FedUpUSA

Archive for June, 2010

By Karl Denninger

The middle class has been systematically shackled by large amounts of debt, banking debt to be exact in a new form of financial serfdom.  Much of this started in the early 1970s on par with the deficits don’t matter policy that engulfed our monetary policy for the next four decades.  Like any giant structure built on debt, there is usually a point where a sort of debtor’s spiral will hit.  Many middle class Americans have seen this occur with their credit card debt, mortgages, and auto loans.  This also comes at a time when we have a record amount of two (or more) income households.  More people are working under one roof but earning less and less in low paying service sector jobs.  If it wasn’t for the two income trap, we’d see how shackled the public is to the banking debt that is so pervasive in America.

This amount of debt will cripple any recovery.  Take a look at the current trap:

Source:  CNN

You can see how with even two breadwinners, many families are merely running fast enough to stay on the middle class treadmill.  Lose one job like many millions of Americans are and the semblance of any middle class lifestyle is now gone.  That is why we have 40 million Americans receiving food assistance and stories of people waiting at midnight at Wal-Mart during the end of the month for food purchases as their debit cards are refilled with government funds.  You have to ask where these funds come from.  The U.S. Treasury and Federal Reserve have bailed out everything in their line of vision including trillions of dollars to the banking system.  Is it any wonder why foreclosures and bankruptcies are near peak levels?  It is a carte blanche insolvency.

This massive growth in debt can be seen rather clearly starting in the 1970s:

But if we want to break down the debt even further, we can put the debt into smaller categories:

Add up the above sectors and you will find that the U.S. has $45 trillion in total outstanding debt!  The household sector carries roughly $13 trillion of this but I think there is a misnomer when delineating between household debt and also, government debt.  What is the government if not the aggregate of all the people in the nation?  Who will carry the cost of all this debt going forward?  If you want to try some troubling hypothetical scenarios try figuring out how long it will take us to pay off $45 trillion.  It will never happen.

How heavy are the debt shackles for Americans?  Let us simply look at the U.S. household debt sector that includes mortgage debt, student loans, auto loans, and credit cards.

Total U.S. households 113,000,000 /  $12.77 trillion household debt = $113,000 average debt for each household

Now the above is a stunning figure.  The median household income in the U.S. is roughly $52,000 so each household would have to put 100 percent of their gross income for two years to pay off their share of the household sector debt.  If we run the numbers for the above $45 trillion the figure is simply daunting:

Total U.S. households 113,000,000 /  $45.65 trillion in multiple sectors of debt = $403,000 average debt for each household

Now debt in itself isn’t necessarily bad.  Yet when you rely on debt for the primary engine to move the economy that is when problems begin to arise.  The two income trap for middle class Americans has been softened by the use of debt:

The single-income family in the early 1970s had more financial stability and wealth than the current middle class family that has a large part of their income going to servicing large amounts of debt.  This all came to a boiling point with the housing bubble.

Middle class Americans are now taking on the brunt of this current correction while the banking sector seems protected from any outside influence.  Banks can still suspend mark to market accounting while any middle class household that tries this will be foreclosed on or see their credit rating slashed.  Imagine if you had the ability to value your assets as you saw fit at hyper inflated levels.  Also imagine that you had the ability to borrow what would seem like an unlimited amount of money at zero percent from the Federal Reserve.  Life would be better but you are no part of the banking elite so you have to operate in a world that is governed by artificial market forces.  The debt you pay to banks operates under free market rules while the debt banks take on from the government operates in an oligarchic fashion.

The middle class is quickly disappearing.  It doesn’t seem like any political party is willing to take on the battle for what is right for the nation.  Piecemeal type of approaches won’t have any impact on a market that is crying for radical reformation.  Instead, this crisis has actually provided a platform for the banking sector to consolidate power and really squeeze every ounce of productivity from the middle class.  The chains of debt are being tightened on the hands of the working and middle class.  The data we are seeing do not show any reversal of this trend.

My Budget360

By Karl Denninger

By Satyajit Das

Central banks cut interest rates, governments provided cheap money giving only the illusion of recovery and a normal functioning economy. But the year of wishful thinking is over.

A Year of Wishful Thinking

The period from March 2009 was the year of wishful thinking. Central banks cut interest rates and governments opened their checkbooks, providing a flood of cheap money that gave the illusion of recovery and a normal functioning economy. By pouring a lot of water into a bucket with a large hole, the world sustained the impression that the receptacle was almost full. As Norman Cousins, an American political journalist, noted: “Hope is independent of the apparatus of logic.”

Governments merely transferred the debt from private sector balance sheets onto public balance sheets. The Global Financial Crisis (GFC) has morphed into a Global Sovereign Crisis (GSC) as sovereign governments now face difficulty in raising money.

Stock markets and asset prices have tumbled. Money markets are exhibiting an anxiety not seen since late 2008/early 2009. The year of wishful thinking has run its course.

Cradle of Debt

If sub-prime was the Patient Zero of the GFC, then Greece, the cradle of Western civilization, was the equivalent of the GSC. As historian Arnold Toynbee observed: “An autopsy of history would show that all great nations commit suicide.”

Greece’s significance is not its economic size (around 0.5% of global GDP (Gross Domestic Product)) but its significant debts. Profligate public spending, a large public sector, generous welfare systems — particularly for public servants — low productivity, an inadequate tax base, rampant corruption, and successive poor governments were responsible for the parlous state of public finances.

Several events focused attention on the problems. Greece needed to borrow around Euro 50 billion in 2010 to refinance maturing debt and fund its budget deficit. There were damaging disclosures that Greece, like many other European countries, had used derivatives to manipulate its debt figures. Greece bungled attempts to mask its increasing difficulties in refinancing maturing debt, including statements about a large purchase by China of its debt which was denied by the supposed buyer.

The revelations focused attention on underlying problems setting off alarm bells. Smelling blood in the water, markets pushed up the cost of Greek debt. The Greek stock market fell sharply by around 30%. Gradually, the ability of the country, as well as Greek banks and companies, to raise money ground to a halt.

Greece was also the “canary in the coal mine”, highlighting similar problems in the PIGS (Portugal, Ireland, Greece, and Spain) as well as some Eastern European countries. These countries alone have around Euro 2 trillion of debt outstanding. Larger countries — the FIBS (France, Italy, Britain, and the States) — also have similar problems of large public debt, unsustainable budget deficits, and (in most cases) unfavorable current account deficits (both in absolute terms and relative to GDP).

Going Nuclear

Will Durant, an American historian, advised that: “One of the lessons of history is that nothing is often a good thing to do and always a clever thing to say.” Initially, European politicians and bureaucrats, who suffer from delusions of adequacy, did nothing, but wouldn’t shut up about it. The oft repeated battle cry was “no default, no bailout, no exit.” Germany remained especially hostile to any financial bailout. Repeated invocations of the no-bailout clause underlying the eurozone drew attention to the risks of Greece’s debt.The major problem was contagion — the consequences if Greece was to unable to raise money from commercial sources. Much of Greece’s debt is owed to investors outside the country, mainly banks and investors in other European countries. If Greece defaulted on this debt, then the resulting losses would have serious consequences for the affected banks and banking systems. Countries, such as Portugal, Spain and Ireland, with similar economic problems would inevitably be scrutinized and targeted.

By February 2010, the need for coordinated action by the eurozone countries and the European Union (EU) was evident. While pledging eternal support, the EU postponed action, waiting for Greece to agree to an austerity program to remedy its finances. The cause of European unity wasn’t served by attacks by George Papandreou, the Greek Prime Minister, that the EU was creating a “psychology of looming collapse” and making Greece “a laboratory animal in the battle between Europe and the markets.”

In April 2010, as the market for Greek debt worsened (the additional interest rate that Greece had to pay reached 8.00% p.a. over that paid by Germany), after considerable prevarication, the EU proposed a highly conditional euro 30 billion rescue package. The Haiku writing, Belgian, Herman Van Rompuy, President of the European Council, hoped “it will reassure all the holders of Greek bonds that the eurozone will never let Greece fail … If there were any danger, the other members of the eurozone would intervene.”

Markets considered the proposal inadequate and unlikely to avoid a Greek default. Increasingly desperate as circumstances began to rapidly spiral out of control, the EU increased the package in early May 2010 to Euro 110 billion, including a Euro 30 billion contribution from the International Monetary Fund (IMF) who would supervise the package and the implementation of the economic “cure.”

About a week later, continued market skepticism and increasing pressure on Portugal, Spain, and Ireland forced the EU to “go nuclear.” After months of slow and tortured discussions, the EU acted with surprising speed announcing a “stabilization fund” to the value of Euro 750 billion to support eurozone countries, including an IMF contribution of (up to) Euro 250 billion. The actions were designed in no particular order to salvage the EU, the euro and over-indebted eurozone participants by stopping contagion and further spread of the crisis.

Nicolas Sarkozy, the French President, turned the eurozone’s sovereign-debt crisis into a personal triumph. The proposal, he let it be known, was 95% French. Le Figaro led the cheerleaders reporting Sarkozy’s comment that “in Greece they call me “the savior.’ “

Struggling for a telling phrase, journalists spoke of financial “shock and awe.” A single word – “panic” — better summed up the actions. Initially, stock markets rose sharply, especially shares of banks exposed to Greece who would benefit from the rescue. The interest rates on Greek, Irish, Italian, Portuguese, and Spanish bonds fell sharply. As the announcement over the weekend caught traders unaware, the rally was driven largely by the covering of short positions.

“Shock and awe” quickly proved more shocking and less awe-inspiring than the EU had hoped. Wiser commentators mused that if Euro 750 billion wasn’t going to do the trick, then what was?

Brussels, We’re Not Receiving You

Details of the “plan” remain sketchy. The entire package conveys the impression that the EU and ECB are hopeful that the announcement will suffice to bring stability to markets and the facilities won’t ever have to be used.

A problem of too much debt was being solved with even more debt. Deeply troubled members of the eurozone were trying to bail out each other. Given that all have significant levels of existing debt, the ability to borrow additional amounts and finance the bailout remains uncertain.

The reality is that Germany, with its large pool of domestic savings, must be the cornerstone of the rescue effort. Predictably, German credit-risk margins have increased while the peripheral countries’ credit margins have fallen. The effect of the stabilization fund is that stronger countries’ balance sheets are being contaminated by the bailout. Like sharing dirty needles, the risk of infection for all has drastically increased.

Karl Dunninger, a trader, writing at www.seekingalpha.com captured the madness:
 

The most-amusing part of this is that nations seriously in debt and without a pot to piss in will be “contributing” some of the money to fund the debt. Spain, for instance, has pledged to do so. Where is Spain going to get the money from? Will they sell bonds at 8% to fund a loan at 5%? That’s a very nice idea… let’s see, we lose 3% on those deals. That ought to help Spain’s fiscal situation, don’t you think?

Solvency Not Liquidity, Stupid

At best, the plan provides temporary liquidity to cover immediate financing needs, repaying maturing debt, and financing deficit. In a striking parallel to the early stages of the GFC, the reality that it’s a “solvency” problem not a “liquidity” problem remains unacknowledged.

Most of the countries in the firing line have unsustainable levels of debt. For example, beyond 2010, Greece needs to re-finance borrowings of around 7%-12% of its GDP (around Euro 16 billion to Euro 28 billion) each year till 2014. There are significant maturing borrowings in 2011 and 2012. In addition, Greece is currently running a budget deficit (currently over 12% but projected to decrease) that must be financed. As noted above, Greece’s total borrowing, currently around Euro 270 billion (113% of GDP), is forecast to increase to around Euro 340 billion (over 150% of GDP) by 2014.

The IMF’s publicly available economic analysis that its plan assumes is that Greece is able to refinance long-term debt by early 2012 and short-term debt even earlier. Given that Greece is expected to have a total debt burden of around 150% of GDP and total interest payment of 7.5% of GDP, the ability to raise funds and the assumed 5% cost of refinancing may be optimistic.

The IMF plan calls for a program of fiscal austerity and major structural reform. This would entail a sharp reduction in the budget deficit to less than 3% of GDP and public debt under 60% of GDP. It’s unlikely that Greece, despite heroic speeches from politicians, will be able to meet these targets.

Temporary emergency funding won’t solve fundamental problems of excessive debt and a weak economy. Government expenditure will need to be slashed and taxes raised to reduce its debt. But the government is too large a part of the economy and the suggested austerity measures will most likely cause a severe recession. In turn, this will drain tax revenues and increase expenditures, making it difficult to reduce the budget deficit and funding needs.

The level of indebtedness may already be too high. Kenneth Rogoff and Carmen Reinhart in their survey of financial crises This Time Is Different argue that sovereign debt above 60-90% of GDP restrains growth. Greece’s interest payment now totals around 5% of GDP and is scheduled to rise over 8% by GDP. Rising interest costs will only worsen this problem.

The cure may not be feasible or won’t help make it easier to meet future debt obligations. Ireland has already implemented austerity measures. The government debt as a percentage of GDP has increased to 64% from 44%. The budget deficit as a percentage of GDP has doubled to 14% from 7%. The nominal GDP of the country has fallen by 18%.

The plan may also make further liquidity problems inevitable. Instead of allowing Greece to raise funds normally, the bailout package is assisting investors to reduce exposure via repayment of maturing debt and the sale of illiquid longer-term securities. The package also risks forcing other vulnerable countries to rely on the stabilization fund.

As Woody Allen once observed: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”

Minyanville

Over a third of HAMP participants have exited the program and another batch is coming up. Those leaving the program will likely end up in foreclosure. Moreover, 4 million delinquent borrowers are not even eligible for the program.

Please consider Borrowers exit troubled Obama mortgage program.

The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.

More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That’s more than the 27 percent who have managed to have their loan payments reduced to help them keep their homes.

Last month alone, 150,000 borrowers left the program — bringing the total to 436,000 who have exited since it began in March 2009. A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. “Even after the permanent modification, you’re still looking at a very high debt burden.”

HAMP Performance Report Through May 2010

Here are a couple of charts from the Making Home Affordable Program Servicer Performance Report Through May 2010.

Hamp Trials Started

Permanent Modifications

Waterfall of HAMP-Eligible Borrowers

Not all 60-day delinquent loans are eligible for HAMP. Other characteristics may preclude borrower eligibility. Based on the estimates, of the 5.7 million borrowers who were 60 days delinquent in the 1st quarter of 2010, 1.7 million borrowers are eligible for HAMP. As this represents a point-in-time snapshot of the delinquency population and estimated HAMP eligibility, we expect that more borrowers will become eligible for HAMP from now through 2012.

Only 30% of the 5.7 million borrowers who are 60 days delinquent are eligible for the program. 4 million delinquent borrowers are stuck. Of those eligible for the program, only 346,000 have completed the trial and received a permanent modification.

Many of those receiving a permanent modification will slip back into default and head for foreclosure. Many of those who successfully keep their house would be better off if they lost it.

Looking at HAMP from every angle, it’s safe to say the program was a failure and another huge wave of foreclosures is coming down the road.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Back in February 2009, the U.S. Congress passed an $862 billion “economic stimulus” bill to help the struggling American economy recover from the horrible financial crisis of 2007 and 2008.  Right now, federal agencies are spending this stimulus money at the rate of approximately 196 million dollars an hour, and they will continue to spend it in staggering amounts up until the September 30, 2010 deadline.  Unfortunately, instead of being spent on useful projects that would revitalize U.S. industry and put American workers back to work, much of this money is being flushed directly down the toilet on some of the most wasteful projects imaginable.  The truth is that nobody is better at wasting money than the U.S. government.  In fact, some of the things that the U.S. government has been spending money on are absolutely mind blowing. 

The following are just some of the examples of “stimulus waste” that we have seen over the last 16 months….   

*Florida Atlantic University in Boca Raton, Florida used $15,551 in stimulus money to pay two researchers to study how alcohol affects a mouse’s motor functions.

*The U.S. government handed over a staggering $54 million in “stimulus cash” to Connecticut’s politically-connected Mohegan Indian tribe, which runs one of the highest grossing casinos in the country.

*Syracuse professor of psychology Michael Carey received $219,000 in federal stimulus money for a study that examines the sex patterns of college women. 

*A dinner cruise company in Chicago got nearly $1 million in stimulus funds to combat terrorism.

*$233,000 in stimulus money went to the University of California at San Diego to study why Africans vote.

*The Cactus Bug Project at the University Of Florida was allocated $325,394 in stimulus funds to study the mating decisions of cactus bugs.  According to the project proposal, one of the questions that will be answered by the study is this: ”Whether males with large weapons are more or less attractive to females.”

*One Denver developer received $13 million in tax credits to construct a senior housing complex despite that fact that the same developer is being sued as a slumlord for running rodent-infested apartment buildings in the city of San Francisco.

*Sheltering Arms Senior Services was awarded a contract worth $22.3 million in stimulus money to weatherize homes for poor families in Houston, Texas - but a new report from Texas Watchdog says that the weatherization work was performed so badly that 33 of the 53 homes will need to be completely redone.

*A liberal theater in Minnesota named ”In the Heart of the Beast” (in reference to a well known quote by communist radical Che Guevara) received $100,000 for socially conscious puppet shows.

*California’s inspector general found that $1 million in stimulus funds for a program to give summer jobs to young people was improperly used for overhead expenses such as rent and utility bills.

*Landon Cox, a Duke University assistant professor of computer science, was awarded $498,000 in stimulus money to study Facebook.