FedUpUSA

Archive for April 14th, 2010

Bernanke: I Tricked You And Now You’re Screwed

Posted by Karl Denninger

This is truly amazing stuff out of Bernanke…

Supported by stimulative monetary and fiscal policies and the concerted efforts of policymakers to stabilize the financial system, a recovery in economic activity appears to have begun in the second half of last year.

…

On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters. Consumer spending continued to increase in the first two months of this year and has now risen at an annual rate of about 2-1/2 percent in real terms since the middle of 2009.

It has?  Uh, no, Ben, it hasn’t.  The following illustrates this:

Real GDP has not been expanding at all.  What’s expanded is this:

That’s not private demand, it’s government subsidy replacing private demand.  But now, having effectively enabled if not demanding that this fiscal profligacy take place, Bernanke says:

Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Timely attention to these issues is important, not only for maintaining credibility, but because budgetary changes are less likely to create hardship or dislocations when the individuals affected are given adequate time to plan and adjust. In other words, addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult.

Note carefully the above chart.

During the 2000 “recovery” from the Tech Wreck there was no actual recovery in GDP over 2% in the private economy.  The entirety of the rest was government fiscal support through deficit spending – that deficit never went below $500 billion annually!

The government often makes utterly-unsupportable claims about what their “deficit” actually is.  But Treasury’s own data – “Debt to the Penny” - “outs” all these off-balance sheet and off-budget programs in the end, as that which is spent must either be taxed or borrowed.

Bernanke is like the fox who herds the chickens into the yard, then blocks the exit with his gaping maw. 

Having created the conditions for government to blow money like no tomorrow, and in fact goading government to do so in previous testimony before Congress (anyone remember the ”fiscal has to do its part” speeches?) he now comes to Congress and warns them to cut the crap – after goading them into committing the sin in the first place.

Bernanke has to know that withdrawing the federal deficit spending will expose the 10% annual compounded GDP gap.  It cannot be otherwise.  There is such a monstrous gap between private final demand the published figures (approximately 20% now top-to-bottom from 2007!) that it cannot avoid being both dramatic and destructive when that subsidy disappears.

And disappear it will – either by Congressional action or by the market forcing withdrawal, as is now occurring in Greece.

The misdirection here is that Bernanke is trying to avoid being tagged as the cause of the GDP “correction” that will inevitably follow withdrawal of that support. 

And note: In Bernanke’s testimony today, under questioning, he specifically said that we cannot inflate out of the mess due to indexing of off-sheet liabilities – Social Security and Medicare (told ‘ya so – again!)

Yet it was Bernanke himself who pushed the government to engage in this path of action in the first place, claiming that it was “essential.”

Bernanke is relying on Americans having the memory of a mouse, being too self-absorbed in American Idol to remember that it was he who demanded the federal fiscal irresponsibility in the first place.

The Invisible Recovery – 40,000,000 Americans Receiving Food Stamp Assistance – Since 2000 23 Million Americans have been added to the Food Assistance Program.

Posted by mybudget360

The latest food stamp data for January of 2010 shows that 39,430,724 Americans are receiving food stamps or are part of the supplemental nutritional assistance program (SNAP).  If you make the acronym and name long enough and with a neutral undertone average Americans won’t fret that 40 million of their fellow neighbors are one government debit card away from being unable to eat.  Yet this is the new corporate funded recovery and somehow things don’t seem to be improving for the middle class and definitely not for those at the lower rung of the socio-economic ladder.  In fact, we may have more than 40 million on food assistance today.  Since the start of the recession in December of 2007, we’ve added on average 474,000 people each month to SNAP.  Since the data lags a bit and we only have January 2010 data, it is likely we now have between 40 million and 41 million Americans on food assistance.

There is little to doubt where the trend is heading.  Even from 2000, this number has been increasing showing that the supposed boom was nothing more than smoke and mirrors fueled by Wall Street debt:

Source:  Food and Nutrition Service

You’ll notice that starting in 2000, the number of people on SNAP has gone up exponentially.  Last year the government provided $53 billion in food assistance (compare this to $17 billion in 2000, a tripling of cost in a decade).  Most of these Americans do not want to be on food assistance.  If anything, the above chart is a clear indicator of how the economy is feeling for millions outside of the Wall Street boom.  When we hear about thousands of people lining up at Wal-Mart just before midnight so they can enter and shop with their newly charged debit card, we know that something is amiss between Main Street and Wall Street.

Now some people would argue with the cost.  But $53 billion going to 40 million Americans makes more sense than giving a handout to Goldman Sachs just so they can increase their bonus pool.  Plus $53 billion is a drop in the bucket compared to the $13 trillion given to Wall Street.  You also have to remember that most of this money is being spent right back into the economy.  It isn’t like these folks are using the funds to pay for their Manhattan apartment or go purchase another yacht with the name of “Big Spender.”  On Wall Street all is well even though we are adding nearly a half million Americans each month to the food assistance program.  Apparently an economic recovery means a booming economy for everyone but the poor and middle class.

Since more and more Americans now use “food stamps” more stores are changing to adapt to this new economic reality:

“(Consumerist) We’re going to have to start offering tips for shopping with food stamps now that a record number of consumers —and stores— are using them.

EBT use has increased 20% from last year and formerly reluctant retailers like Costco are getting in on the action.

The cards are so “popular” that some retailers are crediting them with their “success” in the current economy.”

This is a large reason why stores like Wal-Mart have seen better performance during the recession.  You might not go to Circuit City (now gone) to buy a surround sound system but you’ll definitely go shopping for food for your family.  I’m not sure how we can say we are in a recovery with 40 million Americans on food assistance.

And of course, this is only the other end of the employment equation.  We have 16.9 percent of our population that is underemployed.  And many of the working poor are dealing with smaller paychecks but with higher taxes and fees thanks to crony banks and corrupt politicians:

“(Rolling Stone) If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff’s precincts had to be closed so that Wall Street banks could be paid.

As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. “I’d be on the phone sometimes until two in the morning,” she says. “I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I’d go to bed at night, and I’d be in tears.”

The recovery is invisible for the vast majority of Americans.  Most don’t derive their income from the Wall Street casino but from actual work.  They get their money from actually working instead of selling toxic investment products to siphon off money from the productive economy.  If we look at personal income the rate of change has fallen for decades but only this recession put us into the negative realm:

Until average Americans are protected from the Wall Street gamblers, we can expect this Brazilian split in America.  We used to have three economic classes; the poor, a large and healthy middle class, and a small elite.  Today, we are seeing the category of poor exploding while the middle class category shrinks and the wealthy remain the same but with more resources.  No wonder why this recovery is invisible to many.

Oh, So The “Recovery” Is About Delinquency?

Posted by Karl Denninger

I’ve said for a long time that one of the reasons our consumer spending numbers have been “reasonably good” the last six months or so – and have been improving – is that people haven’t been paying their mortgages.

Now comes Bank of America about to tell Congress the same thing:

Bank of America’s top mortgage executive, testifying today before Congress, will release sobering details of home-loan delinquencies, including that “hundreds of thousands of customers” haven’t made a payment in more than a year.

And, to put a number on it…

Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, or owe more than 50 percent of the value of their homes.

That’s because those 500,000 lied about their income, assets or both when they applied for the loan originally, and that deception would be discovered.

But this also means that some 250,000 of those customers have not made a payment in a year.

If we presume that these people have average mortgage payments of $1,000 a month (and this number is probably low), this amounts to $250 million monthly that is being spent in the economy but would otherwise go to mortgage payments.

Anecdotes bear these sorts of numbers out – so-called “struggling” homeowners who, despite being delinquent on their mortgage and in fact not having paid in over a year, are spending upwards of $1,500 monthly in places like Best Buy, hairdressers and tony clothing stores.

The essential conundrum is this: Eventually, one way or another, these families will have to start making payments toward housing again.  They may make those payments via their mortgage or they may be evicted and become renters but the money currently being blown on frivolities that is “propping up the economy” and leading to “strong consumer sales” is showing up there only because people are literally getting a free ride on their shelter costs.

The perversions at play here are outrageous – not only are these “homeowners” living effectively for free (and since most mortgages have escrow accounts for property taxes, those aren’t being paid either!) but in addition the banks, by not foreclosing, are holding defaulted loan paper on their books at dramatically above recovery value, thereby presenting a false view of their financial health.

Yes, the retail sales numbers this morning were good. 

But how those numbers are being generated is important.

If they’re generated off personal income, then they’re good and indicate improvement in the economy.  But if they’re being generated by people not paying their debts, and the evidence is that this is exactly where the money is coming from, then we’ve got a problem, because just as with the false economic signals sent by monstrous deficit spending this too is a false signal that will be responded to by the market with ultimately disastrous results.

The largest challenge in trying to formulate a clear view of the future is eliminating these distortions.  The “mainstream media” simply ignores these facts, pretending they don’t exist, and then looks at the raw data to draw their conclusions.  This is dangerous, even suicidal when attempting to formulate an economic view for yourself or your business, however, as these distortions are real and at some point they will disappear.

We have a new bubble ladies and gentlemen, and this one is the alleged “consumer recovery” coupled with the alleged “banking system recovery.”

Both are bogus, yet both are also intertwined; banks not foreclosing for more than a year, allowing people to live free in a house, gives the consumer faux spending power and at the same time enables the bank to claim “assets values” that in fact don’t exist. 

As with all such deceptions and the economic bubbles they produce  this game will continue until either the outright fraud is stopped by regulators or a cash flow shortfall forces recognition of the deception.

The damage when this unwinds, if it is not contained now by regulatory force, is going to be horrific.   A concurrent collapse in consumer spending and bank balance sheets will lead us directly into the vortex of another financial crisis, and with The Government having shot its wad bailing out everyone in sight and with a severely-impaired balance sheet itself, there will be no effective policy response available to stop it.

IRA Does It Again (See, Again I Told You So)

Posted by Karl Denninger