FedUpUSA

Archive for January 15th, 2011

The other day, in my post “The Lull Before the Storm”, I mentioned that for fiscal year 2011, the Federal Reserve would be purchasing over 60% of the Federal government deficit.

Literally.

In other words, the Fed would be dancing the Monetization Waltz, just like Latin American countries used to back in the 1970’s: Proof positive that America is indeed a banana republic—only with nukes.

A lot of people didn’t believe me—or wanted me to check my figures. Or wanted to know if I was having an acid flashback from those aformentioned 1970’s. A lot of people couldn’t believe it.

Mark Twain said it best: There are lies, damned lies, and statistics. If you want to deceive your audience, you source your numbers from some shifty salesman with an ideological ax to grind, gussy it up with percentage signs and charts and graphs, and thereby “prove” any damned foolishness you like.

But deceit in this context serves no purpose: It’s in all of our best interests to know exactly what is going on, in fiscal year 2011. 

So in this brief post (yes I know—shocker), I’m gonna check the figures for my observation—but I’m gonna get ‘em right from the horse’s mouth: From the White House, and from the Federal Reserve. 

To begin—

White House FY 2011 Budget Deficit Projection

The 2011 fiscal year runs from October 1, 2010, to September 30, 2011. According to the White House’s budget, the budget defict for that period will be $1.267 trillion. Source is here, on the second page of the document (which is marked as page 146).

This does not include the extension of the Bush tax cuts.

Federal Reserve Treasury Bond Purchases via QE-lite and QE-2

According to the Federal Reserve in its August 10, 2010, announcement, the excedent from the mortgage backed securities and other assets that the Fed purchased as part of QE-1 back in 2008–‘09, started to be reinvested in Treasury bonds starting in August of 2010. This is what is known as QE-lite. Source is here.

The Fed is notoriously shifty as to the exact composition of its balance sheet. Credible source estimate that QE-lite will be between $200 and $300 billion in the year starting in August 2010. Sources for this estimate are here, here and here. No one seriously doubts this range of figures.

QE-lite purchases would have totalled between $16.7 billion and $25 billion per month. Excluding the months of August and September 2010 (which are not part of FY 2011), total QE-lite from October 1, 2010, to August 30, 2011, when the policy by the Fed’s own announcement is supposed to end, will have been between $167 and $275 billion.

Please keep in mind what QE-lite is and is not: QE-lite is reinvestment of excedent—it is not money printing. But this money that can be reinvested originated in QE-1, since this was how the MBS were purchased by the Fed in the first place—and QE-1 was money printing.

So some people might reasonably argue that QE-lite in fact is monetization, while others could reasonably argue that it is not monetization.

All can agree, however, that QE-lite will help the Treasury Department finance the U.S. Federal government deficit, because that’s what the Federal Reserve is going to do with QE-lite—buy up Treasury bonds.

For this discussion, that’s all that matters.

Now with regards QE-2: According to the Federal Reserve’s own statement of November 2010, Quantitative Easing-2 will be $600 billion over eight months, starting in November 2010 and ending in June 2011—firmly in FY 2011. And unlike with QE-lite, the Fed outright said exactly how much it would purchase for QE-2—$600 billion over eight months. Source is here.

The language of the statement left the door open for further Treasury bond purchases by the Fed beyond its self-imposed $600 billion limit. But for the purposes of this discussion, let’s ignore that possibility, and simply take the Fed’s statement at face value: $600 billion, and no more.

Now, QE-2 is monetization—indisputably: It is the creation of fiat money out of thin air, in order to finance the government’s expenditures. It is the very definition of monetization.

Application of Basic Math

Taking the last first, QE-2 represents a direct monetization of just shy of half of the Federal government’s deficit for 2011. The math is: $600 billion divided by $1.267 trillion equals 0.4736.

In other words, 47.36% of the Federal government’s deficit for fiscal year 2011 will be financed through the creation of money by the Federal Reserve.

As to QE-lite, if you take the conservative figure of $200 billion for the total August 2010 to August 2011 period, and exclude the first two months (since they’re not part of the fiscal year 2011), you get $167 billion of total Treasury bond purchases by the Federal Reserve during fiscal year 2011, as part of QE-lite.

Again, basic math applied on the $1.267 trillion deficit gives us a percentage of 13.15%. If we use the $300 billion figure for QE-lite, exclude the months of August and September 2010 as before, and divide it by the $1.267 trillion deficit, we arrive at 19.73%.

So conservatively speaking, the Federal Reserve will directly finance no less than 60.51% of the U.S. Federal government’s deficit for fiscal year 2011. That figure might be as high as 67.09%, depending on the size of QE-lite.

These are the official numbers—as promised, none of these are dodgy numbers from the disreputable sources ax-grinders like to use. These numbers are straight from the horse’s mouth: The White House, and the Federal Reserve.

Verbose Conclusion

With a single market participant buying up at minimum 60% of new issuance, the conclusion is obvious: The Treasury bond market is Bernanke’s bitch. His pimp hand is all over that ho’—and she be doin’ whatever Benny the Pimp wants her to do, as often as he wants her to do it.

Therefore, since Treasury bond yields during FY 2011 will be whatever the Fed wants them to be, they are no longer a reliable indicator of anything.

Quite the contrary, the bond markets will mask problems of the underlying economy until they are insurmountable.

This shouldn’t be a controversial observation: A single market participant that is purchasing 60% or more of a market owns that market. So anything that that market ordinarily signaled—be it risk, instability, whatever—is now no longer the case. The only thing that market will reflect is whatever fixed idea the Market Pimp will want it to reflect.

Therefore, since any problem that the Treasury bond market might ordinarily reflect will be masked until the very last minute, watching that market for signs of the health of the wider economy will only distract from what is actually happening in the wider economy.

Succinct Conclusion

The Treasury bond market is like a concrete highway over a sinkhole: You won’t realize anything is amiss, until the road suddenly disappears.

Like this—

GonzaloLira

“Throughout the country, 90 percent of cities and states are going to go bankrupt within the next five years, many of them sooner.” So says former Los Angeles Mayor Richard Riordan.

Reason.tv’s Tim Cavanaugh sat down with Riordan to discuss state and local budget crises, public-sector unions, and why Riordan recently became a fan of current LA Mayor Antonio Villaraigosa.

Approximately 9.40 minutes.

The last of the BEA GDP reports issued during 2010 indicated that the “real final sales of domestic product” were growing at an anemic 0.9% rate during both the second and third quarters of 2010. This number is calculated by reducing the headline GDP number by the net amount of goods being added to manufacturing inventories (and therefore not being sold to end consumers). Their characterization of the number as the “real final sales” within the economy is telling, and a 0.9% annualized growth rate over the course of the six middle months of the year is statistically indistinguishable from a dead flat economy.

However mediocre that growth may have been, at the end of 2010 the data that we track was materially weaker. The on-line consumers that we track still appear to be reluctant to take on new debt, and they remain cautious in their expectations for the economy in 2011. The heavily reported increases in holiday spending came primarily from reductions in personal savings rates, and that holiday “feel-good” spending may ultimately turn out to be merely brought forward from the first quarter of 2011 — similar to holiday dietary indulgences preceding fervently resolved first quarter diets. In any event, the consumers that we track are still contracting their year-over-year discretionary durable goods purchases at levels that indicate that something is still seriously amiss in this economy.

A look at our Contraction Watch shows that our Daily Growth Index remained in year-over-year contraction from the middle of January through the end of the year:

(Click on chart for fuller resolution)

In the above chart the day-by-day courses of the 2008 and 2010 contractions in our Daily Growth Index are plotted in a superimposed manner with the plots aligned on the left margin at the first day during each event that our Daily Growth Index went negative. The plots then progress day-by-day to the right, tracing out the changes in the daily rate of contraction in consumer demand for the two events. The 2010 contraction event is now very nearly a year old, dating back to January 15, 2010. Although the chart clearly bottomed at about 9 months into the contraction (at roughly 270 days), the rise since that bottom has been neither steady nor substantial. In fact, there is no way to forecast when the indicated contraction will end based solely on the recent course of the blue line.

Frankly, our greatest disappointment in 2010 was how even the feeble 0.9% growth rates of “real final sales of domestic product” during the second and third quarters began to diverge significantly from the much weaker data that we track. The divergences started in the second quarter and widened during the third — with early consensus expectations for the fourth quarter of 2010 pointing to divergences that likely continued through the end of the year.

We have taken from this experience a number of key lessons. These lessons have helped us understand that 2010 was a year of extraordinary distortions in the sources of economic growth in the U.S. economy. Even though it was the fourth consecutive year of unprecedented governmental intervention in the economy, this time the interventions were not targeted exclusively at rescuing financial institutions, auto makers and the housing market. By the second quarter of 2010 the full impact of both a wide range of stimulus spending and the defacto devaluation of the dollar was supplanting the consumer as the primary (and traditional) source of economic growth in the U.S. economy.

The shift to non-consumer sources of economic growth was clearly not the sole reason for the divergence between our indexes and the commonly reported measurements of the economy. By the third quarter we began to understand that the demographics of the consumers most likely to buy on-line were the same as those households most severely impacted by the recession. Unwittingly, some of the previously identified sampling biases in our data collection methodologies turned out to be much more significant than we might have suspected. Simply put, young and highly educated members of generations “X” and “Y” were particularly vulnerable to the hallmarks of this recession: entry level job losses and vanishing home equity.

Reflecting back on 2010, we can offer a number of observations directly from our data:

GDP growth rates can be significantly impacted by non-consumer line items. Manufacturers building inventory, export growth, increased governmental spending and (counter-intuitively) consumer cut-backs on imported goods have all increased the GDP during portions of 2010 even as “real final” consumer commerce remained relatively flat.

This recession was not a shared experience. Some consumers were especially hard hit by the downturn, just as they may have been the very same demographics that benefited the most from the expansion that led up to the 2007 peak. Unfortunately, the consumers who provide the transactions that we capture appear to be disproportionately among those most severely impacted by this recession.

At year-end 2010 consumers were still cautious about the long term. In effect, the massive stimulus applied by the government during 2010 still didn’t significantly improve longer term consumer confidence. Households are still deleveraging, albeit at a moderated pace. Consumers are still reacting to their own personal (and highly localized) assessments of the employment and housing markets, and they currently see no reason to significantly change their new-found conservative behaviors.

Recession-fatigued consumers can self-medicate with holiday spending while still adhering to long term outlooks. December consumer confidence surveys clearly indicate that consumers are not yet convinced that the “recovery” is real or sustainable. A corollary to that observation is that retail sales surveys can be a misleading indication of the quality of commerce.

We can also offer some other general economic observations more broadly hinted at in our data:

Infrastructure spending by governments is poor way to stimulate the economy. Repaving roads is a great way to spend vast sums of money on asphalt and concrete. It is a less efficient way to create quality long term jobs, revitalize the housing market or (evidently) help the consumers we track.

Corporate earnings can be a misleading indication of the health of national commerce. Major U.S. corporations are in a privileged position in the economic food chain, with access to overseas markets, commercial paper, cheap loans, ruthless human resources departments, governmental contracts and stimulus monies. The people actually creating new jobs don’t have such access. This is the business corollary to the “not a shared experience” mentioned above — and it directly impacts the vast majority of the on-line merchants that provide the flip side of the consumer transactions we track.

In time the unemployed simply disappear. They transform into students, the underemployed, the “discouraged,” the prematurely retired or the chronically starving self-employed. Compared to the 1930′s however, a surviving second household income has often mitigated the human suffering — even as upside-down mortgages have prevented the mobility necessary to pursue elusive jobs. Many of the households caught in those binds are part of the “tech-savvy” cohort of on-line shoppers that we have tracked since 2004.

Rescuing banks does not stimulate the economy. Saving banks may be necessary to prevent economic Armageddon, but it is not sufficient (in and of itself) to ensure a self-sustaining recovery. When provided with enough taxpayer cash to be both liquid and solvent, banks will promptly act in their own self interest. And changing regulatory benchmarks and/or accounting rules only facilitates that behavior. Our data includes the impact of the housing sector on the economy, and rescuing the banks has clearly not revitalized that industry.

Ben Bernanke can’t force people to borrow money that they don’t want. And as mentioned above, he also apparently can’t force banks to lend money they would rather use for other purposes, especially if all the highly qualified borrowers don’t need any more debt. Over the past three years the Fed has discovered the limits to what “policy” can do, and the quality shift in the transactions we track indicates that our consumers still have no interest in leveraging back up.

By “feeling the economic pain” among their constituents, politicians have promised results they don’t have the means to deliver. Blame this political empowerment on Keynes, although it has certainly created a nice gig for Alan Greenspan and his successors. The problem is that now the “policy” cupboard has gone bare. Fortunately, Lincoln was right: you can’t fool all of the people all of the time. Deep down the public knows that politicians can’t really fix things — especially if gridlock is setting in. Unlike 2008, this year our data never did see a substantial uptick after the electoral “FUD” (Fear, Uncertainty and Doubt) was resolved. Our consumers seem to know that — self medicated holiday cheer aside — the macro picture isn’t going to change anytime soon.

We are in the business of collecting data about on-line consumer transactions for discretionary durable goods. We’re not going to change what we do (as some have suggested) when the GDP stops tracking our on-line consumers or when the housing market becomes irrelevant within the latest quarter of economic data. Our job will remain the publication of what we collect, however contrary that data may be. And right now that data is materially weaker than many people would like to believe.

Consumer Metrics Institute

The global economy is doomed to implosion, and here are four charts which explain why.
 
Though the complexities may appear endless, the global economy’s coming implosion is really fairly easy to understand: here are four charts which do the heavy lifting. It boils down to these basics:

1. When money is dear and difficult to borrow, then productivity and capital accumulation are encouraged, speculation, malinvestment and debt-based consumption are discouraged.

2. When money is “free” (zero-interest rate policy) and liquidity is unlimited, then the opposite conditions hold: speculation in risk assets, malinvestment and debt-based consumption are all encouraged, and productivity and capital accumulation are heavily discouraged.

3. When debts exceed the value of the underlying assets, the only way out of the Tyranny of Debt is to write off the debt on both the borrower and lender’s balance sheets, wiping out their capital via liquidation and bankruptcy.

4. The “extend and pretend” policy pursued by all major nations is simply transferring the impaired debt from private hands to the taxpayers (public debt), crippling the economy with higher taxes and higher debt service.

5. The Central State’s “extend and pretend” policy requires heavy borrowing every year to prop up the status quo, pushing the Central State (or equivalent, i.e. the Eurozone) into an inescapable double-bind: either continue increasing public debt and cripple the economy with high taxes and high public-debt servicing costs, or let the financial status quo of “profits are private, losses are public” implode.

The first path leads to default, as the Tyranny of Debt cannot be masked for long, while the second path wipes out the Financial Power Elite which feeds the politicians.

Here are the charts. Note how the speculative economy created the illusion of rising wealth for the bottom 90%, an illusion stripped away by the Default Economy.

In essence, the Financial Power Elites profited immensely from creating this illusory wealth which gave the bottom 90% the false sensation that their declining earnings and purchasing power were being offset by the “magic” of asset bubbles.

Then, when the bubble popped, the Financial Power Elites transferred the impaired assets to the taxpayers, a process which is still underway. The politicos of both parties are complicit; behind the simulacra of toothless “reforms,” this process proceeds in myriad ways (Bank of America transferring toxic debt to Fannie/Freddie, etc.) Behind the smokescreen of conjuring a “wealth effect” to foster more consumption, the Fed’s purchase of Treasuries (QE2) serves this transfer-of-debt-to-the-public process.

This same process is playing out throughout the global economy: Greece, Ireland, the U.S., and eventually, in China when its monumental property bubble pops.

Of Two Minds

SIGTARP: Citibank Was About To Fail, But How About Now?