger a chain of defaults across the global markets and the credit markets will freeze up again as happened in the period Oct 08 – March 09. This time it will take much longer to thaw as the ability of Governments to rescue will be limited.
There will be a rush to buy US Dollars as safe haven. The problems of US are well documented and observed. There will be major financial problems emerging from economies like U.K., Japan, Eurozone countries, Middle East etc. which will come out suddenly and dwarf the ones in the U.S.
There will be a sharp fall in stocks, commodities and property markets as soon as the world realizes that the economic recovery or bounce is not sustainable. The fall is likely to be more severe than what was seen last year.
We are going to have years of stock and commodity markets going down with occasional rallies in them whenever there is a restocking GDP bounce.
A no. of banks worldwide will collapse due to the losses on loans on credit cards, autos, residential and commercial property etc. Also the banks will have to forego loan principles as the assets they hold as collaterals continue to fall in value.
The consumers and businesses will keep on de-leveraging till their loans can be serviced with their lower earnings. This is going to hit business profitability hard.
Making a living is going to be one of the biggest challenges to a vast majority of world population. Living within ones means will be back in fashion as compared to carefree expenditure ways of previous years.
There will be mass protests against governments on small issues which will act as a trigger for venting out frustration of the common citizen towards their daily struggles. The governments will find great difficulty in controlling their countries in times of social unrest.
The developing countries face a bigger probability of facing social unrest because the developed countries have in place a social security system whereby they take care of the basic needs of the poor and unemployed citizens. Any such social security system is absent in the developing countries like India and China.
The US dollar will continue to be the world’s reserve currency.
Debt will be considered the worst four letter word.
We have entered a phase of worldwide deflation last year whereby the credit outstanding will shrink faster than speed at which the Central Bankers can print money. Moreover the consumers will not be willing to take on more debt for consumption even if it is available for free as their attitudes towards debt has altered for the foreseeable future.
There is no known cure for deflation in the financial community otherwise Japan wouldn’t be moving in and out of deflation 20 years after their credit bubble burst.
By Akhil Khanna
A crushing burden of debt threatens to sap America’s growth for years to come. Please consider Trillions Of Troubles Ahead.
Not too long ago, a billion dollars in a governmental budget was a lot of money. Then we got into hundreds of billions. People understood that this was a lot, just because of all the zeros. Now, unfortunately, the number has become small: the world “trillion,” as in $1.2 trillion for health care reform, seems so tiny. But it has 12 zeroes behind it, which is so easy to forget.
The total public debt is now at 141% of GDP. That puts the United States in some elite company–only Japan, Lebanon and Zimbabwe are higher. That’s only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time.”
Add the unfunded portion of entitlement programs and we’re at 840% of GDP.
The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.
It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year’s election, there will be no way to turn back.
Japan’s recession is now 19 years old. It has the highest debt-to-GDP level (227%) of any industrialized country. The Fitch rating agency is talking about a potential downgrade of Japan’s debt. Japan’s stock market is still down 75% from the high in 1990. We predict it will make new bear market lows next year. That will make it a 20-year-long bull market [bear market makes more sense - Mish] on the way to 25 years. The bulls in the U.S. should consider that possibility in the formerly great United States of America.
I do not believe the bullish theory that the U.S. situation is different than Japan’s. Ours is so much worse.
Bank Of Japan Will Not Tolerate Deflation
Amazingly, the nation that has been in and out of deflation for 18 years says BOJ Will Not Tolerate Deflation
The Bank of Japan held interest rates at 0.1 percent and policy makers said they are intolerant of price declines amid signs deflation may undermine the economic recovery.
The policy board “does not tolerate a year-on-year rate of change in the CPI equal to or below zero percent,” the central bank said in a statement in Tokyo today after the unanimous rate decision.
Japan’s CPI Negative
Given Japan will not tolerate a negative, inquiring minds might be wondering why the CPI is negative. Please consider Japan’s Notes Rise Most in 13 Months on Central Bank Loan Plan.
Deflation blighted Japan during its so-called lost decade of stagnation after an asset bubble burst in the early 1990s. The government has stepped up calls on the BOJ to prop up growth since it declared the economy was in deflation on Nov. 20.
Consumer prices excluding fresh food slid 2.2 percent in October from a year earlier after dropping a near-record 2.3 percent in September.
“Japan’s CPI will stay negative for some time,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. “Japanese real interest rates are higher than U.S. real yields, which make Japanese bonds attractive. I recommend buying 10-year Japanese bonds.”
OK Japan what are you going to do?
Going deeper in debt with ridiculous Quantitative Easing and Keynesian stimulus efforts did not cure deflation in Japan and it will not cure deflation in the US either. Instead, it will drag the problem out, while increasing national debt.
I find it amusing that people believe debt can be inflated away. They ignore the fact that an increasing amount of interest is needed to service that debt. You can see concerns in the US already with tax increases by Obama.
As the Forbes article notes, eventually interest on the debt will consume all the tax revenues. That holds for both Japan and the US. Both countries will be in real trouble when interest rates rise.
Mike “Mish” Shedlock
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… that does not involve serious pain.
Go ahead folks – tell me how we can simply ignore this.
How we can pretend that the outstanding debt does not have to come back down to reasonable levels.
That these levels are “reasonable” – and that these rates of growth are “reasonable.”
This is the “magic of compounding” writ large – and in a fashion that is going to inflict severe pain on our population – and the longer we wait to deal with it, the worse it will be.
Bernanke, who was at The Fed during Greenspan’s time there, should have used his “education” - his claimed knowledge of economics – to make a lot of noise about this and demand that interest rates NOT be lowered to further encourage more debt-based consumption.
He did exactly the opposite.
As this decade wore on he should have sounded the alarm on our debt binge in all sectors, especially in the financial and consumer sectors where the growth in indebtedness has been the highest.
He did exactly the opposite.
Since this crisis began, in fact, every single government official who has spoken on the matter has emphasized even more lending, that is, cranking the amount of debt outstanding even higher, and The Federal Government has made good on their intent by, in the last year, spending more than $1.7 trillion dollars they did not have – that is, they borrowed even more.
That “pumping” of credit is why the stock market has “recovered.”
BUT IT CANNOT AND WILL NOT STAY ”recovered”, because the debt that is outstanding is unsustainable – interest costs are crushing innovation and we are now absolutely reliant on near-zero interest rates lest everything collapse.
How bad is it?
During the same time period that we essentially doubled the debt of households, businesses, the federal government and financial institutions (2000-2009) we added just 40.8% to GDP ($10.129tn to $14.266tn)
You might think it wasn’t as bad from 1990-2000 – we went from $5.846tn to $10.129tn in GDP (a 73% increase) while household debt went from 3.58tn to 6.53tn (an 82% increase) and non-financial corporate debt from 3.768tn to 6.195tn (a 64% increase.) This looks reasonable. But financial leverage during that decade went from 2.613tn to 7.521tn, a monstrous 187% increase (!) and government debt from 2.613tn to 7.521tn, also a 187% increase (!), both nearly double the GDP growth rate.
The 1980-1990 years? GDP expanded from $2.915tn to $5.846tn, a clean double. Pretty good! Consumer debt, however, went from $860 billion to $3.58 trillion, a 316% increase. Non-financial corporate leverage went from $1.387tn to $3.768tn, a 172% increase, the Federal Government went from $668 billion to 2.498tn, a 273% increase and financial leverage went from $526 billion to $2.614tn, a 396% increase.
The path we have chosen for the last 30 years in this country is clear, convincing, and impossible to continue upon.
THE MATH DOES NOT LIE.
We have not created GDP growth through final demand procured as a consequence of production – that is, people like you and I working with our hands or minds to produce something, then spending the fruits of that labor to buy the things we want and need.
Instead, we have used financial leverage to present to ourselves and the world a false belief and “visage” of prosperity that in fact did not and does not exist, with the continuation of this charade absolutely dependent on the unending ability to forever take on more and more debt compared to growth in actual economic output.
Let’s just take ONE example of this: Larry Summers, President Obama’s “chief economic advisor”, thought he could outrun the math at Harvard – where he gave approval to enter into complex derivative trades. They blew up in the school’s face:
The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school suspended work on the building last week.
“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”
MISSTEPS? This is fifth-grade math! It is willful and intentional ignorance of fundamental and basic mathematics over the last 30 years that is the proximate cause of the mess we are in today – a mess that to this very day none of these jackasses will come out and talk about or have an honest debate over!
These are the so-called “bastions” of higher education - the places where so-called “experts” receive what is claimed to be an “education” in how finance and business work. If you need an explanation for how our government, regulators and businesses could possibly be so dumb as to make this sort of mistake over the course of three decades you need look no further than the “intelligence” displayed by these institutions.
That there are actually people – young and old - who pay $40,000 a year or more for this “quality” of education (and they then use that sheepskin to infest business and government alike) simply demonstrates that PT Barnum was right: There really is a sucker born every minute.
Let me be clear lest anyone misunderstand me: There is no means by which we can return this economy to reasonable forward prosperity except by first deflating the excess debt, even though doing so will cause those who have too much leverage outstanding to fail – that is, go bankrupt – either as consumers or businesses.
We have in fact hit the wall, as I clearly stated had occurred simply from an examination of the math in the middle of 2007.
The facts are in and the math is incontrovertible.
To the politicians of both major political parties:
You can either deal with reality or have it slap you upside the head in the form of political, economic and civil collapse.
To the people of this nation:
You can either deal with reality and be prepared for the politicians refusing to deal with reality, or you will suffer the consequences of being unprepared when, not if there is political, economic and civil collapse.
Ben Bernanke absolutely must not be reconfirmed. He has been aware of these figures as a scholar and as a Fed Governor for more than a decade (the tables from which that graph was produced are from The Federal Reserve itself) while absolutely refusing to discuss them in public in an honest and forthright manner.
What’s worse is that even today Bernanke has refused to take responsibility for his part in intentionally engineering this disaster and allowing it to continue to the point of near-literal insolvency of not only the private sector but government as well!
Our Congress and President absolutely must deal with this reality right now. Not tomorrow, not next week, not next year or after the elections. NOW. “Health Care Reform” is important but this nation will not make it to 2013 when the “new plans” come into effect if actions are not taken NOW to reverse what is going on here. We can and must address entitlements and health care generally – after we get the immediate situation under control.
It is my belief that our Congress and President WILL NOT deal with this reality, and therefore it is incumbent upon each and every American to be prepared – from this point forward – for the inevitable mathematical consequence of the willful refusal of our Congress and Executive to address the issue of excessive leverage in our business and consumer lending space.
There are many things that Congress and our Executive Branch can do right now to address these issues; among them:
The immediate re-instatement of Glass-Steagall and both replacement and enforcement of hard 12:1 leverage limits for both banks and other financial institutions, without exception, loophole or dodge. Fractional reserve lending is a privilege that must come with strong protections against over-expansion of credit in the system and systemic instability.
Each and every one of these positions has been brought up by myself in the past in previous Tickers. We have seen time and time again over the last two and a half years that banking regulators coddle the regulated entities and enable lying, cheating and in many cases outright fraud.
As our government has fiddled our financial system has burned. It has not been stabilized by the actions of The Fed and Treasury; rather, it has been made more dangerous and less stable while those who committed evil and knowingly-unsound acts have been allowed to further asset-strip Americans and enrich themselves.
But irrespective of what people - including Congress, The Administration or even Wall Street want, the math simply can’t be argued with.
Beware and be prepared America.