FedUpUSA

Archive for the ‘Gross Domestic Product’ Category

Egan-Jones Rings The Bell (Again)

And here we go again…

Egan-Jones Ratings Co. cut the U.S. credit rating one step to AA, the second downgrade in nine months and two levels below its highest grade, with a negative outlook citing the nation’s increasing debt burden.

U.S. debt has increased to 100 percent of gross domestic product, while debt climbed 23.6 percent from 2008 to 2010, the credit-rating firm said in a statement today. Egan-Jones lowered the U.S. grade to AA+ in a July. Treasuries have gained 4.6 percent since the company first lowered the U.S. rating, according to Bank of America Merrill Lynch index data.

The downgrade was based on “the increasing debt load coupled with the fact that there has been no tangible progress in addressing the country’s growing debt to GDP” ratio, Sean Egan, president of Egan-Jones in Haverford, Pennsylvania, said today in a telephone interview. “Unfortunately, the debt is growing fairly rapidly while the GDP is not.”

The market ignored it.

The reason there has been no tangible progress on the nation’s debt-to-GDP ratio is found in the fact that about one out of every 10 dollars spent in the economy (that is, GDP) is money borrowed by the federal government and then spent.  This creates an artificial level of demand in the economy and allows the government to claim that “we’re growing!”

But we in fact are not.  In point of fact all we’re doing is inflating the debt bubble, just as we have for 30 years.

This chart is, very simply, the change in total systemic debt (from the Fed Z1) compared against the change in GDP.  We get both numbers quarterly; one from the Fed and the other from the BEA.

Since all money is debt in modern monetary systems each new dollar spent into the economy must come with a debit somewhere (that is, it is someone’s obligation.)  This means that we can very easily measure the total amount of monetary inflation — or deflation — by simply comparing those two figures.

The “fear factor” for Bernanke and Congress is that the deceptive practices of the last 30 years will be discovered for what they are.  The so-called “prosperity” since 1980 has mostly been a scam — it has been nothing more than monetary inflation coupled with frauds that allowed people to borrow money they couldn’t pay.  Under this cover all manner of sin was committed; two bubbles (Internet and Housing) along with the theft of every single dime paid into Social Security and Medicare.

It is not “deflation” to take that monstrous bubble from 1981 forward and let the air out of it.  That would be nothing more than restoring balance, but it would not come “nicely.”

So instead we have pretended.  To be blunt, we all lied.  To ourselves, to each other, and the government lied to all of us.  We see articles telling us that we “can’t” make “irresponsible cuts” to government spending but what was irresponsible was promising to spend money we didn’t have in the first place.

There is no cheap, easy or clean way out of this box.  We will have to, at some point, accept the monetary, fiscal and economic contraction that must come to restore balance.

There are only two ways to do so:

• Tell the truth.  Some political party, whether the two major ones out there now or a third party, must get in front of this and start hammering the above graph until people “get it.”  It’s not hard to figure out really — gasoline prices anyone?  Medical care?  College education?  Stocks?  Just look — there it is.  This means cutting the size of government to what we are willing to fund in the present tense with taxes.  Everything else goes away.  And yes, this means both material tax increases (e.g. recission of all of the Bush tax cuts) and really large spending cuts (like in half — across the board.)
• Continue to lie.  We won’t get away with it for much longer.  Neither will anyone else.  Spain is in real trouble on this account as is Portugal.  The lies are politically expedient but that’s all they are.  They’re not fundable; if The Fed continues to play its QE and “twist” games all that will happen is that the monetary debasement will show up in essential commodities.  When a material percentage of the population can no longer afford to eat and the government is unable to continue to ratchet up the entitlements the game ends in violence and destruction.

The second choice is a bad one, but it’s the choice we make every single day we refuse to confront these realities and hold the politicians’ feet to the fire.  Those who are currently in office should be held to account for their lies, their thivery and their willful blindness.  All three have been equal components of the mess we’re in today.

Not only did politicians steal through the making of promises they couldn’t keep and monetary debasement but they willfully looked the other way while banking interests effectively counterfeited the currency and by doing so blew enormous bubbles in stock, commodity and housing markets.  They all lied too about the quality of the debt instruments they were issuing to back this monetary expansion and they knew it.

I know there are plenty of people who think this game can go on for many more years or even decades.  I disagree.  So did all of the Simpson-Bowles conferees.  Their expectations for the”wall” ranged from 2-4 years out — a year ago.  Mathematically I don’t see how we get out of the 201x years; from a realistic market perspective you’ll never get close to the corner.

The fault is ours folks — not just the politicians.  We get the government we deserve, as it’s the government we vote for.

For every day we refuse to rise and act the damage we must accept to restore balance grows worse.  In 2000 I estimated we had to accept a 10% contraction in the size of the government and that GDP would likely have to fall around 5-10%.  In 2007 I said it was 20% on the size of government.

Today it is nearly 50%.

Soon, it simply won’t matter as the choice will be made for us.

If you choose not to decide you still have made a choice!

The Market-Ticker

Discussion (registration required to post)

Oh look here, someone who can balance a checkbook!

In a speech Wednesday that Volcker himself said was intended to be “a little provocative,” he challenged U.S. leaders to go further in raising taxes and cutting spending than suggestions laid out by bipartisan deficit-cutting commissions and panels.

“The problem is the United States can no longer claim unchallenged leadership over the world economy,” Volcker said at the Economy Summit sponsored by The Atlantic. “We have to do better . . . only a strong economy can ensure our political strength and national security.”

Yeah well, there’s a problem with that Paul, and you know damn well what it is.  We’ve got a GDP that doesn’t represent actual demand.  Instead, it’s been “goosed” for the last four years sequentially borrowing more and more money, sending false demand signals.

There’s a difference between a short-term rescue and structural spending as well.  Unfortunately our structural deficit games go back to 2001 post-9/11 and encompass both Democrats and Republicans.

Structural deficit spending is a massive problem and it is how Greece got in trouble.  It’s also how virtually every other nation that has found itself in the middle of a debt crisis got there.  When false demand signals become embedded in the economy they then become politically impossible to remove, as the entire compounded effect of them over time will immediately come off.

Economic advisers thus strongly recommend that politicians do no such thing, as they are well-aware that withdrawal of the false demand will lead to an instant economic Depression and that, of course, leads to immediate loss of power (through electoral defeat.)

In short you have a bunch of lawmakers that are drunk on power and are willing to wantonly, recklessly and intentionally violate their oath of office along with violating the people for their own personal aggrandizement and power.

Am I surprised? No.

But can this sort of thing avoid the inevitable — that which awaits all who try to abuse compound growth functions?  Nope.

I expect Volcker to be ignored for the same reason that everyone else is ignored in this regard, right up until the math forces contraction in government services, increased taxes or both — Volcker is well-aware that every dollar of tax increase is a dollar that doesn’t get spent in the economy, since deficit reduction through tax increases is a net GDP negative on a dollar-for-dollar basis.

He’s right, but he’s also being disingenuous in that Tall Paul is not putting numbers to paper and pointing out exactly how much government must contract or taxes must rise (or some combination of the two) to restore balance.

That’s probably because we’re talking about a doubling of taxes or a 50% reduction — or more — in federal spending.

Best of luck with the path we’re on folks.

The U.S. economy is in effect a counterfeit economy, living on money created from thin air that is unbacked by an equivalent productive expansion of surplus value.

Yesterday we looked at counterfeiting and money printing and discovered they are one in the same: (Counterfeit Money, Counterfeit Policy.) If we apply the same analysis to the U.S. economy, we have to conclude the entire U.S. economy is also counterfeit.

The analysis is not as complicated as store-bought economists would have you think.Much of what passes for “economics and finance” is simply distraction, a sophisticated version of bread and circuses.

Let’s start with two basic concepts: productive value and surplus value.The classic example of a productive asset is a factory that produces goods that have a market value that exceed the input (production) costs. In other words, the factory produces surplus value.

We can measure value by any number of means: ounces of gold, quatloos, sea shells, etc. To keep things simple, let’s just measure value in units. If it costs 10 units to produce a good (including labor, materials, energy inputs, transportation, and a return on the investment to construct and maintain the factory), then the output (products manufactured by the factory) must fetch 11 units in the open market to create 1 unit of surplus that can be invested or spent on consuming other goods or services.

If it takes 10 units of input costs to make a product that is only worth 9 units, then the process generates a net loss. There is no surplus to spend; rather, there is a loss that must be covered by cash, borrowing or the selling of other assets. When the cash, ability to borrow and assets that can be sold all run out, then the enterprise is recognized as insolvent and it closes.

If the factory’s output has little to no market value, then the investment is what we call a mal-investment–an investment that only claimed to be valuable because it was speculative or protected from price discovery in a transparent market.

Our current economic theory holds that any good or service produced has value, which we measure in dollars of gross domestic product (GDP).The intrinsic flaw in this way of assessing value is that it doesn’t recognize mal-investments.

Here are some examples.

– If a military aircraft woefully underperforms and costs so much field commanders dare not risk its combat deployment, then what value was created by its manufacture?

– If it takes 10 units of input costs to produce a biofuel crop that is processed into fuel worth 9 units, then what value was created by the process of making that biofuel?

– If a subdivision of new homes is built in the middle of nowhere and finds no buyers, then what value was created by the construction of these houses?

– If a costly medicine is distributed at great expense in the millions of doses and is discovered to have little to no effect on longevity or other metrics of health, then what value was created by the immense cost squandered on this medication?

In all these cases, the mal-investment was added to the GDP as if it created productive value.The factory and the costly but essentially useless aircraft (think B-1B bomber) were added to the GDP, but they did not create useable military value. The biofuel production facilities were all added to the GDP, even though the process generated a net loss. The homes built in the middle of nowhere were also added to the GDP, along with the costs of the worthless medication.

Consider a financial sector that is declared “too big to fail” and trillions of units are borrowed on the taxpayers’ account to bail out the albatross banks. The bailout of banks created no productive value, even as it took money away from potentially productive investments.

Since surplus value is not limitless, the money squandered on these mal-investments was no longer available for productive investments.Rather, these mal-investments sucked up all the surplus generated by the entire economy. Now there is no money left for superior (and cost-effective) military aircraft, medications that actually cure diseases rather than reduce symptoms, homes that are in desirable, cost-effective locales, productive energy investments, and solvent banks.

Let’s say an economy required 1 million units of input costs to generate 2 million units of productive value, i.e. goods and services whose price has been discovered by a transparent market. That economy has 1 million units of surplus to spend on consumption, productive investments and mal-investments.

Since everything requires maintenance and infrastructure, then there is no such thing as a steady-state economy: for example, factory machines wear out and have to be replaced. If there is no surplus money left because it has been sunk into mal-investments, then the factory’s ability to create productive value and surplus value degrades.

If the mal-investments have been prodigious, at some point the factory is incapable of producing any surplus at all.

There is a “fix”: borrow money based on the future surplus.If the amount being borrowed is modest in comparison to the potential surplus created by a refurbished factory, and the borrowed money is productively invested, then this reliance on credit and leverage may pay off.

But if the borrowed money is spent on consumption and mal-investments rather than being invested in productive assets, then the only “fix” left is to borrow more money–not just mortgaging the future surplus of the factory, but leveraging it into a stupendous sum of borrowed money.

At some point the sums being borrowed far exceed the potential surplus generated by the factory, even if the factory amd market are running at optimum levels.If the factory requires 100 units of investment to generate 50 units of surplus, but 1,000 units of money have been borrowed against that future surplus, then the interest payments on that 1,000 will eventually exceed the modest potential surplus value.

Note that future surpluses are all imaginary; it could turn out that the market for the factory’s goods declines and there will be little to no surplus value created in the future.

Borrowing money based on imaginary future surpluses is a higher form of counterfeiting. And that is precisely what the U.S. is doing, borrowing immense sums at every level, private, corporate and State/Federal, all leveraged against phantom future surpluses, even as the economy requires some 10% of its supposed output (GDP) to be borrowed and spent on consumption each and every year just to run in place, i.e. the Red Queen’s Race (Bernanke, Goldilocks and The Red QueenJanuary 10, 2011).

In other words, the U.S. economy is running a massive deficit, and squandering the vast sums being borrowed on consumption and mal-investments.Once you rely on more borrowing against imaginary future surpluses to fund your current expenses, then eventually the costs of servicing that debt exceeds any possible future surplus.

The last-ditch “fix” is to simply print units of money (or borrow it into existence like the Federal Reserve)–counterfeiting, pure and simple– and deceive the market for a time via the illusion that the freshly printed units of money are actually backed by productive value or surplus.

As history has shown, eventually the market discovers the actual value of this counterfeit money, i.e. near-zero, and the system implodes.

Alternatively, the credit markets grasp that there is no way the economy can pay the interest on its monumental debts, never mind pay back the principal, and then the number of people willing to lend surplus capital to the economy declines to zero, as does the economy’s ability to sustain itself with leveraged debt.

The system then implodes as the “free money machine” of ever-expanding debt breaks down. Once there is no more “free money” to fund consumption and mal-investment, then the reality of systemic insolvency is revealed to all.

You cannot counterfeit actual surplus value generated by productive assets, you can only counterfeit proxy claims on future surplus. That is the U.S. economy in a nutshell: we are counterfeiting claims on our future surplus, even as we squander vast sums on horrifically obvious mal-investments and wasteful, cost-ineffective consumption.

Charles Hugh Smith – Of Two Minds

Things that make you chuckle in the morning…

European Union leaders gather for their first summit of 2012 as a deteriorating economy and struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis.

EU chiefs arrive in Brussels about 2 p.m. today to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in their debt holdings.

Uh huh.  That’s not the problem.  The problem is that Germany is screaming that Greece must surrender its national sovereignty in order to continue to receive “help”, effectively becoming a vassal state of Germany. 

In the meantime Sarkozy says he’s going to unilaterally impose a financial transactions tax.  One wonders how he’s going to pull that off, given that I don’t think France re-installed a King.  Or did they?

Here in the US we still won’t face reality — although it’s at least being talked about in the media now.

The level of debt held now by governments, the financial industry and especially consumers remains a greater drag on the U.S. than in 1983, Reinhart said Jan. 27 in a radio interview from Davos on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. In the third quarter of 2011, total household debt was 86 percent of GDP, compared with 47 percent in the third quarter of 1983, according to the U.S. Commerce Department.

“The capacity for households to carry on to be the engine of growth that they have been in past recoveries is simply not there,” said Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington.

Until this is recognized and we adjust for it we cannot have the sort of “recovery” everyone wants to see.  That is, we never hit the bottom, we never purged the bad debt, and we never set the stage for a “recovery”, instead covering up the problems with more debt and fraud.

In the final three months of 1983, average after-tax personal income had risen 4.2 percent from a year earlier, adjusted for inflation, according to the Commerce Department. In the final quarter of last year, it had dropped 0.8 percent.

Now now, let’s stop the intentional misuse of statistics there Bloomberg, and instead look at what we had just started doing back in 1983….

So did personal income actually rise?  Hmmmm…. we added, in 1983, a bit more than $100 billion in GDP.  But we also added $176 billion in debt, which means we were borrowing the so-called “increase” in after-tax personal income, we were not earning it.  Indeed, here’s the debt and GDP addition numbers for the quarters from 1981 through 1989:

Growth?  Where? 

We didn’t grow at all — we borrowed from roughly 2x to nearly 5x the increase in output each and every quarter during Reagan’s so-called “recovery”!

This is the fundamental scam that we have run for the last 30 years and we’re still not talking about it honestly!  Until we do and we reconcile the overblown asset prices and costs that go into both business and personal life that have come with this debt there can be no durable recovery — only further attempts to blow more Ponzi-style bubbles.

The problem is that in order to blow another asset bubble you need to find an asset where leverage is reasonably low and can be cranked up so as to support it, at least for a while. 

But we seem to be all out of those unencumbered assets……

So what to make of the GDP release Friday?

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.8 percent in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 1.8 percent.

Sounds like improvement, right?

Well, not quite so fast….

First, this report has a habit of overstating the truth as it’s the “advance” estimate.  But the real problem is that a huge part of this came from inventory:

The change in real private inventories added 1.94 percentage points to the fourth-quarter change in real GDP after subtracting 1.35 percentage points from the third-quarter change.

This is a problem because it’s transient; to get the real GDP change you have to back it out.  Last quarter it hurt, but this quarter it helped.  So we have a net-net slowdown, which isn’t so good.  In other words, last quarter it was 1.8% + 1.35 = 3.15% annualized, this quarter was 2.8% – 1.94 = 0.86%.

At this rate we will print negative next quarter on a net-adjusted basis by about 2%.

The issue appears to be in services, which had a precipitous slowdown being up only 0.2%.  With the majority of the economy being services….

Federal government spending was down 7%, all national defense — non-defense spending was up 4.2%.  State and local spending decreases accelerated from 1.6% to 2.6% (they’re broke folks.)

The trade deficit was up from last quarter, now 582 billion on an annualized basis, with exports increasing only slightly but imports going up more.  Thank Chinese labor and environment exploitation for that (again.)

The personal “savings” rate (income minus spend) was down again, and it appears we’re back to trying to finance our living rather than decreasing spending.

This is the same pattern we saw in 2008 as the economy started to roll over.

This is tiring – and predictable.

Europe is now haunted by the specter of debt. All European leaders quail before it. To exorcise the demon, they are putting their economies through the wringer.

It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.

To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.

WRONG.

The only way to cut the debt is to have GDP grow faster than the debt does (or, if GDP is shrinking, debt must shrink more)

Here’s the problem in a nutshell — we’ve not done that for 30 years:

Or, if you prefer this in 5-year “chunks” to average it all out…

Here’s the theoretical curve that fits that second chart quite-closely, don’t you think?

That latter one by the way is right out of the book Leverage.  It illustrates what ultimately must happen when you try to run this scheme — eventually interest payments exceed the total amount of GDP available and then you must default.

Of course actual default happens long before the theoretical limits, because whether you’re a government, a company or a household there are things you have to spend money on besides interest.  As such you cannot continue this charade to its mathematical conclusion.

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

This is the mother and father of all frauds and those who suggest it should be taken to town square where they are flogged, drawn and quartered with their remains used to feed feral cats.  The reason is that when you emit more “money” you are increasing the denominator of currency in the system.  When you increase the denominator the value of every unit of currency decreases.  That is, you are directly and immediately taxing everyone in the economy that uses that currency by stealth — an intentional and malicious act of fraud.

You are stealing from each and every one of those people and when a common man does such a thing we call it what it is: Counterfeiting.

This, incidentally, under the original Coinage Act (of 1792) was punishable by death.  That was a proper punishment as it was literal theft from the body politic by stealth.  We should bring back such a penalty and impose it upon those who try to demand that the public be robbed through counterfeiting, which is exactly what this “policy” amounts to.

The actual problem is that governments love to make political promises they cannot find the money to pay for with current taxes.  That is, they promise what they cannot deliver as they are making promises to spend more than the economy is expanding on a percentage basis.  This in turn leads them to “borrow” money they have no intention of ever paying back.

Then, having committed this sin, they go looking for a Unicorn that crap out pretty colored candies so they do not have to admit that they defrauded the voters who put them in office by uttering bald-faced lies with the full knowledge and intent of screwing the citizenry down the road — after, of course, they’ve gotten rich and left office.

But Unicorns are mythical creatures and that thing you’re about to bite into is not candy.

These promises are a classic Ponzi Scheme.  They’re felonious when put into practice by anyone in the private sector and invariably (and justly so) lead to long prison sentences.  The law in the United States once recognized that this crime when committed by government officials was even more severe than that executed by private parties, because the “remedy” that people would propose (as Robert has done) would inherently be to screw literally everyone through debasement.

As such the penalty for such an offense was set as death.

Bring back the Coinage Act of 1792 and harness the horses. 

The feral cat population is hungry.

The Market-Ticker

Discussion (registration required to post)