FedUpUSA

Archive for July 10th, 2011

This guy doesn’t know when to shut up, and the threats are getting threadbare:

“We need to,” the president said when asked by reporters at the start of today’s White House meeting whether a deal can be reached within the next 10 days. The president and the eight top congressional leaders met for about 75 minutes, and they made no statements afterward.

Wow, 75 minutes.  Not 74, or 76, but 75.

Am I supposed to be impressed?

Van Hollen (D-MD) said:

“We need to move forward,” Van Hollen said today on CNN’s “State of the Union” program. “If you don’t lift the debt ceiling, every economist out there said the economy will tank.”

Well, yes.  That’s called arithmetic, something you seem to be missing.

Let’s do it again:

That’s the deficit; here’s the percentage of GDP it represents:

Now here’s the problem.  GDP is defined as C (consumption) + I (investment) + G (government spending) + (x [exports] – i [imports])

So, if we decrease “G” (cut spending) GDP goes down.

If we increase taxes then either “C” or “I” goes down, since that which you tax someone else cannot either invest or spend.  This is arithmetic you learned in the third grade at the latest and nothing can change it.

What government was sold by the Banksters, including Bernanke, was that cranking “G” (as a deficit) up from 4% to 10% of the economy (a net increase of 6% of GDP, or about $850 billion annually) on a temporary basis (for a year or two) would “goose”, “prime”, or “kickstart” the private economy.

I said at the time it would not work, because the recession we entered was due to excessive leverage and we had spent thirty years accumulating too much debt through all segments of the economy.

The Krugmans of the world, along with the Bernankes, the Christine Romers and others said I was full of crap.  Congress and The Administration listened to them and followed their prescriptions.

We now know factually that they were wrong; the consumer has not taken the baton back in terms of debt acceptance and acceleration nor can he because nearly-none of his debt has been paid down or defaulted and on balance he’s far worse off employment-wise than he was in 2006.  On top of it our financial institutions are turning to ever-more creative (and bogus) ways to avoid recognizing their losses. 

The error was that while the “pump priming” stuffed the engine full of gasoline there was no air and no spark, and thus it could not run.  The diagnoses was wrong and so was the treatment.

Now we’re faced with the reality: The Federal Government is up against its borrowing capacity.

Can Congress increase that capacity?  Sure.  But will that fix anything?  No, it will simply make it worse.  Eventually the international community will give up and start driving up our borrowing costs, and then we’re really screwed.  If rates were to rise simply to a blended 5% we would pay over $700 billion in interest, out of roughly $2.1 trillion in collected tax revenues, or one third of every dollar taxed.

We won’t get there; long before that point is reached the market will go nuts much as it did in Greece, Ireland, and now Italy.

We must accept that the distortions put into the economy over the last 30 years have to come out. Yes, the economy is going to tank.  That’s inevitable; we’re choosing between “tank” and “collapse”, with the latter coming if we don’t stop playing games.

Federal Spending has to be cut by one third or more.  This cannot be done without major changes to Medicare and Medicaid along with huge cuts in discretionary programs and a serious re-think and re-purposing in our “security” profile.  In turn fixing Medicare and Medicaid cannot happen other than by simply throwing people off without major changes to how medical care is provided and funded in this country.  I have written on this extensively – the cost-shifting and other anticompetitive practices of the medical and insurance industries along with the “freebie” handouts, especially to illegal immigrants, must stop now.

There is no solution that both keeps Medicare and Medicaid and does not address these fundamental issues.  You cannot have medical devices and drugs that cost 2, 5 or 10x as much here in the US as they do in Canada, Germany and England without having a medical system that spends twice as much as a percentage of GDP as Canada, Germany and England.  Removing these distortions will mean that some care will become unavailable to most people and that we will be forced to accept our mortality. Yes, this will also mean that the “C” and “G” numbers will contract as medical care as a percentage of GDP goes down.

Finally, we must stop with the “Free Trade” crap that is in fact not “free trade.”  It’s one-way exploitation that has nothing to do with “free” anything.  All we’ve done with this game is drive asset bubbles in the multinational corporation stock prices through unrealistic and unsustainable “profit margins” in that the ultimate consumer of the products and services here in the United States has been replacing earnings power with more and more debt to continue to buy that which he cannot afford.  Henry Ford figured this out a long time and yet we still have American companies and politicians trying to pretend his premise was incorrect.

It wasn’t.

There is no escaping arithmetic folks.  Bohner and McConnell know this and so does Obama.  So does Pelosi and Reid.  All know full well that any actual fix to deficit accumulation means that GDP will of necessity contract.  Driving deficits from almost 12% of GDP to a 3% surplus, which we desperately need to do over the next three to five years, means that GDP will of necessity contract enough to call this a “Depression.”

Bernanke, Obama, Geithner and others all claim they managed to avoid one.  They did no such thing.  They lied and put in place temporary machinations to avoid recognizing reality that we now know factually did not work, exactly as a few including myself – and only a few – predicted would fail.

The lies and scams must stop now.  If what has infested Europe comes here, and it will if we do not come to our senses, we will not be talking about the economy “tanking” – we will instead be talking about a collapse.

I have quoted at length in past letters from Ken Rogoff and Carmen Reinhart’s masterful work, This Time is Different. While the market may have been surprised by such a low jobs number, it is PRECISELY what is typical following a credit crisis, as they demonstrate in their book.

And now the Fed is done with QE2 (except that they will take the mortgage roll-off from their portfolio and use it to buy treasuries), and the fiscal authorities are going to put the brakes on government spending, or at least slow things down.

Everything is very fluid, but the headlines in today’s Wall Street Journal suggest a deal on the order of $4 trillion in on the table. I assume it will be back-loaded, but it is a start. But assume that the first year sees real spending cuts of $200 billion. That is a reduction of 1.5% in GDP. It’s that pesky old equation I keep using:

GDP = C (total consumption) + I (Investments) + G (government Spending) + net exports Now, the literature suggests that the effect on the economy from a reduction in G should be over within about 4 quarters, on average. But then we reduce “G” again the next year. Maybe not by as much overall, but at least by another $50-100 billion. This is going to put a real headwind in the face of economic growth for years, but we simply have to do it or we become Greece.

The economy will already be slowing down. A recession in 2012 is a real possibility if there is any type of shock coming from Europe, and what will happen there is anyone’s guess. I think most European leaders are basing their thinking more on hope than on reality. When Greece defaults there will be a domino effect; you can count on it. And you could actually see a banking crisis before we get actual sovereign defaults.

Gentle reader, you need to understand that the market does not get it. Neither in Europe nor in the US. When someone says the market has already priced in a default, go back and ask them how well the market priced in a crisis in the spring of 2008. The market doesn’t know jack.

I got a lot of internet buzz from a throwaway line in an interview on CNBC in London. I said that if the market knew what Bernanke and the leadership of the central banks talked about after their third glass of wine, the market would wet its pants. That is not to suggest I don’t think Bernanke or Trichet can hold their liquor. It means that they get the problem more than they let on in public and are simply trying to stem as much damage as they can.

Banking crises are followed by credit crises by 2-3 years. It is getting close to that time. We need 3-3.5% GDP growth in the US to really make a dent in jobs. We are not going to get it. There is nothing we can do other than Muddle Through as best we can. Prepare accordingly.

Read the full report PDF.