FedUpUSA

Archive for December 2nd, 2011

 
A Bloomberg report reveals that the U.S. government loaned banks $7.7 trillion in secret bailout funds at no interest and then borrowed the money back at interest.
 

What do 1637, 1873, 1929, 2000 and 2007 have in common? Why has our economy refused to recover after the 2007 housing market implosion? Is there some sort of simple solution, or even a means of protecting oneself from the ongoing stress in the labor and financial markets when your neighbor loses half the value in his 401k and you receive a pink slip with your paycheck?

Throughout history it is the serial and intentional abuse of financial markets and the unholy alliances that are formed between banking and governments that lead to the worst economic catastrophes.

“Irrational exuberance” is often given the blame, but intentional distortion of factual information, such as the credit quality of a borrower, is not “irrational” — it is an active deception undertaken for profit.

Governments are driven by the same sort of mentality as are private businesses when it comes to willful blindness or outright false statements of fact. It is very convenient for a government to borrow and spend just a few more dollars than they manage to tax from their citizens, satiating their demand for services of all sorts, just as it is convenient for a household to borrow against alleged home equity so as to be able to live a lifestyle that is unsupported by its earnings power. Financial deceptions tend to start small and are justified as being temporary or trivial, especially when they support the holy grail of all economies — growth.

But arithmetic does not care about politics or the personal ethics of politicians, businesspeople or homeowners. The fundamental nature of compounding is often cited as the “most powerful factor working in your favor” when you save and invest, yet that same nature makes fiscal deficits, no matter where they exist, a dangerous drug that addicts with its siren song and then bites back with vicious yet unavoidable consequence.

“Throughout history it is the serial and intentional abuse of financial markets and the unholy alliances that are formed between banking and governments that lead to the worst economic catastrophes.”

Karl Denninger Author, “Leverage”

America has a 30 year record of addiction in this regard. From 1980 until the collapse in 2008 there was not one three month period where growth in GDP exceeded that in total systemic debt. We thus generated alleged growth in our economy that was factually false over a 30 year period and built into our economy false signals of demand. The mathematical laws governing exponential growth made certain the outcome of 2007, where we reached more than 6 dollars of additional debt for each dollar of added GDP, just before the subprime crisis led to the near-collapse of our banking and financial systems. Unfortunately rather than both allowing those who made imprudent bets to fail while holding the people who intentionally misled to account we bailed out the institutions that knowingly took dangerous bets under the rubric of systemic risk but left the market to ravage the common American.

“Leverage” is about these abuses and their impact on real people. It chronicles the abuse of debt financing and fiscal deficits while demonstrating the fundamental mathematical relationships that underlie all financial systems and cannot be avoided.

You can read dozens of books on the 2008 collapse and the incestuous interconnectivity between big business, finance and the political system, but most remain within their narrative focusing on the bad actors or try to provide a guide for personal protection of one’s assets from what appears to be certain economic calamity to come.

“Leverage”, however, spends half of its easily-understood pages in a different endeavor: Real solutions in the political and policy space that, while unable to prevent what is mathematically inevitable, will soften the blow while realigning our nation to restore the rule of law, render banking safe and sound into the indefinite future, address our unsustainable entitlement promises, return both capital and manufacturing to our nation and provide the underlying and necessary energy resources that America needs for a vibrant economy.

Karl Denninger founded The Market Ticker®, a blog dedicated to uncovering market mischievousness. He is also a columnist on SeekingAlpha.com and has appeared on MSNBC, CNBC, and is a frequent guest on WBAL talk radio in Baltimore. He produces a weekly Internet radio segment on BlogTalkRadio with real-time call-ins from listeners and occasional invited guests. Karl is also one of the original founders of the Tea Party movement, and, along with FedUpUSA, launched the first financial protests related to the bailout of banking institutions after the failure and forced takeover of Bear Stearns. Previously, he was CEO of Macro Computer Solutions, and is a self-made
entrepreneur and millionaire.

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I’d take credit for a “spot on” prediction, but unfortunately it’s not that simple.  Let’s first deal with the simple — the headline.

I said +125k +/- 50, and the actual number was +120k.

The unemployment rate fell by 0.4 percentage point to 8.6 percent in November, and nonfarm payroll employment rose by 120,000, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in retail trade, leisure and hospitality, professional and business services, and health care.  Government employment continued to trend down.

Heh, not bad; I pretty much nailed it.  So I can go home with a feather in my cap, right?

Unfortunately not.

There’s a fairly serious problem with the numbers, and it’s not in the headline — it’s in the only number that matters from a fiscal perspective for the government — and there, it’s bad news.  Even worse, there is some real serious misdirection going on in here, me thinks.

Let’s do the charts:

Heh wait a second…. that monthly line (blue dashed) shows a flat to small decline in employment!  How’s that possible?  Let’s look at the “not in labor force” numbers:

So those not in labor force aren’t re-entering the labor force.  That’s not so good; remember that you need about 125,000 people to find jobs a month to keep up with the population.

This led to the following “big picture” chart:

That’s the labor participation rate which is all that matters for the ability of government to collect taxes — since all taxes are paid by people, and if you’re not working, you’re not paying taxes.

And that number, my friends, is down on the month.

Not by a lot, but down.

So what we have here is a report that is nowhere near as strong as it appears.

PS: The original version of this post called the report an outright fabrication.  The BLS site went unavailable for nearly an hour from the time I picked up the figures until I posted the Ticker, and when it was available again the figures were in different places.  Among other things the original data showed a decrease in population, and not a small one either.  I have updated the graphs above from the now-available data tables.  Whether this was an error in their table or in my original pick-up I cannot determine at this point as I did not save the original copy off to local disk.  In any event the report is not strong on a monthly basis and the lack of recovery in the employment rate bodes ill for the ability of the government to continue to spend, which is the “big picture” argument I’ve made since I began this series of reports.

The student loan racket – For-profit enrollment growth surged by 225 percent in last decade.  For-profits live off the 85 percent of revenues they receive from the government and filter out to their Wall Street owners.

The loud commotion you hear rattling the global economy is the massive debt bubble imploding.  A few notable economists have stated that too much debt is reached simply when the public acknowledges that there is too much debt.  To this point the public is now waking up to the reality that too much debt is being taken on for higher education.  Where there is money to be made you now have Wall Street and the government walking hand and hand smiling to fleece the American student without producing any measurable increase in value.  With a web of connections and political pay for play we now have a giant bubble that is causing financially disastrous results for many young Americans walking out with diploma in hand and a massive albatross of debt securely wrapped around their bare wallets.  With youth unemployment rivaling those of third world nations we are starting to see cracks in the current system.  It seems that the $1 trillion mark with student debt might have been a tipping point.

The circle of student debt life

To understand the convoluted scheme of higher education it is useful to see the massive expansion in for-profit institutions:

Source:  Senator Harkin

From 1998 to 2008 the growth of enrollments at for-profits has surged by 225 percent.  Many of these institutions are one step above paper mills and largely provide little value added to students that attend.  Many of the for-profits also market and target heavily lower income Americans.  So who is paying for this?  Step in the federal government:

The life blood running through the veins of the for-profits comes from you guessed it, the Federal Government.  In 2009 for-profits pulled in revenues from one source primarily.  Over 85 percent of revenues to these institutions derived from the government (aka the American taxpayer).  It would be one thing if these schools were producing solid results but they are doing everything but producing results.  Take a look at default rates:

The above chart only goes by generous measures of defaults.  If we look at longer term cohort default models we start seeing default rates soaring into the 40 to 50 percent range.  This student loan bubble is popping because of the lack of quality and infusion of for-profits merely ripping students off.  Yet someone is making money here.  The government is merely a funnel of taxpayer money into select Wall Street institutions……

Read the rest at My Budget 360