Archive for May 2nd, 2012
The CNBC crooners are out again refusing to say what this report was in plain English: It sucks.
Employment in the U.S. nonfarm private business sector increased by 119,000 from March to April on a seasonally adjusted basis. The estimated gain from February to March was revised down modestly, from the initial estimate of 209,000 to a revised estimate of 201,000.
This just plain bites.
Worse, goods producing jobs decreased straight-up.
The so-called “de-leveraging” story is dead as well, as the so-called “savings rate” (in which paying down debt is called “saving”) is going down rather than up, which strongly implies that people are once again turning to credit simply to survive.
The attempt to reinflate the Ponzi bubble that burst in 2008 has failed. Worse, it appears that we we may be weeks to months at most from broad financial market recognition of this failure — and if so, we’re about to have one hell of a crash and this time there are no policy actions available that will make a difference in the outcome.
Be prepared or get caught outdoors when the storm arrives.
As we near the end point, the point where the economy collapses, government becomes more desperate to convey the myth of a recovery. Government data have always been suspect because of the political ramifications of a good vs. bad economic report. Fudging the numbers, or at least the ways of measuring various statistics, likely began once government began issuing economic data. The propaganda value of such data began to increase under Kennedy. Now we have reached a point where manipulation is beyond anything the manipulators dared just a couple of decades ago.
Behind the need to increasingly lie about the economic condition of the country is the dying economy. If that is too strong for you to accept, then the declining standard of living. Real weekly wages are below where they were in the late 1960s. Most people are unaware of this because government chooses to hide it. Instead, they shift to median family income without adjusting for the fact that two wage earners are now required per household where one was sufficient in the past. The tricks and deceptions are too numerous to discuss, although anyone interested should go to www.shadowstats.com for a history of the manipulations and the cumulative effects across a broad series of data.
The latest example of manipulated statistics is the recent GDP report which came in at a disappointing 2.2% growth for last quarter. Without getting too technical, GDP is measured in nominal terms and then adjusted down for inflation. The lower the rate of inflation assumed, all else equal, the higher the real reported GDP. The inflation estimate is known as the “GDP deflator,” By understating this number, real GDP can be made to appear larger than it really is. There are many who believe that even the anemic real GDP numbers reported are overstated.
Mish is particularly condemning in his interpretation:
Three years into a recovery, growth (if you believe preposterous deflators) is a mere 2.2% but only 0% if you don’t. Moreover, with parts of Europe in an outright depression, with even Germany and the UK in recession, and with China slowing significantly, the odds the US economy decouples for too much longer is now approaching zero.
Government declared the recession over a couple of years ago. All other recessions ended with recoveries where quarterly real growth estimates were in the 6 – 8% ranges. We have seen nothing approaching these figures and now we see anemic figures even with apparent manipulation.
No one knows for sure how much government is manipulating the data it issues. Suffice to say that the burden of credibility continues to mount against their numbers and their claims. Clearly politicians have motives to make things seem better. They are not known for their ethics and lying is a routine part of their strategy.
If there were a real recovery there would be no need to manipulate numbers. Now, even with what seems blatant manipulation, the results are still dismal. The charade is getting old, the promoters appear to be getting desperate and the wiggle room for manipulation keeps shrinking. Soon it will become to embarrassing to continue the charade. That time will likely occur after November.
There’s an old saying that goes something like this:
Will you stop pissing on me and calling it rain?
Bernanke said in his speech on April 13, at a conference sponsored by the Russell Sage Foundation and the Century Foundation, that “any theory of the crisis that ties its magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth — more than $8 trillion — resulted in a relatively short and mild recession and no major financial instability.”
The Fed chairman is right: The housing crisis was much more damaging because the initial impact was concentrated in a highly leveraged financial sector and then substantially amplified as those losses cascaded.
The rest of the column is basically a scolding on the “miss”, ignoring the real policy question that should be debated and answered:
How did it come to be that one of the key items for every person’s personal comfort and indeed their life — housing — came to be a “highly-leveraged financial sector”, what intentional government distortions made this possible, and how do we withdraw those distortions so that (1) it doesn’t happen again and (2) necessary components of everyday life — such as housing — are not subject to the rank manipulations of this sort in the future?
But this debate is not being held — on purpose — because to do so exposes the soft underbelly of far too much for comfort among the so-called “financial elites.”
Housing should not be a materially-levered part of the economy. Unlike commercial real estate which can bend and flow with demand — when the local bar goes out of business if there are no others in town someone will soon decide that opening a watering hole makes sense – housing displaces people on a permanent basis and does critical and personal damage to the nation’s population when leverage is abused in this area of the economy.
It was, to a large degree, this same sort of leverage abuse in the 1920s with balloon mortgages (that had to be rolled every five years or so) that led to the Depression being as nasty as it was. The “Hooverville” shanties popped up due to people being displaced — and they were displaced because the nation’s housing stock became financialized and levered from the consumer on up.
The Government of course tried to “fix” the problem with FNMA, now known as “Fannie Mae”, which was originally created to try to bail out banks during The Depression. This eventually led Fannie to be levered 80:1 by the time 2007 rolled around and, ultimately, was responsible for its collapse.
So what’s next?
Good question. This much I can tell you with certainty — there has been no recognition among the policy wonks, nor any attempt to correct the problem with leverage in the housing sector. In fact the exact opposite has happened — the government has, to the maximum possible extent, done everything in its power to prevent that leverage from coming back out!
It’s not working because it can’t work.
And this morning’s ADP number simply underlines the point — until we stop screwing around with trying to protect financial “bigwigs” from the consequences of their own acts and this leverage comes out of the system there will be no economic recovery — because there can’t be.
Submitted by Tim Price, Director of PFP Wealth Management and Sovereign Man contributor
Guest Post: What Is The Consequence Of Printing Money That Nobody Wants?
In a week that saw Britain slide into its first double-dip recession since 1975, we quite fittingly also saw evidence of the sort of insular bigotry and protectionist narrow-mindedness that one associates with that same ugly, painful decade, when Barry Sheerman, Member of Parliament, said:
“I’m getting increasingly worried about the free movement of people across Europe. It’s a very competitive world out there, and my constituents resent that.”
The signs of unravelling are not confined to British shores. French voters in the presidential elections shocked markets by
(a) favouring the socialist Francois Hollande; and
(b) giving almost a fifth of their votes to the far-right extremist Marine Le Pen.
Meanwhile in another turn of the sovereign debt screw, Spain was downgraded toward reality. And the Dutch government collapsed altogether.
Amazingly, the people of Europe just don’t seem that keen on austerity. Yet it’s worth asking– why hasn’t the recession of today produced the same sense of crisis from the 1970s?
Chris Dillow of the Guardian newspaper suggests that average real wages are much higher now, so although standards of living are falling, they’re falling from a much higher level that softens the pain (even though the real pain of austerity hasn’t even really arrived yet).
But there is one outcome from the 1970s that is genuinely to be feared… the risk of which seems to be rising every day, if it has not indeed already arrived: Stagflation.
Stagflation– the utterly painful combination of stagnating growth and steep inflation that marked the 1970s– and will be the natural side effect of extended central bank quantitative easing during a period of widespread deleveraging.
In other words, stagflation is the consequence of printing money that nobody wants.
Moreover, an outbreak of serious stagflation will decimate conventionally managed debt and equity portfolios. And given that most people invest with the crowd, with conventional investments or conventionally managed portfolios, stagflation will wipe the savings and livelihoods from untold masses.
But, we live in strange times– times, for example, that reward bankers handsomely for bankrupting the economy. This is why the likes of so many politicians and financial commentators are able to insist with impunity that central bankers should ‘keep printing more money’ despite never having provided a scintilla of evidence that such tactics work.
Case in point– in a letter to the Financial Times from April 26, 2012, economist Roger Alford remarked:
“The utterly disparate time horizons and the very different experience and skills required… make it virtually impossible for any one person to have the experience and depth of understanding to provide effective leadership [as head of a major central bank].”
Intellectually constrained by his faux science “profession”, Mr. Alford does not take this argument to its logical conclusion: if the institution is so difficult to govern and the role so difficult to effect, why have it in the first place ?
We know the answer to this question. Central banks exist to protect the banking system and to finance the government’s debts at all costs… even if it means bankrupting the taxpayer and productive economy.
Yet the urgent need for austerity and an insoluble sovereign debt crisis make for uneasy bedfellows.
By definition, we cannot shrink our way back to the sort of growth required to service the West’s accumulated debts. Something has to give.
That something will ultimately be social and political disorder on a continent-wide basis, particularly as the taxpayer becomes increasingly frustrated in his obligations to fund the rapidly growing and untenable costs of Big Government.
Such disorder is almost universally feared– by politicians, by markets, by institutions. As the London-based marcoeconomic research consultancy Capital Economics recently commented:
“The last thing that the markets need right now is increased political uncertainty at the heart of Europe at a time when the economic outlook is already bleak…”
The only reasonable response to this is: tough. If social and political disorder is what it takes to shift an unsustainable status quo in which vampire banks and clueless bureaucrats suck the life out of the productive economy, bring it on.
This is a short enough bill (H.R. 4966) to print in full:
H.R.4966 — Sequester Replacement Act of 2012 (Introduced in House – IH)
HR 4966 IH
H. R. 4966
To amend the Balanced Budget and Emergency Deficit Control Act of 1985 to replace the sequester established by the Budget Control Act of 2011.
IN THE HOUSE OF REPRESENTATIVES
April 27, 2012
Mr. RYAN of Wisconsin introduced the following bill; which was referred to the Committee on the Budget, and in addition to the Committee on Rules, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned
To amend the Balanced Budget and Emergency Deficit Control Act of 1985 to replace the sequester established by the Budget Control Act of 2011.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,SECTION 1. SHORT TITLE.
This Act may be cited as the ‘Sequester Replacement Act of 2012′.
SEC. 2. CONTINGENT EFFECTIVE DATE.
This Act and the amendments made by it shall take effect upon the enactment of the Act provided for in section 201 of H. Con. Res. 112 (112th Congress) and this Act and the amendments made by it shall have no force or effect if such Act provided for in such section is not enacted.
SEC. 3. PROTECTING VETERANS PROGRAMS FROM SEQUESTER.
Section 256(e)(2)(E) of the Balanced Budget and Emergency Deficit Control Act of 1985 is repealed.
SEC. 4. ACHIEVING $19 BILLION IN DISCRETIONARY SAVINGS.
(a) Revised 2013 Discretionary Spending Limit- Paragraph (2) of section 251(c) of the Balanced Budget and Emergency Deficit Control Act of 1985 is amended to read as follows:
‘(2) with respect to fiscal year 2013, for the discretionary category, $1,047,000,000,000 in new budget authority;’.
(b) Discretionary Savings- Section 251A(7)(A) of the Balanced Budget and Emergency Deficit Control Act of 1985 is amended to read as follows:
‘(A) FISCAL YEAR 2013-
‘(i) FISCAL YEAR 2013 ADJUSTMENT- On January 2, 2013, the discretionary category set forth in section 251(c)(2)(A) shall be decreased by $19,104,000,000 in budget authority.
‘(ii) SUPPLEMENTAL SEQUESTRATION ORDER- On January 15, 2013, OMB shall issue a supplemental sequestration report for fiscal year 2013 and take the form of a final sequestration report as set forth in section 254(f)(2) and using the procedures set forth in section 253(f), to eliminate any discretionary spending breach of the spending limit set forth in section 251(c)(2)(A) as adjusted by clause (i), and the President shall order a sequestration, if any, as required by such report.’.
SEC. 5. CONFORMING AMENDMENTS TO SECTION 314 OF THE CONGRESSIONAL BUDGET AND IMPOUNDMENT CONTROL ACT OF 1974.
Section 314(a) of the Congressional Budget Act of 1974 is amended to read as follows:
‘(1) IN GENERAL- The chair of the Committee on the Budget of the House of Representatives or the Senate may make adjustments as set forth in paragraph (2) for a bill or joint resolution, amendment thereto or conference report thereon, by the amount of new budget authority and outlays flowing therefrom in the same amount as required by section 251(b) of the Balanced Budget and Emergency Deficit Control Act of 1985.
‘(2) MATTERS TO BE ADJUSTED- The chair of the Committee on the Budget of the House of Representatives or the Senate may make the adjustments referred to in paragraph (1) to–
‘(A) the allocations made pursuant to the appropriate concurrent resolution on the budget pursuant to section 302(a);
‘(B) the budgetary aggregates as set forth in the appropriate concurrent resolution on the budget; and
‘(C) the discretionary spending limits, if any, set forth in the appropriate concurrent resolution on the budget.’.
SEC. 6. TREATMENT FOR PAYGO PURPOSES.
The budgetary effects of this Act and any amendment made by it, and the budgetary effects of the Act provided for by section 201 of H. Con. Res. 112 (112th Congress), shall not be entered on either PAYGO scorecard maintained pursuant to section 4(d) of the Statutory Pay-As-You-Go Act of 2010.
SEC. 7. ELIMINATION OF THE FISCAL YEAR 2013 SEQUESTRATION FOR DEFENSE DIRECT SPENDING.
Any sequestration order issued by the President under the Balanced Budget and Emergency Deficit Control Act of 1985 to carry out reductions to direct spending for the defense function (050) for fiscal year 2013 pursuant to section 251A of such Act shall have no force or effect.
Mr. Ryan, you are a festering pustule on the ass of Congress that your constituents would do well to banish to the dustbin of history.
You repeatedly claim to propose a so-called “budget” that “controls” spending, you take part in amandatory sequester that is intended to force Congress to deal with runaway deficit spending, you go on CNBC and everywhere else and pretend to be fiscally responsible and then you introduce this legislation, which effectively repeals the very law you trumpeted as necessary, proper and good, and should this pass you will blow a $500 billion deficit hole next year in the budget with this one-page piece of legislation.
To S&P, Moody’s and Fitch: If you do not downgrade the US Credit Rating now, citing this as the direct cause as the US Congress has demonstrated that they are intentionally dishonest and have absolutely no intention to ever get control of our out-of-control spending then you are utterly worthless.
Middle class dysphoria – What does the new American Dream look like? Inflated college tuition, lower home ownership rates, and compressed wages.
The American Dream was always tied to economic prosperity. The ability to work and save for a respectable retirement seemed cornerstones to this vision of middle class success. The idea that future generationswould have it better seemed to also be part of this vision of economic prosperity. The last two decades have seen a dramatic shift to this vision. The struggle to stay in the middle class is getting more difficult since more are being pushed into the poor or working poor categories. The recovery has been largely an odd accounting function courtesy of bailouts to the banks and massive government spending. Today, we have the largest number of Americans on food stamps. Those seeking to follow their desire to get a better education are saddled with a minefield of student debt and subpar institutions that simply look to steal their money and give them a piece of paper that is hardly recognized in any professional context. The home ownership rate, the symbolism of the American Dream is drifting further into the shadows.
The consequences of the housing bubble
The current home ownership rate across the country is now back to levels last seen in 1996:
What does this mean for the middle class that once relied on housing as the cornerstone for the American Dream? At the core, it has shaken the faith of many because housing was supposed to be a sure bet. Every year, your home value would go up and you subtly built equity. That assurance has been wiped away in the current aftermath of the housing bubble. The housing market had been a steady investment for many decades providing this bedrock of stability. This all changed of course when investment banks in conjunction with government backed guarantees co-opted the market and turned it into just another commodity to speculate and destroy. Keep in mind many of these investment banks and government cronies sought to increase home ownership across the nation and have only done the opposite. Glass-Steagall was repealed back in 1999 and here we are with a home ownership rate now back to 1997 levels and an economy that is still in disarray for working and middle class Americans.
The Case Shiller Index reveals a lost decade in home values:
Yet this destruction in illusory and real wealth in real estate has impacted the net worth of most Americans. The biggest asset most Americans have is in their property and it has been one of the worst performing items in the last decade.
Read the rest at My Budget 360