FedUpUSA

Archive for January 21st, 2012

On April 1st 2007 the very first Tickers were written.  In just a bit over two months, The Market Ticker will be five years of age.

And through that time The Market Ticker has pointed out one central fact behind everything published here: You cannot spend more than you take in on an indefinite basis.

This, of course, is anathema to a nation — and a world, really — that has done exactly that for more than three decades.  Many of the citizens of the world — those under about 35 (as your first few years of life have little direct connection in a cerebral sense to economics) have never known a world where overspending and ponzi economics was not practiced.

You can’t exactly flaw people for not understanding that a thing is broken when they’ve never experienced life in any other way.  And for those who are somewhat older, those of us who remember the 1970s, the oil shocks, gas lines and 5 gallon purchase limits along with grocery store prices that seemed to double every six months (it wasn’t quite that bad — but it was bad!) it is easy to get the mistaken impression that what we’ve had for the last 30 years “fixed” what was broken in the 1970s.

It didn’t, of course.

The world had run on it a simple fraud covered in various layers of complexity to hide it from the common man, just as has been done many times before.  The 1920s were the same thing, basically, minus the computers but also minus fast information sharing.  The land swindles of the day in Florida were almost identical to the condo-flipping schemes here in the Panhandle when you boiled them all down; tiny down payments on construction not yet initiated, the promise of ever-higher valuations, carnival-style barkers spinning rags-to-riches stories and you only needed $10,000 to get in “on the ground floor” of an elevator that would take you to the sky.  Sign right here mister, and your life of luxury and privilege will begin.

Uh huh.

Last night the yarn-spinning continued on Greece.  Bloomberg said:

Greece and its private creditors said early today they had made progress during talks in Athens on a debt-swap accord needed to lower the country’s borrowings and clear the way for a second round of international aid.

“The elements of an unprecedented voluntary private-sector involvement are coming into place,” according to an e-mailed statement from Charles Dallara, managing director of the Institute of International Finance, a Washington-based lobby group representing creditors negotiating with the government.

Sure they did.  Sure Greece is going to pay debts of more than 100% of its GDP — even after the “restructuring.”  And sure this is “voluntary” — in more-or-less the same way that it’s “voluntary” that you hand over your wallet when there’s a gun up your nose.

The real problem is that people — and governments — borrowed money they couldn’t pay back off their economic surplus.  For a private-sector entity (a person or company) economic surplus is easy to define — it’s what you have left after you spend on the bare necessities of life.  When those necessities (such as your house) become part of the overborrowing then the situation appears more complex but it really isn’t — you just “upscaled” your view of what was a “necessity.”

But let’s face facts — a trashy trailer on a 100×50′ piece of rented land with utility connections is more than the “bare necessities” when it comes to housing — by a lot!  I lived in a little 400sq/ft one-bedroom apartment for a good while when I was just getting started and that was more than “bare necessities” (by a lot) for even modern comforts.  A studio would have been sufficient, since I had no dependents and was single.

The same applies to transportation.  Most people today in the United States are driving around in vehicles that have values that are two, three, five or even ten times the cost of “basic necessities” for the required task (getting to work, the grocery store, etc.)  It was in fact in the recent-enough past that I owned said vehicles that the “basic car” had an AM radio with one speaker, a manual transmission, no air conditioning, no power door locks, no power windows, no power steering, no power seats and the seat coverings were vinyl.  You could also see (and work on) all sides of the engine and the road under it when you popped the hood.

In fact, one of the pieces of said “basic transportation” that I owned in my earlier years (and drove to work every day) was one of these:

Before that I had one of these in considerably worse condition than pictured (it was gray and had a smashed-in passenger side door from a collision prior to my acquiring it for a literal cost of $100.)

THOSE were “basic transportation” and not only where they cheap to buy they cost almost-nothing to insure because there was no reason to have collision or comprehensive coverage on them!  The Vega, incidentally, consumed a quart of oil per tank of gas on good days (and worse on bad ones) along with having a habit of slowly eating coolant.  Yeah.

I’m not saying you shouldn’t own this, incidentally:

IF you can afford it without debt, and without spending more than you make.  That is, if you can pay for it using your personal economic surplus.

But recognition of these facts is rather jarring for most people.  Some of us grew up understanding it; our parents owned one car that was much nicer than the other (and was used to get to work) while the other was, literally, “basic transportation” (with no power anything and no air conditioning) if we had a second car at all.  We rode bicycles to our friend’s home rather than being carted around by “soccer moms” in no small part because driving the car cost money; the bike cost only human power.  Nice bicycles (which most of us could not afford) had 10 speeds; the more-ordinary ones that nearly all of us actually owned had coaster brakes and one speed.

Let’s put this in a slightly-different perspective.  The poverty level income for a single person in the United States today (as of 2011) is $10,890.  Many people reading this, perhaps most, spend more than 1/10th of that on their cellphone bills.  A further significant proportion of the population spends more than 1/10th of this on their cable or satellite TV bill and the overlap between the two is significant.

That is, a very significant percentage of the population spends more than a quarter of poverty level income on two luxury and entertainment items which are utterly unnecessary.

Again, none of this is a problem if you can afford it.

But what should you have paid for first?

Well, for one, a very significant financial reserve.  Your retirement, for example, never mind a cushion in case something goes wrong (like losing your job.)

With governments its equally-simple: Government gets all of its money by taxing it.

Yes, all of it.

I know, some people will say “they can print it!” or “they can borrow it!” but in fact on a long enough timeline all of that is taxed.

If the currency is debased the taxation happens immediately and hits everyone at once.  If it’s borrowed then the taxes fall on you tomorrow, assuming it’s ever paid back.  There’s no real difference, when you boil it all down, other than the immediacy of payment.

All of it, in the end, comes down to taxing you — taking your money and giving it to someone else.

That’s all government does.

This weekend dawned with the news that Greece’s creditors have walked out of their meeting.  That in and of itself is probably not all that important.  What is important, however, is the rising tide of speeches coming from various government officers in Europe recognizing that deficit spending has to end.

It’s not just there — Fed President Dennis Lockhart has said the same thing about the United States.  What was just a few lone bloggers in the wilderness a few years ago, myself included, has now turned to policy-makers inside and outside of the government itself.

At the core of this problem is the buying of votes with money that doesn’t exist.  It’s very popular to do things like that, as having the necessary adult conversation regarding the sustainable level of spending by government — and the adjustment that comes to GDP and thus overall consumption when overspending stops — tends to bring revolt at the ballot box.

But there comes a time when the political expedience of vote-buying and other chicanery simply cannot be sustained any more.  We’re within sight of that cliff, and if we do not act we will go over it.

If you remember the speeches from Bernanke in the 2008/09 time frame he counseled that we must get our budget deficit under control in the “intermediate term.”  But exactly what is “the intermediate term?”  This again leads back to the fundamental nature of exponential growth and how badly you’re screwed if you ignore it.

In 1980 the Federal Government spent $53 billion on health care all-in. Last year it was about $820 billion.  That’s a roughly 9% compounded rate of increase.

The rule of 72 says that this means the spending will double again in roughly 8 more years (2019) to $1.64 trillion, then in 8 more (2027) to $3.28 trillion, which is approximately the size of the entire federal budget today.

Obviously that won’t happen as you can’t raise that much money, but that’s exactly what our politicians are promising people over the age of 50 when they say “Medicare will not change for those over 50” as that rate of expansion simply gets you to where you qualify at age 65!  There will be two more doublings required to get you to 80 years of age, which (if it was possible) would rack that number to over $13 trillion dollars — close to the size of the entire economy today.

Bluntly: Such claims are a lie.

What’s worse is the curve when you look at government debt.  Let’s chart it:

Pick a point on that graph.  Even at the most-optimistic number — 2006 or 2007, when we were creating massive amounts of private credit to prop up an about-to-explode housing bubble — federal debt was still growing at over 6% a year.  That means it was doubling every 12 years!

In 2008 and 2009 we grew it at 15% or more a year.  That means it was doubling every 4.8 years.

Does anyone really think we’ll get away with either of those statistics given what we now know is happening in Greece and elsewhere in Europe?  Remember, Japan, which is the common poster child for this, came into their government debt binge with massive private savings — savings that have been essentially all consumed by that binge.  We never had the private savings in the first place, which means we have nothing to consume in previously-earned economic surplus!

Folks, there is not one year in the last decade during which we can point to a sustainable level of debt.  If you go back into the 1990s there were a few years during which federal debt expanded at a much-more-modest rate, but those were years during which private credit creation was expanding exponentially in place of the government (through the Internet bubble.)

There isn’t any way out of this through more government debt.  It has to stop, and stop now, because the nature of exponential growth is that the rate of damage accelerates.

If you read (again) my Ticker from 10-18 of last year, you should understand what’s going on — and what we face.  This is simply not about what I want, what I’d like, what pundits would like to do or anything of the sort.

It is about mathematical reality.

Think about exactly how much further we can expand government spending in this regard and not have the entire economy collapse around us.  Then reduce that percentage of increase to “doubling times” and you know where the wall is, in your best estimate.  Nobody who does this exercise can come up with a number that is larger than the number of fingers you have on one hand.

Look, I don’t like what taking our medicine means, and the reason I wrote Leverage was because I had gotten very tired of people saying “nobody could have seen this coming.“  In addition, there are a whole host of people who have sounded the warning horns for a while, yet they have no cogent plan to resolve the problem or help buffer the inevitable (and severe) pain that must be endured.  Some of them, including some political candidates for President this time around, understand the problem and even propose massive budget changes (e.g. $1 trillion a year in spending cuts) yet have no plan to buffer the economy and the people from what will, left alone, be a contraction in overall GDP of up to 25% and the Depression that will inevitably come with it — a Depression worse than the 1930s!  That is outrageously irresponsible and worse it will never get passed because without those buffers it is not only unnecessarily harsh but could lead to the collapse of both civil order and our government.

But irrespective of what I would like to see, or what politicians promise, this adjustment — the necessary adjustment — is coming.  It cannot be stopped.  It is mathematically certain, whether people like Bernanke, Obama, Romney and others wish to face it or not.

Your choice is whether to face these facts in your personal and economic life, preparing to the extent you’re able, or whether you will be one of those who claim that you were “blindsided” by the inevitable that you were simply unwilling to face.

The Market-Ticker

Discussion (registration required to post)

The catastrophe of our economy for the young American worker.  Average college debt higher than typical new automobile cost, annihilation of pensions, and younger Americans moving back home because of financial necessity.

The economy for young Americans might as well be in a parallel universe to the stock market run since early 2009.  Talks of recovery must fall on confused ears as many young college graduates compete for fewer jobs with higher amounts of student debt.  In the last decade college graduates have encountered the highest tuition increases ever while getting a lower return on their investment once they enter into the workforce.  The economy is still a mess if we dig into the data and look outside of the stock market gains.  Many of the S&P 500 companies added jobs globally but outsourced many domestic jobs to foreign markets to save money.  So profits increase but how does this help the domestic job market?  It doesn’t and that is why this recovery is one of low wage capitalism and banking handouts.  For the millions of young Americans that are entering the workforce with tens of thousands of dollars in student debt, what can they expect from the current economic structure?

The old and the new

The cost of living has soared across many sectors with food, healthcare, college tuition, and energy all outpacing the growth in the typical paycheck.  For these reasons including fewer jobs, young Americans are facing harder times when it comes to saving money:

Source:  CNN Money

“Ultimately we are pumping out hundreds of thousands of graduates each year that are starting with a negative net worth.”

Contrary to what is being spouted on the media, the employment market is still very weak:

Source:  Census

You have nearly two million job openings less than we did before the recession gained full steam.  Yet our population is expanding and recent graduates are entering the workforce in higher numbers.  The recent job growth is positive but the underlying data shows that many of the jobs are coming from low wage fields.  Many companies, like those in the S&P 500, are exporting jobs to other countries where they can push for lower labor costs.  The question remains, how does this benefit domestic workers?  To the point, this is more momentum when it comes to squeezing out the middle class.

Read the rest at: My Budget 360

Bluntly: Look out below.

But not necessarily right at this instant.

There are firms that are reacting well to earnings.  Intel and IBM to name two.  Then there are those that are doing “not much of anything”, like GE.

Then there’s Google, which is getting pounded today after missing on the top line, along with a few others.

When I look at the tenor of what’s been announced thus far, and the characteristics in general, what I keep feeling like is the early part of 2008.  You know how it was — we had Bear Stearns, there were rumblings of various other problems, but earnings looked mostly ok — not great, but sorta ok.  Some top-line misses were bad, but the catastrophes hadn’t happened yet.

They came though.

We come into and through this earnings season with what should be a cyclical peak in the cycle.  So far the results seem to point this way too, which tends to confirm.  Banks are mixed overall although not disastrous.

The VIX, today, is putting in a pretty solid sell setup.  This doesn’t mean that a big decline is imminent, but it is a cautionary flag.  Assuming it closes where it is now (and it looks like it will) then all we need is a modest sell-off to trigger the signal.  The challenge comes from the potential for that signal to arrive along with the selloff that gives you no entry.

But I don’t think we’ll get that, and am not betting on it.  Instead, I think we’re going to play “muddle muddle” for a bit longer.  Maybe another month, or maybe two.  Maybe — just maybe — right up until next earnings season, when we’ll have a confluence of problems:

• Greece will have either actually defaulted or be about to.  I don’t think their “deal” will happen.  But even if it does, the better question is does it matter?  There the answer is clearly no, because if you get a deal the precedent is still set — threaten and bludgeon and you can force losses.  Guess who’s next?  Oh, Hungary, Ireland, Portugal, Italy.  Any of these and the apple cart doesn’t tip over, it blows up from inside.
• 1Q 2012 earnings will be coming and the warnings should be in full force by then.  I expect the confessional will open about end of February and I further expect a line of parish members out the door waiting for the pretty red light to go off and take their turn.
• The US Debt ceiling — this time without a quick fix available — will be in view.  Yeah, we won’t hit it until the summer sometime if my calculations are correct.  They can play games until the fall.  But note that what Obama was trying to do — desperately so — was prevent this from happening before the election.  He is going to lose that bet.  You heard me say a similar thing about the clock running out in 2008 before the election (remember all those who said there was no way we’d crash before it for the same reason) and those who believed that were proved wrong.  You’re going to be wrong on this one again.

Any of those would be a problem.  All of them — especially if Europe blows up into a hard wall with the US Debt ceiling — is going to be very interesting and not in a good sort of way.

This has been a very nice run from Christmas until now.  I’ve got nothing to complain about with my own performance and I’ve been rather loudly saying that I didn’t think it was going to go to hell just yet — as many have believed and projected.

But if you believe this means the market is safe and we’re going to the moon just remember how well that worked out in 2008.

We’re in far worse shape on a macro level with far fewer policy moves available to the government and Fed now than we were then, and the risk of an “accident” is, in my opinion, rising rapidly toward near-certainty.

The “big story” of the U.S. economy is that we have substituted expansion of debt for meaningful increases in productivity.

For the past 30 years, the U.S. economy has become increasingly dependent on explosive debt expansion for its “growth” rather than on meaningful rises in meaningful productivity.Growth is in quotes because growth based on secular increases in productivity–that is, the same investment of labor and capital produces goods and services of greater value–is qualitatively different from “growth” based on a pyramiding of debt.

Real growth based on rising productivity is sustainable, “growth” based on ever-greater expansions of debt is not.

What has kept the Status Quo from falling off the debt cliff over the past four years is the substitution of exploding Federal/public debt for no-longer-rising private debt.  If Federal borrowing were to return to 2006 levels, the economy would immediately experience a severe contraction.

We can understand this reaction as that of a debt junkie economy suddenly deprived of massive infusions of fresh credit.

This substitution of public debt for private debt is simply an attempt to fool Mother Nature.The justification of the Status Quo for impoverishing future generations is the massive expansion of Federal debt is needed to “kick start” the economy, i.e. “get us through a rough patch.”

After four years of kick-starting and muddling through rough patches, the economy has yet to recover benchmarks set in 2007, much less grown.  Meanwhile, the kick-starting added $6 trillion in visible public debt and trillions more in off-balance sheet obligations and backstops.

Substituting debt for productivity is also an attempt to fool Mother Nature.Here’s how the substitutiion works: when productivity is flat, then “growth” can be created by leveraging the economy’s surplus into greater amounts of debt, which can then be squandered on mal-investments and consumption to foster an illusion of “growth.”

Note that I use the phrase “meaningful productivity.”If a highrise tower is built in the middle of nowhere and sits empty, the construction and related costs (inspections, transport of goods, utilities, etc.) are added to the gross domestic product (GDP) as “growth,” even though the empty building is not adding any real value to the economy.

The same can be said of millions of unneeded medical tests, millions of doses of medications that don’t work as advertised, etc.–all the costs of sickcare that rarely add productive value to the economy but which are all added to the GDP as “growth.”

If you leverage $100 per month in surplus capital in a household into a $100,000 home equity loan that is squandered on luxury cruises, a new kitchen, boats and dining out, then that explosion of spending boosts “growth” like a shot of cocaine.

But then what happens when the borrowed money has all been spent? What happens when the borrower defaults?  The underlying assets–the boat, home, etc.–can all be auctioned off, but a massive loss remains to be swallowed by the lender.

Needless to say, the bankrupt borrower will be unable to borrow another $100,000 any time soon, even if interest rates are lowered to near-zero.

That’s what happens when you try to fool Mother Nature by substituting debt expansion for increases in meaningful productivity.Eventually the surplus that is being leveraged into debt reaches the point where it cannot leverage any more debt, and the over-leveraged borrower defaults at the first financial bump.

An economy that is dependent on constant massive increases in debt to fund its “growth” is not sustainable.  In a very real sense, the U.S. has been fooling Mother Nature for 30 years.  Now we’ve overleveraged the nation’s shrinking pool of surplus capital and assets, and the last rabbit has been pulled from the magician’s hat.  Mother Nature (i.e. reality in the form of a transparent, marked to market balance sheet) is about to take her revenge on all those who reckoned she could be fooled forever by ever-expanding debt.

Charles Hugh Smith – Of Two Minds

It’s Dying.

The two-party system, that is. And it has to, if our Republic is to survive.

It’s dying for good reason. Citizens across our great nation are realizing that the Republicans and Democrats in Washington no longer represent their interests, and they’re ready for a severe change to the political status quo. No longer is the concept of “throwing your vote away” relevant. What does it really matter, if the alternatives – the Republicans and Democrats – have become two wings of the same party, the Big Government party?

The U.S. government borrows more than $40,000 per second. So if you’re an average American, the U.S. government added to your tab more than you make in a year in the time it took to read this sentence. What they don’t borrow, they print. And what they don’t print, they take from you, in the form of taxation.

As if that weren’t enough, Congress seems intent on making life hard on the American people. From the drug war, to the Patriot Act, to the TSA, to the NDAA, their assaults on the civil liberties of nonviolent, innocent American citizens seem to be intensifying at an exponential rate.

The rule of law in America is deteriorating, as white collar banksters are rewarded for defrauding billions of dollars out of blue collar America while blue collar America is harassed and imprisoned for nonviolent crimes that affect no one else. All this has been enabled by both Republican and Democrat politicians alike for decades. At best, they give lip service to the Constitution, while trampling all over it and the principles it stands for.

But there’s a new party in town.

The Libertarian Party has only been around for about 40 years, but the principles it stands for go back centuries. America’s Founding Fathers were the first modern Libertarians. They sought a life free of the King’s dictates. So they wrote the Declaration of Independence, testifying that all men are created equal, and that rights come from the Creator – not from kings, governments, or anyone else.

But men like George Washington and Thomas Jefferson would be shocked at our modern government. They grew hemp and made moonshine, both of which are illegal today. They did not ask for permission to own and carry a firearm. They certainly did not obtain a permit to wager a bet on a friendly game of cards. By all accounts, Washington and Jefferson, those symbols of American liberty, would be common criminals in modern America. Our Congress has stacked the deck in this way, because it enables them to play out the game in their favor.

The message of Liberty was, and is, about individual empowerment. The ability to live free of force from others. To live in a nation of laws, not of men. To enjoy the comfort of one’s own castle, where every man is his own king. The government’s role is not to give us rights (which it cannot do), nor to infringe upon them; but rather, simply to protect our natural rights.

That’s why people of all races, creeds, and colors are leaving the two-party system and joining the Libertarian Party in droves. It is the only party whose registrations are growing. It is the only party that knows that all citizens, and especially minorities, are not served by special rules or government favors, but by the law being equally applied to all. It is truly liberating to finally release oneself from the confines of the two-party box; to no longer be required to make excuses for one politician or another’s repeated shortfalls; to have real choice. The Libertarian Party is the real populist party, the party of We the People.

Perhaps our cry can best be summed up by five words of the Rev. Dr. Martin Luther King, Jr.: “We want to be free.”

We just want the opportunity to live the American dream.

Calen Fretts is a resident of Valparaiso, Candidate for the U.S. House of Representatives in the 1st District of Florida, and Vice Chair of the Libertarian Party of Okaloosa County.

http://frettsforcongress.com