FedUpUSA

Archive for the ‘GDP’ Category

What do we have here?

“We can’t rely on monetary policy. We can’t solve the international imbalances with monetary policy, but people don’t know that yet,” warned Hoenig, who oversees banks in Colorado, which is part of the Fed’s 10th District based in Kansas City, Mo.

The core problem is that the United States has consumed more than it has produced for 20 years running. Consumers and governments in the developed world have piled on too much debt.

Uh, 30 years running.  Remember this chart?

Hoenig goes on to admit that The Fed built the asset bubbles with inappropriately-low interest rates!  That is, he makes one of my central points: It must always cost money in real terms to borrow.

What’s even better is what I’m hearing today in the Bernanke testimony on The Hill.  For the very first time I heard a Representative state clearly that Bernanke’s rate policy is enabling the drug binge of deficit spending in Congress!

Now, Congress, take the next step.  Come to the understanding that we must pay for each and every program we want to have with current tax revenues.

Yes, there will be market consequences from removing the stupidity of past acts.  But that’s unavoidable, just as you cannot avoid the fact that once you smoke crank for months or years your teeth have already rotted and will not grow back!

We still can stop further deterioration in our choppers, and we must – even if we go through a nasty round of withdrawal.

It was all over CNBC this morning, among other places.

The common mantra: The way out of this problem is economic growth.

My blunt response:

Here’s the problem from a historical perspective, looking at GDP growth .vs. debt growth:

In other words we didn’t “grow output”, we bought it by borrowing more and more money.  If you prefer it in “incremental dollars” rather than total outstanding, it’s here:

Now it is true that one might try to economically grow out of debt. 

But in order to successfully do so you must grow the economy while NOT growing the amount of debt outstanding! 

Here’s the ugly reality – since 2000 GDP has grown, on average, by 4.2%.  But debt has grown by 7%, again, on average.

So long as there is a spread between debt growth and GDP growth, and debt is growing faster than GDP (through the entire economy) you cannot “grow out of the hole” – all you’re doing is making the problem worse.

This is the underlying issue with the so-called “economists” who argue this position – they’re raising a true argument but predicated on a false premise – that we can and will grow the economy while either holding the amount of debt across all sectors (private and government) steady or contracting that total amount.

If and only if that takes place – that is, the blue line in the above chart is below the red line and stays there, then one can make this argument.

If not, and history says it is not, then any such claim is a fraud.

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the “Twist” is already guaranteed, as is an IOER cut, per Goldman’s “predictions” and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman’s hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of “credit money.” Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke’s choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America’s TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama’s second term goodbye.

As the two charts below demonstrate, the economy’s ongoing inability to create any growth in the shadow banking system, primarily as a result of the complete shut down of the securitization machine, has been and continues to be, the biggest threat to the Fed. Specifically, after hitting an all time high of $20.9 trillion in March of 2008, this all too critical source of “credit money” has collapsed by a whopping 25%: since the peak $5.5 trillion of credit, and not just any credit, but shadow, and thus non-regulated credit, has evaporated! And as Q2 demonstrated, after almost bottoming in Q1 following a decline of just $57 billion, or the smallest Q/Q decline since Q2 2008, the drop has picked up again, with a one year high $278 billion plunge in Q2.

Among the liability components of the Shadow Banking system’s credit money abstractions, we look at:

• Money Market Mutual Funds: at $2.6 trillion, a decline of $41.6 billion Q/Q
• GSE and Agency Paper: at $6.5 trillion, a decline of $73.8 billion Q/Q
• ABS Issuers At $2.2 trillion, a decline of $80.4 billion Q/Q
• Repos at $1.2 trillion, a decline of $49 billion Q/Q
• Open Market Paper at $1.1 trillion, a decline of $50 billion Q/Q
• and these declines were offset by a tiny increase of $17 billion to $726 billion at Funding Corporations

Altogether, added across this amounts to a massive $278 billion in the second quarter, and explains why GDP, when the manipulation from the Census Bureau is eliminated would have probably declined. What is worse is that should this decline continue without an offset, there will be no economic growth guaranteed.

So where can said offset come from? Well, just as there is a shadow banking system, so there is a traditional commercial bank system with listed liabilities. To be sure, for the duration of collapse in the shadow banking system, this has been the only offset, although granted one that is not nearly doing a good enough job. Specifically, total liabilities of Commercial Banks in Q2 were $13.4 trillion, an increase of $238 billion in the quarter. Alas, this is nowhere near enough to offset the decline in Shadow Banking, having grown by “only” $2.6 trillion since Q2 2008, even as shadow liabilities declined by double this amount. Yet there was a brief saving grace came in Q1 when the spike in Traditional liabilities more than offset the drop in Shadow, as the cumulative total rose by $337 billion, the most since 2008. Too bad, however, that adding across these two categories (second chart below), we once again witnessed a decline in Q2, amounting to $40.1 billion. This explains not only why QE2 could only do so much, but why GDP growth has rolled over and is now almost certainly negative.

What is most important to keep in mind, is that Traditional Commercial Bank assets only grow courtesy of QE. And with Shadow banking continuing to implode, Commercial Banks have to pick up the slack or else… Which in turn means Bernanke has to keep pumping reserves. Whether banks use these to lend out, or to buy shares of Netflix is irrelevant: remember – America, and the entire developed world, is a credit driven system. Take away credit growth and it is game over.

Which explains why tomorrow’s decision is a formality: Bernanke has no choice but to continue offsetting the relentless contraction in shadow liabilities, which as of Q2 collapsed at an annualized rate of over $1 trillion. Incidentally this, +$1, is the very minimum that Bernanke
will have to bring into reserve circulation to offset the relentless deleveraging of the once biggest contributor to American growth, which ironically is now the biggest adverse factor.

That reversion to the mean sure can be a bitch.

ZeroHedge

Long-time readers of FedUpUSA are familiar with Chris Whalen, but for those of you who are not, here’s a link to a bio.

Well well look what the cat dragged in…

Government intervention is the root cause of the financial crisis and the maladies identified by Roubini. Many of his proposals, such as debt restructuring and maintaining liquidity to solvent borrowers, are common sense initiatives that ought to be followed immediately. But the proposals by Roubini and others that governments should borrow and print even more fiat currency to fuel further fiscal stimulus are badly considered. Economists from Paul Krugman in the US to Adam Posen in the UK all call for more stimuli. They are all wrong.

Yep.  As I’ve repeatedly noted the premise of Keynesian Stimulus is mathematically bankrupt.  We’ve run this for the last 30 years and yet have not produced prosperity – we instead produced serial bubbles.

Deflation does hurt debtors and lenders, but it also advantages savers and institutions with cash to buy assets cheaply. The buyers of dead banks and bad assets generate real growth and jobs. When Roubini, Posen and other mainstream economists call for measures to avoid deflation, they actually cut off one of the few ways that consumers and private business have to offset the ill-effects of secular inflation — the real culprit behind the financial crisis.

Reversion if an inflationary bubble (the S&P 500 went from about 100 to 1200 today!) is not deflation.  It is mean-reversion.  If you inflate something to 10x it’s original size and then deflate it back, you did not experience “deflation.”  You repaired an unsustainable bubble.

But for the inflationary policies of the Fed and the ECB to stimulate pseudo “growth” over the past several decades, there would have been no financial bubble and no mountain of housing-related debt. Why do economists like Roubini and Krugman say we need more of this medicine? Such pathetic proposals for more-debt-driven government intervention are what pass for mainstream economic thinking today in the G-20 nations.

Keep in mind that there are still hundreds of billions in bad debts in the US and EU tied to real estate and other speculative endeavors — debt which must eventually default. Until the global financial system is cleansed of these bad debts, market volatility and uncertainty will remain high. Unless we bite the bullet and write down debts to levels that will allow private growth and employment, there will be no recovery.

You mean like this Chris?

That is what our government has created.  That’s the gross increase (or decrease) in GDP on a quarterly basis along with the gross increase (or decrease) in debt in all sectors.

Debt expansion must never exceed growth expansion on a durable basis.  The reason is that it mathematically can’t – you must always, to have a stable economy, grow from excess capital – that is, the amount of wealth left after you pay all the costs of production.

Borrowing has its uses, but it cannot replace capital formation.  If it does, you get what we got.  If you keep trying to run the scam you eventually go over the edge of the waterfall.

I hear roaring water around the next bend.

So many to choose from this week…. Buffett and BAC (which I already wrote on), Bernanke’s continued mendacity and of course the destruction of real liquidity in the markets due to all the gaming and schemes that the “Wall Street Capitalists” have engaged in over the last few years.

But today’s column is reserved for those topics I haven’t explored this week.  We’ll begin with this:

The Elko County Sheriff’s Office was notified in July of possible sexual contact between David Ralph Anderson, 61, and a girl younger than 14.

According to Elko Justice Court records, the victim told investigators that on seven to 10 occasions between 2010 and this year, Anderson allegedly taught the victim about various sexual acts and had sexual contact in the form of touching each other’s genitals.

Alleged perverts aren’t anything special, right?  Well, this one is.  The article says he’s a TSA employee.

Still want to go through that security line to fly, do you?  There wouldn’t be anything special about being a TSA employee that might be attractive to an alleged pervert, is there?  Oh yeah, there is – you get to grope the balls of little boys and fondle little girls breasts, and it’s part of your job description.

Why do we allow this as citizens of this nation again?

You can never eliminate as a prospective matter all perverts – by definition until the first time they get caught, arrested, tried and (hopefully) imprisoned you don’t know they’re perverts.  But you can refuse to create government-sponsored and mandated positions where people like this can molest thousands of kids as part of their job!

What sort of sick society have we become that we’re willing to subject not only ourselves but our kids to sexual abuse simply to exercise our constitutional right to travel?  And don’t give me this “privilege” crap – you (as an adult) may be able to consent to being groped (legally) to get on a plane (the difference between sexual assault and simple sex is in fact consent) but the premise of someone being a minor is that they cannot consent as a matter of law and you cannot consent for them.  Arguing that this is acceptable is identical to arguing that a parent should be able to “consent” to their child sleeping with an uncle – or anyone else for that matter.  Disgusted yet?  You should be – with yourself.

In the first runner-up slot for outrage of the week we have this regarding JP Morgan:

The U.S. Treasury Department announced an $88.3 million settlement with JPMorgan Chase & Co. (JPM) for apparent violations of international sanctions programs, including Cuban assets control and anti-terrorism regulations.

The Treasury said that JPMorgan through its correspondent banks maintained prohibited financial transactions with sanctioned entities in countries including Cuba and Iran.

The JPMorgan payment agreed upon by the Office of Foreign Assets Control, known as OFAC, involves “egregious” violations for five years, according to a Treasury Department statement.

JP Morgan, of course, sees it differently and called them “rare incidents”, unrelated and isolated.

Uh huh.  Treasury says they were egregious violations of the law and went on for five years.

We can argue over whether Cuba should have sanctions upon it, or Iran for that matter.  Nonetheless it is the law, and if you so much as move $5 to one of these prohibited entities you’re subject to huge fines and potential imprisonment.

When a big bank does it?  Well gee, we’ll just issue a tiny little fine for five years of misconduct, indict nobody and imprison nobody, despite the fact that real people in real parts of the bank authorized and performed these transfers.

That is, real people broke the law – either intentionally or through willful blindness.

If the penalty for holding up a bank was simply paying a fine equal to the amount you stole, how many times would your corner bank be held up between noon and 4 PM every day?

That’s what I thought.

Then there’s this stupidity on Bernanke and “Fed activism”:

Advice from Ben S. Bernanke, scholar, to Ben S. Bernanke, Federal Reserve chairman: Be bold.

Really?  What’s the record on “being bold”?

I count three successive chairmen who were in fact utter fuckups and trashed our long-run economic prosperity by putting in place economic and monetary theories that are trivially disprovable using nothing more than fifth-grade mathematics.  That one of them received a PhD for advocating even more of the same crap is an outrage and indictment against so-called “higher” education.  They were high all right, but elevation above the crowd in intellectual prowess most-certainly isn’t what is being referred to.

Other Fed chairmen also have been criticized for bold action. Volcker in the early 1980s pushed interest rates to a record 20 percent to target inflation above 13 percent. While prices eventually dropped, the economy fell into a 16-month recession in July 1981 after emerging from a six-month slump in July 1980.

Prices dropped?  The hell they did.  Even the government’s own twisted statistics do not show contraction in prices – that is, reversion to the mean. The Millennials may not remember this but I sure do and so do people older than I. Indeed, what happened was that the modern ponzi economic “expansion” born of the lie that credit growth is in fact economic growth (it is not; output must always grow faster than credit or mathematically you are eventually screwed!) was born, nurtured, fed and then exploded – twice – into full-blown economic crises from which we have not escaped and won’t until we stop running monetary and fiscal policies that have proven bereft of merit.

Not only is the mathematics clear on this but so is the empirical evidence – a 30-year unbroken track record of failure.

Greenspan, after the 2001 recession, slashed the Fed’s benchmark interest rate to 1 percent in late June 2003, the lowest since 1958, and held it there for a year in a bid to fend off what he called a remote chance of deflation. Critics blame him for inflating the housing bubble that burst in 2007 and thrusting the economy into recession by holding interest rates too low for too long.

Even so, Bernanke has presided over even more economic upheaval.

Yeah, and every bit of it was self-inflicted by himself and the two chairsatan before him.

Why doesn’t anyone talk about the 1920-21 deflationary recession?  It would be called a Depression except that it didn’t last long enough to be classified as one.  In terms of the delta on prices (some 37% at the wholesale level – downward!) and collapse in industrial output it was the most-violent that I can find a contemporary record on.  The stock market was cut in half and unemployment soared.

The cause of the collapse was over-exuberant hiring post WWI and the release of a huge number of Army members back into the civilian labor pool.

What’s interesting is that there was a Presidential election and Warren Harding presided over nearly all of this. Harding received counsel to intervene from one Mr. Hoover – yes, that Mr. Hoover, who was at the time Commerce Secretary.

He refused that advice and the market and economy cleared within 18 months, posting the largest single-year industrial output gain ever in the history of the United States.  Not only that but unemployment returned to the full-employment level as well.

Activism by the federal government and federal reserve works and a “hands off” policy of letting those who get in over their head with leverage, overcapacity and debt doesn’t, eh?

Isn’t selective memory – and how it’s used to block out the success of the government refusing to prop up idiots and swindlers alike a funny thing?

Oh, incidentally, there are nations who have figured out that the debt ponzi doesn’t work.  Spain is one of them.

The amendment (to the constitution) calls for public debt not to exceed 60 percent of gross domestic product, though the ceiling may be breached in the case of “natural catastrophe, economic recession or emergencies.” The parties pledged to pass a separate law by June next year that will set a maximum structural deficit of 0.4 percent of GDP to be met by 2020, the same year the debt limit comes into effect.

0.4%, or in essence a balanced budget, and public debt may not exceed 60% of GDP.

The ruling party in Spain is the Socialist party.  Even die-hard redistributionist political actors, if they look at the math and stop lying to themselves and the public, find the truth inescapable and ultimately come to the correct conclusion: You must pay for the government services you wish to receive, all of them, with current tax revenues – not promises to pay tomorrow.

Wake up America; it’s a disgrace that a socialist nation can and does out-think you at a fifth grade level of comprehension.