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“It’s the DEBT, Stupid!”
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The Wheels On The Bus Go Flying Down The Street

Posted by Karl Denninger

We’re told, of course, that the economy is improving.

The “strongest indicator” that is incessantly pointed to (and which is a part of the “leading economic indicators”) is, of course, stock prices.

But who’s buying stocks and driving their prices higher?

The outperformance of risk assets over the past year suggests investors appear to believe that all credit problems have been solved – but nothing could be further from the truth, says Leigh Skene at Lombard Street Research.

…

Surprisingly, says Mr Skene, surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers.

That’s a problem folks.

In fact, it’s a serious problem.

There are only two possible explanations for this in terms of “theme” – first, that they believe that the authorities will be able to spur people to “lever up” again (exactly how we get into this mess in the first place, and which will inevitably create a bigger bust) or that they are “too big to fail’ and thus can continue to borrow at zero from The Fed and pass these shares back and forth between one another until they can goad those traditional investors to come back in and buy from them at ever higher prices – at which point, of course, the average American is again the bagholder.

Mr. Skene posits (and I agree) that one of these possibilities ultimately means prices “revert to the mean” (ex-leverage), which is very bad, the second, if they succeed, will destroy the average American and their pension and insurance funds.

The actual result of the policies that we’ve seen by nations has not been to “fix” anything.  Indeed, all we’ve done is shift the problem from private parties (who deserve to fail when they screw up) to governments – where failures are far more serious, even catastrophic.  PIMCO’s El-Erian has suggested that:

The Greek debt crisis is now morphing into something much broader. …… The heads of the European Central Bank and IMF have made the trip to Germany that is reminiscent of the Ben Bernanke-Hank Paulson trip to Congress in the midst of the US financial crisis.

Markets are now catching up to the reality of over-burdened public finances in the aftermath of the global financial crisis.

Yeah, like ours (America’s) – shall we once again post this chart?

Again, the reality is this: We have shifted the burden of economic expansion – and maintenance of final demand – from private actors to government.  This is exactly the mistake made in Greece, Portugal, Spain, Ireland and elsewhere. 

The problem with trying to paper over a solvency crisis is that you can’t accomplish it.  Illiquidity and insolvency are two different things; one can be fixed with temporary sources of funds and time, the other has to be absorbed somewhere. 

By shifting these liabilities to governments, the absorption is forced onto the taxpayer.  This means that the taxpayer – and recipient of government services must absorb much higher taxation, much lower service provision (including government salaries, pensions, handouts such as welfare, social programs and similar) or both.

If that adjustment is not immediately made then you get a graph that looks like the above.  Effectively, the nation shifts to attempting to pay for today’s expenses with its credit card, instead of with its tax receipts.

This can go on for some period of time but it cannot go on forever. 

But all of the western governments who got involved in “bailout world” failed to immediately transmit the costs of these bailouts to taxpayers through higher taxes and lower service provision, most likely because they (correctly) deduced that the people would not sit for it, and if they tried to do so there was a very material risk that the people would rise and lynch someone – and it would require luck for those lynchings to be confined to the banksters who had compelled governments to bail them out through their acts of extortion.

Trichet is caught in a nasty box:

Bonds and stocks plunged across Europe in the past week as Chancellor Angela Merkel delayed approving a rescue plan for Greece and Standard & Poor’s downgraded Greece, Portugal and Spain. European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, according to economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.

“Loans are not transfers and loans come at a cost” Trichet said today. Strict conditionality “needs to be given to assure lenders, not only that they will be repaid but also that the borrower will be able to stand on its own feet over a multi- year horizon,” he said.

Remember, Greece was supposed to be a €30 billion problem! 

Suddenly it has transmuted into €600 billion, or twenty times as large?

See what happens when you lie to people folks?  When you try to conceal what’s really going on?

What’s worse is that just as in the US the problem over in Europe is too much debt – and the so-called “solution” is even more loans – that is, more debt!

As I have said for more than three years now you cannot fix a drinking problem with a case of whiskey, nor can you fix a debt problem with more credit – that is, more debt.

To put this all in perspective – despite the claims of Treasury and others in our government – in the 29 days thus far this month Treasury has added $113 billion to the Federal Debt.

Annualized (assuming no additions for the next two days) this is $1.36 trillion “run rate”, or approximately 10% of GDP – still.

Where’s the “private economy” pick-up for final demand we keep being told about?  We’ve had two full years now where approximately 10% of final demand has been filled by government deficit spending, and there is zero evidence that this has fallen off.  For April to post a $113 billion debt addition is outrageous – remember, April is income tax month and is a month that frequently shows surplus for this reason!

In 2008 April ran a $60 billion surplus; in 2007, $9 billion, in 2006 $6 billion, in 2005 $12 billion.  In 2004 there was a $2 billion deficit; 2003 recorded a $395 million surplus; 2002 $21 billion and 2001 $112 billion. 

Point made?  I think so.

Oh, in 2009?  $111 billion of net deficit was recorded in April.

These numbers, unlike the so-called “budget” numbers, are not subject to being gamed.  The Treasury’s actual “debt to the penny” is reported to the public every day.

But for today, it’s “risk on”, at least for the “too big to fails” who can (and have) sucked off the Federal Reserve’s ZIRP and used it to drive “confidence” by pumping stock prices – even if it hasn’t created a single job and government has utterly failed to put the economy in a position where it can support the level of GDP being produced on its own.

Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising

Jan. 8 (Bloomberg) — An exodus of discouraged workers from the job market kept the U.S. unemployment rate from climbing above 10 percent in December, economists said.

Had the labor force not decreased by 661,000 last month, the jobless rate would have been 10.4 percent, say economists including David Rosenberg at Gluskin Sheff & Associates in Toronto and Harm Bandholz at UniCredit Research in New York.

“The actual unemployment rate is higher than shown by the official numbers,” Bandholz said.

About 1.7 million Americans opted out of the workforce from July through December, representing a 1.1 percent drop that marks the biggest six-month decrease since 1961, figures from the Labor Department showed today in Washington. The share of the population in the labor force last month fell to the lowest level in 24 years.

December’s 10 percent unemployment rate was unchanged from the previous month, matching the median forecast of economists surveyed by Bloomberg News. It was shy of the 26-year high of 10.1 percent reached two months earlier.

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — rose to 17.3 percent in December from 17.2 percent, today’s report showed.

The number of discouraged workers, those not looking for work because they believe none is available, climbed to 929,000 last month, the most since records began in 1994.

Length of Unemployment

The backdrop to the disillusionment is that it’s taking longer and longer to find work, economists said. Workers were unemployed for 29.1 weeks on average last month, the most since records began in 1948.

“Longer-term unemployment is one of the biggest problems,” said Bandholz. “Payroll declines will come to a halt in the next couple of months, but the people who are unemployed are having problems getting a job and it’s getting tougher by the month.”

The U.S. unexpectedly lost another 85,000 jobs in December after revised figures showed payrolls climbed by 4,000 the month before, today’s report from the Labor Department showed. The November gain was the first since the economic slump began in December 2007.

“Workers seem to be particularly discouraged by this recession,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Participation Rate

The participation rate, or the share of the population in the labor force, fell to 64.6 percent in December, the lowest level since 1985, from 64.9 percent.

The labor force will probably grow this year as the economy continues to expand and Americans believe jobs will be easier to get. That will mean the unemployment rate will head higher because there won’t be enough jobs available to satisfy the demand for work.

“The exodus from the labor force can’t contain the unemployment rate indefinitely,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “We expect unemployment to resume rising over the next few months, peaking near 10.5 percent in the third quarter.”

Federal Reserve policy makers, while noting stabilization in the labor market, have expressed concern about unemployment and poor job prospects. That’s one reason policy makers will keep the benchmark interest rate near zero longer than most anticipate, said John Ryding.

Fed ‘On Hold’

“We continue to believe that the Fed will leave monetary policy on hold throughout 2010 in light of the high level of un- and under-utilized labor resources,” Ryding, chief economist at RDQ Economics in New York, said in a note to clients. The median forecast of economists surveyed by Bloomberg News last month projected the first rate increase would come in the third quarter of this year.

Treasury two-year notes today gained the most in three weeks following the worse-than-expected payroll numbers. The notes’ yields dropped below 1 percent.

President Barack Obama on Dec. 8 proposed additional spending on the nation’s transportation system, tax credits to spur hiring by small businesses and incentives to make homes more energy efficient in a second round of efforts to cut the jobless rate.

“We’re going to have to work harder to create jobs.” U.S. Labor Secretary Hilda Solis said in an interview today on Bloomberg Television. “This is a very stubborn recession.”

To contact the reporters on this story: Bob Willis in Washington bwillis@bloomberg.net; Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Charts courtesy of Karl Denninger.